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-Source,Date,Text,Token_count
-fomc-corpus,1995,Part I is classified as Class II.,8
-fomc-corpus,1995,Right. The number having access is now 7 and President Hoenig's suggestion is to raise that to 10. I guess I'd like to think about it and see whether there is a ground swell from the rest of the Committee.,47
-fomc-corpus,1995,Why don't we bring this back then at the next meeting? There is no urgency about it. Does anyone else have any views that would be helpful?,30
-fomc-corpus,1995,I just pulled out a confidential Class II-FOMC document here. It reports on exchange rates. I read the document very carefully and I don't see why it is confidential.,35
-fomc-corpus,1995,"The reason, Governor Lindsey, is that we often do report intervention numbers in that document. We can't say it's Class II when it has intervention numbers, and it's not classified when it doesn't have intervention numbers because then we would be revealing something. That is the point. That's why it's always Class II regardless of whether or not it has intervention numbers in it.",71
-fomc-corpus,1995,"The presumption is that since it reports the intervention numbers when intervention occurs, the absence of such a report means intervention was zero, which also is classified information. That is sort of putting it backwards! Does anyone else want to raise any issues with respect to this before we reconsider it at the next meeting? If not, the next item on the agenda is a review of the Authorization for Domestic Open Market Operations. There's a memorandum. Does anybody have any questions? Incidentally, all of these items would ordinarily be on the February meeting agenda and were moved forward for obvious reasons relating to the crowded agenda for the February meeting. Are there any questions with respect to that memo? If not, would somebody like to move it?",144
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,"Without objection. The next issue, which also was moved from the February meeting, is the review of (a) the Foreign Currency Authorization, (b) the Foreign Currency Directive, and (c) the Procedural Instructions with Respect to Foreign Currency Operations including a review of the ""warehousing"" authority incorporated in (a) and (b). These items were, of course, discussed at great length at recent meetings and telephone conferences, and I am just curious as to whether anyone has anything to add to the rather exhaustive discussions that we have had.",110
-fomc-corpus,1995,"Mr. Chairman, is this the time to say something about warehousing if we have views on that?",21
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"I have just a few comments if I could make them briefly. Ted Truman sent out a lot of background materials regarding warehousing and I reread most of it and reread the memorandum that Virgil and his colleagues did earlier. I think the memo makes it clear that from a legal standpoint the Fed definitely has the authority--or certainly that we can make a strong case that the Fed has the authority--to warehouse foreign exchange for the Treasury, and I understand that. But however defensible these operations may be from a legal perspective, I just don't think the case is very compelling when I look at the issue in a somewhat broader context that takes account of the Fed's role in the government generally and the independence we are supposed to have. As I see it, warehousing is essentially a fiscal policy action or at least is fully equivalent in its effect to a fiscal policy action. By that I mean that in the end the warehousing operation has exactly the same final effect as if Congress authorized the Treasury or the ESF to purchase the foreign exchange and fund the purchase by issuing additional debt in the market. The only difference when the transaction is done via warehousing is that the usual Congressional appropriations process is circumvented, and the purchase does not show up in the budget. I really worry about the risk that we are taking over the longer term with this practice.",273
-fomc-corpus,1995,Do you mean market risk?,6
-fomc-corpus,1995,"No, I mean the risk to the institutional position of the Federal Reserve. That is really the issue I am trying to focus on, Mr. Chairman. I think we can get some sense of that in the public's reaction to the Mexican support package. I don't want to go into that in any detail. I just think it's an example that is very relevant here. As we all know, the use of public funds to assist foreign governments, however sensible that may be in particular instances, is a highly charged political issue, especially when some people see good alternative uses for the funds at home. The Congressional leadership apparently supported the package in this instance, but I don't believe Congress would have voted to authorize the funds. I think a broad segment of the general public, rightly or wrongly, opposes assisting Mexico so generously. The point here and the risk as I see it is that if things go badly in Mexico going forward, this could become an issue in the election next year. In that event, our role would become more widely understood, and it is quite possible that people could begin to raise questions about our independence. It could come under much more careful scrutiny. I would sum up the issue briefly this way: Congress placed the Fed outside the regular appropriations process to protect our independence. If we are perceived as abusing this sort of off-budget status, we run some serious risks over the longer run. Now, I recognize the practical difficulty of trying to pull back immediately from these operations. But I would hope that you, Mr. Chairman, and this Committee would at least consider conveying our concerns forcefully to the Treasury and then work with them hopefully to reach an accord whereby we could withdraw from these operations over a period of time, maybe by some defined target date. Again, I recognize that there is a clear legal basis for doing these operations, but I think the broader argument against doing them is really quite persuasive.",384
-fomc-corpus,1995,"One of the reasons why I was very careful to indicate to the Congress that we indeed had this warehousing facility with respect to the Mexican deal was precisely to put it up front. Now, some members of Congress may not have understood it, but I must tell you that I got no negative responses, and the types of questions they were asking suggested to me that at least those who were asking questions had some idea of the nature of this whole operation. On the issue of how we deal with the Treasury in this government, as fiscal agent we involve ourselves in various types of support for the Treasury and that does in one sense impinge on the independence of this institution. The trouble, unfortunately, is that we can not be fully independent because there is only one government and there is an element here of trying to draw the line. I think we are all somewhat uncomfortable about the warehousing facility. I think we are all uncomfortable to a greater or lesser extent about our own swap line facility, and in discussions with the Treasury regarding all of these issues we basically have been to a lesser or greater extent somewhat in opposition to the initiatives of the Treasury. But we also recognize, as I think I indicated here a number of months ago, that the central bank has very broad responsibilities to ensure the safety and soundness of the financial system. We could move ourselves back into a very narrow central bank mode, and I would agree with you that in that respect there would be less risk for us. But I am not sure whether we would be giving the country something of value. I think we have to take some risks, but certainly the issues that you raise are valid ones. I don't think there is great disagreement about the need to be very careful on these issues. I think we have been careful and I hope we will continue to be.",365
-fomc-corpus,1995,"I appreciate that and I am sorry to keep raising these issues. I do think that this is not a short-term risk; it's not the sort of thing that is likely to hit us in the face immediately. But I worry that over time those who really would like to compromise the position of this institution in the government, if they are looking for an argument, this is I think the strongest argument they would find.",83
-fomc-corpus,1995,The strongest argument they have is monetary policy.,9
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,"Mr. Chairman, just to make a technical point on the warehousing issue: I don't want to comment on the political aspects of it; that is not my role. But as a technical matter the Treasury could conduct its warehousing transactions with the market or with another financial institution. So the notion that warehousing as a technical matter is an evasion of the fiscal authority of Congress I think is not correct. I am not talking about perceptions. We have worked hard and have changed the warehousing arrangement so that it is now very clearly an arms-length, market-related transaction. We do it on exactly the same terms that the Treasury could if it divided it all up and did it with 150 institutions in the market. All we are doing is to accommodate the Treasury as a convenience to them. This does raise questions about our role and our role in assisting Mexico in these kinds of things, which I perfectly well acknowledge. But as a technical matter, the transaction could be done with the market. Therefore, I don't think it's fair to say that this is an evasion of the fiscal authority of Congress.",221
-fomc-corpus,1995,"When it's done with us, though, basically it does not show up in the budget, is that right?",22
-fomc-corpus,1995,"It wouldn't show up in the budget either way. What the Treasury does is to swap their DM or their yen with us. They sell it to us spot and buy it back forward. They can do that on exactly the same terms with Citibank or Chase or Deutsche Bank or the Bank of Tokyo, whatever institution it might be. That would have exactly the same impact on them fiscally.",79
-fomc-corpus,1995,The fiscal effect occurs when the ESF funds are created. At the moment the ESF has a big set of assets and a big set of liabilities. Nobody is talking about expanding the size of the ESF or increasing its capital through appropriations. What we are talking about is refinancing its assets on a different basis and that has no fiscal effects.,70
-fomc-corpus,1995,"My feeling is that if it can be done with private institutions and the market, we ought to see what we can do to push the Treasury to do that. Whatever convenience the Treasury is gaining from doing it with us is, from our standpoint at least, offset by the longer-term risk of our continuing with these operations.",64
-fomc-corpus,1995,"That is a legitimate question. In my view the issue essentially is that if the Treasury requests us to do it, we have to give their request very serious consideration. Their view may be that while the transaction is technically feasible in the private market, the inconvenience involved in arranging relatively large sums there raises questions as to the efficiency of the operation. That is a reasonable consideration that we have to confront. We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury, as Ted was mentioning. In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don't inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say ""no.""",185
-fomc-corpus,1995,I understand those points. I just hope that we can continue that process and widen that gap a little further.,22
-fomc-corpus,1995,"I personally am not uncomfortable with what we are doing. I am uncomfortable with the thought that we might have to pick up the entire $20 billion warehousing, but that obviously is a very remote contingency. President Jordan.",44
-fomc-corpus,1995,"All the things that Ted sent out ruined my weekend as well! I read all this material before, one time or another, but I always have to reread it because there is so much that I can't remember all of it. I am satisfied that from a technical standpoint and a legal standpoint there is not really an issue to be discussed because the lawyers can always figure out a way to do whatever it is we think is good public policy to do. So, the question comes down to whether or not it is good public policy. The current set of institutional arrangements was designed in a totally different era for a different purpose. The ESF, swaps, warehousing--all of that--were intended to give us access to liquidity. The ESF was designed when the dollar was not even the dominant reserve currency. The other arrangements came into being when we had the Bretton Woods system. If we did not now have the ESF and the capability of warehousing or have something like swap lines and we were dealing with a situation such as the one that surfaced in December with Mexico, these are not the institutional arrangements we would have designed to address those issues. In today's world, given the role of the dollar and our arrangements with other central banks, we would establish a set of institutional arrangements to provide liquidity to other countries such as Mexico or, in the future, Chile, Costa Rica, whomever. We would not set up something resembling what we have today. What I would like to see happen is for Peter Fisher to work with Board staff to think through what kind of institutional arrangements we would like to have for the 21st century and produce some kind of report by the time this issue comes up again next February. At Fed speed I don't know if they could get that done between now and February. In the private sector if they had such a problem they would give staff a mandate and get it done by three months from now. But at Fed speed, we could ask that the staff come back with a set of proposals by next February as to the kind of arrangements that would provide international liquidity to these countries, especially those that are less developed and that occasionally get themselves in a mess. The objective is for us to carry out our central bank role without getting into this possibility of people saying we are doing something that is not consistent with foreign policy objectives or doing something that is subverting a debt limit issue that may come up between the executive and legislative branches of government. As in 1979 and 1980, we definitely don't want to get ourselves, as a central bank, in between the executive and legislative branches if they are playing a political game over something like the debt ceiling. We want to be nowhere in sight if something like that happens again. Warehousing leaves us open to be in a position of getting caught up in something that we don't intend to do. So, I would just like to see this whole issue rethought.",590
-fomc-corpus,1995,"The question really is whether or not our role or central function is to provide dollar liquidity to other nations on an ongoing basis or on an ad hoc basis. If you are going to raise the argument that the international financial markets have changed from where they were under the Bretton Woods structure, the emergence of private global finance has to a very substantial extent made much of the purposes of the Bretton Woods structure of dubious merit in the current environment. The reason I raised questions earlier about the use of swaps is that their role in the modern world --especially the order of magnitude of the swaps if we look at them in the context of the size and types of problems that seem to have emerged in the EMS, Mexico and the like--seems to be an anachronism. I am a little concerned, however, about setting up a study in the form in which you suggested. That is an expensive undertaking. I do think it might not be a bad idea, however, to have a couple of memoranda that discuss the broader questions without getting into the initiatives that you are suggesting. Your proposal strikes me as a much larger project and use of resources than I think we are prepared to get involved in until we get a clearer focus on how we view this issue. The important question that I think you are raising, Jerry, is how much of our post Bretton Woods structure at the Federal Reserve is an anachronism and what our role is in today's environment. I would much prefer to have a few short memoranda on that than spend a lot of time trying to think of what type of structure we should go to from here. So, unless someone has an objection to that, I will request Ted to see whether or not we could have some short review of the history of this issue. It would involve revisiting a lot of the material that has been put together, but I think the central focus should be on the question of what difference the emergence of private global finance makes relative to the structure that we have had since it evolved in the 1960s.",415
-fomc-corpus,1995,Mr. Chairman?,4
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"I don't have any objection, but this is an issue that has to have been discussed at tables like this around the world, given what has happened in Mexico, Argentina, and other countries. I am wondering what rethinking is going on internationally with regard to how these sorts of things play out and what can be done.",64
-fomc-corpus,1995,"On the basis of the meetings that I at least have been involved in--and some of our colleagues have been in similar meetings--I think there is a general recognition that the size of the problem that emerged in Mexico and the size of the international facility that was perceived to be necessary to address it clearly rule out a generic facility. There is not enough cash in the world to handle the problems without producing potentially large inflationary pressures through use of SDRs, IMF quota expansions, and all of that.",100
-fomc-corpus,1995,The moral hazard is extraordinary.,6
-fomc-corpus,1995,"Yes, including what I am sure the IMF would like, which is for the IMF to become a world bank lender of last resort. That is about the last resort I should think for anything. This has led us to the question of whether it is possible to have bankruptcy statutes for sovereign nations. As you know, at the moment that does not exist and the question is whether there is a mechanism that would make it possible to address the types of problems confronting Mexico in a restructuring mode that is the equivalent of a bankruptcy facility rather than by providing liquidity, which is implicit in our swap and other relationships. That discussion is going forward at the BIS. Ted, I assume there is some talk at the Halifax Summit on this?",144
-fomc-corpus,1995,"The Mexico situation, for better or for worse, has clearly given the Halifax Summit something to focus on--something more than just chit-chat about stable exchange rates, if I may put it that way. Doing something in the bankruptcy or orderly workout area is one of the ideas that is under some discussion. It's also fair to say that other ideas under discussion include some that the Chairman has tried to pour cold water on--that of vastly increasing the size of the IMF and its capacity to deal with these kinds of situations. I don't think there is a consensus among the various nations involved in the G-7 on what to do at the moment. It appears that most options are still on the table, though some people think that a few options have been taken off.",152
-fomc-corpus,1995,I would think that whatever rethinking we do about what the Federal Reserve's response should be and how we view these things has to take place in the context of how the rest of the world is thinking about these issues.,44
-fomc-corpus,1995,"Yes, certainly there are big and small issues involved and both types have been raised here in this discussion. That's partly because we started with Mexico, which on the one hand is a country-specific type of problem. On the other hand, Mexico is regarded as symptomatic, as the Chairman has said, of the nature of the international financial system and its functioning and the potential problems and challenges as we move into the 21st century. It's difficult to sort those things out. As far as country-specific problems are concerned, it is fair to say that many other central banks of the major industrial countries are in fact more involved in this process than we are. The nature of their involvement is different from ours. It might be useful to the Committee, as one of the little studies that the Chairman requested, for us to describe what other G-10 central banks do with regard to dealing with these smaller--if I may put it that way--problems. Indeed, in most of the cases where efforts have been made to help other countries we have not been involved in terms of our own money, though the U. S. Treasury is often involved whereas other central banks have been involved. An example is the current effort to put together a bridge loan for Argentina. You will find the other G-10 central banks backing the BIS in that loan. In the case of United States participation, if that goes forward, it will be done exclusively by the Treasury. Most of those central banks in turn are supported by their treasuries in one way or another, sometimes formally but not always formally. In some cases there are central banks that take a degree of risk in a loan to another country in a far corner of the world; an example is Sweden relative to Argentina. The Federal Reserve has chosen not to do that. So maybe it would be useful, at least as a background note, to try to put together a study to describe what other countries do. That doesn't touch the big issues but it might help deal with the little ones.",406
-fomc-corpus,1995,"It's probably not right to think that we can dot every ""i"" and cross every ""t"" and have a set process that we follow in all circumstances. But what you're suggesting would be helpful, I think, in terms of our understanding this better.",51
-fomc-corpus,1995,"Vice Chairman, you have been as much involved with this as anybody.",14
-fomc-corpus,1995,"Yes, Mr. Chairman. I think that a very basic issue that exists even in light of the very changed international financial markets is whether an individual country is responsible for its own conduct, including paying the price for its own mistakes. The debates that were very difficult on occasion in the Mexican situation were those where some of our normal allies questioned whether we were forgiving Mexico excessively for policy errors. We took the view, as you know, that Mexico was unique, not just unusual, and that there was very serious systemic risk involved. That was not the easiest case to make as Alan Blinder and I discovered at the January and February BIS Sunday night dinners and Mike Kelley at the March dinner. Having been the permanent feature from the Federal Reserve at all three meetings, I got to get my head bloodied at all three! I think one of the difficult questions in moving toward elaborate discussions of the IMF becoming the lender of last resort, which I think is a terrible idea as you do, and even whether we should modify significantly the swap lines and the other central bank relationships that exist from the Bretton Woods era is just that basic question: Is it the responsibility of each country, including our own, to manage its affairs in such a way that the market does not turn and punish it severely? The main thing that the speed and size of capital flows have changed is that the punishment is very quick and very severe. It's not all that different; it's just faster and deeper. There is great reluctance on the part of leading central banks in Europe and Japan, and I think by and large those of us around the table here, to think that we should shift to a world in which everybody can misbehave and the world will take care of them. The world doesn't have the riches or the resources to make that possible. I think we have to be careful, including in meetings like the Halifax Summit, not to be moving in this excessively and unrealistically permissive direction. The Federal Reserve, it seems to me, has been handling brilliantly the very difficult balancing act involved in being supportive of U.S. policy on Mexico, which we thought was basically a good idea at least in substance--I say that as a compliment to you, Mr. Chairman, because you had to do most of it--without getting confused that it should be translated into something that is much more broadly applicable. That policy was to consider the Mexican case unique, which was very difficult for us to do because the next deserving case in the view of many people was Argentina. One could argue that the Argentines have had better policy and that they are taking much more aggressive actions to fix themselves. And therefore it was tough for us to say that we thought Mexico needed support, including support from the Federal Reserve, but that we did not think Argentina needed our support. I think the single best argument that we had is that Mexico is unique. If it isn't, if it's only unusual, God knows where you decide the line gets established.",599
-fomc-corpus,1995,"If there is no further discussion, I would like to combine the three foreign policy instruments and move them simultaneously. Would somebody like to make a motion?",30
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Is there a second?,5
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Let's move on finally to our regular agenda and I call on Peter Fisher.,18
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,Questions for Peter on either the domestic or the foreign side?,12
-fomc-corpus,1995,"Peter, there's been some press commentary to the effect that the dollar's role as the dominant international reserve currency is on the wane, that we are following the pound sterling's earlier slide. Yet the facts are, as you have reported, that central banks around the world have substantially increased their holdings of dollars and reduced their holdings of deutschemarks and other currencies. These outside commentaries would suggest that central banks around the world are now holding a lot more dollar reserves than they really want. Is that your perception?",102
-fomc-corpus,1995,"I think a number of central banks are holding more dollar reserves than some people within those central banks think they ought to be holding. I wouldn't pretend to say that is the official posture of all the central banks, but I think the leakage into the markets occurs as a result of that. There are a number of central banks in Asia that both have accumulated large dollar reserves and have a rather active approach to foreign exchange trading as a potential source of central bank profit. In those central banks, some people may have a view that they would rather hold fewer dollars, and since the banks' foreign exchange desks tend to be somewhat active, the market then is free to interpret that when they move one way that must be a secular trend. It is more frequently just trading back and forth, but that sort of activity certainly has provided some credence to that general story.",171
-fomc-corpus,1995,"One final question: In particular, do you know how the Bundesbank and the Bank of Japan feel about the exchange translation that has been eroding their dollar assets?",33
-fomc-corpus,1995,"I talk to them from time to time about that. They are not happy about it, but the Bundesbank is fully committed to a single reserve currency--the dollar. They have no appetite for diversifying their portfolio. I think the Bank of Japan at a policy level is still more or less committed to a dollar reserve policy. They have diversified somewhat and are holding a few more marks. It's still a tiny, tiny fraction of their total reserves.",90
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"This is a question for either Peter or Ted. In terms of causes of the weakness in the dollar, you referred to the change in expectations about future U.S. fiscal deficits. One way to look at the effect of deficits is that if monetary policy has an inflation objective, the impact of greater deficits is to increase the real rate of interest. Very often that would lead to a higher value of the dollar. In fact, there are many macro models that have that type of linkage. For you to get a lower value of the dollar, I think there has to be an assumption that the debt would be monetized. My question is, of these two types of influences on the dollar, what roles do you think they play over the longer term and what role have they played in the most recent period?",161
-fomc-corpus,1995,"I'll take the short term and leave Ted with the long term! In the short term, I think the fiscal picture weighs on the dollar as I mentioned principally in terms of the competence issue as it relates to U.S. economic management, not in the sense of forecasting a macro economic effect. Whether analytically correct or not, market participants do in a sense add up the two deficits, the current account deficit and the fiscal deficit, and say we can't manage anything so they can't find any reason to buy dollars or hold dollars. In the short run, at least in the last three months, I don't think the markets have really tried to digest the implications, as you have, on a much more sophisticated basis. But they are negative in the short run. Now, I'll defer to Ted on the tougher question.",162
-fomc-corpus,1995,"Well, on the tougher question, I think you are absolutely right about the result that the standard macro models will give you: A cut in the fiscal deficit will produce lower interest rates and that in turn will translate through to reducing the external deficit through lower interest rates and a lower currency. One way to square that with the notion that the dollar should appreciate if the fiscal deficit is cut, is to distinguish between real and nominal. To the extent that there is a fear out there that the central bank will seek at some point to monetize the deficit or float it away through more inflation, then a country could have a stronger nominal currency at the same time that it had a weaker real currency.",137
-fomc-corpus,1995,I guess the point I want to make is that it keys off what monetary policy--,17
-fomc-corpus,1995,"There is one other argument for which there is some support in the literature. It is a longer-term argument that would run from a lower deficit to more investment, a more competitive currency, and therefore an appreciation of the dollar. That is a very long-run argument. A slightly different argument has a timing feature: If the fiscal deficit is cut, that will start to bring down the current account deficit sooner than otherwise and less of a depreciation will be needed in the long run than otherwise. That is a sort of ""compared with what"" argument. In terms of the long run, much of this argument does turn on the factors that Peter was talking about--the notion that the fiscal situation has played on the dollar more in terms of whether we, the United States, can manage our affairs appropriately. That probably has been exacerbated again in the psychological realm by the Mexican situation. Those two situations have played off against each other more than any deep reading of the macroeconomics involved.",197
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I want to make a comment on Bob Parry's point and then pose a question. On Bob's point and the answers to it, isn't it relevant that over the last three months, six months, nine months, twelve months--pick your timeframe; it almost doesn't matter--surveys of inflationary expectations in the United States have shown no deterioration and long bonds here are trading at lower interest rates, not higher interest rates? Those two things would seem to me largely persuasive--although none of this is definitive with regard to the state of long-term inflationary expectations absent an index bond, for which all of us here at the Federal Reserve have been rooting for a long time. But it is about the best information that we have, and it seems to me that it speaks with one voice on the extent to which the market expects the Federal Reserve to monetize deficits. I think--I guess the opposite of ""ahistorical"" is ""historical""--that is also an historical observation because the Federal Reserve has not been monetizing deficits. Whether one has rational or adaptive expectations, I think it is sensible not to presume that the Federal Reserve is going to monetize deficits. And I don't believe the markets believe that the Federal Reserve is going to monetize them. Do either of you disagree with that, Ted or Peter?",262
-fomc-corpus,1995,No.,2
-fomc-corpus,1995,No. I only wish I had thought of it.,11
-fomc-corpus,1995,"Now the question I was going to pose: Peter, I thought you said--correct me if I just misheard what you were reading --that the short end led interest rates down since the last FOMC meeting. Did you say that?",49
-fomc-corpus,1995,That is our sense that the short end--,9
-fomc-corpus,1995,I am reading the Greenbook table--,8
-fomc-corpus,1995,"I think Peter was referring to the shorter intermediate term, the 1- to 3-year area.",21
-fomc-corpus,1995,I am very sorry if that was not clear. I was referring to the 2-year maturity of the coupon curve.,24
-fomc-corpus,1995,Okay. Fine. I have no question in that case.,12
-fomc-corpus,1995,"Peter, you mentioned that the dealers were surprised by the demand for Treasuries and that was what made the difference in terms of the price and yield moves in the Treasury market. Clearly, people are not buying dollars to get into the Treasury market. Has there been a big change in the ownership of these securities foreign vis-a-vis domestic? Or is it even appropriate to ask that?",77
-fomc-corpus,1995,"No, I don't think there has been a big rush of foreign demand for Treasuries. The sense is that the money has been coming out of the investment community, the mutual funds, and the real money crowd into the dealer community. The dealers have been surprised by that. Their tendency had been to play the market from the short side during this period. It gave the market a bit of a choppy feel from time to time, and in fact contributed to some of the rise in prices. There was a phenomenon of the market doing better during the afternoons, which was sort of curious. We feel that was a bit the result of the dealers just catching up with their own customers. But we don't have any sense of foreign demand. There is constant chatter going on about how the capital flight from Latin America is fueling the bond market. Capital flight from Latin America, however defined, is not of a sufficient size to drive the overall dollar exchange rate. It is large relative to the peso and other Latin American currencies. It's hard to see if it is not big enough to affect the dollar exchange rate overall how it is really big enough to drive the bond market, which is rather large.",238
-fomc-corpus,1995,It's not big enough to affect the Treasury market.,10
-fomc-corpus,1995,"So, these stories are more in the nature of anecdotes floating around than anything we have been able to pin down.",23
-fomc-corpus,1995,"There is one explanation that I'm not sure is right, but it helps to answer the question of why the dollar was weak relative to many of the European currencies over this period. One story that can be told is that there has been some degree of flight from emerging markets, or shifts in demand for emerging market instruments. And emerging market instruments are dollar-denominated. Ms. MINEHAN. Right.",80
-fomc-corpus,1995,"The most important of these are the Brady bonds. Those bonds have taken a tremendous hit over the first quarter of this year. Although U.S. investors hold some of the Brady bonds, they also are held around the world by all kinds of investment funds. It's not irrational for those funds, many of which are Japanese--after all there is a lot of savings in Japan--to think that as investors move out of Brady bonds that are dollar denominated instruments, they will move into instruments denominated in the other two or three major currencies, including the Swiss franc. So that seems to me to be the one element one can point to that would help explain some degree of rally in terms of our own bond market and some degree of weakness of the dollar vis-a-vis the yen, the deutschemark, and the Swiss franc. I am not sure it is quantitatively significant enough, but if you look at what has happened to the prices of the Brady bonds, it has to mean that there has been a big shift in the ex-ante demand for those instruments over this period.",216
-fomc-corpus,1995,"One of the central banks that we ought to be concerned about other than the Bundesbank and the Bank of Japan, as large holders of dollars that they are not going to relinquish, is the Bank of Taiwan. It holds close to $90 billion in Eurodollars and direct claims against the U.S., largely in Treasury securities. They are traders, needless to say. Whereas it is fairly difficult politically and strategically in the context of the G-7 to have major shifts in dollar holdings by either the Bank of Japan or the Bundesbank, I am not sure there is terribly much inhibition in that large sort of bloated stock of securities sitting out there. We have some data; I haven't looked at it. What proportion of their holdings of U.S. Treasuries are short-term Treasury bills? Do you know?",165
-fomc-corpus,1995,We wouldn't have the data unless they are held at the New York Bank.,15
-fomc-corpus,1995,"We have data on what they hold with us as custodian, but that is only a portion of what most central banks hold.",26
-fomc-corpus,1995,Have you checked the data?,6
-fomc-corpus,1995,I don't have an exact view. I don't have any of those data here.,16
-fomc-corpus,1995,"Peter, what has happened to the total custodian holdings of Treasury securities in the last 10 weeks or so?",23
-fomc-corpus,1995,In the last 10 weeks they have gone up. We had an extraordinary rise of $10 billion in one reporting period. There has been some back and forth movement in such holdings.,37
-fomc-corpus,1995,Is that because of the Caribbean--?,8
-fomc-corpus,1995,"No, it didn't include the Caribbean. The market all read it as entirely the Bank of Japan. Ironically, it was to a substantial extent other Asian central banks who were thought to be sellers of dollars.",42
-fomc-corpus,1995,Who in fact were buying dollars!,7
-fomc-corpus,1995,Who just happened to be shifting.,7
-fomc-corpus,1995,You have to remember that as a statistical matter they can move investments from Eurodollar holdings to the Federal Reserve Bank of New York and that will show up as custodian holdings but it doesn't have any currency implications at all.,45
-fomc-corpus,1995,"We did have a period when our custodial accounts went down quite a bit, net, but I haven't looked at the figures. There was a period where some of the Asian central banks----went into bills, came out of them, and went back. That created some volatility in our custody holdings. So those holdings probably are a little higher over the past 10 or 20 weeks, but not dramatically, I would think.",86
-fomc-corpus,1995,I assume there is no concern about the American dollar in the context of our holding dollars as custodians for foreign official accounts! I only got a chuckle out of the Vice Chairman!,37
-fomc-corpus,1995,That was with my President of the Federal Reserve Bank of New York hat on. That's why I chuckled.,22
-fomc-corpus,1995,I realize that.,4
-fomc-corpus,1995,"If I could comment, going back to the reserve currency status issue, it is interesting that the markets all chatter about how the dollar is losing its reserve currency status. Yet, the dollar bill is in heavy demand around the world.",46
-fomc-corpus,1995,You mean the hundred dollar bill?,7
-fomc-corpus,1995,"The hundred dollar bill, yes. The greenback. It's an interesting offset to the concept that the dollar is losing its reserve currency status.",28
-fomc-corpus,1995,Any further questions for Peter?,6
-fomc-corpus,1995,"Peter, I understand that some Fed watchers, in trying to decide whether to blame the Federal Reserve for the weakness of the dollar, have pointed to the fact that the dollar price of gold has not gone up very much while the mark and yen prices of gold have gone down. On that basis they pretty much absolve us from blame and say it's more of a mark and yen problem than it is a dollar problem. Do you take any comfort in that view?",92
-fomc-corpus,1995,A tiny tiny bit. I don't particularly! [Laughter],13
-fomc-corpus,1995,To what degree do you think we have a dollar problem as opposed to a mark and yen problem?,20
-fomc-corpus,1995,"I think we have a dollar problem, as I mentioned, in the way the foreign exchange market looks at the relationship between our interest rates and our current account. I don't mean that should drive the policy decided around this table, but that is the chain around our ankle, if you will, that we have to deal with; it's the load we are carrying. The mark is at extraordinary highs on a trade-weighted basis. The mark clearly is strong--however defined--against us, against Europe, against everybody. There also is a problem of an ever appreciating yen. Now, something may break that at some point, but until it does I think there are problems in each corner; each leg of this stool has its own problem. And that in my view is how we get the historic lows or historic highs--when there is something that is pushing the exchange rate on both sides in the same direction.",181
-fomc-corpus,1995,"Further questions for Peter? If not, would somebody like to move approval of the actions of the foreign Desk?",22
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Is there a second?,5
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. The domestic Desk transactions?,8
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Second?,2
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Let's now move on to what used to be called the Chart Show. Whatever happened to the chart presentation?,24
-fomc-corpus,1995,We didn't have it in February. It's an open issue for July.,14
-fomc-corpus,1995,We don't have it today?,6
-fomc-corpus,1995,No.,2
-fomc-corpus,1995,That sounds like a precedent to me! [Laughter],12
-fomc-corpus,1995,Either that or an exception.,6
-fomc-corpus,1995,Messrs. Prell and Truman.,8
-fomc-corpus,1995,"After we have gone on even briefly you may decide that you don't want the full length Chart Show, but we'll see. [Statement--see Appendix.]",30
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for either gentleman?,5
-fomc-corpus,1995,"Mike, in terms of the growth rates for the baseline forecast of real GDP, it looks like almost a perfect soft landing in some respects. But as one focuses more on what the economy looks like in 1996, it seems to me that there are some very troubling aspects, particularly if one considers what a simulation for 1997 might produce. For example, we see that at the end of the year the unemployment rate is below conventional estimates of the natural rate. That suggests to me that if we were to simulate through 1997 we probably would have higher inflation. Therefore, the conclusion is that on the baseline forecast we not only are making no progress toward reducing inflation, we actually are going to see a period of three years in which inflation at best would stay about flat, but in terms of models most likely would worsen. Is that a correct assumption?",173
-fomc-corpus,1995,"Reading the numbers as precisely as they are written down, the thrust of the baseline forecast is that we think we have a modest degree of financial restraint that will hold growth slightly below potential and have the unemployment rate creep up. But we are at a point where we think high levels of resource utilization will begin to foster very gradually some momentum toward higher inflation. So, yes, the most natural extrapolation from this would be a slightly higher rate of inflation in 1997.",94
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Mike, I guess I am a little surprised at your answer to Bob, and that intrigues me some because my question related to the almost ""too good to be true"" sort of pattern for nominal GDP growth through the next two years and the composition of prices--whether the deflator or the CPI--and output. If I understand it, your assumption is that the fed funds rate stays at 6 percent for the full eight quarters.",88
-fomc-corpus,1995,That is correct.,4
-fomc-corpus,1995,"You have long bond yields coming down somewhat further. You don't say how much, but I assume you still have an upward sloping yield curve through the whole two-year period.",35
-fomc-corpus,1995,"Essentially, we would have an upward slope of average dimension.",13
-fomc-corpus,1995,Some liquidity premium in there?,6
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"So you have nominal spending rising at a rate of less than 5 percent for eight quarters and pretty much a flat pattern through 1996. It's not much different from the last several Greenbooks except that at least it's flat now whereas before it dropped this year and rose later. So, to decompose nominal spending into its parts, you have real output rising a little less than 2-1/2 percent on average and prices also rising a little less than 2-1/2 percent, using the deflator anyway, to give you that nominal spending. Yet, you have a structure of interest rates in which rates are 6 percent and higher throughout the yield curve for the whole eight-quarter period. I look at that and say I don't know whether it's a good forecast or a bad forecast. I certainly don't have a different one to propose, but in the sense of a ""reasonableness"" check, should I expect nominal interest rates to be in the 6 to 7 percent range while nominal spending is under 5 percent for a two-year period? Comment?",218
-fomc-corpus,1995,"If you are asking whether the relationship of nominal interest rates to nominal growth looks abnormal or unreasonable here, I would say that there is not a very strong regularity in the history of the relationship between nominal interest rates and nominal GDP growth. We have played around with some econometric exercises to see whether there is any information to be gained by looking at that spread as an index of restraint and prospective real economic activity. It is weak. It can contribute a little to explaining the prospects. I don't feel uncomfortable with this forecast. I think the fact that the nominal interest rate is a little higher than nominal GDP growth is consistent with our sense that this is putting some drag on economic activity, just as the fact that the real short-term rate, a bit above historical averages as we perceive it, could be interpreted as being consistent with some modest monetary restraint on top of what we believe to be some moderate fiscal restraint. That is very hard to say. The real rate of interest could vary considerably over a cycle or even a little longer.",205
-fomc-corpus,1995,If I could follow up--one thing implicit in both the assumptions and the forecast and your responses to me and to Bob Parry earlier is that either the financial markets are embodying and maintaining a higher inflation premium for a sustained period of time than what we are observing or we have a higher real yield. I take this as being a forecast of an economy that is operating for the next two years essentially at full employment or full capacity. We are right at the ceiling over this whole period.,98
-fomc-corpus,1995,"We are slightly above the ceiling now, drifting back toward the ceiling.",14
-fomc-corpus,1995,"Okay, but at least not below it.",9
-fomc-corpus,1995,We are splitting hairs here.,6
-fomc-corpus,1995,"So you would say it is unlikely that the real yield embodied in financial instruments is higher than what the economy is actually churning out or capable of churning out. Unless you have some sort of risk or uncertainty assumption in there, that implies that the market is maintaining an inflation premium. Market participants are still looking out beyond this forecast horizon at a rate of inflation and that is still being embedded in nominal yields.",82
-fomc-corpus,1995,"Let me separate these questions. In some simple models, one can relate the observed real rate of interest to the longer-term growth of the economy as a sort of equilibrium, steady state condition. But if one starts elaborating those models, it can get much more complicated. On the question of what we think is going on with inflation expectations, yes, our presumption is that the current inflation expectation for the shorter run is in the 3 percent --3 percent plus--area for consumer prices. As we go out into the intermediate-term--5 to 10 years--expectations are probably closer to 4 percent inflation.",125
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,"At this point, in our judgment, the notion of a downward trend to inflation is not embedded in the markets. Rather, there is some more inflation in the works, as President Parry was suggesting. Our forecast is pointing toward some gradual pickup to a higher level of inflation.",56
-fomc-corpus,1995,Other questions?,3
-fomc-corpus,1995,"I did have a question, but I am again picking up on Bob Parry, especially on the answer to his question.",25
-fomc-corpus,1995,Picking on him or picking up on him?,9
-fomc-corpus,1995,"No, picking up on him--definitely not picking on him. Inspired by him. Mike, referring to your answer to Bob, I was reading the quarterly Greenbook numbers on the capacity utilization rate. They peak at 85.1 and they go down every single quarter through 1996 Q4, at that point reaching 82.9. I can't imagine, though I thought I heard you say ""yes"" in your answer to Bob, that if this page were another two inches wide and we saw the numbers for 1997 on it, that the utilization rate would abruptly turn back up. Again, I am reading this just the way you stated it, Mike, with the economy gradually going back to its natural growth rate, which does not lead to ever accelerating inflation.",158
-fomc-corpus,1995,"Indeed. But in 1997, assuming gradual convergence, we are as I said splitting hairs.",20
-fomc-corpus,1995,You already have 5.8 percent unemployment and 82.9 capacity utilization by the end of 1996.,24
-fomc-corpus,1995,"Exactly, and in 1997 on this trajectory, we would get back to the NAIRU and a little lower on capacity utilization. In theory at that point, the inflation rate would stabilize at just a hair higher than we observe as the trend to 1996.",55
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,"Maybe this is cutting it too close, but if you look at the two years together in the Greenbook, we have a little more inflation this year because of what we have assumed about the dollar. Therefore, the flatness produces a bit of a distortion. It suggests that the trend is very gradual, but there may be more trend than the numbers themselves suggest.",73
-fomc-corpus,1995,"We are using the usual sacrifice ratios and a NAIRU around 6 percent; and given our projected unemployment rate, we are only talking about accelerations of a couple of tenths a year. The convergence by 1997 implies that we may not even have that in that year.",58
-fomc-corpus,1995,That was my point.,5
-fomc-corpus,1995,The point I wanted to make was that clearly your projection does not show any improvement on inflation; we are not making progress.,25
-fomc-corpus,1995,I understood it to be a deterioration.,8
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,A slight deterioration.,4
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,"Further questions? If not, who would like to start the discussion? President McTeer.",19
-fomc-corpus,1995,"The Eleventh District has slowed somewhat over the past few months, and most of the slowing seems to be in Texas rather than in our parts of New Mexico and Louisiana. A member of our Advisory Council on Small Business and Agriculture said with respect to New Mexico that they had ""hit the three cherries"" there this past year. I am not familiar with that terminology, [Laughter] but it probably would apply to Louisiana whose rebound last year seems to have a lot to do with the gaming industry. The picture in Texas is mixed; employment declined in January for the first time in thirty months, but it rebounded in February. The biggest negative for Texas, of course, is the situation in Mexico, both actual and prospective. Our staff has conducted three special Beigebook surveys on expectations about the impact of Mexico's problems on Texas businesses, and each of those surveys has gotten more pessimistic about the overall impact on Texas. Dozens of retail establishments have closed in most of our border towns. Unemployment is up all along the border. With respect to Mexico itself, given that their economic policies in recent years have been fundamentally sound, the austerity program that this country apparently has been pushing on them seems unnecessarily harsh to me and may prove to be counterproductive in the long run. As for the national economy, about the only straw in the wind that I have picked up that others may not have picked up has to do with retail sales. J.C. Penney, which I regard as the retailer to the middle class, is having in March its second consecutive decline in sales.",318
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Both the statistical indicators and our informal contacts suggest that the pace of expansion is slowing in the First District. Since we never got into an expansionary phase to begin with, this is not being met with great joy around the District. Payroll employment in the region grew a little more slowly at the end of 1994 than it had earlier in the year and then dropped in January. Help-wanted advertising dropped. At the same time, our retail contacts, which are really quite a diverse set, were almost unanimous in reporting that sales were flat to down in both January and February. Some attributed the disappointing performance to the weather; again, we didn't have much snow this year. But there was general agreement that the regional economy is slowing. On the manufacturing side, our contacts are more positive than the retailers. That has been the general pattern for the last several months. A majority of our contacts reported increases over the year ranging from quite modest to fairly strong--in the range of 30 percent or so. But there are some notable areas of weakness: aircraft parts, medical equipment, and potentially the small volume of manufacturing in our area that relates to the auto industry. The price picture remains as before. Prices are generally stable but there are major exceptions in the areas of paper, plastics, and leather in particular. Residential construction has slowed in our region as it apparently has elsewhere, but the potential for nonresidential construction is solid, both as we see it happening right now and in the future. Vacancy rates in Boston are now about 10 percent, which is a level that, at least earlier in the 1990s, nobody predicted would happen over the next 10 years. It may well be that we will see new office construction soon--if not in downtown Boston, then on the circumferential highways of 128 and 495. By way of contrast--and New England has really been an area of contrasts throughout this recovery--Hartford vacancy rates are in the mid-20 percent range and still rising. Two major items of economic interest have dominated the regional news. The first of these is the report of the commission on military base closings--the defense industry in the New England region is about 1 in 10 jobs--and the second is the proposed Fleet-Shawmut merger. Hanscomb Air Force Base, which is in eastern Massachusetts, was not on the closing list to the great relief of many in Massachusetts. If the initial recommendations are approved and Hanscomb continues in operation, it will add slightly to jobs in the region rather than take away something like 11,000 jobs. The Fleet-Shawmut merger has prompted at least two state attorneys general to threaten some sort of action--we are not really sure what--over the loss of jobs as a result of efficiency measures expected after the merger. So far, Connecticut appears to have negotiated a deal to keep certain jobs that would otherwise have been cut, and I am sure Massachusetts has this in mind as well. We have not seen a draft application, which I think is being held up because of the complexity of some of the competitive issues involved in this merger. Turning to the Greenbook, I must say that I have some concerns along the lines that Bob Parry was suggesting. We find ourselves in agreement with the basic GDP growth rates shown in the baseline forecast. But when we use these growth rates, our own projections of unemployment are slightly lower than the Greenbook's and our estimates of inflation growth are a bit higher. More importantly, we don't see the level of inflation stabilizing next year. I know there is a tradeoff in terms of the impact from the external sector, but we don't see that level of stability in terms of rates of inflation growth in 1996. We see a gradual uptick, which is consistent with our projections of unemployment. We believe that the core trend is rising, which is discussed in the Greenbook. Therefore, we think and maybe others believe as well, that there is a bit of upside risk in the degree of inflationary pressure in the baseline forecast, particularly as we take it out through 1996.",830
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, growth in the Twelfth District economy as a whole remains moderately strong. The District's unemployment rate has dropped 1-1/2 percentage points in the past 12 months. The intermountain states have experienced very rapid growth, although we have seen some moderation recently. In California, the modest recovery may gain some momentum this year. Revised payroll employment data for California show that the recovery so far has been characterized by a rebound in construction, recent strength in non-aerospace manufacturing, and continued growth in services. Payroll employment in southern California now is growing at the fastest pace among the regions in California after falling at the fastest rate during the recession. While overall conditions remain strong in the District, several special factors will damp growth in some areas. In California, the estimated damage from March rains and floods is expected to reach $2 billion, including $400 million in crop losses. The recent storms also will depress state employment, construction activity, and retail sales. Recent developments in Mexico likely are beginning to restrain growth in California and Arizona. Arizona's dependence on trade with Mexico is about three times the national average, while California's dependence is about 1-1/2 times the nation's. To date, the anecdotal evidence confirms initial estimates that developments in Mexico will reduce growth in U.S. real GDP by a few tenths of a percentage point in 1995--Ted indicated roughly a third of a percent in his forecast--which implies a moderate-sized shock to both California and Arizona. However, I must admit there is concern that a severe recession in Mexico could bring about more substantial effects on these states, particularly as one gets closer and closer to the Mexican border. In Washington State, the widely publicized cutbacks at Boeing will hold down employment in the near term. However, it appears to us that these cutbacks are more indicative of a restructuring effort than of a downturn in the longer-run outlook for aircraft production in the state of Washington. If I may turn briefly to the national economy, the broad contour of our forecast is similar to that of the Greenbook, although we seem to have differences that are very similar to those mentioned by President Minehan. Throughout this year, the economy most likely will remain above levels of labor and capacity utilization that are consistent with steady inflation, despite a slowing of growth in real GDP. Thus, we anticipate that inflation will increase a bit this year and next. Of course, there is always considerable uncertainty in such forecasts and this is a particularly important consideration at this early stage of a slowdown in growth that now appears to be under way. I find it interesting that several of the spending equations in our model are predicting levels that are below the actual data in the fourth quarter, suggesting that there may be some downside risks to the real side of the forecast. Moreover, I guess we have all noted that forecasts from a model often underpredict the amplitude of cyclical movements in the economy. Thank you, Mr. Chairman.",599
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, Seventh District manufacturing activity remained brisk in recent months, but there were signs of moderation in some of the interest rate-sensitive industries, notably autos and single-family housing. Sales of autos and light trucks in January and February came in under a 15 million unit, seasonally adjusted, annual rate, which was below industry forecasts as well as our own forecast. Auto makers responded quickly by cutting first- and second-quarter assembly schedules. In line with the Greenbook, we now expect light vehicle output to add very little to first-quarter GDP and probably subtract at least a full percentage point from second-quarter growth. It is important to keep in mind that April is a critical month for the auto industry because that is when they determine their model year build-out. Once they determine the number of units produced, they then apply the incentives necessary to sell them for the remainder of the model year. Recent reports from the Big Three auto makers as well as from District auto dealers and distributors suggest that light vehicle sales have improved in March, perhaps to as much as a 15-1/2 million unit rate, with sales increases concentrated among those models where incentives have been enhanced. I emphasize, ""as much as."" However, it will take another month or so before we know whether the early 1995 softness in lighter vehicle sales reflects what one industry contact called ""the pause that refreshes"" or whether there has been a more permanent pullback on the part of consumers. Single-family housing is the other major industry that showed outright weakness in early 1995. But this is being countered by growing multifamily and commercial construction activity. In addition, we have had a few reports that recent declines in mortgage interest rates may have mitigated some of the softening in mortgage demand and existing home sales. We are all aware that sales of Michael Jordan's new number 45 Chicago Bulls jersey have been exceptionally strong recently, [Laughter] but overall retail sales growth in the District has slowed from the fourth-quarter pace. District reports on March-to-date sales suggest no change from the moderating pace set in January and February. Apart from apparel, inventories are not seriously out of line with desired levels, although an increasing number of retailers in our February Michigan survey reported rising stocks. Price discounting continues to be pervasive and competition intense. The District's manufacturing sector outside autos continues to expand at a robust pace. District steel production in the first quarter will post its second largest year-over-year gain since the end of the 1990-1991 recession. However, confidential information we have on the Chicago Purchasing Managers Index, which will be released to the public this Friday--I emphasize that this is confidential until Friday--will indicate a significant slowing in the pace of expansion during March as well as a slight easing in prices-paid inflation. I would add that, on the other hand, the tone of our recent meeting of the Advisory Council on Agriculture, Labor and Small Business was quite positive, with representatives indicating that their small business contacts still expect growth in 1995 to be in line with that in 1994. The agricultural sector is stronger than we had expected. Farm land values continue to rise. There was a 6-1/2 percent increase in District farm land values last year, and that was the largest annual gain in six years. January and February unit sales of farm tractors and combines were the strongest since 1984 and were up nearly 10 percent from a year ago. On the employment front, labor markets remain very tight. Help wanted ads continue to climb in the region, and the survey of Midwest employers indicates further strengthening in hiring plans. Virtually all of our contacts in the personnel supply industry report difficulties finding workers to meet the needs of their customers. Our directors as well as the members of our Advisory Council express significant concerns about labor shortages, particularly in the state of Indiana. One of our directors from Indiana told of a help wanted ad being placed offering a sign-up bonus of $200. By mistake, the ad ran with an extra 0, offering a $2,000 bonus, and it ran for two days before they realized it. They had a total of three responses to the ad! Overall developments in the Seventh District, while upbeat in many respects, are gradually beginning to reflect some of the mixed signals observed around the nation. Our appraisal of the national economic picture is very similar to the Greenbook's. In general, we concur with its forecast of slower real growth combined with a modest but increasing rate of CPI inflation.",911
-fomc-corpus,1995,"Mike, when Hoosiers see something that is too good to be true, they know it probably is. [Laughter]",26
-fomc-corpus,1995,Spoken like a true Hoosier!,9
-fomc-corpus,1995,"Quick, President Broaddus.",7
-fomc-corpus,1995,"Mr. Chairman, reports coming out of our District, which I would remind you is the District where Michael Jordan came from originally-- [Laughter]",30
-fomc-corpus,1995,He's now in Chicago.,5
-fomc-corpus,1995,"These reports continue to show some slowing in the regional economy. We do, of course, conduct monthly manufacturing and service sector surveys, and for the latest two months both surveys are consistent with some general softening in activity in our region. Our directors, while they are still broadly optimistic, are presenting more balanced comments now on local and regional conditions than earlier when almost all of their comments emphasized the strength in business activity. Let me give you a couple of quick examples. The central North Carolina area around the cities of Durham and Raleigh has been the strongest local economy in our District, probably about the strongest local area in the entire country. Activity there is still strong, but we are seeing some signs of softening there. Home sales are weaker than they were; automobile sales and sales of other durables are also a bit weaker. As another example, is on the board of a large national apparel retailer. In that role, she watches consumer trends not only in the apparel industry specifically but more generally, and she is not very optimistic about the outlook for consumer spending either regionally or nationally. To summarize by sector in our District: Retail activity clearly has weakened since the beginning of the year; manufacturing also has moderated, although a good bit less; and both residential and commercial real estate activity have been flat over recent weeks, but some leasing agents have told us that the market for prime office space has become a good bit tighter over the last few months. There is some closing of the gap there. The situation in our region, of course, is broadly consistent with developments at the national level. Much of the national data since our last meeting, as we all know, clearly suggests that the expansion is beginning to moderate. I think the most compelling evidence of that is in the retail sales data. Further evidence is provided by some of the latest residential construction information, especially the decline in single-family starts to the lowest level in about two years. In my view these developments clearly have been reflected in financial markets. Despite the recent acceleration in core CPI, bond rates have come down. I think that certainly can be an indication of some reduction in inflation expectations, presumably on the grounds that slower growth will reduce the pressures on resource utilization and hence on cost and prices going forward. Against that background, the downward revision in the Greenbook's projections for the first half of this year and, of course, the substantial downward revision for the first quarter, are reasonable. One can support the revised projection analytically in a variety of ways. In particular, it is consistent with the permanent income hypothesis, which is a model that many economists now find persuasive in thinking about consumer behavior. As you know, even though consumer outlays have diminished lately, income growth has been well maintained. The saving rate rose significantly in the final quarter of last year, and if current trends persist, we are going to get the same kind of increase in the current quarter. The permanent income hypothesis implies that households will save more if they expect income to grow more slowly in the future, and of course, that is consistent with the Greenbook's scenario. In that regard, I might just note that one of our economists, Peter Ireland, recently developed a projection for real disposable labor income for this year, 1995, using a VAR model that is really driven by the saving rate. His projection is consistent with the Greenbook projection using a very different model of the economy. So, again, I think the broad profile of the Greenbook's near-term projections is certainly plausible. Having said all of this, I think that the risks in the outlook, while certainly more balanced than they were earlier, are still skewed a bit to the up side. I think we have to keep in mind that a lot of talk and focus has been on the softer data in some areas, but not all the recent data have been soft. In particular, employment has expanded sharply over the last three months. It is up 3/4 of a million jobs over that period. That is an annual growth rate of 2-1/2 percent, which clearly is significantly higher than what is consistent with longer-term noninflationary trend growth in employment. Also, industrial production was strong enough in February to push the capacity utilization index back up again. It is now at the highest level since 1979, if my figures are right on that. And perhaps most importantly, I am impressed by the continued strength of business fixed investment, which is a forward-looking indicator, at least in some sense. So, again, I think the upside risk is still there and we should not lose sight of that. I just hope we keep that in the back of our minds going forward.",945
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, the economy in the Southeast has continued to expand in the first quarter, although we are seeing some signs of slowing from last year's very strong fourth quarter. Employment growth accelerated in January, and preliminary February data suggest both strong employment growth and a further decline in the District unemployment rate. We are now forecasting an unemployment rate in the District of 4.7 percent when we get the final data. There are, of course, signs of deceleration as I have indicated, although I don't view any of these as being signs of real weakness in any sense. The slowing that we have had is pretty much along the lines of what we have heard from others for the rest of the country. Retail sales were quite disappointing to retailers in February, but this was attributable to particularly wet weather, and the early March data point to some recovery. Automobile sales have been declining since 1994, and single-family home sales continued to fall through early March and are now below year-ago levels. Manufacturing activity as reported in our manufacturing survey softened a bit in February--that is both in terms of production and shipments--and some of this slowing has been attributed to the situation in Mexico. But other reports suggest that inventory shortages in several industries are contributing some strength. That is especially true in chemicals, paper, and packaging. In Tennessee, the auto plants are operating at full capacity as are the packaging and paperboard facilities throughout the District. The strongest increases reported to us are in communications equipment. On the inflation side, there has been some abatement of raw materials price increases, and as I have been reporting for several months, where there have been materials price increases, they generally have not been passed through to the intermediate or consumer levels. We still are hearing stories of labor shortages and we too have heard of signing bonuses, although not quite the size of that erroneous figure reported by Mike Moskow. Wage increases are still pretty spotty around the District. Travel and tourism are quite mixed, with business and convention travel to Florida, New Orleans, and the Gulf Coast of Mississippi especially strong. But in general tourism in Florida remains very lackluster. Tourism around the major baseball spring camps has been in decline, as you would imagine. Traffic to Florida from Latin America, again not unexpectedly, has slowed. And European visitors are still scarce, but that is showing some hints of turning around. One of our directors from Florida did report that German visitors are not necessarily all tourists because they are buying the high-priced homes in Palm Beach. The Germans are moving in very aggressively and the $2 million and above houses are now flying the German flag. In Atlanta, the Olympics are beginning to have an effect, both in terms of infrastructure and construction for the venues. With respect to the national economy, we see underlying momentum in the economy as still being pretty strong. The signs of weakness or deceleration that we do have seem somewhat unpersuasive to me in the face of the resilient fundamentals that seem to exist in the economy. That is, employment and income are still quite strong, as Al Broaddus just mentioned. New orders have been strong, as has been business fixed investment. I am particularly impressed by the plans that I see for more industrial capacity coming on line this year and next. Of course, as I have indicated, we do see some moderation, but less than in the Greenbook. And our differences with the Greenbook are the same as they were last time. That is, we anticipate somewhat stronger growth with somewhat higher inflation. We see the inflation rate moving up in 1995 to 3.5 percent, but expect it to peak at that level. We have had some discussion about the dollar this morning, Mr. Chairman, and I thought I would interject just one comment on that subject. Although I found Peter's description of the reasons for the dollar decline quite persuasive, I still am not entirely clear in my mind what the real reasons are. There are probably many, but I don't think we really know categorically what they are. More importantly for us is the question of what impact the lower dollar will have on the economy. It seems to me that there may be few tangible repercussions for real activity and prices if the dollar stabilizes around current levels. Perhaps this is preaching to the choir to some extent, but I think as a matter of principle we should not be adjusting policy to achieve some particular external value of the dollar. In some sense, I believe this is one of the reasons we have a flexible exchange rate. The dollar is a signal, although a noisy one, but I don't think it should be a target. Thank you.",935
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, the Tenth District economy remains strong, with strength evident throughout the region. Our directors are uniformly reporting robust growth in all District states. Moreover, recently revised employment data confirm the strength of the District economy. Nonfarm jobs were up 4.2 percent in January over the previous year. New Mexico, for example, continues to rank among the top states in terms of job growth. Six of our seven District states are experiencing job growth above the national average. Manufacturing is a leading source of economic strength; factories in the region are generally operating at high levels of capacity. Durable goods makers have been adding jobs at a rapid pace. Retail sales are generally buoyant across the region, although automobile sales have shown some weakness recently. In the construction sector, a recent surge in office construction has more than offset the slowing in the housing sector. Notwithstanding the recent strength that I am reporting, there are signs that overall activity is beginning to slow. Our quarterly survey of manufacturers suggests that activity has begun to cool somewhat. Fewer factory managers are reporting gains in production and shipments than was the case last fall. Also, loan growth in District banks has moderated lately from the rapid growth of the fourth quarter last year. Manufacturers report steady increases in prices of materials, with more of these hikes being passed through to final product prices. Reports of wage pressures, however, are still isolated. Turning to the national economy, recent signs of moderation in economic activity to a more sustainable level are, of course, welcome. But whether that moderation will be sufficient to cap inflation--to echo what others have said--is still an open question. I believe that, on balance, there is upside risk to the forecast over the year as a whole. I would like to mention some of the reasons. The interest-sensitive sectors of the economy may show more strength than was projected, particularly if the recent run-up in bond prices is sustained. Notwithstanding Mexico and South America, export growth may outperform our expectations, given the decline in the dollar. Firms may be more aggressive in investing in new plant and equipment, especially given their capacity levels, and less aggressive in paring inventory growth than we currently believe. Moreover, recent national bank lending data are consistent with an economy that is still growing at a fairly strong pace. As for inflation, I agree that the core level of the CPI is likely to move up to the 3-1/4 percent range this year. But if the economy comes in stronger than expected and if the dollar continues to weaken, I think inflation could move higher. I do not look for much help on the labor cost side because traditionally labor cost movements have lagged inflation movements, suggesting that the best news on this front may be behind us. The implication in my view is that the risks continue to lie on the side of inflationary pressures. Thank you.",574
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"The Fourth District is operating at a very high level of economic activity, though clearly the rate of change has slowed. Directors and other contacts consistently report that business is not growing as fast as last year, but there are very few indications of anything declining in an absolute sense or even concerns of such. Motor vehicles are quite strong. However, the dealers are now telling us that they have as much in inventory as they want, and they are sending messages back to the manufacturers to slow the rate of shipments. How the manufacturers will respond to that in terms of production is going to be determined in the months ahead. We have a lot of exporting out of the District although, of course, a great deal of it is to Canada. Ohio also has large exports to Mexico --Kentucky does as well--of auto parts. So far, exporters in our District are not raising any concerns about Mexico as being a particular problem because, as our companies tell us, their other markets for exports are quite strong. Canada continues to be a good export market for us. Canada also is still, for better or worse, a strong source of investment funds coming into the region. I am not sure why the motivations are all that attractive from a Canadian standpoint. Both director reports and direct contacts with some retailing companies--these are companies that may be headquartered in our District and operate all over the country--tell us that there has been a slowing in the growth of retail sales, not absolute declines. One area of absolute declines is in residential construction. Generally, there is a pattern of new-start activity being below what it was in the recent past. Inventories of ""for sale"" homes seem to be lengthening. Commercial real estate construction activity has picked up compared to last year. Also, industrial spending, for both productivity and capacity increases, especially motor vehicle-related capacity, is growing. Companies also tell us that steel capacity through 1996 and 1997 will be very substantially increased. Since we have already seen reports of declines in steel prices, they say that we should look forward to some softness in the steel market in the next couple of years. One area that is creating a lot of comment, but to me more uncertainty as to what it all means, is health care consolidation. We see very large companies getting together. People talk about the consolidations resulting in job losses, but we have not yet seen them materialize in any observable way. As for the national economy, the Greenbook's projection that nominal spending growth will slow to the range of something under 5 percent this year and next year looks to me like a very desirable forecast, as I indicated earlier. I don't have any reason to quarrel with that. If I didn't think that that was going to happen, and if I thought that nominal spending growth was going to continue in the range that it was last year, then I would be a lot more concerned than I am about the prospects for inflation in 1996 and beyond. But if that forecast of total spending does materialize, then the question about inflation comes down to issues about productivity growth and the ability of this economy to expand. I am not too disturbed about what might happen in terms of reported rates of inflation for 1995. I don't think that monetary policy can do much about that anyway. At this point, I mainly would be interested in seeing that the rate of inflation in 1996 and 1997 resumes decelerating a percentage point or two from where it has been in the last couple of years. Right now, I don't have any reason to believe that we are not on a track to achieve that result. So I am comfortable with the national forecast.",740
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"There are some clear signs of moderating growth in the Philadelphia District. Manufacturers in particular indicate a slackening pace that is apparent in new and unfilled orders as well as current shipments. Retailers report a slowing pace of sales, especially in autos and other durables, although I think there is considerable uncertainty among retailers as to whether this is just a temporary slackening to be followed by a pickup or the beginning of a slower trend. Residential sales and construction are in a lull and there likewise I think most realtors are not sure whether this is just a lull that will pass or the beginning of a long, dry spell. Commercial real estate conditions are soft, but the cycle seems to have bottomed out in areas of the District that show more strength. Looking across the District, even in those areas where economic activity is stronger than in others, there really is an absence of wage and price pressures. They just remain subdued and are a nonproblem. Increasingly in the District, the outlook for moderating growth is becoming the conventional wisdom, following the fast finish of last year, which temporarily raised spirits that 1995 might be a very strong year. Since the Philadelphia District has been a laggard during this expansion, there is some feeling that the good times could have lasted longer--the same view that Cathy Minehan finds in New England. For the nation, I think we need more than the usual amount of humility about our assessment of the outlook. To be sure, there are increasing signs of slowing growth, but we could be surprised either on the up side or the down side. Areas like inventories or net exports or consumption expenditures all strike me as having more potential than usual for surprises for reasons that have been discussed. How much inventory accumulation is intended or unintended? Certainly, the net export outlook has a number of crosscurrents. Since the lull in consumption expenditures has been mainly in the durables side, just how temporary is that or is it more permanent? We are likely to have some increases in inflation in 1995. We need to try to distinguish between cyclical increases that are likely to moderate as the cycle matures and increases of a more underlying or core character. In this context, a slowing of economic activity makes credible the case that we may see more of a cyclical increase than an underlying increase. But here too, we need to keep a few upticks in inflation in the context of a cycle. This comes back to the importance of gauging the strength of economic activity, and I think this is a time for monitoring.",512
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. Let me comment first on the national economy. I find myself a little more confident than I normally am about the general contour of the Greenbook forecast in part because, as many people have commented, the incoming data on the national economy are convincing evidence to me that the pace of growth has slowed. Those data are also consistent with the tenor of the anecdotes that I have been picking up in the District lately. I take some comfort from the incoming data and the Greenbook forecast and indeed from our own forecast, because as recently as a couple of months ago it was mostly a hope and a prayer that growth would slow to something more consistent with trend. Now I think it is a little more than that. I don't know where the risks lie, particularly; I do know that the confidence bands around these forecasts, if one does it rigorously, are very, very wide. I think that is worth bearing in mind as we go forward. With regard to the Ninth District and the anecdotes there, first of all, I think it is worth saying that the District economy on balance remains very healthy. But, and there are some ""buts,"" there is no doubt that auto sales, housing activity, and retail sales generally have slowed perceptibly. The sellers are disappointed and their attitudes have soured somewhat. I think they attribute this slowing to the level of interest rates to at least some considerable degree. On the other side of the coin, labor remains in quite short supply in most of the District. This has not translated into any real acceleration in the rate of wage inflation, but it does seem to be affecting expansion plans and/or current production activity, simply deferring those plans or limiting output; I think it has made a difference. The final comment I would offer is that I have a sense that we are in for some kind of inventory correction. I say that not on the basis of a lot of rigorous analysis of how production has matched up with consumption or other spending, but mostly as I listen to stories about some of the disappointment that has occurred. That suggests to me that there are some inventories around that people would rather not be holding, whether they want to admit it or not. Certainly, the incoming production data on the national economy have been stronger than the spending data, consistent with the same story. That suggests to me that an inventory correction will occur.",479
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. My view is that the U.S. economy continues to show strength even though there are now a few signs that the pace of economic activity may be slowing. Real GDP grew at a 4.6 percent rate in the fourth quarter according to the most recent estimate. Inventories were a net drag on output growth and domestic demand was strong. This combination, which was not apparent in the original advanced GDP report, is a plus for the first quarter since there should be less risk of a quick slowdown due to a quick inventory correction. Inventory-based stories of a slowdown have been problematic in any event over the last several quarters, and the inventory-to-sales ratio remains near a historic low. The Eighth District economy remains strong, and at 4.5 percent, unemployment in major District states remains well below the national average. Parts of the District continue to report very tight labor market conditions. A recent survey of businesses in the District shows that about as many plan to add employees in the next three months as did at this time a year ago. Auto production in the District for the second quarter is projected to be much stronger than in either the fourth quarter or the current quarter. Taking these facts together, I view the overall picture on the real side as one of a healthy economy. It is not nearly so easy to be sanguine about the inflation outlook. In January and February core inflation averaged about 4.2 percent, up substantially from the 2.8 percent rate we saw in 1994. Virtually all major forecasters expect inflation to rise in 1995. The Blue Chip consensus, for example, puts the increase in the CPI at 3.4 percent in 1995 and 3.6 percent in 1996 as compared with 2.6 percent in 1994. Longer-term forecasts of inflation are worrisome from the perspective of this Committee because they indicate that market participants expect inflation at or above its current level at horizons as long as five years. A recent University of Michigan survey put inflation expectations at just over 4 percent for 5 to 10 years from now. I might add that this troubling figure is actually down from 5 percent late last year. This indicates that we are moving in the right direction, but it is clear that few in the marketplace believe our commitment to long-term price stability. In this environment, it is particularly important that we ask ourselves what our objectives are. Even if we have put a cap on inflation in the 3 to 4 percent range--and I am not sure that that is necessarily clear at this point--we are a long way from our goal of stable prices and the low long-term interest rates that would accompany such an achievement. The U.S. government borrowed long term at 4 percent in the late 1950s and the early 1960s when inflation was held to the 0 to 2 percent range in this country. The Japanese government can now borrow long term at 4 percent when its inflation rate is comparably low. We clearly have a long way to go to establish that kind of credibility again.",631
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Mr. Chairman, the Second District economy, which has been flat for about the last six months, had a little positive flurry, mainly in New York State, in February with retail sales and employment up a bit. However, the continuing announcement of shrinkage by major employers, the difficulties on Wall Street, and certain base closings would lead one to believe that for the rest of the year the economy in the District is likely to be flat. Regarding the national economy, we, like everybody else, are uncertain as to where the economy is going--whether it has slowed enough to sustain a reasonable level of growth and progress toward price stability. On the positive side, we have consumer spending moderating, retail sales down, auto sales down, a little fall in the Michigan index of consumer sentiment, housing starts declining substantially, exports to Mexico and Latin America decreasing, and wage growth continuing to be moderate indeed. On the other hand, one has to look at the fact that in recent years we have had a pattern of a first-quarter slowdown followed by a strong rebound, and none of us can be certain that that won't happen again. Employment growth is still quite strong. The stock market is very strong indeed and the long bond rates have declined. Capacity utilization is still above 85 percent and employment below 5-1/2 percent. CPI inflation has crept up in recent months. Regarding any differences with the Greenbook forecast, we do have differences that are somewhat troubling in that we have the real GDP growth rate slightly higher in 1995 and somewhat lower, down to about 2 percent, in 1996. But the unemployment rate is still low, and we are less sanguine about wage pressures. Consequently, we have the CPI up 3.4 percent fourth-quarter-to-fourth-quarter in 1995 and up 3.7 percent in 1996. In the financial markets, the strong stock market and the strong bond market would seem to reflect the notion in these markets that we have in fact achieved the soft landing, which none of us is quite sure is true, and that the Fed is about to declare formal victory, given the number of comments by some members of the Committee about having raised interest rates high enough. I think the financial markets may have it right, but if they don't, they have it wrong by being euphoric on the top side. If in fact we get a rebound in the economy or any continued pickup in inflation, I think the Federal Reserve would have to tighten even further because of this attitude in financial markets, and perhaps in part because we have contributed to this attitude in those markets. So in my view this is very clearly a time for us to be attentive to what's happening in the economy but perhaps attentive in the sense of looking for a demonstration of price stability from the economy rather than looking hopefully for an indication that we already have been successful. It seems to me it is too early for that.",594
-fomc-corpus,1995,Let's take a 10 minute coffee break at this point.,12
-fomc-corpus,1995,"Governor Kelley, you have the floor.",8
-fomc-corpus,1995,"Thank you, Mr. Chairman. I would like to lean into the wind a little here as several have done, particularly the Vice Chairman when he spoke just a moment ago. I don't think there is much question that the expansion seems to be slowing right now, and I certainly respect the strong logic in the Greenbook about the expectation for upcoming quarters. But I have to say that as of right now, from what I can see today, I am agnostic about the course of the upcoming quarters and the balance of the forecast period. While I am not prepared to bet very heavily on it, I surely would not overly discount the possibility that we are going to see a reacceleration here or at least a considerably lesser degree of softening. I had a list of factors here; almost all of them have been mentioned. One that I would like to repeat was mentioned by the Vice Chairman a minute ago. I have never known whether the old saying that history never repeats itself is correct, or the one that says that those who ignore history are doomed to repeat it. But we should keep in mind that for the last two years in a row we have had a configuration of a fourth quarter going into a first quarter that looks very much like the one we have right now. Certainly, some things are a lot different right at this point, most obviously interest rates, but we have had this kind of configuration for two years--",285
-fomc-corpus,1995,I think it is three years.,7
-fomc-corpus,1995,"Three years? I'm sorry. I didn't go back far enough in my research. The economy is still forming new jobs at a rapid clip--500,000 or so in the first two months. The related earnings will be kicking into the spending stream. I am not sure what may happen on inventories, but certainly we still have a very low historic inventory-to-sales ratio, which leaves a lot of room to build inventories. Factory orders are still strong; backlogs are still rising. Nominal rates all along the yield curve are well off their highs, and real rates are certainly down from where they were. I don't think we can call the real rates high by any reasonable standard that I can see. That may reflect the slowing that we have right now, but it also could set the stage for some reacceleration later. I have been anticipating that the consumer would run out of gas before now, and that has clearly been wrong. Now it seems that the consumer is still quite solvent. With the stronger stock market and bond market that we have had recently, I would expect that confidence will continue to stay high. It is still high, maybe a little off its peak, but nevertheless still quite strong. It will be interesting to see how the lower dollar plays out. As Ted said a few minutes ago, the band of uncertainty is very large. But a great many observers feel that the dollar could easily go lower over time from where it is right now, even if the decline may be somewhat overdone on a short-term basis in the last couple of months. It seems to me that that could give us an upside surprise on the export side. All in all, if you use the baseline forecast in the Greenbook and ask yourself where the risks are around that, at the moment it would seem to me that they are still on the up side, with a meaningfully larger chance that we will see a stronger economy versus the baseline forecast than a weaker economy.",393
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Thank you. In December I thought a slowdown was likely, or feasible, and the evidence is now becoming a bit more definite that we are seeing that slowdown. I think everybody has been pretty consistent in citing housing and retail sales--autos and durables in particular--as the weakening areas. I guess consumers are finally feeling the stress of higher interest rates as their ARMs were repriced and as they took on increased amounts of consumer debt last year. With wage increases flattening out, taking on additional leverage to spend is not as advantageous. Like several others around the table, I also would like to argue that in spite of the fact that we are seeing a slowdown, I think it is likely to be quite mild. Employment at fairly lofty levels implies that aggregate income will continue to support consumption. Also, we don't have any very significant balance sheet strains at the household level. On the business side, I think the climate remains favorable for continued investment at least in the near term. We are carrying forward considerable momentum from 1994. With this kind of business investment, we are going to have significant lead times on projects, and that leaves a fair amount of expenditures in the pipeline. The cost of capital in the aggregate is still relatively low. Business commitments to cost control and increased productivity do imply additional capital expenditures, although I would admit that the impulse of those expenditures is mitigated by the fact that we are seeing falling computer prices. Nevertheless, corporate profits and cash flows are stronger than expected and this can support additional investment. Balance sheets are stronger on the corporate side. Again, this is supporting the opportunity for increased investment. It is possible that the slowdown will ease the strain on resource utilization, but in any case I think most people would agree that the economic slack currently is either significantly diminished or perhaps the economy is operating over capacity. I continue to believe that it is difficult to interpret these capacity questions. On the labor market side, it could well be that we have more flexibility than 5.4 percent unemployment implies, and I would cite the increased use of temporaries. I think the reengineering process has left people employed but willing to relocate if better opportunities come up. For various reasons, perhaps including benefits, people are not moving to seek new employment in the same patterns as in the past. On the manufacturing capacity side, there have been several examples around the table today of capacity being added. Technology, I think, is making it very difficult to ascertain whether our old levels of capacity are even as relevant anymore. Thus, with respect to resource utilization, although both product and labor markets are fairly taut, those data are difficult to assess. On the inflation front, there has been considerable progress both in the numbers and the psychology, but we are continuing to see pressure at the commodity and intermediate materials levels. We have forecast a slight uptick in the CPI for 1995. But the difficulty of interpreting capacity and measuring the NAIRU makes it difficult to know how close we are to building more permanent inflationary increases back into the economy. Perhaps in the near term, we are not likely to see too much erosion of the progress that we have made against inflation if the expansion does slow a bit and wages stay under control. But I think it would be a stretch to see much room for improvement on the inflation front under current circumstances, particularly when we take dollar depreciation into account.",679
-fomc-corpus,1995,Thank you. Governor Lindsey.,6
-fomc-corpus,1995,"Thank you, Mr. Chairman. Like my colleague, Governor Kelley, I am agnostic. The difference is that I am a scared agnostic. Maybe I have to find the right church to go to or something to make me feel better about the future. I am scared for two reasons. First, with regard to the domestic economy, I think that the Greenbook underestimates what I view as very likely fiscal contraction later this year. It seems to me that the way the politics are stacking up, we are going to have a contingent tax cut passed. The contingency will be that we be on a steady and sure path of deficit reduction of about $25 billion a year in order to reach balance by 2002. Now, one can fantasize about how we will get to the out-year parts of that, but we can easily understand why Congress would be interested in passing such a near-term contingency in order to put dollars directly in voters' pocketbooks. I would imagine that beginning in the fourth quarter of this year, where we now have what is described as a change in the High Employment Budget of roughly zero on a quarterly basis, we would see about 1/2 percent of GDP on an annual basis, about $25 billion a year, knocked off. I think that will be a significant brake on the economy. The reason that is a little frightening is that we are also in a situation where the financial sector is in much more precarious shape around the world than it is here. The problems with the Japanese banking industry are well known in this room. They will have to be marking to market on Friday, and that will be an interesting exercise both at the Bank of Japan and at the private financial institutions. I think there will be some interesting activity between now and then. Similarly, the German economy seems to have been slowing down. I think the pressure on the Germans to do something about the deutschemark will become irresistible. Here again, going back to Governor Kelley's analogy of history repeating itself, this reminds me a lot of late 1992 or early 1993 where the possibilities of strange things happening in currency markets seemed high. Back in this country, there is one other ghost on the horizon and that has to do with the debt ceiling bill that will have to pass, probably in September of this year. I have been through two of those where the government shuts down and I went home as a Federal worker--or whatever we do. I went home anyway! [Laughter] The difference here is that the dynamic is slightly different. Previously it was a failure of negotiations where the Executive was trying to restrain spending and Congress was trying to increase it. That makes a lot of sense. What we will have this time, I think, will be Congress trying to restrain spending. The default in that situation really is a zero spending game, and I think it is quite possible to have a protracted period, unlike the 8 or 9 hours or in one case a 2-day period, when the government is shut down. The ramifications of that for the economy and financial markets could be quite interesting. There is a good chance we will avoid it, but if we don't the effects in our bond markets and world currency markets this fall will be very interesting to observe. So, I am worried about the end of the year. I think we are going to have a general drag on the economy from fiscal policy. And with the Japanese, the Germans, and our Congress and Administration, the capacity for something worse happening certainly seems to be there.",720
-fomc-corpus,1995,What I read mainly is that the variance is rising. I couldn't quite figure out where the signs came out.,22
-fomc-corpus,1995,That is why I am an agnostic.,9
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"The data that we reviewed at our last meeting provided inconclusive and, as we put it, tentative signs of slowing in growth. The magnitude of any moderation in demand growth seemed uncertain and the timing of the long awaited slowdown was also in question. That certainly raised the concern that it wasn't going to occur quickly enough to avoid a further reduction in labor market slack, with future inflationary consequences. Since that meeting, I think we have learned a lot, although I agree that not all doubts have been erased. From my point of view, the Greenbook does an outstanding job of digesting all the new information. The analysis it presents is very well reasoned. I would say the evidence in hand now points to a slowdown that is somewhat greater and more pervasive than previously anticipated. The incoming data coupled, of course, with our recent rate hike have led to downward revisions in the projected growth in virtually every component of demand. I think the outlook for net exports, at least beyond the current horizon, is the single modest exception to that pattern. From my standpoint, what we are finally seeing is the result of previous Fed tightening emerging through the pipeline, with the interest-sensitive sectors, housing and autos, leading the way exactly as theory and past experience predict. On the down side, we are now seeing a significant inventory buildup in automobiles leading to production cuts in the spring, and that significantly weakens the forecast in the near term. Investment growth also looks like it is slowing, not excessively but nevertheless slowing. So, at the moment the economy looks to me like it is not too hot, it is not too cold, it is just right. The long-term inflation risk, it seems to me, is not entirely absent. Therefore, we have to be vigilant to see how things progress from here. But it does seem to me that the risk has subsided a little. We now have a forecast embodying more labor market slack in 1995 and 1996 than our last Greenbook forecast, and a forecast of significant new capacity coming on line. Most important, of course, what we are seeing is, to my mind, surprising and continued moderation in compensation growth and subdued growth in unit labor costs. If wages continue to be, as Ed Boehne put it, a nonproblem, that suggests that eventually we may have reason to question whether that the NAIRU is 6 percent or .1 or so lower. I think we should keep an open mind on that topic. The Greenbook emphasizes that the dollar poses significant risk to the forecast. I thought the simulations in the Greenbook did a very good job of assessing the risk. I agree with President Forrestal that the exchange rate should not be a target of our policy, but it does have appreciable effects on output and inflation. Nevertheless, it does seem to me that the risks from the dollar are roughly balanced because, although we are told some interesting stories about why the dollar is doing what it is doing, I think when all is said and done that I would agree with Ted's conclusion that in truth the recent movement in the dollar does not seem to be warranted by any perceptible change in fundamentals. On balance, I would say that in a market like this where psychology matters so much, random walks work well. That is probably going to be the best forecast of where things are headed. Certainly, the dollar could move a lot, but it could go either up or down. The Greenbook assumption of a path with the dollar staying where it is seems appropriate to me, on balance. I take as the moral of those simulations that what we need to do at this point is watch and wait and be prepared to adjust policy in either direction if the exchange rate or any other risk factor in this forecast changes significantly. On balance, I see the risks to the forecast as being in both directions and roughly balanced at this point.",782
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman, I will be quite brief. The scenario sketched in the Greenbook looks reasonable to me both in broad outline and in most particulars. A definition of a reasonable forecast is that there should be risks on both sides, and they should be reasonably close to balanced. I think this one is, but I would shade the risks slightly higher on the down side. Let me tell you why. I could list 12 upside and 15 downside risks, but I'll list only two on each side because I said I would be brief, and the other 13 are already covered. [Laughter] On the up side, I would mention net export performance being better than thought, with or without further depreciation of the dollar, and even more so if there is further depreciation of the dollar--although on that issue I am a random walker, exactly as Govenor Yellen is. The second one I would mention, and it has been mentioned several times, is that this could indeed be a false negative as we have had several times. I can remember, prominently, developments last summer when the economy started to emit a little feel of a slowdown. But the data that we have had in the last two months, I think, are quite different from the two months' worth of data that we had last summer. It is more pervasive. I think it is much less likely that this is a false negative than some of these other episodes that we have seen.",297
-fomc-corpus,1995,Why don't you repeat that; I want to get all the signs right! [Laughter],19
-fomc-corpus,1995,"You want to get all the signs? I think it is less likely that this is a false negative. That was two negatives; I think I got three in the first go-around. On the down side, it seems my role in this FOMC meeting is to keep echoing what Bob Parry said. I agree very much with Bob's analysis. As I look at the pieces of the Greenbook forecast, it is easier to tell stories component-by-component--consumer spending, business fixed investment, inventories, etc.--coming in lower rather than higher. Of these, I think I would put inventories on the top of the list. But these are hunches, after all, and I have no major bone to pick with the Greenbook on any of those details. Much more important than that is the fact--and it really is a fact--that forecasts tend to understate swings whenever they occur. It doesn't matter which direction; they do it. Forecast revisions are serially correlated; that is a statistical fact. There are several reasons for that. I think it has to do with underestimation of multiplier/accelerator interactions. I think it also has to do with people always saying, ""yes there are lags, yes, there are lags,"" but not really internalizing it in their thinking--at least not in a reasonably numerical way. And we all have this tendency to look out the window and see how things are and generalize from that. So changes are always underestimated. To me, that is the major factor suggesting there is a downside risk. The other thing I would say, which is striking to me, is the conjunction--as Governor Yellen mentioned--between what I like to call the fundamentals and the tea leaves. The fundamentals--models, etc.--tell us that the monetary tightening should be just about hitting the economy late in 1994 and into early 1995. That is exactly when we start seeing the slowdown--almost too good to be true! We have no right to think that these models are that good on timing. Nonetheless, there are the fundamentals, and there are the tea leaves coming in right on schedule--which gives me a lot more confidence than I would have in either one in the absence of the other. At the same time, I think there are very few signs of real deterioration in the economy. When I say a downside risk, I do not mean a recession risk; it does not look that way at all. The data really say to me that we have a chance of achieving this soft landing. But I just want to remind everybody that the reason soft landings are rarely achieved has to do with what I was saying a moment ago about the downside risks. People understate swings, forget about lags, and underestimate multiplier/accelerator models. That is why we hardly ever achieve soft landings. In sum, I can hardly imagine circumstances--echoing now both Ed Boehne and Janet Yellen--that argue more strongly that this is a good time to wait and see if this negative really is a true negative, as I guess it is. At this point it is only a guess. Thank you.",642
-fomc-corpus,1995,Let's move on to Don Kohn.,8
-fomc-corpus,1995,"Thank you, Mr. Chairman. The first sentence of my briefing comes directly from Governor Blinder's comments. I expected coffee in between! [Statement--see Appendix.]",34
-fomc-corpus,1995,"Don, we have revisited periodically the issue of going back to some form of credit variable target to replace the funds rate target. You sort of dismissed that in your statement.",35
-fomc-corpus,1995,A credit variable or borrowing?,6
-fomc-corpus,1995,"Either. I use the word credit in a generic sense so that it could be money, it could be borrowing, it could be a credit variable, it could be a non-interest-rate variable. Do you envisage that sort of target as even remotely realistic or are you going to forecast that we will be saddled--I use the word advisedly--with the federal funds rate, which I think everyone would agree is a less desirable target than something directly related to our central bank operations?",97
-fomc-corpus,1995,"There are really two issues, Mr. Chairman, and I would like to subdivide my response accordingly. One is the issue of what Peter Fisher is looking at every day when he is adding or subtracting reserves. We used to have a borrowing objective that was really a proxy for what was going on in the money markets. It had a little more flexibility in it than direct funds targeting. Now, Peter really is keyed to the funds rate. When the Committee's target is at 6 percent he must react every time it is at 5-15/16--although that is not quite true. I think going back to targeting borrowing by depository institutions instead of the federal funds rate would be very difficult because the borrowing is very low, and the borrowing function itself has shifted around. The other question that perhaps you are raising is how the Committee keys its decisions about changing the federal funds rate target that it gives to Peter. That is where the aggregates used to play a role in the sense that if they were running very high or very low relative to expectations or to the targets, they would weigh on the scale on the side of the Committee changing its instructions to the New York Fed. We have noted in the Bluebook the last several times that M2 demand seems to have become a little more consistent with our old models, although the whole level of M2 demand has shifted down. With regard to M2, even when it was on model, it only gave a broad longer-run perspective on policy. I think it would be much too early to say that it was going to stay in its old configuration with interest rates or opportunity costs and nominal income. M2 just keeps chugging along at 1 to 2 percent, and the model now is predicting 1 to 2 percent. It may be that as soon as the model predicts something else, M2 will just keep chugging along! I think we need much more information that somehow the innovations in financial markets--the availability of mutual funds and what not--have not altered fundamental asset decisions by households. On the other variables, there may be a little information in the credit variables and even the broad money aggregates. Certainly, we look at credit conditions in the sense of trying to see how willing banks and other lenders are to make loans. This ought to show up in some of these flows. So, in terms of broad flows of credit through the economy, there might be something there that would provide a little extra information--in addition to the kinds of information we already have on spending and nominal income--that would give us a little sense of what was going on in the financial markets. But I would be very, very skeptical that we could ever put very much weight on those data compared to the other more direct measures of spending.",563
-fomc-corpus,1995,And certainly not abandon the funds rate target--,9
-fomc-corpus,1995,"No, you couldn't really. There is no way of targeting those broad money or credit variables directly. It would all be through interest rates and nominal income.",31
-fomc-corpus,1995,"Well, we used to.",6
-fomc-corpus,1995,"The only thing we ever targeted directly, more or less, was M1. We did move reserves around to achieve M1 targets from 1979 to 1982.",35
-fomc-corpus,1995,"When I first arrived on the scene in mid-1987, there were still remnants of different types of borrowing targets.",24
-fomc-corpus,1995,"Yes, but the borrowing targets were really proxies for what was going on in reserve markets. They were not being changed in direct response to, say, M1 or M2. I think M2 played a role in changing the borrowing target, as indeed we could see in the 1989 episode, but there wasn't a direct tie between the borrowing and M2.",74
-fomc-corpus,1995,Other questions for Don?,5
-fomc-corpus,1995,"Don, in your discussion of symmetry and asymmetry, you indicated that if the Committee were to favor asymmetry to the up side, it might be as a result of its concern about the path that inflation is expected to take over the longer term. In your discussion of symmetry, you talked about the Committee maybe concluding that the risks are roughly balanced. I assume that this primarily means risks in terms of economic growth. What do you think the Committee would be communicating in terms of its views about inflation if it were to favor a symmetric directive?",108
-fomc-corpus,1995,"Obviously, it would depend on the Committee's outlook for inflation. If the Committee were concerned that inflation was more likely to rise than to fall and it wanted to resist that rise, the asymmetry would tend to convey that. If the Committee felt the risks on inflation were evenly balanced around the 3-1/4 percent core CPI projected in the Greenbook but did not like that outcome, then it seems to me the Committee also would want to tilt a little bit toward the tight side.",99
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Don, in your discussion about inertia and what might or might not work, you did not mention the monetary base. Is that principally because of the currency component, especially the currency held abroad, or do you have something else in mind?",47
-fomc-corpus,1995,"No. I think first of all that the growth of foreign holdings of our currency has distorted growth of the base substantially. We have only the roughest notion of what proportion of our currency is held overseas and how it changes month to month. We have a lot of work going on here at the Board trying to estimate that, and people are refining their estimates using all sorts of sophisticated econometric techniques--comparing seasonals and things like that. But in the end, we are still only part way toward knowing what those holdings are. The other point I would make is that even ignoring the currency part, the reserves part of the base tracks Ml; that is what it is. The velocity of M1 is extremely variable as we have seen. The Committee itself abandoned M1 targeting back in the early 1980s because M1 became very interest elastic once NOW accounts were introduced and depositors began shifting funds between NOW accounts and time deposits. That sort of thing also shows through to the base. So, I would not put a lot of weight on movements in the base. For the St. Louis conference on operating procedures a couple of years ago that Al Broaddus was involved with, we cranked McCallum's rule for the base through the MPS model. We found a distinct tendency for instrument instability. McCallum has his base rule being adaptive to changes in velocity, but even with the adaptation, we had huge swings in interest rates and no clear gain over looking at nominal income or other variables directly. We do have some work continuing on this and hopefully we can circulate it to the Committee pretty soon.",326
-fomc-corpus,1995,Good.,2
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Don, am I right in thinking that one of the messages from your very interesting presentation is that we may have reached a point at which quarter point changes in the funds rates would be appropriate again? When we were going through the tightening exercise, we went 25, 25, 25, then a couple of 50s, then 75, then 50. If we are as balanced as you say we are, and based on your presentation, would you not feel that 25 basis point moves are quite appropriate now?",107
-fomc-corpus,1995,"I think they would be more appropriate now, particularly if in order to make 50 basis point moves, the Committee felt it had to wait for more information. I thought the lesson of my sermon was that it is better to be a little flexible, and maybe even have to reverse after going in one direction or another, than to get stuck on a particular rate that gets harder to change the longer the Committee is stuck on it. One can see a little of this in Germany and Japan right now, I think.",103
-fomc-corpus,1995,Any further questions?,4
-fomc-corpus,1995,"Don, do you also think that 25 basis point changes could be implemented, as they were in the beginning, decoupled from the discount rate?",31
-fomc-corpus,1995,"Sure, but they would be announced.",8
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"In fact, I saw a comment recently that suggested it might be wise, if the Fed is going to tighten, to do it with the funds rate rather than the discount rate.",36
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"I think it was in one of the incoming Reserve Bank letters on the discount rate. That would allow the spread to widen and make it easier to reverse, because if the Committee started to reverse in tentative steps, the discount rate would not have to be cut. Now that both discount rate changes and funds rate changes are announced, the difference between them has certainly narrowed. And since the Committee is going to announce any funds rate change, it would need to decide whether there is to be any distinction in the type of announcement it would make between a plain open market operations change and such a change accompanied by a discount rate change.",124
-fomc-corpus,1995,"I have a lot of sympathy with what you are saying, Don, about the need to move the funds rate more flexibly. It gives me an opportunity to underline a point I have made before. If we just had some kind of clear long-term anchor, it would be a lot easier to do that. Certainly, one of the reasons we are reluctant to do that and one of the reasons the press focuses on it so much is that that is really the indicator that they can key on to see whether or not we are still moving in the long-term direction we say we are moving in. If we could solve the longer-term question, I think it would feed right into this kind of operating issue.",141
-fomc-corpus,1995,"Further questions from anybody? If not, let me get started. It is pretty obvious that the growth of the economy is moving down in the direction that we had hoped. Indeed, if the evidence did not show that, as I indicated at our last meeting, I think we would be facing severe difficulties at this stage with serious instability beginning to emerge. The extent of the weakness clearly is not pervasive; it is still relatively spotty. We see it, for example, in the interest-sensitive areas, as many of you have indicated. The longer-term buttress to the system clearly has not been undermined. The recent gains in backlogs of orders, for example, remain very solid. One of the reasons is that a gap has opened up between orders and shipments so that even when orders fluctuate a little, the gap is still there; the second difference of the change in unfilled orders is really not discernible on any particular charts. We are, however, seeing initial claims beginning to edge modestly higher. And I don't know whether it means anything, but C&I loans have flattened out in the last two weeks after spiking up for a considerable period. The question has been raised as to whether there has been a change in the seasonals that explains why we are seeing weaker first quarters relative to fourth quarters than we used to see. I think this is a very questionable proposition in large part because it is tough to find a change in temperature degree-days nationwide. It is especially difficult, at least as best I can judge, to see a pattern in the southern areas of the United States--where one would presume that seasonality would be less of a factor--that differs from that nationwide. We still get a big surge in the fourth quarter and weakness in the first in that part of the country. Nonetheless, there are reasons to suspect that weaker growth may in fact be emerging this year, not because of seasonality but largely because of the operation of the business cycle. Gary Stern has raised an interesting question with respect to inventories. It has always been the case that when business people comment that ""my sales have not done as well as I expected,"" that is algebraically equivalent to ""my inventories are higher than I planned."" The question is how important is that development. I think it is important enough to raise the possibility that the second quarter is going to be slower than the consensus expectation. The Greenbook may be on track here. We probably have a mini inventory recession under way, though not one that I would consider to be any particular cause for concern. As I indicated at our last meeting, I don't think any measures of inventory levels are pointing to a large prospective overhang. Indeed, the inventory data have been revised down. I don't mean necessarily for the fourth quarter, but as I recall the annual revision for trade has actually brought the numbers down so that we are dealing with an inventory level situation that is very far from scary. Nonetheless, we do have a short-term inventory cycle tending to emerge. As a consequence of this, I think we are looking at the possibility that there is an element of euphoria about a soft landing that probably mitigates against it happening for the reasons that the Vice Chairman and a number of others have indicated. I think the downside risks are basically coming from the possibility of significant increases in stock and bond prices. If you remember, some of our discussions about the necessity of moving in early 1994 recognized that we were beginning to get wealth effects that were unsustainable and potentially creating bubbles. Ironically, the real danger is that things may get too good. When things get too good, human beings behave awfully. I would be a little cautious about what stance we take. In retrospect, I would change that sentence in my Humphrey-Hawkins testimony where I stated hypothetically that we might be easing rates. The reason I would change it at this stage is not that I think the statement is incorrect. It is a correct statement of policy, but I underestimated the degree of credibility that the Federal Reserve has accumulated in the last year or so. As a result of this, as the Vice Chairman observed, the markets truly believe that we know what is going on in the economy to a degree that no one else really does. Therefore, we got the largest swing in 2-year to 10-year maturities that I can recall in a long time. That swing was basically the result of the disappearance from the markets of an expectation of significant further tightening. The argument was not that the Federal Reserve is wrong and we are going to have to tighten. Their money was on the fact that we were right and we would not have to tighten. Now, I worry about that, and I worry about that basically because we could be our own worst enemies in this regard. I think that this raises an interesting question of policy, not about our fundamental policy but rather the symmetry/asymmetry issue about which I have mixed views. Let me tell you what I think is the relevant issue here. I think there is no alternative to ""B"" as the fundamental choice. In an odd way, if it were not for this credibility/noncredibility issue and the extent to which we are affecting markets and therefore having wealth effects in the economy, I would say this is a classic case of symmetry. It is very difficult looking at current conditions to see anything other than a balanced situation. I think, however, that the symmetry/asymmetry question is really more appropriately a loss function issue. In other words, it does not involve our best guess as to what we think the appropriate policy is, but rather what the consequences are of our taking a position on this matter, recognizing that it will be made public eight weeks from now. My concern is that after the mini inventory recession unfolds and what is still a relatively strong capital goods market starts to create incomes and consumption, we may find that we wish we had been somewhat tighter somewhere along the line. A change in our rhetoric including the use of asymmetry may be the desirable thing to do. I definitely do think we ought to change our rhetoric. I have no really strong feelings on whether we should be symmetric or asymmetric, and very honestly, I could go either way. My own marginal preference is to go asymmetric, but I would find it perfectly acceptable to use a symmetric directive here. One thing that concerns me about what I just said is that it is almost too cute. It is taking fine-tuning to the point of sharp pointedness that may be overdone. But I must say that I line up with the concerns that the Vice Chairman, Governor Kelley, and a few others have mentioned. I would be inclined in that direction, but I am interested in getting everyone else's view on this issue and call on the Vice Chairman first.",1367
-fomc-corpus,1995,"Thank you, Mr. Chairman. I find myself in the awkward position of advocating asymmetry as a signaling device, having spoken against the use of asymmetry for that purpose a number of times in the past. But at this particular time--although there is no question in my mind that ""B"" is correct, i.e., that we should not change interest rates at this meeting--to the degree we believe that our primary responsibility is price stability, I think the inflation forecast that most of us have discussed is such that we should be on record the Friday after the next meeting as having indicated a concern about the trend in prices even though the use of our directive for that purpose is a somewhat puny weapon. I think the fact that those minutes would indicate that the Committee had decided to maintain interest rates but had decided on an asymmetric directive toward tightening would have a reasonable amount of merit in enhancing our position as understanding our responsibility for price stability. Therefore, while it is hard for me to throw my Celtic enthusiasm fully into the ring for something that I usually think is not terribly important, I do feel rather strongly that an asymmetric directive is preferable.",228
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. I thought Don Kohn's remarks were very useful concerning the problems we are going to be facing in making policy decisions. I also found very useful your remark right now on the interplay with the marketplace and the need to change the rhetoric. I don't know how it can be changed in a positive way. We almost need a heuristic model for the markets as well as an econometric model to figure out what is going on. The sort of things that you point to, these ideas about how we are seen as having some sort of knowledge that others don't have, has led me to the conclusion that at least for the time being it is impossible to say anything that is going to be interpreted the way we want it to be interpreted. If I thought that the New York Fed forecast that Bill McDonough presented was correct about inflation in 1996--if I could be convinced of that and I hope he is wrong on that forecast--I would say that we ought to tighten policy now because inflation is definitely going in the wrong direction. I would agree with Governor Kelley that the risks in the forecast are more likely to be in the direction of more inflation rather than less. What I don't know how to assess, though, is an inventory forecast that is the inevitable mirror image of last year's inventory cycle. What we really are talking about here is that we are expecting sometime within 1995 to have inventory effects that are the opposite of those that we saw in 1994. We won't know and neither will the auto manufacturers nor all of these other people such as retailers know as things unfold whether it is the mirror image of last year or whether it is more of a cyclical development. I guess I am not far away from the use of monetary aggregates. My own judgment is, as Don Kohn's remarks might suggest, that in principle excess demand for and excess supply of money balances can be translated into excess demand for and excess supply of output. The problem is, given the imprecision of the econometric models and all of that, that it requires a lot of judgment. We all have different judgments, so we may come to different conclusions. But what makes the current environment different for me is that we have had a prolonged period of very slow growth in the various monetary aggregates. We saw the narrow money measure not grow at all last year even though commercial loan demand was extremely strong and one would presume that compensating balances increased a lot. Leaving out the growth of currency mainly for foreign usage and making judgmental allowances for what might have happened to compensating balances on the corporate side, we have had very weak money growth and the Greenbook/Bluebook projections for 1995 imply to me that we are going to have a further absolute decline in desired money balances on the order of 5 or 6 percent or something like that. I look at that and say that my main concern now is not that there will be too much growth of output. I really never worry very much about output and employment growing too fast, but rather about the growth of output and employment slowing too fast relative to the growth of demand. I come back to the issue of what is going to happen to spending in the economy, the demand problem, whether it is for current consumption purposes or for adding to capacity or improving productivity. As long as we can see that whatever framework we use tells us that we are getting a deceleration in the growth of demand, I think we probably are going to come out okay. So, at this point, I certainly would not be in favor of the ""A"" alternative. I think that it is premature to think about that alternative. I am not uncomfortable with no change, but because of perceptions on the outside I think that the bias in the directive has to be that, if or when we act, it is more likely to be to tighten than to ease.",784
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Alan, in evaluating the current policy stance, as I think you all know, I tend to look at reserve measures and monetary aggregates. I think the current policy stance has a chance of capping the recent rise in inflation, albeit probably at a somewhat higher level than we are seeing right now. The decline in long-term bond yields gives me some confidence that we can afford to wait and watch for a while. As you notice, I said ""chance."" I am not convinced; I would count myself among the agnostics. Certainly, looking longer term, I am not at all sure that we have done enough to reduce the trend rate of inflation, and I clearly feel that this 3 to 4 percent inflation range that we may be able to settle for here is much too high. With respect to the outlook for the economy, I personally would not put too much stock in the forecast of an imminent rapid slowdown. I think that we could well be surprised by the underlying strength. I would associate myself with what Bill McDonough said before in that it seems to me that financial market participants have all rushed to one side of the boat here, and I don't know to what extent comments by Fed officials have led to that. My feeling is that market participants are looking at a broad range of indicators and there is much more to their assessment than just Fed statements that have been made. In any event, it seems they have all rushed to one side of the boat. I think our focus in this Committee ought to be on long-term price stability, not short-run fine-tuning of the real economy. That is really what we ought to be thinking about--whether we are on a course that is really going to achieve price stability. The other thing I would say, and there has been surprisingly little mention of it today at least in the context of the policy discussions, is that we have to continue to recognize the constraints put on policy by the weak dollar in foreign exchange markets. To the extent that market participants perceive that our actions are not consistent with long-term price stability, then we are courting the possibility of, I think, very severe financial repercussions. I have never believed that we ought to use policy to try to target a specific exchange rate for the dollar, but I do think we have to recognize at times like this that it can be a very significant constraint not only on what we say but particularly on what we do. As I say, I think our focus ought to be on long-term price stability. With respect to the symmetry/asymmetry question, I don't have any strong views about that. If the message were that this is asymmetric toward tightening because we think it is more likely we are going to have to tighten more to achieve long-term price stability, I would clearly favor that. I could accept a symmetrical directive.",568
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Unlike, I think, many of the other people who have spoken already, I did not come to this meeting with a predisposition in favor of staying pat. Rather, most of the work we have done, and most of the people I have talked to, suggested that further interest rate increases were necessary to keep inflation in check and deal with the kind of capacity constraints, particularly on the labor market side, that are being forecast both by us and by private sector forecasters. My own bias would be to tighten sooner rather than later because I think that ends up making for a better situation overall. Increasing interest rates at this time does not seem to be the main thrust of the argument here. I can certainly buy into the argument that it doesn't matter whether we do it at this meeting, or at another meeting, or in between. My own preference, however, would be to indicate that the Committee would be more inclined to increase interest rates in the future rather than to leave them pat, or possibly decrease them, because I think that the trends in inflation over the longer run are not what I would prefer. With that in mind, when we discussed our stance toward announcing decisions after meetings, we did discuss the possibility that when there was no change, we might want to communicate more than that we just left the room. That is a possibility that does not require us to wait eight weeks, although it does run the risk of what President Jordan referred to as the impossibility of saying anything right. But it is at least a possibility that we could mention something in our discussion of this meeting that was a little more explanatory or a little bit more on the side of being concerned about the upside potential for inflation in whatever we release after this meeting. After saying all that, I guess it should come as no surprise that I would be in favor of an asymmetric directive. I really do think that there is more room to move interest rates up before we stop doing so.",391
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"I think Don Kohn raised a couple of interesting points, and I would like to start with comments on those. I do think this problem of interest rate inertia is a real problem, potentially at least. It may be that what we are seeing in the financial markets now is a consequence of unsustainable euphoria for one reason or another. But it may be on the other hand that the markets are telling us something significant. I don't have a judgment about that, and I believe we should be careful about rushing to a conclusion about that. While it is not fully convincing, it is worth noting that some work that we have done suggests that the monetary base might be a useful indicator or maybe some sort of useful intermediate target, even recognizing the problems with the currency component. I think that is worth pursuing down the road. With regard to the immediate situation, I certainly favor alternative B. I don't feel all that strongly about the question of symmetry versus asymmetry, but I come out on the side of favoring symmetry. Part of that is my usual reluctance to go to an asymmetric directive. In these circumstances, as I suggested already, we don't know a lot about what the markets are telling us about recent interest rate movements, at least I don't. But it is also true that the period between now and the next meeting is relatively long, and we are going to get a lot of incoming information. We don't meet again until fairly late in May if I have the calendar right. I don't have a feeling as to what the incoming information may tell us, and I would like to be in a position of simply judging it as it comes in. Beyond that, and maybe I am just being a little too cynical here, I am certainly not pleased by the performance of the dollar, but I don't think we ought to put ourselves in a position where we might want to react to that. I am not persuaded that that would be appropriate at this juncture or that it is something we can do very successfully. So, I would be reluctant to go to asymmetry.",414
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, because I find the path for inflation in the baseline forecast unacceptable, my first preference would be for a small increase in rates. However, I could support alternative B because of the significant uncertainties that we see in the very short-term prospects for the economy. I also would strongly favor asymmetry toward tightening, given the expected unsatisfactory path for inflation for the next several years if the baseline policy assumptions are accepted.",85
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, as I look at the situation, I think that the economy is in relatively good shape. Some might take the position that the dollar would argue against that, but generally speaking the economy looks good to me. We are getting some of the deceleration that we had anticipated from our earlier policy moves. I think policy has been very, very successful. It is true that this deceleration may be temporary; nobody is certain as to whether it is going to be permanent or not. Under these circumstances there is no question at all in my mind that alternative B is the right alternative to have at this time. With respect to symmetry or asymmetry, I don't feel very strongly about it. I do think that the risks are fairly well balanced, and so I would have some preference for symmetry. I also wonder what we gain by going to an asymmetric directive at this time because if the expansion does not slow down sufficiently between now and May 23, we will probably make the next move then, be it 25 or 50 basis points. The minutes for this meeting come out shortly after that meeting, so I don't really know what difference that makes. For those reasons, I would support a symmetric directive. But if I had a vote, I certainly would not vote against an asymmetric directive.",261
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, given the data coming in, I can wait as you are suggesting. But as I said earlier, I am concerned about the upside risks especially for inflation, and I am concerned about the inertia Don was talking about that can take place. With that, I would very strongly support asymmetry toward tightening and would encourage us to move sooner rather than later.",74
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, I favor no change in the federal funds rate today. However, I do think that the risks are more on the up side than balanced at this point. In fact, our forecast for inflation for 1995 is closer to 3-1/2 percent than to the 3.2 percent in the Greenbook. It is appropriate to wait for more information on the economy in the coming weeks, but I think we clearly should remain open to further increases. It comes as no surprise that I favor the asymmetric directive as well, not only for the reasons that you gave, Mr. Chairman, but I think two of the points that Don Kohn made were very well-taken. He said that if we were not happy with the 3.2 percent inflation rate that is forecast in the Greenbook, that would be one argument for an asymmetric directive or if we thought the risks were higher on the up side rather than balanced, that would be another reason. I agree with both. So, clearly, I favor an asymmetric directive.",213
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"I support alternative B because this is a wait-and-see time, and I support an asymmetric directive for the reasons that were well articulated by Bill McDonough.",32
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Mr. Chairman, in considering an asymmetric directive, I am reminded of the spring of 1993. I have been here so long that I am starting to look backward! In the spring of 1993, the fear of a bubble was mentioned at this table. We actually had a pretty good bubble develop in the bond market, and we paid a fairly significant price for it in financial market instability later. As you noted, that bubble gave an extra impetus to demand in late 1993 and early 1994. What we did, though, was to go asymmetric and then back off. I have to conclude that doing that, if anything, cemented the market's view that we were stuck at a particular rate. It only built the market's confidence that they could borrow at 3 percent and lend at 6 percent, which is literally what they were doing. I'll be happy to vote for whatever the Committee majority favors. But if what we fear is a bubble, we should not in my view go asymmetric unless we really expect to raise rates. If people do want to raise rates and want to send a signal that we might be doing so, I think a few dissents would be a much more appropriate way of sending that signal. Given what we did in 1993, going asymmetric and then backing off, I am afraid we would only strengthen the conviction of the market and maybe actually exacerbate the bubble. So I favor symmetric.",292
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Mr. Chairman, I think your strong recommendation for alternative B, the fact that it is a crystal clear decision at this meeting, and the reasoning leading to that conclusion are all correct. I am happy to endorse them. On the asymmetry/symmetry issue, I am certain that I am not certain [Laughter] for the following reason. Before I was a member of the Federal Open Market Committee, I thought I knew what the difference between a symmetric and an asymmetric directive was. The longer I serve--and today certainly has added to this immensely--the less I know about what this distinction means. So, I actually would like to request, before we vote on this, a specification of what we are voting on. Let me elaborate on that slightly. If Bill McDonough and several of the others are correct in the sense that inflation is likely to be higher in 1997 than in 1994--and I think he probably is correct in that--and if we are adamantly opposed to that, this Committee should not be voting an asymmetric directive. We should be raising interest rates, probably by 100 basis points today. I do not advocate that policy, but I think that is the implication. That is not something that leads to an asymmetric directive. At the end of this, I am going to pose the question: What do we mean by an asymmetric directive? On the signaling issue, I find that quite baffling. As I think Bob Forrestal just said, on May 23 we either will raise interest rates or we will do nothing. That will be major news. Three days later, the kind of directive we adopted on March 28 will be announced and nobody will notice it. So, I don't see that this has any signaling value as long as it is not leaked, and I certainly hope that it will not be leaked. Therefore, I raise the question of what symmetry vs. asymmetry means. I thought a symmetric directive meant a fairly strong conviction at this meeting that we would not be changing interest rates one way or the other until the next meeting--leaving, of course, the usual flexibility that something quite unusual could happen and we could change our minds. So it is not a lock-in, but it is a predisposition of the Committee to hold today's decision until the next meeting. If I am right about that, and at this point I am not sure that I am, I would strongly favor a symmetric directive.",496
-fomc-corpus,1995,"I look at it as a question of probabilities. In other words, the question really amounts to: What is the probability in this long period that we will be moving rates up or moving them down? I would say that we are more likely to move them up, finding, for example, that the slowdowns we are seeing are partially false or reversed as has happened many times in the past. I find the probability that this slowing will cumulate into a significantly weak economy that would induce us to move rates down is very low. I think the major probability is that we will do nothing. Since I think the likelihood of moving them higher is sufficiently greater than moving them lower, I lean marginally, tentatively, unsurely toward asymmetry, which is really a reflection of the fact that I think the major probability is that we will do nothing. I read asymmetry not as an overwhelming probability that we will move, but merely a probability that one can basically identify.",194
-fomc-corpus,1995,If I can clarify that: You are suggesting that there are three probabilities. The middle probability is doing nothing. If the up probability exceeds the down probability--,31
-fomc-corpus,1995,By a sufficient amount.,5
-fomc-corpus,1995,"Okay, I have it. Thank you.",9
-fomc-corpus,1995,And each of us has to determine what constitutes a sufficient amount.,13
-fomc-corpus,1995,"Okay, thank you.",5
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, I certainly think there is every reason to ""wait and see"" today. I strongly support ""B."" I did speak earlier about my feeling that as of now the risks could be seen as skewed to the up side. My understanding of the use of an asymmetric or symmetric directive is exactly the same as you just articulated, Mr. Chairman. On that basis, it would seem to me that the likelihood of needing to go up further is strong enough that I would prefer an asymmetric directive. However, let me say that I think that the emergence of that upside potential, if it does develop, may well be a meeting or two out in front of us. So we may really want to wait and see today in the sense of adopting not only ""B"" but also a symmetric directive. I could support that, although I would prefer asymmetric.",173
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Let me first if I may, Mr. Chairman, associate myself with Gary Stern's comments about the monetary base. I think there is a lot to be gained by some additional research looking at the possibility of using the base or perhaps something similar to it in our operating procedures. As far as policy is concerned, I can certainly accept not changing the rate today, but I have a relatively strong preference for asymmetry. As I said in my earlier statement, and I agree with a lot of folks here, I think that while the risks in the outlook are more balanced than they were earlier, they still are not fully balanced. I believe there continues to be a significant upside risk, so I think as a substantive matter asymmetry is a better statement. Also, I think Governor Blinder is right that the significance of our statement on symmetry as a signal can easily be over emphasized; I don't think it is zero. We have already gotten some relatively high numbers on the core CPI, for example, in the first couple of months of this year. If that continues, even if we were to move and certainly if we were not to move and let's say we were on the fence again at the next meeting, asymmetry would just be one additional piece of evidence as to the direction of our longer-term strategy and efforts. I don't think the signal value is zero, and I think that is another reason for going asymmetric.",283
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"I agree with your recommendation for no change in the federal funds rate. I agree with your recommendation for an asymmetric directive, although I normally prefer symmetry, not only to signal our leaning in regard to inflation fighting but also in regard to the dollar.",49
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Given the evidence on the slowdown, I agree that ""B"" is an appropriate directive--no change. I do think that it is possible that additional tightening is going to be needed if we are going to resume progress on reducing inflation. I have a slight preference for asymmetry toward tightening because I do think that there is some signaling value. But I would not vote against symmetry.",76
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"I agree with your proposal for alternative B for no change today. Although I could live with asymmetric, I would prefer symmetric for the reasons that have been explained by President Forrestal and Governor Blinder. At the moment, it seems to me that the economy, with some reasonable probability, is on track for a soft landing. There are all kinds of uncertainties in the outlook. Indeed, we may have a false negative; we may be learning that. There remains a risk that inflation may not come down in the way we would like. I certainly hold open the possibility that at some future point we may need to raise rates more. But over this next intermeeting period, when I think about what data are likely to come in, it seems to me that the risks are balanced and that tends to call for symmetry. Certainly, I agree with what Don said. We should not get stuck where we are. I have no objection whatsoever to intermeeting changes. The approach of possibly smaller changes, 25 basis points one way or another, has a great deal of appeal at this stage. It is simply that at this point, for the next month and a half, it seems to me that the risks and likely information indicate risks in both directions and that that calls for symmetry.",255
-fomc-corpus,1995,"I think as I read the view of this Committee, we would be at alternative B and mildly asymmetric. Would you read the directive?",27
-fomc-corpus,1995,"The directive would read, and this is on page 14 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",114
-fomc-corpus,1995,Call the roll.,4
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,"Before we adjourn, Ted Truman has a very minor change to recommend in the minutes for our previous meeting. Ted, did you want to read it or shall I read it from here?",38
-fomc-corpus,1995,"I apologize because I thought I had read the minutes earlier, but I had not. Out thinking at the time of the last meeting was that the Japanese earthquake would affect our imports but not our exports. The truth of the matter at this point is that we think the earthquake will affect neither. But that was where we were, so I would prefer to take out the phrase in paragraph 14 that says it will affect our exports. That shortens the sentence to the one fact that we know pretty certainly--that the Mexican situation will affect our exports.",110
-fomc-corpus,1995,Without objection.   [Laughter]   May 23 is our next meeting and we adjourn for lunch.,23
-fomc-corpus,1995,Would somebody like to move the approval of the minutes for the March 28 meeting?,17
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Without objection. We now turn to Peter Fisher who will report on the operations of both the foreign Desk and the domestic Desk.,25
-fomc-corpus,1995,"Thank you, Mr. Chairman. I will first discuss current conditions in interest rate markets and then some of the factors contributing to recent exchange rate movements before reviewing foreign and then domestic operations. [Statement--see Appendix.]",43
-fomc-corpus,1995,Questions for Peter?,4
-fomc-corpus,1995,"In the domestic report, you indicated that a group of traders was ""priced out of the market."" What does ""priced out of the market"" mean, and how do you know they were priced out?",41
-fomc-corpus,1995,"If you are taking a short position on the expectation that the data will lean the other way or the market will not continue to rally, you begin to lose a lot of money and you have to cover your shorts. There are people who believe that there will be a rebound in activity by the end of the year, but it is too expensive for them to try to express that position in the market.",80
-fomc-corpus,1995,Do you take a survey or--,7
-fomc-corpus,1995,"We talk to people, and there are some well known losses that are now reported. We certainly talk to the dealers about major positions that go against them. So, yes, there are informal surveys and some more formal surveys.",45
-fomc-corpus,1995,"I think the Governor is asking the question, ""What in the world does it mean to say you are priced out of the market?""",27
-fomc-corpus,1995,That's right. [Laughter],7
-fomc-corpus,1995,You lose a lot of money! [Laughter],11
-fomc-corpus,1995,"I think, as Don said, you lose a lot of money. There were people who were priced out of the market in December. They thought that the fed funds rate might not be raised 200 basis points in 1995 and that the yield curve had moved well beyond where it would go. But they chose not to express that view in the market in December.",74
-fomc-corpus,1995,"Governor, what he is saying is a euphemism for indicating that they were wrong and that the price they are looking at now is too high to buy.",32
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,"Did I get it right, Peter?",8
-fomc-corpus,1995,Sure. [Laughter],6
-fomc-corpus,1995,Any other questions? President Forrestal.,8
-fomc-corpus,1995,"Peter, what effect, if any, would you expect the threatened trade sanctions with Japan to have on the foreign exchange markets?",25
-fomc-corpus,1995,"There were various stages in their announcement process. One of the earlier, more definitive, announcements actually had a positive effect on dollar/yen--modestly positive. I think I have described my views to the Committee before on this. When the markets perceive trade policy statements to be just saber rattling and no action is anticipated--just a lot of angry words--that tends to be negative for the exchange markets because they don't perceive that anything concrete will be done. But on the few occasions when our trade representative has announced concrete trade policy steps, whether sanctions or invocations of statutory authority, the exchange market for dollar/yen generally has responded positively on the theory that at least the sign is right for the impact on our short-run trade position.",148
-fomc-corpus,1995,Further questions for Peter?,5
-fomc-corpus,1995,"Peter, you talked about a coupon purchase operation in the last maintenance period and about the possibility of two such operations in the intermeeting period coming up. This raises a question I have wondered about for a long time, which is how you decide what to buy. There is a whole variety of securities out there. I was just looking at the table in your report which shows that about 50 percent of our portfolio is now invested in Treasury bills, with various percentages in other maturities. It is not obvious what the criteria are nor what the long-run goal is--if there is a goal for the maturity structure--nor how individual purchases and runoffs of securities contribute to or detract from that goal. What do you have to say about that? Do you feel that you know what the criteria are?",161
-fomc-corpus,1995,"No, I don't, and I would like to look into and clarify some of the criteria that we use to approach this task. The presumption for several years has been that we are really replicating the portfolio as it exists. So, there is simply an effort to maintain roughly the current maturity mix. That is the policy that I inherited and it can be seen in effect in the new tables that we provide at the back of our report. It is a policy that I have been trying to understand better and to think through some of its implications. It is something that we have begun to work on. We contemplate having a few staff people devote a fair amount of time over coming months to thinking through the criteria that we use as we approach each auction. The tradition has been to assume that we wanted a relatively high component of bills to permit the portfolio to run off rather easily without the need to sell a lot of securities into the market and disturb the structure of the yield curve, if such an occasion were to arise. So, that is the nature of the received wisdom and how I intend to proceed.",221
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"As a follow up, would that review also include the absolute size of passes and their impact on the composition of the permanent portfolio?",26
-fomc-corpus,1995,Yes. The presumption as to the size of each pass is sort of built into the assumptions about how we operate. We have to look at the two together.,33
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"We will be looking at that. There are arguments for smaller passes with more frequent operations; there are arguments for larger ones. I have had some very interesting discussions with other central bankers in my position about the nature of a central bank portfolio and how to think about it. There is not much divergence in practices, but there is a wide range of views about how to think about this. One central banker feels very strongly that a central bank's portfolio should never contain on-the-run securities. A central bank, after all, makes its own liquidity. Why does the central bank need to hold on-the-run issues? The central bank should exclusively be buying everything that is off the run. But in practice, of course, that would involve the Herculean effort of being the vacuum cleaner of the securities market.",161
-fomc-corpus,1995,Especially if you have to sell.,7
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,And to whom.,4
-fomc-corpus,1995,And to who.,4
-fomc-corpus,1995,And to whom. [Laughter],8
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"I'm sorry Peter, I just thought I would pick on you this morning. I took a pill that says, ""Pick on Peter.""",27
-fomc-corpus,1995,That's fine.,3
-fomc-corpus,1995,He can take it.,5
-fomc-corpus,1995,"So, there is a wide range of views. A number of central banks that apply very sophisticated approaches to their foreign currency portfolios--really as profit centers--have been backfitting some of that financial technology into thinking about their domestic portfolios.",48
-fomc-corpus,1995,"Can I suggest that we consider this issue periodically? The issue raised by Governor Blinder is something that is very important for us to look at. The way you phrased your answer, Peter, I think underscores that. To maintain the status quo really makes no sense whatever. The crucial question is: What liquidity needs do we have and what are the implications? I hope that you and Don can get together and come up with a report that gives the Committee some insight into what the principles should be. Let me just state my own view of what I would like to see in that report: What would have been the consequences, for example, if a few of the major money center banks had gone belly-up in 1990, which was not an altogether bizarre possibility, and of the possible discount window lending that could have required huge liquidations from our portfolio? Secondly, there is the interesting question of whether in fact we could get both that scenario and the need for a major accumulation of foreign currencies. My suspicion is that the two contingencies probably would involve disparate economic events and it is very unlikely that they would come together. But we could face the need to acquire very large amounts of foreign currencies over a short period of time. Finally, I think it would be useful to get a notion of the effect of changing the maturity composition of our portfolio on the portfolio held by the public. That ultimately affects the sensitivity of interest payments in the budget, taking into account Federal Reserve earnings, to changes in market interest rates. Clearly, we have been very much inclined over the years to try to stay away from a position where the short-term interest rate actions of the Federal Reserve could have pronounced federal budget effects. To the extent that we lengthen the average maturity of our portfolio and the Treasury does not offset what we are doing, that creates a portfolio with an increasingly shorter average maturity in the hands of the public. Therefore, the consolidated interest costs including Federal Reserve earnings tend to be more sensitive to changes in interest rates--obviously in the direction of higher rates being associated with higher federal outlays. I don't know how sensitive that relationship is, but I do think that the argument should be to get as much liquidity as we mught conceivably need in the context of whatever we view as a potential amount of resources that might be drained from our balance sheet and then multiply it by some number like they do at the BIS--I think it is three. [Laughter] I don't know whether three is the magic number, but there should be some criteria. I think Governor Blinder raises an important issue. We have this huge portfolio, and we don't really have a set of principles that this Committee determines and I think we should. So, I would appreciate it if, sooner rather than later, you could come up with a set of principles that we can then debate at some meeting. Any further comments on this?",583
-fomc-corpus,1995,I wonder if Peter would comment on whether he is holding the fed funds rate up to 6 percent or down to 6 percent.,27
-fomc-corpus,1995,"By normally leaving the market a little short, we continue to push the rate in that direction. The rate expectations can be seen in the fed funds futures contracts. Both my report and Don's report indicate that the market is looking for the funds rate to be edging down, or skewed slightly in that direction, over coming months. We do not feel a great deal of pressure in the reserve market itself. I wouldn't relate this to the substance behind your question, but there have been some occasions where demand for excess reserves seemed a little on the soft side in the last few weeks. I think that is more of an anomaly, but it is something that I am intrigued with. There was one period in which the demand for excess reserves was really extraordinarily soft; we still have not gotten our hands on the reason for that excess level below $1/2 billion. I don't see that as a profound change but more as a fluctuation in the reserve market itself. But the market's forecast certainly is leaning in that easing direction. I don't think we have quite felt that in our reserve management yet.",219
-fomc-corpus,1995,"Further questions? If not, we need to take three votes. The first is to ratify the foreign currency transactions since the last meeting.",28
-fomc-corpus,1995,Move approval.,3
-fomc-corpus,1995,Is there a second?,5
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,"Without objection. Second, we will need to ratify the domestic operations during the intermeeting period.",20
-fomc-corpus,1995,Move approval.,3
-fomc-corpus,1995,"Without objection. Finally, Peter has requested an increase in the intermeeting leeway from $8 to $10 billion. May I have a motion on that?",32
-fomc-corpus,1995,Move approval of the $10 billion limit.,9
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Now let's go on to Mike Prell.,12
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,"Questions for Mike? Mike, I meant to look up something before we came in. I don't know if you have the data with you, but what is the gap between new orders of durable goods and shipments in the last report?",46
-fomc-corpus,1995,It will take me a minute or so to find that. I think we are still seeing rising backlogs.,22
-fomc-corpus,1995,My recollection is that we have a spread of several percentage points. The reason I raise the question is to gauge how much of a drop in new orders can occur in the near term without unfilled orders also turning down.,45
-fomc-corpus,1995,I can't give you that answer immediately. I'm sorry.,11
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mike, the forecast that you gave has the core CPI running at roughly 3 percent throughout the last half of 1995 and all of 1996, and you have built in, of course, the assumption of a flat fed funds rate at 6 percent. Just looking at those two numbers would mean that the real fed funds rate would be roughly 3 percent during this period. We have often talked about the concept of a neutral monetary policy. I am wondering how you would relate that real fed funds rate to the idea of a neutral monetary policy--whether you see this as a neutral monetary policy.",122
-fomc-corpus,1995,"I don't have in mind a particular number that goes with neutrality in the sense that over time one would expect the economy to grow at potential--or to sit at potential output. We have interpreted monetary policy per se as probably modestly restrictive at this point. That is, the real rate of interest is perhaps somewhat above the natural rate. But, in the total financial picture, we also recognize that credit availability if anything has been improving; the terms and standards of bank loans have been moving in an easing direction; and we also have had an impulse through the exchange market, which you might take as part of the broader financial context, that is tending to be stimulative over this period. So, on balance, we don't have a picture of very marked financial impetus or restraint.",155
-fomc-corpus,1995,But is there a zone or number that you think of as a neutral monetary policy?,17
-fomc-corpus,1995,"We would anticipate, particularly in an environment of ongoing fiscal restraint, that the equilibrium as we look ahead to 1996, 1997, 1998 would be one in which the real short-term interest rate would move closer to its historical average; that rate would be on the order of 2 percent or maybe a bit less. This would suggest that the rate probably is higher now than would be expected over the longer term. So, we have some restraint there. Don points out to me that we have had a very big run-up in the stock market that is providing another financial impulse. Mr. Chairman, in answer to your question about nondefense capital goods, orders were about 4-1/2 percent above shipments.",149
-fomc-corpus,1995,In March?,3
-fomc-corpus,1995,In March.,3
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Ted, your forecast for Japan indicates a fairly respectable pickup in 1995 and 1996, and I saw that the consensus of about 15 international forecasters is very close to your forecast. I was wondering how important fiscal stimulus was in that forecast. We have had instances in the last couple of years where the degree of fiscal stimulus in Japan has been a disappointment. I wondered if you would comment in general about that projected pickup.",88
-fomc-corpus,1995,"Just one technical point: The pickup as far as this year is concerned is quite modest. I think the fundamental pickup may be seen by focusing on the fourth quarter-over-fourth quarter number. Because there was a big negative number last year, the pickup looks a little better as a percent than we would think, though we are looking for an annual rate of growth in the 2 to 2-1/2 percent range for the balance of this year. But, as Mike mentioned, we have tended to mark things down over the last several forecasts. I think we would have marked things down even more in the absence of this fiscal package, which came in a bit on the high side of people's expectations. I find it extremely difficult to judge Japanese fiscal policy because we don't have a very good baseline, if I may put it that way. They have two or three supplemental budgets a year. The fundamental budget may be good from the standpoint of fiscal rectitude. It may be a great way of running things because they can always drop back to a more restrictive policy in the absence of special supplemental budgets. On the other hand, in terms of judging the ongoing thrust of policy in the context of unusually large output gaps and, as Peter mentioned, the threat of deflation, that probably is not the right assumption to make. I believe the Japanese situation clearly involves some downside risk on balance. It is not an unreasonable forecast, but it probably has an uncertainty band around it that is a bit wider than the forecasts for the other industrial countries.",308
-fomc-corpus,1995,Does your forecast have an explicit assumption about trade relations with the United States?,15
-fomc-corpus,1995,"We have essentially ignored the trade relations question in the forecast. So, I guess implicitly we are assuming that some time between now and the end of June this particular matter will be settled. There are then two questions. One would be what happens if Congress does go through with the sanctions. The trade and the price implications of that are likely to be pretty secondary; we are talking about $6 billion worth of consumer demand. I guess the simplest calculation would imply a shift to that much more nominal spending, but that is only 0.1 percent of total consumer spending over some period. We have to worry about secondary effects, but we also have to worry about other adjustments if we assume a full pass-through. So, it is not a big number. Also, the overall trade implications are not likely to be very large because most of the presumed shift in demand for luxury cars will go to Germany and other countries. So, in terms of the aggregate effect on trade, not much would be different. That's the easy part of the story. The more difficult part would be to gauge what would happen if we got involved in a so-called trade war. That is a phrase we throw around, but I don't think we really know what it means, or I don't know what I mean when I say it. Probably the most important aspect of that would be the impact on financial markets on the one hand and some broad perception of where economies were going, which I think is likely to be negative. It is hard to imagine that a trade war would not be a negative factor on the whole, but how bad it would be is difficult to judge. So, in that context, we have assumed it is not going to happen!",344
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Mike, my questions are really along the same lines as those that Mike Moskow asked you earlier. Your response to him frankly is not the response I would have expected from my reading of the Greenbook. A year ago at this meeting we were talking about this issue of neutrality. There was a fair amount of discussion then and at the next couple of meetings about what it means to be at a neutral level in some sense on nominal short-term interest rates and where neutral is. So, when I read this Greenbook, I was led to believe that a neutral nominal rate for fed funds was 6 percent or slightly below 6 percent but that it could be a little higher. There was a phrase in the Greenbook about the core rate of inflation moving up through 1995 and 1996 because that was consistent with an excess of aggregate demand over potential supply. There was also a statement to the effect that the recent bond market rally had pushed long-term interest rates below a sustainable level and that from this point you thought rates would go up. As I read the two alternatives of a higher/lower federal funds rate at the end of the year, the language used to describe each of those also left me feeling that 6 percent was about neutral or maybe a little below neutral. So, your response that neutral was below 6 percent was not what I would have guessed. To come at it from a slightly different perspective, let us assume that the rate got stuck at 6 percent--that we just pegged the rate at that level. To help condition us a little to what we might expect in the midyear review when we come back in July, would you describe what you would expect to be the most likely set of numbers in terms of real output growth, the unemployment rate, and the inflation rate over the next five years that might be associated with a fed funds rate stuck at 6 percent.",383
-fomc-corpus,1995,"I don't know that the concept of neutrality was ever particularly well defined, and I think the kind of economic outcome that would ensue from a given short-term real rate of interest is going to vary considerably over time, depending on fiscal policy and other impulses. So, I have problems putting myself in that particular context. But to respond directly to your question about the longer-term outlook, we have shown in previous longer-term scenarios in the Bluebook and elsewhere a declining path for the real funds rate over time because, looking at history, we felt that this was a relatively high real short-term interest rate and one that would not be consistent with stability in the economy. It would be exerting some ongoing contractionary force and overshooting what would be required to stabilize the inflation level ultimately. So, if we redo this projection, we would anticipate, particularly in a context of ongoing fiscal restraint, let alone any balanced budget program that is credible, that over the next several years there would be a decline in the real short-term rate of interest as we moved either toward a condition of stability at potential GDP or even maintained some minor gap so as to bring the inflation rate down gradually.",234
-fomc-corpus,1995,"It strikes me that the concept probably does not have useful meaning unless we stipulate that we are in an environment in which the budget is balanced, prices are stable, and the exchange rate is stable. The latter, of course, is a function of what other nations are doing as well. To have a concept of neutrality when any of those three is moving, I think is quite ambiguous. But the presumption of a stable economy, maximum sustainable growth at stable prices, and stable exchange rates does raise a question as to what real interest rate structure is consistent with that. Once we move away from that framework, then I think we are dealing with an indeterminate concept. Is there any way, Mike, in which you can define neutrality apart from making certain rigid prespecifications?",156
-fomc-corpus,1995,"I don't think so. As I said, I think that a number of environmental factors would alter the implications of a given real interest rate level. Thus, I don't think there is a number for all time.",42
-fomc-corpus,1995,The question would be--I'm sorry.,8
-fomc-corpus,1995,"I was just going to say, building on what you said, Mr. Chairman, that in the long-run scenario in the last Bluebook, as Mike pointed out, the real funds rate was coming down to stabilize not prices but the inflation rate. One of the factors making rate declines necessary was that the impulse from the decline in the exchange rate was wearing off over time. So you are absolutely correct. I think one has to define neutrality relative to what one expects to happen to exchange rates as well.",101
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Absent supply shocks, Mike, and absent a real contractionary effect from fiscal policy, I would like to talk a little about your inflation forecast and the idea that you believe the risks are fairly evenly balanced around the forecast--at least that is my understanding of what you said. In particular, I was drawn to the fact that the ECI is on a slight upward trend relative to the moderation of the core CPI and that the forecast stays at the low end of most people's assessment of the NAIRU range. Where do you see this in 1996? Do you still see the risks as pretty well balanced around this inflation forecast by the end of 1996? I know that is looking further out and we could perhaps be reaching some cyclical downturn or whatever that would have other effects on inflation. I would like an assessment of what you think the risks are in 1996.",178
-fomc-corpus,1995,"Two comments may be useful in responding to that. One is that you characterized the range of possible NAIRU levels as being one that was sort of biased to the up side of where our forecast has been recently. As we are interpreting it, I think we would say that might be a little too pessimistic. Perhaps one of the risks is that the very good news we saw on the ECI through the first quarter of the year is an indication that the NAIRU was lower than is built into our forecast.",104
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"Basically, our forecast is one in which the economy is operating, at worst, just a shade below the full employment level, or the NAIRU, as we move through 1996. In that kind of environment, one would not anticipate a great deal of pressure toward higher inflation. So, given the recent experience and the factors that suggest what growth rate may be sustainable in this economy without a buildup of inflationary pressures, I think there is a reasonable balance of risks as we look out through next year. Now, we are in a period in which there are some vulnerabilities. The economy is still operating at a quite high level. It is being hit by a shock through the exchange rate channel. As I noted, that shock is not as great perhaps as one would surmise looking at the yen alone, but we think there is an impulse there that is going to tend to bring higher import prices and provide an umbrella for domestic producers of autos and other goods. We quite possibly still have in front of us a significant pass-through of materials cost increases. We can already see that showing up in some industries. It is clearest in industries like paper, but there are hints elsewhere. It is conceivable that this hump that we are looking at in our forecast could be greater and could stretch out more if it generates some broader inflationary expectations than seem to be present now or than we have anticipated in the forecast. So, I think that certainly does pose some short-run upside risk at a minimum.",300
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I have a question that is related to a couple you have already fielded about looking out over a little longer time horizon. But mine may be a bit more specific and pointed. As I look at the last four quarters of this forecast, it gives off the aura of a steady state in all aspects except one. Real GDP is growing at a rate of about 2.4 percent; nominal GDP is growing at a rate of about 4.8 percent; the profits share is constant; the savings share is constant; the unemployment rate is constant; the funds rate, real and nominal, is constant; and inflation is constant. The one exception to that is capacity utilization, which keeps going down; and that raises a couple of questions. Where is it going? What do you think is the natural rate of capacity utilization? What is it that breaks what I think of as not quite an ironclad but a reasonable 3:1 ratio between changes in unemployment and changes in capacity utilization? In the last four quarters of the forecast, the change in the unemployment rate is zero but the capacity utilization rate goes down by 1.1 percentage points.",232
-fomc-corpus,1995,"I think that relationship has varied considerably over decent spans of time historically. So, they have not moved in precise lockstep.",25
-fomc-corpus,1995,"Pretty close, though.",5
-fomc-corpus,1995,"We are certainly mindful of there being a relationship over time. By the end of the period, we are moving into the vicinity, if not below, what one might judge to be a natural rate of capacity utilization in manufacturing. This reflects in part the slower growth of goods output in the economy, but it also reflects the fact that we have built into this forecast very sizable increases in manufacturing capacity, largely in response to what has been a very large increase in investment in manufacturing to date and what seems likely to be strong investment going forward. So, that is a significant ingredient in the diminution of capacity utilization in manufacturing. It is one of the factors that provides considerable hope that we are going to see a damping of inflationary pressures and a flattening out of materials prices--that such prices will not be a concern when we get to the latter part of this year and certainly as we move through 1996.",182
-fomc-corpus,1995,"So, if I can interpret your answer: If the demand for goods and services is growing at a fairly steady pace and the capacity in manufacturing to produce goods is growing faster, then you would get ever decreasing capacity utilization in manufacturing. Maybe not forever but--",51
-fomc-corpus,1995,"Yes. Obviously, as we move out into 1996 and capacity utilization drops, corporate profits will not be growing the way they have been, cash flow won't be as favorable, and all of these factors will work to damp further increments to growth of the capital stock in manufacturing. We are not going to have an ongoing decline in capacity utilization forever, but this is our short-run forecast. A lot of this is given by the natural lags in the process of adding to capacity so that we think there is a good deal of momentum in this process going out several quarters.",115
-fomc-corpus,1995,"Just econometrically, Governor Blinder, the relationship between the unemployment rate and capacity utilization that we have in this forecast is well within the historical range that we have had in the past 20 or 30 years. Indeed, capacity utilization is on the low side relative to the unemployment rate.",59
-fomc-corpus,1995,Is capacity utilization converging to 81 percent? That's what I'm driving at. Where is it going?,21
-fomc-corpus,1995,"I'm not sure. I have a concept of a convergence process here, but over time the average and what we estimate as being a natural rate in terms of price behavior is at 82 percent or maybe a bit less. One would anticipate that if we stretch this out, there would be some processes that would probably move us in that direction.",68
-fomc-corpus,1995,"Any further questions for Mike? If not, who would like to start our round table? President Broaddus.",23
-fomc-corpus,1995,"Current economic conditions and near-term prospects in our District remain mixed, as they have been for the last couple of months. Most of our business contacts confirm an ongoing moderation in economic activity. In our region as elsewhere the softening in activity is most pronounced in consumer spending and in housing activity. For example, with respect to housing in the Raleigh-Durham area, multiple listings have been running about 25 percent below their rate at this time last year and prices of residential lots have fallen a good bit recently. This is a really striking change in a local area that has been booming for the last couple of years. At the same time, we are seeing continuing growth and strength in at least some sectors and industries. In particular, producers of chemical and paper products tell us that things are still going reasonably well, and they are optimistic about prospects for the remainder of the year--especially, interestingly enough, for exports. Also, tourism, which is an increasingly important industry in our part of the country, is stronger now than it was at this time last year. So, again, activity in our District is mixed. I usually try to avoid using the word ""mixed"" in describing the economy since it is so vague, but I think that's essentially what it is in our region right now. Turning to the national economy, the Greenbook forecast is broadly in line with other forecasts that I have seen and it is certainly plausible. But it is calling for an almost perfect landing, a super soft landing, so one naturally has to wonder what might go wrong. I see two distinct and somewhat sequential risks, if I can use that phrase, for the period ahead. First, it seems to me that there is a clear, near-term downside risk. The Greenbook, as everyone knows, is projecting a sharp reduction in GDP growth in the second and third quarters as producers work inventories down. The risk, of course, is that the slow growth in jobs and incomes that presumably will accompany this inventory correction may frighten consumers and possibly precipitate a further reduction in spending. In turn, that could induce producers to cut output further. So, we could get a kind of snowballing effect such as we have had in the past, often in part because of the Fed's reluctance to allow interest rates to decline promptly enough when these kinds of conditions have arisen. Historically, that has tended in at least some circumstances to short circuit the natural stabilizing properties of the price system. In any case, we all know this kind of cumulative downturn has happened before and conceivably it could happen this time and turn the inventory correction into something worse. Clearly, we need to be sensitive to that risk. If, however, we get through the next couple of quarters okay, including this quarter, and the expansion continues as the Greenbook projects--and frankly I think that is the more likely outcome--then as we move into the final quarter of this year and into 1996, we will face a quite different set of risks. I think most people agree that the level of real GDP currently is above its longer-term potential level. That might be a factor in the recent acceleration in the core inflation rate and in the continuing sharp increases in the prices of many key industrial materials. The Greenbook is projecting, if I have calculated it right, that real GDP growth will average about 2-1/4 percent from now through the end of the projection horizon. If that happens, actual real GDP will move down closer to its potential path. As I see it, the risk is that if the average growth of GDP turns out to be higher than this projection, even moderately higher--say, because the inventory correction is milder or aggregate demand is somewhat stronger than we expect--actual GDP will approach its potential path more slowly and remain above it longer. In that event we could see some considerable buildup in inflationary momentum. Once that happens, it could be very difficult to break. In my view, the latter scenario is still a very real possibility and it is important for us not to let the current moderation in activity and all the talk in the press and elsewhere about soft landings make us forget that risk.",842
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. Economic activity in the Southeast has been slowing recently to a more sustainable rate of growth. Notwithstanding that slower growth, job expansion in the District continues to outpace that for the nation as a whole, although by a somewhat smaller margin than earlier, and the unemployment rate remains below that in the rest of the country. Looking at some of the sectors of the economy, retailers are reporting increasing inventories and slowing sales for both April and early May. Auto purchases in particular were weaker than a year ago, but they seem to be stabilizing now rather than continuing to decline. Tourism is starting to rebound with the return of European visitors to Florida and business travel has continued strong throughout the region. The reports we are getting on manufacturing are mixed. Production and shipments slowed in April, but new orders and production are expected to rise. As Al Broaddus just reported, paper products and chemicals remain quite strong. In particular, exports of chemicals are responding rather strongly to the dollar's weakness against the deutschemark, and we are now seeing South American customers ordering from U.S. plants as opposed to their German competitors. Building-related materials industries have weakened with the national slowdown in single-family housing, and residential activity continues to slow in our region. Home sales have fallen below last year's levels, but realtors are encouraged by the recent declines in mortgage rates. Multifamily markets, on the other hand, continue to experience rising occupancy and rental rates along with accelerating construction. Nonresidential real estate is pretty much in the same situation. Loan demand is steady in the region, with commercial demand stronger than consumer demand, and banks continue to compete pretty aggressively for business loans. Wage increases remain stable in most areas of the District, and the extreme shortages of unskilled workers that I was reporting, particularly in Tennessee, are now beginning to abate. Skilled construction workers and contractors remain in very short supply generally around the District but particularly in the Atlanta area. Finally, manufacturers are reporting fewer price hikes for both materials and finished products. With respect to the national outlook, our forecast has a pattern similar to the one presented in the Greenbook, but we have real growth somewhat higher over the forecast horizon. In line with that higher growth, unemployment moves a little lower by the end of 1996 and inflation ends up a little higher--rising to 3-1/2 percent. I think both of these forecasts, the Greenbook and our staff forecast, are within the range of reasonable outcomes. And while growth is probably going to remain sluggish, as we hope it will in the immediate future, there is a possibility of an acceleration later in the year. With respect to inflation, our view continues to be that the rise that we are seeing is largely a cyclical phenomenon as opposed to the continuation of a trend. I continue to be persuaded that since we have not accommodated inflationary impulses in recent years, there is no reason for sustained deterioration in prices to emerge past 1996. Thank you.",604
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, on balance economic activity in the Seventh District in the last two months seems to have continued the slowing pace of growth in the first quarter--led, of course, by developments in the automobile sector. Confidentially, we have the Chicago Purchasing Managers' Index for May, which I caution will not be public until next Wednesday, May 31. It indicates a resumption in the slowing of the expansion which had been interrupted briefly by a slight uptick in April. In the last few days, our contacts in the automobile industry reported new cutbacks in production schedules, including three more plants that will be down this week and additional cuts to overtime and line speed at a handful of other facilities. I note that for automakers these are very expensive actions to take at this time because the materials and supplies for the 1995 models have already been purchased under contract. One of the Big Three firms indicated to me that they expected a slower start-up of the 1996 models in September and further cutbacks at that time because of large expected inventories of the 1995 models. Auto and light truck sales appear to be coming in at about the 14-1/2 million units level so far in May, which is approximately 3/4 million units above the April pace but still well below the expectations earlier this year. Housing activity in the region has been trending down for the last few quarters, but District realtors report some improvement in existing home sales in the past two months. Midwest home builders generally continue to report a relatively higher level of activity in our District than in the rest of the country. A long delayed spring in the Midwest has damped consumer spending growth, but retailers' optimism seems to have improved with the weather. Retail sales reports have been mixed, with some contacts reporting weak sales in April and the first part of May and others indicating some improvement in sales growth. In the capital goods industries, contacts continue to report strong orders for products such as machine tools, agricultural equipment, and heavy-duty trucks. Steel output in the District has strengthened slightly since the beginning of the year, but growth has been at a substantially slower rate than in the fourth quarter of last year. Some of our steel industry contacts report that orders from the automakers are only now being scaled back. Softening in the domestic demand for steel may be offset by an expected rise in steel exports this year. In the agricultural sector, corn planting is proceeding at the second slowest pace in 11 years. If the weather improves over the next week or so, there is still a reasonable chance for achieving average yields this year. But even with average yields, production would fall short of current consumption, implying above-average prices in the months ahead. I should add that the weather forecast for the next 5 to 10 days is for more rain. Farmland values and farm equipment sales continued to rise in the first quarter despite widespread talk of trimming farm income and price support programs. On the employment front, labor markets remain tight, with the District's unemployment rate at its lowest level in over 15 years. But recent weakness in key District industries, especially autos, has reduced overtime and other labor market pressures somewhat. Nevertheless, the surveys continue to reflect relative strength in hiring plans in the second quarter. Pockets of labor shortages in western Michigan, Wisconsin, and Indiana have curtailed expansion plans, adding to recruitment and training costs and combining with other factors to prompt price increases in some industries. Reports on prices generally are mixed. Prices of some materials such as cement, paper, and steel scrap have been increasing. Gypsum board prices were raised about 10 percent in mid-February, but one producer reports some erosion in that increase over the last month, and a planned increase for mid-May was abandoned. Similarly, a number of steel suppliers are reported to have rolled back earlier price increases and the announced July price hike for steel is not expected to go through. In fact, one mini mill has cut its prices for a second time. In terms of the national outlook, Mr. Chairman, I am in general agreement with the Greenbook.",827
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Mr. Chairman, the Second District economy remains fairly flat. On balance, the data indicate that the rate of job layoffs is slowing, but job creations and new business incorporations have yet to show any kind of a typical post-recession surge in growth. In April, the unemployment rate rose to 6.8 percent in New York and 6.3 percent in New Jersey. Preliminary reports suggest that April retail sales were up only 3 to 5 percent on a year-over-year basis despite the favorable timing of Easter, and merchants reported widespread disappointment with such growth. Everything seems to be for sale in the greater New York area. The realtors in the metropolitan area reported that existing home sales fell about 10 percent below year-ago levels in the first quarter and that prices were comparably weak. In the same period, vacancy rates for prime commercial office space rose throughout the greater New York City metropolitan area, largely as a result of ongoing corporate restructurings. The boost to business confidence that we had hoped would come from the change of government in New York State is not materializing. The new governor has been completely tied up in knots by the opposition party, which has the majority in the General Assembly in New York State. He is giving up a great deal in order to reach an agreement on a state budget that is still in the ""hoped for"" stage. At the national level, we have moved to such proximity to the Greenbook forecast that the closest we can get to a disagreement would have to be described as a rounding error. But we are looking, as I think everybody is, at what developments would point to weakness and what would point to strength in this rather difficult forecasting period. Obviously, the factors pointing to weakness affect mainly the interest-sensitive sectors, with consumer durables weak, especially automobiles, and housing starts down. On the other hand, two of the major channels of monetary policy point to strength. The stock market is near record highs; bond prices are up; higher household wealth and net worth of firms bode well for spending by households and firms; and the declines in long-bond rates have a very positive effect on fixed mortgage rates. Those rates are at about 7-3/4 percent, only 3/4 percentage point above the levels in 1993. So, I think one might anticipate some bounceback in housing. There is a little evidence in that direction, with starts flat in April and the Mortgage Bankers Association survey of applications for purchase up 18 percent in the week of May 12. Our bottom line is that there is substantial uncertainty about the forecast so that an open mind is very much indicated. We think that the likely risk to the forecast is that growth will be somewhat stronger than both our own forecast and that in the Greenbook, although we don't completely dismiss the notion that Al Broaddus suggested that the consumer could get spooked by present weakness and lose confidence. The place where we are still a bit distant from the Greenbook forecast is on inflation. You may recall that at the last meeting we had inflation up to 3.8 percent in 1996. We have now modified that forecast to 3.6 percent. So, we are appreciably less optimistic than the Greenbook, which has the inflation rate at 3 percent by the end of 1996. There is no reason to say that the Greenbook is necessarily wrong, but perhaps heartened by the fact that we caught the increase in the spending level in the early part of this year we are emboldened to think that perhaps our forecast of 3.6 percent might be more likely. After all, if the Chicago Cubs can be in first place this late in the baseball season, anything can happen! [Laughter]",761
-fomc-corpus,1995,No comment. President Minehan.,7
-fomc-corpus,1995,"Economic activity in the First District is growing at a very modest pace. Payroll employment in most of the major industries in the District is little changed since the end of 1994. Services employment in particular seems to have lost the buoyancy of last year, but it is too soon really to tell whether this slowing reflects a seasonal blip or a more fundamental change. In some ways we are happy to see the hospital industry shedding jobs, but for most individual services industries the monthly data are just simply too erratic to draw many conclusions at this point. Unlike services, manufacturing employment in New England has been in a secular decline, so stability constitutes relatively good performance. In general the old-time industries such as metals, rubber, and plastics, and in particular paper are faring better than high-tech industries, which in New England have a large defense component. Anecdotal evidence tends to support the statistical picture. Recent retail sales have been disappointing and expectations are lackluster. Furniture stores are especially anxious. Manufacturing results were more positive, but the pace of demand has slowed since last year. First District companies express some relief that auto-related demand has not fallen more in fact than it has. Overseas sales are said to be benefiting from the weaker dollar, and in particular some of our software companies are experiencing upticks in sales as a result of the decline of the dollar. Housing construction is actually holding up a little better in New England than in the nation as a whole. Sales of existing homes in the first quarter are about the same as in the fourth quarter, though down a little from a year ago. Some of our small business contacts report that credit is widely available, with numerous banks calling in search of new lending opportunities. Markets are still quite competitive for most businesses, eliminating the degree to which cost increases in raw materials can be passed on and emphasizing the need for cost-cutting and restraints on wage increases. Generally, all the states in the region realize that New England's slow recovery has a large structural component as well as a cyclical component. Much attention is being paid in all the states to the cost of doing business. This has had the effect of bringing down egregiously high costs such as workers' compensation over the last couple of years. Recently, there has even been some movement in the area of bank taxes in Massachusetts. But this movement in the states also has increased the level of competition, both among the states in the region and between the states of New England in general and other regions of the country. We are now seeing the remaining large employers in the region openly bargaining with legislatures for the tax and utility cost breaks that they believe are necessary and holding the threat of imminent moves, usually south and west, over the heads of governments. Against the backdrop of general unease about jobs in particular and the economy in general, this is not contributing to an overall sense of confidence in the region. Those changes that inspire real structural adjustments in the cost of doing business in New England, and not just specific industry cost breaks, could be beneficial. On the national scene, I agree with President Broaddus and President McDonough that it is very tempting to believe the Greenbook. It does describe in the baseline forecast the perfect definition of a soft landing, and I sincerely hope that the staff is right. However, we do remain skeptical--along the lines that President Broaddus ended up with and President McDonough described--that inflation, as measured by the core CPI, can remain so well behaved in 1996 after a relatively small blip in 1995. I hope that President Forrestal is right that inflationary trends are simply cyclical and are not showing some wayward long-term uptick here. But I am skeptical about whether that is true and whether we are just seeing a pause now rather than a somewhat more permanent downward shift in demand. We could see things heat up toward the end of the year, with an untoward impact on inflation.",799
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, growth in the Twelfth District economy still has considerable momentum, although the pace of expansion has slowed recently. Household job growth in the first quarter was fast enough to bring the District's unemployment rate down about 1/4 percentage point since the end of last year. However, growth in District payroll employment slowed about 1 percentage point in the first quarter relative to the 1994 pace. In California, the moderate recovery has continued and the state and local government fiscal climate has improved a bit, although one gets a different impression from recent articles in the Wall Street Journal and the New York Times. Payroll employment growth through April of this year continued at near last year's pace. Orange County is reported to have moved closer to reaching an agreement with bondholders to reschedule about $1 billion in short-term debt that begins to come due in early July. Some bondholders have been lobbying the state government to help the county honor its obligations as originally scheduled. Thus far, the state government has distanced itself from Orange County's woes, actually leaving it to the county's residents to finance eventual debt repayment. The spread between California state government bond yields and other similarly rated municipal bond yields has remained well below the peak attained when the Orange County crisis first erupted. California's own fiscal situation, we believe, has improved noticeably, although a substantial amount of the debt that accumulated during the recession remains to be worked off. The earlier California deficits were financed largely by a run-up in loans to the general fund of about $6 billion. More recently, state government revenues have firmed with the pickup in economic activity, creating moderate budget surpluses and allowing a payback of about $1 billion of these loans. Turning to the national economy, our forecast is about the same as the Greenbook forecast. We certainly agree that output is going to be weak in the near term as businesses work off excess inventories. While there is some uncertainty about how sharp this correction might be, we do not expect it to be prolonged. In particular, we expect final sales to keep growing at or even somewhat above the growth rate of potential output through next year. We expect CPI inflation to stay slightly above 3 percent over the period as the beneficial effects of the recent slowdown in wage inflation are offset by inflationary pressures from the dollar and the rising prices of intermediate goods. Thank you.",474
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"Looking at the available statistics, the Third District economy clearly has slowed in recent months across a broad front, including manufacturing, retailing, and residential construction. Looking beyond the statistics, however, I think what we are seeing is a downward adjustment in the rate of growth rather than a cumulative decline in economic activity. Both business and consumer attitudes in the District still seem positive. Rail transportation activity, often a good indicator of manufacturing activity, seems to be bottoming out except for autos. The slowing of office leasing seems to be more from short supply than weak demand in the District, a positive sign for future building, and lower mortgage rates are a positive for housing activity. On the inflation front in the District, I think we need to look beyond the current statistics as well. Although there is some uptick in the rate of inflation, I doubt that what we are seeing is a cumulative upturn in the rate of inflation, but rather a temporary cyclical upturn that is not sustainable in the current climate of moderating demand pressures, stiff competition for sales, and subdued wage and benefit increases. Turning to the national economy, my views are similar to what is happening in the District. The national economy in my view is making a downward adjustment in the rate of growth rather than going through the early phase of a cumulative downturn. And the economy is experiencing a temporary uptick in inflation rather than the beginning of a cumulative upturn. Nonetheless, while I am still reasonably confident about the prospects for a soft landing, I think we need to be very sensitive to incoming information.",313
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, the Tenth District generally remains strong with some signs of modest slowing starting to emerge. Overall, though, the District's sectors generally are continuing to exhibit strength and our directors do report consistently healthy growth across the region. For example, recent monthly employment data show broad-based growth. Our nonfarm jobs in the District were up almost 4 percent in March from a year earlier. In six of our seven states the rate of job growth is exceeding the nation's pace, and New Mexico continues to rank among the top states. Manufacturing activity remains robust across the region. Durable goods producers have been adding jobs at a fairly consistent rate, even recently. In fact, while there has been some reduction in overtime in our auto manufacturing plants, they have continued in some instances to hire new workers in the last three months. There is strong growth in nonresidential building within our District. We also have seen loan growth continuing at double-digit rates over the last two months. As I said, though, there are some signs of slowing in our regional economy. There has been a little sluggishness in retail sales according to reports from our directors and some of our other District contacts. Residential building activity also has slowed recently. And as others have mentioned, wet weather has led to substantial delays in planting spring crops, pointing to a slightly more difficult year for some of our farmers. Overall wage/price pressures remain moderate in the District, but there are very scattered indications of emerging pressures. On the national level, our view is in line with the Board staff's projections. We also believe that the projections are subject to considerable uncertainty. Our sense at this stage is that the risks to the projections remain on the up side. A couple of examples: I think that consumer spending could remain strong in future months as employment income continues to grow. Consumer confidence remains relatively good and household balance sheets are in good condition. I think there is some potential strength in our export sector, given the depreciation of the dollar, as others have indicated. The housing sector could turn stronger with long-term rates having come down a little. So, I think there is some risk on the up side and that is a possible area for continued inflation concerns. While I agree that the situation is uncertain, I think we do have to be diligent in watching those inflation numbers. Thank you.",468
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"Employment growth in the Eleventh District has slowed somewhat in recent months. Beginning in the second quarter of 1989, the Eleventh District had 22 consecutive quarters of faster employment growth than the United States as a whole. In the past two quarters, our employment growth has converged with the U.S. rate and it is now only about average. The impact of the peso crisis in Mexico is no doubt an important factor in the relative slowing in the Eleventh District, as trade with Mexico is roughly four times as important for us as it is for the country as a whole. The index of leading indicators for Texas peaked last August and has been fairly weak since then. The weakest component of that index is the Texas value of the dollar because the peso is so important in the Southwest. We are, however, encouraged by the rapid adjustment in the Mexican trade balance and the fact that it has come more from increasing Mexican exports than from declining Mexican imports. On the inflation side, we are not getting new reports of accelerating wages and price pressures in District surveys and in our discussions. On the national scene, the slowdown has been fairly sharp, even sharper than is reflected in the fourth- and first-quarter GDP numbers. Growth in real final sales went from 5.7 percent to 1.8 percent, a fairly sharp decline. Of course, this has been accompanied by sharp reductions in intermediate- and long-term interest rates. The yield curve is getting considerably flatter. If one looks at a graph of the slope of the yield curve plotted against business cycle dates, it tends to make one a little bit nervous. Generally when the yield curve becomes negative, when short-term interest rates are being increased relative to long-term rates, a recession follows. However, I think, as Al Broaddus indicated, that a natural correction occurs in the economy when interest rates can weaken as a result of weakening economic activity. We have to be cautious not to stand in the way of that for too long. The yield curve is not negative yet, but it is getting closer and that puts us in a more precarious position, given the game of chicken that the Administration is playing with Japan over trade policies. So, the conditions for some unstable financial market activities, both domestic and foreign, are there. We should be cautious in the months ahead.",467
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"The economy of the Ninth District is similar to what has been reported in virtually all the other Districts. The pace of expansion has slowed. But I must say the tenor of the information and anecdotes that have come in suggests to me that, relative to the numbers that we have seen for the national economy, the District economy remains pretty sound. The strength is concentrated right now in basic industries. Pulp and paper production is strong; iron and copper mining is strong; energy exploration has picked up. I would describe sentiment as cautious but not negative. There has been some concern expressed about what might follow from the battle with Japan on the auto parts issue, and whether that could inhibit some of our producers who currently export non-auto related goods to Japan. But industry attitudes don't seem to be particularly negative. Labor markets remain quite tight, especially for skilled workers, but as usual that does not seem to be translating into broad-based wage pressures. A couple of mortgage bankers that I ran into recently have expressed growing optimism. I gather their volume has picked up. With regard to the national economy, I don't have any serious problems with the soft landing pattern in the Greenbook forecast. I would observe that it not only is a soft landing but it is a rather quick one. It only takes a couple of quarters of below-trend expansion before we get back to what appears to be trend or steady state. And I guess I am struck that even if things work out that well, that means in some sense that we are going to be looking at subpar numbers on the national economy for at least six months, that is, into October or November. We probably ought to recognize that up front and gird ourselves to be patient if, in fact, we get incoming evidence on the national economy of that nature. That's inherent in the forecast and that seems to be what we ought to be expecting, at least as the most likely scenario.",383
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thank you, Alan. The pace of Eighth District economic activity, while decelerating modestly in some areas, exhibits few signs of a pending slump. Unemployment in the major District states remained at 4-1/2 percent in March, well below the national average. Parts of the District continue to report tight labor market conditions for both entry-level and skilled workers. Many businesses in the District report slowing economic activity, but they generally do not view this as a precursor to a sustained downturn in the near future--very similar to other reports we have heard today. Instead, the consensus is for further growth in sales and employment, although at a slower pace than recently experienced. New residential construction in the District is below last year's level, but 1994 was a record year in many areas. Anecdotal reports support the potential for a revival in housing activity with the recent decline in long-term rates. Commercial construction continues to increase at a steady pace as vacancy rates decline and rental rates increase. The office vacancy rate in the St. Louis area, for instance, has fallen to about 13 percent, its lowest level in ten years. Total commercial and industrial loans outstanding at the largest District banks rose 6.1 percent between mid-February and mid-April. Planned auto production at District plants is contrary to the recent national trends. Scheduled second-quarter production of more than 280,000 units represents an increase of more than 3 percent above the number of units scheduled at the time of the last FOMC meeting and is also 3 percent above the number of units produced in the second quarter of 1994. I would associate this with the fact that some popular vehicles, like the Ford Explorer, some minivans, and other models, dominate a lot of the production in our District. Nationally, the economy seems to be slowing further, though there are reasons for optimism over the remainder of 1995 as a number of people pointed out. But the central concern of this Committee should be inflation, and the pace of price increases is picking up. The annualized growth rate of the CPI was 4.9 percent in April. This index has risen at a 3.6 percent annual rate since December, up from a 2.7 percent rate of increase over the last half of 1994. In contrast to the Greenbook, which has CPI inflation peaking in the current quarter, many private forecasters expect inflation to rise throughout 1995. Most worrisome from the perspective of this Committee are longer-term inflation forecasts that indicate that market participants expect inflation at or above its current level for horizons as long as five or ten years. So-called low inflation of 3 percent or more is endemic in the present U.S. economy and is being built into exchange rates, long-term interest rates, budget planning, contract negotiations, and economic forecasts. We are far from convincing markets of the prospect of moving toward our stated goal of stable prices.",600
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"A few weeks ago, in the last couple of days or so of April, I attended a meeting of over 100 business and civic leaders from northeast Ohio. Martin Feldstein made a presentation to the group and answered questions. His prepared remarks were about Mexico, but during the question-and-answer period, Marty was asked about the economy, the outlook, and policies. He commented at that point that the unemployment rate was too low and we should continue tightening monetary policy until we raise the unemployment rate to about the 6 percent level in order to prevent inflation from accelerating from the current level. After the session the president of one of the companies asked me if I still believed in zero inflation, and I told him that I did. He then asked me how high I wanted the unemployment rate to be pushed up if Feldstein thought it needed to be pushed up to 6 percent to hold inflation steady. Of course, I tried to explain that I did not want the unemployment rate pushed up at all but that the objective of moving toward price stability was in fact to move the unemployment rate down and maintain it at a lower level. After that exchange and then talking with a group of business leaders last week, I was struck by just how difficult it would be to generate broad public support, let alone narrower political support, for the idea of price stability as long as we couch our argument in terms of putting a floor under the unemployment rate. The idea of using a minimum level of unemployment as an instrument in order to achieve the objective of price stability simply is never going to be very popular with anybody. When I look at unemployment rates in Ohio and also in metropolitan areas and other parts of our District, I am puzzled about why those rates do not fit with the stories that we usually hear and see in print. We have a lot of metropolitan areas that report their unemployment rates officially as under 3 percent. When we talk to the people in the area, they say they have effectively no unemployment. They usually do make the distinction that there are a lot of people who do not have any work to do, but those people have jobs--they work in the city governments and the school districts! The state of Ohio has overall unemployment of 4 percent, the lowest of the big eleven states, and our manufacturing employment is double the national average, measured as a share of total employment. If we have some idea concerning which we can be reasonably confident in terms of potential, it has to be generally in the goods producing sectors of the economy and more specifically in manufacturing. That is the largest share of the Ohio economy and parts of the central Kentucky economy, down around Lexington and in that corridor. And yet, we don't see that these reported levels of unemployment are being reflected in people's thinking about future inflation, let alone materializing in terms of wage pressures. Our wage increases in the District are well below the national average. Now, one conjecture could be that it is a good thing that there are a lot of unemployed aerospace workers in southern California, given the number of people working and producing motor vehicles in Ohio. Otherwise, we would have a lot of inflation. And if those people in Long Beach find jobs, I guess we are going to have to lay some people off in Toledo! I was in Toledo last week talking to about 100 bankers from within a 50-mile radius, and they were complaining that their unemployment is close to the national average. They said it was around 5.7 percent, and they were trying to attract people into job-creating activities to lower their unemployment rate because--even though the rate is at the national average--it is quite high for this region of the country as far as they are concerned. So I thought, well, if they are successful in lowering the unemployment rate in Toledo we will have to lay off some people in Dayton or Columbus, or else we are going to have too low unemployment and somehow this is going to influence the purchasing power of money. People that I listen to about what is going on around the District usually perceive the problems to be in somebody else's part of the country. Yes, auto sales have fallen, but that is not affecting the production of cars here and so they feel employment is very good and our area is immune to whatever is happening in Tennessee or wherever. The steel people, similar to what Mike Moskow reported, are experiencing very strong demand but also are planning a lot of additional capacity, especially the mini mills that will come on stream over the next couple of years. One of our directors said that earlier this year he had been looking for a 3 to 5 percent increase in posted steel prices on July 1. He said that will not take place. Even if the steel mills posted the increase, they would not be able to get it, so there is not going to be another steel price increase. Builders report that residential construction is above where it was at this time last year. Nonresidential construction is considerably above where it was before, so the investment side of the economy still looks quite good to us. Agriculture is a different story, though. In particular, there are a lot of concerns about grains. It is reported that because of sharply higher fertilizer costs, fuel costs, and interest rates, average production costs this year for the corn crop may be about 10 percent higher than a year ago, while prices right now are about 10 percent lower. So, farmers plan to make that up on volume once it stops raining. Turning to the national economy, I have a lot of trouble with the rhetoric about a soft landing. If all the commentary that we see in the press is going to be in terms of an airplane analogy, I wish they would talk about leveling off at cruising altitude. That's because I think a landing should not be the objective at all to the majority of the American public; continuing to fly ought to be the objective. Since I have a general view that a market economy tends to allocate its resources to their best uses in the absence of some real shocks or perverse policies, when I think about where the economy might stabilize in terms of growth rates I try to think in terms of what is going to prevent it--whether monetary policy, fiscal policy, oil shocks, or something else. The one we are concerned with, of course, is monetary policy. So, I ask myself whether I believe that what I see in the Greenbook is at least consistent, whether or not I think it is right. And I have trouble with the assumptions about the interest rate structure, both the level of the funds rate and the rise in bond yields, and the associated growth rates of nominal GDP, real output, and all the component parts. I don't know which one of those is wrong, but I think that one of them is. Either the interest rate structure is too high or the forecast of output and inflation that the staff is presenting is too low, and at some point we are going to have to reconcile those--raise our assumptions about output and inflation or accept the idea that a lower structure of interest rates is going to be consistent with it.",1429
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, it seems to me that we are in a classic wait-and-see period here. The expansion is obviously slowing and there are a lot of factors, which have been well aired here this morning, that could take the economy in the direction of either greater near-term or longer-term weakness or strength. It is just too early right now to be making firm judgments about what the economy is going to look like over the forecast period. In the near term, it would seem to me that the inventory cycle and how that plays out is the dominant factor. If final sales hold up, it is hard for me to see how inventories are going to be a terribly big problem. Inventory-sales ratios overall are still modest. I think there are good reasons to believe that final sales will hold up and maybe rebound some. We have the wealth effects from the stock and bond markets. Confidence is still high. Long rates are down and that should help housing and maybe cars to rebound. Those tax refunds that were delayed should kick in here at a very opportune time. And particularly if that plays out well, it seems to me that the out-period risks continue to be largely on the high side. That has been stated in a number of contexts by several people who have spoken already, and I am still very much in that camp. So, I think we are some distance away--I am not sure how far, of course--from a decision point. But in my view we are at least one meeting, maybe a number of meetings away. Thank you.",312
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"The predicted slowdown is well under way. It seems to be pretty widespread, led by housing and consumer durables. Business investment is likely to be off in 1995 relative to 1994, but still strong enough to provide a reasonable cushion during this slowdown period. It appears that only the auto manufacturers have been somewhat surprised by the slowdown and that is even more surprising, given the fact that it was probably one of the best forecast slowdowns that we have had in a long time. The inventory adjustment, which may be largely an auto phenomenon, may well cause the second-quarter slowdown to be deeper than would qualify us for a perfect soft landing or a perfect ""riding off into the horizon"" at some specified altitude. The market side seems to be consistent with a sustainable growth outlook. The dollar has rallied; the yield curve has flattened out rather nicely; and long-term rates have declined, partly I hope due to lowered inflation expectations. But there is also a fair amount of attention being paid to the deficit reduction efforts that are under way. I think that the short-term rate declines are probably reversing the overshooting that occurred when the general sentiment was that we were going to be tightening policy. Stock prices generally are up this year but so are earnings, and price-earnings ratios are not dramatically out of line with historical averages. Several people have cited the positive benefits of the wealth effect from both the stock market and perhaps even from the bond market. I think these market adjustments, given the shocks that have occurred in the markets in the last couple of years, pretty well demonstrate the resilience of the markets. Banks and other lenders appear to be able to support growth as needed, so I don't think we are looking at a bottleneck with respect to the availability of credit. On the price side, cyclical pressures clearly are showing through in the core CPI now, but I don't think we have a firm indication that this is a permanent ratcheting up. We have had some easing off with respect to capacity utilization recently, both in labor and product markets. It doesn't appear that, at least for the moment, wage pressures are consistently building, but I do think we need to exercise a fair amount of vigilance with respect to inflation. Any time we have rising inflation, we have to be wary as to whether we are facing a temporary cyclical situation or whether we are seeing the buildup of a permanently higher inflation rate. In sum, now that the slowdown is under way, it seems to me that the risks to the economy are a bit better balanced than they were earlier. There are some wild cards in the outlook, and several people have mentioned a number of them. One that I would point to is whether some deficit reduction is going to be enacted into law. And if it is, who is going to be affected and by how much? I don't believe we have adequately built that into our projections. Nor do I think we have adequately factored in the potential trade war with Japan, whatever that may mean. On a not unrelated factor, we have had a shock to the dollar. How that is going to play out in the U.S. economy has yet to be seen. So I agree with Mike Kelley. We seem to be in a wait-and-see posture at this point. The Committee is going to have to continue to assess whether some of these wild cards are going to affect the delicate balance that currently seems to be moving us toward a soft landing, notably how this inventory imbalance will play itself out. So, we have a period of sharp vigilance ahead.",714
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Mr. Chairman, I think I am going to be a minority here. Two things concern me, one of which has not been mentioned at all and that is credit conditions. It was pointed out that there has been a lot of easing of credit terms. At some point that is going to stop. Having arrived here at a very scary time in 1991, I am getting a little nervous that we may be setting ourselves up for another pro-cyclical move in our credit terms that might end up exacerbating the next business cycle. Our surveys, for example, are all saying that credit terms are easing. In the last month I must have had four delegations of bankers through my office complaining not only that their competitors were easing conditions, but that they were easing conditions too much. Please stop me from doing it to myself was their message! That has to be of some concern. I think it also is showing up in the data. I remember getting briefings shortly after arriving here to the effect that never again in this millenium would another office building be built in America, and yet cranes are back on the horizon just 2-1/2 years later. Similarly with household debt, 1.2 billion credit card solicitations were mailed out to the American people in the first quarter of 1995. That is five for every man, woman, and child in the country. So, I suppose if I were typical I would have to say, now that my three-year-old has three cards and my one-year-old has two, that I should keep accepting new cards. This is certainly not the kind of environment that is sustainable. I would point out that the Greenbook forecast for 1996 has a decline in the saving rate from 1995 in order to sustain the rate of consumption growth. Furthermore, even the higher 1995 saving rate is not sufficient to slow the rise in the ratio of installment debt to personal income, which means that it is going to rise even faster in 1996. Well, at some point that is going to stop; forty-four percent of all PCE growth last year was financed through installment debt, and that can't go on forever. At some point either the banks are going to stop it themselves or we are going to stop it when, for example, we have a profits downturn or a cash flow downturn and suddenly all these backward-looking assumptions our examiners make about the quality of the balance sheet begin to go in reverse. I don't know when that is going to happen, but I know it is going to exacerbate the downturn when it comes. Second, on fiscal policy, we also have to be a bit forward-looking and make the call. The question that Mike raised is whether or not Congress will follow through or whether there will be some moderation in the fiscal policy actions. We can make a bet either way. There are four reasons why I think Congress is going to follow through. The first has to do with the decision to take on Medicare. All the campaign ads attacking the incumbents are already made for 1996. The advocates of Medicare cuts have heard the charge that old people will be pulled out of their sick beds and tossed onto the curb and everything else. These members of Congress already know that they are going to face that kind of attack, so they may as well get some pluses out of this situation. The only pluses they can get are to save the Medicare system from default and reduce the budget deficit. There is no point in stopping now because they already have incurred the political cost. Second, I think the party discipline which was expected to break down on hard votes has not done so. There were 237 votes in the House for the reconciliation bill--they lost 5 Republicans and gained 12 Democrats on the vote. Party discipline is not breaking down and won't this year. Third, in the power structure between the Congress and the Executive Branch, we have a return to what Madison had in mind when he envisioned a spendthrift king being checked by the taxpayers' representatives in the legislature. That was the model for most of the republic's history. It was reversed legislatively in the 1974 Budget Act, and the picture we all have now concerning how compromises are struck is based on the last 20 years. In fact, the default option in fiscal policy is zero. The President who wants to spend more than the Congress does not have a credible veto threat because the default option will produce less than he wants to spend. That is going to become clear as we move through the 12 appropriations bills this fall. In the end, it is going to be Congress that is going to pass a reconciliation bill. Such a bill can't be filibustered and the President will have the choice of shutting down the entire government or signing the reconciliation bill. Every president has bowed in the past and presidents will continue to bow to the more powerful position in negotiations that Congress has. Finally, there is a temptation to lock these changes in place. If the Medicare cuts are enacted, then point-of-order rules will require that any increase in spending be paid for. And if you want to enact reforms that are going to survive, and arguably that is what some of the leadership wants to do, then the time to put those changes in is now. Logically, I don't understand how the process is not going to end up with a substantial fiscal contraction in 1996. Frankly, I think the yield curve is indicating that that is the expectation. If it is true that we are not going to have growth in the low 2's but growth in the mid 1's--there is a real risk in waiting to find out, assuming the lags in monetary policy remain what they have been in this cycle. If we wait, say, until the autumn, our rate reductions would have their effects about the time that the second round of fiscal reductions would hit in the fiscal 1997 budget. That is certainly a risk. There also is a risk in moving now because we are going to see oscillations in the likelihood of fiscal policy restraint actually passing. I don't think we want to get involved in that game. So, we have a tough call to make. On net, I think that monetary policy is probably a little tighter than we want it to be, but our regulatory policy is a little easier than we want it to be. What I am afraid we are setting ourselves up for is another situation where we reverse monetary policy, and end up with too easy a monetary policy and too tight a regulatory policy. We end up with the pushing-on-a-string phenomenon we saw during 1991 and 1992. I would urge earlier action in both areas to avoid that.",1361
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"As I evaluate the most recent set of economic data, I remain quite optimistic that we will achieve the soft landing projected in the Greenbook, with growth slowing below trend during 1995 and rising back toward trend in 1996, and with inflation remaining contained during the process. Historically, of course, soft landings have rarely been achieved, but this time it seems to me that the preconditions are better. First, any overshoot of potential output that has occurred thus far is relatively small in contrast to past cycles. Second, inflation has remained remarkably well contained. Third, inflationary expectations have not risen. Fourth, we now have clear evidence of a significant slowdown under way, but there is little evidence of any inventory overhang outside the automobile and housing sectors, and I think that limits the possibility of a hard landing. One of the favorable factors affecting the outlook is that, in the words of the Greenbook, ""labor costs remain under remarkable restraint."" Increases in compensation are running significantly below forecasts based on econometric wage equations. Benefit cost increases have slowed substantially, and there has been no offset, at least thus far, in the form of higher wages and salaries. In recognition of that fact, the Greenbook has revised downward its forecast of hourly compensation growth. But with core inflation behaving about as expected, thus far at least, the Greenbook forecast of core inflation has been revised downward by less. That strikes me as a reasonable assumption for the short run, but if the compensation surprise persists over the longer run, it is quite likely that we will see compensation restraint showing through to restraint in core inflation, and we will end up with a slightly more favorable inflation trend as well. In that sense, I think the forecast contains some downward risks on the inflation side, but it is really too soon to know whether this compensation surprise will turn out to be transitory or permanent. If it is permanent, that would imply a decline in the natural rate of unemployment. At a minimum, the economy is in effect experiencing a favorable supply shock, which is quite welcome in a period where the economy may have overshot potential output and there is continuing pressure from the prices of intermediate materials and imports. As I evaluate the risks in the forecast with respect to real GDP growth, they seem to me to be roughly balanced at the present time. I do have a few concerns on the down side. First, I am concerned about the possibility, which Governor Lindsey emphasized, that the personal saving rate may not decline as much from its current first-quarter level of 5.1 or 5.2 percent as the Greenbook assumes, and hence that PCE growth may be less strong. Over the last two years, personal consumption expenditures have been buoyed by strong spending on durable goods. In line with the Greenbook, I think it is quite likely that the growth of spending on durables will slow substantially because a significant portion of the earlier spending probably went to satisfy pent-up demand. Now, it seems natural to expect the personal saving rate as measured in the national income and product accounts, which include expenditures on durables, to rise when spending on durables is weak and to fall when spending on durables is strong simply because durable goods provide a flow of services over a long time horizon and are thus a form of savings from the households' perspective. In fact, this is the assumption that is embodied in the Board's MPS model. Now, the Greenbook assumes that the NIPA personal saving rate will decline, as Governor Lindsey mentioned, to 4.4 or 4.5 percent in 1996, and that is a level somewhat above its 4.1 percent average in 1993 and 1994 when consumption of durables was so strong. But it is well below its 5-1/4 percent average for 1991 and 1992. My concern is that that assumption may be too optimistic, and since consumption is such a large fraction of total expenditures, an error here can have significant repercussions for the forecast. A second downside risk comes from the potential spillover effects of the inventory adjustment currently under way in the automobile sector, which is forecast to depress real GDP growth in the current and subsequent quarters. I don't want to quarrel with the Greenbook analysis here; it is just that I always worry that there is a possibility of significant repercussions through the multiplier if households cut consumption in response to a decline in income and through the accelerator process if investment slows down in response to a decline in the growth rate of real GDP, especially at a time when capacity constraints are easing. I am simply saying that these spillovers could turn out to be greater than the Greenbook assumes. Governor Lindsey has done an excellent job of describing the risks from fiscal policy, and I share his concerns. Of course, there are also risks on the up side. As Vice Chairman McDonough noted, these work through interest rates, exchange rates, and the stock market. The Greenbook assumes that the bond market rally is overdone and that a portion of the decline in intermediate- and long-term bond yields will be reversed. If this assumption proves false, it is conceivable that interest-sensitive sectors will rebound, turning a slowdown into a pause.",1056
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I'll be mercifully brief as the last speaker. Except for a few details, one of which I mentioned about capacity utilization and a few more which I will mention in a moment, I think the Greenbook forecast is pretty reasonable both on the real and the nominal fronts. I would shade it a bit lower on real growth in the near term, more like DRI's forecast than the Greenbook forecast, reflecting my view that in the short term the downside risks exceed the upside risks. I say that without a great deal of conviction; I don't want to exaggerate the asymmetry that I see. I thought I felt the same way at the last meeting and, in reviewing the transcript for that meeting, I found that that is what I did say then. Between that meeting and this meeting, the annual growth rates in the Greenbook for the second and third quarters of 1995 were both written down by an average of 1/2 percentage point and my prediction of what will happen between now and the next Greenbook is a further reduction of that order of magnitude. It has occurred to me that I could probably make money by forecasting a bigger slowdown when the Greenbook is forecasting a slowdown, and forecasting a bigger acceleration when the Greenbook is forecasting an acceleration.",255
-fomc-corpus,1995,That is true of anyone's forecast!,8
-fomc-corpus,1995,"That was the next sentence out of my mouth! [Laughter] If it is not true of the Greenbook, it is an exception to the rule. There are a number of reasons for this tendency of forecasts to underestimate changes. I mentioned this last time, and I am not going to go into any detail here, but a lot of those reasons could be summarized by saying that people underestimate multiplier-accelerator interactions. Janet Yellen mentioned several such instances. As I look across the components, I can find an explanation having to do with consumption, that is, with saving rates, with investment accelerators, with government spending, with fiscal policy --about which I will have one minute's worth to say in a moment--and with net exports as well. It also has to do with the incredible smoothness of the inventory cycle in the Greenbook, something that has not been remarked about. Basically, the level of inventory investment in the Greenbook simply converges to what is essentially a steady state without ever overshooting. That would be a first if it should happen. So, I think the multiplier-accelerator interaction is likely to be underestimated in the forecast, not by a huge amount, but somewhat. As we discussed yesterday around the Board table, the treatment of the Mexico shock as a one-quarter event is extremely optimistic, as I see it. I think that Mexico will be a drag on our exports for longer than is built into this forecast. Finally, echoing what Governor Lindsey just said, though not quite as strongly and certainly not in as much detail, I now think that the likelihood is for a bigger fiscal contraction than is built into the Greenbook forecast. I was extremely skeptical about this for a long time. But with the passage of the budget resolutions in both houses of Congress and, as Larry said, with the hits having been taken and with the Republican leadership very, very committed--you can either put this as having dug themselves into a big hole or put themselves on a nice platform--I think the prospects for a bigger fiscal contraction are much more likely than they were a few months ago. I want to note that we are not talking about something that is very far into the future. This fiscal contraction starts late this year. On the other hand, as has been remarked, what has already happened to the bond market, the stock market, and the exchange rate is going to be supporting the economy later in the year. In my view, this does not add up to a crash landing by any means. But I think it will not be quite as soft as in the Greenbook. I would say it is likely to be a bumpy landing but not bumpy enough to break the landing gear. [Laughter]",551
-fomc-corpus,1995,"With that, we will go to coffee. COFFEE BREAK",13
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,"Don, is the price index that Taylor uses the fixed weight or the implicit deflator?",18
-fomc-corpus,1995,I think it is the implicit deflator.,9
-fomc-corpus,1995,"So, when the GDP figures are revised, his normative funds rate will go up?",17
-fomc-corpus,1995,I would suppose so.,5
-fomc-corpus,1995,"You don't know what the dimension of that is, do you?",13
-fomc-corpus,1995,"If you use the implicit deflator in his rule, you come out with a federal funds rate around 4-1/4 percent now. If you use the CPI rather than the implicit deflator, you are around 5-3/4 percent.",52
-fomc-corpus,1995,"Yes, it is closer to 6.",9
-fomc-corpus,1995,"But using the CPI in the equation for earlier years does not track Committee actions as well as using the deflator. In particular, by persisting at a higher level through the 1991-1993 period, the CPI predicts a much higher federal funds rate than the Committee actually adopted. CHAIRMAN GREENSPAN. The crucial question that you raise is that of using his equation to capture what we were deciding over the last eight years, and I suggest to you that that may be a little fallacious in the sense that it can be misspecified by the choice of variables.",116
-fomc-corpus,1995,"Just an elementary observation: It does not make a lot of sense to take the same equation with the same intercept and the same coefficients and then change the right hand variable to see how it does. If you had used a different inflation index over the eight years, you would have had a different rule.",60
-fomc-corpus,1995,That is exactly right.,5
-fomc-corpus,1995,"Except that, Governor Blinder, this rule was not estimated.",13
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"He just did something that seemed to make sense and things fell out. But you are right, if you were to estimate it, obviously it would come out somewhat differently.",34
-fomc-corpus,1995,For both problems.,4
-fomc-corpus,1995,"Any other questions? If not, I don't have much to add to what has been said in recent meetings because, in fact, the economy is moving pretty much as expected. If you make the adjustment that Governor Blinder requires, namely that forecasts are always a moving average of actual events and they smooth out the real world, that is one of the reasons I recall saying back in our late January-early February meeting that one of the quarters in this first half was going to surprise us on the down side. All I was doing was using the Blinder rule and it always works.",117
-fomc-corpus,1995,"It never tells you which quarter, though! [Laughter]",13
-fomc-corpus,1995,"No, it never is very helpful in that sense. I think we have to look at this particular outlook in terms of what is engendering the softening. That softening is very clearly the result of an inventory backup, which could be a little stronger than we may expect. I think manufacturing may have a few more months, maybe three or so, of a lot more weakness than is implicit in our forecast. The C&I loan figures may be pointing to a slowdown, but I suspect that we are going to find that the inventory reduction has been slower than we were expecting and that a goodly part of that was an unintended inventory backup. That means that people have not yet come to grips with the squeeze down to a significantly lower rate of inventory investment. As a consequence, I suspect that the third quarter is going to be softer than is projected in the Greenbook. Were it not for the fact that inventory levels, no matter how we measure them, remain quite low, I would say the concern that a number of you have expressed with respect to the potential for reduced inventory investment working its way through the income structure and inducing a weaker consumption pattern in a historically typical way would be something that we ought to be concerned about. But no matter how we look at the numbers, the levels just remain too low for the inventory sector to be a matter of grave concern. And because other sectors of the economy such as capital goods and exports, and I might add homebuilding, are showing signs of sustainability, we don't have the conditions that would induce the underlying system to crack at this particular stage. The reason I asked Mike Prell earlier about the size of the gap between orders and shipments is that I suspect that we are going to see new orders coming down in capital goods markets. The only question is whether they will drop far enough to breach the shipments level and turn unfilled orders down. I think that is a mixed call at this stage, but because there is so much of a gap there, we have leeway for fairly significant short-term weakening. I must say that I don't expect all that much weakening in the expansion, largely because the profit picture still looks increasingly supportive. That is, as the Greenbook indicates, the earnings surprises on the up side are still 2 to 1--profits are coming in more favorably twice as often as unfavorably. The first-quarter profit numbers that were published are just gangbusters and profit margins are still rising. This is really quite extraordinary, given the extent of the slowdown that is involved here. What history tells us is that we just don't get a capital goods contraction in the context of rising profit margins, rising stock prices, and long-term interest rates that tend to be falling. That may occur--it undoubtedly will at a later stage of the expansion. The business cycle is by no means dead, but it just does not make any sense in an historical context to presume that we will be looking at significantly weaker capital spending. Certainly, nonresidential building continues to strengthen and we are getting, as many of you have indicated, a gradual, underlying healing of that problem. Indeed, the issue may be more what Governor Lindsey is concerned about: There may be too much nonresidential construction going on already or at least showing signs of being overdone, and I must say I have a certain sympathy for that kind of concern. We did get a surprising statistic from the mortgage bankers last week. I don't know whether to believe it or not, but the weekly seasonally adjusted figure on home purchases as reported by the mortgage bankers spiked sharply upward, and it does not look like a seasonal adjustment problem because the unadjusted number was the highest that we have seen in a very long time. Moreover, all the qualitative evidence--the traffic, the intentions to buy, the consumer confidence elements associated with housing--is in the direction of a rise in housing activity. The reason starts are weak is that we have a very heavy overhang of unsold homes through which the market has to work its way. The underlying quality of this market is pretty sound. In sum, there is no evidence of a cumulative decline in the economy. We have a very odd problem in the published inventory data, but we also have one in the unpublished data that involves stock adjustment inventories. In the housing industry inventories of unsold homes will continue to hold activity down. In the motor vehicles area I think, as President Moskow indicated, that the May data on sales look somewhat stronger at this stage than those for April, although by no means as strong as they have been. Nor, with all the weakness that we are seeing, do the initial claims for unemployment insurance suggest that this economy is in a continuous weakening phase. The evidence does suggest that there are going to be a lot more surprises on the down side in the very short run than we may be prepared for. The debt issue that Governor Lindsey raises is an interesting one, and I would only respond by suggesting that part of the problem with this big increase in installment credit, which really is outsized, is a significant displacement coming from the mortgage market. Up until fairly recently, a rather substantial amount of indirect financing for consumer durables has come from the turnover of existing homes. That turnover has induced large realized capital gains that have been financed in the mortgage market. Those funds are going disproportionately into the financing of consumer durables. The slowness of the mortgage market in relation to the level of existing home sales is suggestive of the fact that less of that is going on, and it may be that--l-1/2 billion credit card solicitations--is that what you said?",1140
-fomc-corpus,1995,1.2 billion in the first quarter.,9
-fomc-corpus,1995,Is that an official figure? Where did you get the number?,13
-fomc-corpus,1995,The bankers gave it to me.,7
-fomc-corpus,1995,No kidding! That is scary!,7
-fomc-corpus,1995,It is scary!,4
-fomc-corpus,1995,"Every dog and cat and moose has a credit card! I think that part of the problem is merely a shift in the form of financing, but I don't think we can look at those figures without some concern. I do agree that the easing of credit terms is a potential problem down the road. I say that even though, according to the bankers, credit terms are still tighter than they were in the late 1980s; but that is scarcely the standard that one should employ, as I think one of our colleagues indicated the other day. I would say that there is a bigger problem down the road related to all of this. If in fact the economy tracks the Greenbook forecast, it is inconceivable in my judgment that it will continue doing so for an extended period. That is because if this happens, the stock market is going to go straight up and then straight down. And on the down side there will be an awful lot of demand implosion. So, if this economy works as well as the Greenbook suggests, the really serious problem that we will have in setting monetary policy, which we are going to have to question ourselves on, will be how we should respond to asset price bubbles. We know how to respond to product price inflation and the instability that is associated with that. You may recall that when we moved in February 1994, one of the reasons was that an asset price bubble was building up. Little did we know that it was much bigger than we had imagined and that it was more in bonds than in stocks. In retrospect, it was terribly fortunate that that bubble got pricked at the appropriate time. I am not sure that one can make a forecast that is as stable as the one in the Greenbook, because implicit in such a forecast, given human nature, are actions that will probably upset it and that concerns me. So, one of the reasons why the real world is not very apt to look like the Greenbook is that the way the real world works is not like ""that"" but more something like ""this."" [Secretary's note: The Chairman made a hand gesture indicating a smooth path when he said ""that"" and an uneven path when he said ""this.""] The only problem is that we don't know what ""this"" is until after the fact. So, all forecasters can do is to draw straight lines through things. The disequilibrium that is implicit in this forecast is an asset price bubble, and I am not sure at this stage that we know how or by what means we ought to be responding to that, and whether we dare. There is always the question, if we make a preemptive strike against an asset bubble, of whether we could blow the economy out of the water in the process. So, it is a slightly nervous-making type of situation. I almost hope that the economy will be a little less tranquil, buoyant, and pleasant because the end result of that is not terribly helpful. On the product price inflation side, I think what we are looking at here is strictly the expected slowdown in productivity that occurs as a consequence of fixed costs not being spread over the aggregate volumes that we have seen. As unit labor costs rise accordingly, we will be looking inevitably at the beginning of a decline in profit margins but not enough of a decline to prevent final prices from accelerating modestly. However, that is a cyclical phenomenon and not one that I would be terribly concerned about. I am certainly not as concerned about that as I would be about an asset price bubble, which is down the road, granted, but still something to be concerned about. Fortunately, as I see it in the short run, none of this is relevant! [Laughter] We can, as I see it, just do ""B"" symmetric and wait until the next meeting. I think it is very unlikely that the next meeting is going to be one where we are going to be confronted with an economic expansion that is picking up, because my suspicion is--I don't know whether I'd pick the specific timing that Governor Blinder did--that the rate of expansion is going to be shading down a little in the period immediately ahead. But I would not expect the slowing to be enough to undercut the fairly solid underlying status of this recovery for a while, perhaps a good while yet. Vice Chairman.",879
-fomc-corpus,1995,"Mr. Chairman, I agree with your recommendation for ""B"" symmetric. I think that the last time we were, somewhat appropriately, more concerned about inflation than we need be now, even though I think we must stay alert. And therefore the ""B"" symmetric resolution is the appropriate one.",59
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"I, too, am in agreement with your proposal, Mr. Chairman. There are a couple of things that I think we need to be concerned about. First, where are the uncertainties? You have talked a bit about that. And secondly, what are the costs of being wrong in either direction even if the uncertainties are more or less balanced? At this point, I think the risks are reasonably balanced. But inflation could be higher than the Greenbook projects, and my own assessment is that the costs of being wrong on that side are a little higher than the costs of being wrong on the other side. You indicated that you are inclined to the view that the uptick in inflation is cyclical; other people have mentioned that as well. I am concerned about the possibility that it is not necessarily all cyclical. If it isn't--and the Greenbook has built in an estimated 1/2 point increase in the core CPI rate in 1996 versus 1994--even recognizing that 1994 was pretty low, I keep asking myself whether we should be satisfied with that and whether that kind of outcome is something to be sanguine about going forward. Are we certain enough that this is cyclical and not some uptick in the trend, or is it potentially an uptick in the trend if in fact we are experiencing a pause rather than a more permanent downturn in the growth of demand? So, I agree with your comments; I agree with your proposal. I think I am just a little more nervous about the inflation prospects.",309
-fomc-corpus,1995,The way I put it is that I am more nervous about the asset bubble than I am about product prices. That is not to say that I would disagree with you. There may be more than a cyclical element in here that we won't know about until after the fact. I think most of it--,61
-fomc-corpus,1995,Is cyclical.,4
-fomc-corpus,1995,"Is cyclical, but such inflation is not acceptable as far as I am concerned. President McTeer.",22
-fomc-corpus,1995,"I think the risks are somewhat unbalanced to the down side, and I think the recent performance of the economy would argue for some easing today, but the markets have already done that, both interest rates and the exchange market. I think they already are providing some support for the economy. I agree with your recommendation.",63
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"I certainly agree with your recommendation, Mr. Chairman. When I made my economic statement, I pointed out that we face two risks currently--a continuing longer-term inflation risk but also a not inconsequential possibility that the current weakness in the economy may cumulate. If the latter situation were in fact to materialize--again that is not what I think is going to happen but, who knows, it certainly could in the months ahead--it would be very nice for us to be in a position to react to that quickly and promptly. That would be a preemptive move against recession which would be the flip side of the preemptive move we made against inflation, I think with some success, last year. The problem, of course, is credibility. If we were to take an action that was in any way seen as an aggressive easing move, that could do great damage to the credibility that we have built up over a long period of time at some cost. That is why I think it would be very nice if we could find some longer-term nominal anchor for monetary policy in order to impress our longer-term strategic goal more firmly in the public mind. We had a discussion of this a couple of meetings ago. At that time I said that I thought it would be nice if we were to make an explicit announcement that we were adopting the language of the Neal Amendment as our longer-term objective. I am less concerned, though, about what the form of the anchor would be than that we do something to tie that down precisely so that we can deal with an increase in the downside risk--should that materialize--flexibly and effectively without giving up all of the gains we have made on the credibility side in recent years. In any case, I would hope that when we get to the July meeting and we have our usual discussion of longer-term goals, we might give that point some attention.",381
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"I support ""B"" symmetric.",7
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, I support your recommendation. I agree that in the short term the risks seem reasonably well balanced, although I share the same views as President Minehan about emphasizing the possibility that inflation may be a little higher than our forecast in the shorter term. I would suggest, however, that if we in fact are somewhat agreed about the direction that we would like to see the rate of inflation go in the longer term, it will make us rather cautious in moving toward lower rates.",97
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, I think we ought to be fairly happy with the course of monetary policy over the last year and the results that it has achieved in the economy. There obviously are uncertainties surrounding the forecast. The concerns that you point to with respect to the asset price bubble are real, but I think that those are down the road as you have indicated. We have the luxury for a change of sitting back and letting events unfold a little longer before we have to make a move. So, I support your recommendation of a ""B"" symmetric directive.",110
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I think the wisdom of your recommendation is evident, and I'll adopt Bob McTeer's words as my own.",22
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, I support ""B"" symmetric.",11
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, I support ""B"" symmetric as well. I am concerned about the asset bubble problem you mentioned. I think it is a real one down the road. We may see some signs of an increase in the inflation rate in coming months, but at this point it appears that that increase will be transitory. There is some danger of giving up ground on our progress toward price stability, so I think it clearly would be inappropriate to respond too hastily to any signs of weakening in real activity. But in light of the evenly balanced risks that I see at this point, the current stance of monetary policy is appropriate.",126
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"I agree with ""B"" symmetric. It seems to me that this is a time to keep the monetary policy powder dry.",25
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, I agree with ""B"" symmetric. I do have concerns, as I mentioned earlier, that the inflation may be more than cyclical, and I agree that it is wise to wait and see.",44
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"I, too, agree with ""B"" symmetric. The only comment I would add is that when I submitted my Humphrey-Hawkins numbers earlier this year, I was relatively negative about the inflation outlook, at least for this year. Unfortunately, nothing has happened to change my view about that. On the other hand, looking at all the incoming information on the economy, I am marginally more confident that this may turn out to be a temporary acceleration in the core CPI, and I don't see any reason to take action at this juncture.",110
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Mr. Chairman, I support your proposal for ""B"" symmetric. I think that an unchanged funds rate is warranted given the Greenbook forecast with risks roughly balanced.",33
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,I agree with no change at this meeting.,9
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"I favor ""B"" symmetric as well, Alan. I think our focus has to be on pursuing a policy that contains current inflationary pressures and is aimed at making progress toward longer-term price stability. I am not, as you know, a great fan of short-run fine-tuning. I think we are seeing a slowdown from a nonsustainable rate of growth, and we should not be trying to fine-tune in those circumstances. We may have a moderately tight monetary policy, but that is appropriate in view of the tremendous stimulus that took place in 1991 through 1993. The other comment I would make, and we heard some commentary on this issue today, is that any reaction to fiscal policy restraint, certainly any reaction to the prospect of it, is very dangerous. Even if we do get some fiscal restraint, I would argue that the best thing monetary policy can do is to provide a stable price backdrop against which the real adjustments that need to take place in that event can occur most effectively.",202
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"I support your proposal, Mr. Chairman.",9
-fomc-corpus,1995,Would you read the directive.,6
-fomc-corpus,1995,"The directive is on page 15 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint or somewhat lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",108
-fomc-corpus,1995,"I think you mean ""might.""",7
-fomc-corpus,1995,It is symmetric.,4
-fomc-corpus,1995,"I used ""would"" for both.",8
-fomc-corpus,1995,Somewhat or slightly?,5
-fomc-corpus,1995,It doesn't matter.,4
-fomc-corpus,1995,"So we use ""somewhat"" for both.",10
-fomc-corpus,1995,As long as they are the same.,8
-fomc-corpus,1995,"As long as they are the same for both. Do we usually use ""would"" when the directive is symmetric?",23
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"There have been exceptions, but ""would"" is used most of the time.",16
-fomc-corpus,1995,"I think we should use ""would."" We are voting on ""B"" symmetric. Call the roll.",21
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,"The next meeting is the multiple day meeting, July 5th and 6th.   I gather it will be held in Dining Room ""E"" because we are going to be renovating this room. This is as early as we have ended a meeting in quite a while.    [Secretary's note: The meeting ended at 12:15 p.m.]",73
-fomc-corpus,1995,"If anyone heard that, it fundamentally disproves his proposition, there being no microphone sitting in front of Norm! [Laughter]",26
-fomc-corpus,1995,Make sure none of them is an 18-1/2 minute gap!,16
-fomc-corpus,1995,Who would like to move the approval of the minutes? SEVERAL. So move.,18
-fomc-corpus,1995,"Without objection. Peter Fisher, you are on.",10
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for Peter? Governor Lindsey.,7
-fomc-corpus,1995,"I have two, Peter. First, could you just quickly repeat the part about the Mexican transaction?",20
-fomc-corpus,1995,"For value today, the Mexicans are drawing an additional $2.5 billion on the medium-term facility. That brings to $10.5 billion the amount that has been drawn on the facility the Mexicans have with the Treasury. For several months we and the Treasury each have had outstanding $1 billion drawings on our respective short-term swap lines with the Mexicans. Those remain outstanding; the drawings have three-month maturities. We have rolled them over once. I would expect, because I have heard nothing to the contrary, to be asked to roll them over again on August 1. That would be the second renewal. In our agreement with the Treasury, there could be a third rollover of the three-month swap in the fall.",148
-fomc-corpus,1995,"Second question: There seems to be a decline in the amount of liquidity in the foreign exchange markets brought about particularly by redemptions by hedge funds and others. Do you think that has implications for the efficacy of intervention down the road? If the private sector has fewer poker chips, might we actually see intervention become more successful?",65
-fomc-corpus,1995,"That's a very important and difficult question. I would put the emphasis slightly differently than you. I think the interbank community has been reducing its risk appetite and has been quite nervous not just in the last period but for the whole six months of this year. It's that reduction in the risk-taking appetite of the dealer community that makes it particularly difficult for hedge funds to operate in their traditional style. Now, the fact that there might be smaller positions in the market--and we have some confirmation of that--can cut either way on the efficacy of intervention. If people are closer to neutral, it's harder to catch them far off guard--leaning far the wrong way. On the other hand, if positions are smaller and people are slightly off guard, it may be easier to frighten them back to neutral. There is not much science to that assertion and a lot of feel. I think there is something to your point, but there could be occasions where it would be harder to intervene effectively because everyone is sitting happily at neutral in terms of their own risk appetite.",212
-fomc-corpus,1995,We only know about the individual withdrawals--I guess they are called redemptions. Do we have any sense at all of how big the market is and how much it has shrunk?,38
-fomc-corpus,1995,"We have a survey on turnover in the foreign exchange market, based on April data. We still don't have all the data, but it will give us a three-year to three-year snapshot. The better comparison is to talk to the major interbank firms to get a sense of foreign exchange market liquidity and what is happening to their volume. In the last month it has certainly been thin. There is some variance among firms; different banks have had good months and bad months this year, and I don't feel confident that we can say something definitive about turnover in the foreign exchange markets this six months as contrasted with the first six months of 1994.",129
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Peter, I want to follow up on what you said about Mexico, because something went by me awfully fast there. You said the Treasury has monetized SDRs to fund the Mexican drawing. Can you explain that a little?",46
-fomc-corpus,1995,"One of the resources of the ESF is SDRs. The process of monetizing them and presenting them to us--let me say if I am explaining something wrong, Sandy, please bail me out--we take them in and they get dollars for them. And that is the major--",58
-fomc-corpus,1995,They sell us SDR certificates.,6
-fomc-corpus,1995,"They sell us the SDR certificates; they get the dollars and we have the SDR certificates. That then is an injection of liquidity that we have to worry about and sterilize as we would any other form of intervention in that sense. So, that's the process of providing them dollars: monetizing the SDRs.",62
-fomc-corpus,1995,"But we, the twelve Federal Reserve Banks, own our respective shares of these SDR certificates based on the capital of our banks?",25
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,How are we informed that we own them? How is my bank informed that we now have that in our portfolio?,23
-fomc-corpus,1995,It's published on the weekly H.4.1 statement; I don't know whether there is a separate internal notification. There already are $8 billion of special drawing rights outstanding in addition to the $11 billion of gold stock.,45
-fomc-corpus,1995,"I think President Jordan is asking whether somebody is going to call him up and say ""You have just become the proud possessor of an increased amount of SDR certificates."" He is asking: ""What's on my bank's liability side?""",46
-fomc-corpus,1995,"Initially, it would--",5
-fomc-corpus,1995,Unless the New York Bank is holding them all and the increase is offset by deposits at the Fed wholly in New York--,24
-fomc-corpus,1995,The Treasury balance goes up.,6
-fomc-corpus,1995,"The mathmatical way is that the Treasury balance goes up, as we are all saying. That's the narrow answer. But the Chairman is asking--",30
-fomc-corpus,1995,"And then we sell government securities, as they draw down the balance.",14
-fomc-corpus,1995,"That's not the question I am asking. If the liquification were wholly an issue of the Federal Reserve Bank of New York taking onto its books an SDR certificate and crediting the Treasury account for the $2 billion, then the transaction is complete and the Cleveland Bank goes its merry way and nothing happens. I think the question is: Are any of those certificates going to show up throughout the System and what are the transactions on the liability side and against whom--the New York Bank, the Treasury, or what?",102
-fomc-corpus,1995,The current SDRs are distributed throughout the System the way every other asset is.,16
-fomc-corpus,1995,"I may be missing the point, but in terms of the System Open Market--",16
-fomc-corpus,1995,"No, the point is that the liquification--",10
-fomc-corpus,1995,What's on the liability side?,6
-fomc-corpus,1995,"The Treasury takes its SDR certificate, gives it to the Federal Reserve, which simultaneously places the SDR certificate on the asset side of our consolidated balance sheet and increases the Treasury deposit on the liability side. That's what happens to the consolidated system. President Jordan is asking what happens among Federal Reserve institutions? If you are going to allocate SDR certificates to the various Banks, then what appears on the liability side? Are we creating a deposit for the Treasury on all twelve Banks? Is it a transfer from the Federal Reserve Bank of New York? What actually is done?",110
-fomc-corpus,1995,It's done through the inter-District settlement account.,10
-fomc-corpus,1995,"It could be the inter-District settlement account; Cathy says it is. But the other point, Mr. Chairman, is that that deposit never shows up. The Treasury knows in advance that it is going to get $2 billion. It doesn't call $2 billion of funds in from the commercial banks. So, the Treasury deposit is $5 billion or $7 billion or whatever it is the Treasury is targeting that day.",85
-fomc-corpus,1995,This has nothing to do with commercial banks. This is basically a Federal Reserve crediting of the Treasury account for the amount of the SDR certificates.,29
-fomc-corpus,1995,Right. Then the Treasury doesn't call in the funds. The Treasury's account--,16
-fomc-corpus,1995,"No, the Treasury then disburses those funds to Mexico.",13
-fomc-corpus,1995,On the same day.,5
-fomc-corpus,1995,Wouldn't we just have a change of assets on the balance sheet?,14
-fomc-corpus,1995,"Yes. In other words the check is then drawn on the Treasury account, if you want to put it that way, and will end up in the Fed account for foreign central banks, or whatever we do with it.",44
-fomc-corpus,1995,Maybe.,2
-fomc-corpus,1995,"But on the Cleveland bank's account their share of SDRs goes up and another asset goes down, right?",22
-fomc-corpus,1995,That other asset is Treasury securities tHat Peter sells to offset the increase in SDRs.,18
-fomc-corpus,1995,That's what happens to Cleveland's balance sheet.,9
-fomc-corpus,1995,"And it happens the same day. The Treasury's balance at the Federal Reserve never changes, whether the SDRs are issued or not. They target that at a given number; they know in advance what it is. They don't raise cash; they don't sell bills.",53
-fomc-corpus,1995,"So ceteris paribus, the total on Cleveland's balance sheet stays the same? SDRs go up and Treasury securities go down.",28
-fomc-corpus,1995,You sterilize immediately so that our share of the Treasury portfolio goes down by the same amount at the same moment?,23
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,If I could just add one other factor--,9
-fomc-corpus,1995,I'm still not sure I understand this transaction.,9
-fomc-corpus,1995,We will endeavor to have a simplified--,8
-fomc-corpus,1995,"We still haven't discussed how the money gets to Mexico, where it is, and who draws the check. It's an interesting issue that I will reraise outside of this meeting, unless somebody needs to know. Maybe you already understand all this.",49
-fomc-corpus,1995,One more fact is that this is a case in which the Federal Reserve has no choice as to whether it accepts SDRs.,25
-fomc-corpus,1995,I understand that.,4
-fomc-corpus,1995,"In a lot of other transactions with the Treasury, the Federal Reserve has some choice. But the law says, I think, that the Secretary of the Treasury may issue SDR certificates and the Federal Reserve shall accept them. Period.",45
-fomc-corpus,1995,Do we shift U.S. Treasury securites from our account to Mexico? Never mind!,18
-fomc-corpus,1995,We will endeavor to clarify it for all interested parties.,11
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Actually, I had a related question. I was curious about the same thing Jerry raised. Do we end up with an earning asset? Is there a way to earn anything on the SDRs that we hold or is that, in effect, a nonearning asset?",53
-fomc-corpus,1995,It's nonearning.,4
-fomc-corpus,1995,"We reduce our earnings. When you're clarifying this, another question is: This is a repurchase agreement, right?",24
-fomc-corpus,1995,No. It's outright.,5
-fomc-corpus,1995,It's an outright purchase.,5
-fomc-corpus,1995,"Like gold certificates, it's an outright purchase; there are no repurchase agreements on the gold certificates. They are required to redeem them under some circumstances.",30
-fomc-corpus,1995,"This differs from my understanding, then, because in February or March or whenever, my understanding when we were going to take yen or deutschemarks--",29
-fomc-corpus,1995,That would be warehousing.,6
-fomc-corpus,1995,That's warehousing.,4
-fomc-corpus,1995,"You are saying this is not warehousing, this is not a repurchase agreement? So, this is permanent.",23
-fomc-corpus,1995,Correct.,2
-fomc-corpus,1995,"Permanent, yes.",4
-fomc-corpus,1995,"It's an acquisition of an asset, not a swap.",11
-fomc-corpus,1995,I didn't know that.,5
-fomc-corpus,1995,Any further questions for Peter? President Moskow.,10
-fomc-corpus,1995,This is on another subject.,6
-fomc-corpus,1995,I want to thank you!,6
-fomc-corpus,1995,"Peter, I was on the ""morning call"" this morning and one of the subjects was the fed funds futures rate. My recollection from this morning was that the fed funds futures rate is now indicating a 60 or 65 percent probability of a 25 basis point cut in the fed funds rate this month. I was just wondering how that ties in with what you were saying here this morning.",81
-fomc-corpus,1995,"I think we heard the same thing from the same sources at different times this morning. Looking through the pricing of the contract and the different time horizons one has to adjust for, there is a 60ish percent probability, if you read it literally, of a move early in the month--meaning now. And there is an implied probability closer to 100 percent of a 25 basis point easing by the end of the month. Without going too far into the gymnastics of it, that's how one interprets 14 basis points on a contract that settles near the end of the month, given the different probabilities and different time horizons.",126
-fomc-corpus,1995,But I thought I heard you saying that the majority of the opinion in the market was that there would not be a move.,25
-fomc-corpus,1995,Yes. I was trying to offer a note of caution about whether you should read that price literally as saying that everyone in the market has agreed that those are the probabilities attached to a move or whether it's a clearing price between some who have a much higher sense of confidence that there will be a move earlier in the month and others who don't think there will be a move this month at all. There is room for all sorts of interpretations as to whether a given basis point implication in the fed funds contract indicates a consensus view or a range of different views that find a clearing price.,115
-fomc-corpus,1995,I think I've got it! [Laughter] You are telling me that the SDR certificate comes out of the Treasury and we cancel the Treasury obligation and it is wholly an asset swap so that the debt to the public of the U.S. Treasury goes down by that amount. Is that what happens? That solves President Jordan's problem too! [Laughter],72
-fomc-corpus,1995,Can I follow up on that? The same thing happened when we changed the price of an ounce of gold from $35 to $38 and then to $42.22. The Treasury got a windfall of about $1 billion to $1.2 billion in both of those so-called devaluations. So an issue on this is: What was the dollar price of SDRs that we monetized? You say I have an asset on my balance sheet and I don't know what the value of it is.,103
-fomc-corpus,1995,It's about $42.,5
-fomc-corpus,1995,It's $42.22; it's equivalent to the official price of gold.,15
-fomc-corpus,1995,We do this at the official U.S. Treasury price of gold?,14
-fomc-corpus,1995,Do you mean that we can lower the debt to the public by moving the price of gold up to the market price? That could cut the debt back by a not insignificant amount!,36
-fomc-corpus,1995,I have been trying not to mention that publicly for fear that someone might want to do it.,19
-fomc-corpus,1995,It's probably too late; we just mentioned it.,10
-fomc-corpus,1995,It will become known five years from now!,9
-fomc-corpus,1995,"Five years from now, it will be read in the transcript for this meeting.",16
-fomc-corpus,1995,By which time it already will have been done.,10
-fomc-corpus,1995,"Any further questions for Peter? If not, would somebody like to move to ratify the foreign currency transactions during the intermeeting period?",27
-fomc-corpus,1995,I so move.,4
-fomc-corpus,1995,"Without objection. Similarly, would somebody like to move to ratify the domestic open market operations?",19
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,"Then let's move on to the Chart Show with Messrs. Prell, Simpson, Slifman, and Ms. Johnson.",26
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Thank you very much. That was a very interesting around-the-world evaluation. Questions for our colleagues?,20
-fomc-corpus,1995,"Tom, could you briefly describe how that model that you mention on the bottom of Chart 8 is set up? I'm not sure I followed it.",30
-fomc-corpus,1995,"This is an exercise using the quarterly macroeconometric model. What is assumed here is that you are willing to lock in inflation basically at current or recent levels and to hold output at potential. Then, in the case of the so-called baseline here, we are taking the CBO's current raw estimate of the fiscal deficit. So basically, the things I just mentioned are exogenous to the model: the fiscal deficit as well as the inflation rate and the output levels you are assumed to accept. Then we solve for the federal funds rate. Basically, it's the long bond rate that is driving spending and it's the funds rate or the bill rate and other short-term rates that have the biggest influence on the bond rate.",143
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I want to follow up on that same chart, Tom. If I'm reading this right, it says that if the bond market, looking forward, feels that lower future debt is going to lead to lower future real interest rates, the fed funds rate stays fixed for four or five years. Is that what it says literally?",64
-fomc-corpus,1995,"Yes, right.",4
-fomc-corpus,1995,That means that rates on instruments with maturities up to four or five years ought not to fall. Isn't that right?,24
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,But this doesn't look a lot like what has happened recently.,12
-fomc-corpus,1995,"No. I might also point out that in this exercise the simulation starts in the second quarter. It doesn't start in the third quarter, so it doesn't acknowledge the large declines that we had in the second quarter.",42
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"But you're right. In the model, the longer-term rates that relate to housing and capital spending are driving the economy. The decline in the shorter maturities would not have that much effect on spending in the model.",43
-fomc-corpus,1995,"Does it follow that expected future deficit reductions should not move rates on intermediate maturities--say, two-year, three-year, four-year maturities? What you just said is that if the ten-year rate stays fixed, those maturities won't have much effect on spending, right?",56
-fomc-corpus,1995,That's in the eyes of the model.,8
-fomc-corpus,1995,"Yes, absolutely, that's right. The other question I had was for Karen. In all of the G-7 economies--or rather the G-6, leaving out the United States--the forecast is for growth in the near term to accelerate by various amounts over what it recently has been. Presumably, in all the cases except Japan--and, heaven knows, maybe even in Japan--there will be fiscal consolidation over the next two years. You mentioned it in some cases. What does this imply about monetary policy and interest rates in those countries?",111
-fomc-corpus,1995,"We actually have explicit interest rate paths built into what we have to say about these countries. I guess I would invert the question just a bit. I will deal with Europe first and return to Canada. These are countries that, as we perceive it, were exhibiting considerable momentum around the end of last year and even into early this year. So, the questions I ask myself are: What has slowed these economies in the first half of 1995 and will that persist? Will policy action be needed to stimulate those economies? In some cases that may be, but I think the answer that we get for some of these countries is ""no."" For example, in Germany the impact of the tax surcharge, which for reasons that I can't fully explain did not seem to have been anticipated, was not visible in the earlier data. But when the tax surcharge went into effect in early 1995, one does see it in the data; we expect to see that reversed in early 1996 when other taxes are reduced. Some effect of the exchange rate appreciation is certainly a piece of the story in Germany and maybe even in France, but there are flip sides of that in Italy and in the United Kingdom. We got GDP for Italy this morning, for example, and it was very strong in the first quarter. So, I guess what I am left with by way of describing our forecast is to say that a piece of this policy story is that the tightening that we thought would come on line early in 1995 has been postponed. And that, in a sense, is monetary easing relative to the baseline from which we were starting. And at least several of the factors that we see as explaining the slowdown in the first half of 1995 we view as having transitory characteristics. They are either already built in, as in the case of the German taxes, or are not seen as persistent enough to require a real policy response. Canada is quite different. The drop in Canada was far stronger than I think I can rationalize in these terms. It was related in part to the U.S. economy, but it certainly was of an amplitude far greater than we experienced in the United States. I suspect that there will be a need for more monetary policy easing in Canada for recovery really to take hold again. We have seen actions by the Bank of Canada already, so I think some of that monetary easing will in fact be forthcoming.",486
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mike, I have a question, not specifically about something that came up in the Chart Show but about a paragraph that jumped out at me in the Bluebook, and I thought you might want to comment on it. There is a reference to a change in the NAIRU; it is now 5.9 percent in terms of your analysis. My recollection is that the very thick study that was done several years ago came up with a number of 6.1 percent. Would you explain what elements have changed to produce this? Obviously, longer term, it does have policy significance. Secondly, there is a footnote indicating that there are no adjustments for demographics. I think Kansas City found out how interesting it is to talk publicly about such demographics estimates! They clearly are relevant in terms of estimating what the NAIRU is likely to be in the future. Are we going to get another thick study about this or a little more detail about how this change was made?",196
-fomc-corpus,1995,I guess it would be a fair request at some point for us to do another thick study.,19
-fomc-corpus,1995,A thin one would be even better! [Laughter],12
-fomc-corpus,1995,"One of the problems of comparing past studies with where we are now is the change in the current population survey. Even at this point we have some degree of uncertainty about how to translate today's unemployment rate into pre-1994 terms. So, that can be one ingredient in a comparison of old NAIRUs to new NAIRUs. As we have gone along, we have had to adjust our sights on what this is and now we also are trying to incorporate the experience over the past year and a half with respect to wages and prices and trying to surmise whether we might have been too high or too low. We have inched down a bit our working assumption about where the NAIRU is--the number around which our price forecast, in effect, pivots. At this point we are talking 5.9 percent; it is a little lower than it was previously. The allusion to demographic adjustments in the Bluebook was merely to recognize that, as we look out over the next five years, there will be compositional changes in the labor force and there could be movements in the NAIRU as a consequence. For this kind of schematic presentation, though, we thought such adjustments would greatly complicate matters and get us into areas of increasing uncertainty to try to maneuver them over the five-year span that we were portraying. But we wanted to alert you that there were a number of subtleties that we didn't address in this and that you shouldn't be thinking necessarily that the 5.9 percent unemployment rate would be the pivotal rate for each of the next five years.",318
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"I have a couple of questions. I'm not sure whether the first one is for Mike or for Tom. Going back to Chart 8 on real interest rates and fiscal scenarios and so on and comparing that with a statement in the Greenbook, I'd like a little further elaboration. You make references to what you call fiscal restraint. I understand what that is supposed to mean. But as you describe it in the Greenbook, fiscal restraint has the effect of lowering equilibrium real rate . Normally, most people would think that lower interest rates, real or nominal, mean easier monetary policy. So, a tighter fiscal policy causes an easier monetary policy.",128
-fomc-corpus,1995,Let me interrupt you there. MR. JORDAN. Okay.,14
-fomc-corpus,1995,"We wanted to make that as clear as we could--and I guess w failed--or maybe we did do it as clearly as we could but that wasn't clear enough! We didn't mean that adjustment in the nominal rate, which we took to be a reflection of a change in the natural r :e, to be viewed as monetary stimulus. In effect, it keeps things neutral as the fiscal restraint tends to lower the natural rate--the rate that would prevail when the economy was in a steady state, operating at potential. I apologize if we confused you on that score. In fact, what we were doing was recognizing something that I think you raised at the last meeting about how high the real short-term rate should be expected to be over the longer run and whether we felt that 3 percent, or wherever the real rate is, was the sustainable rate. I noted then that if we looked out several years that would become a relevant consideration. I said that we felt it was higher than the longer-run equilibrium or natural rate and that in prior Bluebook simulations we had introduced a downward tilt. Since we were going out a bit further with the Bluebook simulations and we were building in a somewhat more substantial fiscal consolidation, we felt that it would be appropriate for us to introduce that into this forecast. So, that's how that should be interpreted.",268
-fomc-corpus,1995,"Okay, and I have absolutely no problems with that. I do still have a little problem with the references to bond markets being adaptive. It's like saying: If the bond market rallies enough, we don't have to lower the funds rate, and that gives me a little problem. But let me hold that for a second. The Greenbook says: ""We have introduced a downward tilt in the funds rate. This decline in rates, though, should not be interpreted as implying any impetus to aggregate demand,"" meaning that this downward movement would equilibrate. I can read that statement to say also that because the natural Wicksellian rate or some equilibrium real rate has moved down, failure to move down the nominal rate would be a de facto more restrictive policy stance.",152
-fomc-corpus,1995,Assuming inflation expectations remain constant.,7
-fomc-corpus,1995,"So, whatever causes the equilibrium rate to move down--fiscal policy, or God, or something--you would say, even though the headlines may say a lower nominal rate is an easing, that failure to lower the nominal rate is in fact more restrictive.",52
-fomc-corpus,1995,That's right.,3
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,"I should emphasize that, given our limited ability to predict these relationships, the calibration of this is clearly very uncertain. I think the point of Tom's presentation here, which is a schematic one in a sense, is simply that if there are large anticipatory reactions in the bond market, then you do not need to move the short rate as aggressively in order to give a greater stimulus to private investment spending. It's a simple point, and we don't want to suggest by the precision of these charts that we can calibrate that very neatly. Again, it's a broad conceptual issue and one that, obviously, I would think you folks would want to contemplate in thinking about where funds rates might be over time.",140
-fomc-corpus,1995,"I want to draw out this conceptual aspect. I do have a problem with this last point about the rally of the bond market, but that's because I translate it into supply and demand for reserves and what that might do in terms of quantities. And that's because I have a different framework. Let me hold that one, though, because I don't want to take too much time and I want to ask Karen to help me through thinking about something about Japan. You used the word ""deflation"" and I know a number of Japanese commentators have denied vigorously that they have deflation. I don't know what they mean by that, but the word deflation in the abstract means that the purchasing power of the yen is rising. I'm not sure whether that is really what people have in mind when they say those things. If you go back to the beginning of this decade, commercial real estate prices were such that the Japanese would say such things as that the land under the Imperial Palace was worth more than the State of California. We would say ""Yes and try to get it."" All the stocks listed on the Nikkei, if aggregated, would have exceeded the present value of GDP for the world. We thought it probably wasn't true. Or at that time a cantaloupe cost 70 U.S. dollars. If you think during the course of the decade that you are going to remove the impediments to the workings of the market so that the law of one price starts to operate in tradeable goods and asset prices and things like that, then one of two things has to happen. The price of these things, converted into the equivalent of some other currency, has to fall either by a depreciation of the yen or by declines in absolute yen prices. Whether it is proper to think about that as deflation or not, I don't know. What else could happen? If the yen is not going to fall in value on the exchange market, then our economics would tell us that asset prices and goods prices had to move toward world levels. How else could this adjustment possibly be made?",414
-fomc-corpus,1995,"I did not mean to suggest any pejorative notion by using the word ""deflation."" I meant it literally as just that the rate of change of certain prices was negative. Now, it is certainly true that it is happening in the goods sector because to some degree what you described has happened. That is, we have opened up--a little maybe--Japanese markets to world trade. For example, if you use Japanese national income account data in real terms, the share of imports to GDP has risen sharply. In that sense, imported goods and the competitive pressures that they can apply through market phenomena are having an effect of the sort you might want. I'm not so sure that I see that as much of an explanation for why land prices have been falling and are still falling. Nor do I see it really as an explanation for the stock market behavior. So, the asset price story, which had its own special factors on the up side in the late 1980s--a speculative bubble kind of story, fueled perhaps by what in retrospect seems like a too easy monetary policy--has a different story on the down side as well. I am not particularly alarmed that Japanese goods prices are responding to competitive pressures from the outside world. I would think that it might be easier on all concerned if it happened through an end to the upward pressures on the yen rather than through falling prices of Japanese goods. But I am not aware of any rigidity stories, for example, that suggest that because prices have some downward rigidity all sorts of problems are being created. I am merely suggesting that in that environment Japanese monetary policy looks to be a bit tight, given what we know about capacity utilization, the behavior of wages, and what is happening to asset prices. All the pieces fit together to suggest that the stance of monetary policy could be eased a bit in an effort to get that economy growing again.",378
-fomc-corpus,1995,"I didn't think you were being pejorative but I wondered about that policy conclusion. I don't see how what you called fiscal stimulus, which I assume is more resources flowing through the government or less taxes, or monetary stimulus is necessarily called for. If what is happening is a breakdown of the various types of impediments to the working of the marketplace in Japan, one should think of that as a wealth gain for the Japanese people. And other things the same, something that produces miraculously a wealth gain would not lead to the conclusion that you need an easier monetary policy.",115
-fomc-corpus,1995,"True, but I am taking into account the other things we know about what is going on in Japan.",21
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Mike, I have a question that relates to current activity. I have been struck by the fact that nonwithheld income tax payments this April were about $20 billion higher than in each of the two previous Aprils. I wondered what your assessment was as to the impact of that on personal consumption expenditures this spring. Is that a significant factor in your mind acting as a depressant?",77
-fomc-corpus,1995,"It was one of the laundry list of factors that we mentioned in our discussion of consumption in the Greenbook. It works in the right direction. We certainly are not going to argue against that as a possible drag on consumer expenditures. While we are on the subject of consumer expenditures--and I may get additional information later and I certainly would not want to interrupt your discussion at that point--but assuming you were interested in motor vehicle sales, Ford has released its data earlier than we anticipated, so we now have Ford and GM, the Japanese transplants, and a number of other manufacturers--that is, everyone but Chrysler. The ones we have are essentially unchanged from May. Chrysler has been indicating that they are fairly optimistic. They actually have seen their numbers, so I assume that their numbers will look fairly decent, and this would suggest that total light vehicle sales in June will be unchanged to slightly higher, which would be right in line with our forecast.",190
-fomc-corpus,1995,Any other questions for anybody? Would somebody like to start our roundtable?,15
-fomc-corpus,1995,"I can, if you don't have another volunteer.",10
-fomc-corpus,1995,Go ahead.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The economy of the Second District remains weak, but earnings in the key financial sector appear to be on the rebound. That bodes well for the financial industry itself, for the service sectors which support it, and for needed tax revenues in New York City and the states of New York and New Jersey. Sales of existing homes are down from 1994 but are less weak recently than in the first quarter; they are now down about 5 percent as compared with 10 percent in earlier months. In the most recent month, permits fell 10 percent in New York and 14 percent in New Jersey, year over year. Payroll employment in May fell 1.2 percent in New York, reflecting cutbacks in local governments, and payroll employment was flat in New Jersey. Retail sales in May are up 2 to 11 percent over last year depending on the region, and they seem to be snapping back from disappointing sales in early spring. On the national level, we see the economy working through the present weakness and growing stronger in the second half, entering 1996 at about a 2-1/2 percent annual growth rate and achieving a 2-3/4 percent growth rate in 1996, Q4 to Q4. We see CPI inflation somewhat more pessimistically than the Greenbook at 3-1/4 percent in 1995 and inching up to about 3-1/2 percent in 1996. You will recall that traditionally we are rather bearish in our view of price trends. Not surprisingly given the foregoing, we see the unemployment rate reaching 6 percent this year and dropping back to about 5-3/4 percent toward the end of 1996. Looking only at the domestic economy, I believe that the risks to our forecast and the risks to the Greenbook forecast are rather well balanced. However, I am very concerned about the possible dangers from what may be at least somewhat greater than projected economic weakness abroad to considerably worse than that. I do not say that the international part of the Greenbook is lacking in its usual realism, but rather that the risks are mainly negative. In the last several months I, like many of you, have had an unusual number of Japanese visitors including They would be less optimistic than Karen Johnson on the growth of the Japanese economy in the next year and a half. Manufacturers must invest in capacity outside Japan to be competitive in world goods markets, leaving real and disguised unemployment behind in a country that is not accustomed to handling that problem. We believe the Japanese price data are distorted on the up side, and therefore there may be price deflation in the neighborhood of 2 to 4 percent. With few exceptions institutions in the financial services sector--banks, securities firms, and especially life insurance companies--have been severely weakened by operating losses and bad debts. Land prices fell 20 percent in 1994, and I agree with Karen that the land prices are likely to drop another 10 percent or so this year, at least that is how I interpreted the graph. The paper profits of many firms are largely gone at a Nikkei level of 14,000, which we are relatively near, and at 12,000 they disappear altogether. The Bank of Japan finds itself in the trap of low nominal and high real interest rates. Monetary policy is tight, A series of fiscal packages has been inadequate to provide needed stimulus. In the confused political situation, career bureaucrats have both more power and more fear of using it. A downward spiral of the real economy and the associated declines in financial--especially equity--markets are possible and could have a serious negative effect on world markets both directly and through generalized investor concerns. In Europe a not very robust recovery suffers from two possible threats to European unity, which is the underpinning of recovery in many European countries. Those two threats, it seems to me, are the growing awareness of the difficulties of monetary union and the possibility that an even worse conflict in former Yugloslavia could separate the major European powers based on traditional and conflicting friendships with the various protagonists. The jury clearly is still out and the verdict uncertain on the three major economies of Latin America--Mexico, Argentina, and Brazil. Positive verdicts are largely reflected in financial markets. I was in Brazil at the end of last week and met with the President, his economic team, and leaders of the private financial sector. Ongoing success of Brazil's Real Plan depends on superb financial management and near magic in working constitutional reforms in the fiscal area through a divided Congress. Among other things, the members of Congress from the various states have to agree to reduce the automatic division of tax revenues to those states, an act of considerable political courage. Any problem in Brazil would almost certainly mean further backsliding on their trade opening--particularly their Mercosur arrangements with their two small neighbors and, of special interest to us, with Argentina. And absolutely key to Argentina's ongoing success is market belief that Argentina will benefit from exports to the much larger Brazilian market. Private-sector investment, both domestic and foreign, is based on that assumption, and the future of Mr. Cavallo's convertibility plan in turn depends on private investment. Now, these foreign risks may remain risks and not realities, and let us fervently hope that is the case. However, the existence of these risks is of particular concern as our domestic economy passes through the present adjustment process when it is especially sensitive to shocks. Thank you, Mr. Chairman.",1112
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, most of the recent slowing in the Twelfth District economy has been in fast growing states, including Arizona, Idaho, Nevada, and Oregon. California has experienced less of a slowdown than other states and continues to expand at a moderate pace, but from depressed levels. Several large local governments within the state of California need to establish a path to longer-term solvency. Los Angeles County recently proposed to curtail expenditures severely. Orange County is working to avert a short-term liquidity crisis, but it is having difficulty resolving its insolvency. Because Orange County voters rejected a proposed sales tax increase, additional measures such as cuts in county spending will be required. These recent developments have had surprisingly little impact on other municipal issuers in California. However, a persistent premium on California state debt suggests that the market expects the county's problems eventually to revert in part to the state. Turning to the national economy, I am somewhat more pessimistic about the second quarter than the Greenbook. Our monthly indicators model suggests that real GDP declined at a rate between 1 and 2 percent in the second quarter. It appears that a good deal of this weakness reflects a small drop in final sales. While the economy is flirting with recession, it seems more likely that real GDP and final sales will increase somewhat in the third quarter and grow moderately over the next year and a half. Our staff has used our structural model to try to make sense of the unexpected surge in growth last year, which has been followed by surprising weakness recently. They found that in the latter half of 1994 household spending came in well above levels predicted by historical relationships with income, interest rates, and other variables. Developments in the second quarter seem to bring these relationships back more into line so that the recent declines may have been in effect a payback for earlier strength in household spending. One partial explanation could be that consumers accelerated purchases to lock in interest rates in a period of rising rates. There certainly were anecdotal reports of this happening in the housing market in 1994. Finally, I might note that we have raised our inflation forecast a bit for 1995, based on developments so far this year, but we have marked it down a little for 1996 in view of the excess capacity that is likely to develop later this year and the recent deceleration in unit labor costs. Overall, the longer-term inflation outlook seems to have improved in our view since we met in May. Thank you, Mr. Chairman.",499
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Mr. Chairman, the economic data for New England as for the nation indicate at least a pause in the recovery. The anecdotal evidence is more positive. In sum, total employment, housing activity, and confidence indexes have weakened in the region. However, the jobless rate continues to drop. Inflation on both the price and the wage side remains well in check. And many manufacturing contacts describe themselves as wavering between hopeful optimism and watchful concern as they contrast their own order books with media reports on the national situation. Moving to a little bit of detail: Employment in the region fell in May with the weakness concentrated in construction and manufacturing. Services and trade, which have accounted for most of the job growth we have had in this recovery, also had a relatively weak May. Despite the lack of job growth, the regional unemployment rate was 5.2 percent in May. A decline in the regional labor force is one reason for the apparent inconsistency between the weak job figures and the low unemployment rate. Consumer confidence in New England has declined sharply, with the index dropping from over 80 in May to 60 in June--the sharpest decline in any region in the country. To contrast this a bit, business confidence in the region also deteriorated quite sharply in June according to a survey of Massachusetts companies, though it still remains above the level consistent with optimism on the part of more than half of those surveyed. So, consumer confidence has dropped quite a bit more sharply. Business confidence has declined but the way those indexes are figured it remains consistent with some optimism. Our informal discussions with area manufacturers and retailers again have a somewhat more positive tone. Manufacturers in particular report good growth in shipments, and several high-tech companies in the electronics and medical areas are planning large hires. Nevertheless, there are some companies that see evidence of slowing and the performance of the auto industry in particular is being followed very closely. The retail situation is mixed. The weaker performers may be more representative of the general state of the regional economy. Our retail respondents who are doing well seem either to be gaining market share or sellers of specialty products. Lastly, since the latest national data on new home sales were so strong and I reported the last time that there was a better picture in New England on home sales in general, I would note that our latest housing market data in New England have been quite sluggish, though again that is not without its bright side. Some contacts have noticed a pickup in sales in the past month. On the national scene, we are largely in agreement with the Greenbook forecast this time around. Based on information to date, we see inflation, particularly for the last part of 1995, a little higher than the Greenbook is forecasting. All in all, we find the baseline Greenbook forecast appealing, but we are concerned about the risks to that forecast and, given those risks, how we should be looking at policy going forward. That is the subject for later on in the discussion.",597
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"Overall, the Philadelphia District economy is flat to down, probably down in the second quarter going into the third. Manufacturing has been the hardest hit, more so than in the nation as a whole. There is a tentative sense among District manufacturers that the bottom may be near and that an upturn is in the offing during the fourth quarter and into 1996. Most say a healthy export business to Europe and Southeast Asia is cushioning the downturn in domestic demand. Housing activity appears to be responding positively to lower mortgage rates, although the level of activity is still down from a year ago. Retailers say sales are up but below expectations. They are cautious about the rest of the year. They say that a period of pent-up demand has passed and customers are again more susceptible to postponing purchases. Retailers look to a continuation of discounting to keep sales growing. Loan demand at banks is soft and most bankers say their customers are more cautious than several months ago. The region has been hit with more major corporate downsizings, which make for headline news, and these downsizings greatly outdistance interest rates as a matter of general concern. There are still a lot of help-wanted signs in the region, at retail shops as an example, but they are mostly for lower-paying jobs. Wage and price pressures remain subdued. My sense is that expectations in the District about whether the economy is headed for a recession or a rebound are in a sensitive stage. Business people generally are cautiously predicting a bounceback, but these predictions are vulnerable to shocks or continued signs of weakness. Expectations could change quickly. Consumers seem more cautious than businesses, judging from comments from retailers. Turning to the nation, I think the most likely outcome is a resumption of growth, although the risks of a self-feeding downturn clearly have increased significantly for all the reasons that we have discussed. There is little room at this point to absorb additional downside developments without causing a recession. These downside developments are easily imaginable. They may occur if we don't get a rebound in exports, say, because of less growth abroad as detailed by President McDonough. Consumer or business confidence may deteriorate much further as recession talk increases, and one can add to that list. We could conceivably get a much stronger rebound in the economy than expected for the opposite reasons, but this outcome seems to me to be much less likely at this point. As for inflation, there has been an uptick in cyclical inflationary pressures. However, with wage pressures subdued and price competition intense against a background of timely monetary restraint earlier, we still appear to be on track for achieving price stability over time.",531
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Thank you, Mr. Chairman. I would like to take just a couple of extra minutes tomorrow when we talk about the longer-term strategy of policy, so I'll try to make these economic comments this afternoon as brief as I can. As our Beigebook report indicated, our three latest monthly mail surveys of retail, service sector, and manufacturing activity all indicated somewhat slower growth in these key sectors in our region in May; again, these surveys were done in May. More recently, I found the tone of the anecdotal comments at our June board meeting, at which we invite not only the Richmond directors but also our Charlotte and Baltimore branch directors, somewhat more bullish and at least mildly encouraging. On the whole, I would say they suggested that business activity in our District may be bottoming out and getting poised for a bit of a revival going forward. Our regional anecdotal tidbit of the month is that the recent closing of Pennsylvania Avenue is going to cost the D.C. Government about $3/4 million in parking meter fees. I don't know what that implies for the fund rate, but that's a fact for whatever it's worth. Regarding the national picture, as I think I have mentioned before, we use a VAR model in developing our Humphrey-Hawkins projections and this time our projections are very close to the Greenbook's except for inflation; we are on the high side there. We are showing about 1/2 percentage point more CPI inflation in both 1995 and 1996--to be specific, 3.5 percent for 1995, which I think is the upper limit of the estimates you received from the members, Mike, and 3.3 percent for 1996. Even allowing for the rising inflation in our forecast, I would say that both the Greenbook projections and our projections in a sense are pretty rosy, at least from here on out. They both say that real growth hit its low point and inflation hit its high point in the second quarter, and they both project rising output and employment and generally declining inflation going forward. Frankly, this gives me a little pause since, as we all know, rosy scenarios often don't play out. In general, along with my staff, I still think the risks are pretty well balanced, but I have to confess that I am still worried about the downside risks on the real side. I think the recent weakness in employment and income growth could feed back into spending. Moreover, a slowing economy is always more vulnerable to downside risks, and I think Bill McDonough's comments about the downside risks in the external sector are reasonably well taken. Against that background, I very much hope that the June employment report is a little brighter than the last two. One final comment I would make on the financial side--I think the 15 basis point jump in the long bond rate in response to that new homes sales report in May was remarkable. It was, to be sure, a very large jump. But this is a series that everybody knows is unusually volatile and it usually does not get anything like that kind of reaction in bond markets. I think that reaction indicates how super sensitive even the longest-term inflation expectations are to relatively small bits of information. That suggests to me that we need to provide a firmer anchor for these longer-term expectations and I'd like to come back to that tomorrow if I may.",679
-fomc-corpus,1995,Well done! President Forrestal.,7
-fomc-corpus,1995,"Mr. Chairman, the recent indications of economic activity in the Atlanta District are fairly mixed, but the important housing and manufacturing sectors are beginning to show some signs of accelerating. Employment growth has pretty much leveled off in the District, although District unemployment rates generally remain below those for the nation as a whole. The retailers in the District have met most of their expectations, at least in most parts of the region, and merchants are fairly optimistic about the third quarter. Apparel sales, for example, have improved but sales of household goods have slowed down. Throughout the District auto sales remain weaker than they were a year ago. Tourism is strengthening in the District, with only central Florida remaining somewhat weak. Manufacturers' shipment and production activities have increased recently, but the number of contacts reporting that they have added to payrolls has declined since earlier in the year. The domestic market for paper producers is cooling, but export demands remain pretty good in that sector and are bolstering production, and chemical and plastic shipments also continue to be quite strong. Apparel production is steady for some products but demand has fallen off for other categories. This is resulting in slowing factory activity in that area. Building-related producers of such items as carpets and lumber are reporting some slowing. Residential building is also slowing in the region and builders are quite cautious, but realtors are optimistic; that is a change. I thought realtors were always pessimistic, but apparently they are not at the moment. Realtors are reporting that single-family home sales are up for May and early June, and they attribute much of this rebound to lower mortgage rates. Home inventory shortages are reported in very few of our markets. Multifamily construction continues to increase with rising rental rates and occupancies, although realtors anticipate that the rate of increase in rental rates should slow in most areas of the District. Nonresidential construction also continues to increase, with rising rental rates and occupancies now notably spreading into industrial space. Lending activity throughout the District again is quite mixed. Demand for auto loans and most other types of consumer loans is generally soft, but commercial and industrial loan demand is strengthening. Wages remain essentially unchanged throughout the District, and we continue to get scattered reports of shortages of skilled workers, particularly construction workers in Tennessee. As was the case at the time of the last FOMC meeting, fewer manufacturers than before reported higher prices for both materials and finished products, although we are getting reports from industrial contacts that materials prices charged by paper, plastic, tire, and chemical producers continue to go up. Though I said at the outset that I think the picture is decidedly mixed, the anecdotal information that we are getting from our directors and other business people is definitely very, very cautious, a little bit on the pessimistic side. With respect to the national economy, our outlook shows a pickup in growth toward the end of the year and we expect that growth to continue in 1996. For that reason we are somewhat more optimistic on the growth side than the Greenbook, and naturally with that kind of forecast our employment gains are a little better. On the other hand, we show very little improvement in inflation. Now, some of these differences might be accounted for by the fiscal policy assumptions in the Greenbook that we don't have in our forecast, and that would minimize the differences in the two forecasts. I think both forecasts are similar in that they view the current slowdown as a mid-cycle pause rather than the onset of a recession. I think that both of these forecasts are reasonable and within the usual range of forecast errors. But I must say that I continue to be disturbed by the incoming data, which are below the expectations that we had earlier. Clearly, as many people have indicated, the risk of recession has risen. It's not difficult to imagine, as Ed Boehne has suggested, that this decline in industrial production and weak employment could lead to a decided softening in demand. And built into at least some of our earlier forecasts was greater growth in our trading partners, particularly in western Europe. And as Bill McDonough and others have pointed out, that may be an optimistic view at this point since we are looking at a lower rate of growth in those countries. To sound like an economist, I would say on the other hand [Laughter] that underlying conditions are not unfavorable in the economy. The imbalances that we had during the last recession clearly are not present; household and corporate balance sheets are much better, the banking system is in relatively good shape. While we do have an inventory overhang, that seems to be in the process of being corrected. As I look at the entire picture, I think a recession is probably not the most likely outcome, but I think that the risks are definitely on the down side. Thank you, Mr. Chairman.",963
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, the Tenth District economy remains moderately strong, but signs of slowing have emerged in recent months as I reported earlier. For example, District employment growth slowed in March and actually turned down slightly in April and May, and the decline was rather broad-based. However, total employment in May was still almost 3 percent higher than a year earlier, and our unemployment levels across the states are consistently below the national average. In addition to slow employment growth, activity in the energy industry remains weak in our region, and the farm economy has been hurt recently by unfavorable weather and weak prices. Other indicators, though, point to continued underlying strength in our District. In construction, we have had recent job losses, but an upturn in housing permits and other construction contracts suggests the decline will be reversed in the months ahead. In manufacturing, our survey of recent conditions indicates that this sector continues to expand, albeit at a somewhat slower pace. District manufacturers also indicate that they still are operating at relatively high rates of capacity use. Retail sales other than automobiles have been holding up quite well in recent months. Moreover, retailers are generally optimistic about their prospects, although some inventory trimming has occurred. Confirming some of this underlying strength in the District, loan growth at our banks remained relatively strong in May after moderating somewhat in earlier months this year. Against this backdrop, wage and price pressures are easing to some extent. We are seeing price increases in raw materials and manufacturing and we still have some shortages in labor in District markets. But price increases for finished goods have moderated and prices remain relatively stable on the retail side. On the national front, our projections are relatively similar to those of the Greenbook. We believe the economy is going through a pause and an adjustment phase right now. We expect that there will be a couple of quarters of growth below trend, but at the current level of fed funds we would also expect the economy to return to growth near potential by the fourth quarter and into next year. This view is based on the fact that the fundamental determinants of consumer spending and business fixed investment are positive. The outlook for net exports, while less robust than earlier thought, remains generally sound. Inventory excesses do not appear large enough to require a prolonged correction. This outlook permits the labor market and the industrial sector to return gradually to levels of activity consistent with more stable inflation. We are looking for inflation to be capped at about 3-1/4 percent, which is not quite as optimistic as the Greenbook. Looking beyond that, we see continued growth near the economy's potential in 1996.",521
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, reports from our District ccntacts have been more mixed lately. While economic conditions in certain sectors of the District continue to show signs of slowing, some pickup in activity was reported in other industries. Reports from our contacts in the automobile industry and, of course, today's announcements indicate that autos and light truck sales in June moved slightly above May's annual rate of 14-1/2 million units, but not up to the 15 million units that we were expecting just a few weeks ago. I think that's because of lower sales at one of the Big Three and lower expected sales at one of the foreign nameplates that has not yet announced its sales. I don't view this as a pervasive, industry-wide slowing in the last couple of weeks in June. I think the slowing is more focused in those two companies. And, as Mike mentioned, Chrysler has not yet announced, but we are expecting its sales to be up 11 to 12 percent; of course, that number is confidential until it is announced.",207
-fomc-corpus,1995,I think Chrysler has announced its sales.,8
-fomc-corpus,1995,You have the numbers!,5
-fomc-corpus,1995,They announced today?,4
-fomc-corpus,1995,"Yes. The Chrysler numbers, seasonally adjusted by the Fed, went from a rate of 2.22 million in May to 2.43 million in June. According to Dixon Tranum, our analyst, that puts a rough estimate of total sales in June up slightly from the seasonally adjusted May level.",63
-fomc-corpus,1995,Is this the first month that Chrysler had the new minivans?,14
-fomc-corpus,1995,I don't think they have the new minivans.,11
-fomc-corpus,1995,They are out.,4
-fomc-corpus,1995,I hope this is not going to throw the seasonals off.,13
-fomc-corpus,1995,"Of course, they are the one company that has widespread incentives for both their cars and their light trucks now. None of the other manufacturers has incentives across the board. Despite the production cuts so far, it is likely that inventories at the end of June remained near the 70-day supply that existed at the end of May. This year's weakness in light vehicle sales may reflect factors other than overall consumer demand because the total number of light vehicles sold, including both new and used vehicles, actually has risen slightly this year from last year. I think an important factor is the rise in the supply of used vehicles coming off lease, and this trend is going to continue to accelerate in future years as well. In addition, despite the incentives on new vehicles, relatively high prices and finance company auto loan rates may be shifting demand from new vehicles to used vehicles. Orders for heavy duty trucks are exhibiting signs of weakness. However, the back orders remain quite high and cancellations have not picked up. On a seasonally adjusted basis, heavy duty truck production in the third quarter is planned to be about even with the first and second quarters of 1995. For other manufacturing firms, particularly in the consumer durables sector, inventory pruning has been a major factor constraining production, but we do not believe that operating rates are falling to recessionary levels. Industry reports have indicated noticeable reductions in order backlogs for heavy equipment, further slowing of durable goods production, and planned cuts in overtime and weekend operations and in temporary workers. One large producer of heavy equipment has seen a drop in the number of their models on allocation from 30 to 15 in the past few months but, of course, they still have 15 models on allocation at this point. Indeed, producers of construction equipment believe that orders and probably production peaked in the second quarter, and firms are now focusing on managing the expected economic slowdown. One District appliance maker reported cutting production and workers in May and June in an effort to trim factory inventories accumulated earlier when sales were softening. But this contact also noted that the inventory adjustment by appliance dealers appears to have been short-lived. For the industry as a whole, factory shipments of appliances strengthened in May and strengthened again in June. Purchasing managers' surveys in our District indicate slowing activity overall, with the latest Chicago survey dropping to its lowest level since June 1992. On the consumer side, although reports were mixed, most retailers in the District report that sales growth improved in May and again in June on a seasonally adjusted basis. Reports from several national retailers reflected less concern about inventory positions than in previous months, although some added that stocks were still above desired levels. Others indicated an inventory buildup at specialty and discount retailers as a result of deteriorating sales. We have not yet seen a widespread revival in the housing sector, although realtors and homebuilders are optimistic and there are increasing signs that lower mortgage interest rates are beginning to have an impact on activity. In agriculture, weather-related delays during the spring planting season trimmed this year's crop acreage from initial intentions and increased the odds that per acre yields will be reduced by other problems during the growing season. Because of the increased chances of a significant tightening in supplies, grain prices have risen sharply and are likely to remain quite volatile for the rest of the summer. Although the labor markets in the District remain relatively tight, slowing economic growth had tempered demand for workers and some easing of wage pressures was reported. Our average unemployment rate in the Seventh District is 5 percent now compared, of course, to the 5.7 percent rate nationally. On the price side, reports generally have indicated some abatement in upward pressures, mainly in input prices. Reports of renegotiations of earlier steel price hikes continue to surface. Of course, the planned July increase is widely expected not to go into effect. The auto parts producers are reporting renewed pressures from the Big Three to cut prices. Energy prices in the District have eased, partly due to soft demand. Freight haulers report competition for slower business is pushing down rates. One notable exception is paper and paper products, where prices continue to move up. Overall, we agree with the Greenbook that the current outlook is for slower growth in 1995 rather than a recession. Even though the second quarter may be worse than the Greenbook forecast, as long as some key expenditure categories do not turn sour, especially business fixed investment, 1995 should not yield to recession. While the core CPI has increased at an average annual rate of 3.8 percent so far this year, we agree with the Greenbook that the inflation outlook is improving. There remains substantial uncertainty about the actual level of inflation, but the expected path is one of improvement.",944
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. As has been noted, there has been a mix of positive and negative indicators of U.S. economic performance recently, and it is not easy to know what such indicators portend for the future. It's my opinion, however, that the economy has enjoyed a very balanced expansion since its cyclical trough in March 1991, weathering major changes in federal spending and corporate restructuring. Like the Board staff, I am inclined to think that the recent spate of negative indicators reflects a pause in the current cyclical expansion rather than the onset of a recession. We are forecasting real GDP growth in the range of 1-1/2 to 2 percent this year, with such growth returning to near its potential in 1996. With an appropriate monetary policy I also believe that inflation could drift down from current levels in 1996, although we would still be a good distance away from price stability. On the positive side, the financial indicators are generally looking good. The equities market is riding high, and long-term interest rates are down significantly from their peaks of last November. Indeed, there are indications that investment spending, including housing, and durable goods may be responding positively to lower long-term interest rates. Bank lending is strong, and in the Eighth District loan quality is very high. Over the economy as a whole, bank lending is being reflected in an extraordinary increase-in the broad monetary aggregates, which on a longer-term basis are roughly linked to demand growth and inflation. There are few signs of structural imbalance. The ratio of inventories to final sales remains low; the consumer installment debt delinquency rate is near a 20-year low; and the ratio of debt service to disposable income is well below peak levels reached in the late 1980s. Furthermore, the value of the dollar has declined significantly in real terms, so much so that U.S. goods and services must certainly look like bargains in the world market. I expect that this will stimulate domestic production later this year and into 1996. Although growth in the Eighth District has slowed, the District economy remains strong. Unemployment in District states continues at well under the national average, and employment has continued to grow in both manufacturing and nonmanufacturing. District firms producing prefabricated metal buildings, mobile homes, and furniture are experiencing strong demand. Perhaps this says something about the durables sector. Currently, foreign markets are providing good outlets for the products of many District firms, but sharp increases in import prices are adding to costs. In the Eighth District, we see little letup in pressures to raise prices. We continue to receive anecdotal evidence that qualified workers are in short supply. Most contacts in our District report rising costs and some moderate wage pressures. Given this outlook, I am more concerned about long-run inflation than the prospect of a sustained decline in output. CPI inflation accelerated to 3-1/2 percent during the first half of 1995. Such an enormous amount of liquidity was added to the economy in 1991 through 1993 that I remain concerned whether our restrictive policy stance since then has been sufficient to cap inflation and make further progress toward price stability. In my opinion, the declines in inflation and inflation expectations have contributed to the current expansion. Comparatively low inflation has kept U.S. output competitive in both foreign and domestic markets. Moreover, the decline in inflation expectations, which is critically linked to our credibility--the point Al Broaddus was talking about before--has reduced uncertainty, encouraged investment, and enhanced productivity. A continuation of the downward trend in long-run inflation is essential for achieving maximum sustainable economic growth.",731
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"Growth in the Dallas District has slowed considerably from the pace earlier in the year, but we are still seeing positive employment growth. With high levels of resource utilization still being the norm, the attitudes of our directors, Beigebook contacts, and others remain fairly good. I might say that while our directors read the same newspapers as everybody else and are aware of the weakening in the national economy, their anecdotal stories are more positive than what they are reading. The drop in mortgage rates is beginning to have a positive impact on building permits, single-family housing starts, and forecasts of real estate activity for later in the year in our District. The impact of the peso devaluation, while it has been serious for our District, has been mitigated by several special circumstances. One is a surge in petro-chemical exports that has helped especially the Houston economy in recent months. Another is a pickup in foreign demand for computers and electronics components produced in our District. Also, the weaker peso has helped the Maquiladora industry along the Texas-Mexico border. El Paso is particularly a beneficiary and is having good overall employment growth despite the very weak retail markets in the area right along the border. So, while export growth has slowed from what it likely would have been had exports to Mexico continued to grow at their 1994 pace, our overall exports have continued to grow sufficiently to offset some of the weakening in domestic demand. Our directors continue to report exceptionally easy credit standards throughout the District, which probably have reduced the effective cost of bank credit and made the impact of current short-term rates somewhat less restrictive than we might normally expect. On the national side we have no major arguments with the Greenbook. One anecdote is that J.C. Penney's sales in June were very disappointing and they described their inventory accumulation during June as being at recessionary levels.",370
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. As at the last few meetings, I wanted to give a fiscal policy update, and I have distributed a table to the members of the Committee. I think the table carries with it several messages. First, I would refer you to a comparison of the two columns labeled ""1995 Enacted"" and ""1996 602B Allocation."" The 602B allocations are given by the budget committees to the various appropriations committees, and this is the amount of money they can divide up for actual spending. I think the first thing that is instructive is that the basis for comparison on this table is nominal 1995 levels of spending. We are not cutting from some baseline that includes growth; we are cutting from 1995 nominals. The amount of the cut is just shy of $22 billion. This is not mandatory spending; in other words, Medicare is not in here; Medicaid is not in here; food stamps are not in here.",198
-fomc-corpus,1995,Social Security?,3
-fomc-corpus,1995,"Oh yes, Social Security is not in here; interest payments are not in here. These are real-money-out-the-door types of programs. The $22 billion figure roughly contrasts with the discretionary number of $18 billion that is in the Greenbook. The fact that these cuts are from a nominal level leads me to make some adjustment to see just how much contraction is occuring. If we thought that real spending should be roughly constant next year, we would need to have an idea of GDP in 1996 and we would at least want to assume some kind of constancy in real spending and perhaps a little above that. If we add a 3 percent inflation factor, we really are cutting real spending by something on the order of $37 billion as opposed to $21 billion, and that is before we get to the Medicare adjustments. The second observation I would make--we have a small sample of only five subcommittees on the table here--is that four of the five subcommittees have cut more than their 602B allocations. These are appropriations subcommittees that refer back to the Appropriations Committee. I can't remember this ever happening before.",238
-fomc-corpus,1995,The reason you don't remember is that it has not happened.,12
-fomc-corpus,1995,"It hasn't happened, yes. The chairmen of these subcommittees often are called the 13 cardinals. If you have a problem, no matter what party you belong to, you go to one of the cardinals and their job is to take care of your post office or your road or something like that. Needless to say, when they are up against a 602B allocation they manage to spend all the money. Otherwise, they don't keep their robes very long or whatever, I don't know what the analogy would be. So, four of the five committees that have come in have cut below their 602B allocations. The only thing I can read into that is that there is perhaps more political seriousness than is usually the case. The third thing to keep in mind here is that what is being balanced is that one has to successfully logroll to get a majority among two different groups of people. The Budget Committee allocations involve one group of people, but they don't really have responsibility here. These appropriations committee people are another group, and the fact that they are managing to get majorities in both is very, very instructive. Basically, these are going through on party-line votes. So, the amount of cohesion is quite high. This, of course, is very, very early in the process. We go from here to the Senate and then to a conference and then to the presidential veto, but so far I would say that the Appropriations Committee actions suggest that deficit reduction is at least on track. Perhaps we are seeing some reductions below 602B allocations to have as bargaining chips later on. You have to have something else you are willing to cut in order to get your program back. But I think it is very, very striking that we are truly in a new world, as the Chairman just noted.",369
-fomc-corpus,1995,"Thank you, quite interesting. President Stern.",9
-fomc-corpus,1995,"Thank you, Mr. Chairman. The District economy continues to do reasonably well based on the available objective measures. There are some problems in agriculture related to weather, but otherwise things seem to be moving along reasonably well. A couple of bright reports have come in recently. One is a firm with a large mortgage banking operation that says business has been quite good recently and the improvement is only partially related to refinancing activity. And a large appliance and electronics retailer says that business has held up well. Having said that, I think there is a sense of disappointment in some parts of the District, and it is not because activity has contracted in an absolute sense. I think it has more to do with what people thought this year's business growth might turn out to be for their firms, what they took to be a trend as opposed to what economists might consider trend rates of growth and so forth. Actual developments just have not lived up to those more favorable expectations. I think there is some of that going on. With regard to the national economy, I do have some concerns. First, I will talk briefly about some things that don't concern me. Our model is also a VAR model. We update it as new data become available and it is giving us a forecast not precisely equivalent to that of the Greenbook, but not very different--a continuation of modest growth and some slowing in inflation over time. What strikes me about the forecast is that the most recent run of the model does not differ very much, if at all, from the run we did prior to the May FOMC meeting. So, even though a lot of the data that have come in on the national economy in that intermeeting period were on the soft side, our model continues to generate the same forecast. That says that either those numbers are consistent with what the model in some sense was expecting or there have been offsets. The offsets, of course, could be on the financial side because of the continued improvement in the bond and stock markets. In some sense it is as if we almost have an automatic stabilizer working in the bond market, with interest rates declining as this has unfolded. That, as I suggested, doesn't concern me. What does concern me are some other things. First of all, like the Greenbook, when we interpolate the second quarter we get a contraction in activity; and if we go back and look at the preliminary GDP data--not the data that are finely smoothed and reported several years later--it's rare, though not wholly impossible, to find a contraction in GDP that isn't ultimately associated with a recession. I just report that as a fact. I don't know what its implications may be this time around. What concerns me are a couple of things that have been mentioned. One, I share Bill McDonough's concerns about the foreign situation. I have a sense that we have looked at the sunny side of a lot of those economies for a time, and that things just are not panning out and have not for a while, and I am concerned about what that implies for domestic activity. I am also a little suspicious that we may have underestimated the effects of the 1993 tax increase. It's not just that tax payments apparently were much higher than anticipated in April 1995, but I can see where the repercussions of that may be more important than I, at least, thought earlier. Finally, I am uneasy about this so-called inventory adjustment. My experience is that those kinds of inventory adjustments never turn out to be as quick and as easy and as painless as we hope. It is a truism that if demand holds up they do turn out to be relatively easy and relatively painless, but that is a big ""if."" In listening to the explanations about why demand might be expected to hold up, I agree that it might well. But I don't know that I heard anything newly compelling about that, and so my concerns are not entirely assuaged as I listen to those explanations.",797
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"The staff at Cleveland did a survey of various companies across the District on the subject of inventories. The main objective was to gauge business sentiment about current inventory levels. In line with what Gary was just remarking, given their comfort levels with their order books and projected sales, our business contacts simply had no complaints about their inventories. They might talk about problems relating to the mix of their inventories, sometimes referring to thin inventories in some lines that were balanced by too much of something else, but they did not have an overall concern. And that was just as true of manufacturing companies as it was of retail companies and distributorships. What has changed in the last few months is that we have heard far fewer stories about overworked workers--workers complaining about too much overtime. So to the extent that there has been an adjustment, our anecdotal information would suggest a change from something that was perceived as being unsustainable to something that is much more comfortable all the way around. We recently had a joint meeting with all three of our boards and the reports were the most remarkably uniform that I have heard yet about how well things are going from the standpoint of real activity. The directors express puzzlement over what they read about the national economy, but I took that to mean that they don't understand the difference between first and second differences. They think in terms of the level of their firm's activity compared to a year ago and it is uniformly positive in every respect. They do not see things as we would in the sense of changes in the rate of change. There was one new development that I thought was significant and that was their expectations about prices. Except for paper, which Bob Forrestal also mentioned--they say that paper is a serious problem--there was uniform agreement in line with their earlier views that prices are going to be less of a problem. Steel industry people said that the July 1st price increases anticipated earlier simply did not happen, would not happen, and in fact that there would probably be some rollbacks in steel prices. They reported that prices of carbon steel were already being rolled back. Specialty steel people said that they had finished with their price increases for this year and were not planning any price increases even for the first of next year. said that he had come back from an international trade convention of their association, and he said that in the last few months there had been a dramatic shift in thinking about prices of paints and resins and that sort of thing--from expectations that firms could get further price increases to expectations that prices would be flat for the balance of this year. On the labor markets, sometimes when I think about all that is being said about the minimum number of people that are not working and how we have to maintain this reservoir of unemployed people, I feel I ought to come to these meetings and apologize because we have so few people who are not working in our District. There are ten counties in Kentucky and more than ten counties in Ohio that report unemployment rates of under 3 percent; some reports are down around 2 percent or even lower. If we have so few people who are merely consuming the product of other people instead of producing something themselves, one might conclude that maybe we are going to have an inflation problem. If I thought that this was going to lead to a problem of cost push, wage push, or rising prices I would be as concerned as anybody else, but I simply don't see it. In trying to find inflation out there, I mostly get an indication that the productivity increases that are being sustained are warranting the kinds of demand for labor that our firms are registering. It is not the kind of thing that I think people have looked at in previous cycles as a source of future inflationary pressures. Turning to the national economy, when I was looking at the Greenbook I was pleased to see the slight downward tilt in the inflation number for 1996. But then Mike gave us Chart 18 showing the ranges and central tendencies of the FOMC members' forecasts, and that leaves me still puzzled about consistency. The Greenbook projects an upward tilt in intermediate- and long-term rates this year. It suggests that the absence of some downward adjustment in the funds rate that is assumed in the Greenbook will disappoint the markets, and so longer-term rates will go back up. But except for that kind of a linkage, when I look at the staff's nominal GDP forecast for this year and next year I don't understand why we should have higher intermediate- or long-term rates than currently--not with 4.1 percent nominal GDP growth this year and 4.5 percent next year. If anything, rates of 6-1/2 percent on 30-year bonds and 6-1/4 percent on 10-year issues are still a bit too high for any sort of sustainable equilibrium. But when I look at the members' forecasts of nominal GDP for 1996, the range goes as high as 6 percent, and if that kind of forecast for next year and its mix of output and inflation are correct, then the consistency problem is in the intermediate- and longer-term rates, not in the short-term rates. If the central tendencies of the members' projections--they are above the Board staff forecast--are the best guess as to what is going to happen, then I would think that the adjustment has to be in the shorter end. I certainly don't sense any urgency on anybody's part--the directors of our boards and other people that we talk to--that we move toward something that would be perceived as monetary stimulus, with or without an idea about needing to offset some fiscal restraint. Yet, I think that very few people would be arguing at this juncture that we ought to be moving to what would be a de facto more restrictive policy stance.",1164
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, when the economy is experiencing a slowdown, we can't be comfortable about its potential length or depth until it is over--and this slowdown is not over. I feel that particularly strongly in light of many of the reports that we have had around the table so far today. But that said, I still have to be on the more sanguine side as I watch the data that come through here. The consumer does not look as if he is scared to death. Retail sales have come back some already, not strongly, but nevertheless they are not falling any more. Credit is still flowing nicely, maybe in the view of some a little too strongly. With regard to the surveys of consumer confidence, the Michigan survey has now turned back up just a little. The Conference Board survey is still showing a little weakness, but both surveys are at fairly high absolute levels. Capital spending was certainly going to slow down from its earlier pace, and I guess it has, but it still looks good. Orders and backlogs are still up. Housing and autos appear to be stabilizing on the most recent numbers that we have received, and certainly the strong rally in long rates has helped that. The stock market must be helping sentiment and certainly the wealth effect that goes along with that. All those good things being said, however, it is hard to find where there is a strong growth engine anywhere that is really going to kick this economy into overdrive. One of them that could have done that, the outlook for net exports, seems to be increasingly cloudy. When one can't find real strength anywhere, that could, of course, presage further weakness. But it does seem to me that the odds are against a deepening of this slowdown and that the odds favor an economy that is coasting upward toward a sustainable growth rate. For my part, I would put that rate somewhat above that in the Greenbook. Turning to inflation for just a minute, the battle for price level stability certainly has not been won yet, but I must say that I feel better about that prospect than I have at any time I can recall since I have been here. The evidence on inflation and its course is positive. Everybody here is familiar with that evidence so I won't recite it. But it does look now as if inflation may be peaking cyclically somewhere right in here. If so, we are entitled to take some satisfaction from that. It would represent considerable progress both in terms of a substantial reduction and also the fact that a secular downtrend has been going on for a long time and is continuing. To be sure, we are not at price level stability and we have to keep our sights on it. A couple of observations if I may: Number one, I think this Committee has always envisioned attaining price level stability as a project to be accomplished over some period of time. If in fact the rate of inflation is peaking right in here for this cycle, that will occur at a pretty high level of economic activity. I think most of us anticipate that we are going to go back to a sustainable level of economic growth that should not kick off any new inflationary pressures. If this expectation is at all reasonable, then I think we are in a fairly comfortable position for the moment. Second, I think it is of key importance that we maintain the secular downward momentum toward price level stability. That has been in place for a number of years now, and I think it still is. I believe it is the number one duty of this Committee to make sure that the secular downward trend continues in place. But if all of this is in the ballpark, I do think it may imply that we have more flexibility for positive kinds of reasons than we have had since I have been involved in this whole business. We do have some flexibility to move responsibly if there should be a desire to do so. I'll stop right there.",781
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Thank you. I think the preparation for this meeting has been for me the most difficult of my tenure, and that is because we are seeing so many conflicting economic signals. We seem to be at the classic fork in the road--whether or not this inventory correction will work itself into a downward spiral or will turn out to be an air pocket as we approach a soft landing. There has been a fair amount of discussion today about the conflicting real economic data signals. We have talked about auto sales, housing, the inventory buildup, and the consumer sector--these are areas where the signals are mixed. But if the real data signals are mixed, I would have to point out that the monetary aggregates are giving us even less consistent signals. The current frenzy of economic analysis and spinning of the econometric forecasting models probably are more than can be supported by the meager data to date. We are all struggling to look inside the models, questioning assumptions, questioning this, and questioning that. However, because we are on such a narrow path and the adjustment is likely to be so fine, it is difficult for the models to pick up some of these fine gradations. Well, having been a bit frustrated by that process, like Bob Forrestal I went back to the question of whether some of the fundamental strengths that propelled the economy forward in 1994 were still present. They are not as strong they were, but they are still definitely present. Business investment, while not growing at a high double-digit rate, is still relatively strong. The financial markets are not pointing to an economic downturn. The banking system is strong. There is no credit crunch in sight. In the labor market, even if unemployment does notch up a bit, we are still relatively close to full employment. In the manufacturing and financial sectors, the productivity improvements are holding up. On the inflation front, the uptick that we have seen this year does appear to be related to cyclical pressures, as Mike Kelley observed. Since wage inflation appears to be in check, it is unlikely that the upward adjustment that we have seen in 1995 is going to be permanent. On balance, the fundamental strengths that brought us to where we are now in this cycle remain, but I think the economy is vulnerable to the inventory correction that is under way. And as Bill McDonough and others mentioned, there is a potential risk from international weakness or other shocks. When the economy is in a weakened situation, any kind of shock can have more of an impact. In short, while I think the fundamental strengths remain, I think the downside risks are stronger.",522
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"During the last six weeks my optimism has diminished that the inventory adjustment process is going to be behind us after two quarters and that thereafter the economy will return to trend growth with unemployment in the vicinity of the NAIRU. The inflation outlook, however, has correspondingly improved. Although the most recent employment report was a wake-up call, I think the news since our last meeting has been predominantly negative. Governor Blinder's prescient prediction at our last meeting that the Greenbook forecast for the second and third quarters of 1995 would once again be written down by an average of 1/2 percentage point per quarter has proven accurate, although he, too, underestimated the downward revision. Even so, I still consider the Greenbook's forecast a bit optimistic because I think the bulk of the risk with respect to real activity is on the down side. With even a modest further shortfall in final demand growth, it is easy to elaborate a scenario in which the inventory adjustment process is more protracted than previously foreseen, and the longer-term outlook, once inventory factors have turned to neutral, entails higher unemployment and a larger output gap than the Greenbook envisions. We could easily end up I think in an extended growth recession. At our last meeting, I was somewhat sympathetic to the Greenbook's conclusion that the bond market rally might be overdone, and I was a bit concerned about the upside risk that interest-sensitive sectors might rebound too strongly. My concern on this score has faded. I now see the bond and stock market rallies functioning simply as automatic stabilizers that partially cushion the downside risks. I think the impetus of lower long-term interest rates and wealth effects that are working their way through the pipeline will buoy spending on housing and related consumer durables later in 1995 and in 1996. That impetus is needed to avoid a hard landing. If longer-term bond yields were to back up, which is an outcome anticipated by the Greenbook under the baseline fed funds assumption, the downside risks would be greater. Let me just briefly enumerate what I see as the major sources of downside risk at this stage. They have all been mentioned in the discussion during the go-around. The first concerns inventory investment, which I think could easily turn out to be higher this quarter than the Greenbook forecast of $29 billion in real terms. This forecast is guesswork since, as Mike noted, a lot of crucial second-quarter data are missing. And if inventory investment is higher, more of the adjustment remains ahead than the Greenbook contemplates. I mentioned this last time and I just want to reiterate it because it is very important in my own thinking. There is always the downside risk that an inventory adjustment could trigger a snowballing process of cumulative decline through the multiplier-accelerator process with negative feedbacks on consumption as disposable income falls and on investment as business expectations are disappointed in line with what Gary Stern said had happened at firms in some parts of his District. As firms see their expectations for growth on which their investment plans are based being disappointed, that could trigger a decline in investment. Governor Lindsey voiced concern at our last meeting that credit terms may stop easing or may even tighten during a process of slow growth or conceivably recession if default rates, which are now showing some hints of picking up, were to rise further. Another risk concerns consumption, which has been sluggish this quarter and could easily rebound less strongly toward year-end than the Greenbook assumes, particularly if a backup in long rates puts downward pressure on the stock market. The Bluebook's simulations reveal that a higher saving rate poses serious risks to the forecast. With a 1/2 percentage point increase in the saving rate, those simulations show unemployment rising to 6.8 percent by mid-1996. A third risk that many of you mentioned and also concerns me has to do with export growth, which is a needed source of strength as we go forward. The depreciation of the dollar has left American goods very well priced in world markets but, like many of you, I am concerned about growth prospects in Canada and Japan and our other trading partners. Karen Johnson gave good reasons to believe that growth will rebound later this year in the rest of the world as in the United States, and I certainly hope that comes true. But it does seem to me that most of the risk is on the down side and the downside risk here is magnified through multiplier spillovers across countries. It comes through one country spending less and other countries seeing their exports fall and their growth prospects disappointed. And then, of course, there is fiscal policy where since our last meeting I think the prospects for a contractionary fiscal package have improved considerably. Now, to offset those sources of weakness, the Greenbook forecast relies on a strong rebound in housing demand and associated spending on furniture and other durables, including motor vehicles. But under the baseline fed funds assumption with some backup of long rates, I see a real risk of insufficient revival in these sectors. Moreover, as the Bluebook baseline simulation makes apparent, and Mike Prell reiterated this, by 1996 the tighter fiscal scenario alone clearly points to reduction in the natural, equilibrium, or whatever you want to call it, Wicksellian real rate of interest consistent with an economy operating at potential. In the Bluebook baseline, the real funds rate must decline to 2-1/2 percent by 1996 and 2 percent by 1997 to keep the economy operating at potential. So, I agree with the conclusion of both the Greenbook and the Bluebook that as we go forward the real funds rate will have to decline from its current level.",1138
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,I have five points to make. I tell you that because then when I get to point four you'll know I am almost finished.,26
-fomc-corpus,1995,Why don't you start at five? [Laughter],11
-fomc-corpus,1995,"All right, I'll start with five. That was about inflation. I thought it was a good place to finish. At the last two FOMC meetings I expressed two views--Governor Yellen has scooped me on this. I said that I thought the Greenbook was a shade too optimistic, and I said that history tells us that forecast errors are serially correlated. I say this not to gloat, because I am just as guilty of this as anybody else. I was below the Greenbook both times, but I was also too high both times. I am again a little below the Greenbook. In none of those cases was the discrepancy very large, although this time I see that I have the distinction of being just enough below the Greenbook to be outside the FOMC range. But that has to do with rounding to quarters, I hope. If not, there is a stronger message there! [Laughter] I should add, however, that since we have free rein in these forecasts regarding what we assume about monetary policy, I did not make the Greenbook's assumption about interest rates, but rather I embedded in my forecast the assumption that the fed funds rate would be 50 to 75 basis points lower by year-end than it is today, starting immediately. I have several reasons for coming in with a forecast that is below the Greenbook, and I am just going to mention them very briefly because someone around the table has mentioned each of them by now. The one I want to emphasize is that while it is not unreasonable to have an expectation of a fairly smooth inventory adjustment the way the Greenbook has it, there is up to now something between scant and no evidence that things are working out that way so far--that is to say, that inventory accumulation is coming in substantially lower in Q2 than it did in Q1. The data on that are very scanty, and so the Greenbook may in fact turn out to be right; I don't rule that out. But I think we should keep in mind that, when it comes to inventory adjustments, the bigger they come the harder they fall. Second, for reasons many people have mentioned and as you probably guessed from the question I raised earlier, I think foreign GDP is likely to be weaker than our forecast, and so exports will be commensurately weaker. Thirdly, I am worried about the consumer, or really the right way to say it is that I am worried about the multiplier-accelerator mechanisms being more severe than those embodied in the Greenbook. As I look at this list, I figure that one of those three downside risks is bound to materialize--I don't know which one--which is the reason my point estimate is lower than the Greenbook's. So, take the Greenbook and subtract any one of those three, and you get outside the FOMC range. Now, more important to me than that is the risk to the forecast. I must be almost the 18th person--17th, the Chairman hasn't spoken yet--to say that the risk to me looks lopsided on the down side. That says to me that I have this point estimate and, as I look and think about the probability distribution around what I guess is the mode--don't ask me how I come up with a point estimate, I think it's the mode--the risks are clearly on the down side. I mentioned the risk of the inventory adjustment being more severe than the Greenbook forecast, and I put that high on my list. I can think of a risk on almost every component of spending. On consumption, I already said that there is a serious concern that, with lower employment and real wages, falling income will lead to weaker consumer spending than is in the Greenbook. There is also a risk, as somebody said--it was Bob Parry--that 1993 and 1994 were unusually buoyant years for household spending and we simply are not going to repeat that again. On business fixed investment, which has been holding up remarkably well, I am very worried about the accelerator taking hold as GDP growth turns from positive 5 percent in Q4 to negative. As in the Greenbook forecast, falling capacity utilization and weaker sales are going to bring falling profits, which I think companies have not really factored much into their thinking as yet. Lower sales imply less need to add to capacity. I hope business fixed investment will hold up in response to that, but it is a downside risk. Governor Lindsey mentioned the downside risk on the fiscal side. I am a little less anxious about that than I was at the time of the previous FOMC meeting, but I don't rule it out at all. And we have already mentioned the foreign demand risk. Frankly, none of those worries, as I look at them, is that huge. But they are all going in the same direction. The odds that we will dodge all those bullets are not very strong. The third point I want to make has to do with the relevance of the latest tea leaves to surface to the top of the cup, which have been a bit better than the news of the previous several months. I think the news of the last six to eight days is better than the news of the last six to eight weeks. But I don't think we should get carried away by that, just as we should not have gotten carried away by the news of the last six to eight weeks. Had we taken that news literally, and if it was the only information that we had, we should all be forecasting a deep recession. That would have been a great overinterpretation of those numbers as they came in. All of us avoided that overinterpretation I am sure. Similarly, the mixed bag of numbers, including finally a few bright spots in the cloud, does not obviate the fact that we are in a cloud. Mainly, these reports look good in relation to the unremittingly bad news in the preceding weeks. When I look at these numbers, I don't look so much at the last six to eight days or even the last six to eight weeks, but the last six to eight months. If we look at the last six to eight months, we find that retail sales were up just 0.4 percent from November to May. That is 0.4 percent in nominal terms and not at an annual rate. If June is down, industrial production will be down for four straight months, and if industrial production comes in close to zero in June, that will leave it barely above its December level. Household employment--again, depending on the way it comes in, if the June report is close to market expectations for total payroll employment--will be unchanged from what it was in November. That is not about tea leaves; that is about what the economy actually has been doing in the near-term past. All of this does not spell a disaster scenario, but it is negative news relative to what we thought six months ago. And it does, as many people have remarked, leave us with an economy that is highly vulnerable to an adverse shock. This is my fourth point. You could think of a whole variety of such shocks, and when you are sitting that close to the edge, it does not take very much. In line with that, I examined--with some help from staff here and also at the New York Fed, which I thank--several statistical indicators of recession. I am not quite sure how many there were because some of them were variants--putting different things on the right-hand side to come out on the left-hand side with a probability of recession. There is a whole bunch of these, more than I realized. I have learned that it is now a small cottage industry. Almost all of them seem to be flashing a number in the 30 to 60 percent range right now as the probability of a recession, which, ironically, is almost exactly what you would get if you just did the most naive thing. The old rule says that if the leading indicators go negative three times in a row, that predicts 10 of the last 5 recessions. That is to say, it gives you about a 50 percent chance of a recession. That is what the leading indicators are saying now and what these statistical indicators also are saying. My personal probability is actually at the lower rather than the higher end of this range, more like a third than 60 percent, but it is enough of a risk to leave me uncomfortable. The fifth and last point, which should have been the first point, has to do with inflation. On the Greenbook forecast, and certainly with a weaker forecast, the risk of rising inflation now looks to be minimal. In the Greenbook, the unemployment rate is rising from just a tad below the natural rate to just a bit above the natural rate. Capacity utilization is falling to and then below its historical average, which leads me to conclude, exactly as the staff does, that the pressure for rising inflation is either gone right now or is soon to be gone as the GDP gap changes sign from positive to negative, if one signs it that way. This is particularly clear if you look at the long-run Bluebook projection, which shows inflation falling ever so slightly for the next several years. This leads me to the final point, and it is echoing what Mike Kelley said a few moments ago. If this inflation outlook turns out to be right--and that seems to be a reasonable expectation--the peak rate of inflation in this cycle, because there are cycles as well as trends in inflation, will be 2-1/2 percentage points below the peak inflation rate in the last cycle. That is very substantial progress. We have been talking here about individual inflation forecasts that differ very little. People have said that their forecasts are higher or lower than the Greenbook forecast by .2 percentage point or so. Nobody can forecast inflation that accurately; nobody on earth. So, a likely reduction of 2-1/2 percentage points from the last cyclical peak is very significant progress. It suggests, furthermore, that one more cycle, hopefully not starting imminently on the down side, is going to bring inflation almost to zero. Thank you.",2069
-fomc-corpus,1995,"Thank you. On that beneficent note, we have come to a termination of today's agenda. I want to remind all of the FOMC members of our usual annual dinner at the British Embassy at 7:30 p.m. In the past we have been quite successful in being as obscure as we are usually. But we need to be a little careful because I think there probably is going to be some awareness outside that we are there, and I suspect that there is going to be some attempt by the press to approach some of the people who will be at that dinner. So, if we can create some-constructive ambiguity, it will not be a great loss to the world at large and especially for ourselves.",145
-fomc-corpus,1995,"It should be easy to keep them talking, shouldn't it, given everything that has happened?",18
-fomc-corpus,1995,That's a good point. I think there are a lot of questions about the future of the U.K. economy. We will reconvene at 9:00 a.m. tomorrow.,37
-fomc-corpus,1995,"With respect to your projections, Mike Prell is keeping an open book and corrections may be submitted through Monday, July 10th. I would also like to call on Mike to bring us up to date on the data that just came out.",49
-fomc-corpus,1995,"Thank you, Mr. Chairman. I will be very brief. Initial claims for the week of July 1 were published this morning and were unchanged at 369,000. You will recall that two weeks ago they showed a spike up to 396,000; they came off last week and were unchanged in the latest week. Insured unemployment was up to 2.7 million. That has been trending up recently, so the rise wasn't particularly surprising in light of the initial claims. The leading economic indicators were down 0.2 percent in May, as we and most other people had anticipated. The change in the prior month stood at minus 0.6 percent; there was a revision from minus 0.5 percent to minus 0.4 percent, I believe, in the preceding month. For what it's worth, we were speculating that the measure of the probability of recession that we presented in the Greenbook would be about 54 percent and, with the revision to the earlier month--this is a very sensitive measure--it is now at 48 percent. [Laughter] The Johnson Redbook came out yesterday afternoon--up 1.4 percent for June--and you have the auto sales figures before you. As I indicated yesterday, they were up slightly in June to 14.9 million units for light vehicles, which is in line with the Greenbook forecast. Thank you.",285
-fomc-corpus,1995,What is the translation of the Redbook into reality? What is your guess as to what that means?,21
-fomc-corpus,1995,"We find it to be terribly unreliable, but a change that large might be a signal that we can look for a positive in the retail sales numbers.",30
-fomc-corpus,1995,Maybe up 0.1 percent!,8
-fomc-corpus,1995,It is hard to say. That is all the news--some of which probably is not fit to print.,22
-fomc-corpus,1995,It will be in five years! [Laughter],11
-fomc-corpus,1995,"Any questions for Mike? If not, let us proceed with the agenda. I call on Don Kohn to bring us up to date on the long-run ranges for monetary policy.",36
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,Questions for Don?,4
-fomc-corpus,1995,"Don, do we have evidence--I think there was some earlier--that the velocity of M2 is now back closer to zero.",27
-fomc-corpus,1995,The trend in velocity growth?,6
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"The whole level of M2 velocity has shifted up by, I think, about 15 percent; M2 is about 15 percent lower than we would have thought using old standards. There is some evidence that the growth rate relationships among M2, nominal income, and opportunity costs have come back roughly on track in the last two years or so. If that were the case and if we had any confidence that it would persist, we might be able to imagine a situation in which the growth rate of M2 demand was back on track and velocity then would fluctuate around its current level rather than around the lower old level. That is a distinct possibility, but the point I was trying to make in my briefing is that, given our uncertainty about these relationships, I think it is a little early to pronounce M2 velocity back on track.",167
-fomc-corpus,1995,But it looks stable for the last two years?,10
-fomc-corpus,1995,"Approximately, yes. Now, we have had more M2 growth in the second quarter--by several percentage points--than this model was predicting. In growth rate terms, the model was right on for 1994. I think what happened in the second quarter of this year was that M2 was reacting to the decline in intermediate- and long-term rates, whereas the model uses the bill rate to proxy for alternative investments. So, it didn't capture those declines. Going forward, whether this old standard model--it is now nearly ten years old--will capture the dynamics will depend in part, I think, on whether short-and long-term rates move together in their traditional cyclical relationship.",138
-fomc-corpus,1995,"I will phrase this as a question, but it is really a statement: If in fact we are back to a more stable relationship, wouldn't a 1 to 5 percent growth range for M2 be a bit low?",45
-fomc-corpus,1995,That would give you a midpoint of 3 percent. The Committee has looked at that as providing some sort of benchmark for what it might expect from M2 when reasonable price stability had been reached.,39
-fomc-corpus,1995,That's the year 2000!,7
-fomc-corpus,1995,"For next year the models actually see growth at the upper end of that range--perhaps consistent with what you are saying--in the 4 to 5 percent area, approximately.",36
-fomc-corpus,1995,"Let me remind you again that we ran those models off our nominal GDP forecast, which is a pretty low number, and you would want to make a mental adjustment for your own forecasts.",37
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Don, applying the same logic you described with respect to how the 1 to 5 percent range was set for M2, do we have enough confidence about M3--its stability over time and its relationship to M2--to say, if historical relationships obtained, what a comparable range for M3 would be?",64
-fomc-corpus,1995,"No, I don't have enough confidence. In the past, M3 growth has tended to run approximately a percentage point above that of M2, so a 2 to 6 percent range for M3 would not seem to be a bad alignment. But the past experience applies to a period in which depositories were capturing an increasing share of credit extensions. If your best guess were that their share of credit flows would remain about constant, then perhaps the M3 range ought to be about equal to the M2 range, assuming that depositories rely on retail and wholesale deposits in roughly the same proportions. So, it is hard to know. It really depends on the role depositories will play in the financial system. To repeat the earlier point, an M3 range of 2 to 6 percent is roughly consistent with a range of 1 to 5 percent for M2 in terms of historical relationships. Whether it would be consistent going forward is a much harder question.",195
-fomc-corpus,1995,"In setting these M2 ranges, do we normally look for some consistency between the target range and the Committee's nominal GDP projections? We just did our nominal GDP projections for 1996. Their full range is 4-1/2 to 6 percent and the central tendency is 4-3/4 to 5-1/2 percent; we were asked to prepare our individual forecasts on the assumption of a desirable monetary policy. So, if we take those nominal GDP forecasts and assume that M2 velocity is constant, wouldn't that suggest that 5 percent M2 growth would be consistent with the forecasts we are providing to the public and Congress? And shouldn't 5 percent be the midpoint of the M2 range? If it is not--and it is not even under alternative II for 1996--it seems to me that adopting the alternative II range, and certainly the alternative I range, communicates a lower real growth target than our nominal GDP forecasts imply. A growth rate of 5 percent for M2 is probably consistent with, say, 1-1/2 or 2 percent real GDP growth. If our M2 target is taken as the middle of our range, a 1 to 5 percent M2 range implies lower target real growth than that. Even under alternative II, the midpoint of the M2 range is 4 percent and that could entail perhaps 1 or 1-1/2 percent real GDP growth for 1996.",297
-fomc-corpus,1995,"I think you are right, Governor Yellen, because for a number of years the Committee really has not been taking these aggregates seriously as guides to policy, and as a result it has not been moving the ranges around to make them consistent with its outlook. Part of the problem is that it is very hard ex ante to know what those ranges ought to be. We may now have a little more confidence about that, but even relative to the staff's nominal GDP forecast, which is 4-1/2 percent for 1996, the 1 to 5 percent range for M2 is obviously low. And if I took the Committee's nominal GDP, which is higher than the staff forecast--and especially if I assumed that interest rates would have to be lower to get that nominal GDP--we might have a decline in velocity. That is, we might need even more M2 as market rates went down. I have not run the exercise, but I would guess that we would be talking about an M2 projection of 5 percent or even a little over 5 percent to be entirely consistent with the Committee's nominal GDP forecast. The other way to work this, which is more or less what the Committee has done over the last few years, is to say that we see this range as something that is out there to provide a benchmark in the future, and we are not paying much attention to this now--and let it go at that.",292
-fomc-corpus,1995,But we were asked to communicate our goals for 1996 and not for 2000.,19
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"I was going to comment a bit on what Governor Yellen was saying and also point out that I think we are really on the horns of a dilemma. Governor Yellen's point stands by itself in terms of the logical consistency of what the ranges ought to be relative to the central tendency of our nominal GDP forecasts. But it is hard to separate that from the message that changing the ranges for M2 and M3 would convey to Congress in terms of the way we have been reducing these ranges over the years and the consistency of that with the credibility of our inflation objective. Given that we don't yet have firm evidence as to whether these measures have trended back to a more reliable long-term relationship with other economic variables, if we take what might be the logical step and increase these ranges to levels that theoretically make sense vis-a-vis the members' nominal GDP forecasts, we would be increasing both ranges to a degree that might be considered inconsistent with the way that the Committee has been reducing them over time. That is the concern I would have on that. I wanted to raise a question on another subject, although other people may want to jump in on the current subject. The question that I had has more to do with your longer-run trends. I had some trouble sorting out the distinction between the downward funds rate path that you talk about in the Greenbook as a function of the change in equilibrium real rates of interest--which is part of the baseline forecast--and what you mean when you talk about a demand shock as a result of fiscal tightening. Are we double counting there?",314
-fomc-corpus,1995,"There is a demand shock built into the baseline, which is the fiscal restraint needed to balance the budget by the year 2002. That is already in there, so you would not add more fiscal restraint on top of that unless you thought even greater fiscal restraint would be forthcoming. One could also imagine a situation in which the path of fiscal policy is a little more front-loaded than the staff is assuming and therefore the restraint happens sooner rather than later. As Mike noted yesterday, the assumptions for 1995 and 1996 on fiscal policy lie somewhere between those of the President and the Republicans. So, if you thought about a situation where the Republicans somehow prevailed on the stance of fiscal policy, that also would be a demand shock--at least over the next few years.",155
-fomc-corpus,1995,But that is not the demand shock that you had in mind?,13
-fomc-corpus,1995,"What we used was a saving rate shock, but I believe we noted that you could think of it also as a situation in which we had more fiscal restraint than we were expecting.",36
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I just want to ask a very brief question to follow up on what Governors Lindsey and Yellen were pursuing. If the M2 demand function works, what interest rate is assumed tacitly in a 3 percent M2 growth forecast? How much higher is it than current interest rates?",58
-fomc-corpus,1995,In terms of a trend interest rate?,8
-fomc-corpus,1995,"No, in terms of 1996. The point was made that what we would like any of these things to be doing over the longer-term horizon may be one question, and what we would like for 1995 and 1996 may be another question. I was trying to ask the easier question--from now until the end of 1996.",72
-fomc-corpus,1995,"I'm not sure it is easier! Of course, the staff has 4-1/2 percent M2 growth projected for 1996 with the interest rates of the Greenbook, and that means a gentle decline in interest rates toward the middle of 1996. If I used the interest rates of the tighter scenario--that is, the 75 basis point increase--that gets the projection for M2 down to 3-1/2 percent.",92
-fomc-corpus,1995,"The question is what interest rates would we need to make the midpoint? The staff has M2 growth of 4-1/2 percent in the baseline and 5-1/2 percent in the easier alternative. But as was pointed out, those are funny numbers if you are aiming for 3 percent.",63
-fomc-corpus,1995,"It would require slightly more tightening than the tighter forecast. The tighter forecast has M2 growth of 3-1/2 percent; to make the 3 percent you would need slightly higher interest rates, perhaps avoiding the drop in interest rates in the second half of 1996 or you might have to raise rates a bit and keep them up. I think the tighter scenario gives you a baseline to think about that.",84
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,"I would like to emphasize the point that there are many kinds of interest rate paths that one could imagine. If you moved rates down very sharply in the short run and they were to flatten out or even come back next year, that might have some implications for growth next year; in particular, M2 growth might not run appreciably higher than our forecast. There are lags here and we still don't know all of the behavioral relationships--what would happen to mutual funds flows and so on under some of these rate scenarios.",104
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"I want to explore a little further Don's answer to Governor Yellen. I think in the past the Committee has lowered the ranges in part because we thought that the trend velocity of M2 had increased somewhat. It was not that we believed that the ranges should be consistent with 3 percent growth in nominal GDP. The latter was closer to 5 percent. I think the fair question to ask is whether we think the velocity trend has shifted back to something closer to zero, and if we believe that, then I think it would be consistent with the Committee's forecast to change the M2 target range. So, I think the rationale had more to do with our beliefs about the trend in velocity than it did with our trying to establish a range consistent with price stability in the year 2000.",160
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"It seems to me that we are still in a position where we don't have a great deal of confidence about the relationship between the growth of the aggregates and the growth of the economy. In the past, I think we have acted in a way, as Cathy indicated, where we have used the ranges to convey a message, and I think we probably are most comfortable in continuing to do that at the present time. We would be able in my view to increase, as Don explained, the range for M3 and still be consistent with our longer-term objectives. One point I would make, Don, about your comment to Governor Yellen is that I don't think there is a consistent basis for the members' forecasts. That needs to be kept in mind. If we were to go around the table, I think people would give different responses about what their forecasts assume, and I am not sure that all make explicit policy assumptions. There also is a difference between what they think is going to happen and what they think should happen. We are not given consistent statements about what we are supposed to assume in doing this exercise. So, I think we have to be a little careful about what those forecasts in fact are.",241
-fomc-corpus,1995,"Any further questions for Don? If not, let me just say something that I think is on the table, and I will start off the roundtable. If we presume that the velocity of M2 is finally going to return at some point to the stability experienced for a very long period of time, all the arguments that are being made with respect to the ranges are very appropriate and to the point. However, the prospect that we will take them seriously, in the sense that their behavior may alter policy, is still a very long way down the road. It just does not seem credible that we will develop enough confidence by next year, or maybe even in two years, to be able to say that M2 is back on track in a manner that will affect the way we conduct policy. As a consequence, were it not for the Humphrey-Hawkins legislation at this point, we would not be having this discussion. We would not even have the aggregates, so far as I can judge, as a significant part of the Humphrey-Hawkins report. I am not saying that we would not discuss them; obviously, they are not an irrelevant issue. So, that really gets us down to the question as to what type of signal we want to put out there. In a sense, what are we trying to do if we make changes in the ranges? If we don't make any changes, our decision will get zero publicity; indeed, that is what we found out after our February meeting. No one cared; no one commented; my recollection of the Humphrey-Hawkins hearings is that no one raised the issue. I may be mistaken on that, but if they did it certainly did not make an impression on me. If, as I hope and suspect, we may vote later to ease policy, superimposing on that a signal that we are changing the ranges would worry me in the sense that we could be conveying more policy implications than I think we want to convey. I am persuaded that the position staked out by Governors Yellen and Lindsey is a perfectly sensible one, especially a year from now if I may put it that way. I would doubt very much that it is useful to make any changes at this stage, and I think that there are more downside than upside risks because we are not in fact using these ranges for policy purposes. Unless I am mistaken, there are very few of you around this table who would consider that your views on policy will be affected to a significant extent by whether or not we move the M2 range today. That is a view which, I will grant to everyone, is disputable because we got to the 1 to 5 percent range to a large extent by accident. We got there because it was very embarrassing to have higher growth cones when the growth figures were falling through the floor, so we decided to adjust and we ended up at 1 to 5 percent. That range is not a rational position; it is an accidental one, but if we change it we will be giving a signal which in my view would probably be a mistake at this stage. President Boehne.",633
-fomc-corpus,1995,"In my view, Mr. Chairman, that is both an accurate and a sensible statement. There is a dog over in the corner and he is asleep and his name is Aggregates and we ought to let him sleep for another year or two.",49
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Mr. Chairman, I agree that it would be ill-advised to change the M2 range at this stage, especially in light of the possibility, as you postulated, that we might ease monetary policy. You would spend an hour and a half of your Humphrey-Hawkins testimony explaining the changes in something that we don't take seriously. The risk of the body politic thinking, thanks to the press, that the central bank had decided to undertake a major softening of monetary policy would be very high, and I think it would be very unwise to take that risk. So, I agree very much that we should keep M2 where it is, and that would be alternative 1 for both 1995 and 1996.",149
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"I certainly agree with your recommendation regarding M2, Mr. Chairman. With respect to the other aggregates, I would favor alternative II for 1995 and alternative I for 1996. Having said that, let me make just a couple of additional comments, if you will indulge me. I think, as the discussion is showing, that we all acknowledge that the monetary targets no longer serve much of their original purpose, at least for now or the foreseeable future. Among other things, that purpose was to underline the System's commitment to price stability and to serve as a nominal anchor for monetary policy. I think many interested parties outside the Federal Reserve, including some key Congressmen, are well aware of that. Of course, the Humphrey-Hawkins law requires us to set monetary targets, and we will have to continue doing so in the foreseeable future to comply with the law. However, the current short-term policy situation gives us an unusual opportunity to argue for some changes in the Humphrey-Hawkins law that may put us in a position to develop a more effective and a more meaningful longer-term strategy for monetary policy. Let me clarify what I mean by opportunity. As everybody knows, the recent fairly sustained deceleration in economic growth has a lot of people calling for the Fed to ease policy. A case can certainly be made for that today. I am not going to be the one to make it, but I am sure someone will; and should we not do anything today, the case will become even stronger as we go forward if the sluggishness persists. I think it is fair to say, though, that many of us would be concerned that reducing the funds rate target, even in these circumstances, could seriously damage the credibility of our longer-term and oft-stated commitment to price stability, because at this stage policy has no firm longer-term nominal anchor. Consequently, within a short period of time--it probably would not happen immediately--if the performance of the economy does not play out exactly as we anticipate, a drop in the funds rate could produce another inflation scare. If that happened, long-term interest rates would shoot up and greatly complicate policy going forward. So, as I see it, we have a dilemma. The way out of the dilemma in my view is for the Committee to develop a new and more meaningful longer-term nominal anchor for monetary policy that would tie down longer-term inflation expectations and really make our commitment to price stability more credible than it is now. That would free us to take more flexibly the short-term policy actions that we need to take. Monetary aggregates may have played this anchoring role in the past, but clearly they can't do it now. Against that background, Mr. Chairman, I would respectfully urge you to try to point this dilemma out in your testimony.",563
-fomc-corpus,1995,"I think you have raised some very interesting points. May I ask, if you are not going to use the monetary aggregates, will you just give us 20 seconds on what you would propose?",39
-fomc-corpus,1995,"I was going to lay out a strategy as briefly as I could. A key point I want to make is that the current situation gives us an opportunity to recommend something in terms that are fairly concrete rather than in the abstract. In my view, we can develop a more operationally meaningful longer-term monetary policy strategy. It would have three components. First, as I said in February when Janet and I had our little exchange, we should commit ourselves publicly and firmly to the price stability objective put forward in the Neal amendment--both its definition of price stability, whose language I think was negotiated at the time, and also importantly its 5-year longer-term horizon. It is that specific time horizon that I think would make it meaningful.",146
-fomc-corpus,1995,Are you talking about a statute or unilateral action by the Federal Reserve?,14
-fomc-corpus,1995,"It would be preferable to have a statute, but I think we can go a significant distance in the direction I am recommending even without a statutory change. I am not recommending explicit numerical targets. It seems to me that it is feasible to adopt something like the Neal language in the context of the current law. I would like to emphasize that the 5-year time horizon would represent a difference from what we have now. We have said a lot about our commitment to price stability, and if we had a specific time horizon for its accomplishment, that would make us more accountable and would make that goal operationally much more meaningful. If we adopted that, we should issue an accompanying statement that says that we expect to continue to take short-term policy actions that are aimed at stabilizing the economy in the short run. As we continue to take those short-run actions, we ought to emphasize that we would in each case evaluate them against our longer-term objectives. Second, if we were to refocus our longer-term strategy that way, I think it would be very helpful to revamp our semi-annual Humphrey-Hawkins reports in a way that would conform to that. Under the refocused strategy that I am proposing, the main purpose of the report would be to explain how our policy actions over the preceding six months have been consistent with advancing us toward our longer-term objective and also to explain how any short-term actions that we might have taken to deal with short-term economic conditions are consistent with our longer-term goals. If we were to revamp the report in that way, I think we would be in a better position to communicate our policy to the public and the Congress and that would help to increase our credibility. Third, at the operational level, if the Committee refocused its strategy this way, we would need to alter in a conforming way our short-term policy deliberations and refocus them in terms of the options that we consider for the short run. This would mean revamping the Bluebook to some extent--especially its discussion of short-term alternatives and options. In some ways that has already been done. In particular, the current attention that we give to the relationship between our alternative short-run actions on the one hand and the behavior of the monetary aggregates on the other should be reduced and replaced with more discussion of the relationship between alternative short-term policy actions and our longer-term inflation objectives. Again, some of this is already being done, as is evident in this meeting's Bluebook, but I think we need to give it more prominence. It needs to be done at every meeting, not just in July and February. Now, I recognize as well as anyone that developing an operationally meaningful linkage between short-term actions and longer-term inflation goals is extremely difficult because there are long lags between the time we take short-term actions and the time they have an effect on inflation. That is why the intermediate monetary targets, when it was feasible to use them, were so useful. It is a difficult issue, but I think there are some things we could do. For example, the Bluebook could routinely assess the inflation expectations embedded in bond rates and perhaps speculate on how alternative short-run actions might affect those expectations going forward. Again, some of that is done already, but the effort could be sharpened and given more emphasis. We might also want to experiment with some sort of nominal GDP feedback rule, not externally but internally, as a benchmark in considering short-run policy alternatives. Clearly, the short-term operating issues are tough problems and some experimentation is needed, but I think that would be appropriate. If I may end up with one last comment, Mr. Chairman, I feel very strongly that we have made enormous progress in the Federal Reserve System over the last fifteen years in moving from a dangerous situation with very high rates of inflation to where we are now. We have gone a considerable distance in increasing our credibility as protectors of the value of our nation's money, and that achievement among other things has helped us to foster growth in employment and output over time. As I see it, the task now is to put in place institutional arrangements that would allow us to extend and solidify those gains. So, I would vote for something like that. I think the time to do it is now.",860
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"I want to start off with a couple of comments related to what Al Broaddus was just saying. This is the 20th anniversary of Concurrent Resolution 133. That resolution was adopted in the aftermath of the first oil shock as a device to put boundaries on inflation in keeping with the notion at that time that there was some stability in the demand function for some measure of money and that constraining the growth in that measure would put boundaries around the rate of inflation. I think that after twenty years we have learned a lot; we have unlearned a lot; and it is time to rethink the underlying premise of Concurrent Resolution 133, which was codified in legislation enacted during 1977 and 1978. We are still being hamstrung by something that simply does not fit our objective. That objective is to give definition to the dollar and to maintain that in the minds of the people. The Humphrey-Hawkins statute, as we call it, as was true of Concurrent Resolution 133, does not do that. For about 30 years the mean level of M2 velocity was about 1.65, with significant cyclical movements around that mean, but still it was a mean in which we had some degree of confidence. The ranges were related to historical experience. There is some very tentative evidence that the mean level has moved up to about 1.9, but that evidence is very tentative; and even if the new level is true there are still significant cyclical variations around it. Right now, with the recent acceleration that is being observed, we basically have two choices of assumptions to make. Either the mean level has shifted up and we are getting a cyclical increase in velocity and the recent growth in the aggregates should be very worrisome, or we should expect a substantial deceleration in the rate of change in M2. If someone wants to make the assumption that the level of velocity is going to shift back down to what it once was, then they have a bigger problem. As a device for communicating intentions to the public and Congress, I think the ranges can be useful if properly explained. I don't think they are useful as a way of indicating to anybody how the short-run decisions about changing the funds rate will be made. I look at a lot of indicators of all sort of things; I look at the price of gold; I look at exchange rates; I look at yield curves. I would not want people to think that decisions on changing the funds rate from one meeting to the next are influenced by any single measure. We would have what former Governor Wallich used to call the Goodhart's law problem if people started to attach our actions to a single measure. So, I agree with the Chairman's initial remarks that changing the announced ranges of M2 in this environment, especially if we also decide to take action in the near term on the funds rate, could miscommunicate what we are doing. A reduction in the fed funds rate or the discount rate at this point, whether we like it or not, is going to be interpreted as an easing in policy. Whether we think it is a more stimulative policy or not is something else again, but we know how it will be interpreted. Associating whatever explanation we give to that short-term action with our long-run objectives is what I think we should be doing and we should not associate it with where money growth is relative to some announced target range. They serve two different objectives.",700
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, I agree with where you are coming from. We have systematically deemphasized these ranges because they have not been reliable, and I think it would be presumptuous at this stage to conclude that we know where velocity is going to be. And so I would feel comfortable with alternative I for the 1995 ranges; I would leave them where they are for 1996, although alternative I, which includes a higher M3 range, is acceptable to me for next year.",99
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Mr. Chairman, I had the unfortunate pleasure of having my maiden interview with the American Banker quoting me as saying that I am an M2 kind of guy.",32
-fomc-corpus,1995,I really thought that was a small typographical error! [Laughter],15
-fomc-corpus,1995,"I understand exactly where you are coming from, but I will phrase it a little more cynically. If after a year M2 growth is above the top of the target range, you will suggest then that we once again shift the range up as we shifted it down because growth was coming out near or below the bottom of the range.",67
-fomc-corpus,1995,"I was suggesting that when it is our judgment as a Committee that M2 is something that we should be discussing and focusing on with respect to policy, we really ought to be serious at that point as to where we want to set the M2 range. In that context I think the types of arguments that you and Governor Yellen are making will be the right ones. My own view is that it would be premature to reach that conclusion.",88
-fomc-corpus,1995,"Given that you are the one who will be up on the Hill to testify on these issues, I am willing to go along with your suggestion. My preference would be to go back to a higher range. I would go for what I would call alternative III for 1995, which would mean raising M2, and alternative II for 1996. In fact, there is no alternative III listed in the Bluebook. Even alternative II for 1995 has an M2 range of 1 to 5 percent. I think a 2 to 6 percent range would be better and that is the range associated with alternative II for 1996. I remember well our embarrassment when M2 growth fell below the range. I am a little concerned that we will have a similar embarrassment when M2 growth ends up above the range and folks who might want a tighter monetary policy will use that as evidence against us. But, again, you are the man who has to be up there, and so in the end I will support whatever recommendation you make.",212
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Along the lines of my comments earlier, I am in agreement with not making any changes in M2. You did not address M3 in your comments, Mr. Chairman, but I would be a little more comfortable making a change, particularly for 1996, basically because I think that range has gotten extraordinarily low. The arguments the staff makes that the changes in intermediation trends probably will affect M3 over a longer course of time seem to make sense. So, I would like to cast my vote for alternative II for 1995 and alternative I for 1996.",117
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Mr. Chairman, with regard to the aggregates, I certainly take your comments to heart. In light of that, I would favor alternative II for 1995 and alternative I for 1996. I would not change the M2 range. After listening to Don, the explanation for changing the M3 range seems straightforward, and in that sense I would go ahead and do that. I don't think that would cause any problems with your testimony.",89
-fomc-corpus,1995,I agree with that. M2 is the crucial aggregate.,12
-fomc-corpus,1995,"With regard to some of the issues that Al Broaddus raised, I think his points are well taken. We ought to be looking at monetary policy as it relates to inflation. My reservations have to do with my impression that a couple of his points in some sense jump the gun. They have to do with two issues in particular. Don Kohn raised a question about the quantification of the benefits of price stability and indicated--or at least I took his comments to mean--that the evidence was mixed and uncertain. If we started doing present value calculations, depending on what estimates we believed, we might find significant benefits or we might find that the benefits are rather small relative to their cost. I happen to believe that there are benefits there and that they are sizable, but I think it is incumbent upon us to make that case more compellingly than we have to date. I don't see any way around the difficult research that probably involves. Another related and important issue has to do with public support for any objective that we adopt, whether it is mandated by statute or we do it ourselves. To some extent, it falls on us to build the public support for a price stability objective. I don't think that support is totally lacking, but I don't believe there is any great conviction among the public at large that price stability ought to be the preeminent objective of monetary policy. Until we put together some of that evidence I was referring to earlier, I think moving way out ahead and trying to bring the public with us might be very difficult. So, for the reasons that I stated, I would be cautious at this juncture about going down that path. I do think there are issues there, and I suggested before that we ought to be discussing and looking at them and probably finding some research to do. I am concerned about moving too far too quickly.",371
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, I have a great deal of sympathy for what President Broaddus said, and I think we ought to give serious consideration to it. With regard to the upcoming Humphrey-Hawkins testimony, I favor setting monetary targets that are likely to be consistent with policy goals in the long run. The current range for M2 would be consistent with low inflation in the long run if growth in M2 velocity returns to its historical zero level. On the other hand, if growth in M3 velocity returns to its historical average of roughly minus 1 percent, the current M3 range would have to be revised upward. Since there is some evidence that M3 velocity is reverting toward its historical norm, I favor Bluebook alternative II for 1995, which in fact does raise the range for M3, and alternative I for 1996, which preserves those ranges into 1996.",181
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Alan, I agree with your concerns about moving the M2 range now and how that might be interpreted. I would not change that range. With regard to M3, I am most comfortable with the rationale that Bob Parry just described with respect to taking a look at long-term trends and viewing M3 on a basis consistent with what we have been doing with M2 in recent years. That would lead me to favor alternative II for 1995 and alternative I for 1996. I would add that our discussion today points up to me that we are in an increasingly untenable position with respect to how we communicate to Congress our long-term intentions about monetary policy and the need for some sort of nominal anchor. I don't expect anything necessarily to come out of what Al has suggested today, but I think we ought to have that as an important topic of discussion well in advance of our February meeting next year. We might be thinking about the need to revise our approach for 1996 and perhaps begin to move our time horizon further out.",208
-fomc-corpus,1995,"We probably will have to respond to a bill on the Hill at some point. Our response will have to capture the view of this Committee in its various aspects as they have been raised, largely pro and con, by you, Al Broaddus, and the rest of us. It is going to be our one shot at the legislation, and I am a little concerned that if we don't focus on this issue, we could suddenly find ourselves with significant mandated revisions in what we do. Those revisions may not involve what we wanted, and in retrospect we may find that we could have gotten a different and more favorable outcome.",124
-fomc-corpus,1995,"I agree and I felt that way when we talked about this in February. The more leadership we exercise in this, the better off we are going to be in terms of the ultimate outcome. There are different points of view on this issue, but I think it would be very unfortunate if, for example, we got to a year from now and we were debating how we might adjust the M2 and M3 ranges and never got to this topic. Price stability is what a central bank is all about. We ought to be quite explicit about that commitment, and we ought to discuss how we might achieve it operationally. So, that is very consistent with the sorts of topics that Al is raising. Ultimately, I think it would improve our accountability, which would in turn improve our performance and lead to higher economic growth and employment than we otherwise would have achieved. Gary Stern made some good points about documenting that case. I think that is becoming increasingly urgent, as pointed up by this discussion today, and it is something we have to pursue.",208
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, your initial remarks about the ranges for the monetary aggregates are quite appropriate and I agree with them entirely. We are confronting a number of issues in monetary policy at the moment, and some of those are going to come up as they usually do in the Humphrey-Hawkins testimony. Changing the ranges would just draw more attention to them and provide a real distraction to the essential conversations that I think we need to be having. With that in mind, I would favor alternative II for 1995 and alternative I for 1996. That encompasses M3. Let me just add one other thought, since there has been some discussion of possible changes that Al Broaddus brought up. I will throw on the table the possibility that if we really do not believe that the aggregates are going to return to providing us with some nexus to the real economy, the time might be coming if it is not here already to think about a change in the statute. Not only is this setting of the ranges a distraction for the Congress in some sense, but it is occupying a lot of this Committee's time for no good reasons except, as you said, Mr. Chairman, that the law is there. If we remove the statutory provision, the focus of Committee discussions can be better directed to more important issues. I realize that there are risks in going forward with that kind of legislative request, but I think it is something that we ought to think about.",291
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"I favor alternative II for 1995 and alternative I for 1996. I find myself quite frustrated with this discussion. I think part of it has to do with our not really knowing whether the ranges are something we should be shooting for--whether they are long-term objectives, or whether they are in effect short-term monitoring ranges to be explained. So, I support the notion of having a more extended discussion of what our goals should be in terms of thinking about restructuring the Humphrey-Hawkins statute and the kinds of things we monitor. I don't think this is the time to do it, because I am not sure we know enough now about what range we should monitor, whether it should be M2 or M3 or something else. At this point, I certainly agree with the notion that if we change the M2 range now, we are going to draw more attention to it. But at some point I think we do need to address the kinds of issues that Al Broaddus has raised and decide whether or not we are going to support legislative changes that would get us off the horns of this dilemma.",224
-fomc-corpus,1995,"My suspicion, incidentally, is that if we are confronted with a legislative initiative to which we have to respond, that might require us to have a special meeting to discuss it or an addition to the agenda at a regular meeting that extends the discussion. It is not going to be easy to respond. However, if we have specific language proposed in draft legislation, that will focus where this Committee wants to come out in the recommendation that we as a group will want to send up to the Hill. President Moskow.",103
-fomc-corpus,1995,"Mr. Chairman, I favor alternative II for 1995 and alternative I for 1996. In terms of the last point that we were just discussing, assuming that we will have to respond to some type of legislative initiative, I think it would be desirable for us to try to get ahead of the curve, as you were anticipating in your earlier comments. Perhaps we could have staff work done to identify some options and some specific language that we could plan to consider at a special meeting or at an extended meeting as you suggested.",106
-fomc-corpus,1995,"We have been doing that for the last several years in part to respond to and capture--not to an exact extent but to a large extent--what we have been hearing around this table. However, when we are confronted with specific legislative language we will have to try to tie down the issue and not just float interesting ideas across the table. It is going to become the law; the law is going to affect how we behave; it is something that we are going to have to deal with as we operate in an institutional context on a day-by-day basis.",112
-fomc-corpus,1995,I agree and the legislative proposal would be the action forcing the event. What I am suggesting is that in anticipation of that coming legislation--,27
-fomc-corpus,1995,I agree with that and I think we will start doing that as we begin to interact with the committees up on the Hill.,25
-fomc-corpus,1995,"I was hoping that in the work that will be done, we could see some alternative specific language.",20
-fomc-corpus,1995,"Why don't I suggest this: Don Kohn is doing a good deal of work on this sporadically; he is the staff's point person on this issue. If you have any ideas that you want to put forward, I think it would be very useful for you to communicate them, hopefully in writing, so that we can all see them. You might send them to Don so that he can coordinate getting the various ideas circulated and we can then decide where to go from there if the legislative issue arises. Governor Kelley.",105
-fomc-corpus,1995,"Mr. Chairman, I would prefer alternative I for 1996. In the case of 1995, I would also prefer alternative I because I have a problem with changing benchmarks in the middle of the stream. I think we lose a lot when we do that in terms of our ability to discuss and judge changes that have occurred intra-period. Certainly, we can conduct policy just as well without making this change. But I think we can also have a better and a cleaner discussion in this Committee, in the press, wherever, without the distraction of having made a change right in the middle of the year and having people trying to read into that something that was not meant to be there in the first place, however clearly we may explain it. So, I would prefer to stay with alternative I for 1995 and for 1996 as well.",171
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"Alternative II for 1995 and alternative I for 1996 seem okay to me. I would like to associate myself with remarks that Al Broaddus and Tom Melzer have made. On our discussion relating to possible legislation, has there been any further dialogue with Senator Mack and is his proposal still the most likely that we will need to respond to?",71
-fomc-corpus,1995,"It seems to be the only operative proposal at the moment. We have been trying to persuade the Senator and his staff to take an approach similar to what has been sort of the generic thinking here. If we have not circulated a copy of my letter to Senator Mack, I think it would be quite useful to do so.",64
-fomc-corpus,1995,"Your letter has not been sent yet, Mr. Chairman.",12
-fomc-corpus,1995,It has not been sent? I thought it would be going out.,14
-fomc-corpus,1995,I wanted to talk to them about it before sending the letter over.,14
-fomc-corpus,1995,"A letter will be going out! [Laughter] I said in the letter that I was not speaking for the Board or the FOMC but was expressing my own views on certain issues. But I must say that I tried, as I formulated my letter, to take into consideration a number of the views that I have heard around this table. I said that my thinking was still in a very preliminary stage, but it might be useful, when we get that letter out, to circulate it to the Committee. The letter might be useful as a vehicle to start getting your responses.",117
-fomc-corpus,1995,I think it would be important for us to give Senator Mack the impression that we are eager to work with him on this--not the impression that he is dragging us along kicking and screaming.,38
-fomc-corpus,1995,"No, and we are trying specifically to do that. Where we think he has a view that would be very difficult to implement, we have been trying to communicate that opinion. Does anybody else want to comment? Governor Yellen.",46
-fomc-corpus,1995,"I would like to associate myself with Governor Lindsey's comments. I would favor alternative III for 1995 [Laughter] and alternative II for 1996. I certainly understand the sentiments that you expressed, Mr. Chairman. This is not the most important decision we are going to make this morning. I think we are dealing with an imperfect law that asks us to communicate our objectives in an imperfect way. I certainly understand why you don't want the ranges to be the focus of your Humphrey-Hawkins testimony, and I understand that they can be confusing. Nevertheless, at the end of the day it seems to me that this is the law of the land and we ought to do the best we can to live with it and to have the forecasts that we put forward be ones that are defensible. If you are asked why we have selected these monetary targets, I hope you would be prepared to answer. Then I ask myself how you would go about answering. If you were to say that we are assuming a continuing upward trend in M2 velocity and if that were a defensible assumption, that would be fine. That would imply, in turn, real objectives that I would find perfectly appropriate. But if you were pushed that far, as I imagine you won't be, and if you were not prepared to say that an upward trend in M2 velocity is our underlying assumption, then you in effect would be communicating on behalf of this Committee objectives which I would not regard as my objectives and I don't think they are the objectives of this Committee. After Bob Parry said that our nominal GDP forecasts don't represent our objectives, I reread the instructions. They said the projections for both 1995 and 1996 should be based on what in our judgment would be an appropriate monetary policy. So, I thought that was the instruction under which we were to be operating.",375
-fomc-corpus,1995,I don't think it said money supply.,8
-fomc-corpus,1995,You have a point.,5
-fomc-corpus,1995,It would be an appropriate monetary policy--,8
-fomc-corpus,1995,However defined.,3
-fomc-corpus,1995,--consistent with our projections for nominal GDP.,9
-fomc-corpus,1995,Yes. There is no M2 or anything else specified in the instructions.,15
-fomc-corpus,1995,"But I think Bob Parry said that the nominal GDP projections, or their central tendency, should not be interpreted as our objectives. Did I misread that?",32
-fomc-corpus,1995,"No, you didn't. I get the impression that people have at times forecast what is going to happen as opposed to what they would like to see happen. I could be very wrong on that.",39
-fomc-corpus,1995,"That is where I was coming from. I understand why you don't want this to be a central issue of the testimony. In the case of 1995 we have language for M3 that says that raising its range is a technical adjustment. You don't seem to feel that M3 is going to be the focus of the Humphrey-Hawkins testimony. It seems to me that we could adjust up the range for M2 for 1996 and make a very similar statement about a change in our views about the velocity trend for M2 and say the increase is a technical adjustment. At any rate, that is where I would come out.",129
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I am in the Lindsey-Yellen camp here, but I must say that I have a little trouble articulating a view on the Ms. I find myself mumbling with great incoherence in the extreme; these Ms are a problem. On your first point, I agree entirely. These are basically gibberish numbers; we don't take them seriously; the markets don't take them seriously; economists who pay attention to monetary policy don't take them seriously; and it is hard for me to get very exercised about them. Having said that, I think there is some argument for consistency with the nominal GDP target, and I also wonder why an M3 shift is a technical adjustment and an M2 shift is not.",141
-fomc-corpus,1995,The reason basically is that the M2 range is wholly an accident of history. M2 has become a crucial variable in discussions on the Hill.,29
-fomc-corpus,1995,It used to be M1.,7
-fomc-corpus,1995,"Yes. I am just saying that if you are asking for a rational reason for the current M2 range, I can't find one.",27
-fomc-corpus,1995,"Right, I don't think there is either, and it is hard for me get exercised about this issue one way or another. Now, unlike the mumbling with great incoherence, there were two things that were said around the table that I can relate to very strongly. First, the kind of plan that Al Broaddus outlined seems to me greatly superior to these M ranges. I don't mean that to be an endorsement word-for-word; I don't think Al wants to hold it word-for-word. But it surely has to be a much better route than the M2, M3 mumblings. I just don't have any doubt about that. I think that something along those lines ought to be explored. The other thing I can relate to is what Gary Stern said. Mike and Don may remember that my first FOMC meeting was the Humphrey-Hawkins one last July, and I came out of that meeting saying that we really ought to get the staff working and put together all the research there is on the costs of inflation versus the benefits of disinflation; we should put together some kind of compendium of research, which is just what Gary suggested. Those are two very coherent thoughts that I can relate to on these ranges.",249
-fomc-corpus,1995,Are we returning to the ranges and the vote on them?,12
-fomc-corpus,1995,"Even though we are required to vote on 1995 and 1996 ranges, let me suggest--can we vote on M2 separately for 1995 and 1996?",37
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"As far as I can judge, there seems to be a broad willingness, if I may use that term, to do nothing on M2 for either 1995 or 1996, but I sense that there is a significant split with respect to M3; there may be a majority in favor of raising the M3 range. I am reasonably certain about the first proposition, and what I will do is put to a vote a range of 1 to 5 percent for M2 for both years, which is unchanged from the current range. I would like to put that to a vote.",120
-fomc-corpus,1995,So the vote is whether people prefer 1 to 5 percent for M2 for both years?,20
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder No President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen No,44
-fomc-corpus,1995,"On M3, the issue is whether to raise the range to 2 to 6 percent for both years or to stay where we are.",29
-fomc-corpus,1995,There was a big majority in favor of 2 to 6 percent.,15
-fomc-corpus,1995,"That was my impression. I think nearly everyone was more comfortable with that higher range. So, let us vote on 2 to 6 percent for both years.",33
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,Short-term monetary policy--Don Kohn.,9
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,"Thank you. Let's cover any questions for Don; then we'll take a break for coffee. Yes, President Minehan.",24
-fomc-corpus,1995,"We have alternatives A, A-prime, and B?",12
-fomc-corpus,1995,"Right, or A-minus. I don't know how you want to characterize that.",16
-fomc-corpus,1995,I just want to be sure that that is what we are considering.,14
-fomc-corpus,1995,You can do what I did.,7
-fomc-corpus,1995,What is that?,4
-fomc-corpus,1995,I gave him alternative C.,6
-fomc-corpus,1995,I think three alternatives are enough!,7
-fomc-corpus,1995,"Any further questions for Don? If not, why don't we break for coffee.",16
-fomc-corpus,1995,"Let me start off the discussion as usual. First, I might indicate that I was somewhat surprised yesterday by the degree of convergence on the outlook. As I saw it, virtually all of us were concerned about asymmetric risks on the down side, but no one thought the probability of a recession was better than 50/50. Indeed, all your forecasts imply that the economy will work its way through this period. There was clearly, in the discussion and in the evaluations, some uncertainty as to how the current adjustment process ultimately will unfold. In my judgment, the crucial issue is whether the inventory adjustment will reach a critical mass that will weaken incomes sufficiently to upend final demand. Such a development would in turn set in motion a typical recession driven by inventories in a vicious circle downward until it exhausts itself. At this stage that does not appear to be the likely outcome, and indeed time is on the side of emerging stability. All we really need is sluggish final demand that persists until the inventory adjustment finally dissipates. Three or so weeks ago I must say that I interpreted the risks as still increasing, because all the evidence that I could see suggested that the economy was moving to the down side. The inventory adjustment process was under way, but not as rapidly as I thought was going to be needed to be easily successful in removing the adjustment in inventories as a retarding element overhanging the expansion; and there was an increasing danger that it could reach a critical mass. But the data of the last few weeks clearly are moving in the direction that, while the downside risks are still there, we at least seem to have reached the maximum risk potential and probably are now somewhat on the other side. But by no means have we reached the point where we can very readily presume that the major threat to the recovery is over at this stage. The key variable that I think is crucial in this process is that durable goods tend to be the major adjustment vehicle. Usually, one can learn a great deal about that by looking at how the orders structure at the bottom of the durable goods pyramid is behaving--steel, aluminum, and other metals to a lesser extent. An initial evaluation, coming largely from contacts at U.S. Steel, was that the steel industry was extraordinarily weak. In fact, conditions in that industry looked very much like those I have seen in the past on the way to a major inventory liquidation. It is turning out not to be that big a problem, because when we surveyed operation, to get an idea of whether or not we are looking at competitive shifts or whether we are looking at real changes, our contacts while sensing that orders were weak, displayed nothing remotely close to some of the negative vibes we were getting from Indeed, the fact that ingot production and, as best we can judge, finished goods production are holding up raises questions about how weak these markets are, because history as I remember it for the steel business tells us that when the markets really start to evaporate, shipments fall very dramatically and before that the ingot level goes down very sharply. That has not happened. The price of steel scrap has held up, apparently bolstered to an extent by export demand. Mill product prices seem to have eased, but it is not terribly clear by how much. We had a significant decline in aluminum orders three or four weeks ago. As best we can judge, it reflected developments not dissimilar to what is going on in steel--the automobile backup, excessive inventories of steel and aluminum at service centers, and to a small extent weak forward orders. Aluminum orders have come back from the low point. They are still lethargic but are scarcely evidencing the type of underlying metals inventory liquidation that usually is at the forefront of some of the bigger declines that we invariably have seen in conjunction with a major inventory correction. We are, as best I can judge from the purchasing managers' data, beginning to see some significant retrenchment in lead times on deliveries. This is probably also affecting the holdings of inventories of component parts and peripherals in the producer durables area because orders for nondefense capital goods weighted by the demand for final producer durables are holding up better than the total durable goods orders for nondefense capital goods. This implies that orders for peripheral parts and components of the nondefense capital goods are coming down, which would be consistent with the type of durable goods inventory correction that we would expect. We have seen significant inventory liquidation in both cars and trucks in May and June. If one looks at the data on inventories, the motor vehicle inventory accumulation in the. first quarter was $14 billion out of the $49 billion NIPA inventory change. Preliminary data on motor vehicle sales and production for the second quarter suggest zero inventory change, which effectively means that most of the implied $20 billion reduction in inventory investment in the Greenbook stems from the motor vehicle area and is pretty much on schedule. The big surge, or apparent surge, in book value of manufacturing inventories excluding motor vehicle finished goods inventories in May evidently got marked down in constant dollars to a level which, combining April figures, is a shade--$1 or $2 billion--under the first-quarter level for that segment. Looking across the board, it strikes me that the estimate of inventory investment in the Greenbook for the second quarter seems a not unreasonable number especially when we also look at the shifts that have occurred in C&I loans and commercial paper. Those shifts suggest a fairly pronounced decline in June inventory investment and probably in May as well, but it is hard to say. While the adjustment in inventory investment is not moving at a pace that suggests it is going to be over fairly rapidly, it is moving at a pace that does not seem inconsistent with the view that final demand will hold up enough for it to work its way through. I suspect this is the reason why the general view around this table has been one of mild optimism even though the members recognize that the downside risks clearly have increased since the last meeting. So far as final demand is concerned, we saw that the motor vehicle sales figures were a shade stronger in June, largely as a consequence of Chrysler and the Chrysler sales incentives. The important issue is probably not so much that sales were up over May but that they were up significantly over April. told me that the market disappeared in the second half of April. They didn't have a clue as to why. The market came back in early May, and they did not have clue as to why it came back. It wasn't a terribly useful insight [Laughter], but the market does not seem to be too bad at this point. The new home sales figure for May, at an annual rate of 722,000, is bizarre as most of those home sales figures are. But we have other evidence that suggests that the residential building sector is clearly turning. As you well know, mortgage applications for purchasing new and existing homes have been moving up in both the series put together by the Mortgage Bankers Association and that by Morgan Guaranty, which has a slightly broader sample. The home builders data clearly indicate that things are moving. This is important not only because of the importance of the residential construction sector, but also because history suggests that motor vehicle sales and some parts of the residential building industry move together. If there is firmness in the home building area it has to exert, if history is any guide, some upward movement in the motor vehicle area, which would be very useful. With regard to the weakness in the rest of the world, I must say that I subscribe to the concerns that the Vice Chairman and others among you have indicated. There is something going on in the rest of the world that I find somewhat disturbirg. One gets a sense that the pickup that seemed to be under way earl er is having great difficulty gathering strength in Europe. In Japan, the odds that something adverse of significance is going to happen seem high enough to make one quite uncomfortable, and the Canadian economy clearly is in something of a swoon. Nonetheless, our export orders, probably largely as a result of the improved competitive position of American producers, suggest that the foreign market is still moving. The equipment markets, especially when we adjust the orders figures for the final PDE as distinct from all the components and parts, remain quite solid. Unfilled orders still seem to be rising at a modest pace, though some slowdown in the rate of increase is probably on the horizon as some around this table have argued, mainly with respect to the deceleration risks that Governor Blinder mentioned. Although we are not yet getting any material evidence that profits are weakening, there is some evidence that the underestimation by the analysts of a continued rise in earnings through the first quarter shifted in the second quarter. But it is largely a change in their views rather than any really significant decline in earnings. Indeed, one crude measure that I tend to look at because it is useful on occasion--manufacturing prices over manufacturing unit labor costs as a measure of margins--continued to move up through May. So, we are not yet seeing the underlying earnings deterioration that one would expect at this stage. I do think that it has to emerge because it is hard to visualize that earnings are going to hold up through the second and third quarters. But at least there is no evidence that they are pulling back to a degree that could undercut the capital goods markets, and certainly the nonresidential building area remains quite strong. As I said before, it looks as though, or at least there is a possibility, that we are passing through and maybe have passed through the period of maximum risk. But just remember that business cycles are not smooth even if large external shocks are missing. In summary, I would say that we clearly have managed to contain a highly unstable and inflationary business cycle expansion that was taking on some fairly strong characteristics in the second half of last year. I think we have cut the top off this boom and thereby significantly reduced the probability of having to deal with what was going to be a heavy and very distasteful inventory correction and perhaps a capital goods correction late this year or next year. I don't think we have solved the problem of the business cycle. I don't think human nature has changed. All we can hope for perhaps is to limit the degree of fluctuation. But somewhere, somehow, by some means, we are going to get something that is going to be called a recession unless somebody finds that human nature has changed in a manner that it has not in eons. So far as policy is concerned, we concluded in late 1993 that the appropriateness of a 3 percent federal funds rate was no longer as evident as it had been before the elimination of the balance sheet adjustment strains and the 50 mile an hour head winds to which that rate was addressed. We accordingly and appropriately moved the rate up as we confronted new circumstances in early 1994. Today, we have defused to a significant degree the inflationary pressures that were building through the early weeks of this year. At this point we have to ask ourselves whether a 6 percent nominal federal funds rate, or a 3 percent real federal funds rate, is the appropriate level we wish to be at in the next 6 to 12 months. In this regard we have quite encouraging evidence that the cyclical peak in inflation may be close at hand. I think inflation is being held down by events in the rest of the world. The crucial question we must ask ourselves is whether we need a 3 percent real federal funds rate to continue the secular disinflation that we have been involved with for a number of years and specifically the points that were made by Governors Kelley and Blinder with respect to the downward moves of the cyclical peaks of inflation. Remember that the cyclical peaks were all moving up throughout the 1970s and into the 1980s--indeed, the cyclical lows were moving up as well--and these highs and lows are now moving down. If as Don Kohn says, and I think he is quite right in this regard, the current real short-term federal funds rate is above some notion of the equilibrium or natural rate, and hence that rate is consistent with a degree of restraint that is not appropriate to the disinflationary trend that we envisage is occurring, then the issue is whether we should bring the rate down. If the argument essentially is that the 3 percent real rate is indeed appropriate for the future, I would ask how do we know that 4 percent real or 6 percent real is not more appropriate? The point I am trying to make is that we are not, as a Committee with a goal of price stability, saying that the rate of real interest consistent with that is infinity. We obviously are arguing that there is a certain path which is consistent with that. We have to come to a conclusion of where we think that path is, and this gets to the point that Al Broaddus was raising about how we are focusing on the appropriate longer-term path to price stability. As I read what it is that we know, the real federal funds rate consistent with achieving price stability is something under 3 percent--not for certain but with some degree of reasonableness. If that is our conclusion--and that is what I would conclude, though everyone has to make his or her own judgment on this--the question is what do we do about it. A month or so ago when a very rapid decline in inflationary pressures seemed to be building up, I would have been inclined to say that we probably were safe in moving the rate down 50 basis points as a mid-course correction. In retrospect, I think that was a wrong view because I don't think the markets would believe an announcement in which we tried to make clear that it was a mid-course correction and that it was as far as we would go, which is frankly as far as I think we ought to go. We tried to make that point last August going in the other direction and we failed. That is, the markets didn't believe us and responded pretty much against it. I have concluded that, since the risks are beginning to ease slightly, there is no urgency here; but I do think we should move because I find it increasingly difficult to argue in favor of staying where we are right now unless one can argue that inflationary pressures are still building. I personally find very little, if any, evidence that that is the case. I have concluded that probably the best thing to do is to move the funds rate downward by 25 basis points, which I must say likely will be a big deal because we would be changing the direction of policy. I am concerned about going further than that in part because I am really concerned about spooking the markets, especially the foreign exchange markets in this context. And I don't think a larger reduction now is necessary. We could readily, if we so chose, add another 25 basis points in August or later. In that sense, I think what we would do is probably create an expectation in the marketplace that indeed we will move again since everyone says ""well, the Fed never moves only once."" I am not sure that is all bad because it probably would mean that we would support gradually declining long-term rates, including mortgage rates, which would create support within the economic system. I find it very difficult to envisage inflationary pressures emerging at any point in the near term. If we were to lower rates by 50 basis points, I am fearful the markets would ask ""when is the next 50?"" I would be uncomfortable with that because it is very difficult to dissuade the markets from that point of view, and I think we would drive the federal funds futures rate down to a considerable extent. I come out with the view, which strikes me as consistent with the Committee's basic economic outlook, that an appropriate monetary policy at this stage would be to move 25 basis points. The choice of an asymmetric directive is implicit in the notion that we might want to move again before the August meeting, while a symmetric directive implies that we wouldn't choose to move until that meeting. I am marginally in favor of going asymmetric, but I must say I don't feel strongly about that one way or the other. That is because I think events will determine what we will do. We are going through a period when we will know within 6 weeks or 2 months at the latest whether the adjustment process that is going on will cumulate into significant recession pressures or whether it will end up as a pause in the expansion. I don't think we can make that judgment today, but we will know a very considerable amount more the next time we meet. So, that is my view. Who wishes to begin? President Forrestal.",3373
-fomc-corpus,1995,"Mr. Chairman, as you have indicated, in February of 1994 we set in train a series of actions to stem the rather robust economy in pursuit of our goal of price stability. I think no one on this Committee should be surprised, and I am sure no one is surprised, that we have experienced some slowdown in the economic expansion. I guess the surprise for me and perhaps for others has been the extent of the downturn that we have had. Now, the question in my mind is whether or not this slowdown will result in a cumulative downturn and a recession. My view is that that probably will not be the case and, as their forecasts indicate, that view is shared by the other members. If I were to look at my forecast and indeed the forecast in the Greenbook and the other forecasts that I have seen, I probably would not want to move because I think the results of those forecasts are reasonably favorable. Some of the forecasts anticipate growth a little below potential but not seriously so. The further question I ask myself is whether I believe even my own forecast. There are enough uncertainties surrounding all these forecasts to make me a little cautious about the downside risks. Those risks clearly are there although, as you said, they probably have dissipated a little over the past couple of weeks. Also, I think that the market is telling us that the 3 percent real federal funds rate that you talked about is a little on the high side. In terms of policy I think it is wise and prudent for us to take this action at this time--as an insurance policy in a sense. When I came into the meeting, I must say I was thinking more in terms of a 50 basis point drop because I thought that 25 basis points would only compel the market to keep asking when the next move is going to take place. But hearing your rationale for 25 basis points, I would be prepared to support that. While 25 basis points is a close call for me, I think it is highly desirable for us to move at this time, whether it be 25 or 50 basis points. I think an asymmetric directive is appropriate. The risks of easing at this point are fairly minimal in my view. The inflation rate is not that bad. As I have said before and other people have said today, we have made substantial progress, and I think that we are going to reach the cyclical peak of inflation. I am not at all concerned by the argument that I have heard outside of this room that we may have to move again on the other side and therefore we should not move now. That argument does not carry much weight with me because I think we are compelled to move when conditions so warrant. In summary, I would support your 25 basis point move at this time with an asymmetric directive.",565
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I strongly feel we should be easing today. Indeed, it seems to me that we are already somewhat behind the curve, which is something we rightly feared greatly on the up side. We never really did get behind the curve then, fortunately. But I think we now are behind the curve. We would be terribly behind the curve I might add, and staring into the mouth of a recession, were it not for what you said in your Humphrey-Hawkins testimony in February, Mr. Chairman. That statement, for which I think we should all thank you, in conjunction with the incoming data has created an interest rate easing that was not of our making. And that, indeed, is what all of us are expecting is going to support the economy in the second half of 1995, which is the crucial period for this episode. That is why I and, I think, most of us are not looking for a recession later this year and into next year. I want to say for the record, Mr. Chairman, that I wrote these notes on the 4th of July, because what I am going to say about the reasons is so similar to what you just said. With that in mind, I am going to be extremely brief. The case for easing now starts with the presumption, or the guesstimate, that the 3 percent real funds rate is too high for the long or intermediate run. Were it not for that belief, I think we would have a much weaker case for easing now. But I certainly think that it is true. I think it is very, very likely true with the current fiscal stance, and just about as sure as one can be with the significant deficit reduction that appears to be in train. So, I feel pretty confident that a 3 percent real funds rate is not something that we want to live with for very long, or another way to put the same thing, that a 3 percent real funds rate is restrictive at a time when we should not be restrictive. The second part of the case is exactly what you said also--that calling this a 3 percent real funds rate assumes that we have capped inflation at about 3 percent, which is the way it looks to me. That seems quite likely as well. If so, bringing down the nominal funds rate at this point is in no sense abandoning the long-run movement toward price stability. It is capping the cyclical peak, exactly as you said. The third part of the argument--again you said it and everybody around the table said it in the go-around--is that the economy looks highly vulnerable to a negative shock right now. As Bob Forrestal just said, that means we ought to be taking out some insurance against recession. It would have been nice if we had taken this insurance out some months ago, but we didn't have that kind of foresight. We ought to take it out now. The final nail in the coffin is something you did not mention, but something that I know you believe as well. It is that, given what the markets have done, if the Fed does not ratify it with some easing--and it doesn't have to be today, but soon--the bond market is likely to back up. I might add that I would expect the stock market to crack as well. So, the very things that we are expecting to support the economy and prevent a recession will evaporate right before our eyes, if we don't act. Now, having said that, as you know Mr. Chairman, I feel that a 50 basis point, symmetric move would be better than 25 basis points, asymmetric, which in turn would be better than 25 basis points, symmetric. Let me very briefly give you the reasons why I think doing 50 basis points would be preferable today. It starts with the belief that the ultimate need is going to be more than 50 basis points. If you don't believe that, doing 50 basis points today would not be a smart action. There is definitely room for disagreement on that. I feel that with the fiscal contraction in train, more than 50 basis points is likely to be the end of this episode. That is to say, at the end of this episode the nominal funds rate will be below 5-1/2 percent. If I didn't feel that, I would not be arguing for 50 basis points now. The second part of the argument is, as I said before, that I think we are already behind the curve and it is useful at this point to give a signal to bolster confidence that the Fed is watching and not asleep at the wheel. In addition to that, doing 25 basis points will be read as a fairly timid action suggesting a very tentative Federal Reserve not quite sure about what should be done. Now, maybe that is in fact accurate, and we are certainly seeing a lot of newspaper reports suggesting that. But again, it is not the image that we would like to project, if we can help it. Related to that, I think that doing 25 basis points now would create more uncertainty about our near-term future intentions than doing 50 basis points. We will have the markets constantly looking for the other shoe to drop and envisioning that this is the start of another downward staircase. I think there is more credibility that minus 50 now would be a mid-course correction or whatever you want to call it--I would call it a temporary resting place--a movement that we would be comfortable to sit with for a while and observe developments. Finally, no matter what we say, a downward move of 25 basis points is going to be read as evidence of a divided Committee that a very clever Chairman was able to hold together on an in-between compromise. That, again, is not a total disaster. The situation is somewhat equivocal and reasonable people could have different views. But I would say it is not the image that we should want. So, for all these reasons I think doing 50 basis points now would be better than 25 basis points now and 25 basis points in August. But, for the sake of unity, I could go along with your recommendation.",1247
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, I basically agree with many of the comments that Bob Forrestal made. If I were certain of our forecast and that in the Greenbook, I would probably favor leaving policy unchanged at present. However, as we all know, forecasts are often wrong and they often underpredict the size of cyclical swings in the economy. Therefore, I support a 25 or a 50 basis point cut in the funds rate. I would have some preference for the latter with symmetric language as insurance against a more prolonged decline in real GDP than I think is most likely. I want to emphasize, however, that we should be prepared to reverse course and raise rates if circumstances change and growth looks as though it will exceed the growth rate of potential output. In fact, I don't think we should cut rates now unless we are prepared to raise them again fairly soon, should that become necessary.",178
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. In my judgment, and I expressed some of this yesterday, the current slowing in the expansion will be followed by a rebound of growth at a rate near the economy's long-term potential. In fact, I think the recent evidence suggests, and you mentioned this in your comments, that lower intermediate- and long-term interest rates have in effect put a floor under the housing and auto markets. So, at this time my principal concern is really with the long-run inflation trend. Trend CPI inflation of 3 percent or higher is reflected in the forecasts, including the Greenbook forecast, and in long-term interest rates. In my view trend inflation of 3 percent just isn't good enough. With CPI inflation during the first half of 1995 running about 3-1/2 percent at an annual rate and the economy expected to continue to expand at or near its potential, I don't believe the current economic outlook warrants a change in the stance of monetary policy. Easing policy at the first sign of economic weakness after a period of what I think we would all agree is unsustainable real growth undermines our credibility and could adversely affect the bond and foreign exchange markets. In effect, we would be engaging in short-run fine-tuning under conditions of great uncertainty with respect to the economic outlook. Accordingly, my preference would be to maintain the current restrictive policy to ensure that the acceleration in inflation that began last year is capped and to bring trend inflation to a level significantly below 3 percent. Now, having said that, if it is the strong consensus of this group that a 25 basis point cut in the funds rate is warranted, I would not dissent on that even though that is not what I would favor. But I would say that if we did that we should make it clear that this action does not reflect a change in our commitment to reduce the trend rate of inflation. And, as Bob Parry suggested, we should be prepared to reverse course and allow the funds rate to rise should the evolving situation warrant it. Any change in the discount rate at this time or a larger change in the funds rate would be most inappropriate in my view.",432
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. Going back to February 1994 when we began the process of raising rates, I remind the Committee that at that time the unemployment rate was still above the natural rate and inflation was still coming down. We made the very wise and prudent decision to take a forward-looking stance on monetary policy and not react to current conditions. I am glad we did. I think it was the right thing to do, and I would suggest that we do the same thing today. When we look down the road 6 to 12 months, we are looking at the first half of 1996 when our action will have its impact. Therefore, I agree with the point that was just made that we cannot think of ourselves as reacting to the current slowdown because there is nothing we can do about the current slowdown. What we can do is affect what we think is going to be the economy in early 1996. In that regard, I think we are fortunate that we have had the slowdown in the second quarter of 1995. Had we had the slowdown in the fourth quarter of 1995 or the first quarter of 1996 when some other factors that I foresee are going to come into play, we would be in the proverbial soup. I think the Greenbook, although I am glad to see they have made an assumption of fiscal policy contraction, understates the actual amount. What they did was to average the President's proposal and the Congressional proposal when, in fact, these proposals start from different baselines. The Medicare saving that the President proposed is from a rate of growth in Medicare spending that is the same as the Senate's, and on the appropriations side that is not where the differences really are. I think we may see something a lot closer to $40 billion followed by another $40 billion rather than the numbers in the Greenbook. In addition, in the first half of next year, we have to add to that the potential of three other downside risks. In the order of their likelihood I would call them Japan, Canada, and Europe. None of us can really bet on the state of the Japanese economy. The chances of something significant happening there are probably less than 50/50, but they are high enough when we add that to the probability of continued sluggishness in Canada and/or less expansion than the Greenbook forecast for Europe; the latter seems high to me given that they have to have both a fiscal and a monetary contraction to meet the Maastrich criteria. It all adds up to a slow first half of 1996. I agree, therefore, with Governor Blinder that ultimately we are going to need more than a 50 basis point reduction. If I were betting I would say that a year from now we will be 100 basis points under where we are now, and we still may be chasing where we want to be. However, Mr. Chairman, I agree with your point on tactical grounds. I think that 25 basis points is the right move to make today largely because of those foreign exchange rate considerations. I would be very nervous, given the current state of the yen, about making a move that was considered bold and aggressive and might send the yen up, with all kinds of perverse implications for our bond market and for the Japanese economy. And so, I support your recommendation.",676
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"I can be brief; I planned to say a lot about the debt aggregate! [Laughter] We probably have one negative quarter in the bag and we may have a second in the bag. If we do, that will be embarrassing. It will be called a recession; and if we have a recession in the second and third quarters, looking back on it in the future, we will be a lot happier if we had eased today. If we barely escape a negative third quarter and barely escape the recession label, the economy is still likely to be weak and an easing will still look to have been appropriate at this time. Only if we have a booming third quarter will we look back on a decision to cut the fed funds target now as something of an embarrassment. If the economy last February had looked like it does now, I don't believe we would have gone that last 50 basis points. It now looks like we may have gone one bridge too far. I don't regard a 25 basis point reduction in the fed funds target as much of an easing of policy, but even if we call it an easing, it is consistent with our long-term goal of fighting inflation for much the same reason that a race car has brakes. The point is not to reduce the average speed of the race car but to keep it on the track for the maximum sustainable speed. A recession now is not in the best interest of the Federal Reserve in the future and our future will be to fight inflation. As for tactics and the probable reaction of the markets, I'll have to defer to your judgment. I must admit, though, that coming into the meeting my rationale was that a 50 basis point reduction would leave the markets more settled than a 25 basis point reduction. I think they are going to start clammering for the next 25 basis points immediately. So, I would have recommended a 50 basis point move, but I will defer to your judgment on that.",393
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"This is a fairly difficult policy decision for me. When I reviewed all the materials for this meeting, I realized that any decision that I would make would really depend on the interplay of three different factors. The first relates to my own preference among the three longer-run policy alternatives that Don laid out, and I must confess to some preference for the baseline strategy among the three, recognizing that they are all forecast-based and so forth. Second, and probably more important, is my view of short-term risks to the baseline forecast as we see it in the Greenbook. And finally, even if the risks are skewed to one side or the other, what are the costs of being wrong? That is, are the costs of being wrong relatively high even if the risks are low? I think I view the risks to the forecast pretty much the same as everybody else here sees them. I think those risks have changed over the last few months from being on the up side--that is, that growth would be faster and inflation more of a problem--to being fairly evenly balanced; and now they seem to be much more on the down side--that is, in the direction of slower growth than the forecast suggests. However, I think these risks are wholly in the context of a pause in economic growth and not a recession. Growth could be slower than the baseline forecast, particularly in the third quarter, given the uncertainties about near-term consumer demand, inventory buildup, auto sales, and other factors that people mentioned yesterday. But I do think there is a powerful offset to all of this in the drop in interest rates, the health of the banking system, and the health of financial markets in general. In my view, those financial factors will pull the economy out in fine measure by year-end. I continue to believe that even though the risks of being wrong on the up side are small--that is, having much stronger growth by year-end than the Greenbook predicts right now--such a development would be pretty costly in terms of central bank credibility and in terms of what might have to be done in 1996 to rein in excessive growth should it materialize. In that regard, I think the boom/bust scenario that DRI plays out in some of its latest releases--even though it gives those results, as I do, a low probability--is interesting and instructive. Also, I should note that the data have been pretty mixed, especially recently, and that recent data tend to confirm my hypothesis that financial market conditions will spur growth by year-end. A lot more data will come in by the end of July. Normally, I would not be sympathetic to a wait-and-see attitude, but I really have these concerns about what would happen if we are wrong on the up side by the end of the year and what we would have to do in 1996 to rein in that excess demand. So, I came into the meeting wanting to vote for a no-change, although asymmetric, directive. I am not going to dissent over 25 basis points, but I did want to convey these beliefs on my part. I can go with your recommendation, and I can certainly accept an asymmetric directive.",639
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"I think a quarter-point drop in the funds rate is the right amount at the right time, along with an asymmetric directive. The current level of monetary restraint has helped cause more of a correction and associated downside risks than we preferred. A cautious move toward less restraint, therefore, would help shore up demand and lessen downside risks. More importantly, it would demonstrate that the Fed is awake at the switch and wants to avoid a recession. I think we would be seen as forward-looking both when the economy is overheating and when it is underachieving. As the central bank our primary contribution to prosperity over time is price stability. Within the longer-run context of moving toward price stability, however, there is some room and indeed an obligation to take into account shorter-run fluctuations in demand. Now is one of those times to act promptly. To wait is to risk having to ease more and faster later on, with a greater probability of boom/bust in 1996 or 1997. A quarter-point drop in the funds rate would be a prudent magnitude for financial markets as well. It would in my judgment balance the need to try to avoid feeding another big run-up in asset values versus the risk of setting off a major correction.",245
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, after listening to the Committee's discusion yesterday and today, one of the things that strikes me--it feeds a little bit off the Bluebook--is that if we take the outcome in the baseline forecast as reasonable and desirable, then we might go with a no-change policy. In our own Bank's view and in my view that outcome is reasonable, and in their comments around this table a lot of people said that they found such an outlook reasonable. This suggests to me that the real funds rate may be where it should be at this stage. There is no strong evidence that it is not. When we look at the risks, yes, there are downside risks. But as others have pointed out, the strong financial markets, the favorable banking conditions, and our own Bank's projection point to upside inflation risks, and that leaves me inclined to leave policy unchanged. There is a statement in the Bluebook to the effect that if we want to insure against a possible further slowdown, we might want to ease. But I am concerned that that insurance comes with its own price. When we vote for monetary stimulus, we are also increasing the risk of further inflation. In addition, some members want to ease in anticipation of prospective shocks that have not yet materialized. The odds of such occurrences are unknown and that, too, leaves me uneasy about moving at this time. So, I think it would be prudent for us to adopt an asymmetric directive and wait for information rather than to move at this juncture based on the projections and the evidence that we have about the real fed funds rate.",321
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"I think the appropriate criterion for choosing a stance of monetary policy is whether we feel it is a move toward the objective of stabilizing the purchasing power of the dollar. An inappropriate criterion would be either somebody's idea about what the impact of fiscal multipliers was going to be, assuming we knew how to measure fiscal policy appropriately, or some idea about a cumulative process of decline in the economy in the absence of some pump-priming to prop it up. I do know that people outside the Fed, who believe in some kind of stagnation thesis and think that the economy contracts in the absence of fiscal or monetary stimulus, are going to interpret our actions differently than I would. But I still think that there are appropriate and inappropriate reasons for our thinking about whether a policy adjustment is called for. In Don's characterization of our move last February, one of his interpretations was that it is possible for us to take out some insurance, and I think that was correct. The way I viewed it at the time was that if we enjoyed full credibility of our commitment to stabilize the value of the dollar over time and felt that we would achieve a stance of policy that in 1996 and 1997 would move us decisively in that direction, then I would not have thought that the action in February was necessary. That is quite different from what I thought about our November 1994 action. In my view that action was an adjustment that was necessary to move us toward price stability. I did not think that the February action in a vacuum would have been necessary. With the advantage of hindsight, I think the February action was necessary because of what has happened to the price numbers and the possibility of our objectives being misinterpreted had we not done that. The way I think about policy now is in terms of how much insurance we need against future inflation. I would not want to be taking out insurance against a contraction because I think the economy tends to expand in the absence of adverse shocks or perverse policy. So, it is a question of whether we should cancel all the insurance now and whether that would be appropriately interpreted, or in the alternative that we have a growing confidence that we are back on track with regard to the future value of the dollar and so we are going to cancel half the insurance now. We can live with the ""other shoe to drop"" syndrome if it is interpreted that when we have further evidence that everybody agrees that we are moving toward stabilizing the value of our currency, we will then feel comfortable in canceling the other half of the insurance policy. At that point I would pause.",521
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Mr. Chairman, policy changes should not be based on reaction to present data, but rather on our views of the economy and prices about 18 months from now. I say that because if we were dealing only with a response to recent data I would want to keep policy unchanged because I don't like the price numbers that we have seen thus far this year. But based on a view toward the future, I do think that the real,federal funds rate is too high. It is higher than it either should be or needs to be and thus we should ease. The question therefore becomes when and how much. Especially because of my very great concern about possible shocks from weakness abroad, I think the time is now. From what we know now and not giving credit for fiscal restraint until the appropriations bills are passed and signed by the President, I believe that the likely total easing requirement is 50 basis points. I think a single 50 basis point move now would be very likely to destabilize financial markets and lead to a concern that we know much more than we really do, or fear more than we really should, about a likely recession. That would disturb markets greatly, and I agree with Governor Lindsey on the likelihood that it would disturb the dollar/yen relationship and disturb further the already weak Japanese economy that is a source of great worry to quite a number of us. So, I think the downside risks that many of us discussed could become downside realities as a result of a 50 basis point move now. But I think we also have another reason to be concerned that our fears about downside risks could become downside realities, and that would be if leaks were to come from this meeting that would reveal our very considerable discussion of downside risks. We are in a particularly delicate period of the business cycle. We are also in a very delicate period for financial markets, and I think we have to show an unusual amount of discipline and restraint about what we have to say for ourselves. Ideally, it would be very nice if all of us were to maintain a stoic silence until the Chairman's Humphrey-Hawkins testimony when he could lay out a very balanced presentation of what the Committee really thinks. Therefore, I support the 25 basis point asymmetric proposal.",450
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, I believe that we should be forward-looking in setting our monetary policy. While we had two or three months of bad numbers, there is still a lot of uncertainty about the economy's underlying strength. As you mentioned, some of the more recent data that we have seen on housing and orders for durable goods suggest that the economy is stabilizing at a sustainable level of real activity. I think it is important that we be careful not to give the perception that we are tying monetary policy too closely to the fluctuations in short-run output. That would damage the credibility of our commitment to reducing inflation. Clearly, if inflationary pressures are moderating, we should be prepared to reduce the federal funds rate gradually. I believe the real federal funds rate should be below 3 percent, especially given the fiscal policy assumptions. At this point our forecast has the economy slowing to a sustainable rate of growth with some reduction in inflationary pressures, though not as much as the Greenbook in 1995. This is based on both the forecast that we have from our model and my own personal contacts with people in our District and elsewhere. Our forecast also assumes that the Committee will be lowering the federal funds rate by at least 50 basis points by the end of 1995. The timing of this policy action would have little impact on the economy's performance this year. By our assessment the 25 basis point reduction in the fed funds rate now will have little quantitative impact, but it may serve as a signal that we are indeed forward-looking. However, I think it is important that we not give the impression that we are simply responding to short-run fluctuations in output. It must be clear that our action is consistent with the slowing expansion and moderation in the inflation outlook. As others have said, I think it is important that we indicate that this is not a change in our commitment to reduce inflation. So, I support the 25 basis point reduction and an asymmetric directive.",394
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"I will make only a couple of points. I think the decision does not hinge--some people have made this point already--on the current weakness in the economy or even prospective weakness, at least of the type we have been talking about. In part that is because of the well recognized lags in policy; there is not much we can do about the economy at this point. In part also, as people have commented, the reaction that has already occurred in the bond and stock markets and the anticipation that the inventory adjustment will be rather brief and rather shallow--those, of course, are not independent events--do not suggest to me that a decision today hinges on the immediate outlook. What I think is important at this juncture is that the markets have essentially priced in an easing of policy. We do not in my view want to peg the federal funds rate at any particular level. Interest rates typically fluctuate pro-cyclically. If we look at even the relatively optimistic path for real growth in the Greenbook or the model that we maintain, we get ceteris paribus a number of consecutive quarters of below-trend growth. That is an environment in which I would expect interest rates to be declining. It doesn't seem to me that we should stand in the way of that. So, I support your recommendation, Mr. Chairman. For what it is worth, though, I would prefer a symmetric directive.",283
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"I am very much where Tom Melzer is. If I were a voting member, I would support your recommendation, Mr. Chairman, although I must say with a considerable degree of nervousness. That kind of nervousness has been underscored by Tom Hoenig and some others. There seems to be a feeling--calling it a consensus may be too strong a characterization--that we can be fairly confident that inflation has reached a cyclical peak. The probability of that is certainly higher than I would have expected a while back, but I think we need to keep a longer-term perspective here. It was less than a year and an half ago that we ended an extended period of substantial monetary ease. While the risk of further inflation in this cycle is smaller than it was, I don't think it is zero and we need to keep that in mind. I think a cautious approach involving a quarter-point reduction in the funds rate is the appropriate degree of easing now. I would oppose a half-point reduction. One other comment: As Mike Moskow and others have said, it is important in communicating this action to the public to make clear that it is done in the context of a continuing longer-term commitment to price stability. I would very much like to see the words ""price stability"" in the announcement that we will make this afternoon if we take this action. I think it would be highly desirable for you, as I am sure you will, to emphasize that objective in your testimony a couple of weeks down the road.",303
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, as I said yesterday, I think that we have the flexibility here to move for positive and affirmative reasons as opposed to negative and defensive ones. Based on my reading of the likely outlook, I don't see us as driven primarily by the specter of a collapsing economy, although I would certainly concur that the downside risks are still there. Rather, I see the likelihood of a moderate and sustainable noninflationary growth period ahead of us coupled with a cyclically plateauing inflation rate that is still in a secular downward trend. I find all of that rather attractive. It gives the Committee room to move within the context of maintaining its posture relative to a steady focus on attaining price stability. The positive reasons to move have been articulated around this table, and I won't try to recite all of them again. I do think that 25 basis points is plenty for us to move today. The major significance will be the change in policy direction as opposed to the amount of the move, and I share the Vice Chairman's concern about the risk of roiling the financial markets in destabilizing ways. I believe that whatever we do, 25 or 50 basis points, there is going to be speculation about what comes next, either way. I also favor 25 basis points because it is not at all clear to me what our next move may be or when it may come. For that reason, Mr. Chairman, I also would prefer to see a symmetric directive, although I certainly can support asymmetric if that is the way we are going to go.",313
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"I also think that the baseline projection is probably the most reasonable, but I would support a 25 basis point move as insurance in the sense of not being 100 percent sure about how our forecast of the inventory correction is going to work out. I must say that I vacillate on this question of symmetry or asymmetry. I guess I don't have strong views, but I am marginally supportive of symmetry because I don't think that we would move before August without talking in any case. But I wouldn't vote against asymmetry because of my lack of conviction as to the use of asymmetric language.",119
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Mr. Chairman, I support your recommendation to lower the funds rate today. As I already emphasized, I am concerned about downside risks and the possibility of destabilizing feedbacks that could weaken the economy more than the Greenbook envisions. On the inflation side, I think a funds rate cut is consistent with our longer-term objective of gradually attaining price stability, given the greater slack already in evidence in both product and labor markets. Moreover, all our forecasts, with or without a cut in the funds rate of the size we are envisioning here, show a decline in inflationary pressures as we go forward. To me, one of the major rationales for such a cut, as Governor Blinder and others have emphasized, is that we need to cement in place the existing financial conditions that are already working to provide the critical cushion against the downside risks. So, I would like to see a cut to prevent a further backup in long-term interest rates, namely, to ratify the expectations implicit in the current structure of longer-term yields. I certainly am not arguing that we should be setting monetary policy by following the fed funds futures, but I think we should recognize situations when the market has gotten things right and act accordingly. I see the reduction in market interest rates that has occurred since our last meeting as a very natural reaction--Gary Stern mentioned this, too--to a softening economic outlook and as an automatic stabilizer mechanism that cushions the the economy when it is buffeted by spending shocks. Our task at this point is to be careful to avoid a pitfall that is well recognized in the literature on monetary policy. It is that interest rate targeting has the potential to thwart the operation of that natural adjustment mechanism, thereby exacerbating economic volatility. So, I see a cut in the funds rate now as essentially giving the green light for this market mechanism, which is already working, to continue its work. I certainly agree that the rationale is stronger for a cut now. As the Chairman emphasized, and the Greenbook and Bluebook acknowledge this, eventually we have to cut the funds rate because the equilibrium real funds rate is tending to fall as we go forward. In my view this is a mid-course correction and it is designed to do a little sooner as an insurance policy what I would envision our having to do anyhow in the not-too-distant future. In a sense we put some extra restraint in place last February at a time when it seemed as though the momentum in demand was never going to subside. That situation has changed dramatically; it changed pretty quickly after the February meeting. Now I think of that as extra braking action that is no longer needed, and I see this as a move to a more neutral stance. I remember that Bill McDonough warned us at the February meeting that we needed to be forward-looking and that we would one day have to make a pre-emptive forward-looking move toward ease that would catch the market off guard, but nevertheless we should have the courage to behave in that forward-looking way even though it would be a surprise. My only regret at this stage is that we really are not as far ahead of the curve as Vice Chairman McDonough envisioned in his remarks then. So a 25 basis point cut in the funds rate is not going to be a surprise to the market. In fact, for much of the past month the odds of a 50 basis point cut at either this meeting or the next have been close to one. What should we do today? I guess my inclination would be if I had my druthers to choose a 50 basis point move today because I think it is needed, if not now then in the near future, to move to a more neutral policy stance. In a way, it would be psychologically stabilizing for households and firms to be able to rest a bit more secure in the knowledge that the Federal Reserve wants to take actions to keep the economy growing. But I also recognize the arguments against such a move today that the Chairman and others among you have articulated on the basis of the possible impact on financial markets. So, I can certainly support the proposal for a 25 basis point cut today. I would have a strong preference for an asymmetric directive, although I don't mean by that a presumption that there would be an intermeeting move.",867
-fomc-corpus,1995,Thank you. A cut of 25 basis points with asymmetric language seems to be the general consensus. Would you give us wording on how that would read?,31
-fomc-corpus,1995,"I am reading from page 25 in the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to decrease slightly the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint might or somewhat lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",110
-fomc-corpus,1995,"I hate to raise the ""slightly"" versus ""somewhat"" issue, but if we are moving only 25 basis points, then we should make it ""slightly.""",36
-fomc-corpus,1995,"Yes, I think you are right.",8
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"Let's go to ""slightly.""",7
-fomc-corpus,1995,"""Slightly"" for both?",7
-fomc-corpus,1995,Yes. Call the roll.,6
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig No Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,Our next meeting is August 22?,8
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"Contrary to the original plan, we are going to have lunch here since apparently the air conditioning is holding up reasonably well.",25
-fomc-corpus,1995,Is there a press release?,6
-fomc-corpus,1995,"I am sorry. The draft reads as follows: ""Chairman Alan Greenspan announced today that the Federal Open Market Committee decided to decrease slightly the degree of pressure on reserve positions. As a result of the monetary tightening initiated in early 1994, inflationary pressures have receded enough to accommodate a modest adjustment in monetary conditions. Today's action will be reflected in a 25 basis point decline in the federal funds rate from about 6 percent to about 5-3/4 percent."" We will try to capture all sides of the general discussion at this meeting in the Humphrey-Hawkins report.",121
-fomc-corpus,1995,"Mr. Chairman, is it possible to add one final sentence there that says ""This action is taken in the context of our longer-term commitment to price stability""?",32
-fomc-corpus,1995,I thought of doing that but I concluded that such an addition would make the statement too complex. I think the issue is that we are not responding to an expectation of a recession. We are responding to the fact that we have succeeded in reducing inflationary pressures enough so that the adjustment makes sense for the longer term. A reference to price stability is implicit in there. I originally had that in an earlier draft and I decided it was redundant and we wanted to keep the announcement short. We will have a longer explanation in the Humphrey-Hawkins report.,111
-fomc-corpus,1995,What time does this announcement come out?,8
-fomc-corpus,1995,"2:00 - 2:15 p.m. What do you want to do, Joe?",20
-fomc-corpus,1995,2:15 p.m.,6
-fomc-corpus,1995,2:15 p.m.,6
-fomc-corpus,1995,Is there a good reason it can't be earlier?,10
-fomc-corpus,1995,"Don, why don't you--",6
-fomc-corpus,1995,"We have tried to establish a regular time so that people, not knowing exactly when it would come out, would not be hovering over the Telerate machines and reading great amounts of meaning into the timing of the release, how long you argued about policy, or whatever. So, we thought it was better to establish a routine time rather than making it 1:55 p.m. after one meeting and 2:35 p.m. after the next. That was the reason.",97
-fomc-corpus,1995,Why don't we adjourn and go to lunch?,10
-fomc-corpus,1995,"This is the first meeting in our rejuvenated Board Room. The map of the Federal Reserve Districts has been enhanced but not redrawn, so your Districts are what they were; you need not worry about that. However, as in the old James Bond movies, there are a lot of buttons here that you can't see. If I push one in an appropriate manner, you fall through the floor with your chair, and there is a pool down there with sharks and all sorts of other creatures. That is not meant to influence your vote! [Laughter]",113
-fomc-corpus,1995,I support your proposal.,5
-fomc-corpus,1995,Whatever it is!,4
-fomc-corpus,1995,Will this be part of the transcript to be released five years from now? [Laughter],19
-fomc-corpus,1995,It's recorded.,3
-fomc-corpus,1995,I don't think there is anything else that has to be discussed with respect to the Board Room. What you see is what you get. We will soon find out if it is a major improvement or just more expense. [Laughter] We have with us today First Vice President Colleen Strand from the Federal Reserve Bank of Minneapolis. She is attending the meeting for the first time under our new procedures. We welcome her. Would somebody like to move approval of the minutes?,94
-fomc-corpus,1995,So moved.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,The July 5-6 minutes have been moved and approved. We now turn to Peter Fisher for his report on foreign currency and domestic open market operations during the period since the July meeting.,38
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for Peter?,4
-fomc-corpus,1995,"Peter, in the absence of financial difficulties in Japan, would the U.S. Treasury on its own have supported actions in the market to increase the value of the dollar?",34
-fomc-corpus,1995,You're asking me to put myself inside their minds. I am a little squeamish about doing that.,21
-fomc-corpus,1995,"I'm not really asking that. I am asking what the driving reason was behind these interventions. Why did the U.S. Treasury perceive that there was a problem with the foreign exchange value of the dollar independent of Japan, which is what Secretary Rubin implied in his comments after the intervention? Or was that a way to make palatable to a variety of different constituencies something that was really done more to help the Japanese situation?",84
-fomc-corpus,1995,"I don't see it as an either/or situation. I think the Treasury feels very strongly about the commitment made in the G-7 communique in April that they were seeking an orderly reversal of previous exchange rate moves. At that point, they were referring to the downward movement of the dollar from January through the end of April. When they say they are seeking an orderly reversal, they really mean that. I think the financial sector difficulties in Japan and the weakness of the Japanese economy are an additional reason why the Treasury was concerned about exchange rates when they reached their lows. But I don't think it is really an either/or situation. They would like to see a stronger dollar and now we have a somewhat stronger dollar, though I would note that it is not yet back to the levels of mid-January. I don't think anyone thought the dollar was over-valued in mid-January of 1995. I tried in my remarks to be rather careful to say that the dollar is off its lows and we have had a big move, but it was a bigger move down.",214
-fomc-corpus,1995,"Yes, but there are two issues here. First, there is a sort of long-term mindset about why you intervene. You intervene to counteract disorderly markets, at least that's the received wisdom coming through the Fed. Second, who really knows the right value of the dollar? There are winners and losers for any value of the dollar. Why would we support strengthening in the absence of a real rout that was damaging to the financial markets?",88
-fomc-corpus,1995,I think the Treasury is looking at the decline of the dollar from January through the spring and seeing that as something that is not positive for U.S. financial markets or the perception of the U.S. economy. It's really the time horizon that is involved here. You can think about disorderly markets as a fifteen minute phenomenon; you can think about them as a 24-hour phenomenon; or you can worry about whether there wasn't a bit of an overshoot on a quarter-by-quarter basis. I think the Treasury's focus has been more on the quarter-by-quarter basis.,114
-fomc-corpus,1995,"But it seems to me that is a different position than the one that I at least have been led to understand is our position vis-a-vis defending the dollar, to use that old terminology. But second, once the winners and losers have been decided over a period of a week after exchange market instability settles down, it looks as if we are taking actions well after the fact that are detrimental to the people who are seeing this new exchange rate level as not really all that bad. In fact, our firms are more competitive in foreign markets.",107
-fomc-corpus,1995,I think this Treasury has tried to shy away from putting it so pithily. They are trying very hard to shake the image that there is any effort to depreciate ourselves into prosperity. So that would be their rather direct rebuttal to the point you are making. They are trying to shake that image.,62
-fomc-corpus,1995,"It's just an interesting change, at least to me, in perspective.",14
-fomc-corpus,1995,"President Minehan, in addition the Treasury has been seeking opportunities in market conditions where its intervention would have a positive effect and where it might ride a rally where one was already occurring. So they piggybacked on the various measures that the Japanese took with regard to external investments, and they caught the market by surprise on several occasions. And that turns out to be, for the moment at least, a little more effective than just intervening randomly.",90
-fomc-corpus,1995,So you think that this is an--,8
-fomc-corpus,1995,They found an opportune time.,8
-fomc-corpus,1995,"Right, and are they going to try to do this a few times to prove the point that intervention can be successful so that when we have a disorderly market and they do intervene it works? Is that the logic here? Or are they seeking some particular foreign exchange value for the dollar?",58
-fomc-corpus,1995,I am not aware of any exchange rate target or particular objective other than the sense that the dollar was a bit low this spring.,26
-fomc-corpus,1995,"Let me say that I think the Treasury people are aware that they cannot do this very much more without falling into the trap, where they basically are intervening all the time to no effect. My impression is that this is the end of the series. We have not been behind the Treasury pushing them in this direction, to say the least. They have acknowledged that this is a risky business and that if they prolong it or try to do it too often, the market will come back and bite them. I don't think there is a newfound insight that modest intervention of a few hundred million dollars or a billion dollars or whatever can really move the market. I think the people who make the decisions at the Treasury are aware that the only way we can effectively change the exchange rate through intervention is to catch the market short against our intervention and the reaction is strictly that. By definition, we cannot continuously surprise the market; at some point, it is waiting for us to move and catch us when we move. I think there has been an element of luck here that we should put in the bank and let it draw interest and not try to spend right away. Any other questions for Peter? If not, would somebody like to move to ratify the foreign currency transactions since the last meeting?",255
-fomc-corpus,1995,So moved.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Would somebody like to move to ratify the domestic open market transactions since the last meeting?,21
-fomc-corpus,1995,So moved.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Let's now move on to the economic situation. Are you going to use the big screens for your presentation?,24
-fomc-corpus,1995,I'm not going to inaugurate the screens.,9
-fomc-corpus,1995,"I'm disappointed. We have new technologies here that enhance the economic outlook, I do believe.",18
-fomc-corpus,1995,I'm not sure the screens will enhance the quality of the forecast!,13
-fomc-corpus,1995,More investment in producers durable equipment. [Laughter],11
-fomc-corpus,1995,Dave Stockton has the floor.,6
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for either gentleman?,5
-fomc-corpus,1995,"Dave, you have some fiscal restraint built into your forecast and you just indicated--",16
-fomc-corpus,1995,"Excuse me; may I just interrupt for a second? Let me request that everyone move their papers away from the microphones, the little disks directly in front of you. I think the system works fine provided we don't block up the microphone system.",49
-fomc-corpus,1995,"Your forecast has some fiscal restraint built into it and you also, as you just indicated, have a relatively lower inflation forecast; and yet I notice that your assumed long-term interest rates remain pretty much at their current levels over the forecast horizon. I am a little confused about that. I would have expected some decrease in long-term rates.",67
-fomc-corpus,1995,"The principal reason we have relatively flat rates over the next year or so is that our forecast is basically balanced. We have the occurrence of fiscal restraint. We also have additional demand crowding in on the net export side and relatively well maintained private domestic demand. In our inflation forecast, the underlying picture is one of flatness, not one of moving lower. So, the underlying view behind the interest rate forecast is our expectation of unchanged longer-term prospects for inflation.",92
-fomc-corpus,1995,President Parry?,4
-fomc-corpus,1995,"Dave, I would like to ask two questions about labor force developments. As I am sure you know, in the last year or so there has been a lot of volatility in participation rates and in particular a very sharp decline in May and a further decline in June. I wonder if the staff has had any thoughts about what is going on in terms of this volatility of participation rates. Secondly, is it possible that there is somewhat greater elasticity in the participation rate such that the current 5.7 percent unemployment rate may be giving us misleading information about the degree of tightness in labor markets?",118
-fomc-corpus,1995,"On the first part, we have been less puzzled with respect to the volatility in the participation rate, which has often been volatile in the past. The real question has been the basic flatness that we have had in participation, even as labor markets appeared to improve considerably. To be quite frank, I don't think we have very good stories at this point; one reason is that with the changeover in the CPS, it has been very difficult to interpret the aggregate movements in the participation rate. I don't think we see any particular change in labor force behavior that would suggest that participation is going to absorb more of the fluctuations in demand and therefore leave the unemployment rate as a less important indicator of labor market slack at this point. But one can't rule out that possibility.",152
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"I have a couple of questions. First, Charlie, on the international side: With regard to the other industrial nations, as I looked at your projections I couldn't discern the reasons you are expecting improvement in their economic activity. Is that based on the general cyclical notion that those economies have been growing slowly, if at all, so they are bound to do better in the future or is there something more fundamental going on that has led you to believe they are going to do better?",96
-fomc-corpus,1995,"It is partly that the slowdown in the first half may well be an aberration with respect to underlying trends and underlying strength in those countries. The German economy felt some impact from the depreciation of the mark, which is now being partially reversed. We anticipate some Japanese policy measures as well, although we have projected a very slow Japanese performance. So, there is a correction for the weakness of the first half that we don't expect will continue.",87
-fomc-corpus,1995,"Second question: I don't fully understand it, but I gather that BEA is going to use the chain-weighted index to deflate GDP and that will lower previous estimates of real GDP, significantly in some cases. Does that also mean that productivity estimates are going to come down significantly? If so, is that really credible?",65
-fomc-corpus,1995,"We have taken a look at trend productivity estimated by using the new Fisher ideal chain-weighted index, and that suggests that the trend in productivity has basically been constant since about 1980. What one sees as a pickup in trend productivity using 1987-based dollars appears to be a statistical artifact that arises from giving much greater weight in recent years to the growth of computers, and that tends to boost GDP growth rates. We think a chain-weighted index is probably going to be a better measure for judging longer-run trends in the economy because it does not assume that the relative prices of computers today are a good reflection of what they were twenty years ago. But it certainly does raise a question as to whether we have witnessed any improvement in trend productivity. On many occasions people have forecast or thought that trend productivity was in the process of improving only to be disappointed later. This, in some sense, is just another measure that would suggest that perhaps we can't be as optimistic as we might have been on the basis of the fixed-weighted index.",208
-fomc-corpus,1995,"Let me add just one other comment that works in the other direction. There are other changes that BEA is considering implementing over the next several years. One in particular that would work the other way would be the inclusion of software as final output. At present, when software is not bundled with the computer, it is counted as an intermediate product. If output of software has been growing faster than other output, that would push up ""true"" output growth. There are some other things that are service-related where BEA is planning to implement new procedures to try to get a better handle on service output, such as this issue with software. Those things won't be reflected in the next benchmark this December, but they will be reflected in the following benchmark revision. In fact, it may well be that productivity is growing faster and that we just are not measuring output properly.",172
-fomc-corpus,1995,"There is a major statistical problem. We are all acutely aware that there has been a shift toward increasingly conceptual and impalpable value added and that actual GDP in constant dollars is becoming progressively less visible. All of these intellectual services have historically tended to be written off as expenses in income statements, research and development clearly being the largest and most obvious of these. We are moving toward an economy in which the value added is increasingly software, telecommunications technologies, and various means of conveying value to people without the transference of a physical good; entertainment is the obvious classical case. So, we are getting increasing evidence that we probably are expensing items that really should be capitalized. This is the issue with software. We have all seen, as I think you are aware, a number of industries in which the ratio of stock market value to book value is much higher than one. In fact, in certain industries it is a huge multiple. The trend of market to book value has been rising very dramatically over the years, and I suspect we cannot extract all of that from changing market valuations of stocks in general. What appears to be the case is that an increasing amount of capital expenditures in the classic sense is being misclassified as expenses and that obviously lowers the book value of the firm to well below where it would be if those expenses had more appropriately been capitalized. The stock market is basically telling us that there has indeed been an acceleration of productivity if one properly incorporates in output that which the markets value as output. If in effect there has been a failure to capture all the output that has been occurring, we will indeed show productivity growth that is too low. It is hard to imagine that productivity is moving up only around 1 percent under the new weighting basis with profit margins moving the way they are and with the widespread business restructuring that is occurring. I think the difficulty is not in productivity; I think it is at the Department of Commerce.",388
-fomc-corpus,1995,Didn't the previous Greenbook mention a switch from basing productivity on income to basing it on expenditures as a more realistic way to assess productivity because of the increase in the statistical discrepancy? Doing that will reduce the growth of productivity.,46
-fomc-corpus,1995,Only in the most recent quarters. The statistical discrepancy doesn't have a particular trend to it.,18
-fomc-corpus,1995,Hasn't it gotten wider in recent quarters?,9
-fomc-corpus,1995,In the most recent couple of quarters.,8
-fomc-corpus,1995,That's a factor that is going to work in the same direction as the chain-weighted index.,19
-fomc-corpus,1995,I don't think that's a trend phenomenon.,8
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Dave, when you outlined the downside and upside risks, you didn't mention what I had guessed you would start with, which was the fiscal situation. If you were doing the Greenbook forecast in a DRI framework, which gives the majority probability forecast, and, say, your alternatives, and you said: here is my forecast with probability P1 and my forecast with probability P2, where P1 and P2 add up to about .3, what would you say about the fiscal situation?",99
-fomc-corpus,1995,"I am not sure that we have any particular political forecasting acumen that could predict how this fall's budget negotiations are going to unfold. Obviously, our best estimate or highest probability estimate is that some agreement will be reached in the fourth quarter that will avoid the more dire fiscal scenarios that have been mentioned. Clearly, there is a tremendous amount of uncertainty as to what actually will occur.",76
-fomc-corpus,1995,"What I am getting at is this: You have one alternative forecast that has more fiscal contraction, and you have another that has less fiscal contraction.",29
-fomc-corpus,1995,"Right. I would say that we are still showing less fiscal restraint in our forecast than is embodied in the budget resolution passed in Congress. Therefore, if we end up with almost exactly what that budget resolution shows, we probably would show slightly weaker activity next year than we currently are forecasting. We are not doing that because typically, even when these budget plans have been put on the table, when everything is added up in the end, it usually comes out shy of what was thought when everybody signed the deal. We felt comfortable doing that. But I guess the probability of a tighter fiscal policy than our forecast is somewhat higher than the probability of a looser fiscal policy.",133
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"This gets back to Bob Parry's question about labor force participation rates and volatility. One of the changes that appears to have taken place in the labor market is this greater use of temporary workers or people who have less than permanent attachment to the workforce. I have two questions relating to this: One, is this in any way related to the volatility that we were talking about before? And second, has the Board staff done any studies on this, particularly in relation to whether this growth of temporary workers affects the speed with which firms respond either in expansions or slowdowns in terms of their hiring policies?",119
-fomc-corpus,1995,"To have an effect on the participation rate, these contingent workers would have to be moved in and out of the labor force. That could actually be occurring; so that could be a factor in some of the additional volatility. I think more typically folks are with some kind of temporary agency and would probably consider themselves to be in the labor market most of the time. But on the margin, there are probably people who can more easily drop in and out of the labor force given the kinds of opportunites that are available. We don't have any studies yet on whether this increasing use of contingent workers is fundamentally changing the dynamics of labor force participation. But we are acquiring data to take a look at this issue of increasing use of contingent workers and temporary help agencies.",150
-fomc-corpus,1995,We have two of those firms in our District. We are working with them to get some data as well.,22
-fomc-corpus,1995,Our staff has been working with yours.,8
-fomc-corpus,1995,Good.,2
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"A quick question: In your answer to one of the earlier questions, you talked about inflation flattening out. I thought I read in the Greenbook that you were really somewhat more optimistic about inflation coming down somewhat. In your projections by quarter, you have a pretty significant decline. Yet, given where we are in the cycle and given where we are with your projections on output, that seemed a little optimistic to me, although I read your rationale. Is there one particular reason why you are foreseeing the improvement?",103
-fomc-corpus,1995,"In my answer to President Forrestal, I was thinking more in terms of the kind of long-term inflation expectations that might be a factor in determining long-term interest rates rather than the quarterly pattern of our inflation forecast, which does have some deceleration. The deceleration is from a bulge earlier this year that was, in our view, related to some special factors including significant increases in auto finance charges and airfares that are now receding; it also is related to the materials prices and import prices that were rising quite rapidly but now seem to be slowing down significantly. I tried to convey in my remarks that, indeed, in some sense we have been surprised by how well labor costs have performed in a period when, by our assessment, labor markets were tight. I think that has played an important role in our thinking about the prospects for inflation and has underpinned our optimism for the outlook over this particular horizon.",185
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Just following up on that question: I was struck by the fortuitous timing that you have in the Greenbook of the halt, if you will, of the one-time--although it seems to be a long time--decline in costs of benefits due to employer efforts and so forth. I am referring to the coincidence of that with our coming to a point in the cycle where the unemployment rate is such that it should not be causing labor market pressures and pressures on prices. You don't see an upturn in inflation after the downward impact of the drop in benefits costs subsides, which will occur sooner or later. Could you talk a little about that timing? Obviously, you think it is probable because it is part of your forecast. How do you come to that fortuitous timing?",159
-fomc-corpus,1995,"It wasn't exactly by design that we did that. We reached a point where the unemployment rate had dropped to the 5-1/2 to 5-3/4 percent level and we were expecting to see some pickup in compensation inflation. It just has not occurred. As we indicated in the Greenbook, we don't really see any reason yet for revising significantly lower our estimates of the natural rate in the face of that; in our view that would be giving too much weight in some sense to the recent performance. But as this year has progressed, we have been impressed by the significant slowdown that we saw in health care benefits costs, particularly in the first quarter. We thought perhaps that was just a flukey number and it was going to reverse itself or at least not be occurring with much strength in the second quarter; but, it occurred again. The anecdotal evidence is that some employers really are making significant efforts to make this adjustment. Now, maybe that could go on even longer than in our Greenbook forecast, in which case the inflation outlook beyond our forecast horizon would remain relatively benign. But as we have the forecast now, we have enough slowdown in the economy and inching up of the unemployment rate to rescue us from the possibility of that rate running below the natural rate for a period of time and ever showing through into prices. In some sense, it is like having a favorable supply shock right at the time when you need it the most. That could be. Then the question becomes: Is it a permanent improvement in supply or is it temporary? In some sense our forecast doesn't really have to come down too firmly on that point because the forecast horizon is not long enough for the effect to show through.",346
-fomc-corpus,1995,"We have this discussion once a month at our directors' table because our chairman is the president and chairman of New England Medical Center and because of the predominance of the health care industry in the First District. For at least the last two years, we have tried to get a handle, both from questioning on our side and from concerns on his side, on how long business efforts to control costs will continue to have an impact in terms of cutting medical costs. It just strikes me that they don't have a handle on it at all. They are being pushed by market forces that have become extremely strong and unavoidable, at least in the First District. I assume that is reflected nationwide.",135
-fomc-corpus,1995,"That is just one reason for being somewhat cautious in looking ahead and thinking that somehow the entire medical care problem has been licked. There are still some significant issues about what is driving medical care prices and whether we are going through a transition period where employers are able to get a series of one-time improvements. It looked for a time as if the health care inflation problems were behind us. But given that we have not solved the deeper problems there, one suspects that at some point those could come back again.",101
-fomc-corpus,1995,"Any further questions? If not, would somebody like to start the roundtable? President Hoenig.",20
-fomc-corpus,1995,"Thank you, Mr. Chairman. I will start with the District economy, which remains relatively strong and actually shows fewer signs of weakness than it did the last time we met. This firmer tone in the region's economy is evident across a wide range of indicators. The broadest gauge of improvement is that the District's employment levels have in fact leveled off after some earlier declines this spring and are up substantially over a year ago. Manufacturing remains sound. It's not growing significantly but remains sound, with plants operating at relatively high levels of capacity and firms generally satisfied with their inventory levels. The District's construction industry shows signs of improving from this spring's slowdown. We have seen some movement in contracts in the commercial as well as the residential side. Our directors are reporting improving consumer confidence and rising retail sales, and this has been evident this past July. Finally, confirming the overall strength in the District, loans at our banks have resumed growing at a healthy pace after slowing earlier in the summer. Indeed, we see some signs of increased deposit rates as loan and deposit ratios move up, and there seems to be a drive for increased funding at the banks. There are a couple of weaker spots. The energy industry as you know continues to languish due to low prices. The District's farm economy has been hurt by a poor wheat harvest, especially in Oklahoma and Kansas, and by financial losses in the cattle industry. Despite the overall strength in the economy, wage and price pressures remain subdued; we have seen only spotty movements in prices. At the national level, we concur with the general assessment that the inventory correction is for the most part behind us and that the economy will be rebounding as we go forward. Looking out over the remainder of this year and into next year, I anticipate a pickup in activity, as does the Greenbook, to the 2 to 2-1/2 percent growth range. Factors contributing to this pickup are continued strength in consumption and business fixed investment and a modest turnaround in residential construction. On the inflation side, I am not as optimistic as the Greenbook. While we are reasonably confident that inflation will be capped at the 3 or 3-1/4 percent level, I do not expect core inflation to move much below 3 percent, if at all. With most measures of the economy still operating at or above capacity and likely to do so for some time, I think the fundamentals indicate that price pressures will remain firm. I will stop with that comment.",502
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"For the most part, Mr. Chairman, changes in our outlook for the economy parallel those in the Greenbook, so I am going to focus my comments on developments in the Seventh District. Overall, it appears that District economic growth increased in the early stages of the third quarter. The inventory correction that slowed growth in the second quarter appears to be nearing completion in several industries, notably appliances and steel. Recent reports from the appliances industry point to a pickup in shipments to dealers and a sizable reduction in factory inventories. These reports were also consistent with increasing production levels in July and early August. In the steel industry, District output climbed relatively sharply in the first half of August. Orders seemed to be flowing in at a good rate. Customers had built up inventories late last year in anticipation of price increases, but stocks now seem to have been worked down to more normal levels. Most steel markets have remained fundamentally healthy, especially those linked to construction activity. In the automobile industry, some progress has been made in addressing the inventory overhang, but the July drop in sales may have raised some concern that additional production cutbacks will be needed. Automakers we have talked to tend to attribute the July drop in light vehicle sales to temporary factors including reduced fleet sales, shortages of some popular models related to model changeovers, and a drop in Japanese luxury car sales. Through the first two weeks of August, showroom traffic is up and sales rates are showing marked increases over July with reports ranging from a 14.6 to 14.8 million unit rate for August; that's for the first two weeks. At this point, only Chrysler has extensive incentives on 1995 models, but at least one other manufacturer is expected to follow in coming months. Inventories have not been a problem in the heavy duty truck market where production has been at capacity for some time. However, there have been some significant changes in this industry over the past month or so. In June and July, order cancellations for heavy duty trucks jumped to their highest levels since the early 1980s. Incoming orders have slowed somewhat from earlier in the year, but backlogs remain nearly as large as last year's record output level. Order cancellations are causing production slots to open in the fourth quarter and some producers are responding by trimming production plans and overtime. However, major adjustments to production schedules are not expected until early next year. While reports were mixed, most retailers in the District reported stronger sales growth in June and July than earlier in the second quarter. As expected, air conditioner sales have been quite robust, but sales gains in June and July were broadly distributed across a wide variety of durable goods categories. So far in August, retailers report that hard good sales remain strong but some sales have been hurt by the hot weather, particularly back-to-school and fall fashions as well as home building and remodeling merchandise. Retail inventories generally seem to be back near desired levels even for apparel stocks, and some retailers now expect to be adding to stocks over the balance of 1995. Reports from District realtors point to a significant strengthening in existing home sales during June and July. Homebuilders remain optimistic, but we have not yet had reports of a strong revival in building activity, partly due to the weather and partly due to the remaining inventory of new homes for sale. Crop conditions vary widely across District states, with crops in Iowa, Wisconsin, and Michigan regarded as above normal and those in Illinois and Indiana below normal. Due to late plantings, the corn crop in most areas is not as far along as usual, but warm temperatures have permitted some catch-up. The hot weather was not beneficial for poultry and livestock production, which was temporarily curtailed. Labor markets in the District remain relatively tight, but slowing economic growth has tempered demand for workers. The average unemployment rate in the five District states has drifted higher this year, but it remains below the national average in every state. Help wanted advertising in the region has slipped a bit. There are still areas, though, within the District experiencing labor shortages. One Iowa contact, for example, noted that he needs to import workers from South Dakota and Missouri. Reports on prices have been mixed but generally continue to indicate receding inflationary pressures, mainly in input prices. Plastic resin prices have actually fallen in recent months. Paper prices are still rising, causing concern for catalog retailers and other District firms. However, the rate of increase in paper prices seems to be diminishing. Steel scrap prices recently rose, climbing to their highest level in four years, but this probably reflects strong demand for scrap-based steels going into construction markets. Price index components of the various District purchasing managers' reports continued to move lower through July. Our early receipt of the Chicago purchasing managers' report for August, which I caution is confidential until it is released on August 31st, indicates further moderation in price increases. The overall Chicago purchasing managers' index shows a modest decline in manufacturing activity, with the index moving down to 49.3 in August from 49.7 in July. Thank you, Mr. Chairman.",1015
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, economic growth in the Twelfth District accelerated a bit in early summer after slowing earlier this year. A pickup in California is evident from strengthening retail sales, faster job growth, and a falling unemployment rate. Employment gains have been particularly large among California's manufacturers of semiconductors and other electronic components. Growth in high-technology industries also is spurring employment gains in the Pacific Northwest. In Oregon, much of the strength is also at manufacturers of electronic components and other electronic equipment. In the state of Washington, employment in the software industry continues to expand rapidly from a high level. Farther inland in the District, economic activity in states such as Nevada and Utah is growing fast and construction continues to boom. Excluding these fast growing intermountain states, the District construction sector had weakened in early 1995, but more recently employment growth and residential permit activity have picked up. Turning to the outlook for the national economy, I guess I have a pretty rosy scenario in mind, which is probably a good reason for suspicion. Although real GDP growth virtually halted in the second quarter, I believe its composition bodes well for the future. The modest sustained rate of increase in final sales was encouraging. In addition, it seems clear that firms made progress in working off the inventory overhang that had built up in the first quarter. This development in combination with continued modest growth in final sales sets the stage for resumption of real GDP growth in coming quarters, perhaps to the 2 to 2-1/2 percent range. Finally, the recent slowdown in real GDP growth should help nip in the bud any potential surge in inflation. It should help eliminate excess demands in labor and product markets that otherwise might have boosted inflation next year. In addition, our model suggests that the so-called speed effects on inflation of swings in the economy will restrain inflation, perhaps by 1/2 percent in 1996. Overall, I would expect to see CPI inflation come in at around 2-3/4 percent next year.",408
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. Overall, the New England economy can be characterized as moving sideways. It is not declining as it did earlier in the spring and summer, but it is not moving up markedly either. As in the past, there is considerable variation in employment growth among the states, with the northern states down through Massachusetts doing much better than the Rhode Island and Connecticut region. In fact, I think I reported in the past that Connecticut had barely inched out of its recession lows. Actually, even though the economy is not doing well there, it is doing better than Rhode Island, which is on a downward trend. As an offset to this, unemployment rates in the region are below what they were a year ago, although there are some labor force participation issues in this assessment. Consumer confidence has improved; price pressures are modest overall. Things are, as I said, moving sideways. Looking at bank lending, our growth in bank loans had been below that of the nation as a whole. We are now running at about the nation's rate of increase. I think that is more reflective of the fact that bank lending nationwide has slowed and we have come into line with that. I don't think much has changed in the First District. We don't have any large firms anymore that drive the First District economy. When you look at it, there tend to be more similarities among firms of roughly equal size than there are among firms of different size within similar industry categories. Our larger industries seem to be tremendously affected by downsizing, by defense industry contraction and all of that, and they tend to drive the headlines and some elements of consumer confidence. The small industries tend to be where the growth in output and jobs is occurring. We get very different impressions of what is going on when we look at the data, which tend to show relatively sluggish business activity, versus what we pick up anecdotally when we talk to business people. We have a small business advisory council. These people tell us that New England is booming. Now, it may be that we selected the right people or the right people agreed to join our council. They are finding it difficult to hire the workers that they need; they see price pressures that they can't pass on; they see a lot of competition; they see more economic growth than we do in the numbers for the District or what we read in the newspapers. The latter probably reflect more of the impact of the large industries. So, we are seeing something that people have commented on as a national trend. People in New England like to think that things happening in New England precede what is going to happen in the nation. That's really the dominance of small industries in terms of the economic pattern of the District. On the national side, we see the economy very much the way the Greenbook sees it. If we were going to quibble, we would quibble about the optimism on the external side and we would quibble a bit about the downward trend in the inflation forecast. I personally was very happy to see the revision in this Greenbook versus the last one in terms of the uptick in GDP for the remainder of the year. We continue to believe that there are forces working in the economy that are going to produce more growth than the Committee certainly expected at the last meeting. I was happy to see the Greenbook reflecting that this time. In our view the Greenbook forecast--as you pointed out, Dave--seems the perfect definition of a soft landing. This also led us to concerns about where the risks are and the probability of ever landing where the Greenbook is forecasting. We evaluated the likelihood of that pretty much the same way you did. We were struck, as you seem to be, by the apparent balance in those risks, even though the risks are sizable on either side and there isn't a high probability of hitting the forecast on the head. So, we would assess the balancing of the risks the same way you do, and I think that is probably enough to say prior to our policy discussion.",809
-fomc-corpus,1995,Thank you. President Boehne.,8
-fomc-corpus,1995,"Thank you, Mr. Chairman. Most of the recent anecdotal and statistical information suggests that economic growth is resuming in the Philadelphia District. Manufacturing, which has been a major drag, appears to be bottoming out and the outlook is positive. Retailers report the usual summer slowdown, but the underlying trend is favorable and retailers are upbeat about the fall. Bankers continue to report that consumer lending is rising. Auto dealers are maintaining positive sales trends, although extensive incentives are underpinning the sales rate. Residential sales have picked up in response to falling mortgage rates as well as effective price reductions by builders. There are some indications that the pricing of office buildings may be firming, although prices are low and vacancy rates are only steady at high levels. The employment situation is mixed, with the jobless rate still high in parts of southern New Jersey and the old industrial and mining regions of Pennsylvania. Other parts of Pennsylvania and Delaware have tighter labor markets. Wage and price pressures remain contained. On the national level, the inventory adjustment appears to be proceeding reasonably well. Final demand appears to be holding up and inflationary pressures appear to be subsiding. There are always risks to any outlook as has been pointed out, and there can always be surprises. At this point, however, the outlook is favorable for sustainable growth and further progress toward reducing inflation over time.",270
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, after a brief pause earlier in the year, the expansion in the Sixth District has resumed. We see broad-based growth continuing for some time to come and this is partly due to continued migration to the region. This is a trend that shows very little signs of abating, and it is supporting economic performance that I suspect is stronger than in the nation as a whole. Our contacts in the District, including our directors, report that retail sales rebounded in July. Apparel is doing fairly well and household items, particularly those relating to home sales, are doing well also. The exception is auto sales, which are mixed. Manufacturers have begun using incentives to clear out end-of-year models. Tourism has improved markedly in comparison to last year. The increasing publicity being given to the Olympic games in 1996 is generating interest generally throughout the District, but perhaps more importantly there has been a return of European visitors to Florida. Our manufacturing survey released just about a week ago showed gains in output but not gains in shipments during July. As a result of this, inventories of finished goods appear to have risen, but the expectational elements in that survey were quite positive. Business has been particularly strong for manufacturers of electronics, medical equipment, and heavy duty trucks. Weakness again is evident in autos and related goods as well as the District's apparel and textile plants, which continue to suffer from import competition. Defense is also weak in the District. Sales of paper and paper products have been good, but industry representatives express concern about prospects for the continuation of that good growth. Sales of single-family homes improved in July and rose to levels above those of a year ago in many areas. Inventories of homes for sale appear tight at the moment; and new home construction, while rising, is still somewhat below last year's level. Multifamily markets are also doing quite well, which I think is in contrast with the rest of the country. Occupancy and rental rates are rising, although this is probably going to be moderated in 1996 by new units coming on line. Commercial construction is also doing quite well and we are beginning to see some speculative office and industrial projects coming on line. Again related to the Olympics, we are seeing a lot of building activity, particularly in Atlanta. On the banking side, bankers are reporting moderate growth in loan demand and very, very strong competition. That competition unfortunately is reflected in credit terms as well as in price. Business loans have been moderate so far this year, but the demand seems to be decelerating. Consumer loans are mixed and lenders are somewhat disappointed with the demand for refinancing. Wage pressures in the District remain in check, almost throughout the District. Skilled workers are still in high demand in a few places, but reports of labor shortages have diminished quite a lot in the last few months. Product prices also seem to be in check with the exception of some pressure in the pulp and paper and the chemical sectors. With respect to the national economy, our forecast is very close to the Greenbook for the balance of this year, but we do show a little greater strength and somewhat more inflation. Our forecast does not have any adjustment for fiscal policy changes, so I believe the differences between our two forecasts are consistent. I think that the outlook is reasonably good for continued growth and moderate inflation. But with the uncertainty surrounding fiscal policy and with the continued softness in the economies of our trading partners abroad, there is some risk of deviation from both of those forecasts. But at this point, I think the risks are about balanced. Thank you, Mr. Chairman.",718
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"The Eleventh District continues to show modest overall growth with a noticeable flattening of employment growth in New Mexico and Louisiana being offset by slightly improving employment in Texas. High-tech industries like electronics, semiconductors, computers, and communications services, which are increasingly important in the Eleventh District, continue to be an important source of regional growth. Our contacts in real estate are voicing a renewed sense of optimism particularly in single-family construction, which is believed to finally have hit bottom. However, we are beginning to hear of some fears of overbuilding of apartments, particularly in the Dallas area, and banks in the District have indicated that concerns about apartment overbuilding have led them to tighten standards for apartment construction loans. Retail sales have improved somewhat in most parts of the Eleventh District in recent months, with the notable exception of the cities along the Mexican border where conditions continue to deteriorate. Most of our peso-sensitive manufacturing industries have been showing flat or declining employment, with electronics and electronic equipment as I previously mentioned being the exception. Electronics have benefitted from strong worldwide demand, and our contacts have indicated that prices have been falling at a slower rate than previously, which has added somewhat to inflationary pressures. We continue to hear scattered reports of tight labor markets but little about wage pressures. On the national scene, we really have no significant quibbles with the Greenbook. The only bit of inside information I have to share with you is that up through the middle of August, sales of nationwide have been weaker than expected. They have maintained unit sales, but have done so only by cutting prices. The weakest areas are in the Northeast and the Southwest.",330
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"At our board meeting a couple of weeks ago, Mr. Chairman, one of our directors summed up his comments on the local economic situation by saying that things were not as good as they had been, presumably back in 1994, but they were better than most people had expected when the economy began to slow earlier this year. I think that remark fairly characterizes the general sentiment not only in his area but pretty much across our whole District. I read that remark as offering some confirmation for your remark in your Humphrey-Hawkins testimony that we may be past the point of maximum risk in the slowdown. I think it offers some support for the staff forecast--maybe it raises the probability from zero to three or four percent or something like that! [Laughter] There really has not been much change in conditions overall in our region since the last FOMC meeting. The economy in the District continues to grow at a subdued pace, but it is growing. As I have mentioned at previous meetings, we still have some pockets of very strong activity, especially in central North Carolina. To a large extent that is because a number of businesses from other parts of the country have been relocating recently to that area. In any case, we have been told that the market for office space is extremely tight in places like Raleigh-Durham and Charlotte and that the supply of both skilled and unskilled labor is quite tight in that region. The South Carolina and Virginia economies for the most part are also pretty strong, and even West Virginia is doing pretty well overall, I think in part because of some relocations from other parts of the country. The main problem in our District I guess is the opposite from your situation, Cathy. The northern part of our area, the Maryland economy, is quite sluggish and, of course, the general economic situation here in the District of Columbia is very bleak because of current and prospective job losses. One anecdotal comment we heard might be of some interest. We are in touch with an automobile dealer in Maryland who is active not only in his own market but in one of the national dealers associations and he gets good information about the industry generally. He told us recently that auto dealers had been surprised and burned three times so far this year--in January, April, and now July. Because of that he thinks that dealers are going to approach the new model year with considerable caution and only order the minimum number of cars, what they need to represent the new models to the public. If that turns out to be right, it could offer some confirmation to your projection, Dave, that the cutback in assemblies may extend through the third quarter and maybe shave a point or so off GDP growth in that period. More generally, the staff's near-term projections for the national economy are certainly reasonable. They seem to me to be closely in line with the private consensus projections. Like most other people, I think the risks are pretty balanced on the up side and the down side. Back in the spring, as you may recall, we in Richmond were especially concerned about the downside risks in the outlook. We are less concerned about them now, but I think we need to keep in mind that they are still there. It seems to me the key is the automobile sector. If the weakness we have seen in auto sales were to persist, that could extend the period of slow job growth, revive concerns about job security, and put a lid on aggregate demand. But there are also upside risks, and I think they are more pronounced now than they were earlier this year with the strengthening in the economy that seems to be suggested by some of the recent data. The main upside risk as I see it is that once we get past the inventory correction, assuming no unanticipated negative shocks, the economy could be operating at close to full capacity in a number of key industries and labor markets. In that kind of situation with a recession having been dodged, people may have an enhanced view of job security. If we were to get a situation like that, the favorable wage picture that we have been looking at in a period of relatively low unemployment could begin to dissipate. The recent upward adjustment in bond rates may be reflecting that kind of concern at least to some extent and maybe to a considerable extent.",860
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. As in the nation as a whole, the Eighth District has experienced some slowing relative to 1994. That was expected because the District economy had been growing faster than could be sustained. The District unemployment rate was 4.7 percent in June, holding at about a percentage point below the national figure. Recent reports show growth in personal incomes in District states centered in the 4 to 5 percent range. Job growth has continued, though at a slower pace. Conversations with our directors and other District business leaders indicate that the District is generally operating at a high level. In fact, forecasts of reduced auto production at the national level are not reflected in the Eighth District. The models produced in our District are popular, and the auto companies are expanding capacity. Third-quarter motor vehicle production is expected to be 3.6 percent above the level in the second quarter and 13.8 percent above the level in the third quarter of last year. Loan demand continues to be strong, and District banks have increased loan portfolios by about 15 percent over the last year. There has been an increase in the issuance of building permits, suggesting that the District is sharing in the nationwide rebound in the demand for housing. Many of the business people I have met have reported pockets of labor shortages, especially for entry-level workers but for some skilled workers as well. Nonetheless, as others have mentioned, the labor market information has been mixed. On the one hand, there have been some suggestions that wage pressures are continuing to build. On the other, there has been a moderate reduction of both overtime and employment of temporary workers. I remain concerned about the outlook for inflation and our inflation credibility. When I look at the pattern of inflation expectations--for example, there is a table on CPI inflation expectations in part II of the Greenbook that I think is quite interesting--I see that expectations for future inflation continue to exceed current inflation. Even the Administration's mid-session review of the 1996 budget assumes that consumer price inflation will continue in excess of 3 percent through the year 2005. This month the Blue Chip consensus reported expectations that the CPI would rise 3.3 percent at an annual rate in the third quarter, 3.4 percent in the fourth quarter, and 3.4 percent in 1996, fourth quarter over fourth quarter. It is clear that the prevalent view is that inflation will continue in the 3 to 4 percent range, which is less optimistic than the view expressed by the staff. Even the lower bound of a 3 to 4 percent inflation range is certainly not price stability as I see it. I am also worried that we, as well as the financial press and others, are focusing too much on news reports about real economic activity. By continually focusing on labor market reports, factory orders, consumer sentiment surveys, and other real series, we undermine our position that the best policy to promote long-term growth and full employment is to achieve and maintain price stability. Our words lose their force when we act on uncertain news about real activity in the presence of expectations for inflation as high as they are. The decline in bond prices since July 6, which Al mentioned a minute ago, indicates that not everyone expects that the modest acceleration in inflation that has occurred this past year will be capped and that inflation will turn down. All said, I am concerned about actual inflation and the high level of inflation expectations that are embedded in forecasts and in longer-term interest rates.",704
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"A general characterization of the District economy, I would say, is the feeling that it is as good as it gets. Certainly for the state of Ohio and for the part of Kentucky in our District, people would say that these are the best times that anyone can recall, and they would have a hard time imagining it improving over that. That would not be the case in western Pennsylvania where we have a number of counties that are still considered to have high unemployment and sluggish growth. But I think the sense of optimism and confidence about the future is really extraordinary. Yet, I don't see it being accompanied by the kind of imbalances or any kind of excesses or speculation that would worry me. The mood I get from our small business advisory council, our small bank advisory council, our board of directors, and the business people that I talk to is one of a calm confidence that this is sustainable. Near term, Cleveland in particular is looking forward to the Rock and Roll Hall of Fame opening on Labor Day. They consider it to be a bigger event than the Atlanta Olympics [Laughter] followed very shortly by the all-Ohio World Series. [Laughter] We have been sold out of baseball seats for over a month now; it is really extraordinary.",251
-fomc-corpus,1995,We take exception to the idea of an all-Ohio World Series. [Laughter],18
-fomc-corpus,1995,"The industry- and sector-specific comments that we hear would not be significantly different from what Mike Moskow is reporting from the Great Lakes region. So, I am not going to go through them. But I will relay a couple of anecdotal reports of note related to motor vehicles and specifically trucks. One director commented that he had seen a very welcome reduction in the amount of overtime. With some relief, the companies--auto suppliers and assemblers--feel that they will have fewer problems with labor now that they are able to cut back on the amount of overtime. Talking to business people about their efforts at hiring, it has been very interesting to hear their comments about the lack of what they call unskilled workers and how much they are having to pay in order to attract unskilled people for entry-level positions. One company that makes rubber products related to motor vehicles said that the nice thing about today's technology is that they can hire people who don't know anything at all and still afford to pay them $8 an hour even though they are unskilled in his view. This says that there is something about the productivity of these people that is not consistent with usual notions about productivity. If he thinks they have no skills and yet they are worth $8 an hour because of technology, that is a different way of thinking about what the labor market is contributing. One of our small business people in the Columbus area said that people who are not working today in that area are people who don't want to work. Bonuses are being paid and firms are competing for unskilled or trainable workers. Another general comment from directors and advisory people is how much they are spending on training and how they achieve better results by competing for workers by offering training programs rather than by raising benefits or bidding up the wage structure. With regard to health care, some of our directors in that industry--including health goods and other health-related activities such as a managed care company in the Dayton area that is adding new members at double-digit rates--describe an industry that is so grossly mismanaged that any organization, even one like the Post Office, could improve the administration of hospitals and clinics. I asked them how long the opportunities for improvement can go on, and they said the introduction of better administration and technology could take until well into the next century. Turning to the national economy, the productivity numbers that we see have interested me for some time. Early this year or late last year, I saw Board staff projections of productivity that I thought were simply too low. But since I also don't think that the output numbers mean much, it's hard for me to get too concerned about the productivity numbers. The fact that those numbers are consistently coming in so much stronger than people expected may tell us something about the different nature of this expansion. That is, it is not a demand-led expansion fostered by monetary and fiscal stimulus, but rather it is the dividend from a gradual improvement in the credibility of our commitment to price stability so that people are putting more into those things that improve efficiency or what we would call productivity. To test that idea, I have been asking directors and advisory council members whether, if they were told that they could not increase their prices for the rest of this century, the cost increases they would have to incur--labor, benefits, raw materials, and so on--would put them out of business. Almost all say, yes, we can make it. But some go so far as to say that such a price outlook is the reality. said that he is operating above capacity but he has not had a price increase in two years. I asked him why he didn't raise his prices. He said it is impossible to do so; he can rely on rising productivity. He is increasing his work force and training it, and he is adding technology. I believe we have made a lot of progress on what I think of as the issue of inflation--people's ability to compensate for cost increases without raising output prices. We are seeing the benefits of that in rising standards of living.",810
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The District economy remains healthy and activity generally has picked up over the summer. That pickup has been reasonably widespread across industries and regions of the District. There have been some further gains in employment. At the same time, labor does remain in relatively scarce supply. That combination is interesting because it still has not translated into anything resembling a broad-based-acceleration of wages or even growing wage pressures. One interesting anecdote bearing on this--and I would not argue that this is a widespread development at this point--came from a fairly large employer in our District who indicated that he was having a lot of trouble finding workers. He said he has gone to outsourcing some of his back office activities; he has contracted with a firm in Maine to do some of this work. Apparently, labor is more readily available there and he can get the work done at a reasonable rate. As I said, I am not suggesting that such outsourcing is widespread, but we may see more of it as time goes on. One exception to this general picture of economic health is the livestock industry; a second is manufacturing. For whatever reason, manufacturers in our District feel business is soft and they are not optimistic. They believe they are going to be cutting output further for some time. I think that's a reasonable generalization of their views. With regard to the national economy, I am certainly in general agreement with the contours of the Greenbook foreast. The major surprise to me has been that things seem to be working out so well, and certainly a bit better than I might have expected a month or two ago. I think we are moving toward a foundation for a resumption of sound economic growth. I anticipate that wage and price pressures will remain relatively restrained. That is based in part on what I see going on in the economy in terms of the difficulty of raising prices and the reluctance to raise wages or other forms of compensation. I don't see anything that is going to come along soon to disturb that. So, I think we are in pretty good shape.",413
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Mr. Chairman, I want to take up Governor Blinder's question and Dave Stockton's answer regarding the risks in fiscal policy. This should not surprise you at all because fiscal policy is what I have talked about all year. I would like to start off with two observations. The first has to do with the level of deficit reduction we are talking about. Now, there are a lot of ways of looking at budgets, and the word baseline has a lot of meanings. I like to think of baseline as being what we would be spending if we adjusted for inflation and demographic changes without changing the law. That number is $20 billion higher than the baseline that the staff is using. So, when the Greenbook refers to a $30 billion deficit reduction from the baseline, we are really talking about a $50 billion reduction from what I think of as a current services baseline. When we talk about the House and Senate budget resolutions, which have a $50 billion budget deficit reduction, we are really talking about a $70 billion reduction. These are numbers that we have to keep in mind because we are talking about more ""real"" money than we might think, to use Senator Dirksen's phrase. Second, when we look back at this, I think we are going to be happy that the second-quarter pause happened in the second quarter and not in the fourth quarter or the first quarter of 1996 because I think the fiscal contraction we are going to have coupled with random events such as an inventory correction, if those happen coincidentally, would lead to much worse problems than we thought. I agree with Dave Stockton that we don't have any particular expertise on the fiscal side. I don't think anyone has any real insight into how this process is going to work out. But I decided to be cynical about it. I decided that our elected representatives may have something on their minds other than purely the national interest. So I talked to pollsters and political advisers of both parties, actually most of them are independent. I asked them for some poll numbers so that you could see exactly what they are seeing and you can make your judgments accordingly. The first thing you hear when talking to anyone is the importance of Perot voters. One only had to watch the parade to Dallas to understand how important they are. So, I am going to focus on Perot voters. They have been called the radical center--I don't know if that's the right phrase. Demographically, they are more middle class than most voters: 37 percent of them had incomes in the $40,000 to $80,000 range versus 28 percent for all voters. They are also less religious than other voters; 47 percent admitted not going to church at least monthly versus 38 percent of all other voters, and the percent of voters that go weekly was well below that for the general public. Those are important characteristics to keep in mind. They are also decidedly more anti-government than Republican voters, and this is where it becomes interesting. When asked if the federal government has too much power, Democrats thought yes, 63 to 24; Republicans said yes, 79 to 17; Perot voters replied yes, 88 to 9. A pre Ruby Ridge question was: Would you actively resist the government if you thought it was threatening your rights? ""Actively resist"" is a pretty strong phrase. Perot voters said yes, 57 to 34. Do you think the government is your partner or your opponent in your pursuit of the American dream? Perot voters said it was their opponent, 71 to 23. Does government hurt or help people like you? Democrats split about evenly. Republicans said ""hurt,"" 50 to 36, and Perot voters said ""hurt,"" 51 to 24. How about the welfare state? There were two choices: government is there to take care of people who can't take care of themselves; or groups like the Salvation Army and/or the United Way would do a better job. Democrats like the government, 48 to 39; Republicans like the private sector, 61 to 25; Perot voters like the private sector, 67 to 18. Do we even need the federal government to provide a social safety net? Democrats said yes, 53 to 33; Republicans said no, 60 to 36; Perot voters said no, 68 to 24. In all these questions, the Perot voters are to the right of the Republican voters. They are even more so in the case of regulations. Do regulations cause significant job losses? Perot voters agreed, 71 to 24, more than the Republicans. Does it increase the cost of things we buy? The Perot voters said yes, 83 to 12, more than among the Republicans. And this is something that maybe the Fed should keep in mind: How much trust do you have in regulators to act in the interest of most Americans? The split was a great deal or a fair amount versus not very much or none. Among Perot voters the largest category was none, and they were negative, 54 to 16. On the key spending issue of Medicare, the choice was: Would you want to tinker--to which most people said yes--leave it alone, or completely redesign. The public in general split 21/20 on leaving alone versus completely redesigning. Perot voters were for completely redesigning, 30 to 14. When given the choice of reforming Medicare to control costs or using money allocated for tax cuts for the rich to maintain the current Medicare system, they split 3 to 1 in favor of reform over using tax cuts for the rich. Those are the numbers that the Republicans in Congress in particular are focusing on since these voters are the ones that gave them the majority. Perot voters in 1992 split evenly among the parties; they went 2 to 1 for the Republicans in the last election. The first conclusion of the pollsters and analysts is that the Republicans think they have to deliver on budget cuts to keep these voters. The second is that the decline in the Republican numbers since January is more a result of the budget-cutting process slowing down than their doing the wrong thing. Independents, for example, were asked whether Congress was stalling or going too fast. They said stalling, by 43 to 30. Third, GOP freshmen are by far the most Perot-like. Secretary Rubin spoke to the freshman class to try to talk them out of not approving the debt ceiling. He came away shocked; that was the word I was given. There are now 160 members of the House of Representatives who have signed their names to something that says they will not raise the debt ceiling unless there is a balanced budget resolution with it. People in both parties gave me a flat prediction that a debt ceiling bill will not pass the House of Representatives unless there is also a balanced budget resolution to go with it. Fourth, specific bureaucratic cuts are not going to be reduced. They are, as the numbers suggested, even more popular among Perot voters than among Republican voters. Finally, shutting down the government is perceived as posing very little risk. You might get a sense of that by looking at the vote on the bill to limit the authority to use the Exchange Stabilization Fund that the House passed by over 100 votes. The Democrats' constituency is best served by saying that there is no problem, and that is in fact the case. Remember, the Democrats we are talking about are the survivors and they don't need to go after the Perot voters. Gephardt says that there is no problem, for example, on Medicare and he is in fact angry that the President said there was. When you look at the Democratic voters, you get a sense that they really have to hold their base if they are going to be re-elected. For example, 47 percent of the attendees of the last Democratic national convention were government employees. The largest group of those were teachers. As a result there is an incentive not to cooperate in the process, which is going to be important both at the beginning and at the end. What we should expect in September, I was told by the pundits, is a series of filibusters in the Senate over the appropriations bills. If the Senate cannot act and we don't have appropriations bills, the President can blame the Congress, and that is the opening for him. I was told that one of the reasons for Bradley's defection was that he became so fed up with this mess. What Clinton is hoping to do is not so much get the Perot voters as to have them not like the Republicans. The way to do that is to have Congress not produce the appropriations bills, and that is the strategy. The path of least resistance, according to the party leaders I talk to, is to have something like the GOP level of budget cuts because they are not going to get anything else through the House. But to achieve presidential victories on issues such as abortion, where we already have seen some, especially if Medicare cuts are incorporated into the process, the President may have to compromise with the Republicans and get the Democrats in the Congress to go along. They would not. The final result may be that a bill will have a lot of difficulty passing because there is no bipartisan support for a compromise. The final caution in all this is that if a reconcilation bill is vetoed, all the deals that were cut in getting the appropriations process are nullified. You have to start the process all over again. A veto of the reconciliation bill probably means that it is going to take weeks and weeks and weeks and not a matter of hours or days to get a second deal through. All that makes me very depressed, but it seems to me that we are probably going to get much larger deficit reductions in the form of spending cuts than the Greenbook is calling for, and I think that should be a factor in our thinking.",2024
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The recently released data show no clear-cut trend in the Second District's economy. In the real estate sector, our contacts reported declines in existing home sales and home prices in the Greater New York City metropolitan area in July and August to date. In June, permits for construction of single-family houses in the District fell below year-ago levels for the fourth consecutive month. Unemployment rates rose in both New York and New Jersey in July, but the payroll reports were mixed. New Jersey reported moderate, broad-based job growth while New York reported a contraction reflecting a decline in government employment. On the more positive side, tax collection data suggested some underlying strength in personal income and retail sales. The considerable concern and pessimism regarding the international situation that I mentioned at the last Committee meeting has been lessened but only a little. It has been lessened slightly because the Japanese have made some rather modest steps to encourage economic growth and a more rational flow of capital from their financial institutions. Much more needs to be done, however. European growth is weak as demonstrated especially by recent German data. In our own hemisphere, the major countries--Mexico, Brazil, Argentina, and Canada--are working through very difficult macro-economic situations, and that is likely to continue. So, we need to continue to look at the United States domestic economy against the background of a rather weak international environment. I view the movements in exchange rates since our last meeting as positive in that the dollar was weaker than it needed to be to make the United States a very formidable exporter, and the strength of the Japanese yen was a major source of concern, then and now, about the basic financial stability of that country, especially its banking sector. But I think the present exchange rate levels, given the current fundamentals, are more rational and more likely to lead to economic growth in Japan and Germany. And as I said earlier, I believe the United States dollar is still at a level that makes us quite attractive. I think that all or most of these exchange rate moves would have happened if we had not intervened. As Peter Fisher and others have suggested, the success of the intervention had a great deal to do with the fact that the market was moving in that direction anyway. You never know whether all of this would have happened if we had just stayed home and relaxed, but it is important that we not get confused into thinking that we can have exchange rates where we would like them to be rather than where market forces say they will be. I certainly support the Chairman's wish to have everybody decide that it is nice that we were successful; we were lucky three times; and now let's cool it. Domestically, we think, as all of you have suggested, that the economy is bouncing back very much along the lines that we and others have been forecasting for the last several months. We think the downside risk has been reduced considerably and that the risks to the forecast are now rather well balanced. Signs of strength: Single-family housing starts are up 11 percent in May and June; nonauto retail sales are strong; consumer confidence is strong; and the stock market is quite robust. On the other hand, auto sales are weak and, as has been suggested, could continue to have an adverse effect on the economy in the fourth quarter. Employment is growing but not very strongly. Our forecast and the Greenbook's are very similar in terms of real GDP and the unemployment rate. We are slightly less sanguine on inflation but just slightly less. We had been considerably more concerned or at least we had a higher forecast of inflation than did the Greenbook until now; we have been revising our inflation forecast down. I think it's easy to get confused about how much better the price data look because used car prices early in the year pushed core inflation higher than it should have been and are now making core inflation look a little too good. If you take car prices out of core inflation, it slows from around 3-1/2 percent in the first quarter to about 3 percent in July.",818
-fomc-corpus,1995,Used cars only or total?,6
-fomc-corpus,1995,"Prices for both. I really applaud the approach of the Greenbook. I think we have to be careful, especially in New York, not to fight the tape and to accept the fact that price performance is in fact better than we had thought it would be. On the other hand, it's a little early to declare victory, and therefore I applaud the decision of the authors of the Greenbook not to say that the NAIRU is coming down from the 5.9 percent level. I think it would be very nice if we could conclude sometime in the future that that has happened, but I believe it is smart not to reach that conclusion quite yet. Thank you.",135
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. There is no doubt that the Greenbook is not exactly correct. It never is; it can't be and it's not expected to be. But that said, I think the staff did an exceptionally good job this time around in assessing what I see as a very tricky period. I find the economy that they project to be highly credible. I also think that it's a very acceptable one at this time but not permanently. By not permanently I mean that over the longer term we still have to keep the inflation rate on a secular downward path. We are not at price level stability yet, and we are still determined to get there. What do I mean by acceptable at this time? Well, I think there are many very big questions out there whose answers are going to have to unfold over the coming months. Virtually every one on my list has been discussed this morning, and it's rather awesome. After all the rhetoric runs its course, what is really going to be the deficit reduction that we are going to have to deal with? Second, has the NAIRU changed and if so by how much? Third, have productivity trends really improved as many think? If we are on a higher trend, how much higher and is it a sustainable one? Fourth, a lot of the good results that we are getting now, I don't know how much, has to do with the so-called traumatized worker. How long is the American workforce going to remain quiescent without the compensation increases that it thinks it should get? When employment is as strong as it is right now, I don't think we can depend on having permanently favorable results in that area. This has been a rather big key to the present happy macro situation where we have a high capacity utilization rate and a relatively low inflation rate. We all feel rather good about that. Fifth, will households continue to take on more debt? That obviously is the key to consumer spending. Consumer debt is rising again toward its all-time high of several years ago. We all know that in many past years we had a much lower level of consumer debt than we are carrying now. One has to wonder if people are going to want to return, at least partially, to those standards of prior years. Then, of course, there is the matter of whether or not we are overstating inflation and if so by how much. That was a very interesting but not particularly critical question when we were at higher levels of inflation, but as we begin to move into the zone that could be considered price level stability, that question starts to become very important indeed. The answers to all these questions, and more I am sure, are going to have everything to do with shaping monetary policy as we go along into the future. How is it going to shape up? I certainly don't know, but the point is that for now it seems to me that we have a good balance in the economy and we are moving toward an appropriate degree of momentum. That puts us in good shape to await the unfolding answers to some of these critical questions and in a pretty good position, I would hope, to be able to react appropriately as those answers start to become available.",641
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The inventory correction appears to be running its course and the adverse follow-on effects that we talked about at the last meeting do not appear to be about to beset us. The economy could well be set to resume its growth path at potential. Many of the areas of strength in the economy have been mentioned. Both consumer and business spending have resumed. The housing market has shown some renewed vigor. Employment still is fairly strong, although the unemployment rate did tick up last month and there has been some discussion about the volatility of the participation rates. The wealth effects of a stronger stock market may support continued spending. The flip side of a strong stock market is that we have a fairly low cost of capital, and that bodes well for continued investment spending. Corporate profits have been holding up reasonably well, and there appears to be a continued commitment to improvement in productivity. In view of this rather optimistic scenario, I have been trying to assess the downside risks, the clouds and uncertainties on the horizon. Larry has talked extensively about the fiscal impact on the economy of dealing with the deficit, particularly since it appears that there is considerable interest in seriously addressing it this fall. It's very hard to know what, if any, effects there will be from a train wreck. I think we'll see a lot of national attention focused on Washington as we approach the November showdown. There also has been considerable discussion today about the labor market. Although the unemployment rate is historically low, it is difficult to assess the longer-term impacts of the re-engineering binge that has been going on in the private sector and in some parts of the public sector. A lot of displaced people are now employed, but they may see their new jobs as temporary. On the positive side, this does suggest that there may be more flexibility in the labor market than is implied by the 5.7 percent unemployment rate. This may help explain the dichotomy that we seem to be seeing between labor shortages and the fact that there don't seem to be many upward wage pressures. This uncertainty in the labor market or lack of confidence among workers may well contribute to consumer spending vulnerability. This vulnerability may be exacerbated by the fact that a lot of consumers have taken on more debt in the last year and a half. On the supply side, the auto market may not provide the same kind of growth impetus that it has in the past. We have heard some mixed reports around the table today about the auto market. Pent-up demand has probably been worked off. The ownership holding period for autos appears to be longer. Some of that is due to the improved durability of autos, but it also may be simply that people can't afford the higher sticker prices. Income constraints may start to hold down auto sales in the future and not provide the same kind of impulse that we have had in the past. Of course, foreign competition may become more of a factor as the impact of the dollar is felt. On the inflation side, I do think that most of the recent data are supportive of the hypothesis advanced at the last meeting that the uptick in the first half of the year was really due to temporary cyclical pressures. It is somewhat discouraging that the outlook for inflation still seems to be in the vicinity of 3 percent, indicating that we have some distance to go. In sum, the economic reports that have come in since the last meeting have been encouraging. The inventory correction appears to have been more the proverbial air pocket on the way to the soft landing. The financial markets seem reasonably consistent with this outlook. The stock market has paused but it didn't tank. The slope of the yield curve has steepened, implying that the risk of recession is somewhat less. Yield spreads have not widened, implying that there may be some lessening of concerns about asset quality in the markets. Credit demand appears reasonably strong. So, it seems to me that a growth outlook reasonably close to potential is quite likely and that the risks are more balanced.",796
-fomc-corpus,1995,Thank you. Governor Blinder.,7
-fomc-corpus,1995,"Thank you, Mr. Chairman. After all the praise that the staff forecast has received, I am tempted to start by saying that I think they have it all wrong. But I don't actually, so I won't. I don't have any major quarrels with the Greenbook. I could differ with it a little bit here and there, but those differences are too small to bother anybody with. Like many people, starting with Dave Stockton, I am troubled by the fact that it's a bit too good to be true. We know it's not going to come in quite that well, but that is in no sense a criticism of the forecast; you make your best guess. A notable feature of the Greenbook forecast exercise, which various people have indirectly remarked upon but I'd like to make explicit, is that we have been seeing a successive writing down of the staff forecast as I have observed at past meetings. That has now stopped. I think the staff has stopped writing down its forecast, as I have, for good reasons. Bob Parry mentioned several of them, and I won't repeat what he said about the composition of the GDP in the second quarter; that's much more important than the tea leaves that we get from week to week. However, as you could probably tell from the question that I posed to Dave, I have some fear that all of us are going to be revising our forecasts down again after the fiscal dust settles, whenever it settles. We don't know what the dust is going to look like, and we don't know when it is going to settle. But when I think about the various scenarios, I have a much harder time thinking about the economy coming out better at the end, or in the middle, of the process than I do about it coming out worse. I just find it extremely difficult to conceptualize a scenario that takes us through this train wreck and has us coming out on the other side with stronger aggregate demand than we had when we went in. There are two reasons for that. One is the aggregate demand effect, which Larry Lindsey was emphasizing. But we also ought not to forget about the potential impact of this thing, whatever it is, on financial markets. The foreign exchange markets, the domestic bond market, and the stock market could truly be rattled by this event. Now, of course, none of us can predict what is going to happen. I am just emphasizing this because I think it now ought to be at the front of our screens, not at the back. Two or three FOMC meetings ago it was at the back of our screens, and now I think it really needs to be at the front. The last thing I'd like to call attention to is a subtle, barely noticeable, feature of the Greenbook forecast. You have to look closely to see it. But I think it's important for the long run--not at all important for the short run--and also sensible. In this forecast, there is a small GDP gap at the forecast horizon, which happens to be the fourth quarter of 1996. GDP is below potential by just a hair more than it is now, according to the staff's estimates. It's not a very big gap, about .4 percent of GDP. That's a small number, much less than forecasting errors for a six-quarter horizon. But it's also about twice the estimate of the overshoot of capacity that we had at the end of 1994 and the beginning of 1995, which was minute. Much more important for the long run--and the reason I bring it up--is that, if we look at the details of the forecast, that gap is slowly widening over time. That is to say, GDP is growing just a tad below potential. If we extrapolated that path into 1997 and 1998--after all, year-end 1996 is a very short time horizon for monetary policy--we would be looking at a path with a slight upward tilt to the unemployment rate and a slight downward tilt to the inflation rate, neither of which is showing yet in the Greenbook forecast. They go together, of course. I said I thought this was a sensible, though very subtle, feature of the forecast. It's exactly what one would expect if the real interest rate is above the equilibrium real interest rate--which, I think, is what we believed at the last FOMC meeting and what I still believe. If that is the case, the gap between potential and actual GDP, or between the natural rate and the unemployment rate, or between 3 percent and the inflation rate, will grow bigger as we go forward--and at an accelerating rate since this thing feeds on itself. Finally, I think there is a reasonable probability that the gap between the equilibrium rate and the real short-term interest rate implied in the Greenbook path is bigger than in the Greenbook forecast for two reasons, both of which have been mentioned. One is that the fiscal contraction is bigger than in the Greenbook path and that lowers the equilibrium rate. The other is the possibility that the NAIRU is actually below the number that is being used in the Greenbook, as has been mentioned several times. We don't know that that is the case. Dave is absolutely right; I was quite happy with the way he characterized it. But I think the odds that the NAIRU is higher than the staff number look extremely small compared to the odds that it is lower. If that's the case, the divergence between the equilibrium real rate and the actual real rate will grow faster than an extrapolation of the Greenbook would presume. Thank you.",1128
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. I think the news that has accumulated during the intermeeting period is almost entirely favorable with respect to the outlook, both for real performance and for inflation over the forecast horizon. While I, too, would like to find a reason to disagree with the Greenbook, I find myself in substantial agreement with the Greenbook's assessment of the data. Most important to my way of thinking is that we now have mounting evidence that the inventory adjustment under way is proceeding more rapidly and with substantially less disruption of growth in final sales than I had been fearing. The continued strength of consumption and investment spending in the face of the inventory adjustment, coupled with strong evidence of a rebound in residential construction, substantially mitigates what I had thought was one of the most serious downside risks. At this stage, as David emphasized, substantial risks to the outlook for real growth remain, but I agree that they are much more balanced than they seemed to me in July. As David also indicated, it's possible to argue that there remains enough momentum in aggregate demand to potentially rekindle inflationary pressures. In that regard, I would simply point out that we have had a significant backup in interest rates since our last meeting, coupled with a significant appreciation of the dollar. I think that those two forces are working to restrain this upside risk. At our last meeting, Mr. Chairman, you argued that the present level of the real funds rate is above the neutral or equilibrium level that is needed for stable growth with a continuing secular downtrend in the rate of inflation. The Bluebook for the July meeting reinforced the conclusion that, particularly with projected fiscal contraction, this neutral real funds rate would be declining gradually over time. I certainly agreed with that conclusion then and I continue, as Governor Blinder emphasized, to think that eventually the real funds rate is going to need to decline to keep the economy on track beyond the forecast horizon. I agree with Governor Blinder's explanation that if we were to go beyond the six quarters in the Greenbook, we would see initially a mild shortfall in growth below what is needed to keep the economy operating at potential and then the gap would begin to widen. It's in that sense that a decline in the real funds rate is eventually going to be needed to keep the economy on track. Nevertheless, over the forecast horizon I think that the outlook has definitely improved. On the inflation front, the news has also been quite favorable. Recent readings on producer and consumer prices along with the appreciation of the dollar have lessened the concern that the uptick in inflation that we saw in the first half of the year could presage a higher inflation trend. And as David Stockton emphasized, the continued moderation in the growth of benefit costs and compensation is a favorable factor in the inflation outlook. It may be too soon to break out the champagne, but it seems quite likely to me that we will succeed in capping the inflation rate in this cycle and preserving the gains that have been made on the inflation front in the 1991 recession and the ensuing recovery.",612
-fomc-corpus,1995,Thank you. I assume we have coffee available at this stage.,13
-fomc-corpus,1995,It's available.,3
-fomc-corpus,1995,"Mr. Kohn, you have the floor.",10
-fomc-corpus,1995,"Thank you, Mr. Chairman. As it turns out, my comments begin where the last two commentors left off. I'll be organizing my comments this morning around the real federal funds rate. [Statement--see Appendix.]",44
-fomc-corpus,1995,Is there a particular reason why you use a one-year forward expectation of the price index deflator with overnight funds?,23
-fomc-corpus,1995,"First of all, I don't know what the overnight inflation expectation is. To make a guess about inflation over the short run, it's pretty reasonable to assume that people would look at inflation in the recent past, so we use a one-year backward-looking inflation measure. It does not give a significantly different result from the Philadelphia Fed's one-year ahead inflation measure. We don't have any shorter measure of inflation expectations. I do think that if folks are trying to guess at what inflation is going to be over the next few months, those guesses are not all that different from their guesses about inflation over the next year or what inflation was over the last year. But I'd be the first to admit that our measures of expectations are highly imperfect. I took a little comfort from the fact that both the backward-looking and the forward-looking measures gave roughly the same answers, though I think the forward-looking measures are--",178
-fomc-corpus,1995,"Except now, if you use a two- or three-month moving average, won't you get virtually a full percentage point higher?",25
-fomc-corpus,1995,A full percentage point? I guess if you use the three-month moving average.,16
-fomc-corpus,1995,What has the inflation rate been in the last three months?,12
-fomc-corpus,1995,I would say 2-3/4 percent if I were going to guess. This has 3.1 percent built in. I am using the last 12 months.,36
-fomc-corpus,1995,"I understand that. You are not using the core rate; you are using the total CPI, is that right?",23
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,The total CPI has averaged about .2 a month for the last three months.,16
-fomc-corpus,1995,"That's closer to a 2-1/2 percent rate, so it would be about 1/2 point perhaps.",25
-fomc-corpus,1995,Any other questions for Don?,6
-fomc-corpus,1995,"Suppose your objective was to maintain nominal GDP in calendar 1996, and suppose on November 7th we got protracted, torturous messes on Capitol Hill and in the bond market. Suppose we got a contraction of government spending somewhere around 3/4 percent of GDP, and again it was messy in the bond market. Which would be more effective as far as influencing nominal GDP in 1996: to have a sharp cut in the fed funds rate at that time or to have gradual reductions leading up to it?",107
-fomc-corpus,1995,The premise of the question is that somehow on a given day you knew the size of the shock and it was huge relative to GDP. So there was no uncertainty going forward about how long the shock would persist and what its size would be.,48
-fomc-corpus,1995,The issue is resolved on that date.,8
-fomc-corpus,1995,"My first thought is that if the issue is resolved, you know what the resolution is and where things are going, and everybody else knows--this isn't some inside information the Fed has--I don't know why you wouldn't reduce your rates right away rather than gradually. I'm not sure I see the advantage of gradualism in the case of an identified shock whose effects I am quite confident that I know, provided that the rest of the world sees the situation the same way so they don't misinterpret your policy actions. Governor Blinder was shaking his head ""no.""",111
-fomc-corpus,1995,"I thought the question was whether to move in advance. Isn't that what you just said, Larry? You got the right answer but not to the question that you asked. [Laughter]",38
-fomc-corpus,1995,If I knew now that this was going to happen--is that the question?,16
-fomc-corpus,1995,"If you knew now that this was going to happen and the objective was the same. Maybe, Governor Blinder, you can help me out in phrasing my question. You are right; I don't think Don answered my question.",46
-fomc-corpus,1995,Am I grading these papers? [Laughter],10
-fomc-corpus,1995,"No, I'd rather he grade the papers. If that was what was going to happen, would it be more useful to wait until the event and have a sharp reduction on that day or to have a reduction sooner than the event?",46
-fomc-corpus,1995,If I knew what was going to happen but the markets didn't?,13
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"That's the key because, as I think Mr. Simpson demonstrated last time, if the markets know what will happen they will take bond yields down and that acts basically as an automatic stabilizer. It doesn't matter quite so much how the Fed validates it. Eventually you have to validate it, but the timing of our moves is not so important. If you knew today that there was going to be a major contraction beginning on November 7th, you would have to proceed somewhat gingerly because there would be a problem if the markets didn't know it. They wouldn't know how to interpret what you were doing even if you stated what you were doing. If they didn't believe you, there could be a potentially adverse effect on inflation expectations or a lot of confusion and volatility in the markets. So, you have set up a very difficult problem where the central bank does have inside information, while the rest of the economy doesn't have it and might or might not believe the central bank if it provided that inside information. So, I think you would have to proceed very cautiously in that kind of situation.",216
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Just a quick comment and a quick question. The comment is that I noticed some changes in the way the Bluebook was constructed and the way you presented some of the information, which I thought was useful and constructive, Don. The question I had: We have had a significant backup in long-term interest rates over the intermeeting period, 35 basis points at the long end of the yield curve. There wasn't a whole lot of discussion about that. I interpret that backup as being in part, and maybe largely, a change in inflation expectations and psychology in the market, albeit a short-term one. It's hard for me to see how real rates would move that quickly. Much of this took place in a very short period of time--shortly after the data began to come in stronger. Do you see it that way?",165
-fomc-corpus,1995,"I would say, President Broaddus, that I see it as much more of a mixture, perhaps with a little more emphasis on the real rates but not exclusively the real rates. That is, I think the information that hit us and the market over the intermeeting period was that real growth was stronger at those old interest rates than we had been expecting. In classroom jargon, the IS curve was out a bit further than we thought. That to me would suggest that in fact real interest rates need to be higher over the business cycle to keep the economy at its potential. If you look at the pattern of forward rates, a lot of the bulge in forward rates over the intermeeting period is at business cycle frequencies of three, four, five years. At the same time, I think we probably can never settle this because we don't have inflation-indexed bonds. Given that the economy was stronger, I think it's logical that inflation expectations might have been revised up at least a little, but I would put much more emphasis on the real side than on inflation expectations.",214
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Don, first of all I wanted to comment that I really appreciated the remarks you made with respect to the Bluebook. I must say that I read the discussion of real rates in the Bluebook and got a headache! I think what really both red me about it is that I view real rates, like any other real variables, as something we can't influence in the long run as well as something that we can't observe. So we are describing policy actions in terms of something we can't affect and something we can't see. That's why I got the headache. Now, there is an easy solution to that: get inflation down to zero, keep it there, and we won't have to worry about it. We have just cut short rates 25 basis points and have seen long-term nominal rates go up 35 to 40 basis points. In that light I was going to note, particularly with regard to a policy option such as alternative A, that it is incomprehensible to me that we somehow could cut short rates again based on our forecast of inflation, which the market doesn't know about, and keep real interest rates in general from rising, let alone foster lower real rates. This is very similar to the example you were giving in response to Larry's question. The Greenbook inflation forecast is not supported by most other forecasts and many surveys of longer-term expectations. Real rates, as you suggested in your remarks, are a helpful thing to look at over longer periods of time, but I don't know what to make of the analysis of a short-run policy option based on what would happen to real rates, particularly to real rates across the yield curve.",328
-fomc-corpus,1995,"I don't think I can help your headache. [Laughter] I can try to explain what I was thinking about. I think that the Federal Reserve can affect real rates by changing the federal funds rate, real and nominal, since the two are about the same because inflation expectations don't change in the near term. I think expectations about what the Fed will do with interest rates do have an effect on real rates, at least through the intermediate part of the term structure. I believe that's the primary channel of Federal Reserve policy to the economy. In 1979, 1980, 1981 this institution raised real rates to very, very high levels and had a major effect on economic activity. Those real rates rose at short- and long-term maturities in order to put slack in the economy and reduce inflation. So, I think the Federal Reserve can affect real rates, at least over a business cycle. I agree that in the long run productivity and thrift determine the long-run real interest rate. The premise of our meeting here and making policy changes is that in the short run we can affect real rates and lean against business cycles. Perhaps we don't do a perfect job all the time, but I think the evidence of the last 15 years shows that we have done a pretty good job on at least a few occasions in smoothing through these cycles by changing real rates. With regard to alternative A, I believe that if you were to lower the nominal funds rate, you would have an effect on real interest rates at least through the intermediate-maturity spectrum. People would change their idea of what this Committee was going to do with interest rates. What would happen to nominal rates is a bigger question and one that we debated amongst ourselves in writing that particular paragraph. That is, if our policy was not credible, if people thought that lowering these interest rates would simply provoke more inflation, then nominal intermediate- and long-term rates might very well do nothing, in which case the inflation expectations part would rise even though the real rate was lower, or these nominal rates might even rise. My view in the end was that the FOMC has a lot of credibility and that if the Committee lowered rates and in particular if you said that you lowered rates because you had an optimistic view on inflation, that would carry some weight in the market at least for a while. If I remember the paragraph, it would only be if the incoming data failed to confirm the Committee's expectations that rates would then back up. But I agree it's entirely a guess as to where inflation expectations will come out if you do that.",518
-fomc-corpus,1995,I thought it particularly difficult in the context of our most recent experience to make that argument. Let me just leave it there.,25
-fomc-corpus,1995,"Tom, there is no question that you are right on the longer-term rate spectrum, but if hypothetically we just squeezed reserves out of the system, two things would happen: The nominal rate would go up and the inflation rate would go down, and the real rate would have to go up. But I think that is not true in the longer run, which is where we can't affect it.",79
-fomc-corpus,1995,It's not true in the longer run. I get troubled when we start extending that out the yield curve and making judgments as to how it affects the long end of the curve.,35
-fomc-corpus,1995,"I think it is not true in the long run, and it is not true in a long-term forecast of the real funds rate, if I may put it that way. But for a short-term forecast of the real funds rate, I think Don is exactly right on that.",56
-fomc-corpus,1995,"In terms of the funds rate, yes. What troubles me is going out the yield curve and making a general application.",24
-fomc-corpus,1995,"Or a long-term projection of the real overnight rate--in other words, what the funds rate is going to be three years or ten years from now.",31
-fomc-corpus,1995,Sure.,2
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Don, I want to ask you a question that came up when I scribbled my notes last night, notes which were much less extensive than yours. I was thinking about the difference between the real Treasury bill rate, or any interest rate that really matters to somebody, and the real fed funds rate, which doesn't matter to anybody but us and a few banks that trade fed funds. If I am not mistaken, when we looked at this a while back, it was somewhat puzzling that nominal fed funds rates were higher than Treasury bill rates on average over long periods of time. Is that right?",119
-fomc-corpus,1995,"Yes, but there are two differences. One is the taxation. Treasury bills aren't subject to state income tax. People often use a New York resident as the marginal holder, so it's a nontrivial tax rate like 10 percent. The second point is that one is the obligation of someone who hasn't defaulted--at least until a few weeks from now--and the other is a private rate. There is a different risk premium.",87
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Different risk?,3
-fomc-corpus,1995,Sure.,2
-fomc-corpus,1995,"Yes, but that goes the other way.",9
-fomc-corpus,1995,No.,2
-fomc-corpus,1995,Fed funds rates are higher than bill rates because banks are riskier than the government.,17
-fomc-corpus,1995,I am sorry. Am I right that the average gap over a very long time is in the range of 75 basis points with fed funds higher?,30
-fomc-corpus,1995,That's too high.,4
-fomc-corpus,1995,That sounds too high to me as well. Dave is saying 50 basis points. In the Financial Indicators package there is a one-year real funds rate; I don't know whether that's helpful in terms of the point you are getting at.,47
-fomc-corpus,1995,He's talking about the two nominal effective yield curves?,10
-fomc-corpus,1995,Yes. The difference is about 30 basis points now and it looks like the average may be about 50 to 75 basis points. It was low for a long time.,36
-fomc-corpus,1995,"What I was getting at is this: On the question of the real rate relative to historic averages, I think you get a little stronger case that it's on the high side if you look at, say, Treasury bills.",44
-fomc-corpus,1995,Treasury bills?,4
-fomc-corpus,1995,I think that's more correct than if you look at funds.,12
-fomc-corpus,1995,I will have it plotted and distributed to the Committee.,11
-fomc-corpus,1995,"Anything else? At the last meeting and at the Humphrey-Hawkins testimony, as Governor Yellen suggested, I indicated that the maximum risk of a short-term recession was probably past. Indeed, the data that have emerged since then have increased the probability that the risks of recession have eased. A significant part of this is unquestionably the fact that we are not seeing a weakening in final demand despite all the evidence that clearly points to a far more rapid pace of inventory adjustment than we had contemplated at the last meeting. The lead times are continuing to fall and the inventory adjustment process is still going on. It may be a bit premature to presume that the adjustment is complete at this stage or approaching completion. There is no question that we are beginning to see order patterns that are stabilizing, but the adjustment has been too quick and the timeframe too short for us to believe that we are through it as yet. I would not be surprised to see industrial production sagging for a number of weeks or a month or so before we work our way through this. Nonetheless, I think the evidence clearly is emerging that the underlying structural weakness that concerned us is dissipating. The evidence of much stronger growth in output is lacking but, as I think Dave Stockton said, the probabilities of that occurring have gone up. Indeed, while the anecdotal evidence around this room has pointed with surprising unanimity to a pause, the Districts are doing better now as we go from one to another than they were three months ago. I think that probably reflects the fact that the economy is coming back and growing at a faster pace, but real pressure on the up side seems a good distance away, judging from all of the numbers we have at this particular stage. When we look at the individual company data and the anecdotal data on orders, it is clear that conditions are improving overall, but it is a mixed bag. It is not the straightforward universal strength that the economy exhibited in the latter part of 1994. Whatever forecast we are looking at, I think a smooth pattern is not going to be the actual outcome. Our forecasts are going to be tested by the fiscal crunch we are all talking about. It is not self-evident to me that the crunch will involve a major contraction in federal spending. I think there are two sides to this issue. First of all, it is pretty obvious that if the debt limit blocks spending--and indeed, as Larry Lindsey said, the chance of getting a debt limit extension through the House without a balanced budget in place is very small--we will have a dramatic shutting down of the government. I am inclined to the view that, when push comes to shove, we are going to get consecutive one-week extensions of the debt limit rather than allowing it to push the economy down. And the ambiguity with respect to the question of how appropriated but unspent funds are employed in various authorization bills, when there is indeed no authorization for the period after September 30, leads me to conclude that the rate of reduction in discretionary spending will be modest in the short term. We will get very significant cutbacks in certain budgets, but overall, if entitlement spending continues as indeed it does in this particular context, the contraction in spending will be modest in the early stages. It would be severe if a debt limit is allowed to go into effect. If in this process we end up with a very sharp reduction in federal spending, the fiscal drag issue will arise, especially if it is presumed that the decline in expenditures will be temporary. Under those conditions we will not get offsetting pressure from falling long-term yields, but we will get a contractionary effect from a reduction in incomes. That will require very difficult policy judgments on our part because I don't recall any historical precedent telling us how all this works. It may well be that everyone will see the decline in income as temporary and hence the saving rate will collapse but expenditures will not. Nominal GDP will stand up except for the effects of liquidity constraints, of which there have to be some. But there is no doubt that until we get a sense of that, we will not be quite sure where it will come out. There is also the distinct possibility--although hopefully at this stage it is a very small probability--that we will run into a situation in which the outlook is for materially less budget deficit reduction. If the outlook for substantial deficit reduction does not look as likely as it does now, markets are going to react very adversely. We will get a significant rise in long-term rates because very clearly there is sizable deficit reduction embodied in the long-term rate structure. If that were to happen, the stock market would come down very dramatically. Therefore, it is possible that this fiscal outlook can create negative real effects on the economy if the budget deficit reduction is too much or if it is too little. It is very difficult to know what the probability distribution looks like. The one thing that is clear is that the budget process is now moving forward to some form of crunch. It just is not conceivable at this stage, at least as I see it, that there can be a resolution before October 1st. I find it highly unlikely that continuing resolutions will simply be adopted as they have in the past. Some variations of continuing resolutions and debt limit extensions may occur, but they are surely not going to apply universally. That means that there will be some impact of an order of magnitude and a nature that I don't think we can get a sense of at this particular stage. We can judge that better after Labor Day as we begin to see whether in fact there are going to be filibusters on the appropriations bills in the Senate. If we don't get appropriations bills, we can be certain that we will not get majority votes for continuing resolutions. Therefore, there will be no budget and no legal authority to spend. In the Budget Act that was passed around five years ago, Congress narrowed very significantly the ability of the President to define threats to life and property as reasons to invoke expenditures to protect them. So, we have emerging an extraordinary set of events that belies the tranquility of the Greenbook forecast. It is not terribly clear precisely how the fourth quarter is going to come out. The one thing I am absolutely certain of is that it is not going to look like the Greenbook forecast. However, I would not know which numbers have a higher probability of being realized because I think that the Greenbook forecast may be the maximum likelihood estimate. But then who knows what the distribution looks like on each side of that forecast? I conclude from all of this that we don't know how the budget debate will be resolved. We will have another shot at it at our next FOMC meeting, which fortuitously occurs just before October 1st. I think we will know a good deal more about how things are evolving at that stage. As a consequence and in the context of our discussion in July, I agree with Don Kohn that the real federal funds rate is a good starting point to get a sense of where we are. Other things equal, that rate is probably somewhat higher than we are likely to want it to be somewhere down the track or over the longer run, with ""down the track"" being on the other side of the fiscal train wreck, to keep this analogy going. In the immediate period ahead, it strikes me that the general outlook is extraordinarily benevolent and one that I view at the moment as pointing to no change in policy. That is, ""B"" and symmetrical seems to me the most sensible approach until the next meeting. By the next meeting, I suspect that we are going to have to make a number of contingent decisions. I will be very surprised if we do not have several telephone conference calls in the month of October as this budget situation evolves because there will have to be coordination between the Treasury and ourselves to ascertain what is going on and to take measures that, to whatever extent possible, will mitigate the secondary consequences of this fiscal process that will loom ever larger as we move into the fourth quarter. Tom.",1623
-fomc-corpus,1995,"Mr. Chairman, I support your policy proposal.",10
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,I support your policy proposal.,6
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"As do I, Mr. Chairman.",8
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"As do I, Mr. Chairman.",8
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"As do I, Mr. Chairman.",8
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,I support your proposal.,5
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Ditto, Mr. Chairman.",7
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,The same.,3
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"I support it, Alan.",6
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,I support it as well.,6
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Me, too.",4
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,I agree.,3
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,I also.,3
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"I support your proposal, too.",7
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"I support it, Mr. Chairman.",8
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,So do I.,4
-fomc-corpus,1995,Have I run out of people? We'll have lunch earlier than usual! [Laughter],18
-fomc-corpus,1995,It's those sharks!,4
-fomc-corpus,1995,Why don't you read the relevant language?,8
-fomc-corpus,1995,"I'll be reading from page 14 in the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with more moderate growth in M2 and M3 over coming months.""",109
-fomc-corpus,1995,Call the roll.,4
-fomc-corpus,1995,Chairman Greenspan. Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,45
-fomc-corpus,1995,Our next meeting is on September 26 and I think we'll have a very interesting meeting. We adjourn for lunch.,24
-fomc-corpus,1995,Would somebody like to move approval of the minutes?,10
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,"Without objection. Mr. Fisher, please.",9
-fomc-corpus,1995,"Thank you. Before permitting myself to take advantage of the new high-tech toys in the ceiling and because of the number of topics I need to cover, I thought I would try to exhaust the potential of older technologies. Thus, you should find an outline of my remarks on the table in front of you together with a single page of colored charts. [Statement--see Appendix.]",75
-fomc-corpus,1995,Questions for Peter?,4
-fomc-corpus,1995,"There seems to be a lot of movement into Swiss francs, particularly by the Germans. Is there a general search in Europe for--I hate to use the words--a ""safe haven,"" or what is it?",43
-fomc-corpus,1995,"Yes. Beginning in the spring and continuing over the summer, the German banking community seemed to awake to the possibility of capturing some of the flows by placing them in Swiss investments. This coincided with some revelations about the use of Luxembourg accounts by Germans for tax avoidance. So, there was a double incentive for the German investment community to move out of Luxembourg and find some other place. German banks in Switzerland, not just Swiss banks, seem to have taken advantage of this opportunity initially through mark Eurodeposits in Switzerland but funds clearly also were moved into Swiss assets for ""safe haven"" reasons as well. There has been much talk in Germany about how far out the yield curve investors can afford to go, given the uncertainties about future returns. That has been part of the marketing pitch the bankers have used to stimulate this flow.",165
-fomc-corpus,1995,Are they actually going to their local Deutschebank to buy Swiss franc money market funds or whatever it might be?,22
-fomc-corpus,1995,"Yes, precisely things like that.",7
-fomc-corpus,1995,"There have been long articles in various German newspapers about the advantages of this kind of operation--newspapers such as the Frankfurter Allegemeine Zeitung and the Suddendeutsche Zeitung. The Swiss are understandably somewhat unhappy since they are just sitting there like any other emerging market, if I may put it that way. [Laughter]",67
-fomc-corpus,1995,I failed to mention that the Swiss lowered their rates and saw their currency keep appreciating last week.,19
-fomc-corpus,1995,How long have they been reducing their rates?,9
-fomc-corpus,1995,They are down to 2 percent on their discount rate.,12
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Would the kinds of operational changes that you are contemplating, or working on, require legislative authorizations?",20
-fomc-corpus,1995,"In the implicit division of labor between Don Kohn and myself, I am working on issues that would not involve legislative changes. There are questions about possible changes in reserve requirements that might involve new legislation, and Don may be better placed to talk about those. At the Desk, we are looking at some very simple issues such as: what time of day we can operate; what level of information we have to operate with at different times of the day; whether there is a different type of repo with which we might be able to conduct operations in the market late in the day; and whether we could change the discount window in some informal way, or perhaps some statutory way. Reserve requirement changes would be another approach.",142
-fomc-corpus,1995,"If the Board wanted to go to a system of low, broadly based reserve requirements, that would require legislative changes. It is one of the options we are looking at. Obviously, if you wanted to pay interest on reserves, that would require legislative changes. It may be a little late for that. Legislative changes also would be required for a system under which the Federal Reserve might pay a low interest rate on excess reserves to put a floor on the federal funds rate and impose a Lombard rate or something like that to provide a ceiling. We are beginning to look at a broad range of alternatives. I think the issue has caught up with us a little faster than we thought it was going to a month or two ago.",144
-fomc-corpus,1995,"Do you think that the kinds of changes that you are looking at would reduce the propensity of banks to develop sweep arrangements, or do you think those are with us anyway and have to be factored in?",41
-fomc-corpus,1995,"At this point I tend toward the latter view. If we were able to pay a market rate of interest on reserves, that would remove the incentive for sweeps. In that event, the current sweep arrangements might be undone, but it would be very hard to get the legislative authority in the current budget environment. The other approaches we are looking at would not remove the reserve requirement tax or the incentive to reduce required reserves.",84
-fomc-corpus,1995,"I have one other question. What is happening in the markets that is affecting the timing of operations? Are things shifting to other markets, to overseas markets?",31
-fomc-corpus,1995,"No. If the dealer community does more of its financing early in the day, they generally have fewer securities left to finance by the time we would normally enter the market at 11:30 a.m. It is a very mechanical issue.",48
-fomc-corpus,1995,So it is still domestic.,6
-fomc-corpus,1995,"It is just the domestic players and they are just completing their financing. Certainty is better for someone looking to finance a large portfolio than uncertainty, and waiting to find out whether or not we will enter the market has its risks for them. It is not a major issue. On Monday of last week we received only $5.7 billion of propositions. The next day we were looking at a need between $8 and $10 billion at the time we made the decision. We did end up injecting about $8 billion, after getting about $10 billion in propositions as a result of operating earlier.",120
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"I have a different response from the one Don gave to Susan's question about incentives for innovation. As long as we maintain a distinction between liabilities that are called deposits and liabilities that are not called deposits, there are going to be incentives. If we had a low, broad-based reserve ratio on all noncapital liabilities without the distinction between deposit and nondeposit liabilities, then that incentive would go away. So, it depends on how we do it.",89
-fomc-corpus,1995,Yes. I suspect this is going to take some major fleshing out.,15
-fomc-corpus,1995,"Any other questions? If not, would somebody like to move ratification of the domestic Desk operations?",20
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Shall we move on? Let's go to Messrs. Prell and Truman.,19
-fomc-corpus,1995,[Statement-see Appendix.],5
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for either gentleman?,5
-fomc-corpus,1995,"Mike, you referred to what is happening to labor costs. If you look at what models seem to tell you about what is happening there, in the last three quarters, at least in terms of the model that we look at, inflation in the employment cost index has been lower than predicted by 3/4 percentage point. My impression is that that may be related to developments in medical costs, and it is possible that the effect will be of short duration. When you look out over the next two years, what assumptions do you make about what will happen to the ECI? Have we seen an intercept change or are we going to see an error decay? What assumptions have you made?",138
-fomc-corpus,1995,"I think your characterization of a favorable surprise relative to many typical models is right. When we get surprises, we go back and start tinkering with models. We want to see whether we can fit history better and whether we can, for example, introduce something into these equations such as lagged wages that might capture a trend in wages or a wage norm and reduce the errors significantly. I don't know whether that is particularly appealing on analytical grounds, but there is a sense that we are locked into some trend here. People seem to have a 3 percent figure in mind about wage increases. If we looked at wages alone and tried to model those, we would probably also see some surprise there in terms of how low the inflation has been. But we do think that the overall compensation number is more relevant over time, and we have seen the downward movement in medical costs as constituting something of a favorable supply shock in a sense to the system. There are significant changes going on in the medical care market. It appears that after a period in which many businesses were surprised year after year by how fast the costs of their medical benefits were rising and they did not necessarily subtract those costs from workers' wages, we are getting a reversal of that now that there is some revolution in the market for medical services. Business firms have not passed the benefits of reduced medical cost increases through to workers on the wage side or in other benefits. As we see it, this process is likely to continue but with diminishing quantitative importance as we go forward. A lot of firms have made the shift to managed care systems. Medical care inflation itself seems to be stabilizing. There are some risks, as we noted in passing in the Greenbook, that if some of the reforms that are being proposed for Medicare and other programs are adopted, there could be more cost shifting to insurance providers. So, we think that this run may be at its end, but we just don't see anything emerging now that looks like a substantial acceleration. Many of the Reserve Banks have reported in their letters on the discount rate and in the Beigebook that there are signs of tightness here and there and that employers are responding with higher wages. But one also has a sense that there are pockets of weakness and that many employers are looking to other means besides raising compensation to solve their labor problems.",467
-fomc-corpus,1995,"So, the inflation assumptions, which are really quite reasonably optimistic, presume that things are moving back to normal.",22
-fomc-corpus,1995,"I think we will remain below most model forecasts, but we have projected a little acceleration in the growth of compensation costs as we go through the next few quarters.",32
-fomc-corpus,1995,A very slow decay in the forecast.,8
-fomc-corpus,1995,Very slow.,3
-fomc-corpus,1995,Thank you.,3
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Mike, I also have a couple of questions about labor markets--along somewhat the same lines. One of the persistent stories that we have heard all year from large and small businesses, more so in what are described as tight labor markets than in markets that are not described that way, is how much businesses are spending for training. Businesses tend to respond to perceived conditions by being willing to spend more on in-firm training programs whose cost as we all know is expensed; it doesn't add to capital stock. There are two motivations. One, of course, is the use of new technologies that result in the need for related skills. The second is that businesses do not respond to the need for low-skilled and unskilled workers by bidding wages up in an effort to get the workers they want, but by in a sense saying they are not going to pay more but will hire people and train them. How does the staff think about that kind of business response in its analysis of potential output, productivity, the NAIRU, those sorts of things? Second, the staff responds to questions about subdued wage behavior by referring to the notion of job insecurity. Is there any direct evidence of a shift in some variable in a labor supply function called ""worker insecurity?""",251
-fomc-corpus,1995,"On the first question, if this emphasis on training is a manifestation of poor quality of the labor force, then that presumably has some implication for potential output. In terms of the growth of the labor force, the effective growth is less than it would appear. That tendency can be made up for by investing to improve the quality of the labor force. Training presumably is a cost that would perhaps be an element in some markup over perceived unit labor costs if it doesn't show up as a form of compensation. On the NAIRU, I suppose it's possible that this deterioration in the quality of the labor force, if that's what it is, could lead to a greater tendency toward mismatches in the labor market and some elevation of the NAIRU. But I don't think we have any sense that there has been a radical change in this. Employers have been complaining about the quality of workers for a good many years. I don't know that what you describe is an entirely different circumstance, but maybe the response is different. I alluded to this when I was replying to President Parry. We do hear these reports, and it does seem that there is this alternative response of taking a less qualified worker and making that investment in training rather than bidding for the scarce pool of well-qualified workers. On the job insecurity question, I don't think there are any direct measures. There may be some opinion polls of which I'm not aware that might have asked people how they felt about this. One can look at some indicators, such as perceptions of job availability in the Conference Board survey, and relate that to actual unemployment and other labor market indicators to see if things are out of kilter. My recollection is that the number of people saying that jobs are in scarce supply is probably a little high relative to what one might have expected. We have tinkered with the question of whether there is a systematic influence by, for example, putting variables into a Phillips curve relation and so on. My sense is that we haven't come up with anything that is very persuasive.",406
-fomc-corpus,1995,"We've attempted to use other measures of labor market slack such as survey measures of jobs and employment, the help wanted index, and a variety of other things that do tend to show readings that would suggest somewhat more slack in the labor markets relative to the unemployment rate. But none of those performed any better or any differently than does the unemployment rate.",68
-fomc-corpus,1995,"I think one can make an inference from other expressions of dissatisfaction with the current situation in the economy and just anecdotal evidence from the press and so on that people probably feel that they don't have a lock on their jobs, even in a well-established corporation, the way they once did. There is a sense that because of changing technology the loss of a job will incur the risk that the next job will pay a much lower wage than the current job and lower than might have been expected in prior years.",100
-fomc-corpus,1995,"You might have the staff recalculate the average age of the capital stock as a potential technology variable just to try to capture this sort of thing. I don't know what the result will look like. I suspect it won't work, like most other things! In any event, the anecdotal evidence that is emerging at this stage does suggest that there is an insecurity issue and that it indeed has had a structural effect as President Jordan points out. That has to be the case if you consider that the workforce interfaces with the capital stock to produce goods and services. If the capital stock is turning over increasingly rapidly, meaning that the capital stock itself feels more insecure, [Laughter] it is reasonable to presume that the people who work with that insecure capital stock have to feel somewhat insecure about their jobs. The issue is how to measure it. In doing so, we have to be careful to put the job insecurity concept in its proper context. It is to a certain extent a level-adjustment issue because one can imagine what a normalized wage level might be under the standard Phillips curve or other wage equation model excluding the insecurity issue. What one would get is an upward trend. If we add in an insecurity variable, and insecurity at its maximum, the level would be uniformly lower. One must presume that as we move from the normal level down to the other level, there comes a point even at maximum insecurity where the wage level becomes a relevant concept, and if we are looking at the rate of change, then the insecurity has to have a diminishing effect. Job insecurity has been around for a long time at this stage, and it almost surely has had the effect of moving the level down from normal. We may soon be running into resistance to downsizing. At that point we will be back on the same growth rate pattern even though the level may be appreciably lower. This issue may be relevant in judging the price level, but after the one-time adjustment, it ceases to become an issue with respect to inflation as best I can see. Anyway, I'll take another look at that. I just got the results on the average age of the capital stock, which I think may be used as a proxy for technology insecurity, and we will see if we even get the right sign. We know it has the right trend; it's just a question of whether it picks up anything in addition.",475
-fomc-corpus,1995,"Mr. Chairman, I think you've made a very good point about these levels and changes. It certainly would be a possibility that as unemployment remains in a relatively low zone, though the average duration is remaining relatively long, people would become a little less concerned about their potential vulnerability so that that could alter the--",61
-fomc-corpus,1995,That would be even more extreme.,7
-fomc-corpus,1995,Exactly.,2
-fomc-corpus,1995,I'm just stipulating that they remain just as insecure.,11
-fomc-corpus,1995,Yes. Your point's well taken.,8
-fomc-corpus,1995,It is a decaying factor on the wage rate change. President Stern.,15
-fomc-corpus,1995,"Ted, would you elaborate a bit on the Daiwa situation and whether that's known in the market?",20
-fomc-corpus,1995,"They announced today, Japanese time, that the head of their New York office had been making false trades for 11 years, which is hard to believe, and had lost roughly $1 billion in the process. They will take that loss in their fiscal half-year results. The news was released early enough to be in The Washington Post. You may not have seen The Washington Post.",76
-fomc-corpus,1995,"I heard something about it on the news this morning, but I didn't see any details.",18
-fomc-corpus,1995,"Peter or someone else may have some more details. They called me last night. The announcement apparently did not affect their markets. The Nikkei, for example, was up 300 points in Tokyo today.",41
-fomc-corpus,1995,What were they trading in?,6
-fomc-corpus,1995,The claim is that this high official of Daiwa's New York branch had been trading in U.S. bills and bonds in the straight bill and bond markets. He managed to lose between $1 and $1.5 billion over the last 11 years; that is the amount that is unaccounted for. It's a rather extraordinary tale. The relevant authorities in New York are looking into the matter.,81
-fomc-corpus,1995,You would think there would be enough derivative hedges to secure the position.,15
-fomc-corpus,1995,"Maybe I could expand on this a little, Mr. Chairman.",13
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,He was dealing in cash government securities and making up the losses by taking securities out of the custody account. He was in charge of the custody section of the Daiwa branch in New York and also was allowed to trade in government securities.,47
-fomc-corpus,1995,"They are a primary dealer, Bill?",8
-fomc-corpus,1995,"Yes. His confession, which was written in mid-July when he paid a visit to Japan, indicates that he falsified the records, managed to set up a separate clearing account on his trading as compared with that of others, and suffered capital losses of about $850 million and losses of about another $250 million in interest that is now owed to the people who actually have rightful ownership of the securities that he sold over these many years. The facts are going to demand a good deal of time by our examiners and the U.S. Attorney. As Ted suggested, the tale as we know it as of now has certain apocryphal characteristics that I think are going to demand a good deal of looking into. One of our principal concerns is that he confessed to the authorities of his bank in Japan in the middle of July and the Reserve Bank was not informed. According to the Daiwa Bank, the MOF and BOJ were not informed until Monday of last week. As all of you would immediately agree, we do not take kindly to the management of a bank that has this information and doesn't share it with regulators for two months. I think our kindness toward the Daiwa Bank will be somewhat less than You will be happy to hear that the president and the chairman are going to take a 30 percent salary cut for six months.",269
-fomc-corpus,1995,Does their chairman earn several billion a year?,9
-fomc-corpus,1995,Is there any evidence of a motive?,8
-fomc-corpus,1995,No. The confession is really extraordinary. It would lend itself to a great soap opera. He suffered losses that were small initially. He wanted to hide them because of the disgrace that it would bring to the bank. The pressure was so great that he went through a divorce. The confession implies that he made a mistake and that he got in deeper and deeper and deeper.,74
-fomc-corpus,1995,Why did he start in the first place? What was his motive originally? Was it personal?,19
-fomc-corpus,1995,"No. The confession does not lend itself to an interpretation of personal greed. Obviously, that's one of the things we have to look into.",28
-fomc-corpus,1995,Is there any evidence in the way it was structured that he would be able to draw funds for his own account?,23
-fomc-corpus,1995,"He certainly was in a position to do so because he was in effect running a separate bank that nobody, according to the confession, but himself knew about. Therefore, he certainly was in a position to siphon off funds for his own benefit very easily.",51
-fomc-corpus,1995,"Why do we assume that this was not the obvious motive, and why are we looking beyond that?",20
-fomc-corpus,1995,"At this stage, we're assuming that that could be the motive; we're assuming that he could have accomplices; we're assuming all kinds of things over and above that which this confession would lead one to believe.",41
-fomc-corpus,1995,"Supposing that were a motive, and obviously we don't know, and say hypothetically that he had succeeded and replenished all the relevant funds and the like, would there be any supervisory mechanism to detect that?",42
-fomc-corpus,1995,"The answer is, I don't think so but--",10
-fomc-corpus,1995,"I would conclude that we have no evidence that there may not have been other significant successful endeavors by people throughout history that were never uncovered. My own judgment is that there is a limit to what the most assiduous bank examiner can do in a situation where somebody engages in a practice in which he trades for his own account, wins, replenishes, and we never hear of him.",77
-fomc-corpus,1995,I think the ability of somebody who was as successful as this guy was at fraud--a lot more successful than he appears to have been as a securities trader--,32
-fomc-corpus,1995,His teacher was an accountant!,6
-fomc-corpus,1995,"According to the confession, he managed to lose money whichever way the market went. [Laughter] I think that a very successful dealer/operator of a fraud could go on for a very extended period of time and never be caught.",46
-fomc-corpus,1995,That's why separation of duties is so important.,9
-fomc-corpus,1995,"Exactly, and I think that is all the more reason why we have to be very assiduous in our evaluation of internal auditing processes and of apparent internal conflicts of interest built into the system. Unless we can do that, I don't know what we can do. Even with that, somebody is always clever enough to figure a way around it. It's a constant ploy.",75
-fomc-corpus,1995,"In three examinations that were done by the New York Bank on the Daiwa branch, the constant theme was that the audit controls were not adequate. We actually got them to improve the audit controls very considerably. Just an interesting anecdote: They had two locations, one in the World Trade Center and one in Rockefeller Center. According to their permissions from both the MOF and the State Banking Superintendent of New York, they were supposed to be doing the government securities trading only from the midtown branch. Mr. Iguchi, the culprit, was at the downtown branch. When we did the inspection in 1992, they took all the dealers from the downtown branch to the midtown branch, turned out all the lights in the downtown trading room, put a bunch of boxes in it, and told our examiners that it was a storeroom.",170
-fomc-corpus,1995,That's nice.,3
-fomc-corpus,1995,It's a little difficult to believe that nobody had a clue as to what this guy was up to when that sort of thing was going on.,28
-fomc-corpus,1995,This organization has no claim to be a primary dealer.,11
-fomc-corpus,1995,"They are not a primary dealer, excuse me. This is the bank. The securities firm is an entirely separate legal entity.",25
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,The securities firm is the primary dealer. This is a branch bank trust department.,16
-fomc-corpus,1995,"Okay, that's good.",5
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I was going to raise a question about job security, but I'm not sure it's appropriate. [Laughter]",22
-fomc-corpus,1995,We know one person whose job security is--. Has he been fired?,15
-fomc-corpus,1995,"He has been fired as of the 25th of September. Officially, we do not know where he is, but we are reasonably certain he is in the hands of the U.S. Attorney.",41
-fomc-corpus,1995,"If I'm not mistaken, the duration, or the amount of long-term unemployment, is high at current unemployment rates. This has to mean by the laws of arithmetic that the amount of turnover and of short-duration unemployment are low. I guess my first thought would have been that job insecurity comes from turnover; you worry about losing your job. Isn't that right?",71
-fomc-corpus,1995,No.,2
-fomc-corpus,1995,You can get it back.,6
-fomc-corpus,1995,"Yes, that's right. I said that was my first thought. Maybe it's wrong. Maybe it's duration.",21
-fomc-corpus,1995,"No, if I feel insecure, I'm not going to leave.",13
-fomc-corpus,1995,"Moreover, for any given amount of unemployment, if it were disproportionately short term it would suggest that people were able to find jobs relatively quickly.",28
-fomc-corpus,1995,It's disproportionately long.,4
-fomc-corpus,1995,"But when there's a lot of long-term unemployment, that would suggest there may be some difficulty for people who have been displaced, for example, with all the restructuring.",33
-fomc-corpus,1995,"The separation rate and the rehire rate are relatively low, right?",14
-fomc-corpus,1995,That's correct.,3
-fomc-corpus,1995,"Yes. Certainly, the hypothesis for years was that the separation rate matters most. Firing was the key thing in job security. That may have been wrong.",32
-fomc-corpus,1995,I think that was the leading hypothesis for a long time.,12
-fomc-corpus,1995,We don't know the facts.,6
-fomc-corpus,1995,"Right. It was an economy move by the BLS to stop collecting those data. Now, they are going to economize more, too!",29
-fomc-corpus,1995,That was a long time ago.,7
-fomc-corpus,1995,1981.,3
-fomc-corpus,1995,"The other question was for Ted. Should we be reading recent events as an escalation of the anti-EMU campaign? This is a two-part question. Should we expect that to continue to weigh against the dollar? There seems to be no inherent reason why that should be anti-dollar, but in practice it always seems to weigh on the dollar.",68
-fomc-corpus,1995,"Peter has some comments. Let me give you mine. What I tried to suggest in my briefing is that this is a process that is going to go on for years. It's going to be up and down and up and down. As different countries and institutions within the countries jockey for position, there will be, I think, a heightening of the debate about the EMU and whether individual countries are ready for it. You saw, for example, how Mr. Arthuis got beat up on Thursday by Mr. Waigel who came out at Majorca and said that maybe we just ought to postpone the EMU for a couple of years. Now, that's not necessarily anti-EMU, but it changes the whole timetable. The debate is heightened as the time for various kinds of decisions comes closer. The effect on the dollar, it seems to me, is largely secondary. It partly depends on what you mean by the dollar. The dollar tends to weaken relative to the deutschemark the less likely the EMU appears to be and therefore the more likely the deutschemark will be free to rise relative to the dollar. Then, the ebb and flow of discussion does tend to affect the dollar: The way I think of it is that for people who have liquid assets it is easier to get out of dollars into deutschemarks to cover positions than to get out of Swedish kronors into deutschemarks. So, you have a backwash effect on the dollar, at least in the short run.",298
-fomc-corpus,1995,"I'll just insert there: A number of the European countries continue to prefer to hold a relatively large portion of their reserves in dollars for investment purposes. But in a crisis, they want to convert those into marks to be able to defend their own currency. There are two effects on the market that in the very short run can create this sort of disturbance. Even the expectation of it can create the disturbance.",80
-fomc-corpus,1995,That shouldn't affect the level of the dollar in the long run.,13
-fomc-corpus,1995,"No, it shouldn't.",5
-fomc-corpus,1995,You have the accumulation of those dollars to begin with.,11
-fomc-corpus,1995,"Yes. I'm referring to a very short-run effect. Countries have a tendency to hold large quantities of dollars and then convert them into marks to defend their own currency. They also have a preference for acquiring reserves that way. Even if their ultimate goal is to acquire marks, they will try to move into the dollar out of their own currency and then into marks in the event of a crisis. The other very short-run phenomenon, which certainly hurt us last week, occurs when the situation that Ted was referring to becomes acute. As Europe closes up for business and investors are looking to defend themselves, then they really have to go into the dollar/mark because they simply can't get liquidity in the Paris/mark or the peseta/mark in the New York trading day after Europe has gone home. This then tends to accelerate the movement in dollar/marks in the very short run. It's very short run but it's very pronounced.",184
-fomc-corpus,1995,"Is there concern that the dramatic shift in funds that has been going on in recent weeks could erode German political support for the EMU to a point where it would be difficult, if not impossible, to implement the EMU on schedule? I am referring to the shift from deutschemarks by German investors into Swiss francs that has been showing up, I gather, in falling sales by German life insurance companies. We are getting moves out of Luxembourg accounts into Swiss franc accounts in Switzerland. I guess two-thirds of the people surveyed are against eliminating the deutschemark in Germany.",113
-fomc-corpus,1995,"It's certainly a possibility. How big it is, I don't know.",14
-fomc-corpus,1995,I think the support of the Chancellor for the process is really the only thing standing in the way of the deluge of public opposition.,27
-fomc-corpus,1995,"He took a position as I read it that didn't say what he said; or if he said it, he didn't mean it; and if he meant it, he shouldn't have.",36
-fomc-corpus,1995,All of the above!,5
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"This is a question on a different subject entirely, the fiscal situation. Going out to 1997, Mike, I noticed that the Greenbook forecast showed real GDP growing at 2 percent in 1997. The reduction in government purchases seemed to have a big impact on GDP going out that far. I really have three questions: Is this viewed as a permanent change? What assumption are you making about the steady rate of GDP growth under that type of fiscal scenario? Do you see any offsetting private-sector spending to compensate for this reduction in federal purchases during this period?",115
-fomc-corpus,1995,"I think it ultimately depends on what monetary policy you pursue. In essence, given our assumption of little change in the federal funds rate--we have just a little ticking down at the end of next year--we don't see here an aggressive effort to offset the ongoing fiscal restraint. We have specified a three-year reduction, but the presumption would be that Congress is going to pass something that goes even beyond that. So, fiscal restraint would be an ongoing force in the economy, though diminishing. As we have it, the biggest degree of fiscal restraint is imposed in 1996. Some of the restraint that flows from earlier actions--over 1993, for example--disappears and the smaller increments from our assumed new fiscal package are what is left. So, on our assumption, the degree of fiscal restraint really is diminishing a bit as we move out in time. We felt that, (1) we wanted to stick to the steady policy assumption for the baseline, and (2) this produced in our analysis an outcome where resource utilization rates eased only moderately and created a situation in 1997 where there was only a small degree of slack in the system. Given the enunciated goal of moving toward price stability, that seemed to be reasonable to present to you. As you move on out, unless you wanted to accelerate the progress toward price stability, if the tendency was for that gap to remain and for the unemployment rate to continue drifting up, you might want to pursue a somewhat more stimulative policy for a time to at least stabilize things at a comfortable level of resource utilization. It's a question in this mechanical fashion of just how fast you want to move toward price stability.",338
-fomc-corpus,1995,"But if you kept monetary policy steady at its current level during this period, is there a wealth effect that would increase private-sector spending to compensate for any of this reduction through lower taxes or anything like that?",41
-fomc-corpus,1995,In our forecast we don't anticipate that there will be any favorable wealth effects as we move beyond this year.,21
-fomc-corpus,1995,Further questions?,3
-fomc-corpus,1995,"Could I follow up on that last question? Mike, I would think that the impact on the economy of any particular budget would depend heavily on the degree of substitutability between government products and services and private-sector products and services. Have you looked at that issue?",53
-fomc-corpus,1995,"There are some very obvious questions, for example in the area of medical care. We have not specified our package in a way that calls for staking out any position on this. But it's quite conceivable that people of reasonable means, if they were called on to pay a larger Medicare premium or to have some deductible or something, might continue to consume roughly the same amount of medical care and save less in the short run. As I suggested, the package being discussed now includes lots of changes in programs that are very fundamental--for example, the welfare program. There are potential labor supply responses that we will have to come to grips with. If legislation is enacted in the next few weeks, we may not be able to put that off for very long in our analysis for the forecast. I don't think it's going to be a big deal over the next couple of years even if there is a phasing in and so on. But over the longer haul, there could be effects on saving behavior; there could be effects on labor supply behavior and maybe many other effects. We'll have to look very carefully at what are pretty radical changes that are being discussed in some of these programs. Regarding the transfer of programs to states and the block grants, we have assumed that there will be some short-run cushioning for states and localities in cases where there were cutbacks in funding to absorb some of those cutbacks and maintain benefit levels. But over time that would change, too.",291
-fomc-corpus,1995,Okay. Would somebody like to start our roundtable discussion? President Forrestal.,16
-fomc-corpus,1995,"Thank you, Mr. Chairman. As I reported last time, the economy of the Sixth District is generally quite healthy. Activity is continuing to move along the path of moderate expansion and moderate inflation. Retailers are reasonably optimistic. Tourism continues to be a stimulative in the economy, and construction is improving. One of the weak spots, if I can call it that, is manufacturing activity, which has been a bit sluggish. I had not thought about this, but maybe it's because of the insecurity of the capital stock! [Laughter] Looking at the individual areas very briefly, reports from retailers around the region parallel the discussion that's in the Greenbook. Most saw very, very good if not excellent back-to-school sales. Demand for home-related products continues to improve along with home sales. Several merchants did note that their inventories are a bit heavy, but they do expect very good holiday sales, and they think such sales will bring them back to more comfortable inventory levels. Sales of 1995 automobiles from inventories are coming at the expense of dealer profits and manufacturers' incentives. On the travel side, tourism actually is stronger than it was at this time last year even though Florida, particularly south Florida, saw a drop in the latter part of August due to tropical storms and hurricanes. But that seems to be a very temporary thing. Foreign travel continues to be strong. The only disappointing area here, and I was a bit surprised to find this, is that the cruise industry has very soft * bookings, and they are now offering discounts; 20 percent discounts seem to be typical. So, the improvement in tourism is not extending to ships. Our manufacturing survey, as I indicated, showed some softness in August, and factories remain very, very cautious about hiring. There has been little change in the outlook for capital spending and expansion continues as the District benefits from relocations and diversions of production from other domestic sites. In the energy sector, the rig count in Louisiana in July was at its highest level in over four years. Single-family sales improved last month, although they were below the very strong levels of a year earlier. Retailers are quite optimistic, and they cite favorable mortgage rates and healthy job growth. The multifamily sector in our District is quite strong, and I think that's in contrast to the rest of the nation. Commercial real estate markets also are continuing to strengthen throughout the region, and we are seeing some speculative office and industrial projects either under construction or in the planning stage. It's interesting that bankers are now becoming much more cautious about financing these activities, which I guess is good news. Bank lending remains mixed with the strength being in the business area. Wage increases remain stable, and the reports of shortages of labor are becoming less frequent than they were even six months ago. Prices for finished products were flat in August, although prices of materials in many industries did post some increases. The general information we are getting from business people is that it is still very, very difficult to pass along price increases. So the situation in the District continues to look good. On the national economy, we have not changed our forecast significantly since the last FOMC meeting. However, we did incorporate a further 25 basis point drop in the federal funds rate and that produces somewhat faster growth later in 1996 and in 1997, with the unemployment rate not drifting any higher and not much further improvement occurring in the pace of inflation. As I look at the national economy, Mr. Chairman, I feel reasonably happy with the result that has been attained, particularly on the inflation side. The concern that I have is that there may be more softness out there than is indicated in the numbers, and I am getting that sense in the anecdotal information from directors and other business people. As we consider our policy action, I think it might be well to begin to question whether potential in the economy is actually somewhat higher than we think it is and the NAIRU somewhat lower. Along those lines, I am also a little concerned that the Greenbook forecast shows a level of growth throughout the forecast horizon that is somewhat below potential as now defined or what we think is potential at about 2-1/2 percent. That obviously has all kinds of policy implications that I'll save for the next go around. Thank you.",863
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, economic growth in the Twelfth District picked up this summer. The annual rate of job growth in California has accelerated by about 1 percentage point--from less than 1 percent this spring to about 2 percent currently. The early 1995 declines in manufacturing employment have been reversed and locally oriented sectors such as retail trade have shown increases. Also, retail sales have been running well above a year earlier. Elsewhere in the West, some of the most rapidly growing states in the nation have resumed their quick pace of expansion. In Utah, manufacturing jobs expanded rapidly this summer, and construction employment surged in both Oregon and Nevada. In contrast, payroll jobs continued to decline in Hawaii. Other District state economies are slowing but appear resilient. In Washington State, fast growing industries like software development, most notably of course Microsoft, are offsetting the effects of the large job losses at Boeing. In Idaho, the rural areas dependent on agriculture or forest products are weak, but high-tech manufacturing such as that at Micron Technology has been holding up growth in the Boise area. The previously rapid growth in Arizona's manufacturing economy was stymied earlier this year by the drop back in exports to Mexico, but the overall Arizona economy continues to expand. Turning to the national outlook, real GDP growth has picked up to a moderate pace in the current quarter, following the inventory correction in the second quarter. Our forecast shows GDP growth of 2-1/4 to 2-1/2 percent through the end of next year as inventory investment stops declining and housing picks up briskly. A downside risk to the forecast, one very similar to that mentioned by Mike Prell, is that equilibrium real interest rates may be shifting down in response to prospects for lower federal deficits, making our current policy stance tighter than it would otherwise be. Recent inflation news also has been favorable and market inflation expectations seem to have come down a bit. For the future, the speed effects from the slowdown in the economy in the first half of this year should restrain inflation late this year and in 1996. As we have discussed, labor costs have come in below expectations. But before euphoria sets in, I don't anticipate any progress unfortunately this year and next in reducing inflation below last year's rate. Despite favorable inflation numbers, both CPI and PPI inflation so far this year are above last year's rates. The unemployment and capacity utilization rates indicate that it is unlikely that there currently is any excess capacity pushing down on inflation. Overall, under the assumption of a roughly constant federal funds rate, our forecast shows CPI inflation at 3 percent or slightly less in 1995, 1996, and 1997--somewhat above last year's 2.6 percent rate. Thank you, Mr. Chairman.",559
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"I think it's fair to say that we have not had any dramatic changes in business conditions in our District, but on balance my sense is that overall conditions in the District are a little stronger than they were at the time of our last meeting. We conduct monthly surveys, as some of you may know, of activity in manufacturing, retailing, and the services sector. Our manufacturing index--the last one went through August--showed a significant jump over July. Shipments, orders, order backlogs, employment, and the workweek all rose appreciably according to that survey. More broadly, I sense that general business confidence is increasing in our region. I am not sure this greater confidence is very deep yet, but at least it's there for the time being. If I were to highlight one feature of the District economic situation, I think it would be recent wage developments. We have had comments on that already, and I think my comment might go a little in the other direction. The manufacturing survey I just mentioned has a question about factory wages. Our last survey--again for the month of August--clearly indicated significant upward pressure on wages over the last six months as a whole. That survey result is reinforced by some of the anecdotal information we are hearing. We had our small business council meeting last week, and typical comments came from a member from Charlotte who reported that nobody in that market was paying the minimum wage and that over the last six months entry-level wages had increased by anywhere from $.50 to $1.00 per hour. Several other members confirmed his comments. I don't want to make too much of this. Again, a majority of the comments along these lines were from people in the Carolinas where labor markets are exceptionally tight. It appears that this phenomenon is mainly concentrated in the skilled and semi-skilled segments of the labor markets--the mechanics, construction workers, and others. But the comments were very striking, and I think they are consistent with at least some of the national wage data that suggest that a gradual upward trend in the growth of wages may bear watching. With respect to the national picture, we certainly don't have any quarrel with the Greenbook forecast. One of our people summed it up by saying that the economy had landed softly and the Greenbook was projecting a long runway. I do believe, though, that the risk of error in the forecast has shifted perceptibly. Earlier this year as you may recall, I was a bit concerned about the downside risk in the outlook. Then, as we got into the late spring and early summer, it seemed to me that the risks were a little more balanced. Now, I think the outlook has shifted again, and it seems to me that the risk is more on the up side than it has been for some time. The economy looks pretty healthy to me right now. I thought the rebound in automobile sales in August was impressive. Overall consumer spending and consumer confidence, it seems to me, have been more firmly maintained in a sense than we might have anticipated a few months ago when we had lots of comments about the possibility of a recession. Also, I think the recovery in housing has been exceptionally solid. We got a lot of anecdotal comments to back up that view. As was pointed out in the Greenbook, we may not yet have seen the full impact of earlier reductions in mortgage rates. So, again, the economy looks quite solid to me at this stage. It seems to me that the risks of error in the forecast may have shifted a bit to the up side since our last meeting. That makes me a little nervous since we are operating at close to full capacity in many industries and sectors. Finally, Mr. Chairman, I'd like to make a quick comment on the fiscal situation and its bearing on the outlook. I gather that anticipated fiscal restraint is a damping factor in the Greenbook's projections, and that's perfectly reasonable. But I hope that we will not give this factor undue weight in our deliberations today and in the near-term future. The final budget outcome is still uncertain. The impact of any particular outcome on the behavior of the aggregate economy is very difficult to predict. Moreover, as is often the case with monetary policy, I think there is a credibility issue here. There is a real risk that if the public and especially the financial markets perceive that monetary policy is being driven to any significant degree by fiscal considerations, we could lose credibility. So, I hope that we will continue to focus primarily on aggregate variables--GDP, employment, and the price level--which over time should reflect whatever impact fiscal developments are having on the aggregate economy.",930
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"Recent data and anecdotal evidence indicate that the economy in the Philadelphia District is growing, but not strongly; growth continues at less than the national pace. Manufacturing has reversed course after a weak first half and is growing again. Residential construction has stabilized after a period of weakness earlier in the year. Nonresidential activity is up some around the District, driven by distribution and retailing facilities plus some hotel and entertainment-related construction. Retail sales are up a little. Banks report that loan demand generally is flat; where there is some increase, it tends to be on the consumer side rather than the commercial side. Employment levels that had been declining earlier in the year have stabilized and are rising, particularly outside manufacturing--in the service areas. Turning to the national economy, of the three broad categories of slower, faster, or moderate growth outlined by Mike Prell, I am in the moderate category. I think that we are likely to head into a period where sales and production will grow at a sustainable pace in 1996. I must say, however, that as I travel around the District--and I do a lot more listening than I do speaking --I sense that the better business confidence is probably broader than it is deep. If one just listens, one gets more of the tone that it's to the slower side. Now perhaps that's the District. If one probes, then, yes, things are better; the third quarter is better than the second; the fourth probably will be still better, and 1996 looks okay. But one does not get the same sense of optimism in the business community generally as when one listens to economists and professional forecasters. Phrases like ""it doesn't get much better than this,"" just don't ring true, I think, in the business community. Maybe it's just human nature; maybe it's our part of the country; but there just isn't that underlying enthusiasm about the future that one would hope to see.",386
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. The Tenth District economy remains really strong, with only a few signs of weakness here and there. The improvement observed at midyear has been sustained, with strength reflected across several areas. Employment has posted healthy gains over the last few months in our region. Manufacturing staged a pretty good rebound in August from what we can tell, especially in the durable goods area including automobiles. And the nondurable goods area, which had been a little weak in our area, is now holding pretty steady as we go forward. In fact, some of our directors report that homebuilding activity has increased but housing construction still can not keep pace with the strong demand in some parts of our region. We are anticipating some improvement in commercial building activity in the months ahead as indicated by lower office vacancy rates in most of the metropolitan areas in the District. Activity in our energy industry has picked up a bit, especially in Wyoming. On the other hand, the District farm economy continues to be weak; it is hurt especially by the cattle industry which is particularly important to our region. The recent weather in the northern and western parts of the District may have hurt some crop yields, but we don't expect a big fallout from that. Growth in bank credit has slowed as is true elsewhere in the country, and we think that may reflect the effects of inventory adjustments. While the District economy generally appears to be strong, wages and final goods prices show no persistent signs of accelerating, though we are finding that some labor markets remain tight. And we are getting indications from our manufacturers that prices of materials are continuing under upward pressure. Looking at the national economy over the remainder of this year and into next year, I expect growth to remain slightly below trend, but in the 2 to 2-1/2 percent range, which is similar to the Greenbook forecast. Now, I think such growth is appropriate, given where the long-run potential seems to be and given the current level of resource utilization in the economy. And that brings me to the issue of inflation. I am still a little less optimistic than the Greenbook. While it seems likely to me that inflation will be capped, I question whether the overall core inflation rate will drop much in the next year, in 1996 at least.",458
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Mr. Chairman, you probably remember from the board meeting that you attended a week or two ago at the Boston Fed our characterization of the New England economy since the summer as a tale of two sections. Overall, the region's jobs grew just about 0.8 percent during the year ending in July--that compares with national growth of better than 2 percent--but there were distinct differences between northern and southern New England. The northern states of Vermont, New Hampshire, and Maine are all experiencing growth in employment, sometimes even in manufacturing jobs which is welcomed. They have lower rates of unemployment and their employment levels have returned to or near their pre-recession peaks. On the other hand, the southern states--Massachusetts, Connecticut, and Rhode Island--have not returned to their pre-recession employment peaks and are not expected to do so anytime soon. I must say, though, that job growth in Massachusetts is much stronger than in either Rhode Island or Connecticut. Rhode Island in particular currently has a level of employment that is below that of a year ago and has lost jobs in each of the last three months for which we have data. The state is undisputably the biggest basket case in New England, which probably makes it the undisputed winner of that prize for the country as a whole. Rhode Island is now edging out Connecticut, which up until recently was winning this contest. In terms of job types, growth as in the past is largely in trade, services, and construction. Defense industry cutbacks continue. New England fared relatively well in the last round of base closings, losing only one major base and about 1,000 jobs, but the region overall lost 32 percent of its military base employment in the years 1989 to 1994 as compared with about half that rate for the nation as a whole. I am coming to believe that the anecdotes we hear when talking with business groups around the District are almost diametrically opposite the standard economic data that we get for the region as a whole. Again, there may be some self-selection process that is going on here. Two local business confidence indexes show marked improvement over recent data, though they are somewhat below their levels a year ago. Our Beigebook contacts and members of our New England advisory council both report higher manufacturing sales than a year ago. However, there is a dichotomy between healthy sales growth and sales prospects and indicators of future employment. Business plans and actual sales have been upbeat, but expectations as to job growth are not. Businesses apparently are willing to continue to try to succeed with a proportionately smaller work force than before, perhaps because of the effect of capital investments over the last two or three years. In addition, many business executives--representing small and large firms--continue to report an inability to raise prices even in the face of rising demand. Competition remains too keen. Turning to District lending, I reported earlier that we had slower rates of loan growth in the First District than the country as a whole. That situation has corrected itself, not because we have had faster credit growth in New England but because the national pace has slowed. New England's rate of loan growth at its large banks was about 6 percent in the last quarter, about the same as the current rate for the nation as a whole, but the latter is down from a considerably stronger pace earlier. On the national scene, I don't find too much to take issue with in the Greenbook. We could argue, given the projection for output, that unemployment might turn out a tick higher than the rate in the Greenbook. We could question the projected rates of growth abroad, and I think Ted Truman reflected some concern on the down side with regard to foreign growth. We could look at consumer durables and wonder whether the projections for slower auto sales in the Greenbook really will be offset by consumer buying in the housing area. And while we don't know any more about inventories than anybody else, it is reasonable to be agnostic about any specific projection there. However, while all of this does suggest some downside risk to the forecast, it really is nitpicking. In the context of a fairly low rate of unemployment and the impetus that could come from financial markets, the fact that there may be some downside risk in some of these factors does seem to us to hold out the promise of economic balance moving forward--that is, a tendency for the various factors to offset one another. economic information and that is probably just what we would hope for to keep us on target with moderate growth, low unemployment, and relatively low inflation. Risks to the forecast seem balanced or perhaps slightly tilted to the down side. But if downside risks emerge, they can be easily addressed. For now, economic conditions seem pretty good and, given all the uncertainties, I at least am drawn to the idea that they may be about as good as we are going to get.",985
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, we are in general agreement with the Greenbook forecast, so I'll focus my comments on developments in the Seventh District. Overall, it appears that District economic activity has been picking up in the third quarter. Consumer spending seems to have strengthened in September. Retailers in the District generally report that while the hot, humid weather adversely impacted sales in August, sales have improved this month as the weather turned cooler. Retail inventories are reported to be at generally satisfactory levels. Another area where we are getting reports of a pickup in activity is in homebuilding. Sales of existing and new homes have been on an uptrend for a while, but it is only recently that the signs of a pickup in construction activity have emerged. We did have reports, however, that the hot weather in August slowed some construction work temporarily. In the auto industry, sales of light vehicles have fluctuated considerably in recent months in part due to relatively sharp swings in fleet sales. In July and August, sales were at an average annual rate of 14-3/4 million units, and recent reports we received suggest that September sales may come in a bit stronger than this average. Measures of overall days' supply moved down toward desired levels in August, but the overall numbers mask sizable differences among producers and among models. The Ryder truck strike has led to some accumulation of cars and trucks at plants and shipping points. However, the strike is not expected to have any impact until October. Better selling models may then be at risk, and in particular light trucks and fleet sales could be depressed. Members of our advisory council on small business reported that dealing with the Ryder strike is being complicated by the unavailability of rail cars to pick up the slack in our District. In the last few weeks we had discussions with each of the Big Three auto makers regarding their estimates of the long-term demand for motor vehicles. In each case, they have reduced their estimates of the long-term trend rate of motor vehicle sales. The primary factors contributing to this reassessment are the higher quality and greater durability of new vehicles and the shift from cars to light trucks, which tend to last longer. District manufacturing output stabilized in June and July and now seems to be rebounding from a weak second quarter. We are seeing a shift from earlier this year. Producers of consumer goods such as autos and appliances are now reporting increasing output while producers of capital goods are the ones indicating a slowdown in activity, although reports from key capital goods industries are now suggesting that the second half of 1995 is actually holding up better than anticipated. For example, orders for machine tools have slowed but still seem to be running ahead of earlier expectations, in part reflecting strength in orders for small machines. Steel production in the District increased considerably from July to August and that pickup continued into the first part of September. Shipments of appliances to dealers were quite strong in August and early September, and it now appears that the expected shortfall from last year's record pace will be smaller than anticipated at the beginning of this year. In Iowa, problems in accessing rail cars have left some grain elevators still full even ahead of this year's harvest. The rail car problems may have been exacerbated by this year's surge in grain exports, which contributed to longer shipping distances and slower turnaround times for rail cars as well as the transitional problems associated with the merger between the Union Pacific and the Chicago Northwestern railroads. Weather-related crop damage this year is turning out to be worse than expected for vegetables and corn, and it now appears that an early killing frost may prematurely end the development of some late-planted fields, especially soybeans. While the grain harvest is now expected to be about average, it falls short of the record demand for grain observed over the past year. Grain prices have risen sharply and will remain high until there is evidence that demand and supply are moving into better balance. District labor markets remain tight and wage pressures continue to intensify at the low end of the wage scale. In both June and July, the average unemployment rates in the five District states were 4.6 percent, a full percentage point below the national average. Finding qualified entry-level and skilled workers was cited as a serious problem by virtually all members of our small business and agricultural advisory councils when we met with them earlier this month. After slipping somewhat during the summer, help wanted ads in the region picked up in early September. Union leaders I speak to emphasize the insecurity factor that we discussed before in explaining wage increases. They emphasize the fact that corporate restructurings have continued even though the economy has recovered, so there is constant concern about losing one's job even though the economy is doing well. Reports on prices have been mixed but they generally continue to indicate receding inflationary pressures in input prices. Price increases for packaging materials have dissipated after the rapid increases last year and earlier this year, and price index components of the various District purchasing managers' reports continued to move lower through August. However, several contacts noted upward pressure on building materials prices resulting in further increases for gypsum wallboard and cement and renewed hikes in lumber prices.",1018
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"Over the past few meetings I have been reporting that the Eleventh District economy has slowed from its very strong growth in 1994 to something a little less strong this year. This month's Beigebook singled out Dallas and New York as the two Districts whose economies have slowed. I should emphasize that the slowing is from growth at a very strong pace to a more moderate pace and not a decline. For example, in Texas which makes up the bulk of the Eleventh District economy, employment growth is running at 3.4 percent, only slightly weaker than the 3.8 percent posted over the preceding months. Industrial production increased at a 2.1 percent annual rate in July, as manufacturing output rebounded from four months of weakness. The housing picture has improved. Single-family permits are 7 percent above last year's level, and last year was a very good year. Gross state product increased at an annual rate of 5.3 percent in the first quarter according to our estimate, and we expect a pretty good number for the current quarter but probably not as high as in the first quarter. Mexico continues to exert a significant drag on the District economy, but not enough to turn the overall picture sour. And in fact, lost exports to Mexico have been largely made up by a surge in exports to other parts of the world. Last Thursday, we had a joint meeting of our Houston board and our small business and agricultural advisory council, and the members generally supported the view that overall business activity is in pretty good shape, although they reflected diminished confidence about the future. They seem to be in somewhat of a funk about the future. All the signs are indicating that we are having a huge turn in the Eleventh District in that our economy is remaking itself very significantly. We are moving from cow chips to computer chips! [Laughter] To give you some anecdotal indications of what is going on, AMD and Motorola have each just finished billion dollar semiconductor plants in Austin. Applied Materials, which manufactures equipment used in chip production, has added 1,000 jobs in Austin. Texas Instruments is speeding up construction of its new microchip factory in Dallas. National Semiconductor is doubling the capacity of its Arlington plant and will spend $600 million annually over the next five years to expand capacity. Dell, Compaq, and Hitachi are all seeing strong growth. This is all computer-related activity, but we also are seeing big advances in other high-tech areas such as telecommunications. Ikea is building a second plant in Fort Worth. Ericsson was just awarded a $300 million contract to build an advanced wireless communications technology facility and will be hiring 800 people within the year. PCS Prime, a telecommunications company, is putting its national headquarters in Dallas. These are some of the ""biggies"" and there also are a number of small companies expanding or moving into the area. Very strong global demand for high-tech products continues to stimulate demand for Eleventh District exports. Thanks to the remake of the District over the past decade, we not only are relying less on cows than we were but also less on oil and gas. The share of the oil and gas sector in the Texas economy has declined from roughly 18 percent in 1982 to about 6 percent today. Our health services industry is now almost as large as the oil and gas industry. In short, a lot of activity is going on that is adding a lot of stimulus to our regional economy, and all that is in addition to the stimulative impact we expect to get from Deion Sanders when he arrives. [Laughter] On the national economy, the slowing of inflation has been very welcome, and I think the probability of a recession has receded significantly. The economy probably could take some stimulus without an acceleration of inflation. On the other hand, the situation is right for a further ratcheting down of inflation. I believe that policy decisions at this juncture probably depend more on the priority we give our goals than on the state of the economy.",805
-fomc-corpus,1995,Thank you. President Melzer.,7
-fomc-corpus,1995,"Thanks, Alan. The Eighth District economy continues to grow at a pace largely unchanged from recent reports. In general, negative news appears to have been mostly offset by plant expansions, new hiring, and sales gains. Reported layoffs from downsizing and plant closings are scattered throughout the District, and such layoffs are somewhat more concentrated in durable goods producers than in other industries. But sales at firms in many industries--this is based on anecdotal reports--for instance, prefabricated metal buildings, electric motors, brick manufacturing, and scrap metal, are up on average between 7 and 15 percent so far this year. District payroll employment is up about 1-1/2 percent year-to-date, about the same rate of increase as in the nation as a whole. The transportation equipment sector is the District's strongest, having grown consistently for nearly two years. District automobile production is expected to jump considerably in the months ahead; planned fourth-quarter production is estimated at about 338,000 units, up nearly 29 percent from the second-quarter level. That has to do with some new lines that are opening up, particularly for the production of light trucks. A survey of 225 small businesses in the District found that most expect little change in business conditions over the last half of 1995. About 20 percent of the responding firms said they expect to raise prices over the next three months, while less than 3 percent are planning to reduce prices. These District price trends mirror the national outlook. Private forecasters predict that inflation in 1995, a year of trend growth in real output, will be higher than inflation in 1994, a year of rapid growth in real output. Over the next 18 months the most optimistic forecasts, including our own Greenbook, place CPI inflation at its current level, while the more pessimistic forecasts see CPI inflation rising to 4 percent. The central concern of this Committee should be progress toward price stability, and there seems to be little prospect that substantial gains will be made anytime in the foreseeable future. Inflation forecasts with horizons of five years or more indicate that market participants do not expect inflation to decrease from current levels. On the national level, the economy is recovering from the slowdown in the second quarter. Payroll employment jobs have increased at a fair, if uneven, pace over the summer and seem poised to resume a more stable growth path through the autumn. One concern in the national outlook is the stance of fiscal policy. I would like to associate myself with what Al Broaddus said before and reiterate my view that monetary policy should focus on price stability and not try to offset temporary effects of deficit reduction on aggregate demand. The suggestion that the Committee can effectively do more than that is in my view overselling our abilities, given uncertainties about the magnitude and timing of the effects of deficit reduction as well as of our own policy actions. Let me conclude with a few comments on financial indicators. Total bank loan growth has been rapid over the last two years and, along with solid growth in M2 since the beginning of 1995, seems to indicate continued strength in the national economy. In the Eighth District, total bank loans have been growing at double-digit rates since mid-1994. At the same time in the nation as a whole, total checkable deposits and total reserves, which grew at rapid rates throughout 1992 and 1993, have been subject to a marked runoff since the beginning of 1994. In my view, which I think you all know, narrow monetary aggregates such as total reserves and the monetary base adjusted for changes in reserve requirements are important indicators of the stance of monetary policy over longer periods of time. However, the adoption by depository institutions of sweep accounts suggests the need to interpret these indicators flexibly in the near term. Estimates by the St. Louis staff, which are consistent with what is in the Bluebook, suggest that sweep programs could be adopted by depositories holding as much as 3/4 of required reserves and 80 percent of aggregate reserve balances. I think it is essential that we continue to monitor these programs because even with all the controversy in interpreting the various monetary aggregates, the provision of an appropriate supply of reserves relative to demand is the core of the implementation of monetary policy.",863
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"The Ninth District economy remains strong. Labor markets are tight. The rate of unemployment in Minnesota is at or near an all-time low. Particularly bright spots in the economy are construction, both residential and commercial, mining and energy output, and forest products. The only major exceptions to this generally favorable picture are cattle producers, who are being adversely affected by low prices--but that is coming off seven or eight pretty good years--and tourism, where apparently the summer season turned out to be mediocre; again, that is coming off several back-to-back very strong years. As far as the national economy is concerned, I have no problem with the general path of the Greenbook forecast, and I am hard pressed to identify a particular bias in the risks. Our model forecast is more optimistic than the Greenbook--more optimistic in the sense that we have slightly more growth in 1996 and 1997 and slightly less inflation. In fact, we have a deceleration of inflation. Given our inability to be precise about these things, I would judge either outcome to be acceptable.",214
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Mr. Chairman, broad measures of employment suggest that economic growth ticked up in recent weeks in the Second District. If, however, as President McTeer suggested, our two Districts are the weak Districts, I'd like to merge immediately. In August, payroll employment rose at an annual rate of 2 percent in New Jersey and 0.7 percent in New York. Mergers, closures, and layoffs continue to monopolize the headlines and to affect confidence adversely. In fact, new business formations continue to exceed closures and the number of firms increased by about 2-1/2 percent in the second quarter in New Jersey and about 1/2 percent in New York. That suggests support for a slow-to-moderate expansion in regional employment and renewed confidence among regional businessmen. On the other hand, consumer demand appears to have weakened. Our contacts reported that existing home sales in August were 10 to 15 percent below a year ago while permits for new home construction declined significantly. Senior loan officers reported a marked deterioration in consumer loan demand, and our retail contacts reported disappointing August sales. The newspapers are full of clothing advertisements. The decline in August tax collections tended to confirm our survey results. On the national level, assuming an unchanged policy, our forecast agrees so closely with that of the Greenbook that our slightly higher forecast of CPI inflation next year--3.1 percent as compared to 2.9 percent--has little significance and is more in the category of a rounding error. We do believe, however, that the risks to the forecast are somewhat slanted to the down side, in part because the remaining level of manufacturing inventories seems to be higher than desired by manufacturers. We also wonder whether business fixed investment could be somewhat weaker in 1996 and 1997 because of some recent weakness in sales of durable goods. We are not so concerned about this downside risk that we think it requires immediate action on monetary policy, but we do think that the risks we had deemed to be about balanced are now noticeably shifted to the down side. Thank you.",418
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"At a recent joint board meeting, one of our directors whose firm employs a lot of people in four of the states in the region listed a number of the major metropolitan areas and said the employment situation was very bad there. I interrupted to ask him to clarify what he meant and his reply was that he could not hire anybody. [Laughter] His firm runs ads and nobody applies. There had been a general feeling in the spring, among large and small businesses, about what was described as the ""hitting the wall"" phenomenon, and that is largely gone. People generally have overcome their earlier worries about the outlook. We get reports that residential construction, both single-family and multifamily, is quite good throughout the District. Commercial real estate is doing very well. There are persistent comments about tight labor markets everywhere except in western Pennsylvania. We even heard one report of bounties to hire people where employers tell existing employees that if they bring in somebody--a friend, a relative, or anyone--who applies and gets a job, the existing employee will get a bonus. That's a novel approach for the labor market. We have reports that college enrollments, both public and private, are at record levels, though there is some discounting on tuition in order to attract students to smaller private schools. The only sector of clear weakness throughout the District is health care; there are continued comments about downsizing of the health care labor force. I want to make a couple of comments about the fiscal situation. I don't know what the Wall Street view is--I'll leave that to Peter Fisher or somebody else--or the foreign portfolio manager view, but I think there is a different view on Main Street than in the financial markets. If you were to walk down the streets of Wooster, Ohio and tell people that the government might decide to cut the growth of government spending, reduce the budget deficit, maybe with some tax elements in the fiscal package, and that this was going to have a bad effect on the economy and that monetary policy would need to do something to offset it, they would wonder what planet you came from! Whatever people in effect think about the size of fiscal multipliers, let alone what their sign might be or their timing, I think we need to be very careful not to communicate the idea that anything that is done on the fiscal side is somehow negative and that this undesirable event will require an offsetting or compensating monetary policy action. I don't think that is going to play very well out there on Main Streets across the land. On the Greenbook forecast, I have given a lot of thought to this issue of what the level of the funds rate implies with regard to either economic growth or inflation. I have reviewed the experience of the last couple of years. Two years ago at this point we thought that the head winds might be diminishing. The federal funds rate was around 3 percent and as late as December 1993 the Greenbook was projecting continued anemic or subpar growth and actually an increase in inflation in 1994. Of course, what happened is that the funds rate went up a lot in 1994; real growth was very strong; and inflation came in below what had been projected in the Greenbook. In August 1994, we increased the funds rate from 4-1/4 to 4-3/4 percent and many thought a rate of 5-1/2 percent might eventually be the right level. In November we boosted the rate another 3/4 percentage point and last December's Greenbook talked about taking the funds rate up to 7 percent by the middle of this year just to try and keep a lid on things so inflation would not take off. Of course, what has happened is that we have a funds rate that is over 100 basis points below that level and the inflation outlook is better than it was expected to be. The lesson for me is that we can have errors in our forecasts of output growth and inflation in both directions, and they don't necessarily go together. When I look at something like the Blue Chip forecast or other forecasts, they tend to indicate that the more growth we have, the more inflation. That simply is not the experience; we are not in a world that says more growth causes higher prices and vice versa. So, I think we need to be very careful about how we talk about the relationship of the funds rate and the growth in output and any implications the latter might have for the purchasing power of money. I do agree with the emphasis of some people that this is the right time to keep a long-term focus and not be perceived as reacting to events either in the economy or fiscal policy.",942
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Mr. Chairman, my opinion about the national economy has changed very little since our last meeting. Although the inventory adjustment may not be entirely behind us, the various sectoral reports on spending seem consistent with continued growth over the next year or so at a pace close to trend. I interpret recent inflation reports as confirming that prices remain well contained. At this stage I think the biggest single risk to the outlook comes from the fiscal situation. Although the odds of a train wreck remain low, a default on the government debt could touch off financial repercussions that would greatly upset Greenbook types of projections. But, of course, on that score we will just have to wait and see what happens. The longer-term problem that confronts us at this stage, though, is gauging whether the federal funds rate remains above the level that is needed to achieve trend growth further out in the forecast period, and I mean in late 1996 and 1997 and beyond. That seems a long way off, but the Greenbook simulations reveal what we already know, namely, that the lags in monetary policy are sufficiently long that any policy changes that we might undertake over the next months would have their maximum effect in 1997. While it is looking into the distant future, I don't think it's entirely premature to be thinking that far ahead. What I think the Greenbook projections suggest is that the real funds rate is a little too high to support trend growth with the assumed degree of budget contraction, and it may turn out that the budget contraction will be greater; we will see. In this sense I think we have what Charles Schultz dubbed a ""termites in the basement"" problem, although he was using that phrase to talk about the federal deficits of years ago. A ""termites in the basement"" problem is a nagging, chronic little problem that can eventually cause a lot of grief if it is not attended to. Termites nibble away slowly so the problem just creeps up and there is no great sense of urgency that one absolutely has to deal with it on one day as opposed to the next. That is how I perceive the Greenbook outlook. I think there appears to be a problem there. It starts as a small problem, but unless it is attended to it will grow into a more significant problem. Simulations that we have done with the MPS model reveal that after 1997--I know that is a long way out--the problem really begins to snowball into a crisis. The MPS simulation suggests that if the budget is balanced by 2002, the real funds rate would need to decline from roughly its present level of about 2-3/4 percent to about 1-1/4 percent. If the funds rate stays where it is, the economy is not likely to remain on an even keel. I would also note that the Greenbook and the MPS model are not alone in reaching this conclusion. Many outside forecasters are predicting an eventual decline in the funds rate. That also seems to be the conclusion of participants in financial markets since longer-term yields apparently embody an assumption of declining short-term rates. I think that adjustments in long-term market rates could easily suffice to keep the economy on course, but they are predicated on at least an eventual adjustment in the federal funds rate. Again, as the Greenbook suggests, I think the outlook for the near term, next year and even the next two years, looks good. I don't view this as a crisis, but I do believe there is a ""termites in the basement"" problem.",719
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"I can't top that! On the fiscal situation, the Greenbook now assumes that the Congress ultimately will pass 85 percent of the reductions called for in the Congressional budget resolution. Believe it or not, I think that assumption is still a little too low. I think it will be more like 95 percent, but at least we are getting closer and at this point I see no reason to quibble. The net effect of that is a negative fiscal impulse for 1996 of 3/4 percent of GDP. I want to talk about what that means for the forecast in just a second, but there were two comments related to the fiscal situation that I would like to return to. I forget--what town in Ohio?",146
-fomc-corpus,1995,Wooster.,3
-fomc-corpus,1995,"Wooster. Well, I didn't hear it right.",11
-fomc-corpus,1995,I said that for Don Kohn's benefit.,10
-fomc-corpus,1995,"The question I would pose is what would I hear if I were to go to Wooster, Ohio just after Thanksgiving. Everyone has come to grandma's house and a cousin, who unlike all other federal workers is a good worker, [Laughter] has been laid off and tells his tale at the Thanksgiving table. I think there would be a perceptible view that federal spending will indeed slow down and that if even this hard working person with the safest employer has lost his job, whose job is safe? So, I do think that in spite of what people believe, and as you know I am hardly an advocate of big government, the transitional effects of moving people from the public sector to the private sector are real. I think the people in Wooster will know it after Thanksgiving. With regard to the role of monetary policy, I completely concur with the view expressed by some that what we should look at is not fiscal policy per se but its effect on aggregate demand. On that point I would note that the Greenbook has projected nominal GNP growth of 4.4 percent in 1996 and 3.9 percent in 1997. Two years ago I didn't think we would see 3-point-something percent during my term as a governor despite our pursuit of price stability unless we had a major recession. Frankly, 3.9 percent is below what I would think of as an appropriate target for nominal GDP. So, I don't disagree with your theory. I would say 3.9 percent means that we are at price stability in effect. That would be, say, a 2-1/2 percent trend rate of growth and 1.4 percent inflation. That sounds like a definition of price stability to me. So, we are there. Returning to the question about the fiscal impulse, if we did have a negative 3/4 percent fiscal impulse, it would mean that to get 2-1/4 percent growth next year the rest of the economy should have a trend growth rate of 3 percent in it. That does not seem plausible to me, particularly when we are at 5.6 percent unemployment already. There is another alternative, and that is that we have had a completely painless and seamless transition from fiscal contraction to private sector expansion; but I don't think that comports with reality. So, let's go back to the possibility of 3 percent growth of the private economy as the underlying assumption here. If we look at what has happened to the incomes and wages of people, the reason that we are not seeing inflation accompanying the low unemployment rate is that structural changes have occurred in the labor market. They are manifest in the fact that the wage share of personal income has declined dramatically. In 1989 at the last business cycle peak that share was 59 percent; in July it was 57 percent. At the margin in the last 12 months, wages have accounted for only 50 percent of increased personal income. It is not hard to understand how we can get both lack of inflation and an improvement in the unemployment rate when in fact wages are being suppressed. The problem is that we cannot have wages that continue to be depressed and have a 3 percent expansion of the real private economy; it just does not add up. One of two things can happen: In one, workers get restless, wages go up, the profit share falls, and there is upward pressure on inflation. That is scenario ""one"" that Mike described. Or we get scenario ""two,"" where the demand is not there, we do not in fact have 3 percent expansion ex-government in the economy, and we get slower growth than the Greenbook is forecasting. My own bet is that the second result is more likely than the first. Certainly, when we are talking about 4.4 percent nominal GDP growth going down to 3.9 percent nominal GDP growth, I hesitate to think what the trend is going to lead to. Clearly, we have a real federal funds rate that is too high. I guess I couldn't camouflage myself as a termite, but I end up tearing down the house just like the termites do in Governor Yellen's story. Thank you.",846
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,I am not going to try to pick up on that analogy!,13
-fomc-corpus,1995,I appreciate your not doing that.,7
-fomc-corpus,1995,"Let me make a brief intervention because like so many others and the way Mike Prell started this morning, I see very little change from where we were in August. Relative to the Greenbook, I continue to believe that the risks, if that is the proper word, are on the up side and I am in the camp that would be closer to the more bullish of the three scenarios that Mike Prell presented this morning, for all the reasons that he discussed. I would like to offer a thought or two about the fiscal deficit situation. First of all, 1996 is an election year, and we are talking about deficit reductions that would be put in place by legislation that is not yet passed, although the new fiscal year is upon us. Assuming they do get passed, it will take some time to get them largely in place. So, I would be surprised if it turned out that there was a great deal of additional fiscal drag in the year 1996. It also is worth noting that in the last three fiscal years the deficit has come down from a level in excess of $280 billion to probably less than $160 billion in fiscal 1995. That is a lot of deficit reduction in a 3-year time period. And yet we had 3 percent plus real GDP growth in 1993 and 4 percent plus growth in 1994, and 1994 was the year when the biggest part of that deficit reduction took place. Deficit reduction has a lot of positive impacts, and in the aggregate whatever deficit reduction does take place--and I hope a program will be enacted--I think there is every expectation that its negative effects can easily be overcome by all the positive impacts that get thrown off from it. In August I remarked on what seemed to be an exceptional number of rather basic questions that, taken together, are largely going to dictate the nature of monetary policy in the years to come. They include issues concerning the trend in fiscal policy, the level of the NAIRU, the need for improved measurement of the inflation rate, the trend of productivity, the longevity of this absence of wage pressures that we see today, and the persistence of household debt formation. It is going to take a while for a lot of these things to play out, but I do think we are in a good position right now to wait and see how all this evolves. Thank you.",481
-fomc-corpus,1995,Thank you. Governor Phillips.,6
-fomc-corpus,1995,"Thank you, Mr. Chairman. My remarks will be short this morning. In view of the revised GDP number that we have received since the last meeting and the somewhat mixed economic signals that we have been getting and certainly have discussed around the table today, I think it's fair to say that the inventory cycle may have flattened out to some extent. Inventory adjustments are likely to stretch more into the future. Except for this shift in the inventory adjustment process, the situation seems to be working out much the way that was discussed at the last meeting. Demand has held up. We didn't slip into a downward spiral coming out of the inventory adjustment process. Specifically, consumer spending and housing have shown improvement. And although business investment growth is slowing somewhat, we all recognize that the previous rates of expansion were not sustainable. Employment is holding fairly steady. People appear to be learning to live in this newly re-engineered world. New businesses are starting up and are absorbing some of the displaced workers. I think the financial markets since our last meeting have reflected the resolution of the inventory situation. They generally have improved--the dollar, the stock market, the bond markets. This means a continued availability of relatively low cost capital, which bodes well for the business investment outlook. In this environment we have had good news with respect to inflation, which appears to be reasonably well controlled. However, I would point out that we have a distance to go on getting the inflation rate down, and it is going to be harder and harder to make progress. I guess I am having a difficult time signing on to the stories that are floating around about significant upside risks, one of Mike Prell's three scenarios. With employment remaining a continuing concern, while this is a positive influence for inflation, job uncertainty means that we are unlikely to see significant expansion in consumer spending. Continuing inventory adjustments in the face of fairly steady demand are probably going to make businesses a bit leery of expanding significantly. We have talked a bit about the pending train wreck and how much of a fiscal drag that is going exert. I think that under any circumstances there is going to be some kind of a drag, but the question is what kind and how much. I am not sure that we have a good handle at this point on what kind of fiscal drag we will see. In sum, I think the outlook is for slow growth in the near term. I do think there are a couple of major unknowns. The train wreck scenario is one and we don't fully understand the implications of a potential train wreck. On the down side, it could produce a lot of uncertainty in the financial markets, and it's hard to know what kind of uncertainty that might engender in the general economy. The second unknown relates to the fact that most people seem to be focusing on an outlook of 2 to 2-1/2 percent growth in real GDP, with 2 percent suggested in the Greenbook for 1997. I would point out that we are going into an election year, and I wonder whether 2 to 2-1/2 percent is going to be deemed politically and socially acceptable. I suspect that there might be a lot more pressure building in the upcoming year for a stronger economy. Even though economists are saying this is about as good as it gets, I wonder whether folks on Main Street will see it that way.",674
-fomc-corpus,1995,Thank you. Governor Blinder.,7
-fomc-corpus,1995,"Thank you, Mr. Chairman. There are two basic reasons for revising a forecast from one meeting to another. One is that you receive news that makes you change your mind; the other is that you goofed the last time. I don't think either one is true in this case. I don't think the staff goofed the last time. I see the news that has come in since the last FOMC meeting as being entirely consistent with the staff forecast, as I think Mike does. The economy has been following the script laid out in the previous Greenbook--toward the much hoped-for soft landing. So, to me, the epsilon in the news has been roughly zero in the last five weeks; and, appropriately the Greenbook forecast has changed very little--negligibly in fact. Indeed, as I read over the minutes of the August 22 meeting last night, I had a strong sense of deja vu. I thought I was reading the minutes of this meeting and it had not yet occurred! I suspect that when Norm drafts the minutes for this meeting, they are going to look a lot like those for the August meeting. In fact, he won't have to do much work.",243
-fomc-corpus,1995,He can just xerox last meeting's minutes!,10
-fomc-corpus,1995,"Yes. A number of us observed last time--fewer of us today maybe because we are getting used to the idea--that this scenario is too good to be true. Almost everybody said that last time; very few people said it today. To be sure, it is five weeks closer to coming true than it was five weeks ago; but it's still a little too good to be true. [Laughter] I believe, as Sue Phillips just mentioned and others too, that the biggest risk remains the step into the unknown that Capitol Hill and the White House are about to take. It could all work out fine, or it could work out to be a catastrophe. There is no way to predict that. But to me it presents a downside risk, not an upside risk. It's hard for me to see it giving a big boost to the economy. Last time, I called attention to a feature in the Greenbook forecast that you could barely see. You almost needed a microscope to see it. That feature was that by the end of the forecast, which was then the fourth quarter of 1996, a small gap had opened up between actual and potential GDP, and that gap was growing slowly. So, if it was extrapolated beyond 1996 one would see an uptrend in unemployment and a downtrend in inflation. In the current Greenbook forecast, which has now gone out one more year, this gap is more visible; but it still is not very dramatic. The real growth rates for the years 1995, 1996, and 1997 of the forecast period read 2.1, 2.2, and 2.0 percent--all, as Bob Forrestal and others have noted, below the growth rate of potential. Consequently, the annual average unemployment rates of those three years go 5.7, 5.9, and 6.1 percent. That is where the Greenbook stops. But that is not where the world will stop. The core CPI inflation reads 3.1, 2.8, and 2.7 percent. So we see a pattern of declining inflation in the data. The reason it is there now is the same reason it was there five weeks ago--which is that, if inflation is indeed capped at or below 3 percent as the Greenbook says and as I believe, the actual real federal funds rate is almost certainly above the equilibrium real federal funds rate. Several people have observed this, and Governor Yellen in particular has emphasized it. That means that by some reasonable definition--I guess my definition of a reasonable definition is that I can't come up with a better one--monetary policy is restrictive. It is very hard to define the ""zero"" on monetary policy, but this is as good a way as I know. And that monetary restraint--that is to say the gap between the actual real federal funds rate and the equilibrium real federal funds rate--probably will be greater the more fiscal restraint there is. This is a process that naturally snowballs. I am sorry, but I am making tacit reference to termites here, though I wasn't going to use the term. You start with a real funds rate that is a little too high; that opens up the gap; that leads to lower inflation. If you hold the nominal funds rate steady, the real funds rate gets higher because monetary policy is not standing still but actually is tightening as inflation declines; and that leads to a larger gap and so on. You will recognize that this is exactly the argument that was used, correctly, on the up side against rising inflation in the 1960s and 1970s to explain why it was foolish to target the nominal interest rate. It's just as foolish to target the nominal interest rate on the down side, and I don't think we are doing that. I had asked the staff, and Governor Yellen mentioned this, to use the MPS model to run the Greenbook forecast out further, holding the nominal fed funds rate at 5-3/4 percent, because you can just barely see what is going on by the fourth quarter of 1997. When the staff did this, they assumed that we would reach a balanced budget by the year 2002. I don't remember that I specified that. I might have, but I don't recall doing so. In any event, it has the consequence of calling for the dramatic reduction in the equilibrium funds rate that Janet Yellen mentioned earlier. When you look at the paths that come out of that simulation, the unemployment rate rises from 6.2 percent in the fourth quarter of 1997, which is where the Greenbook turns off, to about 7 percent a year later and about 8 percent a year later than that. And then it just keeps on going up because the economy is on an unstable path in this forecast. By the year 2002, you don't even want to think about the unemployment rate. The inflation rate falls from where it is now, around 3 percent, to about 1 percent by 1999 in this path. Then it, too, keeps going; and by the year 2002, when the budget is balanced, the economy is experiencing a heavy deflation that makes the current Japanese standard look wildly inflationary. Now, that is not a forecast. Nobody should take this particular model literally and nobody does. I think not even the proprietors of the model take it literally. I certainly don't and I don't worry that people around this table will. Furthermore, we would not let it happen. The economy is not going to go to minus 7 percent inflation and 10 percent unemployment. The point of the exercise is to indicate whether the path we are on is a sustainable path or a nonsustainable path. It suggests that the current real federal funds rate is probably unsustainably high. And it shows us that the effects of this discrepancy start very small, so we don't really see them, but they build. I am now in what will appear in the transcript as the last paragraph--into policy, though just a little--in anticipation that this month's policy discussion may go like last month's policy discussion. [Laughter] This observation does not imply that we have to cut interest rates today. It certainly does not, and I would not in fact argue for that. But it does strongly suggest that we need to ease policy sometime, especially if there is a large fiscal contraction--and regardless of public opinion in Wooster, Ohio as to the effects of fiscal contractions on aggregate demand. More importantly, it suggests that we need to think about a long-term strategy for monetary policy. What we do today will have essentially nothing to do with the next two quarters. But what we do, not necessarily today but, say, in the coming six months, is likely to have a great deal to do with how the economy looks 1-1/2, 2, 2-1/2 years after that, and that's what we ought to be thinking about. Thank you, Mr. Chairman.",1432
-fomc-corpus,1995,Thank you. Shall we have coffee?,8
-fomc-corpus,1995,Mr. Kohn.,5
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,"Questions for Don? Yes, President Melzer.",10
-fomc-corpus,1995,"Don, I would like to ask about these sweep accounts--a couple of different aspects. One stems from an inquiry that we had just this week from a bank in our District. My sense is that knowledge of this is spreading like wildfire through the banking industry, and I think banks are looking to the Fed to take some position on this; they are asking whether the practice is legal and so forth. I presume somebody is out there peddling the idea, or the software that supports it, or whatever. So, one question would be what can be said about these arrangements and maybe this discussion should be continued later at lunch if that is more appropriate. My other question is whether we have the capability to publish data that, without violating any confidences in terms of individual institution data, would give the public a better handle on what is going on. Clearly, some people are misinterpreting the stance of monetary policy because they don't have this information.",190
-fomc-corpus,1995,"With regard to the first question, President Melzer, our Legal Division has written a number of letters to institutions that have inquired. The letters lay out the criteria for a sweep arrangement that conforms with our Regulation D. My understanding from Reserve Banks is that many of the inquiring banks already have in hand copies of the letters that the Board's Legal Division has sent to other banks. So, there are guidelines out there from our Legal Division. There has been an attempt to circumvent the regulation with sweeps that are entirely sleight of hand bookkeeping. A bank has to have a real sweep account. I don't know all the legal ins and outs; we could explore that later if you wanted to. With regard to the second issue, we are exploring that. I agree with you that it would be good to get these numbers out somehow, but there are two difficulties. There is the one you mentioned: if we publish a monthly series, in some earlier months and even in some earlier quarters only one bank or two banks had introduced such accounts. Publication would give information to their competitors, and we try to avoid that. That has not been true in the last few months when many banks have introduced sweep accounts, but that would not be the case for the early part of the series. I think there may be ways we can publish the series using quarterly or semi-annual data at first or something of that sort, and we are looking at that. We intend to publish. The second difficulty is one of interpretation. All we know are the initial impacts of these sweeps; that is what we get through your data departments, your accounting people, and our edit checks. We don't know what happens subsequently, and I think we have to be very careful in looking at these numbers to resist simply adding them back to M1 and assuming that we are getting what M1 would have been otherwise or what the monetary base would have been otherwise. When we do put the series out, I think we need to take a lot of care in how it is put out and hopefully lead people away from misinterpreting what they have. They need to understand the very limited nature of the data that we have, but we are looking at ways to publish them.",449
-fomc-corpus,1995,Could it be a phenomenon that's big enough that we need to collect additional data to be able to interpret it correctly?,23
-fomc-corpus,1995,We have given some thought to that as well.,10
-fomc-corpus,1995,"There is one other aspect in the interpretation of these data that we have to be careful about. While it is true that in a technical sense these accounts are changing, they are not perceived to be changing by the holders of the accounts. So, you can not make the argument, which some might make, that what in fact is engendering a change, for example in M1 or some other aggregate, is relevant in terms of the macroeconomic effect. That is not the case, or should not be the case, if the holders of these accounts are not aware that anything is going on, which indeed they are not except to a marginal extent. So, you can't argue that people are holding certain types of balances voluntarily and acting on those irrespective of how those balances got created. There is a significant lack of awareness among the holders of the accounts that reserve balance adjustments are taking place. And they don't perceive that their NOW account has gone down or been shifted over to MMDAs and therefore one can't argue that their behavior should be altered.",209
-fomc-corpus,1995,But they are held harmless from change.,8
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"Another part of the monetary base's behavior, of course, is that currency and bank reserves have been declining for a good while. Currency was growing very rapidly earlier, but now something is happening to it. Can you tell us what it is and whether it has any implications for anything?",57
-fomc-corpus,1995,"The currency flows to foreign countries have slowed substantially. We have a lot of data on the flows, but we can only guess at the total. The shipments data we get through the Federal Reserve Bank of New York suggest that for the last several months the amount of currency outside the country has been fairly steady, and in the last few months it may actually have gone down with net shipments back to the United States. Now, it is very hard to figure out what is going on. One story, as Ted just mentioned, is that the situation in Russia has stabilized to a certain extent. It is hard to see that in the direct shipments to Russia, but a lot of currency gets to Russia through Switzerland and other countries, and we have seen a slowdown there. The other area where we have seen a slowdown, and perhaps I should turn to Ted and Peter on this, is in lower shipments to, or even a reflow of shipments from, Latin America. For a while we thought we had an Argentina story--that is, that there were huge volumes of shipments early in the year, partly after the financial crisis in Mexico, in preparation for something awful that would happen in Argentina. The something awful never happened and some of that currency came back. But I think the reflows have been wider than just those from Argentina; we are getting some shipments back from the rest of Latin America. In summary, I think an important part of this currency story has been the growth in shipments abroad early in the year--a lot of which were to Latin America and shipments destined ultimately to Russia--and the slowing since then.",323
-fomc-corpus,1995,"Further comments? If not, let me xerox my comments from the last meeting because, as Governor Blinder pointed out, a good thing that can happen to somebody who likes to talk about the business outlook is that things go the way that you expected them to go. It is not usually that way. Let me just point out, however, something that has not been stated--namely, that economic activity, income creation, and the like are still undergoing a suppressing effect from a reduction in inventory investment. It is not overly clear in the data, but as you poke around here and there, it is pretty obvious that the pressure to reduce inventory-sales ratios is still out there and that the retrenchment or stabilization of lead times is exacerbating this process. It is not sufficient merely to look at final sales, largely because inventory numbers are not passive. There is a dynamic element involved in how inventories are managed, and by affecting the level of income they also affect the level of final sales. So, we do not yet have a sense of how all this is coming out. There is evidence that the probability of continued weakness is receding. This is not inconsistent with the comment made by several of you that the risks are on the down side. It's just that the downside risks are not immediate; they arise as we get into 1996 and are the result to a certain extent of the fact that the business cycle is aging. To whatever extent the accelerator works in the capital goods markets, one must presume that that will have some slowing effects. And while I would have a minor quibble, which I will get to, with Governor Blinder's scenario of the federal funds rate being higher than where the long-term equilibrium should be--a view with which I generally agree and one that I think you have all commented on in the past--I would just caution that we should be a little careful about the use of the various models out there. To repeat what I have said in the past to this Committee, those models give forecasts that are marginally laughable if the ""add"" factors are not judiciously applied. Simulations of these models tend to employ a fixed level of ""add"" factors that become less and less usable as you go out farther, and we have to be careful about presuming that these simulations are any more accurate in capturing what is going on in the economy than ""unattended"" projections of these same models--unattended meaning that the add factors are just allowed to run by some mechanical process. Those results are poor and the conclusions that we would get from simulations must of necessity be of the same nature. However, having said that, I think it is correct to argue that we are probably at a real funds rate level that is higher than the long-term equilibrium. I think the argument that Governor Blinder makes--namely, that we get a progressive effect in that as the inflation rate falls the real funds rate rises even though the nominal rates holds stable, is probably an accurate description. I just want to make certain that we don't go overboard and assume that the simulations we make are all that useful in this regard. I think this basically leads to the conclusion that it is probably unwise to move today essentially because of the budget debates that are involved. I think it would be very difficult for us, no matter how craftily we constructed our rationale for moving, to disassociate a move from the train wreck scenario. There is, however, one issue about this that disturbs me, which Don Kohn raised. We have to be careful not to allow monetary policy to be frozen in place by a process that could go on for months and months. Policy should not remain frozen if we determine that the economy is in a state where we have to move. I don't know whether that will be before or after November 15, but our next move certainly will be at a time when this Committee is meeting--either here or on a telephone conference--because the move is probably going to be a sensitive issue. So, I would suggest that it be done with the Committee's concurrence. As far as our decision today is concerned, I would conclude that policy should be unchanged and symmetrical. In my judgment, it would be wrong to move today, and if we are to take action in the period ahead it should be in the context of considerable discussion about its implications and the decision should be made by the full Committee. So, I put on the table ""B"" symmetrical. Vice Chairman.",911
-fomc-corpus,1995,"Mr. Chairman, I support both your conclusion and the reasons that you gave for it.",18
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"I, too, support your conclusion and the reasons that you gave for it. As I said earlier, I am drawn to the view that the economy is doing well both currently and prospectively. So in terms of prescriptions about policy, I look to the old physicians' oath of ""do no harm"" and look at ""A"", ""B"", and ""C"" as to where the harm would be done if we did anything right now. I think it would be more harmful right now to raise rates than to lower them. Lowering them may be the next action, but I agree with the timing points that you made. I don't think that waiting right now, in view of everything that is happening on the fiscal side, prejudges whether or not we would wait in the future if the budget debates really drag out. So, I am comfortable with using timing as an argument right now, although I do agree that we should not have our hands tied at all as to future monetary policy actions. Finally, I would quote some people with whom I ate breakfast yesterday. Their advice with regard to monetary policy was: ""Don't just move, stand there.""",231
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"I agree with your proposal, Mr. Chairman.",10
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, I hate to break the trend that seems to be developing here. Your argument is highly reasonable and I hesitate to disagree with you, but I will anyway. For many of the reasons that have been advanced, I think we ought to move and we ought to do so today. First of all, we all apparently agree that interest rates are high by historical standards, and if maintained I think they are going to be contractionary in the long term. Governors Yellen and Blinder have articulated that theory very well. There is a trend that is building, and I think we ought to arrest it at this point. In spite of the fact that we have a very dynamic economy in the Sixth District, as I indicated earlier, there are business people who are reporting to me that softness is beginning to develop. So, the economy may not be in as good shape as the statistics are indicating. Again, as I said earlier, the Greenbook forecast is placing growth below what is currently considered to be potential. I think potential is higher than indicated in the Greenbook and therefore that the gap between actual growth and what I consider the real potential of the economy is greater than that in the Greenbook. That might give us trouble down the road. Inflation is certainly well behaved and whether we are at price stability or not I guess is a matter of definition. But I certainly don't see any deterioration in the inflation rate. Finally, I think the Fed's credibility is such that we are in a position where we can move today. Now, my preference along these lines is irrespective of the fiscal situation, and I certainly respect your view regarding the timing. On the other hand, I do think that today may be as good a time as any to move. It may be a less sensitive time than it will be later. So, my preference would be to move by 25 basis points today.",380
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Mr. Chairman, I think we adopted a strategy earlier this year to wait and see how things play out. I may have preferred a different strategy, but I think that one we adopted is reasonable. Having selected this strategy, our tactics should be consistent with it, and in my view what you propose is consistent. I think we are going to have to rethink the overall strategy, though--if not at the November 15th meeting then in December as we learn more about the economy. So, I support your proposal for now.",107
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"I support ""B"" symmetric. I think we indeed have to take into account the fiscal side, but I don't know what to take into account at this point. So, we ought to wait on that. Almost surely we will have to adjust policy at some point in coming months, but I don't sense any pressing need today. So, I think your basic arguments are correct and I support them.",80
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Alan, I favor ""B"" symmetric as well. I view policy as being somewhat restrictive, and I think that is quite appropriate. First of all, I think it is a hedge against the possibility that we have not in fact capped inflation in this cycle; I hope we have, but I don't think we know that. Secondly and perhaps more importantly, I would like to see the trend rate of inflation move down and certainly more quickly than is evidenced in any of the forecasts that I have seen. Perhaps when we see evidence that longer-term inflation expectations in fact are moving down, rather than the flat picture we are looking at now, it might be appropriate to consider an easing, but for credibility reasons I would be very careful not to ease before we saw some evidence along those lines.",157
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"I also favor ""B"" symmetric.",8
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, I agree with your recommendation of ""B"" symmetric. The reasons for me, however, are that I think the projections on the growth of the economy are reasonably accurate, and as I said earlier I am not quite as optimistic about the inflation outlook as the Greenbook. I think we are in a good policy position. As for the fiscal outlook, though both the Greenbook and our own projections view some fiscal restraint as possible, we don't know whether it will be more or less than we are assuming and we won't know for some time. So, I am very comfortable with where we are right now.",125
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, I support your recommendation for Bluebook alternative B. I think we have pretty solid evidence that the economy is growing at a faster rate than in the second quarter,and it looks as though the economy is going to continue to grow at an acceptable rate in the future as well. Although we have seen a modest fall in inflation and a modest increase in the real funds rate, I don't think there is much evidence that inflation will be on a declining path. Therefore, I would be reluctant to cut the funds rate at this time.",108
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"I support ""B"" symmetric. We should have some room to ease sometime this fall, but I think we should wait and see how things develop. Symmetry seems most appropriate to me, because I think it is clear that we probably would not move in the intermeeting period without a discussion. It seems to me that if we were going to adopt an asymmetric directive, we should definitely have a move in mind and should only be thinking about its timing. So, I would go with ""B"" symmetric.",102
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Mr. Chairman, I support your proposal for the reasons that you mentioned, but also for some of the reasons that Tom Melzer and Bob Parry noted.",32
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"I support your recommendation, Mr. Chairman, for many of the reasons that were mentioned by Presidents Melzer, Parry, and Hoenig.",29
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"Just for your information, a little arithmetic exercise I did--if we have CPI increases that average two-tenths of a percent each month through December, the December-to-December rate would be 2.8 percent. I support your recommendation.",50
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"I support your recommendation, Mr. Chairman. One of the things that you pointed out in your comments at our August meeting still needs to be kept in mind. There is a risk--and different people can put different probabilities on it--of fiscal fizzle. There would be a lot of disappointment if nothing happens here, and we could have an adverse effect on psychology across the country.",77
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"I support your proposal for ""B"" symmetric, although I do find myself very much in sympathy with President Forrestal's analysis. I think he has made a case for moving today, but on balance it seems to me that the timing isn't urgent, and I am quite content to wait.",58
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I also support your recommendation, Mr. Chairman, although as Governor Yellen does I find myself in considerable sympathy with Bob Forrestal's argument. I think for the reasons Jerry Jordan, Ed Boehne, and others have stated, that this is a good time to wait. We don't quite know what is going to happen. I simply want to state as a matter of principle, one that most people believe but a few have argued against, that fiscal policy is a relevant consideration in setting monetary policy. It doesn't mean that we have made our policy hostage to fiscal policy in any sense. But it is true that we don't know what the fiscal policy is going to be.",135
-fomc-corpus,1995,We are reading from the same page as last time.,11
-fomc-corpus,1995,"It's on page 15 of the Bluebook: ""In the implementation of policy for the immediate future the Committee seeks to maintain the existing degree of pressure of reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful considerable to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with growth in M2 and M3 over the balance of the year near the pace of recent months.""",113
-fomc-corpus,1995,Call the roll.,4
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,"The next item on the agenda is Senator Connie Mack's bill, the Economic Growth and Price Stability Act of 1995. When I reported to the Senate Banking Committee last week, I was not asked very specifically whether I supported the bill as such. I repeated the statements I had made previously, namely that I thought the primary purpose of monetary policy was long-term price stability, and I didn't get queried much beyond that. However, this bill has a very large sponsorship. Indeed, the last report I heard indicated that virtually all the members on the Republican side of the Senate Banking and on the Joint Economic committees were co-sponsors of the bill. So, it strikes me that we will be asked to testify on this bill at some point or another. Despite the strain of the current legislative calendar, it is likely that Senator Mack will be successful in squeezing in a hearing on his bill at some point, and it would be quite useful to get at least preliminary views from the members of this Committee on how we should respond to that bill. I will be testifying as the representative of this Committee and of the Board, and I will try to fend off wherever possible any requests on their part for my personal views. It strikes me that even if my views coincide in all respects with what this Committee might be saying, the Mack bill involves a potential change in the nature of what this Committee is doing and it is the Committee that should be speaking in that regard, not the Chairman. A lot of the provisions of this bill essentially would sanction what we have have been doing in any event, but there are aspects of the bill that are different. So, I think it is important that all of you, to whatever extent you have been able to focus on the provisions of the bill, at least give your preliminary views. The transcript that we will have of our discussion will be helpful in formulating official testimony in response to a request for us to appear and give our views. So, if anyone would like to comment --President Parry.",406
-fomc-corpus,1995,"Mr. Chairman, I believe that the Mack bill has much to recommend it. The bill would clarify our goals and place the primary emphasis on price stability. I also like the fact that it requires a numerical goal, which would add to the public's understanding of monetary policy and hopefully enhance our credibility over time. At the same time, the bill gives us the freedom to define the numerical inflation goal and the timeframe for achieving it. Finally, I like the fact that the bill removes the requirement that we establish and report on ranges for the monetary aggregates, which have become only a minor part of our deliberations. Overall, I think the Mack bill would be a big improvement on Humphrey-Hawkins.",141
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"I have expressed my belief that we need something like this so often that I am sure you don't want to hear it all again, and I won't repeat my views in any detail today. Briefly, I like this bill very much. I like it both in general and with respect to its particulars, many of which Bob Parry just covered. It certainly is true that we have made a lot of progress in reducing inflation over the last decade and have done so without a mandate like this. I think we have every right to be proud of that achievement, but it has not been easy. Basically, it has been a game of trying, by both our words and our actions to build and hold our credibility as we have gone through this period. We have managed to build credibility, no doubt about it, but my own instinct is that our credibility is not terribly deep and that it rests on a relatively fragile foundation through no particular fault of our own. I believe Americans should think about these issues. Certainly, financial market participants are well aware of the limits to the Fed's ability to pursue a price stability objective in the current institutional environment under current law. Because of this, I am not sure we can ever achieve full credibility, or even reasonably full credibility, under current law. The best evidence of that is what I often refer to as the periodic inflation scares in the bond markets. This bill would help us to deal with this credibility problem, and I certainly hope the Committee and the System will vigorously support it. I would add just one other point, Mr. Chairman. Recognizing that the bill even with its current political support still faces uncertain prospects, I would not want to see us tie our own longer-run strategy too firmly to this particular bill. In particular, we still need to be thinking about how we will deal with the Humphrey-Hawkins reporting problem that we are going to face whether this bill passes or not. We discussed that problem a couple of meetings ago.",396
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Let me begin by saying that there is a great deal about this bill that I can endorse. I think the focus on price stability as the single appropriate long-term goal of the FOMC is correct. I endorse the repeal of the Humphrey-Hawkins Act. I think those numerical target reporting requirements are unrealistic and counterproductive. I like the idea that we should be asked to define price stability and report to Congress on how we intend to achieve it. I like the bill's recognition of the fact that the attainment of price stability is not costless in terms of transitional losses in output and employment, and I like the fact that it explicitly directs us to take these losses into account in the transition period. So, I think this bill moves us in a good direction. Having said those positive things, I do have two qualms about this bill. The first is that it does not positively endorse stabilization policy as an objective. Its tone is quite negative and by inference it suggests that if we have just one tool of policy we cannot focus on more than one goal. I have said previously that I think that stabilization of economic activity is an important goal in its own right, and I think it will remain so even after price stability is attained. I recognize that one could make the argument that the actions that are appropriate to stabilize output and employment are going to coincide with what one needs to do to stabilize the price level, namely, to lean against the wind. The problem is that the world is more complex than that, and these two objectives will not always go hand in hand. There are apt to be tradeoffs between the variability of output around its trend and the variability of inflation around a level of zero. That does not mean that I reject in any way the natural rate hypothesis. So, I think our policy ought to be directed to the pursuit of two goals, not one; and as I previously argued, something along the lines of the Taylor rule provides a formal way of thinking about how we could use policy to pursue multiple goals without in any way sacrificing the goal of long-run price stability. On the other hand, I do agree with the point that multiple goals have created uncertainty in the minds of the public and Congress about the aims of monetary policy, and I agree with Alan Blinder that we need a systematic way of clarifying what we are doing. The second concern I have is that not only does this bill not positively affirm a stabilization objective, it actually repeals a key portion of the Employment Act of 1946. It goes much further than the repeal of the Humphrey-Hawkins Act. It repeals that part of the Employment Act that was a declaration of the responsibility of the government. I won't quote the whole thing, but it says in part that the government should ""use all practical means... for the purpose of creating and maintaining conditions which promote useful employment opportunities for those able, willing, and seeking to work."" There are two questions. The first is whether the Employment Act of 1946 has implications for the Federal Reserve. One might say that this Act is just a declaration of government policy and that it has no specific meaning for us whatsoever. A little bit of legal research that we did suggests that that is not the case. We uncovered a 1971 memo from the Board's General Counsel, Mr. Hackley, who wrote, ""The declaration of Congressional policy set forth in Section 2 of the Employment Act unquestionably applies to all agencies of the federal government including the Board, since the Board as well as the Federal Open Market Committee is part of the federal government."" This fact has been expressly recognized by three Federal Reserve Board chairmen--Chairman McCabe, Chairman Martin, and Chairman Burns. What Mr. Hackley concluded was that this broad mandate certainly did govern the general policies of the Board, although we did not have the specific obligation to pursue the particular goals set out in the Economic Report to the President. So, I think it does have implications for the Board, and even if the Employment Act of 1946 had no implications for the Federal Reserve at all, I would oppose repeal of this feature of the Employment Act because it has implications for the federal government more broadly.",847
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Alan, in the ten years that I have been directly involved in this process, this has to be the most significant potential institutional development that I have seen come forward. Needless to say, from what I have said in the past this bill is something that I would strongly support. I think price stability is the appropriate focus for the FOMC and the Federal Reserve more generally. It is the one thing we can deliver in the long run. That is where we ought to be focused, and if we do it successfully, it is going to enhance the performance of the real economy, and it is going to result in lower longer-term rates. I like the way this bill is structured in terms of articulating the general focus and leaving the details to the central bank. Clearly, a lot of work and thinking would have to be done to implement this bill, and it would not be easy, but the structure is quite appropriate in terms of having a direction set by legislation and giving us the opportunity to focus on the details of how to get that done. I think a numerical definition of price stability is very important from a credibility point of view. There probably are some things in the language of the bill where we want to consider certain technical modifications. In some places, the bill talks about the Board and in other places it talks about the Board and the FOMC. One would have to ask in the context of monetary policy whether some reference to the Reserve Banks needs to be in there as well because of the role of the Reserve Bank boards of directors in setting the discount rate. In any event, I think the bill needs consistency in terms of how that sort of thing is described. Don Kohn mentioned in his briefing that there was some ambiguity in the bill's language with respect to our taking into account the tradeoff between output and inflation. The way I read the language, it implied a tradeoff during the initial transition period. That is not an unimportant issue in terms of credibility. If that wording is read in effect as giving us latitude to engage in short-term fine-tuning on an ongoing basis, I think that is going to undercut our credibility and will remove some of the value that is inherent in an approach like this. I have just two final thoughts. As I said, a lot of work is necessary prior to implementing this legislation. I don't disagree with what Bob Parry said about removing the obligation to report on monetary targets, but I think we ought to recognize that if our long-term objective has to do with prices, there is no way around the fact that inflation is a monetary phenomenon. We have to focus on what is happening with our balance sheet, how that influences money, and how money relates to inflation. There may be implications of a very fundamental nature in terms of how we think about what we do or at least in terms of what we look at in doing it. Finally, I agree with what Al Broaddus said with respect to not tying ourselves strictly to this bill. We need to think about how we can continue to reap benefits from the course that we have been on and what steps we can take to enhance our credibility further. One idea that has been kicked around in this room has to do with longer-run forecasts of inflation. There are things like that that I think would be very helpful in communicating our longer-term intentions even in the absence of a bill like this. The reason I think this is so important, frankly, is that it is very hard to quibble in a general sense with the performance of monetary policy in the 1980s and the 1990s, but in my opinion that has had everything to do with the people around the table and particularly the kind of leadership we have had. It has very little to do with the sort of direction we are given in the institutional structure. I guess I view the latter as a very dangerous situation in terms of the potential for the future. We could revisit the 1960s and the 1970s very easily with a different perspective in terms of leadership and membership.",818
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"In many ways the Mack bill conforms to how we have carried out policy in recent years. So, I see it as legislation that is catching up with the experience and the progress. There are some advantages to the bill. I think it is useful to formally make price stability the primary objective over the long run. The proper way to look at it from my point of view is that price stability is a means to an end, not an end in itself. The ultimate end of all economic policy is higher standards of living and growth and that sort of thing. So, as we explain our role, and I think the Mack bill does this, we need to focus on price stability as the primary objective but as a means to a larger end. I also like the flexibility that the Mack bill gives the FOMC in the pursuit of this longer-term objective. It realistically allows us to take into account short-run factors like fluctuations in demand, recessions, financial shocks, etc., but the short-run actions need to be anchored in this longer-run objective. In other words, whatever we do in the short run ought to be consistent with this longer-run objective, and I think the Mack bill does give us that latitude. It does open up the question of what the strategy is. It is easier on paper to explain that we are going to move toward stable prices year after year until we get there. In practice, I think we have to take into account the business cycle in getting there. We got ourselves into this inflationary problem cycle to cycle. We have gotten out of it marginally cycle to cycle, taking advantage of cyclical developments. So, as we go forward, if this bill becomes legislation, we need to take into account the cycle-to-cycle progress even though it can be more difficult to explain. So, as a general proposition, I would support the thrust of this proposed legislation.",379
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"This bill came out of the hopper vastly better than I and many other people expected. Nonetheless, I find I can't support it as it is. Let me explain why very briefly because in some sense I can say, ""Please read Governor Yellen's remarks into the record a second time."" She got to go first, so I'll be very short. I, too, would prefer a much more symmetric treatment, or I guess I should say, in light of what Ed Boehne was just saying, explicit recognition of the stabilization role of monetary policy. There is nothing whatever wrong about the phrase that says the ""primary long-term goal"" is price stability. In fact, it is one hundred percent right. That is what we do now. It's exactly correct, and I am perfectly happy with that in the law. You might even argue that it is the only long-term goal; I am not sure what else we can do in the long term. But, in the short term, there are other goals. I am worried about the applicability of the ""taking account"" phrase that Don mentioned, just as Tom Melzer was worried about it--but for the opposite reason. It looks ambiguous to me the way it is dangling in the bill. I would like to see the ambiguity removed, as would Tom, but in the opposite direction. The reporting accountability aspects, I agree, are a vast improvement over what we have in Humphrey-Hawkins. I don't have any real problem with them except that I would like to point out one thing, which is what Don Kohn pointed out in jest just a while ago. But for me it is not in jest. We have a choice under this bill of reporting to the Banking committees that the answer is ""one or two more recessions"" or, say, of giving them a 5-year projection in which we have enough slack to put in, depending on the definition of price stability, say 4 point years of unemployment above the natural rate over the next 5 years. Now, if we want to live with that or do that, that's okay. I think that is a debatable proposition. I am not necessarily negative about it, but we ought to realize that, in the court of educated public opinion, we will not be able to get away with an airy-fairy forecast that says that everything will be perfect and, in particular, that full utilization of resources will be maintained as inflation tracks down to zero. We just won't. So, we ought to go into that process with our eyes open. I think that could be done, and I think almost all the other mandates in the bill could be done. However, the killer provision for me is the line in there that abolishes the Employment Act of 1946. I am simply unalterably opposed to that; I could never, ever support any bill that has that as a clause.",585
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"In general, I am in favor of this legislation. I think it is the right direction to move for the reasons that a number of people, including Ed Boehne, cited. This will get us toward our largest contribution to economic prosperity over time. Having said that, I would agree--this may seem unusual--with both Tom and Alan. If we start thinking about the implementation issues, they are rather daunting. As Don Kohn mentioned, this would join the issue of whether we really want to achieve price stability in an opportunistic sense or whether we want to go with something like alternative C irrespective of how things stand at the moment. My judgment would be that there would be no escaping those kinds of questions if this legislation were put in place. So, I think that would likely be a very challenging environment. That does not mean that we should not go this route, but I do think some issues that we have been able to finesse in recent years will be joined rather directly if we go down this path.",204
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, I am pretty much where Gary Stern was but maybe in terms that are a little different. I certainly support the thrust of this bill unequivocally in that it gives primacy to price stability as a means toward a larger end. But I am not totally comfortable with virtually any hard-wired legislation that I can think of, even with legislation that is as flexible as this bill appears to be. The good news is that it is consistent with what we have been doing, what we foresee we would like to do, and it eliminates the onerous provisions of Humphrey-Hawkins. I am a little concerned that over time, in ways that we can't foresee, we might very well have some combination of economic and possibly political circumstances that could inhibit us in the pursuit of an appropriate monetary policy if this legislation were in place. The alternative would be to get us back into a situation where we might have a law that we would have to ignore as we have ignored certain aspects of the Humphrey-Hawkins law for very good reasons. I think ignoring a law that remains on the books over a long period of time is completely unacceptable, and I would hate to remain in that situation in the context of new legislation.",247
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, I support the thrust of this bill and most of the specifics. I agree with the premise on which this bill is based, and that is that by promoting long-term price stability monetary policy supports long-term economic stability as well. So, given that premise and given that belief, I support the bill. I also think that the proposed bill does give us flexibility in terms of the short-term effects of our policy and it gives us room to maneuver generally. I would like to see more specific language that takes into account supply shocks or other factors. One can rationalize doing that with the proposed language, but I would feel more comfortable if those types of shocks were specifically recognized in the legislation to give us a little more wiggle room in terms of policy actions that we might need to take in the short term. But otherwise I do support the thrust of this bill very much.",178
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Well, like everyone else I think that the idea that price stability ought to be the long-term goal of the central bank is completely consistent with the contributions a central bank can make to economic growth over the longer run. But the autopilot aspects of this legislation really worry me. It may be that some of the language will permit us to finesse all of that, and the bill certainly would allow us to set the details rather than have written in law that we must report on a set of data that seems to be important at one point in time but may not be at another. I think it is quite helpful to have some options in terms of the details in achieving this longer-run goal. But I have some concerns on the opposite side from Tom Melzer. Frankly, I think we have done a good job over the 1980s and the 1990s precisely because the institutional setup has allowed people of some wisdom, arguably less or even more from time to time, to take the right actions given a variety of circumstances that were impossible to know or to forecast at the beginning of the 1980s. The idea of single-mindedly approaching something through several business cycles in a way that has some autopilot aspects to it gives me concern. It may be that the language allows more flexibility than that and the reality will be less onerous than that, but it really concerns me.",279
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Mr. Chairman, I have felt for a long time that Humphrey-Hawkins was outdated and needed to be revised, and I expressed that opinion in this Committee several times. I think this bill is a vast improvement over Humphrey-Hawkins, but I have some of the same concerns that were expressed by a number of people, notably Governor Blinder and Governor Yellen. Clearly, the responsibility and the objective of a central bank in the long term should be price stability. But this bill does not emphasize the other aspects of the central bank's responsibility, namely economic stabilization, to the extent that I would like. To the degree that this bill is codifying what we have been doing, I ask the basic question: Why do we need it? I just don't think this kind of thing should be enshrined in legislation. I am a little concerned about the view that the language can be finessed. That is not what we ought to be doing with the statutory language. We should not be in that kind of position. The Committee has been operating for several years toward the goal of price stability, and I think any Committee group, however it is constituted, would have the same goal. Again, I come back to the fundamental threshold question I have had from the beginning: Why have the bill at all?",266
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, we currently seem to have the luxury of a great deal of flexibility because the goals established for the Committee are ambiguous and in some cases contradictory. But I think we are moving past that point. Once this issue is raised to the level of a serious discussion with hearings and so on, we are going to have to change. We have been in the process of becoming much more accountable in terms of the announcements that we make after each meeting, in terms of the publication of the transcripts, and our more open disclosure process generally, and I support all of those things. But the world clearly is changing, and there is increasing pressure on us to clarify our longer-term objectives. So, I support the thrust of this bill, although I have one major caveat. I like the fact that it repeals the Humphrey-Hawkins bill. My reaction at the time it was enacted was that members of Congress voted for it mostly because of emotional ties to Hubert Humphrey, not because they really supported what the bill actually said. I like the emphasis on price stability. I think it is clearly, as Governor Blinder said, our primary objective and where we have the most impact. I like the flexibility that the bill would give us. If we go down this road, I think it is written about as well as we could expect it to be written. It can provide a major public education role for us as well, an opportunity for us to educate the public. In that respect, I think it will have a useful side benefit. The caveat is the repeal of the Employment Act of 1946. I must confess that I haven't reread the Act, and I have to go back and reread it now since Governor Yellen raised this as a point. But in general I support the thrust of the Mack bill.",369
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"I am not sure this issue is ready for prime time. Certainly, the intent of Senator Mack and his co-sponsors is the very desirable goal of clarifying the role of economic policy and especially the role of monetary policy. But it is not obvious to me that that is going to be the outcome of the hearings process. Two years after we ended Bretton Woods in 1973, people went to instrument monitoring--monetary growth targeting--as a sort of interim device to try to set the boundaries for what economic policy, monetary policy in particular, was supposed to do. I think that approach has certainly run its course, and it is time to move on to objective monitoring--to set an objective and initiate a process of oversight to see how well we do in achieving the objective. Listening to some of this discussion, however, just enhances my concerns about what will happen in the hearings. We will have a lot of very well respected, well-known academic, Wall Street, and other private-sector economists appearing before the Congressional committees. And instead of educating the members of the Senate and the House--and through them maybe the American public a little--about the contribution that a stable currency can make toward the full employment goal of the Employment Act of 1946, they will speak mostly about the notion that stabilizing the value of the currency depends on maintaining a minimum army of unemployed, or maintaining slack, or holding growth below some notion of potential. As I read the legislation, I think it does not repeal the full employment goal of the Employment Act of 1946; in fact, the Mack bill clarifies that goal in very clear terms. It says in Section 2, Paragraph 8, that price stability is a key condition to maintaining the highest possible levels of productivity, real incomes, living standards, employment, and global competitiveness. Under the statement of policy, the bill says that an environment conducive to both long-term economic growth and increases in standards of living is fostered by establishing and maintaining free markets, low taxes, respect for private property, and the stable long-term purchasing power of the currency. So, I think that the intent of the legislative wording is that the contribution of monetary policy toward achieving the goals originally set out in the Employment Act almost fifty years ago is to stabilize the value of the currency. I simply am afraid that that is not what people would be hearing from a lot of our colleagues in the economics profession because they have a different model in mind.",498
-fomc-corpus,1995,Governor Blinder and then Don Winn.,8
-fomc-corpus,1995,"To clarify what I said, if you read the fine print, there is a section in the bill that calls for the repeal of outmoded or obsolete provisions, or something like that. One of them is Section 2 of the Employment Act. That's why I said what I said.",58
-fomc-corpus,1995,"I spoke with one of Senator Mack's staff yesterday afternoon with respect to the hearings schedule, asking what the likelihood was. I got no specific answer to that question. But in the course of the conversation, I did bring up this issue with him as to what their intent was in terms of the Employment Act of 1946. Had they intended to wipe out the employment objectives of the Employment Act? The impression I got was they had not realized that they had eliminated the ""maximum employment"" objectives of the 1946 Act. Their response was that they had intended to repeal Humphrey-Hawkins and the various aspects of the Humphrey-Hawkins Act that amend the Employment Act of 1946 as well as the Congressional Budget Act; they had intended to take out those pieces from the Employment Act of 1946. On the other hand, they also said that they had substituted new policy objective language, which I think is on the bottom of page 3 in the copy of the bill that I circulated. I mentioned to them that there was no reference to employment in that provision, which relates to the objective of price stability, and it appeared that they had not realized that. They seemed to indicate that that had been an oversight on their part. There is some indication that they would be willing to make some changes. Of course, I was speaking with only one staff person; I don't know how representative that conversation was of the views on the Hill. By the way, on the hearings issue, they really have not planned what they are going to do next. They could have more hearings in the Joint Economic Committee or in the Senate Banking Committee; the timing really has not been decided. I asked if there is a likelihood of a hearing before the end of the year. They said there is a distinct possibility of that.",367
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,I support the Mack Bill.,6
-fomc-corpus,1995,Vice Chairman McDonough.,6
-fomc-corpus,1995,"Mr. Chairman, I think the single most important thing about the bill as proposed is probably that it repeals Humphrey-Hawkins. I, like Governor Kelley, am very opposed to having statutes on the books that we are supposed to be following and that we cannot follow. I think that maintaining such legislation creates something of a contempt for law in society, which is very counterproductive. I believe that long-term price stability is the appropriate goal of monetary policy. But monetary policy with long-term price stability as a goal is really a means to achieve an end, which is maximum sustained economic growth and maximum creation of employment. I know that I have on occasion caused some eyes to cloud over when I have expressed the view that the reasons for that are at least as strongly social and political as they are economic. I think a democratic society is not stable by its very nature, but rather that it can be made stable if the people in the country feel that they really have a reasonable opportunity for a better life ahead. We need sustained economic growth to do that. Therefore, price stability is a wonderful thing, but as a means to an end, not an end in itself. It follows that I do not have any particular interest in associating myself, nor do I think we should associate the Federal Reserve, with the hair-shirt school of price stability--namely, that price stability is such a wonderful thing that we should achieve it at whatever the cost to society. I share President Jordan's concern about some of the nonsense that one could hear at committee hearings from people who do believe that, and I would be worried about the effect that they could have on the general societal view of what monetary policy is all about, since I think that would get the more exciting headlines. I think that the best legislation would say that the goal is to achieve price stability and would leave the definition of price stability up to the central bank. It would not ask the central bank to define price stability numerically from time to time. I think we would have great difficulty in doing that in a reasonable way and still have the flexibility that we need to deal with the business cycle and with external shocks. It also would create an absolute zoo for the people who are of the hair-shirt school to appear not just once while the bill was being considered, but semiannually. It is likely that after the Chairman concluded his testimony, he would be followed by a group of learned types whose opinions on whether their view of the numerical goal for inflation was better than our view of the numerical goal would be given almost equal weight at least by some members of the Banking committees. I think that would be a terrible contribution to public policy. So, I am in favor of the bill, but I would like the bill to make it even more clear, although it does make it reasonably clear, that price stability is a means to an end. I don't like the requirement that the Federal Reserve establish moving numerical goals for the level of prices. I also would want to improve the language to make it clear that the Federal Reserve does include twelve Federal Reserve Banks and that the boards of those Banks have a role to play in the formulation of monetary policy.",640
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"I generally support the thrust of the bill. I think that it is useful to clear out some of the clutter in the current Humphrey-Hawkins Act. One of the major positives of the bill is the clear focus on price stability and the purchasing power of our currency. But I, too, would like to see a recognition that this focus is not inconsistent with economic growth. In fact, this is how monetary policy specifically can contribute to economic growth. I like the at least perceived flexibility that is in the bill in terms of calling upon us to develop definitions and to construct the required reports. I think a great deal of work would need to be done on our part to figure out how we would want to structure these reports. Perhaps we should give some thought as to how much clarification we want up front or how loose we want to make it. I, like others, am concerned about this question as to how tightly we would be wired to price stability at all costs and whether we would have the flexibility to make adjustments to business cycles and supply shocks. I do support the thrust of the bill, but I hope that we can preserve a good deal of flexibility to manage policy depending on the circumstances.",240
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Everyone here dislikes Humphrey-Hawkins--good riddance--and we basically like long-term price stability. What we also don't like is having legislation defining what we should do. Frankly, I think the crux of the issue comes back to that. We could wish that the Congress of the United States, which created this institution, would stay away and not give us instructions. That's not going to happen. Given that's not going to happen, we are going to get legislation telling us what to do. What is that legislation going to say? At worst it produces some horror like Humphrey-Hawkins; at best it produces something like the bill we have before us. It is not ideal. The key here is that we get to define and redefine what is meant by price stability. For example, one issue is the time period over which we are measuring prices. Questions have been raised about supply shocks, and I agree that is a concern. Do we mean that the CPI has to be reported at 0.0 every month? Certainly not. Or even 0.0 in a year? Certainly not. The goal is long-term price stability. The other issue is what price measure do we use. Here I am going to go back to the misfortune that a good Virginia boy like me had in the First District. We had something called the Massachusetts miracle. Now, I bet that the CPI for Massachusetts, if we had such a thing, was not much different from the national CPI and was pretty stable. But everyone knew the New England economy wasn't stable; we had a bubble going on. In retrospect, that's obvious. I don't know why our definition of price stability in the report would not include sectoral monitoring. If we observe bubbles occurring in the economy we know that they are destabilizing, no matter what the price level might be, and ultimately inconsistent with long-term price stability. I really don't see how our hands are being tied. If we are allowed to define and redefine what we mean by price stability, what measure we are looking at, and over what time horizon we are focusing--and given that Congress will not go away--I think we have gotten the best deal that we can get.",446
-fomc-corpus,1995,"Okay. Don Winn, did you want to say anything further on this that you haven't communicated already?",20
-fomc-corpus,1995,"You made the point earlier that in terms of support for this legislation it appears that all of the majority members of the Senate Banking Committee and the JEC seem to have lined up behind this bill. A committee staffer told me that after yesterday they also have as sponsors the Chairman of the Senate Finance Committee, the Chairman of the Senate Budget Committee, and all of the members of the Senate Republican leadership. So, at least in terms of support on one side of the aisle, they feel that they have key members of the Senate supporting the legislation. Now, obviously the detail of the sponsors' knowledge of this bill is something that has to be considered. But in terms of an initial push for this legislation, Senator Mack and his staff are quite pleased by the response they have gotten so far.",158
-fomc-corpus,1995,Have you had any input from the Administration recently?,10
-fomc-corpus,1995,We have not heard anything.,6
-fomc-corpus,1995,I don't think you will unless it looks as though it is a bill that has legs.,18
-fomc-corpus,1995,There clearly will be opposition from some important Senators on the Democratic side. Senator Sarbanes probably will not be supportive of this legislation.,27
-fomc-corpus,1995,"Mr. Chairman, I think that Governor Lindsey raised an important point in his last comments on the issue of flexibility. When Don Winn and I have talked to Hill staffers and asked them about this issue, one of the major points they make is that the Fed is defining price stability and defining the conditions under which you are getting there. Certainly, they would expect you to tell them if there is an adverse supply shock, so that getting there might be delayed. They viewed the provisions cited by Governor Lindsey as affording us flexibility. When I asked about the sentence, ""the Committee shall take into account the potential short-term effects"" and what it was meant to apply to, I was told that it was pretty much deliberately ambiguous. They were trying to cut between certain factions that they were dealing with. They could see that the literal wording did not apply just to the transition period, but the sentence still could be read as applying to the transition period because of where it was in the bill. I think their view was that the Federal Reserve would have quite a bit of flexibility under this legislation, although they admitted that wasn't unambiguous.",227
-fomc-corpus,1995,"That is the concern that I had. If you read the language in that paragraph absent the comments of the Congressional staffers, you do get the sense that we have this one-time transition period during which we could take these factors into account. After that, it is like a cruising 747; we don't touch the controls. Isn't that kind of language something totally unrealistic and unresponsive to the success that we have had over the last 10 or 15 years? It is hard to understand, given the success that almost everyone thinks that monetary policy has achieved, why we need this now.",118
-fomc-corpus,1995,I think that may be spelled out in the report language. A bill has to be short and understandable.,21
-fomc-corpus,1995,I am not suggesting that this one is not understandable in terms of its long-run intent.,18
-fomc-corpus,1995,I don't think clarifying it in the legislation is the way to go. The ambiguity is best left to the report language.,25
-fomc-corpus,1995,Ambiguity is necessary for flexibility.,8
-fomc-corpus,1995,"That's true, but this bill seems to have less ambiguity in the sense of that paragraph really referring to the transition period.",24
-fomc-corpus,1995,I must say that I didn't read it that way. I read it that we had flexibility during the transition and that we had flexibility thereafter.,28
-fomc-corpus,1995,I agree.,3
-fomc-corpus,1995,"If flexibility is the objective, then ultimate flexibility would be not to have any legislation at all.",19
-fomc-corpus,1995,That will never happen!,5
-fomc-corpus,1995,"It is getting quite late. [Laughter] Why don't we adjourn this meeting? If you want to have an informal discussion later today on these issues after Don Winn brings us up to date on overall legislative developments, we can do that. I think this has been a very useful presentation by all of you. It clearly suggests to me the sort of language we can put together for the hearing should such a hearing take place. Obviously, the draft testimony will be circulated to you in advance. Finally, let me just say that our next meeting is Wednesday, November 15th. It promises to be an exciting meeting not because of what we will do but because of what other people will do at that time.",143
-fomc-corpus,1995,The ides of November.     [Laughter],11
-fomc-corpus,1995,"Good morning, everyone. Regrettably, this is Bob Forrestal's last outing. I would be inclined to give him five or six votes for this meeting, but I don't think that authorization is statutorily available. But spiritually we would like to do so. We'll be saying more to Bob at lunch, and we look forward to seeing him there. In the interim, would somebody like to move approval of the minutes of the meeting on September 26?",93
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,"Without objection. Peter Fisher, you have the floor for a while.",14
-fomc-corpus,1995,"Thank you. As you can see on the agenda and also on an outline of my remarks that has been circulated with some attached charts, I am going to take up four topics separately. I will be asking for the Committee's questions and relevant vote at the end of each of the first three topics so that we can get through this rather meaty portion of the agenda in an orderly fashion. I will turn first to the report on foreign exchange market developments and Desk operations. [Statement--see Appendix.]",100
-fomc-corpus,1995,Questions for Peter? I guess your report sounded pretty complete as anticipated. Why don't you go on?,20
-fomc-corpus,1995,The Committee needs to ratify the Mexican swap renewal.,11
-fomc-corpus,1995,"The Mexicans paid down part of their swap line drawings, and I rolled over the remaining portion on October 30 for the third time. I am requesting Committee ratification.",35
-fomc-corpus,1995,"The Committee will remember that we will be covered either by Mexico or the U.S. Treasury--by February, I believe.",25
-fomc-corpus,1995,"Yes, at the end of January.",8
-fomc-corpus,1995,"So, this is a relatively safe activity unless, of course, you know who or what doesn't pay! [Laughter]",25
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,It has been moved. Is it seconded?,10
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,"All in favor say ""aye."" SEVERAL. ""Aye.""",15
-fomc-corpus,1995,"The ""ayes"" have it. Peter, continue.",11
-fomc-corpus,1995,Thank you. [Statement continued--see Appendix.],10
-fomc-corpus,1995,Questions for Peter?,4
-fomc-corpus,1995,"I just want to get something clear. Do any of these reciprocal arrangements with other central banks potentially involve warehousing funds for the Treasury, should the Treasury want to engage in foreign exchange transactions?",38
-fomc-corpus,1995,"No, I don't see how. At the very bottom of the list of our swap lines that I have given you, you can see that the Treasury has two swap lines of its own with Mexico and the Bundesbank.",44
-fomc-corpus,1995,They are separate.,4
-fomc-corpus,1995,"They are entirely separate. So, I cannot see any way that a drawing on the System swap lines would have any necessary connection with System warehousing for the Treasury.",33
-fomc-corpus,1995,"Further questions for Peter? If not, is there a motion to renew the swap agreements that mature in December?",22
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Second?,2
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,"All in favor say ""aye."" SEVERAL. ""Aye.""",15
-fomc-corpus,1995,"The ""ayes"" have it.",7
-fomc-corpus,1995,"Thank you. Before turning to my report on the domestic markets and operations, I would like to give the Committee a bit more background on the Desk's cooperation with the Japanese monetary authorities in managing the liquidity of their portfolio of U.S. government securities as part of their broader effort to aid the dollar liquidity of the Japanese banks. [Statement continued--see Appendix.]",72
-fomc-corpus,1995,"What is the market saying now, if anything, about a possible spike in the funds rate at year-end?",22
-fomc-corpus,1995,A spike in year-end rates is always there. I don't think it's out of line with--,19
-fomc-corpus,1995,The market has built in a spike of about 1 or 2 percentage points as best we can guess. We have to make an assumption about what the market is thinking the federal funds rate will be and then subtract that to estimate the spike.,49
-fomc-corpus,1995,But it's entirely in line with the normal end-of-year pressures.,13
-fomc-corpus,1995,Yes. If anything it may be a little less.,11
-fomc-corpus,1995,"So, you can't really disassociate our actions from the spike.",13
-fomc-corpus,1995,"Right. It's a highly conditional forecast. But, if anything, it appears that the markets are expecting slightly less of a spike at year-end this year than they have at this point in recent years.",40
-fomc-corpus,1995,"But the problem there, just to go into detail, is that we have to look at the futures contract for December, take account of the limited probability of a Committee action to ease in December, and then look at the December contracts. The market normally does some smoothing in its pricing of the futures contracts. If there is an assumption of an aggressive easing in policy three months out, the end contracts tend to edge down a little and to provide a bit of trend line toward that lower funds rate. That makes it hard to judge futures prices.",108
-fomc-corpus,1995,I assume that to a large extent the Japanese have been a factor in the year-end spike over the years. Does that propensity exist in other currencies where the Japanese are heavily involved?,36
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"In some degree, it has occurred in the yen market itself. That is one of the phenomena.",20
-fomc-corpus,1995,The year-end spike?,5
-fomc-corpus,1995,"Well, their fiscal year-end is March 31st, and there is some pressure in their funds market then. There are occasions when the deutschemark money market experiences rather sharp spikes. These stem both from the German banking system and from foreign demand of which the Japanese may be a part, but I don't think quite as significant a part as in our market.",72
-fomc-corpus,1995,"That is a year-end, December 31st spike?",12
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"Can we infer what the market forces are abstracting from our actions by looking at the potential spike characteristics in other currencies where Japanese banks are operating, like in London?",33
-fomc-corpus,1995,"That would be a little difficult. One of the problems is that two things are going on with Japanese banks at this point. One is the Japanese year-end premium. The other is the general Japanese risk premium. I think it's a little difficult, for some of the reasons that Peter just pointed out with respect to the funds futures, to separate which of the two you are dealing with. You can make an assumption, such as attributing it all to the year-end pressures, but there is some leakage in this process. And you have a phenomenon that whatever the pressures are, they are in both the yen markets and the dollar markets. I think that's presumably where most of it is. There may be a little in the sterling markets.",147
-fomc-corpus,1995,Okay. I don't want to press that; I don't think it's a big deal. I am just curious. Other questions for Peter? President Minehan.,31
-fomc-corpus,1995,"I have a couple of questions. On the Japanese funding situation, I know that all this planning is being done within the normal framework of Desk operations. I don't know about the rest of you, but the headlines in The New York Times about this special funding arrangement hit me as a surprise when I read them at 7:30 one morning. If there is going to be a briefing of Congress, I wonder whether the Committee also could be briefed. It's not that we are going to say anything necessarily; it's just to make us feel a little bit in the loop when these things come out in the press.",123
-fomc-corpus,1995,"My recollection is that we thought the arrangement was so routine and so inconsequential that it did not enter anybody's mind to raise it. And, indeed, the way it came out was so distorted that I got numerous telephone calls as a result of a comment by Ralph Nader on the radio that we were bailing out the Japanese and that his listeners should call the Federal Reserve to complain. When I finally talked to Senator D'Amato, who had raised all sorts of questions, he said he wished he had heard that explanation earlier. It would have averted the excessive criticism that was voiced. The problem existed because there was a mis-communication between us and Jim Leach; he didn't realize that he should not talk about this because that made it sound like a much bigger deal than it was.",162
-fomc-corpus,1995,"Do we have these informal understandings with other central banks, other than the Bank of Japan, that if they run into dollar or liquidity problems (a) their banks are not to come to us and (b) there may be some way in which we can, within the normal procedures, help them with their funding?",64
-fomc-corpus,1995,"The answer is no. Some central banks realize that if they are talking about $500 million or $1 billion, they can sell bills to the Desk and we will execute such transactions for them relatively effectively. There are some less subtle or more anxious central bankers who approach the Desk to ask if we can guarantee that we will do a $5 billion repo with them if they need some liquidity suddenly. What they want to avoid is having to sell the securities outright and having to take a gain or a loss. We explain to them that, no, we don't provide guarantees. So, the question frequently comes up conversationally in that way. As I say, the subtler central bankers understand that when relatively small amounts of Treasury securities are involved we can help them by either selling the securities in the market or taking them into our portfolio. The larger amounts are not in the nature of what we do routinely and that was the tenor of our conversations with the Japanese when larger amounts were clearly what they were interested in.",201
-fomc-corpus,1995,"President Minehan, I think one dimension of this that Peter did not include in his report, because he gave a lot of background and the report was already long enough, is that there is a particular problem, which I am sure you will appreciate, in terms of the payments system.",57
-fomc-corpus,1995,Oh yes.,3
-fomc-corpus,1995,"We have staff who have worried about this general problem of foreign-held dollars in the payments system for at least a decade to my knowledge. In some sense, because of the size of the Japanese banks and their role in the international financial system, they are a particular problem and this arrangement or procedure is designed to deal with that problem. One dimension would have almost a pure payments system set of consequences, but I think we all recognize that it is a general dollar payments problem and that it is not unique to Japanese banks. In principle, U.S. banks could have the same problem elsewhere. Although this arrangement was set up because of the current situation with respect to the Japanese banks, it is part of a general problem and I don't think we have a standard set of procedures to deal with it.",158
-fomc-corpus,1995,"I totally agree and I certainly understand what you are talking about. The implication that we would do things after hours, after the securities wire closes and all of that, did seem to me to be a move that it would have been interesting at least to know about.",53
-fomc-corpus,1995,"Certainly. As the Chairman explained, it got publicity when it was not intended and the latter was somewhat premature in any case.",25
-fomc-corpus,1995,"The second question that I had was on the new procedure relating to your operations in coupon issues. Peter, is it your intention over this three- or four-day period, for however long you might spread your coupon pass, to pick certain portions of the yield curve on any given day as opposed to preselecting from a number of points on the yield curve?",72
-fomc-corpus,1995,"Yes. We would try to choose an area of the yield curve, say, the two- to three-year area or the five-year area, define it for the dealers, and then take propositions only in that portion of the curve.",47
-fomc-corpus,1995,And you don't think that will have any disruptive effects on that given day?,15
-fomc-corpus,1995,"It might the first few times that we use the procedure. But my hope is that things would smooth out over time, as the dealers got used to it and they saw that we are like any big customer who might come along and buy up a certain maturity. I also want to be clear. I don't think we would necessarily be mechanical about day one, day two, day three, day four and conduct these transactions on consecutive days. We might do it that way; we might break it up and have a day fall in between depending on what other things are going on--a bill auction, for example.",122
-fomc-corpus,1995,Is it part of your plan to discuss this with major market participants outside of New York?,18
-fomc-corpus,1995,"The community to talk to first and foremost is the dealers, wherever they are located, since they are the ones who have to do the bidding and put in the propositions.",34
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"Obviously, once we begin it we'll have to have guidance for Peter Bakstansky in our press office and figure out what we are going to say more generally so that the Fed-watching community doesn't jump on it and misinterpret it.",48
-fomc-corpus,1995,It might be useful to talk to Fidelity among others.,11
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Peter, your description of the arrangements with Japan and the very unfortunate press reports and confusing stories relating to all that and now this discussion following Cathy's question just emphasizes in my view how obsolete swap agreements are in this environment. In the case where a country has very substantial amounts of dollar-denominated assets that they want to convert into dollar balances, frankly, this ""ain't"" the mechanism to use. Swaps were set up in a period when we needed to get access to some foreign currencies that we did not have or when our foreign central bank counterparts needed to get access to dollars that they did not have. But in today's world we need a mechanism for them to be able to convert dollar-denominated assets into dollar balances. I looked down your list of foreign central banks in our swap network and I see fairly small swap lines: Norway, $250 million; and Denmark, $250 million. What is the probability that we would draw on these swap lines or that they would be in a situation where they needed to draw on them to get dollars? If I recall correctly, So, if in keeping with the original intent of the swap line network a central bank wants access to dollars because they don't have any, we don't want to give it to them. Therefore, when and how is there an appropriate use of swap agreements today, holding the Mexico discussion for a later meeting?",275
-fomc-corpus,1995,"You are raising a good point. I think we have always thought of swaps as a bit of a hybrid. Given our focus on having a short-term means of repayment, we have tried to think of the swap lines, or I try to think of them, as merely a liquidity arrangement with a central bank like the Bundesbank, notwithstanding the fact that they hold a lot of U.S. government securities. Conceptually, I think the swap line can still be used, but obviously its use is problematic given our concern about the short-term means of repayment if a borrower really runs through every asset in sight. In the episode to which you refer, there certainly was a sense, and related anxiety, on our part that they did not merely want to draw on the swap line as they ran out of assets but that they already had gone deeply into debt. We weren't going to be the first creditor in line. Returning to the Bundesbank example, what has clearly eclipsed all this is an increasing sophistication in the liquidity management of the portfolio of the Bundesbank. As I have described to the Committee in the past, they maintain a large amount of immediately available liquidity in case they need dollars for intervention purposes and they structure their portfolio accordingly. So, the likelihood that the Bundesbank is going to look to the swap line for liquidity purposes is quite low. As the Chairman said a year ago, we realize that the swap lines are somewhat anachronistic, but getting rid of them could be more painful than carrying them forward. I think we might all benefit by rethinking the nature of our central bank cooperation. Maybe when we are through with this exercise with the Japanese and have been repaid on the Mexican swap line, it might be useful for the Committee to review the purpose of these cooperative facilities.",359
-fomc-corpus,1995,"Peter, it strikes me that these swap line renewals, for which there basically is no longer any financial or economic purpose, have become exchanges of Christmas cards that serve to maintain our relationships with various central banks. Even at a 3 percent inflation rate, these lines are gradually becoming de minimis. If we wanted to get rid of them, there is a very simple way of doing it: We would talk to the Germans and say ""look, this makes no sense, let's cancel it."" Once we cancel the Bundesbank arrangement, the rest of them will just go away because it will be perceived that if we do that to the Bundesbank then doing that to Norway, for example, will not be considered a withdrawal of Christmas card privileges. So, I think it may be appropriate to do something at some time. It's just not credible under any reasonable circumstances that these swap lines will be activated. It's probably best not to have something on our books that has no operational significance. I think we might consider acting on your suggestion of looking at this after the Mexican swap issue is settled. It's conceivable that we ought to review this then and decide what we wish to do. We may just decide to leave the swap line network alone and let it wither on the vine.",254
-fomc-corpus,1995,"My assumption--it's a very safe assumption, Mr. Chairman--is that in the case of the Bundesbank and the Bank of Japan you would be giving a signal by cancelling the swap lines. For the reasons you cited, some people would not want to do that and we therefore have a problem with respect to the Norwegians, which is a particularly bad example. My perspective on this has been, as I may have said before when we have had these discussions, that the time to rationalize these arrangements is in the context of European monetary union, if they get to the third stage of having a European central bank. In that case most of these countries would have an arrangement with the European central bank. Since Norway is outside the union, you would have a slightly complicated situation, but a number of these swap lines would be captured in that arrangement. Now, if we want to do away with them completely, that is a different proposition. I think it is also worthwhile to think about whether we could imagine using swap arrangements in the context of payments system problems. In that case, as President Jordan suggested, we obviously would need more than $250 million. It would be a very different operation. Because these arrangements always have the characteristics of lender-of-last-resort arrangements as well as helping through what could be just glitches in the payments system, they are not easy to orchestrate.",278
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"I have the view that these arrangements have long outlived their usefulness. I have been in Peter's position and largely have argued that we may as well renew them because not doing so would be a newsworthy event. Each year there usually was something happening so that we didn't want that newsworthy event to occur. It would seem to me that, without mandating that a year from now Peter and Ted come back with a proposal not to renew the swap lines, we should become reasonably active in an effort to work out a more meaningful alternative that probably would include ending the swap lines. Whether or not one needs to substitute for them some notion of how we would cope at a time of some real liquidity need, I think terminating the swap arrangements would be a step very much in the right direction.",159
-fomc-corpus,1995,Are you suggesting some formal or informal agreements--bilateral agreements in a sense?,16
-fomc-corpus,1995,"I don't think that we would need even an informal agreement, as our discussions with the Bank of Japan have suggested. If a need comes along and we have the kinds of relationships that we now enjoy with the other central banks, at that time we can sit down and figure out what if anything has to be done. If the approval of the FOMC were needed, we would ask for it. I think I would prefer that approach.",88
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Peter, you mentioned that on Thursday and Friday, some of the Treasury securities maturing on November 15 started to sell at some discount. How much was it? I was on an airplane at that time, and I didn't see the market quotations.",50
-fomc-corpus,1995,"Those securities had already been selling off a bit, and that's rather awkward for a security with a short remaining maturity.",23
-fomc-corpus,1995,That's why I was asking.,6
-fomc-corpus,1995,"The amount is small in absolute terms, but it is noticeable that dealers are turning them down.",19
-fomc-corpus,1995,"I meant the yield to maturity, not the prices.",11
-fomc-corpus,1995,"I don't know it off the top of my head, I'm afraid. I think we discussed it in the document we submitted as a special report. Sandy--please go ahead.",35
-fomc-corpus,1995,"Because those November 15th coupons are so close to maturity, the smallest increment in price that you can see on the screen is 70 basis points of yield. If I tell you that it traded with a 1/256 change in price, I am telling you 70 basis points, which is incredibly dramatic. But I can't observe anything that is smaller than that on the screen.",78
-fomc-corpus,1995,I see.,3
-fomc-corpus,1995,"A better comparison would be the bills that mature on the 16th, which also were of somewhat uncertain value then, but unfortunately I don't know the change in yield. That is an easier comparison because it's a shorter instrument.",45
-fomc-corpus,1995,Did those come back after the announcement?,8
-fomc-corpus,1995,Yes. There does not seem to be a distortion in the November 30 coupons.,17
-fomc-corpus,1995,Any further questions for Peter on this? President Hoenig.,12
-fomc-corpus,1995,"Mr. Chairman, I just want to comment on the background of the informal arrangement with the Japanese. The memo that we got was very helpful. In the phone calls that I received, there were two issues that warranted some explanation. One was that the arrrangement was a bailout, and I think that notion followed upon the Mexican deal. The other was that the discount window was somehow involved and that we would be lending at the basic discount rate to subsidize the Japanese. Dispelling those distortions became the duty of the day. I think these issues are still a matter of concern among some individuals in the market or in the banking industry, or wherever else the distortions persist. I think it was good that we got the memo and as much information as we did because we received a lot of phone calls related to this fear of subsidizing the Japanese.",172
-fomc-corpus,1995,"In fact, the purpose of our discussion with the Japanese was mainly to dispel any notion of subsidization. If it were not for the fact that they are such a large presence in this banking system, there really would not be an issue. But if they were to run into trouble, we could be dealing with very large numbers.",67
-fomc-corpus,1995,"I think the individuals I spoke to realized that. That's why they were saying that if a problem were to occur, we might get involved in a discount window loan; and lending at the basic discount rate would mean a big subsidy. The issue was why would we allow that, and on and on it went. Because they had this piece of misinformation, their concerns multiplied very quickly.",76
-fomc-corpus,1995,It happens. Further questions for Peter? Train wreck?,11
-fomc-corpus,1995,We need a vote to ratify the domestic operations.,11
-fomc-corpus,1995,I missed three out of three! [Laughter],11
-fomc-corpus,1995,Move approval.,3
-fomc-corpus,1995,Is there a second?,5
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. I hope there is nothing to ratify in the next segment!,16
-fomc-corpus,1995,"No, no, I'm not seeking another vote. [Statement continued--see Appendix.] Mr. Chairman, I would be happy to answer any questions from the Committee on this final part of my report. But maybe you are all tired of listening to my voice, and I wouldn't mind if you pass.",60
-fomc-corpus,1995,Never! President Melzer.,6
-fomc-corpus,1995,"Peter, I would just like to say that I endorse the position you just expressed. I think there are a lot of risks associated with that. We have to evaluate things as they develop, but I wholeheartedly support what you are saying. Ultimately, I think it runs to even broader issues like the independence of the central bank and our commitment to long-term price stability and those sorts of things.",78
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"I agree very much with Tom and I certainly endorse that position. I wonder if I may ask a related question, Mr. Chairman. Is it possible that in some of our operations other than Desk operations, things like Fedwire, we might wind up inadvertently making loans to the Treasury? Has that kind of possibility been considered?",65
-fomc-corpus,1995,An inadvertent overdraft?,6
-fomc-corpus,1995,"Yes. In our Fedwire rules, as I understand it, we guarantee final payment at the end of the day. If on the day the Treasury defaulted we guaranteed some of these payments, could we be caught at the end of the day in an overdraft position? It seems to me it is the same kind of issue. I guess there is an array of possibilities.",76
-fomc-corpus,1995,It's illegal for us to grant an overdraft to the Treasury. The only condition under which it exists is inadvertence. I assume I have that right.,31
-fomc-corpus,1995,"Correct. Reserve Bank and Board staff have been talking to Treasury people about procedures to follow to avoid the concern that President Broaddus just expressed, so that wires wouldn't be sent if funds were not going to be available. We want to ensure that Treasury staff sending those wires understand that and simply would not send them. Those are among the procedures that have been under discussion between the technical staffs at the Treasury and the Federal Reserve. The Treasury is fully aware of the position that Chairman Greenspan just stated--that we cannot lend to them directly. If they got into an overdraft position, it would have to be entirely inadvertent. Therefore, in their financing operations, they have been talking about keeping their cash balance fairly high to avoid the possibility that funds would clear that would put them in overdraft inadvertently.",161
-fomc-corpus,1995,"In recent months and years, we collectively have been targeting a balance of about $5 billion for them. But we all recognize that forecasting the Treasury balance is in part an art, not a science, and the risks exist. But it's in the nature of a forecast that we are always forecasting tonight what the cash balance will be when we wake up tomorrow morning and then tomorrow what it will be when we make payments on the Treasury's behalf. We at the Desk were very pleased that the Treasury made their announcement as early as possible this week because of the various uncertainties we would face in our forecasts of their balances if we waited until the 1lth hour to worry about default and the market did the same, and given the computer systems that release payments early in the morning. So, the Monday morning announcement was very much what we had urged on them in terms of the number of days that we needed for guidance.",183
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"This is admittedly a very airy-fairy contingency if we don't think this default is going to happen. But let me go back into the mindset that you were in a minute ago. How many government securities issues are there, something like 300?",49
-fomc-corpus,1995,260 something.,3
-fomc-corpus,1995,How many of those do we own a piece of? Almost all?,14
-fomc-corpus,1995,Virtually all.,4
-fomc-corpus,1995,How many of them do we actually buy and sell?,11
-fomc-corpus,1995,On any one day?,5
-fomc-corpus,1995,"No. If I watched you for a whole quarter, how many issues might you have dealt in either doing repos or buying outright or anything?",28
-fomc-corpus,1995,Most of them.,4
-fomc-corpus,1995,"Right. Therefore, what kind of signal would you send if you told the market that these 55 issues are being shunned by the Federal Reserve, that we are not accepting them.",37
-fomc-corpus,1995,It would send a very negative message.,8
-fomc-corpus,1995,Isn't that what you are suggesting?,8
-fomc-corpus,1995,"No, I said nothing in my remarks that suggested that. I said the Desk was eager to find a way to demonstrate that they would be accepted as collateral in temporary operations.",35
-fomc-corpus,1995,But we wouldn't do open market operations? I thought that's what you said.,15
-fomc-corpus,1995,Temporary operations are open market operations.,7
-fomc-corpus,1995,What were you suggesting? I missed it.,9
-fomc-corpus,1995,My point was that I did not think that an intentional preemptive strike to buy the particular defaulted securities outright would be an appropriate action in the circumstances that I mentioned.,35
-fomc-corpus,1995,I thought we were talking about purchases in the market.,11
-fomc-corpus,1995,"Yes, we are.",5
-fomc-corpus,1995,I guess I am confused.,6
-fomc-corpus,1995,"We do outright purchases relatively infrequently --to wit my discussion about coupon passes--a handful of times a year. I am suggesting that we raise that to three or four handfuls a year for reasons of operational simplicity without changing the amount we would buy over the course of the year relative to reserve demands. The question is whether we take defaulted securities in temporary operations. In repo operations, we take whatever securities the dealers offer. We are not going to announce in advance that we are going to turn down any particular Treasury security in repo operations. The idea that I urge the Committee to put on the back burner for much later consideration is the question of whether we would buy outright preemptively those particular issues that the Treasury had defaulted upon.",149
-fomc-corpus,1995,"That is, a special open market operation and not the normal course of business.",16
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"I think the question has two aspects, Mr. Chairman. One is the purely practical view of people whose expertise is in markets, as mine used to be, as to what is the best thing to do to maintain an orderly market in the event of a default. I am in complete agreement with Peter's and Sandy's and Don's view that the best thing to do is to take these in repo operations because that would maintain their status as securities and keep them alive. That's by far the best thing to do. Then you can get into a question of high purpose. Is it in the best interest of the central bank to do it? That's the second question. I happen to agree with Peter on that one, too. This is one case where pure pragmatism says we should do what they suggest, and I think high principle leads us to the same conclusion. But we don't even need to get into the high principle. Pure pragmatism is such an absolute no-brainer that that's what we ought to do in any event.",208
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"I am going to follow up on what Governor Blinder said. If you are taking whatever is offered on the open market, might there not be a propensity for you to buy securities in default or potential default that people might have questions about? If you are willing to take whatever is offered and you are not willing to discriminate against defaulted securities, won't you end up taking a disproportionate number of them?",81
-fomc-corpus,1995,"If they were presented to us as propositions for temporary overnight or four-day System operations, and they were at the better end of the prices, we would look at what are the best prices and draw a line at an amount that meets our objective. My desire would be for the Desk to be indifferent to what the CUSIPs are, whether the CUSIP underneath is one that has missed a payment or not. Now, maybe these securities will end up among the better prices; that's a likely hypothesis if the dealers are on their toes. They might be a large portion of what we did or they might be only a small part of our overall operation given the uncertainties about the volume we would be doing. So, yes, there is a certain likelihood that we would take in some, or many, or all of them in temporary operations where the legal risks of an extended duration of a Treasury default remain with the dealer.",184
-fomc-corpus,1995,"Implicit in your question is that when we conduct our operations, a certain number of securities are offered in the market and we choose to buy or not to buy. As a practical matter, all securities are offered in the market at all times. There are active prices on all of them. Thus, it's not as though there is a limited block of securities out there that would disproportionately include defaulted securities. As a practical matter, all securities in the market are offered in indeterminate amounts and that would presumably include all of these defaulted securities. I think the critical issue implied in your question is that, if these defaulted securities are being priced at significant discounts and we buy them, we get criticized for buying U.S. Treasuries at a discount. If we don't buy them, we get criticized for not buying them at a discount. It's an impossible situation. But I suspect that should this occur, it's going to be very fuzzy as to what is in the market, at what price, and who is selling what. The question we have always had on the table implicitly is not whether or not we should do overnight RPs or something of that nature. It is whether we should make direct purchases and inventory the securities in the System portfolio. The implication of not doing it is that we would resell them in the market, which raises even more interesting questions. It's a question of whether we do a pass on defaulted securities. I suspect that has a lot of implications that raise some technical questions, as Peter is suggesting. President Minehan.",310
-fomc-corpus,1995,"Beyond the technical issues, aren't we dealing with a moral hazard situation in the sense that if we show ourselves ready to close all the gaps when these situations occur, the chance of their happening with greater frequency increases? I think it's entirely appropriate to come at it from the point of view of financial stability. The only question I have is whether being willing to use matured securities as collateral and to do repo operations in matured securities says that we are willing to accept the moral hazard up to a certain point where we, arguably, need to do that for the sake of stability in the markets and financial stability for the country as a whole, but beyond that we will not go. I think that's a perfectly appropriate message to send and position to take, but I think that it's not just on the outright operations that we run the risk of running counter to a high principle. We run that risk doing anything with these matured securities. I think what Peter has proposed is defensible, but I don't think we take ourselves out of the arena of the problems that he mentioned simply by drawing a line and not doing coupon passes in matured securities.",223
-fomc-corpus,1995,"Any further questions for Peter on this issue? If not, let's move to Mike Prell and the staff report on the economy.",26
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for Mike? President Parry.,8
-fomc-corpus,1995,"Mike, in Part II of the Greenbook, there is a reference to the prospect that manufacturing capacity growth is going to be revised up in light of some surveys in 1993 and 1994 and also the new investment that has occurred in 1995. I wonder how much of an effect these pending revisions will have in terms of the staff's assessment of price pressures in various product markets and also what impact it might have on either the level or growth of potential?",95
-fomc-corpus,1995,"At this point we don't see anything in the cards that is going to change the picture materially. We have had relatively rapid expansion of capacity in our forecast, and the incoming data in the updated survey on investment have supported that. We will be revising our numbers on production and capacity utilization, but my sense from talking to people who are engaged in that work is that this isn't going to change the picture materially. Basically, we think we have something that's pretty much parallel to our assessment of the labor market. We are a little on the tight side of what would be ""nonaccelerating"" inflation over time.",122
-fomc-corpus,1995,"On the CPI, what do the numbers look like with an additional decimal point?",16
-fomc-corpus,1995,"I don't know that. I just looked at the rounded data here which show a core CPI increase last month of exactly .3 percent, but I don't have the data with the Board staff's estimate.",40
-fomc-corpus,1995,They are short on staff up there; they can't give you two decimal places!,16
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Mike, I have a couple of largely unrelated questions. I will take them one at a time. Your projections in the Greenbook of nominal GDP for 1996 and 1997 have been revised up from the previous Greenbook. Nevertheless, nominal spending growth, after accelerating a bit to a little over 5 percent in the third quarter, is on a downward trend to under 4 percent in the second half of 1997. That was true before and it is still true in the latest Greenbook where it is down to the 3.8 to 3.9 percent range for the second half of 1997. Your forecast now also assumes a 5-3/4 percent fed funds rate--and I will make some remarks about that not appearing to be as restrictive as previously envisaged--and the bond market has rallied because markets thought that we would lower the funds rate. If you take that away, it says bond yields are now expected to go back up from current levels while both nominal growth and real growth are going down. I am trying to imagine how those work out, especially how they would play out in the marketplace if people actually saw things that were reported along the lines of the Greenbook projection. What that means is that in the latter part of the projection period, you would have nominal interest rates running 2-1/4, 2-1/2 percentage points or more above nominal GDP growth. What kind of stories would you tell about the anticipated inflation component of nominal interest rates versus the reported inflation rates that you project, or the anticipated or ex ante real rates as opposed to the real growth rates in your GDP projections? I have trouble reconciling what you say about financial markets, nominal interest rates, and your projections for the economy.",360
-fomc-corpus,1995,"We have discussed this in the past, and as I said, we pondered this question of whether having nominal interest rates running higher than nominal GDP growth over time is an unnatural relationship. It strikes one as being something that is unsustainable. We think of this, in terms of government budget positions and so on, as a relationship that's unsustainable. But over limited periods of time, this relationship clearly has varied tremendously, and there isn't a very compelling short-run macro story that pushes you toward equilibrating these things or having the nominal GDP growth rate higher than the nominal interest rate. Certainly, our view in formulating this revised forecast is that, given real interest rates in the current environment--one in which we are experiencing ample availability of credit, and we looked at all the other parameters of financial conditions at this point--these real interest rates are not creating quite the damping effect on aggregate demand that we anticipated earlier. But we do expect that they will create some drag on final demand and that we will have this tapering off in the growth of consumer and business expenditures. We think there is a coherent story here. But it does in essence have implicit in it, if you like that model, a relatively high natural real rate of interest for the forecast period.",252
-fomc-corpus,1995,Right. It implies de facto a progressively more restrictive policy stance.,13
-fomc-corpus,1995,"We have intermediate- and long-term rates rising in nominal terms, but we see no reason to think that inflation expectations for the intermediate to long run will change materially. The 3 percent inflation that we are forecasting is very much in line with what private forecasters are expecting. I think the survey evidence suggests that expectations for inflation over the intermediate run probably run in the 3 to 4 percent range. I don't think that would change a great deal. You are correct in noting that the uptick in real interest rates has a damping effect in the forecast. It's one of the things that contributes to the deceleration of fixed investment, residential and nonresidential, and gives us this moderation in growth going forward.",143
-fomc-corpus,1995,"My other question relates to productivity. I very much welcome the discussion of higher productivity growth that was in the Greenbook--a sort of level effect and rate of change effect, the way I read it--as far as it went. But it didn't go so far as to change the perceived output capacity situation versus the inflation rate. We have this 3 percent inflation rate; we just sort of drove to it. Once here, it seems we can't get away from it. I want to offer an alternative way of reading the numbers and get your reaction to it. I read a little of this in the Greenbook, but it just didn't go as far as I thought it might. We not only have had a lot of investment in business fixed investment, to which Bob Parry was referring, but also a very substantial increase in business spending on training, both internal and external. The response to the perceived tightness of the labor market--the Chairman commented at an earlier meeting about the insecurity of capital over the life of a given technology--has led companies to increase markedly the amount that they are spending to train their workers. Resorting for efficiency reasons to economic jargon, that says to me that the horizontal axis does not measure the supply and demand for labor in homogeneous units because the quality of the labor force is changing, perhaps especially at the entry level. That says to me that the inflation potential that you would have thought associated with a given physical capacity has to be different. It's not a one-time level effect to the extent that there is this persistent investment in human capital going on coupled with the changes in technology. Whatever you previously thought would be the inflation rate associated with some output potential, it has got to be lower. I don't see, in the Greenbook discussion or the projections, any allowance for those kinds of dynamics to lead to a lower rate of inflation than historical experience would suggest.",379
-fomc-corpus,1995,"Let me make several comments. I probably won't be able to achieve absolute coherence here. In a sense, we have introduced a supply shock into this forecast to the extent that we have lowered our NAIRU and in essence have raised the potential output ceiling. On the trend of potential output growth, the analysis that we have offered is that when one looks at data--not on a 1987 fixed-price basis, but on a more recent base year or chain-weighted basis--recent evidence of surprises in productivity growth disappears. We seem to be running on a trend that has been in place for well over a decade, something on the order of a percentage point in these terms. It doesn't suggest that we had a big surprise in the last couple of quarters. It doesn't suggest that there has been a radical revolution over this decade relative to where we were running before. Now, that may mean there was a mismeasurement, as Chairman Greenspan noted earlier. There may be components that could be added in and so on, but those add to both potential and actual measured GDP and don't alter the output gap. So that doesn't imply anything different about the pressures on the inflation side. Training is an interesting question. I would remind you that training costs money. It's a cost, as you've characterized it, of production. It would have to be made up on the price side. So it's not a free good. Second, I am not sure how clear the data are. I think there may be bits and pieces around about how much expenditures on training have increased. I am not well versed in that, but I have certainly seen anecdotal reports of it here and there. Some of the stories I have seen over the years have suggested that a lot of this training goes to managers--upper level people. They are getting all kinds of training that may not have particularly obvious payoffs in production. I could cite the training here at the Federal Reserve. [Laughter] It will be five years before my colleagues in HRM hear that and in the interim you are all sworn to secrecy! [Laughter]",420
-fomc-corpus,1995,But they aren't the only ones who care! [Laughter],13
-fomc-corpus,1995,"Furthermore, a lot of this training is remedial. Many of you have reported what directors and other contacts have told you about how it's really hard to find workers who are literate or numerate. A question might be raised as to whether they have to spend more and more money just to maintain the quality of labor input that they are accustomed to. In a sense, one of the reasons for some of this investment in computerization--I have speculated about this with my colleagues, who would rather I not say this--may be to make up for some of the deficiencies of the work force. A simple example is something like fast food outlets where workers are able to tell you what you owe them without having to enter in any numbers. They just punch a button that has a picture of a ""Whopper"" or whatever it is. I think we need to be a little cautious here in thinking that there is a revolution in progress leading to an improvement of the labor force. We all recognize that achieving the gains in productivity that might potentially result from the investment in high-tech information processing equipment will only be achieved when people know how to use the equipment, reorganize production processes accordingly, and the whole infrastructure is developed. Maybe it's still ahead and maybe we are not optimistic enough going forward. But from what we can see to date, we feel pretty comfortable with our assessment of the trends in potential output.",281
-fomc-corpus,1995,"Just one follow-up thought: You remarked that training is a cost that needs to be passed through to prices. This is not the case if it really is improving the value of what workers do. Even if it is remedial, to the extent that the value of the marginal product of the work--that's what I meant about the horizontal axis units are not homogeneous--you are in effect shifting the labor supply function. Then, for the same ECI, you would not expect to see the same associated consumer price index that you previously would have associated with it. I don't know how big that is, just its direction.",124
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Actually I have two questions about this path, particularly of household durables spending. The fourth quarter of 1995 number seems high. Is that a growth rate of 11.3 percent? Is that a misprint?",45
-fomc-corpus,1995,Isn't it mainly computers?,6
-fomc-corpus,1995,"This is consumer durables spending excluding motor vehicles in our forecast, As we have suggested, we think there will probably be some improvement in sales of appliances and home furnishings in connection with the surge in home sales that we saw over the summer; reports seem reasonably favorable into early fall. Second, we anticipate that there will be some considerable strength in home electronics, computers, and other such items--hardware and software.",82
-fomc-corpus,1995,Is it basically a Christmas phenomenon and then it falls off next year?,14
-fomc-corpus,1995,"Obviously, the housing element flattens out. We have a weaker motor vehicle contribution in the first quarter. Yes, this is a big Christmas for computer buying in our thinking. I don't want to get too fancy about this. Obviously, whether the sales occur in December or in January isn't of great moment for the GDP forecast--and certainly not for monetary policy--because the production might occur anyway on this schedule.",83
-fomc-corpus,1995,"Incidentally, is computer software a consumer durable good?",11
-fomc-corpus,1995,"Yes, and I think it gets counted with books and other things and in many cases probably is bought at the same outlets. That's one of the real problems in gauging the actual level of expenditures.",40
-fomc-corpus,1995,What actually is being sold is a disk or something that is hard.,14
-fomc-corpus,1995,The question is whether it lasts very long or whether you have to go out and buy a new one next year when you buy your replacement computer. That is where it's counted.,35
-fomc-corpus,1995,Second part of the question. You've got PCE growing fast.,13
-fomc-corpus,1995,Let me just say this. The incoming data have been weaker and that would be a component of this downgrading of the PCE that I suggested would be appropriate at this point.,37
-fomc-corpus,1995,I have been trying to eyeball it. Is PCE generally growing a little more quickly than income?,21
-fomc-corpus,1995,"As you know, the personal saving rate is 4.4 percent in the forecast and it has been 4.4 percent. So, nominal expenditures are roughly keeping pace with nominal income.",39
-fomc-corpus,1995,Then why does the forecast go off the cliff in the third quarter of 1997?,18
-fomc-corpus,1995,Probably inadvertence in the forecasting process. Let's take a look again. The latter part of the year is weaker in 1997. The saving rate is down because of the intra-yearly tax pattern that we have and our assumptions about how people will spend their tax cuts.,55
-fomc-corpus,1995,"But you have consumption down and, in particular, durable purchases are down in the third quarter of 1997.",23
-fomc-corpus,1995,We do have a deceleration going on at the end of 1997 in general.,18
-fomc-corpus,1995,I see.,3
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Mike, what you are saying about productivity prompted a question that I didn't think of before. If you feed through the investment burst, so to speak, of the last three years into the capital stock and into a production function and it does nothing to total factory productivity, what should it do to labor productivity? How much of a fillip to labor productivity ought we to have gotten from this?",78
-fomc-corpus,1995,"As you may recall, it wasn't until quite recently that levels of investment got to the point where we were really adding rapidly to the capital stock. My sense is that those people who would try to approach estimation of what labor productivity should be through a production function find some pretty substantial rates of increase in labor productivity in 1987 dollars. My recollection is 1-3/4 percent.",79
-fomc-corpus,1995,"I would take your previous criticism as being valid. We probably ought to view those in 1994 dollars or chain weighted. Otherwise, we could get excited about something that is not there.",38
-fomc-corpus,1995,"Indeed, how strong investment has been is obviously important to the story.",14
-fomc-corpus,1995,"These numbers aren't in my head. But even though some of the chain-weighted numbers have been low, it is still the case that ""K"" has been growing significantly faster than ""L."" Labor productivity is still growing at 1 percent a year, right?",53
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,"""L"" has been rising for three years, but I don't have the number in my head. Do you know how much it has increased?",28
-fomc-corpus,1995,I don't have the number in my head for what you would derive from a production function approach. But I know from talking to people like Larry Meyer and from our own quarterly model work that one could argue for a somewhat higher number than we have embedded in our forecast.,53
-fomc-corpus,1995,Net?,2
-fomc-corpus,1995,"Yes, net.",4
-fomc-corpus,1995,That has been going up.,6
-fomc-corpus,1995,"That's all a matter of model estimation. There is still the question of what the actual experience has been. The simplest way of looking at this is, if you believe in Okun's law and, admittedly, it is not a precise relationship in every time period, that there is nothing in the behavior of the unemployment rate that would suggest that we have been grossly underestimating the growth potential of output.",82
-fomc-corpus,1995,"I agree with that. Suppose you did this calculation and it came out--I'll make up a number, because I don't know what it is--that it should add .4 percent on first principle to labor productivity. That means total factor productivity decelerated because the evidence is as you said; I'm not disputing that at all.",67
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"For some time now, I have been asking people in Boston if we can learn anything about the current situation or be better informed about the current situation by looking at the late 1980s experience and seeing how long we were below our estimate of the NAIRU at that point before inflation started to accelerate. They keep telling me that we are nowhere near as far below the NAIRU now as we were then, and we were that way for a longer period of time in that period. Given the recent small uptick in hourly compensation and where we are with the unemployment rate, I don't debate your choice of a new NAIRU. I think it's closer to what we had been thinking it was. But I just wonder whether prospectively we are starting to see something like what we saw in the late '80s. Or are you really thinking of this as just minor noise here?",179
-fomc-corpus,1995,I think some would argue that what we are seeing that is reminiscent of the late 1980s is this undaunted optimism on my part. [Laughter] There is a distinct chance that this will be declared Prell's second folly and that we inched toward a somewhat greater degree of optimism on how low the NAIRU might be just when things were starting to turn.,78
-fomc-corpus,1995,You have!,3
-fomc-corpus,1995,"We were somewhat seduced at that time by the run of good experience after we had hit what we thought was probable NAIRU territory. As we saw the unemployment rate moving in the 5 to 5-1/2 percent zone, we got a little more optimistic than in retrospect we should have and there is the risk that that is also the case at this point. In terms of sheer econometric tests, you can't say that the experience that we have had over the past year, a relatively brief period, deviates in a statistically significant way from what model predictions would have been based on a NAIRU as high as the roughly 5.9 percent that we had before we made this change, or even numbers in the low sixes. Compensation per hour numbers have begun to push the envelope a bit. But if you look at reduced form models with prices, there is certainly no inconsistency with a higher NAIRU. I think we have cautioned, at least implicitly in what we've said, that we are making an assessment of what we see going on now and what is likely to be going on in the near term in light of all the factors affecting the economic environment. It is not necessarily the case that we can expect the NAIRU to be permanently lower than what we have previously thought it to be. There may have been some short-run favorable supply side effects, so to speak, that helped push the short-run NAIRU below where we thought it was, and it may pop back up. We need to be very cautious and continue to watch this. Some people point to the other compensation-per-hour numbers that come out in the productivity cost release, and conclude that that has turned up--Larry Meyer, for example, and that's perhaps because it fits his model. It is true that there certainly has been no deceleration in core CPI this year. The latest data are a little worse than they have been for the last few months. But given the average hourly earnings and the slight uptick in the core CPI, I would rather have had the numbers go the other way than have had my neck stuck out this time.",432
-fomc-corpus,1995,"Governor Blinder raised the question before the meeting as to which week the unemployment rate survey will be taking place. Since the 12th is on a Sunday, do they look at the previous week or this week?",43
-fomc-corpus,1995,"My understanding, Mr. Chairman, is that if the government shutdown extends beyond this week, they will not be in the field next week with the household survey. This week is the reference week and next week they will be out in the field actually doing the survey.",53
-fomc-corpus,1995,"There is also possible irreparable damage to the November CPI estimate because they normally have people out in the field all month getting quotes. Those people presumably are not out in the field now. If they get back soon, this may not lead to any major miscues in the estimates, but there is still a potential problem for the estimates.",67
-fomc-corpus,1995,"Any further questions from anyone? If not, who would like to start the roundtable? President Hoenig.",22
-fomc-corpus,1995,"Mr. Chairman, the Tenth Federal Reserve District continues to be relatively strong. Since the last meeting, for example, payroll employment in our District continued to grow faster than the national average. District manufacturers continue to operate at or near full capacity. In recent surveys, many of them suggest that their operations have pretty much rebounded from the summer slowdowns. In addition, retail sales have been solid throughout the District and most of the retailers we have talked to expect a good holiday season. Our directors are reporting that commercial construction activity continues to be fairly brisk, offsetting a bit of a slowdown in home building. Reflecting the generally healthy tone of the economy in our District, growth in bank credit has picked up recently, supported by gains in consumer and real estate lending. While our economy is generally stronger, there are a couple of areas that have shown some weakness: energy and agriculture. Low oil prices continue to hold down activity in the District's energy industry, and financial losses in the District's cattle industry are likely to limit the improvement in farm incomes, which some of us were expecting. Wage and price pressures remain relatively subdued despite the overall strength of our regional economy and despite some spotty reports of wage pressures at the lower end of the wage scale. On the national level, the outlook in my opinion remains favorable. By that I mean that, on the real side, I am looking for growth to be about 2-1/4 percent over the next several quarters. While I note the strength in the third quarter, I see economic activity returning to this more moderate pace as we move through this quarter into next year. But even with this slowing, the economy remains fundamentally strong in my view, except for government spending and inventory investment. I expect most other sectors to contribute to growth over the next several quarters. A growth rate in a 2 to 2-1/4 percent range is entirely appropriate, I think. This is especially true with the economy continuing to operate a bit beyond capacity, by most measures at least. With regard to inflation, I believe that we need to continue to be cautious. I'm pleased with some of the more favorable inflation numbers. But despite this morning's report, I think it is important to acknowledge that core CPI inflation is likely to rise this year over last, and with resource use still at fairly high levels, wherever one believes the NAIRU is, we are not likely to see a real easing in inflation below that 3 percent mark as we go forward. I think that has to be kept in mind as we proceed from here. Thank you, Mr. Chairman.",525
-fomc-corpus,1995,President Forrestal.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. Conditions in the Southeast, in the Sixth District, have not changed very much since the last meeting. We continue to enjoy moderate economic growth in most sectors and relatively low inflation. It is interesting to note that the economy in the Southeast, and I think this is generally true of the nation, has made a successful transition from the rapid growth in the first three years of the current expansion to the more moderate growth that we have experienced this year. Looking at some particular sectors, we have seen a rebound in household spending in early November after some special factors, including Hurricane Opal, had depressed retail sales in October. In spite of this rebound, extensive holiday sales promotions have already begun that will extend the holiday shopping season by at least several weeks. I have seen some reports in the last few days indicating that retailers in the Southeast are expecting sales to be 7 percent above last year's, which I think is a little better than what is reported generally in the nation. In the Atlanta area, they are expecting about an 8 percent increase, which is really quite good. It remains to be seen whether they will achieve those or not. Sales of consumer durables other than autos have strengthened recently along with the second wave of home building. In the real estate area, activity in residential markets has been stimulated by recent declines in mortgage rates. Nashville and Atlanta remain the strongest markets, but other Southeast metropolitan areas also have had quite good growth relative to last year. In the multifamily sector, demand is really strong, and it is not uncommon to see ninety percent occupancy rates in that market. Commercial construction is also expanding throughout the District and speculative office and retail developments are regularly reported now. In manufacturing, our regional manufacturers' survey indicates that the pace of growth in the Southeast has slowed somewhat since July, and that survey includes housing-related manufacturing and auto production, which had been strong previously. The same survey continues to show quite modest pressures on prices at both the input and final product levels, and the expectations are for little change in such prices. The Southeast, and especially Atlanta, are experiencing growth in tourism in both traffic and revenue. The Olympics are guaranteeing a draw of about 2 to 3 million visitors next summer, which is expected to spill over into each of the District states in one form or another. So, the outlook for the Southeast continues to be quite good on both the output side and in terms of prices. With respect to the national economy, for the first time that I can remember, our forecast and the Greenbook forecast are about the same. Both forecasts agree that the 4.2 percent real growth of the third quarter is unsustainable. Our forecast shows real growth in the 2-1/4 to 3 percent range quarterly through 1997 and inflation in the 2-1/2 to 3 percent range quarterly. Thank you, Mr. Chairman.",585
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, economic growth in the Twelfth Federal Reserve District has accelerated through September. Recent California employment growth has been significantly faster than for the United States as a whole. Very rapid growth has continued in Utah and Oregon. Although Nevada and Arizona show signs of cooling, they are growing very rapidly. Idaho and Washington also are growing more rapidly than the United States as a whole, but with some areas of weakness. The limited information that we have on activity in October suggests less robust economic expansion. The official California employment and unemployment figures for October suggest some slowing, although other state data indicate that the recovery is still on track. Boeing's 23,000 machinists located in the state of Washington are continuing a strike that was begun in early October; the strike is likely to pull down overall economic activity in that state in the fourth quarter. I might note parenthetically, as you may have seen, that Boeing received an incredibly large order from Singapore Airlines for their new 777. In California, there is an ongoing debate over creation of higher paying jobs versus lower paying jobs during the state's prolonged recession. During this period, the shift from higher to lower wage industries has been more rapid in California than in the nation as a whole due primarily to large reductions in defense-related employment. More recently, we believe that this trend has been reversed, due largely to job creation in high-tech-related sectors since those sectors have been growing very rapidly in the last year or so. Turning to the national outlook, our forecast shows real GDP growth averaging about 2-1/2 percent or somewhat more through the end of next year. In our view this would leave the economy with some resource constraints in labor and product markets even if the NAIRU has fallen a bit. Recent inflation news, as we all know, has been favorable. Although I hope it continues in this vein, it seems to me there are some reasons to worry about whether that will happen. First, there will be upward pressure on inflation to the extent that the economy is pressing on full employment. Second, I believe there are reasons to be skeptical of arguments that the moderation in employment cost inflation over the past year will be a major factor holding down price inflation for long. As was mentioned by Mike, most of the slowdown in the employment cost index since 1993 has been in benefits, especially health care costs. This has caused employment costs to decelerate since mid-1994. However, in the long run this should affect only the level of benefit costs with presumably no permanent effect on compensation inflation. Second, research at our Bank and in the academic literature--and I would cite here work done by Robert Gordon and also Yash Mehra from the Richmond Bank--questions the direction of causation between wages and prices. We don't talk about that very much. This work suggests that more often than not, these two variables are brought into alignment by wages adjusting to prices rather than the other way around. So, despite the favorable CPI numbers in recent months, the unusual decline of labor cost inflation relative to price inflation during the past year or more could be resolved in large part by somewhat faster wage inflation in the future. In this regard, I found the Greenbook projection of rising labor costs in 1996 and 1997 certainly plausible. Taking these factors into account, I end up concluding, as did Tom Hoenig, that I don't see us making any progress in 1996 and 1997 in reducing inflation below this year's rate. Under the assumption of a roughly constant funds rate, our forecast shows the CPI at around 3 percent in 1996 and 1997, a little above this year's 2-3/4 percent rate. Thank you.",748
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Sometimes the District reports make me think about 12 pistons in a reciprocating engine, with some rising and some falling. It's hard to cut through it and know whether the engine is well tuned and humming along or not. The Fourth District is definitely a piston that is coming down. I've been struck by how consistently the reports from our Bank's business advisory council, our directors, and the other people that we have talked to have been in the negative direction since our meeting in September. People are pulling down their expectations, not only to finish out this year but also for the first half of next year. It may simply be because the District is so heavily influenced by automobiles. Our manufacturing employment as a share of total employment is running about twice the national average so that when autos and trucks and even agricultural equipment soften--and they are distinctly softening--everything else and everyone's attitudes also downshift. That's pretty uniform throughout the District with the exception of the area around Lexington and the Georgetown automobile facility that is still expanding. Everyone else is reporting that it is much easier to hire than before. Their order books are softening; their backlogs are down. There are almost no reports of the type we were hearing for a while about commodity prices of various types being the source of new inflation. Other than some pickup in residential construction around the District--and people say they think that is related to lower mortgage rates--we see people mostly pulling back on the previous optimism. I worry about these kinds of anecdotal reports adding up over time to the mirror image of two years ago when we started to sense that the head winds were dissipating. In terms of the things that we are concerned about, that kind of information we have about real economic activity translated for me into saying in the context of two years ago that the real equilibrium interest rate was starting to shift up. If we don't make some adjustment, we will wind up with a de facto easing of policy relative to where we think it ought to be. If I am right about things going in the opposite direction of two years ago, we should start to see a pattern of people being surprised that the economic indicators are coming in weaker than they previously had expected. We are hearing it not only in consumer goods but also in capital spending. I would call that a downward revision in the equilibrium real rate. We would be in a posture of winding up with a more restrictive policy relative to what is going on in the economy than we may later consider to have been appropriate. I don't make forecasts anymore, but I do listen to the forecasts of my staff. They tell me with a fair degree of confidence that real GDP growth this quarter will come in somewhere between minus 1 and plus 5 percent. [Laughter] I'm not sure what to make of it, wherever it falls in that range. But looking to next year, I am very troubled by that persistent 3 percent inflation rate shown in the Greenbook. If that's the most likely outcome, in the sense of being consistent with the forecast of economic activity and the assumed stance of policy, then it's unacceptable. But I don't have any basis for saying that it's wrong and that it's too high. If I were still in the game of making forecasts, I would tell people that it is more likely to come in below those numbers than above those numbers.",669
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"The regional economy in the Philadelphia District is mixed. It is performing in the range of steady to improving slightly. Manufacturing continues to grow, although the pace appears to be waning. Retailers are disappointed with sales and concerned about the outlook for holiday sales. Even discount stores are now seeing smaller increases than earlier in the year. Auto sales have eased with the end of incentive programs on '95 models and slow deliveries of '96 models. Real estate activity has been running at a nearly level rate. Office vacancy rates are coming down only slowly if at all, and residential sales are flat. Commercial and industrial lending is moving up some, with a slowing of credit card lending. Employment gains are anemic but still better than earlier in the year, and wage gains continue to be in the 3 to 4 percent range. Attitudes appear to be more cautious than upbeat. Turning to the national economy, it just does not have the feel of a 4 to 5 percent growth rate. The statistics appear to be telling us a relatively fast growth story, and the anecdotal information indicates a more moderate growth story. I'm inclined to give more weight to the anecdotal evidence. Consumer spending appears more consistent with the more moderate growth path, as does manufacturing. I would view the 4 to 5 percent growth that we seem to have had as more of a statistical aberration than a basic underlying trend. The outlook for inflation is probably in the 3 percent range for next year. While I believe we are all committed over time to a stable price environment, I think we have to be realistic about this. We are in a very mature phase of the business cycle and it would be a major accomplishment by historical standards just to keep inflation from rising at this point in the cycle. I think there will be opportunities to have further disinflation, but my expectation is that we will have to wait for a more conducive phase of the business cycle for that to be achieved.",394
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, on balance, the Seventh District's economy is performing at a very high level, generally stronger than the national economy and with some sectors or industries at or near capacity. The District's manufacturing sector expanded in October, while manufacturing contracted nationally. The purchasing managers' surveys from across the District in Chicago, Milwaukee, Detroit and western Michigan all indicated expansion in October, while the national figure dropped below 50. However, there are some areas in manufacturing where I think caution seems to be called for. I say this recognizing that our manufacturing firms are now operating at very high levels. In my view our situation is not the same as the one Jerry Jordan described for the Cleveland District, where he said that growth actually is starting to decline, but there are areas in our District that we have to watch carefully. One area is light motor vehicles. October sales of such vehicles were below September's, and our contacts indicate that sales in early November have not shown any significant improvement so far. Of course, this is the early part of the month, but without a pickup from the recent sales pace, it's highly likely that production plans will be trimmed further this quarter. Medium- and heavy-duty trucks is another area where caution seems appropriate. Net orders have declined substantially, but manufacturers do not plan to cut production this quarter as much as might be expected. Although inventories will be increasing, several manufacturers indicate they will wait for the new year before reassessing their production plans. Finally, the steel industry needs careful monitoring. Steel production in our District has been at very high levels, but spot prices for steel have been dropping sharply. District retailers generally were pleasantly surprised with the early November sales gains, particularly after October's lackluster performance. However, retailers are still in a gloomy mood, in part because of weak catalogue sales, and they are boosting sales promotions. Retailers with a national presence noted that sales at stores located in our District generally were stronger than nationally. A note of caution, however: A large national trucking firm reported that large discounters were significantly slower in taking holiday shipments this year as compared with previous years. The housing sector in our District is very strong. New and used home sales in the Midwest led the United States in September and October. Builders in Chicago and western Michigan are struggling to keep up with demand. Labor markets remain tight. Unemployment rates in our District range between 3.3 and 4.8 percent. We are now receiving more reports of rising wage pressures, especially for low skill entry-level jobs. But these increases do not yet appear in the data, as a third-quarter employment cost index for the Midwest was roughly in line with the nation. We have received an advanced copy of Manpower Incorporated's first-quarter 1996 hiring plans survey results, which will not be publicly available until early December. The national results indicate that business hiring plans for the first quarter of 1996 will remain at the high levels reported for both the third quarter and the fourth quarter of this year. Hiring plans for Midwest firms continue to be stronger than the national survey results. Our contacts at that they feel the first-quarter results generally tend to be a good indicator for the full year. They also indicated that wage pressures were very low, but firms they service are expecting increases to become larger next year. One of the major developments in the agricultural area, of course, has been the sharp increase in grain prices: Wheat prices are the highest in twenty-one years and corn prices are the highest in eleven years; a year ago, corn prices hit a seven-year low. While it is not entirely clear how much food prices will be affected, the farm price increases this year have been bullish for suppliers of farm equipment. More generally, price patterns in our District do not seem to have changed much since our last meeting. Nonagricultural commodity prices continue to be soft. Paper board, gypsum, and steel scrap prices have all edged down. Turning to the national picture, our outlook is broadly in line with the Greenbook. We generally agree with the Greenbook's assessment for fourth-quarter GDP growth in inventories, although the anecdotal information we are receiving points to further inventory correction early next year. Our overall forecast is for a bit more economic growth next year than the Greenbook, and we are slightly more optimistic on inflation, but the differences are not really large.",876
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Thank you. We recently have had meetings with our directors and our advisory council, and several themes emerged from those discussions. Many of them are not new, but I think they are worth emphasizing because they were universal. The first of these themes was that labor markets are very, very tight across the District and across skill and experience levels--everything from unskilled, inexperienced workers to college graduates, MBAs, and so on. While that was reported by virtually everybody who commented on it, they also commented that despite the fact that those labor markets have been tight for quite some time, there is no real sign of any acceleration in wage increases or price increases across the District. Also, credit is readily available. There has been a striking lack of reports of difficulty in finding credit. Real estate construction markets have strengthened and are continuing to strengthen. The manufacturing sector, in contrast, is pretty sluggish outside of the paper industry. If there is one group that is concerned about current industry conditions and where the economy is likely to be going, I would have to say it is the manufacturers. Those we have talked to who do business internationally say that outside of Japan they are seeing improved business. Japan appears to be, as we know, largely a case unto itself at the moment. Finally, those who commented on this issue indicated that capital spending today is being driven by technological change rather than interest rates. They would not argue that interest rates are altogether inconsequential, but they seem to feel that they really have to continue to introduce new technology in order to remain competitive. With regard to the outlook for the national economy, I share the view evidenced in the Greenbook that we will see a continuation of respectable real growth from here. It will not be at the pace of the third quarter, but I don't see any reason to doubt that the economy will continue to grow at a pace in the neighborhood of 2 or 3 percent on average over the next several quarters. With regard to the inflation outlook, I must admit to a fair amount of uncertainty. If I had to write down a number, I would probably write down something like the 3 percent in the Greenbook. But if there is one thing that really has surprised me in the past year or maybe two, it has been the fact that despite tight labor markets, rapid growth in demand, and tight product markets we have not seen any acceleration of inflation. I have a tinge of optimism regarding the inflation outlook, and if I were to err I would guess that we might do a bit better on the inflation side than that number I would write down.",522
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Mr. Chairman, New England continues its gradual expansion from the trough of the recession, but recent data suggest that even the moderate growth pace of earlier this year has slowed a bit. As usual there is good news and bad news--or at least downbeat news. Let me cover the downbeat first and finish on a more hopeful note. During the first eight months of 1995, New England added jobs at only about a third the pace of the prior two years. National job growth has slowed in recent months, but New England's decline has been sharper. The region had been adding jobs at about two-thirds the national pace since the recession ended, but recent data show that our job growth has slowed to about half the pace for the nation as a whole. Among the states, Rhode Island maintains its ranking as the basket case, with employment continuing to be below that of the year before. Connecticut is barely growing at all, while the remaining states have had, at least in New England terms, relatively healthy job growth. Manufacturing employment continues to shrink, but the pace of contraction has slowed a bit. The cause of the recent regional employment slowdown therefore lies outside manufacturing; employment growth in finance, government, and transportation has come to a relative standstill. I should note that despite the trend to smaller government, the share of government in the employment pie in New England is expected to grow. This is because the Bureau of Labor Statistics now classifies Indian-run casinos as ""other local government."" [Laughter] One wonders about this! Without casino-related job growth, Connecticut clearly would have continued to be our basket case, because that is where most of Connecticut's job growth has come from. Despite this, unemployment remains relatively low in New England at least in part because of weak labor force growth and outmigration. Recent estimates show that the labor force actually has shrunk by about 200,000 since the recession ended while the number of establishment jobs has expanded by about 325,000. We maintain a decent unemployment rate but largely because the labor force is shrinking. Adding to the downbeat news from local labor markets is considerable softness in retail sales. This undoubtedly reflects weak consumer confidence, which is below year-earlier levels. Now to turn to a little hope: There are bright spots in New England. High-tech businesses are booming, at least certain kinds of high-tech businesses. So much so that one contact said his company was constrained not by demand but by a relative shortage of silicon wafers and glass yarn. Software designers are in short supply, and the industry itself is beginning to regard 25 to 30 percent growth rates as disappointing. A contact at a major software company located both in California and New England said he will be moving some jobs to Massachusetts because shortages are even worse in California. Wages for these workers have risen only a modest 4 to 5 percent, however, due in large part to the value of stock incentive programs that are being used increasingly to reward highly paid workers. Tourism has been another bright spot, with significant gains over even last year's strong performance. Finally, I don't know if this is hopeful or not, but loan growth at large District banks has slowed considerably from its earlier pace. It had been slower than for the nation as a whole throughout the recovery. Most of this weakness lies in commercial and industrial loans, and some of this is due to uneasiness about large bank mergers, which we think have redirected some business to smaller banks in the District. Turning to the national scene, we had a rather healthy internal debate among the economists on my staff. It's a serious debate because I gather money has been wagered on what the direction of the Committee's next move ought to be, up or down. The fact that we can make good arguments for both positions, I think, underscores the Bank's general agreement with the Greenbook forecast. As I see it, that forecast shows a fairly good outcome with relatively balanced risks. Actually, it was a bit more upbeat than I had expected, possibly because the third-quarter numbers have been such a surprise. In that regard, I think that the foreign growth numbers projected by the staff may be overly optimistic, and I really don't know what to believe about the numbers associated with the federal budget crisis. Your crystal ball is probably as good as any on that one. On the other hand, I really do think that the impetus provided by low interest rates and booming financial markets, combined with where we are in terms of the unemployment rate, does play out in the direction of an upside risk, and I would buy into a few of the concerns that President Parry mentioned in his comments. I am concerned that we may not continue to be successful in keeping inflation at the projected 3 percent rate.",956
-fomc-corpus,1995,"Mr. Chairman, may I interrupt a second? Secretary Rubin announced a little less than a half hour ago that he is disinvesting trust funds, in particular the Civil Service Retirement Fund as well as the G-fund, by enough to permit the Treasury to raise some $60 billion in the market. This now gets them up to the last business day of December.",74
-fomc-corpus,1995,Did he say that or is it our estimate?,10
-fomc-corpus,1995,"I believe he said the $60 billion would get the Treasury through December 30. He did it by using the $21-1/2 billion in the G-fund as everybody expected. But apparently he must have made a finding that this crisis, or this debt limitation problem, could go on long enough to enable him to disinvest about $39 billion of the Civil Service retirement fund. This suggests that he found it might go for about a year or so.",94
-fomc-corpus,1995,Couldn't that announcement in itself have the impact of slowing down progress in resolving the budget problem?,18
-fomc-corpus,1995,"In the last few days, attention appears to have shifted to the appropriations process and the debt ceiling issue has come off the table. There was some presumption that the Secretary had enough tricks in his bag to keep it off the table for a while.",51
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Mr. Chairman, Part II of the Greenbook starts out with the statement that the recent news on the national economy is unusually ""conflictive."" I wasn't sure that was a word, so I looked it up and as always the staff was right. It is a word and it is a good word! [Laughter] It is a good word to describe conditions in our District as well as in the country as a whole. I will cite a couple of examples. Furniture, as most of you probably know, is a major industry in our region, and each fall there is a so-called ""furniture market"" in High Point, North Carolina where all the major manufacturers and a number of major retailers come together. That market was held a few weeks ago, and it was said to be the weakest in five years. In sharp contrast, the CEO of a sizable chain of retail furniture stores said that his business had picked up significantly in recent weeks. Elsewhere, textile and apparel manufacturers tell us that conditions in their industries have softened a great deal lately. At the same time, there are pockets of substantial strength throughout the District in such diverse activities as chemical manufacturing in West Virginia, the expansion of high-tech facilities in Virginia and North Carolina, and tourism in South Carolina. Commercial construction is said to be quite strong throughout the District. Auto sales have softened in some places but are much stronger in other places. So again, ""conflictive"" seems to be a good word to describe the kind of reports and information we have been getting recently. Boiling it all down, my sense is that in the aggregate conditions in our District have not really changed a great deal since the last FOMC meeting. I think steady growth at a moderate pace continues to characterize our regional economy. However, as Larry Lindsey reminded me at breakfast this morning, our District is more at risk than other parts of the country to any near-term shock stemming from the current fiscal situation; our region would bear a disproportionate share of such a shock. One other point that might be worth mentioning about our region--it might extend beyond the region--was brought up at a joint meeting of all three of our boards last week. Chairman Greenspan was there. At that meeting, several bankers expressed the view that loan quality was deteriorating in our region and around the country and that loan margins generally had narrowed and competitive pressures had intensified. Six or seven bankers made that sort of comment and only one took exception to it. With respect to the national economy, I have to admit that I was a bit surprised by the magnitude of the upward revision in the forecast. I have been reading these Greenbooks for a long time, and this was a significant upward revision, especially if a comparison is made with the previous forecast in some of the out-quarters. I think the level of real GDP at the end of 1996 is about a percent higher than it was in the September Greenbook. I recognize that with the more recent retail sales figures you may revise your forecast down a bit, Mike, but I take it that on net it is going to be generally the same picture. The Greenbook makes a good case for that revision. Aggregate demand does appear to be significantly stronger than we thought it was not too many weeks ago. Business investment, especially in computing equipment but in a lot of other things as well, is still quite robust. There is still a lot of thrust in housing, and we certainly see that in much of our District. The latest labor market reports, as the Greenbook mentions, suggest that income will be growing rapidly enough to sustain at least moderate growth in consumer spending in the period ahead. Clearly, none of this negates the downside risks that are still there, and I think the retail sales report yesterday was a good reminder of that. But it does suggest that the risks on the up side are also there and they should not be ignored. This brings me to what seems to be the main implication of the revision. It moves the projected path of the economy away from one that might have seemed to be a bit below the economy's potential to a path that may be very close to potential and conceivably even a little above it. This obviously has implications for the inflation outlook, and I think they show up in the projections. They are not dramatic, but they are there if you look at the numbers closely. In particular, as I recall, the September Greenbook showed the core CPI inflation rate gradually declining over the course of the projection period. In this Greenbook, it stays almost exactly constant at 3 percent. Some people might look on that as an optimistic forecast, but I think it is a move in a direction that we don't want to see. Tom Hoenig and Bob Parry have made this point before. I think we should be concerned if we see no further progress toward price stability until 1998 at the earliest. And, obviously, with the revision in the projection, there is some risk that we could get into a situation where the inflation rate begins to drift slowly upward. That prospect should be a concern and it is what struck me most in the projections.",1040
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Mike, I was interested in your comment that the current situation reminded you most of developments in the late 1980s. I wasn't here then. What I remember about 1988-89 is the cover of Business Week that asked ""Have we repealed the business cycle?"" If I were to put a cover on this Greenbook, I too would say ""Have we repealed the business cycle?"" At the least, your forecast puts off any perceptible slowing for another six quarters--until mid-1997. I'm suspicious of that. I hope I'm wrong, but I have a number of quibbles, particularly on the international side, and one major concern that has to do with the consumer debt situation. We continue to have a robust forecast and robust debt growth. The Greenbook rightly notes that consumer debt levels have moved up. In the last 2-1/2 years, consumer debt as a percent of disposable personal income has risen 2-1/2 percentage points from about 16 percent to about 18-1/2 percent. One way of looking at that is that 40 percent of growth in PCE in the last 2-1/2 years has been financed by higher non-housing consumer debt. The reason I am more concerned about that than the Greenbook and the reason that we are going to have some problems is two-fold: first, I think that the quality of income that consumers are receiving makes that debt level worse than what it is perceived to be; and, second, there is the view that the stock market can be a panacea for the deterioration on the liability side. I don't believe that is accurate. Let me start with the income situation. Although personal income has been rising at a respectable rate, not all personal income flows through to spendable income for the consumer. Although that is true for wages, that is not true for substantial portions of interest and dividends. One check on that is simply to look at income tax data. Now, if you receive more than ten dollars a year in either interest or dividend payments, that income is reported to the IRS. So, it is not a question of evasion; any received interest or dividend income by a taxable entity is going to show up in the income tax data. Yet, only 30 percent of personal interest income is reported on income tax returns. That includes nontaxed interest. The same thing is true for 50 percent of dividends and 65 percent of business income. If you define spendable income, you can either include transfers or not include transfers. The numbers I have don't include transfers, but that doesn't change the story. What you get is a picture of the income situation that suggests there is a lot less spendable income out there than what we have perceived. By itself that is not a disturbing fact. What is disturbing is that over time the relationship between spendable income and disposable personal income has been deteriorating. For example, spendable income in 1988, as I just defined it adjusting for what actually flows through to household checking accounts, amounted to about 61 percent of disposable personal income. In 1995, that fell to 57.4 percent. So we have had roughly a 6 percent decline in the base, what I would call the denominator, which we should be using to measure debt service burdens. That means that the 18-1/2 percent that we scored in the second quarter of this year has a ratio of debt to disposable personal income that, after adjusting for the deterioration in the composition of income, would really be a number like 19.7 percent. That would be a record high substantially above anything that we have seen. Obviously, with the average of spendable income to disposable personal income falling, it is even worse at the margin, and the last year has been the worst year to date. The second issue is whether the very substantial stock market gains could in fact offset this deterioration on the household liability side. It is an obvious statement to say that people who own stocks are the same people with credit card debt. But if you take a careful look at the distribution of stock market wealth, it becomes increasingly implausible to believe that a rise in stock market wealth could actually be the cause of any kind of sustained expansion in consumer spending. For example, 31 percent of dividends go to the .8 percent of households at the top of the income distribution and half of all dividends go to people over 65. Actually, among the non rich, substantially more than half of all dividends go to people over 65. I don't know if we have any detailed studies of the marginal propensity to consume, but if you are counting on stock market wealth, which I'm using dividends to apportion, dividends would be a rough signal that a lot of that increase in stock market wealth is--I'm going to use the word--""wasted"" on people who are unlikely to spend a large portion of it and certainly unlikely to be the people who are running up this consumer debt. To try and probe that a little further, if in fact stock market wealth is going to be the leading cause of consumption expansion, we would expect it to permeate down at least into the $75,000 to $100,000 income class. There are about 4 million house-holds in this income range; there are about 4 million households that are richer than that. We are talking here about the 92nd to 96th percentiles of household income. If we are expecting a wealth-led increase in consumption, they clearly should benefit. Yet half of all households in this income class receive no dividends at all, suggesting that they have no stock market wealth. And 71 percent of households in this category under age 65 receive no dividends at all, suggesting that they have no stock market wealth. Of the remaining 29 percent in this category--about 1 million households that received dividends--the average dividend is about $3,000. The median dividend is about $600. If you figure that there was a 40:1 price to dividend ratio, that would mean that even among the 30 percent of this relatively wealthy class that got dividends and owned stock, their portfolio is only about $25,000. The gain in their portfolio was on the order of $6,000. To expect that small a group and that small a gain to somehow sustain consumption spending seems implausible to me. So, I have to believe that the problems that we all acknowledge on the liability side of the household balance sheet are real and can't be offset by improvements on the asset side of the household balance sheet. I think this is going to show up, for example, in continuing declines in auto sales. I don't know that we are going to have a recession, but I do know that this type of increased risk in household balance sheets will mean that whenever there is a misstep--a shock if you will--in some other portion of the economy, it is going to spill over into the consumer sector with magnified effects. I think that means we have substantially heightened risks on the down side. That is my quarrel with the Greenbook. I would like to say one other thing about the economy and that has to do with the current budget negotiations. We have 800,000 federal employees who are furloughed and close to 1-1/2 million who are not receiving paychecks. Now, that is a lot on the spending side. If these people are actually liquidity constrained, it is in effect a sudden 1-1/2 percent rise in the unemployment rate, which would amend forecasts about what is going to happen to consumer spending, particularly in the fourth quarter. Staff has estimated that each week that we continue to have an impasse takes .3 point off the fourth-quarter growth rate. Well, it looks as if we have one week for sure according to this morning's papers and, as I read the rhetoric, I don't see where this is going to end any time soon. As we start adding up the weeks people are not getting paychecks, we begin to get a little nervous about how this might spill over. Secondly, if it is resolved, the direction in which it most likely will be resolved would be a compromise on the Medicare side. I think that would be unfortunate and I believe the bond markets particularly would view it as unfortunate. It would mean that we would get the short-run cuts on the discretionary side, that is, the layoffs in the government sector. But it also would signal to the bond markets that we are not going to be getting our arms around government consumption over the long haul. The effect of that would be that yields on intermediate- and long-term securities would tend to rise. The big rally in securities markets has not come from proposed cuts in funding for the National Endowment for the Arts but from proposed cuts in Medicare and long-term government consumption on the order of a trillion dollars. So, I am afraid that the kind of compromise that we most likely are headed for will give us the worst of both worlds--short-run contraction in 1996 due to layoffs plus a run-up in intermediate- and long-term rates that will adversely affect the auto industry and housing starts. I am substantially more pessimistic than I was, and I am much more pessimistic than the Greenbook.",1892
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. The good news is that this year's CPI inflation likely will be less than the members of the FOMC forecast in July. The acceleration that was widely expected at the beginning of the year has not materialized. Although the staff analysis cites temporary decreases in energy prices and a deceleration in medical care costs, it says little about the contribution of monetary factors. Last year's slow growth of the narrow and broad monetary aggregates likely moderated this year's inflation. On the other hand, I don't consider the current stance of monetary policy as being unduly restrictive. Growth of both the broad monetary aggregates and bank credit has accelerated this year. If we adjust for sweep accounts, there has been some growth in M1 as well. In addition, firms have turned to the capital markets for financing as long-term market yields have fallen and stock prices have risen. The bad news is that neither the staff nor the public apparently sees any deceleration of inflation in sight. Respondents to the Philadelphia Fed survey expect CPI inflation to accelerate to 3-1/2 percent in the first half of 1996, roughly comparable to the staff's projection of 3.3 percent. Households in the Michigan survey on average expect inflation to accelerate to about a 4 percent pace next year. We should be concerned, I think, when the public expects inflation to accelerate and not to fall further after it has been held below 3 percent for several years in a row. It is true that expectations have inched down a bit; we can see that in long rates and in some of the surveys. But no one expects inflation to fall to 2 percent or below anytime soon. We simply do not have the credibility that at least I think we would like. It is important to protect recent gains and to make further progress toward price stability. At some point, a statement in that regard with respect to our intentions would help. It is a topic we have talked about before. The Eighth District economy, like the nation's, continues to operate at a high level, as growth slows to a sustainable rate. Transportation equipment has been exceptionally strong. Orders for both military and civilian aircraft have increased. District auto production was up 34 percent year-over-year during the third quarter, and it is expected to be up 45 percent during the fourth quarter. The exceptional strength in St. Louis auto production, as I have mentioned before, is due to the particular models built there, mainly light trucks and sports utility vehicles. In Arkansas, Tennessee, and Kentucky, the poultry industry continues to expand aggressively. Throughout the District, residential construction is picking up and office vacancy rates continue to decline. There are some signs of cyclical weakness, however. District unemployment rates, although still low by historical standards and below national averages, have risen about 1/2 percentage point on average over the last year. Layoffs at large corporations, such as General Electric, are attributed to weak domestic demand for appliances. On the other hand, announcements of plant closings by Brown Shoe and Fruit of the Loom, for example, more likely represent structural adjustments than signs of an impending downturn. In the banking area, ""unchanged"" is the key word in an Eighth District survey of senior loan officers. Loan demand has leveled off after rising sharply all year. In fact, at large reporting banks, loans have risen about 11 percent over the last year. Although there has been some increase in the consumer loan delinquency rate, it remains well below the level attained before the last recession. The poor weather conditions this year have reduced crops and have led to low agricultural stocks, a comment that Mike in particular made, which may well result in markedly higher food prices next year. Nationally, the economy continues to operate at a high level, with growth slowing to its 10-year average rate. It is important not to repeat the mistakes of the past. It now seems likely that we will get through this business cycle with a peak of inflation well below the 6 percent rate that occurred in 1990. But, frankly, that is a pretty low standard to set for ourselves. The mistake made in previous business cycles was to inflate the money supply in a misguided attempt to stimulate growth. In every case, fighting the subsequent inflation contributed to recession. The outlook for the real economy is optimistic today because inflation has not accelerated. The worst thing we could do is to repeat the mistakes of history, most recently in 1986. That is, we should not allow an acceleration of inflation that would require a sharp reversal in policy later on. What we should be doing is looking to move the inflation trend lower.",935
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,"Not very much has changed in the Eleventh District since the last FOMC meeting. Employment growth remains strong; it is weaker than it was in 1994, but it is stronger than that of the nation. At the margin, the expansion of high-tech industries is accounting for a large portion of our employment growth. To give you some longer-term statistics, over the last six years high-tech employment has grown four times as fast as total non-agricultural employment in Texas and more than twice as fast as high-tech employment in the nation. The growth of high-tech industries has been tightening the market for office space and other nonresidential real estate in our major cities. This is primarily in the outer edges of the cities, though, rather than the inner cities. Single-family home construction has picked up. Single-family permits rose at a 10 percent annual rate in the third quarter, and many homebuilders are raising their forecasts for 1995. This strength has been driven at least as much by business relocations as it has by lower mortgage rates. Many Austin and Dallas firms are recruiting heavily from out-of-state because of tight labor markets for certain skilled workers, engineers and programmers primarily. The Mexican border area remains a weak spot. At our board of directors meeting last Thursday, all of our directors' reports were up except for El Paso and Brownsville. Earlier in the year, we kept hearing reports that businesses have been through and have survived other peso crises. But there seems to be a lot less bravado these days than there was in the early months of that crisis. Retail merchants continue to shut down. The limit on how much Mexican citizens can buy in the United States without paying a duty when they cross the bridge back into Mexico has been raised back up from $50 to $400 on November 1st. But given the cut of about 50 percent in the purchasing power of the peso on the other side of the border, it is probably going to be irrelevant at this point. On the national economy, I am pleased to see the less binding view of supply-side constraints in the potential rate of growth contained in the staff forecast. This accords well with my own views and recent economic results. The broad outlines of the Greenbook forecast seem to me to be about right and reflect the fact that growth momentum has been stronger than we suspected and inflationary pressures a touch weaker than we had thought earlier. I differ from the Greenbook in that I think the rates of real growth forecast for 1996 and 1997 do not appear to call for an upward revision to the inflation forecast in those years. Mike started off his briefing by talking about retail sales. I might just mention that although had a terrible October, they report that nationally the first two weeks of November have been very strong.",563
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The private sector economy of the Second District grew moderately in recent weeks. In September, private payroll employment rose at an annual rate of 1.2 percent in New York and 0.9 percent in New Jersey. In October, the unemployment rate fell from 6.8 to 6.3 percent in New York State and was unchanged at 5.8 percent in New Jersey. Loan officers are reporting that demand for most types of consumer and nonresidential loans at small and medium-sized banks was higher than it was two months ago. Consumer confidence also improved in October, rising 12 points in the mid-Atlantic states. That still leaves the index at the lowest level of the nine regions reported by the Conference Board. Consistent with that low level of confidence, the levels of retail sales and existing home sales have fallen sharply over the last four to six weeks. The major problem in the District continues to be the lack of business confidence in the economic climate, which stems especially from the attitude of government in the city and state of New York. The problem, I think, is actually getting more severe. We had a seminar last week co-sponsored with the Academy of Sciences on regional economic development in the tri-state area: New York, Connecticut, and New Jersey. It provided an opportunity for the private and public sectors to talk to each other, which they don't do as often as one might like. Rather dramatic were the two senior businessmen who spoke, the CEOs of American International Group and Pfizer, both of whom are board members of the Reserve Bank. They talked about why it would make sense to reduce substantially the number of employees in New York City. The following morning the Mayor was talking about how he was trying to improve the business climate in New York City, and I suggested to him that he better increase his pace. We actually put him together with the two business executives at a meeting yesterday. On the national level, we have been concerned, as all of you have, about the explanation for the rather benign performance of inflation in the last couple of years. Rick Mishkin and the staff have been pulling apart everything that they can think of that would be normal causes both on the demand-pull and cost-push sides of inflation. Essentially, the only thing we can find that is not performing pretty much as it has over the last 10 years or so is labor compensation, which is considerably lower than any model results based on performance before the last couple of years. I think the only problem is that nobody, including us, is very certain of exactly why that benign inflation has been happening. There are various bits of psychology, sociology, and political science that people are attributing to it. But I think the real fact is that nobody knows or is absolutely sure why it is happening. Therefore, it is rather risky to predict that it will continue to happen. On the other hand, we don't know whether that is certain, either. It makes us rather concerned about our forecast in general. The reason we have been so anxious to try to figure this out is that the Bank has been very good in its growth forecast over the last couple of years and until very recently was overestimating CPI growth. Now we know why we were overestimating it, but that does not give a pure sign of where to go in the future. We do, however, find ourselves unusually at variance with the Greenbook, not on the CPI forecast where we were bickering with them a year ago but rather on real growth. For example, in looking at real GDP based on current policy, whereas the Greenbook has 2-1/2 percent growth in 1996, we have 2.1 percent. For 1997 the Greenbook has 2.3 percent; we have 1.9 percent. There are three major sources of this difference. We find the expansion rather long-in-the-tooth, and therefore we are less confident about the growth of business fixed investment than the Greenbook is. We are somewhat weaker on net exports, and we are a fair bit weaker on housing. For example, the Greenbook has 1.45 million housing starts for next year; we have 1.4 million. Actually, that makes both the Greenbook and the New York Reserve Bank higher than the consensus. We are about equal with the Greenbook on the forecast of the CPI. Therefore, we are looking at a situation in which a maintenance of current policy may in fact not be appropriate. So, we have been doing some modeling based on what would happen if the funds rate were to drop by 1/4 percentage point sometime late this quarter and by another 1/4 percentage point early next year. That gives us a somewhat better mix. It does very little to the CPI forecast even though we are not assuming that the current wage restraint will necessarily continue. But it does crank up GDP growth by .2 percent from 2.1 to 2.3 percent in 1996 and from 1.9 to 2.2 percent in 1997, not highly robust growth because we do continue to have the view that monetary policy should be somewhat restrictive to continue to work for stable prices. What we are concerned about is whether it is somewhat too restrictive at the present time.",1077
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. I must say that I welcome the more optimistic projection in the Greenbook this time. For what it is worth, my judgment would be right with the staff. Despite the long-in-the-tooth expansion that we have had, I have believed and continue to believe that there is more potential for upside surprise than downside. I am sure it is not an immutable law of economics, but it seems to me that the U.S. economy has a natural tendency to rise unless something pushes it down. On balance, I don't see anything right now that looks to be sufficiently strong to produce that result. If you look down the list of the different elements of GDP, and Al Broaddus ran through that list to some extent a while ago, on balance it looks moderately positive with some components being stronger than others, as one would expect. That is what the Greenbook says; that is where they are. That said on the optimistic side, I must say that I do want to identify with Governor Lindsey on his remarks about consumer debt. He has done a lot more serious work on it than I. But I have been, and I think Larry has been, crying ""wolf"" on this subject for some months now. Obviously, we have been premature so far, but I think some day we are going to have a reckoning on this. I don't know when that might be or how it might play out when it comes. Perhaps because I feel a little bit bruised about having been Chicken Little so far, my best guess is that it is probably going to be out beyond our present forecast period. If we are going to get a shock, I think that could be where it will come from. It does seem to me that it is going to take a shock to push this economy into unacceptable economic sluggishness. We live in a dangerous world, of course, and the potential shocks are out there. Consumer debt is one of them. We can easily identify others. One is what is going on politically right now, and what impact that might have. One can envision a shock from fiscal drag, although I certainly cannot see that happening in 1996 at this point. Net exports could be disappointing; I hope not. At any rate, if we get a shock, it is difficult to anticipate where or when it might come. If we get a shock, we will just have to deal with that. Other than that I have to say I am pretty optimistic. On the inflation side, with the very high utilization rates of our human and physical resources, I think we have been getting remarkably good results. It is a little difficult for me to see how the inflation picture is going to improve, although I guess in recent months it has had a slight tendency to improve. Maybe today's news will be a straw in the wind in the other direction. But so far, it is very difficult to see much by way of upside push there. I do think that given our high utilization level, an upside risk potential could become apparent as time goes on, and we will have to be very careful about that going forward.",630
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. At our last meeting we said that we would know more at this meeting, and now we are all scratching our heads. We do know more, but now we are trying to figure out what it means. We may well be in another fourth-down situation. I agree with Mike Prell that forecasting is a truly humbling profession. We have all had the opportunity to reevaluate some things since the last meeting. As Mike chronicled for us, a number of the statistics have come in stronger than were anticipated at that meeting: GDP, industrial production, and consumer spending. The export situation seems to be improving as the economies of our trading partners appear to be on the mend or strengthening. At 5.5 percent unemployment, the labor market appears to be a bit better than expected. Except for today's CPI news, the recent inflation news has been better than expected. Evidence appears to be gathering that the NAIRU may be lower than 6 percent. Business fixed investment projections look a bit better than we had earlier thought. The recent productivity numbers are above trend, unless one has made the mental conversion already to chain weights. What are the implications of this reevaluation? Taken together, all this information may indicate that labor and product market constraints are not quite as tight as historical precedents would suggest. Monetary policy may not be as restrictive as we had earlier thought. I think that the financial markets are consistent with that observation. Stock prices are up; bond prices are up; the yield curve has flattened during the intermeeting period; the dollar has been steadier. The cost of capital still favors business spending on investment. Credit market demands have flattened a bit in the most recent data, but they are still indicative of a propensity to spend. Perhaps the folks who have suggested that the risks are on the up side are right; maybe we have missed the soft landing and are ready for another takeoff. Alternatively, it may be time to adjust our thinking to chain-weighted statistics. The data seem a bit more consistent, or at least more explainable, using these statistics. In spite of the ""conflictive"" evidence, I continue to believe, similar to Mike Prell, that the best outlook is for moderate growth. In coming to this somewhat unexciting conclusion, I continue to look at the labor markets as a key. People, except for Federal government people, are working. Employment growth has slowed, though, to the point where we are just dealing with demographic increases. People are still mobile. I think the reengineering that we have gone through continues to create some uncertainty. All of this is, I think, showing up in the wage situation. We are not seeing increased wage pressures, though perhaps we will. Perhaps at some point workers will be able to exert enough influence to move wages and real income to higher levels, but we don't appear to be at that point yet. That indicates to me that spending is going to be cautious. We also have to consider the fiscal budget situation. The longer this debate drags on, I think the more uncertain the effects are going to be. Otherwise, and aside from the budget situation, there do not appear to be major imbalances in the real economy or the financial markets. In sum, I am sticking to the story of moderate growth, and I will go even a bit further in view of the strong third-quarter data and the financial market signals. It is possible that the probability distribution around a mean of potential growth has narrowed a bit.",709
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I am not going to say anything about my District economy because you do not want to hear about it! My one anecdote would be that the traffic was unusually light driving in this morning. I will leave it at that. I was very comfortable with the September Greenbook forecast. Like Al Broaddus, I was struck by the large size of the revision in the latest Greenbook. It was a considerably larger revision than I made mentally based on the third-quarter GDP report. Specifically, the shock to the staff, and I guess to me, of about 1/2 percentage point on the level of GDP--that is 2 percentage points on the growth rate for a single quarter--led the staff as Al noted to raise the level of GDP in the middle of 1997 by about 2-1/2 times that much, by about 1-1/4 percentage point. We discussed this yesterday at the Board meeting. I personally would have been inclined, and still am, to be suspicious about the third-quarter GDP report--in two dimensions. One is that there were certain flukish aspects, which is not atypical. The other involves the deflator. I keep staring at the translation of the nominal GDP into real GDP by using a 0.6 percent deflator. Fortunately, we are behind closed doors here. I never predict data revisions in public because it is a stupid thing to do. But in the quiet of my own study, I expect that to be revised.",304
-fomc-corpus,1995,In 1987 dollars?,6
-fomc-corpus,1995,"In 1987 dollars, yes.",8
-fomc-corpus,1995,The transcript will be visible five years from now.,10
-fomc-corpus,1995,"Yes. [Laughter] I know it is on the transcript, but fortunately no one will know I said that for five years. I don't have to say it publicly.",35
-fomc-corpus,1995,"In fact, we may not publish another number in 1987 dollars! [Laughter]",19
-fomc-corpus,1995,You are saved!,4
-fomc-corpus,1995,"That is a very good point. I would have been inclined to boost the forecast between September and now by less. Now, I don't want to overstate that point. Adding .7 percentage point to GDP in a two-year period is well below the ability of anybody to forecast, but one does have to make a point estimate somewhere. So, I'm not saying that the staff's judgment is wild. It just seemed a bit sporty to me. [Laughter]",93
-fomc-corpus,1995,I'm a sporty kind of guy!,7
-fomc-corpus,1995,"Yes, that's right. They are prone to things like that. That is what happens if you work at the Federal Reserve a long time! [Laughter] I had two things on my desk that I could easily pick up to compare. The Blue Chip forecasters--now, that is a consensus, of course, so their forecast is going to move less--changed their 1996 and 1997 cumulated growth rate by zero between a month ago and now. Larry Meyer changed his forecast by .1 percentage point in each year; so he moved up 1997 by .2 point. Those are samples that happened to be on my desk and that I looked at this morning before I walked in. A notable feature of the new forecast, to which Al Broaddus and Jerry Jordan made reference, is that the implicit equilibrium real funds rate in the forecast now is 2.75 percent, which it was not the last time. You can just see that by the behavior of the economy with a constant unemployment rate and a constant inflation rate. That happens despite a budget deficit, which is now down to about 2 percent of GDP and falling and, more importantly I believe, is projected to fall. It ought to be expected that government budget deficits move ex ante real interest rates. That seems rather high to me based on past experience when we have had deficits of that size in this economy. Again, it's not wildly high, just a bit on the high side. One reason, though not the only reason, for the staff's upgrading of the GDP forecast is that long rates are 30 basis points lower now, give or take a little, than they were at the time of the September FOMC meeting. I pointed out the following to Mike Prell yesterday, and I will just point it out to everybody here today. The reasons given in the market for the further notch down of long rates are the following four--I think this is the whole list: increased expectations of Fed easing, lower reported actual inflation and implicitly expected inflation, more optimism about deficit reduction, and perceptions of a weakening expansion of economic activity. The changes in the staff forecast between the last Greenbook and the current Greenbook, which no longer assumes any Fed easing, include a little more pessimism about inflation, less deficit reduction, and stronger GDP growth. Now, I don't mean to imply that I think the staff is wrong. The bond market is a lousy forecaster. I believe our staff can probably educe evidence that they forecast GDP better than does the bond market; I am sure they can. But I bring that up because I do worry about the internal consistency of the forecast. If the strength in the forecast is largely predicated on lower real interest rates, but the reasons in the market for the lower real interest rates contradict those in the staff forecast, it will not come true. More specifically, it suggests to me that if the staff forecast starts coming true, bond rates will rise substantially and I would suppose more than is built into the forecast. One final point: At the last meeting many of us characterized the Greenbook as too good to be true. I believe I was one, but I didn't go back and check the transcript. That was the last Greenbook. This one is better. The risk to me in this Greenbook forecast looks disproportionately on the down side. Some of you may remember that for a long time the biggest risk to me in the staff forecast has been the so-called train wreck. Nine months ago it was well into the future; two months ago it was getting close; and now we are in it. The government lockout is a vastly greater event than the Boeing strike by a factor of 40 or something like that. In the first place, this is going to have, as Governor Lindsey and someone else said, a sort of standard Keynesian effect on aggregate demand. There are fewer people working; they don't have as much money to spend. It also has the potential to scare people and shatter confidence just at a time when the economy is teetering as to where it should be. Further, it has the potential--knock on wood that it won't happen--to rattle financial markets, as we are all well aware. I think that is a danger. The second downside risk to me is the weakening economic outlook in all the G-7 countries. I don't want to exaggerate that risk. I don't think this is a huge difference, and developments in Mexico may be a bigger deal for us potentially than the G-7. Finally, with about 1/8 the weight that Governor Lindsey put on it and 1/4 the weight that Governor Kelley put on it, I would list consumer debt problems as the third set of downside risks. I have a hard time thinking of upside risks that are of comparable likelihood. Thank you.",982
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"I will just conclude the roundtable by echoing my agreement with a number of the points that already have surfaced in this discussion. Certainly, from my perspective the incoming data flow since our last meeting has contained surprises and the surprises do necessitate some rethinking of the underlying momentum in aggregate demand and also the inflation risk. The staff's view is that the news points to significantly greater underlying strength in aggregate demand and a modest reduction in inflation risk. I certainly agree with both of those assessments in a qualitative sense, but like Governor Blinder and a number of other members I guess I question whether or not the new forecast does represent something of an overreaction to one month of really rather perplexing economic news. In the September Greenbook, the staff forecast an unemployment rate of 6.2 percent in the fourth quarter of 1997 accompanied by a real federal funds rate of 2.8 percent. The current forecast envisions an unemployment rate of 5.7 percent in the fourth quarter of 1997, namely 1/2 point lower or as Governor Blinder put it 1-1/4 points higher on real GDP, along with an unchanged federal funds rate of about 2.8 percent in real terms. The staff, I would guess, has concluded that the recent news has not just a transitory effect--it's not just a statistical aberration as Ed Boehne put it--but has permanent significance. A look at a method that I thought was useful for summarizing how much the staff's forecast has changed would be to measure this in terms of the equilibrium real federal funds rate. One can infer from the alternative simulations presented in the Greenbook that the equilibrium real federal funds rate, which I am now defining as the real federal funds rate in 1997 that would be consistent with a given fixed unemployment rate, has been revised upward by about 130 basis points since our last meeting. In other words, the IS curve has shifted up by about 130 basis points over the last month according to the staff. I think the staff procedure for generating the current forecast is easily defended on statistical grounds because surprises in demand do appear to have persistence. Nevertheless, I hesitate to accept the conclusion at this point that one month's confusing data should occasion such a large revision in our assessment of the economic outlook, especially when there is a variety of indicators pointing to greater softness in the economy. These would include--and all of these have been mentioned--anecdotal reports from industry contacts, yesterday's weak retail sales reading, sluggish auto demand, evidence of rising consumer debt problems that Governors Lindsey and Kelley have emphasized, today's IP number, softness in the purchasing managers' survey, a rising moving average of initial claims for unemployment insurance, and signs of softer growth in European economies. All this is coupled with impressive commitments to fiscal consolidation. And finally, of course, we have the current train wreck, which could impair household finances and spirits going into the Christmas season. Rather than quibble with the details of the staff's point forecast, I would prefer to reserve judgment for a while and await further clarification from incoming data, assuming that the government shutdown doesn't actually end up eliminating the continuing data flow. On the inflation front the news since our last meeting, it seems to me, has been on balance favorable. I was particularly impressed by the reading on the core PPI which has remained unchanged and the fact that intermediate goods inflation has registered its second monthly negative. But most important, as a number of you have emphasized, is that total hourly compensation grew at a mere 2.3 percent in the third quarter, and I guess it is that continuing restraint in the employment cost index that justifies the downward revision of the NAIRU and the improvement in the inflation forecast. I think the revisions in the staff's natural rate assumption and in aggregate demand reflect a response to data surprises that we don't fully understand. But in this instance I would emphasize that the reaction is based on a lot more than a single month's data. I certainly would agree with Bill McDonough's assessment of the evidence here. We now have had about six quarters in which the rate of growth in nonfarm compensation, as measured by the ECI, has been falling in spite of continued low measured levels of labor market slack. It does seem from my standpoint, and I assume from the staff's and Bill's as well, that most of the models we monitor have been consistently surprised. The surprise has persisted; it is substantial. Our models are overforecasting, if I understand the evidence properly, on the order of .7 percent in the annual growth rate per quarter, and cumulatively this certainly is a statistically significant surprise. Of course, I also agree that we need to be careful here and not overreact to the information. I think the staff has been cautious. They have not yet concluded that we are witnessing a permanent structural shift. I agree this may end up being a transitory supply shock. I do remain perplexed that the moderation in compensation and unit labor costs has not yet translated into a reduction in core inflation. I would also agree that price-price Phillips curve predictions, while slightly off the mark, remain essentially on track. At our last meeting I argued that the economy suffers from what I called a ""termites in the basement"" problem. It is a bias toward below trend growth the further out one goes in the forecast. It stems from insufficient momentum in private spending to compensate for growing fiscal drag and the real federal funds rate remaining at its current level. As I try to move away from the data and simply focus on economic fundamentals, I find it difficult to understand what components of demand can be expected to replace lost government spending on a persisting basis over the longer term unless there is continuing impetus from interest and exchange rates. I think that financial markets share this view. Indeed, the Greenbook acknowledges that the present level of real long-term interest rates is conditioned on both the expectation that there will be deficit reduction and the expectation that short-term rates eventually will fall gradually. I think the expectation of a cut in the funds rate in the not too distant future, as Peter Fisher emphasized, is built into the current structure of fed funds futures so that a failure to validate that expectation is most likely to lead to a backup in long rates. While the current Greenbook forecast calls the markets' views as well as my own into question and indeed the Greenbook may turn out to be right--I have an open mind on this--from my perspective the level of uncertainty has increased. I would like to wait and see what the Christmas season and the budget negotiations hold in store, but I consider the preponderance of risks at this point to be on the down side of the Greenbook scenario.",1361
-fomc-corpus,1995,Thank you very much. I hope coffee is there.,11
-fomc-corpus,1995,Mr. Kohn.,5
-fomc-corpus,1995,"Thank you, Mr. Chairman. I will be referencing, by the way, the last chart in the Financial Indicators package. If you don't have that with you, I think Carol Low has some extras. I would like to begin by discussing a new chart that appears at the end of that package and use that as a transition into a discussion of the current stance of policy. [Statement--see Appendix.]",81
-fomc-corpus,1995,What happens to your Taylor chart if you extend it back before 1987?,16
-fomc-corpus,1995,"It doesn't look very good, but I don't know what ""very good"" means. That is, the Taylor rule does not track what actually happened, particularly over the previous seven or eight years in the Volcker era. Real funds rates were considerably higher than the Taylor chart would have suggested.",58
-fomc-corpus,1995,How does it look before the 1980s?,11
-fomc-corpus,1995,"Perhaps Governor Yellen or Governor Blinder will remember better than I, but it seems to me that the federal funds rates were too low. That would confirm the notion that policy was easier than it should have been to achieve price stability. Do you remember?",51
-fomc-corpus,1995,For the late 1960s and early 1970s I think that's right.,18
-fomc-corpus,1995,It clearly doesn't fit the ups and downs in that period.,12
-fomc-corpus,1995,"No, it doesn't do a very good job.",10
-fomc-corpus,1995,"It was developed for you, Mr. Chairman, not for Paul Volcker! [Laughter]",20
-fomc-corpus,1995,It looks the way it should!,7
-fomc-corpus,1995,John used to work for me in the private sector and maybe he read my mind better than I do. Questions for Don?,25
-fomc-corpus,1995,"John's choice of .5 for each coefficient is convenient pedagogically. Have you ever looked at estimating it? The two coefficients are quite different if you use estimates. As you can see, they produce much higher federal funds rates. I think in the most recent period the coefficient on the income variable is closer to .8 and the coefficient on the price variable is about .3.",76
-fomc-corpus,1995,"Yes. I think it matters a lot over what period one is estimating it. Of course, I think John picked those in part out of some experience with large-scale modeling exercises, such as were carried out under the aegis of the Brookings Conference a couple of years ago. I think they also were picked because they looked reasonable. The bottom panel is a statistical exercise and that does show pretty high weights on the unemployment gap, the resource gap--",90
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Some of these estimates don't show the FOMC paying much attention to inflation.,16
-fomc-corpus,1995,It's a closer representation of what the Fed actually did than just the selection of the .5 and .5.,22
-fomc-corpus,1995,It's fitted to be a close representation of what we did.,12
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,"I just want to make the point with regard to the last argument that you mentioned, Don, in your prepared remarks. Since the gap is a forecast of inflation, you could read that as the expected change in inflation.",44
-fomc-corpus,1995,Sure.,2
-fomc-corpus,1995,I would not quite translate getting a zero on the second coefficient as an indication that the Committee did not care about inflation. One can reinterpret this as indicating that the only thing the Committee cares about is the level and rate of change of inflation.,48
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,It admits of that interpretation.,6
-fomc-corpus,1995,"Yes, although I would have to think about that a little. The fact that everything goes to the output gap suggests that you are not particularly sensitive to what the inflation rate is when you close the gap.",41
-fomc-corpus,1995,That's right.,3
-fomc-corpus,1995,You need something on that inflation target to provide you with a nominal anchor it seems to me.,19
-fomc-corpus,1995,That's correct.,3
-fomc-corpus,1995,"The other thing that's interesting is that the constant is about 2.7 as opposed to 2.0 and, of course, that's the real rate.",32
-fomc-corpus,1995,"Yes. I am not sure what John Judd did at the San Francisco Bank, but when we fit this the constant actually embodies both the equilibrium real rate and the Committee's inflation target. So, you have to make an assumption about one to separate out the other.",54
-fomc-corpus,1995,"Further questions for Don? If not, let me start off. Frankly, I didn't find the roundtable particularly surprising. It had pretty much the mixed flavor of what is going on in the country District by District. In retrospect, the strength in the third quarter was not all that surprising considering that the economy was coming off a very weak set of developments after the early weeks of this year. As you will recall, we had particularly serious concerns about the adjustments that were going on in inventories that we felt could-conceivably tilt the economy into a decline. Indeed, there was one meeting which I found somewhat distressing back in July where the general tone of our discussion was that all the risks were on the down side even though virtually everyone was projecting moderate growth. One got the impression that if we had a choice of a second opinion on the economy, it clearly would have been down. That was a time when, as I recall, we were getting very severe contractions in steel markets, industrial prices were weakening, inventories were backing up in a number of areas of the economy, and it was only as we worked our way through the probabilities that we concluded that we were moving beyond the point of the maximum risk of a recession. Under those conditions, I think we would expect to get a ""pop"" in the economy when the downside pressures begin to ease. This occurs in the markets generally, and I think it occurs in the economy. I don't think that surge should be viewed as a change in trend, and indeed the more recent indications, as a number of members have noted, are that the economy at this stage can best be described, at least temporarily, in terms of its sogginess. The economy is not deteriorating, but it clearly has lost a good deal of the momentum that it had during the summer. It is, however, difficult to make very much of that because as best I can see the evidence does suggest that the economy is still undergoing some inventory correction. It is still coming off a fairly weak motor vehicles sales pattern. A crucial issue at this stage relates to what is going to be happening to Christmas sales in terms of setting the tone, if I may put it that way, for the trend in retail markets. We need to remember that sales in November and especially in December have a disproportionate effect on fourth-quarter consumption expenditures. Such expenditures in the fourth quarter are not a simple average of seasonally adjusted October, November, and December because the monthly seasonals for those months differ so dramatically. Certain items obviously will account for a very substantial part of the quarterly total in a several-week period just before Christmas. I don't want to overemphasize that, but I think the point that is implicit in the Greenbook--that there is a likelihood of a significant recovery in November and December--is still on the table. Indeed, the early data are at least suggesting that Christmas sales are doing a little better. The major problem that we have so far as policy is concerned is that while the economy seems to be as close to middle ground as one ever sees it, it's not clear which way it is going. In that regard, no change today strikes me as the most appropriate response, and I will get to the ""train wreck"" issue in a minute. What I think is unclear at this stage is what we will be wishing to do at the December meeting if this economy continues to be as soft as it is. As I indicated previously, I think that at some point we should be looking toward a somewhat lower real funds rate in 1996. Whether we will get there in part in December or wait until later, I don't have any particular notion. But I do agree with the Greenbook that, if the economy is coming back and we are getting anywhere near the numbers in the Greenbook forecast, at that level of activity we probably ought to be quite cautious in how we move. There is one important issue with respect to the budget negotiations that I think we have to keep in mind. If we lock ourselves into a ""no change"" position pending what happens in those negotiations, we could find ourselves sitting and doing nothing as the economy is changing and the markets are changing while the Congress and the President continue to diddle on this issue. We have argued in the past, and I think quite correctly, that it has never been appropriate for the Federal Reserve to ""make a deal"" with the Congress or the Administration to take some action if a budget is produced and irrespective of whether it is credible or not credible. I think we all have agreed, as best I can judge, that the response that we make is to the markets. If the markets believe that the budget deal is credible, long-term rates will come down and we will get an abnormality in the term structure of rates if short-term rates remain unchanged. So the pressures on us to ease policy would come from the markets and the term structure, not from the budget deal. The market is what would induce us to move. Conversely, if the economy is softening, or indeed strengthening, the mere fact that the negotiations are under way should not be all that relevant other than what conceivably could happen should be part of our outlook. The mere fact of negotiations should not induce us to take action because I think that could turn out to be very unfortunate monetary policy. I would therefore suggest that while it is terribly important to have the members' judgments about what the negotiations are going to produce, I don't think that should be an overriding issue with respect to what we do or what we do not do. Incidently, with the outlook as mixed as it is, I would not rule out a surprising acceleration in this expansion. There is nothing in this outlook that is undermining the structure of the economy. So it would not be surprising, as Governor Kelley indicated, that if no adverse events occur this expansion could suddenly take off. Profit margins still seem to be reasonably stable. The order pattern and some of the high-tech industries are really quite impressive. We do not yet know how long this malaise, if you will excuse the expression, in the industrial area is going to continue. In the steel industry, despite the significant declines in steel sheet prices, the order patterns are looking better. Fairly recently, U.S. Steel has been reporting a much better outlook. So, I think this is a two-sided issue. We really are not going to get a good fix on the industrial sector for a while. And I am not certain that it matters all that much because the economy does not appear to be threatened at this stage, and the urgency of moving quickly one way or the other is not there. I suspect that the latest CPI is probably an aberration. We don't know that for sure, but the evidence of restrained unit costs and the existing high profit margins do not suggest a weakening economy. This is despite, as the Vice Chairman says, the fact that the expansion is ""long in the tooth"" and what we ordinarily would expect of an aging expansion. This economy does not have the geriatric characteristics that one would expect of an economy that is six or seven months beyond the average length of the post-World War II expansions. It doesn't look that way and it doesn't feel that way. Nonetheless, I think what we have to be aware of is that if this economy fails to pick up and continues to be soggy into the next meeting, the evidence in favor of a move at that time would probably become more compelling than it is today. At this point, I would recommend that we do nothing and hope that an unchanged policy turns out to be where we can be for quite a while, as the Greenbook assumes. I am agnostic, frankly, on whether we should have a symmetric or an asymmetric directive, and I would very much appreciate that those of you who agree with ""B"" also stipulate where you think the intermeeting symmetry ought to be. Those who lean toward a change at some point would, of course, favor asymmetry in one direction or the other. So, that is my recommendation for this meeting. Who would like to comment? President Forrestal.",1647
-fomc-corpus,1995,"Mr. Chairman, first of all I would like to associate myself with the remarks that Governors Yellen and Blinder made with respect to the risks to the economy. Secondly, as I argued last time, it seems to me that interest rates are on the high side relative to inflation and to history. No matter how we think about the Greenbook or the revisions there, I think that we are in a period where economic activity is best characterized as moderate, and in both the Greenbook forecast and our own forecast, moderation is the key word throughout the forecast horizon. At the same time, we have relatively low inflation and, given the federal funds rate of 5-3/4 percent, we have a real interest rate of around 3 percent. Over time in my view such a rate is going to inhibit investment, job creation, and economic growth. That is not going to happen now, to be sure, and I don't think it's critical that we move today, but there are a lot of long-term and short-term arguments that, on balance, lead me to the conclusion that the level of the federal funds rate is too high, that it will have to be reduced eventually, and that any reduction will not have much of an impact on inflation. I would therefore be inclined to move right now. So, if you were to give me those three or four votes, Mr. Chairman, I would cast all of them in that direction. [Laughter]",294
-fomc-corpus,1995,"I said ""five.""",5
-fomc-corpus,1995,"Okay, five.",4
-fomc-corpus,1995,That's almost enough!,4
-fomc-corpus,1995,"But, again I would like to emphasize that I don't think it is critical in any sense that we move today. It certainly will not hurt to wait, but I believe we really need to think about the implications of maintaining the current policy.",48
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, for the reasons that you outlined I agree with your analysis and I support your recommendation of ""no change."" Because I don't think we should be trying to guess which way the economy is going at this stage, I feel that a symmetric directive is quite appropriate.",55
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Mr. Chairman, I certainly agree with your recommendation for ""no change."" I am not agnostic on the symmetry; I think we should have a symmetric directive. The staff forecast and the revision in that forecast have made me more aware of and more sensitive to the upside risks in the outlook than perhaps I was before. I think it's premature to take a position even through the symmetry of the directive as to what our next move might be. I think we gained a huge amount of credibility in 1994 by preventing the strength in the economy that emerged really quite quickly in late 1993 and early 1994 from becoming a boom, and I would hate to do something now that might diminish that credibility or put it at risk.",147
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"I, too, agree with your overall policy position, Mr. Chairman. I also agree with the concept of keeping the directive symmetric. I do see the risks as being reasonably balanced, not so tilted to the down side as some believe. I agree that we should not have our hands tied by the current and prospective debt impasse on the part of the federal government, although I wonder how this will play out going into the future. If even by the next meeting we were to see--and that may be unlikely--an unexpected acceleration of growth, something that might make us want to change interest rates by raising them rather than lowering them, I wonder how an asymmetric directive toward ease would play out in that environment. Whether or not that scenario turns out to be the case, I wonder if we will find that monetary policy will be somewhat hampered if the budget negotiations drag on for a period of time. I hope they won't.",186
-fomc-corpus,1995,Something is going to have to give at some point.,11
-fomc-corpus,1995,One would think so.,5
-fomc-corpus,1995,What may happen is that we may begin to get a piecemeal deal. Instead of a full blown agreement it may come piece-by-piece-by-piece.,32
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Mr. Chairman, I find myself very much of a mind with Bob Forrestal. If the third quarter had come in weak, say under 2 percent, I am sure I would be arguing strongly for a cut today based on four arguments: (1) the weakness in the economy; (2) the very good inflation performance; (3) the high, by almost any standard, real federal funds rate--all of those are familiar reasons; and, (4) is something that you alluded to and Cathy Minehan just alluded to in a different way. I am becoming increasingly uneasy about the Federal Reserve being cast in a role that we don't want as the rewarding or punishing father who looks at the President and Congress and says ""You did well so I am cutting interest rates,"" or ""You did poorly so I am raising interest rates."" We really do not want to be in that position, which is another virtue of making a small rate cut disassociated from a budget agreement. I think this is a factor that we should think about because we are very much in danger of being pigeonholed into that posture. But, of course, the third quarter of 1995 did not come in weak; it came in quite strong. I already said that I don't buy the staff's extrapolation of that upward revision into 1996 and 1997. Nonetheless, the third quarter is what it was and it brings us into 1996 at a higher base level of resource utilization, and that certainly seems to be reality or a reasonable guess about reality. And as noted, the staff also claims that the equilibrium real funds rate is about 2-3/4 percent despite the heavy deficit reduction. Again, I was skeptical about that. I want to point out, though, that if the staff's forecast and estimate of the equilibrium real funds rate are correct, I definitely agree, as Don said, that we should not be cutting interest rates. If I bought into that entirely, these arguments would evaporate. It's possible that the staff is right, but I don't think so. And it still leaves intact two of the four reasons. The reason I said I was very much of a mind with Bob is that the strength of the economy in the third quarter really destroys any argument that there is an urgency to this, that we can't wait five weeks. I couldn't possibly argue for that proposition. Thus, while I could support a small cut now if the Committee were going in that direction, I could also support waiting until the 19th of December, but I would very much favor an asymmetric directive toward ease.",528
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"I support the ""no change"" in ""B."" I think there is enough uncertainty in the economy, and it is on a moderate growth, low inflation kind of track. My sense, and it's entirely judgmental, is that the federal funds rate is on the high side of where we will want it going forward and that we will need to adjust it downward within the next several months. However, at this point, given the uncertainties about the outlook, I would be inclined not to prejudge policy in any way and, therefore, I would go for a symmetrical directive.",115
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, I agree with your recommendation and I also would prefer symmetry. It seems to me that we have had a modest temporary increase in the real funds rate, but I think we ought to be willing to accept that. Our forecast and that in the Greenbook expect some pickup in inflation. That suggests that the increase in real rates is temporary, and until we see that that is an incorrect forecast, I can't see a good reason to move today. So, my preference clearly would be to leave the nominal federal funds rate constant at this point.",111
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"I favor ""B"" symmetric at this meeting. I might say a word or two about what we might consider going forward from here. It seems to me that the degree of sogginess in the economy in the meeting five weeks from now will be one issue, but I think an equally important issue will be the path we want to put inflation on. One way of looking at the work on the Taylor rule is, of course, that policy is overly restrictive. Another way of looking at it is that it's appropriately restrictive because we want to bend inflation down further from here. Where that leads me is that we need to have a discussion and try to get agreement at some point on whether we want to try to move toward lower inflation deliberately as opposed to opportunistically. I think that's a key issue and I don't have a way of judging what we ought to do in December without coming to some understanding about that.",182
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, our inflation forecast remains encouraging. We expect inflation over the period to be a little lower than that forecast in the Greenbook. But despite appearing benign at this point, I think the inflation picture requires careful and continuing monitoring. I certainly don't want the Committee to give up the gains that we have made against inflation in previous years. However, if there are further improvements in inflation that exceed our expectations, I think a modest reduction in the federal funds rate would be called for. But given the rapid growth of GDP in the third quarter, it would be very premature to reduce the funds rate at this meeting; I don't think there is any urgency. Thus, it seems appropriate for the Committee to take no policy action at this time, and I agree with your recommendation of ""no change"" in the funds rate. With respect to the directive, although I personally agree the risks on the outlook are on the down side at this point, I would still support a symmetric directive.",197
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, I can see the argument that the real fed funds rate may be a tad on the high side, but I have to say that so far it's hard to see where it has put much of damper on credit extensions or the stock market or the housing market. I can easily envision the possibility that events may unfold, conceivably fairly quickly, that will make a policy change desirable, but I certainly favor ""no change"" for now. There are two broad reasons in my mind for having an asymmetric directive, the second building on the first. The first is to send a signal about some imminent perceived risk. The second is to facilitate an imminent policy move. I just don't see either of those as germane right now, and consequently I would strongly prefer a symmetric directive.",159
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. On the Taylor rule, I think that even if we were to take it at face value, it implies downward pressure on inflation. It has an implied inflation target of 2 percent. Current monetary policy appears to be tight on that rule, but even if it were on the money it would be putting downward pressure on inflation. So, on the basis of the Taylor rule, current monetary policy is tighter than simply putting downward pressure on inflation. My second thought is on the yield curve. Governor Blinder mentioned the four reasons why we had a bond market rally. One is not only a decline in inflation, but the perception that inflation will continue to drop. I suppose Jerry would agree that either the staff is right or the bond market is right. The bond market also sees an increased chance of federal deficit reduction. It sees a weakening expansion. And here I suppose the length of the tooth becomes important. Although there are not the excesses in the economy that suggest extreme risks to the expansion, what happens as the tooth lengthens--is that the way to say it? Help me out.",225
-fomc-corpus,1995,It lengthens.,4
-fomc-corpus,1995,"It lengthens! My teeth are going the other way! [Laughter] Well, as the tooth lengthens, increased risks begin to appear and we may already have detected some. I think the consumer is one of those risks. The international picture is another, be it instability in Japan and Europe, which I don't see as growing, or in Mexico. The risk of a fiscal misstep is still another that could tip the economy over. So, I see the yield curve as signalling that in fact we should be reducing rates today. I also want to associate myself with Governor Blinder in the ""let's not get caught flatfooted"" waiting for the Congress and the President to act. It is conceivable that they will not produce a fiscal agreement for fiscal 1996. The government could be operating on a continuing resolution forever. So, we certainly don't want to wait that long.",179
-fomc-corpus,1995,Less than forever is better.,6
-fomc-corpus,1995,"Less than forever is better, yes. I think today actually would be a very opportune time to move for exactly that reason. The public disenchantment with the budget process is high and going to get higher. That in itself is a shock. But I think the Fed would be sending a very appropriate signal that we are above the process in all meanings of the word ""above."" So I would support a reduction in the funds rate today.",89
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. I favor alternative B. I believe it maintains a stance of policy that is somewhat restrictive. It is very difficult to define exactly how restrictive, but I think that's quite appropriate given the inflation outlook. I would say that looking forward we need to be particularly vigilant with respect to the possibility of rising inflation expectations and inflation. For that reason, I strongly prefer a symmetric directive. As Al Broaddus and some others have mentioned, asymmetry at this point would signal that we are quite happy with 3 percent inflation and we implicitly define that as our view of price stability. I also agree with what Gary Stern said about the importance of how we make decisions going forward and having that discussion with respect to whether we want to reduce inflation systematically or simply act opportunistically. Finally, I think that trying to coordinate our actions with different possibilities on the fiscal front based on how an action might be perceived later is the wrong way to think about the issue. We have to make the best call we can today based on the fundamentals as we see them. If the fundamentals argue that we should act later, we should worry about managing perceptions at that time. I don't hear anybody making that case, but we have to be very careful that we don't justify an action that is not supported by the fundamentals and is based instead on the view that the perception of what we did was better than if we did act on the fundamentals.",284
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"""B"" symmetric.",4
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,Ditto.,3
-fomc-corpus,1995,The loquaciousness of this group is truly remarkable! Vice Chairman.,15
-fomc-corpus,1995,We are now averaging down!,6
-fomc-corpus,1995,"I will reverse the trend toward the lack of loquaciousness, whatever that is. I am somewhat surprised by the commentary today because I thought one of the things that we managed to do at the February 1994 meeting was to move away from fine-tuning the economy from one quarter to the next and toward an anticipatory monetary policy. If that's so, we ought to be more worried about what happens a year from now or two years from now than we are about what happens next week, about which we can do nothing. Based on my own Bank's view of the economy in late 1996 and 1997, I think the appropriate thing to do today would be to ease. At the same time, the confusion created by the very strong third quarter and what it may tell us about the economy going forward is sufficient to move me to the point of being comfortable with doing nothing at this meeting. But I am sufficiently convinced of the likelihood that monetary policy is too tight and therefore has to be adjusted that I would prefer an asymmetric directive toward easing. It's always difficult for me to get overly excited about symmetry or lack of symmetry, but I think the latter would make more sense in terms of being consistent with an anticipatory monetary policy.",250
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"We moved to the 6 percent level on the funds rate at the beginning of this year in the context of coming off a year of over 4 percent real growth. The final quarter of last year saw 5 percent real growth. Not only the central tendency of the inflation forecasts of this group for 1995 but also the forecasts of a large majority of business economists, the Blue Chip list, The Wall Street Journal list, and so on had inflation accelerating considerably in 1995. Now, if 6 percent was the correct level in retrospect to have prevented the overshooting and spillover of excess demand and rise in prices that some people were worried about and we have now downshifted into a period of slower real growth and maybe less adverse inflation consequences, then clearly the nominal 6 percent federal funds rate was too high or too high to be sustained. It was the right level to foster the downshift, but it has become increasingly restrictive as the economy has decelerated toward growth in the area of 2 percent. So, I thought the fed funds rate decline of 1/4 percentage point in July and the reason given for it were exactly right, namely that we were less concerned about future inflation. When I look at the Greenbook forecast and the assumption of a 5-3/4 percent funds rate for the next two years, I say these don't compute. Either the nominal GDP forecast in the Greenbook--and some split between output and prices--is wrong, or that 5-3/4 percent funds rate is too high. So, I would like to be able to decide when the right time to lower the funds rate may be--not to ease policy, not to make it more stimulative, but when to avoid having it become inadvertently more restrictive than it should be to get to our objective. My problem is that the Greenbook's projection of inflation at a 3 percent rate forever doesn't give us a good basis for lowering the funds rate. For us to lower the funds rate when the Greenbook projection is at 3 percent inflation--and it seems that a majority of this group thinks that's about right--would be to send the wrong message even if we are trying to maintain the same thrust of policy by lowering the funds rate. So, either I have to argue that I am convinced that inflation is going to be lower than the Greenbook projection and try to be persuasive--which I am not prepared to do--or else I have to acquiesce and say that a 3 percent inflation rate is acceptable--and I am not prepared to do that either. So, while I would like to be arguing in favor of lowering the funds rate I don't have a criterion for doing so and I am stuck with saying leave it alone until we come up with a good rationale for lowering it.",570
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"I would associate myself with the analysis presented by Presidents Forrestal and McDonough and Governor Blinder, although, Mr. Chairman, at the end of the day I support your policy suggestion for ""no change"" at today's meeting. I continue to think, for reasons I have given before, that the real funds rate remains on the high side, especially from the longer-term perspective of supporting growth toward the end of the forecast period. I certainly would admit that the staff analysis this time around has created some doubts in my mind and I would value having additional information to resolve some of those doubts. At the end of the day, therefore, I can certainly support your suggestion of ""B."" On the symmetry issue, because I see the risk as being on the down side from that longer-term perspective, I would prefer an asymmetric directive although I do not think that we will need to move during the intermeeting period in the absence of a significant shock. So, symmetry could certainly be an acceptable outcome. I am worried about becoming frozen by the budget negotiations and also appearing at the end of the day to be ratifying some Congressional actions. I think that concern does tend to support Governor Lindsey's suggestion of a move today. However, in the end there are enough uncertainties in my mind about the forecast that on those grounds I would not favor a move today.",271
-fomc-corpus,1995,"As I read it, the modal value of this group's preferences is marginally ""B"" symmetric. That's where I sense it to be and I will propose that sort of directive for a vote.",39
-fomc-corpus,1995,"The draft of the operational paragraph is on page 16 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",112
-fomc-corpus,1995,Call the roll.,4
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey No President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,"The next meeting is December 19th and for those of you who can make it, we adjourn for lunch to honor our departing colleague.",29
-fomc-corpus,1995,"On behalf of all of us, I want to welcome Jack Guynn.",15
-fomc-corpus,1995,Thank you very much.,5
-fomc-corpus,1995,"Jack is a veteran of the Fed who needs no introduction. To start off, would somebody like to move the minutes for the November 15 meeting?",30
-fomc-corpus,1995,So move.,3
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,"Without objection. We need acceptance of the Report of Examination of the System Open Market Account. It has been distributed. Any questions? If not, would somebody like to move it? SEVERAL. So move.",43
-fomc-corpus,1995,Without objection. I now call on Peter Fisher.,10
-fomc-corpus,1995,"Thank you, Mr. Chairman. I would like to begin with the Mexican swap renewal before turning to the market reports. All of this is summarized on the one-page outline of my report that you have before you. [Statement--see Appendix.]",49
-fomc-corpus,1995,"Questions? Yes, Larry.",6
-fomc-corpus,1995,"Peter, would you refresh my memory as to why we increased the Mexican swap line from $1-1/2 to $3 billion last February 1?",32
-fomc-corpus,1995,That was part of the package.,7
-fomc-corpus,1995,"Remember, there was a first phase whereby the Committee initially activated the existing $3 billion. Then, at the end of December 1994, there was an effort to deal with this problem in what I sometimes call the ""old fashioned"" way by getting banks together and so on. The Committee approved a ""temporary"" swap line of $1.5 billion in conjunction with the arrangement that included $5 billion provided by the BIS. Then, the Committee went up to the $3 billion temporary line in the context of the President's second program.",110
-fomc-corpus,1995,But we are now getting out of the second program?,11
-fomc-corpus,1995,Right.,2
-fomc-corpus,1995,"So, why are we not taking our level of commitment back down to $1-1/2 billion?",22
-fomc-corpus,1995,The original $3 billion was associated with the regular program.,12
-fomc-corpus,1995,"There are two $3 billion swap arrangements; think of it that way. There is the basic $3 billion, which was what we already had in place. Then we added a supplemental one last December of $1.5 billion, which was increased to $3 billion on February 1. It's just a coincidence that it was $3 billion. Now, we are letting that whole supplemental arrangement expire, and we are going back to the original, regular $3 billion.",95
-fomc-corpus,1995,The other part of the confusion is that the Treasury also has a $3 billion swap line with the Mexicans.,23
-fomc-corpus,1995,There are lots of threes.,7
-fomc-corpus,1995,Too many threes around here.,7
-fomc-corpus,1995,Further questions for Peter? Cathy.,7
-fomc-corpus,1995,Just a couple of factual questions: The $650 million is from the regular swap line or from the temporary one that was part of the program to help Mexico last year?,34
-fomc-corpus,1995,It's drawn under the regular swap line. They never drew enough to get into the supplemental or temporary $3 billion.,23
-fomc-corpus,1995,Is it a function of our regular swap program that we are repaid by the Department of the Treasury?,21
-fomc-corpus,1995,"One of the conditions for the Committee's approval of the Mexican drawings was that we would be repaid either way--that is, by the Mexicans or by the U.S. Treasury.",38
-fomc-corpus,1995,"The Treasury would repay us, if necessary, under either program on any part of the $6 billion?",21
-fomc-corpus,1995,I think it was just an accounting convenience that we assigned these drawings to their regular swap line. We could have done it the other way around; it might have been somewhat more logical.,37
-fomc-corpus,1995,"I just wanted to understand that. Secondly, the North American Framework Agreement (NAFA) was to provide a forum, according to footnote 2 in your memo, for more regular consultations on economic and financial developments. Has that worked?",48
-fomc-corpus,1995,"My view is that it has worked, though maybe not as well as it should have. In particular, there have been stepped up consultations at all levels among all three countries, some bilateral and some trilateral. I think in fact one of the most useful things that was done--the only thing I think we did right--was that Peter arranged to have a weekly conference call with the Canadians and the Mexicans, which allows us to do a once-a-week update of economic and financial conditions in the three countries. That regular weekly call has meant that it is therefore much easier to have ad hoc contacts. So, that is one element that has come out of this process.",135
-fomc-corpus,1995,"Combining that with the additional transparency that the IMF obtained from the Mexicans in terms of some of their data reporting, do we feel that we would not have been in the situation that we seemed to be in earlier in terms of our knowledge of how much their reserves were being depleted?",57
-fomc-corpus,1995,"The capacity of central banks to manipulate their reserves is quite substantial, but even in 1994 I think we had a pretty good fix on their reserves, though we may not have kept the Committee as well informed as we should have.",47
-fomc-corpus,1995,It is 1994 that I was getting at.,11
-fomc-corpus,1995,"I think you need to separate the question of whether the market had a good sense of a number of data points from their balance sheet and macroeconomics and whether we had good information about their reserves. There were only a very few days in December 1994 when we were, I think, at a loss and a little anxious about what their reserve levels were. But I don't think, if you take 1994 as a whole, that we had a sense that we weren't getting a good level of cooperation and understanding of what their reserve balances were. That's internally. That's different from the public issue that I think the IMF was addressing.",128
-fomc-corpus,1995,"The one thing that has happened since we circulated Steve Kamin's memo is that they have adopted a new framework for their monetary policy. This is not a big deal, but they have adopted more conventional definitions of their domestic assets and international reserves than they used in the past. I think this will facilitate market analysis of their operations. I don't think it avoids the possibility that the market may still misinterpret developments in Mexico, but I think the warning flag is quite substantial. It remains true that the capacity for the Mexicans, or any government, to try to slip things through is still there.",118
-fomc-corpus,1995,I wasn't so concerned about whether the market knew. I was more concerned about whether we know in a timely way.,23
-fomc-corpus,1995,"Partly because of these calls that Peter has arranged and other contacts, we are much more informed than we were. We can't avoid all surprises.",29
-fomc-corpus,1995,"A final question: There is an implication in your memo that while we will approve this renewal, we won't necessarily be receptive to letting them use this swap arrangement for a number of different reasons. Is that a wrong implication to draw from this memo?",49
-fomc-corpus,1995,"I think that's the right implication and inference, if I may put it that way. I can't speak for the Committee. We did have a visitor last Friday from the research directorate of the Bank of Mexico. I went over both the fact that we would not renew the $650 million drawing and that that was a matter for him to take up with the United States Treasury. I also told him that the Committee was going to consider this matter today but that, all things considered, there was not a lot of FOMC appetite for new Mexican drawings in 1996. He said that was certainly the basis on which they were operating. His view is that of only one reasonably important Mexican official on the subject, but I think he was very forthcoming on that.",153
-fomc-corpus,1995,So they don't expect to use the swap facility either.,11
-fomc-corpus,1995,"That's one of the reasons why I think their preferred position would be for the Treasury to roll over the two drawings. They have a $650 million short-term swap outstanding with the Treasury too, and I think the Mexican position would be that they would like to roll the two together into a medium-term obligation to provide themselves a bit of a cushion, given that the door is going to be closed later in 1996.",84
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,Certainly that's their position; I think that's a logical position as well.,14
-fomc-corpus,1995,The sole roadblock is this certification issue?,9
-fomc-corpus,1995,"I don't know whether that's the sole roadblock, but that's an issue that we wanted to surface. The staff felt that it was a little arcane, and I apologize that the memo may not have been clear. The truth of the matter is that even absent that issue, given everything else going on, the objective of the program was basically to get Mexico's financial situation stabilized, and that has been achieved. Now, whether they will be able to move from that to what they need to do in terms of growth is a different matter. We can't do that for them. I think the general attitude is that we have done what we can.",129
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Alan, I have a general question about whether we are going to look at these swap arrangements in any broad and organized fashion. I know you have mentioned before and others have said here that, in the foreign exchange markets in which we operate today, these arrangements are of questionable usefulness and ought to be reexamined. I don't think we can single out this one with Mexico. I think we need to look at all of them together. My question is: Are there any plans to do that?",99
-fomc-corpus,1995,"The answer is ""yes.""",6
-fomc-corpus,1995,Okay. Will that involve discussions with counterparties in general about foreign exchange intervention and the support facilities?,20
-fomc-corpus,1995,"I think we should first discuss it amongst ourselves here before we decide to involve anyone else. The ideal solution to this obviously anachronistic setup is not necessarily to abandon all such arrangements because they are being employed as a means of linking us with other central banks, but to replace them with something that reflects more relevant considerations in the market. We would not expand the swap arrangements, but we would do something different to maintain our relationships internationally and bring this process up to the latter part of the 20th century rather than the middle part.",108
-fomc-corpus,1995,"The other issue that I think is difficult is that swap lines to developing countries can be troublesome. I know that we have North American trade considerations. However, as we learned in this case, what was intended for one purpose in effect drags us directly or indirectly into what I would characterize as intermediate- to long-term financing to support debt restructuring. I don't think that's our role. As I have mentioned before, I think it potentially raises questions about the independence of a central bank.",96
-fomc-corpus,1995,"I am not as worried as you are about the independence question, but I certainly agree that what we have serves no economic or financial purpose of which I am aware. President Broaddus.",38
-fomc-corpus,1995,"Under the current arrangement, we have an agreement with the Treasury that they will take us out if the Mexicans don't pay back the current drawing. I may be mistaken, and this is just a point of clarification, but I seem to have read or heard somewhere that if we renew the swap line and if there is a drawing despite our current intentions, the Treasury could not make a comparable commitment to take us out in the future on such a drawing because of some piece of legislation. Is that right?",100
-fomc-corpus,1995,"As was outlined in the memo, the Treasury is subject to the certification process of the Mexican Debt Disclosure Act. In addition, the Treasury appropriation for fiscal year 1996 contains a provision that limits the extent to which they can use the ESF for operations without Congressional approval. Since they may take over our portion of the Mexican drawings, that could mean they would be using the ESF for more than $1 billion and for longer than 60 days. So, they would be constrained in terms of taking us out of further Mexican swap drawings. Coming back to President Minehan's question, that is one of the reasons why it's unlikely that the Treasury will want to get into this right away once disbursements under the President's program come to an end. Since they could not be our partner, we would be less likely to want to do something on our own than we might have been in the past.",184
-fomc-corpus,1995,"I think it's important to keep in mind that we have not thought of Treasury takeouts as the presumption under which we have swap lines. It was a presumption under which the Committee undertook this drawing in the set of circumstances that existed in January, including the President's program, but reliance on Treasury takeouts has not been a presumption for the existence of swap lines.",76
-fomc-corpus,1995,I am focusing specifically on whether there could be a Treasury takeout if the current arrangement were continued and a further drawing were made.,26
-fomc-corpus,1995,"There would have to be an assured means of repayment for any drawing under the general arrangements. Actually, the Mexican Debt Disclosure Act has a provision requiring an assured means of repayment in our case. So, we would have to have some sense of how the System was going to get repaid in any case. In the particular circumstances that Mexico was in, we were getting involved at least indirectly in a medium-term program and the Committee felt that stretching the maturity to 12 months was about as far--maybe further for some members--as it could be stretched in terms of our normal financial operations.",118
-fomc-corpus,1995,Any further questions for either gentleman?,7
-fomc-corpus,1995,"I move approval of the $3 billion swap line renewal, Mr. Chairman.",16
-fomc-corpus,1995,Is there a second? SEVERAL. Second.,11
-fomc-corpus,1995,"Without objection. Would you like to continue on, Peter?",12
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,Questions for Peter?,4
-fomc-corpus,1995,"Peter, you mentioned that the bond market was selling off further this morning. What is it doing now?",21
-fomc-corpus,1995,"The long bond is at 6.22 percent, I think, so it is backing up a bit. The middle of the maturity range is also backing up.",33
-fomc-corpus,1995,"There was more news on the budget and, as I understand it, more pessimism about the prospects for an agreement.",24
-fomc-corpus,1995,How many 32nds was that down?,9
-fomc-corpus,1995,It was down about 1/2 point.,10
-fomc-corpus,1995,"Yes, 1/2 point. In yield, the long bond traded up to 6.22 percent early overnight in Tokyo, came down to 6.18 percent, and was back up to the 6.22 - 6.24 percent range in the last hour.",58
-fomc-corpus,1995,(Consulting a pocket electronic market monitor) The truth is the markets are down 10/32. The cash market for the long bond is at 6.22 percent.,36
-fomc-corpus,1995,You are our official source on the matter of long-term bond rates! [Laughter],18
-fomc-corpus,1995,"With all the technology we have in this room, I can't have a little old gadget?",18
-fomc-corpus,1995,It's in the transcript that you made that remark! [Laughter],14
-fomc-corpus,1995,Sorry. Further questions for Peter?,7
-fomc-corpus,1995,I move approval of his domestic transactions.,8
-fomc-corpus,1995,Is there a second?,5
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Second.,2
-fomc-corpus,1995,Without objection. Let's move on to the staff reports. Mr. Prell.,16
-fomc-corpus,1995,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1995,Questions? Vice Chairman.,5
-fomc-corpus,1995,"This isn't a question, just a comment on the economic situation.",13
-fomc-corpus,1995,"If there are no questions--yes, President Moskow.",12
-fomc-corpus,1995,"Mike, this is a question on the Greenbook. On Page 1-12, your report projected an increase of 100,000 payroll employment jobs per month over the next two years, the 1996-1997 period. This is keeping in mind that we are dealing with a forecast of close to potential output during this period. I was wondering about this 100,000 job figure. It seems low compared to figures that we have looked at. I was wondering whether you would expect that if we get to higher levels of payroll employment gains--125,000 or 150,000 new jobs per month--this would strain the economy's capacity during the forecast period.",137
-fomc-corpus,1995,"One feature of the latest forecast is a change in our projection of labor force growth. As we have reported from time to time over the past few years, we have been surprised by the lack of rise in the labor force participation rate. The most recent observation was distinctly short of our expectations. So, we have flattened that path out considerably and have less labor force growth going forward. Now, what would happen if demand were stronger and employment were to grow faster? One possibility is that labor force participation remains on the track we are forecasting and we do get a decline in the unemployment rate relative to the path we projected and that creates some additional pressures. Alternatively, maybe at long last what we would see is a response by potential workers to the healthy demand for them, and you would see some renewed growth in labor force participation and stability in the unemployment rate. I don't think we can say what will happen with any certainty at this point, but we have made a distinct change in the trajectory of the labor force in this forecast.",204
-fomc-corpus,1995,"Further questions for Mike? If not, Vice Chairman, do you want to start off?",18
-fomc-corpus,1995,"Yes. The Second District continues to show slow growth essentially across the board. Retail sales for the holiday period have been quite weak in New York, although the more upscale stores like Saks Fifth Avenue have been doing reasonably well, perhaps to some degree because of the considerably higher bonuses from the financial services industry. Our forecast for the national economy is somewhat lower than that of the Greenbook, but the general shape is similar. Under present monetary policy we have growth slowing to 2.2 percent in 1996 and 2.0 percent in 1997 as compared with 2-1/2 percent for both years in the Greenbook. Not surprisingly, inflation is a bit lower in our forecast, 2.9 percent in 1996 and 2.8 percent in 1997, with the unemployment rate rising to 5.9 percent and 6.2 percent in the two years. We have, of course, tried to produce a forecast that has the risks balanced. However, I am concerned about a number of factors that I believe slant the risks to the down side. In an atmosphere of continuing rationalization and restructurings of business, job security, especially for white-collar workers, could cause concerns that would make consumer spending lower than that in either forecast. Second, business fixed investment has held up extraordinarily well; both we and the Greenbook have it slowing down. But it is still the primary driver of growth and could be less strong, especially if consumer spending should be somewhat weaker. Third, the growth we are assuming in Canada, Mexico, Japan, and Europe is not terribly strong. But if we are wrong, I think it quite likely that growth will be weaker in those countries and not stronger. Because inflation has been lower and we believe it will continue to be lower than we thought it would be when we last adjusted monetary policy in July, we have had an effective real tightening of policy, and in our forecast this phenomenon will continue. For a central bank with a goal of price stability, a somewhat firm and firming policy may be a good and desirable thing, especially if you think as I do that an inflation rate of about 3 percent nominal--say, 2 percent real if we take out the bias in the CPI--is too high. However, I would prefer that policy not be so tight as to be a source of additional weakness to the real economy, which we consider to be the case now. We must be flexible in our policy. This year we finished tightening in February and eased slightly in July. If growth should turn out to be stronger than we or even the Greenbook suggest, clearly the Committee should evaluate that strength and what it tells us about the future; and if policy has to be adjusted, it should be adjusted. However, we generally believe that the approach to an even lower inflation rate should be opportunistic. Our policy should be slanted toward fighting inflation if it should move up; but rather than force it down at the excessive expense of real growth, we should be opportunistic in taking advantage of lower inflation when it happens. There is a question whether the present market conditions in either the stock or bond markets should be allowed to inhibit policy. Clearly, despite the slight correction yesterday, the stock market by any historical standard is overvalued. If one relates it to dividend payout or price earnings ratio or market-to-book, it is considerably overvalued, but it has been considerably overvalued for about three years. What one isn't sure of is whether this is a phenomenon that could continue or whether a correction will take place. In any event, I don't think that the stock market should drive policy. It seems to me that the present level of the bond market, given what we have been able to do and what the market and the economy have been able to do in reducing inflation, is not unrealistic at all. Lastly, as regards the budget debate, it seems to me the best thing we can do is to distance ourselves from the debate. I don't believe we should be punishing politicians for what we don't like or rewarding them for what we do like, but rather that monetary policy should follow an independent path. In my view, to the degree that we have opportunities to show that that path is independent, we should take advantage of them. Thank you, Mr. Chairman.",878
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. I wanted to focus on one of the points that Mike Prell made, and that is how we could interpret the likely consumption response to the rise in asset values. He was kind enough to share the regressions with me. The general story is that the marginal propensity to consume from an incremental stock market gain is about 5 percent. The macroeconomic regressions very much support that. What I would like to do today is to test that at the micro level. I asked the National Bureau of Economic Research to run the 1991 individual tax model file, which is the latest one they have up, to look at a detailed distribution of dividends received by taxpayers. I would be happy to give the detailed tables to anyone who wants them. I broke this down into five classes. Look at Table 1, which has been distributed to you, and you can get a feel for this. The first row is zero dividends; 80 percent of taxpayers, which I call households and the terms are roughly synonymous, received no dividends at all. Another 13 percent of households received less than $1,000 in dividends, and these dividends made up about 4.4 percent of the total. As you can see, about 6 percent of households got about 30 percent of total dividends. At the very top, I broke down those people who received over $10,000 of dividends into those with less than $200,000 of adjusted gross income and those with more than $200,000 of adjusted gross income. Group 5, the high-income, high-dividend recipients make up about 230,000 households and got 30 percent of total dividends. The next thing I asked the NBER to do was to calculate after-tax adjusted gross income. They have a federal tax calculator, a state tax calculator, and a social security tax calculator. Column 3 in Table 1 shows the distribution of after-tax adjusted gross income for each of those groups. The last column is designed to get at disposable personal income in the national income and product accounts. The main ingredients that are not in AGI but are in disposable personal income are first, transfer payments, second, fringe benefits, and third, the excluded portions of dividends and interest, which generally tend to flow into 401(k) plans and other constrained vehicles.",473
-fomc-corpus,1995,That includes taxes?,4
-fomc-corpus,1995,No. Personal taxes and direct taxes are out of both columns three and four.,16
-fomc-corpus,1995,But adjusted gross income includes taxes.,7
-fomc-corpus,1995,"That's true, but I computed ""after tax"" adjusted gross income. I started with AGI and and took out federal, state, and employee FICA taxes.",33
-fomc-corpus,1995,It says that on your table. I beg your pardon.,12
-fomc-corpus,1995,"As you can see, it doesn't make that much difference, but I allocated that portion of disposable personal income that was not in AGI in proportion to wages and that gives me the last column. Then comes the thought experiment. Let's assume that we get a $50 billion increment to consumption, which is about 1 percent of personal outlays. That would correspond to a 5 percent marginal propensity to consume out of a trillion dollar rise in the markets, which is about the order of magnitude we are talking about. If you assume that the distribution of dividends is a rough proxy for the distribution of stock market wealth, then we can calculate for each group how much its total consumption would be expected to change. Of course, if you don't have any stocks, tough luck. If you are in group two, which includes people with less than $1,000 in dividends, then on average we would expect your household consumption to go up by $154. Maybe this can be picked up in the statistics and maybe it can't. It amounts to about 0.25 percent of disposable personal income for people in group two. Now you get to the interesting people, people in group three, which I suppose does not include me since I am in the zero category and I can't even borrow at Toys 'R Us! [Laughter] It does include my mother with her AT&T stock. There are a lot of households in that group. They might be expected to increase their consumption by $2,000 per household or about 3 percent of income. Now we get to the people who have dividends and therefore the capital gains. Again, just doing the straight apportionment, for those households making less than $200,000 but having at least $10,000 in dividends, we would expect an average increase in consumption out of stock market wealth of $14,000. It is conceivable to me that I could spend an extra $14,000 a year, but it isn't conceivable that these households would do so, given their relatively low level of disposable personal income. Remember, they are making less than $200,000, and if this is right, we would expect them to increase their consumption by almost one-fourth in order to account for that extra spending out of wealth. In category five, where everyone's income is over $200,000 and the average income is substantially higher at about $800,000, each household would have to spend an extra $65,000. They could buy two Cadillacs they otherwise would not have bought, and that would mean a 7.7 percent increase in their consumption out of disposable personal income. The lesson that I draw from this is that, given the very narrow distribution of dividends, it would seem that the increments to wealth are relatively concentrated. Even combining those two categories, I find a 12 percent increase in spending out of stock market wealth by well-to-do individuals implausible. Therefore, I don't see how the microeconomic data support the macroeconomic estimate of $50 billion in extra consumption as a result of the rise in stock market wealth. There are other channels that could allow it to happen. I could, for example, feel happier and more secure in my job because the stock market is booming and go out and spend. There must be channels through which it operates, but I am not going to go on any longer. I have other tables to show how liquidity-constrained households are. They suggest that it would be very hard for that kind of transmission mechanism to account for a lot, particularly when saving rates are already as low as they are. So, Mike, I have to disagree with you. I don't see the upside potential. I think we are unlikely to get an extra $50 billion in consumption out of the stock market increase.",763
-fomc-corpus,1995,"Let me note just another channel that may or may not be relevant. Higher stock market values tend to be associated at a micro level with higher capital investment within a firm. That increase in capital investment spills through into disposable income and could have an impact that way. So, it is quite conceivable that, despite your very interesting appraisal, there is a channel that bypasses this and effectively impacts disposable personal income through all of these five categories to the extent that that is relevant. Obviously implicit in any evaluation of stock market wealth going into consumption, one would have to trace to be sure that the level of capital investment is reflecting the stock market wealth creation.",129
-fomc-corpus,1995,"I think that is a very fair observation and I would be happy to use that to supplement my interpretation of the regression. The regression had labor income, capital income, transfer income, and wealth in it. So, I would expect that that would appear in that transition. The extra capital spending might feed through into higher disposable income. I think that would show up in the income numbers and not in the wealth numbers.",83
-fomc-corpus,1995,"It does. I am just saying that if that channel is working vigorously, you could reconcile both these data and the reduced form regression of the wealth effect on consumption.",33
-fomc-corpus,1995,"As I read it, the income was in the regression.",12
-fomc-corpus,1995,Just a point of fact: Does the regression have labor income on the right or total income on the right?,22
-fomc-corpus,1995,I don't know what this particular regression is. I assume we are talking about the MPS model.,20
-fomc-corpus,1995,Yes.,2
-fomc-corpus,1995,The MPS model has both labor income and property income on the right-hand side.,17
-fomc-corpus,1995,They are in there as well as the stock market.,11
-fomc-corpus,1995,"Let me say, we are looking at net worth in the model, so that also shows up, which is the other side that you cited in passing at the end of your comments. Could I clarify one point without getting into an argument about the construction of these numbers? There is no significant wealth effect built into our forecast. If you look at the personal saving rate, there is no decline from where we have been. In essence, we pretty much neutralized this, taking into account also the debt side of the picture. That's why I characterized this as an upside risk. It doesn't take the full dimension of the model wealth effect in order to give rise to an upside risk of the sort that I was suggesting.",143
-fomc-corpus,1995,"So, the consumption levels in the forecast do not reflect those from the MPS model?",18
-fomc-corpus,1995,No.,2
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"Thank you, Mr. Chairman. The basic story in the Philadelphia District is essentially the same. Mainly, the region is a laggard compared to the nation. The outlook is for more of the same. Much of the laggard effect is coming from Pennsylvania; Delaware and New Jersey compare more favorably to the nation. On balance, the evidence from recent indicators is that the pace of growth in the District is slower now than it was several months ago. Retail sales in particular reflect a cautious attitude on the part of consumers. Retailers are still hopeful that the last week before Christmas will deliver them from an otherwise dismal season, but the discounting over this past weekend has been very heavy. Employment growth is quite slow in the region, even in industries like manufacturing and construction where activity is expanding. Attitudes --business attitudes in particular--are still generally positive about the outlook, but they appear to be somewhat more fluid. They could resolidify on the more positive side or they could flow more to the pessimistic side depending on how policy and other developments unfold. I have the sense that we are at one of those pivotal periods where people are less certain about where things are going and attitudes can flow either way. Turning to the national economy, most recent economic data suggest that the expansion is decelerating some from earlier months. The extent of the deceleration is an open question. It may be that the strength of the third quarter borrowed from the fourth quarter and that the underlying strength of the economy remains intact. Or, it could mean that the underlying strength is beginning to wane. On balance, my judgment is that the downside risk to the economy has risen some since we last met. The possibility of more of an inventory overhang is higher now than a month or two ago. The strength of exports is more open to question. The economies of Canada, the U.K., and Germany may be weaker than the forecasts suggest, not to mention Mexico or Japan. While we can debate the consumer outlook, my sense is that if we are surprised, we will be surprised because consumption will be weaker rather than stronger. Also, the case that U.S. monetary policy may be inadvertently tighter is now more convincing in my judgment than it was several months ago, although that's a subject for later in the meeting. The outlook for inflation remains about as it has been, neither accelerating nor decelerating much during the next year or so. Given that the economy is in a mature expansion phase, I think we need to remain alert to signs of accelerating inflation. However, price pressures remain remarkably subdued.",520
-fomc-corpus,1995,Thank you. President Parry.,7
-fomc-corpus,1995,"Mr. Chairman, economic growth in the Twelfth District slowed this fall. California lost a considerable number of government jobs in October and November, particularly at the local government level. This job loss apparently boosted the state unemployment rate. However, private-sector growth appeared to have substantial momentum in the state. Economic activity in the State of Washington paused during the Boeing strike. Retailers there worried about slow holiday sales, as about 1 percent of the state's workforce missed paychecks from Boeing during the strike. However, under the new contract returning workers are getting a big Christmas present, a 10 percent lump sum payment that will make up the income lost earlier. Elsewhere, labor markets remain tight in much of the District. Employment growth slowed but generally continued to outpace the nation. In fact, in terms of employment growth over the past year, the District now has three of the four fastest growing states in the nation. Nevada and Utah are number one and number two, and Oregon has moved up to number four. I should also note that the Arizona economy continues to expand rapidly despite the adverse effects of the situation in Mexico. So far this year, exports to Mexico from Arizona and California have fallen 8 percent, a bit less sharply than overall U.S. exports to Mexico. Apparently, Arizona and California are providing a lot of the components and materials to Mexican maquiladora plants whose production has been increased. Turning to the national economy, despite sluggish growth during the current quarter, our model forecast calls for real growth at a rate between 2-3/4 and 3 percent over 1996, which is somewhat higher than the Greenbook. Our structural model predicts that inflation will remain close to 3 percent over the next year or so but will eventually go up because the economy is operating at a high level. The acceleration in inflation occurs despite the fact that the policy rule in our model acts to restrict the growth of nominal GDP by raising the funds rate by a small amount late next year and follows through with further increases throughout the forecast. However, I expect that the economy will turn out somewhat weaker than the model is predicting. Surveys suggest that inflation expectations of both long and short horizons have come down about 20 to 30 basis points over the last quarter, and perhaps around 50 basis points since the beginning of this year. I believe that the behavior of financial markets is consistent with this evidence. If inflation expectations have indeed come down this much, the implication is that the real funds rate has gone up. As a consequence, policy may be somewhat more restrictive than in our forecast since the model we use is based on backward-looking expectations. Thus, both real output growth and inflation could come in somewhat lower than in our forecast. Thank you.",551
-fomc-corpus,1995,President Minehan.,4
-fomc-corpus,1995,"Mr. Chairman, slow growth continues in New England. Nonfarm employment grew for the third straight month, although the overall gain was quite small. In total, the region's job count was up only slightly less than 1 percent over the previous year as compared with nearly 3 times that rate of growth over the 12 months prior to that. The region's unemployment rate declined to a level well below the national rate, but consumers remained wary and uncertain. Real wage growth has been negative. Consumer confidence dropped, especially in the component of that measure that looks at expectations. Retailers have felt this pressure. As one of our Beigebook contacts put it, he could not explain the fits and starts that have characterized the retail market this fall. Business is horrible one week and very strong the next. On a more upbeat note, manufacturing contacts report solid recent sales, with demand increasing for machine tools and industrial equipment, computer and electronics products, health care supplies, and a range of building products and equipment. Input prices have stabilized somewhat, and continued competitive pressures have precluded increases in output prices. Manufacturing jobs continue to decline, but employees are getting hard to find for some job vacancies that call for especially high technical skills. The market for residential real estate is neither good nor bad. Expectations of next spring's seasonal pickup are positive, given this year's decline in interest rates. In fact, if rates go any lower we could see a mini surge, at least in the three northern states and in Massachusetts where markets are stronger. Some commercial building is under way, though the improvement is spotty and confined to eastern Massachusetts. Bank lending in the District remains slower than that of the nation as a whole, with negative growth in commercial and industrial loans most recently. Consumer loan growth is somewhat erratic but generally in line with, if not stronger than, the national pace. Finally, while the economic climate is tepid, if not cool, we are going to witness a very hot senatorial race. Bill Weld is taking on John Kerry for his Senate seat, a contest that has been labeled by such far flung media as The Economist as the battle of the blue bloods. This may augur well for Massachusetts at least until the election. As an example, since a mill burned down in Lawrence recently, to insure that displaced workers receive as much aid as possible. Their efforts have paid off according to with workers being sure they can survive until the new facility is completed.",494
-fomc-corpus,1995,Doesn't that create a moral hazard? [Laughter],12
-fomc-corpus,1995,"In some sense, yes! Turning to the national scene, we are very much in agreement with the Greenbook scenario. I must say that I have a lot of sympathy for the 4 or 5 points that Mike Prell mentioned as potential sources, if you will, of upside risks to the forecast. We looked at some of those and thought that there is some upside risk here but also some downside risk. Overall, though, we thought that the risks were reasonably balanced. And given where we are in terms of the tightness of labor markets and the basic underlying strength of economic growth that the Greenbook mentioned and Mike highlighted and that we also see in our forecast, this balance of risk looks pretty good and the overall forecast looks pretty good. So, we don't have much to argue about with your take on the national scene, Mike.",169
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Mr. Chairman, there really has not been a lot of change in the quite mixed situation in our region that I reported on at the November meeting. I would have to say, however, that the broad tone of most of the anecdotal commentary we are getting is less optimistic than earlier. Looking at the District's economy sector by sector, retail activity did rise somewhat in our latest monthly District survey. But, anecdotally, it's described as quite sluggish. Retailers express their usual concern about rising household debt and consumer reluctance to spend as a consequence of that. Some of the sluggishness at the retail level is attributed to a lack of inventory, especially stocks of the more popular new model cars, but most of it is attributed to diminishing demand. Elsewhere, manufacturing activity, as indexed by shipments of new orders and so forth, has slipped somewhat lately. The textile industry, which is a very important industry in our region, is particularly weak at the moment. Finally, construction activity is very mixed in both the residential and commercial sectors in our region. New construction activity in some areas like Raleigh and the Washington/Baltimore corridor is clearly strengthening, but it's very sluggish in other regions like West Virginia. So, again, we see a very mixed, conflictive picture overall as I reported last month. With respect to the national economy, probably for me at least the most striking point in the Greenbook this time is its expectation that the third-quarter GDP growth rate will be revised up from the already pretty robust preliminary figure to maybe as much as 5-1/2 percent on a fixed-weight basis. I guess we were supposed to get that figure this morning.",336
-fomc-corpus,1995,"We won't get a 1987 dollar figure. The waters could be muddied in other ways, but we do think the third quarter looks stronger than it did before.",34
-fomc-corpus,1995,"I am still thinking of it in terms of those 1987 figures and that would be a much, much stronger performance than I think anyone was expecting back last summer. Given that, I think a key question at this point is whether that much stronger quarterly gain will be followed by another stronger-than-anticipated performance in the current quarter. Not many people seem to expect that. Of course, the staff revised its 2.6 percent growth projection for the current quarter down to 1.9 percent in the current Greenbook. But the Greenbook also suggests that there is plenty of upside risk in that projection, even though that risk is not getting much attention these days, and Mike underlined that very eloquently in his comments this morning. In particular, as Mike said, production-worker hours have been growing at a healthy pace lately. The staff is projecting hours to be up at over a 2-1/2 percent annual rate this quarter. So, even a very small quarterly increase in productivity could on the old basis give us a growth rate in the current quarter of 3 percent at an annual rate or even higher. We have the very real possibility, it seems to me, of two consecutive relatively strong quarters despite all the pessimistic economic commentary we read about. With the economy already operating at least in the neighborhood of potential GDP, it seems to me that that should be a source of some concern. The bottom line is that there is considerable room for forecast error on either side of the staff's 1.9 percent projection for the current quarter. From a policymaking perspective, the picture hopefully should become considerably clearer once we have some of the data for the month of December. We will be getting that information not too many days down the road. One final comment: It disturbs me a little that the staff is still projecting an essentially flat 3 percent inflation rate through the forecast horizon ending in 1997. I am not questioning the projection. I am just stating that I don't like it very much. Since 3 percent is such a mild rate compared to our experience over the last 15-20 years, I think a lot of people--not around this table--are probably fairly comfortable with that scenario. But it's worth remembering, if I have calculated this right, that at a 3 percent annual inflation rate the price level doubles in something like 23-1/2 or 24 years. Moreover, a reasonable confidence interval around a 3 percent point forecast would certainly include at least a 3-1/2 percent rate of inflation, maybe something more than that. That's not price stability. I don't think we should be satisfied with it. In that regard, Mr. Chairman, we talked in July about the possibility of adding a longer-term inflation objective to our monetary aggregate targets to make our longer-term strategy more meaningful. I would hope that we might have an opportunity to resume or reopen that discussion when we look at longer-term issues at the next meeting.",602
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. I have four general points to make today. The first is that the Eighth District economy continues to grow at a moderate pace. District retailers expect this holiday season to be somewhat better than last year's. About half of District auto dealers report autumn sales levels above those of last year, and to the extent sales have been damped, one often-cited factor has been shortages of popular trucks and mini vans. Industry contacts continue to report slow, steady growth, although contractions continue in the apparel, shoe manufacturing, and coal mining industries. The pace of residential construction has slowed slightly, but multifamily construction is picking up the slack in some areas. Nonresidential construction continues to be a bright spot in many parts of the District. Overall loan demand remains healthy with some signs of softening, and District banks continue to post record profits. I might mention that a couple of bankers on our board expect a possible mini mortgage refinancing boom to get started early next year. There is some evidence of that starting now. An informal survey of District contacts reveals that labor problems of various kinds, such as shortages, unqualified applicants, and retention are affecting many businesses. Reports of tight labor markets, defined as a shortage of available qualified workers, are concentrated in areas in the southern parts of the District, especially northwest and central Arkansas, northern Mississippi, and western Tennessee. Some contacts believe the shortage is so acute now that it is discouraging firms from expanding operations or setting up new operations in the affected areas. An added number of firms have begun to import foreign labor to fill positions. My second major point is that the long-term inflation outlook is inconsistent with the Committee's price stability goals. The central concern of the FOMC should be progress toward price stability and there seems to be little public confidence that substantial gains on this front will be made anytime in the foreseeable future. Some long-term inflation forecasts with horizons of five years or more have indeed been adjusted downward over the last year. But generally these forecasts still show that market participants expect inflation at current levels well into the next century. One such forecast was released in October by the Blue Chip group. Their consensus forecast is for consumer price inflation to average about 3.2 percent annually through the year 2006. The Livingston Survey of Economists released yesterday predicts a similar 3 percent rate over the same period, while the University of Michigan Survey of Consumers has the same 3 percent figure, according to preliminary December data. In addition, wage pressures may not remain quiescent over the next year, which is something that I think we all have been puzzled about to some extent given the reported tightness in labor markets for some time. The recent settlement with workers at Boeing was, in the view of some of our directors, surprisingly rich. As Bob Parry mentioned, it included a lump sum payment of 10 percent in the first year, a 4-1/2 percent lump sum payment in the second year, general wage increases of 3 percent in years three and four, and, I haven't been able to nail this down, but one individual mentioned to me that these general wage increases appeared to be on top of cost-of-living increases. I will have to try to nail that down. Finally, there was a major reversal on company plans to shift more medical costs to employees. They have gone from trying to shift costs on insured health care to the employee to actually paying a substantial bonus if employees opt for HMOs, and they have not shifted any costs to workers on the traditional plans. I am afraid that this settlement could be a harbinger of things to come. Stubbornly high inflation expectations and possible future wage increases have led me to view the current situation as a window of opportunity. Ed Boehne mentioned fluid expectations. I think that had to do with the real side. I would also say that expectations could be quite fluid with respect to inflation. Moves now to place downward pressure on inflation expectations might pay handsome dividends in the future. The FOMC, and I agree with what Al Broaddus said a minute ago, should develop a plan to move further toward price stability and offer markets some convincing evidence that we intend to achieve such a goal in a reasonable timeframe. I think some specific objective would go a long way in that direction. My third major point is that the national economy seems to be growing near the post-war average. Most private forecasters predict stable and sustainable growth in real output through 1997. The Blue Chip group, for example, foresees growth of about 2-1/2 percent through the end of 1996, and a majority of respondents expect growth to continue into 1997. The unemployment rate is low and belies predictions of imminent weakness. The index of leading indicators, of course, has been falling through most of 1995, but almost all of this decline is dominated by the changes in the prices of sensitive materials. The rate of increase in these materials prices, I think, has merely been tapering off from the very rapid pace set in 1994 and in fact could be interpreted as a positive factor for the economy, not a negative. The rally in longer-term bonds is mostly good news for 1996 growth prospects. It should help the housing industry as well as business investment and may lead, as I mentioned before, to a new wave of mortgage refinancing. My final point is that recent trends in financial markets seem consistent with continued expansion, which I think is a point Mike made earlier in his briefing. Aggregate credit remains readily available even though growth in total bank loans has slowed recently as firms have turned to longer-term capital markets. In addition, the growth in M2 since the beginning of 1995 seems consistent with an economy growing at potential. The marked runoff in total reserves over the last two years, albeit distorted by the spread of sweep accounts, is a cause for concern. On balance, however, growth in the monetary aggregates supports an expectation of continued moderate expansion in nominal GDP. Thank you.",1217
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. Let me start by saying that I agree with Mike's comment that the expansion at the national level has not run out of steam and that it will continue. As far as the Ninth District economy is concerned, it remains in pretty good shape, although the anecdotes this time around are perhaps a bit more mixed than they have been in a while, and I will comment on that. Retailers, of course, express concern. That goes with the territory to some extent. I think the concern also reflects the fact that there are simply more of them, and they are getting smaller shares of a growing market. That is part of what is going on here. Certainly, some of the large auto dealers in our District point out that a shortage of sports utility vehicles in particular is restraining sales from what they otherwise would be. I happened to be at a meeting with a variety of real estate and construction tycoons whose business is concentrated, but not exclusively, in the Twin Cities metropolitan area. They were all smiles, because 1995 was a very good year for these people, though not a record year. This included everything from single-family and multifamily developers on up through commercial construction, large-scale projects, and so forth. They seem very comfortable with the outlook for 1996. I would say that they were confident that they were going to have another good year. As has been the case for quite some time, labor markets in the District are tight. There are shortages of skilled and unskilled workers in various parts of the District. As Tom Melzer mentioned for his District, I think the shortages are constraining expansion in some parts of our District. That also has started to translate into more signs of wage pressures than formerly was the case. It's by no means universal, but I did hear more about sizable wage increases recently than I had earlier. The principal area of concern is in manufacturing. Even those manufacturers who have had a pretty good year in 1995, and there is quite a number of them, say that orders have slowed, and they express some concern about 1996. I have a sense that inventories are higher in a large part of manufacturing than managers would like them to be. They intend, of course, to pare those back, but that implies that the manufacturing sector could remain soggy for some time. That seems to me to be the principal area of softness at the moment. I think Mike Prell's commentary about inflation and the risks on the up side is well taken. But I wonder if there isn't an equally good case to suggest that maybe we are going to do better on inflation than the published forecasts suggest. If I wanted to make that case, I would point to the following factors. They are not additive; I will just throw them out as factors. One is a number of consecutive years of modest growth in the money supply measures. The second is my sense that productivity has done better than anticipated and probably better than measured in many cases. This is something that may well continue. Third, I think we are going to get a continuation of restrictive fiscal policy. It may be back loaded and all of that, but I think it is still likely to occur. Finally, I have a sense that more and more central banks around the world are committed to low inflation policies. Ultimately, that matters. So, I think one can make a case that the inflation outlook based on those factors may be a bit more promising than we might otherwise expect.",706
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, the level of economic activity in the Seventh District continues to be somewhat higher on balance than that for the nation, but the recent pattern of slowing growth seems to parallel what is happening nationally. I should note that our directors at their meeting last week expressed somewhat more concern about the District and national economies than they had in recent months. Mr. Chairman, you heard those comments firsthand by telephone. Reports from District retailers have been mixed, with national chains continuing to report that sales at their stores located in the District generally are slightly stronger than their sales nationally. Several retailers reported that price-conscious consumers have been hesitant during this holiday shopping season, hoping to get even better deals as the season draws to a close. Promotional activity and discounting have been intense this year, as Ed Boehne mentioned, not only because consumer spending growth has slowed but also because of overcapacity in the industry, as Gary Stern mentioned. But there is one piece of good news. Some of this excess capacity in the Chicago area has been taken up by a dramatic surge in sales of anything with the name Northwestern University on it [Laughter], particularly when it has roses on it, to celebrate Northwestern's first trip to the Rose Bowl since 1949. In the District's housing sector, which has been quite strong, home sales and starts have softened recently, in part due to the adverse weather. In contrast to a decline nationally, housing permits in our region actually moved up in October. So, our regional market may not be as soft as the October sales and starts data suggested. In terms of autos and light trucks, the situation has not changed significantly since our last meeting. This is still an area of concern. While it's too early to get a good fix on December sales, industry contacts report that the current pace is in line with or slightly higher than the November level. Despite some improvement in sales rates since October, production plans for light vehicles through the first quarter have been pared back gradually as inventories have climbed this quarter. For manufacturing generally, the momentum that was developing this fall appears to have dissipated somewhat in November. Purchasing manager surveys from around the District, for example, indicate that overall activity in the region's manufacturing sector flattened out in November after having expanded in October. However, we do have advance information on the Chicago Purchasing Managers' Index that will be released to the public at the end of December. That indicates a rebound from 49.9 in November to 57.6 in December. Again, a word of caution; that information won't be released until the end of this month. Steel shipments continue at high levels in the fourth quarter, led by demand in construction-related markets. Overall demand growth, however, has slowed in recent months. I have been talking to people in the steel industry recently and, of course, their main concern is that prices are soft in their industry, in part due to the slower growth and in part due to the new capacity that is coming on stream. Another reason that steel prices are expected to continue to be soft is that the integrated producers now have labor contracts that prevent them from laying off employees regardless of production levels. So, even if they close down blast furnaces, they still have these employees on the payroll and, of course, this encourages them to continue producing at very high levels. That contract provision was negotiated in 1993. Labor markets in the District remain tight, with unemployment rates still well below the national average, and we are still receiving some reports of rising wage pressures, especially for low-skill, entry-level jobs. Price patterns in the District do not seem to have changed much since our last meeting. Natural gas prices increased sharply with the cold weather in November and early December, but this is viewed as a short-term phenomenon. Turning to the national picture, we see the economy growing near its potential over the next year but perhaps slightly below the Greenbook path. CPI inflation should continue around 2-3/4 percent, which is basically similar to the Greenbook assessment. This view of the economy is shared by other economists in our District who attended our ninth annual economic outlook symposium earlier this month. The median forecast of this group of 33 economists was for real GDP to increase 2.4 percent over the four quarters of 1996, the CPI to rise 2.8 percent over the same period, and unemployment to average 5.8 percent in the fourth quarter of next year.",895
-fomc-corpus,1995,Thank you. President McTeer.,8
-fomc-corpus,1995,"The economy in the Eleventh District continues to be healthy. Throughout 1995, we kept hearing that employment growth had slowed in our District and that we were converging toward the slower rate of growth in the nation as a whole. These District estimates kept being revised up. Through October, employment growth has been about 3 percent for the year, about double the rate of the country as a whole. Reports from our directors and Beigebook contacts suggest moderate to strong growth across virtually all the Dallas District. We had a joint board meeting last week of all of our offices, and the reports were quite upbeat. The directors from the major cities in Texas were competing with each other in claiming that their local economies were stronger and that they were more on the leading edge of high tech. It's been quite a while since there has been that sort of competition and optimism in our District. There were some exceptions, though. Retail is doing poorly. Agriculture has been hurt by low beef prices, especially low beef prices relative to grain prices, and by boll weevils in the cotton fields. Our areas along the Mexican border are flat overall, with weak retail results being offset by strong construction activities related to the maquiladora operations on the Mexican side of the border. These factories continue to expand as they benefit from the weak peso and the resulting low wages in dollar terms. Our friends at tell us that sales in recent weeks have been absolutely terrible, with general merchandise and apparel sales being at recession levels. My concern is that this weak performance will pass through to reduced orders, a rundown of bloated inventories, production cutbacks, and all the rest. I fear that without some reduction of monetary restraint, the economy at the national level could run out of momentum before very long. I think our research economists would almost without exception agree with Mike Prell's five points. My instinct is that the downside risks are somewhat greater than that.",385
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, the Tenth District economy remains strong overall, with only a couple of our directors indicating some evidence of slight slowing. Payroll employment in the District, for example, has been growing at a fairly healthy pace with gains in all our District states. Among other signs of strength, District manufacturers continue to operate at levels near or at capacity, especially in our durable goods industries. Our directors also report that retail sales appear to be holding up during the holiday season, although sales probably will grow less than they did a year ago in some areas. Finally, construction activity has been brisk throughout our District, typically the building of roads and other public infrastructure. While the economy in the Kansas City District appears to be generally strong, a few sectors are giving us some mixed signals. One of those, of course, is the farm economy, which has been helped by higher crop prices, but financial losses continue to hurt the cattle industry, which is a very important industry within our region. While oil and gas drilling activity has picked up recently, the District energy industry remains lackluster overall, with the workforce continuing to shrink somewhat. The final point I would make on the District is that, to date at least, upward pressure on wages and prices has been limited. Labor markets remain tight in many parts of the District, but reports of rising wages, though evident, still remain scattered. For the national economy, I believe that, given current policy, conditions are such that growth for the next several quarters will be about 2 to 2-1/2 percent and inflation will be 3 percent, perhaps a little less. In this environment, moreover, economic resources will continue to be used at or near capacity levels. A little concern has been raised here about consumer spending and fiscal drag. As for consumption, I think it certainly needs to be monitored, but I believe it can be maintained at levels consistent with the income growth projected in these GDP forecasts. Consumer debt, while it indeed has increased relative to income, is not at historical peaks, and I think it would allow consumption to continue upward. Also, if we assume that consumer debt burdens are excessive, I am not sure that monetary policy can address that issue in the longer run. As regards fiscal policy, I agree that the budget debate should not be a consideration for us. Reasonable estimates suggest, though, that the deficit reductions in 1996 are likely to be quite small. Thus, any drag on the economy from fiscal actions will be limited in the foreseeable future at least. I also would point out that lower yields in long-term debt markets have been stimulative. That suggests to me that in the context of developments in those markets our policy has been neutral and not slightly tight. Thus, overall, we have an economy slowing to potential and inflation capped at only 3 percent, and that is something that I think we should keep in mind as we go forward.",587
-fomc-corpus,1995,President-elect Guynn.,5
-fomc-corpus,1995,"Thank you, Mr. Chairman. The Southeast continues to grow at a rate that appears to be above the national average. Thus far, no sector appears to be overextended. Wage and price pressures are stable. Our District's pretty extensive manufacturers' survey shows no net movement in either input or final goods prices. The scattered labor shortages that we saw earlier this year, particularly in the Atlanta and Nashville markets, appear to have abated without any persisting effect on wages. This time of the year we, like everyone else, have been watching retail activity. For our District, retail sales have been quite good compared to last year and to expectations, especially for high-end goods like jewelry and home furnishings. That pattern has been pretty even across our District. Of course, auto sales have been noticeably weak, as others have indicated for other parts of the country. I might mention that commercial construction in the Southeast is also quite strong; that construction activity is concentrated in the retail sector. While we are seeing some speculative building of retail space, mostly in Atlanta and Miami, that is not yet at a worrisome level. We also are seeing expansion of office and industrial building, but most of that is on a build-to-suit basis. We see very little speculative building in the office market. As one might expect, Olympic-related building and public projects are adding measurably to activity in both Atlanta and surrounding cities that are getting some draw from the Olympics. Overall, the Sixth District is expanding smartly, although activity has slowed noticeably from this time last year. Still, it remains hard to find problems that are widespread or worsening in either economic activity or in pricing practices. As far as the national outlook is concerned, the Atlanta forecast on the surface is remarkably similar to the Greenbook's: It includes moderate growth in consumer spending, strong but decelerating business fixed investment, little net contribution that we can see in either direction from net exports, and fairly stable inflation near the 3 percent level. Neither forecast sees serious imbalances. Nevertheless, there are differences in interpretation between our forecast and the Greenbook that have implications for our policy discussion. I will say more about that during the policy go-around. We interpret the relatively benign inflation environment as being in large measure the outcome of the last fifteen years of tough inflation policy. The Greenbook does not seem as confident on that change. But I would also underscore the point that Gary Stern made toward the end of his comments about some of the fundamental changes that have taken place and the reasons that one can be optimistic about the inflation outlook. We do not see the current forecast as a rigid limit on potential growth. In our view, moderate additional growth would likely have no effective inflation cost. In that way, our outlook is somewhat different from the Greenbook and somewhat different from the other comments that have been made around the table. Thank you, Mr. Chairman.",582
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, it does seem that fourth-quarter growth is somewhat slower than the torrid pace of the third quarter, and that slowing may be in response to that torrid pace. But I continue to be quite optimistic that this slowing is not very likely to be indicative of an undue weakness beginning to set in. I certainly concur with the thrust of Mike Prell's briefing earlier. I think there are some important trends that are going to have an impact in the near term and a little further out in the future stemming from the remarkable decline that we have had in long-term interest rates over the last year. We still seem to be able to create jobs in this country at a rate of roughly 100,000 per month, and the unemployment rate has stayed steady at 5-1/2 percent. Credit availability still seems to be quite ample. Debt formation is going forward a bit more slowly than the very rapid pace of a few quarters ago, but that is welcome. Retail sales are certainly unexciting; the anecdotal evidence about Christmas sales is not strong, but the most recent monthly data that we have, for November, were really rather good. So, that sector of the economy may be all right, and I think with the lower interest rates, housing is going to be all right and probably autos as well. Consumer sentiment continues to be strong, a bit off its highs perhaps but still strong. So, these developments and others leave me pretty comfortable with the Greenbook forecast, which essentially showed no change from November. I liked it then and I like it now. Basically, it calls for growth near potential as the highest probability. We have to ponder what might change this outlook. As far as an upside breakout goes, it is difficult for me to see where that is liable to come from in the foreseeable future. I would think that an upside breakout would have a fairly low probability. There is always the possibility of shocks, and if we get one of those, we will have to deal with it. But it would seem to me that if one wants to focus on a concern, we might see in the further reaches of the forecast period a general exhaustion at the margin of growth-creating demand, maybe a weakening of investment. I don't see that as a very high probability in the next several quarters. But further out in the forecast period, I think that concern grows because we do have a very mature expansion on our hands. On the inflation front, I think everyone has remarked, and everyone realizes, that inflation continues to be remarkably well contained. I am particularly impressed with the way that unit labor costs continue to behave. Productivity is still growing very nicely, and the ECI is flat. In the inflation area, the foreign outlook certainly appears benign, and commodities generally have behaved well recently. In sum, I just don't see strong pressures on policy at this time, one way or the other. This leaves us with the rather rare luxury of having a bit of rather low-risk discretionary room to maneuver. I think the question for the next half of the meeting is going to be how we intend to use that.",628
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. Although we have obtained a significant slug of new data on the economy since our last meeting, my view concerning the outlook has changed very little. I continue to think that the inflation outlook is favorable, that growth is likely to proceed at a moderate pace over the next year, and that under current monetary policy, there will be a bias toward below-trend growth over the longer term. With respect to inflation, I have been particularly impressed by the decline in inflationary expectations, which Bob Parry mentioned. Both long- and short-term inflationary expectations have fallen about 1/2 percentage point since the second quarter of 1995. Direct measures of inflationary expectations suggest, I think, a dwindling fear of an inflation breakout on the part of both households and forecasters, and that is a change in perception that is well warranted. We should remember that such expectations do have at least some direct impact on workers' demands for wage increases and the willingness of firms to grant them at any given level of labor market slack. So, reduced inflationary expectations make a direct contribution to an improved inflation outlook. As Bob also mentioned, the decline in inflationary expectations means that real interest rates, both long- and short-term, have not declined as much as nominal interest rates. Now, I have no quarrel with the short-term outlook in the Greenbook, although I do think the jury remains out on whether or not inventory adjustment is going to proceed along the very benign path that is projected in the Greenbook. But really my most important concern has to do with the longer-term outlook, not for 1996 but into 1997 and beyond. I think that should be the focus of our deliberations since that is when the monetary policy changes we undertake now will really take hold, given the long lags in policy. My reasoning here is similar to that offered by Larry Meyer in his latest forecast. According to his characterization, the outlook is for what he calls a soft landing with bias. After a period of near-trend growth in 1996, he foresees a bias toward below-trend growth thereafter with rising unemployment, assuming that the real federal funds rate is kept at its current level. Similarly, our own MPS model contains such a bias toward below-trend growth under the Greenbook fed funds assumption, although it does project an even stronger 1996 than the Greenbook due to the lagged but temporary influence of wealth effects from the stock market. I thought I might enumerate some of my reasons for expecting this bias toward below-trend growth, and I will just quickly mention seven factors that are operative in my view. The first is that lower long-term rates have been boosting residential construction with a lag, and I would expect, as does the Greenbook, that that effect ultimately will peter out. Second, we are finally seeing a cessation of the at least year-long trend toward easier credit terms, and that means that one source of stimulus that has been working as an offset to monetary policy over the last year will stop imparting further impetus to aggregate demand. Now, we can dispute whether and how much stock prices matter to consumption, but if higher stock prices are contributing and will continue to contribute in 1996 to strong consumption growth, eventually this influence is going to subside. I think it will be gone by the end of 1996 even assuming there is no major market correction. Fourth, pent-up demand for consumer durables is presumably spent, and it seems to me that rising delinquencies on consumer debt coupled with higher debt service ratios suggest at a minimum less robust consumption growth going forward. Fifth, the growth in business fixed investment seems likely to wane through accelerator effects. Sixth, the lagged effects of the depreciation of the dollar, which should stimulate exports in 1996, will be petering out in 1997 and thereafter under the Greenbook assumption of a stable dollar. Finally, seventh, I would mention that fiscal drag will, of course, be at work throughout and beyond the forecast horizon. So, it becomes hard for me to see exactly what is going to keep the economy growing at trend over the longer haul. In addition, if consumption spending, in contrast to the Greenbook assumption, is currently being buoyed by the strong performance of the stock market, then any significant stock market correction imparts some downside risk to the forecast. There is consistent empirical evidence in favor of the MPS model assumption of a marginal propensity to consume of 4 or 5 percent out of added wealth. If we take that seriously--obviously we can dispute that--it makes quite a difference. In particular, a 10 percent correction of the stock market would add a half percentage point to the unemployment rate after 6 to 8 quarters. So, clearly, the view that policy is restrictive at this stage involves a difficult and tricky judgment call. I think type I and type II errors are both possible. The Greenbook does offer a very coherent defense of the opposing view, and I think Mike defended that view vigorously. Fortunately for us, monetary policy is a flexible instrument; it can be adjusted in either direction so that any mistakes we might make are reversible.",1054
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The economy has been considerably stronger than we might have expected, with growth probably exceeding 5 percent for the third quarter and higher than 3 percent, or at least in the vicinity of 3 percent, for the year 1995. The question for us is how much momentum we can expect going forward. There are some sources of strength to the economy. One area is the labor market. At 5.6 percent unemployment, people are working. They may not be working at the jobs they want. This implies that they may be willing to move, which suggests in turn more flexibility in the labor force than is implied by a 5.6 percent unemployment rate. I think the proof of this assertion is the fact that wage rates have not consistently been under pressure. We have heard a lot of anecdotal stories about labor shortages, but that has not been widespread nor has it crept into the statistics. With respect to consumer spending, we clearly are getting some mixed signals in both the published data and in the anecdotal reports. We probably have, as Janet Yellen mentioned, worked through the pent-up demand for durables. Consumers appear to be very price conscious and cautious; consumer debt is probably reinforcing this caution. It is pretty difficult to assess the fourth-quarter retail situation. People are probably waiting until that last store markdown, or perhaps they are hitting the discount stores or the catalogs. But as long as people are working, I don't think there is any reason to assume that they will stop spending in any big way. I think it is fair to say that growth in consumer spending is likely to approximate the pace of income growth. So, the upside surprises in this sector of the economy are unlikely. The housing side has been disappointing recently, but I don't see any reason why it should not pick up a bit, or at least not decline, given the affordability statistics and also the availability of reasonably low mortgage rates. On the business investment side, the fundamentals are reasonably strong for continued investment, though probably not at the strong pace that we saw in 1994 and early 1995. Profits and cash flows are holding up and the cost of capital is low. The markets, I think, are fairly supportive of moderate economic growth. The stock market is strong, generally supported by corporate earnings. I guess I am not quite as pessimistic as Bill McDonough about the stock market being massively overvalued. In the debt market, we have seen the emergence of a flatter yield curve. It has not yet turned negative, but it definitely has flattened out. At the long-term end, the decline in inflation expectations has some obvious benefits for lowering financing costs and improving refinancing opportunities. In the inflation area, we have seen more progress than we probably have a right to have expected. In short, there are no obvious bottlenecks or major imbalances in the economy. This is not to say that there aren't any risks to the economy, and there may be some adjustments forthcoming. The manufacturing sector, as has been reported around the table today, is pretty uneven. We may still have to work off some inventories. The international demand side, I think, is a bit more risky. Certainly, the United States is in a better competitive situation than has been the case historically. But the question is: Will the international demand be there? The economic outlook for Europe has weakened; the Mexican economy may be bottoming out, but there are still significant risks; and it is questionable whether Japan has fully faced up to some of its difficulties. With respect to the fiscal negotiations, with a good part of the government still closed down, this remains a concern. I would argue, however, that we know more now than we did at our meetings in September and November. With respect to the debt ceiling, we clearly have bought some time. Rather, I should say that Secretary Rubin has bought some time, and there is a commitment to avoid default. Government operations are going to reopen one way or another. I think politicians will not be able to resist the political backlash from the inability of the public to get services. We also have the specter of public employees getting a paid holiday. In a week or so, they will be eligible to file for unemployment benefits. There also will be complaints about the unfairness of unpaid layoffs for the holidays. Under either a continuing resolution or an agreement, which may not come until next year, there will be some fiscal drag, but not that much in the near term. It seems to me that the point for us, with respect to the fiscal situation is that the areas of discussion are narrowing. From our perspective, I think there is probably more confidence that a deal eventually will be struck, but there will be some federal drag on the economy. In sum, I think the case continues for moderate growth, but I think there clearly will be some unevenness in that growth.",993
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. The only new piece of information of an optimistic type coming from our District was a report that recent shipments and backlogged orders for candlewicks were at record levels. [Laughter] I have not seen that indicator before, and I don't know if staff can attest to its reliability! One of the chief executives of a major company said to me that if we want to avoid a pickup in inflation, we need to ease monetary policy very substantially. I asked him to explain that. He said that recently his sales were off, orders for the first half of next year did not look very good, earnings were under pressure, and if things did not pick up, he was going to have to raise his prices. This is one of those occasions where I regret that this job prevents me from shorting his stock! Western Pennsylvania resembles what Ed Boehne was describing for his District; it had been relatively soft throughout this period of robust expansion in the rest of the Cleveland District. But the other parts of the District including all of Ohio and especially central and western Kentucky that had been so strong have distinctly cooled in every respect, especially in motor vehicles, metals-related industries, residential and nonresidential construction, and on down the list. One director reported that pre-Christmas retail sales were very disappointing. A banker responded that they have been disappointing for the last forty years, and so that exchange didn't seem to add too much to our knowledge. Two years ago at this time, we were contemplating head winds and the extent to which those head winds had diminished sufficiently so that we could start to raise the funds rate and get our foot off the gas pedal so to speak. Everyone inside and outside the System agreed that a 3 percent funds rate was simply too low at that time. A year ago at this time, we were observing tail winds. We were busily reefing the main sails to keep them from gaining too much momentum and trying to figure out how high it was going to be necessary to take the funds rate in order to prevent an acceleration of inflation. As it turns out with the advantage of hindsight, 6 percent was sufficient. Whether it was more than sufficient is debatable, but it was certainly adequate for this round. That says that 3 percent was too low and that 6 percent was at least sufficiently high, so we have the range bounded. We are talking about where the rate should be in between. Currently, at least from my District, it feels very much like the tail winds are diminishing. Two years ago, our anecdotal information put us ahead of the Commerce Department or even the BLS statistics about the need to start raising the funds rate. A year ago, our own anecdotal information or observations around the System led us to believe that we were reaching the topping-out point well before most forecasters were saying that we were going to stop raising the funds rate. Now the information from the majority of us around the table tells me that we are a bit ahead of the numbers in hand and that de facto policy has become more restrictive. I think that a 5-3/4 percent funds rate is now more restrictive than 6 percent was last February because of what has happened in between. The anecdotal information says to me that the equilibrium real rate has moved down, and what we do about the nominal rate has become a question of timing. Let me make a normative comment or two about the Greenbook forecast. I like the real growth rate and the employment and unemployment numbers projected through 1997. If they turn out to be close to the mark, I would be very happy with that result. As some others have commented, I don't like the inflation numbers, especially the CPI numbers. What is puzzling is that if we were targeting nominal GDP, I think the numbers in the Greenbook would look pretty acceptable to everybody, with growth in nominal GDP getting down to a rate of about 4 percent in the second half of 1997. If nominal GDP is cruising along at about 4 percent, that ought to get us pretty close to where we think we want to be in terms of the purchasing power of the dollar. But the CPI doesn't show that kind of progress in the Greenbook projection, and I don't think the Greenbook is internally consistent on the policy assumption and the numbers that are being produced there. I simply don't believe that a nominal 5-3/4 percent funds rate out well into 1997 is consistent with the kind of pattern that is being shown for nominal GDP. Like Al Broaddus or Tom Melzer, I would like to have a forecast that would move us in the direction of price stability. Current policy at best is going to be influencing inflation in 1997 and beyond. I would like very much to have a forecast that shows inflation at about a 2 percent rate at the end of 1997. The reason we can't ask the staff to produce such a forecast is that it requires us to raise unemployment or contract output or hold it below potential. Since I don't want to do that, I can't ask the staff to produce a forecast of inflation that I can translate into an objective. We have to sit and wait and hope that we get lucky and find that potential output turns out be higher than we thought, and we get positive productivity surprises that produce lower inflation. That would be true even if we were at 10 percent inflation. In this framework, once we get to full employment and potential output, it doesn't matter what the inflation rate is. We are stuck with it forever until we produce a recession or raise the unemployment rate. I don't want to do that. I don't know how to end this process and establish an objective of lowering the 3 percent CPI to 2 percent or 1 percent or whatever number we said we were going to accept. I am uncomfortable with this forecast because I believe fundamentally that if inflation rates are not moving down, they are moving up. Yet, we have an inflation rate that continues unchanged forever out there, and I find that difficult to accept.",1226
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"I am going to be blissfully brief. As I sat down last night to write some notes for this meeting, I remembered something my basketball coach taught me when I was very young about shooting free throws. He used to say: the basket is the same, the ball is the same, why can't you be the same? Here we are in December, and I am thinking back to November. The Greenbook is the same, the economy looks the same, and I feel the same way about the economy. I want to elaborate on that just a little. I want to make one point: As has been noted by several people, the Greenbook, except for a few trivial details, is essentially the same Greenbook we had five weeks ago. The economy, I would say, looks the same as it did then, only more so. In broad outline, we were looking then at an economy that had shown a surprisingly strong third quarter; now the third quarter looks surprisingly stronger. The economy was showing signals of weakening in the fourth quarter, which I think have continued to come in. In addition, we had a big question mark about the budget, and now we have a huge question mark about the budget. In consequence, I essentially feel the same way about the economy as I did five weeks ago, only more so. The preponderance of risks, as I said last time, looks to me to be on the down side. I am not going to go into the details of why since you have already heard that around the table. I think the biggest new risk in the last five weeks is the additional inventory pileup that seems to have occurred since then. I am a bit more worried about that than I was five weeks ago. Secondly, it certainly looks, as it did five weeks ago, that the economy can grow at trend with about 5.6 percent unemployment and about 3 percent inflation for a while, maybe a long while. But private forecasts that have this scenario, and many do, are almost all predicated on an easing of Fed policy; the Greenbook forecast is not predicated on an easing of Fed policy. I might add that the market rallies that are propelling or expected to propel the economy forward are also predicated on a Fed easing. We saw a little of that come out of the markets yesterday. The part of the argument that said, ""the budget will be fixed and therefore the Fed will ease"" took a small hit yesterday in the market. I think we got a little microcosm of what might happen if in fact we don't ease. Thirdly, the real fed funds rate looks restrictive to me as it did a month or so ago. My notes here say exactly what Jerry Jordan said: It seems to me that the funds rate is more restrictive now than it was in February when we were actively stepping on the brake. It is hard for me to understand why in December we would want to be stepping on the brake more firmly than we were in February. I can't understand that at all, nor could I five weeks ago. The only thing that I have to say today that is not a repeat of what I said five weeks ago is a comment about wage pressures. This has been mentioned by several people around the table. We ought to recall that labor lately has been taking it on the chin quite badly, despite apparently tight labor markets. Real wages are going nowhere, and profit margins are going everywhere. One manifestation of this is that the gains from diminished health care costs are being pocketed by firms in the form of profits, not by labor in the form of wages, which is what a conventional theory of incidence would have led us to expect. I raise this point for those who have a fear of wage pressures. I raise it to suggest that we ought to expect some reversal of this in the natural order of things. There ought to be a period of time when wages grow faster than prices just as there has been a period of time when prices grew faster than wages. As this aberration straightens itself out, and the wage-price relationship goes back to what most of us think is consistent with the normal long-run theory of incidence, there does not necessarily have to be an acceleration of prices. It would simply be the relative wage-price ratio snapping back toward what it was a few years ago. That is all I have to say.",882
-fomc-corpus,1995,Let's break for coffee.,5
-fomc-corpus,1995,[Statement--see Appendix.],6
-fomc-corpus,1995,Questions for Don?,4
-fomc-corpus,1995,"Don, ignoring lags and transition problems, in a future steady state environment with nominal spending expanding at a 3 to 4 percent rate, output growing at potential, and the economy perceived to be at full employment with price stability, in what ball park would you guess the nominal fed funds rate would fall?",62
-fomc-corpus,1995,"I think under those circumstances it would be below where it is now. You are talking about 2 percentage points less inflation than now, 1 percent instead of 3 percent. So, as a first approximation, I would shave 2 percentage points off the nominal funds rate just to keep the real funds rate from rising, since inflation is that much lower. As to what real funds rate is consistent with the economy growing at its potential, which is the other part of your question, I think that is really difficult to say. We have discussed that a couple of times over the last six months. You can see that so-called equilibrium funds rate bouncing around quite a bit in any model simulation or any look at how the real funds rate has behaved over time relative to how the economy has behaved. We ran for much of the 1980s, certainly the middle part of the 1980s, with nominal interest rates pretty consistently above the growth of nominal GDP, though not every year. That pattern was consistent with a fairly vigorously growing economy and steady inflation in the 4 to 5 percent range. Now, that was associated with some fiscal stimulus, so I think we had a higher equilibrium funds rate in that period. Most people think that the equilibrium funds rate is probably down relative to what it might have been in the 1980s, but how far down is very hard to say. The structure of the economy and the structure of financial markets have changed markedly since the 1950s and the 1960s. We don't have Reg Q, for example, to cut off spending when market rates get high. It is quite conceivable to me that the long-run equilibrium real interest rate at steady inflation right now would be higher than it was back then. One could perhaps run with nominal interest rates above nominal GDP for awhile; it would depend on the stance of fiscal policy and the other things that affect the economy. I don't think there is a simple mapping of nominal GDP growth and nominal interest rates, although there is a relationship.",410
-fomc-corpus,1995,"Maybe you answered it with this matrix and your other remarks. It is all very interesting. Maybe I didn't understand what you were saying; I am trying to clarify it. Starting from where we are today--the perception of full employment, an economy operating at capacity, the current funds rate, and the inherited inflation rate as it is reported--what is the transition mechanism for getting the funds rate from where it is to where it would be in a steady state environment without creating slack?",96
-fomc-corpus,1995,What is the transition mechanism for getting inflation down?,10
-fomc-corpus,1995,"What are the conditions under which you would say, without economic slack occurring or being forecast, that we move from the 5-3/4 percent funds rate to that steady state funds rate?",39
-fomc-corpus,1995,"I think there are two points. One would be that slack occurs that you had not anticipated, perhaps because potential is higher than you thought or there is a shortfall in demand you had not anticipated. When that occurs, you are going to have a little slack in the economy. You react to get rid of that slack, but meanwhile you are running below potential and that would put downward pressure on inflation. I think the opportunistic strategy here is to take that downward pressure. Don't try to push the economy back above potential to make up for the output that you have lost in the meantime. So that's one source. Another source would be that inflation expectations have come down--something that, as I hear it, some of the people around the table think has happened recently. If inflation expectations have come down, that would put some downward pressure on the inflation process. As Governor Yellen mentioned in her remarks, if they truly have come down and particularly if they are in the process of declining further, that would enable you to hold the economy at potential and have inflation come down further. Now, whether you could logically count on much of this sort of immaculate conception of a decline in inflation expectations--if you'll pardon the expression--while holding the economy at potential is difficult to say. But that would be the other way it could happen. You are right, President Jordan, in suggesting that the economy is constantly being hit by shocks, and it is not a question of deliberately putting slack in the economy to bring inflation down. It is a question of taking those shocks, whether they are on inflation expectations, demand, supply, or whatnot, and using them to bring inflation down. Over time, if you react asymmetrically to shocks, strongly to upward shocks and less strongly to downward shocks, the inflation rate will work its way lower.",367
-fomc-corpus,1995,Vice Chairman McDonough.,6
-fomc-corpus,1995,"Don, without benefit of your very good two pages, which would have saved me a good deal of work last night, I spoke in favor of the opportunistic approach this morning. Since we don't agree with the Greenbook, I guess our model would fit in your matrix where you have disinflation pressures and would then move down to the box that indicates a permanent drop in inflation expectations and ergo a reduction in nominal rates that leaves real rates unchanged. My question is, is it safe to assume that opportunistic versus deliberate are two different policies without implying that one is necessarily more virtuous than the other?",121
-fomc-corpus,1995,"I am not sitting in moral judgment here. I think it is a question of your ultimate goal and the gains you think you are getting from your ultimate goal--that is, price stability--and the losses you are willing to incur to get there. If you really believe that 1 percent inflation would produce over time a lot higher productivity, a lot higher output, a lot more benefit to the economy than 3 percent inflation, then perhaps deliberately giving up short-run output gains would be warranted to allow you to get to 1 percent inflation faster. If you are somewhat uncertain about the net gains of going from 3 percent to 1 percent inflation, it seems to me that you are potentially maximizing society's welfare by going there slowly and taking advantage of the opportunities of getting there without necessarily punishing the body economic.",164
-fomc-corpus,1995,"Just a comment: I think you could be equally convinced of the benefits of getting to the low inflation rate but just decide that the price of getting there very quickly is excessive. There would be no difference in the goal, in my view, only in the speed at which you are willing to get there and the cost to society that you are willing to incur.",72
-fomc-corpus,1995,"That's a good point. A lot of models put in utility functions that penalize large misses from output more than small misses from output. On the other hand, if you think that the world is pretty linear and symmetric, in the end it's not so clear. I think it's an open question if you really want to get there, whether going there slowly results in higher utility for society than going there quickly, assuming there is a lot to be gained when you get there. You are giving up years at price stability by going there slowly.",107
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Don, I just want to make sure that I understand the paradigm completely, not using the current policy issues so much as a bit of recent history. I would be interested to know, within the context of this, how you would interpret our initial tightening back in 1994. I would have thought of that intuitively as opportunistic. As I recall, the inflation rate was not rising significantly. What was happening was that bond rates were backing up. Some of us at least had a sense that that indicated a rise in inflation expectations, and of course there was evidence of strength in the real economy.",121
-fomc-corpus,1995,"I would interpret it under 3.b.i. in my outline, that is, leaning hard against potential increases in inflation. As you saw inflation developing, you moved vigorously against it. So, I think it's perfectly consistent with the opportunistic strategy. Some of this may be a bit endogenous since the people who practice that policy are defining the opportunistic strategy. But as I defined it--we are listening to you folks--I think that is perfectly consistent with an opportunistic strategy: lean hard against shocks in one direction, take a more measured approach to shocks in another direction.",116
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. Don, I would like to focus on the middle column of your bottom chart. Would you speak specifically as to what this column means to you in the current situation? When I look at the Philadelphia survey of inflationary expectations, it seems to me that the first thing to make assumptions about is how much of the drop is permanent. If I wanted to keep the real rate constant and thought it was all permanent, I would probably need to reduce the rate by 50 basis points. If I wanted to take more of a Brainard approach and not go the full distance, the rate reduction might be a quarter. What does it mean to you?",136
-fomc-corpus,1995,"I think that from the perspective of the real world situation of the last six months, it is a little fuzzier than it seems in these boxes. For one thing, I think the Committee anticipated a drop in inflation and inflation expectations when it cut the funds rate in July. That's why you did it. Inflation had come up, and you could see that that rise wasn't permanent. It was going to come down, and you expected it to come down. If you had not expected it to come down, you would not have cut the funds rate at that time. What we really need to know is what you thought inflation would be when you cut that rate. Judging from the central tendencies in the Humphrey-Hawkins report, you thought inflation would be about a quarter point higher than it seems to be turning out for 1995. Whether that's what the market expected and how your expectations compared to that is not clear. But you have had a favorable inflation surprise relative to your own expectations as given in the Humphrey-Hawkins report. I just don't think it's a full half point because some of that is the market catching up with what FOMC members expected to happen. The other point, of course, is that leaving real rates unchanged assumes that the intended real rate was the right real rate. That's the other judgment you have to make. In fact, you have had a lot more growth in the second half of the year than you anticipated in the Humphrey-Hawkins report.",301
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Don, I am a little surprised that you recommend responding to a supply shock or a demand shock in the same way in your matrix. I would have expected different signs. The easiest way for me to think about it is to suppose the reverse happens if you have a negative supply shock, say an oil embargo, versus a positive demand shock. If you had a positive demand shock, I think the right prescription would be to raise nominal real rates because you would want to offset the demand. If you had an oil embargo, I would not recommend raising nominal and real rates. In other words, I think there is a difference.",125
-fomc-corpus,1995,"I am not sure I followed you entirely, but there are a couple of points. Part of this is the asymmetry of the opportunistic strategy. Several types of supply shocks are possible, and I think that is a complication as well. If you are looking at the middle panel here with a positive supply shock, cutting nominal rates enough to keep real rates unchanged is what keeps you at potential, since under the opportunistic strategy the Committee is not seeking to drive the economy below potential or have it above potential. On the other side, if you have a negative kind of supply shock, you might want to drive real rates higher to lean against that supply shock. That was the example in 3.b.i. of my outline where policy attempts to hold the line against increases in inflation by accepting output losses in the event of adverse supply developments. So, it seems to me that if you had an adverse supply shock, you would want to raise nominal rates perhaps by even more than the increase in inflation expectations in order to raise real rates. This presumes that you thought the supply shock was feeding through to inflation expectations, and you wanted to respond so that you wouldn't end up with a higher inflation rate at the end of the day than when you started.",250
-fomc-corpus,1995,I will talk to you another time.,8
-fomc-corpus,1995,Okay.,2
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"The answer to that question obviously depends, among other things, on whether you think the shock is temporary or permanent. That is extremely important. Larry is looking at a temporary shock, and I believe Don is thinking about one that is permanent. That is not the only variable but it is critical. I want to make a couple of points. First, I think this is a very good discussion to have. I only wish I knew we were going to have it, because I began thinking about this subject only when you started talking. I have thought about it before, but not within the last month. So, I hope this won't be the last of it for this Committee because I don't think I am the only one who didn't know that this subject would be on the agenda. I have a couple of substantive points. Among the considerations in choosing between these two strategies are the following, though these are not the only considerations. How important do you think losses of output are? That is very important. And--Don, you touched on this obliquely--what are the relative social costs of the level of inflation, especially at low levels, and changes in the inflation rate? This is critical, I believe. Then there are technical considerations, and if I had known about this topic last night, I would have pulled out the work that the staff did on it and could be eloquent on the subject. The choice does hinge sensitively on the marginal costs, around the target inflation rate, of small deviations in output and inflation. Are these costs linear or quadratic; how is the loss function curved; and so on. I won't try to get that right now, because if I try, I will probably get it wrong. That is one set of comments. The second set of comments: You characterized the opportunistic strategy, which like Bill McDonough I favor, as waiting for the unanticipated to happen. In some sense that is right, except that we know it will happen. It is not that we think we will go for the next thirty years without a recession. We don't know when the recession will come, but we know it will come. We also know that when it comes, even if we are being opportunistic the way you describe it here, we will not react fast enough to stop it in its tracks. So, there will be a recession and there will be a period of slack. That is what a lot of us mean when we say that we are ""one recession away from price stability."" It takes a very nimble central bank to move fast enough to avoid the slack that drags inflation down a point or two points when a recession occurs. It will happen with a probability of one. So, it is not unanticipated in some long-run sense; it is unanticipated only as to the timing. That's crucial because, if it was literally unanticipated, you might never get to price stability by the opportunistic strategy. I also have a couple of quarrels with the way I think you portrayed the strategy. Although in your discussion with Jerry Jordan it went the other way, I thought you said you were looking back at inflation performance rather than looking forward at inflationary expectations. I would have thought you would have wanted to do the latter--to look forward at inflationary expectations, not backward at the actual performance. Secondly, I think your matrix, as I think of it, is not quite right in terms of changes versus levels. That is, ""tighten"" or ""tight"" and ""easier"" or ""easy,"" so to speak, are two different things. I would have thought the question was whether you wanted to be ""tight"" or ""easy."" I can imagine easing from a very tight position, and I can imagine tightening from an easy position. Either could still leave policy on the same side of neutral. I think the critical distinction here is which side of neutral are we on, and which do we wish to be on. In that regard, we cannot avoid taking a stand, to use a well worn phrase, even though we know we don't know for certain what the equilibrium real interest rate is. That is our choice. Do we want to be on the north side or the south side of the equilibrium real rate? Once we put ourselves there, the rest basically will take care of itself if we are right, but with very long lags and uncertain timing. If we are close to equilibrium, it is going to be uncertain as to whether we are on the right side because, as I said, we don't actually know the equilibrium real rate. But the fact that we can't know this number with certainty doesn't avoid the need to estimate it. It is the same sort of uncertainty that we face all the time. We don't know what the economy is going to do in the next six months, but we have all these people here to estimate what it is going to do in that period. My last remark will tie that to the current situation. I think that right now we are in a deliberate strategy posture, since I believe, as many but not all of those around the table believe, that we are on the north side of the equilibrium real funds rate. A version of the deliberate strategy is to hold the funds rate unchanged and let the economy do what it will, which is to create slack and bring the inflation rate down. Whereas the opportunistic strategy, as Bill characterized it, would ease now and presumably try to bring the real fed funds rate to roughly what you think the equilibrium rate is.",1115
-fomc-corpus,1995,I thought in effect that's what I had in the lower row here. One way to think about this--the way I thought about it as I was writing it--was that the upper row had the Greenbook assumption and the equilibrium real rate approximately where it is now. The lower row had some words like this--,63
-fomc-corpus,1995,I would have labeled the top row as having a real equilibrium short rate of 2.75 percent and the bottom row as having a rate of less than 2.75 percent.,37
-fomc-corpus,1995,"That's exactly what I had in mind. I was not taking a stand since I had two alternatives here, but I think those notions of the real rate were behind these alternatives. I want to go to one other comment that you made because I think it raises an interesting issue that I tried to point out as we were going through this. The question of why you take disinflation but you don't seek disinflation does rest on these points about the utility of less inflation and how much is gained or lost by different actions relating to the level of inflation versus a change in inflation or the level of output versus movement of output away from potential. I think these are the sorts of things we need to think more about to write down a model in which we really can be confident. I agree that my colleagues have written down an interesting model that produces this result, but it is that issue that I think is the most difficult to confront when you are talking about the opportunistic strategy. I think we talked about this at the September meeting. If the Mack bill ever becomes law, the Committee will need to confront these issues: Why are you doing this deliberately? Why are you not doing this deliberately? Why do you have the opportunistic approach? Is it worth going to price stability? Why not get there? This question of justifying this opportunistic strategy in a fundamental underlying sense of society's utility will, I think, be very much on the table if we have to confront that particular bill.",298
-fomc-corpus,1995,I agree with that.,5
-fomc-corpus,1995,"Any further questions for Don? If not, let me start off. I will take a little more time than usual because despite the short-term budget turmoil and all sorts of churning in the economy, in concert with Don's endeavor to sketch out longer-term policy issues, I want to raise a broad hypothesis about where the economy is going over the longer term and what the underlying forces are. While I have not seen Don's set of boxes before, I am sure you are going to fit me in one box after another as I go through this, but I hope you won't try to do it too readily! [Laughter] You may recall that earlier this year I raised the issue of the extraordinary impact of accelerating technologies, largely silicon-based technologies, on the turnover of capital stock, the fairly dramatic decline in the average age of the stock, and the creation as a consequence of a high degree of insecurity for those individuals in the labor markets who have to deal with continually changing technological apparatus. One example that I think brings this development close to home, even though it is an unrealistic example, is how secretaries would feel if the location of the keys on their typewriters were changed every two years. We are in effect doing that to the overall workforce. As I indicated in my remarks two or three meetings ago, we are getting as a consequence of this a very significant increase in the sense of job insecurity and indeed the trade-off between job insecurity and wage increases. To my mind, this increasingly explains why wage patterns have been as restrained as they have been. One extraordinary piece of recent evidence is an unprecedented number of labor contracts with five- or six-year maturities. We never had a labor contract of more than three years' duration in the last 30 to 40 years, though I am certain that somebody can come up with an example of some quirk somewhere along the line. As far back as I can recall, the maturity distribution of labor contracts in the BLS data was always cut off at three years. The underlying technology changes that support this hypothesis really appear only once every century, or 50 years, or something like that as best I can judge, and many of you have been giving various examples that support this hypothesis, Gary Stern obviously being one. I think the accelerated capital turnover and the advancing technology are having, in addition to the labor market effect, a fairly pronounced impact on costs for different reasons. Basically, the downsizing of products as a consequence of computer chip technologies has created, as you are all aware, a significant decline in implicit transportation costs. We are producing very small products that are cheaper to move. They also are cheaper to move across borders, and so we see them spreading around the world. More importantly--and this is really a relatively recent phenomenon--is the dramatic effect of telecommunications technology in reducing the cost of communications. A while back, The Economist had an article that was called, I think, ""The Death of Distance."" They were pointing out, as one readily observes, that we are gaining the ability to make telephone calls between Washington and London, for example, at the same cost as between Washington and Baltimore. The reason is that increasingly as fiber-optic-related technologies and satellite communications evolve, the cost of adding 200 or 1,000 miles doesn't matter when you are going 22,000 miles up and 22,000 miles down. That is why the Internet charges essentially flat fees for all subscribers, and connections can be made anywhere. The reason is that distance doesn't change the underlying cost. What this has done is to create a major force for increasing labor specialization because it broadens the scope of what an individual or company can get involved in. We are raising the old issues of comparative advantage and the division of labor out of the old Economics I textbooks. In effect, as the downsized products have spread and the cost of communications has fallen, the globe has become increasingly smaller. In the 1850s, a farm somewhere in the Midwest would have been a self-sufficient, fairly low productivity operation because there was no comparative advantage. What we are now seeing is a tremendous move toward the proliferation of outsourcing, not only in the immediate area but ever increasingly around the globe. What one would expect to see as this occurs--and indeed it is happening--is the combination of rising capital efficiency and falling nominal unit labor costs. In fact, that is happening by every measure we can look at. One may readily argue that this process has been going on in one way or another since the beginning of the Industrial Revolution, but I think we are now seeing an acceleration of the process largely as a consequence of the type of technological change that is occurring. I have been looking at business cycles since the late 1940s and have been aware of the various technological changes; there was just nothing like this earlier. This is a new phenomenon, and it raises interesting questions as to whether in fact there is something more profoundly important going on in the longer run. We usually dismiss that sort of development on the grounds that its effect on the short run is nominal. I have a suspicion that in this period, unlike previous periods, we will find that the long-run, deep-seated forces are not so gradual as to be readily dismissed in any short-term economic evaluation. I suspect that the evidence is increasingly emerging that there is something different going on, which we have not looked at for awhile. One would certainly assume that we would see this in the productivity data, but it is difficult to find it there. In my judgment there are several reasons, the most important of which is that the data are lousy. I think we have not correctly defined how to capture the value added in various industries, as I believe I have pointed out previously. Looking at market values, we are not capitalizing various types of activities properly. In the past, we looked at capital expenditures only as spending on a blast furnace or a steel rolling mill. Now, improvement in the value of a firm is influenced by such factors as how much in-house training they have and what type. That creates economic value in the stock-market sense, and we are not measuring it properly. Secondly, I suspect that we also may well be looking at the lag that Professor Paul David of Stanford has been talking about. It relates to the question of why computer technology is not creating the productivity that we would expect to observe by looking at individual companies. The reason is largely that the global infrastructure has not yet adjusted. In a similar manner, we had electric motors coming into use in the late part of the 19th century, but they were put into a system whose infrastructure was built on minimizing costs for steam engines. The technology of a steam-engine economy is fundamentally different from that of an electric-motor economy. It wasn't until the construction of horizontal types of factory buildings in the 1920s that our manufacturing firms finally were able to take advantage of the synergies implicit in the electric dynamo and achieve fairly dramatic increases in productivity. This showed up and correlated fairly directly with trends in unit motor use and secondary uses of electric motors, which I thought Professor David did a remarkably thorough job in evaluating. While the analogies are not exact, there is something extraordinarily obvious as we read through what he is saying and observe what is going on now. Firms are putting tremendous efforts into computer technology. A lot of it is wasted, as inevitably it must be, and we still have not restructured vast parts of the way we do business to fit a fundamentally new technology. It is going to take a long while to do that. It is unclear exactly how that fits into our policy process. But I think it is important to put this point on the table, and I present this as a hypothesis since it is something that we will not be sure is the appropriate assessment of our changing world for probably five to ten years. But the point that Don Kohn has been raising and we have just been discussing is very critical to what we are doing. Let me suggest to you what the recent short-term evidence appears to be that is consistent with this hypothesis. Ultimately, when we have a hypothesis, the facts either fit it or they don't. The wage pattern that I mentioned is clearly consistent with it. It also has been mentioned here, I think quite importantly, that breaking the back of the inflationary surge last year and early this year was a lot easier in retrospect than it should have been. You may recall that the markets had federal funds rates projected to the moon a year ago. The reason they did is not because they were not thoughtful. The reason is that previous relationships implicitly called for substantial increases in the federal funds rate to restrain and contain the burgeoning inflationary pressures that we were looking at. As has been mentioned many times, the CPI is currently running under expectations or forecasts. My suspicion is--and this is a benevolent outlook in Don's context--that we are going to find that the inflation rate will continue to come in below expectations. I think this process is not about to come to an immediate end, although I will suggest in a minute why it is not a permanent state of the world that would allow central banks to pack up and go home. I found the charts on long-term inflation expectations in the Greenbook, Part II, really quite startling because they suddenly dip fairly sharply with the emergence of a general awareness that we are in a late stage of a business cycle period that has not created the inflationary problems that previously have occurred in the post-World War II period. The sharp decline in long-term yields has struck me as quite extraordinary. I know of no one who forecast that with any degree of confidence. Despite the Treasury, we are getting issues of 100-year bonds, and that occurs only infrequently. The last time it happened was in 1993. Before that, I think it was the turn of the century. That in effect is saying that there are people out there who are willing to take low yields for 100 years. The fact that some borrowers are issuing these bonds is terrific. Until you get somebody dumb enough to buy them, that is terrific. But the point is that they are selling, although they may not sell in the future because of the new tax concerns. Finally, it is very difficult to find typical inflationary forces anywhere in the world. If this phenomenon is correct, it has to be worldwide. What we are observing is 1 to 2 percent inflation in Europe, and none to speak of in some areas where inflation really should be at a high level. What has surprised me most of all very recently is that the CPI inflation rate in Argentina was 1.7 percent for the last 12 months, and that was not per month. Even the outside inflationary processes are being contained. Something different is going on. I don't deny, as has been argued here, that central banks have been a factor in this. I suggest to you that we are probably necessary conditions for this state of affairs to persist. But I would suspect that if we did not have these technological changes going on, our job and that of our counterparts abroad would have been materially more difficult. I certainly can agree that my hypothesis is the statistical equivalent of a falling NAIRU. That's all fine and good, but merely saying that the NAIRU has fallen, which is what we tend to do, is not very helpful. That's because whenever we miss the inflation forecast, we say the NAIRU fell. We have to understand what it is that is causing this. I am always uncomfortable with a national NAIRU number because I always look at local NAIRUs. I do not think there is the same slope on inflationary expectations across local areas. I am a little dubious of the national number, but I would grant that there is a fairly impressive statistical relationship between inflation and the national NAIRU. What I am saying is that if this hypothesis is correct, we are looking at a significantly different set of inflation pressures in the world economy. I keep mentioning the word ""if"" because it is a hypothesis. It is one that I have been thinking about for over a year. The evidence continues to come in and suggest that there is something going on here. If it is true, then clearly we can reach price stability with real interest rates lower than where they are now. I do not know where this hypothesis fits in Don's chart, but it is in the most benevolent square.",2518
-fomc-corpus,1995,The positive supply shock square in Don's chart.,10
-fomc-corpus,1995,"Yes, the positive supply shock square. However, before I go too far, let me repeat what I said when I first raised this issue about worker insecurity and wages. If at a fixed degree of job insecurity there is an associated rise in real wages, then at a higher level of job insecurity we would get the same trend at a lower level of real wages. What I think is happening to us now is that we are going from this higher level of insecurity and tilting down into a lower level. The transition period, by definition, temporarily creates a much slower rate of change, but ultimately we get back to a new level with a rising trend. The same thing occurs when we look at capital efficiency or this type of hypothesis. It is a transitional issue, and it is not one that puts us in a permanent state of noninflation. What we do not know is where the fulcrum of this process is, whether it is out there six months or six years. The Paul David argument would say that it is out there six years. I don't feel that confident about it, but clearly this article, which incidentally was written in 1989, has turned out to be extraordinarily prescient as to what has occurred. Getting down to the mundane question of where that leaves us for policy today, as a number of you have maintained, falling inflation expectations have increased the real funds rate since July. Indeed, there is a question as to whether in fact the rate is higher now in real terms than it was when the nominal rate was at 6 percent. It is a close call as to whether it is higher, but it is not something that one readily rules out. I know there is a sense of strength implicit in the Greenbook. I have difficulty with it. To me, the economy has more of a feel of driving with the parking brake partially engaged. One gets the sense that the economy is not breaking out as I thought it might last summer. That suggests to me that the upside potential in this economy is limited. I come to the conclusion, which should not come as a surprise, that we rightfully should be moving the funds rate lower. What are the risks? I am not worried about product price inflation if for no other reason than I think that the longer term is helpful. But I am a little concerned that the behavior of inventories has not been as benevolent as I would have expected. I agree with Mike Prell; I do not think that one can readily see real overhangs except in motor vehicles. But we are not down to the slimmed pace that I felt we might have reached by now, and it is making me a little uncomfortable. So, I am not concerned about moving lower in the context of worrying about reigniting product inflationary forces. I think the probability of that is very low and frankly 25 basis points is not in that regard a big deal. The real danger is that we are at the edge of a bond and stock bubble. Yesterday's market clearly helped, but it is not going to last very long. The sharp runup in stock prices is very heavily determined by the climb in long-term bond prices, but not fully. There has been some not insignificant decline in real equity premiums, and even though we are still well above the dangerous levels of October 1987 prior to the stock market crash, we are in the lower ranges so to speak. It would not take terribly much to drive us through. That is the reason why, if we are perceived to be easing policy, it is conceivable that we could foster further problems in that regard. Fortunately, I think we may be close to at least some temporary peak in stock prices if for no other reason than that markets do not go straight up indefinitely, and the Dow Jones Industrial average has been going literally straight up. I have no problem with moving down now knowing that, if the economy picks up, we have a quite significant amount of time to move back up again and to tighten to whatever extent we think might be required. I think nonetheless that we have to be a little careful about being too aggressive. I would be uncomfortable with 50 basis points unless I knew for certain that the hypothesis that I have laid out here today were really true. In fact, if somebody guaranteed it to me, I think we could safely go down 100 basis points. I would go 25 basis points now with no change in the discount rate. It is conceivable that we may have to go lower. I do not think that we have to make that judgment, and indeed it is not a judgment that I think it is appropriate for us to make at this time. The reason that moving down more than 25 basis points would be a big deal is that we would then raise the discount rate question. I think that requires a great deal more confidence that inflation is contained. I would go symmetrical if we move down 25 basis points. I would recommend that the action be accompanied by a statement that emphasized that the reason for the action would largely be the behavior of inflation. For example if we were to do it, I would recommend that the operative paragraph of our press statement say something like: ""Inflation has been somewhat more favorable than anticipated since the last easing of monetary policy in July, and this result along with an associated moderation in inflation expectations warrants a modest easing in monetary conditions."" I would eschew two issues in the press release. One, I would not say anything that has to do with the economy because I do not think the economy is what is relevant here. I may not feel as strongly positive about the economic outlook as the Greenbook, but there is no real evidence here of cumulative deterioration. I think this is basically a long-term inflation adjustment process in which we are trying to set the real funds rate at the point where we can move toward price stability in a coherent way. Secondly, I would not like to see the word ""budget"" mentioned in the release because there has been much too much said about our basically rewarding good budget actions and penalizing bad budget actions. We are not in that business nor can we nor should we be in such a business. Nonstatement of any budget considerations will, I think, speak more loudly than anything we could say. In any event, I have run out of things to discuss, and that is my recommendation at the moment. I call on President Minehan.",1294
-fomc-corpus,1995,"I think you have laid out an extraordinarily intriguing and interesting scenario. When preparing for this meeting and looking at the forces in the economy, our use of a traditional Keynesian framework to evaluate the Greenbook forecast led us to agree with that forecast--the patterns of good solid growth, stable inflation rates, low unemployment and so forth--and we saw the risks to that forecast as being relatively balanced. However, when one begins to think about the changing framework--that is, the NAIRU being lower, using that as convenient terminology, or the economy's potential being higher and perhaps providing a little more room for growth without higher inflation if that new environment has materialized--then it is quite tempting to think of the current level of real interest rates as too high to promote the projected levels of growth. The new framework suggests some additional room to probe on the up side or the down side, however one wants to look at it, and possibly to get more growth out of the economy at given levels of inflation or even declining rates of inflation. I would like to believe that such a new world is here and that there is some evidence, given the reactions of wages and so forth, that says it is here. However, I don't think the evidence is strong enough yet to be really persuasive. Reflecting on your comments about the potential bubble in the bond and stock markets, Mr. Chairman, it is hard for me to believe that real interest rates are too high. It is also hard for me to think about easing credit in the face of the kinds of financial markets that we have right now. The costs of being wrong, both in terms of the stock and bond market bubbles and in terms of capacity constraints and so on if the world has not changed, clearly are much higher if upside risks are realized as opposed to downside risks. So my basic inclination would be not to change policy at this meeting, but I can't debate 25 basis points. We talk about having purchased insurance against downside risks in July. My attitude at this point would be not to change policy in the sense that that purchases insurance against upside risks. All that said, I don't think I will dissent over 25 basis points, but I think there are risks here and the risks pertain to whether or not we have that new world you described sufficiently in hand.",466
-fomc-corpus,1995,Vice Chairman.,3
-fomc-corpus,1995,"Mr. Chairman, on the basis of my earlier comments, nobody will be surprised that I think your policy recommendation is right, for the right reasons, and in the right amount. I don't think we should expect the market to be particularly pleased with our action. There is a fair likelihood that the market correction in both stocks and bonds will continue, partially because even though the market is erratic, some will think our move is not as big as they would like it to be. But more importantly, we are near the year-end, the markets are relatively thin, and people have some very large gains that they may well decide to realize so that 1995 will look like a good year for them. We might also have some additional stock selling shortly after the turn of the year. There does seem to be a fair number of investors who have held off selling stocks, or selling bonds for that matter, in the hope that the capital gains tax will be lower effective January 1, 1996. How much of that sentiment there is, nobody knows, but I believe that there is some. In my view, it is very important that we not do more than 25 basis points and that we not touch the discount rate because there is sufficient uncertainty that, even though I happen to agree that your hypothesis is likely to turn out to be right, I think we should proceed cautiously. While I am very much a member of the opportunistic school for achieving price stability, I am a near-fanatic believer in achieving price stability. I think that the 25 basis point move leaves our price stability drive very much intact.",326
-fomc-corpus,1995,Governor Blinder.,4
-fomc-corpus,1995,"Thank you, Mr. Chairman. I am one of those opportunists who think that we have the real funds rate too high. As you said, it's higher than it was at the peak of our tightening. I don't see a reason to keep it there. I hope you will allow me to agree with the reasons that you gave for lowering the rate without signing on to your brave new world scenario, which I am not quite ready to do. I do agree 100 percent with all your reasons--the level of real interest rates, a weaker forecast than that in the Greenbook, and the minimal inflationary dangers. I definitely want to underscore that we are quite fortunate to be sitting here on December 19--ironically, we are quite fortunate, but the country is not--able to take this action and disassociate it entirely from the budget negotiation process, which I think is a very good thing for the Federal Reserve. Do it now.",190
-fomc-corpus,1995,Anything on symmetry?,4
-fomc-corpus,1995,Symmetric is fine with me.,7
-fomc-corpus,1995,Symmetric will be okay with me.,8
-fomc-corpus,1995,President Melzer.,4
-fomc-corpus,1995,"Thanks, Alan. Not surprisingly I would prefer alternative B because I think we have the opportunity to move inflation and inflation expectations lower in the context of an economy that is continuing to expand generally in line with the 10-year moving average. I also feel very strongly that 3 percent inflation expectations are too high. On the other hand, I can accept some easing of restraint. My quibble is really with its timing and not so much with the direction in which we are moving. I think the stance of policy will still be somewhat restrictive with a 25 basis point reduction, and such a reduction could well be consistent with lower inflation. I think the risk, and you put your finger on this, has to do with how our actions are perceived. People could well ask whether we are committed to long-term price stability or preoccupied with short-term considerations relating to the real economy. The statement you read that would accompany this action is very significant in terms of not mentioning the real economy. In fact, I had a comment on the minutes for the November meeting that I passed on to Don and Norm; we had almost two pages of draft text with respect to the policy decision last time before inflation was mentioned. So, no matter what we say in that statement, for a lot of reasons the perception is out there and will be out there that we are moving in part in response to concerns about the real economy. I would strongly object to any move greater than 25 basis points now or one that involved a cut in the discount rate for the reasons you cited. I agree that an advantage of moving now, though not a reason, is to emphasize the absence of any short-run linkage between monetary policy and fiscal policy negotiations.",344
-fomc-corpus,1995,President Broaddus.,5
-fomc-corpus,1995,"Mr. Chairman, I won't say anything about the budget, but I might just mention the economy in passing. I think your longer-term vision of what I would describe as a permanent or at least persistent positive supply shock is an appealing hypothesis and may well be a valid one. But in talking about today's policy decision, I am taking a little shorter-run point of view. Clearly, one can make a case for some easing this morning; I don't deny that. But on the bottom line, I would come out with Cathy and Tom, as I am sure will not be surprising. There are risks in taking this action now. There is a risk that we may send a message, at least to some people, that we think the economy still has a good bit of room to run even though we had a very strong third quarter, and we may well find that we have a relatively strong fourth quarter when the figures come out. I feel there is a risk that they could undermine our credibility at a time when we may well be on the verge of a breakthrough in our quest for price stability. I mentioned in my economic statement that I think the current situation and the very short-term outlook are unusually uncertain. I know one can always make the case, and sometimes it's made too frequently, to wait until the next number or the next batch of data, but to me that argument seems more compelling in this situation than normally. Against that background, I think our best move today is no move. The economy's strength in the third quarter, the likely possibility that we will get another strong quarter in the current quarter, and the economy's proximity to something like potential GDP all argue to me that it's better to wait at this point.",344
-fomc-corpus,1995,Governor Lindsey.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. Having dissented in favor of ease last time, I am reminded of Governor Blinder's basketball coach. I certainly support your recommendation. I also support your view that there should be no mention of fiscal policy in our statement, but I do think that in fact there will be some linkage made and in this case an unfortunate one. We would have been much better off to have moved in November. Also, I don't think we should pretend that we in fact ignore fiscal policy in our actions. To do so would be silly. The government is one-third of the economy. For us to ignore the actions of one-third of the economy, well, we don't do that. If there were a 10 percent cut in government spending or a 10 percent tax increase, would any of us say that we should hold the nominal fed funds rate the same? That is just preposterous. I don't think that was what is implied; we certainly pay attention to fiscal policy. I would give those two cases as examples of demand shocks where we clearly should respond. There is also a question about government causing a supply shock. For example, if the government were to raise the minimum wage to $10 an hour, that would be an adverse supply shock. If I followed Don's outline, trying to be symmetric in following your logic, we would respond to that with a cut in interest rates. It's an adverse supply shock.",290
-fomc-corpus,1995,I don't think the Committee would want to cut rates in that case.,14
-fomc-corpus,1995,"No, a rise in rates.",7
-fomc-corpus,1995,"A rise in interest rates, yes. So, we should make ourselves even more miserable! I think this sort of analysis tends to break down, and that's why I have problems with the difference between a demand shock and a supply shock. Basically, when it comes to government actions on the supply side, I really don't think that we should get in the way. I think that's particularly applicable to what I am afraid may be the response next year to our action today. There was a major bond market rally this year in large part because of an expectation that the out-year federal deficits were going to be reduced substantially. If those reductions do not come to pass, and according to reports yesterday's stock and bond market corrections were in large part linked to the first realization on Wall Street that such reductions may not materialize, we may have a backup in intermediate and long rates. If that were to happen, I would view that as an adverse supply shock. Government is doing something stupid and the markets know it. Therefore, there is less confidence reflected in the price at which the markets are willing to lend to the government. If that were to occur, I don't think there is a lot we could do to undo it. So, I will look forward between this meeting and the next meeting to see what happens on the intermediate- and long-term portions of the yield curve. If in fact we get a backup, I think it is going to be very difficult to make any further easing moves. Thank you.",299
-fomc-corpus,1995,President Stern.,3
-fomc-corpus,1995,"Thank you, Mr. Chairman. First of all, Don, let me say that I appreciate your effort here in looking at opportunistic versus deliberate strategies. I found this very helpful. I understand better what I meant! [Laughter]",48
-fomc-corpus,1995,"I'm glad you do, Gary! [Laughter]",11
-fomc-corpus,1995,"Maybe I'm the only one. Just to talk a minute about that, I do think the opportunistic approach is the one we ought to follow. I say that because as I understand the evidence and given the quality of the evidence, and both may be flawed--that is, my understanding and the evidence [Laughter]--it doesn't suggest that there are big gains in taking inflation from 3 percent to 1 percent or something like that. If that's true, we should not want to pay a very big cost to do that. I think that comes out in favor of an opportunistic approach. Having said that, it may surprise you to learn that I favor no change in policy at this meeting. As I commented earlier, while I believe that we may get a soggy quarter or two because of the inventory situation, there is nothing at the moment we are going to do about that with a policy change. As I look out further into 1996 and 1997, I am hard pressed to see cumulative weakness in the economy. I am hard pressed to see a significant problem that I can identify. Yes, there can always be shocks; yes, I recognize that there are risks, but I think there is a good possibility that something like the Greenbook forecast will be realized. Maybe real short-term interest rates are on the high side. but I guess I am not entirely persuaded of that. Even if they are, perhaps that will reveal itself in lower inflation rather than anything else. So, at this juncture, I would favor ""no change.""",314
-fomc-corpus,1995,President Moskow.,4
-fomc-corpus,1995,"Mr. Chairman, I really appreciated your discussion of longer-term trends. You discussed some of them in your talk when you were out in Chicago, and I think that has been very helpful. My preference actually is to wait at this meeting and not to move today. To quote Mike Prell, growth is not steady and we had a very strong third quarter and it could be that the sogginess we see in the economy now is just some slowing down from that quarter. I don't see any urgency to move today as opposed to the next meeting, and I think the 25 basis points symbolically is extremely important, even though it's not 50 basis points. I should add, however, that I don't feel strongly enough to dissent. I think, as Larry Lindsey said, that there will be some linkage to the budget discussions that are going on now, although that was not even mentioned in any of our discussion earlier today. I agree that it is very important in the press release you are suggesting to relate our action to receding inflation and declining inflationary expectations. I certainly would not want to change the discount rate. I agree with the symmetric language proposal as well.",235
-fomc-corpus,1995,President Parry.,4
-fomc-corpus,1995,"Mr. Chairman, I don't believe that a rising real funds rate is warranted at this time. Also, our nominal income targeting rule that we follow calls for a cut in the funds rate of about 25 basis points. Therefore, I favor your recommendation and also the symmetric language you proposed. At least in terms of the work that my staff has done, it is quite possible that we may have to reverse that reduction sometime in 1996 if we maintain our longer-term price stability objective. As I think I indicated in July, clearly a move down at this time should be accompanied by the recognition that it may have to be followed by a move in the other direction at some later time.",138
-fomc-corpus,1995,Governor Phillips.,3
-fomc-corpus,1995,"I can support your recommendation for a small easing move, but I don't think that the case is very strong; we could wait. The economy is growing; the stock market is strong; the Wall Street Journal says we are off the hook; and the shrimp index is up! But we are behind the yield curve, perhaps by 50 to 75 basis points. We are getting mixed reports on demand, which to me reduces the chance of an upside breakout. I think the range of potential outcomes on the fiscal situation has narrowed, and I agree that we should not be holding back until there is a resolution. In fact, a move today would clarify that we are in fact taking into account the overall economic situation and not tying ourselves or being tied by a particular budget situation. To me the crucial thing is the inflation experience. It is much improved. I think there is a good chance, that inflation may not pick up, at least in the near term, given the slackening growth in demand, the increases in capacity, the international competitive pressures, and the labor market flexibility that we have talked about. Maybe this is the time to seize the opportunity, and I don't see that there is much reason to wait. If we go ahead and move today, then I would think that a symmetric directive is appropriate.",262
-fomc-corpus,1995,Governor Kelley.,3
-fomc-corpus,1995,"Mr. Chairman, I certainly support your recommendation. As I said earlier, I see no strong pressures for a change in monetary policy at this moment one way or the other, and under those conditions my normal instinct would be to not move. I think the risks are symmetric and relatively small at this point. But of course we know policy does work with a lag and as this expansion continues to mature, I think the risks are more likely to turn to the down side as time goes along. As a consequence, I can support 25 basis points as a useful and modest move. I certainly concur with the spirit of your proposed statement.",127
-fomc-corpus,1995,Governor Yellen.,4
-fomc-corpus,1995,"Mr. Chairman, I support your proposal. I think we have good reasons to feel pleased with the performance of the economy over the last 18 months. Our job now, as I perceive it, is simply to enable these favorable trends to continue. For the reasons that I have already enumerated, I think the current level of the real funds rate is on the high side. It is arguably higher now than it was last February--as you mentioned, Mr. Chairman--given the decline in inflationary expectations. I think this poses a danger to the outlook, not in the short run, not over 1996, but over the longer term even though I recognize that that is a difficult call about which reasonable people can disagree. Nevertheless, having made that call I think that monetary policy should be forward-looking when we are lowering interest rates just as we are when raising them. On the fiscal policy linkage issue, it seems to me that acting today rather than waiting for a budget deal to be completed will enable us to mitigate at least to some extent the unfortunate public perception of a Fed that plays budget politics by holding out rewards and punishments related to progress on the negotiations. Although having said that, I certainly agree with what Governor Lindsey said. Fiscal policy matters to the economy and, of course, we cannot ignore fiscal policy linkages in deciding on our own policies.",274
-fomc-corpus,1995,President McTeer.,5
-fomc-corpus,1995,I agree with the proposal.,6
-fomc-corpus,1995,President Hoenig.,4
-fomc-corpus,1995,"Mr. Chairman, I would prefer that we not change the funds rate right now given the projections of our economists in Kansas City and in the Greenbook. However, given that we are talking about a small adjustment and given that there would be the expectation, which I would fully endorse, of no discount rate change, I can accept your proposal at this time.",72
-fomc-corpus,1995,President-elect Guynn.,5
-fomc-corpus,1995,"As my earlier comments suggested, I prefer alternative A. I think 25 basis points and a symmetrical directive are the right construct. I don't think I can add to the arguments that already have been made and will spare you a repetition of those arguments.",50
-fomc-corpus,1995,President Jordan.,3
-fomc-corpus,1995,"Mr. Chairman, I think that over time the evidence will accumulate that your hypothesis is correct. I am concerned that that evidence will accumulate very slowly, judged in terms of being persuasive to everybody within the System and to others who need to think about these things. The slow but eventual acceptance of the evidence and the hypothesis means that policy ultimately, ex post, will be viewed as having been too tight for the evolving conditions. I support the move today, but I think we need to be prepared to be a little more aggressive.",105
-fomc-corpus,1995,President Boehne.,5
-fomc-corpus,1995,"It's in times like this that we wish we had measures of the money supply and reserves that would accurately reflect the stance of monetary policy. I think if we did, it would clearly show that there has been a tightening of policy. But we don't have those measures, and we are stuck with the federal funds rate. There is a long history around this table of using and abusing a federal funds rate target. I think what we are doing today is the right thing in terms of using the fed funds rate and making discretionary adjustments when it is necessary to avoid the pegging problem that we have had so often in the past. So, I think what we are doing here is the right thing. This is not the time to be tightening policy. Your admonition about referring to the budget is well taken. I must say, as others have said, that I have been increasingly uncomfortable in recent months about the perception that there is a tight link between what we do in the Fed and what happens on the fiscal policy front. I think it's important that that link be broken. I also agree with you that this ought to be a cautious move. There is enough uncertainty about the economy. I think the asset inflation problem, the bubble effect, is one that we ought to take into account. Our announcement ought to be couched in terms of a reduction in inflationary expectations. I agree that our action should be a 25 basis point reduction in the federal funds rate with a symmetrical directive and no discount rate change. On the issue of opportunistic versus deliberative, I think it should always be clear in this discussion that whether one takes the opportunistic road or the deliberative road, the commitment to achieving price stability is absolutely firm. I don't think there is any difference in the commitment between those who adhere to one process or another. We need to be clear about that. My own view is that the opportunistic approach is the preferred one mainly because it works. There is a practical history to it, and I think that there is a practical future to it. While we are independent, what we do has to make sense to the country as a whole. I think the opportunistic approach will get us to price stability, and I think it will be a more acceptable approach broadly.",455
-fomc-corpus,1995,Thank you. There is a consensus for a 25 basis point decline in the funds rate and a symmetric directive.,23
-fomc-corpus,1995,"The wording of the operational paragraph is on page 15 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to decrease slightly the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",113
-fomc-corpus,1995,Call the roll.,4
-fomc-corpus,1995,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Blinder Yes President Hoenig Yes Governor Kelley Yes Governor Lindsey Yes President Melzer Yes President Minehan Yes President Moskow Yes Governor Phillips Yes Governor Yellen Yes,44
-fomc-corpus,1995,"The next meeting is January 30-31, 1996, and I now move to adjourn.",22
-fomc-corpus,1996,"This is, as you know, our organizational meeting and I turn the figurative gavel over to Governor Kelley to run the proceedings.",27
-fomc-corpus,1996,"Thank you, Mr. Chairman. It happens that I am the senior member of the Board present, and so I have the honor of asking for nominations for the Chairman of the Federal Open Market Committee for the year ahead.",44
-fomc-corpus,1996,I nominate Alan Greenspan.,6
-fomc-corpus,1996,Thank you. Is there a second? SEVERAL. Second.,14
-fomc-corpus,1996,"I hear a motion and a second. Any other nominations? Hearing none, I declare the nominations closed. All in favor say ""Aye."" SEVERAL. ""Aye.""",37
-fomc-corpus,1996,"Opposed? Congratulations, Mr. Chairman.",9
-fomc-corpus,1996,I love democracy! [Laughter],8
-fomc-corpus,1996,"At the Chairman's request, I will proceed very quickly to the Vice Chairmanship where nominations are now declared open.",23
-fomc-corpus,1996,"I nominate William J. McDonough, President of the Federal Reserve Bank of New York.",19
-fomc-corpus,1996,Thank you. Any seconds?,6
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,"That one came a little slowly, Bill. [Laughter] Any other nominations? If not, I declare the nominations closed. All in favor of Mr. McDonough for Vice Chairman signify by saying ""Aye."" SEVERAL. ""Aye.""",53
-fomc-corpus,1996,"Opposed? Congratulations, sir. Mr. Chairman, do you want to proceed from there?",19
-fomc-corpus,1996,"Yes, I'd like to turn it over to Normand Bernard to read the list of proposed staff officers.",21
-fomc-corpus,1996,"Thank you, Mr. Chairman. For: Secretary and Economist, Donald Kohn Deputy Secretary, Normand Bernard Assistant Secretary, Joseph Coyne Assistant Secretary, Gary Gillum General Counsel, Virgil Mattingly Deputy General Counsel, Thomas Baxter Economist, Michael Prell Economist, Edwin Truman Associate Economists from the Board: David Lindsey; Larry Promisel; Charles Siegman; Tom Simpson; and David Stockton Associate Economists from the Federal Reserve Banks: Richard Lang, proposed by President Boehne; Frederic Mishkin, proposed by President McDonough; Arthur Rolnick, proposed by President Stern; Harvey Rosenblum, proposed by President McTeer; and Mark Sniderman, proposed by President Jordan",142
-fomc-corpus,1996,Would somebody like to move that list? SEVERAL. So move.,15
-fomc-corpus,1996,"Are there any questions or discussion? If not, without objection I declare it official. The next item on the agenda is the selection of a Federal Reserve Bank to execute transactions for the System Open Market Account. Do I have any nominations?",47
-fomc-corpus,1996,"Mr. Chairman, I will nominate the Federal Reserve Bank of New York.",15
-fomc-corpus,1996,Is there a second? SEVERAL. Second.,11
-fomc-corpus,1996,"Without objection. We also have to select the Manager of the System Open Market Account. Our current incumbent, as you know, is Peter Fisher, and unless I hear objections I will presume that he is required to remain in office unanimously. Thank you. Mr. Fisher, now that you are re-anointed, you may go forward.",67
-fomc-corpus,1996,"Norm, should we go on to the authorizations?",11
-fomc-corpus,1996,"Let's get those out of the way, sorry about that. We need to. Peter can't open his mouth until we review the Authorization for Domestic Open Market Operations, but that clearly is a theoretical issue. You all have received the text of the Authorization and without objection I will assume that it is renewed. We also have to review the foreign currency instruments--the Foreign Currency Authorization, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations. The current versions of these instruments were circulated to the Committee. Then, of course, you have also received a review of the ""warehousing authority"" incorporated in both the Foreign Currency Authorization and the Foreign Currency Directive. Does anybody have any comments with respect to any of those documents? If not, I will need two votes. The first vote will be on the Foreign Currency Authorization, the Foreign Currency Directive, and the Procedural Instructions. Would somebody like to move these items? SEVERAL. So move.",194
-fomc-corpus,1996,"Without objection. Secondly, we need reauthorization of the warehousing authority. Would somebody like to move that? SEVERAL. So move.",29
-fomc-corpus,1996,"Without objection. Thank you very much. A document also has been sent out to you with proposed changes to the Program for Security of FOMC Information. The memorandum, I think, was reasonably straightforward. Does anybody wish to make any comments or ask any questions? If not, without objection I will presume that it is authorized. Finally, we come to our regular meeting agenda, and I seek approval of the minutes of the Federal Open Market Committee for the meeting of December 19, 1995.",101
-fomc-corpus,1996,I move approval.,4
-fomc-corpus,1996,"Without objection. Peter, you have awaited your turn and you may now proceed.",16
-fomc-corpus,1996,Thank you. [Statement--see Appendix.],9
-fomc-corpus,1996,"Can you explain why the arbitrage that has been put in place by a number of hedge funds--that is, borrowing yen, converting to dollars, and investing in dollars unhedged--does not total more than the $30 to $50 billion that I hear bandied about? Are those numbers anywhere close to being correct? I find them very low for that type of arbitrage in which there is a very substantial potential for a sizable return. Let me say that it is not an arbitrage transaction; it is double positioning.",107
-fomc-corpus,1996,"Right. I have thought of it, and I think the market thinks of it, as two distinct positions. In one, they are long dollars against yen. Secondly, they choose a sector of our yield curve, say the five- to ten-year area, in which to be long. They may have borrowed yen somewhere on their balance sheet as well, given the low yen interest rates. I don't have any better estimates of what the total positions are in these transactions than the one you cited, Mr. Chairman. I think it is a type of transaction that has been talked about more than it may have been adopted. It has pointed the overall market in a direction of confidence in those two trades. That is, its principal impact has been in getting people to think that the dollar was going to appreciate and that there might be value in investing somewhere along the U.S. yield curve. That has given people greater and greater confidence.",186
-fomc-corpus,1996,"I am not talking about the U.S. yield curve. I am just saying that it seems attractive to go out and borrow yen at 1/2 percent or whatever, convert the yen to dollars, and invest the proceeds in 5-day U.S. instruments. The exchange rate would have to fall fairly substantially to offset the gains in that sort of play. So, I am quite surprised there is not more of that type of positioning.",89
-fomc-corpus,1996,"There are a number of financial intermediaries who manage discreetly where they choose to borrow and the size of their positions. I don't think that is being picked up in what people talk about as the ""hedge fund"" trades. The traditional investment banks simply look around the world to finance themselves at the lowest cost they can. There are people who do that within their hierarchies, and there are other people who choose where they should be investing. I assume there is a good deal of that kind of funding operation going on. That may be what you feel is missing in the estimates.",118
-fomc-corpus,1996,"Let me ask another question of you and perhaps Ted Truman. Four to six months ago, whenever new data on the total German economy were released, there was a general view that the data were of very poor quality and had to be appraised very cautiously. Do we have any subsequent view of whether or not the data are more reliable at this stage?",70
-fomc-corpus,1996,"They are still putting out the data with warnings on them and that could continue for some time. They have had a number of changes in their statistical systems incorporating both their going to pan-German data and aligning their statistical systems with the European norms. It is not clear yet what can be interpreted as reliable data. In August or July they changed their CPI, for example, and all of a sudden they lost 1/2 percentage point on their rate of inflation.",93
-fomc-corpus,1996,That's better than the central bank!,7
-fomc-corpus,1996,I thought it was very clever myself. It elimi-nated the difference between the French and the German inflation rates!,24
-fomc-corpus,1996,Any further questions for Peter?,6
-fomc-corpus,1996,"I want to ask Peter about these sweep accounts. Looking at the aggregate numbers, the introduction of those accounts accelerated markedly in January. Do you have any sense about how far that phenomenon has played out in the banking system? If it continues, what are the longer-term implications with respect to the reserve market? Obviously, reducing required reserves and making up for it by holding excess reserves is self-defeating.",81
-fomc-corpus,1996,"I am afraid we all think it can go a good bit further. Beyond that, I don't know if we have anything very scientific to offer you.",30
-fomc-corpus,1996,"You are right, President Melzer. They did accelerate in January and also in December. We keep projecting that the adoption of sweep accounts will simmer down a little, and then another large bank or large bank holding company chain decides to adopt them and the reserves effect grows even faster. I should note that the banks compensate not so much by holding excess reserves, although that may happen in the short run as they adjust, but by holding clearing balances that they can use to pay for services. But that has been a small fraction of the reduction in required reserves, I think on the order of about 15 percent on average. So, the total required reserve balances do continue to drop. I think our projection indicates that once we got through this seasonal low, the rise in the seasonal demand for reserves would offset this trend, and we would be okay for a while. What will happen a year from now is another question.",183
-fomc-corpus,1996,"Further questions for Peter? Peter, did you request ratification of foreign currency transactions as well as your domestic transactions?",23
-fomc-corpus,1996,I got repaid. You don't mind that I got repaid on the Mexican swap drawings!,19
-fomc-corpus,1996,We have to approve repayments?,6
-fomc-corpus,1996,You ratify that I accepted repayment.,8
-fomc-corpus,1996,Would somebody like to move to ratify Peter's acceptance of the repayment? SPEAKER. So move.,21
-fomc-corpus,1996,I second that and move a favorable review of the series of dances he briefed us about. [Laughter],23
-fomc-corpus,1996,Without objection. Would somebody like to move ratification of the Domestic Desk operations? SPEAKER. So move.,22
-fomc-corpus,1996,"Without objection. Let's now move on to the Chart Show with Messrs. Prell, Slifman, Stockton, and Truman.",27
-fomc-corpus,1996,"Thank you, Mr. Chairman. We will be referring to the material that has been placed in front of you. It's entitled ""Material for Staff Presentation to the Federal Open Market Committee."" [Statement--see Appendix.]",43
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,Thank you very much. Any questions for any of the gentlemen? Mr. Parry.,18
-fomc-corpus,1996,"Mike, I have a question about the weakness in the economy that we are experiencing at the present time. If I look at the quarterly projections in the Greenbook, it would appear that the weakness in the current quarter is temporary and is related to some extent to the weather. If you were to characterize the future quarters through the end of 1997, the period would actually show above-trend growth on average. Do you think that is a good characterization of the forecast?",95
-fomc-corpus,1996,I think I would characterize the growth on average after this quarter as being so close to the trend as not to be perceptibly different.,27
-fomc-corpus,1996,That's fine.,3
-fomc-corpus,1996,"Our forecast does suggest that the recent weakness is likely to be a transitory phenomenon. In terms of the available information, the weakness has been highly concentrated, in effect, in the manufacturing sector, with producers moving quickly to gear production down in an effort to reduce inventory investment to a more sustainable level. Once that adjustment has occurred, we don't have a drag from inventory investment and we return to trend growth. This presumes that final demand is reasonably well maintained through this process and that we don't get a big contraction in employment that would reduce income in a serious way. That is the issue that was addressed by all of my colleagues in looking at some of the key sources of impetus to income and employment growth: business fixed investment, exports, and reasonably well-sustained consumer demand despite rising consumer debt burdens. Weather probably is a negative, but we have not attached a great deal of quantitative significance to that for the quarter as a whole. We think it is damaging in January, but that there will be a snapback over the next couple of months. Construction will resume and we will get essentially back on track by the end of the quarter.",228
-fomc-corpus,1996,The baseline policy assumptions keep the economy roughly at trend?,11
-fomc-corpus,1996,"That is our judgment. As I have been careful to suggest, we would not say that we have come close to knowing these relationships with such precision that we would want to pinpoint the federal funds rate down to the nearest quarter of a percent. As best we can see at this point, a real funds rate that currently looks a bit above the historical average seems to reasonably balance the risks and foster sustained economic growth at a pace close to trend growth.",89
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mike, I have just a quick question on the fourth-quarter projection. As you pointed out, total production worker hours are reported to be about the same for the fourth quarter as in the third quarter. I know these data don't move in lock step, but we did get a significantly stronger GDP result in the third quarter than you are projecting for the fourth quarter. Why did you mark the fourth quarter down? Was it mainly because of the anecdotal information?",91
-fomc-corpus,1996,"Until very close to the end of our projection process, we had to rely very heavily on anecdotal information. Toward the end of the process, we received the PCE estimates for October and November and they are a big chunk of total expenditures. Those estimates did not suggest a very strong PCE contribution, which reinforced the anecdotal information in leading us to discount somewhat what we were seeing in the hours data. Looking at the behavior of the unemployment rate as another labor market indicator, we essentially had stability in that rate from the third to the fourth quarters, which would be broadly consistent with trend growth of output. Thus, 2 percent growth seemed a reasonable place to be. If I went solely by the anecdotal information, I might have been inclined to write down a lower number. The retail sales data we received this morning would trim a couple of tenths from our projection, all other things equal. I think we are in a reasonable ballpark, but at this point the range of possibilities clearly is very wide.",205
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"All things taken into account, I am struck by your fairly benign forecast when I compare it with some of the rhetoric from a lot of other sources. I also was struck by your comment that if you were going to rely on anecdotal information, you would have written down a lower number. I feel that way also. Yet, when we look at the data, we still have this mix that looks pretty strong. I am referring to the housing data, to auto sales which don't look too bad despite a production cutback, and to personal income which looks fairly good even though consumption has bounced around a bit. Do you have any sense of why people seem to talk so negatively when things really don't look that bad?",143
-fomc-corpus,1996,"It is always dangerous to judge these things by the anecdotal information, though sometimes such information provides an early sign of a development that we can't perceive yet in the data. With the lags we have experienced recently in getting the data, I think we may have to look at those anecdotal reports a little more closely than we might usually. On the statistical side, some of the indications of trends have not been unambiguous, and some of them have been surprisingly weak. Looking at the housing indicators, the recent pattern of single-family starts and sales has not been particularly robust. We had a spurt in the summer and then we had some slight softening in home sales and so on through November.",141
-fomc-corpus,1996,"Permits are not too bad, though.",9
-fomc-corpus,1996,"Permits look a little better. We are hopeful, looking at loan applications and so on, that there is an uptick in train, only temporarily interrupted by all this snow. Looking at the trend in capital goods orders, we have pointed out for some time that there was some moderation in their growth aside from computers. So, I think that even the data show hints of deceleration. We felt all along that that was coming and was appropriate if the Committee were concerned about not overshooting noninflationary levels of resource utilization. Why are people so sour at this point? The people who do the surveys at the University of Michigan and the Conference Board have noted in their reports that they felt it was possible that the bad weather was having adverse psychological effects. They also point to the layoff announcements, which seem to have picked up in the last few months for large corporations. The AT&T announcement was particularly striking. The disarray and closing of the federal government, which affected hundreds of thousands of people directly, may have left people unsure about what kinds of stimuli were coming from the federal sector. These factors may have played a role, but the recent downturn in the confidence measures comes after several months of very slow consumption growth. So, I am hard pressed to point to anything very tangible to explain why we have had this moderation. I guess this is one reason we are in effect giving some weight to the possible indication of some financial distress at a time when the stock market has been booming. The latter is certainly an indication that someone does not feel too insecure.",313
-fomc-corpus,1996,Right.,2
-fomc-corpus,1996,"Historically, we have not had recessions with the stock market going up. It would be astonishing if we were to see a much weaker picture without some softening in the stock market.",38
-fomc-corpus,1996,"Mike, you did not mention motor vehicles in January, which is perhaps the weakest of all of these.",21
-fomc-corpus,1996,"The anecdotal reports for that industry are quite weak and certainly tend to offset the report of a spurt in sales in December. But averaging through that, we still would come out with a moderate sales pace that is quite consistent with the trends that have been in place for a while. That does not rule out a downside surprise, of course.",69
-fomc-corpus,1996,Any further questions for any of the gentlemen?,9
-fomc-corpus,1996,"I have a question for Dave Stockton relating to Chart 17. It concerns this issue about compensation and labor market tightness. In the middle panel, you make an adjustment that, if I understand the red line correctly, raises the help-wanted advertising index. I would think the implications of that are to deepen the mystery a bit. The chart seems to be suggesting that, after the adjustment, help-wanted advertising was somewhat greater than it would have been measured otherwise, and that would seem to put more pressure on compensation than we got.",108
-fomc-corpus,1996,Indeed it does in some sense.,7
-fomc-corpus,1996,I understood you to say the reverse.,8
-fomc-corpus,1996,"What I meant to imply was that just looking at the unadjusted help-wanted index, the black line, might have helped to solve the mystery. One might have looked at that and concluded that there are many fewer vacancies at this point in time.",51
-fomc-corpus,1996,Okay.,2
-fomc-corpus,1996,"Given our view that it probably has become a less reliable indicator, we made the adjustment for the increased use of personnel supply agencies. But you are right; in some sense, the adjustment does not resolve the mystery. The adjusted index is a little below the highs reached in the late 1980s, but not very much.",66
-fomc-corpus,1996,"Right, thank you.",5
-fomc-corpus,1996,Further questions?,3
-fomc-corpus,1996,"I want to add something on autos; I will be saying more later. We had conversations with one of the Big Three yesterday, and a couple of things came out on the picture for January. One is that they view the sales that they lost due to bad weather as just temporary. They expect to make those up. If somebody is going to buy a car, they are still going to buy it a week later or two weeks later when the weather clears up. Second, they did seem to detect a slight uptick in sales during the last couple weeks of the month--nothing to write.home about, but sales did seem to be moving in the right direction.",133
-fomc-corpus,1996,Four-wheel drive vehicles no doubt!,7
-fomc-corpus,1996,"No. Sales of light trucks have been strong all along. Obviously, cars sales are the area where there has been real weakness.",26
-fomc-corpus,1996,It's clear they have made a move to reduce their production this quarter.,14
-fomc-corpus,1996,Right.,2
-fomc-corpus,1996,"They perceive that their earlier expectations were too rosy. We felt that was true all along, so the shock in terms of our forecast is milder. But it has played a role in our perception that this is going to be a pretty weak quarter.",50
-fomc-corpus,1996,"Further questions? If not, who would like to start our roundtable? President Jordan.",18
-fomc-corpus,1996,"First of all, our District has a very large facility that has recently been added to our idle capacity and will stay idle for a long time--the Cleveland Browns' stadium. [Laughter] I think Mike Prell made a remark that it was a bad January. It's always a bad January in my District. [Laughter]",67
-fomc-corpus,1996,It is unusual to have it here in Washington.,10
-fomc-corpus,1996,"In December, the Chairman remarked that the economy had the feel of a car that had its hand brake on. I think the economy not only has the hand brake on, but it has a flat tire. We may be talking about a 12-wheeler, not an 18-wheeler, at this table, but I know one of those tires is flat. We hear from large truck supply companies that their consensus forecast for sales of large trucks is going to be down 28 percent from last year. think sales are going to be down that much; they say about 20 percent. Large truck sales set a record last year when they were 8 percent above the previous record in 1994. In any case, when activity in an industry of that size drops off that sharply, there is going to be a substantial effect. I am interested in what Mike Moskow said about autos. Maybe he will elaborate, because we are not hearing the same story from auto and auto supply companies in our District. They are much weaker. There are indications that firms in the steel industry are going to try post another price increase. They posted one last July; it did not hold. Even if a new increase holds, it will leave steel prices below their level in the first quarter of last year. Steel executives continue to tell us about the new capacity that will be coming on line this year and next, so at least some of the folks we have talked to in that industry are telling us that they think steel prices are going to be under downward pressure. One of the reports that caught my interest came from an executive of a banking company that operates throughout the region. He has seen a fairly significant pickup in commercial loan demand over the last couple of months. It turns out, however, that he does not see the pickup as a sign of economic strength but rather of weakness. He sees businesses hitting their bank lines because of cash flow constraints related to growing inventories that need to be financed. His conjecture is consistent with early signs of some deceleration in the District business situation that we are seeing and hearing about. Let me turn to the Greenbook. I do not know whether to be encouraged or discouraged. On the one hand, when I look at the 3 percent inflation projection out through 1997, I can't find it acceptable if we have an objective of price stability. Either we have to have a different model because the current assumptions are not going to produce the result that we want, or we have to cave in on what price performance is acceptable. Don Kohn's presentation at the December meeting of an opportunistic framework for policy--where the Committee waits for something to happen--is a positive note. The last time there was a break in the inflation trend--from the 4 percent or so underlying trend rate that had prevailed for 7 or 8 years to a 3 percent trend rate--was in 1991. Our staff does a break analysis that says inflation has been on a 3 percent trend since 1991. My sense in talking with people, my staff in particular, and doing some reading about the 1990-91 period is that there was no indication at the time that a break was imminent. Only sometime later could we say that the trend broke and we were now operating at a 3 percent inflation rate. There is some tentative evidence that we could already be in the early stages of another break, but we are not going to know for a while. Even though the central tendency of the members' inflation forecasts prepared for this meeting shows a rate a little below 3 percent, but in that range, and the Board staff projection is 3 percent, that does not discourage me as much as it might normally. That's because I do not think we will be able to anticipate the next downward break in the underlying rate. I would like to finish 1997 with an inflation rate around 2 percent, and I do not see anything that persuades me that that is impossible from here. I don't really understand, using Don's framework of last December, how we can know when to be opportunistic and respond. A part of the explanation as to why the 1995 inflation forecasts of a year ago, our own and the Blue Chip, did not materialize was that we had a favorable productivity shock. If that is a good description of what happened, that we got lucky, there should have been some opportunity to lock in a break in the trend of inflation. I don't see that opportunity yet in the forecast.",916
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I wanted to talk about Cathy Minehan's perception of why people feel so grumpy and to do so in the context of the staff's Chart Show presentation. Larry Slifman very generously provided charts 11 and 12 a little early today, so I had a chance to look at them and at some of the data behind them. I am more pessimistic than the staff about the state of the household sector. My first observation is that, although the distribution of assets and debt--particularly the distribution of assets--does not look like an issue of rich or poor, I don't think the issue of rich or poor is the right way to look at it. If we look within each income class, we get a very different picture of the distribution of assets. Within each class, asset holdings are highly skewed. I have thrown out the very poor and the very rich income classes because there are problems in interpreting both of those. If we look, for example, at the $20,000 to $30,000 income class and the distribution of interest income within that class, the top 4.7 percent got 60 percent and the top 13 percent got 79 percent of the interest income received by that class. So, it does not matter that, broadly speaking, the $20,000 to $30,000 class has some assets. Of course they do, but those assets are concentrated in a handful of people within that income group. The same thing is true further up the income scale. In the $50,000 to $100,000 income class, the top 8.4 percent of taxpayers got 70 percent of the interest income received by everyone in that class. Again, asset ownership is very concentrated and is sorted not by income but by other factors. Age probably is one of them. If we add it all up, we get some very surprising statistics: 1.9 million low to moderate income households with incomes under $30,000 got $29 billion of interest income. That is more than 16.5 million households earning over $50,000 received, including some making more than a quarter of a million dollars. Sorting this way does not, in my mind, overcome the fact that capital income is unequally distributed. It just happens not to be unequally distributed in ways that would show up in total income. I would like to focus, in particular, on column 5 in chart 12. It shows financial assets greater than non-mortgage debt. I might mention first of all that I calculated my own financial position and to my delight I actually have financial assets greater than my non-mortgage debt. Perhaps I should pass that information on to the Bank of New York in Delaware! I am in the lucky half of people in my income class. But the fact is that half of all people, even in the well-to-do range, have non-mortgage debt in excess of their financial assets. Let us focus on the median rich person and see what has happened since 1992. In 1992, household financial assets, according to the flow of funds, totaled $16.5 trillion and non-mortgage debt was $1.2 trillion. For the person with the median income those two numbers were the same, but for the household sector as a whole, financial assets were 13.5 times non-mortgage debt. A way to start a simple thought experiment is to say that 12.5/13.5 of financial assets do not count as far as the median well-to-do household is concerned. What has happened since 1992? If we were to have no improvement in that situation and no change in the distribution of financial assets or debt, household financial assets would need to have risen by some $4.3 trillion by my calculations to offset the reported increase in non-mortgage debt. In fact, the increase has been only about 3/4 of that amount. So, again, just taking the numbers in the table and assuming no changes in distribution, we have had a worsening of column 5 since 1992. In other words far more than half of upper income households, not to mention lower income households, do not now have financial assets that exceed their debt. I think even that result may be optimistic. The reason for that has to do with the Census Bureau report on what has happened to income since 1992. In the aggregate, income has done quite well. We have had roughly a 5 percent increase in household real income, but 77 percent of all the income gains went to the top 5 percent of households; 21 percent went to the next 15 percent. The remaining 80 percent of households shared only 2 percent of all the income gains over the last two years for which we have these data, 1993 and 1994. I would suggest that a lot of these people probably have had their debts worsen relative to their financial assets. The last point I would make, and it relates to the top of chart 12, is that starting in the third quarter of 1994 through the third quarter of 1995, households have actually been net sellers of stock according to the flow of funds data. This is not counting capital gains. The reason why that might be troubling is that, in a booming stock market, they must be liquidating some of their holdings to pay off something. I would suggest, however, that households are in fact consuming some of their capital gains in order to cover short-falls between their income and their consumption. So, there is reason to be pessimistic, not in the overall numbers but in looking more closely at the majority of households that have not been enjoying income gains and are trying to maintain levels of consumption. Thank you.",1183
-fomc-corpus,1996,"I would like to ask one question of Mike Prell or Dave Stockton or Larry Lindsey--whoever knows the answer. The directly held corporate equities to which Governor Lindsey has been referring include both closely-held small corporations and publicly marketable corporations. The equity that is available in the first case is obviously highly illiquid. Do we know what proportion of the directly-held corporate stock of households, excluding mutual funds, is traded on public markets?",87
-fomc-corpus,1996,"I am sorry, but I do not have an immediate answer. I have seen estimates, but that information is not readily available to me.",28
-fomc-corpus,1996,"I do not know the answer either, and I would appreciate it if someone could get the information. It might be useful to evaluate the extent of directly held stock in the context of Governor Lindsey's discussion in which he raised a considerable issue with regard to the financial condition of the household sector. President Parry.",62
-fomc-corpus,1996,"Mr. Chairman, economic growth in the Twelfth District has been exceeding that of the nation in recent months. The western states of Arizona, Nevada, Utah, and Oregon continue to be among the fastest growing in the nation. Labor demand and the consumer sector have remained buoyant in these areas. Oregon's tax receipts grew fast enough in the last fiscal year for the state to issue a partial rebate in November, boosting holiday season retail sales. California had been holding down the District's overall performance, but its economy is now expanding faster than the rest of the United States according to data from the state. Even in Washington State, where many were worried about disruptions from the Boeing strike until it ended in mid-November, anecdotal reports suggest strong subsequent retail activity. Of course, District retailers did not have to contend with the paralyzing storms that locked up other areas of the country, and the December federal government shutdown noticeably hurt retailers in only a few of the most tourist-dependent areas. Our District also seems to be relatively well positioned to weather sluggish demand growth in the European economies. Twelfth District states export more to newly industrialized Asian countries and Japan than to Europe. We are also producing a lot of high technology equipment for which export demand has been strong. These factors helped District exports to increase faster than total U.S. exports last year, excluding a decline in aircraft exports from Washington State. Turning to the national economy, based upon recent anecdotal and financial data and the recently available monthly indicators, I think we can place a low probability on the economy going into a slump in 1996. Moreover, because of long lags, the inflation outlook this year--and I would say even next year--is barely affected by uncertainties about economic activity. I remain skeptical that the recent dropoff in inflation will be maintained. The unemployment rate remains somewhat below, and certainly is not significantly above, most estimates of the natural rate. In addition, the recent beneficial effects of lower health care costs on overall inflation are likely to dissipate in the future. As a result, I concur with the Greenbook in expecting CPI inflation this year to be at or somewhat above last year's rate. Thank you, Mr. Chairman.",443
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"The economy in the Philadelphia District was slowing during the final months of 1995, and this slower trend has carried over into 1996, aggravated by unusually bad weather. The retail sector has been soft. Holiday sales were below expectations, and January sales have been hurt by severe weather. Auto sales were fairly good in December but fell sharply in January. Manufacturing shows declining demand. Most manufacturers indicate that inventories are not at worrisome levels. Realtors by and large say that most markets are improving slowly. Vacancy rates for office buildings declined last year in many parts of the District. The notable exception was southern New Jersey. Rental rates rose in some areas and were steady in others. Landlord concessions were less significant last year. The demand for industrial space exceeds the supply. The demand for retail space, however, is soft except for large supermarkets and other very large retail operations. The residential market also appears to be better than it was earlier. The outlook for the regional economy in 1996 is cautiously optimistic, with more emphasis on ""cautious"" than ""optimistic."" Business people are hopeful, but they are more concerned about the outlook now than they were six weeks ago. I sense more concern, more restlessness, more jitteriness, all of which would dissipate with a couple of good months or alternatively intensify with a couple more soft months. Price and wage pressures remain subdued, with fierce competition and job insecurity acting as dampers. The persistent downsizing, with layoffs at all levels regardless of performance, not only is undermining consumer confidence in the District but it is also undermining employee morale in affected companies. In fact, there has been modest job growth in the region, but the widespread perception is one of job loss. Turning to the national economy, the most likely path for 1996 is moderate growth and contained inflation. I sense somewhat more downside risk to growth, however, than upside. I think the consumer sector is a clear risk, and the export sector is another source of uncertainty. The inflation outlook strikes me as more symmetrical; I think that the occurrence of less inflation is about as likely as the development of more inflation. Thank you, Mr. Chairman.",440
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, the Fifth District economy is still expanding although probably at a somewhat slower rate in recent weeks. I get this information from several sources. We do some surveys, such as our regular manufacturing and service sector survey, which suggests some deceleration in both of these areas as in other parts of the country. We are getting a good bit of negative anecdotal information about retail spending. On that score, we have four sizable retail chains headquartered in Richmond, all of which have been reporting weaker sales for the month of December. Also, is the CEO of a large home improvement and building supply Many of you, I am sure, are familiar with it. He told us a couple of weeks ago that his sales had dropped in December. Not all of the reports that we are getting are weaker. Some reports, notably from West Virginia where much of the industrial activity in our District is located, have been on the more bullish side. For example, chemical producers there are still operating at close to capacity levels, and a big machinery manufacturer expects another year of good sales following a strong showing last year. On balance, however, I would have to say that these optimistic reports are in the minority. The bottom line is that business activity in our region generally appears to be moving ahead more slowly. I don't get the sense that activity is declining in any precipitous way as yet, despite the snowfall that shut down much of our District for a couple of days and despite the government shutdown, which I believe would have a larger impact on our District than on many others. On the national scene, the information that we have received over recent weeks obviously is still incomplete, but it suggests on balance that the economy was at least holding its own through the end of last year. As I mentioned earlier, some of the best information that we have on the fourth quarter is the labor market data. They include what I believe is the most specific and comprehensive measure, production worker hours, and that was a reasonably strong figure. It was consistent with a fairly good GDP result in the third quarter. On the spending side, of course, we have anecdotal reports of weak holiday sales despite discounting. I don't think we can ignore those reports, but we have to wonder how much of this is really a reflection of weaker aggregate demand and how much may be a reflection of extraordinary structural changes that are taking place in that industry. In fact, a lot of the hard data for the fourth quarter are actually fairly strong. I have not had a chance to look at the retail sales data that were released today nor the consumer sentiment figures that you mentioned earlier, Mike, but I think I am correct in saying that the level of consumer spending in November was a couple percentage points higher than the third-quarter average. And until this latest consumer confidence figure was released, those data were holding up quite well. The series is volatile and the recent period in which that survey was taken was an unusually rough one. As a result, the consumer confidence data may not be a very accurate indicator of true sentiment. Apart from federal expenditures, I don't see any signs of precipitous deceleration in the other sectors of the economy. So, on balance, it seems to me that the information we now have says that the economy is ""hanging in there,"" to use a slang phrase, at a fairly high level of activity in relation to capacity in many industries and in labor markets. Finally, these Humphrey-Hawkins meetings give us a chance to focus a little more specifically on our progress toward our longer-term price stability objective. I have a couple of quick thoughts about that. On a fourth-quarter-to-fourth-quarter basis, the CPI has risen about 2-3/4 percent in each of the last three years. The Greenbook is now projecting that inflation will move up slightly to about 3 percent in 1996 and 1997. It also is projecting the same general pattern for the core CPI over that two-year period. Obviously, that would not be a huge setback, but it would be a move in the wrong direction and it would mean a couple of years without further progress toward our longer-term objective. Also, if we study the numbers carefully, I think we are beginning to see some faint, but nonetheless discernible, signs of a firming in wages and labor costs. A couple of points relating to this firming that I noted in reading over the Greenbook: the increase in average hourly earnings was 2.8 percent in 1994 and 3.2 percent in 1995. This may be evidence that the economy is operating in the neighborhood of the NAIRU without a lot of head room. Also, I noticed that the Greenbook is projecting a 3.1 percent increase in the employment cost index in 1997 compared with 2.6 percent in 1995. Again, none of this indicates a severe impending setback to our longer-run efforts to bring the inflation rate down, but it does suggest less progress than we should be looking for in the future. This should have some bearing on our discussion of both the short-term and long-term policy situation later on.",1039
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"New England grew more slowly in the second half of 1995 than in the first half, and its slowdown was more pronounced than that of the nation as a whole. Moreover, in terms of employment, the region saw a change in the types of industries experiencing either growth or at least declining trends in job losses. The region's manufacturing industries continued to lose jobs, but the rate of decline dropped a little below that of the nation as a whole. New England previously had been exceeding the national rate of job loss for most of this recovery. By contrast, the nonmanufacturing sector that has led our recovery, such as it has been so far, only grew at about half the national pace last year. The weakness was concentrated in the finance, real estate, and insurance areas where jobs declined from December to December, but retailing and transportation were also weak. Reflecting the relatively favorable employment trends, manufacturing reported satisfactory results for the year, particularly the smaller firms. These firms are operating with some spare capacity as evidenced by a small survey that was done right after the blizzard to determine the impact of that weather phenomenon on production. The responses highlighted the fact that despite the closing of local production facilities for a day or two, most firms probably will be able to make up all the lost output within a month. Only one firm, a medical instruments producer, did not anticipate being able to make up the lost output simply because they already were operating at full capacity. Manufacturers also report few price pressures and no major concerns about labor costs or availability except for particularly high-tech specialties. Retailing, in contrast, had a very weak holiday season. While consumer demand was lackluster, we believe that retailers were affected as much by the fact that the New England region is more ""over-stored"" than elsewhere in the country. Sales for the regional chains have been disappointing despite heavy promotions, again partly due to the continued expansion of national superstore chains such as Wal-Mart. The commercial real estate market is said to be steady. Insurance contacts reported strong sales for the fourth quarter but indicated that their employment was flat to down. On a state-by-state basis, the northern tier of states continues its pattern of relatively strong growth, while Connecticut and Rhode Island continue to lose jobs. Massachusetts is on a solid if not spectacular growth path and is the only New England state where current patterns of growth are well in line with historical patterns. Every other state is weaker than usual over a long period. Turning to the nation, despite the lack of good data, a background of negative rhetoric, and the noise introduced by government shutdowns, snow storms, floods, and whatnot, I continue to be struck by the continuing sense of slow but solid growth in such areas as housing, overall employment, personal income, and auto sales --with some blips in January--and by the ebullience of financial markets. There is also a clear lack of any significant inflationary pressure, although there could very well be some uptick in inflation, as Bob Parry mentioned. It seems to me that we ought to be fairly happy with this set of circumstances and fairly happy as well with the Greenbook projections. In that regard, we have relatively few differences with the Greenbook projections. They strike us as a tad overly optimistic in terms of the foreign outlook, for example, but in general we agree. It is unlikely that we are going to see the straight line patterns through 1997 that are projected in the Greenbook. There is certainly some risk that this expansion is reaching a cyclical peak and that downside risks have increased somewhat. But that said, I still think that the near-term prospects look reasonably good, and we need to maintain some concern about where we are with respect to capacity constraints.",755
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. To answer Cathy's question on changes in consumer confidence, I am struck by the fact that I have a pretty good report for my District, and I am beginning to wonder if I ought to give it or not! Our District economy continues to be strong overall with only a few signs of weakness in a couple of areas that I will mention. For example, gains in payroll employment during the fourth quarter were solid throughout our District. District manufacturers continued to operate at or near capacity, with a couple of exceptions. Good growth in the durable goods manufacturing sector has continued. Our directors report continued strength in commercial construction activity in many, if not most, parts of the District and even some modest pickup in residential construction. Capital and loans are still available and even plentiful in some cases. Although the District economy is generally healthy, there are a couple of weak spots: energy activity remains sluggish despite some recent price increases, and continued financial losses in the cattle industry are hurting our farm income outlook even though crop prices are at their highest levels in some years. Wage and price pressures remain modest in the District despite overall strength in the economy. Labor markets remain tight in some parts of the District and some of our manufacturers continue to report shortages of skilled labor. Despite that, upward pressures on wages and prices remain subdued. For the national economy, our projections are very similar to those in the Greenbook. On the real side, we agree that the outlook remains favorable, with real GDP likely to run at or perhaps a little below potential. Because of the mild overshooting in the level of resource use that we have experienced, however, I think we will see an inflation number that is comparable to last year's, about 3.0 or 3.1 percent. So, I think the Greenbook is a little optimistic on that front. Also, with growth running somewhat below potential, I expect unemployment to drift up a little this year. Still, we are essentially in agreement with the Greenbook, and we share the view that the economy is on sound footing at this time. Overall, the fundamentals remain sound or satisfactory as we look to the future.",433
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, economic activity in the Seventh District continues to expand but at a moderating rate, as I mentioned at our last meeting. I sense that we are outperforming the rest of the country, with some sectors experiencing weakness and others strength. Fairly strong business activity was reported for farm and heavy equipment manufacturers, the light truck segment of the auto industry, the professional services sector, and the food segment of the retail services sector. The farm equipment manufacturers are benefitting from the high grain prices of last year. The sectors that display some weakness include cars and heavy trucks as well as some retail segments. On balance, the reports from our retailers were mixed, indicating that January sales were coming in at or somewhat below expectations. Those expectations seem to be quite modest, with a couple of retail chains looking for January same-store sales to be about unchanged or up only 1 or 2 percent from last year. Our contacts among national retailers said that their Seventh District store sales were holding up better than elsewhere in the country, in part because our District weather has been relatively more favorable to date. Reports on retail inventories also were mixed; several larger retail chains were in good shape, while other retailers were still trying to trim their inventories. The effects of lackluster Christmas sales and excess capacity continue to have an adverse impact on District specialty retailers. Store closings continue to be reported in this sector. Seventh District respondents to the Senior Loan Officer Survey expressed concerns about retail trade lending, both for working capital and for real estate based loans. Housing activity is still fairly strong in most parts of the District, as shown by our data after adjusting them as best as we can for the weather. In the motor vehicle industry, demand for light trucks remains fairly strong, but that is not true for cars and heavy trucks, as Jerry Jordan and I mentioned earlier. In terms of the orders for light trucks, the sales figures for January are particularly difficult to interpret because of the shifting of a few days' sales from early January back into December and, of course, the subsequent weather disruptions. To elaborate on what I mentioned earlier, January is not going to be a good month overall for auto sales, though sales improved slightly as the month proceeded. Our contacts suggest that auto sales nationwide will be in the low 14 million range in January. If we average that with December, the number will exceed 15 million units, which is a relatively healthy pace. Sales for the entire year in 1995 were 14.8 million units. Of course, there are incentives in place to boost sales, and those incentives have either been increased or they will be in response to inventory imbalances and the need to remain competitive. Mike Prell mentioned that first-quarter production plans for cars have been cut back further to adjust for high inventories. To give you some examples of the ripple effect of these production cuts, weakening order rates in January have been reported by our auto suppliers for mufflers, brakes, bearings, piston rings, and related products. So far, there has been no reduction in purchase orders for steel by the auto companies. As Jerry mentioned before, steel prices are down significantly. Two increases are scheduled and there is, of course, some uncertainty as to whether those increases will hold. Turning to the heavy truck industry, production will be down significantly from 1995, but output in 1996 should be closer to the normal trend. This is in line with what we talked about last fall when the orders were dropping significantly, but manufacturers were maintaining their production levels. Obviously, they had to catch up at some point. In 1994 and much of last year, it was orders from the large haulers that supported the market. More recently, the order rate has reflected demand from the small- and medium-sized shippers, with cancellations by the large haulers compensating for over-ordering last year. District manufacturing activity outside the motor vehicle industry continues to expand, although at a more modest pace. The purchasing managers' surveys for Chicago, Detroit, and Milwaukee indicated expanding orders and production in December. In contrast, Detroit's auto component in the purchasing managers' survey showed contracting activity in western Michigan. In January, the Chicago purchasing managers' index, which should be coming out tomorrow and is confidential until then, is at 50.9, down from 54.8 in December. This is an indication of a continuing but more modest expansion in the early part of the year. Economic activity in the agricultural sector has been mixed. Corn and soybean producers enjoyed a very good year, but livestock producers found 1995 particularly tough due in part to the high cost of feed grain. A growing shortage of corn combined with its high price may force livestock producers to liquidate significant portions of their stock in early 1996, increasing the volatility of meat prices. However, there is little evidence as yet that such a liquidation is starting. There is a great deal of uncertainty about acreage planning decisions for 1996 since Congress has not yet passed new farm legislation, which is particularly important for that industry. Business loan growth at District banks has started to moderate in line with the general slowdown in fourth-quarter business activity. Credit quality generally remains quite good on the commercial side. On the consumer side, consumer debt burdens appear to be stabilizing and the rate of increase in consumer loan delinquencies appears to be moderating. Labor markets generally continue to be tight throughout the District, especially in Indiana, Iowa, and parts of Wisconsin. Price patterns in the District do not seem to have changed much since our last meeting. Reports generally point to little upward pressure on prices. In January, the pricing component of the Chicago purchasing managers' survey was 53.8, down more than 2 points from December. Turning to the national picture, we don't have any serious disagreements with the Greenbook outlook. We are still a bit more optimistic on both growth and inflation, but the differences are not large. We see the economy expanding near its potential growth rate this year. We do seem to be at the mature stage of the expansion, as Governor Yellen mentioned at the last meeting. The accelerator effects are dying out now. So, while I am sympathetic to the notion that the risks to the outlook are probably concentrated on the down side, I don't see any compelling evidence in the data that would suggest the economy will not grow at its potential rate this year.",1288
-fomc-corpus,1996,Thank you. President Melzer.,7
-fomc-corpus,1996,"Thanks, Alan. I have four major points that I want to make today. The first is that the Eighth District economy continues to grow at a slow but steady pace. Our average unemployment rate stood at 4-1/2 percent in November compared with 5.6 percent nationally. Payroll employment growth in the District outpaced that in the nation during the fall. Much of this strength can be attributed to our services sectors. Nonetheless, in manufacturing first-quarter auto production in the District is expected to be up substantially from its year-ago level; most of that jump is due to added capacity, primarily in light trucks and recreational vehicles. Retailers report that holiday sales were somewhat higher than last year's levels, although the growth rate was below that of last year. The number of nonresidential building permits is well above 1994 levels in the District's major metropolitan areas. Lenders report generally healthy loan demand and supply conditions, with the exceptions of middle market business lending and consumer auto lending. Turning to the national perspective, my second point is that job creation has moved in line with projections for labor force growth. The average monthly gain in nonfarm payroll employment since April has been about 113,000, substantially below the rate of 280,000 per month that we enjoyed from January 1994 through March 1995. But the earlier rapid pace of job creation was unsustainable and widely expected to moderate. The more recent pace is consistent with the BLS projected rate of labor force growth of about 1 percent or 110,000 jobs per month. In addition, the job gains of November and December were reasonably robust according to this benchmark, and the unemployment rate remains low. During the intermeeting period very little other data became available, and it seems to me, as some others have said, that it is difficult to argue that much has changed since the last meeting with respect to the actual performance of the real economy. My third point, and unfortunately one that I have had to make a number of times, is that virtually no gains were made on inflation during 1995. Consumer price inflation is expected to be about the same for all of 1995 as it was in 1994. For the current year, some analysts suggest that food prices will increase at their fastest pace since 1990. Mike Prell mentioned this, as did Mike Moskow. This is consistent with what I am hearing from who heads a major rice and soybean cooperative. He has been concerned about the combination of these very low carryover stocks, drought conditions in parts of South America, and what he sees as very strong export demand from the Far East. He envisions the potential of some possibly very large feed grain price increases in the course of this year. More generally, market participants and professional economic forecasters do not expect lower inflation in the foreseeable future. In their January newsletter, the Blue Chip group put CPI inflation at 3 percent through the fourth quarter of 1997. The Greenbook forecast is about the same. Longer-term inflation expectations have moderated somewhat, but these forecasts do not indicate any further progress toward price stability. Longer-term forecasts still have inflation running at about 3 percent. We will talk more about this tomorrow, but in my view the Committee should develop a plan to move toward price stability and offer markets convincing evidence that it will be achieved in some reasonable time frame. One simple and direct way to convey our intentions to market participants would be to announce now the Committee's inflation forecast for, say, each of the next five years. In our Humphrey-Hawkins projections, we are asked to assume an appropriate monetary policy, and we prepared our 1996 Humphrey-Hawkins forecast based on that approach toward policy. In my view, that would begin with a CPI inflation target of about 2-3/4 percent this year, declining to about 1 percent by the year 2000. Our policy assumption would envision growth in 1996 around the high end of the central tendency ranges for nominal and real GDP and inflation near the low end of the central tendency range for prices. My final point is that, based on financial market behavior and the growth of money and credit in recent months, it is increasingly difficult in my view to argue that monetary policy is restrictive. Longer-term bond yields have held their ground since the December meeting, and the relatively low long-term rates should help growth prospects in 1996 by aiding the housing industry, business investment, and mortgage refinancing activity. The stock market, of course, continues to set new records on the up side on a daily basis, and credit remains readily available. The broad monetary aggregates are growing at the top of the Committee's target ranges. I don't mean to suggest that that implies any action; it is just an indicator of where we are. Narrower aggregates adjusted for the effects of sweep account activity have been increasing quite rapidly in recent months. Financial market expectations of a 50 basis point reduction in the fed funds rate by midyear also incorporate a 3 percent inflation projection for as far as the eye can see. If that is not the goal of this Committee, then I think we had better think twice about fulfilling these expectations in the funds market.",1055
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"On our twelve-wheeler, the Eleventh District tire is not flat, at least not yet, but we do hear a strange hissing sound. [Laughter] Our directors and other contacts, as has been mentioned here before, are more pessimistic looking forward than the backward-looking numbers would suggest. I don't have an answer to Cathy's question, but it does remind me of something Richard Pryor said several years ago: ""Who are you going to believe, me or your own lying eyes?"" But at least looking back, 1995 was a good year in the Eleventh District. Our estimates indicate that employment grew over 3 percent in Texas, about 5 percent in New Mexico, and almost 2 percent in Louisiana. That contrasts with about 1.5 percent for the nation. Construction activity remained high, with single-family construction taking off in the second half of the year and all three District states registering double-digit growth in construction employment since the middle of the year. Building contract values are up sharply in New Mexico and are holding steady at a relatively high level in Texas. Trucking deregulation lowered in-state trucking rates and spurred a lot of warehouse expansion in Texas. It is taking some business from neighboring states where trucks previously had to hide out to avoid Texas regulations. Electronics and other high-tech industries continue to boom in the Southwest. In 1995, electronics employment surged 7-1/2 percent in Texas and nearly 12 percent in New Mexico. The three U.S. semiconductors plants that opened their doors in 1995 were all located in the Southwest: two in Texas and one in Tom Hoenig's part of New Mexico. Samsung Electronics just announced their plan to open a $1.3 billion semiconductor plant in Austin, with groundbreaking beginning in a couple of months. A 35 percent real devaluation of the peso turned out to be a drag on the Texas economy but not an anchor. Exports to Mexico are way down over the year, but exports from Texas to other countries have picked up to take up most of the slack. A boom in maquiladora employment along the border has cushioned the blow for border communities like El Paso. However, border retailers were hit hard and they have not yet recovered. Real oil prices are less than half what they were in the early 1980s, but the energy industry has perked up as producers use relatively new technologies, such as horizontal drilling and 3-dimensional seismic technology for offshore drilling in the Gulf of Mexico, to make a profit at prices that would not have been close to profitable in prior years. One anecdote on the new technology is that they are constructing a new Bush library at Texas A&M University, and at the same time they are drilling for oil under it. [Laughter] Based on our discussions with our directors and Beigebook contacts, the outlook for 1996 seems reasonably good, but we expect growth this year to be somewhat subdued compared to last year. We are already seeing four national trends that are beginning to affect our District adversely. First, there are signs that the expansion has already slowed. In the January Beigebook, Dallas was one of eight Federal Reserve Districts reporting a slowdown in the pace of economic expansion. Our main indicators of a slight slowdown in growth were reports of weak retail sales and somewhat weaker orders for paper, apparel, lumber, and commodity chemicals. Contacts also indicated that semiconductor orders were slightly below their previously very high levels. The second major trend is that labor market tightness is pushing up wages or restraining the ability of some firms to expand production. Our contacts have mentioned labor market tightness in eight of the last nine Beigebooks, but the problem has been more widespread since September. Contacts and press reports indicate current shortages of electricians, engineers, accountants, truck drivers, software designers and semi-skilled workers. One contact reports that his temporary employment firm formerly pounded the pavement to find more customers, meaning employers, but now they are pounding the pavement to find more employees. Not surprisingly, labor market tightness has translated into higher wages. Real hourly wages for production workers in manufacturing have turned up fairly sharply since midyear. The contacts report that higher wages are squeezing profit margins, but they have not been passed on in the form of higher prices. The third trend is that retail consolidation has begun in our region and will likely continue. Christmas sales were very disappointing, and our contacts highlighted the Mexican border as one of the worst performing regions. Furthermore, border sales are likely to remain soft for at least the near future, since the purchasing power of the peso has not recovered. Fourth, the gridlock in Washington is becoming a real problem for District farmers. There may be snow on the ground in the East, but it is almost planting time for farmers in the lower Rio Grande Valley. As Mike Moskow mentioned, the gridlock is interfering with the farmers' ability to make decisions and with banks' willingness to lend to farmers.",1005
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The economy of the Ninth District remains fundamentally healthy, and some parts of the region are very strong. Overall, growth has moderated and there are more crosscurrents than had been the case until recently. One area of the District economy that continues to be relatively soft is manufacturing. For example, the paper industry, which had been very strong, is showing signs of appreciably weakening prices. And that seems likely to continue for some time, given the capacity in that industry which, if anything, is expanding. Retail spending has been lackluster except for the consumer electronics area where sales are quite good. On the more positive side, labor markets remain tight, but there are only scattered signs of more rapid increases in wages. I would say that in general housing activity is good; housing around the District clearly is benefitting from the current level of interest rates. With regard to the national economy, I find myself in general agreement with the contours of the Greenbook forecast. Because of the inventory situation, I think that the first quarter or perhaps the first half of this year will be on the soft side. I have commented on that before, and I don't see anything that changes my assessment of that situation. Once the economy gets through the inventory adjustment, I don't see any major obstacles to a resumption of growth at a rate in the neighborhood of potential. Tom Melzer made an important point when he talked about staff expectations of future net gains in employment of about 100,000 or a little more per month. The reason I feel that is important is that if we get the projected employment increases, while they may be what we ought to expect, the press is going to play such gains as very disappointing as they did with the December employment report. That may create misleading expectations that we ought to be careful of. With regard to the risks to the expansion, I think they include the export situation on the down side. I am not persuaded that major foreign economies will live up to even our modest expectations for them. It seems to me that more often than not in recent years we have been disappointed by their performance. As far as the consumer is concerned, I don't see a vulnerability there that in and of itself is going to trigger a disappointing economic performance. If we get some weakening there, it will be endogenous. My reading of consumer incomes, debt burdens, asset distributions, and so forth, is that if some development does trigger a downturn, there probably is some vulnerability in the consumer sector that may add to the downside momentum, but I don't detect a lot of weakness coming from the consumer. On the up side, one can point to a couple of sectors. The first is housing, which I think will benefit from low interest rates. The other is investment in producers durable equipment; my impression is that such capital investment will turn in another healthy year in 1996 and perhaps in 1997. I noticed when I got to part II of the Greenbook that most of the fundamental determinants of PDE looked positive in historical context. So, we may do a little better than the forecasts in a couple of sectors. As far as the inflation outlook is concerned, I don't think we will do much worse, and we may come out a little better, than the Greenbook forecast because of some dynamics that seem to be occurring which I don't quite understand. When we look at traditional measures of capacity use and what they ought to mean for wage or price pressures, we just don't seem to be getting that translation in the good old-fashioned way. I think that is actually a plus.",722
-fomc-corpus,1996,Vice Chairman McDonough.,6
-fomc-corpus,1996,"Thank you, Mr. Chairman. The anecdotal evidence in the Second District in recent weeks has been very negative, but that is probably more the mindset of the people in the District than anything else. The broader economic data have been somewhat more positive recently. In the labor markets, private payroll employment rose at an annual rate of 1-1/2 percent in December in New York State and was stable in New Jersey. The monthly unemployment rate rose in December in both states, but we tend to smooth that rate over a quarterly average. On that basis, the unemployment rate in New York State actually declined from 6.7 to 6.2 percent from the third to the fourth quarter and was unchanged in New Jersey. Consumer spending as reflected in retail sales tax collections rose moderately in December in New York, led by strong gains in New York City. Our manufacturing contacts reported that the blizzard had minimal effect on production in the Second District, and that any losses would be quickly made up. In fact, our recent survey of manufacturers, some of which are among the nation's largest employers, was quite fascinating. The majority of them expect unit sales to increase in 1996, but they say that competition will prevent them from raising prices. Wages are expected to rise 3 to 4 percent, and capital spending will be similar to that of 1995. Their most optimistic view of the world is that they think their exports will be growing in the 5 to 10 percent range, about the same as in 1995. On the national level, assuming that monetary policy remains the same, our forecast is somewhat different from that of the Greenbook. We have real GDP somewhat weaker, growing 1.7 percent in 1996 and dropping off slightly to 1.6 percent in 1997. We have the unemployment rate going up to 5.9 percent in 1996 and 6.2 percent in 1997. We have found the employment picture somewhat confusing, as I think many people have. One of the things we have found difficult to explain is that participation rates in the labor force by women and by teenagers of both sexes are holding relatively steady, but the participation rate by adult males has been coming down over the last few years. I am not certain that anybody has a very good explanation, but it may be that the 5.6 percent unemployment rate is suggesting greater tightness in the labor markets than really exists. That will be one of our research projects. We have the CPI about the same in 1996 as it came out last year; we have it at 2.8 percent and dropping off to 2.7 percent in 1997. Again, we have trouble, as I think most people do, in anticipating exactly what will happen to prices because neither we nor any other countries that seem to provide a relevant comparison have a whole lot of experience with what happens to prices when the CPI is at the 2.8, 2.9, 3 percent level. We have essentially no experience in estimating the cost of going to price stability, assuming as I do that it is something below 3 percent. But if we want to reduce inflation, it would be nice to know what that will cost, rather than saying it is something that warms the cockles of our theological heart. That again is a major project that we are looking at. Without the knowledge of the cost of lowering inflation further, we are not very content--I am not very content--with our economic forecast. A real GDP growth rate of 1.7 percent this year and 1.6 percent next year, essentially no gain on price stability, and, we think, a rising unemployment rate do not lead us to believe that the basic assumption of unchanged monetary policy has a whole lot going for it. Thank you, Mr. Chairman.",784
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. The economy of the Atlanta District is still growing at a moderate pace and maintains its advantage over the national growth rate, as best we can tell. But we, too, are seeing signs of deceleration. Nonetheless, while cyclical factors at the national level may be damping growth for our part of the country, the Southeast economy is likely on balance to enjoy moderate growth throughout 1996. The Southeast continues to benefit from some longstanding secular trends: in-migration of population and corporate relocations driven by rapid growth rates and relatively favorable cost factors. We do not see this abating any time soon. This feeds retail trade, services, and construction, all of which are generally healthy in our region at the present time. Construction is holding firm, and this is not just the Atlanta Olympics effect buttressing the region's overall indicators. The most active component is industrial construction dominated by warehouse and distribution centers. Inventories of unsold houses remain extremely low and multifamily activity remains strong, although vacancy rates recently have begun to rise and we expect to see a slowdown in multifamily construction later this year. As you know, we have a concentration of construction-related manufacturing in the Southeast. So, while industrial production continues to weaken, the slowdown is less pronounced in our region of the country, and it has been cushioned by the continued migration of auto-related production to our southeastern states. This growth has continued even though that in the auto industry as a whole has slowed. Al Broaddus and I are beginning to steal some of your auto jobs, Mike! I don't know if that is for better or for worse, but they continue to move to our part of the country, not only the assembly jobs but all of the support activities. Even so, Sixth District job growth decelerated in the fourth quarter. Weakness in our area is particularly noticeable in the nondurable manufacturing sector. Still, our region's year-over-year job growth outpaced the nation by a considerable margin in 1995. We see no discernible evidence at the present time of acceleration in overall wages or prices. Our manufacturers' survey indicates less price pressure on finished goods but some increase in pressure on input prices. Turning to the national economy, overall I see the economy continuing to move forward without major impediments, but also without the momentum that we saw earlier. Our outlook has not changed substantively for a number of months. As has been the case recently, the Atlanta forecast and the Greenbook are fairly close. Atlanta has personal consumption growing more slowly than the Greenbook, but we have stronger business fixed investment and net exports. Both forecasts show real GDP growing close to 2 percent over the next two years, and each has inflation continuing at a rate not far from recent experience although we have the CPI on a very slow deceleration course. Neither forecast sees much change in the expected unemployment rate. The difference between our outlook and that of the Board staff is in the interpretation of potential. Our reading of the Greenbook is that it shows an economy expanding near potential and that faster growth will inevitably result in accelerating inflation. We see potential as probably somewhat higher. Importantly, we believe that the current modest and steady inflation environment is a result of 15 years of anti-inflationary monetary policy; it is not some spontaneous reduction in inflation expectations but a rational response to a less inflationary environment. Of course, this is something that I can't demonstrate categorically, but I believe that evidence from both the labor markets and the financial markets tends to support this view.",716
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, as you know the current Greenbook projection is quite similar to, but perhaps a little weaker than, the last several forecasts. The main new weakness is that occurring in this quarter, and that does appear likely to materialize, given what we know now. Thus, I would agree that the Greenbook's assessment of the entire period is probably the best one that we can get. If I could get a guaranteed delivery on that outcome, I would buy it even though it does not project any further improvement in inflation over the projection period. But, of course, there is no guaranteed delivery, and we have to look at where the possible deviations might occur. First of all on the up side, it seems to me that a breakout, defined as growth well above trend in the near or intermediate term, perhaps should not be taken totally off the table but it appears to have a very low probability. The Greenbook's trend projection goes down the middle and, of course, it does not anticipate any great shock or surprise in either direction. If we don't get any major shock, I think the Greenbook forecast is very, very likely to materialize. It is very attractive. It extends near-trend growth over a substantial period, projects moderate unemployment and a somewhat lower than the generally accepted level for the NAIRU, and it projects relatively low inflation. I would add Al Broaddus's caution that this projection shows some acceleration of wage increases, and I think that is quite likely to be the case later in the period. Unless productivity also increases materially over that period, we may see unit labor cost and production figures in 1996 that could add to inflation in 1997 and beyond. Downside shocks are always possible, and when the economy is operating at a level that is a little weaker than before, it takes somewhat less of a shock or disappointment to knock it off stride. In my mind, the downside risks are somewhat higher than I had earlier thought because the expansion does appear to be slower than I had hoped or expected. Thank you.",416
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. There is more fog than usual in Washington and in the outlook. Some of this uncertainty is caused by the data situation. From the perspective of a rear-view mirror, the data are less reliable than usual due, of course, to delays and revisions and weather disruptions. I suspect that we may not be able to assess fully what has happened in the fourth quarter or even in the first quarter until we are well into the second quarter. The federal budget situation may be a bit clearer in the short run, but it is certainly a lot less clear for the longer term. In the near term, we probably will have some reduction in federal spending either under continuing resolutions or a series of appropriations bills. The range of issues is narrowing, and all sides are focusing on deficit reduction. With respect to the longer term, the delay of a budget agreement means that fundamental policy questions such as the appropriate expenditure levels for Medicare and Medicaid are not going to be answered until after the elections. This is a problem because elections don't always provide very clear mandates, so I think that creates a bit more fog with respect to federal government expenditures in the future. I think that the best current projection for GDP growth is about 2 percent, or close to potential. There are a number of developments that in my view are consistent with a moderate growth outlook and a reasonably stable employment situation. By that I mean that people are working, though not necessarily at jobs that they prefer, so that a lot of working people would be willing to change jobs. I suspect the 5.6 percent unemployment rate is more flexible than history would suggest. This may be part of the response to Cathy Minehan's question; people are grumpy partly because of job uncertainty. That attitude will be reflected in consumer spending. There is no reason necessarily to see a major decline in consumer spending, and likewise there is not much room for a significant increase. We have worked through the pent-up demand from the early 1990s, but with the increased debt levels that people have assumed, consumption is likely at best to track income growth. As has been mentioned, we have an inventory overhang in some sectors, some of it the result of a disappointing fourth quarter. Hopefully, on the other hand, managers are developing better inventory management techniques. A slowdown in industrial production has been cited, but in spite of that slowdown, we are still seeing corporate profits and cash flows that are better than anticipated. Some of that results from increased investment in machines and equipment to increase capacity and improve productivity. The fundamentals favor continued growth in capital investment, though probably not at the 1994 and 1995 levels. Nevertheless, this sector should continue to support economic growth. The capital markets are not going to be a bottleneck, at least from what we can tell now. The stock markets have been strong; they appear to be supported by earnings. Declines in long-term interest rates should also contribute to keeping the cost of capital down. Credit growth has slowed but credit is still available. So, there are no bottlenecks in the capital markets to prevent business investment. Turning to inflation, I think that some arguments can be made for a more optimistic projection than the staff forecast of 3 percent. Moderate growth, capacity increases, lower utilization, and international weakness should help to relieve demand pressures on commodity prices. Recent consumer and business behavior, I believe, is consistent with a reduced inflation psychology, but I would certainly grant that there are risks. One of the risks, to which I think we must be particularly alert, is that wage pressures may be reemerging and we are unlikely to get any more gains on the benefits side. To summarize, a key question for us is the sustainability of moderate growth. I see little chance of a breakout on the up side, and that leads me to conclude that there probably are more risks on the down side. I can't really see any likely sources for a potential breakout on the up side. I suspect that we are going to be getting more pressure for higher growth levels. We are starting to see it even in the business press. Although people around this table think that 2 percent growth with low inflation and a strong dollar is a good situation, the question is whether that will be socially and politically acceptable. The expectations for the U.S. economy are for a boom-and-bust cycle, and I don't know whether people have learned to manage sustainable growth. I think expectations differ from economic reality, which may be another part of the answer to Cathy Minehan's question. I believe that we will start to see pressure build for faster growth.",932
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"As I outlined my thoughts on the national economy in preparation for today's meeting, I realized that I am running the risk of sounding like a broken record by reiterating themes that are completely familiar, given the remarks I have been making during the last several meetings. With respect to inflation, I have not seen any reason to alter my view that it is unlikely to move higher in spite of the fact that the economy is operating with a measured unemployment rate that is a tad below the staff's and most economists' point estimates of the natural rate. In that regard, I think it is important to remember that even if we fully accept the natural rate hypothesis, the natural rate is a parameter that not only changes over time but also is very imprecisely estimated. A recent paper that some of you are familiar with applies every conceivable econometric bell and whistle to compute a confidence interval for the natural rate of unemployment. It is hard to get it down below 2 percentage points for a 95 percent confidence interval. That is disconcertingly wide, and I interpret that as a good measure of our ignorance on this. So, I think it also is worthwhile to look at other measures of inflation pressures--capacity utilization, vendor performance, order backlogs, strike activity, and so forth. Looking at those measures, I see no intensification of underlying inflationary forces at this point. As President Broaddus mentioned, hourly earnings have edged a little higher, and that is something we will have to watch. But in my view, total compensation is what matters, and the ECI does not show upward movement, although it certainly would be nice to have a recent reading. In addition, I see commodity prices and intermediate materials prices as well behaved, and the dollar has appreciated. With respect to the pace of economic activity, the new chain-weighted GDP figures reveal an economy that grew over the first three quarters of 1995 at a pace a bit shy of the likely growth of potential output, which staff now estimates at 1.9 percent. With the government shutdown and the blizzard, interpretations of the statistics for the fourth quarter of 1995 and the current quarter are obviously quite confusing, but my sense on balance is that growth has weakened a bit and I am becoming--to use the same word that Ed Boehne used--a bit more jittery and marginally more pessimistic about the short-term outlook. Today's report on retail sales coupled with a plunge in the Conference Board's measure of consumer confidence--to which we should not overreact--reinforces my view that there is some downside risk. The level of inventory investment remains above the normal level that would be associated with an economy growing at potential. So, I agree with the Greenbook assessment that declining inventory investment is going to remain a drag on economic activity for a time, and the planned reductions in motor vehicle assemblies that several of you mentioned may indeed have ripple effects throughout the economy. As Mike Prell noted in the Chart Show, the moving average of unemployment claims has edged upward. Unemployment expectations in the Michigan survey, which are significantly related to growth of consumption spending, do appear to be on an uptrend even if one abstracts from a very significant recent run-up in December. One of the facts that always astounds me about the American economy is how a large number of jobs are permanently destroyed in any year, good and bad. Recent estimates place this loss at about 10 percent of all American jobs in any given year, even in good years. Since it is very clear that we are always getting substantial restructuring both within and across industries, we should not be surprised when we hear announcements of layoffs, even significant ones. But having said that, I also sense that the very large and very visible job losses like those that were recently announced by AT&T do attract widespread attention and reinforce what I perceive to be an ongoing sense of apprehension in the workforce about employment prospects, with implications for wages and also potentially for consumer spending. Ted Truman emphasized that the behavior of the dollar matters to the forecast. The dollar has appreciated about 3 percent on a trade-weighted basis since our last meeting. If we aggregate movements in the dollar together with changes in short-term interest rates into a single index, which is sometimes called the monetary conditions index--if I have done this properly and used a reasonable weight on exchange rate changes of about 1/6 or 1/7--my calculation would be that this appreciation since our last meeting is equivalent to an increase of about 40 basis points in the federal funds rate. The Greenbook certainly recognizes that the appreciation of the dollar will produce a drag on net exports down the road. I also would underscore another point that the Greenbook makes, which is that the market value of the dollar right now is conditioned on an expectation of further Fed easing. If this expectation is frustrated, there may well be further dollar appreciation. With respect to the intermediate-run forecast through 1997, I emphasized previously my view that the American economic house is fundamentally sound but that there is this little problem of ""termites in the basement"" or a bias toward below-trend growth, and I have not altered my view on that one iota. I am not going to take the time to reiterate all the reasons I gave last time, but a prominent factor in my own thinking is the behavior of longer-term interest rates. These rates have fallen and are imparting impetus to the economy. I think that impetus will continue for a time, but it is going to ebb eventually and we will be left with a risk of subpar growth over the medium term. I certainly am not envisioning an economy that is heading for an imminent recession, but I think a growth recession with gradually rising unemployment is a distinct risk if we keep the funds rate where it is now. That is roughly the same level in real terms that we reached last February when most of us considered monetary conditions to be quite appropriately somewhat restrictive. A number of you around the table have emphasized that we need to have a strategy in mind for reducing inflation. I certainly agree with that and in that regard I would endorse the opportunistic strategy that Don described in his sermon last time. I see an opportunistic strategy as one that would not consciously use monetary policy to push the economy below potential in order to achieve a reduction in inflation, unless inflation initially were significantly far from its optimal value. I don't think the current inflation rate represents price stability. I believe the current inflation rate is too high, but it is not vastly too high. I would see an opportunistic strategy as one that would look for gains on the inflation front during periods when negative shocks unavoidably create slack in the economy. Because I hold that view, I regard as quite acceptable for now what I think is currently the most reasonable forecast, namely one where output is expected to continue to grow at a trend rate close to the economy's potential and with no prediction that inflation will decline significantly over the forecast period.",1408
-fomc-corpus,1996,"Thank you. We are running a little late, and we will recess until tomorrow morning at 9:00 a.m.",25
-fomc-corpus,1996,"Dave Lindsey, would you start us off?",9
-fomc-corpus,1996,"Thank you, Mr. Chairman. I will be referring to the Bluebook, starting with the table on page 11. [Statement--see Appendix.]",31
-fomc-corpus,1996,Thank you. Questions for Dave?,7
-fomc-corpus,1996,A question about velocity: What do you think the market would assume about our confidence in our forecasts of velocity if we were to raise the targets?,29
-fomc-corpus,1996,"I don't think the market's view is very different from that of the Board staff regarding the reliability of forecasts of velocity. Market participants have not been focusing on the monetary aggregates. They essentially have accepted the FOMC's analysis that in the 1990s there has been a heightened degree of uncertainty regarding velocity behavior. So, I don't think they would change their view of whether velocity was predictable or not if the Committee were to raise the ranges. The wording of the Committee's report and the Chairman's testimony surrounding this decision could attempt to disabuse them of the notion that we felt there was any greater reliability to velocity forecasts than previously. Judging at least from the experience to date for which they have accepted our analysis, we might have a chance of persuading them.",156
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Actually, I think this is pretty much the same question although coming at it from a slightly different direction. What has our track record been at this point during the year, or in June, in terms of actually hitting a forecast for M2 or M3 growth?",53
-fomc-corpus,1996,"It turns out that in 1990, when the process of very slow growth of the broader aggregates began and M2 velocity started on its upward march, we were a bit slow in catching up. But subsequently, despite the uncertainty, we were not too inaccurate. I vividly remember briefing this Committee in May 1993 with a projection of 1-1/4 percent for M2 growth through that year. Perhaps luckily, M2 ended up growing that year at 1-1/4 percent. I also know that last year we were quite--",112
-fomc-corpus,1996,"I am sorry, who publishes the figures? [Laughter]",13
-fomc-corpus,1996,The transcript of this will be out in five years and I will be vindicated! [Laughter],21
-fomc-corpus,1996,But it is hard to find the actual figures to compare them to the projections. We tried. It isn't easy to do.,25
-fomc-corpus,1996,"That's right. We are revising M2 and that alters the comparison. For 1995, M2 growth and nominal GDP growth came in almost exactly where we predicted six months ago when the Committee last visited this issue, and that involved a judgmental adjustment on our part to a model forecast that was predicting much slower M2 growth, a forecast that we essentially did not believe. This year we are closer to the model forecast in predicting M2 growth of 5-1/4 percent, but we have been influenced a bit by the slope of the yield curve. In a way, our judgmental forecasts have been better than one might have expected, but I wouldn't say that that would necessarily argue for upgrading the role of money as an intermediate target, or even as an information variable.",159
-fomc-corpus,1996,"I actually was reacting to the idea that if there is a rather wide range of uncertainty around these projections, though I gather you don't think there is, we may be changing the ranges on the basis of projections that are very uncertain. It seems to me that some of your argument for Alternative II and Alternative III is that they encompass the growth rates that you are projecting.",73
-fomc-corpus,1996,"I wouldn't deny that there is a significant range of uncertainty around our forecast even if the Greenbook gets the pattern of the macroeconomy more or less correct. I wouldn't want to assert that there is not a pretty big range of uncertainty that the Committee ought to take into account. But, as we tried to argue in the Bluebook, it seemed to us that any of the alternative ranges could be justified and a reasonable case constructed even on the assumption that the aggregates were not being upgraded.",98
-fomc-corpus,1996,"It is certainly true that David's ability and that of others to forecast, say M2, has been quite good in the last few years. But members of the staff are making the forecasts, not a model. The models themselves have been going off considerably because the velocity of M2 has risen rapidly, and since we don't know the cause of that increase, the forecasts have become a judgmental issue. Despite the skill of our colleagues in making those sorts of judgments, it does suggest that the add factors are very important, as they are in all economic forecasts. Those who employ add factors have to be very skillful. No one around this table can be that skillful over time. The worst thing we could do at this stage is to acquiesce in the presumption that because David has been so good for so long, he therefore will be good indefinitely in the future. [Laughter] That would inevitably doom him to failure! Further questions? It is worthwhile to put on the table some of the issues that members raised back in July when we specified tentative ranges for 1996. We were in an easing mode, short-term, at that time. There was a good deal of academic discussion as to whether it would be appropriate, given the staff GDP forecast then, to move the ranges up to center them around the forecast. No economist would argue that that is an inappropriate thing to do. The rationale that governed us in not moving the M2 range in July was partly that doing so would imply that the aggregates had taken on a greater importance. But, more importantly, it was the presumption that we would be moving away from an M2 range that we considered to be consistent with price stability over time, given a return of M2 velocity to its earlier growth trend. I think the general judgment of this Committee was that it was probably best to allow sleeping dogs to lie. For those of you who address this issue today, I would appreciate that you also indicate whether you think that the views expressed in July are still valid or ought to be altered in light of developments since then. Who would like to start off?",428
-fomc-corpus,1996,Are we talking about just this issue?,8
-fomc-corpus,1996,"No, I am sorry. We are talking about the broad question with respect to ranges for the aggregates. If you wish to bring up other issues not related to this, I suggest that you mention them but then set them aside rather than mix everything into this discussion. President Broaddus.",58
-fomc-corpus,1996,"First on M2, Mr. Chairman, we have a person on our staff named Yash Mehra who is a very good money demand analyst. He has done some work that indicates that the leftward shift in the M2 demand function may be ending in the sense that his equation predicted the actual M2 growth rate in 1995 pretty well. Looking forward, his M2 model projection for 1996 is 4-3/4 percent, which is a little lower than the staff forecast but at least in the same ballpark. I would agree with the staff view in the Bluebook that has already been expressed here this morning. I think it is too early to conclude that any permanent relationship has been reinstated between M2 and nominal GDP. Last year's performance could turn out to be a fluke, and we could see the actual growth rate back down again in 1996 as it returns to the slower growth trend of the early 1990s. In these circumstances I would prefer Alternative I for the reasons that you just suggested, Mr. Chairman. We have been explaining this growth rate range in terms of our longer-term price stability objective and I think it would be appropriate to continue to do that. I would add, however, that if M2 stays on track in 1996, we would need to review it at this time next year. We may then want to consider changing the way we are using M2 and the degree of emphasis we give to it. I was going to make just a couple of comments about inflation targeting, Mr. Chairman. Should I do that now or would you rather cover that later?",331
-fomc-corpus,1996,"I would appreciate it if we could wait. There will be other Committee members who will want to raise this issue. So, it may be wise to set that aside unless you believe it is relevant to this particular policy decision.",45
-fomc-corpus,1996,I see it as an operational substitute for an M2 range.,13
-fomc-corpus,1996,"We are legally obligated to make these projections. The drift of our previous discussions on this issue would lead to the conclusion that we want to do something different, but the law has to be changed in order for that to happen. Let us conclude our statutorily required discussion before we move to the broader issues.",62
-fomc-corpus,1996,Fine. I prefer Alternative I.,7
-fomc-corpus,1996,"I was going to say ""Professor"" Parry. [Laughter]",15
-fomc-corpus,1996,"Thank you! Mr. Chairman, I would support Alternative I because I think the considerations you described that motivated our July discussion continue to apply today. It seems to me that we can't forecast velocity reliably. Therefore, I think it would not be advisable to move the ranges annually based on current forecasts. Moreover, raising the ranges at this time in the cycle would, in my view, put greater focus on the aggregates, and I am still not confident that increased focus on the aggregates is warranted. Thank you.",101
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"In his presentation, Dave Lindsey mentioned the issue of the consistency of the central tendency of the members' GDP projections for 1996 with the alternative ranges for the monetary aggregates and whether we should move away from Alternative I. But even if we were using the aggregates as an indicator variable of the thrust of monetary policy, we would need to know the numbers for 1997 because there would be lags. To be consistent, we would have to say that here is the objective that the Committee is seeking and here is the monetary policy that would produce that result. If you took the Greenbook projection as the appropriate forecast for nominal GDP, then you would have to project velocity and indicate what money growth in 1996 is going to be consistent with your objectives for 1997. I don't think that we know enough to do that. I don't know what the staff's answer to that would be if we asked. I don't believe we need to ask, because I don't think we know enough to say that it should be different from Alternative I. So, the arguments about the merits of using Alternatives II or III simply are not persuasive to me. I also believe that the arguments we used last July were right. Moreover, it would be difficult to tell Senator Mack or anybody else that we need to change the law to focus on objectives and at the same time say to him that, by the way, we are changing the ranges for the monetary aggregates for this or that reason but we don't think the ranges are useful. I don't think it is consistent to say that the ranges are not useful, but the law requires us to set them and we are changing them.",332
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"I prefer Alternative I. I agree with the staff and those members who say it is too early to know where velocity is or what its growth rate will be. I also think that if we change the ranges now, we will have things backwards. If we are changing them because we think the growth rates will be much higher rather than because we want to target what we think should be higher growth rates, knowing what velocity is, we could come up with different answers. I don't think we have enough information in either case, and I don't think that we should signal to anyone that we do.",118
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I prefer Alternative I. I think the arguments that were valid last July are still valid. We really don't have that much confidence in the relationship between money and the economy. Because of that, we are largely dealing with symbolism here. It is important that we use that symbolism to underscore our long-run commitment to price stability. I think that's what the current ranges for the aggregates say, and I think that's the way we ought to keep it.",88
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Alan, I favor Alternative I as well. I have felt strongly for a long time that we really ought to set these ranges on the basis of longer-term relationships and that it would send a bad signal to move them at this point. Let me quickly make a couple of other observations in this regard. First, even though money has not been terribly useful in the short run in terms of gauging the thrust of policy, I don't think we can forget the fact that there has been a relationship in the long run between these broader aggregates and the behavior of inflation. I would hate to think that we are a central bank that doesn't think money matters when we set monetary policy. That would be a scary proposition, frankly, but there is very little mention of money these days. The other thing, and this ties in with what Tom Hoenig said, is that if we start moving the ranges around just because we are expecting different monetary growth, that in effect sends the message that we are going to adjust our monetary targets to accommodate inflation rather than using them as a tool to send a message of where we think long-term money growth has to be to achieve our inflation objective.",233
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"I agree with all that has been said so far, which is to let sleeping dogs lie. We would send the wrong signal about our long-run resolve on inflation if we tampered with the ranges now. The projections are too uncertain to be used as a basis for changing the ranges in any event.",60
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"I am afraid I am the odd one out here. I don't think the monetary aggregates should, or do, play an important role in policy. I certainly don't think the Humphrey-Hawkins testimony should focus on the aggregates. I believe we should continue, as we did last July, to downplay the relevance of these ranges to policy. If we are concerned about sending the message that we have a commitment to price stability, we ought to do so in words and, perhaps better than that, we ought to explain in words how we intend to achieve that objective. As I indicated last July when I dissented on this matter, it is important to engage in honest communication with Congress. To me the honest choices are target ranges that are centered on the staff's best guess of where these aggregates will come out given our preferred monetary policy course, which should be related to the economic forecast that we will be presenting in the Humphrey-Hawkins testimony. In my view, the existence of uncertainty does not change this. Yes, velocity is very uncertain, but at a minimum we ought to have ranges that encompass the staff's best guess about what monetary growth we are going to end up with under the preferred policy strategy. I don't want to push the centering issue too hard. My preferred strategy here would be Alternative III, but especially in light of David's argument about opportunistic strategies that I endorse, Alternative II would be acceptable to me. Alternative I, which does not even encompass the staff's point forecast for M2, does not strike me as honest communication. Again, I would say that it's easy to rationalize a change as a technical adjustment. We did this--for M3--in July and it did not appear to create any reaction whatsoever.",353
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I can understand the intellectual attraction of either Alternative II or Alternative III. But I believe the reason the Humphrey-Hawkins legislation requires us to project the M's is that at the time that legislation was enacted, the ranges were expected to be indicators of our intended policy and the future course of the economy. We no longer have the faith that we or the economics profession had in the late 1970s that the M's are directly related to the future growth of the real economy. In that regard, what we now do with the ranges is not governed by forecasts and centered-ranges as much as by communications. Over the years we have moved toward setting these ranges to communicate our long-run goals, and we have been successful in terms of achieving sustainable economic growth at ever lower inflation rates. So, I would view the ranges as a communications vehicle for expressing the goals of monetary policy rather than what they were intended to be when the legislation was enacted. Accordingly, I would prefer Alternative I.",199
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, the idea that these ranges are mainly a communications device is what guides me. Since the Humphrey-Hawkins report and your testimony no doubt will point out that we do not find the monetary aggregates to be a particularly useful policy tool, adopting Alternative I, II, or III would not result in a strong market reaction or great excitement except perhaps in some corners of the academic community. However, at a time when we are still in an easing mode--certainly the last move of the Committee will have been an easing action, whatever we do today--I think using Alternative I would best communicate our long-term goal of price stability. So, that alternative is definitely what I prefer. If the majority of the Committee were to prefer some other alternative, that is not something about which I would get very excited and I certainly would not object by dissenting. But I think Alternative I conveys the message most reliably.",185
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"In his briefing, Dave Lindsey indicated that the M2 range in Alternative I would be the target range that we would have once we reached price stability, assuming that M2 velocity returned to its traditional trend. We don't have either of those conditions. At least we can't be sure about velocity, and we certainly have not reached price stability. None of us to my knowledge put down zero as our estimate for the GDP deflator or more precisely that real GDP growth and nominal GDP growth are the same in any of our forecasts. In fact, I doubt very much whether any of us put down less than 2 percent for our expectation of GDP deflator growth. Given that and given that we are not being asked to provide guidelines for what we would like the M2 range to be in some future time when we reach price stability--clearly that won't happen this year or in 1997--I think the only honest thing to do is to have something like the Alternative II range for M2. At least the staff projection indicates that M2 growth is going to be within that range. For the Committee to say that our range does not encompass expected M2 growth either says that we don't control the aggregates or that the range is not consistent with our policy. So, I think the only honest presentation is Alternative II. I could vote for Alternative III, but I don't think that alternative is going to be favored by a large number of people.",288
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I favor Alternative I. When we adopted this alternative on a tentative basis back in July, we indicated that the M2 range was going to serve as a benchmark for the rate of M2 growth that would be expected under conditions of reasonable price stability and historical velocity behavior. So, if we repeat that statement or words similar to it, I think we will be communicating honestly to the Congress and telling them what our intention is. To do anything else, no matter how articulate you are in explaining our reasons to Congress, Mr. Chairman, would be read by others as implying that this Committee is placing more weight on the aggregates in our policy decisions. I don't think we are at that point by any means, and I would not want the Congress or the public to think that we are. In my view. a lot of messages would inadvertently be communicated if we were to change these ranges. Clearly, I would favor Alternative I at this point.",192
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, I am quite attracted to the arguments that Governors Yellen and Lindsey make and, frankly, it troubles me a little to reject those and go for Alternative I. Nevertheless, I am choosing Alternative I for the simple reason that to change the ranges would involve a certain fine-tuning of the dials that we don't know that we want to do, we don't know that we need to do, and we don't even know that we can do. As a consequence, I will stay with Alternative I.",103
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I will go with Alternative I and associate myself with the comments of President Moskow and Governor Kelley. I will say, however, that I am uncomfortable about not having the staff's expected growth of M2 encompassed by the Alternative I range. As I recall, the staff forecast in July did at least have monetary growth at the upper end of the ranges for last year. If we get to a more normal relationship between GDP and the monetary aggregates, we should take a hard look at changing the ranges. But because changing the ranges at this point would signal more knowledge than we actually have, I think it is best to stay with Alternative I for now.",131
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"I prefer Alternative I as well. I would echo the arguments that have already been made about the danger of sending the wrong signal, particularly the comments of the Vice Chairman about the danger of being misunderstood in the context of our recent easing and the prospect that we may need to ease further in the period ahead. So, I favor Alternative I.",68
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"I think most of the relevant points have been made. It seems to me that we can't have it both ways. The issue is what we want to communicate. Do we want to set up ranges consistent with the baseline Greenbook forecast or do we want to set up ranges consistent with our long-run, low inflation objective? I prefer the latter, which is Alternative I. It also seems to me that, putting Dave Lindsey's magic aside, any rigorous confidence interval around a model-based M2 or M3 forecast is going to be quite wide; it probably is going to encompass all of these ranges. So, I don't see it as all that big a deal even statistically.",135
-fomc-corpus,1996,"The consensus clearly is for Alternative I and I assume that in making that choice, you are accepting 1 to 5 percent on M2, 2 to 6 percent on M3, and 3 to 7 percent on debt. I request that the Secretary call the roll.",58
-fomc-corpus,1996,"The paragraph is on page 23 of the Bluebook: The first sentence is the standard one on the Committee's objectives. ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996. The monitoring range for growth of total domestic nonfinancial debt was set at 3 to 7 percent for the year."" And moving to the last sentence on the page: ""The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets."" Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey No President McTeer Yes Governor Phillips Yes President Stern Yes Governor Yellen No",213
-fomc-corpus,1996,"Okay, let's now go on to the broader question that a number of you have raised. President Broaddus, would you like to start us on this?",32
-fomc-corpus,1996,"Thank you, Mr. Chairman. Although retaining the M2 target range of 1 to 5 percent gives a signal of our longer-term objectives, my own view is that we need something more than that to communicate fully to the public and the markets. I think it would be very desirable to supplement our monetary targets with some kind of explicit inflation objective now, and that could be set for any time period that the Committee agreed on. I would suggest that the 1996-1997 two-year period might be the appropriate time frame. I think the current short-term policy situation presents an especially useful opportunity to do this. As we all know, sluggishness in the economy has a lot of folks saying that we should ease our short-term policy stance now. A reasonable case can certainly be made for that. I am not making that case, but it can be made. With the economy operating somewhere in the neighborhood of the NAIRU--even recognizing the uncertainty you mentioned yesterday, Janet--there is a real risk that reducing the funds rate now or in the near future could raise doubts in some corners about the strength of our commitment to our longer-term price stability goals, at least relative to other policy objectives we might have. As I argued last summer, and I recall others did as well, I would certainly hope that Congress at some point will give us an explicit longer-term price stability mandate. The Mack legislation would do that, but it doesn't look as if the Mack Bill is likely to pass the Congress any time in the foreseeable future. With that in mind, I think we should consider confirming our commitment to price stability in some explicit way now. There are a lot of ways that this could be done. Tom Melzer mentioned a couple yesterday. My own suggestion would be that we include in the Humphrey-Hawkins written report and hopefully in your testimony, Mr. Chairman, a positive statement that the Committee wants and expects the CPI inflation rate to remain below 3 percent on average over the two-year 1996-1997 period and that beyond that we intend to take steps to bring the inflation rate down further over time. We could think of this, and describe this publicly, as a sort of benchmark. That would be the term I would use. Such a benchmark would give the Congress and the public, and for that matter ourselves, something more concrete than we have had in the past to hold ourselves accountable for. It may seem like a small step, but I think this would be a significant departure from what we have done in the past. I believe it would get some attention and hopefully improve our credibility along with our accountability. If we were to agree to do something like this and if it would make the Committee more comfortable, we could add a statement in the report that a benchmark like this would not necessarily constrain us in dealing with short-term ups and downs in the economy. It would not constrain us or prevent us from continuing to take actions that are aimed at stabilizing employment and output in the short run. I think it would make us evaluate such short-term actions against our longer-term price stability objective rather than evaluating efforts to contain inflation against an implicit unemployment objective, which I think has been the case in some past years. Again, this may appear to be a small step, but I think it would be a step in the right direction. It would get some attention, and it would raise the chances that we would ultimately get to where we are trying to go.",700
-fomc-corpus,1996,Can I ask you why you believe that the Mack Bill is not going anywhere?,16
-fomc-corpus,1996,"I am not on top of the latest developments, but in general it seems unlikely to me that the bill is going to pass. From what I understand, there is some chance that it won't pass at all in this Congress. I may be misjudging that.",53
-fomc-corpus,1996,"I think that's much too premature. The issue has not been joined, and there is a large number of cosponsors on the Republican side. What that all means is hard to say. You may well be right.",43
-fomc-corpus,1996,"Even if I am wrong on that, Mr. Chairman, I don't think that would change my view about the desirability of doing something like this.",30
-fomc-corpus,1996,"I think it does in part change the view of where we ought to be moving because I am not certain it is to our advantage to do something in advance of what that bill will do. In other words, that may not help the particular form of the discussions that we are involved in. But I think we will find out within the next two or three weeks because they have to make a move one way or the other in that regard. Well, maybe not in two or three weeks--two or three months may be the more relevant time frame. President Minehan.",114
-fomc-corpus,1996,"I am attracted to President Broaddus's argument. I think that communication of intent by the central bank does aid in raising its credibility, though I question whether we really have a credibility problem at present. Does anybody really believe the stuff that Don Kohn put in the Bluebook? [Laughter] Moving from 3 percent to 1 percent inflation by the year 2002 results in a full 8 percentage point loss of economic growth in this period. If nobody believes that, that's fine. But if one believes even a portion of that, it strikes me that it's a political decision to give up economic growth to achieve that decline in inflation, and that strikes me as an even greater reason to wait for the Mack Bill.",147
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Al, can a layman ask for some edification here? I think you had in there--",20
-fomc-corpus,1996,"Al, you are about to be put down! [Laughter]",14
-fomc-corpus,1996,I sense that!,4
-fomc-corpus,1996,I think part of your proposal included a guideline for 1996.,14
-fomc-corpus,1996,"I was thinking of a two-year period, 1996-97, as a time frame, but the time frame is not a particular issue for me.",32
-fomc-corpus,1996,"My question is, if monetary policy exerts its impact with a lag, whether we are currently in a position to do anything to affect 1996 beyond events that are already in train or policies that have already been implemented.",45
-fomc-corpus,1996,"A longer time frame would probably be more appropriate given the lags, Mike, and that's why I said 1996-1997. Again, I am not talking about trying to control the inflation rate in any mechanical way; we can't do that. I am simply saying that we would make a statement that we would evaluate all of our short-term policy actions over this period of time--especially those in the near term where the lag is long enough presumably to have some effect on the inflation rate during the two-year period--in a way that would bias the outcome toward this result.",117
-fomc-corpus,1996,"I am going to be very disappointed if we don't achieve your guideline in 1996, and I have some confidence that we will. But I think that will be a result of developments and polices that are already in train.",46
-fomc-corpus,1996,"Still, making it explicit in this way imposes discipline. It adds a degree of credibility and accountability that I think we don't have now. It would move us a step forward. I don't think it's revolutionary. It will never solve all our problems, put it's a step in the right direction.",59
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"It will be a long time, if ever, before a consensus emerges about the success or failure of monetary targeting over the last 20 years or so. As far as I am aware, of all of the central banks around the world that have experimented with monetary targeting only the Deutsche Bundesbank continues to do so and continues to argue that it has been successful. It does continue to be successful and German economists outside the Bundesbank also argue that way. While this would be considered heresy by some of my professional friends, I think even in the case of the Bundesbank that monetary targeting was neither necessary nor sufficient for achieving the results that they obtained over a period of time. What happened to the Federal Reserve was that monetary targeting was imposed on an unwilling central bank in 1975 and then again in legislation in 1978, whereas the Bundesbank adopted monetary targeting as a means to achieve a very clear, single objective. There was some help for the Bundesbank from enabling legislation. The Federal Reserve did not have that sort of help, nor did the Bank of England, the Bank of Canada, and so on. I think that a central bank that adopts a very clear, single objective for price stability has more freedom to formulate its policy and achieve that objective. On the other hand, one that uses something like monetary aggregates ranges as a monitoring device or as a communications device without a clear objective is going to have political problems and even problems in formulating policy. I think the most important thing is to emphasize clearly the single objective of price stability and to lay that out into the future. It has to be a multiyear objective. I think it's better if it comes from within the organization. Yesterday, Vice Chairman McDonough mentioned the transition cost problems, but we don't know what those transition cost problems are because of the issue of credibility. Nobody else can really estimate them either. With regard to the numbers in the Bluebook to which Cathy referred, Don Kohn is quite clear in saying that they take no account of improving credibility.",409
-fomc-corpus,1996,That's right.,3
-fomc-corpus,1996,"If we can enhance our own position, not only with regard to the Congress but with regard to the American public, by very clearly articulating and setting out a time path for achieving price stability and if--a big if--that is credible and people really believe we will deliver on it, we will minimize the transition costs of lost output. As I said last year, I still worry about future Congressional hearings. The very well known, well respected members of our profession will focus more than I would like on the transition cost argument--on lost output and how many people will be thrown out of a job in order to achieve the price stability objective. That will distract from the underlying issue that achieving price stability is growth-enhancing; it raises standards of living. That's why we are trying to do it. I would rather see this Committee say, with or without the Mack legislation, that we have adopted a single objective and that it is a way of achieving the objectives of the Full Employment Act. I am not even sure that requires legislation.",207
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Alan, I have expressed my views on this topic before, and as you know I think we ought to be moving in the direction of setting longer-term inflation targets. I would not disagree with what you said before about the Mack legislation. I do not have any information that would suggest that the prospects for passage of the legislation really have been tested, and I can see the merits of waiting to see what will happen to the legislation. However, if we were to approach the July meeting with nothing happening and our sense was that the legislation was not going anywhere, then I think we ought to be considering what steps we could take on our own without legislation. Their purpose would be to convey more clearly our longer-term objectives and, as Al said, increase our credibility and accountability. As I mentioned yesterday, one step that could be taken in that regard, short of actually setting a target, would be to extend our horizon with respect to inflation forecasts. It's ironic that the CBO and OMB put out budget projections with inflation assumptions going out five years. They are assuming 3 percent inflation over that horizon. In my view, those projections generally tend to have an impact on longer-term inflation expectations, and the very agency that actually influences inflation over time doesn't have anything to say about it. Obviously, one could take this to the point where a projection becomes a target. There certainly is a relationship. We would have to think very carefully about what we were doing, but I would not see any real problem or any impediment to a decision by this Committee to provide forecasts over a longer time horizon. If we were forecasting inflation two or three years out, people would realize that that is a time horizon over which we could have some influence, and there might be an expectation that we would deliver on that. To pick up on Cathy's point, and Jerry touched on this a little, I don't put much faith in model projections of inflation. Part of the reason is that they do not take credibility into account. Nonetheless, I found it interesting to look at the model results in the Bluebook. I was fascinated with the examples where it was assumed that shocks raised the equilibrium funds rate by 50 basis points. The conclusion, or the underlying assumption, was that a current and future funds rate of 5-1/2 percent was consistent with 3 percent inflation in the long run. One could argue that easing the funds rate today would be analytically equivalent to the example in the Bluebook of an upward shock in the equilibrium funds rate of, say, 50 basis points. I am not suggesting that anybody who favors some easing has that in mind. What is very interesting, if one believes the model output, is that reducing the funds rate does not really put one in an opportunistic school, which is where I think people who would tend to favor that policy course would be likely to place themselves. Rather, it actually places them in a deliberate camp to raise inflation. The effect in that example, where the real equilibrium funds rate is shocked, is to drive the inflation rate higher; it continues to rise for three years, albeit not by a lot. It does not rise above 4 percent in that particular model. We have been at 3 percent inflation for roughly the last four years. It is only recently that financial markets have been willing to give us enough credibility so that, in looking at longer-term rates, they build in a premium for inflation and inflation uncertainty that has been reduced to somewhere around the current inflation rate. It has taken us four years to achieve that degree of credibility. So I see a policy easing move in terms of taking an action that is deliberate in the sense of forcing the inflation rate up. I know all things would not be the same, but the Bluebook model suggests that conceivably we could be looking at rising inflation for three years. If we keep inflation at the higher level for a further three years, we will have lost a tremendous amount of time in this process of trying to gain inflation credibility. So, I thought the Bluebook exercise was useful from that perspective, at least for those who would put weight on these models. As I said, I tend not to look at them.",847
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I think credibility is earned by what we do, not what we say. We lost credibility by letting inflation accelerate, and we have regained a lot of credibility by bringing inflation down. Over the last 15 years, we have brought inflation down from double-digit levels. We held inflation to an average of 4 percent during the long expansion of the 1980s. We have held it to 3 percent or under during the fairly lengthy expansion of the 1990s. The actions that we took in 1994, when we tightened in a preemptive way in trying to head off inflationary pressures before they emerged, were worth far more than anything that we might say. I think we really fool ourselves if we think that we can put out statements that will enhance our credibility. What counts is what people do, and there is a lag in market perceptions. We now have inflationary expectations down as low as they have been since the late 1960s, and I think that is based on actions, not words. We have put out words. The Chairman has repeatedly said in his Humphrey-Hawkins testimony and in other speeches that we intend to preserve the gains that we have made on inflation and to extend them over time. If Congress wants to pass the Mack Bill, so be it; that could be helpful. But I don't think we ought to engage in legislation around this table. What we can do and what the legislation gives us the power to do is to act. That is what we ought to do and save the words for the legislature and for other avenues as we have done in the past.",327
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, I certainly support the Mack Bill. I think it may increase our credibility, and frankly I think it may have some impact on what we do around this table. In the meantime, having something like the wording that President Broaddus suggested might be useful. One never knows. It might even reduce the probability that we would ease at a time when we as a group expect the economy to grow at a rate in excess of that of potential.",92
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"I would like to associate myself to an absolute degree with Ed Boehne's remarks. I believe that the degree of credibility that we enjoy at the moment has been hard earned, but it is very high. I don't know of anybody--even in the world's capital of cynics, New York City--who really believes that this Committee is not absolutely resolute in the pursuit of price stability. I think that, as Ed suggested, we are better off to continue as a Committee performing with deeds, with good solid, sensible, anticipatory monetary policy. As for words, I for one have been giving a number of speeches recently to groups like the National Mortgage Bankers in which I state as firmly as I can that my whole view of monetary policy is that price stability is the means by which we achieve sustained economic growth. Therefore, I don't really need a change in the Humphrey-Hawkins legislation. To me, that legislation is not in fact contradictory. It says that we want sustained economic growth and we want price stability. I think they are the same goal because sustained economic growth is achieved through price stability. By speaking out publicly, one of the things we can do--and it is a role that I have taken on myself--is to confront the traditional anti-price stability group by reversing their argument. The reason very sensible people have been against price stability is that they believe it is socially and politically harmful to the poor whom they feel they represent. I think they have it absolutely backwards. I believe the best thing for the poor in the South Bronx is price stability. I have argued that, and believe it or not, some of the people who have been most vocal over time as attackers of price stability sort of begrudgingly tell me that I may have it right. I am very much in favor of a Mack Bill because I think formally establishing price stability as a goal of the Federal Reserve is a major political judgment. Major political judgments should be made by Congress with the agreement of the President. In my view, it would be very much in the national interest to have the Mack Bill or something very much like the Mack Bill enacted into law. So, as an individual and as the President of the Federal Reserve Bank of New York, I have publicly stated that the Mack Bill is a very good idea. I am not endorsing all its details; it's too early for that. But rather I think that legislation establishing a single goal for the Federal Reserve has great merit. That is what the Congress and the President are for, and we would be ill-advised in the meantime, as the Chairman suggested, to preempt that debate and in a way make it unnecessary. The whole history of this country is that the Federal Reserve does its job best when we are carrying out what the American people want us to carry out. Over time we have brought this issue to a point where the American people as represented in the Congress are really in agreement that price stability is what makes sense. We should let that political process take place.",608
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I have some sympathy for Al Broaddus's suggestion. It would be a small step toward helping us achieve our ultimate objective, which I view as maximizing living standards. Price stability is the means that we have at our disposal to achieve that. Having said that, I think Al's suggestion, like a lot of relatively provocative ideas, raises at least as many questions as it addresses. For example, if we were to go down this path, what are the right numbers? Is this going to have any operational significance? If it does, don't we have to worry about instrument instability and maybe economic instability as we start to implement this? So, there are a lot of things we would have to think through in a serious way if we are going to do something like this, at least for me to be comfortable with it. In terms of trade-offs and loss functions in some of those numbers that are in the Bluebook, I certainly don't take those numbers at face value, but I question how big the credibility effects may be. I think the burden of proof is really on those of us who think that we can make further progress toward price stability without some short-term loss in the rate of economic growth. I say that based on economic history. I am not aware of periods in this country where we have made progress toward price stability without some episodes of subpar growth. One could counter that by asserting that our credibility was relatively low. That may be, but it seems to me the burden of proof, based on history, is still on those who want to argue that we can do this without some short-term loss of growth.",333
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I think most of the people who plan for the future try to do so with a goal in mind. They should state that goal, and I think such a statement can serve very well. I favor the idea of having a price stability goal because price stability does achieve all those objectives that we talk about. Having a stated goal is a form of discipline that is especially useful during difficult times when it is easier to drift away from it. The caveat that I have is similar to Bill McDonough's. I think if we were to do that, it would have to be done very carefully within the context of Humphrey-Hawkins because that's the law of the land. We have to be consistent with that law not only in substance, which we may be able to do by setting the goal, but also in appearance. There is a debate going on in the Congress right now. I would like to get us to the point where we have this goal, but I think we ought to let the debate play out. If we do adopt a goal in the interim, we should couch it in terms that are very clearly consistent with Humphrey-Hawkins.",237
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"I, too, believe that deeds are more important than words. However, I also believe that words are very important. Al's proposal has a lot of appeal to me. I would suggest that July might be the right time, though, to consider doing something like that. By waiting until July, we will know more about whether the Mack Bill is being debated, about its chances, and whether we would be making such an announcement in the middle of a recession. Also, doing it in July might mean that we could shift the time frame to something like 1997-1998 and at least partially get around the lag issue that Governor Kelley raised.",131
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"As I have said previously, I am quite sympa-thetic to the communications goals embodied in the Mack proposal. For the same reasons, I am attracted to many of the arguments that President Broaddus has presented, although I certainly agree with Gary Stern on the issue of credibility. I think we could proceed to communicate more even without legislation. Whatever happens to the Mack Bill, I think it is desirable to work toward that end. In that sense, I agree with Al. The problem from my standpoint is that before we communicate, we really need more extensive debate and study of exactly what we want to communicate. I do not know precisely what members of this Committee mean when they use the words ""price stability."" I don't know if they mean literally 0 or 1 percent inflation or a range of 1 to 2 percent. Also, I don't know if we are talking about targeting the price level so that we would expect the level of prices to be the same 100 years from now as it is today. That is a very different thing from targeting zero inflation and then forgiving mistakes. It is very clear that the costs of elevated inflation are high, and, in that case, we need to move inflation down to lower rates, and that a consensus exists to do it. But as we get to lower rates of inflation, we need to think much more carefully about the costs and benefits of moving to still lower rates. There are benefits, but during my time on the Committee, we never really have talked about what the benefits are or attempted to evaluate them concretely. I believe there also are costs of moving to very low inflation rates. I am persuaded that there is at least a significant one-time output loss. There also may be a further permanent loss that occurs because a little inflation, particularly in an economy with slow productivity growth, greases the wheels and makes relative wage adjustments easier and may facilitate intersectoral allocations of labor. This is a subtle point, but I think we never have evaluated or tried to measure it. So, I think we are not quite ready to proceed without a further discussion. Also, we need to think through what type of strategy is appropriate to reach the target. Al and I have previously debated this. Inflexible inflation targets don't strike me as a good strategy. I think there is a flexible approach that would take account of trade-offs between active stabilization and inflation objectives, but we have never really worked this through as fully as we ought to. So, I believe in communication, but I have some qualms. We need further study. At the end of the day, though, I thoroughly endorse Al's concrete suggestion that we should, at a minimum, be communicating a strong commitment to holding the line on inflation at 3 percent to keep it from rising higher. To me, an opportunistic strategy would do precisely that. It would lean quite hard against any increase in inflation and it would look for opportunities to bring it down.",597
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I, too, think it's important for us to communicate more about the importance of price stability as a goal, and I must say I am sympathetic to Al's proposal. I do have some caveats and concerns about the timing of implementing such a proposal. Like President McTeer and others, I am a little concerned that now may be a bit early. I would like to have the proposal fleshed out a little more before I have to vote on it. Among other things, I think we ought to give more consideration to the appropriate time horizon. The 1996-1997 time frame that Al mentioned makes me a little nervous. I would prefer a longer horizon. President Melzer's suggestion of looking at what inflation might be doing over the next five years would seem to be a useful kind of communication. In sum, while I would like to do something involving more communication, I would like to have proposals like Al's fleshed out a little more and also to have the opportunity to consider some different alternatives as to what we should communicate.",211
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I have been here only a year and five months, but I think we have discussed this question at least four or five times [Laughter] in that period. Some of the discussions have been very good, and this one clearly is in that category. Al's suggestion has some very attractive aspects to it in my view. A number of people have pointed out some implementation problems, potential operational problems, and some measurement issues. What are the costs, what are the benefits and, as Gary Stern mentioned, can we really identify what the benefits of increased credibility would be? Given the discussions of the Mack Bill, I think this clearly would be an inappropriate time for us to do anything on this. But the bigger question is what do we do over the longer term. Like Governor Phillips, I think it would be helpful to have some staff work done to flesh out some of these longer-term issues to see if we can measure in a better way some of the costs and benefits and whether we can get a little more specific about what we are trying to communicate and how that might differ from what we are communicating now. We clearly are doing a lot of communicating now. Some of it, as President McDonough said, is very useful. So, I think it certainly would help us as a Committee to have some focused staff work done on this for our next discussion so that we could understand some of the issues a lot better before we make a decision.",294
-fomc-corpus,1996,"Let me raise the very specific issue that Governor Yellen mentioned with respect to the possible benefits of a low rate of inflation in terms of ""greasing the wheels"" to facilitate wage adjustments. As I recall, the staff did some work on that a couple of years ago in which the distribution of wage increases was plotted to see whether the existence of the zero limit significantly constrained the shape of the distribution. As I recall, the results of that study were that it did not. But I also have seen other studies since then that have raised questions about this result. I think that, to a large extent, this sort of thing can be factually evaluated. It would be useful if we had some better insights into it. I am curious: Since that study was made, what has been the specific academic literature regarding the notion of slight levels of inflation greasing the wheels of wage bargaining?",177
-fomc-corpus,1996,"There have been a few studies in addition to ours. We found some minimal evidence that there was some downward nominal wage rigidity. But the important empirical point we were attempting to make was that it did not appear to be quantitatively very significant. Other researchers using the same data set and other data sets also have found some evidence of downward nominal wage rigidity. Some people put different spins on it in terms of how much or how little, but I don't believe there have been any major breakthroughs. The additional amounts of empirical evidence have been marginal. There is, I think, evidence of some downward nominal wage rigidity. The issue is how quantitatively significant ought that to be in the conduct of monetary policy. In our study, we found that there was still significant downward nominal wage flexibility. There was some evidence that at zero inflation there would be some downward nominal wage rigidity. But the welfare loss of running a low or zero inflation policy that would be associated with that downward nominal wage rigidity was not quantitatively significant.",200
-fomc-corpus,1996,"Mr. Chairman, I would like to broaden this a little. We did undertake a Systemwide research effort not very long ago. I don't think there have been major breakthroughs in the economics profession in the last couple of years that would greatly change the picture. The picture was that one could not come up with definitive, compelling evidence that could override people's priors, and their policy judgments in a broader context, about how they should view the value of officially setting our sights on moving the inflation rate down from 3 percent to price stability.",107
-fomc-corpus,1996,"Where were their priors coming from, evidence or nonevidence?",13
-fomc-corpus,1996,"I am not talking about the priors of these researchers, which may have varied. What we found was that it was very hard to pin these things down. It was very hard to get definitive, empirical measures of the costs and benefits of varying inflation between 3 percent and, say, 1 percent as measured by the CPI. So, I don't think we are going to be able to solve the Committee's problem through another intense research effort. You are going to be confronted with what economists normally provide, something that leaves some considerable room to maneuver. You are going to have to confront this issue mainly on other grounds at this point. The profession does not have the tools to ascertain the costs of moving the inflation rate by 2 percentage points.",150
-fomc-corpus,1996,You mean economists are truly two-handed! Governor Yellen.,12
-fomc-corpus,1996,"On the question of the greasing-the-wheels argument, I have read the staff paper. It is a very good paper, but I think there are methodological questions that remain open and different ways of approaching it. I understand the empirical findings that you have, and I would not regard them as definitive. This is probably not the right place to get into methodological issues, but if you want just a bit more on this question, I would point to an entirely different type of study that doesn't use longitudinal data sets. Truman Bewley from Yale has spent several years interviewing managers and human resources people at several hundred firms in the New England area to try to understand their wage-setting policies. He is in the process of writing a book summarizing what he found. He gave a seminar here not long ago, and I think it would be fair to say that the bottom line conclusion is that wage rigidity stems from the fact that firms find it extraordinarily difficult to cut wages. This is the unanimous finding of his several years of interviews. That is what people say. It's not that wage cuts never occur, but it is a very serious constraint on what firms feel themselves capable of doing. That is a different kind of evidence on this issue, but it is an empirical question as you have indicated.",256
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Don, your memo about the NBER conference in January referred to the Feldstein paper as indicating that they had identified at least some benefits of going from something like 4 percent inflation to 2 percent inflation. I have not read the paper. Could you comment on whether you find that aspect of it compelling?",62
-fomc-corpus,1996,"Although I have read it, I didn't feel qualified to evaluate it. It rested very heavily on the tax system and the interaction of inflation with the way capital income is taxed and the resulting distortions to asset accumulation and savings by households through this. It was a study that was looking at welfare losses characterized by some sort of four-sided figures, trapezoids or something.",74
-fomc-corpus,1996,Trapezoids.,5
-fomc-corpus,1996,"Right, under the curve. There were a couple of comments at the conference, as I think I indicated in my notes. One of them was by somebody who approached the subject in an entirely different way, with a general equilibrium model, and he found something that was roughly comparable to Feldstein's findings. But that was very theoretical and abstract. Some other people had doubts about the extent of the welfare findings. One commentator, Ben Friedman, noted that the findings of most of the loss of welfare depended on the interest elasticity of saving by households--that is, that the after-tax rate of return really did affect how they accumulated assets. As you know, that is an open question. Judging from what I heard at the conference--Larry Lindsey and Mike Moskow were there as well and I don't know whether they would disagree--it was a suggestive approach but not definitive.",176
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"As I listened to Dave Stockton's remarks about downward wage rigidity, I was struck by how odd that sounds in the context of the last couple of years when people around this table and elsewhere have been puzzling over upward wage rigidity. Why haven't wages been rising more rapidly in the environment that we have been in? The question, which doesn't really need to be answered but needs to be thought about, is whether the rigidity is symmetrical or not. The inference has been that an asymmetry is involved but that is not at all obvious. On the issue of symmetry and credibility, a simple interpretation of the Bluebook would be that if we were to set an objective of raising the inflation rate to 5 percent, we could increase nominal GDP by 8 percent. If we were to take that proposal up to Capitol Hill, some people there probably would say, ""go for it."" Does anybody around this table believe that, if we established a policy of raising the inflation rate and announced a policy of raising it to 5 percent, we would increase GDP? Well, of course not. If the rigidity is symmetrical, that also says something about the costs of getting to lower inflation.",235
-fomc-corpus,1996,"You are raising an interesting issue with respect to the most recent period. If you have downward wage rigidity in a period of falling inflation rates, one would presume that profit margins would be falling. However, profit margins are widening. Average wage increases are admittedly quite small at this stage, and there is evidence of significant downside rigidity on the left side of the distribution curve of wage changes that does not seem to be consistent with the associated distribution of gross profit margins. Were we to look into this issue in some detail, I think it would be incumbent upon us to make a judgment as to what type of underlying process we are dealing with. There are a lot of reasons why wage increases are low. At our last meeting and at previous meetings, I raised the issue of job insecurity and the trade-off of wages against insecurity as an explanation of the low wage gains. We have in that a phenomenon that actually does explain in some detail what is going on. What it does not address, however, is whether in fact there is wage rigidity involved in this. Indeed, if there is rigidity, is that damping the bottom side of the distribution in the sense that with the averages falling, are we in fact getting a narrowing of the distribution that would be consistent with the rigidity argument? The evidence here is that we do not as yet know, but it's not as though those data are not available; they are. It should be a question of whether there is significant flexibility between 0 and 3 percent inflation in the same way that we know there is between 5 and 10 percent. I think the broad macroeconometric evaluations of the sacrifice ratio or related concepts are very interesting, but they are only suggestive. Until we get to the internal structure of the system, I don't think we really will know what the true economic relationships are. Having said that, I am not even sure that one can argue that if we found them that we could therefore stipulate that they are hardened into the system and irrevocably unchangeable in the period ahead. So, even there we are at something of a loss.",421
-fomc-corpus,1996,"I want to follow up on something else that Jerry Jordan said, which I thought was very good. His example referred to an announcement of an increase in the inflation rate to 5 percent. In fact, I think we went through this exercise about a year ago. The staff model did not have an announcement of an increase in the inflation rate, but it indicated that increased inflation itself would raise real GDP. In fact, higher inflation in the model raises the present value of future GDP. I don't agree with that conclusion, but I have to believe that if we were to announce higher inflation, the increase in GDP would be less than it would be if we slipped higher inflation in there. That has to be true. So, why wouldn't we believe the reverse? Why wouldn't we believe that if inflation were to go down that we wouldn't have the same improvement in the trade-off?",175
-fomc-corpus,1996,"I think that's true in concept. The problem, as President Stern and others have noted, is finding it in the real world. That is, when we look at sacrifice ratios across countries that have inflation targets and others that don't, we can't find an improvement there. Now, there are a lot of other things going on in those countries and that doesn't mean that there would not be some improvement in the United States, but researchers also had trouble finding improvements in sacrifice ratios going from the 1970s to the 1980s after the huge disinflation we had and the change in the makeup of the Committee and the objectives of the Committee. So, I agree with the concept, Governor Lindsey. It ought to be there, but it's very hard to find in the data either across time in the United States or across countries.",167
-fomc-corpus,1996,Could it be that on the way down we are doing what we are supposed to do and on the way up we are not doing what we are supposed to do?,33
-fomc-corpus,1996,It might be asymmetric.,5
-fomc-corpus,1996,"When we begin to test the outer limits of these models, I would hesitate to look at the output of our very sophisticated model if we ran a $500 billion deficit through that model. What would happen, I would suggest, is that the model would replicate very poorly what would be likely to occur in the real world. If you don't believe a $500 billion deficit would be enough to produce that result, make it a $1 trillion deficit. The nature of these models is that they are substantially linear in terms of how most of the forecasts and simulations are made. But when we get to the outer limits of policy actions, very significant nonlinearities may exist that are not captured in the first approximations of these models because their simple linear equations really do not reflect what the world is like at those outer limits. An analogy might be that as a particle accelerates toward the speed of light, its physical nature will change only little. As it get close to the speed of light, its nature will be altered very dramatically. I have a suspicion that doing this sort of thing to these models would have a very similar effect, though long before we get to the speed of light. We must seriously question our assumptions about how the sacrifice ratios and other factors are interrelated and not merely presume that we can infer those interrelationships from the types of models that we use. I suspect that those models can lead to misunderstandings that we ought not to entertain for very long. So, I agree with your general focus. There is a serious question here. This kind of Committee discussion is useful, and it is quite possible that our discussion today has been the best we have had on this issue. If we keep talking, we may find ourselves in agreement on a lot of different questions relating to this issue. As a practical matter, I do think it is worthwhile to wait to see how the basic legislative vehicle evolves. I must say that I agree with both President Boehne and the Vice Chairman with respect to the primary importance of our actions and very specifically with respect to the political questions that are raised when major value trade-offs are apparent. In those cases, we must convince the Congress as to what the real trade-offs would be for economic reasons, and in any event we cannot in our society go against what is fundamentally called for by the law of the land. We may or may not agree with the law of the land, but what makes the country work, what makes it great in fact, is that we all adhere to it. With that, I think it is a good idea to go out for coffee.",521
-fomc-corpus,1996,I call on Mr. Kohn.,8
-fomc-corpus,1996,"To accompany my briefing, I have prepared the material in front of you called ""FOMC Monetary Policy Briefing."" [Statement--see Appendix.]",30
-fomc-corpus,1996,Questions for Don? Governor Lindsey.,7
-fomc-corpus,1996,"Don, you mentioned the fiscal package. If we went from a cumulative deficit of $1 trillion to zero over seven years, how big a shock do you think that would be? How should we compare that to what you have here?",47
-fomc-corpus,1996,"There is a footnote in the Bluebook that says that going from a deficit of about 2 percent of GDP, which is approximately where we are, to a balanced budget over seven years would produce a change of about 1 percentage point in the equilibrium rate in our model. Now, that number should be viewed with a huge standard error around it, but that is the order of magnitude.",79
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Don, you referred to the bond market vigilantes who try to correctly anticipate the Committee's actions. One thing they have been able to do is to derive indicators like the Taylor rule that seems to approximate our actions. If we follow an opportunistic strategy, doesn't it imply a much more complicated mathematical expression of our policy processes with lots of nonlinearities? It seems to me that inevitably there would be a loss of understanding on the part of the market about how we react to things.",96
-fomc-corpus,1996,"I am not sure, President Parry. I agree that at least in concept putting out a mathematically precise rule would be clearer than something as vague as an opportunistic strategy. But I think that in practice the market has come to understand, as a few members such as President Boehne already have said today, that the Committee has very strongly resisted increases in inflation. The Committee's actions in 1994 were very helpful in that regard. I think the market also believes that the Committee has its eye on a price stability objective over the long run. Market participants do not, as President Melzer pointed out, anticipate that the Committee will deliberately take action to reduce the inflation rate below 3 percent. But I think they actually have developed a rather good understanding of the Committee's intentions and operations by looking at its actions in various contexts. You would have to judge whether acting in the way you think is best as circumstances change over time is better for the economy than putting out some rule that might describe your actions over some period of time. I would think that inevitably you would have to violate that rule sometimes.",223
-fomc-corpus,1996,"If I could just have a follow-up question: I assume that under both strategies you have a linear Phillips curve, and therefore the output loss is the same under each. What is different is the time period, or point in history, in which you incur the output loss.",55
-fomc-corpus,1996,"For the same set of shocks hitting the economy, the output loss relative to no disinflation is the same.",23
-fomc-corpus,1996,Some people may have gotten the impression that one strategy is less painful than the other. The pain is equal; the question is when you actually sustain it. Is that correct?,35
-fomc-corpus,1996,"In a linear world that would be correct, and that is true in this model. I don't think the Committee has behaved that way, and many models suggest that the output loss is not totally linear. In such models, large misses and large variations in output are weighted relatively more heavily than small variations in output. But it is an open question whether minimizing variations in output around the mean, even with the same integral of output losses, is better than having a few big recessions to get to price stability. That is one of the questions that the Committee would need to consider if it were thinking about adopting a time frame for getting to price stability. Should you go there quickly or should you go there slowly? A lot of people think slow is better than fast, but there may be no way to prove that--or at least it would be very hard to prove one way or another.",177
-fomc-corpus,1996,That is what we talked about earlier.,8
-fomc-corpus,1996,"Right. It is a question of how the economy adapts and how the institutions in the economy adapt. I think there are reasons to believe that going to price stability slowly and allowing institutions to adapt to lower and lower inflation rates would remove some of the frictions one might worry about, say, in the financial sector. Reality is much more complicated than the models say. I agree with you that these models are very linear, and fast or slow, deliberate or opportunistic will give you the same integral of loss. The output loss of eight percentage points would be the same in the model, but I suspect that it's quite different in real life.",129
-fomc-corpus,1996,"Further questions for Don? If not, let me start off. I will try not to be as verbose as I was at the last meeting, but I think there are certain points that require some repetition. First, it is hard to find in economic history a recession that began while the stock market was still taking off and earnings expectations were still reasonably good. Indeed, even though there are very significant pockets of weakness, as was discussed around this table, no one is saying that the economy is collapsing and that there is a yawning gap into which we are falling. Nonetheless, I do think there is very clear evidence that the downside risks are significantly larger now than they were earlier. In my judgment, it probably is wise to recognize those risks and raise a serious question as to whether a policy action would provide some appropriate insurance in this context. In my view real rates are still higher than I feel comfortable with. The analogy that I made at the December meeting, to which Jerry Jordan referred yesterday, about the economy feeling like a car running with its parking brake still engaged, is still clearly appropriate. The actual short-term evidence that we have suggests that the January figures are going to be rather miserable. The weekly data that are available on industrial production, which constitute only a modest part of the industrial production index, contribute something in the area of a .4 percentage point decline in the total index. To be sure, autos are a big factor there. The major problem that concerns me in this context is that we are relatively far along in the economic expansion. We are well beyond the average length of such expansions in the post-World War II period, and indeed, unless my memory fails me, the current expansion is probably already the second longest in that period, excluding the one that was sustained by the Vietnam War. What tends to happen when an economic expansion gets ""long-in-the-tooth"" is that a much broader concept of inventories becomes relevant. I would hypothesize that two types of inventories affect economic activity: The first is the standard type of business inventories that are included in the GDP data; the second is the gross stocks that exist both in the household area and in the business area. For example, we tend to look at final sales as though they were consumption. Well, they are not. Consumption basically is the use of a stock, and it is perhaps better reflected in depreciation than it is in purchases. Indeed, in the motor vehicle area, for example, the sluggishness of sales is being caused by the fact that we have had fairly high levels of automotive sales for a considerable period of time. We have built up the stock of vehicles on the road quite extensively, and we have created a large number of second-car and third-car households. We are getting into a situation in which there is, in a sense, another type of inventory out there that is suppressing economic output. We see that in capital goods markets and in a lot of other places. If we were to get a better estimate of what is actually consumed in the economy, I suspect we would probably do something quite similar to certain revisions in the federal and state and local government accounts involving shifts from purchases to consumption. In that context, it probably means that we ought to be substituting depreciation for a lot of the longer-lived assets that are classified under personal consumption expenditures or producers durable equipment. While I have not looked at the data, I suspect that were we to do that--we are, of course, looking at net property account increases--we would probably find that the consolidated inventories situation, including both business and consumer inventories and unsold stocks of homes, is exerting a much more egregious and suppressing effect on economic activity at this stage than so-called business inventories or primary inventories alone would suggest. The reason I raise this issue is that there is the perennial question of, why do business cycle expansions come to an end? In today's environment, where we presumably curbed the accumulation of business inventories with our preemptive moves in 1994, it is not clear to me how well we have done in the secondary inventory areas. A goodly part of the weakness that we have been seeing probably reflects the fact that there is an ultimate life expectancy to a business cycle in much the same sense that it probably exists in human beings. The expansion cannot go on continuously; something will go wrong. It is hard to know where we stand at this stage. In the past we would have periodic recessions largely because imbalances would emerge, inflation would occur, the Fed would clamp down, and economic activity would decline. That is the classic inventory cycle of the post-World War II period. But our policy has altered that process, and it is not clear what will happen as a consequence or what ultimately will bring this cycle to an end. Do we now have the extraordinary capability needed to fine-tune the system to make a cyclical expansion go on indefinitely? I doubt it, but it is hard for me to judge how long this cyclical advance will continue. As far as short-term developments are concerned, I think the initial claims figures are showing that the economic expansion is weakening. The production figures are weakening. The purchasing managers' data that we are picking up across the country now suggest that this economy is soft. I don't doubt that weather is a factor here. I don't doubt that weather may be in the consumer confidence numbers we are looking at. I find the Conference Board numbers a little dubious. The sharp decline in those numbers looks exactly like the sharp spike that we had a couple of years ago, for which we could not find an explanation at the time. I don't know whether in fact there are sampling problems in the Conference Board survey. The Michigan Survey has a smaller sample but far better control, which suggests that we probably ought to be looking at that survey. Nonetheless, commodity prices are weakening. The Journal of Commerce index, which has not been a bad measure of industrial prices, is showing much the same thing. One would not expect that weather per se would tend to have the effects on employment, production, and the like that one would see as a consequence of, say, the Blizzard of 1996. Not irrelevant to this issue is the fact that economic activity in Europe is stuttering. I am not saying that a huge arbitrage exists between Europe and the United States, but there is some. It's very hard for a major industrial country such as ours to move forward with great alacrity while a significant number of our trading partners are experiencing sluggish or declining growth. Needless to say, neither the Canadian nor the Mexican economies are in great shape. Indeed, the Greenbook projections indicate that they are weaker than in the last Greenbook. And the more we look at what is going on in Europe, the more nervous-making it appears. Finally, while I would not want to rest policy on this, it is by no means irrelevant that a significant weakening in U.S. economic activity is going to make a very important national policy trend toward budget deficit control more difficult to implement. Ordinarily, I would say that that is their problem and this is ours, but we should have a view that what is in the national interest is not irrelevant to the way we conduct our business. I come to the bottom line that while I am not of the school that is getting terribly concerned that the economy is about to dip into who knows what, there is an increasing element of downside risks that I think we have to consider. Given what I have described as an overhang of secondary inventories, which I believe is there, the upside risks seem quite minimal. While I don't think the downside risks are all that large, the net downside risks feel high, given the level of real, short-term interest rates. In this type of environment, it would be wise in my judgment for us to move rates down 25 basis points. I have convened a Federal Reserve Board meeting after this meeting is over in which I will recommend that we move the discount rate down. But that is for later, and I would like to propose for your comments a reduction of 25 basis points in the federal funds rate. If the Committee were to accept that proposal, I think that a symmetrical directive probably would be wise. Yes, President Minehan.",1668
-fomc-corpus,1996,"I want to comment at somewhat greater length than usual because I seem to be constantly putting myself in positions that are at odds with one another. I think that 3 percent inflation or lower is a very good long-run target for this group. My operative definition of price stability is stability at low rates. I would take advantage of opportunities when costs seem low to move in the direction of pushing inflation down. That said, I think it's debatable whether there is any specific target below 3 percent that is preferable to staying at 3 percent. In that environment, it seems to me that to be opportunistic and to move against inflation when the costs seem low really involves moving less than might otherwise be required given the economic data, or not moving at all when a small move seems required. Right now, I think the correct course of action seems more murky than usual. There are underlying sources of growth that we talked about yesterday. Labor markets are tight by any traditional definition. There are some reasons to think that housing is not completely dead. I think your inventory stock arguments, Mr. Chairman, are very credible, but there are wealth effects from a booming stock market working in the other direction. Moreover, we have eased 50 basis points over the last six months; we have reversed last February's tightening; and there has not been time for the more recent easing actions to play out fully. Finally, while we may have more headroom on inflation than traditional calculations would indicate, it is by no means clear that we do. The Greenbook projects some minor pickup in both the core CPI and the ECI. In fact, these upticks may be understated. So, while I do think there are downside risks and the expansion probably has reached a mature stage, if it were up to me I would buy a little insurance now that might enable inflation to move down slowly from 3 percent or at least hold the line at 3 percent through the next cycle. I would buy that insurance in the form of not moving now.",406
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"In our discussions around the table, we talk on occasion about our ignorance, about how little we know about a lot of things such as lags, instrument variables, and so on. But at times I am impressed by the collective judgment of this group in assessing what is going on in the economy and knowing how to make the policy adjustments that are needed. Two years ago we started raising the funds rate well before professional economists in the business community, academia, and Wall Street were saying we should or even before our models and staff projections were indicating the need. Had we listened to some of those Fedwatcher views or looked at Blue Chip or staff projections, we would not have begun to tighten when we did. We tightened because we had information that told us, in the terminology that we use now, that the equilibrium real rate was rising, things were starting to move, and we made an adjustment that was appropriate. A year ago at this time many of those outside observers were saying that we were going to be pushing the funds rate up to something like 7, 7-1/2, or 8 percent. Again, on the basis of our collective judgment we went to a 6 percent funds rate a year ago, but we said we were getting to the stop-out point. I supported that move with the idea that it was an insurance policy. I was not convinced that it was necessary, but in terms of potential errors it would be the least costly to correct. And given market psychology and other factors at the time, I thought that it was wise to raise the funds rate to the 6 percent level so long as we were willing to retrace that move if that insurance turned out not to be necessary. So, I view what we did in July and December as simply having cancelled the insurance that we took out a year ago. In the meantime, I have a sense that the equilibrium real rate has moved down from whatever it was a year ago. Your description of household inventories--the stocks of real goods held by consumers--carries a counterpart in terms of attitudes toward financial assets and financial liabilities. If consumers believe they have reached the saturation point for the moment in their stocks of certain consumer durables, the counterpart is that they are going to be trying to reduce their financial liabilities or to increase their financial assets. They are adjusting their net financial positions, which is also consistent with the idea that the equilibrium real rate has moved down. If I thought that the Greenbook/Bluebook projections were correct about a 5-1/2 percent funds rate producing a 3 percent inflation rate out through 1997, I would have to be arguing for raising the funds rate. The only way I can support reducing the funds rate is to be consistent and say that I don't believe those projections. I have to believe that we are in an environment where the inflation rate will come in lower than is indicated by either the central tendency of the Committee members' forecasts or the Bluebook/Greenbook projections. If that turns out to be wrong, then I will be out in front saying, ""Let's get the funds rate back up because we simply were wrong."" For now, I am comfortable with the idea that it is appropriate to move the funds rate down and see whether or not inflation in fact comes in at a lower rate.",670
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, I support the recommendation of alternative A, symmetric, for the reasons that you gave. I also found Jerry Jordan's intervention just now quite convincing as well.",35
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, I would not favor reducing the federal funds rate. I would refer to President Boehne's comment about our deeds speaking more loudly than our words. If you look at the members' economic projections for 1996, we are saying in effect that we are at potential. The midpoint of the central tendency of the Committee members' forecasts indicates that the economy is going to grow 2.1 percent in 1996. The CPI appears to have increased 2.7 percent in 1995, and the central tendency of the members' forecasts has a midpoint of 2.8 percent. The unemployment rate is equal to or slightly below the natural rate and is expected to be there at the end of the year. It seems to me that the Committee's forecasts speak very loudly and are in conflict with reducing rates at this time. I realize that we are in a period where it appears that the economy has some weaknesses. The staff forecast calls for 0.8 percent GDP growth in the current quarter. The question is whether or not that slower rate will be temporary. If it's temporary, then policy ought not be changed. We can't make that determination right now. We are disadvantaged by a whole host of things including a lack of data and insufficient time to model the new information. I see no reason to change now. It would seem to be the prudent thing, in fact the opportune thing, to wait a few weeks before we make a judgment.",298
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I would prefer not to move at this time. We have an economy that is growing at about potential. There are continued inflationary pressures. They are not strong pressures, but I think we will be making little or no progress on inflation. I realize we are long into this expansion, but there is also a lot of noise in our current data. In my view, it would be wise for us to wait and gather more information to help us determine with more assurance where we ought to be and where we will be down the road. So, I think the wiser course would be for us to wait.",125
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"One of the major reasons why monetary policy has been successful in recent years is that it has had a forward-looking approach to it. Forward-looking monetary policy means that we have to peer into the future, and I don't know anybody who can do that with 20/20 vision. There is always some mist out there through which we need to look. As I try to look out through that mist, my sense is that monetary policy is still on the restrictive side and that we are operating with our foot on the brake. And while I don't think this is the time to adopt a stimulative monetary policy and move our foot to the accelerator, I do think it is time to lighten our foot some on the brake in the context of an economy that in my view exhibits some downside risks. So, Mr. Chairman, I support your recommendation of a 25 basis point drop in the federal funds rate.",180
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, the policy call this morning is a very close one. There is certainly a case for easing policy and you have made it. But I come out, probably not surprisingly, much closer to Cathy Minehan and Bob Parry. Cathy in particular expressed very clearly and eloquently in our earlier discussion the kind of thing I had in mind operationally. Beyond what she said, it's not at all clear to me yet how much of a real deceleration in activity is actually occurring. We have bad weather, government shutdowns, and structural changes in the retail sector all fogging up, in my view, the meaning of much of the recent information. Also, we have a lack of headroom in the economy, as I think many would agree, and at least some signs of a firming of wages. All those things incline me to caution. Sometimes I think inertia can be a good thing, and I am feeling the need for a lot of it at this point. I hear Jerry Jordan's point, but I do think it needs to be said that it may be more difficult this year than in most other years to move the funds rate back up later if things don't go the way we want them to. We are going to get a lot of new information that hopefully will clarify the economic situation in the fairly near future, and I think we ought to look at it before we move.",282
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The current situation gives me some considerable pause. As I try to look at the real interest rate situation, Charts 4 and 5 in the ""Financial Indicators"" package don't suggest to me that real rates are particularly high, at least relative to history. There may be an opportunity here, were we to do nothing, to do a bit better on inflation. The mechanism that I have in mind would be through a stronger dollar than we now anticipate and what that would mean for inflation--recognizing, of course, that we can't really forecast exchange rates. They are far more a hope than a certainty. On the other side of this coin, I am certainly convinced that we cannot halt turning points in the economy, or at least I can't. As I said before, I am pretty convinced that the current quarter and perhaps the next quarter will be rather soggy based on inventory considerations and the time it will take to work through the inventory adjustments. Moreover, something that looks soggy could turn out to be something worse. The bottom line is that in this environment, and recognizing that I can't halt turning points, I find your insurance argument persuasive and I would go along with a 1/4 point reduction in the federal funds rate at this time.",257
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. Like others around the table, I would not like to see us step back from our tough, long-term stance against inflation. I would not support a further easing at this time unless the risks were quite clearly on the side of further weakening in economic growth or we judge that we have a much more favorable inflation setting and see an economy that may be growing somewhat below potential. Although most of us see only moderate growth in the period ahead and some recent data suggest the need for added caution about how things may unfold, I do not yet have the sense that we are about to see a major stalling of the expansion, although the risks clearly seem to be greater on the down side. At the same time, I am increasingly convinced that we have achieved a much more favorable inflation environment that gives us some latitude for a modest additional easing without any substantial risk of a prospective deterioration in inflation. As policymakers, we must always try to differentiate between temporary and longer-lasting influences. In my view, there is a good deal of evidence that the favorable changes that we see in inflation expectations and behavior are indeed persisting. On that basis, I would support a modest easing of 25 basis points at this time.",246
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I support an easing of 25 basis points with a symmetric directive. I think it is important to take out some insurance against the downside risks. I am a bit more optimistic than the staff forecast that we can continue to see some progress on inflation. In addition, based on a fairly flat yield curve, I continue to think we are a bit behind in making downward adjustments. So, it would be a good idea in my view to go ahead and ease 25 basis points today.",97
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Mr. Chairman, last year I was predicting that we would see a very substantial change in the stance of fiscal policy. I was wrong. That has been the big surprise to me since the last meeting. Three weeks ago I was betting that today we would see a long bond rate on the order of 6.50 percent because it seemed to me that the markets also had realized that we were not going to get the fiscal action expected earlier. I was very interested in Don Kohn's estimate that the magnitude of what we are talking about here would be equivalent in this language to a reduction of about 100 basis points in the equilibrium real federal funds rate. So, it seemed about right for bond market rates to back up to 6.50 percent on a realization that the odds of some fiscal restraint agreement had been reduced from, say, 90 percent to 50 percent. The market didn't react that way; the long bond rate stayed around 6 percent. I think the reason for that, I forget if it was the two-step or the three-step--",214
-fomc-corpus,1996,The do-si-do!,5
-fomc-corpus,1996,"Or the do-si-do. I think the market perceived that near-term economic conditions were deteriorating rather dramatically. It is probably true that that is happening. As I have said, conditions in various sectors of the economy are much worse than we thought, and that is what the market was seeing. Hence, what I would normally interpret as a reason at the very least to stop easing and perhaps even a reason to move toward tightening, i.e., the breakdown of the budget negotiations, is overwhelmed by other factors. The failure of bond market rates to move up 50 basis points suggests to me that even a reduction of 25 basis points in the real federal funds rate would still be less of a move than the market is calling for and therefore is consistent with the strategy that Don Kohn outlined in his memo about taking advantage of deflationary situations. Cathy, you raised that in your discussion. I would say that given the failure of the market to act, the funds rate is probably at least 50 basis points too high right now. By splitting the difference at 25, I think we are buying a little insurance on the real side and we are at the same time taking advantage of what might be an opportunity. I hate the term ""opportunistic strategy,"" but I guess that approach is consistent with what is termed an opportunistic strategy to reduce inflation. So, I support your recommendation, Mr. Chairman.",284
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"The other day Ed Yardini, in one of his newsletters, said that we were going to be cutting interest rates this year--either early in the year to head off a recession or later in the year to try to bring the economy out of one. The first alternative seems much more desirable to me. I believe that the risks are very unbalanced toward the downside, as you have indicated, Mr. Chairman. We do have to be forward-looking and we can't wait to be absolutely sure about how the economy will evolve. Although I am not a global thinker, as Business Week pointed out this week, both the economics and the policy moves abroad make it easier for us to make a modest easing move today without adverse consequences to the dollar. In July and December, we cancelled some insurance against a rise in inflation. Right now, a 1/4 point insurance policy against a recession would be in order. I agree with Larry Lindsey that we probably could justify a greater move and a 1/4 point move now is sort of dragging our feet. It is therefore consistent with opportunism and our long-term inflation objectives. I agree with your proposal.",231
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,Where is a vote when you need it? [Laughter],13
-fomc-corpus,1996,"I know how you feel, Tom!",8
-fomc-corpus,1996,"Like Cathy, I would favor alternative B. I would favor it strongly. One of the factors is the Greenbook forecast of rising inflationary pressures in the consumer price arena and also in labor markets and that is consistent with some of the anecdotal evidence. Nobody has mentioned it, but we have had PPI increases of 0.5 percent in each of the last two months. So, there is some reason to be concerned about inflation even though I have heard very little expression of that concern. There are some straws in the wind with respect to rising inflationary pressures. Secondly, I think it is pretty clear that 3 percent inflation is embedded in long-term expectations, and I think such inflation is too high. Third, I am not at all sure that monetary policy is still in a restrictive posture. Don Kohn has talked about the difficulty of assessing just what the real equilibrium funds rate is. Certainly from the perspective that I have used over time, and this is useful only in longer time frames, the monetary aggregates and the credit markets and so forth are not sending the message that policy is in a restrictive posture. For those who want us to be judged by our actions, I think this action says that we are not interested in lowering inflation and inflation expectations. The ultimate reaction of higher yields in the bond market over time could be disquieting to those who are concerned about the performance of the economy in the short run. I have no way of predicting what is going to happen to long-term interest rates, but it is not outside the realm of reason that over time after markets digest this action we will find that we have not taken a step that will lead toward lower longer-term yields. Lowering the discount rate makes a bad situation worse by underlining this move. In my view, there is no reason why the funds rate can't be on top of the discount rate or for that matter go through the discount rate. In fact, when one looks at what is going on with these sweep accounts and the way the supply of reserves is shrinking, for us to have a discount rate that creates an incentive to borrow does not make any sense. So, I would not reduce the discount rate. Thank you.",444
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Mr. Chairman, I support your proposal and I agree with your assessment of the risks. As I have argued, I do think some further adjustment is needed to achieve that elusive neutral monetary policy. From my perspective, in spite of the fact that we did make downward adjustments in the funds rate in July and December, all we have done thus far is to offset the decline in inflationary expectations. That leaves the real rate at about its February 1995 level, which was a real funds rate that I think most of us considered to be consistent with braking the economy. History has borne out the fact that we did brake the economy. I agree with the assessment that our foot remains slightly on the brake and we ought to remove it. How much our foot is on the brake is an extremely tricky call from my standpoint. The alternative simulations presented in the Greenbook certainly caution us that we would be running a very significant inflation risk if we were to adopt the easier alternative and cut the funds rate by a cumulative 100 basis points. I absolutely concur with that conclusion. Such a cut would incur a tremendous risk. I would not envision anything of that sort. But is a 25 basis point cut reasonable? It is tremendously hard to gauge whether or not it is reasonable. One thing that I found myself doing to try to get a sense of whether or not this is a move within a reasonable range is to look at that Taylor rule chart in the ""Financial Indicators"" package. What that shows is that, using Taylor's rule as he proposed it, we are currently at the high end of a reasonable range of values. Looking at our behavior now in terms of our own past behavior, we are well within the ballpark of our past behavior. From that perspective, current policy is not overwhelmingly tight, but certainly a further downward adjustment of 25 basis points would still leave us well within the range of our past behavior. It would not be a major move inconsistent with what we have done before. Again, that would not represent an opportunistic approach, but one designed to bring inflation down. So, I certainly support this move.",426
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, I agree with those who feel that the economy is probably all right, but I also think that the downside risks clearly are elevated. I also believe that it is quite likely that the equilibrium federal funds rate is lower than it was earlier. Consequently, a somewhat lower rate is not inconsistent with what the Committee's goals have been all along and will continue to be. With the inflation outlook as good as it is for the near and intermediate terms, all of this leaves us with room to move, and I support your recommendation as an insurance policy.",112
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I would wait. It's interesting that the three M's on this side of the table who voted at the last meeting would all come out the other way this time.",37
-fomc-corpus,1996,We used to vote!,5
-fomc-corpus,1996,"My reason is that we are forecasting the economy to be at potential output. There is a lot of uncertainty. A lot of questions are being raised about the short-term outlook, and we have talked about these. I don't think anyone knows for sure why the expansion has slowed, whether it is the Federal government shutdown or concern about Bosnia or the weather. The business friends that I talk to are all trying to figure out how to operate in this new, low-growth environment. I think Governor Phillips mentioned this factor yesterday. This is a real problem for people trying to operate businesses today because their environment is so competitive. My feeling is that the sogginess we are seeing now in the economy could be a short-term fluctuation that could correct itself. I don't see any urgency to move at this point. On the opportunistic strategy issue, obviously some of us view this differently in terms of which side of the opportunistic strategy we are looking at. Cathy's presentation was near my view. I would view the current situation as an opportunity to make a little further progress toward price stability at this point, since there is some considerable uncertainty now. Finally on the discount rate, I think that Tom Melzer had a very interesting suggestion. I remember a footnote in the Bluebook that said there really was no problem in having both the discount rate and the fed funds rate at the same level. So, I too would support that idea. If we are going to lower the fed funds rate, which it seems we are, the Board should give consideration to that idea.",312
-fomc-corpus,1996,"Let's have a vote on a 25 basis-point reduction, symmetric. Would you read the appropriate language?",21
-fomc-corpus,1996,With a reference to the discount rate?,8
-fomc-corpus,1996,Let's ask the Secretary of this Committee what is appropriate.,11
-fomc-corpus,1996,"This would be adding a reference to the discount rate at the end of the first sentence that would read, ""taking account of a possible reduction in the discount rate.""",33
-fomc-corpus,1996,I think we have done that before when this situation has arisen.,13
-fomc-corpus,1996,We have?,3
-fomc-corpus,1996,Yes.,2
-fomc-corpus,1996,"Okay, then do so.",6
-fomc-corpus,1996,"I will be reading from page 24 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to decrease slightly the existing degree of pressure on reserve positions, taking account of a possible reduction in the discount rate. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",121
-fomc-corpus,1996,Would you call the roll.,6
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Phillips Yes President Stern Yes Governor Yellen Yes,40
-fomc-corpus,1996,You have until February 7th to submit to Mike Prell any changes you would like in your Humphrey-Hawkins forecasts. Our next meeting is March--,33
-fomc-corpus,1996,26th.,3
-fomc-corpus,1996,26th. Luncheon is at 12:30?,12
-fomc-corpus,1996,12:30.,4
-fomc-corpus,1996,That will be in Dining Room E.,8
-fomc-corpus,1996,"Mr. Chairman, I had a question. Are you going to share with us the press statement that you will be making?",25
-fomc-corpus,1996,"I am sorry, yes. Good for you. The relevant paragraph would read: ""Moderating economic expansion in recent months has reduced potential inflationary pressures going forward. With price and cost trends already subdued, a slight easing of monetary policy is consistent with contained inflation and sustainable growth."" That is followed by the usual boiler plate.",65
-fomc-corpus,1996,Do you care about consistency with the Greenbook forecast with respect to inflation?,15
-fomc-corpus,1996,The Greenbook forecast is a forecast of the staff.,11
-fomc-corpus,1996,I understand.,3
-fomc-corpus,1996,"The Federal Open Market Committee listens to the staff with great reverence, [Laughter] but it then makes its decision.",25
-fomc-corpus,1996,How about the forecasts of the FOMC members?,11
-fomc-corpus,1996,"The FOMC members' forecasts are estimates of the most likely outcome. Policy is based on the most likely outcome conditioned by a distribution of probabilities. If somebody could guarantee that outcome, I would say that insurance is unnecessary at this stage. I would think that implicit in our decision is the understanding that if the insurance turns out to be inappropriate, as some members have stated, it will get reversed as it should be.",84
-fomc-corpus,1996,"So one can accept the forecast, but it's an insurance policy?",13
-fomc-corpus,1996,"Yes. In other words, I find the forecast not an unreasonable maximum likelihood forecast. That is a factor that is relevant to one's view of the world, but it does not determine what the appropriate policy stance should be.",44
-fomc-corpus,1996,People may change their forecast?,6
-fomc-corpus,1996,Sure. Some of them might. I know one who will. [Laughter],17
-fomc-corpus,1996,"Mr. Chairman, a reminder: Under our usual procedures our announcement will be made at approximately 2:15 p.m. Particularly since there will be a luncheon before then, we have to be very careful not to allow any inadvertent word of today's policy decision to get out before the announcement. Peter Fisher pointed out to me that last time there was a story on the tape by one of our well-known Fed watchers that suggested that he might have known something. It was ambiguous as to whether he did, but we have to be extremely careful that knowledge of this decision stays with the people in this room until 2:15 p.m.",128
-fomc-corpus,1996,What's the time of the release?,7
-fomc-corpus,1996,2:15 p.m.,6
-fomc-corpus,1996,Why don't we do it right now?,8
-fomc-corpus,1996,Why does it have to be at 2:15 p.m.?,14
-fomc-corpus,1996,"The Committee would need to make some changes. I think in the past the Committee has wondered whether it wanted to have the market sitting there for hours wondering exactly what time the Committee meeting would be over and speculating, in the event of a delayed release, whether something unusual might be going on. There was some merit in regularizing the time of the release. The Committee could change that.",78
-fomc-corpus,1996,"If we can't trust ourselves for 2 hours and 15 minutes, we have the wrong people in this room!",23
-fomc-corpus,1996,"You have been eloquent all day, but that was your finest comment!",15
-fomc-corpus,1996,"Good morning, everybody. Some of us are slightly blurry-eyed, which is understandable. I appreciate your coming somewhat earlier. Would somebody like to move the minutes of the January 30-31 meeting?",40
-fomc-corpus,1996,Move approval.,3
-fomc-corpus,1996,Without objection. Mr. Fisher.,7
-fomc-corpus,1996,Thank you. [Statement--see Appendix.],9
-fomc-corpus,1996,"Questions for Peter? If not, would somebody like to move to ratify his transactions since the last meeting?",22
-fomc-corpus,1996,I move approval of the domestic operations.,8
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,"Without objection, thank you. Mr. Prell.",11
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,"With respect to your last remark, has the decline in cattle prices been, as best you can judge, essentially a reaction to the increased feed costs that have crushed margins or is there a broader cattle supply cycle involved here? Do we know the answer to that?",52
-fomc-corpus,1996,I take it you are not referring to yesterday's--,11
-fomc-corpus,1996,"No, I am referring to the fact that cattle prices have been falling in the face of rapidly rising corn and soybean meal costs, for example, and ranch margins have been coming down quite appreciably. The question I am trying to get at is whether the weakness in cattle prices is the result of premature unloading of herds, which in the past has often been the determining factor in such price declines.",80
-fomc-corpus,1996,I don't have a good answer. My sense is that a reduction in herd size probably has not begun in any significant way. That remains one of the uncertainties. It could be that the markets anticipate that such a development will occur in the not too distant future.,52
-fomc-corpus,1996,"So a pickup in meat prices, should it occur, is still quite some time away?",18
-fomc-corpus,1996,Yes. We see that as more of a risk as we move out into 1997.,19
-fomc-corpus,1996,"Mr. Chairman, I think that is accurate. We think the depletion of herd inventories has just begun, at most, and meat prices probably reflect that expectation in the context of rising grain costs. The dominant factor is a strong supply of red meat that has not been liquidated yet.",57
-fomc-corpus,1996,Do you have any mad cows in your District?,10
-fomc-corpus,1996,"A lot of mad ranchers, but no mad cows! [Laughter]",16
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mike, you talked a little about PCs, and the Greenbook indicated that in recent history we have all underestimated the amount of investment in that area. I also saw The Wall Street Journal article on Monday. Is your reasoning as to why such investment is going to be weaker in the future similar to that in the article, or are there different reasons that lead you to that conclusion?",76
-fomc-corpus,1996,"The article did echo a couple of the reasons that we stated in the Greenbook. Admittedly, we stated those reasons only very briefly.",28
-fomc-corpus,1996,Yes.,2
-fomc-corpus,1996,"One was the remark about replacement demand. I certainly have heard this from people in the industry. They feel that in many cases businesses have acquired about all the computers they need. The question is how fast they are going to replace those computers, given the changes in technology. That was a central theme of yesterday's article. It also is clear that businesses confront an ongoing decision about whether to buy or to wait for the next round of technology. This is not something we really went into in the Green-book, but it is one of the uncertainties in the forecast. We have gone through a number of product cycles. At times this has been a significant feature in our thinking--that perhaps people would hold off buying until the Pentium chip became available or some earlier version. In this case, the P6 chip that is just coming out might lead to another issue of timing. Basically, though, the industry seems to be mature enough at this stage--its penetration of the business market, in particular, seems great enough--that the movements in investment more generally are going to show through in computer purchases. If we are in a phase when the accelerator effects are no longer a big plus, we would expect that to show through more in the computer sector than it might have earlier when computers were still increasing dramatically their penetration in the business sector.",266
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Mike, when you first gave us the projections for 1997 in the September Greenbook, the nominal GDP growth in that initial projection was a very hopeful path to me because it had nominal GDP growing just under 4 percent for the full year. That seemed about right to me. But in this Greenbook, your upward revision of nominal GDP by a full percentage point for 1997 jumped out at me. You now have it rising just under 5 percent, and I know your real output numbers have not changed that much. Even the CPI is only about 0.1 percent higher than you had it before. As I look at this puzzle and ask where the change is coming from, of course, it is all in the deflator. What changed your thinking so that you now have nominal GDP growing a percentage point faster in 1997 than you were projecting six months, or even four months, ago?",185
-fomc-corpus,1996,"President Jordan, that's a good question. I do not have a ready answer for you. Obviously, the deflator has shifted more than the other price indexes.",32
-fomc-corpus,1996,By a full percentage point.,6
-fomc-corpus,1996,"That suggests an element of mix change here. It is conceivable that, on further investigation, we shall find that there is something we are not entirely comfortable with in these numbers. So, I shall take that question as something for us to investigate before the next round.",53
-fomc-corpus,1996,"This does not answer the question either, but one of the reasons why the deflator is higher now than it was back in September is the shift to the updated base year. That has the effect of tending to raise the deflator and to lower GDP growth. That does not explain why nominal GDP is a percentage point higher than it was before, but it does explain why the deflator might be a bit higher.",83
-fomc-corpus,1996,"I should have noted that. Because the nominal GDP is higher, there is a bit of a mystery here for us.",24
-fomc-corpus,1996,"I'm glad Jerry pointed that out. When you construct the forecast, do you start with the nominal GDP forecast and work back?",25
-fomc-corpus,1996,"No, but in the course of a forecast where one needs to align both the income and the product sides of the accounts, the nominal totals are relevant. We should not end up with numbers that don't make sense.",43
-fomc-corpus,1996,"Right. I am fairly startled at your answer. That is why I am asking the question as to how the nominal falls out. I would think that you would start with a monetary policy forecast that would determine a nominal GDP--Don is shaking his head, so I have it wrong. Tell me exactly.",61
-fomc-corpus,1996,It is a simultaneously determined system.,7
-fomc-corpus,1996,But you have a full percentage point change in nominal GDP--,12
-fomc-corpus,1996,"It means that somebody's ""add factor"" changed very substantially.",13
-fomc-corpus,1996,"Well, all right, this burst of nominal GDP was the way of reconciling things that did not add up in the model.",27
-fomc-corpus,1996,Let me remind you that the observation was about a forecast made last September. That September forecast was put together prior to a total revision of the national income accounts. Some of those revisions did affect nominal GDP going back historically. I don't want to go too far here. I am not certain.,58
-fomc-corpus,1996,But they did. There were significant changes in nominal GDP.,12
-fomc-corpus,1996,"Right. But the fact is that the largest change in these nominal GDP forecasts for 1997 was between September and November. There has been a further upward creep that accumulates to a significant difference from September to now. But if one looked at the changes just over the past couple of months, one would see a pretty small creep and it would not be quite so shocking. We have to go back and look at this in light of the fact that, as Dave Stockton pointed out, we really did have a total change in the accounts in this period, both in terms of data whose history was revised and concepts that have changed.",126
-fomc-corpus,1996,Any further questions?,4
-fomc-corpus,1996,"Can I just follow up on that as regards further work? Mike, had you said in response to my initial question that you had been assuming a monetary policy indexed by a 6 percent funds rate --or, I guess, it was 5-3/4 percent at that time--and that the 1/2 percentage point drop since then is what did it, then we could have talked about that, or a change in fiscal thrust, or something. Or, coming at it from a different framework, if you had said that monetary growth is now producing much more total spending, then we could have talked about that change. So, the underlying question that has to be embodied in your answer once you come back to this is that at the end of the day we are still trying to decide whether a 5-1/4 percent funds rate is too high, too low, or just right.",182
-fomc-corpus,1996,"You are getting into a fundamental question about the whole forecast, and I am focusing more on the fact that, in particular, our consumer price forecast looking out into 1997 did not change a great deal. Our real GDP forecast has not changed much either, but we have switched from 1987 dollars to chain-indexed 1992 dollars. Allowing for that, our real GDP forecast for 1997 is stronger than it was back in September. You have just pointed to a couple of factors that would be relevant to thinking about that: one, we have a lower funds rate path than we anticipated at that time; two, we have removed some of the fiscal restraint that was in the forecast looking out through 1997. So, there is a consistency in that respect. I was focusing more on this narrower technical question and this relative movement in our price measures. That raises an interesting question.",182
-fomc-corpus,1996,"Any further questions? If not, would somebody like to start the roundtable? President Parry.",20
-fomc-corpus,1996,"Mr. Chairman, economic growth in the Twelfth District has picked up after a brief lull at the end of last year. Over the past 12 months, growth in the District has been substantially more rapid than in the nation according to recently revised employment figures. The increased pace of activity largely reflects a pickup in California, where job growth also has exceeded the national figure over the past year. It is encouraging that as the economy in California has improved, job growth has become more broadly based. During the early stages of the state's recovery, job growth was concentrated in several sectors that were growing even more rapidly nationwide, such as business services. During 1995, these sectors continued to grow rapidly but accounted for a smaller share of state job growth. Several key durable manufacturing sectors, primarily electronics, outstripped the rest of the country. In the rest of the District, employment has been very robust in Nevada, Utah, Oregon, and Arizona, which continue to be among the five fastest growing states. Washington's economy slowed over the past year, but the state's outlook for the rest of 1996 appears stronger in part because of increased orders at Boeing. District employment has been particularly strong in the services, trade, and construction sectors. Manufacturing employment in the District has expanded by just over 1 percent over the past 12 months. This compares favorably, of course, with declining manufacturing employment at the national level. However, declining semiconductor demand may slow District manufacturing growth in the near term. Turning to the national economy, as Mike Prell stated, the substantial amount of economic news released since our last meeting has taken us on a bit of a roller coaster ride. Nonetheless, it probably has had little net effect on the outlook for this year. Assuming a constant funds rate at the current level, I would expect to see real GDP growth perhaps slightly above its 2 percent potential rate in 1996. Of course, the GM strike will have some near-term effect on GDP volatility. What I find most striking about the current situation is the consistency of many inflation indicators. They all seem to be pointing toward core CPI inflation remaining around 3 percent, roughly the same rate as in the past 3 years. For example, both the unemployment and the capacity utilization rates are near common estimates of their natural rates. Also, the employment cost index rose by nearly 3 percent in 1995; this would be consistent with about the same increase in the CPI if experience over the past 15 years is a guide. Finally, inflation expectations as measured by Ed Boehne's survey are around 3 percent. This isn't surprising given the inflation indicators I have mentioned as well as experience with inflation in recent years. So, if we maintain the current stance of policy, it appears that conditions in the economy are likely to maintain roughly the status quo when it comes to inflation over the next two years. Moreover, if we do end up seeing a change in inflation, it is more likely to be on the up side since measures of unemployment and unused capacity appear to be slightly on the low side of their natural rates. Thank you.",626
-fomc-corpus,1996,Thank you. President Broaddus.,8
-fomc-corpus,1996,"Mr. Chairman, the information we are getting from our regional contacts has been decidedly more upbeat in recent weeks. Both our latest District manufacturing survey and our retail service sector survey showed broad-based increases in activity for the first time in about five months. Some of this news obviously reflects the rebound that occurred in February from the weather-related weakness in January, but not all of it was a rebound. We have made some inquiries beyond our normal survey questions, and it seems likely that at least some of the increase in the activity that we saw in February reflects a more fundamental strengthening of aggregate demand in our area. This apparent firming also is evident in what I would describe as the noticeably more optimistic tone of the comments at our board meeting a couple weeks ago and at our Small Business and Agricultural Advisory Council meeting last week. For example, who is on the boards of a couple of large retail chains including one national retail chain, has been generally pessimistic about the outlook for this sector ever since the beginning of last year. a couple weeks ago, though, she said she was guardedly optimistic about the prospects for the retail sector. That really got our attention since it was at variance with what she had been saying until now. who runs a multi-state building materials chain supported her assessment. In fact, most with only one exception reported greater optimism in the retail sector at that meeting. Elsewhere, real estate activity has been rising noticeably in most of the major urban areas of our District. The housing market in Richmond is said to be the strongest in five years. Turning to the national picture, we would agree with the Greenbook's increased emphasis on the upside risk in the current outlook. Obviously, we would not want to put too much store in one or two monthly economic reports. The February employment report, in particular, could easily be revised downward somewhat. But even if it is, I think the current situation is striking in that that report and most of the other recent monthly reports on industrial production, car sales, and other retail sales are stronger than we had anticipated. That is, they are all speaking with one voice. Although I would agree that we don't yet have unambiguous evidence that aggregate demand is now growing more rapidly than potential output, I think it is clear that we don't have a lot of upside headroom. By all accounts, the economy has been operating for a while now somewhere in the neighborhood of nonaccelerating inflation capacity or whatever you want to call it. With respect to inflation, I am not unduly concerned yet about the uptick in the core CPI that we have seen so far this year, since it may reflect continuing seasonal adjustment problems that we have had with that series in the early months of several recent years. Nor would I want to give too much weight to the recent increases in some measures of labor compensation, which were mentioned in the Greenbook. But as Bob Parry just pointed out, these indicators are generally moving in the same direction. That makes me nervous, especially against the background of the recent acceleration in money growth and even more especially against the background of the really spectacular rise in both intermediate- and long-term interest rates since the beginning of the year including, of course, the extraordinary 25 basis point jump in the 30-year bond rate on the day that the February employment report was released. Of course, until we have an inflation-indexed bond, we are never going to know for sure, when we get a runup in rates like this, what part of it is real and what part is an increase in the inflation premium. But with the economy currently operating near full capacity, that may well be a distinction without a practical difference because even if all or most of the increase were in real rates, if the economy is strong enough to push real long-term interest rates up this sharply in this brief period of time, it may not be long before that strength presses on capacity with longer-term inflation consequences. Indeed, if one were a pessimist on this, one could actually read the recent data as suggesting that something like this scenario may already be playing itself out. Thank you.",826
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. What is remarkable about the economy in recent months is its resiliency. Despite government shutdowns, severe weather, and strikes, the national economy is still on track for moderate growth and low inflation. The economy is also experiencing what could turn out to be its greatest restructuring since the Industrial Revolution, with all the attendant insecurity that comes at the personal level from change of this magnitude. That, I think, makes this resiliency all the more remarkable. My sense is that the upside and downside risks are about evenly balanced for the period immediately ahead. The inventory correction appears to be well along. The consumer, while somewhat stretched in terms of debt, still appears to have ample purchasing power for sustainable spending growth. And the strengthening in residential construction reflects positive consumer sentiment. One major builder told me, for example, that some of his strongest sales are in areas heavily impacted by the layoffs at AT&T. On the wage/price front, I think we need to be watchful, but we also need to keep in context where we are. We are more than five years into an economic expansion. We have seen little if any acceleration in inflation. I must say as I look back through the pipeline, there really are few signs of an acceleration of inflation at this point. The positive aspect of this expansion is that after more than five years we have not had any acceleration of inflation. My sense is that we are not at the point where that is likely; I think inflation will continue to be subdued for the period ahead. Turning to the region, the Philadelphia District economy continues to lag the nation. Pennsylvania in particular is a major laggard. New Jersey growth rates are more promising, and I think the outlook there is brighter. Delaware continues to be the little jewel that it is in the regional economy. What has impressed me most in recent weeks is the surge in new housing sales in the District. For the better builders, this surge has been apparent for a couple of months. Even in the dead of winter, the traffic into showrooms was very high, and people were more than looking; they were signing contracts. Now, if you talk to the builders who are not the most competitive or the leading builders, they also are feeling the upturn in activity. It is difficult to find a builder in the District who is not feeling that. I think low mortgage rates and the perception that mortgage rates have bottomed out have been a stimulus. But at least for the Philadelphia District, with existing home sales much slower than new home sales and population growth slow in the mid-Atlantic region, I think one has to be skeptical about the sustainability of the rapid increase in new home sales. Nonetheless, for a District that has been rather sluggish for a long time, a spur in residential construction is welcome at this point.",567
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, the economy in the Kansas City District continues to grow at a fairly strong pace, with recent developments pointing to greater strength now than I reported at the last meeting. Recent revisions to our state employment statistics showed stronger job gains in the Tenth District in 1995 than previously thought, running at a year-over-year rate of about 2.7 percent. Moreover, all seven states in the District added jobs at a fairly robust pace in January. Principal sources of our strength are in the manufacturing and construction sectors. District manufacturing continues to operate at high levels of capacity, and our general aviation industry is doing very well right now. Our survey of factories throughout the region also indicates considerable optimism about the next six months. In addition, our directors are reporting continued strength in commercial construction and some expansion in housing activity. As reported to us, loans are readily available at our banks to both commercial and other borrowers. Although District activity is generally strong, there are a couple of weak spots. The region's energy industry remains lackluster despite some higher oil and natural gas prices in recent months. Another weak area is agriculture, where a continued slump in cattle prices and continued dry weather are hurting the income prospects for many in that sector. However, those farmers who do harvest a crop should do well in light of the high grain prices right now. Wage and price pressures still remain modest in the District, although labor markets appear to continue to get tighter. More of our directors are reporting tight labor markets for entry-level and some skilled jobs as well. Prices of raw materials are showing some increases. On the national front, I think that the fundamentals remain strong, and we expect, as the Greenbook does, growth at about the potential rate of 2 percent. With the capacity in the economy being used at its current level, the rise in core inflation from 1994 through 1995 probably will continue, and I think that is a risk we have to keep in mind as I have said before. That concludes my comments.",407
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"For the most part, the Eleventh District's economy is showing reasonably healthy overall growth, but as always there are a few pockets of weakness. In the last ten days, we have met with our board of directors, our Financial Institutions Advisory Council, and our Small Business and Agriculture Advisory Council. The messages we got are pretty much the same. Our urban areas--particularly Dallas, Houston, and Austin--are doing quite well, but the rural areas are hurting. Cattle ranchers and cattle feeders are having a disastrous year so far. Conditions are expected to get worse, and the fallout is affecting our smaller communities. Once we get to the rest of the economy, conditions look a lot brighter. The stabilization of the Mexican economy has given an additional boost to our export demand. Retail sales along the border area have improved a little lately. Demand for computer chips and semiconductors remains strong, and five out of the six large chip plants under construction in the Eleventh District will produce customized chips. Whether we are in the early stages of an overexpansion and excess capacity remains an open question, but more and more people are beginning to express the view that when the next big shoe drops and affects the economy, it will be a boot filled with computer chips. Our construction sector is quite strong and some markets are beginning to heat up, particularly the industrial warehouse market where there is talk of 6 million square feet of speculative warehouse space coming on line in Dallas alone. We also are hearing discussions indicating that the office market is back to where money is chasing office buildings. While this may be a little exaggeration, we have been hearing for nearly a year that the office market has changed from a tenants' market to a landlords' market. The picture for the energy industry has been mixed. Oil and gas extraction continues its downward trend in spite of the high-tech drilling activity that I referred to at the last meeting. But the oil field machinery industry is expanding thanks to drilling demand. The petrochemical industry has been adding to capacity in spite of recent soft demand and low prices. Labor shortages continue to be mentioned as a constraint on further growth in a few industries. Wage and price pressures seem to be contained. Overall, the District shows moderate growth that probably is well above national growth rates. On the national economy, it seems that we are getting the soft landing we have been striving for, though perhaps the runway may be a little shorter than we like. The risks seem reasonably well balanced, but that would not have been the case in my opinion had we not reduced the fed funds rate at our last meeting. With respect to the Greenbook, I remain somewhat more optimistic than the staff with regard to the outlook for both real growth and inflation.",548
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, the New England economy is looking more and more like the national economy, even better in a couple of respects. The small revision in how we are looking at things comes about as a result of changes in the benchmarks for payroll data, which other people have commented on. The changes have shown New England's rate of growth over the past year to have been about the same as that for the nation. Before that, we thought our regional economy was lagging. The picture may change a bit when the national figures are revised this summer, and New England still has not recovered all the jobs it lost during the recession. Nonetheless, the latter episode is beginning to look more and more like a rather severe, one-time negative shock rather than the beginning of a new, slow-growth regime. New England's recent growth, while modest, reflects a continuation of longer-term trends in each of the states. New Hampshire is enjoying the strongest growth. Connecticut continues to lag behind the region while Rhode Island--the basket case as I have referred to it in a couple of presentations over the last several months--now appears to have been holding its own at least with regard to job formation over the past year. Unemployment in the region is low, only 5 percent for the region as a whole, with New Hampshire now down to 3 percent. Surprisingly, in view of the low unemployment, hourly earnings are increasing at an annual rate of only about 2 percent compared to 3 percent for the country as a whole. Anecdotally, however, our contacts indicate that there is a little more wage pressure than these numbers would suggest. Most of them are planning wage increases in the 3 to 5 percent range, where in prior months they had been contemplating 2 to 4 percent. One contact observed that people are no longer comfortable with wage increases covering inflation, and several others have commented on their difficulty in finding highly skilled computer workers and especially software engineers, for which there is a crying need. Unfortunately, laid-off defense workers are not always seen as suitable for seemingly comparable civilian openings. Defense cuts continue to be a drag on the New England economy, with the region experiencing larger cuts in defense-related employment than the country as a whole. The pace of these cuts is slowing, however, and over the next several years we believe the fallout in defense employment should be mild in the region. Despite defense cutbacks, total manufacturing employment has fallen less in New England in the past year than in the nation. No areas of strength stand out. Rather, employment seems to be increasing slightly in a variety of traditional industries such as lumber, metals, food, and paper and to be stabilizing in nondefense high-tech industries. Moreover, conversations with a variety of manufacturers suggest that 1996 is likely to be similar to 1995. Business is not great, but a number of contacts describe new orders as pretty good or decent. Indeed, some companies that pared employment in 1995 are now planning modest increases in staff, and several contacts report efforts to increase prices of final goods. Retailers continue to worry about competitive pressures and consumer anxieties. However, several contacts with stores in other regions observed that their 1996 results have been better in New England. Moreover, some of those who complained most bitterly in the past now report that their 1995 profits were up rather substantially rather than down as they had suspected. Turning to the national scene, we agree with the Greenbook's assessment that the likely outcome for the next year or so is GDP growth at a rate near potential, with unemployment relatively unchanged, and some rather modest upward pressure on wages and prices. While I agree that the risks to this forecast seem balanced right now, there may be some reasons to believe that it is marginally subject to surprise on the down side. That is especially because it includes very optimistic projections for both residential investment and consumer durables, at least when compared with several other forecasts, and because of the upward trend in interest rates, particularly since the employment report released in early March. I would view the possibility that the interest-sensitive sectors may be weaker as a potentially moderating influence on the upward tick, albeit small, in inflation that is incorporated in the forecast. If in fact we do see a March employment report that is anywhere close to being as strong as the numbers we saw for February, I think we would have to take rather decisive steps at that point to keep the expected uptick in inflation from becoming a surge.",907
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, economic activity in the Midwest remains at high levels, with some sectors relatively strong and others showing signs of moderate weakening. In general, housing and retail sales continue to perform well; manufacturing is growing slowly; and labor markets remain tight. A major concern has been the Dayton brake plant strike against General Motors. The strike has had a disproportionately large impact on the Seventh District where half of GM's laid-off assembly workers in the United States are located. Moreover, reports have been increasing of related layoffs at District suppliers of auto parts such as engines, transmissions, brake systems, exhaust systems, and electrical systems. Steel workers in Wisconsin and Indiana also have been affected. First-quarter production has, of course, been depressed by the strike and the layoffs. While some of the lost production will be made up now that the strike has been settled, GM will use the strike to reduce inventories of 1996 model cars and may wait for their new 1997 models to rebuild their car stocks. For light trucks, GM plants were already running at close to capacity, so it is not clear that light truck production in the second quarter will be much higher than it otherwise would have been. The strike does not appear to have affected sales of light vehicles because inventories of most GM car models were above what the industry considers desirable, and we understand that light truck dealers in the District have already sold out their first-quarter allotment. Preliminary reports indicate that sales of light vehicles so far this month are running at about a 15 million unit annual pace or a bit better, which implies a 14.9 or 15 million unit rate for the first quarter, slightly above the latest 12-month moving average. District retailers indicate that sales have improved from the weak results reported for January. Sales in February were somewhat stronger than in January but the bounceback was not as noticeable as it appears to have been elsewhere in the nation. I would note that the Midwest was hit by bad weather in February rather than January and that was a factor. Retailers report that sales so far in March show about the same increases from last year as they had in February. Contacts said it was too early to discern any noticeable impact on sales in communities with a large GM presence and actually none was expected. Reports indicate that Midwest consumers are less in debt and delinquency rates are generally lower than those in other parts of the country. Therefore, consumers are better able to take on additional debt. On balance, it appears that the level of housing activity is still fairly strong in most parts of the District. Housing starts in the Midwest fell in February, but that appears primarily to reflect colder-than-usual weather. Permits have held up and homebuilders remain optimistic. The District does not seem to have an overabundance of either new or existing homes for sale. In labor markets, the issue of job security continues to be a factor mentioned whenever we try to reconcile reports of tight labor markets with continued subdued upward pressure on wages. Labor markets remain tight throughout the District, and the unemployment rate in our states is still averaging about 1 full percentage point below the national average. Both total and manufacturing payroll employment increased in January, in contrast to what was posted nationally for that month. Reports indicate that the use of temporary workers by manufacturing firms has picked up since the end of 1995 as well. After taking weather differences into account, it appears that manufacturing activity in the District continues to do better than in the nation as a whole, although less so than in the past as we observe Midwest manufacturing activity converging to the national experience. For many of our major durable goods producers, activity has been flattening or edging down from the record or near-record levels of last year. Purchasing managers' surveys from Detroit and Milwaukee indicated expanding activity in both January and February. However, the Chicago survey moved from indicating expansion in January to contraction in February. Confidential information we have received indicates that the Chicago Purchasing Managers' report to be released this Friday, March 29, will show the index increasing from 44.9 in February to 47.3 in March, suggesting that manufacturing activity has continued to contract in March but at a somewhat reduced pace. The weakness evident in the Chicago report for March does not appear related to the GM strike because relatively few workers were laid off in Illinois and the survey was taken before the strike had gained much momentum. Farmers in the Midwest are gearing for a sizable increase in spring plantings, especially corn. Analysts expect combined corn and soybean acreage to be the largest in over a decade, up 7 to 8 percent from last year. Crop input prices are up, especially for fertilizers, but supplies are reported to be adequate to accommodate the increased acreage. More generally, however, most reports on prices still seem to point to little upward pressure or declines for a broad range of items such as aluminum, copper, paper, steel scrap, and steel mill products. The price component of the Chicago Purchasing Managers' survey for March continued on a downward trend and actually indicated declining rather than moderating increases in prices for the second straight month. Turning to the national picture, we do not have any serious disagreements with the Greenbook, although we still are slightly more optimistic on inflation. One reason for our marginally greater optimism is that real GDP is estimated to have grown only 1.4 percent last year. Obviously, there is a lot of uncertainty surrounding that estimate, but our analysis indicates that the output gap was about nil prior to 1995 and if our estimate of potential output is accurate, some slack has built up in the aggregate economy, which should reduce the likelihood that inflation will accelerate this year.",1136
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. Looking through the anomalies of the last several months, it appears to us that the Sixth District continues to grow at a moderate pace. The bad weather is likely simply to have increased the amplitude of the seasonal pattern in activity rather than to have exerted some lasting effect on overall performance. When we look beyond these distractions, we think that the Southeast will continue to outperform the rest of the nation, but probably by a smaller margin than has been the case in past years. As before, this improved performance is based on continued migration of both businesses and people into our region. Retail sales grew very unevenly in the District during the first three months of the year, with a notably slow start early in the year, especially in the northern part of the region where weather was clearly a factor. More recently, sales of many goods, particularly apparel and autos, appear to be much improved. Home sales in our area have been particularly brisk in early 1996 after a slow fourth quarter. Much of the acceleration is reported to be in starter homes at the low end of the market. Both residential and nonresidential activity remained surprisingly resilient throughout the bad weather period. Commercial real estate markets continue strong throughout our region. Outside of Atlanta, the industrial market is the most active, with lots of construction of warehouse and distribution facilities. The retail construction component finally seems to be slowing in some areas that have reached saturation, and that is something we have been anticipating for some time. In Atlanta as you might expect, Olympic activity has kept construction at a very high plateau, starting last year. The entire town is a mess. Bulldozers and paving equipment have the right-of-way over cars and people. We promise to be ready when the time for the Olympics comes, but if you can avoid it, please don't visit us until later in the summer. According to our regional survey of manufacturers, manufacturing activity actually eased off a bit in February, but at the same time expectations for the next six months are reportedly improved. In our District, the strongest sector is durables, while nondurables, especially paper, are lagging, and the apparel industry continues to shrink. In fact, the apparel industry is in secular decline and has lost almost 35,000 jobs nationwide over the last year. We don't expect those jobs to come back any time soon. Payroll employment expanded moderately in January following three months of only modest growth. But for the last 12 months ending in January, payroll growth in our region was 3.4 percent, more than double that of the nation. There continue to be scattered reports of wage pressures and labor shortages, and those are in isolated pockets in our District. At the same time, both our manufacturing survey and business contacts report minimal price increases in both raw materials and finished goods. As far as the national outlook is concerned, the unusual circumstances of late 1995 and early 1996 certainly have muddied the waters considerably and left us with more uncertainty than would usually be the case. On balance, however, I believe the economy has been relatively resilient after taking account of those special factors early in the year. So, our forecast of continued moderate growth and moderating inflation is essentially unchanged. From where I stand, I see pretty solid underpinnings for moderate growth in household spending and investment, a return to inventory balance, and good export demand. Except in the details, our outlook is very similar to that of the Greenbook. After a modest first quarter followed by a bounceback, I would expect a resumption of moderate growth in the 2 percent range. I still think that 2 percent is probably a little less than potential, so it may not come as a surprise that I am more optimistic than some with regard to inflation. In fact, I think there is a reasonable prospect that inflation could moderate over the next two years. It is unlikely that the moderation will be particularly dramatic or smooth, but I think there is a reasonable chance that the CPI could move closer to the 2-1/2 percent level rather than the 3 percent level that some seem to expect. I continue to believe that our policies and other factors have combined to create a more favorable price-setting environment that is both genuine and persistent. Thank you, Mr. Chairman.",864
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. Our District economy has outperformed the national economy for a number of years, but I do not have the impression that that is continuing. If anything, District growth certainly has been less than that of the national economy in recent months. The principal areas of concern are the manufacturing and cattle industries. All the cattle producers with whom I have talked describe their industry as an unmitigated disaster. Having said that, I think the District economy in general is still fundamentally sound. Part of the reason for the slowing growth is a factor that I have mentioned before, namely, labor supply constraints. Labor markets remain very tight. There are a few more, but still scattered, indications of increasing wage pressures and a somewhat more aggressive attitude on the part of labor. In addition, I would say that consumer spending on both goods and houses has been healthy in the last couple of months. With regard to the national economy, as has been the case for some time, I remain generally comfortable with the contours of the Greenbook forecast. I do think that the risks to the outlook may have shifted a bit recently, and I say this because as I look at the real side of the economy today, it strikes me as being in better shape than I had earlier expected it to be at this point. Therefore, I think there is probably less risk of prolonged weakness or even prolonged stagnation on the real side. By the same token, as I look at some of the potential indicators of rising inflation and in particular think about conditions in labor markets and labor attitudes, I sense that the risk of somewhat more inflation than at least I had earlier anticipated may also have increased.",336
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. The Eighth District economy continues to expand. A few contacts noted some softening at the beginning of the year, but many expect a pickup as we move into the second quarter. Unemployment rates in District states tended to jump early in the year for weather-related reasons, but Missouri was a notable exception; the state enjoyed a very low unemployment rate of 3.4 percent in January. About 3,400 District workers were laid off because of recent strike activity against General Motors, and unofficially about 800 workers in related industries were affected. But looking forward, District auto production at Ford and Chrysler plants is expected to rise 4.7 percent in the second quarter. Loan demand, especially for commercial loans, is still strong in most parts of the District. Unseasonably cold weather produced significant damage to winter wheat in southern Illinois and catfish in the Mississippi portion of the District in February. [Laughter] It's a big industry! Nationally, the economy is displaying some underlying strength. The February employment report was more than a simple rebound from a weak January. The pace of net job creation was averaging somewhat better than 100,000 per month over the last nine months of 1995. It seems plausible that the January data were depressed by about 300,000. Even if we count 300,000 of the February total as a rebound and add 100,000 for trend growth, the 705,000 February number still looks like a significant upside surprise of about 300,000 jobs. Maybe some of that increase will be revised away. Retail sales, factory orders, and housing starts also indicate underlying strength. For those who look at the latest developments in the real economy as a trigger for monetary policy actions, I think it is clear that we moved last time without much new data; and when the data came in, they were contrary to what was expected. Some here referred to our lowering the federal funds target as buying insurance, but this was not a hedge in any usual sense. In fact, we were making a speculative bet on the nature of the incoming data. It is a bet that we likely lost now that the economy looks a lot more resilient and also a lot more inflation prone. The press release accompanying the last move compounded the problem in my view by suggesting that the FOMC is complacent about longer-term inflation objectives. It read a bit like a victory statement saying in part, ""with price and cost trends already subdued"" when in fact we are still a long way from price stability and Q4/Q4 CPI is projected to rise in 1996. Furthermore, as others have mentioned, some recent data are worrisome, including the employment cost index for total compensation of private industry workers as well as benefits costs, which were discussed at some length in the Greenbook. The long-bond yield, as others have mentioned, also has increased more than 50 basis points since the last meeting. An important component of that yield, namely, longer-term inflation expectations, is a matter of concern for this Committee. As I have stressed before, despite FOMC pronouncements of a commitment to stable prices, market participants and professional economic forecasters do not expect lower inflation in the foreseeable future. These expectations are a large part of what is standing in the way of further progress toward price stability. The way to influence those expectations is for this Committee to announce a target path for inflation over the next several years that contemplates a reduction from the current 3 percent level. In addition, of course, we must take actions consistent with that path. An opportunistic approach will buy us no credibility whatsoever nor market behavior that reinforces our efforts to achieve our objectives. Thank you.",751
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The economy of the Second District continues to underperform the nation as it lumbers along on its slow growth path. Recently, retail contacts reported that February sales rebounded to plan levels following the very disappointing January and the record blizzard. Senior loan officers at small- and medium-sized banks reported that demand for nearly all types of loans has strengthened over the last two months, with the largest increase developing in the consumer loan segment. Of course, we all know that the consumer loan debt level is a bit higher than we might wish. In the securities industry, a major investment bank reported a three-fold increase in pretax profits for the fiscal quarter ending in February compared to the same period a year ago, and our market soundings indicate that its competitors also seem to be having a robust quarter. The profits in that industry are an important contributor to income growth in New York State. Overall, the District's housing industry has remained weak in February and early March, but we have a glimmer of hope in the commercial real estate market, with continued improvement in the vacancy rates in midtown Manhattan. We continue to be concerned about the District and why it underperforms the nation. We are going to be moving even more of our research capabilities into that area and look forward to having a couple of meetings toward the end of the year: one consisting of economists will try to identify the problems and the other of policymakers will discuss what might be done to get the area growing a bit faster. At the national level, our forecast is very similar to that of the Greenbook. The Greenbook, as you know, has growth at just about 2 percent in 1997, and we have it somewhat below that. Not surprisingly, therefore, our CPI forecast is more attractive, at 2.8 percent this year and 2.7 percent in 1997. We have the unemployment rate moving up some, in fact to about 6.2 percent next year. That is to some degree related to our view that the participation rate, especially by adult males, has been unusually low, and there might be some rebound in labor participation that would raise the unemployment rate. So, with the favorable data recently on employment, consumer sentiment, auto sales, retail sales, housing starts, and net exports, the major shift that we have made in our forecast is that we think that the risks to the forecast are now quite well balanced. At the previous meeting, we were concerned about the risks on the down side and therefore thought that the ""insurance"" easing, as the Chairman described it at the last meeting, was appropriate. Now we think that the forecast looks rather good and that the risks are quite well balanced.",549
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. It seems to me that economic activity is tracking along the Greenbook path about as we had expected and hoped. I want to associate myself particularly with Ed Boehne's comment that the remarkable resilience of this economy has been the most interesting development recently. This certainly is not surprising, but it is highly gratifying. Perhaps the only surprise is the very early and rather strong reemergence of strength in the economy, and along with that a more credible upside risk and its mirror image, a little alleviation of the downside risk going forward. This seems to leave us with a high likelihood of a quite satisfactory economic performance in the period ahead. I agree with Vice Chairman McDonough that the risks appear to be symmetric, perhaps not terribly strong at this point, but it seems to me that they are moving in the upside direction. My main concern at the moment is that all of this looks just a little too neat and too pat. I can't quite trust it. We know that challenges are going to emerge, and I suspect they probably will arise somewhat sooner rather than later. We will just have to be alert to what those challenges turn out to be and when they are going to appear.",245
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. The progress of the economy over the last several months has been reminiscent of ""the perils of Pauline,"" with blizzards, government shutdowns, threats of default on the national debt, strikes, and a frightening albeit brief dive in the stock market threatening the progress of our heroine. Nevertheless, the single most probable outcome at this stage is that this economy will survive its treacherous adventure and ultimately attain trend growth with stable inflation. I agree with the Greenbook assessment that the stage appears to be set for a rather sharp rebound in economic growth from the average pace in the fourth and first quarters. Considerable progress appears to have been made in reducing inventory overhangs, so there is a reasonable prospect that inventories will become a neutral factor in the economy in the not too distant future. Meanwhile, demand has held up surprisingly well in the face of a rather large inventory adjustment in the fourth quarter. Over the longer term, a projection of near-trend growth through 1997 with roughly stable inflation strikes me as a plausible scenario, although there are some risks. On the negative side, I am particularly concerned at this stage about the possibility of a significant stock market correction. The current level of stock prices is not impossible, but it is increasingly difficult to justify in terms of fundamentals. Disappointing earnings reports could easily set off a correction. I am also concerned about the likely negative, albeit lagged, impact on housing and consumer durable spending of the very substantial increases in interest rates since our last meeting. I find the longer-term Greenbook projection of housing starts particularly optimistic in light of these increases. On balance, with intermediate- and long-term interest rates at their current levels, I feel less certain than the staff that trend growth is possible as we go out in the forecast period. But there are also some risks on the inflation front. While recent readings on average hourly earnings provide reassurance that wages are not accelerating, the jump in health insurance costs evident in the fourth-quarter employment cost index creates the worrisome prospect that these benefit cost increases may be poised to rise further. I don't think we should overinterpret one single report, but I do agree with the Greenbook's assessment that this is one of the risks going forward.",454
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The fog has lifted somewhat since our January FOMC meeting, and perhaps we are now operating only in patches of fog. I continue to believe that it will be well into the second quarter before we have a clear picture of what happened even in the fourth quarter, let alone the first quarter of this year. We will continue to hear arguments about whether the government shutdown obscured the sampling periods and so on. There will be arguments about the effects of the weather--whether or not firms will make up their losses and whether or not needed inventory adjustments have occurred. I also think that the new data calculation methods will continue to challenge us to become comfortable with the notion that 2 percent real GDP growth is in fact what we should be striving for. Obviously, the past is behind us, but a clear picture of the near past or even what is in the proverbial ""rear view mirror"" can help us understand whether or not the economy is going up, down, or has just rounded a corner. This uncertainty about the near past certainly has been reflected in the markets. There is sensitivity to almost every piece of economic news that is released, and we seem to be having a considerable reaction, perhaps even overreaction, to unanticipated economic news. I was struck by the sizable swings in the GDP estimates in the Greenbook since the last meeting. There is quite a change in the fourth-quarter, the first-quarter, and the second-quarter estimates for GDP. Most of it is explained by the inventory correction, which has shifted some of the growth from the fourth quarter to the first quarter. That improves the outlook so that the second-quarter estimate is considerably higher. The net effect is a forecast that is a bit brighter. Going forward, I quite agree that the best estimate is for continued moderate growth. The employment report that we got for February probably was on the high side and may well be revised. Even so, it is a relatively strong report. Industrial production has been stronger. Housing may slow a bit due to the backup in interest rates, but the recent data have been surprisingly strong, and the fundamentals for continued activity in housing remain pretty good. In addition, my brother just sold his house. [Laughter] This is a sign of considerable strength in the housing sector--in the Fifth District, I might add. [Laughter] With respect to business fixed investment, I think it is pretty unlikely that we will see growth continue at the same pace as in 1994 and 1995. By the same token, I don't think there is any major reason for a big pullback. The cost of capital is still fairly low, and if we are correct in forecasting that aggregate spending will hold up and that businesses have a continuing commitment to holding costs down, profits and cash flows should be reasonably strong. Nevertheless, business firms already have added a good deal of capacity, so we probably will see less growth in spending on industrial production facilities. As has already been mentioned, the outlook for spending on computers is not as strong as it has been, and such spending has explained a lot of the growth in business fixed investment. So, I think we probably will not experience quite as much strength in business fixed investment as we have seen recently. Again going forward, I don't think that the usual bottlenecks that one might see in a mature expansion are present. We seem to have plenty of credit availability. The banks and the markets are still reasonably well positioned to support expansion. We are not seeing as much in the way of balance sheet adjustments. There are some but not enough for us to find ourselves in a windshear situation. I think household spending is likely to keep pace with income. This is a little less optimistic than the Greenbook, but I think that some of the hypotheses relating to household spending suggested in the Greenbook are very interesting. These include job anxiety and perceptions of the shakiness of Medicare/Medicaid. Perhaps people are being attracted to high stock prices. I hope this is going to mean some improvement in saving, and maybe people are hitting their borrowing limits. So, while moderate growth is a probable forecast on balance, I think there are risks to the outlook. One of the big risks that several people around the table have mentioned is on the inflation side. While I believe it is possible to make some progress on the inflation front given reduced capacity pressures, labor market uncertainty, and cautious consumers, I do think that some of the inflation risks have increased since the last FOMC meeting. The increase in oil prices is an example. Another year of bad crops could cause prices to ratchet up. Wage increases could finally be heading up. Also, prospects for major gains in terms of deficit reduction have diminished considerably even since the last FOMC meeting. In sum, I think the economy is in a more balanced situation than it was in late January and we can look forward to moderate economic growth with a bit less uncertainty than we were feeling in January. But I do think that the inflation outlook is less favorable.",1016
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"The Fourth District is in between Ed Boehne's and Mike Moskow's Districts, but so much for geography. It is hard to get a reading not only on what is actually happening but on what is expected in our area for this year and the year ahead--the time horizon that is relevant for policy discussions--especially when the national statistics are so troublesome. An optimistic note for the longer term from one of our directors--he called it an optimistic note anyway--was his report that applications for admission to law school this fall are down 20 percent. In trying to filter all the anecdotal information, the Beigebook report for our District was definitely more upbeat than the previous couple of Beigebooks. One director who has lived in the area all his life noted that this change in mood happens every spring. Sometimes it is a reflection of how bad the winter was. Since this was the second worst winter of the century, a rebound may not be too surprising. That also may explain some of the resiliency of the national economy that both Governor Kelley and Ed Boehne noted, and I will come back to that in a moment. You may have seen the other front page article in yesterday's Wall Street Journal that covered the export industries, including those in Ohio, and indicated how that sector of the economy has served as an underpinning to overall economic activity to an extent that may not have received the attention it deserves. Another issue that we have been looking into is retail sales. Our region of the country is incredibly strong in retailing companies, companies that operate not only nationally but even globally. There are consistent reports of much stronger catalog sales; their mail order sales are continuing to rise very sharply as a percent of their totals, often at double-digit rates. This raises questions about how much of that is domestic and how much of it is what we would call exports, whether it gets reported that way or not. A new phenomenon that people are citing, though it is hard to quantify, is Internet sales, ordering from these companies through the Internet for shipments abroad and bypassing the usual retail distribution problems that exist in Japan in particular but also in other places around the world. The Commerce Department says that at this point they don't have a good handle on either the magnitude of this or what it is contributing to total sales. They are pretty certain that they are underestimating total sales, but they can't quantify it. Because of the difficulty of interpreting the numbers, I made a special effort yesterday to get the first-quarter report of the National Federation of Independent Businesses that will be released in a few days. Not unlike the comments around the table this morning, the report will be fairly mixed. Employment plans are down somewhat from the earlier report while capital spending plans are up, which is contrary to the commentary in the Wall Street Journal column and the general concerns about capital spending. Small businesses indicate that they will increase such spending this year to what would be a record level in the index. The inflation news is fairly good. Fewer firms are now planning to increase their prices this year than in previous reports. This still raises in my mind some very fundamental questions about the process by which an inflationary phenomenon is created. I don't think of inflation as being rising prices. In one sense, I am very encouraged as regards the national economy. It is one of those stories about the water glass being half full or half empty. Compared to a year ago, inflation psychology seems to have improved by about 1/2 percentage point. A year ago at this time, the general forecast was that inflation would rise to about 3-1/2 percent. The current expansion has now lasted several years and every year the forecast has been that inflation would go up. Finally, we are at a point where the forecast is that inflation is going to remain the same this year. It may be too much for us to expect people to say that inflation will go down next year. So, we have to go through a transition period of at least no longer forecasting rising inflation to get comfortable with the idea that, even as we head into the sixth year of the expansion, inflation is going to remain the same. The next step is for people to adjust psychologically to that, and in the future inflation actually will go down. I am trying to interpret what has been going on in asset markets and separate the real from the inflation components. We have to be very careful in what we think we know about that. What has been encouraging about all the commentary this morning and the reports we have seen about the resiliency of the economy is that no one is saying that this is a result of good old-fashioned, pump-priming monetary and fiscal stimulus, but rather it is what markets do. When depressants are absent, markets tend to create a process by which an economy expands. If that is a valid interpretation of the dynamics at work out there, then I don't think we have to be nearly as concerned about an increase in inflation as we would if we were concluding that either monetary or fiscal policy was pumping up aggregate demand. That relates to my earlier concern when I asked Mike Prell about the Greenbook, but we will have to discuss that another time. I am still not comfortable with the Greenbook projection of inflation for 1997; I would like to see it lower. If I firmly believed that the Greenbook was correct and we would have yet another year of about 3 percent inflation, I would find that unacceptable. So, I have to conclude by simply hoping that they are wrong.",1119
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"I think the change in the data, the closing of the government, and the snow have allowed us to forget there are still three unresolved issues in the economy. The first I would call the labor market/household sector issue. I think the story is that we can't go on like this, but I do not know how it will change. The anecdotal comments around the table universally have referred to tight labor markets. That is what I hear anecdotally as well. I was in Indianapolis two weeks ago and, as they phrased it there, ""you can't hire people at any wage."" I won't comment on their economic logic, but no one was raising wages at the time they were saying they could not hire people at any wage! We have had very low increases in nominal and real wages. That is inconsistent with reported labor market conditions. In addition, household spending has been growing substantially faster than wage income, and the gap has been financed by higher debt levels. This situation is going to be resolved either through greater wage claims in a more militant labor market, which could be financed incidentally by foregoing any further increases in the share of profits but would require at least a stabilization in the profit share, or through curtailed spending at some point. The second unresolved issue is fiscal policy. We thought we were going to begin to see it get resolved, but the fact is that we still have unsustainable entitlement policies in place. The entitlements will have to be cut at some point. The market has decided that that decision will probably be delayed until after November. Of course, the election results in November may well serve to defer the decision still further. If that is the case, I think it will lead to what I see as a third unresolved issue, the level of prices in capital markets. That level is one of the reasons why we have been enjoying an investment boom; in fact, the investment boom and rising prices in the equity markets have been feeding on one another. A booming capital market has made equity capital very cheap and has allowed the double-digit rate of growth that has occurred in gross private domestic investment. Focusing on the computer issue, when we have a deflator that is actually deflating, the effective hurdle rate of return needed to justify a purchase becomes quite high. That's because the nominal price of the good is going down, and in addition we need a positive nominal return on the capital. To justify buying a computer now, we have to add the 12 percent decline in the deflator to a 6 or 7 percent rate of return on the cost of capital, a total return of 18 or 19 percent. There just are not many investments in that sector that can be justified on that basis, and at some point such investment is going to end. It will end more quickly if in fact the cost of capital rises at the same time. That in turn will depend on how the labor market and fiscal policy issues are resolved. If we end up with greater wage claims or if we end up with a decision to defer the entitlements reform, we will see a substantial further increase in intermediate and long rates, and that will precipitate a market adjustment. On the other hand, if we see curtailed spending by both the household sector and the public sector, we probably will see a decline in the share of profits and a decline in investment as a result. I think that the weather hiatus has allowed us to forget that we still have some fundamental unresolved issues. The Greenbook is forecasting a sustained middle course on how the economy will resolve those issues. The risks around that middle course are probably balanced at this point, but I think those risks are growing. In fact, especially in the sixth and seventh year of an economic expansion, there is an increasing probability that the expansion will not be able to stay on the middle course but will fall to one side or the other.",785
-fomc-corpus,1996,Thank you. Coffee should be out there. Would someone take a quick look and see whether it is there?,22
-fomc-corpus,1996,We really just finished breakfast!,6
-fomc-corpus,1996,We must be in great shape if we are having a break at 9:30 a.m.!,20
-fomc-corpus,1996,"They are setting up, but it will take a few more minutes.",14
-fomc-corpus,1996,Corporate planning is less than adequate. [Laughter] Don Kohn.,15
-fomc-corpus,1996,"We will have a race between my briefing and the setup for the coffee. I'll talk fast and maybe I can win! As background for your policy discussion, I thought it might be useful to take a closer look at a key development in financial markets over the intermeeting period, the rise in long-term interest rates that a number of you have mentioned. [Statement--see Appendix.]",76
-fomc-corpus,1996,Thank you. Why don't we break for coffee?,10
-fomc-corpus,1996,"Let me get started. In a period like this, it may be a good idea to review history to see how we got to where we are. At the moment, the economy might be described by an electrocardiogram that does not say the economy is dead but indicates it is functioning in a way that suggests something is going to move--as a number of you, including Governors Kelley and Lindsey, have stated. The one thing that is reasonably certain is that the outlook depicted by the electrocardiogram in the Greenbook is very unlikely to prevail. The key questions are: In which direction is the economy going and how is it going to get there? A critical element in this outlook is the interplay of asset values, specifically bond and stock values, and inventory changes. What is really quite extraordinary about this period is that despite what we continue to envisage as an increasingly service-related economy and one where business firms are increasingly getting control over their inventories, inventory investment has been the most volatile element and the greatest determinant of economic change in the last two or three years. In the early part of the 1990s, as firms finally were technologically capable of moving toward just-in-time inventory management, inventory-sales ratios moved down precipitously. You may recall that in the latter part of 1993 one of the reasons we began to get a little concerned about the upturn and potential strength of the economic recovery was that inventory-sales ratios were getting to a point that seemed to be close to bottom. Obviously, the arithmetic of a change from a declining inventory-sales ratio to a flat ratio is a ""pop"" in inventory investment. Indeed, it ""popped"" more than I believe we had expected, creating a significant surge in economic activity throughout 1994. Presumably through the normal multiplier mechanisms, the pickup in inventory investment induced enough income and PCE to create fairly strong economic growth. A big pickup in profit margins was superimposed on that, which in turn fostered growth in the capital goods markets until we ran into the wall in early 1995 when voluntary inventory accumulation temporarily turned involuntary. Final demand slowed appreciably, and you may recall that in June, or maybe slightly earlier, we were terribly concerned about whether the economy was on the edge of a recession. The economy worked its way through that, but inventory investment continued to fall throughout 1995 as business firms endeavored to restore some degree of normality. In the early months of 1996, were it not for the weather problems that dominated a substantial part of our economy, estimated at as much as one-third, plus the government shutdowns, we probably would have begun to see some economic strength after the retardation in economic growth that the inventory adjustment engendered all through 1995. The experience of California, where weather was not much of a problem, suggests that quite possibly the turn occurred at the beginning of the year rather than in February as shows up in a lot of our data. At the moment, we can look back and ask ourselves why the economy held up, or as Ed Boehne put it, was so resilient through all of this period. I think the answer is largely that we had a very substantial increase in stock and bond market prices. There has clearly been a wealth effect here. As in previous periods, it was quite likely that the turn in inventory investment could have tilted the economy into a recession, considering that the expansion is more than five years ""long in the tooth"" so to speak. I think the equity and bond markets were especially helpful in creating a degree of resilience that has carried the expansion into 1996. The economy is likely to be stronger rather than weaker in the period immediately ahead if for no other reason than that it will be getting some stimulus from the GM strike. The strike in retrospect may turn out to be somewhat fortuitous in that the bulk of excess motor vehicle inventories was held by General Motors. While I don't know the configuration of the inventory decline in terms of particular models, because invariably such declines are not uniform nor are they the same as a voluntary decline, clearly there has been some signifi-cant pressure on the economy that will be reversed as we move into April and May. The comments around this table suggest that the members regard the risks to the economy as being as close to balance as one has seen for quite a while. In looking back at the performance of the economy in this period, I must say it was the most probable result that we could have anticipated, but attaining that outcome was fraught with potential uncertainties. I disagree with Tom Melzer's characterization of what taking out monetary policy insurance means. As I see it, taking out insur-ance means that we are adjusting policy on the basis of a risk to the forecast that has a low probability of occurring. In fact, that is the basis for all insurance. We take out fire insurance because we forecast that there is some small probability of fire. I don't think we take out monetary policy insurance when we think that the economic trend has changed fundamentally. A fundamental change in our forecast calls for a policy response in the appropriate direction, whereas I think an insurance takeout is done largely on the basis of a forecast of something that we do not expect to occur. The fact that it did not happen in this case, or at least it has not happened yet, is a desirable outcome. I would be very much disturbed if it were the other way around. You can look at insurance any way you want. I like to take out insurance. I have a lot of personal insurance. I have never collected on any of it, and I must say that I am delighted. [Laughter] And I hope that that is exactly what we will say later with respect to what we have been doing.",1168
-fomc-corpus,1996,The premium isn't fixed in this case; that is the difference.,13
-fomc-corpus,1996,"Let's not get into insurance policies! [Laughter] More generally, to confront the problems that we face, we have to ask ourselves what can change. Two issues have surfaced in the discussion around this table that, I think, are quite to the point. One is whether we are going to be looking at increased labor militancy. The answer is that increased militancy is more likely than not, if for no other reason than that we cannot expect the current situation to continue. As I indicated maybe 6 or 9 months ago when I hypothesized that job insecurity was an explanation for why wage inflation has been subdued, there is a limit to this process at which point it begins to go back to normal. It may well be that political issues that have been raised during the presidential primary campaign plus the General Motors' strike are the first signs that the limit has been reached. It is too early to say, and I don't think we have any definitive data to suggest, that the wage-job security tradeoff has changed, but I believe we are getting the first indications that it may. The second and more disturbing issue is the question of the stock market. The market is probably high by any objective measure that we can find. We need a lot of different assumptions to argue that it will stay there. It is being driven largely by long-term interest rates, but there is more to it than that. Earnings are still coming in above expectations. This is the Wall Street evaluation. It's what a series of analysts expect earnings to be company-by-company. Those numbers have been coming in better than expected for quite a while, although the margin is now changing very materially. There is increasing evidence that profit margins, after showing some significant strength, are finally beginning to soften somewhat, as Mike Prell indicated with his markup ratio analysis. This obviously has significant implications for the capital goods markets at some point and far more impact with respect to the question of what stock prices are going to do. What I find particularly bothersome is that history suggests more often than not that stock prices remain high for a protracted period of time when they should not; stock prices may just be waiting for us to move rates up before they go down. We probably are going to find ourselves in that position one way or another at some point. But I do think we have to be aware of the fact that this may be unlike 1987 when the stock market decline essentially took out virtually all of the overheat, if I may put it that way, in the economy, increased the saving rate about a full percentage point, and barely affected economic growth. In a sense, it went through fat and never quite hit muscle. There is very little fat left in the economic system at this stage. If we get a very significant contraction in stock prices, I think it will have a quite measurable wealth effect. Therefore, it is very difficult to look into the future and merely presume that 1996 and 1997 will produce a flat electrocardiogram. It is probably the best forecast and the most likely outlook simply because it is difficult to figure out where the extremes are. But one thing that we can forecast is that we probably are going to be surprised by more rather than less volatility in the economy. I do not know in which direction the economy will be going, though ultimately it will go down. It will go down basically because if we seriously believe, as I think every one of us has said around this table, that the business cycle is not dead, recession is going to look us in the eye at some point. We do not know when, but I think one of the most extraordinarily difficult periods for monetary policy lies somewhere ahead. For the moment, listening to the consensus on the economic outlook and the balance of risks, I would subscribe, and I hope the rest of you will also, to doing nothing today. This is what the market largely expects because they are looking at the same data that we are. Thank you.",803
-fomc-corpus,1996,Symmetry?,3
-fomc-corpus,1996,An obvious symmetry. Vice Chairman.,7
-fomc-corpus,1996,"Mr. Chairman, I support the ""B"" symmetric proposal. I agree that the most likely forecast is the one that we all agreed on, and I think it also is highly unlikely that it will materialize. We will have to adjust one way or the other and stay extremely wary and ready to move in the interim. But certainly for now, the ""B"" symmetric proposal is the right one.",81
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, much of the evidence that we have received since the last meeting suggests that economic activity has strengthened, as the gains in February have more than made up for the weakness in January. Even with the GM strike this month, it now appears that there will be a marked pickup in real growth in the current quarter as a whole. At the present time, there appears to be little upward or downward pressure on inflation, although I do think that the inflation risks are on the up side. Accordingly, I would agree with your recommendation that we make no change in policy at this time. It seems to me that further easing would be inappropriate, given the increasing strength of the economy and the risks that this could lead to higher inflation in the future. It would also seem prudent to me to wait for more information before we decide on our next action. If economic activity continues to pick up, it might soon be appropriate to increase the funds rate. Thank you.",192
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Alan, I agree with your recommendation. I have some concerns, obviously, based on what I have said before. It is difficult to evaluate the stance of policy, but I am concerned that it may not even be neutral at this stage--just based on what is happening, for example, with monetary growth rates and some of the factors that Don mentioned. I think the current policy stance is inappropriate given the 3 percent inflation expectations. In my view, we ought to be in a somewhat restrictive policy stance and be working the rate of inflation down in some orderly fashion. But having said that, I don't think it is appropriate for policy to go in one direction at one meeting and in the other direction at the next, certainly under the circumstances we have described today. We are where we are, and we should stay there for a while and watch. But we need to be vigilant so that--I am going to stick with this insurance analogy a little longer--the premium on last meeting's insurance policy in terms of higher inflation expectations does not become onerous. That is what I meant before when I said that, in effect, the premium is not fixed. There is a cost to it. One other point I wanted to make quickly refers to Don's briefing. Don, you made a statement, if I heard it correctly, about the Committee's opportunistic inflation strategy, which implied that the Committee had actually adopted that. By default, that may be where we are, but I don't think we ever consciously made a decision about what our inflation strategy ought to be, whether it is deliberate, opportunistic, or whatever. I just wanted to make that comment.",333
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, as others have said, we often evaluate the economy and the outlook in terms of risks and how they are balanced. It would certainly seem that there has been some change in the balance of risks away from the downside risks toward upside risks. I don't know whether we want to call it insurance or whatever, but at the last meeting I think there was a perception that the risks were more heavily balanced or tilted toward the down side than they are now. That balance seems to have changed. On those grounds I think we have to contemplate the possibility that we may need to reverse the move we made last month at some point in the not too distant future. I certainly would not recommend doing that now. I would agree with your proposal. But if the data for the month of March that we will get at the beginning of next month--for example, retail sales or unemployment--show continuing strength, I think we will need to consider seriously the possibility of reversing our policy course at a fairly early date. In that regard, I would point out that we have a long interval before the next FOMC meeting, which is on May 21. If we begin to get these numbers for March early in April and it appears that they are signaling continued strength, I would hope that we might have a conference call to consider how we might want to react to them.",274
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I agree with your recommendation, Mr. Chairman.",10
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I also agree with your recommendation, Mr. Chairman. I would like to reflect a little on your comments about reaching the end of the business cycle expansion sooner or later. Obviously, that will happen. The concern I would have is that we might experience a pattern somewhat like the late 1980s when prior to the end of the expansion phase of the business cycle, we had a surge in inflation that we had to tamp down, thus feeding into the end of the business expansion and adding to the depth of the recession. I am a little nervous about that possibility at this point and concerned that we should, on assessing the data as we go forward, be vigilant on the side of keeping interest rates and monetary policy restrictive enough to prevent a surge in inflation that ultimately would tend to shorten rather than extend the growth phase of the business cycle.",168
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,I agree with your recommendation.,6
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"I, too, support your recommendation.",8
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,I agree with your recommendation.,6
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,I agree with your recommendation.,6
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I agree with leaving the federal funds rate at 5-1/4 percent at the present time. But in the context of Al Broaddus's suggestion about monitoring the incoming information and deciding what to do in the future, I think we need to think more about what the yield curve is telling us and try to reach some consensus about it. In his remarks, Don traced what was happening in the forward and futures markets. I was on the Morning Call during this period and paid more than usual attention to daily movements in interest rates. The yield curve at the end of January and in early February was priced off a 4-1/2 to 4-3/4 percent funds rate. The only thing that was at 5-1/4 percent was the overnight federal funds rate. The rest of the yield curve--3-month bills on out to the 30-year bond --was priced to be at least 50 basis points lower by Labor Day. I don't know what people have in mind in the way of a transmission mechanism of monetary policy to real economic activity, but I thought that the markets simply were well ahead of us for whatever reason: perceptions of a weak economy, inflation expectations, or whatever. They simply readjusted to economic developments and that had to happen. In that sense, we had a relative movement toward less stimulus even though the funds rate did not change, and it should not change for the time being. But as we interpret numbers in the future and decide how to react to them, I think we need to be very, very careful about whether the market is ahead of us, behind us, or whatever.",332
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I agree with your suggestion. It seems to me that the need for additional insurance is less pronounced. The cost is now simply too high relative to the risk. The economy is moving forward, and it does not appear to need our help at this time. I can well imagine that our next move could be either up or down.",66
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Mr. Chairman, I agree with your proposal and I also agree with your assessment of the key risks.",21
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"I concur with your recommendation, Mr. Chairman.",10
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,I concur with your recommendation as well.,8
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,I agree with your recommendation.,6
-fomc-corpus,1996,Would you read the symmetric directive?,7
-fomc-corpus,1996,"The directive wording is on page 13 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",109
-fomc-corpus,1996,Would you call the roll?,6
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Phillips Yes President Stern Yes Governor Yellen Yes,40
-fomc-corpus,1996,The next meeting is on May 21. We took out an hour's worth of insurance this morning. [Laughter] It turned out that we did not need it. I don't know whether you consider that too high or too low a price. [Laughter],54
-fomc-corpus,1996,The risks were definitely up.,6
-fomc-corpus,1996,"Thank you all for trying to confine your remarks to a shorter time frame than usual. We probably will be going up to the Hill in about an hour and we'll see what happens there. In the interim, we have lunch scheduled at 11:30.  Joe Coyne is going to announce at 11:30, 11:45, or something like that we have nothing to announce. Obviously, until then our decision is not public information.",92
-fomc-corpus,1996,"Good morning, everyone. First, I would like to acknowledge the fact that this is the first meeting for First Vice President LeGrand Rives of the St. Louis Bank, Senior Vice President Robert Eisenbeis of the Atlanta Bank, and Pauline Chen of the New York Desk. I would like to welcome all of you and request that the rest of us approve the minutes of the March 26 meeting.",81
-fomc-corpus,1996,So move.,3
-fomc-corpus,1996,So move.,3
-fomc-corpus,1996,Without objection. Peter Fisher.,6
-fomc-corpus,1996,Thank you. [Statement--see Appendix.],9
-fomc-corpus,1996,"Questions for Peter? If not, would somebody like to move ratification of the Domestic Desk operations?",20
-fomc-corpus,1996,Move approval.,3
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,Without objection. I will call on Messrs. Prell and Truman at what has to be the earliest possible time that this has occurred.,28
-fomc-corpus,1996,Except when the Committee started the meeting at 8:00 in the morning.,16
-fomc-corpus,1996,You always throw a monkey wrench into the works!,10
-fomc-corpus,1996,People have said that. [Laughter] [Statement--see Appendix.],15
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,Questions for either gentleman?,5
-fomc-corpus,1996,"Mike, the core rate of inflation in the forecast increases 1/2 percentage point between the first quarter of this year and the fourth quarter of next year. If one were to assume an unchanged policy and to extrapolate that out into 1998, what do you think would happen to core inflation in 1998?",65
-fomc-corpus,1996,"In 1998, economic growth would remain essentially around trend and the unemployment rate around 5-1/2 percent. Our judgment is that the core inflation rate is tending to rise gradually and perhaps it would continue to do so in 1998. We do not think that we are far beyond the NAIRU, and that would mean a very gradual trend in the direction of more inflation.",80
-fomc-corpus,1996,You have a fairly large increase forecast for 1996 and 1997.,16
-fomc-corpus,1996,"There are some exacerbating factors, as I emphasized in my briefing, and those are areas where the uncertainties are substantial. But as we looked at the probability distribution in light of developments since the last Greenbook, we felt that we ought to assign a higher expected value to the levels of grain and food prices down the line. That is the most important exacerbating factor.",74
-fomc-corpus,1996,"What is the timeframe that you assume exists between the increase in grain prices and its effects on poultry, hog, and cattle prices? I will assume that it is in that order of lead times.",39
-fomc-corpus,1996,"We noted in the Greenbook that we do not feel that we can pin that down with any certainty. I think we are already seeing this transmission process affecting the poultry area where producers are cutting back on their production levels, and we expect to see a price pass-through there fairly promptly.",57
-fomc-corpus,1996,Can't you tell from the futures prices?,8
-fomc-corpus,1996,We have looked at the futures prices and--,9
-fomc-corpus,1996,Don't they tell you what average lead times are or can be assumed to be?,16
-fomc-corpus,1996,"Mr. Chairman, our forecast shows an expectation of higher poultry prices showing through to the retail level more fully by the summer. By late fall or early winter, we would expect to see the higher hog prices show up as increased pork prices in grocery stores. Higher cattle prices would show up early next year.",61
-fomc-corpus,1996,That is what I was going to say--that you can make an assumption.,16
-fomc-corpus,1996,"We are making assumptions, but there are no guarantees. Certainly, it is our perception that things have started to turn in the cattle area. Whereas, a couple of months ago, we saw the risks that herds would be cut back, the anecdotal evidence suggests that this process is now under way. So, we feel more certain that there will be that pressure several months down the road.",79
-fomc-corpus,1996,"Governor Lindsey. Mr. LINDSEY. Mike, my first question is, do we have any evidence yet on how households have financed higher gasoline prices? The increases per month amount to about $10 per car or $20 per household. Is that coming out of savings or out of other consumption?",61
-fomc-corpus,1996,"I guess our assumption is that it would probably come out of savings to some degree in the short run. Over time, we would expect people to reallocate their spending and to absorb that elsewhere. But in the very short run, there probably would be some inelasticity. It would not be a one-for-one substitution for other expenditures.",68
-fomc-corpus,1996,"The move in oil prices in the futures market suggests that the market has changed its expectations toward higher prices going quite a ways out. If you just look at the inventory balances held by the majors, which are now at record lows, why do you think we are going to see a decline in oil prices?",61
-fomc-corpus,1996,"There is still an anticipation in the market that oil prices will decline. What happened yesterday, though, is that prices in near-term contracts jumped dramatically after their initial drop. The market reports talked about the closing out of near-term contracts, some short covering, and so on. As we read most of the commentary, though, there is still the expectation that the net effect of the Iraqi oil flow will be to push oil prices down a couple dollars per barrel below what they otherwise would have been. It is recognized that in the near term there is going to be some tendency to rebuild stocks, and that may mean that we are not going to get all of this increased supply benefit passing through to retail energy prices very promptly.",144
-fomc-corpus,1996,What is the average price in your underlying assumption?,10
-fomc-corpus,1996,"We are forecasting a decline in oil import prices to $17 per barrel and in WTI spot prices to around $19.50 per barrel; that is down a couple of dollars from current levels. Our forecast did not assume an Iraqi oil decision at this time, but it did assume that we would get essentially the same amount of oil in 1997, so our forecast had the increased supply occurring 6 months later. We actually have the oil price somewhat higher than the futures prices as of last week, so in some sense all that has happened is an adjustment in the timing. Other than the short-term factors that Mike was referring to, the one argument that you might point to on the further out picture is that one might be led to conclude that this is ""it"" rather than an assumption that Iraq will be allowed to export much more in the near term. So, the prospect of full Iraqi production coming on stream in the next year or two has gone down. That is the only story that I could pick up on that.",208
-fomc-corpus,1996,"You are saying that Iraqi oil exports won't exceed 700,000 barrels per day in this period?",20
-fomc-corpus,1996,"That's right. The probability that it will be 2 million barrels has gone down even as the probability of 700,000 barrels has gone up.",30
-fomc-corpus,1996,"In terms of our CPI forecast, if we assume that the price of oil declines a little faster, the contour of the forecast changes in that we have a little less inflation this year than next year. But at this point, we need to monitor what is happening in the markets.",56
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mike, I want to go back to grain prices. One trend of which we are aware is that the percentage of processed food costs that stem from their grain content has come down--quite markedly, actually, over the last twenty years. I was wondering whether the econometric models that we use take that into account and also what the sensitivity of food prices is to changes in grain prices as we look ahead to this period when the grain price increases are expected to pass through to consumers?",96
-fomc-corpus,1996,"We are well aware of the calculations that show how the grain in a loaf of bread accounts for just a few cents of its cost. There has been an increase in packaging and distribution costs so that there is less sensitivity to changes in grain prices than in the past. The big kicker here is the meat price story, and there again we are less certain about the timing. There have been changes in the production processes, as we have seen dramatically illustrated in the poultry and pork industries. So, one does have to be a little cautious in following past patterns here, but we think that ultimately this grain price increase is creating a lot of pressure on margins and will lead to reduced supply. That is where the big kicker will come over the forecast period.",149
-fomc-corpus,1996,"Isn't that inflationary effect related only to feed grain prices? The amount of wheat that is used for feed grains is very small, and as we know breakfast cereal prices went down as the price of wheat went up.",44
-fomc-corpus,1996,Perhaps. I think we need to see what happens with cereal coupons and all of that business.,19
-fomc-corpus,1996,"Except for its impact on the export markets, wheat has essentially become disassociated from the rest of the economy, whereas corn is a major input into the food chain--actually, corn, soybeans, and soybean meal. Wheat used to be a key factor twenty or thirty years ago, but it isn't any more.",63
-fomc-corpus,1996,"That underscores again that, while we know something about a good chunk of this year's wheat crop, we know very little about the corn and soybean crop outlook. We are making a bet, and the markets are making a bet. We are pretty much in line with the markets, but there is going to be a lot of volatility and we are not going to know the outcome for another four or five months. I think one's optimism on this score has to be tempered by the fact that inventories are quite low and demand growth seems to be robust enough that one year of good harvests probably will not relieve the pressures entirely.",123
-fomc-corpus,1996,"It's probably good for the farm incomes of our wheat growers when they produce a crop, but it isn't good for manufacturers of combines! President Stern.",29
-fomc-corpus,1996,"Thank you. Mike, one of the themes that came through in the Greenbook, and you alluded to it briefly today, is the deterioration in inflationary expectations. You seem to think that inflationary expectations are going to rise, and I would like you to elaborate a little on that. It seems to me that one could tell a story that a lot of what is happening here stems from one-time supply shocks, and it is not obvious to me how that translates into inflationary expectations. So, I would like to know a little more about your thinking. Do you have some sort of COLA mechanism in mind or exactly what?",128
-fomc-corpus,1996,"I think that's important whether it's a formal COLA--and COLAs are much less important in the economy today than they once were--or an informal process, in the sense that employers are conscious of what is happening to the cost of living and have some sort of behavioral norms for adjusting wages in light of changes in the cost of living. In any event, there would seem to be a tendency for one-time shocks to be built into wage increases as they engender a certain elevation of expectations about ongoing price increases. I think there is little basis for thinking that people will look at this price increase as a one-time shock, that workers will absorb that increase, pass the income willingly on to the farmers, and we won't have any resulting elevation of wage increases with resulting cost pressures. To date we don't have a lot of evidence to support this hypothesis, but if one looks at the Michigan survey for early May, coming as it does on the heels of the April survey, the one-year, mean inflation expectations measure has gone up fairly substantially and it seems quite likely that it has been affected by the gasoline price increase. We think that increase will be reversed fairly quickly, but as we move out into the second half of 1996, we are going to have, in our forecast at least, food prices increasing more rapidly and we would anticipate that the consumer will be quite sensitive to that change.",279
-fomc-corpus,1996,So it is a sort of preservation of real wages story?,12
-fomc-corpus,1996,That's the most direct driving force.,7
-fomc-corpus,1996,I gather that you think it's consistent with historical experience; we have had these kinds of shocks before.,20
-fomc-corpus,1996,"As best one can judge, yes.",8
-fomc-corpus,1996,"President Moskow, I'm sorry, I interrupted you. Did you have a follow-up?",18
-fomc-corpus,1996,I just wanted to make sure that the econometric model did take into consideration the reduction in the percentage of processed food costs that is accounted for by grain costs.,32
-fomc-corpus,1996,"The model estimated with data from 20 years ago showed a 30 percent farm value in the CPI for food prices. That value is about 17 percent now, so we have made some allowance in the model's coefficients for the decline in the weight of farm grain prices.",55
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mike, turning from this supply shock to the underlying demand, you did mention a number of factors that you put into your projections that acted to damp demand. I was struck by how stable unemployment stays through 1997, granted that you are projecting growth that is a little higher than in 1995. Could you talk a little more about the unemployment and labor market side?",75
-fomc-corpus,1996,"I take it that you are suggesting that we take as given the projected output path and look beyond that. The year 1995 is still something of a mystery. We had essentially stable unemploy-ment in the face of very low GDP growth. One possibility is that GDP growth was mismeasured. One hint that we have, and have mentioned previously, is that looking at the addition from the income side one would conclude that GDP should have grown about a percentage point faster. That would help to reconcile this behavior. I don't want to push that too far. We don't know where the truth is in that regard, but it is a possibility. Another point is that these relationships are not super tight in the short run. There is considerable varia-bility in the Okun's law relationship. This means that what happened last year could be viewed as just a random event or we could have some continued disturbance as we go forward. Last year, we had very weak growth in the labor force. We also had very small increases in household employment. These tend to correlate, but perhaps it is arguable that somehow or other we will get some rebound in the growth of the labor force and unemployment will tick up a bit and average out in line with the experience in earlier years. But there is nothing to suggest that we ought to think about it that way, and going forward, we have the labor force tending to grow slowly with a flat labor force participation rate. That is one uncertainty that we discussed previously, but basically we have a normal alignment of output growth and unemployment movements in our forecast.",318
-fomc-corpus,1996,"Maybe it's just the tone of the Greenbook, but given the feel of the underlying strength of demand in the Greenbook I was surprised to see this stability.",32
-fomc-corpus,1996,"I think that brings you back then to the question of whether demand really will slacken as quickly and as much as we have in the forecast. I indicated that a number of assumptions about the behavior of various sectors underlie that forecast. These really have not changed in our view. Our basic view has been that we don't see underlying forces in monetary policy, fiscal policy, the dollar, and so on that ought to be expected to produce persistently more rapid or slower growth than potential as we move out. In the very short run, we can see a flattening of motor vehicle production. The arithmetic relating to that helps us to reduce growth very quickly in our forecast from a more rapid pace in the second quarter to a moderate pace in the third quarter. We don't see ongoing, double-digit growth in business fixed investment as plausible, but we recognize some upside risk on the computer side. On the consumer side, we could now be seeing the wealth effects that were not perceptible earlier, and if that continued in some significant magnitude our consumption forecast might have an upside risk. In housing, the anecdotal indicators and recent survey evidence do not suggest that we are getting the kind of weakening in starts that we have in our forecast, but we are anticipating that there will be a significant drop, maybe fairly quickly. So, we can see these upside risks. Perhaps there are risks on the downside as well, but I take your point, and I think that I communicated the view that the risk seems at least as great on the upside at this point.",309
-fomc-corpus,1996,"I think we should emphasize what you said, Mike, only if the relationship between the unemployment rate and the potential rate of operations of the economy as a whole were very tight. The data show that that is not the case. That's because the measurement problems that we have in all these statistics are fairly large and even if we had an exact or very tight relationship the data are going to be wrong. So, we have to try to average through the fog, and I think the latter is a little more dense than it used to be.",107
-fomc-corpus,1996,"We recognize that, because we have a new current population survey that has been in place for only a short time, the short-run movements are very difficult to assess. The seasonal factors could have changed, and we don't have enough evidence on what they are doing. So, we need to take these numbers with a grain of salt.",66
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,You mentioned that GDP on the income side was almost a full percent higher. Where do you suppose the big surprise comes from?,25
-fomc-corpus,1996,"Well, I can't say that there is a surprise that I can point to. I suppose that relative to our forecast one thing that happened last year was that we got a lot of growth in profits. We don't see that as out of line with corporate profit reports, but, certainly, as things evolved last year that was one factor that was a surprise. Basically, we have had a significant swing in statistical discrepancies, and where that gets reduced, whether it's on the product side or the income side, one can't know. Historically, I think you find it somewhere in-between and a little more toward the income side on average.",125
-fomc-corpus,1996,"I was thinking about the report on the Treasury balances that was mentioned earlier and why those balances are higher. Back in the old days, I would have said that the reason is the realization of capital gains because that doesn't show up on the income side. So you are saying that there is something else.",60
-fomc-corpus,1996,"That is something that might be noted about our forecast. In essence, disposable income is currently being reduced by the capital gains taxes that we think are probably a significant factor in the heavy tax revenues, and yet that does not show up in income.",49
-fomc-corpus,1996,"What it may suggest is that manufacturers appear to keep their books internally consistent on the income and the product sides. When we look at services, however, what we see are very considerable anomalies: a fairly small increase in productivity and reasonably slow nominal output growth, but a significant increase in profitability and therefore implicitly an appreciable rise in margins. The notion that has evolved here is that, somehow or other, either significant nominal GDP is missing from the nonmanufacturing area or, because of the productivity data, price levels are exaggerated, as indeed they almost surely are. One sees, for example, that over a protracted period the price of medical services in the CPI has gone up much faster than average hourly earnings and I suspect, though I haven't seen the data, much faster than the ECI for medical services. This suggests that real income has fallen dramatically in that area. I shouldn't say that; it's not real income which suggests that; it's the relationship between productivity and price or some wage-price that does not seem to be squaring at all. There seems to be a major anomaly in the structure of the GDP which for the first time may be on the income side. Perhaps with additional data five years from now we will have a more accurate appraisal of what has been going on. Ted just nodded this way! [Laughter]",266
-fomc-corpus,1996,Mr. Truman expresses his opinion perfectly; he does it with a nod.,15
-fomc-corpus,1996,I can measure his approval rating in the arc of his nod! [Laughter] Any further questions?,21
-fomc-corpus,1996,This may be related to the line of thunderstorms coming from the west and everyone wanting to get out of here.,22
-fomc-corpus,1996,"If you had said that at the beginning, I would not have filibustered as much as I did. Who would like to start the Committee's discussion? President Parry.",37
-fomc-corpus,1996,"Mr. Chairman, our monthly indicators model suggests that economic growth in the current quarter should be close to that in the first. We believe that this relatively high growth rate is temporary because it reflects the building of inventories by business firms. Thus, we see the economy slowing toward its long-run growth trend of 2 percent in the second half of the year, assuming that interest rates remain near current levels. We expect 2 percent growth in 1997 as well, which is just slightly below the Greenbook forecast. Such a forecast is not as attractive as it might appear at first glance. The problem is that with the economy operating around full employment, it will be difficult to make any progress in getting the inflation rate down. In fact, our structural model suggests that there will be a small amount of upward pressure on inflation over this period, and of course that is what the Greenbook says as well. I find this forecast alarming and would like to be in a situation where the inflation rate is projected to come down gradually. Moreover, it seems to me that the downside risks we were worried about earlier in the year have dissipated and that the risks are largely on the upside now. Economic growth could easily come in above our forecast. For instance, our structural model predicts a slowdown in the second half of the year, in part because of the recent rise in long-term interest rates. However, given that the market's expectation of future economic activity is embedded in long rates, it may be more appropriate to treat the recent rise in rates as an indication of a future robust economy. Since we are already operating at a high level of resource utilization, growth above trend even for a few quarters could present an upside inflation risk. Turning to the region, economic expansion in the Twelfth District is continuing at the solid pace that was established in 1995, which remains more rapid than that for the rest of the nation. California is making a significant contribution to District expansion. While current employment statistics indicate that annualized job growth in California during the first four months of 1996 was below the 1995 pace, the recent statistics are likely to be revised upward. Other recent indicators such as a declining unemployment rate, substantial gains in state tax revenues, and reduced outmigration suggest greater underlying strength in the state economy. After a relatively slow 1995, the Washington State economy expanded sharply in February and March, with noticeable job gains in all major sectors. Rapid expansion continues in Nevada, Utah, Oregon, and Arizona, with Arizona accelerating since November after slowing in the middle of 1995. Alaska and Hawaii remain somewhat weak, however. Expansion in District employment continues to be particularly strong in the construction, services, and trade sectors. The growth of construction and real estate loans has been strong in the District, and planned construction remains high in several states. Growth in the District's boom states is still being spurred by expansion in manufacturing employment, and with a shift to higher-paid jobs, average manufacturing wages have risen substantially in several states. Consistent with the recent slowdown in the semiconductor industry, employment growth in the District computer and electronics sector slowed in the first quarter. However, our industry contacts believe that the semiconductor industry is experiencing only a temporary glut and that the computer industry will undergo rapid expansion in the remainder of 1996, although at a somewhat less robust pace than in 1995. Thank you, Mr. Chairman.",686
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, the available information on the Seventh District economy is consistent with moderate growth in the region. In general, manufacturing is still our strongest-performing sector with growth somewhat faster than the national average. Housing and retail sales have continued to perform reasonably well despite higher mortgage interest rates and inclement weather. Labor markets remain tight with few signs of significant upward pressure on wage rates. Our purchasing managers' surveys around the District all signal expanding output in April. Durable goods producers generally are less concerned than they were earlier in 1996, although they still expect growth to slow in the second half of this year. The Big Three automakers have raised their 1996 light vehicle sales forecasts slightly. They also have raised their second-quarter production schedules, mostly to build inventories but also to support slightly stronger-than-expected sales arising from the incentives that they have in place. Gross orders for heavy duty trucks in March were strong enough so that some producers have delayed their decisions on major cutbacks to ""build plans"" that had been expected in the first quarter. The cutbacks have now been delayed until the scheduled summer plant closings. Several other industries reported doing better than they expected earlier this year including producers of machine tools, appliances, and small construction equipment. Retailers generally indicate that sales in the District rose moderately in April and early May, although inclement weather this spring slowed sales of some seasonal items, such as lawn and garden merchandise and motor boats. Housing activity still appears to be fairly strong in most parts of our District. Sales of new and existing homes increased in March, housing starts and permits were up again in April, and recent surveys showed Midwest home builders to be the most optimistic of any in the nation in both April and May. District respondents to the senior loan officer survey reported strong increases in mortgage loan demand over the past three months. Labor markets remain tight throughout the District. In fact, economic growth in parts of the District, such as Indiana, is reportedly being restrained currently by labor shortages. The unemployment rate in District states is more than a full percentage point below the national average. In March, total payrolls increased slightly more rapidly in the District than in the rest of the nation despite the relatively larger drop in manufacturing employment related to the GM strike. These workers, of course, are back on the payroll now. Despite the tight labor markets, we still have few reports of mounting wage pressures. In fact, over the past year, total employment costs increased less in the Midwest than nationally. Job security concerns are identified as the key issue that will be emphasized in the upcoming labor negotiations. In the steel industry, however, management is now offering a wage increase of about 5 percent over the next three years, while labor unions are asking about 7-1/2 percent. Either increase would be the most significant that these unions have had in 10 years but would still average under 2-1/2 percent annually. The current labor contract has a no-strike clause with binding arbitration so that the negotiations will be settled without a strike. I spoke with a CEO of one steel company. He said that he could clearly offset such wage increases with productivity gains. Turning to the agricultural sector, the major story for us has been the surge in grain prices that others have mentioned. These higher prices have led to some scaling back in livestock and poultry production. With respect to the spring planting season, which is so important, cool temperatures and wet conditions slowed progress considerably in Indiana, Michigan, and Wisconsin, with Illinois close to average and Iowa well ahead of normal. It is still too early for us to know how much food prices will rise. That will depend largely on whether the harvest eases or exacerbates the critically tight grain supplies. On the other hand, the higher grain prices have accelerated the uptrend in land values and have strengthened the balance sheets of many farmers in our District. More generally, however, most reports still seem to point to little upward pressure on prices. Contacts indicate that price increases remain in check both on the input side and the output side. Auto industry suppliers report significant pressures to cut prices, and long-term purchase contracts for steel are now renegotiated with smaller price increases. However, price components in both the Chicago and Detroit purchasing managers surveys did move from signal-ing a decline in prices of parts in March to an increase in April. Turning to the national picture, we are in general agreement with the Greenbook. The outlook is for growth at or above potential for the remainder of this year. The key issue, of course, is the outlook for inflation. The Greenbook projects that energy and food price increases are likely to push the CPI up a little faster than we would like. At the same time, the extent to which the underlying rate of inflation is inching up is still unclear. Certainly, the risks of higher inflation are greater today than at the time of our last meeting, and this is a matter of concern.",994
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"On balance, the Eleventh District economy has been experiencing moderate growth and the near-term prospects look reasonably good. Employment growth in the first quarter was about the same as nationally, but growth accelerated throughout the quarter. Real estate and construction have tended to be among the strongest segments of the District economy. Single-family construction is doing particularly well, with levels of starts and new permits in a few of our cities reaching levels not seen in about a decade. Although this is still the exception, leasing activity in a few of our hotter commercial and office markets is being limited by a shortage of supply for the first time in about 15 years. Manufacturing activity remains strong overall, corrugated box demand is on the rise, and we have seen shortages and rationing of cement. Even in the semiconductor industry, where inventory has been growing and prices that had been falling are now flattening, the bad news is that output growth will slow dramatically from the rates of the last few years. The good news is that the semiconductor demand is likely to grow by only 10 percent in the year ahead. The oil price hike was temporary, and oil prices are now back to more sustainable levels. Whatever boost the Dallas District gained from higher energy prices is behind us, and the industry is back on a long-term downtrend. While I have just emphasized areas of strength, there are two negatives that are worth mentioning. First, the impact of drought conditions in much of our District has spread from hearing complaints from ranchers to hearing complaints also from farmers. Beef cattle prices are at a 20-year low. Grain prices are high, but District farmers have lost much of their crop and cotton producers are getting hurt as well. Our agricultural bankers are reporting rising debt loads and delinquent payments. The second cloud on the horizon is the prospect of an increase in the minimum wage to $5.15. The data from the establishment survey of wage and salary employment indicate that nearly one-fourth of Eleventh District employment consists of workers earning less than the proposed minimum wage, compared to about one-sixth in the nation as a whole. Using the household survey narrows the gap considerably. Either way, the Eleventh District states would bear a disproportionate burden of the negative employment impact of higher minimum wages. On the national economy, I am encouraged by the signs of strength, although the uptick in inflationary pressures, while having a number of transitory components, has worsened the inflation outlook. On the other hand, bond and foreign exchange markets have already tightened and will be countering inflationary pressures as we go forward.",518
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, economic conditions in New England are quite favorable, though many of our business contacts describe the situation as continuing to be highly competitive and tough. Employment grew at a rate of about 1-1/2 percent last year and in the first quarter of 1996, slightly less than the pace for the nation but consistent with New England's long-term experience. The regional unemployment rate was 4.7 percent in April, with New Hampshire and Vermont enjoying rates below 4 percent. We do not think that this is an indicator that wages are about to take off in the First District, however, since in growth periods New England typically has an unemployment rate below the nation's. Our contacts with regional businesses are generally reassuring on this score. Wage increases of 2 to 3 percent are the norm, although a few companies are going to be more generous. Anecdotally, we continue to hear stories of severe labor shortages, mostly for software specialists. At the Bank, we have been trying to hire data communications people, for example. It is not just a question of money. These specialists would rather work for a consultant, or even as temporary employees, to get flexibility and to ensure that their skills stay on the cutting edge. Materials and vendor prices are flat, and retailers are holding the line on customer prices. A few manufacturers have succeeded, however, in raising their prices by modest amounts. The retail situation in New England is very competitive, making it difficult to discern underlying economic trends. Upscale stores are doing well, but discounters are struggling. Their sales are down from a year ago. Among manufacturers, revenues are continuing to grow at a fairly good rate. Business is especially good for manufacturers of capital goods, particularly those producing traditional products such as industrial machinery and equipment used in construction and high-tech companies producing computer networking and microelectronics products. Concern was expressed about signs of slowing in the semiconductor business, as others have mentioned, although the correction is expected to be temporary. In addition, several of our manufacturing contacts think their inventories are a bit on the high side despite generally good sales. Retail contacts in contrast believe that they have their inventories under control. Loan growth in the First District continues to be slower than for the nation as a whole, and our banking contacts report that the competition to make loans is fierce. Banks indicate that they are not lowering standards so much as they are relaxing terms--for example, by not requiring personal guarantees. I question whether terms and standards really overlap and how one can distinguish between the two. I think this is an issue for some of the lending officer reports that we get. On the national scene, I remain convinced that the risks have tilted substantially to the up side. As the Greenbook points out rather forcefully, sources of economic weakness and potential restraints on the fairly solid pattern of current economic growth seem few. On the other hand, threats to the rather benign run of price data that we have experienced seem significant. I believe these may stem more from inherent demand than from supply shocks in food and energy. Those shocks could be short-lived and flow through only to a moderate extent to the general price level. However, the impetus from tight labor markets, continued income growth, consumer durable spending, business investment, housing, and the stock market rally could be considerable. The issue for me now is not the direction of the next move but when we make it.",684
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, the Southeast has continued to grow moderately this spring, led by strong and broad-based activity in two of our states, Georgia and Florida, where over half of our District's income is generated. Employment growth in the District has been at a rate of almost 3 percent so far in 1996, nearly double the national average. But, of course, we were spared the bad weather and the GM strike that affected other parts of the country earlier in the year. The fastest income growth has been in Georgia, Florida, and Tennessee. With this good income growth has come excellent, although somewhat uneven, consumer spending. There has been particularly noticeable strength in home-related goods like furniture, appliances, and carpets, and noticeably weak apparel sales. Housing activity has remained generally good for longer than we expected. In fact, there are reports of shortages in inventories of single-family houses in Nashville and Birmingham. Multifamily building is still growing at a rapid pace. Construction of commercial buildings apparently has accelerated throughout the District, but we don't see worrisome speculative kinds of building in that sector of the construction industry. Manufacturing activity in our region has picked up some in the last few months, but the outlook has softened a bit despite increased orders for production. Wage and salary pressures remain about unchanged. Recently, employers have been more concerned about possible wage pressures, but at the same time we see or hear no substantial evidence that actual labor costs are accelerating. In fact, I have just completed a round of meetings with small groups of business leaders in various cities in our District. One story that I believe got told by someone in each meeting, with expressions of agreement from other people at the meetings in almost every case, was how difficult it is to push through price increases in contrast to their past experience. Someone described the situation at one of those meetings last week as one where almost every customer was acting like Wal-Mart or Home Depot in saying to their suppliers, here is what I will pay; don't tell me about prices. Finally, there is some good news from our Louisiana oil patch, which has been through some really tough times over the last few years. Drilling activity has picked up moderately. The improvement is not so much in response to recent world price increases but rather is attributable to some new technology for three-dimensional seismic testing, which makes it easier to pick the places to drill, and to deeper drilling capabilities than were available in the past. With regard to the national outlook, while I would not dismiss the role that special events have played so far in 1996, I would continue to argue that it is important to focus on those influences that will prevail beyond the next few months. In doing that, our outlook is not much changed since late 1995. We are now forecasting GDP growth of about 2-1/4 percent. We anticipate that the somewhat stronger-than-expected growth in the first half of the year will be damped in the coming months by the higher long-term interest rates that we have already seen, a slowdown in housing and related spending, some deterioration in consumer balance sheets, and the persisting uneasiness among workers that people have talked about for a long time. We now expect the CPI to average about 3 percent for the year. That is about 1/4 percentage point above our forecast of a few months ago and reflects all that we now know about oil and grain prices. We expect the impact of higher oil and food prices to be moderate in the near term and to dissipate by later next year. In particular, the oil price increase was comparatively modest and should be reversed rather quickly. I think it is very unlikely that the price changes that we have seen will become embedded in expectations and general price-setting behavior without some decision on our part to accommodate it. If I am confident of anything this morning, it is that we will not do that. Our forecast of economic growth into next year differs at the margin from that in the Greenbook, but the differences are not substantial. Those differences are somewhat greater near the end of the forecast horizon where we see a bit slower growth and the inflation rate coming down somewhat more quickly. Thank you, Mr. Chairman.",843
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, the Tenth District economy continues to grow at a strong pace with most indicators pointing to little change since our last meeting. Recent employment reports show that the number of jobs in the District grew again in March and that employment in all seven of our states is growing at rates above the national average. Manufacturing and retail trade remain principal sources of strength in our region. Our survey of factories throughout the region indicates a recent rebound in production schedules and optimism about the next six months. In addition, building activity is running above a year ago and our directors report continued strength in commercial construction. The recent runup in oil prices and a more favorable outlook have boosted energy activity in the District. Drilling activity, for example, has shown steady increases over the last three to four months, and energy employment actually rose in March, the first increase in recent memory. While economic activity is generally solid in our District, the agricultural sector remains weak, and the District's very important cattle industry is mired in a deep slump. The liquidation of cattle herds appears to have begun. One of our large packers said that their average slaughter rates are up 12 to 14 percent a month over three months ago. Although our wheat crop is now expected to come in at about half its normal size, the rains that we have received point to a more favorable outlook for other crops, corn for example. Price pressures are still stable, but I do want to share some anecdotal information. I am aware that the plural of ""anecdote"" is not ""data!"" With regard to the labor markets, our discussions suggest that highly skilled workers are getting some fairly good wage increases. That would include Boeing-type employment in Wichita. Those increases are having a ripple effect and are causing some gains down to the bottom end of the pay scale--such as increases to $6.00 an hour for entry-level clerks. In the crafts area, business agents for workers in our area tell us that they have not seen such strong demand for their workers since the late 1960s and that their ability to negotiate favorable wage settlements has improved dramatically. So, we are seeing some increasing anecdotal evidence that suggests rising wage pressures going forward. On the national level, our forecast is in line with that of the Greenbook. In the very near term, we continue to see growth at a rate above that of the first quarter. With the long-term interest rate increases that have occurred, we anticipate that the rate of expansion will fall back toward the economy's long-term growth potential later in the year. With regard to inflation, I am less optimistic than the Greenbook and increasingly concerned about the upside risk of greater inflation. While current inflation does reflect the effects of supply shocks, I, like others around the table, believe that the economy is operating fundamentally at a level where the unemployment rate is around its potential and capacity utilization around its potential. Accordingly, I see the upside risks of inflation as noticeably higher, and we should take that into account.",606
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. Economic activity in the Philadelphia region is showing signs of improvement across a wide range of sectors including manufacturing, retailing, and construction. Growth is uneven across the District, however, and overall the region lags the rest of the country. I would still categorize the overall growth rate as probably modest. Some areas in the District have low unemployment rates while others still have quite high levels of unemployment. Wage pressures, while firming in a few areas, generally are not accelerating. General price inflation also is still subdued, but some commodities like metals, fuels, agricultural commodities, and textiles show some firming tendencies. The national economy appears to me to be in reasonably good shape. I think the downside risk of late last year and early this year has subsided. While we see clear signs of firming in the national economy, I really do not see a high probability of a break-out on the up side. The outlook for moderate growth is therefore well founded in my judgment. Developments on the inflation front clearly need to be watched going forward. The economy does seem to be somewhat less inflation-prone than in recent decades, witness the experience since 1994 where we have had an unemployment rate of 5-1/2 percent and the inflation rate has stayed more or less constant. To what extent and for how long this favorable experience will last we don't know, so we have to be cautious about what we say concerning the future. We are, however, better positioned now than we were in 1994 to deal with inflationary pressures, should they arise. Then, we had a clearly stimulative monetary policy and a considerable distance to go just to get to a neutral policy stance. Today, we certainly are closer to a restrictive policy stance, should we need to get there, so we have more time to engage in watchful waiting.",376
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. At the District level, the overall picture has not changed a lot since our last meeting. Our regional economy is still growing at a moderate to moderate-plus pace, and I would say that growth is occurring pretty uniformly throughout the District. Also, increasingly we see signs that the level of activity is high in relation to capacity levels. In particular, several of our directors and other business contacts have told us about shortages of skilled labor. We were getting some reports like this earlier in the year, but they are continuous now, especially with respect to skilled construction labor. In that regard, we see considerable strength in both residential and commercial construction across much of the District, notably in commercial construction along the lines of Bob McTeer's comments. I think a lot of the excess commercial space including office space, which was so apparent earlier in the expansion especially in the northern part of our region, has now been absorbed. Vacancy rates in Richmond, for example, are very low in a variety of categories of commercial space. The same seems to be true in at least some parts of the Washington metropolitan area for the first time in a long time. We are getting some reports of speculative construction, which we have not heard for a long time. One other regional report that might be worth noting is that corporate recruiting at the three major universities in North Carolina--UNC, Duke, and North Carolina State--was up about 20 percent this year. I guess this is consistent with the view that economic activity in our region is reasonably firm. At the national level, let me first tell Mike Prell that I like the change in the format of the Greenbook. I think it was a good product before and the changes make it an even better one. But the content of this month's reported projection worries me a good bit. The Greenbook paints a picture--and I think a generally accurate picture--of an economy that is in a mature stage of a business expansion and growing at a firm pace in the neighborhood of capacity levels with all of the inflationary risk that that entails. Let me make just a couple of comments on this. First, it seems clear as a number of people have already suggested that aggregate final demand is considerably stronger currently than one might have anticipated a few months ago. The first-quarter GDP report was very revealing. It showed remarkable strength across the board, and I think that was really the key feature. Second, the numbers Cathy Minehan, Bob Parry, and a number of other people have already mentioned permit a very strong case to be made now that the risks in the outlook have shifted decidedly to the upside for both real growth and inflation. The Greenbook is now projecting 3-1/2 percent real GDP growth in the current quarter. About a percentage point of that, as I understand it, would be in productivity growth and about 2-1/2 percent in an increase in hours worked, which is well above a sustainable noninflationary pace. Moreover, the stronger projected growth in GDP this quarter is predicated primarily on stronger inventory investment. The projection for growth in final demand actually shows a deceleration from the first quarter. If that does not happen, the current quarter could turn out to be very robust, with the implication of increasing tightness in an already tight labor market situation. In addition, there are the current problems that have already been mentioned with respect to prospective energy and food prices and the possibility of an increase in the minimum wage. I think any one of these problems could be managed, but when they are all put together, that raises some real questions about the outlook. The Greenbook scenario to a large extent is counting on the runup in long-term interest rates to moderate the growth in final demand as we move into the second half of the year. The basis for this, as I understand it, is that real long-term rates are being driven up by the cyclical strength in the economy. By pushing real long rates up, market forces can in that way be counted on to contain demand and bring it back to trend. What worries me is that the discussion in the Greenbook gives the impression, maybe not intentionally, that all of this can happen without an increase in short-term rates. But as the first chart in the Bluebook makes clear, the backup in long-term rates seems at this stage to be due to a rise in 1-year forward rates concentrated maybe 1 to 3 years out. In other words, it looks like a significant part of the increase in long-term rates has been driven by the expectation in markets that the Fed is going to raise short rates by at least a moderate amount either late this year or maybe early next year.",948
-fomc-corpus,1996,Isn't that more the result of a shift away from the expectation that they are going lower?,19
-fomc-corpus,1996,"Certainly, it is partly that, but if you look at the--",14
-fomc-corpus,1996,"If you look at the actual pattern of forward rates, going from overnight out to a couple of years, what happens is that if the long-term rate moves the way you said, the other rates move back up. According to the analysis in the Bluebook, it is difficult to determine whether the term structure at this stage is reflecting anything more than liquidity demand. So, isn't what is involved fundamentally an upward shift in the yield curve as distinct from a shift up in yields?",95
-fomc-corpus,1996,"Well, I think both elements probably are involved. If you look at the first chart in the Bluebook, the middle panel there, I am trying to draw an inference from that. What it suggests to me at least is that expectations for short rates may be pretty flat through, say, the third quarter, but after that, if one looks at Treasury yield curves, I think they are showing an expectation of a tightening of policy late this year--",90
-fomc-corpus,1996,"I agree with that. I am just saying that it is very difficult to differentiate the extent of the rise from what we think we know about the liquidity premium. It is probably right that it is slightly more than the latter, but the major shift has to be coming up from the bottom.",58
-fomc-corpus,1996,"Well, I would certainly agree that it is always difficult to read the term structure and draw precise inferences from it. We tried to look at this pretty carefully, and as I look at the entire structure, it seems to suggest that general expectations--and I think this has been confirmed in some of the documentation--are that we are going to hold policy pretty steady at least through the third quarter and move after that. The only point I am trying to make is that the behavior of long rates--and in the overall scenario long rates are a major factor in containing demand in the future--may be more closely related to policy expectations than to fundamental economic conditions. If that is the case, then it follows that we can't be sure whether the increase in bond rates that has occurred will necessarily contain demand and inflationary pressures to the degree that we want.",170
-fomc-corpus,1996,"That is an interesting hypothesis, but I think you would have a tough time debating it.",18
-fomc-corpus,1996,"I have a tough time in all debates, but I would still be willing to debate this! [Laughter] In any case, I think it raises some questions about whether holding short-term rates relatively constant over the remainder of the year is going to get us where we need to go, or whether we need to consider something stronger.",67
-fomc-corpus,1996,"That is definite but that conclusion can arise independently of the yield curve! Let me say, parenthetically, that Don Kohn said to me the other day that these meetings were getting duller and duller and I was worried that he might fall asleep, so I tried to liven things up a bit. [Laughter]",66
-fomc-corpus,1996,I will try to help keep him awake as much as I can! [Laughter],18
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. The pace of economic activity in the Eighth District appears to have increased modestly since our last meeting. For the three months ended in March, District labor markets remained tight. The average unemployment rate is below 5 percent, and it has been that low for a large part of the last year and a half. Strike activity, which had been quiescent, is again a factor that may impact costs at several large District manufacturing firms. On Sunday, a machinists' union at one of St. Louis's largest employers authorized a strike that will affect about 7,000 workers directly. The contract bargaining strategy in the auto industry is yet to be determined, but negotiations will be getting under way later this year. The two largest automotive producers in the District plan to boost second-quarter production by nearly 5 percent above their first-quarter levels. Second-quarter production is about 1 percentage point more than had been planned at the time of our March meeting. Residential construction activity in the first quarter was at a relatively high level. By contrast, construction contracts point to some prospective weakness in the nonresidential sector, a pattern that despite strong overall capital spending is also observed in the national statistics. Loan growth at 11 large District banks has been off somewhat in recent months from the torrid pace of a year earlier. This year such loan growth has been dominated by real estate loans. Lenders are still very actively seeking borrowers in every category, including consumer borrowers despite some concerns about their creditworthiness. According to the senior loan officer survey, consumer loan delinquencies have picked up somewhat more than had been expected over the last six months. Nonetheless, the rate spread between securities backed by credit cards and comparable maturity Treasuries has remained very low. The national economic outlook has changed dramatically since January, as we all know, with a rebound in real output growth and inflation. Imports also have increased substantially, a possible sign of excess growth in domestic demand. One can't dismiss the increase in inflation simply because it reflects mainly higher prices for food and energy. I think the Greenbook and comments from Mike Prell support that assessment as well. Low levels of agricultural stocks and rising demand for petroleum do not suggest an early reversal of such price pressures. Furthermore, the broad monetary aggregates have been growing above target rates and sweep-adjusted Ml growth has been strong. By pegging the funds rate at 5-1/4 percent in the face of rising market interest rates--here we are back in the same debate, I guess--we may effectively be validating these price increases. The danger is that if price increases are validated by monetary policy, they can become embedded in expectations, particularly in a tight labor market situation. On that front, the Greenbook reports that wages and salaries shot up at a 4.6 percent annual rate in the first quarter, the largest increase in 5 years. The increase in 1995 was 2.8 percent. Furthermore, according to the Michigan survey--and Mike mentioned this as well--households have raised their inflation expectations for the next 12 months from 4 percent in December to 4-1/2 percent in April to 5 percent in May. Looking over the next 5 to 10 years, average expected inflation in this survey is up from 4.1 percent in April to 4.8 percent in May. These forecasts can be wrong, but in any event the public perceives that inflation risks have increased about a full percentage point this year. That matches the increase in long rates since January. Thank you.",721
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you. In the Ninth District, while there was some pause in growth earlier, activity has once again picked up. Most of the news has been on the positive side, and I would say that the regional economy is now advancing more strongly than I, certainly, expected just a few months ago. To give you a flavor of some of this, housing activity is strong and as best I can judge will remain so. There is a lot of activity in major metropolitan areas and housing shortages in some parts of the District. Manufacturing activity is strong and improving; state tax revenues have been running above expectations; and energy exploration activity has picked up. Perhaps the one obvious sign of difficulty is in agriculture where some livestock producers are having severe problems and where grain producers say they may or may not harvest a crop. Our problem is not drought; it is too much ice and too much moisture. Farmers have been getting out into the fields late, among other problems. As far as wage increases and price pressures are concerned, I would say there has been no pronounced change, but there are scattered indications that labor is getting a little more aggressive and wage increases in some instances are turning out to be a little higher than we were hearing earlier. On the price side, the anecdotal news does not indicate any pronounced change, but I sense that, if anything, there is perhaps a little more inflationary pressure than was the case just a few months ago. With respect to the national economy, I certainly agree that there are increased risks of more inflation than I expected earlier. We are going to get more inflation than I anticipated. It is difficult for me to assess the degree and duration of these risks. It was not very many months ago that the concerns were focused more on the down side, appropriately in my view. That was the case in late 1995 and early this year. Those concerns have obviously diminished, and diminished rather quickly. I can imagine that some of the upside concerns prevailing at the moment could diminish quickly as well, but my sense is that it would take a favorable combination of events for that to happen as quickly as it did earlier on the down side.",431
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"This is the first time that I have been the first of the governors to comment. This is amazing; maybe I'll master the timing of this process eventually! I have been staying with the story of moderate growth for a number of meetings, and I am beginning to bore even myself. But I do think there is now a bit more certainty to such a forecast than there was earlier. A lot of the uncertainties that we saw in the fall have dissipated. Until I heard Mr. Melzer, I thought we were past the major strike activity problem, but maybe more strikes will be generated in the Midwest. By and large, however, some of the major strikes are behind us, and certainly the possibility of a Treasury default that was a prime concern for this group is now behind us. The question of government shutdowns and the issue of budget deals appear to be a bit more quiescent now. We did not get a long-term balanced budget agreement, but it does appear that progress is being made on a year-by-year basis in terms of holding expenditures down and addressing the near-term budget deficit. The winter weather disruptions are behind us and we are free to worry about summer drought, planting conditions, and heat problems. The recent statistics display considerably more strength. The labor market is still showing reasonable job growth, and the 5.4 percent unemployment rate is impressive. People are working and they will continue to spend. Housing has remained amazingly strong because the fundamentals remain strong. Business capital spending has been a major factor in the continuing expansion and seems to be growing further in the context of an apparent commitment to capital expenditures to reduce operating costs. Computer expenditures appear to go on and on, and I do not see an end in sight, especially in light of the new opportunities stemming from the Internet. But I think the outlook for expenditures on plant expansion is much more questionable. There are some factors favoring the sustainability of this expansion. Inventories are in much better balance now than at the end of 1995. The financial markets are continuing to support opportunities for additional investment. In spite of the backup in interest rates, the term structure is still reasonably low. The stock market is surprisingly strong, perhaps a bit on the rich side now, but it is still providing a cheap source of equity capital. Bank credit is still available. Balance sheets are healthier. As I mentioned, we have made some progress on the federal deficit. The question now, I believe, is what kinds of things can throw the economy off this sustainable growth path? In my view, unless we resume concentrating on deficit reduction and start to address some of the longer-term deficit problems--entitlements in particular--this issue is going to come back to haunt us and we will have higher inflation expectations and higher interest rates. We always have to question where we are with respect to aggregate demand. It has been stronger than we had expected, but there are some signs that suggest we should at least question the continuation of growth at the current rate. On the inflation front--and this is where I want to end my comments--it is possible that the increases in energy and grain prices can be temporary. But if they are sustained, they will get built into other price structures and into the wage structure. We are getting differing anecdotal stories concerning wage pressures, but we are now seeing indications of some firming of wages in the statistics. An increase in the minimum wage, if there is one, would exacerbate the situation. I continue to be bothered by our concentration on the CPI as the appropriate measure of cost-of-living increases. I appreciated the inclusion of the GDP chain-weighted price index in the Greenbook, but it also has problems. Manufacturers report that they can't make price increases stick, and yet we are seeing some price increases. Weighing all of these differing reports and anecdotal stories, I think the inflation risk has increased and we need to be focusing on that.",790
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I believe we may just now be entering a very tricky and important period. The Greenbook shows a very near-term deceleration in GDP growth to a 2 percent annual rate. Despite that, the staff foresees, as do many others here, an inflationary creep even without a minimum wage bill. If we get that bill, I think the rise in inflation might come sooner and become stronger. In my view, we have been riding the crest of a really remarkable period. Growth has been satisfactory. We have had an unemployment rate of around 5-1/2 percent, which of course is seen as being at or below the NAIRU, for well over six quarters now. GDP is at or near potential. In spite of that, inflation has remained quiescent. We certainly do not have the price level stability that we want to achieve, but inflation nevertheless has been flat and relatively low. So far, no significant trend is visible in the statistics. The Greenbook and other forecasters project some change in this starting very soon--in the third quarter--and going forward through the forecast period and beyond. We are all very jealous of the progress that we have made; we certainly want more; and we probably would see a persistent rise in inflation, even if it were a slow rise, as very dangerous. The question is whether it will happen and if so, when. If we look at GDP growth in recent quarters and the Greenbook forecast for the upcoming quarters and include the 3.5 percent growth rate projected by the staff for the current quarter, we find that the average for this quarter and the previous three quarters is a growth rate of 2.5 percent. However, GDP growth has been accelerating over the last three quarters. If one looks at this quarter and the next three as projected in the Greenbook, they average a little more than 2.4 percent but display a slowing trend. That is the projection. The big downshift in GDP growth is expected to come in the period immediately ahead, in the third quarter, after which such growth is projected to flatten and stay around 2 percent. It seems to me that this outlook is quite credible, quite likely. It seems to be centered on sectors like housing, capital investment, net exports, and government expenditures. We have seen long rates rise; we have seen the dollar rise; we have seen the deficit go down, so this outlook is quite plausible. If we get that pattern, it seems to me that it is also plausible that inflation might continue being dormant. We may even find that the economy's potential is a bit higher, closer to the 2.4 percent or 2.5 percent growth that we have been experiencing and expect to experience on average. With such growth rates, inflation might remain benign, and that would be an extremely positive development. On the other hand, if the economy continues to be stronger than expected, as we have seen recently, and if it stays this strong much longer, we certainly could face a highly increasing likelihood of greater and perhaps somewhat more virulent inflation than is projected in the Greenbook. I will close where I began. I think that we are possibly at a very important watershed. There are some very important months immediately ahead.",666
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"I would like to comment on two issues central to the national economic outlook: first, the possibility that aggregate demand growth will exceed trend over the forecast period, pushing the economy well beyond potential; and, second, the prospect that core inflation will begin to drift upward even if the economy continues to operate with current margins of slack. On the first issue, the Greenbook portrays an economy poised for growth near trend by the second half of 1996. In my assessment of the outlook, the risk of sustained demand growth exceeding the growth of potential is not absent. Frankly, I was surprised by the strength of both consumption and investment spending in the first quarter. Nevertheless, I still consider the Greenbook projection of moderate near-trend growth over the forecast horizon to be sensible and most probable. With the inventory adjustment process seemingly nearing completion, at least by the end of this quarter, I find it hard to identify any fundamental factor or imbalance--other than the dangerously lofty level of stock prices--that I consider likely to spur either unsustainably rapid growth or alternatively to pose a significant risk of recession. The stock market factor, it seems to me, could cut either way; it poses both kinds of risk. Why do I feel that way? For the same reasons the Greenbook emphasized. Pent-up demand for consumer durables seems to be spent. If we can continue to rely on what is one of the most trustworthy relations in macroeconomics, namely the accelerator, it seems probable to me that the growth of investment spending will slow. The combination of moderate growth in our key trading partners, coupled with a dollar that has appreciated about 4 percent just this year--the dollar's movement is working as a stabilizer, as Ted Truman emphasized--should contain impetus originating in the external sector. In addition to the appreciation of the dollar, of course, the most potent force countering any spending shock that may have occurred is the large swing in financial conditions. Now, it is arguable that some portion of the roughly 80 basis point increase in long-term interest rates since late January reflects higher inflationary expectations. But my own reading of survey measures of inflation expectations suggests that most of the movement represents an increase in real rates. I think such an increase is perfectly consistent with the perception that demand is stronger than previously thought, that the shock to demand is not transitory, and that the Fed indeed will need to pursue tighter policies than had been anticipated earlier to keep inflation in check. It seems to me that given the usual lags, this interest rate swing should begin to exercise a restraining influence by the second half of the year. A rule of thumb I sometimes use is that a one basis point increase in the long rate cuts $0.6 billion off aggregate demand, which means that, say, a 70 basis point increase in real rates would chop $42 billion or 0.6 percent off GDP. This is sufficient to counter a rather sizable and permanent upward IS shock. So, I see the interest rate fluctuations that have occurred as serving as an important stabilizer. Under present conditions, it seems to me that the rebound in long-term rates is an appropriate antidote to increased upside risk. However--and here I certainly agree with the comment that the Chairman interjected in response to Al Broaddus's statement--it seems to me that the 6 percent long bond yield that we had in January was premised on the assumption that we would have several further cuts in the fed funds rate. I also would agree that the present level of roughly 7 percent in the long bond rate appears to be consistent with a funds rate that is expected to remain about where it is or, with some probability, to increase slightly during the remainder of the year. I also want to spend a minute, if I may, commenting on the outlook for core inflation because I think the Greenbook inflation forecast is a little too pessimistic. Clearly, we have an economy operating at a level where we need to be nervous about rising inflation, even abstracting from supply side shocks. We can't dismiss the possibility that compensation growth will drift upward, raising core inflation and in turn inflationary expectations. This is a major risk. Obviously, we need to be vigilant in scrutinizing the data for signs of rising wages and salaries. We should be concerned if a pattern of faster wage and salary growth materializes, if that translates into faster compensation growth, and if in turn the faster compensation growth translates into more rapid core inflation. But the sentence I just uttered contained three ""ifs."" First, we need to see a pattern of faster wage and salary growth. As a number of you pointed out, we have seen one disturbingly large reading on wages and salaries in the most recent employment cost index survey. But the upward movement there was mysteriously rapid for sales workers and one reading does not a trend make. The second ""if"" in my sentence concerned whether an increase in wage and salary growth will translate into faster compensation growth, and that is a big ""if."" At this point, the 12-month change in total compensation growth in the ECI has remained virtually unchanged at around 3 percent for five quarters. I would just remind you that standard economic theory suggests that both firms and workers going to the bargaining table ought to be concerned with and ought to be bargaining over total compensation, not wages and salaries alone. Assuming that both firms and workers recognize the tradeoff they face between benefits and take-home pay, slower benefits growth should be reflected in faster wage and salary growth. So, on its own, faster wage and salary growth is not cause for alarm. Now, I do not want to push this hypothesis too far because, although this is a reasonable possibility, it certainly is not the only possibility. I am simply urging caution and am warning against automatically assuming that the growth in these two components of compensation is unconnected and that they lead their own lives. My final ""if"" concerned the relationship between faster compensation growth and product price inflation and whether we should automatically assume that the translation there will be one-for-one. The counter argument is that for the last several years product price increases have outstripped increases in unit labor costs and that has resulted in widening markups, unusually strong earnings growth, and a rise in the profit share. In that sense, core inflation is on the high side now, given compensation growth and productivity trends. The staff documented this situation and highlighted its implications in the January Chart Show. Widening profit margins are a development that should not be expected to continue indefinitely. Eventually, those margins are bound to stabilize or even to decline a bit. That could occur in a number of ways: with a decline in the inflation rate coupled with stable compensation growth or with an increase in the pace of compensation growth and stable inflation. I think the first possibility implies some downside risk to the inflation outlook, and I do not see that in the Greenbook forecast. The second possibility is that compensation growth is indeed poised to rise somewhat, bringing a halt to the continuing widening of profit margins. That could occur without any translation into higher core inflation. These are a bunch of ""ifs."" They are all imponderables and they are open questions that will only be answered with the benefit of hindsight.",1462
-fomc-corpus,1996,Thank you. Vice Chairman.,6
-fomc-corpus,1996,"Thank you, Mr. Chairman. The broad economic indicators suggest that the economy in the Second District grew at a moderate pace in recent weeks, which is an improvement. In March, payroll employment advanced at an annual rate of 2.2 percent in New York and 3.3 percent in our part of New Jersey. Vacancy rates for prime commercial office space continued to inch down in Manhattan and northern New Jersey, reflecting the improvement in office leasings. Contract awards for nonresidential construction, primarily additions to and alterations of commercial space, rose sharply in New York compared to year-ago levels. The gain in New York was offset slightly by a 1 percent decline in New Jersey. In April, retail sales tax collections rose robustly in New York and moderately in New Jersey on a 12-month basis, implying moderate to strong gains in retail sales. Similar 12-month gains were reported in April personal income tax collections. Inflation moderated. The April consumer price index for the New York/northeastern New Jersey region rose just 2.9 percent on a 12-month basis, following gains of 3 to 3-1/2 percent during the previous 4 months. On the national level, our forecast is rather close to the Greenbook's. The differences are that we show less growth in 1997, and we are below the Board staff in our estimate of the CPI increase for 1996. On a Q4/Q4 basis, we have the CPI at 3 percent this year compared with the Greenbook's 3.4 percent. However, we agree on 3.2 percent in 1997. Our Bank's forecasting record over recent years has been quite good, except that we were slow to recognize the wage restraint that is the main reason for continuing good inflation numbers. We, like all of you, are not certain how long that can or will continue. But I could have said that a year ago, and the restraint has in fact continued. People running businesses still seem to be reluctant to raise prices. When we talk to business people, they sound very alarmist about their industry or about the country or the world in general, but I find that they know very little about those subjects. All I am really interested in is what they are planning to do with their own businesses. When we ask them that question, we are told about very severe price restraint--the inability to pass on rising costs--and the need to rationalize their businesses. So, I do not see great risks of the real economy growing above trend. In fact, we have strong growth in the first half of this year, especially in the current quarter, and then growth drops slightly below trend in the second half of the year and in 1997. So, I see the risks as balanced by-and-large. Despite all that, my anxiety level regarding price trends has begun to gnaw. However, I consider the present stance of monetary policy to be just about right or so close to it that, to borrow a phrase from Ed Boehne, ""watchful waiting"" is appropriate. In fact, when he mentioned that, I remembered back about four decades to my days as an officer of the deck on a Navy ship where the possibility of a storm encouraged one to increase the state of alert. On the other hand, increasing the state of alert did not in turn increase the probability of the storm. [Laughter]",693
-fomc-corpus,1996,It might have stirred up a storm! President Jordan.,11
-fomc-corpus,1996,"The most noticeable change since the last meeting has been orange construction-site barrels sprouting all over the Great Lakes region. Infrastructure construction is in full swing. It was explained to me recently that Cleveland in particular has been benefiting greatly from such construction. That is because, while Atlanta has the Olympics, we have a Bicentennial Year with a former mayor who is now governor and wants to be Vice President. That does wonders for suburban infrastructure spending! The irony of prosperity is that everything is closed for renovation and repairs. [Laughter] What apparently are not going to be sprouting in the region are crops. In the last couple of weeks we have heard a lot of statements that are alarming. They are in sharp contrast with what we were being told in March and April by bankers and individuals directly active in farming --farmers, equipment suppliers, seed suppliers--that high grain prices caused by the drought in other areas would make this the best year for the agricultural economy in memory for farmers in our region. Now that our farmers have already sold in the futures markets the crops that they have not been able to plant, people think it will be the worst year for the agricultural economy in memory. I do not know how pervasive the problem is, but I was told that as of last Friday, only 6 percent of the corn crop was planted in Ohio. Farmers say that if they do not have the corn planted by mid-May, they will switch to beans or some other crops. I am not certain how reliable that deadline is.",305
-fomc-corpus,1996,It is already May 21!,7
-fomc-corpus,1996,"Well, people are saying that there will be no corn harvest in our area, but I am not so sure about that. Others are telling us that the Amish do not have any problem; their horses are not slowed down by the rain. The stories also are very negative regarding the nationwide wheat and corn crops, and that carries over to chickens, hogs, and ultimately beef. I am not sure what to make of it all. Our bankers say that they are worried; they have a lot of farmers who were just too enthusiastic about selling crops for forward delivery, and that will result in a financial problem later this summer. I recently participated in a round of meetings with about 40 people on our joint boards of directors and our small business and bank advisory councils. One of the questions I asked them was whether they were more or less optimistic about the economy than they had been at the beginning of the year. Except for one software company, they were consistently more optimistic even though the almost universal belief was that there will be an extensive General Motors strike. The auto supply companies and others are saying that GM has no alternative but to endure a lengthy strike if that is needed to adjust their badly misaligned cost structure to everyone else's. With regard to the software industry, there has been an increasingly strident claim that its growth is a bubble, that there is a severe downside risk associated with overpaying for these firms, and that one of these days we will see a very sharp correction in that industry. Let me comment on some of the discussions we have heard on national issues. What the income side is telling us about the national income accounts in the economy is an important issue. It may explain why sometimes when we listen to the regional reports based on anecdotal information, they sound like we have achieved the Lake ""Woe-begone"" economy where everybody is performing above average. An example is the anecdotes that we hear about productivity. When we ask them, people consistently tell us that their productivity improvements are substantially higher than those in the national statistics. We have to be cautious about how we interpret those reports and how much confidence we can have in them. The exchange earlier today, which Governor Yellen also referred to, between the Chairman and Al Broaddus involves an issue that we all ought to settle in our own minds. Early this year it was said that interest rates had dropped as much as they had on the expectation that the expansion not only was going to be weaker than had been anticipated earlier, but that the economy might even be moving toward a borderline recession. The subsequent runup in interest rates occurred because the economy turned out to be stronger than people thought it was going to be. But the runup in interest rates also implied that the expansion eventually would slow, which presumably would mean that interest rates would come down, which means the economy will then strengthen. As to what that says about policy, it is pretty clear that at the beginning of the year and at least until early February, intermediate-term rates out to 10 years at least were based on an expectation of further reductions in short-term interest rates. My own conclusion is that today's rates, about 6.60 percent on the 10-year maturity, are consistent with an unchanged level of the funds rate. They are not based on the expectation that the funds rate will go up but rather on a reversal of the prior expectation that it will go down. I think everybody should try to settle that issue in their own mind. With regard to the economic outlook for the nation, surveys such as those on consumer sentiment or the Blue Chip don't do much for me. Early this year we saw a lot of stories about the severe winter weather--record snowfalls, low temperatures, and all the evidence that we are going into a new Ice Age. Last week we heard evidence that we are in a period of global warming! I hope our judgments about the economy are more soundly based than those stories about the weather.",796
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"I have not been here since the last meeting for all intents and purposes, so I don't really have anything to say about the U.S. economy. But I find this discussion very informative and useful. Where I have been, I must say, makes me appreciate coming home. It is very depressing to live and work in Washington because it makes one begin to think there must be something wrong with America. But when I go abroad I realize that this is the way it works everywhere; there is something wrong with the world. So, at least I feel relatively better. For the first time in years I agree completely with Ted Truman on Japan, and I think that means, Ted, that we are both wrong! In Japan, I was very much struck by the fact that the recovery is under way. They are going to have a solid recovery this year. Solid growth probably will not be sustainable next year but is likely to slow somewhat. Some of their larger banks have begun tackling their banking problems. What was most encouraging in Japan was the end of denial. I thought they were very candid about what their problems were. That candor was reflected also in a question that they always asked me about our stock market. I was thinking very much about what just came up in Jerry's comments about the bubble in the software industry. If you watch the OTC, not the Dow, you begin to appreciate that a bubble might very well be forming. On one day last week when the OTC was recovering, all of the top 10 issues were up at least 9 points. There are IPOs that do not trade at 20 times earnings; they trade at 20 times sales. My suggestion for such a company would be to sell, put the money in 10-year notes, and it would be better off that way. This is the silly season. To be sure, our stock prices are not at Japanese levels, but who knows how much longer it will take. They are getting closer. In Japan, it was nice to have candid questions. Bill McDonough and I were in Basle last week, and I was in France and Italy and Switzerland the week before. I think there has been a decline in candor and an increase in the sense of denial. It really is stunning to me how everyone who even thinks about the issue will say: You are right; what we are doing is not economically sensible, but it is politically necessary. If they follow that kind of policymaking long enough, I don't see how they are going to come out of it. They are going to be announcing more deficit reduction measures, mostly on the spending side. The French are going to be following up the cuts in spending they have already made with further cuts just to look credible. I think they will hit 3 percent of GDP. When you have the kind of marginal propensity to tax that those economies have, which is 50 percent or more, and you begin to have spending contractions, it is very hard to lower the deficit because the inevitability of G and Y and T make the math very, very difficult. They are chasing themselves down. There is also a remarkable sense of denial or willingness to deny the problems This seems like a very implausible basis on which to run a democratic society for very long. I think it is a good example of the state of denial in France and Germany. I do not share Ted's view that we are going to have a weak euro. I believe we probably are going to have a strong euro because I think the only thing that they will be valuing after convergence is credibility. I do think that they are going to have some credibility problems. In my view that means their policy will have to be tighter than tight to begin with. I think the path of convergence is going to lead to a downward spiral in Europe, and after they get there they are still going to be continuing with that sort of policy. So, I came away from Europe very, very depressed, from Japan mildly encouraged, but, gee, it is great to be in America!",820
-fomc-corpus,1996,Coffee is available. Shall we break?,8
-fomc-corpus,1996,Mr. Kohn.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,Is the question whether we respond to that forecast horizon issue now or at a later time?,18
-fomc-corpus,1996,Whenever. It would be nice to have a little discussion at this meeting. Whether you want to do it after you have discussed the near-term policy choices--,31
-fomc-corpus,1996,Why don't we do that? Why don't we complete the near-term policy discussion and then come back to that issue and conceivably continue to discuss it during the lunch period if that turns out to be necessary.,42
-fomc-corpus,1996,That's fine.,3
-fomc-corpus,1996,"Any questions for Don? Clear as always. I think this is indeed a watershed period, as Governor Kelley mentioned. As I listened to the members' comments relating the current situation to the Greenbook forecast and the staff briefings, I came to a few conclusions that I hope characterize the substance of what we have been discussing. My impression is that if I fully believed the outlook in the Greenbook and indeed expected it to materialize as projected, I would feel that we ought to be tightening policy sooner rather than later. The basic reason is that I find the federal funds rate assumption in the Greenbook inconsistent with the staff outlook. So, the key question that I envisage is essentially whether the internal construction of the forecast as postulated by the Greenbook is consistent with the world that I believe is evolving and to which we must adjust. Let me say, first, that I think the Greenbook is projecting relatively modest growth in real economic activity and that the risks to that projection are probably on the up side. I say that because the staff is projecting a fairly dramatic slowing in the growth of final demand, and one can scarcely conclude that the projected inventory investment is other than subdued. We have seen rather telling instances in the past when business firms have liquidated inventories to the point of some tightness. As they endeavored to restore some inventory balances, lead times immediately began to stretch out on deliveries and desired safety stocks started to expand. The result has been a fairly substantial acceleration in inventory investment that has fed back to the income side and created an economic growth rate that is substantially greater than that in the Greenbook forecast. Implicit in this Greenbook forecast of real GDP is a degree--I could say a new form--of inventory response in the economy that certainly is much more subdued than that experienced in 1994. In a certain sense, it is also a good deal more subdued than one would anticipate on the basis of historic cyclical patterns over much of the post World War II period and far more clearly before then. The crucial issue at this stage is the evaluation of the real side of the economy. The real side is being bolstered, as best anyone can judge at this stage, by the wealth effect. Not that many months ago, everyone was sitting around, here and elsewhere, and wondering what elements in the GDP were going to strengthen and sustain the recovery. We could not find it in residential construction. We could not find it in capital investment. The consumer was dead. The government had gone out of business. And clearly the export side was not doing anything. We are now sitting here and wondering what is going to moderate this expansion. The change has occurred in only a few months and no one can tell me that the world changes that rapidly. What is happening, and one sees it best by looking at the S&P 500 which has been going straight up in the charts, is probably the result of a wealth effect. That effect is lagged sometimes; it is indeterminate. It is very difficult to judge, but one gets the sense that this is where some of the effect is probably stemming from. Obviously, in the capital goods area we are getting some evidence of lower capital costs. We are getting related evidence of increased margins. And it's hard to buy that anything other than the wealth effect is driving the consumer. That gets us down to the question of how long all this will go on. The stock market as best I can judge is high; it's not that there is a bubble in there; I am not sure we would know a bubble if we saw it, at least in advance. But one surely can't argue that the underpinnings of the level of stock prices are all extremely positive. It's hard to believe that if any series of adverse developments were to occur, the market would not come down rather substantially and reverse the wealth effect. That probably would damp economic activity quite substantially. But at this stage I don't think we can make a reasonable judgment because we don't know, frankly, how the inventory situation is going to evolve. We don't know how the accelerator issue that Governor Yellen has raised is going to affect the capital goods markets. At this stage the physical side of the economy is as close to balance as one can imagine. Yet, to quote Mike Prell, ""the smoking gun"" is missing. We are seeing a very pronounced set of pressures that are superimposed on the pricing structure. Every time I get out in the business sector I get reports, as a number of you also have indicated you were getting, that no one can raise prices; at least that is the way our business contacts put it. And, indeed, if we look at the basic structure of industrial prices, the PPI, and the CPI, we just do not find any significant evidence of cumulative pressures. We have seen very little in the data that measure capacity strain. We have seen very little in the way of increased delays in deliveries since that very significant measure of pressures came down. Overtime is not building. What we are seeing is a significant increase in the rate of capacity expansion of close to 4 percent at an annual rate as previous major investment projects are brought on line and push up capacity. The key to this outlook, as I see it, is not an evaluation of the physical side of the economy that appears in the Greenbook because I suspect that starting at midyear economic growth may well be on the low side of recent experience. The crucial question is the linkage to inflation. At this stage it is very difficult to take the existing structure of the NAIRUs, capacity limits, and the usual potential analysis that we do and square it in any measurable way with what we sense from anecdotal reports. I am not saying that one cannot go out and find pressures on entry-level and skilled wages, because we are getting wage increases of 3 percent. If we were not getting any of those pieces of anecdotal evidence, the number would be zero. There are wage increases going on and what we are not sure about is the outlook for unit labor costs. It's not clear to what extent we are getting the usual, conventional pressures. I go back to the issue that I raised about a year ago, namely that we seem to have created a level of job insecurity that has overwhelmed the pressures to increase wages. As I made the argument back then, the state of technology is creating a degree or sense of job obsolescence and fear that apparently--I use the word ""apparently"" because we really don't know and won't know until we look at this in retrospect--has induced a tremendous shift away from increased wages and toward more job security. To be sure, the extraordinarily small number of strikes in 1995, a half-century low, is not going to be repeated in 1996, especially if workers at General Motors go back on strike. Even so, we are still seeing a very subdued pattern of union labor contract settlements, granted that unions are an increasingly smaller part of the private-sector workforce. We have not yet seen the ""smoking gun."" I think it is important for us to see some of this evidence before we can be sure that the translation from real growth into inflation is following the historical patterns as closely as is implicit in the Greenbook. The Greenbook may well be right and, indeed, to argue that it is not is potentially dangerous. We can lull ourselves into thinking that nirvana is here: Inflation has died; it has been buried; we don't need to worry about it; and we can go on our merry way. That is a recipe for disaster. Nonetheless, something different is happening that we do not fully understand, and I think it's important for us to make certain that we not see the ""smoking gun."" The trouble, unfortunately, is that in monetary policy the ""smoking gun"" means ""we already shot the guy"" and essentially that inflation is still running. But there is something not happening out there. We are not getting the usual pricing pressures; we do not see firms able to move prices up at these rates of operation and at these unemployment rates. Something is going on that we do not yet fully understand. How one translates that into policy requires us to recognize an important factor, which Ed Boehne mentioned--namely that, unlike 1993 when our policy was very consciously stimulative to try to undo the credit crunch, real funds rates are not all that low at this stage. It is not easy to determine what price expectation variables we should apply to overnight rates, but of the 75 basis point decline in the nominal funds rate that we have engineered, I suspect that less than half of it represents a decline in the real funds rate. Indeed, depending on which measures we use, it can be significantly less than that. It is true, as Don mentioned, that the real funds rate is in the lower part of the range for the period 1979 to date, but we obviously are well above the average rate over a much longer period of time. Were that not the case, I think we would probably have to make some very key decisions very soon and do so before we have the evidence on how this watershed issue is turning out. I must say that I agree with Ed Boehne that the existing rate structure is reasonably high--probably somewhere near average, maybe slightly restrictive, maybe slightly easy; I don't think anyone really knows. We can afford to wait and indeed we should wait for a short while. We probably will have to make a judgment by July. It is conceivable that if the inventory accumulation moves faster than the Greenbook presupposes, we would have to move sooner. But my general view at this stage, and I raise it as a recommendation, is alternative ""B,"" that is, to do nothing at this stage. I would prefer a symmetric directive, but that is a debatable issue and one can have differing views on this. Vice Chairman.",2005
-fomc-corpus,1996,"Mr. Chairman, I would like to concentrate on the part of your presentation relating to what we don't know. It is clear that we don't fully understand what appear to be some new relationships in the economy affecting the connection between the real economy and the inflation rate. And because I think that the present stance of monetary policy is close to being correct, if not absolutely so, I feel that we have the luxury of waiting until our next meeting in early July and I believe we should wait. However, we should be careful not to assume--and your remarks did not assume, indeed quite to the contrary--that today's decision to wait until the next meeting has any implication that we will reach the same conclusion at that meeting. The next meeting will be a new ballgame. In my view, all we are discussing is whether to do something today or wait until the July meeting to consider what we should do. I very much believe that we should wait. As regards symmetry and asymmetry, if the incoming data suggest that it would be appropriate for us to move before the next meeting, those data will be sufficiently dramatic that I am sure you would wish to have a conference call. But I don't see the need for an asymmetric directive because I think the probability that you would be highly likely or even fairly likely to take action between now and the next meeting is quite low. If we were to adopt an asymmetric directive at this meeting, then not move to implement it over the next 6 or 7 weeks and decide for good and sufficient reasons at the July meeting that a change in policy was not appropriate, I think that the minutes of this meeting to be released on the Friday following the July meeting would give a very strange and difficult to interpret message. I do not believe such a message would be in our best interest. So, I very much believe that we should take alternative ""B,"" and I feel perhaps considerably more strongly than you do, Mr. Chairman, that symmetry is appropriate.",396
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. I was not very successful when I talked about this insurance policy concept before, but I am going to venture into that territory one more time and then probably leave it at that. In my view, we in effect took out an insurance policy in January. In retrospect we did not need it, and I think now is the time to cancel and avoid the premium. In my view, inflation and inflation expectations have increased. I think the stance of policy is neutral at best and, more likely, somewhat stimulative. Accordingly, with such a policy stance, I think it is unlikely that we can contain inflation at the level where it has been over the last several years. In other words, we are likely to lose ground. We certainly are very unlikely to make any progress toward price stability. The risk of waiting is that the premium on this insurance policy is not a fixed premium. It will go up. If it turns out that monetary policy is perceived by markets to be out of position in the face of what is happening in the economy and particularly with respect to inflation, it is going to cost a lot more to reverse it later rather than sooner. My preference would be somewhere between ""B"" and ""C."" I would increase the funds rate by 25 basis points and probably accompany that with an increase in the discount rate, although that is a separate matter, obviously.",278
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, as it turns out I want to talk about insurance policies as well. I believe that it would be wise to tighten policy at this time. We cut the rate in January because an apparent moderation in growth was reducing inflationary pressures and because we wanted insurance against the risk that the economy might weaken further. Since then, the growth picture of the economy has brightened considerably. Growth in the first half of the year now appears to be exceeding the trend rate. Since the need to guard against a slow economy has evaporated, it makes sense to undo the January reduction in the funds rate. Indeed, it seems to me that the risk we now need to insure against is an increase in inflation. This view is supported by the forecasts of both our staff at the San Francisco Fed and the Greenbook. At a minimum, it is safe to say that there is little reason to expect inflation to show a downward trajectory at current levels of interest rates. In my view, these two considerations support a 50 basis point increase in the funds rate. However, given that an increase in the rate would represent a change in the direction of policy and would be a big surprise to the market, it would seem prudent to me to go for a 25 basis point increase at this meeting. Thank you.",261
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"I agree strongly with Tom Melzer and Bob Parry and I am sure that will not surprise anybody. I guess my views on policy at this stage are predicated on a couple of things, Mr. Chairman. First, the long-term goal is price stability. The staff is now projecting an increase in the inflation rate next year. I think it is a credible forecast and it means that inflation is moving in the wrong direction. Second, I know there are risks on both sides of this forecast; there always are. But it seems to me that what we heard around the table this morning suggests that the risk definitely has shifted, in my view at least, to the up side given the strength in demand, price shocks in the energy and food sectors, and a possible increase in the minimum wage. Despite the apparent divergence in our views about interest rates earlier in the meeting, I think we would agree, and I think most observers would agree, that the markets are not expecting a very pronounced tightening of monetary policy, at least in the near-term future--over the next two or three months. I find that a little intriguing because, given all that is going on and the clear change in the tone of the economy, one might expect market participants to anticipate somewhat more aggressive policy moves. There may be several reasons for this. One explanation might be that market participants are expecting us to be somewhat more hesitant in this period of the political cycle. Partly because of this, and given the underlying inflation risks and the upside risks in the outlook for economic growth that I and others mentioned earlier, I think we should raise the funds rate today. I would prefer or recommend a 1/4 point increase. Even though it is a change in the direction of policy, it seems unlikely to me that an increase that modest would do any significant damage to real economic activity, although there would be some real cost. I think the increased credibility flowing from such an action would hold down inflationary expectations and maybe reduce the amount of the increase we would have to engineer later in the cycle to contain inflation.",417
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I would prefer that we tighten now. I think we have consistently underestimated the strength of the economy over the last several months and earlier, going back to last fall. We are looking for the economy to continue to be strong. We are no longer talking about capping inflation. We are talking about seeing it creep up, or move up, and that is the wrong direction because we want positive economic growth over the longer term. In my view, we may be compromising the sustainability of the expansion if we allow inflation to get much higher than what we are now projecting. At a minimum, we should have an asymmetric directive toward tightness.",131
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I am going to continue the revolt of the nonvoters! [Laughter] As I indicated before, I think we clearly have moved from a period of balanced risks to risks on the up side. The risks of increasing rates of inflation seem significant both from supply shocks and from demand factors. It may be that rising long-term interest rates will act to damp activity sufficiently, but the ebullience of the stock market and the continuing strength of such indicators as housing and consumer spending suggest that credit and funding are both available and not overly costly. In my view, the issue now is how forward-looking monetary policy should be. I have argued, and I continue to believe, that the costs of being wrong on the up side and letting inflation get out of hand are greater than being wrong on the down side. We need to act before we see the ""whites of the eyes"" of inflation, as you have argued, Mr. Chairman. I am also worried now that moving later in the year might be more difficult for a number of reasons, and that moving later than that might require a more significant move than we would otherwise need. So, for me the questions are how much to do and when to do it. In that regard, I want to piggyback on the insurance argument. We did 25 basis points in January. We thought things were quite slow at that point. Hindsight now shows that they were not as slow as we thought. I would reverse the insurance policy. I would move the funds rate up 25 basis points, and I would do it now. At a minimum, I agree with President Hoenig that the directive should be asymmetric.",336
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"As I think about the economy and how it is likely to perform from here, my suspicion is that housing still has some momentum that will carry it beyond the next quarter or two. That would also be my judgment about capital spending. As far as the consumer is concerned, I do not doubt the significance of the wealth effect, but we have had sustained gains in employment as well. So, I don't think that what is going on in that sector is entirely a wealth effect. That leads me not to be terribly concerned about the outlook for the real economy. It looks satisfactory, or maybe even better than satisfactory, to me going forward. Is this going to translate into the kind of inflation performance that is forecast in the Greenbook or something even worse? You have pointed out, Mr. Chairman, that we do not fully understand what is going on there, whether it is job insecurity or other things. I agree with that. I think it may only be with the benefit of some considerable hindsight that we will understand that fully. From another perspective, if I look at real interest rates and the real federal funds rate and ask myself whether monetary policy is too stimulative or too restrictive or too whatever right now, my judgment is that it is not very far from where it ought to be. I do not have a strong conviction as to which direction it may be off. When I couple that consideration with what I believe about the real economy and what I think I know and do not know about inflation, that tells me that anything we do ought to be quite cautious. I just do not have the sense that I know enough with enough confidence right now to come out strongly on one side or the other. So, for this meeting I am prepared to stand pat. But I must say that I am getting increasingly concerned about the inflation situation. While we can always explain it away with special factors--grain prices or energy prices or whatever--it is always true that if we take out the most rapidly rising components we get something that we like better. I think we have to be very careful about pursuing that very far.",421
-fomc-corpus,1996,Symmetric or asymmetric?,5
-fomc-corpus,1996,I prefer symmetry on philosophical grounds.,7
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I think that if people outside this room who pay close attention to these matters saw the Greenbook inflation forecast for this year and next year and heard some of the comments and concerns that people around this table have expressed about the inflation outlook, we would be sending a very bad message by not taking action today. So, fortunately, outsiders don't see or hear those things. [Laughter] If the minutes of this meeting, which will come out right after the next meeting, and comments that people make in the meantime convey the idea that we see a worsening of inflation and are not doing anything, I think that would provide a bad message. If that is what happens, then I am going to regret that we did not take action. If I believed the Greenbook inflation forecast, I would have to say that we should tighten monetary policy. I would not want my views in that case to be taken as acceptance of the kind of inflation prospects that we are being presented with. I think that outlook is totally unacceptable. I didn't view the reduction in the federal funds rate on January 31 as an insurance policy against the downside risks in the real economy. The way I thought about it was that, on the basis of the information we were getting, the equilibrium real funds rate appeared to have moved down from what I felt was an appropriate level, and to avoid a de facto tightening of policy, the nominal funds rate needed to come down from the 5-1/2 percent level where it had been since November 1995. I think Don Kohn is correct in his assessment that more recent developments have reversed that decline in the real funds rate, and had I anticipated those developments, I would not have supported the 1/4 point reduction on January 31. But I also am not persuaded that this strength in the economy is likely to be enduring enough that we need to move the funds rate back up to where it was before January 31. So, I support a no-change, symmetric directive, though with considerable concern about how it will be interpreted.",412
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"Several issues have been talked about around the table, and in the end people have to make their own judgments. With regard to the issue about the economy and the structure of the economy, most of the models, which I think the Greenbook reflects, clearly indicate that we should have had accelerating inflation over the last couple of years and are likely to have accelerating inflation going forward. But the actual experience in the last couple of years has not been particularly consistent with forecasts based on those models. So, our dilemma really is one of being open-minded to the possibility that there are some structural changes going on versus getting caught up in wishful thinking because tightening policy is always more difficult than easing. It is easy to fall into the trap of finding excuses for not tightening, but my sense is that there is enough evidence over the last year or so to cause us to be more open-minded about the prospect that the economy may indeed be less prone to inflation. I think there is something to that hypothesis, but we have to be very careful about getting carried away with it. On the stance of policy, if the federal funds rate were a couple of percentage points lower or even a percentage point lower, I would be more persuaded that now is the time to act. But I don't know whether current policy is a little restrictive or a little stimulative. My sense is that it is probably broadly neutral and therefore that we are fairly close to wherever we need to go. Based on those reasons, not out of any overwhelming conviction that I am right but after trying to weigh the evidence and making judgments that are a matter of both logic and intuition, I come down on the side of no change at this meeting, alternative B. On the issue of symmetry or no symmetry, I could support either. I don't have strong feelings. On balance, I prefer symmetry mainly because I can't imagine that you, Mr. Chairman, would make a decision to move toward tightening in this particular environment without a consultation with the Committee. Therefore, I think the operational value of asymmetry in these circumstances is essentially worthless. Looking ahead, since we do have a lag on releasing the minutes, I think asymmetry could convey the wrong impression of where we are when the minutes are made public six weeks from now. I would prefer to keep our policy options very open, debate policy again in July, and make a judgment then without having the added issue of an asymmetrical directive at this meeting exert any influence on that decision. So, I come out with ""B,"" symmetric.",506
-fomc-corpus,1996,"I would like to concur with what several of you said regarding a telephone consultation. If events in the intermeeting period differ significantly from what we now expect, then certainly we ought to be talking on the telephone to see what, if anything, we want to do then. Governor Kelley.",57
-fomc-corpus,1996,"Mr. Chairman, as I said a little earlier, I think we are approaching but are not quite yet at a watershed, and as a consequence I don't have a view at this point concerning what way the water is going to flow when it flows. Clearly, there has been a shifting of the risks to the up side. On the other hand, it is a clearly plausible prospect that we will get a distinct slowing in the expansion rather soon. If we do get that slowing, it seems to me that the history of the past two or three years has to give us some pause about just how ""baked in the cake"" an inflationary rise may be. It could well turn out that if we get a distinct slowing, we will continue to see a pattern of stable inflation. At any rate, it doesn't seem to me that time is of the essence at this point. I think ""watchful waiting"" makes good sense. I prefer symmetry for precisely the reasons that Ed Boehne just stated, and I won't repeat them. But I must say that, for all of this, I am sitting very lightly in the chair about this business, and I would not object to asymmetry.",240
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"Long-term rates are up substantially and the dollar is up a little, so we already have had some tightening in a sense. Don and, I believe, Al Broaddus said that a tightening of the fed funds target right now is unlikely to affect long-term rates the way such a tightening did in early 1994. I agree with that, but we didn't expect the impact in 1994 either. Also, there is a big difference between the present 5-1/4 percent funds rate target and the 3 percent target that existed then. Our policy stance is not so clearly easy now in my opinion. Also, it would bother me somewhat to base a tightening move on output and employment growth developments. Inflation is up overall, but its rise has been mainly in measures that include energy and not in core inflation. I think inflation is what we ought to be looking at more than the real sector. I agree with your proposal for no change with a symmetric directive.",196
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for ""B,"" symmetric. My preferred policy as this stage is cautious inaction. I guess that's called ""watchful waiting."" As I indicated in my earlier comments, the current level of long-bond rates and the stronger dollar seem sufficient to me at this stage to contain the evident upside risk to spending. This level of long rates does seem consistent in my view with the maintenance of the funds rate at its present level, at least for the time being. The market certainly perceives some chance that the funds rate will need to rise this summer and next fall, and so do I because I think the risks have shifted. But the market is not demanding or even expecting such a move today. Market participants would be surprised, and I think it could provoke an excessive adjustment in long-term yields. I certainly understand the reasons for wanting to move in advance of an increase in inflation. I agree with that reasoning, and I definitely do not object to the reasoning that is incorporated in the Greenbook about the inflationary process. But I share some of the doubts that the Chairman has expressed so well, and also Presidents Boehne and Stern. We do not understand fully what is going on in the labor market as evidenced by the errors in our earlier inflation forecasts, and I would like to wait and get a little more information. If the current Greenbook forecast is accurate, we will soon see clear evidence of an increase in compensation growth and an uptick in core inflation. When we see that, I think we definitely will need to respond. The staff's financial indicators package now routinely depicts the recommendations of Taylor's rule. This is a rule of thumb that I regularly consult as a very rough guide to reasonable policy. I don't mean to say that I think one should follow this rule religiously, but according to that rule--and a number of you have made this point--policy is roughly appropriately positioned at this time. It seems appropriate given current inflation and resource utilization. But the chart also indicates that it will be appropriate to tighten if the Greenbook forecast materializes, and I accept that conclusion. With respect to the symmetry issue, I prefer symmetry for the reasons that have been explained by Vice Chairman McDonough and President Boehne.",457
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"""B,"" symmetric. Although I believe that the risks have moved toward higher inflation, I do think that long-term rates are exerting some restraint. I would go with symmetry because if we were to make a change, it would be a change in direction, and I think a phone call would be appropriate.",61
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I listened very carefully to your argument regarding the downward pressure that is now being put on prices. The model that crept into my head was what I will call the secular versus the cyclical factors. There are some secular changes occurring in the economy such as a decline in unionization and the spread of different kinds of retailing. These changes have put downward pressure on the capacity of the economy to increase prices. I have to believe that the secular trend is probably not a permanent one, and the question that we are facing is when it will come to an end. I agree with the Greenbook and with the majority of the people at the table that cyclical pressures are pointing toward more inflation. The question is whether the secular trend will keep the cyclical pressures from adding to inflation. I have just one data point, not enough to base a decision on, and that is some information where I shop a lot! Actually, this information does not come from my shopping experience, but from the company itself. Over the last two years or so, they have been cutting prices on the average of 2 to 3 percent a year. That is partly an effort to gain market share and partly, I believe, the result of new developments in retailing. That policy has now changed. They have stopped cutting prices and are now starting to increase them, albeit very modestly. While this is only one data point, it does suggest to me that the secular factors are probably coming to an end. We have benefited from them for a long time. The second issue is about events. I can't imagine any forthcoming economic event that is going to change anybody's point of view. What future statistic is going to cause us to move? There isn't one. So, I am not expecting the need for a telephone conference, and I don't think anyone else does either because there just is no number that would change something fundamental in this period. The reason is that we are not in an emergency kind of situation. When we tightened policy in 1994, I defended the move even though the natural rate was below the unemployment rate. The reason was that if we had waited for inflation to get embedded into wage rates, it would already have been too late and we would have needed a recession at that point to get the inflation out of wage rates. So, I don't think we should be driven by events. If we actually are looking for a reason in the ECI or in wage rates, it will be too late when we see it. It is my hunch that nobody here knows anyone who is expecting to cut some salary. The betting has to be that the salary is going to go up. Having said all that, I have one hunch and one observation, and that is not enough for me to support an increase in rates today. But given that we are not driven by events, I am not sure that that is the basis on which we should decide symmetry versus asymmetry. As I listened to the comments around the table, I detected a strong undercurrent of unease. So, I am in concert with Jerry Jordan's observation that perhaps symmetric is not the way to go. We should take note of what is happening, and even though I favor symmetry procedurally, I would prefer ""B,"" asymmetric at this point.",673
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"It's a very close call, Mr. Chairman. I was in the group that did not favor a reduction in January, but I don't necessarily conclude that that means we should reverse that move today. I think the risks are clearly on the up side for output relative to potential. We all have expressed concerns about the inflation outlook. That outlook boils down in my judgment to two things: One is food prices and the other is wages and unit labor costs. On the food-price side, I think the outlook is uncertain. It is not clear how much of the increases in grain prices will be moving forward into food prices. I thought the analysis in the Greenbook was particularly helpful in showing that if food prices do increase, they will seep into the overall price level. As I think back, my experience in the 1970s is that increases in food prices tend to have a much greater impact on the overall price level than people expect. It just seemed then that everything started to go wrong and kept going wrong. If food prices do increase, I suspect that we will relive that experience and have more of a problem than people expect. That conclusion is not based on any econometric model; it's just based on my personal instincts. In fact, our econometric model at the Chicago Bank is slightly more optimistic than the Greenbook on the inflation outlook. I think developments on the wage and unit labor cost side will be extremely important for policy. It would be helpful to have more information there, but I am not sure we ever have enough information. Something obviously different is going on. I think there are some faint indications that wages may be rising more rapidly, but as you said, Mr. Chairman, we clearly do not have enough evidence to reach a firm conclusion. On balance, I come down in favor of no change, but I would prefer an asymmetrical directive.",374
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for alternative B, and for the reasons that Ed Boehne articulated I, too, would prefer a symmetrical directive. Being last or near last to speak, I won't repeat all the arguments that already have been made. One of the things that got a good bit of discussion in the earlier go-around was the run-up in oil and grain prices, their impact on the CPI, and how much weight to give to that. On that point, I have had to remind myself over the last couple of months about an important feature of the CPI--namely that, as a fixed weight index, it tends to overstate inflation when we get the kind of relative price changes that we have seen recently. Since a fixed weight index does not capture short-run substitution effects--and someone talked about that briefly during the earlier go-around--such an index does tend to show prices going up quickly. We know that what really happens is that some substitution effect will hold down the increase, although sometimes with a lag. On that point, I would therefore give somewhat less weight than do some others to the run-up in both oil and gas prices. In preparation for this meeting we talked some about what we can learn from the yield curve, a subject that also came up this morning. There are a lot of interesting questions there, but I still am not persuaded that the steepening in the yield curve that we have seen recently provides sufficient evidence that an unchanged funds rate constitutes an accommodative shift in our policy. In sum, I would prefer to stand pat, observe developments very carefully over the period ahead, and be ready to move at our next meeting or before if we begin to see some of the inflationary pressures that people around the table have noted could happen.",357
-fomc-corpus,1996,"Thank you. You were the last speaker. The consensus of voting members is clearly ""B,"" symmetric, and our secretary will read the appropriate directive.",30
-fomc-corpus,1996,"The draft wording for the operational paragraph is on page 13 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",113
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Phillips Yes President Stern Yes Governor Yellen Yes,40
-fomc-corpus,1996,We will now return to Don Kohn's query. Do you just want to give a short summary so people can respond to it?,27
-fomc-corpus,1996,"I was thinking about the upcoming July meeting and recalling the Committee's discussion in February about paying a little more attention to its long-run objectives, in particular its inflation objectives. Taking into account speeches such as the one that Vice Chairman McDonough made on this subject, it struck me that it might be useful for the Committee members to discuss where they expected to be in 2-1/2 or 3 years in terms of those objectives. That would be in addition to the usual discussion leading to the selection of monetary aggregate ranges that the Committee is still required to establish under the law. The discussion might surface some of the pros and cons of this longer-run look at policy. So my proposal, Mr. Chairman, was that Committee members, in addition to the usual 1996-1997 forecasts that they would turn in for inclusion in the Humphrey-Hawkins report and that you would discuss in your testimony, also submit 1998 forecasts of real growth and inflation. The purpose would not be to publish those additional forecasts, but rather to help structure the Committee's discussion. The other point I tried to make is that, if the Committee members decided to go ahead with this, it would seem to me that the 1998 forecasts would incorporate what the individual members thought ought to occur. They would be more in the nature of goals necessarily than forecasts and would be based on the monetary policy that the members as individuals would pursue if they did not have to take account of their colleagues around the table.",303
-fomc-corpus,1996,Can I just amend that slightly? I think you also would want the 1997 forecast on the same basis.,23
-fomc-corpus,1996,"Well, the members have to submit 1996 and 1997 forecasts in July 1996.",21
-fomc-corpus,1996,"What I am trying to get at is that I don't think we want a 1998 number unless it reflects a desired outcome achieved through an appropriate policy. If you have a 1998 number that is the result of your individual policy, it also would be useful to have a forecast of 1996, 1997, 1998 on the same basis. That would highlight the difference between the way we normally have been doing these projections and what your policy would produce.",96
-fomc-corpus,1996,"That has always been an ambiguous issue and one that I think has produced some confusion in the past when the Committee has discussed an extension of its projections. When you are asked for your 1996 and 1997 forecasts, you are asked to make your own assumptions about monetary policy.",57
-fomc-corpus,1996,"They are assumptions of what the members think monetary policy will be, not what they would like it to be.",22
-fomc-corpus,1996,"No, we have asked the members to base their projections on what they think an optimal policy should be.",21
-fomc-corpus,1996,How would you differentiate between the current projection and the new one?,13
-fomc-corpus,1996,"When you are projecting 1996 and 1997, obviously much of what is going to happen, even if you were to run your optimal monetary policy, has already been ""baked in the cake,"" given the ongoing trends in the economy. It seems to me that by the time you get to 1998, you have had enough time to adjust your individual monetary policies to look at 1998 as a goal.",86
-fomc-corpus,1996,That's clear enough.,4
-fomc-corpus,1996,"I find the distinction a little awkward myself, having dealt with these numbers. What I have always found strange was that no one changed the numbers after the discussion at the meeting, which may have given people a clearer impression of what the Committee was up to. But the numbers stood as they were, presumably as numbers that were based on your optimal policy prescription. To divorce that from what is possible in your minds would seem pretty strained to me. So, I take this as a matter of emphasis to remind you that, especially for forecasts that extend further out in time, you should be thinking about what you want to achieve and not just producing some forecast based on current conditions, which is what some people have done.",142
-fomc-corpus,1996,But how are the numbers characterized in the Humphrey-Hawkins testimony? My recollection is that they are characterized as what the FOMC expects to happen.,33
-fomc-corpus,1996,Pretty much.,3
-fomc-corpus,1996,"We indicate that they are consistent with the monetary ranges that the Committee selected and so on. So, they presumably are based on some policy plan. That is what the Humphrey-Hawkins Act calls for.",42
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Don, when you use the word ""forecast,"" you immediately put me off because it is inconsistent with saying ""goals and objectives."" In principle, of course, I think we ought to provide numbers to indicate what we are trying to achieve in 1998 and beyond in order to maintain the purchasing power of the dollar. It is simply inconsistent to have the Congressional Budget Office or the Administration publish inflation assumptions through the year 2002 on which to base a budget without any information as to whether or not those assumptions are acceptable to us in terms of the way we gear our policies. If the numbers that go into that process do not come from us, they should at least be influenced by us. I would like to put out numbers on inflation goals that we intend to achieve. However, as we have seen in these discussions before, if the number is to be 3 percent inflation for 1998, I don't want to publish it. I have a real problem with agreeing to publish a number if it is one that is going to reflect somebody's best guess as to what the dynamics of this Committee and interactions from some models will produce rather than a clear and attainable goal for reducing inflation. My second problem, though not a new one, is the framework. If we supply a number for inflation, my own number would be 2 percent for 1998, and then the staff puts together a matrix that indicates how many people would have to be thrown out of work and how much output would have to be sacrificed to get to 2 percent inflation in that year, I am not going to want to publish that either. Perhaps the staff could at least humor those of us with analytical frameworks that differ from the gap or the NAIRU approach by including a reasonableness check. It would say that to achieve a goal for inflation--I will use 2 percent in 1998 as an illustration--one would need a specified growth in productivity over the interval to 1998. The staff also would indicate what counterpart reduction in the natural rate of unemployment would occur and provide some idea of the rate of sustained economic growth that would be consistent with reaching the inflation goal without reference to the notion of a Phillips curve tradeoff or sacrifice of output. Then, I and perhaps others could look at that analysis and decide whether it was a reasonable approximation of what was going on in the economy in terms of faster growth in productivity, the result of all of the investments taking place, and faster growth in capacity than allowed for in the staff model. I could decide whether I was willing to base policy on it. At least I would have a range in which to work.",534
-fomc-corpus,1996,"President Jordan, I figured that that was what your GDP forecast would embody. Are you asking the staff to take each of the members' forecasts and rationalize them in terms of productivity?",37
-fomc-corpus,1996,Not each one.,4
-fomc-corpus,1996,Each of you would have a different model and different relationships.,12
-fomc-corpus,1996,"No, but you could do it in terms of a range. We are not talking about a GDP forecast. The question is how much would productivity and capacity have to increase over and above what you have in your assumption to be consistent with moving toward 2 percent inflation--whatever unemployment rate falls out of that, perhaps a NAIRU of 4-1/2 percent or whatever, I don't know what the number is going to be--without sacrificing output and without creating a gap. I know your framework says that given where we are, an objective of 2 percent inflation requires us to raise the unemployment rate above the NAIRU and to reduce output below potential to create a gap. I don't want to do that.",146
-fomc-corpus,1996,"Two points, President Jordan. First, I think I tried to emphasize in my earlier comments that your 1998 forecasts or goals would not be published for at least five years, unless you decided otherwise. Secondly, I think it might be useful if you chose to submit written notes to explain how you arrived at a particular configuration of GDP and inflation. The staff would then be more than happy to try to present a fuller explanation of where the goals came from.",92
-fomc-corpus,1996,"I think the storm is really moving in. Maybe it would be wise for us to continue this meeting after lunch. We will still be in the meeting until we finish this agenda item. Let us take a temporary break so that everyone can get lunch. Then, when everyone is back, we will continue our discussion. [Lunch break]",67
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. I was amused when Don brought this topic up because I was going to suggest something like this, as I and others have done in the past. It is a good suggestion in that it represents a starting point for a dialogue about an issue that we need to talk about as a Committee. I would view it just as a starting point. Ultimately, I think we ought to aim for a longer-run goal with respect to inflation, maybe five years out or something like that, and we ought to communicate that goal to the public. I would not expect us to get to that point in this first discussion, but I regard it as very constructive to begin the discussion. Jerry Jordan touched on the reasons why it is so important. In my opinion, one of the most significant aspects is that, in circumstances like the present, we have inflation expectations that are quite volatile. It seems to me that if people were interpreting incoming data against the backdrop of a central bank that had established some longer-term goal for bringing inflation under control, inflation expectations might be less sensitive to the incoming data. If ultimately we got to the point of communicating a reasonable goal with respect to inflation over the long term--I don't mean necessarily as a result of the discussion we might have at the July meeting--I think that would increase our credibility, assuming we acted in the appropriate fashion to deliver on that goal. In my view we are to some extent paying the price right now for not having such a goal. The opportunistic approach we are taking in the fight against inflation to achieve our ultimate objective of price stability is having an adverse effect on our credibility. That is reflected in expectations of higher inflation and interest rates. People are not certain where we are headed, and they are worried right now that the next change could be more inflation, not less. In any event, I applaud Don for putting the idea on the table. I would support his proposal.",387
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, I share Don's ultimate goal, but I do not think that his recommendation is a helpful way to get there. I believe that the appropriate goal of monetary policy is price stability and price stability only. I further believe that at some stage we have to define price stability and that the best way for people to understand it would be for us to connect it with a number. In order to have any notion that that number is something other than what we think we are likely to achieve, given what is going on in the economy at the moment, we have to push it out at least three years. And therefore our number for the second year out is an uneasy compromise between what we think is really going to happen in relation to today and what we are seeking to achieve. So, two years is too short a period to be useful in achieving an objective, and therefore I think it would be counterproductive to establish such an objective. I would much prefer that we have an unfettered debate in July. I am very much in favor of a debate on the issue of where we think we ought to be going, but I would not complicate that debate with a big row over who has 1998 right or wrong. I think that would obfuscate the real issue, which is whether we should agree on price stability as the goal and how we should define price stability. So, I am in agreement with where I think you want to go eventually, Don, but I think your specific recommendation is counterproductive.",307
-fomc-corpus,1996,Are you suggesting 1996 and 1997 and 2000?,15
-fomc-corpus,1996,"No, I would say that, if we wanted to do this and we had had the debate beforehand, we would say the rest of 1996, 1997, 1998, and 1999.",44
-fomc-corpus,1996,What I am trying to say is that if you are looking for an extended period what you want to do is to eliminate part of the projection.,29
-fomc-corpus,1996,"Yes, correct.",4
-fomc-corpus,1996,"So it could be 1996, 1997, 1999 if you wanted to do it that way.",24
-fomc-corpus,1996,"That's right, exactly.",5
-fomc-corpus,1996,"I don't know how you get from your last forecast to your ultimate goal, but it's left a blank because that is where the most difficult transition questions are, and at this point it would obscure the ultimate goal to fill in that blank.",47
-fomc-corpus,1996,You made what I was thinking infinitely more clear. Thank you.,13
-fomc-corpus,1996,I did? [Laughter] President Hoenig.,11
-fomc-corpus,1996,"Mr. Chairman, I will repeat a little of what Bill just said. We have a goal for inflation and maybe we should define more clearly what we mean by price stability in the long term. Our discussion so far today has shown the difficulty of putting that in 1998 terms. We would spend a lot of time discussing whether we have a forecast or goal and not a lot of time on whether it is consistent with price stability. We would be right back where we are anyway. So, if we go with the proposal, I think it will create more confusion over time than it will provide clarity.",121
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"I think I am an opportunist. I am proud of being an opportunist, but the thing I don't know is when the opportunity is going to present itself. We are not going to induce a recession, but we know the business cycle is going to produce one. When it does, then inflation will come down. I don't know if that will occur one or two business cycles from now. Perhaps the year 2000 is a good year for a goal; perhaps ""ultimate"" is another desirable goal; but I would not use 1998.",111
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"I agree with Governor Lindsey. I think this is a discussion that we definitely need to have to clarify what we mean by price stability and what strategy we have in mind to get there. I am also concerned, especially given my interest in an opportunistic strategy, that it would be awfully hard to fill in the boxes relating to what I would expect in 1998. If we extended the horizon out a little longer to, say, the year 2000, I would find it easier to fill in the boxes and participate in our discussion.",110
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, I would like to associate myself with Governor Lindsey and Governor Yellen as an opportunist. I think there are a couple of other problems with this exercise. When we are looking ahead in terms of an expected result, that is a forecast. We come out with a point estimate forecast for that period in time. I think setting a goal is a different exercise. For one thing, people set goals differently. One of the pleasures of my job is that I get to discuss goals with all 12 Reserve Banks. They all have a different definition of how to set goals, and I don't know why that should not be true here. Some people believe in setting a goal that involves a lot of stretch, making it literally unachievable, so the issue is how close they can come to it. Others like to set goals that can be achieved with just a reasonable degree of effort. Both of those approaches are valid as long as people know which one is which, which one to follow. If we tried to establish a goal as a Committee of 19 people, I am not sure how we would do it. Secondly, my working vision of how this opportunistic approach works is to get ourselves, as we have, into a downward sloping channel. We expect to have a little fluctuation inside that channel with regard to the performance of various indicators, but inflation would be pointed downward toward price level stability. How we articulate exactly what inflation will be as a point estimate at a future point in time using an opportunistic strategy is a little difficult for me to conceive. So, exactly how one sets a goal in a quantitative sense if one is basically of an opportunistic inclination is a little difficult for me to see.",347
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"I agree that we have to clarify the difference between a forecast and a goal, and for that reason I agree with Governor Yellen that the further out we go in time, probably the better because I think it will be clearer that we are talking about a goal. But Mike Kelley also made the point, which obviously is a very important one, that people set goals in different ways. That is one of the things that would come out in a discussion about what assumptions people made when they set the goal, whether it really involved a stretch or whether it was something that they felt was achievable. I realize this could be a difficult exercise. We have 19 different people coming at it, but I believe we may learn something in the process. I think a discussion would be useful.",156
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"This is an idea that we ought to pursue. I don't know if Don's suggestion is optimal, but we have to start somewhere. I also think that we need to start with at least some structure. In this case I don't think it's critical whether we use a 1998-type goal or push the goal out a little in time. We have to start with some structure and some process because many of the questions that have been raised around the table have suggested, at least to me, that there are a lot of very difficult issues involved here. While we might agree that we are all in favor of price stability, we need to get beyond that general notion and decide what price stability means and, practically speaking, how we should go about implementing it, over what timeframe, and so forth. Those are difficult questions. They will get even more difficult as we really start to contemplate them, and it seems to me that we ought to get our feet wet somehow. What Don is proposing strikes me as a reasonable way to get started. We will see what kind of issues surface; we will see what we learn from this; and we may see how we can address issues like an opportunistic versus deliberate approach to disinflation.",246
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"I don't have any disagreement with what Don is recommending, and I think it can be done in terms of what one sets as a policy objective for a year like 1998. We use policy rules at the San Francisco Bank. We have some idea about what we think price stability means, and I think we would be able to do what Don is proposing quite easily. In a way it does put the cart before the horse because the real discussion is about what we as a Committee mean by price stability and over what timeframe we should seek to achieve it. Since we haven't been able to talk about that for 10 or 11 years, [Laughter] if Don's proposal gets us closer to it, I am all for it.",148
-fomc-corpus,1996,Would anyone else like to add to this discussion?,10
-fomc-corpus,1996,"I agree with Gary Stern. I think this is a nice initiative. In my view, it's very important to start somewhere, and I am very glad that Don has suggested this and put it on the table. I also agree with some of the other comments, though, in the sense that I think focusing in a fairly unstructured way on 1998 is not the way to go. I believe we need to have a longer-term horizon. I would also suggest, Don, that the staff needs to put some structure on this kind of policy discussion just as you do on our long-term policy deliberations. The form that it usually takes is some set of alternatives. You do that with simulations to a degree already, but I am thinking about something that would be more structured in terms of a goal. That might beg some questions about what price stability is, but that's okay because we need to confront those one way or another in any case. If I may be a little more specific, it might be useful, say, with a horizon that runs out to the year 2000, to flesh out how you might interpret an opportunistic strategy under certain kinds of assumptions and what that might mean in terms of some price measure like the CPI. Perhaps as another alternative, you might add something that is a little more like our traditional inflation targeting with more specific numerical goals, year by year. That kind of structure might allow us to get a little more quickly to some of the questions with which we really need to grapple.",304
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"There was a wonderful quote by Ed Boehne in the research paper that we got on opportunistic strategies. It went along these lines: Well, we are where we are; sooner or later we will have a recession; we don't want a recession; but if we can work things in a way that takes advantage of the inroads that we have made against inflation and hold the line to the next cycle, then we will achieve a pattern of every cycle having lower rates of inflation than the previous cycle, even at the cycle peaks. To me that is the operative definition of an opportunistic strategy, but it raises the issue of whether or not we can sit down and say, okay, by the year 2000 I anticipate that we will have had at least one recession and have made the same inroads into inflation that we made in the last recession. Therefore, my goal for the year 2000 is 2 percent inflation rather than 3 percent. I find that level of precision difficult to deal with. We need to have this discussion about what we mean by price stability. Does a price stability goal mean holding the line where we are and taking advantage of opportunities to get inflation lower, or does it mean some forward-looking policy to drive inflation down with all that implies about how we measure it. There are a lot of issues having to do with what are we talking about when we discuss inflation measures. We know there are a lot of problems with the CPI. What number are we going to look at when we say we have achieved victory? It's only part of the discussion, but I think we need to have it. I don't know whether all of us giving you a specific number incorporating a lot of different assumptions in ""X"" year has to be the way we start. We need to start talking about this, though.",368
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I agree with President Minehan. I think it will be useful to have the discussion. I generally prefer an open-ended, longer horizon for a goal, but starting the discussion is what is important. We need to have some kind of discussion about what price stability means and what time horizon we are talking about, and if what gets us started is thinking about 1998, that's okay with me. My preference would be to base the discussion on a longer-term horizon than 1998, but I think getting started is more important.",107
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"I hope that we can have two discussions. I would set aside the question of strategy and discuss it sometime later because I think the two different approaches to strategy raise a lot of other issues. So, confining the discussion to our goals and objectives and the time period for achieving them would be very useful.",61
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I think the discussion would be quite useful. But starting it with a number doesn't strike me as the way to do it. We ought to have a broader discussion on the issue of price stability, what we mean by it, and how we can get there. I think that if we have the substantive discussion, then numbers will fall out. But if we reverse the order, I think we will end up with a heavily philosophical discussion. So, I support the notion of having a discussion and focusing on the substantive question, and I would leave the issue of numbers for a later date.",117
-fomc-corpus,1996,Does anyone have anything to add? President McTeer.,12
-fomc-corpus,1996,I'll use my turn to compliment the chef on these cookies! [Laughter],16
-fomc-corpus,1996,"That was the definitive end-of-meeting remark! I'll remind you that our next meeting is on July 2 and 3 and if events require, we will meet sooner by telephone communication. Hopefully, at some point we will have a broader telecommunications capability, but at the moment we are limited to telephone communications.",62
-fomc-corpus,1996,"Mr. Chairman, we were hoping even before we had this discussion that we would perhaps have time at the July meeting--probably at the end of the meeting--to discuss the swaps issue, which we have kept pushing off. Hopefully, we will have a full Board by then, but who knows. We were thinking of starting that meeting earlier, say, at 1:00 p.m. on July 2. Perhaps we could start the meeting with lunch. Would that be--",97
-fomc-corpus,1996,All the major unresolved issues of monetary policy in one meeting? Swaps and price stability?,18
-fomc-corpus,1996,Does anybody have a problem with 1:00 p.m.? [Secretary's note: No member indicated a scheduling conflict.],25
-fomc-corpus,1996,Let's now end this meeting.,6
-fomc-corpus,1996,"I would like to welcome Governors Rivlin and Meyer to their first exposure to this Committee. I also would like to welcome Helen Holcomb, who is First Vice President of the Dallas Bank, to her first meeting. I hesitate to welcome, but I have no choice after we approve the minutes, our friend over there. Would someone like to move the minutes? SEVERAL. So move.",79
-fomc-corpus,1996,"Without objection. Peter, I was referring to you a moment ago. [Laughter] You are on.",22
-fomc-corpus,1996,I will be referring to the package of charts that was just distributed. [Statement--see Appendix.],20
-fomc-corpus,1996,"These are very interesting charts. I am a little puzzled by the implicit theoretical construction in the charts showing the relationship between implied volatilities on currency options and exchange rates. I would not have a problem if you were endeavoring to evaluate a market price for stocks, bonds, tomatoes, or whatever in which there is only a net long position. But exchange rates are not of that nature, of course, and what appears to be a theoretical basis for arguing that low volatility is a harbinger of a weak dollar--or whatever you were saying!--is it a sharply rising volatility that you were saying is a harbinger of a weaker dollar?",130
-fomc-corpus,1996,"A change in the dollar. I tried to be careful. If you look at those two charts, they tend to suggest a random walk in the relationship between increased volatility and the direction the dollar will go, but in the last few years the direction has been toward a weaker dollar.",56
-fomc-corpus,1996,"What I have to say has nothing to do with your statement! [Laughter] I am a little puzzled in the sense that whatever the theoretical construction there is for the dollar, it has to be exactly the opposite for the deutsche mark. I am curious as to how you explain the fact that you are getting this type of relationship in one currency and not the reverse in the other. Are we looking at really random events or is there a theoretical conception that you can impose on these data to explain why you don't get opposite effects for the dollar versus the mark.",112
-fomc-corpus,1996,"Well, I am not going to be able to answer that at the theoretical level for the long sweep of history. The data show that it is in the last couple of years that the market has had a bias in favor of the mark; when volatility pops, it is the dollar that weakens. The point is that it ought to be a random walk as to which way the exchange rate goes when volatility goes up, and I think that is probably the case in the long sweep of history. The phenomena that I am looking at and I am concerned about are not a theoretical or principled articulation of the relationship between options and spot prices, but they relate to what I have observed and heard in talking to dealers, namely, that people are writing a very large number of options right now. So, I am offering you statistical data points in the chart that reflect what we hear in the market about all the options that are being written.",187
-fomc-corpus,1996,"Theoretically, in exchange transactions all technical factors should be neutral. To the extent they are not neutral, then we have only net long positions in some particular security, or claim, or something of that nature. I am really puzzled that we can construct something like this. I don't deny the relationship, but it is not outside the realm of a random walk. Clearly, we get noise in any series, and I am just curious whether or not you have come upon something that has little more than curiosity value versus something that may explain certain fundamentals about the market itself.",114
-fomc-corpus,1996,"I think I have both a degree of curiosity and, given the history of the last few years, a point of concern about the level of options being written.",32
-fomc-corpus,1996,"You should think about that. This is an interesting set of relationships, but I am not sure what to make of it. As I said, I am curious. Governor Lindsey.",36
-fomc-corpus,1996,"I share your concern. I am a little worried about what we may be seeing. I had thought about this a little differently. It would seem that this autumn is going to be an interesting period, particularly among European currencies. What is motivating banks to write options, to bet on continuing low volatility in the exchange market when, just reading the papers, we are told that volatility is going to be increasing? It seems to me that there is a lot more risk out there than usual.",97
-fomc-corpus,1996,The incentive that is most evident to me is that they can't make money through normal channels.,18
-fomc-corpus,1996,They can't make money the old-fashioned way!,9
-fomc-corpus,1996,They now are subject to a rather disciplined approach to income targets that are set in terms of the level of income they are supposed to achieve month by month. I am not saying that is a pretty sight.,41
-fomc-corpus,1996,"So, we are back in the incentive-structure problem?",12
-fomc-corpus,1996,"I think in the short run, yes, that is a big part of it.",17
-fomc-corpus,1996,It is not the first time.,7
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Peter, I have a question about your domestic operations. When I see something like a 50 percent fed funds rate, it catches my attention. In your comments you made some reference to the inefficiencies and anomalies in the distribution of reserves yesterday and again today that initially led banks to think that the market for reserves was tighter than was actually the case. What all that says to me is that there is an inefficiency in the market due to the quality of the information. Some of that information we have. It is an infinite regression sort of thing. We are trying to guess at what bankers' behavior is going to be over the maintenance period. Their strategy is to run reserve deficiencies until the 14th day of the period and then look to us on settlement day as the reserve supplier of last resort. We and they guess at what the total supply of reserves is in the market and its distribution, and on the last day of the period they come in to borrow from the Federal Reserve. Can't we improve on that somewhat either in the quality of the information we give them or the way we operate to smooth out the availability of reserves over the maintenance period?",231
-fomc-corpus,1996,"Let me try to take the second leg of that first. The skewing of the demand for reserves toward the end of the maintenance period is a normal pattern but one that we have seen become more pronounced in the past year. My initial reaction to that was to try to force banks to smooth their demand for reserves, force them to come to me in a smoother way over the course of the period. That, though, has the negative feedback consequence of making the funds rate very soft early in the period. We just can't fight it. They want the reserves when they want them and pushing too hard to counter that does not work. So, in the current environment I have not found it a fruitful course to try to insist that they take reserves when I want to give them. With regard to the information available to the market, I think there may be some steps we could take. I am somewhat uncomfortable with the continued use of the customer RP, which is a bit of an historical artifact. It used to reflect the pass-through of the repo pool when the repo pool was only $2 or $3 billion or some similarly small amount. Now the repo pool is $10 billion or more, and we really do not pass it through to the market in any sense. The customer RP also was used by my predecessors as the non-signaling device, which likewise is no longer necessary, but it does have the tradition of having the amount to be done publicly attached to it. One thought I have, which I intend to propose when I come back to you with an outline of the steps we have to go through to conduct our operations earlier in the day, would be to ask for your guidance on my desire to eliminate the use of the customer RP as we now employ it. We would do only System Account RPs. Currently when we do a customer RP, we announce that we might do, say, a total of up to $1.5 billion; however, if we tell the market that we are doing RPs for System Account we never announce how much we are doing. I think a big step in the right direction would be to limit our operations to System repos and when we finish our review of the propositions we have received in a given operation we could then announce to the market how much was done--whether it was $4.5 billion or whatever the amount. Interestingly, that would not have helped us all that much yesterday when we had a very anomalous day. There were more reserves than we thought, and we would have led the market astray in thinking there were fewer reserves. So, that would not have helped. A combination of things occurred yesterday. One major bank making payments on corporate securities delayed the payments until very late in the day, so recipients of very routine dividends did not think they were coming. Another bank experienced a shortage early in the day but ended the day with much more funds than they had 7/2-3/96 anticipated. All of that money became available toward the end of the day, and the federal funds rate fell sharply late in the day. So, our provision of a little more information yesterday might have misled the market. But in general I think the practice would be useful and I intend to come back to the Committee--perhaps at the August or September meeting--with a little more detail on how we might provide more information to the public.",682
-fomc-corpus,1996,"Will what you come back with address the fundamental issue of the current reserve settlement structure, which as I recall was set up in the early 1980s to improve the control of Ml? That was the motivation, which is no longer relevant, for setting up this kind of settlement procedure.",58
-fomc-corpus,1996,We do have some folks looking at what you are referring to--the notion of contemporaneous reserve accounting versus lagged reserve accounting. There would be transition costs to going back to lagged accounting and the issue is whether those costs would be outweighed by the benefits of reduced reserve requirement uncertainties. We have staff both at the Board and at the New York Bank looking at how we could simplify things.,79
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"I would like to state a hypothesis and then ask Peter how he would evaluate it, since he is closer to the foreign exchange market these days than I am. It seems to me that one of the reasons that people are writing a lot of options--because that is where profitability is available--is driven by developments in the foreign exchange market. The major players now have such an investment in people and systems that they have very heavy fixed costs. For example, part of the remuneration that they had deemed to be variable in the past, namely the bonuses, are now becoming more and more sticky. We have major foreign banks, mainly in the New York market, who are hiring reasonably pedestrian dealers in all kinds of market instruments but especially foreign exchange and giving them fixed-period contracts with assured bonuses. So, the bonus becomes a fixed cost for two or three years. When they are in that kind of situation, unless they are willing to absorb operating losses, they have to scramble and look for whatever profit opportunities seem to be available. That means that they would have a tendency to develop very large positions, whether it is in derivatives or the cash market. So if there is an unexpected move in the market, the likelihood of people scrambling to cover their positions can lead to greater volatility. Does that make sense to you, Peter?",263
-fomc-corpus,1996,"Yes, I think it does, particularly in the foreign exchange market. The early to mid-'90s was a period when these firms were building up capacity. The great successes in income terms in '92, '93 and '94 for many dealing rooms led them to build up their capacity and their fixed costs just as you described, and I think they are all feeling some pain now and, perhaps regrettably, that is driving the expansion in their position-taking.",93
-fomc-corpus,1996,How would the implied volatilities and the historical volatilities move with respect to the magnitude of exchange rate movements?,24
-fomc-corpus,1996,The exchange rate movements follow changes in historical volatility but with a lag.,14
-fomc-corpus,1996,What is the order of magnitude?,7
-fomc-corpus,1996,I am sorry I can't calculate that off the top of my head.,14
-fomc-corpus,1996,"One of the issues that raises is that, if you have a structural problem in the supply and demand for options, it would tend to reflect itself in an inefficient options market which in turn would tend to reflect a pattern that differs from the actual volatility in the exchange market. One way of testing this hypothesis is to look at how these option volatilities relate to actual historical volatility, and that would give us at least some sense as to the structural change in the system.",94
-fomc-corpus,1996,"Well, let me try this on you. I hope this is helpful. I talked with one person at a firm in this market for whom I have a great deal of respect, and he referred to the current level of options as both too high and too low. Implied volatility was too high because it was still considerably above the recent historical experience. It was too low for his taste because he didn't think he was going to get compensated for the risks he would be taking at the current levels.",99
-fomc-corpus,1996,"I don't know what I am learning, but I am learning something!",14
-fomc-corpus,1996,"I think the hypothesis checks out, but we can go back and do some work on that.",19
-fomc-corpus,1996,"Yes, we will go back and work on that.",11
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Peter, I just wanted to ask what the source of these options data was that you use for your calculations and charts.",24
-fomc-corpus,1996,A couple of investment firms gave us the data.,10
-fomc-corpus,1996,The back data were provided by a couple of investment banks. We have been collecting more recent data routinely off the screens ourselves.,25
-fomc-corpus,1996,These are fresh 1-month and 12-month implied volatilities on OTC options that are collected every day; the data are not obtained from the exchanges.,32
-fomc-corpus,1996,"So, they are basically over-the-counter. Do you think they are comparable going back as far as you do?",23
-fomc-corpus,1996,They are the best data we have been able to get.,12
-fomc-corpus,1996,"Well, okay.",4
-fomc-corpus,1996,Any further questions? Would somebody like to move approval of Peter's domestic operations?,16
-fomc-corpus,1996,I move approval. SPEAKER(?) Second.,9
-fomc-corpus,1996,Without objection. We now move on to the Chart Show presented by Messrs. Prell and Truman. MESSRS. PRELL and TRUMAN. [Statements--see Appendix.],38
-fomc-corpus,1996,"Going back to your analysis of world oil markets, I notice in Chart 8 that North Sea oil production is still increasing but at a slower pace. Are these statistics millions of barrels per day?",39
-fomc-corpus,1996,They are changes in production in barrels per day. Production is expected to peak in 1997 and to turn down after that.,26
-fomc-corpus,1996,I gather that the Norwegian expansion has been accelerating very recently. Is that going to peter out?,19
-fomc-corpus,1996,"Well, as you probably know better than I, every time we have looked at North Sea production over the last 10 years, it was going to diminish in 2 years. The people who look at this, and they include the experts of the International Energy Agency, expect that Norwegian production will level off at a peak level in 1997 and then decline. That is, of course, one of the reasons why we don't get the same non-OPEC supply coming on stream as in recent years. That is the logic. New discoveries and new techniques obviously could lead to more production than we now assume, but that remains to be seen.",129
-fomc-corpus,1996,This table implies that we will reach oil inventory equilibrium at the end of this year. Is that going to happen considering the extreme shortfalls that we have experienced?,32
-fomc-corpus,1996,"Well, one issue has to do with the question of Iraqi production coming on stream. In fact, we had assumed in our forecast that the 800 thousand barrels per day from Iraq in the second half of the year would be enough to plug the hole in stockbuilding that was created over the first half of the year. If that were not to happen, if the oil flow from Iraq were to start on January 1 instead of August 16, we would have oil prices staying up above the $17 per barrel range through the fourth quarter and then coming down to the $17 per barrel range over the first part of next year. So, the inventory plug results in some sense from the supply coming from Iraq.",143
-fomc-corpus,1996,And the assumption is that there will be no endeavor by other producers as a group to pull back on their oil production?,24
-fomc-corpus,1996,"Yes. In fact, we probably will have a little more cheating.",14
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mike, when I compare the current forecast to the May forecast, there appears to be virtually no change in the economy-wide measures. I guess an exception is the CPI in 1996. Yet, as I read the Greenbook, and the same impression came through in your presentation today, you seem to have shifted your assessment of the risks significantly to the up side. What is your rationale for shifting the risks without having an impact on the expected values in the forecast? In fact, I think I have asked this question about risks many times in the past, and as I recall I have gotten only one answer, namely, that the risks were symmetric.",131
-fomc-corpus,1996,"I think there have been some occasions when we have indicated that the risks in our outlook were asymmetric. I would characterize our forecasts over the years as an effort to present a meaningful, modal forecast of the most likely outcome. When we felt that there was some skewness to the probability distribution, we tried to identify it. In this instance, as we looked at the recent data, we felt that there was a greater thickness in the area of our probability distribution a little above our modal forecast, particularly for the near term, than there was on the other side of our forecast. I am very conscious of the fact that we have made some of our biggest mistakes in the past by losing sight of the trends in responding to the run of recent data, and that is part of the reason why I tried to focus some attention on the GDP pattern on a moving-average basis. We have been getting very erratic movements in GDP data over the past year or two, and we may well be seeing another episode of that kind. I don't feel uncomfortable at all in saying that we think the highest probability is that we are going to experience some significant slackening of the expansion in the near term. We can point to some special factors that have lifted growth in the most recent quarter. Some of these affected just the second quarter and they were offsets to developments in the first quarter. Some may have lifted activity above what the second-quarter level would have been in the absence of various shocks, thus raising the first-half growth rate. On balance, we think there is a good case for the slowing scenario, but we also can see an alternative scenario with somewhat faster growth in the near term than we have projected.",337
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Ted, in Chart 10, you have given us a nifty tool of analysis. I had a question about one of your assumptions. The policy assumption in the chart is that U.S. and foreign monetary authorities target nominal GDP. To my knowledge the nominal GDP developments in the developing countries, including much of East Asia and Latin America, have not had a big effect on our decisions. Would there be a need to relax that assumption with regard to developing countries?",92
-fomc-corpus,1996,"Well, you have uncovered a sleight of hand. Actually, the formal assumption that we make for the developing countries in the model simulations is that their interest rates follow our interest rates. So, if we damp our nominal GDP or lean against a surge in nominal GDP by raising our interest rates, their rates go up, too. Actually, when we ran this simulation, that proved to be insufficient, for perhaps obvious reasons. We therefore went in and constrained the GDP growth path for those countries. That took out some of the shock, if you want to put it that way, so that growth in the developing countries did not continue on a higher path.",131
-fomc-corpus,1996,But your added constraint certainly isn't --,7
-fomc-corpus,1996,"We got that result without specifying the policy mechanism by which nominal GDP is held down for those countries, but in terms of trying to control the impetus to the U.S. economy, we have achieved that modest result. In fact, when we did it another way, we came up with a huge expansion in the developing countries because the rise in U.S. interest rates was insufficient to set off a timely multiplier-accelerator process in reverse. We therefore went in and essentially damped things down so that we got something close to the same growth path from the developing countries as we did with the developed countries where the real level of economic activity rises through the first two years, then essentially levels off, and subsequently comes down a bit as the interest rate effects take hold. We have essentially the same income path in both cases for the U.S. economy.",170
-fomc-corpus,1996,"Why wouldn't an exchange rate peg work in that model? It would be a somewhat more relaxed assumption than the one you made, but less relaxed than in an unconstrained model.",35
-fomc-corpus,1996,"Yes, but the model runs off interest rates and the exchange rates of the developing countries do stay pretty much in line with the dollar. That is one of the reasons, in fact, why we have a different exchange rate in the two scenarios. In the first case interest rates go up more in the industrial countries than they do in the United States and as they go up that pulls up their currencies. In the second case, we don't have that effect, so that's why the dollar goes the other way than it does in relation to the currencies of the industrial countries, because we share in some sense the same income growth factors.",125
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"I would like to refer to Chart 14 relating to the labor markets. On labor productivity, which obviously is a key consideration for the forecast, I think the most recent economic data have productivity trailing off even more than this trend line would indicate. Indeed, you have productivity improvement in 1997 at 1 percent in the forecast.",67
-fomc-corpus,1996,Roughly.,4
-fomc-corpus,1996,"Is that something that you are concerned about in terms of the possibility that it might be on the high side or is that something that, within the confidence factors for estimating productivity, you are feeling rather confident about?",42
-fomc-corpus,1996,"I would say that is one of the things that we feel the least discomfort about. We are forecasting fairly steady, moderate growth in productivity. We don't start off with any major disequilibria that we can see in terms of employers having hired well beyond production levels. A trend increase in productivity seems entirely reasonable in these circumstances. I think the question is whether the trend from here will be what it has been over an extended period. As I said, the trend has been pretty steady since 1973, and obviously we have discussed many times around this table whether recent higher levels of investment or changes in technology and so on might bring about some acceleration in productivity growth. We have not seen it yet; the most recent figures don't indicate it. So, we are staying pretty much with a fairly straightforward extrapolation of recent trends.",166
-fomc-corpus,1996,Mr. Jordan.,4
-fomc-corpus,1996,"Mike, I want to ask a question to get your response from the standpoint of the forecast, but I also want to get Peter Fisher's response from the standpoint of how the market would react. You made reference to slight declines in longer-term interest rates; you used the 10-year rate in the chart. As I think about your forecast for the next six months, I ask myself what is going to happen after real GDP decelerates from an indicated growth rate of around 4 percent in the second quarter to rates in your forecast of 2.3 and 1.9 percent in the third and fourth quarters; the monthly average for the CPI is an increase of .2 percent for the remaining seven months of the year; housing starts drop from the 1.46 - 1.47 million area; motor vehicle sales and production drop from a rate of over 15 million units to something below that; and job growth slows to increases of only 100,000 a month in the final three months of the year. I wonder what the reaction is going to be in the bond market, if that pattern of economic statistics is seen as unfolding. Is that consistent with only a slight decline in bond yields?",244
-fomc-corpus,1996,"That is a quite reasonable question, and I certainly would not see it as implausible to have the bond market rallying beyond our assumption for some period of time. In my view, the only thing that would tend to limit such a rally in terms of how far down yields might go permanently is that we don't have a particularly steep yield curve at this point. And if one hypothesized that a few months down the road the economy is perceived to be on a stable, sustainable, and moderate growth course with inflation perhaps creeping up, I would not expect--with the assumed 5-1/4 percent federal funds rate--to see the bond yield go a lot lower than we anticipate. Basically, we have the long bond moving down to a range of somewhere around 6-3/4 percent. It would not be surprising that a run of softer data would induce a bond rally that would bring the yield noticeably below that level. How far down the yield on the long bond would be expected to go an ongoing basis, I think, is the question. Clearly, there are some in the market who are talking about 6 percent bond yields and in terms of the variability we have been seeing in the market--the overshooting--that level is well within reach on a run of appealing data.",261
-fomc-corpus,1996,I can't improve on that; I agree with Mike.,11
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Mike, we recently had an auto industry consultant drop by the Bank. He had a couple of things to say that I, at least, found interesting and I want to get your reaction to it. First, he was quite sanguine about the outlook for light motor vehicle sales extending over a number of years; basically, he saw them continuing to run at 15 million units or so at an annual rate. It was largely a replacement story that he was telling. Having provided us with that, he also talked about what he perceives to be a great deal of excess productive capacity worldwide. Even allowing for further sales growth in Latin America and parts of Asia, his view is that there is a lot of excess capacity around. I wondered if that was in fact right, because that would have some implications for the labor negotiations coming along later this year.",170
-fomc-corpus,1996,"I don't know how much useful excess capacity is left in the United States. I suspect that when we tote the numbers up it looks as if there is a lot, but when we look at current production problems, we see that, for those categories of cars and trucks that people want to buy, the manufacturers would like to build more than they currently can. It isn't simply a matter of assembly capacity. In many cases the capacity limits are in the production of some key components -- engines and so on. So, effectively there may not be a lot of slack in this country. I suspect there is some considerable slack in Japan at this point and maybe elsewhere. When we talk about yearly sales of 15 million units or a little more on an ongoing basis, I guess I can't quarrel with that too much. I think the foremost authority in the room on replacement demand is the Chairman. He has done some research on this subject in the last few years. Looking at the results of that analysis, 15 million would seem to be a little high. But if you talk about an economy in which incomes are rising and people have a taste for having more motor vehicles per household -- maybe everyone wants to have a sport utility car, a family sedan, and who knows what else -- perhaps there is a potential for higher ongoing demand. I think the automobile manufacturers are looking at forecasts based on trends that are a little higher than we have in our forecast.",289
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Just a quick couple of questions, Mike. In the adjustments on the CPI that are more or less technical adjustments, have you gone back and redone the CPI over time, or perhaps back a couple of years, to see if we still have the same trend that we saw before? The striking thing about this Greenbook is that, because of those technical adjustments, we see inflation flattening out from where we think it has been. But it really has not been there because the numbers that we were using before did not have those technical adjustments in them.",111
-fomc-corpus,1996,"Well, I will yield to my colleague, who is much more expert on this, but there is, in a sense, a discontinuity here. Some of the adjustments we are making have to do with the arithmetic that perhaps you can view as fairly predictable. When it gets to things like changing the way in which costs of medical care are calculated, there are real underlying economic considerations involved and the relationships could shift.",83
-fomc-corpus,1996,They may not be the same.,7
-fomc-corpus,1996,"We have tried to make a sensible assessment of how movements in the old and new versions would go and that is what led us to make the adjustments that we did, but I think that all this is a little problematic.",44
-fomc-corpus,1996,Maybe very minor.,4
-fomc-corpus,1996,"President Minehan, we have a long history of adjustments to the CPI; it goes back over the entire postwar period. Improvements are continually being made, but I believe there will be a concentration of them in this 1996, 1997, and 1998 period. In fact, we could see some discontinuities stemming from the improvements in methodology as well as changes in medical care estimates. In 1998, another significant change could be an updating of the weighting scheme that could take another couple of tenths off the core CPI.",110
-fomc-corpus,1996,"You also have to look back historically and ask yourself what was actually going on. If we combine all the adjustments and go back in time, it does show a different picture. We have been looking at a picture in which core CPI appears to have flattened out.",52
-fomc-corpus,1996,Maybe it really has been declining.,7
-fomc-corpus,1996,The mere change of the dubious medical price component in the CPI for the much better medical net output price in the PPI plus a change in the weights in and of itself takes what was a flat trend and turns it down.,45
-fomc-corpus,1996,The Greenbook projects the core CPI to decline and then to come back up again.,17
-fomc-corpus,1996,"Well, it has not come back up if you look through the month of May. That's the whole point. In other words, the backup is a forecast. I will try to document this at some length tomorrow. It is a very relevant issue and it is very important for us to answer the question of what in fact the inflation rate has been. The problem that we are running into here is that we are combining changing inflation with changing BLS procedures. I think that is creating a degree of skewness that we have to cut through.",108
-fomc-corpus,1996,For me the question is not even what inflation is in absolute terms. It is what the trend is and that is hard to understand.,27
-fomc-corpus,1996,"I'll try to explain it tomorrow on the basis of the data we have put together. If we look at various broad measures of inflation including the core PCE chain price index, which is the best consumer price index by far as Roberts pointed out in his memo, it really makes a difference. Even looking at broader measures such as the gross domestic purchases chain price index, which picks up consumer prices plus everything else, that index has been going straight down into the current quarter with no evidence yet of a turn. Our view of what is happening to inflation is a critical issue here because it says a great deal about what is going on in the economy. It is very difficult to forecast the outlook for economic activity unless we have some sense of that pattern. The emphasis that we have been putting on the consumer price index, I think in retrospect, is turning out to have been a mistake. It has been a mistake in the sense that the CPI is biased not only with respect to the absolute amount of change--the 1/2 to 1-1/2 percentage point bias--but there is also increasing evidence that the bias is increasing. That suggests that the true measures of inflation are giving us a somewhat different picture, one that in a certain sense is ambiguous but, to the extent that we can observe, one that indicates a slower rate of inflation. Now, that may be noise but that is the interpretation.",283
-fomc-corpus,1996,"Thank you very much, Mr. Chairman. I have one other small question. Ted, on your Chart 7, Foreign Growth and U.S. Exports, is that merchandise exports alone or merchandise and services?",43
-fomc-corpus,1996,The top chart?,4
-fomc-corpus,1996,"Yes, or any of those charts. Do they include services as well?",15
-fomc-corpus,1996,"No, the top chart in the top panel includes just goods.",13
-fomc-corpus,1996,"Are the rest of these just goods, too?",10
-fomc-corpus,1996,These are all goods in nominal terms.,8
-fomc-corpus,1996,"It doesn't show on the charts on the next page or at least it doesn't show clearly as I understand this, but exports of services are growing more than exports of merchandise, are they not?",38
-fomc-corpus,1996,"My memory would be that, for example this year, we have exports of merchandise growing 7 percent and exports of goods and services together growing 5 percent. Next year it is 11 and 9 percent.",43
-fomc-corpus,1996,So you have services pulling the overall rate of growth down?,12
-fomc-corpus,1996,"Yes, services are pulling it down. Last year services in the GDP accounts grew only 1-1/2 percent over the four quarters. I hesitate to offer a firm opinion because this calculation may not have been done correctly. There were revisions and we tried to incorporate them in the historical GDP numbers. Whether the revisions got incorporated in the right way, I am not 100 percent confident. There was some double counting of services. I think that happened more on the import side than on the export side.",102
-fomc-corpus,1996,Is there any reason to assume that the growth of services in foreign trade is being skewed by the relative performance of trade with developing countries versus industrial countries?,31
-fomc-corpus,1996,"Because you come from New England, you probably think that your region is providing a lot of services.",20
-fomc-corpus,1996,"That don't get measured, yes.",7
-fomc-corpus,1996,"That don't get measured in. I have the same bias, but I have not been able to convince anybody that the treatment is wrong.",27
-fomc-corpus,1996,"We believe that, but maybe like a lot of the other things we believe, it isn't true.",20
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mike, I have a question on the housing sector. We are seeing some quite good increases in the average price of houses in our area and some buying in the expectation of further increases. That may help to explain the run-up in mortgage rates. What do the data show more generally about housing prices? Are you seeing any of that in the data for the nation or is that just a local phenomenon?",80
-fomc-corpus,1996,"If we look at the constant quality or repeat sales prices, there has been some pickup in house price inflation over the past year or so. This is uneven across the country. Your regional market may be experiencing some pressures that we wouldn't find elsewhere.",49
-fomc-corpus,1996,Do you see it in terms of anticipatory buying more generally?,13
-fomc-corpus,1996,"I don't recall that that stood out in any major way in the Michigan Survey, for example, where people are able to cite that kind of factor as a reason why they think this is a good time to buy a home.",45
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Mike, at the top of Chart 14 there is a red line labeled productivity trend. ""Trend"" tells us about slope and growth rate, but is there a level connotation here as well? Is that similar to what we would get if we were asking what the level of output is relative to potential?",62
-fomc-corpus,1996,"We would take this as a reasonable representation of where productivity is relative to the trend and say that we are pretty close to trend growth, thus arguing against a big pickup or decline in the near term.",40
-fomc-corpus,1996,Do you measure separately an actual potential output gap as opposed to a labor market utilization gap?,18
-fomc-corpus,1996,We do have corresponding numbers.,6
-fomc-corpus,1996,And is it just an Okun's Law transformation or is it done separately?,16
-fomc-corpus,1996,It's not just an Okun's Law transformation. It is a little more complicated in the way it is estimated. But it is conceptually quite similar.,31
-fomc-corpus,1996,And what would it be showing right now?,9
-fomc-corpus,1996,It would show a slight excess demand at this point.,11
-fomc-corpus,1996,"Yes, we are talking just several tenths of a percent, very much in line with our NAIRU.",23
-fomc-corpus,1996,"You mentioned that you are discounting recent increases in average hourly earnings and, I take it, in the employment cost index measure of wage gains. Why?",31
-fomc-corpus,1996,"For average hourly earnings, the charts that we look at are dramatic if we take the latest observation and think about it in terms of the 12-month change. We recognize that there was an odd reading a year earlier that will drop out when we get the next reading, and we would not be surprised to see the 12-month change move from 3.4 percent in the latest month back toward 3 percent. That would still be above the lows we saw a couple of years ago and it gives us a sense of an upward movement, but it would be more the kind of creeping movement that we would have anticipated, given price behavior and what we perceive to be the moderate size of the gap between unemployment and the NAIRU over this period. On the ECI, looking at the composition, looking at what happened in terms of sales workers and some of the unevenness in those figures, we think it likely that we are going to see some considerable slackening in the rate of increase in this wage measure in the second quarter.",208
-fomc-corpus,1996,"Mike, did you get a confirmation on the chain-weighted average hourly earnings calculation? Has it come in?",22
-fomc-corpus,1996,"I was told that we would be trying to get that, but I have not heard anything.",19
-fomc-corpus,1996,"I think you ought to point out that the BLS does calculate a chain-weighted average hourly earnings index that endeavors to take out the inter-industry effects of approximately 300 to 400 industries. Unless that calculation is done inappropriately, it shows an actual diminution instead of an acceleration over the last 12 months on a year-over-year basis. That implies that there has been, if these calculations are correct, a significant shift in the composition toward higher-paid production worker industries--not occupations but industries--and this raises some interesting issues about what the trend in the raw average hourly earnings data shows over and above the year-over-year question in the May data. I assume that we will get a test on Friday as to whether that hypothesis is correct.",151
-fomc-corpus,1996,"What we are anticipating might yield a considerable narrowing of the gap between the recent levels of those two measures. I guess I would characterize that chain-weighted measure as having moved pretty much in a sideways channel over the last year as opposed to an upward sloping channel. I still think the regular average hourly earnings series and the compensation per hour data from productivity and costs, which don't have fixed weights, can also yield some useful information about what is going on within the labor market that is relevant to thinking about pressures on prices. That is, a markup might be applied to this kind of compensation measure.",119
-fomc-corpus,1996,"Doesn't that depend on the relationship between individual wages and individual productivity? The reason is that if there is a fixed relationship between any individual wage and the productivity level, then a change in wages will be associated with a comparable shift in productivity, and unit labor costs will be invariant to that shift. So, you really have to stipulate that the relationship between marginal productivity and wages is different by groups and I don't know that we have the evidence for that.",91
-fomc-corpus,1996,"Again, we have not explored this in great depth but the concern might be that, in the cyclical experience, one sees these changing weight measures as tending to accelerate, perhaps as an early signal of the broader pressures in the labor market. So, I think it's worth looking at all these measures, and certainly that chain-weighted measure does suggest there may be some complexity in this picture, which is worth some investigation.",84
-fomc-corpus,1996,That second-quarter ECI will certainly be a very interesting piece of information. It looks as though it is calculated unambiguously in an appropriate manner.,30
-fomc-corpus,1996,"Well, there are a lot of definitional problems, and I suspect some firms that have to fill out that form are confronted with a real challenge in sorting through the instructions.",35
-fomc-corpus,1996,"I have a question about the role of the stock market in the forecast. It seems to me that it has some important role in the slowdown scenario in two ways. One, am I correct that you have not passed through the full wealth effect of the stock market rise relative to what the models would suggest?",61
-fomc-corpus,1996,One can reach that conclusion. One has! [Laughter],13
-fomc-corpus,1996,"As you know, I have done the same thing, so I can sympathize with that. You are leaning a little against the wealth effect relative to the historical regularity.",35
-fomc-corpus,1996,I think that's right.,5
-fomc-corpus,1996,"Secondly, on top of that you have a mild stock market correction built in.",16
-fomc-corpus,1996,That's right.,3
-fomc-corpus,1996,"How ""mild"" is the mild correction?",10
-fomc-corpus,1996,About 5 percent from where we were as of last night.,13
-fomc-corpus,1996,"I would take it the source is twofold. To what extent does it depend on your judgment that the current market is high relative to fundamentals, and to what extent is it driven by expectations of an earnings slowdown?",43
-fomc-corpus,1996,"On the latter point, it is not at all clear as we look at various reports of analysts' expectations that our profit forecast is really lower than what is anticipated in the market now. So, that leads me to characterize this expectation as being in essence some faith in gravity. We have a feeling that the market has been defying it to some extent recently. It's not that every current measure of aggregate valuation is outside of historical ranges by any means. But when we look at some of the internal aspects of the market -- the IPO craze and some of the other things going on -- and look at that against a backdrop of some high valuation measures, it suggests to us that there is room for at least a moderate downturn.",144
-fomc-corpus,1996,I think gravity is underappreciated in economic forecasting!,12
-fomc-corpus,1996,"Usually it doesn't work when you expect it to, either. So, the fact is that the market, as of last night, is significantly above where we though it might be just a couple days before. In the last half year or so we have consistently had to raise our stock market forecast in the Greenbook.",63
-fomc-corpus,1996,"Any further questions? If not, who would like to start the roundtable? Mr. Broaddus, go ahead.",25
-fomc-corpus,1996,"Thank you, Mr. Chairman. I will try to keep this brief in the hope that you might give me one or two extra minutes when we come around to the discussion of our longer-term policy strategy. Really one or two minutes is all I want.",51
-fomc-corpus,1996,Will you take seven-eighths?,8
-fomc-corpus,1996,"Let's negotiate! On balance, the anecdotal reports and surveys that we have been looking at for our District suggest a more rapid pace of expansion over the last several weeks. To mention a few of the high spots, commercial real estate activity seems to be almost uniformly robust throughout our region, and sales of both new and existing housing also are quite strong just about everywhere. There are a few pockets of resistance, but for the most part housing sales are strong. In the industrial sector, we focus a fair amount of attention on the shipments index from our regular monthly manufacturing survey. In May, that index was at its highest level since last spring. With respect to employment and labor market conditions, we have the impression that labor markets in the District have tightened further recently. We hear increasing reports of recruitment difficulties not only for skilled workers but for less skilled workers as well. That is a relatively new development. Finally, we have little that is new to report on pricing behavior in the District except that we were told by one chemical company in West Virginia that they finally were able to make a price increase stick for the first time in the last year and a half or so. On the national economy, the June Greenbook forecast is not very much changed from the May forecast. It still shows real GDP growth dropping back promptly to trend as we move into the second half of the year. Although labor costs as indexed by the employment cost index drift up over the period, as was already pointed out this afternoon, the basic inflation rate is reasonably well contained at around 3 percent through the projection period. But even though the numbers in this forecast and those in the last forecast look roughly the same, I would argue that this is a much more optimistic projection. As has already been suggested, it seems to me that the upside risks in the projection are considerably more pronounced now than they were at the time of our last meeting. The Greenbook itself seemed to signal this shift at least implicitly. There is very little reference to downside risk in this Greenbook; there is a lot of reference to upside risk. For example, there is a reference to the surprising strength of job growth, housing activity, and consumer spending. The point is made that we are now looking at the highest ratio of household net worth to disposable income in a couple of decades. There is reference to the fact that the manufacturing sector seems to be waking up finally, and there is a comment on the possibility of some inventory restocking going forward. For what it is worth, our own Bank's forecast is very close to the Board staff forecast, Mike. But the Bank forecast is based on the assumption that we will tighten policy a notch at this meeting. Without this tightening, we think that the Board's staff forecast is on the optimistic side. Thank you.",560
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, recent economic growth has accelerated in California and to some extent in the remainder of the District. Job growth has remained strong in Oregon and has picked up further from already high rates in Nevada, Utah, and Idaho, leaving those four states the fastest growing in the nation. In several District states, job gains have been tilted toward higher-paying industries, and labor markets are tight enough to place substantial pressures on wages. For example, over the past 12 months average manufacturing wages have increased about 6 percent in Idaho and about 10 percent in Nevada. The stronger economic growth in California is evident in a wide variety of statistics: The unemployment rate is falling, and employment gains, income tax withholding, and consumer spending are picking up. Business firm formation and small business loan demand also have taken off, and even real estate values in the state's long depressed housing market are moving up, at least in the northern part of the state. Residential building has not yet responded to this pickup in profitability, so looking ahead we can see a further boost to growth in California from its construction sector. For the national economy, the news since we met in May has caused us to revise up our forecast for the second quarter and for the year as a whole. A combination of stronger-than-expected demand in the first and second quarters and lean inventories in the first quarter have led us to raise our forecast for real GDP growth in 1996 to 2.9 percent from the 2.3 percent figure we had in May. We expect a slowing in the expansion next year to about 1-3/4 percent as a result of higher interest rates and more moderate growth in spending stemming from the accumulation of larger stocks of consumer durables, housing, and plant and equipment. The forecast I have just given you is even stronger than it may appear to be because it incorporates a significant rise in the federal funds rate by early 1997. Although I do expect some slowing in growth next year, it would not be enough to prevent the economy from stretching beyond the full utilization of its resources. As a consequence, even with the tighter policy I have assumed, I believe that we face the substantial risk that underlying inflation, abstracting from oil prices and the like, is set on a gradual upward trend. I find this prospect alarming, and I certainly would like to see the inflation rate trending down. So as not to confuse Mike Prell, I would like to note that the Humphrey-Hawkins forecast I sent last week assumed an even higher federal funds rate and showed a lower real GDP growth rate for 1997 than the forecast I have just discussed. I believe that such a policy would be an appropriate response to the inflationary threat we are likely to face.",554
-fomc-corpus,1996,The one you have there is not the one you are forecasting?,13
-fomc-corpus,1996,"That is not what I am forecasting, right.",10
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. Like the Greenbook, we are close to the consensus forecast that sees real GDP growth moderating over the balance of 1996 and into 1997. We, too, see the risks on the up side. Our forecast for auto and light truck sales this year and next is quite similar to that in the Greenbook, and that forecast implies some slowing in sales from the pace we have seen in the first half of 1996. We have not seen much slowing yet. Dealer orders remain quite strong. Reports from our contacts indicate that light vehicle sales in June were coming in near the average pace of 15.2 million units recorded in the first five months of this year. The final tally will depend on foreign-nameplate sales in the days around month-end. Like the auto industry, other durable goods producers in our District generally have seen somewhat stronger-than-expected demand for their products in the first half of the year, and they have raised their forecasts for the year to reflect this. In most cases, however, they still expect sales to soften in the second half of 1996. For example, home appliance shipments rose to a record high in April, a record that was broken in May. The industry does not expect this strength to continue, however, and revised forecasts for 1996 are consistent with slower shipments in the second half. Other industries projecting weaker shipments in the second half include heavy duty trucks, construction equipment, and machine tools. We have already seen production cutbacks in heavy-duty trucks. The story for steel is a bit different because there is likely to be some inventory building even if demand slackens in the second half. Reports from District retailers were mixed but generally consistent with some moderation in the growth of consumer spending in June. Inclement weather again was cited as a contributing factor. Our directors continue to express concern about increases in credit card delinquencies and personal bankruptcies. The level of housing activity is still fairly strong in most parts of the Seventh District, but we are beginning to get reports that higher mortgage interest rates are having an impact. Contrary to the national data, permits in the Midwest declined more than starts in May. While weather was cited as a contributing factor, District realtors noted a definite slowing in contracts that were signed in May for sales of existing homes. These will show up as decreases in existing home sales over the next few months. But new home sales continue to be quite strong in some parts of the District, with shortages of homes in the mid-price range being reported. Labor markets remain tight throughout the District. The unemployment rate in our states is still about a percentage point below the national average, but we continue to have very few reports of mounting wage pressures. Two weeks ago, I met with six chief executive officers of firms and banks based in Wisconsin, where the unemployment rate is now 3.6 percent. Only one of them expected an acceleration of wage increases, and that was for a specialized group of employees working on oil rigs in Louisiana. The other five CEOs expected wage and benefit increases for their employees to be about the same in 1996 as in 1995. On the other hand, we have had several recently signed labor contracts for building trade workers in Chicago that feature wage increases averaging 1 to 1-1/2 percent more per year than the contracts that they replaced. As I mentioned at the last meeting, wage increases in the steel industry will be higher than those in the contracts they are replacing, and that is now in binding arbitration. There also is a definite trend to longer-term collective bargaining agreements, with a number of four-year contracts replacing three-year contracts. who comes from believes that this is an indication that workers are less concerned about inflation now. On the price front, most reports seem to point to little upward pressure on prices. Energy prices in the District are expected to continue moderating as supplies of natural gas accumulate. Competitive pressures also are keeping District businesses from raising prices, particularly in retailing. However, the steel price increase announced for July is expected to stick, as there is very little excess capacity in the steel industry and the order books are full through the third quarter. In agriculture, corn stocks obviously remain critically low. Record-high prices have not generated the cuts in usage needed to stretch available supplies through to the new crop harvest. Pressure on corn prices probably will not ease soon especially if, as seems increasingly likely, temporary shortages occur in the summer prior to harvest. In summary, the Seventh District economy continues to expand, with the pace of growth expected to moderate as we move into the second half of the year. Price pressures generally seem contained, although some recent labor contracts have included higher wage increases than the agreements they replaced.",956
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, the New England economy continues to chug along, though I am struck by the moderate nature of the data versus some of the heat we sense in the economy from the anecdotal reports of our outside contacts and groups that visit the Bank. My comments will be based both on the data from the region and what we have been hearing anecdotally. The pace of job growth is fairly modest overall in New England. The unemployment rate remains below the national average. Initial unemployment claims are at low levels, and labor force growth recently has begun to pick up. Most of the growth in employment continues to be in services, especially business services and health care. Within business services, temporary help agencies are doing very well. Demand for workers in information technology fields is especially high, as I have said before, and there is talk of importing labor, particularly telecommunications specialists, from other regions of the country and of the inability of some money management firms to find even back office staff. We have noted that the nature of the workplace is changing. One of our manufacturing contacts, who makes machine tools for the auto industry, currently has 100 to 150 engineers working on a temporary basis. These people will be let go as the engineering phase of the project is completed, and he will then hire temporary production workers in their place. There is a lot of change going on in how employers are hiring even in skilled occupations. Although manufacturing employment in New England continues to drift downward, the rate of decline has slowed, and the high-tech area seems to be stabilizing at last. Employment in computer and office equipment manufacturing has picked up over the first half of the year after a very long period of decline. Even the cutbacks in defense spending seem to be coming to an end. Layoffs are still ahead in Connecticut at Electric Boat, but defense contractors in both New Hampshire and Vermont are planning to add workers because of new contracts. The anecdotal evidence from the manufacturing sector is generally positive. Materials prices have moved around a bit but are not rising overall. Selling prices are up very slightly, but people continue to say that it is very hard to raise prices. Inventories are generally at satisfactory levels, though companies continue to find ways of bringing them down, often through innovative technologies. A couple of manufacturing contacts commented on the prospect of lower electricity prices arising from deregulation of the industry. Deregulation of electricity could have some fairly significant but difficult-to-anticipate consequences, particularly for the New England economy where electricity prices are unusually high. The retail picture in New England remains difficult to assess because retail competition is so fierce. Some companies are doing well, but others are experiencing sales declines and even bankruptcy because of new entries into the market. Retail inventories seem to be in pretty good shape and price increases, if any, are very moderate. Our real estate contacts report mixed signals in recent months after a very strong first quarter. However, housing activity is quite high in eastern Massachusetts, with both existing and new homes moving well. For example, last Sunday's Boston Globe had a front page story that began as follows: ""Housing inventory has been drastically reduced in the suburbs and cut in half in the city over the past 12 months. Demand is astonishingly high, and properties are selling within days of coming on the market."" That news item was basically residentially oriented, but the commercial real estate market in the greater Boston area is also quite healthy. Brokers report that building prices in suburban Boston are back to their peak of the late 1980s, although prices downtown still have some distance to go. The Providence market is improving and commercial space is reported to be fully occupied even in Springfield. Now, if we could just do something about Hartford and New Haven, the First District as a whole would be back to high-occupancy levels. Growth in bank lending remains below that of the nation, in part because of balance sheet restructuring efforts on the part of newly merged large banks. However, reports of keen competition continue. The senior lending officer for a large nationwide insurance company told me that he has almost never seen such an availability of capital. From venture capital, mezzanine financing, to commercial loans and mortgage lending, according to him almost any project can get financed. He and others believe that the IPO market in particular has gotten frothy of late. On the national scene, we agree with the Greenbook that the risks seem even more heavily weighted to the up side, especially for the near term. We see fairly strong second and third quarters, with moderation after that. But the resulting rise in inflation that we see is somewhat larger than in the Greenbook even in the face of some increase in interest rates, which we have factored into our baseline. Moreover, when we look at the tighter federal funds scenario that the Greenbook assumes, we see higher inflation, lower unemployment, and a better growth path than is presented in the Greenbook numbers. Thus, we might see both a greater need and a greater ability to tighten policy than is reflected in the Greenbook.",1013
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. The Philadelphia District economy is growing at a moderate pace, and virtually all sectors are sharing in the growth. That is an improvement over conditions last year and early this year. Still, the region lags the performance of the nation, and that is not likely to change in the foreseeable future. Wage and price pressures appear to be contained. Although labor markets have tightened some, there is no obvious acceleration in wage gains. Raising prices also seems to be difficult because of competitive pressures. The national economy continues to perform at levels that should generate accelerating price pressures, judging from past experience. Yet, there are few signs of accelerating movements in core prices. Perhaps there will be more signs and perhaps there won't. I think we need to be watchful. Some moderation in the pace of real economic growth is likely during the second half of 1996 and into 1997. The increase in longer-term interest rates almost surely will damp interest-sensitive expenditures. Consumption spending generally will likely grow more in line with disposable income and debt levels. Growth in business fixed investment is already moderating. Increases in government spending also should moderate. Only inventory investment looks notably stronger for the second half. So, all in all, the economy is not likely to break away on the up side. Nonetheless, I think we need to be watchful here as well.",274
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, the economy in our District continues to grow at a relatively strong pace, with gains spread broadly across most of our industries. Manufacturing and construction remain major sources of strength in our region. Factory jobs in the District rose again in April, and industry contacts indicate that production schedules remain strong. In addition, our directors report brisk activity in construction, although slightly less than earlier in the year. Retail sales also continue to improve across the District. While retailers and automobile dealers report modest sales gains, most expect sales to strengthen further during the remainder of this summer. Energy activity continues to strengthen in our District despite somewhat weaker crude oil and natural gas prices. Drilling activity increased in May for the fourth consecutive month and is up noticeably over a year ago. The agricultural area remains weak both in the cattle industry and with crops where prices are good but some of our producers got about half a crop at most, some none. While economic activity is generally solid across the District, we have seen signs of very modest price pressures in the retail sales area. However, there continue to be strong indications of tight labor markets. With regard to the anecdotal information, a major distributor of housewares headquartered in our region indicated that there actually has been a small decrease in the prices of the products that they purchase for sale across the United States, perhaps in the neighborhood of 1 percent, in contrast to consistent 2 percent increases in the last several years. However, their wage costs are rising. The average increase this year will be in the 4 percent range for new entrants, 6 percent for those in the training or the sales areas, and even higher for other workers. So, they are experiencing differing pressures in their costs of doing business. On the national level, I am broadly in agreement with the Greenbook and look for second-quarter growth of 3-1/2 to 4 percent, with growth moderating toward 2-1/4 percent near the end of the year. Looking into next year and assuming current interest rates, I would expect growth to remain slightly above potential. Like the Greenbook, I believe the risks are largely on the up side. Virtually all sectors look solid. While we would expect higher long-term interest rates to temper demand, it is possible that interest-sensitive sectors of the economy may be more resilient to higher rates than we formerly believed. Thank you.",479
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"The Eleventh District economy is doing very well. Employment grew at a rate of about 4 percent in April and May, and most observers do not expect much slowdown in the second half. For reference, our long-term employment growth trend is around 3 percent. On the negative side, the mantra in Texas is still ""eat beef and pray for rain."" The drought continues and it is as bad as it has ever been. It has not been as prolonged as yet, so we do not hear quite as much about it. Willie Nelson's Fourth of July party in Luckenbach is dedicated to raising money for rain-starved ranchers and farmers. He is not worried much about the ag bankers as yet! [Laughter] Neither are our supervision people; we had a talk about that. The condition of the ag banks is pretty good and crop insurance is very prevalent, so that will ease the situation. The effect of the drought on Texas agriculture is estimated at $2.4 billion or about .5 percent of gross state product. Last year the ag sector represented 1.8 percent of gross state product and 1.3 percent of employment. Just for comparison, in 1940 agriculture represented 30 percent of Texas employment. Cow chips have been replaced by computer chips in the Texas economy. [Laughter] The semiconductor industry has rebounded somewhat from a disappointing performance earlier in the year. The construction of several new wafer fabrication plants is being slowed down or put on hold, but other similar projects are moving full speed ahead. Computer chips have replaced the oil and the real estate business as the source of Texas excess spent more than $1 million on the groundbreaking party the other day for its new chip factory Indicators of the District's high-tech sector have picked up recently. The book-to-bill ratio has increased for three months in a row, to .84 in May, but was still below the year-ago level of 1.18. After I wrote that, I read an article in the Dallas Morning News by the number two person at Texas Instruments who argued that the book-to-bill ratio is worthless as an indicator. So you can strike that! The energy sector has been doing better lately, and not so much because of higher prices. Past downsizing and improved drilling technologies that have reduced the number of dry holes being drilled are improving profitability. Five years ago when I went to Texas, it was thought that $25 to $27 oil was necessary for drilling in new fields. Now it is felt that such drilling can be profitable in the $18 to $19 range. Drilling in the Gulf of Mexico has been constrained recently by a shortage of rigs. The rebound in the Mexican economy, which has been going on for a year now, is being increasingly felt in the Texas economy. Southbound train and truck traffic is up more than 50 percent from last year's lows. Retail sales to Mexican citizens have improved noticeably in our border towns and in Houston. Our indexes of leading indicators, for both Mexico and Texas, are signaling continued growth in the coming months. The Mexican rebound will likely get a lot more attention in the press in about a month when the second-quarter results are in. That GDP number will be contrasted to the second quarter of 1995, which was the bottom of their recession, and it is likely to be a very large positive number. Of course, the Achilles heel of the Mexican economy is the dire banking situation. The national economy has continued to strengthen since our last meeting. We in Dallas believe that the real GDP number in the second quarter will be more than 4 percent--possibly 5 percent--rather than just under 4 percent. The growth in employment has continued to surprise us on the up side. The implications for inflation, however, are not that clear to me, although the risks certainly have increased on the up side and are clearly asymmetric. But on the comforting side, much of the increase in consumer inflation so far this year has been in energy, which should ease during the remainder of the year. Commodity and metals prices peaked some time ago, and gold is now near its 12-month low. Thank you, Mr. Chairman.",844
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. The Southeast economy continues to grow moderately, slightly outperforming the nation by almost all measures. Georgia and Florida particularly are doing extremely well. Although much of that can be attributed to the Olympics, the District would still be performing quite well even without the Olympics. There are a few imbalances and those that exist are not surprising. Tourism throughout our Southeast region would have to be characterized as spectacular, as it should be going into the Olympics. Florida tourism is having a record year. Manufacturing activity is steady. Employment and orders were up just a little in recent months. Apparel remains weak. Alabama, Tennessee, and Georgia have lost almost one-third of their apparel manufacturing employment over the last four years. That loss is occurring in regions where the new southern automobile industry is moving in, and it is a perfect example of the mismatch between the qualifications of many of the jobless who are leaving the apparel industry and the qualifications needed for the new jobs in the automobile industry. Single-family housing activity generally remains good, with inventory shortages of single-family homes reported in some of our areas. Multifamily occupancy remains quite high and building of such units continues. Commercial real estate activity is strong except for the retailing sector. Labor shortages and wage pressures now exist in several markets in low-skilled and unskilled positions, primarily in retailing and construction. But it is our sense that those should abate as we get past the Olympics and as housing and other construction slows as we expect. There is a lot of discussion and we get a lot of questions about the economic impact of the Olympics. Our judgment is that the macro impact will be quite small. Only foreign tourists who would not otherwise have come to the United States will make a net contribution to GDP. Everything else is a substitution or a change in timing and by that I mean the building of facilities a little early to have them open in time for the Olympics. Our best guess is that total construction that would not have occurred were it not for the Olympics totals less than $1/4 billion. Also, our best guess on the employment gains that can be expected during the Olympics is that 60,000 to 70,000 jobs will be added at the peak. That peak falls between two employment survey periods. Our guess is that the July survey will pick up about 40,000 of those Olympic jobs and most will be gone by the August survey. Our sense from talking to people in the community is that many of those jobs are second jobs or retirees who are coming out of retirement just for a few weeks and have no intention of staying in the workforce. Our best estimates are that the gains will contribute about $5 to $6 billion to the District over five years, the bulk of that coming about now. So, on a regional basis it certainly is a big deal. As far as the near-term outlook for the national economy is concerned, the Atlanta forecast and that in the Greenbook are almost indistinguishable. Both see a spurt in activity in the second quarter; both show a slowing in the second half of the year based on expectations of a deceleration or outright decline in housing activity combined with the already observed moderation in the growth of business fixed investment. Each forecast also shows the CPI at about 3 percent and little change in the unemployment rate. Notwithstanding these similarities, we have a somewhat different interpretation of recent events. I contrast our outlook with the Greenbook's not by disputing that demand is relatively strong but by noting that recent history shows that increases in demand and increases in relative prices that accompany it very quickly elicit increases in supply, which sharply reduce upward price pressures. If we have learned anything from the last five years of expansion, it is that a focus on demand to the exclusion of supply and competitive pressures may not tell the whole story. Importantly, the change in the dynamics of demand and supply relationships makes traditional measures of potential price pressures, such as capacity utilization and the unemployment rate, less reliable in our view than in the past. Against this broad framework, we do not believe that we have already accommodated an increase in demand. Consequently, common observations about the strength in current and prospective activity lead me to temper my interpretations of at least overall price pressures beyond the forecast horizon. Thank you, Mr. Chairman.",865
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. The pace of economic activity in the Eighth District continues to pick up from the more sluggish levels I mentioned earlier in the year. District retailers and auto dealers report sales at or above last year's levels, and most contacts are optimistic about sales prospects over the summer, though there is some concern about consumer debt levels. District payroll employment grew at an annual rate of 2.2 percent for the three months ended in April, slightly below the national rate. Nonetheless, unemployment rates in the District remain below the national average. The District labor market appears tight. Some businesses are coping with a shortage of entry-level workers--for example, in the fast food area--by offering starting bonuses and wages well above the minimum wage. Poultry producers in parts of the District continue to attract workers from Mexico. There also are growing wage pressures for skilled workers. Computer-literate workers in a variety of occupations are in short supply. There is also some restiveness on the part of organized labor. The strike at McDonnell Douglas by about 6,700 union machinists, which began on June 5, continues though negotiations were restarted last week with the involvement of a mediator. The proposed four-year contract--and this is what was originally on the table before the strike--includes a cost-of-living adjustment plus a 2-1/2 percent increase in base salaries during the first year of the contract and 2-1/2 to 3 percent bonus increases during the remainder of the contract. So, that contract works out to an annual increase in the range of 5 to 6 percent. That Boeing and other companies have been actively wooing striking McDonnell Douglas machinists to leave St. Louis is another indication that the market for machinists is tight. Whether tight labor markets get reflected further in rising wages and prices remains to be seen, although I suspect they will. District auto output has been unusually strong, and auto makers in the District expect production to be up about 16-1/2 percent in the third quarter over a year earlier. There has been a substantial increase in the capacity to produce popular models. Nationally, light trucks and autos are selling at a pace unmatched since 1988. A surge in automotive output in the second quarter to meet consumer demand and rebuild inventories is expected to increase real GDP growth by more than a percentage point at an annual rate. With respect to inventories generally, the main National Federation of Independent Businesses survey suggests that about one-fifth of District firms want to add to stocks while a slightly smaller fraction of District firms want to reduce them. Residential building permits picked up substantially in April in most District metropolitan areas, though builders still expect a slowdown because of recent increases in mortgage rates. Loan growth at District banks continues slightly faster than in the nation. Finally, crop conditions are better than was expected earlier. With respect to the national economic outlook, we are forecasting continued real growth at essentially the average growth rate of the past ten years in terms of the new chain-weighted measures. We are forecasting real growth of about 2-1/2 to 2-3/4 percent this year and 2 to 3 percent in 1997. We have the unemployment rate holding in the range of 5-1/2 to 6 percent. We do not see a recession over the next year and a half, although I am aware that forecasters generally are not able to tell a boom from a bust 12 months hence. Our CPI forecast is for 3 to 3-1/2 percent inflation in 1996, up from 2.7 percent in 1995. However, assuming that policy moves aggressively toward restraint during the remainder of this year, we believe inflation could move down to the 2 to 3 percent range in 1997. The slowing in inflation that we forecast will not occur if the current inflation gets embedded in expectations, which we see as a growing risk given the accommodative stance of monetary policy. One final comment with respect to the forecast: I am concerned about how these forecasts may be interpreted. We are asked to prepare forecasts based on what we think an appropriate policy stance would be, although the policy assumptions themselves are not published with the forecast or for that matter even requested. If the FOMC consensus happened to be identical to the St. Louis forecast of lower inflation in 1997, would the interpretation by the public be that nothing more needs to be done to contain inflation? There is the dilemma. On the one hand, if we forecast accelerating inflation assuming no change in the stance of policy, we may make it easier to take appropriate actions to contain it. On the other hand, if we forecast decelerating inflation predicated on a tightening of policy, we may make it more difficult in fact to take the necessary actions. Either way our credibility could be damaged. I think we should make it clear in publishing our forecasts that the outcomes are not independent of policy actions and may in fact presume some tightening actions. Having said that, our forecasts of variables that we can influence, namely inflation in future years, are important to markets. We ought to use every opportunity to forecast lower inflation in the years ahead and do our best to make such an outcome a reality.",1062
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The regional economy continues to do well. Most sectors are healthy. Construction in particular is strong, housing is very strong, and home prices are rising significantly. Those conditions have prevailed for quite some time now, and I won't elaborate. Exceptions to this generally favorable set of conditions are weather-related problems adversely affecting tourism and agriculture. The cattle industry continues, of course, to have serious difficulties. I have commented on this before but I think it is worth mentioning again that labor is scarce in the District. There seems to be a shortage, especially of entry-level workers, and we see signs of wage pressures at that level. When we talk to some people about that, the attitude seems to be that, of course, the entry-level labor force is mostly young and inexperienced, very mobile. These people are anxious to get some training but they do not care at all about the benefits that might go with the job. So once they get the training or if they get an offer of somewhat higher earnings across the street or across the city, they will move on. More experienced workers seem to be a good deal less mobile. They put a higher value on benefits, and they are concerned about the obsolescence of their skills. labor leader At a meeting that he attended a couple of weeks ago, he was using a lot of language like ""labor isn't very comfortable,"" ""labor isn't very confident,"" and so on. I did not have the sense that he was choosing his words that carefully just to influence us. I think what he was saying is an accurate reflection of attitudes in a fairly well organized, fairly highly skilled labor force. As far as the national economy is concerned, my view of current conditions is that they are too good to last. Relative to our expectations of late last year and early this year, the economy certainly has done better, perhaps considerably better, than individual Committee members expected. The Greenbook forecast has aggregate demand slowing just perfectly to the trend growth of aggregate supply. We achieve equilibrium and in some sense we ought to close up shop! My experience tells me that such a very smooth adjustment is highly unlikely and that may be putting the best face on it. Things are unlikely to work out that favorably. I do expect that aggregate demand will slow, but not so much and not so rapidly as in the Greenbook, in part because I think the expansion has a good deal of momentum right now and in part because I do not see any corroborating evidence at the moment that such slowing is in train. This leads me to the conclusion that sooner or later the growth of the economy will strain capacity, and so I am concerned about prospective inflationary pressures.",540
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, for the last three years I have been reporting on the economy of the Second District in rather dismal terms, and I am now changing from a minor to a major key. The Second District economy has been accelerating in recent weeks and the reason is that the District is amazingly dependent both economically and, perhaps more important, psychologically on what is happening in the New York metropolitan area. Economic conditions there seem to be very much on an upbeat. Payroll employment rose at a rapid clip in May in the District following a pause in April. New York State added 16,700 jobs; that is an annualized gain of 2.6 percent. The unemployment rate held steady at 6.4 percent. In New Jersey, employment expanded 2.3 percent with 6,800 jobs and the unemployment rate fell to 6.1 percent, which is a five-year low. The job growth was, not surprisingly, dominated by gains in business and consumer services. Manufacturing continues to decline in the District. The real estate industry is beginning to pick up. But as I said earlier, I think the biggest change is happening in the ""feel"" of New York City. Some changes are in the purely economic area and some are not. The City is absolutely booming with tourists. That is helped a great deal by the fact that it feels a lot safer, and that feeling is not unrelated to a different approach to policing. The police also have been perhaps brilliant, perhaps lucky, perhaps some of each, in solving some very difficult and problematic serial crimes. The teachers of the City of New York, about 110,000 in number, who had turned down their labor contract late last year, have now approved it, even though there are no pay increases in the first two years. The New York City partnership, which has had a spectacular success in promoting lower-level and middle-level housing in the city over recent years, has announced the creation of what is essentially a start-up venture capital fund of $50 million, and the rather brilliant lady executive who was head of the housing partnership is going to move over to run that. Perhaps equally important, the Yankees are having a great season and last night they scored their second run on a squeeze bunt, which is the baseball equivalent of ""chutzpah."" The good feeling from New York City seems to be moving out into northern New Jersey and the rest of New York State, and the District as a whole is doing very well. On the national level, our forecast for the rest of this year is virtually equivalent to that of the Greenbook. For 1997, we have some difference of opinion. It is largely related to my question to Mike Prell concerning what is going to happen to productivity since it has not been showing all the improvement that we have been waiting for. My colleagues in New York are inclined to think that it could go in the opposite direction, which would give us weaker growth next year. We also have inflation ticking up as the Greenbook does to 3.0 percent next year. Our views are based on models that all of us have to use and that have the quality of thinking that past events are likely to be repeated in the future. Intellectually, I think that is probably very sound. However, I am having great difficulty trying to reconcile my intuition and my mind. That may be because of my strong reaction to what I think is a very unfortunate debate going on in the country with those who consider price stability as somehow antagonistic to growth. The higher the growth, the more we have to worry about price stability in that view. Some of us unfortunately have contributed to that debate. At the same time, what my intuition is telling me is that, rather like the comments the Chairman made in response to a question by President Minehan, there may in fact be developments on the cost side, on the wage side, and therefore in the future on the price side that we do not fully understand. I think it probably would not be a very good idea for us to move policy at a time when the outlook for what we are uniquely responsible for, which is price stability, is questionable both intellectually and practically. So, I think we must busy ourselves between now and the next meeting with trying to understand as best we can what if anything new is happening, as you suggested in your remarks, Mr. Chairman. I know that you are planning to go into that more fully tomorrow, and I look forward to hearing your comments. Thank you.",909
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I will begin by saying that we seem to have ""weathered"" another price scare in agriculture. At the May meeting, I reported on the wet conditions that were panicking the farmers in our area. Many had sold crops that they had not yet planted, and because of the adverse weather conditions the day was getting very close when it would be too late in the season for them to plant a crop. This was going to be a very big problem. In fact, there is an article in today's Wall Street Journal about some of the problems stemming from that. However, our farmers got a window of a few dry days, as we are prone to get every year in our region. Because of ""no till"" farming, they are now able to get a crop in the ground in a few days that literally would have taken weeks before. This raises some interesting questions about measuring productivity in agriculture. What we would compare is a crop that was planted under old technology with one that was planted under new technology to see how much less labor was used. But how do we take into account crops that simply would not have been planted under old technology because it was too late in the season to do so? In any event, we are going to have a good agricultural year in our region even though our productivity figures are not going to show the real benefits of the new technology. At the March and May meetings, we were worried that the rise in energy and food prices would become more generalized throughout the economy and would therefore set a tone of broadly escalating rates of inflation. It now seems that this has been another episode like last year's paper price scare when the concern was that we were going to have shortages of paper forever. That fear has now vanished. Before that it was metals. Last year we also had to worry about Class 8 trucks being produced at unsustainable levels well above capacity, but now the production levels are down 25 percent from a year ago. At one point we worried about escalating prices of lumber and other building materials as being the acorn that could grow into a generalized inflation. One after another, these concerns have popped up and have gone away. In line with Jack Guynn's remarks, I think that these are good reminders that generalized price inflation is not caused by isolated events. As long as we keep an effective lid on the growth of aggregate demand, these price changes, up and down, are critical really to the efficient performance of the economy. I want to comment about the productivity issue. Bill McDonough raised some questions about the labor productivity chart in the Chart Show and Larry Meyer also made reference to it. When we look at a chart like that, we know that for a growing share of the economy there is no improvement in labor productivity because we measure the output in those parts of the economy by labor inputs and we define the latter as not having any productivity growth. So, there is both a cyclical dimension and a secular dimension to that chart. The cyclical relates to periods when there is a pickup in economic activity that tends to be concentrated in sectors of the economy, notably in manufacturing where, according to the data that we use, the proportion of labor having high productivity growth rises relative to labor defined as having no productivity improvement. In such a period we would expect to see an increase in overall productivity and vice versa in a cyclical downturn. But in the secular sense, we are moving increasingly toward a situation where labor productivity in that chart will have no growth at all. If we define 99 percent of the economy as involving industries where there is no labor productivity growth, then the economy's overall productivity growth has to approach zero. So, instead of saying that productivity has been stuck at 1 percent or 1.1 percent or whatever the number is, the question should be, why hasn't it gone down? The anecdotal reports at the micro level tell us that productivity is booming, especially in manufacturing where productivity gains of 4 or 5 percent or sometimes even 6 or 7 percent are mentioned. In order not to have one iota of improvement in productivity at the macro level, as somebody was quoted as saying, we have to have at least a sharp slowing in productivity growth in nonmanufacturing sectors of the economy if not an absolute decline. Then the question becomes, is that credible given what is going on in the world today? Statistically, we know how it is happening. We know that total factor productivity is measured as declining in such sectors as financial services,, because output is falling or there is less labor employed with more nonlabor factors. As a result we have negative total factor productivity. We add that to manufacturing which has big productivity gains, and there it is, 1 percent productivity growth again. But that is really masking the dynamics of what is going on in the economy. We all know that at the micro level improved productivity means less inflationary pressure, but then somehow we get caught up in this loop that says increased productivity gets added together with labor. This means more output and that somehow causes inflation. That does not compute. As we go around the Fourth District asking questions about plans for price increases, the disconnect in the responses that we get is certainly interesting and I suspect a lot of business people think the same way as our contacts. When we ask them what their pricing plans are for their products over the next five years, they say they are going to try to maintain their prices or reduce them as slowly as possible. We do not hear anybody talking about raising prices. The question for these people is whether they can assume that their prices will stay the same or how much they think they may have to cut them. Then we ask them, what is their inflation forecast? They will usually give a number like 3 percent. When we ask why, they say that is the CPI rate of inflation. When we probe into this, we find it mainly means that that is what they think is going to happen to their labor costs. Then we ask, how does this work? If you are not going to increase the prices of your products and your wages are going to go up 3 percent on average, how do you do it? Then they tell us productivity stories. It is interesting in an ironic way that, for a lot of the economy, the more efficient the sector, the less productive it is estimated to be, if we can figure out what that means. We also ask people a lot of questions about what they worry about. The frequency with which companies talk about financial stresses is interesting. Generally, we hear comments from bankers and nonbankers alike who are worried about declining credit quality, slowing collections of receivables, and rising delinquencies and late payments. Such comments are more frequent than Mike's charts would suggest or than the national data show. Companies tell us that they were surprised at how good the first half was but also that their free cash flow is falling. So something is not quite right. In the second half of this year, if the Greenbook forecast is correct, we will have to be alert to the debt service burdens, which will be a growing problem because those Greenbook numbers imply that revenue and sales growth will be a lot slower. We are going to see squeezes on earnings, as most firms expect and the national projections suggest. We will hear more stories about the cost of carrying the inventory that apparently is being built up, and people are going to say that their financing is getting more burdensome. So, I think that six months from now we may be quite concerned about more financial stresses in the economy than seem to exist today. Let me also comment about the labor markets. There is good news/bad news in the Bluebooks. I went back over the last six years of these semiannual projection exercises, at the beginning of the year and in July, that look out five years. The good news is that the staff keeps notching down the unemployment rates associated with a given inflation path and the inflation path has not been notched up. If anything, it is down slightly over those semiannual intervals. I try to imagine what we will be looking at when we come back in January or February for the next semiannual review. Currently and for the last year, all but four of the large eleven states for which we have the data have unemployment rates that are well below the 5-3/4 percent staff estimate of the NAIRU. Three of the four other states, as we heard this afternoon, have experienced rapid growth in employment: California, Texas and New York. Bill McDonough mentioned that unemployment fell to a five-year low in the fourth state, New Jersey. The unemployment rate for the other seven states is below 5 percent. What is going to happen? If employment continues to grow as rapidly as people anticipate and the unemployment rate moves down in some other states, especially those that produce motor vehicles--Mike Moskow mentioned Wisconsin and we know that very low unemployment rates already exist in Kentucky and Tennessee--will we talk six months from now about 5 percent unemployment and yet lower inflation? I hope so.",1835
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"I think these semiannual meetings are best used to assess whether there are any major trends that have surprised us. There are two that have surprised me: consumer debt and public policy. I will restrict my comments to consumer debt. I think the consumer situation is best summed up by the old labor ballad about ""another day older and deeper in debt."" The ballad concludes with the phrase, ""I owe my soul to the company store."" Of course, the song was written in a less enlightened time than the present one. Today the singer would simply declare bankruptcy! [Laughter] The reason all this is a surprise to me is that 18 months ago I thought the consumer would have cut back spending by now either out of voluntary recognition of the family financial situation or because creditors would have stopped extending additional credit. Neither has occurred. In fact, it is now obvious that credit extensions continue to mushroom in at least some areas. Credit is much easier to get than it was 18 months ago. Revolving credit increased $75 billion in the 12 months ended in April according to our latest statistical release. That is a 20.5 percent annual increase. Auto credit increased only 10 percent and total consumer credit was up 13 percent. Our 1995 Survey of Consumer Finances, when adjusted to match flow of funds data to overall household debt, shows that roughly one household in six now pays 40 percent or more of its income in debt-service payments. This is showing up in consumer delinquency rates. In the first quarter, just under 3 percent of all auto loans at finance companies were 30 or more days delinquent. In 1991 when the unemployment rate was 6.8 percent, which was the previous peak, the delinquency rate was 2.65 percent. Credit card delinquencies at commercial banks were 3.49 percent in the first quarter of this year and they were 3.21 percent at the previous peak in 1991. Interest-ingly, the Survey of Consumer Finance shows that the usual signs of economic distress were not the cause. The proportion of consumers with debt payments exceeding 40 percent of income who reported either unemployment during the survey year or unusually low income for the year was actually lower in 1995 than in 1992. That may help explain why the new computerized underwriting procedures continue to extend ever more credit even as debt levels grow. The traditional warning flags simply are not present for the great majority of people who are taking on new debt. Anecdotally, lenders invariably cite ""competitive pressures"" as the reason for granting ever more and ever riskier credit. I called up the American Automotive Manufacturers Association (AAMA) to get some feel for their view on credit. The average term for their members in extending credit is between 52 and 57 months. The standard offer now is 60 months, although one of the captive auto finance companies is now offering a 72-month loan on minivans. The reason they gave for extending the maturity on such loans was competitive pressure from the banks. My colleagues on the Board might chuckle since the members of TIAC, who were here last week, were saying that they were now offering 72-month loans and even some 84-month loans. The reason given was competitive pressure from the auto finance companies! When I hear about an 84-month auto loan, I know that the credit merry-go-round has not stopped and it is probably picking up speed. But I do not think that is the whole story. The AAMA reported their captive members are now financing only 15 percent of their total sales. Fully 30 percent of sales--I guess we call them sales--are now leases. In addition, that 30 percent tends to be heavily weighted toward higher-priced cars. The economics of the auto leasing industry is interesting. From the point of view of consumer debt, it should make our view of the household situation even more troubling. Auto leases are not in the debt numbers or in the debt-service numbers. But in fact, they are really the worst type of debt service since there is absolutely no equity buildup in the payment. I have gotten deeper into this area than I ever dreamed, thanks to our current work on Regulation M. Those efforts have indicated to me that we actually face another macroeconomic problem from leasing, which I thought it was important to share. The auto companies currently are tending to offer high residual-value option prices on their cars. They know this will mean that fewer consumers will end up buying the leased vehicle when the lease is up. The reason for this practice is that it tends to make the lease more attractive to current buyers because it lowers the monthly payment. And given the high sticker price of autos, this is viewed as a necessary sales incentive. The auto companies are willing to do this because they are making an implicit bet on the ability of their cars to hold up in value for longer periods. Now, this is not an altogether bad bet. Auto quality and durability are up. But higher prices in the future for used cars depend in part on prospectively higher new car prices. For this to work, new car prices must therefore continue to rise faster than family incomes, making them ever less affordable and requiring continuing innovation in the financing areas in order to keep sales up. The auto companies are now recognizing, or at least their finance divisions are now recognizing, that they are on a credit-based merry-go-round of their making that must eventually stop. But at the present time, none of them can afford to get off. Future credit problems also are apparent in the trend in home mortgage financing. According to the Federal Housing Finance Board, 45 percent of all mortgage loans granted in May had loan-to-value ratios (LTVs) in excess of 80 percent. Some 26 percent had LTVs in excess of 90 percent. The average LTV on all 30-year fixed, non-jumbo loans was over 82 percent. Also, it is not the S&Ls, the traditional and well-qualified source of mortgage funds, that are making the bulk of these loans. Mortgage companies and commercial banks had 28 percent of their originations in over 90 percent loan-to-value mortgages versus just 18 percent for the S&Ls. Now, from my experience at Neighborhood Reinvestment and from the studies done here at the Board, it is clear that high LTVs are a big risk for future delinquency. No one purchases a home expecting to default, but when economic distress occurs, individuals with no equity in their homes have less incentive to stay than those who have such equity. Our experience shows these high LTV loans can be successfully and profitably made, but they require enormous amounts of handholding and follow-through with the borrower. While there are firms with staff capable of doing this, the personnel infrastructure in the country is simply not adequate to do an effective job at anything approaching the current volume. The problems here are already showing up and are going to get worse. Although, as Mike Prell pointed out, 60-day delinquency rates on mortgages are still fairly modest in the aggregate, the same is not true for those loans that are targeted to populations likely to get into trouble. For example, FHA 60-day delinquencies hit 2.83 percent in the first quarter of this year. That is a new record, and the worst is yet to come. Delinquencies and foreclosures tend to peak a few years after the mortgages are originated. Mortgage lenders were particularly aggressive in this type of lending during 1994 and 1995, in large part because of impending CRA reform and other regulatory jawboning. Why care? I think there is a long-term social cost we are going to pay from all this, but my Calvinist instincts should not have any bearing on your decision. More topically, I do not believe that these issues are of the type or magnitude that will affect the integrity of the banking system. The banks are well reserved for any reasonably expected losses and increasing portions of their mortgage portfolios are being securitized. But from a timing point of view, the increased availability of credit has allowed this expansion to continue longer than it otherwise would. Consumption has expanded more quickly than the income of the great majority of American households. This has not proved troublesome for the expansion because these households took on increasing amounts of debt. I admit to having been surprised that this has gone on for such a long time and I am now convinced that it can go on so long as lenders remain willing to extend the terms and conditions under which they make loans. But the price we are paying is the increasing fragility of the underlying financial structure of the household sector. While increasing debt burdens will not of themselves end the expansion, they do make the economy more susceptible to unforeseen developments. The next recession will be longer and deeper than it otherwise would have been because of this extra debt. Our memories of 1991 and particularly 1992 should be fresh enough to remind us of what balance sheet problems in a significant sector of the economy can do to macroeconomic performance. At the same time, I do not believe that a sudden burst of aggregate demand is likely, given these conditions. As long as the real incomes of the great majority of American households remain stagnant, borrowers and lenders would have to take complete leave of their senses to finance an accelerated consumption binge. It would be one thing to go deeper in debt; it is another to go deeper in debt at an ever accelerating rate. I am also concerned that the computerization of the credit-granting decision is going to accelerate the speed with which any adverse economic shock is transmitted to and throughout the household sector. Aside from lowering the cost of credit decisions, credit scoring also makes it easier to review existing credit files. In the present upturn, this has meant faster granting of increased credit lines on credit cards and easier terms for auto loans and mortgages. In the future downturn, it will mean just the opposite. The normal decision lags in the process will be far shorter next time, and thus the time available for the shock to work itself out before it becomes self-reinforcing will be reduced. From a policy perspective, this is the real meaning of the term fragility with respect to the economy; and all we can do is watch and wait.",2086
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. At the last meeting, I observed that I thought we were entering a watershed period. I believe that we are now in that period, although I think it is too early to tell just which way the water is going to fall when it falls. Certainly at this time, we have an economy with a good head of steam. Many have remarked on that. And we could be looking at a pickup of inflation; that prospect could certainly raise its head. If we are convinced that the likely scenario is intensifying inflation and that it is baked in the cake, then I think it is time for action. It is better to adjust policy sooner rather than later, once we believe that. But I still must question whether or not that is the case. If we look at the past four quarters including the second quarter and assume 4 percent growth for the second quarter, four-quarter GDP growth would be a little over 2.5 percent. Over most of this past period, many observers here and elsewhere have believed that the economy was at capacity; we started talking about that some time ago. And yet where are we? Most of our inflation measures--the core CPI, the core PPI, and the GDP deflator--are flat on a rate-of-change basis or else the rate of change is beginning to drift down in some cases. Foreign inflation is half that in the United States. Unit labor costs currently are rising at a rate of around 2.3 percent, and they have been decelerating over the course of this four-quarter period. The capacity utilization rate has been flat at about 82 percent. Unemployment has been flat at 5.5 or 5.55 percent; there are two 5.6s in there. Commodity prices are now falling almost across the board, including virtually all industrial commodities, gold, oil, and even a large number of foodstuffs. I think the third quarter may be a time when we will get a reading on the watershed. When we are talking about a four-quarter change, folding in one quarter forward could make a lot of difference. If the third-quarter growth rate is going to be another 4 percent or so, then the four-quarter rate of change will accelerate to about 2.7 percent. If the growth rate is going to fall back to 2.5 percent, which is still above the Greenbook forecast, we would then be talking about a four-quarter rate of change falling back to 2.4 percent and we would have a declining trend. So, the current quarter will make a lot of difference in terms of judging the trend. If we look at the Greenbook for the rest of the forecast period of six quarters out, as Mike Prell noted the staff has projected a trend rate of growth of about 2.2 percent, a flat unemployment rate at 5.5 percent, a flat capacity utilization rate, unit labor costs rising at a 2.5 percent rate without much trend, and no acceleration in the growth of activity over the course of that six-quarter period. One certainly can argue that that may be too modest a forecast on the output side and that the rate of inflation may rise during that forecast period. That is the risk. We have had a very fickle expansion for 20 quarters or so now. The rate of economic growth has changed its direction something like 11 times in those 20 quarters, so the rate of expansion has repeatedly sped up and slowed down. Even if the risk is to the up side, it may not be that great a risk. If we look at the last two years and where we are today, and particularly if we focus on the last year to date, it is hard to generate much conviction out of that experience that we necessarily are going to see any inflation impulse at all, given economic growth in line with the Greenbook forecast. Certainly we could, but it seems to me that if the economy runs a course similar to that over the past year or two, at the worst increased inflation will be rather slow to materialize and will not have very much muscle behind it. So, there is some chance in my opinion that we may be able to continue to ride the crest of this really remarkable period for some time to come. Beyond that, who is to say which way the water is going to flow? Mr. Chairman, the tale is not yet told in my view. I do agree that the risks are on the up side, and as a consequence I am sitting very lightly in my chair.",922
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr Chairman. The moderate growth story that we have been talking about certainly seems to be playing out. The second-quarter information looks generally strong, and indeed most of the members around the table have ratcheted up their growth projections. The difficult question before us is to what extent the slowdown that is projected in the Greenbook will materialize. A turn in direction is the most difficult thing to project, and I suspect that may be why we are getting some differences around the table in our forecasts. There clearly are some good arguments for a slowdown. Higher bond rates certainly should affect interest-sensitive sectors of the economy. Housing is showing some signs of a pause. The slowdown in business fixed investment seems to depend on people's expectations of slower growth in final sales, including the notion that we have run through pent-up demand. Consumer spending has been a consistent source of strength, one that has been financed by increased consumer debt as Governor Lindsey has just documented for us. So, I think that consumer spending will at best only track increases in income, which again supports the argument of a slowdown. The notion that job insecurity stemming from downsizings and improvements in technology continues to generate substantial uncertainty is another factor that should help to slow the growth in consumer spending. I do have to say that a slowdown in the second half is not a sure thing. We have been saying, for example, that business fixed investment would slow in 1996, but so far we have clocked in a double-digit rate of increase. Although interest rates are up from their lows, the overall cost of capital is fairly reasonable. The cost of equity capital is really quite favorable. The term structure of interest rates is fairly healthy in terms of both the overall level and the slope of the yield curve. Various types of risk management tools and new financial instruments are allowing businesses and households to time-adjust their expenditures and their commitment patterns. I think that this is adding to the difficulty of projecting a slowdown. Another reason why a slowdown is not necessarily a sure thing is that wealth effects may encourage consumers and businesses to continue to spend and invest. As long as we have unemployment in the 5.4 to 5.6 percent range, people are working and they are likely to continue to spend. So, it is hard to argue that there will be a big pullback in consumption. The industrial sector is showing some strength. We do not have major economic imbalances to work through in terms of inventories, which are relatively well aligned with sales. Business balance sheets have been improved in many cases. Capital and banking markets are well positioned to support increased growth. There has certainly been progress on the Federal deficit, at least in the short run. Turning for a moment to inflation, as measured by the CPI it clearly has accelerated in early 1996, but if we take a longer look at some of the broader statistics, we are getting very mixed signals. I was particularly impressed by one of the tables in the Greenbook showing changes from 12 months earlier for a whole series of indicators for the period ended in May. Comparing the year ended May 1995 to the year ended May 1996, there actually have been improvements in the CPI, core CPI, core PPI, intermediate PPI, core intermediate PPI, and core crude materials. The only major indexes that did not improve are the PPI and its crude materials component, and the reasons there are the oil and food stories. But crude materials excluding food and energy are down 12-1/2 percent for the year to date, and other commodity price measures also are down. I would not have expected to see an improvement in inflation given the fact that we have seen a fairly strong economic performance this year. Looking forward as opposed to looking back at the last 12 months, the inflation risk from the energy sector that we cited in May seems to have abated and energy prices appear to be coming down. But while the risk from energy appears to have lessened, the risk from rising food prices remains. We have come far enough along in the planting season that the chances of a disastrous harvest have diminished, but we still are at some risk in the food area. Wages are another area at risk, given the outlook for a hike in the minimum wage, reports of scattered labor shortages, and the ECI surge that we saw for the first quarter of this year. The federal deficit situation remains a problem for the long term, and we need to make some progress on that. So, the risk of rising inflation is definitely present. Even so, I think there is some room for optimism. There has been some discussion around the table about productivity. Are we measuring productivity in services correctly? Are we measuring the productivity gains from technology accurately? We also have had an expansion in capacity over the last few years that should help in terms of moderating cost pressures. In addition, I believe that inflation psychology has lessened somewhat. So, there is some room for optimism on the inflation side, but there is certainly continued risk. In sum, I think the economy is doing quite well, and the strength is all the more impressive because we have seen improvement in inflation. But the risk to the expansion does seem to me to have shifted to the up side. To the extent that we have a second-half slowdown, it may well be fairly shallow.",1079
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. I will try to be brief because, like President Broaddus, I would like to take a little extra time in our next go-around concerning price objectives for monetary policy. The key questions today are identical to those at our last meeting. Will aggregate demand really moderate in the second half of the year, and are we about to see an uptick in core inflation due to increasing wage pressures in already tight labor markets and the feedback of higher food prices into wage demands? With respect to the slowdown in aggregate demand, I confess both ignorance and concern. I agree with the Greenbook that aggregate demand will probably slow toward trend, for all of the reasons that are by now familiar, and will probably do so with the usual long and variable lags. Higher interest rates and a somewhat stronger dollar will eventually take some toll on housing, associated consumer durables, and net exports. The influence on growth of inherently transitory factors like the rebuilding of auto inventories will soon wane, and the data already point to a slowing pace of noncomputer investment spending, consistent with predictions of the accelerator. But I admit there is only scanty evidence that housing markets are poised to cool. Computer investment may turn out stronger than the Greenbook anticipates. I also agree with the Greenbook that with leaner inventories, a surge in inventory investment is possible and poses upside risks. If final demand growth proves significantly stronger than was anticipated, inventory investment could again increase, touching off a new round in the inventory cycle. The risks here seem weighted toward the up side. With respect to inflation, though, as a number of you have emphasized, the news has been favorable. Core inflation in the CPI and PPI remains well contained and, as the Roberts memo and the Chairman highlighted, consumer inflation as measured by the chain-weighted PCE is running just over 2 percent. I would emphasize that our most recent readings on long-term inflationary expectations also are quite positive, suggesting the absence of any deterioration there. Food prices do seem poised to rise, with pass-through to wages and core inflation a possibility. But eventually, even if it is beyond our forecast horizon, it seems to me that these weather-related price hikes will unwind, bringing core inflation back down, too. In my opinion, temporary supply shocks should be essentially irrelevant to monetary policy. At the same time, labor markets do seem tight, although they are no tighter now than they have been for most of the last two years. Several of us commented at our last meeting, and a number of you focused on this today, that there are several aspects of labor market behavior that are puzzling. Increases in compensation are running significantly below what our models would predict. Core inflation still exceeds the pace consistent with the apparent trend in unit labor costs, and profit margins have widened. In my estimation, the entire pattern of surprises that we are seeing is exactly consistent with what one would expect to see as a result of a structural change that has a negative impact on the bargaining power of workers. Such a shift might result from an increased sense of job insecurity related to technological change or corporate restructuring as the Chairman has emphasized. It could be due to factors raising workers' perceptions of the likely cost of job loss. It could be due to improvements in the ability of firms to outsource either domestically or internationally because this poses a threat to the bargaining power of workers. It could be due to an increased prevalence of more flexible pay-for-performance arrangements. We often remind ourselves that the natural rate is not a time-invariant constant. But it is structural shifts like the ones I have mentioned that in modern theories of the labor market would shift the natural rate of unemployment and result in a persistent, not just a very transitory, decline in the natural rate. The unfortunate thing is that the hypothesis that the natural rate has declined for these or for other reasons remains just that. It is a hypothesis, and it can only be confirmed with an accumulation of data and the passage of time. The staff, I believe, is properly skeptical. We may be living on borrowed time, and there may end up being a price to pay for having allowed the economy, to use Governor Lindsey's phrase, ""to push the envelope."" In my estimation, though, with each passing quarter--and I now count seven--in which unemployment remains near 5-1/2 percent and core inflation declines or remains stable, the Committee's degree of confidence that the natural rate has fallen should rise a little. Mine certainly has.",912
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. During the last couple of months, I have had plenty of time to anticipate my participation [Laughter] in the discussion around this table, and I am delighted finally to have this opportunity.",45
-fomc-corpus,1996,We welcome you.,4
-fomc-corpus,1996,"Thank you. It is nice to begin by finding myself in such strong agreement with the staff forecast, both in anticipation of a slowing toward trend immediately ahead and in appreciating upside risks in the current environment. Now this agreement is both pleasing and disappointing at the same time. I am pleased on the one hand to find that the approach and the judgment of the staff is so similar to mine and, in that respect, it feels like home. On the other hand, I have to admit that this robs me of some potential value-added that I might otherwise bring to this group. I want to focus my remarks on what I view as the two key issues in the forecast in relation to the decision that is before us. If it sounds like there is an echo in this room, it is really my fault for allowing Governor Yellen to slip her remarks in before mine! The first issue is, is growth likely to remain above trend? If so, then given the already high levels of resource utilization, we will certainly have to tighten sooner rather than later. Second, even if growth quickly returns to trend and the unemployment rate stabilizes at the prevailing level as in the staff forecast, are utilization rates already so high as to make a gradual increase in inflation inevitable? If we are going to reach this conclusion, a tighter policy would also be called for, though the small gap implied by the staff forecast makes such a move less urgent than in the case of persistent, above-trend growth. I want to comment a little further on each of these two points. First, with regard to a slowdown toward trend, I expect the economy grew at a rate of about 4 to 4-1/2 percent in the second quarter. If the staff forecast is correct and if mine is correct, this will be the only quarter during the year when growth is significantly above trend, and it will follow a year when growth was decidedly below trend. I think Governor Kelley did a very excellent job of putting that in historical perspective by looking at four-quarter growth rates. That would produce growth for the year of about 2.7 percent on a fourth-quarter to fourth-quarter basis, but I am looking for a growth rate of 2 to 2-1/4 percent both in the second half of 1996 and over 1997. Now, why do I think the expansion is likely to slow? As has been well documented, part of the largess in the second quarter is due to special factors, including the end of the first-quarter GM strike, reversal of the effects of the government shutdown and a rebound from adverse weather. Of course, these special factors have just shifted growth between the first and the second quarters, and they do not take away the fact that the expansion accelerated to a rate of about 3 percent over the first half of the year. Still, the strength now apparent in the second quarter overstates significantly the sustainable momentum in the economy going forward. I expect that final sales actually will have slowed in the second quarter and that the inventory investment that was such a powerful contributor in the second quarter will provide a declining contribution to output growth in coming quarters, setting the stage for trend growth. The projected slowdown in final sales is suggested by both the rebound in long-term interest rates this year and the appreciation of the dollar. It is consistent with at least some hints about what is going on in some key sectors. There is no question that housing has been a lot stronger than I expected in the first half, but I believe that the decline in housing starts we saw in May is the beginning of a gradual erosion of strength in the sector largely due to the rebound in long-term rates. Contract data suggest that nonresidential construction activity is also on a slowing path. There appears to be very little life left in equipment spending other than computers, reflecting a combination of accelerator and cash flow effects. Having said that, I can see the upside risk in this environment and I will say here that if it were to persist and the economy were to be a lot stronger, I would not have to be dragged kicking and screaming into another view of monetary policy. Let me talk about the uncertainty, which I think is also important, about the implications of current utilization rates. Utilization rates have eased in manufacturing since the cyclical peaks in late 1994 and early 1995 and have remained nearly constant for almost the last two years in the case of the labor market. The unemployment rate is admittedly below the staff estimate of NAIRU, which in turn is virtually identical to my own point estimate. However, there is no broad-based evidence of a demand-induced acceleration of inflation despite the persistence of a low unemployment rate for nearly two years. Indeed, core measures of inflation for both the CPI and the PPI actually have moved lower this year. So for my part, if there is any surprise about inflation, it is how well contained it is rather than how high it is. The staff continues to project, based on the unemployment gap, a gradual acceleration of inflation pressures in coming quarters. But there is certainly some hint in the recent data of a change in the fundamentals governing the wage-price process. In the current context, I wonder if it would not be useful to think of NAIRU more as a range than as a point--say, 5-1/2 to 6 percent. If the unemployment rate remains within this range, then there is no case for intervening. As the unemployment rate moves toward the bottom end, then we should become increasingly alert to the potential need for a tighter policy but action should be postponed until the rate moves outside this range. Now, we seem to have a pattern where we see scattered evidence of wage pressures but little evidence of price pressures, and I wonder whether or not what we are seeing is some reversal of the pattern of widening profit margins that occurs early during a recovery when wages lag price inflation. If so, we can accommodate the somewhat faster wage gains without having them pass forward in the form of higher inflation. I also want to say a few words about special-factor inflation, which clearly has boosted inflation so far this year. I am leery of supporting what I might call ""counter-weather,"" as opposed to countercyclical monetary policy that would seek a tighter policy to offset the temporary blip in food prices that has not yet even arrived. In addition, I have some strong priors favoring a sharp decline in oil prices by the fourth quarter, and I expect that oil prices are going to be below the staff forecast in 1997. In summary, I expect growth to slow to trend in time to prevent the unemployment rate from moving below the narrow range that has prevailed over the last two years. The current level of the unemployment rate is not definitively below NAIRU. I am happy with the current environment. Thank you.",1381
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"I have been on the job exactly five days, so I am not going to say a great deal, in part for that reason and in part because an awful lot has already been said with which I agree. But I think you will have to admit that Larry and I chose a remarkably good time to join the Federal Reserve and the FOMC. This is the most favorable set of economic statistics and projections that I can remember and that I think most people around the table can remember. To have healthy growth and no clear sign of inflation is quite remarkable, and as I listened to the comments around the table everybody seemed to be straining to explain to themselves and to each other why it is so good when we all thought that this probably could not really happen. My own views fit very closely with the projection in the Greenbook. That is partly because the Administration from which I am a recent refugee has a forecast that is very similar to the one in the Greenbook. When the Administration is so close to the Federal Reserve, everybody ought to be reassured that there isn't some kind of hanky-panky going on! To draw on my recent area of so-called expertise, I do find the Fed staff a little pessimistic about the outlook for the federal deficit in 1997. The 1996 deficit is certainly going to be better than anybody predicted. The $125 to $130 billion range now looks good to everyone. The 1997 deficit will certainly be higher, but I think it is unlikely to be as much higher as the Fed staff projects; they have a $163 billion deficit. I think it is very possible that we will get a major new effort at deficit reduction, if not before the election certainly shortly after it, no matter who wins. That might not be soon enough to affect fiscal year 1997 very much, but it could have a strong effect in demonstrating the outlook for declining outyear deficits, which the markets certainly would view as a favorable thing. Besides that, I am simply in the same place as my colleagues. Everything depends on whether this slowdown in the second half of the year actually materializes. The recent statistics do not show that yet, clearly, and the upside risk is certainly there. But it is impressive how difficult it is to find any real evidence, either statistical or even anecdotal, that there are strong wage pressures or even more so that there are upward movements in prices. Indeed, as several people have noted, the general inflation trend has been down. So, I will watch with eagerness as this story unfolds over the next few months. I just do not think we know yet whether the good news can hold or whether we are in for some unpleasant shocks.",546
-fomc-corpus,1996,"Thank you all. Shall we adjourn for coffee? When we come back, we can talk about long-term inflation.",24
-fomc-corpus,1996,"The next item on our agenda--the issue of long-term inflation goals--is something that we have been discussing on and off for a long while, and I think we will continue to do so. It is important that we move forward on this issue and more specifically that we agree on what the goals mean before we can find some consensus within the Committee regarding their implementation. As background for today's discussion, Dave Stockton wrote what I felt was an exceptionally interesting memorandum and raised a number of what I believe are relevant issues. Basically, I think what we have to confront is a number of specific issues that we have never really focused on. When we talk about price stability as a goal, setting aside the measurement problem, are we talking about price stability or are we talking about zero inflation? As we all know, those are two separate things. Choosing zero inflation means that, when a deviation occurs, we would forgive past mistakes or changes on either side of price stability. But if the objective is to maintain price stability, a deviation implies action to reverse the changes. We also might have some other approach that is a variation of the two. This organization has become increasingly involved in analyzing the question of the wage compression that occurs when inflation moves toward zero and wages move down sharply. Does the issue of nominal versus real wages make a significant difference as to how the economy functions? Within the Board, I think we have a wonderful argument brewing. The issue also occurs with nominal interest rates and their downside limit. There is also the much broader question of transition costs and benefits, all of which relate to how we approach this issue. It is a simple matter to state that we will have such and such a goal, but it is very difficult to get this Committee--comprised not of 12 but of 19 individuals who are relevant in regard to this issue--to agree on some simple standard without a really fundamental agreement on what it is we are talking about when we have such a stated goal. That is as much as I am going to say on this issue at the moment. We have two discussants requesting to be recognized, and we will go first to Dr. Yellen and then to Dr. Broaddus.",442
-fomc-corpus,1996,"I will apologize in advance, since my comments are a little on the long side. I would like to begin by summarizing my views and then run through a mini cost-benefit analysis of the welfare consequences of a permanent reduction in inflation. To preview my conclusions, I think we should move to lower inflation but gingerly, because we really do not know how large the permanent costs might be in the form of higher unemployment, and we should find out by testing the waters, studying the results, and rethinking further initiatives if the costs turn out to be too large. The experience of our northern neighbor should serve as a warning to us to move slowly. The Canadian economy usually tracks the U.S. economy fairly closely. Recently, though, Canada has pursued and achieved very low inflation targets, but its real economic performance relative to the U.S. economy has been very poor. The divergence between the two economies in the 1980s was likely due to differences in the U.S. and Canadian treatment of unemployment insurance, but the declines in the employment ratio since 1990 are most likely due to restrictive monetary policy targets that have achieved the lower end of the Canadian target range of 1 to 3 percent inflation. Since mid-1992, the Canadian unemployment rate has averaged 10.5 percent, 3 percentage points above the estimated Canadian NAIRU, while core inflation has remained virtually stable instead of decelerating the 6 percentage points--to negative 4.5 percent by mid-1996--that would have been predicted by the usual Canadian Phillips curve relationship. That suggests a long-run Phillips curve that is quite flat in the neighborhood of zero inflation. To perform the relevant cost-benefit calculation of lower inflation in the United States, we need to measure both the transitory costs involved in moving from where we are to our ultimate inflation target and then any permanent costs and benefits associated with different steady-state inflation rates. I would like to start with the easy part, the short-run costs because here I think the literature is clear and we can narrow down the range. The sacrifice ratio in our new FRB-US model without credibility effects is 2.5, resulting in an output cost of about 5 percent of GDP per point of inflation. In principle, credibility effects could lower the sacrifice ratio, but both international cross-section evidence and time series evidence for various countries provide no support for a credibility effect, and I agree with David Stockton's conclusion that ""empirical evidence of credibility effects of announced inflation targets is difficult to find."" So much for the range of short-run costs. Now, to make it worthwhile to bear an output cost in Dave Stockton's range of 3 to 6 percent of GDP per point of inflation reduction, the permanent net benefits would have to be substantial, although any benefits that are dependent on GDP will grow over time. If we think of the short-run costs as a risky investment, we would need to earn a pretax return on a par with alternative uses of funds. If we assume a 6 percent required rate of return and 2 percent growth in real GDP, we would require an expected permanent net benefit somewhere in the range of a bit over .1 to .25 percent of GDP--",651
-fomc-corpus,1996,"Excuse me, that 6 percent is real interest rates?",13
-fomc-corpus,1996,"Right. If you like, you can vary the assumptions.",12
-fomc-corpus,1996,"No, it's just that you did not specify.",10
-fomc-corpus,1996,"I'm sorry; I am thinking of real rates. So one would need a little over 1/10 percent to about 1/4 percent of GDP as a net gain per point of inflation reduction to justify that type of investment. The question is, from whence might such benefits accrue? In the interest of time, I want to focus on only the things I consider maj or. The only identifiable benefit of low inflation that I think could be big enough to create the needed payoff is connected with the tax system and its interaction with inflation. The most important recent study is that of Martin Feldstein, and it shows that the benefits in question are positive and large, contrary to most people's intuition. Feldstein calculates that the benefits due to lower tax distortions from a 2 percentage point reduction in inflation under his baseline assumptions amount to 1 percent of GDP. The lion's share of that gain, .92 percentage point, accrues from reducing the deadweight loss associated with distortions in the timing of consumption over the typical saver's lifetime. But Feldstein's calculation relies not only on the assumption of a moderate positive interest elasticity of savings demand but also on the, to me dubious, assumptions that first, most saving is for retirement and second, that there are no tax-sheltered retirement savings vehicles. Feldstein's calculations omit the many ways under existing tax codes that savers can and do shelter income on retirement savings, including pension plans, tax-deferred savings plans, and annuities. This suggests to me that Feldstein's number could be off by an order of magnitude. I would add that despite the technical difficulties in rewriting the tax code, these gains could be achieved at far lower cost simply through legislation. Now, I think there are likely to be significant, permanent costs of very low inflation, and David Stockton pinpointed them accurately. First, a little inflation permits real interest rates to become negative on the rare occasions when required to counter a recession. This could be important, and I think the current situation in Japan provides a textbook example of the difficulties in stimulating an economy that is experiencing deflation. Even with nominal short-term rates at .5 percent, real short-term rates cannot fall into the needed negative territory. Second, and to my mind the most important argument for some low inflation rate, is the ""greasing-the-wheels argument"" on the grounds that a little inflation lowers unemployment by facilitating adjustments in relative pay in a world where individuals deeply dislike nominal pay cuts. With some permanent aversion to nominal pay cuts, the output and unemployment costs of lowering inflation that we ordinarily think of as transitory simply never disappear because the long-run Phillips curve becomes negatively sloping as inflation approaches zero. This is arguably the recent Canadian experience. A recent paper by George Akerlof, Bill Dickens, and George Perry, forth-coming in Brookings Papers, shows through simulation experiments the frequency with which nominal wage cuts would be required to avoid permanently higher aggregate unemployment as American inflation falls toward measured zero under realistic assumptions about the variability and serial correlation of demand shocks across firms. The authors assume that firms experiencing losses can and do cut wages after two years, which is in accord with existing evidence by Blinder and Choi, Bewley and others, and that workers will accept nominal wage cuts when they perceive it as needed and fair. Even so, these authors find that the needed frequency of nominal cuts rises rapidly as inflation declines. Here are some numbers: On top of those firms that would cut wages after two years of losses, an additional 5 percent of firms would seek to cut wages at 3 percent inflation, 10 percent at 2 percent inflation, 19 percent at 1 percent inflation, and 33 percent of firms would ideally impose wage cuts on workers at zero measured inflation.",763
-fomc-corpus,1996,What is the productivity growth level?,7
-fomc-corpus,1996,"Productivity growth is placed at the current 1 percent level. An aversion on the part of firms to impose these desired nominal wage cuts results in higher permanent rates of unemployment. As the numbers I just cited would suggest, the impact of resistance to nominal wage cuts on permanent unemployment is highly nonlinear. It would be barely noticeable at present U.S. inflation levels. It is also worth pointing out, picking up on the comment the Chairman just made, that what matters to permanent unemployment is not the steady state inflation rate per se but the sum of the inflation and productivity growth rates, which determines the trend in nominal wages. If we go back to the 1950s and 1960s and ask why we had low unemployment with low inflation, I think the answer is that productivity growth was much more rapid and that makes a big difference. The key question is how much permanent unemployment rises as inflation falls, and here the methodology used to assess the consequences does matter. These authors used general equilibrium methodology and here is what they find: The natural rate rises above its assumed 5.8 percent minimum to 6.1 percent as measured inflation falls from 4 down to 2 percent; the natural rate rises to 6.5 percent at 1 percent inflation, and then to 7.6 percent at zero percent inflation. With different methodology, the impact of nominal rigidity could be lower. But even so, I think it is apparent that an economy where 20 to 30 percent of firms need to impose pay cuts in a typical year to operate efficiently is likely to be an economy that will end up functioning below its potential. The simulations in this paper assume that, except in circumstances where the firm is really in trouble, workers resist and firms are unwilling to impose nominal pay cuts for fear of harming worker morale and causing productivity-reducing backlash. In Canada between 1992 and 1994 when core inflation was under 2 percent and unemployment 3 percent above the estimated NAIRU, 47 percent of 1,149 observed labor contracts had pay freezes but only 6 percent had wage cuts. The question is, how common is resistance to nominal wage cuts? I certainly do not have time to review all the available evidence, but I want to say that I think we are dealing here with a very deep-rooted property of the human psyche that is uncovered repeatedly in experiments, surveys, and interviews. Very recently, Bob Schiller of Yale posed the following question to a random sample of Americans. He asked, ""Do you agree with the following statement: I think that if my pay went up, I would feel more satisfaction in my job, more sense of fulfillment, even if prices went up just as much."" Of his respondents, 28 percent agreed fully and another 21 percent partially agreed. Only 27 percent completely disagreed, although I think it will comfort you to learn that in a special subsample of economists, not one single economist Schiller polled fully agreed and 78 percent completely disagreed. [Laughter] To the best of my knowledge, the only potential evidence in favor of the proposition that Americans will and frequently do accept nominal wage cuts without changing jobs comes in recent studies whose methodology I consider flawed. These studies use individual data from the Panel Studies on Income Dynamics, a longitudinal study that follows individuals over time. To compute the wage changes of employees who remain in the same job, these various studies take the difference between wages reported by the same individual in consecutive years. The problem with this approach is that it is known that reporting error in wage levels is very large, and such errors result in an artificially high incidence of calculated wage cuts. In commenting on the most recent paper of this sort, by David Card and Dean Hyslop, John Shea computed the incidence of reported and actual wage cuts of 379 participants in the PSID whose occupation, industry, and area of residence enabled him to uniquely define the bargaining agreement covering them. He found that 21.1 percent of those respondents had reported wage cuts, but in contrast, only 1.3 percent were actually covered by bargaining agreements that contained wage cuts. Where does that leave us? I want to wrap up by indicating what happens when we do the cost-benefit analysis by using the Akerlof, Dickens, Perry estimates of inflation-related changes in permanent unemployment along with Feldstein's estimates of the tax-related welfare benefits under his baseline and more conservative assumptions about the interest elasticity of savings. As I total things up, it appears to me that a reduction of inflation from 3 percent, which I take as roughly our current level, to 2 percent, very likely, but not surely, yields net benefits. The ""grease-the-wheel"" argument is of minor importance at that point, and tax effects could be significant. But with further reductions in inflation below 2 percent, nominal rigidity begins to bite so that the marginal payoff declines and then turns negative. To my mind, to go below 2 percent measured inflation as currently calculated requires highly optimistic assumptions about tax benefits and the sacrifice ratio. Of course, if inflation cum tax distortions were remedied through legislation instead of Federal Reserve policy, the net benefits would be lower.",1053
-fomc-corpus,1996,"Al, may I respond to this just for a minute?",12
-fomc-corpus,1996,"Absolutely. I do not really have a response, just a comment.",14
-fomc-corpus,1996,"We have an argument that is very well put together. In an unusual way, what you have documented is one of the necessary conditions for price stability, which is accelerated productivity.",35
-fomc-corpus,1996,I agree with that.,5
-fomc-corpus,1996,"But let me go further. I must admit that several years ago I raised this hypothesis with our staff colleagues and had them take a look at what happens to productivity as the inflation rate moves toward zero. Lo and behold, they got a reasonably good correlation that unfortunately disappeared to a large extent when the data were revised. Leaving the statistical tests aside, we do observe out in the world that as the inflation rate falls, it becomes increasingly difficult for producers to raise prices. They therefore tend to try to reduce costs in order to maintain margins. We have seen that as a generic observation. We know that if everyone does it, since on a consolidated basis 65 to 70 percent of the cost structure is labor manhours, of necessity we will tend to get an increase in productivity because it is being forced on the system by the downward compression. If that is the way the system functions, then we can turn the analysis on its head and raise the question of what type of productivity increases are required to maintain nominal wage level distributions in which the compression does not occur and all of the adverse tradeoffs that are involved with the Phillips curve do not occur. Implicit in that argument, if we are to move toward price stability, is that the process in and of itself induces an acceleration of productivity.",258
-fomc-corpus,1996,"I would agree with your conclusion that we need higher productivity growth, but I have not seen any evidence that convinces me that we would get it. But certainly if we did get it, or if productivity growth were higher, it would be easier by an order of magnitude to live with price stability.",60
-fomc-corpus,1996,"We do see significant acceleration in productivity in the anecdotal evidence and in the manufacturing area where our ability to measure is relatively good. We can see that acceleration if we look at individual manufacturing industries. It is our macro data that are giving us the 1 percent productivity growth for the combination of gross industrial product and gross nonindustrial product, which do not show this phenomenon.",74
-fomc-corpus,1996,"One could argue that we have roughly a 1 percent bias in the CPI so that right now we have, say, 2 percent productivity growth and 2 percent core inflation.",36
-fomc-corpus,1996,We have not had such productivity growth for long.,10
-fomc-corpus,1996,Such productivity growth would mean that we are living successfully with 2 percent inflation.,16
-fomc-corpus,1996,That is exactly the point. That is another way of looking at it.,15
-fomc-corpus,1996,Because productivity growth is really higher than we have measured it.,12
-fomc-corpus,1996,"In fact there is obviously an exact, one-to-one tradeoff. That is, we can reach price stability either by driving down the inflation rate and getting productivity to bounce up or by revising down the inflation figures and producing higher productivity! [Laughter]",52
-fomc-corpus,1996,I am perfectly happy with the last view.,9
-fomc-corpus,1996,Al.,2
-fomc-corpus,1996,"This is a big and broad issue. Janet has approached it one way. I am going to approach it a somewhat different way rather than try to respond in detail to her comments, which I thought were very interesting and constructive. For some time now, we have had these monetary aggregate ranges under the Humphrey-Hawkins procedure, but I think we would all agree that they have not been effectively playing their traditional role of serving as a nominal anchor for monetary policy and a signal of the Federal Reserve's commitment to longer-term price stability. We need a better anchor. We have discussed this issue on several occasions in the last couple of years, and I am glad we are continuing the discussion today. But I would hope that we can do just a little more today than simply discuss this issue and perhaps get at least a little closer to deciding on a strategy for actually achieving our longer-term objective. We do a lot of strategic planning at the Fed; we have a strategic plan for supervision and regulation and we have a strategic plan for financial services. Mike Kelley and Susan Phillips and our staff colleagues are working on an umbrella strategic plan. I think we need a better and clearer strategic plan for monetary policy. In thinking about this, I found Dave Stockton's memo very constructive but mainly in the sense that it serves to underline and make very clear the substantial disagreement among economists and others regarding exactly what our long-term goal should be and how we should pursue it, and the large number of complicated issues in this area. Reading that memo and listening to Janet Yellen has served to convince me that if we are really going to make progress, we need to prioritize some of these issues. In particular, I think we need to sort out those issues on which we might be able to make some progress relatively easily in the near future from those that are going to be more difficult and complicated and take longer to deal with. Against that background, I ask myself whether there are particular points, even if they are limited ones, that most or at least many of us around this table could agree on to serve as a starting point or a corner-stone for building a long-term strategy. This may involve some risks, but I would assert that there are, or at least there may be, some points of agreement. I think most of us would accept the view that at a minimum we want to hold the line on inflation--that is, to preserve the gains we have made over the last 15 years or so in bringing the trend inflation rate down and then to bring the rate down at least somewhat further over a period of time. Moreover, I think many of us would regard the line to be held as an underlying rate of something like 3 percent on the core CPI, although we can debate which measure it should be. Most of us would like to avoid a situation where the underlying trend rate of inflation moves back up significantly over 3 percent for any length of time. If I am right that we could forge a consensus on what I would regard as pretty basic points--that's obviously because they leave most of the really difficult questions unanswered and I recognize that--I think acceptance of these points would be consistent with either the opportunistic or the conventional deliberate approach to policy, in the language of the Orphanides and Wilcox paper that Don Kohn distributed back in May. I would argue that agreement on these points --holding the line on inflation at 3 percent and subsequently bringing the rate down further--would at least be a start. I think that is important. It would move the ball forward two or three yards in what is certainly going to be a very difficult ball game, and it would do so for the first time since we have been talking about this issue over the last year and half or so. To get the full benefit, though, I think we would need to make some explicit public reference to these benchmark points and our commitment to them. From my standpoint, Mr. Chairman, an ideal opportunity would be your upcoming Humphrey-Hawkins testimony. Some of you may recall that I made essentially the same proposal at the January meeting, our last Humphrey-Hawkins meeting. At that time, several people responded, not unreasonably, that what really matters is not words so much as deeds, and that certainly is true in general. But I'm not sure that we have to choose between words and deeds. I think a few well chosen words stemming from the right source, backed up by deeds, can be a powerful credibility builder over time. The advantage of a public reference to a 3 percent ceiling, as I see it, is that it would commit us to something at least a bit more concrete than simply indicating our commitment to price stability over some indefinite time horizon. We would be putting something on the record for which we could more easily be held accountable. The bottom line is that this kind of commitment would raise the probability--maybe not a whole lot but at least somewhat--that we would eventually get to price stability and achieve our longer-term goals. In this difficult area, I think that is reason enough for doing it. Also, I think public support for the notion of holding the line on inflation and then subsequently making some further progress is probably as high now as it ever will be. If we succeed in putting a firm ceiling on inflation, we could subsequently move on to the separate and more difficult issues revolving around how we should go about reducing inflation further --what the timing should be and what approaches we should use. Janet has done an excellent job of outlining some of these issues and tradeoffs. At this stage, two approaches have been suggested -- an opportunistic approach and a conventional or more deliberate approach. I am uncomfortable with the opportunistic approach, and I will offer three reasons why. First, keeping in mind that the ultimate goal is not temporary price stability but permanent price stability, an opportunistic strategy seems to be premised on the idea that recessions are permanently rather than just temporarily disinflationary. I have trouble understanding that. It does not make a lot of sense to me unless the recession is a byproduct of deliberate efforts by the Federal Reserve to reduce trend inflation. In short, I am not sure that there are autonomous recession opportunities out there, if I can use that awkward phrase, that can be counted on to reduce inflation permanently in the absence of some deliberate effort to do so on our part. Second, I think one of the more persuasive arguments for following an opportunistic policy would be that it might deflect some of the criticism we could be expected to receive if we follow a more deliberate approach and are perceived by the public as perhaps keeping policy tight and keeping the economy slack as a way of reducing the inflation rate. But if this kind of strategy is going to work, it would seem to imply that in recessions we would not ease policy as aggressively as we would if we were not trying to reduce the inflation rate permanently. At first glance, it might look as if this approach would be less visible, less open to criticism, less of a lightning rod, and thus one that would be more likely to succeed. But I think there is a risk here that eventually the public would catch on, and then we would be open to the criticism that we are not easing policy aggressively enough in a recession. Think of the phrases that might come out -- ""we are kicking the economy while it is down"" and so forth. If we got that kind of feedback, that could undermine the effectiveness of this strategy over time. So, it is not really clear to me what we would be gaining from this approach. Third and finally, I have always thought that the word opportunistic had a mildly pejorative connotation. So I looked it up in Webster's and it is defined as follows: ""The act, policy, or practice of taking advantage of opportunities or circumstances, especially with little regard to principles or consequences."" [Laughter] So, if we decide to adopt this strategy, I would hope that at least we would find another name for it. Better yet, I think it would be better to follow a more deliberate, conventional policy.",1639
-fomc-corpus,1996,Principled opportunism.,5
-fomc-corpus,1996,Or deliberate moderation.,4
-fomc-corpus,1996,"If we are going to get anywhere, we can't have people literally talking at cross purposes. Janet, you did not even accept the premise with which Al is starting, that everyone agrees that we should seek price stability as a goal. If we are going to get anywhere, the question I have to ask first is whether you agree with Al that price stability is a goal we should seek. If you do not, this discussion then gets to the question of whether there is a consensus among the Committee members that price stability is something that should be our long-term goal, not how we get there. First, we have to agree on the goal.",128
-fomc-corpus,1996,"I would simply respond to that by saying that the Federal Reserve Act directs us to aim for both maximum employment and price stability. To the extent that there is no tradeoff at low inflation rates and there are benefits that outweigh the short-run costs, then price stability, literally zero inflation, is good and we should go for it. To the extent that there is a tradeoff, we have to weigh what to do, and I think I am pointing to the possibility of a tradeoff as we go to very low inflation rates.",106
-fomc-corpus,1996,"So, you are discussing the issue of the transition, not the ultimate goal?",16
-fomc-corpus,1996,"No, I am discussing the issue of the ultimate objective. If we have to pay a permanent price at zero measured inflation in the form of permanently less employment and higher unemployment, I do not read the Federal Reserve Act as unambiguously telling us that we should choose price stability and forego maximum employment.",61
-fomc-corpus,1996,The Humphrey-Hawkins Act says that we should have 3 percent adult unemployment. That is the law of the land.,26
-fomc-corpus,1996,But it does not obligate the Federal Reserve to pursue that goal.,14
-fomc-corpus,1996,"The fact that it is promulgated in a statute does not mean that it is achievable or that it is something that we assume is achievable because it is in the statute. If I can get the two of you to reconcile, we can move forward.",50
-fomc-corpus,1996,I'm not really sure that we are approaching the problem that differently. I am talking more about the process.,21
-fomc-corpus,1996,"Something is happening to the sound waves between there and here. [Laughter] Go ahead, Bob.",21
-fomc-corpus,1996,"Mr. Chairman, is there a way to focus on what was agreed to between them as an interim step? It looked as though both had the same view about the desirability of not allowing inflation to go higher. There also was a very explicit agreement that inflation should begin to move lower, and I think I heard Janet say something like a full percentage point lower.",73
-fomc-corpus,1996,"I agree, yes.",5
-fomc-corpus,1996,"Why not set that out as an objective, and then we can have another meeting when we reach it. [Laughter]",25
-fomc-corpus,1996,I would like to second that. I think that is a great idea.,15
-fomc-corpus,1996,That would mean more progress than we have made in 11 years.,14
-fomc-corpus,1996,"Janet, didn't you say that?",8
-fomc-corpus,1996,That is actually what she said.,7
-fomc-corpus,1996,"That is what I said, what Bob Parry just stated.",13
-fomc-corpus,1996,That's progress; now we have to talk about when and how.,13
-fomc-corpus,1996,There are 17 other people besides the two of us.,12
-fomc-corpus,1996,"That's okay, but you would be surprised at what happens in a discussion. If you let everybody speak and if they all deliver the speeches that they prepared before walking into this room, we will come out of this room with chaos. Let me see if we can establish some structure for our discussion. Can you give me three sentences in conclusion on how you view the question: Is long-term price stability an appropriate goal of the Federal Reserve System?",88
-fomc-corpus,1996,"Mr. Chairman, will you define ""price stability"" for me?",14
-fomc-corpus,1996,Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions.,23
-fomc-corpus,1996,Could you please put a number on that? [Laughter],13
-fomc-corpus,1996,"I would say the number is zero, if inflation is properly measured.",14
-fomc-corpus,1996,"Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way. My presumption based on the literature is, as Bob Parry summarized it, that given current inaccurate measurements, heading toward 2 percent is most likely to be beneficial.",73
-fomc-corpus,1996,Could we leave it at that? Let us now move on. President Jordan.,16
-fomc-corpus,1996,"I'm not sure I'm going to offer anything helpful in terms of how this discussion is progressing. I may want to come back in a moment to the issues about productivity because I think that the incentive effects, on business decision-makers in particular, with regard to efficiency and productivity versus what Janet was citing about wage cuts are an important manifestation of what we are trying to do. The Chairman's version does not affect business decisions. In my view, businesses and households make their best decisions about the future, whether personal investment decisions or business decisions, when they expect the purchasing power of the dollar to be the same in the future as it is today. It may turn out to be somewhat more or somewhat less, but people make the most efficient decisions about the allocation of resources when they expect the value of the dollar to be the same later as it is currently. If I could be persuaded that permanently eroding or conceivably increasing the purchasing power of the currency, changing the standard of value over time, somehow improves resource allocation and standards of living, I would be very interested. But I am not persuaded. If we can create a situation in which people say that the dollar will purchase the same in the future as it does today and they proceed to base their decisions on that expectation as the most probable outcome, we then would get standards of living that rise at their maximum potential. We also would get maximum employment and the other developments that foster economic well being. The question about an inflation objective versus a price level objective is relevant only if we do not have instant and total forgetfulness. If bygones are totally bygones no matter what happened yesterday, and if all of prior history has no effect on people, and their best expectation for the future is that the dollar will buy the same later as it does today, then there simply is no difference between the two types of objectives. They are identical. A difference comes into play only to the extent that there is a credibility issue. If there is uncertainty about the objective, people will treat yesterday's price shocks as something that we will or will not offset. We then get a difference between a price level objective and an inflation objective. If we are going to talk about the difference between those two, we have to talk about credibility and how we can achieve it. With regard to international comparisons, I too thought about Canada. I have looked at it and tried to understand whether there is something useful for us to learn there or not. Since I do not speak French and do not know what to do about the problem of Quebec, I usually focus on the other provinces. Investment in British Columbia and Alberta is extraordinarily different from that in the Maritimes, for instance. If I had to conclude anything about Canada in the last few years, given the separatist effort, I would say that I just do not find its experience useful for the United States. I would rather say let us learn from New Zealand because they reduced inflation to 2 percent and had 6 percent real GDP growth. But my guess is that other people would not find that the right place for us to learn from. If I were going to do surveys about wage cuts or increases of the sort that Janet reported on, one of the surveys I would want to conduct is to ask people as we approach the end of this century to choose between two things. If the central bank had an objective of reducing the purchasing power of the dollar to 13 cents or 7 cents over the next century, which would you prefer? I would expect the majority of the responses to be, why are you going to reduce it at all? Explain to me why the dollar is not going to purchase the same at the end of the next century as it does today. The difference between 13 cents and 7 cents is the difference between a 2 percent rate of inflation and a 3 percent rate of inflation over 100 years. I think most people would view that as a silly alternative. They would say, why not zero inflation.",805
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I know you will all be happy that I am going to scrap my prepared comments. I will just address a couple of issues that both Al Broaddus and Janet Yellen raised because I am in complete agreement with two things on which I think they agreed. That is, we should at a minimum hold the line on inflation where it is and go somewhat further if we can do so. Now, it seems to me that the context in which we should go somewhat further is the important aspect of this. I would argue that that context has to be one where we have a favorable economic situation including decent levels of growth, employment, and so on. All of that depends on the subject that was raised before--productivity growth and ways in which productivity growth can be enhanced in order to bring about this favorable economic situation. Does a climate of low inflation enhance productivity growth to the point where we can reliably go from 3 percent inflation to 2-1/2 percent, to 2 percent, or to the 1-1/2 percent that we had on average over most of the 1950s and the first half of the 1960s? I do not know. In my view monetary policy's impact on the ability of productivity to grow is indirect. It creates a climate in which I think people make better decisions and focus on investments that enhance productivity as opposed to speculation. So, I believe there is an indirect effect of low stable rates of inflation and arguably of declining inflation on the ability of people to plan and make productivity enhancing investments. That is where monetary policy has an important impact on the growth of productivity. There are others that have some role to play in productivity growth, however. Fiscal policy has a role to play. The amount of investment that we are willing to make either on a public or a private basis in our education systems has a role to play. Those are not things that monetary policy can affect. But I think in terms of how we discuss moving from where we are to potentially lower and lower rates of inflation, it has to be in the context of better productivity growth, a better overall economic situation.",430
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, I think price stability is a means to an end, and the end is sustained economic growth, which is how I resolve what appears to be the conflict in the Humphrey-Hawkins legislation and the Federal Reserve Act. I define price stability exactly the way you do. First of all, it is a very good working definition, and secondly, since you are the head of the Federal Reserve, using your definition makes a great deal of sense for all of us. If we each have a different definition of price stability, it certainly confuses the body politic. Since most of the speeches that I give are on price stability, because I think that is what we ought to be talking about, I would also argue that it has major sociological and therefore political benefits. Since most people can understand that more readily than the economic definition of price stability, I think it gets the point across better. As long as you are willing not to put a number on this purely verbal definition of price stability, we in fact have a national consensus on it. Therefore, the question is whether it is to anybody's benefit to define it more exactly. I am reminded of my days at Holy Cross College studying scholastic philosophy, which had been debating more or less the same major points for seven centuries by the time I came along. Some of those points on which absolute truth had not been defined are probably easier to resolve than an exact numerical definition of price stability. I am not sure that we are ever going to find the absolute truth here or that the search for this absolute truth is anything other than something that would give the FOMC something to do for the next seven centuries. [Laughter] Therefore, why would we want to have anything other than the informal consensus that we have? I think the reason is that an informal consensus is more easily breached than if somehow we could bring about a more formalized national agreement that price stability is the appropriate goal of monetary policy. Previously in our history, we had something closer to price stability for a period of 10 or, arguably, 15 years, as noted in the Stockton paper, and that did not keep us from the guns-and-butter decisions of the 1960s and 1970s that ended that period of relatively stable prices. It had to be reachieved, assuming we think that we are somewhere close to it now, at enormous expense to the American people. I think the people who should decide that price stability, hopefully as a means to an end, is the appropriate goal of monetary policy are not the people sitting around this table. Rather, it should be the American people through their representatives in the Congress. We are dealing with pieces of existing legislation that we are defining in a way that makes it possible for us to do our jobs. But those pieces of legislation are on the statute books, and it would seem to me that in due course, i.e., not in a year divisible by four, it would be a reasonable and appropriate thing for the American people to debate through their elected representatives. We could certainly make an active contribution to that debate. My guess is that it would probably be better for the Federal Open Market Committee not to take a position on this issue as an institution. I say that because if we said price stability is 2 percent--if we were ever able to agree on that--we might set the Federal Reserve against the people. I think that would be a very likely outcome, and in my view it would not be in the interest of the people or this institution. If the people wanted to formalize the idea of price stability as the goal for monetary policy, we are certainly unlikely in the legislative process to get that defined in numerical terms, and probably not even as unspecifically as a range. In a public speech, I suggested a range of 1/2 percent to 2 percent largely because of the lack of precision in such a range and also because I believe very strongly that although inflation is bad, deflation is truly terrible. Therefore, if in the implementation of price stability we make modest mistakes on the up side, I justify those as an insurance premium against the much greater evils of deflation. That's why I wind up pretty much where Janet Yellen did--in the 2 percent area. In any event, I believe that the search for absolute truth is not going to get us there. I also believe that the true decision on anything more than the working definition, which I think is the working consensus that we have now, is really something of such great importance to our society that it should be the American people who decide that through the normal legislative processes. I do not think it is up to us to make what I think would be a rather dramatic and far-reaching interpretation of what the statutes on the books actually mean.",973
-fomc-corpus,1996,Thomas Aquinas would be impressed! Governor Lindsey.,10
-fomc-corpus,1996,"I am very impressed with the Vice Chairman's Jesuit training, and I think I agree with him completely. I also agreed with what I thought Janet Yellen said, which is that we should reduce inflation to a lower rate and we should proceed gradually from there as we gain experience. Having agreed with her, I got very nervous when Al Broaddus said he was not going to rebut her because the readers of this transcript five years from now will then conclude that we actually are all on one side of the issue. So, I am going to do the rebuttal that Al did not do only because she provoked me with the use of the word ""taxes."" [Laughter]",139
-fomc-corpus,1996,"That was not ""taxes;"" that was ""tactics."" [Laughter]",17
-fomc-corpus,1996,"No, she said the word ""taxes."" I heard it and she is not going to get away with this! Let me start off with some calculations very quickly. The presence of retirement vehicles does not solve the problem, and here are some examples. Let us do an IRA-type calculation versus a permanent savings account that is taxed every year and a ""let's abolish inflation"" calculation. If you have a 30 percent tax rate, a 2 percent real return, and no inflation, the real after-tax return after 20 years is 34 percent. If you do not have IRAs, after 20 years the real return would be 10-1/2 percent, assuming 3 percent inflation. If you do have IRAs, it is 19.7 percent. That's because under the IRA system, the fact is the inflation buildup is still taxed and so the real return is depressed. So, in fact, you have to take inflation out of the system in order to solve the problem.",205
-fomc-corpus,1996,I merely meant that the existence of IRAs cuts the welfare gains from lowering inflation.,17
-fomc-corpus,1996,"It cuts the gains, but by this calculation it would reduce the gains by 40 percent, not by 90 percent.",25
-fomc-corpus,1996,I did not say what the quantitative impact was.,10
-fomc-corpus,1996,"Okay, I just wanted to put that in. The economics profession has for 30 years gone through the functional equivalent of CRA reform by arguing that we should change the tax code for inflation indexing. We have tried, we have tried, we have tried, we have tried; we have failed, we have failed, we have failed, we have failed. It is not going to happen, and I think the reason is summed up in what is the most egregious part of inflation treatment in the tax code, and that is depreciation. Back in the early Reagan Administration, indexing depreciation was one of the proposed reforms. The companies are not for it; the Congress is not for it. When it was tried again in 1995, it just floated up there and was absolutely shot down because, horror of horrors, a company could actually deduct over time more dollars than it spent. That was considered politically unacceptable by the enlightened members of the Congress. So, we are never, never, never in my opinion ever going to index our tax code correctly. That is not a first-best solution because it is not a solution. Second, on nominal wage rigidities, I agree with your analysis; I think it is right on target. Here is the case for reducing inflation gradually, which is where I agree with you completely. What would happen is that, over time, we would see a change in the method of compensation in the economy toward a profit-sharing mode. If we reduce inflation gradually enough, there is time for this fundamental change in compensation to occur. Then, I do not think we will have the same slope of the Phillips curve as we had before. Such a change is happening right now. Third, I think there are a lot of other rigidities in the system. One classic example is our housing mortgage rules with which I am intimately aware and have discussed. There the solution is no inflation. So, I do think that the social gains to no inflation in the long, long term are actually greater than you suggested, Janet, and the cost, if we do it slowly and gradually and allow the labor market to get used to it, will be less than you implied. Let's move to 2 percent inflation, and I will bet that if we do it gradually, we can move lower than that.",464
-fomc-corpus,1996,I have a solution to your political problem regarding depreciation that we can solve. We just have to make our dollar bills smaller and smaller to reflect the loss of purchasing power. The total amount of paper would be the same.,44
-fomc-corpus,1996,"The ecological effects would be the same, and we would be all set.",15
-fomc-corpus,1996,The real value of the currency and the value of the paper would be invariant to the purchasing power of the original outlay. I better call on Tom Hoenig! [Laughter],37
-fomc-corpus,1996,"You have lost me, Mr. Chairman; I don't know where to go from there! To address the question as you framed it in your discussion with Janet Yellen and Al Broaddus, I would like to observe that from my perspective the evidence as presented in Dave Stockton's paper and others is that high inflation is bad. Everyone agrees with that. It also is clear that, given the purpose of money, zero inflation properly measured is where we should be over time. Our experience shows that even modest inflation causes distortions over time in terms of incentives and signals in the economy and that inflation therefore lowers productivity. In my view that requires that we take the legislation that is in place now and pursue stable prices seriously. I think the mandate is there. In implementing that mandate, I would agree with Bob Parry and Al Broaddus that we ought to start somewhere. I would accept 2 percent inflation as the interim goal if we can agree on a reasonable timeframe in which we would move systematically toward that goal. I think we would be much better off doing it over some definite time period than arguing over whether we have a proper measure for zero inflation. So, I think moving toward lower inflation, defined as 2 percent, is a good intermediate goal. When we get there, we can see how the markets and producers react and discuss at that time whether inflation ought to go to zero and whether we have the right measure for inflation.",289
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I have a few random, hopefully not inconsistent, observations about all this. For me, the issues that we have been discussing are largely empirical issues. Janet knows the literature better than I do, and I certainly am willing to take her estimates. If she believes there are net benefits in going to 2 percent, then that makes sense to me. The only thing I would add to that is to go slowly to 2 percent.",94
-fomc-corpus,1996,"Janet said ""probably.""",6
-fomc-corpus,1996,"Right. Go slowly to 2 percent, probably. I would add that Bob Lucas currently has a paper that also estimates significant gains from bringing down the rate of inflation. So, I would throw that into the thinking here. I would not do this with the hope or expectation that we are going to get a lot of benefits from credibility, especially in the short run. I just am not aware of any evidence of significant credibility effects. I will not get into it right now, but I think what we are talking about is going to involve some challenging implementation issues. Even capping the rate of inflation at 3 percent, while it sounds simple, may not turn out to be quite so simple at all. In fact, we may be confronted with that issue before too long. But what really concerns me about all this and why I am coming out where I am is that I want to avoid something that puts us back in the late 1970s and early 1980s kind of situation. I would like to institutionalize our anti-inflation effort to a greater degree than we have been able to do up to this point because I think an increase in inflation could really be costly. I would not be so worried if it increased from 3 percent to 4 percent for a short period of time. We really get into trouble it seems to me when inflation goes from 3 percent to 6 percent to 10 percent and higher. I think we would benefit from institutionalizing something that would help strengthen the process to prevent such a rise from happening.",314
-fomc-corpus,1996,"I think that is an interesting point to apply to what we have been saying. There is another side to this issue, namely whether there is a tendency for inflation to go in the other direction if we do not move toward price stability, That is an opportunity cost that has to be addressed. If Gary is right, and I suspect he may well be, that complicates the issue greatly. Governor Meyer.",81
-fomc-corpus,1996,"Thank you. What I want to do is to sort out a little of the evolution of the debate on the costs and benefits of inflation and emphasize what is really novel in the points that Governor Yellen was making. What she has introduced with a much stronger theoretical basis is the notion of a permanent tradeoff. That is what is really novel to the debate. I also want to tell you why I think the Feldstein estimates of the benefits of lower inflation are wildly high. Secondly, I think we all can see, and it is remarkable to me at my first meeting, that we are moving very quickly to a consensus on, if not a very long-term policy, at least a policy that goes more than from meeting to meeting. That, I think, is a great thing. Finally, I do want to respond to Al's questions about opportunistic disinflation, and I want to explain to you perhaps a little more clearly how it actually works. First of all, what do we know about the costs and benefits? I think it is very clear, from the Stockton paper in particular, that the benefits from reducing inflation when it is already high are large and clearly justify the cost associated with disinflation. What is high? What are we talking about--15 percent, 10 percent, 7 percent, all of those? We would not be sitting here arguing if inflation were in that vicinity, and we would not be having a debate on deliberate or opportunistic strategies. Unfortunately, the benefits of reducing inflation from an already modest rate are very difficult to pin down, surprisingly so, and may not justify the cost of disinflation. What people have been saying, I think, is that the benefits of very low inflation are there; it has to get to zero; price stability is always better. And yet we have difficulty actually pinning that down in our cross-country and time-series analyses. In my view--not everybody would agree--there is clearly a sizable one-time cost associated with disinflation and absolutely not a shred of evidence that enhanced credibility of the Fed from announced or legislated inflation targets reduces that cost. One thing we should take into account is that while the cost of disinflation is high, to the extent that it is a one-time cost, we have to balance that cost against the permanent flow of benefits from price stability or low inflation. That is a very powerful argument, one that Feldstein also has made. But here is the key. There are hints that inflation can be too low as well as too high from the perspective of achieving optimal resource allocation and hence the highest possible living standards. But the evidence here remains inconclusive. This is what is really new to the debate. The debate was always between the one-time cost of disinflation and the permanent benefits of lower inflation. Now all of a sudden we are confronted by the fact that it is not only a one-time cost that we might be willing to pay, but there might be a permanent cost of lower inflation, particularly when it gets below 2 percent. This is a theme that was not emphasized in the Stockton paper, but I think it is important. There is a stronger case that deflation is harmful to macroeconomic performance. This weighs against the price level as opposed to an inflation target. I do not think anybody has a real difficulty with that notion, but I think that is important. So when we talk about price stability, we do not exactly mean price stability in the sense of a fixed price level that we get back to. Having said all this, I see all the different sides converging to a debate about what our provisional targets should be, not having decided whether we as a Committee believe in a deliberate or an opportunistic strategy, and I will come to that in a minute. But without deciding on exactly what the path is, we have an agreement that we want to hold the line at about 3 percent on core CPI and that provisionally we want to set a very explicit target for ourselves. We seem to be headed toward agreement on 2 percent inflation. We still have to debate how we get there, but this is a lot of progress. I think this is a good idea in terms of testing the waters, because all of these issues are still quite unresolved in my own mind. I am very worried, and again I really have not made up my mind as to whether or not there are permanent costs to price stability or very low inflation. I never taught it that way, but I am quite prepared to consider that possibility, and I think testing the waters gives us time. As Governor Lindsey said, quite possibly when we get to 2 percent inflation and we find how much we like it and perhaps how much the real economic environment may have improved, it will give us new confidence to take the next step. Now that we seem to have all this wonderful agreement, that leaves us with one issue: How do we get from 3 percent to 2 percent inflation? That brings us to the difference between the deliberate and the opportunistic strategies. There is one strategy that was articulated by Jerry Jordan in previous meetings--I enjoyed going through the transcripts for those meetings--where he said that he would measure economic performance over 1996 and 1997 and evaluate monetary policy solely by whether inflation was lower over that period. That is not the way I would do it at all. This leads me to comment on what the opportunistic approach says and how it achieves its objective. What Al Broaddus was worried about was that recessions are temporary. They come and they go. How do we get permanent declines in inflation with an opportunistic strategy? The answer is that there is an asymmetry built into an opportunistic strategy, and here is how it works. During good times, we only get up to full employment; we never go beyond it. During other times, the unemploy-ment rate is always above the NAIRU. If the unemployment rate averages above the NAIRU we are disinflating on average. That is what the opportunistic strategy does. What goes with that is that if you want to stop at 2 percent inflation, that has interesting implications. It means that once you get there, for every recession you treat yourself to a boom. You treat yourself to a little overheating because that is what it will take to keep the average inflation rate constant. My final comment is, gee this is even more fun than I thought it was going to be! [Laughter]",1314
-fomc-corpus,1996,Tomorrow morning I am going to argue that we are already at 2 percent inflation. [Laughter],21
-fomc-corpus,1996,Hold the line at 2 percent then!,9
-fomc-corpus,1996,"Let me tell you why I think Feldstein is wrong. The issue here is the existence of inflation non-neutralities in the tax system, for example, tax depreciation based on original cost. Inflation essentially raises the cost of capital to firms. Think of these inflation nonneutralities as being like an excise tax that is imposed on firms. What are they going to do with that? They are going to try to shift the burden. How do they do it? They shift the burden by in fact lowering investment, which lowers interest rates and forces lower interest rates back to consumers. Now, consumers can say they do not want those lower interest rates, and they can try to escape the burden of that ""excise tax"" by lowering their savings. But here is the rub. It is a battle between who is more sensitive--business firms or households--just as in the typical excise tax example. If firms are a lot more sensitive to interest rates than households, and that is what I believe--my best guess at this is a zero responsiveness of savings to interest rates--then Feldstein is completely wrong, blown out of the water. I have written a paper on this, though I would not want the staff to delve into my econometrics too much, but as a best approximation I find that what actually happens is that inflation induces firms to shift back the burden entirely to households in the form of lower after-tax real interest rates. Households do not escape that at all. In the process, the after-tax real cost of capital to firms is unchanged, and there is no inflation bias to the savings-investment process. That might be as extreme as Feldstein's argument.",337
-fomc-corpus,1996,You are assuming that savings are not responsive to interest rates?,12
-fomc-corpus,1996,Yes.,2
-fomc-corpus,1996,You assume zero responsiveness?,5
-fomc-corpus,1996,"Yes. That might be as extreme as Feldstein, but I want to say it is no more extreme than Feldstein because the interest elasticities he has picked are so wildly out of sight from any empirical evidence, whereas mine are quite reasonably based relatively. [Laughter]",55
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"This has already been a long day. I must say I have a lot of sympathy with the sentiments expressed by Bill McDonough. I did not have the benefit of a Jesuit training, but I have had a lot of economics, as did a lot of people around the table, and that is both a blessing and curse. As economists we like things to be clear and objective and logical. The fact is that policymaking is ambiguous, judgmental, and practical. The best we can do is to try to make some improvement from where we are and stay away from absolutes. With regard to inflation, I think the best we can do is to hold the line where we are and move inflation down a percentage point or so over time and see where we are at that point. I think we can do that over the next several years the way we have gotten inflation down over the past few years--we take advantage of the business cycle; we take advantage of breaks when they come our way. I do think, however, that we need to put this strategy in a framework of growth. For us in the Fed to be perceived as enemies of growth is a loser. The ultimate objective of monetary policy always needs to be framed in terms of maximum sustainable growth and moving inflation down is a means to that end. If we keep it at that level, I think we can make some practical progress and have something that is salable to the general public. If we try to do a lot more in this context, I think we will let perfection be the enemy of improvement.",316
-fomc-corpus,1996,"Hear, hear. President Melzer.",8
-fomc-corpus,1996,"Thanks, Alan. First of all, consistent with what I have said before, I think our focus ought to be on prices. In my view, that is the only thing we really influence in the long run, and that is what our policy ought to be aimed at. I agree with what Ed Boehne said; we really are talking about a means to an end. Low and stable inflation or price stability, however you want to say it, enables the economy to reach its maximum potential. That is our ultimate goal. My inclination would be to take what I perceive might be on the table now as an interim step. I think it is fairly easy--and I am basing this on 3 percent core CPI--to get people to buy into the fact that such an inflation rate is too high. When I talk to groups, they take notice when I point out to them that a 3 percent rate of inflation cuts the value of the dollar in half in a generation. We can make the case that 3 percent inflation is too high and that it is reasonable to move it another notch lower. I would characterize that as just another step, and would continue to describe our ultimate goal qualitatively and not quantitatively at this point. There may come a time when we are prepared to quantify our ultimate objective, but right now I would view our intermediate objective as just a step along the path to price stability. I think we would have to be explicit about what we were doing. In other words, whatever price index we use, we should indicate that we have a particular quantitative objective in mind over a particular timeframe. I think such transparency is beneficial in terms of enabling the economy to make the adjustments that need to be made in connection with that objective. I suppose that smooth adjustment is dependent to some extent on credibility, and we would have to earn that. This is an objective that we are setting for ourselves, but there is a benefit in my view to being explicit about it. In some ways, one could look at an opportunistic approach as somewhat misleading and likely to create uncertainty that does not need to exist. Unless we are explicit, people do not realize that we have in mind getting inflation down to a particular level, and suddenly they are dealing with the impact that our actions are having on the economy without prior knowledge of their purpose. I do not think that is useful. I also think that taking a step in the direction that I have been describing would be useful to us in that it would force us to do more in the public education arena in terms of explaining to the public the benefits of price stability, however defined, the costs of inflation, and also some of the potential offsets. As I have said to you before, Alan, I think we have a big job to do in terms of educating the public, though I believe we are making progress. I think people recognize that the kind of business environment they have enjoyed over the last four to five years has a lot to do with relatively low and relatively stable inflation. This is a good time to capitalize on that, and I think taking an explicit step on our own and not waiting for legislation would force us to move further down that path. Finally, just a comment on what Larry Meyer had to say about the opportunistic approach and how it works. Larry, in my experience, whenever we get to whatever the NAIRU is, people decide it is not really there and it gets revised lower. This is true of anything we pick. What I worry a little about is the mentality that I see emerg-ing here, namely that we are not going to deal with inflation until we actually see ""the whites of its eyes."" That approach to policy has never served us well in the past, but in effect that is what has been happening. We get to what people thought would be the NAIRU, we do not see wage pressures, and we assume that the NAIRU must be lower. So it keeps getting revised down. At some point, if we are wrong about that and wage pressures hit us when we have not anticipated them, it is going to be much tougher to deal with the practicalities of even containing inflation at 3 percent. That concludes what I have to say, Alan. Thank you.",860
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"Very quickly. It seems to me that we have made a lot of progress despite the fact that we started with the wrong question. [Laughter] With all due respect, the question, should price stability be THE goal of the Federal Reserve--meaning the only goal--is not the right question, as President Boehne and others have said. Implicitly, the goal has got to be either maximum sustainable growth or, as I would put it, raising the standard of living of average Americans. The only way we know how to do that is through raising productivity. Now, most of us read the evidence as indicating that high inflation is detrimental to that end, but there is an empirical question as to whether the costs outweigh the benefits of getting out the last bit of inflation. Janet has made a persuasive case, I think, that there are potential costs and we need to learn more about them in getting from 2 percent to zero inflation. I think we should be very humble before we say very much about the effects on savings in going from 2 or 3 percent to zero inflation. It is very easy to show that reducing inflation increases the rate of return to savings. That is very easy. Wayne Angell does it in The Wall Street Journal this morning, and Larry Lindsey was giving us other calculations. But the empirical evidence that people actually save more when the rate of return goes up has been lacking. We have tried all sorts of experiments through the tax system and through raising interest rates and through all sorts of other things, and we have not seen clear evidence that people save more. So, I think we should be really humble about alleging that there are big advantages to be gained through the saving rate in squeezing out the last bit of inflation.",352
-fomc-corpus,1996,"Let me say before we go further, I need a consensus from this group as to how much time you are going to need to pack up and get to the British Embassy. It is now 6:08 p.m. We should be there at 7:30 p.m.",57
-fomc-corpus,1996,The cars will be at the Watergate and downstairs here at 7:15 p.m.,19
-fomc-corpus,1996,It takes about 10 to 12 minutes at that hour to go from the Watergate to the British Embassy. Would somebody suggest a time?,29
-fomc-corpus,1996,I think we need to be at the hotel by 7:00 p.m. just to check in and put our bags away. SEVERAL. 6:30 to 6:45 p.m.,43
-fomc-corpus,1996,Are you all saying that we can continue until at least 6:30 p.m.? SEVERAL. Yes.,24
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I think I've lost my train of thought here! [Laughter] I am going to be very brief. I agree with Ed Boehne that it would be useful to state our goal in terms of maximum sustainable growth and the notion of trying to achieve price stability. It seems to me that while we can set 2 percent or maybe something else as an inflation goal, I am a little skeptical that any one measure of inflation is the right one. At any point in time, I can imagine that there will be problems with a particular measure, as there are now with the CPI. Intuitively, I am attracted to the notion of the GDP deflator, but I will admit that it too may have problems at times. There may be unusual circumstances affecting the various measures, so I am hesitant to pin down a particular number. I am a little more comfortable with the notion of a range, but I think it might be useful to continue to state our goal in words as opposed to numbers and then give examples of what we see as price stability at a particular point in time.",218
-fomc-corpus,1996,"Governor Lindsey, you have a question?",8
-fomc-corpus,1996,"No, I heard the word tax again. [Laughter] You have the right to tell me to shut up, but I will otherwise persist.",30
-fomc-corpus,1996,"You did not hear the word taxes coming from me, Larry.",13
-fomc-corpus,1996,"No. It is true that the economics literature does not show a correlation between the real after-tax return on savings and the rate of savings. However, in the example I gave before, 3 percent inflation and a 2 percent real return converts a 30 percent tax rate on savings to an 80 percent tax rate on savings. No sensible person would recommend that as a sane policy. That's not because of this elasticity with respect to growth, but because it is distorting and unfair within the tax system. What it does is to induce people to ""save"" in other forms that are quasi-consumption oriented, which causes an untaxed stream of benefits. Now, given that they do all that--hold more ""saving"" in the form of more jewelry, more land, more housing, rather than financial assets--that is a very different proposition. I see everyone shaking their heads that they agree with me; maybe that is to encourage me to be quiet. [Laughter] I will take it as assent with my point that what you measured as the elasticity is not the ""be all and end all"" of policy here.",227
-fomc-corpus,1996,"Even if there is no change, it is still unfair if savers are forced to accept that lower rate of return.",24
-fomc-corpus,1996,It is still unfair.,5
-fomc-corpus,1996,"Can I switch the subject? Since we have now all agreed on 2 percent, my question is, what 2 percent? Let me present the issue more specifically. You can ask the question, what is the inflation rate as appropriately measured, which implies that we can measure it. Or you can ask what is the appropriate inflation indicator that we should focus on, recognizing that it is not appropriately measured and has various biases. There are three fundamentals here. We can continue to use the consumer price index as we have done over the years and in my judgment increasingly inaccurately. I think that is potentially very disadvantageous for us from a policy standpoint. The consumer price index is flawed with respect to the biases that are in it on a continuing basis, although it is evident that very significant improvements can be made and indeed are being made by the Bureau of Economic Analysis. Clearly, as Roberts pointed out, the PCE chain-weighted index, whether excluding or including the energy and food components, is unquestionably far superior as a measure of the real consumer inflation rate, including the biases. Alternatively, we can go further and ask, why not use the gross domestic purchases inflation measure? Here again we have the problem of chain estimates that are superior to previous estimates that used the implicit deflator as a meaningful indicator, which it was not. Here we have the question of what to do about imports. When we endeavor to focus on a price, should we be concerned about the price of imports? I will put it another way: Do we wish to use the gross domestic purchases index, with or without food and energy? It may seem that this is not a relevant consideration, but I think it is a very significant consideration because, in the current environment, prices of producers durable equipment are falling. We do not quite measure it that way and our indexes do not quite come out that way. However, it is apparent that even as badly as we measure it, using prices of producers durable equipment as a proxy for consumer prices clearly is not in the appropriate lexicon. Since we have already come to a major conclusion, I will ask, what in the world are we talking about? If anyone would like to address that issue, be my guest.",447
-fomc-corpus,1996,"It seems to me that when Janet and Al were talking, they had implicit in their minds something like a CPI or core CPI. They were able to generate some consensus or agreement about the desirability of reducing the rate of CPI inflation from its current level of about 3 percent down to 2 percent. That is the critical point. If one wants to focus on a different index, let the staff make a suggestion and maybe we will start out with an inflation rate of, say, 2 percent and go down to 1 percent. I do not think that is the critical issue. I think the critical issue is --",125
-fomc-corpus,1996,Hold the line where we are.,7
-fomc-corpus,1996,Hold the line and come down one percentage point. That is the critical issue.,16
-fomc-corpus,1996,And be explicit about it.,6
-fomc-corpus,1996,What do you think the PCE deflator is now?,12
-fomc-corpus,1996,I don't know.,4
-fomc-corpus,1996,It is 2 percent.,6
-fomc-corpus,1996,Okay.,2
-fomc-corpus,1996,So we are there. Congratulations.,7
-fomc-corpus,1996,"No, you miss the point.",7
-fomc-corpus,1996,I came too late to take credit for it but I am an instant winner. [Laughter],20
-fomc-corpus,1996,I think you have missed the point. They were not talking about that.,15
-fomc-corpus,1996,But the PCE is clearly a superior measure.,10
-fomc-corpus,1996,That's fine. Then we will start with 2 percent inflation and go to 1 percent.,19
-fomc-corpus,1996,"We know that there is a measurement issue. Let us say that the PCE has less of a measurement bias but not a zero measurement bias. It may be 1/2 percentage point; it may be a percentage point, and you still have the issues of the permanent tradeoff that Governor Yellen talked about. I do not know that you can say that you should go from 2 percent to 1 percent. Maybe 2 percent inflation as measured by the PCE is where you want to be.",103
-fomc-corpus,1996,"If you want to change the measure, you have to change the numbers.",15
-fomc-corpus,1996,"We also are not talking about going from 2 percent to 1 percent overnight or in the context of the next few months. We are talking about making a change toward lower inflation, however we are measuring it, using whatever measure. We are moving in the direction of lower inflation over a period of time to the extent that that is consistent with the maintenance of favorable conditions in the economy overall.",79
-fomc-corpus,1996,"But we get back to the issue of whether inflation can be too low as well as too high. We have to take up that point. What are the benefits of a percentage point reduction in inflation, given that it is already 2 percent? Those are the things we have to weigh.",58
-fomc-corpus,1996,"So, you did not agree with the consensus that they reached?",13
-fomc-corpus,1996,"I am sorry. I agree with Governor Meyer and would support the statements he has made. I regret that I have not thought through this measurement issue carefully, and so you should not take my 3 percent and 2 percent inflation numbers as necessarily focusing on the CPI.",54
-fomc-corpus,1996,"I submit that we do not really need to until we get to the question of whether our goal is 2 percent. Two percent of what? It is a perfectly credible argument to say, whatever the inflation rate is now, that it should be lower. That is an unambiguous statement. Members can have their own particular measure and say, I think it is 4, I want to go to 3 or I think it is 1, it should go to zero. Everyone is in agreement with that.",104
-fomc-corpus,1996,"Instead of choosing, let's use all of them.",10
-fomc-corpus,1996,"If you put a number down, the question inevitably is raised as to what you are talking about unless you want a Jesuitical solution that bypasses the whole question.",34
-fomc-corpus,1996,"My view is that we could make a contribution to the societal debate by figuring out what the best inflation measurement is. If it is not the CPI, we should decide what we think it is. It will not be perfect, but if we can determine what is the best one, then we ought to sell that as the inflation rate people ought to be looking at.",73
-fomc-corpus,1996,"There is another element that has not been raised and that is the question, what is the real federal funds rate? In principle, we should be deflating the federal funds rate, to the extent that we think of it in real terms, by the same price index we would want to use to determine when we are getting to stable prices. This matters because, as I will tell you tomorrow, the decline in the real federal funds rate since its peak is very importantly a function of which measure is used. The decline can range from 0 to 50 basis points, and that is a big deal. It matters.",125
-fomc-corpus,1996,"Another big deal would seem to be, though, that if we want to calculate the real funds rate or something like that with a different price variable, we need a time series to put it in perspective. It is not just how it has performed over the last couple of quarters, but where it stands relative to history.",64
-fomc-corpus,1996,Absolutely. We need a time series.,8
-fomc-corpus,1996,"Exactly. It seems to me that there is another issue we have to think a little about, and this is not a defense of the CPI. My guess is that to the extent that labor contracts, government pensions, and the like are actually indexed to something, they are indexed to the CPI or some variant of the CPI.",65
-fomc-corpus,1996,The cost-of-living escalator in labor contracts is rapidly becoming obsolescent.,18
-fomc-corpus,1996,"I understand that, but there is still some of that around. The social security cost-of-living measure still uses the CPI, I believe.",29
-fomc-corpus,1996,"Let me put it this way. I think there is a growing consensus that using the CPI on all the government programs is something that we should veer away from. If we were to go to the gross domestic purchases price index or something like that, it would not change the world, but I will bet that it would have some effect on this sort of discussion.",73
-fomc-corpus,1996,"No, I was not trying to defend the CPI. I was trying to acknowledge that it has an institutional role. It may not be as important as it once was, but it is still there. It may have something to do with the estimates that Janet cited about what the Phillips curve is like if inflation is at a very low level because some of the institutions are tied into the CPI. That is my point.",83
-fomc-corpus,1996,"I agree with you. I think they are. Fortunately, I don't think there is a large number of them with the exception of the federal government. The CPI is a diminishing element. Thirty to forty years ago, it was sacrosanct.",50
-fomc-corpus,1996,"Could I follow up on that? If we come to a conclusion as to what we think is the right inflation rate and, going back to Governor Yellen's presentation, it turns out to be a rate where 33 percent of the firms in the country have to force nominal wage reductions, it will not fly. The American people will not find it acceptable. It will not be something that the central bank can live with over an extended period of time because it is likely that either other people with different views would be taking our seats or our responsibility would be transferred to an institution that the people found more sympathetic. So, I think the inflation number that we will find acceptable will never be zero. It will be some number above zero, hopefully better measured than it is now. I think we also should rely less on our instinctive reactions and seek to quantify better that deflation is truly a bad thing, not just because it sounds bad but because of the very real costs that it imposes on the economy.",202
-fomc-corpus,1996,"I think there is a problem in that when inflation is up to 5, 7, or 10 percent, people have an implicit view that there is a floor below which inflation cannot go. It is the issue of nominal interest rates. People look at nominal interest rates and say, if they are down to 1 percent, get them as close to zero as possible. No one ever suggests getting nominal interest rates to minus 2 percent. But I do not think people are aware that there is no sound barrier at zero. First of all, people do not know when we are there. There is nothing visible as a signpost when we go through zero and into deflation. That therefore makes it a very difficult issue. My own view, as I have stated many times, is that our goal should be price stability. But I do not think we should have a naive view as to what is required to get there or what it means when we get there and what we do when it is no longer rhetoric but action that we need to maintain it. I believe that we underestimate the productivity effects that occur at those levels. The analogy would be that as a particle moves to the speed of light, its mass changes. My own view, which is probably going to be determined to be correct eventually-- in the year 2252--[Laughter] is that as the inflation rate goes down, the tendency for nominal wages not to come down will enforce cost-cutting improvements and technological changes. It is not that low or stable prices are an environment that is conducive to capital investment to reduce costs, but rather that it is an environment that forces productivity enhancements. It forces people who want to stay in business to take those actions--such as cutting down the size of the cafeteria, reducing overtime, and taking away managers' drivers--that they did not want to take before in the ordinary course of business in a modest inflationary environment because it was easier then just to raise prices to maintain margins. If you force the price level down, you induce real reallocations of resources because to stay in business firms have to achieve real as distinct from nominal efficiencies. That phenomenon is what price stability means to me, and I see it as a very complex issue. When we first talked about it in the context of a 10 percent or so rate of inflation, we could just have an academic discussion.",480
-fomc-corpus,1996,Sure.,2
-fomc-corpus,1996,"But now we are getting there and the question is basically whether we are willing to move on to price stability. The question really is whether we as an institution can make the unilateral decision to do that. I agree with you, Mr. Vice Chairman. I think that this is a very fundamental question for this society. We can go up to the Hill and testify in favor of it; we can make speeches and proselytize as much as we want. I think the type of choice is so fundamental to a society that in a democratic society we as unelected officials do not have the right to make' that decision. Indeed, if we tried to, we would find that our mandate would get remarkably altered. Let me ask just one quick question that relates to this issue. It relates to the question of the gross domestic purchases index versus the GDP deflator. How would we wish to respond if oil prices doubled? If oil prices doubled and the United States were fully self-sufficient in crude, then this question would not come up. Assume that we are effectively out of domestic crude and the oil price doubles. The effect would be that, unlike the GDP deflator, the gross domestic purchases index would veer very dramatically.",246
-fomc-corpus,1996,"But it is a level change, not a permanent increase.",12
-fomc-corpus,1996,"No, take a look at the Greenbook. In the first quarter of 1997, the GDP deflator goes up .1 percent from the fourth quarter of 1996. The gross domestic purchases index goes up by .7 or .8 percent because we have an assumption of a significant rise in crude oil prices at the beginning of the year.",71
-fomc-corpus,1996,What happens in the second quarter?,7
-fomc-corpus,1996,It is not relevant.,5
-fomc-corpus,1996,"Right, that is the point. That is what I meant by a level change.",17
-fomc-corpus,1996,But supposing the price level goes up again in the second quarter and up again in the third?,20
-fomc-corpus,1996,That would require a constant acceleration in oil prices.,10
-fomc-corpus,1996,"Yes, sure.",4
-fomc-corpus,1996,With feedback.,3
-fomc-corpus,1996,How do we respond to that? The GDP deflator is 2 percent. I can create a scenario where the GDP deflator is 2 percent and the gross domestic purchases index is 5 percent.,41
-fomc-corpus,1996,It would eventually work its way into GDP at some point.,12
-fomc-corpus,1996,"Over the long run, oil prices would work their way through but never fully. That's because there would be a significant shift to domestic natural gas. The economy would go back to using more coal, and we would have much smaller cars. So, the higher oil prices would filter through only partly.",59
-fomc-corpus,1996,"But focusing on GDP, you are still going to be addressing the question of an external oil shock.",20
-fomc-corpus,1996,Yes. That is a relevant issue. It is not a hypothetical question. You are talking about a 2 percent inflation goal. What do you do in this situation?,34
-fomc-corpus,1996,Hasn't all the discussion allowed for taking shocks to the system into account? It is not that we would immediately react dramatically to bring down the rate of inflation.,32
-fomc-corpus,1996,"But there are different types of shocks, and there are all of these different alternatives. At this point I will merely suggest that we adjourn. It is 6:31 p.m. We actually have made far more progress today than any remote expectation I had. We will reconvene at 9:00 a.m. tomorrow.",67
-fomc-corpus,1996,"We will now discuss the long-term ranges of the monetary aggregates, and I will call on Dave Lindsey.",21
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,Thank you. Questions for David?,7
-fomc-corpus,1996,How much tighter is the tighter alternative?,8
-fomc-corpus,1996,"A quarter point increase for the next four FOMC meetings, so an upward adjustment of 100 basis points by year-end.",26
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"I want to ask a question about the simulations in Bluebook Charts 2 and 3. They have interest rate implications that can affect the growth of the aggregates over the long term. PCE inflation has averaged about 2-1/2 percent in the last two years, and it was as low as 2.1 percent in the last four quarters. The simulations you ran allowed the PCE to get up to 3 percent. Is that consistent with holding the line on inflation in an opportunistic approach? It seems to me that if you were assuming an opportunistic approach, you would have taken something like 2-1/2 percent or 2.1 percent and your decision rule would have been to keep it at that level. Your assumption does not seem consistent with being either deliberate or opportunistic.",165
-fomc-corpus,1996,"When we designed this, we had to design it around the Greenbook forecast, which already had some uptick in inflation. Our design process was to level out the PCE and not allow it to rise any further. In the baseline run, the solid line reflects the fed funds rate assumption in the Greenbook and then shows what tightening has to be implemented at the end of the forecast horizon to stop inflation from rising perceptibly further. The other simulation does start the tightening earlier and levels out the inflation rate a little sooner. But you are right; in both cases, the small acceleration in PCE inflation that is in the Greenbook stays in for the most part.",134
-fomc-corpus,1996,It really gives one the impression that holding the line on inflation is a relatively painless process when in fact holding the line on inflation truly may be very painful.,31
-fomc-corpus,1996,"In order to bring inflation back down to 2-1/2 percent, we would need at least the beginnings of a tighter policy.",28
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"David, John Carlson on my staff has been doing some work with MZM [Money with Zero Maturity]; have you looked at that recently?",29
-fomc-corpus,1996,"Yes, I looked at the chart that I got from him yesterday. We have done a little work on MZM. That chart and our earlier work do not show anything like the breakdown in the velocity/ opportunity cost relationship that has occurred for M2 in the 1990s. On the other hand, judging by that chart and the econometric work we have done, MZM has a rather substantial sensitivity to movements in short-term interest rates and thus opportunity costs. Therefore, it does not recommend itself as an intermediate guide to policy. The example I like to think of in this regard is that if nominal spending starts to drift up sufficiently to cause a problem with inflationary acceleration and the Federal Reserve tightens a little, the result could be to drive the growth rate of a very interest-sensitive aggregate back down at the same time that nominal GDP is still spurting ahead. Inflation could get out of control by insufficient, gradual increases in short-term rates even though we would be keeping this interest-sensitive aggregate well within a range. This is a problem that harkens back to the situation that developed with M1 after the introduction of super NOWs in the early 1980s. Indeed, I think the fundamental reason why the Committee deemphasized the Ml aggregate was that it had become too interest sensitive to be of use as a normal intermediate target.",270
-fomc-corpus,1996,"I think your analysis is right about the dangers of using MZM if something causes an acceleration of inflation so that we get a misreading of what that indicator is telling us. But it is somewhat less interest sensitive than the old M1. We have the problem of sweep accounts with the M1 measure that we do not have with MZM. So, I would suggest that you drop the Ml measure, continue to produce the charts and the opportunity costs because it will get more and more difficult to make sense out of these sweep adjustments, substitute MZM, pay attention to it, and let us see how it behaves over time. Its opportunity-cost relationship is strikingly tight.",135
-fomc-corpus,1996,"Yes. I am somewhat sympathetic to that suggestion. Obviously, we do not currently target Ml; we do not currently put much weight on it. Clearly, the sweep-account problem, which involves these adjustments only for the initial sweeps, is making it more and more difficult over time to have confidence in Ml, even after sweep adjustments. I am a little sympathetic to that idea. I will not speak for my division director, however. [Laughter]",91
-fomc-corpus,1996,"We will assume that you just did! Any further questions for David? Before we go around the room, let me just repeat what the structure of the discussion was when we looked at this issue back in February. I must compliment the staff for indicating then that growth of the broader aggregates was likely to run at the upper end of the ranges that we chose, and, indeed, that is precisely what happened. Therefore, I think we can have confidence that such growth will continue as the staff suggests. The crucial issue that I think is confronting us, to repeat what I said last February, is not how we would set these ranges if we were dealing from scratch in a wholly analytical environment. It makes very little sense to choose a range in which expected M2 growth remains in the upper half of the range. One would presume that we would automatically adjust the range up a notch to surround the staff forecast. In my judgment, were we to do that, we would be signaling that M2 is back in the ball game. But more importantly, I think we would be signaling an element of acceptance of inflationary forces. That is not what we would intend, but it would be interpreted by some as conveying that meaning. At the moment, despite the evidence that David Lindsey produced suggesting, I think with some reasonableness, that M2 is beginning to look like a useful indicator once again, we have not said that publicly. We have in no way indicated that we have taken M2 out of the deep recesses of the statistical dungeon in which we have placed it. I am concerned that we would gain very little in stirring the pot at this stage. Were there a reasonable expectation that M2 would run well above the ranges, then I think we would need to have another type of discussion. As far as I can see, we need to have some very strong reasons to deviate from a range that we presume would encompass the type of M2 growth we would expect in the event that we ever reached the nirvana of a stable price level. Frankly, I would caution against stirring the pot at this stage even though the arguments that will be made are unquestionably appropriate, namely, that it makes no sense purposely to set a range knowing full well that the actual tracking of M2 is highly likely to remain around its upper limit. To my knowledge, no one has commented on that fact since we adopted the range in late January. Were we to change the range, we would raise potentially a new set of concerns, a new set of indicators to measure Fed behavior, and a new view of an FOMC less interested in constraining inflation. All in all, I cannot say that I am intrigued by the thought of changing what we did last January. That is a deep-seated prejudice that I have decided to expose! [Laughter] Governor Lindsey.",573
-fomc-corpus,1996,"Mr. Chairman, even though you did not utter the word ""tax,"" I am going to respectfully disagree. [Laughter]",26
-fomc-corpus,1996,With respect to tax policy? [Laughter],10
-fomc-corpus,1996,"If you had uttered the word ""tax,"" I probably would have disagreed disrespectfully or something. As you stated, Mr. Chairman, we set a range that we thought was going to be consistent with our intermediate- or longer-run targets for inflation. The number that I heard yesterday was 2 percent inflation as an interim target. The number that I heard on expected growth was 2 percent. And 2 plus 2 equals 4.",91
-fomc-corpus,1996,Only in a nongraduated income tax structure! [Laughter],15
-fomc-corpus,1996,"That is probably true. The first consideration is that the midpoint of the Alternative II range is 4, and that range is therefore consistent with our stated purpose in setting a range. Second, even though there may be an argument over what the word ""tighter"" means in the shorter run, if we tighten 100 basis points this year, M2 growth will still be near the upper end of the Alternative I range. Next year, it would fall to the middle of the range under a policy that we would all acknowledge to be ""tighter."" The word ""tighter,"" if translated into a monetary aggregate, means to me that we are running our monetary aggregate below a normal rate because we are deliberately trying to disinflate. Under the tighter scenario, our nominal GDP is not 2 and 2. It is 2 and 1-1/2 or something like that. I also disagree about how perceptions would be affected. Frankly, I do not think that there is any perception out there that we are aggressively easing policy. I do not think that is true in the bond market. The risks in that direction may have existed in the past, but I do not think they exist now. With regard to why we would be raising the range, the answer is that it is a technical readjustment just like M3 was last July. In your testimony, you can state that, Mr. Chairman. No one here is arguing that M2 should become the pinnacle of monetary policy again. We are reporting these ranges only because it is required by law. Because it is required by law, we have a moral responsibility to report a range that is reasonable and consistent with what we actually are going to end up with.",348
-fomc-corpus,1996,"Incidentally, before we go forward, Governor Lindsey referred to a matter that reminded me how very important it is for all of us to recognize the highly confidential nature of what we talk about at an FOMC meeting. We all have seen some evidence recently of Fed officials mentioning what the Committee was going to do or what was being said at our meetings. There was even a rumor of what somebody thought somebody else thought that I thought! That sort of thing serves us very poorly. The discussion we had yesterday was exceptionally interesting and important. I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate. I beseech you all, especially those of you who have not heard this speech before--and there are a number in this room who have not--to realize that it is very damaging to this institution when anybody conveys information from inside the System concerning what members of this group are thinking or what the FOMC is likely to do. You are all free to indicate what you think the economy is doing. You have the right -- but I would suggest not exercising it --to indicate how you are going to vote. That is a bad idea, but you certainly have the right to do it. What you do not have the right to do is to talk for the Committee. No one has that right. I do not have that right. Certainly, to do so is a major disservice to this institution, and I ask you in the strongest terms to remember who has FOMC clearance when you discuss FOMC matters. Most of our leaks, as best I can judge, occur when somebody in this room speaks to somebody else at their Banks or in other institutions, and it is they who leak to the press. My impression is that security in this room is good with respect to direct access to the meeting. What happens is that you go home and you tell somebody, who does not have FOMC clearance, that it was an interesting meeting. That person, who may be on the staff at a fairly high level, tells somebody else that it was an interesting meeting and guess what? That is the type of thing that you have to avoid. I am sorry to interrupt our discussion at this point, but it was precisely Governor Lindsey's allusion to the 2 percent that triggered my concern about this. So, please keep this in mind. President Jordan.",498
-fomc-corpus,1996,"Thank you. I agree with your initial remark about the message that would be sent by changing the ranges and to me that consideration dominates. But with regard to the substance of the ranges that we announce and any information content they may have, we know that the lags are fairly long. It is not just 1997 that we need to be thinking about, though that is what we have to announce, but 1998 and later. If evidence should emerge that the velocity of M2 is stabilizing at essentially a zero drift or trend, we would then want to cap nominal income growth. In Governor Lindsey's 2 plus 2 example, would we want to be considering a world in which nominal spending rises faster than 5 percent? I do not think so. I think holding the range at 1 to 5 percent sends the message that we are capping total spending growth at no more than 5 percent, allowing for the real growth in productivity and making certain that inflation is still on a downward trend. So, I think it would a mistake to shift from the current 1 to 5 percent range.",226
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Alan, I agree with what you have suggested. I do not want to prejudge the outcome of this meeting, but it is possible that we will not take any action with regard to our short-run policy. In that event, I would not want to take any action with regard to these ranges. As you suggested, that might lead people to misconstrue the posture of this Committee with respect to inflation. So, I think it makes sense to leave the M2 range unchanged. The other thing I would say is that, even though these aggregates have been on the bench for a while, I do not believe we can afford to ignore them totally over longer periods of time. One of the problems is that even if we move to some sort of inflation target, we have to be very forward-looking in that regard. In other words, our actions probably have their impact on inflation with a one- to two-year lag, and I think monetary aggregates can be very useful interim guides, not from meeting to meeting but over longer periods of time. So, I believe there is a policy role for the monetary aggregates once we are sure that velocity relationships have stabilized.",232
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, if we were starting out from scratch I would be in favor of Governor Lindsey's position. But we are not starting out from scratch, and as you suggested the message likely to be given by a change in the ranges would be an unfortunate one. We also have to live with the other issue that Governor Lindsey very correctly mentioned, which is that we have a statute that we are supposed to be observing. Therefore, I think one would assume and hope that, in presenting the ranges, you would repeat something along the lines of your statement in February to make it clear that the aggregates are likely to grow at rates around the upper ends of their ranges. Another reason why I would like to retain the current ranges is that a change would be likely to take on an importance far beyond its merit and divert attention from what I hope will be the main message of your Humphrey-Hawkins testimony. That message is that price stability is not an enemy of growth. The contrary notion is far too much alive in the land, and so it is very important for us to confront that issue head on. I would not want anything, including specifically a change in the ranges, to create a diversion and have people focusing on that rather than on the really important issue, which is that price stability is the way that we achieve sustained economic growth and is in no way the enemy of such growth.",278
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"I agree fully with Governor Lindsey's reasoning on this along with his assessment of the likely consequences of saying that we have made a technical adjustment. I would certainly grant that our Humphrey-Hawkins report has honestly stated that the ranges in Alternative I encompass the Committee's expectation for growth of M2 under conditions of price stability, and we said in the report that we thought M2 growth would be near the upper end of the range. All that is true. But what we are required to do, as the Bluebook notes, is to communicate to Congress our objectives and plans for growth of the aggregates for the calendar year, taking account of past and prospective developments in employment, prices, and other factors. The latter do not include what we view as the likely ranges under conditions of price stability. My sense is that this is not a big deal. I think we should simply do what we were asked to do in the Humphrey-Hawkins legislation. We would say that we are making a technical adjustment; we made a technical adjustment to M3 in July of last year. I would note, incidentally, that I have dissented twice before on this issue; Governor Lindsey has dissented once. No one, not even a reporter, has ever called me to ask whether there was a deep monetary policy disagreement among the FOMC members or whether we had lost our commitment to price stability. I have never heard one word from any reporter about this. I have said that I dissented for a technical reason and the boredom factor set in so rapidly that no one wanted to hear another word about it. I believe that is what would happen now.",331
-fomc-corpus,1996,I got your message. I am just curious. Has anybody been asked about the targets of late? SEVERAL. No.,26
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, I agree strongly with your recommendation and for the reasons you stated. As I mentioned yesterday, I think monetary policy has to have some long-term anchor. In the absence of an explicit inflation target, I see the need to maintain this range, which is centered around the longer-term rate of M2 growth that we think is consistent with price stability and sustainable economic growth. This is a substitute. It is not a perfect substitute, but I think it is a better substitute than the higher range. So, I feel strongly that we should maintain it.",113
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, I would join those who argue that the risk of an unintended signal effect from a change at this time, even though the probability may be very low, is a risk we just do not need to take. At least for the moment, that argument substantially outweighs in my view the argument for a technical adjustment. So, I would support leaving the ranges where they are.",78
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"I agree with those who think that the case for leaving the ranges unchanged at this point is a strong one. I certainly would welcome renewed usefulness of M2, but I do not think the evidence, while it may be encouraging, is sufficient yet. As a consequence, I don't think we ought to raise its profile or prominence. We are not getting any questions about growth around the top of the ranges, and there is something to be said for letting sleeping dogs lie.",94
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I agree with your recommendation and with the way Gary Stern phrased it. I think there is a serious risk that increasing the ranges would be misinterpreted, primarily because of what we have done in the past. Since we have not changed them in the past under similar circumstances, why would we suddenly want to do so now? Another point is that, after our very important discussion yesterday about longer-term objectives for core inflation, the time to change these ranges, if we are going to do that, is when we have a better idea of what policy we are going to propose in terms of our longer-term objectives on inflation. We may want to go to the Congress, as was suggested yesterday, for that type of discussion, and I personally think we should. It just seems to me that the appropriate time to change these ranges would be when we have a better idea of what our longer-term objectives on inflation are going to be and how we are going to present that to the American people.",202
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I think one can argue this issue either way. It is not an issue that elicits strong feelings on my part one way or the other. On balance, I would prefer to keep the ranges as they are. My primary reason is that you are the spokesman for the Committee; you are the one who has to present the Humphrey-Hawkins testimony. If you feel more comfortable with the approach you recommended, I am prepared to support it.",90
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, I certainly support your recommendation for the reasons you stated and those that were mentioned by others. However, I would like to make an additional point. I think we ought to keep in mind that the projections that we have here are staff projections based upon the staff's baseline economic forecast. Quite frankly, I think that it is not the best forecast for the next two years. As the next two years unfold, I would expect to see a rise in interest rates and in that event the growth of the aggregates is likely to be less. So, I think the idea that higher ranges are more consistent with everyone's forecast is a mistake in the first place.",133
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"I agree with your suggestion that we not change the ranges and only partly because I think a change might give the wrong impression. Raising a range because our projection is a little higher is a little like drawing a target around the bullet hole in the wall. I think we ought to take the M2 range fairly seriously, be concerned if there is a prolonged period of M2 growth above 5 percent, and not forget about this aggregate as a potential signal for us to do something.",96
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Mr. Chairman, I am uncomfortable with the current procedure embodied in Alternative I for setting the target ranges of M2 and M3, particularly M2 in this discussion. It seems to me that this approach is quite inconsistent with the spirit and the letter of Humphrey-Hawkins. I believe it also differs from the public perception of the logic underlying those ranges among even the relatively well-informed Fed watchers in the private sector. I think it fails totally in communicating policy intent. Many believe that we are trapped here and they fear the loss of credibility that, they assume, would follow the upward adjustment of the target ranges that is required to make them consistent with both the staff forecast and the spirit of Humphrey-Hawkins. Now, in commenting on that, my particular approach may be sharper than I intend, but it seems to me that it is like trying to use bad policy to compensate for bad communication. What I mean is that if we are worried about communicating policy intent to the public, we have a lot of opportunities to do that in testimony, speeches, and otherwise and we ought to do that. I do not feel that we ought to compensate for our inability to communicate effectively by setting target ranges that are so inconsistent, or that are at least mildly inconsistent, with the staff or our Humphrey-Hawkins forecasts. Now, I am uncomfortable about maintaining indefinitely what I consider to be a ruse, and I think at some point we will probably regret it. At this time, however, I am going to defer to the judgment of the Chairman, but I hope that between now and the next time I have to vote on this issue, we will find some means to improve the way that we handle the monetary growth ranges.",348
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I, too, am in favor of your recommendation, Mr. Chairman, for many of the reasons that have been expressed around the table. I think it is a communication device. With only a few technical exceptions, all the changes we have made in the ranges over the years have been to reduce them consistent with our objective of fostering progress toward stable prices. At this point, I think keeping the M2 range where it is will send the message that we want to send concerning our reasonably near-term objectives relating to price stability.",105
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, I have no strong feeling about the ranges themselves, but I do feel strongly that the management of the issue is important. In that sense, I strongly support your recommendation.",38
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"It is. certainly premature to restore M2 and M3 to their full status as policy indicators, but I do think that we should recognize that they are performing a bit better in terms of velocity and GDP growth. I thought David Lindsey's chart presentation was extremely useful, and I particularly liked the first chart that shows the upward migration in M2 velocity. I thought that was very helpful. But it also points out that we do not yet have a lot of dots along that green line for the period since the start of 1994, while there are a lot of dots around the black line for the period from 1960 to 1989. I thought that chart put the recent history into perspective. But I do think that money remains an important monitor for monetary policy, and I believe it would be useful in our Humphrey-Hawkins report to discuss the fact that M2 growth deviated from its historical pattern for a period of time but that it now appears to be coming back. Like Governor Meyer, I am uncomfortable with the current ranges, but I do not want to use them as a monetary policy signal. So, I agree with your proposal not to change the ranges at this time, but I think we should beef up our discussion of the monetary aggregates in the Humphrey-Hawkins report.",264
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I am for leaving the ranges unchanged. First of all, Dave Lindsey made a good point in the sense that, although his chart on velocity suggests more stability over the past 2 years or so, it is still too early to come to any firm conclusion. Secondly, I think changing the ranges systematically involves more than explanations. It involves raising questions in people's minds as to whether we have changed our attitude about our long-term goal for inflation. Governor Lindsey makes a point in terms of 2 plus 2, but I think that requires another discussion. It is 2 plus 2 for some, but it may be another number for others, depending on what they view as a proper measure of inflation, and that would affect where they want to set the ranges. So, a lot more discussion is required before we undertake to change these measures systematically.",174
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"I, too, am somewhat uncomfortable with the whole discussion, as I think everybody is. I would go along with your recommendation, but I think we ought to think seriously over the next few meetings about whether ranges are in any sense an effective policy tool or whether we are going to have a continued discussion at each meeting about the symbolism of something that really is not being used as a policy tool anymore.",80
-fomc-corpus,1996,"We inadvertently got ourselves into this box, and it occurred in a context of M2 beginning to veer off from expected relationships. At the moment, we are at the lower end of potential target ranges largely because M2 was tracking close to zero for quite a long period of time. We had the problem for a protracted period of being perceived as allowing M2 to run near the bottom or even significantly under its target range. As a result we did--I don't want to use Bob McTeer's language--move the target down over the years.",111
-fomc-corpus,1996,We did draw the target around the bullet hole!,10
-fomc-corpus,1996,"Clearly, there is something fundamentally wrong here. There is no doubt about that. But before we play with these ranges, I would prefer that we concentrate on qualitative discussions with respect to M2 and elevate M2 if in fact it begins to deserve more emphasis as an indicator. I do not think there is any doubt that we are in an unsustainable position. It makes no sense. If M2 ceases to be useful at all, it would then become just an appendage, which would be unfortunate. But since it looks as though it is coming back, we are going to have to confront this issue. For the moment, there does seem to be at least a grudging consensus to stay where we are. I will ask Normand to read the appropriate language. I ask you all to listen to it just in case, in view of our discussion, we want to change a few words here or there.",184
-fomc-corpus,1996,"I will be reading from page 20 in the Bluebook. The first sentence is the standard one: ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee reaffirmed at this meeting the ranges it had established in January for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996."" Moving down the page a bit: ""The monitoring range for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent for the year. For 1997, the Committee agreed on tentative ranges for monetary growth measured from the fourth quarter of 1996 to the fourth quarter of 1997 of 1 to 5 percent for M2 and 2 to 6 percent for M3. The Committee provisionally set the associated monitoring range for growth of total domestic nonfinancial debt at 3 to 7 percent for 1997."" And the standard ending sentence: ""The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",262
-fomc-corpus,1996,Would somebody like to move?,6
-fomc-corpus,1996,So move.,3
-fomc-corpus,1996,Is there a second?,5
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey No President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern Yes Governor Yellen No,47
-fomc-corpus,1996,Now we will move on to current monetary policy issues. I call on Don Kohn.,18
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,Questions for Don?,4
-fomc-corpus,1996,"Don, when you think in terms of long-term real interest rates, where do you conceptually put the uncertainty premium about inflation? Is that in the real component?",33
-fomc-corpus,1996,"Yes, it is and that is because it has always been there. When we think of these things, we do it based on history, and the uncertainty premium has been in the real rate historically. I think that would be another reason why the real rate might move around over time. If people are less uncertain now than they were 10 or 15 years ago, and it is quite likely that they are, then you might think in terms of a lower equilibrium real rate.",96
-fomc-corpus,1996,"So, if I were comparing a time when a rise in real rates was strictly due to a change in real activity--real supply and demand were the sole contributors to an increase in real rates--I would distinguish between that situation and one where perhaps some of the increase was due to greater uncertainty about future inflation. That makes the comparison very difficult.",69
-fomc-corpus,1996,"In thinking further about my answer to your question about where the uncertainty is located, I believe we have to be careful. There is uncertainty in financial markets that leads them to demand a higher real rate premium. But we also need to think about the individuals and the businesses that spend the money. My answer assumed that they also were uncertain about the outlook for inflation and that uncertainty would damp their spending at given interest rates. If that uncertainty does not affect them, then we have a different situation. The equilibrium real rate probably would not have declined in that case. But I think uncertainty probably does play into spending decisions as well as saving decisions, and so it might be reasonable to think that with less uncertainty, the real long-term equilibrium rate would be lower.",150
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Don, I want to ask you about your relative confidence level for variables used in your forecast. But in view of your response to Tom Melzer just now, I am not sure whether I should rethink the question. In your prepared remarks, you used the Philadelphia Fed survey of expected CPI inflation, but the Bluebook looked at the PCE to draw conclusions about the real rate. The critical variables in the staff forecast are the assumption that the real fed funds rate is 2-3/4 percent, some measure of inflation and inflation expectations--the sort of thing we discussed yesterday--and the NAIRU versus current unemployment. With the nominal 5-1/4 percent funds rate and with inflation measured by the PCE, one would say that we were at a 2-3/4 percent real funds rate, that inflation is in the zone of 2 percent, and that unemployment is whatever number is going to be reported on Friday for the month of June; it has been in the area of 5-1/2 percent. So, what is the problem? The problem in this framework is that the inflation rate has to go up from where it is because current unemployment is below the NAIRU. That rise in inflation will reduce the real fed funds rate unless we raise the nominal fed funds rate. The only way we can get from where we are to equilibrium is through that mechanism. The confidence question is: If you look at your key component variables, where would you say the weak links or the strong links are located? Is your confidence in the 5-3/4 percent NAIRU instead of, say, 5-1/2 or 5-1/4 percent? Is it in the 2-3/4 percent real fed funds rate versus 2-1/2 or 2-1/4 percent? Or is it in a particular measure of inflation or inflation expectations?",390
-fomc-corpus,1996,"I would have to say that I am not very confident about any of those measures. There is a band of uncertainty around them all. I do think that, as Mike Prell has commented--and I think Governor Meyer said this yesterday as well--there used to be more confidence about the NAIRU calculation. In Mike's chart yesterday, we saw a lot of scatter points around the regression line, but they were fairly tightly bunched. However, the more recent information raises questions about the level of the NAIRU. I think our estimates of inflation expectations are a very weak link. We really do not have a fix on that. The Philadelphia Fed survey is very arbitrary because it is a survey of professional economists and, as highly as we might think of them, they are not necessarily representative of savers and investors in society. The Michigan survey has its own problems. It seems, at least in terms of the means, to be skewed toward too high a number. I have very little confidence in our projection of inflation expectations or knowledge of what they actually are currently. I tend to look at how they are changing, not in terms of levels. If several surveys and other indicators are all moving in the same direction, that might suggest that inflation expectations are moving the same way. On the PCE versus the CPI, I think one answer is that, if it is just a level adjustment, it is not a problem because we are comparing the calculated real rate relative to history. We can revise historical and current values and the gap remains the same. But I think the point that the Chairman made yesterday--and one that you will hear again shortly--is that we might be getting very different signals from the CPI and PCE, not just a level adjustment but different information about what is going on in the economy. That is obviously a much bigger problem than just making a level adjustment.",380
-fomc-corpus,1996,What about your assumption regarding the real fed funds rate?,11
-fomc-corpus,1996,"Once again, I think the assumption about where the equilibrium fed funds rate is situated is very shaky. When we look at history, we have to conclude that things move around, other things are not equal, the equilibrium real fed funds rate varies, and as I said in my briefing, that sort of exercise is at best only a starting point for thinking about the much more complicated issues relating to developments in financial markets.",83
-fomc-corpus,1996,You have made me feel a lot more confident! [Laughter],14
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Don, I want to follow up on your reference to financial markets in terms of policy actions now or later. It strikes me that there has been a fair amount of run-up and perhaps even some artificiality in some of the financial markets, such as those for IPOs or indeed whatever market you want to talk about. You indicated what the effect might be on the stock market if we made a tightening move now. But if there is a certain degree of artificiality, what would be the effect of waiting, and what is the relative risk that we run by letting that market run up further and then moving versus moving now and letting the market adjustment occur and spill over to the real economy?",138
-fomc-corpus,1996,"I guess that depends a bit on what you think will happen if you do not move. One hypothesis would be that, if you do not act now, in Mike's words, gravity will take over and the market will begin to correct itself even without the Federal Reserve. In that case, waiting to act might even be a positive in the sense that by the time you did act, the market already would be at more reasonable levels and less likely to overreact to our tightening action. On the other hand, if that correction were not going to occur, if the froth were to remain in the market, I think your question contained the germ of the answer. The more people build that froth in, the more likely you are to get a strong reaction. That is one interpretation of what happened in 1994, in the sense that we had a low funds rate for a very long period of time and a very steeply upward sloped yield curve. As economists, we could say that a steeply upward sloped yield curve means that markets expect us to tighten; such an action should come as no big surprise. The Chairman had testified several times telling the markets we would be tightening. Yet, when we embarked on a tightening course, which was widely anticipated, I think a lot of people who thought they would be the first out the door actually got caught. Everybody ran for the door at the same time, and there was a rather strong reaction in financial markets.",296
-fomc-corpus,1996,"Any further questions for Don? If not, let me hold forth for a little longer than usual because I think, as Governor Kelley indicated yesterday, that we are in one of those watershed periods that requires deeper deliberation on monetary policy issues than we have had to face at many of our meetings. The current period reminds me of our struggle several years ago to cope with the breakdown of M2 as a forward-looking indicator, as David Lindsey has amply demonstrated. You may recall that in the older regime a slowdown in M2 growth was an indicator of increasing policy restraint, but as the breakdown of M2 became increasingly evident we resisted taking action largely because the collateral information that was available failed to confirm the usual meaning of a sharp rise in income velocity. Current business indicators point to significant strength in economic activity and raise serious questions as to whether we are running up against the type of resource constraints that in the past have been a harbinger of a dangerous breakout of inflationary forces. Yet, there is something disturbingly wrong with this picture: The rate of inflation still appears to be falling; the growth in compensation per hour is 50 to 75 basis points under the rates suggested by past relationships; and the operating profit margins of domestic firms have continued to expand far later into the business expansion than is typical. As a consequence, like the M2 episode only in reverse, we have held in check our normal response to tighten in the face of the accelerated current business expansion. In my judgment, we have done so wisely because the credibility of the Federal Reserve System is at stake here. I am not referring to the important but narrow issue of maintaining, and being seen to maintain, the purchasing power of our currency but to the perception that we as an institution know what we are doing. Are we perceived to understand the changing forces that are driving our economy, or are we viewed as working with obsolescent models? We have recognized the crucial need to be forward-looking and preemptive with our policies. But to be successful in that, we must understand the economic structure through which our policies will play out. To gain the public's acceptance of our policies and our ability to respond to inflation threats in a timely manner, the public has to have confidence that the Fed knows what it is doing. Without prejudging the current evolution of economic forces, which I will get to momentarily, if we are perceived to have tightened and then to have been compelled by market forces to quickly reverse, our reputation for professionalism will suffer a severe blow. This will weaken our future ability to raise rates in a dramatic, preemptive fashion in order to contain inflationary forces at an early stage. We are an independent central bank in that our decisions are not subject to reversal by any other agency of government. Our existence and ability to function, however, are subject to acceptance by a public and a Congress who exhibit decidedly asymmetric propensities in favor of policy ease. The reputation that we have achieved as nonpartisan professionals enables us to function. The public and the Congress may not understand what we are doing, but they trust us, hopefully as they trust the family physician who is prescribing today's version of castor oil. I assume that everyone here is old enough to remember castor oil! [Laughter] We obviously are viewing an economy that at the moment does not resemble most of our textbook models. The unemployment rate is low and has remained low for quite a while. Anecdotal evidence continues to indicate tight labor markets, but with little evidence of significant wage acceleration. We also have a strong economic expansion under way, with industrial commodity prices falling even excluding the plunge in copper prices. Broader measures of price inflation are, if anything, still declining. There are, however, two disturbing numbers that suggest the old model may be operative. The first, of course, is the very disturbing ECI wage and salary figure for the first quarter. The second is the recent fairly significant rise in delayed deliveries in the June NAPM report. Most other data, however, are not supportive of a rising inflation trend. To be sure, average hourly earnings have been rising at a fairly pronounced pace in the last two or three years. But as we discussed yesterday, that series shows very little change when we look at the conversion by the BLS to a chain-weighted basis. Indeed, in the 12 months ended in May, it was up 2.9 percent versus 3.4 percent for the published average hourly earnings. The CPI is becoming increasingly obsolete, as I explained yesterday. The more analytically accurate core PCE chain-weighted price index is increasing now at a rate of about 2 percent, as is the core gross domestic purchases chain-weighted price index, with the increase in both measures declining since 1995. The hypothesis that the inflation rate has stabilized is very difficult to sustain with this data system. This result is consistent with the insecurity wage gain hypothesis that I have been discussing here for the last 12 to 18 months. It is not proof that the structure has changed, but we will never have definitive proof on which to act in a timely manner if our policy is forward-looking. We may in retrospect make very professional and impressively robust econometric estimates of what has been happening and conclude that, indeed, a significant tradeoff has occurred between wage gains on the one hand and job security on the other in the context that I have discussed in the past. The basic thesis, as you may remember, is that the economy can be viewed as having a family of functions relating to the real growth rate of earnings, all with the same slope but with different tradeoffs between wage gains and job security. These data suggest that we are moving from one level down to another. If that is in fact what is happening, one would expect to see the rate of change in hourly earnings fall below previous expectations and profit margins to widen, though by less than the gain from lower wage costs because part of the latter feeds into declining price inflation. Specifically, this data set is consistent with a lower track of real or nominal earnings growth, say, until 1993, but it also is consistent with the reemergence of the old business activity-inflation models after a transition period because, remember, we are then back to the earlier, higher rate of change although at a lower level. For those who would like a more analytic exposition of this type of model, I recommend a paper that is being written by Janet Yellen. I am certain that she will make it available to those of you who wish to read it. For those who are wedded to the Phillips curve format, the translation of the 50 to 75 basis point shortfall in the growth of compensation per hour is the equivalent of a perfectly tracking Phillips curve with a NAIRU of 4-1/4 to 5 percent. With as yet only limited evidence that domestic operating profit margins are contracting, it appears that the transition postulated in this hypothesis is still under way. A falling inflation rate underscores this. But let us be careful. Even this hypothesis postulates a one-time move of the goal post. Inflation is not dead. As we again get closer to the new goal line, the old inflation pressures will reemerge. Indeed, there is reason for concern in that regard. To be sure, second-quarter GDP growth is the result of the rebound from a number of retarding factors--the GM strike, the government shutdown, and the inclement weather, with the latter having had a very material effect especially on state and local construction. However, accelerating economic growth from whatever cause always has the potential to generate accelerating inventory investment. As I indicated at the last FOMC meeting, I am concerned that we may be underestimating the potential for an upward adjustment in inventory accumulation. If this occurs, then I think we are subject to much stronger than expected third-quarter and possibly fourth-quarter expansion in the context of extended lead times and perceived shortfalls in safety stocks. Even a just-in-time environment gets overridden in that type of situation. With the income effects that spill over from inventory investment, it is very easy to draw a sequence of events that can create much stronger GDP growth than we have in the Greenbook. It is too soon to know whether the current surge in the expansion will gradually vanish and fail to ignite inventory growth or whether the wealth effect will support PCE, with a lag, on a higher track than is shown currently in the Greenbook. Fortunately, we have the luxury of waiting at least for a short while to see what develops. While I would not describe our monetary posture as tight, it is scarcely accommodative. Real federal funds are only marginally below their peak of last year. In fact, using the broader deflator, that is, chain-weighted gross domestic purchases, we have not reduced the real funds rate at all. The economy may surprise us and accelerate at an unexpected pace, moving to the new goal line fairly quickly. This may require action on our part, possibly even before our next meeting. Accordingly, I would hope that this Committee, while accepting alternative ""B"" to give us the opportunity to assess what is going on, would nonetheless accept an asymmetric bias toward tightening with the understanding that no move would occur without a prior telephone conference. We have to be aware in this particular context that to reverse direction requires a somewhat higher hurdle of evidence than would be required if we were merely continuing a previous trend of monetary policy moves. Given the recent history of sequential policy moves, any move in a new direction would suggest to the markets that there will be additional moves in the same direction. Although we could endeavor to disabuse the markets of that, my suspicion is that we would fail. My judgment is that in all likelihood, if the Committee does not move at this meeting or during the intermeeting period, we probably will do so at the August meeting or later. It seems quite unlikely to me, looking at the data now, that we will luck out and find the economy expanding at a pace that would not necessitate moving. But as I have said, I think we have time to look, largely because in my judgment our current posture is not that far from the mark. Vice Chairman.",2074
-fomc-corpus,1996,"Mr. Chairman, perhaps one of the chores that goes with being Vice Chairman is that after such a very interesting and demanding presentation, one fills the vacuum, giving other people some more time to think. [Laughter] Agreeing with Governor Kelley's remark yesterday that we are at a watershed, I found myself sitting up straight at 4:00 this morning thinking about the responsibility that places on us as a Committee. It is very clear that the Federal Open Market Committee cannot carry out its responsibility without the support of the American people whom we serve. We deserve that support, which we have, and we will retain it only if we are deemed to be responsible and sensible. That is something about which I perhaps feel particularly strongly because I am the only permanent voting member of the Committee who is neither nominated by the President nor approved by the Senate. Therefore, I think one has to be very aware that we do serve the people and that we are not members of a university faculty or a discussion group. Rather, our purpose is public policy, which is a lot tougher than being on a faculty or a member of a discussion group. We are in a period of very considerable uncertainty as to exactly where the economy is or where we are vis-a-vis price stability. My own guess is that we are either at or very close to what might be the upper end of a price stability range. In light of Governor Yellen's presentation yesterday, which explained that there are very real and continuing costs to a reduction of inflation at these very low levels, I believe very strongly that before we do something we should be certain that what we are doing is right. Therefore, it should encourage us to be courageous when we need to be courageous but to have the courage to do nothing when that is the right thing to do, which is, I think, where we are now. At the same time, we are clearly in a situation in which the real economy could operate more strongly than the forecast says it will, and therefore I think it is equally important that we use the asymmetric directive. For the new members of the Committee, there are three interpretations of what an asymmetric directive means for every member of the Committee, but in this case I think it is clear what it means. It means, as the Chairman stated, that it is not at all impossible that we will see enough incoming data of a kind that will lead us to the conclusion that we have to tighten before the next meeting. In any event, I think there is a reasonable likelihood that we will decide at the next meeting that we have enough information to warrant a tightening move at that time. Therefore, those who share my view that price stability is what we do for a living because it is the road to sustained economic growth have to remember that we are not talking about whether the infidels are replacing the zealots or even whether we are a group of more or less tough-minded people. All the Chairman is recommending, which I very firmly endorse, is that we recognize that we do not know enough to make a firm decision at this point, but we do know enough so that our watching has to be particularly attentive. Therefore, an asymmetric directive toward firming is appropriate.",645
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, I have not yet had the opportunity to read Governor Yellen's paper, which I look forward to doing, But not having read it, I am reluctant at this point to deemphasize what you refer to as the ""old model."" It seems to me that the information we heard yesterday suggests that the economy is currently robust, with the risks dominating on the up side rather than the down side. I think it is instructive, as was pointed out this morning, that even if the Greenbook baseline projection materializes through 1997 with no change in policy in 1996 and 1997, the Bluebook analysis still says that an upward correction of 50 basis points, maybe more, is going to be needed to contain inflation in the longer term. Moreover, in the Bluebook discussion of short-run alternatives, the point is made that if we want to tilt inflation down, we may have to raise the federal funds rate ""considerably""--I believe that is the term used--or by more than 1/4 percentage point before the end of this year. With these considerations in mind, I think the case for a tightening of policy today is a strong one. I personally believe that a solid case can be made for an increase of 50 basis points in the federal funds rate. If we were to do that, I believe there would be a credibility benefit that could be substantial. A decisive move like this would tend to reduce uncertainty in financial markets and elsewhere about the ultimate extent of the tightening we might be contemplating. We could announce that we expected a midcourse correction like this to bring the economy back to a sustainable longer-term growth path with declining inflation, and that might help to reduce the potential reaction in financial markets. I could support such a move, but I realize that that may not be an option today. In any event, I think that a move of at least 1/4 point is necessary. The key thing we need to do now is to reaffirm our disinflationary credentials by reversing the two moves we made last winter.",420
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, news on the economy since our last meeting has strengthened my view that it would be wise to raise the federal funds rate at this time. We cut the funds rate in January because an apparent moderation in growth was reducing inflationary pressures and because we wanted to guard against the risk that the expansion might weaken even further. Since then, the economy has surprised us with its strength. Growth in the first half of this year appears to have exceeded the trend rate by quite a bit. Indeed, my concern now has shifted to the substantial risk of rising inflation. In that situation, whether one is an opportunist or of the deliberate persuasion, strong action is called for. In my view, these considerations support a 50 basis point increase in the federal funds rate. However, given that an increase would represent a change in the direction of policy and would be a surprise to the market, it may be prudent to limit ourselves to 25 basis points at this meeting and an asymmetric directive. Mr. Chairman, I also would like to comment on your presentation, which I found very interesting. It highlighted many of the uncertainties about the analytical framework that we are using to deal with policy issues. I also thought that the emphasis on the PCE chain-weighted index was quite instructive. I would recommend that we put on for a day a principled opportunist's hat and suggest to the Board staff, and perhaps also to our own staffs at the Banks, that they look at what would be involved to keep the PCE chain-weighted index, maybe not at the 2.1 percent that it has averaged over the last year, but I would be willing to say at 2-1/2 percent. That would be consistent in my view with containing inflation. It might be very interesting to see what the policy implications of that would be.",371
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I have not heard anybody arguing that the risks are not on the up side. I agree with the Greenbook and other forecasts that we are likely to see moderation in growth over the second half of the year. But even with that, both the Greenbook and most other forecasts see an uptick in inflation. The Greenbook sees that measured on a CPI basis and the Bluebook sees that measured on a PCE basis. Now, it may be that we are measuring inflation inaccurately. It may be that the trend has been down, not sideways, and that there is room to move up a bit. But if I took anything out of yesterday's discussion, it was a desire to hold the line at where inflation has been, however that is measured. Our forecast in Boston, like many others, is based on standard analytical techniques that look at relationships between overall capacity and pressures on inflation as measured by the CPI. Our forecast assumes, as do all model forecasts, that the past is a guide to the future. I do not know how these models work with other measures of inflation, but I must say that I continue to be uncomfortable with the assumption that things have changed in a major way and that, while rising inflation occurred under similar circumstances in the late 1980s, it will not happen now. I am attracted to the analytical framework that you set up in your discussion about moving down in a sense to a different curve and then starting from there. I find that interesting in the context of all the discussion about job uncertainty, but I am still a little uncomfortable with it. I know we have not seen many signs of rising inflation yet, and one could argue that, as measured by the PCE, there may have been a decline in inflation. However, I do not think that we should wait to see it rise before acting, given the backward-looking nature of any inflation statistic. Moreover, the feel of the economy, the availability of credit, the resilience of the housing and auto markets so far, the possibility that the economies of some of our major trading partners may be healthier than we thought earlier, and the ebullience of the stock market even with the modest downturns of late, all suggest to me that to be appropriately forward-looking we should move now. That said, I do recognize the special circumstances surrounding an increase in the federal funds rate when it would be a turning point. Inflation is not a major concern to the public. In fact, the concern lies in the opposite direction, as you have so clearly pointed out, Mr. Chairman. We are at a watershed, as others have said, and we need to be careful as we were in 1994 in laying the proper groundwork for the move that I think we all recognize we probably will have to make during the latter part of this year. I hope that we can start conveying to the market and to the public in general that there are risks and we perceive them to be on the up side. We could make this communication in the Humphrey-Hawkins testimony and in that way lay the groundwork for what I assume will be a necessary move at the August meeting. I could be wrong, but as I think you indicated in your comments, I believe we will have to move at the August meeting. I accept your recommendation for today. I have had misgivings about not taking action, as I have said in the past, but I am okay with it at this time. I would like to see us set the groundwork for a move in August. Therefore, I would be in favor of an asymmetric directive, which to me means that if there were a need to move before the next meeting, there would be a phone call and we would talk about it. My definition of asymmetry at this point is that it reflects the direction the Committee sees the economy moving. It is not a commitment by any means, but it indicates a direction and it will send a signal when the directive is released to the public. So, I am okay with your recommendation. I would vote for asymmetry if I had a vote.",823
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, after listening to you, I have a better sense of the difficulties in this process--the uncertainty about the model or analytical framework that we use to assess the incoming data. I also appreciate Bill McDonough's comment that we need to have the public's confidence and support. I think, though, that we ought to be careful before we abandon the model we have been using, as some members have said already. I would be reluctant to abandon such a model given our past experience. Our projections suggest that there will be increases in inflation, although the change in our inflation measures introduces a confusing element. Given the upside risks that are associated with the projections and weighing that against the downside risk of a small tightening move, I think there is a very good case for moving now. If I were voting, I would put it in that context. But I probably would say that the asymmetric directive toward tightening that we have on the table gives us an appropriate direction for policy and we can wait for increasing evidence at least until August. I would be willing to wait that long, but I really think that a small move now would have tremendous benefits in the long term.",235
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Mr. Chairman, yesterday I thought Governor Meyer laid out two issues very well. One of them is how GDP will grow relative to trend. Your analysis showed exactly how we would respond. If we saw a rise in inventory accumulation, to use your example, that suggested a sustained, above-trend rate of economic growth, we would move right away. That is in fact why you are recommending an asymmetric directive. I do not think there is any disagreement about that. The other issue, to simplify it in terms of the labor market, is where the existing unemployment rate is relative to the natural rate, the NAIRU. I also have not read Governor Yellen's paper, which probably has had about the best press so far of any paper in history for a paper that may not yet be finished. [Laughter]",165
-fomc-corpus,1996,It is just a little note.,7
-fomc-corpus,1996,You mean it is short.,6
-fomc-corpus,1996,"With both religion and economics, we tend to be schismatic. The Episcopalians can't sing from the Presbyterian hymnbook, and that is always a problem. But let me see if I can put what has been said before in an ecumenical sense. Jim Stock had a very interesting paper earlier this year on the NAIRU in the last three decades. He observed that it has been highly variable. Yes, if one had to pick a number and bet on it for 30 years, one would pick something like 6 percent. But it has been as low as 5-1/2 percent and as high as 8 percent. Let me talk about the 8 percent number, for example. It came during an adverse oil shock. What exactly does the term NAIRU mean? It means the level of unemployment we have to attain to stop inflation from accelerating. An oil shock produces a lot of inflationary impetus in the economic system. To prevent an acceleration of inflation, the unemployment rate has to rise sharply and put downward pressure on wages to overcome the oil shock and hold inflation in place. The lesson is that the NAIRU is variable, but changes in it due to supply shocks are temporary. The NAIRU in his story came back down again after the oil shock ended. Mr. Chairman, when I heard you mention the numbers 4-1/4 and 5 percent for the NAIRU, that set off alarm bells. The way I interpreted what you just said is that given the rate of disinflation we recently experienced, the current level of unemployment, and the usual relationship between the amount of disinflation and the difference between the rate of unemployment and the NAIRU, you backed out an implied NAIRU. But that is a temporary NAIRU. I do not think we would gamble policy on the presumption that we have permanently reduced the natural rate to 4-1/4 or 5 percent. A backlog of fear--this is my word for it--generated by the layoffs and the downsizings and whatever else in the early 1990s, created what we could think of as a positive supply shock, and the labor markets temporarily pushed the natural rate that low. It will not stay that low, and we should not bet that it will. What does that mean for short-run policy? I think you have it exactly right. You told us how we are going to respond to a demand-side shock or surprise, and I think the natural rate probably is much lower right now than it has been historically. But it is there only temporarily. The stock of fear that pushed the natural rate down will wear off. We do not know how fast that will occur, but we had better be prepared to respond when it does. I think we have reached the right solution in whatever New Age church [laughter] it may be that you are describing.",591
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Mr. Chairman, while I recognize that I arrived at an interesting moment for monetary policy, I must admit nevertheless that I did not agonize over my position for the monetary policy directive for this meeting. Although it may still turn out to be a close call as to whether or not we tighten going forward and as early as August, I am very comfortable with your recommendation for no change in policy at this meeting and an asymmetric policy directive. There are four good reasons for no change in policy at this time. First, if you accept the staff forecast and take an opportunistic approach to future disinflation, then I think there are no strong grounds for tightening today. The staff forecast suggests that, with the current monetary policy settings, we can sustain an expansion at a trend near capacity with nearly stable core inflation through 1997. I fully support an effort to achieve this outcome. Second, and I think quite importantly, my own perspective on the outlook reinforces this desire to the very minor extent that my outlook differs from the staff projections. While the staff simulations provide a plausible picture of the acceleration of inflation if the unemployment rate is slightly below the NAIRU, my normal high confidence in this gap story is undermined by the extraordinarily well-contained state of core inflation across virtually all measures. I for one would need to see either a decline in the unemployment rate below its recent range or an acceleration in core inflation measures to justify a tightening. My third argument is a little different, Mr. Chairman. In recent testimony you presented a compelling discussion of the Federal Reserve's position vis-a-vis growth. I have, as you might suspect, a heightened awareness of the political sensitivity of this issue as I spent several months with little else to think about. [Laughter] As I understand your position, the Federal Reserve does not have a growth objective per se. Once we achieve acceptable resource utilization rates and acceptable inflation readings, at least on a near-term basis, we will happily accept all the growth the economy will produce. I accept this logic. Tightening today would contradict that position. We should not tighten solely on the basis of one quarter of above-trend growth when utilization rates are not definitively signaling overheating and when inflation readings suggest inflation remains in check. This is perfectly consistent with a transition to price stability over the longer run, albeit by the opportunistic camp's time schedule. Fourth, we will have a wealth of additional information at the August meeting. At that time, we will be in a much better position to assess the potential that growth will remain above trend. As we enter the second half we will be better able to determine whether the strong growth over the first half has depressed the unemployment rate below its recent range and to judge the degree to which wage pressures may indeed have intensified and whether or not there is any pass-through to prices. I am referring here specifically to the advance report on second-quarter GDP, where the mix will be very interesting; the next two employment reports; a second-quarter employment cost report; and a whole variety of monthly data that will condition our understanding of the economy's momentum heading into the second half. My first two points make clear that there is little danger in waiting, and my last point indicates there is great benefit from doing so. Now, a word about symmetry versus asymmetry. I had a quite interesting time reading the transcript of the last FOMC meeting, and I am somewhat acquainted with the various meanings of the words. But it really is interesting how symmetry means so many different things to different people. We are all asymmetric in our policy posture, deciding here whether we are going to hold or increase the federal funds rate. Nobody envisions a decline in the rate between this meeting and the next. Most of us can envision situations where we would have to raise the rate. All of us recognize that it will be a tough call at the next meeting, so I would have thought that the tilt in the directive for this meeting would be an easy call. Personally, I am asymmetric and would feel more comfortable with an asymmetric directive. From my reading of the last transcript, it does appear that some members of this Committee read into the distinction between symmetry and asymmetry differing degrees of permissiveness with respect to a move between meetings initiated by the Chairman. This may be a fair interpretation also. I am confident, Mr. Chairman, that you would consult with the members of this Committee in the intermeeting period before initiating a reversal of the direction of monetary policy. With that caveat, I fully support an asymmetric directive.",911
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. Based on the increased upside risks, I think that a tightening of policy is going to be needed in the next several months, but I am a bit more optimistic than the Greenbook on inflation. I am not convinced that a large increase--or a series of increases--in the federal funds rate is necessary. In that vein, a tightening move could be delayed. I am generally ambivalent on asymmetric directives, but based on the upside potential for the economy and the attendant inflation risks, it does seem to me that the case for tightening has strengthened. Asymmetry would allow for an intermeeting move. It seems to me that measures of price inflation and the ECI are particularly important information. In that regard, I would still urge a phone call.",158
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"The future usually bears some resemblance to the past, but the future is almost always different from the past. I think we are in one of those situations now where we do not know how much different the future will be. I believe most of us feel as we talk to people in our Districts that it may be more different, at least for a while, than we have become accustomed to. That higher degree of uncertainty ought to make us more cautious about taking steps at this meeting, and I feel very comfortable about keeping policy the same. Looking ahead, clearly the case for tightening and the probability that we will have to tighten in the coming months would be fairly high under the old model. That may indeed turn out to be the case. On the other hand, it may not turn out to be the case because we may be able to remain on an unchanged policy course longer than we now anticipate under these conditions without accelerating inflation. So, while I am prepared to support an asymmetric directive, it does not automatically mean in my mind that we are setting ourselves up for a tightening. That may indeed be necessary, and I think we need to be watchful. Should conditions arise where we have to tighten, I think we ought to do so and we ought to be decisive about it. But I do not know when that tightening will need to occur, whether it will be next month, the month after, or six months down the line. For today, I agree that we should make no change in policy, be very watchful, and keep an open mind as to what we ought to do at the next and subsequent meetings.",326
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"I am very comfortable with your recommendation, Mr. Chairman. It is extremely hard for us to explain the current set of facts to ourselves with the models that all of us have been using, implicitly or explicitly. I am intrigued by your construct, but very frankly none of us really knows what is happening. It seems to me that moving now to tighten policy would demonstrate that the Federal Reserve has a knee-jerk reaction to growth even when we have not seen any clear evidence of increases in compensation, let alone in prices. I think it would be a mistake if we were to tighten because the economy is stronger. It is unclear to me what an asymmetric directive conveys. I asked several people, including you, and I got very different and confusing answers and now I do not want to know exactly! [Laughter] My personal guess is that we will be in the same quandary in August. We will have more information, but we will still be unsure about exactly what is happening. But I see no reason not to admit to ourselves that we could have a shock that would occur in the intermeeting period that would cause you to do what I assume you would do anyway, namely get on the phone and say, what do we do now? So, I would go along happily with your recommendation.",261
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I think you focused the discussion appropriately on the underlying inflationary process and on the questions of what we know or do not know about it. I certainly would admit that I do not know as much about it as I would like. The world may indeed have changed, but even so, if I understood you correctly, the change involves a transition having to do with concerns about job security and so on. Some other things that strike me about the economic environment at the moment are that financial conditions seem to be what I would describe as generally permissive. Credit is readily available on attractive terms. Wealth effects stemming from the run-up in stock prices ought to be sizable. I guess we have been cautious in terms of how we have built that into our model as have some other models as well. It seems to me that bond market participants clearly are not convinced at this point that inflation is dead or even dying. I think there is still a significant inflation premium in long-term interest rates. Having said all that and having looked at the available information, my judgment is that the economy and its momentum are likely to be relatively strong. My preference would be to raise the funds rate 1/4 percentage point now. I view that in part as taking out a little insurance that the old model will reassert itself more quickly than we expect. Certainly, a 1/4 point move is not going to trigger any tailspin in economic activity. It also seems to me that under all the circumstances at the moment, such a move could be at least a start of a policy to bend inflation down a bit further, and it may be just the right thing to do.",338
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"First of all, I think the prospect of rising inflation is the biggest risk we are facing in the economy in the coming months. There is no question in my mind about that. I also think policy is in an accommodative stance from a number of different perspectives. So, I conclude that we ought to move now, and I would be inclined when we do move to do so aggressively. By that I mean that I would raise the federal funds rate by 50 basis points, and I would combine that with a 50 basis point increase in the discount rate.",113
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. As I indicated in the earlier go-around, I, like most others, expect the economy to slow in the coming quarters, leaving us with a rate of growth without increasing price pressures that perhaps can be achieved with our current policy stance. I would like to give things a chance to play out a bit more. Certainly, this position requires that one be of the view that our current policy position is not accommodative. Unfortunately, like many of the other issues we have faced and talked about in the last two days, we cannot demonstrate that categorically. Based on my review of information from financial markets as well as competing forecasts, I am not convinced that current policy is adding fuel to the current inflation environment. As Don reminded us this morning, it is equally clear that we probably are not reducing general price pressures at the moment except to the extent that a continued experience of slow, relatively stable inflation works to temper concerns about our commitment to a low inflation environment. I would prefer to see us keep policy unchanged for the moment. I, too, would be comfortable with an asymmetrical directive as long as it is not an irreversible leaning, making us feel compelled to move at the next meeting even if conditions do not seem to support that move. Thank you.",257
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, it is very correct to be suspicious of the notion that this time things have changed. That is a classic trap. It is frequently a loser's cry, and I find myself very uncomfortable supporting that notion. By conventional standards I think the case to move now is somewhere between strong and compelling. But I also think that there are very strong indications that things have indeed changed. Maybe the better question--it is at least for me--is whether this change is temporary and whether it will turn around very soon. If it does go back toward a more conventional experience, will it look the same as it did historically? I would compare this to the recent history of M2 that we discussed earlier this morning. M2 tracked along very well, very conventionally for some number of years, went badly off the track for a while for reasons that were hard to understand at the time, and now seems to be coming back again. The nature of the M2 episode is beginning to be better understood. That may be in the process of happening here as well. But the presumption either that things have not changed or, if they have, they will immediately return to the traditional relationship, carries its own dangers and its own uncertainties. The better part of valor is to try to get as good a reading as we can get as things progress before we commit one way or the other. As a consequence, I strongly support your notion of a ""B"" directive and can support asymmetry.",299
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"Mr. Chairman, I can support your recommendation. I could also have supported a recommendation for tightening today, had you made it. On principle, I prefer not to tighten monetary policy on the basis of strong output and employment growth or even a low unemployment rate. I know that we should not wait to see the ""whites of inflation's eyes"" before acting, but I do think we might well wait for some leading indicators of rising inflation before we act. That they are strangely missing does suggest to me that something is different in 1996. With respect to symmetry, I believe the Baptist religion prefers symmetry, but I do backslide occasionally [laughter] and am happy to do so today.",141
-fomc-corpus,1996,Baptists have a point of view on this?,11
-fomc-corpus,1996,"Try to top that, Governor Yellen!",9
-fomc-corpus,1996,"I can't, Mr. Chairman! I agree with your analysis and many of you have been eloquent in expressing thoughts that I agree with: the Vice Chairman, Governor Meyer, Governor Rivlin, President McTeer, and others among you. I can certainly support the recommendation to leave the funds rate where it is with an asymmetric directive. I agree that the risks are unbalanced at this stage, and I certainly can envision a set of data between now and our next meeting that would justify in my mind a move following a phone call. But I agree with you that there is a great benefit to waiting and watching a while longer to decide how things are going. I consider this a period of great uncertainty. To my mind, the most serious risk at this stage is that we simply do not know how demand is likely to behave going forward. I think that if we have significantly underestimated the continuing robustness of aggregate demand so that we see a significant reduction in labor market slack in coming months or, alternatively, if our assumption that something has changed in labor markets is clearly proving to be incorrect, we will be compelled to move and I will certainly support those moves. I found the Bluebook policy simulations and also the Taylor Rule computations useful. To my mind, they mean that we are roughly correctly positioned at this point; we are in the neighborhood of the equilibrium real funds rate. So, I do not feel that our policy stance is way off from where it should be, and I think we can wait and see how these things materialize. I don't think we need to jump the gun in order to establish our credibility to prove to markets that we are prepared to act. All we need to do is actually to act when we see that the circumstances justify it.",352
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I think the risks are clearly on the up side, as we all have said. The issue is whether the rate of economic growth will slow in the second half of this year. I think that it will based on the evidence we have seen. The business people with whom I have been in contact also sense that the economy is slowing. The question is whether it is going to slow enough to have the effect that we will need. Obviously, the people with whom I come into contact are not a random sample. You mentioned the issue of inventory accumulation, which I think is very important as we look through the rest of the year. The Greenbook assumes that appreciable inventory rebuilding will occur over the second and third quarters and that subsequent inventory accumulation will be relatively modest. Of course, that was not the pattern that we saw last year when sizable accumulation continued for a number of quarters. If such accumulation does spill over into the fourth quarter, we will not see the second-half deceleration in economic growth that will be necessary. So, I support the asymmetrical directive. I think it is crucial that we watch carefully. I also support having a phone call before making any decision between meetings. I think the Humphrey-Hawkins testimony that you are going to be giving is very important at this particular stage of the expansion and policy formulation. It would be an excellent opportunity to alert the Congress and the American people to our concerns regarding the risks in the economy at this time.",298
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I think the reasons for a change in the direction of policy have to be even more convincing than for a change in the same direction as prior moves. Our action in early 1994, which subsequently was viewed as having been correct by people on the outside, was very important in that regard. If I were as convinced as some of the people around the table that the current stance of policy is too expansionary, I would not only support a 1/4 point change, I would say, let's move at least 1/2 point to get to where we need to be. If I were as convinced as my own staff that the reduction in January of this year was wrong, I would want to reverse it. I am not convinced of either of those things, and I am not at all convinced that an action in August will be warranted. If the staff forecast is anywhere in the right ballpark, we will see in the second half of this year a lower rate of change in most of the price measures and a lower rate of growth in most measures of real economic activity: housing, autos, real GDP, and job growth. An action now at the beginning of a period when everything will start to show a significantly decelerating expansion would subsequently look like we came from a different planet. The asymmetry issue is troubling to me because, as some others have mentioned, I have a problem in principle as to what it means and the message it sends. I would not want support of asymmetry to mean a predisposition to tighten policy in August. But I am concerned about how going asymmetric now and going back to symmetric in August would be interpreted. It is almost as if, once we adopt an asymmetric directive, we are forced to go ahead and take the action so that we can go back to symmetric again. That is troubling. But I would not dissent if you want to go asymmetric.",382
-fomc-corpus,1996,"I should say that there have been occasions in the past when we have gone asymmetric and withdrawn it. But the point you make is well taken. I think the broad mode of the Committee is Alternative B, asymmetric. I will ask the Secretary to read the appropriate language for that motion.",57
-fomc-corpus,1996,"This is on page 21 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",108
-fomc-corpus,1996,Would somebody like to move that?,7
-fomc-corpus,1996,So move.,3
-fomc-corpus,1996,Is there a second?,5
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern No Governor Yellen Yes,47
-fomc-corpus,1996,I think we can break for coffee. Then we will come back to a discussion of swaps and intervention.,21
-fomc-corpus,1996,"You will recall that we twice postponed this discussion until we could be joined by our two new colleagues. That is one more reason I am delighted that they finally came on Board. The staff paper prepared by Messrs. Fisher, Kohn, and Truman raises a number of interrelated issues. Our objective today should not be to try to reach firm conclusions on any of those issues, but rather to have an open, preliminary discussion with a view to having one or more subsequent discussions aimed at reaching a consensus on the wisdom of some of these matters. The excellent paper that has been presented to us focuses on a relatively narrow, nonetheless complex, set of issues associated with the future of the swap network and a possible alternative mechanism to deal with the short-term dollar liquidity needs of foreign central banks. However, in reading over the staff paper, I was struck by the fact that it does not address directly the deeper principles that should govern us in our dealings with other central banks. We have discussed our foreign exchange transactions at great length in recent years, and we have endeavored to define a set of operational principles to bridge our somewhat ambiguous relationship with Treasury as well as with institutions such as the G-7. I am not suggesting we go back and review these particular issues at this point, but we have not recently reviewed our long-standing procedures on RPs and our reluctance to engage in reverse RPs with other central banks. I gather the latter results from the fact that when the Committee last focused on these issues, the nature of central bank bilateral relationships was far less complex, as indeed was the international financial marketplace. Last year, we initiated an arrangement with the Bank of Japan to set up a procedure to liquefy Japanese holdings of U.S. Treasuries. We also have recently entered a broadened swap facility with Mexico and Canada. But what is our generic policy in such arrangements? We have chosen to accept foreign exchange risks with our larger-than-historic holdings of foreign currencies, yet we will not accept market risk on central bank credit transactions. Is this a general principle we wish to promulgate? Do we wish, however, to lend even without risk, for example, through reverse RPs, to any central bank that requests such an accommodation? Are there foreign policy concerns in this regard that should attract our interest? Does the RP pool of the Federal Reserve Bank of New York as currently operated reflect such principles? Finally, does the broader set of issues surrounding our role in a changing international and political environment, in which new financial centers are emerging and cross-border financial linkages have intensified, require our focus before we decide on how best to deal with future requests to meet the liquidity needs of our sister central banks? These developments have the potential to change both the character and the origin of systemic risks compared with what we experienced in the past. They may have implications as well for the way we perform our responsibility as the central bank for the U.S. dollar. In your comments on the issues raised in the staff paper, you might touch on these broader issues as well. My sense is that it would be useful to try to achieve a consensus on the conceptual framework for our international operations before we try to reach final decisions on the specific issues raised in the staff paper. However, in an effort to limit the scope of our discussion somewhat, I would request that we remember that our purpose today is to have a free-ranging, but preliminary, discussion. What I hope the Committee will offer is some guidance about how we can move forward on some of these issues on the basis of an updated conceptual framework with which we all are reasonably comfortable. Vice Chairman.",730
-fomc-corpus,1996,"Mr. Chairman, I do not have any prepared remarks, but let me make just a few comments if I may. The approach that the Federal Reserve has to foreign central banks is very much a product of the rather unusual structure of the Federal Reserve, with the Board of Governors and the 12 Reserve Banks. The Federal Reserve Bank of New York historically has played a particularly important role because we are in the nation's financial center and because we do the intervening in both the domestic and the foreign exchange markets. The attitude that foreign central banks have toward the Federal Reserve is, thank heavens, one of great respect. They take us immensely seriously, including not only central bankers from small countries that you might think would take us seriously because of our being a superpower, but also those from the other G-10 central banks as well. I think one of our strengths is that we respond to people in a flexible and unbureaucratic way. For example, some of the G-10 central bank officials deal very actively with staff at the New York Bank and the Board and certainly with you personally, Mr. Chairman, and we never get into a mode of telling them that they really ought to be talking with Joe instead of me. This approach works very well because we are rather good at keeping everybody else informed. The other Reserve Banks, depending on the part of the world involved and to a degree the personality of the staff or the President at any given time, play very important roles as well. So, I think that this customer-oriented view of dealing with foreign central banks has great merit and should be continued. We should not try to force a method of dealing with the Federal Reserve System on people, but we should just let them deal with us as they have in the past in the context of continued very amicable relationships among the various parts of the Federal Reserve System and especially among the key staff members involved as well as the Board members and Bank presidents. We also, I think, have to be very aware of how the world is changing. Historically, our very important relationships have been with the G-10 central banks, basically Europe, Canada, and Japan. In addition, we have developed very important relationships with the central banks of our hemisphere, an area in which I particularly get involved because of the historical accident of speaking Spanish very fluently. The new area where central bankers are very much interested in us is Asia. People from that part of the world have very active relationships with the San Francisco Reserve Bank, especially in the bank supervision area, very active relationships with Board staff, and very active relationships with us in New York. One of the areas that I hope we will concentrate on and eventually resolve, but not today, relates to developments in the repo market. When the Committee set up the RP authorization to the Desk, and really the last time it was looked at in great depth was in the 1970s, the government securities market was very different. The Committee did not envision in the 1970s that we had to do anything for the central banks around the world in the way of providing liquidity other than allowing them to take part in the repo pool at the New York Bank. For example, at the present time we are somewhat inconvenienced by having $3 billion of while they hold $3 billion of our collateral. The funds are sitting in New York as a pool in case wants to use them to meet the liquidity needs of in our time zone. We cannot deal with them in reverse repos, which would allow us to take their holdings of U.S. government securities and give them money for a day or two, because nobody thought such a financing arrangement was necessary 20 years ago. So, the Desk does not have the authority to make reverse repos [with another central bank]. Leaving aside for the moment whether it is important in our dealings with foreign central banks to have that capability, I think it is very important from the standpoint of our management of bank reserves and to meet our responsibilities to the U.S. securities market. That's because we are in the awkward position that, if at a given point in time we wanted to provide liquidity--not to accommodate their interests but to serve our own--and we wanted to do so on a temporary basis instead of purchasing the securities outright to meet a liquidity need that might last for a couple of days, we would not have the authority to do that. I do not think that is in our interest in as complex a government securities market as exists now. It is essentially an anachronism. When we look at the foreign central bank aspect to it, the debate on how many angels can fit on the head of a pin is kids' stuff compared with the debate among lawyers, accountants, and economists on whether a reverse repo is a securities transaction or an extension of credit. Since good and decent people can argue it is an extension of credit, I think we would have to be very careful in how we use that capability. My own view would be that at some point, when we actually make a recommendation, it should include the condition that it would be done only with the previous approval of the Chairman. If the Chairman were not available, then it would be done with the previous approval of the Vice Chairman, wearing my hat as Vice Chairman of this Committee but looking at the convenience that I happen to be in New York where the Desk is. That, I think, would give us adequate protection against the Desk ever thinking that this was a tool that they would use in the normal course of business. Having run the Desk myself, I know that a Manager takes very seriously ringing up the Chairman even via the ever loyal Don Kohn and saying, by the way, I would like to do something that I am supposed to do very infrequently, but now is the time. A Manager thinks that through a few times before making that phone call, and I believe that would be appropriate. Thank you, Mr. Chairman.",1199
-fomc-corpus,1996,"Just a couple of questions relevant to this issue: The real danger here, as you imply, is that there are numerous people who can envisage a reverse repo as an extension of credit. I can very readily see that there are certain countries with which the Federal Reserve Bank of New York might engage in a reverse repo and that transaction would not sit well with various Congressional committees or a variety of other groupings within this society. Do you think we should have at least some indication from the Committee as to the eligible list of countries or some mechanism for making that sort of judgment other than requiring it to be made by the Chairman or the Vice Chairman of this Committee?",131
-fomc-corpus,1996,"Mr. Chairman, I think that has great merit. The question is the form. Would you want a list or would you want a sense of the Committee concerning what sorts of countries might be on the list?",42
-fomc-corpus,1996,We do not want a published list.,8
-fomc-corpus,1996,"Yes, and we do not want a leaked list or somebody trying to obtain it through a FOIA request. A list cannot be leaked or released if it does not exist. My preference would be for us to have a discussion to arrive at a sense of the Committee concerning standards. The latter might include the requirements that a country should be highly creditworthy and not be in conflict with the United States of America in some manner. I think the Committee could give certain guidelines for the Desk and the Chairman to follow. This is not a firm opinion, but my own working hypothesis is that we would be better off to have guidelines rather than a list.",129
-fomc-corpus,1996,Perhaps they might include such a thing as the State Department's acquiescence in American citizens visiting such countries.,22
-fomc-corpus,1996,"Yes, right.",4
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, I would like to take advantage of your offer to discuss the broader principles bearing on this issue and to leave some of the details for a subsequent discussion. I think the fundamental question that underlies the several discussions of swaps in which I have participated is whether we believe that central banks should have reserves in foreign currencies that they use either to support foreign exchange markets or to address payments system problems or both. My answer to that is that I am in favor of maintaining balances in foreign currencies. I say that despite the fact that foreign exchange intervention is tricky and more importantly it is not suited in some ways to what one might regard as a pure market philosophy. Foreign currency holdings have been useful in the past and not having them seems to me to be more risky than maintaining them despite all the questions that they raise about the size of holdings, earnings, and related matters. We have accumulated a lot of foreign exchange holdings, though I gather mostly in two currencies, over the years. Swap lines, as I understand them, were put in place to provide currency balances where none existed. So, having foreign exchange balances and swap lines at the same time is a lot like having a belt and suspenders, too. Should we do away with swaps? Over the years, I have come to be a believer in the desirability of belts and suspenders at the same time. I think the combination is often a good thing, especially when the suspenders are quite cheap and are legal as in this case. I also believe that engaging in foreign exchange intervention and using swaps in conjunction with the Treasury, rather than compromising our independence, is highly useful,in providing us with an opportunity to inform and moderate Treasury actions. Treasury practices in this area can, of course, bounce back and forth depending on the policies of the Administration. It is possible that existing balances of foreign currencies may not be sufficient in some cases like the Mexican crisis. Swaps are the time-honored way of getting foreign currencies, and the fact that our swap lines have not been used in recent years except by Mexico seems fortuitous to me but not especially relevant to the issue of whether or not they should exist. The use of repo facilities is, I think, a separable issue. Repo facilities inherently involve maintaining foreign exchange balances, as I understand them. At least based on the material presented in the staff memo, I find it difficult to come to a settled conclusion on the expansion of repo facilities because I think we need a fuller treatment and fuller discussion at some point as to exactly how they are used and in what situations they are used. But based on what I know about them, I find it hard to imagine that repo facilities could replace swaps. They do not seem to deal with the issue of a lack of balances in the affected currency. What happens, for example, when there is a sterling run on Citibank branches in London? We do not have a lot of sterling balances. If this repo process is used to replace swaps, which is the implication of the memo, how does that help us deal with that? Whether repo agreements are standard or customized, they could involve a major negotiation process with every country involved, and this undoubtedly would take a lot of time and effort. In short, at least in my own mind--and I could be naive or wrong about this--it seems to be a little like mixing apples and oranges to imply that swaps could be replaced by repo arrangements. It may be that I do not understand this well, but there does seem to be a bit of a mix here.",718
-fomc-corpus,1996,"It is a mix. It is not a replacement for the actual mechanism. It is a political replacement, if I may put it that way.",29
-fomc-corpus,1996,"Yes, it certainly seems that way.",8
-fomc-corpus,1996,It is not belts and suspenders. One is a belt and the other is a raincoat. [Laughter],24
-fomc-corpus,1996,"I did not use ""belt and suspenders"" with regard to the repo facilities. It was with regard to swaps and the accumulation of foreign exchange balances.",31
-fomc-corpus,1996,Just remember a raincoat is anti-liquidity. [Laughter],15
-fomc-corpus,1996,"Because we have a December deadline on approving the swap network for yet another year, my preference at this point would be to approve the swap network. I think it would be very useful for us to engage in a more thorough review of alternatives. I certainly would like to see fewer questions and more strawmen put up as possible ways that we could deal with the issue. I would like to have some idea of how people see using a broader range of repo facilities. If we were to engage in negotiations with our counterparties, I think it would be rather arduous to get the change we want. If and when we want that to occur, the paper asks the question whether that should be linked in some way or another to the European Monetary Union. I am agnostic enough about that and what it would mean over the near term that I think we should go ahead with this reevaluation. We should look at various scenarios, but we should do it on our own timetable and not the European timetable.",198
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I appreciate the breadth of this discussion and for my purposes would like to put it in a different perspective. In my view, the first issue relating to our swap lines is our attitude toward intervention. That has been the reason for their existence, why they have been maintained and renewed. My own preference is for us to intervene on a very limited basis, and I think that also has been a very strong premise for some time for many on this Committee. I believe that should continue. We have foreign currency balances that provide us with a mechanism for intervention should we choose to use those balances in circumstances that we deem appropriate. As they have evolved over the years, our swap lines have been of very limited use, and I think they present a confusing picture about our role and intentions going forward. We should phase them out. As far as the timing is concerned, the European Monetary Union provides us with an opportunity. We may not be in a position to choose the exact timing, but it is an opportunity to phase out the swap network in a rational way without raising a lot of questions or uncertainties. I think we should take advantage of that opportunity. That brings me to the issue of liquidity, whether we call it reverse repos or lending to others. I am very uncertain about that and would not want to indicate my leanings at this time because I think we need more information and a broader discussion. I know on the basis of some of the documents that I have seen in the past that there has been a very strong reluctance to get involved in the appearance or the reality of lending to another central bank or other international financial institution. So, I would like to know a little more about the potential liquidity needs, what countries would be involved, and how we would set general criteria for providing funds if we are going to move down that road. I certainly would hesitate to do it very quickly. Perhaps it is my own ignorance, but I believe we need more information on the table before we move to a decision. And I think that is a separate issue from swaps in principle.",418
-fomc-corpus,1996,It is. Let us emphasize that it is an issue that can be discussed on its own merits.,20
-fomc-corpus,1996,I think we should do that over time in future meetings.,12
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Thank you. I thought there was a general agreement in our earlier discussions that if we did not already have swap arrangements, we would not invent them, so the question looking forward was simply one of tactics for getting rid of them. Cathy in her remarks raised some question as to whether we should invent them if we did not already have them. Another issue is who is on the list. Should we have a swap agreement with Denmark, for example, and under what circumstances would we use it or allow them to use it? In one of our discussions last year, Mr. Chairman, you made reference to the renewals of these swap lines as being like Christmas cards. I went home after that meeting and cut all foreign central bankers off my Christmas card list! [Laughter] A problem with a swap arrangement, either a current arrangement or any new one, is that it is expected to be used and the question is under what circumstances and with what unintended consequences. I think none of us was happy with the further temporary increase in our swap line with Mexico and related decisions a year and a half ago. It was messy; it was uncomfortable with the U.S. Treasury; it was uncomfortable with the IMF. It was difficult and uncomfortable with the Mexicans. We would have been better off if we had not had the swap line. I would hope that by the time the Mexicans hold their next presidential election we will not have this reciprocal lending facility. That would be one criterion I would set up. Another relates to the fact that there are only a very few currencies that serve as major standards of value in the world and every other currency is defined in terms of those currencies. One of those, the deutsche mark, is slated to go away in a couple of years. I think the kind of arrangement that we have with other major central banks whose currency competes with the dollar as an international standard of value is one thing, and the arrangements that we have with everybody else is something else again. Central banks are proliferating all over the world--in Tajikistan and places I can't even pronounce. I hope that my worst fears about the new European central bank and the new euro currency prove not to be warranted, but I believe we need to think very carefully, starting now, about what kind of arrangements we will want to have with that central bank and what kind of transactions we will be willing to engage in with it. There also are questions pertaining to those European countries that may be subjected to some severe dislocations by not being a part of the euro club and the European central bank. What kind of arrangements are they going to want to have with us, and are they arrangements that we are going to want to have with them? I think this is an extremely important issue. We do not have a lot of time, but we ought to put it in that context so that we finish this millennium with something quite different from what we have today.",590
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"On a very basic level, it seems to me that we ought to welcome the respect and the leadership role that the world, as Mr. McDonough pointed out, seems very willing to accord us and we ought to work as closely as possible with the other major central banks to keep things on an even keel and avoid financial crises. For that purpose, it seems to me that, as the world gets more complicated, we probably are going to need a quite flexible set of instruments and a quite flexible set of groupings of countries that we deal with in different ways. I am persuaded by the staff paper that the current swaps are probably an obsolete instrument, but I would be very worried about eliminating them before we are much surer about the kind of structure we want going forward. I think we need to rethink that very carefully, and we need to do it in the light of a couple sets of political sensitivities. One set is the concerns of our friends and allies around the world who are very worried, as I perceive it, that the United States may be withdrawing from the world. They believe that we have an inward-looking, to-hell-with-the-rest-of-the-world stance at the moment and that we are drawing back on foreign aid and not paying our bills that are due to international organizations. If we were to get rid of our swap lines, that might be seen as one more indication that we are withdrawing from the world. I do not think anybody around this table wants to do that. The other set of political sensitivities is exactly the one to which those people are responding--the Congressional set of fears that somehow we are going to become more entangled. So, as we structure a new set of relationships, I think we have to be very careful, first, that they are not seen as foreign aid but as mutual arrangements among central banks to avoid world crisis. They must not be viewed as give-aways because that would create some problem for anything that is an extension of credit. Second, these arrangements should not be seen as obscure, as the mysterious getting together of central bankers who might be thought to be up to no good. Politically, it seems to me that we have a very sensitive set of issues that we have to work our way through very carefully. I for one would think the first thing is to do no harm and not overturn the existing arrangements even though they may not be very modern ones.",487
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"I think the history of the swap arrangements since the early 1980s indicates that there is no need for them. Somewhat in answer to Governor Rivlin's concerns, it would seem to me that there may be political reasons for wanting to substitute something, but I think history has indicated that when it comes to the economic and financial considerations, a substitute mechanism really is not required. In addition, the more recent experience that we have had, I think, is another item on the side of the ledger in support of the view that we do not need this type of arrangement. So, without getting into what one perhaps should substitute or just add to it, I don't see where the case is at all strong that we need our swap lines.",149
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, as you know, I have registered my discomfort with swap arrangements for some time, beginning with my votes against the renewal of a number of these arrangements in late 1994. Essentially, I think swap arrangements are undesirable because their primary purpose is to facilitate foreign exchange intervention, and I do not like foreign exchange intervention. I believe it compromises or threatens to compromise the conduct of monetary policy for reasons I have outlined here before. Just in two brief summary sentences: I think intervention undermines the credibility of monetary policy by introducing some confusion as to what our fundamental objectives are as between domestic price stability and exchange rate objectives at particular points in time. Secondly, I think some foreign exchange operations could over time undermine public support for the Fed's financial independence, which is the ultimate foundation for our credibility. So, I would favor discontinuing the swap network. I was encouraged by the memorandum, which I also thought was very well done, because I sensed from it that a number of other central banks may also share these sentiments. Obviously, if we were to do this, there would be some transition problems and some technical difficulties and perhaps some perception difficulties in actually getting it done. I do not want to minimize those, but I think that if we confront them we can deal with them. As far as the timing is concerned, I would agree that if we could in some way tie this in with the EMU, that would be great. However, Tom Hoenig said it well; we do not know what that timing is going to be and I would not want to wait for that. With regard to the question that you raised and that the memo raises with respect to replacing the swap lines--if we do dismantle them--with some other kind of credit facility, I do not have answers, just questions. There are a lot of questions that we would need to ask and try to get answers to. Let me just highlight the ones that I believe would be most compelling. If we are going to do something like this, we need to be very clear as to the reason. There may be a valid reason, but we as a Committee would need to understand it as clearly as possible, and that would involve some discussion. Then there would be the mechanical issues having to do with whether to have limits on credit extensions either with respect to amount or to whom the loans might be made, how frequently they might be made, what the approval process would be, and so forth. I think we would have to establish those terms very carefully. There also would be questions about collateral. We would need to decide how what would be acceptable collateral and how it would be valued. Finally, and I guess most importantly, if we were to do something like this, we would need to try to design it in a way where we would not be seen as in any way misusing our off-budget status to make loans to foreign governments that could open us up to the kind of charges we got when we made the Mexican loan.",604
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I have to admit my general skepticism regarding the effectiveness of intervention as a means of permanently affecting the value of the dollar. I do think that there are times when other smaller countries may be able to use intervention policies appropriately to affect their currencies. So, it seems to me that the usefulness of swap lines for the United States may be questionable. But I recognize that we live in a global environment, and we may need to be able to respond to the needs of other countries. We also are not the only government institution making this policy. To the extent that the Treasury, for example, decides that it is appropriate to intervene, we need to be there and we need to have the appropriate capabilities. I am not sure that swap lines are the most efficient means of effecting these kinds of transactions. I am not even sure that repos or reverse repos are the only other kinds of financial instruments that we could use. I suspect that in today's marketplace, there may be a wider range of instruments that could be used, and before we come to a final conclusion, we need to be thinking about where we want to go as opposed to eliminating one procedure and having nothing to replace it. Whatever adjustments are made, I hope that we would not be seen as withdrawing from the international arena. I think the Fed should be an active participant in the formulation of U.S. policy. We should have a place at the table. I do think that the Fed provides continuity in the international financial arena on behalf of the United States.",309
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, I have never been completely clear as to exactly what kind of an obligation these swap lines were. What are we obliged to do? It seems to me that whenever there is a likelihood that a central bank will want to draw on its swap line, that involves a full-blown discussion and negotiation anyway. A swap agreement is not a right to automatic credit as I understand it. As a consequence, it strikes me that its very existence may tend over time to be more awkward than helpful if other central banks presume that there is a right to credit which may turn out not to be desirable from our perspective at the time the drawing is requested. So, for that reason and others that have been mentioned here, it seems to me that it would be a good idea for us to start moving slowly away from our swap agreements. An additional dimension that I don't think I heard mentioned here and that seems relevant to me would be the new level of participation and capability of the private sector to perform a lot of these functions. We recently went through an interesting pattern with the Brady negotiations and the structure that came out of that. Very recently, there have been interesting negotiations with Mexico that involved a third-party, private-sector group. I think that that is an appropriate consideration as well. I would like to reiterate two things that Governor Rivlin and others have said. First, we probably should have some idea of where we want to go before we leave where we are. The second point is that I believe this is at least as much a political as it is a financial consideration. As a consequence, as soon as we have our thinking together, I think we should begin to move very slowly and carefully out of these arrangements and to do so in the context of a broad range of considerations and discussions.",360
-fomc-corpus,1996,"One possibility is that we could move this forward if, for example, the Vice Chairman and I at meetings in Basle unofficially sounded out our counterparts concerning their views of these swaps agreements. It is very important for us to know if they think these are useless and obsolete appendages to the international financial system as distinct from a measure of embrace by the United States reflecting the United States' view of the moral superiority of our counterparties.",87
-fomc-corpus,1996,"If we were to assume a world in which the swap network no longer existed, would any formal mechanism have to be created to replace it? My own working hypothesis on that would be ""no."" In my view, what would replace it is what in a way already replaces it. A good many of us spend a fair amount of our time--I spend essentially 10 percent of my time--attending BIS meetings. I don't do that because I like the Basle Hilton, I can assure you, but rather because of the close personal relationships that come from that activity. What that means is that if we have a problem with any of the people that the Chairman sees, say, at four meetings a year and I see at ten meetings a year, we are talking with someone we know very well. So what replaces the swap network is that personal relationship. It does not mean that we do them a favor or they do us a favor. What it does is to make it possible for two individuals representing their central banks to agree on what is in the mutual interest of their central banks and more importantly their countries. If we ever got into a situation in which it was necessary to do something, including a reverse repo with, say, Germany, I think none of us would worry about whether there was a political consideration or a creditworthiness consideration. Germany is, of course, a very easy example. We would do the financial transaction only if it were very clear that it was in the interest of Germany and in the interest of the United States. As long as we keep a very close control on it, as has been suggested, then the risk factor is very, very low. Now, what that kind of approach to the world requires is a great deal of effort in figuring out which of the central banks of the world are important enough for us to spend the amount of time needed to get to know the people who run them as well as we know some of our best friends in Europe. That is a lot of work. I think one of the reasons that you, Mr. Chairman, wanted to concentrate on the overall aspects of this issue is that the people who work on this a lot like Ted, Peter, and Terry Checki from the New York Bank could perhaps be thinking of taking a look at whether, because of our rather disparate organization, we have missed some obvious candidates. I think we were a bit slow in taking the Southeast Asia central banks seriously. San Francisco was doing a good job on it; we were a little slow in New York, no question. I think Board staff was taking an interest in them. But we certainly have stepped up the degree of time and attention that we are spending on those people, I think very appropriately.",551
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I start out with some fairly basic views. I think that we have to be involved in the world and that we have to provide leadership at times. That means doing all the things necessary to build personal and institutional relationships to support our involvement. Whether one views intervention in the foreign exchange markets as desirable or not, I will guarantee, absolutely guarantee, that there will come a time when intervention is going to be something that we need to do. There may be very transitory reasons for the intervention and its effects may fade away over time, but there will be circumstances at some point where we will simply have to engage in intervention operations. As a practical matter, we will then need to have the ammunition to participate. While we may have foreign currency reserves now that permit us to do that, we will also need ways to back up those reserves to get the necessary liquidity. Whether it is swaps or something else, we will have to be in a position to do those things that are necessary for us to sit at the table and be effective players. The view that we can somehow pull ourselves out of the foreign exchange markets for all time, that we can somehow let the world go, is just completely at odds with the kind of financial structure that we have on a global basis and our role in it. If we are going to play, we need to have the tools.",273
-fomc-corpus,1996,Do we need the swaps to do that?,9
-fomc-corpus,1996,"I am not arguing about whether we need the swaps per se. I am just saying that we need the means. If we can improve on the swaps mechanism or find other ways, that is fine with me. I do not think we ought to give them up until we are sure we have something else.",61
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Mr. Chairman, I found a lot on my plate as I prepared for this meeting, and you were the chef! [Laughter] Absorbing the memo on swaps got me very close to a form of intellectual indigestion. So I am not prepared to take a very firm position at this time, but I do want to share a few initial impressions. First, the current swap network certainly appears to be for the most part an historical relic. In her comments, Cathy said that this may be fortuitous, and that reminded me of a mutual fund prospectus stating that past performance is no guarantee of future returns. That may be the case here. However, the staff memo certainly left me with the impression that not only have these swaps, except in the case of Mexico, not been used since 1982, but in the staff's judgment there was no particular prospect that they would be used for the foreseeable future. So, eliminating the swaps would be like paperwork reduction, the 303 streamlining that we are engaged in. Why do we have to meet every year and renew these arrangements when we know they are not going to be used? The main case for retaining them seems to be that it is not very costly, and there might be some political cost in dismantling them because we could be perceived as disengaging or not being a cooperative member of the team. Now, while the topic here is presumably swaps, that is not really what we are talking about for the most part. We really are talking about whether or not we believe in intervention in the exchange markets and how we feel about emergency actions when there are payments system crises as in the case of Mexico. That is the real issue despite the fact that the swap agreements have nothing to do with intervention in foreign exchange markets, except perhaps as a backup source of foreign currencies at some point down the road. Even that remains to be seen. I am not going to reach any judgment at this point about intervention in the foreign exchange markets. I will say that I start out with a degree of skepticism, but I am not so skeptical that I would remove this policy option from the table at this point. With respect to the situation of Mexico, it is interesting that their drawing is the only example of the use of our swap line recently, and it is precisely that use that is the main reason why some people want to scrap the swap line network. This might have been an ugly way of dealing with the problem, but it may be that there were no less ugly options available. Again, I want to withhold judgment on that. In terms of RPs and the merits of reverse RPs, I absolutely withhold any judgment on those issues until I have learned much more about those instruments.",553
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Mr. Chairman, I agree that the swap arrangements are by and large a legacy of times past and may have become something of an anachronism. But even if these arrangements have become largely symbolic, they do seem to me to be an important symbol of our commitment to international cooperation. Here I agree particularly with Governor Rivlin and President Boehne. I think it would be dangerous simply to dismantle these arrangements in a way that creates international tension. I do not really see these arrangements as dangerous. I understand the principle that President Broaddus has enunciated as to why they could be dangerous to our ability to conduct an independent monetary policy, but I think that fear is overblown. I agree with President Boehne that they could even be helpful on occasion in the future. I would support the suggestion that you made, Mr. Chairman, that it might be wise to look for an opportunity in Basle or elsewhere to discuss the future of these arrangements quietly with our central bank partners and to see what their reactions would be. I would not want to see needless tension created here. I also agree that before we have those conversations, it would be wise to figure out where we might want to go in the future to be able to react to suggestions that we replace these arrangements with something else. With respect to a system of repo and reverse repo-type arrangements, I think that is a possibility that is well worth exploring. But I would agree also with President Broaddus's list of the questions that would need to be addressed and answered. What do we see as the fundamental purpose? Is it to guard against systemic risk? Is it a service to our allies? Is it for our own reserve management needs? Will we do transactions on demand? Is this a privilege? Is this a right? Are there limits? With whom do we intend to deal? What criteria will we use to decide which countries? I think Governor Kelley's question about private markets and the impact that we might have on private institutions as we become increasingly large players in this area is a question that we should explore along with the broad issue of the governance structure if we proceed. We need to work out who will make the decisions and what authorization will be required. I think this is a good opportunity for the staff to go home and do some work.",470
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"It seems obvious that the original purpose for establishing the swap arrangements is no longer as relevant as it once was. I do not think this necessarily means that we should unilaterally dismantle the swap lines. They are reciprocal arrangements. If our counterparts sense that we no longer have any need for the swap lines, then it might be appropriate to begin the discussions on how best to proceed with disassembling them without unnecessary adverse reactions. Mr. Chairman, I think your suggestion of the informal discussions that you and the Vice Chairman would have with other central bankers at Basle and elsewhere is a very good initial step. In the process as we are thinking this through, we certainly should explore alternative arrangements to see if they are needed to better reflect the current state of the international exchange markets, the role we should play, and whether the swaps are needed at all. There are many issues involved, and I agree with Governor Yellen that we should send the staff back to do some more work on this, including the private market aspect that Governor Kelley mentioned. I think this should be included in the broader study of intervention and the types of tools that we would use if intervention is called for in the future. I agree with President Boehne that the odds are pretty high that we will be called on to do something sometime in the coming years. On the EMU point, I do not think we should wait to see if EMU becomes a reality before we begin this effort, although we clearly would have an opportunity at that time for implementing any change and adjustments that we need. I also think this is an area where close cooperation is going to be needed between the Federal Reserve, the Treasury, and other affected central banks and governments. It may be, as someone said, that this is more of a political decision than an economic decision in some respects. Our independence may be better enhanced if we take a leadership role on this issue rather than just unilaterally terminating these swap arrangements. We certainly do not want to add to the concern that the United States is no longer exercising leadership in the international community.",421
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"I am certainly no advocate of withdrawing from the world, Two issues have been raised. The first has to do with what I would call the dual purposes here, which is concern about withdrawal from the world versus a domestic political consideration. As some members have emphasized in this discussion, there certainly will come a time in the future when we will wish to be in a position to intervene in foreign exchange markets. I am sure that will happen. We have managed to intervene in foreign exchange markets quite a bit. I can't think of any instance since I have been here when we really had to intervene. It certainly was not because of an emergency or a financial crisis. As I recall, every time we intervened the reason really came down to what was in effect a domestic political consideration. Some major trading partner had too high a currency or too low a currency or something of that nature and that was the real motivation. It was not a systemic risk situation. There was no question about systemic risk. In every instance that we can think of, except perhaps for some hypothetical developments in the future, we know why intervention is being used. It has nothing to do with systemic risk; it is an arm of the domestic political apparatus, and I do not like that. I do not think that is what we are here for, and I think there are risks to this institution if we play that game. We really have to think about two issues. The first, as has been mentioned, is the list of countries with which we want to conduct these transactions, and related to that is the question of whether or not the other currency is a major store of value. Mr. Chairman, you indicated that we should exclude countries where the State Department does not want U.S. citizens to travel. I do not think we need a repurchase agreement with North Korea or Cuba, and I do not know where else we cannot travel, so I think that is too small a list of excluded countries.",394
-fomc-corpus,1996,Iran.,2
-fomc-corpus,1996,"Iran, okay. We do not need a repurchase agreement with Iran right now.",17
-fomc-corpus,1996,They have their own printing press! [Laughter],11
-fomc-corpus,1996,Let us think about the Indian rupee or the Chinese renminbi.,15
-fomc-corpus,1996,These are repurchases involving U.S. Treasury securities.,11
-fomc-corpus,1996,"All right, let us pick the case of a repurchase agreement with China.",16
-fomc-corpus,1996,In dollars.,3
-fomc-corpus,1996,"In dollars. Let us think about the odds that the transaction would be used to prevent systemic contagion to the U.S. banking system versus the odds that it would be used for domestic political considerations because the Chinese are selling us too many shirts or whatever it is. Do you want to give me the odds on that? I know which way it is going to come out. The only place where I think the issue gets really difficult is with the yen, which does serve as a true world store of value currency. Even in that case, it can still be used for domestic political considerations. So, I think we have to draw the net very tightly on countries with which we will undertake to do these transactions. I believe the way to think of this is in terms of the probability that we may need to intervene for good reasons versus purely domestic political considerations. The second issue is one of duration. I do not remember any discussion of this although, Bill, you did allude to it. We could have a two-day reverse repo or a three-day reverse repo, but if we renew it 100 times, it suddenly becomes what I would call a real extension of credit. I would suggest that we think hard about that issue; that would be one of the clearer lines in the sand that we would have to draw. I remember in our discussion of the Mexican bailout that we all knew we were going a bit out on a limb for a year. We viewed that as a long time, and we certainly did not want to go beyond a year. If we are going to focus on this and we want to avoid the appearance of an extension of credit, I would think that the duration has to be a lot less than a year. Maybe it should be a matter of weeks.",356
-fomc-corpus,1996,"I would be astounded, since you addressed the question to me, if the duration were more than a few days. My main motivation for getting the reverse repo capability for the Desk is that I do not want to deprive us, the FOMC, of a useful tool for our own purposes. I am not really motivated by the objective of helping other central banks around the world. A problem that sometime arises in our dealings with some of the Southeast Asian banks when they ask if we can do a reverse repo. They understand fully the nature of that financial instrument. When we say, ""No, we can't do those,"" they think it implies, because a country competitive with us is encouraging them to have that view, that we are not a cooperative central bank. It is not that they are saying they want us to do it. They are not asking for any kind of an arrangement. It is that they are thinking: Why in the world would a central bank not be able to do what would appear to be a completely normal transaction in its own Treasury securities in its own currency when it can do those any day of the week with Salomon Brothers? I have constructed answers to such questions, but in fact it is not very comfortable to have to answer them. So, I would like to be able to say that we have that technical capability, but they should not in any way have the view that we intend to use it. They have access to all those Street firms that Mike Kelley referred to and they should go and do their business with them. All kinds of people are eager to do business with those central banks, and that is where it ought to be done. On the other hand, our not having that tool available to us is a product of the fact that in the 1970s, whenever it was, nobody thought we would need it, so we did not get it. No one can recall a policy decision on this matter, but rather it appears to have been a case where nobody thought of it as something that might be needed.",413
-fomc-corpus,1996,I agree.,3
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"I have just a couple of comments. I think swaps have outlived their usefulness. My recollection is that one of the problems we have encountered with them is that foreign central banks have wanted to draw on their swap lines at times we did not think it was such a good idea. I remember some balance sheet window-dressing on the part of a country whose name has already been mentioned a couple of times here. That places us in a dilemma. They come to us with the expectation that they are going to be able to make the drawing. Do we want to say no, given that the facility is in place? It gets to be very difficult. So, I would think that we ought to try to extricate ourselves, as gracefully as possible, over time from these arrangements. In terms of where we might go, I have some sympathy in the abstract for the flexible approach based on personal relations that Bill McDonough was talking about. But this is politically sensitive stuff. There is no escaping, it seems to me, that these arrangements and transactions are politically sensitive. Where that leads me is to the view that we need some principles with regard to what we are prepared to do, under what circumstances, with whom, when, and so on. It may be that, in extremis, we will need to interpret those principles flexibly, but I assume those situations would be rare.",280
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"I am not a fan of intervention by the United States in foreign exchange markets, and in any event we probably do not need swap arrangements for that purpose. However, our swap partners might have such a need, so I am not sure what we would gain by giving up the flexibility to accommodate that need before we have an alternative in mind. I would look for alternatives and keep the swaps around until we have one. Just a word on Mexico: Nobody liked the way the Mexican support package was put together and it was certainly ugly. But I still believe that we did the right thing, and it appears that it has worked and is working and will be successful. I would keep the swap arrangement around so that it will be available in the next crisis. The idea of hurrying to dismantle it before another crisis occurs where we might use it does not appeal to me.",175
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Alan, I cannot add anything that has not already been said on the swaps issue. I do want to say that I have a lot of sympathy for what Bill McDonough said in terms of how we ought to be thinking about this issue looking forward. We ought to focus on making sure that we maintain the U.S. dollar as the principal reserve currency, and we ought to be thinking of vehicles that support that objective. That is really how I view what Bill is saying in an environment where we are apt to have larger and larger cross-border settlements and the need for liquidity on relatively short notice. The ability to provide the latter would certainly be in our interest. People are going to look to us to make sure that dollar settlements throughout the world are in fact made. We ought to be thinking in terms of a vehicle that helps facilitate that. So, I think our focus ought to be shifted away from supporting foreign exchange interven-tion, and I think swaps are an anachronism in that context in any event. We should be moving more toward payments system risk aspects and really supporting the U.S. dollar. That is what this ought to be about as we think about the future.",239
-fomc-corpus,1996,Any further comments?,4
-fomc-corpus,1996,"I just want to reiterate what Gary Stern said before. For better or for worse, my understanding of the way swaps work is that there is an activation process of some sort and then an actual use. There are principles and rules that apply and so on. I think we need to be very flexible as we move forward, and I think we ought to be responsive as a central bank. We need to be aware of the political nature of these transactions, particularly in the reverse repo situation where there is at least a debate about whether it is the same kind of extension of credit that ended up being debated. Accordingly, I think we need to have a fairly firm set of principles under which we would operate and that would not vary a great deal, except in extremis, from country to country. Those principles would be something that we would talk about in advance of actually providing dollars. I am a little nervous about extreme flexibility because I think it could lead into difficulty for us.",195
-fomc-corpus,1996,"Further remarks or questions? If not unless I hear an objection, I think we probably ought to move forward and see whether we can get some responses on this general issue from our counterparties and bring those observations back to the Committee the next time we discuss this operation. Is that okay with everybody?",59
-fomc-corpus,1996,Mr. Chairman?,4
-fomc-corpus,1996,Yes.,2
-fomc-corpus,1996,Could I remind Committee members that there is an opportunity to submit revisions of their forecasts? It would be very helpful to us if those could be sent to me by close of business on Monday to give us time to incorporate them in our draft of the Humphrey-Hawkins report.,56
-fomc-corpus,1996,"If I could just add a remark that is probably gratuitous and unnecessary, but I will make it anyway. There were many references to the tremendous importance of the upcoming Humphrey-Hawkins testimony, and that testimony is going to be infinitely more meaningful if all of us maintain a very studied silence in the meantime.",63
-fomc-corpus,1996,"Do you have a date for that testimony? Mr. COYNE. It's scheduled for Thursday, July 18.",24
-fomc-corpus,1996,The next meeting is August 20th.   We will adjourn for lunch.,17
-fomc-corpus,1996,The first item on the agenda is approval of the minutes of the July 2-3 meeting. Would somebody like to move them?,27
-fomc-corpus,1996,Move approval.,3
-fomc-corpus,1996,"Without objection. Peter Fisher, you are on.",10
-fomc-corpus,1996,"Thank you, Mr. Chairman. I will be referring to the two pages of color charts distributed this morning. [Statement--see Appendix.]",28
-fomc-corpus,1996,"Peter, I think we have all been aware of a tendency that seems to go against our theoretical preconceptions. I am referring to occasions when we have seen a significant rise in long-term interest rates, which one would presume would have a firming effect on the dollar. Yet, what obviously was happening on some days was that heavy sales of dollar-denominated securities were made in part against purchases of foreign currencies, and the dollar weakened as a result. Have you been able to segregate those episodes in which the rise in U.S. interest rates dominated what happened to the dollar in the foreign exchange market or alternatively the sale of securities denominated in U.S. dollars to purchase other currencies was the dominant force in determining the exchange rate for the dollar?",151
-fomc-corpus,1996,"We have not tried systematically to segregate those episodes. We have observed the phenomenon that you referred to, and that is something we could try to do, although it is quite tricky. I think the causation tends to run in both directions at times such as those you are referring to. So I am not sure--",64
-fomc-corpus,1996,What is required here is that sales of securities denominated in U.S. dollars occur against purchases of foreign currencies. The mere sale of U.S. securities does not in and of itself have any impact on the dollar. Is there any additional evidence related to those episodes that could conceivably give us some insight into which way the pressures on the dollar would emerge or do we face a hopeless task if we try to disentangle those market episodes?,89
-fomc-corpus,1996,"I do not want to be quoted as saying it is hopeless, [laughter] but it may be akin to looking for a needle in a haystack.",32
-fomc-corpus,1996,You will look nevertheless. [Laughter],9
-fomc-corpus,1996,"It will be quite a challenge. Let me think about that, and maybe Don Kohn and I can come up with ways to sort it out. It really is tough to do much better than to talk to as many of the major market participants as one can and get a sense of what they were seeing major accounts doing. Sometimes those accounts are liquidating bonds and moving out of the dollar at the same time, and sometimes they are not doing it coincidentally, but the effect may be the same if they are doing it over a period of time. I strongly share the impression that bond markets are traded more and more each year as we think foreign exchange markets are traded, that is, as a collection of currencies. Traders are consistently thinking that if they move out of one currency or government bond maturity, they will move to some other currency or maturity automatically. It is not automatic in the sense of being by rote because traders do make a conscious decision as to what to move into. So, we think people are trading bond markets as if they were currencies but it is very hard to pin that down.",222
-fomc-corpus,1996,Could we at least look at the Desk's records to identify these episodes and see what proportion were associated with a weakened dollar and what proportion with a strengthened dollar?,32
-fomc-corpus,1996,"Yes, we will.",5
-fomc-corpus,1996,That might be helpful just to see what the trends are.,12
-fomc-corpus,1996,"We can certainly look at the daily correlations, Mr. Chairman, to see how the bond and the exchange markets were moving. I think it is still true, though Charles Siegman may want to comment on this, that over time the dollar and interest rates tend to move together. But there is a lot of ceteris paribus behind that tendency, and it certainly does not happen all the time and every day. Certainly, real interest rate differentials might be the relevant issue.",97
-fomc-corpus,1996,"On the famous Fridays once a month, we get a lot of evidence of spikes in both directions, and that might be a useful laboratory to see what happens.",32
-fomc-corpus,1996,"Don's comment about real interest rates is obviously important. If other news in the market is interpreted in a way that leads to rising inflationary expectations, then long-term interest rate movements need not necessarily affect the dollar.",43
-fomc-corpus,1996,You are really confirming what Peter Fisher said. Jerry.,11
-fomc-corpus,1996,"I want to turn to domestic operations, Peter. Looking at the daily information you reported and your problems over this intermeeting period, it seemed to me that there were at least three significant parts of the story that were not mutually independent. But I could not tell from your reports which was the most important part of the story from the standpoint of this Committee. A part of the story simply seems to be what is going on with sweep accounts and reserves, which created one type of problem. We now have a survey to help us figure out the implications of the low level of bank balances in reserve accounts. But I don't know what to make of the other two parts of the story. One of them is the reference to foreign currency outflows, possibly Russian demand for U.S. currency, which reduced the supply of bank reserves. But it also seemed at times that there was something going on in the domestic economy such that the derived demand for bank reserves associated with the growth of bank credit was coming out differently than you expected. That is quite a different matter. If we failed to interpret correctly the demand for bank reserves coming from the expansion of bank credit, then we would make the kind of mistake that was made back in the 1970s of misreading underlying forces. That is exactly the opposite of a reduced supply of bank reserves coming from foreign demand for our currency. If we failed to accommodate that, that would be the opposite type of mistake. Do you have a sense or feeling of the relative importance of those?",304
-fomc-corpus,1996,"Let me try to answer that, and I invite Don to jump in after I have made the first stab. Your three factors were sweep accounts, demand for currencies from overseas, and then just general demand for reserves.",43
-fomc-corpus,1996,Derived from bank credit growth.,6
-fomc-corpus,1996,"Right. The nexus that we have been looking at is really the first and third together. As sweep accounts continue to ""sweep"" the nation, the level of vault cash that is applied to bank reserves becomes much more important. What we are observing here is a weekly, moving phenomenon, with Friday flows in and out for weekends, and we are experiencing some difficulty in tracking total required reserves as vault cash becomes a larger and larger, and in some cases a dominant, share of the reserves of major banks. So, I would link your first and third points. I do not know if we have any sense--I look to both Sandy Krieger and Don Kohn--that there are other sources of demand for reserves that are giving us a problem of interpretation. We are certainly focusing on this one. Don, maybe you want to comment.",169
-fomc-corpus,1996,"President Jordan, with respect to the third factor, I think the evidence for unexpected demands for money and credit or intermediation services through the banks is not strong in this period. If anything, money growth in July came in weaker than we were expecting. While it strengthened in August, it is still growing along a very moderate track. So I do not think we are seeing a situation in which we are having trouble assessing developments, other than the problems that Peter mentioned of the week-to-week and day-to-day demands for excess and required reserves. I do not think we see a situation in which we are persistently underestimating the demands for reserves because money supplies are coming in stronger and it looks as if we are accommodating a perhaps inflationary increase in liquidity. That is not a situation that we have seen, if that is what you meant by your third point.",174
-fomc-corpus,1996,"This week-to-week, day-to-day problem is clearly something we are spending a great deal of time focusing on. I think this episode reflected a unique confluence of events; everything conspired against us at the same time. But we are still focusing nonetheless on how to track the week-to-week changes.",61
-fomc-corpus,1996,"Any further questions for Peter? If not, would somebody like to move to ratify the operations of the Domestic Desk?",24
-fomc-corpus,1996,So move.,3
-fomc-corpus,1996,"Without objection. You may remember that at our last meeting, Bill McDonough and I were sent on a mission to the BIS to discuss the issue of swap arrangements I thought I would bring the Committee up to date on our discussions and suggest where I think this leaves us in terms of moving forward on the range of issues we discussed at our last meeting. I assume that Bill will want to make some remarks of his own shortly. Based on these conversations, it is my view that we should set aside the issue of the discontinuation of the swap network for the moment. We should return to this matter when a better opportunity presents itself, such as when the European Central Bank is established and we have to decide what to do with our swap lines with the participating national central banks whose currency will soon be the euro. On the current timetable, a decision on stage three of EMU would be taken no later than the spring of 1998. If it were positive, the European Central Bank would come into existence soon thereafter, although it would not start operating until January 1999. Thus, we would return to this issue in the spring or summer of 1998. On the matter of authorizing the Desk to do reverse RPs with foreign central banks, our discussion last month revealed that there are a number of aspects of this issue that the Committee would like to see addressed in the context of a concrete proposal. Those aspects include: (1) the principles that should guide the Desk in using such authority; (2) procedures that would be followed in activating the authority; and (3) whether there should be a pre-established list of countries with which the Desk would stand ready to operate. My suggestion is that the staff should develop a concrete proposal, perhaps with some options or alternatives, that would address these issues and others that were raised in our discussion at the FOMC meeting in July. My expectation is that the Committee would be able to consider the proposal at our September meeting or at the latest in November. Bill, would you like to add anything to this?",415
-fomc-corpus,1996,"Mr. Chairman, I share the view that, since the swap lines are essentially anachronistic, it would have been better if we had had a more receptive response But certainly your report on our meetings with them is absolutely accurate both in content and tone. Since those conversations took place in July, the atmosphere of the European foreign exchange markets and the future of EMU have become a little more troubled and troubling. I think that if we were seen to be trying to dismantle the swap network at this rather delicate time, if that house of stone or house of cards should fall, we could be deemed responsible, which would not be in our best interest. So, I believe that maintaining silence and assuming that the swap lines are harmless even in the worst of cases is very much in our interest. Whereas I was rather hopeful at our last meeting that we could get rid of the swap lines, what has happened in the meantime in addition to our conversations indicates that this is not the right time to dismantle them.",203
-fomc-corpus,1996,"We have to be careful not to allow what are essentially financial anachronisms to continue to embody themselves in our financial system. Were these swap arrangements a potentially dangerous or malignant problem, one could trade off the concerns of against other considerations. But that does not seem to be the problem. So long as we pledge ourselves to review these arrangements and hopefully to dismantle them in an appropriate timeframe, we probably will have done about as much on this question as I think we can at this time.",99
-fomc-corpus,1996,"I very much agree with that. I would hope that the staff could do their work so that we would be in a position to discuss the reverse repos in September. As I mentioned at the last meeting, I think the likelihood of our using a reverse repo capability would be very, very low, and we would make sure that there were all kinds of protections against ill-advised use of it. But the fact that the Desk is not authorized to use that financing instrument with foreign central banks has taken on a life of its own that I think is a bit of a problem for our relations with some countries, especially in Asia. Therefore, our having the power even if we did not plan to use it, I think, would serve our interests better than our swap lines which are an anachronism. The fact is that 20 years ago when the Committee considered the use of RPs with foreign official accounts, nobody thought we would need reverse repos, and that is why the Desk does not have the authority to use them. It is not because anybody went through a thoughtful exercise and said, ""this is an inappropriate power for the Desk to have.""",231
-fomc-corpus,1996,"There are, however, foreign policy considerations involved here.",11
-fomc-corpus,1996,"Exactly, yes.",4
-fomc-corpus,1996,Which I think the staff will address. Governor Lindsey.,11
-fomc-corpus,1996,"Mr. Chairman, I agree that this is not the time to dismantle the swap lines, but I have a question as to whether there really is ever going to be a good time. The establishment of the European Central Bank is not a foregone conclusion, although the odds may favor it. It is also unclear who is in and who is out. Even if all of Europe is included, that does not do anything for our Japanese swap line. So, I am not sure that we have identified an appropriate time as a target date to get rid of these arrangements. While this may not be the moment, it would be nice to have a little more comfort that there is a time when we think it definitely will be appropriate to revisit the issue.",150
-fomc-corpus,1996,"I think we will revisit this issue during the spring of 1998. At that point, we may conclude that the EMU is active, alive, and the ECB is about to happen. Because so many of our swap lines are with those EMU countries, we will have a window to reshuffle all our central bank financing arrangements. If it does not happen that way, we will have to address this issue anyway, and I would suspect we may just decide to drop the whole swap line network at that time.",104
-fomc-corpus,1996,"Let us think about what the ECB is going to look like in 1998. I do not have the complete list of countries that we have swaps with, but I would wager that some will be in and some will be out.",47
-fomc-corpus,1996,"That may be, but the ones that will be in will provide an opportunity for us to readdress the issue. We can use that as the vehicle.",31
-fomc-corpus,1996,"Would it not be even more disruptive if we started to talk about getting rid of the swap lines at a time when, say, there was a great debate as to whether France or Britain met the criteria--I am just using that as an example--and we had some of Europe in and some of Europe out when the decision was made to go ahead with the ECB? We would encounter all the delicacies and ramifications of European politics if we raised this issue then. I would think that, if anything, that would be an even more sensitive time than the present.",113
-fomc-corpus,1996,"It is conceivable that you may be right. I doubt it myself, but I think our conversations with",20
-fomc-corpus,1996,"That is, not now?",6
-fomc-corpus,1996,"Not now. It may well be that when we review that again in the spring of 1998, if that is our plan, we will at that point conclude that we face such a mess that we will bite our tongue, so to speak, and say nothing about the issue. My guess at this stage is that the probabilities of the swap network disappearing by mid-1998 are well in excess of 50 percent. If I have my way--I have a vote, you have a vote--it will be gone. But there is obviously more here than merely the question of financial arrangements. Indeed, the financial arrangements would no longer be relevant if the issue inadvertently turned into a diplomatic hassle. Yes, President Jordan.",145
-fomc-corpus,1996,"I have a question and a suggestion also. In your recommendation that we put this aside for two years, could you elaborate for us on Mexico and maybe Canada too with regard to the arrangements that we have with them?",43
-fomc-corpus,1996,"I think the NAFTA arrangements are essentially independent of this issue, and because they involve a different issue we will evaluate them completely separately from the other swap lines.",32
-fomc-corpus,1996,"Okay. Then, concerning what happens two years from now, I know this Committee cannot bind the Committee two years from now, but in the past we have been in the situation where the presumption was, it seems to me at least, that we would continue such arrangements unless somebody bore the burden of persuading the Committee that it was the time to end them. At this point, I would like to have at least a presumption of a soft sunset provision that says the swap arrangements will be terminated two years or so from now unless somebody makes a compelling argument that they should be continued. Such an understanding would reverse what I sense is the environment that we are in now. I know it would not be binding two years from now, but it would help my comfort level a great deal if the general view of this Committee was that we should not renew the swap lines after two years.",177
-fomc-corpus,1996,"I certainly do not want to take a vote on this question. But if you are asking me personally, I agree with you.",26
-fomc-corpus,1996,Good.,2
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"I was going to make basically the same point that Jerry Jordan did, Mr. Chairman. I understand the timing problem currently, but I think Larry Lindsey is right. It is very difficult to find a convenient time to do this. I am concerned that we are going to continue to drift with this issue, and I was happy to hear your response to Jerry's question. Two years is a long time down the road. Maybe we can take an opportunistic approach to this issue as well. [Laughter] If there is an opportunity and circumstances change or it looks as if we might be able to make progress sooner, I would not hesitate to do that.",132
-fomc-corpus,1996,"It is conceivable that something may happen. The EMU may break down. Events may differ from what we expect. We all know the types of changes that can occur in the international financial system, both planned and otherwise, and circumstances could alter that system. All I am saying is that this issue will be back on our agenda no later than the spring of 1998. Any further comments on this issue? If not, let us move on to Mike Prell.",94
-fomc-corpus,1996,"Charles Siegman will start us off this morning, Mr. Chairman.",14
-fomc-corpus,1996,Thank you. [Statement--see Appendix.],9
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,It had been the conventional wisdom in the business community that a strike tends to be inflationary in the sense that it creates an artificial degree of pent-up demand. That demand gets unleashed when the strike terminates and potentially induces some acceleration of economic activity that would not have occurred without the strike. Are you aware of any systematic analysis of that hypothesis?,69
-fomc-corpus,1996,"I am not aware of any. Certainly, in this particular set of circumstances, were there not to be a major damping of underlying demand trends--and I do not see why that would necessarily occur from a strike of plausible duration--the attempt to make up the lost production to meet the pent-up demand for autos would press pretty hard on capacity. The GM strike in March, as we have seen, created some turbulence in the data, and GM had to press production pretty hard after the strike. In that recent period, we did not see major price increases in the auto industry. So, the bottleneck there does not seem to have resulted in a lot of inflationary pressure.",136
-fomc-corpus,1996,What is the earliest date that a strike can occur?,11
-fomc-corpus,1996,"Our understanding is it would not occur before the expiration of the contract, which I believe is September 14. So, we presumably will have some information around the time of the next meeting. The strike target is, as I gather, to be announced on August 22.",55
-fomc-corpus,1996,August 22.,4
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"My memory on the subject of strikes is short because I have not been coming to these meetings for very long, but I was struck by the number of times the notion of a ""strike"" appeared as a factor underlying the analysis in the Greenbook, particularly in Part II. There were references to strikes that had just ended and to the potential for a strike in the auto industry. I am wondering whether the principal effect of strikes is not so much their near-term impact on economic activity or inflation but rather their longer-term impact on people's perceptions of the relative power of labor unions versus management despite the decline of membership in labor unions in this country. It's an impact that is occurring in an environment in which there seems to be a great deal of concern about whether Wall Street, shareholders, and management are enriching themselves at the expense of workers' standards of living. So, I am wondering whether, even if a strike does not have an immediate inflationary impact, its potential to affect even nonunion relationships between labor and management may be significant going forward.",208
-fomc-corpus,1996,"That would depend on how the strike came out, whether, for example, it was a significant management victory.",22
-fomc-corpus,1996,"Yes. But just the fact that a strike occurred, I think, is something that is--",19
-fomc-corpus,1996,"Well, I wonder. That is not so clear to me. There have been significant strikes in the past where evident union defeats had a very damping effect on labor unions. For example, the flight controllers' strike, which was quashed, did more to suppress union power than almost anything else in the 20th century.",65
-fomc-corpus,1996,"Yes, but I think that was in an environment in which people generally felt that unions were detrimental to the overall competitiveness of U.S. industry. They may still feel that way, but I think there is much more of a feeling now that the wage earner is the one who is bearing the brunt of efforts to improve U.S. competitiveness.",70
-fomc-corpus,1996,"I would just note that in this auto industry situation there also are peculiarities that people will be focusing on in terms of whether the union is able effectively to set a pattern after they have negotiated an agreement with one of the auto makers. I think there are major questions about the mechanics of this negotiation process with the three auto makers. So, there will be a lot of grist for the analytical mills that look at how labor relations work.",88
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I want to ask Mike Prell two questions. But first let me comment on what we have heard on the strike issue from auto supply companies and competing firms in our area. Maybe you have been hearing some similar or perhaps different things, Mike. Our contacts tell us that for General Motors, if they decide to take a strike, it will be a ""no lose"" situation in the sense that they must be victorious or they will have to break up the company. There is a very strongly held view among some of the firms in the industry that for General Motors this is a life-and-death situation because their costs are so much higher than Eaton's and TRW's and some of the auto supply parts companies that they absolutely must get concessions. It really does not matter to them what Chrysler and Ford get. GM needs significant concessions to survive in this view. I have two questions, Mike, and I think they are unrelated. The first has to do with what Charles Siegman had to say about the second-quarter numbers. Typically when we get surprises and revisions of numbers there is one of these two responses: Either they carry forward in the same direction or they produce mirror image offsets in the subsequent period. What is your tentative judgment about the implications for the third quarter and the second half based on the firmer numbers you now have for the second quarter, which are different in some respects from what you thought they were going to be at the time of the May Greenbook? If you want me to, I will let you respond to that before I ask the second question.",315
-fomc-corpus,1996,"There is little I can say at this point because I do not really know the details of these revised data. One obvious implication is that, if our estimates are correct, we will have stronger final sales and stronger output. We also will get the same kind of inventory level that we estimated before, which suggests that inventory positions may be even leaner relative to sales than we had anticipated. Obviously, that might have some favorable implications going forward. Now, we are not talking about night and day differences, but we would lean in that direction. We also want to look for whatever evidence of export trends there may be in these data, and we shall have to make a careful assessment of that. Charles, maybe you know more.",145
-fomc-corpus,1996,"Again, we have few details. For example, with respect to the composition of the decline of more than $2 billion in imports, about one fourth is accounted for by automobiles, and automobile exports went up a little. Inventory movements play a role in this sector. We just do not know how that will work out. Imports of industrial supplies also declined $700 million. This is not a sign of economic strength. Again, we are looking at very preliminary information, but eyeballing the monthly trade data from the beginning of the year, it now looks as if the large May import number may have been the outlier because it was relatively high. The number we have right now for June is similar to that for most of the other months of the year, but that again is the first impression.",159
-fomc-corpus,1996,"The other question, Mike, has to do with Greenbook projections for the period. I was struck by the increase in nominal GDP of about .3 percentage point from the last half of this year to the end of 1997 with the same assumed federal funds rate. I noticed that starting with the fourth quarter of 1994, your four- to six-quarter projections for nominal spending associated with an unchanged funds rate were remarkably stable. This is the first instance where you raised nominal spending growth with a given funds rate. I tried to find in the Greenbook or in your briefing this morning why you now expect, given an unchanged funds rate, spending growth to be more rapid for the next year and a half.",143
-fomc-corpus,1996,"This nominal GDP change is so small that it is going to be very hard to pin down all the factors that go into it from different directions. I don't think there is a major story here because, as I have said before, we do not approach the forecast in terms of taking interest rate assumptions and from that drawing directly a forecast of nominal GDP. It is a complex process. There has been a reassessment of some of the price series and relationships that have crept into the analysis. We do have a situation where we have a bit more inflationary pressure because of (1) a lower starting point for the unemployment rate, (2) the minimum wage hike, and (3) we are impressed by the wage data in the first half of the year that are tending to push us to a forecast that has a little more of an inflationary cast. Given the nominal funds rate, we have a little more inflation and a monetary policy that is a little more accommodative as measured by real interest rates. If you put these things together, they end up producing a nominal GDP path that is a little higher even with essentially the same real path.",230
-fomc-corpus,1996,"I have thought about that linkage, but the problem with that response is that I cannot convince myself that it is not circular. If you assume that we have had an inflation surprise, for whatever reasons, and you now think inflation could be higher than you previously thought--and as a result real interest rates would be lower than you previously thought--that does not necessarily lead to higher nominal spending growth. In my framework, that means we could have higher velocity growth, and I do not see that happening from this dynamic of higher inflation and lower real interest rates.",111
-fomc-corpus,1996,We have a monetary accommodation implicit in our forecast.,10
-fomc-corpus,1996,Then you are saying faster money growth.,8
-fomc-corpus,1996,We let the money stock be whatever it will be. Whether it actually comes out faster in our forecast is also a function of how the recent developments have influenced our views of the money demand relationship. We do not have faster money stock growth in this forecast.,51
-fomc-corpus,1996,That is based primarily on the observation that the incoming money growth data are a little weaker than we had anticipated.,22
-fomc-corpus,1996,"You have to have a budget constraint and central bank money in your framework, so you are telling me that velocity growth is going to be higher. I don't see how that follows from this linkage.",39
-fomc-corpus,1996,What we assume is that monetary growth will accommodate the maintenance of a nominal funds rate in the face of the growth of aggregate demand.,26
-fomc-corpus,1996,"The way we go about this is entirely endogenous. As you know, a nominal interest rate, particularly one that is the Committee's target, is not a nominal anchor. I think that the process that Mike described is exactly what went on.",48
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mike, revisions in the Greenbook forecasts prepared for recent meetings have been quite small. But I think they have been in the direction of raising the rate of inflation and to some extent, I guess, the level of real GDP. In light of that, could you comment on the likelihood that the slowdown during the forecast period will be enough to relieve inflationary pressures?",73
-fomc-corpus,1996,"We do not think there is enough of a slowdown in our forecast to relieve inflationary pressures. Basically, what we see is that the evidence on wage behavior in the first half of this year supports the view that we are operating at a level of resource utilization that is incompatible with maintenance of a steady rate of inflation in the economy. We are not in such tight conditions, particularly looking at the capacity utilization side of the picture as well as the labor market side, that we would anticipate, absent external shocks, a very rapid pickup in inflation. But we would expect some gradual updrift.",118
-fomc-corpus,1996,"The change in the forecast in the last couple of meetings and some of the comments in Part I of the Greenbook, which I must admit I found striking, seem to suggest that you see the prospects of a more favorable outcome as probably lower now than you did at the time of the previous meeting or the meeting before that.",65
-fomc-corpus,1996,I think our confidence in our assessment of the implications of this level of resource utilization has grown with the latest wage figures.,24
-fomc-corpus,1996,I see. Thank you.,6
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Just getting back to the potential for a strike, someone in the auto industry described this period to me as the calm before the storm since nothing really happens until later this week when a target is selected. The key issue, of course, is outsourcing for General Motors. They manufacture a lot more parts themselves, as we all know, and they need to get more flexibility in outsourcing these parts. Of course, the selection of the target is important because if GM is not selected, Chrysler will be. Chrysler could agree to some provisions that would not hurt Chrysler but would hurt GM in terms of this outsourcing issue because Chrysler does so much outsourcing. Compensation increases do not appear to be an issue here. The unions already have a cost-of-living escalator in their agreements; no one is really talking about changing that. They have profit sharing already. The profit sharing agreement for Chrysler workers has paid them very high benefits recently. Of course, the last time they negotiated, they won a lump sum payment and there is a high probability they will get that again. But that does not go into the base of the compensation.",222
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Mike, I agree with your characterization of the productivity data, but I think the business community would take sharp exception to it. Everywhere I go they talk about the tremendous productivity improvements that they are achieving. I must say that I am increasingly uncomfortable about our ability to reconcile the two sources of information. I wonder if you have given that some further thought and have any new information?",75
-fomc-corpus,1996,"I've observed what you well know, that the data certainly are supportive of the notion that there has been in the past couple of years a continued quite rapid improvement in productivity in manufacturing. We get reports from business executives that they can produce as many widgets now as they did a few years ago with twice as many workers then. I think the data are not completely inconsistent with the reports we get anecdotally from the manufacturing sector. In some of the nonmanufacturing sectors, we get into the difficult problem of measuring the output, and it is conceivable that output growth is being underestimated. The only caveat in this regard is that, when we look on an aggregate level at what has been happening to output and what has been happening to unemployment, the relationship has held up reasonably well. We had some veering off seemingly in 1995, but we now seem to be pretty much back on track with that basic Okun's law relation. Ultimately, we think that is of critical importance because it tells us where resource utilization levels are headed for given measured levels of output growth.",216
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,"Are there any further questions for Mike? If not, would somebody like to start the Committee discussion? President Hoenig.",24
-fomc-corpus,1996,"Mr. Chairman, the economy in the Kansas City District, like other parts of the nation, has slowed, in our case from a very strong to a still strong rate of growth; it just is not as strong as it was a few months ago. Our directors confirm the positive tone in the region's economy, with many reporting healthy gains in businesses throughout the District. The rail transportation industry, for instance, is reporting solid gains in rail traffic, and operations are at full capacity right now. The signs that regional growth has slowed through the summer include indications in our latest manufacturing survey of slower growth in output than in our previous survey last spring. Construction contracts and housing permits, consistent with data for other parts of the country, also have shown some easing, but it has to be emphasized that the easing has been from very high rates. On the agricultural side, grain producers continue to do very well at currently high prices while the cattle industry is still suffering somewhat. Our labor markets continue to be tight. Reports of wage pressures, while still sporadic, are becoming more frequent now, and we are seeing some efforts to address those pressures through improved benefits. So, I think inflation prospects are worsening somewhat in our regional economy. On the national economy, we continue to see an outlook for growth along the lines reported in the Greenbook. I do not see a lot of differences in our projections and those in the Greenbook. We agree with the Greenbook that, even if the expansion slows somewhat, the rate of inflation will register a very modest 1/4 point increase this year and maybe another 1/4 point next year, all other things held constant. I think that is the outlook we have to deal with here today or in the next few meetings. Thank you.",356
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. The Beigebook summary this time starts off with a statement that the national economy continued to expand in June and July, but it points out that there was some slowing in some areas and in some sectors. I think that characterization describes reasonably well what is going on in our region. There are signs of slower growth in some sectors over the last month or so. For example, the growth of consumer outlays for durable goods other than automobiles appears to have decelerated a bit, and there is some evidence from one of our regular monthly surveys that the pace of manufacturing activity is a little softer than it was earlier. But I would emphasize that this moderation in growth is still a pretty tentative development at this point. At least in our region, it may reflect in part the unusually wet summer we have had. At this point, it is not at all clear how long this trend will persist, if it persists at all. Moreover, I would make the point that it is a moderation from a very robust rate of expansion in the second quarter, as I know was the case in many other regions of the country. Overall, most of the comments we hear from our directors and other business contacts are still mainly upbeat. They suggest that District business activity has settled into a groove at a very high level of activity even if there has been some deceleration in the rate of growth recently. There are still pockets of very robust activity in certain parts and sectors of the District. For example, on the commercial real estate side, the market for Class A office space is very tight here in the Washington metropolitan area. Whatever may be happening to housing nationally, residential construction is really booming in West Virginia and there are a couple of very large resort and hotel projects under way in that state. Again, the bottom line is some moderation in the rate of growth in the District, but the level of activity is still very high. I emphasize this point about the level of District activity because that, it seems to me, is where our focus ought to be in looking at the national picture this morning. Given the greater-than-expected growth of the economy in the first half, it seems to me that the level of activity nationally is really quite high. It is reflected in a number of ways, of course, but it is especially apparent in the tightness of labor markets and the recent behavior of wages. Consequently, even if the growth of aggregate demand decelerates in the period ahead, as the staff points out in the very first paragraph of the Greenbook and Mike Prell has repeated again this morning, the pressure on resources is still likely to push the trend rate of inflation up a bit, perhaps to above 3 percent over the projection period. To me, that is the central feature in the economic outlook that we really need to focus on most closely at this juncture. If we get an outcome like that, it will be inconsistent with our public commitment to hold the line on inflation. Moreover, as I understood the discussion that we had at the last meeting about our longer-term price objective, while there was some disagreement around the table as to whether we should try to push the trend inflation rate below 2 percent, there was general agreement that we ought to move in that direction, and this projection is saying that inflation is going to be moving in the opposite direction. It is true, of course, that the latest incoming data suggest that the economy may be slowing somewhat from the second-quarter pace. In particular, as we all know, employment grew more slowly in July, but as was mentioned this morning, there certainly are signs of strength in some of the data. Initial claims are at a very low level in recent weeks, as Mike pointed out. The Greenbook is projecting a third-quarter gain in aggregate hours at a 2 percent rate. That's lower than the second-quarter pace but it's still above trend, which means that labor markets are likely to tighten a bit further. Tighter labor markets in turn could foster greater job security, and that raises some questions about the extent and duration of the current softening in consumer spending. But whatever the outlook may be and whatever the debate may be about that outlook, the main point seems to me to be that even if we do get a fairly sustained and marked deceleration in growth, we still have an inflation risk that we need to be aware of and come to grips with. One final comment about wages: I think we ought to be quite concerned about the first-half pickup in the ECI. One can interpret that pickup in several ways. I am inclined to interpret it as a fairly straightforward bit of additional evidence that underlying inflation pressures may be increasing at least to some extent. Obviously, an increase in wages is not inflationary if productivity is rising. Like Gary Stern, I hear a lot of anecdotal comments that suggest productivity may be rising, but it seems to me that we do not yet have any really compelling evidence that the trend rate of productivity is rising. I guess it is also possible, along the lines of the argument in Governor Yellen's paper that was distributed at the last meeting, that the increase in the ECI reflects a corresponding increase in the equilibrium real wage, perhaps because workers are more secure in their jobs now than they were before. If that is happening, then obviously that would not be inflationary in and of itself. But in my view it would still constitute an inflation risk since firms will try at some point to push those wage increases through to higher prices if they can get away with it. They will refrain from doing so only if they are forced ultimately to absorb the increases. For my money, that is where the Fed and its credibility come in. I think we need to insure that our policy stance will maintain a pricing environment that is hostile to such pass-throughs. I think we need to send the same message that a famous resident in Bob Parry's District, Clint Eastwood, used to send, ""don't even think about it."" [Laughter] Thank you.",1217
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"That is a hard act to follow! [Laughter] The Seventh District economy is still operating at very high levels, but it is expanding at a slower pace than in the first half of the year. Housing starts and permits increased rather sharply in the Midwest in July and partly made up for weather-related delays that we experienced in June. Manufacturing activity in the District continues to be strong and light vehicle production reached an expansion high in July. Growth in consumer spending slowed considerably in July, but information from retailers points to some pickup in early August. One of our directors said the Olympics had a very real retarding effect on retail sales, especially during the first week. He indicated that sales have picked up since the Olympics ended, though the tempo is down from earlier this year. While reports were mixed, other retailers generally noted some sales improvement since July. Reported auto and light truck sales for July were down sharply from June, but July's 14.2 million pace exaggerates the degree of slowing in demand for light vehicles for reasons that were discussed in the Greenbook. So far in August, our reports suggest that sales have moved up to the 14.8 to 15 million unit range, assuming no special factors will distort the numbers this month. This is consistent with the modest slowing in sales that we have been expecting for the second half of 1996. On employment conditions more generally, the news is the same. Labor markets remain tight in the Seventh District and we continue to experience unemployment rates below the national average. Future hiring plans seem robust. We have an advance copy of Manpower's latest national survey, which will not be publicly released until next Monday, August 26, that shows stronger fourth-quarter hiring plans relative to a year ago. The strength is fairly widespread across industries and across regions of the nation. The survey indicates the best holiday job gains seen in 13 years for wholesale and retail employment. Recent reports from our contacts continue to show an uptick in wage rates. Wages in the paper industry are up 2-1/2 to 3 percent this year compared to 2 to 2-1/2 percent last year. Wage settlements in the steel industry are under 3 percent, but these replace contracts with no wage increases at all. As discussed in the Greenbook, the upcoming increase in the minimum wage will affect entry-level and near entry-level wages. The Greenbook analysis assumes that hourly workers earning over $6 an hour will not be affected. However, one major retailer indicated that their employees with wages of $8.50 an hour would be receiving wage increases as a result of the minimum wage hike. So I think the Greenbook is understating the impact for those employees earning over $6 an hour. More generally, on the price front most reports still indicate that inflationary pressures are contained, but we have had some scattered reports of more rapidly rising prices. In agriculture, this year's harvest may not significantly ease the tight supplies in grain markets, but very high grain prices are cutting demand from abroad and from domestic users. The related cuts in livestock, milk, and poultry production will extend the recent upward pressure on retail food prices well into next year. Turning to the national outlook, our assessment is similar to the Greenbook's with economic growth over the next year and a half returning to a pace near the growth in potential output. We expect real GDP growth in the second half of 1996 to be in the range of 2-1/4 to 2-1/2 percent. But even this moderation in growth will likely leave the economy's resource utilization at a rate high enough to increase inflation, as Mike Prell and Al Broaddus mentioned in the discussion. In other words, aggregate demand will exceed potential output. We are already beginning to see some of these resource strains reflected in recent compensation data. In addition to the anecdotal reports that I mentioned, second-quarter ECI data suggest rising wage and cost pressures, and I am concerned that the recently favorable trends in benefit costs will not be sustained and that growth in total compensation will increase even further. As we discussed last time, the risks to inflation are on the up side. I think the information that has become available since our last meeting suggests that these risks remain on the up side and may even be slightly higher than they were six weeks ago.",878
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, economic growth is strong in the Twelfth District. In California, job growth picked up noticeably in the second quarter, and the unemployment rate fell about 1/2 percentage point. In July, the California unemployment rate edged down further, and payroll jobs continued to expand at about the second-quarter pace. Economic activity in the State of Washington also is picking up as aircraft production rebounds and the software business continues to be good. Job growth has continued to be strongest in Nevada, Utah, and Idaho. In the second quarter, employment growth in these three states was about 7 percent at an annual rate, twice as fast as the accelerated 3-1/2 percent second-quarter pace for the nation. Employment growth in Oregon and Arizona has continued in the 3 to 4 percent range, and we even have seen some improvement in our laggard state, Hawaii, where economic conditions were deteriorating until recently. For the national economy, the recent news is consistent with our forecast of a moderate slowdown in real output and employment during the second half of this year. Thereafter, we expect real growth to stabilize at around 2 percent in 1997, although our projection is predicated on a slight tightening of policy over the forecast horizon. However, the recent news is also consistent with our general assessment that the economy faces an acceleration of wage and price pressures. We have reached levels of labor and capacity utilization that are inconsistent with steady inflation. Indeed, we anticipate an acceleration of inflation in 1997 on the order of 1/4 to 1/2 percentage point in a wide variety of price and compensation measures. Thank you.",332
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, while the economy may be slowing somewhat nationally, that is a bit hard to see in New England right now. Job growth is steady, unemployment rates in the region are low--a full percentage point below the nation--and pressures in the job markets are growing as employers find it hard to hire skilled and in some cases even clerical workers. Wage increases are picking up, with increases of at least 3 percent the norm, and reports of up to 5 percent are not uncommon. However, inflation concerns remain low with the expectation that wage increases will be offset by productivity increases. Manufacturing conditions have improved. While jobs in this sector continue to decline, New England's rate of decline is now marginally less than that for the country as a whole. By some estimates, the manufacturing job picture is better now than it has been since the late 1980s. Our contacts in the manufacturing sector are upbeat overall, with areas of particular strength noted in medical supplies, furniture, and construction-related products. Construction jobs also have grown at a good clip, in part reflecting an increased pace of activity in the construction of Boston's Central Artery project, which in nominal dollars is the most expensive highway project ever undertaken in this country. Residential construction has picked up as well. At least in the western suburbs of Boston, much of this construction involves very high-end, high-priced single-family homes. The commercial real estate markets are vibrant in many areas. There has been virtually no new construction, and with growing economic activity, conditions are markedly improved, especially in Boston. This is true also in Portland, Maine and in suburban Rhode Island as well as in a number of other suburban locations around the District. Retailing remains highly competitive with disappointing results for many. Tourism has been very strong, with a major influx of foreign visitors. District loan growth, as reflected in the data that we get from five large banks that report monthly, continues to decline as it has throughout 1996. However, this trend largely reflects the balance sheet restructuring that has been going on at Fleet since the Shawmut and the Nat West mergers. Officials at Fleet have indicated that their balance sheet adjustments are over. Loan data for the District as a whole, which tends to be heavily dominated by three or four institutions, may soon start to reflect trends associated with economic rather than acquisition activity. Turning to the national scene, we agree with the Greenbook's assessment that the expansion will slow, possibly to potential, through the rest of the year. We also agree that the sources of the slowdown lie in domestic demand, especially in the interest-sensitive sectors of residential construction, consumer durables, and business fixed investment. We are not quite as optimistic as we usually are about the sources of foreign growth that are shown in the Greenbook. We wonder, however, whether there isn't a certain amount of risk, and I think Mike addressed this, that GDP growth will be stronger than is reflected in the Greenbook in light of the recent declines in long-term interest rates, manageable levels of business debt, recent moderation in the growth of consumer debt, the unknowable effects of an inventory bounceback that may be even larger than is anticipated in the Greenbook, and the continuation of rather buoyant equity markets. Moreover, the risks that wage cost increases will push overall inflation higher seem even greater than the risks that GDP growth will be greater than we expect. Given the overall credibility of the Greenbook forecast, we find possible and certainly credible the assumption that price increases will be moderated by productivity improvements at this point in the business cycle or by shrinking profit margins, but we wonder whether there isn't a good deal of risk in this area. Thus, we believe the inflation situation as measured by the core CPI is likely to be marginally worse than is forecast in the Greenbook if no adjustments are made to policy.",773
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"The economy in the Philadelphia District appears to be on a modest uptrend that has tilted down from a somewhat faster pace earlier in the year. Manufacturing is growing but at a somewhat slower pace. Delivery times, while lengthening in the spring, have shortened more recently. Retail sales growth, quite healthy in the spring, has eased during the summer months. Nonresidential construction is flat and the pickup in residential construction appears to be decelerating. Employment growth is improving slightly and some labor markets are tight while others still have slack. Price and wage pressures on the whole still seem to be reasonably contained in the District. Turning to the nation, at the last meeting in early July we hoped that more information would help settle two questions--whether growth would moderate to a more sustainable pace and whether wage inflation indeed is beginning to accelerate. On the sustainable growth question, I think the bottom line is that the weight of the data suggests a moderating growth trend but how much moderation is far from clear. On the wage question, the larger first-quarter gain was repeated in the second. Once again, however, sizable wage gains were offset by a small rise in benefit costs so that total compensation has been rising at essentially the same rate in 1996 as in 1995. On the whole, price pressures remain remarkably subdued for this stage of an expansion. Reasonable people can easily come to different conclusions about the outlook at this point. My hunch is that we may see appreciable slowing in growth because of subdued personal consumption, more modest growth in business fixed investment, and some slackening in residential construction. At the same time, upward wage pressures will not likely bubble up into upward price pressures as much as one might think because of continuing offsetting smaller benefit costs and strong competition for products and services. Nonetheless, in this environment I think we need to continue to monitor demand and price pressures very closely.",379
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. The economy of the Atlanta District remains moderately strong. The big news over the last six weeks, to no one's surprise I'm sure, has been the impact of the Olympics. Some businesses in Atlanta and other Southeastern cities were somewhat disappointed by the spillover effects. In general, the level of spending during the Olympics was in line with expectations of about $4 to $6 billion spread over six years. While that spending was a nice bonus for our region and it left behind some really desirable infrastructure that will be lasting in its impact, it was really small potatoes when compared with just the Georgia economy which generates over $160 billion in income per year. District residential real estate markets generally can be characterized as healthy though activity is now slowing after a one-year growth spurt. Multifamily and commercial real estate markets remain strong. I mention that because continuing growth in each of these markets at both the regional and national levels bodes well for the Southeast manufacturing sector, where the production of construction materials and durables is significant. While the forecast for durables production remains fairly good, our region's important apparel industry continues to hemorrhage. In the second quarter, year-over-year job losses totaled 42,000 for the combined apparel and textile industries. While the goods-producing sectors are expected to produce some new jobs over the last half of 1996, as will be the case nationally, the majority of the new employment positions will likely come from retail trade and services. The pockets of labor shortages and related wage pressures that have continued to be reported in parts of Georgia and Tennessee should be alleviated somewhat by the tens of thousands of individuals previously committed to Olympics-related construction and services. As those people seek alternative employment opportunities, which clearly exist in the District, we think we should have a smooth and rapid transition into the post-Olympics period. My outlook for the national economy has not changed materially since our last meeting. While the economy seems to be running with little slack in the labor markets, as evidenced by the low unemployment rate and relatively high participation rate, productivity seems to be high when we take account of anecdotal information. Hence, any wage pressures can reasonably be viewed as reflecting those productivity gains rather than an inflationary threat that necessarily will be passed on to prices. At the same time there are signs of the deceleration in activity that we have been forecasting, although they may be preliminary at best. Many fundamentals point to slowing investment and there are signs that the predicted slowdown in housing is finally being realized. The earlier buoyancy in consumer spending seems to be moderating and the saving rate is edging up, at least marginally. I have to admit that inventories are lean and consequently to the extent my expectations for slowing in demand growth are disappointed, we will likely see an immediate impact on domestic production. All things considered, I still think we are in an enviable position with no major imbalances. Real GDP growth will, I expect, average a little over 2 percent this year and probably under 2-1/2 percent next year, and this is with the broader-based measures of inflation continuing in my view under 3 percent. As at our last discussion, I'm unconvinced that our policy stance currently is tending to make inflation worse. So, the favorable news on employment and output is less worrisome to me than it might be otherwise. My inflation forecast continues to show no acceleration for 1996 once we take account of the effect of earlier oil price increases, which seem to be playing out as we had expected. Unlike the Greenbook, when we examine the likely effects of the minimum wage legislation, we see no serious impact on inflation expectations when we take account of recent evidence of the substitution of capital for labor, productivity gains, competition, and job restructuring. Thank you, Mr. Chairman.",771
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"The economy in the Eleventh District has remained on a firm uptrend throughout the summer. Conversations with our directors and other contacts suggest continuation of more of the same, with some minor slowing during the remainder of the year. There are two and possibly three areas of weakness in the District economy. First, the drought is still a factor, but overall it's not exerting a material impact on the regional economy. The semiconductor industry has continued to weaken since the last FOMC meeting; unit orders for semiconductors continue to fall. Some types like microprocessors and digital signal processors have been in strong demand, but this has not been sufficient to overcome the weak demand for memory chips. Several Texas semiconductor firms have announced layoffs or hiring freezes, with the result that employment at firms manufacturing electronic equipment fell at a 6 percent annual rate in June. This industry represents about 12 percent of Texas manufacturing employment and 1-1/2 percent of Texas nonagricultural employment. Construction of single-family housing is still strong but most builders and real estate contacts expect a noticeable slowing in the coming months as the impact of higher mortgage rates begins to take hold. Several sectors of the District economy have continued to improve. Improvements in the Mexican economy have spurred retail sales gains along the border, and we hear that affluent Mexican shoppers are back in large numbers in the Houston Galleria area. The energy sector continues to expand, with every available rig in the Gulf of Mexico reported to be under contract. The anticipated softening of housing construction may be a good thing because it will free up badly needed resources for the construction of industrial warehouse space, commercial real estate, and maybe a year from now a rebirth of office building construction, which has been almost dormant in our area for a decade. Vacancy rates in suburban markets have fallen considerably in the last year or so, and office rents are beginning to reflect the shortages of available space. A similar churning in resource allocation is occurring in electronics manufacturing. Falling chip prices have helped Texas computing manufacturers. Advances in technology are beginning to reduce the demand for paging devices and to boost that for personal communications services devices. This has shifted the demand for a wide range of workers to businesses located only a few miles away. Overall, the national economy seems to be performing quite well. I agree with the broad outlines of the Greenbook forecast. The rate of economic growth will likely slow somewhat in the months ahead, but inflationary pressures could begin to accelerate, although I don't think that is guaranteed. On the question of the inflation outlook, it is somewhat surprising to me to see all the emphasis that people in this room place on wage-push inflation, which I recall learning in school was dependent on an accommodative monetary policy. The first line of defense is productivity improvements and the second is Clint Eastwood's ""don't even think about it"" monetary restraint.",574
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. Tight labor markets continue to be the rule in the Eighth District. The District unemployment rate was less than 5 percent in both the first and second quarters, the lowest since the 1970s. The strike of 6,700 McDonnell Douglas machinists that began June 5 remains unsettled. The company has maintained output so far with replacement workers. Anecdotal evidence in a survey of more than 200 District enterprises indicates quite persistent wage pressures. About one-fifth of the firms surveyed are planning to increase prices in the third quarter and few are planning cuts. District automotive output is expected to jump appreciably in the fourth quarter, although much of this increase reflects the boost that is normally associated with the introduction of new models. Because of strong demand for models produced in the Eighth District and increased capacity this year, the number of cars and light trucks built in the District by Ford and Chrysler is expected to be 22 percent higher this year than last year. Although the District economy is operating at a high level, a variety of indicators suggests that growth is moderating, which is a picture that we have heard described by a number of people around the table. For example, year-to-date growth in District payroll employment lags behind last year's pace. An exception is residential construction where employment continues to grow at a vigorous rate and permits are well above year-earlier levels. Loan growth at District banks has decelerated from the high rates observed last year, matching the national pattern. The most recent Senior Loan Officer Survey suggests that the slowdown may be partly due to a tightening of lending standards. On the ag side, crops are in fairly good condition across the District. The rice crop is down from a year earlier because land has been diverted to other crops. Overall, harvests are expected to be larger than last year, though down from the records of two years ago. Nonetheless, District farm income should increase substantially this year because low inventories are holding up prices and federal outlays for farm income and price support programs will be higher over the next few years under the new farm bill. At the beginning of the year, the Committee took out an insurance policy against the risk of a slowing economy. As events have unfolded, the outlook is much better today than it was then. Most forecasters see real growth holding close to the long-term trend through 1997. In July, the Committee's central tendency forecast for real GDP was a full half-percentage point above the estimates that we presented in January. Because real growth in the second quarter was above trend, forecasters naturally expect some slowing. Earlier figures on retail sales and factory orders for July confirm that view. There also was a decline in job growth in July and a decline in the index of hours worked. It is worth noting, however, that 193,000 new jobs in July, though down from the figures for earlier months, are still well above the growth of the working age population of about 110,000 to 120,000 a month. All said, the real economy seems to be in good shape entering the sixth year of the expansion. Whatever the outlook may be for the real economy, we must be concerned about the rising inflation trend. This rising trend can be seen in the staff's projections. CPI inflation touched its low for the current expansion in 1994, accelerated a little in 1995, and according to the Greenbook, will accelerate a little more in 1996 and yet a little more in 1997. CPI inflation was 3-1/2 percent at an annual rate in the first seven months of 1996, up from 2-1/2 percent over the 12 months of 1995. Last year, we could see signs of falling inflation in August that showed up in the data in the second half. This year all of the signs--tight labor markets, the prospect for further increases in food prices, the pending labor negotiations, inflation-jittery financial markets, fairly rapid growth in M2 and in sweep adjusted Ml, and high levels of long-term interest rates relative to current inflation--suggest that inflation pressures are building. We have taken a risk this year by failing to respond to the unexpected growth in both output and prices. We should not want increasing inflationary pressures to get built into expectations as happened in the late 1970s and again in the late 1980s. Absent the kind of inflation credibility that announcement of a firm commitment to price stability would give us, we need a strong response to signs of incipient inflation pressures. As I read the Greenbook, these signs are becoming increasingly clear. Thank you.",944
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The District economy remains healthy. I have been impressed most recently by strength in many of the natural resource industries. Labor markets continue to be tight and if anything they have tightened a bit further. They are so tight in fact that my kids have found jobs! [Laughter] As far as the national economy is concerned, I read the situation much like the Greenbook. Wage increases clearly are more rapid. They are not offset currently by improvements in productivity, and I think increased price pressures are likely to result. I would like to comment briefly on an issue that has intrigued me recently, though I must admit it is something that is hard to quantify. It is the use of personal credit cards by small businesses, by entrepreneurs, for business purposes. There is no question that this is going on, and I strongly suspect that it is increasing in volume and breadth. I say that because of the anecdotes that I have been hearing; one just has to raise the subject to hear from almost anybody in the small-business arena how they use their credit cards for business purposes. It is not surprising given the teaser rates that are available and the ease of credit card applications as opposed to applications for small-business loans at banks. I think the consumer credit data are being affected by this phenomenon because the small-business people I talk to do not tend to pay this borrowing down; they tend to roll it over from one teaser rate to another and indeed to build up an increasing volume over time. It does not mean that we ought to be sanguine about credit-quality issues. Of course, that depends on whether we believe small businesses are more likely to repay this type of borrowing than consumers. I do not have any convictions about that. But I think it does mean that when we look at consumer credit data relative to something like disposable income, we may be getting a misreading of credit exposure because the denominator is not quite right. What we want to include in the latter is business revenues, business income, or cash flow, or something like that. I have discussed this with Don Kohn and I do not think we have much data on it, but it is something that we may want to bear in mind as we think about some of these credit versus income issues.",455
-fomc-corpus,1996,Do you have any idea what the order of magnitude might be?,13
-fomc-corpus,1996,No. I really do not.,7
-fomc-corpus,1996,These involve 15 or 16 percent interest rates?,11
-fomc-corpus,1996,"No, not on the teaser rates. These are 5.9, 6.9, 8 percent rates, and they are available without any effort. Applications just show up in the mail.",41
-fomc-corpus,1996,"By using these cards, small companies can offset considerable expenses that they otherwise may have. For example, a small business may previously have had credit cards that were being charged to the company's account and may have incurred sizable clerical costs to reconcile the charges and various business expenses. Diners Club, for example, will now give all of a small firm's employees a credit card against the employees' own credit. The firm avoids the need to reconcile charges. And if there are enough employee names on the list, the firm does not have to pay the first year's billing costs, and it can switch to another card and do that fairly easily.",126
-fomc-corpus,1996,It sounds like a decisively sound business practice! Vice Chairman.,13
-fomc-corpus,1996,"Thank you, Mr. Chairman. At the last meeting I reported that the Second District economy had been expanding rather rapidly. It has continued to expand but at a somewhat slower pace in recent weeks. From May to June, the growth of payroll employment decelerated from 2.1 to 1.4 percent in New Jersey and from 2.1 to 0.1 percent in New York State. June unemployment rates were essentially unchanged at 6.3 percent in New York and 6.1 percent in New Jersey. Our retail trade contacts reported disappointing sales in June and July after a very strong spurt in May. Growth in permits for the construction of new homes slowed in June, and realtors reported similar softness in existing home sales for the July and early August period after a robust second quarter. In contrast, the commercial office market continued to improve. Growing demand for office space in the absence of new construction pushed June vacancy rates lower throughout the greater New York metropolitan area. Regional price pressures have remained subdued. The 12-month gain in the New York-northeastern New Jersey CPI was just 2.7 percent in July compared with a 3 percent rise in the national index. That continued a 3-year trend of relatively lower regional price inflation. Going forward, we believe that expansion will continue in the District. The government restructuring in our District states is slowing this year. The drag on job growth from manufacturing continues, but it is less than it was in the past. Modest overall job growth continues, and as we look ahead to next year, we think that the government restructuring will slow even further, manufacturing declines will moderate, and we will continue to have strength in business and consumer services. So, the District economy looks as if it is beginning to behave better than it has since the 1990-91 recession. We have, however, what may wind up being a rather difficult problem for New York State coming from the welfare reform bill to be signed this week. The New York constitution is unique among state constitutions in that it requires that the state provide and I quote, ""aid, care, and support of the needy."" So, it looks as if some of the effects of the welfare reform bill simply cannot take place in New York State. The state is at least as litigious as any other part of the country, and therefore it is almost certain that because the state constitution says the needy have to be taken care of, lawsuits will seek to prevent the state and the cities from making any changes. The level of welfare is already higher than that for the nation. In New York State, 17 percent of all children receive AFDC. That compares to about 14 percent at the national level. The maximum benefit in New York City is $577 a month for a family of one adult and two children. That compares to $367 as a national average. So, we could have a situation in which the already fairly severe fiscal problems of New York State and New York City could be aggravated. What one does not know is whether there will be migration caused by changes in welfare. The scholarship on the subject says that people do not in fact migrate because of differentials in welfare payments, but we could get into a situation that does not involve a differential as such but rather migration from a state with no welfare payments for a family to New York State, which would be constitutionally required to provide welfare support. We do not know exactly what this is going to do to the state's economy. As of now, the political leaders of the state seem to be rather quiet on the subject. Turning to the national economy, our forecast is somewhat different from that of the Greenbook on both growth next year and not surprisingly, therefore, the effect on the CPI. We have fourth-quarter-to-fourth-quarter real growth slowing to 1.7 percent in 1997 as compared to the Greenbook's 2.1 percent. We have the overall CPI at 3.1 percent; the Greenbook has it at 3.3 percent; and we have core CPI creeping up and touching, although not passing, the 3 percent level in the fourth quarter of 1997. Our forecast is based on an assumption that, looking at the employment cost index, there will be a gradual upcreep in wage inflation and that the sharp reduction in the growth of benefits that the economy has been enjoying will at least slow down. We have the growth in benefits plateauing, and I think that any model used for a forecast should include such assumptions rather than ones that are more optimistic. The board of directors at the New York Fed, which is a particularly interesting board that includes a very good cross section of strong-minded, bright people, is of the very strongly held view that the forecasting models are missing what they think are two changes affecting the performance of the economy. First, with regard to benefits, their very firmly held view is that the rise in benefit costs will continue to drop. At most in their view, we will have a respite in which there may be a bit of a slowdown in the reduction of benefit cost increases. But they hold very strongly to the view that the managements of firms will have to continue to reduce benefit costs. They will do it by pushing those employees who are not yet under managed care onto that health care system and then forcing the providers to rationalize further. The net result will be to keep benefit costs dropping. Again, we have not assumed that in our forecast, but it is a very firmly held conviction by my board members and one that I have difficulty not sharing. The other thing that they think we are missing relates to the view that if there is some increase in wage costs, at this stage of the business cycle it would not be wise to assume that we would be rescued from its effect by high productivity growth. They are very strongly convinced that business simply is not being run in a way that assumes business managers will pass on rising costs by increasing their prices. Quite to the contrary, the people running businesses are aware that the only shock absorber is a reduction in profitability. Since business executives are not hired by their stockholders to have their firms' profitability squeezed, they are going to work even harder, as in the benefits area, to make sure that their businesses continue to be rationalized. Therefore, cost pressures will simply not occur and will not be passed on in inflation. If you were to listen to these wise people, you would say that the trend in the inflation rate will in fact continue to be down. I do not know if that is likely to be the case. I don't think it is certain enough by any means that one should put it into any kind of official forecast. But since in our view the present stance of monetary policy is not creating an inflation problem, one would not have to believe any portion of what my board members believe to conclude that rising inflation is not a problem. Thank you, Mr. Chairman.",1406
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Thank you. I had been thinking fairly positively, feeling pretty good, about things since our last meeting in early July. Then, over the weekend, I got a call from my tenant in Los Angeles who said he had lost his job and was breaking his lease and moving to New Jersey. Then I read the Greenbook and that depressed me further. So, I am not quite sure whether the change in my mood since July is affecting my view as to what is the right thing to do at this point. In agriculture in our region, this will be a down year for farm income. There was a fair amount of crop substitution. Farmers were able to plant more crops than they earlier thought they would be able to, but the yields are going to be down and the price effect is not going to compensate. So farm income is expected to be down, and the banks in the farm areas expect some pressures to come from that. One of the issues that we kept hearing about through the spring and into the early summer, even at the last meeting of our board of directors, was concern about speculative excesses, especially in the high-tech sector. But with the sharp overall adjustment in the prices of high-tech stocks on the Nasdaq earlier this summer, that concern has pretty much vanished from the reports we are hearing. We deliberately went out to see if we could find stories of other forms of speculation that might be symptoms of inflationary excesses in the real estate sector, whether with respect to construction or bidding up land prices, and we simply did not find evidence of that in our region. We likewise have focused a fair amount of attention on the auto situation because of the very widely held view that GM is building inventory, that it wants a strike, and that it plans to take a strike to get some very significant changes in work rules. But we also are hearing about a fair amount of militancy on the labor side as well. I am not sure how all that will net out. We asked people what was being done by businesses or by anybody in their communities in response to the possibility that there will be a GM strike. A lot of our communities are very heavily influenced by General Motors. The responses were that nothing was being done. So, I am not sure what the effects of a strike would be if that assessment is correct. The steel industry says that its orders are flat. Orders for steel-producing equipment to renovate and expand domestic facilities are down very significantly and are expected to decline further in 1997 because of what is characterized as looming overcapacity in the domestic flat-rolled steel sector of that industry. However, exports of steel-making equipment are very good. Our contacts also believe that the recent increase in steel imports will fall off so that domestic demand will be relatively flat going into next year. District employment is mostly expected to be flat at very low levels of unemployment, and there is little talk of wage pressures in spite of continuous reports of tight labor markets in large and small communities. We have heard some interestingly mixed views about the minimum wage increase. One surprising response from two different sources was that the perceived adverse effect on retail and fast-food companies, which would expand less or possibly contract in some cases, would be offset by increased applications for employment at other firms. Contacts at investment and bank branching companies said they were looking forward to the minimum wage hike because it would mean that more people would be applying for their job openings. In construction, a labor leader said that union halls were empty but that was not leading to wage pressures. He said the response of workers to this situation is not to look for higher compensation. When we asked what was happening around the region as a result of tight labor markets--and we confirmed the responses in other ways--we were told that business firms simply were postponing projects throughout Ohio in particular and also in central Kentucky and to a lesser extent in parts of eastern Kentucky. Businesses mainly are saying at this point that they are not going to get the projects finished anyway before bad weather sets in, so they are just planning ahead for next spring. Their expectations now are that in 1997 construction will continue to be very good in our part of the country. In banking there are consistent reports throughout the region that loan growth is slowing, including housing and auto loans. I don't know to what extent the auto loans may reflect the decline in auto sales that we saw in July--these reports may be lagged--but the reports provide consistent indications that bank lending has softened. There also has been some deterioration of credit quality. Both the bankers on our three boards of directors and our community bank advisory council have told us a lot of stories about poor credit quality. Some banks were doing spot checks on credit ratings. A consulting firm that is now offering this service went back and rescored all the consumer credit files of a bank and found a very sharp drop in the scores of the same individuals compared to two years ago. The main reason for the drop was the credit card debt that these consumers had incurred in the interim. All the bankers reported slower payments, higher delinquencies, increased bankruptcy filings, and larger allowances for chargeoffs as they finish out the year. The thinking about 1997 is that the volume of credit extensions will be down, the quality of accounts will worsen, and bank profitability will decline. So, they are in a negative mood about that. It's the sort of thing that Governors Lindsey and Kelley cited as a potential development earlier in the year. It seems to me from what we are hearing that such concerns are now becoming more common. Let me turn to some remarks about the national economy. We have heard this morning about the hope that real growth will slow. In one sense, I hope that real growth does not slow down. If it turns out that the investment boom that we have had for some 3 to 4 years has strengthened productivity more than is being assumed, then we could enjoy more output growth without the concerns that we all feel about inflation. But if we are going to experience slower output growth over the balance of this year and into 1997, then of course we need slower growth in the demand for that output. The arithmetic of the Greenbook is that inflation is going to increase and that is why I was disturbed by the upward revision in nominal GDP. Even though it is only .3 percentage point, the higher nominal spending growth continues for the next six quarters. If we are right in assuming that output growth is going to slow because of capacity constraints and if the assumption is right that nominal spending growth is going to increase for whatever reason, then we have baked rising inflation into the cake and that is unacceptable.",1338
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. In the fourth quarter of 1994 the unemployment rate dropped rather precipitously from 6 percent and above, where it had been for some time previously, down into the 5-1/2 percent range where it has been ever since. It also was right around that time that capacity utilization in manufacturing began to drop from its peak of around 84.3 down into the low 82s. For the past eight quarters, including this one, we have been pretty close to living in an economic nirvana. GDP growth has been right on trend: 4 quarters over 2 percent, 1 quarter at 2 percent, 3 quarters under 1 percent. The economy has been operating either at or very close to capacity with very little, if any, gap between potential and actual output. Unemployment has been steady at around 5.5 percent, capacity utilization as I noted has been declining slowly, inflation is flat to down, core CPI has averaged 2.85 percent. If it turns out that the core CPI has been overstated by a percentage point or so, that means that we have been even closer to an economic nirvana. Other measures such as the deflator and the chain indexes have been lower in absolute levels but the trend has looked the same. The expectation going forward in the Greenbook is for more of almost the same through 1997: capacity utilization steady at 82 percent, unemployment steady at 5.4 percent, and GDP growth right on trend at 2.1 percent. At least that is close enough to trend for government work. Government work, you know, is defined as measuring with a micrometer, marking with chalk, and then cutting with an axe. [Laughter] But there is one big difference in the forecast that we have been discussing. That is that inflation will start to rise, and that is projected to start to happen right about now. The Greenbook shows the core CPI moving up to 3 percent this quarter and to 3.2 percent next year. That would represent a half percentage point jump in a year's time, and I presume that if the forecast were extended, the trend would continue to be up from there, ceteris paribus. Now, that certainly would not be acceptable to me or probably to anyone else in this room. And I am afraid that the .3 percent increase that we got in the CPI in July could be a harbinger of things to come. If we are going to get this rise in inflation, how would it happen? We have been discussing all morning that it would be through rising compensation costs that would get passed upstream into prices. If that is going to happen, several things in some combination have to occur. First, the rising wages obviously have to drive unit production costs up materially. We do see that beginning to happen, possibly through the ECI and certainly the new minimum wage law. But the increase in production costs will have to be high enough to overcome productivity growth, which I continue to believe is under measured, and the flatter benefit costs that the Vice Chairman spoke about a few minutes ago. That certainly could occur. There is no doubt about that. But the other question is whether some pricing power will begin to re-emerge in the economy. We still have a world with a lot of slack in almost every economic sector. There still seems to be fierce competition everywhere in the domestic economy. I have not heard of any easing in the consumer's fierce resistance to price increases. Also for this to happen, it would have to imply that business would be able to refuse to compromise their very strong profit margins. Historically, of course, they have compromised them when they needed to. I suppose that it would also imply the likelihood or need for a lower dollar. These conditions for pricing power to re-emerge are not in view insofar as I can see. Nevertheless, could all of this come together and perhaps result in an inflationary surge? Yes, indeed; I do not think there is any doubt about that. But can we be confident that is what will happen, especially very soon or starting now? On the basis of the long-term historical record, I think we probably would be persuaded that that is in fact extremely likely. But on the basis of developments over the past two years, it is a little more difficult to be convinced. It is quite possible that we could roll on along like we are for some time. I do not know how long, certainly. What happens then is virtually anyone's guess in such a period. Admittedly, that is a very sanguine outlook, and frankly I am not a bit comfortable with it. It is dependent almost entirely on an early and substantial slowdown in the expansion, and I have a special concern in that regard given the possibility of a new inventory surge. But the slowdown has to happen if that happy outlook is to ensue. It seems to me that the risks are distinctly on the up side, but for the moment I would say let us continue to give it a chance.",1027
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Thank you. We clearly are still struggling with the same two questions that occupied us at the last meeting. First, is the economy slowing or likely to slow quickly enough to trend to at least stabilize the unemployment rate at the current level? Secondly, is the current level of the unemployment rate definitively below NAIRU so that it ensures a trend toward higher inflation? The Greenbook gives us an optimistic answer to the first question and a pessimistic answer to the second. The data available since the last meeting gave me a little more confidence in my answer to the first question but still left me with uncertainty about the second. There has been a lot of mention around the table already of the risks of higher inflation as a result of that uncertainty. But I hope that we won't ignore the fact that the slowdown has the potential to allow the economy to sustain trend growth at the current level of unemployment with modest, stable inflation at least for some period. While the persistence of the slowdown is hardly assured, the data that have become available since the last meeting provide evidence of slowing that we could only anticipate then. This certainly reinforces my confidence in the slowdown projected by the staff, and that is also very consistent with the consensus of private sector forecasters. So, I think a provisional ""yes"" is in order for the slowdown scenario. Of course, what we are talking about here is really a knife edge--slowing just to trend. So we obviously are going to have to revisit this issue and adjust as necessary. The real key is the second question; that is the heart of our problem. The staff forecast answer to the second question is as follows: The unemployment rate is already below NAIRU and will remain so after the projected slowdown, resulting in a gradual, persistent deterioration in inflation. The minimum wage increase is an ingredient in the staff forecast of higher inflation, but it is a spice not the substance. The fundamental source is the conviction that the current unemployment rate is incompatible with stable inflation. The problem we face in acting on this forecast is that the pattern of rising inflation that it projects going forward should have been under way for some time and in fact is not yet evident. The data available since the last meeting, while somewhat mixed, did not alter this interpretation. The staff views the benign inflation environment in recent quarters as a temporary aberration relative to longer-standing regularities. Technically, the excellent inflation performance is a mirror image of poor model performance. The forecast of higher inflation going forward simply reflects confidence that this model error will diminish or disappear. But it is very hard to dismiss the fact that the extraordinary performance of inflation in recent quarters raises serious doubts about the estimate of NAIRU compared to what it was in earlier periods. As a result, my answer to the question of whether or not the current unemployment rate is below NAIRU has taken into account not only the estimate of NAIRU based on a longer period, but also the details of the inflation performance over the last couple of years. Indeed, estimation techniques that weigh the more recent data more heavily suggest that NAIRU has declined recently and may be close to 5-1/2 percent today. The inflation picture is even more impressive than many acknowledge. More broad measures of inflation have declined than have appreciated; they show no signs of broad-based acceleration and in many cases even hint of ongoing disinflation. Consider particularly the recent patterns in the chain measures of the GDP price index, the gross domestic purchases price index, and the PCE price index. The inflation rate in each case is about 2 percent over the past year and below 2 percent if it is measured net of food and energy components when that breakdown is available. Each of these measures posted a lower inflation rate over the year ended in the second quarter than over the preceding year. At least for the available core measures, each of these inflation measures was near its recent low in the second quarter. The CPI in contrast is closer to 3 percent than 2 percent, and there is less evidence of ongoing deceleration. But even for the CPI, both overall and core inflation rates were lower over the four quarters ended in the second quarter than over the previous year. The ECI data do challenge us, and we are seeing some signs of higher wages. I think we ought to take into account that, given the slowdown in the rise in benefit costs, some increase in wage pressures should be passing forward the benefits that firms have received from those lower benefit costs. So, we want to focus on total compensation, not just on wages. There has been some edging up in compensation; it is fairly small so far, and given the projection of some compression in profit margins, it is also quite compatible with stable inflation at least for some time. In case all this may seem too optimistic, let me end with a cautionary note. There has been some discussion around the table of the potential, or even the reality, that we are already facing fast productivity growth or that we might see some in the future or that faster productivity growth might offset any increase in compensation. My reading of the data leaves me somewhat concerned about that interpretation. Productivity growth over the last three years has been very low, below 1 percent. If we look at the productivity trend over that three-year period--when, after all, the economy has been growing at a rate averaging close to what we thought was trend over that period--one would think that productivity growth during that period also would be close to trend. In that case, we might reach the judgment that the productivity growth trend is a half percent rather than a percentage point. I think we need to monitor this path very closely. But if the trend rate of productivity growth has in fact downshifted, then the growth of potential will turn out to be much slower than the Greenbook projects. The slowing in growth that will be required to reach trend will need to be more aggressive and less certain, and the price inflation that we should expect from the current trend in nominal compensation will be greater. But for now, steady as she goes.",1223
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. At the last meeting I thought we would have more information by now. We certainly have more data, but it is not clear to me that we have much more real information. We are into the sixth year of this expansion and, depending on how we measure them, we have had either two or three soft landings. We are now coming off a strong second quarter. People around the table have discussed whether we are either in for another soft landing or a continuation of relatively strong growth. I must say that I am quite impressed by the unanimity around the table in terms of the outlook, which seems to be settling on the notion of moderating growth. Clearly, the factors pointing to further growth that we have been citing over the last couple of meetings are still in place. In fact, I think some of those factors have solidified. Financial markets generally continue to support growth. With the decline in long-term rates, the yield curve has come into a flatter and more normal alignment. We have had some excitement in the equity markets during the intermeeting period, but much of the correction, particularly in the blue chips, has reversed itself and there has been substantial recovery. If we were to have additional correction or a sideways movement, that probably would be a healthy development in that it would allow earnings to catch up. So, I think the equity markets remain a quite reasonable source of capital. Banks generally appear to be providing ample credit and they seem to be adjusting their credit terms to changing circumstances. Inventories are in reasonably good shape. Growth in business investment is down from 1994 and 1995, but this sector of the economy is still a contributor to the expansion. As long as people are working, I do not think that we will see a big pullback in consumption expenditures. On the inflation front, a lot of people have commented on the surprisingly good inflation numbers, and I think that performance is particularly notable in view of the length of the current expansion. We have had an uptick in some of the indexes, although it can be said that food and energy largely explain the increases in the CPI, the PPI, and the prices of crude materials. The core indexes all show improvement in the last twelve months over the previous twelve months. We do not get as many readings on the deflators, which are broader-based indexes, but they also show improvement over the last twelve months. Where do we go from here with respect to inflation? The outlook for energy prices is considerably improved. I think that food prices remain a risk. Labor cost pressures are firming and are likely to remain a risk. With regard to the recent ECI data, it is hard for me to believe that aggregate compensation costs can be held down forever by improvements on the benefits side. I hope the members of President McDonough's board of directors are right and that we are on an ever downward trending slope in the benefits area, but I have to tell you that I am skeptical. I can certainly understand why some of the benefit costs may go down. State unemployment insurance costs surely could go down, but improvements in other components seem unlikely to be sustainable. Assuming that at some point we do not get further improvement in benefit costs, total ECI is going to be exerting more pressure than we currently are seeing. The question will be whether business is going to absorb these cost pressures either through the traditional squeeze on profit margins or through improved productivity. I am sure that I do not want to wade into the productivity measurement morass. The recent performance of inflation leads me to believe that the economics profession does not have a good handle on productivity measurement. I am sensitive to the comments by manufacturers that we must be doing better than the estimated 1 percent trend in productivity improvement. But in case the statistics are right, we still have the profit-margins safety valve. As much as business managers do not want to report declining profits to their boards of directors, they have had to do so on occasion. So profit margins remain a safety valve. In sum, we have had additional confirmation of an economy that is on a sustainable growth path or even better. There has not been any significantly bad inflation news since our last meeting, but I have to say that the risks remain on the up side.",867
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I think Governor Phillips said it well when she said we have more data but not more information, and maybe that is good. I have two observations. The first is on the business use of credit cards, which I think is certainly happening. In fact, small businesses have always used credit cards as a means of finance, and that use has expanded. It has expanded in part because a lot of the small businesses that are created now involve people who had lost their previous jobs through downsizings or are now in a relationship with their employers that involves consulting. As a result, it is natural for these people to go to credit card financing. However, that is not necessarily a basis for optimism. First, if the entrepreneur is not careful, the apparent 6.9 percent or other low rate of interest is in fact quite expensive financing because, if the entrepreneur is mingling private consumption debt with business debt, the IRS will quickly disallow the deduction of the interest. For example, for a middle class entrepreneur, a 6.9 percent credit card debt is like a 10.8 percent business loan. That tax consequence has not been featured in Money Magazine or on the front page of the business column of the Wall Street Journal, but I think entrepreneurs will be finding out about it soon if in fact that is what they are doing. Second, with regard to the riskiness of credit card debt, it is important to recall that the proprietary type of income is in the personal income numbers. There is no real capital behind what these people are doing. They are basically in the service sector. There may be a computer in the business; but we all know what the resale market for computers looks like, so there is no significant amount of capital behind what they are doing. In a sense, they are giving themselves a consumption loan, but they call it a business loan, and they pay themselves higher salaries than otherwise with the difference in interest. The result is no different from anyone else running up a credit card debt to buy, say, a vacation. So, I think Gary Stern's point is well taken, and if anything I think we should be a little more concerned about small-business-based financing than we are about general financing with credit cards. As far as the economic data are concerned, we are going to get more data and we may or may not get more information in the intermeeting period. Where I would think that we have a risk, however, is not in the U.S. economy. I think our risk will stem from the activities of our good friends located not far from the Federal Reserve Bank of New York in the Second District and our compatriots around the world returning from the beach and looking for a source of money to be made. In fact, there is a great deal of money to be made in speculating on the European Monetary Union or nonunion or whatever. In that regard, there are two obvious events and probably a lot more that are not obvious. One is the French budget, which will be a fake and everyone knows it. The question is, how much of a fake? That should cause a little instability with regard to the franc/mark convergence. The other event--to call it an event really is not fair --is the Italian government, which provides an ongoing spectacle. France and Italy both are risky. I think there will be lots of bets on both the franc and the lira and maybe on the Spanish peseta that will tend to push money into marks. For some reason that I am not fully comprehending, the consequence is not just a mark/franc gain or mark/lira gain. The dollar tends to lose when the mark appreciates. I think this situation is risky for us for two reasons. The first is a long-run fundamental reason and that is that a weaker dollar will result in a net stimulus to the U.S. economy at a time when we really do not need any extra stimulus. The greater risk is that it will tempt policymakers to intervene. I think that would be a serious mistake. We should be ever vigilant in watching the data come in, but I see that as the key piece of information that actually poses a policy risk for a potential intermeeting move.",856
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"I had naively hoped that with the long intermeeting interval and so many key data releases that the fog of uncertainty hovering above the forecast might lift by the time of this meeting. Unfortunately, as many of you noted, the body of incoming data has provided only modest illumination with respect to the two fundamental issues that cloud the outlook. Those are, as many of you have indicated, whether aggregate demand is poised to slow toward trend and whether core inflation is in the process of accelerating. My answers to these questions really are identical to those of Governor Meyer. On the first issue, I agree with him and many of you and with the analysis of the Greenbook. It seems to me that most labor market and demand-side indicators along with the Beigebook and other anecdotal reports do offer tentative evidence pointing to a slowdown in demand growth beginning this quarter. But, unfortunately, the extent and timing of the moderation in demand remain highly uncertain and significant risks remain. I would enumerate two. With inventory-sales ratios at relatively low levels, a surge of inventory investment with attendant multiplier-accelerator feedbacks seems to me to be a definite upside risk. Another risk is from the stock market. Present market valuations appear to be based on earnings expectations that are highly optimistic. Market participants could easily be disappointed, particularly if productivity performance is disappointing and wage pressures intensify, thereby setting the stage for a very significant correction. With respect to the inflation outlook, my opinion is little changed from last time. Labor markets clearly remain tight, but unemployment has not decisively broken out of its recent range. And, as Governor Meyer emphasized, broad measures of price inflation are still declining. If one smoothes through the noise, it seems to me that the trend toward a more rapid pace of wage and salary growth is quite firmly established. At the same time, growth in benefit costs remains well contained, at least thus far, and I also found the Vice Chairman's comments about the prospects here a hopeful sign. The bottom line is that we have a very mild acceleration in the pace of nominal compensation growth, which is of course what matters to unit labor costs. In spite of this uptick, though, nominal compensation growth still remains well below the pace that historical econometric relations would be predicting, and the uptick may thus simply reflect a rebound toward a more normal level. So, assuming that productivity growth recovers somewhat toward its past trend of roughly 1 percent--and I agree that is a significant assumption--or that profit margins erode somewhat, I think that the present pace of compensation growth should be consistent with stable inflation rates in broad measures of product prices. Now, suppose someone, and that someone is not I, firmly adheres to the view that the economy is currently operating at NAIRU and not below it. Can one point to anything in the recent pattern of wage and price behavior that would provide strong evidence against that view? Here I would agree with Governor Meyer; I think the answer is no. On the other hand, historical evidence strongly suggests that NAIRU is higher than 5.4 percent, so it would be both dangerous and foolish to discount the possibility that the modest uptick in compensation that we are now seeing is the beginning of a process that, if left unchecked, will lead to gradually accelerating inflation. I think the minimum wage increase does compound the risks. When I reviewed the transcript of our last meeting, I found myself in strong agreement with the way Governor Kelley summarized the situation and, of course, with what he said today. Last time, he noted that ""it is very correct to be suspicious of the notion that this time things have changed because assuming that is a classic trap and frequently a loser's cry."" I completely agree. He then went on to reason, as he did today, that there are actually very strong indications that things have indeed changed. I also agree. [Laughter] In other words, I am ""conflicted."" I consider the Greenbook inflation forecast pessimistic simply because it assigns virtually no weight to the possibility that things have changed.",818
-fomc-corpus,1996,"Governor Rivlin, top that.",7
-fomc-corpus,1996,"Let me put a slightly more positive cast on the same facts. It seems to me that we are being a little hard on ourselves. Actually, we should be fairly pleased not only with the way the economy is performing, but with our general understanding of it as expressed at the last meeting. There may have been no defini-tive data during the intermeeting period, but at least there have been no surprises. Everything that has come in has been pretty consistent with what we thought. In July, we knew that the economy clearly was growing above its potential, that labor markets were very tight, that there was beginning to be some indication of wage acceleration but offset by the behavior of benefit costs, and that there was little or no evidence of accelerating price inflation. We were all a little queasy about the forecast of a slowdown because we could not see the slowdown anywhere in the available data. It was not happening yet, and there were two big questions. One was, would the slowdown in fact occur and begin to be evident? And the more fundamental question was, could we continue to run labor markets this tight without incurring accelerating inflation? To put it more technically, was there a NAIRU and where was it? Was it indeed lower than we had thought? The inflation risk was clearly there. It seems to me that by August most of the statistics have come in on the track that we thought they would. The evidence of a slowdown also seems to be supported by the anecdotal or regional information that we have heard around the table. Labor markets are still tight, and we have had a little more evidence of wage pressures but no evidence yet of price pressures. The minimum wage is a new law as of today when the President signs it, but it really is not new information. We knew about the minimum wage when we were here last time, indeed since spring. If it was not built into the actual Fed forecast, it certainly should have been on our minds when we were talking about what to do because we knew the minimum wage legislation was going to happen. So, it does seem to me that we structured the problem about right. We see an economy probably growing at about what we think is potential. We still do not know whether we can sustain the currently low level of unemployment for very long without escalating wage pressures. I was struck by the fact that President McDonough was the only one who mentioned the other big bill being signed by the President this week, namely, welfare reform. That legislation not only threatens to put a good deal of pressure on state governments, and not just in New York, but it also puts in strong relief the problem of how tight labor markets can be. If we are going to be successful in integrating some of the welfare population into the labor force, it is important that we keep labor markets pretty tight. So, erring on the side of not precipitating a recession, without taking on a serious risk of inflation, still seems particularly important for that reason, not just right now but over the next several years. My reading is that we still have the big question, given that the expansion is slowing, as to whether labor markets are too tight. The wage information is inconclusive, and I see no reason for losing our nerve when we see things coming in about on the track that we expected.",668
-fomc-corpus,1996,Thank you. Do we have coffee? Shall we go into recess?,14
-fomc-corpus,1996,Mr. Kohn.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. There must be something in the water here! I began my briefing exactly as Governor Meyer began his and Governor Yellen began hers, but it diverges thereafter. I will cut through the first part of my prepared text a little. [Statement--see Appendix.] Thank you, Mr. Chairman.",66
-fomc-corpus,1996,"Questions for Don? If not, let me see if I can summarize and review where we are. I think we are in general agreement that there is some evidence, at least at the margin, of a slowing in the expansion from the frenetic pace of earlier in the spring. Homebuilding is beginning to soften, but I think the softening is modest at best at this moment. Certainly, the permits and backlog data that came out with the starts figures for July suggest that further significant erosion in starts does not appear likely in August. Motor vehicle sales clearly were lower in July, as was pointed out by Mike Moskow and in the Greenbook. A very significant part of the decline in July was the result of the unilateral action on the part of General Motors to curtail very significantly its fleet sales. General Motors has been concerned since the strike earlier this year that its inventory structure was inadequate to supply both its fleet sales markets and its retail markets. For obvious reasons, it chose to support its retail markets. Nonetheless, motor vehicle sales this summer clearly are a tad softer; and a not insignificant weakening in used car prices, especially the ratio of used car prices to new car prices, is suggestive of a softening market. So, I think a judgment that light motor vehicle sales will be coming back in August, seasonally adjusted, is the correct view, but it clearly is not one that implies a surge. As a consequence of the weakness in sales and especially in fleet sales, inventories of motor vehicles were built up at a fairly significant pace in July. There also is evidence of some buildup of inventories in the non-motor vehicle, nonfarm area. One can pick up some evidence of this in anecdotal and state-level data and also from models using C&I loans and commercial paper to address the question of inventory investment. The evidence is still very marginal and most of the inventory data that we have for the third quarter clearly relates to motor vehicles, but I think there is no reason to disbelieve the projection of a significant uptick in inventory investment that shows up in the Greenbook for the third quarter. One potential explanation of the low initial claims and insured unemployment figures may well be that we are getting some production for inventories in the third quarter. We are not, however, seeing any of the elements that indicate a rush to build because we are not getting the usual signs of delivery tightness, stretching out of lead times, and shortages of various goods that tend to be associated with that phenomenon. Those are the types of problems that would induce a significant increase in safety stocks and bring on the kind of accelerated inventory investment that creates the major problems we have seen in the past. What seems to be involved here is not an increase in safety stocks, but an inadvertent drawing down of inventories to levels that are excessively lean at any existing safety stock level. Therefore, I think stocks are being built up at this stage, and that could suggest a somewhat higher GDP than one would normally expect. Indeed, it is probably one of the reasons why there has been an upward revision in the Greenbook's third-quarter GDP estimate. Consistent with a basic slowing of the expansion, though without any evidence of weakness or cumulative erosion, is the fact that domestic operating profit margins finally appear to be flattening. But the data do, nonetheless, suggest that those margins remain high. If you were to believe the individual ""bottom-up"" earnings forecasts of the securities markets, you would find that difficult to believe. However, I think there is some merit to Governor Yellen's suggestion that earnings forecasts are very likely to be discouraging because all the people who do the buildup from individual estimates are getting higher domestic operating profit earnings than those who are doing it from the top down. I think the reason for this is that we are getting mixed evidence with respect to productivity gains. This is crucial because if we disaggregate the total GDP data and separate manufacturing from all other sectors, we end up with the very interesting issue that we were discussing at the break. In the non-industrial area of the GDP, we are simultaneously getting a very significant increase in unit labor costs--in the 4 percent area--and a very dramatic rise in operating profit margins. I suggest to you that while those are reconcilable arithmetically, and indeed the data will reconcile, we do not get the sense that everything will be coming out exactly the way that the markets presume. We are getting anecdotal reports of productivity improvements in the manufacturing and industrial area even when we move a lot of the temporary worker hours from the services area into the manufacturing area, which is where they should be. So, manufacturing productivity is strong; it squares with the anecdotal information. Profit margins are rising in manufacturing but less so than in nonmanufacturing. Something has to change in this data system, and I am frankly curious to see how it ultimately will come out at the end of the day. The flattening of profit margins on the presumption that that is indeed happening is consistent with the expectation that the expansion in the capital goods market will gradually slow down. Yet, there is no doubt in my view that it is premature to assume that the economy is backing off its unsustainable rate of expansion. Product markets do not exhibit much pressure; that is, we are not getting any pronounced upside pressure in industrial commodity prices, lead times are dull, and inventory shortages do not appear to exist. Nonetheless, there exists a tautness in labor markets that has been there all year long, and I think, as has been discussed at length around this table, the crucial inflation question that we confront is on the labor side. Our difficulties lie with the issue of tight labor markets leading to increased wage pressures not offset by productivity improvements. The issue that the Vice Chairman raised with respect to benefits is one that I, too, hear out on the hustings. That is, while everyone acknowledges that the sharp deceleration in the cost of health insurance benefits largely reflects the dramatic shift from fee-for-service to managed care, it is apparently not correct to presume that the end of the adjustment will occur when we reach the point where 98 percent of workers are in managed care. There has been dramatic pressure from the business community to move from fee-for-service to managed care. When that is completed, they are going to go straight at the managed-care providers the way the Vice Chairman suggests. Whether they are successful or not remains to be seen, as Governor Phillips quite appropriately suggests, but I do not think the automatic elimination of further containment of benefit costs is necessarily an obvious forecast. Nonetheless, with the U.S. economy operating at high levels and very little evidence of cumulative weakness in recent data, the risks are and remain unquestionably on the high side. It would not take much to induce strong final demand that would require an accelerated inventory buildup coming from safety stock concerns. This is the type of development that occurred in 1994 but is not as yet showing any signs of emerging. Consumer confidence unquestionably is high, and the balance sheets of households, with the obvious exception of the debt problems in some of the middle-to-lower income households, are in very good shape. While there appears little upside margin, alternatively it would not take much softening to reduce pressure on markets and even labor markets with a lag. As I indicated in my Humphrey-Hawkins testimony, I believe we are at a key juncture where small changes in macro demand can tilt the economy in wholly different directions with different outlooks. Current forecast error ranges easily encompass either scenario. The economy has eased since the Humphrey-Hawkins testimony but only marginally, and it would not take much to put us back in a tightening situation. Certainly, the declines in initial claims and unemployment insurance are not encouraging in this regard, though that may be, as I indicated earlier, a reflection of temporarily higher production in order to replenish perceived depleted inventory levels. I would suggest that is more likely the case if indeed it is showing up in the aggregate numbers rather than any evident upsurge in final demand. Of course, while it is true at least in the retail area that we are getting somewhat better chain store numbers for August, the sales figures for the week ended August 17th that came out this morning tilt down again. The chain store numbers do appear to be modestly better seasonally adjusted for August than for July, but it does not appear to me to be a big deal, and the improvement does not fully reverse the weaknesses that were apparent in both June and July retail sales data. As far as policy is concerned, if the economy is in the process of growing at an unsustainable pace or moving in that direction, raising the federal funds rate only 25 basis points is not going to help much at this stage. Fifty to seventy-five basis points would more likely be required. Although the real funds rate is only a shade off its peak for this cycle, a much larger increase should not be necessary if indeed we have moved toward an unsustainable pace of economic growth. Had we been in a firming mode this year, it would seem prudent to me to tack on an additional 25 basis points at this meeting, as we did under not dissimilar circumstances in early 1995. But any upward move at this point implies a reversal of trend, which the markets will quickly price in, reflecting our increased credibility. They believe we have insights that they do not have; and my suspicion is that is a dubious proposition to say the least. The one scenario that I would very much like to avoid is our reversal of the trend and moving the funds rate upward just as the economy is in the process of measurably slowing down. As I indicated in July, our policy stance is not sufficiently out of line currently to require that we move quickly. I had expected that conditions by now would dictate the reversal of trend, but as a consequence of evidence suggesting some slowing in the economy, the case has become less compelling than I thought it would be. I believe that we can prudently hold off for a while to assess developments to make a determination of whether or not the economy is moving at an accelerated pace or gradually beginning to ratchet down. Nonetheless, if we do choose alternative B, which is the one I would like to propose, I trust we will continue our asymmetric bias.",2084
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,I support your proposal.,5
-fomc-corpus,1996,"Yes, I support the proposal.",7
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,I support your proposal.,5
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, as I said earlier today, my main focus has been on the second of the two questions we have been looking at. The possibility clearly laid out in the staff forecast is that the trend inflation rate is set to increase even if there is some further slowing in the growth of demand. Given this situation, I still favor some tightening of monetary policy. I think there is already ample evidence that the level of economic activity warrants what I would describe as a moderate mid-course correction to reverse at least part of the easing that was undertaken last winter. I must say that I was impressed by Don Kohn's comments about inertia and the potential cost of waiting to take this action. I recognize that the financial markets are not looking for any tightening action today and that such an action would be a surprise. But it seems to me that such an action could be quite beneficial to the atmosphere of the markets in the weeks ahead. The markets have been, it seems to me, exceptionally edgy over the last intermeeting period. They know there is an inflationary risk, and they are not sure how or when we are going to deal with it, especially given the fact that we have not acted to date. The situation and the atmosphere are almost reminiscent of the early part of 1994, after we made our initial move, when the markets were still waiting for the other shoe to drop. Only this time they are waiting for the first shoe to drop. A 50 basis point move today would essentially drop both shoes. You suggested in essence in your comments that the markets would likely conclude that such a move would be all or nearly all that would be required if in fact the expansion continues to decelerate. So a 50 basis point move would be what I would favor today. Beyond any longer-term settling effect it might have on the markets, a relatively decisive action like this would put everybody on notice that we firmly intend to keep our commitment to hold the line on inflation. It would be a very clear signal for anyone who needs it. Finally, while I still think a 50 basis point move is the better move, in this case a quarter of a loaf is better than none. So if 1/2 point is not acceptable, I would recommend that we consider doing 1/4 point. Thank you.",466
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I believe that the risks to economic performance are on the high side in the sense that the stage is set for more wage and price inflation than is desirable and perhaps than market participants expect. To be sure, the price data so far this year can be read favorably, but I know I am preaching to the converted in saying that we have to be forward-looking. There has been a lot of discussion of productivity and, of course, productivity is important; it matters for a lot of things. But the productivity performance notwithstanding, whether we have mismeasured it or not, we do know for sure that output growth so far this year is unsustainable because employment growth thus far this year has been roughly twice the sustainable growth of the labor force. Initial claims data suggest that this may be continuing. There are also signs that aggregate demand, in fact, is moderating. But the evidence is preliminary on this score, and it is not at all clear that it will moderate to a degree that will significantly change the labor market conditions I just described. Given the risks as I perceive them, waiting to act might damage our credibility, and more importantly in my view, might well make it more difficult for us to contain inflationary pressures. This could ultimately produce circumstances that would threaten the ongoing expansion of the economy. Moving modestly toward restraint now would seem to entail relatively little risk to economic performance and moreover could start us down the road that over time would not just contain inflationary pressures but could set the stage for some reduction in them. I would think that would be a prudent course of action and favorable for the long-term health of the economy.",335
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, although the pace of economic activity seems to be slowing as expected, my best estimate is that the level of activity will remain somewhat above its long-run potential. The economy's capacity and the effects of worker insecurity on wage pressures, of course, are subject to uncertainty. In my opinion and that of the Greenbook, we face rising inflation. The inflation increases projected by the staffs at our Bank and the Board imply that the current level of short-term rates will cause inflation to accelerate through the forecast horizon and beyond. I am persuaded by this year's pickup in labor costs and the projected increase in all of the inflation indexes in the Greenbook. Therefore, I believe it is prudent to raise the funds rate by at least 25 basis points.",151
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, I am persuaded by your explanation of what is going on and the situation we find ourselves in, but I am chastened by Don Kohn's presentation of the risk of an excessively slow reaction to a policy requirement. I support your proposal. I think that a 25 basis point increase in the face of a market expectation of no action would be extremely risky in that it would absolutely assure the market that it would be 25 plus 25 plus God knows when that would end, and this would tank every market that I can think of. When we move, it would seem to me that the move should be 50 basis points and that we would try to explain it as a recalibration of monetary policy. That is fairly risky in that I am not sure that there would be three people outside this room who would believe it. But at least to me it makes more sense than to do 25 and to start what would definitely be interpreted as the installment plan. I think the economy is at that balance point at which--as you suggested, Mr. Chairman--a move of policy now with the assumption that we know all kinds of things we really do not know, would be very likely to produce an excessive market reaction, which could very well tilt the economy into much slower growth than is either desirable or appropriate. So, recognizing that the risks are on the high side and therefore the directive should be asymmetric, the better judgment now is to maintain the fed funds rate at its present level. Therefore, I support your recommendation.",309
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I agree with your characterization of the situation and the kind of decision that we are faced with, Mr. Chairman, and I agree with the remarks that the Vice Chairman just made. I thought we were correct in our use of the installment plan to lower the funds rate the last three times we did so after it had peaked at 6 percent. I do not think that we would be correct in starting off on an installment plan now because we would be saying that we misjudged the economy and the inflationary pressures--that we should not have been cutting the funds rate in the first place, and we have to roll it all the way back up to 6 percent. That would be a very, very strong message. I want to explain to the staff of this Committee what it would take to persuade me that they are right about the outlook. I will put it in the form of a challenge. I will not blame you if you do not like the way I am going to characterize this, [laughter] but what you have said to me is that the minimum wage increase is expansionary for the economy. You have said that raising the minimum wage and other wages carries through to higher prices, lowers real interest rates, and therefore expands the economy at a faster pace. Thus, if we raise the minimum wage to $10, we will have a roaring boom. This just defies credibility to me. So, I have to judge my policy decision on the basis of a disbelief in the Greenbook forecast for nominal spending. I do not even believe the real part, but the nominal part bothers me more because of its direction. I cannot get away from the idea that the purchasing power of the dollar has something to do with the dollar and the supply and demand for it, and that what we are trying to do is to stabilize the value of the dollar. I would like to have a definite time horizon for when we are going to stabilize the purchasing power of the dollar and keep it there. When I see your recent numbers and the projection of central bank money growth accelerating, I have to be concerned. But I have a great deal of trouble separating out what is going on in the demand for foreign uses of our currency, that component of central bank money, and the contraction in the reserve balance component of it. I would have to assume that the demand for reserves is contracting even faster than the supply of reserves in order to conclude that we are seeing greater inflationary pressure. I think there is no evidence for that. If you have evidence and you can convince me, then I would change my mind.",523
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I ask myself, what are we doing here? [Laughter]",14
-fomc-corpus,1996,That's a pretty good question. Do you have an answer?,12
-fomc-corpus,1996,"Yes, I have an answer to that. We are trying to keep the economy on track. We are trying to keep inflation low so as to provide the best atmosphere for economic growth. This is not easy to do, and we have not always been very successful at it. But we have been more successful over the last 10 years and particularly over the last 5 years than we had been in earlier years. Part of that is because we have tried to put an emphasis on being forward-looking. Looking back over the long run, it seems to me that most of the times when we could with 20/20 hindsight characterize the Fed as having made an error, it was mostly on the side of waiting too long, as Don Kohn has mentioned, and then having to move harder than we would have had to otherwise, clamping down and feeding into the business cycle. I probably have the name of this philosopher wrong but I think it was Santayana who said that ""those who ignore the lessons of history are doomed to repeat it.""",209
-fomc-corpus,1996,You are correct.,4
-fomc-corpus,1996,"Good, I am glad.",6
-fomc-corpus,1996,"The last time I spoke to him, he said that. [Laughter]",16
-fomc-corpus,1996,"You are older and wiser than I am, Mr. Chairman! Now, it may be that the experience of the last 8 to 10 quarters is a signal that the economy is changing. But we are starting to see wage pressures and we are starting to see a flattening out, if not an upturn, in most of the broad measures of inflation. In this environment, I do not think we can be quite as sanguine as many have suggested. I think we need to be very humble about our forecasts of the GDP slowdown being enough to guide this rather large and cumbersome plane totally on instruments without human intervention, at least at this point in time. I think we need a course correction. I think we need to step in and start steering this economy a little bit. Now, it seems to me that if, in the expectation that the expansion would be slower, we adjusted policy in 25 basis point increments, then we could start to steer it against an upside threat in small increments as well. It might be that the markets will overreact, but I think that overreaction would be short-lived. I do not necessarily believe that they would think we are all knowing because many of them have seen the same trends that we see in some of the data. I am conscious of the fact that a lot of what we are getting from the markets has more to do with how they think we are going to react rather than how they think we should react. If some uptick in the markets, particularly to the extent that it increases costs, takes them back up to perhaps where they were earlier in the year, that might be helpful in restraining some of the possible sources of overshooting that might be in the GDP forecast. So, I would agree with those who recommended a course correction at this point. I could go with 25 basis points.",373
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation. Although it is difficult to judge the stance of policy with any great precision, it is still my sense that with our current policy and the slowing of economic activity that we are beginning to see, we likely will be able to sustain a pace of moderate growth without a pickup in the broader-based measures of inflation. Consequently, I would have a preference for keeping the current funds rate of 5-1/4 percent in place and giving things a chance to play out a bit more. I am certainly comfortable with the asymmetrical directive. Having said that, I again would like to join those who continue to urge us to do additional study and debate, both inside and outside the System, on the costs and benefits of a policy aimed at moving inflation rates still lower. Current circumstances and those likely to be immediately ahead may in fact provide us an excellent opportunity to pursue such a policy.",184
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I believe that we should increase the federal funds rate now at least 1/4 percent. As I read the evidence, inflation is not slowing. I think that is a fact and that the indications are that it will rise. I would also argue that even small but persistent increases in inflation over time can have a fairly dramatic effect on the purchasing power of the dollar when compounded. Also, in the context of our currently strong economy and the objective of sustaining growth over the long term--and I recognize that policy involves balancing risks--I believe that a small increase now would bring more benefits in terms of moderating the inflationary pressures that are facing us than the risks it would incur of accelerating the economic slowdown that is worrying us to some degree. I think it would be prudent for us to take this action now. The economy can afford this action, and I think the long-term benefits would be greater for us.",187
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"I support your recommendation, Mr. Chairman. It seems to me that to move up now, when we did not in July and when we have seen evidence of the slowing of the economy, would be a very hard thing to explain and would risk a different kind of credibility. You said in your Humphrey-Hawkins testimony that we expected the economy to slow. Now we are seeing that it is, and suddenly we would be moving in a direction not suggested by that slowing. Clearly the risks of inflation are there. We have to remain vigilant. I still believe it is possible that we will not have to move; I do not think that is the general view around this table. The general view seems to be that it is a question of when rather than whether. We will know more as time goes on. It is more likely that we will have to move at some time if this economy does not slow more than predicted by the Greenbook, but I believe we have time to make that decision.",201
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. With respect to the stance of policy, I would say with some conviction that I do not think it is restrictive and quite likely it is accommodative, whether we look at the growth rates of monetary aggregates or a funds rate that has not moved in the face of rising market interest rates. I think the risk is that inflation will move higher and perhaps more importantly, it will move higher from a level that I think is already unacceptable. We ought to be moving closer to price stability, not moving away from it. As a result, I would favor an increase in the funds rate today and, for reasons that have been stated by others, an increase of 50 basis points. Let me just make a couple of other comments quickly. I think we are suffering from the fact that we do not have a nominal anchor for monetary policy. We do not seem to have a way to make a judgment about what the stance of policy is and relate that to a longer-run inflation outlook. As a result, I think we have become excessively focused on what is happening with respect to growth as opposed to looking at inflation. I think our actions have in fact been asymmetric. We have tended to show in our actions in recent months more concern about the prospect of slowing growth than we have about rising inflation, let alone getting inflation lower. I think we have gotten away with it so far because a good bit of credibility has been built up over the last 5 or 10 years, and for good reason. But if our indicator of the time to move is seeing the whites of inflation's eyes--I have not heard anybody explicitly say that, but I worry about that sometimes--when we get to that point, we will have lost a good bit of credibility and will probably be looking at a very ugly end to this expansion just to contain inflation, as others have said.",375
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,I support your recommendation.,5
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Mr. Chairman, I also support ""B"" asymmetric. My suspicion is that at some point we are going to need to tighten, but to me the timing is not clear. If the expansion continues at an above-trend pace, the inflationary pressures are bound to prevail. On the other hand, if productivity is better than the historical levels, the move could be deferred. So it seems to me for now that ""B"" asymmetric is the right move.",93
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation. I continue to consider the inflationary risks biased to the up side. I believe we have agreed that regardless of whether we prefer opportunistic or deliberate strategies, we should resist any sustained uptick in inflation. I support that policy. I also think Don Kohn has properly warned us that if we are actually below NAIRU and fail to act, all we will end up doing is buying more output and more jobs now at the expense of less output and fewer jobs later, in effect adding to cyclical fluctuations rather than mitigating them. Ordinarily, I would prefer a preemptive approach to controlling inflation rather than, as Tom Melzer put it, simply waiting to shoot until we have seen the whites of its eyes. Nevertheless, I think the current situation is unusual. In spite of the apparent inflation risk, which has been present now for a considerable time, inflation has been declining, not increasing, and now demand finally appears to be moderating. So, the level of uncertainty about the future course of inflation under current policy settings is extremely high. And particularly because a move today would constitute a change of direction and a surprise to the public and to financial markets, I would prefer to have a slightly higher degree of confidence that a policy change is actually needed before making one. In situations where forecast uncertainly is extremely high, I, at least, find it appealing to look for some guidance from the recommendations of sensible feedback rules, so I would simply reiterate what Don Kohn pointed out, which is that the funds rate judged by Taylor's Rule or other simple benchmarks is now at quite a reasonable level given current levels of unemployment and inflation. On the other hand, the rule definitely calls for a policy adjustment if either of two things occurs: first, if the degree of labor market slack declines appreciably, presumably because demand fails to slow as we anticipate; or second, if broad inflation measures rise. Under those conditions, I would certainly support a tightening of policy.",404
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Mr. Chairman, I also support your recommendation that we make no change in policy at this meeting and retain an asymmetric directive. This position reflects my willingness to support trend growth at full employment with stable modest inflation in the near term, patiently awaiting opportunity down the road for renewed progress toward price stability. I simply am not persuaded at this point that the current policy setting is inconsistent with stable inflation. Given the lags in response to monetary policy, particularly when it comes to inflation, it is often prudent to move to change policy on the basis of forecasts, and that is the challenge that the staff forecast presents to us today. But my willingness to move preemptively in this case has to be conditioned by what seems to me the inconsistency in the story that the current unemployment rate is too low to sustain stable inflation, given that we have seen stable inflation for the last two years. So at this point, I think it would be prudent to hold the line and wait for additional data. Nevertheless, I think there are risks of higher growth and there are undoubtedly risks that inflation at the current unemployment rate might move up. Therefore, I think the asymmetric directive is very reasonable. Thank you.",237
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for a ""B"" asymmetric directive, but as I mentioned in my comments, I am concerned about the labor cost pressures exceeding productivity. I also am concerned about the potential for allowing some upcreep in inflation to be built into the economy late this year and in 1997. Of course, waiting makes the September and the November meetings very crucial decision points.",81
-fomc-corpus,1996,"Would you, Mr. Secretary, read ""B"" asymmetric.",13
-fomc-corpus,1996,"The wording is on page 13 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",109
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern No Governor Yellen Yes,47
-fomc-corpus,1996,"Thank you. The next meeting is Tuesday, September 24th.",14
-fomc-corpus,1996,"Can I make one correction? Earlier in our discussion, I asked Don Kohn and Peter Fisher to come forward with the reverse repo recommendation in September. Actually, it makes more sense to do it in November.",42
-fomc-corpus,1996,So be it.    We adjourn for lunch.,11
-fomc-corpus,1996,"Would somebody like to move approval of the minutes? Bob, I know the San Francisco District is three hours behind us, but I think you are going to have to move their approval.",37
-fomc-corpus,1996,I would like to move! [Laughter],10
-fomc-corpus,1996,"Without objection, the minutes are approved. Peter Fisher.",11
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,Thank you. Questions for Peter? Governor Lindsey.,10
-fomc-corpus,1996,"Concerning the French budget, it appears that the French got from here to there with asset sales. Of course, the budget is a very flexible document, but one would think that asset sales would be a little suspect by the terms of Maastrict. Why is the European Monetary Union going to bless this?",62
-fomc-corpus,1996,"It remains an issue under Maastrict, and I think the answer is politics. It's not settled yet, but it appears to be headed that way.",31
-fomc-corpus,1996,"To put the market's reaction in a nutshell, I think the market is focusing on the question of whether the politicians can pull a rabbit out of the hat. Maybe they can. Having a commission in Brussels bless the French budget is one aspect of how the politicians may be able to do that. The markets are not going to underestimate the ability of the politicians. Those who are positioning in the expectation that EMU will implode fear that the politicians may pull a rabbit out of a hat and when they see something like that happening, they back up and reassess the question of speculating against the EMU.",121
-fomc-corpus,1996,"So, the markets are saying that the triumph of politics over economics is a good thing?",18
-fomc-corpus,1996,"In the short run, it may work that way. The market practitioners are concerned that they could lose a lot of money if they underestimate the politics.",30
-fomc-corpus,1996,"The real question is the outlook for the EMU. If one thinks the EMU is going to fail, one would expect the deutsche mark to rally very sharply. If one expects the EMU to hold together, for whatever reason--all the countries may be running 5 percent deficits but they may still decide to come together--that means the deutsche mark is going to be put into a structure that will inhibit its strength, which is what the EMU will do. So, what is really involved is a practical judgment about the prospects for the EMU, not whether it is good or bad, I don't think the market is going to be judging whether it is good or bad. They may in fact view it as phoney as a four dollar bill--an American four dollar bill. [Laughter]",162
-fomc-corpus,1996,"The question, Governor Lindsey, is whether we are talking about high politics or grass root politics and that is another source of uncertainty. The high politics may bring it about. The question is whether the grass root politics will follow the high politics.",48
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"I believe also that there are a couple of recent events that make one rather more inclined to think that the politicians are taking a fairly sensible line. The last time we were together, there was a real question by most observers as to whether the leading countries would allow the Maastrict criteria to be fiddled. You may say that this interesting and creative budgetary fix by the French is a bit of a fiddle, but I would note that Chancellor Kohl on the occasion of President Tietmeyer's 65th birthday made a very strong speech in favor of Maastrict and the need to observe its criteria very carefully. He was followed by President Chirac who supported him. In addition, there was a very significant event last weekend when the Germans took a position that I think is very rational. The big risk is not that EMU may not take place; it would appear now that it will. The question is what happens after it does. The key to that is what Finance Minister Waigel has brought forth. It is called a stability pact, and last weekend in Dublin the finance ministers and central bankers met and endorsed this stability pact. That is a very significant development. They still have to decide whether the punishment for violating the fiscal rules after EMU will be automatic and just how it will work, but the agreement in principle is quite significant.",271
-fomc-corpus,1996,"It is, but if you take an asset sale that is one-half percent of GDP and consider that appropriate, the fudging potential involved in the stability pact is quite considerable. So, a lot of future relationships are at stake. I agree that these last two events imply that EMU is going to happen. The question is about some of the crucial issues that the Germans specifically are very concerned about, especially a fudged or temporary 3 percent Maastrict followed by erosion. The Germans have made very strong statements on this issue, and the question is whether the agreements are in fact going to back up those words. I would say that the evidence, as Governor Lindsey suggests, does raise some questions.",141
-fomc-corpus,1996,"Yes, it raises questions. However, before these recent developments, the overwhelming expectation was that if EMU happened, it would be followed by something that simply would not work. The whole notion of trying to use monetary unity to create political unity has never succeeded anywhere. Now, it looks as if they are doing some things that at least make disaster not as predictable as it seemed to be until recently.",80
-fomc-corpus,1996,They are cutting down the sharp edges of the adjustment costs. Governor Rivlin.,16
-fomc-corpus,1996,"Just based on our own experience, I suspect they will have long wrangles in the context of the stability pact about what counts and what does not. It isn't until you have budget sanctions that you even have to face up to those questions. It is possible that European markets are simply not very sophisticated about budgets yet, and that what counts and what does not is something on which they have not really focused.",81
-fomc-corpus,1996,"Budget accounting basically. RIVLIN. Yes. We have worried about this for a while, but they have not.",24
-fomc-corpus,1996,That is a very good point.,7
-fomc-corpus,1996,"Even with our fairly specific unified budget principles, there is an awful lot of fudging that goes on in the process.",24
-fomc-corpus,1996,We had to make rules about asset sales.,9
-fomc-corpus,1996,Any further questions?,4
-fomc-corpus,1996,"What is involved in the French budget is not actually an asset sale, but a somewhat complicated takeover of pension obligations in return for cash. It is a kind of asset sale. Economists would call it an asset sale; I'm not sure accountants would.",50
-fomc-corpus,1996,We call it an asset sale. [Laughter],11
-fomc-corpus,1996,It is an asset sale a la francaise! [Laughter],14
-fomc-corpus,1996,"Any further questions? If not, would someone like to move for a vote to approve the domestic operations?",21
-fomc-corpus,1996,I move their approval.,5
-fomc-corpus,1996,Thank you. Without objection. Mr. Prell.,11
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,Any questions? President Parry.,7
-fomc-corpus,1996,"Mike, the information coming from the employment data may be somewhat clearer than you have suggested in the sense that, while admittedly the unemployment rate number is questionable and the labor force has been very volatile with large declines, the nonfarm payroll message is very consistently strong and seems fairly reliable. In addition, I have a feeling that we are going to have upward revisions in that area. We have had such revisions in the last couple of years because the survey does not take into account, as well as it should, hiring by new businesses. There was a big upward adjustment when the last revision was made, and I would expect to see another. So, although I agree with your point about the ambiguity surrounding many of the numbers that have come out in recent weeks, when it comes to the production side, particularly employment, it seems to me that we do have very consistent strength.",174
-fomc-corpus,1996,"I don't think I can comment very productively on your point about what future revisions may show. We do not have a basis for a judgment about whether the allowances that the BLS makes in blowing up their samples for new firms and other statistical problems are on target this time or not. To be sure, there have been sizable revisions at times in the past. On the broader point, as I tried to suggest, we certainly do see evidence that hiring has continued to be quite robust, probably outstripping the trend increase in labor force growth. However, I am not sure how much that tells us about things going forward. It may be in essence that this reflects the strong production gains that we have seen recently rather than the anticipation of much more rapid growth in business than we have projected. I think the indicators of business sentiment that we have suggest that firms are anticipating growth, but not necessarily growth that differs greatly from what we are forecasting. It is a risk, and certainly this is a part of the picture where households that have enjoyed very sizable income gains recently, and probably are continuing to do so in September, add a certain buoyancy in the economy that is visible in consumer sentiment. That is probably a response to the very favorable labor market environment.",251
-fomc-corpus,1996,"Any further questions? If not, would somebody like to start the roundtable? President McTeer.",21
-fomc-corpus,1996,"Economic growth in the Eleventh District has continued to run a little faster than the national average. In recent months, we have benefited from higher energy prices, the rebound in the Mexican economy, and strong warehouse construction activity following the deregulation of trucking. The Texas rig count has risen 22 percent so far this year, with the result that business and consumer sentiment is quite high in Houston and Midland. With the rebound in the Mexican economy, exports from Texas to Mexico were up 17 percent in real terms in the first half of 1996 and are back to levels that prevailed prior to the peso devaluation. Rail and truck traffic also has returned to predevaluation levels. Optimism along the border is slowly returning. Three months ago, only 10 percent of El Paso employers planned to hire additional workers; in a recent survey, more than 26 percent planned to hire new workers. Construction activity in the District is expected to remain strong, as falling vacancy rates and rising rents improve the anticipated returns on offices, warehouses, and retail space. Office and retail rents have been rising in recent months. In some markets, first class office space is about fully absorbed. Warehouse construction continues to be strong particularly in Houston, Dallas-Fort Worth, and El Paso. This construction activity has more than offset a very mild slowing in residential construction. We continue to hear increased anecdotes about tight labor markets and rising pressure on wages, and we hear more rumblings that the higher labor costs will have to be passed on in higher prices at some point in the future. But so far, there is little anecdotal evidence of widespread price increases. At both our board of directors meeting and the meeting of our advisory council on small business and agriculture, there were frequent mentions of shortages of a wide variety of workers and of wage boosts that were considerable in some instances. In some but not all cases, prices have been increased, with rising wages as the justification. Regarding the national economy, I agree with the broad outline of the near-term outlook in the Greenbook. Some signs of slowing have begun to show up and growth more in line with the economy's long-run potential seems more likely than was the case at the time of our August meeting. The risks, however, appear to be on the up side for both growth and inflationary pressures. If anything, the risks have risen over the past several weeks, but I continue to feel that we may be worrying too much about sizable employment growth and low unemployment rates when prices themselves and leading indicators of final prices, such as prices of commodities and metals, including gold, are behaving so well.",524
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Thank you. I first want to comment on Bob Parry's point about the nonfarm payroll numbers because those revisions go in both directions as we have seen. Currently, the BLS is using a plug of 140,000 per month for jobs created in new business startups. In 1990, they were using 80,000 per month. They subsequently decided that the number should be negative and wound up revising the employment data down. By the nature of those plugs, they are always going to miss the turning points. At some point, there is going to be a big revision in the opposite direction, just like last year's upward revision. Turning to the national economy, we got a copy of the August survey of the National Federation of Independent Business, which was also mentioned in some of the material we received from the Board staff last night. I noted with interest that an expansion high 27 percent of the firms said that they have been increasing their compensation, and yet there was a decline in the percentage that said they were going to be raising their prices and an increase in the number saying that their earnings were improving. That says to me that productivity is really quite good. Plans for capital spending rose 4 percentage points, so at least from that sample of a very large number of small businesses, the productivity explanation of developments in compensation is being verified. On the strike situation, people in the District are very pleased with the outcome of the Ford contract and they generally do not expect GM to take a strike. But the answers were not entirely consistent on that point. We have talked to the large auto supplier companies who say the UAW's concern is not GM workers; it is UAW workers. GM wants to sell some of their parts operations. The UAW wants a say in who buys those parts operations because the union wants them to remain UAW plants under the new owners. If that is agreed to, the UAW may go along with GM's outsourcing intentions. The issue is not going to come down to compensation, and the big companies that we have talked to say that they do not expect a strike. In the District, we have had a number of meetings in the last few weeks with directors, advisory councils, and bankers. We asked them about the kinds of capital spending they had seen and business plans for the future. We asked in particular whether business firms were trying mainly to increase capacity or trying to increase productivity. Most said that capital spending would continue to expand but at a slower pace through 1997 compared with what we have seen in the past three or four years, and it would be almost entirely for the purpose of improving productivity. I have only a few stories about firms that are actually increasing their capacity. One director reported that the paper processing equipment now being installed uses 50 percent less labor than the equipment it is replacing. Since the capacity of paper producing operations is growing, there has been some softness in prices, but he said the really extraordinary efficiency of this new equipment is what is driving the industry's investment decisions. We asked firms about compensation increases and whether in their judgment, or that of other firms they talked to, the increases were warranted on the basis of productivity improvements or whether they were seeing pressure on earnings and/or pressure for higher prices. We did not hear any stories about higher prices. We did hear some stories about pressure on earnings, but basically our contacts were saying that they were not going to be passing along higher labor costs or attempting to raise prices for the foreseeable future. We did hear some reports that it is now easier to find people at the entry level than it was earlier, especially in Kentucky and Indiana where it had been very difficult. One of the directors from western Pennsylvania simply said that business there was in the doldrums. Steel and oil executives tell us that their production capacity is rising faster than demand, and they expect downward pressure on prices. Basically, they said the investment in steel producing facilities in the last couple of years is starting to come on stream now and will continue doing so out into 1997. Accordingly, with foreign competition also increasing, they expect more difficulty in just holding the level of steel prices. We have continued to hear stories about rising delinquencies, late payments, bankruptcy filings, and therefore more charge-offs in the banking industry. One report that I found interesting for an area that is so heavily influenced by motor vehicles is that there is an ample supply of tool and die makers. This is not usual for our part of the country in the sixth year of an expansion. The reason given is that investment in computerized design and manufacturing technology is making these people easy to find. One very large auto parts company said that they are now producing the same truck parts with 20 percent fewer hours than in 1994. Productivity improvements at their plants have been averaging 5 to 7 percent per year, and they expect that to continue. Let me turn to the Greenbook and the national economy. It seems to me that there are at least four views about monetary policy in the current situation that are all respectable views even if not equally probable. Of course, there could be some combination of these four views. One is that the current stance of monetary policy is such that in the future we are going to see an acceleration in the growth of final demand. But because of capacity constraints, however one wants to think about that, the growth in output or aggregate supply cannot increase along with aggregate demand, and therefore we will get higher prices. That is why at the last meeting I was so disturbed by the upward revision in the nominal GDP projections through 1997. That revision has now been reversed in part, so my concern from that source has been relieved. A second view is that the stance of monetary policy is not going to produce an acceleration of growth in aggregate demand, but growth in aggregate supply will slow toward an annual rate of about 2 percent because of capacity constraints. That assumes productivity and labor market conditions similar to those in the current Greenbook. Therefore, inflationary pressures are going to increase modestly in this view, but they will still increase. A third position is that the current stance of monetary policy is going to lead to a slowing in the growth of nominal spending and in aggregate supply or potential output at a more or less parallel rate. Therefore, inflation will continue at about the same rate; we simply do not make any progress in reducing inflation. The fourth position would be that nominal spending growth is going to slow because of the current stance of monetary policy, but output growth is not going to slow as much because of the productivity improvements from the capital spending of the last four years--the introduction of new technologies, and all of that. Therefore, we will get less price pressure in the future. I think that those scenarios pretty much encompass the views of what we are hearing from Wall Street, from analysts, and other commentary about whether current policy is too tight or too easy.",1396
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Economic activity in our District has continued to expand at a reasonably steady pace over the period since our last meeting. There does appear to have been some moderation in the rate of growth of household spending and also in residential construction activity in some parts of our region from their very strong pace in the first half of the year. But our latest regular survey of manufacturing indicates that factory activity rebounded very sharply in the latter part of the summer from its somewhat sluggish performance earlier in the summer. Shipments, new orders, employment, and the average workweek have all been rising in that sector. Also, as noted in our Beigebook report and picking up on a comment that Mike Prell made, commercial real estate activity clearly has strengthened through most of our region as vacancy rates have declined and rental rates have crept up. The improvement is not so apparent in the Washington metropolitan area, but it is very evident in the southern part of the District in particular. Probably the most striking aspect of the recent regional information--and I suspect this is true around the country--is the persistent and increasingly widespread reports of very tight labor market conditions. We, too, had a meeting last week of our small business and agricultural advisory committee and all five small business representatives who attended reported some difficulty in attracting workers despite fairly sizable wage increases in some cases. We continue to get similar comments from the directors on all of our boards and in response to our periodic surveys. Recently and interestingly, there have been more complaints especially from construction firms and employment agencies about the difficulty of finding suitable unskilled and semi-skilled workers. There are people out there, but many of them have very little job experience and in some cases very little schooling. As a result, their productivity is quite low and firms are reluctant to hire them in light of the potential costs of doing so. Given this situation, some of our contacts have told us that local labor markets are really tighter in many cases than the already low state and local unemployment rates might suggest. One other indication of tight labor markets comes from state reports of withheld taxes; I think the latter are running higher in all of our states and jurisdictions than had been projected earlier in the year. Finally, Hurricane Fran hit our region pretty hard. I remember looking at the radar weather report, and at one point the clouds were coterminous with the boundaries of my District. North Carolina was especially hard hit; the damage there is estimated somewhere in the neighborhood of $3-1/2 billion and the majority of it, though not all by any means, was to private residences. Repairing that damage is going to spur activity in a local area that is already operating at a very high level of economic activity in relation to capacity. I do not have a lot to say about the national picture beyond what I have been saying for the last couple of meetings and that already has been noted by Jerry and others. The Greenbook projection continues to reflect the view that monetary policy is now restrictive enough to foster a deceleration in real GDP growth to its long-term potential, and then to maintain such growth pretty much indefinitely. In this environment, core inflation moves up fairly modestly to about 3 percent in 1997 and holds there in 1998. Maybe this will happen, but my feeling is that it is hardly a sure thing, and I continue to think that there are significant upside risks on both the real side and the inflation side in the current projection period.",693
-fomc-corpus,1996,Mr. Guynn.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. In my view, the recent economic data and anecdotal information show an economy that is operating at a healthy pace. In fact, coming off a surprisingly strong second quarter, GDP growth is averaging just under 3 percent on a year-over-year basis and is exceeding my earlier expectations. As others have observed, the growth is both broadly based and without serious imbalances. Job growth, which has gotten so much attention and discussion, underscores the strength of economic activity. Although labor shortages are not widespread in our District, I am hearing more complaints in recent weeks and months about both the quantity and the quality of available workers. Fortunately, investment spending seems to have kept capacity utilization within a reasonable range. The slowdown that I had expected in the pace of activity has been slower in coming and is still less obvious than I had anticipated. Some signs of slowdown, which we thought we saw in the data in earlier months, were either revised away or reversed. For example, after sorting through the mixed signals that Mike Prell reviewed on housing, it looks as though that sector has continued to be surprisingly strong and that has brought with it strong spending on consumer durables. The most recent data on retail sales may signal some slowing in consumer spending, but it seems to me that the underlying fundamentals of job and income growth provide a continuing source of strength. Our revised forecast for the remainder of 1996 and into 1997 is for a continuation of good growth but with some moderation. That moderation, again, is not coming as soon nor to the same degree as we had earlier forecast. Despite the greater than expected pace of growth and the low rate of unemployment, price pressures appear to remain modest. While the special effects of the increases in energy and food prices are working their way through the price indices, economy-wide measures of prices remain low. At the same time, I am hearing more and more concerns anecdotally about wage pressures. Some business people I have talked to are actively weighing the costs and benefits of trying to hire more qualified workers, and with that they seem to be developing a clear intention to try to pass through their higher costs by increasing their output prices. At the same time, we continue to hear stories of intense competition that limits price increases across almost all industries, sometimes causing price increases earlier in the year to be rolled back. Finally, in my conversations I continue to try to gauge expectations for both growth and inflation. While it is hard to find folks who want to argue that growth is too strong, the one plea I almost always get when I have serious and in-depth discussions is for a policy that optimizes the chance of keeping inflation at moderate levels. That is something that people would like to be able to take for granted in their decision-making and negotiations. In the Southeast, we have continued to see growth at a moderate pace in August and September. Retail sales remain strong and, in fact, exceed last year's levels. Tourism, which is so important to our District and especially to Florida, has been somewhat mixed, but the outlook is mostly positive. Consumer confidence remains unchanged, while manufacturing continues to expand at a moderate pace. The declines in the apparel and textile sectors that I previously talked about at these meetings continue to show up. Part of that loss is being made up by the expansion of the auto industry in our region. Single-family home sales were mixed throughout the District, while builders noted that new home sales and construction remain healthy but flat. As Al Broaddus observed for his region, class A office space is in short supply in several of our markets, and we are beginning to see some speculative projects, notably in Florida and Atlanta. District bankers report moderately strong loan demand and some decline in credit quality. Payroll employment increased in June and July. Scattered reports of localized labor shortages are more common. Despite those, there are few signs of increasing wages and only spotty reports that the increases are affecting market prices. Thank you, Mr. Chairman.",802
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, overall economic conditions in New England remain good. In particular, the regional unemployment rate in August was a full percentage point below the national rate. Initial unemployment claims have been falling and are approaching levels last seen in the 1980s. In thinking about this, we had a discussion about how our regional economy feels now versus how it felt in the late 1980s. Basically, the thinking is that the dynamism--or as some would phrase it, the frenzy--that characterized the New England economy in the late 1980s is not there now even though the unemployment numbers are approaching the levels of the late 1980s. Payroll employment expanded only 1 percent over the past year or at about half the national rate. Help-wanted advertising is about the same as a year ago and well below the levels of 10 years ago. The growth in average hourly earnings remains subdued, with increases for production workers only about 1.9 percent in New England over the past year compared with a national increase of more than 3 percent. However, the anecdotal reports are more positive than the statistics, and there is some speculation that the state employment numbers will be revised up when the benchmark revisions are done in early 1997. State tax receipts suggest greater strength than the employment data show. The largest disconnect between statistics and anecdotes is in the manufacturing sector. Employment continues to drift down at New England manufacturers, but our informal contacts are generally very positive. Most report sales and orders comfortably above year-ago levels. Some report smaller increases than earlier in the year, but others see no evidence of any slowing. A great exception to this is the paper industry, which Jerry Jordan mentioned before. Manufacturing inventories are in good shape. Prices generally are flat and wage increases are in the 2-1/2 to 4 percent range. Most firms say they are not feeling wage pressures, but it depends on the kinds of employees they are looking for. Computer and software engineers are much in demand and can be had only if the employment package is sweetened with stock options and other incentives. Reports from the retail sector were also positive. Absent from the latest reports were the customary complaints about excess capacity and new competitors. Upscale products are doing especially well. Here, too, prices generally are flat, with a few increases of 1 to 2 percent reported. There are some recent articles that have suggested that changes in temporary help employment may be a leading indicator. If so, the reports from our contacts in this industry point to continued strength. Business continues to grow rapidly, wages are rising, and one contact reports that qualified workers in the technical and professional areas are able to demand wage increases of 5 to 10 percent over year-ago levels because they are in demand and because there is a wide range of options in terms of projects for them. Turning to the national scene, we mostly agree with the Greenbook path for GDP, though I would question whether consumer spending will fall off quite as sharply as expected in the third quarter. However, that GDP path, given stable low unemployment rates through 1998, does not seem likely to result in such a stable level of inflation as is expected in the Greenbook. By anyone's estimate, labor markets are tight. The unemployment rate right now may not be 5.1 percent, but I do not think it is 5.4 percent, and I have some doubts about whether it will bounce back to 5.4 percent quickly. Such a bounceback seems to be what is needed to create the rather low CPI projections that are included in the Greenbook estimate. The inflation picture is also more than normally confused by BLS measurement changes. We have ignored those changes for the purpose of attempting to compare like numbers, which I know is futile, but they do appear to show an uptick of a slightly greater dimension than is reflected in the Greenbook numbers. The Greenbook forecast in some sense is an idyllic one, but the sense that I have is that we are using more than the normal amount of smoke and mirrors to create this idyll, and you should forgive that phrase, Mike. As I see it, this forecast is a very risky one. Growth may well be stronger, and even if it is not, the flow-through to inflation may well be more pronounced than is projected in the Greenbook. Let me close by noting that our Bank, along with everybody else's, has normal rounds of meetings with outside groups. We had a group of academicians in the other day--Paul Samuelson, Jim Duesenberry, Marty Feldstein, Rudi Dornbusch, Bill Poole, and Ben Friedman--people who rarely agree about anything. But they were all in harmony on the subject of where monetary policy is right now. They all felt that it was a little too ""not restrictive,"" let's put it that way, or a little too easy for the conditions as they saw them and in need of a bit of tightening. Of course, there was a lot of debate.",1020
-fomc-corpus,1996,Why don't you hire some decent help? [Laughter],12
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, economic conditions in the Seventh District are quite similar to what I reported last time. Our regional economy is still operating at a very high level. The pace of the expansion has slowed somewhat from the first half of the year, but by less than had been expected. The housing sector has held up remarkably well in many areas of the District. Housing starts, permits, and home sales in the Midwest were all up sharply in July. Housing starts did come down a bit in August, but that retraced only a small part of the 16 percent July surge. Manufacturing activity in the District generally remains strong. Orders in the second quarter and the early part of the third quarter exceeded expectations in most core industries including light motor vehicles, construction machinery, metal working equipment, appliances, and steel. The second half of 1996 is still expected to be softer than the first half for most of these industries, but some of that expected softness seems to have been pushed out a quarter. We have just received the Chicago Purchasing Managers survey for September, which I would caution is confidential until it is released to the public next Monday, September 30. The index will show overall activity expanding at a solid pace of 56.3. That is slightly slower than the robust pace suggested by the August survey, but the August level was significantly higher than in July. The prices-paid component, which has been indicating modest increases, surged in September to 59.3, and that is its highest level since August of 1995. District retailer reports on sales activity for the first half of September ranged from flat to modest year-over-year gains. Sales over the Labor Day weekend were lower than expected, but one major national retailer in our District noted a sharp pickup in the week after Labor Day. Auto and light truck sales have been stronger than expected according to our contacts in the industry. Sales in the first half of September seemed to be tracking at a 15 to 15.1 million annual rate. This pace is consistent with the Greenbook's upward revised forecast for sales to average 15 million units in the third quarter. On the auto negotiations, I do not have much to add; Jerry Jordan already commented on this. I would mention that there are, of course, two sets of negotiations going on--those in the United States and those in Canada. Our assessment is that there is a much higher probability of a strike by the Canadian GM workers than by the U.S. workers. But because of the close relationship between the U.S. and Canadian plants, a strike in Canada, if it occurs, would eventually have a very serious impact on the U.S. economy. On employment conditions generally, the news is still the same. Labor markets remain tight in the Seventh District. Payroll employment growth, however, has been slower than for the nation, perhaps reflecting some labor supply constraints in our District. Similar to what Al Broaddus reported, when our small business and agricultural advisory council met earlier this month, they voiced concern also about the difficulty of finding and keeping qualified workers, and this concern is shared by many in our District. It seemed to be most acute for entry-level jobs, particularly in retailing, but construction and factory workers are also reported to be harder to find. Firms throughout the District have been increasing starting salaries and entry-level wages, often including signing bonuses, and doing more on-the-job training to deal with these labor shortages. One manufacturer reported raising its starting wage of $7.50 an hour to $10.00 to attract qualified workers. trucking firm in the United States reported that his firm is now in the process of deciding how to respond to a 33 percent increase in truck driver compensation that was announced by the second largest trucking firm in the industry. That increase is scheduled to go into effect in February. More generally on the price front, most firms indicate that it is still extremely difficult to get price increases through despite having to pay higher wages. However, we continue to get some scattered reports of rapidly rising prices. Building materials prices were reported to be increasing: Cement is being rationed and gypsum board is on allocation in some areas. Steel prices have increased but are still below a year ago. The October price hike may not hold, however, if added capacity comes on stream as expected. Trucking firms are imposing a fuel surcharge that translates into about a 2 percent increase in prices paid by their customers. Turning to the national outlook, my assessment has not changed greatly since our last meeting. I still expect growth in aggregate demand to slow to a more modest pace late this year or early in 1997. However, I continue to believe that there is a danger that the moderation will have come too late. Resource utilization rates are already high enough to suggest gradual acceleration in core inflation, as reflected in the Greenbook after the adjustments for the BLS measurement changes. Moreover, growth seems likely to remain relatively strong for another quarter or two, which is likely to exacerbate this situation. The recent news on inflation, of course, has been favorable, but I am concerned that this will not continue. The further tightening of labor markets revealed by the most recent employment report combined with the anecdotal reports of labor scarcity that we have all heard suggest that we can expect to see wage increases in excess of productivity gains. Profit margins may shrink somewhat but ultimately, as Mike Prell said before, more rapid price increases are likely to be the result. The risks in the current situation are heavily on the side of increased inflation.",1112
-fomc-corpus,1996,Thank you very much. President Parry.,9
-fomc-corpus,1996,"Mr. Chairman, strong economic growth is continuing in the Twelfth District, although with some slowing in July from the very brisk second-quarter pace. The California economy has performed very well in recent months, with annualized payroll employment growth averaging 3.4 percent during May through August. Although Los Angeles county continues to be somewhat weak, other parts of southern California are gaining jobs and residents, with many of these coming from Los Angeles county. The Washington State economy has accelerated further in recent months, spurred by rapid manufacturing job growth associated primarily with the resurgence at Boeing. Payroll employment growth in most of the other District states is very strong, ranging from about 4 to 7 percent at an annual rate. Slight recent slowing is reflected in decelerated manufacturing employment growth in the District boom states of Nevada, Utah, Oregon, Arizona, and Idaho. The only exceptions to strong growth are Alaska and Hawaii. Alaska's growth has been slow in 1996, and Hawaii has actually lost jobs in recent months. There are signs of increasing growth in average wages in several parts of the District. The increases have been large and accelerating in Nevada and Utah, which one would expect, and they have occurred in the construction and trade sectors in addition to manufacturing. Wage increases in other states mostly have been moderate. There are signs of a slight pickup in California, although from relatively low rates. Turning to the national economy, production-side data, particularly employment as we discussed, have been quite strong lately. On their own, they portray a robust economy. However, on the spending side, consumption and retail sales have not been doing as well. When this information is incorporated into the recently revised nonstructural model that we now use in San Francisco to forecast current quarter output growth, it produces a growth rate of 2 percent in the third quarter. Combining this forecast with that from our structural model, we expect output growth in the 2 to 2-1/2 percent range in the second half of this year as well as in the first half of next year. This forecast assumes that the recent slowdown in consumption spending is temporary. If consumption spending fails to pick up, obviously output growth will be slower. To my mind, however, the growth forecast is simply icing on a cake that already has greater wage and price inflation baked in. Even if growth comes in, say, 1/2 percentage point less in the second half of this year, we will still be left with a quite low unemployment rate of probably less than 5-1/2 percent. Based on this, we anticipate an acceleration of inflation on the order of 1/4 to 1/2 percentage point in a wide variety of price and compensation measures during 1997. I realize that there is some uncertainty associated with this forecast. For instance, the coefficients of the underlying Phillips curve are associated with sizable standard errors. However, as far as I know, the Phillips curve is still the best model available to forecast inflation and our analysis suggests that the Phillips curve is basically on track. With unemployment clearly below the natural rate, wages are accelerating and price pressures are building.",631
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. The Tenth District economy remains strong, and I do not have a lot to add to my previous reports. I would point out that our directors continue to report healthy business conditions throughout our District. Retail sales and home building appear to be holding up well in nearly all parts of the District. Manufacturing continues to operate at high levels of capacity; employment levels remain high; rail shipments by one of our major companies are up about 5 percent this quarter over an already strong second quarter. Crop producers are expecting a sharp boost in income as very large crop yields should be combined this year with good prices. So they are very optimistic. The cattle industry is showing some improvement as well, although ranchers are still losing some money and feeders are making just a little. Wage and price pressures appear to have increased in the District according to the anecdotal reports. In addition, price increases for replacement equipment and machinery parts are being reported to us somewhat more often as we go around the District. Having said that, when we shake everything out in terms of the anecdotal evidence, our retailers are still feeling the pressure from rising costs, but we are not seeing a lot of it being passed on into higher prices at this stage. On the national economy, I have no quarrel with the Greenbook forecast. We see the outlook much as it is being shown there, with all major sectors in relatively good shape. As pointed out in the Greenbook, methodology changes are serving to lower the CPI numbers, but when these numbers are adjusted and prepared on a consistent basis I agree with the projection that core CPI inflation will be trending up over the next two years. I think we have to be aware of that. I also have noticed, not only in our District but a little more widely on the basis of anecdotal reports, that there is a bit more of a speculative bent to the economy in terms of types of investments in land and in some of the asset areas. I believe we should at least take note of that at this stage. Thank you.",414
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"The Philadelphia District economy is growing, but not booming, and attitudes are generally positive. Some labor markets are tight while others still have significant slack. There is some upward pressure on wages but downward pressure on benefit costs, especially health care costs. There are some examples of upward price pressures related to steel and plastic inputs. One also hears, of course, that prices are being raised indirectly. For example, fitness equipment suppliers are raising the minimum order required for free delivery. Some auto dealers are giving smaller discounts. Overall, however, price pressures are still subdued in the District, with businesses reporting strong competitive pressures that continue to make it difficult to pass along price increases; they also report better productivity gains than in the published data. Turning to the nation, there is something for everyone, depending on what story one wants to tell, but not all is murky. Clearly, there is a risk of accelerating inflation because of an overheating economy. The risk, however, is more one of an upward creep in the rate of inflation than a breakout of inflation. Actual inflation rates are still remarkably subdued, and most of the pipeline indicators are quiescent as well. The case for a moderating pace of economic growth, while not completely convincing, is nonetheless substantial. We do a fairly good job of forecasting the direction of growth. We do less well forecasting the timing and magnitude of change. But the expansion of consumption appears to be slowing and the rate of GDP growth likely will be substantially less during the second half of 1996 than in the first half. There is a tension between data on the supply side of the economy and the demand side, which usually says something is going on in inventories. Labor markets are taut but final demand, notably consumption, is moderating. Although industrial production rose 1/2 percent in August, capacity utilization in manufacturing actually declined slightly, suggesting less risk of bottlenecks in production. Also, the rate of unemployment consistent with stable and low inflation rates has varied over the last several decades; it is not constant. Finally, monetary policy is broadly neutral. We almost surely will not have far to go whenever an adjustment is decided upon. In short, we still have time for watchful waiting, if we want to take advantage of it, without letting down our guard against escalating inflation.",462
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. Labor markets are tight in the Eighth District according to most contacts. The average unemployment rate for Arkansas, Kentucky, Missouri, and Tennessee was 4.8 percent in July compared with the national rate of 5.4 percent for that month and 5.1 percent in August. A major hotel chain that is planning to hire about 2,000 workers in the St. Louis area in the coming year has held numerous job fairs and has established a toll free phone number to search for and aid applicants. District payroll employment growth, however, has slowed in recent months, but given other developments this may reflect a shortage of workers available to fill positions rather than a decline in labor demand. Michael Moskow mentioned something along these lines as well. McDonnell Douglas ended the strike with their machinists union during the intermeeting period. In the agreement, union workers will receive a 4 percent lump sum bonus this year on top of their normal cost of living increase plus a 2-1/2 percent wage increase next May. In addition, retirement benefits were increased more than 24 percent, from $33 to $41 dollars for each year of credited service. All told, this settlement represents a substantial increase in worker compensation. District retailers that we surveyed reported summer sales increases of up to about 5 percent over the same period last year. Auto sales, in contrast, were flat, but District automotive production is expected to enjoy a normal seasonal upswing in the third and fourth quarters and is projected to be up more than 22 percent for the year as a whole. Sales of new and existing homes are up in most parts of the District. The national economy is coming off one of its best quarters in recent memory. The growth rate of GDP was so fast that it is easy to predict slower growth in the second half of the year. With nearly 1/2 million nonfarm payroll jobs created in the first two months of the current quarter, employment growth is more than double the trend pace of labor force growth, and that means further tightening of already tight labor markets. Many private-sector forecasts of a slowdown in real output growth in the second half of this year have been incorporating expectations of Fed action--action that has not yet materialized. Even if the economy does slow to a trend pace of growth over the remainder of the year, 1996 is going to be a big improvement over 1995 and in my view the downside risks for the real economy are quite low. The risks of more inflation, on the other hand, are all on the up side. The Board staff predicts faster increases in worker compensation. It is forecasting a rise in the employment cost index from 2.6 percent last year to 3.3 percent this year and 3.6 percent in 1997. In 1994 and 1995, CPI inflation was 2.6 and 2.7 percent, respectively. On a basis consistent with those figures, the Board staff now forecasts 3.4 percent CPI inflation for both the current year and 1997. Such developments are against the backdrop of money growth near the top end of the Committee's ranges, readily available credit, and a booming equity market. In the absence of any reaction by this Committee in these circumstances, market participants may easily conclude that the ""acceptable"" rate of inflation has moved up. This would reinforce inflationary expectations and make our job tougher in the long run. We simply cannot afford not to react to the scenario laid out in our inflation forecast.",715
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. By almost all objective measures, the economy in the Ninth District remains very healthy. Labor markets continue to be tight and, given the quality of new hires, businesses report spending increasing amounts on training new workers. Our District is one of those where the local measures of housing activity would be consistent with the surprisingly positive national statistics. Housing through most of the District has been better this year, whether we are talking about sales or new construction, than it was in both of the preceding two years and has continued to hold up as the year has progressed. This also turned out, somewhat surprisingly, to be a satisfactory summer tourism season even though it got off to a slow start. Despite these positive objective measures, business attitudes appear to be a bit on the cautious side at the moment based on our recent conversations. I am not exactly sure about the source of this disconnect. It may be that businessmen are in fact expecting the slowing that has been widely advertised for the second half, or it may be that they are influenced by their continuing inability to raise prices and the continuing virulence of competitive pressures. With regard to the national economy, I certainly agree with the spirit of the Greenbook forecast, so I will make only a few comments. I think the economy is on solid footing. It appears that demand is moderating, but it is uncertain if this moderation is sufficient to relieve pressures on resources in a meaningful way. I share the concern that resource pressures will lead to a modest acceleration of inflation. We went back and looked in a little more detail than usual at the experience of the mid-1960s and the late 1980s. Those years involved long periods of labor market tightness that in our judgment were perhaps comparable to what we have been experiencing recently. What we saw was that those periods were associated eventually with an acceleration of inflation. Of course, what happened back then is not independent of the policies that were pursued, and we have to be careful about causality and all of that. Nevertheless, the data suggest the risk that more inflation is in train and that it will emerge eventually.",425
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, the economy in the Second District continues to pick up, so the positive developments that I began to record two meetings ago for the District continue. Payroll employment in the private sector accelerated in July to annual growth rates of 1.2 to 1.5 percent in New York State, New Jersey, and New York City, In August, New Jersey increased its rate of gain to 2.1 percent. The real estate markets also reported renewed vigor. Permits for new home construction and contract awards for nonresidential construction rose sharply in July and continued a trend of favorable year-over-year comparisons. More recently, New York City and northern New Jersey realtors reported that sales of existing homes rose 8 to 10 percent in August and early September compared to the same period in 1995, and floor traffic, we are told, has remained heavy recently. Consumer spending has firmed. New York and New Jersey officials reported 5 percent gains in August retail sales tax collections, while New York City reported an 8 percent gain on a year-over-year basis. That rate of increase has risen steadily since April, with no signs of softness, implying no pause in underlying consumer expenditures over the summer months. The securities industry is very healthy; one of the major firms reported a 39 percent gain in pre-tax profits for the third quarter, and we are hearing from the others that they will be reporting very good gains as well. In the inflation area, the news is very good, indeed. Consumer price inflation in the New York-northeastern New Jersey area was unchanged in August at 2.7 percent on a 12-month basis. That compares to a national gain of 2.9 percent. August is the fifth consecutive month in which the region's rate of inflation has been less than 3 percent. At the national level, we agree with everyone that growth is clearly moderating from the 3.3 percent first-half pace. We share the sense of confusion caused by the divergence between the demand side and the supply side in the incoming data, but taking account of an inventory boost, we think that growth will be around 2 percent for this quarter. In comparing our forecast to that in the Greenbook and assuming the present monetary policy, we have real GDP growth slowing next year to 1.7 percent. The Greenbook has it slowing to 2.1 percent. We are slightly more optimistic on inflation. We have the core CPI creeping up and just touching 3 percent in the fourth quarter of next year. There is no question about the risk of more inflation if the rate of wage inflation continues to move up and the price discipline that we have seen does not persist. We have to be concerned about that risk. On the other hand, I think we have equal reason to believe that the inability of businesses to increase prices will continue, that the cost of benefits will remain a positive factor in holding down the rise in overall compensation costs, and that wage earners, including those with high-level jobs, will continue to prefer job security rather than wage increases. I believe that the conduct of the United Automobile Workers provides very important evidence in that direction. For quite a number of months, we have been accepting the risk that these phenomena will persist, that prices will continue to be well behaved because businesses can't raise them, and that wage earners will continue the behavior that they have shown for several years. As a result of our accepting that risk, and that is what it is, we have had the wonderful phenomenon of high growth and low inflation. That is a combination richly to be desired. Thank you.",732
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. After reviewing my comments from the last meeting, I conclude that there has not been all that much change. We are still expecting moderate second-half growth, which would be a slowdown, of course, from the first half. The evidence on inflation that came in during the intermeeting period generally has been fairly benign, and I would point to the core indexes and to commodity prices in particular. I asked myself what, if anything, we know that is new since the last meeting. At best, it seems to me that the news is fairly marginal. On balance, the signs of the second-half slowdown appear to be a bit more solid, but not all that much. Consumer spending has slowed, but now we are seeing signs that it may be turning back up. Housing has been a bit difficult to read, given that the starts number for August was strong. We continue to think that we are poised for a slowdown in housing demand because of the backup in long-term interest rates, but housing has held up surprisingly well. Consumer credit seems to be slowing a bit, to a pace more in line with income growth, perhaps as consumers take cognizance of increasing repayment requirements associated with higher debt levels. Nonresidential construction is showing mixed signs. Net exports appear to be a bit of a drag on the economy. The areas of strength that we have talked about in the economy are still in evidence. The labor market is very strong; unemployment is low; consumer confidence is up, perhaps fed by the strength in employment. The manufacturing outlook seems stronger. Business fixed investment also is poised for substantial growth, perhaps not at a double-digit rate, but it remains a solid contributor to real growth. One bit of news relates to corporate profits. At our last session, there was a fair amount of discussion about whether they would hold up. They do appear to be holding up better than might have been anticipated if one were assuming that increases in wages would result in a profit squeeze unless firms were able to pass on the increases through higher prices. So, while it appears that the signs of a slowdown are becoming a bit more evident in consumer spending and construction, there is still growth--just slower growth. The areas of strength that are prevalent in the economy should also prevent that slowdown from careening into negative growth. A bit more monetary restraint is being provided by the markets since the last meeting, as evidenced by higher long-term rates, including mortgage rates. The stock market has actually recovered. That means that the cost of capital is down, and that argues for continued business investment. Banks are continuing to support growth with credit availability, and I might mention that banks are doing quite well. They are making money! On the inflation front, the laws of gravity appear to be holding greater sway than the principles of economics. At some point, we have to expect that labor costs are going to feed through to prices. If they do not, either profits are being squeezed, which does not appear to be the case, or productivity must be improving, which may be the case. However, statistical analyses and data are not yet showing the improvement. There is considerable analysis of and comment on this inconsistency in academic papers and also in the press. The explanations tend to concentrate on the continued efforts to downsize business firms, lower health insurance costs--some of that improvement may be permanent--additions to industrial capacity and other fixed investments, the inability to pass on price increases, and perhaps a breakdown in inflation psychology. Consumers appear to be quite price conscious. If all this is true, there may even be some room for optimism on inflation, but it seems to me that this is pure conjecture and we really cannot dismiss the tightness in labor markets. Clearly, there is room for additional economic analysis of productivity. In sum, I think we are about where we were last month. We know more but the new information is marginal. We still appear to be on a sustainable growth path as we look for further confirmation of a slowdown. The inflation news has been better, but if economic history repeats itself, the risks are on the up side. So, we must continue to be alert to inflation pressures.",842
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The data that have become available since the August meeting have provided a quite interesting set of crosscurrents. On the one hand, the data indicate that growth has slowed much more sharply in the third quarter than I previously expected, moving down to a pace close to trend. Moreover, the apparent mix between final sales and inventory investment suggests a diminished prospect for above-trend growth in the period immediately ahead. On the other hand, the August employment reports suggest that labor markets have become even tighter, raising the danger of a still faster acceleration of wages and therefore increasing the risk of higher price inflation going forward even if growth has slowed to trend. Thus, the case for tightening to slow growth to trend has diminished in my judgment, while the case for tightening to counter inflationary utilization rates may have increased. Well, it never gets easy. At the same time, the August CPI and PPI reports challenge us with further evidence that core inflation continues to edge lower despite utilization rates that historically would already have been associated with rising inflation. Let me elaborate on these two issues, beginning with the prospects for growth. While I am comfortable with the broad outline of the path for real GDP in the Greenbook forecast, I would have been a bit more aggressive in lowering my forecast for third-quarter growth. There were three significant reports since the last meeting that suggest slower growth: the August retail sales report, the July construction put-in-place report, and the July foreign trade report. Cathy, you mentioned earlier that you were concerned that consumer spending might be even stronger than in the Greenbook forecast. My concern would be quite different. I suspect that consumer spending is growing at least 1/2 percentage point more slowly in the current quarter than the Greenbook is projecting. So, I think the central tendency right now appears to be growth around trend, and I would even say there are about equal chances that third-quarter GDP growth will be below trend as above trend. While the details of one quarter are of little importance to our task here, the sharpness and widespread nature of the softening of demand in the third quarter might make us cautious about the timing of the tightening that still appears to be the most likely direction of policy going forward. I expect an increase of only 1 percent in final sales in the third quarter compared to 4 percent in the previous quarter. At the same time, production-side data--payroll employment, aggregate hours, and industrial production in particular--look stronger. The contrast between the softness in demand and the strength in employment and production is likely to be reconciled with strong third-quarter inventory growth consistent with the rapid inventory buildup reported for July. However, if the rebound in inventory investment leaves the third-quarter growth closer to 2-1/2 percent in the context of softening final sales, the prospect of slower fourth-quarter growth becomes still more persuasive. I think the most important implication of the developments in the third quarter may be that the unexpectedly sharp slowing in the growth of final sales has made room for a rebound in inventory investment to a trend level, perhaps removing the danger that inventory building will sustain above-trend growth in coming quarters. My strong expectation is that we are in a temporary lull. Fundamentals do not suggest to me a serious likelihood that the expansion is tiring to the point of slipping into protracted below-trend growth. Indeed, I continue to expect that, with an unchanged policy, growth will be near trend or slightly above in coming quarters. Nevertheless, the sharpness of the weakening in final sales in the third quarter adds a cautionary note to this forecast and provides the rationale for waiting for data to confirm the expected stabilization in final demand. Second, utilization rates: The decline in the unemployment rate to 5.1 percent in August was another significant piece of data. It suggested that the labor market may have tightened in August from the 5-1/2 percent area over the last couple of years, to a 5 to 5-1/4 range in the period immediately ahead. There are good reasons to believe that the decline in the unemployment rate in August was exaggerated, for example, because of the late survey date. But there is also reason to believe that the above-trend growth over the first half has left a legacy of somewhat higher utilization rates going forward. The staff completely discounts the August decline in the unemployment rate as a statistical quirk and assumes that it will be reversed in coming months. As a result, they project the same 5.4 percent unemployment rate going forward as in their last forecast. The difference between a shade below 5-1/2 percent and a shade above 5 percent is a very important one to me. Personally, I might buy provisionally into a NAIRU as low as 5-1/2 percent. I do not buy into a NAIRU as low as 5 percent. As a result of the August employment report, there is more uncertainty about the degree of labor market tightness, and in my judgment the danger of higher inflation going forward is also somewhat greater now than earlier. Third, a word on inflation performance: The 12-month inflation rate, as measured by the core CPI, declined to 2.6 percent in August, a tenth lower than in the previous four months, and it has declined nearly half a percentage point since the end of 1995. The 12-month core PPI inflation rate was 1.4 percent in August, close to half the pace at the end of last year. Not only has inflation not begun to rise, but by some measures it has continued to decline. While monetary policy should be forward-looking, the disparity between inflation performance and inflation forecasts looking backward might temper our aggressiveness in adjusting policy in response to forecasts of higher inflation, at least until inflation stabilizes.",1177
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. In reviewing the data that have accumulated since our last meeting, I find myself in rough agreement with the Greenbook's assessment. The evidence clearly points to a reduction in the momentum in aggregate demand with a slackened pace of spending growth now likely in consumption, government spending, and residential investment during the current quarter. With the pace of final demand now moderating, the upside risks from inventory investment are also reduced. On balance, it seems likely that demand growth will revert toward trend in coming quarters, with the risks to that forecast roughly balanced. The primary problem that confronts us is that labor markets are already tight, and during the assumed transition to trend growth slack is likely to diminish even further. We thus appear to be on course toward a landing that is ideal except for the fact that we are now poised to hover above the runway without actually touching down. [Laughter] Even if we agree with the Greenbook's argument that the decline in the unemployment rate to 5.1 percent in August should not be interpreted literally, it does seem evident to me that the labor market has notched tighter. In this respect the unemployment data seem consistent with the anecdotal evidence. It is not uncommon to hear that it is now ""impossible"" to find qualified entry-level workers, whereas six months ago the word ""difficult"" would have been used more frequently. At a recent Dallas board meeting that I attended, one director described the pressures that an inability to hire entry-level workers was placing on supervisors who were forced to work overtime. He explained that quit rates were rising among his supervisors as a consequence. I think this is precisely the type of anecdote that one would expect to hear at the onset of an inflationary episode. If widespread pressures of this type emerge, it seems likely that firms eventually will be forced to bid up wages to retain workers and then pass through higher unit labor costs to prices. At the same time, though, the current episode has some unique features. While the labor market is tight, job insecurity also seems alive and well. Real wage aspirations appear modest, and the bargaining power of workers is surprisingly low. Although there is upward pressure on entry-level wages, more senior workers and particularly those who have earned wage premia in the past, whether it is due to the power of their unions or the generous compensation policies of their employers, seem to be struggling to defend their jobs and to avoid sacrificing the perks they currently enjoy. I would also interpret the UAW negotiations as indicating that we have aging auto workers who are focused on securing their own benefits during their lifetimes but appear reconciled to accepting two-tier wage structures with less generous packages for new hires. Of course, we hear reports of continued upward pressure on wages in skilled technical jobs, but that should hardly surprise us because the wage differential associated with skill and education has been widening secularly since the late 1970s, most likely due to technological shifts in the workplace favoring skilled and disfavoring less educated workers. And, of course, while wage growth has accelerated, compensation growth has increased only moderately because companies have offset more rapid wage increases with greater health care cost containment. We may hypothesize that that favorable trend is about to conclude, but anecdotal reports suggest that corporations remain confident of their ability to achieve further cost savings. In contrast to past expansions that have led to inflationary upticks, capacity utilization is not excessively strained. Delivery lags have not increased. The world economy is not in a synchronous boom. Firms still insist that it is impossible to pass along price increases, and the behavior of broad inflation measures remains consistent with that perception. The dramatic table in Part II of the Greenbook reveals no evidence of an intensification in inflationary pressures. Nor can we find evidence that compensation pressures are eroding earnings. The markup of prices over unit labor costs in the nonfinancial corporate sector, for example, has not been declining, and pressure on profit margins is a typical precursor of an inflationary outbreak. Further, we have yet to see any evidence of an uptick in inflationary expectations. I found it striking that when rumors surfaced that hinted at a higher chance of a Fed rate increase today, longer-term rates rose rather than fell. So, we may well be at a point where inflation is poised to rise, but if we are, I think we are still at an early stage of the inflationary spiral. The anomalous behavior of inflation in the face of seemingly tight labor markets is, of course, leading virtually all economists to lower their estimates of NAIRU. For all the reasons that I have given, I am sympathetic to the view that the world has changed. Nevertheless, let me conclude by saying that I would not want to carry such reasoning too far. First, an unemployment rate of 5.1 percent lies near the lower end of almost anyone's estimated NAIRU range. Second, whatever the NAIRU, the unemployment rate does have predictive power for changes in the inflation rate. The probability of an increase in inflation is clearly higher when labor market slack is lower. For that reason, I conclude that the risk of an increase in inflation has definitely risen, and I would characterize the economy as operating in an inflationary danger zone.",1061
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"The worried faces around this table, I think we should remind ourselves, are worrying about the best set of problems that we could think of having. Central bankers all around the world would wish for this set of statistics. I think that Mike Prell and some others, who have rightly emphasized the uncertainty and the difficulty of forecasting at this particular moment, have overdone it a bit. In fact, the developments of the intermeeting period, reinforcing those of the previous intermeeting period, have given us reason for some confidence in our sense of what is happening in the economy and in our ability to forecast reasonably well at least in the short run. There were three things that we thought we knew. One was that the economy was growing strongly but that the expansion was likely to slow. The data are certainly consistent with that expected slowdown, especially on the consumer side, although it is not certain, as nothing is ever certain, that the slowdown will last. The labor markets have proved tighter than we thought, but tight labor markets are something we ought to want, generally speaking. We ought to want the incentives that tight labor markets create both for employers to be as efficient as possible and for employers and employees to focus on upgrading the skills of new and old workers. We need that badly. Second, we thought we knew that wages would begin to creep up in the tight labor market, mitigating the long stagnation in wages that we have had. This has indeed begun to happen, raising the cost of labor despite the slower growth in the cost of benefits. Third, we thought that these wage increases would begin to be passed along in price increases if the slowdown in the expansion did not begin to take the edge off the robustness of the economy in time to keep inflation under control. We thought the risk was clearly on the up side and that we should stand ready to move quickly to forestall price inflation if the economy proved more robust than we thought. I said at the last meeting that we might not find the answers all that quickly, and the evidence around the table is that we have not. The behavior of prices has, as people have pointed out, been surprisingly good. It seems to me that we are still in the situation we were in at the time of the last meeting of watching very carefully the potential for inflation. I agree with Governor Yellen that we are in a danger zone, but we have not seen higher inflation yet. We should be pleased, in fact, that things are turning out as well as they are and that we have understood the current situation as well as we have.",516
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I think I am well aware and I am certainly deeply respectful of the arguments that would say that inflation is likely to rise and that policy should move now or perhaps sooner than now to prevent it. Of course, this view is based, as we have been discussing, on two central facts--that the economy is very fully utilized and that compensation is increasing as a consequence. These conditions clearly exist. I want no part of an inflationary rise. I am sure no one here does. But I also see a number of factors that have forced me to question whether such an event is inevitable, at least anytime soon or to a meaningful degree. We have been talking about all of the reasons in prior meetings and again this morning in some detail. I will not run through my laundry list; it is much the same as we have been discussing. I would say that on balance I just do not see the evidence that moves me away from the judgment that I have been making for some time. There continues to be, as has been discussed, no visible sign of rising price inflation yet. If anything, it is continuing to go down, as Governor Meyer pointed out. I think there are many tell-tale indicators, precursors, that would show that there are very few signs of inflation actually in the pipeline. Unit labor costs are down from 1995 and they are forecasted to go down further. Foreign inflation is benign. Inflationary expectations are flat. We see very little delivery tightness. Commodity prices are flat to down. Real interest rates are flat in a neutral zone. And it does appear that we are getting the slowing in GDP growth that I think we felt was essential to maintain a steady policy. We will see how that develops. With all of this said, I think nonetheless that the risks are clearly on the high side, and I continue to sit very lightly in my chair. I did not arrive at this judgment easily, but I would say that I believe we should continue to give this thing a chance.",412
-fomc-corpus,1996,"Finally, Governor Lindsey.",5
-fomc-corpus,1996,"Thank you, Mr. Chairman. Last night one of the TV news magazine shows had a story about people who won the mega bucks lotteries, millions of dollars, and ruined their lives. [Laughter] That was a popular thing to show since most of us lose in lotteries and maybe we should be grateful because losing helps us to get on with our lives. [Laughter] The TV show reminded me that we have been having a string of what appears to be good luck, although the people at this table all know it is the result of our skill at managing the economy! I would like to comment on the possibility that our luck may be running out. First, it is clear that we are seeing definite acceleration in nominal wages. Second, it also seems clear that the acceleration is not now being passed through to prices, and that is the best of all worlds. A question we have to face, one of the questions that Governor Meyer addressed, is whether this subdued inflation is going to persist along with sustained growth further out. I have done a back-of-the-envelope calculation. It takes 70 cents of extra spending per capita per day to increase economic growth 1 percent. Now, I use this example whenever a reporter asks me to comment on the economic outlook. I ask how much are you going to spend tomorrow, within 70 cents, and when they can't give me an answer I say that I can't tell them what economic growth is going to be next quarter. [Laughter] Without using the sophisticated analysis either of the Greenbook or that Governor Meyer presented, let me use some very unsophisticated math. In the last four quarters, the economy has grown at a 2.7 percent annual rate. Indeed, the economy has grown at a 2.7 percent annual rate since the fourth quarter of 1991. So, I am going to use as my operating assumption that we are in a 2.7 percent economy, which I agree is probably above the sustainable pace at this point. Even if we make that assumption and if we assume that the staff forecast is right about the third quarter, then in the fourth quarter we are going to need a 1.7 percent rate of growth. If the Greenbook forecast is right about the third quarter and the fourth quarter, growth in the first quarter of next year will have to be at a 1.5 percent rate. In other words, just simple regression toward the mean, in addition to all the reasons that Governor Meyer noted, suggests that our luck on the real side may be about to run out, if we think of this lottery drawing as the number from the BEA. But who knows? They may deliver an extra B-2 bomber one of these quarters. Similarly, we are running a risk that our luck is going to run out on the inflation side. In the last year, the monthly CPI increase has been .1 percent four times, .2 percent two times, .3 percent three times, and .4 percent three times. That is what inflation at an annual rate of just under 3 percent is all about. It is essentially a random number month to month on which apparently billions of dollars are being bet. But if we view it as a random number, the odds of our pulling a .4 percent number in either of the next two months run just a tad under 50 percent. That will be, judging from the recent reaction to the .1 percent increase, not a happy day. So, I think we have a chance of seeing our luck run out on the real side of the economy, including inflation. But that is not where I am most worried. What worries me more is that our luck is about to run out in the financial markets because of what I would consider a gambler's curse: We have won this long, let us keep the money on the table. You can see early signs of this. It includes real estate appreciation in the Hamptons, Connecticut, and Manhattan. BMW and Mercedes both had their best summer in history in the United States. The IBES earnings expectations survey for 5-year projected earnings hit a 12-year high in August. It indicates that earnings are expected to grow at a rate of a little over 11-1/2 percent per year. Now, if we assume nominal GDP growth of 5-1/2 percent over the same period, this means that NIPA profits will rise from 10.7 percent of national income to 14.3 percent of national income in 2001. Readers of this transcript five years from now can check this fearless prediction: Profits will fall short of this expectation. Unfortunately, optimism is ripe in the markets. Excessive optimism is also necessary to justify current levels of IPO activity and valuations of highly speculative stocks. While it is not so large as to exert undue pressure on the real side of the U.S. economy, this emerging bubble is nonetheless real. As a survivor of the so-called Massachusetts miracle to which Cathy Minehan referred earlier, I can attest that everyone enjoys an economic party. But the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term saving rate, a seemingly random redistribution of wealth, and the diversion of scarce financial human capital into the acquisition of wealth. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights. Whenever we do it, it is going to be painful, however. In addition, there is an associated risk that we face every two or four years, and it is related to the bond market. The markets have built in an array of rather optimistic scenarios for the effect of the upcoming elections on the nation's health. The dominant view is characterized by a recent missive from Goldman Sachs which predicted a divided government: ""Continued divided control of government in fact might provide the ripest political conditions for a fresh push toward mandatory spending program overhaul in the next Congressional term, which would have the clearest favorable ramifications for deficit control in the coming decade."" A second equally optimistic view was provided by a friend of mine who straddles both the political and the financial markets. He predicted a Democratic takeover of Congress and said with regard to entitlements reform, ""Look, their program of savage cuts becomes our saving the system and it will get enacted."" In this regard packaging is all that matters. It is what we might call the Japanese business gift theory of politics. In short, the markets now have built into them a very optimistic view of what is going to happen after November 5. They may be right no matter what happens. I think there are two reasons to differ. The first is polarization and the second is party parity. Any look at the political advertisements now running makes clear that the new Congress is going to be fairly polarized. I see two types of members: those who got there by accusing their opponents of wanting to throw granny out in the snow and those who survived by vociferously denying that they wanted to throw granny out in the snow. How is either going to enact Medicare or Social Security reform? Second, no matter which party controls Congress, the margin of control is likely to be a relative handful of seats. This creates a very interesting dynamic. The majority will be ill-inclined to take risks for fear of losing its status. The minority will be both hungry and embittered and quite unwilling to help the majority shoulder the responsibilities of governing. That is not an optimistic recipe. Now, it may be that the optimists in the bond market who believe these optimistic scenarios are right and that the people are going to send only statesmen to Capitol Hill, just like they have every two years. In this scenario we, the bond market, and the country have nothing to worry about. But if the optimists are wrong, then indeed not only our luck but that of the markets and of the economy has run out. Thank you.",1653
-fomc-corpus,1996,"On that note, we all can go for coffee.",11
-fomc-corpus,1996,Mr. Kohn.,5
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,"Questions for Don? If not, let me get started. If we cut through the somewhat foggy data for the third quarter, I think that there are two important hard numbers that emerge. One is that no matter how we look at the numbers, it is very difficult to get around the fact that hourly wages and salaries are accelerating. We have no third-quarter data on fringe benefit costs, but as I indicated in the August meeting in support of the views of the Vice Chairman, I think that health cost increases are still on the way down and still basically holding down overall compensation costs. Wage pressures are unquestionably the result of the tightness in the labor markets that we have all seen, and that tightness by every indication has increased rather than decreased in recent months. It is conceivable that there are seasonal factor adjustment problems in the unemployment rate, and I do not doubt that that is the case. There is also a sampling variability issue, which is not to be dismissed very readily, in the household sample figure. But the initial claims and more specifically the insured unemployment numbers are not inconsistent with some tightening in labor markets in the last two or three months. The second very important hard number may be somewhat less hard than usual and is one that Governor Phillips pointed to, namely that profit margins seem to be holding up in the third quarter. In any event, the evidence that they may be declining is not very persuasive. This means that the rise or acceleration in compensation has to show up as it has historically either in increasing prices or increasing productivity growth. I am talking about the third quarter, which is just about history at this stage. The performance on the price side, I think, is very impressive. You cannot find price increases of any significance in the core CPI, which went up .06 percent and not .1 percent in August, if you want to look at some numbers to disbelieve, and I must say that I do not entirely believe them. Data relating to underlying inflation in the pipeline, as I believe Governor Meyer pointed out, show nothing. The pickup that we are getting in the Chicago Purchasing Managers' Survey, as far as I can see, is in oil product prices, which show up across the board in those surveys, and we are seeing them elsewhere. I do not take the price data in the purchasing managers' surveys as very useful, largely because we have far better data for the actual commodities that are being purchased. The purchasing managers' data, I am almost certain, are coincident with the rise in oil product prices and futures. The difficulty that one has with all of this is whether prices will remain generally stable. I must say that I do not expect the September CPI to be as benign because it will include the 10 percent excise tax for airlines, and it is likely that the 1-1/2 percent decline in apparel prices for August will be largely reversed. Those two factors in and of themselves can very readily turn the CPI around. I must admit that I would be quite surprised if we did not get a significant uptick in the core CPI in the September numbers. The question we are dealing with is whether the price/profit-margin/wage pattern implies accelerated productivity. While it is difficult to make a judgment about whether the productivity numbers are improving, it is not difficult to make a judgment that the rate of increase in productivity is a lot higher than is shown by the conventional numbers. At the August meeting, I raised a question about the internal inconsistency between the manufacturing data and the changes in total nonfarm business productivity. Since that meeting, we have done a fairly extensive amount of statistical evaluation and have made some very interesting findings. The first is that if we disaggregate productivity in the nonfarm business sector into corporate and noncorporate, the corporate data are generally not bad, though one must make a judgment with respect to how one price-deflates the gross corporate product. Nonetheless, the figures that are derived are far more consistent with the anecdotal data that we see on a day-by-day basis in the press and that we hear when we talk to anybody in the corporate sector, namely that productivity growth is a lot stronger than the 1 percent or less that we have seen in the nonfarm business product data. In fact, the number for the last four quarters is 2.6 percent at an annual rate; since 1980, it is 1.6 to 1.7 percent, well above the nonfarm business product numbers. Indeed, when we separate out both the nominal and the real noncorporate nonfarm data, we find something quite startling in those data, namely that measured productivity growth in the noncorporate sector is negative and has had a negative trend since 1980. The reason for this obviously is the price factors that BEA uses. When we disaggregate the Gross Product Originating data to two-digit SIC industry detail for those industries that tend to be in the noncorporate sector, namely services, we get full confirmation. Taking the new GPO by industry data through 1994 just published by Commerce and applying hours data, we get productivity for total services, which is a fourth of gross business product, declining 1.4 percent per annum since 1990, health services declining at a rate of 2.7 percent for 1990 to 1994, legal services at a rate of 1.6 percent--that is a more credible number [Laughter]--and social services, which are a large sector, declining at an annual rate of 3.7 percent for 1990 to 1994. This tells us that a large chunk of the productivity data in the nonfarm business product area makes no sense and is giving us a distorted view of the underlying productivity growth rate in the economy as a whole and a distinctly distorted view of underlying real costs. If we look at the data on the corporate sector, even presuming that the inflation rates in that sector are misestimated, we still get some very persuasive productivity numbers. For those who have been brought up believing that productivity rose quite substantially from 1960 through 1973 and then took a swoon, these data show that when we use income-based statistics to disaggregate the nonfarm business product data, which show a decline from a 3 percent annual rate in the 1960s to 1.1 percent now, virtually all of that decline in productivity growth shows up in the nonfarm, noncorporate area. Productivity in that sector rose at a 5 percent annual rate from 1960 through 1973 and has been negative on average since then. The annual rise in productivity in the corporate sector went from 2.2 percent during the pre-1973 period to 1.7 percent since then. In other words, the tremendous contraction in productivity, which all of our data show, is partially phoney. The result of all of this is that if we look at the underlying cost structure and adjust for the bias in service prices, which is obviously the source of this problem, we get an increase in real gross product for the noncorporate sector, an increase in productivity, and the numbers all make sense, assuming that the overall price index comes out lower than implied by the published data. If we look at the current structure of costs, hourly compensation for the corporate sector and probably for the whole economy is going up 3-1/2 percent per annum. If output per hour for the overall economy is going up 1-1/2 percent, which seems a lot more likely than the reported numbers, unit labor costs would be rising 2 percent. Multiplying unit labor costs by .7 percent, the general proportion of labor costs in total costs, results in a contribution to total costs of 1.4 percent from the rise in the compensation of employees. Other costs are going down: Indirect business taxes per unit of output are moving lower as are net interest costs. In the most recent period, these declines average about 1/2 percent, so growth in underlying total unit costs is somewhere in the area of 1 percent. This explains why profit margins are large and holding, and it explains why price pressures are nowhere near as high as we would ordinarily expect them to be at this stage of the business cycle in the context of laggard productivity growth. The question that one must ask in all of this is how to explain the extraordinary behavior of prices when wage increases are very clearly accelerating. The answer is that we can explain it only if productivity is indeed rising a lot faster than our statistics indicate. If we look at the total cost structure, I grant that at this stage it is virtually impossible to make a judgment as to whether productivity growth is accelerating, but it is not difficult to make a judgment that underlying unit costs are rising at a very marginal rate. The evidence that we see of declining unit labor costs in manufacturing is a little dubious because the hours in the personnel services area that are used in manufacturing are not adjusted in those data. But even with those adjustments, manufacturing, which is a big chunk of the corporate sector and indeed probably far more representative of what is going on in the real world than some of the service areas in the noncorporate sector, is showing a cost structure even more benign than the total for all corporations. If this analysis is in fact correct, it is important for us to take a look at what it implies about the current performance of the economy and the underlying inflationary forces. While the probability is still better than 50/50 that we will not get through this period without the very strong pressure on wages overcoming the productivity advances and engendering a much higher rate of expansion in total unit costs, I think the probabilities are falling. Indeed, there is a not inconceivable probability that we could get through this period into the early months of next year without moving policy. The reasons are as follows. One, as Governor Meyer said and as I implied in the August meeting, the inventory data appear to be moving around. We know that the July change in constant dollars is at almost a $50 billion annual rate. The August figure is substantially less. We know that from the numbers for motor vehicles, but we are also picking it up in some other indications for August inventories. One stems from a method for estimating inventories on the basis of industrial production that is not too bad a predictor of inventories before they are published. Another comes from a model based on C&I loans and some judgment with respect to how commercial paper issuance relates to the financing of inventories. That also shows a somewhat lower rate of August inventory accumulation but a higher rate in September. The problem here is not that we are getting an excessive buildup of inventories. Even with a fairly substantial expansion of inventories--and the rate of inventory investment is now up significantly from where it was in the second quarter--we would need a long period of this type of inventory investment to get an inventory overhang. It is not that. I suspect that inventory-sales ratios are still not very high even at the end of September. The issue is that the level of output is being driven by higher inventory investment. As a number of you have mentioned, that takes some of the pressure off the fourth quarter and the first quarter of next year. The issue is not whether inventory accumulation is voluntary or involuntary; it is just that it is there. If it is there, it affects the arithmetic of the growth in GDP. Secondly, while the August retail sales figures may be dubious, I do not think the revisions going back into June and July are. They show a significant slowing, which as best we can judge is also occurring in September. Mike Moskow points out that motor vehicle sales for the first half of this month are at a seasonally adjusted annual rate of 15.1 million. We get the same number here and that is a significant decline from the August level. Part of that may well be fleet sales, but it strikes me in looking at the distribution between fleet and retail sales, which is roughly a PCE/producers durable equipment split, that part of the motor vehicle number is clearly in the retail sales area. We also received a set of weekly chain-store sales data this morning. If the data are to be believed, the September seasonally adjusted numbers are well under the August numbers. Now, I am a little suspicious of the way those numbers run, largely because they have not been that reliable in the past. But they give some indication that, at this stage, we are not getting a pickup in consumer expenditures despite the fact that the consumer confidence numbers are quite strong. The Conference Board number circulated this morning was down just a small fraction; the Michigan Survey looks strong; the ABC numbers look strong; and capital gains and the wealth effect are strong. Yet, with all of that in the background, where are the sales? Now, one can readily argue that the dip in sales is only temporary and sales will come back, and that is a credible forecast. It also might be that consumer credit, which has been growing less rapidly and getting increasingly tight, is finally beginning to affect the consumer data. I think it is important to differentiate between current reporting and forecasting. Current reports, as best I see the numbers, are not yet showing the pickup that is implied in the Greenbook. It may very well occur. We know from the past that these numbers fluctuate a great deal. But for the moment, it is one thing to forecast and it is another to report. Nonetheless, for a number of reasons that were discussed earlier, I continue to believe that the probability of our having to move, though declining, is still above 50 percent. The first and most important reason is clearly that the labor markets are getting increasingly tight. It may be that we will have the good fortune to find that some of the recent wage data are an aberration, but again that is a forecast. The information that we have today suggests that these markets are very tight, and I am not aware of any evidence of a letup. The orders patterns at capital goods establishments are quite robust. The so-called adjusted real orders figures that we calculate to try to get a short-term forecast of industrial production are quite firm. I do not know of any evidence that says that industrial production is easing. The reason production is this strong is the buildup in inventories. That is where the impetus essentially is coming from. Housing starts, home sales, and the like are higher than we would have expected at this stage. We have to be a little careful in our assessment, however. As Mike Prell pointed out, a good part of the increase in starts in August reflects a sharp rundown of the permits backlog. This suggests that the permits come first, the starts come second, and there have been indications that permits are weakening, although not as much as I would have expected. I think this is partly because, if we disaggregate home sales, it is becoming apparent that home sales financed by adjustable rate mortgages are becoming a more prominent element in the housing market. Clearly, as interest rates rise, adjustable rate home financing goes up. While cash sales still account for a small part of the total, they do not seem to be doing much. So, the fixed-rate mortgage is not as potent a force in reducing home sales as it used to be in periods when mortgage rates were rising. I mentioned previously that consumer confidence is very high. The survey data are showing no signs of deterioration. The stock market, needless to say, is going on its merry way. It strikes me that we have to be very much aware of certain key data as they come out in the weeks ahead. I think the data relating to the whole insured unemployment system, which show as I said no signs of simmering down, are crucial to our assessment. We have to be aware of the possibility, as I mentioned at the July and August meetings, that if we begin to see signs of some pressures on the product side of the economy, in intermediate goods prices, and evidence of tightening delivery schedules--the usual types of developments that suggest that the economy is beginning to run not only into labor market tightness but production facility tightness--we can probably expect that inventory investment in safety stocks is going to rise and rise significantly. At this point, even though the current rate of inventory investment is a lot higher than it was in the first half of the year, it does not imply any pronounced increase in inventory-sales ratios. In the past, we have seen such an increase. If that begins to show up, it will be indicating a very strong economic boom superimposed on the expansion that we already have. At the moment, no evidence in any of the data that we look at suggests that. If we start to see profit margins erode, it will tell us that productivity gains, which have been supporting profit margins, are probably easing and that price pressures are probably going to start to show through. That to me would be a very important signal that the inflationary dangers are increasing unacceptably rapidly. I recognize that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on. We have very great difficulty in monetary policy when we confront stock market bubbles. That is because, to the extent that we are successful in keeping product price inflation down, history tells us that price-earnings ratios under those conditions go through the roof. What is really needed to keep stock market bubbles from occurring is a lot of product price inflation, which historically has tended to undercut stock markets almost everywhere. There is a clear tradeoff. If monetary policy succeeds in one, it fails in the other. Now, unless we have the capability of playing in between and managing to know exactly when to push a little here and to pull a little there, it is not obvious to me that there is a simple set of monetary policy solutions that deflate the bubble. We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. My concern is that I am not sure what else it will do. But there are other ways that one can contemplate. This leads, as far as I am concerned, to very much the same policy discussion that we had in August. If there are indeed accelerating inflationary pressures, 25 basis points ""ain't going to do it."" A 25 basis point change used to be a mere indistinguishable tick in interest rate charts to which no one ever paid much attention. Despite the possibility that the markets may assume, if we were to move 25 basis points, that that would be it, I do not believe it. Nobody is going to believe that 25 basis points will accomplish anything. The minimum adjustment needed to have any effect is 50 to 75 basis points. We could have moved 25 basis points in August, as I indicated then, if previous policy had been on a tightening path. But a move then, and I must say now, would be a reversal in trend and would imply in my judgment that it eventually would have to total at least 50 basis points, probably more, and I am sure that the latter would be priced into the markets fairly quickly. This expectation of further action unfortunately requires us in my view to be more cautious than we would like to be if we were dealing with a wholly symmetrical approach to monetary policy. I would like, if we can possibly do it and as I indicated in August, to avoid our moving up just as the rate of increase in GDP starts to come down. We are only a week away from the fourth quarter. I do not know about the rest of you, but my recollection is that whenever we are at the peak of intense demand pressures, we never are able to identify the peak at that point in time. It is only in retrospect that we identify it. So, we have to be careful about distinguishing between history and forecasts. My general impression is that the probability of a peak at this stage, as I said, is less than 50/50 but growing and that we may not need to move prior to the end of this year. We may not need to move as we get into 1997 if the economy starts to look as it did in 1995. That is not an inconceivable development as we look at the data that we have at this stage. There is no evidence that the economy is about to slip into recession. But there is at least a not unreasonable possibility that the pressures on labor markets as well as on the economy generally could ease enough to reduce the current set of pressures. Having said all that, I fully acknowledge that we have a very tight labor market situation at this stage. I think identifying the current situation as an inflationary zone, as some have argued, is a proper judgment at this point. But it is a zone, not a breakthrough, and I would therefore conclude and hope, as I did last time, that we can stay at ""B,"" no change, but also if we make that decision that we can retain an asymmetric directive pending our examination of the data as they evolve in the weeks ahead.",4301
-fomc-corpus,1996,Governor Lindsey has a question.,6
-fomc-corpus,1996,You have a question?,5
-fomc-corpus,1996,"Just a question, yes, about the productivity numbers. President Jordan mentioned that there is a plug in the employment statistics to cover changes in employment associated with business starts. That would all be in the noncorporate sector. How do we know that overstatements of employment in the noncorporate sector are not an explanation for the productivity statistics?",69
-fomc-corpus,1996,"Because we have a separate set of numbers for double checking the household numbers. While the household numbers as you well know do not conform to the payroll numbers month by month, it really is quite extraordinary how close those two wholly independent sets of employment data come out over time. It requires some major changes in assumptions with respect to the distribution of employment between corporate and noncorporate to undercut the conclusions that these data seem to produce. The conclusions may be affected at the margin, but if you looked at these data and asked ""what if,"" you would have to make bizarre assumptions about the distribution of corporate and noncorporate hours to make this problem disappear. Vice Chairman.",134
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for a ""B"" asymmetric directive. I believe that was the proper judgment to be made in July; it was the proper judgment in August; and it is the proper judgment now. In fact, developments since the last meeting make me even more convinced that this is the correct conclusion. So, I support your recommendation because I support the substance. A series of developments not directly in the economic and monetary policy area has transpired since our last meeting. Without going into the details, because we are painfully familiar with those developments, I think this is an appropriate time for the leadership of the Federal Reserve, the 7 governors and the 12 Reserve Bank presidents, to support a common judgment as recommended by the Chairman. The debate in the earlier part of the meeting was very complete and it certainly gave everybody an opportunity to express his or her views. So, at this stage we are able to say that we have heard one another and the Chairman, whose views, I believe, clearly reflect a majority opinion. So, this might be a very good time to indicate that the leadership of the Federal Reserve is capable of pulling together. In my view, that would be of great immediate benefit to the people who work for us, whose morale certainly has been adversely affected to a serious extent recently. I think that it would have considerable merit in the eyes of the American public, whom we ultimately serve, when the minutes of this meeting come out on Friday, November 15. So, for reasons that are easy for me because I agree with the substance, but also for reasons that have to do with a collective responsibility of leadership, I support your position.",337
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"This is going to be a little more difficult given what the Vice Chairman just said, but I would like to indicate that I think there are a number of different arguments that can be put forward to make the case for raising rates, and I am going to argue in favor of doing that. My first and foremost concern involves the level of resource utilization in the economy. The economy has been operating at a level somewhat above its long-term potential for some time now. While I expect growth to slow, and I certainly indicated that is our forecast, I do not think that the slowdown will lead to a reduction in the gap between actual and potential output. Indeed, the gap could well grow larger over the next few quarters. At a minimum, it is safe to say that I do not see any reduction in inflationary pressures in the near term. At this time, inflationary pressures are being masked by certain favorable developments, most notably the marked slowdown in the growth rate of health care costs. In my view, we should be using this opportunity to lock in lower rates of inflation instead of using it to put off needed action on interest rates. Finally, we have talked at times about the level of the real funds rate. While this rate does not appear to be low by historical standards, the data suggest that we are in a period of relatively high investment demand and perhaps a supply-driven expansion that implies higher equilibrium real interest rates. In view of these considerations, I believe it would be prudent to raise interest rates 25 basis points at this meeting. This may not be the last increase we will need unless the economy slows down more than I anticipate. Thank you.",331
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,I support the Chairman and his recommendation.,8
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation. I was fascinated by your discussion of the productivity trends and the analysis that was done. I hope that this will be written up and that you will share it with the members of the Committee. I look forward to reading it.",54
-fomc-corpus,1996,We will do so. President Jordan.,8
-fomc-corpus,1996,I support your recommendation.,5
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, I recognize that there are cogent arguments on both sides of this difficult policy issue. But after sorting it all out, the basic message for me is the one contained in the Greenbook projection--that labor markets are currently tight enough to put continuing upward pressure on wages, which may eventually feed into prices. This is certainly consistent with what we are seeing in our District. I agree with the staff's projection that if there is no change in policy, it is highly likely that we will see at least a moderate increase in inflation. My own view is that the risk of error in that projection is skewed to the up side. So, for me that certainly constitutes an inflation danger zone. In this situation, I agree with Bob Parry. I continue to believe that the Committee should act promptly and firmly to reduce these risks and to hold the line on inflation. Building on one of your comments, my own concern is that if we wait to see profit margins declining, I do not know where that will put us in the cycle or how much we would be behind the curve. So, I would agree with Bob in favoring a tightening of policy today. I certainly agree with you that when we do move, 1/2 point is the right dose.",257
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"This is a tough period, and I have some sympathy for what President McDonough had to say. But I do think that a healthy discussion of where we all are should not be divisive or problematic to our staffs. In fact, I think the worst message that we could send would be to stop doing that at these meetings because people will ultimately know about it. I don't think there is a question at this point about whether GDP growth will slow; the question is how much. Larry Lindsey asked about my comment about consumers. As you mentioned, Mr. Chairman, there is some reason to wonder about the August retail sales data. I do not have anywhere near as much perspective on September sales as you do. But given the employment data, given the level of consumer confidence, given the rise in the stock market, given the lack of real visible restraint on interest-sensitive sectors and particularly the housing markets, I think there is some risk about how far GDP is going to slow. The next question, to the extent that it does slow, is whether that slowing will be sufficient to restrain inflation. You mentioned the growth in wage pressures. It is clear that the relationship between tight labor markets and wage pressures that we think exists, does in fact exist. The question is what nexus exists between the increase in wages and the increase in overall prices and has that changed. It may be that profit margins will be squeezed, but I question, as I think you do, how long that would be allowed to happen in the atmosphere that all of us have seen--or heard of, anyway--in board rooms around the country. I do not think profit squeezes will be accepted for long. You talked about productivity, and I totally agree from what I know of it, which is a lot less than you know, that it is mismeasured. I see that as a hands-on operating person, which I have been through most of my career. I think productivity improvements in the service sector, of which we are a part, are vastly undermeasured. Be that as it may, the question is whether the increases that we have been seeing in productivity, whether we know what they are or not, will offset wage increases in the future. Now, with such tight labor markets, productivity improvements have to accelerate to offset the acceleration of wages. Whether this will happen seems doubtful because markets are tight and because we are starting to pick up more marginal workers than we were earlier. This whole question is confusing. I would assume that the impact of the kinds of things that go into technological diffusion and help increase productivity and cut costs may not be as significant going forward as they have been for some time. So, I would agree with you that when we begin to see squeezes on profit margins, that will indicate the end of the trend where increasing productivity offsets increasing compensation costs. I think the only place where we do disagree is in our degree of willingness to wait to see that happen. There is a willingness, on my part anyway, to move on the belief that wage pressures ultimately will not be damped by squeezes on profits and by productivity increases but rather will show through into final prices. I think the risks that that will happen need to be dealt with sooner rather than later and that in fact we may be behind the curve. It is true that our inaction over a period of months has allowed more growth to occur perhaps than would have otherwise, but if we are behind the curve and we continue to be, that does not augur well for growth going forward, given past history. In fact, once we experience an increase in inflation, we might have to move more than we would if we started to tighten policy now. Waiting might therefore have a more negative impact on growth than would a slight move now. So, I would go along with those who would increase rates at this point by either 25 or 50 basis points.",787
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. I think there is considerable risk in waiting. The economy has enjoyed great benefits from this period of low and stable inflation, particularly given how expectations have been affected. I agree with what Don Kohn said earlier--namely, that we should not lose sight of the fact that the credibility of the central bank may have a very significant impact on price behavior right now. I have been here a good while, as have many people around this table, and I know how hard it was to earn that credibility. It took a long time, even beginning in the mid-1980s when significant progress had already been made in bringing inflation down. I really believe that it is a lot harder to gain and keep credibility than it is to give it away. It is not an issue as to whether the central bank is credible or not; it is not an ego issue. It is an issue with respect to the economy. If we are wrong with respect to our judgments on the risks of inflation, the costs to the economy are going to be higher down the road when we try to catch up with a moving train. If the central bank takes out insurance against anything, it ought to be against the risk of rising inflation, and I think this is the time to take out an insurance policy. So, I would favor an increase in the degree of reserve restraint.",275
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"Mr. Chairman, I strongly support your recommendation both with respect to current monetary policy and with respect to asymmetry. I am intrigued, as others I think are, by your disaggregation of the productivity data because it provides us with at least a partial explanation of the mystery of why wages have been rising, profits have been holding, and price inflation has not been going up. I hope you will give us a chance to see all of this and work on it further. I still think it is appropriate to worry very strongly about inflation. If we get adverse information in the next few weeks, I think we should be prepared to reconsider.",127
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I am uneasy about waiting. I think that cost pressures are building. I, like President Moskow, was fascinated by the productivity discussion and would like to see that analysis. If I were voting, I would say that I prefer to move now, but I would accept your recommendation.",61
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I support your recommendation of ""B"" asymmetric.",10
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, I could support a decision not to change policy at this time, and if I had a vote this year, I would vote ""yes."" As Governor Rivlin noted in the earlier go-around, we can take great pride in the low inflation and the strong real activity that we have achieved. At previous meetings, I was among those who argued in favor of letting this thing play out. I think that has been the right thing to do. Having said that, I have come to the view that a modest increase in our fed funds target rate is probably desirable now or sometime soon. In my view, we do need to continue to wonder about whether the hope for a slowdown over the rest of this year and into next year will materialize, at least to the degree that we expect it. Our previous forecast plainly suggested the need for such a slowdown. However, my concern is now rooted in the belief that the rate of growth that we have seen in recent quarters--unless we get a very substantial slowdown--combined with the recent pace of job creation, tight labor markets, and relatively high labor force participation are incompatible with stable inflation over the longer run. This raises a special concern that monetary policy may be accommodating those trends. The current stable inflation performance suggests to me that over the short run, policy may not be too expansionary. Nevertheless, few if any of our forecasts conclude that inflation will moderate under the current policy scenario. Indeed, most forecasts including my own suggest that inflation is most likely to stabilize at its present level or even accelerate slowly. I am convinced that the risks of inflation are now predominantly on the up side. I believe with Tom Melzer that we currently have a unique opportunity to solidify the gains that we have made in recent years on limiting inflation. A growing number of us around this table and others outside the System are coming to the view that the risks of higher inflation, a small uptick at least, have increased. We have a chance to send a very credible and unambiguous signal to the economy and financial markets about our commitment to stem inflation and perhaps to bring it down further over time. The economy's current strength combined with the fact that markets have been expecting a policy adjustment for some time suggest to me that some change could be made at this time or sometime soon without causing either a large deceleration of real economic activity or a disruption to financial markets. Again, while I do not think the timing is critical, I think the time is now or sometime very soon to move against the inflationary uptick that we are seeing. I clearly would prefer an asymmetrical directive if we decide to hold policy steady.",533
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"My decision at this meeting is more difficult than at the past two meetings. Indeed, leading up to this meeting, I was feeling the pain associated with fence sitting, hoping the data would push me decisively in one direction or the other. No such luck. I believe that increases in utilization rates should in general be followed by increases in short-term interest rates. That is, pro-cyclicality in short-term interest rates is one of the most important rules of prudent monetary policy. If the unemployment rate stabilizes near 5 percent and if the economy settles into trend growth, I expect I will be moved to support a tightening of monetary policy. I could make that case even today given the increased tightness of labor markets indicated in the August employment report and with fundamentals supporting trend growth ahead. I could make the case that, even here, a cautious step toward restraint would be prudent. Nevertheless, Mr. Chairman, I am prepared to support your position for three reasons. First, there is a small risk that a tightening at this moment would be badly timed into a sharp slowing in GDP growth to below trend in the current quarter and the period immediately ahead. Second, the prospects of either higher productivity growth or some compression in above-normal markups going forward will give us some room to clarify both the prospects for growth and the degree to which labor markets have indeed tightened. Third, given the recently stable or even declining trend in core measures of inflation, failing to tighten today does not in my judgment leave us seriously behind the curve. That judgment is reinforced by the Taylor rule projections that, as Governor Yellen pointed out at the last meeting, suggest that monetary policy is appropriately positioned today in light of prevailing inflation and utilization rates. I certainly respect the judgment of any colleagues on this Committee who would prefer a modest move toward tightening today. Nevertheless, I would second the wise counsel of the Vice Chair and encourage those on the Committee who believe as I do that the decision today is a close one and that either no change or a 25 basis point increase could be justified, to join me in supporting alternative B today.",421
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I was very struck with the group of prominent economists that Cathy Minehan assembled at her Bank. That is in part because I learned a lot of economics from the people in that group, and I do not think that they are at all unrepresentative of what I would consider mainstream academic thinking. I do think that moving today would be the academic thing to do. It would comport with history. It would comport with what our models tell us is going to happen down the road. But I also think that history and academic analysis tell us that we face an asymmetric loss function if we are wrong. We will pay a higher price if we are wrong in terms of more unemployed people in 1998 or 1999 or whenever than if we were to move today. Because of the academic respectability of that argument, I would respectfully disagree with the Vice Chairman in this regard. I think that the motivations of the people here are very, very sound. I do not believe that we actually disagree. It is much more important that we pull together in public than around the table. Having said that, Mr. Chairman, I believe that what you are proposing is more reflective of what I would call an entrepreneurial, hands-on approach. I think it is built frankly out of self-confidence and nimbleness, and you have earned the capacity to have self-confidence and to be a little more nimble in the conduct of policy. I will be supporting your recommendation based on what I think is a very well-earned reputation of success. Where I remain nervous relates to what is going to happen at 2:15 p.m. today, or whenever the magic hour may be. I think that the potential for seeing a wave of relief on the screens and the resulting reaction is going to be quite instructive as to our real long-term problem and the challenge facing this Committee.",379
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"I agree that it is a close call. At the broadest level, the performance of the economy has been favorable. It has been characterized by growth at or above trend and by low inflation. In recent months, it appears that the pace of the expansion and demand are slowing as anticipated and inflation has been quiescent. If I stopped there, it might be easy. Yet, I feel uncomfortable and I suspect that comes as no surprise. The bottom line is that I feel uncomfortable because of what I perceive is going on with resource utilization, particularly in the labor market, and what I think history tells us about the implications of that sooner or later for inflationary pressures. I would add that, should we get some acceleration of inflation, I believe that will bring with it some further disruptions and perhaps require a policy response that will jeopardize what has been a very favorable economic performance. Before I came in here today, I was thinking a bit about the institutional issues that the Vice Chairman raised. But I have to say that I am not smart enough to know how things are going to play out on November 15 when the vote at this meeting is released. The bottom line, at least for me and I do not mean to be a purist about this, is the integrity of the process here. I continue to favor some policy tightening now, and I personally think a 1/4-point increase would be appropriate. You may be right that it is going to take more, but in my view it pays to be humble about our ability to forecast with accuracy in these circumstances, given the lags in policy and the uncertainty about the magnitude of the effects of policy. I conclude that a small response is appropriate at this juncture.",348
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. I can support your proposal to adopt an unchanged policy with an asymmetric directive and to continue to evaluate incoming data as it bears both on the degree of momentum in demand and the inflationary pressures latent in the current environment. But I find myself very close to the margin and would also have been quite willing to support an upward adjustment of 25 basis points today, had you proposed that. I can support your proposal because, for the reasons that I outlined earlier and you explained in fascinating detail, this is an unusual episode. I believe we are still at quite an early stage of an inflationary uptick, if indeed this turns out to be one. I also agree that with demand moderating and current inflation stable or falling, we may end up deciding that it is unnecessary to move the funds rate upward. But having said that, I believe that a very solid case can also be made for raising the federal funds rate at least modestly, by 25 basis points, on the grounds that the unemployment rate has notched down further, the decline in labor market slack is palpable, and the odds of a rise in the inflation rate have increased, whatever the level of the NAIRU and the associated level of those odds. I believe I am echoing Governor Meyer in saying that I favor a policy approach in which, absent clear contra-indications, our policy instrument would be routinely adjusted in response to changing pressures on resources and movements in actual inflation. I think such a response function operationalizes the precept that the Fed should ordinarily lean against the wind. A 25 basis point increase in the funds rate is a small move that entails only mild resistance to the forces that are threatening to blow the economy off course. In my mind, what goes up can also come down, and we risk an error if we make the hurdle for moving our policy instrument too high. I am concerned that a policy of maintaining short-term interest rates unchanged, in essence creating a flat LM curve in the face of spending or IS curve shocks, risks increasing the variability of real economic outcomes and decoupling the financial market mechanism and response that should be serving as an automatic stabilizer in the economy. I see the markets as doing their part in moving longer-term rates in response to economic news. But I think we can only count on those responses if our own responses are predictable and we are perceived as willing to play our part, too. My concern is that a failure to shift policy just modestly in response to shifting inflationary risks could undermine the assumptions on which the markets' own stabilizing responses are based.",524
-fomc-corpus,1996,"Thank you. Would you read ""B"" asymmetric?",11
-fomc-corpus,1996,"The draft directive wording is on page 13 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth of M2 and M3 over coming months.""",111
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern No Governor Yellen Yes,47
-fomc-corpus,1996,We will now go on to the next item on the agenda.,13
-fomc-corpus,1996,Mr. Chairman?,4
-fomc-corpus,1996,Yes.,2
-fomc-corpus,1996,I have a procedural question. When would it be good to stop for lunch? [Laughter],20
-fomc-corpus,1996,I had not looked at the clock but that is a very valid question!,15
-fomc-corpus,1996,It was Mike Prell's question and I agree with it. The members and staff could get their lunch and return to this room with it; it could be a break of about 5 minutes.,40
-fomc-corpus,1996,"I will take it not as a suggestion but as a mandated response to somebody who knows. We will adjourn for lunch, but we will still be in the meeting when we return. [Lunch break]",41
-fomc-corpus,1996,"Peter Fisher has laid out what seems to be a reasonable proposal on the issue of our foreign currency investments. He is requesting that we replace the current 12-month maturity constraint on the investment of System foreign currency holdings with an 18-month duration constraint. Before you hold forth on your positions on this issue, are there questions on his memorandum that you want to direct to Peter? President Boehne.",80
-fomc-corpus,1996,"I understand the issue of trying to get some of these holdings off the Bundesbank's balance sheet. What are our alternatives in terms of doing that? Is this proposal the only option? I can think of some theoretical alternatives, but I do not know whether they are worth much. For example, we could diversify into some short-term nongovernment securities instead of extending the maturities of our German government securities holdings. Or we could reduce our position in D-marks. I am just wondering if you have thought about other alternatives and what the pros and cons might be.",114
-fomc-corpus,1996,"Certainly we have. We have not thought about reducing the D-mark position. That is, I take my responsibilities in the investment of our foreign currency reserves to be independent of their level. So, I am left with the task of taking a given quantity of deutsche marks and investing them. There are other avenues and other conversations the Committee can have about the desirable level of our foreign currency reserves. We have not looked at that. Once I take as given roughly the level of foreign currency reserves that we have now or that we have had on average for the last five years, there are only a few alternatives that have any practicality. We already have about one-third of our reserves on the balance sheet of the Bank for International Settlements. I see that as a rather high number, although we could go higher. As a rule of thumb I was stopping at about one-third, but we could decide on a larger exposure to the BIS. We could, as in fact most central banks do, go into the commercial deposit market--the Eurodeposit market. In effect, the BIS is a veil for us. They are in the Eurodeposit market; we are not. We avoid, therefore, the rather time-consuming exercise of credit assessment. It is my sense, but it is a very strong one, that we would find rather awkward the process of making differential credit assessments among banks and taking commercial bank or commercial credit risks in the securities market and making relative assessments about the extent to which we should be exposed to or invest in individual private institutions. But that is really the only alternative that exists today. Now, we have just begun to invest some of our reserves in the deutsche mark repo market, and I think there is some room for growth for us in that market in terms of our overall balance sheet. In my memo, you will see that I am worried about our promise to the Bundesbank that we would get off their balance sheet completely. What I am proposing here will reduce our D-mark balances at the Bundesbank to about one-third of our total D-mark reserves. Another third will be in the German government securities market either in the form of repos or direct investments, and about one-third will be in the BIS. It is my hope that the German repo market will grow and that we will be able to push the envelope a little more there than we have. But if we invest too much there, we will become a rather large piece of that market. So, the alternatives that seem realistic are rather uninspiring because they would involve taking on additional credit risks and the credit assessment process. We would face the prospect of pulling the plug on private entities if we became concerned about their creditworthiness.",538
-fomc-corpus,1996,"What does extending the maturity of our foreign currency investments do in terms of exposing us to greater loss? This comes to mind because we have this issue of our surplus, and that gets us into potential foreign currency losses among other things,",46
-fomc-corpus,1996,"It does nothing unless the Board changes the accounting rules, and we start marking the securities to market. We currently do not mark the securities value of the SOMA portfolio, the domestic portfolio, to market. We have not marked to market the securities value of the short-term foreign currency bonds that we hold now. There are some strong arguments in favor of marking them to market, but I am not persuaded by them. Indeed, I would be a vehement opponent of marking the securities to market, either the foreign or the domestic securities, out of a rather strong fear that, as the Account Manager, I would end up chasing my own tail as the balance sheet went up and down and I moved things around to change the duration of the portfolio. So, absent a change in the accounting rule, moving 15 percent of our deutsche mark holdings into a sub-portfolio of German government debt will have no appreciable impact on profits and losses. The huge impact will continue to be the monthly revaluation of the foreign currency holdings to translate them into dollar values.",211
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Peter, I agree that we need to get our deutsche mark holdings off the Bundesbank balance sheet, and I would agree with that even if Maastrict had not put them on an euthanasia program. [Laughter] Eventually, you are going to be getting out of mark-denominated assets because there won't be D-mark assets. I think the issue of how much of our assets is in the form of foreign currencies has to be addressed sometime, but that is not the issue now. I also would be very concerned about the idea of buying private assets, although I think a few major central banks in the world do that.",126
-fomc-corpus,1996,"If I could just interrupt, we could not buy any private assets other than bank deposits. We should have mentioned that in the memo. It may be useful to note as background that, before the Monetary Control Act, we could only hold our foreign currency balances in the form of bank deposits. The Monetary Control Act added government paper. So, the only private assets we may hold, as Peter has said, would be bank liabilities.",86
-fomc-corpus,1996,"I think that is something we need to preserve, and other central banks around the world would be wise to do the same. On the subject of duration, there are people around the table who know more than I do about it and how to use it appropriately. I understand that it has had a very profound and a very desirable effect on the balance sheets of commercial enterprises. It took a long time to bring that discipline into play. I remember a period in the 1980s when the question among bankers was, ""Have you seen Sandy Rose's last article on duration in the American Banker?"" The response was, ""I hope so."" [Laughter] If the concept is to bring discipline and to help in the evaluation of portfolios affected by interest rate swings, one uses duration as a tool to manage risk; one should not do things to manage duration. So, if we want to be comfortable about the way duration is used as opposed to what a maturity constraint would require, there should not be incentives to take actions for the purpose of influencing duration but rather to manage the changes in the valuation of the assets in the portfolio. I can imagine some scenarios where very dramatic changes in interest rates would influence duration and cause somebody to think that something would have to be done to readjust a portfolio's duration. We would not want to do that.",269
-fomc-corpus,1996,"I would like to comment on that. After spending much of the last five years looking at the foibles of other central banks and their investment strategies and trying to make sure that we do not fall into some of those traps, I think there are two problems--you point to one of them--that can arise in using any kind of benchmark, particularly a duration target. One is the problem of too much discretion and the other is the problem of too little. On the potential problem of too much discretion, as the memo and the investment principles in the quarterly report make clear, we do not trade on interest rate expectations. We are going to design the benchmark and replicate it. Period; full stop. The other problem is one of too little discretion: Are we going to design a benchmark that leads us to do goofy things, to churn the portfolio in order to maintain a perfect target duration? In designing what we might want to do, I tried to address that problem by setting the 10-month duration target that I am telling the Committee I would intend to implement while permitting actual investments to vary over a very wide seven-week window on either side of that. Essentially, the portfolio can decay for an entire quarter without our having to do anything to address or move back toward a center point. If exogenous shocks occur in the market, my inclination--and I hope the investment principles we will be revising will make that clear--would be as apt to look at whether the benchmark itself, the 10-month target, should be revised as I would be to change our behavior. Over the last decade the single largest move in a five-year interest rate in Germany was about 250 basis points. The sub-portfolio that we have described in the memorandum has a 5-year duration target, so it is a rough proxy for that maturity. A 250 basis point move would translate into a change of about 2 weeks, perhaps a little more or a little less, in the average duration of a sub-portfolio targeted at 5 years, and that would translate in turn into a change of just a few days in the overall structure that I am proposing. The reason for having the wide latitude, if I may digress, between the 18-month ceiling I would like the Committee to set and the 10-month target is that there are a number of factors that could lead the duration of the portfolio to move away from my intention and that would be beyond my control as investment manager. The Germans are notorious for not holding regularly scheduled auctions. So, we are always subject to a big surprise, a big shock, as to when an auction takes place and its timing can move the duration quite a bit. The other reason is that I very much want to separate the question of intervention and its size from the question of how the portfolio is managed and what kind of limit the Committee places on the Manager. If 50 percent of the portfolio were to be liquidated through intervention, there are different ways that could be done. We might liquidate everything at the short end; we might liquidate across the spectrum. That could swing the duration quite widely, and I would not want to have too short an overall limit placed on the portfolio that would in effect, because of intervention, lead to violations of the Authorization.",662
-fomc-corpus,1996,Have you thought about how the Bundesbank might implement the eventual transition to the new euro?,18
-fomc-corpus,1996,"I have begun to think about that. It has been my assumption that we would leave our deutsche mark holdings unchanged as they are transfigured into euros. And when that happens, we would then be a participant in the novel question of what the euro yield curve will be--whether, for example, German paper will determine long euro rates but French paper will determine the short rates. There is enough noise in how that will work out that I cannot see very clearly in my crystal ball. That is about as far as I have gotten.",107
-fomc-corpus,1996,Can I ask a follow-up question? I assume that whether our deutsche mark portfolio becomes a euro portfolio has to do with what we decide is the key intervention currency.,33
-fomc-corpus,1996,Yes.,2
-fomc-corpus,1996,"The reason we are in deutsche marks is not because we love deutsche marks. It is because it is the right intervention currency and therefore we sold our relatively small holdings of French francs, Swiss francs, pound sterling, and so on and put it all in deutsche marks. If we came to the conclusion over time that we would do all our intervention in euros, we should be completely in euros. Peter brought to the Committee the view that we will need euros but that we may also need some other currencies because parts of Europe may decide not to join the common currency. That would be a different matter, and we do not know how that will work out.",130
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Peter, the word ""euthanasia"" has been used and I think it is appropriate. One of the options you did not address was to dispose of our DM holdings. President Jordan may be right in saying that this is not the time to consider that issue, but we need to decide at some point why we are still in this. Why do we still hold those large DM reserves? We have talked about getting rid of them since I have been here. We will have to get rid of them before 1999. We do not know how the euro is going to come into play. We do not know if we will want to intervene in euros. Why don't we take this opportunity to go to the Germans and say, look, let's really clean our books?",154
-fomc-corpus,1996,"Our deutsche mark reserves will not disappear; they will be converted into euros. The euro will be a major reserve currency of the world even if it is subject to a great deal of volatility. It is my forecast that there will be some volatility, indeed quite a bit I would think, in the early years of the euro. And I believe that it would be in the interest of the U.S. monetary authorities to have some capacity to participate in reducing what I personally see as a rather significant risk of market disturbances. I am not suggesting any particular intervention or any particular type of intervention, but unilateral disarmament ahead of the event is not something that I would be urging on the Committee. But I want very much to separate these two questions, Governor Lindsey, if I can. The question of how these reserves are managed and invested and how we stand as the prudent manager of what essentially is a public asset is different from the question of the level. In my six years of association with this question, whenever marginal improvements in the prudence with which we manage these reserves are brought to this table, the question of level is what comes back. I do not think the question of level ought to dictate the manner of the investment. We can have a debate about the level--",254
-fomc-corpus,1996,"The reason is that the interest rate risk that you are discussing is trivial in comparison to the exchange rate risk, especially in the transition to the euro. That is why it comes back to you. But if we are going to consider this question another day, I am reassured. Let's consider it another day.",62
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Just a follow-up, Peter. I want to make sure I understand the reason for your average duration proposal. Did you choose the 18-month duration because that leaves you within the bounds of intervention amounts that we have done in the past? What is the reason for the 18 months if it does not relate to that?",65
-fomc-corpus,1996,"If we just take the norm of historic interventions, we would not have to go out to 18 months in order for me to have a 10-month maturity duration target. But the day could come when the decision would be made to intervene using, say, half of our reserves, which would be three times the largest intervention amount used historically. The Committee has procedures for approving the amounts of intervention. I think this investment guidance I am seeking should be a separate issue and not become a constraint on future intervention. A much shorter duration, whether it is 15 months or 14 months rather than 18 months, is not the be-all end-all. But if you start squeezing and impose a shorter total duration and we were forced to intervene in very large amounts, I would run the risk of violating the authorized duration limit if I were to liquidate a great deal of our holdings at the short end. Let me just repeat that I propose setting a 10-month target, and I will not change that target without coming back to the Committee and soliciting your views on a change. So, the two things are separable in my mind.",229
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. I want to pursue an issue that Ed Boehne brought up. Peter, I understood what you said about how we account for this, but regardless of the accounting, there is an economic exposure. Could you give us some idea of our exposure right now with the 12-month maturity limit, given how we typically invest our currency holdings under that limit, versus what the exposure would be if we went to a 10-month duration limit? What would be the actual increased economic exposure if we had, for example, an upward movement in German interest rates of 100 basis points? What would we stand to lose under this new scheme economically, assuming we had to liquidate our holdings right away, versus what we would have lost based on how we historically have invested our currency holdings, at least in recent times?",166
-fomc-corpus,1996,"We have been spelling out some of the risks in the quarterly report that we have been sending you. The immediate answer that I have to your question is what I referred to in the memo. We did a simulation over an entire interest rate cycle and looked at what would happen if we were marking to market the entire portfolio, including deposits.",67
-fomc-corpus,1996,"Yes, that is the question I am asking.",10
-fomc-corpus,1996,"There was no quarter in which a deutsche mark portfolio structured as proposed would have had a net loss; that is, the capital value loss would have been exceeded by the earnings.",35
-fomc-corpus,1996,The interest earnings offset the capital losses?,8
-fomc-corpus,1996,"Yes, over the last 10-year interest rate cycle. Moving 15 percent of our holdings as proposed implied a pickup over a normal investment cycle of about 20 or so basis points over the income produced by our current approach to investing. Now, I do not have immediately in mind an answer to your question in the way you structured it.",69
-fomc-corpus,1996,Okay.,2
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"Peter, let me ask you a question to help further my education. I took two things out of the memo. One, you want to switch to an average duration limit as a way of measuring the overall liquidity of the portfolio. The second issue was more interesting and seemed to be the real question, i.e., whether there was a case for increasing average duration. You note that reserves are invested without price exposure and that liquidity is the primary objective. That would seem to suggest a low average duration. So, I need to understand what you buy by increasing the duration. Let me bring it down to the story about the 10-month versus the 18-month average duration; that was a good example. You started by saying you would like to have a 10-month average duration as the target, but you want to have 18 months as the limit and that is in case of the necessity for significant intervention. But that brings to a head the point because you implied in your discussion that, of course, we are going to sell only at the short end. You did not actually say that, but the implication was that you would sell from the short end of the portfolio. So, why are you holding long-term securities?",246
-fomc-corpus,1996,"We tried to make clear several other points in the memo. First, I do not urge the Committee to adopt the 18-month duration limit solely for its liquidity measurement purposes. I think it is a replacement for the current 12-month maturity ceiling which was intended to limit both price risk and force a certain amount of liquidity into the portfolio. It has had some perverse effects. We are a major owner of very illiquid government bonds at the very short end of the German yield curve. If I continue to try to get off the Bundesbank's balance sheet without some increase in our duration, I am going to be buying more and more illiquidity in these short-dated cats and dogs of the German yield curve, which is contrary to the objective of wanting to be liquid. So, I will be buying less and less liquid paper. It is less liquid than buying securities ""on the run"" out of recent auctions and permitting them to decay and having a sub-portfolio spread evenly all along the yield curve. That is a bit of the background that I think changes the complexion of what you are pointing at. I am also doing this because I feel a necessity to get off the Bundesbank's balance sheet. A decade ago we were entirely dependent on their balance sheet. Between 1/4 and 1/2 of the reserves of the German banking system were owned by us through the Bundesbank's balance sheet. We are down to a much smaller proportion in part because we have moved off the balance sheet and in part because the Berlin Wall came down and reserves expanded in the German banking system. That was a major shift. But I think we ought to recognize that the Bundesbank is in a very different position than we are. Let me just turn it around. A couple of months ago, when this Committee discussed the question of facilities for foreign central banks on our balance sheet, the Committee members expressed a great deal of reluctance, skepticism, and concern. We are going to come back and try to address these issues in a modified proposal. We currently maintain tens of billions of dollars of deutsche marks on the Bundesbank's balance sheet with zero liquidity cost. We can liquidate these at zero notice and contract their balance sheet at our whim. Now, to put that in context, the need here is to get off their balance sheet. We have been rather slow in doing so, and they have been rather good natured about the tardiness of our response to their request. If I take that need as a given, I now have to look for a place to invest. I think a reasonable first step in how I diversify off their balance sheet is to invest in ""on the run"" German government securities or purchase them at auction, and build up a small sub-portfolio. So, it's a different mix of factors than I think we were--",574
-fomc-corpus,1996,"I thought the compelling story was the German balance sheet, but some of the same issues come up when we talk about the liquidity of the SOMA portfolio.",31
-fomc-corpus,1996,They are similar.,4
-fomc-corpus,1996,"The difference is that the way you buy differs from the way you sell, and that is really my question. You have the same situation domestically in that liquidations occur at the short end but buying occurs over a wide maturity range. I want to understand what you achieve by buying over a wider maturity span than you intend to sell.",67
-fomc-corpus,1996,"I'm sorry; I meant to answer your question there as well. I do not mean to say that I will automatically liquidate only at the short end when there is a need to liquidate large amounts. Indeed, many central banks--the European central banks--discovered during the period of market tensions in the early 1990s that it is very efficient to repo out long-dated securities for immediate liquidity. That provides the luxury of selling those securities very slowly and gradually over time. That may be another source of liquidity. We will try to develop liquidation rules that may have an either/or flavor to them. We may liquidate significantly at the short end or we may repo out the long end and rebalance the portfolio more gradually. That is very much my intention because of the enhanced liquidity of holding the ""on-the-run"" German government securities. So, your point is very well taken.",180
-fomc-corpus,1996,"There is one other factual point that it might be useful to note, and I think you referred to it in the memo, Peter. That is that one of the characteristics of the German money market is that they do not have a lot of short paper. That reflects a policy decision on the part of the Germans, and I might add a policy decision on the part of the Bundesbank. They are changing this a little. Therefore, the other side of their being good natured about this is that in some sense they themselves have not promoted the kinds of assets in the market that we could easily purchase. That is changing a little as I noted, and the Desk has taken advantage of that. Again, exactly how it will evolve in the context of the euro--leaving aside all of the other issues about the euro and the amount of euros we will get when the transition occurs--is unclear. My guess is that on balance we will be better rather than worse off because the Germans are the ""least modern,"" if I may use that word, in terms of the kinds of government paper that they have on the market.",225
-fomc-corpus,1996,"It would be my hope and something of an expectation that in the event we move to euros, we will find a deeper short end. And when it is all denominated in one currency, we may find it much more comfortable to be invested in French government bills and to have a shorter duration to the portfolio.",62
-fomc-corpus,1996,Any further questions for Peter?,6
-fomc-corpus,1996,I was going to move approval.,7
-fomc-corpus,1996,Let's first have the Deputy Secretary read what we will be voting on.,14
-fomc-corpus,1996,"This would amend Paragraph 5 of the Authorization for Foreign Currency Operations. The new wording is found at the bottom of page 1 of Mr. Fisher's memo dated September 13, and it would replace the first two sentences of the existing wording in the Authorization. The new wording is as follows: ""Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration)."" What this new wording replaces may be found in the footnote on page 1 of Mr. Fisher's memo.",129
-fomc-corpus,1996,Would you like to move it?,7
-fomc-corpus,1996,"I move approval, Mr. Chairman.",8
-fomc-corpus,1996,Is there a second?,5
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1996,"No? The ""ayes"" have it. The next item, which is the final item on the agenda, is a request from Peter Fisher for the members' views on the liquidity management and maturity structure of the System's domestic portfolio. Does anyone have any questions to ask Peter before we move to the specific views of the members? Governor Meyer.",69
-fomc-corpus,1996,"I think this is where the issues come up that I started to get into with respect to the investment of our foreign currency reserves. It seems to me that what you are talking about in terms of the portfolio is a compromise between two ideas that I call buy-side neutrality and sell-side liquidity. I am struggling to learn how you deal with that. Buy-side neutrality says that you mirror everything so that you do not have an impact on particular markets. The sell-side liquidity says that when you sell, you sell short-term securities. That is obviously how you deal with it. But it seems to me that the current practice is an attempt to deal with that compromise by segregating out a bills portion that you sell and then the rest is for mirroring. The question is whether or not we could be more systematic in how we decide on what those proportions should be. It seems to be very similar to the story we tell in our own regulation with respect to internal models, market-based risk, self assessment, stress testing, and all the rest. The Meulendyke memo on liquidity seems to be at least an attempt to get us to think in that way. But the question it seems to me is whether that procedure should be the one that determines the correct proportion of bills in the total portfolio, whether it is 50/50 or 70/30. Is that the right spirit?",278
-fomc-corpus,1996,"Yes, I think it is. Let me make one comment because it might help other members to comment on it: I wish I had made this point clear in my memo. In addition to the two different kinds of neutrality you are pointing to, there are two very different kinds of sell-side neutrality. One is a very short-run, sell-side neutrality that relates to the impact on the market today. The other is a very long-term, sell-side neutrality that has to do with how the public portfolio is affected by the selling. In some of the hypothetical cases that the Meulendyke memo points to, if we were to liquidate $50 to $100 billion and did it all through the short end, that would have a rather profound impact on the public portfolio and thus would not be sell-side neutral or market neutral in a long-run sense. So, there is another balancing going on there. I think much of the history of the portfolio has reflected a tension between these two different kinds of neutrality. Obviously, there are market situations where we would not want to sell across the yield curve, but there might be some where we would. Clearly, it is generally most convenient to liquidate principally through the short end. But with that caveat, I agree entirely with your formulation of the problem.",261
-fomc-corpus,1996,Any further questions? What Peter needs to have from the members is some reaction to his memorandum so that he can move forward.,25
-fomc-corpus,1996,"I think the case for moving toward a somewhat more liquid portfolio makes a lot of sense. I don't know whether it ought to be 60 percent bills, or 2/3 bills, and the rest coupons, but I think Peter rather persuasively laid out the case that we need to move in that direction. Perhaps the way to do it would be to move to, say, a 60/40 split and see if we like that. If we feel that we need to move more than that once we get there, then we could move further. How long do you think it would take to move to a 60/40 split portfolio?",132
-fomc-corpus,1996,"While Sandy Krieger thinks about how long the transition might take us, I would note that to move in that direction we probably would need to have the Treasury treat us explicitly as an ""add-on"" in the bill auctions. They do not do that now because, as deficits have come down, they have been contracting their bill offers and we along with the foreign central banks have become a rather large share of the competitive auctions. But I think that issue is solvable and that the Treasury would amenable, if that is what we want to do, to working with us on that. Once we had their agreement that we would be an add-on--I am trying to think off the top of my head how quickly the portfolio behaves--I would guess that it might take five years to move our holdings of bills up in a smooth way from 50 percent to 60 percent of our portfolio.",179
-fomc-corpus,1996,"I think we ought to move in that direction and then take another look at it. We might not wait five years but might look toward getting a progress report two or three years from now to judge if the 60 percent makes sense. I don't think there is an absolutely right number, but I think we know the direction in which we ought to be moving, and we ought to get started.",79
-fomc-corpus,1996,"In the past, we have discussed the possibility of having an agreement with the Treasury to swap maturities with them in the event of a need on our part to liquefy a significant amount of our portfolio. I have forgotten what the answer was. Does anyone recall what it was?",57
-fomc-corpus,1996,I do not recall.,5
-fomc-corpus,1996,I do not have a sense of a definitive answer from the Treasury on that.,16
-fomc-corpus,1996,"Let me start from scratch. If we have a maturity structure problem that would prevent us from selling a desired amount of securities at specific times, that would make us lean toward a much more liquid portfolio. But what is there to prevent us from making an agreement with the Treasury to have them swap two-day bills, or something like that, for our coupons?",71
-fomc-corpus,1996,I do not know of any constraint on that.,10
-fomc-corpus,1996,"As we sold the bills, it would make the average maturity of the debt in the hands of the public much shorter.",24
-fomc-corpus,1996,"Exactly. I am only raising the issue of the difficulty of selling coupon issues in the market and as a consequence either affecting the price or affecting our earnings. If on the other hand we made a straight swap with the Treasury, that presumably would not be an issue.",53
-fomc-corpus,1996,"That approach would help in terms of averting the effect on prices in the market if there were a concern about selling coupons because there was a flight to liquidity as well as to quality. Presumably, the Treasury would do it at the market value of the securities.",53
-fomc-corpus,1996,"You can't conclude that there would be no effect on market prices because if we swapped out of coupons into short-dated bills that are going to mature, the Treasury would have to issue new debt. We don't know what their marketing strategy would be, so we don't know what the price effect would be.",60
-fomc-corpus,1996,"What we would effectively have done is to require them to refinance fairly quickly. But depending on the maturity of the bills, even if we made it a 20-day maturity, that would not really affect our ability to sell the bills, but it could make it easier for the Treasury to choose an appropriate time frame to refinance. If 20 days is not good, 45 days is not going to make much difference for us either.",87
-fomc-corpus,1996,"But without knowing what their overall deficit financing strategy is, it would be hard for us to--",19
-fomc-corpus,1996,There is no doubt that the Treasury's reaction to this would be 110 percent negative before they heard the end of the sentence. That does not make it the right answer.,35
-fomc-corpus,1996,"I think this is an issue because regimes and ideas at the Treasury change periodically. Like Ed Boehne, I think that increasing the liquidity of our portfolio is the right thing to do. Liquidity is not just a primary portfolio objective. It is so far out in front that I do not even know what the second objective is. And going forward we may not want to go to bills only, but going dramatically in that direction is the right thing to do.",93
-fomc-corpus,1996,We do not care about the earnings aspect and we should not because it is merely a bookkeeping transfer between ourselves and the Treasury. I do not know if there is a problem here. There would be a big problem if the net issues of Treasury debt to the public were disproportionately in the form of short-term bills because that would make budget policy very closely affected by interest rate policy. But it has nothing to do with us on the other side.,88
-fomc-corpus,1996,"But why wouldn't it if we are adding to our short-term portfolio in an era of, say, low deficits? Why wouldn't that allow the Treasury to ease off on its issuance of long-term debt and move the whole maturity structure of the debt toward short term issues?",53
-fomc-corpus,1996,"If you move the debt to short term, it is the outstanding debt, not the budget deficit, that determines the impact of--",26
-fomc-corpus,1996,I would imagine that to accommodate a growing money supply and a move toward liquidity on our part over time the Treasury is going to have to respond in an era of low deficits by lowering the average maturity of the debt structure. I think that is the incentive we are creating.,54
-fomc-corpus,1996,Versus doing what?,5
-fomc-corpus,1996,"If the deficit comes down and we are increasing our take of the short-term debt, why wouldn't they have to respond by moving into supplying more short-term debt?",32
-fomc-corpus,1996,Some 20 percent of the $6 trillion debt rolls over every year and needs to be reset at the average 5-year maturity of the existing debt. The Treasury needs to refund over a trillion dollars of maturing debt every year,46
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Raising the issue of being able to do swaps with Treasury would add another item to the list of possible liquidity resources in Peter's paper. Rather than working out a deal that would involve 2-day paper, or perhaps 20-day paper, we probably should instruct our Manager, in dealing with Darcy Bradbury's successor, to see if an agreement could be worked out that would be in the best interest of our customer, the Treasury, and in our best interest. That would be one of the things that we could do as part of developing a panoply of liquidity resources.",117
-fomc-corpus,1996,"Why don't you talk to them over there and see whether they slam the phone down before you can get a couple of words in. They are more than disinclined to listen to anything that complicates their task because they think they are over their heads with work. If you impose any more work on them, you are not a friend. Any further comments? President Melzer.",76
-fomc-corpus,1996,"Thanks, Alan. I have one question for Peter. After looking at this, I would agree with what has been said. I think liquidity is the most important objective, and as you said, what we earn on our portfolio does not really matter. It is not like the foreign portfolio where there is some tradeoff between liquidity and earnings.",68
-fomc-corpus,1996,Those are real earnings!,5
-fomc-corpus,1996,"That's right. The question I have, Peter, relates to the loans of Treasury securities by the Desk to dealers in government obligations if there is a delivery squeeze involving particular issues. If we went all the way and at some point got to a ""bills only"" portfolio, would your inability then to lend securities create any significant problems for the functioning of the government securities market?",75
-fomc-corpus,1996,"That is a good question. I am somewhat uncomfortable with our current securities lending program, to say the least. The program itself goes back to the period before government securities were in book entry form. It was designed to deal with the tardiness in the paper clearing process. With the development of book entry, I believe that the Desk became eager to discontinue the program and was on the verge of doing so at the time of the Salomon Brothers episode. But that just seemed to be the wrong time to make the change. To put it bluntly, I am desperate to find an occasion to discontinue the securities lending program, and if I can find the right cover I will urge the Committee to discontinue it. I do not think, however, that this issue raises itself to the issue of the overall structure of the portfolio.",164
-fomc-corpus,1996,Okay.,2
-fomc-corpus,1996,But perhaps on another occasion I may come back and talk to the Committee about some of those more mechanical issues.,22
-fomc-corpus,1996,Maybe you can get rid of it in the context of this portfolio issue.,15
-fomc-corpus,1996,"We might be able to. I might add that even if our coupon portfolio went down to 20 percent or 30 percent or 40 percent of the total, we would still have plenty of securities to lend, given the kinds of limits that we impose. But that would not be an obstacle to me, and I do not think it would be viewed as a serious matter in the market.",79
-fomc-corpus,1996,"If we went to bills only, the earnings of the System would be highly correlated with the federal funds rate. Would it be assumed that as earnings go up we are going to use those funds to go out on the town or something like that?",49
-fomc-corpus,1996,Probably.,2
-fomc-corpus,1996,I am sure someone would assume that.,8
-fomc-corpus,1996,"We could use the profits to support our ""airforce""!",12
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I agree with the recommendation of trying to increase the liquidity of the System portfolio. I am not sure that I know what the right percentage is, but I take your point. I also appreciate your efforts, Peter, to try to identify and analyze the previous portfolio objectives. I take it that what you plan to do following this discussion is to go back and try to come up with some kind of statement of procedures or policy. I thought the principles that you noted on page 5 of your memo were sound. They all seemed important to me, but they were not prioritized or weighted. So, when you go back to redo them, I think it would be helpful if you were to put them into some kind of operating context.",146
-fomc-corpus,1996,"Absolutely. I am hearing some encouragement of the super preeminence of liquidity, which will be reflected in our effort.",24
-fomc-corpus,1996,"You do have it as the first item in your list, but then I can't quite tell where else it fits in.",24
-fomc-corpus,1996,Any other comments? President Minehan.,8
-fomc-corpus,1996,"This may be a naive question, but is liquidity absolutely determined by the percentage of bills in the System portfolio? A priori, the more bills, the more liquidity? Are not the other securities that are commonly used in repo transactions every bit as liquid or is that not accurate?",55
-fomc-corpus,1996,"There is certainly a good deal of depth to the long end of the yield curve, but given the history and current structure of the Treasury securities market, there is no doubt in anyone's mind that the bill sector is much more liquid. Now, I think that we have to stay in touch with a possible evolution at the Treasury on this. Over a long period of time the relative liquidity of bills could change. For example, in the German yield curve it is the short end that is illiquid and that I am trying to get out of.",109
-fomc-corpus,1996,"That is less liquid, yes.",7
-fomc-corpus,1996,"That is not an immutable fact, but it is a fact today and has been a fact for the last couple of decades.",25
-fomc-corpus,1996,"I know the presumption is that the bill area is more liquid; there are more securities at that end, although I believe that the Treasury has been extending the overall maturity structure.",36
-fomc-corpus,1996,The Treasury has shortened the debt structure.,8
-fomc-corpus,1996,"Liquidity through repos, or the ease with which one can arrange them, decreases in a crisis atmosphere. It is precisely then that we may really need a liquid portfolio. There is never a question about, say, 12-day bills, whereas finding counter-parties may be difficult when we want to do repos during a crisis. Everyone is then running for cover.",72
-fomc-corpus,1996,"The other point on the liquidity of bills, President Minehan, is that we could absorb reserves very readily by simply allowing them to run off at maturity.",31
-fomc-corpus,1996,Right.,2
-fomc-corpus,1996,That was one reason why the Committee decided in the mid-1980s to shift more of the portfolio toward bills because that meant that outright sales in the market would not be required to accomplish a large amount of reserve absorption.,45
-fomc-corpus,1996,"I would just note that we are also using the traders' definition of liquidity, which is the ability to execute transactions in volume without moving price. Clearly, the long end is less liquid in that sense. The further out the maturity curve we go and the more we are selling, the bigger the price effect we will have.",65
-fomc-corpus,1996,"Right. But I would think that if we went to an all bills strategy, we would have complications associated with how large a share we are of the auction and perhaps how large a share we own of any given issue. That might be a problem as well. So, I think some gradual move to a more liquid position without going all the way is probably the one to be preferred. You asked the question about income. I do not think we should have an income objective either, as nobody else seems to.",102
-fomc-corpus,1996,"I think in the past the Committee has talked about conducting at least some transactions in the coupon end of the market just to be in the market from time to time, and the possibility of buying coupons in certain unusual circumstances probably should not be ruled out. It is something that the Desk has done in the past. Only four or five years ago, the Committee was concerned that the portfolio was getting too liquid, and the Desk was instructed to stop moving it in that direction.",94
-fomc-corpus,1996,"Further comments or questions? Peter, do you think you have enough to move forward?",17
-fomc-corpus,1996,I will take a stab at the next step. Thank you.,13
-fomc-corpus,1996,"Very good. The next meeting is scheduled for Wednesday, November 13. We have now concluded this meeting.",22
-fomc-corpus,1996,"Good morning, everyone. The first item of business is to welcome John Moore, who as you know is First Vice President of the San Francisco Bank and is attending his first meeting. It means that Peter Fisher has to be on his best behavior!",49
-fomc-corpus,1996,Why me? [Laughter],7
-fomc-corpus,1996,"But before he exhibits that good behavior, I would like somebody to move approval of the minutes for the meeting of September 24.",26
-fomc-corpus,1996,"I move it, Mr. Chairman.",8
-fomc-corpus,1996,"Without objection. Now, Mr. Fisher.",9
-fomc-corpus,1996,Thank you. [Statement--see Appendix.],9
-fomc-corpus,1996,Questions for Peter on either subject?,7
-fomc-corpus,1996,I would like to congratulate Peter on his record period of nonintervention.,15
-fomc-corpus,1996,I would like to second that. [Laughter],11
-fomc-corpus,1996,Congratulate the Chairman,5
-fomc-corpus,1996,"Yes, I think congratulations are due at the other end of the table, but since I get beat up occasionally down here, I will take what I can get!",33
-fomc-corpus,1996,"If you had not run the Desk as well as you did, we would not have had a choice up here. If there are no questions on either subject, would somebody like to move the renewal of the reciprocal currency arrangements, which expire during December, and ratification of the domestic transactions? We will vote separately on each of them. Peter, how do you want to define the motion on renewing the swap lines?",83
-fomc-corpus,1996,The Committee would be giving me the authority to negotiate their renewal.,13
-fomc-corpus,1996,"So move, Mr. Chairman.",7
-fomc-corpus,1996,Is there a second?,5
-fomc-corpus,1996,Second.,2
-fomc-corpus,1996,"All in favor of the authority to renew the swap lines say ""aye."" SEVERAL. Aye.",22
-fomc-corpus,1996,Any opposed?,3
-fomc-corpus,1996,"Hearing none, they are approved. The second motion--",12
-fomc-corpus,1996,To ratify our domestic operations.,7
-fomc-corpus,1996,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1996,"Opposed? The Secretary will note that both motions passed unanimously. Would you like to move to our domestic discussion? [Laughter] Wait a second! Have we ratified the domestic market transactions? SEVERAL. Yes, we did.",49
-fomc-corpus,1996,"Oh, that was the second vote!",8
-fomc-corpus,1996,We are just moving too fast!,7
-fomc-corpus,1996,"No, the trouble is jet lag, and even though Peter and I were on the same plane, his jet lag is different from mine. [Laughter] Slowing things down, we move to Mike Prell.",44
-fomc-corpus,1996,Thank you. [Statement--see Appendix.],9
-fomc-corpus,1996,"Mike, granted all the problems with the data, there seems to be a gradual uptrend in the last two or three years in the measured personal saving rate in the context of a very rapid rise in household wealth. If we were to take the published personal saving rate and adjust it for the econometric evidence of the impact of changes in household wealth on that statistic, is there any question as to whether we would be looking at a secular updrift?",91
-fomc-corpus,1996,"I think there always is a question about the behavior of the saving rate, particularly when we are estimating it ahead of the annual revisions of the NIPAs. We have seen saving rate trajectories altered considerably by those statistical revisions. Given that we feel that GDP growth may have been underestimated, it is not inconceivable that a part of those revenues could be in consumption expenditures. I do not have any particular insight on that, but that may be one aspect of the situation that should make one cautious about jumping to conclusions. But on the face of it--",111
-fomc-corpus,1996,Is there any correlation between the saving rate and the statistical discrepancy?,13
-fomc-corpus,1996,I cannot give you an answer to that off the top of my head.,15
-fomc-corpus,1996,I would assume that Commerce would be doing that sort of analysis in looking for the causes of the statistical discrepancy and presumably making adjustments where they could.,29
-fomc-corpus,1996,"Obviously, each time they do their quarterly estimate, they try to reconcile the income and product sides. If they find income is stronger, they are presumably going to look for opportunities to find product and add it in. But I think they are limited by their source data. And now they are running behind on the updating of the benchmarking to Census surveys and so on because they were unable to do their regular annual revisions. That said, and recognizing that the data may be throwing us a curve, one would have anticipated over the past couple of years, all other things equal, that the saving rate would have declined appreciably in light of that increase in wealth. The saving rate might have been depressed by 1/2 to 3/4 percentage point this year relative to a path that would be consistent with a stable wealth-to-income ratio, say, since the end of 1994. The apparent updrift that we have seen creates a considerable differential from that, and so we look to other possible factors. One of them, as we have noted for some time, may be the fact that the wealth gains are not evenly distributed across the population. A considerable number of households that have built up debts may now be restricting their spending. The tightening of credit availability has contributed something, even if it has not been very great to this point. Earlier we were seeing a liberalization of credit availability and that could have been enhancing consumption growth; now the credit effect presumably is moving in the other direction. We also have offered a laundry list of other rumored factors that may be affecting the saving rate such as greater concerns about retirement security, particularly in light of the perception that Social Security may not be there fully for people now in the workforce; Medicare and Medicaid issues that might suggest less security about medical coverage later on; and the general notion of job insecurity. While we do not see clear evidence that by historical standards people are unusually uncertain at this point about job prospects, there remains some general sense that all is not well and that jobs are not secure, so there could be some rise in precautionary saving levels.",421
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mike, one interesting aspect of the forecast is the strength of consumption. PCE goes up 2.7 percent in 1997. I assume that one of the reasons is the strong growth of income--you have a strong 2.7 percent increase in real disposable income. A bit of a puzzle to me is why there is such a difference between the growth of real disposable income and that of real GDP. The 0.5 percent difference is greater than anything we have seen in the 1990s, and I do not know how far back one would have to go to see that kind of difference in the growth of those two measures.",132
-fomc-corpus,1996,"We do have some increase in real wages. We have diminishing profit shares. So, some shift is occurring in income shares.",25
-fomc-corpus,1996,There is also the CPI-product price.,8
-fomc-corpus,1996,"Consumer energy prices, in particular, rose quite rapidly this year and are expected to be flat next year. The swing we get there acts to boost growth of disposable income.",34
-fomc-corpus,1996,They push up real disposable income?,7
-fomc-corpus,1996,"Yes. Because we are a net importer of oil, declines in crude oil prices obviously are going to be one thing that helps push up disposable income.",30
-fomc-corpus,1996,So maybe what one is using for the deflator shows up in disposable income versus GDP?,18
-fomc-corpus,1996,That is consistent with the historical evidence.,8
-fomc-corpus,1996,Okay.,2
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mike, I am particularly interested in these methodological changes that BLS is making in the calculation of the CPI. You have a table on page 15 of Part I of the Greenbook that shows how these affect the CPI going out through 1998. Could you tell us more about this? I have a couple of questions. Is the BLS planning other changes going forward? To what extent have the changes made so far chipped away at the 1/2 to 1-1/2 percent estimate we indicated before in testimony about how much the CPI actually overstates the true underlying inflation rate?",121
-fomc-corpus,1996,"I should defer to our foremost authority on this, Mr. Stockton.",14
-fomc-corpus,1996,"At this point, President Moskow, I think what we have built into the forecast through 1998 is all that the BLS has officially announced in terms of planned changes. If we pressed them, I am sure they would say that they have an ongoing program for improvement and there will be further changes down the road. Thus far, we think the changes they have made have reduced the CPI by roughly .2 percentage point in 1996 relative to the 12-month change we would have looked at using the 1994 methodology. So, we already have .2 percent built into the data to date, and we are expecting another .3 percent downward correction going forward between 1996 and 1998. In terms of how that affects our current estimates of the bias, according to a paper published earlier this year by my colleague, David Wilcox, the estimated bias is .6 to 1.5 percentage points. That estimated bias incorporated a number of the improvements that we expected the BLS would be making. What we had not anticipated was the change that the BLS will be making in January to the measurement of medical care prices, which we think is going to reduce the CPI by .1 percentage point. I guess we would adjust that range of .6 to 1.5 percent by lowering it by .1 percentage point, but that is all. So, we would say a range roughly of 1/2 to 1-1/2 percent is still a reasonable estimate for the measurement bias.",307
-fomc-corpus,1996,"I should note that our estimates of the effects of these changes in method, or the market basket change in 1998, are somewhat conjectural. It is not a simple, mechanical arithmetic story, and that is truer in some cases than in others. But these are estimates; they are not engraved in stone. I would remind the Committee that the Boskin Group is slated to come out with their final report on the bias by December. I do not think we have any inside information on whether they will be revising their estimates up or down, but there certainly will be considerable focus on the issue at that time.",125
-fomc-corpus,1996,"But if it were not for these methodological changes, you would see a gradual updrift in the core rate of CPI inflation?",26
-fomc-corpus,1996,"That is right, yes.",6
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I have a question on the material you sent us last night. On the basis of the inventory data that were released last week, I see that you reduced your estimate of third-quarter GDP growth to a rate of 1.9 percent and traded that off with an uptick in fourth-quarter growth. How sure are we of third-quarter final sales?",70
-fomc-corpus,1996,"Well, final sales for the quarter could be changed at least noticeably, maybe not importantly, by a possible revision to September retail sales to be published tomorrow. Moreover, we have yet to receive the net exports data for September, which are always a wild card. At least some modest change in that number is possible, but at this point we would not expect a major change in the PCE estimate based on retail sales. We are talking mainly about September. In effect, enough of the quarter is known at this point that there is not going to be a big surprise. In addition, there is only one more month of trade data. So, we know it was a weak quarter for final sales. The inventory situation is harder to gauge at this point. Built into the estimate that we gave you is the BEA assumption about retail inventory investment. It is a moderate number. We did not see any reason to quarrel with it, but the translation of these data into real inventory change is difficult. There is a further wild card here in that a lot of the surprise in the wholesale trade inventory numbers was in food products. There is some question about whether BEA might decide that, if it did not show up in those numbers, the food was still on the farm and maybe some adjustment should be made in farm inventories. Nothing that we have been able to glean from discussions with BEA or from their previous behavior would lead us to assign a high probability of their making some ad hoc adjustment here, but it is a possibility.",306
-fomc-corpus,1996,"So you are still quite confident that the low level of consumption recorded in the third quarter, despite changes in inventories, is pretty much baked in the cake?",31
-fomc-corpus,1996,"I think the numbers will probably hold up fairly well. As I said, they may not be accurate numbers, but we have no basis for gauging a bias one way or the other. We do not perceive that the trend in the growth of consumption has moderated to the degree that those third-quarter numbers might suggest.",63
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,My question actually was the same as Cathy's. It was about the GDP estimate.,17
-fomc-corpus,1996,"If I'm asked again, I might give a different answer!",12
-fomc-corpus,1996,"Well, actually I was going to put it slightly differently. How confident are you about the 1.9 percent growth rate?",26
-fomc-corpus,1996,"Not highly confident, given the statistical uncertainties that I indicated. We can imagine a number a little lower; we can imagine a number a little higher. You will recall that one of the fundamental factors in our thinking about the third quarter was that the labor input was quite ample, and the income side would suggest there was room for considerably more growth. On the other hand, when we looked at the first half of this year or the second quarter, we did not always see these things tracking perfectly; there was some averaging out. The basic trend of growth in the mid-two's for this year seems fairly reasonable relative to the behavior of the unemployment rate, to other measures of labor input, and to our general sense that things had picked up and were running somewhat above the long-term trend.",157
-fomc-corpus,1996,Any further questions for Mike?,6
-fomc-corpus,1996,"When you estimate a consumption function, do you divide the population into subsets?",15
-fomc-corpus,1996,"We have some notional views about proportions of the population that might be liquidity constrained or not liquidity constrained. So, embedded in some models is a perspective on that. But in preparing our forecast, we are not thinking of this on a disaggregated basis.",52
-fomc-corpus,1996,"We also try to take account of the distribu-tion of income. For example, there is a much higher propensity to consume out of transfer payments than there is out of labor income.",37
-fomc-corpus,1996,"Transfer income has been relatively strong, and to an extent that might lead one to have expected fairly firm consumption relative to aggregate income.",26
-fomc-corpus,1996,It would seem that the potentially liquidity-constrained or debt-constrained population would be different from the people who have had stock market wealth gains. I would think that the key to sorting the two out is to try to disaggregate the trends. This is just a suggestion for future research.,57
-fomc-corpus,1996,"As you know, Governor Lindsey, there are not a lot of disaggregated time series data on consumption and saving.",24
-fomc-corpus,1996,"Any further questions? If not, who would like to start the Committee's discussion?",17
-fomc-corpus,1996,"Mr. Chairman, the Twelfth District economy expanded briskly in the first half of 1996, and it remained on track during the third quarter. Growth in total payroll employment slowed only slightly between the second and third quarters, from 3.6 to 3.3 percent at an annual rate. The District's performance this year is attributable largely to a strengthening in the State of California. For example, growth in construction employment in that state has accelerated substantially since the first quarter. The overall expansion has been stronger in northern California than in other parts of the state. The northern region has benefitted from low unemployment and a substantial recovery in housing values, factors that gradually are spreading to southern California. The Washington State economy continues to benefit from stepped up production at Boeing. Twelve-month gains in total employment in the state have increased from 1 percent at the start of the year to 3.1 percent in September. Increased demand for manufactured products related to aircraft production also spilled over to Oregon and added to a third-quarter surge there. The intermountain states--Arizona, Idaho, Nevada, and Utah--continued to post large year-over-year employment gains. About the only weak part of the District is Hawaii, which showed a decline in jobs during the third quarter. Turning to the national economy, data released since we met in September caused us to lower our projections for near-term real GDP and, to a lesser extent, inflation in 1997. We now expect real GDP growth to fall below its 2 percent trend this quarter, in part because inventory investment should drop off following its strong increase in the third quarter. At the same time, inflation in the ECI and the GDP-based price measures all came in below expectations. Over a longer horizon, underlying inflation has shown a slight downward trend according to most measures despite the low unemployment rate. We have updated some earlier work that looked at conventional inflation equations incorporating historical relations among unemployment, inflation, and other variables. These equations over-predicted inflation by a wide margin in the third quarter, and this noticeably intensified the more moderate pattern of overprediction that we have seen for some time. As a result, we have lowered our forecast for CPI inflation in 1997 to just under 3 percent, in effect putting somewhat less weight on upward pressure from labor markets. However, I still consider the risks for inflation to be on the up side because it is quite possible that the historical relationship with labor market conditions will begin to reassert itself. Thank you.",504
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, the Seventh District economy continues to expand at a moderate pace. It appears that price pressures may have eased somewhat. Overall construction activity remains strong, with recent slowing on the residential side being offset by a pickup in nonresidential activity, both public and private. Retail sales improved moderately in both September and October, and the sales gains in the District generally have matched or slightly exceeded the national averages. One of our directors characterized the recent pickup as representing steady gains rather than indicating a new trend. Sales of apparel and other soft goods have been strong, while sales of big-ticket items such as appliances and, especially, electronic goods have been soft. District retailers generally expect a reasonably healthy holiday sales season, and the shorter sales period this year is not expected to be a serious constraint. As we had expected, auto and light truck sales recently have been running slightly below a 15-million-unit annual pace. October sales were not significantly affected by the various strikes against GM, but November and possibly December sales could be. According to GM management, downtime from their new model changeovers presents a significant production challenge in the fourth quarter. The new GM-UAW contract increased compensation costs by just under 5 percent per year and followed a pattern that already had been set with Ford and Chrysler. Manufacturing activity in the District generally remains somewhat stronger than nationally, although conditions vary by industry. Purchasing managers' surveys from around our District indicated continued expansion in October at a pace that was somewhat faster than for the nation as a whole. We are hearing about strength in the farm equipment industry, while producers of heavy trucks and paper are not reporting improvement. Growth in manufacturing employment has slowed in District states, but the number of factory jobs in September was the same as last year. This represents a better performance than the rest of the nation. For employment conditions generally, the news is still the same. Labor markets remain tight in many parts of the District. While we continue to have reports of upward pressure on wages in some sectors, the ECI for the Midwest, like that for the nation, did not indicate a significant acceleration in total compensation costs. Confidential information we received from Manpower Incorporated regarding their recent survey indicates that hiring plans for the first quarter of 1997 are slightly more upbeat than normal. I would caution everyone that this information will not be publicly released until Monday, November 25. On the price front, most firms continue to report that competitive pressures make raising prices extremely difficult. In fact, many of our contacts are quite adamant on this point. I get the sense from people I have talked to recently that materials costs are coming down rather than rising. Steel prices, for example, are down and supplies have increased, in part because of imports. One sign of the impact of imports is that at least two domestic steel companies recently have filed anti-dumping charges under our trade laws. Our latest reports on livestock and crop conditions generally point to larger supplies ahead than were previously expected, and this will result in less upward pressures on retail food prices in 1997 than were previously expected. Our latest quarterly survey of agricultural banks indicates that District farmers are in very good financial condition, and we see no signs of ag loan problems in our District. Turning to the national outlook, it seems clear that the long awaited slowing in the growth of aggregate demand has arrived. We have no quarrels with the broad outlines of the Greenbook's outlook for 1997, but we expect that real growth and employment gains may be slightly higher in 1997 than the Greenbook forecast. I think it is fair to say that the risks to the outlook are more nearly balanced than at our last meeting, but I believe that the upside risks remain more serious. The inflation forecasts concern me. As the Greenbook notes, the NAIRU may have fallen to 5.6 percent. Still, this is an economy where resource utilization rates are high and slack is limited. The outlook is for higher core inflation, as we discussed before, when we adjust for the BLS's methodological changes to the CPI. Obviously, there is a good deal of uncertainty about these adjustments in the inflation forecasts, but I think it is important that we avoid getting into the position of validating an incremental upward creep in inflation.",856
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, New England remains on a solid growth path. Job growth on average has been slower than for the nation, but this is traditional for New England. The unemployment rates for the region as a whole and for each state remain below that for the nation. Employment in our region is still below its prerecession level, but the slow, steady job growth that we have been experiencing is expected to continue for the rest of the decade and to bring employment back to the prerecession level by the end of 1998. Just to touch on some of the bright spots: Manufacturing job losses are continuing but at a slower rate. We see this especially in the defense industry where downsizing is abating, and we are beginning to see signs that defense-oriented firms are becoming successful in nondefense lines of business. Real estate vacancy rates are down everywhere, especially in Boston. A director on our New England Advisory Council heads up the building trades in Boston, and he reports that new buildings are actively on the drawing boards, including six new hotels and a couple of new office complexes. When I arrived in Boston five years ago, that was not expected to happen in anyone's lifetime. Despite low rates of unemployment, anecdotal reports of labor shortages, except for specific technical skills, appear to have abated in the last couple of months. There is some sense that the New England labor force may be growing. There is less net outmigration and perhaps greater labor force participation by previously discouraged workers, especially older workers. Wage increases are expected to be in the area of 2 to 5 percent, probably centering around 3 percent, but pressures on overall prices are considered to be low. Business people firmly believe, along the lines that Mike Prell reported for the nation, that they cannot raise prices. Some are going to try, but overall the expectation is that whatever happens on the wage side, businesses will somehow accommodate to it within their overall cost structure and not raise prices. Consumer sentiment and business sentiment are extremely upbeat, even in such formerly depressed areas as Connecticut. We have had people from Connecticut talking to us about business conditions looking brighter. The stories in the newspapers are more optimistic, and that is not because they just opened a new Indian-run casino in Connecticut! I think the better sentiment has its roots in the opening of a lot of small new businesses. On the national scene, we do not have any essential disagreement with the Greenbook. Certainly, the risks that growth will get out of hand seem to have abated since our last meeting. The slower growth in consumer spending in the third quarter, a slight cooling of housing markets, and a bigger drag--bigger than we expected anyway--from the trade deficit all point to a moderate fourth quarter, even assuming a fairly good bounceback in consumer spending. The risks to the forecast for growth also seem fairly balanced, at least for the coming year, again as compared with our expectations at the time of the last Greenbook. However, there are continued upside risks to inflation. The Greenbook may be overly optimistic about the unemployment rate. It could very well drift slightly downward, at least in our view, and we do not have a whole lot of wiggle room here. The NAIRU probably is lower than we expected earlier, either permanently or cyclically, but it certainly is not centered around 5.2 percent. The Greenbook inflation trend is up, even though that gets masked a bit by measurement adjustments and so forth. But if we were able to make all of those adjustments going backward, we would still expect to see a small uptick in the rate of inflation going forward. The key question here is whether that expected upward tick in inflation is acceptable, and if it is not, when we should move to address it even in the presence of moderating economic growth.",771
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, activity at the regional level in our District, as elsewhere in the country, has decelerated pretty much across the board. In particular, residential construction recently has softened noticeably. Our most recent monthly surveys, though, do suggest a bit of a rebound lately in both the service and the manufacturing sectors. It is our sense that despite the deceleration, these sectors are still relatively firm overall, with a few exceptions like textiles and apparel. In addition, labor markets in our region remain tight according to the information that we have, and wage pressures are still evident in at least some local markets, although here as elsewhere these conditions have produced only scattered increases in prices at this point. In general, I think it is fair to say that households and businesses in our region remain reasonably confident that the expansion is going to continue for the foreseeable future. One manifestation of this is continued, quite marked strength in commercial real estate along the lines of Cathy Minehan's comments. Mike Moskow mentioned that as well. As we pointed out in our Beigebook report, vacancy rates have fallen and rental rates have risen in many parts of the District, and we see at least some new construction activity. In Charlotte and northern Virginia particularly, we see a lot of strength in the commercial real estate sector. Turning to the national picture, I think the third-quarter GDP report and the recent monthly data are quite encouraging on balance because they suggest that the economy is now moving back to a more sustainable growth path. At a minimum, it seems clear that the very rapid and obviously unsustainable growth rate in the second quarter is not going to persist. Moreover, and for me this is probably the single most encouraging development, the recent drop in long-term interest rates suggests that inflation expectations have diminished in a material way at least for now. Finally, employment growth has moved back closer to the trend growth in the labor force, and while labor markets remain tight, they may not be tightening further at present. All in all, I think it is a considerably improved and encouraging picture. As you know, I was not at all confident that we would get this kind of outcome without some additional restraint before now on our part. I am happy that things have worked out this way, at least for the time being. Looking ahead, as others already have noted, the risks of error in the staff's projections are more balanced now than they were. I did not think that there was any significant downside risk until recently, but final demand especially for households was very weak in the third quarter. I don't think we understand this weakness or the related increase in the saving rate very clearly at this point. It may just be noise, and that is my guess, but we cannot rule out the possibility that something more is going on, and we need to be sensitive to that possibility. Having said all this, I do believe, like Mike Moskow, that the balance of risks is still skewed to the up side on both growth and inflation, if somewhat less dramatically than earlier. It is certainly possible that we could experience a poor holiday selling season and that consumer demand could remain weak going forward. But this outcome seems unlikely to me given what we know about the solid growth in jobs and incomes, continued high consumer confidence, and the behavior of the stock market. Also, the overall level of activity seems to remain high. According to all of the information that I see, labor markets are still quite tight. The Greenbook, after all, is still projecting a modest but steady increase in the ECI over the projection period and also in the core CPI, especially abstracting from the reweighting of the index. So, again, I think the risks remain weighted to the up side. Also, even though the upside risk seems to be diminishing somewhat, as I see it there is precious little margin for error in that direction. We are still at a very high level of activity, and if we see any significant increase in aggregate demand in the near term, that could get us back into trouble in a hurry. So, bottom line, we need to remain vigilant.",827
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"Economic activity in the Philadelphia District continues to expand, although the pace of growth has slackened some since the summer. Manufacturing overall reflects this trend. Some industries like rubber, plastics, chemicals, primary metals, and machinery are relatively stronger than textiles and furniture. Retailers are having a better year to date than last year, though there has been some slowing so far this fall compared to the summer. A number of retailers have told us that sales volumes hold up only when prices are cut. Construction activity generally has edged down, with nonresidential construction well under the levels of a year ago and housing permits somewhat above. Labor markets remain mixed, with some areas very tight and others reporting slack. In general, employers report increased difficulty in finding qualified entry-level workers. A major reason is that some minimal level of computer skills is required for many entry-level jobs, especially for clerical workers. There is also a shortage of truck drivers and of skilled tradesmen in construction. In the job categories where shortages exist, there are notable upward wage pressures. Generally, however, wage increases are in the 3 to 4 percent range. On the national front, the economy is performing according to a script of more moderate, sustainable growth and subdued inflation. The best-bet outlook is for more of the same, though something can always go wrong. There are always uncertainties, and there is always room for improvement. At the same time, the macro economy is performing rather well, and monetary tinkering at this point would be likely to do more harm than good.",310
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, many of us indicated at the last FOMC meeting that we were still waiting for the forecasted and hoped-for slowdown in the economy, but as of that time there were only a few scattered signs of a slowdown. I do not think that is the case any longer. Indeed, while the Sixth District does not exactly mirror the national economy, many of the same trends that we are seeing within the District are now appearing in the national economy as well. Our District economy continues to grow at a moderate pace, although I no longer would suggest that it is leading the nation. Signs of a slowdown are beginning to appear, particularly in residential construction and manufacturing. Tourism, a mainstay for our District, particularly in Georgia and Florida, continues to be extremely strong. Retail sales exceed year-ago levels, and retailers we talk to are optimistic about the upcoming holidays. Our real estate contacts report that the single-family market has begun to slow, albeit from an historically high level, as both sales and construction activity flattened in October. At the same time, multifamily and commercial construction continue strong. Loan demand remains steady, with consumer loan demand described as flat and commercial as mixed. Banks in our region tell us they are beginning to pay closer attention to credit quality. On the labor market front, we continue to get reports of localized shortages, which are in fact becoming more and more common across the District. At the same time, we are hearing of only scattered wage pressures and, as Mike Moskow and Cathy Minehan indicated for their Districts, there are almost no signs that this tightness is being passed through to consumers in the form of higher prices. We get few reports that there will be any direct impact from the increase in the minimum wage, but some of our business contacts indicate that certain wage contracts are indexed to the minimum wage and hence we will be watchful on that front. Our outlook for the District calls for moderate-to-strong growth well into next year. We look for some signs of possible slowing due to diminished demand. Although consumer confidence remains strong, we see a slight drop in the willingness to buy big-ticket items. And the regional decline in loan quality suggests the possibility of tighter loan standards and weaker loan demand in the future. Similarly, regional capital investment may slacken unless manufacturers stop revising their capital expenditure plans downward. On the national front, we see things about the same as everyone else does. The reported drop in third-quarter GDP growth and other more recent monthly data seem to be signalling the slackening that we were looking for, especially in light of the evidence that growth in consumer spending and business investment may be slowing. Despite the evidence of some slowing in the expansion, we still expect forward momentum to continue at a good level, with most of the economy's fundamentals remaining essentially healthy. We see three key question marks for the forecast, essentially the same as those discussed in the Greenbook. The first concerns consumer demand and specifically when it will pick up and by how much. We think there are some upside risks here. As Al Broaddus just noted, personal income has been up, savings have been up, debt burdens were reduced slightly in October, and the run-up in the stock market has given consumers' holdings of financial wealth an added boost. The second question relates to inventories, which we have already talked about. Looking at the data closely, we feel that a large part of the increase in inventories was not a result of an unanticipated drop in sales but rather stemmed in most cases from attempts to replenish stocks. Inventory-sales ratios remain moderate to low by almost any standard. Of course, the third factor is the labor markets. How long can we continue to have the current job growth and unemployment environment without the resulting tightness beginning to put upward pressure on prices? We think we have been fortunate with developments in this area for some while now, but it is not likely that reduced increases in benefits can continue to offset wage increases indefinitely. Thank you, Mr. Chairman.",806
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"The expansion of the Eleventh District economy has slowed a little from its rapid pace earlier, but it is still fairly strong. The strengths certainly outweigh the weaknesses. On the up side, higher oil and gas prices are a positive for us at least, boosting activity in the energy industry in the Southwest. The Mexican economy is rebounding, adding to the demand for District goods and services. Nonhousing construction activity is strong in the District, particularly office buildings, warehouses, and industrial space. Call centers are hiring all the people they can get, and there are many reports of labor market tightness. On the down side, the electronics industry is weaker than a year ago. We have seen about a 3 percent decline in electronics-related jobs as compared with 5 percent growth over the previous two years. Homebuilding has dropped off a bit. Employment in motor vehicles manufacturing is down and more layoffs are expected in coming months. On the whole, it is fairly clear that growth remains strong in the District, though it is moderating a little from its earlier pace. Turning to the question of upward price pressures, the bottom line, as other people also have indicated, is that we do not see much evidence of such pressures yet. There has been a lot of evidence both statistical and anecdotal that the labor market is tight in our part of the country. On the other hand, there is little evidence that the tightness is translating into upward pressures on prices. The labor picture is interesting. I have heard a lot of stories recently and have seen some of the problems that companies increasingly are experiencing in their efforts to find enough help at the lower end of the wage spectrum. We hear of restaurants offering signing bonuses for new employees. People are going into 7-Elevens and getting a job offer when they are not even looking for work. [Laughter]",371
-fomc-corpus,1996,Did they think you were worth the minimum wage? [Laughter],14
-fomc-corpus,1996,"Well, I am not getting any respect as a result of that offer! [Laughter] My own evidence of the tightness in the labor markets came just before the elections. For the first time in my life, I was polled about my political views, and the interviewer had trouble reading the questions to me. She never could pronounce the word ""conservative.""",74
-fomc-corpus,1996,She was from Texas!,5
-fomc-corpus,1996,I don't know where she was from.,8
-fomc-corpus,1996,Massachusetts! [Laughter],7
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"As far as the District economy is concerned, there is little to report because the very healthy trends continue, as has been the case for a long time. Labor markets remain very tight, and I have no doubt that there are outright labor shortages that are restraining activity and expansion in some parts of the District. Anecdotes of wage pressure have increased and while we are hearing more about that, the pressure does not appear to be showing up in any of the broad measures of wages. I am not in a position to reconcile the anecdotes in one direction and the data in the other. Part of the explanation would appear to be a greater reliance on variable pay, which seems to be both larger and going deeper into organizations than we earlier thought. But the evidence in support of that explanation still is very fragmentary at this point, and I would not put a lot of emphasis on it. Whatever one might say about wages and wage pressures, business people remain adamant, as a number of people have already commented, that they cannot raise prices and that inflation is not something they are confronted with or that they contemplate. As far as the national economy is concerned, I would characterize developments in recent months as generally pleasant surprises. Inflation has turned out to be less of a problem than I feared earlier, and demand does seem to be slowing along the lines that we anticipated. I am not particularly worried about the third-quarter slowdown in consumer spending. That story looks to me like the dog that does not bark or did not bark. What I mean is that retailers are prone to complain and in fact do complain almost no matter how good things are. The fact that I do not hear them complaining suggests to me that sales remain satisfactory. I clearly do not understand some of the dynamics in the labor market. If we work our way through the data, there are some signs of an upward creep in the rate of wage increases. But given that we probably have been underestimating the rate of growth of productivity, it may be that cost pressures have been offset to this point. Having said that, we know that businesses are relying increasingly on less skilled, less experienced workers because they are the only ones available to fill vacancies, and we may be at the point where we are about to run through the good news as far as being able to offset somewhat higher wages with productivity improvements. That is, we may start to see real increases in labor costs and the pressures that follow from that. I do not know how much to make of that at this point because, as I said earlier, it seems to me that most of the surprises in recent months have been pleasant.",528
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, the economy in the Kansas City District continues to grow moderately and consistently. Our directors and other business contacts generally report healthy economic conditions throughout the District. Retail trade appears to be holding up well across all seven District states. A recent survey of District manufacturers conducted by our Bank found that moderate expansion of production schedules is in place at this time. Despite some generally favorable anecdotal reports, employment has leveled off in recent months. It was unchanged in September and up just a little in August. Improved conditions in our agricultural sector have raised income levels somewhat, and we are seeing some drilling activity in our energy sector as well. Overall consumer and wholesale prices now appear to be rising slowly but consistently across our District. Labor markets are indeed tight, and we are hearing more frequent reports of wage pressures for our manufacturers as well as for our retail and service industries. For the national outlook, our projections are very similar to those of the Board staff. Over the next several quarters, I look for real GDP to advance at around the trend rate of 2 to 2-1/4 percent. There remains, as others have mentioned, some uncertainty about consumption, but we believe that the underlying fundamentals are good. Looking at other sectors of the economy, it appears that we can expect solid economic growth in the fourth quarter. For example, the industrial sector continues to expand, and housing activity should remain healthy, given the declines we have seen in long-term interest rates. While we have a CPI inflation rate that is now reported to be running around 3 percent, allowing for the methodological adjustments being made to this measure, that still reflects an upward move in the inflation rate. I think this has been noticeable over the last 18 months. As it has in the past, the rise in inflation continues to concern me. Thank you.",367
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. Eighth District economic conditions continue to be very good. Sales increases, employment gains, and plant expansions are reported far more often than declines and closures. Firms recently announcing plans for new facilities include some in the poultry processing, paper products, and package delivery businesses. Most firms report inventories at or slightly below desired levels. Construction permits for new homes were up recently in more than half of the District's 12 metropolitan areas. Two District auto manufacturers, Chrysler and Ford, plan to produce 334,000 cars and light trucks in the fourth quarter, an increase of 15.2 percent from third-quarter levels. Current plans call for first-quarter 1997 production to exceed first-quarter 1996 production by about 2.7 percent. Also, farm income is strong because of generally high prices and good yields. With respect to labor markets, unemployment in several Eighth District states remains near 20-year lows. In Missouri, for example, the September unemployment rate was 3.9 percent, well below the national average and the state's unemployment rate one year ago. District payroll employment growth on the other hand was 1-1/2 percent at an annual rate from June through September, somewhat below the national average of 2-1/2 percent. Given other developments, this may reflect a shortage of qualified workers to fill positions rather than weak labor demand relative to the nation. District labor markets are tight. The national jobs picture is similar. For 1996, the average gain in nonfarm payroll employment has been about 209,000 per month or 2.1 percent at an annual rate, well above the Board staff's longer-run trend in labor force growth of about 130,000 workers per month. The national unemployment rate, as we all know, was 5.2 percent for October. All in all, labor markets remain robust. There has been some moderate wage pressure associated with these tight labor markets. The Greenbook notes that the employment cost index increased at 2.9 percent in the third quarter, up from 2.6 percent in the third quarter of 1995. Unit labor costs increased at a 4 percent annual rate in the third quarter, about double the rate in the first half of the year. Financial markets have concluded that the slowdown in real GDP growth has reduced the urgency for immediate action by this Committee. That may be correct, but the facts are that in each of the last three years, we have managed to achieve fourth-quarter-to-fourth-quarter CPI inflation rates a few tenths under 3 percent. This year, on the other hand, CPI inflation will move higher to an estimated 3.2 percent. And forecasts for next year on a consistent basis are higher still, as was mentioned earlier. In short, we are in the process of violating an implicit upper bound on acceptable inflation, which may cause some to conclude that the Committee's tolerance for inflation is rising. Furthermore, the current inflation rate is too high in my opinion to allow for maximum efficiency in the U.S. economy. But because markets believe we are focused solely on short-run developments in the real economy, there is apparently no rationale for tightening unless inflation moves up markedly, which of course we all know is too late once it occurs. In my view, the Committee should develop a plan to move inflation lower and publicize that plan through an announcement of multi-year inflation targets. Lack of transparency in policymaking is preventing the Committee from gaining full credibility and is causing market participants to demand compensation for possible inflation surprises in the future. While current long-term interest rates on U.S. Treasury debt seem low, they could be lower still if market participants were less worried about inflation making a comeback. A clear statement of our objectives and actions consistent with those objectives could help in this regard.",770
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, the economy of the Second District advanced at a slow but steady pace in recent weeks. Private payrolls rose at an annual rate of 1.2 percent in New York and 1 percent in New Jersey in September. Job growth kept pace with labor force growth, and unemployment rates therefore were essentially unchanged. Consumer spending was moderately strong. Retail sales growth remained in its recent range of 4 to 5 percent. Sales in the existing home market softened a bit but from near-record highs that characterized recent months. Housing demand remained strong and price increases were reportedly in the range of 5 to 6 percent. Builders tell us that construction of single-family units declined sharply but that construction of 2- to 4-family condominiums was robust. The vacancy rates for prime commercial office space declined in most metropolitan areas throughout the Second District, while rental rates continued to firm throughout the dominant Manhattan market. The consumer price index for the New York/northeastern New Jersey region ticked up to 3.1 percent on a year-over-year basis. Leaving aside monthly gyrations, the CPI in our area has averaged 2.8 percent over the last two quarters. That is about on a par with the national gain of 2.9 percent. On the national level, our forecast is rather consistent with the views that have been expressed here, at least those of the Greenbook and of the members who are generally sympathetic with that forecast. The concern we have been spending a good deal of our time looking into is whether the tightness that all of us perceive in labor markets is something that is likely to plague us soon and, if so, how. Most economic theory says that if compensation growth does accelerate, it will be passed on to higher prices if labor's share of costs, labor productivity, and the profit margin are all constant. But according to the research that has been done throughout the country, the linkage between the cost of labor and the price level varies from very weak to reasonably strong. In fact, the research that was conducted recently at the New York Fed suggests the strongest link. But generally speaking, the research indicates that the link is not particularly strong, and we have been looking for the reason why that might be so. One possible explanation we have come up with in work that is still very much in progress is that expenditure categories accounting for about half the CPI do not indicate that changes in labor costs have a significant direct effect on prices. That is because either the labor costs represent a negligible fraction of total costs--for example, in existing housing, food that is consumed at home, or in energy--or because of the government's role in price setting as in medical care, tobacco, alcoholic beverages, utilities, and public transportation. That seems to us to leave the remaining half of the CPI as the place to look for a stronger link between compensation and finished prices. We find that labor costs matter in two areas, but a good deal more in one of the two. We find the linkage quite weak in the area involving the production of goods and the prices of the goods. I think that is the area about which we hear so many anecdotes saying that the labor market is very tight, but even if labor costs go up businesses say they cannot pass them on to prices. The competitive marketplace makes that very difficult. But there is another area, namely, labor-intensive services that account for about 23 percent of the CPI, where there is not so much discipline on pricing, at least not any that is close to being comparable to that of the goods producing area. So we have been looking at the linkage between that portion of the ECI attributable to people who produce services and the cost of services. There the linkage is quite clear. That is, if we look back over almost any period of time we see that as costs go up in that area, prices follow rather quickly. That is the area that we think we have to concentrate on most. But even in that area, the related portion of the ECI has not been moving up. Therefore, that particular alarm bell, which we think is the first one that really indicates approaching problems, is not yet ringing. We have not been able to find any convincing reason to think that productivity improvements have been absorbing increases in labor costs. We are all aware, of course, that the productivity numbers are not very good, but we do not think that that is an area where we can place a lot of confidence, at least not yet. The other area that we in New York and most of us around the table have been talking about relates to whether the share of corporate profits in national income has been producing something of a buffer. One would think that is true for the first two quarters of this year. As the data keep coming in on the third quarter and we start getting into the fourth quarter, we are rather inclined to believe that that may be behind us. Corporate profitability is in fact beginning to turn down a bit and, therefore, the notion that increases in compensation will be absorbed by lowering the profitability level is probably not a very good bet to make. Our conclusion from all of this is that we understand better why there has been better price performance than a lot of people thought there would be but that the labor market still is tight. That portion of it in the service area seems to be tight. Therefore, there is still reason to be cautious. Thank you.",1091
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Thank you. In the relatively long interval since our last meeting, gave us two reports from an area we had not heard much about. He said it appeared that the had gotten itself in a bit of a jam, but they were going to try to preserve as many jobs as they could. [Laughter] Listening to directors on a recent conference call reminded me of how important it is to listen very carefully. One of them very forcefully stated that he had seen very strong evidence of weakening demand for steel. He indicated that domestic demand was flat, and he thought it would actually be down in 1997 compared with 1996. Imports would continue to be a problem, and the new capacity he has been telling us about for the last couple of years was already coming into production and capacity would increase further in 1997. He said the new mills were the price leaders. The productivity of these new mills was so much greater than that of the preexisting capacity that he saw substantial downward pressure on prices and some very difficult times ahead for the older mills. Another report from that I found very interesting in terms of new developments came from a company in Columbus, Ohio, It is like a Mrs. Fields but very diversified. The official from that firm said that the fastest growing segments of her business are catalog orders, as she calls them, that come in over 800 numbers and increasingly this year over the Internet. and I asked her what would happen if she came into the office on a Friday morning and found a message from Osaka ordering pastries for a Monday morning meeting. She said that her firm gets such orders all the time because there are so many Japanese associated with Honda and other firms in Ohio. They learn about the gift box that her firm sells and their orders then start to come in over the Internet. When I asked about the cost, she said that for a group of 15 people her firm would arrange for delivery on that Friday afternoon. The package would arrive in Osaka on Sunday, and it would be delivered on Monday for about $100, including transportation. She said that was less than they would pay to buy the pastries locally. I asked if she ever thought of herself as being in the export business. She said, No, and she didn't care. What difference did it make? She may be right about that, too. We also met in recent weeks with a lot of bankers in western Pennsylvania, West Virginia, and all over Ohio. Especially with the community bankers, the consistent story in meeting after meeting was about the quality of consumer credit. One banker would get started on that subject and then everybody would tell stories not only about rising delinquencies and increasingly slow payments, but the phenomenon that most worried them was that of people who had never been late in making their payments unexpectedly walking into the bank and declaring themselves bankrupt. Basically, these were stories about the pyramiding of credit card debts through transfers of debt balances from old cards to new cards until the borrowers ran out the string and their incomes simply could no longer service the debts. So, they declared bankruptcy. The bankers said that the charge-offs could be very high for this quarter, but there was a difference of opinion about the future. Some said that they thought they had tightened up enough that this would be the worst quarter; others believed that 1997 was going to be much worse. We met with the senior credit officers of about a dozen of the larger banks, and they all said that charge-offs would be much greater in 1997. They are very concerned about the credit quality of their loans on the consumer side, though increasingly they seem to be concerned about the commercial side, too. They all believed that their own exposure to commercial real estate in the form of shopping center stores--they call them boxes--and hotels that they have financed is going to be a problem in 1997. I asked them about their earnings projections. They were all budgeting for double-digit loan volume growth in 1997. I asked them to square that with the nominal GDP growth of about 4 to 4-1/2 percent, and of course they said they were going to take it from their competition. [Laughter] They all confessed concern about margins next year and said that they simply would not be able to sustain their current earnings levels without the loan volume they had built into their budgets. So, 1997 is going to be an interesting year in terms of bank earnings. On the national economy, the Board staff has revised down its third-quarter GDP numbers from those shown in the Greenbook. Based on the latest GDP numbers and until we get new data, I assume that means the productivity growth number was close to zero in the third quarter, which defies belief. We can talk all we want about whether the productivity number is bigger or smaller, but it is wrong. It is simply inconceivable that there was no productivity growth at all in the third quarter. In fact, the productivity numbers for this whole year are just not believable. What I am encouraged about is the Board's staff projection of the nominal GDP trend. I was very concerned in March of this year when the staff first made a substantial upward revision in its projection of nominal GDP for this year and out into 1997. I was even more concerned in August when that projection was notched up further, but since then the upward adjustment has all been taken away. The staff now has its lowest nominal income growth projections through 1997 since around 1995, including a growth rate of around 4 percent or a little more as we finish the year, about the same as it appears to have grown in the third quarter. I do not know precisely what the growth of nominal GDP was for the third quarter; it was probably below 4 percent. The staff has raised its growth projection for the first quarter of 1997, but that is strictly on the basis of an assumed rebound in auto sales. If we take that rebound out of the projection, nominal GDP growth is still flat at about 4 percent. So, out through 1998 the expansion of nominal GDP in this projection is still running at a rate of around 4 or 4-1/4 percent. These numbers are well below the central tendency of the nominal GDP forecasts that the Committee members provided in July for the year 1997, and they are below our own forecast in Cleveland, which was at the lower end of that central tendency. The question, then, is how can we get an acceleration of inflation? It has to result from an acceleration in final demand, and we are no longer seeing that. In fact, each successive revision of the nominal spending forecast has been in a downward direction. Conceivably, if one were to believe such a forecast, higher inflation could result with such nominal GDP growth if real output were to drop further to little or no growth. As a practical matter, I do not see how the Board staff could be wrong on the low side of its nominal spending forecast unless I am given different assumptions than I have seen so far about money growth, which has continued to come in below the earlier assumptions, or I am told it has something to do with velocity. But such a velocity story would not be consistent with the interest rates we are seeing. In fact, the story goes in the opposite direction. The way I use MZM, as I have tried to describe before, is as a contemporaneous monitoring device of what is happening to nominal spending with a consistent set of assumptions about interest rates and money growth. That tells me we are more likely to see weaker rather than stronger final demand in the period ahead. I think that the risks are growing on the down side, not on the up side. That view was reinforced by these stories that bankers tell about their consumer credit portfolios. I have one last comment on labor-intensive services that Bill McDonough was just talking about. I think there is a very interesting issue in the linkage here that deserves some further research. If one thinks about a self-employed person in business services, the price of the service is, of course, going to be equal to the person's compensation because output in this case is defined as the labor input of one person. That cannot change. There is no productivity in the calculation. So, any increase in compensation would be all inflation simply by definition.",1685
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"The data available since the last meeting confirmed that the economy has slowed to trend growth. They suggested that an unfavorable mix between final sales and inventory investment in the last quarter weighs heavily against a rebound to above-trend growth in the period immediately ahead. The data also indicated that the acceleration of wage and compensation costs that is under way is somewhat more modest than previously anticipated. And despite the stabilization of the unemployment rate at a level that may yet prove to be below NAIRU, inflation remains remarkedly well contained. On balance the data, if not precisely consistent with every aspect of that forecast, at least matched our fondest hopes and rewarded our patience. The prevailing economic environment, however, is not without risk going forward. The main challenge in my view lies in the suspicion of many of us, precisely as set out in the staff forecast, that trend growth at the prevailing unemployment rate will ultimately prove to be inconsistent with stable inflation going forward. Nevertheless, in the near term there may be more downside than upside risk with respect to GDP growth, particularly given the absence so far of any clear evidence that the collapse of final sales in the third quarter has been reversed and given the restraint to production in the period immediately ahead from the projected slowing in inventory investment. Over the more important intermediate-term horizon of the staff forecast, on the other hand, favorable underlying fundamentals do I think support expectations of growth near trend. Such growth might be incompatible with stable inflation, given the current low unemployment rate. Still, this outcome is far from preordained. Given the current federal funds rate setting, growth could easily be below trend, especially in the near term but even over the forecast horizon. The unemployment rate could gradually increase to NAIRU before the building wage pressures are passed through to higher inflation. If this sounds too good to be true, one should note that this is essentially the Blue Chip consensus forecast. The Blue Chip panel projects 2 percent GDP growth over 1997, measured on a fourth-quarter-to-fourth-quarter basis. While this is just below the 2.2 percent rate of the Greenbook forecast, it is enough to produce a modest but sustained increase in the unemployment rate. The latter reaches 5-1/2 percent by the end of 1997, a level almost identical to the downward revised estimate of NAIRU in the staff forecast. As a result, inflation stabilizes at 2-1/2 percent for the GDP deflator and 3 percent for the CPI. Even if the staff forecast proves to be correct, a more likely prospect in my own mind, the projected acceleration in labor costs over the forecast horizon is modest, thereby containing the threat to our long-term price stability objective over the time period required for a tightening of policy to reverse the rise in inflation. For the moment, a continuation of remarkably subdued price inflation gives us the luxury of waiting for the data to clarify whether growth will remain at or above trend and whether the unemployment rate will begin to rise while we continue to monitor wage pressures and benefit costs. We should not, however, be lulled into believing on the basis of the most recent data on wages and compensation that the acceleration in wages that we have been monitoring and worrying about at recent meetings has abated. In particular, I find the third-quarter employment cost report literally too good to be true. Rather than taking at face value the deceleration in wage costs from a 4.3 percent annual rate in the first quarter to a 2-1/2 percent rate in the third quarter, I believe it is prudent to focus on the gradual but unmistakable uptrend in the four-quarter growth rate to 3.3 percent in the third quarter from 2.8 percent a year ago. Part of the explanation for this surprising pattern of deceleration in the quarterly wage data may be the volatility of quarterly wage changes for sales workers associated with their commissions. Leaving out sales workers, the uptrend in annual wage increases is both more consistent and steeper; it rises from 2.7 percent a year ago to 3.4 percent in the year ended in September. For the moment, the slower acceleration in benefit costs has damped the effect on labor costs of the rebound in wage changes. In addition, the effect of higher compensation costs on prices may be damped for a time by declines in markups, especially in light of the widespread expression by firms of the lack of pricing leverage. Nevertheless, if benefit costs accelerate toward the rate of increase in wages, we will move very quickly toward the staff forecast of an increase in compensation per hour near 3-1/2 percent. At some point, firms will exhaust their willingness to accept compression in their markups. We may therefore be living on borrowed time, but given the slowdown in growth and the recent pattern of price inflation, we still have time to make sure.",981
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"Once again we find ourselves in a very good situation and one that is remarkably uniform, as the stories around the table suggest. Tight labor markets, which have a potential for making a considerable contribution to the long-run efficiency of this economy, provide an opportunity for people of modest skills to increase those skills and move up to jobs that provide moderate increases in income. If the shortages of people with computer skills result in more people obtaining computer skills, we will be a lot better off going forward. If Bob McTeer's young interviewer learns to pronounce ""conservative,"" she may well get a better job, and all of this is to the good. At the same time, we have the slowing in the expansion that we predicted and little evidence of rising inflation. The economy is generating the kind of mixed signals that we really like to have, although they make us a little uncomfortable as forecasters because it is more difficult to tell what will happen next. I could build a case, and I think we all could, for the expectation that the economy will rebound more rapidly than we would like it to and that the mystifyingly proper behavior of inflation, as several members have suggested, may be only temporary. The consumer may come roaring back during the holidays and beyond. I could also build a case for excessive slowing, and some have suggested that. The consumer may remain cautious in the face of rising debt, and the clearly over-valued stock market might head down, perhaps sharply. Much depends on post-election political developments. If we get strong evidence, which we might get fairly quickly, of a bipartisan will to continue the deficit reduction process, that could reassure both consumers and the financial markets and give us lower long-term rates as a solid basis for the continuation of moderate growth. That would be the best gift that the newly elected candidates in both the White House and the Congress could deliver. But it will not be easy. It will be a lot harder to make further progress on the deficit than it was in the last several years. In sum, the Greenbook forecast looks as good as any to me. The risks, as several people have pointed out, seem a lot more symmetrical now than at the time of the last meeting, but I would expect to be back in a month looking at very much the same problem.",462
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. Since Thanksgiving is almost upon us, it seems appropriate to count our blessings, which are numerous. Economic performance with respect to both job creation and inflation has been excellent, and developments during the intermeeting period have enhanced the prospect that these favorable trends will persist. In the first place, it now seems probable that spending growth will moderate quickly enough to avoid placing additional strains on the labor market. Second, inflation remains well contained. In fact, the data on broad measures of inflation in Part II of the Greenbook suggest that inflation performance has been better than merely well contained since, as Bob Parry mentioned, every broad measure of inflation other than the total CPI has been trending downward since 1993. With respect to inflationary pressures in the pipeline, the third-quarter ECI report failed to confirm our collective fear that labor market pressures would translate into an accelerating compensation trend. I was quite pleased to see that with the passage of yet an additional quarter in which compensation ran at such a moderate pace, the staff has finally revised down their estimate of NAIRU to 5.6 percent. I consider this a sensible response to roughly two years of evidence that the dynamics of inflation have changed a bit. Additional good news from an inflation perspective is that prices of commodities and intermediate goods have turned down since our last meeting. The outlook for food prices has improved, and even the outlook for energy prices is more favorable. In contrast to pressures in the labor market, pressures on capacity do not seem intense at this point, and investment in plant and equipment is still rapid enough in the staff forecast to mitigate capacity pressures even further over the forecast period. Finally, there are hints that firms may be stepping up the less visible investments that they make in their workers to create through training the skills they require in their workforce but find in short supply in the labor market. I would agree with Governor Rivlin's comments in this regard. In particular, I was struck by a recent Business Week article that detailed myriad ways in which the Marriott hotel chain and several other large corporations are working with unskilled, disadvantaged workers to inculcate good work habits and in particular to teach English as a second language to improve basic literacy and create opportunities for eventual promotions into more responsible positions. These investments are on the flip side of the hysteresis process that is believed by many observers to have raised NAIRUs in European countries; that occurred as young people unable to find jobs experienced deterioration in their skills and lost attachment to the world of work. So, I would agree with the view that there are benefits as well as costs to tight labor markets. In spite of all that is going right in the American economy, I too remain concerned about the outlook. My first worry relates to the Greenbook's assessment. I agree with the staff that we may well be living on borrowed time and that inflation will eventually accelerate if the unemployment rate remains at its current level, as in the Greenbook forecast. Although I believe there is strong evidence that NAIRU has declined below 6 percent, it seems difficult to use the data in hand at this point to defend the proposition that it is as low as 5.2 percent. My second worry relates to the behavior of aggregate demand. Here I have no quarrel with the staff's estimate of moderation in growth to a shade above trend in 1997 and 1998, but I am concerned about the risks. With drags on growth stemming from government spending, residential spending, and trade, and with reduced impetus to growth from investment spending, the behavior of consumption, as Mike Prell emphasized, is critical to the outlook. The Greenbook assumes that consumption will quickly rebound and then grow in line with disposable income. As Mike noted, consumers have greater income and wealth and their confidence is high, so it is perfectly reasonable to assume that the third-quarter spending lull was temporary and a statistical aberration. Indeed, I think one could easily justify a much stronger consumption forecast than in the Greenbook, given the enormous gains in stock market wealth and the huge increase in household net worth that we have seen in spite of the buildup in consumer debt. On the other hand, I am equally concerned about the downside risk to consumption because at this stage a rebound in consumption spending is a forecast and not yet a fact. During the third quarter, it seems that three things occurred simultaneously: consumer spending stalled, the growth of consumer credit plummeted, and lending standards tightened. I do not know just what caused what, but with household debt burdens--if one includes leasing payments as Governor Lindsey likes to do--approaching all time highs and with bankruptcies surging and consumer credit charge-offs running well above expectations, it is not very surprising that lenders would tighten standards. It seems perfectly possible to me that the consequence could be weaker spending by liquidity-constrained households than the Greenbook assumes. I also would agree that a significant stock market correction, which cannot be ruled out, adds downside risk. Well, where does that leave me? It leaves me thinking that it is certainly within the realm of possibilities that growth may slow enough over the forecast period to bring the economy back toward NAIRU under the Greenbook assumption concerning monetary policy.",1052
-fomc-corpus,1996,Thank you. Governor Lindsey.,6
-fomc-corpus,1996,"Thank you, Mr. Chairman. I think this Committee is going to be facing some difficult issues in the years ahead. As if we don't have enough to worry about, I want to throw one other issue on the table and explain why I think it is more important than what we have been talking about. Mr. Chairman, you were the one who put me in this pickle. You had to go to another meeting, and so I had to talk to a group after you walked around the table, shook all their hands, went out the door, and there I was! [Laughter] Interestingly, it was a group of Dutch visitors, but there also were Japanese in the audience. One of them said that 15 years ago when he was stationed in New York the Dow was at 1,000 and now it is at 6,000. He asked me how I explained that. Well, that is a sure way to get oneself in trouble, so I did some quick, fancy math and explained how 6,000 was a perfectly reasonable number. Throw in nominal GDP growth and profit share growth and, voila, we were pretty much there. In fact, I got the Dow up to 6,600 [laughter], and then I stopped and just breathed a sigh of relief. I had other things in the background in case I did not make it! But here is the problem. Let's take a shorter period, 1992 to 1996. The S&P index has gone up about 69 percent and corporate profits have gone up 63 percent. That sounds pretty reasonable. The catch here, of course, is that if the markets are at all forward-looking, they are presumably buying the next five years' profits, not the last five years' profits. It is not clear all mutual fund buyers know that, but that is what they should be looking at. At the beginning of an expansion when you are about to face five years of 13 percent growth in profits, you can put a higher evaluation on stock prices. Implicitly, therefore, the fact that stock prices have risen as fast as profits implies an expectation of another five years of 13 percent growth in profits. But that would be inconsistent with the numbers in the Greenbook, and that gets to the root of our problem. I think that because of our success people have now pushed the perceived risk of a recession so low that they are putting valuations on financial assets and--God forbid, they are erecting buildings in Boston again--on real assets that pose a problem for the future. I think Governor Meyer was exactly on target in quoting the Blue Chip as an indicator of where people think we are heading. The consensus now is that inflation is permanently under control and that we will have continued moderate growth, probably permanently, though with some down quarters and some up quarters. As a result of our great success here, we have low and stable interest rates. I would suggest that our recent well-intentioned silence may actually be leading to even more of a sense of security, which may be good in the short run but is probably not good in the long run. In addition, we have world peace. The only remaining risk in the forecast is political risk, and the market says that we have taken care of that by electing a divided government. So what is there to worry about? Well, I have a little list and I am going to go over it in reverse order. One is the oil sector which I think is probably riskier than is perceived in the Greenbook, particularly when one looks at the situation in the House of Saud and places like that. That is a low probability risk. Then we come to the consumer debt slowdown. Here I think we really have a two- to three-quarter story at most, unless either we or the banks mess it up, and I do not promise that. Back when I first commented on consumer debt at the beginning of 1995, I was looking at 1994 numbers. I estimated that to get out of the consumer debt hole, the personal saving rate had to rise by about 1-1/2 points from what it was then, about 3.8 percent in 1994. We are up to almost 5 percent now; a little more and we will be there. There is nothing really to worry about. A couple more quarters of drag on consumption growth and we will be fine. But I think there is the possibility that we as regulators and the banks will make things worse, particularly if Jerry Jordan's story is true about what to expect in 1997. I have learned in this job that bankers are very predictable and regulators are very predictable as a result. We have to be very, very careful in making sure that we do not have a consumer recession that we create by regulatory decree. But basically I do not think there is that much of a risk if we leave well enough alone. There is also a political risk. At our last FOMC meeting, I said that if we got a narrow election result, which is what the markets wanted, the result was going to be a lack of political courage. The new Congressional leadership has signaled that they are going to sit back and wait six months for the President to come up with a budget. The President has signaled that he is going to support a balanced budget amendment, which he is going to be stuck with anyway. So, we have nobody taking action except to push through something that will save us from ourselves. That sounds a lot like what I hear in Europe, which is that Brussels is going to save the politicians from themselves in each of the countries. I think that, when the markets recognize that we are trying to postpone severe fiscal problems by finding commissions or balanced budget amendments to deal with them, there is a potential risk for the bond market and for the economy in the years ahead. The biggest risk relates to the current stock market valuation based on 13 percent growth in profits. It comes back to simple math. Nominal GDP growth in the last four quarters has been 4.2 percent. As Jerry Jordan pointed out, if we look at the money growth numbers, there is absolutely no reason to expect such GDP growth to accelerate. I admit that we do not know a lot about money growth, but everything we do know suggests that nominal GDP growth is not going to accelerate. How we are going to get 13 percent growth in corporate profits, or 11 percent growth or anything like that, to validate these levels of the stock market I am not sure. If we have a problem there, either the market will stop rising or we will have to decide whether we are going to make it stop by injecting a little risk into the process. And, frankly, I think that call is going to be our toughest decision in the years ahead.",1386
-fomc-corpus,1996,Thank you. Governor Phillips.,6
-fomc-corpus,1996,"Thank you, Mr. Chairman. The economy currently seems to be in a fairly wide holding pattern. The anticipated second-half slowdown is under way, although we do not know its extent. As always when we are trying to look forward, it is hard to know whether we are going to circle for a while longer, come in for another soft landing, crash land, or resume higher altitudes. At least for the near term, it seems to me that the holding pattern is the most likely scenario. The slowdown in the third quarter now appears to have been more pronounced than was earlier thought, given the recent inventory numbers. But low inventory levels should make the fourth quarter of 1996 and early 1997 look a bit stronger, leaving the outlook on balance for the second half of this year at the proverbial sustainable level. Although we are beginning to hear some arguments about weaker demand, I think the arguments that the economy may be slipping into a recession are fairly weak. They depend on continued weakness in consumer demand and housing, and associated slowing in the manufacturing or industrial sector. It seems to me that most of the recent economic indicators are pointing to a bit more strength, or at least to a soft landing, and there may be some tail winds for higher altitudes. With respect to the spending situation, there will be some propensity for consumers to spend as long as we continue to have a strong labor market and people are making money. That view is supported by some of the recent consumer confidence numbers that may in turn be fueled by the wealth effects of the strong stock market. The retail surveys are pointing to a reasonably strong holiday season. It is even feasible that we could see some tail wind action from lower interest rates; the housing market feasibly could get a modest boost. Business fixed investment, including nonresidential construction, has been holding up better than most forecasts. Financing is generally available. At least for now, we are seeing continued internal financing available as business profits have held up. Maybe, as Governor Lindsey says, that will not continue. Even so, if profits start to get pressured, the cost of external capital is low as a result of low interest rates and the rise in stock prices. Banks are continuing to provide financing. Foreign investment is another source of strength. There is evidence that businesses are issuing new debt and equity and utilizing increased bank financing. Maybe they are putting all of it under a mattress, but productive activity is more likely. On the inflation front, we may also be in a holding pattern. We are in the middle of a period of gathering the most current data, and what we have, I think, is relatively encouraging--the core PPI data that came out this morning, lower commodity prices, better-than-expected crops, and a fairly benign third-quarter GDP deflator and other PCE deflators. The recent ECI numbers were surprisingly benign. There are some uncertainties in this scenario. Will consumer debt, in fact, damp spending or will some of the labor market uncertainties in the era of downsizing damp consumer enthusiasm? If there is a stock market correction, it is hard to know how that is going to play out. It depends obviously on how deep a correction we have. Fiscal policy has been a bit on the back burner at our last couple of meetings. But with the elections over and Congress coming back, we are starting to hear discussions of another budget deal. Depending on how it is structured or how contentious the budget negotiations get, this issue may throw some uncertainty into the financial markets or cause some uncertainty among consumers. Turning to productivity, the numbers do not provide much support for increased or continued progress on inflation. Given current wage pressures and low unemployment, we should either be seeing lower profits or price increases or improved productivity. We are not seeing any of those. So, I continue to be skeptical of the productivity numbers, but we really do not know the full story. In sum, I think that the picture that we painted at the September meeting is playing out much as expected. The slowdown is confirmed. And while there are risks, I think that on balance the best guess going forward is continued growth.",833
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I would like to say first of all that comments around the table at these meetings are always insightful and very interesting, but I have found that to be particularly true this morning and I greatly appreciate it. It also would appear that the discussion is moving along rather smartly today; we may get coffee at a more reasonable hour than we sometimes do! By my calculation, I am the clean-up hitter and I have very little to add to what has been said. Let me just summarize very briefly. I share the strong general concern around the table that the tight labor markets and the attendant rise in wages could very well lead to price increases. That still could very well happen, but we see very little evidence of such a development so far, and we will just have to watch that very closely. The one big thing that is new this time, as we had hoped and expected, is that we now have confirmation that the expansion has slowed. Looking ahead, our attention obviously must shift to whether the expansion is in line for a reacceleration with the dangers that would be attendant to that, whether it will rock along near trend, plus or minus a bit, or whether indeed the economy may be in the early stages of a somewhat more serious slowdown. The point has been made, and I share it, that as time goes on and events unfold, the risks are becoming more symmetric. We cannot tell yet, and I am not prepared to adopt a symmetric point of view at this juncture, but it may be that we will be thinking quite soon of returning to a symmetric directive. For now, it would certainly appear that the remarkable economic performance that we have seen for some time is continuing. We should watch it closely and continue to let it run. Thank you.",360
-fomc-corpus,1996,There is a question at this time regarding the availability of coffee.,13
-fomc-corpus,1996,"We will adjourn for coffee, whether it is there or not. [Laughter]",18
-fomc-corpus,1996,Mr. Lindsey.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,Thank you very much. Any questions for David?,10
-fomc-corpus,1996,"I had a question all ready, David, about trying to square the Bluebook with the Greenbook, but your last remarks about the aggregates go in the same direction. That's because you antici-pate M2 growth of 4 percent for the year, and that means there will have been essentially no increase or a very small increase in M2 velocity this year. As I noted earlier, the Greenbook has a nominal GDP growth forecast of 4-1/4 percent or so. I track nominal GDP on a four-quarter moving-average and an eight-quarter moving-average basis, and that, of course, produces a growth pattern that has been trending down over the last several years. Now, if I run that trend out through the end of 1998 using the Greenbook's forecast of essentially 4 to 4-1/4 percent nominal GDP growth, such growth must accelerate beyond the Greenbook horizon to validate the staff statements about inflation and a policy stance involving a 5-1/4 percent funds rate. The staff forecast is getting close to the point where the CPI is growing at the same rate as nominal GDP. That does not compute. That means we have to have nominal GDP growth accelerating beyond the forecast horizon, and I do not see the mechanism by which a sustained 5-1/4 percent funds rate produces the needed increase in the growth of aggregate demand.",280
-fomc-corpus,1996,"I will turn to Mike Prell for answers to some of your questions about the forecast. As I look at the nominal GDP numbers on a four-quarter basis starting this year, I don't see much change in the annual growth rates, which go from 4.7 percent this year to 4.5 percent in 1997 and 4.4 percent in 1998--actually a little deceleration. I do think, though, that the question of the CPI versus the broader measures of prices is something I should probably pass on to my R&S colleagues.",114
-fomc-corpus,1996,"Thank you. [Laughter] Let me just say once again that our forecast is not based on the monetary aggregates. Rather, we derive what we would expect in terms of monetary aggregate growth through our assessment of likely patterns of money demand consistent with the interest rates and economic activity we are forecasting. That is a different framework than I think you are suggesting for thinking about the outlook for nominal GDP. As we look ahead, we see an economy that is operating above potential and a gradual acceleration of inflation. In such an economy, the growth of real output tends to erode gradually over time. We anticipate some gradual deceleration in real output growth from 1996 to 1997 and 1998. I think there is a coherence to this, and nominal GDP is just a summation of these forces as we see the picture. I do not have a particular view about 1999, but certainly we are coming out of 1998 in no better position with respect to the alleviation of inflationary pressures in the labor markets. So, we would anticipate at this point an extrapolation of that gradual acceleration of inflation.",226
-fomc-corpus,1996,"Any further questions for David? If not, let me get started. As far as I can see, the outlook is very little changed from what it was at the time of the last meeting. The outlook may have shifted toward slightly slower growth, but only at the margin and within the expected range of statistical error. The data are difficult to read, but labor markets unquestionably are still quite tight. My suspicion is that our measures of labor costs may be biased downward in the third quarter. This is my impression for reasons other than those that have been raised around the table. First, I don't think we have enough data to verify this hypothesis on a national level, but it clearly shows up at a micro level in the sense that, when we have a very tight labor market, some of the wage increases take the form of promotions. Consequently, we get a grade updrift that does not show up fully in the wage structure, which is essentially what the ECI represents. Compensation data do suggest that some of the grade drift may be in addition to the real drift toward truly higher skilled workers. There is also a question about the average hourly earnings for October, which as we know came in at zero. But I think the staff has also demonstrated quite credibly that the industry-by-industry correlation between average hourly earnings and average hours is significant. This implies that there is an overtime component in these data. There was a significant decline in average weekly hours in October, and adjusting for that would raise the October average hourly earnings number by something like .2 percent. That is not a big change, but I think the data are giving us a more benign look at the wage structure than probably exists. There also is the issue on the other side as to whether the acceleration in entry-level jobs suggested by anecdotal reports is being offset by an increase in the number of people leaving the labor force, largely through retirement. I am not sure whether the wage rates of retirees are rising, but because the wage rates of these older workers are higher than average, the ratio does not have to rise. The rate of retirements just has to be high enough to overcome the general aging of the remainder of the workforce to allow us readily to reconcile higher entry-level wages with a still sluggish structure of wages overall. Another issue is the variable pay question that was raised earlier by Gary Stern. The surveys are beginning to show that for a proportion of the workforce, which is still relatively small, wages are significantly related to profitability or other company results. This means that the issue applies to a much broader group than sales workers. It is an important issue because to the extent that we have big wage increases as a consequence of, or tied to, profitability, such increases are not necessarily inflationary. That is true because as costs go up in relation to prices, profit margins are squeezed and those wages automatically start to adjust down. So, while it may be true that the wages of commission sales workers have been slipping relative to the average, which is the reason why the numbers for non-sales workers have gone up somewhat more, that may be partially offset by the higher wages of the increasing proportion of workers who have their salaries tied more closely to profitability. What I see as the bottom line of all this is that the wage structure is extraordinarily dynamic and not easy to read. The only thing we know for sure--or more precisely for which our information is fairly accurate--is total wages and salaries, and probably average hourly wages and salaries as well if one is prepared to argue that the data on hours worked are not all that bad. But any effort to isolate in that structure such things as misplaced merit increases or compa ratios and that kind of thing, all of which are important to an understanding of where the wage increases are stemming from, is really difficult. Therefore, I think we have to be quite careful. We also have to be careful about our productivity data, not only for the reasons that I have been mentioning in previous meetings relative to the bias in price indexes and the like, but also because there are significant changes in the quality of the hours worked that we do not adjust for. Our deficient understanding of the true structure of costs, benefits, and the like should create a degree of humbleness on our part that we have not yet achieved. [Laughter] I merely suggest that we have to work harder. The evidence that there is a significant shortfall in measured wages from the predictions of our wage-NAIRU econometric relationships is pretty clear. It is also clear from the reports all of you are getting that wage increases, no matter how we measure them, are falling short of those estimated from our equations. They are falling short in a way that largely mirrors the rise in operating profit margins. It is difficult to get an exact relationship, but it is rather obvious that we can explain a very significant part of this wage/price inflation nexus by a clear downshift in the tradeoff between wage gains and job security or some other factor for which job security stands as a proxy. This, as we have discussed over the last two years, is clearly a transitory phenomenon. Nonetheless, the evidence suggests that the third-quarter operating profit margins are holding up. They may be revised down when we have more complete data for the quarter, but they clearly will not be down by very much, and they surely will not be down by anywhere near what is implied by holding the statistical discrepancy of the GDP accounts constant. The importance of all of this is that if we are still seeing evidence that the broader indexes of price inflation are easing, the rate of inflation is falling or at worst stabilizing, and profit margins are holding up, then the productivity/wage relationship suggests that whatever is happening is not happening very fast. And, as I argued at the last meeting, irrespective of how badly we under-estimate what productivity may or may not be doing, it is still the case that if wages begin to accelerate relative to whatever the growth of productivity may be, then we will begin to see wage/price pressures, which we very strongly wish to avoid. Nonetheless, I think we have been very fortunate in that there is no credible evidence that such a process is in train. If we reduce the size of the add-factors in our various equations that relate wage change to unemployment or any measure of labor tightness, we will get an acceleration of inflation; that is what the algebra requires. But we do not know that we have turned the corner. As far as I can see, it is not self-evident that we have add-factors that have stabilized and are closing. They are not. If we wanted to become real deflationists, we could argue that we are halfway through the process and we have not seen anything yet. I do not believe that myself, but it is not outside the purview of our evaluation. The Greenbook requires a certain add-factor forecast that presupposes the current transitional phase is in the process of coming to an end. I think the process is coming to an end, but I do not wish to bet the ranch that that is in fact the case. So, however one evaluates this, it is clear that whatever is occurring is not occurring rapidly. When we look at the inflationary pressures that are currently built into the economy as a result of the tight level of labor utilization, the question is really one of whether the economy will ease off before a process of inflationary pressures emerges or whether there has been some longer-term change in the structure that, as some people in the business community argue, has essentially killed the inflation expectations bugaboo. I think there is no evidence of such a change. There is, however, some question as to whether in fact this expansion can slow sufficiently to take pressures off the labor market, ease everything up, and make the issue of inflationary pressures moot. It is much too early to say that that will happen. My own judgment is that the evidence is very mixed and highly unlikely to be in that direction in the short run. It is nonetheless the case that less final demand is being generated now by a net increase in the stock of motor vehicles or the stock of plant and equipment. That is the saturation argument. One should remember that the net increase in property accounts plus the net increase in the stock of consumer durables--that is, after depreciation--is the private capital account component of GDP. We can compare it with GDP to get a judgment as to the extent that the element of saturation is adding to or subtracting from GDP. It is the issue that I raised when I said there were two types of inventories: the stock of capital and business inventories. The growth in the stock of capital moderated in the third quarter, as best we can judge, putting downward pressure on GDP and on final demand. I think the regular inventory data are interesting, especially in the context of their being historically low by any measure. But the level of inventories is not relevant in the short run for the GDP forecast. It is the rate of change that is relevant, and a change clearly can occur at any level irrespective of where the inventory-sales ratios may be. While I think there is some reasonable argument to be made that a goodly part of the inventory accumulation we are seeing is voluntary--in the sense that all the surveys we monitor do not point to particular problems--we do have to account for the fact that the underlying prices of commodities and materials have taken a big turn to the south. Steel scrap prices have fallen off a ledge. I think the reason in part is competition from imports. It may also be increased capacity. As I am sure Messrs. Jordan and Moskow are both picking up in order books into the first quarter of next year are coming in below expectations. If that continues, it may reflect some weakening in the consumption of domestic steel or it may be that imports are really becoming an issue that is going to be something for the steel industry to be concerned about. In addition, aluminum prices are under significant downward pressure. They obviously are more subject to international pressures than steel prices in the United States, certainly more so than steel scrap prices. Copper is weak. All the industrial prices are getting soft. These are not the types of numbers we usually see when there is a big voluntary inventory surge. So, the inventory issue is by no means clear. I think all of you have argued quite correctly that the retail market--and personal consumption expenditures more broadly--is the key to the outlook for economic activity. I did have somebody on the Board's staff look at the historical relationships and try to re-work the consumer credit data to put them back into gross extensions minus repayments, equalling the change in consumer credit, as we in fact used to do. We have some unpublished information that probably gives us a leg up on it. It shows, as you might well imagine, a very sharp decline in gross extensions. When we get, as hopefully we will shortly, the ratios of gross extensions to retail sales for certain groups, we will have a better view as to whether there is anything to the argument that particular groups are being liquidity constrained. I am not saying this information will tell us a great deal, but it may add something to our understanding of this puzzling third quarter. We have been through a lot of periods in which consumer expenditures have slowed and then picked up again. Unless the business cycle is dead, however, there will be a point at which that pickup will not occur. The question is when, and perhaps these consumer credit numbers will tell us something in this regard. I have been concerned about the level of consumer debt, as you know, since the beginning of the year. I have taken over from Governor Lindsey, who has thrown me a lateral, and I am running with it for a while anyway. I gave him the worry about the stock market. [Laughter] This division of labor is probably worthwhile. It is too soon to tell what is happening to Christmas sales, but remember that we do not get much of the fourth-quarter personal consumption expenditures from the October data. The real action is in November and December, and the monthly seasonals are not one-third, one-third, one-third. They clearly are biased significantly toward the November data, which we do not have. I think one of the more interesting unanswered questions gets down to the housing industry. As Mike Prell pointed out, it is weakening but there are two fascinating trends. One is home sales, which as you know have gone straight up. The other is single-family permits net of cancellations, which are essentially single-family housing starts plus the change in the permits backlog, and that number has gone straight down. It is at its lowest level in more than a year. If we look at a chart, the sales figures go up like that and the net permits figures go down, with the starts in the middle. If we reconcile them statistically, what we find is that not only does the permits backlog drop very sharply but so does the inventory of new homes. The changes in those two inventories essentially account for the different trends in sales and permits. This raises an interesting issue. Have the homebuilders decided that the markets are weakening, which is what is reflected in their reports to the National Association of Homebuilders, and are they therefore trying to reduce their advance commitments and inventories by pushing the excess supply out into the market? That would not be inconsistent with the relatively soft prices of new home sales. Or is the demand for new homes really much stronger than they have committed to and consumers are pulling out what the builders have been putting into the pipeline much faster than they expected so that they will be forced very shortly to pick up their permits activity and their starts activity? My guess is that the odds are still in the direction of the first scenario. But unless October home sales are down, which I think is very likely, we have a very interesting dilemma about what is going on in this market. And since this is such a big cyclical component in the current, immediate context, it along with personal consumption expenditures will be a key player in determining where this economy is going. For the moment, I would say from a policy point of view that these developments leave us just about where we have been recently. I think it would be premature to pull back on the asymmetry. As long as the labor markets remain as tight as they are, inflation can turn up on a dime. Were we to go back to symmetry and then suddenly have to tighten, I think that would put us in an awkward position. So I think we ought to stay where we are, at least through the December meeting. I would recommend ""B"" asymmetric. Vice Chairman.",2965
-fomc-corpus,1996,"I favor ""B"" asymmetric, Mr. Chairman.",11
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, formulating policy under present circumstances obviously requires finding the right balance between likely future outcomes in the economy and recent developments. Labor market conditions, as you have indicated, appear to be on the tight side. Even if the natural rate of unemployment has decreased a bit, that tightness would suggest a moderate uptrend for inflation in the future. And as I said earlier, we could see a substantial rise in inflation if the normal historical relationship between unemployment and inflation were to reassert itself. These considerations make it likely that we will need to tighten policy in the future. However, recent inflationary developments have been surprisingly favorable, and economic growth slowed in the third quarter and may slow further this quarter. These developments suggest that it might be prudent to wait a while to see how things unfold before tightening policy. On balance, therefore, I would prefer to leave the federal funds rate unchanged for the time being, and I support your recommendation for alternative ""B"" and asymmetric language.",197
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, it is obvious from the discussion around the table today, the latest economic data, and I think particularly the behavior of bond rates that the risk of a pronounced near-term increase in inflation pressures has diminished. So, I no longer think that we need a 50 basis point increase in the federal funds rate. But I still think it is more likely than not that somewhat greater restraint is going to be needed at some point in the relatively near future if we are going to contain inflation over the longer haul. Beyond this, the Greenbook's projections for the core CPI over the next couple of years suggest that at best we are going to hold the line on inflation, and that is only with the help of the reweighting of the index. The projections do not show any further progress toward our basic longer-term price stability goal. And if that were the actual outcome over the next couple of years, the credibility of our longer-term strategy could be reduced, at least to some degree. For all these reasons, Mr. Chairman, I would still favor a 1/4 point increase in the funds rate today. Any tightening now obviously would surprise the markets. I recognize that that could have near-term consequences, but I think it could well help us over the longer run. In particular, I worry about the possibility of a scenario developing next year where we finally begin to see some discernible upward drift in the inflation rate at a time when the unemployment rate may be moving up to a more sustainable, longer-term level. In that circumstance, I think it would be quite difficult to make a move toward restraint. I feel a modest move now could help keep us out of that trap.",340
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"When people use the word ""inflation,"" I always translate that as something having to do with the purchasing power of the dollar. I can't get away from that notion. So, if people say inflation is going to be higher, I ask what is it that is going to cause the purchasing power of the dollar to erode at a faster rate in the future than it has in the past. I wind up thinking in terms of an excess demand kind of framework and so on. I do not believe that we are in an environment where the purchasing power of the dollar will be eroding at a faster rate for the next year or two. If I thought that, I would of course conclude that we have to adjust policy. I have not seen the evidence for that, and I still do not see the mechanism that is going to produce greater inflation from this point. In these circumstances, if we had not already adopted asymmetry at the last two meetings, I certainly would not want to go asymmetric toward restraint at this time. I wish we were not already there, but since we are, I can see the wisdom of not moving to symmetry and running the risk of having to return to asymmetry. So, I will support asymmetry toward tightening but only because we used it in the directives for the previous two meetings.",264
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"I support ""B"" asymmetric, but like President Jordan I do not feel nearly as ""asymmetric"" as I did at the time of the last meeting, and if we were not already there, I think moving to it would be questionable. But since we are and we have a winning formula, let's stick with it.",65
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"Central bankers worry a lot. That is a requirement for the job. But difficult as it is for us, I believe we ought to take good news when it comes. Therefore, I think staying where we are with an asymmetric directive is more than desirable at this point.",54
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. I do not want to talk about symmetry, so I am going to advocate a modest increase in the funds rate. I would be where Al Broaddus came out, a 25 basis point increase. My view is basically that CPI inflation has been trending up, that 3 percent inflation is too high, and that the risks are in the direction of higher inflation, at least if it is measured on a consistent basis. We should lean against this, and we should do so in the context of making clear our long-term intentions. I also think that we should not lull ourselves into thinking that we can in fact predict short-term developments in the real economy and count on these developments to do our job for us, at least on a temporary basis. I also agree with what Al Broaddus said about some of the risks down the road. Another risk is one that Governor Lindsey pointed to; it relates to evidence of some speculative excesses in financial markets. By moving now we might be able to avoid a bigger accident in those markets later.",213
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Things have changed, at least from my perspective, since the last meeting. I see a bit more balance in the factors bearing on the prospects for growth going forward. At the last meeting, I saw all the risks on the side of faster economic expansion, but I now see some counterbalancing developments. Factors that in my view inject some negative prospects into the growth picture include consumer debt, the trade deficit, and some cooling in housing markets. There are still many sources of strength in the economy, and I tend to feel as do Al Broaddus and Tom Melzer that there are considerable risks on the inflation side. But I think the perhaps temporary abatement in economic growth and the injection of some negative aspects to the growth outlook have given us a little breathing room. However, I want to associate myself to some extent with what Governor Lindsey has said and what Tom Melzer just said. The financial markets are acting as if interest rates only go in one direction, and with that attitude there are undoubtedly bets being made that are unwise now and will grow to be more unwise as time goes by. We are risking a major asset price bubble unless some sense of caution, some sense of reality is injected into these financial markets at some point, and I think that injection needs to be made relatively soon. All of that said, I could go with a 25 basis point increase at this point, but I can also support your recommendation, Mr. Chairman. We have some breathing room, but I think we need to retain an asymmetric directive. So, I would agree with you.",318
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for an unchanged and asymmetrical directive. In fact, I think the asymmetrical directive that we have had in place, and would retain, sends a very important signal of this Committee's intention not to let inflation creep higher. I only hope that we are prepared to move if in fact the upside risks that we have talked about materialize.",76
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I support the recommendation for ""B"" asymmetric. I think it is important, echoing what some other people have said here, that we not lull ourselves into a sense of complacency. If we believe the Greenbook forecast, the core CPI, abstracting from improvements in methodology by the Bureau of Labor Statistics will move up during this forecast period. That clearly is not acceptable. However, we recognize that there is a lot of uncertainty in the data, and we have not seen signs of compensation increases or of price increases in the latest data. The key in terms of the strength of the economy, as you point out Mr. Chairman, is the level of consumer spending going forward. So, at this point I support the recommendation.",151
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. As I commented earlier, recent developments have been favorable, and I believe there is something to Ed Boehne's observation that we ought to take the good news when we can get it. However, it still seems to me that the principal risk that we face is that of more inflation than we have forecast. I laid out my basic concerns having to do with taut labor markets, and we may be at the point where we are starting to run out of good news on productivity, if we can in fact accurately measure it or observe it. But having said all that, I do think that the risk of a meaningful acceleration of inflation has in fact diminished. It looks to me as if expectations of future inflation also have diminished among market participants, judging by what has been happening in the bond market. If that is right, then for a given nominal short-term interest rate, a given funds rate, the real short-term interest rate is at least a bit higher today than it was earlier. In sum, I believe that at least for now the risk of an acceleration of inflation has been addressed, hopefully adequately, by higher real short-term interest rates, and I am prepared to support your recommendation.",245
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, I continue to have two concerns. One is that the risks of inflation remain on the up side, as depicted in the projections that both the Greenbook and our staff have laid out. In that kind of atmosphere and related attitudes going forward, I am concerned about signs of a potential financial bubble. Having said that, what you have defined is an environment involving a fair amount of uncertainty about activity in the real economy, where that may be going, and some uncertainty in the outlook for inflation. So, I would be inclined to move now, but I could accept your recommendation of ""B"" asymmetric.",124
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for no change, and I can vote for your recommendation to stay with asymmetry toward tightening. It would be embarrassing to go to a symmetric directive and then rapidly have to go back to asymmetry. On the other hand, if the economy weakens further and more sharply than we expect, it could also be embarrassing to go into a downturn with a tilt toward tightening. So, like Governor Rivlin, I do not feel nearly as ""asymmetric"" as I did at the last two or three meetings.",110
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"I support your recommendation, Mr. Chairman, and I also support the sentiments regarding symmetry expressed by Governor Rivlin and President McTeer.",28
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Mr.Chairman, I support your recommendation of ""B"" asymmetric. We should not be changing course now, particularly when we are in the middle of getting more current inflation data.",37
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation. I think that an asymmetric directive is warranted for all of the reasons enunciated in the Greenbook. I believe the inflation risk definitely remains asymmetric. I also share Governor Lindsey's and President Minehan's concern about euphoria in asset markets. On balance, though, it seems to me that the incremental data since our last meeting point toward more moderate growth than last time as well as a better inflation performance. I would consider it perfectly possible for demand to end up moderating more than the Greenbook assumes, eliminating the excess pressure in the labor market and any need for additional monetary tightening. So, for now I am certainly comfortable with more watchful waiting.",141
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation. I think it is important when we think about symmetry and asymmetry that we not focus too much on conditions in the current quarter or even the next quarter. When we have unemployment of 5.2 percent, we can tolerate a substantial short-term weakening of the economy and still want to be poised on the asymmetric side toward tightening. It would take, for example, two to three quarters of growth in the 1-1/2 to 2 percent range just to get the unemployment rate moving back toward 5-1/2 percent, which arguably means no more acceleration in pressures on resources and inflation. So, I think that being asymmetric is exactly the right thing to do, and frankly I think we are going to be there for quite a while because I do not see any signs that we are going to be removing inflation pressures in the economy very quickly.",182
-fomc-corpus,1996,"Finally, Governor Meyer.",5
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation for no change in policy. Indeed, given that the recent data suggest that the risks have become more balanced, I am more comfortable supporting a proposal of unchanged policy than I was at the last meeting. I still think the major risk is that inflation will begin to rise over the next year. An asymmetric directive reminds us of the importance of remaining vigilant in the face of this risk, and I therefore support your proposal to retain the current policy posture.",97
-fomc-corpus,1996,Thank you. Would you read the directive which encompasses that?,12
-fomc-corpus,1996,"I will be reading from page 12 in the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and relatively strong expansion in M3 over coming months.""",114
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern Yes Governor Yellen Yes,47
-fomc-corpus,1996,Thank you all.  I would just remind you that the next meeting is on December 17. We adjourn for lunch.,26
-fomc-corpus,1996,"Good morning, everyone. This is Tom Davis's last meeting. He has been coming to these meetings for 20 years, and I suspect that by now he knows what they are all about, and just as he finally gets it, he has to leave. I think he has made an extraordinary niche in the System, and if there is ever a plaque in Jackson Hole, his name will be on it. One thing that you can say about the Jackson Hole symposium, which of course Tom struggled mightily to help bring into existence, is that we all put the symposium on our calendar each year and then adjust everything else. Tom, we certainly are going to miss you. [Applause]",140
-fomc-corpus,1996,I hope this does not mean the end of the Jackson Hole conferences.,14
-fomc-corpus,1996,"If it means the end of Jackson Hole, Tom is coming back no matter where he is! [Laughter] Shall we start off? Would somebody like to move approval of the minutes for the meeting of November 13?",45
-fomc-corpus,1996,So moved.,3
-fomc-corpus,1996,"Mr. Chairman, I have a minor suggestion on one of the changes from the preliminary draft of the minutes that we received just last night. It's in paragraph 13, and I talked to Mike Prell about this. I think that the suggested rewording gives the impression that inflation is projected to come down in a meaningful way, but when we allow for the methodological changes that the BLS is putting into effect, the changed wording may give a somewhat misleading impression. This is probably a technical matter that we could work out after the meeting if the Committee is willing to give us that privilege.",119
-fomc-corpus,1996,"Why don't you do that. The problem here is that minutes are supposed to interpret what the FOMC members said, even when they are wrong. So, you can't argue that the minutes are wrong when they record what was said; you can only argue that they are wrong when the Secretariat inappropriately summarized what individual members said.",67
-fomc-corpus,1996,"Mr. Chairman, in this case the reference is to the staff forecast, and the question is how to portray the movement of inflation in 1996, 1997, and 1998 and its relationship to--",44
-fomc-corpus,1996,Does the statement refer to what you said or to what one of your colleagues said?,17
-fomc-corpus,1996,"In essence, it refers to the Greenbook forecast. We could go back to the original wording in the preliminary draft of the minutes or we could put in something that says the price forecast is adjusted for technical changes.",43
-fomc-corpus,1996,"I presume, as President Moskow says, that this is a solvable problem and not something that we have to discuss here at length. Let us get it done. Without objection, we will give you all of our proxies.",46
-fomc-corpus,1996,"Thank you, Mr. Chairman.",7
-fomc-corpus,1996,Peter Fisher.,3
-fomc-corpus,1996,[Statement--see Appendix.],6
-fomc-corpus,1996,"You mentioned that the dollar is holding up remarkably well considering the degree of downward pressure on dollar-denominated asset markets. A while ago, we discussed whether in fact one could ferret out the apparent intermediate- to longer-term effect on the dollar from rising dollar interest rates, the presumption being that as U.S. interest rates rise, other things equal, the dollar will rise. The experience you are noting and the experience that we have discussed previously is that in periods of significant worldwide sales of dollar-denominated assets and rising U.S. interest rates, our exchange rate falls or tends to. We presumably were going to be looking at whether there is any systematic analysis we can do to differentiate those contradictory phenomena. Have you made any progress on that?",149
-fomc-corpus,1996,"Members of Ted's staff and my staff have been working on this, and I am afraid there is nothing that we can come forward with that is conclusive or very satisfactory. Staff are arguing back and forth, and I do not think there is anything that we can put our fingers on that provides a systematic explanation. The work is going along. I think what is most on market participants' minds is the abrupt decline that the dollar suffered in July when our equity markets experienced a reversal. The dollar-mark lost 3 pfennigs very rapidly and the dollar-yen also came under pressure. I am very cognizant of the fact that markets are driven to a great extent by habit. They look at the most recent episode to see what other things might happen and to give them a clue as to how they should behave. In July, we had pressure in equity markets, and it translated immediately into a weakening dollar. Many people were expecting that to happen again as they looked for pressures in our asset markets. So, I am just reflecting on market participants' observations that that did not happen when they expected it to.",224
-fomc-corpus,1996,"The presumption, of course, is that if a significant part of dollar asset sales occurs on foreign accounts and the proceeds are exchanged into other currencies that would explain the decline in the dollar. Obviously, sales of dollar-denominated assets in which there is no exchange into foreign currencies by definition do not have that effect. In this regard, I take it that you do not have any information on sales of dollar-denominated securities or purchases by foreign accounts that is usable on a sufficiently short-term basis. You only have it on a quarterly basis, not a monthly basis.",113
-fomc-corpus,1996,"Yes, that is right. The lags are a bit long in that regard. I would also note that in addition to the mechanism that you are referring to, there is another mechanism. If risk appetites are large at the end of the cycle and these happen to be expressed in long dollar positions, people might collapse dollar positions in a period where risk aversion comes to the fore because of uncertainty and might do so independently of whether they actually are liquidating dollar assets. That is, there may not be a direct pass-through from the closing of a stock position to the sale of dollars. There may also be some management of foreign exchange market exposures that simply implies just a reduction in risks and a reduction in positions.",144
-fomc-corpus,1996,You talk like an economist! [Laughter],10
-fomc-corpus,1996,I have been exposed to them for a while!,10
-fomc-corpus,1996,"Peter, I have a couple of questions on your planned changes for Desk Operations. As I understand this, you have operations for customer accounts and you have operations for System account. Is my understanding correct that on System operations you are now going to announce the amount after the bids have been accepted? You already announce the size of customer transactions, but on that side do I understand correctly that you announce the amount of bids that you are looking for and not the amount accepted?",93
-fomc-corpus,1996,"Yes. That is the historic practice we have continued. Now, I may have gone too far in explaining this, but I think that in all likelihood customer operations may die on the vine. I do not want to announce that we will never do another customer operation, but I am hard pressed to see circumstances when I would be tempted to do it.",70
-fomc-corpus,1996,My question does not focus primarily on the customer side. Are there any advantages or disadvantages when you are doing System operations to announcing the amount of bids that you are looking for?,35
-fomc-corpus,1996,"Yes, I think there are some pros and cons to announcing the quantity in advance. The pro is that telling the market the amount of the contemplated operation is normally thought to be helpful. The con is that we like to look at dealer appetites as one indicator of funding needs, so I am rather uncomfortable in situations where we announce we are doing a $1 billion customer operation and we get so many bids that we do $2 billion, which is rather typical. I am not saying that the amount of the bids is always double, but that is rather common. The amount of dealer bids for financing is actually a very helpful piece of information in assessing the amount of reserves we think we may need to inject. As we have focused increasingly on day-to-day operations because of the much reduced operating balances and related uncertainty, the size of dealer bids has become a variable of growing importance. I accept in principle that it would be better to announce the size of intended System operations, but that makes me somewhat uncomfortable because I like to see the dealers' appetite as an indicator that may lead me to shade the size of the operation one way or another. In my view, announcing the size of the contemplated operation becomes problematic.",242
-fomc-corpus,1996,"That seems like a reasonable tradeoff. If you are planning to go in earlier, and I presume this is just a way station to entering the market still earlier as more information becomes available, that opens up the possibility, or maybe the likelihood, that you can come into the market more than once during the day.",63
-fomc-corpus,1996,As I explained in the memo.,7
-fomc-corpus,1996,"Yes. What are the kinds of things that you look for--you have talked about this some, but could you elaborate--in deciding whether to go into the market a second time? Do you look at reserves; do you look at the funds rate; do you look at both; or do you in a sense put your hands over the market to get its feel? What happens?",77
-fomc-corpus,1996,"Well, it has been a while since the Desk had any kind of habit of going into the market multiple times a day--I guess twenty years or so. I certainly have no hands-on experience with such multiple daily operations. Among the things we would look for would be an unexpected shift in the Treasury balance that could be a big factor that we would become aware of later in the day. The drain of reserves from a rise in the Treasury balance is information that is available to us, as would be an unexpected shift of funds and drain stemming from our customer operations. These are the first order of flows about which we would become aware with some degree of certainty. Another reserve factor about which we are certain relates to those occasions, which I am hoping avoid, where we do not get to add as much in reserves as we wanted to. Then, it would be nice, if we did not shock the market in the process, to be able to come back and conduct further operations because we did not get enough bids the first time. That is another sort of fact, certainly. The harder issues are those where the funds rate just stays firm and, in the current environment where we operate once a day, we are left to wonder in the early afternoon whether we made a mistake. We talk to brokers and funding desks to find out where something is going wrong; sometimes we can determine the reason, such as funds getting trapped in a bank that is having wire transfer problems. The bank may continue to have a wire transfer problem throughout the day, and adding a little reserves could be helpful in that situation. I think that is the sort of issue that we have to look at. Don Kohn and I have talked about this at some length over the last couple of years. What we are really rather hopeful for, but is still even further off, is some way to be able to operate truly late in the day, that is, at 3:00 p.m. or 4:00 p.m.--which would require a change in Fedwire rules and perhaps the window--or even later at 6:00 p.m. We certainly would have more information then about a number of factors and would know whether there is a reserve miss or not and could try to respond to it.",457
-fomc-corpus,1996,"We would have a better sense of the demand for reserves late in the day. I think that one of the phenomena of this low reserve balance situation, at least a couple of years ago, was that things could shift rather dramatically in terms of demands for excess reserves very late in the day. I think many other central banks operate more than once a day, and particularly if there is an interest rate target, it would be nice to have that flexibility.",90
-fomc-corpus,1996,"So, in terms of the new framework for conducting operations, I think multiple operations on one day would be used infrequently but would be available to us. So, whether we operated at 9:30 a.m. or at 10:30 a.m., we would have the option of coming back at 11:30 a.m. if we became aware of something very tangible about the Treasury balance or other developments unexpectedly affecting reserves. But I am also trying to set the dealers up for the time some months or years hence where we might try to create a window for the Desk late in the day if the combination of low operating balances and volatility late in the day really becomes an issue. We do not know that that will happen, but in case it does, I want to alert them to that possibility.",163
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"In that vein and before multiple interventions on the same day become commonplace, I think it would be helpful to the Committee to see some analysis of that. I have not thought about it a lot, but one of the things that worries me a little is the presumption among market participants that we are going to be there, and that creates a disincentive for them to maintain proper operating balances.",80
-fomc-corpus,1996,"I would like to echo that concern. I agree with you and I would want the Committee to have that discussion. I also am quite worried that if we jump too quickly into multiple daily operations, we will actually reduce the incentive for intermediation in the fed funds market. Clearly, these incentives have been declining. As reserve balances have come down and sweep accounts have taken hold, there has been less juice in the system for an individual bank desk or treasurer to intermediate in the market, so their incentives to do so have been coming down. We have to be careful not to reduce those incentives further by our behavior. That means intervening only when we think the market really is not working, when something looks as if it is broken.",148
-fomc-corpus,1996,"Overall, I think what you are doing is responsive to developments in the marketplace, and I applaud the steps you are taking. So, I am supportive of that. One other suggestion I would make, Peter, is that when you talk to the dealers about moving to an earlier time for Desk operations, you might want to telegraph that when our statistical system will support it, you are going to want to go to a still earlier time. That will give them an idea of where you ultimately want to get in terms of the timing of the first intervention in the day. Thank you.",117
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Peter, you talked about the expected performance gains. Can you say anything more about the magnitude of those gains by going in earlier?",26
-fomc-corpus,1996,In terms of bids?,5
-fomc-corpus,1996,Do you have any quantitative sense about that?,9
-fomc-corpus,1996,"Well, in the last couple of weeks, as you will have observed, we have operated a number of times at 10:30 a.m., in part responding to firm conditions in the funds market and the large need that I was worried that we might not have enough bids to cover. I should have this statistic on the tip of my tongue, but I don't--I think we almost routinely saw something like a doubling in the amount of propositions from the dealers when we have operated at 10:30 a.m. rather than at the normal time of 11:30 a.m. Now, whether that is a function of the surprise value of our being in the market and their knowing that we were looking to fill big needs, I could not sort out. But, clearly, we have seen a substantial improvement in the amount of propositions by going in one hour earlier.",175
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I also applaud these moves in the direction of greater transparency. I think these are the kinds of things we should be doing. But you also are taking away one piece of information, for better or worse, stemming from the use of customer RPs. The way that was used in the past by the Desk was to help estimate the reserve need. So that got me to wondering, why not go a step further? What are the pros and cons of actually telling the markets what your rolling projections of the reserve needs for the period are? Is there some reason why you think that would create adverse incentives on the part of the banks?",126
-fomc-corpus,1996,"I have thought quite a bit about the pros and cons of providing some sense of our reserve forecast. Clearly in one sense, that would provide some modicum of certainty, but as soon as I have that thought I realize that it does not provide a modicum of certainty. Our forecasts are really quite movable feasts, and I will start at the end of my own analysis of it. One of the things that I have come to realize is that the forecasters who work for Don and me are actually most valuable in telling me what the probability distribution is of their forecast error. That is, on which side do they think their errors are most likely to be? That actually is the most useful bit of information for me in the whole exercise. That is because we can then think through which way we want to lean on the basis of our own utility function. Now, that would be impossible to communicate to the market unless we sort of did it by shading the forecast. That leads me back to the start of my own analysis. When I look at the whole issue of transparency, whether it is the Committee's transparency on policy or our transparency in operating in the market, I think those are two things about which we need to be clear. In my case the objective is simple: You have told me that the target rate is 5.25 percent. It is in our operations where we have not been as transparent. The process that drives our decision-making is a little fuzzier and a little harder to communicate, particularly while we are going through a shift in market behavior associated with low operating balances and a heightened degree of uncertainty. If I had much greater confidence in the accuracy of our forecasts and in turn in the relevance of our two-week forecasts to the day-to-day volatility in the market than I have today, I would be leaning more on the side of reporting our forecasts. But given where I am now in my own uncertainty about the relationship between our two-week forecasts and day-to-day demand for reserves, I really am quite squeamish about it. So, I think there are definitely pluses and minuses, pros and cons, but it is--",433
-fomc-corpus,1996,"I understand that the errors in the daily forecasts stem principally from unexpected changes in the Treasury balance, but other factors such as float get in the way of accurate forecasts. Of course, that kind of uncertainty exists now in the way that what you announce to customers is interpreted, so I don't see where that changes anything. All of the analysts on the outside understand that. Most of them worked at the Desk! [Laughter] In fact, isn't it the case that the Bank of England, which may intervene a number of times in a day, puts out a number on the amount they have in mind?",121
-fomc-corpus,1996,"Yes, they do, and I think that raises an interesting question. They have a one-day maintenance period. If the decline in reserves balances and operating balances in the System led us to conclude that a two-week maintenance period was becoming irrelevant--it does not look like that is going to happen but we are on that trend even though there is no certainty about it--then I think we would have to come back and think very hard about operating on a de facto one-day maintenance period basis. We would have to decide how much money the banking system needs each day. The Bank of England with its one-day maintenance period has 3 or 4 windows every day during which they may operate. They announce what their forecast shortage will be for the day, decide whether to provide some money or not, and whether to enter the market immediately or later in the day. With the one-day horizon, there is not much intermediation across time, which is something I think we would want to encourage our banks to do. If we get to that point, we will have to rethink quite a number of things. A one-day horizon gives rise to questions of what the target should be, the forecast itself, and whether, given the implications for incentives as President Melzer pointed out, we should be operating multiple times a day on an ongoing basis.",268
-fomc-corpus,1996,"I presume that that would take away the intra-period gaming that we see going on. I agree completely with Tom Melzer on the need for that kind of discussion, and I would suggest that when we have it that we include consideration of a more flexible use of the window. I am not against activity later in the day, but I also think that we may need to rethink the role of the window in an environment where we make adjustments to unexpected reserve needs late in the day. That applies not only to what we do on our side in managing the window, but also to how we should influence perceptions on the other side about the availability of the window for adjustments.",133
-fomc-corpus,1996,"Absolutely. Don Kohn and I had the benefit of being on a conference call with all the discount officers from the Reserve Banks, and we gently urged them to encourage greater flexibility in thinking about the use of the discount window. I think that group is very helpfully working on a number of issues, including the consistency of collateral management across different Districts and the implicit messages that are sent to banks about the use of the discount window. Quite frankly, one of the issues that we have now--and I don't have a sense of which Districts are relevant--relates to the fact that, as discount officers have noted, major banks in some Districts just never want to come to the discount window. Now, that translates very rapidly back to us at the Desk with regard to developments in the fed funds market. That is because certain regional banks are not going to the discount window but they are coming into the funds market when they have a miss or an unexpected heightened demand for funds late in the day. That is one source of pressure in the funds market. So, I agree completely with the desirability of discussing the role of the discount window.",230
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Peter, just to get a little better handle on the magnitude of the benefits, do you have any sense as to whether the variance per day around the average effective fed funds target rate is greater in recent years? Are you having more trouble hitting your target in some sense?",54
-fomc-corpus,1996,"We have not had more trouble. At some point, I would like to bring an analysis forward to the Committee; it is not finished yet. We have begun using internally a standard deviation of the prior day's effective federal funds rate in volume-weighted terms. We have the raw data that are used to calculate the effective rate, and we currently look each day at a standard deviation of that. There has been considerable volatility this year, concentrated roughly speaking in the middle half of the year as I recall. But it does not appear to be anywhere near the kind of volatility that we experienced in 1991. Interestingly, even though it has been high for the year as a whole, there are some months this year in which it has been lower than in some months in 1994 or 1995. So, we are nowhere near a crisis in our ability to manage the fed funds rate, but volatility has been moving up. Some of the fed funds watchers have printed charts that show volatility, but they only cover the last two years. From a longer perspective, the volatility this year is still well below that experienced in both 1991 and the early 1980s. One would expect that for the early 1980s, of course, and it is more relevant to look at the broad sweep. So, we are observing developments, and I would like to bring that analysis forward to the Committee at some point. The people who work for me wonder whether we shouldn't publish the daily standard deviation along with the effective rate. That is an issue we will be thinking about, and we will bring it back to the Committee.",327
-fomc-corpus,1996,"Peter, I now have a table in front of me that shows this. The standard deviation of the daily federal funds rate from the FOMC's targets this year is a little higher than in 1993, 1994, or 1995 and about the same as in 1992. So, it really has been in about the same range for several years. I think an interesting aspect, though, is that the intra-day variations have been a little higher this year. There has been a tendency, as Peter reported before, for spikes to occur late in the day. If one looks at the highs relative to the average and at some of those types of volatility measures, they are a bit higher.",144
-fomc-corpus,1996,"Right. That applies to the rates at which funds have traded without taking volume into account. For example, it does not tell us how much trading there was at the higher rates during the day.",39
-fomc-corpus,1996,"The high-low range, for example, is wider this year than it has been for a couple of years.",22
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"I want to add my approval; I welcome the changes. I think they will be helpful to you in getting a better range of bids. I did want to comment a little on your thoughts for making our operations more transparent, granted that there is a range of uncertainty, particularly about the projected need for reserves over a period of time. We have been hearing from some of the fund managers in Boston about the interpretation of a lack of a coupon pass in December that coincided with concerns about market asset prices and so forth. The temporary nature of the System's operations at a time when normally more permanent, outright operations were expected was interpreted as a subtle way of keeping things tighter than they otherwise would have been. Of course, there was no way to reply to this, knowing that the information you share with us is not to be shared with other people. But perhaps some of that might have dissipated a little and maybe it would have had some effect on the stock market volatility. Of course, these fund managers were in the stock market more than in any other market. In any event, the effect on market expectations was very marginal.",226
-fomc-corpus,1996,"I think the shift in expected interest rates that occurred in the first week of December can hardly be attributed to the presence or absence of the Federal Reserve in the coupon market. Trading volume in that market is $70 to $100 billion a day, and whether or not we bought $4 billion would hardly seem to matter. It is true that many people talked about the absence of a coupon pass, but how that could have affected the March futures contracts has challenged me a little. It is awkward--I will be blunt about this--that the last remaining business for the Fed watchers is predicting when we will do coupon passes. That is what the franchise has been reduced to since we adopted the current practice of announcing policy changes. So, that is about the last thing that the people who write the weekly reports and screens have to offer to their subscribers. To leave that thought with you, we have a certain feedback problem.",183
-fomc-corpus,1996,"Yes, I realize that. The more transparent you get, the more everybody wants.",17
-fomc-corpus,1996,He is creating unemployment! [Laughter],9
-fomc-corpus,1996,"Some analysts who write these screens got it right. There was one who was absolutely on the money when he explained that the Desk probably was concerned about having to drain reserves in January. That is exactly what I told you, and I could have read his analysis here instead of my own.",57
-fomc-corpus,1996,"If there are no other questions, would somebody like to move to ratify the Desk's domestic operations?",21
-fomc-corpus,1996,I move to ratify the operations of the Domestic Desk.,12
-fomc-corpus,1996,Without objection. Let us now go on to Messrs. Prell and Truman.,17
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,(Statement--see Appendix),6
-fomc-corpus,1996,"Mike, what is the change in the December industrial production index that is implicit in your fourth-quarter average?",21
-fomc-corpus,1996,"As I recall, it is up about 3/10 of a percent.",16
-fomc-corpus,1996,"The weekly data, for what they are worth, are suggesting that it is flat to down.",19
-fomc-corpus,1996,"They account for a very small portion, as you know, of the overall index.",17
-fomc-corpus,1996,"So, I gather they will affect the quarter by only .1 or .2 percent.",18
-fomc-corpus,1996,You mean the quarterly average?,6
-fomc-corpus,1996,The total percentage change from the third to the fourth quarters if you are only affecting the December index.,20
-fomc-corpus,1996,"Exactly, it's a very small weight in the outcome for the quarter, but we have been looking at the other evidence such as trends in orders, and we are comfortable in anticipating a moderate increase.",39
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mike, I have two questions. The first deals with the PCE in the fourth quarter. Based upon the data that we have, which of course include the PCE for October, retail sales for October and November, and what we are hearing about retail sales for the Christmas season, do you feel that this is consistent with a PCE growth rate in excess of 3 percent in the fourth quarter?",81
-fomc-corpus,1996,"We feel comfortable with that at this point. We are anticipating that, in part because of the effects of the cold weather that showed up in the utilities component of IP in November, the energy component of PCE services would be quite robust in November. I don't know what to make of all the anecdotal reports on Christmas sales activities, but I will note for what it is worth--and it may not be very much, for even though it has gained some prominence, it is a very small sample--that the Mitsubishi chain store report that came out this morning showed a quite sharp further increase in the latest week. So, we have had a couple of weeks of distinct upward movement there. We have heard other good things about retail sales. So we are reasonably comfortable, especially given that--going back to the Chairman's arithmetic point--a deviation of a few tenths in the outcome for December will have only a modest effect on annualized growth rates.",191
-fomc-corpus,1996,"The second question relates to what I heard you say about the distribution around GDP numbers for the fourth quarter. Based on the data you have seen, particularly the more recent data, would you, if you were to give us a new estimate, revise that estimate as well?",54
-fomc-corpus,1996,Not materially.,3
-fomc-corpus,1996,But probably up?,4
-fomc-corpus,1996,"More likely up than down given, for example, the stronger industrial production data. Also, the single-family housing starts will feed through rather directly in the calculation of residential construction activity in the current quarter and add a smidge. So, the adjustment might be in an upward direction but nothing of great significance.",61
-fomc-corpus,1996,Thank you.,3
-fomc-corpus,1996,Who would like to start the roundtable? President Hoenig.,13
-fomc-corpus,1996,"Mr. Chairman, I will keep my comments brief because economic conditions in the Kansas City District have not changed a great deal since the last time we met. Our regional economy has continued to grow consistently, although at a moderate pace. On the anecdotal side, our directors and other business contacts report solid economic growth throughout our District. Retail sales have been robust during the first two weeks of the holiday season. Manufacturing remains healthy. Homebuilding has been strong. Of the major sectors, I think the only moderately weak area has been nonresidential construction. Estimated employment, reinforcing these other reports, actually increased in October after remaining flat for most of the year. Our farm and energy sectors continue to improve. Our grain sector reported excellent crops and is doing quite well at current prices. We are again seeing some of that translate into purchases of equipment as farmers take some of their sales proceeds and reinvest them. Our cattle industry is profitable on the feed side, although ranchers are still losing money. In our energy sector, current prices have encouraged small but persistent increases in drilling activity. Wholesale and consumer prices appear to be rising slowly but consistently throughout the District. Our labor markets, as I have said before, continue to be tight, and we are hearing more reports of wage pressures. On the national level, I do not have a lot to add to what I have heard from Mike Prell today. We are in general agreement with his forecast. I would note, and again raise some concerns about, the fact that both we and the Board staff are projecting rising core inflation, even allowing for the technical adjustments. The higher inflation would be even more apparent without these technical adjustments. That concludes my comments.",339
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, relatively fast economic growth continued in the Twelfth District in recent months, making this a very good year in the West. Almost 1/3 of the jobs added across the 50 states over the last year have been in the Twelfth District states. As a matter of fact, the percentage growth in employment in our District states has been twice that of the other states. In terms of year-over-year employment growth, the District's inter-mountain states of Nevada, Utah, Arizona, and Idaho have been the four fastest growing states in the country. The 12-month pace of job gains in the inter-mountain West exceeded 4-1/2 percent. Although employment growth has slowed a bit in recent months, it has maintained a healthy pace. The Pacific Northwest is the next fastest growing region in the country. After the four inter-mountain states, Washington and Oregon rank fifth and sixth in terms of the underlying pace of job growth, which has been about 4 percent. Employment growth recently picked up to this fast pace in Washington largely owing to the rebound at Boeing, although companies such as Microsoft are contributing as well. The sizable California economy is growing faster than the national pace, with employment in the state recently growing at a rate of about 3 percent. Not all sectors have shared equally in the long-delayed California recovery, but we now see a pickup in some of the lagging sectors. The state government budget situation finally has improved enough to allow the hiring of many needed public school teachers, and much additional hiring is expected next year. In the residential real estate sector, sales, prices, and new construction were weak throughout the first half of the '90s but began to increase in 1996 in some areas of the state. As a matter of fact, the Silicon Valley area surrounding San Jose is actually booming. Turning to the national economy, if the current stance of policy were maintained, I would envision the economy for 1997 as a whole growing at its trend rate as a result of several roughly offsetting positive and negative factors. On the positive side, it does seem that exports should be boosted by the healthy growth of our trading partners, and spending on computers and related products most likely will continue to grow rapidly. On the negative side, it appears that strong increases in consumer spending on real assets like housing and durables to satisfy pent-up demands has largely run its course. Of course, fiscal policy will continue to be on the restrictive side. With the economy slowing in the current quarter and then advancing at around its trend rate next year, we have scaled back our estimate of the level of resource utilization for 1997. Of course, judging resource utilization is particularly difficult right now, especially in labor markets. My best estimate is that there probably will still be a slight degree of excess demand in the economy next year, which suggests that there will be only a very gradual upward trend in underlying inflation. Our forecast shows core CPI rising from under 2-3/4 percent this year to close to 3 percent in 1998. In the longer-term context, our model simulations suggest that it actually would take a slight tightening of the stance of policy next year to make the inflation rate settle in at around 3 percent in future years. However, it appears unlikely that a downward tilt to inflation, which I think would be desirable, would be forthcoming unless policy were tightened more substantially next year. Thank you.",695
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, overall conditions in the Seventh District economy are little changed since our last meeting. Our regional economy continues to operate at a high level, with unemployment rates in each of our five states still below the national average and most of our key manufacturing industries producing at or near capacity. Although some increase in compensation rates has been reported for selected labor market areas, there does not appear to be any spillover into prices. The one major change in the District economy is that the recent evidence shows a definite slowing in housing activity similar to what was reported for the nation earlier. Purchasing Manager surveys from around the District still indicate healthy expansion in the manufacturing sector. The December Chicago Purchasing Managers' report, which will not be publicly available until the end of this month, indicates a slight slowing from the November pace, but it is still at 57.4 percent. The supplier deliveries component moved up by .6 percent to 49.9 percent in December and the prices paid component moved up to 53.9 percent from 50.7 percent in November. Retailers generally report that holiday sales have been somewhat better than expected. One major national retailer expressed concern that their recent sales have been so strong that they could be borrowing sales from early 1997. Some weakness has been reported in sales of appliances, but that may reflect the housing slowdown more than the holidays. Turning to the steel industry, concern was raised at our last meeting about possible weakness in the early part of 1997, and we have made some special efforts to check with our contacts in the Seventh District. They suggest that the demand for steel remains quite strong. Order books are full through the first quarter and into the second quarter of next year. Mills in the Midwest are reported to be operating at higher levels than elsewhere in the country, likely because of heavy orders from the automobile industry, but our contacts also report strong orders from a broad spectrum of customers. The outlook for steel prices is uncertain. One contact expects prices to rise early next year as a result of continued firmness in demand but not enough to reach the early 1996 price levels. Another indicated that steel prices would remain stable because of increasing imports as well as additional mini-mill capacity coming on stream in 1997 and into 1998. In the automobile industry, light vehicle sales came in at 14.8 million units in both October and November, and early reports indicate that sales are continuing at about the same pace in December. We expect sales in 1997 to decline somewhat from the 15 million units of this year, given the slower economic growth expected next year, fewer price incentives, and a record number of cars coming off lease in 1997. On the production side, we all know that the production of a large number of new models introduced by General Motors has been constrained by strikes. Our latest information is that GM model changeovers now are proceeding somewhat better than GM officials had anticipated, but strike-related production losses will not be completely recouped until early next year. One problem in making up lost production is the availability of parts for light trucks. Several suppliers reported that they will be working over the holidays to catch up on orders, which is unusual for these suppliers. Turning to the national economy, the outlook has not changed much since our last meeting. Growth in the economy has decelerated substantially since the first half of the year, and we see output growing at or slightly above potential in 1997, similar to the Greenbook forecast. Earlier this month, we hosted our annual economic outlook symposium for business contacts and economists from around the District. The consensus of around 30 forecasts submitted for this meeting was for real GDP growth of about 2 percent in 1997 and CPI inflation running a little under 3 percent next year. My own view of the risks to our forecast is that they are slightly tilted to the up side. The Greenbook forecast for core CPI inflation remains below 3 percent but only because of the BLS methodological improvements, as Tom Hoenig mentioned. At previous meetings, we have talked a lot about the value of low inflation, and although we may have disagreed slightly over the timing and the approach to achieving price stability, I believe that there was broad agreement that we should at least cap inflation at current levels. The question is, what are current levels? This is reminiscent of our problem in interpreting the change to a chain-weighted GDP methodology a year ago when we all had to recalibrate our assessment of potential output growth. Now, we need to stop thinking about targets like 3 percent for core inflation, if we are to maintain our progress in reducing the core inflation rate. I think this will be an issue of increasing importance next year.",951
-fomc-corpus,1996,"Mike, our reports from somewhat softer than what you are reporting. They have solid orders through January, softening in February, and there is no indication of firming into the second quarter. Did you check with them as well?",46
-fomc-corpus,1996,"We did, though they are not located in our District. We primarily contacted firms in our District, but we made a special effort to contact and we did not get any sense that there was any slowdown. But I think we only asked them about the first quarter, if I recall correctly. The firms that I talked to personally were talking about the whole year.",72
-fomc-corpus,1996,"Their cold-rolled sheet demand coming from autos is pretty good, but their pipe demand is poor. As I recall, they had not yet filled their first-quarter order books. The mini-mills, I suspect, are doing a good deal better, so your sample may have been more in that direction.",61
-fomc-corpus,1996,"Well, we specifically checked because this question had come up at the last meeting, and the word that I got from that orders for oil-related and tubular steel goods were very strong.",36
-fomc-corpus,1996,That is true. President Minehan.,8
-fomc-corpus,1996,"The New England economy is humming along, though there is some bounciness in the data. Unemployment rates remain low; job growth is solid and on trend from an historical perspective. Net out-migration of the labor force is less than it was in the early '90s. Consumer confidence is better than it was a year ago. Real estate markets are in particularly good shape, especially in Massachusetts, and both manufacturers and retailers see prospects for a solid Christmas and a good beginning of 1997. On the negative side, while anecdotal reports continue to stress the inability of individual firms to raise prices and the average rate of growth of wages in New England remains slower than for the country as a whole, the Boston CPI has experienced a couple of months of increases that are sharper than for the nation, largely because of medical, shelter, and fuel costs. Moreover, anecdotes about wage pressures in selected occupations and areas have begun to flourish once again. A mutual fund company, for example, just instituted an across-the-board salary increase of between 5 and 10 percent on top of a merit increase of 5 percent because of intense demand for system and service professionals and sales people. A high-tech manufacturer reported that the lid has blown on salaries of engineers and software specialists in the Boston area where such professionals command salaries over $100,000. Given our inability to hire such people at the Boston Fed, I think this is probably accurate. Another high-tech firm is offering stock options and starting pay 20% above a year ago to attract new technical talent. Thus, while this sort of competition has not found its way into average wage numbers, we do see some pressure on overall costs from other than wage components, and it may be only a matter of time before general wage levels rebound as well. As we all do, I meet periodically with various groups. In Boston, we focus on investment professionals in the mutual fund industry and on a panel of academic advisers. A couple of similar trends were evident in our meetings this time, and I thought I would give you some perspective on that. Several of the market types and some of our directors as well reported extreme competition for yield among the mutual funds--which I suppose is not news to anyone--and declining liquidity ratios. They expressed concern about the liquidity of the mutual funds, particularly the equity mutual funds, and more generally about the higher and higher degree of leverage in financial markets. Our contacts are worried that this degree of leverage could make stock market adjustments more painful than otherwise and, in contrast to 1987, they perceive that the economy is growing more slowly now so that its resilience in the face of a market downturn might be less. There was some discussion of what, if anything, the Fed could do aside from the occasional speech to let the air slowly out of an asset price bubble, assuming one exists. There seemed to be general agreement that raising margin requirements, while not particularly effective in substance, might send a message to the markets. But there really was no great enthusiasm for an increase. There was concern that more proactive actions, such as raising the funds rate, might not be a good idea unless one were sure that there would be an orderly regrouping after the market adjustment. One person on the academic panel commented that it was probably unlikely that we had any firm sense of, or control over, what would happen after a market adjustment, and that playing with avalanches was always risky. Finally, the academics saw wage inflation as the dominant risk on the horizon, but most of them thought preemptive policy was not appropriate at this point. One participant referred to the lack of evidence on the relationship between unemployment and prices at low levels of inflation and noted that uncertainty made it difficult for monetary policy to be extremely forward-looking. There were also some comments to the effect that there is not a sharp distinction between being reactive and being forward-looking. A central bank that is nervously reactive may be as close to forward-looking as it can get. [Laughter] On the national scene, we have no serious questions about the Greenbook forecast. We think the staff may be overly optimistic about inflation and that the elements of strong growth that are present--job growth, rising real wages, good disposable income, buoyant financial markets, everybody knows all of these--may end up creating more pressure next year than expected. However, we think the staff may continue to be slightly overly optimistic about foreign growth as well, and who knows whether the Grinch will actually steal Christmas or even if that would be an adverse development, given the level of consumer debt. In sum, we are pretty much in agreement with the Greenbook forecast.",937
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. Reports that we get from around the Atlanta District indicate that growth has moderated somewhat since the summer, and the slowdown seems to be continuing into the fourth quarter. The signs of that slowdown are most apparent in residential construction and homes sales, but they also show up in consumer and commercial loan demand. Manufacturing activity remains subdued, but businesses are optimistic about the near-term outlook. We are seeing for the first time some speculative office building in Atlanta and in some cities in Florida, but such building is not at a level that is worrisome at the moment. A particularly robust tourist season is helping the economy throughout Florida and in Nashville, but the gaming industry, which has become a big business in the South, is going through some restructuring and some shakeout and is doing particularly poorly in the city of New Orleans. Job creation in our District, which we have reported meeting after meeting as stronger than the national average, now lags behind the nation as a whole. Labor markets remain tight in many areas. As is the case nationwide, these labor shortages have yet to manifest themselves in significant wage pressures. Finally, retailers in the District report that they have gotten off to a strong holiday season in November. I am reluctant to make any predictions based on that limited information, but they are still cautiously optimistic about the month of December. The financial crisis in the city of Miami is creating quite a stir, with considerable negative publicity. Our reading is that the situation, while serious, does not involve a large amount of dollars since the city of Miami is a relatively small and poor core of a much larger and healthier metropolitan Dade County area. Interestingly, one of our Atlanta Bank directors has been named by the Governor of the State of Florida as one of the five oversight committee members. At the national level, the economy does appear to be showing some signs of slowing. For me, the major uncertainties continue to be whether labor shortages will eventually begin to be reflected in inflationary wage pressures, whether consumer demand will slow, and what will happen with government expenditures. So far, there is no indication that labor shortages have been severe enough to cause rising wage inflation. We have talked a great deal in the past about the influence of job uncertainty on workers, and the threat or actual influence of competition, both domestic and foreign, that still seem to be keeping wage pressures in check. Our forecast suggests that consumer spending will be maintained despite a decline in the growth of personal income. In line with the assessment in the Greenbook, we do not feel that current consumer spending has been buoyed significantly by the run-up in stock market prices. Finally, a point that Bob Parry made, it is likely that government demand will remain moderate in the near future. Federal spending has been on a downward track and the recent announcement by the President that obtaining a balanced budget would be a top priority would suggest that this trend will continue. Similarly, while states may feel the need to initiate many expensive infrastructure projects, major uncertainties concerning welfare and other federal programs that may get pushed down to the states for funding will probably act to damp state spending in the near term. All things considered, I expect economic growth to slow somewhat in the period immediately ahead, perhaps to a rate of around 2 percent, and to pick up somewhat later in 1997 and into 1998. Inflation and unemployment are likely to hold at the levels that we have been seeing recently. Thank you, Mr. Chairman.",697
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,"The Eleventh District economy has continued its reduced, modest pace of expansion over the recent period. The typical situation in our District is for employment growth to be higher than the national average, but with the unemployment rate higher as well because of net in-migration. That pattern was reversed in the course of 1996, with employment growth slowing but the unemployment rate also falling. The latter fell to slightly below the national average, its lowest level in fifteen years. The unemployment rate in Texas is 5.2 percent, and if we took away the counties along the Mexican border it would be 4.7 percent. Of course, on the basis of the commentaries so far this morning, at least before Jack Guynn spoke, it appears that we all have unemployment rates below the national average, [laughter] suggesting a Lake Wobegon economy. The recovery in the Mexican and Californian economies has apparently slowed our labor force growth and the growth of anecdotal evidence of tight labor markets, but the upward pressure on wages has not abated. The slow expansion of employable labor apparently is constraining output growth. Factors contributing to strength in our area are higher oil prices, which are stimulating our shrunken energy sector, capacity limits, which are limiting the rig count right now, and the rebound in the Mexican economy. In the first half of 1996, Texas exports to Mexico increased 17 percent--that is, at a 34 percent annual rate--and such exports have now surpassed their pre peso devaluation levels. Based on the period since 1986, Texas exports to Mexico normally would grow at a rate of about 14 percent compared to a 34 percent rate this year. Our construction sector, both residential and commercial, also has been a strong factor for us in 1996. Home prices are rising again after a long dry period, as are office rents, and announcements of new commercial projects are increasing. Contributing to weakness in Texas this year are the drought, the downturn in the semiconductor industry worldwide, and the slower labor force growth. On the national economy we have no major quarrel with the Greenbook. Our estimate of real GDP growth in the fourth quarter is somewhat below the Greenbook estimate of 2.3 percent, although our estimate was made before the strong industrial production number came in for November. I am not sure what to make of it, but I am struck by the fact that in both 1995 and 1996 we have had only one strong quarter in each of those years, with growth in the other six quarters being very unimpressive. I am sorry to see the overall CPI in 1996 break the string of years below 3 percent, but the reason is primarily energy-related. The opposite occurred in 1986 when sharply declining energy prices brought the overall CPI well below the core CPI. It seems to me that the price of the dollar in foreign exchange markets, the price of gold, commodity prices, and the growth of the monetary aggregates are all fairly reassuring on the inflation front.",616
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, economic conditions in our District have not not changed very much in the period since our last meeting. Growth overall remained relatively moderate compared to earlier in the year. Most of the anecdotal information that we get from our directors and others suggests a more moderate tone than earlier. We see sluggish conditions in some sectors. As Jack Guynn reported for the Atlanta District, housing in our region clearly has been more sluggish lately and that is fairly recent information. So, it is a little out of line with the published data for November that you mentioned earlier, Mike. At the same time, labor markets remain exceptionally tight in our region. We hear that from virtually everyone--directors, other business contacts, just about anybody we talk to. It appears that the tightness is perhaps greatest right here in the Washington metro area. We are told that the inflow of new workers into the labor force here has slowed significantly. Business at temp agencies for both skilled and unskilled labor in this area is booming, and again we are told that the supply of new workers has been constrained. We see evidence of tight labor markets just about everywhere. Yesterday, when Marvin Goodfriend and I were driving up Interstate 95 from Richmond, my eyes happened to fall on a mudflap of an 18-wheeler ahead of me, and they were advertising for truck drivers. I have the number if anybody would like it! [Laughter] At the national level, we have no strong reason to disagree with the Greenbook's forecast that real GDP will grow at a rate somewhere near its longer-term trend and that CPI inflation will remain moderate at a little under 3 percent, at least with the help of the recent technical adjustments to that index. In the Greenbook scenario, the unemployment rate stays near 5-1/4 percent, with the continuation of only a gradual rise in hourly workers' compensation along the lines of what we have seen recently. Not very long ago, an unemployment rate this low would have been accompanied by expectations of greater upward pressures on both wages and prices, and I have to confess to a little nervousness on this score. But I think the staff is right in pointing in particular to the considerable capacity that exists in a number of manufacturing industries. We see that in textiles and furniture in our District. And while I am not ready to uncross my fingers yet, I think the near-term risks in the Greenbook projections are more balanced than they were 3 months or so ago, especially on the inflation side. Some of the points that Bob Parry made are very relevant here. In a sense, the picture might even be brighter in view of the emerging consensus that the CPI overstates actual inflation by something like a percentage point. With both the overall CPI and the core CPI projected by the Greenbook to remain below 3 percent in 1997 and 1998, this would imply that the underlying true inflation rate is in some sense closer to 2 percent, which would mean that we may be closing in on price stability at least after help from those technical adjustments. Having said all of that and before anyone concludes that I have become complacent about inflation--[Laughter]",645
-fomc-corpus,1996,You are ready to declare victory?,7
-fomc-corpus,1996,"I am not ready to do that. In a very important sense, and this is really the main point I want to make, I think we still have some distance to go before we can be comfortable that we have achieved price stability in the way we have defined it. The old Neal Resolution language, which we endorsed, defines price stability as a condition where expectations of future inflation do not play a significant role in economic decision-making. I think one of the best indicators of inflation expectations is the long-term bond rate. That rate averaged around 3-1/2 percent in the late 1950s and about 4 percent in the early 1960s when the CPI inflation rate was in a range of 1/2 percent to 1-1/2 percent at an annual rate. Today the long-term bond rate is at 6-1/2 percent, about the midpoint of its recent range between a little below 6 percent and a little over 7 percent. There is not a lot of reason to think that the real long-term bond rate is much different now than it was in the earlier period when it appeared to average around 3 percent. That seems to be generally consistent with the surveys depicted in the Bluebook, which suggest that long-term inflation expectations are still on the order of 3-1/2 percent today. Alternatively, if we compare nominal rates in the earlier period with nominal rates today and attribute most of the difference to inflation expectations between the two periods, the implication would be that inflation expectations are anywhere from 2-1/2 to 3 percentage points higher today than they were in the late 1950s and early 1960s. Beyond that, the volatility of bond rates is a lot greater than it was in the earlier period and that volatility almost certainly reflects, at least to some extent, more volatile inflation expectations. So, Mr. Chairman, I would conclude that we are still some distance from achieving price stability in the Neal Resolution sense, and I think we need to remain vigilant going forward.",415
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,"I am reassured that President Broaddus is standing firm in his commitment to price stability. I was getting worried about that! The Philadelphia region continues on a modest growth trend, with most sectors reflecting this trend. Attitudes are positive and the outlook is generally positive as well. Labor markets are generally snug, although places like the southern-most part of New Jersey and parts of Pennsylvania still have relatively high unemployment rates. Getting ""qualified workers"" is becoming an increasingly familiar refrain among business people. It is something that one hears almost regularly. Average wage increases, however, still remain in the 3 to 4 percent area, although I think they probably are concentrated more in the 3-1/2 to 4 percent range. Almost everyone trying to sell something, from large businesses to street vendors, still reports stiff competition, which tempers the tendency to raise prices in this kind of environment. There is not much to be added on the national economy. I think the key points are that the economy appears to have successfully made the adjustment downward from unsustainable growth rates earlier; it appears to be on a more sustainable track, and I think that is the outlook. On inflation, we are still operating in a cautionary zone. Performance is better, actually remarkably better, than one might have expected on the basis of historical experience. So, we are doing reasonably well there and are generally looking at a positive, even enviable, position to be in. As has been pointed out, there are worries and potential problems, and we need to stay alert. But we can also continue to be patient.",321
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The Ninth District economy is still characterized by favorable business conditions almost throughout. Perhaps the most noteworthy thing to report relates to a recent meeting that we had with about 30 business leaders. The most striking thing they had to report is something I have commented on here but they certainly emphasized it, namely, how tight labor markets are and how difficult it is to find both skilled and unskilled workers. This is translating into higher wages. The wage pressures are by no means pervasive, but I think it is fair to say that larger wage increases are becoming more common. The business leaders talked about new hires being increasingly expensive, both because of the skills or lack of skills they bring and because they are finding that at least in some cases they have to offer more generous benefit packages, especially to attract part-timers. Those conditions have been in evidence for some time and I think they probably have intensified a bit. As far as the national economy is concerned, I am generally comfortable with the path of the Greenbook forecast. I am hard pressed to think of something that would materially change that pattern going forward, at least through 1997. To be sure, there are risks that aggregate demand could either fall short or turn out to be somewhat stronger than envisioned in the forecast, but it is hard for me to assess those risks with any degree of confidence. Without being very rigorous about this, the risk that I, at least, can identify most clearly is on the supply side. With labor markets in the shape they are in and with what we are seeing in wages and are starting to hear about compensation more generally, there is clearly a risk that those pressures are going to build. We need to keep our eye on the implications for inflation going forward, at least in the short term.",362
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. The Eighth District economy continues to grow at a steady pace. District retailers report that September and October sales were up about 4 percent from a year earlier, and most are expecting a strong holiday season. Sales the weekend after Thanksgiving were especially robust. Despite a somewhat lackluster autumn, most Eighth District contacts were optimistic about December auto sales. District auto and light truck manufacturers have increased their planned production slightly for the fourth quarter of 1996 and the first quarter of 1997, so District production is running above year-earlier levels in autos. Payroll employment in the Eighth District rose at an annualized rate of 1.9 percent from July to October. The average unemployment rate remains low at 4.7 percent. The local employment effects resulting from Monsanto's division into two companies are highly uncertain. Monsanto plans to eliminate 1,500 to 2,500 of its 28,000 jobs worldwide. About 4,600 of its employees work at company headquarters in St. Louis. The employment effects resulting from the Boeing merger with McDonnell Douglas, which is the largest employer in St. Louis, are also uncertain. Labor markets remain tight around the District. Hiring and keeping qualified workers, as a number of others have mentioned, is still a big concern for District companies. Materials prices are generally stable to slightly higher. Real estate markets are strong in the District, with year-to-date permits levels above 1995 levels. Loan demand, particularly for business loans, remains robust, and District banks continue to record high profits with only a slight increase in nonperforming loans. Farmers have had an excellent year, with yields generally above average and crop prices comparatively high. At the national level, relatively low inflation in recent years has been good for investment and growth. Tight labor markets are reflected in unemployment rates that remain low by historical standards. Although real growth has slowed from the rapid second-quarter pace, it remains near our estimate of the sustainable trend--in the 2 to 2-1/2 percent range. This pattern is observed in the labor market as well. The average net increase in payroll employment, which was 240,000 per month over the first eight months of the year, slowed to 113,000 over the three months through November. That average increase is close to the sustainable growth in the labor force. On a fourth-quarter-over-fourth-quarter basis, CPI inflation is forecast to be 3.2 percent in 1996 compared with 2.7 percent in the prior year. Although the 1997 staff forecast has a return to the 2.7 percent level, more than half of that improvement is due to technical changes in the way the BLS computes the CPI. Furthermore, rising average hourly earnings, weak productivity growth, and firm energy prices suggest that there are upside risks to this forecast. In any event, the fact of a 1/2-point rise in 1996 inflation may harm our credibility in ways that cannot be repaired by the staff's confidential forecast of a 1997 inflation decline. Our policy report to Congress last February suggested that we would resist pressures that might push inflation above recent trends. Economic forecasters have often interpreted our policy as a 3 percent cap on CPI inflation. Events in 1996 put us at considerable risk of losing credibility for even that modest goal. In my view, we should reaffirm our commitment to resist inflation above 3 percent. At the same time, we should continue to emphasize that all we influence in the long run is inflation. I personally believe we should go further and announce targets for bringing inflation down over time, but an announcement in February of an intended cap at 3 percent for inflation would be a good start. Thank you.",759
-fomc-corpus,1996,Vice Chairman.,3
-fomc-corpus,1996,"Mr. Chairman, economic conditions in the Second District have been mixed, but on balance they have been positive since our last meeting. Private-sector job growth, which had been above trend earlier this year, has slowed, but unemployment rates are still rather good. The 5.9 percent rate in New York State is holding at a 6-year low, and the 6.2 percent rate in New Jersey is still relatively good for that state as well. Retail sales generally have been running on or above plan throughout November according to our sources, and the traditional holiday shopping season seems to be off to a good start. Rising consumer confidence and record bonuses, including virtually astronomical bonuses on Wall Street, also bode well for consumer spending. In New York, we are getting an incredible wave of tourism, in fact to a point where hotel rates are up about 15 percent and hotel occupancy is very high. New York State's residential real estate markets picked up in October, and Manhattan's commercial real estate markets remain strong. The regional surveys of purchasing managers indicate persistent strength in the manufacturing sector and some easing of price pressures in that sector as well. Consumer price inflation in the New York and northeastern New Jersey area held steady at 2.8 percent in November, so we are looking good compared to the rest of the country. On the national level, we are basically in line with the Greenbook forecast. Our forecast for real growth is just a bit lower, so it is a little more comfortable in relation to growth within capacity. But we share the concern that others have expressed that the risks are slightly on the high side as regards price pressures. However, I believe that the risk the Committee has taken in the course of this year by assuming that the economy was in fact behaving somewhat differently has turned out to be a risk extremely well taken and that the present stance of monetary policy is correct.",377
-fomc-corpus,1996,Governor Rivlin.,4
-fomc-corpus,1996,"I do not know whether we have been smart or lucky, but we do seem to be blessed with a nearly ideal economy that is growing at a rate very close to potential. I have no reason to quarrel with the Greenbook forecast. Certainly, there is reason for concern about future inflation, given the tight labor markets and the beginnings of accelerating wage increases. But I think we ought to remember that if we can keep labor markets tight, in the long run we may be increasing the potential of the economy to grow without inflation. If tight labor markets encourage training, give more job experience to workers who would not otherwise have had it, encourage investment in efficient equipment and productivity-enhancing processes --and there is a good deal of evidence to think that this does happen --then we are improving our potential for economic growth without inflation in the future. The wage increases that we are beginning to see at the low end of the wage scale also augur well in the sense that they will encourage the transition from welfare to work, which hopefully will be made over the next several years, and will give us some new workers with job experience. Clearly, the most worrisome problem on the horizon is the stock market, but I am not sure how that will work out. It could contribute to an upward bounce in consumer spending, which was suggested by some of you, or to a significant correction that will reduce confidence and cut spending in the future. I share the staff's optimism about the prospects for a budget agreement, and I want to underline that because I have been fussing at them for about six months for being too pessimistic. They have finally gotten a little more optimistic about the budget outlook, which I think is right. I believe the Congress and the President will get together over the next few months and work out a deal that will keep the deficit from rising in 1997 and bring it down more significantly in 1998. The main element has to be a Medicare agreement on reduced reimbursement rates, possibly a means testing of the Part B premium, and some more aggressive action on Medicare fraud; such action already seems to be paying off quite well. The Congress and the Administra-tion could get hung up on what to do about Medicaid, but I sense less intensity in the Congressional Republicans' demands for block grants as the states begin to realize that they have taken on a lot already. We may actually see some softening of the harsh treatment of legal immigrants under welfare reform, but I do not expect that that will mean a lot more spending, although some easing for disabled legal immigrants seems likely. We also may see more near-term cuts in discretionary spending, creating a more realistic track over time for spending. The previous spending agreements had unrealistic trajectories in that they had precipitous declines in discretionary spending in the period close to the year 2002. I think that there is even a chance that the President and the Congress might tackle the longer-run Social Security problem by taking advantage of the Boskin Report and solving what is a relatively easy long-run Social Security problem with some downward shift in the CPI adjustment, probably not 1.1 percent but maybe half of that, and some future benefit cuts in the form of a higher retirement age. If that were to happen, and I admit that is pretty optimistic, it is not clear what the near-term effect would be. Spending would be reduced some as the benefits were pared back slightly, but it might have a positive effect on confidence. If it is true that consumers are spending less and saving more because they are worried about Social Security and their long-term retirement incomes, we might actually see a positive effect on consumption.",733
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"Thank you. I had a joint meeting of all three of our boards of directors last week and it included a go-around of the directors. The most commonly used word to describe their business activity was ""flat""--flat at currently high levels of activity with expectations that activity in 1997 will be about the same overall as in 1996. In the motor vehicles area, there is an expectation--from the suppliers' side at least--that production next year will be down about 1 percent or so. Because motor vehicles--both autos and trucks --are extremely important to our region, developments in that industry not only affect the reality but also the perceptions of what is happening. There is also an expectation among the suppliers that the prices of materials are going to be down in 1997, so they expect their margins to improve even though they anticipate somewhat lower volumes. With regard to the steel industry, we did get information that was a little different. Most of it was on the outlook for steel prices. In that industry, mini-mills that have been under construction for some time will be coming on stream next year and adding to capacity. Moreover, the growing efficiency of the integrated companies and expanding capacity abroad--we are seeing more sources of steel supplies from around the world--suggest that steel prices will be flat at best. In fact, one of our directors who is very much involved in steel feels that steel prices at the end of 1997 are likely to be below where they are today, and as Mike Prell noted they currently are below where they were at the beginning of this year. There are growing concerns about the outlook for residential and nonresidential construction. The feeling is that the residential projects that are now being completed are not being replaced in the construction pipeline, so that as they are finished next year residential construction activity will be coming down. On the commercial side, there is a special concern about too many shopping centers--too much retail space. The bankers say that they are tightening up on credit for this type of lending. They feel that they have been extending too much credit for the construction of retail space on terms with which they are no longer comfortable. Employment is generally characterized as flat at very low levels of unemployment. We simply do not have very much population or labor force growth in the region anymore. I think people are going back to California! That population trend is expected to continue. One of the remarks that Governor Rivlin just made about the way the causality runs in labor markets is reinforced by views expressed by some of our directors. One of our directors, who is now leaving the board, said that when he arrived inflation psychology was an issue. He does not believe that anymore. He thinks it has been replaced by what he calls a productivity psychology. He notes that in management retreats and in meetings of boards of directors, people do not talk about inflation. They talk about efficiency and about productivity and they lay their plans for the next year and set their longer-run strategies with the objective of accomplishing greater productivity. The director believes that the productivity psychology is pervading business organizations and that employees understand very well that that is what is driving their companies. On the stock market, one director made a comment that I thought was intriguing, so I tested it with a few other individuals--I had a sort of aggregation problem. The comment was that the shares of an individual's firm were fairly priced in the market or maybe a little undervalued, but the stock of other business firms was overvalued. [Laughter] On the national economy, I do not pay very much attention to what the Commerce Department reports on real output and even less to what the Board staff projects for real output. [Laughter] What Mike Prell does with the real growth measure makes sense, but I believe it is increasingly flawed conceptually. We don't know how to define output and we have all the related problems and concerns about productivity that we have discussed a number of times. The numbers simply are not squaring up with what I, at least--and I think a lot of you, too--hear and see is going on in the economy. In any event, I do not think that the growth measure has much to do with the purchasing power of the dollar. I find the uncertainties about the linkage between measures of inflation and of real output and productivity to be something more than I can deal with when I am so unsure about how to estimate output and productivity. I do spend a fair amount of time looking at the price statistics. Of course, there is a danger in that we can fall into the trap of thinking that inflation is caused by rising prices, but it is not. [Laughter] I do look at the numbers for prices and I look at the numbers for wages. Now, even in theory the only way we can have wage-push inflation is for firms to pay people more than the value of their marginal product. We do not find a lot of businesses that claim to be paying their workers more than they are worth. However, when I look at the Greenbook projections of the deflators--the chain-weighted deflator or the gross domestic purchases deflator--out to 1998 and see that uptick out there in 1998, that certainly gives me reason to pause. When we come back together in February, I am going to be very interested in seeing what the numbers look like going out for five years. I think a crucial issue for this Committee at this point is the inflation forecast beyond 1998. Nothing that we could conceive of doing today or in the early part of 1997 is going to have much effect on reported rates of inflation in 1997. The implications of current policy for the year 1998 are a matter of interest, but much more so is what the inflation trend will be beyond 1998. Implicit in the Greenbook's 1998 numbers is an inflation trend that is rising beyond 1998. And yet I am very puzzled because when I look at the Greenbook projections of nominal GDP for 1997, those in the current Greenbook are the lowest that we have seen since the Greenbook began to include projections for 1997. About one year ago, at the time of the January meeting, the country was in a funk, with the economy perceived as bad and getting worse. That sentiment changed by spring, and going into the summer the economy was seen as booming and getting stronger. Now, the psychology may be back almost to where it was one year ago. The numbers are softer in terms of nominal spending growth in 1997 and we have had three Greenbooks now with projections of 1998 nominal GDP, and each of those projections has been lower than the prior one. So, the trend for nominal income growth is going in one direction, yet I am expecting staff to say that after 1998 nominal GDP is going to grow at a faster rate and produce higher inflation. What I would like the staff to do, at least to humor me, is to show us what policy and the environment would look like if we set an objective of stable prices at the end of five years. We have a pretty good idea of what it would mean in terms of nominal income. We even have a pretty good idea of what it might mean in terms of nominal interest rates--they would be lower than they are today. What kind of heroic assumptions would one have to make in your analytical framework, as it relates to growth in output and productivity, that would be consistent with that objective without first widening the output gap or pushing up the unemployment rate? I think it is possible to put that scenario together in some alternative framework other than a gap analysis.",1558
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"Mr. Chairman, I have very little to add this morning, and I will be very brief. As we know, this was a very short intermeeting interval, and it seems to me that the incoming data have had very little significance for policy in the short run. So, I believe that on balance the economic situation very much calls for the status quo. The Greenbook always makes for fascinating reading, but I have to say that the current edition is as bland as any I have seen since I have been here, which I do not mean as a complaint or a criticism. That is the way things are. We continue to be in a period of watchful waiting; that is what seems to be appropriate in my view. This period is not going to go on forever, but it does seem to continue at least for now. I would like to add that I think that the risks continue to become a little more symmetric, but I am in no rush to change the direction of the intermeeting bias. Thank you.",205
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. The economic expansion still seems to be holding in a sustainable zone. We have further confirmation of the slowdown in the third quarter that we were anticipating. The fourth-quarter results have been mixed but seem to point to a marginally stronger economy as we reach the year-end. The question for us now is how much momentum the economy will carry into 1997. I have been impressed by the mixture of the reports around the table today. There are some areas of strength in the economy: a strong labor market, low unemployment, shortages of certain types of workers, fewer layoffs this year than in recent years, increased wages and income, and reasonably strong consumer confidence that is perhaps related to the strength in the labor markets and to some wealth effects from the stock market gains, at least until a few weeks ago. Housing markets could be getting a boost from lower mortgage rates, and we have some evidence of that in the data for November that we received this morning. There could even be some increased consumer spending capacity if a mini mortgage refinancing wave gets going. On the business side, commercial construction has strengthened as the current business cycle has lengthened and put pressure on capacity. We are even getting reports that available commercial rental space is now becoming scarce in some areas. I never thought that I would be hearing such reports at this juncture. Industrial production bounced back strongly in November. In support of this increased activity, the external financing cost of capital has been relatively low. Profit levels and cash flow also have permitted internal funding. In this financing environment, business fixed investment has consistently outpaced the Greenbook projections. Inventories seem to be reasonably balanced as we go forward, so we should not face a workout from an inventory overhang nor a slowdown because of shortages. Even in this environment, I think there are some potential problems for the economy. One I would point to is consumer spending. While such spending is unlikely to fade given the strong labor market and high confidence levels, it is not likely to grow much faster than the rate of increase in incomes. Consumer debt levels continue to be a constraint. We have worked through all of the pent-up demand. There is also the whole question of labor market uncertainty. During my first two years on this Committee, I talked a lot about this subject. I got tired of talking about it so it dropped off my list of things to mention, but the issue does remain. Another potential uncertainty is the stock market situation, which was highlighted by Mike Prell in the Greenbook. It may well be that the cold shower that was given to the markets by the Chairman may have done the trick. In any case, market participants are taking a second serious look at their valuations. In fact, somebody that I talk to fairly regularly tells me that traders continue to be obsessed by the Chairman's remarks. I will turn to another problem that I place in the potential risk category. I hope that Governor Rivlin is right in her optimism regarding the federal budget outlook. But if some kind of budget deal is not worked out, I think the markets will likely extract a premium via higher interest rates, and that could have a retarding effect on the economy. Another risk that has been mentioned today is inflation. It seems that ""benign"" and ""tamed"" are the more recent adjectives of choice. That certainly seems fair for the major core indexes, the deflators, and commodities including gold. But energy and food are still experiencing price increases. If, as expected, those increases tail off or decline as supply pressures ease, we could see some marginal progress on inflation. But if not, inflation remains a risk to the economy, particularly to the fairly fragile consumer spending situation. Wages are another potential pressure point for inflation and the economy. Maybe we are experiencing enough productivity improvement in enough industries to keep the pressure off prices, and there still is the safety valve of profits. But either prices or profits are going to have to change in the future if labor markets remain tight. In sum, I think that the outlook for sustainable growth looks even better from the December vantage point than it did in September or November, perhaps with a bit more strength going into 1997 than we had earlier thought.",850
-fomc-corpus,1996,Governor Meyer.,3
-fomc-corpus,1996,"The limited amount of data that we now have available since the last meeting does not alter the picture of the economy, and that picture is a remarkably good one. Economic growth has now slowed to trend. I read core measures of inflation as stable to still declining. The unemployment rate remains locked in a low but narrow band. Still, I think we all appreciate that good monetary policy is forward-looking. So, the relevant question is, what change can we look forward to with enough confidence to justify a change in policy today? Given that we are beginning from full employment, one justification for a policy change would be a strong conviction that growth over the forecast horizon will be persistently above or below trend. But the risks related to growth have really become more balanced over the last several months. The Greenbook forecast indicates trend growth immediately ahead. The discussion around the table suggests that few of us have a conviction that would justify a very different forecast. I compared the Greenbook forecast to five of my favorite private-sector forecasts, and the range is remarkably tight. On a fourth-quarter-to-fourth-quarter basis, the range for next year is from a low of 2.0 percent to a high of 2.4 percent. This is a very narrow range. Unemployment rates tend to be slightly higher than in the staff forecast; they jump off from about 5.4 percent, which is the current rate, rather than the lower 5.2 percent rate in the Greenbook, but again these forecasts are in a very narrow range that pretty much encompasses the estimates of trend growth. When we begin from trend growth, I think one thing that we might also recognize is that slight differences in the forecast for GDP growth, differences that are much smaller than the margin of forecast error, produce qualitatively different forecasts. A forecast of slightly slower GDP growth at the lower limit of that range, like 2 percent, produces rising unemployment rates, as in the consensus Blue Chip forecast, whereas a slightly higher forecast of GDP growth produces a degree of further tightness in the economy and further risks of rising inflation that none of us views as acceptable. A second justification for policy change would be the conviction that we are already below NAIRU and not likely to move back to it quickly enough to prevent an uptick in inflation. This is basically the staff forecast, and my view has been and continues to be that this is the most serious risk factor in the outlook. Yet, we get stuck in place because we continue to be confronted by the reality of stable to declining core inflation in the face of this prevailing low unemployment rate. So, we wait for additional data to resolve our doubts. The risk of waiting, judging from the modest rise in inflation in the staff forecast, is not very great. Still, it is probably worthwhile noting that in all of the five private-sector forecasts that I looked at, there are increases in core inflation over the next year or two. That is a pervasive tendency that just about everybody is worried about. I think we need to keep that in mind. Just a little historical perspective: I think the major threat to an expansion comes from an ultimate overshooting of demand relative to productive capacity and from the resulting acceleration of inflation. I do not believe that business cycles are dead. Rather, I think there has been a coincidence of events that so far have permitted us to avoid pervasive excess demand and rising price pressures. I want to suggest a few of them that we have not discussed very much. Demand is always chasing supply during the expansion, but I think supply has been more elusive than normal in this particular cycle. Effective labor supply has been increased by an apparent decline in NAIRU, so the unemployment rate has been chasing down a falling NAIRU. In addition, we have had very strong capital spending in this expansion, and as a result we have seen very rapid growth in industrial capacity. So, if we look at the price pressures in the product markets, they seem even better contained than the price pressures in the labor markets. I think that is an important distinction. One reason why this absence of pricing leverage makes sense is a lack of excess demand pressure in the product markets that makes firms more cautious about raising wages in response to labor market pressures and also more cautious about passing on wage increases that do occur. Other factors that have inhibited the normal buoyancy in demand at this stage in the cycle have been the continuing fiscal restraint and the persistent drag from net exports. So, supply has been increasing more rapidly perhaps than normal, demand has been less buoyant, and that is what has created the current environment. But as I said, the business cycle is not dead; history suggests that the risks are tilted in favor of demand ultimately overshooting productive capacity and causing higher inflation. While this should not prevent us from enjoying the current balanced prosperity and good performance, it does suggest vigilance rather than complacency as we move into 1997.",991
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"Thank you, Mr. Chairman. I think that in spite of your best efforts, 1997 is going to be a very good year for irrational exuberance. [Laughter] I take the Greenbook as Exhibit One. In mid-1993 I got into a little trouble because the wire services quoted a quip I made at the beginning of a speech to the effect that monetary policy had been reduced to the number 3 or 3 something: 3 percent inflation, 3 percent growth, 3 percent fed funds rate. Now, I have to change it to 2 something because what I see in the Greenbook forecast is quarterly GDP growth rates of 2.1, 2.3, 2.3, 2.2, 2.1, and 1.9 percent; and for the implicit deflator from the second quarter of 1997 it goes 2.1, 2.0, 2.0, 2.3, 2.2, 2.2 and 2.3 percent. I suppose the real fed funds rate is ""2 something"" percent, too. So there we are. That is known on Wall Street as the Goldilocks economy, and that perception is exactly what is causing the stock market boom. I remember Goldilocks from when I was a kid, but I have not read it to my kids. I can cite Green Eggs and Ham by heart, which I will spare you, [laughter] but I cannot remember too much about Goldilocks except that there were three bears. So, here are the three bears that I think are going to give us a little further irrational exuberance in 1997, and when we write the history of 1997, we will ask ourselves why we didn't realize it at the time. The first relates to the budget deal cited by Governor Rivlin. I share her optimism that a deal will be reached, but I also have a substantial amount more cynicism than she was willing to express. I think the core of the budget deal will be, as it is with most political deals, to make things sound a lot better than they are. If we look at the Greenbook we note, for example, that the high employment budget deficit actually rises in the next year in spite of all the talk around town and during the campaign about record low deficits. Basically FY97 is locked in. So, we might think of 1997, at least from the point of view of perceptions, as the ""all gain, no pain"" year. I also agree that there probably will be a Medicare deal, which will make us all feel better. My suspicion is that the rhetoric will focus on a line that the President used, namely, that we will have extended the life of Medicare by 10 years. Now, I actually chased this quotation down with some CEA staff when I was in Paris. The President said it first in 1995 and the 10 years he had in mind were through 2005, which really is an extension of 4 years. But since everyone will be signing on, everyone will be saying that we extended Medicare by 10 years. The examples that you gave--a little squeeze on the reimbursement rates for doctors and a tad of means testing are not going to hurt anybody--will make it sound as if the Medicare problem has been put off for 10 years.",698
-fomc-corpus,1996,His 10 years did not include the means testing.,11
-fomc-corpus,1996,"Did not include means testing--so maybe its inclusion will get us to 11 or 12 years, but it still will not be that far into the future. In addition, I think both OMB and CBO have become a little too optimistic with regard to tax receipts. They discovered that the increased tax receipts were not from capital gains, which should make us all pause a little because that means that those gains are not being realized and are not in the spending stream boosting consumption right now. Instead, the discovery was that the extra tax receipts were coming from higher small business receipts. That was certainly true for 1994 and 1995. People who were downsized formed their own businesses and started paying the very high tax rates that small business people pay basically because their fringe benefits are not deductible. But as our staff discovered, small business profit margins are now starting to be squeezed. I think that the declaration that this tax gain is a permanent gain--because it is from small business and not from capital gains--will in retrospect prove to be false. We will look back and find that, in fact, our deficits have been larger than either the Congress or the Administration now believe they will be. For the short term, the news will be great. We will have a fiscal deal, but in fact, we will not have solved our budget problems. The bond market will think that we have and will help fuel irrational exuberance. I think the second bit of fuel for irrational exuberance during 1997 is going to be the credit situation. I noticed that today's Wall Street Journal was carrying a story that the next Congress was going to be considering bankruptcy reform. I can think of few worse ideas, frankly. First are the politics that are involved. Here we have a group of bankers saying that Congress has to tighten up on bankruptcies, and on the other side we have bankrupt people, some of whom have sick children, some of whom were unemployed for very good reason, and some of whom have gone through divorces, although they do not generate enough sympathy to serve on the panel. If we have to satisfy those two constituencies and we open up the bankruptcy laws, those laws will only get worse. Unfortunately, the reason I think the exuberance will be irrational is that the lenders have now switched from saying that they were not making a mistake lending to these people because their models were so sophisticated to now saying the problem is that the bankruptcy laws are too easy. If we actually ask lenders what they are doing, we find that they are turning around and making loans to people who just declared bankruptcy. The easiest solution to this problem in my mind is for banks and other lenders just to say they will not lend to anyone who has declared bankruptcy within the past three years. The lenders are not ready to do that. Instead, they are going to push for new bankruptcy laws. That will create the illusion that something is being done when that really is not the case. So, I think we have probably another year to go on the excessive credit expansion. The third bear is going to be the dollar. I think Ted Truman has underestimated how much the dollar is going to appreciate this year. In both Japan and Europe, there is now one clear recipe for getting out of their mess. That is export growth, and there is only one place to export to and that is the United States. The way to increase exports quickly is to devalue. The Japanese, I am told, decided that they were willing to let the yen go to 120. The Europeans are now deciding whether it is better to devalue before or after convergence. I think in the end, they will go for it before. That is going to be good news, and it is going to feed irrational exuberance in this country as well because it is going to keep inflation artificially low for a little while longer. We are going to be able to continue to sustain demand in the context of downward price pressures on domestic producers because of relatively cheaper imports. All in all, I think there will be good news in 1997 on the fiscal front, the credit front, and the international front. But in each case it is going to be creating bigger problems for us to solve down the road. So, 1998 looks like the year in which irrational exuberance will meet its match.",874
-fomc-corpus,1996,I will make another speech. [Laughter],10
-fomc-corpus,1996,Don't wait a whole year.,6
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"Thank you, Mr. Chairman. I will try to be brief this morning because my view is little changed from last time. The limited new data that are available since our last meeting support the staff's prediction that the lull in consumer spending over the summer was likely a temporary aberration and not the onset of any period of significant retrenchment due to tightening consumer credit or escalating debt burdens. Indeed, I have been fighting the crowds and searching in frustration for parking spots at local malls in recent days only, I assure you, to provide some firsthand independent research concerning the strength of Christmas spending. [Laughter] Frankly, my concern with the possibility that consumer spending may be too robust rather than too weak has increased. At a minimum, the risks with respect to consumption now seem to me to be quite balanced. However, moderation in government spending and residential investment combined with the significant drag from net exports--and that drag has been revised upward in the latest Greenbook due to the stronger dollar as Ted Truman mentioned--those sources of drag, I think, should offset above-trend growth in consumption and investment spending over the forecast period. If we add to that the fact that inventories are seemingly at reasonable levels in relation to sales, the Greenbook forecast of overall growth in demand seems perfectly plausible with the risks looking quite balanced, as Governor Meyer stated a minute ago. Meanwhile, the news on the inflation front does suggest continued moderation in core inflation, with relief on the horizon most likely with respect to energy prices. To my mind, labor markets are undeniably tight. You remarked last time, Mr. Chairman, that we should be careful not to lull ourselves into a false sense of security about incipient wage pressures by reading too much into that suspiciously low third-quarter ECI, and I agree with that. So, I still feel that we need to avoid complacency about the potential for inflationary pressures to emerge from the labor market down the road. But while I think we cannot rule out the possibility that this long expansion is about to end with a period of stagflation and that that is a significant risk over the term of this forecast, that outcome is by no means a certainty. Capacity utilization, as a number of you have mentioned, is not strained at this point. Incoming data do suggest that earnings and profitability remain strong, so I do not see any squeeze on corporate profits at this stage. In fact, this stunning combination of strong corporate profits, a healthy but sustainable pace of real growth, low and maybe even declining inflation, and lower real interest rates due to enhanced prospects of a balanced budget is a mix that may indeed continue to support a level of stock prices that the Greenbook--I liked the staff's term for this--called aggressive. I thought, if anything, that that was an accurate statement and, given the careful analysis done here at the Board, that it was perhaps an understatement. Like Governor Lindsey and some of the rest of you, I consider the stock market a significant continuing risk to the outlook. So, I do worry that this confluence of favorable events has fostered what you describe, Mr. Chairman--I think appropriately--as irrational exuberance in asset markets. I think your recent remarks alluding to the potential for large asset price movements that are likely to have adverse impacts on economic activity was extraordinarily useful in prompting at least some introspection and some second thoughts by market participants about the rationality underlying the current evaluation of equity prices. Maybe your speech also served to heighten just a little the appreciation by the market that there do remain real risks around what is admittedly a very rosy forecast.",727
-fomc-corpus,1996,Thank you all. We can go to coffee now.,11
-fomc-corpus,1996,Mr. Kohn.,5
-fomc-corpus,1996,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1996,Questions for Don? I guess you overwhelmed everybody.,10
-fomc-corpus,1996,I was wondering if applause is in order.,9
-fomc-corpus,1996,"The Vice Chairman is suggesting applause but don't. [Laughter] If there are no questions, let me get started on policy and the directive. As many of you have mentioned, no really significant changes have occurred since the last meeting. The numbers go up and down, all sorts of adjustments take place, and one can easily get mesmerized by small changes, but the evidence suggests that there just has not been much change in the economy since our last meeting. I believe it is correct to say that the expansion is moving along at a reasonably good pace; its underpinnings are fairly solid. There is no credible evidence of cumulative deterioration. Goldilocks may not be the type of story that Governor Lindsey feels appropriate for his children, but the principle of Goldilocks probably will live on for at least a short period of time, though my fear is that her locks are going to get clipped at some point reasonably soon. Personal consumption expenditures appear to be running at a moderate pace. The Christmas data are always very difficult to read. I would suggest to Governor Yellen that her survey has a problem in that there are five fewer shopping days than usual before Christmas--",233
-fomc-corpus,1996,I forgot that.,4
-fomc-corpus,1996,"--so there are more cars per square minute [laughter] than we normally would expect. Nonetheless, as Mike Prell points out, the weekly seasonally adjusted data on chain store sales do show some significant strength. I presume that our X-ll seasonal adjustment program is not mesmerized by the shorter selling season phenomenon. I thought that, to date, the slightly disappointing December motor vehicle sales number was perhaps just as important as the somewhat firmer Christmas season sales in the usual GAF goods categories. Given shortfalls in the last month or two in motor vehicle sales owing to the strike, one would have expected these data to start coming back this month. But, to date, the surveys that Mike Moskow has made and that we are making ourselves do not show any significant improvement in motor vehicle sales. It is conceivable, since we are only halfway through the month, that we could get a lot of action over the rest of the month in both regular Christmas buying and motor vehicle sales. I would say that for the moment it is not self-evident that we will have very strong growth in personal consumption expenditures in the fourth quarter, but clearly growth will be markedly above the pace in the third quarter. I think consumer spending in that quarter was artificially reduced, in part by Department of Commerce adjustments for the hurricane and that sort of thing. One interesting aspect of consumer markets can be seen from a disaggregation we have made of consumer credit into gross extensions, repayments, and net change, the latter being our published number. This statistical construction has much the same form as was used a number of years ago in publishing installment credit extensions and repayments. What it shows is a very significant increase in the last year or two in the ratio of nonautomotive gross extensions to nonautomotive retail sales. That was the case until the last couple of observations, for October and November, when all of a sudden it looked as though consumer credit had hit a ceiling. After rising like this, it went flat. This is consistent with the general notion that consumers as a group may be running up against some credit limit. To test this hypothesis, I asked the staff to try to use our Survey of Consumer Finances, which we conduct every three years, in conjunction with the data on income quintiles and the flow-of-funds aggregates to estimate the different types of household assets by income groups. Those statistics were employed to make judgments as to how the household balance sheet would look on a disaggregated basis as we moved well into 1996. Granted that there is a lot of weakness in all of these data, there is a certain robustness to the result because we do have, in addition to income, controlling aggregates of consumer credit and stock market wealth including equity mutual funds. Even though a lot of statistical manipulations are involved, the robustness of the results is really quite remarkable when we have very strong trends. The numbers that we endeavor to adjust in a matrix with controlled rows and columns and nonnegative components are constrained by algebra. The matrix algebra severely limits how much leeway we have in the various cells, provided they are all nonnegative or zero, which they are. The end result of all of this confirms the fact that consumers at the lower end of the income distribution indeed have more significant consumer debts than equity assets, which are the two big surging items that have been moving household balance sheets of late. This is consistent with the notion of some constraint on consumer spending, although the detail that we have and the limited breakdown of only five quintiles are not in and of themselves all that conclu-sive. All one can say is that there are not enough assets, specifi-cally equity assets, on the balance sheets of those with constraining consumer debt to overwhelm the debt argument. That is, the data suggest that there is a fairly large number of individual households that have a lot of consumer debt and very little equity assets or indeed much of anything else. This, in a sense, confirms the fact that there is some debt limit against which we are running, although one can argue it is not all that much of a constraint. It is a constraint against an acceleration in spending but clearly not one that suggests a pulling back. It may well be part of the explanation as to why the wealth effect on consumer spending seems to be falling somewhat short of econometric estimates that we obtain from the aggregate data when we try to filter out the impact of changes in the value of equity market holdings on personal consumption expenditures. I hope to be able to get something more out of this data system, but it is hard to know because a lot of guesswork is going into our equations, and we are not quite sure whether what we are getting out is the guesswork we put in! [Laughter] On the residential building issue, a quick appraisal of the sharp rise in starts reported this morning suggests that it is going to be partly retraced in December. The reason is that the best short-term forecasting system that I have seen on housing starts is one that tries to track the pace of net permits through to the starts figures. November data show, as indeed I think we have seen in the past, that the level of net permits, meaning permits adjusted to the level of starts less cancellations, is significantly below the current level of starts whereas they were above in October. One of the ways of looking at the November figure is in terms of the pipeline effect, which is in fact the question that Jerry Jordan was raising. There is some evidence that what is in the pipeline at this stage is well under the level of single-family starts. My guess is that we will get some retrenchment. Indeed, whenever the permits backlog declines, the probability of a retrenchment in starts the next month is a good deal better than 50/50. Having said that, all the other evidence, including that sharp rise in mortgage loan applications for the week ended December 6 shown in the mortgage bankers' weekly release, has been rather startling. I do not know whether I should believe the seasonal, but if one looks at the data, it goes like this and then there is a spike. Usually that means that something is happening even though it may be exaggerated in the data. So, I think there is good evidence that while December starts may be down, the residential real estate market is probably in the process of stabilizing. The inventory data, as a number of you have mentioned, are really quite benign, and it is hard to find any significant changes in inventory investment in either direction. The October figures in constant dollars were running at the pace of the third quarter. There is no reason to believe that anything of great significance is going to occur. The only point that may be worth making is that there were somewhat more imported inventories implicit in the third-quarter data than is normal, so it may be that the size of the adjustment if we go to a slower inventory investment level will be somewhat less. The one caveat there is that theoretically one should see those imported inventories reflected on the import side of the GDP accounts. As hard as Ted Truman's people have worked on finding it, it is not there, which I would guess is a statistical discrepancy rather than reality. But no matter how one cuts it, there does not seem to be anything of importance in the inventory data. Wages do appear to be accelerating very modestly, but let me caution you on the .8 percent increase in the November figure for average hourly earnings. The fixed-weight numbers are lower; the fixed-weight plus adjustment for the overtime number that we calculate brings the increase down to about .4 percent from .8 percent. Nonetheless, even with all of these adjustments, we are still getting a mild degree of acceleration, which has not ceased. As a consequence of that, I have also asked the staff to work a little more on getting a better sense numerically of this tradeoff question between job security and wage gains. At my suggestion, they put together a very interesting model that provides clear evidence that the trend of job leavers has been very flat in the context of a falling unemployment rate. At least historically, that is not the way labor markets are supposed to function. The staff has very cleverly been able to extract the average duration of unemployment for job leavers consistent with that overall statistic. One would presume, and indeed the data do show, that the number of job leavers is a function of the average period of unemployment--that is, a proxy for the cost of becoming unemployed. The longer the duration is, the greater the possibility that becoming unemployed is going to be very costly to a worker, and hence the worker will be increasingly disinclined to leave. These data do in fact, with one caveat, suggest that a goodly part of the shortfall in the ability of our regular wage equation to project what actually has been happening is correlated with this statistic. The caveat is that, as you all know, we had a discontinuity in the household series as of January 1994, and the job leaver series has gone a little off kilter. I am not sure it means all that much, but until we ascertain that the discontinuity is not creating a lot of this correlation with the residuals from our Phillips wage equations, it would not be that convincing to use this type of model as a numerical measure of the job insecurity/wage gain tradeoff. I might add that the type of residuals that we are talking about, if translated into a system in which everything is exactly on track but where the NAIRU is the residual unknown variable, would imply a NAIRU well under 5 percent to bring all this together. So, we are getting a gradual increase in labor costs in a data system that is explaining a phenomenon known in principle to be transitional. The only issue is when the transition period will end and we will get a normal reacceleration of wages at lower unemployment levels than they have been historically but where the rate of change in wages and its effect on prices revert to historical patterns. Remember that this wage shortfall also mirrors the opening up of operating profits. What one must assume about all of this is that we are getting such a benign price pattern in this environment because these very large operating margins are creating a rate of return on equity that is higher than normal. This is another way of saying that, if any competitor tries to move prices up in that environment, the profit margins of other competitors are such as to enable them to compete at a lower price and still be above their hurdle rate of return on equity. We do not have to bring into the equation all sorts of noneconomic forces to explain these price phenomena. It is the old basic rate of return on capital that is keeping the cap on the price level. What is keeping the return on capital up is the subnormal rate of wage increases. When one element goes, the whole thing starts to unravel. There is no evidence at this stage that that is occurring, but it is going to happen at some point. When it happens, we are going to find that we are back on the old track. I guess the key question is the same issue that we raised last time. Will the economy soften sufficiently quickly to take the pressure off the wage structure before the transition occurs? I would say at this stage that there is as yet no evidence to suggest any such softening: Order patterns still look reasonably solid; the levels of consumer confidence are beyond belief at this stage; there are very few imbalances of the kind that usually have led to problems historically; profit margins apparently have flattened out, but they surely have not turned down. As a consequence, we are still faced with pressures in the labor market such that, if the latter ever reverts to a normal pattern, a whole new set of inflationary forces will be created. Therefore, while I think we can stay at ""B"" for a while as we assess whether diminished demand pressures in the economy will reduce pressures in the labor markets before this transitional process is over, I believe we confront a far greater likelihood that the next move will be up rather than down. So, I would hope that we can stay asymmetric today and still remain at ""B."" Vice Chairman.",2466
-fomc-corpus,1996,"Mr. Chairman, for all the reasons you suggested, I believe that maintaining official interest rates at their present levels is appropriate and therefore ""B"" is appropriate. I agree that it is very likely that our next move will be up and that asymmetry should be used to indicate that there is a strong consensus among Committee members that the risks to the forecast are on the up side. That is how I would interpret asymmetry rather than as reflecting a high likelihood that we would move to change rates between now and into the new year. So, I believe ""B"" asymmetric is clearly the right conclusion for today.",122
-fomc-corpus,1996,I accept your definition of asymmetry. Governor Rivlin.,12
-fomc-corpus,1996,"I agree and especially with the Vice Chair's formulation of it. I do not see any reason for a move at the moment. We are doing fine, but the risks are clearly on the up side, though they may be less so than we thought when we launched into the asymmetric pattern. They are not enough less to convince me that we should revert to symmetry, although I must say that I find the meaning of these asymmetries a little mysterious.",91
-fomc-corpus,1996,President Parry.,4
-fomc-corpus,1996,"Mr. Chairman, our forecast suggests that it may be necessary sometime next year to tighten the stance of policy to impart some downward momentum to the underlying rate of inflation. However, there would seem to be little or no reason to take action now. At our Bank, we consult two monetary policy rules as a starting point for thinking about the appropriate stance of policy: an estimated version of Taylor's rule and a nominal income growth rate rule. Even if we assume a 2 percent target for core CPI inflation, both rules suggest that the funds rate should be left at about 5-1/4 percent at the present time, although when applied to our forecast they do suggest higher rates will be needed in the future. In addition, it appears to us at least that there is considerable uncertainty at this time about the prospective strength of economic activity. Therefore, I support the Bluebook alternative B, with a 5-1/4 percent funds rate and asymmetric language on the side of tightening.",198
-fomc-corpus,1996,President Moskow.,4
-fomc-corpus,1996,"Mr. Chairman, I support the recommendation for ""B"" asymmetric. I think the risks are clearly on the up side.",25
-fomc-corpus,1996,President Broaddus.,5
-fomc-corpus,1996,"Mr. Chairman, as I said earlier I think the risks are more balanced now. Because of that I do not believe the need to tighten our short-term policy stance is as urgent as it was earlier and I would accept your recommendation, although if you had recommended a slight snugging, my opposition would have been less than heated. [Laughter] I would like to make one other quick comment that is very much in the spirit of what Tom Melzer and Jerry Jordan said during the economic go-around. Our next meeting is a Humphrey-Hawkins meeting where we once again have an opportunity to look at our longer-term strategy. I hope we will take that oppportunity to sharpen our strategy perhaps a little and communicate it even more concretely than we have. This, it seems to me, is an appropriate time to do that since, with the Boskin Committee report, there now is an emerging consensus on the magnitude of the bias in the CPI. It has always struck me as a little ironic or at least curious that at these Humphrey-Hawkins meetings we all submit a forecast for inflation for one year out and then just stop there. Obviously, the Fed can control the inflation rate over a reasonable time period, so we cannot help but ask ourselves why we do not just set out a multiyear path to full price stability that we expect to follow over some sensible time period, state it publicly, and then pursue it. Or at a minimum along the lines of Tom Melzer's comment earlier, we could state explicitly that we will not tolerate a backup in the inflation rate to a level over 3 percent. If I am not mistaken, we briefly discussed the possibility of doing something like that at our last Humphrey-Hawkins meeting, and I would hope that we would consider it again at the next meeting in February. I think this is the time to do it while the current inflation rate is relatively low. If we lock in the currently low level of the inflation rate, I think that will position us to make some further progress on the expectations side, which seems to me to be the big thing now.",428
-fomc-corpus,1996,President Minehan.,4
-fomc-corpus,1996,"Mr. Chairman, I am in full agreement with your recommendation for ""B"" asymmetric. I also believe that Vice Chairman McDonough's definition of the various aspects of symmetry is quite in line with mine. I think that our indicating symmetry or asymmetry in our directive really does communicate the direction to our thinking and does not have any impact on what the process will be in terms of how that will be implemented. I would like to see that understood by everybody because the notion of symmetry in our directive is confusing. I think we can make it less so.",112
-fomc-corpus,1996,President Hoenig.,4
-fomc-corpus,1996,"Mr. Chairman, given that I also agree that the risks are on the up side, I support your recommendation.",23
-fomc-corpus,1996,President Guynn.,4
-fomc-corpus,1996,"I, too, support your recommendation, Mr. Chairman, and like Cathy Minehan I would associate myself with the understanding of asymmetry that Vice Chairman McDonough enunciated.",37
-fomc-corpus,1996,President Boehne.,5
-fomc-corpus,1996,I support your recommendation.,5
-fomc-corpus,1996,President Melzer.,4
-fomc-corpus,1996,"Thanks, Alan. This is for Ed Boehne and others. I do not want them to get too nervous about Al Broaddus and me both ""selling out"" on an earlier view. CPI inflation is up 1/2 percentage point this year over last year, and I think the risks are that it could rise further. Personally, as I view the incoming information and listen to the comments today, I see the risks of rising inflation as somewhat greater now than they were at the time of the last meeting, not less. So, I would favor a modest increase in the degree of reserve restraint. Now, such an increase clearly would catch markets off guard and if we acted, which of course is not going to happen today, we would have to put that action in the context of a long-run inflation objective. At this stage I would put it in the context of trying to cap inflation at 3 percent. In some sense we should not have to explain that. I think markets should have a better idea of what our objectives are. The fact that we have not been more explicit about our objectives, I think, is probably the most significant risk to our independence in comparison to other things we worry about. I think we are perceived to have much more influence than we really do, and we could deflect that perception if we explained that what we are really focused on is the inflation rate in the long run and that is all we influence. So, I would support what Al has said here with respect to a discussion in February. We really need to zero in on this issue and be more explicit about our long-term intentions with respect to inflation. Personally, as I think you all know, I would be in favor of laying out a path like Al described, but whatever we can get in terms of being more explicit would be better than the situation that we are in now. I do not think we can wait for legislative results that might clarify that. I think we have a job to do to educate the public about what our intentions are, and a good starting point is by being more explicit about our objectives. Setting our inflation objectives is something we would have to ease into, but I think that it is very important. I would like to encourage a discussion in February and maybe some staff work that would lay out some possibilities with respect to things we might do that would take us in that direction.",483
-fomc-corpus,1996,Governor Kelley.,3
-fomc-corpus,1996,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1996,Governor Phillips.,3
-fomc-corpus,1996,"I also support ""B"" asymmetric in view of the renewed strength of the economy in the current quarter. It seems to me that the balance of risks has shifted to the up side, implying the necessity of vigilance on inflation developments.",46
-fomc-corpus,1996,President Stern.,3
-fomc-corpus,1996,I support your recommendation.,5
-fomc-corpus,1996,President McTeer.,5
-fomc-corpus,1996,I support your recommendation.,5
-fomc-corpus,1996,Governor Yellen.,4
-fomc-corpus,1996,"I support your recommendation. I see policy as appropriately positioned now and agree with President Parry that that becomes apparent from the observation of rules or from the Greenbook forecast. But to my mind the risks are asymmetric. I appreciate the clarification of the meaning of that term, and with that clarification I certainly am happy to support continued asymmetry today.",69
-fomc-corpus,1996,President Jordan.,3
-fomc-corpus,1996,"I agree with the recommendation to leave the funds rate unchanged at this meeting, but I am troubled by this issue of the meaning of asymmetry, not only among ourselves but also what we communicate to others. In one sense, a central bank should always be asymmetric toward firming with regard to the issue of inflation. In another sense, I cannot imagine the circumstances under which there would be any new information that would cause an action in the near term--between now and the next meeting. So what asymmetry means is that if the consensus of this group is that the next action is more likely up than down, it is because of rising inflation well out there in the future, given the long and variable lags that exist. In my view, we have done a much better job recently of avoiding communicating that we are concerned as such about too much growth or too many people working or not enough unemployed people and other idle resources. We do not want to fall back into those kinds of communications. So, how are we going to communicate the need to move the funds rate up when we face it, because of our concern about inflation in 1998 and beyond, if we do not set out explicit multiyear objectives and couch any action we have to take in that context?",255
-fomc-corpus,1996,Governor Lindsey.,3
-fomc-corpus,1996,"I support your recommendation. I was just thinking about what Jerry Jordan said. I like the line--I am sorry I forgot who said it--that nervous reactiveness may be the best we can hope for. When we look at the loss function and the amount of uncertainty out there, I think prompt action when we first get a signal in this environment is a reasonable conclusion. I would say that that is very much along the lines of an asymmetric directive. I could imagine asymmetry going the other way as well; in fact, we were asymmetric going the other way through much of 1991 and 1992. So, I think it is the right recommendation and that it is consistent with the way President McDonough defined it.",148
-fomc-corpus,1996,"Finally, Governor Meyer.",5
-fomc-corpus,1996,"Mr. Chairman, I support your recommendation. As the risks have become more balanced over the last few months, it has clearly become a closer call as to whether the directive should be symmetric or asymmetric. Nevertheless, the major risk seems to be a rise in the inflation rate and I therefore concur with that asymmetric directive. Let me just preview our next discussion since we seem to be focusing in advance on the February meeting and the potential discussion of longer-term targets and strategies. I would certainly respond well to some notion of a cap like 3 percent on inflation, but I am going to be very troubled from my opportunistic perspective about laying out a specific year-to-year path. I would not want to feel committed to a specific path. Thank you.",149
-fomc-corpus,1996,"Thank you. The consensus appears to be ""B"" asymmetric. Would you read the directive that would accomplish that?",23
-fomc-corpus,1996,"It is on page 13 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with relatively strong expansion in M2 and M3 over coming months.""",109
-fomc-corpus,1996,Call the roll.,4
-fomc-corpus,1996,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern Yes Governor Yellen Yes,47
-fomc-corpus,1996,"The next meeting is February 4 and 5, which is a Humphrey-Hawkins meeting.",21
-fomc-corpus,1997,"I would like to welcome Craig Hakkio from the Kansas City Bank, who is attending his first meeting. He is seated here somewhere.",28
-fomc-corpus,1997,About where Tom Davis used to sit.,8
-fomc-corpus,1997,I turn to Governor Rivlin to initiate our proceedings.,11
-fomc-corpus,1997,It is my pleasant duty to open the meeting and to ask if there are nominations for Chair of the FOMC. Governor Kelley.,27
-fomc-corpus,1997,I will be happy to nominate Chairman Greenspan for that role.,13
-fomc-corpus,1997,Is there a second?,5
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,We have a second. All in favor? SEVERAL. Aye.,16
-fomc-corpus,1997,"Opposed? Mr. Chairman, you have won!",11
-fomc-corpus,1997,"Surprise, surprise!",5
-fomc-corpus,1997,I thought I had voted no.,7
-fomc-corpus,1997,Shall I proceed?,5
-fomc-corpus,1997,"Yes, would you move the other nomination?",9
-fomc-corpus,1997,Is there a nomination for Vice Chair of the Federal Open Market Committee?,14
-fomc-corpus,1997,I nominate President McDonough of the New York Fed.,12
-fomc-corpus,1997,President McDonough. Now there is an original idea! [Laughter],16
-fomc-corpus,1997,I hesitatingly second the motion. [Laughter],12
-fomc-corpus,1997,All in favor? SEVERAL. Aye.,11
-fomc-corpus,1997,"All opposed? The ayes have it. Congratulations, Mr. McDonough. Back to you, Mr. Chairman.",25
-fomc-corpus,1997,"I congratulate the Vice Chairman. The next item is to elect the staff officers, and Norm has a list.",22
-fomc-corpus,1997,"Thank you, Mr. Chairman. Secretary and Economist, Donald Kohn Deputy Secretary, Normand Bernard Assistant Secretaries: Joseph Coyne and Gary Gillum General Counsel, Virgil Mattingly Deputy General Counsel, Thomas Baxter Economists: Michael Prell and Edwin Truman Associate Economists from the Board of Governors: David Lindsey; Larry Promisel; Charles Siegman; Lawrence Slifman; and David Stockton. Associate Economists from the Federal Reserve Banks: proposed by President Parry Jack Beebe; proposed by President Guynn Robert Eisenbeis; proposed by President Broaddus Marvin Goodfriend; proposed by President Moskow William Hunter; proposed by President McDonough Frederic Mishkin. That is the list, Mr. Chairman.",149
-fomc-corpus,1997,"Are there any objections to the list? If not, I will assume that it has been moved, seconded, and voted in the affirmative. The next item of business is the selection of a Federal Reserve Bank to execute transactions for the System Open Market Account. Are there nominations? If not, I will nominate the Federal Reserve Bank of New York! [Laughter]",74
-fomc-corpus,1997,I second the motion. [Laughter],9
-fomc-corpus,1997,"I don't know whether you have standing, but I will accept your second in any event. We have an official second, thank you. Without objection. We have a significant and controversial issue next, the selection of the Manager of the System Open Market Account. The incumbent, Peter Fisher, has been nothing short of superb, and I say that despite the fact that I pick on him at every meeting and that is my most interesting and enjoyable FOMC activity. Would somebody like to move Peter?",99
-fomc-corpus,1997,I nominate Peter.,4
-fomc-corpus,1997,Is there a second?,5
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"Without objection. Peter, having been duly elected to office, you now have to work. You are on.",22
-fomc-corpus,1997,"Thank you. The next topic on your agenda is the review of the Authorization for Domestic Open Market Operations. I do not have any changes to request at this time, but I did want to use this occasion to bring you up to date on three issues. The first is a preview of coming attractions. Following the Committee's discussion in September of the maturity structure of the SOMA portfolio, we have continued to work both on trying to articulate a set of principles that could guide the management of the SOMA portfolio and to develop some concrete alternative portfolio structures that illustrate different mechanisms for implementing what we have taken to be your consensus objective. So, we continue to work on that, and at some point in the future we will be bringing that back to the Committee. The second topic is an elaboration that I would like to make on an answer that I made last September in response to a question from President Melzer. He asked me how different portfolio structures might affect the securities lending program that we are authorized to implement to assist the dealers. In September, I expressed some discomfort with the current program. I would like to explain that a little and explain other work we are doing at the Desk. The current securities lending program was devised in the 1960s as a response to the back office crisis. It was premised, and continues to be premised, on the assumption that we lend securities, but not to a dealer who is ""short"" securities. The idea was that we were providing securities to facilitate the paper clearing process, and in the event that a dealer was going to have a fail, we would be providing the securities and thereby averting that fail. Well, we have had a book entry environment for some time now, and it has never been entirely clear to me how our lending program really fits in a book entry environment where a dealer often will not know if he is short, in the sense of a cash position to settle, until after the wire is closed. In that case, it is too late for us to lend him a security. I have some sense, perhaps more than a sense, that when dealers do call and ask us to lend them securities, some seem to have forgotten the requirement that they should not borrow to cover a short position. They know they have to affirm that they are not short the issue in question, but I have some reason to doubt the veracity of statements, based on my consultations with senior management at dealer firms. I think we ought to have a securities lending program of some kind, and I think the Treasury depends on it to a certain extent as a backstop to provide some elasticity in the supply of securities in the government securities market. However, we do not want to be the first-stop shopping source for securities lending because that would mean that we would destroy the whole securities-lending industry, given the size of the SOMA portfolio. We are in the process of a review. We are trying to start from first principles but on the assumption that we will have a program. I believe an appropriate program would be consistent with the Treasury's wishes, with our joint concerns for the efficient functioning of the government securities market, and with our market surveillance responsibilities. We are trying to be creative and open in our thinking. I am mentioning this to you now because I would like to invite suggestions from the dealers. I am going to ask them what they think. Some of them have raised the subject with me. I want to open it up a bit and let all the dealers know that we are rethinking the securities lending program and that we would be open to their ideas about how we could structure it given our objectives. I wanted you to hear about that from me before you heard about it from them. I will come back to you and let you know once we have a concrete plan. That is the second topic. The third is to bring you up to date on our discussions with other central banks about liquidity assistance, something we have talked about here from time to time. As the Committee knows, we have put aside for the time being any work on a program that would involve the Desk in doing reverse RPs for the SOMA account with foreign central banks that are in need of temporary liquidity. As the Committee and the Board know, we received an inquiry from about our willingness to act as agent, not for the SOMA account, for a multilateral repo facility. It relates to a rather complex policy of cooperation among The matter is not moving forward with great speed, but we have responded. We are posturing ourselves in a helpful but not pushy way and are leaving our positive reaction on the table. We are now considering the idea of the Desk acting as agent with the Street for individual central banks, much as we did earlier in this decade for authorities. That is, had a portfolio of government securities at the New York Bank and the Desk repoed them out to the Street, providing with liquidity. We conducted those transactions as agent for an undisclosed principal. We are considering a similar function as the pass-through agent particularly for the authority and the I suspect that the also may be interested in that approach. Those are the three works in progress, if you will, on which I wanted to update the Committee.",1055
-fomc-corpus,1997,"Thank you. Questions for Peter? If not, would somebody like to move a renewal of the Authorization for Domestic Open Market Operations?",26
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"Without objection. Ted Truman has circulated a memorandum to which he attached the text of the Foreign Currency instruments--the Authorization, Directive, and Procedural Instructions. He proposes that they be renewed in their current form for the coming year. He also suggests in his memorandum that the current $20 billion warehousing agreement with the Treasury revert to the $5 billion level that existed for some years prior to the increase associated with the now-terminated Mexican assistance program. In keeping with past practices, you might recall that we vote separately on the foreign currency instruments and on the warehousing agreement. Before we do so, I would like to know whether anybody has any questions they wish to raise with Ted.",137
-fomc-corpus,1997,"A point of clarification, Mr. Chairman. The authority for the warehousing is in the first vote, right?",23
-fomc-corpus,1997,"Yes, the authority to enter into a warehousing transaction is in the first vote.",17
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,Is that satisfactory to everybody? Would somebody like to move the first vote on the warehousing transaction agreement?,21
-fomc-corpus,1997,"Mr. Chairman, President Minehan has a question.",11
-fomc-corpus,1997,"Just one small question: When we ratcheted up the amount of the warehousing authority in the late 1980s, what was the proximate cause for that? The Brady policy?",39
-fomc-corpus,1997,That was a period when we and the Treasury were doing quite a lot of intervention in the markets. The Treasury essentially ran out of dollars in the Exchange Stabilization Fund. We warehoused some of their foreign currencies to provide them with dollars so that they could participate with us in foreign exchange operations.,60
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,Would somebody like to move the warehousing agreement?,10
-fomc-corpus,1997,"I move the warehousing agreement, Mr. Chairman.",11
-fomc-corpus,1997,Seconded?,3
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,Without objection. The next item on the agenda is boilerplate; it is the report of examination of the System Open Market Account--,26
-fomc-corpus,1997,"Mr. Chairman, I apologize for interrupting. My views on foreign exchange intervention are well known here, and I will not rehash them. I would like to vote ""no"" on the question of renewing the Foreign Currency Authorization and the Foreign Currency Directive. I thought we were going to have two votes.",62
-fomc-corpus,1997,"Didn't I call for that vote, or did I miss it?",13
-fomc-corpus,1997,You went immediately to the warehousing issue.,9
-fomc-corpus,1997,"Sorry about that; I got distracted. Let us go back and start from scratch. On the first vote, would somebody like to move the renewal of the Foreign Currency Authorization, Directive, and Procedural Instructions?",42
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"It has been moved and seconded. All in favor say ""Aye."" SEVERAL. Aye.",23
-fomc-corpus,1997,"All opposed say ""No.""",6
-fomc-corpus,1997,No.,2
-fomc-corpus,1997,"The ""ayes"" have it. On the warehousing agreement--",13
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,Approval has been moved; is it seconded?,10
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"All in favor say ""Aye."" SEVERAL. Aye.",15
-fomc-corpus,1997,"""No?"" The ""ayes"" have it unanimously. As I said, the next item on the agenda is the report of the examination of the System Account. This report is considered each year on an irregular schedule that relates to the variable date of the New York Bank examination. Would somebody like to move acceptance?",61
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Second?,2
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"Without objection. The next item is a memorandum that came out in the last few days on the Program for Security of FOMC Information. Again, this is boilerplate. Does anybody have any questions they wish to direct to Don Kohn or anyone else? If not, would somebody like to move approval?",62
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,Approval has been moved. Is it seconded?,10
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,Without objection. President McDonough has raised an issue in a letter he sent me about the schedule for releasing the minutes. I thought I might turn the issue over to him to present.,38
-fomc-corpus,1997,"Thank you, Mr. Chairman. We now follow the practice of releasing the minutes of our meetings on the Friday afternoon following the next meeting. So, the minutes for the December meeting are scheduled to be released this coming Friday. The effect of that is that the press report on the minutes disappears into a squib in The New York Times on Saturday. That is not a very widely read edition of The New York Times; in fact, it is the least widely read of the week. By the time newspapers like The Wall Street Journal arrive on Monday, the minutes are old news. Frequently, they are not picked up at all or in a very rudimentary way. That is unfortunate because in the course of the last several years, the minutes have become a quite accurate and revealing indication of what actually happened at the meeting. They are, I think, a very important part of the increased transparency that the Committee is seeking to establish. Therefore, I think it is unfortunate that we continue to adhere to this release schedule because of past practice, though nobody can quite remember exactly why we started releasing the minutes on Friday afternoon. So long as we continue this practice, we will have a very important contribution to our transparency effort disappear into the weekend. We actually have ten releases a year--the Chairman's two Humphrey-Hawkins testimonies and the eight releases of minutes--in which the Federal Open Market Committee is telling the American people what we are trying to do. I believe that greater exposure to the minutes is desirable, and that could be achieved by moving up the time of the release. Apparently, the view held by Joe Coyne and others is that Thursday would be a day that we could use. That would get the Friday press, which is better than having less visibility than I believe is desirable.",360
-fomc-corpus,1997,That seems like an excellent idea to me.,9
-fomc-corpus,1997,There is one technical problem relating to the timing. I would like to turn to Don Kohn merely to raise the question.,25
-fomc-corpus,1997,"I think Thursday resolves our problem. Sometimes, as happened when President Moskow raised a question at the last meeting, it takes a while to revise the minutes, reproduce them, and then get the copies out to the Reserve Banks so that they are available for release.",53
-fomc-corpus,1997,A Thursday release would get the press reports into the Friday morning papers?,14
-fomc-corpus,1997,"That is right. My letter suggested a Wednesday release or a Thursday release after a two-day meeting. If we make it consistently Thursday, that is actually an improvement on my proposal.",36
-fomc-corpus,1997,"Particularly since the minutes are approved at the beginning of the Tuesday-Wednesday meetings, then presumably any problems would be cleared up on Tuesday, so a Thursday release would work.",35
-fomc-corpus,1997,I thought it was a very useful idea. Does anybody have any further questions or comments?,18
-fomc-corpus,1997,"I think it is a good idea. I am sympathetic to it. Just a couple of things occurred to me, and I would be interested in either your reaction or Joe Coyne's reaction. One is that while The Wall Street Journal and The New York Times will likely get the story reasonably straight, are not some other newspapers and television networks likely to get mixed up and indicate that the minutes refer to the meeting that was just concluded one or two days earlier rather than to the meeting held some six weeks earlier?",102
-fomc-corpus,1997,My feeling is that any news media that cant make that distinction will find the minutes so uninteresting that they probably will not carry a report on them. Those that do understand the difference are the ones that are interested enough to publish a report.,48
-fomc-corpus,1997,"I think doing it on Thursday rather than Wednesday probably helps that, too.",15
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,"Any further questions on Vice Chairman McDonough's proposal? Are there any objections to this change in procedure? I will assume then that the Committee will accept the change in procedure, and we will proceed on your recommendation.",44
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,"In this regard, would somebody like to move approval of the minutes of December 17?",18
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,Without objection.,3
-fomc-corpus,1997,"Excuse me, Alan. When would we release those?",12
-fomc-corpus,1997,Thursday afternoon.,3
-fomc-corpus,1997,We will go ahead with the new schedule for these minutes?,12
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,Do we release them at 4:00 p.m.?,12
-fomc-corpus,1997,4:30 p.m.,6
-fomc-corpus,1997,"A question about the timing: If you release the minutes at 4:30 in the afternoon, isn't that awfully late for the next day's newspapers. Don't you want to release them earlier in the day?",42
-fomc-corpus,1997,Our current practice is to release them at 4:30 p.m. on a Friday.,19
-fomc-corpus,1997,For the Saturday papers.,5
-fomc-corpus,1997,"Right, but if we are trying to get more exposure to the minutes as a document to explain our policy, wouldn't it be better to release them earlier if we could?",34
-fomc-corpus,1997,"If I could ask, Mr. Chairman--Joe, we could certainly move the release time to 4:00 p.m. when the stock market closes.",32
-fomc-corpus,1997,"Yes, we could. Some options markets stay open beyond 4:00 p.m.",18
-fomc-corpus,1997,"Maybe we could consult on the timing. The other issue, Mr. Chairman, is that domestic market participants sometimes complain when we release things at the end of the day, particularly on a day when the Japanese markets are opening for the next day's trading in Japan.",52
-fomc-corpus,1997,Are you suggesting that it would be better to release the minutes at 2:00 p.m. so that there is time for trading on the information in our markets? Let me ask you this: Can we leave the decision to Messrs. Kohn and Coyne to come up between them with an optimal conclusion?,64
-fomc-corpus,1997,Consulting with Mr. Fisher.,7
-fomc-corpus,1997,That will slow you down a bit! [Laughter] President Minehan.,16
-fomc-corpus,1997,"I know we have decided this issue, and I do not mean to say anything to change the decision. I had some misgivings, and they have just been heightened by this conversation. I think there is a distinction to be drawn between transparency and seeking media coverage, and I am wondering whether our discussion of these timing questions may not lead to some confusion of the two. It seems to me that we are being transparent by releasing the minutes and having them available and doing them the way we do them. I am a little nervous about going the extra mile to seek the media coverage.",117
-fomc-corpus,1997,"Let me defend the Vice Chair's position on this because I would generally agree with you on this particular issue. The purpose of moving the release forward, as I understand the Vice Chairman, is to give more emphasis to a key policy report that we prepare in a less-than-opaque manner. We do not have that many releases relating to our policy decisions because if we tried to do very many more, I think we would very significantly restrict the functioning of this Committee. The presumption of a very significant portion of the Congress is that we release nothing. As a consequence, to the extent that we make it clear that we do release things, I think it probably is a plus rather than a minus. I would restrict that comment to the official issuances of this Committee with respect to monetary policy. I would not wish to go beyond that.",168
-fomc-corpus,1997,Nor would I.,4
-fomc-corpus,1997,I just wanted to register a degree of nervousness.,11
-fomc-corpus,1997,"It is a valid issue. If we were to start to try to manipulate the press, we would lose and so would the System. Let us move to the Desk operations. Mr. Fisher.",39
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,Questions for Peter?,4
-fomc-corpus,1997,"I have a question, Mr. Chairman. The operating balances that the commercial banking system holds at the Fed have been declining. When in your judgment do we start to get into a range where those reduced balances will materially affect your operations?",47
-fomc-corpus,1997,"I remain an optimist that it is not the level but the rate of change that is important. I am sure there is some single-digit number that would have a material effect on our behavior--whether it is as low as 1 or 0, I am not sure. But as long as we have a gradual move from the current level down toward 10, as we have had in the last couple of years, I am not sure there is any magic point in that range at which our operations will be impaired. My hypothesis that that is the case is progressively being confirmed.",117
-fomc-corpus,1997,"Just to follow up on that question, Peter, we have not made such a decision for a while, but what would happen if we were to change the degree of reserve restraint? Given that the banking industry has demonstrated its ability to operate effectively with smaller and smaller amounts of reserves, do you have any thoughts as to whether a change in reserve conditions would have any impact in terms of what you would have to do in the reserve markets to achieve a given federal funds rate effect?",95
-fomc-corpus,1997,"I don't have any concrete sense there would be anything different in what we would do every day. Maybe we would have to intervene a little more than we do currently. A development that could become problematic, I am hypothesizing, would occur if a critical mass of the major banks in the country were all to become unbound. That is, they would meet their required needs with just vault cash. If every one of these banks were over the other side, we might have a very interesting federal funds market. But I remain an optimist in believing that some banks are still going to be operating in the funds market, even if it is the smaller banks, and that their behavior, if all this continues to happen gradually, would adjust to the new conditions and clearing would take place. All of us around the table know that we do not need required reserves to conduct our business. We can run the banking system on a bigger deficit or just up to zero or we can be filling in with temporary operations. The tools are very flexible.",207
-fomc-corpus,1997,"Of course, even if banks do not need any required reserve balances at the Reserve Banks at the end of the day, they need clearing balances through the day and at the end of the day. So, even if every bank in the system were unbound, I think there would be a demand for balances at the Federal Reserve, and we would be able to implement monetary policy. I suspect there might be a critical level, Peter. I think the rate of change is important. We have been pleasantly surprised that, with this gradual rate of change, the banks have adapted. My guess is that they will continue to adapt, as Peter says, as long as the rate of change is low. But there might be some level at which the clearing needs are the operative needs rather than the reserve needs. Clearing needs vary a lot from day to day. Peter will still be able to get the right average funds rate over a period of time, but there might be more volatility. We just do not know where that point is. I think it is lower than some might have suspected it was, based on past experience. It may be considerably lower than its present range in terms of inducing more volatility. But I think even if no bank is bound, there still will be a demand for balances at the Federal Reserve.",262
-fomc-corpus,1997,I do not doubt that.,6
-fomc-corpus,1997,And still something for Peter to operate on in carrying out the Committee's policies.,16
-fomc-corpus,1997,"As balances have gone down, has anything happened with daylight overdrafts? Is there any pattern in what we are observing?",24
-fomc-corpus,1997,I don't think so.,5
-fomc-corpus,1997,"I agree with Don. I generally think of the cause-effect as running the other way. We had the change in behavior in daylight overdrafts when our policy changes were implemented five or six years ago, and we are now seeing the pass-through.",49
-fomc-corpus,1997,"Further questions? If not, would somebody like to move to ratify the operations of the Domestic Desk?",21
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Without objection. We also need to approve the increased intermeeting leeway for Peter. Would somebody like to move that?,24
-fomc-corpus,1997,Move approval of $12 billion.,7
-fomc-corpus,1997,Is there a second?,5
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,Without objection. Let us move on to Messrs. Prell and Truman.,16
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,[Statement--see Appendix.],6
-fomc-corpus,1997,"That is about as good a ""Chart Show"" as the staff has presented to this Committee in quite a long time.",24
-fomc-corpus,1997,It was very interesting.,5
-fomc-corpus,1997,"Very, very informative.",5
-fomc-corpus,1997,Ted suggests it is because we set a low standard previously. [Laughter] But I will try to take it more positively.,26
-fomc-corpus,1997,"I am sorry you raised the hurdle; that will require more work in the future. Questions for either gentleman? Yes, President Broaddus.",29
-fomc-corpus,1997,"When you started off, Mike, I think I heard you say that the actual fourth-quarter data published after the Greenbook was completed had not changed the profile of your forecast from what you had in the Greenbook. What about the risk to that forecast and specifically the upside risk to which you gave some attention in the Greenbook? What motivates my question is that, if I remember your presentation correctly, when you compared the Greenbook projections with the actual fourth-quarter numbers, you referred to the unexpected strength of net exports, which clearly may prove to be temporary. But I believe you also indicated that a number of final demand categories were stronger than your projection, including consumer spending on durable goods, business fixed investment, and I think housing as well. Does that unanticipated demand late last year give you a sense that there may be more underlying momentum in the expansion and that the upside risks may be a little higher than you had in mind before the fourth-quarter GDP data came in?",195
-fomc-corpus,1997,"Perhaps, but not so much that I felt the need to feature that aspect of the picture. There are some sectors where historically one would look for positive serial correlation. The fact that consumption was as strong as it was according to the published numbers, though only a little stronger than we had forecast, might lead us on the basis of historical experience to anticipate ongoing strength to some degree. On the other hand, the personal saving rate was lower than we had forecast. On still another hand, the fourth-quarter outcome may be a sign that the wealth effect is beginning to show through more importantly and that one of the upside risks that we have noted for some time now is coming more into play than we sensed in the fourth quarter. Those durable goods categories may be a place where that would occur. In the area of business fixed investment, nonresidential structures were stronger. In fact, our reading of the construction put-in-place data for December released just yesterday suggests that there might even be a slight upward revision in that number for the fourth quarter. However, I am not inclined to view that report as a sign of even greater strength going forward. In fact, the spike in such construction was so sharp that there probably will be a slight tendency for it to drop off in the near term, at least in growth rate terms. In the residential construction area, we made a very substantial error. That was an error that we should not have made in our translation of housing starts into residential investment. We did not anticipate that the estimates of housing starts and residential investment would be brought back into line as quickly as they were. We think that, going forward, the changes in residential investment that we have been anticipating remain reasonable. The data on new home sales that we got today still look about the same as in November; they seem to confirm our notion that housing activity has perhaps stabilized at the about the level we were anticipating. So, we would not have a new view of the outlook for residential investment. The other aspect of this is that, if we have a level adjustment in GDP that does imply more output. That might call for more inputs and a somewhat lower unemployment rate than we have in our forecast. But the difference here, given our interpretation of the GDP data, is so small that it really is not material to the outlook.",464
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mike, I had a question that is somewhat similar in terms of the implications of the fourth-quarter number for, say, 1997. At the end of the fourth quarter, the GDP gap was obviously a couple of tenths higher. Are you saying that if you were to revise the Greenbook forecast that the degree of resource utilization by the end of, say, 1997, would be roughly what it is in the current forecast or that the gap would be larger roughly by an amount equal to the difference between the fourth-quarter Greenbook forecast and the advance estimate for the fourth quarter? I am not quite sure of the answer.",128
-fomc-corpus,1997,"You will recall that we learned nothing new about the level of resource utilization in the fourth quarter as measured by unemployment or capacity utilization. So, there is a question of alignment here. In the fourth quarter, by Okun's law equations, we found the unemployment rate to be a little higher than we might have expected, given our GDP path. This new number suggests an even greater excess. We had been anticipating that we were going to catch up, with more of a drop in the near term than suggested by the rule-of-thumb applied to the quite modest increases in output that we were forecasting for the first part of this year. We would just, I think, continue in that vein. It would be, in a sense, a bigger catchup. But any adjustment we make would perhaps be on the order of .1 percent on the unemployment rate, and it is a tough call. We would have to think about whether we would want to alter productivity slightly from the higher level. One has to consider other possibilities as well. I just do not think it is a material difference as we are interpreting the data.",223
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you. On chart 3, in the middle section that shows inflation and price-earnings ratios, I had not seen the information presented quite like that before. I am wondering whether there are enough observations in each of these buckets to get a meaningful average. In addition, I assume that the less-than-3-1/2 percent bucket includes a lot of the earlier years in the period.",81
-fomc-corpus,1997,"Because it is such a long period, there are a lot of quarters to put into these buckets.",20
-fomc-corpus,1997,So this is done on a quarterly basis?,9
-fomc-corpus,1997,"I cannot tell you how many quarters there are in each of those inflation ranges; I probably should have checked that. In terms of the broad sweep, if you look at a chart of inflation versus the P-E ratios--all the noise in the relationship makes it a little hard to see--you can perceive this correlation. There are reasons that are propounded for why this pattern might occur. There are differences of opinion, but it's not difficult to come up with reasons that might lead one to believe that there is this kind of correlation. Clearly, that is not the whole story in assessing whether P-E ratios are abnormally high, abnormally low, or right on the historical norms. One needs to think about the interest rates that are prevailing at these times; one has to think about the expected earnings growth at these times. Perhaps because of the phase of the business cycle, and apart from whatever inflation might lead one to think about the stability of the outlook, other factors could affect what kind of risk premium one wants for investing in equities as opposed to fixed income.",213
-fomc-corpus,1997,"The tabulation was impressive, and I guess I was surprised that the relationship is as consistent as is implied by this table.",25
-fomc-corpus,1997,"To be fair, this table is just a slight variation of the one Abby Cohen has used. As you know, she has been among the most bullish and the most correct stock market forecasters. This is one of the key exhibits she presents in support of her opinion.",54
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Mike, a couple of technical things: The principal surprise to me in the fourth-quarter data was the employment cost index, and I know you looked into that. My question is whether you are satisfied with what you found out because there were a couple of characteristics that looked a little out of line to me.",61
-fomc-corpus,1997,"I can pick one that was widely discussed, namely the behavior of the nonproduction bonus component of benefits. It struck many people on Wall Street who were pocketing huge bonuses as out of keeping with reality. However, as best we can tell, this is probably at least in part a matter of timing. If the bonuses were not paid by mid-December, they will be picked up in the March ECI. It could be that these are errant numbers reflecting just some sampling problems. Conceivably, the firms with the big bonuses might not have been in the sample. So, there may still be grounds for residual doubt about the accuracy there. We have not found any smoking guns that tell us that we should look at these numbers with a jaundiced eye. They are reasonably credible, I think.",163
-fomc-corpus,1997,Is there evidence that the Wall Street bonuses at the end of 1996 were significantly greater than the year before?,23
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,That is what I read in the newspapers.,9
-fomc-corpus,1997,What is the order of magnitude? What information have you got?,13
-fomc-corpus,1997,At some of the major firms the level was approximately 50 percent higher in 1996 than in 1995. The tax receipts of New York City and New York State reflect this boom as well.,41
-fomc-corpus,1997,When do they usually pay the bonuses?,8
-fomc-corpus,1997,The earliest is December and most of them are paid out by the end of January.,17
-fomc-corpus,1997,Our supposition is that a lot of this discussion just did not recognize that a good share of the bonuses will be paid out after December.,28
-fomc-corpus,1997,"So, the seasonal adjustments do not capture this change?",11
-fomc-corpus,1997,"I don't know whether that timing is new, though I think there has been some shifting over time. In part, it is inconvenient in terms of tax planning to get this big slug of money very late in the year. But I think there are other considerations, too.",54
-fomc-corpus,1997,My second question: What is your estimate now for fourth-quarter productivity? Is it up 1-1/2 to 2 percent or something like that?,32
-fomc-corpus,1997,My recollection is it that it is up 2-1/2 percent.,17
-fomc-corpus,1997,2-1/2 percent?,7
-fomc-corpus,1997,Yes. That is based on a reasonably firm view of what the nonfarm business output was for the quarter but only a tentative view about what the total hours worked ultimately will look like. We think we have a reasonable handle on it. It will probably be in the 2-1/2 percent vicinity.,62
-fomc-corpus,1997,What is the comparable compensation per hour figure?,9
-fomc-corpus,1997,It's 3-1/2 percent.,9
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mike or Ted, I have a question on your oil price comments. I don't disagree with your projection of a decline in oil prices. But I am hearing more from individuals in the energy industry that, given their current outlook for world oil demand and the limited ability of producers to accommodate that demand, they are increasingly of a mind that these prices will stay higher longer. As you judge this and from what you hear, do you have any inclination to move away from your baseline projection toward a higher price scenario?",101
-fomc-corpus,1997,"I think there are two aspects to your question. One would relate to the short term, meaning the period we are looking at here, and the other would be a longer-term perspective. With regard to our assessment of what the industry is saying about the short-term supply and demand balance and abstracting from accidents of one sort or another like cold weather in Europe, hurricanes, and so forth, we are in fact quite conservative in our use of conventional relationships in terms of what the industry itself says about new production coming on line over the next year or so. That said, I think that for a medium-term forecast going out beyond this period--and leaving aside the little run-ups that we have had--we might be more inclined to shift from an almost flat nominal price trend, which implies a real price decline, to something that might be more flat in real terms. While there is no inviolable arithmetic involved here, I think almost everybody believes that we have to get there ultimately. That's because of a sense that some of the technological improvements that have come on line and other factors will come into play to produce that result. Now, I say all that partly against the background of an assumption that Iraq will stay put. If we assume that Iraq will reenter the market with 3 million barrels a day or something like that, then we are postponing that scenario for 18 months or a couple of years before the extra supply is absorbed. The one negative on the other side is that a good deal of this new production is in parts of the world that are not the most stable; one example is Columbia. So, we might have a lower level of prices for a while, but a firmly higher level of volatility as a result of interruptions of one sort or another in the supply of oil. That's the best I can do.",367
-fomc-corpus,1997,Okay. Thank you.,5
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I have a couple of questions, Mike, following up on what President Stern was talking about in terms of productivity assumptions. You have a discussion in the Greenbook about a change in your thinking about the trend rate in productivity growth. I was interested first of all because it moved down rather than upward, and second it would appear to have implications for potential output. I wondered what those implications were--they are probably part of your forecast--and what your range of uncertainty is around that trend in productivity growth because it does seem to have an impact. I don't disagree at all with the trend in your overall forecast. I just wonder how those changes came about and whether they are reflective of something different in your thinking recently.",143
-fomc-corpus,1997,"We aren't certain and I don't see how anyone really could be in this area. We had clung with great determination to the assumption that the underlying growth trend in this decade would prove to be 1.1 percent. We have been continuing to reassess this assumption, and I guess particularly because this meeting is one of those when a longer-run perspective may be important to the Committee's deliberations, we took another hard look at it. What we perceived was that a trend line well below our 1.1 percent growth assumption clearly would fit in a more natural way what we had been experiencing up through at least the third quarter of last year. The historical pattern is that productivity tends to be above the trend in level terms until almost the end of an expansion, if not all the way to the end of the expansion, and it then dips down below trend during a recession and the early recovery phase and subsequently moves back up. What we found is that, with a 1.1 percent trend line, we were well below that trend line now and have been for a while even though the expansion has not come to an end. That just did not fit. Something like .7 percent gave a picture that looked more like the recent history. Now, there may be reasons why earlier historical patterns would not hold this time. The adjustments of labor to output in the short run may be different, and so on. But, when the divergence persists over several years, that is a troubling pattern. We also noted that there were reasons to think that output, and thus productivity, may have been underestimated over the last few years. The question is how much. One could look at the difference between gross domestic income and gross domestic product--a difference that has become quite sizable--and conclude that production really has been much stronger than the data suggest and productivity greatly understated. But looking at the history of revisions and what little we know about what might be the flaws in the income-product data, we thought that was a rather aggressive assumption about what true output and productivity had been. So we in a sense compromised. We did assume that the trend in actual levels of productivity has been understated in recent years, but only by enough for us to try to square things by assuming about .9 percent trend growth in productivity. The fourth-quarter number actually is reasonably helpful in getting a picture that looks sensible with that kind of trend line. Now, this would naturally feed through to our potential output assumption, but there are offsetting considerations. When we looked at the trends in the average workweek and the factors that get us from nonfarm business output to GDP and so on, we were led to conclude that an estimate of about 1.9 percent for the period since 1990 still looked pretty good. So, we have not changed our potential output trend; it is still about 1.9 percent per year, chain-weighted on a 1992 base.",590
-fomc-corpus,1997,"Just to follow up on that: The lower trend rate of productivity growth, then, has been consistent in your mind with where we are on an unemployment basis and where we are on a change-in-inflation basis.",44
-fomc-corpus,1997,That was another factor. We looked at Okun's Law. It has worked pretty well.,19
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,"It does not in itself suggest that output growth has been a lot more rapid than measured. That also gives one pause because, while Okun's Law is not a relationship one can depend on from quarter to quarter or even year to year, over extended periods it works pretty well. So, that gave us some pause as to whether we should maintain the seemingly optimistic view that the productivity trend was 1.1 percent. Having to adjust that trend, we also adjusted our sights on what actual productivity growth would be over 1997-1998, and that is how we formulated our forecast.",119
-fomc-corpus,1997,"Further questions? If not, let me raise the question that President Jordan raised in his letter to all of us with respect to our individual forecasts. I always thought that the combination of the central tendency and the range was an effective way of summarizing what everyone has been trying to convey. It is not clear to me why that is not the case, and I am just curious to know, Jerry, what you think could be significantly improved and what you think you can infer from the greater detail.",99
-fomc-corpus,1997,"My emphasis was not so much on the distribution, although I would like to see the detailed distribution of these forecasts because I know that three on each side get tossed out to arrive at the central tendency. I am more interested in the multi-year aspect of our efforts to address our problem of distinguishing between a forecast of what is going to happen in the near term and a public statement about what our objectives are.",81
-fomc-corpus,1997,"I think that is an issue that will be coming up later. So, you are not focusing on the question of publishing more detail than we do currently?",31
-fomc-corpus,1997,"No, I am not worrying about that. More detail would not add much to what we already publish, though I don't know why we don't share the detailed distribution. I don't care who makes which forecast. But I am interested in trying to evaluate specific forecasts in terms of what I think of as my version of the internal consistency of a forecast. It can tell me a little about peoples' thinking when I look at their forecasts of output, unemployment, and inflation.",93
-fomc-corpus,1997,"I'm not terribly certain what you would learn if you looked at that. The degrees of freedom that exist in playing around with those numbers, as you know better than anybody, are quite large. Let me suggest this, rather than getting into a discussion now, which I don't think we really need to do. You all have gotten Jerry's letter. If you will communicate your views to Don Kohn, perhaps we can get a sense as to whether people think there are reasons to change what has been a long-standing practice. Is that satisfactory, Jerry?",110
-fomc-corpus,1997,That would be fine.,5
-fomc-corpus,1997,Let us move on to the Committee's discussion. Who would like to start? President Parry.,20
-fomc-corpus,1997,"Thank you, Mr. Chairman. Strong growth has continued in the Twelfth District in recent months and the base of the expansion is broadening. The recent trend of growth has been robust in California despite some lack of cooperation from Mother Nature. Severe flooding in northern California destroyed a large number of homes and disrupted many businesses. But the extent of the recent losses is small relative to overall state income or to the losses from some of the other natural disasters that have shaken the state in recent years. Property damages from the Loma Prieta and Northridge earthquakes were roughly three to five times the damages from this year's flooding. I might note that the damages from our recent flooding in California were about the same as those from last year's flooding. In our other most populous states, growth has picked up a bit lately. Employment growth in Arizona and Oregon is averaging in the 4 to 5 percent range. Job growth also moved up to about 4 percent recently in Washington, reflecting hiring by Boeing to ramp up its production in an effort to work down its huge backlog of domestic and export orders. Several types of nonresidential building activity also have picked up recently in the District, consistent with the national strength that we saw in this category in the fourth-quarter GDP estimates. For example, we have seen a large recent pickup in office construction activity as the fundamentals in that market have improved considerably in some of the District's fastest growing metropolitan areas. Office vacancy rates are particularly low in Seattle and in the San Francisco Bay Area. Turning to the national economy, the stronger-than-expected real GDP growth late last year was related to an apparently temporary jump in exports. That suggests that we should see much more moderate growth this quarter. Nonetheless, last quarter's surge still means that the economy is operating at a higher level than seemed likely last month. This puts additional upward pressure on inflation. The recent rise in the dollar and in long-term interest rates may slow the economy's growth rate later this year. However, we still would expect real GDP to rise at or slightly above its trend growth rate this year if the funds rate were to remain at its present level. With regard to inflation, we expect the CPI to rise by a bit under 3 percent this year. For the longer term, however, I continue to see a significant risk of an increase in underlying inflation over the years ahead. While judging resource utilization is difficult, the unemployment and the capacity utilization rates taken together suggest that excess demand pressures are building in the economy. Even with a healthy dose of skepticism about estimates of resource utilization, it appears unlikely that containing inflation, let alone reducing it which I certainly would prefer, will be forthcoming without a tighter monetary policy in the future. Thank you.",547
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. There are a couple of things that I want to talk about. One is a report that the National Federation of Independent Business made two weeks ago covering the end of last year and the beginning of this year. I thought there were some interesting items in the report. The percentage of firms reporting higher prices plunged to record lows, but plans to raise prices in the next few months jumped to a 12-month high. Reports of compensation increases reached a new record high. Some 32 percent of the firms said they had raised compensation, and that is 8 percentage points higher than in any previous report. But on the other side, plans to raise compensation in 1997 fell significantly, almost to a record low. Capital spending plans remain strong. The report now says that 37 percent of the respondents are planning to increase capital outlays. A record 76 percent of the firms reported actual increases in capital expenditures last year. Let me turn to developments in my District. First on the retail level, who is in retail distribution nationally, and it is not always clear whether his remarks apply to regional or to national developments. He said that retail sales were very good in January in spite of some of the weather problems. They had been somewhat disappointed about December. He expects that wages in the retail sector will rise 4 percent this year versus a 3 percent increase in 1996. Whether or not that rise can be justified in terms of greater efficiency or what some might call productivity was not clear from his comments. We are now hearing from contacts in the construction sector in the region that they are no longer expecting some falloff in 1997 from 1996; in fact, some concerns are being registered about possible overbuilding in the commercial sector. The claim being made is that what is already in the building pipeline to be completed this year, especially retail space, could result in oversupply. Labor contacts tell us that labor negotiations in the construction industry are going to be tough this spring, meaning that they plan to catch up. The view in the unions is that the cost of benefits has been coming down in the last few years and that the contractors are adding to their incomes as a result. The workers feel that they now deserve larger wage increases in the next contract than they received in the last contract because of what they see as very substantial increases in productivity and efficiency in the construction trade. They believe they are not benefiting from that improvement and that now is catch-up time. In the steel sector, we are hearing that wages are expected to be up about 3-1/2 percent this year, and our contacts say that such an increase is in line with gains in productivity. However, they think prices are going to end the year lower than where they are currently and that 1997 prices will average below those in 1996. So, earnings at best will be flat and are more likely to be down. Steel industry executives also continue to be concerned about imports, especially because of the appreciation of the dollar. In our area we are being told, mainly by suppliers of automotive parts, that auto sales will be down this year from 1996. I thought one report on labor was of particular interest. There are 70,000 manufacturing workers in northeast Ohio, and their average age is in excess of 50 years. One of the large firms, a steel company, put out a notice that it wanted to hire 100 entry-level production workers. They stopped taking applications after two days when they had received 1,500 applications for jobs with starting wages of $38,000. However, they could not find 100 qualified workers out of these 1,500 applicants. So, there is concern about the quality of the work force. One note on the housing market: I don't know how general this phenomenon is yet, but we are hearing reports that prices of houses on the high end of the scale are softer and that these houses are staying on the market longer. Quite a few of us took a tour of facilities so that we could report to Don Kohn on what is going on in The discussion focused on the productivity and efficiency challenges is facing. They claim to be in the midst of major leaps in productivity due to new equipment technologies. The latter are leading to the introduction of new products that are substituting for products previously made out of other materials. All this raises some interesting issues. The time for designing and testing a new product a couple of years ago was measured in months. It is now measured in days, because of the use of computer assisted design equipment and new testing procedures. Computerization also has enabled to achieve extraordinary gains in efficiency by using production equipment that is fairly similar, or looks similar, to existing equipment. As recently as 1995, it took them 8 hours on average to change a mold. This year they are planning to do it in 45 minutes. They anticipate machine downtime in 1997 to be 1/4 of what it was in 1995 and their scrap rate to be less than 1/2 of what it was in 1995. They operate on a rolling 3-year plan, and they say that they currently expect a 3 percent per year increase in their labor costs, but their output prices will fall 1 to 2 percent per year. Their earnings are good and they expect them to continue to be good. For 1997, they indicate that their labor costs will average about 5 percent of the wholesale price of a product. We looked at one product in particular--the --which sells for about $10.00 at Wal-Mart. Last year, they were making 2 cans in 35 seconds on one machine, and the new equipment they are installing now will make 4 cans in 35 seconds. The wholesale price will be $6.00, and there will be 30 cents of labor cost in the $6.00. I asked them about the effects of NAFTA on their operations in Mexico. They said that NAFTA was largely irrelevant to their production there. They noted that they have virtually no turnover of labor in their operations. All new hires start on the night shift. It takes approximately 30 years of seniority for a worker to get moved to the day shift. [Laughter] In Mexico, on the other hand, they are experiencing 25 percent turnover. So, recruiting and training in Mexico are huge costs to them. They say that in the end the difference in labor costs is about $2.00 an hour, but when the labor cost is only 30 cents per $6.00 trash can, it is irrelevant. They say that labor could be free in Guangdong province and they still could not make such products there and import them at a profit. So they have crossed over a threshold in which the value added coming from labor is so small because of efficiencies in production that they cannot afford to produce at a remote location and move the product around. They have to have their manufacturing facilities close to their points of distribution. They said their biggest challenge is being able to respond when they know every single day which of their products were sold and need to be ordered in each and every store of a Wal-Mart or some of the other chains. One more note on District manufacturing companies: When they respond to our questions about inflation, they say they are experiencing no inflationary pressures even though their wages are increasing 3 percent or so and their earnings are very good. Their earnings were good last year and are expected to remain so in 1997. So, their story provides at least indirect evidence that productivity gains are quite high and are expected to be quite high in an environment of very, very low labor turnover. Thank you.",1563
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. Overall, 1996 was a very good year for the Seventh District. For most of our key manufacturing industries, shipments exceeded their early 1996 expectations and housing activity for the year as a whole was much stronger than anticipated. As we move into 1997, expectations are that these sectors will continue to operate at very high levels, but perhaps not quite as high as last year. Specifically, discussions with major producers in our District indicate that most of them are expecting 1997 sales to post small declines from 1996 levels. These producers include autos, construction equipment, machine tools, appliances, and steel. A major exception is the agricultural equipment industry, which anticipates a better year than last year. Most of our key industries are expecting the first half of 1997 to be stronger than the second half, and current data and anecdotal reports offer very few signs that activity has declined so far. Manufacturing activity in the District continued to expand in early 1997, as indicated by the purchasing managers' reports for Chicago, Detroit, and Milwaukee. There has been some improvement in the heavy truck industry as noted in the Greenbook. In terms of consumer spending, January looks like a repeat of December. The underlying sales rate for light motor vehicles in January appears to have continued at about the December pace, although the final aggregate sales number may come in higher for a couple of reasons. Some foreign name plates reportedly are including some December sales in their January numbers, and those name plates have increased incentives aggressively, aided by the strengthening of the dollar. Reports from retailers have been mixed but suggest on balance that January post-holiday sales are up from a year ago and about the same as in December. For some retailers that means that January was better than they expected, similar to what Jerry Jordan mentioned. Large District retailers and discount chains entered 1997 with lower inventory levels than usual, allowing at least some of them to avoid the heavy discounting often associated with January clearance sales. Labor markets in the District are still very tight. Unemployment rates in each of our five states continue to be below the national average. Although there still does not appear to be a significant spillover into prices, reports of increased pressure on wages have become more widespread. The head of a major temporary help firm indicated to me that he definitely is seeing wage pressures. He expects wages of temporary workers to increase an average of 5 percent this year in contrast to the 2 to 3 percent gains last year and unchanged wages in 1995. Turning to the national outlook, in December my assessment of 1996 was that GDP growth in the second half had decelerated from the pace in the first half. Even so, I expressed concern that output was still somewhat above potential and, looking forward, that higher inflation rates were a risk. With the fourth-quarter data now available, it appears to me that the risks are clearly on the upside and they seem higher now than they did in December. By the rules of the game to date, this Committee has focused most of its inflation attention on the CPI and the core CPI and in the time that I have been here a 3 percent inflation rate was viewed as progress toward lower inflation. With the recent methodological adjustments by BLS, however, we need to recalibrate that standard now to a lower number, probably about 2-1/2 percent. By this standard the Greenbook outlook for core CPI inflation in 1997 and 1998 has deteriorated substantially since last month.",714
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The burst of year-end 1996 economic activity that shows up in the national data and that people have already mentioned around the table is not reflected in either the most recent data for our southeastern region or the anecdotal reports that we are getting from directors and other people we talk to. While we would still characterize our regional growth as moderate, we clearly are seeing some slowing from the pace that we saw earlier when our region led the nation in job growth. In manufacturing, I have reported at almost every meeting on the weakness and the significant loss of jobs in the textile and apparel industries, and that weakness continues. We are now seeing weakness in both pulp and paper. And as housing construction appears to have peaked, we also are seeing some slowing in the production of home-related products like lumber, carpets, and appliances. That in fact is a cyclical development that we have come to expect because an important part of our manufacturing sector feeds off the national housing industry. On the other hand, our relatively new and quietly growing southern auto industry is showing some modest strength, and the prospects are for more of the same in the period ahead. Reports of less robust capital spending plans by manufacturers in our region also suggest some deceleration in the pace of growth in the period ahead. In construction, single-family home sales and construction have both slowed noticeably in our region and multifamily activity is now clearly past its peak. Retail construction also has slowed. At the same time, commercial construction remains strong, particularly that of office space where vacancy levels have gotten quite low. We are seeing some speculative building in Atlanta and some other southern cities but not yet at a worrisome level for a region that needs space to accommodate companies moving into the area. Retailers, who are coming off what they characterize as generally satisfactory year-end 1996 sales, are telling us that they are comfortable with their inventory levels and their outlook for sales in 1997. The well-publicized freeze of vegetables in Florida was severe, the worst in seven years, with most of the crops damaged and losses around the state estimated at $250 million. Crops like corn and beans can be recycled in 45 to 60 days, but imports of food from Mexico and other Latin American countries are reportedly taking up some of the slack. Finally, labor markets remain tight in our region. I would characterize the change since our last meeting as indicating somewhat less pressure and somewhat fewer shortages in certain skills like those in construction, but at the same time new geographic areas in the region are reporting tightness. Even with continuing tightness, extraordinary wage pressures are still isolated and do not yet appear to be spreading. At the national level, like almost everybody else, we underestimated the strength of the economy in the fourth quarter. Like the Greenbook and others, we anticipate more moderate growth in 1997 and on into 1998. We are among those who see somewhat slower growth in 1997 than is projected in the Greenbook, and consequently we do not expect the unemployment rate to move quite so low as in the staff forecast. The good balance we continue to see is encouraging and happily it leaves the economy in a position that is less vulnerable with regard to the inevitable shocks that will come along. In my view, the risks to such an outlook for economic activity are slightly to the upside and--as others have indicated--consumer spending represents the greatest risk. If, despite the deterioration in consumer balance sheets, strong income growth and confidence fuel consumer spending beyond our estimates, we certainly could get increased overall demand pressures. In particular, if consumers add to their spending by lowering their saving rate or capitalizing on their increase in wealth, the pressures on resources will be exacerbated. Of course, the tight labor markets that we have talked about and are watching closely, as well as the scenario that Ted Truman mentioned in which oil prices linger at higher levels, could among other things create pressures that feed through to higher price inflation if accommodated by monetary policy. As is always the case in judging inflationary risk, we must make judgments about the current stance of policy. While the recent experience with the growth of the monetary aggregates raises some questions, other measures of policy including real rates of interest do not suggest to me that our policy is clearly in an accommodative stance. Given that the broader measures of inflation and the adjusted CPI continue to hold at moderately low and relatively steady levels and are not projected to show any significant deterioration until 1998, we appear to be at a point where we can feel reasonably good about both the outlook and current policy. Thank you, Mr. Chairman.",931
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, overall economic growth in our District seems to be moderating a little. The level of activity is still high, especially in manufacturing. Some of the information we have for our District differs somewhat from what Jack Guynn was saying about the Atlanta District. We see substantial strength in a number of industries--chemicals in Virginia and West Virginia, textiles for the first time in a while, and lumber and aluminum products as well. We hear that a number of plants in these industries are operating near full capacity. Labor market conditions, as seems to be the case elsewhere, have not eased at all in our region as far as we can tell. Reports of rising wages and prices--and this is where our information may differ a little from some things that other folks have said--while certainly not universal are more widespread now than they have been in the last several months. To give you an example of the kind of anecdotal information we are getting along these lines, of a large building materials and hardware chain told us that a number of his suppliers are now trying ""to go up in price,"" to use his words. To be a little more specific on this, we did a special survey recently of about 100 firms in both the manufacturing and services sectors. On the manufacturing side, strong foreign competition is still keeping textile makers and metal producers from passing along increases in wages and the cost of basic materials. But in some other industries--notably furniture and paper, electrical equipment, and machinery--we get reports that some of these companies are now able to pass along their wage and other cost increases more easily than had been the case in prior months. For example, one producer of electrical equipment said that his customers now see and understand that price increases this year are almost inevitable. A manufacturer of bearings reported that his customers seem now to be resigned to some price increase later this year. In the services sector, nearly two-thirds of the firms we contacted reported increased business costs, and half of these said that they expected to be able to pass through at least some of these higher costs to their customers. Again, this tendency is not universal but we see considerably more evidence of it and get more frequent comments along these lines than we did just a few months ago. Turning to the national picture, the projections we submitted are fairly close to those in the Greenbook, but we got there by a different route. Let me quickly explain that. We used a small VAR model in developing our projections. When we initially generated projections under the assumption of no change in monetary policy, the result was an increase in the CPI to a rate above 3 percent this year and next year despite the likelihood of some diminution in energy price pressures over this period. So, we then redeveloped our projection on the assumption that the Committee will take whatever policy actions seem to be required to hold the CPI at or below 3 percent, starting in the period immediately ahead. In our particular model this requires an increase in the funds rate of about 50 basis points early on. The main point I want to make here, though, and I am trying to respond to the point that Jerry Jordan mentioned earlier, is that our 3 percent CPI projection is not just an unconditional forecast but a projected result for the year ahead. It is consistent with the Committee's longer-term projection for inflation based on the assumption that the Committee will take whatever policy action seems necessary to increase the probability that we will achieve our inflation objective. With respect to the Greenbook itself, I have to say that the general contour of the Greenbook projection troubles me a little. It shows the core CPI rising to about 3-1/4 percent in 1998. As I think someone else has already mentioned, the rate would rise to about 3-1/2 percent except for the technical adjustments by the BLS. Moreover, the language of the Greenbook, as I read it, suggests that the risk of error is tilted a bit to the upside in the current forecast. What really caught my eye in the Greenbook, though, was a statement that our forecast has edged further in the direction of a more cyclical pattern of inflation overshooting, which typically has been followed by monetary tightening and then a period of economic weakness. I assume the tightening referred to here is the possibility of a very sharp tightening at some point down the road after we may have let things get away from us, and that tightening could then be followed by a very weak economic outcome. I hope we will do whatever we can to avoid that outcome. Thank you.",919
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. District economic activity has picked up in the past few months. Auto dealers reported a flat November and December compared with a year ago, but most expect a pickup in the first half of 1997. District auto production, which benefits from the popularity of light trucks, is expected to rise 3.6 percent in the first quarter from its year-ago level and to rise even more in the second quarter. Most District contacts are optimistic about the near term. Many firms have announced plans for expansion, but tight labor markets remain a problem for many employers, especially in the construction and information technology industries. There are a few reports of rising prices, mainly in the transportation and public utility sectors where increased energy costs are being passed along to customers. At the national level, the economy is on a relatively balanced growth path. With a 4.7 percent surge in the fourth quarter, the year's real GDP growth came in at a rate of about 3-1/2 percent, well above the 1-1/2 to 2-1/2 percent forecast range that we reported to the Congress a year ago. Momentum from 1996 and the absence of significant imbalances in the economy make us optimistic about the growth outlook for 1997. Our projections are for real growth at about trend, with a continued upward creep in the CPI by another couple of tenths. Quite apart from Jerry Jordan's letter, I find this semi-annual forecasting exercise somewhat frustrating and potentially misleading. We are asked to assume what would be an appropriate monetary policy in making our forecast. In my view, an appropriate policy would be one that moves inflation systematically lower over the next several years and one that makes that objective explicit. This approach would certainly affect the inflation outlook for 1998 and 1999 and quite likely for 1997 as well. In fact, under such a policy regime our forecast for 1997 CPI inflation would be considerably lower than the one we actually submitted. But if I submitted that lower number knowing the FOMC has not shown much inclination to pursue the policy regime I just described, and let us say some other members did as well, what would be the result? The forecast range and perhaps the central tendency of the forecasts submitted by the members would be biased downward. It would look as if the FOMC as a group is more sanguine about the inflation outlook than it is in fact. I think we need to be concerned about how the public interprets these forecasts, because they could be used to decipher our implicit inflation objectives. What did the public learn from 1996? In February, we projected CPI inflation in a 2-1/2 to 3 percent range. As the year progressed, both output and inflation came in well above expectations and long-term bond yields rose, yet we took no policy actions. Instead, we raised the CPI inflation forecast in July to a range of 3 to 3-1/4 percent. So, what is the message about our inflation objective? I think one could conclude--I don't say I believe this--that we seem quite complacent with CPI inflation at or even above 3 percent, which I think is an unfortunate conclusion. In my view a far better approach would be for us to specify our definition of price stability. Presumably, it would be less than 3 percent. Some of us had suggested a 0 to 2 percent range, the midpoint of which happens to coincide with the Boskin Commission's estimate of the upward bias in the CPI. Setting such a longer-term objective and a timetable to achieve it would make our forecasts more meaningful for the public and ourselves. Thank you.",745
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The economy in our District continues to do well. Our directors and other contacts report solid growth throughout the District. Manufacturing remains quite healthy. Construction activity, while off slightly due to weather conditions, is keeping pace with activity of a year ago. I might mention that who is involved with indicated that they had a very strong year. covers much of the western part of the United States, and what is happening to them provides a pretty good idea of developments in the area's economy more generally. I would like to share some of that. In terms of monthly year-over-year data, had increased more than 6 percent for the sixth consecutive month in December. Shipments of the leading commodity groups were all posting increases, with energy products up 11 percent--a lot of that being coal hauled out of Wyoming. Intermodal shipments were up 8 percent; finished automobiles were up 4 percent despite some lingering effects of the auto strike, and automotive parts were up 11 percent. This activity continued through January, and while results were under budget last month they would have been on budget except for the weather conditions in the western part of the system. So, with this very good start for 1997, they are looking for a very good year again. Reinforcing this generally favorable information from our District and from particularly, we also saw some pretty sharp increases in District employment for both October and November. And on the basis of some of the anecdotal information we are getting, such increases seem to be continuing in December. In our region's energy sector, drilling activity is up significantly over a year ago because of the effects of the cold weather on oil prices. Retail prices, I must continue to report, are not showing any sizable increases, but wage pressures continue to be reported in our labor markets and these are becoming more prevalent. On the national level, while I may differ on the components, I am in broad agreement with the outlook presented by the staff here today. In particular, I expect real GDP to grow at or slightly above its long-run potential this year and on into next. With GDP growth coming in faster than expected in the fourth quarter of last year, I think the economy is further beyond its long-run production capacity than we thought in December. I want to make one specific observation on the topic of inflation. Coming back to my question earlier to Ted Truman, I have some concern that the energy price increases that we saw last year may not be as transitory as we may have thought. Energy prices may come down but perhaps not as much we had originally thought, given some of the conversations we have had with contacts in the energy industry. I also am concerned that the moderation in compensation costs, particularly in the benefits areas, may be reversed as we go further into this year. Looking ahead then and given the current stance of policy, I would expect the economy to continue to grow above trend, perhaps only slightly so, and inflation to creep up systematically as we look forward to the next 12 to 18 months.",612
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. New England's economic picture remains much the same. It is characterized by slow, steady growth overall and pockets of weakness in Connecticut, Maine, and Rhode Island that are offset by islands of strength, notably in Massachusetts. Overall employment growth is modest at a rate only about half that for the country as a whole. At the same time, unemployment rates are low and labor markets are very tight in certain areas, particularly for certain skills. This situation is especially true in the greater Boston area and some other areas in Massachusetts, where local labor markets have unemployment rates in the 3 percent and the low 4 percent areas. Rates this low were last seen there in the late 1980s. Added to this in the Boston area, we have rising consumer prices, rising housing prices, very low commercial vacancy rates, anecdotal reports of lowering credit standards and terms, and the general ease of financing just about anything. So, we get a picture of an economy--at least in the Boston area--that is poised for a boom. Despite this, wage pressure seems small. Average hourly earnings in the region increased only 2 percent or so over a year ago, and the rise was even smaller in Massachusetts. Our contacts suggest that wages will rise 3 to 4 percent in the coming year, with some outliers--especially in manufacturing--granting higher increases. Benefits cost increases, however, are expected to be small, with actual decreases in workers' compensation costs. Some of the anomaly of a growing, and in some areas close to booming, economy and very low wage increases might be explained by several anecdotes we have heard recently. At our regular New England council meeting--this is a group of small business people with some labor and social services representation--a common theme developed. In every case the small business representative, whether in the automobile, the jewelry, or the measuring devices industry, reported intense pressures from all their customers--particularly large customers but not just the GMs or the Wal-Marts--not just to hold the line on prices but to lower them year after year. In another conversation with a local consultant who does a lot of work for I was told that cost plus is no longer used as a method of setting prices. Rather, follows a price-minus policy, which looks to adjust internal costs and prices paid to suppliers to maintain or improve margins in a constant final price environment. Clearly, the pressure that large customers exert on smaller suppliers in New England is limiting what price increases they can charge, what prices they will pay suppliers, what margins they earn, and what wage increases they can afford to pay employees. But these companies also face tight labor markets for skilled workers, even in small businesses. Even sophisticated clerical workers now are getting too expensive for some of these businesses. So, there is a considerable tension building, and I think we had a greater sense of that in our last meeting than we have had before. I believe there are similar tensions on a nationwide basis, and they are very evident in the forecast provided by the Greenbook, in the data compiled locally for our own Humphrey-Hawkins forecast, and in many commercial forecasts. We are not as pessimistic about productivity as the Greenbook authors, and we are projecting somewhat higher potential growth rates. So, by 1998 our unemployment forecast does not drop down to 5 percent. However, even with that, we see trajectories for the core CPI and the ECI quite similar to those suggested in the Greenbook--a decided upturn in those measures of inflation. We do not see inflation rising now, though there are certainly signs of wage pressures. But given the solid path of economic growth suggested by the employment data, increases in personal income, rising consumer confidence, continuing business investment, liquid financial markets, and increased consumer wealth, we are led to expect very definite signs of capacity pressures on the economy that will lead to rising inflation. I recognize that there are restraining influences in the foreign sector, in government spending, and perhaps in residential investment, but I am impressed by the fact that the surprises in 1996, if one looks at the year as a whole rather than quarter by quarter, have largely been on the upside. It is hard to believe that the tensions within the economy are not building. The issue would seem to be when to address them.",879
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The reports on the Second District's economy have been steady to slightly stronger in recent weeks. The region's job market, which had shown some signs of slowing in September and October, picked up a bit in the final two months of 1996. In New York State, private nonfarm payrolls grew at an annual rate of 1.1 percent in November and December versus 1 percent in the prior two months. Total payroll employment grew at a modest 0.5 percent annual rate in both of the last two months of the year, held back by ongoing downsizing in government. The unemployment rate drifted up from a 6-year low of 5.9 percent to 6.1 percent, but the entire increase was due to faster labor force growth. In New Jersey, private nonfarm payrolls grew at a 2.6 percent annual rate in the final couple of months of 1996, up sharply from earlier in the year. As in New York State, however, sharp declines in government employment restrained overall job growth to a still quite brisk 1.6 percent. The state's unemployment rate is 6.2 percent. Consumer spending seemed to be rather good. Major retailers reported that holiday sales in the region were on or above plan, with November-December same store sales running 5.8 percent above 1995. Post-holiday sales seemed to be quite strong. A separate survey of small retailers across New York State showed same store sales up 4 to 6 percent from the comparable period in 1995, with even stronger reports coming from Manhattan. Sales there were perhaps not unrelated to the earnings in the securities industry; apparel and jewelry sales were particularly strong. New York State decided to take a 1-week vacation in its 8-1/2 percent sales tax and that helped to clear out the stores in the third week of January. Big-ticket durables, however, were somewhat slower sellers, especially furniture and electronics. Discounting by the retailers was lower than was required in the previous year, and so their earnings seemed pretty good. Residential real estate markets are gaining momentum, led mainly by the multifamily sector. The apartment market in New York City is getting quite strong and the prices of New York apartments are going up. Another indication of the same sort of phenomenon is the old masters' sale at Sotheby's last week, which brought prices that were far above the expectations going into the sale. The office market in Manhattan continues to improve. The New York District therefore is looking rather good. The inflation rate for the greater New York area--2.9 percent for Q4 to Q4 in 1996--is a little better than that for the country as a whole. On the national picture, we think GDP growth will moderate substantially from the unsustainable 4.7 percent rate in the fourth quarter of 1996. Consumer spending started the year with little forward momentum; housing is edging down; and we think fourth-quarter activity in nonresidential construction and foreign trade borrowed from the future. So, the central tendency of growth still looks to us to be near 2 percent, with a gradual drifting down as time passes and the expansion ages further. Under that scenario, the unemployment rate in our forecast remains in the vicinity of 5-1/2 percent. We think GDP is likely to grow at a very slow rate of about 1-1/2 percent this quarter. We do not think that there are any fundamental forces at work that are likely to cause a significant deviation from potential growth, which we put at 2 percent. Inflation both for prices and overall labor costs remains somnolent. We still see significant risks of some acceleration in inflation largely because average hourly earnings growth has picked up noticeably, and we do not have the data yet to see whether that is being financed by improvements in productivity. The more comprehensive wage components of the ECI exhibit less acceleration. The increase in the fourth quarter of last year matches a seasonal pattern, and therefore I am not sure that one should multiply it by four. We continue to be very concerned, as we have been all year and as I think is appropriate, that the risks of inflation are on the high side. But in the context of the comments that some others have made about their Districts so far, I think one has to be very careful to distinguish between the risk of inflation and seeing it as a reality. We do not see it yet as a reality. Nor do we see the raw ingredients in labor markets, commodity markets, or other markets providing the warning signals that would tell us that inflation is close enough on the horizon to indicate that preemptive action is required at this time. Thank you.",959
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Philadelphia District economy is growing moderately overall, with some strong areas and tight labor markets in central Pennsylvania, some Philadelphia suburbs, and Delaware. The rest of the District is improving for the most part but more modestly. Although there are examples of large wage increases, the general situation is still one of moderate wage hikes and subdued price increases. One sector where significant strengthening may occur is in commercial construction in the Philadelphia area. Current market values for commercial buildings have been well under replacement cost values for six or seven years. Current market values are now approaching replacement cost values in the faster growing suburbs of Philadelphia. Build-to-suit construction is picking up, and there is talk of the emergence of some speculative building. There is still caution from lenders and that is a constraint. REITs have been back for a while and reportedly are pushing up the values of some buildings. Given the time lags that are involved in purchasing land, zoning, permits, et cetera, the real strength in construction probably will not be in evidence until 1998 or 1999. Turning to the nation, we clearly have a robust economy. The rapid pace of the fourth quarter is not likely to carry over in the near term because of slackening net exports. Nonetheless, there is an underlying momentum that is likely to keep growth at least on a moderate path. On inflation, the basic question is whether we believe the models, which are based on past experience, or whether we believe that the most recent experience of remarkably good price behavior will continue in the future. We can speculate, but we do not know the answer to that question, and that is why ""wait and see,"" despite its risks, is still a reasonable course for now.",352
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"On the national economy, our estimates are very similar to the broad outlines of the staff forecast in the Greenbook. We are right on with real GDP, while our inflation and unemployment forecasts are just a little higher. There are a number of risks in these forecasts, however, and on balance those risks probably are slightly on the upside. With regard to one upside inflation risk, our conversations with people in the energy industry tend to support what Tom Hoenig said about widespread doubts that the prospective decline in energy costs is going to offset the earlier increases fully. The decline is likely to be a partial rather than a full offset. Furthermore, people do not expect the full amount of a decline in wholesale crude oil prices to be reflected in retail prices because of the tightness of refinery capacity all over the world. Another potential upside source of inflation is the decline in bond yields over the last half year and its effects in boosting aggregate demand in 1997. Fiscal policy may provide less of a drag on household spending with the end of the retroactive phased-in income tax boost that resulted from the 1993 budget agreement. The disinflation in medical costs seems likely to slow or come to an end fairly soon. It's hard to imagine it continuing at its recent pace. The rolling regional recessions of the last 20 years seem to have ended. All regions of the country appear to be in an expansion mode right now, and the ability of labor and other resources to move and damp the impact of shortages in certain parts of the country would seem to be more limited. We are feeling the effects of that in Texas now, where the reduced inflow of labor from the rest of the country and from Mexico is slowing our labor force growth and putting some limits on our output growth. A federal budget balancing deal could cause a bout of exuberance in the bond market and could provide added upward momentum to the economy and equity markets. On the other hand, with regard to downside risks I didn't know that economists had a third hand until today--[Laughter]",409
-fomc-corpus,1997,We get desperate sometimes.,5
-fomc-corpus,1997,It reminds me of the joke about the three kinds of economists--those that can count and those that cannot.,22
-fomc-corpus,1997,That is a new low in economist jokes. [Laughter],13
-fomc-corpus,1997,"It has the virtue of being very short. On the downside, high debt burdens may induce households to restrain consumer spending. Banks are just beginning to get serious about tightening their consumer credit lending standards. The higher dollar and falling oil prices should restrain price pressures. The broader measures of inflation suggest more subdued inflationary pressures than are reflected in the overall CPI. Along the lines of what Bill McDonough just mentioned, ""pipeline"" inflation pressures do not seem to be there. Commodity prices, in particular the price of gold, do not indicate much in the way of coming inflationary pressures. Turning to the Eleventh District economy, it has changed little since the December meeting. Employment growth has slowed over the past few months and now seems to have converged toward the national rate. District employment growth was at a 2 percent annual rate in the fourth quarter versus about 1.7 percent nationally. As I mentioned here before, typically Texas and the Eleventh District economy more generally have higher employment growth than the national average but also higher unemployment growth because of the inflow of labor from other parts of the country and from across the Mexican border. The health of the California economy in particular and the rebound in Mexico have diminished that inflow, and our employment growth has slowed but our unemployment level also has gone down considerably this year. Labor shortages and tight labor markets rather than weak demand seem to be driving the slowdown in employment growth in our District. The energy sector has been running at absolutely full capacity for about a year now, with shortages of most types of drilling and maintenance equipment becoming more and more widespread. Companies are either trying to increase capacity or to stop producing products with relatively low profit margins. In our Beigebook survey, we had one interesting anecdote about a service company for the oil industry. They gave up on their attempts to hire local machinists and started importing them from England. They also wanted to expand capacity so their optimism led them to rip out their racketball court and put that part of the building into production. But their caution led them not to want to expand their building beyond its present footprint, so they limited their expansion to the area of the racketball court that they already had under the roof. Labor market tightness has not eased. The unemployment rate fell throughout 1996 in spite of reports that a number of Texans are leaving the welfare rolls. I don't know whether they are leaving the welfare rolls because of the changes in welfare programs, but they are doing so in fairly large numbers. Reports on price pressures have been mixed. The people who conduct our Beigebook survey tell me that they are hearing more stories of price increases lately, but new capacity in construction-related industries has eased price pressures, particularly for cement. All things considered, the Eleventh District economy is in quite good shape and is expected to remain so.",572
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you. I am hard pressed to report anything new with regard to the Ninth District economy. Overall, the economy is healthy, labor is in short supply, and the weather is lousy even seasonally adjusted. [Laughter] One interesting anecdote came from a couple of business people who reported that they have postponed expansion plans because they cannot hire laborers. That implies, of course, that they have been unwilling to pay the higher wages that presumably would enable them to hire those workers. They have not articulated the reasons why they have been unwilling to pay those wages. I assume it has to do with their estimates of the cost implications and what they think they can get in terms of pricing. In any event, a labor shortage clearly has been a factor for some time, and we have had some further reports of that. As far as the national economy is concerned, I do think the growth of the real economy will slow to trend in 1997. From my perspective, however, that is perhaps not as favorable an outcome as it seems because my suspicion is that aggregate demand will continue to rise more rapidly than trend. I have what is essentially a supply-constrained forecast. That is, I do not think productivity will rise rapidly enough in 1997 to offset slower growth in the labor force and employment. If my assessment that demand will continue to increase more rapidly than supply is correct, then the risks of more inflation clearly are there and will intensify.",293
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I would dearly love to say something startlingly different, but I think I would have to be living in a different country. We really do seem to have accumulating evidence of a quite consistent picture. The strong growth in the fourth quarter, like the strong growth in the second quarter, clearly will not continue and will be followed by a significantly weaker first quarter. This back-and-forth pattern not only in growth but in some other statistics is superficially confusing, but overall we are getting a remarkably consistent picture of healthy and very broadly based economic growth, geographically and industrially. It is a more solid picture than I think we felt we had six months ago, but it is no roaring boom either. Tight labor markets are reported almost everywhere, wages are creeping up, increases in benefit costs are leveling out but the growth in such costs is likely to turn up and to rise more sharply as we get to the end of the shift in the provision of health services to managed care. The productivity data remain significantly mysterious; the low increases do not seem to fit with other indicators. I have no major quarrel with the staff analysis or forecast. I might be a tad more optimistic about the prospects for relatively gimmick-free deficit reductions than they say they are, including something in the legislation that would contain significant Medicare and Medicaid restraints that might continue into the future. That certainly would be a desirable outcome and the bond markets probably would respond to it. I think, incidentally, that this good news might be threatened by the passage of a balanced budget amendment. I agree with the staff that the amendment is not likely to pass, and that probably would be a good outcome. I would be surprised if the unemployment rate got down quite as low as the staff forecast indicates. On the other hand, I share some of the nervousness about oil prices, which might feed into slightly higher inflation than the staff forecast. The question before us as it was the last time is really how long we can expect this very favorable set of indicators to continue. I would agree that the risks are on the upside, but nothing suggests an imminent danger of inflation taking off. So ""wait and see"" is a plausible strategy, but if we really believe the staff forecast, and on the basis of what almost everybody has articulated around this table we do not differ all that much, the real question is whether we are taking a risk of waiting too long to tighten. The question remains: Is this low inflation with tight labor markets sustainable; is it a new situation that could persist; or is it some kind of temporary adjustment at the end of which more normal relationships will reassert themselves? If the latter is what is going to occur, we should be thinking ahead to what those normal relationships have always been.",552
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. In the midst of the enormous plethora of data and impressions that one is subjected to, I have been asking myself what developments over the recent past seem to be significant. I would like to list six things--three of them because they are moving and three because they are not. First are the three that seem to me to be moving, and I would have to put wage pressures at the top of that list. It seems clear that those pressures are present and probably are strengthening as time goes along. Where that is really important is in what it implies for unit labor costs, and I don't think that is quite as clear. I would like to know how many stories like are out there. I particularly like that example because I once ran plastic moldings plants and I understand them. I don't know how widespread that is and I don't know how productivity and these wage pressures interface, but that is a very powerful input, whatever it is, and it does seem to be moving in the direction of more pressure. The second thing is the fourth-quarter GDP, particularly the message there that the consumer is back. The question is whether this strength in consumer spending is going to hold up and be long-lasting or whether it is just temporary and will follow the saw-tooth pattern that we have become familiar with throughout this expansion. Here again, I think we have a very powerful force, but one that at this point seems to me to be completely inscrutable. Consumer confidence, the wealth effect, and job formations seem to indicate that it might have staying power. On the other hand we have the high level of consumer debt and a question as to whether or not there exists a great deal of pent-up demand. Those questions would indicate that GDP growth might fade back to a sustainable rate. If some of the supporting factors start to go away, like the wealth effect through a stock market break, consumer expenditures could actually fade to less than a sustainable level and could become a possibly serious downside risk at some point. The third thing is the recent movement of the dollar. As we know, the stronger dollar should tend to weaken exports. It also should tend to hold inflation in check. There are three important things that do not appear to me to moving much. I would mention first the large number of inflation indices. We are all focused on the CPI; we have been talking about it a lot, but it is not necessarily that typical. There are many other price indices that are not moving up and indeed a number that are moving down. Now, that is not determinative in and of itself because the Committee has worked ahead of those series in the past, and I am sure it will again. I think it is significant that subdued inflation has been the trend for many quarters now. It has persisted in the face of what we have regarded over some long period of time as being considerable upward pressure, and yet inflation by these measures still stays pretty much the same. This raises a lot of questions in my mind about what may be going on in the economy, and I would love to get some answers somehow. I don't know if we will. Another thing that does not seem to be changing much is that no new driving forces appear to be emerging. There are no new engines that seem likely to push the economy toward either consistent strength or weakness. We seem to be enjoying an extended stay on the mountain top that Governor Meyer mentioned a week or two ago, and who knows how long that may last. Lastly, it does not seem to me that we have much pressure on capacity utilization, and without that I wonder how much inflationary pressure is likely to emerge in the economy. My bottom line is that I am very nervous about what may be happening as a result of the tight labor markets and the associated wage pressures. At the end of the day that may be more important than the other five factors or anything else. An enormously important question in my mind is the enigma of the consumer. I guess we will just have to wait and see how much that potential strength stays there. All in all, I continue to think that it makes sense to wait and see.",834
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. As almost everybody has mentioned, the economy ended 1996 on a strong note. The question now is whether this is just a single burst of energy and the economy is about to settle down to the proverbial sustainable path, or does this burst of energy portend a stronger growth path that will strain resources and lead to inflationary pressures. I think there is a corollary question relating to the high level of economic activity at year-end, namely that even if the economy does return to a sustainable growth path, will we be seeing pressures because the economy is operating at such a high level, thus straining resources. During the current expansion, which is now in its sixth year, we have had several of these strong growth episodes and it is probably fair to say that monetary policy has had a lot to do with these above-trend bursts, particularly through at least the first half of 1996. So, it is up to us to make some kind of assessment of the current uptick in economic growth. The arguments for a return to the sustainable path that are presented in the Greenbook analysis are reasonable. Exports, which accounted for much of the fourth-quarter growth, are unlikely to provide a sustainable boost. There were a number of unusual factors in the fourth-quarter trade results, and going forward the strength of the dollar makes U.S. goods more expensive. Turning to spending, although consumer spending was strong in the fourth quarter, consumer debt may provide something of a constraint in the future. This expansion is a bit too ""long in the tooth"" to look to pent-up demand and in particular to leveraged consumer spending on large items. On a related front, housing activity seems to have slowed recently, but I believe that the fundamentals are strong enough at least to allow housing to contribute to sustainable economic growth. Most forecasters have been looking to a slackening of business investment. Many businesses probably also recently expanded capacity and replaced equipment. So, it is questionable as to how long we are going to see large increases in business investment. I suppose that computers and communications equipment are the exception. They seem to involve a bottomless spending pit. Again, spending in this area should at least be adequate to keep us on a sustainable growth path. On the other hand, fiscal policy is likely to be a bit of a constraint. Having bought into the arguments for a slackening of growth going forward, let me hasten to point out that there do remain some significant areas of strength in the economy and there may be some room for surprises. First of all, the labor market continues strong. Even if we do not get to that 5 percent unemployment rate forecast in the Greenbook, it is still a strong market. Although some households may be constrained by their personal debt levels, it seems reasonable to expect consumption to continue at a level at least in step with income growth. In view of the strength of income of late, consumer spending could feasibly create unanticipated demands. I think confidence measures support this scenario. In another area, business investment has been a consistent surprise during this expansion and consistently underestimated. The same fundamentals that brought these surprises could still be present. These include strong profits and cash flows, the low cost of capital, a ready availability of credit, falling computer and communications equipment prices, and the emphasis on efficiency and productivity that has inspired a number of firms to continue to invest. The stock market is another area where we always have to say that there is room for surprises. Either we have an irrationally exuberant market or it is fundamentally driven. No matter what the verdict, either could provide continued sources of investment funding for firms and the wealth effect should continue to support consumer spending. Where does all of this leave us with respect to inflation? Although recently it has been benign, it is hard to believe that we can continue to enjoy this Goldilocks, just-right economy forever without feeling inflation pressures. Wage pressures already are being reported anecdotally and are showing up in wage and compensation statistics. Benefit cost constraints may have run their course. Maybe employers can make up the increased costs through productivity, but it is hard to count on this very broadly in view of the recently disappointing statistical history of productivity. The staff is now suggesting that they are being optimistic in estimating the new trend growth line at .9 percent. Energy costs--and several people have mentioned this--also have the potential for sustained pressures if crude prices do not fall back as forecast. I think the jury is still out there. In sum, I think the arguments for a return to a sustainable trend level of GDP growth are fairly persuasive, but there are reasons to believe that the probabilities of stronger growth accompanied by building price pressures are increasing.",951
-fomc-corpus,1997,"Governor Meyer, you are the cleanup hitter.",9
-fomc-corpus,1997,"Thank you, Mr. Chairman. The fourth-quarter GDP report marks an extraordinary end to an extraordinary year. The defining feature of both the fourth quarter and the year as a whole was a pleasing combination of higher-than-expected growth and lower-than-expected inflation, including declines in core measures of inflation. How did we do it and can we do it again? Three developments I think contributed importantly to the extraordinary performance last year. First, a sharp rebound in the participation rate and hence in labor force growth prevented the strong output growth from pushing the unemployment rate even lower and thereby pressuring inflation. Second, a coincidence of what I would refer to as positive supply shocks, including the further slowing in the rate of increase in benefit costs, the decline in nominal import prices, and the sharper-than-normal decline in computer prices collectively restrained core measures of inflation. And third, the level of NAIRU may have declined or at least we came to recognize during last year that NAIRU had recently declined from its average level over the last decade. The message here is that while we should certainly celebrate last year's remarkable performance, we should not expect to repeat it. Growth must now slow or the risk to inflation will become unacceptable. True, I came with this message last July, but now I really mean it. [Laughter] I also said then that even if growth slows to trend, there will remain an inflation risk from the prevailing low unemployment rate. Still, the immediate prospects are for a benign economy in the near term, assuming, of course, a significant slowing in growth and thanks in part to inertia in the inflation process and a projected reversal of last year's decline in oil prices. I am still in the camp of those who firmly expect a decline in oil prices. The unexpected strength of fourth-quarter growth does, however, put back into the picture what I have referred to as the growth risk in the outlook--the risk that going forward growth will remain above trend and push utilization rates even higher beginning from a level already at or beyond capacity. To be sure, the growth in several components of GDP in the fourth quarter, specifically in consumer services, nonresidential structures, and exports, is unsustainable, and there is little doubt that the expansion will slow as a result in the first quarter. The surge in net exports, the most important contributor to the fourth-quarter growth spurt, in my judgment reflects importantly the residual seasonality in that component. But this means that the sharp rebound in net exports posted in the fourth quarter more likely occurred more evenly over the entire year. The bottom line is that although the fourth-quarter growth rate may be biased upward, the growth over the entire year is not. In light of the likelihood that several components of GDP posted unsustainable spurts in the fourth quarter, I am comfortable with the staff forecast that growth is likely to slow to near 2 percent or even below in the first quarter. Still, what happens in the first quarter is not the key to the forecast. After all, growth over 1996 proved unusually bouncy--2 percent in the first quarter, 4.7 percent in the second, back to 2.1 percent in third, then back to 4.7 percent in the fourth. Reverting back to 2 percent in the current quarter will not, therefore, settle the bigger question: What happened to the second half slowdown and how confident are we that the economy will slow over 1997? If we could correct for the residual seasonality in net exports, we might actually see the second-half slowdown. At any rate, as my former partners at Macroeconomics Advisers have noted in their most recent weekly commentary, the second-half slowdown is evident in a variety of measures of economic performance not directly polluted by net exports--for example, industrial production, payroll employment, aggregate hours worked, light vehicle sales, housing starts, personal consumption expenditures, real gross domestic purchases, and real final sales to domestic purchasers. On balance, therefore, I still view the economy as having slowed over the second half of 1996 and this helps me to be comfortable with a forecast of a further slowing to a 2 to 2-1/2 percent rate over 1997. This judgment is reinforced by my expectation that federal purchases and net exports will decline, that inventory investment will trend lower, and that key cyclical sectors such as housing and auto sales have achieved cyclical peaks and will decline at least modestly. However, I continue to believe that the most serious risk to the outlook does not come from continued above-trend growth but from the possibility that we are already operating above capacity and face as a result a gradual but progressive worsening of the inflation outlook. My interpretation of inflation for the year is that, while sharp increases in food and energy prices boosted overall CPI inflation, the coincidence of positive supply shocks that I mentioned earlier put downward pressure on core inflation. I do not believe, therefore, that the decline in core inflation experienced over 1996 suggests that NAIRU is below the 5.4 percent average unemployment rate for the year. I suspect that NAIRU, at least for the near term, is near 5-1/2 percent. Assuming the coincidence of positive supply shocks will not be repeated this year, at least not as uniformly as last year, I expect an increase in core inflation even if the unemployment rate stays at its current level. Cost pressures on firms nevertheless appear to be well contained, given the modest acceleration of compensation over 1996 and the absence of pipeline inflation pressures coming from core intermediate and crude components of the PPI. Still, the acceleration of wages over 1996 indicated by the fourth-quarter ECI report is consistent with tight labor markets and prevailing excess demand. Some further acceleration of wages combined with a rebound in benefit costs certainly supports the staff forecast of an increase in the rate of compensation over 1997 to 3-1/2 percent from the 3.1 percent posted over 1996. The staff forecast is for slightly above-trend growth over 1997, a further decline in the unemployment rate to 5 percent, and a gradual upward creep in inflation that does not take on worrisome proportions until 1998. It is still a pretty benign outcome for 1997, with inflation measured by both the overall CPI and the chained GDP price index projected at just a shade above 2-1/2 percent. Still, the main message is that the unemployment rate is about to move still further below NAIRU and as a result inflation pressures are likely to build over the forecast horizon. However, because of the inertia in the inflation process and the reversal of energy prices in 1997 the consequences will not be very evident until 1998 and beyond. Relative to the staff forecast I expect slightly slower growth over 1997 accompanied by a nearly stable unemployment rate. On the price side, I anticipate something close to the staff inflation pattern through 1997, including a small rebound in core inflation and a decline in overall consumer price inflation. I do view the risks relative to this forecast to be somewhat asymmetric, with a slightly greater risk of above-trend growth and a greater risk that we are already below the NAIRU.",1464
-fomc-corpus,1997,"Thank you. We are only six minutes over schedule, which is quite remarkable.",16
-fomc-corpus,1997,We are short two governors.,6
-fomc-corpus,1997,"They took that into consideration. Unlike President McTeer's economists who may or may not be able to count, these guys can count! We adjourn until 9:00 a.m. tomorrow morning.",41
-fomc-corpus,1997,"Good morning, everyone. Brian Madigan, would you start us off, please?",17
-fomc-corpus,1997,"Certainly, Mr. Chairman. I will be referring to the package labeled, ""Material for Staff Briefing on Annual Ranges."" [Statement--see Appendix.]",32
-fomc-corpus,1997,Questions for Brian?,4
-fomc-corpus,1997,"Brian, if we were to have a multiyear horizon as our objective for getting to price stability, perhaps along the lines of the price stability alternative in chart 2 of the Bluebook, money growth would be slower in that environment, based on current relationships. Whether inflation, properly measured, is 2 percent or 3 percent, we do not know. We know there are measurement errors that affect the implicit price deflator and other price indexes, but the answer is going to be 2 or 3 percent. Based on the information you have now, whatever assumption you make about own price and the evidence about how the Treasury yield curve behaves relative to the funds rate, how confident can you be that if we maintain a 5-1/4 percent funds rate, there will not be a deceleration of M2 growth consistent with a policy of moving to price stability?",177
-fomc-corpus,1997,"Given our methodology for forecasting, I think that really is a question about how confident we are that nominal GDP growth would behave as projected in the Greenbook. We forecast money demand by looking at growth rates of nominal GDP, making an adjustment for projected movements in opportunity costs consistent with any changes in interest rates. Obviously, the staff could be wrong, and one source of error in projecting money demand or money growth would be our assessment of the likely growth in nominal GDP that would be consistent with a 5-1/4 percent funds rate. Another source would be errors in projecting money demand itself, given a forecast for nominal GDP and interest rates. Clearly, we are still very uncertain at this point on that score.",143
-fomc-corpus,1997,"But we can distinguish among forecasts of nominal GDP. We do not target nominal GDP, but you can say there is an implicit nominal GDP target if you have a price stability objective. If you say your objective is to get nominal GDP growth down to the area of 2 to 3 percent and if your analytical framework tells you that M2 growth also would be around 2 to 3 percent, then you can at least run the intellectual exercise as to what kind of interest rate path would be consistent with producing that outcome. In Gary Stem's words yesterday, if we have a supply-constrained economy, then to get to price stability our task is to constrain nominal demand growth to a rate consistent with that aggregate supply growth.",145
-fomc-corpus,1997,"Yes. Certainly in the steady state, if you will, when price stability is achieved we would not see a 5-1/4 percent nominal federal funds rate as consistent with that outcome. I guess the question relates partly to what federal funds rate path will take us to a steady state with price stability. Chart 2 in the Bluebook presented one scenario where we gave what we consider to be our best shot at projecting that sort of interest rate path. That involved, as you know, a considerable increase in the nominal and real federal funds rates over the next year or two and then a reduction in the nominal funds rate as inflation came down.",130
-fomc-corpus,1997,"Okay, but chart 2 was developed within the NAIRU framework and the assumption that we know where the NAIRU is and where the current rate of unemployment is relative to it. I am asking you to think through the exercise for us and abstract from that. Have you or can you simply run through those interest rate alternatives presented in chart 2 and, based on the statistical relationships in a money demand-opportunity cost framework, trace out what kind of money growth would be produced? That is just an exercise.",104
-fomc-corpus,1997,"I guess I am a little unclear about what you are proposing, President Jordan. In the staffs view, you would have to raise interest rates considerably to get the lower nominal GDP growth that you want. If you are asking us what would happen if hypothetically nominal GDP simply decelerated with the funds rate being held at 5-1/4 percent, obviously money growth would come in lower. That I agree is an arithmetic problem that we could solve. If we were to raise interest rates as in the chart 2 case, money growth as Brian said would come in even lower because we would be moving along the money demand function at the same time.",132
-fomc-corpus,1997,"Okay. We have run the exercise at our Bank where, if we take your price stability path and those related interest rate movements that we can pick off of chart 2, we produce an M2 growth of about 1 or 2 percent in about 3 or 4 years.",58
-fomc-corpus,1997,"That is totally plausible to me, given that we had 3-1/2 or 3-3/4 percent M2 growth associated with the smaller increase in the federal funds rate in the stable inflation alternative. So, lower M2 growth could well be associated with those higher interest rates.",60
-fomc-corpus,1997,"I think that the Bluebook with these alternatives was very helpful this time. Certainly, it provided a great deal of information about some of the issues that were raised in previous meetings and that we clearly are interested in. Don, there is one thing that I wanted to ask about chart 2. In calculating the real rate of interest, you used the PCE excluding energy. I know you cannot be completely comfortable with that measure because of the kind of real rates that it produces, particularly at the present time. The surveys, of course, indicate expectations of about 3 percent inflation one year ahead. Do you have any comments about some alternative price measure that would be a better approach to real rates than this PCE measure? I ask because I think that measure is very misleading?",156
-fomc-corpus,1997,"I agree and we tried to convey that point in a long, complex footnote. Maybe it was hard to read through. I will be covering it in my briefing as well, President Parry.",40
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,"But I agree with you. I think that it is very likely that people, in forming their price expectations, look at the whole array of prices that they are paying and not just at the core measures. To us, the core PCE was a little more revealing of the underlying sense of what was happening to inflation, and it abstracted from CPI measurement changes and related problems. So, the core PCE was better from that perspective, but I agree that it overstates the decline in real rates in 1997. If you use total PCE, you see that real rates actually change very little in 1997. Indeed, they rise a little because of the assumed decline in energy prices, which depresses total PCE or total CPI. Real rates would then go down in 1998 as the total PCE starts to trend up again. But in 1997, it looks as if real rates actually rise a tick, if you just literally use the total PCE rather than the core PCE.",205
-fomc-corpus,1997,"Any further questions for Brian? If not, let me start off by saying that I do not see any significant change from the dilemma we have had in recent meetings on these longer-run objectives. I would stick a little bush next to the tree in Brian's chart to reverse the pattern slightly. [Laughter] The moment that we alter the long-term ranges, we are effectively saying that M2 is back in play. We then have to start to evaluate how the markets will respond to what we are saying. If we go to Bluebook alternative II, which implies the monetary aggregates are back in play, that raises the question of whether we are willing to sanction what amounts to nominal GDP growth of perhaps 6 percent with the implications that has for prices. I seriously question whether we would gain anything of value in monetary policy debates. Looking at the other chart that Brian put together, aside from its wonderful colorfulness, it does show something really fascinating--which we suspected a couple of quarters ago--namely that the slope of the new curve seems to be very close to the slope of the old curve. The presumption that what we have is merely some form of dummy variable type shift is not contradicted by those data, and indeed we may go back to where we were. You may recall that the last time we had this discussion the staff forecast for M2 was toward the upper end of the 1 to 5 percent range, and indeed the staff came out right on the button. The reason they did is that they assumed the new relationships, and indeed the new relationships have held. I think there is very little to be lost by staying where we are with alternative I and watching what is going on merely because we would be indicating that the ranges are not something of significance. If we change them, I think we will put in play a wholly new set of issues that we have to address and for which I do not think we are prepared to come to any conclusion. As a consequence, I am close to where I was the last time, but I would be most curious to hear counterarguments from others.",424
-fomc-corpus,1997,"Could I just raise a question, Mr. Chairman? When you indicated that a 2 to 6 percent M2 range would be viewed as sanctioning 6 percent nominal income growth, I was a little surprised. Would you say that, consistent with the way these ranges have been used in the past, it would take an increase in money growth above the range to justify a tightening of policy?",80
-fomc-corpus,1997,"No, not necessarily.",5
-fomc-corpus,1997,"You could say, after all, that the higher range is centered on 4 percent, which would be centered on 4 percent nominal income growth and on 2 percent real growth. Could one justify a tightening of policy if growth moved toward the top of that range? That is my question.",59
-fomc-corpus,1997,"You could, but that is exactly the type of problem I am not terribly certain we want to get involved with. In other words, why take on an added burden when we ourselves are uncertain about these relationships at this stage?",45
-fomc-corpus,1997,That is the key.,5
-fomc-corpus,1997,I do not think it conveys anything that we cannot convey by other means. Governor Rivlin.,19
-fomc-corpus,1997,"I think it is really simple. It seems to me that unless we made terribly sophisticated arguments, moving to a higher range would be interpreted as less vigilance against inflation and that is not where we are.",40
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"I cant offer a counterargument, Mr. Chairman, because I think it would be extraordinarily unwise to shift from the present ranges to the higher ones. First of all, it would give the wrong signal about monetary policy. Secondly, even on Brian's tree without your bush, we probably will need to tighten in 1997. And this would get us into a debate in which we would be talking about M's and Y's and foolishness rather than concentrating on price stability and the need to say more about the American economy. That is what I think we ought to spend our energy talking about.",121
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, I agree with your analysis regarding M2, and I would favor alternative I pretty much for the reasons you stated. Whatever range we set for M2, though, I think we would all agree that the numerical ranges for the aggregates at this stage of the game are really not sufficient to convey completely our longer-run strategy to the public and the Congress. We have a void there. My personal preference would be for the Committee to fill the void with explicit multiyear inflation targets leading ultimately to price stability. The Committee has not been willing to do that yet. In this situation, Mr. Chairman, I think your biannual Humphrey-Hawkins testimony is the principal channel that this Committee uses to convey its longer-term strategy to the Congress and the public generally. And given that, I hope it will not be presumptuous if I make just a couple of quick suggestions regarding that testimony. I thought your Humphrey-Hawkins testimony last July was particularly constructive because it included a fairly extensive section, you will recall, that reviewed the basis for the Committee's focus on price stability as our longer-term target. That section also asserted a couple of tactical principles to guide us in the short run: one was that we want to hold the line on inflation; the other was that we would be willing to take preemptive action, if necessary, to get where we want to go. I thought then and I do now that the discussion in that section was very helpful, very constructive, and I would urge you as a regular matter, at least for the time being, to have a section like that in your testimony as a way of building support for our long-term price stability objective and taking us a further step toward tying down longer-term inflation expectations. With respect to the upcoming testimony, I think this would be an excellent occasion to make a couple of points. One could be to use this testimony as an opportunity to indicate the really remarkable degree of consensus among central bankers and professional economists--which I thought was especially evident at the Jackson Hole conference--that long-term price stability should be the principal goal of monetary policy. Also, I think it would be an excellent opportunity to note that this Committee has been discussing how to approach our inflation objectives for a couple of years. While we are still a long way from complete agreement on how this might be done, I think we have achieved substantial agreement at least on the point that, at a minimum, we want to conduct monetary policy in such a way as to hold the line on inflation. I thought there was really a remarkable degree of consensus about that one point at the meeting of this Committee in July. So far at least, I have not sensed any change in that general sentiment this morning. I think it would be appropriate to try to convey a clear sense of the extent and strength of this consensus, if we could. Beyond that, and here I am speaking strictly for myself, I would hope that you might consider taking the additional step of explicitly defining the line we are trying to hold with a number, specifically 3 percent on the CPI, as a way of pre-committing ourselves just a little more concretely. In any case, I think making these points would help move us along the road over which we want to travel in the long run. Our longer-term strategy obviously must be credible if it is going to be successful. If it is going to be credible, it has to have the strong understanding and support of the Congress and the public, and I think your testimony is obviously a key vehicle for building that understanding and support. Thank you.",725
-fomc-corpus,1997,"Let me respond briefly. I agree with everything you said, and indeed I will get to that in later remarks that relate precisely to this question. The one issue that I think we ought to begin to focus on is the suitability of the CPI as a measure of anything. The Bureau of Economic Analysis over at Commerce has long since decided that it is a flawed index, and in its PCE deflation process the BEA has deviated quite significantly from the structure of the CPI. After spending as much time as we have in looking at the biases in the CPI, we have come to view this index as going off on its own. It is becoming increasingly a political number and less an economic number. The reason I say this is that those who are making economic judgments, including the staff here, are beginning to move away from the CPI as a reliable measure or goal of inflation. So when we talk about our price objectives, I hope we will not lock ourselves into that index. I do agree that a non-numerical approach can be too vague and without merit. But there is some approach in between those two that seems far more sensible to me as a direction. That is the reason why a number of years ago I thought that defining price stability, not in terms of a number but essentially in terms of expectations and actions, was a more viable concept. Obviously, if we have a goal other than that, it has to be a number in some form. So, the only area where I disagree with the thrust of your remarks is in the implication that the CPI may be a guiding tool. I hope that within two years the CPI rarely will be discussed at these meetings.",336
-fomc-corpus,1997,"Mr. Chairman, I did not mean to put too much weight on the CPI. I was really trying to emphasize that to the extent we can quantify our inflation goal that would seem to be one more step in the direction of tying down expectations. If there is a better number to use or some combination of numbers to communicate our inflation goal as you expressed it that would be fine.",76
-fomc-corpus,1997,"My impression is that this Committee has in effect been focusing on a lot of different price indexes, and there is a growing consensus here, as you suggest, that bringing inflation down over time is healthy to the long-term growth and viability of the American economy. I agree with that consensus. As I said, I would be a little concerned about getting too explicit in putting out a number publicly. I do not mind talking about it internally. I think the more explicit we are in our discussions, the better, so that we all understand exactly where each one of us is. I am a little concerned about going public even in Humphrey-Hawkins testimony. I think we can address the issue you want addressed, and I agree that we ought to, without getting too explicit with respect to a number. If we start using a number, or any range of numbers, we will bring out of the woodwork people who want to get into what I would consider to be irresponsible debates with us. That would not do us much harm, but it would take away from the limited time that we have to do other things. So, as you know, I have always been very cautious about releasing a number to the public. This addresses the issue that Jerry Jordan has been raising as well. I do not disagree with the concept of a reduction in inflation over time. It is just that I don't see the advantages of putting out a public timetable. I do not think the evidence suggests persuasively that doing so would affect the so-called sacrifice tradeoffs or any of the relationships bearing on our ability to bring the inflation rate down without concurrent slowing in economic activity. I think the evidence there is very muddled at best. We ought to focus on this issue, but I hope that we will not move in the direction of publishing price range targets with very long lead times. We would have great difficulty adhering to them, and I think they would make our policy of moving toward a stable price level more difficult because we would have more political problems to deal with along the way. I think we would be far better served by not creating numbers that we really cannot lock ourselves into in a realistic manner but could be forced to do so politically if we were to release them.",450
-fomc-corpus,1997,"Can I make a comment? As I think all of you know, I have been traveling along my own road to Damascus on this issue. I believe that virtually every time I speak about anything, I refer to the theme of price stability, the wonders of price stability, and its merits for society. At a certain stage of my trip to Damascus, I thought that it would be helpful for us to establish publicly a price range objective. I have backed off from that view over time largely because, as the Chairman has been suggesting, I think that it would lock us into a horrendous political debate that would not greatly benefit the country and it would provide opportunities for those who really want to debauch the currency to come forward and have a forum in which to make their recommendations. They probably would be of more concern, or so it seems to me, than the people I sometimes describe as hairshirts who want to grind inflation down for fear of greater inflation. I think the Greenspan definition--that price stability is reached when people are not concerned about future inflation as they make their decisions--probably serves us a lot better in terms of forcing the debate in the right direction, not getting into a sterile numbers debate, and really getting to the goal we want to achieve. That certainly is pragmatism rather than anything disguised as economic theory. But having started with the notion that we would benefit from setting a number, not a specific number but a range, I now think that as a practical matter doing so could hurt our effort to achieve price stability.",309
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"I was just going to comment, Alan, that I understand what you are saying on the political side. On the other side, it seems fair to say that there is a rather large uncertainty premium in real rates with respect to future inflation. Expectations of 3 percent inflation seem to be fairly widespread, but my guess is that there is a considerable amount of uncertainty surrounding those expectations.",76
-fomc-corpus,1997,A 3 percent inflation rate as measured by the CPI?,12
-fomc-corpus,1997,"Yes, I guess that is right. I'm talking about surveys; I believe some of those surveys and economists' projections are based on the CPI. But I think there is a fairly high uncertainty premium and some concern about where we are going with this. So, I believe there are some economic costs associated with our not being more explicit. There is a tradeoff between the political risk on the one hand and on the other perhaps some real economic costs associated with the uncertainty we may cause by not being explicit about--",102
-fomc-corpus,1997,"The question, Tom, really gets down to the issue of what evidence we have that our making explicit statements actually alters that risk premium.",27
-fomc-corpus,1997,I understand what you said before about it.,9
-fomc-corpus,1997,"I think that monetary policy action is what does it. There is no evidence in my experience that words have had the slightest effect. It has not helped the Bundesbank, and if it has not helped the Bundesbank, how is it going to help anybody? The Bundesbank has succeeded because it has taken effective actions. It is what we do, not what we say, that is going to matter.",81
-fomc-corpus,1997,In that regard you probably made the most significant point by suggesting that we ought to start with this by being more explicit among ourselves. I do not anticipate having that discussion in the next half hour or hour but in due course here. It may be something we could pursue in anticipation of the next Humphrey- Hawkins meeting. I think that getting more explicit among ourselves would be a good starting point because I am not sure everybody is on the same page with respect to where we want to go and how we think we are going to get there--over what time frame and so forth.,116
-fomc-corpus,1997,"President Broaddus is not raising that. He is raising, I think, a more interesting question. I think everyone around this table shares essentially the same philosophical economic base. We all have the same view of how the economy functions. We have different views as to what is happening, but nobody here says that the best way to get inflation down is to rev up the economy. That indeed was once a view held by a substantial number in the academic fraternity. The argument was that an accelerating economy brought down unit costs and accordingly brought down prices. This view is rarely expressed these days, and I have never heard it expressed around this table.",128
-fomc-corpus,1997,"I do not mean to suggest that! All I'm saying is that I think it would be useful if we were more explicit among ourselves with respect to what measures we ought to be focusing on, where we want to get to with those, and over what time frame. I think you said the same thing. You had no problem with our being more explicit with respect to using numbers internally, but politically you saw a risk in putting out a number to the public.",92
-fomc-corpus,1997,"Yes, I think the more explicit we are internally and the more we discuss this issue among ourselves, the better. I can honestly say that if you asked me to go around the table and make a speech on this subject for everyone here that I could do it. You would be surprised at how explicit you have all been. So, I doubt that the issue is a lack of understanding of where we all stand. I think we are all pretty clear about who is where under different circumstances. No one would dispute where you are, Tom. [Laughter]",112
-fomc-corpus,1997,I wasn't worried about that.,6
-fomc-corpus,1997,"Mr. Chairman, could I make one other brief comment? I don't want to push this too hard, and I certainly respect your views and the views that the Vice Chairman expressed as well. I would just make the point that although the actions of the Bundesbank are certainly key to their success they also have a mandate that I think is part of the equation. You are right in noting that the empirical evidence on the effectiveness of a precommitment to price stability using words is limited, but the number of data points is also limited. We really have not--",112
-fomc-corpus,1997,I did not say the conclusion was that it did not work. I said the evidence of it working is lacking.,23
-fomc-corpus,1997,"Okay, I was just trying to soften the conclusions you draw from that point. [Laughter]",20
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I think I have a somewhat different perspective on the monetary aggregate ranges, and I want to share that with you. Someone suggested that the main reason we do not want to raise the target ranges is that raising them would suggest less vigilance on our part with respect to inflation. That is not the way that I would make that decision. I think the real key here is whether we have more confidence in the reliability of M2 and its relationship to economic activity. The important issue here is not just the target range; the central issue is the interpretation of that range. The way we are interpreting it today seems very contrary in my view to the Humphrey-Hawkins language. That language asks us, I believe, to establish a target range that is relevant to the current year and that is set in relationship to current and prospective economic developments. The way we interpret the current range is that it is relevant to a period --one that will perhaps occur sometime in the future--of price stability with normal velocity behavior. The justification for such an interpretation is very clear, namely, that it does not make sense to go back to our former practice until we believe that the relationship of M2 to economic activity is more stable. That is the key. In my view, were we to reach a judgment that the evidence was now consistent with the emergence of a more stable M2 relationship, we would have to change the interpretation of the range that we give in the Humphrey-Hawkins reports. The range that we should set would no longer be one that will be relevant to price stability at some time in the future. It should be the range for the year ahead that we expect to be consistent with prospective economic developments. If that were the interpretation that we were willing to live by for this year, then I would say that the 2 to 6 percent range would make sense because it is centered on 4 percent: 2 percent trend growth in real GDP and a 2 percent rise in the GDP deflator, about where we have been. For those of us who take an opportunistic perspective, that is about where we are comfortable in being, and that is the sort of signal we would be giving. Now, I am willing in the near term to accept what I think is the judgment of the staff, namely, that the period of stability in M2 has been too brief to permit a firm evaluation and in particular that stability has not yet been what I would call ""stress-tested"" by more volatile economic times and by variations in opportunity costs. However, I think we need to continue to focus on M2 and to study its relationship to economic activity because, when the evidence does suggest that that relationship has stabilized, I do not believe that we will have an option. I believe we will have a mandate to return to the former interpretation. And when we return to that interpretation, the range that we set will become relevant. Right now we never have to change the range; we never have to discuss it. As long as we retain the current interpretation of the range, we never have to discuss it. The 1 to 5 percent range is centered basically on 3 percent, including 2 percent real growth and 1 percent measured inflation.",658
-fomc-corpus,1997,"I am not sure anyone around here would disagree with your formulation. I ought to point out, however, that Humphrey-Hawkins also requires unemployment goals, which used to be discussed by the Administration and the CEA though I think they forgot to do that in the last couple of reports. What has happened to Humphrey-Hawkins is that many of the goals in that 1978 legislation were probably anachronisms when it was enacted. Remember, those who originally drafted that legislation explicitly took a Friedmanesque view of money relationships. They never contemplated Humphrey-Hawkins developments involving the type of squiggly red line that Brian Madigan shows in his chart. Consequently, for us to fix on a 1978 paradigm that clearly has proved rather faulty in an historical context raises the question of whether we should slavishly adhere to something that has no legal force unless we think it is desirable. But, clearly, if we conclude that M2 is back in play, then I think the way you put it is exactly right.",210
-fomc-corpus,1997,Humphrey-Hawkins does not mandate us to do anything; we just have to explain why we do not.,24
-fomc-corpus,1997,I agree with exactly the way you formulated it.,10
-fomc-corpus,1997,"One other thing if I might, Mr. Chairman: There has been some discussion about how explicit we ought to be with respect to inflation targets and inflation ranges. As I have thought about this, it has seemed to me that when we were very far away from where we wanted to get, a vaguer definition of price stability was perfectly adequate. And in fact such a definition was very desirable because it meant that we did not have to sit down and worry whether the appropriate index was the PCE or the CPI, and we did not have to worry about core or overall inflation or all those operational decisions. But as we get closer to where we want to be, then at least around the table, as Tom Melzer suggested, it might be worthwhile for us to share a little more what price stability means to us because I think that will help us to focus our deliberations on where we are going.",181
-fomc-corpus,1997,May I ask what is preventing us from doing that? Is there anything in the way we structure the meeting that is doing that?,26
-fomc-corpus,1997,"I think in a way there is because in most of our meetings we are really focused on a decision about what to do with the federal funds rate for the period between that meeting and the next meeting and on a forecast that goes out one year ahead and at most two years ahead. The decision relating to inflation really does not come up as being relevant until we go out over a longer period. It is only at these two-day meetings where I think the vehicle is there, with our focus on the longer-term forecast, to have more detailed discussions about long-run strategy and how we bridge from our short-run meeting-to-meeting policy.",126
-fomc-corpus,1997,"I don't think there is any disagreement about that, but let me ask you this. Does anyone have any suggestions as to how we might alter the structure of these meetings to enhance that kind of discussion? I am not aware of anything that is inhibiting such a discussion, but I want to make sure that I am not being blindsided by something. Vice Chair.",73
-fomc-corpus,1997,"I think that we could make our meetings more of a discussion rather than a series of individual presentations. On occasion we discuss something that a member said. That has happened more this morning than in quite some time. You said something; I along with other members commented on it. We had a more useful exchange of minds and views this morning than we have had in a while, and I think that is very good. I believe it would be desirable to have a meeting structure that encourages more discussion. Part of it I think also is that the longer people are here--I have been here about five years now--the more they use shorthand. Somebody says something in about three words, and that is actually equivalent to about six paragraphs when we know, as you said, what everybody's views are.",159
-fomc-corpus,1997,Joke number 473.,6
-fomc-corpus,1997,Exactly.,2
-fomc-corpus,1997,And everyone laughs!,4
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"I certainly support the recommendation for Bluebook alternative I and basically for the reasons that have been mentioned. It seems to me, and I would emphasize this, that raising the ranges would cause unwarranted focus on the aggregates. I am not confident at this point that velocity is sufficiently stable to warrant a change in the ranges. I also worry about the possibility that an increase would be misinterpreted in terms of our resolve to achieve price stability. So, I strongly favor alternative I.",97
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Just to add a footnote to the earlier discussion about being explicit: We really have a remarkably good track record over the last 15 years, and I think that track record is based on a good combination of solid economics and pragmatism. It is not just the 15-year record; we have a good 5-year record, a good 1-year record. As we go forward, I think we need to be very cautious about changing the mix of what has made us successful in the past. We may need to do that, but inflation has come down, we have not had many explicit debates about what the number ought to be, and I think we have done it with deeds. This is one of those issues on which a full-scale debate could be good in an ideal sense. But this is also one of those topics that easily can be demagogued, and we can get thrown off for not very substantive reasons. So, I would be cautious about changing what has worked for us for a long period of time and has brought us so much success. In sum, I am generally sympathetic, Mr. Chairman, to your mix of good economics and pragmatism that has led us to this point. It is encouraging to me going forward, and I think we probably are going to achieve more success over the next few years. On the specific issue at hand, I find Brian's exhibit 1 on the velocity of M2 very encouraging with regard to the potential future usefulness of M2 in monetary policy. But it is really just that--encouraging about potential future usefulness. We ought to continue to watch M2, but whatever decision we need to make in the next few months about monetary policy would be easier to make if it were not cluttered by M2, which is not all that secure a foundation. So, I support alternative I.",376
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"I, too, support alternative I for the reasons that have been cited, and I do not have anything to add there. But let me comment a little on a couple of other issues. First, with regard to a more explicit inflation target that we would go public with, I would tread very cautiously in that direction and not just because of the political risks that have been identified. I also see operational and economic risks. What I am referring to is the risk of announcing an objective that, of course, we would be obligated to try to achieve. In my view, which is supported by some work done at our Bank, that could result in serious instrument instability and have adverse consequences for the real economy unless we are very careful about how we spell out what we intend to do. That suggests the need for a proposal that we have thought through very carefully, and I have not seen such a proposal. I do not believe we have done the analysis that would be required. My second comment relates to the question of whether we can have more of these kinds of discussions. What I would suggest may not be quite as diplomatic as most of the discussion around this table, but I believe that what turns out to be a rehash of the Beigebook at the beginning of our economic discussions could be shortened or dispensed with so that we could spend most of our time discussing what I would describe as more fundamental policy issues.",283
-fomc-corpus,1997,"Let me just say something that came to mind yesterday afternoon. I read the Beigebook, and I listened to the discussion around this table. They are two separate samples. Around this table, I thought that there was far greater concern about economic strength and associated inflationary pressures than appeared in the last Beigebook.",64
-fomc-corpus,1997,"Well, my suggestion would be that we not dispense with our District reports altogether, but I think we could highlight things that are different or outliers.",30
-fomc-corpus,1997,"Let me tell you this. I don't know whether I can speak for the rest of us on the Board, but I can surely speak for myself. I find the individual reports and interpretations of what is going on in your Districts to be new information that is not available either in the Beigebook or elsewhere. I would be very reluctant to suggest that you discontinue making those reports because we will then end up with an academic discussion about how to conduct policy, and we will have fewer facts and more concepts. [Laughter] I am not terribly certain that that would improve the balance. So, if it turns out that we need more discussion, I think we should put it on as a separate element.",142
-fomc-corpus,1997,All right.,3
-fomc-corpus,1997,"If any of you have particular ideas that you want to put on the table for discussion, let us know. There is no reason why members of this Committee cannot present specific ideas they think are relevant. We can lay it out as part seminar. The rest of us can discuss it. And as the Vice Chair says, that will lead to other things. There is no need for us to maintain the existing structure that we observe at each meeting. On occasion we are very constrained by time; at other meetings we are not. If somebody had told me that I had to finish by 10:00 a.m. today, looking at the agenda that we have for this morning, I bet you we could have done it. [Laughter]",149
-fomc-corpus,1997,My goodness!,3
-fomc-corpus,1997,Three minutes to go!,5
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"At the risk of proving your point here, [laughter] let me just say that I agree with you on the alternatives. With regard to the issue raised in our earlier discussion, I too am a little nervous about picking an inflation number and target path. That's not because I wouldn't like to see lower inflation happen, but I see problems. I noticed in this morning's discussion that we had at least two interpretations of the monetary aggregate ranges within this group. And if we went outside of this room, the number of meanings would be multiplied by however much. We would have the same problem with inflation targets. In other words, when an event occurs, does it mean the same thing to me as it does to you? I think we could begin talking about some of the wrong things in an environment reminiscent of the debate about how many angels can dance on the head of a pin. I want to be very careful about that because I sense that right now we are migrating from the CPI to the PCE. We have not really discussed that issue but we appear to be migrating there. So, a 2 percent inflation rate may mean something different now as we migrate. That is why I am cautious about picking numbers. For me, the inflation number is zero whatever the measure, and then it matters what affects us in moving either toward or away from that number, whatever the measure. I think that is what we have to keep in front of us.",291
-fomc-corpus,1997,That is the issue Mike Moskow was raising yesterday about the CPI.,14
-fomc-corpus,1997,I think so.,4
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Alan, I favor adopting the provisional ranges, which is alternative I. On the issue you raised about whether there is anything impeding these discussions or what we could do to foster them, it seems to me that it would be very useful to ask FOMC staff--Board and Bank staff--to research the issue Tom Hoenig was just talking about. Perhaps they could take a look at the various measures and lay out for us some of the pros and cons of the measures, indicate what might constitute price stability in their view, and--I don't know if this is possible--what might constitute price stability in one measure versus another to the extent that biases can be identified. I think that would be a useful starting point in terms of sharpening our internal focus. If we tended to gravitate toward a measure that seemed to make sense to us internally and we had a clearer idea in our minds as to what would constitute price stability under that measure, forgetting what the time frames might be or whether we would get there systematically or opportunistically, that would be a good starting point for a discussion at one of these meetings.",223
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"I also prefer staying with the provisional ranges and getting there by the left leg of Brian's tree that we talked about. After sitting at this table for a year and working through the short-term options meeting after meeting, I guess I have gravitated toward wishing for a better sense and a crisper view of our collective long-term strategy. So, I am glad to hear that kind of discussion. One other comment about our external constituencies: I don't know about the rest of you, but I have been running into more and more complacency among business groups, including directors, with regard to inflation. I think our success has left people feeling that we have won the war against inflation. All the debate in the last few months about the reconstruction of the CPI has undermined the arguments for an anti-inflationary policy even more. People are not sure that they know, or even that we know, where we are with respect to inflation, though there is a feeling that we are probably better off now than earlier. That attitude certainly makes it harder to sell the notion of pushing inflation still lower by 1/2 or 1 percentage point. So, I would argue that we have the ongoing job of doing whatever we can--and whatever you can, Mr. Chairman--to sharpen the external understanding of our focus on inflation. There is an awful lot of complacency, at least in the groups I talk to.",285
-fomc-corpus,1997,"In fact, as I am going to note explicitly in remarks that I will make later, I find that complacency very nervous-making and in particular its reflection in the sharp narrowing of junk bond yield spreads against Treasuries, the level of equity premiums in the stock market, and various relationships that one can infer from the financial structure. That's because, unlike anecdotal information, which is often difficult to replicate over time, we have these series going back into the 1920s, and we have seen these patterns move up and down and up and down. Human nature being the only constant throughout, one begins to suspect when we run into a period such as this that it is not a new Nirvana. It is not even an old Nirvana, and it will change. The trouble unfortunately is that when the change occurs, it too often occurs abruptly and that is something we have to be terribly concerned about. Governor Phillips.",186
-fomc-corpus,1997,"Thank you, Mr. Chairman. I agree with the proposal to retain alternative I. I do think, in terms of full Humphrey-Hawkins disclosure, that we should expand the discussion in the Humphrey-Hawkins report and indicate that we think M2 and M3 growth may well be near the upper ends of our 1997 growth ranges but that we are not confident that there has been a return to a normal relationship between GDP and money growth. So, I think we should keep that discussion open.",104
-fomc-corpus,1997,We have to because we considered that.,8
-fomc-corpus,1997,"The other thing I wanted to mention is that I also, like you, find the discussions of District developments at these meetings very useful, though others may feel that they are a rehash of the Beigebook. I do think that we could relate what we see in each of our individual corners of the world to inflation and various measures of inflation either as a separate discussion or as part of our initial economic go-around. And I would like to see a broader discussion of the various measures of inflation and how we think some of them are progressing. We have had a lot of changes--going to chain weights, for example. In addition, there are the arguments to be considered about the reliability of the CPI and how it should be measured. A lot of shifting is occurring now in these various measures of inflation, and I think it would be useful for us to get back to a fundamental discussion of that. As for commodity prices, I understand that the world does not depend on corn prices, but for some people that is quite important. I think an analysis of some of those basic relationships and how they feed through from the initial commodity prices, or gold for that matter, to final prices would be useful. In sum, it would be good for us to get back to basics.",256
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"I also favor no change in the ranges for the reasons that you gave, Mr. Chairman. We certainly do not want to give the M's too much external play nor to give the impression that we are once again targeting any of them. On the other hand, not only do I think we should be watching them more internally than I believe we have been lately, I also believe that we should make occasional references to them publicly along with other things so that they do not die out in the public mind. It helps greatly in the rhetoric when tightening becomes necessary to be able to say we are having to tighten because the monetary aggregates are growing at an inflationary rate. That sounds a lot better than saying that we have to tighten because the economy is growing and because employment is growing and unemployment is too low. So, money is a very useful thing to have in our tool kit, and we ought to keep it before the public--we have to ""use it or lose it.""",196
-fomc-corpus,1997,"As soon as we start to use it in that context, then when M2 starts to grow at a far slower rate, though we may not think that means anything, we have put it in play and the devil will come back to collect his dues.",51
-fomc-corpus,1997,"I think there is a difference, though, between hanging your hat on it and merely keeping it alive.",21
-fomc-corpus,1997,"I think we ought to keep it alive, and I agree with that idea. If indeed we gain confidence in M2, then we should be willing to allow monetary policy to reflect our evaluations of what is happening to money. We could conceivably tighten if M2 growth is perceived to be excessive and ease if it is looking to be--",69
-fomc-corpus,1997,"I doubt that we will end up tightening today, but if we were to do so, I think that one of the main reasons would be that M2 growth is at the upper end of its range right now. In my view that is as good a reason as any of the other reasons that I could list. I would feel more comfortable with that than I would doing it on the basis of wage-cost push inflation.",84
-fomc-corpus,1997,"I will tell you that if the reason is that the labor markets are getting too tight and wage increases are accelerating, there is a very large section of the population who would say, ""Isn't that wonderful!"" Governor Kelley.",45
-fomc-corpus,1997,"Mr. Chairman, I certainly support alternative I. The reasons have been well discussed and I don't have anything to add. It may be redundant but I would like to add the following: It seems to me that we are entering a new era of appropriate intellectual focus in all our concerns here. I think we have had the first airing of it this morning that I can recall. For the last decade or so, we have been in the process of trying to work inflation down in an orderly manner, and that has been our entire focus. What are the appropriate ways to do that? We certainly have not yet fully achieved price stability, but I do think that we are now beginning to enter a zone where our focus should shift a little, and we should start to think in terms of how to maintain ourselves in that zone over time once we begin to get in it. I would like to see some staff work and see us begin to have some dialogue on such questions as what price indices we should be targeting or what combination of indices. As someone asked, what are the appropriate levels of those indices given the methodologies involved in their construction? At what levels of these indices can we feel comfortable that we are achieving what we want to achieve? If zero is where we would be comfortable, that would have to imply that there are some deflationary tendencies in some sectors of the eonomy. How do we feel about those and the impact they might have on the economy? How do we deal with an upward drift in inflation? Do we accommodate some of it or do we hit it over the head instantly when we are already in a zone of price level stability, however defined? These are the kinds of questions that I do not think we have faced before, and maybe it is a little ahead of the curve to think about them right now, but I would like to suggest that we start to do some work in that area.",383
-fomc-corpus,1997,A very good idea.,5
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"If you wait long enough to talk at these meetings, others have already said everything that you planned to say. I think Mike Kelley hit on exactly the right formulation here. We may be closer than we know to a maintenance situation that has its own set of difficulties. These difficulties differ perhaps from those that the Committee faced earlier, particularly in the 1980s, in its efforts to rein in inflation. That is especially true of the difficulties on the political side that you referred to in one way or another, Mr. Chairman, in many of your comments. I, too, would be very much in favor of a fuller discussion of what we are measuring and what it is we are talking about when we discuss inflation. We all know that we do not want inflation to go up, but I am not sure that we know what the rate of inflation is currently--or at least I know that I do not know exactly what it is. How do we translate that very useful concept of yours of not having inflation be part of economic decision-making into something specific that we can watch over time and anticipate over time? Maybe we have to have those discussions outside of a meeting, as we have before. In any event, I believe we need to do something along the lines that Mike Kelley discussed.",258
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"I guess I am a little out of step with the way the issue is being defined in this discussion because my first choice would be not to announce target ranges at all and to explain why not. Concurrent Resolution 133 and Humphrey-Hawkins were both adopted in an environment where, even in the economics profession, there was no consensus about our objectives. So, the purpose was to constrain the central bank's activities and reduce one source of uncertainty. To continue to announce a target range for an aggregate, I think, actually hinders its use in the formulation of policy. It would be a mistake to resurrect money as an objective or give the sense that any money measure is something that triggers a change in the funds rate. I think it was Herb Stein who once said, ""It is certainly true that there is a stable relation between money and the price level; what is not stable is the definition of money."" If we were to get back into a situation where people thought that our actions were being triggered by M2 or any other money measure, we would have the Goodhart's law problem or what Henry Wallich called the Heisenberg principle of people focusing on an instrument in drawing conclusions about our actions. This alters people's behavior and therefore changes the relationship between that instrument and economic activity.",259
-fomc-corpus,1997,I think Heisenberg would not have approved of that application of his principle!,16
-fomc-corpus,1997,"I think that this is the time, whether it is in your Humphrey-Hawkins testimony in a couple of weeks or not, to start to try to get money out of there. The legislation does not require that we announce any particular money measure--M1, M2, or anything else. It says something broadly about monetary aggregates. I think we could try to explain that using something like money growth to formulate policy to achieve our objective of price stability is one thing; setting it out there publicly as a target on an annual or even multiyear basis, I think, would be a mistake. I do not know how hard that would be to explain to members of Congress, but we could just tell them that we are not going to announce target ranges anymore because they miscommunicate our policy intentions.",163
-fomc-corpus,1997,"It has always been the case that if we had new legislation to replace Humphrey-Hawkins, I do not think we would necessarily be pushing for target ranges. We would think that something else would be more relevant to what we would be doing. President Moskow.",54
-fomc-corpus,1997,"Mr. Chairman, I agree with alternative I. If we did change the ranges, I think that would be interpreted as a change in policy and we really are not making a change in policy. No matter how sophisticated our explanation, I believe it would still be interpreted as a change in policy. On some of the other topics that have been mentioned here, I do think there are a couple of topics that it would be useful for us to discuss. One, the idea of different measures of inflation and different targets for inflation using those measures, I would find very useful. As I mentioned yesterday, I am concerned that the CPI and the core CPI are being severely criticized now as measures. We all know there are biases in those measures and in addition BLS is in the process of making technical adjustments to them. All that obfuscates what the real target is. I think looking at a number of different inflation measures would be very useful for this Committee, and developing our own internal targets on those would be helpful as well. At least we would know within the Committee which direction we wanted to move as a Committee. The second issue that I believe it would be useful for us to discuss is how to get to price stability. We have talked in the past about opportunistic approaches and other types of approaches. That type of discussion has been very helpful because I don't think any of us is satisfied in staying at the current level of inflation. We want to lower inflation, and it is not clear to me how we are going to accomplish that.",308
-fomc-corpus,1997,"There seems to be close to, if not full, unanimity on alternative I. As a consequence of that, I would not differentiate between the M2, M3, and debt aggregates, but I would assume that all the ranges need to stay where they are. So, I think the simplest procedure would be for a reading of a directive that would encompass that.",74
-fomc-corpus,1997,"The wording is on page 21 of the Bluebook: ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1996 to the fourth quarter of 1997. The monitoring range for growth of total domestic nonfinancial debt was set at 3 to 7 percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",150
-fomc-corpus,1997,Call the roll on that.,6
-fomc-corpus,1997,"Mr. Chairman, could I ask a question?",10
-fomc-corpus,1997,Certainly.,2
-fomc-corpus,1997,Will the report include the sentence that has appeared in the last several reports that these ranges are interpreted as a benchmark associated with price stability and normal velocity?,30
-fomc-corpus,1997,Do you mean in the minutes or the testimony?,10
-fomc-corpus,1997,In the testimony. How do we interpret these ranges because that is not in the paragraph that was read?,21
-fomc-corpus,1997,I would assume that we would do it the same way we did it the last time. The minutes would also indicate what that means.,27
-fomc-corpus,1997,"Right, it is not in that paragraph.",9
-fomc-corpus,1997,Call the roll.,4
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,41
-fomc-corpus,1997,We shall now move on to current monetary policy and the domestic policy directive. I call on Don Kohn.,22
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,Questions for Don?,4
-fomc-corpus,1997,"Don, if I were to paraphrase one of the first sentences in your briefing, it would say that the present stance of policy is too easy to contain inflation. With that as a background, I would like you to explain to me what opportunism calls for at this point. [Laughter] It seems to me that if your assertion is true and given the way opportunism was explained to me earlier, under conditions where we see inflation as likely to rise, we would take action. I am a little confused. Have we modified the definition of opportunism?",113
-fomc-corpus,1997,"No, we have not. I think the question becomes one of how much confidence the Committee or the Committee member involved has in this projection that inflation will pick up. This is a forecast and there is a range of uncertainty around it. It is true that under an opportunistic strategy, there would be an inclination to lean very hard against tendencies for inflation to pick up and less hard against shortfalls. So, I do not think we have modified the definition. If an opportunistic Committee member became convinced with some degree of confidence that, in fact, policy was too easy, that member would need to vote for a change to be within this somewhat arbitrary definition of what opportunism means.",137
-fomc-corpus,1997,"So, pursuing the current policy would require me as an opportunist to say that I just do not buy the forecast?",24
-fomc-corpus,1997,"I think it would mean that you would have sufficient uncertainty about the forecast and a sense that it was desirable to wait a while to get more information, particularly given some of the factors we have talked about that will be holding down overall inflation and probably inflation expectations this year. You would have to weigh the costs and benefits of waiting to obtain more information, given your degree of confidence in that forecast.",79
-fomc-corpus,1997,There certainly is a danger in doing that.,9
-fomc-corpus,1997,"The cost of waiting would be that in the event of some upcreep in inflation and inflation expectations and given the lags in policy, you would have to induce more slack in the economy to keep inflation at the current level. The benefit would be that if you had acted sooner on an incorrect forecast, you would have put some slack in the economy and caused some variations in output that were unnecessary to meet your objectives as an opportunistic policymaker.",90
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Don, we have had only one issue of inflation indexed bonds, but are there any preliminary conclusions you could draw from that or is it premature to do so?",32
-fomc-corpus,1997,"I think it is premature. As a general matter, the bonds were, as you know, in greater demand and better received than most people thought they would be. I think there is still uncertainty in the market about how to trade them, what they should be trading against, and what we as analysts should be comparing them to try to intuit what the difference is. We have done some analysis here that was shared in the Board briefings that you all have received. The analysis suggested that the bonds could trade like a floating rate note if all the shocks were inflation shocks, but they would trade more like a 12-year bond or a note with that duration if all the shocks were real shocks. My understanding is that in the UK they trade more like a shorter-term security than a longer-term security. We would have to get more experience and hopefully over time have trading occurring at more than one maturity to be able to analyze the behavior of these bonds in our market.",193
-fomc-corpus,1997,Vice Chair.,3
-fomc-corpus,1997,"Don, you mentioned in your very good as always presentation that there may be some questioning as to whether we are still in the preemptive monetary policy business or at least we are beginning to get those questions. My own feeling from looking at the behavior of the markets and being in New York and therefore having a nonstop opportunity to talk to the people in the markets is that such questioning is still very tentative, if it has in fact begun. The people who think monetary policy can never be tight enough have always been worried about us. Those who never find monetary policy loose enough would, of course, be delighted if we got out of the preemptive business. But I think that the vast range of more serious people in the middle is still giving us the benefit of the doubt. I am not sure how much. That is a wasting asset, I suspect. My interpretation is that it is an asset that we still have in rather large supply. Do you have a different view?",196
-fomc-corpus,1997,"I dont fundamentally disagree with your analysis. I guess I was motivated in part by my own concerns, and I did not have any good answers about how the Committee would act preemptively, particularly in a situation where we had a slow, steady upcreep in inflation and some market commentary that, because of the uncertainties, we would need the so-called smoking gun in order to tighten. But I agree with you that it is not the predominant market commentary now.",93
-fomc-corpus,1997,It sounds as if you would agree that there is a wasting asset quality.,15
-fomc-corpus,1997,"Our assessment of the market's interpretation of us, this looking-in-the-mirror question, has become more complicated over the last few years because you folks have done such a good job. When you do not tighten monetary policy, people say the FOMC must know something that they do not know--that the underlying inflation pressures are not as intense as they might have thought was the case. It is very hard to sort out the effect of your actions on their expectations of the underlying inflation pressures from their reading of what your intentions are and whether you would act preemptively.",115
-fomc-corpus,1997,I agree with that.,5
-fomc-corpus,1997,Further questions for Don?,5
-fomc-corpus,1997,"Don, have you run any simulations, other than those reported in the Bluebook, with NAIRU specified at some lower level, perhaps the 5.3 percent rate that we have been at for some time? Even if you have not, do you have any sense about how sensitive the inflation path is to some lower NAIRU?",69
-fomc-corpus,1997,"It would be symmetrical, President Guynn.",9
-fomc-corpus,1997,It would?,3
-fomc-corpus,1997,You could look at that higher NAIRU simulation in the Bluebook and subtract changes rather than add them to get an idea.,26
-fomc-corpus,1997,"Is there anything else? Let me get started by beginning with the bottom line and working backwards. My uppermost concern is the emergence of gradual, drip-by-drip inflation pressures. As Governor Kelley said the other day, there is no entry point where we can say conclusively that we should be tightening, yet we may find at the end of the day that the inflation dragon has nibbled us to death. One of the reasons that I raised the irrational expectations issue earlier was in response to Jack Guynn's discussions with his colleagues and constituents about the sense of tranquility out there, which history tells us is to be looked at with a good deal of trepidation. I do not think that we have reason to move today because I do think, as I will get to in a minute, that inflation pressures are quite contained at this moment. But I think we are getting to the point--March may be the appropriate time--when we will have to move unless very clear evidence emerges that the expansion is easing significantly. I don't mean evidence that GDP growth is moderating to 1-3/4 percent or whatever the forecast is. The GDP is a nice number and it does have some relationship to the real world. I'm not terribly certain what it is, though everyone tells me it does. The types of things I would be looking for are indications that orders were flattening, capacity pressures clearly were easing, and we had at least sporadic reports around this table that labor market tightness, the crucial issue that is related to everything we have been talking about, was beginning to show signs of letting up. We have not seen such indications yet, and if we don't, I would think that in the Humphrey-Hawkins report we would not only underscore our intention to hold the line on inflation and to take preemptive action as needed, which Al Broaddus was talking about, but we would have to prime the markets to anticipate that we might be moving quite soon even in the absence of clear evidence of upward movements in wage or price inflation. We would take such action largely as an insurance premium, which we have raised in other contexts. How that warning would or should be constructed, I do not yet know. I do remember that in the latter months of 1993 and especially in January 1994, I felt as though I was getting up on the table, jumping up and down and screaming, ""Hey, we are about to raise rates."" I did it three more times, and I said, ""Hey, hey."" [Laughter] We finally raised rates by 25 basis points on February 4th and the markets asked, what did you do, where did that come from? I don't know whether or not we can condition markets that do not wish to be conditioned about changes in policy, but I do think we have an obligation to indicate in advance of our move why we are moving. The old notion that we will explain what we did three weeks after the fact in Humphrey-Hawkins testimony strikes me as wholly inconsistent with how long it takes the world to turn. It is far better to say in advance what we are going to do and why than the other way around. Having looked at the data, I must say that the general consensus around this table seems to reflect a bit more concern about an imminent acceleration of inflationary pressures than I think the data are telling us. There is no doubt that the wage drift is up. The question is how much is it up relative to what historical relationships have indicated it should have been. I think we are all acutely aware that the tracking of either the ECI or what I would call adjusted average hourly earnings, which attempt to adjust for industry employment shifts and overtime, shows an updrift but not one that squares with our usual wage/price Phillips curves, for example. Indeed, if we assume that the ECI wage/price Phillips curve has been exactly on target, meaning the actual and calculated wage inflation rates have been equal, but we let the NAIRU fall out as the residual unknown, solving for the NAIRU gives us a number well under 5 percent. Now, I don't consider that an especially relevant piece of information because, as I have been saying over the last year and a half, I think a very special event unique to this particular business cycle is governing what we are observing, namely, the wage-change/job-insecurity tradeoff factor. This essentially stipulates that the rise in wages will be less than historically expected because of the markedly increased concern about job layoffs and that smaller-than-expected wage gains will convert to higher profit margins. That in turn will make it very difficult for a firm to raise its prices because profits are more than adequate at lower prices, thereby prompting other competitors to undercut the higher prices and increase market share. So, I think the argument is that job insecurity affects wages and in turn prices, and that is the process keeping inflation down. All the evidence at this stage, while not conclusively affirming that model, at least does not contradict it. Indeed, surveys by one organization have asked employees of large corporations if they were afraid of being laid off. In 1991, at the bottom of the business cycle, 25 percent of those surveyed by that organization said they were. In 1995, it was 46 percent despite the sharp intervening decline in the unemployment rate. And I might say that the more recent data for 1996 show it unchanged at 46 percent. We also observe that, contrary to historical relationships, the number of people who voluntarily leave jobs, become unemployed, and seek new employment--a proxy measure of the quit rate--has remained steady, not terribly far from where it was a number of years ago, despite the fact that it should have risen significantly if past relationships with the unemployment rate had prevailed. With regard to the structure of costs and prices, I grant that the data are not terribly useful in certain respects, but I want to point out to you what is indicated by BEA's figures for unit costs and profits of nonfinancial corporations, with our own very rough estimates for the fourth quarter filled in. The prices that BEA uses to deflate gross corporate product are somewhat arbitrary, but our evaluation based on more sophisticated price deflators does not fundamentally change their result. In any event, the result for the last half of 1996 is that the estimated implicit price deflator for the gross domestic product of the nonfinancial corporate sector is unchanged, meaning the price change is zero. The estimated change in unit labor costs over the two-quarter period is zero. Of course, unit nonlabor costs plus profits, which incidentally take up approximately one-third of total sector income, are also zero. These numbers clearly have a range of error that is not inconsiderable. We also have to remember that this is a cost evaluation from the income side, not the product side. So, the productivity gains implicit in these data are larger than the ones we are getting in the official data. The one thing we know about the official data on productivity is that they are wrong. There are weaknesses associated with using the income side of the national income accounts data, but segregating nonfinancial corporations from unincorporated business and financial corporations gives us a far better insight into the underlying wage/price structure. What is involved here is that nonlabor unit costs plus profits have been little changed for a while, and since they account for a third of total costs, it would require some significant movement in unit labor costs to get prices moving. Having said all of that, I do not seriously believe that this pattern can hold very much longer. I think we are getting to the point where it is just not credible to believe that worker motivations in labor negotiations are leading to a continued shift from wage gains to job security in labor contracts. We need to remember that it is not a requirement to get the old inflation-accelerating process to resume to have the wage-change/job-security effect return to where it was. All that is required is for the rate of decline in relative wage gains to slow, and it has to slow at some point. I said that a year ago and, to repeat what Larry Meyer said in a different form, I am saying it again. The fact that it has not happened is merely an indication of how powerful this force is in containing inflation. Therefore, I have not felt, and I do not at this moment feel, that there is a particular urgency about our moving. But it seems very questionable to allow the last 20 percent of this process, or whatever the percentage is, to play itself out without taking some form of preemptive action sooner rather than later. I don't know that I would put it in the terms that you did, Bill, when you raised the possibility that our credibility is a wasting asset. But something of that nature has to be there. Another aspect of the current environment is that the financial markets look just too benign. I do not care what equity price model one uses; the simple model says that there is a single discount rate over an indefinite period and a constant growth rate is implied in the current level of stock prices. Then it is an algebraic necessity that the dividend-price ratio or the earnings-price ratio be exactly equal to the riskless rate of interest plus the nominal equity premium of stock yields over riskless rates minus the growth rate of either earnings or dividends and some factor for a payout ratio if the earnings approach is used. We know the earnings-price ratio and the riskless interest rate, and therefore we know the difference between the nominal equity premium and the rate of growth. Incidentally, they may be defined in either real or nominal terms; it doesn't matter because the inflation level cancels out of that relationship. We are looking at a rate of earnings growth that is very significantly above what is implicit in our nominal GDP forecasts. Indeed, in yesterday's Chart Show Mike Prell had a chart in which the I/B/E/S three- to five-year earnings forecast was rising very sharply, with the rate of growth something like 12-3/4 percent per annum over a five-year horizon. Since we cannot infer any significant drift between the S&P 500 earnings and the NIPA economic earnings, we have an implicit expectation of a continued rise in profit margins. Is it inconceivable? No. Could it happen? It could. Is it probable? I would not want to bet the ranch. If the earnings estimate is high, we have a sufficiently high equity premium, which puts that number somewhere in the range of recent history and not particularly out of line. If, however, we lower the earnings estimate, we also have to bring down the earnings premium and then that falls very significantly below any credible recent history, including 1987. This then means the market is overvalued in that regard. I grant Abby Cohen her little relationship, and I wish her well. I hope she spends her bonus, which I gather is very substantial this year, prudently.",2235
-fomc-corpus,1997,We can certainly assume that it is very substantial.,10
-fomc-corpus,1997,"If I were allowed to invest in the market, which they do not allow around here, I don't think I would be doing so very forcefully! It is that type of thing plus the various risk spreads, which are really quite narrow and have been that way for quite a while, that suggest that product prices alone should not be the sole criterion if we are going to maintain a stable, viable financial system whose fundamental goal, let us remember, is the attainment of maximum sustainable economic growth. It is the real economy that matters. Finance is all very interesting and financial prices are quite important but only because they affect the real economy. Ultimately, that is what our charter is all about. We have to start thinking about some form of preemptive move and how to communicate that in a credible manner. I would not be inclined to do anything today. Indeed, were we to tighten policy now, I think we would really shock the market in a way that would be quite destabilizing and would not advance our goals. I don't think there is a particular urgency here. I don't think we are getting any evidence in the underlying price structure or on the commodity side that there is any pressure pushing through. It is not clear that wage growth, whatever it is, is significantly exceeding productivity increases in the real world. As a consequence, the evidence of a rise in unit labor costs at rates that suggest that it is eating into profit margins is not confirmed by any of the data of which I am aware. Indeed, the earnings forecasts for 1997 by Wall Street analysts show increases that are consistent with rising profit margins, not falling profit margins. In short, I can see no credible evidence of increasing price pressures. And even though I listened to anecdotal reports of price pressures around the table yesterday, you were all talking about parts of your regional economies. I would suspect that if we had real data and did a full-blown evaluation of unit costs, the paradigm shift that Cathy Minehan mentioned, moving from preventing rising supplier prices to actually nudging them down, would turn out to be far more prevalent than I believe people realize. So, I think our policy implementation has to take account of a very complex set of considerations. I think we ought to reflect them as best we can in our Humphrey-Hawkins report and be prepared to move if we have to at the next meeting. I am not saying that we necessarily should. I am just saying that we have to be careful about the inflation dragon's nibbling capabilities, which I mentioned before, and that is what really concerns me above all. If we make this an issue at the Humphrey-Hawkins hearing and the economy eases enough so that no move is dictated, I don't think it would do particularly much damage to monetary policy. If it turns out that we get surprised by a quick acceleration of inflation, which means that we have been somewhat behind the curve, at least our monetary policy choice will be unambiguous. The most likely outcome is in the middle with the dragon lurking there, and he makes me very nervous. As a consequence, I would argue for staying at ""B"" today but with an asymmetry that is unlike that at the previous couple of meetings. There is no reason to change it, but it is a real asymmetry as I see it at this time. Vice Chairman.",675
-fomc-corpus,1997,"Mr. Chairman, I fully endorse the recommendation you have made, and I will try to fill in the gap while others prepare for the pop quiz on your evaluation of the equity market. I also think the asymmetry really is quite different because I now read it as meaning that we will tighten soon and probably at the March meeting. I believe we would wish to do so later than that only if the incoming information suggested greater weakness than we are likely to have, which will be the payback in the first quarter for a very strong fourth quarter. I think we would have to convince ourselves that the slowdown is more meaningful than one that just reflects that payback. In the Humphrey-Hawkins testimony, I think it is very important that you prepare the way and explain to the world, both the market and the public more generally, what is likely to be coming. I think that market participants are more likely to get the message this time, largely because they did not get it the last time. They do tend to learn from that kind of experience. In what I think is the remote possibility of their not getting it, we might have to decide how we should make the message a little clearer. Since I make it an art form of not saying things that move markets, perhaps I could be of use in that regard by enhancing what you said or even just quoting it to help bring more attention to it. Going to the message in the Humphrey-Hawkins testimony, I think we should hit some themes rather strongly, and you suggested all of them: Another theme is that our goal is price stability and that is how we achieve sustained economic growth. That at the very high capacity usage the economy is experiencing, potential noninflationary growth is really limited, as we all know, to the sum of the growth of the labor force and the growth of productivity. We could remind them that monetary policy in that environment can hurt sustained economic growth if it stays too accommodative too long and that we simply do not have the capability to produce higher real growth through an overly accommodative policy. That sort of approach would give you the opportunity to remind people that the Federal Reserve is very much pro-growth and pro-employment and if they want a higher growth rate the way it will be achieved is not by debauching the currency but by increasing the saving rate and therefore improving the economy's ability to increase investment. Especially since we would be moving preemptively again, which I believe very much we should, we have to be very careful in the Humphrey-Hawkins testimony. I would hope that whatever the rest of us are saying between now and the next meeting that we not fall into the anti-growth trap. One particular tool that I think is very useful for us analytically but one that feeds the we-are-against-growth image, of which we are highly suspected in any case, is the use of the NAIRU. We at the New York Fed, you may remember, were extraordinarily accurate in 1994 in forecasting the real economy and extraordinarily inaccurate in predicting inflation, which we overestimated. The need for humility being a great teacher, this pushed us very hard in the direction of trying to figure out why we made that mistake. One of the things that we have become rather convinced of is that the NAIRU is a very interesting analytical tool, but it is a very poor forecasting tool. The more we talk about it as if it were going to tell us what we should do next month, however eloquently we express ourselves, the more I think we come across as anti growth. I see that as unwise because it leads the American people to believe that what we think we are doing to help them is in fact harmful to them. This does not help the public policy debate nor does it help the posture of the Federal Reserve. I am sorry for being a bit long-winded, but I do think that ""B"" asymmetric, seriously asymmetric, is the right choice and that we ought to be girding our loins for a probable tightening at the next meeting.",822
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, I understand your argument. I have to confess, though, that I have some concerns about waiting. The market is now aware that we experienced very strong economic growth last year and that we are seeing some of the effects of that growth in terms of capacity use and so forth. As we go down the road, I do not think that the public will be able to distinguish between a growth rate that is slowing from 2 percent to nothing versus slowing from 3 percent plus down to 2 percent or a bit less. So, if we do not move now, I think people will be even more convinced that we will not take action under circumstances of slowing growth. We may therefore find ourselves more paralyzed at the next meeting, and that could cause us some problems that will be very difficult to deal with.",166
-fomc-corpus,1997,I would just comment that the last thing I want to do is to look at the last quarter's growth.,22
-fomc-corpus,1997,I understand.,3
-fomc-corpus,1997,"In other words, to cater to that point of view would be unwise.",16
-fomc-corpus,1997,"But I think that perception exists. In any event, we now see at least a reasonable consensus that higher inflation is in prospect, and that is what we should act on. If we do not move when we have that sort of consensus, I think we will find ourselves in a more difficult position in terms of taking action down the road.",68
-fomc-corpus,1997,The purpose of the Humphrey-Hawkins testimony will be to address exactly that subject.,18
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, the recent surge in economic activity has raised the level of output, which already appeared to be above its long-run potential. This has intensified my concerns about the outlook for rising inflationary pressures, and I think it has provided a stronger case for tightening policy. Moreover, the two monetary policy rules we consult at our Bank--one is an estimated version of Taylor's rule and the second is the nominal income growth rate rule--both suggest the need for an increase in the funds rate this quarter. Even if we accept a 3 percent target for core CPI, which I think is too high, these rules suggest that the funds rate should be raised by 25 basis points or a bit more this quarter. Of course, an inflation target of 2 percent, which I think is more appropriate, would involve stronger action. In my view, it is time to take an initial modest step in tightening policy, and therefore I would prefer a 25 basis point increase in the funds rate to 5-1/2 percent.",208
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"The staff projects a decline in the unemployment rate to 5 percent, more than 1/2 percentage point below their estimate of NAIRU, and as a result they see progressive deterioration in the inflation outlook. Now, if we were all sure of this forecast, I think we would all agree to tighten immediately even though the sharpest increases in inflation do not surface until 1998. I do want to respond to Bob Parry's question, does that ""we"" include opportunists or only those who prefer a more deliberate approach to reducing inflation? I use the ""we"" as an encompassing one in that case. Why not move now? Uncertainty about the forecast, about the structure of the economy or specifically about the value of NAIRU, justifies, I think, a more cautious approach. Fortunately, the usual inertia in the inflation process and the prospect of a decline in energy prices combine to yield a still favorable inflation outlook through 1997, reducing the need for immediate action. But the risk of above-trend growth and the risk that the current unemployment rate is already below NAIRU together strongly support an asymmetric policy directive to complement an unchanged policy. There has been some very interesting discussion by Don Kohn and the Chairman of the question, if not now, when. I think that is what we really are talking about here. One perspective has been that, indeed, the time has come and the only issue is to prepare the markets. There is a widespread expectation that there will be no policy change at this meeting, and a tightening move would be a great surprise. So that is the only issue. I think we have to think about whether we are at that point or whether there is something we need to trigger an action. Let me give you a perspective that relates back to the staff forecast. How would we respond if the staff forecast turned out to be correct? I would argue that if we do see a decline in the unemployment rate, specifically to the 5 percent rate in the staff forecast, that would be a reason to tighten independently of whatever was happening to inflation pressures directly. That is, a further decline in the unemployment rate would be an appropriate trigger for an increase in the funds rate. This is just a general view that as utilization rates increase short-term rates should increase. We should build in that procyclicality of interest rates that would occur normally, for example, under a money growth rule with a stable money demand function or under a Taylor rule. If in the meantime inflation pressures were to build, then still more aggressive action would be required. But that would be an example of a very clear trigger. Thank you.",536
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, this morning's decision is a really tough one and frankly the comments of Bob Parry and Tom Hoenig have made it tougher. A number of the comments you made have given me some comfort, though, so I can accept your recommendation this morning. But let me say emphatically that unless we see a very marked change in the outlook and the balance of risks very soon, which frankly I do not expect, I think we are going to need to move to a tighter policy posture. I believe we will almost certainly have to do so at the March meeting, and I can think of some circumstances that might propel us to move even sooner than that. Thank you.",137
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Timing is everything, I guess. In the past year or so I thought a somewhat tighter monetary policy would be appropriate. I would have reversed the insurance policy, the final one we took out at the beginning of last year. But as the year progressed, and looking at third-quarter data, I began to believe that tightening could be postponed as the seeming slowness of the expansion gave us some breathing room. Now I feel I was misled somewhat by the unevenness of economic progress last year. As I look back over the year, I see an economy that clearly was expanding at a pace beyond the long-term trend and operating with constrained labor resources in a financing environment that obviously was conducive to excess. Don and you, Mr. Chairman, have presented us with a couple of options, particularly Don's wait-and-see option and another that I would characterize as see-and-do. I am worried about the inflation dragon that is nibbling away. In my view, the wait-and-see attitude has become a little more dangerous than it was in the past. That is because of what we already see. We see an economy with a lot of life, driven by consumer spending and business investment. We do not see the sluggish residential investment picture that we thought we would. We see labor markets that are tight by any measure. I see financial markets that are too one-sided and frothy. I do not know how to measure inflation anymore after the discussion today, but any number I see anyplace seems to be expected to turn up. We see the signs of imminent excesses. I do not see restraining factors that are going to pull them in, and like President Hoenig I am a bit worried about the variability of the numbers we keep getting. These are forcing us into or suggesting that inactivity is the right course and are prolonging the wait-and-see attitude and increasing the risk of the inflation dragon. I think we have a clearer picture of the economy's strength right now, and I believe now is the time to move. I know there is the issue of saying something to prepare the markets. I don't think they are as unprepared as they were in 1994. I believe there is some sense out there of a possible move; the forecasts suggest that people expect us to move; it is just a question of when. I think we should be proactive and we should be moderate in that proactivity. So, I would align myself with President Parry's suggestion of a 25 basis point increase in the funds rate.",507
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I completely support your proposal; I believe it is the right one. I also think that suggestions that we may need to move in the near future are probably correct, and I would support that as the most likely probability. But I am a little uncomfortable with what may be an excessive amount of prejudging that policy action. I am a bit haunted by the fact that we all saw emerging pressures that were clearly going to lead to an outbreak of inflation a year or 18 months ago, and here we are. I do not think we should forget that. The outbreak is still ahead of us. The pressures are still there. They may be more intense, and a rise in inflation may start tomorrow morning; it may already have started and we cannot see it yet. But I think we should be a little cautious about prejudging what we are going to have to do at any point in the future. Thank you.",190
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. I am delighted with last year's results even though they were not forecast by anybody. [Laughter] I hope for similar mistakes this year in the sense of more growth, lower unemployment, and less inflation than we are now projecting. But I also recognize that if we had been more accurate in anticipating the way 1996 was going to come out a year ago, then in spite of that more favorable inflation outlook we would not have notched down the funds rate early last year. And I would not have supported reducing the funds rate if we had been able to anticipate more accurately the way the year came out. Given that, logic tells me that we would have been better off with hindsight not to have recalibrated, and we probably would be happier today if the funds rate were at 5-1/2 percent. Certainly, if it were at 5-1/2 percent, we would not be reducing it. I am very concerned, Mr. Chairman, about how you are going to be able to communicate this to the markets, to people in political circles, and to the public at large. The Labor Department tells us that there are still 6 million people who are not working. Fortunately, they do not live in my District, but I would like to see a lot more of those people find jobs. Most of the metropolitan areas in my District have unemployment rates of around 4 percent or lower, and this has been the case for a couple of years. I would be delighted if we saw more metropolitan areas out in Bob Parry's District with 4 percent unemployment. So, I would endorse fully what Bill McDonough has said--care needs to be taken to avoid communicating that we are concerned that there are too many people working, that unemployment of 6 million is too few, or that we would not be happy if there were only 4 million unemployed. I think that this is a very, very important communications issue as you try to prepare the markets and everybody else for what seems to be unavoidable.",412
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"I buy into your basic approach. I think the odds are that we will have to tighten. It is not an absolutely foregone conclusion. Some open-mindedness is appropriate, but I think your general framework is right. On the communications issue, all of us around the table have had a fair amount of training in economics and we use economists' shorthand. That shorthand has meaning among ourselves and among our academic peers. But I must say that some of the shorthand that gets used in public does not do us very much good. We ought never get ourselves in the position of saying that we are tightening because there is too much growth or the unemployment rate is too low. Whenever we tighten, it ought to be explained in a framework of pro-sustainable growth and pro-job growth. This NAIRU concept, while it means a lot to economists, is a very unfortunate way of communicating because 99.99 percent of the people just do not understand it and it comes across as meaning that we are against growth and against more jobs. While we as economists understand the NAIRU concept and its usefulness, we really have to recast our whole approach in terms of communicating that we are pro-growth, and it can be done. Our case is much more salable if we put price stability in that context. I would urge you in your Humphrey-Hawkins testimony, and I would urge all of us in the aftermath of that, to move strongly in that direction in our public comments because I think it is the most effective way that we can educate the public and further their understanding of the value of price stability.",323
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, if we believe the Greenbook forecast, we will see core inflation accelerate from 2.6 percent last year to 2.8 percent this year and to 3.2 percent next year. If we add in the adjustment for technical changes, the number in 1998 accelerates to 3.6 percent, which I believe we would all find unacceptable. It really comes down to the question, as a number of people have said, of whether we have confidence in this forecast. If we believe the forecast, we should be tightening now, given the lags in monetary policy. However, labor costs and prices have not accelerated as we would have expected on the basis of past experience. So, I think it is understandable that we have some questions about the inflation forecast in the Greenbook. Given the uncertainty, I personally believe that the prudent thing to do is to wait longer at this point to see if some early signs emerge that inflation is closer to accelerating. At that time I believe we should be prepared to act immediately. I am concerned about the inflation dragon, as you artfully described it, nibbling away at us. It involves an insidious buildup of inflation at .1 percent or .2 percent a year. Of course, we have not seen that buildup yet in any of the core price measures, but it is something that I am very concerned about because once higher inflation gets built into the structure it may be very difficult to get it out of the structure. At this point, I clearly support ""B"" asymmetric.",314
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I also support your recommendation for ""B"" asymmetric. I would include a strong expression in your Humphrey-Hawkins testimony of our concern about the sustainability of low inflation with tight labor markets. I believe this is the best informed group about the American economy that one could possibly assemble anywhere, with the benefit of the best statistical analysis and a real feel for the economy from around the country. And yet we come back in the end to our gut feeling about what is happening. That feeling has changed since the last meeting. You pointed out that evidence of higher inflation is not very solidly based on the statistics, and the question is whether we are sure that we have to worry about the sustainability of this growth and its consistency with price stability. I cannot be sure, but I think everybody around the table would agree that the prudent thing to do if we had to do something today would be to move, and yet there are reasons for waiting a little longer. With respect to your Humphrey-Hawkins testimony, I think a lot of very important things have been said around this table about how to couch it and how to communicate the importance of sustainable growth. I am not worried about our wasting credibility asset. I think our credibility and your personal credibility are so high right now that if you write strong Humphrey-Hawkins testimony, you may get a correction in both the equity markets and the bond markets that will make us less certain when we come back here in March that we need to do anything. [Laughter] We may be able to accomplish our objective without moving the funds rate. After all, what is important is controlling the economy. But that is a problem we will have to deal with when we meet again in March.",347
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"I agree with your recommendation. Let me just take a moment to elaborate. In my view, circumstances have not changed significantly in recent months, so I continue to think there is a reasonably high probability that we are going to want to adopt a more restrictive policy over the course of 1997. But if I ask myself why now, I think we do not have a reason that we can use that will garner any amount of support for acting at this juncture. I then ask myself the further question: What are the consequences if your soon-to-become-famous inflation dragon does start to nibble a little sooner than we expect and we find ourselves behind the curve? It seems to me the implications of that are that either we would have to move a little further at the end of the day than we otherwise would or maybe we would move by the same amount but in a more concentrated period of time than otherwise. Those costs do not seem to me to be very great. So, I am comfortable with your recommendation.",203
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. I favor alternative C or at least something in that direction, and my reasons remain the same as I have been stating: I think inflation is too high, and I see increasing evidence that inflationary pressures are building, especially in labor markets. Finally, I do not think one can say that the stance of policy is at all restrictive right now; so I believe some action is called for. We clearly are not going to do anything at this meeting, but as we anticipate a possible move in the future, we might want to think about one that once taken would leave people in a position where they are uncertain about what the direction of the next move would be. In other words, we are in a much different position than we were last time when we were in these circumstances, starting at a 3 percent funds rate with a long way to go. We probably are not too far away from where we ought to be, and we should think about doing enough in one shot so that there is uncertainty about the direction of the next move. That might argue against a modest move as an opening salvo, one that simply would encourage people to speculate on the next move. Once we got enough tightening done the last time, we had a very beneficial impact on long-term markets. In fact, we raised the funds rate by, as I recall, 50 basis points at one point and actually got a drop in long rates. It would be nice to be able to get there sooner rather than later when and if we do move.",308
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you. I support ""B"" asymmetric. It seems to me that the situation is fairly similar to where we were last summer. My guess is that we will need to tighten this year. I have the impression that employers have run out of room in terms of their ability to pass on price increases. So, I think the inflation dragon is getting closer. But I do believe that we have time to assess whether the fourth-quarter strength will necessarily result in strained resource utilization. We should take advantage of the Humphrey-Hawkins report to prepare the markets and also to explain our goal of price stability.",121
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. I, too, am comfortable with the way you laid things out and I support your recommendation. It became clear to me as the go-around proceeded yesterday that I am at least a bit more optimistic than some around the table in terms of how the wage pressures may play out. My view may be colored by the nature of the economy in our region, which has topped off, and my expectation that a similar development may begin to show through elsewhere in the nation as housing and other sectors of the nation's economy begin to slow. I also want to associate myself with those who say that there is a good bit to be gained by preparing our constituencies for a policy move in the period ahead. I am not thinking just of the financial markets and Congress but the broader constituency. I think it can be very helpful to our long-term credibility to prepare the public, given where I believe people think we stand at the moment. So, I support the recommendation for no change and an asymmetrical directive.",204
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,I support your recommendation. Do you know yet when your first Humphrey-Hawkins testimony will be?,21
-fomc-corpus,1997,"February 25 or 26, I think.",10
-fomc-corpus,1997,The first will be February 26.,8
-fomc-corpus,1997,"So, February 26 and 27. A significant majority of the voting members seems inclined toward ""B"" asymmetric, and I request that the Secretary read such a directive.",35
-fomc-corpus,1997,"The draft wording is at the bottom of page 21 in the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the expansion of M2 and M3 over coming months.""",116
-fomc-corpus,1997,Call the roll.,4
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,41
-fomc-corpus,1997,"Our next meeting is March 25. With respect to your forecasts, if you could send any changes you wish to make in those forecasts to Mike Prell by February 7, this Friday, he would be most appreciative. We have a lunch at 1:00 p.m.?",57
-fomc-corpus,1997,"Yes, the lunch in honor of Governor Lindsey is at 1:00 p.m.",18
-fomc-corpus,1997,We have scheduled a pre-lunch discussion of the surplus issue after this meeting.,16
-fomc-corpus,1997,This meeting is adjourned.,7
-fomc-corpus,1997,"Good morning, everyone. Is Mike Prell coming?",11
-fomc-corpus,1997,"Mike is arriving for a just-in-time briefing, Mr. Chairman. [Laughter]",18
-fomc-corpus,1997,Would someone like to approve the minutes of the February 4-5 meeting?,16
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,"Without objection. Mr. Fisher, you are on.",11
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,"Before I ask a question, I have a hypothesis. It is conceivable that the 1982 report on System holdings of individual securities slipped between the drawer and the bottom of somebody's desk and that created a precedent. [Laughter] Therefore, the data were not published in 1982 and it was presumed that they should not be thereafter. I say that only half tongue in cheek. Questions for Peter? Starting with his second request, is there any objection to including the detailed portfolio information in the annual report? If not, we will assume that it is acceptable, and we need a vote on domestic operations.",123
-fomc-corpus,1997,"Move approval, Mr. Chairman.",7
-fomc-corpus,1997,Without objection. We also need a vote on the intermeeting leeway.,15
-fomc-corpus,1997,Move approval of the additional leeway to $12 billion.,12
-fomc-corpus,1997,It has been moved. Is there a second?,10
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,There is a second. Without objection. Thank you all. Let's move on with record speed to Mr. Prell.,24
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,Questions for Mike?,4
-fomc-corpus,1997,"Mike, I was a little uncertain as to the wealth effects on consumer spending in the Greenbook forecast. I had the impression that there certainly was an impact from higher equity prices in particular, but in the Monday staff briefing to the Board, you seemed to be saying that there was not much of an effect. Would you go into that a little, please?",72
-fomc-corpus,1997,"On our interpretation, there probably has been some positive effect on consumption over the past year or so from the increase in financial wealth. Setting aside measurement problems, that effect likely has in reality been offset at least to some degree by an increased propensity to save based on concerns about retirement income and for other precautionary reasons. Going forward, we would interpret our forecast as continuing to incorporate some positive wealth effect, but again with these other factors tending to balance that. Because we have assumed that the stock market tops out as we move into the latter part of this year and then declines noticeably in 1998, the wealth-to-income ratio falls back a considerable distance toward where it was several years ago. That tends to diminish the wealth effect as we move out in 1998. Another factor to keep in mind is that we have had a surge in income growth over the past year or so. It would be natural, given a permanent income view, for spending to lag a bit and for the saving rate, all other things equal, to edge up a bit. As income decelerates over the next year or so, we might still be getting some adjustment in consumption that would then tend to result in the saving rate edging lower. So, we see a number of counteracting forces that we have tried, at least judgmentally, to balance in a sensible way in the forecast.",275
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,I noticed that you built into your forecast for 1998 an increase of 75 to 100 basis points in the federal funds rate.,28
-fomc-corpus,1997,75 basis points.,4
-fomc-corpus,1997,"I gather from the wording of the Greenbook and your briefing that that was basically to keep real interest rates stable. But I wondered why you were doing that. At least in my memory, it was a change from earlier Greenbook practices, and I would find it helpful to have your comments on this. Of course, we can see in your alternative projections what the effects are if you do not change the federal funds rate assumption.",86
-fomc-corpus,1997,"We felt quite uneasy about what kind of message the forecast would convey had we retained the assumption of a flat nominal funds rate. We perceived that the underlying strength of demand has been greater than we expected. Extrapolating that to some degree, it exacerbates what we already saw as a fundamental instability. I think this was highlighted in some of the longer-run simulations in the last Bluebook, where we stretched the projections out a bit. Perhaps it became clearer to you there that what we foresaw with unchanged nominal interest rates was in essence a path where resource utilization was going to continue to be well above sustainable levels. Following up on that analysis, we thought that the assumed uptilt in the funds rate would be a natural way to indicate that at some point nominal interest rates probably would have to rise to avoid excessive stimulus. We built in something that is on a par with what is happening to the core CPI and to some of the broader GDP-related price measures.",193
-fomc-corpus,1997,"I certainly do not object to that approach as a forecast. It clearly is in line with a lot of major forecasts. But I thought the whole point of doing the Greenbook, at least the way we have been doing it, was to have something that shows what happens if we do not change anything.",61
-fomc-corpus,1997,For all practical purposes the assumed rise in the funds rate is tantamount in terms of the economic outcome to your not doing anything over the period 1997 and 1998.,36
-fomc-corpus,1997,True.,2
-fomc-corpus,1997,But I thought it might be a useful signal here of what we now perceive to be the longer-term unsustainability of the scenario that we have been drawing in prior Greenbooks.,36
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"I think it was useful to get those alternatives, but which of the alternatives do you think would be most closely aligned with an opportunistic approach?",29
-fomc-corpus,1997,"I guess it is a matter of interpretation as to what the opportunistic approach entails. If it entails making sure that the inflation rate does not move above the recent range, then our forecast implies that a policy move is necessary at some point. Whether that means a relatively aggressive approach or something that involves a continued ""wait and see"" stance and moving later, I don't think we can readily discern. But the fact is that our forecast does imply that, in an underlying sense, consumer price inflation is moving above the 3 percent mark in 1998. If you view that as a ceiling in the range of acceptable outcomes and the point where you want to apply the brakes, then I suppose you could argue that a more aggressive approach than that associated with our baseline forecast is the one that is consistent with opportunism. But that is in the eye of the beholder. I do not think we can define its application that precisely.",186
-fomc-corpus,1997,"Mike, if you look back at your forecasts of last summer, you were projecting much lower growth than occurred at the end of 1996 and that you now anticipate through 1997. When you made your comments this morning, I think you used the phrase ""entering a boom at this point."" I was just wondering if you could step back and explain what has happened here. Why are you now expecting a boom or ""maybe"" a boom? What has changed in this period?",98
-fomc-corpus,1997,"The ""maybe"" is an important qualifier. That is not our baseline forecast, but again these are matters of definition. We do have a forecast that, given current money market conditions, now sees the most likely outcome as above-trend growth for an extended period and an unemployment rate that falls to 5 percent or less. In some sense, you could regard that as boom conditions even without going to the more dramatic, stronger growth scenario that I suggested was a risk. Why has this occurred? I think we consistently said that we did not see the stimulus that would maintain above-trend growth, so we kept forecasting that growth was going to fall back to something like trend for lack of a compelling reason that it should not. What has happened? That is very hard to sort out. If we look at consumer behavior, for example, we have not had a drop in the saving rate. It is true that the stock market has been much stronger than we anticipated. We have had a tremendous increase in financial wealth that either has reflected or supported a tremendous surge in consumer sentiment. We are at very high levels of consumer confidence according to the Michigan or the Conference Board surveys. The current Michigan index is the highest since 1965, and in only a few months in the history of that index have there been numbers this high. I think there is at this point some buoyancy in consumer demand beyond what we would have anticipated. We see very lean inventories. We continue to be surprised on the upside by the strength in computer investment; we have had some very strong numbers. We seem to be getting a more solid performance in nonresidential construction than we anticipated. You will recall that we were somewhat puzzled by weak contracts data through much of last year, but they tended to catch up with an enormous burst in the fourth quarter. All the anecdotal evidence suggests there is more momentum in that sector than was apparent six months ago, and that has multiplier effects. The upside surprise seems to be a collection of things that have supplied a considerable lift to economic activity. At this point, while we are still somewhat in the spirit of saying that economic growth probably will move back toward trend, we see an economy that seems to have considerable momentum, and we are not optimistic that the moderation in growth is going to occur overnight. Basically, one of the things we learned was that financial conditions were not imposing as much restraint on the economy as we thought they would.",489
-fomc-corpus,1997,"Any further questions for Mike? If not, who would like to start the roundtable? President Broaddus.",23
-fomc-corpus,1997,"Mr. Chairman, the Fifth District economy continues a healthy advance. Labor markets remain exceedingly tight throughout most of the District, especially in some of the booming areas of the southern part of the District in the Carolinas along Interstate 85. Wages for skilled labor in that part of our District have been moving up gradually for some time. We now hear more reports of pay increases for unskilled workers. In Charlotte, for example, hourly pay for entry-level unskilled workers has risen about a dollar over the last year to a range of 7 to 8 dollars on average currently. Elsewhere, both residential and commercial real estate and construction activity are rising sharply. On the commercial side in particular, we see very low vacancy rates and rising rents in some areas. That is especially the case in suburban areas, but to some extent we see it in central city areas as well. Most of the other anecdotal information we have received recently is consistent with what appears to be happening in other parts of the country. Consumer spending clearly seems to have accelerated in recent weeks. With respect to prices, although labor and other costs are rising, there is relatively little talk of imminent price increases in most of the comments that we hear. Indeed, at their last meeting, several of our directors went out of their way to say that there was a general absence of pricing power in most markets with which they were familiar. There are nonetheless a few straws in the wind. One director mentioned that recent increases in trucking fees were beginning to stick for the first time in a while. who runs a large farm equipment dealership told me that his major supplier, John Deere, is no longer guaranteeing prices for items that will be delivered later in the year. But those types of comments are still the exception rather than the rule. Turning to the national picture, it is hard, for me at least, not to be impressed by the current across-the-board momentum in the economy. As you already mentioned this morning, Mike, and as the Greenbook points out, the Michigan Consumer Confidence Index is now at its highest level since 1965. That started me thinking a little about 1965; it was a good year for the economy. At the time, Arthur Okun described the situation as ""the promised land of 4 percent unemployment with no compelling evidence of accelerating wages and prices or stress in financial markets."" In hindsight, of course, we know that 1965 was the year in which inflation really began to take off. The inflation rate was below 2 percent in 1965; it rose to over 3 percent in 1966 and subsequently to over 6 percent by the end of the decade. Obviously, there are significant differences between 1965 and 1997, not the least of which is our greater commitment, I believe, to contain inflation and resist inflationary pressures and the greater credibility that goes along with it. But I think there also are some striking parallels between the situation in 1965, at least early in that year, and what we are facing now. As in 1965, the economy is now operating at a very high level and it strikes me as being quite vulnerable to upside shocks. In the 1960s, of course, the shock ultimately took the form of the Vietnam military buildup. The most likely shock, if that is the right word, in 1997 would be a more subtle process. It would involve a kind of circular process where increased spending generates increases in jobs, which generate increases in income, which encourage further spending, and so forth. I think a key feature of policy in 1965 was that the magnitude of the upside risk was not appreciated by the policymaking establishment as a whole as we went into that year. In the current situation, I worry that the public, as represented by the industrialist who sat next to Mike Prell, does not adequately appreciate the extent of the current upside risk, mainly because of the damping effect of three temporary factors on wage and price behavior. These are: the job insecurity that the Chairman has emphasized in his recent public comments, increased labor force participation, which always occurs at this point of the cyclical expansion but which I think is greater now than is normally the case, and the strong dollar. Let me make just a quick comment on each of those. As you said, Mr. Chairman, once the downward adjustment of real wages to the increase in job insecurity is complete, we would expect the usual impact of tight labor markets on wages to reassert itself. Furthermore, if labor markets remain as tight as they are now for any extended period in the future, at some point workers are not going to feel insecure any longer. When that happens, we could see the usual short-run Phillips-curve effect reassert itself just as the restraining impact of job insecurity begins to unwind. We will then have two forces working on the cost side and a considerable upside risk from that direction. Similarly, tight labor markets encourage greater labor force participation because job search costs are lower and wages are higher. Sooner or later, that effect will dissipate even if demand remains strong. Here again, greater labor force participation can only delay the emergence of inflationary pressures, not prevent them. Finally, the restraint from foreign competition on U.S. inflation can work only so long as the dollar remains strong and does not depreciate significantly. This, of course, turns on the ability of the United States to continue to attract capital inflows. I think we have been lucky on this front over the course of the last several quarters in that our economy has been quite strong compared to the economies of other major industrial nations. Obviously, that situation could change. If growth in Japan and Europe were to begin to accelerate, we could have some weakening of the dollar. The bottom line as I see it, Mr. Chairman, is that I do not think the foundation for our favorable macroeconomic performance is very solid or secure at this stage. We need to do all we can with monetary policy to reinforce that performance. I think we have been pushing our luck with monetary policy in recent months. We could do this because we had built a lot of credibility in 1994, but I would not want to see us push our luck much further.",1267
-fomc-corpus,1997,There is a wide range of opinions in the way our society is looking at this inflation phenomenon. I don't remember it ever being so broad. I am not talking about the uninformed; I am talking about people who are participating in the system. President Jordan.,52
-fomc-corpus,1997,"Thank you. Regarding the Cleveland District first, both bankers and a retail executive for a national firm expressed their concerns about the construction of additional retail space. There is already excess space as far as they are concerned. Store closings are starting to occur, yet new construction is being planned and put into place. One of the bankers said that lending standards relating to the construction of commercial real estate have disappeared in the last couple of months. He hears of lending agreements with no takeouts being arranged, no permanent financing being locked up, no tenants being signed, and he is finding it increasingly difficult to rein in his own people and have them turn down applications for such construction loans. Also, he thinks extensions of C&I loans, which have been very strong throughout the region, may be increasing further. Interest margins have continued to erode. On the noninterest expense side, it is a mixed story. Several directors, bankers and non-bankers, talked about how their telephone expense has dropped dramatically. A banker said his overall telephone expense-- --is down 25 percent from a year ago, but his software costs are skyrocketing. On balance, he has not seen much benefit. from the retail sector said that even though January and February sales came in a lot better than expected both nationally and in the region, he still thinks that growth in retail spending over the next few years is going to average only about 3 percent versus 5 percent so far in the 1990s. So, he is pessimistic regarding the sustainability of the kind of retail spending we have seen. In the steel industry, from a very large company said that he had his people do some research on productivity in 1996 versus 1993. Over the three-year period, they had an increase of 27 percent in productivity, and without that his company would not have been able to sustain its earnings because they have not been able to adjust their prices so far. He said that steel imports were flooding in. In the fourth quarter such imports were 25 percent above a year earlier. He sees downward pressure on steel prices, but then, oddly, he said that he took advantage of a current situation in the marketplace to put in a 3 percent price increase on 30 percent of his volume. I asked if he thought the increase would stick, and he replied that, he personally did not think it would. Some on his top management team thought that current market conditions presented an opportunity and that he had an obligation to try to find out if the market would support the price increase. I found interesting this shift in attitudes and willingness to test the receptivity of the market to higher prices. Another interesting development in my view relates to the newsprint side of the newspaper industry. You will recall that a year and a half ago newsprint prices were skyrocketing, and a lot of companies put through price increases for home delivery and at the newsstand. Now, in an environment where newsprint prices are plunging, I asked what newspaper executives were doing about pricing. I was told that the savings were all going to the advertisers. Price competition there was intense and the volume of ad space was up sharply, but the price of ad space was substantially below where it was a year ago--an indirect effect of how the marketplace works. On the labor side, construction unions are expecting a 4 percent average yearly increase over the next three years. They think their contract will be agreed to by May and that the increase will be higher than it was in the contract for the three-year period currently ending. An interesting twist in the press about plant closings is that the Ford Motor Company announced that they were going to shut down their Lorain, Ohio, operation and terminate the jobs of some 1,800 people. The news stories have said that these workers were not going to provide much relief to the tight labor markets in the area. That's because these people will collect 95 percent of a very high wage for a year and they have the wrong set of skills for other employers. One press report also said that auto industry workers had the wrong work ethic for what was needed by small manufacturing firms. Let me turn to the national economy. I want to put a different twist on the notion of an opportunistic policy. We are experiencing a favorable productivity surprise. We do not know its precise dimensions, but a lot of the anecdotal reports that we hear certainly suggest that it is occurring. In some circumstances, we would expect prices to decline. If we were in a stable price environment--whether it is a gold standard environment or a stable fiat currency regime--and we had a favorable productivity surprise, we would expect the benefits of that wealth gain to show up in higher standards of living by way of lower prices. In an inflation-prone environment, we would expect a lower rate of inflation. There is nothing in the mechanism of the way individual firms operate that would by itself suggest to me higher total nominal spending. I think the connection between what we see at the micro level and the macro level needs unraveling, when we look at projections like those in the Greenbook that show an acceleration in nominal spending growth and in total demand for output. We would expect a favorable productivity surprise, other things the same, to translate into higher real interest rates. In a stable price environment where there is no discrepancy between nominal interest rates and real interest rates, the level of interest rates would shift up. In a fiat money world, if monetary policy failed to recognize the changes in the equilibrium situation and did not adjust nominal interest rates higher, then effectively, to use the language we normally employ, we would have eased monetary policy even if we maintained the same level of nominal interest rates. In my framework, we would see an acceleration in money growth, and that would accommodate, as in the Greenbook presentation, an acceleration of nominal spending growth. The second difference would go up. But we know that the second difference has to come back down if we are going to prevent an acceleration in the rate of inflation when that favorable productivity surprise begins to dissipate. One thing we do not want to do is to accommodate an acceleration of nominal spending like the one that happened in the 1960s, and I think that was a very large part of the story at the time. It has been disturbing for me to see that growth in both narrow and broad money measures in virtually every major country in the world has accelerated in the last 4 to 6 months. Growth in some measures, including high-powered money, has risen into the double-digit range. A sharp acceleration has occurred in Japan, Canada, and countries throughout Europe. Now, it may be that the world is experiencing a productivity surprise and a global post-Berlin-Wall marketplace surprise, but overall that should result in higher real interest rates, not in higher rates of inflation. It does seem to me that our economic analysis would lead us in the direction of saying that we have to guard against passively and unintentionally accommodating an acceleration of nominal income growth.",1414
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Tenth District economy continues to grow at a robust pace. As reported by our directors and other business contacts, growth is strong across the board in all District states and in just about all industries. Our manufacturing survey suggests that firms continue to project strong production activity as they look forward. For example, one of the high-tech firms, Sun Microsystems, announced plans to build a one million square foot plant in Denver and to add between three and four thousand employees. Reinforcing some of this anecdotal evidence, we know that District employment growth in the last year has been somewhat higher than that for the nation as a whole. We know that bank credit has been growing in our region; it has been down more recently, but that is seasonal. The farm economy and the energy economy in the District are both in good shape for now. One crop, winter wheat, never has been in better shape in most people's memory, so there should be an excellent harvest this year, assuming the weather cooperates. In the drilling area, activity is very high, higher than a year ago, and even though both oil and gas prices have slipped somewhat, our producers remain profitable. Retail prices generally are holding steady, but wage pressures are continuing to rise. Most of our directors and other contacts describe our labor market as tight, and this includes both our smaller manufacturers and some of the larger firms, such as Boeing and Eastman Kodak, that have operations in the District. Nationally, I think the best way for me to describe our outlook is to say that we are basically in agreement with the direction of the Greenbook forecast, though we do not see as much strength in some of the components. But in terms of where we see real growth, nominal growth, employment levels, and inflation, we are fundamentally in agreement. I will not comment more specifically other than to note our concerns about the inflation outlook as presented in the Greenbook and in our own projections.",396
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, strong growth has continued in the Twelfth District in recent months following large gains last year. Although severe winter weather slightly disrupted economic activity in January, we have seen indications of a large bounceback since then. In 1996, District payrolls expanded by about 3-1/2 percent. Employment growth in the fastest growing states--Nevada, Arizona, and Utah--currently is averaging between 4-1/2 and 7-1/2 percent. I might note parenthetically that Utah is perhaps the state with the tightest labor conditions in the entire nation; its unemployment rate is 3.2 percent. I would also note that if one wants to find slack labor conditions, I would like to recommend Alaska and Hawaii, which were 49th and 50th in terms of employment growth, and you could also choose a broad spectrum of weather as well. [Laughter] Revised data indicate that California's recovery accelerated throughout 1996. California payroll employment grew by 3 percent last year, well above the 2.3 percent rate recorded in 1995. The rate of growth picked up in most areas of California last year, and although severe winter weather held down employment in January, the February numbers showed another large job gain. The fastest growing sectors in California are high-tech manufacturing, business services, and engineering management services, although other sectors such as construction, trade, and real estate are growing steadily. Turning to the national economy, the concerns I had in February about the inflation outlook have been intensified by recent developments. Real GDP growth appears to have turned in another strong performance this quarter following a rapid advance in the fourth quarter. The economy's surge in recent quarters means that it is operating at a noticeably higher level than seemed likely only a few months ago. While judging resource utilization is difficult, the unemployment and the capacity utilization rates as well as estimates of the GDP gap taken together suggest that excess demand pressures most likely are building in the economy. A number of factors, including the high dollar and tight fiscal policy, seem likely to slow growth later this year. However, I do not think the basic problem of excess demand for resources is likely to be solved anytime soon with an unchanged funds rate. Therefore, I see a significant risk of an increase in underlying inflation in the years ahead. I emphasize the word ""risk"" because we have not actually seen signs of rising inflation in the data. This fact obviously raises uncertainty about the future. For example, it is difficult to judge the magnitude of possible roles for enhanced productivity and for changes in the labor market in holding down inflation. However, given the long lags in monetary policy, we are left, I believe, with little choice but to use forecasts in gauging policy. My best judgment at this point is that even with the measurement improvements being introduced by the BLS, the core CPI would still show a modest upward trend this year and next if monetary policy remains unchanged. Our forecast shows core CPI inflation of around 2-3/4 percent in 1997 and 3 percent in 1998 compared to just 2-1/2 percent last year. I do not think we should risk an upward trend in inflation because, if it becomes established, it would be costly to turn around. Thank you.",668
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, the Seventh District economy continues to expand at a modest rate that is somewhat slower than the nation's but its growth is consistent with a regional economy that is at full resource utilization. However, activity in a number of sectors has been stronger than expected so far in 1997. For example, both the light vehicle and steel industries have been doing better than anticipated. Production of light vehicles and steel rebounded in the first quarter following declines related to the strike in the fourth quarter. On the demand side, light vehicle sales were stronger than expected in the first quarter, although the Big Three lost market share to foreign nameplates. Orders for steel have remained strong. Incentives have been an important factor supporting light vehicle sales, which appear to be continuing in March at the higher-than-expected rate of 15-1/4 million units that we saw in January and February. In contrast to these price concessions, several steel producers announced price increases, as Jerry Jordan mentioned before. Our contacts are saying that these increases have about a 50/50 chance of sticking at this point. Steel imports remain high and four new domestic plants will come on stream in the next five months. They will add about 3 to 4 percent to steel capacity in the United States this year. Of course, we do not know if any other plants will be closed as these new plants are activated. Adjusting as best we can for the weather, housing activity seems to have been slightly stronger than in the nation. A large national retailer reported that sales in March continued in line with recent gains on a year-over-year basis. District labor markets are still very tight. The unemployment rate for District states edged lower in January and averaged 4.3 percent in early March. Initial state unemployment insurance claims were still running well below a year ago. Payroll employment growth in our District is lagging the nation, and contacts indicate that labor shortages are constraining both employment and output growth. Our small business, labor, and agricultural advisory council met last Friday, and the members almost unanimously reaffirmed the difficulty of finding qualified workers. A representative of the temporary help industry mentioned that computer programmers are in extremely short supply, and programmers who know any of the older languages such as COBOL that are needed to deal with the year 2000 conversion problem are receiving significant premiums of up to 50 percent over what programmers would normally be getting. In addition to the usual reasons cited as to why wages more generally have not accelerated significantly, a representative of the United Automobile Workers noted that dramatic increases in gain sharing, tied to either productivity or profits, were significant for her union negotiations. Turning to agriculture, Taiwan recently announced that they were halting all pork exports because of an outbreak of foot and mouth disease. Some 17 percent of all pork consumed in Japan is imported from Taiwan, and U.S. exporters are now expected to fill a large share of this gap. U.S. hog prices have increased sharply since the Taiwan announcement of the ban last week, and with little or no growth projected in U.S. pork production, this is likely to put more pressure on meat prices this year. We have received an advance copy of the Chicago Purchasing Manager's survey for March, which is confidential until it is released next Monday, March 31. The overall index for our area shows a slight acceleration in the rate of expansion, up from 56.2 in February to 57.5 in March, with new orders and production both rising more rapidly. The inflation measures were mixed; the prices-paid component moved further above 50, while the supplier-deliveries component dropped sharply to below 50. Turning to the national outlook, our assessment of the economy has changed somewhat since the February meeting. We still anticipate that real growth will decelerate somewhat by the second half of this year to a pace slightly above trend or at trend. But we no longer believe that current conditions in the economy are such as to guarantee that deceleration. Our growth forecast is now conditioned on a higher funds rate path than it was in February. We continue to see a risk that demand pressures will outstrip the growth of productive capacity. The strength of demand has been surprising most of us since at least last summer. Given the maturity of the expansion, one would not expect demand to be growing so quickly without some stimulus. It is, of course, difficult to know for sure, but that stimulus may stem from a monetary policy that is more expansionary than we had thought. After all, given what we know about the lags associated with monetary policy, the timing of the pickup in demand corresponds roughly to the expected effects of the actions that we took a little over a year ago. Those actions made sense at the time as insurance against what might have been an overly weak trend in demand, but clearly conditions have changed and weak demand is no longer a concern. Finally, on the puzzle of why we have not yet seen appreciable wage or price pressures, I believe the Chairman's discussion of worker insecurity provides a useful insight. As job insecurity, rising labor force participation rates, and other temporary damping forces wane, the balance of risks tilts more clearly to the upside. In sum, I agree with the overall picture of the economy depicted in the Greenbook.",1062
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, the New England economy remains quite healthy. In fact, it is healthier than we thought it was. As I reported before, we had been tracking regional employment growth at about half the national pace. The spring benchmark revisions to the employment data showed that, in fact, jobs were expanding at just about the national pace or about double the rate that we had been seeing earlier. New Hampshire and Massachusetts are exhibiting the strongest growth; Maine, Vermont, and Rhode Island are on the low side, and even Connecticut is showing surprising strength. The region's jobless rate fell to 4.2 percent in February, more than a percentage point below the national rate. The rates in all six states were below the national average in January, with rates in Vermont and New Hampshire well below in the 3 to 3-1/2 percent range. The labor market continues to be tight for selected job categories, but the definition of ""selected"" seems to be broadening a bit. More individual occupations or job types are being mentioned as hard to fill than in previous periods. Some retailers indicate they are experiencing recruiting difficulties even at the low end of the job skills spectrum, and temporary employment firms report both increased difficulty meeting demand and rising wages across the board. Anecdotally, I am told that an employer no longer interviews prospective employees in the data communications field; the prospective employees interview the employer, and some will not even show up in person for an interview unless the answers to their questions over the telephone are responsive to their concerns. Those concerns are not just about money--they include money, to be sure--but more often than not, these technicians want to be assured of being involved in high-tech, cutting-edge projects so that their skills will continue to be marketable. Contacts also note that their firms are using signing bonuses and stock options to attract scarce skilled staff but that those practices are not yet leading to across-the-board wage increases. Rather, employees with specific skills are being paid more, while other employees with less marketable qualifications ""enjoy"" much smaller pay increases. Thus, overall wages are rising a bit more slowly in the New England area than in the nation, and we continue to hear that price increases are difficult, if not impossible, to make stick. I have reported in the past on the pickup in nonresidential construction and the prospects for more nonresidential building, particularly in the eastern Massachusetts area. Housing markets also are enjoying a good bit of strength. Realtors region-wide have said that activity is picking up either in terms of actual home sales or the number of inquiries from potential buyers. Massachusetts stands out with reports that 1996 broke the previous record, set unfortunately in 1987, for the number of residential real estate sales in a calendar year. But contacts say all the New England states are seeing improvement. Prices are rising in response, modestly as yet, and new housing construction has picked up. Turning to the national scene, we are in general agreement with the Greenbook that the near-term outlook for GDP growth is stronger than we might have expected earlier this year and the risks associated with inflationary growth are a bit higher. Arguably at least, the Greenbook overstates a little the strength of the prospective expansion, and the external sector especially could exert a stronger drag than is projected by the staff. In addition, our estimate of potential is a bit higher, so we do not expect unemployment to drop below 5 percent as does the Greenbook. But all of this falls by and large into the category of ""nit picking."" The potential for robust, above-potential growth led by consumption seems clear, as are the asymmetric risks that capacity constraints will begin to bind sooner rather than later. Thank you.",755
-fomc-corpus,1997,I used to write COBOL. Maybe I could go into business. Perhaps I should make a few telephone calls! [Laughter],27
-fomc-corpus,1997,Right. You have to find all the programs where only two digits are embedded instead of four.,19
-fomc-corpus,1997,Vice Chair.,3
-fomc-corpus,1997,"Mr. Chairman, the Second District economy has shown continued signs of strength in the first quarter. Payroll job creation remains sturdy, and job growth was revised up a bit for 1996 and early 1997. New York State's unemployment rate was stable, while New Jersey's fell to a six-year low. Benchmark revisions to 1996 unemployment rates were minimal, though both civilian employment and labor force participation were revised up substantially. Retail sales generally were above plan, boosted in part by New York State's one-week tax abatement on clothing in January and by unseasonably mild weather in February. Consumer confidence in the Middle Atlantic region surged to a new cyclical high in the first quarter, but it remains below the national average. Residential and commercial real estate markets continued to gain momentum early this year; single-family home sales improved, and permits to build apartments remained on an uptrend. In some of the region's tighter office markets, falling vacancy rates have begun to push up asking rents. Regional surveys of purchasing managers were mixed in February, but they generally signaled improvement in the manufacturing sector. In New York and northeastern New Jersey, consumer price inflation averaged 2.7 percent in the twelve months ending in February, down from 2.9 percent in 1996 and just below the national rate of 3 percent. Local banks have reported little change in loan demand and only a slight rise in consumer delinquency rates. On the national level, since our last forecast in late January, indicators of domestic demand, labor markets, and production have come in surprisingly strong. However, the international trade data for January were much weaker than we expected. On balance, we have boosted our growth forecast for this quarter to 2-1/2 percent and for 1997 as a whole to near 2-1/4 percent. We do not have quite the robust growth that the Greenbook does for 1998; we have it at 2 percent, but we do believe that the upside risks are substantial. Under our scenario, the unemployment rate declines to between 5 and 5-1/4 percent by the end of this year and stays around that range for 1998. Despite the continued strength of real economic activity, core consumer price inflation has decelerated further in the current quarter, and the rate of increase in aggregate labor compensation is running well below that predicted by traditional Phillips curve models. Nonetheless, given the current and expected levels of resource utilization, we believe that acceleration of core inflation over the forecast horizon is the most likely outcome. Indeed, while we have pushed the starting point of that acceleration further out in the future, we have raised the rate of core inflation expected to be reached in 1998 to 3.3 percent on a Q4 to Q4 basis. There are three developments since our last meeting that have raised my staffs and my own concern about inflation considerably above the already increasing level of anxiety that I expressed at our last meeting. First, the levels of consumer spending, consumer confidence, and residential construction are so high that I believe the always hard to predict wealth effect is kicking in and is likely to remain engaged even if there should be a modest stock market correction. Second, business fixed investment seems unusually robust for this late stage of the business cycle, and it shows up in areas such as heavy truck orders and investment in structures that make me believe that the business executive will be joining the consumer in increasing demand. Third, we have benefited for several years from a positive supply shock in the form of slower increases in health benefit costs than in wages that has produced an acceptable slope to the rise in the ECI. Our sources of expertise--on both the supply and demand sides of health care and for both goods and services--believe that positive period is behind us and that increases in health care costs will track the rise in the CPI in the future. They, and we, are not predicting a negative supply shock but the end of the positive shock. That combination of developments makes me believe that the risk of rising inflation next year and in 1999 has become significantly higher since our last meeting.",833
-fomc-corpus,1997,Mr. Guynn.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. I, too, am an old COBOL programmer. If you go into business, I hope you will give me a call; I would love to be your partner.",41
-fomc-corpus,1997,We will increase Federal Reserve earnings!,7
-fomc-corpus,1997,"The economic picture that emerges in the Southeast has many parallels to what is going on nationally. At the same time, as I reported at the last meeting, the overall rate of economic expansion in our region has settled back somewhat from what it was earlier in the expansion. When I talk about some slowing, it is from relatively high rates of economic growth. As elsewhere in the country, retail sales in our area were stronger than expected during the mid-winter period. Retailers are optimistic going forward to Easter, and inventories seem about right to them. We are seeing some signs of a slowdown in real estate, both residential and commercial. Exceptions are in Nashville and Atlanta where, for the first time in this cyclical expansion, a few of my contacts in real estate and banking are expressing some concern about developers who seem to be forgetting the lessons of the 1980s. I will save the stories that go with that observation, but I have heard some very interesting stories that make the point. I certainly will watch that closely. Some bankers in Atlanta also commented recently to me that they think the multifamily market in Atlanta may be close to being overbuilt. The good news is that they are going to pull back their lending to that sector. Manufacturing, too, seems to have slowed somewhat from earlier in the expansion. Our own survey of manufacturing showed declines in the proportion of firms reporting increases in production, shipments, and new orders. Employment, the average workweek, and the index of expected business activity six months out also declined, and expectations of future capital spending have dropped off some since our previous survey. As Tom Hoenig mentioned for his area, oil and gas activity is strong--in Louisiana in our case. That activity not only has pushed the rig counts to high levels, but it has brought demand for crew boats and other kinds of support spending to higher levels. We reported at the last meeting on signs that energy prices would decline, and that has happened, as you know. One of our directors who is close to the natural gas business noted that supplies have now been rebuilt after the drain from last year's harsh winter, and that should continue to put downward pressure on energy prices, particularly natural gas, in the period ahead. Shipyards along the Gulf Coast report good orders. One yard in Mobile is particularly excited about getting the first order from Chinese interests; it is for four large container ships. To be sure, labor markets remain tight in our area, with pressures now evident almost uniformly across our entire region. The extraordinary pressures that we saw in the Tennessee area have lessened somewhat. We still get very few reports of unusually large increases in wages, and we still see almost no signs of cutthroat attempts to steal workers from other companies. We are picking up some reports in our manufacturing survey, and I would underscore ""some,"" of increasing pressures on input prices in the sense that they may be beginning to see some of that also in finished good prices. However, there still is no real change in most retail prices. Finally at the regional level, we have two new directors this year from the retail automobile industry--one associated with a group of moderate-size dealerships and another who ran the Alamo car rental company until it was recently acquired by one of the new conglomerates. Those directors suggested at our last meeting that we are seeing what they call a ""seismic"" shift in the retail auto business as the consolidations that are under way continue. They think the consolidations will bring significant efficiencies in operations and an important change in the bargaining power that dealers have with manufacturers, all of which they think should bode well for the prices that consumers will pay for autos down the road. At the national level, we like almost everyone else have been surprised by the persisting strength in the economy early this year. We continue to expect a slowdown in the expansion later this year and we hope we will not be disappointed. We have not raised our fourth-quarter over fourth-quarter growth forecast appreciably. We expect growth in expenditures on housing and consumer durables to be measurably slower as we move into the rest of the year. We do not expect unemployment to drop quite as low as is indicated in the Greenbook. On the other hand, and probably as a consequence, we also are not quite as pessimistic with respect to inflation, whether measured by the CPI or the deflator. We still see few signs of stress, excesses, or imbalances except for persistent tightness in labor markets. Having said that, it is my judgment that the risks are now somewhat greater on the upside. My view stems mostly from the greater-than-expected consumer spending that we can readily see, fueled by either more borrowing, lower saving rates, or as Mike Prell reminded us again this morning, the possibility that we will see some additional kick to consumer spending from the stock market wealth effect. One offsetting risk on the downside, as Cathy Minehan also mentioned, is our view that the outlook for exports could change. Should the dollar not fall back or even rise further, and we think that is certainly possible, growth in exports could be less than is currently built into the forecast. There also remains the strong and growing probability of increased wage pressures, although we are less sure than some that those will be fully fed through to price inflation. But again, on balance, I think the risks are considerably greater on the upside. Thank you, Mr. Chairman.",1092
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"The Philadelphia District economy is operating at a high level. Intense competition, however, seems to be keeping the lid on wages and prices. Manufacturing is doing well; retail sales are generally good. Commercial real estate is shifting from a buyer's market to a seller's market. Vacancy rates are going down; rents and property values are going up. The incentive to build is picking up, and developers are shopping for land. Competition for bank lending is stiff, with the predictable squeezing of margins and slippage of underwriting standards. The slippage in lending standards is always done by the bank down the street. The problem of one large credit card issuer in the District clearly has had a sobering effect on other issuers, but that occurred too late to avoid varying degrees of hangover for most of them. I think the issuer that received the press attention probably is more prone to problems and not as well managed as some of the others in our District. Turning to wages and prices, some selected wage hikes are occurring. On the whole, however, the wage/price climate in the District remains subdued. One manufacturing CEO I recently spoke with, and I think she is representative of manufacturers generally, said emphatically that increases in productivity will continue to absorb wage hikes. Turning to the nation, the uncomfortable uncertainty that most of us have felt around the table over the last six to nine months is partly explained, I think, by how people look at the economy. Most people we talked with see the economy from their own point of view. They see business rolling in, stiff competition, and productivity going up. They also see some labor shortages, but those are the kinds of problems they like to live with. Now, that view contrasts with the macro framework that I think lays out the prospects for problems down the road. It strikes me that there is a greater divergence between the person-in-the-street view and this macro framework than I have seen in a long time. There is not much appreciation, I think, for that macro framework view. We have to weigh the risks, and my sense is that the national economy has considerable self-feeding momentum. Although inflation is remarkably quiescent for now, I think the risks have shifted fairly substantially toward the upside of too much demand pressing against supply down the road. With the strong demand, I think the current federal funds rate almost surely means that we are pumping too much liquidity into the economy. It is the old pegging problem that we know so well from the past. While patience has been wise, I think some insurance against overheating makes sense now in order to keep the economic expansion on track.",527
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Most measures of economic activity in the Ninth District remain positive. In particular, labor markets are still tight, and there are widespread labor shortages. But we are at the point that this is so familiar, so much a part of the landscape, that people mentioned it only in passing. Wage pressures are there but they are scattered and by no means overwhelming. With regard to other District developments, construction activity is positive, the manufacturing sector is doing well, and state tax revenues are running well above what had been anticipated. A major potential negative is the weather. Widespread flooding is anticipated in the spring, but for better or for worse, the snow and ice have not started to melt yet. As far as the national economy is concerned, I certainly agree with the significant upward revisions in the Greenbook forecast, and I think, if anything, they may be conservative. My sense of the dynamics of the situation is that the economy will probably--and will certainly without a change in policy--grow at the higher pace of the latest forecast or maybe even faster. I would point to a couple of factors. My sense of the inventory situation is that there is considerable room for some significant spending on inventories going forward and that such spending will probably add significantly to aggregate demand. As I think about financial conditions and the broad range of variables that one might throw into that bucket, it seems to me that financial conditions remain very comfortable whether we look at interest rates, growth in the broad measures of money, equity prices--even though they have waffled a bit recently--or credit availability in general. As I see it, we have financial conditions that are consistent with further substantial expansion in demand. Finally, as far as inflation is concerned, I agree that a variety of temporary factors has worked so far to restrain inflation to a pace that is certainly lower than I would have expected at this point in the expansion. I think that may continue for some time. In particular, I would point to the state of many of the other major industrial economies around the world where there is considerable slack. In my view, that has been an important factor in what has been going on here. But having said that, I would emphasize that the factors that have been restraining inflation are certainly temporary and that the inflationary risks are clear.",469
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"We have all been watching this remarkable economy with some puzzlement for the last several months. Until now, the signs of strength in the private domestic economy always seemed to be mixed with some signals that the expansion might be slowing down. What strikes me at this point is that the signs of a slowdown are nearly absent. Virtually all the statistics at the national level point to continued strength. This pattern is reflected almost uniformly in the reports from around the nation, although the report for Atlanta sounds a little different. Labor markets are tight; employment is moving up; labor participation is high; the workweek is longer; initial unemployment claims are down; all these indicators reinforce the good jobs picture. Consumer spending is strong; inventories are lean; business investment, housing, and nonresidential construction, you name it, look good. It just does not look like an economy that is running out of steam. There are two elements of restraint. One is the federal budget, which is modestly restrictive. I think the outlook for fiscal policy is probably the biggest difference between this year and back in 1965. I remain fairly optimistic that we will get a budget deal, but we probably will not get it until August or September. There is no pressure of an election to keep the Congress from trying hard to finish its work and get home, so the debates will probably string out. But I think the budget deal will get done without a government shutdown and without a continuing resolution, and the agreement is likely to include a modest CPI fix, agreed to very quickly at the very end of the legislative process. In that regard, I think there was an overreaction to the President's rejection of the commission idea. With all due respect to the Chairman, they do not need a commission; they just need to fix the CPI. My guess is that they will do something.",371
-fomc-corpus,1997,"Okay, let's do it! [Laughter]",10
-fomc-corpus,1997,"The long-run effect depends on whether the budget legislation includes significant reductions in the growth of Medicaid and Medicare. I think the chances are quite good that it will. Nevertheless, the effects will be mostly psychological and possibly not particularly strong even there. The real effect of having a deal is not going to be very great in the near term. The other negative that has been mentioned and is much bigger in its effect is net exports. This clearly is helping restrain the economy at the moment, but it is exacerbating the long-run problem of the current account deficit for which we have no obvious solution at the moment. The case for viewing this economy as just a little too robust to be sustainable is the clearest one that I have seen since I have served on the Board; admittedly that has not been very long. A small move to restrain growth and the future acceleration of inflation that seems increasingly likely could prolong this remarkable expansion, and that seems to me to be what we ought to want to do. I do not see very much downside risk. If we had a sharper, better policy instrument that operated more immediately, we could certainly afford to wait, but unfortunately we do not.",236
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. The Eighth District economy continues to operate at a high level. Contacts report little or no change in the growth rate of economic activity in the past few months and continue to be optimistic about the near term. With unemployment rates well below the national level, labor markets remain tight in much of the District, especially for construction workers. Payroll employment increased at a 2.3 percent annual rate for the three months ended in January, a rate not seen since October 1995 and well above the 1-1/2 percent average rate posted in 1996. Second-quarter District auto production is expected to be up more than 10 percent from the first-quarter level. Early 1997 sales tax receipts are up substantially in the District from their year-ago levels, suggesting strong economic activity, particularly at the retail level. Residential and commercial construction activity has stayed relatively strong, although January residential permits dropped from their year-ago levels in most District metropolitan areas. About 120 counties in Arkansas, Indiana, Kentucky, and Tennessee have been declared federal disaster areas as a result of the tornadoes, heavy rains, and flooding that occurred in early March. Although reliable estimates of damage are not yet available, federal disaster assistance is expected to lead to new home construction by displaced residents. That was the experience after the major 1993 floods in the Midwest. At the national level, forecasters see continuing expansion. A burst of consumption growth is expected in the current quarter, which will be the highest quarterly increase in consumption since the end of 1992 if the staff forecast of 5 percent growth at an annual rate is realized. The run-up in stock prices and the high level of confidence reported in consumer surveys as well as early reports on retail sales and residential construction support this conclusion. On the one hand, such an outlook suggests that the downside risks for the economy are limited in the short run. On the other, the longer-run inflation outlook is not so sanguine. Despite moderate decreases in PPI and CPI inflation so far in 1997, there is a heightened concern about an inflationary impulse emanating from observed price increases, a tight labor market, and a continuing easy credit market. In addition, we have seen anecdotal evidence along the lines of what Bill McDonough mentioned with respect to the apparently shifting pattern of health care cost increases from a declining to a rising trend that will no longer tend to offset at least a portion of the wage increases. It does not seem to me that the current stance of monetary policy will mitigate the inflation impulse that I outlined. Growth rates in the broad monetary aggregates, which conceivably are back on track, are running at or above our announced targets. The yield curve has steepened further, increasing the likelihood that the federal funds rate target is too low to prevent further acceleration in monetary growth. All told, the longer-term inflation trend may be a lot less favorable than the 3 percent norm of most forecasters. My reading of the economy supports the conclusion that we are at risk of losing the hard-won credibility of our commitment to hold inflation at 3 percent. In the current situation, it is vitally important that we act to preempt prospective further increases in inflation and thereby avoid the substantially higher costs of having to do a lot more policy tightening later.",668
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"The economy in the Eleventh District remains healthy. While data for January showed an actual decline in District employment levels, I am inclined to discount those figures because of weather-related factors and because they are inconsistent with the anecdotal evidence that we have been getting from all our boards of directors and advisory councils. The composition of growth in the Eleventh District has shifted somewhat. Last year's downturn in the computer chip industry seems to be behind us, and the industry is once again announcing expansion plans. Job gains in our District's semiconductor industry are expected to be about 10 percent this year, offsetting the losses of last year. As both Tom Hoenig and Jack Guynn mentioned for their Districts, oil and gas drilling continues to move forward at all-out, full capacity. The rig count in Texas is 20 percent above a year ago. Shortages of rigs and crews continue to be reported. There is a widespread feeling that the drop in oil prices over the last few months will not result in any drilling slowdown because it is the use of new technology that is making drilling profitable at prices anywhere above $18. The use of 3-D seismic techniques has drastically reduced the number of dry holes, both on land and at sea, if you can imagine a dry hole at sea. [Laughter] The construction sector showed signs of slowing over the last few months in single-family and multifamily homes, industrial and warehouse space, and retail shopping centers. Office construction continues to rebound from fairly low levels, and a large number of medium-size projects have been announced recently, especially in far north Dallas. I might add that when I moved to Dallas six years ago, this was the very region that had the greatest concentration of RTC properties in Texas. Obviously, the glut is over. This has been reflected in rising commercial rents in the suburban areas. There are even scattered reports that prices of prime shopping center property have doubled over the last year or so. We continue to see signs that the Mexican economy is coming back, although there apparently is still more slack in Mexico than in Utah. [Laughter] Warehouse space in Laredo is fully leased, and reports are coming in from both our border and inland cities that Mexican shoppers are returning. However, retail sales to Mexicans remain below pre-devaluation levels, partly because Wal-Mart and other U.S. retailers have opened outlets on the Mexican side of the border. As for wage and price pressures in the District, it seems like the same song, seventh verse. Wages overall appear to be increasing on a slowly rising gradient, but exceptions to this generalization have been reported with increasing frequency. Still, they are sporadic exceptions against the backdrop of a steady trend. As for pressures on final prices of goods and services, we hear an unending story that competitive pressures negate the ability of business firms to pass cost increases forward. Turning to the national economy, it is difficult to find signs of weakness or imbalances. The inflation picture in the Eleventh District is a reflection of the trends I see nationally. Consumer and producer price increases have been subdued. The broader inflation measures look even better. As for inflation in the pipeline, gold and commodity prices do not suggest too many reasons to be concerned. M2 growth does, however, remain on the high side, perhaps as a result of the pegging problem that Ed Boehne mentioned earlier.",679
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I want to focus on two key questions about the outlook that I believe should shape our decision about monetary policy today. First, how does the economic environment, meaning both the recent data and the current forecast, differ today from that prevailing at the July and September FOMC meetings--which in my judgment were the closest calls for a tightening of policy--and more generally from that prevailing for the entire recent period of the asymmetric policy directive? Second, how do today's forecasts for 1997 by members of the FOMC compare to the central tendencies of the forecasts for the year that the members submitted at the February meeting and that were incorporated in the Humphrey-Hawkins report? This focus presumes that any change in policy we contemplate today would reflect a change in the FOMC members' readings of the fundamentals and risks in the economic outlook. That would be the natural assumption. However, the comments of at least some members at the last meeting could be interpreted as indicating that they already had changed their view about monetary policy but thought that a tightening should be postponed until this meeting to allow an opportunity to prepare the market. And the market certainly has been prepared! [Laughter] For myself, however, some trigger, some change in the fundamentals, is necessary to push me to accept a change in policy. I will focus here on whether or not there has been such a change in fundamentals. Let me remind you of the basic framework that has underpinned my judgment about monetary policy during this period. I worry about two risks to the inflation outlook: the utilization and the growth risks. The utilization risk refers to the possibility that the prevailing utilization rates may already be so high that inflation will rise over time. The growth risk relates to the possibility that future above-trend growth will raise utilization rates still further, thereby aggravating the risk of higher inflation. Given the uncertainty about how to judge utilization rates, we have tempered our inclination to be forward-looking in our policy actions and have given added weight to recent data on inflation and labor costs. There is, nevertheless, a causal chain that I believe we have been relying on--from growth relative to trend, to utilization rates, to wage changes, and finally to inflation. There are, to be sure, complications associated with changing profit margins, possible change in the productivity trend, favorable or unfavorable supply shocks, and change in threshold levels of utilization rates. But this causal chain is and must be at the heart of preemptive policy. Policy could be said to be more forward-looking or preemptive the more willing we are to act earlier in this causal chain. The importance I attach to this causal chain necessitates a response to the flurry of disclaimers around this table at the last meeting about the usefulness of NAIRU. I intended to respond then but, frankly, I somehow got distracted. [Laughter] As the most enthusiastic champion of the NAIRU concept around this table, let me briefly respond now because I think that concept is relevant to our decision today. The concept fundamentally involves three principles. First, a major proximate source of higher inflation is excess demand in the labor and/or product markets. Second, the causal chain is most likely to proceed from excess demand in the labor market, to wage changes and hence labor costs, and finally to price inflation. Third, as long as the excess demand prevails, inflation continues to rise progressively and indefinitely over time. I frankly would be shocked if most of us around this table did not believe in these principles. To be sure, applying them has become more difficult of late because the implied relationships have not been nearly as tight as had been the case earlier. There are data that suggest some decline in the NAIRU. Nevertheless, these principles must in my view be the framework for conducting a disciplined monetary policy, and I believe that is central to any decision to tighten today. Now back to the outlook: What is different today in the data and/or the forecast compared to what we had at FOMC meetings during the period of asymmetric directives? To set up my later discussion of my position on monetary policy, I will organize the discussion from the perspective of the Taylor Rule. A rough summary is that current utilization rates are about the same and core inflation is lower. Unlike at earlier meetings, the forecast now shows continued above-trend growth immediately ahead and, as a result, higher utilization rates over the next year or two. The current Greenbook projection of a decline in the unemployment rate is not much different from what was projected at the last meeting, though I would argue that this forecast is more believable now for many of us. At the February meeting, both the Greenbook and FOMC members were projecting near-trend growth over 1997, but the FOMC members were forecasting stable unemployment rates in contrast to the decline projected in the Greenbook. The current data on utilization rates and core inflation are no more alarming now than earlier, and perhaps less so. So, if we want to justify action today, we have to look at an earlier stage of the causal chain. In his recent testimony, the Chairman has focused on labor market indicators as being of special importance in reaching a decision for a preemptive move, and I agree. Let us take stock here. The data on compensation are somewhat mixed, but they suggest some acceleration on balance. The latest 12-month increase in average hourly earnings is 1/4 to 1/2 percentage point higher than had prevailed at the time of the July and September meetings. On the other hand, the increases in average hourly earnings were rather tame in the last couple of months. There is certainly a hint here but hardly a smoking gun. On the other hand, virtually all other indicators of labor market tightness are at more elevated levels today: help wanted ads are up, initial claims for unemployment insurance are down, the index of hard-to-get jobs is down, and consumer sentiment about jobs being plentiful is up. But the key to our decision today is the change in the forecast. Ill focus now on the Greenbook forecast, which may be more aggressive in certain respects than some of our own forecasts. This will effectively serve to make more dramatic the point I want to make. There is a significant change in the current Greenbook forecast for 1997 from the forecasts prepared for the July and September meetings and even that for the February meeting. Compared to the earlier meetings, the Greenbook now projects a 2-3/4 percent rate of growth over 1997 in contrast to just above 2 percent at the July and September meetings and 2-1/4 percent at the February meeting. This follows an unexpectedly strong second half of 1996. To be sure, as is almost always the case in such projections, growth slows to trend over the forecast period. But the combination of a stronger second half of 1996 and an upward revised forecast for 1997 translates into an increase in the level of output and hence utilization rates in 1997 and 1998. At the July and September meetings, the unemployment rate was expected to stabilize near 5-1/2 percent for 1997. Now it is expected to decline to 5 percent this year and below 5 percent in 1998. Just to underline the difficulty in making and selling any policy change, the other important difference in the Greenbook forecast is that inflation for 1997 has been revised downward relative to the July and September meetings. To repeat the second question, how did we FOMC members change our forecasts for growth over 1997 and the unemployment rate at the end of this year compared to the central tendencies of the forecasts that we submitted for incorporation in the Humphrey-Hawkins report? For my part, I see the economy as having more near-term momentum than I did at the last meeting, and therefore I now expect the unemployment rate to be lower in the second half of the year and into 1998. As a result, I have revised upward my expectations for inflation over 1998.",1634
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. For a number of meetings now, the economy has seemed to be deja vu. For some time, we have felt that we were looking at a fully utilized economy, one with tight and tightening labor markets that seemed likely to begin to show escalating labor costs and from there escalating inflation--in short, an overheating economy. But that has not happened so far. In fact, inflation is flat to down according to many statistical series. Our expectation has been that the expansion would slow to growth at about trend and that this might allow us to experience a quiescent inflation rate for some period of time or indefinitely. This is a very rosy scenario. It certainly has seemed quite plausible, and it has been working for a long time. Our policy has been to stay alert, stay asymmetric, but basically to wait and see. While I have never been very comfortable with it, I certainly have been solidly in that camp. But now I think the very strong first quarter that we seem to be experiencing calls into question the continued viability of that scenario. Growth for the past four quarters including this one is going to be somewhere in excess of 3-1/2 percent. That is certainly well beyond anybody's estimate of potential in an economy whose resources already seem to be fully utilized. And it now seems that there is very little that is likely to slow that growth materially. We talked about all the factors this morning: job formation and the purchasing power that it creates, surprisingly strong construction, both residential and nonresidential, sky-high consumer confidence with jobs plentiful, and supportive wealth effects. If consumer spending should slow in the near future, I think we probably would get an inventory pop that would keep things going. Certainly, there is a potential for slower growth if we were to get a stronger dollar or a bear stock market. There are other potential shocks I am sure, but they seem to have a considerably lower probability. The very strong and persistent job formation that we have seen is very likely in my view to start to take its toll on costs. The unemployment rate has been held up as high as it is by the fact that the labor force has been growing at an unexpectedly high rate. The labor force participation rate is now at a record high, I believe, or very close to it. If the rapid growth of the labor force were to slow, the unemployment rate would probably go down substantially and costs would probably and perhaps inevitably rise. But if that labor force growth somehow continues, we will have to wonder about the quality of the new labor and what is going to happen to productivity and costs as a result. Certainly, there is some other combination of potential developments in the labor market. Some employers who are not chasing their firm's stock price will simply restrain production, slow growth down rather than allow their costs to rise. I am sure that many will be able to keep their productivity growing. There are employers who are causing jobs to migrate to lower cost areas, though it looks as if Utah is off the list. [Laughter] Many are going offshore. That is happening, but we have to wonder whether there is likely to be enough of that to affect aggregate indicators of economic performance. There certainly are a lot of things or combinations of things that could stretch out the benign era that we are in. But given what we see happening in the economy right now, what we know about the utilization rate of economic resources, and what seem to me to be the highest probabilities in coming quarters, it may soon be time for us to consider pulling up stakes and moving the camp to higher ground. [Laughter]",729
-fomc-corpus,1997,Is that the result of the floods?,8
-fomc-corpus,1997,"I started to say something like that, Mr. Chairman, but I thought that was just taking it too far.",23
-fomc-corpus,1997,I am glad you restrained yourself from referring to the notion of excess liquidity. [Laughter],19
-fomc-corpus,1997,I would not want to see us get under water. [Laughter],15
-fomc-corpus,1997,"Governor Phillips, I think you better talk now.",10
-fomc-corpus,1997,"My goodness. Well, I guess I am batting cleanup here. Last month we were trying to determine whether the returns for the fourth quarter of 1996 and early 1997 constituted a temporary burst of energy and the economy was about to settle down to the proverbial sustainable growth trend or whether those developments marked the beginning of a stronger growth path. It does appear that we have a bit more confirmation in the direction of the latter than last time. In addition, as Governor Meyer mentioned, we have come out of 1996 with an economy that is operating at a higher level. So, additional growth could put significant strain on our product and labor markets. The areas of economic strength that have been confirmed since our last meeting include consumer spending, which is supported by increases in income from a strong labor market and perhaps even by stock market wealth effects. Housing activity appeared to slow in the fourth quarter, but it is now showing signs of reviving or at least continuing to operate at a relatively high level. In the business sector, we have persisting strength in profits and cash flows, restructured balance sheets, and reasonably priced capital. I see no reason to expect a slowdown in expenditures for equipment or structures. With demand holding up and space shortages developing, we may continue to see strength in construction expenditures with follow-along equipment purchases. If anything, inventories are lean, so the goods-producing industrial sector should be able to maintain its momentum. This rosy scenario does not mean that the business cycle is dead, just that it is a long cycle. Some of the stories that we see concerning the industrial sector are in a sense showing a little more creativity. I would point to the Business Week article this week that indicated the technology industry is about to ""tank."" I must say that I have a hard time swallowing that story. Granted the technology industry is competitive and some fallout is likely to occur among producers, the fundamentals for continued demand for information and communications technology are not going to disappear. The monetary aggregates, although we have not been talking much about them recently, are confirming the economic strength. I believe that the industrial sector is aware that it is about time for us to remove the punch bowl. The only area of weakness in the economy that has been confirmed since the last meeting is net exports. Although this sector is somewhat of a drag on U.S. growth, strength in the domestic economy significantly mitigates the effect. Another area, which Governor Rivlin mentioned, is the fiscal situation. In a sense, stronger economic growth is improving the chances of a successful budget deal. Turning to inflation, although ostensibly it appears fairly benign, I would argue that there are growing signs of latent or pipeline pressures. I would point to average hourly earnings of non-supervisory production workers. The anecdotal stories of labor shortages and wage pressures are increasing, and employers certainly are getting more creative. I hope that productivity improvements will contain labor cost pressures, but it seems to me that there are some limits to this process. Governor Kelley referred to that issue. There are some commodity price pressures showing up: President Moskow mentioned hogs, certainly a prime commodity to which attention should be paid; other commodity price pressures may be seen in metals, lumber, and coffee. There also seems to be a lot of testing of the sustainability of price increases. With energy prices easing off, it is hard to know exactly how quickly any of these pipeline pressures will show through to the CPI, but it seems to me that we have moved further into the inflation alert zone.",707
-fomc-corpus,1997,I assume that the Beigebook did pass through the group around this table before it got out to the public. I would suggest that you all go back and read it. It really is quite interesting to see the difference between what is in that document and what was said around this table today. Shall we go to coffee?,65
-fomc-corpus,1997,Mr. Kohn.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,"Questions for Don? If not, let me start off. It is quite evident that we have come to a point, as we suggested we might at the last meeting, where as Don put it--how did you put it?",46
-fomc-corpus,1997,"""Deliver.""",3
-fomc-corpus,1997,"We have to ""deliver."" Let me, however, review the various aspects of what is going on and try to put them into a policy context, which I think we need to fashion fairly carefully. Let me start with something that has not been discussed very much around the table this morning. The proposition that inflation has stopped falling is not readily provable. That may seem to be a rather ridiculous statement, but if we look at the data, what we see is that the rate of inflation, no matter how we look at it, has been edging lower with some bumps here and there. Even if we add back the BLS adjustments, that conclusion is not changed significantly; it certainly is not changed with respect to the GDP chain-weighted index and the like. The reason is very clearly that productivity is badly underestimated and indeed may actually be accelerating. If we start with the proposition that price levels are moving up very modestly, that domestic operating profit margins are stable or maybe slightly improved, and that consolidated nonlabor costs in the nonfinancial corporate sector are going nowhere, we necessarily end up with the conclusion that on a consolidated basis unit labor costs in the nonfinancial corporate sector, as I mentioned at the last meeting, are not moving very much, if at all. Since we know what compensation per hour is doing, it necessarily follows that productivity has to be rising almost as much as the compensation numbers. Indeed, all the anecdotal stories that we hear tend to confirm that. This suggests, as Mike Prell pointed out, that we may finally be getting the productivity gains that many have anticipated from the synergies created by the rapidly developing computer technology information structure. The gains surely seem to be showing up in a lot of areas, and it is very difficult to understand the profitability numbers we are looking at without some reference to significant improvements in productivity. The reported per share profit figures, I should add, are stronger than domestic operating earnings despite the fact that the dollar has been firming. That's because the earnings of foreign affiliates, which are a significant portion of both the S&P 500 index and the NIPA data, have been rising rather strongly and indeed have been an increasing share of total profits over the last couple of years. So, we have to discount the reported profits at least slightly. But even after doing that, we still get a sense that the rate of increase in operating profits of domestic firms probably implies modestly accelerating productivity. The reason why manufacturers in particular and business people more generally have the view that inflation is dead and the economy is in a new era is that that is the way it feels to them. In other words, if we examine individual company accounts, we find that business firms are offsetting their cost increases fairly aggressively and quite successfully. They are not able to raise prices. Pricing power is gone, and the reason it is gone, as we have discussed previously, is that competitors have sufficiently high rates of return to enable them to undercut price increases and go for market share, should some firm try to raise its prices. This also implies that a degree of slack still exists in the system that all these business people can see. You can speak to any of the most sophisticated corporate managers, and you will get exactly the same story. The answer, of course, is that as sophisticated and farseeing as they may be, their time frame is too short for the purposes of monetary policy. Indeed, as we might put it in a macro sense, there are certain realities that are consistent with perceptions of the individual companies but inconsistent with the macro data. First of all, it is pretty clear at this stage that the tightness in labor markets is increasing. Initial claims for insured unemployment continue at a very low level, showing no signs of turning up. Insured unemployment data have moved off the previous track and have gone down. Help-wanted advertising, which admittedly is not the world's most reliable statistic, has suddenly perked up in recent months in a way that we have not seen for a number of years. Most importantly, as a number of you have pointed out, labor force participation now seems to be rising after being stagnant. And if we look at the internal structure of the workforce, we see that employers are hiring marginal workers. The first sign of some labor market pressure is that new workers are recruited from outside the labor force. The problem is that there is no way to increase the working age population, which means that we can expand our labor resources only up to a point. We then run out of qualified people to hire. The numbers in this regard look quite impressive. We also are seeing that average weekly hours are moving up, and in a sense we are running out of space to expand, at least in terms of labor market resources. The reason I emphasize this is that it is far simpler to evaluate capacity use in the labor market than capacity use of other producer resources, and since either labor or capital utilization limits can restrain economic growth, we need not argue that both constraints are in place. All we need is for one to be exerting a constraining effect and labor supply clearly is. It is very difficult to see the emergence of resource constraints in the nonlabor structure. The reason, of course, is that advancing technology has created a degree of flexibility that we never had before. Not only can business firms now produce customized products in small batches through computerized and rationalized production techniques that they did not have previously, but they can also add features or take them away--do whatever they want--in a way they never had the flexibility to do before. This means that the concept of capacity is far more flexible than ever. The only way that we can detect obvious difficulties or pressures is by watching such things as lead times on deliveries, overtime hours, or other measures of tightness that are symptoms of the difficulty of using the existing state of technology to adapt capacity and facilities to unanticipated developments. One way business firms have accomplished all of that is by moving to a quite remarkable just-in-time inventory system. They have tightened the production system to a point where, as part of its flexibility, they have the capability of essentially not having inventories other than work in process. Indeed, part of the improvement in productivity has resulted from squeezing down the way businesses use resources. As a consequence, inventories measured in terms of days' supply at factory value are now at very low levels. The reason I raise the issue of factory value is that when we are looking at a demand system, the markup of inventories in the distribution channels is not a truly relevant consideration. We are interested in the number of shoes in the distribution channel if we are calculating production; we are not interested in the constant dollar value of those inventories because that will change depending on where they are in the production and distribution process. While I may exaggerate when I say that the markup for the inventories is not all that important, it nonetheless is not as valuable in measuring the tightness of supply and demand as the factory value numbers. For purposes of measuring GDP, the markup obviously increases value added, which is why we calculate it, but it does not give us information about the supply of shoes. It just tells us what the value added has been in the distribution process. One problem with just-in-time inventory systems is that resource use is very tight. Consequently, if anything abnormal emerges, there is a marked rise in delivery lead times or bottlenecks. All of a sudden people who think just-in-time inventory management is terrific find that they now need to add some safety stocks. What happens is that the inventory pattern then begins to turn around even though days' supply may not go up very much. In the current situation, since inventory-sales ratios at factory value have been coming down in general, inventory investment could go up quite abruptly. As a consequence of such a development, there is a very clear underlying tightness in the current inventory situation that is creating significantly more risk on the upside than we had earlier, certainly more than in the summer of 1996 when inventories had backed up and there was a degree of slack in the system. That slack has essentially been pulled out of the system at this stage. It is very hard to believe that personal consumption expenditures are not significantly affected by the wealth effect. Leaving aside the econometrics, I think that whenever we get as huge an increase in financial market wealth as we have gotten, people at some point begin to believe that it is permanent. They start thinking that it is not going to disappear right away and that they are now in a sense richer. That attitude begins to have an impact on consumption expenditures. Indeed, if we look at the decline in risk premiums and/or the cost of capital, what that means essentially is that we are progressively discounting the future less. If we examine the normal processes by which time-dependent investments are made, as the risk premiums and the discount factors fall, we see that production is brought up front from the future. Capital assets are produced today on the basis of expected returns much further in the future than was true in the previous periods. As the risk premiums fall, the time preference moves into the future and picks up additional current demand. I think we are seeing that in consumption expenditures and in home sales. Let me just add parenthetically that awhile back I discussed the discrepancy between the level of home sales and the levels of housing starts and permits. What we were observing was that the level of starts was being supported by declines in permit backlogs and the level of permits was being held down by sales drawn out of housing inventories. I am talking about single-family homes. We now are seeing for the first time at least some pickup in the permit backlogs. This indicates that sales of single-family homes out of existing stocks finally are beginning to induce builders to take out more permits for new home construction. While I certainly grant that the February data were an aberration, they do tend to suggest that housing activity may not be moderating. Certainly, plant and equipment expenditures are crucially related to this time preference issue and are undoubtedly being affected by the evidently continuing rise in the prices of commercial real estate and the quite pronounced decline in vacancies, especially in suburban areas. We are beginning to see some upward movement in commercial rents. Having said all of that, we are not at this stage moving into what I would describe as an overheated boom. We are short of that. For example, it is certainly the case that homebuilding is at a relatively high level, but it is not accelerating. Motor vehicle sales, I think, are a little softer than Mike Moskow was suggesting. Our reading of the same people he spoke to a week ago comes out with a slightly smaller number. Chain store sales have tended to flatten out. In other words, this economy is not running away to a degree that would suggest we have to hold everything in place. What we have at this stage is a situation that is clearly evolving over time. In fact, as I said at the beginning of my comments, we still do not have concrete evidence to suggest that the inflation rate has stopped going down. In this situation, we can allow ourselves a fairly considerable amount of time to act. Therefore, I do not think that there is any particular urgency to move in a very aggressive way. I do think we have to move, but I don't think that we have to be concerned about being behind the curve in any measurable way. Certainly, there are some principles that clearly need to be kept in mind here. One is that recent experience tends to reinforce our view that low inflation is very positive to economic growth, to employment, to stability, to all the good things we talk about with respect to the economy. Therefore, it is crucial to keep inflation low. The argument that we can wait until we see signs of inflation before taking action fails to take account of how important this low inflation environment apparently has been in enhancing the recent performance of the economy. It strikes me that whatever we do, we need above all to make certain that we keep inflation low, risk premiums low, and the cost of capital low. We recognize that that can create unusual problems within balance sheets and the like, and members have expressed some concerns regarding those problems of late. Nonetheless, if we are talking about long-term equilibrium, high market values are better than low market values. What we are trying to avoid is bubbles that break, volatility, and the like, but we are not opposed to the implications of low inflation, which include relatively low risk premiums and fairly strong economic activity. I conclude that what we clearly need at this stage is finally to move off the dime. I think that 25 basis points is enough for now; indeed, I will argue against 50 basis points in a minute. It is conceivable that economic growth may slow, and it is possible to interpret the data we have seen as suggesting that backlogs, new orders, and sales are beginning to turn sluggish outside the high-tech area. As far as the high-tech sector is concerned, we have seen a very strong acceleration over the last two or three years that is numerically unsustainable because if that rate of growth were to continue, the high-tech area would soon account for 120 percent of GDP! That clearly is not going to happen. I think the stock market is telling us that the growth projections implicit in some of those earnings forecasts for high-tech industries are unrealistic, and there is some evidence that this sector is beginning to flatten out. One of the reasons why I suspect that Microsoft is not moving terribly fast in coming out with a Windows 97 is the fact that they are getting some resistance to all these technological changes. There is a physical incapability of putting in one software revision after the other, and this reaction could very well be in the process of occurring. I would not rule out as a significant probability, perhaps not a high probability, that the current economic expansion is on the verge of some slowing. If that does happen, 25 basis points is not going to be a major inhibiting factor, but 50 basis points, which the market is not expecting, could be very jolting indeed. I want to recall a conversation we had when we last decided to move up the federal funds rate after a long period of no change. That was in February 1994. We had a lengthy discussion as to whether we would move 50 basis points or 25 basis points. We did 25 basis points and the market almost fell apart, but not because they did not expect us to move. As you all know, I had been out there in the immediately preceding weeks in effect waving a red flag saying we were about to do something. We did it and somebody asked, ""Why didn't you tell us?"" At this stage, the market is expecting 25 basis points. It has discounted such a move, frankly, but it has done so in a positive way, not a negative way. The stock markets are up this morning; the bond market is up. I think that if we were to move 50 basis points today after a long period of doing nothing, though being vigilant if you like, we suddenly would shock the market into thinking that we must feel that we are behind the curve. We are not behind the curve, and we have a lot of time to take various actions as we perceive the need to take them. I think the odds are better than 50/50 that the move we are considering will not be our last tightening move. We are very likely to have to move again, though I see a low probability of a very considerable near-term acceleration that would raise inflationary pressures and require us to move before our May meeting, which you will remember is two months away. I think we would have to have a telephone conference to consider such a move partly because the views regarding the risks of rising inflation among our constituents, especially the business community, deviate so far from where we are that it is very important for us not only to move appropriately but also to make certain that people understand why we are doing it. You may recall that there was a fairly broad consensus at our last meeting that we ought to condition the markets in the Humphrey-Hawkins testimony to the likelihood that we were finally going to move. I think that was a desirable thing for us to do. I would say that the stage is set for us to take action, and I would argue that we should do only 25 basis points. I must say that it definitely would be better to do 25 basis points than to do nothing. I believe a failure to act would be a major mistake, given what we see out there in the economy. I would prefer symmetry at this stage if for no other reason than our having been asymmetric for so long I am worried about devaluing the currency so to speak. I do not think that symmetry or asymmetry will affect our actions one way or the other, and I must tell you that I do not feel strongly about my preference. If we were to move further before the next meeting, we would do so with a preceding telephone conference, so as a practical matter the symmetry or asymmetry doesn't mean anything in this situation. It does, however, establish a presumption that we probably would move again in May. The issue is basically whether we want to convey that notion in advance, because having asymmetry and then not moving again is something that I think we ought not to get involved with. In sum, my view on the symmetry/asymmetry issue is more a mechanical than a policy matter. Governor Rivlin.",3541
-fomc-corpus,1997,"I would strongly support this set of moves--the 25 basis points and a symmetric directive. I think what we say about our action is terribly important, not just in the announcement but what we all say about it over the next few days. I believe the key words should be that we want to sustain the growth of the economy and to sustain our ability to have tight labor markets. There is an enormous benefit, which we are seeing, in having tight labor markets, and I think we ought to say that sustaining them is our goal. I also would support a symmetric directive because I think there is significant uncertainty about whether we will want to move again in May. We do not want to stack the deck.",142
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I strongly support your recommendation for a 25 basis point increase in the funds rate, and I can accept your recommendation for a symmetric directive though I could have been persuaded to go for an asymmetric one. I will come back to that later. I want to focus my remarks, though, on an analytical framework for supporting this kind of a move. First, I want to consider the implications of the Taylor Rule and talk about the importance of a flexible approach to interest rates in response to economic developments. I also want to explain why we should not leave the task of countercyclical policy to the bond market and present an interpretation of tightening in terms of what I will call the maxi/min solution. The Taylor Rule, as Don Kohn noted in his presentation, would suggest no move at this meeting because utilization rates are about the same as they have been and core inflation is actually lower. While the Taylor Rule does not provide support for an action today, it would suggest that, if the Greenbook forecast proves to be correct, we will want to tighten later. There is, however, an alternative specification of the Taylor Rule that would, in my view, support a tightening of policy today. I will call it the forward-looking Taylor Rule. To be sure, the standard rule is forward-looking to a degree in relation to inflation because it includes current utilization rates. But in the forward-looking Taylor Rule, actual values of inflation and utilization rates are replaced by forecasts. There is a growing literature on forward-looking policy reaction functions. An early paper was done by Steve McNees at the Federal Reserve Bank of Boston in the mid-1980s and updated in the early 1990s. Over the last year, in fact, there has been a flurry of additional work along this avenue, including work in progress at the Board, which finds that policymaking has tended to evolve over the last 15 years from reliance on incoming data to gradual responses to forecasts. However, these papers are an exercise in description and what we really need is a normative analysis to confirm that moving in response to forecasts, given the accuracy of forecasts, would produce better results than responding to actual data. Would such a forward-looking reaction function provide support for moving today when we did not choose to move at earlier meetings? In terms of thinking about raising interest rates today, we might interpret the recent strengthening as a shift in the IS curve and ask whether monetary policy should impose a horizontal LM curve that would resist the natural tendency for stronger growth to push up interest rates. Alternatively, should monetary policy enforce an upward sloping LM curve that allows a stabilizing response to cyclical strength? In fact, there has been a lot of discussion or implicit commentary around the table about the old pegging strategy, the mistakes of the 1960s, and also more discussion of M2 than at any of the previous FOMC meetings that I have attended. One of the implications of imposing that horizontal LM curve is allowing an acceleration of M2 growth in response to a shift in the IS curve. Some might argue that because long-term interest rates already have risen along with the dollar, the economy is moving along an upward-sloping LM curve. I do not believe, however, that we should leave monetary policy to the bond market. The question is whether we should be validating or resisting the recent move in long-term rates. That move after all reflected to a significant degree the bond markets' expectation of a shift in monetary policy, particularly as a result of the Chairman's recent testimony combined with the recent strength in the data. Let's pat the bond markets on the back and tell them that we appreciate their effort but also let them know that they should not have to do all the work. Finally, let me discuss the maxi/min solution. Here I compare the consequences of two types of mistakes we could make today: not tightening when that would have been appropriate versus tightening when it was not needed. In this approach, a decision today can be interpreted as selecting the best of the worst possible outcomes. First, consider what would happen if we tighten when that turns out to be unnecessary, NAIRU could turn out to be lower than anticipated, productivity growth higher than projected, or demand unexpectedly weaker. The unemployment rate could then be higher than would have been desirable and inflation lower than otherwise. In this case, the unemployment rate would still be at a historically low level and inflation would be moving toward our long-run objective, not a really bad outcome. Indeed, that would be a preferred outcome for some on this Committee. On the other hand, if we failed to tighten when it would have been appropriate to do so, the excess demand gap would open or widen and inflation could increase. We would then face the Taylor Rule's triple whammy on the funds rate. We would have to raise the funds rate to prevent the real rate from declining, to counter the rise in output relative to potential, and to combat the increase in inflation relative to our target. This is usually an ugly affair. It does not end well for the economy. Mr. Chairman, because I am guided by a forward-looking specification of the Taylor Rule, because I believe we should be flexible in adjusting interest rates to changing economic developments, because I think we should enforce an upward-sloping LM curve in response to shifts in the IS curve, and because it is a maxi/min solution, I support your recommendation for tightening monetary policy. Because containing a threat to higher inflation is likely to require some further increase in short-term rates beyond the small change contemplated today, I could have accepted a call for an asymmetric directive. I think that is particularly true given that your comments raised the possibility, if not the likelihood, of a move between now and the next meeting. That sounds like an asymmetric directive to me. But I do not see that as a very important point, and I can certainly accept your scenario.",1193
-fomc-corpus,1997,Vice Chair.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I think that the best thing to concentrate on at the moment, or at least what I find myself concentrating on, is what we do not know. Even though we have had a lot of rather good albeit partial explanations, I think we are not, and certainly I am not, altogether sure why inflation and the cost-push causes of inflation have been so benevolent. We are tightening now largely because we as a group have decided--and certainly I believe--that the risks of waiting further have become excessive and therefore unacceptable. Then the question arises as to how much we should tighten. I think 25 basis points does two things. It indicates our concern, especially given the fact that a shift in policy direction is involved, but it does not pretend that we know more than we know. I, at least, am not so sure that the benign performance of growth and inflation, which we have found acceptable since last July, is going to end soon. Therefore, I think it is appropriate that our response be moderate and in that sense a 25 basis point increase is enough. I believe a 50 basis point move would indicate a far greater assurance regarding the end of the benign period--that it is more highly predictable and will occur sooner--than I feel intellectually or in any other way. The asymmetric directive--I think I have become almost the resident theologian on what asymmetry means--is inappropriate now. I believe that the combination of a move with asymmetry would cause us to fall into the same trap of assuming something that we do not know. If, as is possible and not absolutely a no-brainer, we decide that we have to increase the fed funds rate again either before the next meeting or at the next meeting, the lack of asymmetry when we announce it in releasing the minutes the Thursday after the May meeting will not be very important to anybody. Consequently, I think the 25 basis point increase and a symmetric directive are most consistent with what we know and maybe more importantly with what we do not know.",414
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, I support your recommendation on the federal funds rate. Though I might prefer asymmetry, given your comments I would also support symmetry.",30
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, I can accept your recommendation. On balance, I think the case for a larger move is stronger than indicated by others who have spoken to this point. But I am satisfied with 1/4 point. It is a way of getting back into the ballgame, so to speak, and reaffirming our longer-term commitment to price stability. I do think, as you suggested, that this move very likely will not be our last and that we will have to tighten further. And I see a good chance that the tightening may happen sooner rather than later, perhaps before the May meeting. I hope we will move promptly if we need to do so. In that context, I would prefer an asymmetric directive because I think the situation even after a 1/4 point increase is still going to be asymmetric. The issue is not a deal breaker for me, but I have more than a marginal preference for asymmetry. If I could add one other hopefully preemptive point: In this situation, I think there is some possibility the dollar could strengthen. I am not predicting that, but I think it is possible. If it should, I hope we will resist the temptation to engage in any foreign exchange market intervention because I think that would dilute the signal we want to send with this move.",262
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, I should mention that the estimated Taylor Rule, which we use as a policy reaction function in our forecasting model and which I think is preferable to the original Taylor formulation, suggests a gradual rise in the funds rate totaling about 100 basis points, with the increases beginning in the second quarter and continuing through the end of this year. The degree of tightening is very similar to the one assumed in the tighter policy simulation in the Greenbook. According to our analysis, a path like this for the funds rate appears necessary just to hold the line at around 3 percent on core CPI inflation. It certainly is time to take an initial step in tightening policy. While I think the case for a 50 basis point increase is stronger than you do, Mr. Chairman, I would support a 25 basis point increase to 5-1/2 percent. I also would strongly prefer to have language in the directive that is asymmetric toward further tightening since I think that course of action is likely to be appropriate in the future. It seems to me that there was very little, if any, discussion around the table that would be consistent with a symmetric directive. Thank you.",235
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, as we all have said, we need to be forward-looking in our policy, and I think a rate of inflation as high as the forecast we have seen today is clearly unacceptable. Just looking at the Greenbook forecast of a core inflation rate of 3.2 percent by 1998, that rate would increase to 3.6 percent if we added back the BLS methodological changes. Although this forecast has not changed since our last meeting, I think we are more confident about the forecast today than we were then because of the persisting strength in the economy and because of other changes in the forecast, as Larry Meyer pointed out in his comments. Therefore, I clearly support your recommendation for the 25 basis point increase, and I prefer 25 basis points to 50 basis points for the reasons that you explained. I would prefer an asymmetrical directive, but I do not feel strongly enough about it to dissent on that issue.",192
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, I fully support your recommendation for both the 25 basis points and the symmetric directive. I, like many others, could support an asymmetric directive as well, but I think your wisdom in this case is good as usual.",48
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"I support a 25 basis point increase. We ought to explain this tightening action by indicating that we think we will increase the chances of prolonging the expansion by moving now. We central bankers ought to like job creation; we ought to like growth; we ought to like prosperity, and I think we ought to explain our actions in the context of favoring those things. Indeed, if we have learned anything, it is that low inflation is pro-growth rather than anti-growth. With regard to the symmetry issue, I think the choice of symmetry or asymmetry is based on a flexible theology. It seems to play different roles at different meetings, and I do not have strong feelings one way or the other. But I think your rationale is as good as any, Mr. Chairman, so I would vote for symmetry.",163
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"I am generally comfortable with your recommendation, Mr. Chairman. I do not want to dwell on too many nuances, but let me just make a couple of additional comments. Like President Broaddus, if I interpreted him correctly, I guess I am somewhat less confident than you that we are not behind the curve. My concern is that there seems to be a lot of momentum to demand in the economy, and that momentum could translate into rising inflationary pressures. While I agree with your assessment that we probably have been underestimating productivity growth for some time, I wonder how widespread that mismeasurement is and what the prospects for productivity are going forward. Mike Prell's report on the dichotomy between the views of the banker and the industrialist is perhaps a little indicative. There is no doubt that the productivity increases have been substantial in manufacturing, but people in the financial services industry at least implicitly suggest that they have not achieved the same kind of gains. I think that is one of the reasons they have not quite bought into the ""new era"" story the way others have. Having said that, I think that when we make policy adjustments like this, it pays to be cautious. We are uncertain about the outlook; we are uncertain about the effectiveness of policy; and because of those uncertainties, I think we ought to be cautious. As I said, I am comfortable with your recommendation.",278
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"I, too, am comfortable with your recommendation, Mr. Chairman. I came to this meeting with a preference for an asymmetrical directive, and even after the discussion, I still have a slight preference for that. But you and others have argued very persuasively that it is not a big deal in present circumstances, so I am comfortable with a symmetrical directive.",73
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I support your recommendation to tighten 25 basis points. I am not sure how much tightening ultimately is going to be needed, but caution seems appropriate when we change the direction of policy. I support a 25 basis point move. At 5-1/2 percent, we may not be that far out of alignment, so symmetry seems like the right message to me.",75
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Alan, I agree with what you said in terms of the likelihood of more tightening down the road. I think we will need to do more, and I might be inclined to do more at this point, but I can accept your recommendation.",48
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Mr. Chairman, I support the 25 basis points and I support the symmetrical directive on its merits.",21
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"We are now entering the seventh year of the expansion as dated by the National Bureau. For the most part, it has been an extraordinary expansion in that not only has inflation been contained, but more importantly it has tended to drift down through this expansion period, which is remarkable. Last summer when Fed watchers--Wall Street types especially--were certain that we were not only going to raise rates then but that a tighter policy was needed, I was comfortable in not supporting that view. I felt from a forward-looking perspective that we would continue to get productivity increases, downward pressure on inflation, and a concurrent decline in the unemployment rate. People's perception about capacity and how much slack existed would be changing, which allowed us the luxury of leaving the nominal funds rate where it was and not incurring any trouble. But I also was counting on not having an acceleration in the growth of nominal final demand. For quite a while we had been in a period where the successive Greenbook surprises were in the direction of lower nominal spending growth than previously forecast. Not only was inflation lower, but nominal spending growth and domestic final demand growth were lower. Even as recently as the December Greenbook--a week or two away from the end of the quarter--we were looking at a fairly modest growth rate of nominal spending of under 5 percent for the fourth quarter. Of course, it did not turn out that way. It came in much, much stronger. But then in the February Greenbook we still were looking at the reported strength in the fourth quarter as having been a one-time occurrence associated with such things as seasonals, weather, and the trade sector. Now we are looking at a situation where nominal spending growth accelerated very sharply in the final two quarters of the sixth year of this expansion and, more important in some ways, where the domestic component of final demand accelerated in those two quarters. All of that may turn out to have been a one-time thing, and spending growth may decelerate significantly from these levels. But when we look at virtually every measure of money and credit, the monetary base, Ml, MZM, and so on, not only for this country but around the world, we find that such money growth rates have accelerated sharply. That says to me that the world's central banks are financing an acceleration in final demand and that monetary policy could very quickly come to be viewed as being behind the curve and require a lot of adjustment to make sure that money growth does not start sprouting out in higher inflation.",501
-fomc-corpus,1997,We have acceptance of 25 basis points and--I'm sorry. President McTeer.,18
-fomc-corpus,1997,Ditto. [Laughter],7
-fomc-corpus,1997,Ditto what?,4
-fomc-corpus,1997,"I agree with your recommendation, and I also agree with Governor Rivlin and Ed Boehne on the pro-growth rhetoric.",25
-fomc-corpus,1997,I knew I was missing an important voice.,9
-fomc-corpus,1997,"If you want, I will tell you an Aggie joke! [Laughter]",17
-fomc-corpus,1997,We don't have time for that!,7
-fomc-corpus,1997,"There is a marginal consensus toward symmetry as the first choice. Therefore, I will ask your vote on 25 basis points with symmetry.",27
-fomc-corpus,1997,"The directive wording is from page 12 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks to increase slightly the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the expansion of M2 and M3 over coming months."" Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes",153
-fomc-corpus,1997,"Given the possibility that we would do this, I already have a draft of what we may want to announce. I will read the whole draft announcement. ""The Federal Open Market Committee decided today to tighten money market conditions slightly, expecting the federal funds rate to rise about 1/4 percentage point to around 5-1/2 percent. This action was taken in light of persisting strength in demand, which has progressively increased the risk of inflationary imbalances developing that would eventually undermine the long expansion. In these circumstances, the slight firming of monetary conditions is viewed as a prudent step that affords greater assurance of continuing the current low inflation environment for the rest of this year and next and prolonging the economic expansion. The experience of the last several years has reinforced the conviction that low inflation is essential to realizing the economy's fullest growth potential. No change was made in the Federal Reserve discount rate, which remains at 5 percent."" Is that acceptable to everybody? I would put it out in the name of the Committee because this is such an important document. I hope you do not mind in this context.",223
-fomc-corpus,1997,"Mr. Chairman, one suggestion for your consideration.",10
-fomc-corpus,1997,Sure.,2
-fomc-corpus,1997,"About two sentences from the bottom, you list inflation first and growth second. I would suggest reversing the order in which you say those two things.",29
-fomc-corpus,1997,Let me think about whether the grammar holds.,9
-fomc-corpus,1997,We have to do that for sure.,8
-fomc-corpus,1997,"I had the same reaction. It was a little heavy on inflation, and since we do not have any, I don't think we want to be stressing that quite so much.",35
-fomc-corpus,1997,You favor reversing the order in that sentence?,9
-fomc-corpus,1997,"Yes, or some other verbal means of emphasizing growth a little more, inflation a little less.",19
-fomc-corpus,1997,"That is the reason the previous sentence says in part ""and prolonging the economic expansion."" It was meant to capture that thought.",26
-fomc-corpus,1997,It is there.,4
-fomc-corpus,1997,"Let me see if it creates grammatical monstrosities to reverse the sequence in the last sentence. Let me remind everybody that we are going to lunch to say our best departing words to Janet Yellen, and a lot of people will be there who do not have access to what we have done. The announcement will not be released until 2:15 p.m. Please be particularly careful in observing this central bank confidence. It may or may not be crucial, but it would be awful to find that somebody picked up something and it got out prior to the 2:15 p.m. release to the press. Also, as Joe Coyne will tell you, we have a rule about not commenting about what we have done during the next week. I merely emphasize that. We have no further business except to note that our next meeting is on May 20. See you all at lunch. Lunch is at 1:00 p.m.?",189
-fomc-corpus,1997,At 1:00 p.m.,8
-fomc-corpus,1997,Would somebody like to move approval of the minutes?,10
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,Without objection. Mr. Fisher.,7
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will be referring to a package of six colored charts with a peach FOMC Class II cover. [Statement--see Appendix.]",34
-fomc-corpus,1997,The dollar/yen decline from May 5 through this morning is as sharp as I recall a major exchange rate ever moving. Is my memory faulty or is this a quite extraordinary shift?,37
-fomc-corpus,1997,"Yes, it is extraordinary. I'm sorry that I don't know precisely how it compares with large movements in the past, but I think the shift over this period of several days now exceeds the dollar/yen move during February 1994 after the Clinton/Hosokawa disagreement on trade. I can't recall any larger move over the last 5 years.",70
-fomc-corpus,1997,Do we have any evidence that the Bank of Japan was selling U.S. Treasuries in this period?,22
-fomc-corpus,1997,No.,2
-fomc-corpus,1997,"In other words, you are not picking up evidence of official intervention in the data or other sources of information, and as far as you can see, the currency price change is strictly the result of private market forces.",43
-fomc-corpus,1997,"That goes one step further than I would be comfortable with. Let me try to explain what I only hinted at in my statement, namely, the impact on the dollar of intervention by the Bank of Thailand and other Asian central banks.- I will try to be pithy about this. I think the simplest example is to take the Hong Kong dollar but only as a hypothetical case; that currency did not come under much pressure in this period. As you know, Hong Kong runs a peg to the U.S. dollar. If $20 billion, for example, moves from Hong Kong to Japan and the peg is maintained, the one thing that we know will happen is that the dollar will go down against the yen. Now, if we extrapolate that to Thailand just for purposes of an example, that country runs a peg against a currency index in which the dollar has a roughly 80 percent weight. When the Thai authorities defend their currency, funds flow out of Thailand to repay leveraged financing in Tokyo. Thailand defends the baht by selling dollars either spot or forward, and the net effect shows up in dollar/yen movements to the extent that the Thai authorities are successful in maintaining their peg to their index, which they have so far. So, I think the dollar/yen was affected to a significant extent by some of the intervention in defense of Asian currencies and other currencies in this period. It was not a direct effect.",286
-fomc-corpus,1997,"Since we know the particular days when the dollar was under real tension, and I presume that we at least had the benefit of some judgment from market sources, if not officially, as to when a lot of the intervention and related movements of funds was occurring, can we trace such intervention to the actual days in which the dollar was particularly weak against the yen?",71
-fomc-corpus,1997,"Yes, the dollar's weakness occurred on the days when the Bank of Thailand initially intervened in size, May 6 and 7, but not so much in the days that followed. May 6 and 7 were days when the Bank of Thailand's defense of its currency was building up, although there were indications that they had been defending their currency for a while on a modest scale. It was at the start of that week of May 5 to 9 that Thailand announced some disappointing forecasts for its budget and economic growth for the coming year. Pressures began to build on their currency, and the exchange market activities were thought to be related to that.",133
-fomc-corpus,1997,It doesn't necessarily have to happen immediately.,8
-fomc-corpus,1997,"No, no.",4
-fomc-corpus,1997,What happens is that portfolio adjustments start to cascade--,10
-fomc-corpus,1997,"Yes, precisely.",4
-fomc-corpus,1997,"And it takes a few days at least for that to work its way through. A lot of it is essentially automatic because individuals have no particular desire to sell dollar holdings, but they end up with a maldistribution to which they have to adjust, and that is what has been happening. Governor Rivlin.",61
-fomc-corpus,1997,"Peter, what do you think you learned from the April surprises affecting the federal funds rate, or what do you think you need to learn before next April?",31
-fomc-corpus,1997,"That we all need to go back to the drawing board on forecasting taxes, and I will not pretend to be the expert on that subject. I think our projection problems were universal--New York, the Board, and the Treasury. None of us had it right. Mike Prell may be able to offer more insights into this than I. Such a study clearly will require a major effort. We had some rather big surprises last year, and to be candid we thought we had learned from them. So, that is a major area for study.",109
-fomc-corpus,1997,Do we have sufficient regional data to help us locate as we go along where an excess Treasury balance is coming from?,23
-fomc-corpus,1997,"No, we do not. There is a rather disappointing inability to take the Treasury tax information and quickly derive statistics that we would find useful.",28
-fomc-corpus,1997,"We have daily information on some regional characteristics of the tax receipts, and we know from the statistics of income where there are big capital-gains taxpayers and what may change. Has anyone been able to infer anything from the regional pattern?",46
-fomc-corpus,1997,I am not aware that anyone has tried that; it is an interesting idea. It sounds like a lot of work.,24
-fomc-corpus,1997,Big Blue could do it. [Laughter],10
-fomc-corpus,1997,I am not sure that we have that much free computer space right now! We can check into it.,21
-fomc-corpus,1997,"The other part of your question, Governor Rivlin--or the other part of my answer--is that I was very pleased that our announcing the quantity of RPs helped the market get a quicker handle on how far off we all were on our forecasts, and that I think was a help. We did operate twice in one day on two occasions. That was not to fine-tune the rates but because of the paucity of propositions we had from the dealers and how far off we were going to be unless we tried to add some reserves by going back into the market. I think the dealer community responded rather well to that in terms of not thinking we were flying off the handle. The added flexibility to the Desk was helpful. I think the tools worked fairly well. The first time we had a big miss in propositions, it did occur to me that it might be nice to be able to do foreign exchange swaps to inject reserves when there was a paucity of collateral. I don't think it was really necessary, but that thought at least crossed my mind.",212
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Throughout this period, wasn't there evidence of a reduced appetite for U.S. securities by Japanese investors and some speculation that the Ministry of Finance actually had played a role in this reduced appetite?",37
-fomc-corpus,1997,"Anecdotally, we at the Desk have heard the same stories. I have not been able to see that in any data anyone has shown me, but there are some lags in this process.",42
-fomc-corpus,1997,There will be data on that?,7
-fomc-corpus,1997,"There will be some data on that. I have heard it said by a number of people whose views on the markets I respect that they think the very sharp movement in the dollar/yen means that U.S. Treasuries are now at attractive levels for Japanese investors to purchase on the principle that they have taken losses and it is done. I think that the net impact of these movements has been to produce a fairly good two-way market. Clearly, there was some aggressive verbal intervention, both public and private, on the part of the Ministry of Finance. I think that is regrettable, given the nature of the volatility it has engendered.",130
-fomc-corpus,1997,Mr. Hoenig.,5
-fomc-corpus,1997,"Peter, in your statement, you said that you thought there were more adjustments to come in the dollar/yen. I don't know if that had to do with portfolio adjustments. Can you elaborate on that just a little?",44
-fomc-corpus,1997,"I just mean that this is only an initial round of market expectations that the Bank of Japan may start tightening sometime later this year. Differentials remain rather wide against yen fixed-income assets. I do not mean to draw a perfect analogy from this, but in 1994 the Committee started raising rates in February and we all remember the Orange County bloodbath in December. That was a full thirteen months after long bond yields started to back up in October and November of 1993. There are different mark-to-market conventions in Japan. Some institutions do not have to; they can just hold their fixed-income assets at historic cost. Others have to mark to market. We have a more mark-to-market financial system than the Japanese. That does not mean the losses in Japan are not buried there somewhere. They are, but they do not come to the fore as quickly. Foreigners who borrow at low interest rates in Japan are subject to a mark-to-market discipline.",192
-fomc-corpus,1997,Any further questions for Peter? Would somebody like to move approval of the Desk's operations?,18
-fomc-corpus,1997,Move approval of the domestic operations.,7
-fomc-corpus,1997,"Thank you, is there a second?",8
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"Without objection. Let us move on to the economic report, Mr. Prell.",17
-fomc-corpus,1997,"Thank you very much, Mr. Chairman. Carol Low is distributing a table to which I will be referring in a couple of minutes. [Statement--see Appendix.]",33
-fomc-corpus,1997,Questions for Mike?,4
-fomc-corpus,1997,"Mike, the story you tell about the past and your concerns about the future are consistent with a supply side surprise--a productivity shock. In a passive sense, what happens is that we accommodate the existing demand because we peg a nominal interest rate while the natural rate--the real rate--is shifting up during the period. We see not only an acceleration in nominal spending growth but in money and credit growth to go along with it and make it all possible. What are the dynamics, then, that cause this process to reverse and growth in nominal spending to slow? I am referring to your baseline forecast and not to your concern about the upside. Is it not true that, in effect, the natural rate shifts back down and we then get the slowing that the staff is projecting in money and bank credit growth? We get what you refer to as a fairly attractive scenario.",173
-fomc-corpus,1997,"You are talking about the natural rate of interest, I presume.",13
-fomc-corpus,1997,Right.,2
-fomc-corpus,1997,"I guess one could interpret what I have said about the stocks of capital goods and so on as implying a lower natural rate going forward. One could look at this from various vantage points. Whether, indeed, one should view the development of surprisingly strong growth over the past year as a favorable supply shock, I am not sure. There certainly are some elements in the picture that support that view. The labor force growth that we have had over the past year might fall in that category. If one felt that we were seeing something more than the normal kind of cyclical kick to productivity over the past couple of quarters as output growth surged, say from strengthened aggregate demand, then that might be characterized as a supply shock. I am not sure that conclusion is clearcut. Indeed, by our normal rules of thumb and model results, I do not think we have had any more productivity acceleration in the past couple of quarters than one would have expected with a surge in aggregate demand, a rise in output, and firms being able to get more mileage out of their existing resources.",212
-fomc-corpus,1997,"President Jordan, in thinking about the real rate relative to its equilibrium or natural level, I don't believe that a real rate a bit below its equilibrium level, as apparently it has been, would be inconsistent with the staff forecast. In fact, it is perfectly consistent with the economy producing at a level beyond its potential on a sustained basis and inflation just creeping up under those circumstances. It would not necessarily be the case that if the real rate were a bit below its equilibrium rate, the gap between where the economy was and its potential would widen. So, I do not think the staff forecast requires the equilibrium rate to drop back down again. In fact, the staff forecast is consistent with the equilibrium rate being a bit above where real rates are right now.",150
-fomc-corpus,1997,"I am not clear on that. I understand that your framework is different, but if growth in nominal demand accelerates to a rate of 8 percent, as it did in the first quarter, what are the dynamics that will cut such growth in half unless you say the surge is all statistical error and it will unwind itself? But if the dynamics of your adjustment process include an accommodation in behavior to the increase in nominal demand, what causes the second difference to turn negative?",94
-fomc-corpus,1997,"Can I answer that? I think there are two factors that, taken together, are consistent with your framework. One involves inventories. If we have a buildup in inventories that is incapable of being sustained at the same rate, we do not have to have a change in the actual interest rate versus the natural rate for the growth process to turn down. What we have here is an adjustment process that is not affected by the differential between the actual and the natural rate. Secondly, there is a serious question here about seasonal adjustments. If growth in nominal demand was significantly higher, seasonally adjusted, in the first quarter because the weather was warmer than usual, and such growth was unusually low in the second quarter, you would not be looking for an explanation in the real world. I suspect that the combination of both of those factors is enough to explain the full shift in the nominal GDP. I do not know that for a fact, but it is certainly going in the right direction.",194
-fomc-corpus,1997,"For confirming evidence of that, we would expect to see slower money and bank credit growth emerge in this period. At least the staff projection, I take it, is that we are going to get that. Some of the surge never was real because it reflected bad seasonals and an inventory buildup that will go away. To be sure that interpretation is right, we would need in a sense to accommodate a much slower growth of money and credit; otherwise we missed it.",93
-fomc-corpus,1997,"Barring some shift in the demand for money--this is almost tautological--we would expect to see slower money growth with the moderation in nominal GDP expansion that we are anticipating. But our forecast in a sense says that, on an intermediate-term basis rather than looking quarter-to-quarter and defining movements in natural rates of interest in that sense, we have the actual rate too low relative to the natural rate to bring us back to equilibrium between actual and potential output. In other terms, we have an ongoing gap between the natural unemployment rate and the actual unemployment rate and some tendency for inflation to pick up.",120
-fomc-corpus,1997,"In our judgment, President Jordan, we are seeing some slowing in money growth in recent months when we abstract from the accumulation of balances for the payment of taxes. In looking through that kind of thing and taking account of the fact that we have essentially a no-growth forecast for M2 in May, we think that the rate of growth in that aggregate has in fact decelerated a couple of percentage points from the first to the second quarter.",88
-fomc-corpus,1997,"As you know, we use MZM to monitor how these things happen because it does not have the sweep problem. It grew at a rate of 8 percent in the first quarter, right in there with nominal GDP. For the second half of this year, we would expect MZM to get down to a 3 to 4 percent growth rate if this forecast is right.",76
-fomc-corpus,1997,"As we have pointed out previously, the money demand relationship, the relationship of velocity and opportunity cost, has been quite stable over the past couple of years. And we have not had a big movement in interest rates, so you would expect close to equal growth of M2 and nominal GDP.",58
-fomc-corpus,1997,"Okay, any further questions for Mike? If not, would somebody like to start the Committee discussion? Mr. President.",24
-fomc-corpus,1997,Me?,2
-fomc-corpus,1997,From the Republic of Texas. [Laughter],10
-fomc-corpus,1997,President of the Republic of Texas.,7
-fomc-corpus,1997,Just remember that we cannot take a position on political issues. [Laughter],16
-fomc-corpus,1997,"Mr. Chairman, the Republic of Texas and the Eleventh District are much the same for all practical purposes, and they both continue to do as well as the national economy. Our job growth has been converging on the national mean for about a year, after several years of stronger growth. Positive factors contributing to the performance of the Eleventh District include the continued recovery of the Mexican economy, the more recent recovery in semiconductors, and technology-driven gains in oil and gas exploration. Based on my careful monitoring of cocktail party conversations--which I consider an important part of my job description--I can report that Texas is experiencing a mild but discernible mood shift having to do with the incipient recovery in commercial real estate. There have been several recent sightings of the construction crane, which had been the national bird of Texas [laughter] but which has hardly been seen in the past 10 years and was thought by many people to be extinct. The emerging mood is one of exuberance, although tempered and made more rational by the long memories of the people with whom I hang around. But even rational exuberance makes many Texans nervous given the bust that followed the previous boom. That sort of caution, of course, is to be expected and welcomed. However, I hope the crowd around this table does not become overly nervous about the recent show of strength of the national economy. If the first quarter's 5.6 percent real growth rate is too much for comfort, I suggest that we focus on the real final sales number of only 3.8 percent. That is still a high number, but we are already down the road from the first quarter and have some ""reassuringly"" weak recent monthly numbers. Let the record show quotations marks around the word ""reassuringly."" Industrial production was flat in April. Payroll employment growth slowed in March and April. Retail sales declined slightly in April after being flat in March. Producer prices have declined for 4 consecutive months, down .6 percent in April. CPI increases also have moderated as energy prices have reversed last year's buildup. The Greenbook has real GDP rising only at a 1.8 percent rate in the second quarter and for the next 6 quarters it projects growth rates of 2.5, 2.3, 2.1, 2.0, 1.9 and 1.9 percent. As I understand it, these projections assume no fed funds target rate increase until mid-1998. Even if strong real growth were something to fear, those numbers would hardly seem frightening. Actual measured inflation also has declined in recent months. The Greenbook has the first-quarter CPI rate at 2.3 percent; its CPI forecast for the second quarter is 1.2-percent; then it rises to 3 percent in the second half of 1998. So, the Greenbook is forecasting rather slow real growth as well as rather low CPI inflation. While I do not remember past Greenbooks as well as Jerry Jordan, I do recall that in recent times the Greenbook has underestimated real growth and overestimated inflation more often than the other way around. If that pattern is repeated, it would make the outlook even better than the Greenbook anticipates. In terms of guides to monetary policy as it is currently practiced, I do not know what is the precisely correct federal funds target rate. Apparently a lot of people, including Gail Cincotta, thought the correct rate was precisely 5.25 percent and that 5.5 percent is a travesty. I do not know, but I will note that when the recently lower inflation rate is taken into account, the funds rate probably has increased by more than 25 basis points in real terms. Also, the recently reduced need for federal deficit financing seems to make the current target rate tighter in some sense than it otherwise would be. If we look to market-based indicators as guidelines, they are fairly reassuring. Despite the recent backup in the yen, the dollar remains on the strong side and is probably putting direct downward pressure on import prices and indirect downward pressure on the prices of exportable goods. Commodity and metals prices, including gold, also reveal little buildup of inflationary pressures in the pipeline. Unfortunately, money growth has picked up recently to levels that used to be inflationary. I hope the Greenbook is right in attributing that money growth to the April surge in tax receipts, which should indicate a near-term reversal. In any case, money growth is about the only evidence that suggests to me the need for some urgency to counter a potential rise in inflation. Otherwise, warning signs are conspicuous by their absence.",939
-fomc-corpus,1997,President Parry from the Republic of California. [Laughter],13
-fomc-corpus,1997,"Mr. Chairman, strong economic growth has continued in the Twelfth Federal Reserve District in recent months, although the pace has slowed slightly in some of the fastest growing states. During the first quarter of 1997, District jobs expanded by 3-1/2 percent at an annual rate. In the fastest growing states--Nevada, Arizona, Utah, and Oregon--growth is averaging between 3-1/2 and 7 percent. With the exception of Alaska and Hawaii, employment growth in the other District states is running at or above 3 percent. Construction and services continue to be the fastest growing sectors in the District economy, but manufacturing is becoming a key contributor to the growth in District employment. Manufacturing employment grew by 3 percent at an annual rate during the first quarter, as rapid expansion in high-tech and aircraft production was boosted by growth in food processing and textile industries. Accompanying strong employment growth has been a recent surge in the District's labor force. In most states, labor force growth has been broad-based. In California, however, our estimates are that perhaps one-half of the new labor market entrants have transitioned from welfare to work and are competing for a narrow range of low-skilled jobs. Of the total number of U.S. welfare recipients who must leave the rolls before July of this year, over 38 percent are in California. If all of these individuals move into the labor force, labor force participation in California will increase by 1/2 percentage point. Despite rapid labor force growth, strong employment demand is creating tight labor market conditions in several parts of the District. The District-wide unemployment rate has fallen by 1/2 percentage point over the past quarter, and in several areas in the District competition for employees is so fierce that employers are holding job fairs and offering finder's fees and signing bonuses to recruit new hires. Turning to the national economy, the risk that inflationary pressures are building seems to me to have increased since our March meeting. The economy's rapid growth in recent quarters means that it is now operating at a noticeably higher level according to both the unemployment rate and the estimated GDP gap. The unemployment rate is now clearly in the inflation danger zone even when we take into account the rather large standard errors that characterize estimates of NAIRU, and the excess of real GDP over its potential level rose to about 1-3/4 percent in the first quarter according to our estimate. In addition, the industrial capacity utilization rate is somewhat above the level at which inflation typically has accelerated in the past. With these indicators presenting a fairly uniform picture of excessive pressure on resources, I believe there is good reason to be worried about the trend of inflation in the future. Given this situation, the key question is whether real GDP is likely to slow enough and for a long enough period of time to eliminate inflationary pressures. Like the Greenbook, our forecast for the current quarter shows a rather sharp slowing of growth; our estimate is 2 percent for the current quarter. It certainly would not be surprising to see such a pause in activity following the torrid pace of the first quarter. Looking to the second half of the year, we expect growth to come in at around the trend rate of 2 percent. This would still leave the unemployment rate at just under 5 percent at the end of 1997. The bottom line is that it is unlikely that the basic problem of pressure on resources would be solved anytime soon with an unchanged funds rate. My best judgment at this point is that underlying inflation would show a modest upward trend this year and next if monetary policy remained unchanged. Of course, when we look at the CPI, a good deal of the upward trend would be obscured by the higher dollar and lower price of oil, not to mention the methodological changes being introduced by the BLS. As always, of course, we should acknowledge that this forecast of rising underlying inflation could turn out to be wrong for a number of reasons. For example, it is difficult to judge the magnitude of possible roles for enhanced productivity or changes in the labor market in holding down inflation. However, I believe that even with a slowdown in growth in the current quarter, the risk of rising inflation in the future has increased to a serious level.",855
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. First, I want to comment about your speech at NYU a couple of weeks ago. I thought it not only was very effective but also very welcome even though the wire service types still do not know the difference between nominal and real GDP. It is worthwhile to continue to press on those issues. I have grown increasingly concerned that, with people on both the political left and the political right criticizing us, they could together foster a general environment of open season on the central bank. Criticism on either side does not constitute a great risk to us, but here we have a sort of unholy alliance of reasons to criticize us. So, I thought that your making the speech at that time was very desirable, and I hope that when you get the chance to testify on the Hill in July, you will be able to press the same arguments and maybe get some people to start listening. Probably like others around the table, I spent this long interval between meetings traveling around the District to a lot of meetings, sometimes in small communities. One word that summarizes attitudes is ""sobering."" I noted a dramatic shift in mood and concerns everywhere that I was traveling. I want to run through some of the highlights of what we have been hearing. Executives in the steel industry are very concerned about the surge in imports stemming from very strong demand. Some interpretations of developments in the last couple of quarters suggest that we were fortunate in being able to draw in a lot of imports because the latter helped to hold down prices and minimize inflation. But both the steel companies and the auto companies know that once these foreign manufacturers get a foothold in our marketplace, they are very hard to dislodge. Domestic steel companies are saying that their inventories are too high and that they are going to be working to get them back down. Specialty metals producers report that raw materials prices are up very sharply and their plants are running flat out. They say that their sales to aerospace firms are booming and that they have no more capacity to satisfy that market. They are now engaging in what they call precautionary ordering. They say that there are widely perceived shortages and longer delivery times and that sales in their medical equipment market are strong and getting stronger worldwide. A number of these companies, including some glass and rubber companies, indicate that they are revising up their sales projections for the second half of the year and that they are going to have a better year than they thought at the outset of the year. Oil and gas companies are saying that their operations are running flat out and that they do not have additional capacity to meet expanding market demand. Retail sales, though, have softened very considerably in the last few weeks after what retailers characterized as a surprisingly strong first quarter. They said that we should expect to see very aggressive efforts to move merchandise in the weeks ahead. Labor market developments are unsettling. Union contract settlements in the first four months of this year were above those in the first four months of last year. The increase is not dramatic, but it is clear that the trend of successive contracts resulting in successively lower settlements is over, and it is just a question of how fast the increases will occur from this point. Entry-level wages are jumping throughout the District. We talked to bankers who said that they are losing employees. When we ask where those people go when they leave, the bankers say mainly to local school districts and to city and county governments. The dynamics are that tax revenues are very strong in these communities, and they are replacing retirees and others and adding staff at wages that are substantially above the earlier prevailing wages. In two different areas that we visited, bankers said that last year their starting wage for a teller was $5.50 per hour, whereas it is now $8.00 at one bank and $9.00 at another, if they can find someone who is qualified. This kind of increase, of course, is raising their whole pay structure. Farmland prices are a problem. As recently as last November, we were not hearing any reports of transactions that we would have characterized as speculation in farmland. No more. People are saying that farm prices are now 20 to 25 percent above where they were a year ago. One banker terms the increases that he sees as ""scary."" He says that on the basis of current crop values the price would pencil out to about $1,500 per acre. A year ago the prices were in the range of $1,800 to $2,000 per acre. He says it is typical now to see them at $2,300 to $2,500, and everyone wants to borrow on the basis of this newly perceived higher level. I have two reports, one from south central Ohio and one from western Ohio, of foreign investors coming in and paying twice the highest price recorded previously in the county for large chunks of farmlands. I have two other reports, one in Kentucky and one in western Ohio, that the Federal Farm Credit Banks are very aggressive in lending and are now willing to engage, once again, in types of financing that they did in the late 1970s and early 1980s. They stopped such financings in the mid-1980s, but they are starting to do them again. Contacts in residential construction say that they are experiencing the same level of activity as in the spring of last year. One difference is that last spring the construction was all under contract; this year more than half of it is speculative. With regard to bank lending, one banker on our board said that there are no standards. Bankers are just pirating each other's loans. We asked one large banker what we would look for as large banks moved toward caution in their C&I lending, especially after our March move. He said that every deal was skinnier than the previous one, and that deals are now being done that would not even have been considered last summer. Small and medium banks say that they have become more cautious on consumer lending, and as a result, in order to achieve their profit plans, they have become more aggressive on business lending. In the large manufacturing sector, we talked to representatives of quite a few companies both at our board meetings and as we traveled around the District. They say that they are convinced that 1997 will be a better year than they had anticipated, and, therefore, they are stepping up their capital spending for the year from what they had planned earlier, and they are placing larger orders for the second half than they had anticipated coming into the year. On the national economy, the first time we got a look at a Greenbook forecast for 1997 was in September 1995--that's the way the timing usually runs. At that time, we had a 5-3/4 percent federal funds rate, and the projection showed nominal spending growth of less than 4 percent for 1997. That definitely was a favorable outlook, and it looked as if we were on a track to move nominal spending down toward a rate of growth that we would think of as approximately consistent with price stability. But now we have nominal spending growth closer to 5 percent for 1997 even with the deceleration that the staff is currently projecting, and out through 1998 such growth is projected to remain above 4 percent. So, while we had what I thought was a very favorable trend a year and a half ago when we first starting looking as far out as 1997, the attainment of such growth has now been pushed well beyond the current forecast horizon. What are the risks? If the Greenbook is right and we do get the projected decelerating growth in activity in the second quarter--and it is widely perceived on the basis of monthly reports and other evidence that this will be a soft quarter--whether growth for the quarter comes in at the projected 1.8 percent is not the important thing so long as the outcome is in that direction. And if we also are getting a lower increase in the CPI--and it may not get down to the projected 1.2 percent but again assuming it is in that direction--then what are the chances we would want to do something in July? We would not have any hard evidence that would justify tightening in the minds of many people who watch us. By August, second-quarter information is essentially all we are going to have and only very tentative indications of how the third quarter is shaping up. Even in September, we would not have much more in terms of hard numbers except for some additional monthly readings. So, it will probably be November before we will have the kind of hard evidence at hand to justify in everybody's mind the need to do something. That would be very late. For me, the policy issue is not a question of a little now or a little later. It may turn out to be a question of a little now or a whole lot later.",1791
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, I will start this comment off the same way I started my comments at the last several meetings: Economic activity in the Fifth District is still very strong. The survey readings for our manufacturing and services sectors did slip a little in April, but they remained very close to the high levels to which they had jumped in March. This indicated a rate of expansion in our region that we had not seen since the first half of 1994. Moreover, our directors and other contacts suggest little, if any, softening in demand. Labor markets remain very tight. The demand for lower skilled labor continues to increase at a substantial rate. Despite some reports of rising wages recently in some parts of the District, we have had fewer reports of price pass-throughs in the last several weeks than we were getting a little earlier this year and that I reported on earlier. The most striking new development in the District is something that fits in with what Mike Prell said about commercial real estate. In our real estate markets, especially in northern Virginia, we are told that rental rates for industrial and office space have now gotten back to the peaks that they reached in 1989. Also for the first time in this expansion, we are getting increasing reports of speculative building, especially of office buildings in northern Virginia. Turning to the national picture, the Greenbook projects that real GDP growth will slow of its own accord in coming months. Certainly given the extraordinary growth we have seen in the last couple of quarters, some slowing seems likely. But as I see it, nothing in the fundamentals really assures us that the rate of expansion is going to slow to trend. That obviously is what needs to happen if we are going to avoid a boom. I think that is the point Jerry Jordan was making in his question earlier. On the contrary, the staff candidly recognizes in its write-up that household fundamentals and general economic fundamentals remain exceptionally strong. I continue to see some significant upside risk in the outlook. The projected deceleration reflects in considerable part reduced inventory building after the big run-up in the last quarter, as Mike Prell emphasized. In this regard, the Greenbook authors do not seem to be concerned that a constrained availability of supplies will generate a precautionary demand for inventories at this time as it did in 1994. That conclusion may be right, but if it is, the interesting question is why. Maybe firms wanted extra stocks in 1994 because they were not sure that monetary policy would do what was needed to contain the expansion. Maybe they have more confidence in us this year, and if that is the case, I think that would underscore the important role our own credibility needs to play in generating and reinforcing the sustained moderation in economic activity the staff is projecting. In any case, I think stock building needs to be counted as an upside risk in the near-term outlook. Another considerable upside risk in the Greenbook forecast is that the projected increase in the labor force participation rate will not happen. The Greenbook is projecting a real GDP growth rate of 3.1 percent for 1997, and that is expected to take the unemployment rate down to 4.8 percent by the end of the year, leaving it around that level through 1998. If such a rate is sustained for that long, it could in itself create capacity problems. If the expected further increase in labor force participation does not occur and we still get the predicted growth, obviously the unemployment rate could be driven even lower. Given the relatively moderate increase in productivity the staff has forecast, I think Mike Prell made the point that payroll employment has to rise 2 percent to generate the 3 percent growth projected for this year. That is twice the longer-term trend growth in the labor force. Increased participation may bail us out. It bailed us out last year; maybe it will do it this year, but then again maybe it won't. Of course, an alternative possibility is that productivity will rise more rapidly this year than the 1.2 percent increase the staff is projecting because the trend rate may have moved up to 2 percent or so, as a number of economists and others are arguing. Let me conclude with just a couple of brief remarks about what this alternative scenario might imply for aggregate demand and interest rates. This is a little counter-intuitive, but I think even this possibility involves an upside risk. Let us suppose that markets are confident that the Fed will conduct policy so as to hold the CPI increase to a rate of 3 percent this year and that inflation expectations are anchored at 2 percent--that that is not an issue. Let us assume in that environment that the productivity trend increases. What does that do to financial markets and specifically to real interest rates? Broadly speaking, the improved productivity trend is going to cause firms to expect higher future earnings and workers to expect higher future wages. The point that needs to be emphasized in this situation is that, at the existing level of real interest rates, businesses and households are going to want to bring some of that expected future income into the present. Workers may want to fix up their houses; business firms may want to invest in new plant and equipment; and they will try to do this by borrowing against expected future increases in income. But, of course, the economy does not have the future income and output yet so real interest rates have to rise in order to restrain this new demand for credit. In effect, the higher real rates raise the price of current consumption in terms of future consumption foregone so that firms and households will be content to wait until the economy actually has the output in hand before they try to consume it. The point of the story is--and this is the bottom line--that even if the productivity trend turns out to be higher than the staff is assuming, which would remove some of the inflationary risk stemming from the labor markets, real interest rates would still need to rise to prevent a further credit-driven increase in aggregate demand. In sum, Mr. Chairman, I see considerable upside risk in the staff forecast, and I think we need to be in the market for a little more insurance.",1234
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Philadelphia District economy generally continues to operate at high levels, although the rate of growth has moderated some in recent weeks. The more moderate growth is most notable in manufacturing and auto sales. Manufacturers generally expect a high level of activity for the balance of the year but relatively small additional increases. Auto dealers, too, report less than buoyant sales. Retailing more broadly is doing well, although there is so much competition that anecdotal reports from individual retailers sometimes understate the broader picture. Restaurant sales in particular are doing well, which is a fairly good indicator of consumer attitudes. Construction activity is mixed. The outlook for commercial building in suburban locations is strong. Buildings are now selling for more than reproduction costs, and there are the beginnings of some speculative building. On the other hand, some shakeout is likely in the construction of retail outlets, such as supermarkets, which are overbuilt. There is more than ample liquidity available, and competition to make commercial loans is fierce. One executive in a highly leveraged company told me that some lenders are willing to lend up to 30 percent more than a new acquisition is worth. Some REIT activity also looks shortsighted. By contrast, however, there does appear to be more caution in the consumer lending area, particularly in credit cards. Labor markets are tight in many areas of the District. One sign of this is that parents, although greatly relieved, are pleasantly surprised that someone is willing to hire their offspring. There is some upcreep in wages as labor markets tighten around the District. Many businesses, however, still say that they cannot raise prices and therefore must offset higher wage costs somewhere else, usually through improved efficiencies. Turning to the nation, the uncertainties on the demand side of the economy are greater now than when we last met. There also are continuing uncertainties on the supply side. On the demand side, growth clearly is moderating more than was forecast at the last meeting. What we do not know is how long the slower pace will continue. My hunch is that there is still a fair amount of self-feeding momentum underlying the expansion. When people earn more and feel more secure in their jobs, they spend more and businesses invest more. I think the risks for demand are still on the upside, but there is more uncertainty than when we last met. On the supply side, the uncertainties remain about as they have been, although with a higher level of anxiety as the economy moves further into territory not charted for nearly three decades. Both labor force growth and, apparently, productivity gains have increased capacity limits surprisingly far without generating broad-based price increases. The risk is that overheating will occur at some point, and we want to avoid that to prolong growth. At the same time, we do not want to act prematurely or unnecessarily. On balance, this strikes me as more of a time for heightened surveillance than for overt action.",583
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The economy in the Kansas City District remains strong, but as others around this table have mentioned with regard to their regional economies, growth in our District has slowed a bit from the-rapid pace of late 1996 and early 1997. Manufacturing and services remain the primary engines of growth in our seven states. Manufacturers are operating at high levels of capacity, and growth in service-related jobs is quite brisk. Manufacturing activity has been slowed somewhat because of strikes. The six-week strike at the GM plant in Oklahoma City has idled about 3,500 workers. The strike issue centers on GM's earlier decision to cut about 900 temporary workers from its workforce and, as reported to me, that has resulted in a union complaint that the cut is too large. The union wants GM to hire some permanent workers, several hundred in fact. There also is a steel strike in Kansas City that is affecting about 1,000 employees. The issues there are outsourcing and pension benefits; they do not currently involve wages. Data for the District states suggest that our employment has been about flat since March, indicating some easing in the region's pace of growth. Our farm economy and energy sectors are in good shape. The District's winter wheat crop is in good condition despite freeze damage in some local areas. Soybean prices have risen, and this is going to be beneficial to producers in our area. Solid cattle prices are giving the cattle industry its best profits in a couple of years. In the energy sector, the recent drop in oil and gas prices has not yet affected production. Drilling activity is much higher than it was a year ago. In fact, there are some reports of capacity constraints in areas like Wyoming where reported shortages of trained crews are hampering activity. Retail prices continue to hold steady in our District. The labor markets are tight and we continue to hear reports of wage pressures. An informal survey of firms in our region conducted by our Branch directors indicates tight labor markets in nearly all cities in the District. Labor shortages are pronounced for entry-level workers, as you have heard from others here, and also for computer and other high-tech professionals: Several firms are reporting bigger wage hikes than normal, although the number of such firms is about the same as a month ago or so. So, we are not seeing an acceleration. On the national economy, we anticipate as does the staff forecast that the expansion in economic activity will moderate in the second quarter after unusually rapid growth in the first. However, our estimates do not have the expansion slowing as dramatically in the immediate future as does the Greenbook. Consumer and business confidence remains high and income and employment growth appears solid and able to support substantial growth going forward. Despite this and the fact that resource utilization has continued high, inflation has been surprisingly well-behaved. Thus, while I remain concerned and alert regarding the inflation outlook, it is difficult to assess its near-term course with any great certainty. Returning for a moment to District developments, like Jerry Jordan I have done quite a bit of traveling, and what I found particularly interesting in my meetings with labor, consumer, and business groups is a uniform view that the Fed should ease off in terms of contemplating any preemptive move. I found that an amazing change because when I went out before, I heard many people saying that we were doing a good job, that we needed to be vigilant, and that we needed to be ready to act. I no longer hear that. One group, a rural group, said that ""you guys need to chill out,"" to use their phrase. What I am saying is that while we can build a case for a move, the fact that we have not seen the anticipated rise in inflation come through is leaving a very large number of people less patient with any kind of action. It is a noticeable change from 6 or 8 months ago, and I wanted to report that today. Thank you.",795
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. Like everybody else, I continue to be amazed and pleasantly surprised by the strong performance of the economy and the lack of evidence of imbalances and dislocations, both regionally and nationally. Our southeastern region now looks very much like the nation as a whole after slowing a little over the last couple of quarters from the greater-than-national pace that we were seeing earlier. We also have one of the best balanced economies I can remember, and that balance extends across both the geographic areas and the various industries that make up the diverse economy of our Atlanta region. Like Jerry Jordan and Tom Hoenig, I traveled a good bit during the last eight weeks. One of the most interesting regional stories that continue to emerge relates to what is going on in the oil and gas industry. Both Bob McTeer and I have reported before on the excitement in that industry over the new 3-D seismic technology that has fundamentally altered the economics of exploration. Bob mentioned it again this morning. At a breakfast meeting with a small group of business people in New Orleans three weeks ago, an independent driller told me that the break-even point has now dropped from about $16 a barrel to about $4 a barrel. Not only will this keep the Louisiana oil patch engaged in a more steady pace of exploration as the price of oil goes up and down, but it also is having a major spillover effect on the supporting businesses like rig construction and crew boat manufacturing. The Gulf of Mexico, which the local people referred to as the Dead Sea when the price of oil was in the $20-$25 range, is now a beehive of activity with the rig count up to 218 compared to 166 just a year ago. This is putting some pressure on the support industries in the short term; daily rates for crew boats are almost double what they were a year ago. Judging by the backlog of barges and crew boats, it currently takes a much longer time to complete the planned construction of an oil rig, but my guess is that this technological breakthrough should help hold down the long-run cost of oil and petroleum products. The other very positive story in our region is tourism. Both current and future bookings are strong, and that is driving the construction of large hotel projects in several cities and very strong demand for workers in the hospitality industry. Manufacturing, an industry where we thought we were seeing some slowing at the time of the last FOMC meeting, recently has shown signs of some pickup back to a moderate pace. Construction activity, despite some indicators of future slowing, is still at a generally high level. As others have noted was happening elsewhere, there are more reports of speculative projects, at least in the Atlanta market. Labor markets remain tight across our region and across a growing number of skills. We are still hearing sporadic reports of increased wage pressures and some stories of nonconventional forms of compensation, as also described in the Greenbook. For example, a fast food operator came up to me after a recent speech and told me that he had issued over one hundred W-2s for tax year 1996 for a staff of 13; that reflects a 600 percent turnover rate. On some days he had to choose whether to operate the drive-in window or the sit-down part of his restaurant. Also, he was now paying employees for 40 hours of work, but having them work only 30 hours as a way of keeping them on his payroll instead of someone else's. On the national level, the broad outline of my own outlook over the rest of 1997 into 1998 is very similar to that of the Greenbook and that of most private forecasters. I see considerably stronger-than-expected growth for 1997 on a year-over-year basis, a slowing expansion as we move into 1998, and a modest upward drift in inflation. While many of us have been making a very reasonable forecast of slowing growth in final demand, and we are beginning to see some signs that may be happening, there also are some not insignificant risks on the upside. Consumer spending continues to be the greatest risk on my worry list as the underlying fundamentals to support continued strong spending still seem to be there: good job and income growth, record high levels of confidence, and the wild card kicker that we have talked about before--the rise in the value of assets that have not been appreciably drawn down. Although less likely, a pickup in export demand and even further inventory building, which Mike Prell alluded to as a possibility, could contribute to greater than expected growth. For me, the risks are still on the upside. Recent inflation remains low by all conventional measures, lower I think than almost all of us expected. As all of us have noted before, there is growing evidence that underreported productivity gains and broad resistance to price increases are the biggest factors that have restrained general price advances in this cycle compared to those that we have seen in the past. At the same time, my own forecast, as well as those of most private sector forecasters and the Greenbook, shows a gradual upward drift in inflation at the end of 1997 and into 1998. Obviously, the central policy question continues to be whether the stance of policy is too accommodative and, given the persistence of robust demand, how strongly we feel about not risking a loss of the ground we have gained in keeping inflation low. With the economy having gotten to a point where it must be near full employment, if not beyond it, we have a unique opportunity with little downside risk to lean a bit more against the expected upward creep in inflation that most of us are forecasting and, in doing so, to underscore our resolve and credibility in the minds of financial market participants, -business decisionmakers, and the general public. I also find myself wishing we had been more successful collectively in making the case for low, perhaps even lower, levels of inflation so that our various publics would be supportive of such a tightening move. Thank you, Mr. Chairman.",1215
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, the Seventh District economy continues to expand at a modest rate, and abstracting from the effects of the strike in the automobile industry, our manufacturing sector still seems to be outperforming the nation. Our labor markets are still very tight. The unemployment rate for District states has moved down again; it was 4.1 percent in both February and March. Payroll employment growth in our states continues to lag the nation, but many contacts regard this as a labor supply problem. Despite the tight labor markets, we still have not seen much upward pressure on wages, and District manufacturers and retailers continue to report that competitive pressures inhibit their ability to raise prices. There was an article in this morning's Washington Post about Milwaukee, Wisconsin that described this phenomenon in great detail. It is a phenomenon that I hear mentioned almost every time I speak to someone in the manufacturing industry. Another indication is that steel price increases of 3 to 5 percent announced for April and May are not sticking and in some cases are now being publicly rescinded. It is clear from the published data and from our anecdotal information that the economy in the United States and the Seventh District has slowed from its rapid first-quarter pace. As Bob Parry mentioned before, the key question is the extent of the slowdown and whether it is sufficient to return the economy to a path of sustainable growth without an acceleration in inflation. Since we all have seen the published statistics in the Greenbook, let me focus on some of the anecdotes. First, with regard to signs of slower growth in business activity, retailers generally report that sales were sluggish last month. One large national retailer attributed the noticeable slowing in part to poor weather, and preliminary results from our survey of Michigan retailers show a moderating sales performance last month and some inventory buildup. As we all know, light vehicle sales in April were well below the first-quarter level. Our contacts report that sales so far this month have been somewhat stronger than in April but still below the sales pace expected for all of 1997. In the paper industry, we had reports of slowing in corrugated paper shipments as well as in heavy paper production. A very large telephone company in our area reported a slowdown in the number of lines installed in small businesses and homes during March and April. This is a markedly different pattern from that of the last two years, and our contacts believe it reflects an industry-wide slowdown rather than a loss of market share. On the other hand, we also have had reports of strength from a number of our industry contacts. Heavy trucks continue on a strong recovery path from last year's depressed levels. The uptrend in sales and production of farm machinery equipment also is continuing. One national specialty realtor told us that land prices and rental costs for retail stores, both freestanding and in malls, are moving up rapidly. This is similar to some of the other comments made here today about real estate. Contacts at one large airline in our District reported very strong business, with forward bookings through the summer setting records for both business and vacation travel, and they believe that the forward bookings at other airlines are also very strong. Next Tuesday, May 27, Manpower Inc. will publicly release the results from its Quarterly Employment Outlook survey; this information is confidential until May 27. They will report third-quarter hiring intentions in all regions of the nation, particularly in the Midwest, as the strongest since the boom years of 1988 and 1989. The chairman of Manpower believes that part of the demand is for seasonal workers, but some of the hiring plans are for jobs that firms have not been able to fill because of widespread labor shortages. So, the anecdotes and the published data paint a mixed picture of the expected extent of the slowdown in the expansion and the inflation outlook. It is clear that the first-quarter growth rate is unsustainable, but we do not know whether inflation will continue to be restrained by the temporary damping factors that we have discussed for some time. If growth fails to moderate sufficiently just as these restraining factors lose their punch, we run the risk of opening up a sizable output gap with its attendant inflationary consequences. As additional data for the second quarter roll in, I think we must be on the lookout for the moderation needed to avoid accelerating inflation in the months ahead. I am concerned that imbalances may emerge later this year, so I still see the risk as being on the upside.",884
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The economy in the Ninth District remains healthy. The expansion is continuing; it remains well balanced and broadly based both geographically and by industry. There are three or four developments of relatively recent vintage that are worth commenting on. First, there was a very severe flood in the Red River Valley that runs between Minnesota and North Dakota and on into Canada. This flood has been very disruptive in that part of the world, but it probably will not have any broad ramifications for the national economy or even for the District economy as a whole. Of course, part of its effect will be reversed because, while wealth has been destroyed, economic activity tends to pick up as replacement activity occurs. There also were significant losses in some of the cattle herds around the District due to the severe winter this year, and that is a double-edged phenomenon as well because, for those people who did not lose cattle, prices have improved recently. At our recent directors' meeting and also at a meeting of our advisory council, a couple of things of interest came up. One is that we have further confirmation of the tautness of the labor markets in the District. If we look at the District data, as best we can get a handle on them, employment gains over the past 12 months outpaced the increase in the labor force by a significant amount. Our directors and advisory council people are very explicit about labor shortages and about very, very tight labor markets. That is not new; it is just a confirmation. They also indicated, and I think it is fair to say, that there have been some signs that wage and now price pressures are becoming a bit more generalized than formerly was the case. Business people are still very wary and talk a good deal about how competitive the business environment is, how difficult it is to raise prices, and how cautious they are about doing that. At the same time, I think they will admit that price increases are perhaps becoming more commonplace than was formerly the case in the District. With regard to the national economy, I will strike a couple of familiar themes. I am sympathetic with the general pattern of the Greenbook forecast and with Mike Prell's description of where the risks lie. That is, I think they lie in the direction of our possibly getting a more rapid increase in aggregate demand than the Greenbook envisions, and that will lead to greater price pressures. In part, I feel that way because I am not entirely persuaded that aggregate demand will slow as appreciably as is indicated in the Greenbook. There are a couple of reasons for that. First, the increase in wealth over the past 2-1/2 years or so has been enormous, and it seems to me that the implications for consumer spending are quite straightforward. It is just a question of degree. Secondly, I have a sense that the outlook for BFI is quite positive. So, it seems to me that the risks, in terms of how demand is likely to perform, are more on the high side. We may continue to get some very favorable developments on the supply side. We all have spent a lot of time trying to analyze exactly what is going on there and the extent to which that will continue. I do not have a conviction, but I would not place a large bet on favorable supply side developments continuing much longer; at least, I would not make such a wager without very favorable odds.",687
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. There is not a lot to report that is new about the First District. The regional economy, despite the slow-to-arrive spring weather, continues to hum along at a rather rapid pace, buoyed by solid job growth at about the national pace, which is good for our region. There are low unemployment rates--in fact, I believe New Hampshire at 2.1 percent has the lowest unemployment rate of any state in the country--and moderate increases overall in prices and wages. Competition continues for specific skills so that we do continue to see a heating up in total compensation. Contacts in retail and manufacturing report solid growth over a year ago, and there are expectations that this favorable trend will continue. The District's high-tech industries--software, biotech, hardware producers, and telecommunications--remain extremely vibrant and continue to face a shortage of technical employees that I have mentioned in the past. On the financial services side, we have a sense that the downsizing in the commercial banking industry locally may be moderating as firms realize that they cannot prosper any longer simply by cutting costs alone. They need to generate revenue and improve customer service. Insurance companies, on the other hand, may have just started on a trend of downsizing and consolidation. This is in direct contrast, of course, to the firms in the money management and mutual funds industries that are growing by leaps and bounds. This growth plays out in quite low office vacancy rates, particularly in the Boston metropolitan area; the low vacancy rates have spread from downtown Boston all the way out to Route 495. Contiguous office space of any size is just not available. Rents are rising and new construction cannot be far behind though, unlike reports from some other areas of the country, we are told that developers in our region continue to be wary of building ""on spec"" after the lessons of the 1980s. Turning to the national scene, I am impressed a bit by the tone of somewhat quiet desperation in the Greenbook forecast. Things are really quite good, but we seem to be frustrated by our inability to gauge either the strength of the economy, even into the current quarter, or the quiescence of inflation. There are a lot of questions. One of them is when the current combination of very favorable trends will come to an end. It's not that we necessarily want them to end, but we would like to know when the economy will slow, perhaps on its own as a result of the projected moderation in the growth of consumer spending, a worsening of net exports, and a decline in residential investment. Alternatively, at what point will overall resource utilization become so tight that the wage-price spiral will take off? Just as important as these two questions is which of these reversals to trend, if they occur, will happen sooner. In my view anyway, the likelihood is that resource utilization will begin to bite before the strength of the economy wanes. It is true that the current economic data show signs of some slowing but, frankly, some slowing from a first-quarter pace of 6 percent is inevitable and necessary. However, if one looks to the first half of the year, then assumes that the Greenbook is right about the degree of slowing in the second quarter, which may or may not be accurate but let us assume it is right, we still have GDP growing in the first half of 1997 at a rate that is nearly double our current estimates of economic potential. Will growth in economic activity moderate for the rest of the year as the Greenbook expects? Maybe, but we still see healthy job creation, good income growth, high consumer confidence, good business confidence, and booming financial markets. The same factors persist that have caused our projections of economic growth to be off the mark fairly consistently through 1996 and 1997. I must say that I remain agnostic about whether growth will slow in line with the Greenbook forecast, at least without some shock to the economy that no one is forecasting at present. We, along with others, have been wrong about inflation. We have underestimated the potential of the economy to grow at a solid pace without the usual bottlenecks associated with tight resources. It would be comforting to think that this can continue, but here I am also agnostic. If we think about our estimates of labor market tightness not as a point but as a range of uncertainty that is fairly wide around a central tendency and we consider both the experience of the late 1980s and the current data, I am drawn at least to the proposition that we have not had sufficient constraint on resources long enough to produce the smoking gun of a real inflationary increase. But I do not think we are very far away from this, particularly given the continued labor market tightness projected in the Greenbook and elsewhere. So, despite the recent indications of a slowing expansion, I think the risks are still strongly asymmetric. If anything, the Greenbook likely understates both growth and inflation.",1003
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. The Eighth District economy continues to grow moderately, with firms reporting sales increases and net new hiring. Labor markets are generally tight. In March, the unemployment rate in Missouri was 4.2 percent, the lowest since 1979. District automotive production by Ford and Chrysler was up 1.1 percent in the first quarter from the fourth quarter of 1996. Second-quarter production is expected to increase another 2 percent. Resolution in early May of the Mound Road engine strike in Detroit put about 2,500 auto workers, who had been out about a month, back on the job making pickup trucks at Chrysler's St. Louis plant. March flooding along the Ohio and Mississippi Rivers and tornadoes in Arkansas, Tennessee, and Kentucky led to about 6,000 claims for unemployment insurance. Estimates of total storm damage are sketchy but may total around $80 million for infrastructure alone. Nationally, real GDP growth in the last four quarters is just over 4 percent, matching the best performance since 1984. If adjusted for a change in survey methodology, the April unemployment rate would have been 4-1/2 percent, a level not seen since 1970. What about the future? Recent forecasting records have not been good. In October 1996, many forecasters projected that the economy would grow at an annual rate of less than 2-1/2 percent in the fourth quarter; that, of course, turned out to be well short of the observed rate of 3.8 percent. In January of this year, many forecasters projected that the economy would grow at a rate of less than 2-1/2 percent in the first quarter, and that forecast turned out to be even further short of the observed rate of 5.6 percent reported so far. In the current quarter, forecasters are again projecting growth at a rate of 2-1/2 percent or less. They may be right this time, but with such a record, it is hard to argue that monetary policy actions should be based on forecasts of short-run real economic growth. It is essential for us to maintain a longer-term orientation focused on the general level of prices, which is all that monetary policy ultimately can influence. Inflation has been running at a rate close to 3 percent for the past five years, and it has continued at about that rate so far in 1997. Thus, I see little reason to believe that the longer-run inflation trend will decline. Looking forward, the risks remain on the upside. Broad money and credit have been growing rapidly, which could easily translate into upward pressure on demand growth and inflation. Because the economy remains so strong, we have an ideal opportunity to take a longer-term view about appropriate action to temper inflation risks. While sending a message that our intention to cap inflation at 3 percent is desirable, it is a mistake to give markets the impression that inflation near 3 percent is consistent with our long-run price stability goal. The most recent IMF report on the world economic outlook posed the question: Is inflation outside a range that the country's authorities consider to be consistent with price stability? According to the IMF report, the answer for the United States was ""no."" I think the question is a good one and the FOMC might benefit from discussing it. My judgment is that there is less than a percentage point of bias in the CPI and, accordingly, 2-1/2 to 3 percent inflation is not price stability in spite of the views that the IMF reports. Furthermore, I certainly am uncomfortable with an IMF forecast of U.S. consumer price inflation in 1997 and 1998 that is higher than that of any other G-7 country. To clarify our goal, we need to get our inflation measurement straight. How can we answer the question about whether current inflation is consistent with price stability without being clear about what we are talking about: CPI, core CPI, median CPI, experimental CPI, GDP or PCE price indexes, or something else? We certainly need to be specific among ourselves if not before the public. How should we interpret the current 1997 and 1998 forecasts in the Greenbook of an acceleration in the GDP chain-weighted price index and the core CPI and a deceleration in the overall consumer price index? Is inflation accelerating or decelerating? At our February meeting, there was general agreement on the need to be more explicit among ourselves about what we mean by price stability: what measure to emphasize, where we want to be with respect to that measure, and ideally a time frame to get there. I hope we can continue that dialogue at our July meeting and sharpen our internal understanding of our long-term objective.",958
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Economic growth in the Second District has slowed somewhat on balance from the brisk pace reported for the first quarter. Payroll job growth remains fairly strong, with employment levels running more than 1 percent ahead of a year ago. New York State's unemployment rate held steady at 6.3 percent in March, and New Jersey's went down to a cyclical low of 5.2 percent in April--the data for New Jersey come in earlier. Retail sales were generally below plan in March and especially in April, though much of the weakness was concentrated in seasonal merchandise and was attributed to unseasonably cold weather. Consumer confidence retreated in March and April and remains the lowest in the nation. This may seem rather surprising given the fine economic performance of New York City, but that performance is attributable mainly to Wall Street and tourism. The northern tier of New York State from Buffalo to Albany and most of the way down the Hudson Valley is an area of psychological depression, where some breakdown in the leadership of the private sector is looking more and more apparent. We go to various places, even large cities like Syracuse, and are beckoned to take over the private-sector leadership of the community, which is a somewhat depressing experience. Commercial and residential real estate markets, especially around New York City, are continuing to gain momentum. In the early part of this year, permits to build new homes were up about 20 percent, led by the multifamily sector. Office vacancy rates have continued to fall in Manhattan, and we hear more and more discussion of new office construction, even of ""spec"" buildings. On the national level, we too were surprised by the very strong first quarter, but we see the economy slowing to a growth rate of about 1-3/4 percent this quarter followed by growth at a rate of about 2 percent for the rest of this year and the two following years. We believe that the unemployment rate will stay near its present level of close to 5 percent during that period. As others also have noted, the strong dollar has helped price performance this year, both because of its drag on the economy and its direct immediate effect on prices. In addition, some recent research we have done at the New York Bank has convinced us that the microeconomic effect of the dollar's recovery since 1995 on the relatively open U.S. manufacturing economy has restrained both wage increases and investment growth in 1996 and thus far in 1997. This, we believe, has been a more important contributor to the excellent price performance in the manufactured goods area than generally has been realized. The other side of that coin, of course, is the additional inflationary effect of a weaker dollar through that channel in the future. We use the gap between actual and potential GDP as the best tool of inflation forecasting. That tool helps us understand why the good performance of inflation is less mysterious than it has seemed. The recent large discrepancy between the income and the product sides of the national income accounts and the unexpectedly large tax receipts suggest that GDP has been underestimated, meaning that productivity was underestimated. We think that is very important because it is a sustainable phenomenon that does not require a train of happy events that seem to have come together mysteriously to give us good results. So, we think that what appeared to be a sizable gap between actual and potential GDP really was not very substantial at all before the burst in growth in the last two quarters. If we take account of that burst of growth and then assume a trend rate of economic expansion, we conclude that real GDP is now somewhat above potential and likely to stay that way. Consequently, we, like the Greenbook, are forecasting accelerating core inflation. However, we keep on being surprised by an excellent inflation performance. What, therefore, should we conclude? In more than two decades of trying to make a living in the private sector, it always seemed to me that if we have less confidence in a forecast, we should be less activist and more cautious in our decisionmaking. I asked Rick Mishkin to see if there was some economic research about policymaking in times of uncertainty. The principal author of such research is Bill Brainard, who is Chairman of the Board of the Boston Fed at the moment. The conclusion of that research is that the greater the uncertainty about the economic model and its forecast, the more cautious we should be in changing policy instruments. I was very happy to hear that economic research and two decades of private-sector experience seemed to be in ""sync."" That suggests to me that, although our point forecast for inflation is for a fairly substantial acceleration, there is a great deal of uncertainty around that point forecast and therefore less information in output gaps about the path of future inflation. Accordingly, we need to look elsewhere for hints of inflationary pressures. The recent core CPI inflation number does have some troubling elements, particularly the rise in core services inflation which we think is the sector most susceptible to wage pressures being passed through to prices. But we have just one month's data, and we probably should not leap to a conclusion based on such limited data. Apart from that evidence, we see no hints of increasing inflation. We conclude that caution is the appropriate lesson to be learned. Thank you, Mr. Chairman.",1058
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"It seems to me that we are witnessing a very impressive performance by the U.S. economy. Everything that has been said around this table today and for quite some time is testimony to the basic strength and resilience of the economy and its ability to restructure itself. But we really do not know very much about how it is doing that. This is going to be a plea for trying to find out more. Over the last few months, the economy has seemed to be handling the tightness of labor markets remarkably well. We need more information about exactly what is happening to different kinds of wages in different labor markets. We do not know a lot about that. The anecdotes convey the impression that labor markets are tight everywhere, employers are very short of technically skilled and especially computer skilled people, and they are going after them any way they can. But basically, given what has happened over the last few months, we have to conclude that we have very flexible labor markets and a very flexible economy. Companies are doing a lot of training; they are doing a lot of upgrading; they are doing a lot of job reorganization; they are substituting capital for labor. They are doing something right or this tight labor market would have gotten out of hand long before now. But we do not know very much about all of that. I met with Bill McDonough's boards, including the Buffalo board, and I was struck by the comments of one director--I think it was the chairman of the Buffalo branch--who was complaining that Columbus, Ohio had held a job fair in Buffalo. [Laughter] That is too bad for Buffalo, I guess, but it is exactly the kind of thing that ought to be happening. Columbus is doing the right thing. People are moving around; employers are looking for employees either by recruiting them to come to their workplace or by moving their operations to other places. Something is working quite well here, but we clearly do not know enough about it. We also don't know enough about what is happening to productivity, which is the other side of the same coin. The anecdotes are much more positive than the staff forecast of a return to trend would indicate. The staff is quite rightly worrying that as employers dip down into the unemployment pool, they will have less skilled workers, and that may take us back to a slower productivity growth trend. I'm not sure there are enough of those people; I suspect that their number is too marginal in relation to the overall number of workers to outweigh what may be happening to productivity generally as this flexible economy adjusts to the shortages in skills. But the fact is that we do not know. If my assumption is right that we are going to be struggling with these questions for some time to come, then clearly we should think about how we could get data that could fill the gap between aggregate statistics like the employment cost index, which don't tell us a great deal, and the anecdotes that we trade around the table. It seems to me, as it seems to almost everybody, that the risks clearly are on the upside with respect to inflation and that the question to be discussed later in this meeting is whether we move now or move later. It seems to me that we sent a very valuable signal in March, namely that the Fed is awake and watching. The question is whether it would be better to send the signal now that we are still watching or leave it out there to be used later. One final word about the other piece of good news, the budget deal. I am more positive than some in the press have been on the importance of this deal. The cynics seem so eager to be cynical that they point out that the deal does not involve a big cut in spending, but that is partly because we have done so well already. The deficit was down to 1 percent of GDP, so there was no need to cut spending much further. It is also because the big core pieces of the reductions are cuts in future rates of growth in Medicare, but it was extremely important to do that. It does not make it less effective that those are reductions in future rates of growth. The third point is that the spending cuts are to some extent offset by increases in spending for education, but this is an opportune time to do that. Such spending will involve more than just the national government, obviously, but if we as a nation can improve education and training over the next several years, we will be in better shape to take advantage of this huge opportunity that is presented to us by the very tight labor markets.",911
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. It has been almost two months since our last meeting, but in many ways the economic situation seems like more of the same: strong growth in both demand and production, continued expectations of a slowdown, and inflationary pressures that generally seem to be contained. I don't see any need to review all the underlying factors, but I would like to comment on a few that seem particularly important with respect to their contribution to the potential strength and length of the current expansion. The first factor I would point to is one that was mentioned by Gary Stem, business fixed investment. This is an area the strength of which generally has been underestimated in this expansion, although the current Greenbook forecast does have a higher increase in such spending. Both construction and equipment expenditures have been adding to capacity. Not only is this investment allowing business firms to meet rising demand without having to increase prices, but it may also be generating some productivity increases. This productivity hypothesis is supported by continued strength in profits. I agree with Governor Rivlin that we do not really know how this is happening, but we can see the bottom line, which indicates that despite increases in unit labor costs--and those costs are rising at a faster rate than general price increases--businesses have been able to maintain their profits without raising prices. All of this business fixed investment has been supported by a very favorable financial environment. Not only has the financial environment supported growth, but it also has allowed firms in the nonfinancial sector to strengthen their balance sheets. Internal financing has been available. The bond market has been deep and liquid and has provided significant debt financing opportunities. I would note that the spreads on speculative-grade debt are particularly low, so that even higher risk companies have had access to the debt market at favorable rates. Bank credit has remained available. Commercial delinquencies have been relatively low, so the outlook is good there. Securitizations of commercial credits have made this source of credit even more reliable. On the equity side, we have seen IPO issuance decline a bit from last year, but equity via IPOs is still available at a reasonable price, particularly for firms with strong earnings outlooks. In short, the availability of financing will not be the culprit if business investment falls off. In the U.S. economy, a forecast of the macroeconomy cannot ignore consumer spending, but I'm not sure that the prospects for such spending have changed much. I continue to believe that the most likely outlook is for sustained growth in consumer expenditures at a rate that about matches income growth, the so-called Goldilocks outlook. It is not too hot in that consumers are too leveraged to finance purchases with much more debt, and pent-up demand is an unlikely factor at this late stage in the business cycle. On the other hand, it is not too cold in the sense that unemployment is low, sentiment is good, and the wealth effects from the stock market should continue to provide some strength. So, I do not think that there is any reason to anticipate a slump in consumer spending. The federal deficit situation is one of the factors that could throw the economy off this path to yet another soft landing, but as Governor Rivlin mentioned, the outlook for the deficit is actually a little better. The budget deal is good news, although we do have to recognize that there are some structural budget problems that still have to be addressed. We certainly are a lot farther down that trail than we were several years ago. There can always be an external shock, and Mike Prell mentioned the possibility of Mideast oil disruptions. On the international side, net exports have been a drag on the economy, but at least for now the domestic economy is strong enough to offset weakness from the external sector. In addition, the strong dollar has been providing some salutary effects in the inflation area. It does seem to me that with this fairly strong outlook, the risk does remain on the upside with respect to inflation. It is hard to judge how long employers can continue to absorb wage increases without raising prices. I will say that I was comforted by the recent inflation reports, and like President McTeer, I was particularly comforted by the decline in the total PPI thus far this year and the rise of only. 1 percent in the core PPI. I would point out, however, that after declining earlier the core CPI has now been flat for two years, so the progress that we had been making in terms of this key inflation measure seems to have stopped. To wind up, I do think that there are tentative signs of a slowdown in the expansion and, as support, I would point to IP and to auto and retail sales in April. I think the risks to the economy are concentrated on inflation, but the news in that area indicates that the near-term threat appears to have abated a bit recently.",975
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Earlier when President McTeer was about to begin the ""tour de table,"" reference was made to the recent episode of the so-called ""Republic of Texas."" If I understood President McTeer correctly, his reply was that the Republic of Texas and the Eleventh District are about the same thing. As Chairman of the Bank Affairs Committee, I can verify that that is correct. [Laughter] The outlook for the balance of this year and next appears to be heavily weighted in the direction of offering a very attractive period of continued growth, a high level of utilization of the economy's resources, and an inflation rate that may begin to growl but almost certainly not to roar. Given that likelihood, I think it is appropriate to focus, as the Greenbook does at the end of its first section, on the forces that might be influencing the trend of events going into 1999 and out from there. Addressing the latter point, how should we think about policy for 1999 and forward? Let me outline briefly two strands of thought in the context of our national economic goal of maximum sustainable growth, which we at the Fed believe requires price level stability as a prerequisite for success. First of all, we reversed policy at the last meeting. After holding our fire for many quarters in the face of rising labor market pressures, seeing a very strong surge of activity in the first quarter, which was counter to expectations, the FOMC raised the federal funds rate by 25 basis points. In absolute terms, this is a modest move, but such impact as it will have has not yet fully been felt. I believe it carried two meaningful psychological messages. First, there is a new policy paradigm in the sense that the basic thrust of monetary policy is now toward tightening. And second, the Fed continues to have no intention of permitting inflation to get a grip on the economy. I am entirely comfortable with that decision. In my opinion, it clearly was the right thing to do. With that decision behind us, where do we stand today? The pace of economic activity, while still moving forward, appears to be slowing. The employment cost index moved up modestly in the first quarter. Most commodity prices are flat to down. Unit labor costs do not appear to be accelerating. Profit margins continue to be strong and deterioration there should provide us with an early warning of inflationary change. There appears to be no fear of inflation embedded in the yield curve. As I peruse the Beigebook, I have to go back to check the date because it continues to read precisely the same as it has for well over a year. My best judgment from all of this is that growth will continue, and we are seeing likely but not definitive signs of incipient inflationary creep. But in terms of our stated national economic goal, that does not seem to pose a clear and present danger. Moving to line-of-thought number two: In the absence of a settled notion of the definition of price level stability, I think a responsible judgment can be made that we are now either in that zone or very close to it. If the CPI measurement is about a percentage point too high, the real CPI is now increasing at a rate between 1 and 2 percent. Almost all the other price indexes indicate a steady rate of inflation in the 1 to 2 percent range, although some measures, including the core CPI, suggest that inflation may be beginning to edge up. The Chairman's qualitative definition of price stability, namely that we are there when inflation concerns are removed from economic decisionmaking, appears largely to be in place. If we are in or very close to the price stability zone, again in terms of national economic goals, the relevant question becomes how we hold the economy there and keep it robust. First of all, if higher-than-trend growth continues or resumes soon--and it well may; I think the growth risks are on the upside--that clearly would seem to require additional tightening, perhaps a good deal of it. But if the economy returns to a trend rate of growth or slower than trend, there may be a significant probability, given the economy's performance characteristics over the past two years as a guide, that we will not need to adjust policy for some time and indeed there is no absolute certainty as to which direction we may ultimately move. Further, we do not satisfactorily understand why the economy is working so well right now. If we were to cut its momentum back too much too soon, we might forego a precious opportunity to learn more about what could be some critically important new realities. In my view, the risk/return ratio of alternative policies evaluated against national economic goals provides ample reason for waiting to see what happens as events unfold. Thank you.",962
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"My reading of first-quarter performance and incoming monthly data suggests the economy will slow sharply in the second quarter in line with the Greenbook forecast. Special factors boosted growth in the first quarter while payback and special factors are at work in the current quarter. Inventory investment clearly is playing an important role in the near-term dynamics. On the other hand, the fundamentals supporting the expansion remain very positive and suggest a rebound in the second half to at least slightly above-trend growth. As a result, the economy is likely over the forecast horizon and in the absence of further policy action to remain at the high level of labor resource utilization rates reached in April. Monetary policy decisions are appropriately conditioned by the inflow of data between meetings. I want to focus on an interpretation of that data, and there certainly was something for everyone in that data. First, we had the first-quarter GDP report with its surprisingly robust growth immediately followed by a decline in the unemployment rate in April to a 23-year low and to a level outside the narrow range that had prevailed over the last year and half. Second, we had reasonably strong evidence of a sharp slowdown in growth in the second quarter. Third, we had better-than-expected performance in labor costs, focusing on the first-quarter ECI report and the April reading on average hourly earnings, combined with mixed evidence on inflation. On balance, the evidence did not suggest a trend toward higher inflation, but it seemed to indicate a reduced prospect that core CPI inflation is still declining. The data on the unemployment rate signal higher inflation risk. The information on current quarter growth, particularly when combined with the Greenbook forecast of near-trend growth beyond the second quarter, suggests less risk of further increases in utilization rates. But these two developments do not offset. The threat of continued above-trend growth we faced at the last meeting has already delivered its consequence in the form of higher utilization rates. In the framework of utilization and growth risks that I have been using to assess the risk of higher inflation, the data since the last meeting simply have transformed growth risk into utilization risk. This was a bad trade from the perspective of inflation risk. We traded a speculative increase in utilization rates, because that is what growth risk is, for a realized increase in labor utilization rates. There are at least two sources of increased uncertainty suggested by the flow of data between meetings. Such uncertainty sometimes encourages caution in policy action, and I expect it to weigh on our decision today. First, there may be greater uncertainty about the second-half outlook, given the sharpness of the slowdown that now appears under way in the second quarter and given questions about the degree and persistence of the expected slowing in inventory investment. That is, even though the combination of stronger-than-expected first-quarter growth and the sharp slowing projected in the Greenbook for the second quarter leaves the first half stronger than was projected at the last meeting, the distribution of that strength over the two quarters might add some downside risk to the second-half forecast. Second, the better-than-expected performance of labor costs in the first-quarter ECI report and the April reading for average hourly earnings might increase further the uncertainty about the estimate of NAIRU and hence increase the uncertainty about the degree of deterioration to be expected in the inflation outlook if the economy returns to trend growth and the unemployment rate stabilizes at its current level. I believe that the fundamentals supporting the expansion remain very positive. I am going to focus on two examples of the positive underlying fundamentals: financial conditions broadly defined and consumer confidence. We might ask what factors have contributed to the strong above-trend growth over the last year and a half. A supportive set of financial conditions certainly seems to have been a factor. Financial conditions either have been sufficiently stimulative to promote this strength or not sufficiently restrictive to prevent the resurgence. Borrowing terms generally are viewed as attractive for home buying, for consumer durable purchases, and for business fixed investment. If there is a problem, it is the excessive amount of borrowing that some households would like to undertake under prevailing financial conditions. How have financial conditions changed since the March 25 policy action? That action was widely anticipated, so it largely was reflected in financial market conditions at the time of the move. Since the March move, however, long-term interest rates have edged slightly lower, the stock market has rallied, the dollar first rose and then declined to below its initial level. A monetary conditions index for the United States, which took account of short-term and long-term interest rates, the stock market, and exchange rates would, I believe, show more favorable financial market conditions today than was the case immediately following the March move. I do not ordinarily place great weight on measures of consumer confidence in my own forecast, so I don't want to oversell the significance of the latest reading when it supports the case I want to make. But the preliminary report of the Michigan Consumer Sentiment Index for early May was extremely interesting. It shows a decline in the index as it relates to current economic conditions that are consistent with the projected near-term slowing. But it also indicates a sharp improvement in expectations about future conditions supportive of the prospect of a solid second-half rebound. Let me read you a few sentences from Richard Curtin's interpretation of the early May data on consumer sentiment: ""Extraordinary strength was recorded in consumer sentiment during the first half of May, with the Sentiment Index reaching a new record level. The early May gain reflected consumer reactions to the very favorable economic news that has dominated the headlines: record low unemployment, strong GDP growth, and a resurgent stock market. Moreover, in sharp contrast with the initial reaction to the interest rate hike, consumers have now concluded that the recent increase will have little, if any, impact on future economic conditions. To be sure, consumers have not changed their views that further interest rate hikes would be forthcoming in the year ahead. Consumers, however, no longer expect those rate increases to damp income gains nor to represent a barrier to planned purchases."" My conclusion is that the projected slowing in the current quarter is part payback, part special factors, part breather, but not likely to be the beginning of an extended period of below-trend growth. The underlying fundamentals remain very positive. As a result, from the perspective of monetary policy, we should give appropriate attention to the level of utilization rates. For better or worse, this is what will determine the course of inflation over the coming quarters.",1291
-fomc-corpus,1997,Thank you all. I think we can go for coffee.,12
-fomc-corpus,1997,Shall we resume? Mr. Kohn.,10
-fomc-corpus,1997,"Thank you, Mr. Chairman. (Statement--see Appendix)",13
-fomc-corpus,1997,"Questions for Don? If not, let me start off. I think the probability that we are in a very unusual era is rising. A number of developments point in that direction, and they raise some very fundamental questions about how to view this economy and how to implement policy. At the risk of being a little more definitive than indeed I think is appropriate, let me sketch out what I believe may well be happening, put that scenario on the table as a hypothesis, and then try to see what its shortcomings may be. First, we have some very significant and unexpected evidence that profit margins are still rising at this late stage of the business cycle expansion. The preliminary earnings reports suggest that the domestic operating profits of nonfinancial corporations showed a fairly significant rise in margins for the first quarter. When we add in the dramatic rise in foreign affiliate earnings, which have increased despite the rise in the dollar, we find a quite impressive increase in total profits. That is, if we start with the firms in the S&P 500, whose domestic earnings are rising faster than those of smaller firms, add in the smaller companies, and allow for the nonpublic corporations that also appear in the national income accounts data, we see that total domestic operating margins are moving higher. This has a very interesting implication for what is going on because if we disaggregate the data for nonfinancial corporations, it turns out that the estimated rate of increase in total unit costs from the first quarter of 1996 to the first quarter of 1997 is close to zero. This total, which combines unit labor and unit nonlabor costs, has been moving lower in recent years; that is, the rate of increase in underlying total unit costs has been slowing. The number for the first quarter of 1997, which is a rough estimate at this point but one that is based on accounting relationships, is the best that we have seen in a while. If we believe that the price data are reasonably accurate, meaning that the bias is not changing very much, and if we believe the profits estimates are about right--the latter are based on independent earnings reports--then, by arithmetic, total unit costs could not have changed much. If we subtract nonlabor unit costs, which are comprised essentially of capital consumption allowances and net interest per unit and which combined have been falling for quite a while--you may recall that we discussed this a couple of meetings ago--the residual, unit labor costs, can be seen to have increased at a rate of about 1 percent in the past year, and that rate of increase, too, has been falling. Any reasonable set of numbers for average hourly compensation, which has been rising in this period, permits us to derive productivity numbers that are accelerating significantly--up roughly 3 percent from the first quarter of 1996 to the first quarter of 1997. Now, one should remember that this productivity estimate does not cover the full economy. When we try to reconcile this estimate with the published nonfarm business sector productivity data that we usually deal with in our models, we run into that large anomaly of a long-term decline in productivity for the noncorporate business sector. This decline makes no sense. It seems to me that all the anecdotal evidence that comes to our attention is consistent with the data we are getting in the nonfinancial corporate area. Those are the data that everyone sees. The rest is an unfortunate fabrication that I think is distorting what we are looking at and that distorts our policy view, with potentially significant consequences. It may well be that the rise we have seen in nonfarm business output per hour, which is the official series, may to a large extent be explainable through econometric analysis by the increase in the rate of growth in the economy. But I have more difficulty with the sharp acceleration in nonfinancial corporate productivity. There is an inflection point in those data that shows up very clearly in the last couple of years. The question is, why? What does it mean? Is it a statistical aberration or just a shot out of the blue? Here we have another unexplained set of data that I must say have been bedeviling me for quite a while. This may suggest the explanation: If we look at the high-tech investment area or more generally the high-tech portion of gross domestic product, whether in nominal or real terms, we get a gradual increase through the 1980s and early 1990s.- But starting in 1993, such investment tilts up sharply and progressively, and its rate of growth has not turned down since then. The question is, why? One must assume that people make investments because they perceive prospects for increasing profitability. Indeed, the presumption is that each company has looked at its opportunities for profitable capital expansion and decided that such investment was a good idea. We have seen a fairly dramatic increase of capital investment in the high-tech area, less growth in the non-high-tech area, and in-between increases in the intermediate types of investment. This raises the very interesting question reminiscent of the 1989 hypothesis of Paul David of Stanford, which I discussed at some length in previous meetings. He argued that the reason why the huge amount of computer investment prior to 1989 did not show up in productivity was not that it was inefficient investment but that, as in the development of the electric motor at the turn of the century, certain synergisms need to build their way into the system before productivity gains can emerge from a major new technological insight. You may recall that, in what I found to be a very persuasive paper, Professor David looked at the 1920s and the pattern preceding it and developed a view with respect to the gradual buildup of synergies after the introduction of the electric motor. The latter initially displaced the steam engine that had largely driven transmission belts utilizing the advantage of gravity in tall buildings. The electric motor could not do much to increase productivity in that environment. But as soon as the tall buildings were replaced by flatter ones the synergies began to take hold and productivity picked up very substantially in the 1920s. Professor David's view was that today's high-tech change represents a comparable situation. Indeed, if in retrospect this hypothesis is correct, what has happened is that the synergies finally came together in recent years mainly as the software industry in this country expanded extensively and, as you all have observed, computer technology cumulatively enhanced our production capabilities. We presumably are seeing a rise in the potential rates of return on marginal investments in a system in which the synergies are coming together. If that is not happening, it is very difficult to explain the protracted, very extensive expansion in high-tech capital investment. The question is whether those making the high-tech investments were right. Did rising rates of return actually materialize? The productivity data that we are looking at here suggest ""maybe."" One would expect the rate of return on capital investment to rise in real terms as productivity increases. If the inflection in the rate of growth at this late stage in the business cycle is in fact real--and it certainly appears less and less to be statistical noise as it continues quarter by quarter--then the issue essentially is why it is happening at a time when the unemployment rate is so low, when employers are of necessity drawing in marginal workers, even if we want to argue that they are not doing so extensively. The answer has to be that we are getting some long-term improvement in productivity performance cyclically adjusted and after any other adjustment one may wish to make. This would imply in the context of very tight labor markets that we are also getting a significant shift from labor to capital resources. Indeed, that would have to be the case. It does not have to be measured physical capital because it can be intellectual capital such as managerial changes, structural changes, and a variety of other changes that we do not include in our tangible capital stock. But the question really is whether we are indeed getting this long-term productivity increase. I will come to the issue that I think Al Broaddus correctly raised in this connection, namely, the implication that has for the real long-term rate of interest. In any event, the pickup in productivity helps to explain why inflation remains so well contained at this stage in the expansion despite the increasingly tight labor markets and other developments that, on the basis of our historical models, would have produced significant inflation. It also may partially explain why nominal and real GDP are as strong as they are. We need to remember that output does not stem only from the demand side; it also comes from the supply side. The containment of inflation also is consistent with the general notion, which we have discussed before, that it is very difficult for business firms to raise prices in this environment. The reason is that there is enough product slack in the economy to restrain firms that endeavor to raise their prices because they fear the loss of market share to competitors who may decide not to adjust their prices higher. We have what increasingly strikes me not so much as noise in the data but as growing evidence that something quite fundamental is happening. The important question is where it goes from here. It is too soon to be sure of any magnitudes. I suspect that the 3 percent growth in productivity that I mentioned may well have occurred in the nonfinancial corporate area over the last year; incidentally, that improvement has been supported by a much stronger rate of growth in manufacturing, a significant component of that industry grouping. If those productivity estimates are correct and the productivity gain is coming from high rates of return on the capital investment side, then the latter is not about to slow down much, particularly at the moment. This analysis basically argues that prices are in check for a while. It does not say, however, that we have cured inflation or that capacity is unlimited in some way or another. It does suggest, I think, that we ought to be careful about how we evaluate what we are doing. While it is certainly the case, as Al Broaddus pointed out and others have implied, that we do get a higher real rate of interest or, as Don Kohn correctly said, a higher marginal product, there is a tradeoff. In other words, we get both lower inflation and higher real rates. Rephrasing what Al said, at constant nominal federal funds rates, we get a higher real long-term rate and a lower inflation trajectory. The question arises as to what is the appropriate policy in this situation. It strikes me that there are risks on all sides because this hypothesis, which I would stress is only a hypothesis and by no means a certainty, involves some probability of being wrong. My own guess at this stage is that, even given this hypothesis, the rate of economic growth in the Greenbook may be too low. I think that the second-quarter number is phony for the same reasons that people are suggesting the first-quarter number is phony. I believe that there is a deeper underlying strength in the expansion, as Gary Stem suggested, and I agree with him that it is very hard to avoid the conclusion that the wealth effect has not spilled over in certain respects. It does not take very much in the way of a change in core productivity growth to alter radically the inflation outlook as presented in the Greenbook. If we consider that employment costs account for 2/3 of total price, then a 1/2 percentage point change in productivity growth, presuming it affects the total system irrespective of how we may look at the noncorporate sector, means a difference of 3/10 point in long-term inflation rates. The improvement in productivity could very well be more than 1/2 percentage point; I do not have a clue. All I am telling you is that the numbers do not strike me as evidence that the old-fashioned model is working. I am not aware of any evidence suggesting that domestic operating margins are declining in the second quarter. I think the gains in foreign affiliate earnings are probably coming to a halt, in part because of the lagged effects of the dollar's strength. But I hear nothing that suggests reduced growth in domestic operating earnings. If virtually all of the inflation is coming from rising profit margins and the increase in total unit costs has been near zero for the last year, it just is not credible to assert that policy is behind the curve. Indeed, I would suspect that the real funds rate, as appropriately measured depending on how one looks at it, is probably not terribly far from where we want it to be. I believe the fact that we are getting stronger growth at the current federal funds rate than we would have expected is a supply side as well as a demand side phenomenon, perhaps more supply than demand. I am not convinced that the inventory effect may not cause us some difficulty. It is hard to believe that the inventory growth rate will simmer down and stay down. The inventory risks are clearly on the upside. Let me summarize quickly; I have been going on longer than I intended. The bottom line as I see it is that as I balance the demand side pressures and the supply side offsets, I suspect that we are going to have to tighten policy somewhere along the line. My guess is that we will need another 25 basis points, more likely more, by the end of the year. I would be concerned, however, about moving today. A move would give us too steep a trajectory for the endpoint of the interest rate pattern. Two things might happen, neither of which would be terribly helpful. One would be a market presumption that a big increase in rates is needed, something that I do not think we are in the process of implementing. Alternatively, and worse in a certain sense, would be the conclusion that the rate increases are all over, thereby removing the uncertainty that occurs when the Federal Reserve's Damocles Sword overhangs the economy. That is not something that I would look upon with great tranquility. I recommend that we not move today. If we do not, I think the probability that we will have to move and should move in July is better than 50/50 and, alternatively, the probability of a move by August is very high. I would add that the odds of a further move in the fall are better than 50/50. I think it is appropriate in this situation to weigh what seems to be a very important and fundamental shift that appears to be occurring coupled against the unquestioned notion that the amount of slack in the economy is not substantial. In that context, I think we ought to be looking at a potential trajectory for interest rates that is modest but definitely up. We need to continue to create an element of uncertainty about what we are going to do in order to damp what undoubtedly are some elements of speculation, especially in the commercial real estate area. To conclude, I would recommend at this stage that we not move today but that we adopt an asymmetric directive. I think that with all of the things I have been saying about structural change, the risks unquestionably remain on the upside and are likely to be in that direction for quite a period of time. Vice Chairman.",3038
-fomc-corpus,1997,"Mr. Chairman, during the go-around I gave a shortened version, not intentionally, of the very interesting analysis you made of productivity developments. As I said then, an advantage of attributing the unusually favorable performance of unit costs to higher productivity growth was that it removed some of the mystery surrounding that performance. Our previous analysis that attributed much of the relatively subdued inflation to the dollar and to uncertainty among white collar workers might be compared in terms of its plausibility to a relay race in which people who never saw each other before run on the same team and pass the baton perfectly. It was always very hard for me to believe. So, I think this analysis actually makes a good deal more sense. I would add as you indicated, Mr. Chairman, that we are dealing with a working hypothesis, not a proved theory. Therefore, it does leave us with a rather high degree of uncertainty about what is going on in the economy even though we may be less uncertain. In the circumstances, caution is the appropriate response. I agree with the idea that keeping participants in financial markets and the real economy somewhat uncertain about the exact timing of our moves has considerable merit since we still have rather frothy asset markets. As I mentioned, we are now heading toward speculative real estate development in New York. I can support very comfortably your recommendation of ""B"" asymmetric.",270
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I agree. I think your analysis is very appealing. I hope it is right; it will take us a little while to find out. I believe we all agree that the risks are still on the upside, that the economy is very strong, and that we probably will have to move again. In my view, the psychological argument is very much in favor of not moving now because the markets and other Fed watchers would interpret another move at this time as the end of the story, especially with the expansion softening. We will have a much bigger psychological effect if we do not move at this point, and I would support your recommendation, Mr. Chairman.",131
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Let me begin with some further thoughts on the Taylor Rule perspective on monetary policy options and the changes in initial conditions and forecasts between this meeting and the March meeting. This will lead me into my own version of the policy options for today's decision, with special attention to the interpretations attached to the options. I will conclude with some considerations relating to initial conditions and to other policy priorities that might justify a willingness to assume greater inflation risks. The Taylor Rule perspective underlies my strongly held view that prudent monetary policy should lean against the cyclical winds by enforcing a procyclical pattern in real short-term interest rates. Specifically, I believe that real short-term interest rates should rise in proportion to increases in utilization rates over the course of a cycle and that such a disciplined response is especially critical as the economy approaches capacity. I interpreted our action at the last FOMC meeting as being justified by a forward-looking version of the Taylor rule; that is, by a forecast at the last meeting of rising utilization and inflation rates in the absence of policy action. The wisdom of that move was quickly apparent, to me at least, in the quicker-than-expected realization of higher labor utilization rates. We might in retrospect call it a ""just-in-time"" monetary policy action! In my view, we tightened in March because we believed that continued above-trend growth would lower the unemployment rate to or below 5 percent by midyear, in line with the staff forecast. The unemployment rate is already where we feared it might go. Why should a forecast of more moderate growth ahead make us more relaxed? All the forecast of a return-to-trend growth guarantees is that the economy will linger indefinitely in this precarious position until inflation does turn up. In short, we have more reason in my view to be concerned about inflation on May 20th than we did on March 25th, not less. If one accepts the view that there is indeed justification for some tightening, the next question is how much of a cumulative move is justified by today's initial conditions and how gradually should such a tightening be implemented over time. We can get some guidance on this subject from alternative specifications of the Taylor Rule as well as from model simulations of alternative funds rate paths around the base forecast. I conclude on the basis of guidance from those sources that the real federal funds rate should move at least percentage point for percentage point with the unemployment rate, with some of the evidence suggesting that the best stabilizing results come from a gradual policy response that cumulates to twice this magnitude. The bottom line of the analysis is that some further tightening appears justified by current initial conditions and forecasts. On the other hand, it would be hard to argue that recent data on labor costs and inflation suggest a high degree of urgency about taking the next step today. I also can accept the wisdom of a view that present uncertainties might suggest a more gradual implementation of any cumulative tightening than otherwise. In my outlook statement, I noted two uncertainties that could influence our judgment today, particularly about the timing of any action. The first is that the data on labor cost inflation in the period between meetings raised further questions about the estimate of NAIRU and suggested that the staff forecast of rising inflation at prevailing utilization rates may be too pessimistic. The second is the sharpness of the projected decline in second-quarter growth, which encourages the Committee to wait until we confirm the expected rebound. The Chairman has focused on a third uncertainty--heightened by first-quarter profits data--the trend in productivity growth. With the above considerations as background, let me offer my own version of the Bluebook policy options for your consideration. First, we have alternative B, no change. This alternative could be supported on the basis of two quite different arguments. I want to place at least as much emphasis on the principles that underlie the action as on the action itself. Let me call the first rationale for no action the ""B/reactive policy"" alternative. It carries the following interpretation: growth is slowing sharply in the current quarter, and it is projected to be near trend over the remainder of the forecast horizon. Therefore, we can comfortably return to a reactive posture of watchful waiting. A move to a tighter policy in the absence of evidence of a sharper rise in labor costs or direct evidence of higher core inflation would require at least a forecast of above-trend growth if not evidence of persistent above-trend growth. This justification for no action seems to make growth the issue rather than utilization rates. It seems to be a surrender to a reactive posture. This approach could be taken a step further to hold that, given the uncertainty about productivity growth, we should not even worry about the strength of growth. Do not worry about utilization rates. Do not worry about growth. Do not worry about wages because their increase could simply be a response to higher productivity growth. Worry only about inflation, the ultimate reactive posture. This might be the best we can do if we believe that we know so little about the structure of the economy that past regularities provide no guidance for current policy. For my own part, the puzzles of the current episode have not yet pushed me into this camp. Some might worry that this view suggests that irrational exuberance has affected more than the stock market. I will take the liberty of redefining alternative C in my menu of options as 1/4 percentage point of additional tightening today. This would be the second step in a cautious but still preemptive policy posture. It is justified by the increase in utilization rates since the last meeting combined with the expectation, consistent with the Greenbook forecast, that utilization rates are likely to remain at or below this level going forward. In light of the uncertainties I have previously discussed, we could accompany this move with an announcement that indicates an intent to pause after the March and May moves. The pause would allow us to await confirmation of a rebound in demand in the third quarter, to assess the degree and persistence of the projected slowing in inventory investment, and to evaluate the implications of additional information on labor costs and inflation and whether utilization rates were already so high as to yield a rising trend of inflation. The pause also would provide an opportunity to assess the July NIPA revisions for insights about trend productivity growth. Given the prevailing large statistical discrepancy and the recent unexpected surge in tax receipts, there is reason to be particularly interested in this revision. Let me offer a third alternative as a compromise, which I call ""B/go slow,"" that I hope is in keeping with the spirit of the Chairman's proposal. Like the ""B/reactive"" policy, it calls for no change in policy today, presumably combined with an asymmetric directive that clearly is justified by the inflation risks in today's initial conditions. But it also carries the expectation that current utilization rates may justify additional tightening. We postpone any tightening today in light of present uncertainties in order to confirm expectations that demand and growth do firm, that unemployment remains at 5 percent or below, and to have time to assess the implications of additional data on trends in labor costs, inflation, and productivity. ""B/go slow""could be thought of as a slower moving version of ""C."" It still allows us to cling to a preemptive posture, but it suggests additional caution in light of the present uncertainties. It might well be argued that there is only a hair of difference when all is said and done between any of these alternatives. But a ""B/reactive"" policy is of great concern to me. It suggests a willingness to abandon any sense of preemptive policy in favor of resuming a reactive posture that history suggests will ultimately produce overheating and higher inflation and that will end up threatening the expansion. I prefer ""C."" I think it is the more disciplined policy, the more balanced approach, but I could live with ""B/go slow"" if it contributes to a stronger FOMC consensus about current and prospective policy. Let me turn now to two quite different sets of considerations that would be consistent with the choice of a reactive strategy. I am not promoting either of these justifications--I have already committed to preemptive ""C""--but I believe they deserve to be put on the table. The first is the economic and political difficulty, what I will call a ""reverse"" soft landing. I view the monetary policy implementation through 1996 as an attempt to achieve a conventional soft landing. It involved slowing the expansion to trend before it overshot capacity, thereby stabilizing inflation and extending the expansion. We already have seen that it can be difficult to muster public support even for such a sensible policy effort. Given the recent decline in the unemployment rate, we might now need a monetary policy that is attempting a reverse soft landing in which we approach capacity from above and thus require a period of below-trend growth to allow actual output to drift back down to capacity. Perhaps more to the point, it would be a period of below-trend growth to raise the unemployment rate back to NAIRU. Such a policy is very difficult to sell and very difficult to achieve. It might be argued in this case that the best we can do is to attempt to slow the economy to trend, hope for the best, and react if necessary to clear and persistent signs of higher inflation. I wonder if this is a factor encouraging some to accept a reactive posture. A second consideration, and one increasingly talked about, is that a policy priority for sustaining a high-pressure economy, one close to capacity, may have increased. Achieving maximum sustainable employment would ensure an environment that would reduce the tensions and challenges associated with welfare reform and the associated movement from welfare to work. Given the continued uncertainty about NAIRU, it has been argued that this is an opportune time to experiment by allowing the unemployment rate to decline further, even below the best guess of the current NAIRU, to ensure that we avoid sacrificing any employment that could possibly be sustained without accelerating inflation. I think these are provocative arguments for a reactive posture. They do not, however, sway me from my preference for a cautiously preemptive stance. I am still aiming to avoid overheating and sustain the expansion. I like my version of ""C,"" but I can accept the Chairman's version of ""B,"" which I take to be a ""go slow"" strategy and not a retreat to a reactive policy.",2074
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I agree that there are a lot of similarities to the 1920s. I just do not want it to end the same way. [Laughter] I don't even know what to call the next decade when the years after 2000 are counted in single digits. Once we get to the teens, I'll be fine. But I expect to end my career in the next decade, and I do not want it to be labeled ""the great contraction."" I see a growing chance that the 1990s will be viewed at least as one of, if not the, most prosperous decade of the century. It will get some label like the ""soaring 1990s"" or something like that. There are some scholars who say that errors made starting in 1927 sowed the seeds for what happened in 1929 and afterward. I find some of the analysis of what occurred and how it looked and felt in that period rather compelling. I started my career in the Fed in 1967, a year in which some policy mistakes were made. I was out of the System in 1977, another year in which policy mistakes started to be made. I was not in the System in 1987; a lot of you were, but I remember very well what kind of year that was. It is now 1997, and I think we need to be cautious about being too shortsighted regarding how much momentum is built into the expansion. If the productivity-supply side arguments are right about how much strength there is in the economy, then it must be true, as it was in the 1920s, that real interest rates are quite a bit higher than those we have gotten used to. I think that Al Broaddus's argument earlier and the Chairman's remarks say that we have to accept the idea, and maybe try to sell the story to some of our critics, that high real interest rates are a sign of a strong, healthy economy and are not a bad thing.",412
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, like some others around the table, I would like to move steadily and persistently toward price stability as measured somehow. This will require some further tightening and I think the economy could absorb that tightening rather well. However, it is also very apparent to me--I commented on this earlier--that this will require a further debate, perhaps within this Committee but certainly with the public. We will have to make a greater effort to educate the public before they will accept the need for some further tightening of policy. For that reason, I would accept and support your recommendation and encourage us to make a very conscientious effort to improve our public educational activities.",131
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"This has been a tough meeting, Mr. Chairman, but I think a very good one with a lot of constructive comments. Early in the meeting, Jerry Jordan summed it up best for me when he said that the choice may well be between moving a little now and moving a lot more later on. Let me make a couple of observations. We all recognize that there are significant upside risks. To repeat what everybody else has said, for me the key upside risk is that the expansion may not slow to trend as projected. The problem is, of course, that we are not going to know this for sure. If we find out that growth is well above trend at some point down the road, we could find ourselves in a box with some very, very difficult choices. There has been a lot of focus on uncertainty in the commentary around the table, and there certainly is a great deal of uncertainty. I agree with Bill McDonough that greater uncertainty should induce greater caution, but I think we need to be very careful not to let uncertainty paralyze us. I have been attending these meetings off and on since 1973 and there is always a lot of uncertainty. There may be a little more of it than the average at this meeting but in my experience not that much more. With respect to productivity, I am glad that you have highlighted it today, Mr. Chairman. I think you are providing a very useful service not only to the Committee but to the country in emphasizing that we may well be in the midst of a significant increase in trend productivity growth. Again, as far as the short run is concerned, that does not necessarily mean that nominal rates need to go up, but it certainly does imply that real rates need to increase. That is another factor in my thinking. As always, policy is a matter of balancing the risks. Let me tell you that I recognize the risk in moving today. But I think there is also a substantial risk, in my view a greater risk, if we do not move now. I would reiterate the point Tom Melzer made about our longer-term goal of price stability. We certainly need to keep it in mind as we go forward. Someone mentioned today that the core CPI is flat; actually the growth rate is flat but the index itself is still moving up. We should not lose track of our longer-term goal. If we are going to try to make progress toward that goal, this is a very good time to try to achieve it. I think we need to move today. This is not the beginning of 1994. The funds rate is already at 5-1/2 percent, so I am not saying we need to make a terribly robust move, but I believe that a 1/4 percentage move would be appropriate today.",561
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, for me the policy choice comes down to assessing alternative risks. It appears to me that the risk associated with raising the funds rate is smaller than the risk of not raising it. If we tighten policy and that action turns out to have been unnecessary, we would slow the expansion a bit, but there would be relatively little risk of a prolonged period of weakness. If we do not raise the funds rate and the inflation rate begins to show a clear upward trend, the long lags in policy mean that we could end up with a problem on our hands. On the basis of these considerations, I would prefer to raise the funds rate by 25 basis points at this meeting. However, since I do not see a possible pickup in inflation as imminent, I am willing, somewhat reluctantly, to support a policy of no change in the funds rate for the time being and asymmetric language even though I believe we are running the risk of a larger rate increase later. Finally, I very much look forward to our next meeting and the opportunity for us to reconsider our decision not to change the rate.",220
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I think my analysis is quite similar to Bob Parry's. We need to assess both the risks that we face and the costs of being wrong in any action we take. I, too, view staying put as a policy action. As I noted earlier, the risks that growth will be more rapid and inflation more difficult seem to me to continue to be strongly asymmetric. In fact, if I thought the Greenbook forecast had a reasonable probability of being realized, I probably could live with it. It is a forecast of a pretty good economic outcome. But I do not think it has a good probability of coming about. In my view, some additional amount of tightening is necessary to provide an extra source of constraint on the economy and keep it on a healthy track. Your discussion of productivity was extremely interesting, Mr. Chairman, but in the end it seemed to me that you had some sense of the potential need for tightening at some point this year. What if we were to tighten now by 25 basis points and we were wrong and everything started to come in at least as well as the Greenbook sees it, and maybe even a little slower? Are the costs of being wrong in that way unacceptably high? I do not think so, and one of the reasons has to do with the argument of the psychological impact on the markets. I meet with a group of investment managers on a fairly regular basis. Their discussions in recent weeks have continually focused on the availability of credit, the liquidity of the markets, and the excesses that they see everywhere, particularly when it comes to commercial real estate financing. Rather than feeding a sense of caution through uncertainty about our actions, I think that not moving at this meeting or certainly not moving soon will lead to a greater level of certainty among market participants that they can persist in their excessive activities and that will feed into more speculation in the asset markets than is healthy. What if we stand pat and we are wrong? Of course, timing is everything and perhaps it really doesn't matter whether we tighten now or in July or August or whenever we meet during the rest of the year. I do think that in delaying we stand to lose a bit in the markets, as I mentioned, and we also stand to lose the high ground of advocating a proactive monetary policy. We need to reduce the risk of overshooting, and if we do not do it at a time of fast growth and tight labor markets, when will we do it? For what it's worth, the same group of investment managers spent a lot of their time at our meeting discussing what they saw as the potential outside sources of resistance to Fed moves, along the line of what Tom Hoenig was reflecting on in his comments earlier. Their advice, again for what it's worth, is to do the right thing. For them, doing the right thing is to tighten up a bit on the markets and rein in the potential for inflation to get out of hand. I believe the right policy now is a further 25 basis point move. But again, timing is everything. I think our current policy stance is not too far away from where it should be, Mr. Chairman, and I could support your recommendation.",640
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I have to admit that I feel a little like Dr. Watson to your Sherlock Holmes. You wove together all these strands and reconciled the various puzzles that I have been worried about. Whatever else may be going on, we know that as the period of economic growth has lengthened, gains in employment have outpaced what would seem to be consistent with what demographic trends normally would generate in terms of labor force growth and any reasonable long-term trend in participation rates and hours worked. So, I am still a little cautious about where we are and how the economy is performing. I would add that I continue to agree with the basic concern that the risks here are that demand will outpace supply and that we will experience a buildup of inflationary pressures. I do not feel that it is absolutely urgent that we act on that concern at this meeting. But having said that, I ran through the same chronology that Jerry Jordan referred to earlier in the meeting and arrived at close to the same conclusion. That is, I think that if we delay action now, we may not find ourselves confronting circumstances where we are convinced and confident of the need for a policy tightening move and have a persuasive explanation until perhaps November. Now, I do not know if waiting until November would turn out to be a fatal error, but why find out? It does seem to me that circumstances today ought to persuade us not to wait that long or run the risk of waiting that long. So, I would certainly prefer a modest tightening now.",308
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"This decision comes down to balancing the need for more insurance versus wait-and-see. I am more persuaded by the wait-and-see argument. There is, as I look at it, more upside risk on the demand side in the future, but there is also upside potential on the supply side, which we have consistently underestimated. If there is one unifying theme that we pick up when we travel around our District, it is that there are developments out there that really are enhancing productivity and working their way through on the supply side. I think a proactive monetary policy has to take both the demand side and the supply side into account. We want to see problems in a proactive sense, but we also need to see benefits in a proactive sense. I think it is a reasonable bet to have that wait-and-see attitude, particularly since current monetary policy is not loose. It is probably somewhat restrictive, and I don't think we are that far behind the curve even if we are making a mistake and should be tightening today. I am quite comfortable with the ""B"" asymmetric proposal.",213
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Mr. Chairman, I had intended to say something much like what President Boehne just said. Let me simply associate myself with his remarks and concur with your recommendation.",34
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. I think the inflation risks are on the upside, as I said before, and I believe it would be prudent to take out some additional insurance now in the form of a 25 basis point increase in the federal funds rate. To reemphasize a point that was made earlier--I know Al Broaddus made it and others probably did as well--we cannot lose sight of how important our credibility is in assuring the kind of economic climate we have enjoyed in recent years. The confidence that people have that we are going to keep inflation low and stable is very important, and I see a move in the direction that I am suggesting as consistent with maintaining that kind of credibility. As others have said, if we are wrong and there are unique circumstances here that would not lead to an imminent increase in the inflation rate, what would be so bad about moving the inflation rate lower? We are not at price stability. We have some distance to go, and frankly I think exercising monetary restraint at a time when the economy is strong is more likely to succeed in an opportunistic sense than doing so in a recession or a recovery. This is what is implied by the so-called opportunistic strategy. Even though people would associate me with the deliberate approach, I think one could characterize a tightening move today as opportunistic. Finally, I do not think that inaction on our part will do anything to stem speculative behavior. If anything, inaction will foster such behavior.",296
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I could support ""B"" symmetric or asymmetric. I do not have strong feelings on the symmetry question because if we were to move in the intermeeting period, I think there would be some kind of consultation. I do think that tightening is eventually going to be needed, but since inflation has been rather benign recently, it seems to me that there is room to wait a bit longer. As I said last time, I am not sure that a federal funds rate of 5-1/2 percent is that far out of alignment, particularly if we get a slowdown in the expansion or if productivity has moved us to a higher growth potential. It does seem to me that we have some time to let things play out a bit more, and I think it would be best to conserve our monetary tools for now.",162
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. I have a preference for an additional 1/4 point tightening, but I can support your recommendation for today. In any event, I certainly would support an asymmetrical directive. In view of the hour, I will not repeat all the arguments. The possible payback of staying ahead of inflationary pressures that many of us think are probably building weighed against the very small downside risk of a modest tightening in a fully employed, solid economy leads me to conclude that a somewhat less accommodative policy would be both reasonable and explainable. I would like to add, as we talk about policy options, that we always seem to be constrained by insufficient focus on the longer run. Without a better defined and better articulated goal, whatever we decide that goal needs to be, each meeting becomes an exercise in judging the latest data in the context of a short-term forecast. While I would not want to give up our individual and collective judgments, especially in a period of fundamental changes in the way the economy may be working, our current approach to policy without a clearly understood anchor makes it very difficult to build the kind of understanding and support for policies that promise long-term gains but entail short-term costs. I hope we can get back to that debate in July or sometime soon. Thank you.",261
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, our outlook for the economy in 1997 is very similar to the Greenbook forecast, but we are a little more optimistic on inflation. However, we are assuming a slightly higher federal funds rate through the end of the year than does the Greenbook in its baseline forecast. I am very pleased that you raised the productivity point today because it is something that we have been talking about at our Bank, and I think it deserves a great deal more attention. If we look at the productivity improvement in the first quarter, which we did not talk very much about today, and if that is not the result of a structural change as you are suggesting in your hypothesis, it follows that the current high output levels are being achieved at very high resource utilization rates. Obviously, in this situation we will have an output gap that will open up further, and inflation almost certainly will accelerate. I very much hope that a structural change is occurring as you are hypothesizing. Any additional data or information that we can gather to get a better understanding of this will be of great help to us in our formulation of monetary policy. But regardless of whether this is a structural change or not, I think the risks clearly are on the upside, as we have all mentioned. We have to keep in mind the uncertainty that is caused by the methodological changes that are now being made in the consumer price index. We have to keep adjusting our thinking to these slight methodological improvements of .1 percent a year that we are getting in measured inflation. Although I, too, see a need for further tightening this year, I can accept your recommendation today for the ""B"" asymmetric directive. I do want to add one point, though. You will recall that at the March meeting we adopted a symmetric directive that will become public information on Thursday of this week. I think it is going to be important in your speeches and comments in the coming weeks and months that you once again prepare the market for what you said was a high probability of a tightening move--you indicated a 50/50 probability for July and a very high probability for August--because I think there is likely to be some confusion when that symmetric directive becomes public knowledge later this week. I think you carried out this educational effort very effectively earlier in the year, and I am sure you can do it equally effectively now.",472
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,I support your recommendation.,5
-fomc-corpus,1997,"Would you read the directive that would encompass ""B"" asymmetric?",13
-fomc-corpus,1997,"I will be reading from page 13 in the Bluebook. There are several charts that come before it, so when you get to page 12 you will have to go several more pages. ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the expansion of M2 and M3 over coming months.""",139
-fomc-corpus,1997,Call the roll. MR. BERNARD: Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus No President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,50
-fomc-corpus,1997,Our next meeting is July 1 and 2. Let's go to lunch.,16
-fomc-corpus,1997,"I have the gavel that was used for Federal Reserve Board meetings in 1914. I was going to bring it in for this meeting, but it appears to be fragile even though it looks more like a weapon than anything else. [Laughter]",51
-fomc-corpus,1997,"Mr. Chairman, have wood mites attacked it? [Laughter]",14
-fomc-corpus,1997,"It looks more like attacks by the Congress than wood mites. Regrettably, this is the last meeting for Rick Mishkin who, much to the dismay of the Vice Chairman, is going back to Columbia University. I thought he had just arrived. Whether or not that is the case, we will miss you and we wish you well. I suspect that you have learned something about chaos theory from these meetings. [Laughter] I will start off as usual by requesting approval of the minutes.",100
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,"Without objection. Mr. Fisher, you are on.",11
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix.]",13
-fomc-corpus,1997,Questions for Peter?,4
-fomc-corpus,1997,"In the memo that presents some of the options for dealing with declining required operating balances at the Reserve Banks, you and Don Kohn addressed the topic of returning to lagged reserve requirements from the current contemporaneous reserve requirements regime. There was a reference in that document to the preparation of another memorandum. Could you elaborate on that in terms of whether that paper will be a discussion memorandum or a decision-oriented memorandum. Where are you on that issue?",88
-fomc-corpus,1997,I would be happy to refer to Don and his staff on that.,14
-fomc-corpus,1997,"Board staff is working on a memorandum for Board consideration that proposes a return to lagged reserve accounting. The Board has not seen any of this or heard this discussed previously because we are still working on this issue at the staff level. I think there are two factors that make this a potentially opportune time to consider this issue. One is that as reserve balances have dropped, we have had increasing difficulties predicting required reserve balances from week to week. The reason is that vault cash has been high enough to enable some banks to shift back and forth between being bound by reserve requirements and not. The previous formulas that were used to predict which banks were going to be bound and which were not no longer work. We have tried to improve these predictions, and I think we have. The errors have dropped substantially, but it is still more difficult to make predictions about demands for reserve balances in an environment in which we cannot even be certain that one or another major large bank will be bound by reserve requirements. Secondly, the Federal Reserve System is in the process of changing the programming and accounting regime for reserve requirements, and it would be relatively easy to allow for a shift back to lagged reserve accounting once that programming is completed. Previously, we were told that it would be a major undertaking to go into the reserve accounting system and change it from contemporaneous to lagged accounting. The implementation of the new accounting system, which I think will occur about a year from now, would be an opportune moment to shift back to lagged reserves. As I mentioned, we are going to come to the Board with a proposal on that.",324
-fomc-corpus,1997,"As you know, this is an issue that has been debated at length at various times. We have had both regimes. We had contemporaneous reserves before the late 1960s, when we went to lagged reserve requirements. As we got into the monetary aggregates approach to policy, we shifted back to contemporaneous reserves. I think this is more than a technical issue. It has implications for how monetary policy is implemented or the perception of how it is implemented. I hope that this will not be treated as just a technical issue. It ought to be talked about in the broader context of monetary policy rather than in terms of accounting changes. It is a worthwhile debate to have, and we ought to have it in that broader context.",147
-fomc-corpus,1997,"When we get there, why don't we bring it to the Committee as a subject for general discussion, presuming that something materializes out of what the staff is working on at the moment?",38
-fomc-corpus,1997,"I agree very much with what Ed Boehne just said. It would seem to be especially appropriate to discuss that in a situation where it is possible that M2 may be coming back on track. Lagged reserve accounting precludes the use of any sort of reserve operating instrument in my opinion, and such an instrument might be a more desirable option in this kind of situation.",75
-fomc-corpus,1997,"I would underscore that the paper, particularly the decision tree that shows the different options, is not intended to be technical or to bury this issue in the details. Don and I were trying to lay this out so you would see all the steps we think need to be gone through before you reach any of what we deem to be the important policy choices at the bottom of the decision tree, as it were, and perhaps along the way. I hope no one looks at this paper as taking any of these issues and burying them. Rather, we are trying to let you see, with as much advance notice as we can give, the full scope of the possible changes that might be envisaged as a potential answer to the low operating balances problem.",149
-fomc-corpus,1997,"I think President Broaddus is raising an interesting issue. If the M2 data eventually suggest that there may be some particular policy use for M2, the whole concept of reserves in the structure of monetary operations, especially in the context of the significant decline in required reserves, will become more than a technical question. I think we will have to be very careful about how that plays out. We do not want to start moving in one direction and find that we have to backtrack because of factors we did not foresee. My guess is that it would be very premature to consider the issue at this stage, but I would not rule out the possibility that it may become a significant question in 6 months, 18 months; I do not know precisely when.",152
-fomc-corpus,1997,"As you and President Broaddus remember, the reserve requirements are geared to Ml, and there are no reserve requirements on non-M1 deposit balances.",30
-fomc-corpus,1997,"I think that is precisely the issue in the sense that if we go back to M2 and stay with reserves on transaction balances, something is incoherent. At the moment, it doesn't matter all that much. But it would if we began to take the M2 cone seriously. Any other questions?",60
-fomc-corpus,1997,"I have one. I agree with the general thrust of the views that have just been expressed. One of the options on the decision tree would be to lower reserve requirements and increase the deposit base to which they apply. It would be exactly in that circumstance that I think the point the Chairman is making would be relevant. I just want to make the general comment that I am glad the staff has undertaken this analysis of the implications and possible responses to the decline in operating balances. I am sure that everyone shares this view. We have to be concerned about excessive volatility in the federal funds rate, but I think some volatility is actually quite desirable from a market discipline point of view, particularly as required reserves become a less important driver of the demand for federal funds. We really want institutions to have the incentive to hold appropriate balances to settle transactions, and the price they would pay in a very stable funds market might not be sufficient to create the kind of incentives that we would like to see in that process. I know that, as market people, this is something you are well aware of, and we should keep it in mind as we think about these issues.",229
-fomc-corpus,1997,"Further questions for Peter? If not, would someone like to move ratification of the domestic operations?",20
-fomc-corpus,1997,So moved.,3
-fomc-corpus,1997,Thank you. Without objection they are approved. Let us move on now to the Chart Show.,19
-fomc-corpus,1997,"Thank you, Mr. Chairman. We will be referring to the packet of material titled ""Staff Presentation to the Federal Open Market Committee."" Dave Stockton, Ted Truman, and I will jointly share the honors this afternoon. [Statements--see Appendix.]",49
-fomc-corpus,1997,"Thank you, gentlemen. That was a very thorough evaluation. Questions for anybody? [Pause] I cannot believe it was that thorough!",27
-fomc-corpus,1997,"With regard to the table in the middle of chart 5 showing output gaps, could you give me the memo item for the United States, Mike? I assume it would be about 1.0 percent above potential for the fourth quarter of 1996. What was the fourth quarter of 1998 in the Greenbook?",66
-fomc-corpus,1997,The Greenbook estimate for the fourth quarter of 1998 is 2.1 percent above potential.,21
-fomc-corpus,1997,2.1 percent and 1.0 percent roughly for the fourth quarter 1996?,19
-fomc-corpus,1997,We have .8 percent above potential for the fourth quarter of 1996.,16
-fomc-corpus,1997,"Okay. With regard to my other question, it is obvious that what is happening at Boeing has a big impact on BFI and also on the export number. Are there any limits on their ability to produce?",42
-fomc-corpus,1997,"I think they purposely have chosen to stretch out deliveries, as they have done in the past, because they know a bust will inevitably follow the boom.",30
-fomc-corpus,1997,"To piggyback on the aircraft question, we really do not have a precise view of what is going on. I mentioned that the aircraft shipments have picked up over the last two quarters. The information that we have, where we have some slippage going forward, is that their foreign component is leveling off rather than continuing to rise. A larger fraction of what is shown on that chart, at least for the next 5 or 6 months, is going into the domestic side of BFI.",100
-fomc-corpus,1997,Of BFI?,4
-fomc-corpus,1997,"Yes, as best we can piece these things together.",11
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,Further questions?,3
-fomc-corpus,1997,Just a quick question about the projected stock market correction. What is the real impact of that? How much does that negatively affect your GDP figures for next year?,32
-fomc-corpus,1997,"We have not quantified it, as I suggested in my remarks, but we think it will have a relatively modest negative effect with a lag on consumer spending in 1998.",35
-fomc-corpus,1997,Are declining equity prices basically the major drag that you have embedded in your figures for next year?,19
-fomc-corpus,1997,No. We anticipate that the slowing of activity will result primarily from some stock adjustments following the large increases in investment spending in recent years.,27
-fomc-corpus,1997,On both the consumer and business sides?,8
-fomc-corpus,1997,"Right, in both consumer spending and business investment.",10
-fomc-corpus,1997,"Let me emphasize that this is partly a matter of the peculiarity of the timing. We really don't like to attempt to pin down the dimension, let alone the timing, of this adjustment.",39
-fomc-corpus,1997,Right.,2
-fomc-corpus,1997,"But we had to do this. We have it starting essentially at the end of this year and continuing relatively steadily through 1998. Given the normal lags estimated for the wealth effects, we will not see a lot of the impact until the very end of the period and in 1999. That is why it does not loom so large.",70
-fomc-corpus,1997,"Anybody else? Incidentally, Mike Prell has indicated that you can have through Monday, July 7, for any revisions to your individual forecasts for the Humphrey-Hawkins report. President Broaddus.",43
-fomc-corpus,1997,"I have one quick question: Dave, on chart 15--I may be the only one in the room who had a little trouble following all of this--why does the nominal funds rate in that alternative unemployment targeting simulation have to go up more rapidly? I presume you are keeping employment constant while productivity is increasing.",63
-fomc-corpus,1997,"Yes, but the reason is that you need to raise rates earlier in that episode because you are trying to keep the unemployment rate constant. If you did not do that, the strength in demand actually would outweigh in some sense the increase in supply. There is a bigger effect in our models in terms of investment demand and consumer spending that actually causes the net effect of this improvement in productivity to be expansionary for the economy. The improvement would tend to drive down the unemployment rate in the absence of a rise in rates.",103
-fomc-corpus,1997,"If there are no further questions, would somebody like to start the meeting discussion? President Hoenig.",20
-fomc-corpus,1997,"Thank you, Mr. Chairman. Economic activity remains strong in the Kansas City District, with only a few signs of slowing. Our directors and other business contacts report solid economic growth throughout the District. Retail sales have been robust and manufacturing remains quite healthy. Two strikes that I mentioned at our last meeting have ended satisfactorily, with some 4,200 or so workers back to work. Conditions have continued to improve in the District's farm and energy sectors. The District's wheat harvest is under way and expectations are that we will have the largest crop since 1994. Also, cattle prices have improved and ranchers are now making modest profits. In the energy sector, drilling activity registered another small gain in May despite some decline in oil and gas prices. Tempering some of the positive economic news for our District, construction activity has tended to level off and total employment fell slightly in April even after adjustment for strikes. Retail prices are holding steady in the Kansas City District, but labor markets are tight and we continue to hear reports of wage pressures. Many firms continue to have difficulty filling entry-level positions and hiring skilled workers. Our quote of the month is from one of our directors in Southern Oklahoma who reported that labor markets were so tight in his town that everyone was working who wanted to and some were working who did not want to. [Laughter] Several branch directors and other respondents that we survey informally reported above normal wage increases in their markets, especially at the entry level. For example, the owner of one of our large retail chains reported that entry-level wages have increased somewhere in the neighborhood of 10 percent plus over the last year. However, this rate of increase is spotty; we do not see wages pressing up at those rates uniformly across the District. On the national front, despite the more moderate pace of growth in the second quarter, the economy appears to be fundamentally strong. We would agree with much of what was said in the Greenbook. We expect real GDP growth to pick up somewhat in the second half of the year and then likely move toward trend in 1998. Consumer spending should grow at a relatively strong pace. Contributing factors are solid employment, high levels of consumer confidence, and substantial gains in the stock market. Spending on business equipment should also remain strong, rising in response to corporate profits and elevated stock prices. While there is a great deal of uncertainty about the inflation outlook, and we share that uncertainty, our projections for economic activity and those in the Greenbook certainly suggest that the inflation risks remain on the upside. We continue to be sensitive to those risks in our analysis of the economy. With that I will stop, Mr. Chairman.",537
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, Twelfth District economic growth has been vigorous thus far in 1997. Payroll employment expanded by 3 percent at an annual rate during the first four months of the year and probably in May as well. That rate is only slightly below last year's pace. The durable goods manufacturing sector has performed particularly well, as strong demand has continued for high-tech products and for materials related to aircraft production. California's economy is fully on track, with the state currently ranking seventh nationally in its pace of payroll job creation. Los Angeles is now sharing fully in the state's economic success. Employment growth in LA County has accelerated substantially this year, and the county's unemployment rate has declined about 1-1/2 percentage points over the past 12 months to 6.8 percent. Five other District states are ranked among the top seven nationally in their yearly rates of payroll job creation. After accelerating substantially last year, the Washington State economy has settled into a solid growth path. Although economic expansions in the fast growth intermountain states and Oregon have slowed only slightly in 1997, those states remain on strong growth paths with stable or declining unemployment rates. Even Hawaii has shown signs this year of reversing its several-year pattern of employment declines. Sustained and rapid expansion has caused rising inflation in many areas of the District. In the San Francisco Bay area, sharp acceleration in prices of services led to rising consumer price inflation in 1996 and early 1997. Inflation in other strong growth areas of the District also increased in 1996 and is likely to rise further this year. Turning to the national economy, recent data have confirmed that growth in economic activity has slowed markedly, probably to a rate around 2 percent in the second quarter, which is a little lower than the Greenbook projection. Although our forecast shows growth picking up in the second half of this year, it drops back to a more sustainable pace in 1998. I think there are a number of factors restraining prospective growth, but the economy's rapid expansion over the past year or so has left it operating at a noticeably higher level according to our traditional measures of capacity such as the rate of unemployment, rates of capacity utilization, and the GDP gap. These indicators provide good reasons to be concerned about the future trend of inflation, and the lags in policy mean that we must be forward-looking. In this regard, I am concerned about the indications of excess demand for resources. This situation raises two key questions that are very difficult to resolve. First, are our estimates of capacity accurate, and second, given those capacity estimates, is the economy's growth likely to slow enough and for a long enough period of time to eliminate any inflationary pressure that may exist? In balancing these uncertainties, my best judgment is that underlying inflation will show an upward trend. For the GDP price index, our forecast indicates an increase of around 2-1/4 percent this year and 2-3/4 percent in 1998. Thank you.",605
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, economic conditions in the Midwest remain quite similar to those I reported at the May meeting. Our regional economy is still expanding at a modest rate, and District manufacturers and retailers continue to report that competitive pressures inhibit their ability to raise prices. Our manufacturing sector is still operating at very high levels. The Chicago Purchasing Managers' Survey results, released on Monday, showed a sharp increase in the composite index to 61.5 in June from 56.8 in May, indicative of a pickup in the rate of expansion in the manufacturing sector. Contacts report strong activity in a number of industries including steel, heavy trucks, cement, gypsum board, and agricultural and other heavy equipment. However, a large national paper manufacturer headquartered in the District reported slow growth in shipments of containerboard and noted that they are reducing capacity by temporarily closing two plants. In terms of consumer spending trends, retailers indicated that the sales slowdown evident in April and May continued through much of June. However, sales improved significantly in the latter part of June when warm weather finally arrived. To illustrate the adverse impact of the cold weather, one very large national retailer headquartered in our District noted that on a year-to-date basis, unit sales of air conditioners were down 38 percent compared to last year. This retailer also reported that sales of white goods were flat year-to-date; they are now taking a more conservative approach to the second half of the year. Contacts in the trucking industry reported that shipments of new merchandise to retailers nationwide had slowed from the first quarter. This probably indicates attempts by retailers to keep inventories in line with the slower sales pace. Information from the auto industry suggests that reports on light vehicle sales to be released this week probably will show June sales at an annual rate of around 14.8 or 14.9 million units, which would be consistent with what is implied in the Greenbook forecast. Our labor markets are still very tight. The unemployment rate for District states was 4.1 percent in April for the third straight month and then fell to 3.8 percent in May. Despite tight labor markets, we still have not seen much upward pressure on wages, although reports are mixed. Contacts at one large national retailer said they still are not having difficulty attracting workers, and a recent labor settlement with the UAW calls for a 50 percent reduction in wages and benefits for new hires at a foundry, resulting in a two-tier wage structure. In contrast, another retail chain increased wages 10 percent and is still having trouble getting workers. A large phone company is seeing upward pressure on wages, particularly for marketing and managerial people. In the trucking industry, one firm's 33 percent increase in truck driver wages that went into effect in February of this year was not enough to attract as many drivers as they needed, so they have started advertising for drivers. Other trucking firms have raised wages considerably, with the increase in the industry being about 10 to 15 percent. Turning to the national outlook, since we met in May new data have confirmed our view that growth slowed considerably in the second quarter from its first-quarter pace. Further, we have had more good news on the price front, as the CPI rose only .1 percent in May. However, if anything, labor markets now appear tighter than we previously anticipated, and we currently have a positive output gap. Our forecast of growth near trend over the next few quarters will only maintain the gap and not shrink it. Consequently, we see a significant risk that the economy is operating beyond its long-term potential and that underlying inflationary pressures will worsen gradually over the next few quarters, though these pressures may be masked somewhat by the favorable developments in food and energy prices and by continued BLS implementation of methodological improvements in the CPI. Furthermore, though we and the public may have been pleased with keeping inflation at or under 3 percent in the last few years, we must ratchet down this threshold to about 2-1/2 percent now just to keep up with the BLS changes that remove, little by little, some of the measurement bias in the CPI. With the new benchmark in mind, I find the Chicago Bank forecast for inflation and the Greenbook forecast as well quite troubling both in terms of the projected levels of inflation and the upward tilt to its future path. We all know that a gradual acceleration of inflation is difficult to detect in real time and that any actions we take today will not affect inflation in the short run. But we also know that an inflation rate that is gradually, even gently, moving up is not moving us any closer to anyone's definition of price stability. The risks in our forecast and in the Greenbook as well clearly are tilted toward the upside.",945
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, the New England economy continues to expand. The annual rate of job growth now rather closely matches that of the nation as a whole, but within the region considerable state-by-state variation is evident. Massachusetts is now the fastest growing New England state, at least as measured by job growth, outstripping New Hampshire by nearly a full percentage point. After New Hampshire, Connecticut is a close third, while Maine, Vermont, and Rhode Island have had relatively slower rates of job growth. New England employment is dominated by at least four large sectors: high-tech, defense, education, and financial services. The financial services sector is booming as is high-tech. Education remains relatively stable, but defense has endured major reductions in the last several years. Work conducted recently at the Federal Reserve Bank of Boston suggests that, while Pentagon contracts have declined, some formerly defense-oriented companies are starting to expand their employment as a result of opportunities in commercial markets. This is especially true in Massachusetts and New Hampshire where the most flexible defense businesses appear to be located. By contrast, Connecticut and Maine suffer as a result of the inflexibility of their submarine and other shipbuilding industries. At a recent panel discussing labor shortages in New England, we were told that the Massachusetts software industry has grown from about 800 companies with revenues of about $3 billion in 1989 to over 2,000 companies employing 130,000 people and having revenues of nearly $10 billion in 1996. More than 73 percent of Massachusetts software companies are planning to add jobs in 1997, and one of the biggest issues the industry faces is the labor shortage, not just locally but nationally. Massachusetts software companies are said to be facing the tightest labor market in a decade, with unfilled positions a problem not just in old mainframe companies but in the hottest Internet companies as well. Over the short term, companies are using higher bonuses to attract and retain personnel, increasing benefits such as portable vacations and family-friendly work environments, courting retired and laid-off workers, and granting financial awards to existing employees who recruit new employees. Over the longer term, there simply will have to be more high-tech graduates from local and national colleges to meet the demand we see in Massachusetts and nationally. During much of the last two or three years, loan growth at First District institutions has trailed that of the nation due at least in part to the effects of mergers and restructurings but also to concerted attempts to manage balance sheets and organizations to eliminate low earning assets, restrain costs, and improve efficiency ratios. Large First District banks now appear to be embracing loan growth as a means of increasing net income, and they have become intense competitors locally and nationally, especially for commercial and industrial loans. They commented recently about the narrowing of spreads and weakening of loan covenants that they have observed, though they maintained that their own commitment to loan quality remains firm after the lessons of the 1980s. They also report that a tremendous amount of liquidity is being supplied by nontraditional middle market lenders--Merrill Lynch, for example. Finally, let me say a few words about the tightening of commercial real estate markets. We saw a graph in the Chart Show that looked at that development. We see this especially in Boston. The vacancy rate for Class A office space is now below 5 percent, and per-square-foot rental rates are at levels just below the peaks of the late 1980s. It is not occurring just in Boston. We did a survey that indicates that other New England cities are experiencing declining vacancy rates, as are a number of cities around the country--San Francisco, Seattle, Charlotte, just to name a few. So far, ""spec"" building has not begun in Boston, but it would seem to be only a matter of time before it starts both locally and nationally, given current interest rates, liquidity, and both business and consumer optimism. On the national scene, it is interesting to compare the Greenbook forecast with a range of other forecasts: DRI, Georgia State, Michigan, and our own. All these forecasts evidence a lot of similarities in their GDP growth projections for 1997 and 1998. The Greenbook is more optimistic about inflation, as previously noted; more importantly, it paints a picture of declining unemployment rates while most of the other forecasts anticipate increasing rates, with one showing no change as I recall. Thus, while the numbers are not far apart, the feel of the forecasts differs quite a bit. In sum, the other forecasts see an environment of slowing growth and rising unemployment, spurred in part by federal funds rate increases, with some small pickup in inflation. The Greenbook, on the other hand, sees falling unemployment, marginally stronger growth, and a rather similar uptick in inflation. Why is the Greenbook so optimistic or, to put it another way, why is it willing to be further behind the curve than other forecasters seem to think is wise? Some of this optimism could relate to how wrong we all have been in our projections for the past year or so. In comparison with our Humphrey-Hawkins forecasts in February, our current forecasts now suggest that GDP will grow faster than the highest forecast in the February range and that both the CPI and the unemployment rate will be lower than the lowest forecast. So, collectively, we have been wrong. We have underestimated the potential for the economy to grow and for unemployment to fall without serious inflation damage--in fact, with some progress on the overall inflation front. Should we be a ""learning organization"" and assume that this experience can continue through 1997 and into 1998? Or should we remain skeptical that the relationships that drive other forecasts, and ours as well, will reassert themselves sooner rather than later? It should come as no surprise that I am a bit skeptical. I am skeptical because I believe the factors damping inflation--medical cost containment, the value of the dollar, a restructured and downsized business environment--are temporary or about reaching the peak in terms of their economic impact. As I look ahead, I see few, if any, constraints on growth. All the factors have been mentioned: good jobs, high levels of optimism, no particular fiscal drag, and reasonable levels of growth abroad. About the only negatives mentioned in the Greenbook are the prospects for a stock market correction and for consumer and business buying to moderate because of stock price effects. As I keep saying, people in Boston have been telling me for over a year now that consumers can only buy so many cars and that businesses can only buy so many computers. However, it has been difficult to see the effects of that buildup in stocks kicking in as yet, and I wonder when it will in 1998, given all the positive factors. It may be that increases in capacity and moderating agricultural and energy prices will help, but I also think it is wise to be skeptical about the impact of a stock market correction on the real economy. Thus, I would associate myself most closely with the Greenbook's worry about a boom/bust scenario, where we wait too long and then we need to move too strongly to attain our objectives.",1447
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, economic activity in the Fifth District seems for the most part to be following the pattern of the recent national data. As in the nation as a whole, consumer spending was very strong in our region over the latter part of last year and the early part of this year, but it clearly has decelerated in the second quarter, especially spending on automobiles, other durable goods, and apparel. The question, of course, for both our own region and the national economy is whether this deceleration is a temporary phenomenon or something more permanent. Unfortunately, the recent data and anecdotal information from our District do not shed much light on this issue. Consistent with some of the comments in the Greenbook relating to the national economy, there have been some signs of a pickup in retail activity in our area in the last couple of weeks, but it is much too early to know whether that will persist and, if it does, how strong it will be going forward. Certainly, the fundamentals seem to be in place to support a reacceleration of consumer spending in our region in the months ahead. Labor markets remain exceptionally tight in our District as they apparently are elsewhere in the country. Jobs and income are growing strongly. I am always a little suspicious of local unemployment rates because I don't always know how they are constructed, but they suggest that unemployment is very low throughout our region, and that should help support consumer outlays. While credit card charge-offs have risen fairly significantly at some banks, that is not the case at all banks, and we do not see any significant constraints on consumer credit availability, at least at this point. Elsewhere, residential construction is holding up very well in our region, especially at the high end of the market. There is considerable speculative building throughout the District, especially of upscale new homes. With respect to prices, the reports we get are mixed. Some of our board members commented at the latest meeting that there are signs of outright price moderation. For example, told us that his company recently signed a contract with an automobile company that calls for a 3 percent cut in the prices of all the items will supply that company in each of the next five years. But there also are signs of potential upward pressures. This is consistent with some of the comments that Mike Moskow was making. Several months ago, I commented here that trucking companies were advertising for drivers on the mud flaps of their trucks along 1-95. At the time, they were offering 26 cents a mile. They are now offering 42 cents a mile, and at the speeds those guys drive, that is a heck of an hourly wage! [Laughter] I don't have a great deal to say this time about the national economy. Our projections, which are based on a VAR model modified by judgment, to the extent that we have it, [laughter] are not very different from the staff baseline forecast. That is obviously a very rosy forecast, especially with the modifications from the last Greenbook. But in contrast to the staff, I guess we are skeptical along the lines of Cathy Minehan's comments and some of the outside forecasts that she mentioned. We think that at least a moderate increase in the funds rate is likely to be required soon to achieve that nice outcome. Incidentally, we would not see this as a tightening of monetary policy in any meaningful sense. The economy seems to be experiencing something that is at least approaching an investment boom. While I think the staff is right to be cautious about concluding in any definite way that the longer-run trend growth in productivity has increased, there is certainly a possibility that we may be looking at a moderate increase. As I said at the last meeting, either of those events would imply a need for higher real interest rates. With inflation expectations basically stable, a moderate increase in the nominal funds rate would give us a moderate increase in real interest rates. Thank you.",787
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. The Eighth District economy continues to grow at a pace consistent with national trends. Firms report moderate gains in sales and employment, but we often hear that concerns over labor availability have put a damper on expansion plans. Tight labor markets are reflected in an average unemployment rate of 4.6 percent for District states in April. Manpower's employment survey for the third quarter shows increased job opportunities compared with three months earlier. A survey of 223 small businesses in the District revealed that about 18 percent plan to increase sales prices in the months ahead, while about 3 percent plan to lower prices. This is consistent with results from the same survey a year ago. Year-to-date sales tax receipts for District states are running nearly 5 percent ahead of the same period one year ago. Retailers in the District remain optimistic about sales growth in the second half of 1997. Although results for April and May were mixed, many say that sales growth generally has been in line with expectations and that current inventories are at desired levels. While loan demand appears to be slowing at District banks, many are still experiencing double-digit growth rates in their loans on a year-over-year basis. Some contacts report more generous lending terms stemming from stiff competition, which is consistent with the most recent Senior Loan Officers Survey for the nation as a whole. The national economy is indeed turning in an impressive performance. So far in 1997 the economy has created an average of 229,000 nonfarm payroll jobs per month, well above projected longer-term trends in labor force growth. Consumer confidence indices are at high levels, and manufacturing continues to show strength. While retail sales slumped over the last three months, part of that reflects adjustments to exceptionally strong gains early in the year. As the Greenbook notes, weekly chain store sales data indicate some upturn in June. The consumer price index has increased only 1.4 percent at an annual rate over the first five months of this year, down sharply from the 3.3 percent rate for all of 1996. This favorable inflation news has come as a surprise relative to most forecasts made last year, as Cathy Minehan noted. The Committee might do well to think about ways these inflation gains could be locked in. If markets had more confidence that the Fed was not satisfied with 3 percent inflation, longer-term interest rates might fall in line with the news on the CPI. As it is, 30-year Treasury bonds have been trading to yield about 6.7 to 6.8 percent in recent sessions, actually up a notch from 6.6 percent in the fourth quarter of 1996. It appears that markets expect inflation to rebound later this year, a forecast echoed by the Blue Chip consensus. Their expected 1997 CPI inflation rate is 2.8 percent as of June 10, followed by a rate of 2.9 percent in 1998, the same rate that professional forecasters see over a 10-year horizon. Our St. Louis forecast, after incorporating the good news on real growth and inflation for the first quarter of 1997, assumes the persistence of the underlying forces that have generated sustained real growth at a rate of about 2-1/2 percent and sustained CPI inflation at a rate of about 2-1/2 to 3 percent. With respect to CPI inflation, we recognize that the experience of the first five months will moderate measured inflation in 1997, which we expect will come in below that observed in 1996. Nevertheless, like other forecasts, ours is for a bounceback in 1998 to the 3 percent rate that is entrenched in budgets and long-term interest rates. We have assumed in this regard that the Committee will not adopt a deliberate strategy to achieve price stability over some specified time period. Thank you.",777
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Philadelphia District economy is paralleling the national economy. Our region experienced robust growth in the first quarter, as did the nation, and moderating growth in the second quarter, also like the nation. The regional outlook is positive. There are tight labor markets but few, if any, signs of accelerating inflation. A major focus of management across a broad range of companies is to contain costs to protect profit margins and hold the line on prices. The major emphasis is to avoid increasing worker head counts as production expands. Companies are investing in labor-saving equipment and technologies. For example, in areas like law and real estate, which we do not often think about in terms of labor-saving efforts, professionals are getting more done in less time by taking advantage of advances in information processing and telecommunications equipment. Outsourcing is also increasing. The use of variable pay and signing bonuses is becoming ever more present to meet current needs while helping to hold down permanent increases in employee compensation. There is a huge cultural shift going on throughout the District in the way management approaches cost containment, and its vigor is still intact. Turning to the nation, we find ourselves in a very favorable situation, just to introduce a little joy into these discussions. [Laughter] Demand has moderated but it is still solid, and developments on the supply side have been surprisingly positive. Producer prices have fallen for five straight months; the last time that happened was in 1952. Consumer prices are rising at a slower pace this year than last. The unemployment rate is as low as it has been in 24 years. Nonetheless, there are legitimate concerns about what might go wrong, particularly in terms of overheating of the economy and upside inflation risks, and I share those concerns. But I also see and hear what is going on in the real economy in terms of productivity increases and price containment. As I weigh the two sides, I feel comfortable with the wait-and-see approach that we have followed in recent months.",398
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. As was the case the last time we met, the economy of our southeastern region also looks very much like the nation's, after having led the nation for five plus years earlier in the expansion. Sixth District economic growth appears to have moderated somewhat during the second quarter, primarily reflecting some softening in manufacturing and to some extent in the single-family real estate sector. Our regional survey of manufacturing indicates that the proportion of firms reporting increases in production and shipments declined significantly, and there was a sharp falloff in new orders. Looking ahead, however, expectations were for increased orders and backlogs. Reported plans for capital spending over the coming six months also declined. Underscoring the comments Ed Boehne just made, I too am struck by the frequency with which corporate CEOs continue to tell me that their investment spending is driven by the pursuit of gains in productivity and efficiency to protect their margins rather than to increase capacity. Regional retail sales, while on average slightly above year-ago levels, seem to have slowed somewhat or at least to have paused. At the same time, we are told that inventories are at desirable levels, with only a few retailers reporting somewhat higher levels. The tourism and hospitality industries, which are particularly important to our region, continue their solid growth. Near-term bookings in our major tourist cities are now reported to be up between 5 and 20 percent. For example, the huge Opryland complex in Nashville, which added 20 percent capacity just recently, stays essentially full with spillover to other hotels in Nashville. Wage pressures across our regions are mixed. The tightest markets are those with the highest percentage of high-tech employment and the hospitality industry, which has been tight for quite a while now. Stories about the role of competition in holding down price increases do not seem to change very much from those we have been talking about for more than a year, although I recently had several CEOs tell me that they are beginning to see pressures on margins, and they are expressing doubts that they can continue to get the productivity gains they have seen recently. Our view of the national economy is very similar to that of the Greenbook this time. It is now quite clear that the expansion slowed significantly in the second quarter. We, too, look for the pace to pick up again in the last half of the year, pushing year-over-year growth to about 3-1/2 percent. Like others, our best guess is that the slowing is likely to turn out to be a pause or catch-your-breath period rather than a fundamental slowdown. The ingredients for renewed vigor in consumer spending seem to be in place and, absent a significant correction in asset prices, we could get a sizable surprise on the upside. What concerns me most, consistent with what others already have observed, is that our own forecast and most other forecasts show a gradual upward drift in inflation at the end of 1997 into 1998 and even into 1999. If we are really committed to a forward-looking preemptive approach to policy and if we are satisfied that we have corrected for what has been an overestimation of inflation in most of our forecasts in recent times, then in my view we probably will need to adjust policy further sometime soon. We will need to do so to hold our inflation and credibility gains before we get behind the curve, as we have so often in the past. In my mind, the risks of being wrong in our forecasts and getting somewhat slower-than-expected growth and lower inflation seem quite small. Accordingly, a forward-looking preemptive approach to policy is quite consistent with our longer-run objective for controlling inflation that I hope we will embrace more firmly as we talk about these issues during the remainder of this meeting. Obviously, a preemptive approach to policy to guard against an expected upward drift in inflation, which is present only in our forecasts and cannot yet be seen in our current data, increases the burden on all of us to provide skillful explanations of our policy actions. Thank you, Mr. Chairman.",817
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Ninth District economy remains remarkably healthy overall and rather than go into details about that now familiar story, let me report on a breakfast meeting that we had last week with some 20 or 30 business and community leaders from the Twin Cities. They were representative, I think, of the Twin Cities economy, although certainly not a perfect reflection of it. Several themes came out of this breakfast. One is that the degree of tightness in our labor market cannot be overstated. There were widespread reports of great difficulty in finding workers, and some of these firms, of course, are employing people District-wide and in some cases nationwide. I think it was clear that this tightness is now being reflected in wage and benefit increases, and that incentives like signing bonuses, retention bonuses, early qualification for participation in 401(k) plans and so on are becoming increasingly commonplace. A second theme was the importance of international trade to many of these businesses. There were generally favorable comments about such trade. The protectionist sentiment that rears its head from time to time in the District was not evident. There seemed to be a general appreciation of what trade can do for an economy. Certainly, most of these business leaders feel and believe that globalization is a big issue, and it may be the single biggest factor in their minds as to why it is difficult to raise prices in the current environment. That is a summary of what came out of that meeting. As far as the national economy is concerned, my view is generally positive in the sense that I think real economic growth will continue at a satisfactory pace. My own numbers are not very different from those of the Greenbook, maybe a bit more optimistic as far as real growth is concerned. Where I become concerned is that if we believe the Greenbook forecast, then it seems to me that an acceleration of inflation is increasingly likely at some point. Our forecasting model, which is a VAR model unencumbered by judgment, [laughter] produces the same result. In listening to the staff presentation on the outlook in conjunction with the prospective inflation situation, I found two things particularly discouraging. As I understood the presentation, were it not for a projected decline in the markup of prices over unit labor costs, we would get a more discernible increase in inflation. So, in part the staff is banking on a factor that to me seems by no means to be a foregone conclusion. The second thing that I found discouraging about the forecast is that after some analysis and thought, the staff concluded that potential growth on the supply side is no more rapid than they thought earlier. This means that despite the business community's view that productivity is rising rapidly, there apparently is not much evidence that that is the case.",556
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I am going to characterize reports around the Fourth District as mixed. All of the large metropolitan areas and most of the medium-size metropolitan areas are not mixed at all; their local economies are operating flat out. But a number of smaller communities around the District and some counties still report unemployment rates of about 9 or 10 percent. My impression in driving through those counties is that such unemployment rates might translate into only 1 or 2 people, [laughter] but still--",103
-fomc-corpus,1997,"If you mean a 9 percent unemployment rate with a labor force of 2, that raises a very interesting mathematical question!",25
-fomc-corpus,1997,"Construction activity is reported to be booming throughout the District in that there are no unemployed construction workers. Resources in that industry are so tight that many people cannot get bids on construction contracts. There was a recent effort to secure bids for the Cleveland Browns' new football stadium, and they came in well over budget. It is now reported that the whole project may cost $100 million more than the first estimate when it was agreed to build the stadium. Three years ago, we negotiated a guaranteed maximum price on our building project. I am now told that we would no longer be able to get a guaranteed maximum price. So, I'm glad that we negotiated it when we did, and in fact the cost came in under budget. Under current circumstances, the project would be much more expensive. Retail spending is reported to be definitely softer. who is associated with a national retailing company but tries to assess what is happening at the stores in our region, indicates that earnings are coming under very severe pressure. The main problems that he sees are in imported inventories. Such imports account for about 70 percent of the problems with inventories insofar as the latter relate to filling orders and production pipelines. Labor contract settlements have been coming in with increases of around 3 to 4 percent in most cases. There clearly has been an uptick from previous settlements, so that the period of successive contracts coming in somewhat lower than prior contracts is definitely over. We had one construction union contract that went to arbitration and came in at 4.8 percent. We all hear the same talk about labor shortages in our Districts, and I will not go further on that. We have heard some talk about job fairs about which I am a bit puzzled after listening to some of the reports around the table this afternoon. Columbus city officials went to Boston to hold a job fair to recruit people and Cincinnati officials went to San Francisco. I hope they had a good time [laughter] because it is not likely that they hired many new workers.",400
-fomc-corpus,1997,Their recruitment efforts are increasing revenues in the tourist industry.,11
-fomc-corpus,1997,"We are told that there is no backlog in orders of steel, basically because new domestic capacity is coming on at a time when imports continue to be very strong and there are downward pressures on prices. One director feels very strongly that plant and equipment spending is going to slow, mainly because he says the motor vehicle companies are going to be winding down their spending on new capacity. I think he is talking principally about domestic companies. Communications companies in one of our metropolitan areas said that their yellow-page listings are running at an all-time record, especially business listings, which they said are rising very sharply. Phone line installations are proceeding at rates above previous records. Bankers are telling us that earnings are good but they are worried about not being able to maintain these earnings. Their margins are getting squeezed, and the quality of their loan portfolios is deteriorating. Everybody is talking about very aggressive bidding for real estate deals that they would not have considered not that long ago. We hear more reports that speculative residential and commercial projects are getting funded, mainly as banks try to achieve their earnings objectives for the year. Down in Kentucky, horse farmland prices are jumping. [Laughter] Next year I will say they are galloping! We are told that land that was running $3,500 to $3,800 per acre in 1996--these are horse farms--was recently selling for $4,500 to $5,000. So, there has been a significant notch up. Two of our directors have argued that inflation is understated. They claim that many discounts that they had become used to and regularly expected are simply no longer available. Let me shift to some thoughts about the national economic environment in which we find ourselves. Often in the past when we have talked about recent and prospective near-term developments, we have given attention to such things as inventories, trade statistics, and the like. Usually we try to look through the statistics for the past couple of years and the forecasts for the next couple of years in an effort to discern the basic trends in productivity, labor force growth, labor force participation, and those kinds of things. I want to focus on a much longer-term perspective for a few minutes. The business cycle dating committee at the National Bureau of Economic Research says that this expansion is now past its seventh year. Without that eight-month contraction associated with the Gulf War, they would be saying that we have just finished 15 years of expansion. This period generally has been characterized by a rising participation rate in the labor force, a declining unemployment rate, a concurrent downward trend of inflation, and even a recent improvement in the saving rate. There have also been increasing returns to capital relative to returns to labor associated not only with increased capital inflows but a domestic investment spending boom. Certainly, at least some of these good results are due to good policies. I think even our most severe critics would give us some credit for helping to make this economic performance come about. It was not all luck, and it was not all technology and innovation. Looking back, if the past 15 years had been characterized by several 2- to 3-year stop-and-go cycles and/or if the inflation rate had averaged, say, 5 or 6 percent through this period, I think we would all agree that standards of living would be lower today, the capital stock would be smaller, and overall the economy would not look and feel nearly as good as it does. If 5 years from now we are talking about an expansion that is approximately 20 years old, it will be because the basic trends that have characterized the last 15 years have been maintained. Instead of asking how we can keep inflation from going up, we could pose the question simply by asking how we might improve the chances that the expansion will last another 5 years. Part of our answer probably would be that a necessary but certainly not a sufficient condition is to prevent the escalation of inflation. Some of the Fed watchers--and some of us, too--who look back on what we did in 1994 have characterized those actions as preemptive anti-inflation measures. But it would be just as accurate to say that they reflected a preemptive anti-recessionary policy. That is because had we not done what we did, I believe we could make a very good case that we would have had a 1996-1997 recession. If we had failed to act in 1994 and inflation had accelerated, we would today be facing a higher unemployment rate than we currently have, a lower level of output, less overall capacity, and the economy would not feel as good. So, we were preemptive in the sense of being anti unemployment and preserving growth. When we turn to our future prospects, if we state our objective as minimizing the risk that the year 2000 will turn out to be a recession year, I think we would argue that it is necessary but not sufficient to prevent more inflation from emerging in 1998 and 1999. If we are successful in doing that, employment is going to be higher and output and standards of living are going to be higher when we get to the year 2000. This is going to be a richer country. The frustration comes when we look at policy options for the near term, for the next year or two. The latter often involve raising the unemployment rate to prevent inflation, but the ultimate objective is preventing the emergence of a recession and unemployment. Sometimes it must sound to people out on Main Street that we had to create unemployment in order to prevent unemployment. I think we need to find ways to cast our policy alternatives and to communicate our objectives in a manner that does not involve retarding growth and raising unemployment, even for an interim period. There are ways of thinking and talking about the interim objective of stabilizing the purchasing power of money that do not involve excess supply of or demand for output, or excess supply of or demand for labor. I think that would be a useful thing for us to be working on as we struggle our way to the year 2000. Thank you.",1226
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I had somewhat the same instinct to look back that Cathy Minehan had, but because this is my first anniversary meeting, so to speak, I looked back to my first meeting in July a year ago. In the Greenbook for that meeting, the following points were made: GDP was growing at a rate well above trend, but the rate of expansion was expected to slow to trend and, indeed, second-quarter growth last year turned out to be even stronger than the Greenbook predicted. Consumption, investment, and housing were all described as strong but expected to slow. Last year's Greenbook had a tone of some surprise at the strength especially of consumption and housing. Labor markets were described as very tight, but demand for labor was expected to moderate. The unemployment rate was then 5.4 percent, and it was expected to level out at around 5.5 percent. Concern was expressed about prospective wage increases, employment cost increases, a rise in the minimum wage and its impact on wages more generally --the minimum wage legislation had not passed yet, but it was expected to--and about prospective increases in the CPI. But the actual CPI forecast was shaded down a little on the basis of then-recent experience. In addition, it was boldly stated that the stock market was seriously overvalued. A year later, what have we seen? We have seen the GDP experience some slow quarters and some fast ones, but on balance it has been stronger than was forecast a year ago. It is still expected to slow to trend but not quite as rapidly as was thought last year. Labor markets are even tighter than anticipated and actually are expected to get a little more so, with the unemployment rate leveling out at about 4.5 percent instead of about 5.5 percent. Concern is still being expressed about the outlook for wage increases, employment cost increases, another round of minimum wage hikes, and prospective increases in the CPI. But the forecast of the CPI is again being shaded down a bit. The stock market is being described even more emphatically and for good reasons as seriously overvalued. We now have a forecast of a decline in stock prices, but not a very imminent one. What have we learned over the past year? I think we have learned to be cautious. The tone of the current Greenbook is considerably less sure of itself than it was a year ago. We have learned that the economy is less inflation-prone than we thought. After another year of low inflation, we can be more confident that expected inflation will be low. But the risks of inflation are still there, and almost everybody around the table is emphasizing those risks. I think it can be said that the cost of waiting has proved to be less than anticipated. We are all aware of that, but there is also a view that we may be about to run out of time. We have learned that tight labor markets have benefits. They cause people to use labor very effectively, and we have heard examples of that around the table even at this meeting. We have not made a lot of progress toward solving the fundamental puzzles. The question of why wages and benefits are not rising faster is still there, and the job insecurity hypothesis propounded by the Chairman a year or so ago seems perhaps a little less plausible after a year of more plentiful jobs. The puzzle of why prices are not rising more, given the labor cost increases, is still there. One of the strongest contributions clearly has been the downward pressure of import prices stemming from the strong dollar, but that effect seems to be coming to an end. We do not have a very good analytical explanation for the anecdotes we keep hearing. Those include the perceived inability of firms to make price increases stick, even in thoroughly domestic markets and quite local markets. That puzzle is still mystifyingly there. Productivity remains a puzzle. The circumstantial evidence still points to an acceleration in productivity growth, possibly associated mainly with the large investments in computers and associated changes in production processes, with other types of capacity increases, with the tight labor markets themselves, and with a greater flexibility in the use of labor. But we really do not know, and the usual statistics are not helping us at all. I think we come down to a contest between the optimists and the pessimists. I tend to be one of the optimists. I think we still have to be very vigilant about inflation, but I would be inclined like Ed Boehne to be a little more on the side of wait-and-see. I do not think we have made a lot of progress on the analysis that will tell us more than we get from being optimists or pessimists.",934
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"Over the last couple of months, growth of the Texas economy has begun to pick up steam. In the Eleventh District as a whole, employment growth is once again outstripping that of the nation after both had converged for a period of about a year and a half. In addition, it is becoming increasingly difficult to find any pockets of weakness to report about. If anything will put a damper on future growth, it is likely to be the continued tightening of labor market conditions. I, too, had breakfast last week. [Laughter] I had breakfast with the senior executives of three Dallas-based high-tech firms. It was not long before the discussion turned from overall business conditions to labor market turnover and the methods they were using to deal with the loss of key employees and the shortage of replacements. There was talk of retention bonuses to match or top the signing bonuses offered by competitors, of drastically increased incentive bonuses, indeed, anything to meet the market even to the point of scrapping completely the compensation and reward systems that had been in place for many years. My first reaction was to think that somehow this new attitude that ""the sky is the limit"" on pay scales would have to be inflationary if it persisted. But within a few minutes the conversation turned to the reengineering efforts that these companies were engaged in. These efforts were driven by a need to continue dropping their final product prices by 10 to 20 percent per year. If competitive forces are bringing about 10 to 20 percent deflation in product prices, I have about decided that I am not as worried as I was that rising wages could be causing inflation. The energy industry and all the industries that service it are running at full capacity in our District. Oil drilling remains profitable even with the lower prices that have prevailed in recent months. Thanks to improved technologies, drilling is profitable for some companies with prices as low as $15 per barrel; with prices above $19, everybody I meet in the energy business seems to have a smile on his face. The Dallas Fed has just lost one of its head office directors, who runs an energy services machine shop, because he is simply too busy to attend the board meetings. Construction activity continues to strengthen and a few of my contacts in that industry are starting to talk about the beginnings of a possible boom in commercial construction. Hardly a day goes by without an announcement of a new office or other commercial project. Dallas may have the most empty downtown in the nation, a 33 percent vacancy rate versus 13 percent nationwide, but it now has a suburban vacancy rate below the national average. With the supply of such space fixed over the short run, rents have risen sharply to reflect the growth in demand. It is likely that the rise in new construction activity will put a cap on rent increases, and later the added capacity will likely reverse the inflationary impact of the recent rent increases. About a year ago, I mentioned that our commercial real estate market had turned from a tenant's market into a landlord's market. One of our Beigebook contacts just reported that ""it's a scary time to be a tenant right now."" In fact, one of our head office directors may be forced to move his office headquarters to suburban Houston unless he is willing to double his rent payments when his lease expires shortly. The Mexican economy continues to improve, with positive spillovers for Texas. We get reports that more Mexicans are making trips north for shopping. Lately, they have been showing up at higher-end apparel retailers and even at car dealerships. Mexico's improved economy has led to renewed growth of Texas exports to Mexico. The recent boom in Mexican export-focused maquiladora manufacturing has attracted several high-tech electronics and computer manufacturers to the El Paso/Juarez area, thereby generating a new label, ""Chilicon Valley,"" for the region. [Laughter] This weekend's election in Mexico is generating more than the usual amount of uncertainty because the ruling party could possibly lose control of the legislature. The general feeling seems to be that the outcome of the election will have little economic impact. This view may be too optimistic; we'll just have to wait and see. Given the importance of Mexico to many businesses in Texas, concerns about the election outcome are one of the few worries in our area. As for the national economy, I don't have any information or new insights that you do not have or have not heard before. I guess the main difference is in my interpretation of that information and, perhaps, Ed Boehne's. When I read over the transcript of our May meeting, I was struck by the dovish tone of my remarks, which makes me uncomfortable, being the hawk that you all know me to be. I realize that only hawks get to go to central banker heaven, and I want to go there to be with all my friends around this table! [Laughter] So, let me assure you that I have not lost my inflation-fighting zeal. It's just that I believe we are already winning that war, and for some reason we are having trouble accepting our success. Maybe we feel that we do not deserve the gain because we have not suffered the pain. Something is different in this economy. It may not last, but it already has lasted much longer than we expected. At the last meeting, we had four straight months of declining PPI; now it is five. At the last meeting, we had two months of .1 increases in the CPI; now it is three. The two price measures have increased significantly less or have declined so far this year, as have other broad measures of inflation. Neither is there a buildup of inflation in the pipeline--commodity prices, oil, gold, steers, wheat, whatever. The yield curve is lower and flatter, the dollar remains strong, and the bond vigilantes have eased long-term rates recently. Sooner or later, the tight labor markets will probably spill over into higher prices, but that prospect seemed imminent a year or more ago. In summary, the economy looks too good to be true. I know how these stories usually end when people say something is too good to be true, but perhaps they don't always end as expected. Yes, Cathy, we are a learning organization but with a long and variable lag. [Laughter]",1269
-fomc-corpus,1997,"Governor Meyer, top that if you can!",9
-fomc-corpus,1997,"That is a tough act to follow. I read the recent data as consistent with a slowing in second-quarter growth to near 2 percent. I view this in large measure as a payback for the surprisingly robust first-quarter growth. More importantly, the fundamentals supporting aggregate demand, in my judgment, remain very positive: there is solid momentum in income and employment; financial conditions are generally favorable, and measures of consumer confidence have soared to new highs. In the absence of a change in policy, the fundamentals appear to support the Greenbook projection of a rebound to well-above-trend growth in the second half and continued growth near trend over 1998. As a result, the unemployment rate is likely to trend lower in coming quarters from an already low level. While this would normally suggest an increased risk of higher inflation, the staff trimmed its inflation forecast in this Greenbook. This highlights what we have come to appreciate as a very unusual period from the perspective of the relationship between inflation and unemployment. The staff forecast represents a careful attempt to balance the inflation risk stemming from prevailing and projected labor utilization rates with a continuing exceptional performance of inflation. My first reading of the Greenbook, however, was that the staff had somehow mistakenly combined an output path from a buoyant economy run and the low inflation path from an alternative soft economy run. True, there remains some upward drift in inflation in the staff forecast, but most of the acceleration over 1998 reflects the small rise in oil prices following the sharp decline this year and a rebound in non-oil import prices after a further fall in the first half of this year. Compensation per hour, on the other hand, edges up only .1 next year despite an unemployment rate that is nearly one percentage point below the staff's assumption of the NAIRU. Let me focus on two positive elements in the inflation forecast that support the Greenbook story and two concerns that nevertheless make me very worried that prices may rise more than the Greenbook projects. The first positive factor is the influence of an excellent inflation performance this year on wage determination and on inflation next year. Overall, inflation this year is benefiting from falling energy prices, smaller increases in food prices, and to date still declining import prices. Next year, wage change and core inflation will feel the benefits. That still leaves unanswered the question of what is holding down wages and core inflation this year despite the low unemployment rate. In my never-ending effort to reconcile low inflation and low unemployment, I have been placing increased weight on the contrast between the apparent tightness in the labor market and the seeming absence of comparable tightness in the product market. This is illustrated by the fact that while the prevailing 4.8 percent unemployment rate is below most estimates of NAIRU, the prevailing capacity utilization rate is only a shade above its estimated natural rate. Looking at the historical record of unemployment and capacity utilization rates in previous cycles, one reaches the conclusion that this disparity is a unique feature of the current episode. One way of appreciating the significance of this disparity is to view the unemployment rate in a price/price specification of the Phillips curve as a proxy for overall excess demand across both labor and product markets. Given that the excess demand in the labor market is traditionally mirrored by a similar degree of excess demand in the product market, the unemployment rate is generally a reasonably good proxy for economy-wide excess demand. In the current case, however, the unemployment rate at best is capturing tightness in the labor market and hence overstating the economy-wide excess demand. Another way of seeing this is to compare inflation forecasts from the Phillips curve using the unemployment rate to specifications using capacity utilization rates. This disparity most likely reflects one of the key and perhaps under-appreciated features of the current expansion--the robust pace of business fixed investment, notably equipment purchases and particularly purchases of high-technology equipment. The result is that industrial capacity is increasing at the fastest rate in 28 years. The net effect is that while labor markets are tight, the increasing productive capacity associated with the investment boom has prevented excess demand from arising in the product markets. The much reported absence of pricing leverage that firms emphasize may be another implication of the absence of excess demand in the product markets. Nothing gives a firm market power like excess demand. I also suspect that firms have responded to the absence of pricing leverage by being less willing to bid aggressively for workers, thereby helping to explain why wage change has increased so modestly despite the prevailing tightness in labor markets. The above considerations do encourage me to expect continued modest inflation over the forecast horizon. Let me conclude, however, with two reasons why I remain concerned that inflation may nevertheless increase more than projected in the staff forecast. First, the unemployment rate averaged 5.4 percent in 1996, close to most current estimates of NAIRU. It has fallen significantly below this threshold for only a couple of months. The rise in wage change we would normally anticipate from the prevailing unemployment gap may therefore be just ahead. As I emphasized above, the role of the capacity utilization rate is in my view only to damp rather than to block entirely the effect of the lower unemployment rate. Hence, both time and still lower unemployment rates pose a real threat of higher inflation. Second, a coincidence of temporary factors, including declining import prices associated with the appreciation of the dollar, a slowdown in the rise in benefit costs, and most recently a decline in energy prices have been contributing to restraint in the increases in compensation and consumer prices. These factors are likely to be of diminishing importance going forward. On balance, in the absence of further policy changes I expect above-trend growth over coming quarters, a further decline in the unemployment rate, and still modest inflation. Perhaps the main message here should be that this would be a remarkably benign outcome. But we get paid to worry and we get paid to hold the line on inflation. I am concerned that the increase in inflation may be somewhat sharper than projected in the Greenbook, and I believe that the single most important risk factor in the forecast is the potential for a significantly sharper rise in inflation.",1222
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. A lot of the suspicions that we discussed last time seem to be a bit more confirmed. We have had some slowdown in consumption, at least for March through May. Inflation appears to have remained well behaved. It seems to me that the questions now before us cluster into two areas. The first is whether we really are experiencing a slowdown in the expansion. If so, how much? Is this soft landing more of a touchdown to be followed by a takeoff in the next few months? The second area of questions clusters around inflation. How is it possible that the inflation record has been so favorable? How much longer can we reap the benefits of this benign inflationary environment? I have structured my comments around these two sets of questions. First, with respect to the factors contributing to the length and perhaps to the upcoming strengthening of this expansion, there is certainly the behavior of the labor market, as has already been discussed around the table today. People appear to be coming out of the woodwork to join the labor force. The consistent and now widespread reports of labor shortages, hiring bonuses, and retention bonuses are impressive. During the intermeeting period, I made several trips to the Midwest and the West, and I met with several groups here at the Board. I have been particularly impressed by the labor shortage stories. I never thought that I would be hearing in-migration suggested and accepted as the answer to Iowa's economic challenges. [Laughter] Business people are now talking about and recognizing that they not only have to locate and transport new workers, but they also have to train unskilled workers to meet their production needs. Clearly, this indicates that the labor market is going to be strong for a while. I am not sure that I can quite buy into the Greenbook forecast of a 4.6 percent unemployment rate through 1998, but even if the rate drifts up a bit, it is clear that the U.S. job machine is alive and well. Strong labor markets mean that people have the wherewithal to spend, and we certainly are seeing the evidence of that in the aggregate numbers for retail sales and housing. The second area that has been contributing to the strength of this expansion is business fixed investment. I think the fundamentals remain for growth in that area. The overall cost of capital is low for short-term and long-term debt financing and for both internal and external equity financing. There is no capital shortage and certainly no credit crunch. Profit levels have been holding up, and that puts management in the mood to expand or at least to buy more equipment to improve productivity. The low inflation environment, I believe, is especially conducive to capital investment. In fact, declining prices for computers and information technology make these investments particularly viable in the presence of tight labor markets. The gains in the productivity of capital seem to be encouraging additional investment. The technology story has been well documented, and I think firms are learning to manage inventories more closely. These two factors seem to feed on each other: business investment creates job opportunities, and a strong labor market allows continued growth in consumption and aggregate demand. I guess we have located or we are at least getting close to a zone of sustainability. The second set of questions that I identified relates to inflation. Why is it that we have had such a favorable inflationary performance recently? That performance probably can be attributed to a number of factors. The strong dollar accompanied by low-inflation imports has helped to control domestic inflation. Increased business fixed investment has added to capacity and improved productivity. The macroeconomic weakness of the economies of some of our foreign trade partners has alleviated commodity price pressures. There have been no recent energy or food shocks, and the farm outlook for 1997 is quite favorable also. Now, lest we get too cocky, we should remember that the BLS has made some improvements to CPI measurement, shaving several tenths from the index. President Moskow drew our attention to this. While this is quite a rosy outlook, I do see considerable risks: The economy could turn out to be stronger than we anticipate. Consumers could reemerge and go on a spending spree. As the international sector strengthens, we should expect it to be less of a drag on GDP growth, but concomitantly that may bring back some inflationary pressures. With respect to inflation, at some point wage pressures will start to bite. Productivity improvements can only absorb so much. I believe a key area for us to watch is profit margins. If we were to see significant profit declines, investment activity would slow and that could trigger a sizable stock market correction. The possibility of such a development was certainly highlighted in the Greenbook. In sum, while we have seen a bit of a slowdown in the expansion, it may already have come and gone or it may be on the way out. It does seem to me a bit too soon to tell, but the risk is that growth may be more than has been anticipated.",1003
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Mr. Chairman, economic growth in the Second District has slowed slightly over the past six weeks, and the growth that is taking place is mainly in New York City. Economic activity is rather stagnant in the rest of New York State, and growth has slowed slightly in the northern part of New Jersey. We do not have great differences with the forecasts of the other members so let me talk a little about where I think we are. Because monetary policy works with long and variable lags, as we all know, we must consider what will happen 18 to 36 months from now, not what is happening today. That puts us in the forecasting business. All of us believe in price stability, even though we have not agreed around the table on precisely what that means beyond your working definition of it, Mr. Chairman. I find increasingly that the degree of anxiety of Committee members varies with their belief in traditional forecasting methods. All are forecasting some increase in core inflation later this year and in 1998, but all have been forecasting higher inflation for the last two years and it has not happened. Those of us who are perhaps least uncomfortable with watching and waiting are those who, in my words, concentrate on knowing what we do not know. We know that for the last two years or so the forecasting models have not been working well, witness how bad our forecasts have been. What we do not know is why they have not been working. My feel, as was discussed at length at the last meeting, is that we have been underestimating and we continue to underestimate productivity, but we aren't sure of that. In fact, in meeting after meeting with the exception of March, the Committee has been fretting but waiting. I think that many of us have felt that the risk of waiting has been quite low because, as measured by the real fed funds rate and in other ways, our policy is in fact rather tight; it certainly is not loose. Therefore, I believe that we can afford and should continue to wait until we have greater certainty about what really is happening in the economy. Some members of the Committee are very concerned about our credibility if we wait, and certainly they should be concerned if we wait too long. But I think credibility is not the result of raising rates whether needed or not; credibility is doing the right thing. In my view, we have been doing the right thing. Thank you, Mr. Chairman.",486
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. By my count, I am the cleanup hitter here in this excellent tour de table. Nearly every thing has been said, and I will be very brief. It does seem that we finally are getting a slowdown in the expansion, albeit a quarter later than expected. The inflation news continues to be very good, with none of the indices surging, a few beginning to show signs of drifting upward, and most still either flat or drifting down on a 12-month change basis. I continue to try as best I can to scan carefully for emerging pressures in the inflationary pipeline. I've seen very little pressure for a number of quarters, but recently there have been straws in the wind that some new pressures may be starting to emerge such as the expected increase in the level of import prices and so forth. The glaring exception, of course, is our remarkable labor market; everybody has talked about that. So far, price levels have been very little affected by the low unemployment rate and the rising ECI, as our unit labor costs of production have remained very stable. However, the Greenbook is now projecting a substantial and sustained acceleration in unit labor costs beginning almost immediately, and time will tell about that. While the condition of the economy today remains excellent, tensions and pressures continue to build as one looks forward over our forecast horizon. If the rate of expansion remains moderate, this remarkable era could continue well into the future. However, if growth should reaccelerate strongly in the short run, the Committee may need to reassess conditions quickly and critically. Looking further out in our forecast period, I would like to be more confident than I am of the Greenbook's projection of substantially slower growth through 1998. It seems quite likely to me that growth will exceed the Greenbook projection over the forecast period, especially if there were to be no additional monetary restraint until the middle of next year. For now, however, it is steady as she goes. She is going very well so far. Thank you.",408
-fomc-corpus,1997,"Thank you. As you pointed out, we have come to the end of this very interesting discussion. We now move to something quite different but also something that is likely to be quite interesting. I call on Dave Stockton to lead us through this set of issues.",52
-fomc-corpus,1997,"Thank you, Mr. Chairman. [Statement--see Appendix. 3/]",16
-fomc-corpus,1997,Questions?,2
-fomc-corpus,1997,"I don't know if I can convert this into a question, but I will make a comment that ends with a question mark.",25
-fomc-corpus,1997,I will rephrase: Questions or comments?,9
-fomc-corpus,1997,"Thank you. It was an interesting paper and it led to provocative and 3/ Secretary's note: In Mr. Stockton's statement and the discussion that followed, reference was made to a staff memorandum to the Committee dated June 19, 1997, and titled ""Toward a Working Definition of Price Stability."" A copy of the memorandum has been placed in Committee files. useful discussions with my staff. I was glad to see not only the paper but to have the topic included on the agenda. When I approach the subject of various price statistics as potentially useful information for policy, I cannot help but think back to the time when I was a Boy Scout and had to learn the difference between magnetic north and true north. How much adjustment you make depends on where you are on the globe. The adjustment is important because no one wants to go to magnetic north. Likewise, we use these statistical series to guide us toward some place where we want to go, but it is also important that we not lose sight of where that place is. The paper starts by approaching the issue of how we measure inflation. I start a different way. I start by asking how I should define the condition of noninflation because prices are changing all the time to some degree. Noninflation to me is a condition in which the weighted average of those prices that are rising is just matched by the weighted average of those prices that are falling. This immediately gets to the question, prices of what? How do we want to use the concept of inflation in talking about what we are trying to prevent or minimize? In a gold standard world that was fairly easy because people in such a world were conditioned to the notion that inflation meant it took more gold dust or nuggets to buy the same thing. Unfortunately, we in the modem world have gotten into the habit of talking about inflation in terms of rising prices of things instead of an increase in the number of money units it takes to buy those things, which is really what inflation is and what we want to measure. Regarding what to measure, we are condemned to live in a world now and forever in which we can only distribute and consume what we produce. Brezhnev thought that such a world was the result of a capitalist plot; he never discovered markets. Our inflation measure has to relate to output over time, which does not mean we should ignore asset prices. Ultimately, it has to be a weighted average of the prices of things that people buy and consume over time. Some of those prices always seem to go up; tickets to Cleveland Indian baseball games certainly do. Some prices go down; computer prices certainly do. We are trying to find some way to normalize all of that information about prices in the minds of people and get them thinking that, yes, some prices are always going up, some are always going down. We want them to see price changes as averaging out. That is what I mean by noninflation. I think our price index has to be the broadest possible measure of output prices, but we also have to have information about asset prices. That does not mean that we necessarily want to include asset prices in our statistical measure. With regard to the relevant theory, Alchian and Kessel developed a theoretical framework about 30 years ago, and Alchian and Klein did further work in the early 1970s. The St. Louis Fed staff tried to put some empirical bones on that in the mid-1970s, using various statistical measures that introduced asset prices into the Alchian and Klein framework. About two years ago at a Bank of Japan Conference, Charles Goodhart went through all that theory again and he tried to develop an empirical measure for England using certain asset prices. So, there has been some work that one could build on. At this point, however, my judgment is that we would add more noise than we know how to process if we included asset prices in our measure than if we did not. We are better off seeking as broad a measure as we can of those things that are simply current consumables over time. Question mark. [Laughter]",828
-fomc-corpus,1997,Mr. Parry.,5
-fomc-corpus,1997,"I don't have any questions either, just some comments. I, too, think this is a very good study, and it clearly is based on some first-rate empirical work. I like the use of the model-based simulations to illustrate the tradeoffs facing policy. At least to me, these simulations suggest that a flexible approach to pursuing price stability would not generate excessive variability in output. But more importantly, I believe that this study contains other useful insights as well. For one thing, it gives us a working definition of price stability. Measured in terms of the broad indices at least, a value of around 1 percent seems reasonable. Since inflation as measured by the broad indices is still rising at a rate of 2 to 2-1/2 percent, we clearly are not at price stability, and this, of course, is a fact that is brought out in the Bluebook as well. Moreover, the study shows that it does not seem to matter which index we choose. Focusing on one broad price index rather than another is unlikely to make a significant difference in the longer-term success of our policies, and I think the focus on the longer term is appropriate. Finally and perhaps most importantly, I would like the Committee to focus more clearly on the pursuit of price stability, which will require that we address some of the other issues raised in this study and also the list of issues that were in Dave Stockton's cover memo. Thank you.",291
-fomc-corpus,1997,"I would like to raise a more fundamental question about this whole issue. It is not something that we need to address in the shorter term, but it does come up when we look beyond a 5-, 8-, or 10-year horizon. If we start to focus on price stability now, we should try to be aware of the problems that we may be confronting over the longer term. First, let me raise a heretical issue. Is price stability really what we are after or are we after financial stability? Even more generally, going back over time we have tended to argue, I think correctly, that the objective of monetary policy is to create maximum sustainable economic growth, and we have argued, again I think quite correctly, that price stability is a necessary condition to reach that goal. But price stability may indeed be a proxy for something else, which I suspect is financial stability. If we look at the data with which we are working, part of our problem as we have discussed before around this table relates to the fact that an increasing proportion of nominal GDP involves items whose prices, as we define and estimate them, have been undergoing very significant declines ranging up to 15, 20, or even 30 percent per year. I will argue tomorrow that industries accounting for 3 percent of the nominal GDP created about a third of the increase in the real GDP over the past year. It does not require much analytical insight to see that if these segments of the economy are increasing their nominal share of GDP and if they continue to do so, then at some point we will be looking at an average price level that is falling and could be falling quite significantly. I would argue that that is not deflation in any meaningful sense of the word. Indeed, the question really is whether that is something we wish to fight. The reason is that if we define price stability in terms of whatever price measure we are using and if we run into an increasing proportion of high-tech products with falling prices, we would be led by our price stability objective to inflate the economy because prices are falling. That clearly cannot make any sense. One of the difficulties created by all of this is that it involves very tough conceptual and measurement problems for us. It is by no means clear exactly how we should measure price stability, given the prospect that it will become increasingly difficult over time to define what constitutes output and prices. I raised the issue at an earlier meeting and suggested that it really didn't matter all that much from a policy standpoint because it may well be that what we are endeavoring to do is to stabilize the inflation premium in long-term interest rates. In short, as Jerry Jordan said, the question is whether we are looking at the inflation of prices or the decline in the purchasing power of money. In this context, even if we get to the point where we are not able to define very explicitly the unit of production or bundle of goods or services involved in particular nominal dollar sales and hence are unable to define exactly what constitutes price, there is no question that we will still have a nominal interest rate out there. An inflation premium is of necessity implicit in the nominal interest rate. We may not be able to define a particular price, but in the end we know that markets are operating on the basis of some notion of prices. When we move into the 21st century, what we will try to stabilize may in effect be the purchasing power of money, however that is measured. The reason I raise these questions is not that we have to worry much about them in the current period, as I noted. All I wish to put on the table is the notion that, as we respond to the excellent paper by Dave Stockton and his colleagues, we bear in mind that it is a paper that really refers to the nearer term. The problems that we will be dealing with as we get beyond the turn of the century are going to be increasingly difficult to resolve and in fact to define. There is no conceptual problem involved in defining nominal GDP, and we can in principle calculate it down to the last dollar or even the last cent if we know how to measure it correctly. It is unambiguously defined. The unit of production is not; price is not. So, I think the problems that we will have to deal with in defining what we are stabilizing are going to increase in the years ahead. What I want to suggest is that we confront the question of whether we are trying to stabilize prices or trying to stabilize the financial system. That is where the issue of asset prices comes in; it is in a certain sense positioned on a continuum that begins with spot prices for units of goods and services. In sum, I am speculating that we are going to have problems that are quite different from those that we have today. While I am not saying that these involve issues that we need to resolve today, I suspect that we will start to confront them in 5 years or certainly within 10 years, and they may very well affect our projections going out to, say, the year 2006. I also suspect that by around the year 2006, this very tricky question may involve what we are endeavoring to stabilize and may be the focus of our policy actions. My own guess is that we are going to be dealing with asset prices, the question of nominal long-term interest rates, and probably the outlook for nominal GDP as well. In any event, our task will surely be tougher than it is today, and the issue will be how we should proceed. For the moment, fortunately, that is not an issue. All this probably is violating President McTeer's view that we should just sit and enjoy it, but I did want to mention that I have a different set of worries. Tomorrow, I will raise the conventional worries.",1168
-fomc-corpus,1997,"In the theoretical framework, I think we should understand that it is one thing to measure and define price stability; it may be something else again to define an inflation target. I want to put on the table the view that, before we decide that we want the target to be price stability or what I might call price stability plus a small cushion, we still need to do a lot of research dealing with nominal rigidities, the potential flexibility of real interest rates, and whether a little deflation is more dangerous than a little inflation. I just want to throw that out.",114
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you. I already mentioned to Dave Stockton that I thought this memo was extremely well done. I think it advances our knowledge and understanding of the strengths and weaknesses of the various indices. It helps to focus our attention on some of the questions we should be looking at, including some that you raised, Mr. Chairman. I also thought the memo made a good point in suggesting that perhaps we should be thinking about price stability as opposed to arguing and thinking about various inflation indexes. One of the things I wanted to mention is my hope that some of the conclusions in the memo and some of our discussion here will find their way into the Humphrey-Hawkins report. I say that because I think we need to give some thought to conditioning people to recognize that we are thinking about a broad range of issues and trends as opposed to concentrating on just one interest rate. It is my impression that we are seen as focusing only on the fed funds rate when in fact we are looking at some longer-term issues and what monetary policy can contribute to sustainable economic growth. In my view, some airing of the issues that we are looking at would be a useful thing to include in the Humphrey-Hawkins report.",240
-fomc-corpus,1997,"Let me just raise one caveat to that. If we were involved in an objective and wholly academic discussion, I would agree with that wholeheartedly. I am fearful that there are people out there who are looking for any reason to presume that a sound-money, hawkish view a la McTeer is the wrong view. That is regrettable at this stage, but we still have a very large bias among various members of the public toward inflation. I would be uncomfortable about opening up discussions in a way that might not be interpreted as an appropriately balanced view.",111
-fomc-corpus,1997,I understand.,3
-fomc-corpus,1997,"I would be very concerned that it would be misread as meaning that we have abandoned our objectives of a stable currency and stable inflationary pressures. Nonetheless, it is an issue that is going to emerge, and I do think we have to confront a lot of broadened policy issues in Humphrey- Hawkins testimony. I am a little nervous about the way the political system is operating. I do not want to say that our monetary policy has been exceptionally good, although I think it has in fact been quite good. That certainly has not stopped criticism in any material way, and frankly I find that worrisome. I don't know where that leaves us particularly, but caution is probably wise.",138
-fomc-corpus,1997,"I am thinking in terms of some of the conclusions of the paper, including how some of the price indices may move together and what their biases may be. I believe publishing some of that would be very useful.",42
-fomc-corpus,1997,"It depends on where it gets us. If at the end of the day we raise more questions than we can answer, I'm not sure that would be helpful to us.",34
-fomc-corpus,1997,"Maybe not, but if we are never perceived as asking the questions, I think we will not be seen as a very--",25
-fomc-corpus,1997,That is a valid point; I agree with that. I think that bolstering the broad range of information that is already in the Humphrey-Hawkins testimony is a good idea. But the presumption that we are just dropping ideas into an academic environment for general discussion is not my notion of what we should be doing. President Melzer.,70
-fomc-corpus,1997,"Thanks, Alan. I, too, want to thank the staff for a good job of analyzing these issues, and I also appreciate having this matter on the agenda. These are topics that we need to be talking about. I see this with a shorter-term focus than you were talking about, but I feel that we could benefit at the appropriate time by being more clear among ourselves and eventually with the public about our objectives and by being more transparent regarding what we specifically are trying to accomplish. So, I think we need to be looking at and talking about this sort of thing. From that perspective, some of the things I took away from this analysis included, first of all, the desirability of focusing on a broad measure of inflation. That certainly raises questions in my mind about the focus that we as an institution have placed on core CPI. Even now, some of the analysis and some of the simulations in the Greenbook focus on core CPI and core PCE, and I wonder whether these measures are what we ought to be looking at in these longer-term simulations. We probably have created an impression with the public and the financial markets that core CPI is what we really care about. I don't think we need to change that impression in the near term, but I believe there's a good bit of feeling out there that core CPI is our focus; at least that is my sense. I thought the insight with respect to rates versus levels was very interesting. Clearly, if we were going to go in this direction, then rather than debating what the ideal index would be and setting its level, it would simplify things greatly to recognize that the indices move broadly together over time and to focus on rates, realizing that we are a good distance away from price stability. That might be a good first step. I was also interested in the sensitivity analysis with respect to fluctuations of plus or minus 1 percentage point from a fixed target. In general, I feel that if we go in this direction, we have to be looking at the trend in inflation rather than a point estimate. Probably the way to capture that idea is to think in terms of some range around a particular rate. I thought it was interesting that the plus or minus 1 percentage point that most people would think about in terms of a reasonable range does not generate larger variations on the real side in these simulations than those we have experienced. In my view, one of the assumptions that one would have to question is the tradeoff between the inflation rate and the output gap. In fact, I suppose one could argue that if we had lower and more stable rates of inflation, we would also engender more stable output. I'm not sure that is implicit in the curve that the staff has in its chart. Finally, and Bob Parry made this point, even after taking account of the bias, we seem to be a good distance away from where we ultimately need to be to achieve price stability. That is the case no matter which of these measures we look at, even with these 80 percent confidence intervals. In any event, I believe it is very constructive to be talking about this. I don't know when and if the time would be right to go public with something like this. I accept your judgment that now is not the right time. But, clearly, if we wanted to move in this direction, we would have to cut through some of this. In other words, we can continue to throw issues in the air that arguably need to be analyzed before we presumably have enough confidence to go in this direction. So, I have always viewed this sort of thing as having to be imposed from above when the time is right. It is almost like a corporate strategy where a decision is made and is followed by efforts to figure out how it should be implemented as opposed to wandering around in the weeds and thinking about all the problems that could come up. Clearly, this is not the right time, but we could study this forever and never be comfortable with all the questions that could be raised. Ultimately, if it is the right thing to do and the time is right, then we have to cut through the questions and move ahead.",833
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. I have a couple of comments. First, I agree that this is a good paper and the right time to be talking about this issue. It is an issue that has to be put in the context, as you mentioned, of the more important goal of sustainable growth. When we put it in that context, it becomes a very important discussion item. From that perspective, what has been brought to the table is the realization that, regardless of the price measure we may have in mind, we are not at price stability. That is something we should keep in front of us, continue to talk about, and introduce to the public at some point so as to broaden its education on this issue. With that in mind, I think we should take the paper and this discussion to the next step, namely what it might mean from a policy standpoint and how we might proceed. With regard to your point about looking further ahead, ten years or whatever, to anticipate what will be happening in the economy, I agree that conditions then will be substantially different. However, I am not convinced that prospective changes over that period will be substantially more pronounced than those we have gone through over the past 10 or 15 years. How we deal with the changes ahead is part of this discussion of how we measure prices and define price stability. We are constantly refining our thinking on that, and I think that is what we will have to continue to do going forward. In that regard, having this analysis and working definition of price stability is very helpful and can assist us in our discussions as we work toward making progress in achieving our price stability objective.",331
-fomc-corpus,1997,"Let me raise a related question that is not on the table largely because, to my knowledge, nobody around this table supports the alternative in question. I am looking at page 2 of this memorandum. That page follows an executive summary comprised of several pages. The second sentence on page 2 under the heading ""Theoretical Issues Related to the Choice of the Appropriate Price Index"" says in part that ""the case for price stability rests on the belief that inflation is costly."" There is general agreement around this table that inflation is costly and undesirable, but that is not a universal view. That view is not really addressed in this paper. To the extent that we want to go forward in our pursuit of price stability, we need to recognize the absence of a universal belief in the benefits of price stability. In this regard, I find that there has been a very major change in central bank politics. It is really quite remarkable that all central banks have seized upon this issue as crucial. Indeed, if we look at the communiques of the G-7 summits, they all take the desirability of price stability as a given. Yet, we have papers like the Akerlof-Dickens-Perry article and a similar paper in Canada that are raising questions about this basic policy objective. The notion that widespread support of price stability is a given and that all we have to do is to assert it is really not quite there. I looked at the word ""belief' in the sentence that I quoted from, and it struck me that if I were writing it, I would have said ""because the case for price stability rests on something other than belief."" [Laughter] It rests on some greater or higher conviction. I hesitate because it is an interesting question.",352
-fomc-corpus,1997,"But if you are a true believer, there is nothing stronger than belief!",15
-fomc-corpus,1997,"That may well be, but the true believer often has great difficulty communicating the reasons for that belief to a third party.",24
-fomc-corpus,1997,"Just to follow that up with some examples: Marty Feldstein has a paper in which he tries to demonstrate the importance of squeezing out the last bit of inflation to achieve low inflation, which he defines as 2 percent. All the countries that have zone inflation targeting have ranges of 1 to 3 percent.",62
-fomc-corpus,1997,Part of that is the bias question.,8
-fomc-corpus,1997,"It is, but it is what I call bias plus a cushion. I think that is the issue that we really have to confront. We need to do a little more work on whether there are some costs that outweigh the benefits in eliminating that last, say, percentage point of inflation. In that regard, we should keep in mind that when we look at the literature on the costs of inflation, we find an enormous nonlinearity in those costs. They are very high at very high inflation rates. They are discernible for more modest inflation rates, but the fact is that below 8 or 10 percent inflation it is really hard to find that definitive evidence. So, I think we have a long way to go in our research to make that case very definitively, particularly for that last percentage point. I think we want to be a little cautious.",172
-fomc-corpus,1997,I have a feeling that Dave Stockton would not want to do that study again! [Laughter],20
-fomc-corpus,1997,"The emphasis is on ""again."" [Laughter]",11
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Just to add a brief observation on the most recent point that was made, I would agree that the importance of zero inflation is an article of faith among central bankers and that we still have a lot of work ahead of us to make that case in society as a whole. But that is not my main point. I, too, thought that the paper was quite helpful. One of its main conclusions is that all the broad measures of inflation that were examined tend to move together over the long run but not necessarily in the short run. Therein lies a dilemma for policymakers. While we need to keep a focus on the longer term when we make monetary policy, we still make it in the short run and we have to have justifications that carry some short-run weight. Even if we ended up picking the ""best"" measure of inflation, there would be periods when it would lead us astray and some other measure or measures would be more accurate. Therefore, I think at least one avenue that we should pursue as we go further with this is to study the potential advantage of a basket of price measures that would enable us to monitor multiple price indices rather than hanging everything on one. The Committee faced a similar problem in the period leading up to Humphrey-Hawkins when we were supposed to target money. The question then was what is money? We had M0, Ml, M2, M3, and I think at one time we had up to M8. At some point, one goes too far. My main point is that whatever may be the strengths and advantages of individual measures over time, in any given period a single measure can lead us astray. While it is a little untidy to look at a basket of measures, I think it would be helpful as we go forward to consider such a basket as at least one alternative way that we might proceed.",375
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, I also thought that the paper was very well done. It is a good step forward in addressing this issue, which is the type of longer-term issue that is important for this Committee to review from time to time. I was intrigued by Ed Boehne's suggestion of considering a basket of measures at least as one option. I was coming at it in a slightly different way. If we are going to choose one measure, I have a slight preference for continuing our focus on the consumer price index. If we are to have a basket of measures, I would say that the CPI has to be in that basket.",127
-fomc-corpus,1997,You can have it first among equals.,8
-fomc-corpus,1997,"My preference for the CPI stems not so much from any technical superiority of that measure but from its familiarity to the public. Of all the inflation measures, it has received the most attention. If we were to switch the focus from the CPI to one other single measure, I think we would risk causing a lot of confusion and divert energy away from more productive efforts to educate the public on the importance of price stability. But as others have noted, it doesn't matter too much, according to the memo, which broad index we choose if we are to choose one. The reason is that if we stabilize one inflation rate, we tend to stabilize them all. And no matter which index is chosen, the simulations suggest that economic performance would be enhanced. So, the important thing is that we choose some index or basket of indices and then stick to the goals of first capping inflation and then moving inflation rates down until we achieve price stability, however we define the latter.",191
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I, too, thought it was an excellent and stimulating paper. I don't think we've had a dissenting vote on that score. We do have to think a lot about where we put our marginal research effort. I guess the paper convinced me that I would not put it on refining measures of inflation. The broad measures are plausible and they all tend to move together in any event. I would concentrate on studying the costs and benefits of inflation because I do not think we have been able to demonstrate convincingly that the benefits outweigh the costs when we try to reduce inflation from a level near the current range. To go back to Susan Phillips' point, I have the feeling that part of the criticism that we get for being too focused on inflation is that we have not explained it very well in the past, and we have not offered supporting evidence very well. In my view, our credibility would be enhanced, not undermined, by a serious discussion. Humphrey-Hawkins may not be the right venue for it, but the more we inform the public that there are some real issues here and we really are thinking about them, the more credibility I think we will have.",234
-fomc-corpus,1997,"I suspect that the last couple of years are going to give us data observation points that will be very helpful to our case. What we have to demonstrate effectively is that the lower the rate of inflation, the higher the rate of productivity growth. If we can demonstrate that, we can make the case for low inflation; if we cannot, it is a very tough case to make, especially as inflation falls below Larry Meyer's 8 or 10 percent range.",92
-fomc-corpus,1997,There is a causality question here. You also have to look at whether low unemployment gives you high productivity growth and what the tradeoff is.,29
-fomc-corpus,1997,"If you cannot demonstrate at least the covariation, then the causation issue never comes up. President McTeer.",25
-fomc-corpus,1997,"Rather than comment on the paper directly, I would like to comment on your point a moment ago about the sentence that has the word ""belief"" in it--the belief that inflation is costly. Your statement was that that belief may be universally held within the community of central bankers, who all want to go to central banker heaven, but not necessarily outside that small group. I will express a view that I believe is a minority view around this table. A lot of people have said that price stability should be regarded not as an end in itself but as a means to an end, and the latter should be maximum sustainable growth. While price stability is a means to that end, I think it is a worthy end in itself, and we lose a lot by not emphasizing that. It is a little easier for me to think about that distinction if I borrow what I believe is Jerry Jordan's view of the distinction between price stability and stability in the value of the monetary unit. The government issues something that we call a dollar, and it is our responsibility to take care of that dollar. People are using those dollars as a store of value, and I think we have something of a moral obligation to protect the value of that dollar regardless of statistical studies about whether 1 percent or 2 percent or 3 percent inflation might maximize real growth.",267
-fomc-corpus,1997,I think we try to make that point periodically.,10
-fomc-corpus,1997,I believe we may overdo the point that price stability is a means rather than an end. I would like to go back to Henry Wallich's famous speech about the distinction between sound money and honest money. He made some good points there about honest money.,52
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"As the person who may well have spent less career time puzzling over these issues, I probably have learned more than anybody around the table from this exercise. I have come to the simple conclusion that the differences among the primary indices that have been studied are quite small compared to our ability to control inflation and hit some price target. I may be the most cynical of all the members who have spoken on the question of the public's understanding of our inflation goal. In my view, we are well short of any ability to explain why we need to squeeze out the last bit of inflation. I don't think we've gotten to first base in terms of achieving a general public understanding of the benefits of lowering inflation even from 2-1/2 percent to 2 percent. When I make speeches or talk to smart business people about it, their eyes glaze over. As persuasive as you are, Mr. Chairman, I don't know whether I would like to see you try to explain to Congress in your upcoming Humphrey-Hawkins testimony why it is desirable to push inflation down even 1/2 percentage point from its current level, much less to get all the way to price stability. I may have missed the sermon, not having been at the table for as long as most of you, in terms of having gotten this religion, but I know in my heart and everything I ever studied that moving toward price stability is the right thing to do. Unfortunately, the current state of public understanding of this concept, or even of pushing inflation somewhat below its current level, is so minimally advanced that I cannot imagine us being in a position to use that as a justification for our near-term policy actions without engaging in a great deal more educational effort. Again, I know I come to this debate later than many other people, but I do not think we can underestimate the need to talk about this.",375
-fomc-corpus,1997,"We have to be a little careful about misreading this in one respect. What the polls show is that when the inflation rate is very low no one is worried about inflation. Trying to convince them that inflation is a problem when they do not perceive it to be one, basically because it is already low, is very difficult.",65
-fomc-corpus,1997,That's what I am trying to say.,8
-fomc-corpus,1997,The best time to try to argue a move from 2-1/2 to 2 percent is when the inflation rate is at 10 percent! President Minehan.,35
-fomc-corpus,1997,"I must say that I, too, enjoyed reading this paper. When I came back from one of our meetings five or six months ago, where yet another index was raised as a possibility to consider, I challenged the people in Boston to tell me which of these indices were bad, which were good, and which we really should be looking at. Staff here did a lot more intensive work on this issue, but I was glad to see that the overall conclusion in the two sets of studies was about the same. Particular measures may have some advantages and disadvantages at the margin, but it really doesn't make a whole lot of difference which measure we look at. So, that was comforting, at least from my point of view. One of the things that impressed me was how stable things have been for a 4- or 5-year period no matter which one of these indices we look at and compare to this confidence band around some definition of price stability. Depending on which index we look at, the outcome may differ for a particular year but the stability over the last several years is quite striking. With reference in particular to your comment about financial stability, Mr. Chairman, it seems to me that we do not spend a lot of time thinking about fluctuations in inflation at a low level versus pushing it down to a particular number. I am a bit uncomfortable with the idea of focusing on a particular target number for inflation. The reason is in part because I agree with Governor Meyer's thoughts on the desirability of a cushion and in part because I would hate to be forced by some published number into doing something--or even thinking about doing something--at a point in time when that would not be the right thing to do for purposes of financial stability. That does not mean we should not have some settled idea among ourselves of where we are headed, but published numbers make me nervous. I am wondering whether it is possible to think about a stable band of inflation as opposed to pushing the rate down continually, with fluctuations occurring within that band, however we may want to measure it. What concerns me the most about developments over the past year is that we may get ourselves into a situation where we could have a boom/bust environment in which we might have to overreact and induce negative economic growth. Of course, we would not be reacting strongly except to stabilize conditions when they got out of hand. I wonder if more of our attention could be focused on fostering stability as opposed to ratcheting inflation down to a particular number. I realize I am not being very eloquent in expressing this.",515
-fomc-corpus,1997,"Not at all. You are in effect raising the question that we were discussing before, namely, can we demonstrate that as the inflation rate falls, the rate of growth in productivity continues to increase?",39
-fomc-corpus,1997,Right.,2
-fomc-corpus,1997,Because that is the basic determinant that tells us whether in fact the system is functioning.,17
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,We do not have enough data points in recent history to be able to make that judgment. Governor Kelley.,21
-fomc-corpus,1997,"Mr. Chairman, one part of this fascinating discussion leaves me a little nervous. There are many intriguing questions here that we can ponder. We can spend a great deal of time doing so if we allow ourselves to focus on such questions as what is money, and are prices necessarily the most relevant way to measure whatever we will want to measure in tomorrow's world. These are important questions, but we must not lose sight of the fact that we have to manage policy and the related question of how we should manage policy in a low inflation era. We are in such an era. We may not be at price level stability, however someone may want to define it, but we are in a low inflation period. Most of the price indices that we look at show inflation rising between 1 and 2 percent and the trend is flat. A few indices are in the 2 to 3 percent area, but I don't think any are over 3 percent at this point. Much of the discussion on price level stability is focused on inflation rates in the 1 to 3 percent area. We have to manage policy in that framework, and there are some rather imminent questions. Larry Meyer raises probably the most basic question, and that is, what is socially optimal in this era? If it is a range, what is the range? Should policy respond differently to inflation when it is at a low absolute level than it does when it is high? A one percentage point difference in the inflation level may mean something entirely different when the absolute level is 5 or 6 percent as opposed to when it is 1 or 2 percent. And if policy should respond differently, how should it respond? If we are going to get down to lower levels of inflation, we are going to start having more and more pockets of deflation. How should we think about those, and to what extent is that an acceptable condition? In sum, low inflation has its own problems as we all know. But we have not had to face them, and I think we could very well get ourselves in a situation where we may need to face them. So, there are some very practical problems that we need to work on even while we are thinking about these longer-term, perhaps a little more theoretical, kinds of concerns. I guess my plea is, let's give a large amount of attention to those nearer-term problems while we are dealing with the others.",485
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"Let me make several brief observations: In terms of the general question of the overall value of low inflation, it seems to me that we actually have developed some evidence. If we think about the performance of the U.S. economy in the 1960s, much of the 1980s, and much of this decade, those have been periods of very favorable economic performance and periods of relatively low inflation. This does not prove causality, but if we step away from the rigor that economists might want to apply and think of the general public, it seems to me that we are in the process of developing some very practical evidence. That does not get to what I think is the tougher question--and I agree with Larry Meyer and Cathy Minehan on this--of demonstrating that there is a significant payoff to reducing inflation further from, say, 3 or 2-1/2 percent. I think that is a very significant challenge. I don't think we have the evidence that would convince skeptics that that is a sensible and sound thing to do. Finally, and I raise this only as a question, I wonder whether it is preferable to have a basket of inflation measures as opposed to one measure. This paper suggests that as long as we pick a broad index, we are not in any danger of going significantly off course over an extended period of time. It seems to me that when we were working with the monetary aggregates, we really were doing something a little different. We were trying various combinations and permutations of bank and other liabilities, knowingly changing the concept. Here I think we know the general concept and that it does not make a lot of difference empirically what specific measure we choose.",340
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Mr. Chairman, it seems to me that what we are talking about, directly or indirectly, is whether there should be a publicly stated, publicly agreed upon goal of monetary policy. By that I mean a goal that is a little more clear to the citizens of our country than what I would describe as the goal of sustained economic growth to be achieved through price stability, which in turn is not defined with a number. In fact, I use your working definition. In my view, there would be a benefit if we had a more clearly stated goal of price stability today because it would give us better signals. We could stop this debate and we would be more accountable to the American people in that they would have a better idea of what we are supposed to be doing and whether we are doing it. But in a democracy, one has to be extremely pragmatic. Given the absence of absolute certainty about what we are supposed to be doing, we have in fact been very successful in bringing down the level of inflation. Despite having done that, however, the political criticism of the central bank has been increasing. We are not being particularly rewarded for our achievement; instead, there has been increasing questioning. Going back to the Humphrey-Hawkins report and testimony, I think we should be very clear about what we think ought to be the goal of monetary policy before we go out and start selling it. We do not quite know what to sell because we have not agreed on it, and we have to be very certain that what we attempt to sell will make it more likely that we will be able to carry out policy more effectively rather than less.",327
-fomc-corpus,1997,"President Broaddus, you are going to have to close us down.",15
-fomc-corpus,1997,"Most of the comments I wanted to make on the paper have already been made, in many cases more than once, so I will make just a quick comment on the broader issue of the desirability of price level stability, which has come up in an interesting discussion. I have only a couple of points. One is, as Gary Stern mentioned, that a lot of work has already been done to support the idea that price stability is a desirable longer-term objective for any central bank. I thought a lot of good evidence in support of that view was summarized at the Kansas City conference at Jackson Hole last year. My second point is a little more vague. Let me put it this way: I do not think we should underestimate the degree of appreciation that already exists among the public concerning the desirability and benefits of something approaching price level stability. I see in everyday life and hear in conversations a growing realization that at least part of the explanation for the universally recognized good macro economic performance has something to do with the way we are conducting monetary policy and our focus on low inflation and eventual price stability. Like a stew, one has to let that appreciation steep, and it will slowly but surely grow. What we need to do, it seems to me, is to reinforce it in every way we can. One dimension of price stability for me is not just the current inflation numbers, but the very important expectational component. We need to reinforce the view that we are going to maintain the progress we have made, and I think that will pay off over time. I think we need to have a strategy, and it needs to be as clear as it can be. In my view, this paper is a good first step in helping us to build that strategy and address the related tactics as we go forward.",358
-fomc-corpus,1997,"Unless anyone has any final words, I think Al Broaddus has completed this session on a very good note. Congratulations to the staff who took an impossible subject and made it slightly less so.",39
-fomc-corpus,1997,"We turn to a discussion of the long-run ranges for the monetary aggregates, and I call on Tom Simpson.",22
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will be referring to the handout called ""Material for Staff Presentation on Money and Debt Ranges."" [Statement and related handout--see Appendix.]",38
-fomc-corpus,1997,"Tom, going back to the bottom panel of Exhibit 3, I would assume that if we were to substitute gross domestic income for gross domestic product, the most recent data would not look as good as they do because we would be getting higher V2.",51
-fomc-corpus,1997,"Right, the points would be farther apart.",9
-fomc-corpus,1997,"Have you actually done the calculations to see what that would look like? In other words, is part of the tightness of fit that we see a function of the widening statistical discrepancy in the national accounts or is it de minimis?",47
-fomc-corpus,1997,I think we are only talking about .02 on this scale. I don't think it would greatly alter the recent picture.,24
-fomc-corpus,1997,Especially if the revision went back a couple of years.,11
-fomc-corpus,1997,It's a question of starting points for thinking about this.,11
-fomc-corpus,1997,"But the gap has been opening up since 1994, so V2 shifts up progressively over time from the observations you have here. The most recent observations are on top of the fitted line, so we would expect a little more of a drift.",50
-fomc-corpus,1997,It could alter the slope.,6
-fomc-corpus,1997,"I don't know how significant it is, but it does raise some questions. Since we have so few observations, it is not clear to me what is happening. President Parry.",36
-fomc-corpus,1997,"Also with reference to Exhibit 3, it seems to me that developments in the last couple of years clearly are encouraging. If we focus on the bottom panel of the exhibit, it also seems clear that velocity is continuing to change. In particular, if one had run that regression to include the forecast period, it would have produced a different velocity. So, this exhibit seems encouraging to me, but it also illustrates that it would be a mistake to assume that velocity is now stable.",96
-fomc-corpus,1997,"Right. As was mentioned in the Bluebook, we thought that M2 velocity was being boosted somewhat this year by continuing very large inflows to mutual funds, presumably involving diversions from M2 accounts.",41
-fomc-corpus,1997,"It is also the case that when we fit these things econometrically, we find small time trends both for the period covered by the bottom line and for that covered by the top. Thus, the charts show bigger misses relative to the fitted line than there are in our models because the models have this time trend in them. But I think your basic point is still correct. In some sense, it is amazing how little velocity has shifted up given the huge flows into stock mutual funds.",97
-fomc-corpus,1997,"If you look at the upper panel, an alternative interpretation would be that the big upward movement in the early part of the 1990s has slowed rather than come to an end.",37
-fomc-corpus,1997,Other questions? President Jordan.,6
-fomc-corpus,1997,"A couple of things: With regard to your question, Mr. Chairman, we too have looked at this with gross domestic purchases instead of nominal GDP and also the command basis of GDP. That's because we are trying to relate money held to household income and the command of U.S. citizens over resources. It does change the picture a little. The statistical relationship of MZM is better in terms of the stability of the functional relationship. The series is volatile because of the higher interest elasticity, but we still get a tighter fit with MZM, especially if we use gross domestic purchases or the command basis. My other question, a real question, is how to complete the picture of the NAIRU alternative. The Bluebook presents almost a ""for your information"" kind of alternative that assumes the NAIRU is 4.8 percent, and then it really doesn't do anything with it. It would be helpful, to me anyway, to have Exhibit 4 completed to include what would be implied for the velocities of the three aggregates under that assumption and then the appropriate ranges for the aggregates. You might choose not to change the nominal funds rate, so opportunity costs would not change, but the lower NAIRU has to have an implication for your choice of the appropriate ranges.",255
-fomc-corpus,1997,"As I mentioned, with a supply shock of this sort and particularly if the Committee wanted to see more of that shock show through in terms of real output, we would get more nominal GDP and more money growth.",42
-fomc-corpus,1997,"On that low NAIRU alternative, we would have small effects on nominal GDP and lower inflation. It is not clear which way nominal GDP would go since we would have higher output and lower inflation. Actually, I think nominal GDP would be a bit lower in that scenario than in the baseline scenario. Interest rates would not be rising, which would help boost M2, but nominal GDP would be a little lower because inflation would be so much lower. So, I don't know which way it would go, but my guess is that the net effect would not alter our projection of M2 a great deal.",121
-fomc-corpus,1997,Any further questions for Tom? Governor Phillips.,9
-fomc-corpus,1997,"Tom, could you expand a bit on Exhibit 1, which shows growth in federal debt turning up?",21
-fomc-corpus,1997,That is basically in keeping with the slightly larger deficit that we are projecting for 1998.,19
-fomc-corpus,1997,Does that take the current budget negotiations into account?,10
-fomc-corpus,1997,It has our assumed fiscal package.,7
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,"You will recall that our unified deficit forecast for the next fiscal year is somewhat larger than the deficit for this fiscal year. On a calendar-year basis, because of the timing of borrowing and other means of payment or cash flows in the federal government, we have more of a step-up in borrowing than one would have expected on the basis of the unified deficits for the two fiscal years.",76
-fomc-corpus,1997,"Any further questions for Tom? It strikes me that M2 is creeping its way back into potential use. This creates interesting questions including the need to review issues that were raised yesterday such as reserve requirements and contemporaneous reserves. All these issues, including the longer-term target ranges, are in the same package. That is to the extent that M2 has no appreciable monetary policy significance, then, of course, the ranges are irrelevant except in the sense that they have a technical meaning as do reserve balances and similar measures. Frankly, the less we do in any of these areas, the better we probably are. That is because anything we do that is not required by sweeps, for example, or other unavoidable technical problems elevates the issue of money supply to a level that does not conform with the way in which we currently employ the monetary aggregates. My impression of the current ranges for the aggregates is that at some point we probably will have to change them to capture and center the expected outcomes. But for now I would be inclined simply to reproduce what we wrote 6 months and 12 months ago as reasons for not changing the ranges and save ourselves a lot of typeface. There you have a true cost cutter at the Federal Reserve! [Laughter] It is rather fascinating to recall how good the forecasts for the growth of the aggregates have been. In retrospect, the M2 forecast of a year ago was right on the money. If M2 growth continues that way, we will have to make a decision, and a very significant decision, about the M2 range. The irony of having such a good forecast is that we are exactly where we were a year ago. My own preference, frankly, would be to retain the ranges that we have.",353
-fomc-corpus,1997,"I agree with that to the extent that we decide not to change the way we use the ranges for the monetary aggregates. But in anticipation of the possibility that in one, two, three or more Humphrey-Hawkins hearings down the road we may want to give a little different weight to the information M2 is providing, I think it would be useful to start preparing the Congress and the public for the change. We would alert them that the change would not be a return to the 1970s kind of monetary targeting but rather that we intended to use these aggregates as a contemporaneous monitor of how our policy actions are interacting with the real economy. I believe it would be a mistake to allow people on the outside to think that we will go back to setting target ranges in the forward-looking sense that they could provide information to trigger increases or decreases in the federal funds rate. Rather, if a range is used for monitoring and especially if, as the staff paper says, the feedback effects of interactions--the simultaneous determination aspect of nominal income and money--are getting more weight, then we will want to characterize that range as a monitor of what is going on in the economy. It is telling us something about the demand for central bank money and is not a target that we are trying to hit.",260
-fomc-corpus,1997,"We actually have started to do that at the fringes in Congressional testimony. If these relationships hold, I think we will gradually increase our emphasis on the aggregates. In that event, this Committee is going to reach a crucial point when we will have to decide whether we should start to do something more formal. That is going to be an interesting discussion, in part because I think each of us will have slightly different time frames in mind. I must admit that I happen to agree with the view that if we get the sense that we are going to lock in on the aggregates, we will soon find ourselves backing off, to our chagrin. But that remains for a later discussion. President Parry.",141
-fomc-corpus,1997,"Mr. Chairman, I agree with your suggestion and support alternative I. It seems to me that M2 velocity is coming closer to stabilizing, but I don't think we have enough evidence yet to put more weight on the aggregates at this time.",49
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, I also agree with your suggestion and would prefer to stay with alternative I. I want to comment, though, on a point that Jerry Jordan made. As I read the Bluebook this time, I found myself facing a choice. If I concluded that I wanted to use these aggregates as indicators of our projections, then I would choose one alternative. If I decided to use them as targets with an assumed velocity, I would choose another. If we do get to the point where we are starting to put weight on these aggregates, I think we will need a careful discussion of how we want to use them. Otherwise, we are going to have split votes as we tend to do on issues such as the interpretation of alternative I versus alternative II.",152
-fomc-corpus,1997,I have an old P-star memo sitting at the bottom of my desk that might help. I could blow off the dust and pull it out! President Minehan.,33
-fomc-corpus,1997,"I, too, agree we should not change the ranges for all the reasons that people have given here today and that I mentioned the last couple of times we talked about this. Until we know exactly how we are using these measures of money in the formulation and implementation of monetary policy, I think we are well advised to keep the ranges the way they are. I would also encourage some further discussion down the road of exactly how to use these measures should these trends continue.",93
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I am delighted to see that M2 is doing better. I thought that the more detailed memo that we received was very helpful and moved the ball a little farther down the field. I agree with your proposal, Mr. Chairman; I do not think we should change the ranges at this time. But I would align myself with Jerry Jordan's comments because I think it would be useful to start to talk about the way we see M2 changing.",89
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, I certainly agree with your recommendation. I have to say that I am impressed by the increasing evidence that M2 may be coming back on track. We produced some supporting research at our Bank to supplement the excellent staff paper that was done here. On the basis of the analysis that I have seen, I think a case can be made, and the Bluebook indicates this, for setting the provisional range for 1998 under the assumption that M2 will continue to reassert its old pattern. But I would not want to do that quite yet. One of the attractive things about the 1 to 5 percent range for M2, which has been around for a while, is that in a sense it is the closest thing we have to a nominal anchor in the absence of an inflation target or similar target. I would be reluctant to give that up. Having said that, I think that if we continue to see evidence over the remainder of 1997 that M2 is coming back strongly on track, we probably ought to consider changing its 1998 range when we take another look at it in February. That's because, with more normal behavior, M2 could actually come out near the top end of a 1 to 5 percent range, and we might feel a little uncomfortable about maintaining that range as we move into 1998. I would like to make a couple of additional comments that focus on our longer-term strategy. In these Humphrey-Hawkins meetings in recent years, I have used this agenda item as an opportunity to make a pitch for inflation targets, and I sometimes have recommended, Mr. Chairman, that you might be a little more precise in your testimony about our objective of holding the line on inflation. I want to say that I still think these are very worthy ideas, and I hope they will get some weight and attention. But you all know how I feel on this issue, and I will not repeat my arguments today. I would like, though, to make a brief comment on a closely related matter, one that I think is an increasingly serious issue from the standpoint of the strategy and conduct of our longer-run monetary policy. These points are related to some of the things that Jerry Jordan said yesterday. That is, in the absence of a clear and firm nominal anchor for policy, almost all of the public's attention to monetary policy focuses on the federal funds rate and the prospect that it may change at a particular point in time. Obviously, this is nothing new, but it seems to me that the single-mindedness and intensity of this public focus is, if anything, a little stronger than it may have been historically. In my view, that presents some potentially serious risks to the conduct of policy going forward. In particular, there now seems to be a widespread tendency to view almost any tactical increase in the federal funds rate as an effort on our part to reduce inflation by restraining economic growth, even if the objective really is only to hold the line on inflation. As a result, almost any funds rate increase these days is going to turn into a lightning rod. In this situation, I think it is very important that we make every effort to do a better job of explaining to the public how we expect the funds rate that we target, and for that matter other short-term interest rates, to behave in the current regime and why. Specifically, I think we need to make the point that in the current environment, where actual inflation is low and our anti-inflationary credibility is relatively high, though maybe not perfect, short-term nominal interest rates are essentially short-term real interest rates, and short-term real rates routinely will have to move up and down in order to clear credit markets. Dave Stockton made a point like this in his Chart Show comments yesterday. Whenever future income prospects brighten relative to current prospects or perceived permanent income rises, however we want to describe it, both households and business firms are going to want to borrow against that anticipated future income, and demand for credit will rise. In that situation, short-term real rates need to rise to maintain the balance of supply and demand in credit markets, and the Fed needs to let that happen. The point is--and this is really the main point I want to make--that actions like this on our part are not restrictive monetary policy actions as they are usually portrayed in the press and elsewhere. They are neutralizing actions. In those situations, we really are not tightening policy; we simply are doing the minimum needed to hold the line on inflation and maintain the current inflation rate. Far from endangering the expansion, it seems to me these kinds of actions are essential to sustaining it. They do not really pose the kinds of risk to the economy that some of our actions necessarily did in the mid-1980s when we were indeed tightening policy in an effort to reduce inflation at a time when our credibility was relatively low. I realize that while these points may make good economic sense and may be persuasive to some people, putting a pretty face on a funds rate increase is a tough sell when we are dealing with the media or Congress or the general public for that matter. I think we need to find a way to get this message across and to be persistent in doing so. I thought you made some similar points very effectively in your NYU speech, Mr. Chairman. We need to do more of that whenever we get the chance, and it strikes me that your upcoming testimony might be a good opportunity for another tutorial.",1108
-fomc-corpus,1997,"I think we were well aware of what would happen when we shifted to an explicit federal funds rate target. As you may recall, we fought off that apparently inevitable day as long as we could. We ran into the situation, as you may remember, when the money supply, nonborrowed reserves, and various other non-interest-rate measures on which the Committee had focused had in turn fallen by the wayside. We were left with interest rates because we had no alternative. I think it is still in a sense our official policy that if we can find a way back to where we are able to target the money supply or net borrowed reserves or some other non-interest measure instead of the federal funds rate, we would like to do that. I am not sure we will be able to return to such a regime and in the process create a whole new army of Fed watchers who interpret what we are doing, but the reason is not that we enthusiastically embrace targeting the federal funds rate. We did it as an unfortunate fallback when we had no other options, and I think the consequences are much as we anticipated. The way to get around this problem is to meet it head on, and instead of saying that we are moving rates up to curb inflation, we should say that we are moving them up to sustain long-term employment growth. That is effectively what our argument is, and it is the right argument. It involves bypassing the intermediate inflationary imbalances issue in a lot of these discussions. My opinion is that from a public relations point of view it is very hard to sell low inflation when we already have low inflation. It works only in a period like the late 1970s when everyone was terrified of the consequences of inflation and the Federal Reserve effectively had a mandate. We do not have a mandate now, and the reason is that we have been successful. It is the fallout of being successful that we have to handle. It is a very difficult and complex public relations issue. But we have to realize that if we fail to succeed in the public relations, we may still have to move ahead and do what we have to do and take the consequences. We still have to do our job.",440
-fomc-corpus,1997,"I agree with all of that. My point is that while we currently have low inflation, we do not really have what I would regard as a firm nominal anchor in a forward-looking sense. In that kind of environment, the operating regime that we have, as you said, presents risks. I don't know if there is an easy way to do it, but we need to take every opportunity to make it clear that short rates will move around. They may have to go up, and that may be perceived as an effort on our part to squeeze the economy in order to reduce inflation or hit some target. That is not correct economics, and we need to get that point across any way we can.",140
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, I agree with your recommendation. As I understand it, we would describe the money ranges as we did last time, namely as benchmarks for what we would normally expect under conditions of reasonable price stability and historic velocity behavior. With regard to the discussion you were having with Al Broaddus, a few of us were talking about the same issue before the meeting. I think the sense of our discussion was to agree completely with exactly how you phrased the need to communicate the basis for our monetary policy actions, namely by saying that our objective is to encourage continued recovery, sustained economic growth, and further increases in employment. I realize that this is a very difficult and complex public relations issue, as you said, but I think that is the right track to go on.",156
-fomc-corpus,1997,"I will tell you, Mike, one thing that has to be considered here is the moral tone. In the NYU speech, I said that it is irresponsible to take the risks that are involved in not trying to contain inflationary imbalances. If we give only the other side of the argument, they will beat us nine times out of nine on a moral argument. That is what they have been doing. And if we allow that to happen, we deserve to be beat upon because I am persuaded that we do have the moral high ground. We have a long-term focus rather than a short-term expediency rationale. We believe in insurance, which is a well established long-term risk-averse type of activity. I think all the ethical, moral issues are on our side. Short-termism--all of the expediency issues--is what effectively is on the other side, and their advocates make it sound as though that is the moral high ground. I think our allowing that to happen is unfortunate. It merely says how good they are, because if I had to make their case, I would not be able to do it as well as they.",231
-fomc-corpus,1997,I agree with everything you have just said. I believe that we need to spend more time thinking about how we can best communicate that message.,28
-fomc-corpus,1997,"I absolutely agree with that because the focus of outside commentary on monetary policy in recent months has not been as good as it should have been. Considering what is going on in the world, it is really unbelievable. Vice Chair.",45
-fomc-corpus,1997,"Mr. Chairman, I agree that we should adopt alternative I. I think it is far too early to conclude that the recent fit in V2, and therefore the use of M2, is anything like a sure thing. One of the things I believe we have to be aware of is the effect of a change in market focus on a monetary measure. We may have a monetary aggregate that tracks reasonably well when we are not using it as a policy tool. Therefore, it is a matter of passing interest but essentially of indifference to the marketplace. On the other hand, if we start using it as a tool, the markets are going to concentrate on it a lot more, and it may pick up a degree of volatility related only to its being used as a policy tool. On the broader issue of explaining what we are doing, it seems to me that a concentration on economic growth and the creation of jobs is where the high ground is located and is what we appropriately are dedicated to. That is why I use price stability as a means to an end, not as an end in itself. I also like the clarity involved in talking about an interest rate because people in the real world understand interest rates. They do not understand reserve levels or all this other arcane stuff that we like to discuss. Our use of the latter appears to them as an effort to obfuscate. It will be more understandable to them if we say that we believe in long-term economic growth, we believe that monetary policy is a very effective tool to bring that about, and the tool that we have is the overnight interest rate. When we decide that we have to shift the overnight interest rate as a means of working toward that long-term goal, people may not like it, but at least they will understand it.",359
-fomc-corpus,1997,"Yes, granted how far we have come. I think the only way we could go back to some non-interest-rate regime--let's assume it involved a net borrowed reserve number--would be if we believed that analytically such an approach had become the most efficient means to implement policy. We could identify our net borrowed reserves target, but instead of associating it with that huge range that we used to set for the federal funds rate, we could indicate that we expected it to be consistent with a federal funds rate within a relatively narrow range. So, we would still in fact have some focus on the federal funds rate. If we believe that the literal fixing of the federal funds rate is an inappropriate policy--a conclusion we may well reach at some point because theoretically it's very hard to make a case that fixing the rate is the optimal way to conduct monetary policy--how we would reword the directive would be of some importance, but we would then have what we would view as a superior mechanism to carry out our policy. We could explain that we expected this approach to policy to engender a federal funds rate between, say, 5-1/4 and 5-1/2 percent or some narrow range like that.",246
-fomc-corpus,1997,I would be very comfortable with that.,8
-fomc-corpus,1997,I think we could defend it. Governor Meyer.,10
-fomc-corpus,1997,"Thank you, Mr. Chairman. Tom Simpson's presentation of the Bluebook alternatives for the Humphrey-Hawkins ranges identified two distinct decisions that we have to make today, and also a third decision that we might want to talk about and contemplate. The first is the interpretation of the ranges; the second is the boundary of the ranges; and the third is whether we want to upgrade the role of monetary aggregates in our monetary policy process. I must admit that when I came here, I was initially uneasy about the current interpretation of the M2 range that related it to some hypothetical period of price stability and normal velocity behavior. That interpretation seemed to me to be inconsistent with the spirit and the letter of the Federal Reserve Act. But I have come to appreciate that such an interpretation might have evolved as a quite reasonable compromise, given the instability of the monetary aggregates. On the one hand, we are told to set a range. On the other, the instability of the monetary aggregates prevents us from doing so in a meaningful way--or from using the monetary aggregates in a meaningful way--in the policy process. Now that there is evidence of improved stability of M2, I think we have to ask whether this continues to be a reasonable compromise. I agree with the Chairman that despite early signs of improved M2 stability, it is premature to reach that conclusion. I would say that we really have not stress-tested this relationship yet. It has proved stable through a very tranquil period, and I don't think we want to make the move back to the earlier interpretation and then have to reverse ourselves when we find that we are in a more turbulent period. Having said that, I think the Bluebook also challenges us a bit because it points out that some interesting issues are involved in setting the target ranges under the current interpretation. Although we have been talking and easing our way through discussions about whether we should have explicit inflation targets, in a sense what we have been doing under this interpretation is to set target ranges for the monetary aggregates that in effect become inflation targets. Given that that is their role, we might want to consider over time whether they really are in line with where we want them to be. The discussion in the Bluebook is very interesting. It points out that the ranges are aligned very closely with what we might discern to be true price stability. Then the question is, as I pointed out yesterday, whether we really want our inflation target to be true price stability or maybe true price stability with a cushion. It forces us into making that choice.",508
-fomc-corpus,1997,"I would say that what you are suggesting, and I would agree, is that when we get to the point of discussing these issues we should combine them because they are interrelated",35
-fomc-corpus,1997,"Right. It is premature to get into that at this point, but I thought the discussion in the Bluebook was quite interesting and challenging. Even if we do not want to go back to the earlier practice, there might be a case for upgrading a little the role of the monetary aggregates in our deliberations. We could ask the staff to bring to the Committee information that they glean from the monetary aggregates that they think might be useful to the monetary policy process. Having said that, I do not think there is necessarily any going back to the earlier practice. I would only suggest that there is an element of hysteresis in the monetary policy process. The way we view monetary aggregates has evolved over time in part because we have had to adjust to the instability of those aggregates. In the process, we began to give more weight to our ultimate objectives, an implicit inflation target and a stabilization objective--a Taylor rule kind of procedure. We are focusing more on the ultimate objectives and less on intermediate targets. Despite the instability of M2 over the years, our track record is quite good. We might wonder whether we really want to go back to the earlier importance of the target ranges even if M2 becomes more stable. At any rate, I would concur that we should retain the current interpretation and not elevate the role of the monetary aggregates. I would not modify the current ranges; I would just stay with them.",281
-fomc-corpus,1997,"To return to the issue of whether or not we are against inflation or for jobs, was I mistaken, Jerry, or were you quoted in the James Glassman newspaper column yesterday or the day before?",40
-fomc-corpus,1997,I hope not.,4
-fomc-corpus,1997,"I thought it was you that he quoted. He was talking about the issue of job creation, and the example came up as to why somebody in a Chinese city had everyone working with shovels to build a dam. Was he quoting you?",49
-fomc-corpus,1997,That may have come from a speech that I gave.,11
-fomc-corpus,1997,Why don't you set it straight for us. This actually refers to the issue of whether it is jobs or growth that we ought to be focused on.,30
-fomc-corpus,1997,"It was in a speech where I said that a Western businessman traveling in China visited a site where hundreds of workers were building an earthen dam with shovels. The businessman suggested that they could get an earth-moving piece of equipment to build that dam in an afternoon. The Chinese official asked what could be done about all the unemployment that would create. The businessman replied that he now understood. He thought they were building a dam, but the Chinese authorities really were trying to create work for people. So, he had a suggestion to make, namely to take away their shovels and give them spoons. [Laughter]",126
-fomc-corpus,1997,I don't think we ought to repeat that suggestion in too many places! It is in fact an effective argument against creating jobs directly rather than fostering economic growth to create jobs. There are stages that should not be short-circuited in that process; they involve controlling inflation in order to promote growth and more jobs. President Melzer.,67
-fomc-corpus,1997,"Alternative I is all I was going to say. On this communications issue, I think we also have to be careful in terms of how we communicate. We use shorthand internally, but the public has the confused impression that we can affect inflation or we can affect growth. So, we need to talk about inflation in the context of how it prevents the use of real resources in a way that fosters maximum efficiency and maximum growth. We all understand that, but it involves a certain subtlety. We certainly do not want to put ourselves in the position of having the public think we can directly deliver growth when it is real factors that do that.",127
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"I say ""ditto"" to all the arguments for alternative I--keeping the long-run ranges the same. On the issue of the role of M2, I think we have to spend a fair amount of time talking about this among ourselves. It is not an easy discussion. The first issue is whether M2 will be an intermediate target or an indicator, and there are various levels within that. I think we probably ought to get started discussing that among ourselves. On the communications issues, we can do better. I think we are doing somewhat better, but we can do a lot better. Our basic problem is that our job requires short-run discipline for long-run good, and that is not an obvious virtue, given human nature. I think the way to do it is to focus on jobs and growth; that should be the approach. I think that deserves all of our attention, not just in speeches but in one-on-one conversations and in informal gatherings. We can make our case a lot better than we have.",204
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"I, too, Mr. Chairman, would prefer to stay with the current ranges. I think the most important consideration for the moment is the signal effect, and in my view raising the ranges would risk sending the wrong signal. I have some notes from yesterday's discussion that I wanted to work into the conversation. I was going to save them for the next go-around, but let me just relate at this point my personal observation about how difficult we found it yesterday to make the argument for low inflation. My comment about how far we have to go certainly did not mean to imply that we should not work as hard as we know how to achieve our inflation objective. I think the comments that Jerry Jordan made yesterday and Bill McDonough and you made this morning about better ways to communicate clearly indicate the right direction. I am very supportive of our collectively trying to make that case in a better way than we have in the past. I wanted to weigh in on that as well.",195
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"I, too, would support alternative I. There are ways to improve this aspect of the policy process, and I look forward to discussing them in future meetings.",32
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I, too, would go along with alternative I, but I think we should not do it just to kick a difficult decision down the road. The next few months may actually be an easier period in which to explain a change in thinking than later when one might imagine that we may be doing something really unpopular at a time when the economy is not doing very well and we are being blamed for it. One can think of a lot worse moments for explaining things than we have now. The second point is that it is very easy to say that we are raising interest rates, if we have to do that, to sustain growth in the economy and jobs. But that explanation will not be credible unless we make the connections clear. This was Tom Melzer's point. We risk having people ask what we are talking about and totally tuning out unless we get that explanation across.",173
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"Alternative I. I have an early flight, so I will not say any more. [Laughter]",21
-fomc-corpus,1997,You already used up more time than you really intended. Governor Kelley.,14
-fomc-corpus,1997,"I concur, Mr. Chairman, with alternative I. I don't think I can add anything to the many valuable comments that have been made around the table.",31
-fomc-corpus,1997,"We have had a fairly thorough discussion. Before we get to a vote, there is a minor question about an adjective in the directive, the word ""monitoring."" Don Kohn, would you explain that issue?",43
-fomc-corpus,1997,"It has struck us in recent Humphrey-Hawkins write-ups that putting the word ""monitoring"" in front of debt makes it sound as if that aggregate has a quality to it that differs from the Committee's use of the monetary aggregates. I think the existing practice evolved when the monetary aggregates really were more indicators or targets, somewhere in that nexus, while debt was never intended to be a target and was on trial as an indicator. The Committee decided to call it a ""monitoring"" range so that people would not expect any action by the Committee if the actual behavior of debt fell outside the range. However, it has struck us that no one should expect action just because one of the monetary aggregates is breaching its range, and in fact the ranges for monetary growth are not even set with that in mind. So, the differentiation is awkward. The question before the Committee is whether we can drop the word ""monitoring"" in front of the word ""debt"" since in effect all the ranges are ""monitoring"" ranges.",209
-fomc-corpus,1997,"Unless someone expresses an objection, I presume that would be appropriate. It will be fascinating to see if anyone notices the deletion. [Laughter] Would you now read the version reflecting alternative I?",39
-fomc-corpus,1997,"The wording for the paragraph on the long-run ranges is on page 29 of the Bluebook. It starts off with the usual general policy statement: ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee reaffirmed at this meeting the ranges it had established in February for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1996 to the fourth quarter of 1997."" Then, skipping to the very bottom of the page: ""The range for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent. For 1998, the Committee agreed on tentative ranges for monetary growth, measured from the fourth quarter of 1997 to the fourth quarter of 1998, of 1 to 5 percent for M2 and 2 to 6 percent for M3. The Committee provisionally set the associated range for growth of total domestic nonfinancial debt at 3 to 7 percent for 1998. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",265
-fomc-corpus,1997,Call the roll.,4
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,41
-fomc-corpus,1997,Thank you. Mr. Kohn.,8
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will begin with some thoughts on the longer-term strategy section of the Bluebook, and I will be referring to the charts in that document. I will talk a bit about how the results of those exercises might or might not relate to the current situation and finish with some comments on proposed changes in the wording of the operational paragraph that are shown in the Bluebook. [Statement--see Appendix.]",86
-fomc-corpus,1997,"Well, I assume there are no questions! [Laughter] President Boehne.",18
-fomc-corpus,1997,"Don, I think the exercise you did on the various policy rules is quite useful, and you and your colleagues are to be complimented for helping guide us through this using that approach. As you quite properly point out, however, the Achilles heel of this is uncertainty. We do not know the underlying structure of the economy with a high degree of certainty; at least there are different views about it. There is also uncertainty, often in real time, about whether we are dealing with a supply shock or a demand shock. What happens analytically to this approach if one relaxes the rather Herculean assumption of certainty and says we really do not have a high level of understanding of the underlying structure and there is uncertainty about whether there are demand or supply shocks? Is there an analytical way to deal with that or do you just end up with something that is not very definitive?",175
-fomc-corpus,1997,"I think ""both"" is the answer. The models actually do not have to differentiate as such between supply and demand shocks. In effect they do, but it should be noted that they are just reacting to output gaps and to inflation gaps. From the perspective of the rule, the ruler, I guess, does not have to say this is a supply shock or this is a demand shock. Having said that, I would like to mention that certain rules work better for demand shocks and other rules work better for supply shocks, as the other paper that was circulated pointed out more clearly. So, if you have some clue as to whether you are dealing with a supply shock or a demand shock when making policy, you would want to use that information to shape your policy response instead of adhering rigidly to a particular rule. In theory, you do not have to know what type of shock it is, but you could make policy better if you did know. Concerning the problem of uncertainty about the structure of the economy, this is a really complex subject that President McDonough brought up at the last meeting, and it is one that I must admit I have not sorted out to my own satisfaction. As he pointed out, there is an older literature starting with Bill Brainard that says, if there is multiplier uncertainty--if you are not sure of the connection between a policy action and the response in the economy--that ought to induce some caution. If you are not sure what will happen, you go part of the way there, see how it works out, and go a little further. The so-called Brainard uncertainty should induce a much more cautious response than you would get from the Henderson-McKibbin strategy. On the other hand, people have done other exercises in which the coefficients are known, the slopes of the lines are known, but their position is uncertain. For example, we may be uncertain about the position of the NAIRU but quite sure that we know what the slope of the short-run tradeoff is. Those kinds of uncertainties do not necessarily engender sluggish policymaking. You would proceed on the basis of your best guess with that kind of uncertainty, see what happens, and adjust later. So, there are different kinds of uncertainty. The real world clearly is much more complex. Various uncertainties interact. You observe things happening; you do not know whether a multiplier effect is involved. Things are not happening the way you expected; you do not know whether the reaction of the economy has changed or the whole position of some function has changed. And you do not know what caused the change, whether it is a supply or a demand shock. While I do think uncertainty counsels caution in policymaking, I would get a little concerned if it counseled paralysis. The other part of the lesson is that when you see an output gap opening up, if that is your best guess, you have to do something at some point or the pressures producing that gap will mount and you will have a worse problem later. My concern about cautious policymaking is that it can get so cautious that problems build.",625
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"I am going to refer to chart 4 following page 12 in the Bluebook. I would like to get Don and perhaps you also, Mr. Chairman, to comment on an observation that I am going to make. I believe it is true that if each of us were polled individually and asked if we believe in the Phillips curve tradeoff, we would give an answer along the lines that there probably is none in the long run. We would say that there are various inflation rates consistent with a given unemployment rate in the long run and vice versa. But we probably would believe there is a shorter-run tradeoff. Comparing the top panel and the bottom panel of chart 4, it seems there is a very strong Phillips curve built in that lasts for years and years. There are a lot of allusions to the tradeoff in the Bluebook that seem to indicate a strong belief in a long-term Phillips curve.",185
-fomc-corpus,1997,"No, there is no long-term Phillips curve built into this. I think you have to be a little careful, President McTeer, about the scale of these charts. We are talking about small declines in inflation and fairly small output gaps. The sacrifice ratio built in is 3 over a very long run. That is consistent with many, many modeling exercises. The sacrifice ratio we used in the first set of simulations, 2 over a period of 5 years, is also consistent with a lot of modeling and empirical work done over a quite long period. So, there is a short-run Phillips curve built in here. We do not have a persistent supply shock that allows us to get a free lunch in the form of lower inflation without giving up something in terms of output. These are symmetrical shocks around zero, so there are as many positive as negative ones. In order to get inflation down, you have to give up some output in these kinds of exercises. The only way you could get around that is illustrated in chart 3. If in fact you have a positive and persistent supply shock and the NAIRU is lower than you thought it was, then you have the type of favorable tradeoff that Dave Stockton talked about yesterday in another variant. But in the stochastic simulations, the shocks are all temporary. They average to zero over time, and so the short-run Phillips curve dictates that you need to give up some output to get inflation down on average over this time period. Again, there is no long-run Phillips curve built in here. In fact, there's a negative relationship between output and inflation, as I tried to point out, but no positive one. That is, the model does not produce any gain in efficiency and output from having lower inflation, though we think there really are some gains.",363
-fomc-corpus,1997,I guess I was struck more by the horizontal axis than the vertical axis. There seem to be a lot of years there.,25
-fomc-corpus,1997,The implied sacrifice ratios are in line with what we have been using for quite a while.,18
-fomc-corpus,1997,"I think that the model reflects the importance of price expectations in this process in a very simple way. That is why we do not have the long-run tradeoff. If expectations change gradually over time, we are going to have short-run tradeoffs.",50
-fomc-corpus,1997,"There's a sentence on page 6 of the Bluebook that says: ""In the staff model, the sacrifice ratio over five years is about 2; that is, a 1 percentage point reduction in inflation can be achieved only by pushing the unemployment rate above the NAIRU by the equivalent of about 2 percentage points for one year."" At the end of 1996, in December, the CPI inflation rate was 3.3 percent, and I think the latest reading is 2.2 percent. It has come down then on that trailing basis more than a full percentage point at a time when the unemployment rate has come down by half a dozen notches.",136
-fomc-corpus,1997,"I think we have been facing a situation in which there have been some very favorable supply developments, and that means we have not had this short-run tradeoff.",32
-fomc-corpus,1997,"The tradeoff is there in a sense, but it is obscured by the big drop in oil prices. That has shifted the short-run Phillips curve.",31
-fomc-corpus,1997,"I am going to address this issue in a somewhat different form. The basic problem is that the model has a whole series of consecutive short-term Phillips curves, and its structure does not change. If you accept that hypothesis about the short-term structure and you continuously work with no change in that structure, then the results shown here are mathematically inevitable.",69
-fomc-corpus,1997,Life is a series of short terms.,8
-fomc-corpus,1997,"That is what the short-term Phillips curve is. We see this correlation historically. The trouble is that it veers off periodically, and that creates the nonexistence of a long-term Phillips curve. We are now in the veer stage! President Jordan.",52
-fomc-corpus,1997,"Don, I believe you provided a useful framework for thinking about demand side/supply side. The need to think about that is unavoidable. We do that implicitly. So, why not do it explicitly? It is very helpful to be forced into that framework as we think about what is going on and the policy regime with which we respond. You say that the model does not really care whether it is dealing with a supply-side or a demand-side shock; it responds to output and inflation gaps. Of course, as policymakers we have to care. It is important for us to try to evaluate a shock when it occurs even if we cannot be sure of what we mean by demand side and supply side. I think I know what you mean. Over the last 30 years, we were comfortable in thinking of the oil events of 1974 as a negative supply shock or those in 1986 as a favorable supply shock. But there are a lot of other events that shock the economic system such as international developments: certainly Suez, the Bay of Pigs, and Kuwait come to mind. There also are domestic events like the Crash of 1929, Nixon's price controls, and things like that. I do not know whether you call them supply side, demand side, or what, but we might want to react differently in a policy sense depending upon which of those we think it is--the nature of the events. There is a potential interdependence based on the monetary policy regime that I think we have to be very careful about. It does get back to this question of when we may want to exercise caution in the Brainard sense or the Bill Poole sense or when we should worry about paralysis. I suspect--this is only a guess at this point--that to the extent we are confident that we are dealing only with a demand-side development, we would lean in the direction of caution. To the extent we believe we are dealing with what starts as a supply-side event--it may be an asset market development--then we need to resist paralysis. The reason for that is the following: We may have a series of developments that one might characterize as being a favorable supply-side shock such as the recent increase in productivity--where people perceive that the real rate of return on productive capital is rising for a whole host of reasons. The reason we worry about a pegged nominal interest rate approach to policy is that the market dynamics of people reacting to the perception of rising real returns and increasing wealth raise the opportunity costs of holding central bank money. If we have a derived demand for central bank money, a pegged nominal interest rate policy would cause us to expand central bank money. This would unintentionally convert a favorable supply-side shock into a demand shock. We would want to be a little more activist to avoid converting a favorable supply shock or a negative supply shock, say the Kuwait War, into an adverse demand shock. That is what I mean by the interdependency between the two. Sometimes we talk about those in terms of what has happened to the natural rate of interest or something similar. We can translate these things into the kind of framework that we are talking about here. I think the analysis of whether we can convert one kind of shock into the other type of a shock, intentionally or not, needs to be fleshed out a little more to enable us to guard against an inadvertent outcome. That is just a comment and if you want to react to that, I would be glad to hear your thoughts because I don't feel that I have thought it through as carefully as I need to. On your alternative wording for the operational paragraph of the directive, I like getting rid of the ""woulds"" and ""mights"" and all that. However, I really do not want to introduce the words ""tighten"" and ""ease"" into the directive even though it is clear that the language refers to tightening and easing conditions in reserve markets. What we are talking about is expanding or contracting central bank money. We all know that if we have a supply-side event, or possibly a demand-side event but I have not thought about that enough, we can in effect tighten or ease money market conditions or reserve conditions with an unchanged fed funds rate. Conditions in reserve markets can tighten or ease if we fail to change the nominal funds rate based on the derived demand for central bank money as modified by external shocks. The proposed directive language would imply that only our actions cause reserve conditions to tighten or ease, and we know that is not true. It is failing to change the funds rate that would cause them to tighten unintentionally or ease unintentionally, and we often are trying to guard against that.",941
-fomc-corpus,1997,"I don't think I have a lot to add to what you said, President Jordan. You indicated that you might not react as strongly to demand shocks as to supply shocks, and I wonder about that. If you really thought that demand had shifted up in the first half of this year, starting from a position in which the economy was close to potential and was now going past potential, you would want to react rather strongly to that. On the supply shocks, I agree with what you said in the following sense: I think they are very difficult to analyze. I thought Dave Stockton in his briefing yesterday gave a very good example of the kind of supply shock you were discussing. In that example the equilibrium real funds rate rose because there was an increase in productivity in the economy, and at some point the Fed would have to tighten to avoid the overshooting in demand that you were talking about. There could be other kinds of supply shocks. I think, for example, that a NAIRU shock has a different flavor to it. So, supply shocks do require differentiating to see whether they require or will eventually require raising or lowering interest rates to equilibrate supply and demand in the economy. It is not always obvious which way that is going to go and how the tradeoffs will go. Supply-side shocks are more difficult to analyze because they come in different varieties.",272
-fomc-corpus,1997,"I want to respond to your point about the demand-side shock late last year and early this year. That was a case where I became increasingly concerned that what was really going on related fundamentally to the supply side, and we were inadvertently converting it into a demand-side shock by holding the nominal funds rate steady. We were unintentionally creating more demand, but the initial impetus came from the favorable supply-side surprises.",81
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"I found the simulations on chart 4 of the Bluebook extremely interesting. I would like to ask a question about the opportunistic approach to monetary policy in that chart. I am sure that in a situation where you have an adverse supply shock or a positive demand shock that causes a rise in the forecast of inflation, there is a very aggressive reaction in terms of the opportunistic rule. If one were to adjust that reaction to reflect more realistically that policymakers might not have a symmetric objective function in terms of their willingness to raise or lower interest rates, it seems to me that we could conceivably see the opportunism line on the chart reach the long-run inflation objective even beyond the year 2030. When it looks as though the model is forecasting increasing interest rates, I think it is almost human nature to begin to question the forecast. That may apply to all the policy strategy alternatives, but I think it is more explicit in the opportunistic alternative.",191
-fomc-corpus,1997,"If you turn back to page 10, you can see that in both the target zone and the opportunism simulations we had a strong reaction to inflation outside the target zone or outside the zone of indifference for opportunism.",45
-fomc-corpus,1997,That's right.,3
-fomc-corpus,1997,"And certainly, almost by algebra, you are right. If you reduced those coefficients on inflation outside the zone from 2.5 to 1.5, then you would get a less strong reaction, and it would take longer to get to price stability. On the other hand, I think we have to be a little careful. Look at the Henderson-McKibbin deliberate rule. That is a case in which the policymaker does respond more strongly to output gaps than to inflation gaps, and it performs fairly well in terms of getting to low inflation. If you have a demand shock, of course, there is no conflict. The output gap opens and that is going to raise inflation strongly in response. Both are moving in the same direction. It is with supply shocks that you get conflicts. So, it is not necessarily the case that a policymaker who puts a lot of emphasis on output relative to inflation would take a long time to get to price stability. The Henderson-McKibbin policymaker takes less time than the opportunist and only a bit more than the Taylor policymaker.",222
-fomc-corpus,1997,I see.,3
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I am coming from a different direction, but I wanted to make some of the same comments. I found these simulations very interesting even though I know that nothing can be carried on until the year 2030 with any reasonable level of reliability. I must say that if we are going to keep using this definition of opportunism, I would like to feel a little more comfortable about what is involved in it. A great deal of good material accompanied the Bluebook, and it is going to take me a while to digest that. I have been reasonably sympathetic to the idea that one reacts when inflation goes above a boundary, but when inflation is within that boundary, one tries to work harder on the output side than on the inflation side. I like that as a theoretical construct, but I'm not sure that the way this is modeled is the same as the way I am thinking about it. I need some time to assimilate that. This discussion was really helpful and the paper was very helpful. At the risk of being resistant to change for the sheer sake of being resistant to change, I must say that I have some sympathy for Don's comment about Pandora's box with reference to the proposals to change the wording of the directive. I was watching the CNN financial commentary program from 6:00 to 7:00 a.m this morning. The woman who usually does their commentary about Fed policy observed the Fed's policy decision today was a ""no brainer."" The really important thing was the wording of the directive from the May meeting, to be released tomorrow, and whether it would be symmetric or asymmetric. I thought, oh heavens! If we change this directive wording, it will make a lot more difference to people than we expect. We don't necessarily want to send new messages with this wording change.",359
-fomc-corpus,1997,"But remember, she had to think of something to say this morning. [Laughter]",18
-fomc-corpus,1997,I suppose.,3
-fomc-corpus,1997,That change would give her six months' worth of new material!,13
-fomc-corpus,1997,"Yes, that's right.",5
-fomc-corpus,1997,"At least she said ""no brainer"" rather than ""no brains.""",15
-fomc-corpus,1997,"Well, that's my interpretation of what she actually said.",11
-fomc-corpus,1997,"It does strike me that we have to go back to the drawing board on this. My maximum likelihood estimate is that it would take us 4 hours, 52 minutes, and .4 seconds to get this issue resolved today. We do not have that much time.",54
-fomc-corpus,1997,To change the wording?,5
-fomc-corpus,1997,"Yes. What we ought to do is the following: We should try to negotiate this issue between meetings. It is too difficult to negotiate directly here. We have to figure out another way to do it. The reason people interpret this directive differently is that its constructive ambiguity has worked. That is the problem. We are all looking at the elephant from different directions. So, unless somebody disagrees with what I am saying, we will try that approach. I am more than willing to support what is being proposed here.",103
-fomc-corpus,1997,I am super more than willing to support it. MS. RIVLIN and,16
-fomc-corpus,1997,"Me, too.",4
-fomc-corpus,1997,"I have some question about how the wording on symmetry and asymmetry is handled. However, our practice when we set a target for the funds rate of describing that in terms of reserve conditions seems to me to be somewhere between embarrassing and amusing. I think the time has come to make at least that change in the directive.",64
-fomc-corpus,1997,I think it could take us many hours of discussion to decide whether or not we ought to include a reference to symmetry in the directive. But I don't understand why it would take us four hours to make the words clear. We are merely saying it in English.,52
-fomc-corpus,1997,"Why don't we do the following. This should not be a vote of just the Committee members because some are on the Committee and some are not currently, but the concern is general. Why don't we go around the room and get a quick statement from everyone as to whether or not they accept the recommendation as is, or with very minor changes, or they do not accept it. We will find out very quickly. Why don't you start, Governor Rivlin.",91
-fomc-corpus,1997,I like the recommended wording. I think it is simpler and clearer.,14
-fomc-corpus,1997,I would retain the traditional wording until we explain to the public how and why we are changing it; the explanation should be released in advance of the actual publication of the reworded directive.,38
-fomc-corpus,1997,"Mr. Chairman, it might be useful to ask the members to differentiate between the first sentence and the second sentence. Some may favor changing one and not the other.",33
-fomc-corpus,1997,"Yes, I thought about that. We ought not change one and not the other one until we are sure that one is acceptable and the other is not. Doing this in two steps is not a good idea. I'm sorry, go ahead President Minehan.",51
-fomc-corpus,1997,I totally agree with Governor Kelley.,7
-fomc-corpus,1997,I pass.,3
-fomc-corpus,1997,"I'm not sure any change gets us much. I worry a little about reinforcing this idea that we are in a more rigid interest rate targeting regime at the very time we are thinking about the possibility of some alternative regime, though I know that is a decision for the longer-term future. Secondly, I worry a little about what Jerry Jordan was pointing out. Presumably, we could at times maintain current conditions in reserve markets with an increase or a decrease in the funds rate. We would have to allow for that here, and in the event that might be quite confusing to describe.",115
-fomc-corpus,1997,You said it. President Stem.,7
-fomc-corpus,1997,I think I agree with Tom Melzer's reservations.,11
-fomc-corpus,1997,Tom is saying it is very complex.,8
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"I would very much like to clear up the difficult wording, but I would suggest taking the preamble portion that applies to the second sentence and have it apply to both sentences with the alternate wording.",39
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"I like the changes. When we change the federal funds rate, we now announce that following the meeting. So, including the rate in the directive does not seem to me to be much of a change. I also like the clarity of the alternative wording suggested for symmetry and asymmetry. The only reservation I would have is that I think Jerry Jordan has raised an interesting point.",75
-fomc-corpus,1997,"I would like to see clearer language. We might want to negotiate whether this is it, but I think we definitely could use clearer language.",28
-fomc-corpus,1997,I think the suggested rewording raises enough issues that it's not worth the trouble it might bring us if we introduced it at this time. I would leave it alone for now.,36
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"In recent years we have moved in the direction of transparency and clarity in terms of making public what we do. We debated for years, for example, whether we ought to announce our decisions promptly. I think we are much better off because we now announce them. We were concerned about what would happen if we released the transcripts, and I am not aware of any adverse results from our doing that. I think the proposed rewording of the directive is just a continuation of our movement toward being more transparent and clear. One can quibble about the words and we don't necessarily have to make the proposed changes today, but as a general matter I think it would be helpful to continue to move in this direction. There are times when one may want constructive opaqueness, but I am in favor of the proposed rewording because it points toward more openness and transparency.",173
-fomc-corpus,1997,I do not think this language is ready for prime time.,12
-fomc-corpus,1997,"Mr. Chairman, I like the transparency aspect of the proposal very much. However, in the current environment where we do not have a very specific long-term goal, I worry about the point that Tom Melzer made. This rewording is going to reinforce the focus on the funds rate. One other point that Tom made intrigued me, though. If we could at some future point consider linking in that first sentence the notion of ""maintaining current"" with an increasing funds rate and explain that in some way, that might be a way to get around the problem. But for now, I would leave the wording unchanged.",125
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"I view this as an improvement, an increase in explicitness and transparency. I don't see any reason why only professional Fed watchers should understand the directive. I think we have to bring it into conformity with what we say in our announcements. I also object a little to the idea that the new wording is a problem because it would tend to reinforce the notion that we control and move the federal funds rate. That is what we do! As long as that is what we do, that is what we should say we do.",104
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I am a bit more comfortable with the proposed first sentence because, as Larry Meyer said, that is what we do. That is what we have been focusing on, and I think we should update that directive sentence. I must say with respect to the symmetry sentence that I worry about substituting one archaic expression for another. I also feel that every time we vote for a given symmetry, it is for a different reason. When we vote for a particular symmetry at one meeting, it does not mean the same thing as it does another time. So, I am not sure that whatever change we make in the wording of that sentence is going to help much.",132
-fomc-corpus,1997,Vice Chair.,3
-fomc-corpus,1997,"I think the proposed first sentence merely says in the directive what we already say in the press release, so I cannot see any reason why one would not wish to adopt that rewording. In the current second sentence, I find the ""woulds"" and ""mights"" to be embarrassing nonsense. I think that wording is the ultimate in obfuscation and truly silly. Therefore, anything that is understandable English has to be an improvement, and I find the proposed language to be just that. So, I am happy with the proposal.",109
-fomc-corpus,1997,"During the intermeeting period, why don't we try to find a mechanism to communicate our views on this question and bring perhaps two or three alternatives to the next meeting, with some sense of where everyone stands. In other words, let us not just throw the issue on the table. We could then have a discussion in which hopefully we will reach some consensus. The issue is rather tricky and we may end up agreeing, for example, on the first sentence and not on the second. Maybe we can find a choice of words that people will support. With respect to the issue of locking in the funds rate, I am not terribly concerned about that because if we do move away from the funds rate, we will change the language. I think the language should reflect what we are doing, but I do not see why the new wording in itself should be seen as reinforcing our focus on the funds rate any more than the current wording does. I cannot see how it does that, provided that we in the Committee recognize that this rewording is merely an endeavor to describe how we operate under the current regime. It does not prejudge how or when we might improve the current regime and employ new language in the directive to describe it. If you go back and read some of the very early directives, they do not look anything like the current directives. The Committee has changed the wording of the directive innumerable times. The directive is not a constitution; it is more like a statute and not a terribly good one. Why don't we break for coffee?",308
-fomc-corpus,1997,"Are there any other questions for Don? If not, let me start off and go to the directive specifically. As you may remember, I indicated a hope at our last meeting that we would have a credible basis for tightening today on the grounds that the balance of risks that I saw at that time, which are not materially different today, suggested that a very gradual rise in the federal funds rate would be consistent with what we knew and what we did not know. In my view that was the likely policy outcome, given our incomplete knowledge at that time. However, it has become quite obvious in the last several weeks that the data do not yet make a credible case for tightening. I suspect that such a case will emerge by the time of the August meeting, but even that is not clear because there is something different going on in the economy. I do not know if the word ""fundamental"" is the appropriate term to describe it, but we are observing something that is different from what we have experienced over the years, and it is increasingly difficult to argue that we are dealing only with statistical noise or minor aberrations in our model of the functioning of the economy. The most important policy consideration, however, is whether policy inaction at this time would put us behind the curve. What is reassuring is that we are hard pressed to find any evidence of rising inflationary pressures in the data, whether we are looking, for example, at the pipeline numbers or at the wage structure. Wherever we look, we are getting little, if any, evidence of mounting inflationary pressures, and that has to raise some questions about how we view the economy at large. I recently glanced through the Beigebook of about 18 months ago, and it seemed to me that I could take its cover off and replace it with the cover for the latest Beigebook. That may seem a bit shallow analytically, but if we think about it, this is telling us something quite important. It is hard at this stage to look at the errors produced by our equations and conclude that they reflect the usual statistical noise. The evidence no longer suggests in my opinion that that is a credible view. We tend to construct, in either a formal or a less formal manner, some econometric structure that reflects the way we think the economy works. We try to fit that structure to the available data and derive specific fixed parameters. To the extent that history is a useful guide to the current structure, we will get parameters that do not show any drift. If we use that model, we presumably will come up with a forecast that is truly replicating the dynamic forces in our economy at this stage. The interesting specification in virtually all such models is that, under current conditions, prices go up if any element of a Phillips curve tradeoff or some other set of relationships incorporating tight labor and tight product markets is involved. If we lock in those parameters and run a simulation, given the present level of labor market tightness, any historical data will engender an immediate acceleration in inflation. Yet, what is happening currently in the real world clearly is something other than that. The reason I think we have to be exceedingly careful is that as we go around this table and listen to the descriptions of very tight markets, which are unquestionably there, the usual implication is that such markets of necessity lead to an acceleration in wages and prices. Implicit in that translation from tight markets to expected wage and price acceleration is that the parameters in question are still valid and that their signs are correct. The reason we are not getting the predicted results is that something fundamental is happening that is not reflected in the structure of our models. Our problem at this stage is that it is much too early to say what the full force of those changing parameters may be or how long it will take for them to exert their effects. I'm not saying that the explanation I have given is the only one that will stand up, but it is clear that our existing models do not account for what has been happening. They do not, in any configuration of which I am aware, explain what has been happening to the price level as the unemployment rate has fallen. However, if we compare the forecast in the previous Greenbook to that in the current Greenbook, it is obvious that appropriate adjustments are being made in the model to capture certain ongoing developments. I think there is a series of simple relationships that in fact might explain all that is going on. The issue is whether the developments underlying these explanations are sustainable. I refer to the notion, not dissimilar to the argument that Paul David of Stanford was making back in 1989, that fundamental technological changes that occur once every 50 or 100 years can explain what is happening. Whether in fact that is a viable explanation is the open question. As I have argued before, I think that the uncertainty associated with the rapid introduction of new technology has created insecurity. Until 1995, we observed that changes in wages tended to fall well below what any of our equations would have predicted. Since then, the one-year changes probably have been in line with the short-term Phillips curve, but they have not retraced the shortfalls that occurred in 1993, 1994, and 1995. This is suggesting that the more recent acceleration in wage increases is fitting into a short-term Phillips curve model. It does not in any way restore the wage levels that we would have expected had we been projecting them four or five years ago. The actual accounting explanation of what is going on is the one that I mentioned at the last meeting, namely that the increase in unit costs in the nonfinancial corporate area has slowed to virtually zero for all practical purposes. This largely results from a limited rise in unit labor costs of only about 1 percent at an annual rate. This outcome can be separated into factors relating to the impact of technology. First, the uncertainties stemming from the rapid introduction of technology are engendering a considerable amount of fear that has induced lower wage gains as a tradeoff for increased job security. It is very difficult not to acknowledge that that is happening in some form or other. One cannot argue, as far as I can see, that because people are saying that jobs are more plentiful and they are more confident about the job market, it therefore follows that they have significantly less job insecurity. People can be totally insecure about their own jobs and still say, ""I can get another one, but I am not sure how much it will pay."" Uncertainty is essentially an irrational phenomenon, and the phenomenon of diverging views is nothing new in the world. Unless we can explain why wages are being held down below historically predicted levels for other reasons, I find technology-induced uncertainty the most credible explanation, although I grant you it is by no means a necessary explanation of that phenomenon. The issue of profitability is, however, the crucial question because it involves a combination of subdued wages and a stronger rise in productivity than one would expect at this late stage in the business cycle. It is true that we can explain a goodly part of this productivity increase by the acceleration in economic activity, but the latter too is very tough to explain at this late stage in the business expansion. I think we will have a very important test in the upcoming period. If productivity is indeed accelerating in a cyclically-adjusted sense, we should see it reflected in the second-quarter data. This is because economic growth has come down very dramatically in the second quarter from the rate of the previous six months. To be sure, productivity accelerated in the fourth and the first quarters. However, one can argue that that is nothing more than a reflection of accelerating output. But if productivity growth held up in the second quarter, something different is happening. We obviously do not have much data for the second quarter, but we do have some evidence suggesting that profit margins were not under severe stress in that quarter. If we look at unit labor costs, prices, and the like in the manufacturing sector, we get very little evidence of rising inflation, maybe some shade of a decline. If we look at security analysts' evaluations, the second quarter appears very strong. If in fact it turns out to have remained strong, the only explanation is that unit labor costs have not accelerated. Since we know roughly how wages and salaries per hour are tracking, this suggests that productivity growth is not easing significantly in the second quarter. Indeed, the manufacturing data through April and May show an insignificant decline in unit labor costs, for whatever that is worth. If this is in fact the case, it explains what is happening. It does not explain how long the process will continue, but it does tell us that a different structure is currently exerting an impact on the markets. Having said all that, we are still confronted with certain undeniable facts, namely that employers are digging into the bottom of the barrel for workers. We are experiencing demand growth at this stage that probably requires roughly one million additional workers at an annual rate in excess of what can be sustained with the normal growth in the population. There are roughly six million people outside the labor force who say they would like a job if they could get one. They are not seeking one and therefore they are not in the unemployment pool. I am sorry; I think I just misspoke. I said six million were seeking jobs, and I think that number is wrong. What is the figure? [Pause] I take it back; it is 5.9 million. [Laughter] In any event, we obviously still have room in the economy, but we have a lot less than previously. The level of economic activity is getting to a point where something has to give. While one may argue that at this stage we are not seeing any evidence in the product markets that we are running into significant difficulties, clearly if we run out of labor at some point, capital basically will not help no matter how much we may have. Therefore, the inflation risks certainly remain on the upside, although there is no urgency for a particularly aggressive move as yet. Superimposed on all this is quite startling evidence of how much of the growth in the GDP, how much of the growth in productivity, and how much of the increase in profit margins is confined to a very small segment of the economy, the high-tech area representing roughly 3 percent of the economy. That sector of the economy has accounted for one-third of the total economic growth--maybe slightly less depending on what indicators one looks at. It accounts for a very significant part of the increase in profit margins and productivity gains that we are experiencing. The significance of this bimodal distribution is as yet unclear. We always have this phenomenon to one extent or another, but it is particularly pronounced in this period. As I mentioned at the last meeting, the acceleration in capital investment by high-tech industries starting in 1993 and continuing at a very substantial pace until now is an indication that they see significantly improved productivity growth from the synergies of the various new technologies. This is the reason why I think an alert, so to speak, on watching the productivity numbers is very important to give us a heads-up on policy. At the moment, as I said before, I think we have the luxury of waiting to see how all this proceeds. I do not think we have the luxury of relaxing our vigilance because it may turn out that the productivity gains we have seen in the last six months are strictly a reflection of faster economic growth that is temporary for any number of reasons. We may not fall behind the curve very quickly, but clearly we could find ourselves behind the curve if we waited too long. I think the demand elements in the economy are essentially quite strong. The Greenbook is probably right regarding acceleration in the third and fourth quarters. It is hard to believe that we will sustain the degree of sluggishness we have seen in the first part of the second quarter. Nonetheless, the data indicate that motor vehicle sales are poor. We are not seeing, except in certain areas, a big rise in retail sales in June. I would be surprised if we did not get that, and I think the producers of the Greenbook would be more surprised. I think that is the best forecast that we can make at this stage. I have been in a rambling mode today because I think it is appropriate to the levels of confusion that I sense. In the circumstances, I believe the wisest thing we can do today is to adopt ""B"" asymmetric and continue to monitor the outlook. If we begin to see signs of a pickup in demand that threatens to exceed the available supply of workers, I think we will have no choice but to start to move. For the moment I believe we have the luxury of standing pat. Governor Rivlin.",2568
-fomc-corpus,1997,I strongly support your recommendation. You amused me yesterday by saying I was too agnostic. You sound rather agnostic yourself at the moment about knowing what is actually happening.,34
-fomc-corpus,1997,"No, I said you are too agnostic, but so am I. [Laughter]",19
-fomc-corpus,1997,"Fair enough. I think in view of the uncertainty and the fact that there clearly is not enormous pressure to do something, doing nothing is the wise course. But the risks are, as you say, still on the high side.",46
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Mr. Chairman, I agree that there is a great deal of uncertainty and that the risks are on the high side, which certainly argues for asymmetry no matter how confusing the existing wording of the directive may be. The right decision now is to watch and wait but to watch quite carefully. So, I believe ""B"" asymmetric is the right decision.",71
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Mr. Chairman, I agree with your policy recommendation for today. I want to spend a few minutes talking about policy in a somewhat longer-range perspective. I think our semiannual two-day pre-Humphrey-Hawkins meetings give us the opportunity to take that broader perspective on monetary policy. To take advantage of that, I want to talk about the policy that I think would be appropriate over the remainder of the year. This in no way binds me with respect to future policy decisions, as my prescription will always respond to unexpected developments in the data and associated changes in my forecast. Based on my current assessment of the outlook, which is very similar to that of the Greenbook in terms of the path for the unemployment rate--growth is well above trend in the second half of the year and the unemployment rate declines further--I believe that we should plan to raise the funds rate by 50 basis points over the remainder of the year in two 25 basis point increments, one in August or September and the other in November or December. I would, in effect, be pushing forward to the second half of 1997 the increases in the second half of 1998 that are incorporated in the Greenbook forecast. I think such a path would put us in a better position to limit the increase in inflation projected over 1998 and especially into 1999 as well as reduce the risk of a still sharper increase in inflation than is projected in the Greenbook. I might also note that the environment in the second half, at least as projected, provides an unusually good opportunity for tightening: above-trend growth, a falling unemployment rate, rising long-term interest rates, and building expectations of Fed action. That same window of opportunity will not be so evident when the economy slows to trend in 1998. I view this recommendation as consistent with the long-run simulations presented in the Bluebook. The most important conclusion that I reach from those simulations is that, even given the very optimistic assessment of the inflation outlook in the base forecast, monetary policy needs to tilt toward greater restraint to prevent an increase in consumer price inflation over time to above 3 percent. The second conclusion, perhaps more implicit than explicit, is that putting some restraint in place in the near term enhances the prospect that any required restraint will be modest, will be imposed gradually, and can be done without threatening a recession. I think the simulations with alternative policy rules reinforce this recommendation. They establish that any of those rules would have yielded an improved tradeoff between inflation and output variability compared to actual policy over the historical period. One reason for this is that they require aggressive moves in the federal funds rate in response to changes in inflation to insure that inflation does not lower the real federal funds rate. The Greenbook follows this pattern by assuming a rise in the nominal funds rate in 1998 to prevent the higher inflation from lowering the real funds rate. Another reason these rules are successful is that they all insure systematic responses of the real funds rate to evolving economic conditions. This is consistent with my view that increased flexibility in the response of interest rates to changing economic conditions might contribute to a better macroeconomic performance. I interpreted our decision to hold policy steady at the last meeting as reflecting a desire to move gradually and to postpone further tightening until there was clearer evidence of a rebound in demand following the slowdown in the second quarter. The data since the last meeting do not yet clearly signal that that expected rebound is under way. I am, therefore, comfortable with the recommendation of no change. I also think in light of the balance of risks in the outlook that an asymmetric directive is appropriate.",727
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, although a clear implication of both our forecast and that of the Greenbook is that we will have to tighten policy soon, I am willing to support Bluebook alternative B and asymmetric language.",41
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Our basic dilemma is that the real world is operating differently from what our preconceived notions would suggest. We do not know if this divergence between our models and actual experience is temporary or permanent. At a minimum, this situation suggests caution and a wait-and-see attitude. At this point, I think ""B"" asymmetric captures that posture nicely and I support it.",72
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"I also support no change, alternative B. I have a reasonably strong preference for an asymmetrical directive on the basis of either of two interpretations people might put on it. First, although I am not sure we have fully corrected for our past tendency to overestimate inflation, I certainly don't know any more than anyone else how to take account of some of the fundamental changes that are taking place. My best guess is that we are likely to face a situation that we will decide is unsustainable and we will tighten. Second, we do not circulate our individual assumptions about policy for the Humphrey-Hawkins submissions, but I want to confess that my own submission was based on the assumption that we will in fact decide that we are experiencing unsustainable rates of economic growth. Accordingly, I have built into my submission some moderate tightening over the period ahead. I also would be comfortable if others want to interpret our asymmetrical directive as a commitment and resolve to hold the line on inflation. So, either of those interpretations of an asymmetrical directive would be just fine with me. Thank you, Mr. Chairman.",220
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, I can accept your proposal today with no difficulty. However, I do want to make a couple of comments. I will preface them by observing that I understand the complexity of the issue that was raised in our discussion over the last couple of days and illustrated by the models in the Bluebook. But I also must confess that I am a person of the price stability faith. With that in mind, I think it is interesting that as output has strengthened, inflation has declined. Though there are difficulties involved in explaining that, as you have pointed out, Mr. Chairman, it is a fact that we have seen an improvement in output even as inflation has fallen from modest levels to more modest levels. We need to keep that in mind. I also believe, however, that we are not yet at price stability. So I have to wonder if some small increase in the federal funds rate might not be wise. I see the desirability of some tightening not just as an insurance policy against increasing inflation but as a further step toward price stability where the tradeoffs between recession and inflation are less dangerous in my opinion. We may have an opportunity here, if not now then at some time in the near future, to move toward price stability if we do it carefully. In my view, that is one of the objectives in addition to preventing higher inflation that we should consider as we contemplate policy in the future.",283
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I too support your recommendation essentially because I agree with you that we do not have a credible basis for tightening at this point. Let me comment on your description of the situation in which we find ourselves. I agree with that description, but I am not sure that it is as much a departure from past experience as you suggest. The reason for my view is illustrated by a chart of the relationship between unemployment and inflation going back over a long period of years. This is perhaps not the most rigorous way to go at it, but I find it a useful way to start the analysis. Several things pop out as we look at that chart. First, the relationship between unemployment and inflation is nonlinear. Secondly, if there is a NAIRU, it bounces around a lot. Thirdly, there is a variable lag between when low unemployment is achieved and when inflation accelerates noticeably. Because we have had the benefit of analyzing this relationship over a number of years, we may find our view of its history to be simpler today than it was earlier. Now, there obviously are several caveats about getting into the analysis in this way. One, of course, is that the history of this relationship was predicated on policy at the time, and I am not analyzing it with contemporaneous data and so forth. But I think the chart is instructive because it suggests that the kinds of discussions and the kinds of uncertainty that we are facing today do not differ greatly from past experience. Where that leads me, at least tentatively, is that I think the risks remain in the direction of an acceleration of inflation, and I worry that we may be ill prepared to address it properly.",342
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, I am in agreement with your proposal because I think, as President Stern mentioned, that we probably do need a greater element of credibility in taking action than we have right now. But I do want to sound a couple of notes of caution and to pick up on a couple of things that Bill McDonough and Ed Boehne pointed out yesterday and today. Both of them discussed the need to be forward-looking with monetary policy, given the long lags that are involved and the fact that we have to rely on forecasts as a result. Both of them, particularly Ed today, noted a sense of disconnect between the theory involved in most of our forecasts and the reality of what we see in terms of a highly competitive business environment and a commitment within that environment to stable, if not declining, prices even in the face of rather tight labor and other capacity constraints. I agree with that. We have seen the same process in our own District, and I have heard a million anecdotes about cost-cutting and productivity improvements. There really does seem to be a new environment out there. However, it seems to me that while theory and reality can be slightly divergent in the real economy at present, the same may be true in the financial markets, only in the opposite direction. In the financial markets, theory suggests that real interest rates are high by historical standards. However, we have the reality of booming capital markets, enormous liquidity, and incipient real estate booms that people all around the table mentioned in our discussion yesterday. It is true that some staff material we received yesterday with a salmon-colored cover suggested that it is difficult to find evidence of a real estate boom nationally. But, we certainly do see it in Boston. Current conditions in the financial markets and apparently starting to emerge in the real estate markets say to me that real interest rates in reality are not high, and that monetary policy at this point may be a bit too accommodative for those kinds of markets. I do not believe that monetary policy ought to be used to reduce stock market prices or asset prices, but I do think we run the risk that the ebullience we have today in financial markets will flow over into real estate markets and even increase the sense of wealth that consumers and businesses now have. This is where the boom/bust scenario that I mentioned yesterday comes in. We all know what happens when asset bubbles occur in financial and real estate markets. We saw that in the late 1980s in this country; we saw it in Japan as well. People begin to believe that the prices of their assets can only go up. Banks begin lending for any project, viable or not. Everyone who can pick up a hammer becomes a construction worker, and all of this feeds back into the economy in the form of increasing pressures and rising prices. I think the boom is inevitably followed by a bust and the anecdotal evidence suggests the bigger the boom, the bigger the bust. There is no question that our economy right now is about as good as it gets. As President Boehne and others have pointed out, we should be very pleased about that, and I think there is good reason for waiting and seeing right now. But with strong continuing forward momentum in economic activity, tight labor markets, and indications of incipient if not fully realized asset bubbles, I think there are real danger signs. You have mentioned, Mr. Chairman, the need over the near term to think about tightening monetary policy. I am very much in agreement with that. I wanted to interject this note of caution from the financial as opposed to the real side of the economy, but I am, as I said, in favor of your recommendation at this meeting.",745
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I agree with ""B"" asymmetric. Since inflation and pipeline inflation look pretty benign, it seems to me that there is time to see whether the economy will slow to a more sustainable growth rate. With regard to symmetry, since there is more likelihood that we are going to tighten than to ease and since we adopted an asymmetric directive at the last meeting, I think the asymmetry should be continued. Should we tighten in August or early fall, we would look rather foolish if we had just removed the bias. I continue to believe that we will have to tighten in view of the strong labor and equity markets, but it does seem to me that there is time to let the situation develop a bit. At 5-1/2 percent, the federal funds rate may not be that far out of alignment, particularly as long rates have come down. So, I think we should conserve our monetary tools for now.",182
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. I would favor alternative C. Basically, my rationale would be that we should be acting to protect against the prospect of a future rise in inflation, if not to lock in the recent windfall in terms of the decline in inflation we have actually witnessed. Having said that, I recognize the implausibility of acting now when we didn't last month with arguably a stronger case in terms of current as opposed to forward-looking data. But relating where we are to the discussion we had yesterday, I think the current situation we find ourselves in demonstrates what I would call the emptiness of an opportunistic disinflation strategy in the absence of a clear goal. The way I look at it, what better time than now to act opportunistically when the economy is strong and the risk of recession is low? It really is inconceivable to me that we would exercise monetary restraint in or immediately after a recession to achieve lower inflation. Circumstances would conceivably be different now if the public had a clear idea that 3 percent inflation was not price stability in our view. I think prudent actions on our part to achieve a lower rate of inflation would be anticipated and better understood in the context of a clear price stability objective. I believe it is extremely important that our discussion of yesterday be continued and broadened, with the ultimate aim of agreeing on a sensible long-term monetary policy objective and strategy. In a sense, our hands are tied right now because we have not been clear in that regard.",301
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. I agree with your recommendation, Mr. Chairman, that at this point no action is the best course mainly because any rationale we might have for taking action would not be well understood and would not be credible. And therein lies the challenge of moving ahead from here. How do we make any rationale that we have credible to the array of audiences that we have out there? I think that what is credible as a rationale changes depending on the nature of the economic environment and trend. Certainly, it makes quite a difference if we are facing pure demand-side or pure supply-side forces. If we are experiencing a favorable productivity shock, then we would expect downward pressure on the level of output prices and an increase in asset prices. One version of opportunism would be to want to lock in that lower level of output prices. But an inadvertent conversion of a favorable supply development into a demand shock or an excess demand situation would not be seen in rising unit labor costs or in rising output prices. We would not see it in those markets. While we tend to look at retail sales and other nonfinancial areas of the economy, that is not where we would see it. We would see it in speculative developments and asset prices. Like Cathy Minehan, I too was struck yesterday by how many of you are hearing what I am starting to hear about growing signs of speculative activity in farm land, residential real estate, and commercial real estate. I worry a little that these symptoms of speculative excesses, rather than the sort of things we normally look at, may be the first early warning signals of developments down the road that we would have to react very sharply to. As we move from here to August, I think we need to be looking for and worrying more about indications of speculative activity than about conventional indicators of wage-push or cost-push inflation such as unit labor costs and that sort of thing.",379
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, I think the economy is operating beyond its potential and that we will have to increase interest rates eventually. But I also agree that we do not see any early evidence, certainly no credible evidence, of wage and price acceleration at this point. So, I agree that we should wait for now. Gary Stern stated his concern that we may not be willing to act promptly to address early signs of rising inflation. I certainly hope that we will be willing to act promptly and preemptively as we did earlier this year. My concern is that we are going to start to see a little inching up of inflation--a tenth here, a tenth there, no really large increases. The methodological changes that the BLS is introducing are going to make it more difficult for people outside to detect this inching up of inflation, and there will be a lot of pressure for us not to take any action in those circumstances. There may be some reluctance on our part to act as well. That is something we have to be very careful about and very concerned about, but for now I agree with your recommendation of a ""B"" asymmetric directive.",230
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,I agree with your recommendation.,6
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, we have had a lot of favorable reports over the period since the last meeting, and like everybody else I am encouraged by them. At the same time, as Cathy Minehan emphasized very appropriately, we need to keep our perspective. The level of economic activity is still very high. Labor markets, if anything, are tighter than they were at the time of our last meeting. The data suggesting that aggregate demand is softening may reflect temporary rather than permanent developments; we just don't know. Certainly, the fundamentals seem to be in place for a reacceleration of consumer spending in the third quarter. This is an expansion in which on a number of occasions we have seen a weak quarter followed by a resurgence in the following quarter. With respect to the structure of the economy, I certainly hope you are right that it is changing in a way that can help us in conducting monetary policy. But we just do not know that, as Jerry Jordan said. I think we have to be careful and cautious about jumping to any unduly firm conclusions in that regard. I have tried to balance these considerations as best I can. If it were up to me, I would still prefer to take out some insurance now mainly because it seems to me, in line with what Tom Melzer was saying earlier, that the risk of taking out that insurance is less on balance than the risk of not taking it out. I also would make the point that a small move would not be a tightening of monetary policy. That goes back to some things that I said earlier. I believe that we do have a rationale for moving today, but I do not think it is a rationale that the public is ready to accept. We need to do a better job of preparing the public to accept it. At the same time, the recent news is encouraging. I feel at least a little more comfortable than I did at the last meeting. I can support your recommendation, Mr. Chairman, but I would definitely want an asymmetric directive.",402
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Mr. Chairman, healthy humility is a virtue in the eyes of the Lord, and I think you have given voice to a certain level of humility that we all feel in the light of our lack of understanding. Happily and fortunately, the conditions that we do not understand are favorable, and so far they are holding. I think your recommendation accommodates these uncertainties. It recognizes the state of affairs as they exist, and it anticipates the most likely course of upcoming events. So, I support your recommendation.",101
-fomc-corpus,1997,Please read the directive with the old language. [Laughter],13
-fomc-corpus,1997,"I will be reading from page 30 in the Bluebook, starting toward the bottom: ""In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",115
-fomc-corpus,1997,Call the roll.,4
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,41
-fomc-corpus,1997,Our next meeting is on August 19.,9
-fomc-corpus,1997,"I would like to welcome three newcomers to these proceedings--Jane Little from Boston, George Kahn from Kansas City, and Steve Cecchetti from New York. This is their first meeting and as I have indicated previously to individuals who have come and gone, they will not learn very much economics but large amounts of chaos theory! I think that was a welcome, but I'm not quite sure. [Laughter] We need the approval of the minutes for the July 1-2 meeting.",98
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,Without objection. I turn the next item over to the Vice Chair.,14
-fomc-corpus,1997,"Mr. Chairman, I would like to move the election of Steve Cechetti as Associate Economist for the Federal Reserve Bank of New York to serve until the election of his successor at the first meeting of the Committee after December 31, 1997. I very much hope that his successor will be himself.",62
-fomc-corpus,1997,Would someone like to second that nomination?,8
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,Without objection. Let us move on to Mr. Fisher. Peter.,14
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will be referring to the several pages of colored charts distributed this morning. 1 In reviewing recent market developments, I will try to describe what I see as the causes of the recent, abrupt repricing and volatility of equity, bond, and currency values. First, since your last meeting, there have been noteworthy shifts in the interest rate outlook for the United States, Germany, and Japan. While each of these movements may appear small, in perspective and in conjunction they can be understood as causing a significant increase in risk to which market participants responded. Second, to my way of thinking, it is not helpful to view the dollar's movement--or exchange rate movements generally--as ""causing"" the sell-off in bond and equity markets. The dollar's recent movements appear to reflect the same reassessment of the outlook that has affected other markets. Third, I think the recent volatility in markets can, in part, be attributed to the difficulty all market participants are having in coming to grips with the extraordinary performance of the U.S. economy. In this sense, the recent volatility reflects the contest between ""old"" and ""new"" paradigms. Looking at the first page of charts, which depicts forward rate agreements and Euro-deposit rates from August 1996 for the dollar, the mark, and the yen, you can see the backing up of the 9-by-12 dollar FRA--indicating three-month deposit rates, nine months forward--which occurred following the August 1st release of the nonfarm payroll data and the NAPM survey. In the blue lines, you can see the consistent rise in German forward rates from mid-July. At the bottom, you can see the recent, continued decline in Japanese forward rates. The rally in U.S. interest rate markets, which started in the spring, continued in the last two weeks of July. That rally was propelled by the combination of reduced expectations for any near-term Committee action following the Chairman's Humphrey-Hawkins testimony and expectations for reduced Treasury issuance as a consequence of the improved fiscal outlook. The August 1st release of the nonfarm payroll and NAPM reports caused a modest increase in expectations for a tightening by the Committee before year-end, with the December Fed funds futures backing up by 14 basis points in six days. As you can see in the FRA chart, late last week the backup in interest rates reversed at the time of the rapid decline in equity markets. But through last Wednesday's close, the 9-by-12 backed up by 32 basis points in the nine trading days from July 3 1 st . Looking back across the past year, this move is comparable to the increases in the 9-by-12 that occurred in December and February. In December, beginning a few days before the Chairman's speech at the American Enterprise Institute, the 9-by-12 backed up by 30 basis points in thirteen trading days; in response to the Chairman's Humphrey-Hawkins testimony in February, the 9-by-12 backed up by 28 basis points in just six trading days. Trend reversals such as these, reflecting only a modest increase in the probability of a tightening of monetary policy, also tend to cause market participants to reassess the likely consequences of still seemingly remote events. Most market participants still think that an increase in rates by the Committee is not likely to occur at this meeting or the next. But given the lofty levels to which bond and equity markets had traded, even a small increase in the likelihood of an event which could have such extreme, negative consequences for asset values causes traders to reduce their exposures. To put the same thought differently: for those still working in the ""old paradigm,"" uncertainty premia were squeezed awfully tight by the end of July, when the two-year Treasury yield traded within 25 basis points of the Fed funds target rate; some backup in interest rates and a collateral selloff in equities were accidents waiting to happen. In conjunction with the reversal of the U.S. rate outlook, after the mark began to weaken sharply in mid-July market participants also have had to respond to the escalating rhetoric from Bundesbank officials threatening an increase in rates. On July 24 th , the Bundesbank Council met and announced that their repo operations would continue at the fixed rate of 3 percent but only for the first two weeks of their four-week holiday until the next Council meeting. This suggested that the Bundesbank Directorium would have the opportunity to change the repo rate by either moving to a variable rate tender or raising the fixed rate last week. However, they announced one more operation at the fixed 3 percent rate last week, and this morning they announced one more operation at 3 percent. From the Bundesbank's perspective, this saber rattling has had two beneficial effects: It has created a much greater sense of two-way risk in the Deutsche mark and itself in the pre-monetary union environment. Now, the Bundesbank faces something of a dilemma--or a couple of dilemmas. First, the German economy is providing mixed signals: some measures of activity are picking up and, as a consequence of the decline in the mark this year, officials expect import price inflation to begin to show up in the data. On the other hand, high unemployment continues; ongoing problems in implementing tax reform suggest that consumption demand will remain weak, and M3 growth continues to slow. Thus, on strictly domestic grounds, a decision to increase rates would be finely balanced. Second, it is not clear how markets would respond to a rate increase in the context of European monetary union. To the extent that an increase in rates by the Bundesbank were to be perceived as hostile to the EMU process, causing delay or postponement or a narrowing of the field of likely member countries, it might then be expected to cause the mark to strengthen. However, much of the Bundesbank's rhetoric of the last few weeks has been in service to the idea that an increase in rates would be consistent with and supportive of EMU, suggesting that European monetary policy should not be frozen in place until the ECB is created and that the convergence process could be completed by German rates rising to meet Italian rates. To the extent that market participants believe this, in the event that the Bundesbank were to raise rates, it is not clear that German long-term rates would move very much, or that the mark would appreciate much more than it did last week. Japanese forward rates reflect the continued unwinding of expectations for any near-term firming by the Bank of Japan, particularly following the July 24 th release of the Bank of Japan's Quarterly Report and the July 30th release of weaker-than-expected June industrial production data. As you can see at the bottom of the page, the rise in rates that occurred in May--in response to official pronouncements that things were not as bad as they seemed--has now been completely reversed as market participants have come to see the Japanese economy to be as weak as they originally feared. The 9-by-12 forward rate is now returning to the levels where it was trading in March, at the end of the last Japanese fiscal year when gloom was widespread. On August 15th and again today, the yield on the benchmark No. 182 Japanese government bond hit a new, historic low of 2.065 percent. Turning to the next page, a further jolt to the global outlook has come in the rush of currency devaluations in Southeast Asia. Over the course of the spring and summer, media attention has shifted back and forth between describing these events as ""speculative attacks"" on the one hand and ""competitive devaluations"" on the other. Increasingly, emphasis is now placed on the latter. While much of the focus has been on the devaluation of these currencies against the dollar, shown in the top panel, their declines against the yen since May 1 s t have been even more impressive, which is not likely to do much to improve the outlook for the Japanese export sector. Turning to the third page of charts--",1636
-fomc-corpus,1997,"Peter, may I interrupt you for a moment? Would you remind everybody what a 3-by-6, a 6-by-9, and a 9-by-12 are?",38
-fomc-corpus,1997,"It is not a question of ""reminding!"" What are they? [Laughter] Let me put it this way: I have never heard that term except as used by you in this room.",40
-fomc-corpus,1997,"All right. As I mentioned at the outset, [laughter] a 9-by-12 is the 3-month rate traded 9 months forward. So, 9 plus 3 is 12--",43
-fomc-corpus,1997,"Now, stop! [Laughter] The arithmetic is easy, but why don't you use English? This is market jargon whose use is restricted to a very few acres surrounding your office in New York.",40
-fomc-corpus,1997,I think the new technology is spreading it out all the way to New Jersey and Westchester! The 3-by-6 is the 3-month rate as it trades 3 months forward.,39
-fomc-corpus,1997,Why didn't you say so?,6
-fomc-corpus,1997,"Where were we? [Laughter] As I mentioned at the outset, I do not think it is helpful to see exchange rate movements generally, or the dollar's movements in particular, as an exogenous ""cause"" of bond and equity market volatility. Rather, I think that exchange markets have been responding to the same shift in outlook that has influenced other markets. In the first panel you can see the dollar's movements against the mark, in blue, and against the yen, in red, since May 1s t. In July, the dollar rallied sharply against the mark as the idea of a broad and timely EMU process became generally accepted. The dollar came off against the mark in early August when the Bundesbank worked hard to suggest the risk of upward movement in German rates; as these risks declined, the dollar has jumped back up a bit against the mark in the last few days. The dollar appreciated modestly against the yen in July as the Japanese outlook deteriorated and recently has been more stable against the yen than against the mark. Looking at the movements in bond and equity markets, depicted in the second and third panels, I see a case of correlation in their responses to common impulses, not causation. Finally, just as members of the Committee have been surprised by the performance of the United States economy in sustaining low inflation and relatively strong activity, so too have market participants. Surprises--even pleasant ones, like the combination of last Wednesday's PPI and retail sales releases--tend to create uncertainty, and uncertainty needs to be priced into markets. Another way to view this, depicted on the fourth page, is as a contest between the old and new paradigms and, specifically, among the diverse views now being expressed in market behavior. ""Old paradigm pessimists"" think that inflation is about to break out; it has just been hiding in the lags. They think the Fed is ""behind the curve,"" providing too much liquidity. In response to last Wednesday's data, old paradigm pessimists would be inclined to sell stocks and bonds short. ""Old paradigm optimists"" think inflation is probably coming soon, but it's hard to tell. They think the Fed is doing a good job and that maybe this benign inflation behavior can be kept going for a few more quarters. Many old paradigm optimists are reformed old paradigm pessimists, whose pessimism became too expensive a few thousand Dow points ago. Thus, they remain cautious: buying stocks and bonds on dips and selling them on rallies. ""New paradigm optimists""--who have done rather well over the past year or so--think that we have entered a new era in which productivity growth, hidden in the macro data, is taming inflation. They think the Fed is doing a great job and are great admirers of the Chairman. In response to low inflation and strong activity, they do what they always do: buy loads of stocks and some bonds whenever they can. ""New paradigm pessimists"" are only recently getting the attention they think they deserve. The lack of corporate pricing power, the industrialization of China, the chronic weakness of Japan and Europe, the competitive devaluations of the United Kingdom and Italy a few years ago and, now, of all of Southeast Asia, are signs of the coming global capacity glut. They think the Fed is much too tight. They look at the PPI and retail sales data and see deflation staring them in the face and the last gasp of the U.S. consumer before the deflationary reality sinks in; they, therefore, sell stocks and buy Treasuries--not corporate bonds, just Treasuries. While some of the recent volatility can perhaps be attributed to thin, August markets, as I see it the volatility is also a consequence of the interaction of these four archetypes' diverse responses to the same data and of the movement of market participants among these four types. Much of the rally of this year can be thought of as having been propelled by the migration of old paradigm pessimists to old paradigm optimists and of old paradigm optimists to new paradigm optimists. Much of the recent retrenchment can be thought of as old paradigm optimists hedging against the risks of either old paradigm pessimism or new paradigm pessimism. Turning to domestic operations, reserve needs were somewhat more moderate than in preceding intermeeting periods and we tended to use shorter-term operations to meet those needs. The next page of charts contrasts the volatility of Fed funds trading and operating balances in comparable periods from last summer and this summer. The daily range of Fed funds trading is shown in blue; the one-standard deviation of funds trading around the daily effective rate and the effective rate are depicted in red; below each is a bar chart showing daily operating balances. At discernibly lower levels of operating balances this year as compared to last, we have actually had modestly less volatility in the funds rate, as measured both by the range and by the standard deviation. Mr. Chairman, we had no foreign exchange intervention operations during the period. Committee members have received materials describing how we intend to manage the diversification of a small portion of the System's Deutsche mark holdings into a sub-portfolio of longer-dated German government securities, which the Committee approved in principle last September. I would be happy to answer any questions about this material, or about any aspect of my report this morning. I will need the Committee's ratification of the Desk's domestic operations during the period.",1097
-fomc-corpus,1997,How serious is the most recent pressure on the Hong Kong dollar?,13
-fomc-corpus,1997,"It is certainly worthy of note. I do not have an exact read this morning, but the forward exchange rates have backed up quite a bit in the last 10 days. I am told anecdotally that the pressure is from prudent asset managers who are hedging risks, not speculators poised for an attack. I don't know how much value I can place on that information.",77
-fomc-corpus,1997,"I talked with Hong Kong Monetary Authority officials last night, and they did not seem particularly concerned. Their mode of operation is one that in some sense tends to draw attention, because in essence they meet a demand for Hong Kong dollars when it arises, but they automatically tighten their money markets. That's why we've seen a rise in their short-term rates, which they hope will be enough to adjust financial market balance. There does seem to me to be a question as to how long the peg of the Hong Kong dollar against the U.S. dollar is going to last. The current mechanism is somewhat artificial, and now that the artificiality of the other pegs in Southeast Asia has been revealed, there is some sense that the Hong Kong authorities are nearer the time when they will have to make a decision on this issue.",162
-fomc-corpus,1997,Is that true of the other Southeast Asian currencies as well? Are they going to let their currencies float?,21
-fomc-corpus,1997,"I don't think they know what they are going to do, quite frankly. In fairness, they face a difficult problem. President Minehan and I were at a conference last week, and a very bright woman from Indonesia asked what advice we had for them now that they had floated their currency. Mike Mussa of the International Monetary Fund replied that at a minimum they should not freely float but should have some sort of managed float and should re-orient the basket of foreign currencies in terms of which they had sought to maintain their own currency's value so that the basket is less heavily weighted toward the dollar. He added that that was the end of his advice. My comment to her was that it was very good advice, although it was only about 25 percent operational in terms of what they really needed to do. They have a relatively small open economy, so the notion that they can ride the roller coaster of international financial disturbances is very difficult for them to accept. Their financial markets do not have the depth or resiliency that is necessary to allow them to go, for example, to a Canadian style of monetary conditions index and expect to have the sort of gyroscopic stability that the Canadian dollar has displayed. It is a real problem for them, and we should not underestimate it. Perhaps monetary union with the Japanese--[Laughter]",266
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I have a follow-up question based on some of the conversations at the conference. It was rather striking to a few people there, as it probably is to a lot of people in this room, that as compared with our involvement with Mexico and in IMF packages in general, there was no specific U.S. involvement in the Thai baht situation. I am sure that some people in this room view that as highly positive and other people may not. I wonder whether there is any perspective on this. Is this a new paradigm going forward that we do not get involved in these things, or is it solely related to how much the Thai baht is going to impact the United States? What is the thinking?",141
-fomc-corpus,1997,With respect to the baht?,7
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,"Ted, why don't you take a minute and review that.",12
-fomc-corpus,1997,"I think there are two points to be made. One--about which it would seem appropriate to inform the Committee in any event--is that the United States government was very concerned about this from the beginning. In fact, this issue came up last March and I think it is fair to say, as Governor Meyer can attest based on meetings he attended, that this is an accident that did not particularly surprise us. Once the pressure built in March, we were in the awkward position, partly because of U.S. political opinion, of not wanting to be perceived as pushing the Thai authorities into an action that I believe most observers thought was inevitable. The Thais and they have a very serious problem in terms of restoring confidence and the stability of the baht. The Treasury's position basically was to encourage the Thais to engage with the International Monetary Fund, which has a traditional view on these types of things, and to urge the Japanese to restrain from pouring money into Thailand until the Thais had fully arranged their loan from the International Monetary Fund. When it came time for the Fund to put forward its package with the augmentation of bilateral assistance--a quite unusual feature and one that the Fund tried to put together in connection with Mexico but could not find countries that were willing to take on the direct Mexican risk in the way the Asians are prepared to take on the direct Thai risk--the Treasury had to contemplate, in consultation with the Chairman, whether to participate in this arrangement. Post Mexico, as you may remember from our discussion of the renewal of the swap lines, the Treasury is under much tighter constraints about what it does with the Exchange Stabilization Fund than it was in the past. So, the Treasury would have had to jump a lot more hurdles to participate, and they have a number of other proposals before Congress that require political support. The latter include the approval of the New Arrangements to Borrow, which is on the legislative agenda, and the potential approval of an IMF quota increase. So, on balance, they said that they would like to participate for purely geopolitical reasons, but for internal political reasons it would be risky for them to do so. They have said they can anticipate some step-up in EX-IM Bank financing, but that financing is tied aid as opposed to the untied aid contained in the rest of this Fund package. The one thing that we and the Treasury have done is to put forward a proposal, which has now been accepted, to provide some backstopping in the form of short-term liquidity bridge financing. This was in the works from the beginning. We were sufficiently skeptical about the ability of the Fund to raise this medium-term money in Asia that we tried, and were largely successful, not to put this forward as an alternative but rather as a supplement to the basic package. Agreement on that package has now been reached by the G-10 countries and a few non G-10 countries. It is expected to be announced tomorrow or Thursday after the IMF approves the Thai program. That program provides a degree of political, if you want to put it that way, or international monetary support for the operation, but obviously not on the scale to which the Japanese and the Southeast Asian and other Asian countries have participated. Some people in Asia think that the Japanese they put up $4 billion and everybody else put up $6 billion, which is a higher fraction than we got with Mexico. On the other hand, as President Minehan knows, the Japanese were represented at our conference by Mr. Sakakibara, who observed that So, I don't think we've heard the end of this. For your information, this arrangement probably will be announced Thursday morning or late tomorrow afternoon and will include a conventional bridge loan--the amount will not be announced--that is intended to bridge to some World Bank and ADB disbursements that are part of the package. The BIS will be putting up the bridge loan money and will be backstopped as an agent by the Federal Reserve Bank of New York and ultimately the Exchange Stabilization Fund.",811
-fomc-corpus,1997,"Ted, have you had any discussions either with the Peoples Bank of China or the Hong Kong Monetary Authority about the political commitment to peg the Hong Kong dollar? It would seem to me that there would be a lot of vulnerability associated with making any change very soon.",52
-fomc-corpus,1997,"I think everybody in the room has heard in one form or another that they have a very strong political commitment. I was referring to the future. At this point, it seems to me that it would be very difficult for them to abandon the current policy. The Hong Kong dollar may be under considerable tension right now, but the right time to rearrange things would not be only two months after the hand-over, no matter what one thinks about the long-term viability of the current exchange rate regime. One also could say that they ought to pick some point of relative calm in the next five years and adjust their exchange rate regime. They will face some of the same kinds of issues as they do now concerning which way they should adjust, and if some of their economists were to say that they have the right answer, I would not believe them. Let me just add the fact that Hong Kong and China have participated in the Thai financing arrangement and they also are going to participate in the bridge financing; there's not much risk associated with the latter. It is essentially an operational risk--symbolic in my view of their perceiving themselves as having a big stake in stabilizing this situation for exactly the reason that they do not want to confront these difficult questions concerning the Hong Kong dollar right away.",256
-fomc-corpus,1997,"Ted, in the Mexican bailout, we gave them money to refinance their tesobonos, their dollar-guaranteed debt. What is the money being loaned to Thailand to be used for?",39
-fomc-corpus,1997,"You can use the word ""bailout,"" but I am not allowed to. The financial situation in Thailand is in some respects much more problematical than was the case in Mexico. They have something on the order of $38 billion in short-term obligations. Most are bank obligations, of which more than half are to Japanese banks. They also have a very large forward position that is approximately equal to their gross reserves. The amount of money being put up, about $16 billion, is relatively small. If we net out the forward position against the foreign exchange reserves, their reserves position is no better than Mexico's was. In a sense they are getting some $16 billion in this package against $40 billion of short-term obligations, which are mostly private-sector debts. In that sense the whole program is predicated on the assumption of credibility rather than a bailout because the money is not sufficient to allow all these short-term lines to run off. In the Mexican case, we had a package of close to $40 billion against essentially $40 billion of short-term bank obligations and tesobonos. We tend to forget that there were a lot of bank obligations in the Mexican case, but they were as vulnerable as the tesobono problem. In fact, in the short run Mexico did lose some dollars through the banking system, but they recovered quite quickly. So, in that sense that financing package was less problematic. Two elements of moral hazard are involved in this case. One has to do with the people on Peter's acreage who conduct their business, but do not book their positions, on that acreage. They are on the other side of many, but not all, of the forward liabilities of the Bank of Thailand. You could say that the system is financing the Thai central bank's ability to meet its commitments. It would be a tricky business if the Thais were to start to default on their foreign exchange contracts. It would change the nature of the business. The second element is a little more conventional. It has to do with what should be done with the obligations of banks in Thailand. The Thai central bank already has expended 16 billion--that's in baht, not dollars--to bail out domestic institutions whose operations have now been suspended. They have been quite successful in sterilizing it, but it has become in effect an obligation of the Thai government as a whole. It would be one thing to stiff bondholders and still another to stiff commercial banks that might be expected to come in and help support the Thai financial system as a whole. The goal is to keep the central bank's gross and net reserve positions from going to zero as they run down these forward obligations. I think that is the simple answer to your question.",549
-fomc-corpus,1997,Any further questions? President Melzer.,8
-fomc-corpus,1997,"Alan, I just want to make an observation on another issue for Peter. We are a fairly substantial holder of inflation-indexed Treasury securities in our portfolio, 5 percent of the outstandings or something like that. Looking down the road, as those securities become more useful as guides to monetary policy in terms of giving us insight into inflation expectations and real rates, I wonder whether we ought to be investing in that market. In other words, if the perception is that we are a significant enough player to affect how those markets trade, it may undermine the usefulness of the information. I don't expect an answer right now. I assume that our purchases have been on the same basis as they are for any other Treasury securities, but we may want to think about continuing to acquire those obligations as we go forward, perhaps as they become more useful to us from an information point of view.",176
-fomc-corpus,1997,"That's a very good thought. Let me make a few observations for the benefit of the whole Committee. First, we are treated as an ""add-on"" in the Treasury's issuance at the long end, so our purchases do not reduce what the Treasury issues to the public. Whether to buy such obligations at all was a bit of a dilemma for us. If the Treasury launches a new program and we do not buy any of the securities, there is a risk of a negative inference for the new instrument that the Treasury is marketing. There is also a risk that if the new type of security becomes a major vehicle for Treasury funding and we have not bought any such securities, we will need to buy them in order to keep the SOMA portfolio invested in the deepest area of the Treasury's issuance. On the other side of the dilemma, obviously, the notion of central bank purchases of inflation-indexed securities has a certain odd ring to it.",188
-fomc-corpus,1997,That occurred to me.,5
-fomc-corpus,1997,"But as I noted, we are not a net subtractor of market supply because the Treasury treats us as an ""add-on."" An additional reason for holding some of these securities was to have them available for our securities lending program. You inspired me to comment on that program at an earlier meeting, and I have told the Committee that we are trying to come up with a new program. I hope to come back to the Committee during the fall with some new ideas for that. It might well help the inflation-indexed market if we were in an improved position to lend securities to that market.",118
-fomc-corpus,1997,Is there going to be a forward market in those securities?,12
-fomc-corpus,1997,Not that I'm aware of.,6
-fomc-corpus,1997,I recently heard discussions concerning possible futures contracts.,9
-fomc-corpus,1997,The Board of Trade is reviewing the feasibility of such contracts.,12
-fomc-corpus,1997,"Yes, the Board of Trade is considering those, but when you said ""forward"" I thought about the over-the-counter forward market.",27
-fomc-corpus,1997,"""Forward"" is a more generic term.",9
-fomc-corpus,1997,The futures market is what the Board of Trade is working on.,13
-fomc-corpus,1997,We could always hedge our position. [Laughter],11
-fomc-corpus,1997,"As long as we publish our forward position, Mr. Chairman!",13
-fomc-corpus,1997,As a footnote? [Laughter],9
-fomc-corpus,1997,"There are futures markets in both the 5-year and the 10-year issues. Those issues are eligible to trade in those markets, but as of a week ago there had been essentially no trades--a few trades in the 10-year bond--and no positions. I believe the markets also obtained permission to trade options on the futures contracts, but there had not been any such trading as of a week or two ago. So, the markets are there but they are not being used.",98
-fomc-corpus,1997,"It's a complicated issue, but one that I believe is worth continuing to think about.",17
-fomc-corpus,1997,There is an anomaly in the central bank buying inflation-indexed bonds for its portfolio. Any further questions for Peter? I'm going to need a motion to ratify the actions of the Domestic Desk.,39
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"Without objection. Thank you very much. Mike Prell, you are on.",16
-fomc-corpus,1997,"Thank you, Mr. Chairman. In the opening sentence of the Greenbook, we characterized the economy as continuing ""to hum along in recent months."" As of last Thursday, we were able to report that hiring remained strong and that high-spirited consumers were once again spending heavily at auto dealers and other retail outlets. Now we can report that homebuilders are busy, too. According to this morning's release, which is summarized in the table you received, total housing starts were unchanged in July, as we expected. Single-family starts rose 3 percent, just a hair above our guess, but permits for such units were off 2 percent. On the whole, these data, along with the upbeat report from the homebuilders survey for early August, would seem to support our view that the housing sector is doing quite well at this juncture. Indeed, the basic point is that the indicators now in hand provide few direct hints that economic expansion will be limited to the relatively moderate path that we think is ahead. We are predicting that real GDP growth will average just 2-1/4 percent over the next few quarters--well below the 3-1/4 percent rate of the past year. And as you know, a slowing of at least this degree likely is necessary, given our assessment of the trend of potential, if we are to avoid a further intensification of pressures in an already taut labor market. Unfortunately, our near-term growth forecast hinges crucially on a judgment about the outlook for inventories--a very tricky element to predict. In a nutshell, we find it difficult to believe that the pace of accumulation in the second quarter was as high as the available statistics indicate. But, after discounting the data as much as we feel comfortable doing at this point, we are still left with a rate of inventory growth that is clearly unsustainable--around a 6 percent annual rate. We don't think there were major overhangs of undesired stocks at midyear, but there will be if the accumulation doesn't slow soon. Our guess is that it will, exerting an appreciable damping influence on GDP growth in the second half of this year. What could go wrong with this forecast? The possibilities are numerous. One is that the rate of accumulation could have been even lower than we have assumed, so that the near-term drag on output might therefore be less than we are anticipating. It's my intuition that this should be viewed as the more likely alternative to our Greenbook forecast than that inventory investment has been greater than we have assumed. But what if we have the rate of inventory investment in the second quarter just right? The possibility would still exist that businesses will want to maintain that brisk pace of accumulation a little longer because they are highly optimistic about sales prospects. However, I don't sense such a degree of optimism now; nor am I as concerned as I was earlier that final demand might seriously overshoot our forecast, in turn generating additional inventory requirements. In particular, we have been noting for some time the risk that consumer demand might yet surge in response to the enormous run-up in stock market wealth. Now that the national income accounts show the personal saving rate declining considerably over the past couple of years, the likelihood of such a spending surge would seem to have diminished. Moreover, for what it is worth as we look ahead, the flip side of this argument is that we can perhaps also be somewhat more confident that there will indeed be some demand-damping effect if the stock market drops, as we are still predicting it will. The wavering of the market recently might suggest we are on the right track in that regard, but we have been wrong before. There are uncertainties regarding other components of final demand as well, but I think our forecast is reasonably balanced overall. I won't take the time to run through all the sectors of demand, but Ted and I will be happy to answer any questions you might have. Before concluding, however, I would like to say a few words about the price outlook. We continue to believe that a pickup in inflation is brewing out there in a very tight labor market, but it clearly has not surfaced yet. As you undoubtedly noticed, we have lowered our forecast of price inflation again--this time by a couple of tenths of a percent through next year. The incoming wage and price indexes provided only a bit of the motivation for this adjustment: The ECI for June and the CPIs for June and July were no more than a rounding difference below our expectations. But we saw other grounds as well for some greater optimism about the price outlook. Notably, while we think the recent run-up in the dollar is unlikely to hold up permanently, it seems prudent to anticipate only a gradual erosion in its value over the forecast period. Consequently, we have anticipated a tad more restraint on inflation coming through the trade sector in coming quarters. Certainly, the auto market is demonstrating the efficacy of import competition as an inflation fighter, as the Big Three have cut prices to save market share. In addition, however, the prospects of competitive pressures damping inflation seem greater now because the inventory adjustment is likely to contribute to some slippage in the level of factory capacity utilization. Moreover, the revised NIPA data suggest that profits have been much stronger and that corporations have more cushion to absorb some increase in labor costs. Finally, there has been increasing evidence of a gradual downdrift in inflation expectations among individuals, for example in the Michigan SRC survey, which bodes well for the nominal wage outlook. Speaking of wages, in refining our inflation forecast, we obviously did not give much weight to a concern that surfaced occasionally last week when commentators were looking for excuses for the stock market decline--namely, that the UPS strike might signal a major shift in the balance of power in the labor market, with workers now being able to dictate the terms and conditions of employment. In particular, there was a fear that the outcome would be an erosion of firms' ability to use part-time and contingent workers at lower cost. What we have heard of the settlement does suggest that the Teamsters won some significant pay gains for part-timers and 10,000 promised conversions of part-time jobs to full-time over the next five years. But, pending receipt of more information about the agreement, it is far from obvious that what has happened would warrant a change in our forecast of only a gradual acceleration of labor costs.",1285
-fomc-corpus,1997,"The information that I heard on the radio this morning on the UPS agreement may or may not be correct, but it suggested wage increases of 5 or 6 percent. Since the firms that compete with UPS are, to my understanding, all non-union, is there a possibility that the wage cost change could result in a competitive situation for UPS that would significantly erode its very large market share of this industry and in a sense undercut what appears to be, at least on the immediate surface, a victory for the union? Is there any evidence that supports or refutes that proposition?",118
-fomc-corpus,1997,I don't think we know enough to answer that question at this point. It does appear that the gains for full-time UPS workers may not be spectacular in terms of hourly wages. I don't have a very good fix on what the part-time workers received.,50
-fomc-corpus,1997,I heard $4 an hour over 5 years on an $11 base.,16
-fomc-corpus,1997,I saw those figures and I'm not sure to whom they apply or whether the reference is to the minimum wage or some other measure.,26
-fomc-corpus,1997,I think it applies to the average wage.,9
-fomc-corpus,1997,"In that case, it would seem that there have been some significant gains.",15
-fomc-corpus,1997,"It is interesting that the head of the Teamsters Union was acknowledging that there would be job losses. The implication was that UPS will convert 20,000 part-time jobs into 10,000 full-time jobs.",43
-fomc-corpus,1997,"The company has been saying that they probably would lose some market share, at least for a time, because many firms would no longer want to rely solely on UPS. This strike is going to be a fundamental problem for them, at least until they can rebuild confidence among their customers. I have not heard the assertion that they would be priced out of the market by the wage agreement, but it was not known what the wage agreement would be when people were making these pronouncements. The company evidently has indicated, and as you said the union has confirmed, that there probably will be some layoffs. So, the situation is ambiguous. I don't know how much erosion of market share one might expect simply on the basis of the cost factor.",146
-fomc-corpus,1997,This is a labor intensive activity is it not?,10
-fomc-corpus,1997,At least at the distribution centers.,7
-fomc-corpus,1997,"To a considerable extent, yes, but there is also a lot of capital investment involved, particularly in the rapidly growing area of second-day service that UPS has developed. That is part of the story behind the changing employment mix. In order to implement this rapid delivery service, they needed to have a lot of people in concentrated periods to shuffle all the boxes and get them loaded onto airplanes. That is where the disproportionate rise in part-time employment apparently occurred. So, UPS evidently had some real problems in accommodating the labor union's desires; many of their employees were working two four-hour shifts with a three-hour break. The unions did not want to call that an eight-hour day. I do not know how these working-condition aspects of the negotiations were resolved.",151
-fomc-corpus,1997,"Mr. Chairman, a directly related development, at least in the New York area, has been the reaction of UPS competitors. When some shippers asked those competitors to provide a delivery capability, rather than increasing prices the competing firms asked for a two- or three-year agreement to assure the continuation of the new business. So, they were going for market share rather than short-term price increases.",78
-fomc-corpus,1997,"This could turn out to be a quite counterproductive labor contract for the Teamsters if a lot of events go in the wrong direction. They could end up with a significant loss of total jobs not only as the result of the conversion from part-time to full-time work, but also through a significant loss of market share because of the continuity agreements secured by UPS competitors and because of the effects of higher wages on UPS pricing. So, after the significant glow that the union is putting on the settlement, things could turn in the other direction and be most unhelpful for the union as far as I can see.",122
-fomc-corpus,1997,Unless their negotiating success leads to greater organizing success in some of the non-union companies.,18
-fomc-corpus,1997,One would assume that to be the result unless there emerges a perception that works against the union organizers and reduces their ability to unionize more companies. It is in part a question of timing as far I am able to tell. President Parry.,49
-fomc-corpus,1997,"Mike, I wanted to ask you a question about inflation forecasts that in the view of some have become particularly unreliable recently. We did an exercise--an out-of-sample forecast--that looked at the inflation forecast in our model. As one would have expected, it turned out that we were overestimating inflation, but the overestimate did not exceed the 90 percent confidence level. If we look back to, say, 1994-95 the errors actually were greater then and in the other direction. There were times, one in particular, when the 90 percent confidence level was exceeded in the sense that inflation was so much understated. My question is whether you conclude in terms of your model that that relationship has broken down, or do you find in a statistical sense that you cannot state that conclusion? We feel we cannot.",167
-fomc-corpus,1997,"I do not think, given the standard errors across most models, that one would say that the price equations have uniformly broken down. And I emphasize ""equations."" We tend to look at an array of models in our forecast work. Some perform better than others. Not surprisingly, the inclusion of import prices as one of the variables in the Phillips curve model would have produced much better results in the last year or so in terms of anticipating the deceleration that occurred in the core CPI. So, we would not throw these models out at this point. We would use them cautiously, though, as we always have, knowing that they are not very precise predictors in any given period. As a practical matter, we have not found an alternative to these models that we can turn to in our effort to come to grips with the problems involved in constructing quantitative forecasts.",171
-fomc-corpus,1997,"It strikes me as interesting that if we wanted to make a point that we are in some new era, we would not use these equations to support that conclusion.",32
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"Mike, I understand that you are assuming a significant decline in equity values next year. How important is that to your view of how things are going to transpire?",33
-fomc-corpus,1997,"As we emphasized, applying the normal lags that we found in estimating consumption functions with wealth terms, the time profile and dimension of the stock market movement that we have assumed suggest that we would not get much of a retardation in consumer spending from that drop in stock prices before the end of 1998. If we contrast this outcome to a counterfactual one where the market continued to climb at anything like the rate we've seen on average over the past couple of years, I suspect that we would have a considerably different consumption forecast for the latter part of 1998. Unless there is a significantly quicker effect transmitted through consumer sentiment in some way, which at the fringes is allowed for in our thinking, I think the story mainly is how robustly the economy will be moving in 1999.",161
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mike, I want to ask you about spending for durable equipment, particularly for technologically oriented durable equipment. The Greenbook says that this sector has become less cyclical, and I have two questions about this. One, I assume you mean it has become less cyclical since the last recession. And, second, I was wondering what the implications are for overall durable equipment spending. Does the growth of this category mean that durable equipment spending is becoming less cyclical more generally?",94
-fomc-corpus,1997,"I don't want to convey the notion--and I hope we didn't state it quite that way--that we believe the durable equipment sector is systematically less cyclical than it might have been in the past. Our assessment at this juncture is that there seem to be in train some changes in technology of a dimension such that the demand for those products will outweigh whatever drag there will be from the general flattening of profits and cash flow and the deceleration in output. We would not see the same kind of impetus in some other areas of capital spending such as basic industrial equipment. So, we have a continuation of quite rapid growth in real computer outlays and fairly substantial growth in telecommunications equipment expenditures as measured by the national income accounts. The effects of this, as I think we noted in a footnote in the Greenbook, on the growth in spending for overall producers' durable equipment are invisible in this forecast relative to the previous forecast because of the chain weighting. This means that the weights diminish as the prices of these goods fall rapidly and this balances out the higher real growth that we anticipate for this component. But at this point we see very substantial reductions over the near term in the cost of various components of computers and very strong continuing demands for equipment in the networking area. There seems to be enough innovation going on here that people are going to find that their equipment is becoming obsolescent, and they are going to be replacing it at a relatively fast rate for a while longer.",296
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,You noted the dependence of your forecast on the assumption about inventories. Is there any way of knowing how much of this inventory accumulation is domestically produced versus imports?,32
-fomc-corpus,1997,"We saw considerable strength in imports in the second quarter in a number of categories in the consumer goods and machinery areas, and that suggests that imports may have contributed to the very substantial increase in inventories in that period. As we look to the third quarter, we anticipate that some of the fallout in inventory accumulation will be mirrored in a more modest increase in imports in the merchandise category.",75
-fomc-corpus,1997,"We do estimate a synthetic split in inventories between domestic and imports. My recollection, and I may be wrong on this, is that the inventory accumulation that occurred in the second quarter was predominantly in domestically produced goods.",44
-fomc-corpus,1997,I don't recall whether there was any significant change in trends in those estimates.,15
-fomc-corpus,1997,I don't think it was a trend; I think it was a second-quarter development. I will check on this and report on it when I get the information.,32
-fomc-corpus,1997,"We do not yet have the June trade data. Taking the inventory data to give us a hint about what is going to happen to the trade data, one would expect imports to tail off. That would occur especially in the consumer area because we saw such a big rise in imports of consumer goods in April and May. Understanding all of this is a bit puzzling. Our forecast tended to level off such imports in June and into the third quarter, but there is a tension in the forecast as a whole on exactly this point and how this should be put together.",112
-fomc-corpus,1997,"There is, of course, a lot of noise in the data when we move from the trade account to inventories.",23
-fomc-corpus,1997,"There has been some shift in the seasonal factors over the years and to some extent earlier this year, especially in the consumer goods area. One would not expect Christmas to come in April, if I may put it that way. It is not clear to what extent the seasonal adjustments may have become unreliable, but it would not be a surprise if the seasonal adjustment of imports were another source of the noise in these estimates.",83
-fomc-corpus,1997,"Further questions for Mike? If not, who would like to start the Committee discussion?",17
-fomc-corpus,1997,"Mr. Chairman, the Eleventh District economy, like the national economy, has been exceptional. I guess most of you saw the notice from the Shadow Open Market Committee. For the first time since 1974, they are going to skip a meeting, and the reason they gave was that policy and the results of policy have been so good that there was nothing for them to talk about. In our District, there is not much new to report. We continue to have faster employment growth than the nation. Since the beginning of 1995, if we use January 1995 as the base, Eleventh District growth is second only to that of the Twelfth District. The fall in energy prices that we have had in our neck of the woods has not been a problem; it was anticipated. Drilling is being constrained by an 18-month backlog in deliveries of drilling pipe; energy firms cannot get enough pipe to do the amount of drilling that they would like. Our labor markets remain tight, and the job churning seems to have picked up. It may seem tighter to me because our Bank has been experiencing some of the turnover. We have lost several key professional people recently to expanding firms in the Dallas area. But surveys indicate that workers are being found somewhere, and there is no inordinate upward pressure on wages, at least in the statistics, even though anecdotally we hear a lot of stories. I would not be surprised under these conditions of prolonged labor market tightness to see our labor force participation rates hit new highs soon. Prices appear to be constrained. House price inflation in our area is about a third of what it is in the nation. Computer chip prices have fallen more than the high-tech firms had expected, and recent attempts to raise petrochemical prices have failed. An exception to this price picture in our area is commercial real estate. Office rents in Dallas rose 9 percent in the first half of the year, and prices for Dallas office buildings are up about 50 percent from a year ago. Warehouse prices are up about 40 percent, but there is a lot of building going on to provide new supply. So, we do not expect those kinds of numbers to last all that long. Turning to the national economy, as everybody knows, the string of consecutive PPI declines is now up to 7 months. I understand that the 0.7 percent increase in the deflator for gross domestic purchases in the second quarter is the smallest since 1961. The core CPI increase at a rate of 2.4 percent in the first 7 months of this year is the lowest since 1965. The 4.8 percent unemployment rate is a 24-year low, and some measures of consumer confidence are at about their highest level since 1952. Now that the UPS strike is apparently over, there is nothing obvious on the horizon to spoil the party, although I suspect we will find that the strike has done a good deal of damage in the past couple of weeks. The settlement may go a long way toward undermining the wage flexibility that we started to get in labor markets with the air traffic controllers' strike back in the early 1980s. Even before this strike, it appeared that the secular decline in real wages was over, although productivity gains appeared to be sufficient to keep unit labor costs under good control. To summarize my views, I would say that I consider myself a new paradigm optimist. [Laughter]",698
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, the New England economy--",9
-fomc-corpus,1997,You have to label yourself before you go on.,10
-fomc-corpus,1997,"Oh, okay. I have to think about that.",11
-fomc-corpus,1997,Peter has set up a little box for each of us.,12
-fomc-corpus,1997,"I hate to call myself old anything. [Laughter] I think I'll wait on that. The New England economy continues to expand steadily. Employment growth is roughly the same as that for the nation, and it is above New England's long-term trend. Massachusetts is a star performer, while Rhode Island lags behind. The retail sector in New England is experiencing fierce competition in addition to somewhat slower growth overall than the nation. All our retail contacts think that the New England economy is quite strong. However, in a number of cases, their own results do not reflect this. In contrast, the manufacturing sector is doing quite well. Although increases in employment are minuscule, they are there. Employment in manufacturing increased over the past year for the first time in a long time. I assume that a lot of this is due to the Boeing merger with McDonnell Douglas and the demand for aircraft worldwide. The demand for aircraft engines that are produced in the First District, at least in part, and for aircraft parts is quite strong. We also have a local auto-related manufacturing industry, and demand among the firms in that industry varies depending on which auto company is being supplied. Suppliers to Chrysler reflect a mixed picture, and reduced production of the Taurus model has affected suppliers to Ford. On the other hand, a fabricated metals company reports fantastic business because General Motors is using its product. The regional unemployment rate was 4.2 percent in July, and that rate puts our region back, after several months, below the national average. A number of firms are responding to the tight labor markets with targeted compensation schemes. We see a lot of reports of individual workers' salaries going up by 20 to 25 percent, but these salary increases are being applied so selectively that the overall rise in compensation packages amounts to a small fraction of total payroll, somewhere between 2 and 3 percent. Some firms also are using signing bonuses to attract workers. In general, firms seem to be contending successfully with these tight labor markets, although one of the Bank's directors recently noted that turnover had increased so much that training costs had become an issue. While both the unemployment rate and the anecdotal evidence indicate that labor markets are tight, help-wanted advertising in the region remains very low, suggesting that employers may not be using traditional means to attract workers. Firms continue to view increasing their prices as an impossibility. One person, who may have been talking to Peter, said in commenting on customers' resistance to higher prices that ""the paradigm has changed."" Despite their inability to raise prices, a number of firms indicated that margins are being maintained or even improved. There are exceptions to this benign price picture. One is the rates for Boston hotel rooms that have risen 12 percent in 1997 in response to a banner year for tourism. Another exception involves commercial real estate in a number of cities in the region. The Boston real estate market has been described, as I have mentioned before, as being as hot as a firecracker and as one of the three or four best real estate markets in the country. The office market is especially strong, with rents up 10 percent in the past year and even industrial rents are rising. Other cities are seeing a less dramatic improvement. Hartford still lags behind but is starting to appeal to some investors because its space is so cheap. The Conference Board's index of consumer confidence provides an interesting perspective on the regional economy. The index increased slightly in July from a fairly high June. However, the assessment of current conditions soared while future expectations plunged to levels not seen in two or three years. There may be a sense in New England that things really are too good to last. On the national scene as well, trends have been almost unbelievably good. We, like the Greenbook, have begun to question our assessment of capacity measures, especially in labor markets. We have trimmed our perceptions of likely inflationary growth over the next year, though we believe there certainly is the potential for the economy to be stronger and for the rate of inflationary growth to exceed the rather mild uptick predicted in the Greenbook. In particular, I think conditions for residential investment seem a bit brighter than the Greenbook suggests, and we would not predict that net exports will have as benign an effect on prices due both to dollar depreciation and our somewhat stronger assessment of foreign inflation prospects. On the whole, however, we have no major differences with the Greenbook. Thank you, Mr. Chairman.",898
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. Our regional economy continues to expand at a modest rate, though growth in the District seems to be slower than that for the nation due in part to labor supply constraints. As I have been reporting for some time, our labor markets are very tight, with lower unemployment rates and higher employment-to-population ratios than the nation's. In fact, last year the employment-to-population ratio for our five states averaged 3 percentage points above the nation's 63.2 percent, and over 70 percent of the working age population was employed in Iowa and Wisconsin. Nonetheless, the employment cost index for the Midwest has not risen appreciably faster than the nation's, although we have received numerous anecdotal reports of intensifying wage pressures for entry-level and certain skilled workers. Next Monday, August 25, Manpower will release its latest survey on hiring intentions, so this information should be treated as confidential until then. The survey indicates that the demand for workers continues to be very strong. In fact, the results show the highest fourth-quarter hiring intentions since 1978, both nationally and in the Midwest. Manufacturing activity in the District continues to expand at a slower pace than in the nation. Strong activity continues to be reported in industries such as cement, gypsum board, medium- and heavy-duty trucks, agricultural and other heavy equipment, and steel. However, there are a few hints that business is slowing in some industries, though all of my contacts believe that the slowing is temporary. For example, noted that for the first time in several years there was some softening in demand at his firm's steel distribution subsidiary that caters to small manufacturers. Another contact reported slower growth in orders for a variety of products including food equipment for restaurants, hotels, and supermarkets as well as for decorative ceramic tiles in the construction industry. in the trucking industry described activity as slower than normal for this time of year, but he said his customers expect business to improve significantly in the fall. Manufacturers and retailers in our District continue to report that competitive pressures inhibit their ability to raise prices. One report to the contrary relates to our discussion at the last meeting when I indicated that a large paper company was reducing capacity by temporarily closing two plants. In July, that company pushed through its first price increase since 1995, which other firms in the industry followed in August. The firm referred to this increase as ""price restoration,"" and it emphasized that the increase still left prices 30 percent below their peak in 1995. In terms of consumer spending trends, retailers indicated that sales over the past month or so were generally at or slightly above expectations, helped in part by more seasonable weather and the use of promotions in some cases. Incentives apparently also contributed to the sizable pickup in auto and light truck sales last month. Reports suggest that light vehicle sales got off to a good start in August, although probably not as strong as in July. Part of the recent sales strength may be due to a change in end-of-model-year allowance policies at General Motors. Credits to dealers are now targeted to slow-selling models rather than across the board, and they were initiated in July of this year rather than October, which had been GM's traditional policy. Turning to the national outlook, our forecasts of real growth and inflation have both come down a bit since our last meeting. However, the big question is still whether we will see the increase in inflation that most of us are forecasting for 1998. Labor market conditions suggest that we may. Of course, labor markets have been tight for some years now without a major pickup in labor costs or inflation, but they have become even tighter in the past few quarters. Moreover, the fundamentals appear to be in place for continuing real growth at trend rates at least. Consequently, the labor markets should remain tight for the foreseeable future. Fortunately, we have had a great deal of investment in recent years, and the resulting increase in productive capacity should at least lessen inflationary pressures. We may also be entering an era of significantly faster productivity growth; I guess that is part of the new paradigm. But the most recent official statistics do not provide much evidence of this. Moreover, even if the data become more favorable, it will take quite some time before we know with any certainty whether the economy has changed in such a fundamental way. Thus, given our current understanding of the economy's growth potential, the most reasonable forecast is one of rising inflation. Of course, the upward tilt to the inflation forecast is relatively modest, but in my view the risks are still clearly on the upside.",917
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, the Twelfth District's rapid economic expansion has actually gained momentum in recent months. Payroll employment grew by 3.2 percent at an annual rate in the second quarter. Growth in durable manufacturing employment accelerated between the first and second quarters as Boeing's expansion combined with the continued strength in high-tech industries and a recent resurgence in wood products industries. Construction employment growth also accelerated in the second quarter. Districtwide, this sector expanded nearly 9 percent on an annual basis during the first half of the year. I might note parenthetically that in the last year construction increased 9.2 percent in California, generating more than 46,000 jobs, and 14.9 percent in Nevada. Normally, I would say that a percentage increase that large is unsustainable, but when I discuss the Nevada economy, I do not use the word ""unsustainable."" The second-quarter acceleration was evident in most District states. Payroll employment in each of the District's growth leaders--Nevada, Arizona, Utah, Washington, and Oregon--grew by 4 percent or more at an annual pace. Furthermore, the unemployment rate has fallen this year in all District states except Hawaii, and labor markets in virtually all major urban areas are extremely tight. The impressive turnaround in California's economy has continued this year; payroll employment grew nearly 3 percent at an annual rate during the first seven months of the year. Although the pace slowed in recent months, the state's unemployment rate continued to fall. Other California economic data also point to a continued rapid expansion. Unexpectedly strong growth in state income tax receipts recently led to a substantial upward revision in state government revenues. Also, the recovery in residential real estate markets has spread to most areas of the state, and housing prices statewide are back on the rise. Turning to the national economy, recent data suggest that over the next year or so, real GDP is likely to grow at a rate close to the 2-1/4 percent pace now reported for the second quarter. Like the Greenbook, I think underlying demand may be somewhat stronger than this in the near term, but firms are likely to satisfy part of the demand out of inventories. While the economy is not likely to grow much faster than its trend rate over this period, conventional measures, as we all know, suggest that it is already operating at relatively high levels of resource utilization. Thus, there is still a risk that inflation may trend upward in the future. Of course, recent data on wages and prices have been highly favorable and now actually show a modest downward trend. While part of this can be explained by factors such as the higher dollar, part remains unexplained by conventional relationships. Is inflation being held down by temporary factors such as unusually small increases in benefit costs or higher worker insecurity or is the change of a more permanent nature because it reflects developments such as an increase in trend productivity? Taking these factors into account, my best judgment is that, while remaining low, underlying inflation is likely to pick up a little over the next six quarters. For instance, our forecast shows measures of core inflation going up between 1/4 to 1/2 percentage point between this year and next. Finally, I would classify myself as an old paradigm, newly found optimist. [Laughter]",661
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. As far as our District goes, not a great deal has changed since our last meeting, so I will summarize developments and highlight a couple of them for you. Generally, we have a robust economy that is growing modestly; we have strong production and increased sales overseas. Our manufacturing sector is operating at high levels of capacity, including the airline industry with Boeing and the auto industry with GM and Ford. The energy companies are continuing to expand in the District and are experiencing some production backups because of supply constraints. Bank lending picked up in July, with banking contacts reporting a fair amount of activity. With regard to the agricultural sector, you may have read about our excellent wheat crop. Kansas will have a record harvest of just under 500 million bushels, and that comes after a spring forecast of a decline in production. There is some pressure on the corn crop and current estimates are coming in a little lower than earlier forecasts. How that will turn out remains to be seen. One of the topics about which we have talked a lot at these meetings is the cost of worker benefits. We had interesting conversations with an executive of They are estimating that premiums probably will increase by 3 to 8 percent in 1998, partly because capacity is being wrung out of the system and demand continues to increase. We are seeing some indications of moderating growth in our District. Our employment growth has fallen over the last two months for which we have data, the last one being June. We do not know if that slowing is partly due to the fact that we have such low unemployment rates to begin with. The rate is 2 percent in Nebraska and around 4 percent in some areas that are experiencing our worst unemployment. Also, manufacturers are saying that while their production is still expanding, the growth is moderating. Some of them are rethinking their projections and are forecasting more modest growth going forward. In construction, we have seen some moderation in our region, especially in housing. The latter is concentrated in the mountain areas around Denver and Albuquerque, and it may be in part the result of a slowdown in in-migration. However, the moderation in those areas is being offset to some extent by pickups in the eastern parts of the District. Overall, District business activity is good, but there are some mixed signals and slowing in some areas. On the national front, our projections of GDP and inflation are similar to the projections presented here by the staff. We do not have any real disagreements. We currently see the economy expanding at a pace a bit over potential, with only slight increases in inflation. I will end with that, Mr. Chairman.",535
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The economic picture and outlook for the Southeast also have not changed very much over the last seven weeks. We still have a very favorable and balanced picture, mirroring and reinforcing what we see at the national level. The Southeast is still ""humming along,"" Mike. Picking up on Cathy Minehan's comments on tourism, our region's hospitality and tourist industry, which offers some insight into discretionary spending, is operating at or near capacity in most of our major tourist cities. Future bookings are well ahead of a year ago. Even with the new capacity that has come on line--and more is coming--hotels are offering fewer off-season discounts, and there is no noticeable impact on occupancy rates. Cruise ships and airline flights in South Florida are essentially fully booked, so if anyone is planning a speech in South Florida, make your reservations early! We, too, see continuing evidence of some slowing in residential construction activity, but one must look beyond very high levels of activity in cities like Atlanta. Expansion of construction activity in the commercial sector, mostly office buildings and hotels, is taking up some of the slack. But even with speculative prices still holding up, leasing activity has slowed somewhat in those sectors and we expect announcements of new projects to moderate in the period ahead. Manufacturing activity is more difficult to read, but it appears to have recovered a little since the last meeting. While our latest regional manufacturing survey showed that current production had eased slightly, shipments, new orders, back orders, employment, and the workweek all rose in the last report. Also, picking up on Bob McTeer's comments, oil and gas activity continues to be strong in Louisiana and along the Gulf Coast, with the number of working rigs remaining high. Orders for new ship construction are booked several years out. Labor markets in our region also remain tight, an old and familiar story by now. Pockets of special tightness include information technology and skilled crafts in areas like marine and oil-related work. At the same time, we still cannot find any evidence of a systematic run-up in wages, and wage increases reportedly are continuing to hold below the 4 percent level. In fact, in the paper industry told me last week that his company is continuing to get concessions from its unions to protect jobs at lower productivity plants. Employers are telling us that they are not spending significantly more to pay workers but are spending considerably more to recruit, screen, and train new employees. Our surveys have turned up no new evidence of unusual developments in prices. While our latest manufacturing survey indicated that prices received increased moderately, 75 percent of the respondents in that survey expected no change in the period ahead. Prices paid eased slightly, with 70 percent reporting no change. Consistent with Tom Hoenig's comments, we too hear with greater frequency reports of sharper increases in health care costs. One area of special concern in our region is the Florida citrus industry where growers are battling the medfly for the first time in many years. While current estimates of damage are only in the $20 to $26 million range, those estimates are doubling every couple of weeks, and we are mindful of the last experience in California where losses hit some $200 million. So, we could see some run-up in fruit prices late in the year. Our view on the national picture is very similar to that laid out in the Greenbook and discussed by Mike Prell this morning. We, too, expect a slower second half of 1997, with GDP growth at perhaps 2-1/4 percent and a similar pace in 1998. We also think it likely that we will lose some ground on inflation over the coming period. My feeling is that we need to remain vigilant, and with the risks still skewed somewhat to the high side an anticipatory anti-inflationary policy move in the future is still quite likely. Thank you, Mr. Chairman.",787
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The central question on the economy that we face this morning is much the same as the question we faced at the last meeting and at earlier meetings: Is demand reviving as we move into the third quarter or not? At our Bank, we tried to analyze the recent information and data that we have received as closely as we could in the context of that question. Our sense is that activity did pick up fairly markedly in our region in June and July, especially in the retail and services sectors. As some of you may know, we conduct a couple of monthly surveys, one on the manufacturing sector and one on services and retail. In July, our indexes for service-sector employment and wages both posted their strongest gains since we started putting these indexes together about four years ago. The results of the latest manufacturing survey were less robust overall, but there are some indications in that survey of firmer wages at plants and factories. Prices for finished goods and manufacturing inputs are up about a percentage point from the almost negligible increases that had been registered consistently for about 18 months or so before this. Overall, we do not see any signs of significant weakness in our regional economy; even West Virginia is doing well. On the contrary, we are impressed by the basically across-the-board indications of stronger activity and at least some modest upward pressure on both wages and prices. On the national picture, the Greenbook projection is certainly reasonable. Like a number of others around the table, we still think that the risk of error in the projection is moderately tilted to the upside. The major reports that we have received since early July--the jobs report, the Purchasing Managers' Survey, the reports on retail sales and automobile sales--all suggest, at least to me, that the economy is poised to put some additional upward pressure on our labor resources. I was especially interested and happy to see that this month's Greenbook and Bluebook both included for the first time charts comparing the regular 10-year Treasury rate with the rate on the new inflation-indexed note. The first page of the Bluebook interprets the gap between the two yields as a reflection of longer-term inflation expectations. I hope the staff will continue to provide that information. As we gain more experience with it, I think it will be useful in both our economic analysis and our policy analysis. As many of you know, it has been used by the Bank of England and included in their inflation report for some time with good results. A couple of quick observations on the behavior of this indicator in recent weeks: I think there is both good news and bad news, or at least not-so-good news. The good news is that the current gap indicates an expected trend CPI inflation rate of about 2-3/4 percent. If we subtract the 1 percent Boskin Commission bias from that, the true expected trend rate of inflation is somewhere below 2 percent. That is very nice, and I will eat a little crow and say that a year or so ago I would not have expected this result. That kind of inflation expectation is close to what I think we need to have to be able to say that inflation expectations are no longer a major factor in business and household economic decisions, which has been our working definition of price stability for some time now. I do not want to understate this outcome; it is good news even for inflation hawks like me. The bad news, or the not-so-good news, is that this indicator has been very volatile recently. It was at about 3 percent in early June and fell to about 2-3/8 percent in late July, but it recently has risen again to about 2-3/4 percent in the wake of stronger-than-anticipated economic reports. To me that kind of sharp, short-run reaction of inflation expectations to just a couple of monthly economic reports indicates that, although we certainly have had an encouraging increase in our credibility in recent months, we still do not have a level of credibility that I would regard as fully consistent with price stability as we have defined it. Moreover, apart from the volatility, the recent increase in inflation expectations in that indicator is a signal that bears watching. Last month Bob McTeer suggested, quite reasonably I thought at the time, that we are winning the war against inflation but having trouble accepting our success. I thought about that afterwards, Bob. It th made a lot of sense to me and it is obviously a very attractive idea. Around July 28 I was about to relax, declare victory, take the day off, go to a ball game, and maybe even drink a cold beer, but then we got these numbers and the reaction to them. So, I don't think we want to get too comfortable yet. As far as the paradigms are concerned, I would characterize myself, Mr. Chairman, as an old paradigm optimist because I know that eventually we will do the right thing, whatever that might be. [Laughter]",1003
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Conditions in our District have not changed much in years in the sense that the moderate and steady expansion that has been under way continues. Employment has continued to grow and there are some anecdotal indications that employers are going to new extremes to find workers. Construction activity is healthy, both residential and commercial, and certainly the major contractors in our District, of whom there are a decent number, are quite optimistic about the outlook. Perhaps the only prominent soft spot in the District is tourism, which is experiencing a disappointing season. I don't have an explanation for that. It may be partially weather related, but that is the one sector that jumps out as a departure from a generally healthy economy. Wage and price pressures are generally absent. People have been commenting particularly favorably about nonlabor costs because they are not seeing increases in input prices. The one exception is in the health care area where we have had a very competitive market for some time and have enjoyed small increases or even declines in costs. People in the health care industry have been suggesting with more force than usual that the favorable trend may be over. As far as the national economy is concerned, my impression of the Greenbook forecast is that it is very finely balanced. It projects modest growth and what I would describe as relatively low inflation. In my view, it would not take much to tip the economy off that generally positive course one way or another. Abstracting from fluctuations in inventory investment over the next quarter or two, my view is that we will see somewhat more growth in the real economy than the Greenbook envisions and somewhat more inflation as well. But whoever is right about that, it seems to me that the risks in the outlook have not changed significantly in recent months; they continue to lie on the side of greater inflation, given where we are cyclically. Thank you.",372
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The pace of economic activity in the Philadelphia District is picking up somewhat in the third quarter after moderating in the second. Labor markets are tight, with some upward pressure on wages. Businesses, however, are still finding ways to offset higher wage costs. Inflationary pressures therefore remain muted. Manufacturers, retailers, and contractors are all showing moderate increases in business activity. Loan volumes are up slightly. Firms generally are doing very well in maintaining their cost structure. All in all, my impression is that the District economy is growing steadily without noticeable excesses. This steady growth environment is particularly helpful in alleviating some of the long-standing social problems that one finds in a large northeastern city like Philadelphia. Turning to the national economy, there does appear to be some pickup in final sales during the current quarter. The amount of inventory accumulation is uncertain and quarter-to-quarter growth rates are therefore uncertain as well. More basically, the economy appears to be growing moderately, with tight resource usage. Conventional economic models point to upward price pressures, as they have for some time. They may be right or they may be wrong, but in the meantime actual signs of an inflationary buildup are shadowy at best. There still is a strong case for us to wait and watch.",256
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. The Eighth District economy is still growing at a moderate pace. District firms report continued growth in sales and employment, although tight labor markets throughout the District are a limiting factor. Average unemployment, at 4.4 percent, remains below the national rate. District payroll employment, which earlier had increased much faster than nationally, grew only 1.4 percent in the year ending in June compared with 2.1 percent for the nation. Estimates of District automotive production are down about 4-1/2 percent for the third quarter and .2 percent for the fourth quarter from high levels a year ago. Residential construction activity also remains below last year's high levels, though some bankers have noted a pickup in mortgage demand recently. Commercial and consumer loan demands are described as steady. In agriculture, crops are in reasonably good condition despite the hot, dry weather that has prevailed in most of the region, and an above-average harvest is expected in most of the District. Regarding the UPS strike, concerns have been expressed by District contacts about the long-term ramifications of the strike for future labor market bargaining, including the ongoing UPS dispute with its pilots and the Teamsters contract with less-than-truck-load carriers, which expires April 1 next year. The nation seems poised for another year of above-trend economic growth despite the strike and some slowing in the second quarter. Rising real wages, high consumer confidence, and a recent surge in consumer expenditures, especially for housing and big ticket items, all suggest that real GDP will continue to grow above trend in the second half of 1997. Although labor markets have become extremely tight, there is some puzzlement as to why the employment cost index has been on a downward trend. An alternative measure, compensation per hour, has displayed a more distinct cyclical behavior, slowing to 1.4 percent for the year ended in the second quarter of 1994 and rebounding to 3-1/2 percent over the last four quarters. The compensation per hour measure picks up changes in labor costs when the composition of the labor force changes as well as cost increases due to promotions and bonuses that can be missed by the ECI. We are hearing an increasing number of reports from our District contacts about the need for hiring bonuses and other special compensation arrangements to attract the talent that they require. The broad monetary aggregates continue to grow at or above the upper limits of their ranges. M2 growth, at an annual rate of about 5 percent and given its recent velocity pattern, is roughly consistent with projected nominal GDP growth. The good news on lower inflation in 1997 is welcome, but as we all know it is partly an illusion. The low CPI inflation in 1997 reflects the moderation of energy prices after a surge in 1996. Also, people seem largely unaware of the technical BLS adjustments that will shave 1/4percentage point from the 1997 average. If this 1/4 point is added to the last 12 months of CPI inflation, the rate is back around 2-3/4 percent, which is about the average for CPI inflation over the last several years. The continued emphasis on the CPI less food and energy can be misleading in identifying underlying inflation trends. Recent research suggests that the CPI itself is actually a better predictor of future inflation than the ex-food-and-energy measure. If we want to eliminate the month-to-month noise in the data, rather than focusing on the ex-food-and-energy measures we can simply average CPI inflation over a longer period or we can look at a measure such as the median CPI. The median CPI averaged over three months has remained around 3 percent at an annual rate over the first seven months of 1997, essentially the same pattern as in recent years. I guess the question is whether that is good enough. Until we can agree on a common yardstick, I don't know how we as a group can ever reach agreement as to whether we are achieving our objective of price stability. That's why I think it is so important that we continue the discussion on inflation measures that we began at the last meeting. Finally, although we tend to assume that there is not much of a constituency for price stability, we should not underestimate the cost to our credibility and the potential public backlash if we permit trend inflation to rise. In fact, we might be surprised at how much support there would be for locking in the lower inflation we have seen this year, in view of how well the economy has performed under conditions of relatively low and stable inflation. Thank you.",916
-fomc-corpus,1997,Vice Chair.,3
-fomc-corpus,1997,"Mr. Chairman, the Second District economy continues to underperform the nation's to some extent, but it has been doing somewhat better. The region's labor markets remained steady in the second quarter. New Jersey's unemployment rate edged down to 5.4 percent in July, reversing its little uptick in June, but it is down 0.7 point from a year ago. New York State's unemployment rate remained fixed at 6.3 percent for the first six months of this year. New York City's rate climbed to 10 percent in June, up from 9.6 percent in May. That is the highest level since early 1994. It does appear, however, to be the result of an upward trend in labor force participation. Most major retailers in the region report that sales were above plan in July. Compared to a year ago, same store sales gains for July ranged from 2 to 6 percent. Virtually all the retailers surveyed report satisfactory inventory levels, helped in part by successful summer clearance sales. Our retail contacts report little or no change in merchandise costs and some deflation in selling prices. Retail wage pressures generally remain subdued. Residential construction activity retreated modestly in the second quarter, but the regional variations persisted, with upstate New York weak and the New York metropolitan area relatively strong. The commercial real estate markets in and around New York City continued to tighten in the second quarter, as reflected in brisk leasing activity and declining office availability rates. The reports from our regional purchasing managers indicate some slowing in manufacturing activity in July, especially in the upstate area of New York, again the problem part of our District. Consumer price inflation in the New York metropolitan area averaged 2-1/2 percent during the 12 months ending in July, up a little from the year ending in June and just a tad above the national rate. New York State legislators finally approved the fiscal year 1998 budget. The approval came four months later than the deadline under New York State law, a new and not particularly enviable record. On the national level, we see the economy rebounding in the third quarter and we draw some confidence in that forecast from the strength in retail sales and in the sales of light vehicles in July. We see the economy subsequently slowing to its potential growth of about 2 percent. We see reasonably balanced risks to our forecast of real economic activity, but there is some downside risk in the next few months if the ratio of sales to inventories, especially in manufactured goods, should encourage manufacturers to cut production back somewhat. That ratio is low by historical standards, but it's a bit higher than it has been in the recent past. We share the disappointment of many that the recent NIPA revisions did not demonstrate a greater growth potential for the economy. The revisions helped explain the good performance of inflation because of the downward revision to unit labor costs, but it leaves us with the large question of how long the low growth rates of wages and benefits will continue. There is also a question of how long the favorable effect of a strong dollar can continue to be helpful to our inflation performance because of both its direct effect on import prices and the discipline it provides to domestic manufacturers. So, as regards our inflation forecast, we believe that the rate of increase in the prices of core goods will remain subdued, but we are somewhat more concerned about increases in the prices of services where competition is less severe and more local. We think it is possible that such prices will creep up. The reason for that is above all because we think the economy is at present operating about 2 percentage points above what would appear to be potential GDP. Therefore, we have some concern about the possibility of rising inflation even though our forecast has the economy growing in line with the rate of increase in its capacity. So, we are forecasting a rise in inflation, but we are not terribly certain about the timing; the forecast has the rise taking place in the latter half of 1998 and as we go into 1999.",806
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. In the seven weeks since we last met, I have been doing my best to search the data and read and listen as carefully as I could to see if I can come up with any convincing information that indicates things are beginning to change. Other than various straws in the wind, I just cannot find any. There certainly are some straws in the wind. Al Broaddus mentioned some important ones that would indicate some strengthening in economic activity, and others have as well. But it should be mentioned that there also are some straws in the wind blowing in the other direction that would indicate a possible slowing or at least not very much acceleration in economic activity, and possibly some easing in inflationary pressures. The dollar has continued to strengthen on balance; long-term interest rates have eased on balance; the yield curve is flatter and lower; the PPI has fallen for seven straight months; inventory growth has been too strong; consumer sentiment is still quite high but is off its peak; gold prices--for anyone who is interested--are lower; capacity utilization is down a little; and non-oil import prices are expected to continue soft. There are straws in the wind that are swirling, I would guess, in all directions. I have no intention whatsoever of climbing into any of Peter Fisher's boxes, [Laughter] but I must say that we should be careful about making too much fun of the so-called new paradigm pessimists because I don't think that deflation is completely impossible. All in all, the message to me is that the risks are probably still moderately to the upside, and we should, and will certainly, stay very alert. But basically, it is steady as she goes.",347
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I have always been an optimist. I think I was born that way, but I find myself stuck between the old and the new paradigms at the moment and not helped very much by the flow of data. The good features of this economy have been emphasized by all of us for several meetings in a row. I believe we are now beyond the point where we are just getting short-run good news. We have had a solid economic performance for long enough to be quite reassured in a basic sense about the strength and competitiveness of the U.S. economy, and that is a good thing. The continuing tight labor markets, without accelerating inflation, are terrific. We certainly have lots of evidence of the increasing competitiveness of U.S. industry at home and abroad, which is reassuring. The fact that exports have held up so well in the face of the high dollar is really a quite good thing. We have had continued and balanced growth across regions and industries. It's getting harder and harder to figure out with our eyes closed who is talking around this table because the reports are quite uniform. On top of that, we have generally good news in agriculture and commodities, and prospects for growth in all our markets abroad should keep the favorable export story going even if the dollar fails to reverse course. There still seems to be a major mystery about what is going on, especially about productivity. That is not helping us to decide among paradigms, which actually, Peter, I find you have very usefully organized as a set of boxes. So, I think all of us have to conclude that the risks are more on the high side. I'm not so much worried about the possibility that the economy may overheat and that we will face the prospect of higher inflation because I think we know what to do about that. We have a tool; it is just a question of when to use it. The bigger problem for the U.S. economy, which was reinforced in my mind by the Humphrey-Hawkins experience--both the Chairman's and the one I shared with Larry Meyer and Bill McDonough--is the problem of the distribution of the gains from this very good economy. It is hard to refute the evidence that the gains are very heavily concentrated in the top 25 percent of the income distribution, and I find that very worrisome. There is a real problem for social cohesion. There is a potential problem, at least, for economic stability if we get more strikes and labor unrest, perhaps even as a result of what may be perceived as the success of the UPS strike. It is a serious problem, it seems to me, for people who talk about the economy, including or perhaps especially representatives of the Federal Reserve. If we talk about all the good things that we see happening and crow about the excellence of the economy, we risk sounding insensitive and out of touch with average people or even the majority of the population. On the other hand, if we recognize the problem of concentration of gains at the top of the income distribution, that would lead to the reasonable question regarding what we propose to do about it, since we do not command the tools that can help. We can talk in general terms about other kinds of policies, about education and training, but it seems to me that we have to be very careful when we talk about this economy, given the limited tools of monetary policy at our disposal.",681
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"I definitely identify with the old paradigm, albeit with an updated estimate of NAIRU. [Laughter]",22
-fomc-corpus,1997,The first mention of NAIRU today!,9
-fomc-corpus,1997,"But I am at least an old paradigm with a new NAIRU. I recently have become more optimistic about the near-term outlook in response to data indicating much larger than expected inventory building in the second quarter, continued favorable inflation news, and the further appreciation of the dollar. These developments suggest that it is now less likely that the economy will rebound to well-above-trend growth in the second half, and more likely that inflation will remain well contained in the near term. I guess that makes me, along with Bob Parry, an old paradigm newly found optimist. This more benign outlook reflects crosscurrents on both output growth and inflation in the near term, crosscurrents that are very well captured in the Greenbook forecast and discussion. The first crosscurrent is between slowing inventory investment and rebounding demand. While this was a minor story in the forecast at the last meeting, the higher pace of second-quarter inventory investment, especially in light of expected revisions to the data, has made this a dominant theme of the near-term outlook. As a result, the economy is more likely to grow closer to trend in the second half, and therefore there is less concern that utilization rates will rise further. A second set of crosscurrents affects the inflation outlook. I continue to be concerned about the risks of higher inflation as a result of an economy that is operating beyond its sustainable capacity. The resulting upward trend in inflation should be reinforced for a while to the extent that the restraining effect of favorable transitory factors recently in play diminish over time. Developments so far this year, however, suggest crosscurrents that might slow this process. First, the better than expected inflation outcome this year, both in terms of lower core and especially lower overall inflation, and the modest acceleration in compensation per hour will act in the near term to restrain wage and price increases going forward. In this case, it is inertia that is our friend, and the result is a virtuous wage/price spiral. Second, some of the transitory factors that have been restraining inflation, particularly the effect of the dollar on import prices, appear to be less transitory than previously expected following the further appreciation of the dollar since the last meeting. Third, the upward adjustment of profits in the NIPA revisions suggests more of a cushion that might delay passthroughs of any future increases in compensation. While the net effect is still likely to be higher inflation over the forecast horizon, any increase will begin from a slightly lower base, and at least over the forecast horizon may be even more modest than previously expected. The net effect is the prospect of a more benign environment going forward, though one certainly not without its challenges. Looking at the Greenbook forecast, it's hard not to be delighted with the projected outcome in 1998 unless we have become jaded by two years of stronger-than-expected growth and lower-than-expected inflation. While the near-term outlook looks more benign, I still view the risks as asymmetric. Consensus forecasts for the second half, for example, still appear to be in the 2-1/2 to 3 percent range, compared to the 2-1/4 percent rate projected in the Greenbook. While the slowdown in inventories should be a drag in the period immediately ahead, I would interpret the inventory building in the second quarter as largely voluntary, and therefore a measure of the confidence that businesses have in the economy going forward. That confidence undoubtedly reflects the sound fundamentals supporting demand and is consistent with the initial indicators of the strength of demand in the third quarter. Growth over the second half is therefore more likely to be above than below trend in my view. As a result, it remains more likely that utilization rates will rise further rather than decline, at least for the second half of the year. In addition, even without a further rise, prevailing utilization rates continue to point toward higher inflation over time. One of the more intriguing aspects of the Greenbook forecast is the projection of utilization rates. The Greenbook projects a nearly unchanged unemployment rate, but a declining capacity utilization rate even after taking account of a slowing in the growth of investment spending in the manufacturing sector and a resulting moderation in the rate of increase in industrial capacity. A decline in the capacity utilization rate with an unchanged unemployment rate would further widen the disparity between these two measures of resource utilization, already one of the interesting anomalies of the current episode. If this divergence is part of the explanation for the apparent decline in NAIRU and the surprisingly favorable inflation outcome, the further widening of this gap may further damp the responsiveness of inflation to the already low unemployment rate. Maybe. But I expect one of the more important stories still to be written about this expansion is how the economy will find its way back to NAIRU, assuming we are already below NAIRU. In the Blue Chip consensus forecast, the economy slows on its own over 1998 to a below-trend rate and, as a result, the unemployment rate retreats slowly toward NAIRU, fortunately before inflation rises to any considerable degree. In this case perhaps we can sit back and watch. In the Greenbook on the other hand, the economy grows at trend, preserving the prevailing utilization rates, and as a result, inflation rises gradually over time. This version of the story is waiting for us to write the conclusion. The change in the outlook since our last meeting suggests, however, that we may have more time to refine our forecast before we have to pen our conclusion.",1105
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. We did get our second-quarter slowdown, but the signs are now consistent with the continuation of the slower growth or the resumption of somewhat above-trend growth. So, it seems to me that the challenge for the Committee is to assess the strength of the economy's momentum and the related prospects for inflation. The press and other more professional forecasters phrase our current dilemma as a dichotomy between a lengthened or protracted business cycle and the so-called new age, new era, or new paradigm economy characterized by enhanced but unmeasured productivity improvement, deepened capital capacity, and less proclivity for inflation. The truth is probably somewhere in the middle. That is, while there probably are technology-driven productivity improvements at least in some sectors, it is hard to believe that business cycles have been exterminated. At this point, there is considerable strength in the economy. The labor market not only looks strong but it may have more flexibility than is implied by the current low unemployment rate. That is, employed people seem to be quite willing to change jobs. Business is getting very creative in finding ways to attract and train new workers and to stretch already taut labor markets. Wage pressures are probably uneven across different types of jobs and skill levels. This may help to explain the anecdotal stories we are getting about the lack of statistical evidence of widespread wage pressures. Whatever the outcome of this analysis, the low unemployment rate suggests a continuation of consumption growth. Housing and auto sales are holding up quite well for this stage of the expansion. Another source of strength is business fixed investment, and I see no particular reason to believe that this sector will fade. Profits continue to be surprisingly strong. The capital market is supportive of further spending. As long as aggregate demand holds up, business investment and reinvestment are justified. It does seem to me, however, that there is a confluence of events or factors that have helped to hold inflation down in this favorable economic environment. First, of course, as has already been noted, is the strong dollar. Relative economic weakness in foreign competitor nations is alleviating supply pressures. Various supply factors in the oil market have kept world oil prices down, and this is a particular vulnerability for the United States economy. There has been good enough weather to prevent major problems in grain crops, thereby allowing some replenishment of reserves and avoiding run-ups in food prices. The recent pattern of consumers taking a breather after a spending spree has helped to temper spiraling demand. Progress on the deficit has been made somewhat easier by a strong economy and a favorable interest rate environment. If any of these factors change, the balance could be tipped in the other direction and reverse the recent benign inflation situation. World demand could heat up, creating supply problems. OPEC could get itself together and push oil prices higher. The stock market could take a dive off its recent roller coaster ride. The El Nino and global warming could converge to wreak havoc on agriculture. Labor unions, or employees generally, could become more successful in pushing wages up to a level that could not be absorbed by productivity improvements or profit hits, resulting in final price increases. Consumers could get so self-confident that they forget to take that quarterly pause that has refreshed our economy. These are clearly upside risks for inflation, but none of them appears imminent. In the other direction, we could get a more ordinary inventory cycle, as Mike Prell has suggested, but none of this is certain. So, I believe that for now we are left to debate how long a sustainable economic growth trend is sustainable.",720
-fomc-corpus,1997,"To round us out, President Jordan.",8
-fomc-corpus,1997,"Thank you, Mr. Chairman. I want to mention only a few things from the District that relate to the national outlook and to convey some of my concerns about where we are or may be in a few months. On the retail outlook question discussed earlier, the head of a major retail company, said that the first half of this quarter had been excellent, with double-digit rates of increase. However, he is not yet confident that the strength can be sustained. He said it would be mid-September before he would be able to begin to assess the extent of the pickup in holiday season ordering and to reach a judgment on whether the recent bounceback in sales was anything more than a temporary aberration from the softness in the spring. On the question of inventories, his view was that in the case of autos, the buildup was in domestically produced vehicles, not imports. However, in the case of dry goods, the rise reflected imports, not domestic goods. He said that imported goods accounted for some 70 percent of his company's stocks. Manufacturers of communications equipment reported to us in the spring that their sales had been disappointing. More recently, however, they indicated that there had been a significant pickup in new orders and that their backlogs were starting to build again. One of our directors said that the whole high-tech sector has ramped up sharply after being soft for several months. One area that concerns me, as it does others around the table, is real estate. With regard to farmland, we are continuing to hear reports of sudden and sharp increases in prices that make no sense if we think in terms of the agricultural use of that land. The huge price increases are not limited to Kentucky horse farms, and that leads us to speculate that those increases may reflect the anticipated conversion of these lands to alternative uses at some point in the future. In any event, we are not sure what to make of these very dramatic reports. We are told that construction in the region is being constrained only by labor shortages. Contractors simply are not able to get more construction workers. Projects are being delayed or they are being completed much later than anticipated, and new bids are coming in significantly higher than previously. There are still some concerns about sluggish sales of higher-priced homes, but reports from most of our metropolitan areas indicate that there has been a recent pickup in existing home sales after a very slow spring. That is happening through much of the region. One isolated report, from is that there has been absolutely no traffic in the four months that his house has been on the market in Columbus, Ohio. Bankers tell us that vacancies are appearing in shopping malls throughout the region. The new malls may get the tenants, but they are leaving behind vacant stores throughout the District. This development is still in its early stages. One banker claimed that through next year, we are going to see sharply rising vacancies in commercial retail space. Another banker said with regard to developers that it is getting hard to hold them back and they are getting later and later in their payments. The community bankers claim that they are making fewer unsecured loans, but they say that the regionals and super regionals continue to lower their credit standards. I have a couple of observations about the labor markets that provide a little different twist on productivity and about what we are hearing and reading concerning developments in labor markets. who runs a small manufacturing company that is mostly related to the motor vehicle industry and does a fair amount of exporting, said that he cannot hire the same skilled worker at the same rate as he could one or two years ago. However, he is not willing to raise his workers' wages, and he also does not feel that he needs to because in a sense he is dumbing down his workforce. He still pays the same wage, but because his business makes use of computer-driven machinery, computerized inventory control, and computerized scheduling he is able to produce the same output and continue to pay the same wage. He simply has smarter equipment coupled with less skilled workers to get the same output. That will not show up in productivity. who is associated with a company that employs several hundred workers, said that software is available to permit the flexible use of a workforce with unusual hours and that has greatly increased their ability to tap into labor pools that were unavailable to them previously. Examples cited include housewives and formerly retired people who do not want 40-hour workweeks but are willing to work odd schedules. The available software allows the preferences of these people to be accommodated. Another company that produces auto parts needs a flexible workforce to meet the just-in-time demands of its customers. A few years ago, they could not have handled such demands, but they are now able to do so because of the new software. Finally, a very large company with 70,000 employees worldwide is now using very sophisticated, multimedia educational software to train their workers. They have been able to reduce their training costs after several years of dramatic increases in such costs. And at the same time, they claim to have increased the effectiveness of their training by 80 percent. Again, this is something that would not show up in productivity statistics. There is a question as to how much training actually occurs in a three-hour training session or a three-week training session. When asked how many students were in their classes, the reply was three students; the others in the classes were just avoiding work. Concerning paradigms and the outlook in the Greenbook, anytime I hear that something is new, whether it is an idea or a paradigm or whatever, I usually react by thinking that what is new probably is not true, and what is true is not new. It was said in this room well over 25 years ago that the old laws of economics had been repealed. It was not true then and it is not true now. The old laws of economics still work. Of course, 26 years ago last Friday the U.S. government tried to repeal the laws of economics, but I hope that that will never happen again. It may be that what is called a new paradigm simply involves allowing what we all accept as fundamental economic forces to operate in a less fettered way than previously. That does lead to some optimism about the sustainability of the expansion. With regard to the new paradigm of pessimism as it relates to deflation, we certainly are not hearing any of that when it comes to asset prices. When I looked at the Greenbook and listened to a number of people report about a pickup in economic activity, the words ""rebounding"" and ""somewhat stronger"" were used to describe the near-term outlook. Yet, the Greenbook has 2.6 percent real GDP growth in the second quarter and 2.3 percent for the third quarter. On the surface, that would lead people to think that there is some weakening or softening going on. But what it says to me is that the growth reported for the second quarter, assuming that the Commerce Department numbers are correct, was unsustainable. The mix was unsustainable and, as one exceptionally smart economist once said, unsustainable things have a habit of ending. When we look at that second quarter with weakness on the consumer side, booming capital spending--which would suggest capacity is increasing--a dramatic surge in imports, and inventory accumulation that is extraordinary for a second quarter, we have to conclude that something is fundamentally wrong. If those quarterly numbers are right, those conditions cannot be sustained. The Greenbook fixes things by having everything shift the other way. The consumer comes back, which I guess is what we mean by a pickup or rebound even though real GDP is projected to slow. There is a dramatic negative swing in inventory spending, and net exports also make a negative contribution in the forecast for the third quarter. I don't know whether that is a correct forecast or not. I certainly hope so because if it isn't, our problems will be much, much greater. We need an outcome something like the Greenbook's third quarter and also its fourth quarter or we will have missed something here in a very serious way. The question in my mind, then, is how to monitor whether that is occurring or not. A part of it, getting into the monetary numbers, is the need to make sure that the behavior of those numbers stays rather tranquil, including slow growth in M2 which has been running at a rate just under 5 percent and some slowing in the growth of MZM from almost 7 percent in the second quarter to something under 5 percent. The recent jump in the growth of the monetary base is also worrisome even though it reflects only a few weeks' data; that growth needs to slow. I am troubled, though, that as we get out to September th, we are not going to know a 30 great deal more than we do today about the performance of the economy. It really is going to be November before we get a reading on how good a job the staff has done in forecasting an economy that corrects the problem second quarter. I would simply like to skip October because nearly all the corrections take place in October. We ought to repeal October, jump from the end of September into November, and then get it right. Thank you.",1851
-fomc-corpus,1997,I think this is an opportune time to break for coffee.,14
-fomc-corpus,1997,Mr. Kohn.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. As background for the Committee's decision today, I will begin by taking a few minutes to discuss real interest rates, concentrating on the real federal funds rate, given its occasional use as an index for the stance of monetary policy. In the course of my discussion, I will be referring to the set of charts that has been distributed; these update selected charts from the Financial Indicators package. 2 As you can see from the panels on the right side of the first chart, the real federal funds rate has risen considerably this year when lagged CPI inflation is used to proxy for expected future inflation. The increase is a product of the Committee's decision to raise the nominal funds rate in March as well as a decline in inflation expectations, as estimated using these proxies. One might question whether inflation expectations actually have decreased as much as has measured inflation--especially total CPI inflation, which has been driven importantly by temporary swings in energy prices over the last two years. But qualitatively similar movements are also evident when real rates are constructed by subtracting the results of surveys of inflation expectations. Moreover, as you can see by comparing the bottom to the top rows in the lower panel, the current level of the real federal funds rate is fairly high relative to history--in the neighborhood of a percentage point above its average over the entire sample, from 1965 to the present. This sample period was chosen because it has about the same inflation rate at the beginning and the end. This should indicate that over this interval the economy experienced about the same amount of excess demand pushing up inflation and excess supply pushing it down so that, on average, output was at its potential. Consequently, other things equal, the average real federal funds rate from 1965 to 1997 might be a reasonable approximation of the natural or equilibrium federal funds rate consistent with holding the economy at potential and keeping inflation steady. But, of course, other things have not been equal. One set of developments that probably has been tending to shift up the equilibrium real rate over the last 30 years has been deregulation and innovation in financial markets. The dismantling of regulatory interest rate ceilings and the spread of loan securitizations and other means of diversifying sources of funds have removed or reduced important sources of nonprice rationing in credit markets. Greater reliance on the price of credit to allocate scarce saving implies that higher real interest rates are needed. Aside from such structural changes, the equilibrium real funds rate will depend on cyclical or one-time influences on the economy and financial markets. Certainly, the required level of interest rates was lifted in the early-and mid-1980s by an expansive fiscal policy, and reduced in the early 1990s by the so-called credit crunch. What can we infer about equilibrium rates in recent years? Note that, although the actual real rate has risen to a fairly high level of late, it is now only a little above the range of the last few years. Moreover, if the staff and Committee members are right about the slight pickup in the CPI next year, some of the very recent increases in the calculated real rate will be reversed. Real funds rates near these elevated levels over the last three years have not connoted a restrictive monetary policy. Instead, over this period, robust growth has propelled the economy to a level that exceeds many estimates of its long-run potential. An important reason for this, as Committee members have pointed out in past meetings, is the strong demand for capital goods. The profitability of this investment means that higher-than-normal real rates may be needed to avoid inflationary pressures on resources. And this profitability has been reflected in other financial markets, such as for equity, where high prices have reduced the cost of capital and boosted net worth, further damping any restraint from short-term real rates. Moreover, a somewhat different picture of financial conditions is portrayed by longer-term real interest rates. Much of the run-up in the real federal funds rate over this spring and summer apparently has not been transmitted out along the yield curve. The rise in the real funds rate resulted importantly from the drop in measured inflation expectations against a fixed nominal funds rate. But nominal longer-term rates have been free to decrease with inflation expectations--and they have done so, leaving real yields on the Treasury's indexed debt fluctuating fairly narrowly. The top panel of the next chart shows other measures of real long-term Treasury yields. Despite a small upward trend since early 1996, these rates remain appreciably below their peaks of 1994-95. The uptrend is even more muted in private rates, the lower panel, which have been held down by low and narrowing risk premiums. The behavior of these premiums is indicative of the generally ready availability of financing for private borrowers, which itself would boost required real rates on federal funds or Treasury securities. The effects of the flattening yield curve and declining risk premiums on the real private bond yield can be seen in chart 13, which plots this yield against the subsequent year's change in inflation. This technique, like the use of historical averages, is limited by the implicit assumption that history provides reliable guidance to future developments--that the equilibrium rate has not shifted significantly over the past 15 years. And, as you can see, the fit is not tight. Nonetheless, real long-term rates in 1996 and 1997--plotted in the diamonds marked 97 and 98 for the Greenbook projection of the change in inflation for those years--are not elevated by this standard; they are certainly not in the restrictive territory implied by recent readings of the real funds rate. While not evident in domestic credit and equity markets, elevated real short-term rates may still have some restraining effect. For example, they may be one factor behind the strength of the dollar, though questions about foreign economies and policies likely have been important. Whatever the reason, the appreciation of the dollar should help to hold down U.S. production and prices. Moreover, further increases in real short rates--through policy tightening action or declining inflation expectations without compensating policy easing--would put upward pressure on real intermediate-and long-term rates. In sum, short-term real rates are high, and they have risen recently. The current real level of the funds rate may provide some assurance that policy is not highly stimulative. But, in the absence of policy action, the real funds rate is likely to begin to edge lower as some of the special factors holding down inflation wear off and higher inflation rates begin to affect expectations. Moreover, even very high real federal funds rates may not necessarily indicate restraint or even neutrality in monetary policy when other important elements in overall financial conditions are considered, especially taking account of the strong demand for capital. Real short- and long-term rates close to current levels have apparently allowed output to overshoot sustainable levels, and in the staff forecast this situation is not corrected without a change in policy. Still, considerable uncertainty persists about the level and growth of potential output and the implications for inflation of operating for a time with the current degree of tautness in labor markets, which may be seen as supporting a continuation of the wait-and-see posture of alternative B. The drop in inflation expectations provides an additional counterweight to the effects of resource pressures on prices, allowing the Committee to await firmer signs that inflation is likely to intensify without risking a substantial acceleration in prices. And with inventory investment likely to slow, the odds on a near-term strengthening of production that would increase resource utilization rates have diminished. Recently more volatile conditions in financial markets may also counsel caution. This development may be associated with some second thoughts about just how rosy the outlook for prices, profits, and interest rates may be. If markets become more cautious, equity prices and credit spreads would become a little less stimulative. If the Committee were to choose to keep the stance of policy unchanged, it would need again to consider whether to retain the asymmetry in its directive. As compared to the situation in early July when the Committee last voted to have an asymmetric directive, the favorable behavior of prices and price expectations, along with a slightly less expansive staff forecast for growth going forward, may be read as reducing the urgency to take action should any signs of inflation pressures emerge over the near term. On the other hand, the basic situation has not changed since early July: The labor market continues to operate at levels beyond most estimates of sustainable potential, and strength in consumption and investment spending seems to suggest that financial conditions, at least those prevailing a little while ago, have not been tight enough to prompt a closing of any output gap. This brings me to the language of the directive. As you suggested, Mr. Chairman, I polled the members for their views on the wording of the two sentences, and as I suspected, there were almost as many suggestions as members. I tried to boil these down to a few alternatives, which were sent to the Committee and are repeated beginning on page 12 of the Bluebook. On the first sentence, most members preferred the alternative sentence in the June Bluebook, though some suggested relatively minor wording changes. President Boehne's alternative, labeled ""New Alternative,"" seems to have the advantage of eliminating the somewhat/slightly distinction from the first sentence--employed in the past to differentiate 50 from 25 basis point actions, but perhaps not needed to describe actions taken at the meeting now that the Committee is explicit about the actual federal funds rate it expects. It also eliminates the tighten/maintain/ease choice on reserve conditions, which several other members also suggested. Consensus was less clear on the second sentence. Although quite a few members preferred the June Bluebook alternative, there were a number of other suggestions. The wording given as ""New Alternative 1"" is also based on President Boehne's suggestion and would conform the June Bluebook alternative for the second sentence to his alternative for the first sentence. In keeping with a suggestion several of you made, it puts the possible change in terms of an increase or decrease in the federal funds rate, instead of reserve conditions. However, a few of you also thought that the asymmetry was about presumptions, or inclinations, or risks rather than weight given to incoming data. This approach may be more consistent with the notion that the directive tilt is a signal of the risks the Committee sees, and hence the more likely direction of its next action, without any necessary implication for the upcoming intermeeting period. In the circumstances, the tilt implies that you would move relatively promptly if the data seemed to confirm your concerns, and that you have a hard time imagining moving in the other direction, though such an action cannot be ruled out in very unexpected circumstances. I tried to capture some flavor of this in the second new alternative. However, on re-reading this alternative, I'm not sure better language couldn't have been found to express this view--for example, ""In the context of ... , the Committee believes that developments are more likely over time to require a tightening than an easing of reserve conditions to attain its objectives."" The difficulty of framing a consensus on the second question may suggest that leaving the current wording in place for this sentence, or tinkering with it only very slightly, ought to be seriously considered. The current wording, however awkward, does not try to spell out what the Committee means by asymmetry but merely states the kind of actions the Committee would, or might, find acceptable. If the Committee changes the first sentence but wants to leave the second essentially unchanged, it could conform the second sentence simply by substituting ""higher"" and ""lower"" ""federal funds rate"" for greater and lesser reserve restraint, though even this change might not be needed.",2347
-fomc-corpus,1997,"Let's see if we can make some progress on this. I have the general impression that there is a consensus around the Boehne alternative for the first sentence. I will assume that is the case unless somebody wishes to raise an objection here. [Pause] Not hearing one, I will assume that we will make that change, which really has carried us much further than anyone would have anticipated! [Laughter]",82
-fomc-corpus,1997,Should we stop?,4
-fomc-corpus,1997,"I think we have to focus on whether we should leave the second sentence alone, apart from the minor adjustment that Don Kohn has mentioned, or try to go further.",34
-fomc-corpus,1997,Leave it alone.,4
-fomc-corpus,1997,"The major problem I always have had with this directive has been in the first sentence. I find all the proposed variations of the second sentence to be circumlocutions in one way or another. The difficulty is that we are trying to reflect differing opinions as to how we should view the question of asymmetry. That is an issue we never have been able to resolve among ourselves. There are differences in this Committee and very legitimate differences. Yet, I think we all find a value in maintaining the notion of symmetry and asymmetry, though for somewhat different reasons. There has never been any consensus, as I read the views of this Committee, to eliminate that concept. So, my inclination at this stage, given my suspicion of what would happen if we tried to resolve something that we have failed to do in the past for good reasons--",166
-fomc-corpus,1997,No lunch would be the consequence! [Laughter],11
-fomc-corpus,1997,That is a very thoughtful way of putting it. [Laughter],14
-fomc-corpus,1997,Thoughtful and practical.,5
-fomc-corpus,1997,"After going through a lot of the possible variations with Don Kohn, it strikes me that we are not going to succeed in resolving this issue at this stage, and it probably is not worth the effort of the Committee to try to force something that would make a number of us feel uncomfortable. I am inclined to put on the table as a potential resolution of this to make just the minor change that Don Kohn has suggested.",85
-fomc-corpus,1997,"Could you repeat that, Don? I'm sorry, I didn't mean to interrupt.",16
-fomc-corpus,1997,"I'm just opening the issue up for questions. Don, in that context would you read the operational paragraph of the directive with those changes?",27
-fomc-corpus,1997,"Okay. I'm on page 13 of the Bluebook and I will start with the ""New Alternative."" If you chose Alternative B and translated the July directive into this, it would read: ""In the implementation of policy for the immediate future the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period.""",129
-fomc-corpus,1997,"That wording is not satisfactory to everybody, but it is everybody's second choice, if I may put it that way. I would be inclined to go with that, but I would like to hear the Committee's views. Governor Phillips.",47
-fomc-corpus,1997,"What is the purpose of differentiating between ""somewhat"" and ""slightly?""",17
-fomc-corpus,1997,It gives you the asymmetry in effect.,9
-fomc-corpus,1997,We have not worked that out.,7
-fomc-corpus,1997,"We have two methods of establishing that; the other is the use of ""would"" and ""might.""",21
-fomc-corpus,1997,The two methods together have been used when we wanted to express a strong degree of asymmetry.,19
-fomc-corpus,1997,"""Somewhat"" is stronger than ""slightly?""",11
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,"Well, this has not been clear to me in the past! [Laughter]",17
-fomc-corpus,1997,It wasn't supposed to be! [Laughter],10
-fomc-corpus,1997,I am going to write that down so I won't forget it next time.,15
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Well, Mr. Chairman, I would say that you are in error in one respect. It is not everybody's second choice. It is my first choice.",32
-fomc-corpus,1997,"I am delighted to be corrected. In a hidden sense it is mine, too. President Broaddus.",22
-fomc-corpus,1997,"Mr. Chairman, just a comment here: The only thing that bothers me about making these changes--and I think I made this comment at the meeting last time--is that what we are doing here is to be clearer about our operating instrument without making corresponding changes with respect to the language on our longer-term goals. That worries me because I think it is going to increase the already intense focus on the funds rate, and that, I think, is one of the principal difficulties we face currently in conducting monetary policy in the short run. I don't know how far I'll get with this, but I would like to make this suggestion concerning the lead clause in the second sentence. There are no suggestions on the table now for changing it, but it currently reads: ""In the context of the Committee's long-run objectives for price stability and sustainable economic growth..."". Is it possible to consider changing that to: ""In the context of the Committee's long-run objectives, which assign priority to price stability as a prerequisite for achieving sustainable economic growth...""?",208
-fomc-corpus,1997,"That is a fundamental change. The words have been fudged in such a manner as to avoid stating that. I think you are quite right on the issue of giving prominence to the funds rate, and I think we all recognize that were we able to find financial aggregates that reflect the state of the money markets and that we could employ to gain leverage in the system, we would find that preferable to targeting the funds rate. The latter has all the problems that we have discussed over the years. Having gone in the direction of announcing changes in the federal funds rate after our meetings, all we are doing is moving that explicitly into the directive. If at some point we are able to shift away from the funds rate, then the directive will get changed and our public statement will get changed.",156
-fomc-corpus,1997,"I was just going to say, Mr. Chairman, that you have made wonderful progress here this morning, and I do not think we ought to jeopardize it. We ought to support it as a group and consider it time well spent.",48
-fomc-corpus,1997,Why don't you make a motion?,7
-fomc-corpus,1997,"If I could, I would.",7
-fomc-corpus,1997,He's not a voting member.,6
-fomc-corpus,1997,Can we make you an honorary one? [Laughter],12
-fomc-corpus,1997,I will make an honorary motion.,7
-fomc-corpus,1997,I will second the honorary motion.,7
-fomc-corpus,1997,"Technically, it is true if we are taking a vote of the Committee as presently constituted. But as a practical matter, the vote has to include everybody around the table because we are making changes that will involve all of us. So, the ""votes"" of those who are temporarily nonmembers should be taken into account.",65
-fomc-corpus,1997,Can I make it legal by moving the Boehne motion?,13
-fomc-corpus,1997,You could do so.,5
-fomc-corpus,1997,I second the Boehne motion.,8
-fomc-corpus,1997,"Would you read the Boehne motion, just to make sure we know what it says?",19
-fomc-corpus,1997,"The first sentence, assuming alternative B, would be: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent.""",49
-fomc-corpus,1997,And go on.,4
-fomc-corpus,1997,"The next sentence, if I have it down correctly and using the same tilt as in the July directive would read: ""In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period.""",78
-fomc-corpus,1997,Okay. Let's recognize that this is not a vote on the directive; this is a vote on the structure of the directive.,25
-fomc-corpus,1997,You could ask for a show of hands maybe without doing a vote. That way everybody could be included.,21
-fomc-corpus,1997,Let's have a show of hands rather than an official vote. This is in favor of it. All opposed? It carries unanimously. I congratulate Donald Kohn for a Solomonesque--,38
-fomc-corpus,1997,And President Boehne.,6
-fomc-corpus,1997,And the Chairman.,4
-fomc-corpus,1997,"Well, I merely followed you two gentlemen.",9
-fomc-corpus,1997,I would like to add Governor Rivlin for drawing attention to the practical consideration that got this discussion over with.,22
-fomc-corpus,1997,I thank everybody. [Laughter] Are there any questions on the first part of Don Kohn's presentation relating to monetary policy?,27
-fomc-corpus,1997,"Don, before each FOMC meeting we are provided a memo on what various rules are indicating, the Taylor rule particularly. My recollection is that the equilibrium real interest rate constructed in that case is for a 2 percent real funds rate, using the chained GDP deflator.",56
-fomc-corpus,1997,Right.,2
-fomc-corpus,1997,"Do you want to talk briefly about the table at the bottom of chart 10 in your handout and its implications? While I am a strong believer in some of the wisdom embedded in the Taylor rule, I have been concerned for a long time that we need to be more careful about how we set its level by coming up with a more reasonable estimate of the equilibrium real funds rate. The 2 percent comes from Taylor's heuristic rounding. Do you think this table provides a somewhat more thoughtful estimate?",100
-fomc-corpus,1997,"I think that if we took it literally, and I would have to look at that, it actually would be a little higher if we used the GDP deflator over time, which is what Taylor's rule is based on. These days the GDP deflator tends to run a little below the CPI, but over time I think it runs a little above. So, if we use the deflator, the gap between the 2 percent and what we might think of as history over the 1965 to 1997 period would be a little larger. So, we need to think about that rule in the context of what price index we are using, what changes have been made to the price index over the years that might have distorted it going back in history, and whether it may be less distorted now. I think most researchers, as we have been told over the past few years, have not found a big change in the amount of bias in the indexes, but we need to be careful about that. I think all these factors are important. I know that partly at your behest, Governor Meyer, people on the staff are trying to take account of these various factors and make a more sophisticated, technically justifiable estimate of the real funds rate even for the very simple Taylor rule. The real funds rate in that rule is not allowed to move around. The other major issue, even if we know how to measure the real funds rate, is whether it moves around from time to time. So, we should take account of all these other aspects.",311
-fomc-corpus,1997,"Don, I have a question for you that comes from page 1 of the Bluebook. In the fifth line down you state that ""longer-term nominal yields were down 15 to 25 basis points, but yields on indexed debt were about unchanged, suggesting that a slight reduction"" etc. Is part of the reason you use the term ""suggesting"" that you believe that these bonds are new enough and still not liquid enough that they will not tell us as much as they might ""X"" years from now when they are not so new and have become more liquid?",116
-fomc-corpus,1997,"That is one of the factors, President McDonough, in the sense that relatively small trades can push these rates around because these markets are not liquid, and I think we need to be careful about interpreting small ups and downs in the yields. On the other hand, I don't think the lack of liquidity in the market vitiates their usefulness entirely. There are a few folks out there, at least as one talks to people on the Street, who are keeping their eye on these things. They are doing a little trading. And if there were a sense, for example, that the economy was terribly strong and the Fed really needed to raise real interest rates a lot to keep inflation down and was going to do so, I think these yields would go up. Now, we would have to be careful about whether we should count every basis point and look at that spread for every basis point. I think it is useful to look at that yield and at the spread in a general kind of way, but we have to be careful not to slice it too thinly. Another factor here is relative supply. The Treasury has cut back on its note auctions, and in particular it has eliminated a ten-year note auction or two and is concentrating more of its issuance in the indexed area. So there may be, particularly with a thin market, some relative supply effects that ordinarily we would think would wash out very quickly in a nominal bond market but that may have some effect in the indexed market. Nonetheless, I think the fact that the spread has come down by almost 50 basis points over four months suggests something.",321
-fomc-corpus,1997,"I think you have it just right. I believe it tells us something, but we have to be very careful not to get overly caught up with it quite yet.",33
-fomc-corpus,1997,"The other point I would make about the sentence that you pointed to is that we characterize it as inflation compensation. There is another part to inflation compensation. It is not only expectations; it is the inflation risk premium. One had a sense, particularly over the spring through the end of July, that not only were people perhaps a little more optimistic on inflation, but they were a little less uncertain about their optimism. So, one reason that nominal yields might have dropped relative to the real yield is not entirely a decline in inflation expectations but a decline in the insurance premium that people buying nominal bonds required for the possibility that inflation would turn out to be a lot different than they expected it to be.",138
-fomc-corpus,1997,"The term ""inflation compensation"" is really a word of art because what is being projected here is not true inflation expectations, including the risk premium, but a forecast of the CPI as published. And that may or may not be exactly equal to inflation expectations. But shouldn't the word ""expectations"" be in this sentence--""a slight reduction in ""expected"" long-term inflation compensation""?",78
-fomc-corpus,1997,It is a reduction in the actual compensation that investors are demanding for buying a nominal bond. Its size would depend on their expectations for inflation and on the standard error or standard deviation--,36
-fomc-corpus,1997,It is based on their forecast of the CPI.,10
-fomc-corpus,1997,Right.,2
-fomc-corpus,1997,"It is a kind of economist's 9-by-12, I think. [Laughter]",20
-fomc-corpus,1997,"Further questions for Don? If not, let me start. I will be a good deal briefer than I have been of late. To be sure, as Governor Kelley indicated, not all that much has changed in the period since the last meeting, but there are a few fundamentals that I think require a bit of evaluation. The most recent period is interesting because it reinforces the notion that we still may be experiencing disinflation. That is, it is very clear in looking at the price indexes--whether we are using the CPI, the PPI, or the various NIPA data on prices--that the inflation rate over these last six months has been coming in lower than in 1996 or at the least has been unchanged. This is really quite relevant, especially since the data on domestic operating profit margins still seem to be edging higher. Taken together, these two factors clearly imply that consolidated unit costs for the nonfinancial corporate sector are moving up only very modestly. Indeed, our latest estimate for the four quarters ended in the second quarter of 1997 is that consolidated unit costs have gone up just .4 percent. Since net interest payments per unit continue to fall, the increase in unit labor costs remains rather modest though obviously higher than the rise in total unit costs. Unit labor costs are up about 1.2 percent over the four quarters, but higher productivity growth is factored into that. Indeed, the productivity increase for the nonfinancial corporate sector looks something like 2-1/4 percent, with average hourly compensation moving up close to 3-1/2 percent. The significance of all this is that we have continued to get this sort of data for quite a while. Indeed, I used almost the same set of numbers several months ago with the sole exception of productivity, which seems to be accelerating for nonfinancial corporations. The obverse of this is that the decline in noncorporate business productivity, as residually estimated, seems also to have accelerated in the most recent period. That explains why, when we bring the corporate and noncorporate sectors together, we get this modest increase in total nonfarm productivity. The problem with that number is that it cannot explain the rise in profit margins, whether we include only nonfinancial corporate margins or the broader margins where we add in the appropriate part of noncorporate earnings or noncorporate profitability. Of course, the problem in this context is our inability to price services appropriately; they have a substantial overlap with the noncorporate sector. The question is, which data do we believe are the most accurate? The profit figures have to be reasonably accurate in the sense that they come out the same way no matter how we calculate them. The price data doubtless have biases in them, but there is no evidence that the bias is changing significantly. Clearly, if prices are going up very modestly and profit margins are increasing, we are forced algebraically to conclude that consolidated unit costs are going nowhere. If that is in fact the case, it is inconsistent with the nonfarm productivity data, and we have to choose which data we believe are best describing the current state of the economy. I suspect that we ought to be able to find out, hopefully within a year or two, whether this issue is ultimately resolved by the closing of the statistical discrepancy or by some extraordinary discovery of new data that create a more reasonable set of real noncorporate gross product. Despite the absence of indications that inflation may be accelerating, signs are beginning to emerge that suggest we may finally be running out the string. The major sign relates to compensation per hour whose relatively subdued behavior I have attributed largely to job insecurity, a view that is subject to some controversy. I recognize that the econometric analyses are of dubious value on this issue, and I am sometimes inclined to suggest that instead of trying to find out what people believe by using detailed and indirect econometric analysis, we might try something terribly novel. We might ask them. When people are asked whether they fear that they are going to lose their jobs, and the same question is asked of basically the same sample year after year, we find that the proportion of people responding in the affirmative doubles from the recession period of 1991 to the mid-1990s, leading one to conclude that people mean what they say. But survey respondents are now saying that they are not as nervous as they were earlier; that is, the survey results are beginning to tilt in the direction of less concern as tight labor markets have persisted for a now protracted period of time. Indeed, one statistical estimate that had been significantly subdued throughout this period--namely, the measure of the number of people who voluntarily leave their jobs to seek other employment--is finally showing some signs of moving up the way it did in past periods. So, the notion that the insecurity issue is beginning to wane is getting some statistical verification. Leaving aside the NAIRU and other issues involved in evaluating unemployment and labor force participation, we still have the problem of determining how many people are left in the noninstitutional population who want to work. That number is diminishing at a very rapid pace. The number of people who say they want a job but are not currently seeking one, which by definition puts them out of the labor force, has gone down 1-1/2 million, as I recall, in the last three years. This implies a fairly dramatic squeeze on the potential labor supply in the sense that an annual increase of 2 percent on average in both payroll and household employment in recent years is matched against growth in the working-age population that is half that rate. We do not have to go through a Phillips curve analysis, nor any other analysis, to conclude that when we run out of a product--in this case labor--its price goes up. At some point something has to give. The process still appears to be at a very early stage, and it is moving slowly. It may well be that the real significance of the UPS strike is that we are beginning to see a reversal of what had been a dramatic development: The air traffic controllers' confrontation with President Reagan set in motion a fundamental change in policy for this country more than 15 years ago. It is conceivable that we will look back at the UPS strike and say that it too signaled a significant change. I don't know whether that is true or whether that impression may change when we look at the data after all the publicity spins stop in the next 48 to 72 hours and we begin to learn what actually happened. But it is clear that something is going on in that area. The important question that we have to ask ourselves is whether the fairly significant pickup in effective demand in the last six weeks or so will moderate before the pressures on wages begin to work their way through to prices. As Mike Prell pointed out, the crucial element in the near-term outlook for economic activity is the inventory situation. Certain conclusions probably are not unreasonable. The first is that we do not need any liquidation of inventories for the economic expansion to slow; all we need is slowing in the rate of increase. It is quite conceivable that we can have, as we have had over the last six months, a very dramatic increase in inventories that is wholly voluntary, wholly the result of inventory-sales ratios having gotten too low and bottoming out. Obviously, if we have an inventory-sales ratio that declines and then flattens out, inventory investment surges at that particular point. But there is also a concern that we can still have very low inventory-sales ratios even after the big surge. This, indeed, may result in a view that there is no inventory overhang in any meaningful sense. However, as I said, the rate of increase in inventories merely has to moderate to slow the economy, meaning that the rate of inventory investment falls. I think the inventory investment forecast in the Greenbook has an important element of credibility because at this stage neither the new orders data nor any anecdotal reports suggest serious inventory level problems. But the numbers do seriously suggest that the inventory investment level is excessive. To get a sense of whether there is something illusory in the Greenbook forecast, I have converted the inventory investment numbers to factory value, as distinct from chain-weighted deflated book value. If the physical quantity of goods does not change but merely moves from the factory level to the retail level, the constant dollar value of the inventories rises. The reason is that as goods move from one sector of the distribution channel to the next, value is added and income is created. For national income accounting purposes, it is indeed the book value where held, properly deflated, that is relevant to the income and product account calculations. But to measure whether inventories are excessive or not, we don't care where the units are held in the distribution stream. Whether automobiles are in inventories at the dealer level, at the factory level, or somewhere in the pipeline is of no significance to the level of assemblies but it is to GDP. In any event, stripping out the markups in the distribution process, the factory value data for inventory investment for the first half of 1997 are very significantly above the peak levels of 1994 and early 1995, whereas that is not true for the deflated NIPA total book value data. I don't know whether you can see this chart from where you are sitting, but the black bars are what the official NIPA data show, and they are at about the same level as they were in 1994. However, if you look only at factory value, it is up close to the NIPA data in the first half of 1997, but it was much lower in 1994 because a substantial part of those earlier data reflected markups and not increased numbers of units. Secondly, Cathy Minehan raised the issue as to whether, in fact, the inventories were produced by domestic firms or were imported. With the caveat that the data themselves are very dubious, the staff here has tried to associate imports with various types of inventories in order to estimate separate domestic and foreign-originated inventories. Overall, the levels have tended to run about one-fourth imported, three-fourths domestically produced. Through April and May, the proportion of inventory investment that was imported was about one-fifth--or less than normal. In that sense, we are not getting any evidence, at least in these data, suggesting that all the inventory buildup is coming from imports, which, if it were the case, would mean that the impact of their adjustment would be on foreign producers and not on domestic production. The NIPA inventory investment data appear to derive disproportionately from domestic production. Hence, the impact of the slowdown in inventory growth on the GDP shown in the Greenbook is credible. If we find instead that final demand is significantly higher and that we get further strong inventory accumulation from either a wealth effect or factors that are related to inventory investment, we will not get a slowdown in the growth of GDP. In that case, we will face some serious policy questions. My judgment is, as we have discussed before, that we will have no choice but to tighten because if we do not, the risks will be too high, no matter whether one is in box A, B, C, or D of Peter Fisher's little structure. So, I think we need to recognize at this stage that there may be factors that could cause inflation to pick up. Let me add something parenthetically that was hinted at but not put on the table. A very big part of the consumer price index is related to property values. You will recall that about 19 percent of the CPI is imputed owners' equivalent rent. Rents are tied to property values. Rent as a ratio to the market value of single-family homes has been falling for quite a long period of time. And the little pop that we saw in the last CPI may be an indication that this ratio is stabilizing or moving back to a somewhat higher path, which suggests that the services CPI may look a little stronger in the near future than we have seen of late. We are going to have to make a judgment as to whether we should look at property-value-related prices somewhat differently from prices that are related in effect to income flows. I have raised this issue before, but we never really have confronted it because the issue has never come up with respect to a question of monetary policy. I would not be surprised if what we encounter is a CPI that looks a lot stronger but one where the rise in inflation will be very narrowly concentrated in these property-value-priced areas. Commodity prices could be going down, other prices could be going down, and these prices could be going up. What should we be looking at? That may well prove to be an interesting question. In summary, my general view has not basically changed. As I see it, the real federal funds rate, as Don Kohn pointed out, is sufficiently high that we need not be concerned that monetary policy is out of sync at this point or that it is far off from where we will want it to be in any event. And with disinflation probably still going on, there is very little reason to move today, as has been the case for a number of meetings. Nonetheless, as many of you have argued, and I think quite correctly, the risks are on the upside and there also is little reason to discard the asymmetric directive toward tightening. Nothing out there of which I am aware suggests that the underlying pressures are very different from what they have been for quite a long period of time. President Boehne.",2741
-fomc-corpus,1997,"I agree with your ""B"" asymmetric proposal.",10
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,So do I.,4
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,I agree as well.,5
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,I accept your recommendation.,5
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,I accept your recommendation as well.,7
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,Me too.,3
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"I accept, Mr. Chairman.",7
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,I agree.,3
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,Agree.,2
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,Agree.,2
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,Agree.,2
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,Agree.,2
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,Agree.,2
-fomc-corpus,1997,Has anybody been left out?,6
-fomc-corpus,1997,"I can accept your recommendation, Alan. I will not say much more other than to express the wish that we had the groundwork in place to lock in these lower inflation rates. I do not think we have. It would be an excellent time to act opportunistically, as I have said before. I worry a little about whether there will be a defensible rationale that will permit us to act before inflation actually starts to rise. That is going to be a challenge.",93
-fomc-corpus,1997,"I think it is going to be difficult. The reason is that the longer we are in a period where the economy remains exceptionally tight and price inflation continues to go down, the more difficult it will be for us to make a credible case for a policy tightening move, indeed around this table let alone how we explain it to everybody else.",67
-fomc-corpus,1997,"Just one last question because you raised the issue in your commentary. We have noticed an uptick in housing-related components of the CPI. There also are increases in other asset prices that people are worried about, obviously the stock market, nonresidential real estate, and so forth.",56
-fomc-corpus,1997,"Remember that the nonresidential real estate sector shows up in the CPI for hotels, lodging, and--",21
-fomc-corpus,1997,"Yes, exactly. I probably am asking the same question that you were posing: What do we do with monetary policy when there is no inflation but asset prices are booming?",34
-fomc-corpus,1997,That is the question that I raised in a speech just before the sentence in which I expressed concern about how we will know when we encounter irrational exuberance.,31
-fomc-corpus,1997,"Yes, in your AEI speech.",8
-fomc-corpus,1997,We have not been able to address that issue because I don't think we know how to handle a problem where we have one instrument and conflicting goals. What do we do? What should the Japanese have done when confronted with a very benign product price environment and rapidly escalating asset prices?,55
-fomc-corpus,1997,"Hindsight tells us to prick the bubble sooner, but how does foresight tell us we have a bubble?",22
-fomc-corpus,1997,"That was the context of that speech, and the state of my knowledge, at least, has not gone beyond that. I do not know what to do.",32
-fomc-corpus,1997,It had some success.,5
-fomc-corpus,1997,Temporarily. President Moskow.,8
-fomc-corpus,1997,"Mr. Chairman, I accept your recommendation. I was very interested in your analysis of inventories, and I hope you will distribute your comments to the Committee so we can look at it more carefully.",39
-fomc-corpus,1997,"Certainly. Does anybody else want to say anything? Okay, would you read the directive again. [Laughter]",23
-fomc-corpus,1997,"I will be reading from page 13 of the Bluebook, and then coming back to page 12 for the last sentence. The first sentence, then, is under the ""New Alternative"" heading on page 13: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent."" Then, moving just below that to the ""Current Wording"" section for the second sentence: ""In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period."" Finally, to catch up with the last sentence on page 12 under the ""Standard Version"" heading: ""The contemplated reserve conditions are expected to be consistent with moderate growth of M2 and M3 over coming months.""",201
-fomc-corpus,1997,Call the roll.,4
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes th,42
-fomc-corpus,1997,The next meeting as you all know is the           30        of September. There are no topics for the luncheon today because Bob McTeer has a 2:15 p.m. flight. [Laughter],44
-fomc-corpus,1997,"Good morning, everyone. Would somebody like to move approval of the minutes for the August 19 meeting?",21
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Without objection. Peter Fisher.,6
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will be referring to the four pages of colored charts in front of you under the Class II cover. 1On the first page are current 3-month deposit rates and 3-, 6-, and 9-month forward, 3-month deposit rates that for the United States are shown in red, for Germany in blue, and for Japan in green. Looking at the U.S. forward rates, you can see that there has been relatively little net change since the Committee's last meeting. Indeed, after rising during August, the forward rates are now back to around their levels at the time of the August meeting and almost back to the recent lows they reached at the very end of July. The single biggest decline in U.S. forward rate expectations came on the release of the August CPI on September 16. That followed a smaller decline the prior day after the retail sales and the PPI data for August were announced. Looking at these rates going back to late March and given their recent declines, I see relatively little, if any, pricing in of expected further action by the Committee in the months ahead. Looking down to the German forward rates shown in blue, you can see that the rise in German rate expectations that began earlier in the summer has continued. While both German and some other European data have been somewhat firmer, I believe the bigger impact on German rate expectations has come from the rather loud whisper campaign that the Bundesbank has directed at financial markets. The message in effect is that in order for the European monetary union to work, German and Italian short-end rates will have to meet somewhere in between their current levels. With the German short-end rates now around 3 percent and Italian short-end rates around 6 to 6-1/2 percent, this implies a 150 basis point rise for Germany and a 150 basis point decline for Italy. The rather public whisper campaign has been driving German rate expectations up, and you can observe on the right side of the chart the rather pronounced upward shift following the ECOFIN meeting the weekend of September 13 and 14. Looking at the Japanese forward rates in the bottom panel, you can see that the various forward rate maturities have continued to collapse on top of the current rate. The release of the 11.2 percent (annual rate) decline in second-quarter GDP added to the gloom in Tokyo. Rather than try to parse out the green muddle of rates at the bottom of the chart, let me observe that the 9-month forward, 3-month yen deposit rate now trades at 3 basis points over the overnight Libor rate. The JGB benchmark yield has traded down to 1.86 percent in the last couple of days. These relative shifts in interest rate expectations have had a fairly predictable impact on exchange markets, with the yen depreciating about 2-1/2 percent and the mark appreciating about 5-1/2 percent against the dollar since August 1. I think this impact on the dollar-mark exchange rate is precisely what the Bundesbank had in mind when it engineered its whisper campaign. Turning to the second page, you can see that recent developments had a somewhat more complex impact on bond markets. The four panels on this page depict the basis-point changes since July 1 in 9-month forward 3-month deposit rates implied by the FRAs and in 10-year government bond yields. In the upper left panel, you can see the story of U.S. interest rate markets as the red lines move across the chart. We had the rally in July followed by the upward spike in early August. There was little net change subsequently until the more recent rally associated with the release of the August price data during September. In the top panel for Japan on the right, the persistent decline in Japanese rates, both for 10-year bonds and forward interest rate expectations, is evident. In the bottom left chart for Germany, we see a different pattern of interest rate movements throughout the period. The 9-month forward 3-month deposit rate has risen by 72 basis points since July 1, while the 10-year bond has traded more or less sideways; it rallied a little in September, declining 18 basis points in yield. The truly dramatic impact of the Bundesbank's whisper campaign was felt in Italian interest rate markets where participants heard the Bundesbank to be saying three things: First, the Bundesbank would be raising rates. Secondly, the Bundesbank was so convinced that Italy would be in EMU that they were prepared to act on that basis. And third, the Bundesbank thought it would be an EMU-friendly act for the Bank of Italy to lower rates 150 basis points. As shown in the panel at the bottom right, the 9-month forward 3-month lira deposit rate declined by 125 basis points from the beginning of August through last Friday and there was a similar decline in the 10-year bond yield. One of the questions that have come out of this experience is how to explain the stability in long-term German interest rates. From Frankfurt, the markets have heard that when central banks with real credibility threaten to raise rates, the long end of their yield curve remains stable or rallies. And much to my surprise, a great number of market participants have adopted this view as their own. There is an alternative view to which I am somewhat partial. It begins by noting that over the last several years the Bundesbank has been of the view that the long end of their yield curve has followed the lead of the U.S. and the global bond markets, and it has not really followed expected changes in short-term German interest rates. The pattern of the solid blue line for Germany does have some echo of the solid red line for the United States. One could also note that relative to U.S. and Japanese 10-year rates, German rates have backed up by 25 basis points since the beginning of the summer. So, I think there is some excitement yet to play through in European bond markets as we move forward toward EMU. The third page of charts shows percent changes in equity indices for the second and third quarters of 1997. I have included that chart to make two obvious points. First, equity markets were somewhat more volatile in the third quarter than in the second. Also, there was a much greater diversity of outcomes in the third quarter. That is true globally and also if we look at some of the internal comparisons. For example, the NASDAQ performance was quite different from that of the Dow. The Milan MlBtel, the German Dax, and the French CAC all had quite different outcomes and, of course, the Tokyo Topix and its construction sector, reflecting the Japanese domestic economy, also turned in rather different performances than other equity indices. Turning to domestic open market operations, the daily effective federal funds rate averaged about 5.55 percent over the intermeeting period, a little higher than the intended rate. This outcome reflected principally a few days of elevated funds rates. I'm not going to take you through all the detail on these charts, but I did want to make a point. The vertical blue lines in the top panel show the daily range of federal funds trading; the horizontal red lines are the daily effective rate; the vertical red lines represent one standard deviation in the volume of federal funds trading each day and give a sense of the concentration or dispersion of funds trading. The middle panel shows our misses, that is, the actual level of free reserves less the intended level; the yellow bars indicate negative misses and the blue bars show positive misses. In the bottom panel, you see operating balances as they occurred each day. My reason for showing this chart is to focus on three days in September on the right hand side of the page--the 15th , 16 th, and 17th--and to point out that neither changes in operating balances alone nor even our misses of some size really tell us everything we might want know about what drives volatility in the federal funds market. The 15th, 16th, and 17th were corporate tax payment dates. On the 15th, you can see that we had an elevated effective rate on the day but a very narrow effective range, as market participants priced up for the pressures they anticipated and traded funds in a very narrow range. However, looking at the middle panel for the 15th , we had a rather sizable miss of $2 billion on that day. Even so, we had a relatively contained federal funds rate. On the 16th , the effective rate was right on the target at 5-1/2 percent. The one standard deviation trading range was somewhat wider on that day, but we again had a miss and, if you look at the bottom of the page, a very low operating balance. In fact, we almost hit the historic low operating balance, but we did not have a terribly volatile day or upward pressure in the funds market. The next day, the 17 th, funds traded over a quite wide range at rates up to 15 percent and the one standard deviation volume of trading was much wider. We had a very large miss and again a low operating balance. The difference between the 16th and the 17th was in the distribution of reserves, with the need falling on the large regional banks whose behavior pattern tends to be to bid up the funds rate. So in this case, the behavior of those banks determined the volatility of the funds rate a great deal more than the level of operating balance or even the size of our miss. I do not want to overstate that, but I think it is a significant point to emphasize. The level of the operating balance is not the only factor. Since your last meeting, we have conducted two legs of outright purchase operations, both in the coupon sector. The bill market remains quite tight, and I have been reluctant to enter that market. So, I expect to continue to operate in the coupon market. There is some possibility that with the new fiscal year the Treasury will be issuing a larger amount of bills and we will be able to return to bill purchases. Mr. Chairman, there were no foreign exchange operations for the System account during the period since the August meeting. I will need the Committee's ratification of our domestic open market operations. I would be happy to answer any questions.",2098
-fomc-corpus,1997,Questions for Peter?,4
-fomc-corpus,1997,"A quick question, Peter. It seems to me that our key concern about intra-day funds rate volatility would be the possibility that we would give the wrong signal to markets. I have not had the sense that anything like that has been happening lately, but you may have a different impression.",57
-fomc-corpus,1997,"No, I do not. I think the market understands as well as any of us the implications of low operating balances and how they may foster market volatility on some days. So, no, I don't think such volatility has had any effect on policy expectations. Don and I have worried that it might at some point. I don't want to make too much of this, but we are making an effort to refine our ability to measure volatility so that we can provide the Committee with a better basis for judging and deciding whether this is something it should care about.",110
-fomc-corpus,1997,"Peter, the numbers look quite good in terms of confirming your hypothesis about the rate objectives of the Bundesbank and the Bank of Italy. I had always thought that the Bank of Italy, specifically the Italian government, would have been far more interested in having their rates converge with the German rates at the bottom of the maturity curve because, as you know, their budget is financed through short-term instruments and lower short-term rates would do wonders for their fiscal position. Nonetheless, I suspect that the implication of the German action, which is essentially saying that they will not resist Italy's joining the EMU, may be the real driving force here. Have you spoken to anybody at the Bank of Italy to get a sense of whether in fact they were focusing more on German acquiescence in Italy's EMU entrance or whether they were in a sense somewhat disturbed by the fact that the Germans seemed to be pushing their rates up?",183
-fomc-corpus,1997,"I have spoken with people at the Bank of Italy, the Bank of France, and some other European central banks. For the Italians, there is a hierarchy of objectives. Getting into EMU is the first, the second, and the third objective! So, I think they are prepared to pay some price for EMU membership. If they cannot get their rates all the way down to match German rates, they are prepared to go half-way. Now, most people in the market anticipate another interest rate reduction from the Bank of Italy once the Italian budget passes. I believe that may occur in coming weeks, and there may be one or even two Bank of Italy actions before year-end in light of the Bundesbank's implicit announcement that short rates ought to converge somewhere in the middle. The Bundesbank's comments fell on very fertile ground in the markets. They seemed to be waiting to see when something might happen, and they got a pre-blessing out of Frankfurt. It seems clear that people in Europe wanted to see rates converge on the low German rates and felt a certain reluctance to suggest that the convergence be somewhere in the middle of current rate levels. On the plus side, one reason the German action can be seen as positive is that it is creating a greater flexibility for the new ECB when it comes in. People previously had been assuming that the ECB would simply pick up whatever repo rate was set by the Bundesbank and that would be that. This has introduced an element of uncertainty. On the other hand, I think the French are the ones who will really feel they have been misled. They went through the pain of getting their rates all the way down and having them converge on the low German rates. Now they hear that they will have to suffer the pain of going half-way up to meet Italian rate levels, and they do not think that was the understanding. That is painful for them. There are two ways to think about this ""meet-in-the-middle"" story. One is in terms of mood music: it sets a positive tone and gets the process going. But if it is taken literally, I think it can be quite toxic. You can fix exchange rates and let interest rates float or you can fix interest rates at the short end and let exchange rates float. Trying to fix both in advance of the EMU event is a high-wire act.",475
-fomc-corpus,1997,"Yes. Any other questions for Peter? If not, would someone like to move to ratify the domestic operations?",23
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Without objection. We turn now to Mike Prell.,11
-fomc-corpus,1997,"Thank you, Mr. Chairman. It would not surprise me if many of you found the tale of the staff forecast in the Greenbook more tortuous than usual. Preparing the forecast and then writing it up proved to be a considerable struggle for us this time. Perhaps we engaged in more soul-searching than was really required, but we found ourselves with what seemed like a complex task. We had to contend with the fact that as we were at work, financial markets appeared to be in the grip of new era fever and stock prices were moving ever further above, and bond yields ever further below, where we had anticipated they would be. We also had to explain why we were raising our forecast of near-term growth again, as well as why we thought moderation would yet be coming. And we had to explain why, though we were lowering our inflation forecast again, we still expected prices to accelerate in coming quarters. I will try to run through some of the highlights of our thinking as quickly as possible this morning. First, on the new era, we do not have any problem with the notion that a good many things have changed in the world. There have been some marvelous technological advances that offer the potential for productivity gains. The emergence of new market economies around the world has unlocked vast amounts of underutilized labor resources. There has been a lowering of barriers to international trade and capital flows. There have been gains in competition and efficiency through domestic deregulation and restructuring. Also, today's labor market is marked by less unionization and by more flexible approaches to compensation. Of course, one may observe that these phenomena generally involve rather gradual processes, most of which have been in train for some time, but perhaps there has been some harmonic convergence that is yielding magnified effects recently. In any event, the practical question is what to make of these observations when we attempt to prepare a forecast that may be helpful in framing monetary policy. The new era advocates say the economy can grow faster, with lower unemployment, without generating inflation. If they are simply talking about higher trend productivity growth or lower NAIRUs, this doesn't suggest the need for a new analytical paradigm. But they sometimes seem to be claiming that aggregate supply and demand will always be in non-inflationary sync, even if the government's statistics do not always show it. Monetary policy seemingly is irrelevant in this self-regulating state of perfection. You can dump the staff and take an indefinite vacation. [Laughter] If I were not well shy of retirement eligibility, I might be more receptive to this view. But, I suspect that most of you share at least some of our skepticism. Under the circumstances, we feel much more comfortable taking the most relevant and persuasive aspects of the new era view and incorporating them in our model--one in which supply-demand imbalances can occur and give rise to inflationary pressures that can be modulated by monetary policy. This is, in effect, what we have been doing all along. So, with that prologue, what tendencies do we think are facing you in the economy today? As you know, we believe the economy is still running pretty hot. Exports have been zipping along with remarkable strength. And, though last Thursday's report on capital goods orders was a bit weaker than we anticipated, it didn't undermine our assessment that this sector of the economy is still on a steep uptrend, paced by demand for computers and communications equipment but with fairly substantial demand elsewhere, too. The growth of these sectors and the massive gains in stock market wealth are providing consumers with the wherewithal to spend, and they are doing so. Indeed, judging by yesterday's monthly PCE release, they are doing so to an even greater degree than we thought. In light of those figures and the other late-arriving data, we would now place likely third-quarter GDP growth in the 3 to 3-1/2 percent range. We continue to think that the levels of some types of household and business investment expenditures are high enough that stocks might soon begin to get out of kilter with income and output trends if there is not some deceleration in inventory accumulation. And we believe the rise of the dollar has been large enough to damp export growth and raise import penetration further in the period ahead. But, these are far from a sure thing--certainly in terms of timing and dimension. Booms generate a momentum of their own, and like others, this one is being supported by a degree of financial exuberance. In fact, it is our assessment that, more likely than not, financial restraint sufficient to rein in the excess demand we see will be achieved only with a decisive enough monetary policy jolt to shake the market's current euphoria. Whether the percentage point hike in the funds rate in the forecast is the right dose, we obviously do not know for sure, but if our analysis is correct, something noticeable probably will be required. The other part of the analysis is, of course, our judgment that we can't depend on productivity increases large enough to sustain such rapid growth of output and that the Phillips curve is not dead. It is somewhat disfigured, perhaps, but not dead. On the productivity front, as we suggested in the Greenbook, there may well be room for optimism regarding the outlook for growth in output per hour. Among other things, despite all the complaints about the quality of available workers, measured productivity performance has improved of late. We are skeptical of the new era view that firms always have another productivity trick up their sleeves to offset any cost increase--but it could be that the high-tech investments are now having a more significant payoff, and we have taken a somewhat more optimistic view of productivity prospects. As for the Phillips curve, we believe that compensation practices probably have changed in ways that may temper the short-run response of overall pay structures to tight labor markets. On top of that consideration, we also have the apparent divergence of the degrees of labor and factory utilization. This might be viewed as part of the new era--the perfectly elastic and immediate supply of plant and equipment as needed to meet demand. Our projection of moderate capacity utilization argues, we think, for some restraint on inflation relative to what might be implied by labor market conditions. Similarly, in the near term, the legacy of recent low inflation and a seeming convergence of expectations on continued low inflation bodes well for the sustained moderation of compensation increases. How far to carry these arguments in recalibrating one's model of the inflation process is a difficult judgment call. We do not think they eliminate entirely the risk of an upturn of inflation if labor markets remain as taut as they are now, let alone get tighter, as we are projecting. Moreover, there are a couple of other special factors that reinforce the likelihood of a steeper rise in prices going forward. One of them is the possibility that employers will face significant increases in premiums for health insurance. In this regard, I might note that, at the end of last week, it was announced that the premiums in the Federal Employees Health Benefit program will be rising an average of 8-1/2 percent next year. We have not had the opportunity to research this development adequately, so I am not sure that this is a clear sign that the pressures in this sphere will be greater than we anticipated in our forecast. It is a worry, however. Finally, in looking at the inflation outlook, we think it is important to consider the prospects for the dollar. Estimates of the effects of the dollar appreciation and the associated decline in import prices vary considerably, but they certainly have been a significant factor tending to trim domestic inflation in the past year or two. An advocate of the new era might say that a strong dollar is just a natural and lasting result of the reaccommodation of the United States in the world economy, but with the probability of a growing external deficit, we find it hard to swallow the concept that we should be anticipating another 20 percent rise in the dollar over the next two years. It could happen, but we are betting against it. Without that influence --indeed, with the possibility of some reversal of the dollar--containing inflation is going to be more difficult. Toting up all these considerations, we have core inflation accelerating only a couple of tenths per year through 1999 despite continuous sub-five-percent unemployment. That rate is, to be sure, damped a couple of tenths by technical changes to the CPI. But, especially given the expected abatement of favorable exchange rate effects, the forecast does fall somewhat short of what might normally have been anticipated simply on the basis of the excess demand for labor--say, if one simply applied a conventional ""sacrifice ratio"" to the unemployment gap relative to a 5-1/2 percent NAIRU. We think that we have been judicious in adapting to the incoming evidence and in taking account of alternative explanations for the surprises we have experienced. In the end, despite our flirtation with the new era view, our forecast conveys a rather clear message that the risks are tilted toward higher inflation in the absence of some restrictive policy action. But, I would have to say that this is truly a period in which the outlook is characterized by the proverbial ""unusual degree"" of uncertainty.",1863
-fomc-corpus,1997,Questions for Mike?,4
-fomc-corpus,1997,"I think Mike's oral presentation adds a good deal of clarity to the ideas behind the Greenbook forecast. There are a couple of things there, however, that strike me as somewhat inconsistent, and perhaps you could clarify this for me or the rest of us. We have a rather high real interest rate now and that rate makes carrying inventory expensive. This may be one of the reasons why inventories have been kept rather low. If we cranked up the federal funds rate by 100 basis points as assumed in the Greenbook forecast, we would have a real interest rate of about 4 percent and that would make carrying inventories hugely expensive. I would like your view of the likelihood that such an increase in the real rate would bring about a much greater inventory correction than you have in the forecast. The other thing that strikes me as somewhat inconsistent is the relationship in the forecast between the 20 percent correction in the stock market and the behavior of long-term interest rates. I think that if you assume any kind of wealth effect coming from an ""I-am-scared-to-death"" 20 percent correction in stock prices, especially if the latter were to occur relatively quickly, the flow of funds would be from the stock market into the bond market and instead of the long-term interest rates going up as in the forecast, I think one might expect them to come down. Those are the two things in the forecast that appear to me to be somewhat inconsistent.",289
-fomc-corpus,1997,"Those are very interesting questions. Perhaps the relatively high real rate of interest in recent years, particularly if it is measured in terms of the prices of goods, say the PPI, may have something to do with why we see a downtrend in inventory-sales ratios. Another factor, of course, is the better information systems that firms have to work with. Going forward, we do project a substantial deceleration of inventory investment from what we have been seeing recently. The level of the inventory-sales ratio remains historically low in our forecast. I think firms will still find that markets are not so loose, even given our capacity utilization numbers, that they feel they can avoid the need to have some precautionary stocks on hand. But, yes, there is always the potential, especially when we are anticipating that final demand will be decelerating and perhaps surprisingly so over the coming year, that inventories will get out of line at least temporarily. That would lead initially to a period of somewhat greater inventory accumulation than we have in the forecast but that would be followed by a swing down toward a much lower rate of accumulation, and it would introduce a bit of a cycle into the outlook. Whether inventories in our forecast are too high on an average basis given these real interest rates is an interesting question. I don't think I have much more that I can add on this question. It is certainly something that we are aware of. On the stock market correction question, there is something of a chicken and egg problem. The same sort of thought has occurred to me; we may have some shifting of the risk premia in the market. But there is a consistency in the forecast, at least in the sense that one reason why we anticipate the stock market decline is the rise in interest rates. That rise will require a higher discount rate in the stock market valuation formula. If we did not get that interest rate adjustment at least initially, we wonder whether the negative earning surprises would be enough to create this kind of decline in stock prices. So, it may be a timing issue; we may see some swings involving a flight to security and to fixed-income instruments. It is not inconceivable that the enthusiasm about prospective stock market returns has been a factor that in essence has raised yields across the board on various types of financial instruments. Why would I invest in a bond that yielded only 4 percent when I think I can get a much higher return in the stock market? If the expected returns in the stock market go down, perhaps we will also have some effect on the bond market. But I think we would see this in significant measure as a change in the equity premium in the stock market so that people will require a higher expected return relative to those on bonds.",547
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"I think you answered my question in part, Mike. It also relates to the Greenbook assumptions of a one hundred basis point tightening in 1998 and a 20 percent stock market correction. My specific question was whether you are assuming that same stock market correction in the ""no change"" scenario. More generally, is the stock market correction independent of the course of monetary policy?",76
-fomc-corpus,1997,"The ""no change"" scenario that we have included in that model simulation clearly would imply a higher level of stock prices than in our baseline forecast. That better stock market performance results from the strength of the economy that helps to sustain profits, and it works through the discount factor in stock price valuations. So, the wealth effects are more favorable to consumer demand in the alternative stable interest rate scenario. Our feeling is that there is certainly the potential, simply on the basis of disappointment in earnings growth, for stock prices to fall off some. We see the tightening of policy, and the shift in expectations that that causes--and the related tendency for bond yields to back up--as an important factor in explaining the timing and dimension of the stock market decline we have in the forecast.",154
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mike, the ECI forecast in the Greenbook has an increase of just a couple of tenths over the forecast period. There is reference in the Greenbook to the fact that the increasing role of bonuses and other incentive payments may be having some influence in moderating measured increases in employment costs. You mentioned in your oral presentation that medical premiums may be rising significantly. We, too, hear a lot about the possibility that medical premiums will be going up considerably in 1998. It seems to me that in your ECI forecast there is almost an implicit flat-to-down path for wage and salary increases. Do you think the risks are fairly symmetrical in that forecast? Are there factors that I am not taking into account that could moderate the increase in medical premiums? The latter seems likely to be very large.",161
-fomc-corpus,1997,"Let me mention a couple of things: One, we did build in only mild accelerations in wages and salaries and in total benefits, and we incorporated a rather modest upturn in the cost of medical benefits relative to some of the stories we have heard. To some extent, we have to consider whether we are looking at the gross increase in the cost of the medical benefits or whether they are the net cost the employer is going to incur. Certainly, many larger companies in the last year or two have been talking about how their philosophy has shifted to viewing the health insurance benefit as a defined contribution arrangement rather than as a defined benefit. So, they are looking for ways to pass along the rising cost to the employees by restricting benefits or increasing the out-of-pocket expenses that the employees will experience. In light of the seeming confirmation of some of the scarier stories and the recent federal employee health benefits announcement, our faith is a little shaken that we have allowed for enough of an increase. I would say that we do not see compelling evidence that one should write the step-up off as something that will be offset through lower wage increases. The evidence that that will be the pattern in the short run is rather shaky. In this tight labor market, I think there is a clear risk of more overall compensation inflation than we are projecting. The final point I would make is that, in this forecast, as measured in product prices--and we think this highly relevant--the increases in compensation are sizable in real terms and they are growing faster than trend productivity. So, in this model, workers are doing reasonably well because of the benefits of low price inflation. Now, whether this is the dynamic that will prevail in this kind of environment is a matter of conjecture. We have been struck to date by how, in the face of lots of stories about tight labor markets and employers undertaking to pay particular workers more in one way or another, we really have not seen an acceleration in labor costs. It may be just around the corner, and we may have to reverse course in the sequence of revisions we have been making in the forecast.",423
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,Thank you. I always pay special attention to September Greenbooks because they give us that extra year in the forecast horizon to think about.,27
-fomc-corpus,1997,"I might just remark that since this is the first time we have formally done a forecast for 1999, it probably is a little shakier than it might otherwise be.",35
-fomc-corpus,1997,"But September forecasts are nonetheless useful. A year ago in September, I looked at the projections and noted that nominal spending was increasing at a rate of around 4-1/2 percent and not much progress was being made in the direction of reduced growth. This forecast pulls down nominal spending growth by a full percentage point by the end of 1998 compared to the previous forecast, but it also runs growth out in 1999 at a rate of around 3-1/2 percent. I find that interesting, but I need to know how it is coming about. As I understand it, Mike, your baseline assumption is that starting perhaps 6 months or so from now the Committee will raise the federal funds rate by 100 basis points over the course of next year, presumably in 1/4 percentage point steps. That is more of a total increase than you were previously assuming. I would imagine that, as a general principle, the longer we delay taking any kind of policy action, the more policy action you assume we will have to have to get the same result. In comparison with your assumption of starting to raise the funds rate in 6 months to produce the Greenbook forecast result, assuming we like that result, what kind of tradeoff in timing versus amount would you have in mind if we started to tighten policy now? How much less of an increase in the funds rate might we need in total to produce the same Greenbook forecast through 1999?",296
-fomc-corpus,1997,"I do not have a model simulation in my pocket to give you a quantitative answer to that. I think that a series of policy moves that raised the federal funds rate 100 basis points by next March instead of one that only started to raise the funds rate next March would probably lead to circumstances that would encourage the Committee to think about reversing course by 1999. The reason would be to make sure that, as we moved out of 1999 and into 2000, monetary policy was not holding down the level of output so much that more slack ultimately would be created than was needed to achieve a gradual moderation in the expansion and a return to a flat-to-descending inflation path. Another way of approaching this policy adjustment would be to start the process earlier and move more gradually to get to the same point. You basically are talking about shifting the process forward with about as sharp a total increase in the funds rate, and I think that approach would create a greater likelihood that you would have the opportunity to reverse course, say, in 1999.",211
-fomc-corpus,1997,"So your view is not that we do less in total, but that we would start to reverse it sooner?",22
-fomc-corpus,1997,"As a first approximation, I would conceive of that as a more likely alternative in terms of nipping in the bud what we think is an incipient pickup in inflation. But we recognize, harking back to President McDonough's remark, that the implied real interest rate at the short end would be fairly high with a nominal federal funds rate of 6-1/2 percent. At that level, some easing in policy might be warranted if and as the inflation rate was checked and the perception was that the rate of inflation was clearly headed back down into the sub-3-percent inflation zone.",120
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Jerry just asked the question I wanted to pose.",13
-fomc-corpus,1997,"Mike, the data of the last couple of months clearly have been far stronger, especially in the manufacturing area, yet commodity prices have eased. Are we being put in a position where, for forecast and model purposes, we are using wages and prices as exogenous variables?",54
-fomc-corpus,1997,I'm not sure I understand that thought.,8
-fomc-corpus,1997,"Let me take a step back. If you were to take the type of macro environment we are looking at and you were trying to make up for a shortfall from your earlier expectations, the numbers in such a forecast would, I suspect, be far stronger than the ones that you have. So, in that regard the add factors are very dominant elements in the forecast. The question that I am asking is whether these factors have become so large in recent forecasts that they are in effect giving us an exogenous forecast of prices.",105
-fomc-corpus,1997,"I'm not sure I conceive of it as exogenous. In a sense we are letting bygones be bygones and not anticipating that the favorable inflation surprises have created some pent-up inflationary pressure that is going to burst forth in the future. I am impressed by recent commodity market developments. I looked at the charts the other day. I did see some indications in copper markets of changing expectations that appeared to be associated with the problems in Southeast Asia, and there may be some special stories elsewhere. However, when we look across the breadth of the commodity markets, there really is no sign of general pressure in those markets. If we look at these markets narrowly in terms of the domestic industrial picture, capacity utilization rates are not extraordinarily high in most sectors. And where utilization is fairly high, as it is for example in the steel industry, the businesses in question are drawing in a large volume of imports and they have capacity coming on stream prospectively in such a way that there really does not seem to be much pricing leverage. So, in the last few months we increasingly have given weight to the sense that there really is not much pressure in the goods sector and that there is a lot of capacity coming on line in the United States and in many instances abroad. In our view, worldwide economic activity is not going to be so robust relative to capacity that we are going to have a lot of pressures in the commodity markets. I do not see those markets as the source of more inflation independently of what is going on more broadly.",303
-fomc-corpus,1997,"If you are making the assumption that your model's historical structure and its coefficients are essentially correct and you are letting bygones be bygones, you will get a specific numerical forecast which follows from those two assumptions.",42
-fomc-corpus,1997,"We are in a sense modifying some of the conditions in that model. When we look at cycles historically, we see that capacity utilization has tended to move up as unemployment has moved down. It is very hard to discern econometrically a separate role for industrial capacity utilization as a measure of the underlying inflationary pressure. In the current circumstance, the deviation of the capacity utilization rate from what we would predict given the unemployment rate is becoming substantial.",88
-fomc-corpus,1997,I gather that is true with the manufacturing unemployment rate as well?,13
-fomc-corpus,1997,Probably. Those industry unemployment rates are a shaky proposition. I must say I have not really looked at that.,22
-fomc-corpus,1997,"The last time we looked at this issue was a year or so ago, and we saw the same problem for the total unemployment rate. It was not a sectoral phenomenon; it was a divergence between the labor market and the facilities market.",48
-fomc-corpus,1997,"Since manufacturers cannot produce without workers, the labor market is still relevant here. We do hear, and there were some Beigebook comments, that at least in some instances manufacturers were finding that they had to raise their wages in order to attract and retain the workers they needed. But the system seems to be working in such a way that we think it behooves us to give some weight to our expectation that capacity utilization is going to remain relatively moderate. We think this will put some damper on what the pickup in inflation otherwise would be going forward.",110
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"As Jack mentioned, most of the good questions already have been asked. Mike, I know we have had an asymmetric risk picture in most of the recent Greenbook forecasts and certainly in the way the Committee has approached setting its directives. Would you say that the risks incorporated in this forecast are larger than they have been in earlier ones in terms of the degree of ""judiciousness"" that has been used in interpreting some of the evidence?",87
-fomc-corpus,1997,"One of the risks we repeatedly have pointed to and then last time said it might not be such an asymmetric risk was the role of the stock market and the implications for consumption. As you may recall, the revised national income accounts that we received after the August meeting showed that the saving rate had fallen so that the wealth effect seemingly was working the way one would have expected. We thought that somehow the world now was right and that we had a grasp of its functioning. We were not quite so concerned as we had been about the risk that we would suddenly find consumption surging in a belated response to the accumulation of wealth. In the interim, the stock market has once again risen more than we expected. The difference is not big, but it is there, and consumption expenditures are surpassing even our expectation of a robust upturn in the third quarter. Going forward, I do not have the sense that our forecast implies an asymmetry of risks in terms of aggregate demand being stronger or weaker. But it makes me nervous that we keep making revisions in the same direction, and my sense is that there really is a boom mentality at work in the economy today. The financial markets are supplying ample credit to borrowers, and the ongoing appreciation of share prices, now more concentrated in the smaller cap issues, is providing cheap equity capital for many companies. I worry that these booming conditions may be even more strongly maintained than we have forecast. But in terms of the nuts and bolts of putting this forecast together and the assumptions we have made for deviations from what we think of as normal behavior over time, I don't think we have an obvious tilt in the risks. Let me add something that Don Kohn just whispered in my ear. We have helped, I think, to balance these risks in a sense by changing the policy assumptions. As we talk about the changes in the forecast, you should not overlook that we have incorporated in it a more stringent set of policy actions.",391
-fomc-corpus,1997,"In your alternate forecast scenario that involves no further change in the federal funds rate, I wonder about that 2.6 percent GDP growth figure for 1998 which occurs without the 100 basis point tightening. I think there is a lot of optimism in that forecast that growth will slow on its own. Now, granted that this is not your forecast number, but in terms of trying to balance off your actual forecast against a picture of what would happen if we did nothing, I think you have a lot of windage in that ""no change"" scenario.",112
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,Mike said a moment ago that he did not think that manufacturers could produce without workers. I have heard that the factory of the future will only have a man and a dog. The man is there to feed the dog. The dog is there to keep the man from touching the equipment. [Laughter],61
-fomc-corpus,1997,"Well, we don't have to worry about our educational system!",12
-fomc-corpus,1997,"I have heard that joke specifically pertaining to chip plants, an industry joke.",15
-fomc-corpus,1997,It is called a high-tech shaggy dog story. Who would like to start off the Committee discussion? President Broaddus.,26
-fomc-corpus,1997,"Obviously the latest data, particularly including the latest inflation report, are very favorable. Maybe it is time for me to stop worrying and join the celebration.",30
-fomc-corpus,1997,Don't you dare do that! [Laughter],10
-fomc-corpus,1997,"You need not worry. I'm still nervous, and I get the sense from the questions and comments this morning that the staff and other people are as well. I am still nervous partly because of what I hear in my District and because I have a sense that the foundation of all the good news lately may be fragile. As far as our District is concerned, it seems quite clear to me that regional economic activity has strengthened appreciably over the period since our last meeting. Labor markets, which were already tight, strike me as even tighter now than they were. I have heard some comments recently suggesting that labor markets in much of our District are as tight as at any time since I have been in the Federal Reserve. There is increasing concern about this among employers. We hear this in a lot of comments, but I heard it especially loudly in the comments of the members of our Small Business and Agriculture Advisory Council when they met a week ago. They spoke about signing bonuses for middle level and even clerical entry-level workers. The owner of a construction company talked about skyrocketing wages in his sector. The owner of a private employment agency said that salaries for mid-level people have risen sharply over the last three months. One of the members of the group said that the remaining labor pool in her region consisted mostly of essentially unemployable people, and there were reports of construction projects being stretched out for lack of even minimally qualified workers. So, our regional labor markets are very tight. Elsewhere, we are hearing reports of overbuilding in the commercial real estate sector. These reports are not universal across the District, but we hear that especially in the southern part of the District there is overbuilding of hotels and office and commercial space for the first time in some time. Again, there currently seems to be a lot of steam in our District economy, but having said all of this, let me acknowledge that we still are not hearing reports of significant price increases in final goods and services. That condition, of course, is encouraging, but I wonder how long it can last given the apparent robustness of business conditions in our region. At the national level, I think we already recognize that the Greenbook's baseline projections are quite optimistic. They call for continuing growth at a robust pace, a drop in the unemployment rate to 4-1/2 percent, and an acceleration in core CPI inflation of only .2 percent next year despite the absence of any firming action on our part until 1998. That is a rosy scenario, but it is not an unreasonable one given what has been happening over the last year and half or so, and it certainly could come to pass. I think, however, that there are very substantial risks to this projection. Some of them already have been mentioned today. I will focus on a couple that arise primarily from the Greenbook assumption that we may wait until as late as next spring before tapping on the brakes. First, the Greenbook is projecting that our assumed tightening in 1998 will contribute to a 20 percent decline in the stock market over the course of the year. Of course, we really do not know where the market is going to be 6 months down the road, especially if we keep policy on hold until then, or how strong the market reaction to our initial action may be, again especially if we wait until as late as next spring before taking that action. I think there's a significant risk that the reaction could be very negative. What worries me about that possibility is that concern about it might incline us to wait longer before tightening further, and that could put us significantly behind the curve. I would argue that something like that happened after the market break in 1987. If this does happen, we will have to play catch-up the way we did back in 1988 and 1989. Obviously, that would increase the risk of a recession. I recognize that is a speculative comment, but I do not think it is far-fetched. The second risk, perhaps in some ways the greater one, is that by waiting until late next spring to tap the brakes, we risk being challenged by some sort of inflation scare. It could arise from one of the incoming economic reports. Capacity utilization, domestically at least, is now approaching the level that has been associated with rising inflation pressures in the past. So, the good fortune and good luck we have had with the monthly core inflation reports may run out at some point. In that kind of situation, I worry that public confidence in our ability to keep a lid on inflation could diminish quite rapidly if we are seen as reacting to developments rather than conditioning them. Some of you may have seen a TV commercial that advertises an upscale car by saying that life is divided between drivers and passengers, suggesting that drivers are more content than passengers because they are in control. I'm not sure that is always true on the highway; I know it is not true on 1-95 where I would rather let somebody else drive. But I think it is applicable to monetary policy. I hope we will keep our hands firmly on the wheel and be ready to tap the brakes sooner than in the Greenbook scenario if we need to, as I think we may well have to.",1053
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, economic growth has continued to display strength in the Twelfth District in recent months. Payroll employment grew by almost 3 percent at an annual rate this summer. The number of jobs expanded briskly in the construction, real estate, and local government sectors in the District states that have fast-growing populations. Total manufacturing payrolls were boosted by the pickup in Washington State where we see a lot of growth in aerospace employment. This, of course, is the effect of Boeing's increased production as well as the effect of that production on supplying industries. However, aside from the aerospace industry, growth in District manufacturing employment has slowed a bit recently. Job gains have been most rapid in Washington and Nevada where payrolls are expanding at about a 6 percent annual rate. For example, the competition for skilled workers has stiffened in the Seattle area where Boeing, Microsoft, and other high-tech employers are expanding rapidly. In the Las Vegas area, construction of resort and other commercial projects continues to boom. The pace of expansion in California has remained strong in recent months, but it no longer appears to be accelerating. Payroll employment growth slowed to about a 2 percent average annual pace this summer, and that is down from a 3 percent gain in the preceding 12 months. The national economy has continued to yield good news, as we have all seen. Economic activity appears to have turned in another strong performance in the third quarter and inflation has fallen further. Looking forward, I think there are a number of reasons to expect aggregate demand to slow in the quarters ahead. Inventories appear to be a bit on the high side as do stocks of most other types of real assets held by businesses and households. At its present level, the dollar is a restraining influence, and fiscal policy certainly remains somewhat restrictive. As a result, we expect to see a slowdown in nominal GDP growth from 5-1/4 percent this year to about 4 percent in 1998, with real GDP expanding by about 2 percent next year. However, I think there is upside risk to the outcome for next year, given that the economy has surprised us on the strong side over the past year or so and the possibility that a significant positive supply shock is affecting the economy. With regard to inflation, the roughly 2 percent increase in the GDP price index that I expect for 1998 represents a relatively small rise over the 1-3/4 percent increase anticipated for this year. Of course, conventional measures of resource utilization suggest upward pressure on inflation. It is difficult, however, to know how much weight to put on these indicators. While there are reasons to be concerned about their reliability at present, it is too soon to tell if their historical relationships with inflation have broken down. Our analysis suggests that inflation forecasts in the past two years based upon these relationships are within normal statistical bounds. Even if we do get some upward pressure on inflation from high resource utilization, there are other factors in our forecast for 1998 that tend to restrain inflation at least temporarily. These include negative speed effects from the slowing growth of the economy and the high level of the dollar. Thank you.",636
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. Economic conditions in the Seventh District are quite similar to those on which I reported at our August meeting. Our regional economy continues to expand at a moderate rate that is slower than the nation's, in part due to labor supply constraints. I met with our Advisory Councils on Agriculture, Labor, and Small Business a couple of weeks ago. The primary focus of discussion in all three groups was labor market conditions. Indeed, for small businesses, labor has become the limiting factor rather than capital, which seems to be quite plentiful at least according to these people. The general sense was that labor markets had tightened further since these advisory councils previously met last spring, and that is consistent with the fact that our region's unemployment rate fell below 4 percent and stayed below 4 percent during this period. These tighter conditions seem to be leading to some increases in the growth of base pay. But with a few exceptions, the increases are quite modest and on the order of .2 to .3 percent higher than a year ago. More striking are the other measures that firms are taking to secure qualified labor. These include signing bonuses for new employees and staying bonuses for existing ones. These forms of compensation do not show up in the ECI, and they appear to be ever more common. Small businesses are offering more flexible hours, customized benefits, and perks like tickets to sporting events. At the same time, the trend toward greater use of variable pay seems to have accelerated. Even some UAW assembly workers now have their pay tied to productivity targets. Firms seem increasingly willing to move jobs to areas where labor is not as scarce. The most extreme example mentioned at this meeting involved telemarketing firms, which seem to be able to locate in areas with relatively high unemployment. A new facility in such an area can begin its operations within a month. Tight labor markets also are encouraging, and in some cases forcing, firms to spend more on worker training. Similarly, apprenticeship programs are being revitalized in the building trades and elsewhere. Finally, council members reported that conditions remain favorable for moving people from welfare to work. Even here, the constraint appears to be mainly on the side of the labor supply. The individuals who have difficulty moving from welfare to the workforce often cannot pass a drug test or are not familiar with the mores of the workplace. As I reported before, District manufacturers and retailers continue to tell us that competitive pressures inhibit their ability to raise prices, although there have been some exceptions. For example, at our last meeting I reported on a large paper company that had pushed through its first price increase since 1995. That increase has held for the entire industry, and the firm is planning other price increases this fall. Prices of heavy and corrugated paper are up, and there is talk that newsprint will soon be on allocation. Overall, manufacturing activity continues to increase in the District, although at a slower pace than in the nation. Results from the Chicago Purchasing Managers' Survey were released this morning, and the composite index moved lower, to 61.2 in September from 64.3 in August, a sign that activity continues to increase at a healthy pace but more slowly than in August. The prices-paid component was 59 and the supplier-deliveries component came in at 58.1, both above 50 but below their August readings. At our August meeting, I mentioned that there were some hints of slowing in the steel distribution and trucking industries, which contacts thought might be temporary. That seems to have been the case as these contacts now report that activity has returned to high levels. In terms of consumer spending trends, reports generally point to continued strength in August and September. Our survey showed that August was the best sales month so far this year for most Michigan retailers. Across the District as well as nationally, discounters are now experiencing strong sales performances, while the high-end or luxury segment is noticeably sluggish. This represents a reversal from the pattern that we saw earlier this year. At one large national retailer headquartered in the District, sales of appliances and home electronics have increased considerably in recent weeks while sales of apparel have moderated. Auto and light truck sales have been boosted by targeted incentives and the unbundling of option items. September sales will not be quite as strong as the 15-1/2 million unit pace of July and August, but even with the shortened reporting period, our automobile industry contacts believe September sales will be higher than the level implied in the Greenbook. Turning to the national outlook, I was slightly optimistic at our August meeting that the fundamentals were in place for future real growth at trend rates, but the new paradigm dilemma is now about as large as it gets. Second-quarter real GDP growth is substantially higher, while the inflation data continue to roll in lower than expected. The burst of investment in potentially productivity-enhancing capital equipment is encouraging. Nevertheless, although my inflation outlook has moved lower since the August meeting, it still has a somewhat steeper upward tilt than the Greenbook. On balance, I continue to view the risk to the outlook as being on the upside.",1025
-fomc-corpus,1997,"Mr. Chairman, may I interrupt for a moment? I would like to remind the members that in this discussion of what happens if the Committee tightens sooner than is assumed in the Greenbook forecast, the tighter alternative in the Greenbook is a first approximation. It is the sort of scenario where the Committee starts the tightening process immediately, and by the middle of next year the funds rate is at 7 percent instead of 6-1/2 percent. But as you can see if you look at the numbers for 1999, we have slow growth in economic activity and the unemployment rate is moving up very rapidly. So, this goes to the remark that I made earlier. If you looked out to 2000, you would probably be thinking about moderating the amount of restraint that was being imposed so that you did not needlessly overshoot the sustainable unemployment levels. I think you can get some sense from the Greenbook as to what the difference might be.",195
-fomc-corpus,1997,"What worries me is that we may well need an actual turn in the inflation rate to get a sense of what this process is all about because we are still guessing. If we go back six months, even though we were then seeing falling inflation, the presumption that it would continue to fall over the ensuing six months would probably have been considered almost inconceivable. Until we get a sense that this unusual behavior is coming to an end, I don't think we are going to understand fully what is happening.",101
-fomc-corpus,1997,I don't question that. I just felt that I probably overlooked a piece of information that might have been a more direct answer to your question.,28
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"The Eleventh District economy continues to do very well, which I regard as a good thing. The Dallas District was cited in the Beigebook summary as having increased retail sales and some modest upward pressure on prices and wages in the services and retail sectors. Manufacturing activity has picked up in our District since the last meeting. Oil refineries are operating at record capacity levels. Rig counts are at their highest level since 1991, and even so their number is being constrained by a shortage of crews. Existing home sales have increased modestly, while commercial and office vacancy rates have continued to decline, leading to rising commercial construction in our area and a shortage of construction workers. Moderate gains in bank lending and continued competition between bank and nonbank lenders have been putting some downward pressure on rates but mostly on terms. As for shortages and bottlenecks, there have been some rail shipment disruptions related to railroad mergers, and anecdotal reports from our Small Business Advisory Committee suggest that, at least in our part of the country, UPS operations have not yet recovered fully from the strike. There is still a good bit of confusion there. Most farm crops in our area are in better shape than they have been in quite a while, but our farmers are almost obsessed with El Nino. They do not know what its impact is going to be on them. An economist at Exxon, who is also a meteorologist, has asked us if we could get a combination economic/weather forecast for them. Perhaps we will be looking into that! Texas traditionally has faster employment growth than the nation as a whole but at the same time a somewhat higher unemployment rate. That is the result of two factors, net strong in-migration of workers into Texas and the poverty and high levels of unemployment in the southern tier of Texas counties along the Mexican border. That area is now benefiting from the recent strong recovery of the Mexican economy, which is export-led and concentrated in northern Mexico especially among the maquiladora plants on the Mexican side of the Tex-Mex border. That is beginning to improve business noticeably in South Texas. I might just mention that the peso devaluation gave a boost to the already strong and rapidly growing maquiladora industry. It is my understanding that U.S. manufacturing employment has increased by only about 33,000 workers since the end of 1994 while manufacturing employment in the maquiladoras has increased 300,000, about ten times as much. Only seven U.S. states, if they are ranked in terms of manufacturing employment, rank higher than the maquiladora industry.",514
-fomc-corpus,1997,"I did not quite get the difference between the 33,000 and 300,000. What is the 33,000 again?",28
-fomc-corpus,1997,"The 33,000 is the increase in U.S. manufacturing employment since the end of 1994.",22
-fomc-corpus,1997,In Texas?,3
-fomc-corpus,1997,"No, I think it is for the nation.",10
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,"And the 300,000 is the increase in maquiladora manufacturing employment over the same period. If we rank the states in terms of manufacturing employment, California is first, Ohio is next, then Texas, Illinois, Michigan, Pennsylvania and New York. The maquiladoras would rank eighth, coming in ahead of North Carolina and Florida, for example, which I find to be something of a surprise. They are supplementing the U.S. manufacturing capacity, and I think a lot of that supplemented capacity is in the industrial Midwest. The point there is that the maquiladora manufacturing capacity is helping to alleviate the pressure on U.S. capacity utilization. I might also mention with respect to Mexico that since the last FOMC meeting. Harvey Rosenblum and I spent a day with the Board of Governors of the Bank of Mexico and we also met with the Minister of Finance. Some of my impressions are as follows: The smoothness of the Mexican election should not encourage us too much. There is a mood of ""get even"" and ""pay back"" that threatens to take economic policymaking out of the control of the technocrats in Mexico. The parties of the left and the right seem more willing to get together to oppose the center than to get with the center to oppose the other extreme. So far, the economic argument is focused on whether and how much to roll back the value-added tax that was increased during the peso crisis. While the macro numbers describing the Mexican economic recovery are strong--their real GDP increased almost 9 percent over the past year--it is concentrated in the export sector, which is also concentrated geographically in the northern part of Mexico. This recovery is missing a lot of the people who were harmed by the initial downturn and by the devaluation. The point is that the vast majority of the people have not felt much of the benefit of the rebound, and this is limiting the political credit that might have been given for the good macroeconomic performance. While the Mexicans have stopped the hemorrhaging of their banking system, the latter's return to health has barely begun and it remains vulnerable. In addition, the cost of the government's rescue efforts is a double-digit percentage of GDP, another factor contributing to the lowering of standards of living. The Mexican authorities understand the dilemmas and the dangers of having their exchange rate held up in real terms by capital inflows, but their desire to maintain an open economy leaves them with not much they can do about it, and they may be a little nervous about being in somewhat the same position now as they were in 1994. From our side of the border, their strong peso is boosting our exports. A favorite way of measuring exports to Mexico is to measure the length of the line of trucks in Laredo going toward Monterey on 1-35, and it is typically backed up 5 to 7 miles these days. Turning to the U.S. economy, what can I say except ""the beat goes on."" It is good to see the near-term Greenbook forecast taking on more of an optimistic, new paradigm tone. I did note that the Greenbook soul searching over the new era rhetoric was, in Mike Prell's words, ""tortuous,"" but it was appreciated nevertheless. As for Greenbook details, the only thing I would quibble with a little is that we see the real third-quarter growth rate to be considerably stronger than the Greenbook has it now.",695
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, the New England economy continues to grow steadily at roughly the national rate. The regional unemployment rate in August was about 4.3 percent, and initial unemployment claims continue to trend down. Labor force participation rates are rising in response to the attractive employment situation. Most of our job growth has been concentrated in services, as is true for the national economy, but no sector of the regional economy is doing poorly at present. Even manufacturing employment has begun to edge up. This represents a rather striking contrast. We are always looking at how things got out of whack in New England at the end of the 1980s and how things are different now, and hopefully they are. At the end of the 1980s, New England was enjoying a very high degree of prosperity. Then, as now, most of the new jobs were in services, but that situation masked employment declines in many of the region's manufacturing industries, and that, of course, played into the depth of the recession when the bubble finally burst in New England. Our informal conversations with the region's retailers and manufacturers confirm the positive picture. Retail sales and manufacturing revenues are up from year-ago levels, surpassing expectations in many cases. Manufacturing strength is quite broad-based, with aircraft parts and furniture exhibiting some of the most rapid growth. Most retail and manufacturing contacts report that they have capital expansions under way. Some of the manufacturing plans are quite ambitious. Many of our contacts characterized labor markets as tight. Several commented that the quality of the pool of people from which they draw has declined. Employers claim to be resisting increasing wages across the board, although the normal wage increase seems to be edging up from what it was a few months ago. It is now in the 3 to 5 percent range. In addition, special bonuses and other incentives seem to be available to more and more of the workforce. While overall wage levels continue to rise only in the moderate range I have talked about, our contacts in the temporary help business commonly report increases of 10 percent or more, and in some cases a lot more. Wage increases are particularly rapid for people with technical skills. These workers in New England, as well as elsewhere, are in very short supply. Many receive offers of permanent employment but are choosing to stay in contract work. The temporary help agencies report no difficulty in passing the increased cost of temporary workers on to their customers. Salary pressures are also quite intense, as you can imagine, in the asset management area. One respondent observed that while the general salary pool increase at his firm is 4 percent, investment managers have bonuses like sports stars. Bonuses to existing employees who refer new hires are becoming more prevalent along with signing bonuses, and these referral bonuses typically range somewhere between $500 and $2000. Most companies in retailing and manufacturing continue, however, to hold the line on prices, citing competitive pressures. Even when prices of materials or wages have increased, gains in efficiency have enabled companies to maintain selling prices without sacrificing margins. A contact from a very large company regarded as one of the nation's most efficient observed that she sees virtually unlimited opportunities for cutting costs and improving productivity. These opportunities often involve changes in procedures rather than specific new capital investments. I must say that I was impressed by some of the discussion when a trade mission from India recently visited Boston; the trade mission included India's minister of trade and industry and the ambassador. They were talking a bit about the boom in some areas of the Indian economy. In particular, they talked about how several hospitals in the Boston area now create automated records during the day, which are shipped overnight via telecommunications to Bombay, entered into online real time databases there, and then are available the next morning for use by our hospitals, effectively a day or less from the time that they were created. This basically moves major back office operations out of Boston to Bombay in a way that seems to be fairly easy to set up. They were pointing to the advantages that India has, and it was quite striking that this improved service was available to hospitals and other kinds of companies that traditionally have had some difficulty with the productivity of their back office operations. Another contact attributed low inflation to Wal-Mart and other retail giants who have taught companies to be just as difficult with their suppliers as their customers are with them. Real estate markets throughout New England continue to be quite active, and we had some improvement in previously lagging areas, Rhode Island for one. Prices, however, are increasing as yet only modestly. I was intrigued by Mike Prell's discussion of the Greenbook forecast because I think it addressed a lot of the differences that we had with the Greenbook presentation. We agree with your assessment of the outlook for growth, Mike, particularly over the short run--that is, over the next 3 quarters or so. We have some concerns after that. We think it likely that unemployment will decline to the 4-1/2 percent level talked about in the Greenbook and that, at least in the short term, inflation will creep up only modestly. However, we begin to have some questions after the short term. We question whether the appreciated dollar will stay where it is over the entire projection period and have the impact on controlling inflation that is expected in the Greenbook forecast. We wonder whether we are going to have more normal cost increases in benefits. You talked a little about that, Mike. It is not featured much in the Greenbook, but you did bring it into your discussion. We think it possible that more normal wage increases will begin to reassert themselves sooner rather than later. I also question whether the impact from the decline in the stock market that we have been expecting for so long will really begin to hit us in the early part of 1998 the way both your standard forecast and your alternative forecast assume. It seems that aside from the dollar, you are hanging your hat on two things to derive a very rosy forecast. They are a 100 basis point increase in the federal funds rate and a related drop in the stock market. I want to question whether, if we get on this bandwagon a little earlier than is assumed in the Greenbook, we can do a little less and have a little more of an impact on asset valuations going forward. That would help to moderate demand pressures and reduce the risk that I think is apparent in this Greenbook forecast that the economy could get out of control earlier next year than we expect.",1297
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. In addition to our usual advisory council meetings and other contacts, we had a board of directors meeting earlier this month with all the directors from our three offices and, in conjunction with that, a breakfast with some leading manufacturing CEOs to talk about innovations, greater efficiencies, and new products. Chairman Greenspan was present to hear these executives as well as the directors. So, if the way I feed back what was said does not fit with your impressions and recollections, Mr. Chairman, you may want to add to or correct what I have to say here. We were trying to get a sense of what was happening within companies and whether or not that resonates well with what we see in various economic statistics. Some of the common themes and responses were as follows. The increase in manufacturing capacity and in efficiency and/or productivity as seen by firms reflects in part the very strong incentives that they all feel as well as the availability of new technologies that can be used to minimize their downtimes, tighten their control of factor input costs, and improve the management of their inventories. They said that the incentives for much of that increase in capacity and related productivity would have been there and could have been accommodated even without major expenditures for capacity. They talked a lot about the continued shortening in product life cycles, and observed that the only way they could hold prevailing product prices steady was through product enhancements. They doubted whether such enhancements were accurately reflected as different products within their own firms, let alone in the statistics. The CAD/CAM technologies are making it possible for them to shorten product life cycles dramatically, which then allows them to customize the products far more readily than they were able to before. Also, they offer more frequent shipments to their customers as a way to reduce the inventory costs of the customers. That sometimes allows them to raise the posted price, but for the most part it simply reduces the pressure they feel to cut their prices. That is a product enhancement even though it would never be recorded as a different product when it is simply made available more frequently. Production automation means that the setup times are dropping sharply, and in turn that means that business firms have more actual capacity even with the same physical plant facilities and product enhancements are facilitated. Global competition and outsourcing together with the constraints on pricing are increasing the incentives for innovating and introducing new products at a faster pace. I got the sense that we were nowhere close to the end of that set of opportunities. One newspaper executive talked about how their overhead relative to total revenue has been falling because the same support expenditures are now spread over much, much larger volumes. This is made possible by new technologies that have caused a very sharp drop in production and distribution costs. Steel is one industry that was well represented, and they commented that over the last 10 years their industry has had a major increase in labor productivity averaging 4.4 percent per year. Over that same 10 years, they have experienced a 57 percent increase in labor costs per hour with no increase in product costs per ton. A little more on labor: An interesting twist on what we have been hearing or thinking about the behavior of unions is that they are now providing more and more intensive training of union workers to insure that the productivity of their members versus nonunion workers is sufficient to more than offset any wage differences. Within the last 10 years, construction and some other unions have adopted what they now call a ""lifetime-of-learning"" philosophy as a part of the rationale for union membership. The objective is, of course, to have their members stay in demand as the most highly-skilled and therefore the most highly-paid workers. This is a shift away from earlier philosophies of protecting jobs through various restrictive labor market practices. There was also a claim that for office workers we are only beginning to see the kinds of technologies that will allow workers to be trained and retrained on a continuing basis at their desks or their work stations. How that might enhance productivity also was discussed. One note about the tightness of labor markets: It was said that Wendy's Restaurants across the nation once had a notice in the center of every table that said ""special of the day."" Now every table has a list of ""positions available."" Other directors commented that retail sales went flat last spring. They characterized retail markets by saying that ""customers went into a cave."" Then, in the course of July and August, customers crawled out of their caves and started to spend at a surprisingly strong rate in the view of some directors. Major retailers reportedly are growing more confident, and the expectation now is that we will see orders increasing in the period ahead. With respect to the real estate market, we hear that higher-priced homes are still staying on the market a relatively long time and that in some metro areas overbuilding is becoming more obvious in what had been hot markets. Our directors expect that situation to get even worse. Some of the bank directors reported brisk home refinancing in the most recent weeks. The bankers also talked about increasingly skimpy pricing in their C&I lending. They claimed that banks have plenty of money to lend and that everyone is driving their volume up to maintain earnings in the face of slimmer margins. One banker commented that everybody is chasing deals. Turning to the national economy, a year ago we were looking at a near-term forecast for the fourth quarter of 1996 and the first quarter of this year that looked satisfactory, with nominal spending growth in the 4-1/2 to 5 percent range. Of course, that did not happen. We were very surprised at how much stronger than expected nominal and real growth were in that period. That was a pleasant development because, at least in that period, the rapid growth was not yet associated with an acceleration of inflation. With the advantage of hindsight, we can see that that condition was being signaled by an acceleration of money growth. We got a lot more growth in broad money but also in the base, sweep-adjusted Ml, and MZM than was projected at the time of the September meeting. Nominal spending growth needed to slow down, and it did slow down in the spring quarter. Money growth also slowed down, providing a little respite. But money growth then started to accelerate again, and we are now getting upward revisions in the third-quarter GDP numbers, both real and nominal. I was out in San Francisco a couple of weeks ago and Larry Klein, who was on Bob Parry's program, reported that he uses a high-frequency model to make a new estimate of the economy every Monday. He has been revising his forecast successively upward, and at that point he already had growth of 4 percent in real and 6 percent in nominal GDP for this quarter. He said that each time he makes this estimate, the economy looks a little stronger. That concerns me because we again are looking at a rather good forecast in the Greenbook. If this forecast turns out to be correct with or without the policy adjustments it implies, I would be comfortable. But I am more and more concerned that we are likely to be surprised again in the near term by just how much stronger nominal spending is than we are anticipating. So, when the money numbers accelerate as dramatically as they have over the last couple of months, I see a need for those increases to slow and I am not comfortable that our policy is right. I cannot visualize the conditions that would allow me to accept growth of the sweep-adjusted monetary base on the order of 7 percent--and that growth is currently accelerating--at this stage of the cycle. It says to me that we more likely have calibrated the nominal funds rates too low rather than too high. The way we usually look at real interest rates--the real funds rate or some other real short-term interest rate--abstracts from the idea that real interest rates have to be thought of in a relative context. If people in their decision-making are adjusting upward their expectations about real returns on productive assets in real estate markets, equity markets, or elsewhere, then real short-term money market interest rates have moved down in a relative sense even if consumer price inflation has moved down. There were references earlier to the possibility that boom conditions could emerge. If boom conditions are starting to emerge in the minds of people, then the stance or thrust of policy has become progressively more expansionary even with an unchanged nominal funds rate.",1679
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Tenth District economy continues strong. Our manufacturing sector is still operating at very high levels of capacity. District retailers are again experiencing good sales after a slowdown this summer. The energy sector is strong. The District farm economy is in uniformly good condition; that includes both our grain and cattle industries. The construction sector has shown some slowing over the last several months but from elevated levels to more moderate levels of activity. We have seen some slowing in our labor markets, but that may be due largely to the fact that we had very low unemployment to begin with, anywhere from 2 percent to 4 percent across the District. In the circumstances, our labor markets remain quite tight and we are continuing to see some evidence of wage pressures across the board. That includes entry-level workers, technicians, engineers, and so forth. Wages for entry-level jobs are now reported as starting at about $10 per hour in the Denver area, and entry-level wages are rising elsewhere in the District. Mike Prell and others have mentioned that medical costs are expected to increase, and we too are seeing evidence of that. In fact, who is an executive with said that they expect premium increases of 4 to 6 percent or higher and that half of the health plans in Colorado are now losing money. So, they are going to push to recover their rising costs. On the inflation front we have not seen widespread increases in prices, but there are indications of higher prices in some sectors such as the transportation industry. Some of our major railroads have pushed through price increases. Their customers have complained, but since the trucking industry is doing the same thing, competition is not forcing the railroads to back off. On the national level, I would be skeptical about pushing the concept that we are experiencing a new paradigm. I do think, though, that business cycles do not repeat themselves exactly as we have seen in the past. A host of special factors seem to be affecting various parts of the economy, but fundamental economic forces may well come back to bear on the course of this cycle. I am alerted to that possibility when I look at the level of resource utilization throughout the economy, and that makes me skeptical of the explanation that we have a new paradigm that will last. I do not mean to ignore some other developments, which I will keep in mind when Don Kohn presents his alternatives to us a little later. These include a real fed funds rate that remains high in an historical context, core CPI inflation that has been trending lower, pipeline inflation that is essentially absent right now, inflation expectations that continue to be stable for now, inflation indicators that are pointing downward, a dollar that is higher at this point, and long-term rates that are lower than they were somewhat earlier. That is the other side of the coin that everyone is talking about and debating, and we have to keep it in mind as we raise concerns about the level of resource utilization and its implications for inflation. Thank you.",601
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"The economy in the Philadelphia District currently is performing much as it has in recent months. It features steady growth at a moderate pace, tight labor markets, and little or no upward pressure on prices. In commercial real estate, vacancy rates are low and rents are rising. More capacity is in train, however, and rents are expected to be under less pressure as more space is completed. As yet, there is surprisingly little speculative building going on in the Third District. Although wage increases seem to be holding at around 4 percent, there are more reports of additional perks, signing bonuses, and other incentives to attract and retain skilled people. With business activity generally favorable, attitudes are positive but tough competition seems to be providing a restraining influence on the development of a boom mentality. Turning to the nation, we are in a reasonably comfortable position for now. Actual performance at the macro level continues to be surprisingly good, and the risks to that favorable performance are largely unchanged from recent months. Like some of the rest of us, I did appreciate the confessions of a tortured staff. Perhaps the time has come for all of us to torture ourselves less. Most people like to be right rather than wrong; most would rather have the outcome turn out to be better than worse. The problem here is that things have turned out to be better, but most of us have been wrong. [Laughter] Depending on one's mindset, each of us will respond either by saying, ""The old model is still true; just give it time; it will reassert itself,"" or by saying, ""There is a new model at work and the world is indeed different."" My guess is that the truth is probably somewhere in the middle. We just do not know where in the middle at this point. But I think the time has come for us to be less defensive, and the way we do that is to adopt the stance of being open minded and alert and let the truth, whatever it is, fall out wherever it might. In the meantime, we make the best judgments we can. If we are right, we are right; and if we are wrong, we are wrong. But I do not think we ought to torture ourselves any longer.",445
-fomc-corpus,1997,"I should say that the word I used to describe the Greenbook forecast was ""tortuous."" [Laughter] I hope we did not torture the readers.",33
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. I have little new to report on the Eighth District economy. On balance, economic performance has improved in the third quarter, as we hear has occurred in other districts. Sales exceeded the expectations of many businesses. District labor markets are stretched to the limit in many areas, and that is putting a damper on payroll employment growth. For example, the latest Manpower survey as well as a recent survey of small businesses in the District show continued strength in labor demand relative to the supply of qualified workers, resulting in some pressure on wages. The market for high-priced homes has weakened somewhat in the District, but overall residential building has been held back more by supply than by demand factors. District banking data are broadly consistent with an overall strengthening in activity recently, as reflected in the apparent year-over-year growth in bank loans at a double-digit pace in the second quarter. One problem with this assessment, however, is that the data exclude what was the District's largest banking institution, now part of another District for statistical purposes. The outlook for the nation continues to improve. The substantial upward shift in the Greenbook's outlook for economic activity in 1997 is consistent with our view from the Eighth District. Perhaps the most important reason for this good outlook is that inflation and inflation expectations have declined, facilitating sounder economic decisions and avoiding imbalances that occurred in past expansions. When the recession started in the third quarter of 1990, inflation as measured by the CPI had accelerated to 7 percent. By the first quarter of 1991, the CPI inflation rate had dropped to 3 percent, and it stayed near that level until recently. This year the inflation rate has dropped to an annual rate of 1.6 percent through August. We should view this unanticipated development as an opportunity to take a step closer to price stability, a step that would put our inflation performance much more in line with that of other industrial countries. Longer-term inflation expectations appear to have come down a bit in financial markets as well, perhaps reflecting the view that we will lock in a rate of inflation lower than 3 percent. However, we have not taken any important steps to do so as yet. If anything, and Jerry Jordan mentioned this in a very clear fashion, monetary policy may be getting more accommodative as gauged by the growth of money and credit. The broad aggregates, M2 and M3, surged in the last 12 weeks and remain above the upper bounds of their target ranges for 1997. We see a similar surge in the narrow monetary aggregates after adjusting for sweep accounts. These indicators of an expansionary monetary policy stance are consistent with the continued rapid growth in bank credit we have observed and a readily available supply of loans for both consumers and businesses. The Greenbook is forecasting a substantial acceleration of inflation and a significant increase in the federal funds rate target in 1998. If such actions are judged by the Committee as likely to be needed in 1998, then why not adopt a tighter monetary policy stance in 1997? Policy actions while the economy is robust, as it is now, might be less disruptive than they would be in a situation where real growth is slowing and inflation is accelerating, as is forecast for next year. A little preventive medicine sooner, which is not a new theme in light of some of the comments made here today, might avoid such a dilemma later. I realize that markets would be surprised by such an action because we have not laid the groundwork for it. We have not been explicit about our inflation objective. If we had been, markets would not be caught completely off guard by monetary policy actions to preserve the inflation gains we have experienced this year. For all intents and purposes, those gains have brought us to price stability. Indeed, markets might react favorably to such actions since low and stable inflation is sound economic policy. Thank you.",782
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you. The Ninth District economy remains quite healthy, and I have asked myself what has changed in our area that might provide a clue as to the future performance of the national economy. The short answer to that is ""not much,"" but let me comment on a few aspects of the situation in any event. District agricultural conditions are mixed. Livestock producers find themselves in better shape than they expected and are having their best year in some time. On the other hand, producers of wheat and other small grains are finding themselves in even worse shape than they anticipated, both in terms of the size of their crops and the prices they are going to get. As Mike Moskow commented, the paper industry is doing better and probably better than it expected at this point in time. The scramble for labor continues in the District and, if anything, it has intensified. I would say that there is more commentary among business people about wage pressures than I was hearing a few months ago. For the most part, that has not translated into price pressures or price increases yet. I have come across a couple of reports of firms that, after not raising prices or at least not making price increases stick in recent years, have done so recently, and it appears that those increases will stick. So, there may be something going on there, but I would say it is premature to conclude very much. As far as the national economy is concerned, given the momentum that appears to be underlying what is going on, I have some sympathy for the changes to the Greenbook forecast. We are looking at more real growth and lower inflation, and that is sensible. But it does strike me that changes to the forecast could almost as easily have been made in the opposite direction on the grounds that the unemployment rate has fallen more rapidly than we anticipated, capacity utilization rates have risen, employment gains have been larger than can be sustained in the long run, and all of that might lead us to believe that we are going to see more inflation and less growth in the future, even in the relatively near future, than is envisioned in the Greenbook. However that may be, my concerns are heightened a bit by some analysis we have done on what I would describe as proxies for imbalances. Of course, these variables are not infallible, but they all have moved into ranges where they are beginning to flash some warning signs. In particular, we have been looking at the quit rate, capacity utilization in manufacturing, and the term structure spread. Based on historical performance, all these indicators are now in ranges where we might anticipate slower real growth and/or more inflation than in the Greenbook forecast some time in the next 12 months. Again, I would not want to make too much of that at this point, but for those of us who still have some faith in the old time religion, I do think that there may be some warning signs out there.",583
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. Our Sixth District economy looks much the way it did six weeks ago, and District activity finished the summer at a pace that looks much the same as that for the nation. The regionally important tourism and hospitality industries could not be stronger, and this is despite the added capacity that I reported at previous meetings. At the same time, we have seen some impact on tourism from a stronger dollar. Traffic from Europe, especially Germany, is down, but that has been offset by a pickup in visitors from other areas of the world such as Latin America. Manufacturing seems to have slowed somewhat after a strong summer. Activity remains solid in shipbuilding and energy. Further expansion from present levels in the oil and gas drilling business is limited by the availability of rigs, many of which are being refurbished after having been written off earlier as unusable. Our people tell us that inventories remain in good balance for the most part. There is growing anecdotal evidence suggesting that continued strength in investment spending is motivated more by the desire to cut costs and improve productivity than the desire to increase capacity in anticipation of future growth. In Alabama, where many small towns dependent on apparel manufacturing have been hard hit in recent years as I have said at a couple of meetings, we have seen a welcome influx of light manufacturing, especially electronics and high-tech. Much of that seems to be driven by the new southern auto industry in that part of the country. Residential construction in our area appears to be moving sideways rather than falling off to some extent as we expected would occur by now. Retail and industrial construction has passed its peak, but office construction is still showing some acceleration in the Southeast. Retail sales were good in July but slowed again in August. No one is surprised that labor markets in our region remain tight, although I would not characterize them as tighter than a year ago. Perhaps that is because our growth was relatively stronger early in this expansion. An interesting story that matches some others comes from one of our businessmen in a very small meter-reading business. He said that he was having a very difficult time recruiting young people with good driving records to run around the community and read meters. His solution was to hire two people in the place of one: a retiree with a legitimate driver's license and a good driving record who needed something to do and a young person with good legs to do the running between the houses. He said the experiment has worked quite well. This is an interesting way to get around the labor shortage in that area. Despite tight labor markets, we still are not hearing any reports of significant wage increases. Retailers continue to tell us that they expect to get no meaningful price increases over the next six months. And while manufacturers say that their margins continue to narrow at least a little, even small increases in prices are tough to pass on, a now-familiar story. At the national level, we see the picture much the same as most of those who have commented this morning: higher-than-anticipated growth and lower-than-anticipated inflation. Like the Greenbook, we too expect economic growth to slow in the latter part of the year and into 1998, partly due to inventories but also reflecting moderation in the growth of investment spending and in the contribution from exports. We are not anticipating any significant new price pressures in the near term, but we do expect an upward drift next year to the extent that energy prices increase and we lose the moderating effect they have exerted this year. I am not looking at Ed Boehne's notes, but I too believe that we continue to be in a period where we should allow ourselves to enjoy the happy combination of developments that have occurred, even if we do not fully understand them. My instincts, like almost everybody else's, indicate that the risks are still somewhat on the upside and that we are still likely to need to tighten at some later point down the road. If I were more confident that the economy would play out as laid out in the Greenbook, I would be beating the table for an early policy move. I believe that what probably has been at work is not just the good fortune of positive shocks but rather the more subtle and hopefully more lasting effect of some years of good monetary policy and, in more recent years, of better fiscal policy and expectations of more of the same. I think there is at least a reasonable chance we could continue to be happily surprised for a while longer. Thank you, Mr. Chairman.",895
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The rate of economic growth in the Second District has held fairly steady since the last meeting. The latest figures on payroll employment suggest a third-quarter acceleration in the pace of job creation, though the figures were held down a bit by the UPS strike. The job growth in New York and New Jersey averaged an annual rate of 0.9 percent over the last three months, but if we remove the strike effect, the rate of growth actually would be about 1.7 percent despite some drag from the public sector. Consumer spending in our area is reasonably good. The retailers are happy and report that sales are a little ahead of their plans. In the real estate area, the main characteristic continues to be weakness in upstate New York and some further tightening of the space markets in various parts of Manhattan. Manufacturing in the area continues to be fairly good, again with some drag from the upstate New York area. That was dramatized recently by Eastman Kodak's announcement that it will cut at least 10,000 jobs; they did not specify where the cuts would occur, but a third of their workforce is in upstate New York. Within the District, consumer price inflation averaged 2.2 percent during the 12 months ended in August, about matching the national rate. On the national level, we do not have quite the drama in our forecast of a 20 percent correction in the stock market or a 100 basis point tightening, but our forecast is a reasonably attractive one in any event. We look for GDP growth of 3-1/4 to 3-1/2 percent in the third quarter, but we then have growth slowing to about the trend rate both at the end of 1997 and into 1998. The big variable, of course, is the consumer. We anticipate that consumer spending will settle down to a trend growth rate of about 2-1/2 percent, and for reasons related to the question I asked earlier, we think that inventory investment will be a significant drag on GDP growth as will net exports. We have been happily surprised, as has everybody else, by the performance of inflation and actually have reduced our trend inflation rate somewhat for the balance of 1997. But we have inflation picking up gradually in 1998 and 1999, hitting about 3.2 percent in 1999. That is measured as it would be today, though the reported numbers will presumably be lower as various technical improvements are worked in. We think the real threat to the inflation forecast would be a stronger economy induced by higher-than-projected increases in consumer spending. We do not particularly expect that to happen, but it does make us believe that the risk to the forecast is that the economy will be stronger than we anticipate, and therefore the inflation risk will be somewhat greater. Since some members are wandering into the policy area, I will refer to our view which is that we do not need to tighten quite yet. However, we think the time is coming somewhat closer than we thought it was a meeting or two ago. Thank you, Mr. Chairman.",630
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"Like Ed Boehne and a few others, I feel moved to say a few things about new and old paradigms. If one listens to the economic and financial press and sometimes to the conversation around this table, one gets the impression that there are only two possible explanations for what is happening at the moment. One is that the economy's functioning has not really changed much over the last 20 to 30 years. In this view, economists' models with the parameters fitted to the data of the last couple of decades are still good predictors; it is just that something temporary or several temporary factors are giving us more favorable results right now. When these temporary factors turn around, everything will snap back into place. In particular, inflation and low productivity growth, the bugaboos of the U.S. economy since the late 1960s or early 1970s, will be plaguing us as much as ever. The alternative explanation is that there is a new era or new paradigm, which actually seems to mean no paradigm. In this view, it is possible ""to have the cake and eat it too"" without worrying about productivity or inflation because the former will be rapid and the latter nonexistent. In this view, economists are to be ignored if they say anything cautionary about overheating or bubbles in asset values or wages outrunning productivity growth. The atmosphere has gotten a little like the policy discussions of the early 1980s, which I remember very clearly. In that period, the so-called supply side economists overwhelmed the essential kernel of truth in their thesis that incentives, including tax incentives, matter to economic performance. They made absurd claims about the magnitude of the likely effects on labor supply or the saving rate of small, marginal changes in tax rates. Those who warned that high deficits generated by cutting tax rates without cutting spending might lead to either inflation or, with a responsible Federal Reserve, to higher interest rates and a punishingly high dollar were labeled as old paradigm Keynesians who were not to be paid much mind. It was not a helpful debate, and it led to bad policy and an undermining of confidence in the economics profession. Both are things that ought to be avoided. [Laughter] At the moment, it seems to me that we ought to be focusing not on new or old paradigms but on the fact, and it is a fact, that while economists have learned a great deal about how the economy works over the last two or three decades, it is demonstrably functioning better than any of us thought it would. Now, good fiscal policy and good monetary policy clearly get some of the credit for this, but there is accumulating evidence that the economy is more flexible and responsive and less inflation-prone than it used to be. To my mind, one of the most gratifying charts in the Greenbook, meeting after meeting, is the inventory-sales ratio chart, especially in manufacturing, which keeps trending down and suggests that manufacturers really have learned something about inventory management. More fundamentally, the surprising thing about the economy at the moment is the uniformity in the activity levels across the country and across sectors of the economy. Labor markets seem to be almost uniformly tight. Twelve people around this table said almost exactly the same thing--not quite, but very close. We do not really understand why this is true, but one has to suspect that there is more flexibility both in labor markets and in production location than there used to be. Workers move to jobs and jobs move to workers; capital moves more easily nationally and internationally; and production can be located and expanded in different places, including overseas and across the Mexican border, more readily than it used to be. We have heard some wonderful examples of this today--Cathy Minehan's Bombay back office for Boston area hospitals, as well as the maquiladora process. The other surprising development is the apparent increase in productivity growth at a time when the economy has been growing for a long period and the boom might be expected to be running out of steam. Economists have always given two reasons for the observed slowdown in productivity at the peak of the cycle. The first one never seemed to me to make very much sense, but we all used to say to each other that we were scraping the bottom of the labor market and bringing in less skilled, less experienced people. That was undoubtedly true, but a drop from 5-1/2 percent to 4-1/2 percent in the unemployment rate, while a big drop in unemployment, means an increase of only a little more than 1 percent in the employed labor force. And it is hard to believe that this 1 percent of the workforce, however inept and inexperienced, could really drag down productivity all that much. The other explanation that one still hears is that old, less efficient capacity is brought on line. When the old boiler that does not have to be used until the firm is facing severe capacity constraints is finally brought on line, it obviously is less productive. That also seems to make less and less sense after a period of very high investment accompanied by rapid technological change. It may be that the tight labor markets in the current environment actually provide incentives for increasing productivity. None of this seems to be a reason for arguing that economists do not know anything or that staff is irrelevant. It does seem to provide a rationale for at least a tentative hypothesis that the U.S. economy is less inflation-prone today than it was in the 1970s and 1980s for a lot of reasons relating to globalization, information technology, pro-competitive developments, and the safety valve that recent immigration might have given us in the labor market. Econometrics is a very useful thing, but it is inherently conservative in the sense that when parameters shift, the equations pick this up with a very considerable lag. At the moment, it is very hard to defend the proposition that economists ""know"" in some sense that an economy operating below 5-1/2 percent unemployment is taking on a serious risk of wage and price increases. We have been operating in that range now for quite a while, and we have not seen either rapid acceleration in wages or any increase in prices. We still have declining core inflation. The temporary factor most frequently invoked to explain this is the high dollar, but that is not a fully plausible explanation even in an economy that is much more open than it used to be. This is not a plea for new era thinking in the sense of throwing caution to the wind. It is a plea for economists to stop being defensive and to try to figure out more carefully, as the staff here is actually doing, how this dynamic economy is really working.",1340
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"My view of the economic outlook has changed rather significantly since the last meeting. At that time, it appeared that growth had slowed more sharply in the second quarter than now appears to have been the case and that growth might remain near its sustainable trend in the second half and into 1998. To be sure, the risk of higher inflation remained, but the slowdown in growth and the recent favorable inflation performance removed any sense of urgency to the policy decision. The crosscurrents that underpinned the earlier forecast, specifically between the projected slowing in inventory investment and the expected rebound in demand, seem well enough in evidence now and continue to underpin the forecast of slower growth in the second half of this year. But crosscurrents do not necessarily balance, and the crosscurrents in question apparently have not yielded a return to trend growth. Indeed, growth in the third quarter appears likely to be about as strong as it was in the second quarter. Perhaps more importantly, the ample evidence of positive fundamentals including, I believe, supportive financial conditions and the absence of signs of imbalances suggest that growth is likely to remain above trend for some time in the absence of a change in policy. As a result, it now appears likely that the unemployment rate will decline to a new cyclical low in coming quarters. Three important changes in the Greenbook forecast for this meeting effectively highlight the key issues in the forecast. First, the staff forecast for growth in the first half of 1998 was revised upward to about a 3 percent rate, with the unemployment rate falling to 4-1/2 percent by mid-1998. Second, a series of adjustments and forecast assumptions were introduced that moderated the decline in the unemployment rate and the rise in inflation associated with a higher growth forecast. And third, the normal practice of a constant funds rate, either nominal or more recently real, was replaced by a preemptive policy response. The key is the interaction among these changes. Even with the more favorable assumptions about the link from growth to inflation pressures, the higher growth path of the Greenbook forecast yields an unfavorable inflation outcome, justifying a preemptive policy response. I believe that the risks relative to the staff growth forecast are now more evenly balanced, and I would endorse a preemptive policy response to the projected decline in the unemployment rate and increased risk of inflation. I do have some reservations, however, about three changes in assumptions in this forecast, each of which worked to diminish the response of inflation to the upward revised path of growth. The staff revised upward its projections of both labor force and productivity growth, in effect raising the trend rate of GDP growth over the forecast period and as a result moderating the decline in the unemployment rate. In addition, the staff revised downward the response of wages and prices to the lower unemployment rate. Mike Prell referred to these changes as a flirtation with new era thinking. They are clearly an effort to balance what I have called regularities and possibilities. Whatever the merits of these adjustments, they leave in my judgment considerably greater upside risk to the Greenbook forecast of inflation than has been the case in earlier forecasts. I can appreciate the conditions that motivated such adjustments. I too would like to get the inflation forecast right for a change, and I too want to be careful to balance regularities and possibilities in my forecast. I can hardly argue that the adjustments that were made are implausible or that the productivity path in the forecast is unbelievable. But this does change the balance of risks, in my view, in relation to the Greenbook forecast. While the policy change is introduced in an understated way in the Greenbook, it is also an important change in the forecast assumptions. It is notable not only because it is preemptive, but also because the increase in rates is sharper than previously assumed and begins earlier. The policy message is clearer than it otherwise might have been, precisely because the staff leaned so far with its forecast assumptions in order to limit the chance that the forecast overstated the risk of higher inflation. I believe there are some interesting similarities today to the situation we faced at the March meeting when we raised the federal funds rate. Leading up to that meeting, the unemployment rate had moved within a narrow range; it was near the bottom end of that range, near a cyclical low and below estimates of NAIRU. The forecast for near-term growth at that meeting was revised upward from the earlier forecast of trend growth. The resulting projection of above-trend growth was accompanied by a forecast of a decline in the unemployment rate to below its recent rate. As a result, the forecast presented a combination of utilization and growth risks that compounded the threat of higher inflation compared to the earlier forecasts and galvanized support for a tightening move. Given the changes in the forecast since the last meeting, we again face a similar combination of utilization and growth risks going forward, and those risks are compounded by the fact that we begin with an unemployment rate nearly 1/2 percentage point lower than was the case in March. Fortunately, we also begin at a lower inflation rate. But as a proponent of opportunistic disinflation, I want to hold on to this lower inflation going forward.",1046
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The second-quarter slowdown was so shallow that we could easily have missed it. Consumer spending did slow to less than 1 percent, but we had an increase in inventory investment. Even with that increase, inventories are still not out of alignment. Growth so far in the third quarter seems to be quite robust. I am particularly impressed by the uniform breadth of the pickup. Resource utilization has to be getting rather taut, especially for an expansion that has lasted so long. This makes the recent inflation experience all the more impressive. Going forward, there seems to be considerable strength in the economy. Business fixed investment is incredibly impressive, with support from falling computer prices. In addition, there are favorable returns for fixed investment in a wide variety of areas, not just computers. This strong investment performance also is supported by strong profits and cash flow, providing internal financing. The external financing market also has been quite favorable, with strong equity and long-term debt markets. Bank financing has also been available. The balance sheets for both financial and nonfinancial corporations seem to be in quite good shape. With aggregate demand appearing to hold up, I do not think there is any reason to assume that the nonfinancial sector of the economy is going to fade unless labor becomes the dominant constraint to expansion. Turning to the labor market, I have argued for a number of months that there is probably more flexibility in that market than is implied by the current unemployment rate. But at some point, it seems to me that flexibility has to run out. The staff's projection of 4-1/2 percent unemployment in 1998 strained even my optimism. But I have been impressed to hear how many people around the table have bought into that projection. So, perhaps I will have to reassess that skepticism. Businesses are still finding ways to economize on their workforce and attract new workers through training programs, transportation gimmicks, and other approaches such as new ways of looking at and trying to implement welfare-to-work initiatives. But it does seem to me that U.S. demographics will not support job increases of 200,000 per month forever. The wage pressures that we now see in the high-tech and skilled areas eventually will be more widespread. In any case, the strong labor market and the business investment outlook augur well for continued growth in consumption. This leads me to concerns about resource and supply constraints. Price inflation has been held down by several favorable factors including the strong dollar and weakness in the economies of international competitors that have been keeping pressure off commodity and other supply prices. We have not had any major supply shocks for several years in oil or agriculture or wars and so on. Even the much discussed El Nino does not seem to be having much effect yet on prices. Progress on the deficit has helped to ease long-term interest rates, thereby lowering financing costs. Inflation psychology appears to have been considerably reduced. Businesses and consumers seem to be unwilling to accept price increases. In sum, it is hard to escape the conclusion that the risk is on the upside for inflation. But I also think we have little recent historical experience to judge the impacts of some of the factors underlying the ""new paradigm"" economy. I would also throw in as significant in this argument the lower federal deficits and a U.S. economy that is now engaged in worldwide expansion. Other factors are global market integration and few worldwide supply shocks. I cannot fully buy into the new paradigm, but I agree that its proponents raise questions for which we do not have complete answers. It may well be that we are experiencing what is simply an elongated cycle and that more traditional strains will soon be showing up.",731
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. As we head for coffee in the next couple of minutes, it seems to me that my notes may be a bit of a composite of what has been said around the table. As I began to focus on this meeting, I asked myself first and foremost ""what is new?"" The answer that came back is ""so far, not much."" The data story today seems to me to be very much as it has been for some period of time now: strong growth, tighter labor markets, and very little evidence of pressure on unit costs or prices. As I look at the inflationary pipeline to try to get some clue of what may be coming our way, it is very hard to find very much in the way of new pressure. There is some, but not very much. With regard to indicators of economic activity, we are all very conscious of what is happening in the labor market. We have been discussing that at length. On the other hand, we see no pressure on unit labor costs. In my view, I don't see much pressure emerging in capacity utilization, except perhaps New York hotel rooms, Bill (McDonough)!",233
-fomc-corpus,1997,"Boston, too!",4
-fomc-corpus,1997,"With respect to financial indicators, one can find very little pressure in the yield curve or in interest rate levels. On the other hand, household wealth continues to rise and there is abundant liquidity in the economy. From the foreign side, there seems to be very little in the way of new pressure, and from the side of commodities or what one might call goods inputs, none at all. So, on its face, the appropriate policy once again looks like steady as she goes, asymmetric, high alert. In short, little visibly has changed. And yet, one has to feel, or at least I do, a certain heightening tension driven mainly by the fact that the slowdown we had been expecting did not happen. It is not happening now, and there seems to be very little likelihood that it is going to unless it gets a boost or a jolt from here or elsewhere. During the past four quarters, growth has averaged 3.8 percent, which is very strong. Unemployment has come down over that period from 5.3 to 4.8 percent. And no matter how guilty one may feel about harboring heretical notions about lower NAIRUs or higher productivity or shifting paradigms or whatever, one thing for sure, as many people have observed, is that there are limits somewhere. What is going to keep the economy from pushing right through them, wherever they are? There is plenty of liquidity available at reasonable rates. We are beginning to worry about M2. Household wealth continues to rise; consumers are very confident; jobs are abundant. Our foreign trade prospects seem to be favorable for more domestic growth. There is no meaningful fiscal drag. The Greenbook calls for two more strong quarters before any slowing occurs, and when it does occur, it is at least in part being pushed by the possibility of a stock market break and rising interest rates. Mr. Chairman, at the last meeting you commented that there are signs that we may be running out the string, and it seems to me that those signs are multiplying.",410
-fomc-corpus,1997,"On that, we will go for coffee.",9
-fomc-corpus,1997,Mr. Kohn.,5
-fomc-corpus,1997,"Thank your, Mr. Chairman. The sustained strength in final demand since the last FOMC meeting and the staff projection of building inflation pressures suggest that the question facing the Committee remains whether, or perhaps when, to tighten the stance of policy. Prices in financial markets do not seem to embody this asymmetry of risks or potential Federal Reserve action, perhaps because, as Mike noted, investors have become entranced by visions of a new era. I say investors because, once again, a survey of economists at primary dealers taken in advance of this meeting indicated that a majority--albeit a slimmer one than in the near past--expects policy firming by year-end. Nonetheless, futures market rates and the overall slope of the yield curve appear to make no allowance for such a rise in the federal funds rate. Moreover, equity prices continue to advance and credit remains readily available, both of which are consistent with a lack of concern that real interest rates or labor costs might move higher to impinge on the growth of income and profits and the ability of households and firms to service debt. If the economists, including the staff, are right that risks are tilted toward higher inflation, investor behavior is complicating the Committee's job because markets are not acting as an automatic stabilizer; indeed, the vigilantes seem to have been lulled to sleep so that financial conditions, if anything, are exacerbating any economic overshooting that may be occurring. Market mistakes are not usually prolonged, implying that this circumstance would correct itself to some extent without System action if cost pressures do, in fact, develop. As profit margins disappoint, equity prices will fall and lenders may become a bit more cautious. However, such a reaction, by itself, is unlikely to be sufficient or timely enough to forestall potentially emergent inflation pressures. With financial markets determined to be optimistic, markets are more likely to follow than to lead inflation pressures. If the Committee sees a high likelihood that the economy is or soon will be producing beyond its sustainable potential, action sooner rather than later would be called for. The longer disequilibrium is allowed to persist, the more disruptive can be the actions required to correct it. The Committee has been most successful in recent years and has minimized needed policy corrections by acting preemptively. Following that pattern, if the Committee were confident of an intensification of inflation pressures, it might want to act at this meeting. But such preemptive policymaking presupposes a level of conviction about the outlook that the Committee may not have today, given the uncertainties about price/output relationships. Allowing for the possibility that there may be no disequilibrium lies behind the arguments for alternative B. In short, the persistent, unexpected, favorable behavior of inflation of late may call into question our understanding of the underlying inflation process. Moreover, some of the projected impetus to inflation comes from what will be, not what is already, in the pipeline: the projected further edging down of the unemployment rate given strong final demands and the ending of the restraining force of declining import prices. All of these inflation influences seem to have been particularly difficult to pin down of late, and the Committee may want to wait for surer indications that inflation will increase before tightening. After all, unnecessary tightening does have costs in terms of lost output and market disruption. Moreover, with inflation already fairly low, the Committee may view the gains from the resulting additional, unintended disinflation as relatively small. Action once those surer indications begin to emerge may be effective in restraining inflation, provided such action is prompt, and perhaps relatively forceful, but the new elements and uncertainties in the current situation make such indicators--short of the ""smoking gun"" of a string of adverse inflation data--difficult to identify. One class of indicators the Committee has used in the past is early signs of pipeline price pressures. Price increases for commodities or goods at early stages of production and the stretching out of supplier deliveries and the like have been important not so much for their direct implications for business costs, but rather as indications of pressures on resource capacity. They were prominent in 1994, helping to cue the need for more tightening than originally anticipated, and timely System action did forestall a more general increase in inflation. However, at this time, with industrial capacity more ample than labor force potential, the cost and price pressures may be less visible and more gradual. Rather than easily observed increases in crude and intermediate materials prices, pipeline pressures may manifest themselves in a steady upcreep in labor costs and a gradual squeeze on profits. Another indication that tightening is in order might be the continued growth of aggregate demand beyond that of the economy's potential. It was the threat of persisting unsustainable growth in demand that motivated the Committee's firming in March, and the current circumstances closely resemble those the Committee faced at that time, but with utilization rates in labor and capital markets now higher. Nonetheless, the Committee may see some differences in the situations that counsel caution. For one, the real federal fund rates probably has been edging higher without Committee action, as inflation and inflation expectations appear to have abated. For another, the flow of unexpectedly good inflation news has been extended, suggesting a changing environment or at least more uncertainty. Despite these possibilities, the Committee at some point still may want to consider tightening on the basis of above-trend growth and before even pipeline pressures on prices or labor costs are clearly evident. Growth that is accompanied by rising utilization rates is, by definition, unsustainable, even in a new era. If there are no signs of moderation, the Committee may desire some additional assurance that it is not accommodating a major build-up of inflation pressures and subsequent correction. In the staff forecast, above-trend growth going forward is supported by accommodative financial conditions, despite high real short-term interest rates. This circumstance suggests another set of factors that might contribute to a decision to tighten--signs that financial conditions were becoming even easier. Unless potential output can expand considerably faster than now seems likely, substantial further increases in equity prices, for example, or a drop in the dollar, or a further turn toward easier credit conditions would seem inconsistent with demand being damped by enough to prevent a further overrun of potential output. The staff does expect most nominal interest rates to edge higher, even if the stance of policy remains unchanged in coming months. But a particularly worrisome sign might be an increase in inflation expectations not coupled with an increase in real rates. This combination could be read as signaling doubt about the Federal Reserve's resolve to limit any potential increase in inflation. Thus far, we have been living with the virtuous part of the circle of inflation determination: Damped inflation expectations have themselves helped to hold down inflation despite high resource utilization. While the key expectations in this regard are those on Main Street, a deterioration on Wall Street that persisted could be an early warning that the circle might turn vicious. Money growth might be one element in assessing whether financial conditions have been too accommodative. The expansion of both M2 and M3 has been much more rapid in recent months than the staff had anticipated. In part, the overage seems to reflect asset and liability allocation decisions unrelated to current or future spending: Demand for M2 assets picked up in the wake of the stock market weakness in August, and was reflected in particular in rapid growth of money market funds; M3 has been boosted by bank decisions to fund in U.S. rather than Eurodollar deposit markets. But rapid growth in M3 also is consistent with ample resources being available to the banking system to support continued aggressive lending. And strength in M2 was broader than just money funds--nearly all major categories came in above our expectations. In recent years, with M2 demand more stable and opportunity costs not varying much, quarterly variations in money growth have been roughly correlated with quarterly variations in the rate of expansion of nominal GDP. In this context, the third-quarter pickup in M2 growth looked anomalous relative to the estimated slowing of nominal GDP, but some of the latter now appears to be in the process of being revised away. We are predicting a relatively sharp slowing of M2 growth over the months of the fourth quarter to keep quarterly average growth from greatly exceeding predicted GDP. Money running appreciably above our forecast might be one indication that financial conditions were accommodating somewhat stronger spending than anticipated. At this point, a tightening would catch markets unawares, and could provoke a considerable reaction. Such a market reaction would arise both because participants, at least those controlling the investments, do not believe that tightening is necessary, but because they also may feel that they have been encouraged in this belief by Federal Reserve statements. To some extent market reactions, occasionally strong, are desirable because changes in interest and exchange rates and in equity prices are key links in the transmission channels for policy. Strong reactions and surprises also are inevitable from time to time in an uncertain economic environment in which the Committee's assessment of the requirements of policy may not always match the markets'. Moreover, a sense that the markets needed to be primed for every action could constrain the Committee undesirably, tying its hands to act or not at certain times depending on market preparation. In these regards, market surprise is just the counterpart of macroeconomic uncertainty and flexibility in policymaking. But surprise can also grow out of misunderstanding. If markets are to have a chance to perform their stabilizing roles, they need to understand the concerns of the Committee and the risks it sees. These can be clarified in the Minutes and elsewhere without pre-committing the Committee to particular policy actions or necessarily expecting that the markets will share the Committee's views and expectations.",1939
-fomc-corpus,1997,Thank you. Questions for Don?,7
-fomc-corpus,1997,"Don, you mentioned that a substantial slowing in the growth of M2 was necessary for such growth to be consistent with the staff forecast of nominal GDP in the fourth quarter. The Bluebook has M2 growth down to 4 percent in November and December. This suggests to me that the growth of overall commercial bank balance sheets--whether we focus on the demand for credit, the supply of credit, or some interaction between them--also has to decelerate very sharply from what we have seen in recent months. The balance sheets still have to balance. Given an unchanged funds rate and the Greenbook-type forecast of the real economy, what produces that significant deceleration in the growth of bank balance sheets and therefore money growth?",144
-fomc-corpus,1997,"We have a modest deceleration in bank balance sheets in the fourth quarter. We do not have a major deceleration. Let me start with the bank balance sheet picture. We do not find the relationship between those balance sheets and money growth to be very tight. Certainly, the relationship between M2 growth and bank balance sheets is not at all tight. There are just too many other sources of funds for banks besides M2 funds. In fact, we have found that the relationship of the balance sheets and M3 also has not been very tight. One reason is that when banks substitute domestic dollar borrowings for Eurodollar borrowings, that tends to boost M3 growth and vice-versa. The other factor has to do with the institution-only money funds. There has been a trend for those money funds to compete aggressively for corporate cash management business. In effect, corporations are moving away from the management of their own liquidity by putting it in the hands of the institution-only money funds. We include the institution-only money funds in M3; we do not include corporations' own direct holdings of commercial paper or Treasury bills. Therefore, that substitution also has tended to cut the link between M3 and bank credit. We look at that when we do our M3 projections. We try to make sure the residual funding of bank credit, other than that provided by the monetary aggregates, is sensible, but we do not force M2, M3, and bank credit to conform to the same growth path. We see a little slowing in bank credit growth in the fourth quarter, but not much. It has been very strong. Business loan growth in particular has been very robust, and we think that such growth will slow a little but still remain quite high. We have some further increase in business borrowing needs and some flattening out, to a certain extent at least, in the growth of profits.",378
-fomc-corpus,1997,"Your answer says that we can get a slowing in the broad money measures without a slowing in the growth of aggregate bank credit. You also suggested in your earlier remarks that if we do not see the slower growth of, say, M2 that you are now projecting, that might be evidence that we are not getting the slowing in nominal demand. If it is not an opportunity cost argument, what is the argument that produces the slowing in M2 growth?",90
-fomc-corpus,1997,"We track M2 growth to the projected increases in nominal GDP. The slowing in the fourth quarter in M2 growth arises largely from our sense that there has been a lot of M2 built up over the months of the third quarter. There is enough to finance the nominal GDP that is forecast for the fourth quarter. In fact, there is almost more than enough because, even with our projected slowing in M2 growth, we have a slight decline in velocity predicted for the fourth quarter, which is an unusual event these days. Basically, we are saying that there is enough liquidity out there to finance the predicted nominal GDP with only moderate further M2 growth. If we saw much more rapid further growth, we would wonder why people are accumulating those M2 assets. We would have to look carefully. There could be an asset allocation situation that was not related to spending, but it could also be that people were realizing more income and doing more spending.",189
-fomc-corpus,1997,"Are there any other questions for Don? [Pause] If not, then let me get started. I think the incoming indicators are pointing more clearly to underlying trends in this economy, although they are scarcely adding to our understanding of these trends. Let me start with what I think is the most interesting event of recent weeks, the extraordinary acceleration in capital investment. A big increase in capital investment this late in the business cycle is really quite startling. If we focus on the orders pattern, we see it suddenly take off. You will recall that this expansion in capital investment started to accelerate in 1993 after a very sluggish period and has progressed at a fairly pronounced rate. This suggests that anticipated rates of return on investments have risen. More precisely, prospective internal rates of return must be rising or else we cannot explain why so many firms are undertaking large investment programs. Part of the explanation is unquestionably the desire to expand capacity. That is especially the case in the high-tech area where there has been very substantial investment, a not insignificant part of which has been for capacity expansion. But there also is very little doubt that the plant managers who propose these new investments anticipate very significant improvements in the efficiency of their operations, and that ultimately leads to increased productivity. They look at it as cost reduction, but on a consolidated basis it obviously nets out to a significant drop in the ratio of hours to output, the inverse of productivity. We have several indications that the prospective productivity improvements may be materializing. First, the earnings figures still seem to be rising. It is too early to get a good fix on the third quarter--obviously no reports for the quarter have come out--but security analysts' estimates do show what appears to be a seasonally adjusted rise in the earnings of S&P 500 companies for the third quarter. Second, there also is a quite surprising acceleration in manufacturing productivity in the data through August, and it is now running at an annual rate somewhere around 7-1/2 percent. To be sure, the August figure is a little suspect because, as you may recall, the initial estimate of industrial production is based in part on hours worked coupled with a presumed productivity number. But that is not the case for July. Apparently, there was a quite significant and surprisingly strong rise in electric power use, and all other indicators suggest that July IP was quite strong. So, manufacturing productivity appears to be rising at an annual rate of about 7-1/2 percent for the third quarter. Third, although we have little available data, the evidence we do have for various types of facilities is consistent with a general pattern of improved efficiency and flexibility. I have mentioned before that with the ratio of unfilled orders to shipments declining in the capital goods area, specifically excluding aircraft, we are getting a pronounced and inexorable decline in the lead times on the deliveries of capital equipment. In a sense, this is consistent with the product cycle in a variety of other areas. There is no doubt that we are seeing a fairly marked decline in lead patterns and an increase in the ability of companies to meet unanticipated demand rather quickly through new facilities, whereas they could not do that before in any readily observable sense. We get confirmation of this phenomenon if we compare the vendor performance numbers of the NAPM with the capacity utilization data, either for primary processing or for total manufacturing. What we see is progressively lower vendor performance numbers at successive peaks in activity. This means that the bottlenecks and shortages are falling relative to any constant operating rate. This is, in effect, consistent with the declining lead times. At the end of the day, one would presume that we could keep squeezing and squeezing and, as indeed the new era people like to say, capacity would no longer be a restraint. If we literally stayed with the facilities that are coming on stream, there is a strange degree of verifiability of that. We can see that there are very few constraints, very few shortages. For example, the list of shortages we get from NAPM now has one or two items, whereas we used to get 15 or 20. Something different is happening in the facilities area. This has led a large number of executives, mainly in the corporate area which is where the forefront of the new era issue is arising, to conclude that technology is continuously enabling facilities to be less and less a constraint on activity. Indeed, when we include the globalization factor, it looks as though inflation is dead, the world has changed, and the central bank ought to get out of business one way or the other. The major element that is missing in that argument is biology! Biology is what one looks at when we are trying to find the lead time, not on facilities, but on people. I know of no evidence suggesting that that factor has been altered in any significant manner. As a consequence, leaving aside the question of the unemployment rate, the NAIRU or whatever, we have a fundamental disequilibrium in the labor market best characterized by the fact that employment is rising by 2 million each year and the population of people of working age who wish to work, including immigration, is going up 1 million annually. The 1 million difference between those two statistics over the last three or four years may be broken down into a net flow of 600,000 individuals per year who moved from unemployment to employment and another net flow of 400,000 people per year who moved from ""not in the labor force but say they want a job"" to being employed. Remember, the definition of unemployment requires that a person be making an active effort to secure a job in the previous five weeks. The consequence of saying ""I would like a job, but I have not been looking"" is that it throws that person out of the labor force. The group of people outside the labor force who say they want a job has contributed almost as much as the decline in unemployment to that difference between employment increases and the growth of the population of people who wish to work. This group of people is now at the lowest proportion to the working age population since 1970. I cite the year 1970 solely because the chart I got from the staff goes back only that far. There have been some very dramatic declines in their number since 1996 as employers have drawn very heavily from that group. We do not need to consider the NAIRU and the unemployment rate because, while they obviously are more sophisticated approaches to this issue, we do not have to get terribly sophisticated. All we have to do is to observe where the unemployed people are, and there clearly are fewer and fewer of them. Since early 1996, we have seen a rise in average hours worked. That is another way of suggesting that the pressures that we are seeing in this taut labor market are inducing employers to squeeze the available supply of workers. If the supply were really there, we would not be getting this type of pressure on the average workweek. I think this pressure has been the equivalent of about 500,000 additional workers at an annual rate, so that the comparison would really be 2-1/2 million versus 1 million. I have argued before that we have not seen an acceleration in wages because of the job insecurity phenomenon. We have seen significant evidence of that phenomenon in the last five years. The latest evidence that has come to my attention is data on the quite dramatic increase in the number of people aged 25 to 34 who are going back to college and the huge increase in the amount of on-the-job training. There is an awareness that one can no longer count on getting lifelong job skills just by getting a college degree or even a high school degree. What we are looking at is still, as far as I can judge, a fear of job skill obsolescence and a significant shift toward job security in lieu of wage gains. I have maintained in raising this issue over the years that there is a limit as to how far this job insecurity effect can go. We are beginning to see some signs that that limit has been reached. Earlier polls indicated that from 1991 to 1995 job insecurity or fear of job layoffs had risen very significantly despite the tightening of the labor market, but the responses in these polls have now shaded off in the other direction. The proportion of people in the labor force who decided voluntarily to leave their job to seek another, which had been exceptionally low for quite a long period of time, has now popped up, suggesting less job insecurity. So, the data that tended to argue for job insecurity are beginning to shift a little. They have not reversed sharply, but they are beginning to be shaded. The question that we are running up against is that all of this is plausible, but in effect we still have negligible inflation in the system. It may very well be that productivity increases are creating enough in the way of absorption of hourly labor costs to prevent rising prices. Indeed, there is no evidence to suggest that there is any pipeline inflation or any other type of inflation. The fundamental disequilibrium, and I don't see how we can get around it, is the fact that the rate of increase in overall demand is creating a demand for employment that cannot be satisfied indefinitely. The trouble is that we don't know where that pressure point is located, but it has to exist. I think, as Mike Kelley said, there have to be limits. Larry Meyer also said that in a speech the other day. We do not know exactly where the limits are at this point, but the longer we stay on this course, the more this disequilibrium continues to spread. It is conceivable that productivity could accelerate to the point that labor requirements fall without a change in overall domestic demand. There is no evidence of which I am aware to suggest that outcome because employment still seems to be growing at a fairly good clip. It is conceivable that we may suddenly find employment growth starting to fall short of its current trend while output growth is maintained, which would suggest that productivity is accelerating, but at the moment there is no evidence of that in the data. Although it is conceivable that we may get bailed out by a sudden discontinuous acceleration in productivity growth, that is something that has not occurred in the past to my knowledge. There is no doubt, however, that a lot of the synergies of the new technologies are emerging. That development is producing very large investment opportunities. The joining of lasers and fiber optics has created huge demands for telecommunications investment. The continuous breakthroughs in the computer area in conjunction with the new communications systems created and are now fostering the extraordinary expansion in the Internet. So, one can argue that it is possible that we could get enough acceleration in productivity to close the gap between labor supply and labor demand. However, the gap looks so large to me that I will suggest that arithmetically we would need a full percentage point acceleration in productivity increases to close the gap. Is it possible? Yes. Is it likely? I do not think we can depend on that. With respect to policy, my view is that we are getting repeated reprieves because the price level is not changing much. I do not think we should move today, but I do think the probability that we will be forced to move at the next meeting has gone up quite considerably. I don't know how high that probability is, and I do not know what we would do if we ended up with a CPI of zero in the next report. We will be getting the ECI between now and the next meeting, and it could show an increase of 1 percent. I doubt it, but who knows? In any event, I think we are getting close to a policy move. It is important, for all the reasons that a lot of you have stated, to be in front of the curve. We are not arguing that the probability of rising inflation has increased, but the possibility that we may be wrong is rising. You do not need an above 50 percent probability of being wrong to take out insurance. I don't know what the data are going to look like in the next four or five weeks, but my guess at this stage is that there is easily a 50/50 chance that we will decide to move in November because the presumption that we can wait until just before Christmas to move is not going to be something about which a lot of us are going to be enthusiastic. In any event, I am putting on the table a ""B"" directive with continued asymmetry. Vice Chair.",2522
-fomc-corpus,1997,"Mr. Chairman, I very much believe that what you have recommended is what we should do, and let me briefly give some reasons. The factors leading to a combination of good economic growth and ever better price performance--a firm dollar, restrained wage demands, and the excellent performance of health benefit costs--clearly have to be transitory and cannot be depended on to continue to give us the present combination of favorable developments as we move forward. I do not think we can bet on faster productivity gains because such a bet would involve a leap in the dark. We have a sufficient basis in the transitory factors that I just mentioned to explain why we have had the good economic performance. Therefore, I think it would be bad policy to maintain the present stance in the expectation that productivity gains might bail us out. If that is the case and policy needs to be changed, then the question obviously is, why wait? We have been telling the American people, who are infinitely more important than the market participants, that the purpose of the Federal Reserve is to create sustained economic growth and that price stability is a means to that end. With sustained economic growth clearly taking place and with price performance even better than anyone had anticipated, including us, we need to do some informing of the public before we move. Since the likelihood is, as you have suggested, that we will wish to firm policy at the next meeting, I encourage you to seize an opportunity in a speech or Congressional testimony or some other avenue where you can lay out the line of thought that you just gave, including the wonderful news that we have fewer discouraged workers, more people coming into the workforce, and all the other favorable developments that, as you suggested, can be and should be mentioned as evidence of the great success achieved in the functioning of the U.S. economy. I think that type of presentation to the public would make people understand, though not all would like it, why we would choose to firm policy in the near future, and I encourage you to make that presentation. In my view, that is the kind of thing that has to be done by the Chairman of the Committee. Others can say what they like to be supportive, but it really is only the Chairman who speaks for the Committee. Therefore, I think it is important that you do that before the next meeting. I very much believe that at the present time ""B"" asymmetric is the right policy choice.",486
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I agree with the policy recommendation and also with Bill McDonough's notion that we should be talking more about why we think the risks are on the upside. That said, however, I think I am a little less convinced than you that we will have to move in November or December.",58
-fomc-corpus,1997,I am saying there is a 50/50 probability; what are you saying?,17
-fomc-corpus,1997,"All right, you said 50/50; I heard something stronger than 50/50. I would say the odds are perhaps a little less than that. That is because I am persuaded that we are dealing with a much less inflation-prone economy than we were, and I am a little less persuaded by the biology argument in part because it depends on a fixed labor force. I'm not sure that our labor--",84
-fomc-corpus,1997,"No, it depends on a fixed population.",9
-fomc-corpus,1997,"All right, it depends on a fixed population.",10
-fomc-corpus,1997,And fixed immigration.,4
-fomc-corpus,1997,"Okay, but that is what I am questioning. If some of our labor force is in Bombay or Mexico, and we have much more flexibility in outsourcing and even in calling on high-skilled people in distant places, then this argument is a little less overwhelming. I guess I also have been a little more skeptical about the job insecurity explanation of why we have had such limited wage increases. That puts a lot of the explanation on the worker side. I think we also have had a strong disinclination on the employer side to grant wage increases because of the correct perception that the economy is very competitive for numerous reasons, including the reasons we have been talking about. That said, I think we need to accumulate more evidence before taking action, but your policy recommendation is the right one for today.",157
-fomc-corpus,1997,Could I add a comment? Just a brief one?,11
-fomc-corpus,1997,Sure.,2
-fomc-corpus,1997,"We have been doing a good deal of work at our Bank on where inflation stems from on the wage side, and it is not in the goods-producing industries. Therefore, the labor force that does exist in Bombay and Mexico does not help to explain our wage behavior because inflation comes from the services part of the economy.",63
-fomc-corpus,1997,The Bombay example involves services.,6
-fomc-corpus,1997,But for most services there is no import competition.,10
-fomc-corpus,1997,The Bombay example relates basically to the use of computer software. It involves very few people.,18
-fomc-corpus,1997,"The portion of the workforce that is most likely to give us the inflationary pressure, at least on the basis of our analysis, is in the services areas where there is no possibility of competition with imported services. That pressure initially kicks off in the wages of service workers, but with a not very long lag it seems to spill over into general wage inflation and over into the price side.",77
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, given uncertainties about the magnitude of a possible supply shock, I am somewhat more comfortable with data and forecasts of nominal GDP growth than with forecasts of the split between real GDP growth and inflation. Nominal GDP has grown moderately over the past year and is projected to slow in both our forecast and the Greenbook. I think there is a reasonable chance that nominal GDP growth will slow, and such an outcome would make it unlikely that a significant inflation problem would develop. Therefore, I am willing to leave the funds rate unchanged for now, and I can support Bluebook alternative B with asymmetric language to the upside. I do believe, however, that a strong case can be made to take out a small insurance policy against the likelihood of higher future inflation, but delaying such a decision until, for example, November is not likely to be the difference between success and failure.",175
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, without putting odds on what we need to do at the next meeting, I think I understand where you are coming from, and I can support your recommendation.",35
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"I agree with your recommendation, and I have an open mind about what will occur in November and December.",21
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"I agree with your recommendation, Mr. Chairman. I do think that the probability is higher that we will have to move in November than I thought it was, say, four or so weeks ago. I agree with President McDonough that it is very important for us to alert the American people to our thinking. I know this is a delicate matter because we are waiting for data to come in during the next several weeks before we know for sure what the probabilities are going to be. But I do think it is important that you lay the groundwork for any move that you anticipate the Committee would want to make in the future.",125
-fomc-corpus,1997,"I thought I was doing that in the July Humphrey-Hawkins testimony. It turned out that instead of the bond market falling by up to a point or so, as I thought it would after that testimony, it went in the other direction. The market's response depends on what it wants to hear. One of the things I have learned is that sending a message is very difficult unless it is absolutely unequivocal because people hear what they want to hear. It is a tricky matter.",98
-fomc-corpus,1997,I thought you were very effective in sending a message earlier this year.,14
-fomc-corpus,1997,"Yes, I think the March message worked well. President Guynn.",14
-fomc-corpus,1997,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. I would prefer alternative C but I could accept your recommendation. The stage setting is probably very important, although I think we need to recognize that at some point it may be only actions that will get the message across. I think, as was clear in my comments today and earlier, that the odds of our having to act are quite high. In sending a message, I believe it is very important that we focus on the benefits of low inflation and specifically the benefits of locking in the very low rates of inflation that we have as opposed to the evils of rising inflation. That approach has the potential of playing better, and Bill McDonough had some good thoughts with respect to your talking about this. We cannot come across as taking credit for the current economy, but we can certainly relate some of our argument to the benefits we are enjoying today in this economy that is creating a lot of jobs and opportunity.",185
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I, too, accept your recommendation largely because I think there is still sufficient uncertainty to warrant caution. While it is tempting to take the attitude that we ought to sit back and enjoy this economy, I see a danger in that. The danger is that we will wait too long before acting, as has occurred on occasion in the past. We ought to remain sensitive to that possibility, and that leads me to view November with a good deal of interest.",97
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Mr. Chairman, I agree with you and I endorse all elements of your policy recommendation: no change in the funds rate today; maintaining an asymmetric directive; and, importantly, recognition that there is an increased possibility, if not a presumption, that a tightening move will be justified in November, assuming the data between now and then confirm the thrust of the Greenbook forecast. My view is that monetary policy should continue to lean against the cyclical winds and be cautiously preemptive. In my view, such a preemptive move might well be in order at the next meeting. By that time, we will have two additional employment reports, the third-quarter ECI report, and a better feel for the momentum of the economy early in the fourth quarter. This timing is also consistent with my view that there are windows of opportunity for policy tightening. We are not, in my judgment, at such a window at this moment, but I expect we may be approaching one. It is easier to change policy, for example, when the financial markets anticipate a move and when the public will understand it. It is easier for this reason to tighten when growth is above trend and the unemployment rate is moving lower than when the economy has slowed to trend and the unemployment rate has stabilized, whatever its level. In my view, to maintain a preemptive course, to sustain the decline in inflation we have recently achieved, and to take advantage of a possible window of opportunity, we should be prepared to tighten in November if the data confirm continued above-trend growth and rising utilization rates.",315
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, I can accept your recommendation. I also agree strongly with the thrust of your comment that the probability of having to tighten in November has risen significantly. I hope that you will make some public comment, and I agree with Bill McDonough and others that doing so would be productive. I recognize that it is difficult to deliver the message, but I think some comment would be in order. I would just add that a principal reason in my view for the considerable success of our policy over the last three years as a whole is our consistent commitment to hold the line on inflation built largely on our preemptive tightening actions in 1994. That series of actions was one of the most successful we have undertaken in recent monetary policy history in this country. And it was successful precisely because we acted proactively rather than reactively. Because of that, we earned the public's confidence. There is a lot of talk about a new paradigm. I think that increased confidence and credibility is a big part of that new paradigm. But that confidence has to be nourished, and I think there is a good chance for you to do that in November.",230
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I, too, am supportive of your proposal, Mr. Chairman. I also would have supported a small preemptive move at this meeting, but I recognize that the lack of a real smoking gun in terms of inflation, either existing or in the pipeline or guessed about, makes that sort of recommendation a bit difficult to entertain at this point. I agree with Alice Rivlin that we probably are facing a less inflation-prone economy than might have been the case in earlier decades, but I also think that the factors that have contributed in a major way to this situation are more transitory than new paradigmish and their effects may be coming to an end. I think benefit cost increases, wage increases in the face of increasing labor shortages, and the potential for a reduction in the value of the dollar given the large size of our external deficits will at some point start to work together to make this less inflation-prone economy more inflation-prone. I agree with the comments about being forward-thinking and locking in the benefits of reduced inflation. I have some concern about the idea of communicating to the markets. With respect to what you said in your Humphrey-Hawkins testimony, I told a lot of people to read the whole testimony, not just what was in the headlines of the New York Times or the Wall Street Journal. There was a good deal of balance in that testimony. I think it is really difficult to communicate these things in such a way that people understand the intended message. Don Kohn made some good comments to the effect that surprising the markets, particularly in a boom-like environment either existing or building, is not all that bad a thing. I wonder whether we can communicate effectively in the absence of real inflation, but I think we need to move before real inflation materializes. In my view, anyway, there is more than a 50 percent probability of our moving at the next meeting.",380
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"I think what is going on in the labor markets is a fascinating subject, one that I wish I understood better. I also wish that our friends on the European continent understood a lot better than I do what is going on in our labor markets. It does tell us a lot about the distribution of the current prosperity and about how well all the wealth creation is being shared by our people. But I am not sure it tells me a lot about the purchasing power of money, at least not in a direct way. I also am very interested in all the discussions about capacity, capacity utilization, productivity, efficiency, and capital formation because even though they too don't tell me anything directly about what is going to happen to the purchasing power of money, they give important information about things that I think directly bear on the purchasing power of money. The demand for labor is a derived demand; it is derived from the demand for goods and services. That in turn, as Bob Parry says, depends on nominal spending, which does have something to do with money. I am less comfortable than Bob seemed to be that we will get the needed deceleration in nominal spending growth. But with respect to the stories about productivity, capacity, capital formation, and all of that, if the perceived real return to productive capital is rising due to technology, including both wealth effects and substitution effects, that indicates to me that the demand for high-powered money must be declining. But what we see is an increased demand for bank credit to finance it all. That effect is somewhat like that associated with the old real bills doctrine when it signaled what was interpreted as an increased demand for base money while modern theory tells us the quantity needed to go down. We should not be seeing an acceleration in base money growth at this stage. So, I think that we are probably late. What I would be looking for in the next six weeks is what Don Kohn alluded to, namely the much needed deceleration in the broad measures of money. If we do not get it, then I will conclude that we made a mistake.",417
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"I concur, Mr. Chairman.",7
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I also agree with ""B"" asymmetric. The strength of the economy makes the asymmetric directive appropriate. In view of the recent inflation experience, I think there is some time to let things develop before removing the punch bowl.",44
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"I agree with your recommendation today. I would keep an open mind about the next meeting and wait and see what the data show and not be praying for bad news so we have an excuse to do something. With regard to 1994, I do think it was a very successful preemptive strike experience. Two fundamental differences between now and 1994 are that we went into 1994 with a 3 percent federal funds rate, zero in real terms, and had been there 1-1/2 years. Also, throughout 1994, we had pipeline inflation going straight up. Commodity prices peaked in mid-1995 and have not gone up since then. Those are two important things to keep in mind.",146
-fomc-corpus,1997,"That explains why we have not moved since March. Okay, let's have a vote on ""B"" asymmetric after you have read the directive.",28
-fomc-corpus,1997,"I will be reading from page 13 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the growth of M2 and M3 over coming months.""",130
-fomc-corpus,1997,Call the roll.,4
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,41
-fomc-corpus,1997,"The next meeting is on Wednesday, November 12.",11
-fomc-corpus,1997,I would like to welcome Governors Ferguson and Gramlich to their first meeting and offer a preliminary farewell to President Melzer. We will do the farewell more officially at the next meeting.,36
-fomc-corpus,1997,"Thanks, Alan.",4
-fomc-corpus,1997,Why don't we get started. I request that someone move to approve the minutes.,16
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,Without objection. Peter Fisher.,6
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will be referring to the package of charts that should be in front of you.' It has a Class I cover and begins with a color chart showing 3-month deposit rates. Today I will be going over four distinct subjects. To give you a roadmap: First, I will discuss market developments in general, focusing particularly on some of the causes of events in Hong Kong. Second, I will discuss recent open market operations. Third, I would like to take a few minutes to bring the Committee up-to-date on the performance of primary dealers. I think it is important for me to give you a sense of what I have been doing with the dealer community. After that, I will be seeking two votes. One is the normal vote to ratify the open market operations since the September meeting. I also will be asking for an increase in the intermeeting leeway. After that, I will come back and comment on the swap line renewals, which are a separate agenda item. I will seek a vote to renew the swap agreements for another year. Focusing on market developments, the first page of charts shows 3-month deposit rates, including the current rate, 3-month forward, 6-month forward, and 9-month forward for the United States, Germany, and Japan. In the first panel, you can see that interest rate expectations began to back up here in the United States following the Chairman's testimony before the Budget Committee on October 8. The next day, the Bundesbank hiked their repo rate by 30 basis points, as you can see in the middle panel. To many people in financial markets around the world, this indicated, perhaps inaccurately, a concerted effort by the industrial nations to raise interest rates globally. Many 1 Copies of the charts used by Mr. Fisher are appended to this transcript. people talked very seriously about how the tide had turned and interest rates could be expected to go higher in the industrial world. Both in Germany and the United States, rates continued to back up for several days until the events beginning on October 23, a date I will come back to in a minute. That was the day when financial pressures first emerged most acutely in Hong Kong. You can see that interest rate expectations in both the United States and Germany came off rather sharply beginning that Thursday, October 23, and bottomed out on the day of the sharpest U.S. equity market decline the following Monday, October 27. Forward rate markets were already stabilizing to some extent, at least here, by the time of the Chairman's testimony before the Joint Economic Committee on October 29. I would like to note that U.S. interest rate expectations, as measured by the forward rate agreements, did not subsequently back up. They stabilized more or less at levels slightly above the lows reached before the Chairman's October 8 testimony, whereas German interest rate expectations, reflecting a rise that occurred in market rates, are still quite a bit higher. I think this goes a long way toward explaining the relative movements in the dollar and the mark. One does not need to look anywhere else even though many financial market analysts are looking under every rock and in every nook and cranny. You can see in the bottom panel that Japanese interest rates, as measured by forward rate agreements, are still quite flat. I will come back in a moment to some events leading up to this morning's developments in Tokyo. Turning to the charts on page 2, I will focus on the causation of the events in Hong Kong, or as the Chairman sometimes puts it, a discussion of who sneezed last. This discussion is not necessarily to point a finger at anyone but to delineate the series of events that led up to the financial pressures. The first panel shows the percent changes in the foreign exchange value of the Taiwan dollar, the South Korean won, and the Hong Kong dollar since September 30. The middle panel shows 1-month interbank rates for Taiwan, South Korea, and Hong Kong, and the bottom panel shows percent changes in key equity indices for those countries and for the United States, Japan, and Brazil. Working across the top panel--the Hong Kong government announced in early October that they would hold another land auction. This is a more or less routine event for them, but the announcement did indicate they were coming back to the market and would be putting some pressure on land prices. They held the auction several days later, on October 15, and found a bogus bid for one of the largest parcels of land that were up for sale. The bid was made by a woman in the name of a major firm and she certainly did not have the billions of dollars necessary to purchase the real estate. The Hong Kong authorities are reviewing their practices for accepting bids, but it was rather shocking to think that an auction for this kind of real estate could involve someone who was a mental patient, quite literally. Several days later, Taiwan ceased intervening in the exchange market and allowed its currency to depreciate significantly. This posed a question in the minds of many foreign exchange market participants the world over--a profound question. If a country with such a high level of foreign exchange reserves was not prepared to defend its currency, who would? The Taiwan government certainly had the capacity to defend their exchange rate, but it turned out they did not have the will. The question in everyone's mind after Taiwan's decision was whether the People's Republic of China, and not so much Hong Kong, would need to devalue. For many people the answer to that question appeared to come when, on October 23 or late in the evening of October 22, the People's Bank of China announced a reduction in interest rates. They reduced their lending rate by 150 basis points and their savings rate by a little more than 100 basis points. This appeared to answer the question for many people by showing that China was worried about their competitiveness. The markets very quickly tried to price that in, but they could not price it into the yuan. The only place it can be priced is in a proxy for the yuan, the Hong Kong dollar. So, the pressures began to build and you can see in the middle column that the Hong Kong monetary authorities squeezed their money market rather tightly. I don't think they expected overnight interest rates to go to 300 percent. They expected the rise to be considerably less than that, but there were a number of players who held onto long positions hoping to make money in subsequent days. In the bottom panel, you can see them play through to the equity markets, with whose performance you are familiar. Turning to the third page of charts, I want to draw your attention to the impact of these developments in credit markets. While equity markets had some sharp losses, the real fear and adjustment that took place in financial markets seemed to be, as I heard it, in the credit markets. In the first panel, you can see that absolute spreads of Asian Yankee and stripped Brady Bonds over U.S. Treasuries backed up rather considerably. These are measured in hundreds of basis points. The backup was more or less triggered by the pressures on October 23 and thereafter, obviously with many contributing events. In the middle panel, in order to get the scaling right, I simply have the basis point changes in two Merrill Lynch corporate bond indices, one for high yield and one for investment grade, over Treasuries since September 30. Clearly, there has been some widening of spreads over Treasuries. What is worth noting is that the corporate yields have not moved at all; it is the Treasuries that have moved. As shown in the bottom panel, 10- and 30-year rates were down 20 basis points over this period, and that was the full extent of the backup, the widening of the spread if you will, both to junk and investment grade paper. It was very hard to chart in the bottom panel how odd the bond market has felt over the last few days because there has been a tortuous back and forth between those who want to trade on fundamentals and the flight to quality that seems to be taking place. I cannot show you last Friday's developments in a chart because the adjustments happened so quickly. Following the release of the employment data last Friday, bond market and fed funds futures backed up and then, after about 90 seconds, came right back down as the market returned to its flight-to-credit posture. The fourth page displays three charts to make a very simple point. Each panel shows the percent changes in one of the G3 currencies against the other two G3 currencies. In the first panel, you can see that the mark has appreciated against both the dollar and the yen since September 1. In the middle panel, you can see that the yen has depreciated against both the dollar and the mark. And in the bottom panel, you can see that the dollar is being pulled somewhat in two directions. That is, it is considerably weaker against the mark but a little stronger against the yen, the dollar having been stable for most of this period. I want to go back to what I referred to earlier, namely, that I think interest rate differentials between the United States and Germany explain most of the movement between the dollar and the mark, although market participants do look eagerly at the question of whether there is a flight out of dollars into marks and whether the mark is something of a safe haven. I think it is reasonable to pause and note that in terms of financial flows, there probably was some movement out of dollars, given how many of the assets that have been under pressure are dollar-denominated. So, when portfolio managers sustained losses on Bradys and Asian Yankees and equities that are more or less dollar-linked, there was going to be some marginal movement out of the dollar. That is a very different question from one about the macroeconomic consequences; this is a financial flows issue. I think Ted Truman will be coming back to the broader macroeconomic question. Let me pause here to discuss some of the events of the last few days in Tokyo. The yen has weakened overnight; it was below 126 this morning. The Japanese government bond yield is up to 1.70 percent after backing up 10 basis points in just a few days. A week ago, with the announced bankruptcy of Sanyo, a very profound event happened in Japanese financial history: The authorities let a major firm go bankrupt. It is something our colleagues at the Bank of Japan have been working on earnestly for 10 years and are very proud of. Obviously, the timing was another matter. It took the markets a few days to begin to price it in. But the number of financial market participants around the world who have been trading with Japanese counterparties on the assumption that the government stood behind them is very large. By Friday of last week, some Japanese names, the weaker ones, were finding it hard to get quoted in the forward interest rate market in New York. Today, people are talking about Japanese institutions needing to liquidate government bonds. The Nikkei was off 434 points earlier and is now down again. We see a grinding out of some of the worst fears one might have about the Japanese financial sector. That is beginning to show up in forward rate markets. For example, in the Euro deposit market as of the end of October, there was no credit premium in the 3-month rate for Japanese institutions. This morning, it is already 250 basis points as compared to zero at the end of October.",2329
-fomc-corpus,1997,250 basis points?,4
-fomc-corpus,1997,"Excuse me I should have said 25 basis points. I am very sorry. I'm trying to catch up with everything that happened overnight. On that note, let me turn to domestic open market operations and try to get my numbers right. On the fifth page, there are two panels illustrating developments in the federal funds market. The top panel shows the behavior of the federal funds rate. The blue lines indicate the daily range of actual trading, the red vertical lines depict one standard deviation of funds rate trading on either side of the effective rate, the horizontal red line is the daily effective rate, and the green dotted line is the Committee's target. In the upper right of the sub panels for each of the three full maintenance periods, you can see the period average effective rate. In the lower panel of the chart, the blue bars show the daily level of free reserves, and the numbers on top of each of the bars indicate our daily projection misses. There is one exception related to a labeling problem that I will come back to in a moment. The intermeeting interval unfolded more or less as we had expected. In the first biweekly period, September 30, the last day of the quarter, was a difficult day in the market. The market priced up for that statement date, initially producing a high rate, and we came in a little later in the day and added quite a few reserves. That resulted in a very wide standard deviation in the federal funds rate on September 30. On the last day of the middle period, the settlement day, the very tall blue bar, is labeled 9.9; that number does not indicate the size of our miss; it refers to the level of the bar, which was cut off at the top of the chart. Our miss that day was only 0.3. This was a day when we supplied quite a few reserves to the market, but given the skewing up in the rate, we underestimated a bit the demand for excess during this period. Actually, the point I want to make, which we describe in our written report, is that the demand for excess reserves has been growing. We target demand for excess reserves of $1 billion in each reserve maintenance period on a period average basis, but actual demand has been creeping up on us. Independent of the turmoil of the last few weeks, the rising demand for excess reserves is in all likelihood a function of declining operating balances. Bankers appear to be looking for a little more excess reserves, but this is something that we are still looking into. In the final period, you can see that we did have to deal a little with the effects of the large volume of trading in equities. The largest volume day was on October 28, and with a 3-day settlement, the settlement of that trading fell on October 31. That was a month-end, already a slightly complicated day for us. We more or less had a day that looked like a maintenance period settlement day where we had to add a sizable amount of reserves and the funds market had a quite wide standard deviation. Stepping back, I would like to ask the Committee for an increase in intermeeting leeway to purchase securities on an outright basis during the intermeeting period between now and the December meeting. The temporary increase would be from $8 billion to $12 billion. We began another sequence of outright coupon purchases last week. We have a significant amount to execute going forward. We estimate that our holdings will need to grow about $15 billion by the maintenance period ending around the time of the Committee's next meeting and that the cumulative need will increase to up to $20 billion in the period immediately following the December meeting. I would like to complete the portion we are planning to do on an outright basis in the market before we get that late in the year. So, by the time of the December meeting, I expect to want to add around $10 or $11 billion through outright operations, principally in coupon securities. However, given that the Treasury issuance of bills seems to be increasing somewhat, I also hope to buy some bills a little later this month or early in December. Before turning to your questions and your vote, I would like to talk to you for a few minutes about the performance of the primary dealers, as shown on your next page. I will try to go through some of the background on our primary dealer relations. Criteria for primary dealers were revised in February 1992, as most members of the Committee will recall. At that time, we identified some drawbacks in the existing system. We described as one drawback the public impression that because the Federal Reserve Bank sets standards for selecting and maintaining these relationships, the Fed was in effect the regulator of the primary dealer firms. Another drawback was that the primary dealer designation was viewed as conferring a special status on these firms in that it carried with it elements of franchise value. As a consequence, we dropped the requirement in 1992 that dealers maintain a 1 percent share of total customer activity. We also discontinued our dealer surveillance activities, which had led to the impression that we were supervising the dealers. In 1992, we also reiterated our standards for maintaining dealer status. All primary dealers were told that as in the past they were expected to (1) make reasonably good markets in their trading relationships with the Fed's Trading Desk, (2) participate meaningfully in Treasury auctions, and (3) provide the Trading Desk with market analysis that could be useful to the Federal Reserve in the formulation of monetary policy. Primary dealers that failed to meet these standards in a meaningful way over time would have their designation as primary dealers discontinued by the FRBNY. I think that spells out, as I have been describing to the dealers, essentially six criteria that we look at in judging our trading relations with the dealers. As listed at the bottom of page 6, these include their performance relating to our RP operations, our outright operations, the Treasury's bill and coupon auctions, the Desk's trades on behalf of foreign central banks, and the provision of information to the Desk. Bluntly put, we have not succeeded in removing the ""Good Housekeeping"" seal of approval. There are many customers in the market who insist that they will only deal with primary dealers. There are municipalities and other public bodies in this country that have such a requirement in their enabling legislation, and many other customers follow that practice informally. So, we have not been successful there. At the same time, it has been hard to motivate dealers to perform. I frankly face something of a moral hazard because there is no longer a volume requirement. Previously, that was an easy thing for the dealers to measure. They knew that if they maintained their volume, they would be kept on our dealer list and that kept their minds focused. What I had hoped to do is provide the dealers with report cards that they could take home and share with their management and really understand how we saw them. I then decided that I did not want to read about those in the Wall Street Journal. So, we came up with a formula for sharing their relative performance with them, at least on the first four criteria, without giving them something they could take home. The following four charts give you some sense of the performance of the individual dealer firms, though they will not enable you to master the details. The first panel shows primary dealer performance in financing Desk transactions. The horizontal axis shows the percent of our volume in repo operations that any one dealer actually does with us, that is, it measures the propositions we accept. The vertical axis measures pricing competitiveness in which zero represents the stop-out rate on our operations, that is, the lowest rate at which we operate. Plus basis points indicate better yields we earn and minus basis points measure poorer yields. The vertical axis reflects all propositions, not just the ones we take. On average, we do not take most propositions. For example, we may accept only $2 billion when we get $10 billion of propositions. So, on average most prices will fall below the stop-out. As a first approximation, poor performance is reflected in the lower left corner; strong performance appears in the upper right corner. However, there is another twist. If a dealer firm is too much of an outlier and too eager to price through the stop-out rate, that may say something about its ability to finance elsewhere and whether there may be something of a credit risk associated with its name. In some sense, if a firm is in the very lowest quadrant, it is hard to know whether it has no business at all to be financed or whether it simply has numerous internal sources of funding that are cheaper than what we provide them. So, that is another element of interpretation on this chart. The next chart illustrates primary dealer performance in Desk outright transactions. The horizontal axis again shows the percent of volume they actually do with us. The vertical axis is in effect a pricing competitiveness index in which zero in this case is a snapshot of the yield curve before we operate. The prices we then see may give us more yield than the yield curve or they may give us less yield. Again, the lower left in this chart indicates poor performance, and obviously something more toward the upper right indicates a stronger performance from our point of view. The third and fourth charts show the dealer performance in Treasury auctions for bill and coupon issues respectively. The horizontal axis measures awards in their name as a percent of total tenders accepted by the Treasury, and the vertical axis is a measure of their capital that both we and the SEC use. We call it ""liquid capital;"" the SEC calls it ""tentative net capital."" This chart again shows, more or less, that the lower left reflects a weaker performance and the upper right a stronger performance. I chose to show the information to the dealers in this form because it indicates that there is not a very strong positive correlation on capital. That is, some dealers that have relatively low capital can compete rather effectively in underwriting the Treasury's debt. Their ability to do so is not just a matter of capital. We have shown these charts to dealers in the last few weeks, but with only their own name indicated and 38 black dots depicting the other dealers. The charts provide a rather powerful indication of the absolute and the relative performances of the individual dealers from where we sit. I tried to calibrate my message to the dealers. When I showed them this information, I was able to point to both 12-month data, which are depicted on these charts, and four-quarter data, quarter by quarter, because trends were quite important for some dealers. I told the dealers that my goal was to improve median performance. I wanted better performance on their part. I was rather blunt with eleven dealers in saying that they were not doing much to meet our current business needs. Of that eleven, I told four flat out that they were not meeting our business needs currently. However, I proposed that we work together over the coming six months to enable them to describe to me their intended business strategy for meeting my business needs and to make an effort to do so. I will meet with them again two quarters from now to review fourth-quarter and first-quarter data. I warned them that if they took no initiative to describe to me how they intended to meet my business needs and could show no performance over this period, we would discuss at our next meeting in the spring whether they wished to announce the termination of their dealer relationship with us or whether they wanted me to announce it. As I noted, four of the dealers heard that message. Another seven heard a message that they were near that category. I think they all understood it, and they all thought the process was reasonable. Again, the pictures on these charts are rather stark, and the dealers did not have much to argue about in that sense. I wanted the Committee to be aware of this process that I am going through. I think it is reasonable but, obviously, I am sharing it with you to solicit your views if you have any. I want to emphasize the sensitivity of these data. I have assured the dealers that I was not going to share it publicly, and I informed them that I did not want them to share it publicly. I did not let them take copies with them, but I did let them take notes. I did not want to read about it in the Wall Street Journal, and I am sure many of them did not want to either. Mr. Chairman, we have no foreign exchange operations to report for this period. I need the Committee's ratification of our domestic open market transactions. Separately, I would like to seek a vote to increase our intermeeting leeway from $8 billion to $12 billion. I would be happy to answer any questions on my report as well as on my memo about our desire to publish the standard deviation of the federal funds rate for each trading day.",2601
-fomc-corpus,1997,I must say that your endeavor to inform the primary dealers of your likes or dislikes is creating a franchise value for them whether you like it or not. I think the presumption that they are primary dealers and you are in fact making that an issue makes it quite impossible to maintain simultaneously that there is no franchise value in their being primary dealers.,68
-fomc-corpus,1997,"I completely agree with you. It is a dilemma, and I think we are stuck with that dilemma. I personally would rather take a hard look with the Treasury on whether the primary dealer system makes sense in terms of underwriting Treasury debt issuance. The Treasury still feels strongly, as it has for many years, that the existing system is important. So, they wish to retain it. We are going to conduct our operations with someone, and until we can get to the point where we do not publish a list of the firms we deal with, which is what I would be happiest with, I think we are in a dilemma. It is very expensive for us to maintain relations with 38 institutions, some of whom are deadbeats from our perspective. We could create a two-tier system. I would be happy to talk to the Committee about that. It would involve our ignoring a lot of firms that provide no value to us but that might continue to sit on our list. Unfortunately, that does not foster very good performance from anybody. That is the nature of the dilemma. We get poor performance from everybody or a franchise value, which sets up the dilemma.",231
-fomc-corpus,1997,"You mentioned that the yuan was not an attackable currency, which I have always assumed to be the case largely because it is an essentially illiquid, controlled, and blocked currency. Can you conceive of any scenario whereby there could be an international attack on that currency? I presume that would require a free market and some ability to move funds, and I am not sure how that can be done in the yuan.",82
-fomc-corpus,1997,"My colleagues and I have thought about that, and we have not come up with a way that might be done directly. I think there are assets that could be sold--",34
-fomc-corpus,1997,"My guess is that that is the way it would happen. In fact, a country can always experience the problem of domestic capital flight, of which there is a substantial amount in China--on the order of $10 billion a year. Another way that domestic residents can attack the currency is through classical, if I may call it that, leads and lags. There also are certain foreign investment strategies that could be used. I do not think the yuan can be attacked in a money market or financial market sense but--while it is much more difficult--pressure can certainly be brought on yuan asset values, and in some sense that has been going on.",130
-fomc-corpus,1997,I have been out of contact. What happened in the financial markets in Brazil and Argentina yesterday?,19
-fomc-corpus,1997,Not much happened in Brazil after they announced their program. Rates were down marginally yesterday; stock markets were flat and are down a little today.,29
-fomc-corpus,1997,Was it the same in Argentina?,7
-fomc-corpus,1997,"Yes, both cases.",5
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Just a question. If all the primary dealers reacted well to your counseling, Peter, what would be the impact on our operations? What benefit would we see as a result of that?",37
-fomc-corpus,1997,"We would get better prices. We would earn more for the U.S. taxpayer. We would have more flexibility in our operations the more propositions we received. I very much hope to avoid the situation that we had in April when we had the large miss in forecasting Treasury tax flows and an insufficient volume of propositions forced us to go back into the market to purchase more securities. I want to see a healthier volume of propositions so we can have much more flexibility. That is very important to me. Frankly, we can operate more efficiently overall if we get better information from the dealers and they execute our trades more expeditiously. Our costs should in some sense be covered by the value we produce as a trading operation.",143
-fomc-corpus,1997,"Looking at your first chart on primary dealer performance in Desk financing transactions, that dotted line for the median is -1.8 basis points. Your desire is to move that up to the stop-out rate?",41
-fomc-corpus,1997,"No. In this case, what I would like to see is movement of the median volume line to the right and a cluster of dealer performance around the intersection of the two medians. Where the auction falls vis-a-vis the stop-out rate is really a matter of how much we are doing because we want more propositions than we can use. Forgive me for my analogy, but I would like to see what Pete Rozelle always said he wanted for the NFL, that on any given Sunday, any football team could beat any other football team. I would like this money market operation to be very competitive. We should have every dealer bidding at a reasonable price, and that would give us the greatest flexibility. So, if we succeeded, we might move the median volume line to between 2 and 3 percent or maybe all the way to 4 percent, with every one of 30 or 40 dealers getting a roughly equal share of volume. Maybe it would be a 2-1/2 or 3 percent share, and the pricing could be in a tighter cluster on that chart. That is what I would be looking for, and that is what I told the dealers.",238
-fomc-corpus,1997,"So, you would like to move that intersection both up and out?",14
-fomc-corpus,1997,Out more than up is what I would expect.,10
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"This question reflects my lack of understanding, but are you creating any legal problems for us here? If a team is dropped from the league, can they sue the commissioner?",34
-fomc-corpus,1997,"I referred earlier to the paper that we put out in February 1992 to establish the current ground rules. That paper indicated that the arrangements between us and the dealers were business relationships and that we could terminate an individual arrangement if no business relationship existed. There are a lot of lawyers in the country, and anyone who can find a lawyer can sue. But I think that the dealers are on notice. I don't want to say that any of the dealers were happy with the message I was giving them, but as businessmen they understood it because I was able to document it in black and white. That is what I have been trying to do. I felt there was no way I could come down hard on them unless I could show them something concrete. As businessmen, I think they understood that. I have been taking this degree of care to minimize the risk you are referring to.",175
-fomc-corpus,1997,"You are a businessman, but they think of you as the government.",14
-fomc-corpus,1997,"I have been working very hard for a couple of years in every meeting I have had with the primary dealers to remind them that ours is a business relationship and that we want them to treat us as a valued customer. I gave a speech about this business relationship to the Bond Market Association in Phoenix in which I emphasized that they should treat us as a valued customer, not as a mere regulator.",78
-fomc-corpus,1997,Did they sniff at that?,6
-fomc-corpus,1997,"A little, but it is a language they understand.",11
-fomc-corpus,1997,"I think that, as a practical matter, the dealers who decided they did not want to behave according to Peter's desires would probably decide they did not want to be primary dealers. They would be very unlikely to bring attention to themselves by suing us. That would be saying, ""I have been deemed unacceptable, and I want the whole world to know about it.""",73
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Peter, on the domestic bond markets, the yield spread between the regular 10-year Treasury note and the inflation-indexed bond has diminished a little over the intermeeting period. At first glance, that might normally be expected to imply a drop in longer-term inflation expectations. But I am wondering whether in the flight to quality, more funds have been directed to the regular nominal note than to the inflation-indexed bond. Would that be part of what is going on?",93
-fomc-corpus,1997,"Yes, I think that is right. I do not want to put too fine a point on it, but I think most people in the market understand that. I don't think people have been making too much of the shift in that spread. I agree with you.",53
-fomc-corpus,1997,"It is true that the indexed bond went down several basis points, particularly on the day of the sharp market break. So, I think there was a flight to both of the securities. It had been our interpretation as well, at least for a while, that if investors were going to get into something liquid, they would choose nominal bonds. But as markets settled over the next few days--and they are still skittish and volatilities are still a bit higher than earlier--it struck me that some of that effect would have played out. The fact that this spread may be down 10 basis points on net--and I may be reading this a little too finely--suggests, if anything, that inflation expectations have come down. There is every reason to think that they might have. All the external events were playing in that direction, and certainly the tone of the discussions in the press and in the market was that events were having a disinflationary or even deflationary effect on the U.S. economy.",207
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. Peter, on the issue of publishing the standard deviation data, I have no objection to providing that additional information. I think it is probably a good idea. I guess I would be concerned if I thought the Desk were going to use those data as a measure of its performance and, specifically, if the Desk were to adopt the perspective that a lower standard deviation in the funds rate indicates better performance. I say that because I think we ought to want the market to act as a form of discipline on those banks that have not properly provided for their reserve needs, particularly for settlements. Some degree of volatility is desirable from that perspective.",129
-fomc-corpus,1997,"I share your view about that. We have developed this measurement for slightly different purposes. I find it very useful in talking to you about our operations, and I think it may help you to judge what we are doing. That's how I think of the standard deviation. As is illustrated in some of those charts, there will be days when the standard deviation is going to be wide, and we can do nothing about it. It is on days when perhaps we could and should do something about it that I want to focus my attention. The standard deviation does not tell me anything automatically. For a long time, people in the market have asked us to publish the underlying data that we get on trades in the federal funds market. They want us to give them the actual data on how many trades are done at each rate level. I am very uncomfortable with that, and I think other people in the market also would be uncomfortable if we started doing that. The reason is that the data might help market observers figure out who needed to do what volume. They could then determine at what rates the trades were done even if the names of market participants were not attached to what we published. I think the standard deviation data give the market a very good sense of the volume done at various rates, and that matters to them in their effort to understand trading activity. So, the information on the standard deviation is intended to give the market something that is helpful to them in return for the statistical information that they provide to us. I share your view on market volatility.",308
-fomc-corpus,1997,Both the Desk and the Board staff have been using the standard deviation data for analytical purposes to see whether the character of the market is changing in any way as reserve balances decline. There is no reason why the market cannot have the same data for analytical purposes.,51
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Peter, I have a couple of questions on the primary dealer situation. Is it your impression that the performance of some of the dealers has deteriorated over time? Secondly, what do we know about the profitability of their current operations?",46
-fomc-corpus,1997,"I will respond to the second question first. The Desk collected profitability data from the dealers for a long time. When I became Manager, I looked at that and discontinued it. What we were getting was apples and oranges and kumquats. We had no ability to insure that we were getting apples compared to apples from the dealers. The dealers were very unhappy with that decision, but I felt that we should not be putting our name behind something where they had not done the work to develop standard accounting conventions. I viewed that as a very risky and potentially embarrassing situation for us.",115
-fomc-corpus,1997,I assume that you get a sense of what is going on by talking to them.,17
-fomc-corpus,1997,"Yes, and I want to distinguish two sorts of information that we get from the dealers. From our conversations with the dealers, it is clear that there is some disparity among the firms. There are some firms that are doing rather well and others that are not. What also comes out in our conversations is that the nature of the underwriting process is changing. Many of the dealers understand this. With the Treasury's use of Dutch auctions, they already have been disintermediated in certain sectors and they feel it. I think this is a profound issue that the Treasury has to grapple with, and Don and I have been urging them to grapple with it. We have looked at individual firms, and we can see dramatic trends. The quarter-to-quarter data are very helpful for that. There are some firms with very fine names globally but whose performance as dealers has deteriorated markedly over the last 12 months because of business decisions they have made. These firms are profitable as global entities. As I have explained to all the dealers, we ask them to compete in the thinnest margined, most competitive sector of global fixed-income markets. It is a tough market, but that is the business I am in. I cannot change that.",246
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Peter, we do not have primary regulatory responsibility for the parents of some of the primary dealers. Do we have a dialogue with the primary dealers about century date change compliance and is it an issue?",39
-fomc-corpus,1997,There are numerous efforts. Bill McDonough might be able to say more about his contacts in New York with the Securities Industry Association. The Federal Reserve has been talking about those issues in many ways with the securities industry generally. I have not singled out the dealer community because there are so many initiatives going on in securities markets.,65
-fomc-corpus,1997,"Also, there is the issue of foreign banks, which I think has become more of an issue in recent months.",23
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,"Within the limits of not in effect becoming their supervisors, which would be inappropriate, we pay as much attention as we can and gather as much knowledge as possible about the activities of the securities firms and perhaps even more so of the foreign banks in our market because we do supervise them.",56
-fomc-corpus,1997,Right.,2
-fomc-corpus,1997,"There is a general move at securities firms in the direction of policing their activities better in order to run their businesses more soundly. Needless to say, we have encouraged that effort and applaud it. Some of the time we can get a point across in a speech that shows an interest in how well they are behaving themselves and how well they are managing their businesses.",72
-fomc-corpus,1997,Would it be appropriate to have a discussion with the primary dealers regarding their handling of century date compliance just as we would with banking institutions?,27
-fomc-corpus,1997,"On that issue, we are trying to work with the Securities Industry Association and the Bond Market Association. Again, we do not want to become their regulator as primary dealers. As securities firms, we are trying to make sure we are talking to them, but it is a little awkward, qua primary dealer, to discuss the century date change issue with them.",71
-fomc-corpus,1997,"On century date change, I meet one-on-one two to three times a year with the heads of insurance companies and securities firms as well as major banks. At those meetings, we go through all the business concerns on their side and our side. For the last year, a piece of that agenda has always been century date change. My impression of the securities firms is that they are very much on top of it. I think in the case of the foreign banks, it varies considerably. The Asian banks seem to be less on top of the problem than the European banks, who are probably six to nine months behind the major U.S. banks. Their attention was gotten a little bit late, but I think we have it now.",146
-fomc-corpus,1997,Okay.,2
-fomc-corpus,1997,"You may know that during the annual meetings in Hong Kong, the Institute of International Finance had a very well attended gathering. I was asked to give the primary speech and I dedicated all of it to the century date change issue.",45
-fomc-corpus,1997,Any other questions? Would somebody like to move to ratify domestic Desk transactions since the last meeting?,20
-fomc-corpus,1997,"So move, Mr. Chairman.",7
-fomc-corpus,1997,Without objection. Would somebody like to move to give Peter Fisher some additional intermeeting leeway?,19
-fomc-corpus,1997,Move approval to increase the leeway to $12 billion.,12
-fomc-corpus,1997,"Without objection. Peter, would you move on to the next item on the swap line renewals?",20
-fomc-corpus,1997,"On the last page of my package, there is a list of our existing swap lines, a note on the Treasury's two swap lines, and the new maturity date if we go ahead with the normal renewal process. This is the time of year I ask you for authority to begin that process, which involves a lot of exchanges of telexes and telephone calls over the next month. I am asking for your approval to renew our existing swap lines, and I would note that that includes both the swap lines listed here and the North American Framework Agreement, which covers the use of our swap lines with Mexico and Canada in certain circumstances. The two swap lines of those countries can be used separately. It is a stand-alone framework in the event of trilateral drawings. Last year, we had a rather lengthy discussion of our swap line agreements. We discussed the possibility that some of these swap lines might fade into the sunset once European Monetary Union proceeds apace. At that time last year, the members of this Committee agreed that we would begin discussions with our colleagues at the other central banks in the spring of 1998, and we intend to do so. I think that will be an uphill struggle given the relative priority that the ECB and the NCBs will place on this issue vis-a-vis other issues. But your humble servants will begin that effort in the spring before we are back here again a year from now with this issue.",286
-fomc-corpus,1997,Servants?,3
-fomc-corpus,1997,"Yes, humble!",4
-fomc-corpus,1997,"It is also intended to include ""and obedient."" Move approval of the swap line renewals, Mr. Chairman.",23
-fomc-corpus,1997,"Mr. Chairman, I think my concerns about foreign exchange operations are well known, and I'm not going to repeat all the arguments I have made earlier. I am uncomfortable with foreign exchange operations for the reasons that I have stated previously, and I see the swap lines as our instrument to implement those operations. Accordingly, I am opposed to their renewal.",69
-fomc-corpus,1997,Any further comment? Is there a second to President McDonough's motion?,16
-fomc-corpus,1997,Second.,2
-fomc-corpus,1997,"All in favor say ""Aye."" SEVERAL. Aye.",15
-fomc-corpus,1997,Opposed?,3
-fomc-corpus,1997,No.,2
-fomc-corpus,1997,Let's move on to the staff economic reports with Messrs. Prell and Truman.,17
-fomc-corpus,1997,"Thank you, Mr. Chairman. I want to offer just a few comments before yielding to Ted for his remarks on the recent turbulence in the international economy and its implications for the U.S. outlook. I think it's pretty obvious that we don't share the view that the United States is going to be sucked into a deflationary whirlpool by the difficulties encountered abroad. Time will tell just how big the contractionary shock will be, but it would have to be a large one to override the momentum of domestic demand in the near term. All major segments of private spending look strong right now. Consumers as a group are rich and happy, and it seems likely they will continue to buy with abandon. Manufacturers of capital goods report heavy inflows of orders--not just for computers and communications equipment, but for a wide range of other machinery as well. Commercial property prices are rising and should buttress nonresidential building activity. Meanwhile, all indicators of housing demand are giving off positive signals. As for financing, although the recent upheavals have produced some widening of risk premia in the securities markets, conditions are still such that most projects can get funding on what evidently are regarded as attractive terms. Absent a sizable shock, then, the economy probably will continue to power ahead--perhaps not indefinitely, but for long enough to exacerbate inflationary pressures significantly. In our forecast, the recent developments abroad are a drag on aggregate demand, but not enough alone to bring a halt soon to the above-trend growth we have been experiencing. One possible source of restraint on demand would be a steep decline in the stock market. It's quite possible that the large equity premiums of the past will not be restored; however, we do believe that the current price-earnings multiples incorporate unrealistic expectations about future profits. If we are correct, the market surely will reflect it at some point, but that might not be soon and the adjustment might start from still higher levels. In our forecast, therefore, we have assumed that you will put a damper on the economic boom by raising the funds rate three-quarters of a point by the middle of next year. That isn't a lot, but we expect that the effects will be magnified by some deflation of the stock market bubble. As you know, we are predicting a drop next year that would take share prices down about 20 percent from Monday's closing level. We make no claim of precision in that forecast--we are dealing not simply with math but also with mind reading. In any event, we expect that once people are shaken out of their complacency about the economic risks, the bond and loan markets will also be affected--with a further widening of yield spreads and some firming of loan standards. With the resultant financial restraint, demand growth weakens and growth of output falls below potential in our forecast. But this doesn't occur before the labor market has tightened further. In that regard, a few words about Friday's labor market data might be in order. According to that report, the unemployment rate has already traversed some of the distance to our predicted cyclical low of 4.6 percent. The report also showed the labor force participation rate slipping further. This suggests that we might, despite the trimming in our latest forecast, still be on the high side for labor force growth. This could spell more labor scarcity and greater wage pressure. We would recommend waiting for another reading or two before reaching that conclusion, but the data do sound a cautionary note. The sharp increase in average hourly earnings in October was anticipated in our forecast. Although the recent surge in wages is attributable in part to the effects of the hike in the federal minimum, we do believe that there is an underlying tendency toward acceleration associated with the efforts of businesses to attract and retain workers in a very tight labor market. Real wage gains have turned up noticeably over the past couple of years, and the pressure will remain in that direction. We think, however, that the decline in price inflation and inflation expectations this year has created a circumstance in which nominal wage increases will be damped in the short run--enough to offset a pickup in medical insurance costs that seems to be in the offing. Our projection shows prices accelerating over the next two years. However, the pickup is even more gradual than in previous forecasts. The recent developments in the external sector suggest that the swing from declining to rising import prices will be of still smaller magnitude than we anticipated earlier. In addition, our reassessment of the trend in labor productivity leads us to think that price inflation will rise more slowly. Our projection of actual productivity growth has not changed much; however, price setting seems to be influenced more by the trends of productivity and unit labor costs than by the short-run variations, and so the change in our trend assumption tends to damp our inflation projection. The end result is a prediction that the rate of price increase will rise only a little over the next two years--especially in the published figures, which will be held down by technical changes to official indexes. But, I would conclude my remarks with the reminder that we believe this rather benign outcome is probably contingent on something happening to create a less accommodative financial environment. Ted will now say a few words about how we see the external environment.",1058
-fomc-corpus,1997,"I thought it would be useful to say a few words about how we have tried, in preparing the Greenbook forecast, to take account of the recent turbulence in the international economic and financial environment. I would note at the start that our assessment is very much a work in progress; in particular, the assumptions, explicit and implicit, underlying our analysis could be vitiated. In preparing the Greenbook forecast for the global economy and its impact on our external sector, we tried to take account of three interrelated changes in the international environment since the Committee's previous meeting in September: (1) the evolution of the economic and financial crises in Asia and the limited spread, so far, to other developing economies, particularly in Latin America; (2) changes in our outlook for other industrial economies including the influence on them of Asian and related developments; and (3) the modest further depreciation of the dollar against European currencies. The net impact of these changes on our outlook for real net exports of goods and services has been small; they increase the negative contribution of the external sector to growth of real GDP by about two tenths next year and one tenth in the following year. Although we think that this is a reasonable best estimate, we also believe that the negative risks to our overall forecast associated with developments in the rest of the world have increased. Let me touch on each of the three principal sources of change in our forecast: Asia, the other industrial countries, and the dollar. We have sliced and diced in a number of different ways the implications of the financial crises in Asia and hints of their spread to developing economies elsewhere, but I think the simplest way to understand the forecast is as follows. In effect, we have taken as a starting point an assumption that in 1998 the current account deficit of the developing economies as a group will have to shift toward surplus by a combined total of $50 billion relative to our baseline in the September Greenbook, which implied a combined 1998 deficit of about $100 billion. Based on historical trade patterns, principally with respect to Asian imports, the U.S. share of such a required external adjustment is about $15 billion, or about two tenths percent of nominal GDP. In this simple framework, it does not matter much for U.S. economic activity or prices whether this adjustment is caused by macroeconomic policies, by collapsing financial systems, or by severely depressed stock markets, nor does it matter much whether the impact on the U.S. economy is felt via exchange-rate, other relative-price, or aggregate-demand channels: as a first approximation, it is the size of the overall adjustment that counts. We are assuming that most of the adjustment occurs quickly, by the end of the first half of 1998, and that little further external adjustment in Asia or elsewhere is required in 1999. Our basic message, as we see it, is that in terms of deflationary effects on the U.S. economy, developments in Asia will be more like a ripple than a wave. With respect to other industrial economies, in our forecast we took into consideration two influences: the underlying pace of expansion and the effects of the Asian crises. Excluding the effects of the Asian crises, we probably would have left our outlook for Japan unchanged because recent data on the economy have been broadly consistent with what we had expected, pointing toward a resumption of growth at around 2-1/2 percent in the second half of the year and extending into 1998. However, mainly because of Japan's relatively large share of Asian trade and relatively small GDP (compared with the United States), we have marked down Japanese growth next year by about half a percentage point due to the Asian crises. With respect to Europe, recent information on trends in economic activity have on balance been better than we had anticipated which, other things being equal, would have led us to edge up projected growth. However, these economies also will be affected by the economic adjustments in Asia. Europe's share of Asian imports is essentially the same as ours while its combined GDP is somewhat larger, suggesting that the direct effect of the Asian adjustment on European growth should be marginally smaller than on U.S. growth. The feedback effects on the U.S. economy of lower growth in Japan and Europe are negative, and they are expected to be somewhat more spread out over time than the direct Asian effects. Turning to dollar exchange rates with the other industrial countries, as Peter Fisher reported, the dollar has appreciated on balance against the yen over the intermeeting period and it has depreciated against the DM and other European currencies, with the latter effect outweighing the former effect in terms of our G-10 average exchange value of the dollar. Broadly speaking, these movements are consistent with relative trends in economic activity in these economies and shifts in the market's view of the outlook for monetary policies: extending the period of easy money in Japan, continuing moves to withdraw monetary stimulus in Europe, and foreseeing no change in policy in the United States. Looking ahead over the forecast period, we have left the dollar unchanged at its recent lower level, on average, in terms of other G-10 currencies. This has the effect of providing a small net stimulus to U.S. net exports that partially offsets the negative effects of Asian developments and their feedback on the U.S. economy through weaker growth in the other industrial countries, Japan in particular. Returning to our basic message, the combination of these influences and considerations has led us, on balance, to increase by a small amount the negative contribution of the external sector to U.S. growth over the forecast period. The small downward adjustment in prices of imports, other than oil, computers, and semiconductors, in the Greenbook forecast for this meeting is due not to changes in our outlook for the dollar--which on an import-weighted basis in terms of both G-10 and non-G-10 currencies is not projected to change further on average over the forecast period. Rather the lower import prices are due to the small decline in international commodity prices that has occurred over the intermeeting period, a decline that may or may not be attributable to developments in Asia. The risks to our forecast with respect to the dollar and underlying growth trends in other industrial countries, we believe, are balanced. In terms of the Asian crises in all their ramifications, the probability of further deterioration should be thought of as greater than the risk of a sudden unexpected improvement. However, it would be a mistake to think that there are no upside risks involved in the Asian situation. For example, the news coming out of the deputies' meeting in Manila next week about a new Asia-Pacific cooperative financing arrangement may be perceived as sufficiently positive for the region as a whole that net inflows of private capital will resume and substantially reduce the size of the external adjustments that we now think will be required. On the downside, the new government in Thailand may not be able or willing to deliver quickly on that country's IMF-supported economic and financial program; the implementation of the Indonesian program also may get bogged down in domestic or family politics; the storm clouds over Korea may darken further; and the spread of contagion to Latin America may intensify. We circulated to the FOMC a note on a so-called ""worst case"" scenario in which the negative impact on U.S. growth from the Asian crises is roughly double what we incorporated in the Greenbook forecast, largely because of an assumed spread of the turmoil to Latin America. That scenario might better have been called a ""worse case,"" since it is easy to spin out scenarios that are more extreme. Mr. Chairman, I will stop on that pessimistic note.",1544
-fomc-corpus,1997,What has been happening in the last couple of years to the statistical discrepancy in the world current account balance?,21
-fomc-corpus,1997,It has not moved much. It is still a very big negative or positive depending upon how you want to think about it.,25
-fomc-corpus,1997,Is it still $100 billion?,7
-fomc-corpus,1997,"When we did this calculation, we held that unchanged. We forced the adjustments to go elsewhere rather than into the statistical discrepancy.",25
-fomc-corpus,1997,"I noticed in the most recent labor force data that the participation rate declined. We usually would expect it to rise in the context of a sharp increase in economic growth. I gather from the underlying data that there has been a significant increase in school enrollments. One would presume that is occurring because of the need to upgrade skills and because parents can afford to let their children stay in school. So, the number of people not in the labor force but in school has been rising very rapidly. This has exactly the opposite effect on the participation rate from what a strong economy would ordinarily impart. When you projected the participation rate to get an unemployment rate of about 4-1/2 percent, did you have any explicit assumptions regarding school enrollment or any other not-in-the-labor-force elements?",157
-fomc-corpus,1997,"We have looked at the movements in the labor force in some detail. Basically, in this latest forecast we backed off from our previous expectation of a significant rise partly because the incoming data were not moving that way. What we have seen since the spike in March is a rather broad-based decline involving adult males, adult females, and teenagers. Certainly, a possible factor affecting school enrollments is the wealth or income effect that you have noted. One area where we have seen recent increases in participation is among women who are head of a household, and I think that is consistent with some impact from welfare reform. Basically, all of the rise in labor force participation in our forecast is related to the anticipated effects of welfare reform. The latest data put the participation rate at a lower level than we had anticipated, but there is enough noise in these numbers that we are hesitant to leap to further conclusions. Even so, the data do tend to underscore the risks to the participation outlook in that direction.",196
-fomc-corpus,1997,What is the effect on the productivity numbers of the upward BLS revision of payroll employment from the annual survey?,22
-fomc-corpus,1997,"All other things equal, it will tend to lower productivity growth over the period in which they wedge in this increase. We are talking about a 0.1 or 0.2 reduction.",39
-fomc-corpus,1997,"Isn't the BLS revision something like 500,000 workers?",14
-fomc-corpus,1997,"I think it was 475,000. If we assess the effect on productivity growth in terms of gauging the trend over a period of time, it would not be quite so large.",38
-fomc-corpus,1997,"It will affect the historical data, the 1996 numbers, but are you suggesting that it will have little effect on the outlook?",27
-fomc-corpus,1997,"They will carry something through as well, but there is also the possibility that by the time we get to the middle of next year other data will have changed too, perhaps on the output side.",39
-fomc-corpus,1997,Is there a tendency for that to happen when BEA does its annual revisions?,16
-fomc-corpus,1997,That is a very interesting question for which I do not have an answer. It is something that we ought to look into.,25
-fomc-corpus,1997,"If it were to show up, it probably would be as an additional increase in the statistical discrepancy. There is no evidence that statistical discrepancies revise back toward zero when the annual revisions are made. So, you could not necessarily use the revision to forecast more GDP, but it certainly is a logical possibility.",60
-fomc-corpus,1997,It certainly would make BEA look harder.,9
-fomc-corpus,1997,"Indeed. I think they will undertake a more careful review of the discrepancy between the income side data and the product side data, and to the extent that they have some discretion, they might emphasize it that way.",42
-fomc-corpus,1997,"As I understand it, the only data we are really dealing with are the revised employment numbers. They will feed that through in estimating total hours, but one does need to look at the income data themselves.",41
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mike, I had a question in reading the Greenbook. As you look out beyond this year, you are forecasting a slowing in GDP growth, and even though you have reduced the rate of increase in inflation, the inflation trend is still positive. As the Greenbook explains the surrounding circumstances, it seems that the primary reason for the continuing inflation is the projected decrease in productivity, which raises costs. Are the inflation numbers being driven by labor costs?",89
-fomc-corpus,1997,"That is a part of the story. We view resource pressures at this point, particularly in the labor market, as being strong enough to produce some ongoing acceleration in prices. The fact that productivity growth in the industrial sector is as rapid as it is suggests to us that, going forward, we are going to have a reasonably comfortable picture in that sector, but more generally we see ongoing pressures in the labor market. We have the difficult question of judging what the relative influences are of trend productivity and actual productivity growth. It is probable that reality lies in some combination of those two elements. Therefore, as we go forward and the upcreep in compensation is augmented by a decline in productivity growth, we expect to get a noticeable acceleration in unit labor costs that will put some pressure on profit margins. In that case, firms may, in what will still be a reasonably tight market overall, try to extract some price increases along the way.",186
-fomc-corpus,1997,Even with the GDP numbers coming down markedly?,9
-fomc-corpus,1997,"One might think that there will be something of a so-called speed effect as we move into 1999. The other element, though it is a small and uncertain factor, does work in the direction of tending to raise inflation. It has to do with the fact that we have been benefiting significantly over the past couple of years from a decline in import prices. Going forward, we do not anticipate that to continue, so that adds to the acceleration of prices in our forecast.",95
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mike, in the corporate profit area, I wonder if you could elaborate a bit on the basis for the Greenbook's assumption that corporate profit growth slows so significantly by early 1998. The labor costs do not seem to accelerate dramatically in this period, and, of course, if profits come in higher than you anticipate in 1998 and 1999, that could lead to higher spending on business fixed investment.",84
-fomc-corpus,1997,"The numbers do conform arithmetically with the behavior of compensation and unit labor costs, but there are other factors that play a role such as movements in interest costs, foreign earnings, and so on. In the short run, we probably will have our greatest hit to foreign earnings from the problems in Asia in particular. So, there are a number of elements that tend to put a damper on profit growth in the near term. The profit share begins to turn down, but the greater damage really occurs as we run through the forecast period. The year 1999 is where we see profits really declining. Indeed, that is one of the reasons we have only the mildest of declines in the stock market through the first part of next year. Year-on-year comparisons of earnings in our forecast will still look quite good. Certainly if there is any continuing inclination for investors to be optimistic, as they clearly have been in recent years, I do not think reduced earnings will be such a rude shock to the markets that they would have devastating effects on share prices in the early part of our forecast period. Cash flow in the nonfinancial corporate sector is not growing as fast as capital expenditure, and we are seeing a widening of the financing gap. As we go out through the forecast period, the financing gap gets to be sizable enough that at least we would not think that firms will be spending simply because money is coming into their coffers and they have to do something with it. It begins to be a less favorable factor as we move out through 1998 and certainly into 1999.",318
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"In the Greenbook forecast, the funds rate is kept constant through this quarter and then begins to move up, rising 75 basis points by the middle of next year. Was there any thought as to how sensitive the forecast might be to this assumption, in view of recent developments in Asia? In particular, if this path were embarked upon somewhat sooner than is assumed in the Greenbook forecast, would you modify the response of the economy in light of the possibility that it might generate some financial consequences that are not incorporated in the forecast?",106
-fomc-corpus,1997,"I will call on Ted to comment regarding how he thinks other markets will respond. This is a question that President Jordan asked at the last meeting, and in retrospect I thought my answer may not have hit on one point that logically would be potentially significant in our thinking about the forecast. That point is that to the extent that you surprised the market early on before you saw any evidence of building price inflation, your credibility would be enhanced. You would not appear to be playing catch-up, and the solidification of low inflation expectations would be greater. Now, in fact, with the kind of acceleration in prices we anticipate, it might be very hard to explain price developments from month to month. So, I do not want to draw this distinction too sharply. Certainly, one of the reasons we have share prices declining is that the markets do not seem to have built in any anticipation of tightening, and an earlier move, as the Bluebook points out, could have fairly sharp effects on domestic financial markets.",199
-fomc-corpus,1997,"It seems to me that two or three points could be made. One is that there is a sense in which all of this volatility in foreign markets has been associated with some moves toward tighter policies, as Peter has pointed out. We have had the Canadian moves, the British moves, the German moves, and although Japanese moves have been postponed, it is fair to say that the generally benign monetary conditions in the industrial countries have been one factor that has contributed to the acceleration of capital flows to emerging economies. As we have commented before, when that comes to an end, there is some risk of a process of readjustment, some of which may already be under way. I think it is probably a reasonable guess that if the Committee were to surprise the market and move sooner, or move at all at this point, there certainly would be some short-run dynamic effects. And no doubt we all would come under some criticism. That having been said, unless you think that early tightening would set off some great avalanche that would continue regardless of fundamentals, I don't think the timing will make much difference in the medium term. I don't think that in any fundamental sense an earlier policy move will somehow cause political leaders in Southeast Asia to step back from the things that they have said they were going to do. I might even argue that it could accelerate the adjustment process, but there might be a lot more broken crockery in the meantime.",284
-fomc-corpus,1997,"I would only add that it is always hard to predict how markets are going to react to a policy move, but if you do something unexpected in a skittish and nervous market, it would seem to me that predicting the outcome is much more difficult in that case. The chances of outlier kinds of responses are somewhat higher.",66
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"This is a version of Tom Hoenig's question. I was quite surprised by the projected falloff in productivity growth in your forecast for 1998. We have had a gratifying improvement now for four years, and you reflect that experience in your estimate of increased trend growth, but then you have a big drop in 1998 to an increase in output of 0.7 percent per hour. Can you say a few words about why you think it will drop that much?",96
-fomc-corpus,1997,"The basic thesis here is that we have had a spurt. We think the improvement in trend is an element in that, but we also think that, in part, the acceleration of output has lifted the growth in productivity to substantially above the trend line that we would draw. As the economy decelerates, we would anticipate a movement back toward the trend line. That is the pattern that we have here.",82
-fomc-corpus,1997,It's not just a movement toward the trend line; it falls below.,14
-fomc-corpus,1997,"No. Think of the productivity trend as a line that is rising and current productivity as moving above the line. The two lines then tend to converge, with actual productivity converging to trend from above. Now, during past business cycles, this has occurred irregularly. Certainly, it has occurred at the end of cyclical expansions. To some extent, that may have reflected a deterioration at the margin in labor quality as new workers were added to the labor force. In some cases, it may have reflected the need to use less efficient equipment, which does not look to be a very significant problem in this instance. It could be simply the deceleration in demand and the cutback in output, which is not followed immediately by a proportionate reduction in hours of labor. It is quite conceivable that not only are we wrong on the trend, we could be wrong on the shorter-run dynamics too, and we could have a more sustained growth of productivity. But we think this is a sensible pattern, one that conforms to experience as we have it embodied in models of productivity behavior.",214
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Mike, I may have misread the analysis in the Greenbook, but I got the sense that you placed a great deal more importance on the wealth effect in your current forecast for household consumption. I compared that analysis to your earlier assessment of how much the wealth effect would affect spending as the stock market rose sharply. Is this simply a matter of an asymmetrical response to a market correction downward as opposed to what you thought the wealth effect would be when the market rose sharply? Is there some new work underlying your current analysis or have I, in fact, just misread the importance that you attach to the wealth effect in explaining a falloff in the growth of consumer spending?",135
-fomc-corpus,1997,"Perhaps because we did not include verbiage in that part of the Greenbook about a lot of other developments, it may have seemed that there was more focus on the wealth effect. Since the midyear revisions to the national income accounts that showed a decline in the saving rate, I think we have used essentially the same logic in terms of assuming that a good bit of the strength in consumption and decline in the saving rate over the past year is attributable to the increase in stock market wealth. We also anticipate that, as the market turns down in our forecast, we are going to see the wealth effect eroding gradually. ""Gradual"" is the point that we have tried to stress. Some have suggested that the response is almost instantaneous, but as best we can gauge that response, looking at a variety of econometric models, it takes a significant span of time for the wealth effect to play out. So, in 1998 we would still see for most of the year some impetus on balance to consumer spending relative to income coming from the rise that already has occurred in the stock market. But, by 1999 we have it turning the other way. I guess one could say that, anecdotally, we hear increasing reports of people feeling rather wealthy and deciding that they are not going to leave all of their gains to their kids or the IRS. They are going to spend some of those gains. Certainly, people in the auto industry believe that one of the reasons the demand for sports utility vehicles, especially the high-end models, has been so strong is that people are spending some of this wealth. I think there is some evidence in the housing market that demand for second homes has firmed in the past year, and people in that industry seem to feel that the improvement could be a reflection of the stock market. So, this factor could be having fairly broad and significant effects, which is the reason we feature it so much in explaining the deceleration in 1998 and 1999.",403
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I want to go back to Ted's comment about whether or not the paper we got on the ""worst case"" scenario was really ""worst"" or ""worse."" I noticed that the paper still foresees some growth in 1998 for Korea, and I must say I am a little concerned that the impact of the Southeast Asian crisis on Japan may be more significant than the paper anticipates. If you have any comments, I would like to hear them because I'm a little concerned that our idea of what is the bottom may not really be the bottom.",115
-fomc-corpus,1997,"There is always that problem, and that is why I made my last comment. You could always say that if growth is going to be marked down by 5 percentage points, why not mark it down by 6 percentage points? That is at one level. There is always some chance of a cumulative process, reminiscent of a lot of economic history. On the other hand, one also has to think about something from which many tend to abstract, namely, about what might happen to policy along the line. There likely is some policy whose feedback could prevent the cumulative effects. So, what may happen is difficult to say. One point to think about, at least in terms of developing economies, is that many of them are high-growth economies. If they go into recession, say their GDP declines by 2 or 3 percent, we would not think of that as a big recession but for them it would represent a very large adjustment from previous growth rates of 6, 7, 8, or 9 percent. The adjustment in growth would be something close to double digits. We might anticipate that Korean growth would still be 1 or 2 percent, but that would be a decline from 7 or 8 percent, a 6 percentage point change in the trajectory of the Korean economy. Obviously, there is no magic about zero here, and I think what you are saying is that in some real sense these economies will be going into some kind of recession. Such a development could have further feedback effects, especially in Japan which, I would argue, is hampered principally by their delay in doing something about the problems in their financial system. That has meant, at least in part, that their standard macroeconomic measures may have been somewhat less effective than one might otherwise have thought, and they are to some extent running out of string. I don't think that is true for other industrial countries as a group. The industrial world seems to have the capacity to take policy steps that would cushion some of these effects and in turn avert feedback effects on the developing economies. Things could be much worse. One part of the world that we have left out of our analysis is Eastern Europe. There, too, some economies have been impacted by at least the financial dimensions of all this turmoil. Although our trade with Eastern Europe is trivial, Western European trade with Eastern Europe is not so trivial. If there were dramatic changes in conditions in Eastern Europe, that presumably would have some impact on Western Europe. While it may be fair to say that Western European nations have scope to use policy to offset the general macroeconomic effects of such a development, it is not unreasonable to question whether they would be able to coordinate their policies to do so. So, I think there is some risk stemming from potential developments in Eastern Europe that we have not taken account of arithmetically. It is one reason why we probably should have called our analysis ""a worse"" rather than ""the worst"" case scenario. Absolute zero is difficult to define in this context.",607
-fomc-corpus,1997,"If you use that ""worse"" case scenario as a guess, is the impact a one-half percentage point reduction in our GDP growth over the next couple of years?",34
-fomc-corpus,1997,It is a little more.,6
-fomc-corpus,1997,Spread over 1998 and 1999?,10
-fomc-corpus,1997,"It is more like adding 0.2 to 0.5 in 1998 and 0.1 to 0.2 or 0.3 in 1999. I think that is the order of magnitude. There is always a question about multipliers in these exercises. Now, in fact, when we run these through, the ex post multipliers tend to be close to 1.0. It is not entirely clear to me whether that is because the true multiplier is close to 1.0 or because either automatic policy responses or discretionary policy responses are such that the multiplier ends up being close to one.",128
-fomc-corpus,1997,"Apart from that, how does this scenario play out in terms of unemployment and downward impact on inflationary pressures?",22
-fomc-corpus,1997,"That goes to the question of global deflation. Perhaps Mike Prell and Don Kohn ought to answer this question, but my view is that the fundamental behavior of the U.S. economy has not changed so much in the last half dozen years that we can no longer analyze effects of this size through standard aggregate demand approaches. Obviously, the developments in question would raise our unemployment rate and lower inflation pressures much as one might argue that the collapse in Latin America in the early 1980s may have affected our economy. At that time, our economy was recovering from a recession, but it also was a recovery from a recession with, at least as perceived at the time, remarkably quiescent inflation. Inflation was then in a 4 to 5 percent range, and that rate of inflation may have reflected some influences from abroad in terms of downward pressure on commodity prices and related developments. We are looking at an effect on our macro economy that is marginal rather than large in terms of fundamental behavior.",200
-fomc-corpus,1997,"There is a simple rule of thumb. One has to have a full-fledged scenario that indicates the circumstances in which, for example, this extra couple of tenths of GDP restraint might be occurring. If we just had a quarter percentage point more deceleration in GDP growth for two years, we would end up by Okun's Law with about a quarter percentage point higher unemployment rate by the end of the second year. The difference in inflation outcomes would be very small. But if we blend in stories about exchange rate and import price effects and their financial dynamics and so on, one has to step back and think very carefully about what the outcome might be. Just taking that little bit of arithmetic that Ted was mentioning, we need to go to a drastically ""worse"" case scenario to totally change the outcome.",161
-fomc-corpus,1997,"As I looked at this analysis in relation to the scenarios at the end of the Greenbook, it seemed to me that the effects were somewhere between the baseline and the tighter scenario in terms of GDP growth. Remember that the tighter scenario in effect keeps inflation from rising. As I will say in my briefing later, it seems to me the ""worst"" case scenario still leaves the tightening move an open question.",82
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mike, I was struck by the fact that the projection for the ECI for next year is the same as the number for this year. I would like to get some sense about how comfortable you are with that projection because I believe it was made before we had the October jobs report. Also, we at our Bank get a lot of anecdotal information to the effect that health care costs will begin to rise at a more rapid pace. That information comes from a fairly broad range of contacts. As an example, the head of made a big point of this in a recent meeting. I am wondering whether you are factoring in that sort of information.",129
-fomc-corpus,1997,"As I noted briefly, the average hourly earnings report for October did not upset us. We anticipated another large number, and it was in line with our expectations. The forecast of a stable ECI increase in 1998 reflects the expectation that wages will be favorably affected by the very low rates of consumer and overall price inflation that we've seen in the past year and the apparent effect of that price behavior on inflation expectations. That effect has been small on the median of such expectations, for example, in the Michigan Survey, but very striking on the mean. Seemingly, there has been a convergence of expectations to the lower level. We would anticipate this to have a damping effect on wage increases, and in a sense we are not looking for the ongoing effect of the minimum wage hikes that have raised the rate of wage increases in the past year. When we did simulations about a year and a half ago, the simulation of a minimum wage increase involved some follow-through as higher wages raised prices and price expectations. But in fact consumer prices have decelerated, so we see that as a favorable element in the near term. We have built a significant acceleration of health insurance costs into the ECI forecast. We have reports of increases in insurance premiums beyond those of CALPERS and the federal employee health programs. We are fairly well convinced that those increases will happen this time. They did not happen this year despite some earlier reports, but we feel the evidence is now tangible enough for us to want to build that into our forecast at least in a moderate way. I guess my final comment would be that there seems to have been some increase recently in the anecdotal reports of step-ups in wage increases. It is very hard to read this information, but I would say that there's a basis for some concern that the increases may be larger than those we have built into the forecast. I have not seen the actual numbers, but just to cite something that I have heard, the survey of smaller businesses by the National Federation of Independent Businesses has evidently shown a noticeable increase in the last few months in the number of firms reporting that they actually have raised wages and a noticeable increase in the number of firms saying they plan to raise wages. In sum, there clearly are risks. I think we followed the logic of the basic model of how wages are determined, and it just may be that we are going to get increases in this period that turn out to be greater than we forecast.",493
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"I just have a few comments that I'm not sure will be all that helpful and a question. On the balance of payments arithmetic and the worst case not appearing all that bad, I think we should not get too complacent. It seems that we are thinking of the transmission mechanism as being through the trade and the current accounts when it may be that the Asian flu spreads more through the capital account. On the arithmetic, while the net of the two tends to be the same, the gross of the capital account has gotten much larger in recent years than the gross on the current account. So, I think the fact that we have small trading relationships is probably less important than it was before capital became so notable and so large relative to trade. We should be careful about that. My other comment is on the stock market. I thought, when we had the big stock market decline a couple of weeks ago, that there was a silver lining to it. I thought it would provide at least part of what Mike Prell was expecting for next year so that he would give us some relief in his forecast for stock market adjustments in 1998. But it seems as if it didn't make a dent at all.",240
-fomc-corpus,1997,"Before the drop, the market had moved up further. So, as of Monday, I think the average for the quarter was actually higher than we had predicted in the last Greenbook. Now, if the market stays at these lower levels, we will come out pretty much in line. The decline from the very peak of the market to the low that we forecast, going by the Wilshire 5000, is about 25 percent. We have about 5 percent under our belts.",98
-fomc-corpus,1997,"In line with Mike Moskow's question earlier, I gather the stock market is going to fall because you expect higher interest rates and lower profits. I believe you have profits coming down from a growth rate of 11 percent in the third quarter to only 1 percent in the fourth quarter. That seems rather abrupt.",63
-fomc-corpus,1997,"It could be. We have been wrong previously! We certainly have found it more difficult in the past couple of years to track from our output forecast to profits, because the statistical discrepancy has moved substantially. Perhaps that could happen going forward. In our forecast, we do not have that continuing movement in income relative to expenditures that we have experienced over the past year or so.",74
-fomc-corpus,1997,"On your first comment, I would agree with you and maybe I should have been more clear. It seems to me that in the particular framework that I laid out, which is not the only way we looked at this, it is the capital account that is forcing the current account adjustment. As you say, the order of magnitude of those capital flows certainly is larger than the gross trade flows. But when it comes down to the corrective effect on goods and services--which is what we measure in GDP--we end up wanting to look at that in terms of trade. We always have this question, much like the question on stock market effects on consumption, about how to marry something with financial dimensions to how these things play out in real dimensions, and whether the effects will be cumulative. We have not added that in except, as I think we mentioned in the Greenbook, that there is a side of this that looks at the implications for growth in the developing countries. It is hard to make everything consistent. One sense of why you might find less growth in developing countries would be that the cost of capital has gone up, uncertainty has gone up, and there has been a big drop in investment. It is not only investment that comes from the public sector, which is supported in these economies, but from the private sector as well as we go through this financial turmoil. In that sense, we try to take account of that effect.",286
-fomc-corpus,1997,"I was traveling on the day that the stock market went down over 500 points. I heard about it after it had already happened. I did not get to build up to it gradually. What I heard on the car radio was that it was because of the Hong Kong stock market. So, it was stock market to stock market and had nothing to do with anything rational.",75
-fomc-corpus,1997,"I was traveling, too. I got trapped in Springfield, Illinois.",14
-fomc-corpus,1997,"Any further questions for our colleagues? If not, would somebody like to start the Committee discussion?",19
-fomc-corpus,1997,"Mr. Chairman, the Tenth District economy continues to perform very well. I am going to focus my comments on anecdotal information partly because that information, though not different from the statistical evidence, is in some sense at a higher pitch as suggested by various stories coming out of our District. First of all, manufacturing continues to do very well, but there is a very persistent commentary that firms are continuing to do everything they can to substitute capital for labor. The reason is labor shortages, especially in the low-paying, repetitive-type jobs. Members of our advisory groups corroborate our information that loan growth is moving up. One of our advisory panel members, a CEO, received a call from a major banking firm that asked whether they should put the firm down for a $50 million or a $100 million line of credit next year. The bank did this without knowing what the firm's plans and loan demands might be. This story illustrates a very strong desire by banks in our area to increase their loans to business borrowers. On the other side, there are credit card fish stories that are scarcely believable. I heard one involving, for me, a new high in indebtedness by an individual. In a credit check for a new loan application, one of the banks in our region found that the individual had debts on several credit cards totaling $180,000. The individual was using advances on new cards to keep them all current. Whether that person was trying to support a business endeavor or just consumer purchases was a question in the bank's mind, but they did not consider the application long enough to get into that kind of detail! With regard to bottlenecks, the Greenbook mentioned some delays in rail transportation and we are finding evidence of that in our region. One firm in Tulsa leased some trucks to go to Memphis to pick up some of its raw materials because the railroad bottlenecks were keeping the firm from getting its supplies on a timely basis. On the salary issue, we are seeing continued escalation in the high-tech areas. One of our states was losing their programmers because of an average 25 percent increase in programmer wages in their job market. With regard to worker benefits, we are hearing from organizations like PCI in Colorado that they are decreasing the waiting period for their workers to get into 401(k) programs. Other employers are increasing their use of stock grants to entice people to stay or to come on board with them. On medical insurance costs, we are hearing from Kaiser Permanente and Blue Cross/Blue Shield of cost increases of 5 to 10 percent on renewals and 9 to 12 percent on PPOs for next year. Finally, though on the other side, we had some meetings with a couple of labor representatives and, for example, the one from the International Brotherhood of Boilermakers was talking about wage increases totaling 2-1/2 to 3-1/2 percent. However, the contracts were for 5 to 7 years, and the wage portion was not renewable though the benefits portion was. One of our major companies also indicated that they had now signed a five-year contract. That says something about future inflation expectations. Briefly on the national level, the only comment I would make is that we have a very strong economy and very strong demand for labor. I do not think the Southeast Asian crisis will necessarily have a contagious effect on our economy. So, we have very strong growth, but in terms of its potential for inflation, I continue to be struck by a number of offsetting factors: how well balanced the economy is at present, a core rate of inflation that continues to decline, the continued absence of pipeline inflation, persisting expectations of stable inflation, and from the standpoint of monetary policy a historically high real fed funds rate. So, the dilemma on the national front continues to puzzle me. Thank you.",774
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, labor markets have remained quite tight in the Twelfth Federal Reserve District in recent months, as employment growth has proceeded at a strong but moderating pace. The District unemployment rate fell about 1/2 percentage point in the first half of the year and remained at this low level through September. With the notable exception of California, unemployment rates in most District states now are at lows not seen in several decades. Although California's unemployment rate is still high relative to those in other states, it has been falling sharply and labor markets in some of the major metropolitan areas are very tight. Unemployment rates have fallen to new lows in San Diego and the San Francisco Bay area. Labor market conditions also have improved noticeably in the Los Angeles area, which until recently had been experiencing a strong out-migration of people who lacked good job opportunities there. For the District as a whole, although third-quarter employment growth was strong, the rate of increase was about 1 percentage point lower than the very rapid pace in the first half of 1997. This includes California and Washington where the slowdown follows a pickup in growth earlier in the year. Moderation in growth rates in the intermountain states of Arizona, Nevada, and Utah appears to be related to a slowing in population growth. This is partly a result of fewer new residents relocating from California. Job growth has tapered off this year in the population-oriented sectors of the economy such as residential construction and state and local government. Recent data show that the national economy continues to perform well, with robust output growth accompanied by low inflation. Traditional models still predict that the economy will grow at around a 2 percent rate next year, with the slowing based on factors such as high stocks of real assets, the dollar's appreciation over the last year, and the relatively high level of real interest rates. The latter have been nudged up a little by recent declines in expected inflation. I agree that the turmoil in East Asia may contribute a bit to the growth slowdown, but I think the contribution is unlikely to be large. However, I believe there is plenty of room for skepticism about whether a slowdown as big as that predicted by traditional models will occur, especially when one takes into account the inability of these models to predict the robust performance of the economy over the past year and a half. It is possible that we are experiencing the effects of a positive supply shock, which means that the uncertainty extends to predicting inflation as well. The recent moderation in inflation certainly is consistent with a positive supply shock, and some market-based indicators provide room for optimism. For example, the rate spread between nominal and inflation-indexed bonds has now fallen below 2-1/2 percentage points; we talked about that a little earlier. But I believe recent data provide reason for concern as well. For instance, the unemployment rate has fallen even further below most estimates of the natural rate. This leads me to expect higher inflation, and both ECI and hourly earnings data show that wages are beginning to move up somewhat. In balancing these considerations, I would expect the core CPI to rise about 2-1/2 percent in 1998 compared to about 2-1/4 percent this year. Thank you.",647
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. In addition to the usual discussions we have had with directors and advisory council members since the last FOMC meeting, we also spent some time visiting communities around southern and western Ohio and central and northern Kentucky. I came away with an impression similar to the one I felt almost 10 years ago when I was still traveling around Southern California, namely that I was in a rare part of the world and everybody else must be suffering because everything was booming where we were. And these are counties that are not accustomed to experiencing such prosperity. Bankers reported strong loan demand in all categories, with most getting stronger. Of course, there has been a surge in mortgage refinancing that I am sure most people are seeing around the country. In the areas that we visited, people reported that consumer loan demand was still very strong, especially auto-related. The most prominent stories related to real estate lending. Our contacts said it was booming everywhere. One banker in Kentucky indicated that there was more speculative building under construction now than at any time in his memory, and he is certainly older than I am. He commented that in his county if a construction worker were driving through in a pickup and happened to have a breakdown near a vacant field, by the time he got the tools out of the back of the truck at least five bankers would stop and offer to finance the project for him! [Laughter] Just before our visit, one banker saw seven proposals for new speculative building projects. He said three of the ideas were so poorly justified that they did not even have a plan, and all the potential borrowers were significantly undercapitalized. There are a lot of reports that farmland is being acquired for future conversion to either commercial or residential uses or on the chance that somebody might build an interstate interchange on the land, making it more valuable. These are not prospects at all, just hopes. In central Kentucky, we were told that the number of lots developed and ready for construction was triple the number of a year ago. Bankers said that a sharp net in-migration into the region was expected. I asked them from where and they didn't know. Obviously, they thought that people were going to move into their area because the local economies were in such good shape right now. We were hearing the usual reports of farmland prices well above what crop values would justify. We heard more stories of residential mortgages being made by nonbanks with 125 percent loan-to-value ratios. One banker said that one of his nonbank directors indicated that he was strongly opposed to participation in any economic development efforts by the state or by the county because his firm's labor turnover was high and he wanted to slow growth. On the labor side, we were told that entry-level tellers were being paid around $14 to $15 an hour to start. One reported $20 an hour for a teller trainee. Our contacts said that banks that advertised in newspapers for employees got no applications at all. Instead, the banks were resorting to hiring bounties. They were paying existing employees to bring in a friend or a relative and then paying them part of the bonus, depending on how long the new employee lasted. One new bank said that in their first six months of operations, they had surpassed their initial three-year plan for earning assets. There were more stories about consumer loans going from being current to bankruptcy status without the transitory stages of late payments and delinquencies. In other reports from directors and advisory council members, like Tom Hoenig we have heard about the bottlenecks in rail transportation and even about the difficulty of booking trucking transportation. The claim is that there is a shortage of truck drivers, and our contacts said that it was common now to pay $40,000 a year or more for truck drivers. We have heard reports of other worker shortages, including nurses, warehouse workers, computer operators and programmers, and machinists. Somebody reported to us that pickers and packers were now getting $14 an hour; I'm not sure exactly what pickers and packers do! One company, a fairly good-sized shop, said that they had a number of machinists whom they had been paying $18 an hour, and a group of them walked out and went to a nonunion shop for $21 an hour. The unionized company cannot find replacements at $18 an hour, and the union will not agree to their hiring new people at higher wages than the existing workers receive. They are demanding that the whole pay structure be raised. So, the company's owners are now looking into the option of simply shutting the plant and moving the whole operation to Mexico. On health care, we heard from one advisory council member that increases in medical costs are now sticking and that we should expect such costs to rise for the next several years--the same kind of thing that Al Broaddus mentioned. Three years ago I asked the members of my small business advisory council if they could contemplate still being in business in five years if they were not able to increase the prices of their products or services at all over that period. The response was a unanimous ""yes,"" and they explained to us how they could do that. When I asked the same question recently, the responses were almost all ""no"" or ""doubtful."" The reasons they give are that labor costs have risen much more than they had expected, the quality of the labor force has fallen more than they had anticipated, and the easy steps to increase productivity have already been taken. Moreover, they now expect more labor militancy, work stoppages, and competition from nonunion operations. Some commented that they thought the unions were going to demand catch-up raises. As the unions view developments, business earnings have been so good because the benefits of increased productivity and efficiency have all gone to owners and not to workers, so now it is the workers' turn. We heard some general comments to the effect that compensation data understate actual labor costs. It is an interesting phenomenon that nobody thinks that their situation is normal. It will be interesting as we go around the table to see how others view this phenomenon. If all of us are operating above average, it is going to be hard to know what is really going on. No one thinks that the unemployment numbers reflect what they are seeing in their communities and their counties; nobody thinks that the inflation data reflect what they are seeing; no one thinks that the compensation numbers reflect what they are experiencing; nobody thinks that their labor turnover experience is reflected in the statistics. Generally, our directors believe that there is a buildup of inflationary pressures and that the inflation risks are decidedly on the upside. They report that sectors of the regional economy such as construction are operating flat out, constrained only by the availability of financing. I have a couple of thoughts on the national economy. One relates to the wealth effect that Mike Prell mentioned. Mike referred to high-end SUVs and second homes. We surveyed boat builders and found that luxury boats are doing very well. The recent International Boat Show in Annapolis was said to have been the best in over 10 years. It is the high-end boats, both power and sailboats, that are selling extremely well. As we were driving around in Kentucky, one banker reported that cars with license plates from New York and Massachusetts sometimes pull into a farmhouse driveway and offer to pay cash for the farm. It appears that we have been in a virtuous phase of the cycle during the last few years, with strong growth in income, output, and employment, good productivity, and falling inflation. It seems to me that the risks are rising that we are going to experience the mirror image of those favorable developments including slower economic growth with possible declines in income, output, and employment, and rising inflation. On the outlook for corporate earnings and the stock market, I was surprised that the Greenbook talks about a decline of only 20 percent in stock prices because it also says that we have seen the peak level of corporate earnings in the third quarter of this year. According to the Greenbook, corporate earnings will be essentially flat from this quarter through the second quarter of next year and will then decline for the subsequent six quarters. By the first quarter of the year 2000, the level of corporate earnings will be below where it is today. I think that if the standard view in the stock analyst community were that the level of corporate earnings early in the next millennium would be below today's level, we would have a more severe correction than the staff is talking about. The notion that any policy action would be viewed as preemptive is true only from the perspective of the national statistics, such as the consumer price index, but not from the standpoint of Main Street. Wall Street might think so; I do not think Main Street would. I believe that when people on Main Street look at asset prices, not just equities but assets in local communities such as those they are seeing in the housing market and the farmland market, the anecdotal reports would not say that a policy action would be viewed as preemptive. Their reaction would be that it was warranted in current economic circumstances.",1826
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, by all accounts, activity in the Fifth District has continued to expand strongly since our September meeting. By now, tight labor markets are obviously old news but, if anything, our sense is that they have tightened even further. Several manufacturers in our region told us over the last several weeks that they had accelerated their purchases of equipment because of the difficulty they are having in finding new workers. In general, the consensus among nearly all our contacts is that just about everybody who is willing and able to work is already working. Anecdotally, I have a little direct personal experience with this. I have two sons. The older one graduated from college back in 1992, and it took him almost a year to get a paying job. The younger one graduated this year, and he already has two jobs. While he was on one of them the other day, someone came up and offered him another, better job. Elsewhere, and somewhat related to what I just said about labor markets, there is evidence of some precautionary inventory building in our area, especially at the factory level. The delays in rail deliveries are causing some manufacturers to stockpile raw materials because of the difficulty they are having with those deliveries. And some factories are stockpiling finished products since it's hard to find additional workers to raise production when demand increases unexpectedly. Despite this evidence of strong demand and tight labor markets, the reports we are getting on final prices are still generally mixed. Trucking rates have been rising this year. As I mentioned earlier, it is generally expected that health care costs will rise appreciably over the course of the next 12 months or so, but goods prices at both the wholesale and retail level generally have been flat recently. Finally, like Jerry Jordan, we are seeing evidence of booming real estate conditions in the District, especially commercial real estate. That is especially true right here in the Washington metropolitan area. And we are beginning to hear comments that developers are now making some of the same kinds of mistakes as were made back in the 1980s. We have a lot of pickup trucks in our District, too! At the national level, we have a lot of new information since our September meeting. I think the headline of 3-1/2 percent growth in real GDP in the third quarter indicates clearly that the economic momentum we have seen for a year is continuing. Indeed, the growth rate in that quarter, as we all know, would have been even stronger had it not been for a slackening in inventory accumulation. And it appears that the fourth quarter is starting off on a strong note if the job report and the purchasing managers' reports are any indication. We had a big increase in employment in October. The increase was well above the average monthly increase for the first three quarters of the year. In short, as I see it, the economy currently appears to be growing at a rate well above the staff's estimate of potential longer-term growth of 2-1/2 percent, and we are projecting that such growth will continue roughly through the second quarter of next year. Beyond this, the demand for labor nationally appears to be outstripping the sustainable supply currently by a factor of maybe 2 or 3. That is certainly consistent with what we hear in our District about the difficulty of finding employable people. Factory utilization rates, according to the Greenbook, are currently above past noninflationary levels. Against this background of quite robust economic activity, the recent stock market volatility, as I see it, is being widely viewed in the markets as precluding any Fed policy tightening for the time being. And what I think is more important is that because the Fed is expected to remain on the sidelines for a while, even very strong economic reports like the third-quarter GDP report and the job report are not getting much reaction in bond markets. They are having little effect on longer-maturity rates. This insensitivity of longer-term rates to the gathering momentum in the economy--and I worry about this--may prevent them from playing their usual role as an automatic stabilizer for the economy. In that sense, one might make the case that the recent market volatility has caused a de facto easing of monetary policy. Bottom line, I see a number of factors that increase the upside risks in the near-term outlook. These include the accommodation of an economy growing well above potential, labor demand outstripping labor supply, factory utilization rates at high levels, and the short-circuiting of the usual automatic restraining force of increases in longer-term interest rates due to the market expectation that the Fed is on hold. We have heard a lot about downside risks, and they are certainly there, but the developments I noted certainly increase the upside risks. In my view, they also increase the danger that we could get behind the curve, as I think one could argue we did in at least somewhat similar circumstances back in 1988 and 1989.",996
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, the economic conditions in the Seventh District are quite similar to what I have been reporting for several meetings. Our regional economy continues to operate at very high levels, but it is expanding at a slower rate than the nation. Our housing and manufacturing sectors are prime examples of this. As I have noted before, labor supply constraints seem to be trimming growth in our region. Labor markets remain very tight. The unemployment rate in District states has been below 4 percent since May. One of our directors noted that his firm is paying bonuses to retain computer-related staff, and salary increases of one-third for these skills are not uncommon now. Many retailers express concern about not having enough staffing for the holiday shopping season. Moreover, based on the unpublished results from the latest Manpower employment survey, labor demand continues to be quite robust. Hiring plans are the strongest for any first quarter since 1989, with hiring intentions remaining uniformly high in all geographic regions of the nation. This survey is not going to be made public until Monday, November 24, so this information is confidential until then. For some time, I have reported that wage rates in the Midwest had not risen appreciably faster than in the rest of the nation despite our having the tightest labor markets in the country. However, the latest ECI data show that over the past year, total compensation costs as well as the wage and salary component were up considerably more in the Midwest than in any other region in the country. In terms of consumer spending trends, retailers report that sales improved over the month of October as the weather got cooler. Reports were mixed concerning whether there has been any impact from the recent stock market volatility. For example, a very large retailer and one of the Big Three automakers reported that sales actually improved in the last week of October. Another of the Big Three showed no noticeable impact. In contrast, the last of the Big Three attributed a sales decline to the stock market. So, on this question, reports of the Big Three clearly are mixed. Competition in the auto industry is described as brutal, and at least one major automaker, General Motors, will be doing more discounting in the near term. You will recall that GM starting offering end-of-model-year discounts in July this year rather than in the usual October time frame. This, in our view, was the major reason that GM's October sales were weak rather than any serious problems associated with Union Pacific. People we talk to at GM and other companies generally said that while the Union Pacific situation posed some temporary difficulties, it was not having a significant impact on deliveries or sales. The trucking industry is seeing very strong demand, and it is not just a result of the Union Pacific problems, as strength is apparent in areas of the nation not served by the railroad. The steel industry also faces strong demand, but with new capacity having come on stream, prices for a wide variety of steel products are expected to drop next year. On the other hand, prices for corrugated and paper products have been increasing and further increases are expected in November. Turning to the national outlook, despite a good deal of financial market uncertainty, the economic situation has not changed greatly since our last meeting. The news on inflation continues to be good, but the long-awaited slowing in aggregate demand seems to be yet further out on the horizon. Even factoring in a larger trade deficit due to the recent events in Southeast Asia, our forecast sees above-potential growth this quarter and out into 1998. The most recent data suggest that labor demand continues to grow more rapidly than the working-age population and that the increase in participation rates has at least temporarily ended. Thus, the tightening in labor markets that occurred early this year may be further intensified. Perhaps the investment boom has increased our productive capacity enough to avoid a buildup in inflationary pressures, but still the resource utilization numbers suggest that the increase in demand may have exceeded the growth in capacity. On balance, I feel that the risks have increased and are still on the upside. There is one other recent event relevant to our economy that I want to mention. That is the defeat--or I guess more accurately the withdrawal--of the fast track trade legislation several days ago. Short term, that prevents the United States from negotiating free trade agreements with Chile, other Latin American countries, and the APEC nations. Longer term, it will inhibit our nation's progress in expanding trade, which we all know increases our standard of living. My overriding concern is that the United States has been a leader throughout the world in multi and bilateral negotiations to open markets and expand trade, and we are now taking a major step backward. I understand that there is some chance that the fast track legislation will be reintroduced next year, possibly in a more limited form. But 1998 is an election year, which poses another set of difficulties in getting this type of legislation enacted. Thank you, Mr. Chairman.",989
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, there is not a whole lot that is really new in New England. In a nutshell, our unemployment rates remain well below the national rate. The rate of job growth also remains below the national rate, but it finally has been sufficient to bring the region back to its pre-recession employment levels. This has occurred about a year earlier than most forecasters had been expecting, so it is very good news for the region as a whole. Our state economies are all quite healthy. Their tax revenues in fiscal year 1997 provided all of them with surpluses somewhere between 2 and 5 percent of their spending bases. Inflation remains subdued, as evidenced both by anecdotal reports and the CPI for the Boston area. Increasingly, we hear the lament in a variety of forms that economic conditions are so good they can only get worse. I want to comment on a couple of developments of a local nature with some national implications. First of all, loan growth at the four large First District banking organizations that are tracked on a weekly basis accelerated to an annual rate of about 18 percent most recently. That increase is well above national trends and well above what it has been locally. This was a result of solid commercial loan growth at the District's two largest banks as well as concerted efforts to expand real estate portfolios, both residential and commercial. Banks in the District, as elsewhere, remain very profitable. They are well capitalized and their stock prices are as high as three to five times book value. However, the CEO of one of our banks in the $10 to $20 billion range--we don't have many of them, but we have one or two--told me last week that his institution, which had been increasing in size basically by acquiring smaller, mostly thrift, depository organizations, was now in a holding mode because he felt the prices of those smaller institutions were getting much too rich for such acquisitions to be sensible investments. He characterized this as a ""very dangerous time"" when the availability of cash and the outrageous price tags on smaller depository institutions could lead some organizations, his not included, to very poor acquisition decisions. As everybody knows, we have a large confluence of mutual funds in the First District. Our employment numbers in the finance, insurance, and real estate sectors in Massachusetts have grown almost 4 percent over the last year. The mutual fund industry is seen as one of the main reasons for the tight Boston office market, which is getting tighter every week that goes by, and more generally for the city's currently strong vitality. We have been doing some research over the last year or so in combination with people at the New York and the Cleveland Reserve Banks on what the reaction would be in the mutual fund industry and more broadly to a sizable stock market correction. Lo and behold, about the same size correction that we had been asking our contacts about actually occurred, at least for a day or so. So, we went to all the mutual funds and banks that had been part of our earlier study to see how they felt they had weathered the crisis. In general, the mutual funds believed that they had weathered the experience fairly well. Redemptions were considerably higher than normal on both October 27 and 28, but purchases were also higher, especially on the second day. Outflows were within the volumes that could be financed from cash reserves. Some funds needed to draw on lines of credit, but those that tried to access uncommitted lines of credit found that they probably would be better off paying the extra price to get their lines of credit on a committed basis. Funds reported no major liquidity problems and no significant problems executing payments, but they did experience a degradation in response time to shareholder calls. Banks serving the mutual funds industry also reported no significant delays, and one contact observed that the increased transaction volumes were likely to be highly profitable to the banks in question. So, maybe the next time we go out and talk to the funds, we need to consider asking them about a bigger stock market correction! Turning to the national forecast, I guess all of us around the table have been impressed, as I know we have been in Boston, by the continuing strength of the economy and the continuing environment of a low and even declining inflation experience as reflected in broad measures of prices. While we have observed this favorable economic performance, we also have found that we are unable with our current forecasting methods to project both the strength of the GDP and the quiescence of inflation. As a response to our own sense of uncertainty about these developments, we invited a few fairly well known forecasters to talk about inflation and how we might better forecast it. As one can imagine, there was a considerable divergence of opinion as there always is when such people are brought in to talk about something so close to their hearts as the way they forecast inflation. There was, however, a good deal of focus by two or three of these forecasters on the impact of the change in relative prices of computers--something that Bob Parry talked about a little earlier--in creating a positive supply shock with sufficient feedback effects to account for much of our inflation success. Now, they recognize that it is possible that the relative change in the prices of computers and its impact on our overall inflationary trends is temporary, somewhat like health care cost changes or import price changes, but forecasting how temporary it is really presents a conundrum. It would seem that the relative changes in computer prices might be much longer-lived and have a much greater impact on the overall trends in inflation than changes in either health costs or import prices. Maybe this is just the other side of the new paradigm economy, or whatever. There did seem to be a sense among these forecasters of a much less temporary impact and a potential for a much longer-run effect on our inflation numbers. We talked a little about the uncertainties stemming from the turmoil in Southeast Asia, its impact on Korea and Japan, and the potential for a broadening of that impact. I sense that many of you are much more sanguine about that impact than I am getting to be. I think that this development inserts an element of downside risk that I did not see earlier, or perhaps it generates a greater appreciation of the downside risk than I have had over the course of the last several FOMC meetings. While I don't think we would disagree with the Greenbook's baseline forecast that the economy is very strong--nearly all the incoming data suggest that it is--I do have a little more question about whether we're going to see that transmitted as strongly to the inflation numbers as traditional models would suggest. Also, I think I now have a slightly sharper sense of concern about the situation in Southeast Asia and its impact more generally. So, I guess I have moved out of the climate, or the attitude, of seeing all the risks only on the upside to where I now sense a greater balancing of risks in this forecast than I did in previous ones.",1402
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"The Eleventh District economy continues to expand rapidly. Recently, we have had some upward revisions in Texas employment, which have put the state's employment growth at over 4-1/2 percent for the last 12 months. This is about twice the national rate and the strongest we have seen in Texas since before the 1986 oil price bust. Employment growth in the third quarter averaged a slightly more moderate 3.7 percent, but it appears to have accelerated as the quarter progressed. Even 3.7 percent is remarkably robust, given the very tight regional and national labor markets. We are not sure that we know where all the new labor is coming from. Relevant to its sustainability, growth has been evenly balanced across different metropolitan areas and across different industries. This balance has allowed growth to continue longer, at a stronger pace, and with fewer wage and price pressures than we might have thought possible when this expansion began about six years ago. Also relevant to sustainability, some of the sectors that were showing symptoms of overindulgence--construction, electronic equipment, and instrument manufacturing--have seen growth decelerate in recent months, and sectors that were lagging have begun to pick up. The border region, which was hit hard by the peso devaluation in late 1994, has benefited greatly from the turnaround in the Mexican economy. Meanwhile, strong worldwide energy demand and Mideast tensions have brought boom times to the oil and gas exploration industry, placing the Houston economy on the same growth track as the rest of Texas. Oil and gas well drilling was operating near 70 percent capacity as recently as late 1996. It surged to over 108 percent of capacity this summer. Although it was back down to 93 percent in September, the high level of drilling activity has been putting substantial upward pressure on labor and equipment costs in that industry. Oil exploration is a much more sophisticated and high-tech business than it was 15 years ago. Consequently, the industry can remain profitable with oil prices as low as $17 a barrel, and some would say lower than that. But the technological sophistication of the industry means that it is also subject to bottlenecks when demand for oil rises. The supply of labor with the skills needed to work with the new technology is not very elastic. If we look hard enough, though, we can find some things to worry about. Hiring problems are now widespread, and reports of wage increases are common in retail trade, business services, and among skilled workers in construction. In the retail trade sector, markdowns and discounting have become rarer. Business services firms find that they are able to pass on more of their rising costs to their customers. However, these upward wage and price pressures have not yet shown up much in the aggregate statistics. I have an anecdote that I think will win as the most unbelievable anecdote of the day, [laughter] but I hesitate to give it to you because you will not believe it.",597
-fomc-corpus,1997,Try us.,3
-fomc-corpus,1997,"We double-checked this one. One Dallas real estate concern has not increased its secretaries' base pay in seven years, but business is so good that each secretary now receives $5,000 per month in incentive bonuses. See, I told you!",51
-fomc-corpus,1997,Where do we apply? SEVERAL. Yes.,11
-fomc-corpus,1997,"Just don't tell my secretary! The point is that some of these profit-sharing bonuses do not end up in the wage data. I was going to say that some of you know about ""the little engine that could"" and tell you that in Texas we have the ""big railroad that could not."" [Laughter] I did mention last time that this problem was creating some fairly serious bottlenecks in the Southwest, and Tom Hoenig, Jerry Jordan, and Mike Moskow have already mentioned it here today. Those problems are rooted in the botched merger between the Union Pacific and the Southern Pacific railroads. They have been exacerbated by strong shipping demand. Southern Pacific stopped basic maintenance and cut workers in anticipation of the merger, and Union Pacific was slow to recognize the situation. Production at Eleventh District manufacturing firms has not been significantly disrupted, but costs have risen due to late, diverted, and lost shipments. Accidents have become a concern too, as long hours have caused railway workers to quite literally fall asleep at the switch. So far, rail customers have absorbed increased shipping costs. However, recent reports suggest that companies plan to begin passing these costs along to their customers. Strains are expected to ease early next year. Disruptions to coal shipments, caused in large part by these railroad shipping problems, have contributed to the extraordinarily high natural gas prices, as have temporary operational problems at one producer's offshore wells in the Gulf. The bad news is that natural gas prices may remain high and volatile over the winter. The good news is that gas prices are expected to come down as the rail snafu unwinds and operational problems in the Gulf of Mexico are resolved. Over the long term, the news on natural gas prices becomes very good. As many as a dozen natural gas pipelines are under construction or being planned to bring Canadian natural gas into the Chicago and New England markets. This gas will begin to enter the United States by the end of 1998 and will mean lower gas prices in the United States for several years. That is bad news for Texas for these years ahead but good news for the U.S. economy. Mideast uncertainties cloud the outlook for crude oil prices. Crude oil accounts for a much larger fraction of the energy market than does natural gas. The collapse of several Southeast Asian currencies will reduce the cost of electricity to high-tech manufacturing firms in the Eleventh District. On the other hand, it may have a significantly adverse effect on our chemical industry, which before the crisis had already found itself facing increasing competition from chemical producers in Southeast Asia. Moreover, the downward pressure on Latin American currencies generally, and the Mexican peso in particular, may cut into future growth of the District's exports. We don't expect this effect to be large, but the level of uncertainty is high. As for the national economy, I have no unique information to impart. All my comments on that are more in the area of interpretation and probably should best be left for later.",597
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. Since the last meeting, the new data and anecdotal information from our region seem to confirm that the Southeast is now settled into a pace of economic growth that is very similar to that of the nation. That is occurring after our regional economy had led the nation for several years. I suspect that experience colors our view of the world, since we have watched our business people work through tight labor markets for some years now. Retail sales in the region have been very uneven, but much of that seems attributable to the change in the opening dates of schools and some unusual weather. We talked to retailers about the upcoming holiday season. They now describe their outlook as one of cautious optimism, and that is a retreat from the unguarded optimism that they were expressing in late summer. Manufacturing activity has slowed in the District. Not surprisingly, apparel continues to be the weakest segment. According to our survey of manufacturing in the Southeast, which is to be released tomorrow, production in October was little changed from September. The backlog of orders has risen for two consecutive months. On the other hand, outlook indices for shipments, new orders, and backlogs will be reported as having declined after large increases in September. The anecdotal reports that we had been getting prior to that survey were more positive, with pulp, paper, and building materials leading the way and with extremely strong reports from the aerospace and oil-related industries. Speaking of oil, and building on what Bob McTeer reported, oil and gas exploration continues to expand in Louisiana. The already high rig count rose somewhat more in October. In fact, the pace of oil field leasing and exploration has caused the day rental rates for rigs and service boats to increase by 50 percent over the last year or so. Residential construction in the Southeast has now slowed somewhat, but there is a noticeable shift in commercial construction from office and industrial structures toward retail space. Commercial space remains tight. Tourism continues to be one of the District's strengths, with tight bookings both for hotels and cruise ships. District job growth was marginally less strong than the national average in September. I believe this is the first time job growth in our region has been below the national average during this business expansion. Wage and price pressures remain modest, and expectations regarding future increases have not changed significantly since the last meeting. In fact, we have seen some easing of compensation premiums in construction in some areas. While the Southeast has lost jobs in the apparel industry, the displaced workers have been able to move to higher-paying, although low-skilled, jobs. [Laughter] That is a true story! Nationally, I see a continuation of the good growth we have observed in overall employment and modest price movements. Clearly, consumer spending is going to bear watching, and I think it is yet to be seen how much the wealth effect or uncertainty concerning financial markets will damp spending in the fourth quarter and beyond. Our own reading of the evidence sees somewhat less of a wealth effect behind consumer spending than is reflected in the Greenbook and hence less sensitivity to stock market changes over the forecast period. Investment spending has remained stronger than I expected, but anecdotal reports link more of that spending to projects that substitute capital for labor, motivated specifically by the rise in labor costs rather than the anticipation of increases in productivity or sales. One would probably expect to see this pattern when labor markets are tight and labor remains relatively more expensive than other inputs. To the extent this investment pattern is widespread, we may see stronger investment spending for a while longer than might be suggested by the capacity utilization numbers and commensurately greater GDP growth in the near term than might otherwise be the case. On the inflation front, I see the outlook for prices, as measured by the implicit GDP deflator, about the same as the Greenbook, but that is without assuming a 75 basis point increase in the funds rate and without a major stock market correction. While I feel strongly that we should not lose the inflation gains that have been made, I am not quite as certain as the Greenbook that we are on an imminently inflationary path. I see little hard evidence to date that this is the case or that immediate and aggressive policy actions are necessarily needed to get us back on path. Indeed, the forecasts of the broader indices of inflation show less acceleration than does the CPI. The CPI, we have to remember, reflects the effects of the energy price swings in 1996 and 1997, which lowered the CPI earlier during that period, leading to greater projected relative upticks going forward. Of course, any judgment on the probability of deterioration in inflation depends on an assessment of the current stance of policy. While the monetary aggregates have been somewhat expansionary over the past two years, the evidence for the past couple of months is that growth of the aggregates has declined somewhat. Moreover, real interest rates, as we interpret them, do not seem unusually expansionary, at least by historic standards, nor is this signaled in the exchange rate movements. With policy not accommodative, the individual price movements, including wages, should be viewed as relative price changes that need not necessarily feed through to higher price inflation. As has been discussed this morning, the wild card in the economy at this time is, in fact, the volatility in the financial markets worldwide. Our own estimate, done before we got the Board staff's work, also suggests a 0.2 to 0.3 percent markdown of real GDP growth. I remain concerned, as does Cathy Minehan I believe because she explored this risk to the expansion when she questioned Ted Truman about the secondary spillover effects, especially from Japan. Less well publicized, even in Japan, until the last couple of days has been the pressure on the Brazilian and Argentine currency and equity markets. I believe the Brazilian market actually has declined more than the Hong Kong market over the last four or five weeks. This point was driven home to me last week when I had a visit from Argentina's ambassador to the United States. Should there be significant problems in Brazil, the fact that over 30 percent of Argentina's exports are to Brazil could put additional pressure on the Argentine economy. I see the risks not only in how much our real GDP growth may be marked down, but also in the possibility that the United States will have to step in and support the economies of one or another of those countries. Mr. Chairman, these are certainly interesting times. Thank you very much.",1301
-fomc-corpus,1997,"Indeed they are, and I think that is one of the reasons we are running so late. Let's take a very short coffee break at this stage. I mean short because we really are tight on time.",41
-fomc-corpus,1997,"President Stem, you have the podium but don't hold onto it any longer than necessary! [Laughter]",21
-fomc-corpus,1997,"I will try to be concise. As far as the District economy is concerned, I can say the same thing that Mike Prell said about the national economy: virtually all sectors are strong. Labor continues to be in very short supply. I think there has been some upcreep in the rate of wage increases, but it certainly has not been dramatic, and it does not seem to have affected pricing as yet. Just a couple of other comments about the region: Hotel occupancy rates in Minneapolis are quite high. We know first-hand that they are high not only currently but prospectively as well. We have been trying to book dates next year for director and other meetings, and we are running into difficulty. There are two new hotels under construction in downtown Minneapolis and two or three major commercial office towers, so we clearly are seeing some step-up in commercial construction activity in the largest metropolitan area of the region. The other comment I would make is that retail sales recently have been quite healthy, and if traffic in the malls is any indicator, the holiday spending season looks promising. As far as the national economy is concerned, if I assume that the Greenbook has the various repercussions of what has been happening in Southeast Asia and elsewhere about right, then it seems to me that we face greater risks than are indicated in the Greenbook numbers. Let me explain what I mean by that. I think the immediate risk is for more of an acceleration of inflation than is projected in the Greenbook. I say that because it seems to me that there is a good deal of momentum to aggregate demand. There are gathering cost pressures. Labor is in even more short supply than was the case earlier, and credit availability is ample. But longer term, I think the risks may be on the other side. I say that because it seems to me that if we carry out the policy envisioned in the Greenbook and we get the assumed decline in stock values and associated negative wealth effects, the resulting sluggish growth in real GDP in 1999 and perhaps beyond will occur according to the Greenbook forecast in an environment where the saving rate stays at a quite low level. I can imagine circumstances where that saving rate may bounce up, if not in 1999 then certainly thereafter. If so, it seems to me that the higher rate of saving would add to the risks of an even more sluggish economic performance. So, my sense of the situation is that perhaps we are facing, both near term and longer term, greater risks than the Greenbook numbers suggest.",505
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. The economic news from the Eighth District continues to be remarkably good. Business contacts in the District remain very optimistic about future economic prospects. However, tight labor markets are a concern. The District's seven-state unemployment rate, at 4.6 percent in September, remained below the national average. Payroll employment growth continues to slow, in part because of a shortage of available workers. Payroll employment grew at a 0.5 percent annual rate in the third quarter, well below the nation's 2.3 percent annual rate. District banks have been pumping a great deal of liquidity into the regional economy. Commercial and industrial lending has been strong as firms increasingly have turned to banks to finance investment in inventories and plant and equipment or to finance mergers and acquisitions. Although there has been some slowing in consumer installment lending, the most recent state sales tax data for the District suggest, on balance, moderate to strong growth in consumer spending. Mortgage lending has held up well in the District, even though overall levels of new residential construction remain below last year's high levels. The national economy continues to expand at a rate above most estimates of long-run potential. An average of over 230,000 nonfarm payroll jobs per month has been added so far in 1997, a pace well in excess of long-run trends in labor force growth. Unemployment has been low by postwar standards for some time. There are signs of mounting wage pressures, including the $.13 increase in average hourly earnings in the manufacturing sector, which brought the pace of growth there to 7-1/2 percent at an annual rate over the last three months. The third-quarter advance GDP report indicates substantial underlying strength in the economy. Final sales increased at a 5 percent annual rate and personal consumption expenditures at a 5.7 percent annual rate in the latest quarter. That is more demand pull than the economy can likely continue to supply. Further, we appear poised for a robust fourth quarter, notwithstanding the turmoil in Southeast Asian currency and equity markets. The fundamental effects on the U.S. economy of these international developments should be small. Good news on inflation and declining inflation expectations have been major factors in producing the excellent economic performance so far in 1997. Nonetheless, I remain concerned that some of this year's good news on inflation has been due to factors that may soon abate. Most forecasters expect somewhat higher inflation in 1998. In the postwar era, when inflation has been lowered and then begins to turn up, it has often turned up quite sharply in the following 12 months. That could happen again, forecasts notwithstanding. Rapid M2 growth and even more rapid M3 growth over the past two years suggest that the stance of policy is not appropriately restrictive to lock in low inflation. The question in my mind is surely when, not whether, inflation will escalate more rapidly. The fundamentals have not changed much since the Chairman's House testimony before the Committee on the Budget on October 8, which seemingly was made to prepare markets for a possible tightening. If anything, unsettled markets aside, given a high level of demand growth and accelerating wages, the situation has worsened from an inflation risk standpoint. Market conditions may cause us to defer any action today, but it seems to me that the challenge for monetary policy could be far greater going into 1998 and beyond if economic growth tapers off and inflation picks up as expected. We may be running out of room for continued deferral in taking an appropriately anti-inflationary policy stance. Certainly, there have been some opportunities this year and last when the stance of policy could have been firmed without surprising the markets. Yet, it is hard to quibble with results so far, and inflation is unlikely to rise at the rate it did in 1990 and 1991. But I wonder, had we been more explicit among ourselves, if not the public, about our objectives, whether we could have locked in CPI inflation at 2 percent or less when the economy was expanding strongly. In my opinion, it will be very difficult to act opportunistically and lock in lower inflation in a weaker economy because of pressures to focus monetary policy on the real side, even if inflation pressures continue to mount. We cannot do much about the real economy, but we can and should use the current opportunity to lower the inflation trend a notch. Thank you.",881
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"In the interest of brevity, I will touch on only a few highlights. The economy in the Philadelphia District is operating at a high level with tight labor markets, but the pace of demand has moderated some, notably in retailing and manufacturing. There are several other areas, however, that suggest that new attitudes are developing. Business demand for new office space is very strong, and landlords clearly are in the driver's seat. Commercial loan demand is also very strong, but the competition to make loans is intense. As a result, bank margins are thin and the terms are very liberal. Lenders, if reminded, remember the lessons of the late 1980s and early 1990s, but that influence on their current decisions is weakening. REITs have a lot of money. Armed with a lot of cash, they are bidding up the prices of almost any property that has some value. They still seem, at least in the Third District, to be more interested in buying than building, although I think that will change as prices exceed reproduction costs. In the credit card area, although there is justifiably a lot of concern, delinquencies have stabilized, albeit at a higher level than a year ago. Anecdotally, the credit card issuers have been trying to do something about the quality of their new issues. But I don't think what we're seeing suggests that they are successful because the new issues seem to have about the same quality as the older vintages. In our market, wages had been going up in the 3-1/2 to 4 percent range. I think the typical increase is now settling in at a fairly solid 4 percent growth rate and labor markets are tight. Nonetheless, the familiar story is still there about the inability to raise prices, and I think that is holding overwhelmingly. I do not sense an increase in inflationary psychology. Turning to the nation briefly, the situation is that demand was supposed to moderate but it has not, just as the inflation rate was supposed to accelerate but it has not. When we throw in the market turmoil that we have had, I think recent developments point at least to deferring a decision today. Nonetheless, given all the uncertainties as we look forward and weighing all the pros and cons, it does seem to me that the risks of overheating have increased somewhat. In particular, one is beginning to see some attitudes that could very well become excessive on the bullish side. Thank you, Mr. Chairman.",499
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The outlook for monetary policy has become more complex since our last meeting. On the one hand, the slightly stronger-than-expected third-quarter GDP report, indications that the momentum in economic activity has carried into the fourth quarter, and a decline in the unemployment rate in October all underscore and reinforce concerns voiced at the last meeting about the threat of higher inflation and the convergence of growth and utilization risks. On the other hand, the developments in Southeast Asia suggest a new downdraft on growth next year and further restraint on inflation, reducing the degree of tightening that would otherwise have been appropriate and adding an important element of downside risk that perhaps was absent previously. How do these things balance out? Given the staff's judgment about the implications of developments in Southeast Asia, the dominant concern in my judgment is the momentum in demand and the recent and prospective declines in the unemployment rate that continue to point to a growing risk of higher inflation. While I am comfortable with the staff forecast of growth, I am concerned, as I was at the last meeting, that the unemployment rate might drift lower than projected by the staff and that inflation might rise more than they anticipate, reflecting my somewhat less optimistic assessment of trend productivity growth. One doubt sometimes expressed about the need for further tightening in this environment is the possibility that increases in real interest rates this year have already imposed the requisite degree of restraint. Although the nominal federal funds rate has increased only slightly, the sharp slowing in overall CPI inflation this year has raised real short-term interest rates--computed by subtracting 12-month CPI inflation from nominal rates--by more than a percentage point. This method of computing real short-term rates is used by the staff, for example, in international comparisons of real short-term interest rates. The effect is qualitatively similar though somewhat smaller if real interest rates are computed, as in the Taylor Rule, by subtracting core CPI inflation from nominal interest rates. Should we therefore conclude that, in effect, a sufficiently aggressive tightening in monetary policy already has occurred to inoculate the economy against the risk of higher inflation? The most important considerations may be that the current level of real short-term interest rates, however high and however much they may have increased this year, does not appear to be restraining demand growth and that credit availability in general appears to be supportive of continued strong growth. But the key to why overall financial conditions still seem to be highly supportive may be that real long-term interest rates, generally viewed as the more important force in aggregate demand, appear to have declined over the year, even predating the decline in long-term government rates during the current turmoil. The contrast between the increase in real short-term rates and the decline in real long-term rates reflects both differences in the movements in short-term versus long-term inflation expectations and differences in the movements in short-and long-term nominal rates. Long-term inflation expectations as measured, for example, by the median expected long-term inflation measure in the Michigan survey and inflation expectations in the Philadelphia Fed survey have not changed much over this year, in contrast with the sharp decline in actual CPI inflation and the smaller but still significant decline in other measures of short-term inflation expectations. Also, nominal long-term rates have declined compared to the small increase in short-term nominal rates. This is reinforced by the comments of President Broaddus about the recent de facto easing produced by the further decline in long-term rates. Two other developments have reinforced the effect of the small decline in real long-term interest rates on the real cost of capital. First, there has been a further increase in equity prices this year, contributing to a further decline in the cost of financing capital spending. Second, the sharpest slowdown in inflation has been that for durable goods. Indeed, outright declines have occurred in the prices of some durable goods, and in comparison with the prices of overall output, the reduction in the relative prices of durable goods has further lowered the real cost of capital for such goods. My message is that we should not take too much comfort in the rise in real short-term interest rates that has been produced by a decline in actual inflation and an accompanying decline in measures of short-term inflation expectations. The financial conditions that are most important in underpinning real economic activity continue to be highly supportive, indeed more supportive than at the beginning of the year. I conclude that if we want financial conditions to become less supportive, we will have to do the dirty work ourselves.",889
-fomc-corpus,1997,Vice Chairman.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Reports on the Second District economy have had a somewhat firmer tone in recent weeks: employment growth has accelerated; retail sales have picked up in mid-to-late October; retail inventories are in good shape; wage pressures are reasonably moderate; housing markets have strengthened; the New York City boom in tourism continues, and hotels are full and the rates are very high. Local banks report that demand for most types of loans is increasing at a steady pace, but I am happy to say that bankers seem to be showing somewhat greater restraint in the credit area. Looking ahead at the national economy, I find myself mainly focused on what we know now that is different from what we knew at the last meeting. At that time, the likelihood of the emergence of inflationary pressures seemed sufficiently great that a monetary policy tightening seemed both likely and imminent. Our forecast for the fourth quarter is a little weaker than the Greenbook staff forecast but not very much. Next year and the following year continue to look quite positive in terms of growth, though a little less robust than 1997. Our staff forecast is based on some return to dependency on traditional models, and it therefore says that inflation will accelerate to a bit greater degree than does the Greenbook. But it is the inflation forecast that I find most problematic, both in the Greenbook and our own work. Since price stability is what we are trying to achieve, uncertainty about the inflation forecast is particularly challenging. The unusually good price performance of the last few years is capable of being fully explained by the combination of a stronger dollar, wage restraint, and the slow growth of health benefit costs. We all have been worried about how long those trends can continue. Obviously, wages and benefit costs could rise more without increasing inflationary pressures if productivity increases were to, in a sense, finance the faster rise in wages and benefit costs. Lo and behold, productivity does seem to be improving quite significantly; at least it was improving quite significantly in the second and third quarters. But again we do not know how long that will continue. The changes in financial markets that already have occurred and the contagion effect that definitely is still going around the world are developments that are likely to reduce growth, and they may do so with a somewhat greater impact if they have a seriously adverse effect on consumer confidence. In my view, the result of all this is that the degree of uncertainty has increased. However, I believe that the urgency that I felt at the last meeting for an imminent change in monetary policy has been very considerably reduced.",513
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"We find ourselves in a new situation. For many months, we as a group have recorded our awe and wonder at the continued strong performance of the U.S. economy and our varying degrees of concern about future wage and price inflation. We have shared our evolving theories about why there has been so little increase in wages in the face of low unemployment and why there has been no price pressure at all. And we have shared our guesses. The Chairman does not like me to use the word ""guesses"" so I will not use it publicly anymore, [Laughter] but it's okay to use it here.",121
-fomc-corpus,1997,"I ""guess"" that is all right! [Laughter]",13
-fomc-corpus,1997,"We have shared our guesses about when the world as we thought we knew it was likely to reappear. But we have not worried much about the rest of the world except to note that global competitiveness and the strong dollar were helping us fight inflation, and that the dollar was unlikely to go on rising much longer. Otherwise, the world economies seemed to be just perking along, indeed growing well enough to buy increasing amounts of our exports and all too willing to feed the voracious American appetite for imports. This month, however, we have been forcefully reminded that the increasing interconnections of global economies and capital markets were not just some cliche we all put in our speeches. Those interconnections are real and have added greatly to the uncertainty about our own economic future. As I look at the Greenbook, I find myself a bit more optimistic than the Greenbook staff about the domestic economy and a bit more pessimistic about the international situation. My optimism about the domestic economy relates mostly to productivity. The Greenbook assumes that at least a substantial fraction of the recent good news on productivity is temporary and that it will revert to trend quite forcefully in 1998 because of the slowing of growth and because of very tight labor markets. I increasingly think it is possible that the confluence of tight labor markets, high investment, and technological change have come together to give us at least a sustained spurt in productivity increases. So, I am less sure than the Greenbook seems to be that we will need to raise interest rates in the near term. Incidentally, I imagine myself making a speech a couple of years from now that would talk about what we did on the assumption that the Greenbook lays it out absolutely right. It is a hard speech to make. It says: we raised interest rates, we tanked the stock market, we cut the growth rate to less than half what we ourselves thought the potential growth rate was, we raised unemployment, and yes by then we are admitting that we overshot because we are beginning to lower the interest rate again. We did this because we were worried about inflation, which even in the Greenbook forecast was quite modest. Then we have to explain that although we were on the forefront of arguing that the CPI was overstated and should be corrected, it is really misleading to leave that correction in when we look at inflation. So, I would find this a very hard speech to make, but maybe we will not have to. [Laughter] On the other hand, as I said, my pessimism about the rest of the world is a little greater than the Greenbook's. This is based on no real knowledge, just a feeling that there is a great potential for snowballing weakness around the world and that our immune systems in the United States may not be quite as good as we thought. We might get that stock market correction not by raising interest rates but simply by the contagion from abroad. If I am right, we also might face a much greater potential conflict between our domestic and our foreign responsibilities over time. We will be wondering what we ought to do if the U.S. economy is still growing very strongly and the rest of the world is a lot weaker.",646
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. For the United States, October turned out to be an Octoberfest of sorts. There was plenty of activity, or froth, but it is still hard to tell if all that market activity is only foam or if there is something of more substance underneath. Like the fall event in 1987, we may be witnessing another departure of Wall Street from Main Street, but some stock market events do have real effects. At this point, I think the jury is still out. We are all struggling to assess the depth and extent of the Asian flu, but practically speaking, the forecast errors are extremely high. The outcome is going to depend on how the various players conduct their business going forward. I think that to say much else would only add to the speculation. While it may be too early to diagnose the severity of the Asian flu affecting Wall Street, we can make some comments about the health of Main Street. In short, the economy is doing extremely well in all sectors. Business fixed investment has been strong. Inventory even appears low enough relative to sales that producers should remain busy at least for the near term. The labor market has remained strong. Consumers returned in the third quarter after the second-quarter pause. While the Main Street economy looks good, I cannot believe that the current rate of economic growth is sustainable. As I said at the last meeting, U.S. demographics will not accommodate forever the filling of 200,000 or more new jobs per month. Strains are starting to show up. ECI wages and salaries have been increasing somewhat. Reports of supply bottlenecks are becoming a bit more frequent, for example, in transportation, at Boeing, and for specialty skill workers. Increased stock market volatility may be a sign of a fundamental reassessment of the outlook for earnings by market participants. If we get a 20 percent stock market correction, economic growth will be slowed by reduced consumer spending from wealth effects and by reduced business fixed investment as the cost of equity capital increases. In addition, profit pressures more generally may slow business fixed investment. Moreover, the Asian problems that we know about are likely to increase the drag that the external sector has on U.S. GDP growth. So far, the pressures on resources from strong economic growth have not shown through to price inflation. Recent statistics have been quite impressive, especially the deflators reported in connection with the third-quarter GDP statistics. Improved productivity undoubtedly has contributed to this performance. We also have to recognize that some of the credit for the improving inflationary environment could be attributable to such temporary factors as the strong dollar, the international competitive situation, and the lack of supply pressures. The balance of these factors may be shifting in light of an international situation that remains quite tenuous. Although arguments can be made that point to differing outcomes, I tend to think that, on balance, inflationary pressures could be held at bay a while longer by the Asian turmoil. To be sure, inflationary pressures are still there, perhaps just below the surface. It is interesting to see discussions of deflation appearing more and more in press analyses, and it is not just a few extremists who are putting forward arguments of worldwide deflation. I have a hard time buying into these arguments on a wholesale basis since so much of the U.S. economy is domestically driven and involves the services sector, which is less subject to the effects of worldwide excess capacity. I do, however, think that the people pressing the deflation thesis raise some interesting points. For example, how do we adapt to an environment with upward price pressures in some sectors but falling prices in others? Also, what are the effects of excess capacity in countries not dominated by market forces and thus less subject to competitive cost and price pressures? I suspect that these may be topics for future discussion. In sum, however, the risks have shifted somewhat since the last meeting. The real economy is doing well and there is significant momentum in the short run, but some slowdown must be coming. Financial markets are unsettled. The question, of course, remains whether this is a temporary financial market event or whether there will be real effects not now anticipated.",836
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Most of the incoming evidence we have been talking about suggests that the economy is continuing to grow very robustly, quite likely well beyond what even an optimist like me would like to think of as sustainable growth. Certainly, it is true that there are widespread and credible expectations of a more or less spontaneous slowdown. Inflation indexes continue to come in remarkably subdued, and I must say that it is hard to see how monetary policy could be falling behind the curve, at least so far. Nonetheless, absent extraordinary circumstances, I for one would be wrestling strenuously this morning with a question of whether or not the time had arrived for preemptory action. However, as we know and have been discussing, extraordinary circumstances do exist in the form of turbulence in Asia and excessive volatility in many financial markets. We will not be able to judge for some time what the fallout of all these events may be, but it is certainly highly likely that they will act to some degree to damp the pace of the expansion. I can readily envision the possibility that the impact, once all of these dominoes have fallen, would be at or perhaps beyond the severe end of the range that we presently envision. If those events were coupled with a policy tightening, this instability could easily ignite a very undesirable and excessive chain reaction. This concern, together with the comforting belief that our policy is not falling behind the curve at this time--although I must say I am not nearly so sanguine as I was earlier about that--presents anew the line of reasoning that leads me to the same old conclusion, ""steady as she goes.""",327
-fomc-corpus,1997,Governor Ferguson.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. As has already been said in this room, many reports suggest that the economy was very strong in the third quarter. However, the reports also indicate that inflation remains quite quiescent. Going forward, I think there are many reasons to be concerned that this good news on prices may soon come to an end. We are well aware of the labor market tightness from the latest BLS report and from the reports of the Reserve Bank presidents today. I also would note that a number of indicators suggest an upcreep in both wages and benefits. I admit that some of those indicators are anecdotal at this point, but we all recognize that anecdotal evidence is sometimes a leading indicator for developments that eventually show up in the aggregate statistics. Capital has been readily available to borrowers on very reasonable terms, and as Governor Meyer indicated, long-term interest rates, both real and nominal, have retained much of their recent declines. However, some countervailing forces exist at this time. We have talked a great deal about the instability in Asia and the resulting fluctuations in our own stock markets. In this regard, I would associate myself with those who said they had some concern that perhaps the Greenbook forecast may be a bit optimistic in terms of both the rapid recovery of Asian markets and the limited spillover. I will admit that the only obvious evidence I have for this is the Brazilian austerity package. More fundamentally, we have had two quarters of productivity growth in the range of 2-1/2 to 3 percent. The measured increase in productivity will obviously slow if economic growth moderates. But in the long run, capital deepening and the possibility of some improvement in the quality of the labor force provide a reason to hope for some continued good news on the productivity front. In sum, as others have said, we are in a challenging and complex period. Several factors indicate that the risks are on the upside for inflation. However, recent instabilities in financial markets may well result in some slowdown in the U.S. economy and a slight decrease in risks for general price increases. Indeed, some of these instabilities create the likelihood of a heightened reaction to any policy move that we may make today. For the longer term, while I recognize that there clearly are some limits on capacity and we may be close to them, I am also mindful that we may be seeing some evidence of a payoff from capital deepening. Thank you.",493
-fomc-corpus,1997,Governor Gramlich.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. I would like to break my remarks into a comment on our overall policy stance and another on the question of timing. On the issue of the overall policy stance, I have become persuaded that, if anything, the present federal funds rate is a little on the low side. I say that for three reasons. One is that in the staff forecast the unemployment rate is low and inflation is heating up. It is heating up at a very slow rate that is hard to observe, but it is heating up. The direction is clear. I believe monetary policy should stay ahead of the game in cases like this. Secondly, this is the first opportunity that I have had to listen to a go-around of the Reserve Bank presidents, but I think most of you were supporting that conclusion. Now, I know enough about the law of averages to realize that what the national statistics indicate will be reflected on balance in what Reserve Bank presidents say, but a lot of you were providing anecdotal evidence that is not necessarily apparent in the aggregate statistics at this point. I think there are indications in that evidence that some overheating may be on the way. Thirdly, I want to refer to some calculations that the staff has done on the Taylor Rule. As I understand at least the fitted version of that rule, it, too, suggests that the funds rate is a bit on the low side. Having said that, let me turn to timing. There I find a real quandary because from the standpoint of domestic management alone, I think that the proper course would be to raise the funds rate promptly by--I don't know the amount--3/4 percentage point or whatever and that would be that. But then the international issue creeps in. There I think there are two considerations--one that a number of you mentioned and another that I have not heard mentioned too often. The one that a number of you have mentioned is that there are some risks that things could turn out to be a little worse than we have seen so far, and that might argue against a funds rate increase. The second is that I would be a little worried in terms of a concept that I will call ""international citizenship."" We are trying to ""unruffle"" or stabilize world currency markets, and if the United States were to raise its short-term rates at this time, that might put even more pressure on some of these struggling currencies. I worry about that both from the macroeconomic point of view and also in terms of what it says about international leadership and responsibility. These considerations define what I consider to be a difficult balancing act, but I would join most of my fellow Governors in saying that I think this probably is not a good time to act even though we might favor some action from the standpoint of domestic management alone. So, I would be on the side of delaying a bit. I would also like to have the directive say something about international events because that is a major reason why I am coming out with this suggestion. Thank you.",606
-fomc-corpus,1997,Let's move forward with Don Kohn.,8
-fomc-corpus,1997,"Thank you, Mr. Chairman. At your last meeting, many Committee members were concerned that financial conditions were too accommodative to prevent strength in aggregate demand from raising resource utilization from already elevated levels, and hence imparting--or perhaps accentuating--an upward trend to inflation in 1998 and 1999. Indeed, there was a sense that tightening would be needed soon, perhaps at this meeting, if the expansion in economic activity did not demonstrate signs of slowing to a more sustainable pace. In fact, the information becoming available since the meeting has shown economic growth continuing to exceed the growth of potential and utilization rates rising. As a consequence, a number of market commentators have suggested that, in the absence of financial market turmoil, the Committee would have been highly likely to tighten at this meeting. In my remarks, I will begin by examining some of the arguments behind this proposition, before turning to possible implications for policy of the turmoil itself. Strong growth and rising utilization rates would weigh on the side of policy firming. Not only has the unemployment rate fallen, and to the lowest level in several decades, but manufacturing capacity utilization has risen to its highest level in 2-3/4 years. Moreover, with final demand exceptionally robust, prospects are good that the expansion of output will continue to exceed the growth of potential, as indeed it does for a while in the staff forecast. However uncertain the Committee might be about the NAIRU or the level of potential output, the chance that inflation will increase goes up with the level of resource utilization. From this perspective, if the Committee were concerned about the stance of policy before, other things equal it ought to be more so when the unemployment rate falls and capacity utilization rises, especially since the movements in both variables were larger than anticipated. As the Chairman has pointed out, a track for economic growth that continues to erode slack in available resources is, by definition, not sustainable. It was concern about a similar set of circumstances that led to the policy tightening of last March, and a forecast that resource utilization would continue to rise would be the strongest argument for a near-term tightening of policy, even before early signs of cost and price pressures began to emerge. But, of course, other things have not been equal, and not only in worldwide financial markets. On the economic side, inflation continues to decline by many measures, generally falling short of expectations. One reason for this has been an uptick in productivity growth, which is holding down unit labor costs. These developments have contributed to a marking down of the staff forecast for future inflation, and they provide some offset in several respects to the signal for higher rates coming from robust increases in output. First, policy need not be as tight as it otherwise might be because lower inflation means the Committee is not as far above price stability--or any interim inflation objective--as it previously might have thought, both now and likely prospectively. Second, improved price and productivity performance has boosted estimates of the growth of the economy's potential and shaded down notions of the range of unemployment rates that might be associated with rising inflation. As a consequence, at least in the Greenbook, the surprisingly strong expansion of real output and the decline in the unemployment rate so far this year have not resulted in as large an output gap as might have been expected from previous estimates of potential output. Moreover, continuing surprises in the output-inflation nexus suggest that high levels of uncertainty about underlying relationships persist and may indicate added caution before tightening in the absence of more concrete signs of oncoming cost or price pressures. Third, the recent inflation performance has probably fed through to lower inflation expectations. It does appear that inflation expectations have been edging lower--at least judging from the behavior of nominal Treasury interest rates relative to rates on inflation-protected securities. Decreases in inflation expectations, if prevalent among households and businesses as well as among bond investors, would themselves tend to hold down any incipient increase in inflation, at least for a time. Moreover, declining inflation expectations have raised real short-term rates as the Committee has held the nominal funds rate unchanged. Thus, recent domestic macroeconomic developments by themselves--encompassing the news on prices and productivity as well as on resource utilization--would not suggest that the case for a rise in the nominal federal funds rate had gotten overwhelmingly stronger, even in the absence of market turmoil. In the staff forecast, the current level of the nominal funds rate was too low to contain inflation in the September Greenbook, and it remains so in the projections for the current meeting. An important reason for this is that financial conditions, broadly defined, do not appear restrictive or moving very much in that direction, even after recent market movements. It is difficult to see evidence that higher short-term real rates are being reflected in most other financial variables in the transmission channel or are restraining interest-sensitive spending. Intermediate- and longer-term real rates, for example, appear to be unchanged or even a little lower over recent months, judging either from the rates on inflation-protected securities or from real yields calculated by subtracting survey-based measures of inflation from nominal yields. And funds continue to be available to businesses on favorable terms in equity and bond markets and at financial intermediaries. In sum, there does not appear to have been any appreciable change in the interest rates or credit conditions that have fueled continued above-trend growth. Moreover, without trying to put too fine a point on it, the recent behavior of money does not suggest that households or depositories are facing any greater constraints on their liquidity. While money growth has been moderating in recent months, it has been doing so from unusually rapid rates earlier in the summer, and the deceleration is in line with expectations for M2 based on the Greenbook forecast, and somewhat less than expected for M3. The staff forecast does embody some effects on U.S. economic performance from the recent worldwide market turmoil, but those effects are limited and they do not damp activity enough to forestall a rise in inflation. Indeed, the need for eventual policy tightening would still be a close call in the staff's ""worst case scenario."" If, in light of the risk of increasing inflation pressures, the Committee were inclined to tighten at an early date, global financial developments might still suggest reasons to postpone action, at least for a short time, to assess ongoing market conditions here and abroad and their economic implications. The effects of recent developments abroad on the United States depend importantly on how political and economic systems in affected countries respond and to what degree skepticism about the prospects for emerging markets spreads to other countries, some of whom are important to us as financial and trading partners. As Ted noted, the course of events abroad appears to present a greater risk of damping than of boosting economic growth relative to the Greenbook forecast. Right now, a firming would come as a complete surprise to market participants. Partly, this reflects the fact that the FOMC's assessment of inflation risks is not generally shared by investors. Not only do futures market rates indicate that markets do not expect tightening in the near term, but the flat yield curve can be read as expressing very low odds on rising interest rates for some time to come. Market participants also perceive the skittishness of markets themselves as another impediment to tightening at this meeting. It is difficult to predict the response of nervous markets to an unanticipated policy action. I suspect that interest rates would ratchet substantially higher across the yield curve, as investors reassessed not only their read on Federal Reserve intentions but also perhaps marked up their evaluation of the risk of inflation itself, given the Federal Reserve's evident concern. The chance of outsized spillovers to markets abroad--with feedback perhaps to the United States--would seem to be magnified in the current situation, especially because such an action, coming on the heels of the Canadian, German, and British tightenings, might suggest to markets a general trend of rising rates in industrial countries. By themselves, skittish markets and unpredictable effects are not reasons to avoid firming policy if the Committee saw appreciable inflation pressures developing fairly soon, particularly as those pressures would only build if needed action were postponed. In such a situation, a sizable correction in debt and equity markets would be an integral aspect of monetary restraint. Delaying action might only impose more disruptive adjustments later, especially if it were feared that delay would only feed the over-optimism of markets. In that regard, one lesson from the turbulence of recent weeks is the resilience of U.S. asset markets, undergirded by the apparently deep-seated optimism of investors. The wild swings in financial prices and the front-page coverage they received would seem to have given investors reason enough to re-examine risks and risk-adjusted returns. Yet the net change in equity prices and risk spreads in the United States has turned out to be quite small. If the FOMC believes that financial conditions broadly defined are independently restraining demand, sufficiently less accommodative conditions are unlikely to evolve by themselves. Still, if economic circumstances were not seen as indicating a pressing need for action in the near term, the Committee very well could favor waiting a bit. Delay would give it the opportunity to see where and whether markets do settle down and to better assess spillover effects on the U.S. economy.",1869
-fomc-corpus,1997,"Thank you. Questions for Don? If not, let me move forward. Something unusual is going on in our numbers system that I think has a bearing on issues I have raised in FOMC meetings over the last two or three years. The important and striking statistic relates to the issue that Governor Rivlin raised, namely that the staff is projecting a slowing in productivity growth in its Greenbook forecast. That slowing in and of itself is the major force that is engendering an increase in inflation. I think it is important to ask ourselves what evidence we have one way or the other on this issue. First of all, if we disaggregate the staff's forecast of labor productivity into capital deepening, changes in labor quality, and total factor productivity, we will find that total factor productivity--the usual residual that all of us have been taught to interpret as an embodiment of technological gain--appears to have risen in 1997. Indeed, if the synergies that we have been observing in different segments of the capital goods markets continue to materialize, we could very readily expect that residual to grow even more rapidly in the years ahead. But even if total factor productivity stabilizes, then the labor productivity numbers that are in the Greenbook, as best I can judge, are probably much too low. Just using the internal data that are not exactly built into the Greenbook forecast but are incorporated in the Board staff's evaluation of productivity associated with capital deepening, the residual actually goes down significantly in 1998 and 1999. And if one were merely to assume that total factor productivity remains at the 1997 level, then instead of getting productivity increases of 1.6 percent in 1997, 1.2 percent in 1998, and 0.9 percent in 1999, productivity would rise from 1.6 percent in 1997 to 2.0 percent in 1998 and 2.3 percent in 1999. I do not know what the actual productivity data will turn out to be. I don't think the staff can predict this; I don't think we can; I don't think anybody on the outside can. But it is very important to recognize, as Governor Rivlin has indicated, that a significant part of the pressures implicit in the price forecast, to which we are responding, rests on an evaluation of what that residual will be. I would suggest that if we look at the data on the current underlying cost structure, it is clear that the evidence, if anything, has been indicative of very constrained cost pressures. You may recall that earlier this year when we were looking at the quite remarkable and persistent rise of profit margins, we also were looking, given that prices were not increasing very much, at very slow rates of increase in total unit costs, about two-thirds of which are unit labor costs. Those data have not changed at all. Unit labor cost increases for nonfinancial corporations are roughly estimated by the staff to have been approximately 0.2 percent in the third quarter. The unit labor cost increases for nonfinancial corporations are at an annual rate of something less than 1 percent. While we do not as yet have any firm data on nonfarm productivity, though we will get a preliminary estimate shortly for the third quarter, the staff estimate is a rate of increase of approximately 3 percent following a rise almost that large in the second quarter. Compared with the nearly 4 percent advance expected for the third-quarter productivity of nonfinancial corporations, that implies what we previously knew, namely, that noncorporate productivity is very badly underestimated. Indeed, the actual productivity numbers for nonfarm businesses are doubtless much larger than the increases being reported. Needless to say, all of this is important because it suggests that we may in fact finally be getting some acceleration of productivity in the statistics after observing, as I had indicated in earlier meetings, a very significant pickup in plant and equipment expenditures. This can be looked at in two ways: one, as an indication of very significant increases in prospective earnings starting in 1993 when the acceleration in investment spending began; and two, as evidence--after the continued strong growth and indeed further acceleration of such investments in recent months--that after a number of years we may finally be getting sufficiently higher profit rates from new facilities to suggest that the previously prospective increases in earnings have indeed begun to materialize. Those prospective increases were based on evaluations by plant managers of various new technologies that have become available and the ability of those technologies to increase factory floor productivity and its equivalent in the nonmanufacturing area. So, we are looking at an acceleration of investment in capital goods, which presumably are being purchased because the required rate of return is there. And as some of you have mentioned, part of that acceleration probably stems from an endeavor to replace labor, whose availability is diminishing rapidly. I think this type of productivity increase is real in the sense that it is not inconsistent with the anecdotal reports. Indeed, it's the earlier data that were inconsistent. The statistics we are seeing now seem to square readily with what we observe is going on in most companies. Of course, this is important because we can have an increase in compensation per hour, which indeed I suspect the numbers are showing, without unit labor costs moving up to a point where they are pressing on profit margins or affecting the price level. I know we had a significant increase in average hourly earnings in October, but a good part of that was the result of overtime and of mix shifts, which I gather brings the published 0.5 percent monthly figure down to 0.3 percent on an adjusted basis. And we probably are still picking up some spillover from the rise in the minimum wage. So while I believe there has been some acceleration in compensation per hour, certainly in the ECI and especially in wages and salaries, I still see it as rather modest and unit labor costs being held in check to a significant extent by what appears to be accelerating growth in productivity. At the last meeting, I looked at what was a very poor trend in labor availability, and I suggested that by this meeting there would be a 50/50 probability that we would have to move. The argument I was making then, before we had a reasonable fix on the third-quarter productivity numbers, was that we were running out of available labor at a particularly rapid pace. Not only was unemployment falling, but the number of people not in the labor force who wanted jobs was declining quite appreciably. The October labor market figures, which were just released, made that far worse. The decline in the number of people in the labor force who wanted to work but did not have a job was quite pronounced in October and the ""not in the labor force"" group who wanted a job also dropped quite appreciably, seasonally adjusted. In effect, we are confronted with an extremely tight labor market, one that will inevitably continue to lead to movement on the wage side. But it is unclear at this stage which is moving faster, productivity or wage acceleration. At the moment, I do not think we can tell. I'm not sure, even without the Asian financial turbulence, that I would have argued for a rate increase at this meeting largely because the developments that are emerging are of such an interesting, if not important, magnitude that it will take one or two more months of CPI and other price measures to see what is going on. Also, not insignificantly, we are waiting for a decline in profit margins, which I must say we have been projecting now quarter by quarter, Greenbook by Greenbook going back seemingly to the 19th century! [Laughter] I suspect that is not literally true, but I think it is a very important issue because, as I have said earlier, the first sign that we will see is that profit margins will begin to be squeezed. If that happens, we are going to get a nice, fat contraction in the stock market. I am not sure how this process is playing out, but in any event to quote Governor Kelley, ""We do not have to 'wrassle' with it at this point."" You didn't put it quite that way; I'm paraphrasing!",1653
-fomc-corpus,1997,Wrestle.,4
-fomc-corpus,1997,"Okay, wrestle.",5
-fomc-corpus,1997,He is from the sophisticated part of Texas.,9
-fomc-corpus,1997,I am sensitive to that!,6
-fomc-corpus,1997,"In any event, as I judge our discussion, we are not going to have a serious problem in reaching a decision on whether we move today. As nearly all of you have indicated in one way or another, moving today given the Asian situation would invite extraordinary financial disruption. Whatever we believe we may have to do in December or later, I think it is quite appropriate for us to stand pat today. But I still think that with the asymmetry of pressures in the labor markets, we have no real choice about maintaining an asymmetric directive toward tightening. As I read what all of you have been saying to a greater or lesser extent, that seems to be where most of you stand. Vice Chair.",139
-fomc-corpus,1997,"I stand exactly where you do, Mr. Chairman, ""B"" asymmetric.",16
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Let me offer at least a slightly different perspective. In the absence of developments in Southeast Asia and the related turmoil in world financial markets, I believe a 1/4 percentage point increase in the funds rate would have been justified today. In my judgment, this move would have been consistent with the concerns voiced at the last meeting, concerns that were reinforced by the stronger-than-expected growth of GDP in the third quarter, the decline in the unemployment rate in October, and the upward revision to the GDP forecast for the fourth quarter. Such a move would have insured the procyclical movement in short-term interest rates that I believe is so important to achieving our macroeconomic objective. Let me comment a little on my views on productivity. I frankly do not see anything amiss in the staff forecast of a sharp slowing in productivity growth next year. GDP growth slows in that forecast from 3.8 percent to 2.2 percent. If we get the slowing in GDP growth anticipated by the staff, then actual productivity growth should be quite sharply below trend productivity growth. The staff estimate of that trend may be a little high, but I think it is defensible. I would not want to go higher than it is. The second point I would make is that I do not believe the anticipated reduction in productivity growth would be an important factor contributing to higher inflation. The reason is that I think pricing is done more off trend productivity than off actual productivity. I believe the slowdown in productivity growth is the key story behind the projected downturn in profits. So, the behavior of productivity is really more of a profits story than an inflation story. But I certainly agree that there is a lot of uncertainty about what that productivity trend is going to be, and that is why I focus on utilization rates. From the standpoint of monetary policy, I think that is really what needs to be kept in mind. Utilization rates continue to increase, but I think it would be prudent to accompany that increase in utilization rates with a somewhat firmer monetary policy.",407
-fomc-corpus,1997,In manufacturing?,3
-fomc-corpus,1997,"I think we have to look two-fold: I am focusing more on the labor markets for all the reasons that you suggested, but I also agree that the gap between capacity utilization and the unemployment rate is important. If that gap widens further, then my view would be altered a little. There is also no question in my mind that developments in Southeast Asia and to a lesser extent the stock market correction and the uneasiness in world financial markets fully support delaying any move to a tighter policy. The reason is not only because of the turmoil in financial markets but because of some uncertainty about just how sharp the economic impact is going to be in Southeast Asia and what the spillover effects to other developed economies and therefore to the United States are going to be. So, I think there is a premium on additional information that comes only from waiting. In my view, that does caution some patience, but again I would be concerned if we did not respond over the longer term to increases in utilization rates.",199
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"I am in basic agreement with you, Mr. Chairman. I want to add a couple of thoughts even though I know the time is late. I want to make clear my thinking because it has undergone a bit of a change. My comments on a set of more balanced risks notwithstanding, I do believe there are real inflationary concerns about the underlying momentum of the economy. These relate to tight capacity constraints, the momentum in both consumer and business spending, the absence of any real sign of a drag from fiscal policy, and very accommodative capital markets. But I have begun to ask myself whether I really believe that this combination of factors will cause inflation to tick upward so that growth needs to be reined in at this point. We have not seen inflation actually change; in fact, it has gone down over the past year by most broad measures. I still hear anecdotally from almost everybody I talk to in the First District a marked unwillingness to raise prices even though there is a sense that wage pressures are growing. I think this pricing restraint is only going to be intensified in the near term by the Southeast Asian turmoil both because of reduced prices for competitive products and actual reductions in the cost of components for U.S. goods. I still think the best guess is the traditional one, the one that is embodied in the Greenbook, that we need to move to tighten policy fairly soon to head off a strong inflationary impulse. But I for one would like to do that on the basis of something more than a blip in wages that can be, at least in part, attributed to minimum wage impacts. I would like to see more evidence of rising inflationary pressures to strengthen my confidence that after a fairly long period of getting inflation trends wrong, we finally got them right. In that regard, I am in full agreement with your recommendation, Mr. Chairman.",374
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Mr. Chairman, I agree with your policy conclusion. I would point out, though, that I do not agree with you because of the Southeast Asian uncertainty. I agree simply because, although I am very concerned about the momentum in the economy, I do not think that we can offer an explanation for raising interest rates today that would be acceptable to the public, given the price data and the analysis behind those data. So, I agree with you on policy.",92
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Mr. Chairman, it seems to me that, even taking account of the market turmoil and what is happening in Asia, the basic economic case for tightening policy is considerably stronger today than it was at the time of our last meeting or even a few weeks ago. My view is that our best course of action is to go ahead and raise the funds rate modestly today. A modest tightening would have the great advantage of putting the Fed back into play and it would allow long-term interest rates to resume their role as automatic stabilizers. I recognize that an action like this carries significant risk. It could produce a very adverse market reaction. We could be blamed for that, and that possibility obviously is an argument for delaying any move. But I think the key point is that delaying a move also involves, in my view at least, significant risk. In particular, if the economy continues to strengthen at anything like the pace we have seen recently, then I believe we have to face the possibility of a significant inflation scare. If that happens, the markets will get a ""double whammy."" First, as interest rates begin to rise and the discount factor on equity prices rises along with it, that would have a negative impact on markets. Second, if we ultimately have to play catch-up and take strong action, which risks a recession, that obviously could have doubly adverse effects. It is this latter possibility that really frightens me. To be sure, the probability of that outcome may be less than 50 percent--maybe it is well below 50 percent--but I don't think it's negligible in the current environment and the consequences of that kind of outcome would be very undesirable. To me, that would be the worst case scenario, the one we really need to avoid. I would not want to write Alice Rivlin's speech, but I wouldn't want to write this speech either. It is a tough call. So, I strongly favor a modest tightening move today. Yes, there are risks in moving today, but in my view there also are significant risks in not moving. It seems to me that the recent, at least relative, market calm might give us a brief window to act. I believe we need to take advantage of it today.",449
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"I concur with your recommendation, Mr. Chairman.",10
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"I concur with your recommendation, Mr. Chairman.",10
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,So do I.,4
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, some indicators show that the economy is experiencing a positive supply shock. For instance, despite the robust growth in real GDP, nominal GDP growth since early 1996 has not been that much higher than its average since the end of the last recession. At the same time, other indicators such as the unemployment rate suggest that we have overshot potential and risk a sustained increase in inflation. I believe one way to balance these conflicting signals is to look at the recommendation from a policy rule that takes into account both risks in inflation and output behavior. Our version of the estimated Taylor Rule suggests that tightening policy by roughly 50 basis points by next quarter would be appropriate. Ordinarily, this would make me vote for an increase in rates as a form of insurance against rising inflation, and it is very tempting to take that position today. However, given the recent instability in financial markets, I would be willing to wait a while before raising interest rates. Consequently, I support alternative ""B"" with asymmetry.",203
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"I, too, support your recommendation, Mr. Chairman. It seems to me that financial markets are too sensitive at this point for an action on our part. Having read recently about some previous financial episodes in Southeast Asia and elsewhere, I also have a suspicion that that circumstance may turn out to be a bit worse than we currently expect, with implications both for financial markets and perhaps for somewhat greater spillovers to the real economy. Having said that, though, if we were in more normal circumstances--and clearly we are not--I think I would want to get started with a little more restraint today. I say that because as I assess the risks, as I discussed earlier, it seems to me that the value of some restraint today would be that we would get a more favorable inflation performance than the one we are otherwise risking and perhaps a smoother path for the economy as well.",175
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, I agree with your recommendation, but I would add that were it not for the financial volatility stemming from events in Southeast Asia, I think we would be much more likely to act today based on developments in the real economy.",48
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,I agree with your recommendation.,6
-fomc-corpus,1997,President Melzer.,4
-fomc-corpus,1997,"Thanks, Alan. I favor alternative C, like Al Broaddus, but I could accept ""B"" on the basis of unsettled market conditions. I believe inflation is likely to rise in the near future as I mentioned in my earlier comments, and I think, as Al does, that there are risks in waiting. So, I believe it is very important that when the Committee becomes convinced that inflation will rise, it must be prepared to act promptly and forcefully. Strong actions like those taken in 1994 send a message that the FOMC will not tolerate rising inflation. In my view, such actions would encourage markets to build in expectations of permanently lower inflation. Let me close with a longer-term thought expressed in the form of a few questions. What are the FOMC's intentions? Do we like seeing inflation below 2 percent? Does the public know it? I think, as I have said before, that we ought to be more explicit about our longer-term objective. In that event, it would be much less likely that our actions would be misinterpreted as being anti-jobs or anti-growth. I believe the last five years of relatively low and stable inflation have demonstrated to businesses and consumers the desirability of relative price stability. It comes back to a comment that Jerry Jordan made about how ""Main Street"" would perhaps be more supportive of our moving than we might think. I also believe that long-term interest rates likely would be lower because of a reduced inflation risk premium. And finally, I think it would probably take less forceful actions to contain inflation and inflation expectations because of enhanced credibility. Thank you.",329
-fomc-corpus,1997,Governor Gramlich.,4
-fomc-corpus,1997,"I concur with your recommendation, Mr. Chairman.",10
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"This expansion will ultimately come to an end when the speculative excesses and imbalances have built to a point where we have no choice but to take strong action to deal with them and put the economy into a recession. The speech I would not want to have to write is one saying we never saw it coming and when we finally recognized it, we had to take much stronger actions and cause a recession. Apparently, I am not as convinced as others that the problems to which we ultimately will have to react will be in consumer prices or even in wages or other measures of labor costs. The problem may not be in output markets but in asset markets as suggested by historical episodes in this country, notably in the 1920s, and in Japan in the late 1980s. In those episodes, inflation was never apparent in consumer prices or wholesale prices, and the policy reactions were too late. I think we have to think more broadly about where we see the signs of the excesses that we need to deal with.",204
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"I support your recommendation, Mr. Chairman. I agree with those who say we have not given up terribly much today by allowing ourselves a little more time.",31
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,I also concur for the reasons that Mr. Guynn just expressed.,14
-fomc-corpus,1997,Governor Ferguson.,3
-fomc-corpus,1997,I concur with your recommendation.,6
-fomc-corpus,1997,"Let me ask the Secretary to read a ""B"" asymmetric directive for purposes of voting.",18
-fomc-corpus,1997,"I will be reading from page 14 in the Bluebook. Page 14 follows several pages of tables and charts: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",138
-fomc-corpus,1997,"Call the roll, please.",6
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus No Governor Ferguson Yes Governor Gramlich Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes GovernorPhillips Yes Governor Rivlin Yes,49
-fomc-corpus,1997,Thank you very much. Our next meeting is on December 16th. We will now adjourn for lunch.,23
-fomc-corpus,1997,"I would first like to welcome our temporary new Bank representative, LeGrande Rives.",17
-fomc-corpus,1997,"Thank you, Mr. Chairman.",7
-fomc-corpus,1997,"Also, sadly, this is Charlie Siegman's last meeting after several generations of watching the ups and downs of these proceedings. We are going to miss you, Charlie.",33
-fomc-corpus,1997,"Thank you very much. On my list of things from the Federal Reserve that I will look back to, this is one of the activities that I will miss very much.",34
-fomc-corpus,1997,"When all of a sudden we begin to see a hole in the staff analysis, we will infer its cause. [Laughter] Would somebody like to move approval of the minutes of the November 12 meeting?",42
-fomc-corpus,1997,So move.,3
-fomc-corpus,1997,"Without objection, they are approved. Mr. Fisher, you have the floor.",16
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will be referring to the package of colored charts, which you should find in front of you. On the first page are charts covering the same information we have shown in the past, but we have changed the source of the data for the current 3-month deposit rates. Traders have persuaded me that the LIBOR fixing provides a better comparison than the Eurodollar series we have been using, so that is a slight change. Focusing first on U.S. forward rates, there are two points to which I would draw your attention. One is that there has been relatively little net change in these rates since the November meeting, as shown by the red lines, but clearly some compression has occurred as the money market yield curve has become increasingly flatter in the period since October. I think 1 Copies of the charts used by Mr. Fisher are appended to this transcript. the updrift in the solid line, the current dollar LIBOR, reflects a fairly typical year-end phenomenon. I would not attach any significance to that. Looking at the German forward rates, Mr. Tietmeyer said rather publicly on November 14 what other Bundesbank officials have been saying for some time, namely, that the market should not expect German rates to go up by 120 basis points between now and next May to meet Italian rates halfway, as the market had come to believe was going to happen. In effect, Tietmeyer was saying that the German economy is stronger but not really all that strong. You can see the gentle drift downward in German forward rates. If you look at the solid blue line, the current mark LIBOR, it is quite interesting that the spike in early December parallels the spike in the yen LIBOR, shown in the chart below, at the time of heightened concerns about the Japanese premium. Now, this is interesting for those of us in the money market business, as it were, because the calculations really are quite different. In the British Bankers Association panel for the yen LIBOR fixing, there are eight Japanese banks, whereas in the panels for the dollar and the mark, there are only three and the calculation is done by throwing out the highs and the lows. So, I think the spike in the German money market rates reflects the demand for funds from the Japanese banks. It is not a reflection of the credit premium, as it were, from the demand side but a pushing through of the demand coming from the Japanese banks. Turning to the Japanese market, we need a little magnification of the bottom panel to see what is going on in Japan. So, if you turn to the second page, I will work through some of the events in the Japanese markets. Three rates are traced in the top panel: the current yen LIBOR 3-month deposit fixing in dark purple, the 9-month forward 3-month yen deposit rate in orange-yellow, and the Japanese overnight call rate in green. In the middle panel, we have plotted the excess reserves in the Japanese banking system. I talked to Bank of Japan officials at some length about their calculation of this measure. It is not quite how we would calculate it, but it is the way they do it. The chart illustrates the heightened generosity that the Bank of Japan was practicing by leaving their market in considerable surplus following the closure of Yamaichi and subsequently in the last few days. The bottom panel has two measures of the Japanese premium in dollar interest rates: the solid line is the difference between the 1-month LIBOR rates at the Bank of Tokyo-Mitsubishi and at Chase, and the dotted line is the Fuji rate minus the Bank of Tokyo-Mitsubishi rate. There was some modest differentiation among Japanese names at the height of the crisis, but clearly the dominant difference may be seen in the comparison between the best Japanese name and Chase as shown in this example. Going back to the top panel, I would like to draw out two points. One is that in the last few days the Bank of Japan has pushed the overnight call rate down into the 20 basis point range. A Bank of Japan official has told me that ""you may call this a temporary easing."" I took that to mean that the emphasis was on ""you"" because they were not going to call it that out loud quite yet. But clearly, they have pushed the overnight call rate down. The gap between the purple line showing the current LIBOR and the orange line does tend to indicate that the current premium is expected to wash out on the other side of the fiscal year. That is, the high premium, high demand for funds coming out of the Japanese banks is thought by the market to be something that will wash out 9-months forward when we get happily to the other side of the Japanese fiscal year-end in March. Turning to the third page, I thought I would give a little background on events in East Asia. I know Ted Truman will be speaking more about that. The main purpose of these panels is to remind us that this is not just a bad thunderstorm but something more like the 100-year flood. The top panel shows the exchange rate movements since July 1; the middle panel has percent changes in equity indices; and the bottom panel depicts 1-month interest rates. Focusing on the currency panel, I think it's easy to say that the currencies have overshot their fundamental values. But I think it's important to recognize that there is still a very large position overhang weighing on these exchange markets. In effect, a leveraged convergence trade as we would have called it in Europe a few years ago, short dollar or yen external currencies and long internal currencies, was embedded on the balance sheets of businesses throughout the region, and they have not yet completed hedging those exposures. In these thin markets, both bankers and traders have a very hard time thinking of these currencies as having overshot because they are aware of how much more there is yet to hedge that is weighing on the exchange rate. A second inference I would draw from this page is to note that the downward slope of the foreign exchange and equity values is somewhat steeper than the upward slope in the 1-month interest rates at the bottom. Another point I would note is that so far Taiwan, the red line, has managed to distinguish itself. In the top panel you can see that its currency has declined against the dollar only slightly more than the yen; and in the middle panel, you can see that their equity market has really broken out of the pack. While looking at this chart overall, I think it is possible that we will look back and see that the end-of-year effect for some of these currencies and values provided something of a nadir for them, given the risk aversion that is generally typical at this time of year. But I think it would be risky to count on a bounceback after the New Year for all of them. Turning to the fourth page, I have depicted in the top panel both the March Eurodollar contract and the March fed funds futures contract as they have traded throughout the fall. There is relatively little net change in both those series from just prior to the November meeting to today. The middle panel shows the U.S. Treasury constant maturity yields for 30, 10 and 2 years. You can see that we have had a continued decline in bond yields in the 30- and 10-year areas, while the yield on the 2-year note has been more or less flat over that time horizon. Clearly, this is something that is quite difficult to interpret. I think that with the worsening of the Asian crisis, market participants have inferred that there will be no action at this meeting, and more of them have come to adopt the deflationist outlook or at least are taking it more seriously than they did some time ago. While point estimates for inflation have moved down a bit, I think the better explanation is that market participants have shaved off the upside risk in the inflation probability distribution, that is, the risk that inflation will rise over the next six months. That is what is tending to bring down the yield curve in combination with the flight-to-quality, end-of-year effect, making market participants more comfortable about moving their duration out the yield curve in this end-of-year environment. The last page of charts relates to our open market operations in this period. The top panel covers daily fed funds trading: the blue lines show the daily ranges, the vertical red lines show the standard deviations, and the horizontal red lines indicate the effective rates. The panel at the bottom has the level of free reserves and indicates our daily misses from the projections. I should point out that at the start of the middle period, which included Thanksgiving, we raised the allowance for excess reserves from $1 billion to $1.4 billion. The demand for excess reserves clearly has been inching up. I do not want to suggest that this is a precise science, but we are trying to get a handle on how much it has drifted up. I think it will be some while before we are confident that we know where it has settled. We had some volatility around the Thanksgiving holiday and the start of December. As you can see, excess reserves averaged around $2 billion in that period, and we still had a slightly firm funds rate. We may have slightly overcompensated at the beginning of the current maintenance period, but the market was quite tight. Yesterday was a corporate tax payment date, and we tried to prepare the market for that. We purchased a total of $15.6 billion on an outright basis since the last FOMC meeting and a total of $17.2 billion since early November. The total included a small amount of bills, $1.5 billion, and those purchases seemed to go quite well. I was trying to leave something of a marker with the market and the Treasury--a notice that we were not forgetting about the bill sector, that we plan to come back to it. In making these permanent reserve injections, we did change our pattern of operations from last year. A year ago, we left a larger need in the market, but we reverted to our traditional pattern this year by adding a large amount of permanent reserves. That may put us in a position of having to drain reserves to a modest extent toward the end of January when the Christmas demand comes out of the market. At that point, we also will be reaching rather low levels of operating balances, but I think we are ready to handle the effects of being on the drain side at what are likely to be new lows in operating balances. We had no foreign operations in this period. Mr. Chairman, I will need the Committee's ratification of our domestic operations, and I would be happy to answer any questions.",2172
-fomc-corpus,1997,"The Southeast Asian exchange rate patterns imply, as you say, that a lot of market participants are overshooting the fundamentals in a certain sense. It is difficult to avoid that sort of conclusion. We cannot get a 40 or 50 percent decline in an exchange rate in a short period of time under any realistic assumptions concerning what has changed. Stock prices can do that. They reflect net long positions, and if everyone decides to pull out, stock prices will go to zero. But exchange rates are zero-sum games; one person's rise is another person's decline. So, this exchange rate decrease looks extraordinarily large. You raised a question when you stated that the balance of foreign currency positions is still effectively long in local currencies and short in dollars or perhaps yen. One would assume that forward positions in the currency, if they exist, would be able to pick this up. I have never seen 9-month or 1-year forwards on baht/dollars. Do they exist?",195
-fomc-corpus,1997,"They exist. They are quite thinly traded, and I'm not sure how much confidence people put in them, but they are there. They are not the kind of market instruments that one can click on a Reuters page and see.",46
-fomc-corpus,1997,"But the question is whether they give us at least a partial answer. If we are getting extreme disequilibrium, the deep forward positions ought to be closer to minus 10 or minus 15 as distinct from minus 40. And if we cannot infer it from these other positions, we could in principle handle the credit risk in this situation--I haven't thought this through--by focusing on the spot rate adjusted for covered interest rate differentials to give us an idea of the forward position. I wonder whether we know anything about the more distant horizon in order to answer the question about overshooting, so to speak, in the adjustment of balances. If indeed those balances are precisely what you say, namely, that they are comprised of long positions in the local currency and short positions in dollars, that imbalance would give us a very significant premium on the forward position vis-a-vis the spot. It would be very interesting to test that if the information is at all available.",193
-fomc-corpus,1997,"Are you not just as likely to see higher short-term interest rates, so in fact it would go the other way? The forward foreign exchange rates would be more depressed. You use the word position, which is quite different--",45
-fomc-corpus,1997,"I'm thinking of 2-year forwards, for example.",11
-fomc-corpus,1997,"I don't think you can find 2-year forwards in these markets. If they existed, they would tend to have higher interest rates and would be more depressed than the current spot rates.",37
-fomc-corpus,1997,I think the problem is that we do not have a time horizon where one ought to find fundamental value. There is not enough confidence in markets that one would want to have a contract with a maturity of that length. That is a long duration exposure to take on a currency that is declining so rapidly now.,61
-fomc-corpus,1997,"Before the Southeast Asian markets collapsed, we used to talk about the ability of the Koreans to fund long-term debt more readily than short-term, which goes against everyone's view of the way the world works. Was that true then or was it just an illusion?",52
-fomc-corpus,1997,I don't know. I have not heard that story.,11
-fomc-corpus,1997,"If it was true, it would be an indication that there is a premium in a longer forward exchange rate. This is a crucial question because the adjustment is either going to implode down to minus 80 percent or it is going to run into downside resistance.",51
-fomc-corpus,1997,"Peter Fisher may want to comment, but I think it is reasonable to say that many people want to cover their positions. There are a lot of different ways of covering them. Some covering can be done in the spot market; some in the forward market; some through borrowing; and some through lending. How it manifests itself in individual cases may be quite different. If you have thin markets, this continuing activity may be depressing spot exchange rates and you may get some bounceback even though the whole process has not played itself out because basically no one is in a position to provide forward cover.",117
-fomc-corpus,1997,I think what we are seeing is the implosion of the intermediation process in these exchange markets. The exchange markets for the won and the baht have disappeared. There are not a lot of people who are excited about participating in those markets.,50
-fomc-corpus,1997,"It will be fascinating to watch what happens. It's like the tide coming in for the first time in 20 years, and we find all the junk on the shore that we didn't know existed. This is partly what is going on in the financial system.",51
-fomc-corpus,1997,"Also, if and when confidence is restored or when greed overcomes fear, people may suddenly find that they are much better off to keep a lot of those positions that they now want to get out of.",41
-fomc-corpus,1997,"If this thing turns, it can turn on a dime. The trouble is, it cannot turn on a baht. [Laughter] President Parry, bail me out!",36
-fomc-corpus,1997,Neither won!,3
-fomc-corpus,1997,"A question about Yamaichi: It was closed on the 23rd of November, and I guess they ceased being a primary dealer on December 4th. Could you talk a little about what our financial relationships with them were just before the 23rd and then between the 23rd and the 4th?",65
-fomc-corpus,1997,"We had been monitoring their trading exposure to us rather carefully for many, many months. We had an arrangement where if they needed to elevate their demand for financing in our RP operations from the agreed routine amount, they would call Sandy Krieger and give us some advance notice and information to enable us to understand their need. The process of getting a resignation letter from them was really a formality. The lag can be attributed to all the things they had to do other than type out a letter and send it to us, but I think their management understood that was something they would have to do in the course of winding up their affairs. Was that helpful?",130
-fomc-corpus,1997,Yes.,2
-fomc-corpus,1997,Anyone else? Would somebody like to move to ratify the Domestic Desk operations?,16
-fomc-corpus,1997,Move approval.,3
-fomc-corpus,1997,"Thank you. Without objection, they are approved. This is a very short agenda. Messrs. Prell and Truman please.",26
-fomc-corpus,1997,"Thank you. Anticipating that, as last month, the focus of your interest this morning is on the international side, I will try again to be brief. I thought, however, that I would offer a few remarks on some of the tougher calls we had to make on the domestic side of our forecast--namely those relating to the outlook for wages, the stock market, and capital spending. Before that, however, just a few words on this morning's statistics: The CPI--total and core--increased just 0.1 percent in November. The twelve-month changes were 1.8 percent for the total CPI and 2.2 percent for the core--the total a tenth below our Q4/Q4 forecast and the core right on it. Housing starts rose slightly further last month. We had expected a dropback. Most of the upside surprise was in the lower value multifamily segment, which held at a high level. For what it's worth, I am told that this may be the result of a new seasonal pattern related to efforts to qualify for tax breaks on low-income housing projects. We'll have to look into that further. Single-family starts were up a little, but permits were down, so this more important segment looks broadly in line with our prediction of flatness. Now back to my main theme, some of the tougher issues in the projection. The first I noted was the outlook for wages. As you know, we have forecast that wages and total compensation will decelerate slightly in the next year, in the face of continued low unemployment. We certainly are not arguing that the labor market is not tight. We have heard the anecdotes and read the surveys, as you have, and we are persuaded that finding and retaining qualified workers is a major problem for employers. While many firms continue to report that they will do just about anything they can to avoid raising their wage bills--including even forgoing expansion opportunities--wage increases have been creeping up for a while now. My gut tells me that the pressure is building in this labor market pot to where the lid could blow off. But, for better or worse, our forecast has not been shaped by this visceral sensation. In particular, we have given major weight to the observations that wages are rather inertial and that they can be significantly affected by perceived trends in prices. And, at this point, workers and employers are looking at very low inflation over the past year, and they should be seeing more of the same for a while longer, given conditions in goods markets. The net result in our forecast is still a hefty further rise in real wages and a marked increase in the labor share of the income pie--but not an upward wage-price spiral. Another tough call relates to the stock market outlook. As you know, in light of our reassessment of the prospects for inflation, we have eliminated our prior assumption of an increase in the federal funds rate. We had viewed that tightening as an important trigger for a marked downturn in the market in the first half of next year. The question before us, then, was whether disappointing corporate earnings alone could be expected to produce a significant correction before long. Our answer was yes, but that the decline will likely be more gradual and smaller overall--about 15 percent from yesterday's close by early 1999. Question marks remain, however. To date, individual companies or industries have been punished for bad earnings announcements, but this seemingly has occasioned merely a rotation to other sectors by determined equity investors. So, could the market shrug off the negative news we are forecasting? Perhaps, at least for a while. Certainly, on our numbers, aggregate year-on-year profit comparisons will not begin to look really poor until next summer or fall. That said, though, I think there is the distinct possibility that, once the deterioration of profits comes clearly into view, the market could develop even more downward momentum than we have anticipated. I would note that we are currently projecting a low for the Wilshire 5000 in 1999 that would only take it back to where it was this spring and leave price-earnings multiples at historically high levels. A combination of revised earnings expectations and any further increase in the equity premium from what probably has occurred recently would point to a much more sizable decline, unless interest rates were to fall appreciably at the same time. Finally, a few thoughts on the outlook for business investment. This is a sizable sector and one that has provided a lot of propulsion for the expansion to date. We have forecast a significant deceleration in capital spending, and while this gets a little circular, it fits well with our predictions of rising equity capital costs and decelerating output. However, most of the indications at this point are that investment plans are very strong going into 1998. For example, the semi-annual survey of the National Association of Purchasing Managers indicated that manufacturers are expecting to increase their capital expenditures next year by 15 percent--an even greater increment than they reported for this year. The NFIB's November survey of small firms also showed extremely upbeat investment plans. These surveys underscore the risk that investment will, yet again, prove stronger than we have gauged. But, there is some reason to doubt their predictive power in the present case. For one thing, even if the surveys are merely a few weeks old, they may still be providing pretty stale readings. Just looking at how our own changing perception of the international outlook has altered our GDP projection over the past few weeks, it seems reasonable to think that businesses are also reassessing their plans and that many of them will be trimming their investment budgets. If we are wrong, that does raise the question of whether this capital spending boom won't come to a more jarring end sometime down the road, with firms finding themselves with excess capacity and experiencing a deeper hit to profits. So, to sum up, we think we have provided a realistic baseline forecast, but there is still plenty to puzzle over--and perhaps to worry about from a policy standpoint. On that comforting note, let me now turn the floor over to Ted, who has been doing a lot of worrying lately.",1240
-fomc-corpus,1997,"Our message about the international economy and the external sector of the U.S. economy is straightforward and easily summarized: We have a weaker outlook for net exports, primarily as a consequence of the further deterioration of economic and financial conditions in Asia. While I am tempted to stop at this point and turn to questions, there may be a bit more that I usefully can add. It is true that we are again projecting slower global growth, in particular in Asia. We also are projecting a stronger dollar and lower oil prices; the first is associated to a considerable degree, though not entirely, with Asian developments, but those developments have only marginally affected our view of oil prices. Finally, we have updated our worse-case scenario, and I will say a few words about our current thinking on that subject. With respect to the current quarter, we have very little hard data on U.S. international transactions; trade data for October will not be released until Thursday. However, we have written down a small negative contribution of net exports to GDP growth this quarter, in contrast with a small positive contribution in the November Greenbook. This estimate is based primarily upon three considerations: first, our assessment of the third-quarter data that revealed somewhat weaker exports than we had anticipated; second, a judgment that the unexpected strength in our exports during the first half of this year was coming largely from an accelerator effect on exports of capital goods that has waned with the Asian crisis; and third, anecdotal information, for example, from the Beige Book and the supplementary reports received from Reserve Banks about the apparent negative effects of the Asian crisis on trade flows this quarter. The anecdotal information, in turn, is consistent with our prior assessment that the first-round effects of the Asian crisis on our trade will be felt sooner rather than later. Turning to our forecasts for 1998 and 1999, our aggregate projection of growth in the rest of the world, weighted by U.S. nonagricultural exports, is now 2-1/2 percent next year and 3-1/4 percent the following year, compared with a trend rate of around 4 percent. Most of the downward adjustment is for the developing economies in Asia, where we anticipate greater near-term weakness and a more protracted return to trend. We have also marked down slightly further our growth forecast for Japan, while that for the other industrial economies is essentially unchanged. Our outlook for Japan and the other industrial countries has been affected by our revised view of dollar exchange rates. As Peter Fisher has reported, the dollar strengthened against both the yen and the continental European currencies during the intermeeting period. We attribute the yen's weakness to continuing question marks hanging over the Japanese economy and financial system--questions marks that we do not expect will be removed by the announcement, now postponed until tomorrow, of yet another package of policy measures. Because we do not expect underlying conditions in Japan to improve immediately or dramatically and because we anticipate that the effects of Asian developments will prevent a further substantial expansion of the Japanese external surpluses in the aggregate, we have incorporated into our projection only a slight appreciation of the yen/ dollar rate from its recent level. Compared with our September projection, we now have the yen more than 15 percent weaker at the end of 1999. With respect to continental Europe, we are no longer expecting a further increase in German official interest rates prior to the start of monetary union, and the market appears to be gradually coming around to the same conclusion. This has contributed to the weakness of the DM and its associated currencies, and we expect that recent lower exchange rates against the dollar will persist, on balance, over the forecast period. We also anticipate in our forecast that sterling will depreciate somewhat against the dollar as U.K. economic growth and interest rates ease but that the Canadian dollar will strengthen somewhat as interest rates continue to rise in Canada. With respect to the currencies of non-G-10 countries, in particular in the Asian region, our crystal ball is murkier. The Asian currencies, except for those of China and Hong Kong, have declined substantially further over the intermeeting period. We are not expecting further depreciation, on balance, from the current highly depressed levels, nor are we expecting a recovery. To borrow a term from the politics of 1884, I would characterize this as a mugwump position with regard to the nominal exchange rates of these economies--our mug is on one side of the fence and our wump is on the other. However, real dollar exchange rates of these countries should appreciate somewhat due to inflation rates that in many cases will approach or exceed double digits. The net result of these assumptions is that the dollar is stronger in both real and nominal terms throughout the forecast period against both G-10 and non-G-10 currencies, with an associated negative impact on our outlook for net exports. Turning to oil prices, we have reduced our assumption about the price of imported oil by about $2 per barrel in 1998 and 1999. Our revised assumption is based on the substantial increase in official OPEC quotas (which has led us to boost our projection of OPEC production by 900,000 barrels per day in 1998), the easing--at least for the moment--of tensions with Iraq and Iran, and the slowing of global growth, especially in Asia. The market appears to have adopted a more cautious interpretation of these developments. Although futures prices have declined, the implied downward adjustment in import prices over the forecast period is about half the size embodied in our assumption. We believe that the difference reflects primarily continuing concerns about the availability of supply from Iraq and, perhaps, a different assumption about the increase in actual OPEC production--in particular by Kuwait, Saudi Arabia, and the United Arab Emirates--under the new quotas. In terms of our overall forecast, lower oil prices, of course, imply lower U.S. inflation. The principal impact on our external forecast is with respect to the nominal balances: Our assumption of lower oil import prices translates into a projected reduction in the value of U.S. oil imports in 1998 and 1999 of about $7 billion a year compared with the November Greenbook. Lower oil prices have only marginal effects on net exports in real terms, boosting real imports slightly. In total, the estimated drag from the external sector in the December Greenbook is about 0.9 percentage point over the four quarters of 1998 and 0.4 percentage point during 1999. As a rough approximation, the drag from net exports would be a bit less than half this amount in the absence of the effects of the Asian crisis and the weaker outlook for Japan and the yen, using the September Greenbook as the basis for comparison. I would caution, however, that it becomes increasingly difficult to disentangle causes and effects in successive forecasts. For example, in the case of effects that are transmitted through third countries, establishing the counterfactual assumption is problematic. As an illustration, in the November and December Greenbooks, we've assumed progressively more moderate trajectories for monetary policies in the major foreign industrial countries as well as in the United States, and these assumptions have affected our thinking about the path for the dollar. No doubt some, but probably not all, of these adjustments can and should be attributed to the generally weaker global outlook and in particular to the effects of the Asian crisis, but it is increasingly tenuous to try to separate out how much is due to developments in Asia and how much is due to other underlying factors. Some of the same qualifications apply to the interpretation of alternative scenarios. For this meeting, we have updated and circulated to the Committee a ""worse case"" scenario for the global economy in which the already seriously affected Asian economies experience deeper and more prolonged recessions and less recovery in their real exchange rates. In this scenario, the crisis also spreads in a major way to China and Hong Kong, and it impacts with greater ferocity on Latin America, Eastern Europe, and the countries in the area of the former Soviet Union. On our assumptions, such a worse case would further reduce the growth rate of U.S. real GDP by about a half percentage point next year and about a quarter point in 1999, compared with the Greenbook forecast, with comparable effects on other industrial economies. An important qualification to this analysis is that it assumes that the authorities, in particular those in the major industrial countries, would respond under the hypothesized circumstances by taking appropriate countercylical actions, primarily in the area of monetary policy--that is, they would lower interest rates. As I noted earlier, in preparing our Greenbook forecasts, we have already incorporated assumptions that go in this direction; we are no longer assuming much monetary tightening. It is another matter, some might argue, to assume that policymakers will act aggressively and on a timely basis to damp a global slowdown in growth that is having differential effects on their economies. Policymakers in Europe, preoccupied with the transition to monetary union, might be less than poised to take prompt, decisive action. On the other hand, this alternative scenario is one that combines both lower inflation and lower growth, which would facilitate easing action, at least in the area of monetary policy. Although our revised worse case scenario is possible, and you might even see it in February as our base case, I do not believe at this point that this scenario is the most likely outcome. No doubt, Asian financial markets and economies will continue to experience substantial downs and ups for some months, but my view of the situation is one of optimism combined with realism. I am optimistic that the political leaders in Asia, on balance, are acting and will continue to act constructively to stabilize their economies and financial systems and that the support they receive from the international financial community will help to bridge the gap until confidence in their policies and underlying economies returns. On the other hand, it is clear that the crisis is not over, and there is plenty of scope for additional errors or negative surprises. Mr. Chairman, I will conclude our presentation on that note.",2027
-fomc-corpus,1997,Thank you. Questions for either gentleman?,8
-fomc-corpus,1997,"Ted, on the worse case scenario, do you have any sense of what probability you would put on that given what you know now?",27
-fomc-corpus,1997,"I am never quite sure how to answer those questions about probabilities, but I would guess a fifth or something like that. How seriously should we take that scenario? I would say moderately seriously. This is not a meltdown scenario because it assumes that action will be taken by others to prevent a meltdown.",59
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"I was going to ask Al's question, but I will ask a follow-up. Is there a better case?",23
-fomc-corpus,1997,"Yes, I think there is. That's partly because we are in December and this crisis has been going on for some time. As Peter said, we have the sense of a flood rather than a severe rainstorm. The psychology is pretty gloomy, though one might say it has been slightly less gloomy in the last couple of days. It is slightly less so only with respect to Korea, not with respect to any of the other countries. But there is a scenario in which we could have a rebound in that situation. For example, their exchange rates could move back up in nominal terms--we are assuming essentially that they will not--and the global economies could pick up faster than we anticipate. I think this scenario is equally likely, though I would argue that it is not completely symmetrical. I think a better case would be associated with a series of the right policy steps in the right order, rather than two steps forward and one step back as is often the case in these situations.",196
-fomc-corpus,1997,"When you say it is not symmetrical, do you mean the better case has a lower probability?",19
-fomc-corpus,1997,"No, I would say the better case has the same probability, but it probably is not as good as the worse case is bad. We have a somewhat skewed distribution in that regard.",38
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Ted, I have a question about China and Hong Kong. In early 1994, China abolished its official foreign exchange rate, and I guess that produced a depreciation of about 40 percent in their currency. That obviously had an adverse impact on the relative competitive position of Southeast Asian countries. The real appreciation of the Southeast Asian and Chinese currencies since early 1994 and the problems in their banking systems led last summer to depreciation of their currencies and related capital outflows. We now have China's relative position very adversely affected by foreign exchange developments. What adjustment is likely to occur in China and Hong Kong? China's currency is not convertible but I guess there could be capital flight out of Hong Kong. In fact, we could get a depreciation of both currencies. It seems to me there is the possibility of a rather significant adjustment in these areas, and we do not seem to be focusing on that.",178
-fomc-corpus,1997,"That possibility certainly is incorporated in the worse case scenario we have laid out, though the effect may not be as big as some would argue it could be. Let me go back to one of your premises. Although there was a 40 percent adjustment in China's official exchange rate in 1994, most of China's trade--some 80 percent of it--was already being conducted at the unofficial exchange rate. So, although the sign certainly was right, we, unlike some commentators, do not think the depreciation was a major cause of all these developments. Moreover it came in early 1994, not in 1997. The Chinese financial system is very weak and has many of the same problems, if not worse, as the financial systems in these other economies. The important difference is that the Chinese financial system is not as integrated into the world financial system so it is not a major source of external weakness. It may be a source of internal weakness, but one can debate that point. Clearly, it is not the same source of external weakness that we find in some of these other countries. That having been said, there certainly is scope for continuing capital flight from China. I know some analysts, including colleagues on my staff, who estimate that capital flight on the order of $10 billion a year probably is occurring today from Mainland China. It is disguised in the trade account and so forth and there are errors and omissions in the data. There certainly is plenty of money in that economy and there always are ways of getting it out, though that may require some patience. In my view, the Chinese authorities have taken a fairly responsible and nuanced position to date with regard to the yuan. In fact, at the meetings this week in Kuala Lumpur they basically said that they were not going to devalue their exchange rate, but they also indicated that they were not going to go out of their way to help neighboring nations financially any more than they already were. As you know, they have a fairly comfortable international reserve position of well over $130 billion--the latest number that I remember seeing. So, there is a risk there. Setting aside the Chairman's view about the possibility of a downward limit to declines in other Asian exchange rates, which seems to be right to me, there is a point at which the competitive pressures on China and the different competitive pressures on Hong Kong would be felt. Therefore, I think we cannot rule out the possibility that that pair of dominoes, to use an old metaphor, could affect other Asian economies and likely have a secondary ripple effect on the United States and other parts of the world. That is a risk, though if I were to assess the risks, I think there is a higher probability of a problem in Brazil associated in the short run with a spread of the Asian disease and a lower probability of a problem in Mainland China and Hong Kong.",575
-fomc-corpus,1997,"It seems to me that, without getting into specific probabilities, if one were constructing another worse case, Brazil would be an interesting dimension to add to it.",31
-fomc-corpus,1997,"It is in this scenario; it just may not be in the outline that we sent to you. We assumed that the Hong Kong peg goes and, as I remember, that economic growth in China drops from essentially 4 or 5 percent to zero or close to it next year and similarly in Hong Kong. That aspect of the scenario could be worse, if you want to put it that way, and in some sense it is just illustrative of what would be happening. Any of these developments could be augmented by 25 or even 50 percent without much argument from me.",115
-fomc-corpus,1997,"Okay, thank you.",5
-fomc-corpus,1997,"Any further questions for these two gentlemen? If not, do you want to start the go-around?",20
-fomc-corpus,1997,"Thank you, Mr. Chairman. I will not comment to any degree on the economy of the Second District, which actually is a little better than it was at the time of our last meeting, nor on the national economy because we agree essentially with the viewpoint of the Greenbook. Since I have spent a little more than four decades on the international side of things, I thought I would devote some comments to my feel for the political and economic situation in the world. My views are not significantly dissimilar from those that have just been shared. It seems to me that the world economy is walking along a rather narrow ridge. To the right, we have a pleasantly upward sloping meadow and to the left, a rather large precipice. The forecast essentially has the world economy continuing to walk successfully along that ridge. It is not very likely to begin to enter the meadow and experience better conditions nor is it likely to fall into the precipice. What are the dangers? If we look at the three economies in Asia that already are in the hands of the International Monetary Fund--Korea, Thailand, and Indonesia--we see that even though they are very different in many ways, they all have command economies in which resources are allocated by politicians and bureaucrats and not by the marketplace. The tool that the politicians and bureaucrats have used to allocate resources has been the financial system, and the financial systems in all these countries are extremely weak. The process of allocating resources by politicians and bureaucrats through the banking system means that a country does not produce good bankers and it does not produce good bank supervisors. However, the leaders of these countries have had very long records of success. Accordingly, it is very difficult for them to believe that the leadership they have provided, which has taken advantage of some very real virtues--such as very high saving rates and tremendous investment in education that have created a dedicated, hardworking, and well-educated labor force--has suddenly become wrong. They really were not wrong during that long period of success. What they miss is that the world has changed, just as a number of years ago the leaders of the Soviet Union missed that the world had changed. The command economy simply does not work today in a more integrated world with very rapid technological developments. That means that the leaders in those countries do not understand, either emotionally or intellectually, how the new economy in which they must operate now functions. This is where there is a great deal of confusion that leads to equating these Southeast Asian situations with that of Mexico in 1994 and 1995. The differences are that Mexico has had political leadership that very deeply understands how a market economy behaves; it has had the good luck of having a president who is an outstanding economist and understands markets very well and, after a short adjustment period, it has had an outstanding finance minister who also understands very well how markets work; it has a much better, more market-oriented entrepreneurial sector and a population that sadly has had many centuries of experience with hardship and thus has the ability to adjust to this new hardship with patience. Therefore, the Mexican economy, with some very creative help from the United States and the International Monetary Fund, improved rather quickly. It began to turn upward in March and April of 1995, within months after the rescue package was put into effect. I do not think that we can have great confidence that the same favorable outcomes will prevail in Korea, Thailand, and Indonesia. Among the other countries in Southeast Asia, Malaysia certainly has a very similar economy, but I think it is involved in an advanced exercise in denial. Even countries that have managed themselves particularly well, Hong Kong and Singapore, are being battered, as the Singapore dollar was today, by people who view them as command economies. They have been much better managed, certainly in the case of Singapore with a very high degree of integrity at the official level, but they are still regarded as command economies that may have the same problem in adjusting to the real world. The Chinese leadership, as Ted Truman suggested, has thus far behaved extremely well. Overnight, the spokesman for Jiang Zemin, the chairman and president, said that they would not devalue their currency. Their vice premier for economic management, Zhu Rongji, who is generally deemed to be the premier-to-be, provides very effective leadership especially considering that he has lived all of his life in a command economy that is still under Communist Party leadership. He understands rather well how the world economy works. One can hope that China will not add to the problems by making some unfortunate policy mistakes. As President Parry suggested in his questions, the temptations certainly are there. The major command economy in Asia is that of Japan. It is after all the Japanese model that Korea followed. Japan basically has the same structural problem: Resources are allocated by bureaucrats and politicians. one has to hope that certain steps will be taken that recognize that the way they have been managing their economy may have been grand for a while, but it no longer works. If we were to have a continuing contagion from Asia, I think it is very likely, again as suggested by President Parry in his question and Ted Truman in his answer, that the next country about which one would have to worry is Brazil. The Brazilian real is overvalued in the exchange markets; the banking sector is extremely weak; and the political system is not functioning well except when there is a feeling among the politicians that they are about to be infected by Asia. After some improvement in facing reality a couple of weeks ago when the Asian flu seemed particularly virulent, there appears to have been a return to politics as usual. Fortunately, Brazil has a very good government team at the levels of the president, the finance minister, and the central bank governor. Argentina continues to do well, but because of its Mercosur involvement, it would not be able to withstand a shock from Brazil. If we look at Europe, there were dire warnings at the recent BIS meeting of the dangers from Russia. Every central bank governor took us aside--Alice Rivlin, Ted Truman, Peter Fisher, and me--and said they hoped we were not concentrating so much on Asia and on our own hemisphere that we were unaware of how precarious the Russian economic situation was. That situation is exacerbated somewhat by the most recent illness of President Yeltsen. The leadership that we normally share with Europe is adversely affected, though one should not overstate this, by the fact that they are heading into the most crucial six-month period for the creation of the euro. The concentration of European political and economic leaders is very much focused on their own affairs and that of the United Kingdom. Even though the United Kingdom is going to be an ""out"" initially, though an ""in"" later, it also is going to concentrate on European economic affairs by the historical accident that its prime minister is the president of the European Union for the first six months of next year. Therefore, it would appear that we have a world that is not likely to slide into the precipice, but that risk is very considerable. In my view, what would bring about such a slide would be the implosion of the financial systems in some of the Asian countries, as happened in a number of well-developed economies in the 1930s. That is not likely to happen but it remains a possibility. There is a positive side. As we have been suggesting, markets probably have overreacted in relation to fundamentals. I think it is less likely but not at all impossible that, if the Asian financial systems do not implode, the markets would decide that the risk is behind us. Markets participants might decide that there are some very good buying opportunities and that there could be a recovery. The latter probably would be accompanied by a certain amount of euphoria, which could have us entering the meadow that I described. There might be a very big question, if that happened, about the degree of realism that would accompany the euphoria and whether we would be preparing ourselves for an even more difficult situation a year or two down the path. In the middle of all this, the United States should continue to do rather well, as Mike Prell and Ted Truman have suggested and certainly the New York Bank agrees. Therefore, I think we, the central bank of the United States, are in the very fortunate position of being able to pursue our primary long-term goals of sustained economic growth and price stability. However, I believe there is a tactical aspect relating to what I have described as the precipice on the left. Tactically, I think we should maintain an extremely flexible view of what we need to do, and that approach should characterize at least our operating view of our responsibilities in the coming months. Thank you.",1759
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, the pace of economic growth in the Twelfth Federal Reserve District remained solid in recent months, although down slightly from its trend during the first half of the year. Despite the slowdown, economic activity is expanding more rapidly in most District states than in the nation as a whole. Employment growth in the District continues to outpace growth in the labor force, pushing unemployment rates down and creating very tight labor markets, particularly in urban areas. The District-wide unemployment rate fell nearly 1 percentage point over the last twelve months. The generally positive outlook in the District is tempered by reports of tight labor markets, shipping bottlenecks, and recent problems in East Asia. In several areas in the District, competition for employees has become so fierce that employers reportedly are converting temporary part-time jobs to permanent full-time jobs in an effort to attract workers. Shipping bottlenecks associated with the Union Pacific rail scheduling problems reportedly have caused delays in deliveries of both final and intermediate goods, with the most affected sector apparently being agriculture. Initial reports from District states indicate that recent developments in East Asia have reduced the demand for exports of some commodities, primarily raw and processed agricultural goods and lumber and wood products. At this early stage, other vulnerable industries such as high-tech equipment reportedly have not been greatly affected, although we recently heard that Microsoft is talking about some weakness as a result of problems in Asia. Data on merchandise exports indicate that in percentage terms the Twelfth District exports about twice as much of its estimated gross product to East Asia as does the United States as a whole. Thus, the effects of recent developments in East Asia on economic growth likely will be larger in the Twelfth District than in the nation. Turning to the national economy, the data certainly indicate that real GDP growth remains robust in the current quarter and that inflation continues subdued. But traditional macro models strongly suggest that growth will slow next year. We expect real GDP growth of just above 2 percent in 1998. Our pure model forecast actually showed a more pronounced slowdown than this, but we boosted it a bit to reflect the effect of a possible favorable productivity shock. Just to mention very briefly a couple of the factors behind the projected slowdown: First, the dollar's appreciation over the last year and the projected slowing in foreign demand in 1998 certainly should reduce demand for U.S. products. Of course, both of these factors are being reinforced by recent developments in Asia. In addition, real short-term interest rates appear to have been nudged up by recent declines in expected inflation. I must add, however, that there is plenty of room for skepticism about whether a slowdown this big will actually occur next year. Traditional models have been incorrectly predicting slower growth for the past year and a half. As I mentioned, it is quite possible that economic activity is being boosted to some extent by a positive productivity shock, but it is certainly too soon to tell how much of an effect this factor may be having or how long it may last. With regard to inflation, we have reduced our forecast since the November meeting. Certainly, the continued appreciation of the dollar will help to hold down prices. Secondly, the results of the last Philadelphia Fed survey of inflation expectations were impressive. The sizable drop in long-term expectations provides an important confirmation of the evidence that we have seen from the inflation-indexed Treasury bond market. And third, recent productivity data have been encouraging, and it may be reasonable to build in a modest reduction in future inflation from faster productivity gains. There is, of course, one major factor that goes in the opposite direction. The unemployment rate has continued to fall and is now well below the natural rate. Given all these considerations, we expect that price inflation will hold steady in 1998 and 1999 at about this year's rate. At our last meeting, it seemed more likely that there would be some upward tilt to inflation. I must add, however, that the risk to this forecast may be skewed to the upside. If economic activity does not slow as much as we expect, labor markets could tighten further and add upward pressure on inflation. Thank you.",824
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, economic conditions in the Seventh District are quite similar for the most part to what I reported at our last meeting, but the Asian situation has left a sense of greater uncertainty about the outlook. In terms of consumer spending, retailers have used the terms ""sluggish"" and ""soft"" to describe recent sales trends. That may be partly due to what has become a bimodal holiday sales season, with sales relatively stronger around Thanks-giving and the week before Christmas but weaker in-between. While it is possible that we will see the same pattern this year, at least one large retailer in our District has trimmed expectations for industry sales from a rise of 4 to 7 percent to one of 2 to 3 percent. Light vehicle sales this month seem to be tracking around the 15 million unit rate according to our contact at the Big Three who also noted that incentives are a very important factor in maintaining sales at this level. Overall manufacturing output in the District has been expanding at about the same pace as in the nation, but trends are mixed across industries. Demand for heavy trucks has been very strong, with order books filled through the middle of next year. One truck manufacturer believes that there has been some double ordering, although cancellation rates have been low thus far. A number of District industries including steel, cement, gypsum board, container board, and housing have not experienced as much strength as seen nationally. In terms of any impact from the Southeast Asian situation, it is still too soon to know all the direct effects on the region, let alone the indirect effects. On the export side, the Seventh District is likely to be directly affected less than the nation as a whole because the Southeast Asian countries account for a smaller share of our export markets, a flip side of the situation in the Twelfth District that Bob Parry was describing. Contacts in the food equipment, paper, and plastic laminate industries already have seen some reduction in export orders to Asia, but they also note that business has been good in Europe. Depreciating foreign currencies and slow economic growth in several Asian markets may account for part of the sluggishness in our corn exports, but an increased supply from China, Eastern Europe, and the former Soviet Union may be a more critical factor there. On the other side of the trade equation, auto and steel imports could rise as Asian producers attempt to find replacement markets in the United States for their products, and that would affect our region relatively more than the United States as a whole. One of our directors in the steel industry believes that steel imports will surge and that the quality of selected categories of imports will be quite high relative to the more common imports from Eastern Europe. Steel and auto industry contacts said that they were moving ahead with plans to accelerate their cost-cutting measures substantially over the next year, perhaps spurred in part by prospects of more intense import competition. As I have been reporting for some time now, labor markets are very tight in our District, with the unemployment rate at or below 4 percent since May, and we continue to hear many anecdotes of various ways that firms are dealing with worker shortages. Turning to the national outlook, my view at the last several meetings has been similar to that expressed in past Greenbooks. GDP growth and inflation could only be contained by policy tightening in 1998. The question now is whether the deteriorating international situation will have the major consequences for the U.S. economy that the current Greenbook envisions. Of course it could, but I don't see the balance of risks pointing in that direction. Considering the strength of the underlying domestic economy, we tend to think that real GDP growth in 1998 will be closer to 2-1/2 percent than to the 1.7 percent rate in the Greenbook. Our figure factors in a substantial degree of pessimism based on the Asian crisis. Net exports subtract about 0.7 percentage point from 1998 GDP growth in our projection. Combined with some further collateral effects on U.S. financial markets, this takes us to the 2-1/2 percent forecast. This is not a worse case scenario; it is our best guess given the information to date. Regarding prices, I, too, am concerned that the favorable inflation shocks that we anticipate from the international situation in 1998 will be transitory and their reversal will have to be addressed later at a time when action will be more difficult. In summary, I see the upside risks for 1998 to be substantially greater than the Greenbook portrays.",912
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. Overall, it appears that aggregate demand remains relatively strong in our region, although reports are a little more mixed than they were a month ago. Regarding a couple of the details, general retail and service-sector activity picked up sharply in November according to our latest monthly survey. However, we also heard a number of reports of weaker auto sales over the course of the last several weeks, and recent anecdotal reports indicate that housing may be softening a little from a very high level. Commercial real estate activity, in contrast, appears to remain very strong, especially in the Washington area but generally around the District as a whole. Elsewhere, manufacturing activity moderated in November according to our survey, but there is some evidence of a firming in this sector so far in December. Labor markets--what can I say? They are at least as tight as they have been in our region, perhaps even a little tighter than they were if that's possible. We have reports of record-breaking job vacancy backlogs at a number of temp agencies. Labor shortages apparently are resulting in some buildup in wage pressures in at least some sectors of the regional economy, especially construction and retail. Typically, seasonal workers earn the minimum wage on average during the holiday season. They are now making $6.00 an hour or even more in some cases. Turning to the national picture, I have to say that I found the abrupt revisions in the Greenbook projections surprising, at least their extent. Actually, this month's real growth and inflation forecasts are not all that different from last month's. But in this Greenbook, the moderation in the rate of real GDP growth and the containment of inflation take place without any tightening of monetary policy. In the November Greenbook, a significant tightening was assumed to occur over the course of 1998. I understand, of course, that this change reflects the potential negative fallout of Asian problems on the U.S. economy, but it is not at all clear to me from the discussion in the Greenbook that in terms of the most likely outcome recent developments have changed the outlook as substantially as the projections indicate. Let me make four observations about this very quickly. First, at our November meeting I expressed concern that the widespread view in financial markets that Fed policy was on hold, at least for the time being, was preventing long-term interest rates from playing their usual automatic stabilizer role. In my view, the market reaction to the November employment reports was very strong evidence for this point of view and this concern. That report was much stronger than expected. The strength was across the board, and the report included an hourly increase in wages that was well above any reasonable projection of productivity gains. The markets hardly reacted at all. It appears now that the markets think the only thing that will make us react is a fairly substantial jump in CPI inflation. With labor markets as tight as they are, I think this absence of the usual stabilizer mechanism coming from long-term interest rates is a significant upside risk in the outlook, and I believe that needs to be given considerable weight along with whatever weight we give to the Asian problem. Second, a key element in the Greenbook's new projections is the estimate that the Asian crisis will double the decline in U.S. net exports in 1998 from what was projected in the November Greenbook and that net exports will reduce real GDP growth by about one percentage point next year. I don't know exactly how that estimate was arrived at. More importantly, I do not have a clear sense of what the staff would say about the confidence interval around that estimate. I think it would be helpful to know that, given the extent of the changes in the projections, although Ted's answer to my question helps to put a little more of a quantitative dimension on it. The basic point is that net exports clearly present downside risks, but we need to be careful not to overstate them when weighing them against other risks that we face in the outlook. For all of the talk about globalization, the U.S. economy is still self-contained to a very considerable extent. Third, the flip side of the prospective widening of the U.S. current account deficit is a widening capital account surplus. The Asian crisis, as I think we all know, has redirected capital flows away from emerging economies back toward industrial economies, especially the U.S. economy. This is certainly part of the reason for the recent declines in bond rates in U.S. markets, and I think it has helped to increase loanable funds at banks. In short, the capital reflow that is occurring has some of the effects of an easing of monetary policy. I don't think the Greenbook mentions this, and I wonder whether the projections take account of it. Finally, while the appreciation of the dollar obviously will reduce export demand, that effect will be partially offset by the restraining effects of the dollar's appreciation on prices. The better inflation performance will bolster real wage gains in the U.S. economy and probably increase household confidence that those wage gains will continue. That could well keep consumption expenditures on an above-trend path and add further to the tightness in labor markets. In short, while events in Asia obviously are serious and present significant downside risks, the upside risks that were in the outlook before the Asian crisis emerged have not disappeared. We should not discount them in our assessment of the outlook. Thank you.",1082
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The economy in the Philadelphia District is operating at a high level, with most sectors doing well. Labor markets, as elsewhere, are very tight, but inflation remains subdued despite some upward pressures on compensation. We talk about the tight labor markets, but business people are doing a lot more than talking about it. They are being rather creative in terms of attracting people who ordinarily would not be available to work. For example, along some of the main arteries in the Philadelphia region, we see large signs advertising job opportunities at ABC company or XYZ company. Local theaters advertise jobs in their film clips. Instead of just getting previews of the next film, the moviegoer gets a film clip about working for specific companies. Flyers about available jobs are being distributed at senior citizens' meetings and in grocery stores. I am told that serious consideration has been given in some schools to sending flyers home with school children to invite their parents or other caretakers to call a number or come to a particular place to discuss available jobs. The subways, buses, and taxis also are getting advertising from employers. So, business is responding to this labor scarcity and is exercising some flexibility in terms of enticing unemployed people to accept jobs. Clearly, there are limits to this process, but I think those limits are being pushed back. In the consumer spending area, holiday retail sales seem to be doing reasonably well overall. However, one can get quite a mixed message depending on whom one talks to. Competition is fierce, and the patterns of retail sales are changing. Sales through the TV medium and catalogue sales are taking away some business from traditional retailers. The large malls with the more established stores seem to be doing well, whereas the big box retail stores and strip malls tend to be having a tougher time. We can get any story we want depending on whom we talk to on any given day, but if we put it all together, I think we come away with a sense that holiday sales are doing reasonably well. The commercial real estate market continues to tighten and office vacancy rates are dropping. Home builders and real estate agents report that demand for both new and existing homes is quite healthy. At this point, manufacturers report some moderation in demand and output, but they do not point in particular to the Asian situation, although they may well do so over the next several weeks. We in the Fed and other central banks focus on inflation and the goal of price stability. Being a good central banker, I always warn people of the risks of inflation and the virtues of price stability. When I finish that talk, the first question I get now concerns what I think about deflation. In my view, this deflation talk is not something one can just dismiss. That's mainly because it is coming from fairly sensible people, the same people who told us not to worry a whole lot about inflation in 1996 and 1997 when we insisted that there was a big problem. In part, I believe these comments are reflecting the fierce competition that businesses face, and they also reflect the fact that most businesses find deflation harmful. I think they would rather have a little inflation than a little deflation. Nonetheless, while we do not have to buy into it and we want to be sure to keep it in perspective, this is something that we ought not to dismiss out of hand as coming from people who are ill-informed. On the international side I want to compliment President McDonough on his analysis. It was a very insightful analysis of what is happening and I appreciate very much having it. As far as the national economy goes, we are in an enviable position in terms of underlying demand in the economy, in terms of job creation, and in terms of benign inflation. There clearly are risks and we have talked about those risks for months. I think we need to be flexible both in our assessment of where the risks lie and what monetary policy might or might not have to do over the next 12 months or so.",801
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Sixth District economy continues to expand at a moderate rate. Tourism remains a real strength for us, with flights to Florida already booked up earlier and faster than last year and with above-average attendance at tourist attractions for the holiday period. In particular, the influx of tourists from Latin America is reportedly boosting retail sales in south Florida. Hotels, car rental companies, cruise lines--all indicate that current and advanced bookings are strong. Similar patterns prevail along the Mississippi and the Gulf Coast. Production and new manufacturing orders have declined somewhat recently in our area, according to both anecdotal evidence as well as our December regional manufacturing survey. However, expectations are for a pickup in both production and new orders looking six months out. Not unexpectedly, orders for textiles and apparel are reported to be declining. Also, the rig count in the Gulf slipped back a tad in the last month. The picture for housing has changed very little since the last FOMC meeting. Home sales remain mixed, and housing inventories are reported to be in good shape. Single-family home construction has been essentially flat and multifamily construction has begun to slacken. Occupancy rates are expected to stabilize by the first of the year. As was the case at the time of our last meeting, commercial real estate markets remain healthy, as evidenced by increases in both occupancy and rental rates. However, the industrial real estate sector has shown some signs of a slowdown. Overall, both developers and real estate agents remain optimistic about the period immediately ahead. With regard to the now familiar story that everybody is talking about, labor markets in our area remain tight. Reports of wage increases have been occurring with some greater frequency recently. In certain hot areas like Atlanta, finders fees are being offered to employees who recruit family and friends. Overall, however, prices generally are remaining steady. There are scattered reports, some coming from our District manufacturing survey, of a slight rise in materials prices. The impact of Asian problems on our region does not appear to have been great to date. Like President Parry, we have reports of citrus shipments, mainly grapefruit, that are either being cancelled or are down considerably, especially to Japan. Port contacts in both Miami and New Orleans report some decline in the overall volume of shipments to Asia, while the port of Savannah indicates a slight reduction in shipments of wood pulp. The big Georgia Pacific Company states that it has seen some slowing in shipments of pulp and paper to the Pacific rim, but the company had expected a seasonal slowdown in any case. As for the national economy, the consumer sector is a little stronger than we expected at the time of the last FOMC meeting. Because of the deepening difficulties in Asia, the foreign sector has been a bit weaker than we anticipated. Business investment spending has been maintained at strong levels longer than we had forecast. I continue to be heartened by the good balance we continue to see in the economy and the fact that inflation remains moderate and is showing a slight downward trend. Four developments have led us to modify our projections: the stronger-than-expected November employment report, the decline in energy prices, the surprising upward revisions to rates of growth in industrial capacity, and the view that the weakness in Asian economies may be greater than initially was thought. As a result, we project the consumer sector to be somewhat stronger, the international trade sector somewhat weaker, and capacity utilization somewhat lower, with inflation marginally more subdued in the near term. Both our judgmental forecast and our VAR policy model suggest that real GDP growth will be a bit smoother than that reflected in the Greenbook, with near-term growth being somewhat lower and longer-term growth somewhat stronger but with an inflation path closer to the Greenbook alternative with no stock market decline. Indeed, our VAR model, which does not consider the effects of the Asian flu, implies that if one wanted to hold the rate of inflation at about current levels, a small temporary increase in the federal funds rate would be necessary sometime next year. Considering that to be a warning signal and in light of my desire not to lose the gains we have had in bringing inflation to its current level, I regard the likely drag that the Asian problems imply for the economy as equivalent to a slight policy tightening, but with a more immediate short-run impact on the real economy, an outcome that seems desirable at this time. Projected results should take some of the heat off both production and labor markets and may even have the desirable effect of taking inflation down another notch. Thank you, Mr. Chairman.",909
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"The economy in the Dallas District continues to grow considerably faster than the nation's. Growth has remained broad-based through all segments of the private sector. The strongest employment growth has been in oil and gas extraction, followed by the finance, insurance, and real estate sectors. The only industry running at or beyond full capacity is oil and gas drilling, where supplies of all key inputs have constrained activity. A few meetings ago, I mentioned that some oil companies were going as far as Great Britain to find machinists. More recently, we have heard reports of a company recruiting welders from India. In spite of the somewhat bearish outlook for oil prices over the next year or two, most companies expect to remain profitable and are trying to expand exploration and production. All sectors of the real estate market remain quite strong, especially the industrial and office markets. Both the Dallas and Houston office markets have had falling vacancy rates and steeply rising rents throughout 1997. In Dallas, it is expected that over 11 million square feet of office space will become available next year. That is the equivalent of about 15 Dallas Fed buildings. In Houston, plans for the construction of the first downtown office tower since 1986 have just been announced. Class A space in Houston's central business district is now about 90 percent occupied. Prices of existing homes in Texas are up 3 percent year over year, with some metropolitan markets such as Dallas showing gains of more than double that. The president of the largest single-family real estate agency in Dallas told us that October and November were the two best months in the firm's history, and she expects December to be the same. Normally, they would be practically shut down at the end of the year for the holidays, but demand has been making that impossible this year. Not all sectors are this robust. Employment has been weak in the apparel industry, and the announcement by Levi Strauss that it will close three El Paso plants has increased the level of concern in that community. More recently, Hasbro also announced a plant closing in El Paso that, together with the big decline in wages in Southeast Asia, has begun to undermine some of the confidence that had been returning to the border economy. The last year has not been such a good one for our manufacturers of semiconductors, electronic equipment, and instruments. While they are anticipating a better year in 1998, recent financial turmoil in Asia has damped near-term prospects. At our board meeting last week, our director from the retailing industry reported that Christmas sales were about on track so far this season and that retailers were expecting a ""ho-ho"" year rather than a ""ho-hum"" or a ""bah-humbug"" year. Labor markets remain extremely tight. Sizable wage increases are reported for highly skilled technical workers. Salaries have soared as much as $20,000 in the last year for workers such as software engineers, though the more typical increases have been in the $7,000 to $10,000 range. The greater the shortage, the more extraordinary are the measures taken to find workers. For example, Intel is building a chip factory in Fort Worth and is reported to have mailed letters to 14,000 engineers working at competing companies with offers of a week-long trip to Hawaii for two if they joined Intel. One telecommunications company has been helping Asian students to get visas after graduate school. Consequently, 11 percent of their workforce of 2,500 is Asian. The company also has begun recruiting in Canada. Another large Dallas-based firm offers telecommuting to engineers who wish to live in Austin and work in Dallas. To increase the future supply of engineers, a number of leading telecommunications companies including Motorola, Southwestern Bell, AT&T, and Texas Instruments have joined forces with several leading Texas universities to form the Texas Telecommunications Consortium, which will fund research and educational programs. Turning to the national economic outlook, it is clear that the risks have shifted considerably since the November meeting. The Greenbook does a good job of reflecting this increased uncertainty, both on the downside and the upside. The so-called ""worse case"" scenario is a highly plausible and unnerving one. We must be concerned that a serious slowing of world economic growth would imperil the ability and willingness of countries in Latin America, Eastern Europe, and Asia to continue their transition to more democratic, market-based economies. This seems to be a time that calls for economic diplomacy on our part and an excellent time not to ""rock the boat."" Against the backdrop of continued disinflation stemming from lower energy prices, a stronger dollar, and plenty of domestic and worldwide industrial capacity, the inflation risks seem small indeed and may be shifting rapidly toward the other end of the spectrum.",947
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"Mr. Chairman, the New England region continues its recent trend of solid growth, low unemployment relative to that for the nation, tight labor markets, but only moderate price and wage pressures. There are exceptions in specific job categories where workers are in extremely short supply, especially in information technology and engineering. Like Atlanta, the First District is experiencing a boom in tourism. We, too, have some large manufacturers who are concerned about deflation as in the Philadelphia region. But my sense is that their concern reflects a long period of very strong competition within their industries rather than any real expectation that the economy will experience broad-based reductions in prices and wages. While it has been a short period since our last meeting, we have seen a change in attitudes regarding the sustainability of this favorable economic situation. On the one hand, there is the Asian crisis, which will both limit the exports of some of New England's fastest growing companies and increase domestic competition because of lower import prices. However, we also are told that some New England companies outsource production to Southeast Asia and may now be getting cheaper components, thereby keeping costs lower than would otherwise be the case. The other area that has called into question the sustainability of the regional expansion is speculative commercial real estate construction. I have been reporting for some time that while the Boston commercial real estate market was very tight, with only small amounts of contiguous Class A space available, there also were no reports of plans for major building projects or much new building under way except for that related to the Artery Project going through the center of the city. That has now changed. Senior city officials told me recently that plans have been submitted for 40 new hotels in Boston proper. We also have reports of 11.3 million square feet of speculative office space being proposed for construction in the greater Boston area within the next 12 to 18 months. At current absorption rates, this additional office space will take about four years to fill. Commercial loan data support stories of an increase in construction plans. First District loans are growing at better than twice the national rate, with real estate lending at our two largest banks leading the way at over three times the national pace. Commercial real estate lending is seen as a growth opportunity for the first time since the late 1980s, raising regulatory as well as economic concerns. We understand that a Systemwide effort is under way to investigate lower lending standards of banks. We would suggest that some follow-up be done on commercial real estate lending as well, as we are doing in the First District. Finally, one of our directors, the chairman of State Street, sounded a warning of a different nature at our last meeting. As you know, State Street has extensive and highly mission-critical information technology systems. As a result, it has been a leader in century date change planning. Recently, State Street was asked to speak to eight very large European banks to discuss Year 2000 problems and ways to work together to solve them. Our director believes it would be helpful and in the national interest if the Federal Reserve were to raise this issue more forcefully. Turning to the national scene, we had prepared our own forecast prior to receiving the Greenbook. Our assessment for GDP growth in 1998 was in the area of 2.8 percent, following growth of about 4 percent in the fourth quarter of 1997. We had unemployment trending down by year-end 1998 and the core CPI trending up, even after adjustments were made for measurement changes. Obviously, in terms of broad trends this is quite different from the Greenbook scenario though it is in line with several private forecasts. In preparing this forecast, we incorporated between .50 and .75 percentage point of negative impact on GDP as a result of the Asian crisis and a few tenths more reflecting our expectations of a general slowdown in the domestic economy. The result is that we had projected a bit less of a slowdown in GDP growth than the Greenbook. When I looked at the Greenbook forecast this weekend to assess the progressively gloomier Asian prospects, I could accept the Greenbook estimates of the effects of the external situation. However, I am more agnostic about the impact of smaller additions to inventories and the gradual decline in stock market prices, both of which contribute to a Greenbook GDP outlook that is well below our forecast in Boston. Inventory and stock market levels are difficult to project, and I worry that they are expected to play such an important role in reining in the domestic economy. I believe there is a good probability of growth being stronger, unemployment levels more stable, and pressure on prices greater than is evident in the Greenbook, though I do agree that the Asian situation is a wild card.",944
-fomc-corpus,1997,President Stem.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The District economy continues to grow at a healthy pace as usual. I will not dwell on much of that in detail; it is not an unfamiliar story. We recently had a couple of meetings with business leaders, and I would say the general information gleaned at those meetings indicated no major surprises. Business people are uniformly positive about the 1998 outlook. Construction is a particularly bright sector. They clearly expect economic growth to continue. All in all, I would say the forecast is generally favorable. It is also clear now, at least in our region, that wage pressures have become pervasive both geographically and by job and skill categories. It is very, very hard to find workers, and there are more reports of larger wage increases. Some business people believe that they can offset the higher wages with productivity improvements or other actions. Some say that they expect profit margins to be squeezed in 1998 and presumably beyond. That was the general thrust of the commentary at those meetings. All in all, the District economy continues to perform very nicely. As far as the national economy is concerned, my view is that the risks are on the downside at this stage. But in making that statement, I would not start with the current Greenbook forecast. If we compare that forecast with, say, that in the September Greenbook, we do not have any tightening of policy in the current Greenbook in contrast to the staff assumption in September. While I certainly recognize that Asia and its repercussions represent a significant shock that was not anticipated in September, we also have had more sustained aggregate demand than was anticipated. We now have tighter labor markets. We have an economy that displays a good deal of momentum. So, if I were going to write down a baseline forecast based on all of this, I would put in more real growth and more inflation than is in the Greenbook. Against that background, I think the risks are on the downside. I say that because if the Greenbook is right that there will be no appreciable acceleration in inflation, and if I am right that wage pressures are now pervasive, which is pretty well baked in the cake, then it seems to me that the implications or at least the risks for profit margins, stock prices, and ultimately real activity are on the downside.",462
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. The economy in the Kansas City District continues to do well. Reports from our directors and other contacts suggest a healthy business environment throughout the region. Manufacturing activity remains strong, especially in our durable goods sector. Our manufacturing employment has grown about 1.6 percent over the past year, and that is quite a bit higher than the national average. Our most recent survey of manufacturers found that production, shipments, and new orders are all increasing at least moderately. District exports of manufactured goods to Asia represented less than 3 percent of our total shipments in 1996, so we don't think there will be a strong direct effect on District manufacturing from developments in that part of the world. Retailers reported higher sales last month and expect a very robust holiday season across the District. Our regional farm economy continues to do well. As strong as this District report is, there are some signs of slowing. Construction activity has been flat, as are indicators of future construction activity. Housing permits grew at a rate of only 2 percent in October, down from a 13 percent rate the month before. The value of total construction contracts fell 6 percent in October, resuming a downward trend from earlier in the year. District energy activity has edged down somewhat for three consecutive months. Actually, the rig count in our District is now only about 1 percent higher than it was a year ago. Business loan activity is only modest throughout the District. Labor markets, though, remain tight in most of the District, and reports of wage pressures have become more common in the last couple of months. However, there is still no evidence that these pressures are showing through to prices. The District's unemployment rate remains a full percentage point below the national average. Almost all the firms we have contacted are reporting labor shortages, and a substantial majority say they are raising wages and benefits in an effort to attract and retain workers. The labor shortages are especially severe for some skilled positions. As one rather frustrated Kansas City employer said, he now feels very much like the owner of a sports team in his efforts to set salaries for data processing workers. He is being told to negotiate with the workers' agents, and he is only half joking about that. But, as I said, the higher wages are not enabling firms to raise prices. On the national front, like others, I expect to see strong economic growth for this quarter followed by a slowing toward trend over the next year. This slowing is caused in part by the restraint on some economic activities in the United States stemming from the Asian financial crisis. However, domestic economic fundamentals remain quite healthy, and I think they will keep the economy growing at a pace around trend through next year. At this point, I expect inflation to remain modest over the next year or two despite the tight labor markets, partly because the appreciation of the dollar will keep import prices down for a while. I think the downward revisions in the utilization rate of manufacturing capacity also suggest less price pressure than we might have thought previously. Inflation continues to be low and stable, and inflation expectations remain subdued and are declining at the moment. Low inflation and inflation expectations in fact may help damp future wage demands as we face these tight labor markets. Finally, although I recognize the upside risks and I believe they are real for both the growth forecast and the price environment, I do not see any evidence, at least not any overwhelming evidence, that action is required at this time. Thank you.",697
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I think it was brave of the staff to produce a Greenbook forecast at all. The increased uncertainty about world events in the short interval between meetings certainly has widened our confidence intervals quite a lot, even though we don't know exactly what our confidence intervals are! My own hunches are that the domestic economy may prove stronger and more resilient than the Greenbook suggests, and others around the table have voiced that feeling. I sense that we now have some momentum in wage increases, especially at the low end of the wage spectrum, and I'm not sure that declining inflation matters that much for wage increases. We may have achieved the Chairman's definition of price stability: It occurs when inflation does not play into business and consumer calculations. I also am more skeptical than the staff that the minimum wage has had a lot to do with the wage increases that we have seen. I'm more inclined to attribute the increases to tight labor markets. If that is true, the absence of another minimum wage increase going forward will not have as much of a restraining effect as the staff seems to anticipate. I also think we could see health cost increases adding more to labor costs than the Greenbook predicts, though we have not seen that happen yet. Especially with somewhat higher wages, consumer spending may prove stronger than is projected in the Greenbook. I am a little skeptical of a significant negative wealth effect if the stock market does what we all hope it will do, namely, reflect real earnings prospects company by company and drift down at a moderate rate. That kind of outcome may not have a major negative wealth effect. There also may be a little more momentum in business investment than the staff is estimating. I would not expect, however, that a slightly stronger economy would give us significantly higher inflation. Cheaper imports, including the flood of goods we will be getting from Asia, are certainly going to hold down price increases, and productivity growth may hold up a little better than the Greenbook suggests. I, too, am mystified by the deflation question that we get every time we make a speech. I have concluded, unlike Ed Boehne, that the question should not be taken too seriously. That's because when I ask those who pose the question what they really mean by it, I often do not get a very good answer. They may have in mind something they read on the front page of the Wall Street Journal that sounds like a good question to ask a speaker from the Federal Reserve. The prospect that prices actually will go down in the face of what we normally see as continuing strength in the economy strikes me as bizarre. On the foreign front I, too, thought Bill McDonough's analysis was extremely cogent. I spent a week in Europe listening to the remarks of Japanese finance ministry and central bank officials concerning what they are going to do about their economy. The explanations were not reassuring. One of our European colleagues asked me if I thought they didn't understand the problem or if they just didn't have the political will to do what was needed. I said that I did not know. But, there is still a great deal of uncertainty about whether they can come to grips with their problem. There are, of course, possibilities that we could fall off the precipice internationally or even conceivably domestically if an international rout had a sudden effect on the U.S. stock market and consumer confidence, the kind of Gulf War phenomenon that nobody expected but that did happen. I think that is unlikely. On balance, I am not that far from the Greenbook forecast, although my confidence interval on anything that might be said about the next few weeks is very wide.",729
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. What a difference a month makes! The stock market has recovered from its 500 point decline. The economy seems to be marching ahead. We have an incredible labor market and generally benign aggregate inflation, although there is quite a split between inflation rates in the goods and the services sectors. Services inflation, largely affected by wages, more than offsets price stability or deflation in the commodity and goods sectors. I think that managing in this dichotomous situation is going to be a challenge for monetary policy. So far, demand and growth are holding up quite well this quarter. We even hear debates about how to spend the federal surplus. Under normal conditions, we would expect the current momentum to carry the economy forward at a rather high level of activity well into 1998. However, the depth of the Asian problems is still unknown. What is certain is that no one can say that the Asian turmoil has bottomed out or that the situation in that part of the world is under control. I expect that the upcoming debates about funding the IMF and the use of the Exchange Stabilization Fund will not shore up confidence in contemplated solutions. In the near term, the apparent inability or unwillingness to make changes, particularly in Korea and Japan, makes the prognosis somewhere between uncertain and grim. The terms ""denial,"" ""haven't got a clue,"" and ""no political will"" seem to crop up continually in assessments of the Asian economies. The high Asian saving rates, the culture or Asian way of doing business, and their economic growth history appear to be dulling corrective response actions. In the United States, we see only the beginnings of an awareness of the potential problem and its effects on U.S. economic activity. Firms are now starting to assess sales forecasts, profit outlooks, and related investment plans. In any case, a widening of the U.S. trade and current account deficits is certain. More generally, we have been expecting slower growth to occur in the United States. We may be seeing some very tentative signs of developments that could lead eventually to a slowdown. As mentioned, net exports clearly will be diminished by the Asian flu and by the strength of the dollar. Labor shortages may directly curtail expansion plans in some cases. In other cases, firms that are unable to raise prices to pass on higher labor costs may find that expansion or investment plans simply will not pencil out. Profits seem to be coming under pressure. Classic bottlenecks also are showing up, for example, in transportation. In short, the staff forecast of a reduced rate of business fixed investment makes sense. Although the fundamentals remain reasonably strong in terms of current cash flows and sales as well as the cost of capital, the risk to investment has risen considerably. The flattening of the yield curve is another indicator that some slowdown is likely. Inflationary expectations appear to have abated. Looking at the stock market volatility, I am hoping that it is reflecting a fundamental reassessment of prospects by investors. Turning to inflation and productivity, despite press debate on the subject, the productivity picture appears to be getting a bit clearer. We have seen some improved statistics recently. There is some recognition of improvement by economists. More attention is now being directed to trying to understand what is going on in different sectors of the economy. Capacity increases help to explain the performance of inflation to some extent. We may now be witnessing some of the benefits of a low inflation or stable price environment: persisting economic growth, strong balance sheets, and sufficient confidence in forecasts to carry low inventories and make capital investments. In sum, international uncertainty has heightened, but the U.S. economy is doing quite well for the moment. It is better to be facing this higher-risk international situation with a U.S. economy that is not fragile.",761
-fomc-corpus,1997,Governor Ferguson.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. As we meet today, both international and domestic developments give us obvious food for thought. I believe, as others do, that our watchwords at this point should perhaps be a ""cautious"" and maybe even a ""nervous"" wait-and-see stance. The trend of the domestic economy, as others have said, is clearly quite strong. The latest figures indicate continued tightness in some sectors of the labor market, particularly in the area of information technology. I also am impressed by indications of declining labor underutilization, which suggest that there are fewer people, at least domestically, who can be pulled into the labor markets by the creative solutions that others have mentioned. I am not an expert on how an employer can pull in workers internationally, but the need to attract such workers may increase. There is also some obvious strength in industrial production. The recent numbers indicate quite clearly a widespread increase in production activity. There is a large backlog of unfilled orders suggesting some continued strength in manufacturing output. I also see evidence pointing to some moderation. If we look at the real adjusted orders measures, we see an indication of possible slowing in growth, admittedly at still very high levels of activity. While we are observing tightness in the labor market, I continue to believe that the evidence indicates an increase in productivity above the anemic 1 percent trend that we have seen thus far. It is quite clear that some capital deepening has occurred. We should continue to watch that. Obviously, there have been changes in capacity utilization measurements that indicate some room for continued output growth without taxing productive resources. Others have already talked about recent indications of some slowing in inflationary pressures stemming from lower oil prices, which I think will continue to be important. With respect to financial markets, it is clear that credit conditions are not overly tight. In addition, some of the evidence that President Minehan referred to with respect to investments in Boston, discussions with other bankers, and even this morning's American Banker continue to indicate some loosening of lending standards. We should be mindful of that as we go forward. Finally, with respect to the international situation I, too, commend the analysis that we heard earlier with respect to international markets. The major issue we are dealing with there is that the recovery periods of these countries and the potential impact on U.S. prices and export demand are still very unclear. At the time of the previous Greenbook forecast, I believed that the actual outcome might end up being closer to the so-called ""worse case"" scenario than to the Greenbook forecast. This time, I am more convinced of that. The anecdotal evidence, at least, suggests that the Greenbook forecast as it stands now is about right. Secondly, we should also consider our own financial markets. A number of different forces evidently are driving them, but it is clear that we have declining inflation expectations, which we should continue to keep in mind. The financial markets apparently do not perceive that monetary policy is behind the curve in terms of fostering our price stability goal. I do think the dichotomy between goods inflation and services inflation will start to come more into play going forward, but at this point neither of them is pressing us to do anything dramatically different. In summary, there are some clear stresses, particularly in parts of the labor market. There are signs of a pickup in wage-induced inflation, but there also is room to believe that productivity gains will preclude significant wage pressures. I will admit that there are few clear signs of moderation in economic growth or price pressures. And, finally, I think the staff has the likely impact of Asia on our economy about right in the Greenbook, and I commend them for that. I conclude that this is a period to wait and see. In my view, any other posture risks upsetting a fairly complex economic and financial system that is looking for a new equilibrium. Thank you.",789
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. The forecast to which policy must respond is now being shaped by three powerful forces. The first is the strong cyclical upturn over the last two years. The second is the diverse set of factors--some combination of temporary influences and longer-lasting structural changes--that have restrained inflation and resulted in a virtual disconnect between the real sector and the wage/price sector. The new ingredient, also threatening to be a powerful player in its own right, is the Asian turmoil. In terms of monetary policy, we mainly have watched as the first two forces have battled to a near draw. We have remained alert and asymmetric to be sure, but mostly unmoved. Our inaction has been rewarded with exceptional macroeconomic performance. However, the further decline in the unemployment rate over the past two months and the evidence of growth at a pace still well above trend in this quarter have begun, in my judgment, to tilt the balance toward policy action to lean against the cyclical winds, notwithstanding the continued excellent inflation performance. Simply put, an economy growing at a pace near 4 percent and operating at a 4.6 percent unemployment rate deserves to have a little sand thrown into its wheels. The Asian crisis will throw a heap of sand into the wheels of the economy. This should, in my judgment substitute for at least part of any monetary policy tightening that otherwise might have been appropriate. This suggests the use of a comparison. How much monetary tightening would be required to yield the same slowing in growth over the next two years as the staff now expects from the Asian turmoil? Between the September and the December Greenbooks, the forecast for growth over 1998 was revised downward by almost a full percentage point and over 1999 by 1/2 percentage point. The September forecast in this comparison is adjusted to reflect the same monetary policy assumptions as in December. The effect of the Asian turmoil with allowance for a multiplier effect accounts for most of this revision. We can compare this effect with that of a 100 basis point tightening over 1998 as shown in the December Greenbook. This tightening is estimated to slow growth 0.3 percentage point over 1998 and 0.7 percentage point over 1999. The dynamics of the two shocks are quite different. Nevertheless, this comparison suggests that the effects of the Asian turmoil might easily match or exceed the outer end of any monetary policy tightening we might have contemplated over the next year. That is a lot of sand to throw into the wheels of the economy. The dynamics of the response to the Asian crisis are more front loaded, and that may be even better suited to policy objectives at the moment than a policy tightening. The next questions are whether the staff may have overestimated the spillover from the Asian crisis or underestimated the momentum in the economy in the absence of an Asian shock. The reality is that there is a great deal of uncertainty about the dimension of the Asian turmoil. First, the situation has not stabilized in the region. Second, it is very difficult to predict the effect of the crisis on growth in that region. And third, the degree of spillover to other developing economies remains in question. The good news is that we may not have to wait long to grade this forecast. The staff expects the effect of the Asian turmoil on the United States to occur very quickly. It may be hinted at in a downward revision to the forecast for net exports and the less favorable mix between inventory investment and final sales now projected for the fourth quarter. It will be clear for all to see, according to the staff, in the halving of growth in the first quarter relative to the fourth quarter. Nevertheless, most of the data we are likely to see between now and the next meeting will be dominated by the monthly data for November and December and the NIPA data for the fourth quarter. These data will more likely, in my judgment, signal momentum rather than slowdown. So, we are likely to have to be patient and wait for the data that will come out after our next meeting to see more clearly the effects of the Asian turmoil. The degree of the slowdown will, of course, dictate the nature of the challenge monetary policy will face going forward. The staff forecast, now close to where private sector consensus forecasts have been for some time, presents one vision, a remarkably graceful version of what I would call a reverse soft landing. We begin from an economy already operating beyond its point of sustainable capacity, with the prospect of a slow progressive updrift in inflation. Growth slows immediately to below trend where it remains over the next two years, ending 1999 close to NAIRU. Inflation is restrained over the interval by a variety of factors; it rises only modestly, and the cumulative increase is limited by the return toward NAIRU by the end of the period. This scenario allows monetary policy to remain on hold and permits the economy to move into the year 2000 near full employment and with inflation still low. Maybe! But given the more balanced risks going forward, I certainly cannot rule out that the next move might be toward ease if the Asian shock turns out to be even greater than is now projected. Let me offer an alternative that I believe is at least as likely as the staff forecast. This is a forecast that already has been presented today by Presidents Moskow, Broaddus, and Minehan. The economy slows only to trend. The unemployment rate stabilizes near its current level, having declined by 1/2 percentage point recently without any response from us, and inflation begins to edge upward over time. This would be a challenge for monetary policy--to tighten into an economy that already has slowed to trend when the updrift of inflation is still only a forecast. It is a challenge I believe we may still face. Certainly, as Presidents McDonough and Boehne have noted, flexibility should be our key word, both in respect to the outlook and to demands on monetary policy going forward.",1206
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. At our November meeting, at least some of us were thinking hard about tightening policy in the face of very strong economic growth, but we were deterred from doing so by the problems of Asia. The Asian turbulence, the severity of which was and still is difficult to judge, introduced major uncertainties, and we felt it unwise to stir that bubbling pot further with a shift in policy. Basically, I believe that constraint still holds. The domestic economy still looks quite strong, with what has come to be a rather standard array of driving factors. Those factors still seem to shift about but not to weaken on balance. Inflation, of course, remains dormant at this time. However, we do face some important changes. The Asian concerns have intensified substantially, and their likely impact on our GDP appears to be growing. I, for one, would bet that the news is likely to get worse before the crisis is over. For the domestic economy, the Greenbook and many analysts see a slowing in prospect that goes well beyond the Asia impact. It is driven by reductions in rates of growth in investments by businesses and households and a slowing in inventory accumulation. To make this bet, I would ask for somewhat better odds, but there is a good probability of such an outcome. So, I find myself once again favoring a ""steady as she goes policy"" but with these added thoughts. Number one, upside risks seem to me to have moderated a bit while, number two, significant downside concerns have now emerged. Taken together, while quite substantial in both directions, those risks seem roughly in balance. This is indeed a remarkable time. Thank you.",334
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"Thank you. Last week we held a joint meeting of our three boards of directors. I had asked our directors to come to the meeting to convey their own views and those of other companies or organizations with which they confer. I asked them in particular to compare how 1997 was now finishing in relation to their expectations a year ago and then to characterize their outlook for 1998. The word I wrote down afterwards in summarizing all of this was one that Governors Phillips and Ferguson already have used this morning, ""dichotomy."" It was quite obvious that the economic evaluations were similar to the story of the blind man and the elephant in that the economy looks and feels differently to different people. Clearly, for firms in some sectors, such as metals and energy and those that compete with imports or are engaged in exports, the year 1997 was disappointing and the prospects for 1998 are not as good as previously anticipated. In other areas, retailers and especially importers say that business conditions are terrific and can only get better. One director reported that a real estate developer who operates in Ohio and Kentucky said that his industry was starting to experience the super boom of the century. My concerns are more along the lines of what Cathy Minehan and Gary Stern indicated earlier about where some of the risks lie. A realtor said that activity cannot increase in 1998 because his firm barely could handle all the work that was available in 1997 and it has no capacity to handle more transactions. Construction, at least in our region, cannot grow very much simply because there are no additional workers to be found. A union director said that employment in every segment of construction could increase if workers were available, but he does not expect to be able to find them and he anticipates that employment will be close to the current level a year from now. He said that even though union contracts are going to increase worker compensation only about 4 percent in 1998, nonunion compensation is rising much more rapidly. He indicated that the unions are trying to recruit and retain members by offering them more training and a focus on lifetime considerations because they cannot keep up with the competition for workers on the basis of compensation alone. A new problem for the unions is how to stop subcontractors on a site from pirating employees from other subcontractors. The unions could provide some discipline if the subcontractors were both union employers, but otherwise there really was no discipline left on projects. Most directors said that they and other people they talk to were concerned about the cost of attracting additional workers. One director commented that to keep employees under current conditions, an employer did not give them a raise within the current pay grade but jumped them two grade levels. Another argued that it was impossible to discipline workers because of the hot job market. If an employer tried to tell a worker that there were policies about showing up on time or the length of the lunch hour, the worker simply left and went someplace else. There is no accountability. The paradox for our region of the country is that employment growth is so slow. We probably will report employment growth of about 0.6 percent this year in Ohio. The increase is so low because people are going elsewhere or there is not enough labor force growth. On the national and international situation, I remember a meeting with my directors about six months ago and hearing them talk about how great the U.S. economy was. I said, yes, but the paradox is that the rest of the world is a mess. We spent quite a bit of time talking about the rest of the world. Oddly enough, the foreign economies have gotten worse and are likely to get worse yet. So, again the word ""dichotomy"" seems to fit the international context. The U.S. economy is doing very well while much of the rest of the world is very troubled. This is not the first time that that has happened; we have been in that situation before. While we all recognize the problems that exporting and some import-competing firms are having, people generally are optimistic about the next year or two. Americans are getting richer. This is a period of prosperity. Last week in preparing for the directors' meeting, I looked at the Blue Chip forecast that had just come out for December. It had some special questions because of the Far East. Consistently, every participant in the forecast revised down their forecast of real growth and inflation because of what was happening in Southeast Asia. How is it possible that we are worse off in the sense of anticipating slower growth and simultaneously better off with low inflation, higher real incomes, and wealth rising at a faster rate? Everybody agrees that net capital inflows are going to be even larger than they were before. That word ""dichotomy"" has to be applied to asset prices as well as to goods prices. Some Board members referred earlier to the dichotomy between the prices of services and the prices of goods. That clearly is the case, but the notion of dichotomy also has to be applied in the case of asset prices because we would not say that we have had deflation if we think in terms of what has happened in the stock market in the last three years. When I get that question about deflation, I usually remind the audience that in the early 1990s we had a lot of people, including some reputable economists, writing about asset deflation because of what they saw happening in commercial real estate. They were not referring to deflation at all; they were simply talking about the prices of certain types of manufactured goods that were falling, as was the case in the 1920s. I was reading some material about the operations of the FOMC in the early 1930s. This involved a discussion of the concern about the international situation in Britain, Germany, and Japan. As we know, some countries turned to militarism because they experienced a depression while we enjoyed a boom in the 1920s. I decided to go back and look at A Monetary History of the United States, written by Friedman and Schwartz. They say at one point that U.S. monetary policy was too restrictive for goods prices and too expansionary for asset prices. That observation may strike some as somewhat curious. I think that it's a useful reminder of what can go wrong if we are too narrow in thinking about words like ""inflation"" or ""deflation."" When people use the term ""deflation"" today to refer to the price changes of certain types of manufactured goods caused by foreign competition, innovations, product enhancements, productivity gains, or some combination of those factors, that does raise some questions. What do they mean by the word ""inflation?"" Clearly, it cannot refer simply to the current prices of goods, whether domestically produced or imported. We have to think in terms of the present price of future consumption. Three years ago, Mexican officials said that their monetary policies were not inflationary as conventionally measured in terms of peso goods prices or peso wages in 1994. That was too narrow a way to think about it. One would not have found warning signs of the problems in Southeast Asia by looking at prices of goods available in the marketplace in these Southeast Asian economies or wages paid in domestic currencies. That is not where the problem was manifested any more than it was where one would have found the problem in the 1920s in the United States, when the wholesale price index fell and the CPI rose at a 1 percent rate, or in Japan in the 1980s, when wholesale prices fell and the CPI did not increase at all. But that did not mean that they did not have a problem.",1540
-fomc-corpus,1997,Governor Gramlich.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. At the last meeting, I felt that from the standpoint of domestic considerations alone, it was time to raise the funds rate. I was dissuaded from actually voting to do so by the worrisome situation in Southeast Asia. While I still favor no change this month, my reasoning has changed. On the one hand, events in Southeast Asia have become much more worrisome. Last month's worse case scenario has now become the best guess scenario, and this month's worse case scenario has gotten quite bad indeed. The impact of the Southeast Asian crisis on the U.S. economy already generates all the demand restraint that anybody should want. More tightening, I think, would not be called for. Moreover, there is still the question of what I will call international leadership. The United States does not want to be taking monetary actions that will drive up the dollar and drive down Asian currencies any more than at present or actions that reduce the growth in overall world demand any more than at present. Domestically, too, conditions have changed. While the economy may still be on the inflationary side of the NAIRU, that is not quite as clear to me. Recently, the Board revised its capacity utilization figures showing much more productive capacity than was apparent earlier. Evidently, the respondents to the survey do not feel that much capacity tightness, and the overall utilization rate is now close to its historical average. It is not clear whether the state of demand is best measured by labor market statistics or by the capacity statistics. Indeed, the capacity statistics seem to be explaining price and wage changes better at present. Moreover, other leading indicators of price increases, such as commodity prices, gold prices, and term-structure spreads, are remarkably quiescent. All that refers to where the economy is now. If the staff is right and we are looking at a weakening economy as we peer ahead, it may be even less wise to be tightening now. Hence, I would favor no change in current policy. Several speakers around the table used the word ""flexibility"" and I think that is a very good word for the present time. It is frankly quite hard for me to know where the predominant risks are, whether they are up or down. Thank you.",457
-fomc-corpus,1997,"President McTeer, you wanted to add a few points.",13
-fomc-corpus,1997,I will not insist on doing it before the break unless you want to do that. I want to follow up on the Vice Chairman's parable of the meadow and the precipice.,37
-fomc-corpus,1997,Better to do it now.,6
-fomc-corpus,1997,"Okay. He did not mention the role of the IMF, and I thought I would ask him about that and you, Mr. Chairman, as well. I know that the IMF does a lot to promote movement toward market mechanisms in command economies, and they do a lot to bring government policymakers out of an attitude of denial. But it also seems that IMF officials promote a lot of austerity wherever they go. They have a root canal theory of the way to get out of difficult situations by canceling projects and so forth. If one watches CNN frequently, one sees a lot of Asian people on the street talking about how they are going to do their patriotic duty and stop spending money. It seems to me that there is a psychology that presupposes that the way out of this problem situation is to stop spending. It is hard to save your way to prosperity in an environment of collapsing aggregate demand. I wonder what we really think about the role of the IMF in all of this.",197
-fomc-corpus,1997,"I think the IMF has pulled back a good deal from some of its previous statements. In addition, there has been a lot of talk suggesting that implicit in the IMF agreement with Korea is a 3 percent growth limit. Such a limit does not exist. There is a series of recommendations with respect to policy, which essentially rest on the issue of disbanding the dirigiste-type of activities, the command economies that the Vice Chair was talking about, and a series of other types of deregulatory, market-opening type initiatives from which the IMF forecasts that the growth would be 3 percent. But there is no directive on the issue of growth. The interest rate issue is also noteworthy. I think there is a recognition that when we have a degree of instability in exchange rates, which suggests very rapid changes in expectations, small increases in the annual rate of interest are going to be overwhelmed by changes in exchange rates. You will recall that in 1992 the Swedes tried to curb a run on their exchange rate by raising their overnight interest rate to 500 percent. They discovered that when they divided that rate by 365, the daily interest rate was small relative to the fluctuations they were experiencing in their exchange rates. I believe that lesson is understood by the IMF at this stage. The issue really is not about raising interest rates for the purpose of affecting the exchange rate. It is essentially a balancing of market forces and an effort to keep the money supply from growing too fast and potentially engendering undermining inflationary pressures. So, I do question the IMF and their tendency to use language relating to this Southeast Asian set of actions that sounds very similar to that used to describe actions taken to counter the inflationary, government-debt type of problems in Latin America to which that language was applicable. Fortunately, when we look at the details of what the IMF is doing in Southeast Asia, it turns out to be significantly less that kind of issue. The IMF is dealing with a different regime from that associated with the problems in Latin America.",408
-fomc-corpus,1997,Thank you.,3
-fomc-corpus,1997,"First Vice President Rives, do you want to add anything to our discussions?",16
-fomc-corpus,1997,"Nothing that has not already been said, Mr. Chairman. Thank you.",15
-fomc-corpus,1997,"Then, let us break for coffee.",8
-fomc-corpus,1997,Mr. Kohn.,5
-fomc-corpus,1997,"Thank you, Mr. Chairman. The Committee's decisions at this meeting, with respect both to its immediate posture in reserve markets and to the symmetry or asymmetry in its directive, entail weighing actual evidence of strong domestic economic activity against the prospective effects on the U.S. economy of financial and economic developments abroad and the possible interaction of any Federal Reserve action with conditions in foreign markets. Incoming data have indicated on balance that the U.S. economy has continued to grow at an unsustainable pace. Labor markets have tightened further and give more suggestions of mounting pressure on wages. While there are hints on the spending side of some slackening in demand, this could well be another brief pause in inherently noisy statistics; judging from continuing low levels of initial claims, employers have not yet trimmed their hiring in response to actual or prospective softening of growth in sales. Moreover, with the important exception of the dollar, financial market conditions remain at least as accommodative as those that have been associated with persistent rapid expansion this year. In fact, bond yields are noticeably lower than they have been for some time--including rates on corporate bonds despite a slight rise in risk premia. Although much of the decline in longer-term interest rates since earlier this year is probably accounted for by lower inflation expectations, real bond rates likely are no higher than they were over recent quarters, and they could be lower. Equity prices remain near the much higher levels reached over the spring and summer, holding down the cost of capital and boosting wealth. And we see no signs of additional caution by banks and other lenders in advancing credit. The ample availability of credit and liquidity is reflected in robust growth of late in broad measures of money. In the staff forecast, although the economy slows substantially, the level of output remains beyond its estimated long-run potential, and the resulting updrift in underlying inflation begins to emerge in the second half of next year. Taken by themselves, these circumstances might suggest serious consideration be given to firming policy. But developments overseas provide the important counterweight to those at home. The dollar is higher against a broad array of currencies, as Ted discussed. Appreciation against the Asian currencies transmits a portion of the negative spending shocks those economies are experiencing to the United States. Demands from Asia for our exports are further damped by lower incomes there and possibly by financing problems that will also constrain their ability to import until confidence in their financial systems returns. And the dollar has risen against the currencies of industrial economies of Europe, putting even more downward pressure on demand and prices in the United States. Lower oil prices will reduce near-term inflation, though they will also boost aggregate demand. Changes in the level of the dollar and oil prices can leave a more lasting imprint on inflation by reducing inflation expectations a little. Altogether, these influences will override any increases in underlying inflation pressures in the next few quarters and could well help to keep inflation relatively subdued over a longer period without policy tightening, as now embodied in the staff forecast. By the way the financial markets have shaken off incoming data, it appears that investors have placed much more weight on the potential effects of weakness abroad than on current pressures on resources at home. Not only have long-term rates fallen half a percentage point since the turmoil intensified in October, but commodity prices have dropped substantially in reaction to the stronger dollar and prospects for weaker global demand. However, markets do not seem to be anticipating that problems abroad will on balance weaken U.S. economic performance substantially. The resilience of equity markets indicates that, aside from companies with high Asian exposures, investors do not see the foreign difficulties as exerting enough restraint on demand and prices in the United States to impair earnings prospects materially. Some of the decline in long-term interest rates, probably impossible to quantify, is associated with a flight to quality. Even allowing for such distortions, however, the flatness of the yield curve suggests that market participants expect short-term rates to remain near current levels well into the future, implying that they do not anticipate inflation pressures--or economic weakness--that would require much action on your part. Notwithstanding the assessment of the markets and the staff, the Committee still may view policy as somewhat more accommodative than desirable at this level of labor utilization. It could be concerned that the staff and the markets have overestimated the impact of foreign difficulties on the United States. Or the Committee could view as inconsistent with its own long-run goals the uptilt of inflation in the staff forecast or level of inflation expectations still embodied in long-term market interest rates. Nonetheless, there would seem to be reasons to consider postponing a corresponding tightening action. One reason would be the effect any tightening might have on global markets. To be sure, several countries have tightened policy since the problems intensified in October, including the United Kingdom, Canada, and Sweden. But their combined GDPs do not approach that of the United States and, more importantly, their currencies do not play the lynch-pin role of the dollar, which is, among other things, the currency of denomination for many of the debts of troubled Asian countries. By itself, a 25 basis point increase in short-term dollar rates would not add appreciably to the burdens of these borrowers, whose principal problems center around doubts they can roll over their debts. But higher rates and the associated strengthening of the dollar would not make their task any easier. And, unexpected tightening in tender markets does risk an outsized response, here and abroad, especially if markets extrapolate further policy action. In addition, the cost of waiting for economic and market conditions to become clearer could be viewed as rather small, even if foreign and U.S. economies turn out to be stronger than the staff expects. With inflation already low and declining and with inflation expectations, by some measures, still above actual inflation, these expectations are unlikely to turn around very quickly. Moreover, some of the influences that will be restraining prices in the near term should persist in any event. The dollar is unlikely to roll back soon all of its recent increases, even if foreign markets begin to recover, because the level of demand overseas will remain depressed. And oil prices should be held down for some time by greater OPEC production and smaller world demand, even if not by as much as the staff is forecasting. It might be important to firm policy promptly if growth in the United States appeared to be continuing at a rapid enough pace to tighten labor markets further, but in the current circumstances it seems unlikely that the Committee would find itself seriously ""behind the curve,"" in the sense of chasing rising inflation expectations, if it waited until it had additional information on foreign markets and the domestic outlook. There is always a temptation to await more evidence on the state of the economy, and the inertia this can impart to policymaking can lead to policy errors that end up creating or accentuating business cycles. However, the range of possible outcomes for the economy would appear especially large at this time, given conflicting signals from data and projections and the fluid state of foreign markets and economies. Among those outcomes is the possibility that problems abroad could exert sufficient restraint on the U.S. economy to warrant monetary policy easing. This possibility is what led us to reintroduce an easing alternative in the Bluebook after a prolonged absence. In that regard, some outside economists have marked down their forecasts for the United States by more than Board staff owing to these events. And, even if the staff's baseline is the best modal forecast, the Committee might perceive some odds--albeit small--of an even worse market disruption that could spread further and feed back more forcefully on the U.S. economy and financial markets. In something like the ""worse case"" scenario presented by Ted, it would be important for you to ease to cushion the effects on the United States and other economies, as was assumed in that exercise. And the worse case did not encompass a freeze up of markets and credit availability in affected countries, which could constrain their imports even more for a time. If the Committee, like the market and the staff, now sees a more balanced set of risks going forward, including the possibility of needing to ease, it might want to reconsider the asymmetry in its directive. Retaining the current asymmetry could be justified on the grounds that in a fundamental sense the balance of risks remains tilted toward higher inflation. Persistent strength in domestic demand is likely to keep the economy producing beyond most estimates of its potential for some time. At some point, escalating labor costs should begin to pressure prices, and the sooner this situation is addressed, the less disruptive will be the correction. Moreover, of course, the Committee could ease its policy stance from an asymmetric directive toward tightening if circumstances changed enough. But the Committee may view the odds on tightening over the intermediate term as having receded considerably, especially with price increases likely to be damped for a while. And it might want to put some weight on the original purpose of the sentences in question--that is, possible policy actions over the intermeeting period--if it considers there to be some potential that a worsening situation would call for a prompt response. If the Committee shares these perspectives, symmetry might better represent the contingencies it sees confronting policy.",1841
-fomc-corpus,1997,"Thank you. Questions for Don? If not, let me warn of our talking about the ""worst"" case or ""worst"" around-the-world scenario because everyone here can contemplate a case, which is far more negative than the so-called ""worst"" case.",55
-fomc-corpus,1997,"Ted Truman, to his credit, did not say ""worst"" case. He referred to a ""worse"" case.",26
-fomc-corpus,1997,"This time we did it right; we did not call it ""worst!"" [Laughter]",20
-fomc-corpus,1997,"Oh, ""worse"" case. Sorry about that. There is a ""worst"" case, but I don't even want to contemplate it. There is not terribly much I can add with the exception of one area that I think has not been fully addressed in our deliberations today. We are looking at a November CPI increase of 0.1 percent. In prior months, the changes in the CPI and the PPI clearly exhibited a receding trend in the rate of inflation, no matter how these measures are affected by technical adjustments. In fact, we have been observing that trend for quite a long period of time in the context of still rising profit margins, as best we can judge the latter from the most recent data. A distinctive feature of the Greenbook forecasts in the last two or three years, which it has shared with other forecasts, has been the projection that profit margins would begin to fall immediately from the base period of the forecasts. This is important because arithmetically, as we all know, if prices are not changing and profit margins are rising, unit costs are going nowhere. As we saw in the third-quarter profit data for nonfinancial corporations, that was indeed the case. We do not have such data for the fourth quarter as yet, but the presumption that unit cost increases are low and productivity is accelerating seems rather difficult to support considering the size of the increase in the hours input, adjusted or otherwise for hours of self-employed workers, in the available data for the fourth quarter. It will be difficult to get a significant increase in productivity in the fourth quarter with the data we already have seen for October and November unless the December hours numbers truly collapse. Indeed, some softening is implicit in the Greenbook because there appears to be a very substantial aberration in the 400,000 plus increase in the payroll employment number for November. In particular, the seasonal adjustments are dubious, not to mention the hours figures, as was explained in Part II of the Greenbook. Leaving aside the measurement problems, there is no way of getting around the fact that, on average, productivity has been accelerating over the past several quarters. We can argue at great length about how businesses are managing their operations. Obviously, if the technological capabilities are not there, the potential real rates of return on facilities are not achievable. I don't care how assiduously businesses try to contain costs. If they don't have the necessary underlying infrastructure, they will not be able to do so. But they have succeeded in doing so, and the reason, as we have discussed on numerous occasions in the past, is that the opportunities to improve profits clearly have been expanding. I don't know what the real gains in underlying productivity will turn out to be in the fourth quarter. I don't know what they will be in the first, second, third, and fourth quarters of next year. I do know that the current Greenbook does the same thing it did last time, namely, it takes the growth of so-called total factor productivity--the residual in the decomposition of labor productivity growth--and turns it significantly negative. The staff forecast of a pickup in capital deepening implies a full percentage point slowing in output per hour between 1997 and 1998 from what it would be if total factor productivity growth were held at its 1997 pace and another quarter percentage point slowing for 1999. I don't think any of us knows what that number can or should be. All I can tell you is that we keep getting reams of ever lower CPI readings that seem outrageous in the context of clearly accelerating wages and an ever-tighter labor market in which employers are running out of people they can hire. Yet, prices are just locked in. Indeed, as Don Kohn pointed out, if we look at the underlying price structure, we see falling prices. The Journal of Commerce industrial price index, which every deflationist and every bear uses to make this case, does indeed show prices going down significantly. That is noteworthy because this is not a particularly biased commodity price index. It may well be the best among comparable indexes. Something very different is happening. I think the only way we can explain it is from the output per hour side. Unfortunately, that is where our data are weakest. The behavior of inflation suggests to me that potential output is a lot higher than we tend to assume. Leaving aside the mismeasurement of prices, the notion that we are on the brink of a major acceleration of inflationary pressures is correct arithmetically if we assume a stable rate of growth in productivity. It is not correct if we leave open the potential for an acceleration in productivity. The price data are telling us that the hypothesis that productivity is accelerating cannot be dismissed unless the profit figures we are looking at are all wrong. I am merely indicating that there is something quite unusual going on here, and we have been aware of this for a considerable period of time. As I have argued many times in the past and despite the latest set of employment data, employment cannot increase indefinitely at the rate it has been increasing. Leaving the Phillips curve aside, leaving NAIRUs aside, leaving everything aside, I do not know how one can put negative people in an equation and then run it out. At some point, something has to give. We cannot increase productivity merely by an act of will. There are upside limits, so that if effective demand continues to grow as it has, there is no question that inflationary pressures have to emerge. To paraphrase St. Augustine, yes, but not yet.",1118
-fomc-corpus,1997,"He said, ""God, make me pure, but not yet.""",14
-fomc-corpus,1997,"I didn't want to say the first part of that! [Laughter] There is something going on here that we have not observed in decades, and maybe decades is too short an interval. I was startled by this morning's CPI report. We cannot keep getting such numbers and continue to say that inflation is about to rise. As we keep projecting a higher rate of inflation, it keeps going down, and there has to be an admission at some point that something different is affecting prices. The growing recognition of that is the reason why markets are reacting as they are to incoming economic information. That is why the big November surge of 400,000 in payroll employment had only a very slight market impact. I don't think the surge affected policy expectations and economic forecasts. The markets are responding to something that they perceive as important. We don't know fully what it is; we do not have any data; and we probably will not for a while. As I said last time, I do not deny that the Asian problem is a crucial issue with respect to policy. But I think it is a mistake to say that we should be moving at this stage, absent the Asian difficulties. That is at least a debatable issue. I probably would come out in favor of moving if for no other reason than that this economy has been undergoing a powerful surge and we could not do much to harm it by moving rates up 25 basis points. It is very hard to make the case that we have tight money when the housing market is behaving as well as it is, including the starts figures, granted the seasonal factors, that came out this morning. So, we have experienced unusual developments, which get compounded by the Asian situation. The Asian problem is a fascinating one for macroeconomic evaluation because, as those of you who have been involved in building models know, there is virtually no way that we can infer a very large impact on the American economy from the Asian developments in light of our fairly limited trade connections. We cannot get a very large number using the existing model structure because the latter in effect has coefficients that essentially reflect the level of confidence that has existed over the period for which we are fitting the model. We have to bring in a confidence-deterioration factor as an exogenous variable to get a different result. It is very difficult to infer it in any material sense. In theory, we can get virtually any impact we want if we remember that what we mean by psychology is the degree to which people withdraw or reach out. In effect, it is a time preference type of issue. When people get frightened, they disengage or pull back from whatever they are doing. If they are involved in markets and are net long, then disengaging means that prices go down. If they are net short, prices go up. In most markets, participants are net long. There are very few historical periods like the Northern Pacific panic early in this century when everyone decided that there were more shorts than there were stocks outstanding. That led to a panic and everybody ran for cover; they disengaged. If people disengage enough, the payments system begins to freeze up, intermediation is curtailed, and all forms of lending contract. There is no downside in any model that is structured to pick this up, but a huge implosion can nonetheless occur. I don't think any econometric model would have picked up the 1929-1932 debacle without a major exogenous evaluation of how human beings behave. There is something going on out there, and I ask myself where its impact is being felt. Can it be on consumer confidence in the United States? I would say, hardly. There is no evidence of it; that would require a far greater disturbance. We are just beginning to see reports on the Asian crisis on the front pages of our newspapers. It is still not in our mindset; it is not significantly affecting attitudes. Is bank lending pulling back here? I do not see any evidence of that whatever. A significant pullback cannot be based on the notion that there are a lot of losses on loans to Southeast Asia, because our financial institutions have not lent that much to borrowers in that part of the world. Even if they lost 90 percent of those loans, it would not be a big deal. The only place a material effect can occur is in the combination of asset prices and capital investments. For example, one can envisage a significant change in the equity premium in the American stock market. The calculations that people are currently making have the equity premium at the low end of normal ranges with very significant further increases in earnings embodied in the relationship. At any realistic earnings forecast, stock prices will be substantially overvalued. It is conceivable that we could get a significant implosion here. I believe the odds are small but not zero. What that essentially does is to create a high level of uncertainty, as the Vice Chair was mentioning. It gives us the much wider ranges of uncertainty that Governor Rivlin referred to. A lot of us were gradually becoming concerned about the range of possibilities, not the probabilities but the tails of the various types of distributions, which very clearly seem to be getting more extended. It is useful to think in terms of the Vice Chair's analogy about the meadow on the right and the ditch on the left. Some of the market changes in Asia have been overdone. If financial conditions there stabilize, the economies in that region could very easily recover, putting us back in much the same place that we were in the sense that our economy would still be experiencing quite strong demand. There would be some lessening of export demand because it is very unlikely, given the trauma they have experienced, that the Asian economies will suddenly return to 8, 9, or 10 percent rates of economic growth. If they achieve 2, 3, or 4 percent rates for a while, that is not going to be a bad outcome. They have been subjected to a tremendous shock, and economies do not recover from that sort of shock readily. It is going to take a while for them to recover. But that is not the critical issue. The issue is whether their economic performance will be severely negative or whether these countries just will not be the Asian tigers that they once were. As I indicated before, the IMF is facing a different type of model in its efforts to address the Asian situation. It is not clear that the problems are going to be resolved readily. I do not think the issue here is one of propping up a number of institutions. I believe there is a fundamental flaw in the Asian economic model that is only becoming apparent now as their technologies move closer to the cutting edge of technologies in the world and they begin to run into problems because government-directed investment cannot work in highly sophisticated economies. I do not think they believe that. They have had an extraordinary run for three decades. You cannot tell a Korean cabinet minister that what they have been doing is wrong. you can do a lot of things to get them to say things that sound more forthcoming; but you do not change a people's view of how the world works in a matter of two or three weeks. If there is a big flood of IMF money into Asia, I think we will find that they are going to continue doing whatever they did before. They are going to behave the way they think they ought to, which is what got them into trouble. Injecting a lot of IMF money would just prolong the problem situation, but I don't believe that is going to happen. I think that there has been a considerable increase of realism in the IMF. I do not anticipate a crisis, but I do not expect a quick recovery. The problem is going to be with us for a good while, and I think it is going to have generally negative effects, the extent of which I do not have any way to evaluate. I have gone on longer than I expected. Where I come out on policy is that I continue to believe that we will have to move rates up at some point. I see that as the most probable next move. This assumes that the Asian problem will diminish and that the tremendous underlying thrust that we have in our economy eventually will run into limits stemming from productivity constraints. But if we focus on the very short run, it strikes me that the probability of our having to move in the next month or two is exceptionally low, given the price numbers we have been looking at. The only move that we might make in this period, if we move at all, might be to lower rates as a consequence of some substantial asset deflation, a prospect that has a low probability. Accordingly, I would be marginally in favor of alternative B symmetric this time. On the basis of the price indexes for the last couple of months, that probably is the right policy until we see some evidence, not necessarily of consumer prices, but at least of commodity prices or the prices of intermediate goods starting to move or some evidence of declines in profit margins. All of these developments will precede an acceleration of the CPI, but we are seeing none of that, and it is going to take several months for anything like that to emerge. I think the market, in looking at central bank policy, probably is saying that the Fed will not move until we see some pressure on prices. It is not sufficient evidence to argue that the economy is running hot, that the labor markets are very tight, and that there is evidence that wages are accelerating. That is necessary evidence, but it certainly is not sufficient for a policy move unless one argues that productivity is not accelerating, that profit margins are not expanding, and that the total unit costs structure is beginning to exert greater pressure on prices that we are able to observe. As far as I can see, none of that is occurring. So, I would argue for ""B"" symmetric. Other members may feel that we should remain asymmetric. I could live with that without any difficulty. Vice Chair.",2006
-fomc-corpus,1997,"Mr. Chairman, I think that ""B"" is the right call and that it is a clearer choice than the intermeeting adjustment decision. I agree with you that, absent the international events, this might be a rather good opportunity for a 25 basis point move that could do very little harm in present circumstances and probably some good toward achieving our goal of price stability. But given the international considerations, I believe such a move would be very ill-advised at this time. The financial markets are thin, both because the markets in Asia are very thin and our normally much more liquid markets are becoming thinner as we get closer to the end of the year. So, this is not a good time for a policy move, which clearly would be a great surprise in the financial markets. I believe I have become something of a resident theologian on the meaning of symmetry and asymmetry. We have been using asymmetry since the May meeting essentially to indicate that the central bank of the United States remembers that its primary responsibility is to foster sustained economic growth through price stability and that the balance of risks has been in the direction of rising inflation even though there has been no evidence in the inflation numbers to that effect. However, I think the international situation currently demands that we be flexible enough to respond as appropriate to unanticipated developments, so that signaling our general anti-inflation intent with a bias in the intermeeting adjustment instruction is not desirable at this point. We may wish to return to asymmetry at some later date. I certainly do not think we have reached a point where we would want an asymmetric directive toward easing. That would have to be based on the assumption of an international crisis that we are not in fact assuming. On the other hand, I also think a tightening move would not be appropriate at this time. In my view, there is almost a zero possibility that we would tighten between now and the next meeting. Therefore, the best choice is to move to symmetry, largely to avoid an emotional or intellectual bias that might make us feel that we could not respond appropriately to any critical development. With that interpretation of what symmetry means, I believe that ""B"" symmetric is the right judgment.",438
-fomc-corpus,1997,President Minehan.,4
-fomc-corpus,1997,"In thinking about the current situation, I ask myself, where are the risks to the forecast? Last month, I was more negative than the staff on the Asian situation, but my sense now is that the Greenbook has it about right, although there certainly is a lot of uncertainty about potential developments in Asia. It is possible, of course, that a ""worse case"" situation could materialize. The Asian situation could get worse, spread to Latin America, affect Hong Kong and in turn China more significantly, and the contagion could develop into a worldwide downturn. On the other hand, it is also possible that, given the strength of the current data, domestic growth could fail to slow sufficiently despite retarding external effects, feeding into a cycle of more intense wage and price pressures and ultimately into higher inflation. To me, these risks seem fairly balanced right now, but I think the costs of being wrong are not balanced. If, in fact, international developments occur along the lines of the Greenbook forecast or even get worse, we will not be in such a bad situation if we do nothing now. Monetary policy is not overly tight. We have inflows of capital to the United States that are reducing interest rates. We have low inflationary expectations. There is not a lot to be lost in waiting in that case. On the other hand, if resource use is tighter than we think and economic growth is stronger than projected in the Greenbook, we could be waiting too long. Wage inflation could get embedded. It would then cost more to root it out, and it could cost more at a time when the strength of the U.S. economy is more rather than less important to the worldwide situation. In thinking about these alternative costs, I conclude that the right decision is probably not to do anything now. The underlying situation is too uncertain in Asia. I also believe that it would be desirable to see the price data stabilize, if not tick up, before we move on the inflationary front. But because I think the costs of being wrong in the direction of greater inflation are more significant than if we are wrong in the other direction, I would have a slight preference for staying with the asymmetric directive. I would interpret symmetry and asymmetry a little more broadly than simply looking at what is likely to happen over the next several weeks.",468
-fomc-corpus,1997,President Parry.,4
-fomc-corpus,1997,"Mr. Chairman, in view of the situation in Asia, I certainly would recommend against a change in rates at the present time. So, I would support alternative B. I have a slight preference at this point for asymmetry because I do not think the distribution of likely outcomes with regard to inflation is unbiased. In my view, it is biased toward higher inflation, but in the short run--at least in the very short run--it may be less biased than it was in the past. Therefore, I would not object to symmetry.",108
-fomc-corpus,1997,President Broaddus.,5
-fomc-corpus,1997,"My policy preference today, Mr. Chairman, takes account of the new Greenbook projection, which assumes no action on our part and has the growth of employment barely getting down to a sustainable trend over the projection horizon. Given that forecast and for the reasons I outlined earlier today, I still think there is a significant upside risk in the projection, even taking account of Asia. I mentioned a number of things earlier, and one of them was my concern about the impact of rising real wages on consumption. Some of the comments around the table have reinforced that point for me. I recognize, of course, that there are arguments for not moving at this point. There are clear reasons for lying low. Don Kohn laid them out well, and you summarized them also, Mr. Chairman. But I continue to believe that there are considerable risks to delaying action further. Cathy Minehan mentioned some of those. Weighing the reasonably hard information we have about current U.S. economic conditions against the softer projections, I still think, stubbornly no doubt, that a modest 1/4 point increase in the funds rate today would be a prudent step for us to take. It is a form of cheap insurance. In my view, not only would a small rate increase today better position policy for unanticipated strength in the economy if domestic demand should fail to slow, but it would signal that we are prepared to take whatever actions we need going forward to contain inflation. That in itself would help longer-term interest rates resume their role as automatic stabilizers. Let me make one final comment about flexibility. A lot of people have used the word flexibility today. I know I am shifting the context a little here, but flexibility certainly does not apply to our management of the funds rate. Over much of the last year, that rate has been parked at 5-1/2 percent. That is not the way one would expect short-term interest rates to behave in an adjusting, fluid economy. I worry that we may be introducing inflexibility by the way we are dealing with this policy instrument.",416
-fomc-corpus,1997,President Hoenig.,4
-fomc-corpus,1997,"Thank you, Mr. Chairman. I would support your recommendation on the ""B"" alternative, and I certainly would not disagree with you on symmetry. I will tell you that I, like others, remain concerned about the tight labor markets and the possible effects they may have on inflation, but I do not conclude that monetary policy has necessarily been overly accommodative. I say that partly because, as has been noted, the real fed funds rate has been above its long-run average. I know that average should not be equated to the real long-term equilibrium rate, but still it has been relatively high. I would also mention that while M2 growth has been above the upper bound of the Committee's range, it has not been substantially above that range and it is projected to moderate. As I mentioned earlier, the utilization of manufacturing capacity is near its long-term average after the latest revisions. Perhaps most importantly, as you also noted, inflation has been quite stable. Core inflation has been stable or declining, pipeline inflation is basically nonexistent, and various measures of short-term and long-term inflation expectations are stable or declining. Long-term rates have fallen in this environment. So, I do not think that right now we are in a position to change monetary policy. Thank you.",254
-fomc-corpus,1997,Governor Phillips.,3
-fomc-corpus,1997,"I support your recommendation of ""B"" symmetric. There is no pressure to act now. It seems to me that there is time to see how things play out. Given the shape of the yield curve, the recent inflation experience, and the inflation outlook, I have to question the direction and timing of the next move. This seems to me to be an argument for removing the asymmetry from the directive.",81
-fomc-corpus,1997,President Boehne.,5
-fomc-corpus,1997,"I support your recommendation for ""B."" I think the case for staying where we are is overwhelming today. The issue of symmetry is a more marginal decision, and I don't have strong feelings about it one way or the other. In my view, the major case for removing the asymmetry is that symmetry is probably a more accurate description of where policy is. Now and then, I think we ought to be accurate. [Laughter]",87
-fomc-corpus,1997,Not to mention transparent.,5
-fomc-corpus,1997,President Moskow.,4
-fomc-corpus,1997,"Mr. Chairman, the economy is quite strong currently, but I believe the situation in Asia is likely to be a key restraining factor going forward. I agree that no one knows for sure exactly how severe the Asian problems will be and how they will play out. In his comments, Ted Truman did not rule out the possibility of a better case. It was not the best possible case, but it was a better case. So, there is another side to this in that adverse developments in Asia may not be as severe as we now tend to anticipate. I agree that we should be cautious until more of the uncertainty is resolved. While I do not favor changing policy at this time, I do think that the risks are tilted to the upside. So, I would personally favor retaining the asymmetric directive, Mr. Chairman, although I could live with your recommendation for going back to a balanced directive.",179
-fomc-corpus,1997,President Guynn.,4
-fomc-corpus,1997,"Mr. Chairman, I support the recommendation for no change this morning. After trying to sort out the crosscurrents we have discussed in the last three and a half hours, I still have the sense that the Asian shock represents something of a substitute for a modest policy move. I, too, could support a symmetric directive, but on balance I would be a little more comfortable with an asymmetric directive for a while longer to make sure that the strength in the domestic economy is not overwhelming the drag we are getting from international developments. But, again, I can support a ""B"" symmetric directive.",119
-fomc-corpus,1997,President Stern.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. I support your recommendation both in terms of alternative B and a symmetric directive. I do so principally because I believe there is more than enough uncertainty to go around. We do not know how severe the Asian problem is going to be. We do not know how far it is going to spread. We really do not know what it means for the United States in terms of quantifying it. In light of all that, it seems to me that no change in policy and a fair amount of flexibility are appropriate at this point.",111
-fomc-corpus,1997,Governor Rivlin.,4
-fomc-corpus,1997,"I, too, support the ""B"" symmetric. I don't think there is any case for moving rates down. Were it not for the Asian problem, one could make a case for moving rates up, but I'm not sure I would be totally persuaded by that case, given the CPI and the productivity information. But we do have the Asian problem and we do not know how severe its effects will be. So, it seems to me that ""B"" symmetric is the right thing to do.",99
-fomc-corpus,1997,Governor Ferguson.,3
-fomc-corpus,1997,"I, too, concur with your ""B"" symmetric proposal. I agree particularly with what President Stern has said. We are in an era of significant uncertainty, and I think it is important to signal to the markets that as a responsible central bank we are prepared to be flexible in our effort to address whatever challenges may emerge. I also recognize that this is an intermeeting approach, and we will have a chance to rethink this in the near future.",90
-fomc-corpus,1997,President Jordan.,3
-fomc-corpus,1997,"After our action to increase the funds rate last March, we had a debate at the May meeting concerning the desirability of a further increase--whether we should drop the other shoe. In an environment of decelerating real growth as evidenced by an assortment of measures, related expectations of a fairly soft second quarter, and slowing money growth, we decided against raising the funds rate another notch. That decision was partly conditioned on an expectation that growth in employment, real output, and other measures was going to be a lot slower in the second half of the year in the context of fairly benign money growth. That did not happen in the third quarter, but at the September meeting we were still looking for much slower money and economic growth in the fourth quarter. So, we decided not to tighten policy then either. My guess is that if we had been focusing on nominal spending growth last May or any of the other measures of demand people want to focus on, such as real output growth, employment growth, the unemployment rate, or various measures indicating capacity pressures in the economy, we probably would have raised rates at that time and we probably would be glad today that we did. We would not have financed so much demand over the past six months that induced a lot more imports and enabled the Asians to get themselves into a deeper hole. However, of the various reasons for not acting now, I think the Far East crisis is among the better reasons.",286
-fomc-corpus,1997,Governor Kelley.,3
-fomc-corpus,1997,"Mr. Chairman, as I said earlier, I think this is a remarkable time in the sense that we face very substantial risks, both up and down. This leads me to support strongly your proposal for a ""B"" symmetric directive. But there is another interesting reason for symmetry this time. It relates to some asymmetries that I see in terms of the time frames within which these different sets of risks might present themselves. The downside risks primarily revolve around the Asian situation, and if that situation blows up and forces some kind of policy easing move, that is liable to happen reasonably soon and probably fairly dramatically. On the other hand, the upside risks that have been with us for a long time are liable to emerge over the longer term and more slowly. As a consequence, we would have a better opportunity to respond if that is the way to go. So, the short-term risks seem to me to be more on the downside, and we presently have an asymmetric directive toward tightening. I would prefer not to face the prospect, should it emerge, of going all the way from an asymmetric directive toward tightening to an easing move in an intermeeting period. If we were to adopt a symmetric directive now, I believe we would then be very well positioned to respond to whatever might emerge as time goes on, whenever it might emerge. Thank you.",269
-fomc-corpus,1997,Governor Meyer.,3
-fomc-corpus,1997,"Thank you, Mr. Chairman. Given the expected effects and uncertainty related to the Asian turmoil, I agree that we should hold policy unchanged today. Because the risks are better balanced, I also support a move to a symmetric directive. It is, as President Boehne suggested, likely to be a much better description of our intermeeting posture. I believe a symmetric directive has the advantage of signaling our flexibility to respond quickly to a worse case scenario, should it materialize, without changing our view that the next move is still likely to be in a policy tightening direction. Thank you.",117
-fomc-corpus,1997,President McTeer.,5
-fomc-corpus,1997,"I supported a symmetric directive before Governor Kelley talked about the relative timing of the various risks, and I support such a directive even more after hearing his comments. It is doubtful that we will have to ease in the near future, but it certainly would be embarrassing to ease with an asymmetric directive toward tightening. So, I support your recommendation.",67
-fomc-corpus,1997,Governor Gramlich.,4
-fomc-corpus,1997,"I am for ""B"" with symmetry. I say that both from an international standpoint and a domestic standpoint. The one thing that gives me pause is that if we wait to see evidence of inflation, given that there are lags in monetary policy, it could be too late. I think that is a cost that we need to keep in mind, but I still conclude, given the current data on the economy and the international situation, that ""B"" with symmetry is the most logical course of action.",101
-fomc-corpus,1997,"First Vice President Rives, do you want to add anything to this discussion?",16
-fomc-corpus,1997,"Thank you, Mr. Chairman. Real GDP growth through the first three quarters is above most estimates of potential growth. Fourth-quarter estimates and forecasts are sharply higher than they were earlier in the year. Personal spending and credit growth are expected to end the year on a high note. The broad monetary aggregates, M2 and M3, are growing at or above the announced target ranges. On balance, it appears that the surprisingly low rate of inflation in 1997 may give way to higher inflation in 1998 and beyond. Nevertheless, continued turmoil in the Asian markets argues for a steady policy prescription at this meeting. In my view, the FOMC continues to face the challenge of when and how to lock in recent gains on inflation. We would support ""B"" asymmetric.",156
-fomc-corpus,1997,"There seems to be a very substantial majority for ""B"" and a modest majority for symmetry. Would you read the directive in that context?",28
-fomc-corpus,1997,"The directive is on page 14 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a slightly higher federal funds rate or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the growth of M2 and M3 over coming months.""",128
-fomc-corpus,1997,Would you call the roll on that directive?,9
-fomc-corpus,1997,Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus No Governor Ferguson Yes Governor Gramlich Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes,48
-fomc-corpus,1997,Thank you. Our next meeting is--,8
-fomc-corpus,1997,February 3rd and 4th.,9
-fomc-corpus,1997,February 3rd and 4th. The lunch to bid farewell to our colleague from St. Louis is scheduled to begin in about three minutes.,30
-fomc-corpus,1998,"Good afternoon, everyone. I would like to begin as we always do at the first meeting of the year by turning the floor over to the Board's senior member, Governor Rivlin.",37
-fomc-corpus,1998,Thank you. This is the election you all have been eagerly waiting for! The floor is open for nominations for Chairman of the Federal Open Market Committee. Is there a nomination? [Laughter],39
-fomc-corpus,1998,I nominate Alan Greenspan.,6
-fomc-corpus,1998,Alan Greenspan. That is a good idea.,10
-fomc-corpus,1998,I will second that.,5
-fomc-corpus,1998,"Are there any further nominations? All in favor say ""aye."" SEVERAL. ""Aye.""",21
-fomc-corpus,1998,Now the floor is open for nominations for the Vice Chair of the Federal Open Market Committee. Are there any nominations?,23
-fomc-corpus,1998,"After long and careful consideration, I nominate President McDonough.",13
-fomc-corpus,1998,"With even longer consideration, I second the nomination.",10
-fomc-corpus,1998,"Are there any further nominations? All in favor signal ""aye."" SEVERAL. ""Aye.""",21
-fomc-corpus,1998,The deed is done.,5
-fomc-corpus,1998,We now turn to Mr. Bernard to give us a list of the officers who are on the slate.,21
-fomc-corpus,1998,"Secretary and Economist, Donald Kohn Deputy Secretary, Normand Bernard Assistant Secretaries, Joseph Coyne and Gary Gillum General Counsel, Virgil Mattingly Deputy General Counsel, Thomas Baxter Economists, Michael Prell and Edwin Truman Associate Economists from the Board: David Lindsey; Larry Promisel; Thomas Simpson; and David Stockton. Associate Economists from the Federal Reserve Banks: Lynn Browne, proposed by President Minehan; Stephen Cecchetti, proposed by President McDonough; William Dewald, proposed by First Vice President Rives; Craig Hakkio, proposed by President Hoenig; and Mark Sniderman, proposed by President Jordan",131
-fomc-corpus,1998,"If there are no objections to that slate, I will assume that it has been appropriately voted upon. The next item on the agenda is the selection of a Federal Reserve Bank to execute transactions of the System Open Market Account. Would somebody like to make a suggestion in that regard?",55
-fomc-corpus,1998,"Mr. Chairman, I would like to recommend the Federal Reserve Bank of New York to assume that responsibility.",21
-fomc-corpus,1998,"Without objection, I will assume that it has been appropriately voted upon. The incumbent Manager of the System Open Market Account is Peter Fisher. Would somebody wish to renominate him?",35
-fomc-corpus,1998,I renominate Peter Fisher.,6
-fomc-corpus,1998,"If there are any other nominations, Peter may object, but that is probably irrelevant! I assume there are none. Would somebody like to second that nomination?",31
-fomc-corpus,1998,I second it.,4
-fomc-corpus,1998,"Without objection. Now that he is officially ensconced, we can go back to work. Peter, you are on.",25
-fomc-corpus,1998,"All right, Mr. Chairman. I sent a memorandum to the Committee suggesting two modest changes to the Authorization for Domestic Open Market Operations. I think that is the next item. One is a permanent increase in the intermeeting leeway from $8 billion to $12 billion. The other is to remove from the Authorization the references to bankers acceptances that have been inoperative lo these many years. I think the memorandum speaks for itself. I would be happy to answer any questions.",96
-fomc-corpus,1998,"If there are no questions, would somebody like to move amend the Authorization as proposed?",17
-fomc-corpus,1998,Move approval of the Authorization with the modifications proposed in Mr. Fisher's memo.,16
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,Without objection. Mr. Truman.,7
-fomc-corpus,1998,"I sent a memorandum to the Committee containing the current versions of the Foreign Currency Authorization, the Foreign Currency Directive, and the Procedural Instructions. No amendments are recommended. The memorandum includes a review of the warehousing authority, also with no proposed amendment of the current arrangement of $5 billion. I will answer any questions.",64
-fomc-corpus,1998,Questions for Ted?,4
-fomc-corpus,1998,"Move approval, Mr. Chairman.",7
-fomc-corpus,1998,Is there a second?,5
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,Without objection.,3
-fomc-corpus,1998,I do want to dissent on that.,8
-fomc-corpus,1998,It is on record.,5
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,Any other dissents? [Secretary's note: No other dissents were heard.] May I have a motion to approve the minutes?,27
-fomc-corpus,1998,Move approval.,3
-fomc-corpus,1998,"Without objection. Peter, you are on again for your report on Desk operations.",16
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to the three pages of color charts that were placed in front of you before the meeting started. 1/ The first page updates the charts I have shown before on current and forward three-month deposit rates. In this case, I am presenting a full 13 months of data so you can see recent developments in the context of a longer period of time. If you look at the top panel, shown in red, you can see the abrupt downward shift in U.S. forward rates that occurred right after the New Year. I think it is interesting that not much else has happened other than an abrupt move down. The forward rates do not show much of a rising rate environment or falling rate expectations. They are flat and right on top of one another after their downward shift, which I will come back to in a minute. The flattening of the forward deposit rate curves really began in late October when the Dow lost 554 points. It is quite dramatic how flat the forward curves of expected three-month rates have become for the United States. Looking at the middle panel for Germany, shown in blue, you can see the continued modest decline in German forward rates. I think this continues to reflect three factors. First, there is a widening consensus that when the European central bank comes into existence 12 months from now, the initial policy rate is likely to be in the mid to low 3 percent range, and that is down from market expectations of higher rates. I think there has been a widening appreciation that the Asian crisis will have a greater impact in Europe than the Europeans initially thought, and that has begun to weigh on the outlook for economic activity in Europe. I believe those two developments combine to create a third factor in that the market really sees very little risk of a pickup in activity in the German economy or the European economy more generally in the months ahead, so rates have been winding down in Europe. In the green bottom panel, you can see at the lower right that there has been some rise in forward rate expectations in Japan as we have moved into the New Year, but the curve is still very flat. I find it interesting that the forward rates have backed up a little, but the rise is not close to being as dramatic as the movements in the Nikkei and the yen in reaction to what the markets have seen as a very aggressive move by the Ministry of Finance to try to stabilize the financial sector and undertake some stimulus in the economy. I think it is noteworthy that the forward rates depicted here are nowhere near the levels that they reached last May when there last was something of a burst of optimism, in the Japanese context at least, regarding the possibility that the tax impact that came in with this fiscal year might not be as bad as feared, and there were some hopes the Japanese economy might start recovering. The point here is that we are not even near those levels even if there is some modest uptick in the Japanese forward rates. Turning to the second page, I would like to delve into the question of how to interpret recent movements in the U.S. Treasury yield curve. In the top panel, you can see 30-, 10-, and 2-year Treasury yields in green and the implied fed funds effective rate in red from the April fed funds futures contracts as they traded in December and January. I would like to step back and give a little background. In December, as yields and the yield curve were pressing lower, there were a number of market participants, myself included, who thought that with the start of the new year we would begin to see a modest backup in yields. The backup was not expected to be dramatic, but it was thought that yields would rise at least to the levels that existed in early December. This would occur as a consequence of the unwinding of a year-end flight to quality when investors were rushing out of emerging markets and into U.S. Treasuries. The thought was this would begin to unwind itself during January. In particular, the managers of a number of major mortgage-backed securities portfolios took that view. They may have gone home for the New Year holiday somewhat short of their normal duration targets with the idea that they would be able to catch up more easily in the gently rising yield environment they expected to see in January. At the start of the year, there were three surprises for the market that came very quickly and changed that outlook rather dramatically. One was a shift in expectations for monetary policy. The second was a rather sudden jump in demand for Treasuries and other securities stemming from the Asian crisis, some actual and some anticipated demand. The third was confirmation of a changed outlook in the supply of Treasury securities. Let me go over each of those. The first came as a result of the Chairman's speech, and its market effect is depicted in the area of the chart associated with the line marked ""January 3."" The Chairman discussed the problems of price measurement in a low inflation environment, and over that weekend the market interpreted his comments to mean that the Committee and the Federal Reserve had moved to a symmetric outlook on the risks for policy. Later that week, after Governor Meyer's speech on January 8, which included a discussion of easing, the market jumped on that part of the speech and interpreted it as meaning that the Committee probably had a slight bias toward an easing move or, if you will, that the greater probability was now in the direction of an easing in policy. I am not passing judgment on whether either of these interpretations represented a fair reading of the texts, but that is the way the market interpreted them. So, by the end of that first week in January, there was a quite significant shift in expectations for the stance of monetary policy. Two other things happened that week. One, at the beginning of January there was a further sharp depreciation of a number of East Asian currencies as business corporations in those countries rushed into the markets to try to hedge their exposures for the new year. It was a rather ham-handed, inexperienced effort to hedge their dollar exposures. They had avoided the thin markets in December in the expectation of jumping into the thick markets of January, but they found that they were causing the currencies to move rapidly away from them. That gave a further boost to the dollar and a further anticipation of very strong demand coming into the Treasury market. The third factor, not to be overlooked, is that on Monday, January 5, the White House announced its expectation that the fiscal budget for 1999 would be in balance. While the market knew developments were moving in that direction, that news hit the market the same day that it had its first opportunity to respond to the Chairman's speech over that weekend. All of these developments taken together, which may have caught some of the major players slightly short of their duration targets, led to something of a rush. You can see in the top panel of Chart 2 that in the first week in January both the 2-year and the 10-year rates moved down through the fed funds target rate level depicted by the solid black horizontal line. I think the challenge is how to weigh or untangle the three different factors: the shift in expectations, the supply, and the demand factors influencing the market. In the middle panel on the left, the implied yields in fed funds futures are depicted from now through August. The implied fed funds rate curves are shown for December 16, the date of the Committee's last meeting, for January 9, the end of that first heady week of January, and for last Friday, January 30, when rates backed up a little. In the right panel is a snapshot of the Treasury yield curve for the same three dates. As I look at the fed funds rate curves in the panel on the left, I see that the market is pricing some probability but not the certainty of an easing action. It is not a particularly strong expectation that policy will be eased any time in the next six months, but clearly that is the direction where the probabilities lie. With regard to the Treasury yield curves shown in the middle panel on the right, many market participants look at the fact that the 2-year note is now trading significantly below the funds rate and take that as a very strong sign or conviction that an easing move is near at hand. Indeed, over the last decade each time that the 2-year note has traded definitively through the funds rate, there has been an easing in policy within the following three months. So, there is some historical background for that view. But I believe it is important to keep in mind when we try to interpret the yield curve that the fed funds futures contracts and the forward rates suggest only some probability of an easing in policy rather than a certainty. When I look at the yield curve, I see a strong conviction that there will be no tightening within the next six months, and I think that conviction is permitting the rather novel set of demand and supply conditions to migrate into the intermediate sector of the curve and thereby promote greater confidence among investors that they can carry 2- and 5-year paper without the risk of a backup in rates induced by the Committee. I would note two things. First, the entire bill curve, even in the 1-year sector, was already below the federal funds rate at the time of the Committee's last meeting. Moreover, while the entire yield curve--from 3 months to 30 years or 3 months to 10 years depending on how you slice it-- has declined a bit over the intermeeting period, the coupon curve from 2 to 30 years actually steepened over the same even as it shifted slightly lower. So, while there clearly has been a shift in policy expectations in the market, I for one do not think it is as pronounced as a straight reading of the intermediate sector of the yield curve might lead one to conclude. In the bottom panel of page 2, you can see the movements in the dollar and get a sense of the run-up in the dollar that occurred at the end of last year and the first few days of this year. Clearly, the yen strengthened over the course of January as the Ministry of Finance worked very hard to communicate their intent to stabilize the financial sector of the Japanese economy. I would note that the dollar/mark is very little changed over the period from the high levels it reached at the end of the year. Turning to the last page of charts, I will briefly discuss our open market operations during the period. I would like to make just a few points. First, in the first maintenance period shown on the left side of the upper panel, we had both pronounced softness in the market around the Christmas holiday and then the year-end pressures; so, we had a ying-yang maintenance period. We tried to manage both that softness and then the firmness. In the next maintenance period, which ended January 14, we began the period by adding reserves, but we subsequently had repeated days of fog-induced float that led to a certain sogginess in the market. So, we ended up being on the other side of the market, draining reserves that resulted from a considerable rise in float. Early in the third period, on January 16, the unexpected size of corporate tax payments led to a miss of just under $3 billion in our projection of the Treasury balance. That contributed to a very high fed funds rate, which rose as high as 20 percent on that day, and there was some borrowing from the discount window. So, January 16 was one of the difficult days we faced during this period. I would note that in the current period just under way, which is not depicted here, we again were supplying reserves in the last few days in anticipation of the settlement on new Treasury securities yesterday. Today, we have been draining reserves. We knew we would in fact have this heightened demand yesterday, but we anticipated soggy conditions as we came to the end of the period. I would also like to mention something not depicted in these charts to make sure the Committee members are all aware of the transactions in question. Just before Christmas, we confronted an order from the Japanese authorities to sell in Treasury bills. In the absence of We took of bills into the SOMA account, selecting bills that we would be able to run off in the course of January so as not to make our need to drain reserves any worse at the end of the month. We sold for them in the market and took another out of the repo pool, where we have had an elevated cash balance for them, to help them in effect to meet their cash needs. We also actually arranged a transaction between the Bank of Japan and the Ministry of Finance during the period; one wanted to sell bills and the other to buy. This transaction was associated with their very heavy intervention in late January, and we tried to organize the financing this way to minimize the impact on the bill market. At the same time, my colleagues at the Bank of Japan were faced with the problem of how to sterilize the intervention on the other side and get enough yen back into their market to avoid a spike in rates. I just wanted to inform the Committee of these transactions. We had no foreign exchange operations for the System during the intermeeting period. I will need the ratification of our domestic operations, and I would be happy to answer any questions.",2693
-fomc-corpus,1998,"You raised an issue that I frankly have not thought about in a long time when you referred to fog-induced float. I remember years ago that this was a relatively usual occurrence. That is, weather-related transportation difficulties caused float to fluctuate sharply. What has been the experience in recent years?",57
-fomc-corpus,1998,"In the last several years, I do not recall that many instances of sharp variations in float.",19
-fomc-corpus,1998,Is it technology that is stabilizing float? What is happening?,13
-fomc-corpus,1998,"Sandy Krieger says the weather has been better! [Laughter] Sharp, unanticipated fluctuations in float now tend to happen only with extreme weather. The blizzards we had a couple years ago that closed the city of New York created some extraordinary float around the time of the holidays. The improvement we have seen may have been the result of technology and a better working check clearing process, but I do not have any particular insights beyond that. My sense over the last six months to a year, however, is that we are seeing a little more variation in float, and as operating balances get lower and lower, a given miss on float proportionately matters a lot more.",136
-fomc-corpus,1998,Governor Rivlin says it is El Nino. [Laughter],14
-fomc-corpus,1998,The improvement is due to a lot of effort on the part of many people all around the Federal Reserve System. They have been dedicated to reducing float from a level that used to run in the range of $2 to $3 billion a day and is now below $100 million on most days.,59
-fomc-corpus,1998,"In other words, we have float down too far to float!",13
-fomc-corpus,1998,"Right! First of all, we have made an enormous number of changes in the way we transport checks and other payment instruments and in the timeliness with which we do it. We have been very careful about the time frames in which we both give credit and transport items from one place to another. If you compare what we do currently to 1982, we now deliver twice as many checks in a single day to locations across the country as we did in 1982.",95
-fomc-corpus,1998,"Don't smile, Peter, the next thing that will come is a slip of paper that says your salary has been reduced.",24
-fomc-corpus,1998,That is deflation! [Laughter],9
-fomc-corpus,1998,"Peter, one; the Chairman, zero. [Laughter] Any further questions?",17
-fomc-corpus,1998,"Peter, we took a fairly sizable loss on our foreign exchange holdings last year. I know it was unrealized and I know that in some years we make a profit on these holdings. As I understand it, the unrealized loss or profit does affect the amount that we return to the Treasury in any particular year. This may be a dumb question, but is it at all feasible to consider hedging our exposure in some way?",86
-fomc-corpus,1998,"One could consider hedging it, but I think the policy inference of how we choose to hedge and how much we hedge would be rather awkward.",29
-fomc-corpus,1998,The act of hedging would be an act of intervention.,12
-fomc-corpus,1998,We don't want to do that! [Laughter],11
-fomc-corpus,1998,"Once you hold the foreign exchange, you intervene when you hedge it. It is as if you had reversed the intervention that occurred when you purchased the foreign exchange to begin with. Hedging is an alternative to intervention, and it has been considered on occasion. A similar question is whether we could do all the intervention in the forward market or the nondeliverable forward market. I don't think the Manager would recommend that.",84
-fomc-corpus,1998,"Not yet! If I may, President Broaddus, you mentioned unrealized losses or profits. We pass our net profits on continuously to the Treasury. They go through the P&L system and on to the Treasury throughout the year.",48
-fomc-corpus,1998,"I think that is a very important point. Although our unrealized profits or losses get announced once in the summary report for the year and therefore that is a big number, I think the policy that we have followed for some time now is to forward our net earnings to the Treasury every week, if I am not mistaken.",64
-fomc-corpus,1998,That is a new policy?,6
-fomc-corpus,1998,"No, it has been in existence for some years. The fact that we make payments to the Treasury periodically through the year does reduce the political dimension of this. In some foreign countries such as Germany, the central bank makes a payment once a year and the size and timing in and of itself is a political event. Leaving aside the comments that you made, which are perfectly reasonable, the fact that it is done routinely in bits and pieces as the foreign exchange value of the dollar rises and falls means that we essentially cushion it in terms of the political impact. Perhaps to further lower the impact we should not report it only in the annual statement.",128
-fomc-corpus,1998,"Mr. Chairman, I move approval of the domestic operations.",12
-fomc-corpus,1998,Hold on. Some of your colleagues may have more questions.,12
-fomc-corpus,1998,I was looking around and didn't see any. [Laughter],13
-fomc-corpus,1998,I will presume you are correct. Is there a second?,12
-fomc-corpus,1998,I will second it.,5
-fomc-corpus,1998,Without objection. We now move on to the Chart Show with Mike Prell and Karen Johnson.,19
-fomc-corpus,1998,"Thank you, Mr. Chairman. We will be referring to the charts in this colorful handout in front of you. 2/ Chart 1 summarizes the staff forecast. I should note that here, as in the other exhibits, we have used the Greenbook numbers for GDP-related variables rather than those in the BEA's advance release. We have done this partly for mechanical reasons but also with the thought that the differences are for the most part small and mainly matters of forecasting missing source data. Time will tell whose estimate is closer to the mark--though it makes me a bit uneasy knowing that they are the umpire as well as a contestant in this guessing game. In any event, on either set of numbers, we would be predicting a sharp deceleration of activity this year. As indicated in the top panels, we are predicting that real GDP growth will slow to about 1 percent this year and pick up to just 2 percent next year. We expect the growth of private domestic final demand, the red line on this chart, to fall off but not so sharply; in fact, we are expecting an advance of almost 4 percent this year. The story behind the near-term drop-off in overall GDP growth is inventories and the external sector, as we will be discussing shortly. The projected growth of output is slower than potential, and thus we anticipate an easing of pressures on resources. The middle panels show that the unemployment rate is predicted to rise to 5-1/4 percent by late 1999, while the factory utilization rate is expected to drop to 78-1/2 percent. This continues the recent pattern of disparate messages from the two utilization measures, with the jobless rate remaining so low that we would normally expect inflation to pick up by a few tenths of a percent per year, while the capacity utilization rate is below par historically and seemingly pointing to further disinflation. The forecast in the bottom panels essentially splits the 2/ Copies of the charts used by Mr. Prell and Ms. Johnson are appended to the transcript. (Appendix 2) difference, while also taking account of the other elements in the inflation picture. The core CPI inflation rate edges off slightly through 1999, while the overall index slows further this year and then accelerates discernibly next year. At least, that is what we foresee for the published data, a distinction I will return to later. Meanwhile, Chart 2 outlines the key financial and fiscal features in the outlook. First, our basic monetary policy assumption is that the fed funds rate will remain near the present 5-1/2 percent level. As you can see in the upper left graph, the real funds rate has been rising in recent quarters owing to the quarter-point snugging last March and a decline in inflation expectations--proxied here alternatively by lagging one-year PCE inflation and the Michigan SRC survey median. We anticipate that this real rate will remain at a relatively elevated level over the forecast period. We also expect that long-term rates will stay pretty much in the range of recent weeks. This implies the persistence of an unusually flat yield curve, as depicted in the upper right panel. Historically, so narrow a spread between long and short rates would appear to point to very weak GDP growth. However, this narrowing has occurred in an unusual way. Most commonly in the past, the narrowing of the spread occurred with Fed tightenings causing short rates to rise more than long rates. In this instance, though, policy action has been a minor factor, and the long rate has been influenced by, among other things, a flight to safety, diminished inflation expectations, and the prospect of federal surpluses. One thing is clear, though: whereas a year or so ago the markets evidently thought the Fed would have to tighten to keep inflation from rising, that is no longer the case. What to take from that observation is not entirely clear, but I would offer the speculation that it is not so much a reflection of a view that the economy is going to weaken drastically as it is an indication of the belief that favorable supply conditions-- including strong productivity gains and the availability of cheap imports--will be restraining price increases as the economy expands moderately. The ability of the stock market to achieve new highs in the face of the recent Asian storms would seem to support this upbeat interpretation of the yield curve developments. But, we believe that the market will decline about 10 percent from yesterday's record level by the end of this year. The key reason is the divergence between our forecast of profits and those apparently prevailing in the market today. The red line in the lower left panel of Chart 2 shows that stock market strategists--the so-called ""top-down"" analysts--are expecting S&P 500 earnings per share to grow roughly 6-1/2 percent this year and 51/2 next. The ""bottom-up"" summation of individual-company security analysts' views, not plotted here, is still well into double digits. The black line shows our forecast of a NIPA item that has tracked the S&P earnings relatively closely in recent years; as you can see, we are more pessimistic about the outlook. It is obvious to which drummer the market has been marching in the past few days; and there is a clear danger that this rally will provide additional stimulus to aggregate demand. The Greenbook provided a simulation of a more buoyant stock market for those of you skeptical of our predictive powers, which I assume is many of you at this point. Finally, on the fiscal side, we have assumed that there will be no significant net changes in policy in the near term. The unified budget is projected to be in approximate balance in fiscal 1998 and 1999. As I suggested earlier, a good deal of the action in our forecast has its roots in the external sector, so let me turn now to Karen, who will discuss that part of the outlook.",1200
-fomc-corpus,1998,"Financial market turbulence in Asia has dominated events abroad over the past six months. We have attempted to foresee how these events will influence prices, global trade, and thus output growth both here and abroad during this year and next. Despite our best efforts, uncertainty about exactly how these variables are linked and about how the key financial variables will behave in the near term is a major source of risk to our forecast. Your first international chart reports interest rate changes and developments in exchange markets, along with our forecasts for selected dollar exchange rates. The top left panel shows the change in the value of the dollar in terms of the yen and the mark since mid-1997. We believe that the relative strength of economic activity in the United States accounted for much of the rise in the value of the dollar over the year. Dollar assets also provided some security in a turbulent world. With U.S. output growth expected to slow, and given our assumption that the crises in Asia will not give rise to additional major surprises in that region or elsewhere, we look for the dollar to remain near recent levels in terms of these currencies. In terms of the Canadian dollar, on the right panel, we look for the U.S. dollar to retreat a bit from recent all-time highs. We expect the dollar to rise slightly in terms of sterling, which has been particularly strong recently. As is shown in the next row of panels, three-month interest rates have moved up since July in foreign industrial countries, particularly in Canada and the United Kingdom, where official central bank lending rates have been increased. Ten-year rates have generally fallen, however. On balance, long-term rates have moved down less in Germany and Japan than in the United States, perhaps reflecting capital flowing into U.S. instruments in search of safe-haven opportunities. The next panels show a range of selected Asian currencies, expressed as the U.S. dollar value of those currencies. In nominal terms, the Hong Kong dollar has to date successfully maintained its peg to the U.S. dollar, and we project that will continue. The Korean won and the Thai baht have lost about one half of their market value at the start of 1997. The drop for the Indonesian rupiah is even larger. There undoubtedly will be more volatility in these nominal exchange rates. But, as shown on the right, on balance over the forecast period we expect that rising domestic inflation will impart an upward trend to the real exchange rates of the heavily depreciated Asian currencies. For the Mexican peso, bottom left, slowing domestic inflation and some nominal depreciation should prevent further real appreciation. A broad measure of the exchange value of the dollar in terms of 29 currencies --weighted to reflect the competitiveness of U.S. exports and adjusted for relative consumer prices--is shown in the bottom right panel. Taken together, our projections for dollar exchange rates imply that, for this measure of the dollar, the extended real appreciation that began in early 1995 will give way to some modest real depreciation of the dollar. Your next chart translates our outlook for exchange rates and foreign prices into prospects for U.S. import prices. The top left panel presents what evidence we have of the effect to date on U.S. import prices of the events in Asia. Prices of imports from the Asian NIEs and from Japan continued to fall rapidly through the fourth quarter, in contrast to prices of imports from other industrial countries. The right panel shows some results of our efforts to use models to calculate the contribution of foreign consumer prices and exchange rates to average U.S. import prices. Our research shows that it is useful to separate prices in the foreign industrial countries--translated into dollars using nominal exchange rates (the black line)--from prices in the nonindustrial countries, also expressed in dollars (the red line). The very sharp declines in the exchange rates of many countries in the latter group result in the much steeper drop during 1997 that is evident in the red line. In addition, in our analysis of import prices, we need to allow for impulses from non-oil commodity prices (in the middle left panel) and oil prices (the middle right panel). Non-oil commodity prices are expected to continue their downward trend throughout the forecast period as supplies of these commodities generally remain ample and as economic distress in Asia weakens global demand. Oil prices have already decreased significantly and are expected to edge down a bit further before partly retracing their decline. The present softness in oil markets reflects additional oil supply from some Persian Gulf producers and mild winter weather in several regions that has depressed demand. The bottom panel reports results of our efforts to take account of these factors in forecasting the prices of core imports--that is, imports of non-oil goods other than computers and semiconductors, shown by the black line--and prices of total imports of goods and services, the red line. The solid black bars show the model's calculation of the contribution of prices in foreign industrial countries to the forecast for core import prices; the open black bars do the same for prices of the nonindustrial countries. Our analysis suggests that the extreme depreciations in some Asian currencies were an important influence in the decline of import prices late in 1997 and will continue so in early 1998. However, our estimates suggest that the effect of a given percentage change in dollar prices in the nonindustrial countries on U.S. import prices is about one third of the effect of the same change in prices in foreign industrial countries. Thus, the disinflationary impact of price developments in Asia on U.S. import prices is limited. Prices from both groups of countries are projected to switch to exerting slight upward pressure later this year. Our outlook for output abroad, the subject of your next chart, incorporates our judgment about the implications of financial developments in Asia for activity in that region and our estimate of the spillover effects of those developments onto growth in other regions. Growth abroad, the red bars in the top left panel, is estimated to have dropped sharply in the fourth quarter and is projected to remain weak this year before recovering partially next year. As can be seen in the top right panel, swings in projected growth in the Asian developing countries account for the lion's share of the fall in average growth abroad. Growth in the Latin American developing countries and in the industrial countries is expected to be weaker this year and next than in 1997, in part the result of spillovers from events in Asia. As reported in the middle left panel, the Asian developing countries account for nearly 20 percent of U.S. exports. Our reading of developments to date is that output growth in Korea and in several southeast Asian countries will be pushed into negative numbers as domestic demand is severely reduced by the financial market turmoil, higher domestic interest rates, restricted availability of credit, and macroeconomic policy measures put in place in these countries. We look for recovery to begin in 1999 in response to strong external demand and success on balance in implementing the structural reforms now under way. In ""greater China,"" some asset market disruption and loss of export competitiveness as a consequence of currency depreciations by neighbors is expected to weaken growth this year and to restrain the rebound next year. This forecast incorporates the substantial improvement in external balances in Asia that we believe global financial markets are demanding. The bottom left panel compares our forecast for the aggregate current account balances of the Asian region in the current Greenbook (the black bars) with that prepared in September (the red bars) when it appeared that adjustment would be limited to one or two smaller Asian countries. We now estimate that the aggregate Asian external balance for 1997 already has adjusted significantly. Substantial further adjustment is expected to be accomplished quickly during this year; the emergence of sizable surpluses should reassure markets, thereby easing credit availability and permitting moderation of some policy measures. Growth in domestic demand should then resume. You can see in the right panel for the Latin American countries that only a small positive revision has been made to our forecast since September. This aggregate masks substantial changes since September in our forecasts for individual countries. Nevertheless, we are assuming that these countries will not experience the kind of financial crises that would force substantial external adjustment. Chart 6 contains our forecast for the industrial countries and some of the factors that lie behind it. Real GDP growth in most of these countries, the top left box, is expected to slow this year, in part as a consequence of weaker export demand from Asia. In Japan, large direct effects of downturns in the troubled Asian countries came on top of domestic factors that weakened domestic demand and the result was little growth on balance last year. We expect only limited recovery during the forecast period as the move from fiscal contraction to a more neutral stance yields a bounceback in domestic demand that is partially offset by weakness in the external sector. The panel on the right shows measures of the yen and the mark calculated as weighted averages based on their exports and adjusted for relative consumer prices. These measures suggest that, in effective terms, these currencies appreciated in 1997--with the yen moving further over the year as a whole. This effective appreciation should act as a drag on the external sector for much of the forecast period. Our exchange rate projections imply some real effective depreciation this year and next, especially for the yen, that should help to boost the Japanese and German economies in 1999. The extent to which the other industrial countries are vulnerable to spillover effects from Asia is suggested by the data in the middle panel. While Japan exports a fraction of its GDP similar to that for the United States, a far larger share of its exports has been to the Asian developing countries. The European Union members, when taken together so that intra-EU trade is excluded, closely resemble the United States. The bottom panels show the available information on business confidence. The downturns evident for the Canadian, U.K., and Japanese measures in the second half of 1997 likely are at least in part a response to the Asian crises. In the European countries shown on the right panel, business confidence leveled off in late 1997. In France, where we have a reading from January, confidence remained at a high level but there were some reports of lower foreign orders, perhaps a hint of Asian effects to come. The final international chart presents our conclusions about the path of real net exports over the forecast period. The black line in the upper left panel, projected growth of core imports--the volume of non-oil goods excluding computers and semiconductors --is shown slowing on a four-quarter change basis through the end of 1999. Our models decompose the contributions of U.S. GDP (the black bars) and relative prices (the red bars). Through part of 1998, the stimulative effect of the recent dollar appreciation increasingly boosts import demand, partly offsetting the restraining effect of slower U.S. GDP growth. From mid-1998 through mid-1999 both variables are working to decelerate core imports. In the upper right panel, projected growth of real core exports--the line--drops sharply, starting now. Relative prices are working to cause exports to decline throughout the forecast period. The robust contribution of foreign growth to our export performance that occurred in 1997 is projected to be followed by significantly diminished contributions this year and next. Growth of total exports and imports is depicted in the lower left panel. As you can see, the slowing that we expect in export growth--the black line--greatly exceeds that projected for imports--the red line--a consequence of the real dollar appreciation that we have seen. In addition, we have not extrapolated into the forecast period the surprising strength in real export growth that occurred in the first half of 1997--the part not explained by the bars in the upper right panel. With real imports growing significantly faster than exports throughout the forecast period, the contribution of real net exports is negative. As the data in the box show, real net exports likely will subtract nearly one percentage point from real GDP growth this year and about half that in 1999. Mike will now continue our presentation.",2430
-fomc-corpus,1998,"The next two charts focus on the dynamics of private demand in the forecast. First, in Chart 8, the upper left panel shows real PCE growth holding at a high rate for a while longer and then dropping off to 2 percent in 1999. All signs look positive for consumer spending in the short run, among them the historically high level of sentiment portrayed at the right. Surely, one of the factors accounting for these favorable attitudes is the run-up in stock market wealth. As I noted earlier, we are expecting the market to give back a small share of its gain, causing the wealth-income ratio to fall off--as shown by the black line in the middle left panel. The experience of the past year has reinforced our belief in the significance of the wealth effect on consumption; thus, we are predicting that the personal saving rate will drop further over the next few quarters in lagged response to last year's market advance and then level out in 1999. An added attraction in the story of strong consumer demand is the current wave of mortgage refinancing. The run-up in the MBA refinancing applications series, plotted at the right, probably exaggerates the relative dimension of the interest savings that will be realized by households in this episode, but there should be enough to give a small lift to spending. The decline in mortgage rates obviously has made home purchase more affordable. As documented at the lower left, our usual measure of the cash flow burden of ownership shows that, by this criterion, now is the best time in decades for the average family to buy a house. In our forecast, this remains so, and--with little supply of unsold new units overhanging the market--we see single-family housing starts holding up well through next year, despite the slowing of job growth. A very close inspection of the right panel, perhaps requiring a magnifying glass, shows that multifamily starts--the reddish upper layer--spurted in the fourth quarter of 1997. We do not expect that higher level to be sustained--although there may be some upside risk here, given the generous availability of financing for developers. The bottom line is that residential investment, which rose substantially in 1997, is likely to flatten out soon and then edge lower. Softening export and consumer demand will tend to cause businesses to trim their capital spending programs over the coming months--the so-called accelerator effects. The upper left panel of Chart 9 shows that through some large quarterly gyrations indicated by the red line, real business fixed investment remained on a strong growth trend last year. We foresee a notable slowing but not a collapse. Indeed, as indicated at the right, we estimate that the level of spending will sustain the recent 3 percent-plus growth of the business capital stock through the next two years. This is high enough to produce further sizable increases in the amount of capital per worker. Among the forces spurring this capital deepening is the rapid decline in the price of computers, shown in the middle left panel. The combination of further price reductions and increasing power should be enough to keep real computer purchases on a steep growth trajectory. Orders for nondefense capital goods, ex aircraft, shown at the right, have waffled a bit in recent months, but from what we hear, we do not think this is a major turning point in domestic equipment spending. I might note that, in the near term, this series will have to be read with extra caution when gauging the strength of domestic purchases. International trade is very important in this sector, and by all reports--and perhaps reflected in yesterday's NAPM survey--equipment orders from Asia have begun to weaken. Likewise, at some point, U.S. firms may find some bargains in imported capital goods, although this is likely to be a lesser part of the story and more concentrated in computers. Another key element in the projected economic deceleration this year is inventories. Nonfarm stocks rose around 5 percent last year, clearly an unsustainable rate. We are expecting a deceleration over the next few quarters to roughly 2 percent. Admittedly, we have been telling this story for some time. Perhaps, however, the risk of another upside surprise has been diminished by the rise of the stock-sales ratio that you can see in the right panel. In retrospect, it looks like firms found themselves with leaner-than-desired inventories at the end of last year and have been restocking--with the added ingredient of the Boeing production ramp-up. Of course, with no broad overhang of unwanted stocks at this point, any upside surprise in final demand relative to our forecast could again be reinforced by an inventory response. Let me turn now to the question of the implications of the projected growth for inflationary pressures. Chart 10 shows some key features of our labor market forecast. In the upper panel, you can see that we expect a slowing of labor productivity growth in the near term and then a return to roughly trend growth in 1999. As we noted in the Greenbook, a number of considerations came into play in this forecast, but central is that there will be some lag in the adjustment of hours and employment to the slowing of output growth. Certainly, at this point there is no sign of a major slackening in hiring. Initial claims and a variety of other indicators suggest that the January and February labor market reports will show still sizable increases in payrolls--albeit not on the scale of those reported for the fourth quarter. But we expect firms to respond before long to the evidence of softening demand, and--as you can see at the middle left--we are looking for monthly payroll increases to drop below 100,000 this spring. On the other side of the ledger, we do not foresee any significant movements in the labor force participation rate. A reduced growth in job opportunities will tempt fewer people to enter the labor market, balancing off a modest positive effect of welfare reform. On balance, as I noted earlier this all results in a rise in the unemployment rate, but not to what we would regard as implying the absence of wage pressures. The latest ECI release showed a big jump in compensation in the fourth quarter, which we are discounting heavily in our assessment of ongoing trends. First, we always downplay the quarterly numbers because they are so noisy; but, second, in the present case they seem to have been importantly influenced by a few non-recurrent industry developments and the minimum wage hike. That said, we do believe that the tightness of the labor market gave an underlying lift to the trend of compensation gains last year, especially on the wage side. Our forecast, however, is that wage increases will diminish slightly this year and next, owing to the lagged effects of falling price inflation and inflation expectations. Meanwhile, benefit cost increases are expected to be a little larger, owing primarily to rising health insurance premiums. The net outcome, tabulated at the right, is a slight drop-back in compensation inflation to just over 3 percent by 1999. If one viewed prices as being determined in the short run by a mark-up over trend unit labor costs, this might suggest a pretty sanguine outlook for price inflation. An alternative view, though, is that the more reliable modeling approach is to link price inflation directly to resource utilization, letting wages and the share of income going to labor be a side show. But, in implementing this latter formulation, one must choose a measure of resource utilization. Traditionally, it has been the unemployment rate, but it is far from clear what really works best. The upper panels of Chart 11 illustrate this quandary. On the left side is a scatter plot of the unemployment rate versus changes in CPI inflation; on the right is the corresponding plot for the manufacturing capacity utilization rate. As your eye will tell you and the cited R-squares will confirm, there isn't much to choose between the two versions. That is because the jobless rate and the capacity utilization rate generally have moved together. But that has not been so true of late; capacity has been growing very rapidly in manufacturing, and the factory utilization rate has been only a bit above average in the past year while the unemployment rate has fallen to quite a low level by past standards. Reflecting this, the inflation forecasting ""error"" in 1997, as measured by the vertical distance to the regression line, was smaller for the utilization rate than for the unemployment rate relation. We do not want to make too much of this observation. First, these clearly are loose relationships historically. And second, we have yet to develop a compelling story for why plant use would systematically be pivotal in the overall inflation process. Under the circumstances, our forecast involves what we hope is a judicious weighting of the signals coming from the two indicators of inflationary pressure. Certainly, at this juncture, despite the tightness of the labor markets, there is no anecdotal support for the notion that prices are about to firm; indeed, in goods markets, prices may well decline in the near term. The competition from cheaper imports obviously is a factor there. Also pointing to a lower inflation outlook this year than might be suggested by the unemployment rate alone is the likelihood that food prices will increase relatively slowly--the middle left panel--and the favorable consequences of the oil cost developments that Karen described for consumer energy prices--the right panel. In both instances, however, we are looking for some pickup in 1999. The bottom panel summarizes once again our projection for total and core CPI inflation, the value-added in this version being the addition of the effects of the technical changes in the index made by the BLS since 1994. As you can see, the trend of inflation--as indicated by the total height of the bars--is somewhat less favorable when viewed from this perspective, but the acceleration in prices still is not dramatic. From where we were last year, the pickup by 1999 is only on the order of a quarter percentage point in the core CPI; even measured on a basis consistent with the 1994 figures, core and total CPI inflation would still be less than 3 percent next year. As the Bluebook simulations suggested, a plausible extension of the Greenbook baseline might show inflation trending up still further after 1999, in the absence of some policy action, but perhaps only a moderate one. Under the circumstances, and with all the uncertainties in the outlook, we did not think it unreasonable to stick with a stable funds rate assumption in formulating this projection. The final exhibit summarizes the forecasts you submitted. You folks generally are predicting stronger growth and higher inflation, but with an unemployment rate similar to ours. It is tempting to enter into some mind-reading about what might lie behind the different behavioral relationship, but I expect that this will become apparent in the discussion. I might also note that in the Humphrey-Hawkins report, the Board is effectively required to comment on the consistency of your forecasts with those of the Administration; their CPI forecast is at the high end of the central tendency range I have constructed for you, while their growth rate is at the low end and their unemployment rate above yours. I will stop here; we will be happy to answer whatever questions we can.",2262
-fomc-corpus,1998,"Let me say first that as is usually our procedure, we will allow the forecasts that you submitted to Mike Prell to be subject to revision until the close of business on Monday, February 9. Questions?",42
-fomc-corpus,1998,"Mike, I want to ask a question related to your confidence in the consistency of the financial and the real forecasts. I would like to get Peter's reaction from the market's standpoint and from the Desk's as well. Looking at Chart 1, Chart 2, and the Greenbook numbers, let us imagine that six months from now, maybe at the FOMC meeting in August, these projections have been borne out by the data reported for the first two quarters. In that event, we would be looking at real GDP growth of 1 percent for the second quarter and an average rate of inflation, as measured by the CPI, of 1.1 percent for the first half. Bond yields would be about the same or higher than they are today.",153
-fomc-corpus,1998,"Let me say that in our forecast we anticipated that a considerable proportion of market participants would be expecting us to ease in that economic environment. So, we actually have long rates coming down from their current levels. We indicated in the Greenbook that they probably would go down to their recent lows and possibly through them. We think the incoming news in the next few months is going to create a much more bullish atmosphere in the intermediate- and long-term sectors of the market.",93
-fomc-corpus,1998,"In my presentation, I pointed to the possibility that bullish sentiment is already building in the market. This is one of the anxieties that I have in looking at the market.",35
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,"It is not uncommon to find forecasts that indicate a little more strength in the bond market than ours does over coming months. Those forecasts are associated with predictions of 30-year Treasury rates in the area of 5-1/4 to 5-1/2 percent, and there are those who are looking for a rate of 5 percent in the not too distant future.",76
-fomc-corpus,1998,"The question was really about confidence in the consistency of the two sets of data, the national income and product account numbers and the financial. When I look at the Blue Chip forecast, for instance, it is not clear to me to what extent such a forecast is already built into the current market. If this Greenbook projection is already close to being built into current markets, that is one thing--",79
-fomc-corpus,1998,"I think our economic forecast is weaker than most of those in the market. There are people with even weaker forecasts than ours for 1998, but the Blue Chip consensus looks more like your forecasts at this juncture, and it appears to be associated with essentially stable short-term rates.",57
-fomc-corpus,1998,"How much of an error in the Greenbook projections for the next two quarters, the current quarter and spring quarter, would be required before we had a significant backup in market interest rates? To what extent does the market in this sense need to see something close to this kind of projection to hold these levels versus a surprise in the other direction?",68
-fomc-corpus,1998,"Peter may have greater insight into this than I, given his proximity to more market participants. I guess my sense is that real growth alone is not going to be the critical variable. I think a more crucial factor will be signs that inflation is picking up in a way that would be perceived as making the Fed very nervous. If this were an environment in which we did not see signs of the Asian shock feeding through, I think that would make markets all the more anxious because developments in Asia are seen right now as balancing out, in the Fed's eyes, the high level of resource utilization and the inflation risk that that entails.",125
-fomc-corpus,1998,"I was going to comment that over the last couple of months in particular the markets seem to have had a weaker picture of the outlook for economic growth and inflation than many economists. The markets seem to be building in a softer path for short-term rates, even making the allowances that Peter mentioned, than have most economists. So, it is very hard to tell what would be a disappointment and what would not. The other point, just to reinforce what Mike said, is that expectations relating to the economic outlook seem to have a lot to do with the timing of the Asian effects on the U.S. economy. The question is not whether they will hit shortly but whether the markets will see them coming. The fact that growth in the first half of the year might prove to be a little stronger than expected would not have much effect on markets if market participants had some hints that the Asian effects were yet to come down the road. So, I think we have to look past the first half to see how markets would react.",203
-fomc-corpus,1998,"I was asking the question because headline reports about the Asian situation give one the impression that these economies are even bigger than California's economy, let alone Canada's, which, of course, is not true. All of them taken together are not that large in terms of their aggregate GDP, total trade, or shares of our trade. Yet, one gets the impression from the press reports that a very, very big downdraft effect is about to hit us. If such an effect is built into the marketplace, we could get a significant backup in rates when the markets find out that it is not true. Let me ask a somewhat related question since you mentioned possible reactions to signs of rising inflation, should they emerge. In one of the panels on Chart 8, Mike, you illustrated the strength of the housing markets by showing multifamily and single-family housing starts, but you did not show house prices. Do you have any implicit or explicit forecast of what you think is going to happen to residential house prices?",201
-fomc-corpus,1998,"Yes. But I must say that exactly what has been happening to house prices is a little unclear. By most measures such prices have been rising somewhat faster than the general inflation rate. The rise varies from measure to measure and seemingly month to month, but I think there has been a real increase. We anticipate a further real increase over 1998 and 1999, something in the 3 to 4 percent range for single-family houses.",89
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mike, I have a question about the ECI forecast. I understand your point about the fourth quarter of last year. If we look at the trend of the ECI in your forecast from the second quarter of last year to the first quarter of 1999, it seems unlikely to me that we are going to continue to experience such a favorable trend. First, it seems to me that increases in medical costs are likely to be accelerating, and if that occurs your forecast would imply slower increases in the wage and salary component of the ECI. Secondly, I think that bonuses and commissions, which clearly played a major role in boosting the ECI in the fourth quarter of last year, may continue to play such a role in the current quarter and maybe beyond. That seems likely for real estate commissions in particular. I do not know how the BLS handles the seasonal adjustment of bonuses, which sometimes are paid at the beginning of the year for tax reasons as opposed to the end of the year. I also think that inflation expectations could be a major factor, but how those are actually formulated may be more complex because we anticipate improvement in the core CPI due to technical factors. To the extent that people are looking at what is happening to actual prices, those factors may not be seen. So, I guess I end up thinking that this is one area where I have the greatest uncertainty.",276
-fomc-corpus,1998,"I don't know if it is the area in which we have our greatest uncertainty, but I would certainly agree there is uncertainty attending this part of the forecast. It probably is unwise to put too much weight on the quarterly progression of these compensation numbers. We have found them to be extremely erratic and the seasonal adjustment of this series is uncertain. I think the best way to look at these numbers is on some moving average basis. We took a look at them on a four-quarter change basis, and we saw an acceleration over the past four quarters, but it was only on the order of about 1/4percentage point. That included the effects of a considerable boost to the fourth quarter from commissions and bonuses. The surge in the latter was associated with the high level of activity in the real estate and mortgage banking business, and it does not necessarily imply ongoing rapid growth from that high level. We also had a minimum wage increase that probably affected the fourth quarter to some extent on a lagged basis. But when we look at the ECI components by industry and so on, there is no broad, across-the-board acceleration that one can observe. So, I think it is reasonable to take those recent numbers with a grain of salt. They are affected to an important extent by the finance, insurance, and real estate sectors, and they may also be capturing some of what we have been hearing about temp workers and computer people. When we get beyond that, we do not see much going on. In the first quarter, yes, we expect another slug of bonuses. That is apparently when the majority of the Wall Street firms will be paying them out, so we have them in our numbers. That tends to keep the first-quarter benefits number from dropping back as it might otherwise, given the fourth-quarter bulge. The really big issue going forward, I think, is the inflation expectations story. Now, there are different ways that people model the momentum in compensation. Some look at wages as the momentum variable. If we did that, we would forecast an acceleration. Depending on which compensation variable is selected, it could be a slight acceleration or one that is considerable. An alternative view is to look at price expectations, and we have models that do that. It is not clear which model works best, but the ones that incorporate price expectations are predicting much slower inflation in compensation than we have written down. If we take the latest Michigan reading as our measure of current inflation expectations, there seems to be some movement of these expectations into closer alignment with the actual inflation rate over the past year. When employers sit down to consider what kind of pay increases they may grant their employees, to the extent that they take the cost of living into consideration they will be looking back at 2 percent inflation, maybe a bit less. Some of our models are using lagged inflation terms that have higher inflation expectations implicit in them. So, we see this as a balancing act. We do not know which is the optimal formulation to use, but we think we have a reasonable projection to work with at this point.",618
-fomc-corpus,1998,How significant is the correlation between nominal compensation and productivity?,11
-fomc-corpus,1998,"I don't know the answer to that question, but I suspect the correlation is very weak in the short run. In fact, we get some of our largest compensation increases when productivity increases are beginning to fall near the end of a cyclical expansion. But I would not venture a further statement on that.",60
-fomc-corpus,1998,"One can put nonfarm business productivity into a wage equation and actually see whether or not productivity is an important factor explaining nominal wage gains. The statistical effect turns out to be marginally significant at best. We know that real wage aspirations, loosely based on productivity, ought to be an important factor in conditioning wage demands, but businesses may not be willing to grant the wage increases. To the extent that fluctuations in productivity do not show up in wages, the first round effects will show through to profit margins rather than nominal compensation.",104
-fomc-corpus,1998,"The reason I raise the question is actually the reverse; it relates to anecdotal indications that when nominal wages are beginning to accelerate, then business escalates its efforts to reduce costs and improve productivity. So, if that model were functioning in a meaningful sense, then a significant rise in nominal wages could very well merely reflect the fact that productivity was rising and therefore unit labor costs were not. But when you try to put that into the equation, you are telling me that you are picking up almost nothing.",100
-fomc-corpus,1998,"Some of this has been touched on in the simulations of the effects of a productivity surprise that we have discussed in the past and how it might feed through to wages, profits, and prices in a short-run dynamic. One of the things that presumably happened in the fourth quarter is that people working in mortgage banking firms and in some other finance and real estate areas probably were more productive, and they got larger commissions. So, there was a direct link between compensation and production.",94
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Mike, I think you mentioned before that the Greenbook forecast is at the low end of a lot of outside forecasts, including the low end of the Blue Chip range in particular. You also mentioned that it was a little lower than most of our forecasts here. Obviously, the two things that are driving your forecast are net exports and the swing in inventories. As I look at other forecasts, particularly on the export side, you seem to be an outlier in terms of the growth in exports. Have you done any testing to see what the effect on your overall forecast would be if, instead of a growth rate of 0.6 percent in exports, you assumed a higher rate, say, 1, 2, or 3 percent?",157
-fomc-corpus,1998,"I don't have a precise numerical answer to that question. If we were to generate higher export growth in our model by exogenously stronger income growth abroad, then we would go through a process involving certain interactions whose result would be to produce a net positive impact on U.S. GDP.",57
-fomc-corpus,1998,"The effect on GDP would be 0.2 percentage point, I think.",16
-fomc-corpus,1998,A couple of tenths?,6
-fomc-corpus,1998,"Yes. Exports are 10 percent of GDP. When they grow 2 percent faster, I think the answer would be 0.2 percent, roughly.",33
-fomc-corpus,1998,That implies a multiplier of 1.,8
-fomc-corpus,1998,The multiplier might be as high as 112.,10
-fomc-corpus,1998,"Yes, 1 to1-1/2 is usually what we use as a rule of thumb in our calculations.",24
-fomc-corpus,1998,"What are the underlying reasons for your forecast of exports being as low as it is in comparison to other forecasts? I guess it's not important what other people think in some sense, but you must have a lower forecast for foreign GDP.",46
-fomc-corpus,1998,"To a degree. The swing in exports in our forecast, as our models depict it, owes to the relative price term more than to what we are saying about the slowdown in the growth in foreign GDP.",41
-fomc-corpus,1998,"So, that has more to do with the appreciation of the dollar?",14
-fomc-corpus,1998,"Yes. Forecasters do vary in terms of the speed and strength of the reaction to changes in exchange rates that they put into their models. I don't think we really are an outlier in terms of the nature of our model being radically different from other models. Our forecasts are comparatively a little weak on some countries, but I do not think we are radically different. We do systematically take relative price effects into account, and I think we see them as quite elastic on the export side. Through both 1998 and 1999, the exchange rate has a significant effect in slowing exports. The other missing piece is the decision on our part to utilize a forecasting strategy that we have wrestled with since the middle of the year. That relates to how we evaluate the very rapid growth of exports that occurred in the first half of 1997 and how to incorporate that development looking forward. We have taken a middle course. About two Greenbooks ago, we indicated a change in our strategy, as it were, in the sense that in forecasting growth rates, we were going to be guided by the fundamentals. We were not going to assume that because the growth of exports had exceeded our forecasts for the first half of 1997, we should extrapolate that forward. This strategy was adopted partly because we concluded that we did not understand some of the elements that had driven the high numbers in the first half of 1997. In addition, we had tested our model in as many different ways as we could, and we thought that on average it was robust and therefore that we should be guided by it. So, we have not added, if you will, an unexplained factor to the growth rate in 1998 and 1999. That causes a very rapid deceleration in our forecast. We should see it soon and we should know soon whether or not this was the right strategy to take with respect to forecasting export growth. The data that we have, particularly the data we just got for the fourth quarter, had slightly higher exports in them than we had written down in the Greenbook but not by much or enough to make us think that this strategy of not assuming an additional unexplained element to export growth was the wrong thing to do. I think we felt supported by the Beigebook stories that we have been hearing, by the purchasing managers' data that were released today, and by the information obtained through the extra calls about the effects of Asian developments that we made with the help of our Reserve Bank colleagues. There are responses from members of the private sector suggesting that there is some evidence to date, along with increasing uncertainty and concern, that export growth is, in fact, going to slow dramatically.",543
-fomc-corpus,1998,I do not doubt that it is going to slow. Dropping off the cliff is the question. The other area of uncertainty that is actually more important in thinking about the slowing rate of GDP growth is inventories.,42
-fomc-corpus,1998,I don't know that it is more important. I think they're both very important in the short run here.,21
-fomc-corpus,1998,"Okay, but given the change in the rate of change, don't inventories end up being more important?",20
-fomc-corpus,1998,"Setting aside the very fine points of the effects of seasonal adjustments, net exports are the bigger drag in the first few quarters of this year. There is a dynamic here that I alluded to very briefly. I think you are right. As I have looked at other forecasts and tried to figure out the arithmetic I have seen, our consumption forecast looks relatively strong compared to many of the outside forecasts.",79
-fomc-corpus,1998,And business fixed investment?,5
-fomc-corpus,1998,"Business fixed investment is in the ballpark of the outside forecasts. So, I think you've put your finger on two key elements. On inventories, I have seen forecasts that anticipate rates of over $40 billion of inventory accumulation through the year. That is well beyond the final sales growth that they are forecasting and suggests that they feel businesses will be happy with an ongoing rise in their inventory-sales ratios. I don't see any reason to anticipate that in the market that we see now. Nothing is in short supply. The latest purchasing managers' report said that absolutely zero things were in short supply, and prices are falling. It just does not look like an environment where goods producers or merchants want to stock up. So, we think our forecast is internally consistent and reasonable, but if anything in the final demand dynamics pushes the economy toward stronger-than-expected growth, we do not have a cushion here. Inventories would in that event add to the upside surprise relative to our forecast. I don't want to intrude too much on Karen's territory but in regard to the comment that we have net exports falling off the fence on the international side, I think in the pre-FOMC briefing that we gave the Board yesterday--and you have all received copies of that briefing--there were some very interesting indications in the data from the other side of the Pacific that suggested very abrupt adjustments in current account balances in the fourth quarter. So, having something happen very quickly in the United States as a mirror image of that does not seem unreasonable.",304
-fomc-corpus,1998,"The actual data will be complicated by a residual seasonality problem. If history repeats itself, the first-quarter data, as they get announced to the world, will show weaker exports because the fourth quarter is one that we estimate has a big positive residual seasonal factor. I think such a development in the first quarter might change the expectational climate a little. I took this moment to check our forecasts of growth in the industrial countries compared to the outside consensus. Again, we are not radically different on the economic outlook for those countries. Our forecasts for the Asian countries are somewhat weaker than a reading of what others are saying. But the difference is small, and we felt we were behind the curve for a long time on that and we wanted to catch up to reality or what we thought it was. Mike's point is quite well taken. We already are seeing evidence of substantial improvement in the trade balances of Korea and several of the other Asian countries that have released trade data for December. We even have, I believe, a January number for Korea.",208
-fomc-corpus,1998,"I don't want to extend this unduly, but I should remind you that not everyone is expecting a stock market decline. As I said, our consumption forecast does not look weak and our business fixed investment forecast does not look all that weak relative to other forecasts. But if we were to assume a modest rise in the stock market or something more, then our forecast would be very much closer to the consensus.",81
-fomc-corpus,1998,"I don't want to prolong this either, but there is an interesting issue related to this on which I would like to have your reaction. When the Mexican problem emerged, the collapse in their trade was immediate and direct, but it had very little in the way of a multiplier effect because virtually everything Mexico was doing was vis-a-vis the United States. What is the impact, for example, of the Asian problems on Europe and Canada and elsewhere and in turn on our trade with those countries?",97
-fomc-corpus,1998,"We asked our analysts to calculate mentally, econometrically, or indeed using any other estimating device they have available to them, how much they have lowered their economic forecasts for Canada, Japan, and major European countries in response to the events in troubled Asian economies. Of course, the answer varies depending upon the country. The most pronounced effects were on Japan. We used September as the benchmark month on which to base the assessments because that appears to be the month before the world generally began to recognize the scope that the Asian problem would eventually take on. In Japan, the weakening impact on GDP is on the order of a full1-1/4 percentage points for 1998 and almost 1 percentage point for 1999. We have written down the Japanese forecast considerably since September, and we attribute that almost in its entirety to the Asian effect; there are other factors but they tend to be offsetting one way or another. For Europe, running my eye down the column of estimates, I would say the number tends to be about 1/2 percentage point of GDP. We have estimated an elasticity of one for our export demand from these economies. If their GDP slows by 1/2 percentage point, we translate that using an elasticity of one into their demand for our exports. For Canada, which is not to be overlooked because of its importance in our trade, the write-down has been significantly less. But it is still several tenths--2, 3, or 4 tenths--that analysts would attribute to the Asian effect. In the case of Canada, that has been offset by other factors to the point where the actual forecast has not changed by that much. Obviously, had the Asian slowdown not happened, we would be getting more demand from Canada because the domestic Canadian economy is quite strong. So we have repeatedly asked people to be very aware of the Asian impact both with regard to its effect on the exchange rate and on the real demand for our goods. They have come back with numbers on this order of magnitude.",409
-fomc-corpus,1998,"I was at a meeting yesterday where there was a discussion of the IMF's forecast for particular industrial nations and for the industrial world as a whole. With regard to the effect of Asian developments, I was struck in listening to the forecast presented by Mike Mussa at the difficulty the IMF staff, too, was having because there are a lot of things one has to disentangle before one can isolate the Asian effects. On the one hand, the IMF staff has less of an Asian effect on paper, but Mussa does not have much influence over the individual analysts. So, he is less able to force consistency across the forecast than Karen has been. He has a smaller change in the current account balance for Asia but, on the basis of what he said, I think he actually would be closer than his staff to what we have. He gets numbers that are of the same order of magnitude. The one difference was that he was assuming the effects on Japan would all be offset by some combination of exchange rate changes and other developments; precisely what he had in mind was difficult to appraise because everything depends on one's starting point in September. He gets about the same effect as we do on North America and Europe, taken together. Like everyone else he had to guesstimate a multiplier there, and he had estimates that were in the 3/4 percent range. Ours is probably a little higher than that, but it is well within the same ballpark. However, his analysis produced a surprising number for the Europeans at the table. Both the French and Germans said it was a much bigger number than they were thinking about and that is going to mark things down. One point that it seems to me is very misleading from an analytical standpoint is that the Europeans always look at their growth rates on a year-over-year basis. So, year-over-year growth in Europe may be the same in 1998 as in 1997 because 1997 was a good year, picking up toward the year-end. But if we look at fourth quarter over fourth quarter, we get something like a half percent markdown and that is essentially the half percent that Karen was talking about because we used to have the same growth rate in 1998 as we had in 1997. The interesting thing will be to see how the disconnect gets resolved in 1998 between what is actually happening in markets as opposed to 1998 being as good a growth year as 1997 and incidentally how that will affect the mood in Europe, in particular.",508
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"I'm afraid I am going to belabor this a little further. The income effect is one thing. We discussed that and we may come out at slightly different places about the importance of Southeast Asia or at least the countries affected so far and how well integrated our economies may be. Let me ask about the relative price effect and the effect of the exchange rate appreciation. Maybe you answered this and I missed it, but I am struck by the sharp change in the international outlook, which was evident in the last Greenbook as well as this one, and the fact, of course, that the dollar has been appreciating since the spring of 1995. I guess that is the heart of my question. I don't have a sense of what is going on in your forecast.",153
-fomc-corpus,1998,I guess I did not follow the question too well. I think if one looks at Chart 3--,21
-fomc-corpus,1998,I am trying to say that it is not news that the dollar is higher.,16
-fomc-corpus,1998,"In putting together the Greenbook forecast, we have not extrapolated the strength of the dollar. We saw the dollar rise from the spring of 1995 into 1996. Our view was that to some degree the rise was warranted because in the spring of 1995 the dollar was exceptionally weak, and there were good reasons for it to rise. I have not done this exercise and I cannot quote numbers to you, but one can look back at the forecast as it was presented a year ago today. Indeed in a briefing that was delivered yesterday, a copy of which I believe you have received, staff in Research and Statistics did precisely that. In January 1997 we were not expecting the dollar to continue to appreciate the way that it has, and we were not expecting the U.S. economy to be as relatively strong as it has been. So, most of the appreciation that you can see in Chart 3 from the beginning of 1997 to the beginning of 1998, which was quite considerable, was a surprise as it evolved. We have gone back and looked again at how best to parse that into the relative exchange rates for the price terms that we put into the export equation and the relative price terms that we put into our import equations. We incorporated more currencies than we had before because so much of what was taking place that caused the dollar to appreciate involved currencies that we had not been systematically using in our calculation. We added a couple of currencies and then we decided that we should perhaps look at them individually. The end result of that analysis is that a great deal of the slowing that we are seeing is projected to come through the relative price term. The bars on that final chart, Chart 7, tell you what our model was telling us, namely that the appreciation of the dollar pushed up imports and will continue to push up imports for some time. Concurrently, it is going to slow exports through the end of the forecast period in 1999. If the dollar appreciates further, we will send out a March Greenbook that includes an even weaker foreign sector. I don't know how else to adjust our forecast in response to the ongoing appreciation of the dollar. If the dollar simply stays as high as it is, which is loosely speaking what we have assumed, we are depending on price inflation in Asia to cause some real appreciation of the currencies there to offset some of the appreciation we have experienced. Until that comes on stream, we have these relative price terms that our analysis is telling us have powerful effects on exports and imports. Export demand price elasticities are not quite at 1 but are between 0.7 and 1 with some lags, and the lags in our exports are longer than those for our imports.",553
-fomc-corpus,1998,"Any further questions? If not, who would like to start the Committee discussion? President Parry.",20
-fomc-corpus,1998,"Mr. Chairman, economic growth in the Twelfth District picked up in recent months. The pickup was broad-based and it occurred in most areas of the District. Payrolls expanded most quickly in the states of Utah, Nevada, and Arizona, where employment growth accelerated to annual rates of 4.6, 6.6, and 9.5 percent respectively in recent months. Employment growth in California and Washington also accelerated, rising above a 3 percent annual average pace during the last months of 1997. With the exceptions of Idaho, Alaska, and Hawaii, employment growth in the District states was running above the national pace. Employment growth in the District also continues to outpace growth in the region's labor force, pushing unemployment rates down and creating very tight labor markets, particularly in urban areas. The District-wide unemployment rate fell to 5.3 percent in November, a full percentage point lower than a year earlier and the lowest it has been since March of 1990. In the District's fastest growing states, unemployment rates have fallen to between 2.8 and 3.9 percent. Construction and services are the fastest growing sectors in the District but manufacturing continues to be a key contributor to District employment. Manufacturing employment posted strong gains in recent months, spurred by rapid growth in high-tech and aircraft production. The generally positive outlook in the District is tempered by reports of tight labor conditions and uncertainties regarding developments in East Asia. In several areas in the District, employee shortages have begun to hamper plans to expand production. Initial reports from District states indicate that recent developments in East Asia have reduced the demand for exports of some commodities, primarily raw and processed agricultural goods and lumber and wood products. At this early stage, other vulnerable industries, such as high-tech equipment, reportedly have not been greatly affected. Developments in East Asia also are having some effect on business loan conditions in the District. In recent months, East Asian-owned branches and agencies, which account for 20 percent of total business loans in the District, have tended to tighten credit standards and terms on business loans, in part due to concerns about the capital positions of their parents. Reports also indicate that some commercial banks in the District have tightened standards for nonbank affiliates and subsidiaries of East Asian commercial firms. That does not apply to Japanese firms. Finally, reports indicate some increase in credit demand by Japanese firms, in part because their other credit sources have become less attractive or less available. Turning to the national outlook, there have been few surprises with regard to the overall U.S. economy since we met in December. As expected, economic activity was robust last quarter and inflation remains subdued. Our outlook for 1998 is much the same as it was in December. We continue to think that at the current funds rate, growth in real GDP is likely to slow to about 2 percent this year and price inflation is unlikely to change much despite a pickup in wage inflation in our forecast. However, it is obvious that there is plenty of uncertainty in the outlook. Traditional models have been incorrectly predicting slower real GDP growth for the past year and a half. Thus far, however, the upside surprises have not been associated with rising price inflation. It is likely that economic activity is being boosted and inflation is being held back to some extent by a positive productivity shock, but we do not know how much of an effect this factor will have or how long it may last. I would feel better about the long-run prospects for the economy if economic activity were currently slowing to a rate that appeared to be sustainable in the long run. Given that we have yet to see such a slowdown, the risk to my forecast would appear to be skewed to the upside for both output and inflation.",751
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Overall economic activity in the Richmond District appears to have strengthened rather than weakened in recent weeks. With respect to goods, some of the manufacturers in our region are reporting faster growth in January in both shipments and new orders. Service sector revenues appear to be continuing the strong growth they registered toward the end of 1997. At this point, it is too early to estimate what the impact of Asian developments on our regional economy is ultimately going to be. There is a lot of speculation but no hard information at this stage. Wage growth has picked up--I think it is fair to say noticeably--in our District of late. Upward wage pressures are much more widely reported now than they were earlier, especially in the retail sector. There is no evidence yet of any broad attempt to pass wage increases through to prices, but we do have the impression that it is becoming a little easier to push some cost increases through in some sectors of the economy. For example, a contact at one of the Virginia airports indicated that the airport is raising rental rates and the fees they charge airlines. We have heard similar stories relating to the prices charged by some manufacturers and some retailers. This is not a general development yet, but we have heard a few stories along those lines. Housing markets continue to tighten in our region. Inventories of single-family homes in the Washington area in particular dropped sharply in late 1997 due to increased demand. We have information that construction activity, construction costs and, in response to the question Jerry Jordan asked earlier, new home prices are rising in this area. We also see that in some other District markets like Charlotte. Regarding the national picture, I still believe, like Bob Parry, that because of the strength of the domestic economy the upside risks are a greater danger going forward than the potential drag from net exports stemming from developments in Asia. In my view, to really boil it down, the key is consumer fundamentals. I believe they are exceptionally favorable at this stage. Labor markets are still very tight and wages are rising in general, however one may interpret the last quarterly ECI report. With inflation subdued for now, most of these increases are in real wages rather than in nominal wages. More broadly, real disposable income rose at an annual rate of almost 5 percent in the fourth quarter. Debt service burdens are high but they are manageable. In this situation, it is not surprising that consumer sentiment, on both the Michigan and the Conference Board measures, is at a very high level. Consumer spending, it seems to me, may remain quite strong this year not only in the first half, as is being projected by the Greenbook, but in the second half as well. If it does and if financial conditions remain favorable, business investment and housing activity are likely to remain robust as well. Despite all this, the Greenbook is projecting that nominal GDP growth is going to decline by about 2-1 /2percentage points, from close to 6 percent in 1997 to 3-1/2 percent in 1998. That is mainly because of the substantial hit from Asia, although some of the factors that Cathy Minehan was suggesting are also relevant. In my view, it is not unreasonable to question whether such an abrupt decline in nominal GDP growth will in fact occur. Even if it does, the Greenbook is still projecting that the core CPI rate will remain steady at about 2-1/2 percent on a consistently measured basis in 1998 and 1999 rather than declining further. This relatively favorable result hinges on the belief that the factory utilization rate is going to decline appreciably over the next couple of years and offset the impact of continuing tight labor markets. In short from my standpoint, while the Greenbook projection is certainly plausible, its realization depends on a lot of developments that may or may not occur. I recognize, of course, that Asian developments could turn out to be worse than expected. But it seems to me that the striking rebound, especially in recent days, in most Asian stock markets suggests that with the possible exception of Indonesia, this crisis is being contained at least for now. Also, the negative effects of the crisis are being offset in part by the stimulative impact of reflows of capital to U.S. markets, which have helped to lower U.S. long-term interest rates. All in all, I conclude that the greater risk going forward is on the upside.",889
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. The economy in the Philadelphia region remains strong and labor markets are tight, but there are few indications that inflation is accelerating. Businesses in the District continue to find ways to deal with tight labor markets. One illustration is an auto manufacturing plant in the District that was faced with a strong demand for a new sports utility vehicle. Recognizing the difficulty of finding 850 additional workers to add a third shift, the company spent some $30 million to install new robotic equipment over the Christmas holidays, thereby reducing the need for additional workers to 350. Indeed, the substitution of capital equipment for production workers by manufacturers is widespread in the District. Construction workers are in strong demand not so much for adding bricks and mortar but because producers of everything from pet food to railroad wheels are installing new equipment as labor-saving devices. In the residential area, as some others have reported, District builders tell me that the demand for new housing is very strong. As an example of that, Super Bowl Sunday is usually a very slow day for showing real estate, but this year the floor traffic was heavy and sales were quite strong. The price increases for new homes appear to be holding, although prices for existing homes remain flat. There seems to be a real change in tastes. If a seller has a regular sized bedroom and a regular sized bath, the house will not move. Buyers want bathrooms as big as traditional bedrooms. We are hearing reports from some manufacturers who export to Asia that some orders are being cancelled and others postponed. The Asian problem is also affecting agriculture. Poultry is a big industry in the Third District, particularly in Delaware and the south central part of Pennsylvania. With the bird flu scare in Asia and the strong dollar, there is a slowing demand for poultry exports to Asia. As a result, this poultry is being sold on the domestic market and chicken prices are coming down. Turning to the nation, I think there are three key uncertainties that we need to deal with. The first is that the national data show a very powerful economy in 1997 coming into 1998, fueled largely by strong consumption and investment growth. Our evaluation of the anecdotal information points to some slowing in demand stemming from the fallout from the Asian situation. But how much of a damping effect is uncertain, although I see more growth than the Greenbook. The second uncertainty is that the disinflation process has had surprising staying power. Wage gains continue to be offset by productivity gains, so inflation is falling while corporate profits remain high. How much more staying power this disinflation process has is also uncertain, although I suspect it has a while to run. If businesses cannot get more volume out of existing resources, they undertake additional rounds of downsizing. The third uncertainty, which is more for discussion tomorrow so I will touch on it only briefly, is that monetary policy is roughly neutral, but it may be tightening implicitly with the nominal fed funds rate held constant and inflationary expectations falling. However, the money supply has been growing faster lately. What should we make of these uncertainties in the national economy? I think we need a wide peripheral vision because I don't think we know where the real danger is going to come from.",643
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Over the past year, the performance of the Sixth District economy generally has paralleled that of the nation, and with few exceptions that continues to be the picture that we see. Today, rather than run through a detailed commentary sector by sector, I thought I would concentrate my remarks on a few important differences and concerns that I have begun to note. First, the Asian situation has had only a marginal impact on our District so far. Shipments to Asia have moderated, especially shipments of fertilizer, pulp, paper, and citrus. A large chemical company in our region experienced some cancellations of shipments to Asia but reportedly was relieved because it was unable to meet those shipments anyway due to a lack of available rail cars. People in our aerospace and defense industries also have begun to express concerns about potential declines in orders from the Asian part of the world. At the same time, some interesting asymmetries are appearing. One shipper reported recently that his firm had added capacity in anticipation of increased trade with Latin America, but the firm had to divert that capacity to meet its customers' demand for more shipping to bring imports from Asia to the United States. Finally, doing business in Asia is clearly more difficult for District firms. The owner of an upscale retail sunglass chain with over 2,000 outlets, including 19 in Asia, reports that his Asian sales are off some 70 to 80 percent. The bottom line for the District is that the overall effects from Asia have been minimal so far, with declines in our region's exports to Asia mitigated by stable growth of exports to Latin America. Second, after their recent decline, prices of oil and natural gas are now approaching their historic break-even levels that in the past would have caused domestic drilling and extraction to begin to shut down. However, we see no evidence of that pattern this time around, and in fact the rig count remains at very high levels. The new drilling technologies that I talked about in past meetings have truly brought break-even prices to much lower levels. Hence, we don't expect to see the slowing in that sector that we would have in past cycles. Third, real estate activity, especially residential, is more mixed in our region than appears to be the case nationwide. Commercial construction is strong, especially in grocery and class A office space, and this should balance the weakness we are seeing in residential construction. One cautionary note, however, is that I am starting to get numerous expressions of concern that pockets of excessively speculative commercial construction are emerging, notably in the north Atlanta market. Fourth, we are getting mixed signals from lenders. Consistent with the loan officers' survey, credit still seems to be available and competition is fierce. When lenders are asked whether credit standards are slipping, the response is generally no, but lenders then go on to say that because of competition they are apt to grant loans at lower rates than in the past. This seeming disconnect between their perception of the links between credit standards and pricing for risk is something we should be concerned about. Fifth, with respect to wages and prices, like everyone else we continue to get reports of labor shortages, and firms are either going to great lengths to hire qualified workers or they are curtailing production. For example, shipbuilders in New Orleans are resorting to hiring workers from overseas to fill the need for welders, shipfitters, and other workers. One national trucking executive reported idling 10 percent of his equipment because he has not been able to find qualified drivers. Despite such problems, however, wage increases in our region appear to have been held to moderate levels, and this also appears to be the case with prices. In our most recent manufacturing survey, the portion of firms reporting that they are paying higher prices for materials decreased, as did the proportion of firms indicating that they received higher prices for finished goods. At the national level, we see an economy that continues to ""hum along"" with few, if any, of the signs of slowing that many of us have been forecasting for several meetings now. However, as others have observed, I do not believe that we have yet seen much of the slowing effects from the Asian problems and what they hold for the United States. Of course, the threshold question is how great the negative impact eventually will be. It does seem clear that the Asian shock will forestall the need for any policy tightening move in the short run. Clearly, the economy will not continue to get the boost to GDP from net exports that the recently released report suggests we got in the fourth quarter. Stepping back, it does seem to me that the risks to any forecast have changed in two respects since our last meeting. They have gotten more symmetric and they have gotten greater. I guess one could say the distribution of risks now has fatter tails than it did the last time we were together. For me, the wild cards continue to be related to Asia, the consumer, and investment spending. While one certainly can argue that all these sectors will slow in coming quarters, there is also a significant probability that all may not slow. For example, it isn't difficult to anticipate that the increased disposable income that households may generate by refinancing their mortgages to take advantage of lower interest rates will stimulate and help maintain consumer spending. Similarly, the reports we get are that much of the recent surge in investment spending is motivated by the desire of U.S. businesses to cut costs so as to maintain profit margins in the face of competition from lower import prices. Clearly, this downward pressure on prices will continue as a result of the Asian crisis, and this could help maintain investment spending at higher levels than would otherwise be expected. Finally, of course, as others have suggested, the impact from Asia may prove to be either substantially more severe or substantially less severe than our most likely scenario indicates. On balance, as I hope my comments have suggested, I think we continue to be in a period of very satisfactory economic performance, but one where the range of potential outcomes is even wider and more uncertain than when we last met. While the Asian shock and its fallout may give us significant slowing in the economy's expansion and a further respite from price pressures, I think it is equally likely that we may find ourselves by late fall or early winter of this year with almost the same set of policy questions that we faced in November and December of last year. Until we see the Asian effects play out, I would say again that I hope we can allow ourselves to enjoy the moment and use this period of time to talk out our long-term policy preferences. We should continue to make the point that low inflation is also pro-growth and pro-employment, and that is something that not only central bankers should get excited about. Thank you, Mr. Chairman.",1360
-fomc-corpus,1998,Well done. President Moskow.,7
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Seventh District economy continues to expand at a moderate pace with only a few reports thus far that Asian developments have had any measurable impact. However, many of our contacts expect their businesses to be affected as the year progresses. In the consumer sector, retailers generally ended up being pleased with holiday sales, but the bimodal holiday shopping season that I mentioned at our December meeting was quite evident. After a post-Thanksgiving lull, sales picked up noticeably in the week before Christmas and that strength then continued into January, benefiting in part from gift-certificate buying as well as the strong housing market that boosted appliance sales. Our survey of Michigan retailers showed the largest December sales gains since 1994. Light vehicle sales probably averaged about 15 million units at an annual rate in December and January combined, but as noted in the Greenbook, the monthly sales numbers for December and January are distorted by reporting period shifts and efforts by Toyota and Honda to achieve best selling car status in 1997. Although low interest rates and low gasoline prices have reduced the cost of driving, incentives remain extremely important in maintaining sales near the 15 million unit pace. Manufacturing activity remains quite strong in the District. Purchasing managers' reports for January indicated that overall activity expanded at about the same pace as in December in Chicago and at a somewhat faster pace in Detroit and Milwaukee. Contacts noted very strong demand in industries such as aluminum, steel, farm and other heavy equipment, appliances, chemicals, paper, and publishing. In terms of the Asian situation, the impact on most Seventh District industries is still more speculation than reality. Auto and steel companies are worried about possible increases in imports from Korea and Japan, although that doesn't seem to have happened yet. Several contacts from a variety of industries reported that Asian manufacturers and distributors are experiencing significant difficulties in borrowing funds for working capital and other purposes. Our business contacts report dramatically slower business operations in those Asian countries, and friends of mine who have been to Thailand indicate that even the traffic in Bangkok is now bearable. For most businesses in the Seventh District, the major problem continues to be hiring and retaining competent workers. In other words, labor markets are still very tight. Help-wanted advertising increased in all our major metropolitan areas over the last three months of 1997 and that is in contrast to the national index, which in December was lower than in September. The latest survey by Manpower Incorporated indicates that hiring plans nationally for the second quarter of 1998 are up somewhat from the first quarter and about the same as for the very strong second quarter of 1997. These results will not be released until February 23 so they should be treated as confidential until then. Manpower's own domestic business apparently is very strong with demand for workers widespread but especially robust at computer, telecommunications, pharmaceutical, and food processing firms. Other contacts indicate that high salaries for COBOL and FORTRAN programmers are drawing some retirees back into the labor force, but wage pressures generally continue to be relatively modest, given the tightness in labor markets. Turning to the national outlook, I think the risks are somewhat more balanced today than they seemed to be in December. The level of real GDP currently appears to be above potential. Labor markets are the tightest in a generation and yet there is still no hard evidence of accelerating inflation. Looking ahead, the key issues are Asia, inventories, and, of course, inflation. Considering the composition of fourth-quarter growth, our view is that growth this year will slow to its trend rate due to sizable drags coming from declines in net exports and inventory investment. As we discussed earlier, the biggest sources of uncertainty are the Asian situation and the possible inventory correction. Our outlook is about as pessimistic as the Greenbook regarding Asia and slightly less so on the outlook for an inventory correction. Despite this anticipated slowing of GDP growth, we expect labor markets to remain tight. Without mitigating factors such as recent exchange rate movements and heightened competition from imports along with energy price declines, we would be concerned that CPI inflation was poised to increase. All in all then, we face risks on both the upside and the downside. Without significant slowing in the growth of economic activity, wage and price pressures appear likely to intensify. However, the Asian crisis seems to offer the kind of non-monetary policy restraint that can keep aggregate demand in line with the economy's potential output.",884
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The New England economy continues to perk along with perhaps more strength than at least some other regions. Employment is rising at close to the national pace. The unemployment rate in all six New England states is below the nation's and well below in the case of Massachusetts, New Hampshire, and Vermont. Commercial vacancy rates are extremely low in the metropolitan Boston area where there is a small amount of speculative construction under way, but real estate markets are more mixed elsewhere in the region. In particular, Hartford's rather weak commercial real estate recovery has been hit hard by the closing of several major retailers, leading to an increase in retail vacancy rates and a drop in retail rental rates. Prices and wages remain stable overall, though manufacturing wages have begun to increase at about the national rate after earlier weakness. Premiums continue to be paid for hard-to-find employees with high-tech engineering or software skills. Our take on the Asian crisis, to the extent we know much about it at this point, was reported to the Committee in the earlier memo that we all received, but I want to underscore one thing. That is the potential impact of the downturn in Asian economies on the region's universities. It is expected to be significant both in terms of the ability of those universities to attract students from the Asian countries, which have been very important in terms of full-paying foreign students, and in the ability of current students from Asia to stay on in universities in this country. Two items of broad regional import dominated our economic news aside from the Asian crisis. First, we had a severe winter ice storm that affected the northern New England states in January. This storm hit the central and northern portions of Maine and New Hampshire, the area around Burlington, Vermont, and also north of the border in Canada. Fortunately, the storm came well after the New Year and well before the Martin Luther King holiday, so ski areas didn't lose holiday business, but that is one of the few good things we can say about it. Many businesses in the affected areas were unable to open for more than a week or at least the best part of a week, and some rural areas were without power for a much longer period. The storm was unusual in the extent of damage to utility property. Utilities in the three states estimate their total cost for capital replacement and additional labor at about $80 million, with $60 million of this in Maine alone where the storm covered a wide area and resulted in some destruction of transmission towers as well as power lines. The full extent of the damage to forestry and agriculture will take longer to estimate. The spring's logging and maple syrup harvesting activities should provide further information on the extent of damage to the forests. A couple of interesting vignettes: One apple grower reported that apple trees were comparatively unaffected by the ice because the latter's weight was less than the capacity of most trees to hold relatively heavy fruit. Dairy farmers report that cows were having difficulty producing milk as a result of the storm. Finally, with true New England spirit, members of the Bank's Small Business Advisory Council commented on the increase in neighborly spirit that has prevailed.",626
-fomc-corpus,1998,Is that in the GDP?,6
-fomc-corpus,1998,"It can help! The second issue of note is the purchase of Digital Equipment by Texas-based Compaq Computers, billed as the largest takeover in the history of the computer industry. This purchase along with Compaq's recent acquisition of Tandem makes the company the second largest computer maker in the world behind IBM. Now, this is not important in terms of the overall macroeconomic picture perhaps, but only a couple of years ago employment repercussions from the purchase would have caused waves of fear throughout New England. Now, I would guess that businesses are just waiting to snap up any laid off high-tech workers. It has gone by without a ripple on the local scene. On the national scene, we agree with the Greenbook's assessment of rather robust consumption at least for 1998 and renewed strength in business fixed investment at least from the fourth-quarter level. We also are largely in agreement with the Greenbook forecast regarding the drag from net exports due to the Asian situation, though as I noted before we could quibble a bit about whether exports will be as weak as the Greenbook suggests. However, we are most skeptical about the relatively large negative inventory swing. We agree that there may well be negative inventory effects, but we wonder how long and how negative they will be given the relative strength of final sales, the prospects for business spending, the view in financial markets, abundant credit, and strong consumer confidence--all things that people have mentioned. Only one other major forecaster, DRI, projects as significant an inventory correction, again giving us some pause about the risks inherent in this aspect of the forecast. Overall, we anticipate a bit stronger economy in 1998, with growth much closer to potential than the staff forecast and some upward pressure on core inflation as a result. Thus, I agree with others who have spoken before that there are risks on the upside to the Greenbook forecast, though it is not possible to talk about a forecast these days without mentioning the potential for downside Asian-related risks as well.",401
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"The Eleventh District economy remains strong in almost every respect, although the crisis in Southeast Asia has caused expectations to be downgraded considerably. The January go-around among our directors, for example, was noticeably less positive than December's in terms of expectations. Nationally, in my first cut at forecasting 1998, I had real GDP growing at 3 percent and the CPI at 2 percent. Then, I was shocked to see the Greenbook's inflation forecast come in under mine, so we are going to go back to the drawing board. That has never happened before. I think a good rule of thumb on these forecasts is to take the Greenbook forecast and add about a percentage point to real growth and subtract about a percentage point from the CPI! [Laughter]",157
-fomc-corpus,1998,That would be tough!,5
-fomc-corpus,1998,"The trouble is, they already did that! [Laughter]",13
-fomc-corpus,1998,"I must say that their strong final sales number upset my calculations a little. In any case, we really do expect to see more of the same--very low inflation combined with quite strong real growth. Most of what I have said in recent meetings relating to the growth of the Eleventh District economy being stronger than the national average, particularly in terms of employment growth, still applies but with one exception. That is oil drilling. Oil drilling has been straining against capacity limits even with the lower crude prices that we have seen in recent months. It is still very strong, as Jack Guynn indicated, but drilling costs have increased substantially during the past year. Those higher costs and related budget constraints among the smaller and weaker firms have relieved some of the capacity constraints. It is now possible to find a rig again where one could not be found before, although at exorbitant prices. Some of the concern regarding the Southwest has to do mostly with the direct impact of the Asian crisis but also to some extent with the indirect impact coming through our region's largest trading partner, Mexico. Mexico is vulnerable not only to the Southeast Asian export competition but also to the continued low or declining oil prices. I find it remarkable that in recent days We made a special effort to gather information from many of the larger companies in our District about the impact of the Asian situation. It is hard to draw any firm conclusions about the net impact on the region, but a few patterns are worth mentioning. First, in high-tech, the impact is nearly a wash. Computer producers like Dell and Compaq expect to benefit from some lower prices for semiconductors, while chip producers like Texas Instruments and Motorola expect to lose. Second, the area's defense contractors like Bell Helicopter, Lockheed Martin, and Raytheon have expressed surprisingly little concern given their exposure in Southeast Asia. For example, Bell Helicopter has a couple of big orders in Asia that are now questionable, but they expect to make up for any declines in sales to Asia by increased orders from South America. Area ranchers are net losers as export demand falls off. The Asian credit crunch is beginning to be noticed in Texas. a very large chemical company reports that they are not selling much petrochemical feed stocks and chemicals to Korea because of an unwillingness to accept letters of credit from Korean banks. The expansion of Samsung's very large new chip plant in Austin is being delayed by a lack of financing. And we have heard anecdotes that Japanese banks have stopped rolling over lines of credit to some large Texas companies. Fortunately, those companies have access to other sources of credit. Let me conclude by saying that given the strength and momentum of the Eleventh District economy, if we are going to be hard hit by the fallout from Asia, this is a good time to have it happen. At the national level, the prolonged combination of rapid output and employment growth with lower inflation continues to test the limits of the old rules of thumb and argues for a revision of those rules. The momentum going into this quarter and the disinflation and deflation in the pipeline, augmented by Asia, suggest that the unemployment/inflation tradeoff will continue to improve before it gets worse. We should be glad we removed the bias toward tightening at the last meeting, and it is not too early in my opinion to start talking at this meeting about whether and when to ease. I believe that makes me the first to use the ""E"" word, Mr. Chairman. Rising real short-term interest rates as inflation has moderated have made policy tighter in some sense, as have the strength in the foreign exchange value of the dollar and declining sensitive commodity prices. The yield curve is close to flat and the graph in one of our handouts shows that very bad things usually happen shortly after yield curves turn negative. Only the monetary aggregates suggest that policy is accommodative, but we have not shown any confidence in the reliability of those measures for a long time. So far at the national level, the Asian decline probably has helped our macroeconomic balance more than it has hurt, but it remains a potentially large negative. For the record, I must say that I don't think the impact of the IMF's interventions has been altogether benign so far. Like the doctors of old, the IMF does make house calls; like the doctors of old, too often the favorite remedy is bleeding the patient. Fighting deflation with austerity seems rather problematical as does the apparently related goal of creating current account surpluses in developing countries, which means turning them into capital exporters. How much of Asia can have a current account surplus at the same time and what would be the impact on China if those countries achieve it? It may be true that many construction projects and other government-directed investments were ill-conceived in the first place, but canceling them in the midst of the crisis doesn't seem to be the best timing in the world. It may be that employment has been misdirected, but deliberately creating unemployment hardly seems the appropriate cure. We need to get the IMF to give us a line item veto!",1016
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Tenth District economy continues to do well on balance. Manufacturing continues to operate at relatively high levels of capacity utilization and is a source of strength for the District as a whole. Significant investments are still being made in our region. Examples include the recent announcement by Intel of a billion dollar upgrade to its New Mexico plant and the expansion by Sumitomo of its New Mexico plant that manufactures computer chips. Construction activity generally has been flat in the District, but flat at a very high level. We still find firms in the construction industry that are trying to import labor into the region. The farm economy is generally in good shape, although developments in Asia remain a concern for some in agriculture as well as in other sectors of the regional economy. For example, IBP, which is a large processor of beef and pork, has seen a 50 percent drop in its international sales, with Asia especially contributing to that. Also, Japanese customers are negotiating very hard for better deals to circumvent the effects of the stronger dollar. Some firms we have talked to, as I think Bob McTeer mentioned was happening in his District, are having a little trouble because a number of their Asian customers cannot obtain letters of credit, and that has hurt the exports of those firms to that part of the world. Still, District labor markets remain among the tightest in the nation, and the number of firms reporting larger-than-usual wage increases is rising. To illustrate this in terms of our current labor market situation, District unemployment was about 3-1/2 percent in November and the participation rate was estimated at around 70 percent, in contrast to the national level of about 67 percent. About half the firms that we spoke to are raising wages more than usual to attract and retain workers. As an example, one manufacturer in Colorado reported average wage increases of about 8 percent last year. A furniture warehouse in the Omaha area reported 10 percent increases at the lower end of their pay scale and, as I mentioned, IBP for all of its concerns about Asia reported that they had to increase wages over 15 percent last year because labor markets were extremely tight for them. Firms also are reporting a variety of incentives to retain workers, including the expansion of benefits for their employees. Overall, therefore, we have a very strong economy in the region. At the national level, we expect growth into next year at a pace very similar to the Greenbook forecast. Having said that, we have also found ourselves spending a lot of time trying to make sure we could rationalize our forecast. We looked at the same factors that others already have mentioned, including the outlook for inventory adjustments, the strong dollar, a fed funds rate that in our opinion is not accommodative at this time, and other factors bearing on a forecast of some slowing in final demand. But when we try to feel comfortable with that forecast, we remind ourselves of the very strong economy in the fourth quarter and apparently into the early weeks of this year. If the markets do not become unsettled, I think there is every reason to expect consumer demand to stay strong. And unless we have a somewhat more negative multiplier effect from Asia, we are left with some real upside risks to this forecast. On balance, this seems to be a time to wait and see. Thank you.",672
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. The strength in virtually all sectors of the Fourth District economy in 1997 was sustained through year-end and appears to have carried over into at least the early weeks of the new year. The most common complaint we continue to hear has to do with recruiting and retaining people. Turnover of workers continues to rise, and reports of higher compensation to keep people are much more frequent, along the lines of several other comments that already have been made here this afternoon. The financial sector is finding it especially difficult to attract and retain people. One bank that is now represented on our board of directors put through a 7.7 percent pay structure increase, and the bank does not believe that increase is going to be adequate to retain the people they need for their operations. Job switching for significantly higher salaries is becoming more common for people with computer skills. All parts of construction--residential, commercial, and industrial--were strong in the fourth quarter, and prospects for the spring and summer are reported to be very good. Construction contracts increased significantly in 1997, and so far we have had a very mild winter in our part of the country so that construction activity has been seasonally strong. Bankers report a growing sense that retail space is overbuilt. Nevertheless, new proposals keep coming in ever-increasing numbers and they are getting financed. One director said that REITs have a ton of money. He indicated that there is ample funding for just about any project that gets proposed. Manufacturing generally continues to be strong in our area. The production of large trucks reached peak levels in the fourth quarter, and orders are reported to be strong, suggesting that plants producing trucks will be operating at very high levels through the first half of this year. Steel orders and production also continue to be very high. Even though imports are expected to rise, domestic absorption also continues to increase so domestic production and orders haven't yet weakened from very high levels. One director said that foreign steel would arrive just in time to meet his company's needs. Another asserted that the cutbacks and consolidations had ended in the health care sector and that we should expect faster increases in health care costs going forward. In fact, one director commented that on the basis of what he is observing, health care costs are starting to soar in western Pennsylvania. of a small manufacturing company said that there seemed to be a lot of people who were trying to put their money to work because she was receiving 4 to 5 offers to buy her company every week. Help-wanted advertisements that a year or two ago would have produced a lot of resumes now produce very few, and the only ones from qualified people are from individuals who already have jobs and are looking for big wage increases. Commenting on very strong worldwide demand for machinery to make plastic goods, one director said that there is an inordinate amount of capital available for acquisitions in that industry and that we should expect a lot of consolidation, both domestic and international. Turning to the Greenbook forecast of the national economy, it is a good news, bad news story. The good news is that I really like this Greenbook forecast for 1998. The bad news is that I simply do not believe it. [Laughter] I have tried hard since last Thursday night to convince myself that we got this lucky in terms of the economy's performance and prospects because the crony capitalism and corruption in Southeast Asia has taken us out of the very difficult policy spot that we had gotten into. Nominal spending growth accelerated in the second half of last year to a pace well above what the forecasts were showing just 6 months ago, not just the Greenbook forecast but everybody's forecast. Nominal spending growth accelerated, real growth accelerated, and money growth accelerated. Every measure of money came in well above what had been expected, creating what looked to me like a tough spot to work out of. Then we got the Southeast Asian crisis that supposedly solves the problem for us. When I look at components of the GDP forecast such as personal income, however, I see a strongly rising trend of nominal personal income growth through 1997 with all the favorable factors that contributed to it, and I then note that the forecast suddenly cuts the rate of growth by half to about the 1990-1991 recession pace. I do not believe that forecast. I think it is plausible to anticipate that real growth will decelerate, and the reason is simply that there is nothing in the universe for which the second difference is always positive. The second difference of everything must turn negative. If the second differences of real growth and employment slow because we have supply-constrained economies, then we simply have to hope that growth in final demand will slow simultaneously. I do not find it plausible to anticipate that the amount of slowing that is necessary in final demand is going to come from weaker exports. In fact, some companies in our area that view themselves as global companies now say that the Southeast Asian situation is an opportunity for them to export high-tech products that they want for their own foreign operations. The risk is that the reported slower growth of output and employment will materialize but not the slower growth in final demand. If so, we are going to find ourselves at some point with substantially much more upward pressure on inflation than is now forecast or showing through the numbers, and we will be scrambling to catch up. Thank you.",1080
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. With regard to the District economy, it is hard to imagine that conditions can get any better, with perhaps a few minor exceptions. I have described much of this to you in recent years, and I will not go over this terrain again. A particularly bright spot at the moment is construction activity. It is strong in much of the District and probably would be stronger if it weren't for the fact that there is a labor shortage in the construction industry and some projects are not under way or are going more slowly than planned as a consequence of that. Another favorable development is that there continues to be virtually no evidence of a broad-based acceleration of inflation. But having said that, wage pressures have continued to intensify, and I would expect that to continue as we go forward. It is perhaps also worth noting that the unemployment rate in the Minneapolis/St. Paul metropolitan area has now dropped below 2 percent. That is probably a record low, and it is also significant given the Twin Cities' dominant position in the nonagricultural sector of the District. Finally, Asia is not yet a significant issue in the District, although clearly people in agriculture and some other natural resource industries are, I guess it's fair to say, at least a bit concerned about it. As far as the national economy is concerned, I certainly agree that there may be even more than the usual amount of uncertainty about the outlook. But, net, I am more optimistic about real growth than the Greenbook, and I get there mainly because of productivity considerations. To some extent, based on statistical judgments but more importantly on the anecdotes that we have heard over and over, I have become convinced that productivity is on a more favorable trend and therefore capacity is as well. I believe aggregate demand will grow sufficiently to equal that capacity. All in all, I am more optimistic than the staff about the potential growth of the economy.",383
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"As a lot of people have noted, the Committee is faced with an unusual degree of uncertainty. We all said that to each other in December but it is more true now. Uncertainty does not make today's decision harder; in fact, it makes it easier. The fact that there is no imminent danger of inflation or recession makes it easy to justify leaving the monetary policy levers where they are until more evidence accumulates bearing on the question of which way we might want to move them. Uncertainty at this level, however, does mean that we are likely to be facing very tough decisions in the next few months. The question is in which direction. I can live with the Greenbook forecast, but I can also imagine the economy proving to be a good deal stronger than the staff projects. Consumer demand could prove even more resilient than they are projecting based on strong wage growth, attractive interest rates for financing homes, durables, and cars, and continued strength in the stock market. Yesterday's stock market increase seemed irrational to me since the best that could be said about the Asian crisis is that it may have bottomed out and that its currently predicted slowing effects on the U.S. economy and the rest of the world may not worsen any further. However, my thinking that market behavior is irrational, or indeed even the Chairman thinking out loud in the same vein, does not guarantee that such behavior will not continue. Favorable financing and general optimism also could keep business investment stronger than projected. If the economy does prove stronger in the near term than the staff anticipates, we could be faced with a difficult dilemma as early as next month, especially if the big increase in the ECI at the end of 1997 turns out not to be a blip attributable to extraordinary bonuses for real estate agents and stockbrokers but the beginning of a broad-based acceleration in labor compensation. Some of the comments around the table seem to support that possibility. A decision to increase the federal funds rate would be difficult to defend publicly because the downward pressures from declining import prices would still be constraining inflation. Productivity might still be exceeding expectations and the prospect of a slowdown in the economy from the net export drag and slower inventory accumulation would still be highly likely even if it were not showing up in the current data. If all this happens, we will have to face up to a hard choice about raising rates in March. I do not know how we would come out, but I think Al Broaddus would be a lot less lonely! [Laughter] Conversely, I can imagine the U.S. economy looking substantially weaker than the Greenbook forecast over the next few months. This scenario would depend largely on psychological factors and not on anything likely to be picked up in models. The list of downside factors includes some potential setbacks in Asia, such as the lack of political will to carry out the reforms in Korea or Japan or a new round of devaluations, possibly sparked by China and Hong Kong giving in to pressures to devalue. Other downside factors might involve a spate of poor U.S. corporate earnings reports that triggered a steep drop in the U.S. stock market and a fall in consumer and business confidence, negative domestic political developments, or escalating tensions in the Middle East. Any of these triggers would precipitate a steeper-than-anticipated reduction in U.S. growth and even a negative downward spiral that would threaten a world recession. I view this scenario as a lot less likely but a lot more dangerous than the first. The Fed might be called on to act quickly but decisively to contain the damage and try to restore healthy growth. The one thing the world cannot afford right now is a stalling U.S. engine. The hard decision, especially if events prove only mildly more negative than now expected, will be to distinguish between a stall and a return to sustainable growth. I for one believe that the economy's recent history strongly suggests two conclusions: One, that the U.S. economy is a lot less inflation-prone in the face of tight labor markets than we used to think it was. Second, that tight labor markets have important positive effects on individual incentives to work and acquire skills and experience and on business incentives to invest in productivity-enhancing processes and capital improvements. Hence, I believe the Fed should be prepared to act quickly and decisively to limit damage from slow growth and rising unemployment.",879
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Usually on college campuses, the demand for economics courses goes up as economic conditions worsen, so I guess in a way I'm glad I switched careers. Looking at the forecast, inflation seems to be stabilizing at about 2 percent or so. That rate is arguably close to a definition of stable prices we might all endorse, given the measurement errors in the price indices. Even at the present levels of labor force utilization, we obviously are not far from NAIRU as far as I can tell. If the Greenbook is right, more wind will be taken out of final demand. Among the Greenbook simulations with alternative assumptions, I prefer the forecast that is given with no stock market decline. It seems to me that all these possible declines in earnings could perfectly well be known and already capitalized in stock prices. So, I would not crank in lower stock prices and would get a slightly more bullish forecast. Even so, the unemployment rate does rise some, and while it remains below NAIRU, it does get a little closer. The summary of present conditions is that we are fairly close to target, both on the price side and the output side. Most of you have mentioned the relevant risks. The upside risk is that unemployment is low, and usually that is the most important phenomenon. The employment cost index for the fourth quarter could turn out not to be a blip. We think it is, but we are not sure, of course. I must say that for three meetings in a row the combined comments of the Reserve Bank presidents have scared me. They seem to give a tighter tone than we get from looking at the national statistics. On the downside, there are a lot of risks, many of which have not been mentioned so far. Commodity prices have been reasonably well behaved, gold prices are pointing down, term spreads indicate stable prices, inflation anticipations are turning down, and utilization rates are not terribly threatening. As far as I can tell, a lot of the volatile prices and exchange rates in Asia seem to have hit bottom. What I think a lot of you are reporting is not that the changes in exchange rates and related prices aren't going to have significant effects but that they have not been that significant yet. I think we probably will see more Asian effects on the domestic economy. Another risk is that if inflation really has dropped to a slightly lower level, we have a higher real funds rate than we had before, and this is a non-trivial factor. So, there are a lot of risks on both sides. It is hard to add them up. They are certainly in both directions in my view, and the weight on the downside may be a little bigger.",544
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The year 1997 turned out to be a very good year, no matter how we look at it. Output expanded. The U.S. jobs machine was alive and well. Salaries and wages recorded real growth. A balanced federal budget came into in sight. Overall inflation was relatively well contained; goods inflation appeared to be about nonexistent, but inflation in the service industries did persist at about 3 percent. I don't think the 1997 growth rate is sustainable and strains are starting to show. Some of the reports around the table today have provided examples of labor shortages that now appear to be hampering some kinds of investment activity. Increases in labor costs show signs of edging higher at least in some areas. Although increases in compensation costs have been offset by increases in productivity, it is questionable as to how long that process can continue. Since the U.S. economy is service-oriented and costs are under pressure in that sector, it is hard to believe that aggregate inflation will be held at bay forever, but the indicators are better at least for the near term, particularly on the goods front. While the U.S. economy is strong, Asia remains the big unknown. Had the Asian situation not occurred, effectively reducing the outlook for expansion in the United States and indeed perhaps world growth, I think something else would have happened to slow things down. We could have had a stock market correction. Inflation could have heated up. Demand, particularly in the labor markets, could have outstripped supply, and we could have seen more of an increase in salaries and wages. More likely, preemptive monetary policy would have been necessary. It seems to me that the Asian crisis is simply the trigger for the emergence of a slowdown that was bound to happen. That leads to the next question, how much of a slowdown will we get? I find myself more optimistic than the staff in that I anticipate a more sustainable growth rate of 2-1/4 to 2-/2 percent for 1998. The fundamentals that made 1997 so strong have not gone away: a strong labor market and a good climate for continued investment--adequate cash flow, profits that seem to be holding up at least for now, reasonably low-cost capital, and strong balance sheets. Consumer spending should also hold up as long as employment is sustained, and if the mortgage refinancing boom continues, consumer spending should support economic growth in 1998, or at least there shouldn't be much of a slowdown in the growth of consumer spending. I admit that Asia is likely to be a decelerating factor, but even Asia creates some crosscurrents for U.S. economic growth. In sum, there clearly are risks and they may have increased. But unless the stock market declines more than the staff assumes or unless the Asian situation produces more unanticipated surprises, the expansion should slow to a more moderate growth path in 1998 with inflation contained in the near term. If and when conditions stabilize in Asia, inflationary pressures are likely to resume for all of the traditional reasons, but it does seem to me that the timing is pushed out for now.",633
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I understand that the role of central bankers is, in fact, to take risks. I was rather surprised to learn that, coming as I did from consulting where we took no risks. But I am getting used to this job. The economy, as others have said, clearly entered 1998 with significant momentum. Since we last met, we have seen a number of indicators of notable strength going forward. Examples include consumer confidence, low long-term interest rates that make for a low cost of capital, housing permits, and something no one has yet mentioned, the rise in real adjusted durable goods orders. So, a number of factors point to strong forward momentum. I will concur with what Governor Gramlich had to say. There are also a number of factors that suggest that inflation pressures may well diminish as we go forward in 1998. These include oil prices, commodity prices, inflation expectations, and capacity utilization. In addition, there is obviously what I think is the least understood risk, which is the turbulence in Asia. There we are getting a broad range of signals. The anecdotal evidence suggests that developments in Asia are starting to produce some slowdown in some U.S. industries, but I was surprised to hear how few presidents came forward with more of those kinds of stories. In addition, of course, some have indicated that the markets in Asia seem to have a point of view, perhaps irrational, that the situation there is starting to turn. Before this year is over--it could be in March or a little later--we may confront some tougher policy choices. I noticed that there is already a bit of a split in the Committee about the outlook. For now, to make this short, the economy is strong, the impact of Asia is unclear, and the risks are greater. I happen to think that there is still greater upside than downside risk. But in that environment, I believe we are going to be together as risk takers, and I would encourage us to maintain a vigilant, maybe quite uncomfortable, waiting attitude to see exactly what emerges going forward.",421
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Recent reports on the Second District economy point to steady growth. That is an improvement over recent years. Both the payroll and household surveys indicate further tightening in the District's labor markets in December and in the fourth quarter overall. Payroll employment for New York and New Jersey combined grew at an annual rate of 2-1/2 percent during the last three months of 1997. That is up from 2 percent in the prior quarter. Most of the job gains were concentrated in New Jersey and downstate New York. On the whole, post-Christmas retail sales appear to be running roughly on plan, with inventories generally at levels that are satisfactory to store owners. Unseasonably mild weather across most of the region has hurt sales of cold weather items and has caused an inventory overhang of some seasonal merchandise. The early January ice storm that spilled over from the First District and hit part of upstate New York disrupted business during the first half of the month. It is not clear yet what lasting effect that storm will have. The housing markets across the region appear to have gained steam during the fourth quarter, possibly assisted by unseasonably mild weather. Housing permits in New York and New Jersey, which had slipped below year-ago levels during the spring and summer months, rebounded in the fourth quarter, and there was unusually brisk activity in December. Single-family sales in New York State have picked up. The office vacancy and availability rates across the metropolitan New York area continue to decline. In midtown Manhattan the availability rate fell from 10.7 to 9.1 percent, and in our area downtown the rate has tumbled from 18.9 to 15.5 percent. Vacancy rates are similarly low in suburban areas. I spoke at some length at the last meeting about the possible dangers coming from the Asian situation and expressed the view that the hoped-for continuation of good economic performance in the United States and in the world in general depended on the Asian situation at least not getting seriously worse. There has been some progress in Asia in that conditions in both South Korea and Thailand seem to be improving. I don't think Indonesia can be described that way. Japan, if anything, is perhaps even a greater potential problem as their financial and political paralysis seems to continue. We agree at the New York Bank that the most likely forecast is one along the lines of that in the Greenbook. We see a slowing in growth during the first half of 1998 and some subsequent strengthening to a growth path of about 2 to 2-1/4 percent. However, we are somewhat more concerned about inflation than the Greenbook. That is largely because, as we continued to disaggregate the ECI, we noted that the employment costs for those portions of the service sector of the economy in which there is no import competition are rising rather significantly. That is the case not only in the fourth quarter but for about three quarters in a row, and I think it is something we have to watch very closely. On balance, with the Asian risk on one side and the view that most of us have that the expansion will slow in the first half on the other, I think we are in a very good policy position. But I agree with a number of other speakers that the Asian situation could make things worse. On the other hand, the economy could be stronger and this rather troubling increase in costs in the service sector, which basically is not subject to import competition, could mean that we will have a policy challenge on the upside as well.",715
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. We're coming down the home stretch here, and I'm afraid I am going to be quite repetitive, but I will press ahead briefly. Inflation, of course, is still showing no signs of rearing its ugly head even as the domestic economy rolls along strongly. We had a very strong fourth quarter and this quarter looks strong so far. We surely are going to get at least some slowing from developments in Asia. But as I look for reasons to expect any slowing from non-Asian sources--in other words for domestic reasons--I find it quite hard to uncover any, and I would be loathe to predict very much downside from domestic developments. In fact, it seems to me that the domestic scenario is distinctly one of upside risk, although we certainly should not ignore or forget the possible downside shocks that Governor Rivlin listed. Asia, of course, is the major unknown of which we are aware, and it potentially skews the risks in both directions in the following sense. I was struck by the phrase that a writer used in yesterday's Financial Times when he observed that the Asian impact needs to be just right. If it is, that's going to be really good news. In fact, that is exactly what is being predicted by most observers and indeed in the staff projection we looked at a little earlier. If developments in Asia slow the U.S. economy just enough but not too much, that would be a very nice outcome. But if that assessment is wrong, the risks could certainly be skewed in either direction. If the Asian impact is meaningfully stronger than projected through metastasizing to other countries or for whatever other reason, then it obviously could cause a downside jolt that the Fed might need to respond to. Alternatively, if the impact turns out to be meaningfully weaker and the crisis either is or for some time appears to be contained and its effects rather modest, that then opens the door to the high probability of a strong run by an already buoyant American economy. In that case, our longstanding upside concerns may very well be realized and we might have to respond. So, which way will it go? Will it be about right, stronger, or weaker? I think we're going to have to wait and see, and meanwhile, once again, steady as she goes.",464
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Not a lot has changed since the last meeting to affect my assessment of the near-term outlook. The key forces at work remain clear. These are the tug of war between the momentum in domestic demand and the expected external drag from Asia and the tug of war between very tight labor markets and the forces that have restrained and appear likely to continue to restrain inflation. But there is, as nearly everyone has said today, a great deal of uncertainty about how these powerful forces will play out, particularly with regard to the uncertain dimension of the still evolving crisis in Asia. It seems to me, therefore, that there is not much for us to do for a while but to wait and see precisely how these crosscurrents balance out. Relative to the Greenbook forecast, I would expect slightly stronger growth this year, with the expansion slowing down a little less to a pace close to 2 percent, and slightly higher inflation. I think my forecast is qualitatively in the same spirit as the Greenbook. Given the crosscurrents and related uncertainties, a variety of outcomes could challenge monetary policy in coming quarters. I want to comment on two. One of them could easily come into play almost immediately and a second might arise later this year and into next year. Perhaps the most important question that we may have to confront in the near term is how long we can afford to wait for the effect of the spillover from Asia to slow growth to or below trend. This question is highlighted by the stronger-than-expected performance of the economy in the fourth quarter, including the somewhat more favorable than anticipated mix between final demand and inventory investment, and is also highlighted by the upward revision to the Greenbook forecast for the first quarter. The prospect for further strong employment gains and a further tightening in labor markets immediately ahead raises the question of how long we can afford to wait and how much further tightening in labor markets we are prepared to tolerate without some response. The good news is that the initial conditions afford us the luxury of waiting, assuming at least that we do not have to wait much beyond the first quarter to observe a slowdown in growth toward trend. Because it appears that inflation is likely to remain in check in the near term despite tight labor markets, there may be room to wait out some residual above trend growth, provided the forecast continues to point toward slower growth ahead. My greater concern, however, is the forecast for inflation in 1999 and beyond. While this does not bear directly on our decision today, it highlights a transition that we will have to make and one that might reasonably affect the way we respond to developments over this year. The relevant issues are effectively highlighted in the longer-term simulations reported in the Bluebook. In those simulations, a combination of tight labor markets and dissipation and reversal of some of the forces that recently have been restraining inflation finally begin to put upward pressure on inflation into 1999 and beyond. One of the alternative longer-term scenarios in the Bluebook involves a tightening to prevent the persistent updrift in inflation. We may want to keep this scenario in mind if growth slows to below trend or the unemployment rate edges upward as in the staff forecast. The transition ahead may require either such a period of below trend growth or a tightening of monetary policy, and maybe both.",665
-fomc-corpus,1998,Mr. Rives.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. Economic conditions in the Eighth District are consistent with full employment of the region's economic resources. District labor markets remain very tight, with measured unemployment rates showing no indication of departing from their lowest levels in 20 years. The diminished pool of qualified labor continues to temper employment gains in the District relative to those seen nationwide. Labor inflows from other regions do not appear sufficient to meet the demands of firms engaged in the current robust business expansion. Despite these caveats, reasonably strong employment gains persist in many manufacturing sectors and to a lesser extent in construction, especially nonresidential building activity. In some areas, increased wage pressures are accompanying the tight labor markets. A District executive in the health care field suggested that further productivity gains in that industry are unlikely in the near term. On balance, Asian market turmoil does not appear to be exerting a serious drag on the District's economic activity. Recent discussions with business contacts in the District indicated that while some industries have seen appreciable disruptions, others have benefited from lower costs that foreign-based suppliers can pass along. Some agricultural prices have declined sharply in response to the Asian situation. On net, the effect on economic activity in the District appears to have been minimal and absent a dramatic deterioration of conditions in Asia, the effect should remain muted. Even in the face of diminishing labor pools and disrupted foreign markets, District manufacturers remain optimistic for 1998. Orders appear to be holding firm, and so far there have been no broad-based adverse inventory shifts. Likewise, consumers appear to have perked up recently. Initial District reports suggested that retail sales increased between 2 and 3 percent on average during the 1997 holiday season over a year earlier, but those increases may be somewhat understated in view of post-holiday sales strength. As long as income and employment gains remain solid, there is little reason to question the forecasts of retailers who are expecting moderate to strong sales during the current quarter. I will not repeat the indicators relating to the nation's economy that have been mentioned, but the national economy in our view is entering 1998 with substantial momentum. The economy appears very robust and shows few signs of slowing. As a result, the Eighth District forecast is on the high end of the range of the members' forecasts for nominal and real GDP growth and on the low end of the range for the unemployment rate. Considering the environment in which recent inflation gains have been achieved, we may be testing the bottom on inflation, with most of the future risk remaining on the upside.",509
-fomc-corpus,1998,"Thank you very much. This appears to be the appropriate time for us to adjourn for the evening, and I look forward to seeing you tomorrow morning.",31
-fomc-corpus,1998,"We will now turn to a discussion of the long-run ranges for the monetary aggregates, and I will call on Dave Lindsey.",25
-fomc-corpus,1998,"The Committee was given some colorful charts yesterday, but today I will be referring to the colorless charts entitled, ""Material for Staff Presentation on Long-Run Ranges."" 3/ The first page of your handout reproduces the table on page 11 of the Bluebook except for a revision to the M2 and M3 growth rates for 1997 in the first column. The receipt of new data from the Investment Company Institute on the IRA component of retail money market mutual funds in the second and third quarters of last year has caused us to revise upward the annual growth rates for M2 and M3 by 0.3 percentage point each. Thus, the revisions place M2 growth somewhat above the 5 percent upper bound of its range for last year and M3 growth even further above its 6 percent upper bound. The second column shows staff forecasts for money, credit, and nominal GDP this year. Nominal GDP and M2 are both expected to grow at annual rates of 3-1/2 percent, which represents quite a slowdown for both measures. The Committee's own central tendency for nominal GDP has a midpoint a bit above 4 percent, implying a somewhat faster rate of M2 growth than the staff foresees this year, assuming flat V2. The lower panel of the next chart, also revised from the Bluebook, puts the implied prediction of a flat V2 over 1998 in the perspective of the experience of recent years. Despite the uptrend of V2 from mid-1994 to mid-1997, we expect the pattern of little velocity change that held late last year to persist through this year. The steady funds rate assumed in the Greenbook forecast implies that the opportunity cost of M2 will change little. We also believe that the sogginess of stock prices in the staff forecast will divert some inflows from stock mutual funds to M2 assets, with their stable principal, thereby short-circuiting any renewed updrift in V2. With that outcome, the behavior of V2 this year would parallel its performance during the three decades prior to the 1990s shown by the dots surrounding the regression line in the upper panel of this chart. Over that period, the velocity of M2 was relatively stable unless the opportunity cost of holding M2 balances varied. Your next chart shows our forecast of a sharp decline in M3 velocity this year that follows from the staff's projection of 6-3/4 percent growth of M3. At more than a 3 percent annual rate of decline, the line this year is not only steeper than the nearly 1 percent trend rate of decline over the three decades prior to the 1990s but it is also steeper than the 2 percent average rate of contraction over the three prior years. The staff foresees rapid M3 growth relative to that of nominal GDP this year, in part because businesses should continue to find the institution-only money fund component of M3 an attractive cash management tool. More important, depository institutions will need appreciable M3-type funding to finance lending if they are to maintain their share of relatively rapid debt growth. Our projection is that the growth of the debt of domestic nonfinancial sectors, at 5-1/4 percent, also will exceed that of nominal GDP by a sizable margin. Hence, projected debt velocity, as shown in the lower panel of this chart, falls this year at almost a 2 percent pace. As may be seen in this panel, apart from the exceptional drop in debt velocity during the 1980s, this ratio has evinced little trend since the early 1960s. The fall in debt velocity this year mostly reflects larger business borrowing necessitated by flagging corporate earnings and greater merger-related retirements of equity. Turning back to the table, three alternative sets of ranges are presented for Committee consideration. Alternative I retains the provisional specifications that the Committee chose last July. In recent years, the FOMC has not interpreted the ranges for broad money as suggestive of its expectations for growth over the year or two covered by the ranges. Instead, because of continued heightened uncertainty about the demand for broad money, the Committee has interpreted the ranges as being consistent with the trend of money growth under conditions of price stability. With true price stability, nominal GDP would grow at a rate of around 3 percent each year; that increase is composed of measured potential real growth of 2-1/2 percent and an upward bias in the GDP price index of a bit more than 1/2 percentage point. If V2 were flat and V3 were to trend down by 1 percent as was the case in the three decades prior to the 1990s, then the midpoints of the provisional ranges of alternative I would match the expected growth of M2 and M3 under price stability. The FOMC has interpreted the 3 to 7 percent debt range of alternative I differently than the ranges for the monetary aggregates. The Committee has intended the debt range to encompass the likely growth of debt over the year in question. The actual growth rates of debt over the last three years, in fact, turned out fairly close to the 5 percent midpoint of this range. This 5 percent midpoint, however, would be too high to characterize our expectation for trend debt growth under conditions of price stability. As we have seen, debt velocity has tended to stay about constant, apart from its decline during the unusual decade of the 1980s. Alternative IIIin the table adjusts the debt range down to 2 to 6 percent, matching the provisional M3 range and in effect moving the rationale for the debt range closer to one consistent with trend debt growth over time under conditions of price stability. Under alternative II, all three ranges would be roughly consistent with price stability. Because the staff projects a step-up of debt growth from 4-1/2 percent last year to 5-1/4 percent this year, though, the Committee may not consider 1998 to be an auspicious year to harmonize the rationale for the debt range with that of both broad monetary aggregates. If the Committee chooses to leave the debt range and its rationale unchanged at this meeting, it may wish to consider alternative II. This alternative encompasses the expected growth this year of all three aggregates. Thus, it makes the rationale for M3 more like the familiar one for debt in the provisional ranges. It raises the M3 range to 3 to 7 percent, so that the upper end is above the staff's projection of 6-3/4 percent M3 growth this year. Of course, raising the M3 range even more, say to 4 to 8 percent, would come even closer to centering the range around expected M3 growth for this year. But such a move would depart even further from the specified range for trend M3 growth consistent with price stability, making it even more wrenching in some future year to return to a price stability rationale for the M3 range. I should add in concluding that the staff remains somewhat uncertain about its projections of the broad money aggregates relative to nominal GDP. M3, in particular, has shown itself to be subject to unpredictable surges or sluggishness in its non-M2 component. This behavior has resulted from changes in bank reliance on large time deposits, which are included in M3, versus borrowing funds from foreign offices, which are outside M3. Even M2 velocity behavior may not have returned all the way to normal. Specifically, the staff is still unsure whether any significant uptrend of V2 independent of the opportunity cost of holding M2 balances will resume in the years ahead as financial innovations or perceptions of attractive returns lead households to diversify further their savings away from M2 balances. Any such uptrend is unlikely to be of the dimensions of the shift in the early 1990s, but the possibility of continued shifts in money holders' portfolio preferences makes projecting the future behavior of V2 still error prone.",1622
-fomc-corpus,1998,"I am looking at the lower frame of Chart 6. It illustrates clearly the independent rise in V2 at any given opportunity cost, because the opportunity cost has not moved very much.",37
-fomc-corpus,1998,"On balance, it has not; that's right.",10
-fomc-corpus,1998,"The behavior of V2 since mid-1994 had suggested to us earlier that the relationship of V2 to opportunity cost was moving back to its previous pattern in the period from 1959 through 1989. Does the more recent pattern alter that view or merely emphasize that even this shift back, so to speak, has meaning only in the context of a further secular updrift of the trend in V2?",84
-fomc-corpus,1998,"That is the open question. It is true that we think the velocity of M2 since mid-1994 has moved more closely to its behavior over the three decades prior to the 1990s. However, it also is true--and we sent the FOMC a memo to this effect--that we can fit an equation with only M2 velocity, opportunity cost, and a time trend from mid-1994 to mid-1997 that gives an annual growth trend of 1-1/4 percentage points. We certainly do not see that uptrend in the last part of 1997, as one can see from the chart, nor do we foresee such an uptrend going forward because as I mentioned in my briefing, we anticipate some weakening in stock prices in 1998. The latter should, as I said, short-circuit some residual trend toward increasing velocity. However, we are somewhat unsure of what the future holds in store. It is true that we have estimated a model over this whole period that in the early 1990s has velocity change starting to move in a gradual ""S"" pattern. This model fits recent years better than any of our other models. It suggests that the residual uptrend of V2 in 1998 will be only about 0.2 percentage point, virtually zero, and that it will move down to 0.1 percentage point in 1999. So, to the extent we believe the ""S"" pattern indicates that the updrift in velocity is gradually coming to an end, we would not anticipate much of an uptrend in velocity going forward. Whether one can believe that is, as I say, an open question. Personally, I feel fairly uncertain about the behavior of V2 going forward, but having said that, I certainly feel more secure than I did as we went through the early 1990s and observed that extreme updrift.",389
-fomc-corpus,1998,"You mentioned the stock market as being the reason for bringing down V2 through the forecast period, other things equal. Have you tried to put stock prices in as an additional variable in your model to see if anything happens?",44
-fomc-corpus,1998,"We have estimated a variety of M2+ and M3+ models in an effort to capture the non-M2 or non-M3 components of those broader measures. We have had some success but not a perfect success. One issue is that inflows to stock mutual funds were negatively correlated with inflows to M2 until the last two years. Inflows to both M2 and stock mutual funds subsequently increased to fairly rapid rates, so they became positively correlated. It could be pointed out that spending also was strong, tending to provide a third reason for that positive correlation. I would not say we were entirely successful in our efforts to construct models that capture well the behavior of M2+ or M3+. I would be interested in Don Kohn's view of that, though.",156
-fomc-corpus,1998,"In a technical memo that was circulated some six months ago, we put in stock and bond mutual funds, and we came away at that time with some sense that when the growth of those funds was strong, M2 was weak. So, that result gave us a little confirmation of a tradeoff. Recently, I saw a chart that suggested the two had become more positively correlated. For example, stock mutual fund flows were extremely strong in the second half of last year; M2 also was strong. But income growth likewise was very strong, so the economy was generating a lot of savings that were allocated to both. I still think some of the evidence points to a bit of a tradeoff there, but we do not feel very confident that we have pinned down the substitution between capital market mutual funds and M2.",163
-fomc-corpus,1998,"When we normalize M2, stock mutual funds, and stock market prices by consumption or income or some parameter of that nature, does the sign reverse on the relationship between M2 and mutual funds?",39
-fomc-corpus,1998,"The original equation of a year or so ago had income in it, so income was being taken into account. I don't know about the more recent modeling experience. As I noted, the chart that I saw suggested that the two recently had tended to move together, but I don't know whether income was held constant in the model.",65
-fomc-corpus,1998,Expressing them as ratios to income or consumption is not the same thing as regressions that include those variables.,22
-fomc-corpus,1998,It is a different form.,6
-fomc-corpus,1998,It should be if it isn't. Further questions for David?,12
-fomc-corpus,1998,Can I be forgiven a rookie question?,8
-fomc-corpus,1998,Those are the unanswerable questions.,8
-fomc-corpus,1998,"All these Bluebook ranges are four percentage points wide. Is that writ on a stone tablet somewhere? It strikes me that with all the financial uncertainties and the institutional changes that are occurring in the financial markets, it is very hard to pin these relationships down whether one uses ""S"" curves or whatever. Where do the four-point widths come from?",69
-fomc-corpus,1998,"That, of course, is a matter that gets decided by this Committee. The historical precedent is that the ranges through 1987 were three percentage points wide and the Committee raised them to four in 1988.",43
-fomc-corpus,1998,"So, now we are in 1998 and might it go to five? [Laughter]",20
-fomc-corpus,1998,"When it was widened, Governor Gramlich, it was as a result of some increasing uncertainty about what demand for M2 would be consistent with the Committee's expectations for nominal GDP over the coming year, especially since M2 does retain considerable response to opportunity costs. At the beginning of 1988, the Committee did not know whether interest rates would be rising or falling. The members were a little uncertain about the position of the demand curve as well. In order to have the ranges reflect both uncertainties, interest rates and position of the demand curve, they widened them to four percentage points.",117
-fomc-corpus,1998,Further questions? Who would like to start the Committee discussion? Governor Meyer.,15
-fomc-corpus,1998,"Whenever we talk about the monetary aggregate ranges, it seems to me we are always caught between two kinds of decisions: whether we want to confirm or change the interpretation we give to the ranges and what boundaries we want to set. The staff presentation today reminds us that the ranges are set inconsistently in terms of their interpretation, and we have an opportunity to make them more consistent. M2 and M3 are set according to what I call a ""price stability"" rationale, one that is consistent with price stability and normal velocity behavior, and debt is set according to what I call a ""projections"" interpretation. It seems to me that the principle of consistency has some value here. I think the ranges should be set consistently with one another. We could argue as to whether the ""price stability"" or the ""projections"" interpretation is the one we want to use. In my view, the choice between those two involves two principles. One I call convenience. As long as there is a lot of uncertainty or projected potential instability in the aggregates, the ""price stability"" interpretation is rather convenient. The other principle is consistency with Humphrey-Hawkins, or the spirit of Humphrey-Hawkins, and that would make me lean toward the ""projections"" interpretation. In the midst of concern about the instability of the monetary aggregates, I am comfortable with the ""price stability"" rationale until stability emerges long enough for us to move back to a ""projections"" interpretation. Given that, I prefer the spirit of alternative III. In particular, I cannot think of a good rationale for alternative II because all it does is change which aggregate is inconsistent with the other two. Now, while I like alternative IIIin principle, I do not think the timing for moving to that alternative is particularly good. On the one hand, we would be lowering our target range for debt and raising our forecast of its growth. On the other, we would be drawing attention to the monetary aggregates at a time when we do not necessarily want to signal that we are going to place more emphasis on them. So, I would prefer to retain alternative I, and as the growth rate projections for the debt aggregate decline over time and become more consistent with the ""price stability"" rationale--if that should occur--we could then lower the debt range and change its interpretation, too. One other observation that I would bring up relates to the ranges for the M2 aggregate. The staff has made a very good point that the M2 range seems to be almost perfectly centered on virtual price stability. It implies a 1/2 percent increase in inflation. So, it might be said that, by voting for alternative I, we are saying that price stability is indeed our long-run inflation target and is what we intend to achieve. I want to come back to that issue in my policy position statement, but I do not want my preference for alternative I necessarily to carry that implication.",590
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"On the ranges, I think the main thing we need to do is to leave the M2 range where it is today at 1 to 5 percent. That would serve both as a signal of our continuing commitment to price stability and operationally as a likely rate of M2 growth that would be consistent with maintaining the low inflation environment we are now enjoying. All three alternatives have a 1 to 5 percent range for M2, so I am relatively indifferent among them. In this regard, it is worth noting, as Dave Lindsey indicated, that there is some evidence that the standard M2 demand equation is coming back on track. So, at least some case can be made for giving M2 a little more weight. I recognize the uncertainties that are involved, but I believe a little more weight to M2 would be desirable in our deliberations going forward. In that context, it seems worth noting that if in fact M2 is coming back on track with little or no velocity trend, the annual rate of M2 growth close to 7 percent that we have seen recently is clearly inconsistent with maintaining the progress we have made in reducing inflation. At our Humphrey-Hawkins meeting in July of last year, I made my usual plea, Mr. Chairman, that we consider setting, one way or another, an explicit or at least a somewhat more concrete and precise longer-term inflation objective. A couple of recent developments make me want to put that issue back on the table and I will try to do so very briefly. First, we are very close to price stability right now--candidly, a lot closer than I thought last year or maybe a year and a half ago we would be at this time. With the measured CPI currently around 2 percent and with an upward bias of around 1 percent, the true underlying rate of inflation may now be at 1 percent or perhaps a little higher. That has a couple of implications as I see it. One is that we no longer need to get hung up on the topic of the transition costs of moving back to price stability. We are already there essentially. I think that is a powerful argument for trying to lock in price stability by announcing a somewhat more specific inflation objective. Also, with inflation as low as it is currently, the public has become more aware of and more concerned about deflation. For obvious and understandable reasons, there has been much more public comment about deflation recently than in the past. In effect, one might say we recently have gone through a mini-deflation scare. In the current low inflation environment, it seems to me that our longer-term policy strategy now needs to address deflation concerns as well as inflation concerns. For that reason, I believe we should consider stating explicitly a lower bound for our longer-term inflation objective. It could be zero on an accurate price index or maybe 1 percent or so on the actual measured CPI. We would explain how we would avoid going below that lower bound. If we did that, I think it would help to clarify our strategy for situations that have begun to receive some attention very recently but that, understandably, had not previously received a lot of attention for four or five decades. In my view, that could help us avoid getting into the kind of situation the Japanese have found themselves in from time to time in recent years. Of course, if we announce a lower bound on inflation, then it would make sense for us to announce simultaneously an explicit upper bound as well. It might be in the neighborhood of 3 percent on the measured CPI. Even economists who think that some inflation is desirable for one reason or another generally agree that inflation over 3 percent or so is excessive. In any event, if we did set a lower bound, I believe we would have to set an upper bound because if we did not, we would invite credibility problems. That is one reason for giving strong consideration to an upper inflation limit today. Very briefly, the other consideration that I believe strengthens the case for a more concrete inflation objective, and broadens it incidentally to include a Congressional mandate for price stability, is recent fiscal developments. We all know that there are major fiscal challenges still facing the nation in the long run. But for now, it strikes me that the members of Congress on both sides of the aisle are very proud of their achievement in balancing the budget, whatever the true underlying economic forces producing that balance may be. They feel that they have accomplished their longer-term strategic economic objective, the equivalent for them of our price stability objective. So, the stars may be in the right place for a change, and with a little push it might be possible to persuade Congress to give us some longer-term guiding principles for monetary policy. I would urge you, Mr. Chairman, to consider making a pitch in your upcoming testimony for a Congressional mandate, as you have in the past.",982
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I basically agree with the points made by Governor Meyer and would favor alternative I. It seems to me that the reasons for not changing the ranges that we have cited in the past, some of which Governor Meyer mentioned, are applicable today. Eventually, it will make some sense to go to what is shown as alternative III, but in view of the fact that debt is projected to increase at a faster rate in 1998 than it did in 1997, I don't think this is the best time to make that change.",109
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"I prefer alternative I, Mr. Chairman.",9
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"I also prefer alternative I, and I would like to associate myself with Governor Meyer's remarks. We have to formulate these ranges against the realities of our forecast for the real economy. I am not attracted to alternative II, but I feel a lot of attraction to alternative III because of the consistency of its ranges in terms of their interpretation and their consistency with price level stability. But I agree with Governor Meyer that this probably is an unwise time to move to that alternative. So, I would prefer to stay with alternative I and look for an opportunity to go to alternative III, or whatever the alternative IIInumbers might be when we are prepared to make that move.",133
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,"I also prefer alternative I. It is interesting to observe that M2 growth is coming into closer alignment with the Committee's goal of price stability. I could at some point live with alternative IIIfor many of the reasons that Governor Meyer stated. At this point, no change would be needed in the M2 and M3 ranges and the lower range for debt in this alternative would give us a consistent interpretation of the three ranges. My memory of how we got to alternative I is not quite the one that has been suggested. I don't think we were thinking in terms of inconsistency when the current ranges were set. As I recall, it was more that monetary growth was falling considerably. I have agreed with keeping the M2 and M3 ranges consistent with price stability during the intervening years, and I think that retaining alternative I is appropriate for now. But at some point we will want to contemplate moving toward alternative III.",184
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Governor Meyer did some of us a big favor by articulating at the outset all the good reasons to stay with alternative I, and I agree with him on that. I but for now I would like to leave the ranges alone and not am attracted to alternative III, draw any further attention to the aggregates.",61
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"I am going to sound very similar. I prefer alternative III in order to bring the ranges into a consistent formulation, but given the uncertainties surrounding the M2 and M3 forecasts, I can very easily accept alternative I as well.",46
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Despite the enormous ingenuity of the staff, I don't think we understand these M relationships very well at all. My guess is that our understanding will not get much better. We may get some comforting returns for a while to some relationships with which we are familiar, but that might not last. I think the optimum position would be to tell the Congress honestly that we don't understand the Ms very well. We do not, in fact, discuss monetary policy in terms of the Ms between Humphrey-Hawkins meetings. Don Kohn dutifully mentions them because he thinks he ought to, but that is not the way we think about monetary policy. I don't think we want to take on that crusade at the moment. For that reason, I would stay with alternative I because I think it will involve the least complicated discussion with the Congress about why we are adopting particular ranges. I don't think we have a good rationale for changing them, although moving to a consistent set of ranges would be rather nice. But if I had my druthers I would be consistent in not talking about the Ms at all.",220
-fomc-corpus,1998,You favor alternative zero?,5
-fomc-corpus,1998,"I would prefer alternative zero, but as a practical matter I am opting for alternative I.",18
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I support alternative I largely for the reasons articulated by Governor Meyer. Regarding the point that Governor Rivlin raised about consistency, we probably ought to postpone that debate for a long time because it will open up deep theological arguments that do not tend to get us very far.",53
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,Maybe alternative III later but alternative I today.,9
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"I favor alternative I. If we did make a change, it would be interpreted as our placing increased emphasis on the aggregates, and I don't think we are even close to being in a position to explain that to the American people.",46
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"I too favor alternative I. The only thing I might add to our discussion is that I think it is worth paying some attention to the aggregates, at least in the long run.",36
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"I have been waiting for somebody to say something I agreed with [laughter], and I think Governor Rivlin got closest. I could certainly go with alternative I for now if we do not want to attract attention to the aggregates. But if we are looking to make a change somewhere, my preference would be to go in the direction of deemphasizing these ranges. Absent that, we might widen them to reflect more clearly our view that there is a great deal of uncertainty about these ranges.",99
-fomc-corpus,1998,"Humphrey-Hawkins statutorily requires that we set monetary ranges. Now, I don't think we would be put in jail if we stopped doing it, but the law is the law.",40
-fomc-corpus,1998,The law requires that you indicate your plans and objectives for the growth of money and credit.,18
-fomc-corpus,1998,"Yes, the law is the law, but we could also write paragraphs.",15
-fomc-corpus,1998,I think we have been doing that for some time.,11
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"I agree with alternative I. I think Governor Rivlin said it best. It would be nice in some sense to be more clear about what we are doing, but precedent, previous interpretation, ease of communication, and pragmatism--none of which has anything to do with monetary policy I suppose [laughter]--all suggest alternative I.",69
-fomc-corpus,1998,Mr. Rives.,5
-fomc-corpus,1998,We support alternative I for now and eventually moving to alternative IIIas Governor Meyer suggested.,17
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"I am fine with alternative I also. I actually came to this meeting with a willingness to change the M3 range if that would make people comfortable. But I think the wisdom of leaving it alone and not calling attention to the aggregates probably still is the prevailing view, and that would be my thought.",60
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"I cannot tell the difference between any of these alternatives either in the way the Committee operates or in the way we communicate with the public. I believe we should start to articulate a view as to what monetary policy is all about quite aside from the prices of goods and other assets denominated in units of money. Our objective has never been to stabilize or target or control any of those things but rather to focus on the prices of items that people buy that are denominated in units of money. We have used various monetary aggregates as a benchmark of whether policy was roughly in the acceptable zone, or a constellation of financial variables that gave us some sense of that. I think that once we approach something that most people would consider to be close to price stability, an expression I do not like at all, these ranges do not serve us well. To the extent that it provides any guidance in communicating with the public, I think M2 is the only aggregate that is at all useful and I would not change its range. I would leave it at 1 to 5 percent, but I don't think that is going far enough. We do not want to stabilize prices. We want all prices to be changing all over the lot all the time, especially prices of certain things that should be going down, like computers. Prices of other things, like tickets to Cleveland Indians baseball games, we know are always going to go up. We want people to conduct their daily household and business affairs in the expectation that, roughly weighted in their minds, the prices of things that are going up are matched by the prices of things that are going down and the purchasing power of money is stable. I do not see that M3 or debt is at all useful in communicating that objective. M2 gets the closest to it but it is not satisfactory. The one change I would make for 1998 versus 1997 is that we not only announce a range but that we mean it.",391
-fomc-corpus,1998,"I think that we are not looking at price stability per se as a goal because prices at the end of the day are not that clearly measurable. What we really are endeavoring to do is to reduce the implicit anticipated change in the purchasing power of money that imbeds itself in long-term nominal interest rates. We are trying to extract and stabilize that component of long-term rates because if we can do that, I think we can demonstrate that it will create the lowest level of instability in the economic system and the position in which money plays its maximum role for economic growth. So, it may be that the problem down the road will not be that of following money; it may be our great difficulty in determining how to measure it. We have had to measure unrelated supply variables, and it is interesting that as we get an increasing proportion of GDP composed of palpable intellectual products versus specifically high-tech products, the convention by which we define output has created significant price declines. What do we really mean by those prices and do we have any interest in stabilizing them per se? To carry Governor Rivlin's view further, the difficulty I think we are running up against and indeed the problems we have been having for the last number of years are likely a consequence of the major changes in technology that are fundamentally undercutting our notion of the supply of money, not in a real sense but in the way we measure it. It may be that we can find some way to track the true prospective change in the purchasing power of money, whatever that term means to people, as it deposits itself in long-term interest rates. That should be the Humphrey-Hawkins variable. The problem is that we do not have a clue as to what that number is; it is not something that we can explicitly measure.",358
-fomc-corpus,1998,"I would like to follow up for just a moment because there are two things along that line that we do know as economists, even if we are not able to communicate that knowledge effectively to the Congress, let alone to the public at large. Our theories tell us that if we have a world in which the purchasing power of money is stable, then all changes in nominal interest rates are simultaneously changes in real interest rates. We have a fully anticipated world. Second, when there are changes in the prices of things that people buy and sell, goods as well as assets and various services, those changes in prices denominated in units of money are relative price changes. If the price of something goes up by 10 percent and people think of that as being partly a change in the purchasing power of money and partly a change in relative prices, we are not there. If they can take the percentage change in the price of something as being totally a relative price change, we have achieved a condition of stable purchasing power of money. That means that price increases are matched by price declines of such items as computers and digital watches. Stability in the purchasing power of money is ultimately the benchmark by which our policy is going to be judged. If people conduct their affairs in the belief that the purchasing power of money, real income, and wealth change as prices change, then we have not fulfilled our objective.",276
-fomc-corpus,1998,"If we cannot explain to the American people in understandable words, and not very many of them, what it is that we are trying to achieve, then we are not carrying out our function to create public policy as servants of the people.",47
-fomc-corpus,1998,Can we be employees instead of servants?,8
-fomc-corpus,1998,You would rather be an employee than a public servant?,11
-fomc-corpus,1998,"No, than a servant. [Laughter]",10
-fomc-corpus,1998,"Four or five years ago, I began to think that a target range for some version of the CPI had the merit that it could be explained and it would be understandable. But as time has gone on, I have come to believe that that does not work. That does not meet the very understandable verbal definition of price stability that you invented some years ago, namely that we have price stability when people are not taking inflation into consideration when they make either their investment or household decisions.",95
-fomc-corpus,1998,That is in fact what Jerry Jordan is talking about.,11
-fomc-corpus,1998,"I agree. But I wouldn't worry about figuring out some new, very erudite way to express price stability because we already have the way to express it and it works beautifully. I think it is something we ought to stick to.",47
-fomc-corpus,1998,"May I make a comment? I agree that it is a wonderful definition, and I think it has served us well. The problem is that the concept is difficult to communicate to the public. When the public thinks about the price level, it thinks about the CPI and similar measures. That's why I think we could strengthen our position if we used some kind of explicit guidepost related to that key number. It is the number that most of the American people associate with this phenomenon.",95
-fomc-corpus,1998,"Could I add a point? It is not just our ability to communicate to the public, it is our own internal deliberations that are at stake here. We might ask where we are heading. Do we think we are where we want to be or do we think we want inflation to move down 1/2 percentage point, 1 percentage point, 1-1/2 percentage points? This vague definition was perfectly adequate when inflation was 10 percent, and it worked when inflation was 5 percent, but now I think there is a real question--maybe among us and certainly among the public at large. There is an issue here.",130
-fomc-corpus,1998,It is a nice problem to have. I think there is a general consensus on alternative I. Would you read the appropriate language?,26
-fomc-corpus,1998,"This wording is from page 21 in the Bluebook. The paragraph begins with the general sentence on the Committee's goals: ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1997 to the fourth quarter of 1998. The range for growth of total domestic nonfinancial debt was set at 3 to 7 percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",162
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Minehan Yes Governor Phillips Yes Governor Rivlin Yes,47
-fomc-corpus,1998,Thank you. Shall we move on to current monetary policy? I will call on Don Kohn.,20
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will provide you with some more impalpable, intellectual product that you probably would pay me not to give you. [Laughter] I will spend a few minutes discussing the long-run scenarios in the Bluebook and use them as a lead-in to a discussion of the stance of policy. The Bluebook simulations examine the implications of the staff Greenbook forecast beyond 1999 and look at a few of the forces that could cause the economy to deviate from that baseline. In that risk assessment, we chose perturbations to the international and productivity assumptions underlying the staff forecast. That is not only because those are the areas where everyone is most uncertain, but also because earlier changes on both these fronts have been important in the baseline forecast. For that reason, the simulations can illuminate key characteristics of the baseline forecast. The alternative international developments were modeled as a prolonged Asian shock--that is, a recovery of the Asian economies that begins much later than assumed in the Greenbook--reflecting the risks that structural problems may be less tractable, or the political will to deal with them more ephemeral, than assumed. Greater weakness in Asian economies in the out years is transmitted to us in part through a stronger dollar, in much the same manner as are the current Asian problems that are already built into the baseline. In some respects, this simulation also mimics the effects on the U.S. economy in the baseline of the substantial rise of the dollar before the Asian crisis hit, though that rise reflected strength at home as well as weakness abroad. Similarly, the productivity shock--one percentage point faster growth than in the baseline--may pinpoint some of the effects of the apparent pickup in productivity already being felt in the economy. Last year, the staff raised its estimate of trend productivity by1/4 percentage point, and some of you have voiced suspicions that the gains may be more. The ""shocks"" are alike in one important respect: Both involve favorable supply developments that put downward pressure on prices at any level of output, through lower import prices in one case and lower unit labor costs in the other. Consequently, in both cases, the unemployment rate can run below the NAIRU for a time without generating a pickup in inflation. But the simulations provide the cautionary note that these favorable effects on inflation are temporary. The lower unemployment rate may look like a reduced NAIRU, but inflation will begin to pick up if unemployment is held at that lower rate, even if the dollar remains at its elevated level or the trend in productivity is tilted up permanently. In the baseline scenario, mild underlying inflation pressures begin to emerge in 2000 as the effects of the higher dollar of recent years ebb, nominal compensation rises to reflect higher productivity, and other favorable supply developments wear off. That situation is exacerbated by the swing to a declining real value of the dollar, which, by raising import prices faster than domestic prices, places upward pressure on inflation that must be offset by keeping the unemployment rate a little above the NAIRU. In actuality, any decline in the dollar would not follow the smooth path of the baseline, but rather will occur in fits and starts, which will affect the dynamics of the adjustment of prices and output. But the important point is that the dollar is more likely to fall than to rise over the long run, given what would otherwise be an unsustainable path of the current account. Such a development will leave the Committee with less pleasant choices than has the dollar appreciation of recent years. In contrast to their effects on aggregate supply, the two shocks have very different implications for demand and, hence, for interest rates. Weaker Asian economies reduce demand and require an easier policy relative to the baseline to keep the economy on track. In the simulation, the added weakness of Asian economies effectively eliminates the need for the Committee to raise rates to contain inflation and calls for a modest easing at some point, leaving the funds rate about 75 basis points below the baseline for a time. The additional shock is somewhat smaller than the staffs baseline estimate of the Asian difficulties about to hit our economy, which have been largely responsible for eliminating the 100 basis points of tightening that had been built into the Greenbook last summer. Despite the effects of weaker Asian economies, the relatively high level of real short-term interest rates that has developed over the last year or so persists in the baseline. The productivity simulation may give some insight into the good performance of the economy even as the real funds rate remains well above its long-run experience. A faster trend for productivity increases demand substantially, as the accelerator effects associated with attempts to keep capital growing in pace with the more rapid growth in output cause investment to jump, and as consumption rises with permanent income. However, supply only picks up gradually, in line with faster productivity growth, and real interest rates must increase to forestall inflation. Indeed, strength in consumption and investment in recent years --driven in part by elevated profits and their effects on the stock market, as might be expected from a pickup in productivity--are an important reason why demand has remained robust despite high real interest rates. Of course, possible productivity increases are not the only factor that have been buoying spending at high real interest rates. Another important influence has been that in virtually all other respects financial conditions have been quite accommodative. Greater appetite for risk or perhaps perceptions that risk is now lower have helped to raise equity prices and have made credit available at exceptionally narrow spreads. And the level of short-term rates does not seem to have materially impeded declines in nominal and perhaps real long-term interest rates last year, helping to bolster demand. In the baseline, favorable credit and equity market conditions erode to a limited degree and real rates only edge lower before they need to rise once again for a time to counter the effects of dollar depreciation, remaining above their long-term values for some time. Interest rates should be above equilibrium when the economy is operating beyond its sustainable potential and inflation threatens to rise to levels the Committee does not find acceptable. In large measure, the real short-term rate got to its current high level under such circumstances--though the methodology was a little unusual. The Committee tightened last March, and many members found reassurance in the subsequent, so-called ""passive"" firming of the real funds rate over the rest of the year as inflation, and presumably inflation expectations, fell. This firming occurred with other financial conditions accommodative, the output gap widening as the economy remained on a seemingly unsustainable track, and inflation projected to rise. But Asian developments and incoming data have altered circumstances and projections over recent months. The central tendency of the Committee members' inflation forecast for 1998 has dropped 3/4percentage point since July, while the members' expectations for the unemployment rate at the end of this year are only a touch lower. In the past, for given levels of the output gap, the Committee has tended to move the nominal funds rate with the inflation rate--in fact by more, to ensure against getting ""behind the curve"" in countering either inflation or economic weakness. In light of the level of the real funds rate and the way it came about, the Committee may see it as imparting a downside risk to the outlook. If so, the Committee might want to be especially alert to further increases through declining inflation expectations, and to signs that its high or rising level--or greater concern about risk by savers--was feeding through substantially to financial markets more generally and threatening to damp demand more than the Committee desired. Prompt response to such signs or to unexpected weakness in demand, say because the Asian situation was having a bigger effect than expected, might be called for. With trend inflation already at a low rate, the Committee might want to be cautious about taking the ""opportunity"" to let it drop substantially further. Moreover, in the context of a yield curve that already has built in some easing, market perceptions that the Committee was unlikely to validate its expectations might temper the response of long-term rates to further adverse demand surprises. We don't have much experience with the evolution of steeply downward sloping yield curves arrived at by declining long-term rates. So far, however, high real short-term interest rates do not seem to have greatly affected other financial conditions, except perhaps for the dollar. Financial markets are still accommodative overall, judging from the rise in equity prices, the drop in bond yields, the further narrowing of loan spreads at banks, and robust growth in the monetary and credit aggregates. As a consequence, and perhaps because potential productivity gains and stock market advances continue to fuel spending, increases in real short-term rates and in exchange rates do not yet seem to have impinged substantially on demand. Strength in hiring persists, judging from low initial claims. Labor markets remain quite tight and wages may be on more of an uptrend than the staff has assumed. In these circumstances, the risks may look balanced to the Committee. Against the backdrop of the more robust economic projections of Committee members compared to those of the staff, whether the future drag on demand from the Asian crisis will be enough to stem potential inflationary pressures is uncertain. Moreover, the anomalous position of tight labor markets but damped inflation probably buys the Committee breathing room to await some clarification of developments in either direction before reacting, without risking a serious deterioration of economic performance. If escalating compensation and narrowing profit margins suggest that inflation pressures are turning out stronger than expected, damped actual price increases as the higher dollar and lower oil prices feed through will keep inflation expectations down and add a little incremental restraint in the form of a higher real federal funds rate until the Committee responds. A weaker-than-expected economy will only tend to bring forward in time what may be a required easing of pressure on labor markets now built into the staff forecast, and the Committee should have time to react before the economy overshoots on the downside. In either circumstance, however, delay could easily become excessive, and a sluggish response awaiting unambiguous confirmation of the economy's direction could accentuate volatility in output and prices. Thank you, Mr. Chairman.",2030
-fomc-corpus,1998,Questions for Don?,4
-fomc-corpus,1998,"Don, you noted a few times in your remarks that from the standpoint of one financial indicator, the level of real short-term interest rates, the current stance of monetary policy may be interpreted as being restrictive. The measure you mentioned is the overnight interbank rate minus some index of prices--the CPI or some index like that. You then referred to a wide array of other financial indicators that do not suggest a restrictive monetary policy at all. These include not just the ample availability of credit from the banking industry but from the financial services industry more broadly, the relatively rapid growth of various measures of money, and the ongoing strength in various asset markets. How much confidence can we have in the overnight interbank rate minus the CPI as a gauge of the thrust of monetary policy in the face of all these other variables that are pointing in the opposite direction?",168
-fomc-corpus,1998,"I tried to indicate in my briefing that I do not place much confidence in that measure at this point for the reasons you cited, President Jordan, and certainly that notion is inherent in the staff forecast. We have the real funds rate staying rather high. It edges off a little measured against backward-looking inflation indexes because inflation edges up a little in the forecast. Even so, it remains at a rather high level. In the forecast, that is perfectly consistent with moderate growth in output and essentially contained inflation pressures though the latter increase a little by the end of the period. So, I don't think there is anything in the staff forecast that fundamentally contradicts what you are saying. I do think a lot of people are looking at this relatively high real short-term rate. A number of members mentioned it yesterday. I think it introduces a bit of a cautionary note here. In fact, the real funds rate got to its current level because the Committee did not change the nominal rate as inflation expectations came down. Ordinarily, the Committee does follow inflation expectations. I think it had good reason not to do so last summer, but the way you got into this situation is a bit unusual. We do not have evidence that the high real funds rate is somehow pulling up longer-term rates but that could happen. I was trying to convey the view that if I were in the members' position, I would be looking for some evidence that the real rate was high and rising and beginning to affect other financial conditions. The way I was looking at it and the way I tried to voice it here was as an element of caution. It is something to look at but we do not see any evidence at this point that it is feeding through to financial markets or certainly to demand.",351
-fomc-corpus,1998,"Don, I may not be asking this correctly but from reading the Bluebook and listening to you, I had the impression that if we allow the unemployment rate to fall below the NAIRU after a positive supply shock, analysis suggests that inflation will re-emerge. Intuitively, there is the differing view that if we have a meaningful supply shock and it persists, we can in fact let the unemployment rate come down to below the NAIRU and not have inflation spike up. That seems to be part of the issue today. Could you give me a little more explanation in terms of whether you are letting the model drive this result or whether there are other considerations?",134
-fomc-corpus,1998,"I see two aspects to that, President Hoenig. The model is driving the simulations. In the model, there is a NAIRU and if we put pressure on the labor markets, eventually that will show through in terms of rising labor compensation. That in turn will feed through to inflation if the unemployment rate stays below the NAIRU. In fact, we are very uncertain about the level of the NAIRU, and some of these supply shocks could be affecting it in a more permanent way. The cautionary note that I tried to sound in this regard was that some of those shocks may look as if they are lowering the NAIRU, and the productivity shock is a very good example. That was a big shock, a one percentage point shock. It provided an example of a situation where you could keep the unemployment rate low and have low inflation for a while. Then you had a choice as to how you wanted to take the effect ultimately, whether as permanently low inflation or an extended stretch of low unemployment. But I think it is possible for supply shocks to fool us to some extent into thinking we have a lower NAIRU and that these favorable price surprises--there is a choice between taking them in the form of inflation or in output--are permanent. In most analyses, they are not permanent. We can have more output for a while, but at some point the unemployment rate has to return to where it was, and how much we take in output will determine whether we end up in a lower, the same, or a higher inflation track.",314
-fomc-corpus,1998,It's a part of the struggle we have been having over the last year.,15
-fomc-corpus,1998,Absolutely.,2
-fomc-corpus,1998,"I think as a way of characterizing this, Governor Meyer in his earlier incarnation frequently used the term ""an effective NAIRU"" as a short-run, maybe transitional, phenomenon in the context of a more permanent NAIRU. That permanent NAIRU would re-manifest itself after the shock had run its course.",65
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,Further questions for Don? President Minehan.,9
-fomc-corpus,1998,"Thank you. Don, I was intrigued by the final comment in your presentation about the danger of sluggish reactions of monetary policy on the upside or the downside. It made me wonder if you know of any work on whether there is asymmetry in terms of the amount of time it takes the economy to react to a change in interest rates directed at weakness versus one directed at counteracting inflation?",77
-fomc-corpus,1998,"I'm not aware of any asymmetry in the modeling exercises, but I think there is asymmetry in the normal course of raising and lowering rates. One point that I tried to convey and have the Committee begin to think about relates to situations when inflation and nominal interest rates are down to very low levels, though we certainly are not there. We have a nominal funds rate of 5-1/2 percent right now. But one can imagine the economy running along at a 1 percent inflation rate and a 2 or 3 percent nominal funds rate. The economy then gets hit by a shock, and policymakers have that zero constraint on the nominal funds rate that is bedeviling the Japanese right now. So, there are some asymmetries from that perspective. There is no limit on how high a nominal rate can go, but there is a downside limit at zero. There is potential asymmetry with regard to the zero level on nominal wages that others have talked about. If inflation is very low or has started to go down to very low levels, there might be more adverse tradeoffs on inflation on the Phillips curve basis because people are reluctant to reduce nominal wages. We have seen no evidence of that, but that is something that people have been concerned about in the past. So, one thing that is being discussed now, and this is perhaps relevant to what Governor Meyer was saying before, is that we have inflation down so low or potentially getting so low, particularly if it falls short of current forecasts, that it affects how we think about monetary policy. President McTeer's rule of thumb yesterday was to subtract a percentage point from the staff's inflation projection.",333
-fomc-corpus,1998,You cannot do that!,5
-fomc-corpus,1998,"You have a low rate of inflation and you might at least have in mind some asymmetries in the context of low inflation, particularly if it turns out to be much below 2 percent.",39
-fomc-corpus,1998,"I am trying to translate that into thinking about how forward-looking monetary policy needs to be. You seem to say that there is at least some logic to being more forward-looking if we think the economy is going to be weaker in the future, particularly given where we are.",54
-fomc-corpus,1998,If we are at a very low rate of inflation.,11
-fomc-corpus,1998,"Right. Then, given where we are, can you really say that there is a greater necessity to be more forward-looking if we anticipate an economy that is getting weaker than if we expect inflation to rise slightly in the future?",45
-fomc-corpus,1998,"Ideally, of course, you want to have good foresight and act in a forward-looking way in both directions. Because inflation has been above its long-run target for a long time, the Committee may have a tendency to be a little more sluggish to react to downside shocks. After all, if inflation comes down another1/4 or 1/2percentage point, that is a great result. But at some point, you have to consider whether you need to change that kind of response. If you are more sluggish on the downside than on the upside, for example, as is captured in some opportunistic kinds of scenarios, then you need to think about changing that sort of reaction as the economy gets to lower levels of inflation. There is the Japanese risk, if I can label it as such.",162
-fomc-corpus,1998,"May I just inject a thought? I do not want to deny the argument about the real interest rate level, but I would like to remind you of some analysis we have provided you in the past, for example, with regard to the Akerlof-Dickens-Perry notion that at very low rates of inflation, the economy is going to run into nominal rigidities that will effectively raise the NAIRU. I think that view rests on some potentially questionable notions about the inability of our wage-setting institutions to adjust to a new environment. I have in mind the recent experience in which we seem to have been making faster progress toward price stability as inflation has gotten lower. There has been no evidence that nominal rigidity has been a major problem. As I said, one would think that more and more of those institutional and psychological barriers would break down over time. So, I think the list of arguments one can propound to support the notion that we need to be worried about low levels of inflation seems to have shrunk. I just wanted to remind you of that.",213
-fomc-corpus,1998,"Don, what can you say about the GDP path associated with your first long-run alternative? What kind of output loss is associated with that path to virtual price stability?",33
-fomc-corpus,1998,"You can see that by looking at the two lines showing the rate of unemployment. We have a sacrifice ratio of 2-1/2 over 5 years. So, in order to get the inflation rate down by 1 percentage point relative to the baseline, you need to hold the unemployment rate above the NAIRU for 21/2 point years, or 1 point for 2-1/2 years, however you want to think of it. That is the sacrifice ratio. I can give you some--",106
-fomc-corpus,1998,One can do the mental calculations.,7
-fomc-corpus,1998,"Right. In the price stability alternative, GDP in the years 2001, 2002, and 2003 is growing about 1-1/4 to 1-1/2 percent less rapidly than in the baseline. In those years we have baseline GDP growing at rates of 2 to 2-1/2 percent. So, we never get a recession in this alternative strategy.",82
-fomc-corpus,1998,It comes very close.,5
-fomc-corpus,1998,It comes really close. Growth has to be slow enough to raise the unemployment rate above the NAIRU. We already have in the staff forecast a growth in output that is below potential and that has the effect of getting the unemployment rate up. You have to have a number of more years of that in the virtual price stability simulation.,67
-fomc-corpus,1998,"Other questions? If not, let me get started on the policy issue. To repeat what we heard around this table yesterday, the key to the economic outlook and to our policy stance is very clearly how we evaluate the tsunami of the Asian crisis. It is rolling across the Pacific and the question is when it will get here and how large the wave will be. At the moment, all we are feeling is a little spray, but we know something is happening. The reason we know is that we have some hard evidence that suggests something more than a mere ripple. We have seen a fairly pronounced decline in exchange rates vis-a-vis the dollar. We do not yet have firm data, but we strongly suspect that net capital flows into those countries have collapsed. And when capital inflows come to a halt or turn negative, that invariably means the current accounts are driven into significant surplus. That, of course, immediately affects the trade balance since the trade balance must fit into the current account. In Mexico, as we saw, there was a really sharp adjustment. It would not ordinarily be that steep when we are dealing with a number of countries since obviously their economies are functioning at different levels and growing at different rates. But because of the order of magnitude of the exchange rate adjustments we have seen in Asia, I suspect the declines in capital flows to those countries, when we are able to measure them after the fact, probably will prove to be steeper than they were in the case of Mexico. So, it is likely that after a lag we will experience a sharp discontinuity in our trade with those nations. The collateral evidence other than the sporadic data we are seeing on trade accounts is the quite remarkable performance of commodity prices. The averages are really representative of virtually all the individual prices in the commodity price indexes. They drift gradually lower until the latter part of 1997. Then at the point when the Asian crisis worsens, they go down more decidedly. I am talking about the whole spectrum of commodity prices. About the only price that has not gone down is my favorite indicator, steel scrap. That has stayed up along with silver and platinum, which leads me to conclude that steel scrap is truly a precious metal. [Laughter] If anybody quotes me on that, I am dead! [Laughter]",462
-fomc-corpus,1998,People will not see it in the transcript for five years!,12
-fomc-corpus,1998,"I have said that in disappearing ink for those who are taking notes! In any event, it is quite interesting. We basically are seeing the shadow of this Asian weakness. We have seen it in the price of oil, where demand clearly has slipped quite measurably. We are seeing it in copper, in aluminum, in gold, and even in some of the agricultural commodities where weakness in demand is bringing basic prices down. So, it is not as though we are sitting here with no evidence and wondering when the Asian tsunami is really going to hit us. As I said before, we are beginning to see its early stages. What we do not know is its eventual order of magnitude. It is noteworthy that private forecasts of economic growth in East Asia are continuously being revised downward. Even the IMF, which very recently came out with lower projections, is apparently claiming in a confidential memorandum that the next revision will be down still further. It is very likely that we will see the initial impact in industrial production because this tsunami clearly is not something that relates to services. This is as close to a merchandise trade account/industrial production type phenomenon as we are likely to get. We will have a fairly good indication of the January industrial production index in a week or two as the data accumulate, but we do know that the weekly data have been tilting down. It is too soon to get a good sense of what is happening to inventories except that the industrial production data suggest that inventory accumulation was quite significant in November and December. It was not enough to raise inventory-sales ratios significantly, but clearly enough to stabilize what had been a declining inventory-sales ratio. Assuming that we are still in the throes of greater use of just-in-time inventory policies, the mere fact that inventory-sales ratios are flattening out, perhaps with a slight uptilt, suggests that there is some backup in inventories. It is going to be difficult to measure how this affects labor markets because the effects of shifts in trade balances are not immediately likely to show up one-to-one in output and even less so in the employment numbers. When the economy gets down to the low levels of unemployment and extremely tight labor markets that we currently are seeing, the first response to any weakening in aggregate demand is likely to be labor hoarding rather than labor shedding. As a consequence, the measured productivity data are likely to flatten out. But at the first sign that there is any easing in the ever increasing pressure in labor markets, I think we probably will get a cascading effect, and we may get the same slip-off-the-ledge effect in employment, though only with a lag behind the off-the-shelf fall in goods production that we presumably are looking for sometime this quarter. The importance of that obviously is crucial to how we come out on policy. It is very difficult not to conclude from looking at the data through December that we should expect to get, and indeed we very likely are getting, further pressures on wages, even factoring in the quite appropriate caveats that Mike Prell raised with us yesterday with respect to the ECI. The data show increasingly tight labor markets with a continuing contraction in the number of individuals both in the labor force and out who would like to work but are not working. The pressures in these markets by any measure we look at anywhere in the country are as tight as any time I can remember, and that goes back a very long way. If, therefore, we do not get an easing fairly quickly in labor markets or it turns out that the tsunami, while very big for Asia, is only a small troublemaker for the United States, then we are looking at a stark demand situation, very tight labor markets, and upside inflation pressures. At that point, the only thing that can keep prices stable is what has been keeping them stable all along in an accounting sense, namely, productivity. Productivity gains in the fourth quarter have slowed from the outsized, frankly nonbelievable, gains in the third quarter. I might say parenthetically that the staff is estimating nonfinancial corporate productivity growth at a 2.1 percent annual rate in the fourth quarter and cumulative growth for 1997 of 3.2 percent on a fourth-quarter to fourth-quarter basis; this is a full percentage point higher than in the previous four quarters of 1996. Productivity gains clearly have kept increases in unit labor costs at a very modest level; indeed, the latter have shown no signs of accelerating during the last several quarters. The increases in such costs in the four quarters ended in 1997 are estimated at slightly under 1 percent and at 1 percent for the previous year. Similarly, unit nonlabor costs have continued to decline and overall unit costs for all practical purposes are within shouting range of zero and have been that way for the last 12 to 18 months. With profit margins opening up, there has been a modest increase in prices--something in the area of 1 percent for the implicit deflator and slightly less for the nonfinancial corporate sector. So, the growth of the cost structure is effectively zero. Indeed, all of the price increase is, in effect, increased profit margins. As Don Kohn said, we have some fairly significant leeway here. While I anticipated that the statistically measured productivity number for the fourth quarter of 1997 would be artificially low merely because of the clearly noncredible 6.7 percent annual rate of increase in the third quarter, the fallback to 2.1 percent is a lot more than I thought it would be. In looking at the monthly price patterns, we are seeing a failure of pipeline inflation to emerge. This is wholly consistent with an economy that is engendering nominal acceleration in wages from the productivity side and evidently not from pressures on resources per se, even though it is very difficult to reconcile the latter notion with labor markets that already are very tight and becoming increasingly so. As a consequence of all this, it strikes me that we are dealing with a situation in which the next several weeks are going to determine the extent to which the tsunami will hit us. It will probably take a couple of months for us to get a much better fix on the order of magnitude because it will take that long to get a better fix on what is going on in East Asia and also its impact on Europe, Japan, and Canada. We also will have a couple more months of data on orders and production. It will be very interesting to see whether the incoming data tell us anything more about the issue that Vice Chairman McDonough raised concerning the ECI services numbers, which are a counterforce to the slowdown of inflation in the goods area. To summarize and merely reaffirm what I heard around this table yesterday, there is considerable concern that a deflationary push from East Asia is going to affect the economy in the short term. We do not know what its size will be. This suggests that a position of wait-and-see is clearly the appropriate policy for the short term. I am not sure whether we will know enough about the magnitude and the ultimate consequences of the Asian effect in time for the March meeting, as Governor Rivlin suggested, but clearly we are going to know substantially more as each week goes on. I think it is going to be important to be sensitive to moving in one direction or the other if called for. For the moment, I see very little choice but to stay where we are, namely ""B"" symmetric. President Boehne.",1497
-fomc-corpus,1998,"I support your recommendation, Mr. Chairman. Your logic is indisputable.",15
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"I support your ""B"" recommendation as well, Mr. Chairman. In my view, the right thing to do clearly is to remain very much on alert and not tie our hands in either direction. So, I think the correct policy is no change and symmetry.",53
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I strongly support ""B"" symmetric as the best policy at the moment.",15
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I continue respectfully to think that the dominant risks are on the upside. What worries me is that if these risks are verified as we go forward, we will indeed get what you referred to a minute ago as a stark demand situation where we do not have very many good choices. So, I still favor alternative ""C"" for whatever that is worth. If we do not adopt that alternative, it strikes me--given the continued very strong incoming data--that the Committee might consider moving to asymmetry toward tightness.",107
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I certainly support the recommendation for leaving the funds rate unchanged. But I must admit that I am still impressed by the fact that we do not see any signs whatsoever of a slowdown in the domestic expansion. This combined with the fact that we have such tight labor markets suggests to me that asymmetry in the direction of higher rates is the proper position.",73
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation. I want to say a word about what I think a symmetric directive means. Sometimes, one thinks of it as meaning that there is an equal probability that the next policy move might be up or down. I do believe, given the tight labor markets and the continuing strength of demand, that the next move still is more likely to be up--that there is that upside risk. On the other hand, I think a symmetric directive signals our readiness to respond rapidly to a sharper downdrift from Asia than we foresee in the baseline forecast. I also want to come back and mention something about the longer-run simulations. It seems to me that the two-day meetings we have twice a year are an opportunity to think about some of the longer-range strategic issues facing monetary policy rather than always focusing meeting by meeting on just one decision. In my view, that is the value of the simulations of alternative policy strategies that the staff has presented to us. In those simulations they considered, for example, a couple of options for longer-term monetary policy--either to stabilize inflation at 2 percent or to reduce it further to, say, 1 percent for the PCE. As I read that, the question occurred to me, why do we make the staff guess at our longer-range inflation target? One of the reasons might be that we are uncertain ourselves about our long-range inflation target because of issues relating to the perils of deflation. Do we want to center our inflation target in the long run on true zero inflation so that a typical recession would always be accompanied by deflation? I'm not sure. Is a little deflation worse than a little inflation? Maybe, but I'm not sure about that either. I would like to encourage the staff to think more about these issues, give us some guidance about them, and perhaps devote some of their simulations to them. We might then set aside some time at the next two-day meeting in July to focus on those issues.",400
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation. Yesterday, I spoke a bit about risks and the fact that we are risk takers. I think we are taking reasonable risks by waiting to see exactly what happens. We need time to observe the strength of the factors that will be exerting an impact on both sides of the economy. The other comment I would like to make to explain why I support your recommendation relates to a topic that does not come up much at these meetings, namely, communications. We seem to have gotten ourselves in a position of having an implicit contract to communicate with financial markets. All we have communicated thus far is a great deal of balance. Given what we have communicated and our implicit contract, I think it is appropriate for us to retain the balanced approach that we adopted at the last meeting. It may be that we did not intend to have this implicit contract, but I believe it is there now and we have to live with it.",191
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"I agree with your recommendation as well. I also want to endorse the comments made by President Broaddus and Governor Meyer. They were implicit in some of Don Kohn's comments as well. Now that inflation has come down a good deal, I think it is important that we focus more specifically on what we view as our price objective. I say that not only because it may help us to communicate to the public what we are trying to do, but I believe it will help the inner workings of the Committee over time. So, I would agree that we should spend some time on that issue in July.",122
-fomc-corpus,1998,"Of course, what has happened to us is that the cost of lowering inflation that we always presumed to be negative has turned out to be positive. We have been given a bonus that we did not earn. The question is, do we make good use of it or do we dissipate it? That may well be the usefulness of trying to focus on where we want to go and what we should do from here. I think the issues raised in our earlier discussions of the nature of prices and where we are in relation to price stability are becoming quite important, especially if Al Broaddus turns out to be more cautious than he needs to be and the Asian crisis has a more deflationary effect on our economy than we now anticipate. President Minehan.",151
-fomc-corpus,1998,"I very much favor your recommendation, Mr. Chairman. I agree it would be useful to revisit our discussions about inflation even though we have had many of them without coming to any hard conclusions. Maybe it will be more productive this time in the sense that we will have a longer period of low inflation to observe. Perhaps we can derive more information about the real tradeoffs from that experience. I am a little nervous about this notion of being forward-looking. Do we still know how to do it? Do we know enough with enough confidence to be able to say that we need to tighten policy when we are not observing any real inflation, or that we need to ease policy when we are not seeing any real deflation? You emphasized that there is a premium on quick movement, and I think there is. I believe that we need to be forward-looking. I wish I understood better how to do it.",180
-fomc-corpus,1998,"We have to be careful. The preemptive move that we made in early 1994 occurred on one of those very rare occasions when we could actually see that the funds rate was fundamentally out of line and it was dangerous to keep it there. We did not know to what level the funds rate ultimately would need to go, but we knew the direction was up. It is going to be very difficult to find situations such as that in early 1994 in which we can take action with the same degree of confidence.",105
-fomc-corpus,1998,That is my worry.,5
-fomc-corpus,1998,"It is one thing to say that in principle we are going to be preemptive. Having done so successfully, we may be tempted to say that this is like shooting fish in a barrel. The trouble, unfortunately, is that the barrel is a large ocean and the fish are minnows! [Laughter]",63
-fomc-corpus,1998,"Yes, exactly!",4
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,"I support your recommendation of ""B"" symmetric.",10
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"I, too, support ""B"" symmetric.",10
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation. I think it is interesting that we are in a period when we are benefiting from a productivity supply shock and wondering if it is wearing off, and at the same time we are waiting for a demand shock from Asia and wondering how hard it is going to hit the economy. I think that describes our situation and it tells us to ""wait and see"" and that symmetry is right.",85
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"With the obvious advantage of some hindsight, I now think the thrust of monetary policy in 1997 was more expansionary than I thought at the time, and it became progressively more expansionary as we went through the year. There is an irony in the way we now look at the numbers and also in how we communicate them. A favorable productivity shock or surprise has meant that the real rate of return on capital was higher ex post than we had anticipated ex ante and that relative or nominal interest rates, especially the overnight interbank rate, turned out to be lower ex post than we had expected ex ante. This manifests itself in what we see happening in the financial industry, the banking industry, and in various measures of money and credit growth. The irony is that the way a favorable productivity shock is reported implies not only that real incomes are higher than they would otherwise have been, which is certainly a desirable outcome, but it also is manifested in the form of a lower level of measured price inflation than would otherwise have occurred. Therefore, the change over a short interval in indices like the consumer price index makes it appear that we have higher real interest rates, for a given level of nominal rates, when in fact our theory tells us it was the opposite. We had lower real interest rates. There is no question about the direction of the effects of the Asian influence. In the statistics, exports will be lower than they otherwise would have been, but I am not sure what that level would have been. Imports will be greater than they otherwise would have been. In an arithmetic sense, those two developments tell us on the basis of partial analysis that GDP is going to be smaller than it otherwise would have been. But that is not a full general equilibrium effect. Lower prices of both imported goods and domestic goods that compete with imports mean that incomes are higher than they otherwise would have been. I now think that we would have been looking at even stronger nominal demand growth coming into this year, fueled by rapid money growth. We may benefit by some amount--I'm uncertain about the amount--of less strong demand than we would have experienced in the absence of the Asian developments, but I am not at all convinced that demand is actually going to decline or that the rate of economic growth is going to be slower than is reflected in the Greenbook. So, I think the odds are strongly in the direction that our next move will be to raise the funds rate to slow the growth of money and credit. We are going to see a substantial acceleration of prices even if it is somewhat delayed.",513
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation of ""B"" with symmetry. Just to make a few points about it, the risks are large on either side, but they are very different and they are very hard to figure out. So, it is difficult for us to be preemptive right now, but that is fine and I agree that we should wait and see. I think, however, that we should tell ourselves that once these risks are clarified, we may have to act quite forcefully. The fact that we are not acting now may in a sense be increasing the burden on us to act forcefully in the future if we can figure out what these risks are, and we may as soon as new numbers come out. My last comment relates to Governor Meyer's suggestion that we have a debate about our price stability targets. I think it is always a good idea to have debates, but I believe it is going to be hard to have a productive debate. One reason, as our previous discussion indicated, is that we probably all have slightly different notions of what we mean by price stability. We certainly have very different operational notions about whether we should look at this index or that index, adjusted this way or that way, and about relative prices or absolute prices. It probably is always desirable to go through the discipline of discussing such an issue, but it is going to be a very hard issue for us to resolve.",285
-fomc-corpus,1998,First Vice President Rives.,6
-fomc-corpus,1998,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1998,"Let's have a roll call on ""B"" symmetric.",11
-fomc-corpus,1998,"The wording is on page 21 of the Bluebook, starting at the bottom of the page: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal percent. In the context of the Committee's funds rate at an average of around 5-1/2 long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a slightly higher federal funds rate or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consisted with some moderation in growth of M2 and M3 over coming months.""",135
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Minehan Yes Governor Phillips Yes Governor Rivlin Yes,47
-fomc-corpus,1998,"Our next meeting is on March 31. As I indicated yesterday, revisions to forecasts are due to Mike Prell by Monday, February 9.",30
-fomc-corpus,1998,"Welcome, everybody. I especially want to welcome back an old colleague, Bill Poole. I did not realize that the last time he sat in this room was 25 years ago.",37
-fomc-corpus,1998,I was sitting back there along the wall.,9
-fomc-corpus,1998,It has taken 25 years to move from there to here? [Laughter],17
-fomc-corpus,1998,Baby steps.,3
-fomc-corpus,1998,"Well, that's the pleasant news. The less pleasant news is that both Joe Coyne and Larry Promisel, who have been fixtures in this room and around here for a very long time, probably are attending their last meeting. The agenda is fairly routine today, as you well know, and I would like to start off by requesting approval of the minutes for the meeting of February 3-4, 1998.",84
-fomc-corpus,1998,So moved.,3
-fomc-corpus,1998,"Without objection. You all have received a Report of Examination of the System Open Market Account. Are there any questions on that? If not, would somebody like to move acceptance?",35
-fomc-corpus,1998,Move acceptance.,3
-fomc-corpus,1998,I second the motion.,5
-fomc-corpus,1998,"Without objection. Peter Fisher, please.",8
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to a package of materials that you should have in front of you. It begins with a one-page summary of my comments. 1/ Going over the summary, the first point is that the short-term and forward interest rate curves for the G-3 countries remain relatively flat. Second, I will be commenting that greed eclipses fear in asset markets, except in Japan. My third point will be that the flat forward pricing of short-term interest rates reflects, in my view, a ""clearing price"" for divergent views about the direction of the Committee's next move, not a conviction about the likelihood of steady policy. If I am right about that, then there is something of a problem. Why hasn't the risk premium associated with this uncertainty been more evident in the Treasury yield curve? I offer two tentative answers to that. One is that, in general, expanding risk appetites have consumed the uncertainty for the moment. Secondly and more technically, reductions in Treasury supply both actual and anticipated, combined with the flat forward money market curve recently have been encouraging dealers to extend duration, and that has tended to flatten the Treasury yield curve. Finally, I will discuss Desk preparations for the heavy tax inflows in April and May that will cause a sharp rise in the Treasury balance and lead once again to a need for much larger operations than normal. Turning to the charts on page 2 that show current, 3-month forward, and 9-month forward deposit rates, you can see that these rates remain relatively flat in all three charts. Only in Germany, the blue lines, is there much of a spread between the current 3-month rate and the 9-month forward 3-month rate. In the chart for the United States, the red lines, you will note see that forward rate expectations backed up following the Chairman's Humphrey-Hawkins testimony, but they have not backed up to the levels where they closed at the end of last year. Looking at the chart for German rates, you can see that there continues to be a wide spread between current and forward rates relative to the spreads for Japan and the United States. That spread reflects the anticipation that the European Central Bank, when it comes into existence next January, probably will have a policy rate somewhere in the mid 3 percent range; 3-1/2 percent is what most people in the market expect. The Bundesbank's current rate is 3.3 percent. Even with that in the background, I think the German economy and the European economies more generally are perceived to be doing a bit better than they were earlier, and it is noteworthy that both Finland and Norway raised their rates. So, if anything, the market has a sense of some upside risk to interest rates in Europe, even if the potential increase is very moderate. Finally, in the bottom chart you can see that Japanese deposit rates, both current and forward, declined in February and March. This reflects some decline in the Japanese bank premium. Unfortunately, this is not so much the result of an improvement in the credit standing of the individual institutions but rather, in my view, a reassertion of the convoy system and the implicit government guarantee behind the major Japanese banks. The Japanese government simply will not let those banks fail, and that has pulled some of the risk premium out of the forward rate market. With that rather muted monetary policy outlook in the G-3 countries, the charts on the next page suggest in my view how greed has eclipsed fear in a number of the asset markets. In our written report, we detailed that phenomenon across a number of individual markets. This is a quick summary. On the left side, we have equity indices re-indexed to July 1, 1997, and total return bond indices for the United States, Germany, and Japan. The red lines show the equity indices trading up from a 100 value on July 1and the blue lines indicate the total return on 10-year bond indices. On the right side, we have indexed the option implied volatility on equity and bond futures in the G-3 countries. We plotted the price of an option and its implied volatility on each of the contracts, but they are indexed to place them on comparable terms, again with 100 on July 1, 1997. You can see that the upward shifts in volatility that occurred in October and November have been reversed, especially in U.S. and German equity markets. Generally speaking, you can see that financial asset prices in the United States and Germany have been consistently rising since the November period and their volatilities consistently falling, although it is noteworthy that in the last few days there has been some uptick in the implied volatilities in both the United States and Germany. The bottom panel, of course, shows that Japan is quite a different story. You can see the poor performance of the Nikkei, but it did rally early this year, and total returns on Japanese government bonds have improved. The authorities were working quite hard over the last quarter to get the Nikkei to close at the 18,000 level, an effort that did not succeed. On this index scale, 89 would be equal to the 18,000 level. In Tokyo, they even invented a new term for this effort. Traditionally, the market has referred to PKO, meaning price keeping operations, where public pension funds and the like are used to support equities. In the last month or so, they have relabeled these PLO, price lifting operations. As you can see, the Japanese authorities had their only success in early January, and since then they have succeeded only in lifting the level of volatilities, illustrated on the right. I did not chart the last few days. With the failure of the Nikkei to close at the 18,000 level at Japan's fiscal year-end, the markets are quite anxious at this point. The yen has been weakening a bit, reflecting something of a sense in the markets that the Japanese authorities are without a policy at this point. While we hear that one more package is coming, it is not clear that the package is going to do anything for the financial sector, and the markets are quite cynical about what is likely to happen. The next page provides another way of thinking about how risk appetites have been expanding. I return to a table that I showed to the Committee last August in which I introduced the different philosophies of four characters in their search of a return in financial markets--the optimists and pessimists under the old paradigm and the new paradigm. The top half of this table is identical in form to the one that I presented to the Committee last August. It shows the old paradigm pessimist who is worried about an imminent breakout of inflation and the old paradigm optimist who thinks inflation may be coming but the Fed may be able to delay it for a few quarters. We have the new paradigm optimist who thinks the economy has entered a new era and he does not worry about inflation at all. We have the new paradigm pessimist who thinks that deflation is upon us. I introduced these four characters last August to help explain the volatility we were then experiencing in the markets, including intraday volatility, and these four characters were duking it out in the markets. I reintroduce them here to show briefly how they would have fared to date. Had you run a portfolio consistent with the views of the old paradigm pessimist, shorting stocks and bonds as shown here at the bottom, you would have been crushed, to put it bluntly. The new paradigm pessimist, who would have been short stocks and long bonds, would have done a little better, but his positive return in bonds would not have come close to offsetting his negative return in stocks. The two optimists would have done fairly well, obviously. The point is, of course, that the pessimistic views, the skeptical views, have simply been priced out of this market and are not being reflected in the performance of the market. If you were trying to manage money on the basis of those views, you were stopped out long ago. Turning to the next page, I depict in the top panel three different trajectories of the implied yields on the fed funds futures contracts. The blue line shows these yield trajectories at the time of the August meeting, the green line in early January, and the red line as of last Friday. My view, as I mentioned, is that the steady path of the fed funds rates implied by these contracts reflects a clearing price among divergent views regarding the direction of the Committee's next move. Forgive me if you saw it, but Friday's Wall Street Journal had a lovely item in it that summarized a recent poll of the 36 primary dealers. It showed that none expects the Fed to change interest rates at this meeting. But the survey also revealed ""that there is no clear consensus on the direction of the Fed's next policy shift."" Sixteen dealers predicted a tightening, twelve an easing, seven saw the Fed on hold for at least the foreseeable future, and one said it was not possible to assess accurately what the Fed will do.",1852
-fomc-corpus,1998,"Give him an ""A."" [Laughter]",10
-fomc-corpus,1998,"Give us an ""A.""",6
-fomc-corpus,1998,"With that degree of uncertainty, why isn't there more of a risk premium evident in the yield curve? I think, as I said, that expanding risk appetites associated with the bull market in financial assets have consumed the premium and therefore partially obscured it. The charts showing the bond and equity market returns and the implied volatilities speak for themselves. Around the middle of last week, both the implied volatilities on bonds and equities and the yield curve did begin to back up. I certainly would have been a buyer of volatility at the low levels reached in the middle of last week. In my view, this backup in volatilities and in the yield curve probably reflects two things. One is that the market is beginning to price in some uncertainty in recognition of the greater uncertainty about direction. Secondly, the market may also be pricing in the very small probability that the Committee will act at this meeting, even though it still views a move as an extremely unlikely event. When markets begin to get anxious, they sometimes price in a little of that anxiety. That adjustment may come out of the market after the meeting if the Committee does not make any change. The other kind of adjustment may be more enduring. Turning to the next chart, a second explanation that I mentioned is that the reductions in Treasury supply, both actual and anticipated, combined with a flat forward money market curve recently have been encouraging dealers to extend duration, tending to flatten the Treasury yield curve. I hope you will bear with me while I explain this chart. At the last meeting, I showed the Committee a chart of the yield curve on a constant maturity basis as each of the on-the-run issues traded through the funds rate. I noted that with numerous issues trading through the funds rate, many saw that as encouraging an expectation in the market that an easing move was coming. But showing you only the yield curve relative to the fed funds target rate was an incomplete picture. In pricing on-the-run Treasury issues, dealers are not significantly constrained by the level of the funds rate. Rather, their cost of carrying on-the-run issues is reflected in the term-to-date repo rates. In the top panel, the red line indicates the 10-year on-the-run yield. The bottom blue line is the term-to-date RP rate for the on-the-run 10-year maturity as it traded over the past year. This rate is a declining maturity repo. On the first day of a refunding cycle, it is a 90-day instrument; on the last day, it is a 1-day instrument. So, it has a declining maturity as it moves across the chart. There are a number of factors that influence this rate, obviously. One is the remaining term. A second is the scarcity of a Treasury issue. As we move through each auction cycle, the outstanding Treasury issues become more and more scarce. The on-the-run issue is purchased by people who actually want to hold it, rather than just to trade it or to hedge with it. So, as you come to each of the dotted vertical lines on the chart, you see a greater and greater scarcity value. Of course, the term structure of the money market also affects this rate. The purpose of the top panel is to help you understand the bottom two panels by putting them in context. On the left, you can see a snapshot of the entire yield curve and the term-to-date repo rates for the on-the-run issues as of the Friday before last March's meeting. On the right, you see the same as of this past Friday. Each of these dates is roughly in the middle of the auction cycles--the first-quarter refunding and the second-quarter refunding. They are off by only a few days. What you can see is that even though the yield curve has moved down, there is still a positive carry across the entire curve. What you also can see is how much more attractive the carry is on the 10-year now relative to the short end than it was last year. The purpose of this rather complicated picture is to make two simple points. First, to be clear, the marginal buyers and sellers of on-the-run Treasury securities are not significantly constrained by the funds rate itself but rather by the cost of financing, particular on-the-run issues in the repo market. There, the rates are significantly affected by the supply and demand conditions for those particular issues and by the term structure of the money market. Second, at present the positive carry in the market is making it relatively more attractive for dealers to extend duration into the 10-year sector. So, while real investors or nonleveraged investors are being drawn out along the yield curve in search of higher absolute returns, the dealers are being pulled to some extent into the 10-year sector in search of the carry. These are not the only factors that affect the level of the yield curve by any means, but I think they are important ones for us to understand. Finally, turning to domestic operations on the last page, our operations over the last period have been detailed in our written reports, and I thought I would focus on the upcoming period. Last May, Governor Rivlin chided me and my colleagues for the $50 billion positive surprise in the Treasury balance relative to our projections. That positive surprise reflected a positive Treasury income surprise. I thought it might be helpful to review how we are doing so far this year and to anticipate the Desk's operations in April and May. At the top of the page, we have shown the forecasts and actual results for last year's first two quarters. At the top left you can see the forecasts by the Treasury, the Board, and the New York staffs of first- quarter Treasury budget receipts. The actual is shown in red and the percent errors of the three forecasts are indicated on the right side of that first box. In the right side panel at the top, you can see the 7 to 10 percent misses in projected Treasury revenues for the first quarter that created the positive surprises of some $40 to $50 billion. The next two panels show how we are doing this year. On the left are the forecasts for the first quarter by the Treasury, the Board, and the New York staffs and the preliminary actual outcome. The Treasury's forecast was right on the money, and the Board and New York are doing a little better than last year in their forecasting. In the right panel, you see the April-June forecasts. We have a rather wide range of about $30 billion separating New York and Washington, with the Treasury right in the middle. The bottom picture translates this into our estimates of the daily Treasury balances at the Fed. The latter rise sharply once the Treasury reaches the ceiling on its TT&L account capacity in the banking system. The differences between the New York and the Board estimates, as I understand it, are not related to differences in nominal GDP forecasts but in some of the nuances of tax collection. We do have a bit of a gap here, but the estimates bracket last year's actual Treasury balances, the dotted green line. I want to offer this as background to help you understand that in the coming weeks we are likely to be changing some of the normal aspects of our operations--not permanently, but to deal with this situation. First, we are likely to conduct another coupon pass in the next couple of weeks for $5 to $7 billion to lay a bit more of a reserve base. Secondly, when the need for reserves starts to rise sharply, we are likely to want to enter the market quite early in the morning, 8:00 or 8:30 a.m., so that we can insure that we get sufficient propositions from the dealers to cover our needs. On those occasions, we are likely both to announce the day before that we will be coming into the market at, say, 8:30 a.m. the following morning, and we would plan to conduct two operations that day. We would do one in quantity, on the order of $10 or $20 billion, and come back later in the day to fine-tune the total. I certainly hope that the fine-tuning operation is going to be in the same direction as the morning's operation. There is some risk it might not be, that we would be adding reserves in the morning and draining reserves later in the day. If we did that, I would certainly hope that we would be doing them in different maturities. We might have met our basic reserve objective for a week or so in a big operation in the morning and then have to fine-tune it later in the day with an overnight drain. I hope that does not happen, but that is a possibility we have to bear in mind if the reserve needs expand to levels close to either the New York or the Board estimate. Both estimates indicate the need for quite sharp reserve growth, and how quickly we will have to expand the scope of our operations will depend on how soon that need arises. Mr. Chairman, there were no foreign operations to report for this period. I have provided the Committee with annual reports on both our domestic open market operations and our operations in foreign currencies. I will need the Committee's ratification of the Desk's domestic operations during the intermeeting period; they are detailed in our written reports. I would be happy to answer any questions.",1876
-fomc-corpus,1998,The difference between the New York Bank and the Board with respect to Treasury receipts is huge in the sense that it does not appear from the pattern on the chart that this is merely a displacement of revenues from one period to another. New York's 1998 fiscal year surplus is significantly higher than the Board's. What number do you have?,68
-fomc-corpus,1998,I'm afraid I don't have that number at my fingertips. It's on the order of a $30 billion surplus for this quarter.,25
-fomc-corpus,1998,"I think the higher receipts in the New York forecast carry through the end of the fiscal year. In fact, I think New York has an even larger difference in its forecast of the fiscal year surplus because there are some factors other than receipts affecting their surplus estimates. But you are correct, Mr. Chairman. The difference is not simply the result of a displacement from quarter to quarter; New York has a much larger surplus.",84
-fomc-corpus,1998,Is the Treasury surplus for the fiscal year over $50 billion at this point in your forecast?,19
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"Can we go back briefly to Japan? I think we are all puzzled by the presumption of the Japanese authorities that they can somehow have an effective program to change the stock market and announce it. It is questionable enough to believe that the government can substantially alter the level of the stock market. It is worse to believe that it can announce its intention to do so and presume that the readings that are going to occur as a consequence are going to be taken seriously by anybody. Most questionable of all was the announcement yesterday by the postal and life insurance system that they had completed their transfers to purchase stocks for the period through March 31. You said they do not have a policy. Having any plausible policy is better than none. If this is the way they conduct their financing operations, why is there not far more significant negative reaction within Japan to this type of operation, which seems so inefficacious?",179
-fomc-corpus,1998,"I wish I knew the answer to that question. I certainly share your assessment. When I said ""no policy,"" I want to be clear that I was referring to the market looking, seeing, and feeling that nobody was home. There is the LDP; there is the cabinet; there are the members of the Diet; there are the agencies; these are the different decision-making poles. I think the perception in the market is that they do not seem to be talking to each other, which is what I am implying by no policy. There is no center of gravity being provided, and that is what I was focusing on. On the question of whether this matters, how otherwise sensible people--",139
-fomc-corpus,1998,"One of the purposes of their stock market operations was to create Basel-weighted capital adequacy ratios for the March 31 statement date. If I am a counterparty funding some of these Japanese banks, I am not going to look at those numbers. What possible use are they to me in judging the safety and soundness of Japanese institutions if they are produced as if somebody had lit a match under the thermometer?",82
-fomc-corpus,1998,"I think the counterparties of the major Japanese banks are looking, unfortunately, at the implicit Japanese government guarantee that appears to have been reaffirmed. I don't think they are trading on the basis of the capital adequacy numbers when they are trading with Japanese institutions.",52
-fomc-corpus,1998,What has been the latest premium in the London market on yen deposits for Japanese banks?,17
-fomc-corpus,1998,It has come down to under 20 basis points.,11
-fomc-corpus,1998,But it is still positive?,6
-fomc-corpus,1998,"Oh, it is still positive; we can still see it.",13
-fomc-corpus,1998,"If I could make a comment: The people in the market think that the single least wise thing the Japanese could have done was to reconstitute the convoy system. But that is exactly what they have done. As a result, the view is that the 19 largest banks have become a sovereign credit, and therefore the premium was created and there is still a premium.",74
-fomc-corpus,1998,The premium has to be a reflection of doubts about the sovereign credit.,14
-fomc-corpus,1998,"Precisely, and even though there is a perception that the bank that failed, Hokkaido Takushoku, was managed reasonably well when it collapsed, the Japanese are convinced that they did a terrible job because they did not anticipate the collapse. I think the market is saying that, yes, there is a convoy and there is sovereign credit, but if there is an accident, the winding down of the institution will be managed very badly. Therefore, there is concern that that could have a contagion effect. With reference to the Basel ratios, I think there is a general feeling that the stated ratios are meaningless in assessing the condition of Japanese banks. The rest of us play a game where the ratios mean something, but for the Japanese banks they really do not. We have a sovereign credit with a question associated with it, as you suggested.",169
-fomc-corpus,1998,"They have always had the opinion that since they would never let a bank fail, the Basel ratios were irrelevant.",22
-fomc-corpus,1998,Exactly.,2
-fomc-corpus,1998,"The fact that they agreed to the Basel ratios has always implied a very unusual admixture. On the one hand, every Japanese commercial bank is backed by Japan's sovereign credit, and on the other hand, they have met their Basel ratios. This creates confusion. It has to be terribly confusing to a lot of our colleagues in Japan who are wondering where all this is going. Other questions for Peter?",80
-fomc-corpus,1998,"Peter, you made what was almost a passing reference to the fact that intermediate-term Treasuries had traded through the funds rate this year, and you indicated that many saw that development as reflecting expectations of some easing in the funds rate. But the alternative explanation is that trading through the funds rate is consistent with an expectation that the funds rate will be increased. We had at least a brief discussion of that on the call over the last week or so. With regard to our credibility as a central bank, one of your people commented that if in a gold standard type world there was growing credibility that the central bank was going to take the appropriate policy actions to maintain price stability, one would expect intermediate-term issues to trade through the overnight interbank rate. Do you want to elaborate?",155
-fomc-corpus,1998,I don't think I need to. I think you've said it very well.,15
-fomc-corpus,1998,I'm asking about Street talk or views on this issue.,11
-fomc-corpus,1998,"I don't think the Street's focus on that hypothesis would be at the short end of the coupon curve, but if there were an anticipation of an easing move, the Street would talk about expecting a rally further out on the yield curve. In January, in fact, we observed what I was talking about in the chart that I showed at the last meeting. As I said then, I think the market was responding to recent speeches by the Chairman and Governor Meyer, which were interpreted as indicating an increased likelihood of an easing action. That is when the short end of the coupon curve traded through the funds rate. I do not dispute that what you have described can happen and the Street does talk about it that way, but what was happening in January was the other scenario.",153
-fomc-corpus,1998,"But wouldn't it also reflect, President Jordan, the expectation that, unless there was a negative term premium, nominal short-term rates would fall at some point so that the expected holding period yield from rolling over overnight instruments and two-year instruments would be equal.",50
-fomc-corpus,1998,"I was thinking more in terms of the 5- to 10-year range. If people anticipated a transitory acceleration of inflation that we would respond to, we would expect the yield curve to be downward sloping in that longer-term range.",49
-fomc-corpus,1998,"Right, because inflation would come down and short-term rates would move up.",15
-fomc-corpus,1998,"Further questions for Peter? If not, would somebody like to move to ratify the actions of the Desk?",22
-fomc-corpus,1998,So moved.,3
-fomc-corpus,1998,Without objection. Let us move on to Mike Prell and Larry Promisel.,16
-fomc-corpus,1998,"Thank you, Mr. Chairman. I think it would be appropriate for me to begin this morning by acknowledging that, yes, you did tell us so last month. You said that our GDP forecast for this year probably was too low, and now we have raised it appreciably. Moreover, a little reading between the lines of the Greenbook would indicate that, even with the revisions we have made, we are somewhat more concerned about the possible upside risks to our forecasts for demand and inflation than about the downside risks. With that as preamble, let me engage in a little mind-reading and attempt to anticipate a few of the questions you might have about our revised forecast. First, isn't the upward-revised GDP growth rate of 3.1 percent that we're showing for the first quarter still rather skimpy, especially in light of the strength of the labor market indicators? That's certainly a reasonable question. Judging by the growth of employment and hours through February and the continuing low level of jobless claims, the increase in labor input almost surely was well above the average of recent quarters. Moreover, the data on consumption, housing, and equipment purchases point to a large gain in private domestic final sales. However, it is also true that the January figures for net exports and inventory investment were much weaker than their respective fourth-quarter averages. Even when we plug in what seem like ample numbers for these two variables in February and March, we still end up with a drop-off in GDP growth. But, you might ask, doesn't that just imply an implausible drop in labor productivity? Yes, it does imply a drop, but obviously not one we find implausible. Output per hour has risen considerably in the past two years relative to the underlying trend embedded in our projection--the kind of pickup that one might expect to accompany an acceleration of production. If we have it right, a movement back toward the trend line was to be expected over time--and, given the erratic character of the series, a substantial drop in some quarter would be far from shocking. That said, in the present case, we also would not be stunned if the spending data coming in over the next few weeks were to point to a larger gain in Q1 GDP. Well, you are thinking, the first quarter is history, anyway; so the real question is what makes us think that the still greater moderation of GDP growth that we long have been forecasting is here at last? Isn't domestic demand proving to be strong enough to override any damping effect that might be coming from the external sector? It certainly is conceivable to me that what we are going through now will turn out to be the obverse of the 1987-88 experience. In that case, a strong upswing in net exports helped to keep the economic expansion on track in the face of the stock market decline. This time around, a booming stock market might offset the effects of a slump in net exports. However, a few considerations lead us to conclude that this scenario is not the most likely. I will leave it for Larry to discuss the incoming evidence on the trade front. Suffice it to say at this point that the recent news has not undermined our notion that there is--and will be for a while--an appreciable drag on activity coming from the external sector. It is not just an Asia story; it is also the lagged effects of a sizable cumulative appreciation of the dollar over the past few years. But, that said, could we be seriously underestimating the ongoing thrust of domestic demand? As we look at it sector by sector, we do not think we have stinted on expenditures. Among other things, demand has been boosted recently by the decline in longer-term interest rates over the past year, and we do not foresee that interest rate trend being extended in any meaningful way. As many have commented, this has in part been the dividend of the Asian crisis for the U.S. economy. To be sure, the predicted softening in economic indicators could revitalize hopes of Fed easing. But, unless the bond market bulls are able to push yields materially below the recent range, this should not provide a great amount of additional stimulus. Where we might be especially vulnerable, though, is with respect to the stock market. At this point, it appears that the market has entered a phase in which the gravitational pull of valuation may no longer be operating. The PE ratio for the S&P 500 recently reached 27, based on trailing 12-month earnings, even as companies were issuing warnings and analysts were lowering their 1998 profit forecasts. In the prevailing psychological environment, with people increasingly convinced that the market will inevitably yield returns vastly greater than those available today on liquid fixed-income instruments, the market can keep going appreciably higher on its own momentum--at least until there is an event jarring enough to cause people to reassess their general view of the world. For now, the market is an integral part of a perpetual motion machine that keeps the economy powering ahead. We have seen this before, recently in Asia, and while I do not want to overstate that comparison, the issues about bubbles that the Chairman raised in his famous ""irrational exuberance"" speech do seem increasingly relevant. We pointed out once again in the Greenbook the difference it might make to the outlook if the market were merely to rise moderately from here--rather than falling somewhat, as we have predicted. If the market were instead to keep zooming upward at 20 or 30 percent per year, then the consequences for aggregate demand and thus for inflationary pressures could be quite striking. This brings me to a final question. There seems to have been some increase in concern about inflation risks of late, with commentators noting such things as the continued tightness of the labor markets, the recent upturn in oil prices, or the heating up of real estate markets. Is there something going on here beyond what we have captured in the Greenbook? Perhaps, but we think that the upward revision we have made to our inflation forecast leaves the risks reasonably balanced--assuming that the predicted output and unemployment path is about right. As we noted in the Greenbook, increases in average hourly earnings --the only broad statistic yet available for this year--have not been getting discernibly larger or smaller of late. However, the anecdotal reports seem to be indicating with increasing frequency an acceleration of compensation rates and an increase in recruiting and training costs. The picture is still uneven, with many firms saying they are holding the line on pay and others that they are tightly targeting increases to those workers in key positions or with ""hot"" skills. And, where pay is raised, it often is through flexible forms of compensation that can be trimmed more easily when business slackens--a feature that we think may be significant in determining the momentum of wage inflation going forward. In the end, we bowed only slightly to the anecdotal news and raised our compensation forecast just a touch more than we would have on the basis of the lower unemployment rates in this projection. At this point, we are sticking with the notion that the decline in inflation and inflation expectations over the past year will exert a significant damping influence on nominal wage increases. Thus far in 1998, the trend in overall CPI inflation has remained very favorable, owing to the sharp decline in oil prices. Moreover, even with the recent firming in oil prices, the outlook for this sector through 1999 now looks more favorable than it did in late January, and we have lowered our forecast for retail energy prices. On the other hand, though it may be splitting hairs to say that the core CPI has increased more rapidly on average in the past couple of months, there certainly has not been any further downside surprise there. The deflationary impact of the Asian crisis appears to be no greater than we anticipated, and with a slightly lower dollar exchange rate path this time, the projected decline in non-oil import prices outside the semiconductor and computer sector is a little shallower. Overall, our interpretation of the incoming price news--coupled with the more inflationary labor market conditions in this projection--has been mirrored in the quarter-point elevation of our core CPI forecast. In concluding, I might remind you that we have not built into the baseline projection any allowance for the big hike in cigarette prices that looms as a distinct possibility. The legislative proposals keep changing, as they did just yesterday, and the only thing that seems certain right now is that there are lots of people willing to provide the manufacturers with an excuse to raise their prices sharply. It is easy to come up with numbers that would add several tenths to the CPI inflation rate at some point. This would present the Committee with a challenge it has not faced in some time--that is, deciding whether to accommodate an adverse, rather than a favorable, supply shock. Larry will now comment on factors bearing on the external outlook.",1796
-fomc-corpus,1998,"I would like to highlight four areas of uncertainty on the international side: the crises in Asia, Japan, oil, and the dollar. First, the crises in Asia: There is an Asia effect, although we do not have a systematic handle on it. We see evidence in the trade statistics of the Asian economies themselves. The combined trade balance of Korea and Thailand in November-December swung from a deficit of $5 billion in 1996 to a surplus of $4 billion in 1997--a swing of more than $50 billion at an annual rate. We see evidence of it from the U.S. side: Trade statistics for January show a substantial decline in exports to Korea and Thailand. The U.S. purchasing managers' survey reports weak export orders. The anecdotal reports from the special survey conducted by the Reserve Banks contribute substantially to our sense of the weakness in exports to Asia. And we see evidence in the trade statistics of Japan and Europe. Based on all of this somewhat fragmentary information, most of the effect to date seems to be on the side of Asian imports, not Asian exports. The question now is not whether there is a noticeable effect, but rather how large and how long-lasting that effect will be. On that score, about all I would assert is that the probability of some of the more negative scenarios that we and others have talked about has diminished. While the problems in Asia certainly have not been solved, the situation outside of Indonesia--and perhaps Malaysia--seems to have stabilized, and we can be a bit more confident that at least some of the needed reforms and policy measures will be implemented. The evident resolve of the new government in Korea and the success of the rescheduling effort for claims on Korean banks have added importantly to our degree of confidence. Second, Japan: Recent data--including fourth-quarter GDP and indicators for the first quarter--suggest that the Japanese economy is even weaker than we had been expecting. Progress on resolving the problems of the Japanese banking system is slow, at best. On the other hand, substantial fiscal stimulus has been signaled, although the details are missing, and there is some prospect for stimulus in the form of tax cuts. What remains to be seen, of course, is how much so-called ""real water"" there will be behind the headline figures. I would say there is now some upside risk, not just downside risk, to the outlook for Japan that is presented in the Greenbook. Third, oil: The decline in oil prices through mid-March was a surprise. If that had been sustained, it would have been a central element in the revision to our Greenbook forecast since January. Of course, the decline has not been sustained. Oil producing countries have responded with an agreement to cut production, and their decision is sufficiently credible that prices have backed up quite a bit. We anticipate that prices will stay near current levels, with expanded exports from Iraq working to keep prices from rising further later this year and next. The price of oil in our forecast for 1999 is now $2 per barrel lower than in the January Greenbook. We think the risks to oil prices are fairly evenly balanced around the forecast path. I might note that the price of oil in our forecast also is about $4.50 per barrel lower on average in 1998 than it was in 1997. The decline in price from last year plays a significant role in the allocation of the burden of current account adjustments in the world and tends to some extent to support global aggregate demand. Fourth, the dollar: We have a small decline in the dollar's value built into our forecast, in both nominal and real terms against the yen and European currencies and in real terms against the currencies of emerging market economies. Again, there are risks on both sides. Especially in the short run, we see some upside risks. The market may continue to be disappointed in the performance of the Japanese economy, putting further downward pressure on the yen. Problems in Indonesia could spread and Asian currencies could weaken again. Persistent vigor of the U.S. economy could entice investors. And while the process leading toward the next stage of EMU seems to be on track, there is scope for problems--associated, for example, with the German election in September. However, over the longer term, what we see as the need for the dollar to decline to begin to correct U.S. current account imbalances could assert itself, as some of the factors that have been putting upward pressure on the dollar diminish in force: the uncertainties related to EMU, the Asian crises, and even the weakness in Japan. Putting all four elements together, I myself see the balance of risks skewed toward the upside, in terms of the foreign impact on U.S. demand and prices. My colleagues probably would not be so unequivocal, but then again, this is not their last FOMC meeting! [Laughter]",988
-fomc-corpus,1998,"Larry, I noticed that in the last couple of days we have had a particularly strong trade-weighted dollar. How much is the dollar above expectations in the final Greenbook forecast, which I assume was put together a week to ten days ago?",49
-fomc-corpus,1998,"How much higher depends on what you mean by the dollar. There are a lot of different ways of weighting and characterizing the dollar's average value. It has gone up some against the yen, but I don't think there has been a big change in terms of the various weighted averages that we use. I am looking for one average that we employ--it was 101.3--",77
-fomc-corpus,1998,That is the G-10 weighted average?,9
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"On that average, the dollar is about one percent higher than it was at the time the Greenbook went to press.",24
-fomc-corpus,1998,"That's against the other G-10 currencies, but it is up less than that presumably against some of the other weighted averages. It does not change the basic picture.",33
-fomc-corpus,1998,The recent appreciation is still noise as far as the Greenbook forecast is concerned?,16
-fomc-corpus,1998,"Absolutely, in our view.",6
-fomc-corpus,1998,Supposing the fiscal year surplus number comes in closer to the New York Bank's estimate than ours. That would seem to be outside the noise range in terms of the implications for fiscal drag. What kind of response would you have if we accepted their numbers for receipts? What happens?,56
-fomc-corpus,1998,"I think we need to consider what the source of that difference might be before we would characterize that as fiscal drag. We have not gotten totally inside their brains to be able to say exactly why their numbers differ from ours, but it appears that one element in the picture is, in effect, New York's expectation of much larger revenues from capital gains. We normally would not think of that as a particularly restrictive fiscal element. People get wealthier; they presumably anticipate that they will be paying more taxes; and they are not bound by any liquidity constraint, given their wealth. So, if that is the source of the difference, we would not regard that as implying much additional fiscal restraint. Also, I wouldn't say at this point that the difference is outside the range of normal noise. We have had some substantial surprises in the last few years. As the economy gets bigger and bigger, the possible dollar errors grow. Even so, it is a significant difference, and we shall know a lot more in the next few weeks. Some of this is speculation about whether people anticipated their tax liabilities for last year better than they did for the previous few years. There also is uncertainty about the sources of the income. We are not adamant in saying that the New York forecast is wrong, and I am sure that they are humble about the precision of their forecasting ability, too, at this juncture.",278
-fomc-corpus,1998,"Absolutely! I put in last year's actuals to show that the range of misses was 7 to 10 percent. That had a huge impact in dollar terms. But I was also offering that experience to provide some scale of the forecasting errors involving big numbers. If we could get Desk operations to have misses of only 10 percent over a 24-hour horizon, we would be doing awesomely well.",82
-fomc-corpus,1998,"It is my understanding that the difference in the projections of the surplus for the fiscal year, which I believe is on the order of $40 billion, is mostly on the revenue side, but not all of it is there. There are the ongoing questions concerning how appropriations will play out in terms of authorizations and expenditures.",65
-fomc-corpus,1998,Do you have any rule of thumb regarding the effect of changes in crude oil prices on the core CPI--some notion of the feed-through?,28
-fomc-corpus,1998,"I cannot cite a rule of thumb off the top of my head, but in some of our models we do have terms for food and energy prices feeding through to the core CPI. We did a simulation that indicated that the effect of the downward movement in energy prices in our forecast on the core inflation rate this year is somewhere between .1 and .2 percent.",72
-fomc-corpus,1998,It is quite substantial in other words.,8
-fomc-corpus,1998,"It is not negligible, to be sure.",9
-fomc-corpus,1998,"Mr. Chairman, we have done a little work along the same lines. Our staff has what we call the median CPI or the trimmed mean. The effects are on the order of magnitude that you suggest, Mike, from what I recall our people were saying. They are continuing work to evaluate those indirect effects.",62
-fomc-corpus,1998,"Mike, I have two questions that are somewhat related. The Greenbook stresses that labor markets are very tight and that the tightness could lead to increases in real compensation. But increases in real wages in the Greenbook forecast actually decline in 1999. For example, the ECI decelerates by .5 percentage point relative to the CPI. In fact, real wage inflation may even be going down more than that if one believes that wage earners bargain in terms of what they see on Main Street rather than what they read in the newspaper about the CPI, which, of course, is affected by the technical adjustments. Could you comment on why real wages are decelerating in the forecast where you have the economy operating at such a high level and with such little slack?",156
-fomc-corpus,1998,"We do not have real wages declining, but in 1999 the gap between the ECI increase and the CPI increase is smaller. We are not at all sure that that is the number to focus on. In fact, we prefer to focus on a product price measure rather than the consumer price index in looking at real wages, and it feeds through, too, to the implications for income shares. We have had very substantial acceleration of real compensation gains over the past two years. We are anticipating sizable further increases in 1998 and 1999. In 1999, it is a smaller increase and one could explain that in part by the fact that we project a little upcreep in the unemployment rate. We also are banking to some degree on the notion that the ECI and other wage measures have been boosted over the past year or so by minimum wage hikes. These are not present in this projection. One could regard that, I suppose, as another upside risk on the inflation outlook because there obviously is discussion, albeit fitful, of further minimum wage increases. We also saw a very big increase in commissions and bonuses in the latter part of 1997, which we think probably will be repeated in the first quarter of 1998. These are associated in part with the huge level of profits and activity in the financial and real estate sectors. We foresee an abatement of that contribution to compensation increases as we move forward. As I said earlier, we are fairly convinced by all the anecdotal and survey evidence--indicating that employers have been utilizing more flexible forms of compensation such as cash bonuses and incentive pay of various sorts--that future adjustments to compensation should be more sensitive than previously to a deceleration in the economic expansion and a falloff in profitability such as we have in our forecast. In other words, the inertia in adjustments to compensation that formerly might have been present in such circumstances may not quite as evident in this cycle. Those are the elements that lead us to be fairly sanguine about the prospects for holding the line on nominal compensation increases even in this tight labor market. We still anticipate sizable increases in real wages that we think are in general conformity with the Phillips curve model.",442
-fomc-corpus,1998,"Related to a point that you made in your comments about the anecdotal data pertaining to inflation and how they might be at variance with some of the published statistics, might that be related to the fact that the anecdotal data reflect what people see? The CPI certainly includes the effect of technical adjustments. Might this discrepancy actually increase over time because, as you show in the Greenbook, the technical adjustment to the core CPI is probably going to be on the order of .6 percent in 1999? Of course, people do not see that; they only read about it.",115
-fomc-corpus,1998,I am not sure about the ability of John Q. Public to filter out all the cumulative changes from the 1994 approach to measuring consumer prices to the method used in 1999.,38
-fomc-corpus,1998,They never see it except when they read about it.,11
-fomc-corpus,1998,"In the world of instantaneous flows of information, all the economists will be talking about it and maybe it will filter out into the real world to some degree. I guess we are not totally persuaded one way or the other on this. We are inclined to think that in terms of formal cost of living adjustments and, more informally, to the extent that people look at what the CPI has done over the past year, they are probably going to be influenced to a considerable degree by the headline number. I did note some tension between the anecdotal and the statistical news on the wage side. This does make us nervous. In our survey that all the Reserve Banks participated in, the focus was more on what business firms are doing, if anything, if they are experiencing a shortage. I think a majority of the firms that were in that predicament said they were doing something. But I think it is difficult to judge the timing and dimension of an acceleration--how much more they are doing now than they were doing before. And in general, based on this anecdotal evidence, I wonder if there isn't some sort of Heisenberg problem here. We are looking so hard and we are asking so many people that one wonders whether we are finding a few more stories than we would have if we did not have a neutral expectation about what was going on. We are a bit nervous about this, but I think there is a little upside risk in the wage outlook. On the price side, I believe the markets and the commentators have gotten a whiff of the inflation that may be out there. Recent housing market developments have intensified that impression. The indexes have been distorted by shifts in geographic mix, but I think the large increase in prices that was reported in connection with this new home sales figure the other day is one more instance where people are not looking at those subtleties. What they sense is that this is a really hot market and prices may be moving.",390
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mike, you mentioned that oil prices are one of the temporary factors that are affecting inflation; in fact oil prices are even affecting core CPI. The other key factor, of course, is the dollar. I'm wondering if you've done any simulations or have any quantitative estimates as to what the impact of the stronger dollar has been on the core CPI last year and this year.",73
-fomc-corpus,1998,"President Moskow, our model estimates suggest an effect of about 1/4 percentage point per year over the last couple of years on core CPI from the lower nonoil import prices, simulating forward from 1995.",45
-fomc-corpus,1998,Does that include 1998?,7
-fomc-corpus,1998,"Yes, there may be another quarter percentage point or so for 1998.",16
-fomc-corpus,1998,"This is an area in which economic science has not given us anything that we want to stake our lives on. We have various results with the various models, but I think we are persuaded that the appreciation of the dollar has had a significant effect. Looking at what is going on in the goods markets, I think the evidence is quite persuasive that we are getting a significant effect. As we go forward, the waning of that effect, given our dollar assumption, does add a little to the acceleration of prices that we have in the forecast.",108
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,"We do have a bit of a lag built in between the exchange rate change and the effect on import prices. So, even if the dollar starts coming off its current level, we will see some effects in terms of lower nonoil import prices for a little while.",53
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Mike, you correctly anticipated a question that I had, but in at least one respect your presentation added to a puzzle that I had when I read the Greenbook and some of the other materials. You have personal income growth picking up to a 6.7 percent rate in the first quarter from a relatively robust pace last year and in fact from an upward trend over the last five years. Employment growth has been very strong along with hours worked. There is strong demand for output, strong demand for workers, and spending has been very robust. The stock market is booming. The real estate sector also is booming, including existing and new home sales, housing starts, and housing permits, and business fixed investment remains on a sharp uptrend. Then I read the first sentence of the draft directive that says ""the information reviewed at this meeting suggests that the expansion in economic activity may have slowed somewhat.""",178
-fomc-corpus,1998,"All of that reflects the arithmetic that I described at the outset as to how we have added up the GDP components. There is the tension between the labor input indicators and what we can add up on the expenditures side. We've seen this before. We will see it again. It leaves a lot of room for surprise, but we have reconciled this discrepancy by pumping up the missing expenditure numbers as much as we felt was reasonable, particularly on the inventory side. We are left with the implication that there was a substantial decline in productivity in the first quarter. As I said, that is not inconceivable to us in terms of our general outlook on the cyclical, so to speak, element of productivity performance over the forecast period. However, the quarterly change in productivity is sharp and that raises a question. We might yet find that GDP growth did not slow in the first quarter.",176
-fomc-corpus,1998,"Let us suppose it is true that real GDP growth in the first quarter, as you have added it up, is a smaller number than that for the fourth quarter. In the face of all these other indications of strength, do we really want to characterize the economy in the first quarter as a weakening in economic activity even though the real GDP growth number may be arithmetically smaller for the reasons that you indicated?",83
-fomc-corpus,1998,"This is a policy issue on which I have no expertise. You are asking whether I am comfortable with that? I guess what you are saying is that the characterization of economic activity need not be a reference to GDP growth per se, because the latter may not capture the sense one has of the vitality of the economy in the first quarter of the year. Perhaps there is some other way that you folks might want to express your view of what you heard at this meeting.",93
-fomc-corpus,1998,"Let me take you to the productivity issue then. Nothing that any of us hears anecdotally when we talk to people or other evidence that we can look at would support your first-quarter productivity estimate. I understand how it is derived and why you wind up with this negative productivity number, shocking as it is. It is a residual.",68
-fomc-corpus,1998,Can we stipulate that measured productivity is distinct from true productivity?,13
-fomc-corpus,1998,"Somehow statistically arrived at! When I was talking to Don Kohn last week, he told me that the decline did not happen and that productivity probably rose by, say, 2 percent. Starting with that presumption, what else has to change in your forecast if you are forced to put in a positive productivity number for the first quarter? Also, what is the net going to look like?",80
-fomc-corpus,1998,"If we talk about it simply from a straight arithmetic point of view, obviously we would have to find some more expenditures. Where might we find them? It could be in any number of places. One could conceive that, despite what looks like a very strong consumer expenditure number in the first quarter, people really have had a lot of income, though it is overstated in the first-quarter number because of seasonal adjustment quirks. Nonetheless, consumer spending is strong and is supported by a lot of wealth and people feeling really great. So, there could be an even boomier picture in consumer expenditures than we have projected.",123
-fomc-corpus,1998,So you would be raising not just the real output number but the nominal GDP?,16
-fomc-corpus,1998,"In the end, BEA is only going to publish a number that adds up on the expenditure side, and the productivity numbers are measured that way. So, that is how we are going to have to get there. We have only one month of data for net exports and that is a volatile number, so we could be surprised there. Over the past year we have been surprised on final sales, and there has been an accompanying upside surprise on inventory investment. We could see larger amounts of inventory investment that would be consistent with higher final sales and with our basic sense that no troublesome accumulation has been occurring. Getting up to 4 or 5 percent GDP growth is not totally implausible. We could also have some revisions in the employment figures or something precipitously on the weak side in March that would make up for the string of upside surprises that have helped to generate this weak productivity number.",179
-fomc-corpus,1998,"When you try to reconcile the data and make them consistent on the income side, is your negative productivity number tied in with the decline in corporate profits that you're showing?",33
-fomc-corpus,1998,"Again, arithmetically it is. Certainly, what we have in this forecast for 1998 in essence is a story where unit labor costs are increasing more rapidly because of the lagging adjustment of labor input to the deceleration in output. Weaker productivity means weaker profits.",57
-fomc-corpus,1998,"You can imagine what it's like when we are out around our Districts talking to people and we tell them that productivity is going down, profits are really bad, but employers are hiring workers in large numbers because they are earning income and spending a lot of money. Something just goes ""clunk"" in that logic; it simply does not sound quite right.",71
-fomc-corpus,1998,"I think they have been hiring people in part because business has been very good and they expect business to continue to be good. On the basis of the anecdotal reports, firms have had such a difficult time finding workers that they're probably still catching up to some degree. That may be one of the reasons the workweek has been on the firmer side than we would have expected, even allowing for statistical problems. I think that continues to happen. There is momentum to this process. If we get that stronger first quarter, it is going to imply accelerator effects and possibly a stronger investment outlook beyond. If we get that performance and stronger profits, it calls into question our expectation of a weaker stock market. So, one could envision, as happened last year, that things could come together in a way that propels the economy forward and keeps going on with the support of the financial markets. On the other hand, that would imply that we might be moving toward a 4 percent rate of unemployment this year, and I think that strains one's sense, given what one can already see, of what is possible without really substantial inflation pressures.",226
-fomc-corpus,1998,"As a statistical matter, President Jordan, there are a couple of quirks in this minus 2.2 percent productivity number that we have for the first quarter. One relates to the fact that we think the 10- and 11 -day pay period seasonal adjustment problem has led to an artificially large increase in hours worked in the first quarter. The second is that, as you may recall, we thought we were seeing significant declines in self-employed hours late last year that were boosting productivity to well in excess of the 2 percent underlying number that you were just talking about. Some of that appears to be going away now.",126
-fomc-corpus,1998,Any further questions for the gentlemen?,7
-fomc-corpus,1998,"Mike, I have the impression that the possibility of a stock market decline is playing a larger and larger role in the projected deceleration of the expansion. I would be interested in some sort of quantitative relationship here. Are you expecting a permanent drop in the market? Is it something that is going to be extended and sustained? If we had a normal correction, something like a 10 percent correction or like the correction that we had in the fourth quarter, that really might not have much of an impact on aggregate demand. So, I'm wondering what underlies the quantitative dimensions of this aspect of your forecast.",120
-fomc-corpus,1998,"It could be less. I apologize if word about what we are assuming did not get to you. We have a 10 percent decline in the market from its level last week to the end of the year and we then have a flat market in 1999. So, in comparison to what we've seen in the past few years, which as I recall were a couple of close-to-10-percent corrections that were quickly reversed, this more permanent correction would be a distinct contrast. We provided a simulation in the Greenbook of an alternative GDP path in which in essence the stock market rises roughly 5 percent a year, enough to keep pace with the growth of nominal disposal income. It makes some material difference when we move out to 1999. As I suggested in my remarks, if you think the market can do appreciably better than that--and that is really a paltry performance by the standards of recent years or in relation to what the average investor seems to be expecting--then the economy's performance will be dramatically different as we move out into 1999.",215
-fomc-corpus,1998,"Further questions? If not, would someone like to start the roundtable? President Jordan.",18
-fomc-corpus,1998,"Thank you. When I left the meeting in early February, we were waiting for the East Asian effects to get here, and as I tried to analyze their likely impact I felt like someone who was trying to anticipate what would be the effects of an asteroid or a comet that supposedly was going to show up one of these days. A couple of weeks after our meeting, there was in fact a report about an asteroid that might reach the earth in about 30 years. [Laughter] Upon further analysis that report was very quickly dismissed. Almost 25 years ago, we were all treated to reports of the coming of the comet Kohoutek. Comet Kohoutek was going to do wondrous things. It was going to be the brightest celestial object of the century, and there was speculation that it might change the earth's rotation and weather patterns. Of course, it was a complete fizzle and no one will remember it. As I thought about such phenomena, it occurred to me that asteroids and comets are less predictable than eclipses. But even eclipses, though predictable, are often very hard to observe because there is so much other activity in the atmosphere that even a trained scientist may need powerful instruments to observe one. I then thought about El Nino, which has been wonderful for my part of the country this winter. The lesson there is that even when phenomena are accurately forecasted and exceed anticipations, the effects are sometimes hard to analyze. If one analyzed El Nino's effect on the basis of expensive California homes falling into the ocean, one would have a different picture than if one lived around Lake Erie and saw what a wonderful winter we had in our part of the country. The schools did not close. The people who drive salt trucks complained about the lack of overtime, but other than that the experience was relatively positive. If we put such disparate observations into a full general equilibrium context, it really is very hard to sort them out. It may be that companies that compete with Asian imports or that lose export sales in Asian markets will continue to get hurt. Even so, I still think that the economy is much more likely, as Mike Prell remarked, to be stronger on the upside than weaker on the downside of the Greenbook forecast. I also continue to be concerned that we may never see the effects of monetary excesses in output prices, but rather that we will see them in asset prices. At our business advisory council meeting about two weeks ago, one of my relatively new members came into the meeting and indicated that he now understood the role of the Federal Reserve. It was to keep people like himself from doing foolish things. I asked him to explain. He runs a manufacturing company. He said he was driving one day and saw a big sign indicating that the land he was passing was zoned for commercial real estate development and was for sale. He stopped and considered whether he ought to purchase that land in order to diversify his business activities. On further reflection he realized that he didn't know anything about commercial real estate development and that this really was a dumb idea. So, he came to our meeting to persuade me to help keep him from doing something that would be really foolish. We are hearing more such stories, and I would be interested in knowing whether some of you have heard them as well. We asked our advisory council members and our directors how the first quarter felt compared to the first quarter of last year and compared to all of 1997. In general, the run-through simply reflected what the Greenbook is reporting probably happened. Results were not only strong but stronger than anticipated; indeed, they far exceeded expectations. People said they came into this year with a cautious view of the economic outlook, but they now are revising up their expectations about what is going to happen. The anecdotal reports on labor markets still lead me to believe that the reported compensation numbers are not capturing what is going on. First, I don't think the turnover of workers is being analyzed correctly. In addition, there is occurring what I now think of as the ""dumbing down"" of the labor force. More and more employers are telling us that because of the introduction of smarter technology and the way they are organizing their operations, they now are willing to hire at a given wage people who have lesser skills than previously. That does not get captured in any of the compensation numbers that we receive. To cite other signs of labor market tightness, in the several counties around Dayton, Ohio, in what is called the Miami Valley, there are currently 550,000 employees. The university there did a survey of job openings that added up to over 50,000. That total is 10 percent of current employment in the area. I asked our business contacts there how they were going to deal with this labor scarcity problem. They indicated that they are counting on migration from other parts of the country. They also reported for the first time such developments as workers balking at voluntary overtime. Retail companies are telling us that they are going to mandatory overtime because their workers are not signing up. What the workers are signing up for, faster than ever before, is their vacation schedules. We are hearing more and more reports about real estate transactions that I think are very questionable. As probably everyone else is hearing, our banker contacts claim that it is the other lenders that are engaging in such dubious real estate financing. All of their own transactions are very soundly based on appropriate valuations. Home prices are rising very rapidly in our area. People are paying up for commercial space. We are getting anecdotal reports, scattered here and there around the District including the metropolitan areas, about rising rental rates for retail space and other commercial space. In another report that I found interesting, directors said that the fastest rising wages that they see are teacher salaries. State, local government, and school district tax receipts are coming in very strong and they are being spent on worker compensation. We hear bankers, in particular, who say that when they lose lower level workers in their organizations, they typically lose them to schools or to city governments. One of the large banks that operates in most of the states in our region said that they came into the period expecting good commercial loan demand, and it has been very strong. What has surprised them, though, was that consumer loan demand, which had previously tended to weaken, has rebounded very sharply. They also asserted that credit quality standards definitely have been lowered as a result of what they said is shoddy underwriting by syndicators. Finally, as an illustration of labor market flexibility, we saw a report that United Parcel Service would be expanding greatly its operations in Louisville, in Bill Poole's District. A bank that has a significant credit card operation in Louisville said that was not a problem for them; they were going to shut that operation down and move to some other place where there was a bigger pool of labor. They were not going to compete with UPS for workers.",1400
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, Twelfth District economic growth accelerated in 1997, led by a surging California economy. We believe that the District economy entered 1998 with considerable momentum. Recently revised figures show that growth in California payroll employment jumped to 3.8 percent in 1997, about a percentage point greater than in 1996 and also a percentage point greater than the increase for the nation as a whole. The pickup occurred in most major sectors, but not surprisingly it was largest in the construction industry where employment grew by over 11 percent. Furthermore, we see that all areas of the State of California shared in that surge. The most pronounced acceleration occurred in Southern California, led by San Diego and several counties that surround Los Angeles County. Although demographic factors held growth in Los Angeles below that of the rest of the state, the Los Angeles economy did pick up substantially in 1997. Employment grew at a solid rate, unemployment declined by nearly 1-1/2 percentage points, and the housing market improved considerably. For the state as a whole in 1998, a weather-related pause in January employment growth was followed by strong expansion in February, suggesting that California remains on or close to the path that we saw in 1997. As the California economy continues to heat up, there are signs of a shift in economic activity away from other states in the District. Employment and construction indicators generally showed that Nevada, Arizona, Oregon, Utah, Washington, and Idaho all expanded less rapidly in 1997 than they did in 1996. Despite the gradual cooling trend outside of California, the District as a whole remains on a stellar growth path. One development that we are watching carefully is the impact of conditions in Southeast Asia, which certainly are having a moderating effect on District export sales of various agricultural and manufactured products. But the net impact on employment growth in our region is quite limited to date. At the national level, the economy has once again shown surprising strength. Indeed, our monthly indicators model projects first-quarter real GDP growth well above the Greenbook estimate. It is in the low 4 percent range. Some of this strength may be transitory, perhaps a result of unusually warm weather. If that turns out to be the case, then the robust expansion in the first quarter may have little implication for the longer-run outlook because it may be the result of some borrowing from the second quarter. However, we think it is more likely that the considerable momentum of the first quarter will carry forward. The latest gains in disposable income, which should support further purchases by households, are particularly impressive in this regard. Thus, at the current funds rate and even taking into account the fallout from East Asia and a slowdown in inventory investment, we see real GDP growth remaining near potential throughout the remaining quarters of 1998. Given our outlook for real growth, there is little question that labor markets will remain very tight this year. There is already significant upward pressure on wages and salaries, and we see annual compensation growth increasing several tenths this year and again next year. However, as all of us have noted, the outlook for prices is considerably more favorable than that for wages. With falling import prices, lower prices for oil and other commodities, as well as recent productivity enhancements and additions to capacity, core price inflation probably should come in at a rate of around 2 percent. This would certainly represent further modest progress toward our objective of price stability. Looking beyond this year, it is uncertain in my view whether the special factors moderating inflation will endure and whether our recent progress toward price stability can be maintained. Thank you.",729
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The pace of economic expansion in the Seventh District has picked up since the beginning of the year. Mild winter weather explains part, but not all, of the reported strengthening in retail sales and our very robust housing market. In contrast to the slowing seen in the nation, expansion in our manufacturing sector has accelerated. The March results of the Chicago Purchasing Managers' survey released this morning show an increase in the overall index from 57.8 in February to 59.5 in March, paced by sharp increases in both production and new orders. Consumer surveys from Detroit and Milwaukee had shown a pickup in the pace of retail sales expansion in January and again in February. Output growth in our manufacturing sector has started to exceed that in the nation, which may reflect the Asian situation since we expect that other areas will be affected more than our region. Since our last meeting, I have visited several areas of our District. In addition, our academic advisory and our agriculture, labor, and small business advisory councils met recently and we had meetings of our Chicago and Detroit boards of directors. Several common themes emerged from these meetings: first, labor markets remain very tight; second, health insurance costs are rising; and third, Asian developments have not yet had much of an impact. We continue to hear about new ways that employers are using to deal with tight labor markets. For example, many contacts noted the increased use of apprenticeship programs in the construction industry. We were pleased to hear that apprentice and pre-apprentice programs for electricians and carpenters are being reestablished in the city of Chicago as opposed to the suburbs. These programs draw on the unemployed in the inner city. In Peoria, a high-tech jobs training center is being built and sponsored jointly by a local university, high schools, employers, and the state employment service. All the sponsors will be located in the new building in order to ensure that the high-tech training reflects the needs of local employers. We even have heard that temporary help firms are using temporary help. [Laughter] One labor union contact told us a real first: A temporary help firm solicited striking workers on a picket line for temporary assignments elsewhere. [Laughter] In terms of the Asian situation, most of our directors and council members felt that the Asian impact on net exports would not be large. Still, we have heard various anecdotes that indicate an Asian impact on some types of exports and imports. Pork sales to Asia are down significantly, and we are importing container board from Japan for the first time in our contact's memory. In the auto industry, some domestic light vehicle production has been cut as a result of softening export sales to Asia. Import sales of light vehicles have increased, although mostly sales of European rather than Asian models. Korean imports have doubled their market share of motor vehicle sales from .7 to 1.4 percent. I guess it's not surprising since they are offering $2,000 rebates on cars selling for $12,000. All of us have heard that Asian firms are having difficulty obtaining trade finance, but several auto industry contacts speculate that the Japanese auto firms have not increased exports to the United States because of political considerations. Turning to the national outlook, I continue to be impressed by the strength of the domestic economy. Consumer fundamentals are strong and firms seem poised to remain big spenders for high-tech capital goods over the next few quarters. As in January, we expect net exports and inventory investment to be the largest drags on GDP growth this year, though our outlook for a depressing Asian effect is somewhat less pessimistic now than it was two months ago. All told, we expect to see GDP growth of about 2-1/2 percent this year, with some slight pickup in inflation over last year's levels. Last week I met with eight economists comprising our academic advisory council. Most council members attributed measured inflation's recent low levels to a variety of special factors. These include the dollar's recent appreciation and the deceleration of medical care costs as well as the continued methodological changes implemented by the BLS. Every council member expects inflation to accelerate noticeably over the next 12 months, the consequence of tight labor markets and GDP growth consistently above its trend rate. The council was nearly unanimous in its view that monetary policy should be tightened over the next few months. In summary, I remain concerned that the domestic economy's strength will outweigh any negative effects arising from the turmoil in Asia. At our currently high resource utilization rates, this strength threatens to generate noticeable price pressures over the forecast horizon. Although in January 1 viewed the risks as somewhat balanced, I now view the risks going forward as tilted toward the upside.",940
-fomc-corpus,1998,"Mike, excuse me, but what were your academics saying a year ago?",15
-fomc-corpus,1998,"Several were saying the opposite a year ago. It was much more of a mixed picture, with some saying that we should be tightening and others indicating that things were just fine and we should not change our policy. But for the first time at the latest meeting, they were virtually unanimous in the view that some tightening would be needed. It was a surprise to us.",73
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. The economy in the Philadelphia District is growing at the same rapid pace as last year. Job growth has expanded to all sectors including manufacturing, which had been a drag on the regional economy. Labor markets are very tight. Compensation costs are rising, but apparently so is productivity growth. There is little evidence of rising inflation. As others have said, the anecdotal comments from the business community revolve mostly around people issues. The most frequently heard comment is that qualified workers are scarce and they are becoming more expensive. There is more job-hopping as compensation is bid up. One labor leader told me that the building trades are having trouble attracting qualified workers because wages in manufacturing have now surpassed those in construction. For the first time in several years, I also am hearing comments about a shift in the psychology of the workplace. In the wake of corporate downsizing, there was job insecurity and people tended to work longer and harder. Now there is an emerging view among workers that they cannot keep up the pace any longer. It would appear that job insecurity is beginning to turn the other way, and workers are looking for things like more vacations and more predictability in their work schedules. If they're not getting that from their current employer, they can get a job somewhere else with a significant increase in pay. In conjunction with the tightness in the labor market and the increasing costs associated with it, I continue to hear stories about the pervasive use of technology throughout the economy to increase productivity. It is one story after another, and one gets the sense that the end is nowhere in sight, that we are in one of those periods where this process is likely to go on for some time. Turning to the national economy, it seems that we are still being dealt the same hand that we have been dealt for a number of months. We have ongoing strength in demand and very tight labor markets that by past standards should be causing inflation to accelerate, but that acceleration is not happening. We also have the card that points to some prospective slowing in the pace of demand, and that slowing is not materializing either. We all hear anecdotally about significant productivity growth, but it is not being captured fully in the statistics. I also think we have the same hand being dealt to us as far as policy goes. That is a wait-and-see policy versus some kind of preemptive action. We will be talking about that later.",487
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I would characterize the overall growth of our region's economy as moderate, at least by our District's standards, in that growth in our region has fallen back to national trends in the last several quarters after leading the nation through the early years of this expansion. With a couple of notable exceptions, I currently see few signs of imbalances in our regional economy. Housing activity continues to be mixed but at a high level, with increases in sales of single-family homes offset to a substantial extent by declines throughout the region in the multifamily sector. We have generally healthy commercial real estate markets, but to repeat a comment that I made at the last two meetings, I continue to see some worrisome signs of speculative commercial development in Atlanta. Planned expansions in Atlanta are estimated to be about double the current absorption rate for the coming year. I would emphasize that this real estate activity is concentrated in Atlanta and is not representative of the region as a whole. Nonetheless, it is a development that I think I need to continue to watch. Tourism in our major tourist centers is very strong. One measure of just how strong is the unavailability of airline seats on most flights into Florida, where hotel and cruise ship bookings are quite heavy into the future. Like others on the Committee, I continue to look hard for signs that the Asian problems are affecting our regional economy. One piece of tangible evidence shows up in our District's pulp paper industry. Two pulp paper companies in Alabama were forced to shut down for two weeks. About two-thirds of their hardwood output and about one-half of their softwood output is sold to Asian customers. Pulp obviously is a volatile industry and periodic shutdowns are not unusual, but this is the first attributable to developments in Asia. Beyond this, there are as best I can tell only fragmentary reports so far that individual companies have been adversely affected. In the aggregate, the reported Asian impact in our region appears to be negligible at this time. It is also becoming clear that there are both positive and negative impacts on the domestic economy from Asia. A positive example comes from one of our directors who builds roof trusses for houses and small commercial buildings. He reports that because of the very wet weather, it has been nearly impossible for heavy equipment to get into southern forests to harvest southern yellow pine, and the price of such lumber has increased significantly. However, the price run-up of pine lumber resulting from the supply squeeze has been muted by the influx of West Coast spruce and fir. The drop-off in demand from Asia for that West Coast lumber and its diversion to our region has come with price cuts of about 25 percent. Lastly, as far as the region is concerned, I would be remiss if I did not add our perspective to the current availability and cost of labor. To no one's surprise, labor markets in our area also remain tight and continue to press employers to look even harder for opportunities to substitute capital for scarce labor. To add one more story of productivity gains, on a swing I made through north Alabama two weeks ago, who manages an agricultural conglomerate told me about a new piece of equipment. The equipment is configured so as to allow each pass of the equipment through the fields to till or harvest 12 rows instead of the previous 10, a very appreciable increase in productivity, part of the resulting savings was retained by and part was used to raise the hourly wages of the workers by about 15 percent. I continue to get similar reports from almost every industry contact that I talk to. It is clear that efforts to achieve productivity gains are still meeting with some success. As far as the national outlook is concerned, our judgmental forecast is extremely close to the Greenbook's this time and similar to others that already have been laid out around the table. I agree that the near-term outlook is good to excellent. Given this agreement on the near term and the lack of immediate policy action that it seems to suggest, our focus should continue to be on the longer term over which many forecasts have inflation rising after 1999. Here we must acknowledge that we have tended to over-forecast inflation and under-forecast growth during this decade. Speaking for myself, this is the type of error I can live with if it does not lead us into policy missteps, which I think we have avoided so far. Still, seeing the past pattern of forecast errors, I am concerned that we may be lulled into discounting the current inflation forecast too much and risk waiting too long before the required policy move is made. I suspect that many forecasts implicitly assume that the FOMC will behave as it has in the past, and if we do, I think inflation certainly should be expected to rise. Our Atlanta baseline model forecast explicitly assumes that we will behave as in the past, and it indicates that on average we have tended to ease policy when growth was in the range we are now forecasting for a substantial period ahead and when inflation was low and falling. The model shows that later, but not much later, inflation has tended to accelerate, demonstrating the kind of policy mistake we need to guard against. I think this history cautions us to be leery of suggestions that the recent low inflation, whatever the source, provides an opportunity to ease policy. This leads me back to thinking about how much to discount the current inflation forecasts, which tend to show an acceleration several years down the road, something almost all of us have said we find unacceptable. Our model suggests that if we stick to our current policy position and do not repeat the pattern of easing when growth seems to be slowing and inflation to be declining, then I think we can comfortably discount the forecast of worsening inflation. It is for those reasons that I think we can afford to wait for a while to see if the disruptions in the real economy do or do not materialize. Thank you.",1180
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The economy in the Tenth Federal Reserve District remains quite healthy. It appears to be growing at a faster rate than the nation so far this year. For example, we estimate that total employment rose at an annual rate of 7 percent in the first two months of 1998, quite a bit faster than the increase for the nation. Some of the surge in employment was due to the warm weather, which had a favorable effect on construction activity in our region, but other sectors also added jobs across the District. Labor markets remain quite tight, with some continued evidence of wage pressures coming through. As in the last several months, about half the firms we have contacted said that they were responding to labor shortages by raising wages more than normal. District firms report that they continue to operate at very high levels of capacity. Manufacturing remains strong. The farm economy continues to do well, although there are some signs of weakness related to developments in Asia. For example, contracts in the food industry show reduced exports to Asia this year. District energy activity also has slowed in response to the sharply lower oil prices. The District rig count has fallen about 20 percent since the beginning of the year. Retail sales have been quite healthy in the District, partly due to good weather, but again the gains have been broadly based across the District. Despite the concerns about credit quality nationwide, lending standards in the District as they are reported to us do not appear to have deteriorated a great deal. At the same time, we are beginning to hear anecdotal stories of some speculative activities. I will share just a couple with you. In one of the resort areas in Colorado--not Vail or Aspen but one of the more modest resort areas--condominiums were offered for sale prior to construction. The prices that were considered minimum in the bid process could not cover the required cash flow even if the condominiums were rented every day of the year. Yet, people were standing in line to buy one unit at a minimum and they were often going for two. Another example relates to the recent experience of a small investment firm with a good reputation that offered shares in a new fund. They were trying to raise about one- half billion dollars for investment purposes. They started the new fund in January, and when I asked them recently how they were doing, they indicated that so far they had been offered about $1-1/2 billion to invest. One of their examples of investor interest was that although they did not want to take more than $20 million from any one investor, a couple of them insisted on their taking at least $60 million. So, some of the anecdotal reports that we are getting suggest a degree of optimism and speculation that we have not seen for some time in our region. More generally, our forecasts relating to the broad domestic economy are not unlike others. We see a very strong economy and one that we expect will remain strong. The contributing factors are the obvious ones: low interest rates, high consumer confidence, strong incomes and employment, and, of course, the stock market. We do expect some moderation in growth due to weakness in net exports and to inventory corrections that might occur. However, we think that the risks to the expansion are on the upside in the context of improvements in productivity that may continue on a more permanent than expected basis as a result of persisting high rates of investment and further improvements in technology. But we also recognize that inflation has been held down by some temporary factors. How temporary is, of course, the question. These factors are the prices of food, oil, and imports. As these favorable price trends unwind, I think we're going to see some fairly substantial pressures toward increased inflation, given our forecast of an economy that remains very strong on the domestic front. Thank you.",770
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The economy in New England continues to be strong. Actually, on the basis of revised benchmark data, it is a little stronger than we thought it was in 1997 and early 1998. Tight labor market conditions prevail, as do strong real estate markets in most areas, and good, if not great, prospects for the tourist industry and investment management firms, just to name two businesses. Manufacturing reports are a bit more mixed. Some firms are doing quite well as a result of accelerating demand for aircraft and heavy truck parts, furniture, and equipment. Others, especially in the equipment and high-tech industries, are holding their own or experiencing some difficulties in the face of cheaper imports and difficulties in their Asian markets. In general, the impact of Asia seems wider than at the time of the last meeting. Nearly all the manufacturers we talk to either have felt some impact so far from Asia or expect, directly or indirectly, such an impact by midyear. The nature of the Asian impact can be both negative and positive, echoing a little of what President Guynn said. On the negative side, firms have been affected by the cancellation of orders from their Asian customers, and several have associated layoffs with this problem, including in one case the closing of an entire plant. In addition, some contacts have indicated that they have had to supply financing to Asian customers or suppliers who are unable to get credit through normal sources. On the positive side, however, many of our contacts report that lower prices have led them to increase their purchases in Asia, and they are trying to move more manufacturing to that region to take advantage of lower production costs. It will take some time for them to make these changes in cases where existing business relationships are constrained by long-term contracts. As I noted before, labor markets are very tight and one hears anecdotally about difficulties in hiring beyond high-tech employees who have been a problem for some time in New England. Even entry-level employees, particularly in the hotel and tourism industries, are difficult to find. At the Bank, we have begun to experience turnover in our night check-clearing staff that is making it difficult to absorb the increased processing that resulted from the closing of our RCPC in Lewiston, Maine. Contacts tell us that firms continue to pursue a number of strategies to cope with hiring difficulties. The latter include on-the-job training to improve efficiency and efforts to accommodate the mix between job and family life situations, as well as selective increases in wages, benefits, and bonus pools. Even the very hard to employ and particularly those who are targeted by the Federal welfare-to-work legislation are being courted in Boston by such firms as Marriott, which is designing special training programs aimed at making these people employable and employed in the hotel industry. This objective will be very hard to achieve, and one can only hope that the effort will be successful. On the national scene we, like the Greenbook, have increased our estimate of 1998 GDP, so we still stand a little above the staff forecast. Our forecast is based on the strength of employment, residential construction, consumer durable expenditures, and business investment so far this year. We agree that there will be a drag from Asia and an inventory correction as well, but we fully expect that domestic demand will be strong enough to withstand these negative forces and keep the economy from slowing much below potential over the remainder of this year. We, like the Greenbook, see 1999 growth about at potential, though we have been hesitant to forecast a stock market correction. Our forecast shows unemployment declining and core inflation rising a bit more than in the Greenbook, but taken altogether that is not a bad prospect. Where we are concerned is in the assessment of the risks. Mike Prell picked up a little of that concern in his presentation as well. At our last meeting, I and a lot of other people thought that the risks to the forecast were roughly balanced. I could see the potential for negative as well as positive surprises. Now it seems that the risks are more on the upside again. Domestic growth is stronger than expected. Wage and benefit increases have crept up by some measures into the 4 percent range, particularly in services. There are selected price increases in service industries. Comments around the table have reflected on indications of more speculation in real estate activity. This speculation is fed by financial markets, which are extremely accommodative. From every perspective that we can see in our region and nationally, monetary policy is not tight; it is not even neutral. It is accommodative to an increasingly speculative environment. Sure, there are negatives. We have yet to see the full brunt of Asian developments. Inventory levels may correct. The temporarily benign influences of low benefit costs, growing productivity, increases in dollar exchange rates, and declining oil prices may be about to shift. I think the question for today is how long the current situation can last before tighter monetary policy is warranted or, more specifically, how long we can wait before we have waited too long.",1013
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"After a year of exceptionally strong economic performance in 1997 and into 1998, the economy of the Dallas region has recently begun to show some signs of softening, or at least expectations and early hints of softening. Lower oil prices, the effects of the Asian crisis, and continued labor market tightness are key factors responsible for the spreading expectation of slower growth. The recent sharp drop in oil prices, which was partially reversed last week, has done a lot to shake business confidence in Texas. As of just over a week ago, real oil prices had slipped by over $8 per barrel since October and were at their lowest level since 1933. If that 20 percent reduction had not been reversed, research at the Dallas Fed suggests that there would have been long-term employment losses of between 1/2 and 1 percent of the workforces in Texas, Louisiana, and New Mexico. While this is probably only about one-third of the impact that would have resulted from similar oil price declines in the mid-1980s, it nonetheless would represent an inflection point of the District's growth trajectory of recent years. Combined with the weakness in petrochemicals, semiconductors, and agricultural commodities stemming from reduced Asian demand, the weakness in oil prices has the potential to set the growth trend in the Eleventh District on a divergent path from the nation. Lower financing costs have added to the construction boom in Texas. Commercial construction remains strong and large new projects are announced almost daily. At our small business advisory council meeting two weeks ago, one of the members commented that several of his law firm's clients have decided in recent months to become real estate developers, probably a sign of trouble. [Laughter] I don't know if that included Jerry Jordan's guy or not. With the increased uncertainty about energy prices and the impact on growth trends in Texas, some of this building activity might be looked back on as irrational exuberance a couple of years from now if oil prices stabilize around $14. We are encouraged somewhat by recent reports from Houston that oil companies have begun to cut back on office expansion plans that were developed earlier. Additional evidence on market sensitivity to the changing situation comes from anecdotes that lenders in Houston are becoming more conservative about construction loans for speculative building. Mexico adds to the downside risks facing the Texas economy. I suppose you saw the ""Salt and Pepper"" cartoon in the Wall Street Journal the other day that said, ""You can live the American dream working for a Japanese company in Mexico."" So far, the Mexican economy has held up well, given its reduced competitiveness with Asian countries and its reduced revenue from oil production. We continue to get reports that Mexican shoppers are back in force in Texas retail stores along the border and at upscale stores in Houston and San Antonio. Whether this reflects an overvalued currency or just a strong recovery in Mexico is an open question. My tight labor market anecdote of the month from the Eleventh District is that a competitor of Texas Instruments put up a billboard across the freeway from the Texas Instruments headquarters in Dallas. On the billboard it said, ""Why did the engineer cross the road? To get a better job."" [Laughter] The national economy seems more like two economies these days, with the foreign trade goods sector showing signs of weakness while activity in the nontrade goods sector has accelerated of late. Price pressures remain subdued, but the core CPI statistics are beginning to be a source of concern. I am not inclined, however, to react to labor market tightness as long as businesses continue to be innovative and creative in holding down labor costs in the face of stiff competitive pressures in the markets for goods and services. M2 is growing too fast for comfort, but I do take comfort from market-based indicators of monetary policy, such as a strong dollar and weak commodity prices, as well as the prospective impact of Asia.",777
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"In keeping with most of the other comments around this table--] guess Bob McTeer's comments are an exception today--our District economy seems by all accounts to have remained very strong. There are some indications in the manufacturing sector that shipments may be softening a bit, but orders remain quite strong. Like Jack Guynn and some others, we have gotten occasional comments from folks indicating that the Asian situation is having some negative impact in particular industries, especially in the paperboard industry. A manufacturer told us that paperboard orders from Korea and Indonesia recently have fallen sharply, but those stories are the exception rather than the rule. Manufacturing is very important in our region and most manufacturers are quite optimistic for the longer term. In general, they are expecting total shipments, domestic plus exports, to be higher and perhaps significantly higher six months from now than they are now. Elsewhere, in the words of one of our retail contacts, consumer spending is ""going great guns."" Auto sales may be a little spotty, but they are higher than most dealers had expected them to be not too long ago. Our housing sector remains very strong, and we hear more and more tales about speculative building. We have had a lot of anecdotal reports on tight labor markets and I, too, hesitate to add any more, but that is what most of our contacts want to talk about. At our small business council meeting a couple of weeks ago, a member who runs an employment agency here in Washington reported that her firm no longer counsels prospective employees on how to attract prospective employers. Rather, she counsels ""candidate"" employers on how to attract employees, especially high-tech folks but others as well. She also told us that $40,000+ salaries for senior level executive secretaries and other high level administrative people are not at all uncommon in this market, runs a small manufacturing company. He told us that he recently lost a programmer who was making $50,000 for a salary almost twice that level. He now defines a ""hot job prospect"" as somebody who shows up for an interview and passes a drug test. [Laughter] And he is working on introducing robot technology into his operations! On the national economy, we now have at least some hard evidence as opposed to pure predictions that the Asian problem is having some negative impact on U.S. net exports. Obviously, we need to watch that situation and give it weight in our deliberations. But, as Jack Guynn and Cathy Minehan mentioned, the Asian situation has another side to it. It is also having effects that are helping to strengthen already robust U.S. domestic demand, helping to keep the inflation rate down, helping therefore to keep real wages up, and also helping to keep U.S. interest rates down. On balance, I think it's reasonably clear that at least during the period since our last meeting, the strengthening in domestic demand has outstripped whatever negative impact is in fact coming from Asia. The Greenbook obviously has recognized this with what in my experience is a fairly striking upward revision from one meeting to the next in the projected growth of real GDP for the coming year. I still think, and Mike Prell said the staff has this view as well, that the risk is on the upside in this projection. I have felt that all along and I feel it even more strongly now, especially with respect to inflation. In this regard, it is interesting to note that almost all of the Greenbook's projected decline in real GDP is accounted for by a drop in productivity growth, as several people have noted already. This means that labor markets are expected to remain tight over the forecast horizon. It is a little surprising to me that despite this extraordinary job market tightness and widespread expectations that health care costs are going to move up, the Greenbook does not project a further increase in the growth rate of ECI compensation for 1998 over 1997. Unit labor costs in the projection do rise as a result of the weak productivity growth. So, we do get a projected .3 percentage point increase, on a consistently measured basis, in both the core CPI and the core PCE measures of inflation. Obviously, if compensation moves up more strongly than the staff is expecting, that would compound any upward push on prices emanating from labor markets. Approaching the inflation risk from a different direction, as we all know M2 growth has accelerated sharply of late. I am well aware of the tax and refund effects that may explain part of this strength, and I know that M2 velocity is still subject to a lot of uncertainty. Even so, I think it would be a mistake to overlook what might be the most straightforward explanation of this strong M2 growth, namely that domestic demand is very, very strong currently. Thank you.",961
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Let me start by commenting on three or four characteristics of the District economy, some of which are by now familiar and some perhaps less so. I will then talk a little about the national economy. With regard to the District, nearly all sectors of the regional economy remain very strong. For example, District employment is up about 3-1/2 percent from early 1997 to early 1998. In Minnesota it is up over 4 percent. What is really remarkable, if not startling, about those numbers is where the new workers are coming from. We do not exactly get Sunbelt immigration rates in our District! [Laughter] It is a very impressive performance.",144
-fomc-corpus,1998,Are you going to answer that question?,8
-fomc-corpus,1998,"I think part of the explanation is that people are taking second and even third jobs. I wasn't going to get into the anecdotal competition on this. [Laughter] We do hear stories about places like Mall of America that are sufficiently desperate that they will hire a worker, if they can find one, who for whatever reason is willing to work only from 4:00 in the afternoon until 8:00 in the evening three days a week. These are people who obviously are doing other things much of the time. We hear that some of them may be in the process of taking their third job. On the other hand, we are seeing something that we have not observed since probably the mid-1980s. I don't want to exaggerate this, but we see some indications that a two-tier economy is developing where the urban areas are doing better than the rural areas. The principal problem in the rural areas is agriculture. There it is partially a question of commodity prices--and Asia may be having some effect--and partially a question of growing conditions, which right now are not terribly favorable. Having said that, there is always a problem with every generalization, and the energy sector, which is of course rural, and the iron ore industry, which is also rural, are both doing very well at the moment. The third and final regional characteristic I want to comment on relates to shortages. I will not comment further about the labor situation, but there is a related shortage of housing, particularly in those rural areas where employment has gone up. In the metropolitan areas, I think housing construction has been sufficiently strong to more or less keep up with housing demand. There has been a shortage of office space, but that is in the process of being alleviated and it probably will disappear in the next several years. There are now five significant office projects under way in downtown Minneapolis and at least two in downtown St. Paul. Developers report uniformly that they have no problem finding financing. As far as the national economy is concerned, overall I must say conditions look very good to me. Real growth, both current and prospective, seems secure, and I believe inflation will remain low at least for some time. If I wanted to worry, I think I would worry about the following things, especially in the context of the Greenbook forecast. One is that the Greenbook seems to have a very favorable nominal wage adjustment in the face of very tight labor market conditions. I worry a little about whether we really ought to expect that to happen. I also worry about the role of a stock price decline in that forecast. I do not have a conviction about stock prices, and I would not premise a forecast on it. I guess, like Larry Promisel, I'm not quite as negative as the Greenbook about the foreign trade situation, at least longer term. I must admit that growth in M2 is starting to concern me a little. In my view, the kicker here is productivity. I don't want to get caught up in how we measure productivity, but all of those adverse factors can be offset if productivity is on a fundamentally more favorable trend. Certainly, business people have asserted for a long time that it is and they continue to do so. They also continue to indicate that it is very hard to make price increases stick. Indeed, a more favorable underlying or fundamental trend of productivity would help to rationalize stock prices. I think I will stop there.",691
-fomc-corpus,1998,"Why don't we take a break because if we go through the rest of the speakers, we will have our coffee break after lunch! Let's allocate 10 minutes.",32
-fomc-corpus,1998,"As in most of the rest of the country, conditions in the Eighth District are strong and labor markets are very tight. The unemployment rate in the Eighth District is actually a bit below the national average. Rather than repeat the kinds of anecdotes we have heard before along those lines, I would like to emphasize my interpretation of the Asian situation because I think we are all searching for that as the key to understanding where we are. In my view there are three analytically distinct effects on the U.S. economy that flow from Asia. One is the trade effect. If we search, we find firms and industries that are impacted by reduced Asian demand for U.S. goods. In the Eighth District, we see this in food processing, including chickens. I was surprised to discover how high a fraction of District food exports go to Asia. Secondly, after the summer, as the impacts of Asian developments and the appreciation of those impacts grew, we obviously had declining interest rates. I think that came about for two reasons: one, safe-haven money came to the United States; secondly, there emerged a view in U.S. markets that the Asian impacts would slow the economy and that the odds on monetary policy becoming easier or tighter had changed. That was an indirect effect from Asia. I suspect that the second reason relating to the outlook for monetary policy was much more important than the safe-haven money that came here. Obviously, the lower interest rates are unambiguously expansionary for the U.S. economy. The third analytically distinct impact is lower oil prices that have come about from the decline in Asian demand for oil. The lower prices have had mixed effects in the United States. The firms and the regions that specialize in oil production are obviously impacted negatively, but the overall impact is positive because we have a lot of oil consumers who are benefiting. My overall assessment is that Asia is primarily a relative demand shock rather than an aggregate demand shock for the United States. We have shifts in the mix of demands in the U.S. economy. I believe we need to appreciate especially that the particular impacts we see in the trade account and in the oil regions are easy to spot. That is, they involve particular firms, whereas the generalized effects on consumers that come from lower interest rates and lower oil prices are much more diffuse. I think they are much more important but easier to miss precisely because they are so widespread. Overall, it seems to me that slower U.S. growth than that seen in recent quarters is likely but primarily because of resource constraints. Economic activity is bumping along, it seems to me, above and beyond capacity. I do not see slower growth in aggregate demand because I believe the underpinnings for further growth in aggregate demand are very strong. There are many signs of booming demand. The ones that impress me are the recent rapid growth of income, output, and consumer demand that is fed by rising asset prices everywhere one looks--equities, bonds, real estate--and high and rising money growth, however defined. This is not an issue of exactly what monetary aggregate is one's favorite since all of the Ms are giving the same kind of picture. We also have tight labor markets and wage pressures. In sum, I don't see anything in current economic conditions that suggests significant negatives in our outlook.",663
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I think the FOMC is in a difficult spot though I don't expect we will get much sympathy. [Laughter] Our difficulties, as Bill Poole just pointed out, stem not because anything bad is happening but precisely because so little bad is happening. The economy is performing as well as it ever has and probably as well as any economy ever has, which is a mind boggling thought. People are producing and consuming and working and investing at higher levels than anywhere before. Better than that, the economy's adjustment mechanisms seem to be working better than they ever have, here or elsewhere. Capacity has expanded and modernized at the same time. Companies have learned how to manage inventories. Labor markets seem to be functioning well in moving people to where they are needed most. Shortages, bottlenecks, strikes--imbalances that characterized boom periods in the past--do not seem evident, although we all have been looking hard to find some of these imbalances. Even world events are supporting the good performance of the U.S. economy. That is especially true, again as Bill Poole just pointed out, with respect to the price of oil. The latter seems to have fallen far enough to help our oil-consuming industries, which are most of our industries, without hurting our oil-producing sector so much as to create widespread problems, although Bob McTeer has pointed to some problems. It is hard to find any villains in this piece when one looks at the usual suspects. Even politicians seem to be behaving reasonably well. Some reports around this table, quite a few actually, point to speculative building. We have not yet had an evident boom in nonresidential construction, although we may. There are a lot of reports of labor shortages but also considerable evidence that the response has been flexible, targeted compensation increases coupled with cost-cutting in nonlabor areas. There also are reports that companies are leaving jobs unfilled or even expanding in different locations rather than bidding wages up. Only the stock market seems out of line, and there is some evidence even there that investors are responding sensibly to earnings declines in particular stocks. The view that equities are a good long-run investment might indicate that investors would not panic in the event of a significant stock market correction. All of this makes policymaking quite hard for us. Our job is to keep the good news flowing, and we are quite sure that the economy cannot expand much longer at its current pace without running out of workers and setting off a process of labor cost increases followed by price increases. So, we would like to take out some insurance by slowing things down a tad. But it is not clear that we have a policy instrument that will do that. The real federal funds rate is already quite high; raising it a notch or two might not raise long rates for some of the reasons that have been mentioned. It might not have much of an effect. Conversely, there may be some danger that an increase would be seen as too strong a signal, especially to the stock market, and might induce some panic selling since we have not signaled that we were about to do anything like that. I lean to the notion that it probably would not have much effect, but there's no way to guarantee that outcome. By May, we might be either more or less worried about overheating. If, as the staff projects, the expansion slows because of the Asian effects and for other reasons, the prospects of overheating might seem less serious. But the risk that it will not slow and that labor cost pressures will be building even more is certainly there and has been voiced around this table. The good news, it seems to me, is that there is almost no evidence that we could get surprised by a rapid spurt of inflation. If anything seems clear about the economy, it is that its adjustment mechanisms are well oiled at the moment so that we are unlikely to be surprised by sudden lurches. That is comforting if we decide to do nothing.",796
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I want to focus on three aspects of continuity in the developments since the last meeting. First, there has been continued exceptional momentum in private domestic demand and payroll employment, only partially offset by a decline in net exports. Second, the strength in domestic demand has continued to be supported by very favorable financial conditions, including soaring equity prices. Third, favorable supply shocks, reinforced in this case by a sharper-than-expected decline in oil prices, have continued to restrain inflation. I continue to accord an important role, indeed a central role, to favorable supply shocks in explaining recent economic performance and assessing an appropriate course for monetary policy. When there is an adverse supply shock, it is well appreciated that the bad news cannot be escaped, only shared in the near term between higher unemployment and higher inflation. And so it is with a favorable supply shock, only substituting good news for bad news. Policymakers cannot escape the benefits no matter how they might try. [Laughter] They can only influence how the benefits are shared between lower unemployment and lower inflation. There is, of course, much to like in the outcome of low unemployment and low inflation and in the policy that has supported that outcome, so far at least. In particular, it is not imprudent to operate for a while beyond the point of long-run sustainable capacity as part of the sharing of the benefits of the supply shock. Still, the optimal course of policy in this case depends on the expected persistence of the shock, although the length of time it persists is sometimes as much of a surprise as the shock itself. At any rate, the longer-than-expected persistence or renewal of the favorable supply shocks has certainly contributed to the very favorable outcome and to how brilliant monetary policy appears after the fact. The danger in this policy is the possibility of misperceiving the sustainability of the recent performance and therefore of failing to appreciate the necessity of a transition at some point to a more sustainable state. Given the transition that must ultimately be made, it might be unwise to move still further beyond the point of sustainable capacity. The key to the Greenbook forecast is the projected slowdown immediately ahead in the rate of economic expansion to below trend growth. The Greenbook forecast shares this feature with almost all private sector forecasts. This is worrisome because my experience as a forecaster suggests that forecasters can get it all wrong, but they almost never get it all right. At any rate, I have described this widely shared forecast as tracing out a graceful reverse soft landing. Because the economy slows almost immediately to below trend growth, it moves gradually from its initial point beyond sustainable capacity toward sustainable capacity just as the favorable supply shocks that are restraining inflation dissipate. The result is an economy that glides toward full employment with still low inflation as we reach the end of the Greenbook forecast horizon. This is a remarkably favorable outcome, especially since it occurs while we play spectator. The risks, however, seem weighted from my perspective to stronger growth and hence higher average utilization rates and, given the projected slowdown, to even sharper increases in compensation and inflation than in the Greenbook forecast. There is still a potential for further declines in the unemployment rate based on the momentum in demand before the slowdown takes hold. There is also the potential that the crosscurrents so clearly identified in the Greenbook may work out a little less favorably for price inflation, exert somewhat more pressure on nominal wage changes, and produce a somewhat sharper reversal in benefit costs. The latter developments, interacting with a slowdown in productivity growth, suggest the potential for a less benign than projected path of labor costs in coming quarters. Looking to 1999, I also am concerned that there might be a somewhat sharper reversal in the supply shocks than projected by the staff. Financial conditions in general and monetary policy in particular have played important roles in supporting recent economic performance. Favorable financial conditions have been supporting aggregate demand, notwithstanding the sharp rise in the real federal funds rate stemming from the decline in inflation. Real long-term rates are steady to declining, equity prices are soaring, credit availability is ample, underwriting standards may have eased somewhat, loan pricing is aggressive, and money growth is rapid. True, there is good reason to project a decline in velocity in the first quarter, and there are some special factors that likely have boosted M2 growth. Still, there is a fairly clear signal in the acceleration of money growth that should not be ignored. Financial conditions in general and monetary policy in particular clearly are not restraining aggregate demand. The projected slowdown in M2 growth in the forecast is only the mirror image of the projected slowdown in nominal income growth, reinforced by a return to a more stable velocity path. This simply indicates that if the Asian slump slows the economic expansion to the degree projected, the current setting of the funds rate is consistent with the slowing of nominal income growth and hence money growth. Policy does not slow money growth in the forecast; Asia does. The bottom line is that a slowing in growth is essential to avoid a sharper than desirable reversal of inflation fortunes in 1999 and beyond. The Asian slump may accomplish this. Some patience has been advisable early in 1998 as we wait for evidence on the degree of momentum in domestic demand and the offset from Asia. Patience is a virtue but only to a point. We may be able to remain spectators if economic growth slows and helps to preserve the low inflation environment. But the continued momentum in demand so far this year suggests that a tighter monetary policy may still be required to slow the expansion and preserve the low inflation climate.",1126
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. This is my fourth meeting. At the previous three, I felt rather confident in my advice, and I'm afraid I am now joining the cold feet crowd. Let me first make a few comments on the Greenbook forecast and then a few on policy strategy. On the Greenbook, there is a big change in the forecast from last time that many of you have noted. A second comment is that at least one of the projected sources of the slowdown is and has been questionable to me. I think that if any of us really knew what we were talking about with regard to stock market values, we would not be here. We would be doing something else. I have always been troubled by the forecast of a stock market decline in the sense that the stock market traders know everything that we know. They presumably know about the earnings forecasts. So, I have been troubled by the assumption that in effect we can see something that they cannot see. Mike Prell has conveniently done an alternative forecast that does not assume a stock market decline. In that forecast, growth in real GDP does not moderate to a pace below the trend rate of long-run economic growth. It gets down to about trend or maybe even a bit above it, so part of the slowdown in the staff's baseline forecast is based on the assumption of a stock market decline. There is another way to look at the stock market. If we compare price/earnings ratios to interest rates, those ratios do not necessarily look out of line. So, the market decline source of the slowdown seems a little shaky to me. The third point I would make about the forecast, and a lot of you brought this out with your questions, is that even core inflation is not really ""core."" There are already a lot of positive supply shocks in that measure. Inflation could be heating up a little even as we speak, though that is not apparent if we just look at the CPI excluding food and energy. I also want to make a few comments about policy strategy. Actually, Larry Meyer made the first when he talked about the reaction to good news. The point is that while it is great to have low unemployment, we cannot overemphasize it in relation to inflation. We have to be very careful that we know what we are doing. Other than that, Larry said it very well and I will not repeat his comments. A second point on policy strategy is that I am among those who think that we can operate on the basis of a federal funds rate target. But the point of that target is that we have tried to work out, or others have tried to work out, the way the federal funds rate replicates or would respond to economic events had we been following a money standard. It is as if we are following a money growth standard, but we are somehow putting aside all the supply shocks or the velocity shocks that give us so much trouble in interpreting the monetary aggregates. I think it is perfectly possible to operate with such a modified money growth standard, but we should remember that if we do so, the federal funds rate will bounce around. The risk in following a funds rate target is that we can get a target that is too rigid, and we ought to keep that in mind as well. The third policy strategy comment is about lags. Economic conditions are great now. As Alice Rivlin says, we may be seeing the best performance of an economy ever. I am not enough of a historian to know about that, but it certainly is as good as I can remember. As we look around the world, we see that we are uniquely blessed, but we do have to look ahead. We have known that there are lags in monetary policy and we should not be conducting policy on the basis of what we see out the side door as we drive but on the basis of what we see ahead. As I look ahead, I must say that the inflation risks are beginning to get a little more threatening and the aggregate demand risks from Asia are beginning to get a little less threatening. The last point I would like to make relates to something that to my surprise nobody has mentioned in all the meetings I have attended. I get a periodical on my desk called Fed Watch. Probably all of you get it. Every time some new statistics come out, Fed Watch says the Fed is going to have heart palpitations about this new set of numbers, but it will not do anything at this meeting or at its May meeting. I am reluctant to be that predictable. [Laughter]",915
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. During the coffee break, President Boehne suggested that he had relatively little to say this time around because he had such a short distance to travel. My office is the nearest to this room, short of the Chairman's, so I will have even less to say this time. Let me observe, as others have, that during the first quarter the spillover from the Asian crisis was indeed overshadowed by the strength of domestic demand. Labor markets have remained tight, as many of you have indicated. One thing I would add that we have not discussed much is that while short-term interest rates have risen to relatively high levels by historical standards, this de facto policy tightening is not associated with similar tightness at the longer end of the yield spectrum. Risk spreads for private debt instruments are quite narrow, and the extension of credit to private nonfinancial borrowers from numerous sources--commercial paper, bank lending, and so on--is running well above the pace of the last couple of years. So, I think we are in a very stimulative environment from a monetary and financial standpoint. The second thing I would add relates to Asia. We already have talked about how little impact we have seen from developments in Asia. I have just returned from a trip to Japan during which I met with central bankers and finance ministers from the affected countries. Two things emerged from those meetings that I would like to bring to your attention. One is that both the Koreans and the Thais certainly feel that their economies are on the road to recovery, but they describe their recoveries as ""U"" shaped, and they expect their economies to bounce along the bottom for an extended period before they finally see some uptick. Secondly, the major economy in the region, Japan, is still facing significant challenges. During my visit, I found universal agreement that the economy was at least stagnant and probably in a recession. The fiscal stimulus packages introduced to date, the latest one totaling 16 trillion yen, are thought to be far less stimulative than they might appear. As one newspaper indicated, the most recent package is ""big, vague, and unconvincing."" Therefore, I think that the United States is still likely to be the importer of last resort and that more impact is yet to be felt from Asia. To summarize these brief comments, what risks do I see? I believe, as do a number of others, that there is an increasing inflation risk emanating from labor market tightness, from the potential ending of some of the special factors that have restrained inflation recently, and from the stimulus that is emerging from financial markets. I still see a possibility of some greater-than-desired drag from Asia, but I think that risk is less now than it was at the time of our last meeting. Overall, I believe we should be in a vigilant posture, recognizing that the risks now seem to be tilted toward the upside. I do see some dangers in a premature change in policy stance that might be too great or that would take markets by surprise. Unlike my colleague to the right, I think predictability is sometimes not a bad thing.",630
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Mr. Chairman, the Second District is doing so well that I will not spend any time commenting on it. We have reached a point of prosperity in New York City that has led the Mayor to decide that we should now spend most of our time being nice to one another. On the national level, what do we know now that we did not know at the last meeting? There have been some changes. From everything we have heard this morning, the Asian effect on the American economy is going to be less or at least later than we thought it might be at the last meeting. I was particularly impressed by the fact that California, the place that one would think is most vulnerable to a negative Asian shock, seems to be doing extremely well. Consumer demand is even stronger than we anticipated. We have had yet another positive supply shock coming from lower oil prices. The labor markets are tight and may be even tighter than they were at the time of the last meeting, and there is much anecdotal discussion of some upcreep in compensation. The equity markets are overpriced in my view, but the strong flow into equity mutual funds, which was very substantial in February and appears to have been very strong in March, could well push equity prices even higher. One very positive effect of tight labor markets, and one about which we should rejoice, is that people who normally do not get hired are getting jobs in these markets even though they may have to be trained before they are able to do these jobs. That experience prepares them better for the labor markets of the future and not just for their current jobs. However, the duration of these jobs is particularly vulnerable to the policy actions that may be needed to correct an overheated economy. So, if we are interested in sustaining that very positive aspect of our job markets, we have to be especially vigilant and not allow the economy to overheat. On the other side, I think the problems in Asia are in no way solved. Yes, the economies of Thailand and South Korea probably have bottomed out, are bouncing along the bottom, and the policy mix in those countries is much better. Indonesia's problems certainly are in no way resolved. Japan A continuing weak Japanese economy has an adverse effect on the world economy. Also, the persistence of such an economy would be very likely to bring to an end the relatively calm world trade environment. We in the United States are very good at grumbling and complaining and screaming, but we don't do a whole lot about it. Europeans are much better at reacting and, for better or for worse, they definitely react. It is highly likely in my view that if Japan continues to follow its present policy of allowing no growth or a recession, thereby providing a very weak market for other nations' exports and fostering a very great desire to export themselves, we are likely to have a serious trade conflict between Japan and Europe. That would not affect the world economy in any positive way! Since the last meeting, I think we have had a modest shift in the risks to the economy from balanced to somewhat on the high side. In my view, the positive supply shocks that we have enjoyed are sufficiently likely to continue that, for the present, we can afford the luxury of some additional waiting. But this is not a situation in which the guardian waiting in the night can allow himself to be lulled into sleep. Rather, the guardian should be even more alert. It seems to me that there has been enough of a shift in the risks toward the upside that we have to be very careful of becoming overconfident about our ability to analyze current problems and relying too much on the continuation of positive supply shocks and in fact waiting too long.",738
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. We are reaching the time of the day when all has been said. Between the briefings and the excellent comments that we have heard around the table this morning, I think we have a good understanding of where the economy is and what the issues are, and I'm not going to repeat all of that. Let me just add that I see very little, if any, evidence that this expansion is slowing now or likely to slow very much. It seems to have a tremendous amount of momentum. Consumer confidence is sky high. Employment conditions are superb. Personal income and the wealth effect are very strong. The cost and availability of credit are attractive. Inflation fears seem to be diminishing. It seems likely to me that it would take a very substantial shock to slow this economic expansion down very much, let alone bring to an end this era of very strong and attractive economic growth. We have focused on two potential shocks to the economy that are an important key to the outlook--Asia and the stock market. In the case of Asia, I have no doubt that we will get a We have focused on two potential shocks to the economy that are an important key to the outlook--Asia and the stock market. In the case of Asia, I have no doubt that we will get a trade shock. As Vice Chairman McDonough just said, it now appears that we will avoid the worst of the impacts that we saw as possibilities just a few months ago. I had been thinking until quite recently that our forecasts that the Asian impact was going to be ""just right"" were probably reasonably accurate, but I am beginning to lean to the view that the Asian impact may turn out to be somewhat less than ""just right."" 1 appreciated Bill Poole's comments to that effect a little earlier, if I understood him correctly. In the case of the stock market, I have no doubt that sentiment is going to change some day. I remember that after a brilliant period for investors in the 1960s, we experienced what amounted to a 14-year bear market starting in 1968 and lasting until 1982. I am not predicting that outcome, but some day the euphoria we are witnessing now will change. The change may occur today, next month, next year--who knows. However, left to its own devices, there is a great deal of momentum in the stock market also. Serious weakness that could have a material impact on macroeconomic performance could be a long time off. In short, I agree with others who have said over the course of the morning that the risks now clearly appear to be to the upside. In my view a move to tighten is becoming increasingly advisable, although I do not think the case for such a move is compelling today. I would agree with the comments of President Minehan a little earlier that our job now may be to consider carefully the timing of a policy move that we increasingly are seeing as necessary. Thank you.",596
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The expansion is now entering its eighth year. The situation is starting to feel a bit surreal, perhaps even unbelievable. Every facet of the U.S. economy is surprisingly strong. GDP output continues to expand briskly. Housing activity is up. The labor market remains extremely tight, yet employers have managed to contain costs by productivity improvements, capital investments, and creative labor-management approaches. Throughout this process, capacity actually has expanded. To date inflation generally has been contained, although I would note that the spread between core commodities inflation and services inflation does remain. The oil price downturn is bad for some, but for others and in the aggregate it is helping to control costs. Financial markets have been supportive of expansion. Stock markets, bond markets, and all forms of short-term financing including bank financing generally are available. The stock market may be too good to be true, and I must say that this is the first time that I have felt really uncomfortable about the market. The monetary aggregates also are indicating strong growth. I recognize that some of the growth in the aggregates may be the result of temporary factors and more generally may just be reflective of contemporaneous economic growth. Even so, the monetary aggregates are pointing to significant strength. So far, the Asian crisis has on balance been more positive for the United States than negative. Indeed, the rest of the world seems to be relying on the United States as the engine to get their economies going. I keep thinking that something has to give. The rate of economic growth in 1997 and the apparent rate of growth that we are experiencing in the first quarter are not sustainable. But where is the slowdown going to come from? If we started to see a deterioration in profits, that probably would be an indication that firms are no longer able to offset their increasing labor costs. That in turn would surely trigger a stock market downturn, and we would start to see a diminishing wealth effect. Inflation could heat up, although I think that is a bit more unlikely in view of the absence of much pressure worldwide on commodity prices. But inflation could still heat up and that would cause a deterioration in aggregate demand. Again, as I said, I think that is fairly unlikely. The Asian crisis could turn more negative. Indeed, although conditions seem to have stabilized in Thailand and Korea, it is hard to know whether or not some of the long-term changes that need to be put into place in those countries actually are going to occur. Unless conditions in those countries become more transparent, and I mean transparent Western style, reduced foreign capital for investment will limit their economic growth. Absent bank supervisory reforms and a shoring up of domestic bank balance sheets, the proverbial credit crunch will slow their recoveries. We say that there are cultural differences when we try to understand what is going on in Asia, but it is difficult to determine how these cultural differences are going to play out in a crisis environment and whether some of these countries are going to make the long-term changes that are needed to stabilize their economies. So, even though it appears that conditions have stabilized, at least in two of these countries, the jury may in fact still be out with regard to the long-term economic performance of those countries. Certainly, we cannot say that conditions have stabilized in Indonesia, and they have not yet started to improve for Japan. For the United States, the latter is a bigger risk. For now, I think the balance of the risks seems to have shifted toward stronger growth. The slowdown from Asia is starting to show up, but it has not exerted much restraint thus far, and in fact it is hard to know how much of a restraining effect it will have. Inflation, which has been helped by weaker oil prices, has been quite well contained, but unless the expansion slows, the traditional pressures from scarce resources, in labor markets in particular, will have to be passed on via higher prices.",787
-fomc-corpus,1998,Thank you very much. I will now call on Don Kohn.,14
-fomc-corpus,1998,"Thank you, Mr. Chairman. Governor Phillips and a number of others mentioned money growth in their presentations, and I thought this might be one of those infrequent occasions when discussion of this subject would be helpful. I will begin with some comments on the surprising strength in money growth and use that as a lead-in to issues involved in the Committee's current policy. I will be using the chart that was distributed this morning. 2 My remarks will focus on M2 because that aggregate has been the one most closely associated with spending since deposit rates were deregulated in the early 1980s and, consequently, the aggregate most closely followed by the Committee and the staff over that period. As can be seen in the upper left-hand panel, M2 growth has been accelerating over the last few quarters. The pickup in growth in the second half of last year and the first quarter of 1998 does not appear to be a result of increasingly faster growth of nominal GDP, at least based on the Greenbook forecast of current-quarter GDP. Instead, as is evident in the upper right panel, velocity turned down in the second half of 1997 following several years in which a residual uptrend in velocity persisted, even after the major shifts of the early 1990s. And that decline seems to have become faster in 1998 despite unchanged opportunity costs as conventionally measured. The middle panel lists a few hypotheses for why velocity may be declining. First, some special factors have artificially boosted M2 growth relative to spending toward the end of last year and early in 1998. These have included continued strong overseas currency shipments, enlarged mortgage refinancings, which tend to be associated with temporary deposits in liquid accounts, the effects of accelerated tax refunds and, perhaps, the recent buildup of balances in anticipation of outsized tax bills. Still, we believe that these special factors can account for only a small part of M2 growth in the fourth and first quarters and none of the surprise because we basically had anticipated them in January. A second influence that may be giving an unusual boost to M2 growth is the flat yield curve. Savers sacrifice very little current return, reduce their exposure to capital loss, and gain liquidity when they de-emphasize longer-term fixed-rate investments in favor of liquid assets in M2. In fact, almost all the growth in M2 in the last two quarters has been in its liquid components--money market funds and savings deposits. Moreover, we saw evidence of such a redirection of savings flows in accelerated runoffs of noncompetitive tenders at Treasury note and bill auctions late last year. But in recent months those runoffs have slackened a bit, and flows into bond mutual funds have been fairly robust, so such shifts probably do not account for the further pickup in M2 growth this year. A third possibility is household efforts to rebalance asset portfolios. Although the ratio of M2 to GDP has been rising in recent quarters, M2 is becoming a much smaller proportion of household wealth owing to the tremendous rise in the market value of equities. In response, people could be diverting more current savings or the proceeds of securities sales to M2 to restore desired risk exposures. While this explanation is plausible, one has to wonder why such shifts have begun in the last few quarters when equity prices have been skyrocketing for several years. Fourth, some scale variable other than GDP or wealth may be driving M2 demand, or current-quarter GDP may be underestimated. Income has been growing faster than published or estimated GDP, and so, too, in most quarters including the first, has private domestic spending. In the past, these alternative scale variables have been no better related to M2 over the long run than has nominal GDP. But our standard model does use consumption spending to explain short-run movements in M2, and people may be accumulating relatively large amounts of M2 to support current and future private spending, whose growth, owing to a widening trade deficit and damped government outlays, is outstripping that of GDP. And, as Mike Prell noted earlier, the rapid growth of employment in the current quarter may be telling us that GDP is stronger than estimated in the Greenbook. Lastly, the money demand relationship has always been fairly noisy--even in previous decades when, in hindsight, it seems to have been well-behaved. Innovations over the past 20 years, which have made a broader menu of financial assets more readily and inexpensively available to households, should only have added to that noise. We have never been able to identify all the factors affecting M2 demand, especially over periods as short as a few quarters, and undoubtedly my list misses some that are relevant now. This uncertainty raises questions about the implications of unexpected variations in M2 growth over relatively short time frames for the Committee's objectives for spending or prices. As a consequence, since the early 1980s the Committee has been unwilling to tie its behavior too closely to M2 or to any other monetary indicator. As you can see in the bottom panel, M2 growth over a year's time had a strong association with future spending in the 1960s and 1970s. But that relationship has weakened considerably in the 1980s and 1990s, even outside the velocity-shift years of the early 1990s. The earlier leading indicator properties worked importantly through differential lags in the responses of money and spending to changes in interest rates. If, for example, the Federal Reserve, seeing money and economic activity growing too rapidly, raised interest rates, financial portfolios would be reallocated fairly promptly out of money, whose rates tended to adjust sluggishly, into market instruments, but spending tended to be trimmed much more slowly. Hence, money would weaken before the economy. For money to be a leading indicator through this mechanism, the Federal Reserve needed to react to contemporaneous or lagging indicators of the economy and it needed to move short-term interest rates substantially to affect opportunity costs. Since the early 1980s, the Federal Reserve has become increasingly more anticipatory, in effect changing short-term interest rates--and, implicitly, money stock growth--to head off swings in GDP, which were then more damped. And, of course, in the last few years the Committee has not had to move short-term rates very much, leaving M2 largely to fluctuate passively with contemporaneous spending. So it is not surprising that the reliability of M2 as a leading indicator has been considerably reduced. That does not mean the monetary surge in 1997 and early this year can be ignored, aside from the possible implication that contemporaneous GDP may be higher than the staff is forecasting. The portfolio shift that has raised M2 relative to income results importantly from more accommodative conditions in key sectors of domestic financial markets over recent quarters. The decline in nominal long-term rates, which has flattened the yield curve and spurred mortgage refinancing, and the rise in equity values, which has elevated tax obligations and increased asset portfolios, have boosted both M2 and spending. And we haven't discussed M3, whose very rapid expansion is related in large measure to accelerating credit growth at depository institutions, which, in turn, is part of a broader pickup in the availability and use of credit. The relationship between money and current or future spending may not be very tight, but from this perspective strong growth of money reinforces the message from other financial market indicators that financial conditions are quite supportive of domestic spending, once we look past the level of the real federal funds rate. It was those financial conditions, along with the lagged multiplier-accelerator effects of recent economic strength that led the staff to raise the level of spending throughout the forecast period. To some extent, the staff projection may simply be catching up to the Committee, but the recent upward revisions do highlight the risks in the outlook. Even in January, the forecasts of both the staff and FOMC members portrayed the economy as operating beyond most estimates of its sustainable potential, at least in the labor market. Obviously, the revisions accentuate that tendency, and in the staff forecast underlying inflation has assumed a more discernible upward tilt. Thus, the data on the economy and financial markets along with forecast revisions would seem to argue for more serious consideration of a near-term firming of policy. But there remain reasons why the Committee may want to wait. It was supply uncertainties--questions about whether the economy might be able to sustain faster expansion through faster productivity growth and a higher level of resource utilization than suggested by history--that deterred the Committee from tightening last fall, and those uncertainties have not been resolved. Despite a low unemployment rate and anecdotes of strains in labor markets, wage and compensation inflation still seems to be moving up only slowly. Price inflation remains largely quiescent, and a resumption of robust investment spending in the first quarter should keep industrial capacity ample. On the other side, disappointing profits in fourth-quarter data and first-quarter estimates, perhaps associated in part with weaker productivity performance, may be early signs of emerging cost pressures. On the demand side of the economy, robust domestic spending has been expected to a considerable extent, and the questions have involved the coming offset from the foreign sector, which is just emerging in the data. The size and timing of the offset remain very uncertain, given the still unfolding drama in Asia and the scarcity of precedents for gauging its effects on the U.S. economy. In a fundamental sense the situation has not changed that much over the long intermeeting period. The Committee remains in the difficult position of waiting for a moderating influence of unknown dimensions, with the economy uncomfortably strong and ebullient financial markets feeding that strength--it's just that the economy is stronger and markets more ebullient than anticipated. On the positive side, developments in train to support growth and contain inflation mean that the ill effects of either too much or too little external sector restraint are likely to be muted for some time. This may give the Committee some breathing room to gauge the economic situation, at least for a short time, without risking the need for substantially more disruptive policy action at a later date. The unusually favorable economic performance of the last few years is generating its own momentum: low and declining inflation already experienced will hold down inflation expectations, damping wage and price increases, even if economic expansion is strong and labor market pressures intensify. And robust growth has bolstered confidence and equity markets, supporting domestic demand and growth even if external demand weakens more than expected. The effects of this momentum are reinforced in the short run by the Asian crisis itself. The rise in the dollar and drop in oil prices on balance since last fall will add to restraint on inflation for a while. On the spending side, the drop in oil prices and the decline in intermediate- and long-term interest rates seem to be stimulating demand before the adverse effects of lower foreign income and higher dollar exchange rates are felt. In effect, financial and commodity markets have anticipated oncoming Asian effects on real GDP, providing some near-term stimulus to spending. In this regard, the Committee is facing a combination of near-term stimulus and projected restraint similar to that associated with a fiscal policy tightening whose implementation is delayed but which has already reduced interest rates. If the Committee decides to leave the stance of policy unchanged at this meeting, it still needs to consider the symmetry of the directive. Moving to an asymmetrical directive toward tightening would reflect a judgment, ultimately conveyed to the public, that information and analysis becoming available since the symmetrical directive was adopted in December have tilted the risks enough to make tightening a clear possibility in the not-too-distant future. Retaining a symmetrical directive would indicate that there remained enough uncertainty about the outlook at this point to cast significant doubt on this outcome. Of course, a symmetrical directive would not rule out a near-term action--at the next meeting or earlier--if warranted by new information. Thank you, Mr. Chairman.",2401
-fomc-corpus,1998,"Questions for Don? If not, let me get started. It is quite evident, as Governor Rivlin said, that the performance of this economy is about the best that we can possibly imagine. I suspect that I have been watching the economy longer than anyone around this table, so I can confirm that statement in terms of personal observation over an extended period. The economy's performance is absolutely unusual. It seems to be caught in the grip of a virtuous wealth-effect cycle. That is, the extraordinary domestic demand that we are observing is almost surely a spillover from the unbelievable uptrend in the ratio of wealth to disposable income that we have experienced over the past several years. As we know, the wealth effect has a lagged and cumulative effect that begins to flatten out only after there occurs a significant and evident slowing of wealth creation. There is no evidence of the latter. I think the Dow is up about 1,000 points so far this year. Clearly, the situation is difficult to get into context because if we take the level of, say, the S&P 500 and decompose it into the riskless rate of interest, the projected rate of growth in earnings, and, as a residual calculation, the equity premium, we end up with an equity premium that is at the lower end of the historical range of experience even if we accept the Street's estimates of quite extraordinary growth in earnings. While it is not as low as it was in the summer of 1987, it is quite low relative to any recent period and it has been moving down at a fairly dramatic pace. That in and of itself doesn't tell us terribly much until we look at the implications of the earnings expectations that are implicit in that structure. If we convert the earnings expectations for the S&P 500 into operating profits in the NIPA accounts, then profit margins, which have been rising considerably for quite a period of time, continue to rise indefinitely; they eventually break through to all time highs and still continue to rise. Everything we know about the way the system functions implies that that is an utterly unrealistic expectation. The question, however, is how far the rise in stock market prices can go. We know from history that markets can be perceived as overvalued for an exceptionally long period of time. It is quite conceivable, as the Vice Chair says, that the extraordinary flows into equity mutual funds can sustain this market phenomenon for a while. But countering that is something that was not very evident the last time we met, namely, that operating earnings are beginning to come up short of forecasts, and indeed their growth rate clearly has begun to decline in the past several months. These are not the numbers that are showing up so far in the earnings per share of the S&P 500 companies because that index provides a biased estimate of total earnings. The S&P 500, by the nature of its selection criteria, picks up those companies that are growing most rapidly and whose earnings generally have been quite impressive. Nonetheless, there is no doubt that the earnings growth numbers are slowing down. That means that for the first time in evaluating the unit cost structure of nonfinancial corporations, we are not looking at the phenomenon that I have referred to many times at these meetings of a very low inflation rate and stable or rising operating profit margins, the direct implication of which is that growth of unit costs is negligible. We are still seeing very low inflation. The estimates through the first quarter are about as low as we have seen for quite a while, oil obviously being a relevant factor here. But even apart from oil prices, we do not yet see any meaningful acceleration of inflation. The evidence of pricing power on the part of business is still lacking. There is no anecdotal evidence of which I am aware--and I have not heard any in the discussion here--that suggests a change in the suppression of pricing power. Indeed, in the Beigebook summary, I have forgotten the exact phrase, but it was noted that pressures on product prices were ""eerily calm."" That in fact is characteristic of what is going on at this stage. We have very little evidence of inflation, but we are beginning to see pressures emerge in the cost structure, and that obviously is one of the reasons why profit margins are beginning to slip. Even though we continue to get declining unit nonlabor costs, we are beginning to see some acceleration, still not large, in unit labor costs. In the nonfinancial corporate sector, we are seeing an increase in hourly compensation at a rate of roughly 4 percent. That rate is not accelerating at this stage, and I suspect one of the reasons is that firms are using every novel way they can devise to keep compensation costs down. Obvious also are their efforts to improve productivity. The productivity numbers are very rough estimates because we are measuring a whole set of product outputs from one set of data and a whole set of labor inputs from a different set. That they come out even remotely measuring actual labor productivity is open to question in my view. Nonetheless, we do see some slowdown in the published data, although output per hour estimated through the first quarter of 1998 for nonfinancial corporate business still shows a 2.3 percent increase from four quarters earlier. That is down only modestly from a year ago but down significantly from the surge that we saw in the middle of last year, which surely was an aberration. As you will recall, BLS estimates that output per hour increased at a 6.3 percent annual rate in the third quarter of 1997. It just is not possible for productivity to increase that fast. I think the four-quarter average is more meaningful. Productivity gains in these data appear to be sufficiently strong to keep increases in unit labor costs down to an annual rate of about1-1/2 percent for nonfinancial corporations. Basically, we are observing a very substantial wealth effect but one that has not yet spilled over to a significant extent into the product area, creating shortages of goods and services. As you know, there are none. The National Association of Purchasing Managers' survey indicates what I think is a record lull in reported shortages of materials. There is no evidence of tightness in facilities. There is exceptional tightness in labor markets, obviously, and if anything, they are getting tighter. We have a phenomenon that I don't think we have seen in the post World War II period. This economic performance is really different. I don't know how one would determine what it is, but there is some ""X"" factor, a missing variable in our basic models, that has to be there to explain why even with these exceptionally tight labor markets, we are only getting an increase in compensation per hour of slightly more than 4 percent and, more importantly, why pricing power is not evident in this situation. Nonetheless, there is very little evidence to suggest that monetary policy is tight. We cannot explain why the underlying demands in the interest-sensitive areas of the economy are as strong as they are, and I will even acknowledge that maybe the weather has had some effect on both housing and some sectors of the retail markets that are displaying more strength than one would expect, at least on a historical basis, given the level of short-term interest rates. All in all, we have an economic performance that is essentially unsustainable. It is unsustainable in two contexts. One, the stock market as far as I can see cannot sustain its current strength. The aggregative virtuous cycle that is embodied in it cannot keep going without ultimately running off the track. There is no credible model of which I am aware that embodies all of this. In my judgment, echoing a good deal of what has been said around this table, unless either profit margins decline or some other developments break the back of this stock market surge in the very short run and take much of the strength out of the forces that dominate this expansion, we will have more inflation. Even so, the adjustment cannot happen very rapidly even though the economy could begin to go in a different direction. One alternative scenario is that the fallout from the Asian situation, which as far as the Greenbook is concerned is about to exert a significant effect on our economy, actually will do so. It is generally correct to say that the economies of Southeast Asia are very weak. The Japanese government estimates that industrial production will be significantly negative in February and March. The first quarter is very clearly much weaker than the fourth. I think that, if anything, the Japanese economy is in a fairly pronounced recession at this stage. That is also the case in Thailand and Korea where production has fallen very dramatically. The weakness associated with Asian developments has not yet reached these shores fully, but there have been some pricing repercussions and orders clearly have been affected. But it is by no means clear that even at its full force, as a number of you including Bill Poole have indicated, the Asian effect will be enough to undercut this expansion to an extent that drives it off track. Therefore, in a sense responding to Cathy Minehan's question of when we will start to move, I believe that we are running out of time. I think that unless this system starts to self-correct fairly shortly, we will have no choice but to move. In the process, we could very well crack the stock market. We could affect a lot of things because this benevolent virtuous cycle probably has also created an increasing vulnerability in the sense that yield spreads have fallen to unbelievable numbers, the slack attitude of lending officers has become a potential concern, and the risks that people normally are worried about have tended to be ignored. All this means that if we have a sharp adjustment, it will occur at a time when the vulnerability of the economic system is far greater than is the case when we have a great deal of uncertainty. There is too little uncertainty in this system. Human nature has not changed and when it reasserts itself, things are going to look a lot different. To translate all of this into policy, I think we ought to be moving back to asymmetry at this stage because developments since the last meeting have changed economic conditions enough to justify that. I do not think it is appropriate to move at this stage. Were we to do so, I believe we would create too large a shock to the system, which it would not be able to absorb quickly. More importantly, I don't think there is that much urgency. What we are observing can go on for a quite significant period of time. While I agree with those who say that product price inflation ultimately has to accelerate and something has to give at some point if the growth of effective domestic demand continues at the current pace, that is not necessarily going to happen very quickly. That's because the productivity numbers are reasonably strong and the absence of pricing power is still very much a factor in holding down inflation. It is by no means evident if we look, for example, at the chain-weighted GDP deflator or the domestic purchases deflator, that prices are in any sense accelerating. Indeed, the first-quarter estimate is the lowest we have seen in this cyclical expansion. Part of the explanation obviously is oil, though I don't know what that part is. But as we discussed before, we just cannot take oil out of our inflation measures and make believe it does not exist; it is too big a factor in an economy. As I see it, the overall inflation rate has shown no evidence of accelerating at this stage. To be sure, the core CPI did show an uptick, but a good part of that is tobacco, which is no longer an open market product. While airline fares did go up and they are an open market product, we are not yet getting the inflation pressure. So, I think that we have to be, as the Vice Chair said, on a new alert because if this expansion does not slow down, we will have to start to move. I think the clock is starting to tick, and my guess is that unless the evidence of an Asian slowdown is fairly pronounced and/or the stock market goes in the other direction, we will be singing a different tune the next time we meet. So, I would recommend and put ""B"" asymmetric on the table for consideration. I feel uncomfortable about switching back to asymmetry after having moved to symmetry so recently, but I think the real world has changed. Vice Chair.",2490
-fomc-corpus,1998,"Mr. Chairman, I support your proposal. I think it would be unwise to change our policy today, but what you have said and the general tenor of the comments around the table convince me that we will not hesitate to move when the evidence is somewhat more clear that that is the appropriate thing to do. For now, I believe that ""B"" asymmetric toward tightening is the right policy.",79
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I certainly support your recommendation of no change at the present time and I very enthusiastically support the move to asymmetry. It seems to me that the discussion strongly supports such a move. I have a question. It relates to my recollection that when we talked about how we were going to handle the public announcement of a no-change decision, we discussed the possibility of making a statement to accompany such an announcement. If one thinks that economic developments are moving in a direction where it is likely that a change in policy would occur--say, at the next meeting--and given that you have stressed the importance of laying a foundation for a policy change, the adoption of asymmetry clearly could lay a foundation. But under our current procedures the asymmetry is announced two days after the next meeting, so the public is not put on notice on a timely basis. I wonder if there is some virtue to making a statement in our announcement about the strength of the economy.",195
-fomc-corpus,1998,"That is an interesting question. I would appreciate hearing other comments on that. Vice Chair, do you have a comment?",24
-fomc-corpus,1998,"If the economy continues to move in this direction between now and the next meeting, I think that we would have to begin preparing the way. I do not object to what Bob Parry is suggesting. Marginally, I would prefer that you do it in a policy speech.",56
-fomc-corpus,1998,"That would be my inclination. The reason I would feel uncomfortable with a short press statement is that we could not leave it at that. The question would remain as to why we did it. If it appears that economic developments are beginning to move us toward a policy change, I think we will have a lot more to explain. I might add, incidentally, that we cannot be perceived as moving to thwart the stock market. That may be implicit in our analysis of what the economy is doing, but a move to curb the buildup in stock market wealth is a very difficult issue to put on the table. We have to be very careful about that. The argument is that the wealth effect is driving domestic demand, which in turn is driving the product markets, but it cannot be other than that, if I may put it that way.",167
-fomc-corpus,1998,"Mr. Chairman, I can appreciate the viewpoint that Bill McDonough expressed, and I can understand that there may be opportunities for you to lay that foundation. It is obvious that if we do not change our current procedure, then going to asymmetry does not accomplish what we want. Asymmetry would serve to alert the public only if a decision to change our policy were delayed beyond the next meeting.",81
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I think we have an unsustainable situation. Unless we are quite fortunate and get some offset to inflationary demand pressures other than through policy action, we indeed will have to face up to making a policy adjustment and probably more than once. On the issue of preparing the market, I think a policy speech by you at the appropriate time is far superior to a two or three sentence press release. There are a couple of reasons: One, I think that if you need to make such a policy statement, we have to be prepared to follow fairly quickly with policy action. We don't want to get ourselves into a ""cry wolf"" situation where we talk and do not act. So, I would prefer that you wait until it looks as though a policy action needs to take place. Your speech would prepare the markets at that time, and a policy action would follow. Ultimately, it is actions, not words, that count, and words will only matter if they are followed by action. Second, I would suggest that in addition to the usual macroeconomic rationale for action, such a policy speech should stress that we like good times, that we like people to have jobs, and that we are acting to sustain the good times. The point was made earlier that the lower echelons of the labor force are now beginning to participate in this prosperity, and they would be the first to be unemployed if things went awry. I think it is important that we also make a point like that because it helps to give a balanced view of our policy. It indicates that we are not against growth and against lower echelon workers making progress and, indeed, that we are moving to sustain such progress. I would urge you to add that to the usual macro analysis.",350
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I expected the general tone of this meeting to be more bullish than it was at the February meeting, but the bullish comments today have exceeded my expectations! So, it will not surprise you or anyone else that I would still prefer to take action today. Governor Gramlich's comments about operating with a funds rate target resonated with me. It is certainly true that we have had some movement in the real federal funds rate, but we have pegged the nominal funds rate for almost two years. Obviously, if we do not move the rate itself at this meeting, I would certainly support very, very strongly your recommendation for asymmetry. I have a lot of sympathy with the point that Bob Parry made, and I was in fact going to raise the same issue. I think that if we do move to an asymmetric directive, it would be desirable to announce that decision now rather than waiting for six or seven weeks. I believe it is important, to use Bill McDonough's metaphor, for us to let people know that the guardian is there and the guardian is awake. I know there are some problems with this suggestion, but one could make a good case for routinely announcing the directive language tilt concurrently rather than shortly after the following meeting. The tilt language is after all a routine part of the directive; there are questions about this practice, but we do in fact follow it. I don't see any compelling reason not to release it concurrently.",292
-fomc-corpus,1998,Wouldn't it be better to start doing that when it does not matter?,15
-fomc-corpus,1998,"It would be more convenient, no doubt about it. Maybe the best way--",16
-fomc-corpus,1998,"If we are to establish a precedent, it seems best to do so when it does not create problems.",21
-fomc-corpus,1998,That's a good point. It may be that the best way to go about preparing the markets currently is for you to make a speech of some sort where you bring this matter up. But I think that we might want to consider later the other alternative of announcing something immediately after each meeting.,57
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. Referring back to something I said earlier about the opening sentence in the general paragraphs of the directive, I think we do need to make a change there.",34
-fomc-corpus,1998,I think that already has been done.,8
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,"After having listened to your earlier comment, I think wise heads around here made a change.",18
-fomc-corpus,1998,"I agree with Ed Boehne about what to include in our public comments concerning the reasons for our policy actions. I still think that our actions in early 1994, properly viewed, prevented the recession of 1996. What we are faced with today is how to prevent the next credit crunch and recession of the year 2000. We will have enough other problems in the year 2000 without having to deal with a recession and a real estate debacle. I thought that your remarks, Mr. Chairman, developed a persuasive case for acting now. I am not particularly concerned about the stock market. I agree that it is not a reason to do something, but in my view it also is not a reason not to do something. I believe that reasons for taking action would be the excessive growth of the whole constellation of money and credit aggregates, the upward revision of expectations about the growth of economic activity, and what is going on in the banking industry and especially in the real estate markets. A 1/4 percentage point increase in the federal funds rate now would deliver a very important message. We are going to get some first-quarter numbers that will make it obvious to everybody why we acted. I am concerned that on the basis of the published information, the case on the surface for a move may not be as compelling by the middle of May as it is today, so I would strongly prefer taking action today.",286
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I can accept your recommendation as you presented it. There is information that suggests we can wait: the relatively high real federal funds rate, fairly low and trendless inflation right now, and bond markets that are signaling benign inflation expectations. But there is also an issue of timing. I believe we should move fairly soon, if not at this meeting, because of the information on the economy: Our labor markets are obviously tight, aggregate demand growth remains quite robust, monetary growth is accelerating even though there is uncertainty about velocity, and finally, there are increasingly frequent reports of large amounts of global liquidity seeking investment outlets and accelerating the inflation of assets. These developments do give me some pause and some concern. So, yes, I can wait, but I have a sense of some pressure to act on a relatively prompt basis.",166
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation for no change in the federal funds rate and for an asymmetric posture. I have some considerable sympathy with the notion that, rather than just expanding the policy announcement, we have an immediate release of the directive that would indicate--",52
-fomc-corpus,1998,You mean the whole directive?,6
-fomc-corpus,1998,"The whole directive. On the other hand, I think that proposal deserves a full discussion of the pros and cons before we move forward. If we decide to go in that direction, we might want to do so at a time when the directive would not create a surprise when it is released. There are some relevant issues. A change from symmetry to asymmetry sends some indication of partial tightening or easing to the market, and our willingness to move from symmetry to asymmetry may be affected by whether or not we are going to announce that move, depending on what impact it is going to have on the market. Another consideration, Mr. Chairman, would be that your signaling to the markets in a speech would allow you to provide more explanation, and I think that would be desirable at this point also.",159
-fomc-corpus,1998,"Mr. Chairman, could I comment on whether we should make such an announcement? In earlier discussions, I have expressed some sympathy with what President Parry was talking about regarding announcements because I believe more information is of value. However, like others, I think that if we release a statement on this occasion, we will have set a precedent and we will have to continue making statements going forward. I do think that requires a fair amount of discussion of what the impact will be and how we want to manage that. For that reason, I would also encourage you to prepare the markets in a sense through a very carefully drawn up speech that outlines the issues that we face and gives the market more information than would a short statement after each meeting.",147
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I am very surprised that in recent months the markets have responded so little to the stronger than anticipated economic data. The markets have absolutely solid expectations that we will not move. I think it is very unfortunate that that situation faces us as we sit here today. As an outsider, I also have been puzzled about the asymmetric directive because it appears six weeks or more after the time it is adopted. It may turn out that the message is not what we want at the time it actually appears. I think we know what kind of message we would like to give today and would expect from the remarks that the Chairman intends to give at the appropriate time--namely, that the markets need to be prepared for a tightening in the future. The asymmetric directive, if released quickly, could be a mechanism for providing that message. I hope that we can deal with this issue very promptly. I agree that we need to discuss it, but I hope we can have it on the agenda quite soon and perhaps make a decision on this at the next meeting. In my view, disclosing the symmetry or asymmetry promptly might have some benefits. But I find it puzzling that if we adopt an asymmetric directive today, which I am prepared to support, it will not be released until after the next meeting.",257
-fomc-corpus,1998,"I think we ought to put it on the agenda for the next meeting. That issue has not come up in that form until very recently, and I think it is worthwhile discussing it.",37
-fomc-corpus,1998,"I, like everyone else around the table, am well aware that the inflation numbers look very good. But I am concerned that we are at a very vulnerable stage. We could have some bad news and once a rise in inflation gets going, particularly if our policy has gotten behind, it is going to be very hard to catch up. So, I think we want to move before we see any worsening in the inflation numbers. That is what is going to keep it all under control.",97
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"1, too, support your recommendation, Mr. Chairman, and I share Bill Poole's concern about the timing of the release of the asymmetry. We now release it at a point when it does not do us any good, and I think the implication of that is what Ed Boehne was talking about. You can give a policy speech that elaborates on our current attitudes.",78
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I agree with your recommendation. A lot has been said already, and I don't want to repeat it. In my view, the one thing that may well undo this expansion and all its benefits to society is for inflation to start to accelerate and require us to take some very severe action. So, I think it is absolutely essential that we look ahead and that our policy be preemptive. The last thing we want is to be caught in a situation where we are behind the curve. I do think it is important to lay the foundation for a policy action, and I think the suggestion of a policy speech that you and Bill McDonough made is an excellent one. I also want to associate myself with Ed Boehne's comments about the nature of the speech. I thought that he had some very good suggestions about how to explain our objectives in terms of the broad-based benefits from sustainable economic growth that we want to see continued for the benefit of all segments of our society. I think we should review how we use asymmetric or symmetric directives. I believe we should have a policy for that. We should use symmetry in a systematic way, and I would prepare the markets for any changes that we may make in our disclosure of that aspect of our policy.",255
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I agree with your recommendation of ""B"" asymmetric. I think it is important that we signal that we are both vigilant and want to maintain the gains that already have been made. When we removed the asymmetry from the directive in December, I asked one of the other Board members why we did not announce the change then. I was told that it was because we would then be announcing two different policies at the same time. I wasn't sure I understood that explanation then, and I'm not sure I understand it now, but I do think that--",113
-fomc-corpus,1998,It sounded okay!,4
-fomc-corpus,1998,"It was one of many explanations! I believe, however, that the issue deserves more consideration. So, I would not rush into announcing now, but I do think we should discuss the issue at the next meeting. I recognize that we will have some explanations to make when we move to tighten policy because, while inflation pressures are building, there also are low inflation numbers and low inflation expectations. In my view, all of these considerations point more in the direction of a policy speech as opposed to simply a quick announcement after the meeting. I would associate myself with what President Boehne had to say with respect to making sure that people recognize the context in which our policy action is undertaken and to remind people that the economic benefits we have achieved to date have come from low inflation. I believe it is important to keep those two things in mind. I guess the only other concern I would have relates to our trying to think through our policy strategy going forward. It might be appropriate at some meeting, perhaps the next if it looks as though we are on a new policy trend, to be quite clear with ourselves as to exactly what our strategy is. This is what I think Governor Gramlich was referring to earlier.",241
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I, too, support your recommendation and I am pleased with the return to asymmetry. I take heart, as I guess everyone else does, from our resolve not to wait too long. Just to finish that thought, I guess it is obvious in what has been said by Bill Poole, Gary Stern, and others that not only do we not have a way to signal our move to asymmetry today, but the minutes that will come out in a couple of days will show us in a symmetrical stance at the February meeting. This development seems to cry out for some kind of mechanism to correct what I think will be a misimpression that we would prefer not to give in the next couple of days.",149
-fomc-corpus,1998,That's right.,3
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I strongly support your recommendation. Relative to the discussion about a possible announcement, I would have a very strong preference for not making one today. That preference is based on a longer-term reason and an immediate reason. The longer-term reason would be the one that has been expressed around the table, namely, that this would have a precedential impact and one that we should consider carefully, not just rush into. I will say parenthetically--we are not going to debate that issue today--that I have very great reservations about the whole idea. More immediately, I believe that if we were to make a new type of announcement today that the market has not seen before and does not expect, it would come as quite a shock and be very confusing. Why are they doing this? Why did they make this announcement and not change policy? I can see the potential for a reaction of fairly major proportions that would not be at all what we are setting out to do. So, I would be very hesitant about that.",206
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation, but I think we should remind ourselves that, with the exception of Bill Poole, we have all been here before. The situation has changed and we have a new view of the outlook. It is not inconceivable that we will be back in six weeks when something, presumably developments in Asia, has weakened the expansion and we may not be quite as sure as we seem to be today that everything is moving in the direction of an overly strong economy. But I certainly agree that that is how it looks today. I also have a lot of sympathy with the suggestion to announce our asymmetry decision immediately. I think we all wish that we had already adopted that policy so that we could say something about asymmetry in our announcement today. But if we change our announcement policy in midstream without any prior discussion, it probably would be better to raise the fed funds rate today than to do this peculiar and unexpected thing. I also would like to stress the importance not just of your making a policy speech, but that there be a series of policy speeches with all of us weaving into our remarks more about how we feel. I would suggest that the emphasis should be on our worries about speculation, loose credit, and other concerns that people can relate to rather than saying that we think the economy ought to be restrained because we are very worried about tight labor markets and poor people earning more money. That sounds silly when you say it that way, but sometimes we come across as though our real worries are tight labor markets rather than the objective, as Bill McDonough said earlier, of keeping the labor markets tight and retaining the benefits of full employment for the future.",339
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,"Thank you. I think we can hold off for now. I do not see any immediate pressure to act. But unless the economy cools off, I believe we will have to tighten. With respect to symmetry or asymmetry, I think that if we were to act in the intermeeting period, we would have a telephone conference anyway, so I'm not sure that the type of symmetry we adopt means too much. In that vein, I would not vote against asymmetry. I think a policy speech probably is better for now, but I agree with President Boehne that we should be prepared to act shortly after that speech. I also agree that it is the sustainability of economic growth that is the issue, and that is what should be emphasized in our speeches. I believe that it probably would be useful to have a discussion to consider the possible release of the directive after each meeting. I have not at this point thought through the pros and the cons, but such a discussion might clear up the question of whether symmetry or asymmetry means anything. So, I look forward to that discussion.",218
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,I support your recommendation.,5
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Mr. Chairman, I came to this meeting prepared to vote for an increase of 25 basis points in the federal funds rate, and I also came prepared to dissent if we did not at least move to asymmetry. I am glad that your recommendation is to move to asymmetry. I support it, but I am concerned that we continue to face the difficulty of explaining a tightening move in the context of declining price trends. Of course, our expectations are that those price trends will turn around over the course of the period during which our current monetary policy has an effect. I also am concerned about what you have so eloquently described as the vulnerability in financial markets and what President Poole has described as the lack of uncertainty in those markets. I think we face a real risk of feeding the speculative excess that will ultimately come to haunt us if we do not move soon. That may still mean moving when we have broad price trends that do not suggest major inflation upticks. I frankly believe, along with I think at least one other member of the Committee, that moving now might be easier than moving later, given the transitory effects of Asia. But, again, I am willing to go along with your proposal. I have felt for some time that an announcement of no change is as much a policy move as an announcement of a change. So, when we do not change our policy, I think it would be helpful to go beyond saying at 2:15: ""the meeting ended at such and such a time."" If we can figure out a way to say in one or two sentences why we made a policy change, we could figure out a way to say in one or two sentences why we did not make a policy change and what our general policy attitude is.",355
-fomc-corpus,1998,That could be part of the discussion that we will have at the next meeting because it is part of the same issue.,24
-fomc-corpus,1998,"Right, and that takes me to the policy speech proposal. I know we have been commenting on these issues in policy speeches, and I agree with Alice Rivlin, Ed Boehne, and others who have talked about the context in which to describe our policy actions. But I am a lot more comfortable with policy speeches after a move than before a move. I worry about the latter. What are we doing here if we are going to telegraph what we will be doing before the fact rather than explaining it after the fact? I think we are better off if we avoid a stance where all of us are trying to telegraph what we are doing before we actually do it.",136
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Mr. Chairman, I will support a no-move, asymmetric directive. To see if I have mastered Fedspeak, if somebody had proposed that we raise the fed funds rate by 25 basis points, I would have supported that, too! I am worried, as I said, that we could get ourselves in a position of being too rigid on the funds rate. I do not see that 25 basis points is that big a deal. It is not going to have a fundamental effect on the boom or put a lot of workers out on the street. So, I think that a 25 basis point increase could be justified, but I will support a no-move, asymmetric directive. I do think we ought to discuss releasing the directive at the earliest opportunity. I agree that if we were to change our procedures now, it would cause a lot of uncertainty and turbulence, and there is no reason to do that. But we ought to discuss that issue as soon as possible. We would be in a little better shape, as Governor Rivlin suggested, if we had a precedent for announcing an asymmetric directive today. So, I think we should prepare for the future. Let me say one other thing about this issue. I believe, Mr. Chairman, that when you give policy speeches--and I read a lot of those before I became a member of the Board--there is some feeling, at least I had it, that you are speaking for yourself. Maybe that was naive on my part. But I think one advantage of getting the word out sooner is in a way to take the heat off you by indicating that all of us stand behind the policy or at least that the FOMC stands behind the policy. In my view, that would be an advantage of getting the word out sooner. So, I would like to discuss that proposal at an early date. I wish we could do it today. I accept that we cannot, but I would like to see that change.",399
-fomc-corpus,1998,"Okay. I think we have a broad consensus around ""B"" asymmetric, so would you read the directive.",22
-fomc-corpus,1998,"Excuse me, Norm. On that first sentence of the directive, Mr. Chairman, one possibility would be to keep essentially the words that were used in the last directive. It would say, after changing a few words in that sentence: ""The information reviewed at this meeting suggests that economic activity continued to grow rapidly during the early months of 1998.""",72
-fomc-corpus,1998,That would be accurate.,5
-fomc-corpus,1998,"The wording of the operational paragraph is on page 14 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining a federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with considerable moderation in the growth of M2 and M3 over coming months.""",133
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich,17
-fomc-corpus,1998,"Do we have to have the ""slightly lower"" phrase? Am I out of order? [Laughter]",23
-fomc-corpus,1998,That is the conventional rhetoric.,6
-fomc-corpus,1998,"Yes, but--",4
-fomc-corpus,1998,"We have been butchering the English language in this directive for years, but let's not change it just yet. Why don't you bring that up at a later meeting? [Laughter]",38
-fomc-corpus,1998,"On that advice, I vote ""yes."" [Laughter]",13
-fomc-corpus,1998,President Hoenig Yes President Jordan No Governor Kelley Yes Governor Meyer Yes President Minehan Yes Governor Phillips Yes President Poole Yes Governor Rivlin Yes,28
-fomc-corpus,1998,Our next meeting is May 19th. We adjourn for lunch.,15
-fomc-corpus,1998,Would somebody like to move approval of the minutes for the meeting of March 31?,17
-fomc-corpus,1998,So move.,3
-fomc-corpus,1998,Without objection. This incidentally is the last meeting of our esteemed Governor Phillips.,16
-fomc-corpus,1998,"Yes, and I thought about that as I was reading Greenbooks over the weekend. [Laughter]",21
-fomc-corpus,1998,"I'm sure it occurred to you, Susan, that you don't have to read them anymore! In any case, we will miss you. As you know, there is an official farewell luncheon at the time of the next meeting. We will withhold all our kind remarks at this point because we do not want to influence your vote this morning, one way or another.",73
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,"I think all of you are aware that Lynn Fox is trying to step into Joe Coyne's shoes, a task she is struggling with successfully, I hope. We welcome you to your first meeting. Peter Fisher, would you take over please?",49
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to the package of color charts that should be on the table before you.1/ The first page shows the 3-month deposit rates including the current Libor, the 3-month forward, and the 9-month forward rates. Looking at the U.S. panel, you can see that there has been little net change in these forward rates since your last meeting on March 31, but there has been a very modest uptrend since the nonfarm payroll release on April 3, when forward expectations troughed. So, we have seen a gently rising trend since early April, with a punctuation mark associated with the April 27 Wall Street Journal story. Looking at the panel for Germany, you can see that forward rates had been drifting up at the time of your last meeting and they did not stabilize until after the EU summit on May 1-3 at which the president and the board of the European Central Bank were selected. That pattern is contrary to the expectations of many observers in the market. I think the earlier updrift was the consequence of the same factors that I have been talking about for some months. These include the perception of slightly stronger-than-anticipated growth in the German and other European economies that has been viewed as leading to a slightly higher probability that the Bundesbank might raise rates before year-end or that the ECB might establish a slightly higher opening rate next January than previously had been assumed. The Japanese rates are shown in the bottom panel. You can see that the announcement of the stimulus package on April 9 and the foreign exchange intervention on April 9 and 10 had little impact on the forward rates, with the 9-month forward 3-month rate not moving at all on the announcement. I think that is worthy of note. However, on May 7 Deputy Governor Yamaguchi of the Bank of Japan commented that he saw more positive than negative effects from a rate reduction, and forward rates moved down a bit following his remarks. Turning to the next page, I hope the Committee will find it worthwhile to bear with me while I try to go through some of the different components and ways of thinking about the Japan premium. I think this explanation might be helpful now. I will first go over the mechanics of the top three charts, and then discuss some issues and problems that come up. Let me say in advance that I am presenting this to show you how skeptical I am that we really understand the Japan premium phenomenon. The first panel shows a measure of the premium in dollar terms. It is expressed as the spread between the Bank of Tokyo-Mitsubishi's 1-month Libor rate and Barclay's 1-month Libor rate. You can see that during the first quarter of the year, from the start of the year to the end of the Japanese fiscal year which also was the date of your last meeting, the premium averaged around 20 basis points, though it moved around a bit. That is the measure of the premium that most people were talking about. Since the end of Japan's fiscal year, it has moved down into the 9 to 10 basis point range. The second panel with the green line is a crude, but I think still useful, measure of the premium in yen terms, which is expressed as the spread between 1-month Tibor and 1-month Libor. Tibor is the Tokyo interbank offer rate; Libor is the London rate. The Tokyo panel is made up almost exclusively of Japanese banks. If you threw out the high and the low in that panel, you probably would eliminate the 1 or 2 western banks that are in it, so it would become an exclusively Japanese panel. Libor is overwhelmingly non-Japanese. If you threw out more of the highs and the lows, you would end up throwing out all the Japanese names that usually operate in Libor. You would end up with a measure of 1-month yen funding comprised mainly of non-Japanese banks in London and Japanese banks in Tokyo. That spread is important to underscore because it gives you a sense of the premium for the best Japanese names. It covers only the banks that everyone thinks are implicitly guaranteed by the government, not the smaller more anonymous banks. The left-hand scale of the third panel measures the asset side of the Bank of Japan's balance sheet. The shaded blue area depicts the growth of assets. The right-hand scale refers to interest rates. The blue line is the overnight call rate; it recently has been mostly below the solid black line, which is the official discount rate. Let me now go back over some of the issues that come up. First, it is worth noting that both the dollar and the yen premiums have come down quite a bit in recent days. It is quite noticeable that the dollar measure still indicates a premium in the 9 to 10 basis point range. One might ask whether this premium should be arbitraged out; it ought to be an easy thing to arbitrage away. But, of course, an investor would have to take on the credit risk implicit in doing business with Japanese names. What interests me is that when I talk to bankers, many of them will tell me very frankly that their credit lines to their Japanese counterparties are completely full. That is, their traders are taking maximum advantage of trying to capture this premium and arbitrage it. But the bank credit departments are now in charge on an individual trade-by-trade basis, and they are up against their limits. With that in mind, I find it quite impressive that the spread is still only 9 to 10 basis points--that even with greed restrained by credit departments, the spread is still in that neighborhood. If you look at the yen measure, you can see that the premium has been squeezed down to 1 or 2 basis points at present. I believe it is important for us to ask whether we are looking at a single phenomenon that we can measure consistently from last fall. When we talk to Bank of Japan officials, they point to what they call the twin peaks of the premium--one prior to the calendar year-end and the other prior to the fiscal year-end. They view the premium principally as a liquidity risk, not as a credit risk. I would note, however, that the first peak occurred in late November when we began to see closures of Japanese financial institutions, bringing to mind a larger question of credit risk. Also, given the dubious quality of assets on the balance sheets of Japanese banks, this does not seem to be a very useful time to be drawing a fine distinction between liquidity and credit risks. A Japanese bank that cannot fund itself is really a credit risk to me if I am a market counterparty. The third panel shows the growth in the Bank of Japan's assets. In our conversations, Bank of Japan officials explained what they were trying to accomplish when they were aggressively expanding their balance sheet around calendar year-end and fiscal year-end. By doing so through 1-month repos, they wanted to provide the market with a sense of confidence by injecting liquidity for a relatively long period. The growth of the asset side of their balance sheet depicted that. They are rather defensive about the low growth on the liability side of their balance sheet because they say that various measures they have been publishing for a long time are misleading. They actually have been draining reserves at times by issuing their own bills. That is, they issue their own liability on one side as a Bank of Japan bill, but they also drain reserves. That is a swap on the liability side and not really growth in the balance sheet. In any case, these transactions have not given me much confidence. I will offer you my own interpretation, my words not theirs. It seems to me that for the last six or seven months, they have been doing something of an ""operation twist"" at the very short end of their yield curve. They have been intervening in the 1-month interest rate area, pushing money out. Then, because they target the call rate and try to keep it in the neighborhood of the overnight discount rate, they have been draining funds out of the shorter end--overnight and for two or three days at a time--against the backdrop of the overall expansion of their balance sheet. That leads me to the tentative conclusion that when I look at the yen funding premium, I am not measuring a single consistent phenomenon expressed on the demand side. That's because, overall, there has been a net increase on the supply side of the money market. But at the margin, it makes me even more nervous to think that they really have been price-targeting the 1-month interest rate to push it down while draining funds out overnight to try to keep the overnight call rate close to the overnight discount rate. If I am right about that, then interpreting the premium is even more complicated than I thought. I believe the risks of a sudden backup going forward, if there is bad news, are even greater. The bottom panel is a place holder to show you widening corporate spreads, expressed in some Moody's indices that we found, over comparable Japanese government securities. I think this panel is interesting for three reasons. First, many people talk about the fact that they cannot find deteriorating credit spreads in markets in Japan. They suggest that Japanese markets do not work that way, that they are not Western, but we can see the deterioration quite clearly in this chart. Secondly, these widening spreads are those of the banks' customers, and things are getting worse and worse for them. Finally, I think it is a useful reminder that we are approaching the Japanese bankruptcy season. The bankruptcies do not actually occur at the end of the fiscal year; they take place later when the fiscal year results have to be made public. Much the same thing happened in November of last year when we began seeing reports of bankruptcies relating to results in the fiscal half year that ended September 30, 1997. Turning to the next page, let me briefly note some of the dollar's movements. You can see in the top panel that the Japanese government stimulus package did little to improve market sentiment toward the yen, and perhaps the kindest thing one can say about the of intervention they carried out on April 9 and 10 is that it had only a transitory effect on the exchange rate. Over the last month, many market participants have been full of brave talk about dollar/yen going to 150 and 160. When we ask them why it is not there already, they express a strong conviction but they do not make a very persuasive case. Even so, since the close of the G-8 summit this weekend and the absence of compelling talk about intervention, the yen has been weakening against the dollar for the last two days, bumping up through what the market thought was the very significant 135 level. On the mark side, for all the fireworks involving the personalities at the EMU summit on May 1-3, I think one should not ignore that the summit did make a certainty out of EMU when previously there was at least a one-in-a-hundred chance that the process would be delayed or derailed. The removal of that uncertainty has made the mark rather more significant as the predecessor of the euro. We can see some slight firming of the mark. But overall, except for the slight uptrend of the dollar against the yen since February 1, what impresses me about this panel is how very little has happened to the dollar in 1998. We have had shifting expectations regarding Committee policy, sharp fluctuations in equity markets, crises in Southeast Asia and in the world's second largest economy, and an historic monetary union in Europe. Taking a step back, this panel suggests to me that the dollar has been out on a Sunday stroll. In the bottom panel, you can see that Treasury yields have tracked the movements in short-term expectations shown in the upper panel of the first page of these charts. These yields have changed very little on net since the date of your last meeting, but there has been a gentle uptick since the nonfarm payroll release on April 3. I have talked to a number of traders and speculators who complain rather loudly that there is not enough volatility in this market for them to make money. Let me turn to our open market operations on the next page and give you an update on the tax inflows in April and May. In the top panel, you can see that the Board and New York staff forecasts for second-quarter receipts converged at the higher level, closer to the New York numbers. In the chart below, you can see that this did not help New York very much in forecasting the daily reserve levels. As the red line shows, the actual balance came in much closer to the Board's estimate than to New York's, which is a good lesson in the difficulties of making daily forecasts. The first reason for this is that receipts did not come in as strong or as early as the staff in New York was forecasting. This is indicated in the first notation line at the bottom of the page. The first row of numbers, which shows total actual Treasury balances less the New York forecast, indicates how far the actuals came in below our daily forecasts, particularly early on. But the gap narrowed quite a bit as we got into late April and early May. The second reason why it was so difficult to forecast the day number is that on April 17 the Treasury announced some changes to the TT&L program that were designed to make it more attractive to banks. While we had been working with them on this and are very supportive of these changes, the timing of their announcement frankly took us, the market, and the Treasury's own forecasters by surprise. As you can see, the notations in the bottom row show how much this affected our own day numbers by indicating the extent to which the TT&L accounts were holding higher balances than we were forecasting, meaning lower balances at the Reserve Banks. The next page shows various indicators of trading activity in the fed funds market since your last meeting. The vertical blue lines are the daily ranges of the federal funds rates; the horizontal red lines or ticks are the effective averages for each trading day, and the vertical red lines each represent one standard deviation of trading around the daily effective rates. The increase in TT&L balances at major banks may have been one of the factors contributing to the softness in the funds market in the middle two maintenance periods; the increase substantially reduced rather suddenly the purchasing needs of some of the major banks that often are active in the morning. More importantly, demand for excess reserves appears to have shifted lower, particularly during the April 22 and May 6 maintenance periods, a development that we do not yet fully understand. Moreover, banks apparently were able to use positive carry-ins from the April 22 period into the May 6 period to a much greater extent than we previously viewed as the norm. That may be the result of little more than a random distributive effect or it may be something more profound; we do not yet know. The softness in the funds market in the May 6 period, I think in looking back, reflected a combination of this apparent shift in demand for excess reserves and our desire to remain symmetric with respect to the risks on each day. To put this somewhat more precisely, even as we became aware that bank demand for excess reserves was lower than we had expected, we were reluctant to pare back the cumulatively higher excess reserves because to have done so would have required aiming for quite a low daily excess number. Moreover, this would have occurred at a time when the absolutely high level of Treasury balances at the Fed meant that a small percentage point miss in the Treasury balance estimate could have completely drained the funds market and left us with a very negative day number and a big surprise on the upside. However, based on this experience, we revised down our assumption about period average excess reserves by $200 million to $1.2 billion. I think excess reserves are going be very much a moving target for us. Finally, we had no foreign exchange operations to report for this period. I will need the Committee's ratification of our domestic open market operations. I have distributed to the Committee a memorandum on proposed changes to the securities lending program. I am not seeking a Committee vote at this time, but I would like to share the details of these proposals with the primary dealers and I did not want to do so without giving Committee members an opportunity to react first. I would be happy to answer questions about my report, our operations, or the securities lending memorandum. Thank you.",3354
-fomc-corpus,1998,Questions for Peter?,4
-fomc-corpus,1998,"On the proposed changes to the securities lending program, you indicate in the memo that you plan to use a noon auction. What are your thoughts about lending in times of stress? Would you have to supplement that noon auction later in the day? Why noon? Why not 1:30 or 1:00 p.m.? How will you deal with problems of demand after noon?",76
-fomc-corpus,1998,"Noon is rather late in the cycle of daily trading and clearing in the market. The book entry side of the wire closes at 3:00 p.m. We want to try to provide some elasticity to both the trading and the clearance functions of most major firms. A noon auction would enable them to get their results around 12:30 p.m., and that is already a little late in the day. How we would respond in a period of acute stress is, I think, a good question. I would emphasize that if the market knew securities were to be auctioned at noon and they could look forward to relying on that auction on days of some stress, that might help to comfort them. Beyond that we have considered two possible approaches. One might be to announce early in the morning a change in the limits for the noon auction, which might provide some additional comfort. I would begin by using that device in a period of particular stress. Another possible approach would be to hold the auction earlier in the morning in such circumstances. In terms of selecting a routine time, however, we are trying to pick a slot that is in between our operations, Treasury auctions, and other noise in the markets. As a routine matter, noon seemed about as good a bet as we could find, but we would have to remain flexible in thinking about the timing of our auction if we were responding to a particularly acute problem.",283
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Peter, I have read your memo on our securities lending program. Just for my benefit, perhaps, is there some compelling reason for the Federal Reserve to be lending on a daily basis? Is there fear of a market failure? I know we have increased our lending in certain crises, but I am a little unclear as to why we should expand our daily lending of securities as you propose. It is not clear to me what sort of market inadequacies we as a central bank should be trying to remedy. Is there a problem in the securities market that is impeding smooth trading activity whose resolution would be facilitated by this expanded program? I would appreciate your clarifying that for me.",135
-fomc-corpus,1998,"Obviously, if we state the problem in the extreme form of market failure, it is hard to point to a market failure. What I would emphasize is that we rely on the very smooth operation of this market because it is the vehicle for our principal policy tool. I think that is why, in looking back through years and years of memoranda and reports on this issue, we see a consistent concern from the Fed's point of view about making this market work efficiently. A number of central banks do not rely as much as we do, almost exclusively, on our own government debt to comprise the asset side of our balance sheet. We are the ""hog"" of the government securities market. We hold about a third of the bill issues and a rather significant portion of the longer-term obligations--10, 15, 20 percent of individual issues as we move along the yield curve. So, it is in our interest to make this market function as smoothly as possible. The market certainly views us as a large holder of these instruments. The initial System securities lending program in the late 1960s was established in response to the request of the dealers, and our proposed revision is also a response to the dealers who claim that the existing program no longer works. We are in a period of declining debt issuance by the Treasury, and the stresses in the market feel particularly acute. All that said, I think it is very important to emphasize how much on the margin of the market we should try to position our program. We will be a very small part of the securities lending market even at the higher proposed limits--our share will be a single digit percentage. There is a vast securities lending market that we think works well. The question is whether we are part of the problems that exist and whether we should be part of the solution to getting more efficient clearing.",370
-fomc-corpus,1998,"Does it require that you go in on a daily basis to provide this ""marginal"" help, if that is the right word?",28
-fomc-corpus,1998,"I would prefer that we be predictable and transparent in the rules under which we operate. We thought long and hard about trying to design a more discretionary program where we would just respond to dealer needs. But that began to feel more like intervention in the ""specials"" market. It was very hard to see how we could get comfortable if we established rules of the road that involved decisions about whether to make securities available for lending today or some other day. It seemed most effective and most efficient and most transparent to say, here is what a dealer is able to do every business day of the year. In acute circumstances, we could change some limits if there were to be, say, another Drexel Burnham. But normally, we will try to be transparent, predictable, rule-based, and let the market come to us through a price mechanism.",169
-fomc-corpus,1998,"I can see utilizing this for a situation involving a Drexel or some kind of strain, but being there constantly on a daily basis seems more than necessary. That is my reaction to it. I am not an expert, obviously.",46
-fomc-corpus,1998,We have been in the business of lending securities on a daily basis for 30 years.,18
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,"We get requests every day, which essentially end up being rationed on a first-come, first-served basis and very small amounts being lent with great awkwardness. The last time I spoke to the Committee about this, I indicated how uncomfortable I was with our rule of lending only to dealers who were not short. It is a nice idea, but we just cannot enforce it. I do not even have a fig leaf of protection here.",89
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,"I admit that I am stuck. We have been in the business of lending securities for a long time, and we would have a problem if we tried to get out of it now. I think the dealers and the Treasury would raise a hackle.",50
-fomc-corpus,1998,I take it that you feel more comfortable going to a price constraint rather than depending on the current quantity limits.,22
-fomc-corpus,1998,"I'm proposing going principally to a price constraint with some quantitative limits. One reason I want to have a concrete proposal to show the dealers is that I anticipate a spectrum of opinions. There are some who will think this proposed program is great, but others will say that it is not a good idea and that it will jeopardize the securities lending business. We want to hear about that so we can see if there is anything we can do to address legitimate concerns. I think this is the best way to approach a new program. I want to underscore that on both the quantity limits--the totals per dealer and per issue--and on the 150 basis point spread, I think we are going to learn from experience and we will adjust going forward. The quantity limits and the spread may be too high or too low to enable us to adhere to the principle of operating only on the margin of this market. The Treasury is also very interested in making sure that we keep our securities lending operations on the margin and that we do not become too important a part of that market. We are going to have to watch that very carefully.",223
-fomc-corpus,1998,Your words were subtle. Is the Treasury comfortable with this?,12
-fomc-corpus,1998,"Yes, they are comfortable. They support, as I said, our going forward. There is some delicacy in that it is our program and not theirs. This function is right on the edge of both open market operations and debt policy. They see some risk that while we could generate additional revenues from the new program, of which they are the ultimate beneficiaries, we might squeeze out more of any market price premium than we generate in added revenues. I don't think that's likely to happen, but it is something we and they will be watching.",108
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"Peter, could we go back to your discussion of what the Bank of Japan has been doing? I think we all agree that they are dealing with a troubled banking system. The Bank of Japan now has a significant amount of bank paper on the asset side of its balance sheet. So, if we had a bank failure in Japan, one of the interesting things that would happen is that a fair bit of paper from the bank that collapsed would be in the asset structure of the Bank of Japan.",98
-fomc-corpus,1998,"Yes, that is another feature I did not mention. You can see that in their balance sheet. I don't have the figures in front of me, and I'm not sure it is an overwhelming number. But, yes, there has been a certain amount of credit substitution that the Bank of Japan has arranged largely by issuing its own bills while it has added reserves principally by taking in private paper as well as government securities. I should not say ""principally by taking in private paper."" They have been taking in a fair amount of such paper in addition to Japanese government bonds. So, they have ended up with more customer or bank paper on their balance sheet and have put out their own credit into the market. A number of traders in Tokyo have noted that it seemed to them that the Bank of Japan was caught in a dilemma. Having taken in private paper, if they disgorge it now, very strange things may happen to the prices and yields that private entities in Japan get on such paper.",198
-fomc-corpus,1998,"Isn't this one instance, President McDonough, where that bank paper is covered by the implicit guarantee of the government? Actually, the Bank of Japan itself has substantial profits, so I think it could absorb sizable losses. The first recourse might be that if a bank failed, the creditors would be made whole by the government, as has happened in all the other bank failures, and then the Bank of Japan would be made whole, too.",90
-fomc-corpus,1998,"My policy problem is that, since they seem to have fully refloated the convoy system with 19 banks now limping along in the convoy, part of the fuel in each of the ships currently is supplied by the Bank of Japan. Even though the Bank could absorb the shock financially, this is another reason why they would be inclined to say, if the condition of one of those banks did not look so good, that they did not want the additional public disgrace of acknowledging a write-off on their balance sheet. They would therefore want to keep the bank afloat, which is a further step in the direction of not resolving the problems in their banking system.",131
-fomc-corpus,1998,"I don't have any evidence of this other than anecdotes in the market, but the impression in the market is that the private paper the Bank of Japan is taking in is not of the top 18 banks but of the lower tiers. As I see it, this makes it a slightly bigger problem. The Bank of Japan may have an implicit guarantee for the whole financial sector. We may yet get a financial shock there, but I think it is more likely to come from the hinterlands, as it were.",101
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,Just a follow-up question. You are referring to bank paper and not to bank customer paper?,19
-fomc-corpus,1998,"As I understand it, it is a mix of both. It is similar to what we take in at the discount window.",25
-fomc-corpus,1998,The recommendation for some time has been for them to distinguish between bad banks and good banks in their efforts to resolve their financial problems. Is the Bank of Japan becoming the bad bank?,36
-fomc-corpus,1998,I don't think it is insolvent!,8
-fomc-corpus,1998,That's an interesting way of putting it!,8
-fomc-corpus,1998,Do they take in collateral on this paper?,9
-fomc-corpus,1998,"Yes, they are taking in some.",8
-fomc-corpus,1998,"So, it is collateralized.",7
-fomc-corpus,1998,"The collateral is the private paper. It is like our discount window. If we take in a ""Trump"" note from a bank, our collateral is--",31
-fomc-corpus,1998,"As Ted says, it is government paper. Let me ask you this because it is an interesting issue. Can you conceive of a problem emerging in that respect?",32
-fomc-corpus,1998,"I think Cathy Minehan is pointing to a real problem, Mr. Chairman. At the margin, that is the direction. I'm not sure one would assert that the Bank of Japan is now the bad bank for the banking system, but as people now talk about it in Tokyo the marginal change seems to be in that direction. That is what I am reporting.",72
-fomc-corpus,1998,"It is getting scarier and scarier. At least, I am getting more scared.",18
-fomc-corpus,1998,"I think it is fair to say that there are other mechanisms to take over the really bad paper. In some sense this occurs when they actually resolve institutions. It's not clear to me exactly what has happened when institutions that failed were taken over by one of these resolution banking organizations. That is where the bad debt of these resolved banks ends up, although obviously some of it is on the Bank of Japan's balance sheet. Actually, their advances have gone up and down, which suggests that there have been mechanisms to delay some of that in order to allow time to seek other arrangements. The advances got quite large in certain periods, in the fourth quarter in particular.",131
-fomc-corpus,1998,Further questions?,3
-fomc-corpus,1998,Move approval of the domestic operations.,7
-fomc-corpus,1998,Is there a second?,5
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,Without objection. Mr. Prell.,8
-fomc-corpus,1998,"Thank you, Mr. Chairman. I might call your attention to the housing data that were put at your places this morning. I won't go into that at any length. Let me just say that the single-family housing starts and permits data were very close to our expectations, while the multifamily starts were on the low side and really surprisingly low given the trend in permits. Multifamily starts are of lesser importance in dollar terms, and we would also expect to see some bounceback. So, on the whole, I think these data do not represent a significant departure from what we had in the Greenbook for residential construction activity. We have seen some astonishing economic data since the last meeting, and we have worked hard to make sense of them. In the end, what we have presented to you in the Greenbook is a forecast that, from the current quarter on, looks much like the prior version in terms of both growth and inflation. I hope that this is not simply because we are unimaginative or stubborn, but rather because we have shown good judgment in processing the various surprises that came our way. For some of you, the central question probably is how we could have looked at a first-quarter GDP increase that we now estimate at more than 5 percent, along with April's 4-1/4 percent jobless rate, and still not have come up with a scarier price forecast. I will focus my remarks on that question, with the expectation that I will end up addressing some of your other concerns along the way. First, there is no doubt about it: The first quarter was a stunner. As you may recall, I did say at the last meeting that it would not be a shock to see the forthcoming expenditure data come in strong enough to push the GDP growth rate a point or two above our 3 percent prediction. But, at the time, we knew only about the huge increases in payrolls in January and February; I would have been more conservative if we had known that employment had declined in March. In any event, the incoming spending data prior to the April 30 release of BEA's advance estimate really did not prepare us for a GDP number as high as the 4.2 percent they published. The major surprise was their big inventory component. It was not a matter of their writing down a questionably high set of assumptions for the missing March data. They did not. Instead, it was mainly the translation of the available book-value data for January and February into real terms. We talked with the BEA staff who did the calculations, and we could not find any flaws in their methods. That said, though, $67 billion of nonfarm inventory investment still looked awfully large to us, coming as it did on the heels of a similarly high rate of accumulation in the fourth quarter. It seemed odd that stocks could be piling up so much more rapidly than final sales without our hearing more reports that firms were concerned about excess inventories. All things considered, it looked in late April as if there was a good chance that subsequent data would point toward a downward revision to the Q1 GDP number--most likely in the inventory category. Well, you know what happened: We got a string of stronger-than-anticipated inventory readings for March, plus some upward revisions for prior months. All told, we think these ran the nonfarm inventory tab up to a whopping $93 billion--more than 3 times what might plausibly be sustainable in the steady state. Recognizing the important implications this would have for the dynamics of our forecast, we considered again whether there were any chinks in the data that might be grounds for discounting them in anticipation of later revisions. Finding none, at least of a statistical nature, we went ahead with the straightforward translation in the Greenbook. What we did was to adjust our expectations regarding the March international trade report, which will come out tomorrow, with the thought that some of the increased inventory accumulation might be reflected in a wider trade gap than BEA assumed. This did not alter the inventory picture itself, but it seemed sensible in terms of better aligning the production and expenditure data. So, as it stands, it is the high level of inventory investment in the first quarter that is the key reason why, despite the indications of strong momentum in private domestic final demand, our GDP growth rate for the remaining seven quarters of our forecast is virtually the same as it was a couple of months ago. There are many risks here. One is that the Q1 inventory bulge really was not so large, and thus that the drag of the forthcoming adjustment will be less than we have anticipated. Another is that, even if the number is right, we could be wrong in our prediction of the timing of the adjustment. We have a substantial deceleration occurring already this quarter and carrying into the summer, and that is a crucial ingredient in the immediate, and quite marked, slowing of GDP growth in this forecast. That such a slowing in activity is indeed in train is far from clear right now. For a variety of statistical reasons, discussed in gory detail in the Greenbook, the labor market data are unusually opaque at this time; however, it is our general sense that if there has been a reduction in the growth of labor demand, it has not been commensurate with the degree of GDP slowing that we are predicting. In other words, we are expecting that the slowing in output growth will be mirrored in large measure by a slackening in productivity gains. Of course, I told you a similar story at the last meeting in regard to the first quarter; I will understand if you are a little skeptical now. But while I'm on the subject of productivity behavior, let me take this opportunity to segue to another conjectural aspect of our forecast, namely the revised productivity trend. Based on a review of recent developments and of the newly available data on multifactor productivity through 1996, we have raised our assumption regarding the trend growth of output per hour in the nonfarm business sector by a quarter percentage point per annum. This might not sound like much, but it is significant in offsetting the surprise we have had with respect to the unemployment rate. It provides an offset in two ways: It mutes the effect of a higher GDP path on the unemployment rate, and it also means that a given rate of compensation gain translates into a smaller increment in standardized unit labor costs. This helps to explain why, despite the recent surprises, the unemployment rate is only a hair lower by next year than in the last forecast and why we have not raised the inflation forecast. Of course, we not only have not raised our inflation forecast, we actually have trimmed it a tenth. This puts us more clearly below the consensus, although I am not sure how many of the private forecasters are being as assiduous as we are about keeping track of the damping effects of the ongoing BLS technical revisions to the CPI. I may not be able to persuade the doubters among you of the wisdom of our view, but for the purposes of setting the stage for discussion, I will remind you briefly of the major ingredients of the forecast. First, on the compensation side, we have absolutely no doubt that the labor market is extremely taut. We are a bit skeptical about the 4-1/4 percent unemployment rate registered in the survey last month, but whatever the true number is, we are sure that workers have gained some clout in the pay-setting process. Nonetheless, the March ECI figures showed wage and salary increases right in line with our expectations and benefit cost increases below our guess. Thus, there was nothing in that report to negate the basic premises of our forecast of flat nominal compensation inflation: namely, that low price inflation will damp wage increases; that there will be no repetition of the minimum wage hikes that boosted pay rates in the past couple of years; and that, though health insurance costs will be increasing more rapidly, a slowing of the economic expansion will take some of the ""oomph"" out of commissions and bonuses. Time will tell whether this sanguine assessment is right, but we are sticking with it for now. On the price side, the incoming data have been close to our expectations, though we can find some reasons to worry: The tobacco price increases keep coming at us, and we have not incorporated a legislative action that might lead to much steeper increments than we have been seeing of late. The 0.4 percent jump in owners' equivalent rent in last month's CPI could be a harbinger of a more adverse trend in a stronger housing market. And there are signs of price increases happening elsewhere, too.. But, against that consideration, one must also weigh the continued indications of softness in prices in many sectors--the lack of ""pricing leverage"" still so widely reported, especially in goods markets. The fact is that there are substantial segments of the economy where prices are going nowhere or downward because there is slack industrial capacity, intense import competition, deregulation, cost-saving technological advances, and so on. Commodity prices clearly are not signaling an upturn in inflation. In fact, oil companies will tell you of a supply-demand picture that leaves them concerned that prices might go down from here. The predictions regarding the likely fall grain harvest suggest the possibility of price-depressing inventory buildups, especially if the Asian crisis countries are not able to reverse the dramatic contractions in their ag imports. Semiconductors are in abundant supply, leading to steep declines in the prices of chips going into computers and innumerable other items. I am told by an auto company economist that his firm is actually thinking about targeting declining vehicle prices in future negotiations with their parts suppliers. In short, there is no sign that goods prices are on the brink of acceleration, and they could be even weaker in the near term than they have been. We have noted for some time that, if one looked at the factory utilization rate as the indicator of pressures on productive resources generally, one would not only have done better in predicting what has happened to overall prices to date, but one would also be looking for appreciable further deceleration ahead. We have not gone that whole hog by any means. We have stayed closer to what might be suggested by the unemployment rate outlook. We think a little caution is called for, given the possibility that the end of the favorable supply-side shocks of the dollar's appreciation and health care cost-cutting might be more important than is apparent at this point. I have gone on, now, at some length, without touching on perhaps the most crucial issue in the economic outlook--namely, the prospects for final demand. The risks and uncertainties here are obvious. Asia is one that remains prominent; the possibility that we shall yet head toward one of the ""worse case"" scenarios is still out there, but at least thus far the direct effects on the United States through the trade channel have been in line with our expectations. On the domestic side, the latest reports on the retail sector and the housing market have given further evidence of the robustness of demand trends. It was not a slip that we mentioned in the Greenbook the current catch phrase, ""bubble economy."" We continue to believe that the rise in equity prices has been a key element in the persistent strength of spending. And we remain concerned about the possibility that the market will continue to climb even in the absence of earnings gains. It is commonly remarked that this is a ""liquidity driven"" market, the implication being that it will take an appreciable tightening of monetary policy--or the fear of one--to prompt a serious correction. Perhaps the hints of a little sterner antitrust posture will put a damper on mega-merger speculation, but that has not materialized yet. And the market has largely shaken off the renewed slump in Asian equity markets. So, at this point, I think one has to consider the possibility that, rather than weakening even slightly, as we have forecast, the stock market will climb appreciably further and give an added boost to domestic demand.",2428
-fomc-corpus,1998,Questions for Mike? President Parry.,8
-fomc-corpus,1998,"I have two questions about your forecast, one about your new estimate of the trend growth of productivity and the other about the outlook for inventories. Could you say something about the educational and job experience composition data that were referred to in Monday's briefing by the Board staff and also in the Greenbook? The evidence must be compelling because it seems to be the basis for your revision in the trend growth in productivity or at least in the assumption that it is now 1/4 percentage point faster.",98
-fomc-corpus,1998,"I think the analysis is a little more complicated than that, and I will spare you some of the details. I would probably stumble over them in any event. We have been building into our forecast a substantial allowance for a positive effect on productivity from capital deepening. We did not have a set of numbers that was as up-to-date as we would have liked, and the recent statistical release has clarified that picture. What we found was that the productivity effects on the capital deepening side probably were not as large as we had estimated earlier, and yet we also saw more favorable data on other components of the productivity picture. One of them was a step-up in the rate of improvement in labor quality. That always seemed to be a possibility. We know that college enrollments have been increasing. We have seen recently some increase in participation among older, more experienced workers. Whether such workers are truly as productive as one might assume on the basis of their experience is conjectural, given the changes in technology and other innovations. But looking at the compositional changes in the workforce and the influx of recent college graduates who may have more current skills in terms of what employers are looking for, it seemed reasonable to us to extrapolate that recent improvement in our forecast. So, taking our investment forecast, extending what we have learned about the capital services contribution, extrapolating in a sensible way in light of recent labor markets developments the information we have on the quality of labor stemming from greater education, we concluded that it was reasonable to raise our assumption about the productivity trend. We triangulated against all the other information that was available--the continuing surprises in the recent labor productivity growth figures and how these fit with the Okun's law relation--and we concluded that this elevation of our number was reasonable. I must say that we are not alone in our estimate of a 1-1/2 percent productivity growth trend. I think DRI is there. People bringing different technology to these estimates come up with different conclusions, but we feel that this is a reasonably sound move for us at this point.",417
-fomc-corpus,1998,"On the inventory forecast, I think a distinguishing characteristic of the Greenbook forecast, certainly for the current quarter and the following two quarters, is what happens to inventories. Given the expectation for the second quarter, shouldn't we be seeing more signs of the projected deceleration at this point in terms of surveys, inventory-to-sales ratios, and so forth? We are slightly beyond the middle of May, and the kind of runoff that is part of that forecast is, I would use the word, ""huge.""",101
-fomc-corpus,1998,"I think I voiced my concern in this regard, maybe not clearly enough. There are a couple of possibilities here. One is, as I indicated, that while we cannot find a flaw in the data at this point, inventory investment may still have been significantly less rapid than the first-quarter numbers currently seem to add up to. On the other hand, we have to cut such investment back a long way to get to as lean an inventory picture as we had just a couple of quarters ago in terms of inventory-sales ratios. Another possibility is that businesses are so optimistic or they see so many opportunities to pick up relatively inexpensive supplies--perhaps because of what is happening on the import side--that they are building up their inventories willingly, and we will see this in the data that will get released in the weeks ahead. Thus, there may not be as big a drag from inventories in the near term as in the Greenbook forecast. MR.PARRY. Voluntary accumulation, but unwise!",197
-fomc-corpus,1998,"In the short run, that provides a little more support to production, employment, and income growth, and this process can be self-sustaining to a point. But I think the level of inventories is high enough now that one has to anticipate a gearing down in the rate of inventory accumulation at some point in the coming months. Whether it will be as quick and sharp in the second quarter as we have in the forecast is an open question. I might note that a good part of that dropback is in the oil sector where inventories ran up very substantially in the first quarter. We are not expecting a repetition of that. When we strip that out, the moderation in inventory accumulation in the second quarter is not quite so dramatic. In fact, for the remaining components of inventory investment, there is still quite ample additional accumulation that would be quite unsustainable by our lights.",174
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mike, I wanted to ask you about one part of the wage side of the forecast. As you point out, you anticipate that workers will accept limited wage increases in the future because of low inflation and low inflation expectations. Of course, we know that wages are going up now. We have seen that in all the measures, and we are all getting anecdotal information about rising wages. You point out that workers have more bargaining power. You add in the fact that we have the technical changes in the consumer price measures, which are getting significant in the CPI going forward. So, when we look at your forecast of the overall CPI going out to 1999, it shows consumer price inflation rising 2.1 percent on a measured basis. If we add back in the technical adjustments, we are up to 2.8 percent in 1999. On the core CPI, if we add in the effect of these technical changes, we see an acceleration each year as well. From the perspective of worker expectations, how do you plug in these technical changes to the CPI?",216
-fomc-corpus,1998,"The process by which price movements enter into the determination of wages is very complex. The movements in the CPI are a benchmark in some collective bargaining situations where employers are gauging an appropriate pay increase to offer their employees in the hope that the workers will not be so perturbed about where they stand relative to others that they will leave. Movements in the CPI also serve as a benchmark in many cases outside of collective bargaining where a one-sided decision has to be made. Employers will look at what has happened to the published index over the past year, or some other relevant period, and make that an important element in their decision. In some cases where there are complex systems of general base pay increases that are supplemented by merit pay increases and bonuses and so on, that first element may be very much influenced by the perception of what has been happening to the cost of living. I think these year-by-year changes that you are talking about--you referred to the Greenbook level of CPI inflation in 1999--involve comparisons using 1994 methods. They are cumulative and overstate the differences from year to year. We are talking about differences of only .1 or .2 percentage point for each of these years. That is a subtlety that probably is missed in those cases where people are simply looking at the published CPI to gauge what the appropriate pay increase might be. Part of this process is, I think, simply a backward-looking one as I described. It is a cost-of-living catch-up, formal or informal. There probably also is some influence from expectations that may not be entirely backward-looking. On that score, we have no evidence that people are expecting a dramatic pickup in inflation. The recent survey evidence has shown a declining trend in inflation expectations, though with some small uptick in the Michigan Survey last month. The expected level of inflation is not down to the measured level of inflation yet. That might suggest that some people are not going to conclude that if they get a 2 percent wage increase, that increase is going to keep them whole over the next year. But I think the downward progression of readings on inflation expectations would suggest that, whatever their influence on wages was a year ago, it is probably going to be less this year. So, we think that both the price changes we have seen and the expectational changes will tend to moderate nominal wage increases. An important point is that real wage increases have been very sizable, as measured against product prices in particular but even against overall consumer prices in the last year. What we are forecasting in the next seven quarters is a continuation of very sizable real wage increases in product price terms. It could be that this whole process will escalate, but at this point we don't see a big surge coming from the price side. So, we don't see any reason to think that the way to reconcile these things is to jack up both our wage and price forecasts in the near term. There's a certain momentum here that I think is quite favorable for the wage outlook. Benefit costs are very erratic from quarter to quarter. We did get a downside surprise for the first quarter. We are assuming that there will be some catch-up in the quarters ahead. You may have seen the horror stories about medical benefit cost increases in this morning's Wall Street Journal. The second page had another story about how businesses are trying to head these increases off or offset them in some way by making employees pay for a bigger proportion of the cost if they do not take the cheapest plan. Our expectation is that there will be a perceptible uptick in medical benefit costs and in the total compensation picture. Just to give you a rough handle on the quantities involved here, if we had an extra 5 percentage points added to the rate of medical benefit cost increases going forward, that would add about .2 or 1/4 percent to the overall increases in labor costs. The cost of benefits is important, but it takes really big numbers to greatly disturb the trend here.",800
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I think you have mostly answered this question, but let me pose it in another way. Are the computational changes being made in the CPI masking the real price increases that are occurring? In other words, is there a distinction between what people really are experiencing and what the numbers say, or are the computational changes reflecting the reality of what people see?",69
-fomc-corpus,1998,"That is an interesting question, and it may suggest that the way I approached the prior question was not right. In a sense, we think these changes are improvements in the measurement of inflation because they better capture reality. I guess that suggests that if all along people had been making their decisions based on something more like the reality than the published numbers, then they would not perceive, for example, that their real wages were going up faster than the measured numbers suggest.",92
-fomc-corpus,1998,"So, you don't see further major changes after the end of this period in BEA's computation of this measure? If you take the 1994 numbers, compare them to those projected for 1999, and adjust for measurement differences, you get an upward trend of something like .5 percent. You don't think that trend will then reassert itself? You don't think BEA's adjustment is masking a trend that is going on anyway? You think it is measuring what is really going on?",99
-fomc-corpus,1998,We think these numbers better capture the reality. We also think that it is important to keep tabs on this in thinking about whether there is an acceleration or not in the rate of inflation.,37
-fomc-corpus,1998,"The reality is that real inflation is lower now than the current numbers are suggesting. While the price measures are getting closer to actual price inflation, our forecast indicates that there is some pickup in the real underlying rate of inflation, that is, between where we think inflation is in the real world today and where we think it is going to be in 1999.",72
-fomc-corpus,1998,We are moving only incrementally toward reality in the measurement changes. The fact that we are getting there gradually means there is a distortion in the underlying acceleration.,31
-fomc-corpus,1998,This gets into metaphysics! [Laughter],10
-fomc-corpus,1998,"Mike, can we get the University of Michigan to insert a single additional question for just one month? Before people are asked what they expect price inflation to be over the next year, they would be asked what they thought inflation was in the previous year. I will bet that the results would be startling.",60
-fomc-corpus,1998,I'm sure they would be happy to accommodate us for a price. [Laughter],17
-fomc-corpus,1998,"If we asked a number of people what the inflation rate was in the last year, I cannot believe that most would come within 5 percentage points. This Michigan Survey, as best I can judge, is asking straight questions of people without any bias. Even so, I would be terribly curious to see whether the responses come close to what the actual inflation rate was. I think that information is needed before you can safely say, as you said just a moment ago, that they are still expecting an inflation rate higher than the actual rate. It depends on which direction they are going. It is not irrelevant what they think the previous year's rate was.",129
-fomc-corpus,1998,"I suspect that the Michigan survey people might have some qualms about injecting that question, given the possibility that it would disturb the answer to the subsequent question.",31
-fomc-corpus,1998,It surely would.,4
-fomc-corpus,1998,"They don't have to give survey participants the correct answer for some index. In fact, I don't think the question relates to any particular index.",28
-fomc-corpus,1998,Maybe they ought to ask my question after they ask all the other questions!,15
-fomc-corpus,1998,That would be a safer approach in that respect.,10
-fomc-corpus,1998,"The people at the Michigan Survey have tried to design the series of questions that they ask very carefully in order to avoid getting biased responses. In fact, Mr. Chairman, you are right that when people are asked in surveys what inflation has been in the past, the results are similar to what you are suggesting. In such surveys if the question is not asked carefully, people give all sorts of bizarre answers. In fact, the mean expected rate of inflation is usually much higher than the current rates.",99
-fomc-corpus,1998,Doesn't the Conference Board truncate some of these means?,11
-fomc-corpus,1998,"The Conference Board truncates both the upper level and the lower level responses. They confine the answers to a 0 to 15 percent range, whereas the Michigan Survey allows the full range of responses.",41
-fomc-corpus,1998,It would be very interesting to know whether that works.,11
-fomc-corpus,1998,"Just on this point alone, of the identifiable biases in the CPI, more than half of them are still there. BLS has taken out 0.6 percentage point, but that is less than half of even the identifiable biases.",47
-fomc-corpus,1998,"Yes, of that estimated one point plus something.",10
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I have a comment and a question. Clearly, the outlook depends, as you made clear, on the outlook for equity prices, the bond market, and the exchange rate. For the bond market, you are assuming that rates stay about where they are, which I think is a sensible thing to do. I think it makes the most sense to have a baseline forecast that follows the same procedure with respect to all of these speculative markets, making use of the evidence from the marketplace. The baseline stock market assumption should be along the lines whereby the returns will approximate the risk-free rate plus the equity premium, with a similar kind of assumption for the exchange rate where changes are based on interest rate differentials. The staff would then explore the implications for the forecast of some potential deviations from those baseline financial market conditions. That would be my suggested approach. I have a question on inventories: Have you made any inquiries to firms in industries where you suspect that there has been large inventory accumulation? We talked about the specific information that we have on oil inventories. But how about other industries where there may be inventory accumulation that you can identify? Have there been any phone calls to people in those industries to ask them what is going on as best they know?",247
-fomc-corpus,1998,"We have talked to a number of business people and have attended meetings where economists from various corporations talked about these things. There are not a lot of industries where the accumulation of inventories stands out. I can cite a few anecdotes and a few statistics that I think might be worthwhile. The chemical industry clearly has had a substantial increase in inventories and a big run-up in its inventory-sales ratio. That is probably at least partly related to Asian developments. I believe there has been an upturn in pulp and paper. I have heard of some stocking up by electronics firms that thought it was a good time to buy because prices were good. We have a few anecdotes, including some in the Beigebook, that indicate that some firms have taken advantage of low prices being offered by Asian suppliers to build up their inventories in some materials.",164
-fomc-corpus,1998,Crude oil and oil product inventories have moved up quite significantly.,13
-fomc-corpus,1998,There is no doubt on the oil side. My sense is that the buildup was only to a modest degree the result of price speculation. It appears to have been much more the result of softer-than-anticipated demand for petroleum products because of the warm winter weather.,52
-fomc-corpus,1998,That is evidence of some backing up in inventories because the accumulation is not what they intended.,18
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,"So, from the look of things, oil inventories are higher than intended. The oil companies obviously would have preferred a lower level of liftings around the world, especially the amount that has flowed into the United States, which they obviously are trying to cut. Oil stocks are not an irrelevant statistic among the numbers we are looking at.",66
-fomc-corpus,1998,I was just trying to get at the issue of whether the firms themselves felt that their inventory accumulation was voluntary or involuntary.,25
-fomc-corpus,1998,"I think the answer, and that is what the Greenbook suggests, is that there's very little evidence that it is involuntary.",26
-fomc-corpus,1998,"Right, that's what I thought.",7
-fomc-corpus,1998,"In that regard, the only really interesting statistic that we have is the response to a question we asked the purchasing managers, namely whether in their judgment the inventories of manufacturers' customers were too high, about right, or too low. While the latest published number is up slightly, it is still well within any meaningful range. There is no indication that inventories are building up involuntarily. Since virtually all goods are manufactured goods, one would presume that purchasing managers would provide a very good assessment of the inventory situation, and their responses do not show any particular problem. I gather that the data from the National Federation of Independent Businesses (NFIB) show much the same thing.",134
-fomc-corpus,1998,"Yes. We showed these data in our briefings for the Board yesterday that I hope the presidents received. Neither the Purchasing Managers' survey nor the NFIB survey provides significant evidence that there has been any unintended, undesired accumulation of inventories in the first quarter. One of the things we did not highlight in our briefings but that also is part of the survey is a question about inventory plans. The April reading in the NFIB survey showed a startling jump in plans to build inventories.",97
-fomc-corpus,1998,That is usually an indication of history though.,9
-fomc-corpus,1998,"It may be that they are reflecting what has happened but, be that as it may, the April number took a big jump. It actually looks weird. For what it's worth, no concern was expressed there, and in fact the NFIB survey overall, as interpreted by their own people, would suggest that the growth of the economy in the second quarter will be as strong as it was in the first, and that did not come as any surprise to them. According to their survey, second-quarter growth is going to be stupendously strong.",109
-fomc-corpus,1998,The truth of the matter is that inventory backups are perceived only when final demand begins to slow. I think we almost never find anecdotal inventory concerns when markets are moving as fast as they are currently.,40
-fomc-corpus,1998,"Let me offer two very brief final points. One is on the financial side. If one looks at the business financing flows, short-term business credit in particular, those flows are not inconsistent at all with there having been a strong run-up in inventories earlier in the year. And what we have in hand for the first part of the second quarter is entirely consistent with a big reversal, sharper than the one we have in the Greenbook.",87
-fomc-corpus,1998,Part of the latter is corporate debt repayments.,9
-fomc-corpus,1998,Yes. I was going to caution that this is not an entirely reliable indicator. There are a lot of things going on in the financial sector.,29
-fomc-corpus,1998,It is the only one that we have showing an acceleration in the second quarter.,16
-fomc-corpus,1998,"The other point I want to make is that it is not simply a question in our minds of whether this inventory buildup is involuntary. It is in large measure simply a question of whether the inventory accumulation was as rapid as was indicated for the first part of the year because, one way or another, that rate of inventory investment needs to come down. If it was involuntary, then we might expect a more rapid orders and production adjustment, but the drag would still be there over time.",98
-fomc-corpus,1998,"In other words, merely reducing the rates without any indication of whether there is a problem or not will arithmetically reduce the level of output.",30
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,"With regard to your comment on exchange rates, President Poole, we did look about a year or so ago at whether we would forecast better if we used expected forward exchange rates and forward interest rates. It gets a little complicated when we use non-G10 currencies by the way. The answer is that we introduce more noise by using that than by using an assumption built off independent assumptions for exchange rates and interest rates here and abroad. That is true partly because in the short run, over periods of a year or so, expectations about policy movements or other developments move around so that a lot of noise is introduced into the forecast. I think we are better off with this arbitrary assumption rather than something that is driven by market interpretation. We are not a lot better off, by the way, but obviously the former gives us a less good forecast.",168
-fomc-corpus,1998,"On the stock market, President Poole, this is a recurring question and it puts us in a tough logical bind. You suggested a formulation that would have grossly underforecasted what happened to stock prices over the past couple of years but not as much as we have. [Laughter]",59
-fomc-corpus,1998,I was about to get to that!,8
-fomc-corpus,1998,"We took a punch on that one, and it has been painful. But the other issue is one of simple coherence. To the extent that we have any inkling of what is built into the stock market in terms of expectations about monetary policy, interest rates in general, earnings, the behavior of the economy, and so on, it leaves us uncomfortable to ignore all that and write down something that implies a vast extension of price-earnings multiples beyond what we have seen. So, we have taken the approach of trying to put in a stock market path that seemed more consistent. It has not stood us in good stead to date. Over the past couple of years, we certainly would have been better off using the approach you outlined. Whether that could be said going forward, we do not know. But it is a point we continue to think about.",171
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Mike, I want to comment on your response to a question by Mike Moskow. I am trying to reconcile it with my own view of the process, which right now I am not able to do. You talked about the extraordinary domestic demand and about the increases in compensation we are seeing. Year over year since 1993, we have seen a steady upward trend in the rate of personal income growth. Last year it was 6 percent for the full year. In the first quarter of this year, it was 6.6 percent according to the Greenbook, and next week we will get a number for April. The Greenbook forecast indicates that after the steady upward trend of the 1990s to a rate of over 6 percent in personal income growth, the rate drops to 3 percent in the current quarter that we are halfway through. What we hear from companies and from employers of all types is that they are hiring people, giving them bigger and bigger compensation increases, promoting them, and in short doing everything they can to retain them on their payrolls. And yet, personal income growth suddenly drops to 3 percent in your second-quarter forecast. Now, other than needing that to happen on the income side to add up to what is supposed to happen on the product side, are there other stories we can tell as to why income growth suddenly decelerates sharply?",278
-fomc-corpus,1998,Are you talking about nominal figures here?,8
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"Total personal income, not disposable?",7
-fomc-corpus,1998,Total personal income.,4
-fomc-corpus,1998,I have not focused on that measure. We have a considerable slowing in the economy--,17
-fomc-corpus,1998,"But personal income is for people who are working and getting paid. The number of people working is going to go up another 600,000 this quarter according to the Greenbook projection, and everything we hear indicates that what will be going into their pay envelopes will be bigger than before. Every employer we talk to complains about how much more they have to stuff in those envelopes one way or another. So, why would personal income growth slow down? I am getting more and more accustomed to the idea, at least when I talk to people, that the growth in personal incomes has nothing to do with monetary and fiscal policy.",124
-fomc-corpus,1998,"I can see in the detail of our forecasts a number of components that we have shifting. Transfer payments, for example, fall off, presumably because of the spurt in social security payments in the first quarter. But I guess I don't have a compelling answer for you. Total personal income in the first half is still rising at a rate close to 5 percent, which is not far below the average pace last year when employment growth was even faster than we have over the first half of this year. Perhaps there's something in these quarterly numbers that I can't immediately put my finger on to explain this.",119
-fomc-corpus,1998,"It always drops from the first quarter to the second quarter, which says something about the seasonal adjustment. But as the quarterly personal income numbers run out through the end of 1999, they maintain a nice steady 4 percent rate of growth.",49
-fomc-corpus,1998,"When we go out that far, I don't have a big problem reconciling this growth path with the much more modest increases in employment that we are forecasting. It is more with regard to this first quarter-second quarter pattern that I am not prepared to give you a nice crisp answer as to why we have that particular gyration. But as we move out in time, the question is whether the economy is going to moderate as we have forecast. If it does and if productivity holds up reasonably well, employment gains will be much smaller and they will be entirely consistent with this kind of slackening in the growth of nominal personal income in our forecast.",129
-fomc-corpus,1998,"Some of the anecdotal comments we are hearing can be put into a framework that people are familiar with, one that indicates a purely transitory decline in the NAIRU along the lines of what I think of as the inverse of the money illusion. From a money framework, the reason we have lags in the system is the existence of a money illusion. People think that they are richer for a while, but we get an adjustment ultimately when people realize that more money does not buy more. The inverse of that in a NAIRU framework is that people do not realize that they are a lot more productive and that they are worth more to their employer. The value of the marginal product of labor goes up and labor is not being compensated according to that value, but at some point it is payback time. It is catch-up time. More and more, there are stories from both employers and from the labor side that the reason corporate earnings have been so good is that workers increasingly have been underpaid in terms of the value of their marginal product, and now workers feel it is their turn. I hear those kinds of stories everywhere: what employers are doing to promote people, what they are doing to recruit people. I have trouble with the notion that personal income growth is nonetheless going to decelerate and grow at a nice steady 4 percent rate for the next 6 or 7 quarters. That just does not compute with what I am hearing.",292
-fomc-corpus,1998,"You're switching gears on me! Before I was addressing the question of employment growth and how that is slackening substantially over the forecast period and accounting for a good part of this slower growth in personal income. The other question is what is going to happen to real wage rates or nominal wage rates. I discussed that earlier. There is not a great deal I can add to what I said about our theory in that regard. What we are predicting, given the price path, is not at all at odds with what history suggests in terms of models that relate wage changes to past price changes and measures of labor market tightness. The situation in terms of the workers being fooled for a period and then some catch-up occurring is something that we have made some allowance for, at least in our minds, in that we anticipated that the NAIRU would come down a bit as the productivity trend shifted upward. This productivity gain was not immediately recognized, so employers might have been able to get away with more moderate nominal wage increases, some of that showing up in lower inflation and some of it showing up in higher profits in the short run. That process may be reversing. We are assuming a little tick back up in the NAIRU. Maybe it will be more dramatic than what we have allowed for. In the end, we are monitoring the incoming data as closely as anyone can. As I said, what we have seen in the recent numbers has not been at odds with our expectations. You can eyeball the moving averages on a number of these series and see an upward drift that you will extrapolate, given your sense of what is going on. Or you can look and see that, after you have allowed for some of the bumps along the way with respect to the minimum wage and have looked at the recent period, it is not clear that there is an ongoing acceleration in the recent numbers. Maybe more of this compensation is taking forms that are not captured well in the measures. That means there may well be a cost that employers are incurring that is not going to be reflected in the wage data. That would be something one would want to take account of, I think.",433
-fomc-corpus,1998,"How important is next week's number on personal income for April? I look at this and say that if the two sides of the accounts are going to add up, we better get a sharp slowing in the growth of personal income for the second quarter.",49
-fomc-corpus,1998,"Obviously, we would look at a number on personal income and adjust our forecast as appropriate. The personal income number is rarely something that is of enormous importance in itself because we think we have some rough handle on how those numbers are estimated from the available data on hours and average hourly earnings and so on.",60
-fomc-corpus,1998,"May I ask a question on that, a very quick question?",13
-fomc-corpus,1998,President McTeer has been trying to get in. He has probably forgotten his question! [Laughter],22
-fomc-corpus,1998,"I want to call your attention to the third paragraph on the first page of the Greenbook. I'm going to read two sentences and ask a question about the second one. ""Our forecasts of moderating growth of demand have long been premised on an assumption that some reversal of stock prices would be precipitated by a failure of corporate earnings to meet unrealistic expectations. However, we have also warned repeatedly that, given the prevailing psychology of investors, a greater shock--perhaps a significant tightening in monetary policy--might be required to put a damper on the market's uptrend."" Does that sentence mean to suggest that we have a goal of putting a damper on the market?",135
-fomc-corpus,1998,"No, it reflects the thought that our stock price assumption might be too low or that we might be putting too much of a premium on what we think is rational investor behavior. As we see it, if the market continues to go up, the wealth effects, cost of capital effects, and so on would stimulate greater aggregate demand. We leave it to you to determine whether the implications of stronger aggregate demand for inflation would be troubling and thus whether some policy action might be warranted. In all likelihood, a substantial monetary policy tightening would have some damaging effect on equity prices. That is, I think, how we see this sentence.",125
-fomc-corpus,1998,"I just had a very brief question about personal income. Doesn't the first release on personal income come mostly from the employment data? If so, is it really an independent reading on personal income?",38
-fomc-corpus,1998,Exactly.,2
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,"There is some massaging. As we have indicated, at the present time with all of the uncertainties about the measurement of the average workweek and average hourly earnings, that massaging is more important. To a first approximation, we think we know how BLS is doing this, and that is not normally an independent piece of information of great importance.",70
-fomc-corpus,1998,Any further questions for Mike? Go ahead.,9
-fomc-corpus,1998,"I have just one final question, Mike. If I understood what you said about the stock market, you described it as a possible source of excess demand in the economy that would cause us to be concerned. Is that what you are saying?",48
-fomc-corpus,1998,"We tried to address this issue once again. I assume that President Poole noticed this in Part I. We do have a simulation where the stock market rises moderately. Given the uncertainties about equity premiums, I am not sure what your formula translates into, but basically the alternative has the equity values rising with nominal personal income. So, running this through the model, we get a significantly faster growth of GDP. We think that what we have assumed is reasonable given our expectations of earnings against what seem to be still very buoyant earnings forecasts. While they have come down for 1998 among private analysts, it seems as if most of them think the damage is entirely behind us and that earnings are going to be moving up rapidly in the second half of this year and into 1999.",157
-fomc-corpus,1998,"Further questions for Mike? If not, who would like to start the roundtable? President Boehne.",22
-fomc-corpus,1998,"The regional economy around Philadelphia continues to operate at a fairly high level with mostly modest growth. There are few signs of upward price pressures. Among the anecdotal tidbits that I have picked up around the District in recent weeks is that one in four jobs is likely to go unfilled this summer in District shore areas. There seems to be an increase in the number of retail customers who cannot complete purchases because their credit cards are ""maxed out."" There also are quite a few bankruptcies and delinquencies. One Philadelphia firm, for example, has sent 14 of its 250 employees to credit counseling school in recent months. But almost everywhere in the District, and this is the unifying theme, people are in an upbeat mood. At the national level, we find ourselves facing much the same economic situation that we had in March. Employment and output growth appear unsustainably strong, but there is little evidence that inflationary pressures have begun to build. We are wondering how soon or whether growth in aggregate demand will slow or inflation build if the fed funds rate remains unchanged. Early data for the current quarter are inconclusive about any slowing in the expansion. Higher compensation costs and a slightly faster rise in the CPI in recent months are possible early warning signs of accelerating inflation, but that evidence also is not conclusive. The acceleration in M2 also might be an early warning sign, but that too is questionable. So, with data that remain unclear, we basically are still in the business of balancing risks to determine what the appropriate course for monetary policy ought to be. The risks for the real sector are, in my judgment, still tilted toward the upside as they were in March. The risks in the financial sector also are tilted in the direction of excess. Some examples are the narrowing of spreads, strong competition for lending that has led to an easing in credit terms, a high level of consumer debt and personal bankruptcies, expansion of subprime lending with questionable terms--for example, 125 percent loan-to-value ratios for home equity lending--rising prices of homes and office buildings, rapid expansion of REIT activity, narrow risk spreads between Treasuries and corporate bonds including junk bonds, and rapid growth of the junk bond sector so far this year. I would also mention the stock market, where P/E ratios seem out of phase, and the strength of the merger movement, with merger offers that involve growing premiums over current stock prices. None of these signs is conclusive individually as an indicator of major financial excess. One can make that case, but I don't think it is that convincing a case. They do bear watching, however, because excesses in the financial sector can easily undermine the pursuit of maximum sustainable growth and output. Where I come out is that our ready, alert position of recent weeks remains appropriate, although we certainly have a number of things that we need to watch closely going forward in the coming weeks.",586
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"I don't have a lot to say about the District economy today, Mr. Chairman. There hasn't been much change in our regional picture since the last meeting, and overall it doesn't differ that much from the national picture. With that in mind, I thought it might be more useful to relay a few comments that made to me recently. He is a major real estate developer who is active in the mid-Atlantic region, most of the Southeast, and parts of the Southwest. He called me on May 11 to express some concerns about what he sees going on in his sector of the economy. First--and this differs from a lot of the information we're hearing--he said that prices of construction materials that he is familiar with have been rising sharply very recently, especially the price of concrete. Second, he indicated that there are now very high absorption rates for office space in most parts of the country. He said that rents are rising and that he actually has seen some acceleration in rent increases most recently. To pick up a little on what Ed Boehne just mentioned, he also said that the amount of money available for speculative investment in real estate is beyond anything he has seen in his long and very active career. Finally, at a recent meeting with other large-scale developers from across the country, he said the general consensus was that there are clear signs in many markets of some overheating in the commercial real estate sector. With respect to the national economy, for several quarters there has been a tug-of-war between those who expect real GDP growth to decelerate appreciably, including the Greenbook, and those who think that strong domestic demand will continue to propel strong economic expansion. With the Asian drag on net exports expected to peak soon, the Greenbook, as we have been discussing here this morning, is now predicting that a significant inventory correction will bring about sharply slower growth in the second quarter. Now, it is certainly true that inventory accumulation was quite robust in the first quarter. But as I see it, inventory-sales ratios are still very much in line. I don't hear much anecdotal evidence of excessive inventories in my region. So, they may or may not be excessive. But in general, it is hard to escape the conclusion that at this point predictions of a deceleration boil down to a general feeling that the expansion will have to slow from its current track on general principles, which is certainly not an unreasonable view to take. But as I see it, even if the expansion does slow, the growth of demand has already outstripped the growth of productivity for a long time. Mr. Chairman, you expressed some concern about this in testimony back in October as I recall. Since then we have seen what has happened in labor markets. We have had average monthly growth of about 200,000 jobs, which is about double the trend growth in the labor force. Everybody agrees that the labor markets are extremely tight, and that seems at least to some degree to pose an inflation risk going forward. On the other side of the issue, people like me have been predicting higher inflation for a long time, and those predictions certainly have not been borne out by events. So, I think a little humility on our part is pretty much in order at this stage and I acknowledge that. But frankly, as I look forward and try to assess the risks in the outlook, I still think that the key risks are on the inflation side. It occurred to me that it might be time for me to sit back and review, with the help of my staff, what the analytical basis for that concern might be. I would like to summarize that analysis for you this morning, and I will do so quickly. It has to do with real interest rate behavior and what that might be telling us. First, it seems clear enough at this stage that permanent productivity gains are a major force driving this economic expansion. The staff has revised upward its estimate of productivity growth. That revision in turn is consistent with the higher level of stock prices in the current Greenbook forecast. If households similarly are now beginning to think that their recent real wage gains and their stock gains are going to be sustained, that might help to explain some of the extraordinary current strength in consumer demand. If permanent productivity gains are in fact driving the expansion at this stage, one would expect on general economic grounds to see higher real interest rates as consumers borrow against expected future income gains and firms borrow to take advantage of favorable investment opportunities. Sure enough, real interest rates are rising, and they already are relatively high. That then raises the key question in this analysis. Is it possible that our policy stance is still inflationary even though real interest rates are at a relatively high level? I think it's possible. First, if technological innovations have raised the marginal product of capital, and I believe many would agree that they have, then firms naturally would be willing to borrow at high real rates to finance acquisitions of new capital. But as the investment boom progresses, one would expect the capital deepening to cause the marginal return to capital to decline over time. That in turn would be consistent with the pattern of real interest rates where current short real rates are above expected future short real rates, resulting in a downward sloping real yield curve. The fact that the actual real yield curve now is basically flat at least raises the possibility, even though real rates are high, that with monetary policy we are holding current short real rates below the level they are trying to reach. Given that possibility, I think the bottom line is that we may not want to take too much comfort, from the standpoint of evaluating our policy stance, from the fact that real rates have been rising and are fairly high. Finally, the possibility that policy is too easy seems to me to be made all the more likely by the strong growth in M2 and other monetary aggregates, at least until very recently. That growth has carried M2 above the 1998 target cone and even at one point, if I am reading the Bluebook picture correctly, above the wider band that we used to refer to around here as the Volcker tunnel. The bottom line is that I still think there is good reason analytically and fundamentally to be concerned about inflation even though we have not seen very much of it lately.",1258
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, economic activity has remained strong in the Twelfth District in recent months. We have seen particularly strong job growth in Arizona and Utah where the rate of expansion has reached 4 percent. Job growth in Washington State is running above 3 percent, and the local unemployment rate is falling rapidly. With a tight Seattle area labor market, Boeing aircraft recently announced a decision to shift some if its production to southern California. But the supply of available workers in southern California is dwindling too. The Los Angeles area unemployment rate has fallen almost a full percentage point over the past year to 5-1/2 percent. For California as a whole, employment growth remained solid in the first quarter of 1998, although not quite as robust as it was in 1997. Growth was boosted by sectors such as construction that are benefiting from low, longer-term interest rates. We do see some slowing in some manufacturing industries in California and other District states, with exports diminishing and import competition from Asia picking up. The volume of cargo through the District's six major seaports--and of course two of those, Los Angeles and Long Beach, are huge--showed a large rise in imports and a drop in exports in the first quarter. Employment in District computer and electronics industries has been weak in recent months and additional job cutbacks have been announced. In many cases, the high-tech firms that are cutting back have lost market share to other domestic firms and are now making competitive adjustments to cut costs. I'm sure you've seen the list of these companies: National Semiconductor, Silicon Graphics, Syntax, Netscape, Apple, etc. The adjustments have proceeded quite quickly, so it is possible that this recent period of intense, competitive adjustments among domestic firms may be nearly complete. Even with these pressures restraining manufacturing employment in our region, the overall District manufacturing sector still managed to add jobs at about a 2 percent rate in recent months. In the national economy, the continued combination of strong economic growth and low inflation in the first-quarter GDP report made it more likely that economic events are being driven by favorable aggregate supply conditions. Based on that experience, I am leery about predicting even a modest slowdown in economic activity in the immediate future. However, some slowdown does seem to be the most plausible outcome. We show real GDP growth of around 2-3/4 percent in the current quarter and also in the second half of this year. The economy appears to be experiencing modest contractionary effects stemming from the problems in East Asia. In addition, employment growth in March and April taken together recently provides a bit of evidence of a slowdown. With regard to inflation, tight labor market conditions certainly represent the main risk of inflation problems ahead. The large recent drop in the unemployment rate has intensified this risk a bit even though the rate may bounce back somewhat in coming months. Fortunately, a number of other factors have been holding inflation down including, as we know, ample manufacturing capacity, some increase in productivity over the past year, a higher dollar, lower oil prices, and diminished inflation expectations. In light of these considerations, our forecast shows core CPI inflation holding steady at just over 2 percent this year and next. However, even if there has been a positive supply shock, I doubt that recent economic growth rates are sustainable. I remain concerned that if real GDP growth does not slow soon, the effects of tight labor markets will begin to show through to price inflation. Thank you.",695
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, the Seventh District economy is expanding at a moderate pace, with few signs of slowing growth and increasingly frequent reports of upward pressures on labor compensation. Our robust housing markets have strengthened retail sales and also have boosted activity in steel, gypsum, cement, and other construction-related industries. April's light vehicle sales were at an annual rate of 15.4 million units; that is the highest so far this year. Our contacts indicate that sales so far in May are running above the 15 million level. Sales are being sustained by incentives, although relatively more of the Big Three sales are retail rather than fleet sales compared to a year ago. Expansion in overall manufacturing activity declined slightly from March to April according to the Purchasing Managers' surveys from Chicago, Detroit, and Milwaukee, but activity remains at high levels in virtually all of the industries. In general, we are not getting many reports of an adverse Asian impact on our manufacturing sector, although there has been a sharp reduction in demand from Asia in high-tech electronics. Labor markets remain very tight and the unemployment rate in our five states was 3.8 percent in March. Moreover, Manpower's report on hiring intentions for the third quarter shows no easing in labor demand, as these hiring plans are the highest since 1978. This report will not be released to the public until May 26, so it should be treated as confidential until then. In their own business, Manpower has seen two different markets: a softening in demand for industrial workers but strong demand for white collar and technical jobs. Manpower is also seeing increases in compensation, and other contacts increasingly are reporting a pickup in wage growth as we were talking about before. One of our directors in the trucking industry reported a bidding frenzy that has raised the wages of employees, not just for drivers but across the board in his industry. Another director noted that several labor contracts with firms in Iowa were leading to rising labor costs. However, the increases remain relatively modest so far, and more importantly they are being offset by productivity gains according to our directors and other business contacts. Still, employment costs in the Midwest increased at a faster pace in the last year than in the nation and that has been the trend for the past four quarters. While regional CPI data can be volatile, consumer price inflation in the Midwest has been accelerating since December, in contrast to the rest of the nation. Similar to trends in the nation, however, increases in consumer prices are being driven by the prices of services. In line with what Mike Prell mentioned before, all the business people I talk to in the goods producing sector continue to emphasize that they cannot raise prices because of fierce competition. Turning to the national outlook, we have revised upward our forecast for both real GDP growth and core CPI inflation. The Asian financial crisis seems to be having a significant effect on the trade-sensitive manufacturing sector, but the direst predictions about its effects seem increasingly less likely to materialize. Moreover, domestic demand remains very strong as reflected in the unexpected strength we have already seen this year. Altogether, we see GDP growth of about 3 percent for this year. This is roughly 1/2 percentage point higher than we were looking for at the time of our last meeting and above estimates of a sustainable trend. Labor markets are extremely tight by all measures. Nothing in the growth forecast seems likely to change that in the near future. Moreover, labor supply may have reached its outer limits. After growing rapidly for two years, the labor force has been increasing more slowly in recent months, and a period of slower-than-trend labor force growth represents an additional risk to the forecast. Given these developments and the prospect that benefit costs will increase more rapidly, employment cost pressures seem very likely to intensify significantly. Taking all this into account, we have raised our forecast for core CPI inflation this year to 2-1/2 percent. Given the changes in methodology, this would be about 1/2 percentage point worse than last year. At the time of the last meeting I thought the risks had shifted to the upside. They now seem to be more decidedly in that direction.",832
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The New England economy continues to show remarkable strength. With employment growth only slightly below the nation's and an unemployment rate that remains lower than elsewhere, the District economy remains strong and vibrant. As evidence of this, regional manufacturing jobs recently increased at a pace faster than in the nation and merchandise export growth was faster as well. This may reflect the fact that we are a little less oriented toward Asia than some other parts of the country. The trend in manufacturing jobs reflects a turnaround in the region's computer industry, the successful commercial conversion of some formerly defense-intensive manufacturers, and growing strength in the region's equipment and transportation industries. Our labor markets remain very tight even at entry levels. Here are a few anecdotes. We cannot hire check clerks for our nighttime processing operations to deal with the increase in volume from the shutdown of the Lewiston RCPC. One of our directors, who is the publisher of the major newspaper in New England, cannot find people to deliver the papers. Employers associated with the tourism industry in Maine are concerned, similar to what President Boehne mentioned, about filling summer jobs in tourism in southern Maine. Pressure is most widely felt, as it has been in the past, in the computer, engineering, and other technical job categories, and there we are seeing wage growth at double-digit rates. Other wage increases reportedly range in the 3 to 5 percent area and do not seem, at present anyway, to be presenting a problem. Real estate markets are very tight in downtown Boston. Speculative building has picked up in the western suburbs, given the total lack of class A space downtown. Rents are up everywhere. Elsewhere in the region, real estate markets are improved and even quite active, particularly in suburban Providence, but the sizzle remains confined to the Boston metropolitan area. Asia is a concern and its impacts are felt in different ways. Some see delays and cancellations of existing orders and some decline in new orders from Asian customers. Others see renewed competition from Asian sources. This is reflected in the commentary of a Providence manufacturer of gold jewelry. Finally, still others see risks in the chronic structural problems of China and Japan, but as I noted earlier, our region does tend to be a little less exposed to Asia than others. Turning to the national scene, our own forecast has overall GDP growth just below 3 percent in 1998 and has it trending down to our estimate of potential in 1999. We see stable unemployment over the period and, unlike the Greenbook, we have not made any major changes to our estimate of trend versus cyclical productivity. Thus, we see an uptick in core CPI inflation not unlike what President Moskow was talking about. By that measure, inflation ends up somewhere in the high 2 percent range by the end of 1999, even when adjusted for changes in measurement. I must say that I have some questions about the Greenbook's forecasts of productivity and unemployment and the related impact on inflation projections. It seems to me that if productivity trends over the past couple of years, as opposed to looking forward, were truly higher and the economy's potential greater, unemployment should not have declined as much as it did over the past two years or so. But it did decline from the mid 5 percent range to the mid 4 percent range. I do not know how to measure inflation consistently. I wonder if this is a metaphysical question about whether inflation is actually rising even though we cannot see the rise because the way the CPI is measured has changed so much. The nexus between unemployment and the rising wage pressures and wage costs on the one hand and final prices on the other is a little muddied. But even given that muddiness, I do think that there is reason to be concerned about the risks to the inflation forecast. It is very difficult to see the expansion slowing as much as it does in the Greenbook projection and frankly easier to see it speeding along as it has been, with some sizable risks on the upside with regard to inflation. I would like to pick up on President Boehne's comments in terms of not relying on any of the individual smoking guns in the financial markets, but when viewed altogether they add up to a sense of a real risk in those markets as well.",862
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Cathy ended with smoking guns. The main thing that has been going on in Texas for the last week and a half is second-hand smoke from forest fires in Mexico and central America. It has put a heavy haze over all our major cities. The Eleventh District economy remains strong, but we believe our strong rate of growth has slowed a little since the March FOMC meeting. The primary factors that have contributed to this slowing are weaker demand from Asia, the general softness of oil prices, shortages of construction workers and cement, which have put a cap on the level of construction activity, and some early signs of slowing in the Mexican economy. Demands for three of the Dallas District's major products--semiconductors, chemicals, and energy products--have weakened slightly over the past couple of months. Intel Corporation recently halted construction of its $1.3 billion Fort Worth plant, and numerous chip manufacturers have announced small layoffs at their plants in our region. One of our directors reported at last week's board meeting that the global market for semiconductors is expected to shrink 2 percent this year, with the strongest demand coming from Europe for the first time in 20 years. Demand from Asia overall is expected to be flat, but that from Japan is expected to decline by 14 percent, and demand in the United States is anticipated to shrink slightly. These forecasts are in value terms. Physical output is growing in the District, but it is not keeping up with the price declines. Oil drilling activity has slowed, and the rental price of rigs has begun to reflect that slowing. Several large oil producers have announced cuts in their capital budgets for the coming year after reporting sizable declines in profits for the first quarter. Residential and commercial construction activity remains strong. Dallas recently passed a number of bond issues that increased the demand for construction resources. Many projects are being slowed by a shortage of cement, which has been put on allocation for the last few months and is expected to remain so for months to come. To give you an idea of the seriousness of the cement shortage, Texas A&M may not be able to complete their football stadium in time for the season, and they have some alumni in the cement business. [Laughter] Overall inflationary pressures remain subdued in the Eleventh District. Office rents continue to rise, but the rate of increase has slowed. New office buildings are coming on stream, but demand for them remains strong. Labor markets are tight, but firms are becoming increasingly innovative and flexible in their search for workers and in the way they deal with them. The health of the Mexican economy represents an important downside risk for the Eleventh District. Mexico has been affected to a much greater extent than Texas by the Asian crisis and by the decline in oil prices. Oil exports fund roughly 40 percent of Mexico's federal budget. The budget has been cut twice because of falling oil revenues, and Mexican officials have warned that a third cut may be on the way. Mexico's consumption industry could be hard hit by budget cutbacks because it is heavily dependent on government contracts. The Dallas Fed produces a Mexico leading economic index, and it has been on a downward trend since last October. The fall in real oil prices has been the largest component pulling down the index, but over the last three months, five of the seven indicators have been negative. Turning to the national economy, I am pleased to see the Greenbook forecast of1/4 percentage point increases in productivity growth and potential output. We believe, however, that the Greenbook remains a bit too pessimistic on the inflation numbers. While it is reasonable to agonize and fret over future inflation risks, we need to recognize our accomplishments. The GDP deflator in 1997 was the lowest since 1964. The first quarter's annualized change of 0.9 percent in the deflator was a 43-year low. This year's CPI has grown at the slowest rate since 1986 and before that since 1964. In 13 of the last 16 months, the PPI has been zero or negative. This run of nonincreases is unprecedented, and the rate of deflation shown in the PPI is comparable to that in 1952 - 1953. Against this backdrop, I am pleased rather than displeased by the 4.3 percent unemployment rate reported for April. I would be more concerned about losing ground in our constant battle against the forces of inflation if there was some compelling evidence that stimulative monetary policy was behind the economy's output growth realizations. It seems to me that our recent robust real growth is more of a supply-driven phenomenon and is thus disinflationary rather than inflationary. Given the upward creep in short- and intermediate-term real interest rates and given the strong dollar, the flat yield curve, and soft commodity prices, it appears that monetary policy is not doing anything that would add to the virtual lack of inflationary pressures. This seems like a good environment for us to remain watchful and patient.",1007
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. On balance, the pace of expansion in our Southeast region appears to have accelerated somewhat since our last meeting. Retail sales that were soft in March picked up throughout the region in April. Manufacturing, which was exhibiting some slowing seven weeks ago, has come back strongly as measured by production and shipment data reported in our latest regional survey. Our aerospace and defense sector has been boosted by several important new contracts involving General Dynamics in Tallahassee, Pratt & Whitney in Palm Beach, and Boeing in Huntsville. Somewhat offsetting those areas of strength and adding to Bob McTeer's comments, the drop in oil prices has resulted in some contraction in onshore drilling activity, and orders for onshore drilling supplies are reported to be off some 20 to 30 percent. Offshore drilling has been less affected. Also, the record-breaking bookings at our regional tourist attractions have come down from their earlier blistering pace. But new attractions are coming on line, like Disney's new Animal Kingdom, and are expected to keep tourist spending at high levels. Commercial real estate activity remains healthy, but we continue to watch for signs that undesirable speculative activity is beginning to emerge. Other than pockets in Atlanta and perhaps too much of a good thing in a couple of Florida markets, we do not detect such problems. There continue to be reports, as Al Broaddus suggested, from various sources of large amounts of money looking for deals. Although we hear hints of relaxed lending standards, they always involve the other lender and our examiners have not yet uncovered any serious problems. The interesting stories about coping with tight labor markets continue. At an earlier meeting, I reported on a Tennessee trucking firm that had idled 10 percent of its fleet for lack of drivers. Over this past period, we have been told that Wal-Mart has postponed some plans for expansion in south Florida for lack of workers. There is a shortage of some 8,000 welders in the Louisiana oil patch and 2,000 more at the Avondale shipyards in New Orleans. Consequently, ship-building and steel structure manufacturing schedules are being pushed out substantially. The oil exploration slowdown should help relieve that bottleneck a little. I find it interesting that these firms in large measure are passing up the opportunity to expand output rather than bid up wages and erode their margins. In a related development, reported that the hospital said ""no thank you"" to a major health care provider that was demanding still more cost concessions. Generally across our region, unusually large wage increases continue to be primarily in certain skills. Finally, the Asian effect watch still is not uncovering any significant, negative effects in our area. There are modest losses of business in various industries. The hardest hit by far is the pulp and paper business. A number of paper plants have shut down for several weeks to adjust production. One plant in Georgia with a large volume of Asian business is contemplating shutting down permanently. In addition, the port of Baton Rouge saw its tonnage go down 50 percent in March compared to a year ago and much of that was lost pulp and paper shipments. All sectors and all geographic areas considered, our region continues to exhibit good growth and good balance. Turning to my views on the national economy, as everyone else has observed, we find ourselves with a rate of growth that is measurably stronger than all of us expected. Strength in the first quarter, especially with the upward revisions we expect, was well beyond what I was looking for. Aggregate demand remains strong and the sectors where I have been looking for some slowing--consumer spending, housing, and business fixed investment--have not fallen back as I expected. Had it not been for the drag from net exports, we would have blown the doors off, as the kids say. The Greenbook and my own staff's forecast once again lay out the rationale for some slowing. Should that materialize, it seems likely to produce an inflation path with little or no upward movement. I would find it acceptable to maintain a core rate of inflation near the one we have been experiencing. My personal judgment as to what lies ahead is tempered, however, by our virtually consistent underestimate of growth in recent times. I also am influenced by the sense that I get from talking with directors, a member of my Small Business Advisory Council, and others around the region. That sense generally is one of ""damn the torpedoes, full speed ahead."" Given the high levels of confidence, continued low levels of interest rates, and readily available credit, I conclude that the probability of getting the slowing that we have in our forecast is not as high as we would like, at least not without a modestly more restrictive monetary policy. Among the people I talk with, I sense stronger and stronger support for a low inflation monetary policy. While we have heard a lot of voices recently suggesting that we leave well enough alone, I think a preemptive move based on our best forecast and judgment would reinforce our commitment to price stability. It would come to be accepted as prudent, forward-looking policy. Thank you, Mr. Chairman.",1025
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The preponderance of the evidence that has become available since our last meeting is generally consistent with the path that the District economy has been on and also with the path that the national economy is currently on. That is, much of our regional economy remains sound and healthy. Labor markets remain very tight. Wages are going up more rapidly than formerly, but not as rapidly as I might have expected given the tight conditions in our regional labor markets. Some of that wage restraint may be due to the fact that there are more and more unconventional ways of compensating people that we may not be picking up in our reports and part of it may be consistent with the thought in the Greenbook forecast that people recognize that they are in fact better off in real terms. The one exception to this is in the natural resources industries and in agriculture in particular. I commented at the last meeting about the reemergence of a two-tier economy in our District--something that we saw in the 1980s--and it is reappearing, particularly among wheat producers and some livestock producers who clearly are having a very difficult time. A combination of wheat disease and reduced prices is affecting output and incomes. It is hard to convey the sense of despair that some of these producers currently feel, but there will undoubtedly be further contraction in the number of producers in parts of our agricultural economy. The land is likely to remain in cultivation, but the trend is toward fewer producers. That, of course, is something that has been under way for decades in the District, but it is now occurring in a period of accelerating economic activity. As far as the national economy is concerned, abstracting from short-term fluctuations in inventory spending, I am convinced that aggregate demand will continue to grow at a fairly healthy clip. There is a wide variety of reasons for that. One set of reasons has to do with financial conditions, and they have been commented on. Credit seems to be readily available. The monetary aggregates have been growing rapidly. There are many implicit signs such as the number of mergers and so forth that suggest there is not much monetary restraint. In my view how things play out will depend on what happens on the supply side. There, I think productivity is a key. Of course, productivity is very difficult to forecast. It might grow rapidly enough for supply to keep pace with demand, and we could get a very favorable inflation outcome. I would be inclined to leave it at that were it not for what I take to be quite accommodative financial market conditions. I referred to a few things there. My reading of real interest rates, as I look at the charts labeled ""Financial Indicators,"" is that while they are not low, they are not exceptionally high by any stretch of the imagination. If we think about how the interest-sensitive sectors of the economy have been performing, we certainly would not conclude that real interest rates have exerted much of a restraining influence. One could always argue, I suppose, that those sectors would be growing even more rapidly if real interest rates had not risen somewhat, and that probably is true. But they certainly have been doing well under current circumstances. So, my concern is that we have a set of financial conditions that is setting the stage for a rate of expansion of aggregate demand that is going to exceed what supply is capable of accommodating.",676
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. As has already been mentioned, the U.S. economy is extremely strong, and the strength is all the more impressive in view of the drag that is being exerted by developments in Asia and by the weakness in the agricultural sector that Gary Stern just mentioned. Central to this assessment, of course, is the labor market. People are working, spending money, buying houses and stocks, and baby boomers are planning for retirement. I'm going to focus my comments today on inflation and the stock market. First of all, by almost any measure inflation appears to be well contained, even falling. To be fair, some of the improvement in the CPI is accounted for by the statistical and sampling changes, and much of the improvement in the broad indexes is accounted for by energy. Although that could turn around quickly, it does not appear that energy pricing is necessarily one of those temporary serendipitous factors bringing about disinflation or even deflation. More importantly, in the current low inflation environment, businesses and households have available very clear cost and price impulses reflective of pure supply and demand pressures. That is, inflation is not distorting market supply and demand pricing messages. For example, weak demand from Asia means that there is little pressure in international commodity markets. Domestic service and other labor intensive markets that are not directly affected by international competition are seeing some price increases. Although there are exceptions, even wage pressures seem mostly confined to the high labor demand areas like those for computer specialists, stockbrokers, and other capital market or risk management people. Some of that pressure is showing through in the averages but not nearly as much as might be expected with a 4.3 percent unemployment rate. These clear market pricing signals have given employers the wherewithal to focus on their costs and the final product price that the market will bear. If the costs of production, investment, or expansion cannot be recovered in the market, plans are changed. Inventories can be more tightly controlled with available technology. Gone are the days of padding planning estimates of production and budgets with the knowledge that inflation would provide room to cover production, inventory, or other forecasting errors. The result, of course, is significantly enhanced productivity in today's economy. This leads me to a few comments on the stock market. No matter what model is used, valuation comes down to a function of earnings and interest rates. It may be that market participants are forecasting improved productivity, which implies higher earnings, or they may be expecting lower inflation, which implies lower interest rates. Either would support P/E multiples in the current range. Or perhaps the bubble economy article in The Economist a few weeks ago is right and the market is wrong. Where does that leave us? I for one think it would be a mistake to focus monetary policy on one segment of financial asset prices, namely the stock market. First of all, monetary policy is a broad-gauged tool that is not sufficiently fine-tuned to single out one set of asset prices, particularly one a few equations away from short-term interest rates. The Economist and others have suggested that the bubble could be pricked with a small rate hike. But with the baby boomers focused on investing for retirement, the market might bounce right back. It probably would take a sizable interest rate increase to move the market--one that would invert the yield curve--and such an increase probably is not justified by the rest of the economy. The move might have to be reversed shortly after it is made in any event. The better strategy, it seems to me, is to focus on the real economy and let market participants do the stock market pricing. In summing where we are with the current economy, Asia remains a source of uncertainty and for now U.S. inflation is well contained. But unless growth slows considerably either from reduced final demand or inventory adjustments, our virtuous cycle could burn itself out as inflation heats up. Thank you.",789
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. In addition to our usual discussions with directors and advisory council members, we also did a series of what I think of as listening sessions in smaller cities around the District. Their general tone was captured well by one banker in one small city who said that people have more money than sense.",59
-fomc-corpus,1998,More dollars than cents! [Laughter],9
-fomc-corpus,1998,"said that every day people ask him to find them a deal so they can put their money to work. But for balance, who says that everybody already has as much money as they need so that the bank cannot find any more borrowers because there are too many lenders. He constantly argues that we should lower interest rates so the business firms will be more willing to borrow and produce more to catch up with demand; otherwise, we are going to have inflation. [Laughter] This leads me to be concerned about how directors are selected. [Laughter] A theme among other bankers around the District is that lending is being driven by asset assessments and not at all by cash flows or concerns about future cash flows. Bankers complain a lot that pension funds and insurance companies are doing deals that no sensible banker would be willing to consider. They indicate that income properties such as hotels, motels, strip mall outlets, all kinds of outlet stores, restaurants, and auto parts stores are having problems. The turnover in such existing income properties is occurring at prices that these bankers see as questionable. In Zanesville, Ohio, for instance, they reported that three of the five new auto parts stores that were built last year already were closed in the first quarter of this year. I guess the capitalist system is working in a certain sense. Losses are being incurred. Another frequent complaint has been the Federal Farm Credit Banks. One banker said he lost 15 percent of his ag portfolio in the first quarter of this year alone to the Federal Farm Credit Banks. That caused another banker to say that they decided to get completely out of ag lending because they could not compete on equal terms with the Federal Farm Credit Banks. One banker asserted that when he talks to customers about borrowing more, they are unwilling to consider the possibility of a rise in interest rates in the future. They believe that the economy is in a permanently low interest rate environment. To his frustration, when he tells them that they have to allow for the possibility that interest rates could go up, they just dismiss the thought as being unrealistic because the economy has entered a new era. So, he argues that even a very small interest rate increase would have a significant sobering effect on acquisition prices that are being paid. Another banker commented that all of his customers are bankrupt; they just will not know it until interest rates go up. In manufacturing, directors have cited numerous examples of acquisition prices that they think are too high. For example, equipment business said that he is seeing acquisition prices worldwide that he thinks are out of sight. In retailing, Dillard Department Stores bought Mercantile Stores on Monday of this week. When the CEO of Mercantile Stores, who is on my Cleveland board, called me over the weekend, he simply said that he approved it for his shareholders. That was the best he could say about the transaction. We heard more reports of sharp price increases in farmlands. One that I thought would be of special interest to Don Kohn is that while we were in Wooster, Ohio, we heard that over the course of the past year over 50 Amish families have sold raw land and moved to a neighboring county. They told us that farmlands that were going for $2,000 to $2,500 per acre a year ago are now being sold for over $4,000 an acre. As an example of the tightness of labor markets, one banker said that whenever he sees a customer talking to a teller for more than a minute or two, it turns out that the teller is getting a job offer. [Laughter] With respect to construction, one director said that this spring he has seen more announcements of new projects of every type than he has ever seen in the region before. This director is an official of a building and construction labor union. The surge in new projects may be reflective of the mild winter and early spring. In any event he sees announcements of new projects involving water, sewer, transportation and auto plants, hospitals, schools, road construction, and hotels all over the District. In Newark, Ohio, three new hotel projects have been announced by major chains, financed by institutional investors. So, we will have plenty of hotels in Newark. As others have noted, there are numerous reports of health care cost increases. The most extreme that I have heard involves Pennsylvania Blue Cross and Blue Shield, which is requesting a 30 percent increase this year. Turning to the national situation, over 25 years ago Leonid Brezhnev said that the fundamental problem we faced was that we can only distribute and consume what we actually produce, and he felt that a capitalist plot was involved. But we do face that problem. How much demand is out there, what is fostering all of this demand, and what is the probability that we are going to have adequate aggregate supply to keep up with all of it? A year ago, I was hearing reports of good economic conditions, but also about the need to be cautious about taking risks. Now I only hear reports about good economic conditions. People's expectations about returns that are available to them on a variety of investments clearly have risen very sharply, whether it is direct or indirect, in the equity markets, in residential and commercial income properties, and in various types of new business ventures. So, in a relative sense, they view the costs of borrowing funds for investing as having gone down compared to what they can get on more secure long-term financial instruments like Treasuries. I thought that Al Broaddus' initial analysis on this point was correct. We have all become accustomed to repeating the Chairman's way of phrasing the objective of our policy and its success as being inflation that is so low that people do not even think about it. In that sense, we have been meeting that criterion in terms of output prices. But a corollary also has to be that we do not see people making decisions based on the assumption that asset prices will rise forever relative to output prices. In that sense, we are not meeting the criterion, and we are not being successful. We all know that asset prices cannot rise forever relative to output prices or income streams. So, the good news is that this too will end. The question is how and when. Over the last two years through the first four months of this year, I have seen that not only is demand for output from households and businesses very strong, but it also is continuing to accelerate. I believe such demand is being fostered by excessive growth of money and bank credit and we see a lot of evidence that supports that argument. We need to see that growth in demand slow down. It is not a question to me of no change or a small change in the stance of current monetary policy in terms of the interbank overnight rate. It is a question of a small change now or a much bigger change later on.",1383
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, the Kansas City District economy continues to grow at a solid pace, without a lot of change since our March meeting. Manufacturing remains quite healthy. Our survey of manufacturing for April found moderate increases in production, shipments, and new orders. Retail sales remain robust. Real estate sales and construction activity still look strong. Over the past year, we have seen median increases in housing prices ranging from 8 percent in Denver and Kansas City to as high as 15 percent in our smaller Omaha market. There has been more REIT activity in the District's housing markets. District energy activity continues to slow despite some firming in oil prices. Our farm economy remains stable, but there are some signs of weakness. District wheat production is down in terms of acreage, but the quality of the crop is excellent. So, perhaps there will be some pressure on wheat prices. The beef and pork industries are under some pressure, but overall those industries appear to be stable for now. District labor markets remain tight, and there is continued evidence of wage pressures. Even so, there is still very little or only modest pressure on output prices. Turning to the national economy, like others we have raised our projections to reflect the very strong first quarter. That does turn our attention to the issue of inflation. In that regard, some of our discussions have focused on the issues that we've been talking about around this table. First, with regard to pressures on resources, I am convinced that the tight labor markets across the country suggest that wages and labor compensation more generally are going to increase more rapidly. That outlook concerns me especially if the productivity growth numbers decelerate as has been reported most recently. On the other hand, capacity utilization is below its historical average. Secondly, we are watching carefully the temporary factors affecting inflation, although what we mean by temporary may be changing, especially as we look at food and energy prices that are still basically stable though no longer falling. In energy, nonoil import prices continue to benefit our economy. If these benefits run out, we may well see rising inflation. But whether and when they are going to run out is the question. Finally, like others here I am concerned about the financial side of the economy. I am concerned about the high levels of money growth. It remains to be seen if the projections of slower monetary growth are going to materialize. I see that as a very important factor for us to consider because I think the rapid growth of money is carrying over into the financial sector where money is looking for places to be deployed for a high rate of return that people have come to expect.",523
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I think that we are approaching crunch time, and there are several arguments for tightening. There are several arguments for sitting tight as well. Since by and large the tightening arguments already have been made around the table, let me give some of the arguments on the other side of the question. The first is Asia. It seems to me, and I think it seems to others, that the Asian situation has worsened again. There are two countries that are especially problematic in very different ways, Japan and Indonesia. I think the spillover effects in the other Asian countries are also a little more disturbing than they were when we met in March. So, there could be a bigger impact on the United States than I felt there would be the last time we met. Secondly, let me talk a little about price movements. There is a slight acceleration of inflation in the forecast. In a way we should be expecting a slight acceleration because we have had some positive supply shocks. Simply as these wear off, we will get some acceleration. The Greenbook mentions a few shocks on the other side, one of them being tobacco. I do not quite know how to interpret the rising rent shock. That may be a shock or it may not be one. In any event, there are some shocks on the other side. In my view, the basic message from the price side is that on their face these price movements seem quite minor. Why do we worry about them? That brings up the third point; it is the NAIRU. We worry because of the unemployment gap. Some of that unemployment gap goes away in the Greenbook forecast. I gather from the comments that some of you made that the gap goes away in your own forecasts as well. I personally think that some of this gap will go away when future econometricians reestimate their equations for the 1990s. This does seem to be a relationship that is shifting, and time series analysis is not a very good way to analyze that kind of shift. Let me also put on the table a new uncertainty about NAIRU that I have just begun to think about. I have not heard too many people mention it, but it does strike me that compared to earlier times, firms that need additional labor are increasingly farming out their production to other countries. Labor conditions are not tight in other countries, especially in to which the production is being farmed out. This may be a new trend. I do not know, obviously, if that is the case or if we could ever demonstrate it in any rigorous way, but I think it is possibly important. Let me also talk about the bubble issue. First, it is mentioned in the Greenbook that M2 growth has slowed and is wending its way back to within what I will call the Kohn cone. On the stock market, of course the price indexes are high. But when we compare the earnings/price ratio and long-term real interest rates, we find that the equity premium is still positive by about 1 percentage point. None of us knows what the equity premium should be, but I personally do not find it surprising that this equity premium has dropped slightly. The reason is that one of the things that financial innovation has done is to make it possible for average people to buy a more diversified portfolio of equities. The upshot of that is a lower equity premium. I am still, as I have been all along, uneasy about this situation, and it makes policy a very tough call. But I think that the uncertainties are great enough for us to make a strong argument for holding steady for now. What that does mean, as many others have noted, is that when and if we do make a change, which might not be too long from now, we may have to move sharply. I think we take that cost upon ourselves but for me it is a cost worth bearing. Thank you.",789
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Second District's economy continued to expand at a sturdy pace in the first quarter, but there have been some signs of slowing in the manufacturing sector in recent weeks. Job growth in New York and New Jersey slowed a bit from a very brisk fourth quarter, with job losses in manufacturing and government more or less compensating for strong gains in most other sectors. As a result, the unemployment rates were little changed in the two states. Retailers are happily reporting that sales continued to run ahead of their plans in both March and April, and they are satisfied with their inventory levels. Residential and commercial real estate markets both retain a firm tone. On the residential side, our data indicate that new home construction, existing home sales, and home prices strengthened in the first quarter. Office rents in New York City, especially in Manhattan, rose sharply in the first quarter, and vacancy rates continued to fall. Local banks report some slowing in the growth of loan demand, but they also report further declines in delinquency rates, especially in consumer loans, so the banking sector looks rather good. At the national level, we do not quite find ourselves ready to buy the productivity improvement argument in the Greenbook. Therefore, although we have about the same picture as the Greenbook for 1998, we have inflation rising substantially more and heading up toward the 3 percent level in 1999. If that should be the case, namely that productivity does not increase as the Greenbook says it will and that I personally hope it will, then I think we would be looking for a monetary policy correction toward the latter part of this year. But I believe we are now in a position in which we can look at the domestic economy and decide that patience has been very rewarding for the Federal Reserve Open Market Committee over the last couple of years. We are at a position that if we continue to get the productivity shock or if it becomes no longer a shock but a real improvement in productivity, then policy at its present level would be quite acceptable. Even if productivity growth does not continue to benefit us or other pleasant supply shocks do not come along, it impresses me that we do have some time to wait. When the Federal Reserve is in a position of being able to wait because that is, I think, the best policy for domestic purposes, it gives us the opportunity to give the international effects of our actions a rather high priority. From that perspective, I believe that most times the best thing the United States and the Federal Reserve can do is to manage our own economy well because of its huge importance in the world economy. At present, I sense that the world economic situation continues to deteriorate. The Indonesian situation is still very touch-and-go, with nobody sure of what the political developments are likely to be and the economy getting more desperately bad every day. Thailand and Korea are improving, but in both countries the improvement is in the external sector, and there is a very long and a very difficult domestic workout ahead for both countries. It seems to me for reasons that we discussed in conjunction with Peter Fisher's report earlier that the situation in Japan is, if anything, getting more risky, not less, and it continues to be the single, greatest threat to a stable world economy. Elsewhere in Asia, India's decision to test thermonuclear weapons caused the United States to react with financial measures against India, which the Indian economy may or may not be able to tolerate well. However, if Pakistan responds as it may very well do and we have to impose similar measures against Pakistan, its very weak economy could implode rather quickly. The measures that were taken against Mexican banks yesterday, however justified, are very likely to create considerable backlash politically in Mexico in a situation in which the leadership is already having difficulties, and they almost certainly are going to have some serious spillover effects on the Mexican economy. So, the rather optimistic view that one could have about Mexico certainly has to be tempered. Russia is getting ever more highly volatile. The history of Russia has been a long conflict between the westernizers and the nationalists. The nationalists now have a very popular hero available to them after General Lebed's election victory in Siberia on Sunday. The situation around them with NATO's expansion, however much everybody may think that is a fine idea, gives additional strength to the nationalists, and if they come to power, we are going to have a very destabilizing regime--destabilizing not only for Russia itself but for its neighbors. It seems to me that as we look around the world, we see a good American economy. The British are doing reasonably well, but unlike us, their economy does not appear to be benefiting from rising productivity. Therefore, a correction is likely for the British economy. Actually, the two good lights are continental Europe and ourselves. On balance, it seems to me that international considerations would say that an interest rate increase by the Federal Reserve, which could conceivably be justified domestically for preemptive reasons, would carry such a degree of risk internationally that I think it would be extremely ill advised. Thank you, Mr. Chairman.",1035
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. In the intermeeting period, I became more certain that the sense of upside risks that many of us expressed at the last meeting was continuing to hold true, and I have detected a bit of that sense today in our discussion around the table. However, I must admit that the economy is showing some signs of an ongoing uptrend and also of some possible emerging weakness. The first-quarter GDP, as Mike Prell said, was a ""stunner."" In my view, it does require some general reassessment of our outlook for the rest of this year. Early indications of retail sales and the orders and shipments data suggest that the robustness seen in the first quarter, driven by both consumers and producers, is likely to continue for the foreseeable future. Obviously, labor markets are tight, so there is not much more to say there. Manufacturing has not yet returned to its December levels. Factory output and operating ratios are below what had prevailed last year. However, manufacturing output did grow about 0.3 percent last month. So, while there are signs of weakness in that sector of the economy, it may be turning around a little. On balance, I would agree with the characterization that I heard before, which is that the evidence bearing on the near-term course of the domestic economy seems somewhat inconclusive. What worries me in this mixed picture is that there are some special factors that benefited us on inflation in the past that may well be on the wane now. In particular, I am worried about indications of some acceleration in compensation. It is true that the ECI increased at a low 2.7 percent annual rate over the three months ended in March, but the 12-month wage and salary compensation components have broken through the 4 percent level for the first time in several years. Health insurance costs may also be giving some indications of an uptick, even though the evidence is primarily anecdotal. I did not hear very much about that as we went around the table, but there was some discussion of that here at the Board. Now, these increases in labor costs may well be occurring at a time when productivity growth may have moved up to a new higher trend, but I do wonder if even 1.5 percent growth in productivity will be enough to offset overall increases of 4 to 5 percent in wages and salaries. The changes in labor compensation that may be ahead are particularly worrisome because I think they may occur in the context of flattening or possibly declining profit margins in the corporate sector. Some of these declining profit margins seem to be hitting the high-tech sector as well. As we well know, some of the benefits we have had in the economy have been driven by relatively low, in fact declining, prices in the high-tech sector. That may start to change. The second risk that I see in this economy is the ""immaculate"" slowdown in the growth of economic activity that Mike Prell has presented in the Greenbook forecast. I am concerned that it may well not work out the way that Mike has projected. If inventory investments reflect the expectations of sales growth, and I think some members have referred to the inventory-sales ratio as not being out of line, then I am quite concerned because I believe as do others that consumers are not likely to show much restraint. Obviously, there are plenty of jobs. A few members also have pointed to some inconsistencies on the income side of the projections. As many have said, significant wealth considerations are driving consumers. I think we can see on the basis of what happened in the first quarter that inventory investment might not slow nearly as much as the Greenbook has projected. On balance, the domestic indicators are, in my judgment, generally pointing toward mounting upside risks. Turning to the international side, I think as does Vice Chair McDonough that the turmoil in Asia is entering a new and highly unpredictable social and political phase that we have not seen before. At our last meeting, I reported that the economies of Korea and Thailand might be bouncing along the bottom for quite a while. Now, it seems as though the Indonesian situation may have placed a trap door beneath them, and the outlook for the entire region looks a lot less certain than it did even a few weeks ago. However, that situation is quite fluid and could return to an improving trend relatively quickly. Japan is even less likely to act as an engine of growth in the near term than I thought earlier, so we cannot look there for help. With regard to the other major economies in the region, Vice Chair McDonough mentioned India, but I would turn our attention to China. China has committed to holding their peg, which I think is an act of great international diplomacy and statesmanship. But its success does depend on strong discipline and also on an ambitious target of 8 percent growth, which seems less and less likely. Therefore, in this Asian context, I think China adds a bit of uncertainty. Finally, let me respond or refer to some of the comments that my colleague, Governor Gramlich, made with respect to the NAIRU. I agree with him in the sense that I do not believe we know exactly what the actual NAIRU is. There are people in the room who surely will tell us that it is an unemployment rate of 5.5 percent. There are others who will say that it is 5.2 percent. There are those who probably thought a year ago that it was 6 percent. We don't actually know. I believe that the capital deepening and labor quality improvements of recent years may have allowed for an increase in productivity. I hope that is true. I believe that businesses are now focused more on achieving efficiencies, and that structural changes have made the economy somewhat less inflation prone. I do not believe, however, that that means all limits have been removed. I think we are very close to those limits. In summary, based on domestic concerns alone, I think we are probably focused correctly on the upside risks. I believe that on the basis of domestic concerns alone it might be reasonable for us to consider acting in the near future. However, I don't think we need to act now as I expect that there will be only a slow unraveling in the forces that have held inflation at bay. I think that for international reasons, it is appropriate for us to wait and see. That is what is in order at this point, and I suspect there will be greater clarity in the economic outlook in the near future. Thank you, Mr. Chairman.",1317
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I am substantially where Roger Ferguson is, and I'm not sure I can put the case any better; he presented it very well. We have a very difficult problem. We have had an extremely strong economy, which continues to be strong. It has been an extraordinary performance. Every time we meet we have a few more anecdotes about the tightness in labor markets, and we are beginning to get more and more signs of tightness of other sorts: some speculative building, some land price increases, evidence of that kind. But I believe we have learned a few things about the economy in the last couple of years that lead me to be reluctant to move quickly. One is that the economy clearly is not as inflation prone at low levels of unemployment as we thought it was. Some of the reasons may be temporary and we need to watch to see if they are turning around. The rising dollar, the falling oil prices, and the slow growth in the costs of health care benefits may all be exerting beneficial effects on inflation that are not going to last. But some of the reasons seem to be much more lasting. I believe that there has been a productivity upshift, probably from a combination of technological developments, new management reforms and attitudes, deregulation, global competition, lower inflation expectations, and new ways that businesses are reacting to labor scarcities. The second thing I believe we have learned is that tight labor markets do us a lot of good. They generate more experienced workers, more training, more education, more opportunities for promotion, and more incentives to invest in oneself and in one's workers. That investment in skills actually is happening and should pay off in productivity improvements in the future. The low unemployment levels seem to generate pressure for capital deepening, which may have an unusually high payoff in the present state of our technology. None of this means that there are no limits, as Roger Ferguson put it. The economy cannot continue to grow at the first-quarter pace without running out of workers and generating serious wage and eventually price pressures. I would be very worried but for the prospect that the expansion will slow for the reasons that are set forth in the Greenbook. I tend to think that the Greenbook is a bit optimistic about Asia. We may not see a rout but more deterioration in Indonesia, Korea, and possibly also in Japan. That leaves the stock market, which clearly is too high. I'm not sure that anything we might do here would provide a good signal, nor is signaling the stock market an appropriate way to use monetary policy. I am inclined to the view that we will get a correction as earnings deteriorate and, if I'm right about Asia, as that source of deterioration sinks in. So, I would join those who would urge that we wait yet another six weeks and see where we are because I think a tightening might prove unnecessary.",569
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. This Committee is always confronted with complexities and conundrums. Over time they tend to be largely matters of degree and perhaps relative significance at a given point in time, but today it seems hard in many cases to know how to get the sign right. A few key examples, starting with Asia: At the time of the Humphrey-Hawkins meeting in February, most of us felt that the impact of Asia was going to be just about right in that it would give us just enough slowing. I think that is pretty much the view that the staff and the Greenbook still carry. However, in just 90 days we have been through two clearly identifiable cycles of how we have felt about the Asian impact on the U.S. economy. It looked as if it was going to be more benign around the time that we met last, and now, as President McDonough and others have observed, things look very ominous again. In the case of the interaction between productivity and compensation, which is obviously a key determinant of costs and hence prices, it is hard to read either productivity or compensation trends right now. We have new calculations on productivity, which I enthusiastically welcome, that suggest far more improvement than we thought earlier. On the other hand, in the area of compensation we have had an ECI in recent quarters that has been remarkably benign, particularly the latest reading which actually was down. To what extent are we entitled to rely on that kind of information and for how long? If both of these factors behave at all positively, and I think there is a significant chance that they might do that other things being equal, this virtuous cycle that we have been experiencing could go on for a very long time. In the case of inflation, the CPI shows very clear signs of moving up on an adjusted basis. One way to look at those adjustments is to say that some time back we were at price level stability and didn't know it; now we are in the process of losing it. But as President McTeer and others observed, there are virtually no other price series that confirm this deterioration. What about inventories? We have had an amazingly strong accumulation of inventories recently, and yet the aggregate levels do not look excessive. I'm sure there will be a drag of some sort from inventories, but how much and when is it going to happen? We just cannot know yet how all this is going to develop and net out. I feel that we will have to tighten policy, but I do not believe that we should tighten policy now. I lack the confidence to sit tight because I think there is too much uncertainty to say that we are sitting tight, but I do suggest that we should sit still. [Laughter]",553
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to a couple of charts that I am having passed around. 2 At the last meeting, many members of this Committee expressed concern that inflation risks might be increasing in light of the prevailing tightness in labor markets and the momentum in domestic demand. The question we confront today is whether developments since the last meeting should encourage us to relax that concern or to act on it. Of course, a serious alternative is to remain concerned but on the sidelines, perhaps increasing vigilance instead of rates. I want to focus my remarks on the labor market, inflation data, and on the question of whether the evidence points to a still higher trend rate of growth in productivity and the prospects for an imminent slowing to below-trend growth. I will have some comments on the monetary policy implications of the stock market and of Asia during the policy go-around. At the last meeting, many emphasized that it was important that economic growth slow quickly and significantly given the already tight labor markets. I refer to this concern as growth risk. Specifically, it is the concern that above-trend growth would raise utilization rates further and thereby exacerbate the risks of higher inflation. The bottom line is that the tighter labor market we worried about last time has already arrived. Utilization rates rather than growth per se drive inflation pressures. A slowing of growth to trend at this point would only stabilize utilization rates at their elevated levels. It is true that a decline of 0.4 percentage point in the unemployment rate in one month makes no sense in terms of underlying fundamentals. But neither did a constant unemployment rate over the previous five months during which growth was so robust. I, like the staff, would assume an upturn immediately ahead to an unemployment rate of about 4-1/2 percent. Growth turned out to be 2 percentage points faster in the first quarter than expected at the last meeting, the unemployment rate is well below where we expected it to be, and the staff forecast for the second quarter was revised upward. The bottom line is that if we were worried about the tight labor markets at the last meeting, we should be more worried today. I am. What about the prospect of an imminent slowing in growth going forward, perhaps to below trend in the second half as in the staff forecast? It seems to me that the economy has somewhat of a knife edge quality with respect to the pace of the expansion. On the one hand, the fundamentals continue to look very positive. There is impressive momentum in domestic demand; financial conditions appear to be very supportive; and interest-sensitive sectors of the economy continue to prosper. It is not hard to imagine that we could have continued above-trend growth ahead. Still, three factors are likely to weigh on the expansion going forward. First, assuming that the latest staff estimate of a $103 billion increase in inventory accumulation in the first quarter is on the mark and is not revised down going forward, the rate of inventory investment in the first quarter is almost certainly unsustainable. Indeed, the two most impressive numbers related to this forecast are 4.3 and 103. The 4.3 percent unemployment rate in April highlights how tight labor markets are, and the $103 billion rate estimated for first-quarter inventory investment is a triple-digit weight hanging over the expansion going forward. At any rate, while there do not appear to be stock imbalances, there likely will be if the flow rate of accumulation does not slow immediately. A lower rate of inventory investment, a flow correction, should lead as opposed to follow a slowdown in economic growth. Second, the external drag from a combination of the emerging Asian economies, Japan, and the long cumulative appreciation of the dollar should continue, although at a diminished rate after the first quarter. Third, the positive impulse from the stock market should at least diminish, partly in response to a slowing in the expansion and hence in the growth of earnings. This is in line with the staff forecast and would contribute to a slower growth of the economy in 1999 after the effects from reduced inventory investment and external drag had mostly run their course. Particularly because of the interaction of inventory correction and external drag and perhaps with some help from the stock market, there is the potential for a significant slowing immediately ahead. Still, there is some question about how much longer one should wait for this slowdown especially in light of the fact that growth has consistently outperformed expectations over the last two years and in light of the very tight and indeed now tighter labor markets. At the last meeting, members of this Committee expressed the following concern about wage pressures in the context of tight labor markets. Here is a quote from the minutes: ""but additional improvements in productivity growth could not be counted on to offset further increases in the rate of growth of labor compensation, which were more likely to occur if labor markets were to tighten further."" The staff, however, does plan on higher productivity growth to offset the effects of tighter labor markets, at least for a while. This is very much central to their forecast. The staff's decision to raise productivity growth reflected their assessment of two new pieces of data: the adjusted productivity series, reflecting a correction of the data on hours--the length of the pay period--and the report on multifactor productivity that indicated faster growth in capital services in 1996. I followed with a lag and some discount factor the staff's earlier upward revision in their estimate of trend productivity growth. Perhaps I will ultimately follow this revision as well but not now; I have some reservations. My lower estimate and the staff's higher estimate work about equally well in explaining the recent decline in unemployment via Okun's Law. The adjusted productivity series provides a hint of a sharper break in the trend rate of productivity growth in mid-1995 but it is only a hint in my judgment and not definitive enough for my taste to justify an upward revision in my estimate of the trend. Indeed, assuming a constant trend from 1990 onward, the staff's productivity equation yields an estimate of just 1.1 percent for the trend rate of productivity. There is in this case no difference in the estimated trend whether published or adjusted productivity data are used. This trend is also identical to the trend estimated over the earlier 1974 to 1990 period. While the staff's analysis is suggestive and it definitely got my attention, it appears to me that the recent robust productivity growth can be explained by a combination of a more modest increase in productivity and a normal cyclical rebound. What about the inflation and the wage data? Should developments since the last meeting make us less concerned about the potential for an acceleration in wages? Let me focus first on the recent data on core CPI. The staff projected a 2.2 percent rate of increase for this measure over 1998 and over 1999, the same as over 1997. On a consistent methodological basis, however, this translates into an increase from 2.2 percent over 1997 to 2.4 percent over 1998 and 2.7 percent over 1999. The first question about inflation is whether the trend in core CPI is stable or declining or already rebounding. The 12-month increase is now 2.1 percent, a tenth below 1997. This perhaps suggests an underlying rate of inflation that is still stable to declining. But as indicated in the charts I have passed around, the annualized inflation rates over three-month and six-month intervals exhibit quite a pronounced upward trend. The three-month rate is now 2.8 percent and the six-month rate is 2.5 percent. This leads me to suspect that the underlying inflation rate may already be higher going forward than the staff suggests and it may also be rising faster than they project. Let me admit that I have taken a very different approach in interpreting the CPI data than I did with the productivity data. I weighed more heavily the lower frequency data on productivity, down-playing some signs in the higher frequency data that there might have been a recent break in trend. On the core CPI on the other hand, I emphasized the higher frequency data in an effort to identify a change in the trend quickly. I admit that I was looking for faster inflation and I found it. I was not looking for higher productivity growth, and I did not find it. But this is where my intuition has taken me. The wage and compensation data, including ECI, compensation per hour, and average hourly earnings, point to some upward drift in wage and compensation rates. But as shown on the second page, the acceleration is much more evident in the 12-month rates than in some of the higher frequency data. Especially in the case of ECI, the latest quarterly reading is more benign than what is suggested by the 12-month changes. Putting it all together, on balance it seems to me that the risk of higher inflation has escalated a bit further since the last meeting.",1798
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"As with everybody who asks business leaders, bankers, and others about labor market pressures, we see such pressures in the Eighth District. In addition to staff input on this issue, I have been traveling around the District, and I participated in three sessions in different cities. In these sessions I was particularly trying to extract from people evidence of price pressures. What we get by and large are stories about wage pressures. The stories about price pressures continue to be rather isolated. It looks as though firms are either turning down business or just finding ways to deliver the goods or the promised services at prices that are more or less where they have been. The labor market continues to tighten. One of our directors put it this way: a woman who runs a computer services firm said that she can not even find recruiters anymore! [Laughter] There is no question that the pressures are there. I keep asking myself how we should interpret these apparently inconsistent findings on the wage side and the labor market side and on the price side. What I come out with is that there are solid, perhaps even rock solid, expectations in the marketplace of continuing low inflation. Firms do not want to permit costs to get built into their structures that they do not think they can realize in future prices. Therefore, the wage increases that we are seeing by and large are in isolated areas or in areas where firms find that they can improve the productivity of their operations one way or another and meet what they view as very, very competitive price conditions. I worry, though, that these solid expectations of continuing low inflation will last only so long as we continue to see good performance on inflation itself. If inflation starts to rise, I worry that some of these expectations will start to come unstuck. The process could become cumulative, and we could see a much quicker change in that outlook than we would all like to contemplate. I recall that the situation in the U.K. in the late 1980s was rather the same. The measures of inflation expectations in the U.K. indexed bonds compared with the conventional bonds did not show that the market was successful in foreseeing the outbreak of inflation in the U.K., which, of course, was quite substantial. The market does not necessarily foresee what may be ahead. I think the market is relying on us to make that forecast come true, and we should be very cautious about saying that there is a benign situation, that there is no problem just because the market doesn't see a problem. The market is looking to us to make that forecast come true. Those are the only comments that I want to offer at this point.",524
-fomc-corpus,1998,I assume we have coffee out there even though it may be a little cold. [Laughter],20
-fomc-corpus,1998,"In view of the hour and the fact that many of the members and staff have crowded agendas for this afternoon, it has been proposed that we postpone discussion of the agenda item on disclosure policy until the next meeting.",42
-fomc-corpus,1998,"I think that is a fairly sensible idea. There is no point in rushing it, and there is absolutely no urgency that we resolve this issue quickly. Can we put it on the calendar for the June 30-July 1 meeting?",48
-fomc-corpus,1998,We might be able to start that meeting a little earlier.,12
-fomc-corpus,1998,"Unless there is any objection, consider it done. Now, back to monetary policy. Mr. Kohn.",22
-fomc-corpus,1998,"Thank you, Mr. Chairman. When the Committee last met it was concerned about the risk of an upward trend to underlying inflation in the future, and in some respects that possibility seems in fact to have acquired more weight over the intermeeting period. In particular, the economy looks as if it will be putting more strain on the labor markets. Perhaps accentuating concerns, the slowdown in economic growth to a more sustainable pace is still just a projection. To date, despite the evident increases in real interest rates, financial markets show few signs of any erosion in the accommodative conditions that have been bolstering demand. The stock market continues to defy the gravity of weaker earnings. Banks are still easing terms and conditions for business loans, have begun to do the same on commercial real estate lending, and have about stopped tightening them on consumer loans. Perceptions of reduced risk in financial markets--""complacency"" as the Chairman has called it--probably owe in part to a sense that the Federal Reserve is on hold for the foreseeable future and likely would not act before warning the markets first. On the price side, the steadiness of the dollar against an average of major currencies this year after last year's appreciation and the bottoming out of oil prices after earlier declines suggest that a couple of the factors that have helped to damp wage and price increases will fade over coming quarters. By themselves, these influences would seem to argue in favor of a small firming of money market conditions, as in alternative C. In these respects, analogies could be drawn to the situation in March 1997, when the Committee chose to ""buy some insurance"" against the inflation risks associated at that time with strong aggregate demand, or last September, when tightening labor markets put the Committee on a path toward policy firming in early November, had not Asian events intervened. When a wider array of factors is considered, however, the shift in inflation risks may not be so clear cut. In the staff forecast, inflation in 1999 is no higher than in the last Greenbook. Once again, new information on and analysis of the supply side of the economy provide a counterweight to stronger demand and higher output. Mike has discussed the key elements in the forecast. Most importantly, as he noted, the rise in the level of output has been about matched by an increase in estimated potential, owing to faster trend productivity, that leaves the output gap about unchanged. And that higher productivity also is manifest in a temporarily lower NAIRU as firms compete for more profitable business. As a result, the staff forecast suggests no greater urgency for firming policy than in March. But, as was the case then, the outlook does embody a significant upward incline to underlying inflation at the current federal funds rate. Several of you noted our concern that inflation might rise by more. In the context of such forecasts, to remove the inflationary tendency and lock in something like the current low inflation rate probably would require an appreciable rise in the federal funds rate, and the sooner you get started, the easier the task. But even if the Committee finds the prospect of higher underlying inflation troubling, it still may see some reasons to consider holding off moving against the potential pickup, at least for a short time. One is the instability plaguing much of Asia. To be sure, a one-quarter point increase in the federal funds rate is not going to have much effect on the developments unfolding in Indonesia, which are being swept along on more fundamental political and economic tides. But it could affect other Asian markets and economies, which are a bit more fragile owing both to the Indonesian situation and to the growing recognition that the required real adjustments are going to be painful. And, in the last few days, turbulence in Asian markets seems to be spilling over outside the region. The response of the emerging financial markets to the leak of the Committee's bias suggests that interest rates on emerging market debt would rise by as much or more than dollar rates. Small interest rate increases in those financial markets might not have much effect on the output of their economies, but one can not be sure. Any effects on the real economy may be offset through further currency depreciation, though that may not be viewed as particularly helpful to financial stability. Of course, from the U.S. standpoint the corresponding rise in the dollar would be one channel through which your tightening would damp demand on U.S. productive capacity. In addition, just how markets here and abroad would interpret a firming in U.S. monetary policy is quite uncertain. The effects could be significant if global markets took it as the first of several installments or thought that it presaged firming actions in other industrial countries where economies are strong, including Canada, the United Kingdom, and ""Euroland."" Even small weight given to the possibility that spreading instabilities threaten to adversely affect the U.S. economy and financial markets, and that the turmoil itself might be exacerbated by a policy tightening, might incline the Committee toward setting a higher hurdle in terms of purely domestic concerns for taking action at this meeting. That is not to say that such a hurdle could not be crossed, though. If the Committee saw a distinct threat of an inflation emerging in the United States whose seriousness would be significantly exacerbated by waiting, a small firming now might be less destabilizing to U.S. and global financial markets than larger increases later. A second consideration that may argue for no change at this meeting is uncertainty, especially about the supply side of the economy. The members have noted continuing under-predictions of economic growth over recent years. As well, the staff, Committee members, and other forecasters have persistently over-projected inflation over the last few years even as the economy was growing faster and operating at a higher level of labor force utilization than expected. The forecast errors are partly attributable to one-time developments that could not easily be anticipated, such as the drop in oil prices. But they are also indicative of the shifting relationships among labor, capital, wages, and prices lying behind the aggregate supply process, and these could persist. The events of the past couple of years underscore how tenuous is our understanding of how much can be produced over time without adding to inflation pressures. This presents considerable difficulties for policymakers, and I'm not sure the current state of economic modeling is as much help as we might hope for. One natural response to this uncertainty is to be less preemptive in your policy strategy. It's hard to be forward-looking when you can't see the road ahead and are unsure about the accuracy of the map. Of necessity, policy decisions end up being made more on the basis of incoming information about emerging inflation pressures and less on the basis of forecasts. To a considerable extent, this is what the Committee has done over much of the last year. Under current circumstances, with even early warning signs of higher inflation difficult to spot, following this strategy might also weigh on the side of standing pat. The benefits to not tightening on forecasts accrue when such a firming turns out not to be needed and the economy has produced along a higher path in the interim. And, the potential costs of risking an updrift in inflation may be lower now than a few years ago. The resource distortions from a rise in inflation starting at a 2 percent rate may be smaller than those from a 3 percent base. Moreover, the persistence of low inflation over recent years, by bringing down and anchoring inflation expectations, should mean that counteracting inflation pressures once they become evident is less disruptive than it would be in a more volatile inflation environment. While the costs of not acting as preemptively may be lower, they may not be negligible. If a policy action turns out to be required, the longer it is postponed the larger the disequilibrium and the more wrenching the subsequent real adjustment to the economy. To avoid embedding higher inflation and to minimize eventual economic instabilities, a more backward-looking policy is likely to require a prompt and vigorous response once problems emerge. Bond markets anticipating such responses will still help to stabilize the economy. But if uncertainty induces you to wait for the ""smoking gun"" of a string of higher inflation numbers, some of those costs of waiting are sure to be incurred. However, even a less forecast-based strategy, should the Committee follow it, does not imply that you would necessarily await a string of bad inflation numbers to firm policy. Incoming data over the next weeks or months suggesting continued unsustainable growth and further tightening in labor markets, persistent ebullience in financial markets and in money and credit growth that was feeding into aggregate demand, and greater cost and profit margin pressures still could be sufficiently unambiguous signs of heightened inflation risks to trigger firming before inflation itself turns noticeably higher.",1756
-fomc-corpus,1998,"Thank you. That was an excellent and balanced presentation of the problems that we confront. Questions for Don? If not, I will start. It is apparent that our discussion has been one of the more interesting roundtables that we have had for a while in our effort to assess the underlying crosscurrents in the economy and the policy tradeoffs. I will cover the same subject matter and review it point by point. First, I agree with a number of you who view the Asian crisis and the international financial system as involving crucial issues. I must say that I am a lot more pessimistic about Japan than is implicit in the Greenbook analysis. In my view, that huge economy is under significant downward strain, which unless it stabilizes will spill over into the United States in ways that I do not think we can fully anticipate at this point. Fortunately the size of the Indonesia economy is not of sufficient magnitude to have a major impact on its neighbors or the United States. Nonetheless, it is enough to be a serious issue. The Indonesian markets, as you know, are exceptionally weak and effectively shut down. A very significant but not widely discussed problem is the Korean labor situation. Korea has a big economy. It is a lot larger than Indonesia's though obviously not nearly the size of Japan's. It has improved quite significantly; you will recall that they had virtually no usable central bank reserves, and now they have built them up to almost $30 billion. In that regard, if it were not for the current labor unrest and the political problems, I believe Korea clearly would be a stabilizing force in Asia. But as best I can judge, the Korean economy has started to turn in a negative direction, and I don't think we can forecast the magnitude of the potential decline. The second issue that we have discussed is the U.S. stock market. Its performance, as we are all aware, has been crucial in this virtuous cycle. The rise in stock prices has had a variety of positive results, including the stimulation of increased effective demand that in turn has led to larger federal government revenues that first lowered the budget deficit and more recently produced a surplus. The market is still exerting a positive effect on the economy, although stock prices have changed little on balance since the last FOMC meeting. I have been giving a lot of thought to the question of whether we are experiencing a stock market bubble, and if we are, what we should do about it. If the market were to fall 40 or 50 percent, I would be willing to stipulate that there had been a bubble! Now, if we invert that, we have to be able to say before the fact that we define a bubble by being willing to forecast that the market is going down, say, 50 percent. That is a tough forecast to make. We all have our capital asset models--more or less sophisticated time discount structures in which we evaluate what is going on in the market--but in truth we have to take account of the fact that we have an international market with millions of people who make decisions for a wide range of reasons. It is very difficult to forecast the market when we are dealing with a huge number of money market professionals who know as much about what is going on with individual stocks as anybody. These people currently are buying individual stocks at prices that create a Dow Jones industrial average of over 9,000. It is not that they are buying the market per se. In the circumstances, it is very difficult for us to judge whether the market is overvalued and is about to go down. One can readily say that the equity premium that one derives from a capital asset model is showing such and such and is a low number historically, that expected earnings are going up at an exceptionally high rate, and that this does not make sense because it implies that profit margins will increase indefinitely. One can make all those statements, as I do, and conclude that the stock market is significantly overvalued, which I do. But I ask myself, do I really know significantly more than the money managers who effectively determine the prices of these individual stocks? I must say that I, too, feel a degree of humility about my present ability to make such a forecast. The more interesting question is whether, even if we were to decide we had a bubble and we wanted to let the air out of it, we would be able to do it. I am not sure of the answer. We have observed, in fact, that letting the air out of the bubble, if it exists, could well be counterproductive. I cannot be sure but I suspect that the fact that the economy did not begin to unwind after the more than 20 percent stock market crash in October 1987 probably served to create an upside potential in the Dow of a couple thousand additional points. As you will recall, as soon as things began to stabilize, investors concluded that if this was the worst that could happen, they should get back into the market. We have had three or four similar episodes, though not of the 1987 magnitude, that have reinforced the view that the upside potential of this market has risen. So, we have to be very wary of the notion that a small 25 or 50 basis point move could permanently unwind this bubble. Unquestionably, it will do so for a short period of time, but it may then merely set the stage for a further rise that may in fact be highly destabilizing. I have no doubt that if it were really our desire to unwind a stock market bubble, we could do it. I have no doubt that a 200 or 300 basis point rise in the funds rate would do it overnight. I'm not sure that there is a point in between, a saddle point, where we could hit the market, defuse it, stabilize it, and nothing else would happen. There may be such a point. I don't know how we would ever find it. I am certain that if it were the policy objective, we would fail. After thinking a great deal about this and wondering how we should integrate this issue into our evaluations, I have in effect come out where Bob McTeer has. The question, essentially, is whether we have any great insight into how to handle asset values as a part of monetary policy. In principle, we have to recognize that asset values have an effect, so we have to consider their impact and we certainly do so in terms of the wealth effect. But how we can alter the pattern of market valuations, as distinct from its effects on consumption and other sectors of the economy, is somewhat beyond me. I have concluded that in the broader sense we have to stay with our fundamental central bank goal, namely, to stabilize product price levels. To the extent that the financial markets affect the factors that influence product price levels, I think monetary policy action is appropriate. But I believe the notion of merely hitting the market itself is an illusion. It may be something that we could discuss at great length as a chapter of a textbook, but I doubt very much that we know how to implement it from a policy point of view. The third and crucial issue that has come up today relates to wages and productivity. I agree that the ECI has changed at a far more modest pace than one would have expected on the basis of past Phillips curve calculations. But compensation per hour figures are running somewhat higher and in fact tend to negate the conclusion one draws from the ECI. So, there is an interesting question as to which set of data is more appropriate. There is no question in my mind that the ECI, properly measured, does reflect the wage structure. I suspect, however, that in periods like the present when there are extreme shortages of certain skills in the workforce, a lot of the increases in labor compensation are not showing up in higher wages for a given job but rather in promotions and the like because that is the way business firms can avoid certain internal problems. The overall effect cannot be large, but it has to be of some size. So, I would be somewhat less sanguine than I might otherwise be about how good the ECI numbers look, though there is no way of getting around the fact that the wage pattern has been somewhat subdued. The more interesting data that are beginning to emerge are those that provide increasing evidence that the underlying trend of productivity is moving up. One can disregard the noncorporate sector, which I think abnormally constrains the number we use for total nonfarm productivity, and look at the area for which data are clearer--that is, the nonfinancial corporate sector. There is, of course, a statistical discrepancy between the output data from the spending side, even if we make adjustments for the noncorporate area, and the data from the income side. The advantage of looking at productivity from the income side, as the BLS formerly did, is that the income side is internally consistent with the price numbers. The reconciliation from productivity to prices, if we are dealing with output measured from the spending side, requires us to make some judgment about how to handle the increasing statistical discrepancy, whereas dealing with the income side eliminates that need. I'm not saying that one approach is superior to the other as a pure measure of productivity, but I wanted to point out that the income side approach is an easier way to get through to the price relationships. Having said that, the published productivity data for nonfinancial corporations have shown some modest decline over the last three years from a 3 percent rate over the four quarters ended in the first quarter of 1996 to 2.7 percent for the four quarters ended in the first quarter this year. However, when the hours data are adjusted for the length of the pay period problem, the comparison reverses significantly. Instead of going down from 3.0 to 2.7 percent over the last two years, productivity growth goes up from 2.7 to 3.2 percent, 3.2 percent being the staff's estimate of the rate over the four quarters ended in the first quarter of this year. The first quarter by itself has an estimated 3.4 percent annual rate of increase and the estimated increase in manufacturing for the month of April is .8 percent. So, I find it very difficult to set aside the evidence that these data are indeed accelerating. The staff put together a set of data that in essence cyclically adjusts these numbers to observe how productivity growth in the nonfinancial corporate sector would have looked at a fixed operating rate, i.e. neutralizing the business cycle. While, of course, the growth in productivity is somewhat slower, it is only marginally slower. The pronounced acceleration in the trend starting in early 1995 is unaffected. You may recall the argument I made a year or so ago that an explanation is required for the sharp increase in capital investment, especially in high-tech areas, that started in 1993 and has persisted since then. One explanation, in fact a necessary explanation, is that plant managers who were involved in planning capital investments anticipated that a significant increase in the prospective real rates of return on facilities could be achieved as a result of emerging new technologies. If that had been a mistake on their part, one would have expected capital investment to run up for a year or two and then start down again when the lower-than-anticipated rates of return actually showed up. Instead, if anything the whole process has accelerated. If one were to calculate the real rates of return that are implicit in the sharp rise in investment, I think one would find that the actual real rates of return have gone up, but I have not done the calculation yet. I know that real profits have risen and therefore the actual incremental profit has gone up, but I am not sure whether it has gone up more than the denominator, the capital investment to which it applies. It is clear that a very significant acceleration in productivity has occurred compared with the previous trend. A goodly part, perhaps most of it though not all, is attributable to a pickup in the rate of capital deepening. That is because there clearly have been improvements in the quality of labor, and because the residual, which we call total factor productivity, has gone up as well. While we are getting very significant advances in capital spending and total factor productivity that suggest an increase in real rates of return, what we are trying to explain is why labor productivity is rising. Labor productivity very clearly has accelerated, and it has done so because of its interaction with the sharp rise in capital investment that has occurred. So, it strikes me that that set of data is internally consistent with the presumption that we have had a marked and discontinuous pickup in productivity growth that started in 1995. There is another set of observations that also was quite important in our around-the-table discussion of the economic outlook. Bill Poole referred to the issue that a number of you have raised in the past with regard to the very striking statements that businessmen are making. When asked why the big increases in their wages or other costs have not been reflected in their profits, they respond that they offset those increases by raising productivity. That implies that productivity is a free good in the sense that if a business needs a bit more of it, it sprinkles a little on its income statement and it can do so at will. This makes no sense because it is not conceivable that productivity is available at will unless there is some significant increase in the backlog of unexploited productivity-related capital investments. If that situation exists, then when a business says that it will work to get costs down, there would be available on-the-shelf types of equipment, research, managerial alterations, and the like that could significantly increase productivity or offset costs. It is the cost offset that most businesses look at. But on a consolidated basis, two-thirds of their costs are labor and the latter therefore have an important effect on the productivity data. I don't think we know for sure at this point how long this process will persist. We do know and can readily observe that there has been a very dramatic increase in underlying demand in the economy. What is also fascinating is how easy it is to bring on new supply. The reason for that is obviously in part the fact that the lead times for deliveries of equipment have fallen so materially that when demand picks up, it is readily met by increases in production. We are looking at a huge increase in demand in the manufacturing sector, but one that has readily been met by increases in supply with no evident shortages and no slowing in lead times on deliveries. All of this is consistent with what a number of you have called the supply side elements in the economy. I have no doubt that we have very strong demand underlying this expansion. I think the Greenbook is probably right in its forecast that this demand will decelerate, but I also share the concerns that a number of you have raised that it may be sustained for an extended period because it is very hard to detect any slowing at this point. Labor markets are tightening, as many of you have argued. I thought that the comment about not being able to find recruiters was especially significant. [Laughter] We are running out of new workers. Part of that problem is being resolved by substituting capital for people, but that obviously cannot go on indefinitely. At some point there will be a reversal of the very sluggish pattern of wages, which I have attributed to a possible desire for increased job security stemming from the fear of job skill obsolescence associated with the introduction of technology. That appears to have caused a shift in emphasis from wage increases to job security as evidenced in union contracts. But union contracts are becoming a smaller and smaller part of the market. As a consequence, I don't think we can know for certain whether, and how much, job security concerns are still damping wage increases. If we were dealing with an economy in which the productivity data were not showing significant signs of acceleration or if we knew with some degree of conviction that the productivity gains were temporary, that the international financial system was not in as fragile a state as it is, including the Asian problem and its effects on Russia, Brazil, Mexico, and similar countries, then I think we probably would have moved the funds rate higher a meeting or two ago. In any event, it is very difficult to get around the notion that what is going on strictly in the domestic economy is something that could very readily run off the rails as various developments that have contributed to the virtuous cycle that the economy clearly is experiencing start to unwind. I personally have been somewhat reluctant to support tightening because I think that the cost structure, even with the acceleration in wages, is still moving up in the nonfinancial corporate sector at less than a 1 percent annual rate. That rise essentially picks up increases in unit labor costs of a little over 1 percent, unit nonlabor costs that are declining markedly, and a modest decline in profit. We can describe the underlying cost structure as still quite benign. I do think, however, that it has been showing some slight uptilt in the last couple of quarters though the uptilt really is quite minor. There is a question of the cost of waiting to see how all of this will turn out. Obviously, if the international system stabilizes, or in fact gets worse, that factor is going to be removed from our calculations one way or the other. I don't know what is going to happen to the stock market. I must say that I would not be surprised to see it weaken significantly, but I would not want to bet the ranch on that at this stage. I do think that the crucial decision we have to make and have been making for a while is the recognition that the longer we wait, if our analysis of this process is wrong, the more we will have to do to stabilize the economic system. I believe that is a given. The issue is whether the cost is so large as to induce us to act very soon. Jerry Jordan thinks that a substantial adjustment will be needed if we do not act promptly. I cannot say that I know he is wrong. I suspect that, in line with what Don Kohn was saying, the currently low level of inflation probably gives us a little more of an opportunity to wait--I say ""probably"" without a high degree of certainty. In other words, taking the most striking statistic, a GDP deflator of under 1 percent at an annual rate for the first quarter gives us a little leeway on the upside. We can afford to be wrong; we can afford to wait; and we can afford to pay a modest price to avoid taking the risk of acting prematurely, which I think is what would be involved if we took action today and maybe even at the next meeting. I am fairly certain that if we were to move in the near term, certainly today, the impact on Asia and the international financial structure would be surprisingly large. I am not sure that would be true at the next meeting, but it might. However, if this expansion does not moderate, I don't think we can wait indefinitely. At some point we will have to say there is a danger. It is conceivable a move could create significant international financial turmoil, which would redound onto the U.S. economy as well, but the alternative could very readily be perceived as worse. After that rather long discourse, I conclude that I would like to stay where we are at this stage. I think that not moving today is quite important especially because of Asia, but I believe that maintaining asymmetry toward tightening is essential as well because I think the evidence points in that direction. Vice Chair.",3961
-fomc-corpus,1998,"Thank you, Mr. Chairman. I agree completely with both the recommendation that you have made and the arguments that you have advanced in favor of it.",30
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I want to start with the puzzle that I talked about at the last meeting. The markets and business forecasters are all looking at the same data that we look at. Yet, they seem to be assigning essentially zero probability to the possibility of a Fed tightening. That concerns me because I think markets are not paying enough attention to what the Fed may have to do to sustain the excellent record on low inflation, which has to be our primary goal. I believe it is important that we talk about our outlook for aggregate demand rather than output per se. In my view, output growth may well slow because of resource constraints. If it does slow, that will not necessarily be a sign that we are out of the woods. We need to be looking at aggregate demand growth. As I see it, we have somewhat of a classic case in which money growth and associated measures may be giving a different signal than some of the other developments in the economy. We are going to have to make some choices about that. I do not have a conviction that however I vote my decision will turn out to be right after the fact. I have been trying to think through the various risks and the tradeoffs. One approach is to look at the situation at the end of the year and in retrospect at the decision that we reach today and my own position. There are two risks to weigh one against the other. If we do not act today when in retrospect we should have taken action, what are the costs that we will have set in train? The other way, if we act today when in retrospect we should not have, what are the costs? It seems to me we have to weigh those two in trying to decide how to come out on this. I think that the difficulties in countries around the world, including of course Asia most immediately, should not be a major influence on our decision. That's because it seems to me that if the U.S. economy starts to go off track, we are going to create problems for the international economy as a consequence. I also am concerned that although Indonesia is the problem in front of us today, at our next meeting it might be another country, and at the meeting after that still another. I am worried that by looking at the problems abroad we can be diverted from our major responsibility for price stability in the United States. As I weigh the case I and the case II risks, it seems to me that if we raise rates today and in retrospect it turns out that the increase was not necessary, we can reduce rates in the future while creating very minimal problems in the meantime from that action. On the other hand, if we do not act today when looking back we find we should have, it seems to me that we will be getting ourselves further behind and digging ourselves into a deeper problem that would be considerably more costly to straighten out than if we had started earlier. So, that is my calculus along those lines. I do not have, as I emphasized, a conviction that whatever we do, it will turn out in retrospect to be the right thing to do. I think we have to weigh the costs of the different kinds of mistakes that we may make.",636
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Mr. Chairman, at our last meeting I expressed concern that, even in the absence of clear indications that inflation was rising, both the strength of the domestic economy and the frothiness in financial markets required some policy tightening to reduce the risk that even more tightening might be needed later. Nothing has happened since the last meeting to change my perception of that need. If anything, the domestic economy has gotten stronger as have financial markets. Price pressures remain low to be sure, but I continue to believe that this is more the result of temporary rather than permanent factors. It may be that the trend rate of productivity has risen, and certainly your arguments are very persuasive on that, but I wonder whether productivity will continue to grow at a rate that will offset inflationary pressures stemming from labor and other resource constraints. In my view monetary policy is accommodative right now. I do not think that so much because of the level of the stock market, and I totally agree with you, Mr. Chairman, that we cannot really target a particular level of the stock market, and we should not attempt to do so. My concern about an accommodative monetary policy is along the lines of what President Poole just referred to as the costs of being wrong. I think the costs of continuing with an accommodative policy are fairly large. As asset prices escalate, not just in the stock market but elsewhere, their impact on resource allocation can be negative. And the escalation of asset prices can be negative in terms of its impact on credit quality, on the financial sector more generally, and ultimately on the rest of the real economy. So, with a continuing accommodative monetary policy that we are seeing anecdotally, even if we don't see it in more traditional measures such as the level of the real interest rate, I think we run the risk of building problems in the financial sector and in the real economy that will come back to haunt us. I know that conditions internationally are very tenuous. I do not know, however, to what extent increases in our interest rates at this time would affect events in Indonesia or India or Pakistan, although I do agree they would have an immediate impact on the dollar/yen rate. I don't know how big it would be, but it might be troublesome. It may be, and I will defer to your judgment, Mr. Chairman, that now is not the time to move for various reasons, particularly on the international side. But again, I am really worried about the costs of being wrong. If I look back, I wonder how much difference tighter monetary policy would have made over the last couple of years. In fact, looking at the Asian situation as it has unfolded, how much would tighter conditions here in the United States have impeded the flow of hot money to Asia that turned out, at least in part, to be the source of some of the problems in that part of the world? I truly believe that a conservative, well balanced U.S. economy with solid growth, low inflation, and low risks is the best prescription for the entire world. I hope we are not sacrificing that by waiting. I will agree with your recommendation. As I said, I hope we're not sacrificing something.",643
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, if it were my choice, I would still prefer to make a small move today for many of the reasons that Cathy Minehan and Bill Poole have adduced here. To go beyond what they said, there are a lot of folks in this room and outside of the System who are making the point that we have time to wait before we move. I am a little suspicious of that judgment. As Bill Poole said earlier in the meeting, expectations and psychology can change very, very rapidly. As has occurred at times in the past, we can get behind the curve very quickly. When we do, there is usually a big price to pay. So, to paraphrase Governor Kelley, I would say that if we sit still, I hope we will at least sit uptight. [Laughter]",165
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I think this is one of those decisions where we have come to the end of the line as far as whether hard analysis will give us the answer; it will not. This is a period where we must use our judgment. Our judgment over the past year or more has been to be patient. It is tempting to overdo something that has worked in the past, but my judgment is that we ought to keep things where they are for now. In the spirit of humility that has been expressed, I'm not sure I am right, and I don't think anybody else can be that sure either. But my judgment coincides with your judgment, Mr. Chairman, to stay where we are.",137
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Mr. Chairman, I concur with both parts of your recommendation. I do not think we ought to move today. My reasons relate to Asia, but not in terms of the impact of our move on Asia. Rather, it is because I expect the deteriorating situation in Asia to have more of an impact on our economy than we seem to be anticipating and possibly to make a move unnecessary. Nevertheless, I agree that the risks are on the upside. Even so, I do not share the view of Presidents Poole and Minehan that there is much of a risk of waiting too long. It is not my perception that the U.S. economy is some tight spring ready to pop. The economy has a lot of inertia, as we have seen for quite a long time. I don't think the cost of waiting is likely to be that high.",169
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"I concur with your recommendation, Mr. Chairman.",10
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"I come out much where you did, Mr. Chairman. I talked earlier about what might be called the tension between the strength in aggregate demand and accommodative financial conditions and what clearly has been rapid growth in aggregate supply. The latter is premised, I think, on favorable productivity conditions, and the question is whether that will or will not continue. If it does, of course, we could get a favorable resolution of all this. Another possible resolution is that productivity will fall short but businesses, because of competitive market conditions, will not be able to pass along their cost increases and profit margins will get squeezed. That would lead to the long anticipated correction in equity values that would cool demand over time. So, that is another potential resolution. I do not have a conviction as to how all this ultimately is going to play out. I think this is a case where there is, at least in my mind, so much uncertainty that I conclude we should not do very much. In that environment, I am comfortable with your recommendation.",206
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Mr. Chairman, I support both parts of your recommendation for the reasons that you and others have given. Let me make two points on the other side. One is, as I mentioned last time, that in focusing on a funds rate target we may make the funds rate too rigid, and we should be mindful of that. The second can be summarized in a comment that Yogi Berra made in a year when the New York Yankees were falling far behind the leading team early in the season. He said it was getting late early that year. [Laughter] I think we should recognize that this is a political year, and it might get harder to make changes later in the year. We should be mindful of that and perhaps think hard about it at our next meeting. Having said all that, I would still support your recommendation.",167
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I think there are good reasons that one could cite to justify raising rates today. However, for goods prices at least, a number of factors are offsetting labor market pressures. In addition, I think the recent declines that we have seen in inflation expectations have raised the real funds rate to what appears to be a moderately high level. In light of that, it may make sense to wait a while longer before deciding to raise the funds rate. I assume that a ""no change"" decision would include an asymmetric directive. Thank you.",110
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I concur with your recommendation and would like to make a couple of comments. I am very mindful of the Asian situation, though I would not use international considerations as a primary motivation for not changing our policy. I think the stability of the U.S. economy needs to be our foremost consideration. I come out this way because, as I look at the U.S. economy, I see a variety of factors influencing the outlook that do not paint a clear picture. They do not provide an easily defined rationale for moving now. Moreover, I don't find the argument that we should tighten policy at this stage for insurance or preemptive reasons a very acceptable rationale either. We need some hard data to justify a policy move. In particular, I think we need to watch the productivity numbers. If those point to a clear policy course, we should act. On that basis I would be willing to wait and see.",185
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, my view is that the sky probably is not falling yet. Certainly, there is some probability that we can slip by without a tightening of policy, but the odds appear to be growing on the other side. With all the comments I heard in the first go-around, I think I identify most vividly with Bill Poole's assertion that inflation expectations, while subdued, are fragile and that people really are counting on us to do the right thing, even if they squeal and holler at the time we do it. Although I feel that we should tighten today based on domestic considerations, I certainly defer to you and others who can better judge how much weight to give the fragile international situation. Having said that, I come back to your reminder that that means we may well have to do more later. I presume it is our judgment that the international situation is likely to be more settled and less fragile at the time of the next meeting or perhaps two or three meetings down the road and that it will then be able to cope with a more aggressive U.S. monetary policy move if that becomes desirable at that time. I support your recommendation and the asymmetrical directive.",235
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Labor markets are very tight, and a significant part of the recent inflation performance owes to the temporary effects of favorable supply shocks. Inflation will almost certainly be on a rising trend going forward, but the published rise will be partially offset by the effect of technical revisions. Let me say a few words about the stock market and then Asia and how they fit into the monetary policy calculus. For the stock market, I suggest two rules. Rule number one is that, in general, monetary policy should focus on our broad macro policy objectives, namely price stability and full employment. The stock market in this case has only an indirect influence on monetary policy through its effect on aggregate demand, with no more influence than a host of other factors. If the FOMC is disciplined about its monetary policy and thereby contributes effectively toward its broad macro objectives, the stock market in my view is likely to converge back to fundamental values and to do so in a reasonably graceful and not very disruptive way should it drift away for awhile. Rule number two addresses the case when there is evidence of a bubble economy in which asset values are more seriously stretched in both financial and real asset markets, as was apparently the case in Japan in the late 1980s. Failure to control such widespread over-valuations can risk serious disruptions to the real economy down the road. Rule number two suggests the use of monetary policy to resist such wider and more dramatic asset market overvaluations. The art of good policy is knowing when to switch from rule one to rule two. [Laughter] I do not think that time has come yet. Nevertheless, when there is an increased risk that equities are significantly overvalued, it would be prudent for monetary policymakers to reassess how disciplined their policy really is and perhaps to err on the side of restraint when there is a close call. What about Asia? Specifically, should the FOMC weigh the global effects of U.S. monetary policy? Applying my belief in rule number one for stocks, a globally friendly U.S. monetary policy is one that insures the United States is an anchor for strong global performance. This is generally achieved by promoting price stability and maximum sustainable growth and full employment at home. Like rule number two, there may be exceptions and the acute stage of the Asian crisis toward the end of last year might have been one. The recent sense of increased fragility in the region and perhaps a greater sense of vulnerability of the Japanese economy at least raises some question about whether today we are still or again in such a situation. Another close call. The bottom line is that this is a close call for policy. I believe that monetary policy needs to edge toward a tighter stance and soon unless either inflation moves still lower or growth slows to below trend. The staff forecast suggests that growth may slow to trend this quarter and to below trend in the second half. That would reduce the risk of rising inflation going forward. But such a slowdown is far from assured, and even in the staff forecast, inflation drifts upward. Asia encourages some patience. On balance I think I would support a tightening today if the consensus were there. I will use my energy today and in the days to come to try to move the consensus in this direction unless, of course, the data going forward or further analysis of the data change my view of the appropriate policy. But today I will accept your recommendation, Mr. Chairman.",687
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation, but I do think it is only a matter of time before we will have to tighten policy. We all talked about the strength in the economy and the fact that inflation pressures have been muted. I hope you are right about productivity growth being larger than that reported. Perhaps the Greenbook is right that trend economic growth is in the neighborhood of 2-3/4 percent. If all this is true, then obviously inflationary pressures will remain contained. Our best estimate is that the Greenbook inflation forecast is too optimistic. Even if we accept the forecast in the Greenbook, core CPI inflation in 1999 is nearly 3 percent on a consistently measured basis. That is a clear and troubling acceleration. I believe we have to be humble about our ability to forecast inflation, given our track record going back over the last few years. Nevertheless, I think the balance of risks strongly suggest that we will have to tighten policy this year, maybe not today but relatively soon.",203
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"I support your recommendation, Mr. Chairman. We have unexpectedly low inflation in large part because a strong supply side has accommodated unexpectedly rapid real growth. I'm not sure that locking in the low inflation now requires weakening the economy to slow down real growth. It may or it may not. I guess this uncertainty is an argument, as Don Kohn put it ""on the one hand"" in his statement, for being less preemptive and relying more on actual experience and less on forecasts.",97
-fomc-corpus,1998,Governor Phillips.,3
-fomc-corpus,1998,Thank you. I think this is as close a call as I have had to make since coming to the Fed.,23
-fomc-corpus,1998,Maybe you should not leave!,6
-fomc-corpus,1998,"Yes, maybe that's right! I am going to end up concurring on ""B"" asymmetric. The reason is mostly because inflation appears to be quite well contained. Growth is extraordinarily strong, but in view of the inflation situation, I think there is time to see how Asia plays out. That will take time, so I will be watching you guys! [Laughter]",75
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. I agree that asset markets like the stock market should not be an objective of policy, but I also do not think they should be a constraint on doing what we otherwise think is the right thing. I never saw the need for signaling or the desirability of trying to condition the markets to anything we do. As far as Asia goes, I don't think the Japan problem is going to go away any time soon. I believe they are in far worse condition than is generally understood, and six months from now or maybe even a year from now we will see that Japan is an even more severe problem. So, if we are going to have that as a constraint, it is going to be around for awhile. Demand is extremely strong and we are meeting a lot of that demand by increasing our imports. Even if the Greenbook is right, two years from now we will have a trade deficit of over $300 billion, over 3 percent of GDP, and in the wrong hands that is a dangerous statistic. I think that playing locomotive to the rest of the world is the wrong way to conduct monetary policy. So, I believe we need to do something now or we will find that the toothpaste is already out of the tube and it is going to be costly to try and squeeze it back in again.",263
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I concur with your recommendation. I agree with others around the table who have said that our obligation is primarily to our own citizens. However, I also recognize that there will be spillover effects if conditions continue to get worse in Asia, and I am concerned about that. In my view, the monetary and credit aggregates are quite accommodative and that is troubling at this point. But I also am comforted by the fact that we seem to have relatively low inflation expectations, and as Governor Phillips has said, we are starting from a relatively low level of inflation. I have three or four questions. One is, can we wait? I think the answer to that is yes, we certainly can wait. Inflation is not out of control, and we retain some well-won gains. Should we wait? I believe the answer is yes; obviously at this meeting we should wait. Should we then be prepared to move quickly? I think the answer to that is obviously yes. I believe it probably will be appropriate to move before the summer is out, but that does not mean that we have to move today.",225
-fomc-corpus,1998,"The preponderance is for ""B"" asymmetric. Could you read the operational paragraph?",18
-fomc-corpus,1998,"Yes, Mr. Chairman. I will be reading from page 14 of the Bluebook where the operational paragraph is shown: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with considerable moderation in the growth in M2 and M3 over coming months.""",142
-fomc-corpus,1998,Call the roll on that recommendation.,7
-fomc-corpus,1998,Yes sir. Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan No Governor Kelley Yes Governor Meyer Yes President Minehan Yes Governor Phillips Yes President Poole No Governor Rivlin Yes That is a 10 to 2 vote.,58
-fomc-corpus,1998,Our next meeting is on June 30-July 1.,13
-fomc-corpus,1998,"Since the members are all here, I propose that we move up the starting time of the meeting to 1:25 p.m. Hearing no objection, I consider the meeting to be in order. The first item on the agenda is approval of the minutes for the May 19 meeting. Does somebody wish to move them? SEVERAL. So move.",72
-fomc-corpus,1998,"Without exception, they are approved. The Board's public information officer traditionally has served as an assistant secretary of the Federal Open Market Committee. You all know Lynn Fox. I assume that all of us presume she is qualified, and therefore I would request that somebody nominate her.",54
-fomc-corpus,1998,I so nominate her.,5
-fomc-corpus,1998,I second the nomination.,5
-fomc-corpus,1998,"If there is anybody opposed, I don't want to hear it. [Laughter] Nominations are closed, and congratulations, Lynn. Peter Fisher.",30
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to three pages of colored charts. 1/ They have a peach cover and are somewhere in front of you, I hope. The first page shows the 3-month Euro-deposit rates including the current, 3-month forward, and 9-month forward rates since July 1 of last year. This chart therefore covers the 12-month period since the start of the Asian crisis. In the top panel for the U.S. dollar rates, you can see that most recently those rates have continued their gentle decline from their peak on April 27 at the time of the Wall Street Journal article. The decline was punctuated more recently by the market's reaction to the Chairman's testimony before the Joint Economic Committee on June 10. I will come back to that in a moment. That leaves the forward rates right on top of the current 3-month rates, which is the same state of affairs that exists in Japan, as you can see in the bottom panel. If you look at German rates over the course of the year since the start of the Asian crisis--shown in the middle panel--your first impression may be that Europe has been going its own way. Rates rose in the second half of 1997 and maintained a bit more of a spread between current and forward rates in contrast to the dollar and yen rates. But on a second and closer look, I think one can see that since December 1997 German rates have tended to move in the same direction as U.S. rates; they declined in December and January, rose from mid-January to late April, and generally declined again from late April to the present. Their recent downdrift is attributed to the anticipation of a larger Asian effect on the European economy and therefore the perception of a reduced likelihood of rate rises over the remainder of the year from the NCBs in advance of the ECB taking over on January 1st. As this gentle downdrift has occurred in the last couple of weeks, the mark has weakened slightly against the dollar. The bottom panel indicates that money market rates in Japan in general and the Japan premium in particular have backed up quite sharply in the past few days. The backup has occurred even though the Bank of Japan has been quite generous in its term operations in the 1- and 3-month areas, but they again have been draining shorter maturities measured in days and weeks. The widening of the various measures of the Japan premium began about two weeks ago as Nippon and Long Term Credit Bank problems came to the surface. It is interesting that the widening accelerated from last Friday to Monday after the announcement that there might be a merger between Sumitomo Trust and Long Term Credit Bank. Turning to the next page, there are three panels that I will first describe and then go over my thoughts about them. The first panel shows the dollar/yen in green with the scale on the right side and the dollar/mark in blue with the scale on the left side. The middle panel shows constant maturity U.S. Treasury yields of 2, 10, and 30 years. The bottom panel shows the currency values of seven currencies against the dollar. Those currencies are indexed to April 10, which was the date of the Bank of Japan's intervention operation in Tokyo. The Japanese yen is shown in green. The day before we had conducted a more modest intervention operation on their behalf. Many market participants have observed an apparent correlation between the dollar/yen and various exchange rates and rates in other asset markets. Having observed this apparent correlation, which they date back to about April 10, many in the speculative community may have reinforced it through their own trading behavior in the expectation of making a profit. That certainly has happened. But while most market participants are focused on the weakening yen as the cause of the recent correlated movements, I think we should not overlook the common thread of the strengthening dollar and the strengthening mark, which I have not graphed here, as capital flees the periphery and moves into core industrial countries. In particular, it seems to me that over recent months, the dollar and dollar assets have been strengthening as U.S. economic data have come in close to expectations, though not so strong as to appear to require a policy tightening by the Committee. Indeed, the data have been just weak enough to avoid provoking a tightening but not so weak as to suggest that the end of the great expansion might be in sight. While I do not have similar charts for Germany, the same phenomenon has been occurring there, with the mark strengthening against the yen, equity markets reaching new highs, and Bund yields reaching new lows. The Chairman's testimony on June 10 before the Joint Economic Committee, coming as it did in the midst of much anxiety about Japanese, Russian, Chinese, South African, and other asset markets, was perceived by the market as something of a neon sign announcing the good health of the U.S. economy in contrast to much of the rest of the world. In addition, because the Chairman appears to have been read in the market as being both on the lookout for inflationary pressures but also suggesting that a near-term tightening was not likely, investors took the testimony as a green light to buy Treasury coupon securities with minimal risk. Our joint intervention on June 17, while providing something of a respite from the rush of markets in one direction, also in a sense proved the correlation hypothesis, at least to some people in the market. In any event, the strengthening of the yen provided some trading relief for many other asset markets. Overnight, we again had something of the same phenomenon. Today, official statements in Tokyo that made a permanent income tax cut seem more likely and suggested that one faction of the LDP might support the prime minister in his pursuit of a bridge bank concept gave the market a certain pause. In markets here at the quarter-end, a number of participants seemed to cash in their positions and take their profits home when they could. This induced something of a rally in the yen, which played through into other asset markets. I'm afraid that while there is a positive side to that, we should be aware of the likely risky side, namely that this episode seems once again to be confirming in the market's mind that everything is driven off the dollar/yen. Turning to the last page and domestic open market operations, the average effective federal funds rate since your last meeting has been quite close to the target rate at 5.51 percent. But as you can see in the pattern of funds rate trading over the three maintenance periods, the daily effective rates have tended to oscillate between slightly soft early in the periods and somewhat firmer toward the end of the periods. You can see the slight down/up, down/up pattern in the effective rates, the red horizontal lines. This is not quite how I think we should be going about meeting the Committee's objective of an average rate. I would prefer to avoid the apparent instability that stems from having the market think of us as content with the oscillation of a negative autocorrelation pattern. I would rather that they think of us and anticipate our operations as being directed more toward a reversion to the mean. I do not yet entirely understand why we have had this problem of a soft market early in the maintenance periods. It may simply be that we have switched back and forth from adding to draining reserves as the needs worked out that way. It may also be that there continues to be some volatility in the pattern of major banks' participation in the Treasury tax and loan accounts. Some of them raise and then cut their capacity, and this is leading to some inherent instability in the market. In the last few days, markets have been anticipating the usual pronounced quarter-end tightness in the market. Today, federal funds are trading above 6 percent as we thought they would, but this is a major payment day. We have tried to address the pressures. You can see the softish tone we gave the market yesterday in our effort to anticipate today's tightness. We have been trying to meet that as best we can. Mr. Chairman, I will need the Committee's ratification of our domestic operations. Separately, I will need ratification of our June 17 foreign exchange intervention that I have previously described to the Committee. The System's share comes to $416.7 million. I would be happy to answer any questions members of the Committee might have.",1699
-fomc-corpus,1998,Questions for Peter? President McTeer.,9
-fomc-corpus,1998,I gather you are saying that you object to movements up and down around the target for the funds rate and you would like those movements to be tighter. Why exactly is that?,35
-fomc-corpus,1998,"I don't want the market to think that if we allow federal funds to be very soft at the beginning of the period, we will inevitably let the market be tight at the end of the period. That is not my objective. I'm afraid that the pattern we have seen tends to induce a certain amount of instability if market participants come to anticipate that if the fed funds rate is soft, we will permit firmness later. I would prefer that they think of us, whatever the funds rate deviation may be on a particular day, as trying to get back to the target as best we can on each of the subsequent days.",122
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"I don't have a question, Mr. Chairman, but I would like to comment about some of the recent foreign exchange market developments. I will be brief. Specifically, I see a risk in resisting the depreciation of the yen, if that begins to occur again. Obviously, the countries in East Asia face an extraordinary, challenging, and difficult adjustment problem; we all know that. There are no good choices for them as I see it. Deflationary forces in Japan have now pushed that very important economy into recession. Consequently, the yen has depreciated very sharply against the dollar over the last several weeks. The depreciation may indeed have been disorderly enough that it warranted intervention. I do not know. I certainly recognize that continued yen depreciation raises a lot of problems around the world. It raises the threat of another round of currency depreciation, especially in the East Asian region. But the performance of the Japanese economy, as everybody here knows, is critical to the economic health of that region and to the health of the world economy generally. And at this point, as I see it, the exchange rate is one of the few flexible prices that can adjust quickly enough and substantially enough to help the Japanese economy in the near term. I hope that as we go forward we will keep in mind that any international effort to resist further yen depreciation carries some important risks of its own. The reason is that it has potential consequences for both Japanese and U.S. monetary policy. Fundamentally, to prevent a further yen depreciation if underlying economic forces renew downward pressure on that currency, either the Bank of Japan must pursue a tighter monetary policy or we must pursue a more accommodative monetary policy or some combination of the two. The former, of course, risks an even deeper recession in Japan. The latter risks creating stronger inflationary pressures in the U.S. economy at a time when, at least in my view, rising inflation is already a risk. These obviously would be very undesirable consequences in two crucial economies. Indeed, a case could be made that we really need just the opposite, a more expansionary monetary policy in Japan and a less expansionary one here. I do not pretend, obviously, to know the best way to address all of the very difficult questions we face on this subject as we go forward. I suppose one could argue that this Committee should be prepared to follow a more accommodative policy than it might otherwise to facilitate adjustment in East Asia. Such a policy would, of course, tend to stabilize the exchange rate. But it is not obvious to me that the potential benefits from stabilizing the yen/dollar rate, even though there clearly would be some significant benefits at least in the short run, are worth risking the potentially adverse consequences for both the U.S. and Japanese economies, given the underlying monetary policy actions that might be required to maintain the yen/dollar rate at or near its current level going forward. Again, these are the two largest economies in the world and they are crucial to the health of the world economy. It may be that the least-worst choice in this situation is to let the yen depreciate further and deal with the fallout from that in Asia and elsewhere in the world as best we can. On a more positive note in that context, other Asian economies clearly would benefit over time from the stronger Japanese economy that an easier monetary policy in Japan would foster, even if the cost in the near term were a weaker yen. I just wanted to make those comments. Hopefully, they will be helpful.",703
-fomc-corpus,1998,"Let me just say that I do not think anyone at the Treasury would seriously disagree with the way you framed the issue. There was a great reluctance at the Treasury to intervene, and the decision was touch-and-go for a considerable period of time. I would say that the chances of repeating such intervention verge on the remote or even less than that. I believe there is a real understanding that Japan's or more effort to stabilize the yen in April clearly demonstrated that intervention per se does not work. If we ever needed any demonstration, that was it. The only reason that intervention seemed to work in the latest episode had nothing to do with the size of the intervention. It was the result of what somehow was perceived as a signal that either we were going to ease monetary policy or the Japanese were going to tighten. Clearly, neither policy option is even remotely on the agenda at this stage.",177
-fomc-corpus,1998,"While our attention has been focused mostly on Southeast Asia, the situation in Russia is deteriorating and seems to be extremely vulnerable. Could you or someone comment on that? Do we have any relationship with Russia, formal or informal, that would get us involved in their problem?",54
-fomc-corpus,1998,"I haven't even heard the idea floated of an intervention to support the ruble, though it has been floated with respect to some of the other currencies that have come under pressure in the last year.",39
-fomc-corpus,1998,South Africa?,3
-fomc-corpus,1998,"No. We have operated as agent for the account of South Africa, but that is a standard reciprocity practice among central banks. We've done it routinely over the last ten years for the Reserve Bank of Australia, so routinely that you never hear about it. It is rather hard to turn down the Reserve Bank of South Africa when they ask us to do something that we are doing month in and month out for the Australian authorities. But for our own account or the Treasury's account, I haven't heard any proposal floated for intervention in support of the ruble. I'm not sure how I would go about trading that currency. But your question was a little more general, and I defer to Ted Truman or others on whether there are other modes of assistance we might be giving to the Russians.",156
-fomc-corpus,1998,"The complications with Russia stem from the fact that it is important to the United States politically and less important economically and financially. It is much more important economically and financially to our European colleagues. The basic problem in Russia is that although they have made better progress than I think many people might have expected six or seven years ago, they also have a much longer way to go. In particular, the capacity of the country to generate revenues and the need for funds to meet the obligations of the government have not been matched. There is a real concern that the heavy involvement of external funds in the financing of their government budget in recent years is building up a mountain of debt that may be a problem. But the crucial issue here is the capacity of the political system in Russia to operate effectively. As far as financing is concerned, even leaving aside the operations that Peter Fisher commented on, I do not have a sense that there is a strong likelihood of any bilateral financing, though I wouldn't assign zero probability to anything at this point. The more likely mechanisms would involve the continued use of international financial institutions where, perhaps especially in the Russian case, the multilateral approach through these institutions is probably helpful in terms of blunting some of the political criticisms. The other comment I would make, which is a tribute to what has been accomplished in part through the efforts of the Federal Reserve System over the years, is that I perceive a general feeling now that the central bank is one of the strongest institutions in Russia. It should be noted that many features of the Federal Reserve System were built into the Central Bank of Russia. But as we know, central banks cannot do it all by themselves.",331
-fomc-corpus,1998,"The major concern in the Russian situation is that the time is rapidly approaching when a major crisis could occur. As you probably know, the Russian authorities have found it increasingly difficult to refinance maturing obligations in their new Treasury bill market. As their outstanding bills have matured, the Russians have increasingly had to raise interest rates in order to sell the new bills, and there apparently is no equilibrium rate level. A lot of those bills denominated in rubles are held by foreigners. At this stage, the time frame before the crunch occurs is probably only a few weeks to a month or so. The issue that Ted Truman alluded to is a very considerable concern in this government beyond the financial officials--people in the White House, the State Department, and the security agencies--that some action will have to be taken to prevent the collapse of the Russian economic system. The question that is driving everyone to the wall is what type of conditionality can be imposed. As Ted has mentioned and his colleagues have reaffirmed in a fairly explicit manner, the Russians have a tax structure at the moment that if it were fully enforced and fully complied with, would make everyone bankrupt. As a consequence, people are given the choice of paying their taxes legally and going bankrupt or not paying them at all. It is very difficult to be somewhere in the middle. The new Russian government is trying to put a tax reform bill through the Duma to get a much lower tax structure that is capable of being complied with and will therefore raise revenues. At the moment, their revenue shortfall is very large, and they are continuously required to fund it. Their need for revenues will inevitably go to the central bank as their ultimate and only source of funding. At that point the ruble will be gone. Its value will essentially disappear. Some estimates are that it will decline by 50 percent. The geopolitical implications are very obvious. At the moment, it looks as though pressure is building to get the IMF to do something. It is not clear what will happen if that approach does not work or conditionality does not work. All I can say is that there is considerable anxiety among political authorities in this country about a potential collapse of the ruble in Russia. I do not know what the outcome will be.",454
-fomc-corpus,1998,"The Russians are aggravating the problem further in their handling of their short-term workout, if there is one, by doing some borrowing in dollars and other hard currencies and pledging export earnings as collateral.",40
-fomc-corpus,1998,That gives them a day or two! President Moskow.,12
-fomc-corpus,1998,I want to return to Japan briefly. I had a question for Peter Fisher on the recent intervention. Can you tell us how market participants viewed this intervention and also what they see as the outlook for possible future interventions?,43
-fomc-corpus,1998,"The intervention in which we participated on June 17 certainly took the market by surprise. We had a much bigger price effect than I and, I think, a number of my colleagues anticipated. Some large speculative players seemed to have been extending their long-dollar/short-yen positions, and as the yen strengthened from 146, where we entered the market, down to 142, they had to close those positions. That's why we had such a ""pop"" in the market. The market is wary of further intervention. Obviously, when people sustain significant losses on a mark-to-market basis and some of them close their positions, that gets the market's attention. I think the rate went to 142 much faster than most market participants thought it would. They expected it to take longer. It is worth noting that the rate has not yet returned to the previous high of 146.",176
-fomc-corpus,1998,Didn't it strengthen to 143?,7
-fomc-corpus,1998,"It peaked this time in the high 142's, briefly touching 143. It is clear that the market is going to be on guard for further intervention. I would be the first to say that intervention without some message is not going to be very effective, as our South African friends found when they orchestrated their own intervention. The Bank of England joined with us in trying to warn them that trying to match the speculators dollar-for-dollar without some new message about what was going on probably would not have much effect. In fact, it was counterproductive. That kind of intervention creates the liquidity illusion that speculators can turn over their positions and get cheap dollars. I should add that in terms of market expectations, the financial world was coming to an end as of just a week ago, and the Japanese were going to be completely incapacitated in the view of most foreign exchange traders. Clearly, the Japanese have been able to beat those low expectations! I alluded to some announcements and some comments that they made about permanent income tax cuts. So, the Japanese are beating the expectation that they would do nothing. That, I think, has helped to moderate the yen's movement over the last few days and has prevented it from going back up to 146. But much remains to be seen between now and the other side of the Japanese elections. I don't have the sense that the market is anticipating any imminent intervention. I think market participants are very curious about further announcements out of Tokyo. I hope that answers your question.",304
-fomc-corpus,1998,"Yes, thank you.",5
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"On the Japanese situation again, we received what I thought was a fascinating paper on the policy options available to the Japanese. It certainly emphasized the fact that they need to do something that is fairly aggressive and strong on the fiscal side. The paper also discussed the topic that Al Broaddus brought up, namely, the potential for a depreciating yen to lead over some period of time to a recovery through an expansion in exports. In that regard, I was wondering whether the yen has actually depreciated on a trade-weighted basis.",106
-fomc-corpus,1998,"It depends on which trade-weighted basis one uses. It is a fact that the yen has not depreciated as much on a broad trade-weighted basis--it has depreciated slightly on that basis--as it obviously has against the dollar. In fact, that is part of the argument. But having said that, as Peter Fisher pointed out in his reference to correlations, the problem is that to the extent that the yen weakens further and the won, the rupiah, and the Thai baht all weaken with it, it does not weaken relatively that much on a trade-weighted basis, but it does weaken relative to dollar. This is implicit in Peter Fisher's comments, and I would agree with that. In some sense, we have the chicken and the egg conundrum, but it is increasingly clear that Japan is the heavy occupant of the boat, if I may mix my metaphors. So, a lot depends on the health of the Japanese economy, as President Broaddus pointed out. It also isn't clear on the other side that even if the yen depreciates, it is likely to provide much net stimulus to the Japanese economy. This is partly because it will not depreciate that much on average, and it's not clear that the associated income effects among Japan's trading partners in Asia will not overwhelm any yen price advantages relative to the dollar. I would not advocate a policy of letting the yen go, nor do I think the recent intervention was intended to promote any stabilization of the yen. Its purpose was at best to try to cause the markets to pause and think a little about what the fundamentals might be saying. There is some question, it seems to me, on that score. But the simple answer to your question is that the yen may be said to be back to where it was, but it depends a bit on what you take as your reference point or index.",380
-fomc-corpus,1998,"Further questions for Peter? If not, would somebody like to move ratification of the foreign currency transactions since the last meeting?",25
-fomc-corpus,1998,"Move approval, Mr. Chairman.",7
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,All in favor say aye. SEVERAL. Aye.,13
-fomc-corpus,1998,Opposed? Without objection.,6
-fomc-corpus,1998,I also move ratification of the domestic operations.,10
-fomc-corpus,1998,Is there a second?,5
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,"Without objection. Thank you very much. We will now go to the staff report to be presented by Messrs. Prell, Stockton, and Hooper. Gentlemen.",35
-fomc-corpus,1998,"We will be using the set of charts titled ""Staff Presentation on the Economic Outlook.""2/ But before I turn to the first exhibit, I want to take a minute to update you on the implications of the late-breaking data--particularly Friday's report on personal consumption. As you know, the downward revisions to spending in March and April, along with a mild downside surprise with respect to the May increase, left us on a path that makes it unlikely we will see the 5+ percent growth of real PCE that was predicted in the Greenbook. If we were starting afresh today, we would write down something in the low 4 percent range. Some of the surprise in these data appears to have reflected a different split of auto sales between consumption and producers' durables, which does not affect GDP. But that is only part of the shortfall, and we would now trim our forecast for second-quarter GDP growth to about 1-1/2 percent. Seemingly, some of what the GDP gods unexpectedly gave us in the first quarter they may have taken away in the second--still leaving us, though, with a quite impressive overall first-half performance for GDP. Perhaps there was a more graceful way to start our presentation than with a correction of the Greenbook forecast, but at this point we do not see this news as undermining the major themes in the outlook that we will be addressing. So, let me turn now to the first chart, which provides a brief summary of our projections. In the top panels, you can see that we are forecasting a marked slowing of the economic expansion. The thin red line shows the quarter-to-quarter movements in real GDP, while the black line captures the broader contours via a four-quarter percent change. We believe that growth will remain low over the next six quarters--indeed, considerably below the trend growth of potential output, which we put at almost 2-3/4 percent over this period. Under these circumstances, we expect to see unemployment drift upward, as indicated in the middle panels. By the end of this year, the jobless rate approaches 4-1/2 percent and by the end of 1999, 5 percent. Even with this rise, labor markets will still be tight, putting pressure on real wages and on prices as well. We see the CPI rising only 1-3/4 percent this year but picking up to 2-1/4 percent next year. In the chart, we have also shown the time series adjusted for technical changes to the index since 1994, the red line, so that you can get a sense of the ""true"" degree of deceleration and acceleration over time. Chart 2 addresses some facets of the financial backdrop for this projection. We have once again predicated our forecast on the assumption that there will be no significant shift in the federal funds rate through next year. Although we anticipate that nominal bond yields eventually will back up a bit, as you can see in the top panel, there are no really exciting movements in real rates in the forecast. Given that the economy has been chugging along in the face of the current monetary policy setting--at least up to the current quarter--this might naturally lead one to ask what we think is going to produce the sustained weakening of aggregate demand growth we have predicted. From the financial side, one answer is merely that we do not have a repetition of the decline in longer-term rates that has provided a boost to economic growth over the past year. But another answer can be found in our stock market forecast. We are anticipating a decline of just six percent in share prices, occurring over the next several months. As the middle panel shows, we estimate that this would roughly flatten out the price-earnings multiple on the S&P 500. I won't take up your time with the umpteenth restatement of our skepticism regarding the sustainability of these valuation levels. The panel points up just one extraordinary aspect of the market's performance--which is that the P/E is not only at an historic high, but that, in contradiction of past patterns, it has reached that level well past the trough of the earnings cycle. Indeed, it is our sense that the current market level reflects, in part, unrealistic expectations about future profitability. The lower left panel shows the divergence between Wall Street strategists' predictions for earnings and our own. One might argue that this difference is the stuff of a greater market correction, but the ability of the market to continue its levitation act thus far this year makes us reluctant to go much further than we have. In any event, the end of the stock market uptrend will itself remove another source of impetus to demand. Finally, in fixed-income markets, we expect that, if and as the economy shows signs of persistently slower growth and weaker profits, lenders and bond investors will turn a bit more cautious. As you can see at the right, there has been only a slight widening of risk premiums in the bond market to date, and that reflected at least in part a heavy supply of new junk bond issues rather than a fundamental shift in investor attitudes. We expect spreads to remain relatively modest, but again, we see things moving in a less stimulative direction than they have over the past couple of years. Of obvious importance for financial market sentiment and for demand trends in the economy is the denouement of the drama playing out overseas. And so, we turn now to Peter Hooper for his assessment of the outlook in that regard.",1115
-fomc-corpus,1998,"Developments in international financial markets, which are reviewed in Chart 3, continue to be dominated by turbulence in Asia as Peter Fisher has indicated. Movements of exchange rates in that region, shown at the top left, can be divided into three groups of currencies: first, sharp declines in the dollar values of Korean and Southeast Asian currencies last fall, followed by some recovery and a further downturn more recently; second, a somewhat less pronounced but persistent decline in the yen; and third, still relatively stable currencies in Greater China and Singapore. Movements in Asian equity markets have paralleled those in currency markets across these groups, with equity prices in Southeast Asia and Korea turning down again in recent months after an early 1998 bounce-back, while those in Japan and China plus Singapore have shown much less precipitous declines since mid-1997. Looking ahead, a central assumption underlying our forecast is that in the period ahead Japanese authorities will come to terms on and implement an effective resolution of their banking crisis. Bumps in the road will be inevitable; interruptions of credit lines and other uncertainties associated with the resolution process will weigh on real activity for much of the forecast period, but we expect financial markets eventually to be bolstered by signs of progress. Against that background, we have assumed that the yen will be flat for the balance of 1998 and will appreciate somewhat during 1999. Our forecast has currencies elsewhere in Asia remaining about unchanged in nominal terms, with the exception of the Chinese renminbi, which we see depreciating moderately next year. The currencies of Korea and Southeast Asia should appreciate in real terms with rising inflation in those countries. The middle two panels show developments in other key emerging markets. The recent decline in the real value of the Mexican peso is dwarfed by its earlier recovery from crisis-induced lows several years ago--the real peso is still nearly 20 percent below the pre-crisis highs reached in early 1994. Brazilian authorities have maintained a steady rate of depreciation in the real, and we assume they will be able to continue to do so. Russian authorities, too, have so far succeeded in keeping the ruble relatively stable in the face of growing uncertainties about Russia's economic prospects, but the odds of a sharp depreciation are rising. (Russia has too small a weight in U.S. trade to be included in our index for the dollar.) Stock markets in all three countries have retreated noticeably from earlier highs in the past year, feeling the contagion from Asian equity markets. Among the major industrial currencies, shown in the bottom panels, sterling has strengthened recently, while the Canadian dollar has weakened against the dollar and the mark has moved roughly sideways since its sharp decline through the middle of last year. We project the mark/euro to appreciate somewhat over the year ahead as the new monetary union gains market acceptance. Our trade-weighted average of 29 currencies of industrial and emerging market economies follows a similar pattern. Stock markets in continental Europe have continued their strong advance in recent months, while those in the United Kingdom and Canada have leveled off or declined somewhat. Turning to foreign economic activity, while observers on continental U.S. shores are still waiting for the tsunami to hit, our seismographs now indicate, for a second time, that the quake in Asia has been substantially larger than previously believed. The top left panel of Chart 4 shows how we viewed total foreign GDP growth and Asian real GDP growth prospects last September as Thailand's currency crisis was beginning to spread to elsewhere in Southeast Asia. At the time, we saw economic and financial turbulence as a downside risk for Asia, but with indicators for the third quarter coming in strong for the region as a whole, this risk did not significantly alter our baseline forecast for growth to remain near its historical trend rate of more than 5 percent. By the time of the January Greenbook, the panel at the top right of this chart, with the crisis having intensified greatly and spread to north Asia, we had marked down Asia's growth for 1998 by more than 4 percentage points to less than 1 percent. In recent weeks, news about the first quarter and preliminary indications for the second quarter have been far weaker than we anticipated, indicating that GDP has been plunging at unprecedented rates, as shown in the lower left panel. Our current forecast has Asia's GDP falling 3 percent during 1998 and picking up only very sluggishly, by Asian standards at least, in 1999. The level of GDP in that region at the end of the forecast period is 11 percent below the path we were projecting last September. We see total foreign growth, the black bars, rising over the next year and a half as the drag from Asia recedes. The lower right panel shows the importance of various regions in U.S. exports--the weights used in constructing our foreign GDP aggregate--as well as their shares in total foreign GDP. Asia accounts for over 40 percent of foreign GDP but for 30 percent of U.S. exports and on that basis is divided into three roughly equal subgroups: (1) the front-line crisis economies of Korea and Southeast Asia, (2) Japan (which seems to be seeking membership in the first group), and (3) Greater China plus Singapore. Europe, Canada, and Latin America, shown at the bottom, each take about one-fifth, or a little more, of U.S. exports. Turning to a closer look at these regions, your next chart focuses on the front-line Asian economies. The numbers here are mind-boggling but, I would caution, also very fragile and subject to substantial revision. In the first quarter of 1998, real GDP in Korea, Indonesia, and Malaysia dropped at annual rates in excess of 20 percent. Early indicators for many of these countries suggest large declines in the second quarter as well. The picture that emerges from our analysis of this free fall in GDP, based on some still very sketchy details and an accumulation of anecdotal reports, is indicated in the middle panel. Sharp contractions in consumption and especially in investment have resulted from four factors: first, massive adjustments of balance sheets as private wealth has plunged with the downturn in stock market, property, and other asset values and increases in the local currency value of foreign debt; second, growing uncertainty about job security and earnings prospects as unemployment and business failures have soared; third, cancellation of construction and investment projects following past overinvestment and growing excess capacity; and fourth, a widespread credit crunch and rising cost of funds. Credit availability has dried up as foreign investors have fled and as domestic banking systems have retrenched. Substantial increases in interest rates--as indicated at the lower left--have raised the cost of funds, although real rates have risen much less as inflation has ratcheted up in most of these countries and soared in Indonesia in response to currency depreciations. As indicated in the lower right panel, trade balances in these countries have dropped sharply, primarily because imports have plummeted with the contraction of domestic demand. Korea's imports in the first quarter were $53 billion at an annual rate, or nearly 40 percent below year-earlier levels, contributing to most of the $63 billion increase in its trade balance over the same period. In most cases, exports have failed to rise appreciably, partly because of the contraction of trade credit but also because of falling export prices and the fact that a large share of the exports of these countries are to each other. Returning to the top panel, in the two right-hand columns we are projecting further significant declines in activity in the second half of 1998 and only sluggish recovery at best next year. The near-term outlook for Indonesia is especially bleak, weighed down by ongoing political uncertainty, social unrest, and a paralyzed banking system. The likely prolonged absences of many ethnic Chinese, constituting a substantial portion of Indonesia's entrepreneurial and managerial expertise, also are resulting in critical breakdowns in the distribution system. Prospects in the other countries are somewhat less gloomy as some progress has been made on restructuring foreign debt. Current accounts in many cases have moved strongly into surplus, and macroeconomic stabilization programs are being adhered to. Once domestic financial conditions begin to stabilize, renewed access to international capital markets should help to support economic expansion, but probably not until later next year. A linchpin for the prospects of stabilizing Asia's financial markets is Japan, the subject of Chart 6. As can be seen in the first line of the upper panel, GDP fell at a 5 percent annual rate in the first quarter, much more than expected. Consumption was weak, reflecting declining consumer sentiment and rising unemployment, as shown in the middle left panel. Sentiment fell further in April, while unemployment soared in April and leveled off in May, although the ratio of job offers to applicants weakened further in May to a 20-year low. These and other recent developments portend a significant further downturn in consumption in the second quarter. Investment dropped sharply in the first quarter and likely declined further in the second quarter. As shown in the middle right panel, the Tankan survey of business sentiment and the lending attitudes of Japanese banks tanked in the first half of the year. The drop in the latter series is evidence of a credit crunch associated with the growing crisis in Japan's banking system. Uncertainties surrounding the resolution of the banking crisis, as banks are closed, merged, or otherwise dealt with will continue to depress consumption and particularly investment in the second half of 1998, but we are assuming that private domestic demand will stabilize and begin to creep up next year as longer-term prospects for the financial system begin to brighten. The projected increase in GDP in the second half of this year is more than accounted for by fiscal expansion as the recently passed large supplemental budget package more than offsets the contraction incorporated in Japan's initial 1998 budget. As indicated in the lower left, we are now assuming that the structural budget deficit will weaken by3/4 percent of GDP this year and a bit less next year. We also expect net exports to make a modest positive contribution to GDP growth, as indicated at the lower right, with real imports contracting somewhat further and exports receiving some stimulus from the depreciation of the yen. Turning to the third group of Asian economies, Greater China and Singapore, growth in China has slowed noticeably from the near double-digit pace of a year ago, as both exports and direct foreign investment inflows have declined sharply. We are projecting growth to come in well below the government's target of 8 percent during 1998 and to recover somewhat in 1999. We assume, though with diminishing conviction, that the Hong Kong peg will hold despite the beating that the Hong Kong economy has been taking. Hong Kong's GDP fell at a 10 percent annual rate in the first quarter following a downward revised fourth quarter. The spike in interest rates late last year, shown in the middle left panel, in response to pressures on the Hong Kong dollar along with massive corrections in equity and property values have weighed heavily on domestic demand and will continue to do so well into next year. The bottom two panels summarize changes in the combined external balance of all ten major Asian economies. As shown on the left, we expect the combined current account surplus of this region to be well over $200 billion this year, up from less than $50 billion in 1996. A rough indication of how this massive shift is being distributed around the globe is shown at the right, based on trade data for eight of the ten economies. Between the first quarter of 1997 and the first quarter of 1998, the combined trade surplus increased $151 billion. Of this total, $36 billion was in trade with the United States and $41 billion with Europe. In both cases, Asia's imports fell and exports rose by similar amounts. The $50 billion decline in Asia's imports from itself, and hence identical decline in its exports to itself, reflects a sharp contraction in intra-Asian trade as demand in the region has plummeted. There was also a sharp drop in imports from the ""other"" region, largely OPEC and Latin America, reflecting in part declines in the volume and price of oil imports. Your next chart touches on the rest of the world. Despite the negative surprise in Asia, growth in Europe came in at a healthy 3 percent annual rate in the first quarter. As indicated in the second panel on the lower left, net exports made a large negative contribution to Europe's GDP growth in the first quarter, partly because of a surge in imports and partly because of a slowing of exports to Asia. In contrast, Canadian net exports benefited from strong demand in the United States. The net export drag in continental Europe was offset by robust growth in domestic demand, supported by low or declining interest rates, shown at the right. U.K. interest rates have been rising, however, as the unemployment rate, shown in the third panel on the lower left, has declined further, and consumer price inflation, shown at the right, has moved above the Bank of England's 2.5 percent target range. Looking ahead, we project growth in Euroland to continue at a fairly robust pace, buoyed in part by ""europhoria,"" while growth in the United Kingdom and Canada should slow somewhat. The bottom two panels address developments in Latin America. Negative effects of the Asian crisis have been felt by the major countries in this region. Brazil's GDP will be depressed this year, partly by a run-up in interest rates in the wake of the Asian turmoil last fall. Brazil's problems are also home grown, including persistently large fiscal and external deficits and growing political uncertainty as President Cardoso faces a tough challenge from labor candidate Lula ahead of the elections in October. Mexico has been hurt by the drop in oil prices, and the region as a whole is facing higher spreads in international credit markets. Assuming the situation in Asia stabilizes by next year, we expect growth to pick up in Mexico and Argentina. However, this means a further widening of the region's current account deficit, shown at the right. In the case of Mexico, we can begin to anticipate its own special Year 2000 problem in connection with its 6-year presidential election cycle. Chart 9 reviews the implications of these developments for U.S. exports and imports. Recent movements in U.S. exports by region reflect the differing trends in activity abroad. Exports to Europe and Canada have been on an uptrend, while shipments to Asia dropped sharply in the first quarter. Imports, shown at the right, rose in the first quarter from all regions except Asia. However, there appears to be some uncaptured seasonal variance in these data; imports from Asia were well above their level of four quarters earlier, roughly consistent with the view we get from Asia's export data. As shown in the middle left panel, real net exports of goods and services declined in the first quarter and, given the substantial drop that occurred in April, we expect a more significant decline in the second quarter. Thereafter, a slight increase is projected for the second half of 1998 and a somewhat faster expansion in 1999, roughly in line with the projected pickup in total foreign GDP growth. Real import growth, shown in the middle right panel, should slow in the second quarter and beyond in response to the decline in U.S. GDP growth. The bottom line for real net exports, as shown in the lower left panel, is another substantial negative contribution to GDP growth in the second quarter, about 1-1/2 percentage points, followed by lesser negatives in the second half and next year. The ongoing declines in net exports push the current account, shown at the right, below minus 3-1/2 percent of GDP by the end of 1999. This level matches the previous low that occurred in 1987, a period of considerable weakness in the dollar.",3212
-fomc-corpus,1998,"I think the domestic demand picture is sufficiently familiar to you that I can run through the highlights quite quickly. We are expecting a substantial deceleration of both household and business spending. Chart 10 summarizes the household side. The Greenbook predicted a quite noticeable drop-off in the growth of consumer spending in the wake of the first-quarter surge, and the latest data suggest that that slowing has come a bit faster than the previous figures had indicated. But, even 4+ percent in the second quarter is a pretty hefty further gain, and the fundamentals at this point are still highly favorable to demand. So, we would be inclined to stick with the general contour of the forecast represented by the heavy black line in the upper left panel, which shows the four-quarter change in PCE dropping off from over 4 percent at this point to something closer to 2-1/2 percent in 1999. One indication of the favorable fundamentals is the still high reading on consumer sentiment in the June Michigan survey, portrayed at the right. For many households, I suspect that the rising value of their stock portfolios has been a significant source of their confidence and willingness to spend. The middle left panel documents the remarkable run-up in the ratio of wealth to income, the black line. Historically, the personal saving rate has tended to move inversely with the wealth ratio, and the current episode is no exception. The anticipated decline in share prices implies a drop in the wealth-income ratio over the next year and a half and--allowing for lags--this contributes to a leveling out of the saving rate, thereby explaining the moderation of spending growth. In the housing market, all signals on demand are still flashing green. Yesterday, the Census figures showed new home sales edging up to a new high in May, and--as plotted at the right--the homebuilders' survey for early June showed their index of sales activity also setting a record. As we look ahead, a modest updrift in mortgage rates in combination with a slowing in employment and income gains will take some of the ""oomph"" out of the market, but, as shown in the bottom left panel, housing affordability as measured by the cash-flow burden of ownership will remain very favorable. Thus, we are projecting a decline in housing starts that leaves the level still comparable to the high readings of the past few years. Turning to the next chart, which relates to business spending, the upper left panel highlights one of the most important elements in the dynamics of our forecast. Over the past year, a significant component of the growth of GDP has been the rise in the pace of inventory accumulation--the black line. Stocks have been rising much faster than the trend of final sales--the red line. This is not a sustainable pattern, and we think we see signs in the April data that a drop-off in stocking may be in the cards. We still have a sizable accumulation of non-auto stocks in the current quarter, however, and so we expect that a further slowing of inventory growth will be putting a considerable damper on demand over the second half of the year. As the expansion of demand is perceived to be slowing, businesses will likely be less anxious to invest in plant and equipment as well. The black line in the right panel shows that we are projecting that real BFI growth will slow from about 12 percent over the past year to half that pace in 1999. Because the level of investment will still be rising, though, we estimate that this forecast implies that capital stock growth, the middle left panel, will remain substantial--exceeding the pace of output expansion. Although we believe that declining capacity utilization will be causing discomfort in some sectors--especially in manufacturing--there are some basic considerations favoring a rise in the desired capital-output ratio. An obvious one is portrayed at the right: the declining relative cost of equipment, particularly computers and communications equipment. It is with the expectation that the prices of such information technology will continue to decline rapidly that we are predicting that investment in capital equipment will continue growing at a good clip through next year. As you can see at the lower left, the data on new orders booked by domestic manufacturers of nondefense capital goods are already providing a possible hint of the projected pattern of investment, with orders for computers and communications equipment having risen appreciably, even in nominal terms, this year, while orders for other equipment have leveled out. I should note, however, that it is tricky to translate these data into GDP expenditures, given that international trade is so important in this sector. Finally, we are predicting that the structures component of BFI will be rising modestly over the coming quarters. As suggested by the vacancy rates at the right, trends and conditions differ across the various markets, but it is our sense that there are enough areas of strength to push aggregate construction somewhat higher. The recent upturn in the monthly data on construction was heartening in this regard; but, frankly, we are not yet sure whether the latest data are reflecting an actual change or simply the first stage of a statistical improvement that will be followed up subsequently by significant upward revisions to the historical time series. But, before I lapse into further discussion of statistical arcana, let me turn the floor over to Dave Stockton for a more important subject--the outlook for inflation.",1070
-fomc-corpus,1998,"The upper panel of your next exhibit lays out the key components of the supply side of our projection. We use a variety of approaches for estimating potential output. The one displayed here is a growth accounting framework. As may be seen on line 1, we are projecting that growth of potential output, on a consistently measured basis, will be 2-1/2 percent per year during the 1995 to 1999 period. This translates into a 2-3/4 percent increase by 1999 after allowing for the technical changes in the CPI. The growth of potential output is more than1/2 percentage point higher than the pace estimated to have prevaied over the first half of the 1990s. Labor input--line 2--is projected to increase at a 1 percent annual rate, close to the average pace observed earlier this decade. But we now estimate that trend growth in labor productivity--line 3--has picked up to a 1-1/2 percent pace per year. As you know, we revised up this estimate by about1/4 percentage point in the May Greenbook, and we expect that this faster pace will continue over the forecast period. The two principal elements behind this pickup in trend productivity are capital deepening and multifactor productivity. As Mike noted earlier, the high level of business investment has boosted the growth of the capital stock, and with it capital services. As shown on line 4, we estimate that the accompanying step-up in capital deepening has contributed a bit more than 1/2 percentage point to the acceleration of trend labor productivity. Multifactor productivity--line 6--which captures the efficiency with which capital and labor inputs are utilized, is projected to be on an upward trend of about 1/3 percentage point per year, well above the average pace of the preceding 15 years. As we see it, there are risks on both sides of our projection of trend productivity. On the downside, productivity is a sensitive cyclical variable and extracting the trend from the cycle in the midst of a strong upswing in activity is exceedingly difficult. It's possible that the recent improvement in labor productivity will prove less durable when output slows than we are currently assuming. On the upside, multifactor productivity in the past couple of years grew faster than the 1/3 percentage point per annum that we have pencilled in as the trend. Moreover, the explosion of investment, especially in the high-tech area, suggests that businesses are anticipating ample rates of return that would be consistent with some greater increase in the marginal efficiency of investment. As you can see from the dashed extension of the black line in the middle panel, we are projecting that actual labor productivity will grow a bit more slowly than trend, on average, over the next six quarters. In part, we anticipate that productivity will exhibit a fairly typical slowing when activity decelerates as, for a time, employers continue to fill outstanding vacancies. We also have incorporated a minor dent in productivity growth--on the order of a tenth or two in 1998 and 1999--for the diversion of resources to addressing the Year 2000 problem. With regard to labor input, the abundance of job opportunities in this tight market has lifted the labor force participation rate--the lower left panel--to a level above our estimated trend. Going forward, we anticipate that, with jobs remaining readily available and real wages rising, the participation rate will hold roughly constant at 67.1 percent. The flat participation rate implies that the growth of the labor force--the first column in the lower right panel--should mirror the roughly one percentage point per year expansion in the working age population. Employment growth--the second column--is projected to slow considerably, in lagged response to the downshift in activity. To place this in some perspective, we are looking for payroll employment to slow from average increases of more than 250,000 per month over the past year to about 100,000 per month next year. Turning to the upper left panel of Chart 13, with the growth of employment dropping below that of the labor force, the unemployment rate is projected to rise gradually to a shade below 5 percent, relieving only some of the pressure on what is a very tight market. Anecdotal reports continue to stress the difficulties that many employers are experiencing in finding and retaining workers--difficulties that are especially acute in hot fields such as information technology. These perceptions appear to be shared by households. As shown in the upper right panel, the proportion of respondents to the June Conference Board survey viewing jobs as plentiful outstripped those reporting jobs as hard to get by a wide margin, in a dramatic reversal of the situation that existed earlier this decade. The influence of taut markets on labor compensation is likely to be reinforced over the next year and a half by continued acceleration of health insurance costs. A recent Peat Marwick survey of large firms found that health insurance premiums are expected to rise about 3-1/4 percent this year--a still modest increase but one that is, nonetheless, the highest in four years. We are anticipating an extension of this uptrend next year--consistent with the reports of outsized increases that are scheduled to take effect or that are under negotiation. That said, not all of the influences on labor compensation are likely to be in the upward direction. We are not anticipating a repeat of the minimum wage increases of the past two years. Moreover, as we noted in the Greenbook, bonuses, commissions, and other forms of flexible compensation that are tied to business performance should level out or turn down next year, as activity slows and profits edge lower. More broadly, most measures of inflation expectations have moved down over the past year. The Michigan SRC results--plotted in the middle right--have moved up a bit recently but on net are still below the readings of the past few years. Low past and prospective inflation should be a source of restraint on wage determination over the next year. On balance, the growth of ECI compensation per hour--shown by the red line in the lower left panel--is projected to be about flat this year and next, near its recent 3-1/2 percent pace. Turning to the upper left panel of Chart 14, these nominal increases have translated into relatively rapid gains in real wages, especially measured in terms of product prices. As may be seen, gains in real compensation per hour outstripped the growth in trend productivity last year, and the gap is expected to remain wide this year and next. As a consequence, the markup of prices over trend unit labor costs--shown in the upper right panel--is expected to move down still further in coming quarters. One of the main factors behind this apparent restraint on the pricing power of businesses has been the rapid expansion of productive capacity. Manufacturing capacity utilization, shown in the middle left panel, essentially has been moving sideways at a relatively neutral level for about two years. Moreover, we anticipate that the weakening of activity in the factory sector will result in some reduction of utilization rates over the next year and a half. Consistent with the view that there are few pressures on industrial capacity, purchasing managers' reports on vendor performance--the right panel--have been nearly balanced in recent months between those reporting slower deliveries and those reporting faster deliveries. In addition to ample domestic capacity, the spill-over from Asia has left a clear mark on global commodity markets and should provide some further damping of inflation pressures. Non-oil commodity prices--the lower left panel--have plummeted over the past year, and we are not anticipating much if any recovery in these prices over the forecast interval. A rather similar story has been apparent in oil markets. Weakening world demand and excess inventories that built up over the warm winter have pushed prices sharply lower in recent months. We are expecting efforts by OPEC and non-OPEC producers to result in only a limited rebound in the spot price of West Texas intermediate--the black line in the lower right panel--from its average level of about $13.50 per barrel in June to about $16.00 by early next year. The steep drop in oil prices that has occurred to date is expected to depress consumer energy prices--the black bars in the upper left panel of Chart 15--by about 51/2 percent this year. And, next year, retail energy prices are anticipated to retrace only a small part of this year's decline. With regard to the agricultural outlook, considerable uncertainty always attends our forecast at this point in the year. But, in brief, we are not projecting any significant disruptions to production that would move food price inflation--the red bars in the panel--off the moderate pace of the past year or so. The decline of core non-oil import prices--the upper right panel--is projected to steepen to a 2-1/4 percent rate this year, after decreases of about 3/4 percent in each of the past two years. Although we do not anticipate any sharp reversal, these prices are likely to turn up next year as the dollar retraces some of its recent gains and as prices on world commodity markets stabilize after their recent plunge. Slumping import prices and ample domestic capacity in the goods sector have resulted in somewhat greater disinflation among consumer commodities--the blue line in the middle panel--than among consumer services--the black line. The 2-1/2 percentage point gap between goods and services inflation that has opened up recently is larger than the historical norm. And, we are expecting the gap to remain relatively wide over the next six quarters. All told, we expect the total CPI--line 1 in the lower panel--to pick up from a 1 percent pace this year to a 2-1/4 percent rate in 1999, pushed up largely by less favorable price developments for energy and imports. As you know, the stability that we are showing in our forecast of the core CPI--line 2--masks an underlying acceleration of these prices. On a technically consistent basis--line 3--we expect a pickup in core CPI inflation of about 1/2 percentage point between 1997 and 1999. We present these technically consistent figures in the Greenbook in order to facilitate a comparison of our forecast with the historical published data. But, that should not obscure the fact that we believe that changes being made to the CPI are making it more accurate over time. Line 4 in the table--labeled ""actual"" CPI excluding food and energy--provides a somewhat different slant on this issue by adjusting the historical and projected core CPI for our estimate of the bias in each year. Viewed from this perspective, the1/2 percentage point acceleration that we are projecting boosts core CPI inflation from slightly above 1 percent in 1997 to a bit less than 1 percent in 1999. The final line in the table displays our forecast for total GDP prices adjusted for measurement bias. On this basis, we project GDP prices to rise about 3/4 percent this year and a bit more than 1 percent next year. Chart 16 addresses two risks to the forecast. First, in light of recent disappointing events in Asia, we consider a still more pessimistic scenario for that region that hinges on upcoming events in Japan. Although there have been some signs recently that the Japanese government finally will act decisively to deal with its banking crisis, this is by no means a foregone conclusion. An unfavorable outcome in the Upper House elections in two weeks or growing concern about the negative effects of the credit crunch could still result in policy inaction, leading to a sharp further decline in the yen; we have picked 175 yen per dollar as the bottom in this scenario, though considerably weaker numbers have been bandied about in recent market commentary. In this scenario, we assume that the Hong Kong and Chinese currency pegs would give way and that resulting financial market turmoil would drag Asian GDP down another 7 percent below baseline by the end of 1999. We also assume that the contagion would spread to Latin America and Eastern Europe, with reductions in growth there. Finally, we assume that the U.S. stock market would take a 20 percent hit. In brief, this is not yet the black hole scenario, but it is taking a few steps closer to the edge. Running this scenario through the staff's model with the federal funds rate held unchanged, and allowing for feedbacks to imports, we get a reduction in U.S. real net exports, as shown by the gap between the red and black lines at the right, of about1/2 percent of GDP by the end of 1999, roughly similar to the markdown in net exports since the January Greenbook shown by the blue line. The effect of this shock on U.S. exports is larger, eventually reaching 1 percent of GDP, but feedbacks that reduce imports also cut the decline in net exports. In contrast, a good deal of the decline in net exports since January occurred because imports were stronger than expected. The second alternative scenario is a dollar depreciation. If events in Asia turn out as our baseline forecast assumes, with markets beginning to dwell less on Asia's problems, two factors could begin to weigh heavily on the dollar. One is events in Europe. With jitters over the introduction of the euro out of the way and confidence brimming with robust growth in Euroland, there is a risk that the dollar's rise against European currencies over the past year and a half will be reversed. Similarly, with conditions in Asia beginning to stabilize, the outsized U.S. trade deficit and Asian trade surpluses will attract growing attention in the markets. In this scenario, we have the dollar fully reversing its rise since 1996, with the mark/euro going to 1.40 and the yen to 120 by mid-1999. As indicated at the right, this 17 percent depreciation of the dollar generates an 8 percent increase in core import prices by the end of 1999. The implications of these scenarios for U.S. GDP growth and inflation are shown in the bottom panel. With the federal funds rate held unchanged, the pessimistic Asia scenario would reduce GDP growth to 1.3 percent in the second half of 1998 and to less than 1 percent in 1999. The drop in the stock market accounts for more than a third of the effect. The dollar depreciation would raise GDP growth through stimulus to net exports. As indicated in the last line of the table, it would also raise CPI inflation above 3 percent in 1999 and close to 4 percent in 2000. Mr. Prell will now continue our presentation.",2981
-fomc-corpus,1998,"The last exhibit is the usual summary of the projections you submitted for Humphrey-Hawkins purposes. If you scan down the second column, where we have listed the central tendencies, you will see that most of you are expecting real GDP to grow 3 to 3-1/4 percent over the four quarters of 1998, with CPI inflation running 1-1/4to 2 percent for the year and the jobless rate holding in a 4-1/4to 4-1/2 percent range. This is a stronger, more inflationary forecast than ours, and you remain slightly to the high side of the Greenbook in 1999. The central tendency range for GDP growth next year, at 2 to 2-1/2 percent, allows the unemployment rate to inch upward to between 4/2 and 4 percent, but inflation also edges up, into the 2 to 2-1/2 percent range. We have included in the table the Administration's forecasts, because these must be addressed in the Humphrey-Hawkins report. As you can see, in the mid-session budget review document, the Administration predicted smaller increases in nominal and real GDP than your tentative central tendency ranges for the two years and a tad less inflation, on average. I have my doubts, though, that this will lead to harsh criticism from the Administration that you are intending to pursue an excessively accommodative monetary policy! This concludes our presentation, and we will be happy to answer any questions you might wish to raise.",315
-fomc-corpus,1998,"I think that was one of the better presentations this Committee has heard in a while. The outlook is very complex, and I think you all handled it exceptionally well. Peter, what is the potential outcome in Latin America of current account deficits that appear to be getting out of hand? There seem to be political and other obstacles in Brazil, Argentina, and perhaps Mexico to taking the types of actions that would lead to stabilization in those countries. Concurrently, we may have an even worse situation in Russia. Do you have breakdowns stemming from contagion in your simulations for those areas?",116
-fomc-corpus,1998,"In the more pessimistic simulation that we did, we had Asian growth falling by somewhere between 5 and 10 percent at an annual rate across countries. We assumed that this weakness would spread to Latin America and growth there would fall on the order of 2 to 3 percent. There is obviously a risk that it could fall a good deal more. The situation in Latin America is a bit reminiscent of that being experienced a little less than a year ago in Asia. We are seeing some turbulence in Latin American financial markets, but the current indicators in that region look fairly strong outside of Brazil. We have seen indications of slowing economic activity in some of those countries but also a fair amount of good news. There seems to be optimism in Argentina where domestic demand is growing fairly strongly. Mexico has been hurt by the drop in oil prices, obviously, but domestic demand there seems resilient. Nevertheless, given the widening current account deficits we see in those countries, and perhaps a little overvaluation of their currencies, though nowhere near as much as we had in Mexico in 1994, there clearly is a risk in that part of the world. In Brazil, growth has been sharply reduced by monetary tightening in response to currency pressures, and risks remain high given that country's large fiscal and external deficits and the fact that President Cardozo is in a close election race with the leftist labor candidate, Mr. Lula. We thought the pessimistic scenario we picked was a plausible one that would involve a fair amount of contagion following a failure in Japan. There is no question that it could get a good deal worse.",321
-fomc-corpus,1998,"David, in Chart 14 you have a table that shows real compensation per hour and trend productivity. Is that real consumption per hour number deflated by the CPI?",33
-fomc-corpus,1998,"It is deflated by the nonfarm business price index. So, it is a product price deflator.",22
-fomc-corpus,1998,Further questions for our colleagues? President Broaddus.,11
-fomc-corpus,1998,"I have a question, Mr. Chairman, but first I would like to echo your comments about the staff presentation. I have been watching these presentations for a long time, along with Ed Boehne, and I thought this one was particularly well done, especially the focus on the international context. My question has to do with inventories. I have seen a fair amount of commentary recently to the effect that a good part of the buildup in inventories in the first quarter, more than normal, involved imported goods. I was looking for some reference to this in the Greenbook, but I didn't see any. The commentary suggests that the inventory correction may have a relatively small impact on the behavior of final demand in the United States going forward. Is there anything to that?",152
-fomc-corpus,1998,"As you know, there are no direct observations on this. One significant element in the rapid accumulation of inventories in the first quarter was oil. Clearly, the greater flexibility in supply in the short run will be on the import side as opposed to domestic production. So, as that buildup in oil stocks unwinds, we would expect the impact to be more on the import side. Actually, we have seen some further accumulation in the second quarter as best we can tell. The buildup has gotten to the point where there is not much more room for storing oil. Some is probably being stored on ships in distant places on the oceans. We expect this continuing accumulation of oil inventories to end in the near term. Outside the oil sector, if we look at the normal ratios of imports to various categories of domestic expenditures, I think we can make a case that a very substantial component of the inventory pickup in the first quarter was probably in imports. There have been anecdotes to the effect that some stock building has occurred to take advantage of bargains that were available either in components or in finished goods. So, yes, we think that while a complex interaction is involved--just because something was imported doesn't mean that the offset will be in imports in the future; the adjustment could still involve displacing domestic production--our forecast contemplates this in terms of our overall import growth and our domestic spending patterns.",275
-fomc-corpus,1998,"We did get a calculation that supports what Mike Prell is saying. On average, about a quarter of inventories are imported goods. Assuming all of the increase in oil inventories in the first quarter was imports, considering the limited capacity of the domestic production system, and making a lot of assumptions with respect to the shares of different types of industry inventories that are imported or not imported, we end up with a shade more than a third of the inventory buildup being imported out of the one hundred-odd billion dollar annual rate increase in the first quarter. So, there is no question that the first-quarter buildup is comprised disproportionately of imports but not predominantly so. The bulk of the inventory change in the first quarter involves domestic production. Governor Kelley.",146
-fomc-corpus,1998,"Mike, on Chart 10 you have a fairly dramatic decline in the growth rate of real personal consumption. I understand that part of that comes from the peaking of the wealth-to-income ratio--the stock market weakness. What other factors create that downdraft?",53
-fomc-corpus,1998,"Part of it is simply an assessment of what the underlying trends would be and the fact that consumer spending was at such a high level in the first quarter. Even if second-quarter consumer expenditures were to drop off to the 4 percent plus growth area, or somewhat below our forecast, the first half would still be very strong. That is a significant element in the picture. Another is that the second quarter would be weaker still were it not for the extra incentives that were provided for auto purchases, and that is a factor that will reverse in the second half of the year. So, it is distorting the intra-yearly pattern.",126
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,I would like to make three comments. The first is a plea on terminology dealing with net exports. We know as a matter of arithmetic that I plus C plus G minus net imports equals output; that is arithmetic. But to say that net imports are a drag on output is making an assumption about causation that I do not think should be there.,70
-fomc-corpus,1998,"I think we crossed the Rubicon on this. We recognize that it is hard to express this thought, but we have come to the conclusion that everyone understands this area.",34
-fomc-corpus,1998,"I'm not so sure about that, but I think it is very easy to express that in a different way. We can simply say that total spending exceeds total output when net exports are negative. I think it is too easy to slip into a wrong frame of mind on this. My plea is to be accurate on the terminology here. Secondly, when I looked up oil price futures in the newspaper this morning, August of this year to August of next year, I saw Brent oil futures going from $14 to $17 per barrel. I think that is a substantially larger increase than you have, so you might want to comment on why your view differs from that in the futures market. Thirdly, and this is the most important comment, it seems to me that the internal structure of your forecast makes perfect sense if growth in final sales slows. The components of the forecast would be internally consistent. But I still do not understand where the drive to slow the growth of aggregate demand comes from. The real federal funds rate is falling during this period because you have the CPI rising and presumably inflation expectations, at least in the model, are consistent with the CPI. We assume the market is smart and sees what is going on so that the real funds rate is falling. The only retarding influence in the forecast is the impact from Asia. It reminds me a lot of the debates when I first came into this profession in the late 1960s when we were hanging everything for a slowdown of the economy on federal fiscal restraint. The Asian impact is very much like a restraining fiscal policy. We all know what happened in the late 1960s environment. The fiscal restraint in 1968 did not in fact slow the economy. So, I am very worried that we are putting much too much weight on Asia in this outlook and that we are not paying enough attention to the underlying strength of aggregate demand as driven by very accommodative monetary and credit conditions.",390
-fomc-corpus,1998,Peter Hooper will say something in response to your question about oil prices.,15
-fomc-corpus,1998,"Just to address the oil price question, I think the jump in the futures reflected OPEC's recent agreement to cut production by somewhat more than we had assumed in our forecast. Our oil experts doubt that OPEC will come through and actually restrain production as much as the agreement suggests. But there is some upside risk in the oil price forecast in light of these very recent events.",76
-fomc-corpus,1998,"I think one has to ask, too, whether the current prices are not abnormally low because of the oil storage constraints. We are getting a contango in the market that may be extreme. There also are some fine points in the current situation that may be exaggerated.",54
-fomc-corpus,1998,"Peter Hooper is right. You are a little ahead of us in terms of looking at the newspapers this morning. The Greenbook as of the time it went to bed actually had an implied monthly forecast through the end of the year that was almost the same as the market futures. There was a slight variation as we went out into 1998, but I think that was largely a function of the market's adding some risk premium about uncertainties such as whether Iraq will continue to produce and so forth. That actually has been a feature of most of the recent forecasts in the sense that we go with a point estimate of supply and the market has more of an uncertainty band around it and therefore has a risk premium built into it after six months out. But through December as of the time the Greenbook went to bed, the forecasts were very close. More recently, as Peter said, we had the OPEC announcement on Tuesday and the current market may now have a somewhat different interpretation than the one we assumed before we learned about the OPEC decision.",209
-fomc-corpus,1998,"As to the general outlook for domestic demand, your point is well taken. There is an alternative view in which the multiplier-accelerator effects that flow from the external shock and the inventory investment correction are inadequate to precipitate the kind of slowing of employment growth and domestic demand expansion that we are anticipating. Were the stock market to continue going up, that would certainly add something to the prospective growth of domestic demand. We have been surprised repeatedly in the last couple of years, and I cannot rule out a further surprise. On the other hand, one could point to some risks on the other side. We have had very high rates of accumulation of consumer and producer durables. The capacity utilization rate in manufacturing is already below its historical average, and if indeed profitability begins to wane and manufacturers decide they want to cut back some more, there could be a weaker business investment picture than we have projected. We think this is a reasonably balanced forecast. Our model simulations in effect say that we currently have rather high real interest rates. If we take out the extra stimulus that has been coming from the outsized increase in share prices, at least as many models would interpret that stimulus, we then have this factor weighing on demand going forward. So, I think a case can be made on either side of this forecast. I cannot rule out your being right. If you had said this a year ago, we would have been in the same position and you would have been proven to be the one who was correct.",300
-fomc-corpus,1998,"There is an interesting issue here. Everyone has been wrong by underestimating domestic demand and wrong in the other direction by overestimating inflation. The area where the error is crucial has been productivity because as productivity growth has accelerated, expectations about earnings over the long run have moved up. This has created a major increase in stock prices and a virtuous circle wealth effect. We end up with (1) much higher domestic demand and (2) lower prices because of the acceleration in productivity that has occurred. The Greenbook forecast incorporates a significant slowdown in earnings growth, which in turn comes largely from a slowdown in productivity gains. If that happens, then the growth in spending on capital goods also slows and that creates some negative internal multipliers that conform total spending to the Greenbook forecast of much slower expansion in demand. The only thing that presumably could keep the stock market on a rising trend is that we are wrong again on productivity. That would mean that earnings expectations, which are now in the area of 13 or 14 percent over the five-year time frame used by security analysts, would continue to move up, stock prices would continue to move up, and effective demand would continue to rise quite substantially. The unanswered question is what would happen to inflation in that context. That is why I think the crucial error in our forecast models has been the productivity numbers. I believe it is a mistake to view the issue of having been wrong on the real side independently of also having been wrong on the inflation side. The implication of the analysis we have relied on is that if domestic demand is consistently underestimated in the future and the Greenbook is wrong, inflation will be stronger. That is not necessarily true because the effect on inflation depends on where the domestic demand is coming from. I would say at this point that we have a very tough set of forecasts to make on both sides. I am not terribly certain where the balance effectively may be. My own concern, as I will try to express tomorrow, is that the odds of a very significant negative effect in the international area, while still low, are rising. That is where the big downside potential lies. The upside potential is that the stock market will continue to rise independently of any productivity changes, and we will get serious inflationary pressures coming largely from the wage side, as we discussed. I think we are in an area now where both the upside and the downside risks are much larger than we have been presuming. I am not sure that we can merely look at whether we are underestimating the demand side. We may well be doing so, but it is crucially important to determine why.",529
-fomc-corpus,1998,"There is an obvious circularity in our forecast in that, were it not for the slowing of demand, we would not have the cyclical deceleration in productivity that Dave Stockton talked about and the related deterioration in profits. It's not that we are anticipating any deterioration in the productivity trend. In fact, we are anticipating a continuation of the more favorable trend that we have estimated for the past couple of years. It has been in a sense a supply shock of the type President Jordan has talked about a number of times. That supply shock, working through the stock market as you described, has created the compensating aggregate demand to absorb that additional supply. In a sense, as we have shown in simulations in the past, we need a higher real interest rate to equilibrate things in the face of that kind of shock.",163
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Peter, I just wanted a few more details on the pessimistic Asia scenario. When you start out with the yen depreciation in that scenario, do you ""add factor"" down any other parts of Japanese aggregate demand or is that the hit on it?",50
-fomc-corpus,1998,"We ""add factored"" both the yen and aggregate demand.",13
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,"We stipulated that we were going to reduce growth. What we did was to impose an exogenous negative psychological or confidence effect on Japanese aggregate demand in the model. Everything else equal, if the yen were to depreciate to the extent that it does in the pessimistic scenario, the model would normally give us a rise in Japanese GDP. We stipulated that this was a combination of a currency shock and an aggregate demand shock through confidence effects.",87
-fomc-corpus,1998,"So, the falling Asian GDP is imposed exogenously. Let us come back, then, and follow through on President Broaddus's suggestion that we let the yen depreciate, whether it is to 160 or 175. If you had not imposed the exogenous shocks to aggregate demand in Japan and the rest of Asia and had just assumed that the prevailing weakness in Japan, if we stepped back and allowed it to happen, would lead to this depreciation, how would that have changed your overall view of this picture?",105
-fomc-corpus,1998,"If all you do is let the yen go, this is positive for Japan. The effect of this currency shock on the rest of Asia is not that large in the model. The model does not pick up the related uncertainty and confidence effects.",48
-fomc-corpus,1998,"So, the Chinese currency would hold and the Hong Kong spillovers would be contained.",17
-fomc-corpus,1998,"Another shortcoming of the model is that it does not capture borrowing denominated in foreign currencies, and the wealth effects are rather minimal.",27
-fomc-corpus,1998,"Governor Meyer, I think the problem here, if you want to put it in a slightly different way, is that these Asian countries whose currencies have lost 30, 50, or 80 percent of their value and have negative growth rates of 20 percent of GDP present a challenge for economics to explain. Whether we talk about the functioning of the economy as working through the financial markets or other dimensions of the confidence process, it is certainly a reasonable proposition that we do not have to have simultaneous currency depreciations and negative growth. But it is also, I think, a reasonable proposition that this kind of accelerated free fall of currencies more often than not is associated with declines in real GDP rather than increases in real GDP. Declines do not occur in all circumstances. There was a depreciation of sterling and the lira in the fall of 1992, and that was positive for European growth. In the context of a financial crisis, which Japan certainly is experiencing, it is hard to imagine that a depreciation of the yen in the short run would actually improve growth in a substantial way.",217
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. I want to ask a general question about the way we think about Japan. This may build on Governor Meyer's question. A number of the Committee members recently have been in Japan, and I would be interested in their views about the problem and potential solutions, as well as staff comments. We sometimes read commentaries about Japan that, it seems to me, are based on a premise that it has an economy that tends to stagnate or decline in the absence of some type of monetary or fiscal stimulus or pump priming to get it going. These commentators do not seem to believe as I do that the nature of a market economy is to display an inherent resiliency and a tendency to expand in the absence of negative impulses. When I try to figure out what is preventing expansion in an economy like that, I look for headwinds problems like our own in the early part of this decade. One way to think about Japan in my view is that over the course of the 1990s the Japanese have been learning that Japan is not immune to the law of one price any more than other countries. Sometimes analysts, especially academic types, tend to think of exchange rates mainly in terms of a fairly narrow set of tradable goods. It is almost as if the relative cost of producing a car in Yokohama versus Lexington, Kentucky will determine the exchange rate. Obviously, that simply is not the case in global capital markets. Asset markets have as much impact on exchange rates as manufactured goods, and that includes commercial and residential real estate as well as other asset markets. Ten years ago if we had held aside the narrow set of exportable manufacturing goods of Japan and focused on everything else--commercial and residential real estate, equity prices, a whole host of things about Japan--translated through a filter of the prevailing exchange rate and we had learned we would have predicted one of two things: deflation or devaluation. We would have anticipated that either the exchange value of the yen would decline dramatically or the price level in terms of the yen would decline dramatically. We could have sat back and waited for something to happen. Yet, we have gone through a long period of time with the idea that the yen was somehow undervalued and needed to go up. It seems to me that is like saying that in the late 1920s the British were right in repegging the pound at the pre-World War I price of gold. All they had to do was to let prices denominated in pounds fall, including the prices of real estate, hamburgers, and everything else sold in the U.K. economy. For people who have traveled to Japan and looked at the situation there more closely than I have, how close or how far is Japan to having adjusted to the rest of the world in terms of the yen prices of residential and commercial real estate, a cup of coffee, and everything else so that normal economic policies may work?",589
-fomc-corpus,1998,The World Bank just released a study on purchasing power parities a few weeks ago that designated what it costs to live in cities around the world. Cities in Japan are still very high on the list.,40
-fomc-corpus,1998,"Even better, the Big Mac index comes to the same conclusion. [Laughter]",17
-fomc-corpus,1998,The Big Mac index used to be worthwhile until it began to include too much fat! [Laughter],21
-fomc-corpus,1998,Did you have to eat one to find that out?,11
-fomc-corpus,1998,"There has been a longstanding dichotomy of views about the equilibrium exchange rate for the yen. Most PPP indices have it somewhere between 150 and 200, depending on which one we look at on which date. Most models that focus on the external balance would put it between 100 and 120. Perhaps one way of looking at it is to anticipate that in the very long term the yen will gravitate to a real rate consistent with the 150 to 200 range as a result of domestic price adjustments but that in the intermediate term, given the pressures from the market relating to the external balance, the yen will most likely go the other way.",130
-fomc-corpus,1998,Isn't the arbitrage value of the yen vis-a-vis the dollar under 100 if we go ten years out?,24
-fomc-corpus,1998,That comes from the 10-year bond yield.,10
-fomc-corpus,1998,"I gather that bond yield spreads imply a covered rate for the yen, which, as I recall, is well under 100 for a ten-year horizon. That is the type of issue that President Jordan is raising, namely the real disequilibrium in the current yen exchange rate.",56
-fomc-corpus,1998,You have to build in deflation in Japan in order to get the internal economy and external economy back in balance.,23
-fomc-corpus,1998,"To come to that part of your question, it seems to me that two aspects are involved. One is that, as with everything else with Japan, it is difficult to tell. In particular, as you mentioned, part of the dimension of the disinflationary process has to do with the current level of asset prices. There, in particular, the asset price situation has not yet stabilized, and in turn that is related in part to what they have not done and what they may be unwilling to do to clean up their banking and financial system. Therefore, we may have an undervaluation in the yen relative to its long-run equilibrium, but that is in some sense my view of what the Japanese have to do to deal with it. Your colleagues, who spent more time in Japan than I did, can comment on the fact that Japan still has a remarkably prosperous economy, especially in Tokyo. When we talk to Japanese officials about their economy, they will tell us that if we look at the department stores we will see a lot of customers; everybody is buying; everybody is well dressed. It does not strike an outside observer as an economy in a depressed state. That may say more about whether advanced industrial economies can sustain extended periods of no growth, which is not what we have been used to assuming. But given what Japan started from in terms of wealth and standard of living, I think that in fact a large proportion of the Japanese economy can very easily sustain extended periods of slow growth. That, in turn, contributes to their lack of urgency in trying to solve some of the fundamental problems associated with their banking and financial system.",327
-fomc-corpus,1998,"They have a very rich economy, with income and wealth rather well distributed. That gives them a capacity to continue an inappropriate policy for a fairly extended period of time. They also have a relatively content electorate so that there is not the pressure on the elected officials that would normally come in some countries such as our own. I think another aspect of President Jordan's question relates to an assumption that the Japanese economy is more of a market economy than it really is. It is a command economy that worked rather well for an extended period of time because the people commanding it did a reasonably good job. That command structure has broken down to a large extent, but there is not enough pressure, except that brought by foreigners including recent visitors, to say to the people running the country that they simply are not going to be allowed to let their currency devalue and export their way out of the current economic difficulties because the rest of the world will not permit it. We, the rest of the world, will bring enough pressure to bear on you to make it clear that rising exports are not a solution you will have the luxury to use. That may be good policy or bad policy, but if we look at the effect on the United States and on Europe of having to absorb the cost of the Asian crisis, we can easily see where the pressure on Japan is going to come from to manage its economy in a way that is more hospitable for its neighbors in Asia and less demanding on the rest of the world. Japan will have to fill the role that I think we can properly ascribe to them.",316
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"I have a different question, but I am intrigued by this discussion. My question about Japan gets back to the forecast. As I recall our previous financial crisis in this country, whose severity I would judge to be about one-tenth that of Japan's current financial crisis, it was some time before there was sufficient recognition that the problem lending institutions, the S&Ls in our case, had to be cleaned up. I don't know how long Japan's banks have been in a problem situation, but I think it is within the two- or three-year horizon that it finally took us to act on our financial crisis. So, I think the fact that economic conditions seem prosperous in Tokyo can be a little misleading because the Japanese have not yet started to lose their assets. Of course, they've lost a lot in terms of real estate values, but they haven't started to lose much in terms of their financial assets. When we put all of that together, it looks as if they have some distance to fall before things get righted. Let me get back to the forecast. The one number that struck me was on Chart 6. Japan's GDP for the second half is rising at a 1.9 percent annual rate. I understand that there will be a big change in their fiscal policy, but it strikes me that a realistic forecast might be to go more to the pessimistic Asia scenario than to look for this rapid bounce back.",286
-fomc-corpus,1998,"We see further weakness in Japan's private domestic demand. That clearly is a result of anticipated difficulties in the process of resolving Japan's banking crisis. Over the second half of the year, there is no question that the banking problem will continue to weigh on the performance of the Japanese economy. We have chosen to write down a relatively moderate further decline in private investment after a fairly significant drop in the past few quarters and some further decrease in consumption after the declines registered over the past year. We are starting from a low base. The declines in these two key sectors have resulted in a significant further reduction in GDP in the second quarter. I agree with you that, despite impending large fiscal stimulus, there is a downside risk in our second-half forecast. There is also the possibility that if Japanese officials made a clear statement about resolving their banking-sector problems and actually started to implement remedial polices and their financial markets began to improve, we could see their economy begin to recover.",193
-fomc-corpus,1998,"To follow up with a comment on Governor Gramlich's question about Japan: Just looking at these charts, I assume that if you have their real exports flat and real imports declining, then you have built in a very substantial decline in real domestic consumption in Japan.",52
-fomc-corpus,1998,"Yes, domestic private consumption in our forecast does fall through the second half of the year.",18
-fomc-corpus,1998,"Let me ask, Jerry, was the nature of your question to ask how far they have left to fall?",22
-fomc-corpus,1998,"That is part of it, insofar as deflation rather than depreciation of the currency is the solution. One of those two things has to happen. If the second solution reflects a correct interpretation of the environment, does any amount of monetary or fiscal pump priming do any good?",56
-fomc-corpus,1998,"On the fiscal side, there is no question. Over the past three or four years, the growth that we have seen in Japan has been largely associated with movements in Japan's structural budget deficit. In 1996, they had a large fiscally-induced expansion of GDP. At the time, we thought conditions were beginning to turn around in Japan. They withdrew that fiscal stimulus in 1997, and the economy dropped off sharply. In the bottom left panel of that page, you can see a shift from fiscal stimulus of1-1/2 percent of GDP in 1996 to fiscal contraction of 2 percent of GDP in 1997. It was not surprising that Japan's economy weakened substantially between those two years. The fiscal expansion expected for 1998 is going to be crowded largely into the second half of the year. Our view is that if they get progress on the financial side--financial restructuring and banking reform--and the economy begins to pick up as a result of this fiscal push, households will start to have a brighter outlook.",211
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"I have two questions about Japan. First, I know that a program has been proposed on the fiscal side, but a lot of forecasters assume that perhaps only one-quarter or one-half of that involves actual economic stimulus. What assumption has been made in the Greenbook forecast? I hope it does not incorporate the announced program in full.",67
-fomc-corpus,1998,"We looked at the numbers carefully in this regard and made judgments based on the past relationship between the announced numbers and the so-called ""real water"" content of the package. The numbers on actual investment spending in the announced package account for about three-quarters of the overall spending and the tax cuts for one-quarter. The tax cuts are spread over the next couple of years. The spending also is fairly evenly distributed. I have forgotten exactly what the gap is between the ""real water"" and the headline number, but it is fairly significant.",107
-fomc-corpus,1998,"Where does the term ""real water"" come from? Is that the Japanese translation? What is ""non-real water?"" Does it have to do with priming the pump? [Laughter]",39
-fomc-corpus,1998,"With no water in it! My second question is how would you assess the extent of a credit crunch in Japan at the present time? I know there is some debate about that because banks obviously do not have an appetite to lend. At the same time, we do not see some of the typical characteristics of a credit crunch, notably rising interest rates. Do you see this playing a major role?",79
-fomc-corpus,1998,"We see it as beginning to have a significant impact. Probably the best indicator is the Tankan survey of business perceptions of the lending attitudes of banks. The survey results are shown in the middle right panel on Chart 6. They indicate a rather large decline in the first half of the year in the perceived willingness of banks to lend. Last year, our Japanese banking experts were questioning the existence of a credit crunch and attributing the weakness in lending to a slowdown in demand. Now, with these survey results and a lot of supporting anecdotes, one cannot ignore the possibility that there is something significant there.",120
-fomc-corpus,1998,"I would like to make a partial response to an issue that Jerry Jordan raised about what type of policy Japan should pursue. In the area of monetary policy, I think we cannot talk about that very effectively until we have had our discussion of the last item on today's agenda because I think theology may be required to answer what monetary policy is appropriate in Japan.",70
-fomc-corpus,1998,"Jerry, to return to your two descriptions of internal deflation or external devaluation, my observation of what is happening in Japan is that they have experienced an enormous amount of deflation that has not been recognized; they have put it off. I am referring to the portfolios of their banks, which are exerting enormous pressure. As these unsupportable liabilities to cash flows are being valued down and eventually recognized, I think we are seeing the effects in the form of both internal deflation and external devaluation. I think they have a distance to go. Their public estimates of the losses are now anywhere from $250 billion to $500 billion. That is a lot to work through. The fiscal issue is how much of the losses they are going to bail out through government spending. I think they have a long way to go.",166
-fomc-corpus,1998,"Further questions for anybody? If not, why don't we break for coffee and come back in 10 minutes.",22
-fomc-corpus,1998,We have an announcement to make before we continue.,10
-fomc-corpus,1998,"Because the markets will be closing at 2:00 p.m.-and the futures market at 1:10 p.m. on Thursday, we will be releasing the minutes at noon on Thursday instead of 2:00 p.m.",48
-fomc-corpus,1998,Would somebody like to begin the Committee discussion? President McTeer.,14
-fomc-corpus,1998,"On the national economy, as a new paradigm optimist, I am looking for somewhat stronger economic growth, somewhat less inflation, and lower unemployment rates in my Humphrey-Hawkins projection than the Greenbook forecast. I was pleased to see today that that puts me within the central tendencies on everything but the CPI, where my forecast is barely under the central tendency. I readily admit, however, that my level of uncertainty regarding these forecasts has increased considerably since the last meeting. I have become increasingly concerned about the potential impact of Asian difficulties on our economy. The downside risks for both this year and next have risen in my view. It is my feeling that any economic weakness from Asia that spills over to our economy would be accompanied by even lower levels of inflation than we have had in the last year or two. As for the second quarter that ends today, my forecast at the moment is for a real growth rate of 3.3 percent. The Eleventh District economy has continued to expand. I mentioned in the last two meetings that the rate of growth seemed to be slowing, led by the traded goods sectors, which have been impacted heavily by Asia and other forces as well. Again, it is oil, semiconductors, farming, and Mexico that are slowing the overall rate of growth. At the same time, the service and construction sectors are having difficulty keeping up with demand. Oil prices hit a 12-year low of $11.56 two weeks ago. Inventories are said to be so high that oil is being loaded onto tankers, as Mike Prell mentioned earlier, that have no destination. They are just being used for storage. This supply overhang from a very mild winter in the United States and Europe together with weak demand from Asia has brought about steep declines in prices despite output cutbacks in recent months. This oversupply situation is expected to continue because 1.5 million barrels per day of new capacity are due to come on line by the end of the year. Normally, the downstream energy business in refining and chemicals would be helped by the lower price of inputs. But that does not seem to be the case right now, partly because lower demand from Southeast Asia has put downward pressure on those product prices. The glut of computer chips is causing a restructuring of the high-tech industry in our region. The increased demand for the sub-$1,000 computers has hurt the sale of higher-end computers and reduced profit margins. Asian weakness has hurt the demand for PCs, cell phones, and other wireless products that use chips. All of this has occurred at a time when global overcapacity in chip production would have been a problem by itself. The large chip manufacturers in Korea halted production in their factories for at least a week in June in a futile effort to curb falling chip prices. Samsung is the largest chipmaker in the world with 19 percent of the market. Samsung, Hyundai, and LG Semicon have 40 percent of the world's DRAM market. Here at home, Texas Instruments sold the last of its DRAM businesses and announced the elimination of 3,500 jobs. One of the plants it sold was a joint venture it had with Hitachi in Richardson, Texas right outside of Dallas. Hitachi had to sell its share in an effort to deleverage its balance sheet. Now the deleveraging, which is becoming so prevalent in Asia, is happening here. Parts of our agricultural sector have been hit hard by a drought that is spreading across west and south Texas. The cotton crop in non-irrigated regions is virtually nonexistent. Even irrigated crops are at risk because many farmers have already used up their allotments of irrigation water. On the other side of the coin, the Eleventh District still enjoys one the fastest rates of employment growth in the country. Our construction sector is still booming. Construction employment growth remains strong. Single-family and multifamily permits continue to increase. Residential contract values are up, and office vacancy rates continue to decline all over Texas. As a result, shortages of concrete and labor have spread to sheetrock and insulation. I mentioned at our last meeting that the shortage of concrete was so serious that it might affect construction of the new Texas A&M football stadium even though a number of their alumni produce concrete. That has happened and they are postponing the completion until the following season. The Aggies have lobbied for a tightening of monetary policy to make the current concrete shortage go away. [Laughter]",896
-fomc-corpus,1998,There is material for a joke in there somewhere!,10
-fomc-corpus,1998,"The Mexican economy slowed substantially during the first quarter, particularly after the correct seasonal adjustments are made to the official data. Mexican oil revenues have been hurt by lower oil prices and by Mexico's decision to join Saudi Arabia and Venezuela in a futile attempt to cut production in the hope of stabilizing prices. This has cut government revenues and expenditures have been reduced as well. The rate of growth in Mexican exports of manufactured goods has slowed and this trend is expected to continue as Asian exports and labor become relatively cheaper. The deceleration in the Mexican economy adds to the downside risks for the Texas economy over our forecast horizon. Back to the national economy: The downside risks for the economy have risen since the last meeting. Inflation statistics over the last two months have raised some concerns, but signs of inflationary strain are lacking in goods markets, and long-term inflation expectations continue to fall. The Asian crisis has and will continue to exert a downward impact on inflation by lowering commodity prices and the prices of imports generally. And if it has not already done so, the crisis will have a longer-term restraining effect on inflation through its moderating influence on U.S. output and employment growth. The yield curve, and I am referring to the 10-year yield minus the 1-year yield, is telling us that slower economic growth is imminent. A negative yield curve has preceded seven out of the last six recessions, the one exception being in 1996 when a recession did not occur. The world economy is especially sensitive to U.S. policy changes at this time. Through its impact on net exports, an unexpected tightening would have a much stronger-than-usual negative effect on the U.S. economy. There are very few signs of production bottlenecks and unfilled orders, and supply deliveries suggest that inflation pressures are easing. Our directors and other contacts continue to tell us that their pricing power is at an all-time low. Market indicators such as the price of gold and commodity price indexes say the same. As I weigh the risks, I think a strong case can be made for a more balanced view of the economic outlook.",422
-fomc-corpus,1998,"The tankers obviously are being used for storage. Is that mainly for storing crude, products, or a combination?",23
-fomc-corpus,1998,"I think it is crude, but I'm not positive.",11
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Economic growth in New England continues to be strong. Employment is growing at about the same rate in our region as in the nation, while the unemployment rate is more than 1/2percentage point lower. Massachusetts leads the region in job growth, outstripping the national rate, and Maine and Connecticut are second and third in the nation, behind Alaska, in the size of their decline in joblessness over the past 12 months. The region mirrors the nation in the types of jobs being created. Construction is vibrant, followed by services. While manufacturing jobs declined slightly in May, they remained a full percentage point above year-earlier levels. Labor markets continue to be very tight, especially for skilled workers. It is reported that Fidelity has 4,000 openings, while John Hancock, only recently enmeshed in downsizing, is trying to hire a substantial number of workers as well. Consumer prices rose 2-1/2 percent from a year earlier in the region with wages growing at about the same pace. Our contacts see little change in overall wage inflation; however, personnel supply firms report wage hikes for temporary workers in the 5 percent range for less skilled individuals and increases ranging up to 20 percent for highly skilled technical workers. Contacts mentioned growing use of incentive-based salary increases as a method of keeping base wage advances modest and overall wage bills expanding no faster than sales or revenues. he commented that the GM strike was likely to be short. At that point, only one plant was involved. I saw him recently and asked about his prognosis now. He still believes the strike will not be long, though it has surfaced tensions within the UAW itself on how to deal with GM. However, his assessment of the length of the strike should be taken in the context of the fact that is just about to end a strike of three years' duration in Detroit. [Laughter] More interesting from the point of view of this Committee meeting, however, is the fact that from his perspective, more are now in preparatory steps to labor action than he has seen over a considerable period of time. Confidence remains high in New England, but in our Beigebook calls concerns were voiced about the length of the expansion and the impact of the turmoil in Asia. Earlier this year, regional retailers expected little impact from Asia. Now they are less sanguine, but the size of the negative effect is uncertain. Real estate markets remain robust, with the strengths first seen in Massachusetts now in evidence in all the New England states. Inventories of homes are short, and residential prices are rising, though only at a rate slightly above that of the nation. Some speculative construction is now occurring. The chief investment officer for John Hancock attends a regular breakfast meeting that I hold. He notes that Hancock sees tight real estate markets across the country with especially fast growth in Houston, Phoenix, and Orlando. He expects prices to continue to rise though perhaps at a slower pace. Hancock plans to More broadly, on the national scene our forecast is more optimistic about growth and more pessimistic regarding inflation than the Greenbook's. We do not see as large an effect from an inventory correction for several reasons. First, inventory buildups in both manufacturing and retail have not had much of an effect on inventory-sales ratios. In particular, retail inventory accumulation is largely in nondurables for which sales have been brisk of late. Survey data, in particular the NAPM survey, do not indicate concerns regarding inventories. Inventory buildups, as we mentioned earlier in our discussion, could also reflect a desire to lock in lower material and supply costs in the face of future needs; this seems particularly likely in the area of petroleum inventories, which by some accounts made a sizable contribution to the pace of inventory accumulation in the first quarter relative to that in the second half of 1997. I think Mike Prell mentioned that as well. Finally, the buildup in wholesale inventories, which has affected inventory-sales ratios, is largely in the durable goods area, likely reflecting both a decline in exports and an increase in imports, possibly at bargain prices. Trade data support the idea that imports of capital goods grew substantially during the first quarter. Thus, it may be that even the manufacturing inventory buildup was intended and that its inevitable slowdown will hit foreign producers as well as domestic producers. With stronger growth in 1998, our forecast sees the unemployment rate falling slightly and inflation as measured by the core CPI picking up, as it clearly has in the first months of 1998. Looking forward to 1999, even assuming a modest policy tightening, inflation in our forecast tilts upward more than in the Greenbook. Clearly, there are risks to this forecast. Our assessment of the inventory correction could be off the mark. Our judgment about the impact of Asia, which is not terribly different from the Greenbook's, could be wrong and Asia's impacts could be worse. A stock market correction could damp consumer confidence and rein in spending or the very age of the expansion could begin to damp consumption. However, I should note that our forecast as well as the Greenbook's and other forecasts need a slowdown, and care must be taken not to overreact as it occurs. There are risks on the other side as well. Our forecast and those of others have consistently underestimated growth, as the Chairman pointed out before. Labor markets are tight and are expected to remain so in our forecast and the Greenbook's. Personal income is rising, spending is strong, home buying conditions are very favorable, and confidence is high. Business investment in capital goods and now nonresidential construction are reasonably strong and may be prompted by rising wage costs and labor scarcity to remain so. A sideways or declining stock market could eat into household wealth and put even more pressure on business. But at least on the household side, rising housing values could sustain confidence and spending. Finally, credit continues to be available, though spreads have widened a bit, particularly for anything involving Asia. So, there are risks on both sides. But I continue to see the cost of being wrong as skewed to the upside. I do not think there is much doubt that our economy is operating at levels beyond its potential, even though trend productivity may have increased. Being wrong at this stage runs an increasing risk of building in an inflationary momentum, and we may be seeing that in the uptick in the core CPI recently, especially as it reflects the cost of shelter. If we are wrong on the downside and growth slows more than is forecast, the remedy of easing policy is there and likely could thwart any move toward recession. If growth is stronger, however, the job to rein in inflation may be tougher, take longer, and ultimately be more damaging to the domestic and world economies.",1366
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, the pace of economic growth in the Twelfth District has remained strong in recent months, and some of the tightness in local labor and housing markets is showing through to wages and consumer prices. In Arizona, the fastest growing state in the nation, job growth has been running at more than a 4-1/2 percent annual rate. Nevada and Washington are not far behind with recent employment growth at a rapid 4 percent pace. Growth has slowed a little in California, which has been somewhat more affected than other states by the drop in exports to Asia and the pickup in import competition. The slight slowdown largely has been confined to the state's manufacturing sector, and overall California job growth still has been solid, about 3 percent at an annual rate. Farther west in Hawaii, recent economic developments have been decidedly more negative as the effects of reduced Asian visitor spending have rippled through that island economy. Although the Asian situation has had disruptive effects on real activity in the Twelfth District, consumers have been benefiting at least temporarily from the related declines in prices of imports as well as the generally low prices of commodities. However, we have seen some recent pickup in price increases for nontraded goods and services. Housing markets are tight in the District, and the regional CPI has been boosted to a noticeable extent by an acceleration in its housing shelter component. For example, CPI housing shelter costs in the San Francisco Bay area have jumped about 7 percent relative to a year earlier, and rents also are picking up in Los Angeles. In the Pacific Northwest, where a tight labor market has led to a pickup in wage inflation, consumer prices for services other than housing also are increasing at a fast pace. Turning to the nation, we continue to see a divergence between our structural forecast and the economy's actual performance. On the one hand, our structural model continues to predict slower growth. Real GDP is projected to grow at a 2-1/2 percent rate in the second half of this year and a less than 2 percent rate in 1999. The huge inventory buildup in the first quarter is responsible for much of the near-term slowing currently predicted by the model. Weakness abroad also is an important reason for the slower growth. More generally, the forecast of demand is constrained by the relatively high level of the real short-term interest rate. On the other hand, incoming data continue to show a stronger-than-expected economy. Among the prominent recent examples are the employment and industrial production reports for May. Together with a rapid expansion of liquidity, these data suggest that there may be a substantial upside risk to the forecast that calls for a marked slowing of growth. Even in our forecast of slower growth, the low unemployment rate will continue to exert upward pressure on wages. This pressure is offset by a number of factors including an increase in trend productivity growth, diminished inflation expectations, the higher dollar, and increased price competition from abroad. As a consequence, our forecast shows core CPI staying between 2 and 2-1/2 percent this year and next. But I remain concerned that if growth does not slow as predicted, the effects of even tighter labor markets will begin to show through to higher wages and inflation expectations and ultimately to higher price inflation. Thank you.",655
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Let me start with a puzzle I am left with after listening to some of the comments that have just been made about inventories, oil, and the connection between oil inventories and imports. I may be missing something. If the increase in inventories is basically composed of imports, whether they are oil or something else, those inventories could not have contributed to GDP in the first quarter because as imports they were recorded as a negative. By the same reasoning, the projected decline in inventories in the current quarter should not have a negative effect. That strikes me as something important that we need to understand a little better. I remember some huge previous discrepancies in the international trade accounts when there were statistical discrepancies worldwide on imports and exports. It turned out that exports from some countries were counted as exports but were not yet recorded as imports someplace else because they were in tankers held up in the Cayman Islands or elsewhere. So, we would have to wait a while to figure it out. I think that is an issue that would bear unraveling before we draw any firm conclusions about how either the trade account or inventories will affect GDP in the second quarter and the rest of the year. I have a comment on the auto situation. About 21,000 of the GM-affected workers are in Ohio. We have very large auto and auto-related production facilities in our area, so the strike will have a negative impact on manufacturing activity in our region as long as it continues. Turning to some regional anecdotal reports since the last meeting, bankers continue to tell us that commercial loan demand is very strong, exceeding their loan budgets for 1998 as estimated at the start of the year. Consumer loan demand is reported to have weakened recently compared to earlier in the year, but bankers say that their consumer loan extensions are still well ahead of their plans as set out at the beginning of the year. With respect to real estate lending, they say that mortgage financing, which boomed late last year and early this year, has cooled more recently. But in the usual reports on their real estate portfolios, they do raise increasing questions about the transaction prices they are seeing on income property deals. As before, we are hearing frequent complaints from bankers throughout the District that the Farm Credit Banks are very aggressive in their pricing, doing some of the things they were doing back in the mid-and late 1980s. Construction spending in the District is heading for another record. We have had more announcements of new public buildings, and this is a reflection of very strong local tax receipts. Those projects will carry through into next year. We already are hearing that not only will 1998 construction spending and employment in the construction sector exceed 1997, but our contacts expect 1999 to be even stronger yet. Following up on the persistent complaints of shortages of construction workers, the building trades unions are now lobbying Congress for an increase in immigration limits on construction workers. In Cincinnati, we heard that the labor market is so tight in southwest Ohio and north central Kentucky that people involved with the construction industry are developing plans to bus in workers to build the two new stadium projects that have been authorized. When I asked them from where, they said that they are still working on that. [Laughter] Reports on labor market conditions indicate larger wage structure increases than before and more use of retention bonuses to address turnover. Health care cost increases, as we have heard before, have risen by up to 30 percent. One firm in the Columbus area reported that they advertised for two weeks for unskilled clerical and warehouse workers with starting wages of $7 to $10 per hour and the advertisements yielded no applications. That prompted another businessperson to respond that in their warehouse distributorship business, they have negotiated a work release program with the local prison and have experienced no absenteeism so far. [Laughter]",775
-fomc-corpus,1998,Only breakouts!,4
-fomc-corpus,1998,"A communications company told us that they now feel compelled to pass through steep increases in labor compensation costs to their customers because they are no longer able to meet such costs through greater productivity and efficiency. We were told that tourism is booming everywhere, but average occupancy rates in hotels and motels in the region are declining because new construction is adding to capacity more rapidly than the rise in demand. Exports to Latin America and Europe are reported to be well ahead of expectations this year. Contacts report optimism about markets in both parts of the world because those markets are not only good for U.S. exporters, but because they provide some relief to import-competing industries here that see potential imports from Asia going instead to those other regions. An exception has been steel. We were told that European steel was now coming into the United States because Asian steel is going to Europe. Balancing that somewhat, a mine safety appliance company said that sales in Europe were the best in years, and they are optimistic that will continue into next year. On the national economy, the Greenbook projects a soft landing. Again, I like the Greenbook forecast; I only wish I could believe it. The soft landing largely comes from the slack created by falling export demand and the leakage of excess domestic demand into the external markets that is reflected in the surging imports and the skyrocketing current account deficit. The story implied by the Greenbook is that without the Asian crisis, inflation would be a much more serious problem already and in the future. The Asian crisis also helps us indirectly by depressing earnings of exporting and import-competing firms. That fosters less exuberant equity markets, which in turn reduces the wealth effects that presumably have supported the extraordinary domestic final demand. In a nutshell, I read the Greenbook analysis as saying that we are going to get out of the current situation without accelerating inflation or a recession or both. That will happen because the Asia crisis came along at just the right time and in just the right magnitude. Maybe so, but I am becoming increasingly less sure that we can avoid inflationary excesses and imbalances in some of our markets--assets markets in particular and especially real estate--that would eventually make a recession unavoidable. Our challenge is how to keep this wonderful economy going not only for the benefit of our own people but for that of the rest of the world. I would like to see and hear in our District more caution being exercised by both borrowers and entrepreneurs on one hand and lenders and investors on the other side. But the pattern of errors that we have seen in the last year in forecasting money and credit growth and nominal spending growth has gone on for too long. I feel very certain that if a year ago we had looked at a forecast that accurately predicted what actually has happened in the economy in the last four quarters, we would have been more inclined to think that some precautionary firming was appropriate. Even if the Greenbook is right about the economy and the Bluebook is right about money growth, two years from now we are going to be looking at a current account deficit of $400 billion, a direct reflection of excessive domestic demand in the sense of much more rapid growth in demand than aggregate supply. We know that pattern is unsustainable and it also should be unacceptable.",653
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"The economy of the Philadelphia District continues to operate at high levels, but the rate of increase appears to be slowing. The labor market in the District reflects this situation with a low unemployment rate and slowing job growth, and there continues to be little upward pressure on prices. Home sales have been doing very well in recent months. Land prices have been rising, but builders have had trouble passing through these increases. Buyers are shopping a lot and they are pressing builders for lower prices. When there have been price increases, they generally have been modest. National builders have made competition even more fierce for local builders and, as a consequence, builders have had to be more efficient to maintain reasonable margins. Despite widespread indications of high levels of demand, producers continue to have little ability to raise prices, and this phenomenon is still widespread in the District whether in construction, retailing, or manufacturing. Turning to the national economy, the basic story in the Greenbook of moderating growth and modest inflationary pressures in the context of a lot of uncertainty strikes me as being reasonable. The only part of that forecast that I have a good deal of confidence in is the ""lot of uncertainty"" part. I have the sense that what we see as the most likely outcome is less likely than earlier and that both upside and downside risks have increased in recent weeks. We have little practical choice but to be patient and alert in this environment.",280
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. Our District has been expanding at a moderate pace in recent weeks, maybe a little more slowly than earlier in the year mainly because of a deceleration in manufacturing activity, notably in the chemical and paper industries, which are important in our region. Anecdotally, manufacturers currently are more pessimistic in their comments to us about the longer-term impact of the Asian crisis on their markets than they were at the time of the last Committee meeting. Elsewhere, we have had some impact from the GM strike, mainly in Maryland. For example, a van assembly plant in Baltimore had to shut down because it could not get component parts from GM facilities that had shut down in Michigan. About 2,700 people were laid off in that instance, and there have been smaller layoffs at a number of companies that supply GM. So, manufacturing is currently on the soft side of our regional picture. Outside the manufacturing sector, business conditions still look quite strong. If anything, consumer demand may be strengthening further. Automobile and truck sales have been quite robust recently, and we also have seen good demand for furniture and appliances, presumably because of the continued strength in housing activity. Finally on the District, I have been struck by the frequency of comments we get from our directors and other business contacts regarding the extraordinary amount of money that is looking for a home. Potential investors, including notably REITS, are competing very aggressively for deals. In this kind of environment, there is a lot of concern on the part of bankers in the District and other observers that credit standards may be slipping and we may be digging a hole for ourselves. That is it for my District. I have a little anecdotal information on the Kansas City District. I have a son who recently went out to Albuquerque. He doesn't know anybody out there. He had been there about two weeks, and he got a job with benefits! [Laughter] I don't have to pay his health insurance anymore. So, as far as I am concerned, the Albuquerque economy is in really great shape.",414
-fomc-corpus,1998,It has the highest unemployment level.,7
-fomc-corpus,1998,"Well, my son has dropped it down a little.",11
-fomc-corpus,1998,Did he get a signing bonus?,7
-fomc-corpus,1998,He did not get a signing bonus. But incidentally I should tell you that the job he got was recruiting high-tech workers. [Laughter],30
-fomc-corpus,1998,Does he know anything about that subject?,8
-fomc-corpus,1998,"I hope he does by now; he has been working for them for a couple of days. [Laughter] With respect to the national economy, real GDP growth may indeed have slowed to a 1-1/2 percent rate, the figure you gave us earlier, Mike, with inventory accumulation slowing from the rapid pace in the first quarter and net exports continuing to deteriorate. But it seems to me, and I guess I'm just repeating some things that others have said, that these two negative impulses on real GDP growth clearly should be temporary. With that in mind, it is hard for me to see why the negative effects of these two factors would be powerful enough to reduce the growth of real final domestic purchases by 3 percentage points in the second half of 1998 and by roughly an additional percentage point next year as projected, holding the average growth in real GDP below 2 percent for the next six consecutive quarters. The labor markets are still extraordinarily tight, and the Greenbook is projecting only a small reduction in the growth of employment in the near term. That implies continued solid growth in real wages and real income, supporting consumption. Investment, it seems to me, ought to remain reasonably strong, given continuing favorable financial conditions and a lot of opportunities to increase both productivity and sales. From this perspective, it seems quite plausible to me that the growth of final purchases will continue to offset the negative effects coming from the inventory correction and weaker net exports. Indeed, if these negative effects dissipate, it seems to me that demand could actually strengthen a little in the quarters ahead. With these points in mind and with the core CPI on a consistently measured basis projected to drift up, I come out in the opposite position from Bob McTeer. I think there is still a lot of upside risk in the outlook and we need to give it weight. Having said all of this, Mike Prell and his staff might be forgiven for wondering why we submitted projections that are very, very close to the Greenbook. The answer is that the appropriate monetary policy we assumed, following the instructions, raises the federal funds rate about 3/4 percentage point over the next several months.",436
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Apart from the GM strike, conditions in the Seventh District generally are quite similar to what I reported at the last several meetings. Our region is experiencing continued moderate expansion and very tight labor markets, with occasional signs of wage increases but very few indications that price inflation is accelerating. Like last year at this time, championship performances by both the Chicago Bulls and the Detroit Red Wings have boosted local economies. Labor shortages continue to be the main concern of virtually all businesses in the District. The unemployment rate for our five states dropped /2 percentage point in April to an average of 3.3 percent and remained near that level in May. One of our directors, who for months reported that his large national retailing firm had not had to raise wages to get workers, has for the first time reported labor shortages and higher labor costs. I noted last time that consumer price inflation in the Midwest had accelerated ahead of that for the nation, and that continues to be the case, with prices for services being the driving factor. While the District economy continues to perform very well, there are a few signs that activity may be slowing. The Chicago Purchasing Managers' survey results released this morning showed a slower rate of expansion in June, with virtually all of the components lower than in May. Part of that may be due to Asia. Anecdotal reports of any serious adverse Asian impact have been largely limited to the high-tech electronics and electronics components industry. However, we have heard that Asia may be the reason for slowing in the temporary help industry. While overall business was quite strong in the paper industry, exports were down sharply. In general, retailers noted that there has been some slowing in sales activity in June from the torrid pace of April and May. A large producer of agricultural equipment has reduced production for the first time in four years. The firm anticipates slower sales because of larger carryover stocks in agricultural commodities, lower farm incomes, and weather problems in agricultural areas. Bob McTeer mentioned drought. We have had floods in Iowa; maybe we can ship some water down to Texas to help them out! The biggest news, of course, is the GM strike, which is constraining our region's economy relatively more than the nation's. Over 50 percent of GM's laid-off workers at U.S. assembly and parts plants are in the Seventh District. Retail sales in Michigan and other communities having a sizable GM presence are showing more softness than elsewhere. Auto dealers in the District are concerned about shortages of vehicles as well as parts, which could affect their service business. A survey by our Detroit branch found that spending by business firms in the Flint area has been particularly affected. In terms of the strike's impact on the national economy, we are in broad agreement with the Board staff that the strike will reduce real GDP growth about 1/2 percentage point in the second quarter. Much of that effect will show up as a reduction in inventories, as June's light vehicle sales probably will be in the mid-15 million unit annual rate range. That would be a strong performance though not as robust as in May. Some of the strike's lost output will, of course, be made up the second half of the year, but the key point is to recognize a strike for what it is so far, namely a temporary adverse supply shock with temporary negative consequences for both output and prices. Turning to the national outlook, the incoming data of the last few weeks have confirmed the underlying strength of domestic demand. So far, we see little evidence of slowing in consumption and fixed investment, and labor markets are still very tight. As at the previous meeting, our forecast of slowing growth hinges on substantial declines in inventory investment and deterioration in net exports in the near term. Certainly, the April business inventory data show some slowdown in accumulation relative to the first quarter, but we still may see higher growth in stocks than the Greenbook projects. Although we are somewhat more optimistic on net exports than the Greenbook, we recognize that the risks here are great. My recent trip to Japan only confirmed my growing pessimism over the prospects for the quick and significant structural reforms needed to improve their economy. It was painfully reminiscent of my days as a trade negotiator back in the early 1990s. All told despite these considerations, we think that real GDP growth is likely to exceed 3 percent, and we forecast 1999 growth at or slightly above trend. We are less optimistic about future inflation than the Greenbook. The slight recent deterioration in CPI inflation may not be alarming, but as the special factors holding down goods price inflation wane, we may see overall inflation moving higher as the gap between services and goods price inflation closes. In my judgment, the risks we face have increased on both the upside and the downside since our last meeting. Domestic demand has not slowed appreciably, and wage and price data show some deterioration. On the other hand, the situation in Asia and in Japan in particular seems to be more serious than just a few weeks ago. On balance, despite my increased concerns regarding Asia, I believe the risks we face remain on the upside.",1032
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Sixth District economy is still operating at a high level, but recent growth appears to have been slightly slower than that I reported at the last FOMC meeting. Retail sales have posted only modest gains above those of a year ago, while the stories on manufacturing are mixed, with strong reports from some areas and problems from others. For example, layoffs at Motorola are expected to have an impact on employment in Huntsville, Alabama and at two plants in Florida, and prospects are gloomy at a Nissan auto assembly plant in Tennessee. The GM strike has already idled 5,000 autoworkers across our District, and a report last week from was very pessimistic about the likelihood of a prompt settlement. Building on what Cathy Minehan said, other signs of labor activism are showing up: negotiations are going on at Bell South, where wages are a very big issue, and at Lucent Technologies, where benefits and job security are highest on the list of issues. Housing activity continues at a strong pace in the District, with single-family home construction and sales being the strongest. The only area of softness is in Louisiana. One sign of how strongly the tourism industry in the District is affecting housing markets is illustrated by a report from one of our directors at a recent meeting. He indicated that entire single-family home developments are being built in Florida and sold with the idea that the homes will be rented for a week or month or more to tourists. Office markets remain healthy while multifamily construction, which we thought had peaked, now appears not to have done so and is certainly doing better than we expected. Nevertheless, with the exception of Orlando, we continue to believe that most of the big cities in the District are on the verge of being overbuilt. At the last meeting, I indicated that the torrid pace of tourism, one of our region's major engines of growth, had slowed a bit. But as new attractions have come on line in Orlando, we have seen some rebound in tourism. On the wage and price front, the stories seem to be much the same. Unusually large wage increases remain tightly targeted on just those fields where scarce skills are in high demand, and firms are continuing to report a determination to resist raising prices. With labor markets tight and perhaps even a tad tighter in recent months, I am hearing more reports of hiring bonuses, retention bonuses, and other one-time compensation increases. Like others, I am hearing increasing talk of companies adding benefits. Small companies are adding hospitalization; large and small companies are adding childcare benefits. It is not clear to me to what extent those nonwage benefits may have found their way into the traditional measure of overall compensation costs. Not to be outdone, I have brought along with me a copy of an Atlanta newspaper from last week that tells my favorite tight labor market story for June. It was reported that a small high-tech firm in suburban Atlanta had just leased a BMW for every one of its 40 employees, from the receptionist to the programmers, as an added inducement for people to stay with the company. It is reported that they are even paying for the auto insurance to go with the BMW.",640
-fomc-corpus,1998,How long is the lease?,6
-fomc-corpus,1998,I'm not sure. [Laughter],8
-fomc-corpus,1998,As long as they stay!,6
-fomc-corpus,1998,"As long as they stay. On the national front, like others, I see an economy that is divided into two very divergent sectors: the international sector, which is looking weaker and weaker, and a strong domestic economy, where growth was paced in the first quarter by robust gains in consumer spending, business investment, and inventory expansion. It seems to me that there is little one can do directly with monetary policy to affect the international sector. After taking account of the damping effect it is having on overall domestic real growth, I would argue that we should not allow international developments to divert attention unduly away from any developing imbalances in the domestic economy. Fortunately, I don't believe that is happening, at least not yet. To be sure, consumer spending continues to pace the domestic economy. Last Friday's spending and income numbers continue to suggest that the consumer is not yet spending beyond his means. Consumer debt burdens remain somewhat high, as do bankruptcies, but appear to be manageable so far. Corporate profits remain strong, increasing but at a decreasing rate. Whether this will damp investment and whether the recent buildup in inventories is planned or unanticipated continue to be key questions in my mind. Our forecast for the next two years is similar to that in the Greenbook and to many other forecasts. Like the Greenbook, though with some difference in composition, we see some slowing in coming quarters due primarily to a slackening in investment spending and a pullback in inventory spending. We see consumer expenditures remaining strong. We anticipate that inflationary pressures will be modest over the forecast period, with the expected pickup in inflation being due primarily to an unwinding of the favorable effects that recent declines in energy prices have had on prices rather than a surge in underlying inflationary pressures. To be sure, the risks to this forecast, as others have said, are different depending on whether one looks at the domestic or the international components. Clearly, as Peter Fisher has laid out and others have commented, problems in Japan and elsewhere in Asia could worsen significantly and the ripple effects could be quite alarming. However, I think the risks to the domestic economy remain on the upside. In my view, it would be premature to take down the caution flag in that area quite yet. We have continually been surprised by the strength in investment and consumer spending, and those patterns could well continue for some time. Thank you, Mr. Chairman.",478
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The regional economy continues to do very well: consumer spending is strong, construction activity is strong, and business attitudes are generally upbeat. The only exception to those favorable patterns is in the natural resource industries--agriculture, energy, and paper--where conditions are clearly a good deal less favorable and there are some concerns. Our labor markets remain very tight. The unemployment rate in the Twin Cities metropolitan area has now dropped to 1.7 percent. This has led to some acceleration in the rate of wage increases but it's spotty. It's by no means generalized. As a consequence of discussions we have had with a variety of business and labor people, one development that seems to have restrained at least overt wage increases is a greater emphasis on what people are calling quality-of-life issues. That is, labor is increasingly interested, at least in our area, in things like more flexible hours, more flexible vacation time, relaxed dress codes, and so forth. Employers seem willing to trade those kinds of things for what we think of as traditional compensation increases. Whether those always lead to cost increases or not depends, of course, on what happens to productivity. There, we do not have very good statistics, although business people do report what they consider to be very favorable results in terms of the application of technology and their ability to raise productivity. So, that seems to be ongoing, at least in our part of the world. All this is hardly news at this point, but I do think productivity is one of the keys to the economic outlook and will be a principal determinant of how the economy plays out. I tend to be relatively optimistic in that respect. I think something like the Greenbook forecast is certainly possible, although my own view is that we will get more real growth both this year and next than in the Greenbook forecast. I believe domestic aggregate demand will continue to expand substantially. I expect aggregate supply to benefit from the productivity improvement that we are seeing, but I also think we probably will see more inflation next year than is anticipated in the Greenbook. My view is not based so much on a conviction that more inflation is inevitable but simply on the notion that I would not want to bet the whole ranch at this point on sustained productivity improvement above and beyond what the trend might be. So, I am a little cautious when it comes to that. As far as Asia is concerned, we obviously don't know how much of an adverse effect developments there might ultimately have on the U.S. economy. Even if we did know, I think we would have a good deal of difficulty unraveling the implications and ramifications for our economy. My own guesstimate is that we should not exaggerate the effects of Asia. The reason is, as we have seen repeatedly over the years, that our economy is very resilient. We have seen major domestic disruptions to various regions of our economy from time to time--I'm thinking both of the East Coast and the West Coast--and yet overall activity continues to march ahead rather nicely.",609
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Since we had a very fine report on the Tenth District earlier, I will keep my comments relatively brief. [Laughter] I will say, though, that the District economy remains strong. Our directors and business contacts report signs of this strength everywhere. Consumer spending is brisk, manufacturing is solid, and housing sales and starts are robust. Labor markets generally remain tight across the District. There have been some significant developments in the ag markets recently, and I thought I would touch on that for a few minutes. Overall, the agricultural situation is weakening as farm prices continue to sag. The District's important wheat harvest is well under way and a large crop is expected, although about 10 percent smaller than the bumper crop that we had last year. In addition, recently planted spring crops are well established and are enjoying excellent growing conditions. Damping the farm outlook, however, are low farm prices. Wheat, soybean, and pork prices are running more than 25 percent below levels of a year ago. Corn prices are down about 12 percent. Part of the problem stems from the drop in demand from Asia. Wheat exports to Asia have been especially weak, contributing to the low hog and cattle prices and widespread losses in the first half of this year. The weakness also results from prospects for large supplies of both crops and livestock this year. If weather patterns are normal this summer, crop inventories will build for the second straight year. If these low prices persist as the futures markets currently suggest, we expect that farm income in the nation will fall about 5 percent. In our District where livestock is more important, farm income could drop as much as 10 percent. In real terms, farm incomes are sliding to near the lowest levels in this decade. Lower farm incomes will, I believe, lead to some rise in farm loan problems this year. However, most banks had strong portfolios coming into the year and should be able to absorb likely increases in delinquencies. Moreover, rising farmland values and strong cash rents continue to indicate that many farmers still have strong balance sheets. On a more positive note, of course, the weak farm prices will moderate any upward pressures on food prices. On the national front, I think private domestic demand is fundamentally strong. Even though domestic demand growth may slow over the forecast horizon, I believe that it will remain at or even above the long-run trend. The first-quarter revision suggests that the economy carried over more momentum than previously estimated, and so far the second-quarter consumption data support that view. Even though the expansion should slow this year due to the expected inventory correction and the worsening of the trade deficit, I think the slowing will not keep real GDP from growing above the long-run trend. I recognize that inventories and the decline in net exports are a significant risk to the expansion. Recent developments on the inflation front have caused me to revise upward my inflation expectations for the year. The increase in core inflation we have seen so far this year is larger month-over-month than I had anticipated. I also expect inflation to increase further next year, perhaps as past favorable inflation factors unwind. While I remain reluctant to draw strong implications for inflation from the labor markets, I don't think we can ignore the upward movement in wage gains arising from very tight labor markets. In addition, we are seeing a divergence between growth in domestic demand and growth in GDP. To the extent an accommodative monetary policy may be generating the strong domestic demand, I think we should worry a little about inflationary consequences. Finally, the continued strong growth in the monetary aggregates, M2 and M3, suggests to me that monetary conditions have become more accommodative. Having said this, I am aware that favorable offsetting factors continue to exert moderating influences. Pipeline pressures are small; capacity utilization has been declining; and the dollar, of course, is and has been appreciating. In addition, the historically high real federal funds rate appears to be consistent with a slower expansion. I weigh all this and balance it out as follows: The expansion recently has shown signs of slowing to a more moderate pace, but I expect it to continue growing above its long-run trend for at least the foreseeable future. Also, as temporary favorable factors unwind, I think inflation is likely to pick up later this year. I see evidence accumulating to suggest that monetary policy has become more accommodative. As a result, there is a risk that inflation will rise more than what I would be comfortable with. However, I recognize that the data relating to the extent of this risk remain mixed, and I also am aware of the unfolding events in Asia. So, I look forward to our policy discussion tomorrow.",938
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Second District economy has been quite strong in the second quarter. Our manufacturing sector, which is concentrated in the northern half of New Jersey and upstate New York, actually began to look up a bit until the General Motors strike came along. GM has laid off about 5,400 workers of the 10,000 located in Buffalo, some more at a parts plant in Rochester, and about 2,300 in northern New Jersey. That has set manufacturing back a bit. Although New York City still has an unemployment rate of over 7 percent, that rate is down from over 10 percent 8 or 9 months ago, and the city seems to be on the way to adding more new jobs this calendar year than in any year since the 1960s. So, the city continues to do rather well. As I look at the national and international economies, the word that comes to my mind is ""uncertainty."" I think that the forecast, as presented in the excellent staff Chart Show, is a perfectly reasonable one and one that I sincerely hope will materialize, especially the international aspect of it. However, the downside risk on the international side is very considerable in my view. The situation in Japan impresses me as one in which the economic data do not tell us the nature of the crisis. What we are dealing with in the second largest economy of the world is a very deep cultural crisis in which the decisionmaking process of the society, which had served Japan very well since the Meiji Restoration and especially since the Second World War, has broken down. The decision recommenders and to a large degree the policymakers have been in the bureaucracy, which is now completely discredited and even more completely dispirited. During our recent trip to Japan Deputy Treasury Secretary Summers and I found that leadership for the Japanese nation would now have to come from the largest political party, the LDP. This is a rather significant shift in the way that society is run, and one has to hope that the shift will work well. In my view, the emerging decisionmakers in the LDP probably have a window of opportunity of about two to three months in which to convince the party members and other political decisionmakers to take some very difficult steps as regards the restructuring of the Japanese economy, especially the financial sector. There is a real question concerning whether they will be able to do that. If they do not--that is, if the Japanese people continue to have very low confidence at both the consumer and business levels and if that doesn't turn around in the next two to three months--I think that Japan will sink into a deeper recession. That inevitably will cause a much more serious crisis elsewhere in Asia, largely because the situation in Japan would add to the crisis of confidence in an area where confidence is already abysmally low. It is very difficult to imagine that the effects would not spread to the key countries in Latin America. We have seen that even Chile has become vulnerable and has had to change policies of very long standing, which they thought had served them very well. We have a crisis that is at an advanced stage in Russia, and it could readily spread to Russia's neighbors. Turkey is always an accident that could easily happen. In my view that sort of international financial crisis would not be limited or 1 percent on U. S. economic growth, because it is very to an Asian trade effect of, say, 1/2 or 3/4 difficult to imagine that that would not spill over into our financial markets and create a rather large correction. Looking at the purely domestic economy, if the crisis that I believe could emanate from Japan does occur, the downside risk to our real economy will be very considerable. If on the other hand a crisis in Japan does not happen, the other great uncertainty is whether we will continue to have the kind of productivity growth that is projected in the Greenbook. Lower productivity growth could reduce the rise in real output to below the Greenbook forecast and raise inflation to a rate above that in the Greenbook and certainly as high as that in my own Bank's inflation forecast. Our forecast, which appears to be rather similar to a number of forecasts reported around the table, has inflation rising to about 3 percent next year. We simply don't know whether productivity will continue to ""finance"" more rapid economic growth with very low inflation. We have been experiencing very nice productivity improvement since the last quarter of 1995, and even a nonbeliever in the new paradigm like me eventually has to become convinced, if it goes on long enough, that there really is something new here. Now, it seems to me that if we have this massive uncertainty on the international side and very considerable uncertainty on the domestic side and we have monetary policy close to where we want it to be in any event, there is a very, very strong case that the watchful waiting that has served this Committee so extraordinarily well over the last several years is the right policy to continue.",1012
-fomc-corpus,1998,As opposed to unwatchful waiting not being the right policy!,13
-fomc-corpus,1998,"President Poole, no double negatives, please! [Laughter]",14
-fomc-corpus,1998,"I will try not to double anything. Since our last meeting, there has been no significant change in Eighth District economic conditions. We continue to have exactly the same kind of stories about tight labor markets and firms with unfilled positions. We don't see any great upward pressure on product prices. We do have some disruptions from the GM strike, as is true in a number of other Districts. It looks as if we're going to have an Anheuser-Busch strike, but perhaps given the uncompleted stadium in Texas--",105
-fomc-corpus,1998,That is really serious! [Laughter],9
-fomc-corpus,1998,It's the only thing that is giving Mike Prell reason to pause.,14
-fomc-corpus,1998,I don't drink beer! I am wondering how the record will look in five years. [Laughter],21
-fomc-corpus,1998,"I am told that the management of Anheuser intends to keep the brewery operating, so I guess it will become the largest microbrewery in the United States. District housing markets remain very strong. In most markets, we have seen house price increases in the 5 to 10 percent range over the last year. Prices in the St. Louis market rose 14 percent in the last 12 months according to the data I'm looking at, suggesting that I bought my house just in time back in early April. I would like to talk about the national outlook and the puzzle in the business investment area. If one thinks about firms that are growing over time and expanding capacity, one would expect them to be adding capital and labor and not ending up with excess capacity in either area. If we look at the capacity utilization numbers, it would appear that conditions are quite comfortable, and yet all around the country we hear stories of labor shortages, firms with unfilled positions, and an increasing amount of turnover. So, there seems to be something of a mismatch between the capital and the labor sides. That could come about because firms have made some miscalculations, but I'm guessing that the investment outlook will remain strong because firms in this situation are going to be substituting capital for the labor that they cannot hire. We have an example in Louisville. UPS is going to be adding a huge facility, an investment of over $800 million, to automate the package sorting that they do every night and reduce the large amount of hand labor in that operation. That is a very large investment. I hope it works better than the baggage handling system at the Denver airport, which also was automated, but I guess the Denver airport eventually straightened that problem out. Given the persisting stories that we hear about the shortages of labor, we probably will continue to see strong investment. With the capacity utilization numbers that we are looking at reflecting capital that is not in tune with the available labor or some maldistribution by industry or otherwise, we should not be lured too readily into a comfortable outlook on investment just because the capacity utilization numbers look lower than they have at times in the past. I continue to believe that with an unchanged federal funds rate, the inflation risks are substantially greater on the upside of the Greenbook forecast than on the downside. I have not changed my views at all, so I will not repeat them.",479
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"The most important developments since the last meeting relate to near-term growth. They include early signs of the projected slowing in inventory investment, the GM strike, and the further deterioration in foreign real economic activity centered in Asia and Japan that is threatening to spread elsewhere. The combined effects of these developments, reflected in the significant declines in both inventory investment and net exports in the Greenbook forecast, point convincingly to a sharper than previously expected slowdown in the second quarter--from well above to likely below trend growth. This, of course, follows robust growth in the first quarter and indeed for the last year and a half. While this is history, it has left a legacy in terms of the prevailing very tight labor market that is the major source of inflation risk going forward. This risk will remain even if growth slows immediately to trend. The significant deterioration in the foreign economic outlook is the most important change in the forecast since the May meeting. In thinking about the effect of the Asian crisis on the outlook, I like to keep in mind both the central tendency in forecasts of the spillover on the U.S. economy and the probability distribution associated with this effect. In my view, the central tendency was relatively stable earlier in the year while the probability of a significantly worse outcome appeared to diminish when some rebound occurred in the currency and equity markets of the countries in question. More recently, however, there has been both a worsening in the central tendency and a renewal of a higher probability of a significantly worse outcome. The aggravation of the central tendency reinforces the case for a significant slowing in the pace of the economic expansion going forward, while the widening of the tail associated with worse case scenarios adds an important downside risk to the forecast. The list of countries facing serious difficulties seems to grow by the day. Nevertheless, the growth of domestic final demand remains robust. The strength reflects positive fundamentals, including continued supportive financial market conditions. This leaves some serious doubt about whether the slowdown that clearly appears to be under way will leave growth persistently below trend, a consideration that is central to the optimistic inflation scenario in the Greenbook. While I expect slower growth and higher inflation going forward, still in question is the degree to which this turns out to be a relatively benign outcome--specifically, a reverse soft landing with inflation remaining modest--or a less pleasant ending of one form or another. There is once again a more balanced set of risks in terms of output growth, given the sorry state of foreign economic developments and the still robust domestic demand. On balance, I expect somewhat faster growth and higher inflation than projected in the Greenbook. Like President Broaddus, I believe that an outcome in line with the Greenbook forecast would require some tightening of monetary policy over the forecast horizon. On the growth side, I wonder whether we are facing only a transitory decline in growth to below trend in the second quarter, after which growth will rebound to at least trend or higher. I wonder, in particular, if growth will remain as subdued as projected in the Greenbook for the second half when auto production rebounds from the GM strike and as the drag from nonauto inventory investment and net exports diminishes. If growth slows to trend or remains above trend, the unemployment rate will remain near where it is today or drift still lower and the inflation outlook will deteriorate more rapidly than in the staff forecast. Even if growth slows as projected in the Greenbook, I wonder whether the staff was too optimistic in its jump-off from third-quarter core CPI inflation. I interpreted the May CPI report as incrementally reinforcing my view that there may already have been a rebound in the underlying rate of core inflation from near 2 percent to about 2-1/2 percent. But after a 2.7 percent annual rate of core inflation over the first five months of this year, the Greenbook projects only a 2.1 percent rate for the second half. I would be less concerned about the outlook for inflation if the staff turns out to be on the mark about where the underlying rate of inflation is today. That jump-off point, the higher productivity trend produced in the last Greenbook about which I am also skeptical, and the 0.3 percentage point downward revision in the CPI inflation in 1999 due to technical revisions combine to yield the Greenbook's still low 2-1/4 percent core CPI inflation for 1999. Finally, I am concerned that when the trend in the dollar reverses, it will be more dramatic than the staff projects. When the fundamentals in terms of relative cyclical growth rates and real interest rate differentials tilt against the dollar, I expect the surging current account deficit to reinforce the decline in the dollar, potentially yielding a much sharper reversal of the exchange rate than is projected in the Greenbook. That would add to the inflation rebound in 1999 and beyond.",976
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Like many around the table, I find the Greenbook forecast very appealing. It would be nice if it were right! I think that if the forecast turned out to be right, we would find ourselves in a situation that is extremely interesting, unusual, and uncertain but not difficult. By that I mean the soft landing would get us out of the difficult choice between our domestic responsibilities and our international ones. We have had so much good news over the last year or so that it is nice to think that good news is normal. The domestic economy has certainly been performing extremely well by even the most demanding standards. Growth has been very strong and well balanced. Labor markets have been tighter without adverse inflation consequences for longer than any of us would have thought possible. Wages have been rising but not yet at an alarming pace, and prices have been astonishingly well behaved so far. Capacity has increased and whatever we think about the permanence or impermanence of the productivity increase, it certainly has been there when we needed it to help keep wage increases from pushing either prices up or profits down. The pace of growth last year and the acceleration in the first quarter of this year were clearly unsustainable by anybody's measures. There is no way we could keep adding to payrolls at that rate without running out of workers and ending up with the proverbial bottlenecks that have been so amazingly absent from the current boom. Without an impending slowdown, we clearly would be tempted or required by any serious economic analysis to use the only tool we have to slow the expansion down. But we are saved by a forecast that shows the growth rate dropping like a rock under the combined impact of inventory retrenchment and the worsening Asian crisis. So, we have to hope that the Greenbook is right or at least roughly right and that the slowdown will occur or indeed has already occurred. I certainly agree that the evidence points to slowing, but I am skeptical about the break being as sharp as the staff believes. My guess is that we will be back in August with a domestic economy that is running a bit faster than we think it sustainably can and with more signs of domestic inflation. I am not too worried about that because I think the dollar also is likely to stay strong and that the anti-inflationary inertia is currently a very potent force. By that I mean that the low inflation expectations and the pervasive belief of the business community that they have no pricing power because market conditions are so competitive are keeping inflation in check. If the forecast is substantially wrong and growth does not slow much, then we really have a difficult problem. The problem arises primarily because in some respects at least we are not just the central bank of the United States. We are an institution with world responsibilities, whether we like it or not. If by August or sooner, it is obvious that the U.S. economy is continuing to run hot, then we have a serious dilemma, especially if the world outlook is as precarious or even more precarious than it looks now. We can tell ourselves that the best thing to do for the world as well as for ourselves is to keep the U.S. economy growing on a sustainable track, and therefore we better slow it down by raising rates. But we would then be taking the risk of making the world situation even less tenable and perhaps precipitating another round of competitive currency devaluations that could lead to a prolonged global depression. That is not an attractive set of choices, so we had better hope that the Greenbook forecast is right. Of course, there is also the possibility raised by several around the table that the Greenbook is wrong in the other direction. The sharp slowing could cut investor and consumer confidence. The stock market could turn to rational nonexuberance and we would be faced with a soft economy and rising unemployment. That would be unfortunate but not particularly hard to manage from a policy point of view. The world would be quite happy with our cutting interest rates.",794
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. At one level it might seem that this meeting is more of the same, but as our earlier discussions have brought out, there have been subtle differences on the policy question since this expansion has proceeded. Beginning with the domestic economy, the first quarter was unsustainably rapid by almost anyone's definition. But because of the inventory swing, the damping influence of the stock market, and net exports, I guess I'm in agreement with the Greenbook that growth is slowing on its own to roughly a sustainable path. One could argue that policy should tighten some to help this process along, but I suppose I am more comfortable with the view that policy should sit still and let the slowdown occur naturally, especially in view of the surprisingly good performance of inflation. Turning to the international economy, others have said this and I will repeat it: We should not as a general rule make policy by trying to stabilize international currency values. Our best contribution to the world economy is to keep our own house in order, our own inflation rates low and stable or perhaps zero and stable, and our own real output growth healthy and sustainable. But the Asian crisis is unique. At every meeting we hear about new countries on the danger list. The last time it was Russia and Brazil. This time it is Pakistan and South Africa. The next time we will have a number of other countries, perhaps. The linchpin is Japan, and over the last few meetings conditions there have been described in bleaker and bleaker terms. The Japanese are now finally considering closing some banks and disposing of their assets, but over what seems like a rather relaxed schedule. Even if they do this, this step is only a necessary condition to arrest their downturn, not a sufficient condition. In the short run, closing banks is likely to be contractionary, not expansionary. I think it is almost inevitable that Japan's rebound will be delayed, at least in relation to the Greenbook timetable. To turn their economy around, they probably need a large and permanent tax cut, exactly the item omitted from their recent stimulus package. Until they do this, and perhaps go beyond, both the Japanese economy and the yen probably will fall further, reducing growth prospects in the rest of the world including the United States. Adding all this up, I am still roughly comfortable with the present policy. Given the incipient slowdown, tightening is probably not now called for in this country. Internationally, one might argue, as my colleague to my right does or seemed to a minute ago, for tightening and letting the yen depreciate a little. But given the asset situation and the inter-country links within Asia, that is a rather dangerous stance at the present time. I think there is a very strong argument for continuing the watchful waiting policy that we have been following and waiting for the risks to clarify. Who knows when they finally will?",579
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. A strong thread has been running through the discussion all afternoon relating to the stark difference between the domestic and the foreign outlook. It is leaving us with an unusual and bifurcated decision mix that I find rather uncomfortable. If we think about the United States economy domestically and in isolation from foreign impacts, we see a very, very strong economy. It is coming off a very robust first quarter. Job formation continues strong, unemployment is very low, business and consumer sentiment is sky high, credit is readily available on reasonable terms, the federal budget is balanced, the stock market is strong, and so forth. It is true, of course, that first-quarter growth was heavily influenced by inventories and that part of the economy is probably in the process of rebalancing. But I think of inventories as having a rather transitory influence that is going to hit the economy in one direction or the other from time to time, and we have to look past that. Looking forward, it is very hard for me to see the domestic economy slowing spontaneously to or below any reasonable definition of sustainability for any extended period of time. That scenario clearly has the potential of being inflationary at some point. My fear is that we may be close to that point. An incipient inflationary trend may now be starting to become visible, and I think that trend should be countered. However, internationally, as we know and as we have been discussing, we perceive a totally different view of the world. Asia is the centerpiece, especially Japan. We have been discussing that at length and I will not replay the discussion. The problem is not only Asia. Western European economies look very good right now, but they have a major challenge on their hands in making EMU work. Of course, they have clawing on their doorstep. Much of Latin America is fragile as usual, and it seems to me that they are at a watershed where they could very possibly institutionalize a major, strong, and lasting breakthrough, which would be wonderful, or they could fall back into stagnation for another decade. It seems to me that for the United States to embark on a round of policy tightening right now could be very destabilizing from an international standpoint. How do we position policy in view of this bifurcation? The Federal Reserve creates policy obviously in the national interest of the United States. But the state of the world around us is certainly part of that national interest for obvious reasons. In my judgment, the precarious state of the world economy seems to preclude tightening by the Committee at this time, or maybe I should just say at this meeting. The international impact may yet prove to be just the right thing to offset the rising pressures in our domestic economy, and we may indeed get the Greenbook's soft landing scenario. I hope so. But I have to say that I do increasingly fear that at the end of the day we may have to pay a high price for delay.",599
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I think I'm the last to speak, so I will try to be brief. We received a number of signals during the intermeeting period. Many of these indicators point to a continued uptrend in the economy, perhaps at a slower pace but not necessarily one that is without inflation risks. As others have said, jobs continue to be plentiful. The labor market is tight. April's 4.3 percent unemployment rate was not a fluke. Indeed, for the year through May, the unemployment rate averaged about 4.5 percent, which is probably below anyone's reasonable estimate of the NAIRU. Disturbingly, these labor markets are clearly creating some conditions for wage-induced inflation that in my view are noticeably stronger than earlier. Average hourly earnings increased 4.3 percent over the past 12 months, up from 3.9 percent in the prior 12 months and in turn up from 3.3 percent in the 12 months before that. In addition, the so-called indicators of worker insecurity appear to have turned toward increasing security. President Broaddus talked about his son. The median duration of unemployment is not normally two weeks but it is down to about five weeks from eight weeks previously. The quit rate is back up and labor force participation has not grown further. I recognize that productivity increases may offset some of the nominal wage increases, and in this regard I am hopeful that the staff is right and in fact I think that they probably are. However, the difference between nominal wage gains and productivity growth, even assuming some uptick in productivity trend, is growing ever larger. In my view, the gap between wage gains and productivity growth is putting increasing pressure on businesses to translate some of these wage gains into price increases, particularly if the growth of profit margins is slowing. Someone mentioned earlier that the yield curve was flattening. As I see it, the flattening is being driven more by the long end than the short end, which does not suggest to me a slowing of the economy. In fact, it might be having a stimulative effect. So, I believe we should be cautious about putting too much weight on the flattening. Finally, as others have said, the strength in labor markets is feeding unabated demand for consumer goods, and interest-sensitive goods, housing in particular, have continued to display strength. Others have talked about the Greenbook forecast, and I will quickly give my read on it, which is not dramatically different from that of others. The staff suggests that the extremely strong economic picture is going to be cooled to lower growth rates by net exports, correction of inventory overhang, and some moderation in the PCE uptrend. I think there is at best only the barest evidence in support of this deceleration story. The net export story, as the Greenbook indicates, is actually more past than prologue. The staff forecast says that the worst of the direct retarding impact from net exports already occurred in the first quarter and that going forward we are likely to see less of a direct impact from that sector of the economy. Therefore, we are relying on a multiplier-accelerator story to achieve the desired results, as I think Mike Prell suggested in response to President Poole's question. Similarly, with respect to the slowdown in inventory accumulation, I think I'm in the same camp as President Minehan. Inventory-to-shipment ratios in manufacturing have edged up only slightly, and they remain below where they were in January. Wholesale inventory-to-sales ratios also seem to be quite well behaved. Admittedly, maintaining these ratios does not require a continued $100 billion annual rate of inventory increase, but it does seem likely that there may be more of an increase or less of a slowdown than the staff expects. Finally, the staff is looking forward to some slowdown in PCE due to a slowing in wealth creation from the stock market and a slight uptick in unemployment. The rise in the unemployment rate in the Greenbook forecast is only to about 4.5 percent this year, which I believe most of us would not regard as an indication of a loose labor market. The slowdown in the stock market may turn out, as usual, to be more ephemeral than real. So, I see some real risks on the upside, particularly with respect to the domestic economy. There are, as others have indicated, some countervailing and potentially growing risks on the downside. The strike at GM, I think, is likely to exert a short-term but noticeable shock. The international developments that others have talked about are certainly no less certain. The one thing I could add, after coming back from Japan and talking to some private-sector forecasters there, is that I believe the base forecast that the staff has presented to us is somewhat more optimistic than those forecasters in Japan currently believe. So, there is some more downside potential there. In summary, I believe that the risks to the upside still exist. However, none of these worries are yet realities. The staff forecast may materialize and, like others, I hope that it does. I think that the risks to the downside are a little stronger now than they were at the time of the last meeting. There obviously is continued international instability. On balance, I would go with the word ""uncertain"" in characterizing the outlook. The future is quite uncertain and I think no action is required on our part, either up or down. The more prudent course is, again, to wait and see. It appears to be the most responsible among the difficult choices that we face. The next meeting may have a different outcome, but I think this is the appropriate outcome for this meeting.",1147
-fomc-corpus,1998,"I think we have time this afternoon for one last item on the agenda. You may recall a fairly elaborate paper that was circulated entitled ""Issues Arising from the Zero Constraint on Nominal Interest Rates.' I don't think we will want to get involved in a particularly long discussion of this issue, but I do think it's probably worthwhile for Don Kohn to take a few minutes to summarize the paper. Then we will see how much of a discussion we wish to get into before we adjourn for the evening. Don.",103
-fomc-corpus,1998,"I will try to be brief, Mr. Chairman. My colleagues, David Reifschneider and David Small, who did much of the work on the paper are seated at the table. Hopefully, they will answer your questions! This study was prepared in response to a discussion at the February meeting of the Committee. A number of you noted that for several decades the Committee had focused on reducing inflation from high levels that were clearly unacceptable. The inflation rate was now low enough that it seemed appropriate to consider how much further it should go down and what trend rate would be most consistent with maximum economic growth. That nominal interest rates cannot go below zero is one aspect of such a consideration. This zero constraint comes into play when inflation is low because nominal interest rates also are low at the same time. If in this situation the economy is hit with a downward shock and policy is eased and if the economy is then hit with another downward shock or policy eases too slowly, the Federal Open Market Committee could find itself constrained in its ability to continue to support the economy and the economy could worsen further. Very briefly summarizing the results of the paper, one is that being caught at a zero bound nominal rate is probably a very rare event. Policy errors are one reason the Committee could get caught there, and that is more likely, obviously, when the starting point is a low inflation rate. Being caught at the zero nominal bound could have very serious consequences. There were two ways that the study approached this issue. One was by looking at history. The 1930s in the United States provide one example of monetary policy caught at the zero nominal bound, particularly from 1932 through most of the rest of the 1930s. In the 1990s, the approach of the zero nominal bound in Japan seems to have constrained policy there. The other way the study looked at this was through model simulations. There it was shown that hitting a model of the economy with shocks representing unexpected events, the zero nominal bound tended to present problems and tended to produce longer and more frequent occasions when the economy was producing below potential after starting from an inflation rate of 1 percent or lower. A second suggestion of the paper was that the Committee can structure monetary policy actions to reduce the odds of ending up at the zero nominal bound by being more aggressive in countering downside surprises when inflation is already low. Now, this can be seen to some extent in the one place in the paper where the staff looked at an alternative to a Taylor Rule that had more aggressive coefficients so that the Federal Open Market Committee reacted more strongly to output and inflation gaps. That is a symmetrical kind of reaction. One can also imagine an asymmetrical reaction where the Committee reacts particularly strongly to the threat of deflation when inflation is already at a low rate. But it is not easy to implement such a policy. The Committee needs to identify the surprise, needs to be confident that inflation is moving down to dangerously low levels, and needs to be willing to take risks by moving aggressively against deflation or a potential deflationary shock. The Committee needs to take the risk that if it is wrong, inflation might re-emerge and the Committee would then have to counter that--would have to reverse course. So this asymmetric strategy requires a willingness to take risks. A third conclusion of the paper was that once the Committee finds itself at the lower bound, its options are limited. Fiscal policy is probably the most effective way of stimulating the economy when monetary policy is trapped by the zero bound, but the central bank cannot count on the fiscal authorities, as we certainly are seeing in Japan today. The monetary authorities have at their disposal some fiscal-type actions that they could take, for example, making loans to private parties at a subsidized rate, which the paper did not consider on the thought that it was more a part of fiscal policy than monetary policy. Unorthodox monetary policy may work, but it obviously would have to be through channels other than reducing short-term interest rates since they are already at zero. Those channels might include reducing expected short-term rates by tilting down long-term rates, or reducing term or risk premiums in long-term rates. The latter also would tend to reduce long-term rates and exchange rates as well. Pumping up the monetary base by itself would be unlikely to be effective in doing either of these things, that is, reducing short-term rate expectations or term and risk premiums. Such increases in the base would tend to go into excess reserves and there is no obvious reason why that would change expectations about future rates. Tilting open market operations to a limited degree toward bonds or foreign exchange also is not likely to do much. Studies show that modest changes in the supply of bonds, Operation Twist kinds of things, do not have much effect on bond yields. Sterilized intervention, which is what in effect such foreign exchange buying would be, also does not do much. However, massive purchases of bonds or massive intervention might. The Federal Reserve did set the rate on government bonds during World War II. If a central bank were willing to purchase all the supply of government bonds, it could set the bond rate again, and presumably this would feed through to corporate borrowing rates as well. So, there are extreme policies involving massive purchases that should work in lowering term premiums and risk premiums. In considering how low inflation should go, the zero bound is only one part of the calculations. There are a number of other potential costs and benefits. On the benefits side, the paper did not deal at all with the extra growth, productivity, or efficiency that might result from an economy operating at very low or even zero rates of inflation. Unfortunately, it is hard to quantify with confidence the gains from going to zero inflation or the costs of the zero bound. A final question is whether there are any implications of this analysis for the Committee's consideration over the next couple of years. For one thing, there could be a practical policy issue at some point. Right now, of course, the funds rate is at 5-1/2 percent and the risk, as a number of you already have noted, is for inflation to be rising. A zero bound problem does not seem to be in the cards, but it is not impossible to imagine a situation involving lower inflation and lower nominal interest rates. We have tended to overpredict inflation over the last few years. I think one of the lessons from the United States in the 1930s and Japan in the 1990s is that problems have tended to follow sharp breaks in asset prices coupled with sluggish monetary responses because the authorities were concerned about re-igniting asset price increases or inflation and with destabilizing fiscal policy because the fiscal authorities were focused on budget balance or long-term surplus. Given the level of equity prices today in the United States, I don't think we are invulnerable to a sharp break in equity prices, the initiating step in this sequence. And if it came on top of a situation somewhere down the road in which foreign economies were worsening and the dollar was appreciating, it is not beyond imagination to think that this kind of situation might be one where the Committee might consider whether it wanted some strong asymmetric responses to downward shocks to the economy. From a different perspective, the Committee might want to consider whether it has anything useful to communicate to the public about the long-run context of its policy decisions. If the Committee had a sense that it would lean hard against inflation rates that tended to drop to very, very low levels or to zero, there might be some benefit from laying out the issues for the public. It would allow markets to anticipate such actions and such anticipation might help to bring down long-term rates. You will remember that one of the problems in Japan in the early 1990s and in the United States in the early 1930s was that it took long-term rates a long time to come down, presumably because markets were anticipating that the authorities would bring rates back up again. If the Committee were not going to do that, it might be useful to inform people. That also would promote a public debate, understanding, and accountability of how the Federal Reserve interpreted the price stability mandated in the Federal Reserve Act. Now may not be the best time. Since the Committee is worried about inflation going up, there would be a risk of misinterpretation if it started to talk about a supposition that inflation might get too low. But at some point in the future, I think a public discussion of these issues might be constructive for all concerned. Thank you, Mr. Chairman.",1722
-fomc-corpus,1998,Thank you. Questions for Don?,7
-fomc-corpus,1998,"I think this is a very nice piece of work, but if I were assigned a job of refereeing it for a journal, I know that it would take me two or three days, maybe a week, of hard full-time work to get through the paper and get to the bottom of it. There are a lot of very interesting but very important technical issues affecting how the staff gets these results. I think the overall issue is extremely important as a backdrop to a decision, which I hope we will reach at some point, that our long-run policy goal is zero inflation properly measured, whatever that might mean in terms of the actual CPI. I believe we need to be clear about all the technical issues involved before we actually confront this as a live issue. I would propose that this paper be put into whatever is the appropriate form and sent out to four or five academic specialists in macroeconomics who approach these issues from different perspectives to give us the best professional opinions. I have spent so little time on the paper that I hesitate even to comment on it. I spent a couple of hours reading and thinking about it, and I have thought about these issues before. I don't know whether you want to get into a substantive discussion on this, Mr. Chairman.",251
-fomc-corpus,1998,"I will tell you one thing that I do not want to do and that is to send this out of this room or out of this building and have it leaked to the newspapers. If that were to happen, it would give all the wrong signals. I don't know how to avoid having somebody leak it.",61
-fomc-corpus,1998,"I agree. Obviously, if it is going outside, it would have to be done in a way that would not cause us grief from that point of view.",32
-fomc-corpus,1998,I don't know how we would do it!,9
-fomc-corpus,1998,"I think, Mr. Chairman, the staff does intend to try and re-dress the paper and put pieces of it out, the model simulations in particular, as a working paper in the working paper series here. There is another paper on this general topic that has been presented at college seminars by other Federal Reserve researchers. There has been a publication of a paper by Brian Madigan and Jeff Fuhrer on this issue. I think we could take the paper out of the immediate policy context so that people would not know that the Federal Open Market Committee had been working on it, and we could get academic comment on it. It has been done before.",130
-fomc-corpus,1998,"If you feel confident, I feel confident as I shake! [Laughter]",16
-fomc-corpus,1998,I feel less confident now than I did a few minutes ago! [Laughter],17
-fomc-corpus,1998,"This is an issue that has been discussed in the academic literature for a long, long time.",19
-fomc-corpus,1998,"I know and it is a crucial issue. A couple of years ago we had an extended discussion of the Akerlof, Dickens, and Perry paper. It is a very crucial issue, and I think it is important for us over the long run to get a fix on it. I am concerned about the press looking for any indication of what we might be thinking. I would be worried about creating the wrong sense of our thinking.",87
-fomc-corpus,1998,"In any case, though, I think we should take up what I heard as Bill Poole's offer to give it a very serious review. [Laughter]",33
-fomc-corpus,1998,That would commit him to a week of hard labor!,11
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. I think that getting other input on the paper, if a way can be found without creating all kinds of problems for us, would be very desirable. But like the research that was done a couple of years ago on the costs and benefits of reducing inflation, I have a difficulty with the starting point. To reduce inflation from any inherited situation implies initial conditions and policies that set in motion certain dynamics as opposed to starting from the premise that we have stable purchasing power of money. Stable purchasing power of money does not mean that the prices of all assets or goods or services are unchanged. What it means is that the weighted-average of relevant price categories is not rising or falling. Once we start from that concept of the stable purchasing power of the currency, which is the idea we are trying to implant into the minds of decisionmakers--households and businesses alike--I think we come out a little differently. Suppose that is our initial condition and we then have a favorable productivity shock, maybe like the one we have had in the last couple of years. That means an increase in the purchasing power of money because the weighted average of prices that are falling exceeds the weighted average of prices that are rising. There is some literature on this, the work that George Selgin and others have done about the productivity norm for inflation. A couple of economists in Britain also have done some work on that issue. A central bank can conduct a monetary policy in that environment through a monetary base arrangement of supply and demand for central bank money. It does not create problems of the type that I see in this paper derived from the Taylor framework. So, even if we consider a Taylor framework approach, there is another or different way of approaching the same question that I do not see included in this paper.",356
-fomc-corpus,1998,"I think a favorable productivity shock, even in the context of this paper, would not present the Committee with a problem for the reasons that were discussed earlier in this meeting. Such a shock tends to raise the equilibrium real interest rate and it tends to boost growth. I think what becomes an issue in this paper is downward shocks to demand.",67
-fomc-corpus,1998,"That is why I referred to initial conditions. We do not get that liquidity trap effect where efforts to increase the monetary base only add to excess reserves unless we start with the initial condition of inadequate aggregate demand. If we start with a favorable productivity shock and we have stable purchasing power of money, then the real rate of return to real productive capital has actually gone up. We don't have a problem then. We only have it in this inadequate excess demand framework.",91
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I just wanted to comment that I was struck by the juxtaposition of a highly theoretical and really interesting paper that we received at the same time we got a paper on the real world that shows that the Japanese government and the Bank of Japan are faced with the same range of choices that the staff put on the table in the theoretical paper. It was fascinating to read the two as companion papers, as I did, and realize that the theory matches the reality fairly closely. That theory says that the Japanese do not have much they can do other than massive fiscal intervention or massive depreciation of the currency. We know depreciation of the yen is not going to be a healthy choice for a lot of reasons. So, massive fiscal intervention seems to be their only option. I think it is a good idea to get the theoretical paper more thoroughly vetted. I would worry, however, about some of the untried monetary policy options that are mentioned in the paper including operations in the futures market and in the options market and making direct loans of a significant size to nonbank borrowers. I think all of those options, if they were perceived as really under consideration by the central bank, would create difficulties for us.",238
-fomc-corpus,1998,"I think the intention, President Minehan, was to concentrate on the modeling part of the paper, not on the other part.",26
-fomc-corpus,1998,"I see, although policy options do get included to a minor extent in some of the variations you put into play in the modeling exercise. In any event, the paper made me conscious of the fact that there are a lot of other papers on this subject that I read a long time ago, and I am going to go back and reread them. So, I thank you for that.",78
-fomc-corpus,1998,Over the weekend?,4
-fomc-corpus,1998,Likely more than a weekend.,7
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"I think this is a very interesting, useful, and important study. I would agree that it involves a very difficult subject to study, and all of us probably should spend a lot more time with it. I think Don Kohn hit on most of the quite interesting issues that I saw in the paper. I found the one about taking more vigorous or aggressive action a fairly significant point. If we are operating under a Taylor Rule, I guess in effect what we are envisioning is that we have higher coefficients on the two gaps that cause policy to move more aggressively. It may also cause policy to move in a more preemptive way, which we can do even under a Taylor Rule if we have forecasting. So, I think that is interesting. The other interesting point relates to what may be, at least in terms of these models, the advantage of setting a goal that is a little above zero. The simulations seem to suggest that if we have 1 to 2 percent inflation as our goal, we would run into the zero bound constraint very few times. Again, this is in terms of the simulations in those models, but I think it's a quite interesting result. I frankly did find some of the alternative policy options interesting, in particular the ""put"" option to bring long-term interest rates down; perhaps it does have some practical relevance to real world situations. I want to make a couple of additional points, which may be related to some that Bill Poole brought up. It seems to me that a deflation with zero interest rates is somewhat similar in effect to a break in history in the sense that we have estimated a Keynesian model over a period of history where we really have not had this basic condition. So, it may not be all that strange that the results are not particularly satisfying, as often would be the case if we had a break in history. It also is conceivable, although I basically buy the Keynesian approach, that we may have regime shifts at different points. In hyperinflation we may have a different regime than we would at zero inflation. Although I know you looked at some different models, they did not seem to me to involve complete regime shifts. The third point is that I would like to see somebody, maybe Bill Poole, give the monetarists' explanation. I have seen an article where Friedman has offered some comments on this issue. After all, not everybody in this world believes that we should focus solely on interest rates and therefore that central bank purchases of securities do not accomplish anything when we are at zero interest rates. They do increase the monetary base, and if one believes that quantities are what is important, that can have an impact. I would like to see other viewpoints, which we could get in a conference. I don't think it has to be a forum the Committee would necessarily endorse, but we should try to get the views of other people who have thought long and hard about these issues over the years. This staff paper is a good work, but I think it is a good work in a particular religion. We might look at a few other religions.",625
-fomc-corpus,1998,I just realized that the paper could go out without difficulty and sensitivity if it were sent out by Ted Truman. [Laughter] It is so obviously the Japanese issue and not ours.,37
-fomc-corpus,1998,"You would have to simulate it with a Japanese model, though. [Laughter]",17
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Bob Parry already made my point and I would just underline that this is an interesting paper. It is an important subject, and I think it deserves discussion. If there's a public perception problem, then I think we could, at least as a starter, have a very robust discussion within the System. There are a lot of people on our staffs who are working on this issue and are interested in new approaches using different models. It seems to me that would be something we should consider as a first step.",101
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"I want to support the point that has just been made. I think we have enough intellectual resources within the System that have not been brought to bear on this paper because of the shortage of time. It was very difficult for any of us to spend enough time on it, let alone to have an in-depth discussion with our staffs on it. I think that a robust discussion within the Federal Reserve System, which certainly does not create the security problem that I believe is a very real one, would be much to be desired.",104
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Much has already been said, but I want very briefly to reiterate some of President Jordan's comments. If I understood correctly, this model's parameters were developed in a period when we had declining inflation. I believe it is very important, though, that we look at it in the context of zero inflation and a stable economic situation and then evaluate the effects of shocks. I believe that would be very important. A broader discussion or conference on this issue probably would bring out that kind of analysis.",99
-fomc-corpus,1998,Are you suggesting what the topic at Jackson Hole will be next year?,14
-fomc-corpus,1998,I am open to suggestions.,6
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"I thought this was a very interesting and very useful study and entirely relevant, not only to what is going on in Japan but to the low inflation environment that is now in place throughout the developed economies of the world. I would feel more confident about the results if they were replicated in a variety of other models. I would be particularly concerned about the rational expectations focus of the FRB-US model relative to some other econometric models, but I would like to see it played out in a variety of models. What I found exciting in the paper were the implications for both policy strategy and for policy objectives. I think it is a very relevant point that when we have a situation where inflation is low and we don't have much room to move nominal rates, we can compensate for quantity with speed and more aggressive moves. This notion of asymmetric responses to downward versus upward shocks is a very interesting one. Having said that, I am a little skeptical that the Committee would be willing to move as aggressively as is contemplated in those models, given uncertainty and the need to build broad consensus for policy changes. On policy objectives, I see this as a part of a long discussion that we seem to be having a couple times a year with regard to how we would set an explicit inflation target if we ever decided we wanted to set an explicit inflation target. One of the reasons I liked this study was that it reinforced my view that an appropriate inflation target would be price stability plus a cushion where this cushion was related to the potential adverse consequences of setting too low an inflation target. I would like to see further work along these lines and I would be delighted to see outside reviews of this study.",332
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"I, too, thought this was a useful study, especially in terms of getting us to think more concretely about our objectives. We do have a lot of talent available within the System. We could spend time profitably with some further analysis and discussion of all of this. I did have a couple of reservations about the study at least with the way I interpreted what we have here. One is a point that Don Kohn touched on that I would emphasize. It is that if we think there are significant long-term benefits to low inflation in terms of productivity and growth and so forth, then worrying about what we might do in terms of countercyclical policy seems to be a second order question. It almost has the flavor of saying that while we have a distortionary tax in place we want to leave it in place right now even though it adversely affects the economy because it gives us something to do if conditions turn bad. I suspect that there is some problem with that, and I would like to think this through more fully.",206
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"President Stern has picked up my point. I thought the paper was very interesting, but in some sense quite inwardly focused because it is all about what we should do. It missed what for me is an important point, the one in the Akerlof paper to which the Chairman alluded. I guess I would like to see added to this study some sense of the impact on the real economy from having inflation at various levels. Is 2 percent inflation right? Is zero inflation right? Which one does better in terms of productivity, in terms of investment, in terms of flexible labor markets? I think it would be useful to have a summary of the information that is available on this issue. Otherwise, we are aiming at a target that may have very little to do with our general goal of creating an economy that is performing well overall.",168
-fomc-corpus,1998,"Unfortunately, we did turn the best minds in the System loose on that three or four years ago, and they could not reach a conclusion. [Laughter] They could not show that there were benefits from reducing the rate of inflation below 2 or 3 percent.",54
-fomc-corpus,1998,"Given the turnover of the Committee, it probably would be sensible for us to recirculate that material, at least to all those who have not received it.",32
-fomc-corpus,1998,"We also have to put it in a broader context. Those of us who have recently been confirmed as Board members had to go through a bit of grilling by a few senators on why we did not think an inflation target might be a good idea. It is easy to dance around that issue, but it would be nice to attack it directly.",68
-fomc-corpus,1998,"We have to be a little careful. I think we have demonstrated in this country in the last four or five years that the notion that was held rather tentatively, namely that low inflation has a very significant and favorable effect on long-term economic growth, is now being held very firmly. In other words, the experience we have just gone through has really demonstrated statistically or at least has added a few important data points that corroborate the crucial importance of low inflation on maximum sustainable growth. If we start to get into a mode of worrying about not getting down too close to zero inflation, we may inadvertently introduce a strong inflationary bias in our deliberations. I would worry about that. We have to be a little careful about keeping the appropriate balance in our discussions because it can be very easy for us to conclude that it would be a disaster if we got to zero interest rates and got to the type of phenomenon that Japan is experiencing. We may be tempted to conclude that the simplest way to avoid that situation is to keep inflation at 5 percent, which means we will end up with inflation at 10 percent. That's a slight exaggeration.",228
-fomc-corpus,1998,That's not where we are now!,7
-fomc-corpus,1998,"It's not where we are now, but I just want to stipulate that these types of discussions can take on a bias that we never intended them to take. We have to make sure we are wary of that.",43
-fomc-corpus,1998,I agree. That is the magic of the verbal rather than the numerical definition of price stability.,19
-fomc-corpus,1998,"I have the unenvied position of being chair of the Board's Committee on Economic Affairs, and I have been wondering about not having a whole lot on our plate. [Laughter] One thing this Committee might do, as some already have suggested, is to organize a conference. If we were to do that, I think we definitely should open it to people outside the System and get different economists in on this. I would like to see us get representatives from different countries, and in Bob Parry's terms, different religions as well--rational expectations, monetarism, and so forth. I personally would like to have somebody take a look at the costs and benefits of different inflation targets. Maybe these are well-trodden issues, but I have not seen too much on them since I've been here, and in any event I think some new studies are being produced. So, I would not give up on that. How best to do this is something I might volunteer to think about with the staff. Again, I do think our study should be broadened beyond the System because there is a lot of academic talent out there that both insulates us and improves the academic product.",239
-fomc-corpus,1998,There is this nice lake in Wyoming where one might do this.,13
-fomc-corpus,1998,"We can talk about that, too.",8
-fomc-corpus,1998,That is not a bad idea. Can we assume that you will put some suggestions together and circulate them to the Committee for comments?,26
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"It's not that everyone will necessarily accept your view, but it would be a vehicle by which we could get some form of collective judgment on where this gets carried to.",33
-fomc-corpus,1998,Sure.,2
-fomc-corpus,1998,Does everyone agree with that? [Secretary's note: Several members expressed agreement.],16
-fomc-corpus,1998,"Does anybody else have something they want to say on this subject? I forgot to mention earlier that, as always, you have time to revise the projections you have submitted. Dave Stockton will be the recipient of revisions, and the date is?",48
-fomc-corpus,1998,Close of business on Monday.,6
-fomc-corpus,1998,"Close of business on Monday. If you have any revisions, please give them to Dave Stockton prior to COB Monday. Buses are leaving from here and from the Watergate at 7:15 p.m. for dinner at the U.K. embassy this evening.",53
-fomc-corpus,1998,Good morning. We'll begin with a discussion of our longer-run objectives for money and debt growth. I call on Bill Whitesell to start us off.,30
-fomc-corpus,1998,"The Committee again must decide whether to make any adjustments in the ranges for money and debt growth, which have been unchanged since mid-1995. In recent years, the Committee has been interpreting the monetary ranges as those that would be consistent with price stability and normal velocity behavior, while the debt range, by contrast, has remained fairly well centered on the staff's projected growth rate for this aggregate. One reason for adopting this rationale for the monetary ranges was uncertainty about the behavior of velocity early in this decade. The handout reproduces several charts from the Bluebook that examine more recent evidence on this issue. 3/ Chart 4 depicts the relationship of M2 velocity to opportunity costs--defined as the three-month Treasury bill rate less the weighted-average interest rate on M2 assets. Breaking the analysis into four subperiods allows for shifts in the level of velocity--the largest by far being that of the early 1990s. The elasticity of V2 with respect to opportunity costs was held constant across the four subperiods at its value estimated over 1977 to 1990. The panel on the lower right indicates that, after allowing for a level shift in the early 1990s, M2 velocity has had about as close a relationship to opportunity costs recently as it did in the past. Chart 5 plots the percentage deviations of V2 as predicted by opportunity costs from its actual levels. For the recent period, while the errors tend to run in the same direction for a while, they are not larger on average than those for other historical periods. But even if M2 velocity is again as predictable as it was prior to this decade, it may not be predictable enough. Suppose the Committee decided to center a range of 4 percentage points in width on its forecast of M2, which was based on its desired growth of nominal spending. If M2 began to move out of that range because of a departure of GDP from expectations, the monetary aggregate would be providing an appropriate signal for policy. However, M2 may at times diverge from its range not because of movements of GDP but because of unforeseen interest rate changes or noise in money demand. Such divergences would be reflected in errors in forecasting velocity, which are investigated in the upper panel of Chart 6. The solid line shows the errors in the Board staff's predictions in February of the annual growth of M2 velocity, based on Greenbook interest rate assumptions. The parallel dashed lines show a 4 percentage point range around the projections. There were six cases in the last 15 years in which errors in predicting V2 were outside that range. The dotted line adjusts the errors in V2 for deviations of the federal funds rate from Greenbook assumptions; two of the six velocity forecast errors exceeding the range width could plausibly be attributed to unforeseen interest rate changes, while the other four were evidently noise in money demand This analysis suggests that if you do again use a range for M2 that reflects M2's forecast growth for the year, you should expect on occasion a departure from that range because of unpredictable elements in money demand and not only because a change in policy was needed or was made. Despite the uncertainty in money demand, M2 still seems to be of some use as an economic indicator. For instance, there is a strong correlation between the growth of M2 in one year and the growth of nominal GDP in the next. Another example of the indicator value of M2 is shown in the lower panel of Chart 6, which plots surprises in nominal GDP relative to the staff forecast along with surprises in M2 adjusted for the effects of deviations of the funds rate from Greenbook assumptions. The positive correlation suggests that incoming data on M2, which are available well before the final GDP numbers, give some guidance on contemporaneous developments in nominal spending. The Bluebook provided a similar analysis of M3, not shown here, and found that the forecast errors for the velocity of M3 have been slightly larger than those for M2, while the relationship of M3 to GDP is a little weaker than that for M2. The final page of the handout is a table from the Bluebook showing the staff projections for money and debt growth and three alternative sets of ranges for the Committee's consideration. We expect that growth of money and of debt will slow from their robust pace over the first half of this year, largely because of a deceleration of nominal spending. In addition, the differentials between the growth rates of these aggregates and nominal GDP are projected to narrow in an environment in which longer-term interest rates edge up and the stock market slips off a bit. Committee members may have a somewhat stronger outlook for money and debt growth than the staff, as the central tendencies of your forecasts for nominal GDP exceed the Greenbook projections by something in the neighborhood of 1/2 percentage point for this year and 1 percentage point for 1999. This would imply higher money growth by similar amounts, other things equal. However, a couple of you noted yesterday that you had assumed a higher funds rate in making your forecasts, and that would damp money growth. For instance, a funds rate 3/4percentage point higher by the end of this year would mean nearly a percentage point weaker M2 growth over 1999, and the combined effects of the stronger nominal GDP and this higher funds rate could be roughly a wash. In 1998, M2 and M3 are projected by the staff to grow appreciably faster than their current ranges, shown in alternative I, and M3 is expected to exceed its current range next year. Alternative II shows ranges reasonably centered on the staff projections for money and debt growth for 1999, albeit with the midpoints of the M3 and debt ranges a bit below the staff projection on the thought that the Committee's concerns about inflation pressures suggest that you would rather round the ranges down than up. Alternative III could be used if the Committee wished to adjust the range for the debt aggregate downward further to make it consistent with the expected growth of debt under conditions of price stability, assuming the members see trend nominal GDP growth at price stability of around 3 percent, as does the staff. While the monetary aggregates have some value as economic indicators when considered in the context of a variety of other variables, it is now widely recognized that the monetary aggregates are not suitable for a role as intermediate policy targets. Nonetheless, ranges for money and debt growth can be a useful means for the Committee to communicate to the public. If you prefer to avoid attracting any attention to these financial quantities and have no intention of using them in policymaking, then leaving the ranges for 1998 unchanged and carrying them forward to 1999 might be your choice. You could also use the ranges to communicate to the public the rate of inflation you believe to be consistent with maximum economic growth over the long run; this might be true price stability as implied by the current monetary ranges, or perhaps a small positive inflation rate that allowed some flexibility for policy above the zero bound on nominal interest rates. The latter would imply an upward adjustment from the current ranges. Alternatively, ranges based on annual projections for money and debt could help inform the public about your expected annual growth of these aggregates, which could be useful, particularly if you had some sense of what growth rates would begin to raise concerns for you. Rapid money growth relative to the ranges might be one factor you could cite in explaining a policy tightening, particularly if it were preemptive in nature. Such projection-based ranges would also be closer to the spirit of the reporting mandated by Congress. Projection-based ranges need not be linked to any greater emphasis on the monetary and debt aggregates in policymaking. The Committee could make clear to the public that the forecast ranges were not at all policy targets and perhaps go even further to state that no additional weight on the aggregates was intended by a return to projection-based ranges. On the other hand, retaining price stability ranges for the monetary aggregates does not preclude your giving them more attention in policymaking.",1617
-fomc-corpus,1998,"Questions? No questions! I guess you created some sort of record around here. Let me just give my impression of this policy issue. We currently have a set of targets that we believe encompass monetary growth under conditions of price stability, and we have had those targets for a considerable period of time. The moment we change them is the moment we essentially will be saying that price stability was a good idea, but let us be a little more flexible. I feel very uncomfortable with that. I think that until we really perceive a change in the role of the aggregates and we decide that our policy actions are likely to be reflective of their behavior, staying where we are is not a bad idea. Interpreting what the money supply is doing in the context of a range that we stipulate as a price stability range has a certain meaning that in one sense may even be superior to our targeting the expected growth numbers and making a judgment about whether our forecast is good or bad. Our forecast is far less important in a broader sense than the range that is consistent with price stability. We have fallen into a pattern of setting the latter sort of ranges for the monetary aggregates, which frankly is not a bad idea. In my view, we should consider very seriously the possible advantages of any move away from those ranges because once we do so, we are going to open up a whole set of new issues that we will have to address. I'm not sure we have as yet arrived at a point where we as a group feel reasonably confident about the stability or predictability of the monetary aggregates, at least as far as I can judge from our discussions. I meant to ask a question before I got into my impression of our use of these targets. Your data show, as we have seen before, that the recent acceleration in M2 growth may merely reflect a reversion of velocity to normal. Given that we had not previously seen that sort of velocity behavior since 1992--your actual versus calculated velocity was going straight up starting in 1993 but it now seems to have turned around--would the turnaround in fact be a necessary condition to restore the previous relationship?",428
-fomc-corpus,1998,"Absolutely, and that is what that graph shows. We may sometimes be in danger of trying to overinterpret wiggles in money demand. There does seem to be some tendency over time for money demand to return to levels estimated by opportunity costs, aside from the periods where we have had major shifts. Instead of breaking past history into subperiods, we alternatively have estimated money demand over a time frame--1964 through 1988--that has a very gentle uptrend in M2 velocity. It could be that over long stretches of time we have had some substitution out of monetary assets into alternative investments that is reflected in rising velocity. When the increased availability of bond and stock mutual funds became very apparent to households in the early 1990s, especially with a steep yield curve at that time, there was a burst of substitution out of monetary assets. It seems that that phenomenon has stabilized over the last few years, and there has not been what we had feared would be a continuing substitution back and forth between bond and stock mutual funds and monetary assets. Of course, the stock market has not really been fully tested yet for that result. It does seem to be the case that the velocity of M2 is returning to the same type of relationship to opportunity costs that it had in previous periods.",259
-fomc-corpus,1998,"I would presume that the staff forecast, which I do not see on this chart, is in effect going back to assuming a type of relationship between opportunity costs and velocity that prevailed earlier. Is that correct?",41
-fomc-corpus,1998,"To some extent, I would say yes. Obviously, we do not have--",16
-fomc-corpus,1998,"The staff forecast would have to take account of various new variables including mutual funds, since sometimes they work and sometimes they do not, or incorporate ""fudge"" factors.",34
-fomc-corpus,1998,The staff forecast actually is in the first two columns of the last table.,15
-fomc-corpus,1998,"I don't see it relative to your calculated values. In other words, these charts are based on models.",21
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,What I do not see here is how the forecasts relate to the velocities and the deviations of V2 from a simple relationship with opportunity costs. Is the forecast going back to the zero deviation from opportunity cost on Chart 5?,45
-fomc-corpus,1998,Projected M2 growth continues to be slightly above nominal GDP growth so velocity would be edging downward in 1999 as well.,25
-fomc-corpus,1998,But will the gap reach zero?,7
-fomc-corpus,1998,"I'm not sure if it exactly hits the opportunity cost line. Obviously, we are projecting that the opportunity cost itself will be flat. I'm not sure where velocity exactly hits on a level basis, but it gets very close to that opportunity cost estimate. We had some special factors affecting M2 over the first half of this year. We had mortgage refinancing effects, which boosted M2 growth. We had very strong tax payments in the second quarter that also provided a boost to M2. Those factors will unwind over the second half of the year, but we still are projecting a velocity decline this year for the first time since 1986. We anticipate that M2 growth will be returning to a rate closer to that of GDP next year when the temporary effects disappear. We do try to speculate about portfolio effects such as those associated with shifts in expected rates of return, substitution effects, and possible wealth effects--so-called rebalancing effects. There also could be transactions effects associated with high payouts of capital gains and retirements of equity that will boost M2 growth temporarily, but our knowledge of these effects is very speculative.",223
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I agree with your comments about the ranges. I, too, would not want to choose the ranges on the basis of a projection that is consistent with a forecast. I would prefer to set them on a basis that is consistent with price stability. I would suggest, though, that that approach might strongly support the choice of alternative III because all the ranges in that alternative, including the 1 to 5 percent range for debt, are intended to be consistent with price stability. As it turns out, the projection for debt suggests that this might be a good time to make the change.",121
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"I am somewhat sympathetic to President Parry's view, but I think this is a dog that is better left not barking in the night and bringing attention to the ranges at this time. We would have a lot of explaining to do if we said that we were reducing the debt range to move even more in the direction of price stability. I'm not sure that opening up that argument would be very convincing or worth the trouble. The move would occur at a time when most of us are concerned that, if we look purely at the domestic economy, the likelihood is that monetary policy might have to be tightened. I think giving a signal that clearly would be interpreted as a weakening of monetary policy would be a terrible idea. Although I sympathize with President Parry's view, I believe we are better off if we retain the present ranges for all the aggregates.",170
-fomc-corpus,1998,"I'm not sure I understand what you mean by ""weakening of monetary policy.""",16
-fomc-corpus,1998,"In other words, I would not change the debt range even though I think you probably are correct intellectually.",21
-fomc-corpus,1998,"But if you are reducing the range, that is the opposite of weakening.",15
-fomc-corpus,1998,He meant weakening debt growth.,6
-fomc-corpus,1998,"Oh, I see.",5
-fomc-corpus,1998,"I think we should not make any changes that would increase the monetary ranges, and therefore the fine-tuning of the debt range--which is really all you are suggesting, is it not?",38
-fomc-corpus,1998,"Yes, just the debt range. No change to the other ranges.",14
-fomc-corpus,1998,I think that would bring attention to the subject that we do not need.,15
-fomc-corpus,1998,I see.,3
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Let me offer an alternative perspective. I think that the current price stability interpretation allows target ranges for money growth to be set independently of both the current forecast and projected policy and therefore to be ignored in the policy process. Switching to a projections interpretation is therefore closely connected in my view with a return of money growth to a more important role in setting monetary policy. An expanded role, as noted in the Bluebook, need not be in the form of a rigid target with policy responding aggressively to deviations of M2 growth from its target. But an expanded role would at least signal that money growth would be more important as an indicator variable, and that deviations of money growth from a target range would be one of a number of considerations that would affect the course of monetary policy. I look forward to the return to a projections interpretation of the money growth ranges for two reasons. First, I believe it is more consistent with the spirit of the Humphrey-Hawkins Act. Second, I believe it would increase public awareness of money growth, and this could be useful at times in explaining the need for a change in policy. In particular, this might make it easier to explain the need for a tightening of monetary policy during a period when robust economic growth pushes money growth above its target range. The staff reports that V2 continues to perform as well relative to its determinants as was the case before the deterioration of such performance in the early 1990s. This progress report is similar to that made at virtually every meeting at which we have discussed this topic during my two years on the Committee. So, the question is if not now when? What additional hurdles do we expect M2 to jump through and over how long a period before we accord it a new role? In fact, the bar seems to have been raised. A second question has been put in the discussion of the Bluebook for this meeting. Was velocity ever stable or predictable enough to justify a more important role? This, of course, is a relevant question. My assessment is that money growth did play a useful role earlier and that it may, therefore, be ready to resume a somewhat more important role going forward. A greater role for money growth in the policy process might be facilitated both by returning to a projections interpretation of the range and by the identification of a long-run target for money growth consistent with the Committee's inflation target. We implicitly identify such a target today as the midpoint of the current money growth ranges, which we have interpreted as being consistent with price stability. Many countries have either adopted an explicit inflation target or have given a more central role to money growth in policy deliberations, insuring a nominal anchor for monetary policy and its communication. If we decide not to adopt an explicit inflation target, according money growth a more important role in the policy process and establishing a long-run target for money growth would be a natural alternative. In considering the long-run target for the money growth rate and indeed in specifying the numerical range under the price stability interpretation, I think we also need to take into account the analysis of the implications of the zero nominal interest rate bound we discussed yesterday. The current price stability interpretation of the money growth ranges is set with the midpoint for M2 growth at 3 percent, corresponding to about a1/2 percent inflation rate for the GDP price index. If we decide that the appropriate long-run inflation target is true inflation plus a cushion, then the long-run money growth target for M2 should be raised. So what about alternatives I, II, and III? Alternative III remains unattractive despite its consistency. It doesn't make sense to move to alternative III if the ultimate objective, as in my case, is to move from the price stability to a projections interpretation of the ranges. I personally am ready to move to a projections interpretation of the ranges, though in this case the numerical ranges in alternative II should be adjusted to make them consistent with a FOMC consensus forecast. The staff, however, does not have the necessary information to make the adjustment because they need the FOMC's projections of short-term interest rates as well as nominal income. Let me suggest a few possibilities. First, it might be appropriate for the Chairman to note in his upcoming Humphrey-Hawkins testimony that the Committee is moving toward paying somewhat closer attention to money growth, if there is some agreement here that that is the case. Second, perhaps we could ask the staff to adjust the alternative II ranges to make them more consistent with the Committee's forecast and for them to think more about how to accomplish this. Third, perhaps we should retain the alternative I ranges at this meeting but keep track of the adjusted alternative II ranges and see how useful they are relative to forthcoming developments in M2 as we think about our policy choices over the months ahead.",961
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I come at this issue from a position that is opposite from Governor Meyer's and closer to yours, Mr. Chairman. I think that the value of the aggregates in terms of communications focuses on the long term rather than the short run. I went back to look at the original language of the Humphrey-Hawkins legislation, and I concluded that the focus of that language is on communicating the ranges that the Committee plans for various aggregates. Since the enactment of that legislation, the Committee has been explaining how difficult it is to plan for any of the aggregates and how they are affected by numerous variables. It seems to me that for short periods of time, like a half year for 1998 and a full year for 1999, we are better off focusing on our longer-term goals rather than trying to project or establish plans for variables that are subject to an enormous amount of change, as evidenced by all the factors that we talked about earlier. I think the communications value of these aggregates is better if they focus on longer-run objectives. I also think that by keeping the ranges where they are, we do not lose the value of M2 in our own deliberations. The point was made earlier that it is widely recognized that monetary targets are not intermediate variables. They are in the array of variables that we look at to determine what is going on. We may be able to look at them with more confidence now that relationships seem to have stabilized a little. That is a good thing. But that does not mean that we have to change these ranges just because we are looking at them with somewhat more seriousness and perhaps using them to a greater extent than we did before. I think the communications value of these is exactly the way you put it. I could go with either alternative I or alternative III. My inclination is to stay where we are.",369
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"My reading of the ranges in recent years is that they are almost completely ignored by the public primarily because the financial markets realize that money growth does not play an essential role in the Committee's deliberations on the course of policy. That was my perception when I became a member of this Committee. I think the ranges can serve a useful function in conveying our attitude about a policy on inflation in the long run. I would leave it completely to the Chairman as to how he believes he can most effectively use this opportunity to convey the Committee's views. I certainly share the view that a move to alternative II would be very unfortunate because I think it would be read in the context of some relaxation of our concern about inflation. The question as to whether we have alternative I or alternative III or III-A or something else along those lines, I would leave completely to the Chairman's discretion to choose whatever he thinks he could use most effectively in conveying our views. I, of course, have some sympathy with Larry Meyer's statement that the aggregates should play a more important role in our policymaking. That is certainly my view. But I think the Committee has to get there first in terms of our actual use of aggregates in the making of policy before we announce to the world that that is what we are doing. So, although I have a lot of sympathy with that approach to policy, I don't think it would be a good idea to make the announcement and then not carry through on it.",294
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I agree with the way you have presented this. I do not think we should change the ranges for the monetary aggregates nor do I think we should go to alternative III. As you said, we backed into a situation where the ranges emphasize our commitment to price stability and that approach is serving us well at this point. Therefore, I would change the ranges only if for some reason they stop serving us well, or as President Poole said, if we start using money growth in a serious way for policy purposes. Then, I think it would be desirable for us to increase public awareness of money growth. But at this point, I do not think we should make any change.",139
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I am sympathetic to the position that you laid out initially, Mr. Chairman, and while there is some intellectual case for changing the debt range, I do not think it is worth the effort at this point. I therefore would be for keeping the ranges as they are.",54
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. A year ago at this meeting, I felt 1 to 5 percent was the right M2 range for 1998, given an economy operating at most people's notion of full employment, and I still think that. A year ago, I thought that if money growth was coming in above the 1 to 5 percent range, repeating the experience of late 1996, we should be adjusting the level of the funds rate, and I still think that. I thought a year ago that if money growth was coming in above the staff projections for late 1997 and the first half of 1998, it would be telling us that nominal income growth was exceeding their GDP forecast, that there was an error in the GDP forecast. I still think that. So, I still think that the 1 to 5 percent M2 range was right, is right, and it tells us that policy is not appropriately calibrated.",193
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I, too, favor what is being called the price stability approach to these ranges, so alternative I is certainly fine with me. It seems to me that at the abstract level, there is a potential problem with going to something like alternative II. That is, if we allow for the normal lags between money and nominal GDP or money and inflation, we might inadvertently set ourselves up for a situation where we would be prepared to tolerate or accommodate or perhaps even produce more inflation than we wanted in the future as a consequence of raising those ranges. So, at the abstract level, I would not be comfortable with that. At the practical level, if we were to raise the ranges, that might be seen as acceptable in the unusual situation where we would explain that inflation had been low. It is certainly our perception that the public views inflation as being low. But to say that inflation will be low and therefore we are going to raise the money ranges just does not intuitively make any sense to me.",206
-fomc-corpus,1998,So unintuitively it does? [Laughter],11
-fomc-corpus,1998,Could I just point out that the Committee is accepting that view in its policy decisions. Are you saying you don't want to communicate that to Congress because we will not look disciplined enough?,36
-fomc-corpus,1998,"I'm sorry, I didn't follow.",7
-fomc-corpus,1998,The price stability range is not the range we are aiming for next year.,15
-fomc-corpus,1998,Maybe we are!,4
-fomc-corpus,1998,"I guess part of my view of this, Larry, is that I don't think we have the ability to be all that precise in forecasting M2 or any of these other variables. We just are not that precise. I am not troubled by two facts. One fact that does not trouble me is that next year's projection of 4 percent M2 growth is not right in the center of our range. I would not be astonished if M2 wound up growing 3 percent next year, say, as opposed to 4 percent. But also we have not had any trouble explaining those ranges to Congress in recent years. I'm not even sure the issue has come up in recent years, but we certainly haven't had any problem when it has come up in explaining why money growth deviated from the ranges. Congress seems to have been fully satisfied with those explanations, at least as best I can read the situation.",181
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Mr. Chairman, I agree that we should let sleeping dogs lie as far as these ranges are concerned. I would not disturb them. I have long believed, though, that we should keep these monetary aggregates alive for possible future use. When I look at Chart 4, especially the southeast corner that shows the relationship between the opportunity cost and V2 in recent years, I am somewhat surprised at how close the relationship has been. I lived through those years and I don't recall being aware that it was behaving so well. I wonder if that may be a result of some revisions of the money numbers or something like that. I agree with President Poole who said that we should use the aggregates in our policy before we tell the public that we are using them in that way. But if the relationship stays as close as it appears to be in that graph, I think that (1) we should be paying more attention to the aggregates in our policy and (2) we should occasionally refer to them publicly because there will come a time when the best way to explain what we are doing will be in terms of the growth of the aggregates. We don't always want to have to say that we think interest rates should be higher.",244
-fomc-corpus,1998,"In every presentation of monetary policy that I have made to the Congress, I have had some reference to the money supply for exactly that reason, to keep the aggregates alive. We do not want to shift back to some emphasis on the aggregates and have somebody ask where that came from. In my recent testimony before the Joint Economic Committee, I commented that the pickup in M2 growth had our attention even though we did not yet feel comfortable about the forecasting capability or indicator capability of M2. After all, we are the central bank. What we produce is money supply.",113
-fomc-corpus,1998,"When I read the financial press, though, I get the impression that nobody thinks we are looking at M2. The reporting is all in terms of other things. So, I do not think that the aggregates have broken through to the consciousness of the financial writers.",53
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I would join those of you who argue against making any changes in the current ranges. Presidents Minehan and Poole made the arguments the way I probably would have made them. I will repeat only one of those arguments, and that is that I do not see anything about the current construct that takes away our ability to give whatever weight we wish to give to the aggregates we have selected for our ranges. In fact, I would argue that having money growth trending above what we consider to be the price stability ranges keeps the issue in front of us to a greater extent than would adjusting ranges to fit experience. So, I very strongly prefer retaining the current monetary growth ranges, and I would not tinker at the current time with the range for debt. Thank you.",159
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I agree with President Guynn. I think it is very important for us to keep track of what ranges are consistent with our views of long-term price stability. That does allow those of us who are focused on them to remind the rest of us that we are experiencing above trend growth. I think that actually provides for a useful discipline. I also took note, as did President McTeer, of the southeast corner of Chart 4 that indicates that stability may be returning to these relationships. For me, that provides a little hope that there might be some increased discipline in those ranges and therefore all the more reason to keep them alive. So, I would not change them right now. I would keep the monetary growth ranges focused on long-run price stability, and I look forward to a day when we might start to use them more seriously in our deliberations.",179
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I, too, believe in the price stability approach for setting the long-run ranges. In my view, there continues to be a long-term relationship between money growth and inflation, and I think we will be returning to the use of money aggregates in the not very distant future. Therefore, I would support either alternative I or alternative III.",71
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I also would not make a change now in the ranges for either of the two time periods. In the case of the second half of 1998, I agree with President Minehan that the Humphrey-Hawkins Act primarily focuses on what the Committee plans for the aggregates. That implies that we are setting ourselves a benchmark. To change the ranges in the middle of the year would be to destroy the value of that benchmark and fuzz up the reasons why it was adopted. In the case of making a change for the year ahead six months in advance, a reason for doing that might be that the Committee wanted to signal a major change that was ahead. And we may--I emphasize may--have a candidate for such a change here if we want to send a signal that the aggregates are now much more on the front burner than they have been. But I would say that if such a signal is desired, it might be better approached by developing some kind of information release and having the Committee debate it and perhaps adopt it, rather than simply changing the ranges at this meeting. I think a change at this point could prove to be counterproductive.",233
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I, too, concur with keeping the ranges where they are. The fact is that we do look at the money supply numbers and we discuss them along with a lot of other variables, but in my time on this Committee we have not really used them to set policy. I would need a lot of convincing to believe that we should. That leaves me, of course, with some sympathy for the Meyer projections approach, but I come out thinking that leaving well enough alone is the best policy.",98
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I also am opposed to changing the ranges and interpreting the ranges as goals. I would retain alternative I, but I would point out that these are stochastic goals and they involve relationships. For those of you who are tremendously influenced by the bottom panel of Chart 4, relationships do come and go. I would like to put in a plug that if we ever do change these ranges, I think we should put on the table the notion that I tried last time of widening them. But for now, I'm happy to stick with alternative I.",114
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I strongly agree with your position. My main focus is on M2 rather than M3 and the debt aggregate. Like others, I think the current 1 to 5 percent range for M2 plays a couple of critical roles. First, I am very strongly of the view that it clearly signals our ongoing commitment to price stability. In fact, one might argue that this range is the only formal nominal anchor that we have. I think it also provides an early warning system when actual money growth begins to deviate on the upside as it has recently. It helps to signal that. So, in a sense it holds our feet to the fire. I think Bob Parry has a point. I certainly would not object to going to alternative III, but I guess the disadvantages of making a change with the questions that might raise probably would lead me to continue to prefer alternative I. One other point I would make is in the context of the possibility that we may want to use the aggregates in a more operational way going forward. The Bluebook does not have an alternative now that shows what we would have to do to get back into the 1 to 5 percent M2 range by the end of the year, and it might make sense just as a starting point to have something like that in the list of alternatives.",268
-fomc-corpus,1998,"It appears that there is fairly general consensus for no change, which is alternative I. Would you read the language encompassing that alternative?",26
-fomc-corpus,1998,"That will be from page 22 of the Bluebook. The first sentence is the usual general sentence on the goals of the Committee: ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee reaffirmed at this meeting the ranges it had established in February for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1997 to the fourth quarter of 1998."" Then, skipping beyond the bracketed sentence: ""The range for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent. For 1999, the Committee agreed on tentative ranges for monetary growth measured from the fourth quarter of 1998 to the fourth quarter of 1999 of 1 to 5 percent for M2 and 2 to 6 percent for M3. The Committee provisionally set the associated range for growth of total domestic nonfinancial debt at 3 to 7 percent for 1999. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",258
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan Yes Governor Kelley Yes Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes,43
-fomc-corpus,1998,The next item on the agenda will be introduced by David Lindsey. He is pinch-hitting for Don Kohn who may have a sore back. Is that why you are not at bat swinging?,39
-fomc-corpus,1998,"I had more important things to do over the weekend, Mr. Chairman. My son got married! [Laughter]",24
-fomc-corpus,1998,Mr. Lindsey.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The long-run simulations shown on Chart 2 following page 9 of the Bluebook provide one way of placing the Committee's short-run policy decision in a longer-term strategic perspective. 4/ The solid lines show a baseline extension of the Greenbook forecast for ten more years, along which the economy makes a reasonably smooth transition to the steady state implied by the staff model. With the current nominal federal funds rate, shown in the upper left panel, held in place through the year 2000, real GDP growth--not shown--remains below the growth of its potential just long enough for the unemployment rate, in the middle panel, to return to the staff estimate of the NAIRU of 5.4 percent by late 2001. During the interim, inflation in the lower panel--as measured by the core PCE price index--gradually rises to a 2-1/4 percent pace, which is maintained thereafter. During this time, the rise in inflation combined with the steady nominal federal funds rate causes the real funds rate, in the upper right panel, to edge lower. A declining real federal funds rate is consistent with rising unemployment as the effects of the earlier increase in equity prices on consumption abate, as investment spending throttles back, and as the trade deficit continues to widen. Once inflation levels off in 2001, the process of declining real federal funds rates is continued through very gradual policy easings of the nominal federal funds rate. The real funds rate stays on a gentle downward glide path toward the long-run equilibrium real interest rate of 2-1/2 percent embedded in the staff model. The dotted lines convey the effects of a tighter stance of monetary policy in the near term that is designed to achieve eventual price stability. By the end of this simulation, inflation has been reduced to3/4percent, only a bit above the assumed remaining measurement bias. To achieve this result, the nominal federal funds rate is raised to a little more than 6 percent by late this year, and is held there through the end of next year. The boost to the real federal funds rate depresses real GDP growth enough to raise the unemployment rate to a bit above 6 percent in 2002. Thereafter, the unemployment rate can be gradually returned to the NAIRU. The Committee could view the baseline simulation as a successful strategy. With1/4 percentage point of the updrift in underlying inflation offset next year by the further methodological improvements assumed in the Greenbook, the measured core rate ends up no higher than the rate prevailing early last year. If the Committee could accept this inflation outcome and also views the extended staff forecast as plausible in terms of a ""best guess,"" it may be inclined to stand pat on policy for some time, as under alternative B, at least until the economic outlook starts to diverge from this baseline scenario. If the Committee were dissatisfied with the prospect of a reversal of some of the recent deceleration in prices, it might be inclined to tighten in the near future, perhaps at the current meeting. The 25 basis point rise in the federal funds rate of alternative C in the Bluebook would be a halfway house along the road to the increase of around 50 basis points that characterizes the tighter strategy. Of course, both simulations could be viewed as based on an overly sanguine set of longer-run structural relationships and temporary factors. A particularly obvious risk that would add weight to the case for a policy tightening is that the staff has underestimated likely inflation pressures. The recent upside surprise to CPI and PPI inflation, despite softer than expected oil and non-oil import prices, may be an early warning that the staff has gone too far in lowering its estimate of the NAIRU and in raising its estimates of the growth in trend productivity and potential output. As for the actual unemployment rate, the lower than predicted May report confirmed a 4-1/4percent jumping-off point, well below any plausible estimate of the NAIRU. And the unemployment rate would stay lower than in the baseline if the downshifting of spending to a sustained sub-par pace, which the staff considers to be now in train, does not in fact eventuate. After all, financial conditions remain accommodative and stock prices have shown remarkable resilience to adverse earnings reports. In case the Committee foresees either a higher NAIRU or stronger aggregate demand, it might anticipate that a funds rate path something like the one in the tighter strategy would be necessary over time just to produce the resource pressures and inflation outcomes of the baseline. Tracing out the assumed path for the funds rate in the tighter strategy would require starting to tighten policy fairly soon, if not at the current meeting. If the Committee saw a higher funds rate as being necessary in the not-too-distant future, then the longer tightening action were delayed, the more aggressive would the subsequent tightening have to be. Indeed, based on this policy outlook, a tightening at this meeting could be defended as the best way to minimize the harm done to emerging market economies in Asia and elsewhere; by keeping domestic inflation relatively low, such a move today would limit the extent of future interest rate increases. The Committee instead may view the recent deteriorating situation in Asia as posing a serious enough downside risk to the U.S. economic outlook to counsel against any monetary policy firming for some time. If anything, this risk to the outlook has become more prominent over the intermeeting period, as the lower tail of the probability distribution for Asian developments and possible contagion to non-Asian emerging market economies seems to have gotten fatter of late. To be sure, the staff has made significant adjustments to its baseline forecast in reaction to the recent disappointing news, as Peter Hooper noted. But the Committee still may be more apprehensive than before about unanticipated adverse impacts on the performance of the U.S. trade sector, which would directly damp aggregate demand, resource utilization, and inflation pressures in this country. As Peter's more pessimistic Asia scenario also noted, worse than expected Asian developments could well be accompanied by continued dollar appreciation and by extended further declines in commodity and other import prices, which would further damp U.S. inflation pressures. And these downside risks to developments abroad and in the United States would only be heightened by a tightening in U.S. monetary policy at this meeting. In particular, an increase in the federal funds rate today would catch market participants unawares and probably induce a backup of U.S. interest rates across the maturity spectrum. Such a rate increase would be enlarged to the extent the policy tightening were perceived to reflect a Federal Reserve judgment that inflationary pressures are stronger than previously recognized, hence raising the odds of further tightening actions down the road. While the inflation premium in interest rates might rise, real interest rates would increase as well, and the rise in real rates would make U.S. debt instruments more attractive relative to those abroad, thereby tending to strengthen the exchange value of the dollar. The associated decline in the value of the yen and other Asian currencies might be especially troubling to the authorities of China and Hong Kong, whose currencies are fixed relative to the dollar, and contribute to further instability in the Asian region. Given the relative likelihood of the main risks in the domestic and foreign outlook, together with the relative costs to the United States if they occur, the Committee may conclude that standing pat continues to make sense. If so, the Committee would be balancing the not unlikely probability of a somewhat worse inflation outcome than in the Greenbook against the smaller, but growing and perhaps more damaging, possibility of a meltdown in Asia. The Committee's previous decisions to await more information to clarify macroeconomic trends both here and abroad seem to have paid off to date. The Committee may not yet see any compelling new consideration that would induce it to change. As for the choice of the tilt to the directive, the enlarged risk of more surprising bad news from Asia may be seen as warranting a return to an unbiased directive. Alternatively, the Committee may prefer to maintain the tilt toward tightening on the grounds that the threat of faster inflation also has intensified considering the recent stronger than expected incoming data on consumer prices and employment.",1650
-fomc-corpus,1998,"Thank you. Questions for David Lindsey? If not, let me start. For months, we have been concerned with weighing the effects of strong excess domestic demand, that some may have seen as accelerating, against those of a deteriorating international environment. A number of you commented yesterday that the risks on both sides appear to be escalating. Clearly, on the international side Japan, the big factor in Asia, has become an increasing concern. I will not go into the discussions we had yesterday, but there is a lethargy of policy analysis and decisionmaking in Japan that, despite the evident movement in recent days, is still going to grip that country in a way that I fear will keep it in a deteriorating condition. As I indicated last night at the U.K. embassy dinner, Japan's culture of civility makes the type of harsh actions required to restore balance in their economic system exceptionally difficult to undertake. I am not sure what they are going to announce tomorrow with respect to banking reform or the broader package, but it is very likely to be less than many press commentaries, especially in Japan, have suggested is needed. This workout is going to be far slower and far more difficult for Japan than many have assumed, and perhaps it is not an accident that the Japan premium, instead of going down in the context of the somewhat better news reports, has gone up. We have an 800-pound gorilla problem if ever there was one, and it would be quite disturbing if Japan got into a worse financial situation. Conditions in the rest of Asia clearly are deteriorating further, and most recently the deterioration has spread to Hong Kong and Singapore. The problem is that the Asian contagion is obviously engulfing other areas of the world. Russia is at the edge of financial collapse at this stage. How they are going to get themselves out of that is going to be a very interesting phenomenon to watch, but I believe it is a matter of weeks before the issue is going to have to be resolved one way or the other. Latin America is a little shaky. Brazil, as you know, has been experiencing some difficulties. Now that President Cardoso appears to be in a neck-and-neck race with Mr. Lula, the left wing populist who has run against him in the past, there is concern that policy may not be as sound as it should be to restore a semblance of balance in that country's economy. Argentina, as well as it is doing, is also in some difficulty, especially with regard to its balance of payments. Their imports are very strong as a consequence of a very robust and frankly quite successful economy. The falling price of oil, which obviously has been a major factor in the Russian situation, also is having an adverse impact on Mexico, where the budget problems are quite difficult. The lower price of oil also is having an effect in Venezuela and elsewhere. No one mentioned the Middle East, but if one looks at the financial and budget implications of the reduction in the price of oil for some of the Gulf states, though it is not something of international concern, it is part of a whole cloth. The danger of a wider world financial crisis, while still very small, has risen beyond the point of being de minimis. None of us has ever experienced anything like that. Our parents did. I'm not sure that it is something we know how to forecast. We have learned, if we have learned nothing else from Asia, that forecasting financial implosions and vicious cycles is virtually impossible. We can merely look at a structure that seems to be somewhat shabby, but it impossible to project whether that will fall in on itself or begin to stabilize. All of our models call for stabilization, but that is because of the way we build them. They are essentially equilibrium-seeking models, and we cannot effectively model vicious cycles or financial implosions. A financial crisis in these countries is a mildly scary prospect on the horizon for the United States, but it still has, by any measure that I know of, a relatively small probability of occurrence though perhaps not quite de minimis. The impact of the Asian situation on the United States, while more than we expected, is really two-pronged. In an arithmetical sense GDP falls when we get a larger trade deficit. As Bill Poole insists, the word ""arithmetical"" should be put in there. Another factor offsets this effect in part in that the deterioration in Asia clearly has altered portfolio preferences in favor of the U.S. dollar and in favor of investment in the United States. One must presume that part of the decline in long-term interest rates is a safe haven effect, a reflection of the same forces coming out of Asia that are pulling down our net exports. The net effect of Asian developments on the U.S. economy is therefore somewhat less than the gross direct effect. The effects of the Asian difficulties on U.S. financial markets have augmented the virtuous cycle that has occurred in the United States in the last two or three years by contributing to the surge in capital investment, the related acceleration in productivity, and the increase in stock prices associated with expectations of rising profits over the longer run. The consequent wealth effect has spurred consumption expenditures, which in turn have increased profitability and have raised capital investment and productivity and thus fostered continued cyclical expansion. As I indicated yesterday, I believe a goodly part of our failure to forecast the extent of real GDP growth on the one hand and the surprisingly benign inflation pattern on the other is arithmetically resolved by our failure to forecast the degree of acceleration in productivity. At the last meeting, I raised the issue of whether it was possible, as suggested in widespread anecdotal reports, for businesses confronted by the absence of pricing power and rising labor costs to find new capital investments seemingly at will to offset their rising costs through increased productivity. The notion that someone can, at will, choose from a stock of potential investments goes against the view we all share that business firms always seek to maximize their economic situation. Apparently, of course, they do not. One possibility that I raised at the last meeting was that the implicit rates of return on new investments were in fact rising. We have done some work on that since then. The preliminary results do indicate that when we try to get estimates of the real rates of return on capital investment for various vintage years, the period from 1993 forward does show a significantly higher rate of return than in the previous years. That would be consistent with the notion that the synergies that were developing as many different technologies evolved and improved in the 1980s and early 1990s created the opportunity in recent years to pick and choose almost at will among various types of technologies to get increased productivity, reduce labor costs, and indeed displace labor. If that is in fact occurring, it does explain to a substantial extent why the productivity numbers are rising. I might also say parenthetically that if we can rely on these calculations, they do say that we have the ability to translate expected rates of return into long-term structural productivity gains, or at least into various measures of structural productivity. At the moment, while I want to emphasize that the results are quite tentative and that there are certain features of this model that I am a little uncomfortable with, the tentative results certainly are consistent with the notion that something different started to occur in the early 1990s. Indeed, if we look at the big surge in orders and shipments of communications equipment, it is obvious that we are looking at the synergies made possible by the development of the laser, fiber optics, and the micro chip--[Secretary's note: Noises from someone's watch heard at this point.]--which was just making those noises. [Laughter]",1560
-fomc-corpus,1998,Perfect background noises.,4
-fomc-corpus,1998,"I think the watch was digitally saying ""right on!"" [Laughter] In any event, if we look at these rapidly improving technologies, they represent the areas where all the faster than expected growth in capital investment is coming from. Such growth is occurring in communications equipment, which has benefited from a huge expansion of new technologies that are found in products ranging from cell phones to pagers to equipment incorporating a much higher level of sophistication, and obviously we also see it in the whole computer area. So, the data are beginning to confirm that something has been going on. How important it is and, far more importantly, how long it will last are significant questions. I don't think we have any way of knowing the answers to them at this point. It may well be that we have run through a specific bulge in available technologies, and the data that we have are not inconsistent with the notion that we are rapidly using up the backlog. But we don't know that with any degree of certainty. There is nothing in any of these analyses that would promote optimism about a permanent rise in long-term trend of structural productivity growth. The data and analyses are suggestive but not much more than that. For the moment, the data that we have still indicate that unit costs are rising at a very modest rate. Unit labor costs have picked up some, and productivity gains may be accelerating. Indeed, that is what the data for nonfinancial corporations show, but compensation per hour also is accelerating. As I said at the last meeting, I have some questions about how much confidence we can place on the extraordinarily benign behavior of the ECI as an indicator of underlying trends in labor costs. The ECI is no doubt measuring what it is supposed to measure, namely, the wage structure abstracting from the movement of people into different job classifications. But it is hard for me to believe that in today's very tight labor markets there are not numerous phony promotions for purposes of giving pay increases to selected individuals within companies, which would be politically difficult for employers to give directly. Yet, that sort of pay increase obviously will not show up in a change in the ECI. The clear evidence that such pay increases are occurring is the fact that average compensation per hour, as best we can judge, is moving up a good deal faster than the ECI itself. Nonetheless, I think it is safe to argue that price pressures, while modestly accelerating, are not by any means overwhelming. We have been using the core CPI as our standard. I seriously question whether that is the right statistic for that purpose. First of all, the increases in the core CPI over the last three months have averaged about 2.6 percent at an annual rate. That is equal to the rate we had in 1996. On a methodologically consistent basis, the average increase is closer to 3 percent. If, however, we look at the core PCE, which is a far more sophisticated way of evaluating what prices really are doing, the average for the three months is still under 2 percent or below where it was in 1996. I do not have the methodologically consistent number at hand to make the comparison. It is somewhat higher, obviously, but it is nowhere near the level that gives rise to the type of concern created by a focus on the recent acceleration in the core CPI. If we take the analysis a step further and go to the GDP chain weight index, which includes, of course, the prices of capital goods that generally are falling, we see an increase in the 1 percent area. Inflation probably is rising, but not at a rate that one would consider to be a matter of considerable concern. So, I think that we can talk ourselves into believing there is more inflation than in fact has occurred. I do not deny that all these indexes show a pickup from the latter months of 1997. Were that to continue, it would set off a number of whistles. But inflation is not there yet. I think it is important for us to get a good sense of where we are as distinct from where we fear inflation is going to go. Very obviously, if a slowdown in line with what many of us are projecting or that the Greenbook is projecting does not materialize and if labor markets continue to tighten, as they have since our last meeting, what is happening to productivity will be irrelevant. At some point we are going to get a surge in real wages beyond what we are seeing now and the pressures on prices are going to be quite pronounced. As it stands now, we are getting some pressures on profit margins, most notably in the manufacturing area. The available data for the second quarter, which are fairly rough, suggest that profit margins in manufacturing eased further after declining in the three previous quarters. Productivity, however, is still moving up at a fairly good pace in manufacturing. A goodly part of the weakness in margins is coming from general price weakness rather than significant increases in costs. But it is obvious that at some point we may get a very rapid acceleration of compensation per hour, and costs would be going through the roof. At that stage, what would be happening to productivity would be irrelevant. That prospect is what we are all concerned about, and I think very rightly so. For the moment, there is at least an inkling that the strength in demand is easing. The Purchasing Management's survey for June, which was released about 20 minutes ago I assume, shows a little more weakness than the market expected. It is under 50 percent. New orders remained weak. Prices paid continued to decline. This survey has no General Motors strike effect in it because it was taken well before the GM strike. Chain store sales, as a number of you probably noticed, turned quite significantly weak in June. Sales of light motor vehicles have remained quite strong, but it is hard to assess the underlying strength of demand given the extent and size of the rebates that were offered. The presumption is that motor vehicle sales are going to slip quite significantly in July from the current levels. The GM strike is a difficult issue to deal with largely because strikes as such never cause economic weakness. What they basically do is to create a back-up of demand. When that demand is released at the end of the strike, there often occurs a surge in demand, including inventory investment, that is too strong and the economy subsequently falls into a slump. That is actually what happened after the very long steel strike in 1959, which created a major contraction in economic activity in the second half of that year. The subsequent surge in overall demand led to an inventory recession in 1960. There have been a number of instances of that type. The GM strike is beginning to get less than de minimis, if I can use the term I used before. It is beginning to look like an important development. It obviously is going to have a major impact on June industrial production. It presumably is going to have an impact in July as well, although a normal two-week shutdown is captured in the seasonal for July. As a consequence, if the strike is over before the end of July, I assume it is not going to have so pronounced an effect on the industrial production number as in June. Inventory investment, while very strong, still has not created any significant evidence that firms view their inventories as excessive because another statistic in the purchasing executives' report this morning indicates that there still is no particular concern among the purchasing managers in manufacturing regarding the size of the inventories held by their customers. By definition, all goods are manufactured--or virtually all goods apart from agricultural products--so that they are aware of customer inventories in all industries. However, while there certainly is no inventory overhang, it is hard to believe that inventory investment will continue at a $100 billion annual rate. To the extent that it falls well short of that, which is what the Greenbook is projecting and what I think is the likely outcome, then the arithmetic of production suggests that industrial production will remain quite soft. In summary, I think I expressed the majority view, at least as I heard it here yesterday, that it is too soon to judge the size of the Asian spillover into the United States in all respects. In my view at least, it is too risky to raise the funds rate at this point. I think, as David Lindsey pointed out, that the psychological impacts on Asia, Russia, and Latin America could be quite outsized and I would suspect rather destabilizing, with the ultimate impact on the United States possibly quite negative. I do not think we can make a real judgment about what the probability distribution looks like. But it is hard not to suspect that there is, to use Larry Meyer's term, a significant tail sneaking out into the high risk area. While it does not seem to be a particularly large tail, if we inadvertently tighten in an economy that is already deteriorating, we could trigger a far bigger problem. But having said that, I would note that the labor markets continue to tighten. There is no evidence of which I am aware which suggests any material change in that direction. If the most immediate evidence of some slowing in the expansion reflects nothing more than a temporary slowdown--a possibility that a number of you have raised and I think quite rightly--then I think we face a very serious potential problem of inflationary pressures emerging out of the labor market. If that in fact were to materialize, I do not see how we could do otherwise than to respond. As a consequence, I would propose that if we decide to stay where we are today, we at least also retain an asymmetric directive to the upside. Vice Chairman.",1946
-fomc-corpus,1998,"Thank you, Mr. Chairman. I am essentially in agreement with your analysis and with the conclusion. I do have modest differences. I believe that the risk on the external side is somewhat greater than you indicated, and it could materialize even sooner than we have anticipated. On the basis of what we now know, what the Liberal Democratic Party is going to announce in Japan on July 2, which is coming on us rather quickly, will be very disappointing to the financial markets. The big rally that we have had in the yen and the Nikkei was mainly an end-of-quarter rally as of June 30. Today, when the Nikkei rally resumed, I think the markets indicated that they are expecting far more out of the announcement on July 2 than is likely to be there. Therefore, the notion, which I think is the single biggest problem, that the Japanese government and its leading party cannot get their act together could be on us rather quickly indeed. I agree that the Russian situation is extremely hazardous. Since one of the areas of strength in the world economy is continental Europe, a serious financial crisis in Russia, which could very quickly turn into a political crisis in a nation with lots of weapons, could easily undo some of the confidence that has been restored to continental Europe in the last year. I think a severe worsening of the international situation is certainly not within the range of the probable, but I would describe it as a risk that is distinctly possible. On the domestic side of the economy, I agree very much with your view, Mr. Chairman, that we do not know whether the wonderful productivity improvement we are experiencing is going to last. You laid out the basis for that uncertainty very well in your remarks. I think the likelihood that wage pressures are going to burst out is not terribly great. What would happen in my view is that in various pockets of the economy people would start to realize that they could push their employers to pay higher wages, but I think that realization probably would spread somewhat more slowly than your remarks suggested. Therefore, the price reaction might be somewhat slower as well. However, clearly if the domestic economy is to be looked at in isolation and one assumes that the international crisis will not happen, and we certainly all hope it will not, then I think we will be in a situation in which the risks to inflation are sufficiently great that, although I agree we should not change our policy today, an asymmetric directive toward tightening is certainly in order.",495
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I agree with your recommendation on maintaining the federal funds rate where it is today and also on maintaining the bias toward tightening. I am concerned about the prospects of an updrift in inflation. I guess I fear, perhaps more than you do, that the staff's forecast for slower expansion without some policy intervention may be too optimistic. I do recognize that there are some indications of a little slowing right now, but I'm afraid those may be short-lived. I also think, based on other information we have received from the staff, that even if there is an updrift in productivity, that may call for a higher funds rate and not a lower funds rate in order to maintain equilibrium. So, while I am optimistic on both of those scores, I think the bias toward tightening that you recommend is right. However, in line with what the Vice Chair has said, I also am concerned about the international component of the forecast as I mentioned yesterday. I think the external situation is not going to improve anytime soon. Therefore, I believe the wiser course for us at this stage is to sit tight. I guess ultimately this is the least unacceptable choice, but I think it is also the most responsible one. Therefore, I would make no change in either the funds rate or the asymmetry.",264
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Obviously, I am delighted with the staffs upward revisions in its estimates of productivity growth and potential output growth, and I will be even more pleased if future revisions are also upward to 3, 3-1/4, or even 3-1/2 percent, which I guess was the highest in history. That would be absolutely delightful. I doubt that we will see it go above that and set a new record, but if that happens, that would be great! Nevertheless, such productivity growth is still not as rapid as the growth of demand, and that creates the problem that we have. I also am delighted with the unemployment rate being at 4.3 percent, and I hope it continues to go down. I would like to see it go to 4 percent or even below 4 percent. Low unemployment helps us to do wonderful things by providing opportunities for people. But it also sets a model for the rest of the world about what works. The longer we can sustain it, the more imitators around the world we are going to have. So, I hope we will not get ourselves into a situation where we have to take action. An unavoidable byproduct would be a higher unemployment rate. It would be not only bad for us, but also bad as a model for the rest of the world if we found ourselves faced with having to take such an action. When I look at the Asian situation, perhaps Latin America, and certainly Russia, I think we should ease policy. Unfortunately, we do not have the luxury of even considering that option at this time, and that is too bad. Maybe if nominal spending growth, money growth, and other things over the last year had been as forecast by the staff instead of coming in stronger, the economy might be more balanced right now and we might be able to entertain that possibility. Or maybe if we had responded earlier to indications that spending growth, domestic demand, and money and credit growth were coming in a lot stronger and the current account deficit was widening, we might have had the option of considering an easing sooner. I think we are going to need to ease for the sake of the rest of the world. The sooner we create the conditions within the domestic economy that will permit us to contemplate an easing of policy, the better off we are going to be and the better off the world is going to be. Unfortunately, we sometimes have to tack; we sometimes have to go in an opposite direction from where we really want to go to get there. I want to be in a world where we not only have lower inflation, but where we have lower interest rates, rapid economic growth, and sustained low unemployment. But I think we are approaching a point where we may have to go in a direction different from where we all want to come out.",571
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"If there ever was a time to hold steady, it is now. We have a precarious international situation that I think is as dangerous to world prosperity as we have had in a long time. We also have latitude to wait and see domestically. Our backs are not to the wall in that regard and, therefore, I think the case is very persuasive that we should stay where we are with regard to monetary policy. As far as the tilt of the directive is concerned, I think continuing with the current tilt toward tightening is appropriate going forward. I say that mainly because I do not believe we know enough about whether it would be constructive to make a change at this point.",135
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, we clearly are seeing some weakness now in some of the second-quarter numbers, but it seems to me that even though the growth of final demand may be weaker in the second quarter than we thought it was going to be just a few weeks ago, it is still going to be well above trend. We have discussed the two negative impulses from inventories and net exports, but as I said yesterday, my own feeling is that they are likely to be temporary. There is a very good chance that they will not have much lasting effect on the above trend growth in final demand. Such growth is an upside risk, and I think we should take it seriously in an environment in which labor costs and the core CPI on a consistently measured basis are rising. I still think that an increase now in the funds rate would be prudent and could well increase the lifespan of this expansion. Having said that, I recognize that for many reasons that have been expressed around this table, this would not be a convenient time to tighten policy since we are likely to get a weaker-than-expected GDP number at the end of this month and the public perception might link whatever action we might take at this meeting with that number, which would cause unfortunate problems for us. That sort of constraint underlies the need to take advantage of opportunities to tighten policy when they arise in an environment like this. They do not arise very often, and the window of opportunity does not often stay open very long. I know people can disagree about this, but I frankly think we may have missed a couple of opportunities in the recent past that might have served us well. So, if we see that the strength of overall demand is persisting as we go forward, perhaps as a result of an improvement in the Asian situation, and we see a window of opportunity, I believe we should take it.",370
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Mr. Chairman, there is no question in my view that we currently face heightened risks. On the downside, the risks discussed during our lengthy review of the economic outlook yesterday and this morning stem from developments in Asia, Russia, and other places, projections of declining inventory investment over the short term, and the possible impact of reduced profit margins on the stock market. All of these downside risks seem more compelling than they were at the time of our May meeting, if not scary in some cases. I think we have to remember, however, that given the persisting strength of the expansion, we need some of these retarding influences to rein in the growth of the domestic economy. We have forecasted a slowdown, and we are seeing a slowdown. It may be a little larger than we expected, but I think we have to worry about overreacting to it in current circumstances. I believe the risks on the upside also have increased. We are beginning to see warning signs of rising inflation. We continue to have an atmosphere of very accommodating financial markets. We recognize that there are temporary factors at work that are still helping to restrain costs, and those temporary influences may fade away. I continue to believe, very much like President Broaddus, that we run a significant risk of excess demand whose cumulative effects may well come back to bite us in the end, and that we may have missed a couple of chances to tighten policy that we should have taken advantage of earlier. But I also agree with you and with the Vice Chairman that the timing for a policy tightening move is not favorable today, especially as the Japanese are trying to work out appropriate policies and there seem to be so many other potential developments that are hanging in the balance. So, I would agree with your proposal, in some sense reluctantly because I think our policy may well be behind the curve as far as our domestic economy is concerned. I would hope that we can, as President Broaddus has suggested, find a window of opportunity when a little tightening might be helpful both for us and for the rest of the world. In that regard, I would retain the tilt toward tightening as well.",431
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, the upside and the downside risks we face are much the same as those we talked about at our last meeting, but as a number of us have said, they now seem to be more severe in both directions. The domestic economy has continued to show signs of unsustainable growth, and we now have seen some modest worsening in inflation readings. However, the international situation has grown even more uncertain since our last meeting, and I saw it firsthand during my recent trip to Japan. I think the chances of a more severe than anticipated reduction in our net exports appear to have increased. I would just add that my experience in dealing with the Japanese government and the LDP lead me to believe that they will not act quickly and decisively to deal with their problems. Their unique culture and political processes are very powerful, and they are not likely to change in the short term. I believe it will be a very long haul. For now, I think the uncertainties in the international outlook clearly justify waiting. However, I do think that, on balance, the risks remain definitely to the upside and that we are likely to have to tighten this year. So, I agree with your recommendation.",238
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, for many of the reasons you mentioned, I agree with your recommendation both with regard to the federal funds rate and the asymmetry. It does seem to me, however, that inflation is becoming a more serious problem. My greatest fear is that we may be losing the relatively painless gains in inflation we have enjoyed over the last year or so. To me that loss would be tragic. I still agree, though, with your recommendation.",90
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Your comments and those of others this morning and in yesterday's discussion certainly have reinforced my sense that we are seeing some signs of a slowing expansion and can identify some new, larger downside risks than we could at the time of the last meeting. At the same time the slowing in coming quarters that most of us are forecasting for the domestic economy is far from certain in my mind. Moderating developments have been in our forecasts for a long time without materializing. If we continue to get the kind of strength we have been experiencing along with other indications that policy may be too accommodating, obviously I too would be concerned that we are taking too great a risk of an uptick in inflation. Until we get more confirmation of the direction in some key sectors of the domestic economy, I also would be more comfortable with an asymmetrical directive. It would continue to serve both as a reminder to us of the upside risks in the economy and as a signal to others that we are not interested in giving back any of the ground that we have gained on inflation over time. Thank you.",220
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I certainly share most of the concerns you expressed and it seems to me, given the trends that I believe are in place and at the risk of some oversimplification, that how things play out domestically largely depends on what productivity does. Some outcomes are going to be much more favorable than others depending on productivity. I don't have a strong conviction on what productivity might do over the next six quarters, so I'm left to fall back on patience. I think patience has served us well to date. There is a danger of overstaying that hand, but at the moment I am prepared to stick with it and I support your recommendation.",133
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I am in sympathy with virtually everything every speaker has said, and I support your recommendation.",22
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I agree with your proposal. I am willing to wait and see if the growth in domestic demand slows and I am mindful of the international situation, but I have a couple of comments. I believe domestic demand is stronger than is consistent with long-term price stability. We have to be very much aware of that. My other comment is that I do not want Japan's paralysis to become our paralysis in terms of what is the right thing to do. I am very mindful of that. Yes, we should wait, but I don't think we necessarily should wait until everything is perfectly clear. Thank you.",126
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Certainly nothing is ever going to be perfectly clear! I support your recommendation, Mr. Chairman. As I said yesterday, I think the staff may be overestimating the potential for a slowdown in the near term, but I also am very worried about Asia and the possibility of a general collapse in several foreign countries. I do not think we know what we can do to avoid that, but we know that raising the federal funds rate today is not the appropriate measure.",93
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. In light of the sharp slowdown in U.S. economic growth that appears to have taken place in the second quarter, the increased potential for a more persistent slowdown due to the further deterioration in foreign economic activity and perhaps especially due to the substantial increase in global risk, I support your recommendation for no change in policy today. Nevertheless, I remain quite concerned about the risk of inflation going forward due to the very tight labor markets prevailing today, due to the continued robust state of domestic demand, and due to uncertainty about the degree and the persistence of a slowdown. Therefore, I strongly favor the asymmetric directive as well.",128
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"The upside risk appears to have risen further, as it probably did at each of our last several meetings, but the downside risk seems to have gone up quite sharply since the last meeting to the point that I think the risks, even though they are both greater than they were, are now relatively balanced. I guess I am willing to be a minority of one in that, while I favor a no change policy today, I would suggest a removal of the bias toward tightening. Obviously, Asia and the spreading financial crisis around the world are the main reason. In my view, the reason is not so much because of possible spillover effects to the United States through the trade accounts or whatever. I don't know what the spillover is likely to be. I think that, on balance, it has been positive so far. But we are the world's remaining superpower and an economic and political leader in the world. We often say that China has been very statesmanlike for promising not to devalue its currency under current circumstances. I think the circumstances also require that we not upset the apple cart. So, I would agree with your no change proposal, and I would remove the bias. I was a lot more comfortable saying that before Tom Hoenig made his soundbite.",253
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"My concern is that meeting after meeting we are drifting into a situation that will accommodate higher inflation next year and the year after. Let me start with an assumption about the policy environment that we are going to be facing over the next few meetings through the rest of this year. The inflation rate over the remainder of this year is almost completely predetermined. We don't know what it's going to be, but whatever it is, it is not going to be much affected by what we do at this meeting or the next. However, what happens to the inflation rate is going to make a difference to the environment within which we are making our policy decisions. I am also quite prepared to assume that our external problems or the problems in other economies are very likely to be with us, and I fear they will be with us for a long time. Consider two different scenarios for our coming meetings. First, suppose that the published CPI inflation rate remains low. That will make life easy for us. We will have the luxury of acting or not acting at any point, and we can continue a policy of watchful waiting. But consider scenario two. Suppose that the CPI starts to rise in the published data to the 3 to 4 percent range, which I think is certainly well within the realm of possibility. Then we are going to be faced with some very, very difficult decisions. Assuming the problems with Asia and maybe elsewhere in the world persist, we are going to be faced with the same unpleasant external situation but with the added pressure of CPI increases right in our faces. I continue to believe that it would be best if we were to raise the funds rate now rather than to wait for what I think could well be a more difficult environment for taking action in the future. It is not obvious to me that a tightening move now is going to make the situation in Japan worse. What I believe the Japanese need to do is to have a consistent policy direction on a number of fronts, including a monetary policy that is more expansionary to end their deflation. Such a policy in Japan is likely to lead to some further depreciation of the yen against the dollar, and that is a constraint that the Japanese feel in part because of U.S. pressures. If an appreciation of the dollar against the yen is attributed to policy action here, it may actually make the situation easier for Japan. I don't know. Having said all that, I well understand the judgment going the other way. There are very tricky issues in the international markets and because of all the uncertainties in the outlook that we have discussed, I am happy to support your recommendation.",521
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation and as always I think you have made some interesting points in your analysis. I would like to comment on a few things that I heard around the table. The first is on Asia. To put in a word for something that Jerry Jordan implied yesterday and Bill Poole implied just now, some combination of a reduction in Japanese prices and the yen still seems to be in the cards. That tilts me a little more toward the pessimistic Asia scenario that Peter Hooper mentioned yesterday. The second point is that we have not heard much about NAIRU at this meeting, but let me repeat for the record that given the slowdown that I believe is in the cards and normal econometric uncertainties, I am not so convinced that we are below NAIRU or at least that we will be below it in a few months. My next point is on inflation. I would like to underline what you said was our focus on the core CPI at a time when there is a very large difference between that measure and the core PCE or the GDP deflator. If we are going to put things to study on the table, I would like to put that on the table. I think there are some interesting issues here. We see some acceleration in all of the series, but they are from different levels and on the whole perhaps less worrisome levels. I would like to support the view expressed by Al Broaddus that if we see an opportunity for raising the federal funds rate and if we become convinced that the unemployment rate is below NAIRU, we should take advantage of that opportunity. In taking it, we probably should be thinking about a bigger change in the funds rate than 25 basis points because, as we know, these opportunities do not come along too often. Lastly, I have some sympathy for what Bob McTeer said about returning to a symmetric directive. I have been mulling over that option, but in the end I rejected it because, while it might be consistent with our current thinking, basically added uncertainty is what might lead us to symmetry and until we know or think we understand a little more about the economic situation, I would not want to attract attention to the symmetry issue. It is to some extent the same issue we talked about this morning with regard to the ranges for the monetary aggregates. So, I am for sitting still with the asymmetric directive, but I did give some thought to the idea of shifting to symmetry that Bob McTeer raised. Thank you.",506
-fomc-corpus,1998,"I think we have a large block of potential votes going for ""B"" asymmetric. Would you read the appropriate language for the directive to embody that.",30
-fomc-corpus,1998,"The wording is from page 23 in the Bluebook.: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher federal funds rate would or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",126
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan No Governor Kelley Yes Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes,43
-fomc-corpus,1998,"Let's break for coffee and then when we come back, we will discuss the subject that we postponed from the last meeting, alternatives for disclosure policy.",29
-fomc-corpus,1998,"Mr. Kohn, would you lead us off?",11
-fomc-corpus,1998,"Thank you, Mr. Chairman. At the meeting in March, several members suggested that the Committee consider whether some explanation should be given to the public after each meeting when no change is made in monetary policy. Two proposals were put on the table at the March meeting. One was to release the directive when the tilt was changed along with a brief explanation. Another was to release a brief statement after every meeting whether or not the tilt was changed. Dave Lindsey and I came up with a number of permutations and combinations of those proposals. The desire for more explanation comes from within the Committee. There is no real outside pressure for more or earlier release of information. Committee members from time to time have wanted to explain the basis for a ""no change"" decision, notably when markets expected a change that did not occur. Some members also indicated that they thought an explanation was desirable when the Committee felt that underlying conditions were shifting significantly though not enough to warrant a change in policy. That was the case in March. There also has been a desire at times to warn markets that a change might be forthcoming in order to reduce the odds on an overreaction because of the surprise when policy tightening or easing actually occurred. It may also be that the felt need to issue a statement when no change is made is fed in part by the limited number of actual changes. The Committee has few opportunities to comment on policy considerations outside the two Humphrey-Hawkins testimonies each year. The question of how much to announce and how often to do so has been addressed by the Committee on a number of occasions, most recently in February of 1995. At that time the Committee had a report from a subcommittee headed by Governor Blinder, with Governor Kelley, President Boehne, and President Melzer as members. The subcommittee recommended and the Committee accepted what essentially is the current policy of announcing changes in the stance of policy. That subcommittee recommendation included the possibility of an occasional explanation of a ""no change"" in policy if there was a good reason to provide such an explanation, but it was expected to be rare. The possibility of an occasional public statement to explain a ""no change"" policy decision was announced to the public at the time. The Committee has shied away from using that option partly on the ground that members felt it would be difficult to do so just once in a while. Having done it, there would be pressures for and expectations of more frequent announcements. No one at the February 1995 meeting was in favor of making an announcement after every meeting, although I think Alan Blinder leaned in that direction. More than three years have passed since then, and the Committee has had more experience with announcing changes, so it seems appropriate for the Committee to reconsider its policy. In its discussions of these issues in the past, the Committee has weighed two broad considerations. Here I am drawing on the February 1995 discussion as well as Dave Lindsey's memo and other information that we have. On the one hand, providing more rather than less information is viewed as generally better public policy. It is the responsibility of a public agency to explain its activities in a democratic society, and it enhances accountability of that agency. In addition, on average and over time, markets should work better if they understand what the Committee is thinking about and what its concerns are. That is, changes in market prices should tend to stabilize the economy and help the Committee to achieve its goals. I think there are two caveats here. First, it is not always easy for the Committee to convey its intentions and concerns. They are subject to misinterpretation, certainly an experience we all have had from time to time. Second, volatility may increase if events do not validate expectations. Moreover, Committee statements help to frame press reporting and press coverage of policy and hopefully to educate the public in that way. Committee statements or official releases give you, the members of the Committee, some guidance in your own statements over intermeeting periods. Those are the positive aspects. On the other hand, the Committee has anticipated drawbacks to making additional announcements and releasing additional information, especially if those announcements and information feed back on the policy process itself, making it more difficult to reach the right decision. In some of the discussions over the years, the market reaction itself was viewed as a potential problem as well as a benefit. The reasoning was that if the Committee wanted to move interest rates, it would change policy. The fact that it had not changed policy suggested that it did not think conditions were right for changing interest rates. In 1995 in particular, several Committee members expressed concern that the announcement itself could lock in market expectations and reduce flexibility because it would set up situations in which the market expected some action and the Committee would then have to worry about disappointing those expectations. One question raised at the time was whether announcing a ""no change"" decision would make it more difficult to implement intermeeting changes, including delayed contingent changes. In the past, the Committee has from time to time made decisions at meetings to change its policy stance in the next few days or weeks after the meetings if the data came in a certain way. I can recall a decision like that in December 1991. The Committee did not want to announce a ""no change"" decision and then not be able to make a change within the next few weeks if the incoming data were of a certain kind. That is why the current announcement after each meeting is phrased ""there is no further announcement"" rather than ""the Committee has not changed its policy."" The Committee also was concerned that announcing symmetries and asymmetries could be seen as a precommitment not only over the intermeeting period but for the next meeting as well. If the directive were released, the symmetries and asymmetries would be much more consequential, partly because of market reactions. That prospect could provoke more dissents and could lead to reduced use of the symmetries and asymmetries because members would be concerned about the market reactions. Members commented at that time that the tilts had contributed to policy flexibility and consensus building, and they were concerned about doing something that would reduce the use of the tilts in the policy process. There also was concern about the wording of the press statement. Members anticipated difficulties in reaching agreement or consensus, especially if statements were forward-looking or had implications for future action. It was not clear what to do about dissents or contrary views in the announcements. These are problems that arise for statements made when the Committee actually changes its policy. But some of the thinking was that with no action, there was nothing to take the focus off the words themselves, and the words might be more important for a statement about why the Committee did not take action, which would be examined more for what it implied for the future than for a statement that explained something the Committee had done. At the March meeting, a number of you were concerned that the nuances of a ""no change"" directive with a tilt or change in the tilt could not be captured in a short statement. In addition to these pros and cons, there are a number of other issues that you could think about in the process of reaching this decision or that would need to be thought about if your disclosure policy were going to change. One question is whether there are ways of accomplishing the objective of explaining a ""no change"" decision other than making an announcement after every meeting. One possibility obviously would be to implement the February 1995 decision to issue the occasional rare statement. If the directive is released, should minutes be speeded up to help explain the directive? Even if they were speeded up, the minutes would still be released with a lag after the directive, but at least they would help to explain the Committee's decision with a shorter lag. And should the directive wording be looked at again? The Committee did look at directive wording on the tilts in August of 1997, just about a year ago, and you were unable to reach a consensus on any changes. Another issue is how to treat dissents and alternative views. A further concern might be whether these issues should be considered in the broader context of interactions of FOMC members and staff with the public and the press. You have discussed what is appropriate and what is not appropriate to tell outsiders, but the guidelines remain informal. The question is, should they be codified or at least discussed again? Finally, if there is a change in procedures, how should this be announced to the public? If you were to change something today, the Chairman's Humphrey-Hawkins testimony would be a natural possibility. Thank you, Mr. Chairman.",1739
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"This is a topic that has been the basis for a lot of discussion from time to time, and I think it is worthwhile to bring it back and discuss it again because circumstances change, people's views change, and the Committee's membership changes. I would like to provide a few observations because this is not the first time I have been through this. I believe most of us around the table start with a bias toward giving the public more information. But I think there are two basic reasons why we should not end up disclosing the tilt or regularly making statements when we do not change policy. They come down in my view to the quality of the information that we would be releasing and the quality of the deliberations that we have around the table. I think it is beneficial to give the public a lot of information about monetary policy, and we do give the public a lot. But giving misinformation is harmful. As an illustration, one only needs to look at the ambiguity that surrounds the tilt. Markets do not have a clear understanding of what we mean by our ""woulds"" and ""mights."" For example, some analysts say that the asymmetry toward tightening that the Committee adopted in March means members agree that a rate hike is more likely than a rate cut. Others say the asymmetry means members agree that their next move will be to raise rates, though the timing is up in the air. Yet another group says the asymmetry was meant to prepare the markets to give the Committee room to act at today's meeting or the May meeting. I recall analysts explaining not too many years ago that an asymmetric directive meant that the Committee had given the Chairman leeway to change rates between FOMC meetings, while symmetry meant the Committee had decided to tie the Chairman's hands. This ambiguity is not terribly important when the tilt is old news, but I believe ambiguity about the meaning of asymmetry in a current directive plants the seeds of considerable confusion. Then the issue is whether we could clear up this ambiguity. The problem is that it is hard to clarify the ambiguity for the public when we are not clear about the meaning of asymmetry among ourselves. The reason is that it has meant different things to different Committee members in different circumstances. In that kind of situation, the task of crafting an explanation that does not mislead is at best a challenging one and the likely outcome is that the effort will end up being an exercise in frustration or one that will produce boilerplate. The second reason for not increasing the amount of disclosure is its effect on the quality of the deliberations. Quicker and more complete disclosure already has changed the nature of the Committee's deliberations. I am for the disclosure that we do, but we should not mislead ourselves about how it has changed the nature of these proceedings. I recall participating in routine, vigorous, and freewheeling debates in this room before we decided to release transcripts. Now, most of us read prepared remarks about our Districts and the national economy and even our comments on near-term policy sometimes are crafted in advance. Prepared statements were the rare exception rather than the rule until we started to release transcripts. So the issue is how early release of the tilt will change the nature of our deliberations. I think it will. Announcing the tilt of the current directive ultimately will lead us to avoid asymmetry altogether. I think that will eliminate a consensus-building tool that has benefited our decisionmaking process and has helped avoid the hardening of positions. Announcing the tilt of the current directive when we have not decided to change policy immediately inevitably will invite more speculation and even lobbying of individuals about the timing of our next move. I suspect that over time a majority of the Committee will develop a preference for symmetric directives just to avoid these kinds of announcement effects. In most cases when the Committee has adopted an asymmetric directive, it has voted for no immediate change in policy. There have been a few times when the Committee has adopted an asymmetric directive along with a 25 basis point change in the federal funds rate. But in most cases, perhaps all, the asymmetric directive helped build a larger majority for consensus. I think consensus is useful, particularly, as we discussed last night at the U.K. embassy dinner, because what has evolved is a collective responsibility and accountability for this Committee rather than the individual responsibility that has developed in England. I had the sense last night that they wished they were closer to us than where they are now. I think we send a louder, stronger message when we do change the funds rate if we have this consensus-building, collective-accountability approach. If we do not have the asymmetry available as part of our directives, I think we will see more 8 to 4 votes and 7 to 5 votes. Is that bad? Maybe not. But when I came away from the discussion last night, I sensed that we are better off the way we do things here. The bottom line is that releasing the tilt in the current directive is not likely to give the public much useful information about monetary policy, but it is likely to reduce the quality of our deliberations and our ability to build a consensus. That leads to the issue of releasing a statement after all meetings in which we do not change the existing policy stance but without identifying the tilt in the directive. I believe such a statement would fairly quickly lead to demands to identify the tilt. We cannot avoid making the tilt known for very long if we start to make regular announcements. What would happen if we did not announce the tilt is that outside observers would pore over every word in the announcement in an effort to determine whether there is a tilt or not. So, I think the two go together. I personally believe that we have found about the right balance for now between the public's right to know and the public's interest in having a high-quality decisionmaking process for monetary policy. No tradeoff is perfect, but I think that what we have works rather well most of the time. In the rare exceptions when we might want to provide some information about the tilt and our policy direction or to prepare the markets for a near-term policy change, I think we have ample vehicles to do that that are consistent with our collective accountability, notably the voice of the Chairman.",1254
-fomc-corpus,1998,"That was a very thoughtful evaluation and historical review. On the basis of my own experience, I come out at the same place. I have gone around and around on this issue and I keep ending up in the same spot for exactly the reasons Ed Boehne mentioned. Governor Kelley.",57
-fomc-corpus,1998,"Mr. Chairman, I strongly agree with President Boehne, and between what you and he just said, you have preempted the substance of the statement that I wanted to make. But if you will indulge me, I would like to go ahead and try to expand on what Ed Boehne said. I did sit on that earlier subcommittee, as Don mentioned, and I strongly supported the changes that we adopted in early 1995. But I would have a very strong concern about making further changes such as those that are discussed in the Lindsey paper. There is a presumption, of course, that information released about the activities of a public body is basically a good thing, and I would concur with that view if the information meets two criteria. The first is that it will be useful and helpful to society, and in this case I think we are talking about the market and its participants and balancing in a positive way the beneficial and potentially harmful effects that may exist from that perspective. The second criterion would be that there be no negative impacts on our critical policymaking processes, as Ed Boehne suggested, or that policy's intended result is not outweighed by the benefits of an earlier release. In my view, the notion here to release immediately fails on both of those criteria. Let me comment on both of them. Before I do, I would like to make a few points. My first point is debatable, but I believe that if we start making regular announcements, we will very soon find ourselves locked into doing it all the time whether we like it or not. Be that as it may, I would like to call your attention to the statistics in Table 1 on page 12 of Dave Lindsey's paper. That table records 152 decisions. They include 69 decisions to change policy and 83 decisions not to change. The table also shows the tilts that existed at the time those decisions were made. I am considering symmetry to be a tilt in this analysis. Eighty of those decisions were accurately foretold by the existing tilt at the time that they were made. That is 52.6 percent of the total. Seventy-two were inaccurately foretold by the existing tilt, or 47.4 percent. That is not a very impressive guideline to future decisions. I think that is good news and bad news. The good news is that it clearly shows that the FOMC is always looking at incoming data with an open mind and is not being trapped by any previous sentiment. The bad news is that while immediate release would obviously reveal what the FOMC members were thinking as a group at the time of a meeting, the tilt is very close to being perfectly worthless as a predictor of what the FOMC will in fact do. Fifty-fifty would be perfectly worthless in this analysis. As for the two criteria, the first has to do with the net impact on society and how it appears to the market. What would be the possible objectives of the earlier release? The first might be a better understanding of the Federal Reserve on average over time, as Don Kohn says on page 4 of his memo. To be sure, achieving that objective is highly desirable, but I don't think it necessarily has anything to do with early release of the directive. In fact, as I hope to show momentarily, early release actually would be counterproductive to that objective. With respect to the market's functioning, remembering this 52.6 to 47.4 inaccuracy split, the market professionals who watch the Fed closely will immediately know those facts. They will learn nothing that they do not already know, and they are going to continue to do their own analysis and act accordingly. In the case of the general public, I believe that they would very soon become quite disillusioned with the lack of follow-through that they would perceive, because they are just going to look at our actions; they are not going to study the reasoning and the carefully crafted language in our releases. I personally have no doubt whatsoever that those unfulfilled tilts would harm the credibility of this Committee to the public. Would it damp volatility? I don't think so because in the short term, the tilt has no forecasting power. The speculators would respond with a ""ho hum"" and perhaps feed the information marginally into their assessments. Their odds on the direction of the next policy change might shift a little, but the volatility in the market would continue as speculation continued. I would have a concern that immediate releases would leave us wide open to political demagoguery by persons known to all of us. Take this 47.4 percent of the time when the operative tilt is not followed. I can hear it right now, ""the Fed is misleading the public,"" ""the Fed is manipulating the market,"" ""the Fed is indecisive,"" ""the Fed has no integrity,"" and so forth. When we announce a tilt toward tightening, we will get an incessant drumbeat until that gets settled one way or the other. If we eventually do not act, then those who engage in demagogic rhetoric will say that they forced us to back down. If we do act to tighten, we will get the same rhetoric we get now. If we announce a tilt to ease, the demagogic rhetoric is going to ask us why we are hesitating, why we are dithering; the easing clearly is desirable; it clearly is needed; you are already late. Then, if we do ease, they will claim to have forced us to ease, but that we should have eased by 50 basis points, not 25, and we were too late anyway. That brings me to criterion number two. To release information is good unless it affects the policymaking process and its results in a seriously perverse manner, and I think it would do that in three ways. Two of them have already been mentioned. The first is that this Committee would in my view lose credibility with the general public, and that would weaken our ability to conduct an effective monetary policy. Secondly, I think the political demagoguery would be dangerous in the sense that it would be very hard for us to ignore. The worst but not unlikely result would be that at some point we might feel obliged to assert our independence and act in a way that would be harsh and perhaps premature. Thirdly, as Ed Boehne said a minute ago, I think that our symmetric/asymmetric convention has been very useful. It depressurizes uncertainty. It legitimizes uncertainty and it legitimizes delay when delay is appropriate. It helps build a consensus. I think that regular announcements would ultimately cause us to lose the use of that very useful convention. If the FOMC wants to change policy, then it does so and if it wants to decide on ""no change plus a tilt,"" then that should be the result. But if we were immediately to announce the tilt without a policy move, it is very likely in my view that the announcement would move the market at least some of the time, possibly the equivalent of about one-half a policy move or maybe more, but sometimes the market would not react at all. We would never know. As we sat here and voted, knowing that the tilt was going to be released, we would not be able to anticipate with any degree of certainty what the effect would be on the market. That would create the likelihood of an unintended and unpredictable policy change. I believe that after that happened a couple of times, we would feel burned and we would very soon cease to use the symmetric/asymmetric convention. I think that would be a very important loss in a couple of ways. It would frequently force the Committee into timing decisions on a basis that it would not otherwise choose and that might be unwise. Secondly, again as Ed Boehne said, I think it would remove a very useful and legitimate consensus-building tool. I do not think it is any accident that there is no other central bank of significance anywhere that uses such an immediate release. In my opinion, we should not do it either. I think we have it right at this point. Let us not try to fix it.",1650
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I am going respectfully to take the opposite view from that supported by Ed Boehne and Mike Kelley. Incidentally, I would like to thank Dave Lindsey for his memorandum that I think laid out the choices well, especially the roadmap. That was a huge help, for me anyway. I believe any consideration of this question of whether we should disclose the tilt immediately needs to start by asking whether the tilt is useful in general in our deliberations, whether it is released or not. I believe it is. In my view, the need to consider the tilt language forces the Committee to keep in closer touch with its consensus and to specify it more precisely at any point in time. As I see it, that facilitates our taking timely policy actions. It also allows the Committee collectively and as individual members to express a concern or an expectation on one side or the other of neutrality without necessarily favoring an immediate change in the federal funds rate. It does not always work that way with me in practice, but certainly it can in principle. The fact that the tilt language is useful does not necessarily mean that releasing it immediately would facilitate the implementation of policy. But my own view is that doing so would be constructive, and I would cite three main reasons for that view. These have already been alluded to. First, we all know that markets do not like surprises, and in my view they work better when they are not surprised. Releasing the tilt immediately would keep the markets better informed and better apprised of the direction in which we are most likely to move over time and in that way help better prepare markets for impending changes. Second, it seems to me that the same principle that guided our decision back in February of 1994 to begin disclosing changes in the funds rate target immediately is applicable here. As I understood it then, the principle was that greater transparency was better than less transparency unless there were clearly negative consequences of greater transparency for our deliberative process. I respect the differing opinion that has been expressed, but I am not convinced that this procedure would necessarily have a negative effect on our deliberations. In fact, I think we can make an argument that it might enhance them under some circumstances. I think Mike Kelley's point about being demagogued is a good one, but on the other side of that, immediate release would reduce the problem of leaks. I think it also would reduce our vulnerability to the politically very sensitive charge of secrecy, or excessive secrecy. To me, that is one of the most serious charges that can be leveled against the central bank in this society. Immediate announcement of the tilt would work to reduce that problem. Finally, immediate disclosure of the tilt would enable markets and the public generally to interpret incoming data against the background of fuller knowledge of the Fed's current position, even recognizing that our position might change. For example, stronger-than-expected data coming in after disclosure of an upside tilt would be more likely to produce a reaction in markets that would cause long-term interest rates to rise a little and in that way enhance the role that long-term interest rates can play as automatic stabilizers for the economy. If the Committee accepts that position, as I do, the next issue is how we would implement it. My own preference would be to release the operating paragraph of the directive after every meeting. We all know the language is not exactly Shakespeare, but it is what we in fact use to explain our decisions after each meeting and to convey those decisions to the Desk. If we are going to continue to do that, I do not see any compelling reason for withholding that information from the public. I also do not see any reason to release anything beyond the operating paragraph--the other language in the directive. I think it would make sense, Mr. Chairman, to continue to rely on your testimonies and speeches to convey the Committee's broader thinking about underlying economic developments that condition our decisions.",789
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"I had a question for Don Kohn before making a comment. Don, you referred to occasions when we did not change policy but saw a possibility that we would do so in the next week or so after the meeting depending on the incoming data. How did that affect our wording of the directive? Do you recall?",63
-fomc-corpus,1998,"No, I don't recall exactly. I believe the Committee adopted a very strong asymmetrical tilt. I am thinking of December 1991 when the discount rate was cut by a full percentage point and the federal funds rate was cut by 1/2 percentage point less than a week after that December meeting. The members left the meeting with a strong presumption that they wanted to get a package of easing actions together that included both the discount rate and the federal funds rate. I think there was a strong tilt or presumption in that directive, but I don't remember the exact language.",116
-fomc-corpus,1998,"I cannot remember either. Let me make a few comments. There have been some interesting points made with regard to reasons why we might not want to announce changes in the tilt. But I believe there are some advantages to making an announcement when we change the tilt as well as when we change the funds rate itself. Announcing decisions concerning the tilt would in my view provide additional information to the markets that would enable them to function more efficiently. We have talked in the past about conditioning the markets. This is a very effective tool for doing that. Otherwise, we sometimes have to depend on the timing of testimony or speeches that are going to be given by the Chairman. This is a simple way to accomplish the same thing. I also think these announcements would cut down on leaks. We have had problems with leaks associated with the tilt. Announcing changes in the latter would make the decisions to change it more meaningful because in effect the tilt would become an additional instrument of policy. I see that as a good thing, not a bad thing as Governor Kelley implied. There are times when there does not seem to be agreement or a clear consensus about what a particular decision about the tilt actually means. That is obvious. It seems to me that making a public announcement would require more clarity within the Committee as to what it means, and that could be a positive development. I also believe that on occasion the availability of an unannounced tilt has provided a way for us to defer making tough decisions about policy actions that should be taken. I do worry a little that a policy of regular announcements could cause us not to use the tilt, but it doesn't have to turn out that way. One approach that I have been thinking about is that the announcement could actually be the entire directive rather than just the operating paragraph, but I haven't thought enough about that. It seems to me that the full directive, while it may not be Shakespeare, provides a little more information that would be of interest to the markets.",396
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I come out where Mike Kelley, Ed Boehne, and the Chairman do. I did not get there very easily. It does seem to me that we have an obligation to be as clear as possible and to get across to the press and the public that follows monetary policy developments that we are dealing with hard issues, that we are balancing risks, and that no mysterious things go on behind the walls of the temple. I want people to understand what our discussions are about. In that context, I have been rather admiring of what the Brits have done in getting it all out and talking more clearly than it seems to me we sometimes do. So, I started with the notion that maybe the first step should be to announce the tilt in a comprehensible way. If it is not a signal to the markets, to whom is it a signal? Just to us? I came to the conclusion that it is really a signal just to us and that putting it out to the markets would have all of the difficulties that Mike Kelley and Ed Boehne have discussed rather eloquently. I believe it would end up being more confusing than not, in part because the world changes in six weeks and we change our minds. It is not a good predictor of future policy actions largely because we often perceive things differently by the time of the next meeting. I don't think we want to be in a position of having to explain that as well as everything else. I conclude that we are doing more or less the right thing with two exceptions. I would amend the wording of this directive. I do not have a proposal right now, but it is mysterious in the extreme with the ""woulds"" and the ""mights."" Every time I hear it, I have a little difficulty not laughing. [Laughter] I think we could do better than that if we put our minds to it. The other exception is that I don't see any harm in announcing a ""no change"" decision in just that way. A ""no change"" decision is a policy decision just like a change, and I don't see why both should not be treated the same way. We could just state what we decided at the end of the meeting in an ordinary way rather than continuing to use the arcane expression that ""the Committee met.""",460
-fomc-corpus,1998,"Mr. Chairman, could I remind us all why we decided to do it that way? If we change the tilt but not the federal funds rate and we say there is ""no change"" in policy, we are in some sense lying because there has been a change in policy. There has been a change in the tilt.",65
-fomc-corpus,1998,I agree with that.,5
-fomc-corpus,1998,"That is why we invented the notion of saying ""the meeting has ended, there is no further announcement.""",21
-fomc-corpus,1998,Can't we say we decided not to move the federal funds rate?,13
-fomc-corpus,1998,"Had we said that the first time, I suppose we could continue to say that.",17
-fomc-corpus,1998,Can't we now?,4
-fomc-corpus,1998,The reason that we want to be very clear is precisely not to deceive the public.,17
-fomc-corpus,1998,I don't think what I am proposing would deceive the public.,12
-fomc-corpus,1998,I think our current practice has the benefit that people are used to the way we do it now.,20
-fomc-corpus,1998,"I agree that it may be arcane, but I think it is unambiguous.",18
-fomc-corpus,1998,I think it just adds to the perception of a mysterious Federal Reserve.,14
-fomc-corpus,1998,"If you can figure out a way to get the directive rewritten, everyone around this table, or a majority at least, would agree that that would be a great accomplishment. We tried several times to improve the paragraph, but without success. The current wording is awful. We all agree it is awful, but the trouble is we all agree it is awful in different ways. [Laughter]",78
-fomc-corpus,1998,Let us try again!,5
-fomc-corpus,1998,"If you succeed, you could be a candidate for one of three Nobel prizes: literature, economics, or peace. [Laughter]",27
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Let me start by saying what I am not in favor of. I am not in favor of releasing the tilt, the full directive, or the operating paragraph of the directive. I believe there probably is more noise than value in doing any of the above. Having said that, I do think that increased disclosure and increased communication have served us well on balance over the years. I do not conclude that we have somehow, or at least I'm not entirely convinced that we have somehow, stumbled into optimality here [laughter] and are doing just the right thing. So, I am giving thought to what we can do incrementally, what I would describe as another small step toward providing additional information. What I am attracted to, and I think this comes largely from the discussion we had a meeting or two ago, would be a statement of our thinking after every meeting. For the most part, this statement would be retrospective rather than prospective, but it would help to explain why we came out where we did not only in the cases where we changed policy but also where we did not change policy. As Don Kohn already has suggested, drafting something like that is probably not going to be easy. On the other hand, those of us at the Reserve Banks all have some experience with that when we communicate the discount rate discussion and decision of our boards to the Board of Governors. So, I don't view that as an entirely impossible task. I do think it would be another small step toward improving communication. My judgment is that it would be received well in the marketplace and elsewhere and would help people understand what we are thinking about, what we are concerned about, and some of the difficult tradeoffs that Governor Rivlin referred to.",351
-fomc-corpus,1998,"I want to comment on that briefly. I think it is far easier to write a statement when we are taking action because we have a majority of the members who favor the policy move, presumably largely for the same reasons. It is very difficult to agree on a statement when we are not taking action. In other words, to try to capture in a statement the reasons why people are not doing something is in my view far more difficult than stating why certain things were done. I may be wrong on that, but my experience in trying to write communiques over the years is that there is a real, excuse the expression, ""asymmetry"" in how one approaches this. That is a practical consideration.",141
-fomc-corpus,1998,"You could well be right. I suppose we could, if we wanted to, try it out internally before deciding to go public with it to see after a meeting or two whether we could craft a statement that people agreed with. Presumably, you would want to have something in the back of your mind before the meeting began, so you could proceed from there. That is a way of approaching it and seeing how difficult it might be.",87
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"When I try to think through this issue, I start with three elements. We have policy decisions; we have a policy rationale that we try to convey to the markets; and we have the internal policy debate. I think it is very important that the internal policy debate be kept confidential so that we can have a complete and free exchange. In terms of the policy decisions, I believe they should be disclosed promptly to the market in part to avoid leaks and in part to provide the clearest possible direction to market participants and to avoid the problem of different market participants with different positions getting information at different times. In the past, before the funds rate decision was announced after every meeting, some market participants, the experts, got the information first, and I do not think that is a wise way to operate. In terms of the rationale, a fully articulated rationale is impossible. We are never going to agree on exactly why we do things. We all come out in somewhat different directions. The rationale that is incorporated in the directive is very, very general. It is mostly boilerplate. I don't understand the difficulty of releasing the full directive because it is almost all boilerplate, and it is a very minimal common ground that we can agree on. So, I would be in favor of releasing the directive. I cannot imagine that release would cause us any grief. The issue then comes down to the question of whether the tilt is a policy decision or not. If it is not a policy decision, it seems to me that it does not belong in the directive at all because the directive is a statement of what we are telling the Open Market Desk to do and the underlying rationale for that. I think the tilt could be used constructively to convey our sense of the balance of risks, the likely future direction of our policy decisions. I believe that is the point that Bob Parry was making. Of course, that is where I came in at my very first meeting back in March because we were facing this issue. We were talking about whether we should be providing some signal to the markets about our future policy direction, and we thought moving to asymmetry might be useful in that regard. Maybe it is like a half step on the funds rate. We might have different interpretations of exactly what it is, but I think it would be useful to keep it in the directive and treat it as part of our policy decision, providing a sense to the market of our future direction.",491
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"I have not been struggling with this issue very long as everybody knows, but I am tentatively in favor of releasing the operational paragraph, or something like it, after every meeting essentially for the reason that Bill Poole just gave. At the same time, I understand the arguments that Ed Boehne, Mike Kelley, and the Chairman have made. I do not think the system is fundamentally broken, so I don't care passionately about this. I think Governor Rivlin made two very good suggestions that I would endorse. By the way, if a group is established to try to draft this paragraph, I do not want to be on it. [Laughter] I'm used to university-professor speak and not central-banker speak. My participation would be an outrage in terms of comparative advantage, [laughter] but I do think it could be written better. In terms of the suggestion that Gary Stern made about providing some information after each meeting, I thought about that, too. But it strikes me that what we would be doing then is subjecting the Chairman to a press conference every afternoon after our meetings. I do not want to do that to him. So, I would not be for that suggestion. Let me also raise one other issue. An intermediate step we might consider taking would be to release the minutes slightly before instead of slightly after the following meeting. I asked about this at the dinner last night. The Bank of England, as you know, is considering that possibility. The Chairman indicated that one reason we could not do that was that there is some contingent language in the minutes. There have been so many fun things occurring this morning that I haven't had a chance to read the minutes carefully to figure out how much, but I believe there is not that much. I think the minutes could be moderately rewritten. This is difficult to do in periods when we are tightening. When we are easing, we are heroes and nobody cares much. When we are tightening, it is hard to do, but in that circumstance I see a lot of advantage to giving a warning before we do the deed. So, if we don't go all the way to releasing the operational paragraph immediately after each meeting, a possible intermediate step is to release the whole minutes a little before the next meeting.",456
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I think we already have had some very thoughtful discussion of this topic. I will try to add incrementally to that if I can. I believe we have an opportunity to take another small step toward greater transparency. I believe such a move would be constructive because the additional information would help participants in the financial markets to better understand the FOMC's assessment of risks. This would allow the FOMC to better prepare the public for changes in policy that might lie ahead. Let me comment on three issues. First, should we change the announcement policy? Second, should we add the tilt of policy to the announcement? Third, should we immediately release the full directive? I believe that announcements should be used on occasion even when there is no change in policy. First, if there were significant uncertainty about whether or not policy would change, we might explain why we chose not to change policy. Second, if we were expected to change policy and did not, again we might explain why. Third, if we did not change policy but changed the tilt in the directive, then we should explain why. On the other hand, we should not be in a position where we feel compelled to make an announcement in the case where we were not expected to change policy and did not. Whether policy is symmetric or asymmetric is a very simple way of conveying important information to the market and to the public more generally about how the FOMC weighs the risks going forward. I believe we should announce our assessment of those risks after each meeting. Would we make less use of an asymmetric bias? I think that if we agree to be honest and use this procedural change to enhance public transparency, we will not use it any less. I think the memos we received on this issue contained two very interesting arguments against immediately releasing the entire directive. First, it was said that the opening paragraph is written before the meeting and is basically vacuous. Second, it was noted that the language of the directive neither says what it means nor means what it says. Thinking about this even for a few seconds suggests an obvious solution. First, we might eliminate the first paragraph and perhaps replace it with our announcement. Second, we could improve the language so it says what we mean and we can honestly say we mean what we say. My first preference is to publish a new and improved directive. My second best is to announce our tilt decision following each meeting. In addition, depending on the Committee's decision, I would like to provide an explanation when there is a change in the funds rate, a change in the tilt, or a no-change directive under the circumstances that I detailed above.",535
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. After listening to a number of very good arguments from people who have much longer tenures than I do in this area, I will weigh in just a little. I believe that we have two decisions to make. The first is whether we should make any announcements after meetings when there is no change in policy. I think the answer to that is ""no"" because I don't think such a decision represents a consensus in the same sense as a decision to change policy. Bill Poole and others have suggested that there are many and differing reasons why individual members of the Committee may decide not to make a change in policy. It is very difficult, as you point out, Mr. Chairman, to write a clear summary statement about such a decision. We spend a fair amount of time discussing factors relating to our policy preferences before coming to a consensus on not changing policy, but we would then be hard pressed to state clearly and concisely the reasons for that consensus. That exercise would not be productive. Secondly, with respect to announcing the tilt, I actually see that as a close call, though I have a slight preference in favor of making an announcement. The reason is that I believe the tilt does reflect a change in policy and a consensus is needed to make that change. So, I think it is useful to inform the markets of that for a variety of reasons that others have alluded to. One is that we often want to condition market expectations in one way or another. That may be done through statements or speeches that you make, Mr. Chairman, but in some sense releasing our decision on the tilt after each meeting is an easier way to accomplish that result. Secondly, I think we can indeed educate the markets on what this means. Mike Kelley pointed to a table that some would interpret as indicating that we are quite undecided when we adopt a tilt. One of the things we might do if we were to undertake to make this announcement would be to educate the market as to exactly what it means. We often find people in the press who ask whether we think the risks are in one direction or the other. The tilt is a way to disclose what the Committee thinks the risks are, and that might be very helpful, though we could also then step back from that as we get new information. I think that indicates that we are responsible public servants as opposed to irresponsible public servants. I am not so concerned about having people belittle us or ask us why we have changed our minds because we always have new information to assess after our decision. Finally, as I understand the origin of this, some of the language of the tilt as I read it suggests that it is aimed at intermeeting actions. It seems that we have moved away from intermeeting adjustments in the target for the funds rate, and therefore perhaps the tilt has taken on a slightly different meaning that can be disclosed more clearly and more readily to the public. For those reasons, while it is a close call, I would be in favor of disclosing the tilt but not making statements when we have made no change in policy.",624
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I have been the beneficiary for many years of the wisdom and experience of Ed Boehne and Mike Kelley, and it is with some uneasiness that I come out on the other side on this issue. I am most comfortable with the kinds of comments that Al Broaddus and Bob Parry made for the following reasons. First of all, I would agree with Alice Rivlin that at the minimum we certainly should be able to find a way to redefine and recast the language relating to the tilt. We did it in the first sentence of the operational paragraph relating to the federal funds rate, and I have to believe that somebody can in fact win that Nobel prize. We should try again. Second, I guess the unspoken assumption is that there is no turning back once we liberalize our disclosure policy. We will be stuck with whatever additional disclosures we go to. I just mention that because I do not think anybody has focused on this explicitly. I also start with an underlying bias that more transparency and more information are better than less. I would argue that serious observers in financial markets and elsewhere of our policymaking are sophisticated enough to understand the nuances when we announce the tilt and they also are able to interpret changes in the economy between the announcements just as we have to. The other argument that I would underscore without repeating all of it is that announcing the tilt would avoid the misinformation that spread just a couple of meetings ago. I believe that is going to happen again. It was most unfortunate at the time. We all struggle with how to deal with misinformation, and I think that avoiding it is worth something. I think David Clementi's comments last night suggest that the Bank of England's early experience with delayed information has given them the same type of problem. So, announcing our decisions does in my view avoid the risk of what I call ""slips,"" not ""leaks."" I would prefer to put a more charitable spin on that and assume that we simply from time to time may say something we wished we had not. That cannot happen if we already have made the announcement. I also agree with the comment that any small step we can take that reduces the sense of secrecy that surrounds our activities is in our long-term interest as an organization. We simply need to move a little further in that direction. I don't believe we can make these announcements on an ad hoc basis at one meeting and not at another. I think it has to be a routine that we use for every meeting. The cleanest and simplest way would in fact be to release the operational paragraph of the directive. It takes care of announcing the tilt and it also accommodates Al Broaddus's proposal to announce our fed funds target at every meeting, not just when we have changed it. This is not a ""slam dunk"" issue, but I have a modest preference to come out on that side of it. Thank you, Mr. Chairman.",592
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. I think that if someone did an empirical study of central bank behavior, at least for the last couple of decades of fiat monies unanchored by a gold standard or something else, they would conclude that there is an asymmetric bias toward easier money. The reason, of course, relates to the existence of an asymmetrical political bias toward easy money, which already has been alluded to. Because of that, we have seen a search for a way to neutralize that political bias, and it takes various forms such as a provision in the Maastricht treaty that gives central banks a mandate for price stability, currency boards that anchor their policies to a strong hard currency, and other ways that try to institutionalize an asymmetric bias toward tightening or at least to neutralize the asymmetric bias toward ease. In that sense, I would never favor an asymmetric bias toward ease, announced or unannounced, because it is redundant. [Laughter] I also question the value of having a stated bias toward tightening, whether released immediately or later, and any signaling that comes from that. Governor Gramlich stated that he feels there is some value in signaling or communicating in advance what we are going to do. I look at what the Bank of England did in May, and I do not see the downside of their having taken an action that caught a lot of people by surprise. Why is that necessarily a bad thing? In fact, I worry about the opposite. Before we started in early 1994 to announce changes in the funds rate or to release a statement at the end of our meetings, the Fed watchers had to interpret Desk actions, and success at that created a rent or a value to those people. We took that away from them and I was happy we did. But now we may create a similar opportunity for those who can interpret our statements or their tone and feel or something like that. I think that there is a hazard in that approach over time. I saw a cartoon a few months ago in a magazine that a lot of you probably do not read, so I will describe the cartoon. It showed a man sitting in front of a television set. The television set says, ""This is just a test; if it had been a real emergency, Alan Greenspan would have said so."" [Laughter] I have seen and I suspect everyone has seen newsletters to customers of brokerage houses that claim to know the Fed is not going to tighten policy because, if it were, Alan Greenspan would have signaled in advance. In the absence of a signal, you are safe in assuming that nothing is going to happen. Over time, there is a risk in allowing that view to dominate behavior. Ultimately, of course, it is our actions not our words that matter. I just am not convinced that even having an on-again, off-again asymmetric bias is desirable. It does tend to reinforce an unfortunate conviction that contemporaneous data have a heavy weight in policy rather than a long-term strategic focus.",602
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"Mr. Chairman, I wind up agreeing with the very fine explanations by President Boehne and Governor Kelley that have been supported by a number of people, but let me say why. First of all, a bit of history: The reason that we decided in February 1994 to announce changes in the funds rate was partly transparency and partly ethics. The Committee's previous policy of making a decision and then having the Desk at the New York Bank in effect apprise the cognoscenti through its operations in the market seemed, in my view as someone who had been in the business 22 years, to verge on the unethical. The reason is that it clearly had the effect of letting the insiders know before the unwashed knew. So, one of the main reasons we changed that practice in my view was because it was the right thing to do, the moral thing to do. At the time, we also decided that if there was a change in the tilt, it would not be announced, and that is how we got into the announcement mode that I mentioned earlier. It seems to me that we can go one of two ways at the present time. We can either stay where we are, which is what I think we should do, or we can move to announcing as soon as possible what the policy decision has been. I think a number of people who are of the latter persuasion have concluded that we would probably issue a cleaned-up operational paragraph that is understandable to the average person. I see that as a big problem because such a paragraph would inevitably state very baldly what is in fact a very sophisticated message. Monetary policy is not an ""on and off"" switch nor is it a partially on, partially off switch, which is the tilt. It is rather something that one is trying to do in order to have a better economy at the end of the day for the good of the American people and people around the world. I think our present policy, which is to make an announcement when there is a change in the federal funds rate, is very clear and very specific. It is easily understandable. If we need some additional explanation of what we are doing, ideally we have the Humphrey-Hawkins testimony or, if not, the Chairman can either create or take advantage of a speech opportunity. We have the great advantage of having an unusually capable spokesman, who is able to provide all those measures of subtlety and nuances that I believe are a very important part of the policy message. We simply cannot do that in an announcement that we have to release on the day of the meeting. If we did, we would have exactly the problem that Ed Boehne described so well We would spend the whole meeting shadowboxing about what we were going say at the end of the meeting. That would take any spontaneity out of the meeting, which is already unspontaneous enough because of the knowledge that the whole transcript is eventually going to be released. So, people come into the meeting with prepared remarks. It is always hard for me to believe that if we have prepared remarks, we will spend a lot of time listening to the other people who have been trying to share some information with us. I think that releasing anything on the day of the meeting would make the meeting a completely unspontaneous set piece, and as a result we would have poor monetary policy. It is wonderful to have transparent monetary policy. If we could have the best possible monetary policy and the most transparent monetary policy, I think that would be the ideal. I don't think we can have both. In my view we are better off having the best possible monetary policy explained to the American people in a way that in fact works quite well, which is what we have now. So, I am very much in favor of retaining our present formula.",767
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Coming into the meeting today, my second choice was to announce the bias. I thought that would be my ultimate choice because I didn't think my first choice would get anywhere. My first choice would be to stop voting formally on the bias. We do talk about it; we have a rough idea of where each of us stands; and we know what the consensus seems to be. Accordingly, I do not see a lot of advantage to having a formal vote and then having the dilemma of whether to release that vote or not. However, I found President Boehne's and Governor Kelley's initial remarks very persuasive, and in particular they convinced me that we should not announce the tilt. They partially convinced me that there is a benefit to having a formal bias, but I suspect that we could retain the benefit of the bias and still not formally vote on it. That would eliminate the dilemma about releasing it shortly after the meeting. Where I come down is to make no change but to consider the advantages of not having a formal vote on the bias.",209
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"We started this discussion at the March meeting after changing the tilt in the directive and arriving at a consensus around the table that the Chairman should somehow convey that decision to the public. Subsequently, there was a ""slip"" or a ""leak"" of information concerning the Committee's new policy direction that came out in the press. I am inclined to the view that situations involving leaks of information are not dissimilar to the kinds of situations that brought us to fuller disclosure in the first place. So, I would buy into Gary Stern's perception that we have not yet reached nirvana when it comes to our disclosure policy. I have some concern about asking either the Chairman or anybody else to go out and convey information about the direction that Committee policy is taking in the absence of a reasonably forthright statement of the Committee's decision. In this regard, I think a ""no change"" decision can be as much a policy decision as a change in policy or a change in the direction of the tilt. So, if we feel compelled to prepare the markets, I think it is more consistent with the notion that the decision is a Committee decision to have the Committee make a statement about where it is than to rely even on the Chairman and especially on the rest of us as individuals. If we go out as individuals and present our own views, we risk having them interpreted in a variety of ways. We obviously cannot change how the journalistic community views us and how it tries to drive wedges between us, at least in the press. But I think it is easier to have a common front if we have a common statement. What worries me is that we seem to have some sympathy for preparing the markets, but we don't seem to want to do that as a Committee. We seem to want to do that as individuals, and I think that has some risk. The risk of demagoguery is always there. We get demagogued whether we make announcements or not. I think our ability to withstand demagoguery is what makes us credible. It has made us credible in the past and it will make us credible in the future, and I do not think whether we disclose or not disclose will change things a whole lot in that regard. I think there is an advantage to demystifying what the Committee says, and I think there may be simple ways of doing that. I know when we talked about clarifying the directive I was on the opposite side of this argument. My thoughts have changed over time. There may in fact be ways after this discussion or maybe other discussions that follow of making the directive clearer, of releasing the minutes or the operational paragraph earlier. I come down on the side of feeling more comfortable with the idea of disclosing our thoughts in a simple way after every meeting. I feel that the advantages of doing that outweigh the disadvantages. But I must say that a lot of the comments and concerns expressed by people who have been on this Committee a lot longer than I weigh on me heavily as well. I don't think I would be comfortable about making a decision on this issue at this meeting, certainly a decision to change our disclosure policy, even though I would agree with a change if we went in that direction ultimately.",647
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, as I looked at this issue and went back and read some of its history, it seemed clear to me that the whole idea of the tilt as it was designed in an earlier period was to allow compromise and build consensus. It is an internal mechanism for decisionmaking. I think the way we announce actions now is the correct way, and releasing the tilt will not add to transparency because the directive language relating to the tilt is incomprehensible. If transparency is our goal and we want to have the context of our thinking in our release of information to the public, then I believe Governor Gramlich has a very good point. We should then focus on putting the minutes together because they incorporate the full context of our decision, and we could release them earlier. But I think trying to come up with a statement at the end of this meeting to be released to the public at 2:15 p.m. and to frame it in the context of the discussion at this meeting is an almost impossible task for anyone. So, I would focus on getting the minutes in good shape as soon as possible if we want to release them early, and that would be the way to enhance transparency. I do not think immediate release of the tilt as currently drafted, or probably could be drafted, will do anything but confuse.",264
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I actually come out very close to where Tom Hoenig did but reach that position in a slightly different way. This has been a very helpful discussion for me, including the opportunity to learn the history. I have been on the Committee slightly less than four years, and I now have a much better understanding of just how complicated this issue really is. I view it as a theory versus practice issue. In theory, we all favor more disclosure and more information to help make the markets operate more efficiently and to help us accomplish our objectives. But in practice, we have a legacy. It is the tilt, which is an arcane tool as I view it. I know that in some of my earlier meetings, the tilt was viewed as a directive to you, Mr. Chairman, as to the authority you would have to take some policy action between meetings. People on the Committee would say that they were giving you this authority, but they wanted you to consult them before you actually used it. I guess that was probably part of the later evolution of this arcane tool. In earlier times, I believe the Chairman did not consult the Committee as to what he would do between meetings. It is a tool that we are not using for the purpose it was originally created.",256
-fomc-corpus,1998,"It is a business cycle problem. I think it becomes quite usable when events are moving very fast and in an unanticipated way. For example, there were a number of occasions during the recession when policy had to move fast and very rarely at the time of Committee meetings. So, the Chairman's role in this regard is really a function of the relative stability of the business cycle. As it has turned out in the current period, because of the stability that is built into the economy, we effectively have been ahead of the curve, and therefore making decisions only at meetings became very sensible. Hence, the directive to the Chairman became irrelevant in effect. It is conceivable that at some later time--two years from now, ten years from now--the tilt is going to come back as something that we will need to assure the flexibility of the decisionmaking process. So, I am almost certain that the change will not be permanent.",185
-fomc-corpus,1998,"That is, of course, my point. To try to explain this to the public and to use the tilt as a method of educating the public seems fruitless to me.",35
-fomc-corpus,1998,I agree.,3
-fomc-corpus,1998,"It will confuse the public more if we try to use this tool to educate them about monetary policy. It is the wrong tool to use. I certainly favor educating the public about monetary policy, but let's not try to do it with the tilt. I would like to find other ways to do this. I don't have any easy suggestions, given the difficulty that people have pointed out here. I certainly support Alice Rivlin's suggestion, though, of writing the operational paragraph in plain English. I, too, am offended by it every time we go through it. I would support giving her three Nobel prizes on this, but I do not think fixing it is quite that difficult.",135
-fomc-corpus,1998,We actually did improve the directive once before.,9
-fomc-corpus,1998,This directive is clear by comparison! [Laughter],11
-fomc-corpus,1998,But I think we can do better.,8
-fomc-corpus,1998,"Let me suggest the following. Proposition one is that if we make a change it is irreversible. Let's be certain that to the extent we make a change, we are all comfortable that we are not going to say three meetings later that it was a mistake and we should go back. We will not be able to go back. I think this has been a very useful discussion in all respects. I would put it to Don Kohn to do the following if everyone is in agreement--[Laughter]",100
-fomc-corpus,1998,If I have the consensus!,6
-fomc-corpus,1998,"There is a lot of sentiment for releasing the directive. It is not a majority. Incidentally, in a decision like this, it is not the Committee per se but the 19, or now 18, who should make the decision because we are all involved. I think it would be a mistake to base a decision strictly on the views of those who happen to be on the Committee at a particular time. I think we all should be equally represented in this type of decision. There is some sentiment, a considerable amount of sentiment, for releasing the directive. There may even be more if we make the directive coherent.",125
-fomc-corpus,1998,There might be less!,5
-fomc-corpus,1998,"There is the crucial question about the value in the deliberative process of various gradations of agreement, which is what the tilt has enabled us to do. I think we should come back to this issue after (1) seeing whether we can find a way to clarify the wording of the directive and (2) examining the interesting question that some of you have raised about the earlier release of the minutes. That would require removing all the contingency material, but that may not be a particular problem. After that, I would suggest that instead putting a variety of alternatives on the table we limit the choices. In other words the choices might include (1) maintaining the status quo, doing nothing, or (2) clarifying the wording of the directive and releasing it at some point. That would automatically get the tilt into the public domain as quickly as any announcement. In principle, I think the proposal that Cathy Minehan made is where we would be if we could get there, namely, to have a statement after each meeting of what the Committee meant. I just think that approach is not feasible. I do not think it could be done, and I would suggest that what would come out if we succeeded in doing it would be some boilerplate similar to what the G-7 comes up with, which is awful. If there were a way to do it, I think it would be the most useful thing we could do. The directive is the next vehicle, but the directive carries with it the problem, as stated in the very eloquent remarks of both Ed Boehne and Mike Kelley, of interpreting the meaning being conveyed by the sentence on the tilt. I also would like to say that I think the issue that Bill McDonough raises with respect to the art form of constructing monetary policy is relatively important. We are engaged in a very difficult activity. We can make it more difficult for ourselves if we lock in certain issues without a full understanding of the implications. I hate to say this, but we will have to come back to this issue again. I do think that in doing so we will be able to narrow the alternatives quite significantly. This has been a very productive go-around. It has clarified a number of issues for me as well, and I have been around for quite a while. We moved the luncheon up 30 minutes because we thought we would be available earlier. That turned out only to be half true. We are adjourned.",492
-fomc-corpus,1998,Ijust read on the Dow Jones tape that this meeting was going to begin at 9:00 a.m. as scheduled. It is now 8:58:25 a.m. Does anybody object to moving up this schedule?,47
-fomc-corpus,1998,I move that we start the meeting.,8
-fomc-corpus,1998,Without objection.,3
-fomc-corpus,1998,Don't tell Dow Jones!,5
-fomc-corpus,1998,Who would like to move the minutes of our previous meeting?,12
-fomc-corpus,1998,Move approval.,3
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,"Without objection. Peter Fisher, would you start us off?",12
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to the package of color charts, which should be on the table in front of you. 1/ The first page as usual shows the 3-month deposit rates: current, 3-month forward, and 9-month forward. Since your last meeting, there have been small but noteworthy changes in interest rate expectations. In the United States, the top panel in red, you can see that the 9-month forward 3-month rate has slipped below the current 3-month rate. Even though this negative gap is small--a dozen basis points or so--it is the widest on the chart since the January period. I think it reflects a growing chorus of voices in the market, particularly in the last 10 days, who are increasingly confident that the Committee's next move will be an easing action. In the middle panel, as you can see, the German 9-month forward 3-month rate also has crept a little lower in recent weeks. I think it still reflects the anticipation of an increase in European rates sometime over the coming months. I believe it is particularly noteworthy that the 9-month forward 3-month rate is actually trading around levels just above 3.8 percent where most people just a month ago were expecting the European Central Bank's 1-month policy rate to be set next January. So, that reflects quite a reduction in expectations over the last couple of months. In the bottom panel in green, you can see that both the 3- and 9-month forward 3-month rates in Japan dropped distinctly below the current 3-month rate following the selection of the new LDP leadership team, but those rates recently have bounced back up a bit. As I look at the last 14 months of interest rate expectations in the leading industrial nations, two things strike me. First, the current trepidation in global capital markets is not a consequence of the perception that the leading central banks are about to do anything. There is no such expectation. Secondly, it strikes me how far markets have come over the last 12 months in giving weight to the risks of deflation, however they imagine them to be. A year ago at your August meeting, I introduced my four characters in pursuit of a return, the old and the new paradigm pessimists and optimists. At the time I introduced the new paradigm pessimist who was anxious about deflation and global capacity glut leading to competitive devaluations, I think only Governor Kelley had a kind word to say about the new paradigm pessimist who he thought should not be overlooked.",525
-fomc-corpus,1998,He is always nice. [Laughter],9
-fomc-corpus,1998,"Today, at least as the market sees it, the nation with the second largest economy in the world, Japan, and the nation with the largest share of the world's potential labor supply, China, are both experiencing distinctly falling prices. Moreover, the premier of China is no longer worrying about maintaining the pace of investment in order to prevent inflationary bottlenecks. Instead, he is now talking about how China is trying to invest its way out of deflation. It is this context that I think we should keep in mind in our effort to understand how the markets are looking at the question of whether China will devalue its currency. I think that implicitly this question is seen, rightly or wrongly, as representing something of a turning point for the markets--from a world they are familiar with to one they are less familiar with, that is, a deflationary world. Turning to the second page of charts, on the left side are three panels showing foreign equity prices, German and U.S. equity prices, and German and U.S. 10- year yields over the period from last July to the present. On the right hand side are three panels depicting the same market movements since the beginning of July this year. Markets have gotten a little ahead of me since I prepared this chart, but let me focus on the right hand side first and make a point. I think we can see in retrospect that the combination of the Chairman's Humphrey-Hawkins testimony this July and Mr. Obuchi's selection to lead the LDP were turning points for global market expectations. Now, I want to be very clear. In both cases, the outcomes were as the market expected but not as the market hoped. Market participants were engaging, I believe, in some wishful thinking, hoping to be pleasantly surprised. With respect to the Humphrey-Hawkins testimony, the market was hoping that the Chairman would say something rather kind and benevolent. Instead, they heard him say exactly what he said in June at his JEC testimony, namely that he was more concerned about the risks of inflation than those of deflation, and they heard him testify with what might be characterized as a ""make no mistake about it"" delivery. With respect to the selection of the LDP leadership and the new Japanese government, again the market was hoping to be pleasantly surprised, thinking that perhaps the Japanese could find their own FDR. So far, it does not appear that they have. Thus, looking back, I think the market's two self-generated disappointments can be seen as the last sneezes on which the start of the recent equity market declines might be blamed. I do not have charts depicting some of the market movements in the last two days that reflect the Russian devaluation. Let me just note that on Friday both the German bund market and our Treasury market experienced some extraordinary inflows. There is still a flight to quality into both core Europe and the United States. The details are still coming out for the Russian devaluation and debt restructuring announced yesterday. Market assessments are that the Russian program is better, at least insofar as can be judged in the first day or so, than they might have feared. However, I think there is also a great deal of anxiety about how trades will be settled, and this is causing considerable market commotion. The ruble was fixed today at 6.8 to the dollar, but it is trading around 7, at least in the interbank market. But according to the reports that we have, the ruble is already trading around 9 in the black market. I do not pretend to understand, and therefore I am not comfortable explaining, how it is that the Dow thinks this is great news while the Bolsa and other emerging equity markets think it is bad news. I think we will have to wait a few days to see how this plays out. I would note that the devaluation of the Thai baht had looked pretty good on day 2 also. I think we have quite a few risks ahead of us particularly in the days ahead when the collateral that has underpinned much of the leverage in the Russian financial markets starts to be liquidated as counterparties figure out what trades are being settled and what trades are not. There is still a great deal of uncertainty there, but I cannot pretend to be up to the minute on these developments. Turning to the third page, you will see three different charts that depict changes in dollar exchange rates since July 1997. In the top panel dollar exchange rates, indexed to last July, are shown against a number of currencies as well as the Bank of England's trade-weighted dollar. In the middle panel dollar movements are shown against the yen and the mark. The changes are comparably scaled in the middle panel. That is, given percentage changes for dollar/mark and dollar/yen are the same on the chart and permit a comparison of how the dollar has moved against the yen vis-a-vis its movements against the mark. The bottom panel, again comparably scaled, shows the movements of the yen against the mark since the beginning of July 1997. Given the dollar's movements indicated in the top panel, my point, Mr. Chairman, is that we are quite fortunate in my view that the world is not talking about too strong a dollar but rather is focusing its attention on too weak a yen. There are some reasons for our good fortune. Not the least is the fact that policy inertia is most evident in Japan and that the yen is weak against both the dollar and the mark, as you can see in the bottom panels. The fact that the yen is weak against both currencies has translated into a remarkably stable dollar-European currencies relationship over the last year and a half as evidenced by the green line in the middle panel for dollar/mark. As I noted a moment ago, investments both in the last few days and over the last few months have been pouring out of emerging markets into core markets. This flight to quality is what has made our 30-year yields so low and has reduced German 10-year yields to below 4-1/2 percent. Because Europeans historically have been the loudest to complain about too strong or too weak a dollar, I think the relative stability of dollar/mark is obscuring the public's appreciation of the dollar's strength against a lot of other currencies. For example, we passed through new highs against the Mexican peso and the Canadian dollar. Another way to think about the strength of the dollar is to look at how stable the dollar/mark relationship has been and to realize that we are in the middle of the period in which, as I would have expected and we hear anecdotally, there are significant flows into Europe in anticipation of the creation of the euro. Those flows are not going to occur in January after the euro is a fact, but people are trying to position themselves in anticipation of its creation. Again, with bund yields at 41/2 percent, we see that the bund seems to be the happy place to invest in anticipation of a successful launch of the euro and also to hedge against its failure. Turning to the fourth page of charts, you can see in the top panel the September Eurodollar futures contract as it has traded from May to the present and the November fed funds futures contract. I want to make two points here. First, you can see the slight decline in yields in the last few days as expectations of an ease in policy, not immediately but in the future, have come into the market. What I think is much more noticeable in the top panel is how flat and boring these movements have become since your July meeting compared with what they were earlier in the spring. There is much less a sense of ""push me/pull you"" in the interest rate markets and expectations have gone very flat without a lot of rate movement. The bottom two panels show something that I depicted several meetings ago, which is the positive carry of on-the-run Treasury issues. The on-the-run Treasury yields are shown in the red dots and the blue dots represent the term-to-date financing for each of the on-the-run issues. The gap between the two gives some sense of the positive carry that the dealer community and leverage participants are still experiencing in pricing on-the-run Treasury issues. I want to make clear that the general collateral rate that applies to most Treasury securities is still close to the funds rate, and therefore there is not as much positive carry for most off-the-run issues. However, the price discovery process is dictated by the on-the-run issues where there is depth, liquidity, and trading volume. Even as the yield curve has been squeezed to below the funds rate, you still can see the very modest positive carry in the on the-run issues. Turning to open market operations on the next page, activity in the federal funds market has been mostly uneventful since your last meeting. Funds traded at very elevated rates on one day when wire transfer problems bottled up a very large amount of funds at a major money center bank. That bank sold funds in the market after the wire was extended. Given the very firm rates we saw around the turn from June to July, we tried to anticipate similar pressures at the latest month-end turn from July to August, and we laid in some repos in advance. We seem to have succeeded more or less in calming the market in this case. Yesterday, we had quite an elevated funds rate, which is not depicted in this chart. August 14, the last date shown in the chart, was on Friday, and the somewhat higher range of trading on that day occurred in anticipation of market pressures associated with the settlement of the Treasury's refunding yesterday. There was in fact a great deal of pressure in the market yesterday, but that seems to be behind us. We made an outright purchase of $1 billion of securities on August 3, and we will be looking for opportunities to make additional permanent injections of reserves in the coming days. One final point, Mr. Chairman: On the last page of my handout is a list of primary dealers. A number of Committee members and others in the System have asked me how many dealers there are. You need a scorecard to know the players at present. In the top half of the page, you can see the 26 dealers whose status has not changed in the last year. On the left side of the bottom half of the page, you can see the list of dealers 27 through 39 as of August 1997. At the bottom, you can see the three withdrawals that have occurred since then: Yamaichi, Eastbridge, and Sanwa. Sanwa was the most recent firm to withdraw from dealer status. They were aware that we thought of them as one of our weaker counterparties, but their decision to close their operations was unlike that of Yamaichi and Eastbridge: It was not forced on them by the market or other events but reflected a business judgment on their part. A dealer operation was not in the mix of activities that they thought would be profitable for them in New York. In the middle column for August 1998, we have listed the mergers that have been effected to date. On the right side, you can see that we expect a couple more mergers to take place and have two pending applications for dealer status. I want to make clear that we do not have the ""aspiring dealer"" category, but it still takes some time to work things out with a firm that has approached us to become a dealer. Mr. Chairman, we did not conduct any foreign exchange intervention operations during the intermeeting period. I will need the Committee's ratification of the Desk's domestic open market operations, and I will be happy to answer any questions.",2372
-fomc-corpus,1998,"The black market ruble is selling at 9 and the fix was around 7. What are the mechanics that allow that to happen, and secondly, which of the two rates filters into the price inflation structure? In other words, which rate affects import pricing?",53
-fomc-corpus,1998,The right answer is that I do not know.,10
-fomc-corpus,1998,That is the wrong answer! [Laughter],10
-fomc-corpus,1998,It is the only correct answer that I am able to give. I think the most important point is to be very skeptical about the interbank fixing at 6.8 or 7 rubles to the dollar. It is best to assume that that is a number that someone in the central bank or a couple of banks have decided to post on the screen. I don't know whether there is any volume behind it at all.,85
-fomc-corpus,1998,Is there a measure of volume in the black market?,11
-fomc-corpus,1998,"By definition, we don't know how to measure that. We don't even know whether the black market is experiencing a deep day or a thin day.",29
-fomc-corpus,1998,Some black markets are blacker than others.,9
-fomc-corpus,1998,"Yes. I'm afraid I cannot help you there, Mr. Chairman.",14
-fomc-corpus,1998,"I don't know either, but my guess would be that the fixing rate is a rate at which people have agreed ex ante to settle certain contracts. Ultimately, it should provide some guidance, but it doesn't necessarily provide any in the short run. The black market rate presumably depends a bit on where you are and who you are and which black market you are talking about--the foreign exchange kiosks outside the railway station or the large transactions. I think there is a big difference between those. Over time, we could see a black market in Russia that was very important in terms of its effects on import pricing and the inflation structure or one that was of only minor significance because it would be the place where one might go to take $100, not $100 million, out of the country. The Russians have essentially brought their foreign exchange and financial markets to a halt. In time, as they announce what they are doing with the GKOs and what they are doing with the 90-day suspension of debt repayments, one would think that these things will come together. For a while, though, I would assume there will be a number of different rates depending on the nature of the underlying transactions. I guess that's as far as I would go, which is more words but less substance probably than Peter Fisher conveyed.",260
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,This is an easy question.,6
-fomc-corpus,1998,Good!,2
-fomc-corpus,1998,What exactly did the Russians do?,7
-fomc-corpus,1998,That is not an easy question!,7
-fomc-corpus,1998,They floated their exchange rate.,6
-fomc-corpus,1998,To a band?,4
-fomc-corpus,1998,"They had a band before, but they were really operating with a heavily guided, narrow interbank band. However, they floated the ruble in a wide enough band that it is trading, at least for the moment, within that band; it is not yet at the lower limit. They announced that they were going to restructure their internal official debt in the form of the GKOs, which are obligations with maturities of less than one year, and their OFZs, their more than 1-year obligations. They announced a debt moratorium or suspension of controlled payments, and they clarified that announcement slightly this morning to say what was included and what was not. They excluded debt to the EBRD, state and local debt, and some other categories.",152
-fomc-corpus,1998,So they excluded foreign official types of debt?,9
-fomc-corpus,1998,They have excluded foreign official obligations.,7
-fomc-corpus,1998,What about private-sector debt?,6
-fomc-corpus,1998,Private-sector debt is subject to a form of temporary capital control.,13
-fomc-corpus,1998,Just the external private-sector debt--debt to foreign lenders as opposed to debt within the country?,20
-fomc-corpus,1998,"Yes, debt owed to foreign lenders. The trouble is that the linkages are quite high. It is a little odd to read in the wires that Russian banks have borrowed abroad in order to invest in GKOs, which are obligations denominated in rubles. That is not exactly what one normally would think would be the way so-called financial institutions should operate. That has led to a lot of problems and, of course, there has been a lot of financial engineering going on relating to those transactions. That has created a lawyers' paradise.",108
-fomc-corpus,1998,"Yes, with no laws.",6
-fomc-corpus,1998,"Well, lots of laws, maybe no justice! [Laughter]",14
-fomc-corpus,1998,"Just a small follow-up question, which may be harder. Why? Were they really broke?",19
-fomc-corpus,1998,"I think the answer to that question is ""yes."" They had lost about $5 billion in reserves, most of it in the last couple of weeks since their program was put in place. It was quite clear that the new program approved by the IMF on July 20 had not stabilized confidence. They were facing an external and internal financial crisis. The only difference is that they did it with $10 billion of actual foreign exchange reserves still in the bank rather than zero. One might argue that it is better to take such actions sooner rather than later.",110
-fomc-corpus,1998,"So, you think they really did have the $10 billion?",13
-fomc-corpus,1998,"Yes. Their dwindling reserves combined with the momentum in the market last week did not, I think, give them much choice on Monday. Both of their actions are regrettable, as has been amply highlighted. Abandoning the peg means, at least for the moment, that they put in jeopardy the one success they have had on domestic inflation. With regard to what might be viewed as their internal defaults, I think that will be mostly a matter of restructuring and refinancing their internal debts, though that process gives rise to some trepidation. It is hoped that there will not be a confiscatory refinancing in real terms, and in that sense one might argue that they will just be leveling the playing field that is particularly oriented toward the domestic fiscal problem. Even making relatively modest assumptions about how much they have achieved on the fiscal side, they have a primary surplus. Their problem relates to the fact that they have accumulated a lot of debt recently, and they have very high interest rates.",199
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Peter, at the beginning of your remarks you made reference to market concerns about Japan in two ways, deflation and weakness of the yen. This may sound like a continuation of a similar discussion about Japan at the last meeting or some of the previous meetings. What adjustment process do people really think needs to take place in Japan? When markets are unfettered by various kinds of intrusions, prices provide information. We have seen numerous examples in the last couple of decades of governments, central banks, and regimes of one type or another--in the former Soviet Union, Latin America, and elsewhere--that have dismantled various barriers to the free flow of goods such as tariff and non tariff barriers, the movement of products if not labor, and obstacles to financial flows such as capital and other controls. We have seen as a result that the law of one price takes over and the economies in question move toward equilibrium in global markets--those for goods as well as assets. If we start from where Japan was some years back and if--maybe a big ""if'--Japan is in the process of gradually transforming itself into something that is more like a market economy, they will have to have either deflation or devaluation. They cannot get from current domestic yen prices to world market prices without one of those two things happening. Now, the world does not want them to have deflation and does not want them to devalue their currency. What do they want them to do, impose controls?",298
-fomc-corpus,1998,"I don't think the world or market participants disagree with your analysis. I believe the dominant view is that the yen will grind lower from its current level. That is the market consensus forecast for exactly the reasons you described. Now, the market has gotten itself into a bit of a loop by becoming persuaded that a depreciating yen will force the devaluation of the Chinese yuan. I don't think that follows from a macroeconomic perspective. It is the absence of Japanese demand that is affecting the rest of Asia, not the behavior of the yen per se, even if that makes things worse. But there is a deeply imbedded expectation in the market that further yen weakness will lead to a devaluation of the yuan and the Hong Kong dollar. That is where the market gets itself into a tizzy and thinks that such an outcome will be the end of the world as they know it. I am impressed by the number of unabashed dollar bulls I talk to who say that if the Japanese do the right things, if they suddenly find their FDR and start to clean up their banking sector, the yen will continue to weaken. But if they don't get their act together and they continue to dawdle and delay, the yen is still going to weaken. The result would be positive for the dollar in either case. The dollar bulls are unabashed in asserting that view, essentially along the lines that you outlined. It is the Chinese connection that I think causes the anxiety.",292
-fomc-corpus,1998,"What about the differential between tradable goods prices in Japan and the average general price level, which is really a crucial difference there relative to the rest of the world? What do the markets think about that resolution?",42
-fomc-corpus,1998,How is it going to be resolved?,8
-fomc-corpus,1998,"In other words, how do the traders view a continuing weakening in the yen and Japan's ever increasing trade surplus?",23
-fomc-corpus,1998,"I think they recognize a certain tension there. That is true even of those who assert that the best probabilistic forecast of dollar/yen is that it will go through 150 and keep going. If we ask the same people who make that forecast when they plan to start to ""bottom fish"" and buy cheap Japanese assets, the quick response is that the time to start cost-averaging in is now. They do not see any contradiction there. I think that is the traders' answer to your question. They are in effect acknowledging that the turn may occur sooner than they are forecasting, which itself is ironic.",123
-fomc-corpus,1998,"If their position does not appear altogether logical, it is not.",13
-fomc-corpus,1998,"I appreciate that, Vice Chair. [Laughter] President Hoenig.",15
-fomc-corpus,1998,"Peter, I think you just answered this question, but given the confusion in the market, I will ask it again. When you made your earlier comments, you indicated that the market has suddenly begun to think about deflation though it is uncertain about that prospect. How is that reflecting itself in the market? In other words, how is this new attention to deflation manifesting itself in the market's actions?",82
-fomc-corpus,1998,"One thing I alluded to is the continuing demand for bunds and Treasuries, which is indicative of uncertainty. The reason for the uncertainty is that investors do not understand the deflationary world, and the result is a flight of capital. The flight is not motivated so much by a search for quality as it is for certainty, to something investors think they know how to price. As I have said a few times before, 18 months ago I could not find anyone in Germany who thought Germans would hold 10-year bunds at a yield under 6 percent. They saw that rate as a rigid floor. Now the yield is below 41/2 percent. Something affecting global investor sentiment has changed. That is how I would put it. Now, that is not an entire explanation, but it's the best that I have.",169
-fomc-corpus,1998,Better than mine!,4
-fomc-corpus,1998,"How do you read the rise in risk spreads in the last three or four months--junk bonds vis-a-vis Treasuries, BAA's versus single A's, that sort of spread? They are not huge by any means, but they sure are consistently higher.",54
-fomc-corpus,1998,"I may be too much of an optimist here, but I think there is a growing appreciation that credit quality may matter some day.",27
-fomc-corpus,1998,That is also a deflationary indicator.,9
-fomc-corpus,1998,"Absolutely. In a deflationary world, lenders and investors had better start figuring out who is going to remain in business because not everyone is going to make it.",33
-fomc-corpus,1998,"Any further questions for Peter? If not, would somebody move approval of the Desk's operations?",19
-fomc-corpus,1998,"Move approval of the domestic operations, Mr. Chairman.",11
-fomc-corpus,1998,Thank you. Without objection. We now turn to Messrs. Prell and Truman.,18
-fomc-corpus,1998,"Let me start with a few words about the June trade data that were released this morning. The deficit was $14.2 billion compared with a downward revised $15.5 billion in May. As readers of the footnotes in the Greenbook know, we put down an estimate for the June deficit that was somewhat larger than the one that was implicit in BEA's preliminary estimate of second-quarter GDP. We had weaker exports of goods and services, stronger imports, and a deficit of $16 billion. That deficit was similar to one of the consensus market reports and a bit higher than another, though both were above the BEA estimate. In fact, exports declined further in June by about the magnitude that BEA assumed but by less than we had estimated. The decline in imports was more than BEA assumed and substantially more than we estimated, suggesting perhaps a bit less strength in underlying domestic demand than we might have thought. Despite this positive surprise, the effects of the Asian crisis on our trade balance are not over. Our bilateral trade deficits with the Asian economies, including Japan, widened further in the second quarter. Moreover, we had a decline in real exports of goods and services for a rare second quarter in a row. The differences between the staff and BEA estimates for real net exports in Q2 from the now-published data merely reduce the deterioration from almost $60 billion--measured in chained 1992 dollars--to slightly less than $50 billion at an annual rate. Our quick look at these data suggests that, taken alone, they would imply an upward revision of about half a percentage point to second-quarter growth. However, there is likely to be a substantial offset in producers' durable equipment. To state the obvious, the June trade data do not alter the contour of our outlook for the external sector from the one we have presented for the last seven meetings: continuing restraint on aggregate demand in the United States associated with very weak growth on average abroad and a strong dollar. But we see some diminution in these trends. Though it is difficult to imagine at times, growth abroad will eventually return to trend. In our outlook, growth picks up next year, but it remains extraordinarily weak. We believe that the modest pickup in foreign growth on average--with perhaps some associated modest uptick in interest rates abroad--the success of the euro's introduction, the stabilization of the Asian crisis, including importantly the situation in Japan, and the widening U.S. current account deficit will be enough to bring about some decline in the dollar next year. As I am sure you can appreciate and as was amply demonstrated in Peter Fisher's report and by the discussion that followed it, we once again had to assemble a forecast against the background of substantial turbulence in global financial markets that has been associated with considerable uncertainty about the course of policies and other developments in much of the rest of the world. While most of the major industrial countries seem to be on solid growth paths, Japan is a glaring exception. In fact, one might argue that the uncertainty about its prospects are indicative of the risks in the entire external forecast. So, let me say a few words about our outlook for Japan while staying away from the deflation debate. I proceed from the assumption that Japan's downward spiral eventually will come to an end. We have a bottom built into the forecast but not much of a recovery. Four consecutive quarters of negative growth are projected to end this quarter. For the remainder of the forecast period, Japanese growth averages less than one percent at an annual rate. While net exports impart a small positive contribution to Japanese growth throughout the forecast period, that growth is driven almost entirely by government spending. We have a swing in the structural budget deficit of 3/4percentage point this year and a bit more than 1 percentage point next year, including a large dose of permanent personal and corporate tax cuts and some additional spending that is not yet on the plate of the Diet. However, private domestic demand contracts through the middle of next year and is flat thereafter, even with substantial tax cuts. Thus, we have at best the hint of a turnaround in Japan based on the assumption that the Japanese authorities will continue gradually to get their collective act together on fixing the banking system and the macro economy. For the developing countries in Asia, we have five quarters of negative growth extending into early 1999 and a modest recovery thereafter. Our basic story is that external and internal financial conditions stabilize, recovery begins in the traded goods sector, confidence improves, and investment begins to pull out of its deep swoon, financed primarily from internal sources of funds--not by domestic banks. Outside of Asia, we have weakness in Latin America owing to the spillovers from Asia that add to investor caution and boost interest rates. With slowing growth in Canada and the United Kingdom because of the rise in real interest rates in both countries, there is not enough growth in Euroland to provide much impetus to aggregate foreign growth. Weighted by U.S. nonagricultural exports, the four-quarter growth of foreign GDP was less than 2 percent in the second quarter of this year and will have remained below that rate for six consecutive quarters ending in the third quarter of next year. The only comparable period over the past thirty years was in 1982-83. By this metric, the Asian crisis and its surrounding events and aftermath are now projected to match the scale of the Latin American crisis in the early 1980s. To review a bit of history, in that case the dollar continued to rise through early 1985--albeit with a different U.S. fiscal-monetary mix--and our current account deficit peaked at 3.6 percent of GDP in 1987, the year in which our net international investment position turned negative. In contrast, we project that the current account deficit as a share of GDP will exceed the previous peak by early next year and that our net international investment position will be an estimated minus 20 percent of GDP. There are still considerable downside risks to the outlook, as illustrated by the material on the possible implications of recent Russian events that was circulated to the Committee late yesterday by Peter Hooper. At the same time, there are some upside risks as well. Without spelling them all out, let me just say that at some point our outlook for the external sector will be seen in hindsight to have been too pessimistic. Nevertheless, I suspect that the next cycle of external excitement will focus on our external position and the dollar. The reason is that unless growth in the rest of the world comes roaring back, we are likely to see a continuing erosion of our external position from what is already a rather low base, and investors will see dollar depreciation as the only way to narrow the gap. Moreover, we don't know how much of the recent strength of the dollar has been driven by safe-haven or risk-aversion considerations. It is suggestive, I think, that the dollar did not rise against either the DM or the yen yesterday following the Russian announcements. Once Japan and the rest of Asia stabilize, the air could come out of the dollar's balloon in a rush, and I could find myself in another location drafting vacuous statements about the excessive and unjustified weakness in the dollar. Mike Prell will now add his own perspective on the outlook.",1469
-fomc-corpus,1998,"Frankly, I'm hard pressed to see where I can add much of value to what you already have heard this morning or read in the Greenbook. Much of the drama during the intermeeting period was on the international side, which Ted has just covered. The domestic development that has attracted the most attention, the decline of the stock market, has been pretty much of the dimension we predicted last time and for the reason we gave--namely, disappointing corporate earnings. Looking ahead, our forecast has been altered only a little, mainly to incorporate the more negative outlook for the external sector and to deal with the additional short-run gyrations associated with the longer-than-anticipated GM strike. The basic story, however, remains one of a deceleration in economic activity and some worsening of inflation. Perhaps the interesting point is that we appear to be predicting a considerably weaker expansion of aggregate demand than are the majority of forecasters. For example, the latest Blue Chip consensus shows nominal GDP growing around 4-1/4percent over the six quarters of our projection period--the better part of a percentage point above the Greenbook prediction--even though their short-term interest rates are, like ours, flat. I can't tell you for sure why our forecast differs from the average view of the several dozen Blue Chippers, but the available detail on their forecasts contains one compelling clue: Only two members of the Blue Chip panel have real net exports in 1999 as low as the Greenbook forecast, and the consensus view is that the trade gap will widen only around $25 billion over the next six quarters, versus more than $100 billion in our forecast. Even allowing for the endogeneities that President Poole emphasized at a prior meeting, I feel quite comfortable in asserting that this difference is a key factor in our more subdued outlook. While I can't prove who is right on this, I will note--because humility would prevent Ted from doing so--that in the past couple of years he and his colleagues have been much more on track than the private analysts with regard to the deterioration in our trade position. Of course, even if we don't seem to be at odds with the Blue Chip panel with respect to the tenor of the domestic demand outlook, that doesn't mean we're right on that side. Expectations of a slackening of demand have repeatedly been disappointed in the past couple of years, and there is no assurance that it will materialize this time. We continue to think that the performance of the stock market has been, and will be, a key factor. The revisions to the national income accounts have done nothing to diminish our belief in the significance of the ""wealth effect."" Although the recent slide in equity prices has erased only a modest portion of the gains that had accrued to investors, the mere cessation of wealth increases relative to income would remove an impetus to household demand. And this, in turn, would prompt businesses to curtail the growth of their inventories and fixed capital. This is, of course, the scenario that we have described in our forecast. We have the Wilshire 5000 running at a level around 10,000 through next year; it closed less than one percent above that level yesterday after exceeding 11,000 a few weeks ago. As we noted in the Greenbook, even with that correction, shares still seem to be very generously valued, given what we see as the plausible scope for corporate earnings growth from the high levels already attained. But, while some hints of rationality perhaps have crept into the market, one still hears people saying that there is no other good place to put investible funds. A sure return of 5 or 6 percent on a fixed-income investment doesn't provide much competition for equities that, as surveys have repeatedly shown, people expect to yield double-digit returns over the coming years. To be sure, there were signs of some hesitation in flows into equity funds during the recent market downdraft, but we've seen such episodes before in this long bull market. It seemingly takes merely a whiff of favorable-news oxygen to get the bulls running again. In fact, yesterday they even rallied the market on what might have been construed as bad news. Under the circumstances, we've thought it wiser for now to treat a deeper market decline as an explicit risk rather than as part of our baseline projection. Let me turn, then, to the inflation side of the ledger. Given our softer real outlook, it probably isn't surprising that we also have a more moderate inflation forecast than the Blue Chip. Again, without knowing their perspective about such things as the dollar, oil prices, and crop prospects, it's difficult to pinpoint the sources of the difference in forecasts. I think we've given due emphasis in the Greenbook and in yesterday's Board briefing to the uncertainties that attend the price outlook. The trimming of our core inflation forecast since the last meeting represents in large measure a fairly straightforward reaction to the slightly weaker outlook for aggregate demand and the lower import prices that now appear likely. But, at the margin, we've also been moved by some of the recent economic data to give a little more weight to the stories we've been telling all along for why inflation should be slow to pick up even with such tight labor markets. Those data have included a smidge lower readings on wages and prices recently than we had predicted. Given that the July CPI was to be released this morning, just before my briefing, moving our forecast farther below the consensus obviously was risking some immediate embarrassment. But the Fates have been kind, with the two-tenths increases in the overall and core indexes being in line with our expectations. The bottom line of the inflation story is that, although labor markets are tight, experience suggests that prices respond only slowly to such pressures. And, in the recent period, and for a while longer, the underlying tendency for inflation to pick up in response to those pressures is being offset by favorable shocks with respect to the terms of trade and supplies of food and energy--not to mention an ample amount of unutilized factory capacity. Some of the favorable shocks are expected to turn around next year but not with sufficient force to do much damage within our projection period. We'll be extending our Greenbook forecast through 2000 next month, and I hesitate to venture now beyond our current horizon. However, recognizing that the lags in the effects of policy on inflation are long, I probably should offer the observation that, with a stable funds rate, there's nothing in the direction of our present forecast that points to a take-off in wages and prices in 2000. Of course, with things as unsettled in some important areas as they are now, we'll have to take a further close look at this over the coming weeks. That concludes my prepared remarks, Mr. Chairman.",1358
-fomc-corpus,1998,"With regard to the year 2000 problem, I noticed that the Greenbook forecast does not have any acceleration in nonfarm inventory investment for the fourth quarter of 1999. I have no doubt that as we move toward an unknown Y2K phenomenon, just-in-time inventories will get a little disrupted and concerns are going to arise that will create some inclination to put a few extra goods on the shelves, so to speak. Has anyone thought about that as a potential cyclical event? My question is whether the numbers that are involved are so small that they are not even remotely of an order of magnitude to show up in forecasts such as these.",130
-fomc-corpus,1998,"We have not anticipated that prospect in our forecast, as our numbers might suggest. The one thing that we have anticipated is a pattern of earlier than usual acquisitions and installations of computer equipment over the next few quarters in an effort to avoid doing a lot of that in late 1999. But I take your point; what you describe is possible. Certainly a lot of people may consider stockpiling some cash over that weekend. That is an entirely different issue.",92
-fomc-corpus,1998,That inventory will be up! [Laughter],10
-fomc-corpus,1998,"Obviously, we will have to confront this question more concretely when we write down year 2000 numbers in our Greenbook forecast for the next meeting. We will do that with some trepidation. I don't recall hearing anything from business firms that suggests they have focused very much attention on this matter thus far. In fact, even in talking to some of the computer firms, we find that they sometimes seem surprised when we raise the question about business strategies with respect to equipment purchases toward the end of next year. It is a bit puzzling that people seemingly have not given more attention to that question, but there is, I think, plenty of time for them to undertake that kind of stockpiling.",142
-fomc-corpus,1998,"Let me put it this way. The one forecast that I will make unequivocally--with almost the same amount of fervor as Governor Kelley displayed in his forecast of currency inventories--is the media's response to this. From their perspective this is the equivalent of an asteroid hitting the earth at 12:01 a.m on January 1, 2000. The one thing we can be certain about is the extent to which this Y2K issue will be unbelievable grist for the media. Two days before the start of the year 2000, that is all that is going to be in the newspapers. Two months before, there will be enough of it to really attract people's attention because there is no way that anyone can guarantee that the event has a zero probability of being disruptive. So, it will get everybody's attention and it is going to affect business behavior. People make decisions in the context of relative degrees of certainty, and this will be a major uncertainty without historic precedents. No one has a clue about what will happen under these conditions.",214
-fomc-corpus,1998,"Obviously, firms that provide goods that their customers might want to add to stocks will have to decide whether to increase production or just let their shelves be depleted and then not have to reverse an increase in production. With the just-in-time production chains, there may have to be some producer responses.",58
-fomc-corpus,1998,"What happens is that business firms that fail to meet the demand of their customers lose market share. Customers are going to build inventories, and the only question is to what extent. If company A does not supply a product, company B will. This is going to be a very interesting forecasting exercise. You did say that you're going to extend your forecast to include the year 2000 in the Greenbook for the next meeting?",85
-fomc-corpus,1998,We're looking forward to it! [Laughter],10
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I have two questions. Ted, when I went to Asia in June one of the comments that I heard, particularly in Korea, was that a lot of exporters were facing tremendous difficulties in getting financing to support their businesses. More recently, there have been discussions about a shortage of shipping containers and the need actually to build them in Asia. The reason I guess is that most of the containers are in the United States at this point. Do you think these developments are major factors affecting Asian exports to the United States? If these two problems were to be dealt with, would that lead to a significant increase in our imports from Asia?",129
-fomc-corpus,1998,"I would say a couple of things. I think your sign is probably right. I believe the problems are still there; we still hear these reports. The question is one of magnitude. It is fair to say that our imports have not increased as much as one might have thought as a result of this crisis. But we have to be a little careful about that conclusion because those imports have held up in nominal terms and their prices clearly are down. So, in real terms there has been an increase in imports from Asia, though perhaps not as much as certain incentives would suggest there could have been. Therefore, it would seem to me that in time, one way or another, if the incentive is there and remains, people will find a way around the obstacles and there will be some upward impact on our imports. On the other hand, to the extent that the growth of the U.S. market slows, not all of the higher Asian exports may be coming to the United States. I find it is quite interesting that the one area where we seem to have been about right in our forecasts is the extent to which the swing in the trade position of the developing Asian countries has been shared among importing countries. Some considerable fraction has gone to Japan, notwithstanding its own situation, and a considerable fraction to Europe as well. Indeed, in line with some comments at recent meetings, European domestic demand has been much stronger than we expected before the crisis, and European net exports have been much weaker. Thus, there has been a parallelism in this situation.",308
-fomc-corpus,1998,"Thank you. Mike, I thought the staff survey on recent trends in compensation practices produced some interesting results, as did the related discussion of the ECI. One thing that struck me is that variable compensation practices clearly have become much more significant for many firms in different industries. In the past, at least when we had an economic slowdown, sticky wages were an important automatic stabilizer. Have you done any analysis that can give us some insight into how the more flexible compensation practices will in fact affect total compensation when the U.S. economy goes into a slowdown and what the effects on spending might be? I ask because it appears that we will be facing a different situation from what we have experienced in the past.",141
-fomc-corpus,1998,"We are engaged in a multifaceted research effort on that issue. In a sense, the work that the Reserve Banks were kind enough to do for us in conducting the survey is a small component of that research. We have been talking to firms, interviewing them in some depth, and we are going to be doing more of that. Our contacts emphasize that this is a new labor compensation regime and that flexible compensation practices will enable them to cut back on labor costs if the economy and their fortunes deteriorate. That outcome is untested and time will tell. We also are doing some statistical work at a micro level, using employment cost index data from the Bureau of Labor Statistics, to try to estimate at the firm level how businesses are managing in this new regime, perhaps by trading off various components of their compensation packages and so on. We hope to have some additional insights on this in the next several months, but I think this is something that ultimately will have to be tested in the real world by a real change in the cyclical situation. We will only be in the conjecture phase on this for now, but I think that too is a potentially meaningful exercise. I would stress that our projection of the ECI does not assume a major change in compensation behavior. Some of these compensation elements do not even show up in the ECI. That is another factor we need to take into account in thinking about cost pressures in the economy and how those may wax or wane. Basically, the most important element going forward is the potential role of the continuing low inflation that we are experiencing in damping nominal wage increases. On that basis, models embodying that mechanism suggest that there is considerable potential for deceleration in compensation increases over the coming quarters. As the pressures in the labor markets abate in our forecast, these factors combine going out through 1999 to produce what I think is likely to be some moderation in spending.",383
-fomc-corpus,1998,"One factor in thinking about the spending outlook is that it is conceivable that as variable pay becomes more important, profits will become less variable and labor income more variable. That is, when there is a slowdown in the expansion, more of it will show up in the form of a slowdown in labor income than in capital income. Past estimates typically have indicated higher marginal propensities to consume out of labor income than out of capital income than had previously been the case. If those propensities were to remain the same, the implication would be that consumer spending could be more cyclically sensitive. Arguing from first principles, however, one might think that those marginal propensities to consume would change if in fact people began to recognize that their labor income was indeed more variable now than in the past. In essence, the marginal propensity to consume out of labor income should shrink somewhat as consumers perceive that any movements in their labor income may now be more transitory than was the case earlier. Those are just some conjectures about how changing compensation practices could affect spending. Consumer income might become more variable and spending more sensitive to income changes if people continued to consume out of permanent income as they have in the past. That effect might be muted to the extent that their behavior actually changes when they recognize that the sensitivity of their labor incomes to changing economic conditions has increased.",271
-fomc-corpus,1998,There certainly are a lot of studies that suggest that the marginal propensity to consume would be lower if variable incomes were expected to regress to Friedman's original permanent income levels.,33
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,That might be true at least for those people who are not living essentially from hand to mouth. I think a lot of these flexible pay schemes tend to affect people who are in the upper income brackets and have no liquidity constraints.,45
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,Payments that are directly related to labor recruitment and paid to outside agencies in one form or another obviously are not included in measures of compensation per hour. But am I correct in assuming that such payments are of an order of magnitude that suggests we should be adjusting compensation per hour to include them as costs in our models that interrelate market tightness with wage change?,72
-fomc-corpus,1998,"Maybe not with wage change, but with total labor costs in some way.",15
-fomc-corpus,1998,I meant compensation.,4
-fomc-corpus,1998,"Theoretically you might want to include those payments as your argument suggests, but I don't think we have any data that quantify them. I suspect that they are not a huge element in the picture. On top of that, we have payments that actually go to employees that are not counted in the ECI. The reason is that they are regarded by the definitions used in the ECI as out of scope because they are recruiting expenses.",87
-fomc-corpus,1998,Shouldn't the value added of personal service or help service groups like Manpower all be directly related to this?,22
-fomc-corpus,1998,"Yes, except to the extent that in a sense they also are substitutes for the internal management of labor resources.",22
-fomc-corpus,1998,That is true.,4
-fomc-corpus,1998,"If you eliminate a janitorial function and outsource it to another firm, that firm is taking over various fixed administrative-type costs. The analysis gets complicated.",30
-fomc-corpus,1998,"In that sense, there is an argument for including internal costs of employment administration in those data as well.",21
-fomc-corpus,1998,"Obviously this is an incredibly complex matter. As I said, I hope that we are going to make some headway in our effort to discern the effects that some of these changing practices have on the cyclical variability of spending.",45
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I want to go back to your previous comments about folding in expectations about Y2K problems into the forecasts. In looking through a number of forecasts for this meeting, I noted that DRI seems to be the only one that explicitly deals with the year 2000 problem. However, it does so only in the context of a boom/bust scenario and not in their alternative scenarios--the baseline and the pessimistic scenarios as they call them. The scenario that they have had for some time puts us behind the curve in 1999, has us increasing fed funds rates to catch up with inflation at that point, and has the boom/bust scenario aggravated by an inventory accumulation related to the year 2000 problems. I had a feeling that their model results were rather marginal with regard to that inventory swing, at least insofar as they see the data. They already have a swing taking place in the boom/bust scenario and inventories feed into it in the same direction. Otherwise, inventories do not seem to have much of an impact on their overall statistical analysis, at least as yet.",218
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. First, on Cathy's point, I would think that even people who believe that there is not going to be a significant problem because of the century date change will find it prudent to stock up before the hoarders get all of the supply.",52
-fomc-corpus,1998,Only those who read or work on the Internet!,10
-fomc-corpus,1998,"I have a couple of questions that relate to the staff presentations. The first is directed to Ted Truman on imports. I don't know anything about the mechanics of putting the import data together, but it would seem to me that in times like this, unraveling the crosscurrents between volume effects and price effects is very complicated. A dollar today buys boatloads more of Indonesian goods than it did before. I do not know what is happening to the rupiah prices of goods, especially the costs of exportable goods. We have a retailer on our board who reports that he is importing a lot more from Asia, and his import bill has gone down. That says the volume effects did not swamp the price effects. How should we think about these import numbers, given this exchange rate and pricing problem?",159
-fomc-corpus,1998,"The answer to the first part of your question is that we have aggregate price and aggregate quantity numbers. The aggregate price numbers basically come from the BLS survey of import prices. There are problems with those import prices, and what we do is to take a nominal total and deflate by an index at various levels of detail to get real figures. The quality of the price data is substantially better than it was 20 years ago. We used to have something called ""the unit value,"" which really would have led you to ask this question. On the other hand, it also is not clear what we are now getting with the price data or what question they are answering. That's because it is unclear what the relationship is between the price that is quoted on an invoice and included in the index and the price at which the sale actually is made and embodied in aggregate demand. The other point is exactly what I was trying to say in response to Bob Parry's question. We do have disaggregated price indices by area, and we can see what has happened to the price index for the Asian countries. That has declined dramatically. You may then say that the nominal amounts of our imports from them have been flat, so the increase in real imports has been substantial. I think the only point that we can make here is that we have a J-curve effect. We might have expected that J-curve effect to have run its course earlier. I have not been able to look at the detail of the numbers that came out today, but there have been stories, for example, relating to some industrial supplies. You probably have heard additional stories about iron and steel, for example, some involving Korea. The trouble is that we have a third factor, which is the general weakness of commodity prices. In fact, one of the surprises in the data that came in today was that June exports and imports of industrial supplies were much less than we had anticipated. I asked the same question you are asking, is this shortfall nominal or is it real? The answer may be some of both. A lot of it may well be nominal, in which case real would be less. The analysis is very complicated. The other thing you want to remember is that although conceptually we think about exports and imports as being final demand, they are not. Very few imports go directly from the ship or the plane to the supermarket shelf. As a result, the way they get imbedded in the production and therefore the price structure is very complicated, and it probably has become more complicated in recent years. Just-in-time inventories, reduced transportation costs, and the reduced weight in GDP which the Chairman likes to cite mean that the way these things get integrated accounts for much less of GDP. That is probably one of the reasons why simple rules of thumb for exchange rate depreciation or exchange rate changes and inflation have tended to break down. Another reason may be that we are not talking about just two countries. We are talking about the increasing number of sources of imports to be traded, as in the Indonesia point that you raised.",617
-fomc-corpus,1998,"Thank you. I also have a question about the Greenbook's outlook for the U.S. economy and the emphasis on wealth effects. Following up on your response to Bob Parry, it seems on the surface that there might be some logic and even some indirect empirical evidence in support of these wealth effects. People are behaving in recent months and quarters as though their permanent income is either above or has risen relative to their measured income. The indirect evidence of that shows up in measures such as the personal saving rate and so on. I do not know how much weight to give to all of that. But suppose the central bank does give significant weight to that kind of phenomenon, how do we then avoid incorporating views about equity markets in the formulation of monetary policy? We would run into the problem we have discussed before about somehow using the level of the stock market or changes in the stock market perhaps not as an indicator but almost as an objective of policy.",189
-fomc-corpus,1998,"I do not think that you need to go that extra step. The stock market is in effect one of the financial market channels through which the impulses that the Committee generates through open market operations create a financial environment that influences the growth of aggregate demand. Exchange rates are another channel. We also would include the bond market and the shape of the yield curve. We can think about what the consequences of the Committee's actions might be with respect to the bond market if we were to change money market conditions. We also need to consider the effects on the stock market in that context, which may be harder, though I am not sure, than anticipating the effects on these other financial markets. In any event, the whole complex of financial variables does influence spending decisions. I don't think you can avoid that conclusion.",159
-fomc-corpus,1998,"That is the reason I asked the question. As I read the Greenbook and I think about the outlook for the balance of this year and next year and the emphasis you put on the wealth effects, I cannot help but think that my comfort level with that forecast depends on what I think about the outlook for the stock market. If the Dow Jones Industrials were to soar to 10,000 by year-end, how do I avoid that?",89
-fomc-corpus,1998,"If you felt that the market was likely to start to rally again, even against the fundamentals, and to spur aggregate demand in a way that you felt excessive in terms of the inflation prospects that would go with that, I think that would argue at the margin for considering a tightening of policy that you would not otherwise have wanted to institute were it not for that expectation. Now, what I think I heard from many people around the table is that they want to remain humble about their ability to anticipate movements in the stock market, especially nonfundamental movements. So, that might cause you to be reluctant to move with great force on a hunch about which way the market would go. But I think you have to have one. It is manifest in the behavior of the economy in the last couple of years that the stock market's movements are of considerable importance. You need to take a position on this. Mr. Chairman, I might just add one small fact. I can't say for sure that we have this nailed down, but I am told that our first look at the trade data suggests that about 3/4 of the imports of capital goods would be offsets to PDE. So, we would have weaker producers durable equipment expenditures than is written down in the Greenbook. However, the GDP effects are trivial. That is a tentative conclusion.",268
-fomc-corpus,1998,"Any further questions? If not, who would like to start? President McTeer.",18
-fomc-corpus,1998,"The Eleventh District economy has continued to grow at a healthy but steadily moderating pace. The summer's heat and drought combined with the unending financial and economic troubles in Asia are the two most important factors contributing to the slower expansion of the Texas economy. Unless the weather changes soon, this year's drought losses could exceed the $5 billion of agriculture-related losses that occurred in Texas in 1996. Cotton is the number one cash crop in Texas, and cotton farmers' losses currently are greater than during the 1996 drought. The impact of the drought also has been severe on the corn crop and on cattle ranchers. Although the drought is causing enormous financial strains on the agricultural sector, its effect on the Texas economy is fairly modest because agriculture is less than 1-1/2 percent of gross state product. The impact of the worsening Asian situation is being seen in the Eleventh District through reduced demand for semiconductors, lower energy prices, the stronger dollar, and growing strains in Mexico. Worldwide chip sales have continued to decline. As a result, a couple of manufacturers have shut down their factories three times this summer to ease the glut of memory chips. Sales of more sophisticated chips, such as digital signal processors, have been hurt to a much lesser extent by the situation in Asia. In spite of all this, we are seeing a considerable expansion of the resources going into the research and design of new chip technologies, particularly in Austin and Dallas. Oil and gas prices are very weak and my industry contacts expect them to remain so. A lot of new supply from non-OPEC producers is scheduled to come on stream in the near term. With the expectation that low oil prices are here to stay, a number of companies, particularly in Houston, are beginning to announce layoffs and other belt-tightening measures. As the dollar has strengthened, it has made energy cheaper in dollar terms but increasingly expensive in currencies that have weakened relative to the dollar. This currency value effect has reinforced the downward price effect from weaker Asian demand. Low oil prices continue to adversely affect the Mexican economy, and if this situation were to continue, it would place considerable financial strain on Mexico. The construction and service sectors remain strong in our region. Residential construction, especially apartment construction, has been robust. A shortage of labor seems to be as important or more important than the shortage of concrete, which I have mentioned before, in limiting the supply of new housing units. Office vacancy rates have begun to edge up slightly and rent increases have slowed. Employment gains in the private service sector remain strong, and wage pressures, if anything, have increased slightly. Turning to the national economy, the Greenbook is full of crosscurrents and, like the Bible, can support many different points of view. [Laughter] Real GDP growth slowed dramatically in the second quarter, but inventories were largely responsible. Wage inflation has picked up, but price inflation has not. Money growth has been excessive by historical standards, but market measures of monetary policy reflect a restrictive stance. Perhaps we should back away from the trees and try to see the forest the way historians might do so several years from now. What historians are likely to focus on looking back to 1997 and 1998 is the international crisis that began in Asia last summer and spread to several countries. Currencies and stock markets collapsed in one country after another. Financial conditions appeared to be stabilizing for a while, but they subsequently relapsed and a second round of turmoil ensued that included additional countries. During this period of growing deflationary pressures, with gold and oil and other commodity prices falling in dollar terms, the dollar rising against most currencies, the yield curve flattening, import prices falling, and most measures of price inflation declining, the FOMC adopted and then in my opinion held on too long to a bias toward tightening monetary policy whose implementation would have exacerbated these trends. In my opinion, the risks were pretty well balanced at our last meeting, and in my opinion the downside risks are greater today and the consequences of policy mistakes are greater as well. In terms of the global context and our nation's position in the world, I think it is time to talk about getting ahead of the curve by easing monetary policy.",850
-fomc-corpus,1998,"Mr. Chairman, I just want to make clear that while we were praying that we would not be humiliated by incoming information, there was no divine guidance when we drafted the Greenbook.",38
-fomc-corpus,1998,We never really suspected it! [Laughter],10
-fomc-corpus,1998,I did! [Laughter] President Moskow.,11
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Seventh District economy suffered a minor fender bender in June and July. The setback was only temporary, and we are back on the moderate expansion road now that the GM strikes have been settled and recalled employees are working overtime. It will take a few months before the inventory pipeline is completely filled, so light vehicle sales in August may still be affected by inventory shortages, as was the case in July when reduced incentives also depressed sales. Demand apparently remains solid as automakers indicate that light vehicle sales in August remain slightly ahead of expectations of about 14-1/2 million units at an annual rate. Abstracting from GM strike effects, it does appear that activity in some manufacturing industries has slowed over the past few months. In particular, Asian developments have adversely affected producers of paper, chemicals, food equipment, agricultural equipment, and some other heavy equipment. For most of these industries, however, strength in other export markets has offset at least part of the weakness in Asian demand. I spoke to a group of steel executives earlier this month and, as Ted Truman anticipated, they were quick to express their concerns about steel imports from Asia and declining prices for steel products. In our District, however, almost all of the recent weakness in steel output has been related to the GM strikes. We have seen some slowing in a few construction-related industries such as cement and gypsum wallboard. Housing activity remains at very high levels, but we are observing smaller increases than elsewhere in the country and smaller than we experienced earlier in the year during our unusually mild winter. Retailers indicate that consumer spending continues to surprise them on the upside and recent reports suggest no pullback in consumer demand. Labor markets remain very tight, and the Manpower survey to be released next week will show strong hiring plans continuing through the fourth quarter, with both the national and Midwest results after seasonal adjustment at the highest levels in the survey's 22-year history. The only weakness is in durable goods manufacturing where hiring plans have fallen for the second consecutive quarter. The Manpower survey results should be treated as confidential until they are released next Monday, August 24. Increasingly, we are seeing entire communities becoming involved in the search for qualified workers. For example, 2500 workers are needed for a new shopping mall opening up this November in a Detroit suburb. Recruiting is going on at high schools, colleges, senior centers, and social agencies like Goodwill industries. In addition, job fairs started to be held in June and will include one at the Pontiac Silver Dome this October. Significantly, the city of Pontiac is adding a bus line to the new shopping center and efforts are under way to get similar public transportation to and from Detroit. Business contacts in the manufacturing sectors continue to say that competition constrains their ability to raise prices. Furthermore, many of our farmers are caught between a rock and a hard place as weak Asian demand combines with expected record soybean and near-record corn harvests to push grain prices lower. But we have sighted some upward price pressures outside of agriculture. In the trucking industry, shipping costs are being affected as empty trucks head to the West Coast to bring back full loads of Asian imports. We were told that several consumer products firms are planning to increase prices this fall. One retailer noted that although prices for new inventory are lower, they plan to raise prices to consumers by 3 to 5 percent largely to offset labor cost increases of 4 to 6 percent. Turning to the national outlook, at our last meeting I indicated that I thought the risks for the economy had increased both on the upside and the downside. News since that meeting has convinced me that while the international situation has worsened, domestic demand continues to grow strongly. On the one hand, second-quarter export figures reveal a deterioration in the international situation, which continues to be a substantial risk to the U.S. and the world economies. Although I am a bit more optimistic than the Greenbook about the outlook for foreign GDP and its effect on our exports, this sector continues to represent a big downside risk. On the other hand, domestic demand continues to grow strongly. Consumer confidence is at a high level, and employment and income gains remain substantial. Economic fundamentals for the consumption and investment sectors continue to look strong. We see real GDP growth for 1998 in the 3 percent range. Looking to 1999, there is a great deal of uncertainty, but we expect real GDP growth to decelerate to the 2 to 2-1/2 percent range. The 1999 projection gives a good deal of weight to the deteriorating international situation and that may be overly pessimistic. Consequently, I continue to think the risks are tilted to the upside. In any event, they are large on both sides.",964
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, the Twelfth District economy expanded at a strong pace during the first half of 1998. Payroll employment grew by 2.9 percent at an annual rate, noticeably above the pace of growth in the rest of the United States. Among District states, growth has been most rapid in Arizona, Nevada, and Washington during recent months. Vigorous construction and real estate market activity has helped to maintain the District's expansion. Construction jobs have grown at a sizzling pace in California and Nevada this year, and construction activity remains at high levels in most parts of the District. Although District growth has outpaced the nation's this year, it has been slower than in 1997. Oregon, Utah, and Idaho have cooled the most, and employment was flat or down slightly in the second quarter in those states. Employment growth also is moderating in California this year. Among sectors, slower growth has been most evident in durables manufacturing. This slowing is consistent with what might be expected from the restraining effects of the East Asian financial and economic problems. Data for the first five months of 1998 compared with the same period in 1997 show that growth in total District exports has fallen essentially to zero following substantial growth in previous years. This slowdown appears to be almost entirely attributable to East Asia. For example, in the first quarter of this year, California's exports to key East Asian countries were down about 13 percent compared to a year earlier. Exports have slowed substantially throughout the District, and Hawaii's struggling economy has been hit hard by additional losses in their Asian tourist business this year. Although these effects may grow as the year progresses, the problems in East Asia have not derailed the District's expansion so far. Turning to the nation, it remains to be seen whether the long awaited slowdown will be sustained during the second half because a good deal of the slowdown was due to temporary factors. Despite these doubts, I think that the most likely outcome is moderate growth of around 2 percent through the end of next year, with activity being restrained by problems in East Asian economies, the high dollar, restrictive fiscal policy, and relatively high real short-term interest rates. The recent drop in our stock market adds another potentially moderating factor. The news on inflation certainly continues to be outstanding. The GDP price index came in under 1 percent for the second straight quarter and, as we all know, inflation as measured by that index has averaged only 1 percent over the past year. In our Bank forecast, the unemployment rate does not quite reach 5 percent by the end of 1999. This low rate perpetuates the acceleration in the ECI that we have seen over the past year. However, I expect this pressure on price inflation to be offset by diminished inflation expectations, the higher value of the dollar, ample industrial capacity, falling commodity prices, and somewhat higher trend productivity growth. As a consequence, our forecast shows CPI inflation staying between 2 and 2-1/4 percent for the remainder of this year and next. Thank you.",616
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Tenth District economy continues to do relatively well. Year-over-year employment growth as of June was better than 2 percent, slightly below the national average. Consumers are still buying at a fairly brisk pace. Manufacturing for the most part remains strong, although in some areas, especially in Colorado, our contacts have seen some effects from the fallout of the Asian crisis. Construction remains high for the District as a whole; we are experiencing a modest slowdown but from extremely high levels. Our agricultural sector is an area of weakness. Like the Seventh District, we are experiencing very large grain harvests and large supplies of meat, both beef and pork. That is having a depressing effect on farm prices and farm income. Labor markets remain very tight in the District. We are receiving more reports of wage pressures going forward. Perhaps the most interesting change that is occurring, though very preliminarily, is in the area of psychology. We hear more negative talk even though we are enjoying a very strong economy. People talk about the good times, but they are more concerned about whether the latter can continue. Some of that concern relates to the outlook for energy. I think it is important for us to try to keep tabs on such attitudes as we go forward. Turning to the nation, I think our District largely reflects national economic trends. Our projections point to strong domestic demand that is being offset to an important extent by the external sector. We also do not rule out some possible retarding effects from the stock market correction. We continue to have supply shocks that are having favorable effects on prices. As I add all that up, I see a fairly tame projection for inflation going forward. I cannot help but wonder, given Peter Fisher's earlier comments on the markets' efforts to assess the outlook for inflation and the risks of deflation, whether we are not seeing some of this negative psychology and uncertainty spreading a little more widely. I think that bears watching as we go forward.",396
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. District economic conditions remain positive, but they are perhaps a bit more mixed than they were formerly. I previously have talked a little about the emergence of a two-tiered economy in our District, and the gap between the urban economy and the rural economy appears to be widening. On the positive side, consumer spending remains strong. Real estate markets are healthy. Construction activity is buoyant. Most recently, markets for rental apartments have become very, very tight in the urban areas of the District. Rents are moving up significantly. Construction will undoubtedly follow once labor becomes available. Labor markets are tight. Just one anecdote on that issue: The Minnesota State Fair, which is a major activity in our part of the country as you might imagine, gets under way in about 10 days. They are short about 600 or 700 temporary workers that they need to hire to open the Fair. There is, I would say, widespread upward pressure on compensation, and I think it is fair to say that labor is becoming more militant, at least in our area. On the other hand, in the rural parts of the District the problems in agriculture are serious, as Tom Hoenig just mentioned. Mining activity is softening. Energy exploration is slowing. Some executives from the paper industry told me recently that their industry is not doing well. They are talking a lot about the trade situation and the need in their judgment for a lower dollar. As far as the national economy is concerned, I have talked before about what I perceive as the tension between the pace at which domestic aggregate demand is growing versus the growth in aggregate supply and how the two might ultimately be reconciled. At the moment, it looks as if the reconciliation is occurring through the serious and sustained weakness in Asia and the squeeze on domestic profit margins, with their attendant effects on equity prices and ultimately their wealth effects on the economy. If those trends remain in place, I think the Greenbook forecast is more likely to materialize than I thought formerly. I also think that however this plays out, the risks look to me to be very large. The Greenbook forecast may be a good central tendency, but the risks that I see on both sides are significant.",448
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Because the Sixth District economy is little changed since our last meeting, I will try to keep my remarks shorter than usual this morning. Over the summer, the Sixth District has continued its steady but modest expansion. Retailers expect sales growth to persist, and a significant number of new plant announcements bode well for capital spending. There have been some recent signs of slowing in our regional manufacturing sector. They showed up in the decline in our latest index of manufacturing activity and in, as expected, the export orders component. This information, which came in after the Beigebook was prepared, is supported by anecdotal evidence. However, the overall prospects going forward are for the Southeast economy to continue to operate at a high level. I see the outlook for growth in our area as only slightly less positive than at the time of the last FOMC meeting. A number of special negative factors in the District have received a lot of nationwide publicity, but in fact they have had no appreciable impact on the overall level of regional economic activity. It is true that the drought has caused substantial losses in farm receipts in our District, but our agriculture sector has become a much less important part of our regional economy, the sort of development that Bob Mcteer indicated also has occurred in Texas. The fires in Florida caused a temporary slowdown in the state's important tourism industry. However, the losses from postponing the Daytona 400 stock car race because of smoke from fires are greater than all the other losses due to drought and fires in the region. The only other noteworthy intelligence, and this also has been commented on by Bob McTeer and Gary Stern, is that we are receiving an increasing number of reports of significant increases in wages and benefits. However, there is still no indication that companies are able to pass those higher costs on to their customers. On the national front, it seems to me that the overall risks to the forecast have increased, as almost everyone has commented. The uncertainties relating to the net drag from the international sector, particularly Asia and Russia, are being realized and are proving to be more negative than expected. However, and again I join others in making this comment, the strength of domestic demand based on continued strong growth of income and employment and what now appears to be considerable momentum in domestic consumption and investment are important sources of upside risk to the inflation picture. The recently released revisions to GDP by BEA have impacted our forecast to a greater extent than recent market developments. They have caused us to raise slightly our forecasts of sustainable economic growth, personal consumption, and investment, and they leave me marginally less concerned that the past pattern of growth in the monetary aggregates will be translated into future inflation. Our real GDP growth forecast for the rest of this year is slightly more optimistic than that in the Greenbook. Furthermore, there are other differences in the forecast. They relate to the extent to which the hypothetical risks that I mentioned previously will be realized. In that regard, they are mainly that we see less of a decline in business investment and consumer demand than the Greenbook. As a consequence, we are slightly more pessimistic about the inflation outlook. Finally, I continue to believe that policy is not seriously out of line, nor is it allowing inflation to accelerate though we are predicting a slightly worse inflation performance over the second half of 1998 and into 1999. Most of the price acceleration that we project reflects the expected reversal in the previously favorable behavior of energy prices. Having said that, however, I do believe that the overall inflation risks continue to be slightly more on the upside and that now is not the time for us to relax or to let the depressing effects of the international sector divert our attention from the projected strength in the domestic economy or our ultimate goal of a stable, low inflation environment. Thank you, Mr. Chairman.",773
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The New England economy remains strong, but weakness related to Asia and the GM strike and increased labor and real estate market pressures are evident. Unemployment rates for the region's states were a full percentage point below that for the nation in July, and job growth was a full percentage point above the region's long-term trend. Part of the region's labor market tightness is due to sluggish or even negative labor force growth in the various New England states in recent months. Job growth varies from state to state; it is virtually flat in Connecticut, Maine, and New Hampshire and up about 3 percent in Massachusetts. The Asian flu has hit New England manufacturing, with exports to South Korea and Taiwan dropping about one-third and exports to Japan off almost 10 percent. Manufacturing jobs declined in July for the fourth month in a row, largely due to Asia. Business confidence, as measured by one of the surveys in Massachusetts, fell sharply in June and then again in July; manufacturers were the main contributors to this fall. This survey, Beigebook contacts, and anecdotal reports all suggest that about half the manufacturers in New England have experienced undesired inventory buildups and layoffs, again with much of this attributed to the impact of Asia. At the same time, labor markets remain extremely tight. Regional consumer prices are thought to be rising slightly faster than the average for the nation. Construction, tourism, and service jobs are expanding rapidly. Real estate markets, especially in Boston though elsewhere as well, are tighter and commercial vacancy rates are lower. Technical engineering workers are hard to find, even for manufacturing jobs, as are workers in the tourism industry where raiding workers from competitors is becoming commonplace. Large and small employers report being forced to grant broad wage increases to existing staff when new employees are hired at higher salaries, especially in technical areas. Hiring bonuses are commonplace even for fairly low-level jobs such as restaurant positions and telemarketing. Commercial and industrial lending at the District's large banks grew at rates about double that of the nation as a whole, and competition among lenders reportedly remains intense. However, of a large national insurance company, reports that they see some widening of spreads related to credit quality and the beginnings of some slight restraint in credit markets. That view is reflected a bit in the data, but unfortunately it seems at odds with the System's survey of senior loan officers. On the national scene, we agree with the projection in the Greenbook of a slowing in the pace of GDP growth from the first half of 1998 to 1999. However, without a tightening in interest rates, our estimates suggest somewhat stronger growth averaging above 2-1/2 percent over the period. We do see consumers and businesses affected by Asia, by rising labor costs that are putting a squeeze on profits, and by a sideways if not slightly lower stock market, all of which dampens consumer enthusiasm and reins in business spending. However, we do not see unemployment rising to 5 percent nor inflation remaining as quiescent as in the Greenbook forecast. These differences partly reflect different estimates of the economy's potential. Ours is a bit lower than the Board staff's. We also assume a somewhat slower rise in unemployment when GDP is growing at rates below potential. This reflects, I think, a greater agnosticism on our part as to whether the higher rates of productivity growth we have seen are cyclical or more structural in nature. Thus, we do not see unemployment rising above the upper four percent range, and our estimate of inflation rises to just about 3 percent by the fourth quarter of 1999. Clearly, the data in our projections suggest a good deal more upside risk on the inflation side than that expected by the Greenbook, but I would confess to some humility about these projections as well. With that in mind, my concerns at prior meetings about the stance of monetary policy and the risks associated with the current economic situation have revolved around two issues. The first is that the risk of rising inflation, given tight labor markets, is considerable though hard to see as yet except in the form of wage increases. The second is that financial markets were fueling speculation that, even in the absence of inflation, could present real risks. The inflation risks remain, and I think the recent data on the domestic side suggest that they are at least as strong as they were at the time of the last meeting. But it seems to me that financial markets, both nationally and especially internationally, have interjected real notes of caution.",911
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. I, too, will try to be brief. Not a lot has changed in the Philadelphia District. The region generally remains strong, although growth has slowed. This is showing up in manufacturing where the effects of Asia are apparent, particularly with producers of building materials, chemicals, and machinery. The same phenomenon of a high level of sales but slowing growth is apparent in retailing. Although the national news reports have spotlighted the weakness in autos, sales of automotive products apart from GM products generally have been strong in our area. Construction is robust, both residential and commercial. There may be some slowing of construction activity in our District. The reason is not so much because of a lack of demand but I think because of some bottlenecks related to the shortage of machinery and labor. A number of people around the table have commented on the problems in agriculture, and they certainly are severe, but I would like to add a footnote to that. Apparently, ""fat is back"" and the dairy farmers in my District are pleased about that. People want some taste back in their food. Milk fat prices are up and milk now joins red wine, martinis, and eggs in making a comeback. I have heard complaints from dairy farmers for years, and it is nice now and then to hear something positive from them. Labor markets remain tight in our District, although wage increases are generally moderate and the phenomenon of not being able to raise prices is still heard among businesses around the District. As far as the nation goes, I think the biggest change since we last met is that the problems in Asia and their spillover effects appear to be more severe or at least make me feel as though the global economy is in a more precarious situation. U.S. inflation remains subdued, and in my estimation the threat of a breakout on the upside has lessened. So, whereas the risks in recent months were thought to be more pronounced on the side of greater inflation, they now seem to me to be more balanced.",407
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Second District's economy has continued to expand at a strong pace since our last report, led by real estate and construction. Job growth moderated a little in June, but it was brisk in the second quarter overall. Retailers report continued very good sales in July, notably of home durables. Retail prices were steady last month and inventories remained at satisfactory levels. Tight real estate markets persisted in the second quarter. Office rents surged at a 27 percent annual rate in Manhattan but leveled off in the suburbs, and vacancy rates generally were steady. On the national economy, our forecast is somewhat more optimistic on growth and, not surprisingly, we have the CPI rising a bit more between now and the end of 1999 than does the Greenbook. But by and large, we are in sympathy with the Greenbook forecast. What I think has changed since our last meeting is the balance of risks. The risks have moved from a higher likelihood of rising inflation to a situation in which that possibility still exists but is at least counterbalanced by the possibility that both the American consumer and the American business executive will become more cautious, with the result that growth could be reduced to below our New York forecast or that of the Greenbook. I am not suggesting that we fear a recession but rather quite weak growth. The international situation appears to me to be worse. Japan's new government is doing virtually nothing, and the political opposition has announced its unwillingness to support the already inadequate banking reform legislation that the government has proposed. The recession in Japan, in my view, is at least as likely to persist--with continuing chilling effects on the rest of Asia and the rest of the world--as to bottom out and improve. A weak Asia, a seriously troubled Russia, and weakness showing up in Latin America all raise the likelihood that the flow of capital to the safe havens of the United States and core Europe will not slow down but rather will continue, making those currencies stronger than they otherwise should be. I believe that will lead to a political furor both in continental Europe and in the United States, especially as people become, probably appropriately, unhappy with helping Japan solve its problems, to the degree it is solving them, by drawing in exports from that country. I do not recall a time when there has been more uncertainty in financial markets. Although there has been heavy trading volume in the U.S. equity markets in recent days, that seems to be concentrated among speculative investors. In many other markets, there is considerably less liquidity as large financial institutions, both observably and from what they tell us, react to the uncertainty by reducing their trading positions. That strategy makes an immense amount of sense at the level of the firm, but it increases market volatility because of a lack of liquidity. I have felt for many months that watchful waiting is appropriate for this Committee but with a view that the risks were in the direction of rising inflation. Now I think that the risks are greater still but much more fully balanced, given the perceptible shift in the direction of the risks toward inadequate growth. Thank you, Mr. Chairman.",629
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The autoworkers in our part of the country have ended their very welcome summer break and have gone back to productive activities, giving the theme parks and other tourist attractions a little relief. They are looking forward to the start of school so that they can get a little more relief. Everybody is reporting record tourism traffic of all types throughout the region. Construction projects continue to be announced at a rapid pace. I view it as a ""tyranny-of-small-decisions"" effect. Some people might call it an aggregation problem because virtually every metropolitan area in the region is announcing new construction projects on the assumption that they will be able to import the needed construction workers from someplace else; the local construction workers are all fully employed. A director of a construction trades union said that the union halls were empty, so they are now providing training to prisoners and parolees as well as lobbying for increased immigration of construction workers, as I have mentioned before. This is quite a dramatic change in the attitude of unions that are trying to satisfy the demand for labor as they see it out into the future. Nevertheless, Pittsburgh announced that it is going to spend $1 billion to construct two new stadiums and a convention center over the next few years. Apparently, Pittsburgh is trying to outdo Cincinnati, which is building two new stadium projects if they can find the needed workers. Both cities are trying to keep up with Cleveland, which is completing a new stadium as well as a large assortment of infrastructure projects downtown. Like every other region of the country, billions of federal tax dollars are now going to become available to add to local spending for roads, bridges, tunnels, and rapid transit systems--again if the necessary construction workers can be found. Our banking directors and advisory council members cite examples of what they view as the overbuilding of hotels, motels, and retail space. They report that the deals are being done at ever thinner margins, longer terms, less collateral, or no collateral. I was interested in the Board staff's report on rents for commercial space relative to prices of commercial structures. Mike Kelley was at our board meeting last week, and one of our directors, the chairman of National City Bank, said he had read in a newspaper that National City Tower had been sold again. His bank occupies 90 percent of the building and has fixed rents for seven years. The building sold two years ago for $60 million, eight months ago for $80 million, and last week for over $100 million. Public works infrastructure projects are being announced all over the District every week. Tax collections continue to be very strong throughout the area. Residential construction also is very strong. Some counties report that permits are up over 50 percent from a year ago. The only area of softness in construction is industrial structures where there has been a slowing in new contract awards. Overall, the labor markets are reported to be very tight. Turnover continues to increase and the quality of entry-level applicants is reported to continue to deteriorate. Retail sales were reported to be surprisingly strong right through the GM strike period. Retailers now are concerned that they will enter the fourth quarter without adequate inventories of the right products to satisfy what they see as very strong consumer demand. Apparel and specialty stores have experienced very strong sales and their earnings should be at record levels this year. Last week the Cleveland purchasing managers reported the first increase in new orders in several months. Business confidence levels, one director said, are more shaken by what they read about Asia than by what they see in the order books. Our steel industry sources say that consumption levels are excellent, perhaps a record, but surging imports have put downward pressure on steel prices. So, the domestic steel producers are going to start filing dumping charges very soon and join textile producers in seeking some protection from cheap imports. Turning to the national economy, much like Bob McTeer I think that the time is growing nearer when we will have to contemplate an easing of our policy stance, but my reasons are quite different from his. That's mainly because I think it will become increasingly apparent that we first will have to tighten monetary policy to deal with the speculative imbalances and excesses that are accumulating across the country. Subsequently, we will have to be flexible enough to respond promptly once we get to the other side of this problem. Over the last year we have seen final demand persistently exceed our expectations in the context of the rise in equity markets, related wealth effects, and other developments, but we still found reasons not to act. I think that once we finally do act, we will have to be prompt in reading errors on the other side in the expectation that we subsequently will have to back off a bit. Even though we and everyone else are happy about the low inflation, the low unemployment, and the good income gains that we are seeing in the nation, it would be very hard to call this a well balanced expansion at the present time. We can put a favorable spin on the past year by saying that in view of the very strong domestic demand, we are fortunate that the Asian economies fell apart at just the right time, that their exports were available to meet our surging consumption, and that their reduced demand for our exports liberated some domestic industrial capacity so that the domestic economy did not spill over into rising inflation. Or we could turn things completely around the other way and say that in view of the Asian crisis, it is really a good thing that the United States was enjoying a spending boom so that we could play locomotive to the rest of the world and lessen the adverse effect on people in those countries. But the distortions in our economy are becoming ever more obvious. Manufacturing has been hit hard while construction soars to unsustainable levels. Goods prices are falling while service prices are accelerating. Returns to capital have risen to historic levels as a share of total income in the economy, while returns to labor appear to have declined as a share of the total. I will now commit a little heresy in the minds of some folks. In current circumstances, the absence of consumer price inflation is not a sufficient condition for financial stability in my view. It is ultimately financial stability, as we have seen in our own history and in other economies around the world that is the key to maximum sustainable growth. When there is a favorable productivity surprise, it brings with it an acceleration of the growth of business earnings and in equity prices. It is a normal cyclical phenomenon in any case, but it is accentuated when we have a favorable productivity surprise. That in turn translates into increased credit demands. So, we see both bank and nonbank lenders face outward shifts in the demand for loanable funds and investment capital, and then an increase in the derived demand for bank liabilities. But if those demands for credit and investment capital are accommodated by an acceleration of money growth, there will be an acceleration of nominal spending growth that manifests itself in excessive capital accumulation, inventory accumulation, and even employment in some sectors of the economy. I have avoided talking about the stock market because I do not want to make the same mistake that Irving Fisher made weeks before the crash of 1929. But there was another economist of the period, a New Zealand economist, Allan Fisher, who wrote an analysis of the boom-bust cycles of the time. He was following Dennis Robertson, Ralph Hawtrey, and some other economists who dissected the period of the 1920s and the 1930s. Fisher argued that sustained periods of very favorable developments in productivity led to an exaggeration of what he called false profit signals or returns to capital. If capital investments were financed through an intermediary banking process, with or without moral hazard problems, there would be set in motion dynamics that ultimately would result in an economic decline. He, of course, was writing in a period of the gold standard and arguing that the price level should be allowed to decline in order to avoid the imbalances resulting from these dynamic forces. Speaking of gold, it is intriguing that the ratio of gold prices in dollars relative to oil prices is about the same today as it was 30 years ago. In all of the intervening years, the ratios stayed in a fairly narrow range expressed as a multiple of gold in dollar terms to oil in dollar terms. That is because both are internationally traded commodities. They do not look quite the same in yen or rupiah or other currencies that have been weak relative to the United States dollar. In the end, shifting the supply schedule of bank credit or other forms of intermediary credit by increasing the monetary base in a passive way by pegging an overnight interest rate in the face of a shift in the demand for loanable funds is not the right thing to do. We ought to be allowing a move up on a relatively fixed credit supply schedule and let a rationing process take place. I still am concerned that the growth of the monetary base and the monetary aggregates this year is fostering too much demand, and we are going to pay a price for correcting it.",1813
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"Conditions in the Eighth District are substantially the same as they have been in recent months. Labor markets remain tight. Labor shortages are abundant, particularly in professional areas. Builders are unable to satisfy demand in some markets. The agricultural economy in the Eighth District is in fairly good shape. There are some areas that have had too much rain and some too little, but on the whole crops are going to be satisfactory. In sum, economic conditions are about unchanged in the Eighth District, but there is an ever so slightly easier or less buoyant feel to these District conditions. I want to concentrate my comments on the national economy. I also want to talk about Asia from that perspective, but I will begin by talking about the balance between aggregate supply and demand, putting Asia aside. On the aggregate supply side, I think that we probably have overshot full employment and are seeing evidence of that in the upcreep of wages and in the labor shortages that are widely reported. My casual impression is that we have rising numbers of labor disputes and time lost through labor disputes. There have been a number of strikes. That is a standard feature of labor markets that are overstressed. Almost independently of what happens to aggregate demand, I think we can anticipate slower growth of employment than we have had as we move toward a closer equilibrium of supply and demand in the labor market. On the aggregate demand side, domestic final sales remain strong, and that was true in the second quarter as well. Money growth, whether we use M2 or a narrower measure--I prefer MZM because I think it avoids the problem with sweeps--is up substantially over the last year in terms of both measures. It has tapered down a little most recently, but I see no signs of a real turn. Now, how big is the impact from Asia? Has that slowed aggregate demand sufficiently to put us on a reasonable track for the near future? Asia accounts for roughly 25 percent of the world economy. If 25 percent of the world's economy gets into deep trouble, one would expect to see a big impact on the other 75 percent. The question here is the magnitudes involved. Consider an analogy within the United States. Suppose California got into really big trouble. Suppose Bob Parry really screwed up so that the whole Twelfth District had a financial crisis and California looked about like Japan and Nevada about like Indonesia and Oregon about like Malaysia and so forth. Would that have a big effect on the rest of the United States? Well, of course it would! That region is fully integrated into a single national economic area. We use the same currency. We have a completely integrated capital market. The labor markets are closely interconnected through a lot of movement of the workforce. The goods markets are completely connected. There are no trade barriers except for a few agricultural barriers. Trying to take fruit into California may be a problem, but that's about it. The relationship of the Asian economies to the economies of the rest of the world is quite different. The labor markets are not integrated at all. The goods markets are integrated. The Asian economies are open, but nothing like California and the rest of the United States. Capital markets are fairly well integrated. There are floating exchange rates, but not a single currency. So, there is a very great difference between 25 percent of the world economy in Asia and a comparable piece of the U.S. economy. The question is how large are the impacts flowing from Asia to the rest of the world economy and particularly to the United States. Total U.S. exports are something on the order of 14 percent of GDP, and our exports to Asia are something on the order of 3 percent of GDP. These are rough orders of magnitude, close enough for back-of-the-envelope calculations. Of course, we are not going to lose all of our exports to Asia. So, if we anticipate a significant effect, we have to rely on an argument that says there are substantial indirect effects on other parts of U.S. trade that are coming through other countries. Obviously, as Europe loses some exports to Asia, European demand for U.S. goods may go down. But it is critical to get the magnitudes right and not be seduced by the high visibility of the Asian problems. There is no question that these Asian countries are experiencing very severe problems, but the question is how big are the impacts flowing through into the United States economy as a whole. The research staff at the St. Louis Fed has taken a look at the disaggregated U.S. exports for the first five months of this year relative to the first five months of last year. They have broken down our exports by two-digit SIC industry codes to try to get a real feel for the magnitudes involved. The effects on some of these industries are very large. At the top of the list we find that SIC code 10--producers of metallic ores and concentrates--have lost 50 percent of their exports to Asia. In other words, firms in those industries have seen their orders of such products from Asia cut in half. Obviously, that is very visible. Producers of some other products like refined petroleum and related goods have seen their Asian demand decline by as much as 47 percent. If we go down the list, agriculture and livestock exports to Asia are down 29 percent this year compared to last year. I will not read the whole table. Of course, the relevant question for the impact on the U.S. economy is not those numbers but the decline in exports to Asia relative to the size of these industries. If we take the industry that has experienced the biggest percentage impact, metallic ores and concentrates, which lost 50 percent of its Asian business, that turns out to be about 1-1/4percent of the product of that industry, using 1996 production levels. So, the loss of the Asian business amounted to 1-1/4 percent of the domestic production of that industry. That gives us the right order of magnitude in terms of the effects within the United States. The biggest impact for any of these industries is that for agriculture and livestock, which lost about 2 percent of its business as a consequence of the reduction in exports to Asia. I don't know what the effects of the Asian problems will be in other parts of the world, but I think it is very important for us to keep the magnitudes in the context of the size of the market in the United States. In addition, we should not forget the indirect offsets that take place because Asia is not an integrated part of a single currency area within the United States, the point that I made before. I don't think there is any question that the risks in the outlook have become greater in both directions. If it turns out that the impacts from abroad are larger than our best guess currently, obviously demands in the United States are going to be weaker. There may also be substantial financial and political uncertainties stemming from unrest in some of these countries that would have an effect on our economy. On the other hand, it may well be that the underlying strength of nominal demand in the United States is going to be little affected by Asia and that we will find ourselves in an increasingly inflationary environment. I think the uncertainties are quite substantial in that regard. That is about all I want to say at this point. Thank you.",1480
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The expansion clearly is weakening. Real GDP according to the Greenbook is already below the trend growth rate in this half year, and it falls even shorter in the next half year. Unemployment rises in all of the Greenbook scenarios. Depending on the stock market, the rate of unemployment may at least arguably get close to my definition of NAIRU fairly soon. As one listens to the Reserve Bank presidents, one hears much more commentary than a few months ago using words like ""slowing,"" ""negative psychology,"" ""less positive,"" etcetera. Let me bring Asia back on the table. The Asian forecasts are being progressively downgraded. I believe the staff already has moved about one-fourth of the way to its so-called pessimistic forecast of the last meeting in this forecast. The process probably is not completed. Even in the present forecast, as Ted Truman commented earlier, foreign growth is very weak. I will talk a bit about the strategy of policy. I am a believer in conducting policy on the basis of the funds rate as opposed to using other indicators such as the monetary aggregates, gold, or any of a number of other indicators that have been suggested. A problem with the funds rate, as I have mentioned before, is that a lot of attention gets focused on it and it becomes very difficult to change it. It may even become difficult to change any adjectives we use to describe our approach to it, such as symmetry. I think the remedy is to make more changes in the funds rate, and the world will get used to the fact that that is the way we operate. A good driver does not apply steady pressure to the gas pedal but rather tries to keep the car going at an even speed. A few months ago, I felt that it was time to raise the fed funds rate a bit. I now think that the time is coming, perhaps very soon, when the right thing to do may be to lower the funds rate a bit. Whether a lower rate is needed at this meeting is very debatable, but the way things are going, I believe we could be confronting this issue rather soon. In all the staff documents that I read to prepare for this meeting, the paragraph I liked best was on page 9 of the Bluebook. That was the justification for a lower funds rate. Having said that, I cannot question the current stance of policy very much either. If the real interest rate is about 3-1/2 percent, steady inflation is arguably about 2 percent, and both inflation and unemployment are reasonably close to their target values--this is my own mental version of the Taylor Rule--policy is roughly about right at this point. The economy may not be well balanced in Jerry Jordan's sense, but I do think that in terms of the level of the federal funds rate, it is hard to argue that we are far away from where we ought to be. That means that there is no significant harm in waiting a bit before we move in either direction. But having said that, I would like hereby to announce that I have joined the small but growing band of those who think that there probably are more downside than upside risks at the present time.",648
-fomc-corpus,1998,First Vice President Varvel.,6
-fomc-corpus,1998,"Thank you, Mr. Chairman. It is a real honor for me to be here representing our Bank and subbing for Al Broaddus. You may know that Al's son was married this weekend. He had an extended trip out of town. He wanted to be sure the Committee knew that the economy of western North Carolina was receiving a big boost this past weekend! The Fifth District economy continues to grow at a moderate rate this summer. Overall manufacturing activity picked up some in July as a result of strong domestic demand, especially in the building materials and capital goods areas. But, with much weaker orders, our textile and apparel producers continue to have a tough time. Growth in retail sales slowed somewhat, especially in consumer durables, but the nonretail service sectors are experiencing very strong revenue growth. Real estate activity and bank lending remain strong, and there is excess money chasing too few investment opportunities. The Charlotte area continues its very rapid growth, and we have reports of a record amount of new investment there in the first half of 1998. Finally, District labor markets remain very tight. We continue to hear frequent comments from District contacts about difficulties in attracting and retaining workers and an increased dependence on the in-migration of workers, especially in the construction industry. On the national picture, I have a few comments about the Greenbook forecast. The Greenbook sees the slowdown in inventory accumulation and the deterioration in net exports that occurred in the second quarter as setting the stage for a sharp and lasting slowing in the growth of domestic final demand. As a consequence of that slowdown and a further significant deterioration in net exports, real GDP is expected to expand at a rate just below its potential, relieving some of the pressure on labor markets and lowering core inflation a bit in coming quarters. It would be very nice if this chain of events were actually realized and I hope it will be, but I have some doubts. First, domestic demand is expected to slow promptly to about half its average pace in the first part of 1998. Given that labor markets adjusted for the GM strike apparently tightened further in July, pointing to further real wage growth, I am not convinced that domestic spending will slow as much and as promptly as in the Greenbook forecast. Secondly, as Mike Prell noted earlier, the Greenbook is forecasting a much greater deterioration in net exports than the Blue Chip forecasters. In fact, I noticed that the Greenbook is about as pessimistic as the average of the ten most pessimistic Blue Chip forecasters. The Greenbook's forecast of net exports represents a drag on real GDP growth of about 1 percent in the second half of 1998. By contrast, the Blue Chip consensus looks for a much smaller drop in net exports, with much less drag on GDP. I know that foreign trade developments are very difficult to forecast and I certainly am not a forecaster, but on the face of it, the Greenbook seems to be at the low end on this point. I see considerable upside risk in the Greenbook forecast of the economic outlook. Inflation itself, continued strong domestic demand, and the second-quarter jump in the ECI are particularly worrisome. The latter may indicate some ebbing in the productivity growth that has been holding down unit labor costs. I also worry that we are at risk of a jump in health care costs that would raise the benefit-cost component of the ECI. And, as Mike Prell pointed out, the special survey data on variable pay suggests that the ECI may understate compensation costs.",710
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"We in the FOMC tend to concentrate on what has happened since we last met, this magical period known only in this room as the intermeeting period, but I find it interesting to go back a little further sometimes. In this case, I went back to March, which is only five months ago, and found myself very impressed, which is a compliment, folks, with the forecasting ability of the staff. The March meeting, as you remember, was held near the end of a roaring first quarter that proved to be even stronger than we expected at that time. The staff was predicting, albeit somewhat diffidently, a drastic slowdown in the expansion due to inventory deceleration and the impact of the Asian financial crisis on our net exports. There was some skepticism around this table, including my own, but in hindsight it appears that the staff made a quite good forecast. The timing was a little off; the first quarter was stronger and the second weaker than they anticipated, but the basic forecast of slowing to less than potential for the rest of this year and next looks increasingly right to me. They also called the stock market about right--so far. Despite the reduced earnings expectations that are bound to occur with slower growth, they expected only a modest correction in the stock market. So far, that is what we have gotten. What is evident looking back even five months is that the Asian crisis is proving to be deeper, more intractable, and possibly more contagious than we thought it would be a few months ago. Japan is more deeply mired in political paralysis. Other Asian economies, especially Indonesia, are in more desperate shape. China, including Hong Kong, Russia, and possibly Brazil, are more fragile than we anticipated at that time. Looking ahead, it seems to me that the overheating of the U.S. economy is likely to be slipping into the category of past worries despite some evidence of shortages of construction and other workers and of some materials that have been mentioned around the table. We have learned over the last couple of years that even with extremely tight labor markets, our economy is much less prone to accelerating inflation than we thought it was. Labor markets now seem likely to ease up a bit as economic growth slows. That does not necessarily mean that we will avoid an uptick in inflation in delayed reaction to higher wages, possible increases in health care costs, and some other factors that have been mentioned. Indeed, we might be in for a bit of stagflation. If that happens, we may unfortunately have to live with it. It is hard to imagine raising interest rates in the face of softening employment and economic growth that is below potential. What has been learned before is that we do not have a very good tool to combat stagflation if we get it. I suspect that domestic overheating and inflation are going to be fairly low on our list of worries over the next few months. Rather, I suspect that we will be focused more and more on how to keep the world economy--the non-European, non-North American economy--from unraveling further and how to mitigate the damage to our own economy. It is not hard to imagine that world growth, instead of recovering modestly in 1999 as forecast in the Greenbook, might get a good deal worse before it gets better and that recovery will be delayed at least until the year 2000. Our economy now looks strong enough to weather the storm without a recession, but its ability to do that depends heavily on consumer confidence and the absence of a rout in the stock market. My guess now would be that we will get a series of orderly corrections in the stock market--stair steps down to values more in line with realistic profit expectations--but market psychology is a fragile thing. This all adds up to saying that I believe the risks are now at least as much on the downside as on the upside and that not moving the federal funds rate is certainly the right policy for now.",795
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. As I review the current economic outlook I am, like others, struck by the strong but at least currently balanced forces that appear to be shaping the future. Potentially weakening developments stemming from the external sector seem to be balanced against a currently strong domestic sector, although some weakness in the latter is a possibility. We also continue to see a dichotomy between the goods sector, including commodities and agriculture, and the service sector. I think the links across these various balances and dichotomous elements of the economy reside in two areas. One is the labor markets and the other is the financial markets. The challenge to me is that this balance is quite fragile right now, and it seems very much like a high-wire act where a move to either side would be quite detrimental. As others have indicated, developments relating to the external sector clearly have slowed the growth of GDP. The Greenbook projections suggest that the external sector will slow the expansion less and less going forward. Therefore, one might think that it should be less and less a part of our deliberations. However, the risk that I see here is that the staff may have underestimated the net drag that will come from the external side. I agree with Ted Truman that its negative contribution eventually will turn around, but I see some risk that the Japanese economy will not turn around as quickly as in the Greenbook forecast. The current Greenbook estimates that economic activity in Japan declined at a 5 percent rate in the first half of this year, and it anticipates a flat performance in the second half and an upturn to a low growth rate in the first part of next year. That forecast seems a little optimistic to me. Also, as the events of this week have indicated, global contagion is still very much a risk that could undermine fragile recoveries around the world. The staff forecast, as Governor Gramlich indicated, has moved some distance toward the so-called ""worse case"" scenario. I hope that that partial movement is not further abetted by unfolding events overseas. In any event, the importance of the external sector is much greater than the 3 or 4 percent of GDP that is accounted for by the U.S. current account deficit. The domestic economy provides a marked counterpoint to the external sector. The Greenbook forecast calls for some abatement of what has been very strong growth. That abatement is based to a very substantial extent on an anticipated diminution of wealth effects. Such an outcome is quite possible. The recent so-called near correction in the stock market lends some credibility to this scenario. However, as others have indicated, the stock market is notoriously difficult to forecast. Therefore, I would say with respect to purely domestic developments that I sense considerable tension between factors pointing to an overly strong expansion and those that suggest a potential for some shortfall in demand from current expectations. For me at this point, those two sets of factors seem to be roughly in balance. The other set of mirror images that we are dealing with is the goods sector versus the service sector. It is clear that the goods sector has thus far taken the brunt of the adverse impact of foreign trade developments. Goods exports and imports seem to account for almost all of the net export drag that we have experienced. Additionally, the goods sector has been an important player in the recent performance of the domestic economy in that the swing in inventory investment was a key factor in the shift of GDP from very rapid growth in the first quarter to much reduced growth in the second. Forward-looking indicators, such as recent purchasing manager surveys, show some weakness in the goods sector going forward. However, I think there are some signs of strength even in that sector. While there was a slowdown in the buildup of inventories in the second quarter, stock building was still substantial, something like 6 percent at an annual rate. For its part, the service sector is a clear story of strength building on strength, and the Greenbook forecast shows that as basically continuing. The linkages across these various elements of our economy may be seen, as I said, in the labor markets. The overall labor market is obviously tight and likely to stay tight. The tightness seems to be discouraging some layoffs in industries that have been affected by the externally induced drag. Not surprisingly, the strength in demand also has forced employers in other sectors of the economy, in the service sector in particular, to increase the number of workers that they employ. So, it seems to me that the unemployment rate, as the Greenbook suggests, is likely to adjust very slowly to a moderating economic expansion. While I think the labor markets will be slow to adjust, we will see and have seen that financial markets are quite quick to adjust, and they add a degree of volatility to the economy. I think the potential interplay that we are starting to see between corporate profits, stock valuations, and consumer performance are the elements that are most relevant to us. I believe they represent the main sources of risk to the forecast. The staff forecast depends on this volatility and an adjustment in equity prices to more conservative profit outlooks to bring the various elements of the economy into an equilibrium at a lower, indeed subtrend, growth rate. Unfortunately, I think there are many risks to this ""immaculate slowing"" forecast. The most obvious stem from the weaknesses in foreign economies and the international financial turmoil that continue to take some toll on psychology and real economic performance. On the other hand, tight labor markets, which the staff currently expects to have little impact on prices, could potentially translate into greater inflationary pressures than the staff has forecast if businesses attempt to maintain profit margins by raising prices to offset declining productivity. Similarly, the diminishing wealth effect that is expected to come from the stock market may not be as strong as the staff has forecast. Overall, I think the risks are larger in both directions, and unlike where I was at the last meeting, I now believe they are quite balanced. However, I see it as a delicate balance, and I think our current role is to do as little as possible to upset the various forces that affect the economy. By sitting still now, we run the smallest risk in a scenario that is fraught with uncertainties, none of which is of our own making. Thank you.",1263
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I expect both slower growth and higher inflation over the next year and a half. However, I expect faster growth than in the Greenbook forecast, with the rate of expansion in GDP closer to trend and a slower rate of increase in potential output. These two factors combine to yield a lower path for the unemployment rate than is indicated in the Greenbook. In part because of this, I am skeptical that the recent pattern of a rising rate of increase in nominal compensation will reverse next year, an outcome central to the Greenbook inflation forecast. The story underpinning the forecast of a persistent slowdown in growth to below trend begins with a sharper external drag associated with the turmoil in Asia. The resulting decline in net exports is projected to slow GDP growth. The multiplier-accelerator effects of the slower GDP growth then moderate domestic demand, reinforcing the slowdown in GDP growth. If for good measure we add a stock market correction that is sharper than might otherwise occur in a period of slowing expansion to reflect some initial overvaluations, we get a slowdown in GDP growth that carries into 1999 even though the external drag is fading. It is a good story. I have told it more than a few times myself. I think it is the story in the Greenbook, with the important substitution of a realized for a projected stock market correction. What is wrong with this picture? Well, it does not seem to fit the facts of the first half of this year very well. The story in the first half was not that of a significant slowdown in GDP growth. The economy grew at a 3-1/2 percent rate in the first half despite a subtraction of 2-1/2 percentage points stemming from the decline in net exports. This GDP growth rate is only 1/4 percentage point slower than over 1997, and it is fully accounted for by the GM strike. True, growth was unbalanced in the first half in terms of the pattern of growth in the first and second quarters, but this difference was almost entirely associated with the pattern of inventory investment. The real story in the first half was that a stronger-than-expected advance in private demand was offset by a sharper-than-expected decline in net exports, leaving GDP growth about unchanged. That outcome suggests at least a couple of questions. First, why did private domestic demand accelerate? Second, why should private domestic demand now weaken so sharply as in the staff forecast when there are no multiplier-accelerator effects to speak of stemming from slower growth in the first half? One piece, but only a piece, of the puzzle of the further strengthening in private demand may be the same Asian turmoil that was reflected in the sharper-than-anticipated decline in net exports. That turmoil resulted in at least $3 of the per barrel decline in oil prices and was accompanied by a shift in portfolio preferences in favor of dollar-denominated assets that contributed to lower intermediate- and long-term interest rates in the United States. But the key question in the forecast is, what will now induce a slower rate of economic growth in the second half and into 1999? It is not the external drag. The decline in net exports in the second half is about half as sharp as in the first half, and the decline then halves again next year. Therefore, in order for GDP growth to moderate going forward, the slowing in domestic demand must be aggressive enough to more than offset the diminishing external drag. The bottom line is that we need a story other than just external drag to explain the slowdown in GDP growth going forward. Part of the story is clearly the stock market decline, but this is not enough. The FRB/US model forecast identifies a second key underpinning of the slowdown scenario, and one that, I expect, is also a factor in the judgmental forecast. I call it the ""X"" factor in that it slows growth through gravity. It reminds me of my defense of a forecast of a sharp decline in long-term rates in 1993. When I was asked why long-term rates were headed lower, I responded that it was because they were too high. The FRB/US forecast talks of error correction rather than force of gravity, but it's the same story. Many private-spending components have expanded at a rate above what that model and most other models predicted. This was true by the way during 1997 but perhaps even more so during the first half of 1998. Now, these spending components are projected to return to fundamentals, hence the economy slows. There is nothing wrong with this story, but it is not an overwhelmingly compelling one, especially in terms of the timing of the slowdown. As a result, I have some doubts about the degree of the slowdown in the staff forecast. The second major call in the staff forecast is for a reversal in the recent trend toward faster increases in nominal compensation. This is partly due to a rising unemployment rate and partly to the pass-through of lower inflation expectations. The case was quite carefully argued in the Greenbook in terms of a range of forecasts from different wage-price models. Again, such an outcome is possible, but I remain skeptical. Given the uncertainty about the structure of the economy and the forecast going forward, it is likely that collectively we will become more reactive in terms of policy response. This makes reading the inflation data for signs of a change in the underlying trend more important. But this also has become more difficult. I have noted before, for example, that the core CPI data hinted at a rebound in the underlying inflation rate based on three-month and six-month inflation rates. However, taking account of the last two months of CPI data, the three-month inflation rate of core CPI has receded from above 2-1/2 percent to about 2 percent, very much in line with the staff forecast for the second half of the year. The data for the chain measure of GDP prices show, in contrast, a remarkable slowing in the rate of inflation. The four-quarter rate of inflation for this measure has declined steadily from 2 percent in the second quarter of last year to 1 percent in the second quarter of this year. The slowing in the quarterly inflation rates occurred quite abruptly in the third quarter last year. Inflation by this measure has now been near 1 percent for four consecutive quarters. The widening gap and different trends in the alternative measures of inflation are making our job of reading inflation signals more challenging, but on balance they are showing few signs of building inflation pressure. The last topic I want to comment on is the risk to the forecast. Given the tightness in the labor markets, the lack of compelling evidence of a persistent slowdown even to trend growth, and the likelihood of some diminution in the favorable supply shocks, there remains a risk of higher inflation going forward. The other major risk is that of a still worse outcome from the Asian turmoil. The forecast embodies a sensible central tendency for this external effect. It still appears to me, however, that the possibilities relative to the central tendency are asymmetrical. I see more chance of a much worse outcome than a much more favorable one. For this reason, I believe the risks to the forecast have become more balanced than I viewed them earlier. Thank you.",1459
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The morning has moved well along and I am the last in the queue, I believe, so I will be very brief. At the last meeting, the Committee was wrestling with the very uncomfortable dilemma of having two sets of concerns that pulled in very different directions. We have been wrestling with the same concerns all morning. The question for today seems to be what has changed over the last few weeks. The answer perhaps is that not much has changed fundamentally and definitively, but I think there are some potentially very significant straws in the wind. Thanks to inventories and Asia, the expansion slowed dramatically as expected in the second quarter, confronting us now with the question of whether or not this moderation will settle in as a new regime as suggested by the Greenbook. I thought the case that was made there was quite impressive. But if the stock markets still have the stamina for one or more bull runs left in them, confidence could be reinforced and we could again easily find ourselves in an excessive growth mode for much, perhaps all, of the forecast period. That obviously could present significant difficulties in the long run. My assessment is that domestic risk remains on the upside but perhaps not so heavily as earlier. The next several months should tell that tale. Internationally, one is hard pressed to identify any news of improvement. To the contrary, deflationary pressure seems to be increasing. Japan appears to be fumbling the ball, which may further endanger the entire region. Long-held fears of contagion with some boost from weak oil prices have become reality and have impacted Russia and parts of Latin America. The downside risk seems to have intensified outside our borders, calling even more strongly for caution. We still have the bifurcated mix of factors that existed on July 1. My sense, however, is that for the moment at least, the upside domestic concerns may be a bit milder while the downside international concerns may be cause for even more caution. While both of these straws in the wind now blow in the same direction and suggest a softening expansion as a rising probability, I do not think that this warrants a change in our policy stance at this time. But we are moving toward more balanced risks.",449
-fomc-corpus,1998,Thank you. Shall we break for coffee?,9
-fomc-corpus,1998,Mr. Kohn.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. In opting to keep the stance of policy unchanged at recent meetings, the Committee has been balancing its expectation that policy most likely will need eventually to tighten to forestall an uptrend in inflation against the possibilities that developments in the global economy could make that tightening unnecessary and that any rise in the federal funds rate might worsen instabilities in foreign financial markets. Living with the risk of rising inflation has been made easier by the low level of actual inflation and by the prospect that, despite tight labor markets, inflation will not turn up for some time. Given that prospect, waiting to tighten--in order to be in a better position to judge the course of developments overseas and inflation dynamics in the United States--probably would not deprive the Committee of adequate time to head off a significant pickup in inflation that would be very disruptive to reverse, even allowing for policy lags. Developments since your last meeting would seem mostly to reinforce the arguments for standing pat. The rise in volatility and in contagion across countries of movements in financial asset prices suggests that investors are more fearful and uncertain and that many markets remain quite vulnerable to a tightening of monetary policy in the United States, especially if the policy action were unanticipated and not clearly dictated by an obvious threat of higher U.S. inflation. And, the deteriorating situation overseas is reflected in a higher dollar and lower commodity prices and in downward revisions to the path of foreign economic activity, which will help to contain pressures on resources and prices in the United States. Moreover, the reactions of U.S. financial markets of late to the deteriorating situation overseas on balance are reinforcing the restraint on aggregate demand. This is in contrast to earlier when domestic markets were responding to foreign turmoil in ways that seemed to support more domestic spending, partly offsetting the damping of net exports. To be sure, interest rates on Treasury obligations have dropped still further, but the adverse effects of the higher dollar and weaker foreign demand on profit prospects have contributed importantly to the recent decrease in equity prices and rise in credit risk spreads. The cost of raising capital for U.S. businesses probably has risen a bit in recent weeks, and previous gains in household wealth have been trimmed. The key question is whether these recent market movements represent a more lasting reassessment of profits and risk or are simply another hiccup in investors' persistently optimistic view of business prospects. If the staff profit forecast is in the right ballpark, such optimism should prove difficult to reestablish. In addition, much of the decline in Treasury interest rates in the last few weeks, and even in the last few months, may represent a fall in inflation expectations, rather than in real interest rates, limiting its stimulative effect on spending. In the Michigan consumer survey, for example, partial data for August indicate a drop in expectations for inflation over both the next year and the next 5 to 10 years; expectations over both horizons have fallen a couple of tenths in the last two months, bringing the decline in median long-term expectations to half a percentage point this year. Using these measures, rate declines in recent months or even since December entirely reflect longer inflation expectations. This conclusion is supported by the slight upward creep in yields on inflation-indexed securities over this period. It may be that the downward pressure on real interest rates stemming from market perceptions of greater restraint coming from abroad are being about offset by upward pressure arising from increases in expected real short-term rates over the near term as inflation expectations fall relative to the forecast of an unchanged nominal funds rate. Of course, not all developments over the intermeeting period point to reduced inflation risks. So far, private final demand remains quite strong, counterbalancing the restraint coming from the foreign sector and lower inventory investment by enough to keep income and employment growing at a good clip. And, as a consequence, pressures on labor markets show few signs yet of becoming less intense. Moreover, financial conditions continue to be accommodative for spending. Price-earnings ratios are still extraordinarily high, holding down the cost of capital, and consumption has not yet caught up to the previous run-up in wealth. Even if real interest rates have not fallen, recent declines in nominal interest rates will boost mortgage borrowing and spending, particularly for those households who feel constrained by limits on available liquidity or cash flow. And, according to our August survey of loan officers, more domestic banks still are easing terms on business loans than tightening them, though by a smaller margin than in the previous few surveys. Lastly, although money growth has slowed somewhat in recent months, measured over the more relevant time frame of the last few quarters, the aggregates continue to expand rapidly--more rapidly, if they continue on these paths, than likely would be consistent over time with nominal income growth in line with the Committee's desire to keep inflation very low. Perhaps the immediate question for Committee consideration is whether, on balance, conditions have changed enough to warrant a return to a symmetrical directive. The Greenbook forecast would seem consistent with such a move in that, at an unchanged federal funds rate, it sees inflation remaining quite damped. In that forecast, the rise in inflation has become even more gradual; indeed, no longer does the rate of increase in the core CPI drift higher in 1999--even after allowing for technical changes to the index. Moreover, the Committee might be more confident now than at previous meetings that the slowing of domestic demand likely needed to contain inflation pressures is in train. For the first time, the reduction in wealth critical to that moderation has actually happened, not just been projected. To date, the restrictive effects of high real interest rates on aggregate demand have been offset importantly by the rise in equity prices. But if those prices don't rebound, much less fall further as seems possible with the staff outlook for profits, the restraining effects of high real short-term rates holding up the real yield curve should begin to show through to spending that already is being restrained by the higher dollar and weak income abroad. A policy stance that keeps real rates relatively high would seem appropriate when, as now, the economy appears to be beyond its sustainable level of production. That rate setting helps to drag the economy back toward its potential--the result that is in the staff forecast. A symmetrical directive would not seem unreasonable or come as a great surprise to financial market participants. The term structure of interest rates suggests that investors do not see the risks as tilted toward greater inflation and tighter policy, even making allowance for the effects on that structure of the flight to quality. Indeed, a growing number of observers seem to be taking seriously the possibility that the next action may be toward ease. Finally, even if the Committee views inflation risks as still substantial, it may also see recent developments at least as having postponed the need for possible tightening, both because greater fragility in markets is likely to persist for a while and because price pressures should be quiescent for a longer period. If tilts in the directive are interpreted as having a time dimension as well as connoting the likely direction of the next policy action, a symmetrical directive may better represent the Committee's intentions. Until a few years ago, tilts applied to possible policy actions in the very near term--that is, over the intermeeting period. While the Committee has not emphasized this interpretation in recent years, it still has seemed often to be using tilts to signal that risks were sufficiently skewed to make a policy adjustment in the indicated direction a distinct possibility over the next several meetings, and not just a statement of probabilities in the indefinite future. Still, Committee members have been projecting more inflation than has the staff, and the Committee may see the risks of higher inflation as large enough and immediate enough to justify retaining the asymmetric directive. Declines in equity prices and greater foreign turmoil may have reduced your inflation concerns, but perhaps not by enough to change the directive. The fundamental situation of the economy has not changed. Economic activity remains at a level well beyond most estimates of the economy's sustainable potential. That overshoot continues to be reflected in the labor markets, where increases in compensation remain on an upward trend. And, recent profit results may in part suggest that the reservoir of productivity-enhancing investments that could offset the effects of higher compensation on costs and prices is not bottomless. In addition, the moderation in the growth of domestic final demand so essential to relieve pressures on labor markets is still mainly a forecast. Although markets don't see an eventual tightening of monetary policy as necessary for that moderation, on balance outside economists still do. As recently as last week, the survey of economists of primary dealers showed that a considerable plurality expected your next action to be a firming rather than an easing. And, as Mike discussed, private forecasters included in the Blue Chip survey on average continue to expect an appreciable pickup in inflation next year. The Committee thus would have reasons for retaining a view that inflation remains the principal threat over time to sustaining the economic expansion. If so, before shifting its directive stance, the Committee may want to see further evidence that the risk of higher inflation has indeed receded--for example, data pointing more clearly to a slowing in domestic final demand. In these circumstances, the Committee might be concerned that returning to symmetry and then perhaps needing to shift back to asymmetry a few meetings later could be interpreted as implying more sensitivity to very recent developments and less regard for the underlying fundamentals and long-run goals of policy than in fact characterizes the Committee's policy strategy.",1900
-fomc-corpus,1998,"Thank you. Questions for Don? If not, let me proceed. I do not have very much to add to what has been discussed around the table this morning. I am in the group that sees no evidence yet that economic and financial conditions are stabilizing in Asia. Indeed, many of you have noted that conditions there continue to deteriorate. One of the problems that concern me about stabilization in Asia and perhaps other areas of the world is that the flexibility required for adjustments is inhibited to a very substantial extent by worker unrest. I am speaking mainly about Korea, but other areas are affected as well. More generally, the political problems around the world clearly restrict the ability of governments to make the adjustments that we would consider necessary in these types of crises. Russia is the classic case. It is clearly the case throughout Asia as well, even in Korea where one would assume that President Kim has fairly strong support. In fact, Japan remains the most difficult area and the greatest concern. I don't have much to add to what has been said, but it is obvious that the situation in Japan is deteriorating. There is no evidence of stabilization. The notion that the Japanese economy will bottom out in the early months of next year is a very interesting thought for which I find the evidence quite lacking, to say the least. I think deflationary pressures are rising around the world. That fact is very difficult to avoid recognizing. There are fewer and fewer areas that are not touched by deflationary developments. Even Canada, which seemed to be such a bulwark, is obviously in some difficulty with respect to its exchange rate that in turn is a function of commodity price pressures from Asia as well as oil price declines. Europe is doing well, but it is not self-evident to me that there is any acceleration there. Very fortunately for the introduction of the single currency, Europe is in a situation in which the ERM has turned out to be a vehicle that is going to ease them into the euro without any obvious adverse difficulty, and this is not something I would have forecast two years ago. But it is hard to argue that Europe is exhibiting the considerable economic strength that is still obvious in the United States. One of the problems I have currently with our statistical system is that I am having great difficulty figuring out what is going on in certain very crucial areas. The most perplexing is turning out to be in the labor statistics area. We are seeing a widening divergence in the employment data as measured by the payroll and the household surveys. I don't know the extent to which the problem is a short-term phenomenon, but the numbers are really interesting. The best way to describe them to you is by citing the fact that over the past year payroll employment has gone up by 3 million while household employment adjusted to payroll survey concepts--that is, by taking account of agricultural workers, the self-employed, unpaid family workers, unpaid absences, multiple job holders, and a few other minor categories--has gone up only 1 million. Hence, the statistical discrepancy has widened by almost 2 million. The same pattern exists to an even greater extent in the past six months. In this period, payroll employment has risen 1.2 million and the adjusted household figure has declined 600,000--a difference of 3.6 million at an annual rate. A small part of the larger discrepancy apparently relates to underestimates of illegal immigration, which bias down the population data and, therefore, the household data. There are some other small technical issues in both the payroll and the household data whose resolution would tend to reduce that discrepancy, but only marginally. We have been accustomed to looking with some skepticism at the monthly changes in the household data because of the characteristics of a limited 60,000 household sample. But for six-month changes, the standard error of the estimates falls quite dramatically, and it is very difficult to dismiss these household data for sampling variation reasons. As a consequence, we are looking at an extraordinarily difficult problem. You may recall that up until the last six or nine months, the evidence had indicated that both payroll and household employment were growing at a 2 percent annual rate whereas the working age population including immigration was going up only 1 percent. Over the past year, the adjusted household data have now also risen 1 percent and the unadjusted household data have gone up somewhat more than 1 percent but decidedly less than 2 percent. The serious question that we have at this stage is how significant the tightening in the labor market has been over the last six months and the last year. Certainly over the last six months, the number of unemployed people plus those who are not in the labor force but want a job has not changed. To be sure, that number has stabilized at a level that still implies a very tight labor market, but one that is not tightening further. This story, as you are well aware, is quite different from the one we get by merely looking at the payroll data, which still show a relatively strong month-by-month growth pattern. Something is different here. We do not know what it is. It unfortunately turns out to be in a very crucial area for the analysis of what is going on in the labor market. As some of you have indicated, we are not even quite sure what the inflation rate is. Until 1995, the inflation rate, if we wished to measure consumer price inflation, was evidently fairly close to the core CPI and core PCE rates, which did not diverge greatly. Since then, even without the methodological adjustments affecting the CPI core, the gap in the two rates of inflation has opened up. We are now dealing, for example, with a 12-month change in the PCE core deflator that in June was about a full percentage point less than the CPI core. So, at a crucial nexus in our efforts to make judgments about the inflation process, our data have deserted us, if I may put it that way. We are in a position where it is very difficult to feel comfortable about what is happening. To make matters worse, when we look at the productivity data, it clearly makes a big difference whether we measure output on the basis of the product side of the national accounts or on the income side in light of the continued widening of the statistical discrepancy. The discrepancy reflects itself quite measurably in the analysis of unit costs and prices. When we look at productivity measured from the income side--which we used to do in the BLS data and we are effectively required to do in the nonfinancial corporate data--we see that productivity growth continues to be quite strong and total unit cost increases are still quite subdued. However, as the expansion slows, the labor markets appear to be sufficiently tight so that individual employers are quite reluctant to lay people off. As a consequence, increases in measured productivity slow down of necessity. This is another way of saying that the unemployment rate is a lagging indicator. In any event, we are at a point where a critical evaluation is required for us to understand the inflation process. I still think that most of the evidence, irrespective of the data we are looking at, clearly shows that inflation is low, labor markets are tight, and compensation per hour is accelerating. The productivity data, as measured on both the product and the income sides, are reflected in muted increases in unit labor costs that coupled with the decline in unit non-labor costs result in a still benign inflation process. But our evaluation would be a lot more convincing if we had a set of data that were internally consistent and did not leave us with very large, yawning gaps in significant places in the statistics. Despite all these data problems, however, I believe that conditions have not changed enough to suggest that we alter our evaluations of the policy choices, for example those that Don Kohn laid out for us to consider. In my view, the bottom line at this stage is that the anecdotal data and either version of the other data that I discussed clearly suggest that ""B"", meaning ""no change"" in the rate structure, is the appropriate position at this stage. But I must say that this does leave open the question that many of you have raised of whether we ought to shift from our asymmetric stance back to symmetry. Don Kohn has outlined the arguments pro and con. I must say that I do not have a strong view one way or the other. I sense, but I cannot be certain, that the Committee is moving from asymmetry back to symmetry. It would be useful if each member made explicit in the go-around where he or she stands with respect to that issue. Vice Chair.",1742
-fomc-corpus,1998,"Thank you, Mr. Chairman. I think your analysis was exactly right in regard to where we should be with the federal funds rate, that is, alternative B. I very strongly prefer that we move to a symmetric directive for reasons that I stated earlier and that were expressed by most of the people in the go-around. Risks have increased on both sides, but they are very well balanced in my view. As of today, I see no likelihood whatsoever that we would decide to move the rate between now and the next meeting, and I think our next rate move is equally likely to be up or down. Whatever one's theological view of how the Committee reaches its decisions on symmetry or asymmetry, one would conclude that a symmetric directive most clearly reflects the current thinking of the members.",155
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I agree, Mr. Chairman, that a symmetric directive makes sense at this moment. Such a directive reflects my view that we are unlikely to change monetary policy anytime soon and that, when we do, we may move the fed funds rate up or down. Now, I have been wrong before. We all have been wrong before. The only argument that I see for not changing the tilt is the fact that it does not have much operational significance and moving it around a lot risks our looking a little silly if we turn out to be wrong about the balance of risks. So, I could go along with the strong argument for leaving the tilt where it is, but my preference would be to adopt a symmetric directive.",142
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. First, I strongly support your recommendation for no change in policy at this meeting, but I want to focus my attention on the issue of symmetry versus asymmetry. In my view, the very tight labor markets impose a natural asymmetry to policy in relation to growth prospects. Specifically, a forecast of persistent above-trend growth would, I believe, justify a tighter policy, but a forecast of modestly below-trend growth would not immediately dictate an easier policy. Instead, such a development would help to unwind the very tight labor markets and contribute to a soft landing with maximum sustainable growth and full employment. This, I believe, is the foundation for the asymmetric bias toward tighter policy that we have maintained since the March meeting. I still believe that very tight labor markets and likely growth near or above trend will ultimately dictate that the next move for the funds rate will be up rather than down. This balance of risks is best conveyed by the current tilt in policy. But there is a second asymmetry in the outlook today. This asymmetry relates to probable outcomes versus central tendency forecasts for Japan and emerging economies in Asia and elsewhere. Relative to such a baseline forecast, there is in my view a considerably greater risk of a much worse outcome in those economies than there is of a much more benign result. I see this downside risk of a worse case outcome in Asia, should it materialize, as likely to spread to other emerging market economies and constituting the most serious threat to the U.S. and the global economies. Such a worse case outcome does not have the highest probability, but it is the most worrisome possibility that we face today. On balance, therefore, I think a symmetric posture is the best choice for now.",352
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I, too, am in agreement with your recommendation of alternative B. I have mixed feelings about whether or not to change the symmetry of our directive at this meeting. The reason is that I continue to believe that our next move should be to raise the federal funds rate, and I think we would be better off right now from the point of view of speculation in financial markets, credit markets, and real estate markets if we had moved to a tighter policy stance earlier. However, there are a lot of worrisome downside risks right now coming from the external sector of the economy. There is a sense of spreading fragility abroad and a possibility of a feedback to our own financial markets. Given the sense of caution that I feel to a greater degree now than I did at the last meeting, I think the need for a move has been pushed off until we see what the impact of various evolving events abroad will be on our economy. So, I can go along with what seems to be the consensus so far that we move to an unbiased directive.",209
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,I have a strong preference for symmetry for the reasons already stated.,13
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation of alternative B. I have a mild preference for symmetry. With President Minehan, I still have some concern about the risks of rising inflation, but I also agree that the external sector has become more uncertain. I sense that symmetry is the best way to communicate these concerns taken together.",65
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will support alternative B. As I have said before, I would like to see us move to a regime where we could move the funds rate more often--not randomly but more often. [Laughter] I don't think that would look silly or needs to look silly, and I will go back to my example of using the gas pedal to control the speed of the car.",83
-fomc-corpus,1998,Except on the highway?,5
-fomc-corpus,1998,"A highway with hills. On the directive, if we cannot move the funds rate around, I would certainly like to move the symmetry clause around. I think the risks are roughly symmetric now, so I would definitely support going to symmetry.",47
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I, too, favor alternative B and I also support symmetry. I almost always am in favor of symmetry. It has the advantage in this case of being appropriate. [Laughter]",44
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I also support your recommendation for ""B."" I agree that the risks are greater than they were at the time of our previous meeting, and I think there has been some shift toward the downside. So, I would favor moving toward symmetry. I would suggest, though, that it is a little unfortunate that we will be releasing information on Thursday that is not going to be consistent with this proposal. I hope that we will be coming back to the discussion on disclosure with Don Kohn at a later point.",105
-fomc-corpus,1998,"Yes. Don has that scheduled. As you know, we were contemplating doing it today. We just could not get the material together in time.",29
-fomc-corpus,1998,I know.,3
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"I support your recommendation for alternative B. Frankly, I have mixed emotions about the symmetry issue. If I were asked, I would probably retain the asymmetry at this point, given the strong domestic demand, but I am very comfortable with symmetry as well.",52
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I support alternative B. I also support a symmetrical directive because I think that the risks are far more symmetrical now than they have been during the previous few months since I became a member of this Committee. I would like to point out that a key feature of the policy regime in recent years is that the market has moved rates and has done a lot of the stabilization work for us under conditions where the Fed has set the right long-run environment and the market has moved. There currently is plenty of room for the market to move rates higher, and should incoming data start to point in that direction, I would anticipate that the market would back up quite a bit. So, in that sense, there is plenty of room for a tightening policy to take place through the market. In the other direction, there is not that much room, although a little, for rates to decline from where they are now because they are anchored to the current fed funds rate. That would mean that if economic conditions were to weaken quite a bit as the data come in over coming weeks and months, we might be looking for policy easing to follow the market down as that evidence accumulates.",231
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I can certainly accept your ""no change"" recommendation. As far as the symmetries go, I can accept symmetry without great angst because I think there clearly is a strong case for it. But I would prefer to stay with asymmetry because the basic structure of the risks that we have been living with for some time is still intact in my view. There is a case for reorienting our directive a little by moving toward symmetry, but for me economic conditions have not yet changed enough to change the policy stance. To repeat, I can certainly accept symmetry.",117
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. For what it's worth, during the break I got the data used by the staff to calculate the median CPI. It takes us a little longer to compute this number after we get the BLS statistics. The number for July is 3.0 percent. For July-to-July, it is 2.8 percent. I would take that as the best estimate of what to expect in the next 12 months. What is interesting is that when we break it down, we take the position based on long historical experience that in the case of a divergence, the published CPI almost always converges to the median. A divergence occurred between October of last year and March of this year when the published CPI dropped to an annual rate under 1 percent and the median stayed right at about 2.8 percent. During the four months since March, the published CPI has come back to an annual rate of 2.4 percent. So, one can look at that and say that monetary policy has eased because the real fed funds rate has fallen in the last four months. That is consistent with some other monetary statistics and credit aggregates, especially the monetary base, which I pay a lot of attention to. The reason for not taking action to restrain monetary growth at this point would be either the effects of developments in Asia and Russia, though I am not sure how to quantify that, or the argument that some tightening would do harm to them and therefore we should refrain from taking action. Well, I am really a believer in tough love. I remember all the periods in the 1980s of rolling over repeatedly the maturing debt of Argentina and other countries to give them time to build up the courage to fix their problems. It really was only when we cut them off that the political dynamics within those countries got to the point where they were willing to do something. When I listen to the discussion about Asia around the table, it seems to me that people are saying that some of these countries are not yet in bad enough shape to fix. I do not know how our taking action for the purpose of helping them creates the pressures for them to help themselves. The other argument on the domestic side for not doing anything is the Greenbook forecast. Don Kohn and others have talked about a forecast of slowing expansion in domestic demand and related slowing growth in money and credit and so on. It is a forecast. On that score, I am reminded of century date change problems associated with the computer, whose development owes much to Marina Whitman's father, John von Neumann, who was the architect of the modern computer system. I do not think we ought to blame him for the two-digit problem, but he did develop the basic architecture that goes into modern computers.",558
-fomc-corpus,1998,I think we ought to blame Alan Greenspan!,10
-fomc-corpus,1998,I learned it from John von Neumann!,9
-fomc-corpus,1998,"The other thing on which we as economists place more emphasis was his work with Oskar Morgenstern on the calculus of decisionmaking using mathematical formulations of the minimax type. This helps us to identify which kinds of errors we are willing to make and which are the most difficult to correct. In that light, I still believe that the more costly mistake to correct will be the one that occurs if it turns out that excess demand growth does not in fact slow down. The analysis so carefully done and mathematically developed by von Neumann and Morgenstern basically says that we sometimes should base decisions on something that we not only do not believe and definitely do not want, but that is still the wisest course of action.",142
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I support a ""no change"" policy, and I think the risks have shifted sufficiently to justify a symmetric directive.",23
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation for ""no change"" in policy. On the directive, it is a close call. I think that on balance the risks are still marginally on the upside. So, I would have a slight preference for an asymmetric directive but I can support a symmetric directive.",61
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"I prefer alternative B as well. I am at the same place as Governor Kelley. I have a slight preference for continuing the asymmetrical directive, at least for a while longer. It seems to me that given the extraordinary visibility and publicity of the Asian and Russian problems, we could give too much weight today to those issues before we have some greater assurance that domestic final demand will slow to a pace that is consistent with no deterioration in inflation. I also have some concern about the confusing signal effect of our delayed announcement of the symmetry in the directive, and I would feel more comfortable with moving to a symmetrical directive today if we were on a regime of announcing that decision promptly after each meeting. However, I do not feel strongly about the symmetry issue.",149
-fomc-corpus,1998,First Vice President Varvel.,6
-fomc-corpus,1998,"We would agree that the downside risks have increased, but we still believe that the upside risks are greater, given the strength in domestic demand. So, we would continue to favor a smaller increase in the fed funds rate sooner rather than a larger increase that could well be needed later. There obviously is a lot of sentiment for alternative B around the table. Given Committee adoption of that alternative, we would favor a continuation of the asymmetric tilt.",87
-fomc-corpus,1998,"There seems to be a fairly large concentration of preferences around ""B"" symmetric. Would you read the appropriate directive?",23
-fomc-corpus,1998,"The draft directive is on page 13 of the Bluebook, which follows a lot of charts and tables: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a slightly higher federal funds rate or a slightly lower federal funds rate would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months.""",135
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan No Governor Kelley Yes Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes,43
-fomc-corpus,1998,"The next meeting will be on September 29. We will adjourn for lunch, at which time two topics will be discussed.",26
-fomc-corpus,1998,"We are getting under way a bit early, but I am sure we will use the time productively. Would somebody like to move approval of the minutes? I want to call your attention to the addition of a reference in the minutes to our recent telephone conference. I trust all of you have looked at it and that there is no objection to the way it is worded.",75
-fomc-corpus,1998,Move approval.,3
-fomc-corpus,1998,"Without objection. The second item on the agenda involves a continuation of discussions we've had on the issue of disclosure. In its memorandum, the staff winnowed down our earlier considerations, and the options now seem fairly straightforward. There is no urgency to implement any of them, and I think we should continue our discussions until we can reach a consensus of some sort. This is not strictly a matter for a Committee vote. Whatever we do, including nothing, it is important that it reflect a consensus as differentiated from a majority vote. I don't think a change in our procedures should be made by a majority vote because once such a change is made it is very difficult to backtrack. As a result, any change should be something with which everyone feels reasonably comfortable. Having said that, would somebody like to respond to the memorandum, which sets out the issues in a way that does not seem to require a staff briefing? President Hoenig.",186
-fomc-corpus,1998,"Mr. Chairman, after reading the memo and participating in several discussions of this question, my inclination is to go with Option 1. With regard to that option, the simpler and more straightforward the language, the better. Indeed, I would simplify the language even further. For the symmetric alternative, I would say something like ""in view of the currently available evidence, the Committee believes that developments are equally likely to warrant a decrease or an increase in the federal funds rate."" If the decision were for a tilt, I would have the sentence say ""in view of the currently available evidence, the Committee believes that developments are more likely to warrant a decrease/increase than an increase/ decrease in the federal funds rate."" I think that wording is understandable and straightforward. I also would like to see the minutes released even sooner than is contemplated in this memo if that is physically possible. That's because, as I said the last time we discussed this matter, the minutes provide context for the Committee's decision. If we are going to be more transparent, sooner is better than later in that regard. I know there are physical limitations involved in the production of the minutes. In sum, my preference would be to put simpler language in the directive, release it promptly, and then publish the minutes as soon as we can to give context to our decision.",266
-fomc-corpus,1998,"I gather by implication that we have concluded in our previous discussions that variations in wording to describe differing degrees of tilt have not served us very well. As you know, in the past we have had hard tilts, medium tilts, tilted tilts, biased tilts, and who knows what else!",61
-fomc-corpus,1998,"We need an interpreter to figure out what all that means. That is true even for us, let alone the public.",24
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, I share Tom Hoenig's views pretty much down the line. I come to this, as I said last time, with a sense that the more information we can put out promptly, the better. The more quickly markets react, the more the policy uncertainty premiums that might otherwise get built into markets are reduced. So, I would favor both announcing the tilt immediately after each meeting and releasing the minutes sooner.",85
-fomc-corpus,1998,"Tom, did you also say you favored releasing the tilt immediately?",13
-fomc-corpus,1998,"Yes, I would be in favor of releasing it promptly after each meeting with the simpler, clearer language.",21
-fomc-corpus,1998,"I think it is important as we continue this discussion to be sure that we all have the same objectives. In my view, the first and foremost objective is to make our intent clear. I think the staff does a really nice job on page 2 of their memo where they express their sense of what we mean by the tilt, namely that it reflects the Committee's thinking about the balance of risks. That is my current understanding of the primary reason for the tilt language. I believe the secondary intent is to continue the practice of giving the Chairman the authority to act for the Committee in extraordinary circumstances. I assume those are the two things we are trying to accomplish. I do not think that announcing the tilt would have a negative effect on the Committee's discussion, although that is an issue raised in the staff memo. In fact, I would argue that it might even strengthen the discussion in that those who favored action at a meeting when none was taken would at least have the benefit of the tilt being announced immediately, with whatever effect that might have on the market. I also am satisfied that Fed watchers and others who pay attention to the tilt are smart enough to realize that circumstances may change as events unfold after a meeting. Thus, they will not expect our next action always to be in the direction of a tilt. I also share Tom Hoenig's view on releasing the minutes. I assume that we should be able to publish the minutes sooner than a few days before the next meeting as suggested in the staff memo. Since the minutes elaborate on the reasoning behind the tilt, I think the sooner we release them, the better we are served. I also share Tom's preference for simpler language on the tilt, and I would incorporate the simpler language in the staff memo with the changes that Tom suggested. I also would reword the lead sentence to indicate that the Committee seeks conditions in reserve markets that are consistent with its mandate to foster longer-run price stability and sustained economic growth. Finally, I wonder whether we should consider dropping the last sentence of the operating paragraph, which references growth in M2 and M3. That sentence may suggest that the Committee has those aggregates as a policy objective, and I question whether it is relevant in terms of the way we currently conduct policy. However, this may be an issue that we don't want to open at this time.",468
-fomc-corpus,1998,"As a central bank, we should at least recognize that M2 and M3 exist, no matter what we do with them. [Laughter]",30
-fomc-corpus,1998,"I accept that! Thank you, Mr. Chairman.",11
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I am very much in agreement with Presidents Hoenig and Guynn. I favor Option 1, prompt release after a meeting, and simpler language. I, too, tried to draft language that would underscore the concept of risk to which both Tom and Jack seemed to be referring. I also believe that the minutes should be released sooner than 2 or 3 days before the next meeting, if that is at all possible.",85
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"I basically support what the three Presidents who preceded me said about making a prompt announcement, and I would release the operational paragraph when we change the tilt. I have to say that I find the language in Option 2 relating to the tilt to be somewhat preferable to that in Option 1, though both certainly are better than what we have today. Option 2, it seems to me, captures the essential element of asymmetry in that it refers to the likelihood that we will move policy in one direction rather than the other, and I think that is highly desirable. What I like about Option 1 is the reference to the long-run goals. So, some combination of Options 1 and 2 would be my preference.",145
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Just to play devil's advocate, I would like to suggest that we'd be better off not formally voting on a tilt. Therefore, we wouldn't have the decision to make on how to release that vote. I understand that having the tilt as an option may help with consensus building and arriving at a decision during any given meeting, but we can get the sense of where we as a group are leaning without necessarily voting on it. We would run fewer risks of creating embarrassing situations where we were getting ready to zig but had said at the previous meeting that we were more likely to zag. I think there would be a greater degree of freedom for the Committee if we did not have a formal tilt but just listened to each other and knew which way we were leaning without having to take a vote.",156
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I agree with Option 1 as amended by Tom Hoenig. I thought the staff draft was a quite good breakthrough in terms of added clarity and straightforwardness, and Tom has made it a bit better. I suspect that what will happen if we know we are announcing the tilt is that we will be less likely to have one. We may, if there is a considerable degree of uncertainty, take refuge in a no tilt directive, but that seems appropriate to me. The only reason for having a tilt is that we want to send a signal about which way we are leaning. When we are sure enough of that signal, we ought to say so. We don't need to signal ourselves; we need to signal somebody else. So, it should be a public matter. I also think it would be desirable to get the minutes out sooner if we could. But the important breakthrough is straightforward language on the tilt and announcing it immediately.",185
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"I continue to favor immediate announcement of the tilt. I thought Tom Hoenig and Jack Guynn presented the arguments extremely well, and I believe Tom improved the draft language a little. I recognize that there is some danger that an immediate announcement could reduce the use of the tilt. However, if we are disciplined, we can avoid that and honestly communicate to the public exactly how we assess the risks going forward. That is what the tilt does. Releasing the minutes more quickly would be a further constructive step toward incremental transparency, and I think doing that would be a good idea.",115
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I continue to believe that the more information and the clearer the information, the better. So, I agree with the majority here. I like the language of Option 1, and I think Tom Hoenig has improved it. With Tom's changes, that option strikes me as a huge improvement over what we have now. I would release the directive immediately and release the minutes as early as possible.",83
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I agree with the simpler language. I, too, think that Tom has improved it, and I would go with that. While I realize that it's difficult to be against providing more information, I continue to have some problems with immediate release of the tilt. I am for more information as a general matter, but I believe the practical outcome of prompt release of our decision on the tilt would be less use of it. Monetary policy does not take place in a vacuum. It takes place in a wider social and political environment. In that environment, it is almost always easier to lower interest rates than it is to raise them. If we are planning to raise interest rates, we may as well get a real bang for the buck and actually do it. If we say we might raise them and then fail to do so, we are going to get the inevitable announcement effect and the associated criticism for doing it. There will be a further ""announcement"" effect later when nothing happens. I think we will go through that exercise a few times and conclude that it really is not worth doing. Not acting in the direction of a tilt may also erode our credibility. The tilt may be useful for our internal deliberations, but we would be using it less and adopting symmetric directives more frequently. So, I have real doubts that this kind of disclosure would actually contribute to clarity. And I therefore have misgivings about moving in the direction where the majority opinion appears to be going.",293
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I certainly favor earlier release of the minutes and clarifying the language with regard to the tilt or the lack thereof. Like Bob Parry, I have a mild preference for something like Option 2, but there doesn't seem to be a huge difference between the two versions as I read them. I share Ed Boehne's reservations about the immediate release of the decision on the tilt. Historically, it seems to me that it has been a very noisy signal because we frequently have had a tilt or changed the tilt and nothing followed. That gives me some pause. I'm not sure we are going to have the intended results from that kind of release, at least at this point in time. So, I'm not in favor of immediate release at least for now, and I would prefer to hold off making a decision.",169
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"I am with what seems to be the growing majority here, but I recognize that there are counter arguments. I'm in favor of immediately releasing the tilt mainly because it's a question of honesty. If a consensus has emerged in the Committee that says the risks have moved in a certain direction and therefore policy may follow, I think it is useful to inform the market. We are now in a posture where we do not release the tilt and we end up having a number of people trying to interpret our speeches and our responses to questions in a way that may not conform with our thinking. I think releasing the tilt promptly will give us a chance to be much clearer with the market, to signal with one voice as opposed to potentially 19 voices, and to be certain that if we have reached a consensus, we will tell the market what the consensus is. I also would be happy to encourage the earlier release of the minutes in the sense that they provide a fuller context for our decisions. As to the language, I have a slight preference for Option 1 as amended by Tom Hoenig, but I can support Option 2 as well.",225
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I, too, like Option 1, but I would prefer the tilt language from Option 2. I think that the earliest possible release of the minutes, consistent with their being written clearly and informatively, is a good idea. I would like to add that I cannot imagine a better time to introduce these new procedures than right now, given the other things that are going on.",77
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. First, I am for releasing the tilt sentence or the entire directive paragraph promptly after the meeting and the minutes as soon as possible thereafter. On the language of the directive paragraph, I am for Option 1. Let me point out one difference between Option 1 and Option 2; Option 1 states the Committee's goals in the first sentence and goes on to say what the Committee did; Option 2 reverses that order. However we describe the tilt, I would like to preserve that aspect of Option 1. That is, I would state the goals first and then indicate what we did. I agree with Bill Poole that we should adopt these changes today, although they may make us a little less aggressive about changing the directive language. I agree with what Tom Hoenig said, but unlike Bob McTeer, I would like to retain the tilt in the directive. One thing I have been worried about, and I have said so in the past, is that the way we make policy could allow us to get too rigid on the federal funds rate. If we keep the tilt, we can be a little less rigid, and I would like to retain it for that reason. On a last point regarding our credibility that Ed Boehne made and Gary Stern seconded, I have been impressed since I have been here at how short people's memories are. Six weeks is a fairly long interval in terms of monetary events, and there is a great deal of speculation about what we are going to do today and not too much is remembered about where we were six weeks ago. I'm not too worried about the credibility issue because if we change our position or change our minds I think that would be viewed in the context of whether it is a good thing to do in light of the most recent events. I don't think we would lose any credibility. So, I am inclined to downplay that argument.",388
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Mr. Chairman, I think it might be worth thinking about why we do what we do before we change it. One of the realities is that by releasing the minutes of a meeting two days after the following meeting, the decision on the tilt at the earlier meeting may be interesting but it is no longer very important. We already have decided either to ease or not to ease or to tighten or not to tighten at the meeting that took place two days before. Why have we thought that use of the tilt has served our cause well? In my view it has helped us to focus on what we want to do in terms of guiding our policy between one meeting and the next or at least in terms of a longer-term view of where we are headed. I think that has served us very well. If we decide to release the minutes earlier, which in and of itself is probably a good idea, my analysis of the collective psychology of this group is that in fact, as Alice Rivlin suggested, we will not do a whole lot of ""tilting."" The reason is that if we are going to announce the tilt either right away or shortly before the next meeting by releasing the minutes early, we will create a difficult conundrum for this central bank. Central bankers are supposed to be believers in price stability. Even if we are symmetric in our approach to inflation, as I think many of us are, in the sense that we are opposed to both inflation and deflation, the public believes that central bankers are supposed to be inflation fighters. We have to remind them every now and then that we are against deflation also. I can envision us sitting around this table saying that we ought to have a directive that is biased toward tightening, and some of us would then say that we ought to go ahead and tighten. But if we do not want to tighten at a meeting, then it would be better not to announce after the meeting that we are thinking about doing it later. Doing the latter would in my view make us look a little questionable in our judgment or at least in our strength of character. On the other hand, if we are thinking of easing but are not sure we want to ease at a given meeting, people would conclude that that is a rather reasonable thing for central bankers to be doing. So, with an early announcement we would wind up in my view of the real world more likely to tilt toward easing and less likely to tilt toward firming. Even though I believe that it would be a good idea in principle to release the minutes early, and therefore I don't feel very strongly about whether we announce the tilt or the absence of a tilt shortly after a meeting, I think it is likely that with such an announcement the use of a tilt would become a fairly rare phenomenon. Most of the time when we think that economic conditions, the financial markets, and monetary conditions are such that it might be appropriate to ease monetary policy at some point, we as good central bankers might not be entirely sure of the need for easing quite yet, so we would not do it. Therefore, I'm not sure what we would accomplish by changing our procedures. To summarize, prompt announcements make us look like believers in transparency; that is good. They make us look like we are sharing information with the American people; that is good. But in terms of actually serving the interests of the American people well--and I think we have been doing a phenomenally good job in that regard, leaving collective modesty aside--I am not sure that a change in our announcement procedures would improve our performance.",716
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I tend to agree with President Boehne and also President McDonough. It is hard to argue against transparency. Obviously, we all want to release as much information as possible. But if we were to design this system from the start, I cannot imagine that we would design a system that would require us to make two decisions. One might be a decision to maintain an unchanged policy and the other a decision on whether we want to tell the world we might be tightening or easing later. Alternatively, we might take an action and announce shortly after the meeting whether our directive includes either of those two tilts. It just does not seem logical to me that as a central bank we would want to do that. We have used the tilt for other purposes, and now we are trying to design some system around that history. We wouldn't design it this way if we were to start afresh and didn't have to take account of its use in the past. I believe that if we were to agree to announce the tilt at some time before the next meeting, the practical result would be that we would use it much less. Actually, though, the existing system seems to be working rather well. We had unusual circumstances at the August meeting when we changed to a symmetric directive. The July minutes, released shortly after that meeting, indicated that we had had an upward bias. In the interim, between the August meeting and the September meeting, the Chairman consulted with us at Jackson Hole, and he subsequently announced that the directive no longer had an upward bias. So, I think that, on the whole, our system for announcing our decisions has worked rather well over the years and I do not see any need to change it at this point.",349
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. With regard to the minutes, I agree with releasing them as soon they can be prepared, even though releasing them sooner will impose some burden on the staff and on all of us who review and approve them. On the release of the tilt, though, I am persuaded by a number of comments today that if we release it immediately, we will not use it. Therefore, I want to release the tilt immediately! [Laughter] I am persuaded that over time the costs of having a tilt outweigh its benefits in terms of consensus building. I have always thought that if we have monetary policy that operates on a price basis, we run into problems in terms of interactions in the marketplace if we announce our intention to change interest rates in a certain direction over time. The markets do move on that kind of information, as opposed to the way they tend to function if we have a quantitative approach to implementing policy. With regard to the wording of the options, like Bob Parry and Ned Gramlich, I like the way Option 1 begins with a statement of our objectives. Regarding the tilt sentence, though, I do not like Option 1 because it states that ""the Committee believes that developments are more likely to warrant....etc."" That immediately starts to raise questions about what developments are involved or what indicators flashing red, yellow, or green will trigger an action. It puts undue weight on some signal that may lead to a change in policy. Option 2 does not do that. I agree with Governor Gramlich's comment that the federal funds rate has tended to be too rigid, but my sense has been that the tilt frequently has been used in lieu of making a policy change. The tilt may serve a function in terms of building a onsensus, but if it were not available, we would have more straight up or down votes. We would change our policy or we would not.",379
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, when we discussed this issue earlier, I spoke at some length against the idea of early release and I still feel the same. I would like to restate my views briefly, if I may, even though most of my concerns already have been expressed. First of all, please recall that the Lindsey paper that supported our earlier discussion showed that over the past 12 years, the tilt in place at the time of each FOMC decision was in the same direction as the decision itself only 52.7 percent of the time. In the other 47.3 percent of the time, the decision differed from the existing tilt. Thus, the tilt has been nearly perfectly worthless as a predictor of policy decisions. [Laughter] In my view, this and other problems give us three reasons not to change our announcement practices, and they provide me with a notion of what the results would be if we did. First, this record shows that an early release over the past decade would frequently have misled the general public, which is only concerned with deeds and not the fine nuances of economic reasoning. As a consequence, I am convinced that with early release we would experience a severe loss of credibility that is the lifeblood of our policy's effectiveness. Second, early release of an asymmetry would often be the equivalent of a policy move that the Committee had just decided not to take, and the Committee could never know as it voted what forces it might inadvertently be setting in motion an hour or so later when the announcement was made. Third, if an asymmetry were in place at a meeting where the issues were close, the very existence of a publicly known 6- to 8-week old position could influence the adoption of a less than optimal new policy. As a consequence of all this, I am confident that, after being burned a couple of times, the Committee would simply cease to employ this very useful convention. That would be a shame because the tilt legitimizes the uncertainty that is frequently present and the delay that is frequently appropriate, and it also aids materially in building a consensus. In sum, I can see no helpful elements to an early release regimen and many serious negative consequences. On the rewording of the directive, truth to tell I like the existing language and I would be a little sad to see it go. Everyone who is interested and needs to know understands it perfectly well, and more importantly it constitutes a bit of quaint Americana that we should cherish. [Laughter] That said, I would support a change if that is the Committee's wish, and either of the two wording options and the suggested amendments are perfectly acceptable to me. Option 1 is fine, but I think there is much to be said for Option 2 because of its greater continuity with the present practice. Thank you.",568
-fomc-corpus,1998,"One of the things that strikes me about this discussion, and I must admit that I am on both sides of this issue, is that I switch back and forth to different sides at different times. The reason is that we are being pressed on something that we consider to be of value to the market, namely that more information is better than less. There also is an ethical issue here, one relating to the integrity of this institution, that clearly is an important issue that we need to address. Both of those considerations suggest that more is better, although we must remember that we are not going all the way in providing information. If we went to the fullest extent in that direction, then Henry Gonzalez's approach of live transmission of this meeting obviously would be the most ethical and most directly available source of information to the market, but it also would be the most useless. So, let us be careful about how we weigh the various alternatives. The one thing that struck me, which has not surfaced in our discussion today, is that our experience of the last several years has not been the same as our experience over a much longer time frame. That is, the nature of our deliberations and the way we conduct monetary policy are quite different when the economy is under extreme stress, when the unemployment rate is rising, when there is a cacophony of outside comments about the need to lower interest rates-- the sort of commentary we seldom get when the economy is strong. So, we have to be a little cautious about proceeding further without availing ourselves of the lessons of past experience with regard to how things may play out in a period, say, when the economy is getting away from us on the downside and we are looking at a fairly dramatic decline in demand, rising unemployment, and a lot of political stirring. I think it would be important for us to work through a number of alternative scenarios in that context. If we do that, I think we're going to find that this issue is a lot more problematical than it may currently appear. I think we ought to do that. What our discussion did clarify, unless I misheard, was a general willingness to abandon quaint Americanism--SEVERAL. Americana.",442
-fomc-corpus,1998,Americana.,3
-fomc-corpus,1998,"There does seem to be a fairly broad consensus about the desirability of better and simpler language. However, we have not yet come together on some of the other issues; if a vote were taken on those issues, I think there would be a majority in favor of doing something now, but there is still a significant minority on the other side. With regard to the wording of the directive, this is the first time that I have sensed the existence of general agreement though there remain some small differences. I would recommend that we put together language that reflects, as best we can judge, the consensus of this group and revisit this matter at a later meeting. We can then make a change, and I think we will be ready to do so in part because we have wrestled with this issue for a long period of time. There are two quite different disclosure issues. One is that of giving changes in the tilt the same status as changes in the funds rate with respect to when they are announced. The second, which as I see it may be viewed as independent of the first, is when to publish the minutes. I have a certain sympathy for the views of the Vice Chair on the latter. I often have wondered what we would gain by releasing the minutes a week earlier than the current schedule if the information on the tilt was already out. I grant that if the tilt is not announced shortly after the meeting, then moving up the publication of the minutes clearly has the effect of releasing the tilt at that point. But if the tilt is already published, then the acceleration of the minutes strikes me as something that probably has more potential for mischief than not. Remember that the minutes provide a discussion of the various forces and nuances and the like, and if we were to decide to publish them one week earlier, then why not two or three weeks earlier? There has been general agreement within the Committee that the contingency discussions contained in the minutes should be published only after those contingencies no longer have relevance. So, I do think that the issues of whether we publish the tilt at the point of decisionmaking and when we release the minutes are separable. They are not necessarily tied. Unless I hear an objection, what I would like to do is to have Don Kohn construct a specific, formal proposal based on today's discussion of the various wording options and Tom Hoenig's amendment. I believe we can come to an agreement at our next meeting on that issue. However, I do think we should continue our discussion relating to more prompt disclosures to see if we can narrow our differences further. We have narrowed them to some extent. In that regard, I would like to suggest that the staff review how, as they see it, changes in our practices would play out in periods other than when we make decisions only at meetings and are getting very little outside criticism. We have been in such a period for quite a while. In fact, it is almost unprecedented because we tend to be the favorite scapegoats of a significant number of people who live inside the Beltway. The fact that we have not been the subject of heavy criticism for a prolonged period is quite unusual and may limit our ability to anticipate what we could face in the down phase of a business cycle if we change our disclosure practices. I think it is essential for us to make certain that if we decide to move toward earlier release--a decision that as I said earlier would effectively be irreversible--we will have thought through how things would play out and what the implications are. Unless there is an objection, I will close the discussion on this issue at this point. Hearing none, let us go on to Peter Fisher.",733
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to the usual package of colored charts with an FOMC cover and also to three pages of black and white charts showing standard deviation data that I will refer to briefly. Those two sets of charts should be in front of you. 1/ Looking at the first page of 3-month deposit rates--the current 3-month, the 3-month forward, and the 9-month forward--you can see that the 9-month forward 3-month rate is now trading at a level of about 4.7 percent, reflecting in my judgment a market expectation and pricing not of a single easing of monetary policy but of a whole series of easings through early next year. You can see that these expectations began building after the Committee's last meeting and the contemporaneous Russian devaluation and moratorium. They have become much more pronounced in recent weeks. In contrast, the forward rates in Germany and Japan have now collapsed onto the current 3-month deposit rate, so there is no expectation of up or down rate movements in those two countries, just sideways. I always like to point to instances when movements in exchange rates are consistent with changes in short-run interest rate differentials. I do not want to suggest that the changes in the rate differentials were the only cause of the dollar's slight weakening, but it is gratifying when we find consistency there. At your last meeting, I suggested that market participants were on the edge of their chairs with respect to the risk of a Chinese devaluation of the yuan. It turns out that the Russian devaluation and moratorium of the prior day was sufficient to strain, and in some cases nearly to shatter, investor confidence around the world, particularly in fixed income markets. Turning to the second page, we have depicted a series of yields on fixed income instruments. Let me work up from the bottom of the page. At the bottom, we have the 10-year Treasury note and a Merrill Lynch high grade agency index in yield terms. The dark blue line above the red line is the 10-year U.S. swap rate, that is, the fixed component of the ""plain vanilla"" 10-year fixed rate to floating rate interest rate swap. The lighter blue line is the Ford Motor Company's 10-year bond and there is a Fannie Mae coupon issue as well. Moving up the page, the middle panel is on the same scale as the bottom panel. We are looking at a jump of 150 basis points to get up to this Merrill Lynch index of high yield securities. That index covers more than 900 companies rated BBB or lower. The top panel is on a completely different scale in order to fit the JP Morgan emerging market fixed-income index on the same page. One reason for presenting this in this form, which I will come back to in a moment, is that a widely emulated trade in the financial markets has been a spread trade. It is based on an expectation that spreads would be narrowing between higher yielding credits and, for example, Treasuries. You can see here that spreads between the higher yielding issues in the top two graphs and the Treasuries widened considerably after the Russian devaluation on the day before the Committee's meeting in August. While some of the yields on higher grade credits are lower in absolute terms, the spreads themselves also have been widening. So, trades constructed even against those credits have been under considerable stress despite the fact that their yields in absolute terms have shifted lower. The rush out of emerging market and higher yielding instruments in late August obviously put significant strain not just on those who are carrying higher yielding instruments but on those involved in trading on spreads. The result has been an acceleration both of purchases of Treasuries and sales of higher yield securities. It is worth noting that while the yields on higher grade credits have come down, at least part of the explanation is an expectation in the market that there will not be the normal pace of new issuance. In these very volatile markets, firms that have higher grade credit ratings like the Ford Motor Company are not going to try to price new issues, so some of the reduction in yield is in anticipation of that supply effect. Of course, the treasurer of Ford Motor Company is not complaining that yields on Ford's bonds are lower, but he does face more volatile markets. The 900 or so companies represented in the Merrill Lynch master index of high yield securities, however, are facing both higher yields and an inability to borrow in these very volatile markets. Turning to the next page, we see another way of looking at similar data. In the top panel, we have the 10-year swap spreads that I referred to earlier. The panel shows the 10-year fixed leg of a fixed-floating swap against the government bond for the same country--France, Germany, the United Kingdom, and the United States are shown. You can see the tremendous widening of these spreads after the Committee's last meeting. The bottom panel, unfortunately, is poorly labeled; it should be called ""swap-spread spreads."" What is depicted here is the difference between the U.K. swap spread and the French swap spread in blue and between the U.K. swap spread and the German swap spread in yellow. This is a trade that is based on what a number of people have expected to occur--the long-run convergence of the United Kingdom into the EMU. Eventually that is going to happen and this is one way to take advantage of that expected event. Instead of converging, however, you can see that the spreads have tripled since late August. Yet another way of looking at the same data is reflected in the black and white charts that I have handed out. The point here is that the events that have occurred recently in fixed-income markets produced a shock not just for those who have been trading for the last year or two but also for those whose trading goes back as far as June 1992. What we are looking at here is the standard deviation in basis points of these spreads, as measured over 20-day intervals, from the mean for that interval. This chart indicates how many basis points need to be encompassed to include one standard deviation. For the U.K. 10-year swap spread, the average 20-day standard deviation from June 1992 through July 31 of this year was 2.6 basis points. As you can see, the prior high for any 20-day period was an average of 9.5 basis points in 1994, while for the 20-day period through the end of August it was 14.8 basis points. So, we had a huge explosion in the volatility of the swap spreads in August. The same essentially can be seen on the second page for the U.S.10-year swap spread.",1372
-fomc-corpus,1998,This is the U.K. bank rate versus sterling?,11
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,What maturity?,3
-fomc-corpus,1998,"The 10-year maturity. So, we have a 10-year gilt. It is a 10-year swap among the prime bank names, not necessarily British banks; it involves the major players in all the markets.",44
-fomc-corpus,1998,But in sterling?,4
-fomc-corpus,1998,"Yes, in sterling. It is that spread we are looking at as it widens out and becomes more volatile. I don't need to go through all the data, but you can see essentially the same for the U.S. 10-year spread and the JP Morgan emerging market bond index. My point is to underscore that the shock to fixed-income markets that occurred in late August was of considerable significance to the players in the markets and in historical terms. Turning to the next color page--I will try not to dwell long on this--on the left side, we have re-indexed to May 1 a total return, 10-year bond index in blue for the United States in the top panel, Germany in the middle panel, and Japan in the bottom. In red, we see the local equity index, in each case also re-indexed to May 1. The obvious point here is that bonds have been a better investment over this period than have equities. That may not have required rocket science expertise to figure out! [Laughter] On the right hand side, we have a measure of volatility. Here the blue line is the At-the-Money implied volatility of options on futures of the 10-year bond contracts and the red line is the At-the-Money implied volatility of options on the equity indices, both indexed back to May 1. So, this is the change in the level of the implied volatilities on the futures contracts. This shows how extraordinarily implied volatility has increased, particularly for equities. Please forgive the lack of JGB data for June and July in the bottom right panel. The point here is in part the extraordinary increase in volatility in the equity markets but also how much money an investor might have lost in late August if the investor had written a lot of option contracts in the expectations that volatilities would be coming down. The loss could have been an extraordinary sum of money.",385
-fomc-corpus,1998,Some did!,3
-fomc-corpus,1998,"And some did. Finally, Mr. Chairman, in the chart on the last page relating to our open market operations, you can see that fed funds generally have traded uneventfully since your last meeting. We did purchase $7.9 billion on an outright basis, and we will have to make more such purchases because reserve needs have been growing. Finally, we had no foreign exchange operations in the period. However, we are working on a number of issues and I would like to mention those. One on which we are working with Board staff is that of opening accounts for the European Central Bank on our books and trying to open a Federal Reserve account on their books. It is not quite clear what, if anything, we can do with our account on their books. We don't know what services they will be offering. But in the spirit of bonhomie and camaraderie, we are looking to open an account with the ECB. There are a number of technical issues for them that are proving to be very time-consuming to work out. With respect to their accounts with the Federal Reserve, they want to maintain a very complex structure of 13 different accounts for the national central banks as well as for the ECB itself and to have it all under one umbrella. We are trying to work that out. We also are working on a number of technical issues related to the advent of the euro that have to do with our payment facilities and how we operate the accounts. I am opposed, however, to undertaking any planning at this time of changes in the investment of our reserve holdings. I would much rather wait and see how markets develop. There may be some diversification options for the management of our deutschemark reserves, but I think the markets are going to be very uncertain and in any event the operational issues are consuming our time at present. Our holdings at the BIS, the Bundesbank, and in German government bonds and German repos are in the wholesale markets where they will all be converted and denominated in euros. We would have to resist rather strongly and seek out bankers prepared to help us out if we wished to maintain them technically in deutschemark denominations. We have not been resisting that conversion but have been trying to work with the flow. Ted Truman and I have sent you a memo on the status of discussions of the swap arrangements, 2/ and we will be happy to answer any questions about those discussions. Mr. Chairman, as I said, we conducted no foreign exchange operations for the System during the intermeeting period. I will need the Committee's ratification of our domestic operations during the period, but I would be happy to answer any questions about them.",532
-fomc-corpus,1998,"Peter, I think we are all aware that a major trauma in world financial markets occurred when the Russian devaluation and debt moratorium were announced. Since the size of the Russian economy is de minimis relative to the rest of the world, something fundamentally different was going on. There are two, not necessarily competing, views as to what occurred. The first is that there was a general sense that the Asian contagion around the world was moving into remission, 2 / A copy of this memorandum, dated September 28, 1998 and entitled ""Update on the Federal Reserve Swap Network,"" has been placed in the Committee's files. though that was seen as a gradual process. That improvement was perhaps best evidenced by the behavior of the stripped Brady spreads, which were fairly stable for a while. The realization that contagion was still alive and well unwound a whole set of views and expectations that went back a long way, and that shock clearly is capable of explaining the behavior of the financial markets. The second hypothesis relates to the presumption that in all likelihood there would be a G-7 bailout of Russia, and the implication was that if Russia was bailed out, everybody would be bailed out. The evident failure of that to occur raised the question of whether bailouts are back on the shelf, and the associated market disruption reflected an abrupt reassessment of risks, which is captured in the very rapid changes that you mentioned. Of those two hypotheses, where do you tend to lean or would you consider them not necessarily to be mutually exclusive but part of the explanation for what occurred?",319
-fomc-corpus,1998,"I would fall in your third category, and I'm glad you offered that option to me. As you described it, Mr. Chairman, there was some sense of stabilization or calming in late July when extreme movements in the Bradys and other securities seemed to moderate. I think there was a hope at the time that the IMF program for Russia announced at that point was going to tide Russia over. No one thought that program was going to be the last word on Russia, but it was seen as a brief sign that things could be held together. Over-optimism about that may have led some to double up their trades. In any event, when their confidence was lost there resulted, through either of the channels you are suggesting, a bigger balloon to explode or to collapse. That is, some nebulous force in the world of financial contagion was closing in or the official sector did not have an answer. Bailout is an answer, but it is not a plausible one for the whole world, as I think your second alternative was suggesting. It doesn't matter for investors which of the two hypotheses you described is correct; both of them involve an extreme loss of confidence. The market movement itself causes enough losses to concentrate the mind and begin a delevering process. I must say, as a side note to this, that in a meeting in Basle earlier this month, a number of my fellow central bankers discussed with me their view that money does not disappear. I disagreed. When markets delever, money goes away and credit comes in. In the macro sense, one can look at the Japanese money supply; money really is disappearing in Japan. In a shorter-run sense, if the parties financing counterparties take away the financing, borrower balance sheets shrink and in one sense money is disappearing.",359
-fomc-corpus,1998,"Also, the asset values are essentially a psychological evaluation of expected future earnings. If expectations change in the direction of weaker earnings, wealth declines. It is not a zero sum game.",36
-fomc-corpus,1998,Absolutely.,2
-fomc-corpus,1998,"Financial intermediaries can create money; they also can ""uncreate"" money.",16
-fomc-corpus,1998,"Financial wealth can be destroyed. Obviously, other people probably have views on this very important question that you raised.",22
-fomc-corpus,1998,"May I hazard an observation? I think one lesson the market learned from Russia is that if there was any country the G-7 wanted to keep from going into free fall, it was Russia because of the potential geo-political consequences. I believe there is a general view that Russian behavior at the official level was so awful that it was impossible for the G-7 to keep supporting such a country. That reminded people that even if the G-7 is trying to do something, the host country has to be reasonably responsible in order to allow the effort to go forward, much less to assure success. On top of the other things that you suggested, Mr. Chairman, and that Peter has been discussing, I think this experience was a reminder that even if the G-7 has its act together perfectly, it is limited by the host country's willingness and ability to cooperate.",174
-fomc-corpus,1998,That is called sovereignty.,5
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"On the Russian situation, at least as regards people in the First District, I believe their concern related more to the lack of a clear bailout in July, though I think opinions have changed about whether that was a good or a bad thing. Obviously, people have responded to the new stories and the rumors that the last tranche of money that the IMF put into Russia quickly found its way out of Russia. I think they now have a better sense of the wisdom displayed by the IMF in not putting in more money. But as far as the Boston markets were concerned, to whatever extent they played into the general market trend, the trigger was the lack of a Russian bailout, at least as people in our area tell me. I know money can disappear along the lines that you talked about, but I do wonder about some of these spread trades. Who is on the other side of them? Isn't somebody making money on a bet that spreads will widen instead of narrowing? Do we have any sense of who or where that might be?",204
-fomc-corpus,1998,"I think one has to think of that in terms of the issuers or borrowers of debt. That is, the role of the financial sector is to take on the financing requirements of people actually building factories and the like. So, the other side may be those who issued bonds and built factories and did so by borrowing on BBB or worse credit some time ago.",72
-fomc-corpus,1998,And they are paying off those loans now?,9
-fomc-corpus,1998,"The borrowers made money. They borrowed at a good rate and they built nice factories umpteen months ago. So, as I see it such borrowers involve a fair number of those on the other side of these trades. It is not a zero sum outcome within the financial sector in that sense.",58
-fomc-corpus,1998,Some of it may well be.,7
-fomc-corpus,1998,"Yes, some people in the financial community undoubtedly are making money on the other side.",17
-fomc-corpus,1998,These gains and losses used to be related to trade and now they seem to be associated mostly with speculation.,21
-fomc-corpus,1998,"They never involved trade! Seriously, Peter did not mention the fact that the Federal Reserve Bank of New York is going to release its turnover survey today. If we go back and look at the first such survey many years ago, we find almost precisely the same low number, namely something like 10 percent or 15 percent of all the financial transactions are traceable to real transactions. The multiplier essentially has been constant over the roughly 20 years that the Bank has been doing that survey. I don't think there has been much change, at least on the foreign exchange side. One can assert that it is a Ponzi game, but I'm not sure it is a bigger Ponzi game than it was 20 years ago.",144
-fomc-corpus,1998,"Cathy, clearly there are trades where people on different sides make money.",15
-fomc-corpus,1998,Somebody is benefiting from these lower yields.,9
-fomc-corpus,1998,"I think it's important to understand the degree of grossing up of the nation's balance sheet. That is, a fully consolidated balance sheet of the United States would on the asset side have our gold stock and our net physical property accounts plus net claims against foreigners; on the claims side all we have is equity. Grossing up by including intermediation is a zero sum game. What is not a zero sum is the real assets. If we have inventories of copper on the asset side of the consolidated balance sheet and the price of copper falls, then equity on the right hand side falls. That is not a zero sum game; there has been a real loss. The same is true if we evaluate the physical assets in terms of their market value, essentially the discounted present value of expected future earnings of those physical facilities. That number can change and that will change the equity side. That is not a zero sum game. But all the grossing up by debt intermediation, which is a huge part of total assets and liabilities, is a zero sum game. The only thing that is not is the market losses. But one person's market loss is another person's market gain and that just washes out of the whole system.",243
-fomc-corpus,1998,"Yes, I agree with your analysis, though my point to Cathy Minehan was more limited, namely that initially we have to be careful to separate the financial sector from those who borrow. We might call it the real sector for the moment. If we have had years and years of IPOs and junk bond financing, the real sector has already taken its money and invested it somehow. The financial sector is now faced with a collective writedown of the value of that paper as the balloon is pricked. There will not be an offsetting gain within the financial sector for every loss within the financial sector as the air comes out of the balloon.",129
-fomc-corpus,1998,"We had some $15 trillion in equities issued in the United States, the market value as of say last June, and we have lost $3 or $4 trillion of that value. That is not a zero sum game. It has to appear somewhere as somebody's losses. It may be a reduction in pension fund values or a loss by a bank that has made a loan to somebody who owns those assets. It is going to show up somewhere, and we will not have a clue where that is until we start to see third-quarter results. But I will tell you that it is going to start showing up in places we do not anticipate, and the sense of nonzero sums is going to become very obvious.",143
-fomc-corpus,1998,I do not disagree with the nonzero sums. My point is that at some level somebody has benefited from all this.,24
-fomc-corpus,1998,"Yes, there are a lot of winners.",9
-fomc-corpus,1998,"The other question I wanted to ask relates to the sharp rise in volatilities. With regard to volatilities in the stock market, we have concluded on the basis of some of the work we have been doing on mutual funds over the last two or three years that until recently volatilities had been lower rather than higher than normal. We may be wrong about that, but I am wondering where we are in terms of some normal level of volatility. I'm sure we are still above such a norm, but are we as far above it as some of the recent volatility charts show?",117
-fomc-corpus,1998,I'm not sure what data you are working with. I gather your study was historical.,17
-fomc-corpus,1998,"Yes, very long term. Our sense was that until very recently volatilities, in stock markets in particular, had not been what they were, let's say, 10 years ago.",38
-fomc-corpus,1998,"On an historical basis, working from the data in my head, I think that is right. I have not compared the July 1 to September 15 period with other periods. What I was showing you was implied volatility on equity and bond futures, which moved up sharply from levels in prior months. Again, I do not know precisely what an historic comparison would show.",74
-fomc-corpus,1998,"This level of volatility is not necessarily important in terms of its immediate economic consequences, but I wanted to understand what the relationships were.",26
-fomc-corpus,1998,"My impression of most of the work that has been done on this subject over a long period of time is that volatility has not shown much trend in markets that are well developed. Of course, we may have episodes of high volatility and that is what Peter has pointed out. This is an episode in which we observe an extreme set of withdrawals from a large number of markets. But that does not say anything, it seems to me, about whether we are on a new trend.",95
-fomc-corpus,1998,I wasn't making a remark so much about trend as about what we have been observing over the last three or four years in particular.,26
-fomc-corpus,1998,"These things, it seems to me, give us six years worth of information and they are all off the charts.",23
-fomc-corpus,1998,"Dino Kos just gave me a specific reference that helps to illustrate the point. I think the current level of implied volatility is double the historic; that is a very skewed result. The rush to try to hedge in the options market has been making the options market, which people rely on, very thin. So, I was focusing on that. That is a pithy point.",78
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"I have a question for Peter Fisher or Don Kohn on a somewhat different issue. The spread between 10-year Treasury bonds and the inflation-indexed bond has narrowed very significantly. I think it has narrowed to a little over 1 percent. That is amazing when we consider that the spread presumably includes the effects of expected inflation and inflation risk. Is that due to a lack of liquidity in the inflation-indexed bond, and if it is, why hasn't the market been selling the 10-year issue and buying the indexed bond in an effort to reestablish a more sensible relationship?",117
-fomc-corpus,1998,"Let me first discuss the mechanics. There clearly is a lack of supply in relation to demand, whether it reflects a flight to quality or a closing of the spread trade. I think a number of people in the market are now realizing that they have to shift their basic assumptions about how to think about the Treasury curve relative to other credits. Supply is down, demand is up, and they have to think of the Treasury curve in a different way. As I see it, they started trading the indexed bond against an internal mental benchmark of how the normal 10-year bond has traded over the last five years. The typical trader, I think, has a 5-year moving average of recent experience in mind, if they are senior traders. The junior traders have a 1-year rolling average! [Laughter] Traders started out with a presumption of how to price the inflation-indexed bonds against their notion of a 5-year average of a normal yield curve, and there has been a sudden shift in that norm, a break in behavior because of the heightened demand and reduced supply. I think they're going to have to work that out. Don Kohn may have a more profound answer.",238
-fomc-corpus,1998,"There is an implicit forecast in that arbitrage of the BLS's CPI over a long-term period. The question is whether we should treat that implicit CPI forecast as a true reflection of the view of the inflation risk in the marketplace, assuming that the CPI is measuring inflation accurately. It is not a supply/demand issue. If I seriously believe that the CPI will average, say, 3 percent over the next 10 years, it would be like shooting fish in a barrel to go buy that particular security with a 10-year maturity because it has an implicit inflation risk of well under 2 percent. What are we to make of that?",130
-fomc-corpus,1998,That was my question!,5
-fomc-corpus,1998,I don't think you should interpret it as a good forecast. I don't think that's what the market is doing. I think the trade you are suggesting is a very good one and might be very profitable for you if you or anyone wants to make it at this moment. [Laughter],57
-fomc-corpus,1998,When can we do that? After the end of the meeting? [Laughter],17
-fomc-corpus,1998,The illiquidity of the indexed bonds is notorious. The dealers do not like trading them.,19
-fomc-corpus,1998,"Peter, it is not a trade! You buy it, and you put it away.",18
-fomc-corpus,1998,I agree with you.,5
-fomc-corpus,1998,"I do think that the market has put a greater premium on holding liquid assets in these very uncertain times. We can see that in the spread between Treasury securities and federal agency securities, even the benchmark agency securities, which are extraordinarily liquid. That spread has widened out by 15 basis points. The on-the-run, off-the-run Treasury spreads also have widened out.",73
-fomc-corpus,1998,I was about to say that is a good case. This is the extreme form of that.,19
-fomc-corpus,1998,"This is an extreme. Peter Fisher and Bob Parry are right in the sense that at least part of that decline in the spread between nominal and real rates and the extraordinarily low level of the spread reflect not so much expected CPIs but the extra premium on holding very liquid, nominal, on-the-run Treasury bonds. That premium has driven those rates below what would be sustainable levels in calmer markets, consistent with expected inflation and expected real interest rates. I do think it is sensible or potentially reasonable to think that at least some of this decline in the spread--and it has been a fairly steep decline of about 1/2 point or more since the middle of August--represents a bit of a markdown of inflation expectations as economies all over the world have weakened and commodity prices have come down. In these circumstances, it would be sensible to have some shift in inflation expectations, even if the whole level looks very low and may be distorted. Our interpretation of this decline was that it reflected the extra premium people were willing to pay for the liquid, nominal Treasuries as well as some drop in inflation expectations. It seems logical.",226
-fomc-corpus,1998,"Anybody else? Does anybody have any questions or comments on the memorandum on the swap network? If not, would somebody like to move approval of Peter's domestic operations?",33
-fomc-corpus,1998,"Move approval, Mr. Chairman.",7
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,"Thank you, without objection. We now move on to Ted Truman and Dave Stockton.",17
-fomc-corpus,1998,"What can I say after all the talk and ink that has been spilled on international economic and financial developments since the Committee's August meeting? It occurred to me that the Committee's ""central tendency"" preference might be that I should shut up and get out of here. My so-called international friends have caused enough trouble, and you do not need any further explanations from me about the consequences of external developments for the U.S. economy. On the other hand, you may have noticed that our forecast for the external sector of the U.S. economy has weakened further, although it has not changed all that much from the one prepared for the August meeting, before the Russian authorities lost their game of roulette with the domestic and international financial markets and set off a global withdrawal from risk. That may be surprising in light of the aforementioned spilled ink. It is clear that our external forecast would have been different without the change in our assumption about U.S. monetary policy and the calming influence, even before its delivery, of the Chairman's testimony last week. In brief, four factors have influenced our outlook for net exports in different directions: Recent trade data have strengthened our near-term outlook. Projected slower growth abroad and in the United States reduces both our exports and our imports, but the former is more important than the latter. A slightly weaker dollar tends to strengthen our exports and weaken our imports. On the first factor, U.S. trade data for June and July were stronger than we had anticipated, leading us to reduce slightly our estimate of the negative contribution of net exports over the four quarters of 1998. In the June data, imports were weaker than we expected; however, this weakness brought the second quarter as a whole more in line with our model estimates. In both June and July data, we were surprised that exports, particularly of machinery, did not fall as much as we had expected. In the Greenbook forecast, we carried some of that strength through into the remaining months of the quarter. However, in light of the August report on shipments of capital goods that was released late last week and suggested weaker-than-expected PDE shipments in that month, we may well have overdone our cautious optimism. On the other hand, there may well be some remaining residual seasonality that will boost fourth-quarter exports that we have not taken into account in our forecast. Turning to the second factor, our forecast for growth abroad, which was very weak to begin with, has been revised down again--by half a percentage point this year and three quarters of a point next year. This is the major reason why we now are projecting no growth in real exports of goods and services between the second quarter of this year and the fourth quarter of next year, in contrast with the 2-1/4 percent growth in our previous forecast. In particular, for Latin America we have reduced growth by 1-1/2 and 2 percentage points this year and next, respectively, in reaction to the reduced access of countries in this region to credit in international capital markets and to interest rates that have been elevated in defense of their currencies. In particular, we have negative growth this year and next in Brazil and Venezuela, negative growth this year in Chile, and negative growth next year in Argentina. We are assuming that Brazil will adopt a program that involves significant fiscal tightening and a depreciation of the Brazilian real with negative short-run effects on Brazilian growth, but our base assumption is that these adjustments will be relatively orderly and will not push the Argentine peso off its peg. With respect to Asia other than Japan, we have reduced slightly our already very weak outlook. There are a few signs of a bottoming out of economic activity in Korea--ask the U.S. steel industry--and Thailand, but not enough to lead us to alter our basic outlook. Turning to the industrial countries, we have not altered our basic view of the weak outlook in Japan. We had anticipated the cut that occurred earlier this month in the Bank of Japan's target for the overnight rate. The official release on second-quarter growth suggested that activity was not quite as weak as we expected, largely because of a sharper-than-anticipated decline in real imports. We expect the third quarter to record a fourth consecutive negative quarter, in part because of delays in the implementation of the program of fiscal stimulus. We now anticipate that more of the effects of that program will be felt in 1999. We have weakened our outlook for the other foreign G-7 countries more significantly in light of the deterioration of global financial conditions, spillovers from Russia, Eastern Europe, and Latin America, and in the case of Euroland, a stronger currency that has affected our outlook for Germany in particular. This deterioration occurs despite significant changes in our assumptions about monetary policies in these economies. In the United Kingdom, we now assume that interest rates will decline by 125 basis points by the end of 1999, to a level 150 basis points lower than we assumed in August. In Canada, interest rates are assumed to decline in line with U.S. rates, but with a longer lag and from the elevated level to which the Bank of Canada pushed them in late August. In Euroland, we assume that short-term rates converge to the current German level by the end of the year and remain there through the end of the forecast period, in contrast to the assumption in the August Greenbook of a rise of 75 basis points over the course of 1999. We have not assumed that the outcome of the German election will affect policy or the economy during the forecast period; it remains to be seen if we will be right. With respect to monetary policy in Euroland, it is clear that right now euro-area central bankers do not want to lower interest rates below the current German level before the European system of central banks becomes operational on January 4, 1999. However, in considering how attitudes may change going forward, I found it instructive to consider how the outlook for growth in Euroland has changed over the past 12 month . Using our own forecasts for the G-7 members of the Euro area as a proxy, our current forecast for growth over the four quarters of 1998 is lower than we thought it would be a year ago by three tenths in France, four tenths in Germany, and one percentage point in Italy. Moreover, contrary to European protestations that the Asian crisis has had little effect on Europe, our estimate of the contribution of net exports is half a percentage point lower for Italy, 1-1/4 points lower in Germany, and 2-1/4 points lower in France. As the Europeans have pointed out, they have had a positive surprise on domestic demand, leading to caution about monetary policy easing in Frankfurt--both at the Bundesbank and at the ECB. Nevertheless, if the euro should appreciate against the dollar by more than the roughly 10 percent that we are projecting from the second quarter of this year to the fourth quarter of next year, we could well see a reduction in interest rates before we see an increase. With respect to my third factor, U.S. economic activity, the downward revision to U.S. growth, despite our changed assumption about U.S. monetary policy, is the major factor behind our projection of somewhat slower growth of imports of goods and services. Fourth, the dollar has weakened a bit more than we expected over the intermeeting period, primarily against the major foreign currencies. We expect the dollar to continue to decline on average during the forecast period, reaching roughly the same point by the end of 1999 in terms of our real 29-currency index as we had projected in the August Greenbook. This forecast seems reasonable with respect to the major currencies, given the roughly parallel adjustment in our monetary policy assumptions here and abroad. However, the slightly weaker dollar in the near term tends to strengthen our outlook for exports and weaken our outlook for imports a bit. The combined influence of these forces on our outlook for real net exports is to weaken it somewhat further, but not by a huge amount. However, the risks over the forecast period as a whole remain skewed to the downside. Moreover, in thinking about Federal Reserve policy in this context, the issue is not simply one of how developments in the rest of the world will affect us. Under current circumstances, the size of the potential linkages from Federal Reserve actions or inactions to the rest of the world and back onto the U.S. economy appears to have been magnified. Dave Stockton will complete our report.",1723
-fomc-corpus,1998,"The changes in the international environment just sketched out by Ted Truman were important elements in the alterations that we made to the Greenbook forecast. However, as you know, we also have had to contend with the noticeably more negative domestic financial conditions of the past month or so. The stock market has dropped roughly 5 percent over the intermeeting period and, as Peter Fisher noted, volatility has been high. In fixed-income markets, yields on investment grade debt have only edged down, despite the sharp drop in rates on comparable Treasuries, and yields in the junk market have risen steeply. Moreover, our special survey of senior loan officers revealed that large banks have shifted from a somewhat accommodative to a more restrictive posture for business loans in recent weeks. Clearly, there has been a pulling back in financial markets that appears to be part of a reassessment of economic prospects and a repricing of risk. These developments seem likely to leave an imprint on economic activity in coming quarters, and they would have had a more pronounced effect on the top line of our forecast had we not altered our policy assumptions. After your conference call last week, we decided to abandon our assumption of an unchanged federal funds rate in favor of a decline amounting to about 75 basis points by next spring--an assumption not far from market expectations. By our reckoning, this path for the funds rate will help to limit the shortfall in activity next year and to restore growth to potential in the latter half of 2000, with the unemployment rate flattening out at about 5-1/2 percent--roughly our estimate of the NAIRU. With activity projected to drop from the 3 to 3-1/2 percent pace of the past couple of years to a rate of about 1 percent in the first half of next year, it's natural to ask, ""how do we get there from here?"" I should begin this discussion by admitting that there is little in the incoming nonfinancial data that is currently signaling the weakness that we expect to emerge by year-end. Indeed, the information that we have received over the past month left the starting point for this forecast very similar to that of the August Greenbook--which is an economy that continues to show considerable forward momentum, led by strength in domestic final demands. In that regard, last week's reading on consumer spending for August confirmed our view that, but for a slump in outlays for motor vehicles in response to the GM strike and the end of the coupon incentive programs, the growth of real PCE this quarter would have nearly matched the phenomenal gains of the first half. And by most reports, motor vehicle sales are rebounding smartly as supply constraints ease and manufacturers sweeten incentives. Housing starts, though off a bit in August, remain at an exceptionally high level, with mortgage applications for home purchases and builder attitudes suggesting continued strength over the near term. In the business sector, the figures on shipments of capital equipment, which we received after the Greenbook was completed, were marginally weaker than we had incorporated in the projection. But the underlying growth in new orders points to reasonably healthy gains in equipment spending in coming months--especially in the high-tech area. And, given the low level of initial claims, businesses apparently are hiring at a brisk pace. All in all, it's still a pretty strong picture. That said, there are a few straws in the wind that hint at some downshift in the pace of the expansion. Increases in payroll employment in July and August, on net, fell below the gains of the first half, with pronounced weakness evident in the factory sector. That weakness is consistent with industrial production which, excluding motor vehicles, has been flat since May. Reports from purchasing managers, anecdotal information, and the slump in commodity prices seem to be pointing to a continued sluggish manufacturing performance--a view that receives support from the recent declines in weekly steel production. The preliminary reading on consumer sentiment from the Michigan survey for September also slipped some, with households citing the stock market and foreign developments as contributing factors. The Conference Board survey, released this morning, fell to its lowest level this year. At this point, it's simply too early to tell whether these shreds of evidence are just statistical noise or the harbingers of slowing activity. Clearly, in our projection we see a number of the factors that boosted production earlier in the year acting to restrain activity later this year and in early 1999. One of these is nonauto inventory investment, where we think a further reduction in the pace of accumulation will be necessary to prevent imbalances from developing. The reduced pace of stockbuilding is expected to lop off more than 3/4percentage point from the growth of real GDP in the second half. But the real action in the forecast follows from the sharp slowdown that we are projecting for private domestic final demands. That slowdown results not only from the waning of positive financial influences that propelled growth previously, but their partial reversal in many cases. With corporate earnings expected to continue sagging in coming quarters, we anticipate that equity prices will decline still further. High and rising equity values no doubt contributed importantly to the six percent annual rate gains in consumption in the first half of this year. Over the next few months, this stimulus should dissipate, and the past and prospective decline in household net worth should begin to cut into spending. Housing starts also received a boost from higher stock prices as well as from a strong job market and declining mortgage interest rates. Although we expect mortgage rates to hover around their recent lows, the drop in stock prices and the slower income and employment growth that we are projecting should turn housing from the considerable plus observed in 1998 to a modest negative in the first half of next year. We do not anticipate business fixed investment to escape this period unscathed. A less favorable external financing environment, a slowing in cash flow, and diminished sales expectations seem likely to leave a clear mark on investment plans as we move into next year. These forces will be intense in the manufacturing sector, where continued declines in export demand and heightened import competition will slow the desired rate of capacity expansion. Financing difficulties are expected to be notable for office and other commercial construction projects. Although these negatives result in a deceleration of fixed investment from the heady pace of recent years, capital outlays are still expected to outpace growth in real output. Declining relative prices and associated rapid technological changes should continue to provide support for capital spending. Taken together with the continued drag from the external sector, we expect these influences to hold growth of real GDP to about 1 percent in the first half of next year. Thereafter, the lagged effects of our assumed easing of monetary policy, the slight decline in the real exchange value of the dollar, and the gradual recovery in foreign economies combine to provide some lift to real activity. Abstracting from a few highly speculative wrinkles that we have incorporated to account for possible Year 2000 effects, growth in real GDP increases from about 1-3/4 percent in the second percent in late 2000. half of next year to about 2-3/4 There are, as usual, substantial risks to this forecast. We highlighted in the Greenbook the consequences of alternative scenarios for the stock market and for international developments, largely because we continue to see these areas as posing the greatest risks to the forecast. This morning, I thought I would mention a couple of other risks to the outlook. On the upside, there simply may be more near-term momentum to the economy than is contemplated by our projection. As I noted earlier, most of the incoming economic indicators have remained upbeat of late. And while we expect the economic news over the next month or so to remain fairly bright, forward indicators will need to show a considerable softening before too long in order to be on track for our first-half slowdown. Given the resilience that the U.S. economy has exhibited in this expansion and, at least until recently, the basically sound fundamentals, household and business spending plans may prove more durable than we have projected. This upside risk would be further amplified if the negative sentiment that has gripped financial markets in recent weeks were to be substantially alleviated by an easing of policy. We don't see that as the best bet, but it is a possibility. On the downside, there are always risks associated with negotiating a slowdown in aggregate demand of the dimension included in our forecast. Despite the sharp downshift in growth that we are projecting for the first half of next year, this forecast can still be characterized as one in which the economy achieves a ""soft landing."" By that I mean that in our projection firms, by and large, foresee the softening of demand and adjust production promptly, preventing the imbalances in inventories, in capital equipment, and in workers that have tipped slowdowns into recessions at times in the past. Finally, I don't have much to add to our Greenbook discussion of the outlook for wages and prices. The inflation projection and its determinants have changed little since the last meeting, and we continue to be on the low side of the consensus. Consumer prices are projected to pick up some next year. After declining sharply this year, both oil and non-oil import prices turn up in 1999, and labor markets will be tight through the middle of 2000. Nevertheless, we believe that there will be some important factors limiting the deterioration in inflation. Weak demand and ample capacity in the factory sector are expected to result in further declines in capacity utilization rates, and that should help keep a lid on goods prices. In addition, we expect that growth in hourly compensation will soon level out and then drift lower over the projection period. We expect this restraint on nominal pay gains to come from both the supply and the demand sides of the labor market. On the demand side, with profit margins under pressure and the climate inhospitable to price increases, firms are likely to resist outsized pay increases. Moreover, some forms of flexible pay should decelerate. Certainly, bonuses in the financial industry are not heading for a banner year. On the supply side, even though unemployment remains low, a rising jobless rate may trim pay demands if latent worker insecurities resurface. But perhaps most importantly, the drop in inflation this year and the attendant ebbing of inflation expectations are anticipated to help perpetuate the current low-inflation environment. Mr. Chairman, that completes our presentation.",2104
-fomc-corpus,1998,Thank you. Questions from my colleagues?,8
-fomc-corpus,1998,"I have two questions. Ted, it seems to me that our international assumptions are now fairly close to the worse case scenario that was presented to us last year in terms of the real impact on the economy. Would it make sense to think in terms of a worse case again, and what would be its probability? Do you have any thoughts about where the risks are in terms of such a forecast?",79
-fomc-corpus,1998,"In preparing for this meeting, I looked back at the work that we did on a worse case scenario late last year. In one sense, we are close to the worse case, but it has taken a different form. The sense in which we are close is essentially in that the total impact on the U.S. economy is commensurate with it. It has taken the form, however, of the deeper recessions and problems in Asia including Japan and no spread to Latin America. We had in our worse case scenario a generalized spread to Latin America. It is a little embarrassing to say so at this time, but this proves the less than reliable nature of forecasting. We had no growth in Asian economies last year in our worse case scenario and also no growth in Latin America. We now have positive growth on average in Latin America and negative growth in the Asian economies. So, we are close to our worse case forecast, but we have a slightly different mix. I think that outcome also points to the second part of your question about where these foreign economies are heading. I probably should have said this in my oral presentation. Our outlook for Latin America is quite gloomy and is much gloomier than I think anyone will see in other forecasts. That may just be because we did ours three days ago, and most of the others you have seen were done three weeks ago. But as was pointed out in the Greenbook, we made a rather modest adjustment. I always find it easiest to think about current account deficits, at least in terms of our own economy, by calibrating them on the basis of how large an adjustment in the deficit goes with everything else that is happening in the economy. It gives me a shorthand way of assessing how big the impact is on the United States. The answer there is that in our forecast we only cut the current account deficits of Latin America in half from where we had them last year. We are still assuming that the major countries in Latin America can finance $30 billion current account deficits rather than $60 billion deficits. It is easy to envision, especially in light of what has happened in Asia, that the number could be zero or a $30 billion surplus without any stretch of the imagination. I think that will be the next aspect of this. One other point about Asia is that our 1998 forecasts for China and Singapore are about the same as they were earlier. It is the affected economies in Asia that were much weaker than we had them before. But clearly in Latin America and, I think, in eastern Europe and Russia--which are not as important to our economy as to the economies of Europe as I tried to illustrate in my little story about our forecasts of the G-3 nati ns within Euroland--there clearly has been a big impact. The interesting development is our forecast. I did not go back and look at it, but I believe our U.S. forecast for 1998 even now is probably stronger than it was a year ago. Interestingly, our Euroland forecast is slightly weaker than we had it last September. The Euro area has taken a very large hit on the external side. This suggests, I would think, that there is a risk of some substantial cumulation on the downside. Now, we could talk ourselves into being too gloomy about these things.",668
-fomc-corpus,1998,Sure.,2
-fomc-corpus,1998,"It is useful to think about worse case scenarios, but worse case scenarios do not always come true. Let me just end on that point.",28
-fomc-corpus,1998,"I have a question for Dave Stockton. The assumption in the forecast is that the saving rate remains basically constant at one half percent. That seems a little surprising given what happens to the equity market and particularly with the coefficient that you have in terms of net worth. I presume that what is happening is that the weakness in the equity market is being offset by such things as lower interest rates, which stimulate consumption. Would you say that your forecast that the saving rate will not be moving up as a result of the assumed decline in the stock market might be a downside risk to the outlook?",116
-fomc-corpus,1998,"There is some downside risk there. I think the size of the stock market correction we have in this forecast, taken by itself, would have been expected to boost the saving rate by at least a couple of tenths. I should point out that one of the things that keeps the saving rate down is that we do have some offset coming from lower interest rates, and we do have some offset coming through when income growth slows below its permanent rate. That helps to hold up consumption a little.",98
-fomc-corpus,1998,I see.,3
-fomc-corpus,1998,But I think there is some downside risk there as you suggest.,13
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"Thank you. Ted, I would like you to elaborate a little on Brazil and the risks there because I have the sense that at least some in the international financial community are trying to draw a line in the sand with regard to Brazil. Yet, while you said you were expecting the Brazilian real to depreciate, you are expecting that to proceed in an orderly way. Obviously, it is not hard to imagine something much worse happening.",86
-fomc-corpus,1998,"When we do these forecasts, there is a tendency to be at least slightly conservative. There are so many different scenarios that are possible for Brazil. We took a sort of average of what we felt was a reasonable set of scenarios in which we assumed that the Brazilians basically have three problems: they have a fiscal problem; they have a banking problem; and they have a competitiveness problem. We are assuming that these problems are all somewhat interrelated. If they address the fiscal problem that will be enough to avert a complete loss of confidence. Although the exchange rate may have to give, it may give in a way that either is a discrete devaluation followed by a faster rate of crawl or simply a faster rate of crawl so that by the end of the period, the real will be at a level that by one rule of thumb appears to be sustainable. One indicator suggests that the currency may be 15 percent overvalued. So, the real could get down to an acceptable level without too much of an adjustment. I'm not sure what you mean by drawing the line in the sand, unless you mean drawing the line in the sand in terms of the exchange rate itself?",234
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"I think that is one of the problems with these situations. Brazil has an election on Sunday, so I don't imagine that the president of Brazil is going to say they are about to devalue. Nor do I think they want to devalue. They actually may be considering a widening of the band. Setting a faster rate of crawl is not as much of a problem as a devaluation. They might want to talk themselves into that, maybe correctly. It did seem likely to us as we prepared our forecast that there would be a devaluation or some adjustment of their exchange rate over the period. But since we did not know when it was going to come, whether it was going to come tomorrow or next week or the week after that or in January, and whether it was going to be discrete or gradual, we put it in as being at the desired level a year from now. We drew a straight line between its pre- and post-devaluation levels so that it did not drift around during the forecast period. I think there are very sizable downside risks. The worse the scenario, the more likely obviously it could have ripple effects not just in Latin America but elsewhere.",234
-fomc-corpus,1998,Any further questions?,4
-fomc-corpus,1998,"Ted, I have a question on Europe. Some of the discussions that I have heard in terms of whether Europe should lower its interest rates are that as they move toward convergence, their interest rates are coming down in effect. Do you agree with that?",50
-fomc-corpus,1998,"Yes, and that has been in our forecast. On that point, we have tended to be somewhat more optimistic all along. That may not have been the case initially when we probably had convergence at a higher level. Fairly early on, however, we had convergence at the relatively low French and German level and the beneficial effects of that on the Euroland economies. I don't want to minimize the actual problems that they have had. There are two groups of countries. Italy, where the actual performance of the economy is not so great, is lowering its interest rates. One could argue that is not so bad, but that gets everyone involved in the fiscal fights that they are having. Then we have the other group of countries that have higher interest rates because they want to pursue tighter monetary policies. The question then is, what about France and Germany? At the moment, there is no reason for them to panic, and I'm not sure that I necessarily would panic. In my view it is a little foolish to say that there is no way one can imagine why they would need to lower interest rates. In some sense, our forecast does have them lowering interest rates. It's just that by not having an increase in interest rates associated with a boom condition in the wake of EMU, we now have them with unchanged interest rates. The rate differential in this forecast in some sense is not that much different than it was in the last forecast.",287
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,Further questions from anyone? Who would like to start the roundtable? President Moskow.,18
-fomc-corpus,1998,"Thank you, Mr. Chairman. Since our last meeting, economic prospects at home and abroad have changed considerably, yet much of the data that we typically use to gauge the forces at work in our economy have changed only marginally. In some respects, conditions in the Seventh District remain little changed since mid August. Growth in the manufacturing sector has continued to slow though levels of activity remain high. Labor markets are still tight and price pressures remain benign. However, the depth and the breadth of actual and anticipated impacts of international developments in our District economy now seem greater than they did only a few weeks ago. I think it is fair to say that many of my contacts are much more nervous about the future than they were in August. For example, in the manufacturing sector we increasingly hear reports of weakness even among firms with little direct international exposure. The strength that we do see is limited primarily to housing-related industries. Although the Chicago Purchasing Managers' composite index indicates renewed strength in September, we believe this largely reflects a rebound from the GM strike. Furthermore, the report shows little rebound in the September new orders index, pointing to future additional slowing. This index is confidential until 9:00 a.m. tomorrow morning. District steel manufacturers are being adversely affected by increased U.S. capacity, significantly increased imports, and softening demand in some market segments. A major producer of corrugated boxes reported that demand for boxes from manufacturers has declined significantly in the last several months. Further, several members of our Advisory Council on Agriculture, Labor, and Small Business reported that among some District manufacturers, earnings and new orders had declined, overtime shifts were being cut back, and layoffs were likely if export orders did not recover soon. In contrast, contacts in the auto industry remain upbeat about U.S. sales prospects. After averaging only 14.1 million units in July and August, light vehicle sales seem to be running million units in September, with Big Three projections for the fourth quarter at around 14-3/4 around 15 million units. Outside of light vehicles, the retailing picture is somewhat mixed. Michigan retailers surveyed through early to mid-September report no deterioration in current sales or in expectations about sales three months ahead. However, one large national retailer in our District reports that sales of big ticket items have slowed week by week in August and September and that the softening trend in electronics and other durable goods has worsened. Sales of this retailer at stores located in small and mid-sized towns where they face little competition also have softened considerably. Similarly, a large trucking firm in our District reports that shipments to retailers are not as strong as expected for this time of the year. Another weak spot is our ag sector, which continues to be hurt by low commodity prices, large crop yields, and declining export demand. Sales of agricultural equipment have dropped enough to generate plant shutdowns and layoffs at some District plants. On balance then, I see our District's expansion continuing at a slower pace than I reported in August, though with little easing of the tight labor markets we have had for some time. Competitive pressures still limit the ability of firms to raise prices. Among our business contacts I also see greater uncertainty about the future and some declines in confidence. Turning to the national economy, at our last meeting I thought that the risks, though close to balanced, remained greater on the upside. Since then, however, virtually all the news has suggested a weakening in the prospects for real economic growth and less risk of a significant increase in inflation. International financial instability has begun to have significant effects on the economies of Latin America, as has just been mentioned, which likely will reduce the demand for our exports even further. The continued decline in U.S. equity prices appears to be showing through to consumer confidence, which threatens growth in consumer spending. Despite the decline in Treasury interest rates, financial turbulence seems to be threatening the access of at least some firms to capital, and that may take much of the steam out of the great burst of investment spending we have had in this expansion. Our projections do not show as sharp a deceleration in growth as in the Greenbook, but we do see a period of growth somewhat below potential next year. To be sure, with labor markets still very tight, the threat of increased inflation has not disappeared. Indeed, we still expect some pickup in core inflation next year, but the balance of risks has shifted noticeably toward the downside.",887
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, solid overall economic growth continued in the Twelfth District in recent months, although the pace slowed from earlier in the year. Between June and August, District payrolls expanded by 2.3 percent at an annual rate, down from the 3 percent pace of the first half of the year. Construction and services as well as finance, insurance, and real estate continued to grow rapidly in recent months. However, the District's manufacturing sector has not fared as well. Reduced export demand and a more general slowdown in high-tech manufacturing have led to a significant weakening overall in manufacturing. District manufacturing employment has contracted slightly so far this year after rising 3.7 percent in 1997. The deceleration in manufacturing has been concentrated in California, with manufacturing employment falling 1/2 percent so far this year. While many sectors of California's manufacturing have slowed in 1998, producers of high-tech products have been particularly hard hit. However, employment growth in high-tech software and business services remains strong. Turning to the nation, the outlook for economic activity has deteriorated since we met in August largely because of a continued decline in our stock market and a worsening outlook for growth in the rest of the world. Under the assumptions of an unchanged federal funds rate and no further change in the stock market, we have lowered our forecast for real GDP growth for the remainder of this year and 1999 by 1/2 percentage point to only 1-1/2 percent. I actually see risks on both sides of this forecast. On the upside, the economy has consistently outperformed most forecasts for the past three years. On the downside, of course, the stock market is still overvalued according to most models. In addition, it is possible that the expected economic performance of the rest of the world could be even worse than we all have been forecasting and, of course, we cannot rule out future shocks in financial markets. Real GDP growth in the neighborhood of our forecast, we believe, would help to ease tight labor markets, and this would reduce the risk of higher inflation in the future. Under our forecast, upward pressures from labor markets would moderate over the next couple of years. Moreover, any pressures from this source most likely would be offset by diminished inflation expectations, the higher dollar, ample industrial capacity, falling commodity prices, somewhat higher trend productivity growth, and negative speed effects as the economy slows. As a consequence, our forecast shows inflation as measured by the core CPI falling from 2-1/4 percent this year to about 2 percent in 1999, and then going below 2 percent in 2000. Overall, since we met in August the risks of higher inflation have receded, while the downside risks for the real economy have increased noticeably.",563
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Not a lot has changed in New England during the intermeeting period. The regional economy continues to expand nicely, with respectable job growth vis-a-vis the nation's and very low unemployment rates. Labor markets remain very tight despite August job losses in three of our states and anecdotes abound about the difficulty of finding qualified workers even at the entry level. However, signs of potential weakness have grown as well. Manufacturing jobs declined in four out of the last five months, though there has been some small year-over-year growth in this job category in contrast to the nation as a whole. Regional merchandise exports declined in the second quarter, though not as steeply as in the first quarter. The largest falloff occurred in exports to South Korea. Exports to Japan, Taiwan, and Singapore were also below year-ago levels as were exports to the United Kingdom and the Netherlands, but exports from our region to France and Germany were considerably higher. Uncertainty about the future is greater than earlier this year. Manufacturers see problems now and in the near future while retailers are less concerned about the near term but see downside risks six months off. Volatility in the financial markets has affected regional commercial real estate trends. The greater Boston commercial real estate market remains strong, with rents of about $30 per square foot, adding together markets inside the city and suburban markets closely related to Boston. However, downtown Class A space is now priced above $40 a square foot and vacancy rates are below 4 percent. But as REIT financing has moved from equity to debt markets, as investors have demanded higher yields on paper backed by commercial real estate, and as banks have tightened lending standards, new and existing real estate deals have come under increased pressure. In greater Boston and some areas of Connecticut, about half of 20 recent office building deals are being renegotiated. Financing has not totally dried up, but it has become more expensive as lenders raise their rates to match the demand for increased yields in bond and syndication markets. Since the period of market volatility in mid-August, I have been regularly canvassing the CEOs of the region's major banks, one of our insurance companies, and a major mutual fund to determine first-hand how they see their own business risks and the risks facing markets more generally. These conversations have served to underline three themes that seem interesting to me. First, despite worldwide market volatility, flight to quality, and disclosures of losses, settlements in global markets have been largely unaffected. The CEO of one major global custodian, which settles in more than 50 countries daily, indicated that he believes the changes in settlement practices brought about by the events of October 1987 have enabled markets around the world to withstand this period of instability, at least so far. The only problem that his firm has experienced is related to settlements involving Malaysian securities. With the imposition of currency controls in Malaysia, there were distinctions drawn between residents and nonresidents. Those have prompted the introduction of rather complicated administrative measures. But that is something his firm is well capable of handling. Second, the CEO of the region's one major global bank commented on the recent widening of spreads and what he sees as a rather significant drying up of liquidity in all markets, the same phenomenon we have seen in our tables and charts on spreads. In that bank's view, the widening of spreads has been exacerbated at least to some extent by some of the supervisory letters on credit standards. Those letters have been interpreted as a warning about REITs or cautioning about REITs and what the bank sees as an unexplained downgrading by the OCC of shared national credits. Finally, the bank is especially concerned about market turmoil in Brazil and Latin America more generally. This bank traditionally has benefited from a flight to quality during periods of financial turmoil in Latin America and regards their own positions as more or less devaluation proof, but their concerns are heightened nonetheless. Finally, while all those contacted believe the current market retrenchment is overdone, they also believe that spreads were far too narrow previously. So, in some sense they regard the financial market conditions as in part a return to more normal spreads in the markets, though there clearly is a concern that the attendant deleveraging will have a near-term contractionary effect. Those organizations that are publicly held have seen a sharp deterioration in the value of their stocks in the market, though they admit that the four to five times earnings reflected in previous market valuations probably was a bit high. Moreover, institutions that have a track record of growing by acquisition see a time of potential opportunity, with the prices of smaller banking and financial institutions becoming more realistic. Clearly, even the ill winds of global financial insecurity may blow some good fortune to those who are positioned to recognize it. On the national scene, we have little to quarrel with in the Greenbook's forecast for 1998 and early 1999. However, we and other forecasters are not as pessimistic as the Greenbook about the full year 1999. We see a bit higher growth, lower unemployment, and a small pickup in inflation even without the easing of monetary policy embodied in the Greenbook forecast. These differences result from several factors. We have not built in a further drop in stock market prices from current levels. Our estimate of the economy's potential is somewhat lower, resulting in more pressure from tight labor markets. Our assessment is that given profit pressures, wage increases will begin to show through more directly into prices. However, this estimate is fraught with risk, and I must say that we are very humble about our ability to forecast inflation trends in particular. I am not at all sure that we fully accounted for either the contractionary effects of the current credit squeeze or the feedback effects of low inflation on future prices. Also, I must admit to finding the pessimistic international scenario at the end of the Greenbook more reflective of my personal assessment of a likely external outcome. Thus, I think the risk to the Bank's forecast and possibly to the Greenbook's as well is decidedly on the downside despite relatively upbeat domestic conditions currently.",1228
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"The Eleventh District economy continues to perform at a healthy level, although it is retreating from the strong growth we saw earlier in the year. District employment picked up slightly in the first two months of the third quarter after a weak second quarter. The pickup is masking a tale of two economies: a strong service sector and a softening goods sector. Southeast Asia effects continue to accumulate, especially in the energy and semiconductor industries. Low oil and product prices are harming the energy industry. Lower demand from Asia has worsened the excess supply problems in the oil market, keeping prices below $15 per barrel for much of the summer. Drilling has declined dramatically, especially for oil. Our directors report that wells are being shut in and rigs stacked. Not many new pickup trucks are being bought in West Texas these days! We haven't seen too many layoffs yet because companies are reluctant to part with the skilled workers they worked hard to recruit in a very tight labor market. However, if oil prices stay at or below $15 too long, we will begin to see the layoffs accelerating. Our directors in the energy industry expect the supply overhang to continue and oil prices to remain weak for the foreseeable future. Petrochemicals felt the fallout from the Asian crisis early, and the inability to export to Asia has placed substantial downward pressure on chemical prices all year in spite of strong domestic demand. The semiconductor industry continues to feel the effects of Asia. Some semiconductor plants are closed in our area, and we continue to hear intermittent layoff announcements. All segments of the semiconductor business show declines except for digital switch signal processors, which have seen 5 percent growth year over year. However, some people in the semiconductor industry feel that it may be at or near the bottom of its recession right now. Most regional high-tech firms were battered in the stock market decline. Some smaller Austin firms have put off going public because of the gyrations in the stock market and have scaled back their expansion plans. Texas exports have felt the pains of a weak Asia and a strong dollar. Exports have been falling throughout the year, but the decline accelerated in July. The current Beigebook also suggests continued weakness in exports of petrochemicals, primary metals, liner board and other commodity paper, plastics, and semiconductors. The construction industry has been one of the bright spots in our District, propelling our high employment growth. But it, too, is showing some signs of softening lately. Single-family housing has been the hottest sector, but we are seeing a slowing in sales of new homes. Housing inventories are still slim, though. On the office side, industry contacts are wondering whether the market has reached its peak. They note that although absorption remains good, rents are not rising as rapidly as earlier. Financing has dried up recently for a variety of commercial projects. REITs and insurance companies have scaled back their operations, citing the stock market slump and the flattening of the yield curve. Contacts tell us that some banks are not lending because of tougher lending standards even though they have the money. Our most recent Beigebook report shows that the price picture has turned deflationary in several sectors. Weak international demand has continued to add to growing supplies and falling prices. We see price declines in gasoline, petrochemicals, oil and gas services, semiconductors, computers, primary metals, paper and paper products, and softwood lumber. Although wage pressures remain prevalent, they are not being passed forward to consumers because low input costs are offsetting any increases in wage costs. On the national and international fronts, the risks have risen sharply in emerging market economies, and the exposure of the United States to these risks has increased. The United States is increasingly vulnerable to the effects of trade deterioration because the stock market is no longer driving U.S. consumption and investment. The real economy shows continued moderate growth, but the downside risks are increasing. Manufacturing is showing increasing signs of weakness in the face of falling foreign demand and increasing competition from imports. The manufacturing sector has lost 53,000 jobs per month so far in the third quarter. Employment growth in the payroll survey slowed slightly in July and August. Employment growth in the household survey is much weaker. There are signs that consumer and business spending will weaken from here on out. Consumer confidence has fallen off. The most recent Purchasing Managers' survey painted a weakening picture for manufacturing. Export orders were the main source of weakness. The Michigan survey of future business conditions has deteriorated markedly since the spring. The attitudes expressed by our boards of directors were very consistent with the survey's depressed outlook. The El Paso board was especially gloomy, reflecting a region hit by lower oil prices, drought, and a softening outlook for Mexico. On the financial side, the stock market is down roughly 15 percent since the record highs posted in July. The yield curve is now inverted. These indicators are telling us that real economic weakness lies ahead. While most risks are on the downside, there are some upside risks as well. Medical and housing costs are on the rise, and M2 growth has accelerated and is well above FOMC bounds for the year. However, the downside risks far outweigh the upside risks primarily because of the international problems. A monetary policy that is effectively tight is detrimental to both domestic and global economies. The risks of Asian contagion are real. Low commodity prices and a strong dollar continue to batter the Latin American economies. Asian contagion to Brazil is the most worrisome for us in part because it has the potential to spill over to the rest of Latin America including Mexico. Recent history suggests that small or moderate devaluations, as was discussed earlier for Brazil, are very difficult to implement these days. I concluded my statement at the last meeting by saying that in terms of the global context and our position in the world, I thought it was time to get ahead of the curve by easing monetary policy. I still think so, although it's probably too late to get ahead of the curve. [Laughter] Much additional damage has been done in the world's financial system during the last six weeks. I'm afraid history will blame us for too little too late. I hope we deal with both of those issues today and not just one--the too little as well as the too late. To paraphrase a quote coming out of Washington last January in another context, ""we need sooner rather than later, and we need more rather than less.""",1294
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"The Philadelphia District economy, while still operating at high levels, is showing some early warning signs of deterioration. Business people have become more uncertain and in some cases apprehensive. This anxiety began in manufacturing and is now spilling over to other businesses as well. The outlook now is significantly more guarded compared to several months ago. However, measured deterioration and actual business conditions today are still mostly concentrated in manufacturing. Other sectors report more a fraying around the edges. Retailing and construction are still holding up. Bankers report less loan demand and still acute competition, and lending terms remain looser than one might expect in this environment, especially among smaller and medium-size banks. Inflation is a word that is hardly used in the District. Labor markets are still tight, although the squeeze on earnings and less demand for exports are prompting a few layoffs and talk of more layoffs around the District. Turning to the nation, the risks clearly have shifted to the downside. Global financial stresses are closing in on the American economy and are likely to continue to do so for some time. With the Treasury yield curve now completely below the federal funds rate and the real fed funds rate rising, there is a persuasive case for a decrease in the fed funds rate. I believe, however, that we have not fallen behind the curve and that we are still in a position to be preemptive. While it is important to move today, we also do not want to convey a sense of panic or that things are getting away from us. I think that what easing we do should be deliberate.",310
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. In one sense, it is difficult to find much of significance that has changed in the Sixth District since the July and August meetings. Our District's economy continues to expand at a moderate pace, but with signs of some modest slowing. Indications of some slowing showed up in the manufacturing survey where production slumped in August and fewer respondents indicated that they expect new orders or production to rise in coming months. Single-family home sales in our area are slightly weaker than this time a year ago, and the multifamily sector now seems to have passed its peak. Our commercial real estate sector remains quite healthy, but for the first time in this cycle our examiners report that some caution is being exercised by commercial real estate developers, largely attributed to a pullback by the REITs as sources of financing. As a couple of other members already have indicated, perhaps the most noticeable development over the intermeeting period has been a decided shift in confidence and growing unease about the future; I see that among almost all my business contacts. The spread of world problems to Latin America, which is much more important economically to our region than is Asia, clearly has heightened concerns. We still can find only pockets of activity that have been affected thus far by international crises. Hardest hit have been pulp and paper forest products and the energy sector. Echoing Bob McTeer's comments, the lower oil and gas prices have discouraged drilling. The Louisiana rig count declined to 170 in August, down from 184 in July and a little over 200 a year ago. Some producers are telling us that they are now shutting down production to wait for higher prices; they argue that oil is worth more in the ground right now. International trade winds are helping some and hurting others in our District. A Mississippi chicken producer reports that the collapse of the Russian financial markets has devastated poultry exports and disrupted shipments of 70,000 to 80,000 tons of frozen chickens; these will now be dumped on the domestic market with commensurate implications for domestic poultry prices. Ironically on the positive side, tobacco products are doing well. Cigarette demand abroad apparently is holding strong despite weakening economies. The Brown and Williamson Tobacco Company is planning a $500 million expansion in Macon, Georgia and indicates that nearly half of that production will be supported by foreign demand. Looking forward, we expect more of the same in our District's economy. We anticipate a modest deceleration in the rate of growth, albeit from a relatively high base. One sector of our economy that may be vulnerable is tourism. While it has been quite strong and is not yet showing any significant falloff in future bookings, visitors from South America are an important part of that business and problems in that region are likely to begin to show through. We still are not seeing significant signs of price pressures. Our manufacturing survey indexes for prices of materials remain negative for the fifth month in a row, but we now are picking up more incidents of escalating wage costs due to continued tightness in labor markets. Whereas wage increases were in the 0 to 4 percent range earlier, our contacts now report them to be in the 4+ percent area for many companies. However, there is no inication that the higher wages are being passed on in the form of higher prices. On the national front, we see a relatively strong domestic economy over the near term, and the prospects are for only moderate but clear downward revisions in our third-quarter forecast. We are now projecting third-quarter GDP growth in the 1.8 percent range. We think that the fundamentals have changed only marginally on the domestic side but that the risks are now slightly to the downside on net. Of course our chief concern, as it is for others, is the risk to continued growth due to turmoil in international markets and how much developments in those markets will feed back to the domestic economy. Compared to our previous read, affected countries appear to be in worse condition and are less poised for a turnaround than previously expected. We are getting increasing evidence from surveys of expectations, declines in corporate earnings, and the pullback in confidence that the risks from the international sector have increased and are now posing a significant downside risk to GDP growth going forward. The main question marks are how these developments will ultimately affect consumer spending, inventory accumulation, and business investment, all of which have been sources of strength over the past year. At this juncture, the outlook for a slowdown is still prospective rather than reflecting strong evidence that some slowing is currently in hand. Nevertheless, I believe the risks clearly have shifted since our last meeting and are now asymmetric to the downside in my view. Thank you, Mr. Chairman.",943
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. As far as the District economy is concerned, general conditions remain favorable, although I think it's fair to say that the trends are a little more mixed than was the case earlier in the year. Attitudes have not changed dramatically, but I do think there is a little more caution and a little more concern now than there was earlier. On the positive side, labor markets remain very tight. The unemployment rate in the state of Minnesota has dropped to a new record low, and this must be the third or fourth record monthly low established this year. Housing activity and nonresidential construction activity in general remain strong. Auto sales are healthy. The weaknesses are in agriculture, where I think the problems are well recognized and are quite severe in at least parts of the District, in parts of the manufacturing economy, and in mining activity. Trade issues, especially with Canada, have become a matter of concern, and several of the governors in the District are taking actions at least to show the flag with regard to trade. As far as the national economy is concerned, I started by assuming that the national economy would grow at trend, which is not too different from the model forecast. Then, I asked myself where the risks lie. Like others, I concluded that the risks at this juncture are mostly on the downside relative to trend growth. I don't know exactly how I would parcel that out on a quarter-by-quarter basis, but that is what I concluded. Having said that, I think we have to be careful not to get carried away with the downside risks. I am not at all sanguine, but I think it is worth reminding ourselves that there has been a lot of discussion around this table in recent months, indeed in recent years, that the equity markets have been overvalued. The implication was that those prices had to come down. Indeed they have! In some sense, we are getting what we expected or what we hoped. I think there has been a similar discussion that quality spreads were far too narrow. They have now widened out. Again, that seems to be something that we expected would happen and hoped would happen in the context of a necessity for domestic demand to slow to a pace more consistent with the growth of aggregate supply. We were concerned about the excessive availability of credit. Those conditions seem to be changing. Again, that is something that we anticipated and to some extent hoped for. In my view, what we are seeing here to a great degree is developments that we either expected or hoped for, and while, as I said, I think the risks are on the downside, I believe we should be careful not to lose sight of the fact that these developments were anticipated, at least in part. What I conclude from all this is that it is very hard to see any inflationary momentum building in the current environment. So, I think we are in for further periods of modest inflation.",586
-fomc-corpus,1998,Why don't we take a break at this point. President Jordan will have the floor when we come back.,21
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. We had a joint meeting in September of our three boards of directors. What was notable about the meeting was that about half of the group said that there had been a change in confidence and the other half said there was none. At earlier meetings, virtually no one had said that there was any concern on the downside. So, this was a marked mood change on the part of many of the directors, while others from their local vantage points--their local city or economy--saw no break from earlier trends. In construction, commercial real estate continues to be very strong throughout the District. We get more reports of overbuilding in the upper price range of the housing sector. Our contacts say that projects are falling through or are behind schedule because of labor shortages; certain construction skills are just not available. Cost estimates of some proposed new projects, especially warehouses and hotels, have come in so high that institutional investors are no longer willing to provide permanent financing because the implied yields are so low. In contrast to that concern about low yields, the Cleveland Browns franchise was sold for $530 million plus stadium cost overruns that are estimated to run between $35 and $50 million. One of the investor groups backed out, saying that above about $350 million they no longer saw any current yield. But a spokesperson for the NFL said in the New York Times that even though some are concerned about a very low or nonexistent current yield, the owners can count on capital asset appreciation! Builders report that local banks are still willing to provide 100 percent construction financing without pre-arranged takeouts in the form of permanent financing because of their knowledge of the projects and the builders. But our contacts believe that institutional investors are backing away, especially out-of-area investors. One banker commented that the young developers in the region believe that they are bulletproof. Probably the worst situation in the District is that of the steel industry. Steel is being impacted very severely by imports. While domestic consumption is going to be at record levels this year, we are told that imports were up 43 percent in July. The steel companies are now telling us that there will be consolidations, permanent plant closings, and companies taken over by foreign investors, probably the British, because the domestic companies are in so much difficulty. One theme that came out of meetings with advisory council members and others around the District is investor caution. We get reports that the fear factor is pervasive. We hear claims of a daily buildup in cash on the sidelines; investors are parking cash because of uncertainty and are waiting for it to subside. We hear nothing about what will dissipate the fear, when it may happen, and what will be done with all the cash that is parked on the sidelines waiting for the green lights to come on again. Labor markets continue to be extremely tight. Turnover is rising and finding qualified replacements is taking longer and longer. One of the banks that hires throughout the region and in several other states said that a year ago starting tellers were earning $7 an hour; they are now earning $10. The bank expects their nonexempt pay to be up 4-3/4 to 5 percent this year versus 4 percent in 1997. They also reported, like some others, that mortgage lending is at record volumes. Our retail sales have been very strong. Retailers say that sales and profits for the third and fourth quarters will be at record levels and that retailers that source from Asia are doing especially well. They are not as optimistic about 1999 but extremely optimistic about the way this year will finish. In contrast to what somebody else said, sales of home furnishings have been very strong, probably reflecting the housing industry. Telecommunications also are very strong. We decided to check on a couple of developments in parts of the service sector that had not otherwise been reported. One was what is happening to hotel rates, but after the staff memo on the Watergate, I guess I don't need to report on that! We contacted major theme and amusement parks in the region. I myself as part of our research effort spent a weekend looking at those roller coasters at Cedar Point! They boast about having more and bigger roller coasters than anywhere else in the world. They and other theme parks in the Pittsburgh and Cincinnati areas boosted ticket prices this year by 6.5 percent to 6.7 percent, yet attendance also was up in excess of 6 percent at all of them, giving them double-digit revenue gains this year. One big park said that they will boost ticket prices 10 percent further in January and February next year. To deal with the labor shortages, one of the parks reported hiring 500 foreign students this summer. Another bit of evidence as to the psychology in our area is that caution apparently did not hit Kentucky because the thoroughbred horse auction was the best ever. Average prices were up 35 percent from last year. More yearlings were sold for over $1 million than in any year since 1980. In two days alone in September 56 yearlings were sold for over $1/2 million each. Most of those horses will be sent to Europe and Asia. Turning to the national economy, I can save some time by saying that I agree with Gary Stern that a lot of the changes--the break from the past that we have seen--were essential. We have known for a couple of years perhaps that there were certain unsustainable trends at work. As some sage once said, unsustainable things have a habit of ending. We may not like the way they ended, but it was essential for that to happen. The difficulty now is how to deal with the attendant shocks to confidence. We have a long history of responding to domestic events such as Nixon's wage and price controls and the stock market crash of 1987 and to international events such as financial crises and military actions--including among the latter the Suez, the Bay of Pigs, and the Gulf War in the early part of this decade. When these things happen, there tends to be a rush to liquidity and a rush to quality. The yield curve steepens at the short end and people seek to invest in better grade assets. The central bank had to respond to such developments in order to avoid an inadvertent contraction of central bank money. But in this environment, we have to be very, very careful about how much of a response we make because the developments in question tend to be reversed. The response has to be limited and proportional to the problem because of the unavoidable necessity of taking out an injection of liquidity as confidence starts to rebuild. We do not want to err on the other side. We have had a number of episodes in the past where we responded to surprises and overstayed our response. The cost of then taking corrective action in terms of contracting central bank money and raising interest rates had some unfortunate effects. Thank you.",1386
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, if you were to ask how the Tenth District is doing today, you would get two answers. If you looked at any metropolitan area, you would see that its economy is still very strong, with tight labor markets and unemployment rates that are extremely low. When you looked at retail sales, you would find that they remain very strong. If you looked at housing, you would find it strong overall. You also would hear a lot about changes in attitudes in the sense that while business conditions are strong, people are much less confident about the future. We are seeing some of the effects of Asia in our manufacturing sector, in health products for example, and we have anecdotal indications that at least some firms are backing off on plans to invest in plant and equipment as they look to the future. But, currently, the metropolitan area economies are still in very good shape in our District. In the rural areas and in the energy sector, we get a completely different answer. Contacts in the energy industry, as you already heard for some other Districts, are very pessimistic about the outlook for oil. Natural gas, which is more predominant in our region, is a question mark; its prospects depend on how the winter goes. Contacts in the agricultural sector are very pessimistic. I know you have heard some of the statistics, but I would note that we normally export about 40 percent of our agricultural products to Asia. So demand is down.",292
-fomc-corpus,1998,Is the 40 percent for the Tenth District or nationwide?,13
-fomc-corpus,1998,"Nationwide, but I would say that percentage is not too far off the mark for the Tenth District as well. We are having some bumper crops this year, 20 percent increases in some areas. That is on top of earlier increases. So, prices obviously are down. Our banks are saying that their loan portfolios currently are in satisfactory condition, but they anticipate loan problems going forward. They already are contacting us and others about what the attitudes of examiners are going to be with regard to carrying over loans and so forth. So, there is a fair degree of bearishness in that sector of the economy and concern especially among banks in the rural areas. However, we need to put that in the context of the District as a whole, which still appears to be generally sound. On the national economy, I think the most likely outcome next year is for real GDP growth to slow to below trend and for inflation to remain moderate. I am concerned about further downside risks to the domestic economy. Therefore, I believe a slight easing of policy would be appropriate at this time. But I, like Ed Boehne, would be cautious and deliberate in adjusting policy at this time. I don't think we would be behind the curve after a small move. I want to add a couple of points relating to policy. First, while I see growth moving down toward or below the economy's long-term potential, I am not as pessimistic as the Greenbook at this time. I think that is why I also am cautious about how deliberate we are in adjusting policy. Second, I believe there are significant downside risks to the outlook, as I mentioned. These stem from the fact that there are significant slowdowns in the economies of Latin America and Canada that could cause our own economy to grow more slowly. We need to keep that in mind. In that context, inflation should remain moderate in the near term, and a number of factors should help to keep it in line for the foreseeable future. I would not, however, recommend a more significant easing. I am mindful of the fact that our record in forecasting growth slowdowns has not been overly accurate in recent years, and therefore I think we should be cautious. As others have mentioned, M2 is growing strongly. So, I think a deliberate ease in policy would benefit the economy, and I would go cautiously forward with it. Thank you, Mr. Chairman.",482
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Second District economy has slowed somewhat during the third quarter, with continuing job losses in the manufacturing and government sectors. Not surprisingly, the anecdotal evidence is considerably weaker than the data. There is real concern throughout the District about the growth prospects both for the Second District economy and that of the nation. This lesser degree of optimism or beginning of pessimism is not reflected only in the financial sector, where it is quite understandable, but around the District as a whole. Needless to say, some major firms in the financial sector have announced rather significant losses that have important implications for the tax revenues of state and local governments in our District. The firms in the securities industry and the banks that compete with them are very concerned about their profit prospects in the fourth quarter because of their sharply reduced deal flows. Our national forecast is somewhat more optimistic than that of the Greenbook, in part because we do not have quite as strong a wealth effect. But our sensitivity analysis to our own forecast has a downside alternative that produces an outcome that is quite close to the comparable alternative in the Greenbook. Like everybody else, we see the main source of the weakness as stemming from the effects of international weakness on the performance of the American economy. Let me speak briefly on how I interpret the very wide credit spreads that have emerged. I don't spend a whole lot of time worrying about the level of prices in the equity markets because I think the credit markets are really more important for the economy as a whole. The spreads in the credit markets were certainly unnaturally tight earlier this year, but the correction has carried these spreads well beyond a return to normalcy. The current spreads are very wide indeed, and they indicate in my view that we have to be concerned on the downside that risk aversion will become unduly great. The result could be that not only would the credit markets be essentially unavailable to firms that normally deal with banks, but the banks themselves might in this environment become sufficiently risk averse that we could get a credit crunch. I am not forecasting that, but I see it as a serious downside risk that we have to be concerned about. I think we have to be extremely attentive, especially in the Reserve Banks with our proximity to the banks in our Districts, to whether that is happening or not. There is no question that in the securities firms and banks with which I am familiar, the executive vice president in charge of marketing has been put in the closet and the executive vice president in charge of credit is now in front taking charge. That is a good development as long as it does not get into the risk aversion area to a point where a credit crunch could follow.",540
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"At least for the time being, overall economic activity in our District remains at a very high level. Revenue growth in the broad service-producing sector slowed in August but picked up again in September. There was a noticeable rise in retail activity essentially across the board in September. As in many other Districts, residential construction and new home sales are still quite strong throughout our region. More generally, our contacts indicate that there has been no perceptible easing in the extraordinarily tight labor market conditions we have experienced for many months. Workers with even minimal job skills are hard to find in many areas. Skilled construction workers are especially scarce. We had a meeting of our Small Business and Agriculture Advisory Council last week and they were particularly direct in describing the tight labor market conditions in their respective industries and areas. That said, we are now seeing for the first time some unmistakable signs of softening in the region's manufacturing sector. Manufacturing is important in our region. A special note: A couple of components on our monthly manufacturing survey, namely new orders and planned capital spending, slowed quite sharply in August and September. A number of manufacturers, as in other parts of the country, had been telling us about reduced exports and increased competition from imports. One especially high profile example of a change in sentiment in the manufacturing sector was the announcement a couple of weeks ago by Motorola that they are going to suspend construction on a new $3 billion chip plant that was being erected near Richmond. That is a big blow to our local community. They did not announce any time frame for resuming construction. In my view, manufacturers in our region now clearly have the sense that they have bigger problems and that these problems may last longer than they had thought previously. Turning to the national economy, I would like to add a note of caution, and I guess I am underlining some of the things that Gary Stern, Jerry Jordan, Tom Hoenig, and others have said. It is certainly true that the overall national picture has changed quite radically in many ways over the last couple of months. As we all know, the Russian devaluation and default, doubts about the effectiveness of the IMF, and perhaps to some extent a perceived world leadership deficit have produced a quantum jump in risk in world financial markets. I think that has been a seminal event. One can see it in the data, as Bill McDonough said, and it is quite dramatic. The Salomon Brothers spread on Brady bonds over U.S. Treasuries, for example, increased by fully 5-1/2 percentage points between the end of July and the end of August. That is not much less than the cumulative increase in that spread over the much longer period when we were tightening policy back in 1994 and 1995. This increased financial risk is significantly complicating adjustment problems in the world economy, and in the United States it probably accounts for a good part of the decline in stock prices and the apparently tighter conditions in loan and other credit markets. I certainly agree that these shocks will likely take some of the steam out of domestic U.S. demand. That is probably a good thing. But it is still unclear to me how sharp the ultimate slowing is going to be. Even with a 75 basis point decline in the funds rate built into the forecast, the Greenbook expects the real GDP growth rate to fall to only 1 percent in the first half of next year and then to rise only1/2 point to 11/2 percent in the second half. However, there still is no really hard evidence as I see it that the U.S. economic expansion either is or will soon slow in a major way. It may happen. Certainly, the downside risks are greater than they were, but it may not happen. Labor markets are still tight. Wages are rising. Consumer confidence is down from its peak, but it could pop back up in the wake of any easing action we may take. Also, the rate of growth of M2 over the last 18 months or so, as far as I am concerned, still constitutes an inflation risk in the outlook. The most recent M2 surge probably does reflect a flight to liquidity, but the rapid M2 growth in the earlier months of this year and late last year did not. This latest bulge could well reflect in part the prospective policy easing that is now apparent in fed funds futures rates. If we ease policy now, as assumed in the Greenbook, in reaction to events that many in the United States regard as largely a foreign problem, we run at least some risk in my view of creating a perception at some point that our longer-term price stability objective has changed or at least that we are being distracted. There is a risk that we may in fact be distracted to some extent from our long-term price stability goal. I think that risk is heightened by the tightness in labor markets and the general strength of the economy. The good news at this stage, of course, is that markets have already priced in much of the policy easing that is assumed in the projections. As yet, bond rates have not risen; they show no increase due to heightened inflation expectations. For now at least, I think we still have our credibility and it is holding up well. But I do hope we will watch closely as we go forward for any evidence of eroding public confidence in our commitment to price stability if we follow the policy strategy that is laid out in the Greenbook.",1098
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. For much of this year, as others have said, we have been waiting for a financial upset to hit our shores, and it looks as though that is about to happen. While many of us have migrated to a view of noticeably weaker growth, and I am among them, I think it's important to reiterate two realities that others have brought out. First, of course, this weakness is a forecast. Domestic weakness is not yet here. In fact, labor markets, as others have said, remain tight. Anecdotal evidence suggests that the demand for workers is still strong in some sectors. GDP is likely to grow at or above trend for this quarter and the next. The boost to GDP is the result of two things: the first, obviously, is the return of the GM workers and the second is the continued strength of some interest-sensitive sectors of the economy. PCEjumped as consumers purchased more automobiles. Orders for durable goods indicate continued increases in shipments and spending, albeit at lower rates than in the first half. Retail sales reports are strong and anecdotal evidence indicates no slowing yet in housing or housing-related durable goods. I think I heard a little of that around the table. There clearly remain some risks of higher inflation, though I will agree with others that they have gone down significantly. On the negative side, employment growth is down further and the likely impact of international financial turmoil has become much clearer. For me the important source of potential weakness from the foreign side is not necessarily in the traded goods sector even though that will continue to be a source of drag on domestic economic activity. What is more worrisome in my view is the transmission of financial weakness abroad to our financial markets and the resulting impact on the investment behavior of U.S. businesses. I guess it should not be a surprise that weakness will emanate from the investment activities of firms after a period when growth has been heavily driven by business investment spending. Importantly for me, a lot of this investment spending from corporations has been maintained during this period by both cash flow and leverage. We have not talked much about it in this room, but I believe that nonfinancial corporate debt grew at an annual rate of about 12 percent in the first half of this year. The difference between capital spending and internally generated funds, what many call the financing gap, is I believe at its highest level since the recession of 1982. This approach to corporate investment, which includes both cash flow and leverage, makes such investment particularly vulnerable to changes in financial conditions, psychology, and profit prospects, all of which we have experienced recently. I agree with Vice Chair McDonough that the vehicle for this weakness is not purely stock market effects where we in fact had expected some deterioration. Of greater importance to me is the fact that it is more broadly centered in credit markets. We have heard from the staff that the syndicated loan market appears to have become less accommodating, and that is causing some banks to pull back to some extent from lending. I am concerned that if that reduced willingness to lend is combined with significant increases in the cost of capital from the stock market, we will face a real risk of serious capital-raising constraints. Like Vice Chair McDonough, I am not predicting a credit crunch, but I am mindful that it is not out of the realm of possibility. It also seems likely that a slowdown in credit-driven business investment will lead to slower growth in job incomes and wealth-driven consumption. Thus far this year consumption has surprised us on the upside, driven by tight labor markets and by high equity values. It seems, though, that both of these factors have begun to unravel or will shortly do so. Equity markets already have done so. Labor markets will adjust gradually over time. For me the final question is what the reaction of this Committee should be. As others have indicated, the international side seems unlikely to settle sufficiently or sufficiently quickly to alter the scenario. No other major economic power seems capable of engendering the growth of demand that we need to maintain near-term trend growth in our country. But like President Boehne and others, I believe that any monetary policy adjustment that comes out of our meeting today should be done very judiciously. There are some elements of strength in the economy. The downside risks are still quite high, but we could again be surprised on the upside. I for one do not think we are yet behind the curve. Thank you.",898
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Coming late in this discussion, there is not too much to say that has not been said many times already. That is the good news. I would point out that there has been a quite important change in the general comments of the Reserve Bank presidents in the past several meetings, though maybe not a sea change. My own forecast, such as it is, is fairly close to the Greenbook; I am roughly in agreement with the Greenbook scenario. While it is true that more is influencing the slowdown than the stock market, I think there is an important point to be made about the stock market that has not been brought out today. That is, if we look at forecasts of earnings by the so-called stock market analysts, they would still be on the high side by all measures. What seems to happen in the way these forecasts are put together is that as disappointing numbers come in, as they have recently, the current quarter is downgraded but not the future quarters. There is still a lot of that going on. I think the Greenbook is on solid ground in anticipating a further decline in stock prices and a feedback on the real economy through the consumption wealth effect. One concept that we have not talked about much this morning is NAIRU. I think that if we are coming out in the direction of an easing move, as it seems to me most people are, we should at least go through a mental test on why we are doing so when we have an unemployment rate that is sitting at 4-1/2 percent. Many of you have addressed the fact that you see very little evidence of accelerating inflation. On the TIP premium that we talked about earlier, my view is that while liquidity preferences and transaction costs may account for some of the TIP premium, I think there is some information there as well, namely that it reflects a general downgrading of inflation worries. So, with regard to the NAIRU, I guess the story on inflation would be a combination of things. On the one hand, those who think the NAIRU is 5-1/2 percent or thereabouts may be a little off on that estimate. The other aspect, however, is that even in the Greenbook forecast there is projected to be a rise in the unemployment rate. All of this together adds up to a recommendation on my part for easing as we have previously discussed. I think the main question is whether to ease a lot or a little. The arguments are actually nicely made in the Bluebook, and I will not repeat them. I will just say that where I come out on that issue is that I am for cautious ease. One reason is that I believe we are still ahead of the curve in terms of managing the real economy. I don't think there is a sense in which, if we just look at the real economy, we can be described as being too late or behind the curve. Dave Stockton pointed out that there still are upside risks and we should keep those in mind. I think that Al Broaddus made a good point when he said that if we go too far at this meeting, it might look as if we have become distracted from what should be our fundamental goal of dealing with inflation. We certainly would not want to send out that message. The last point, which others have made, is that a big move at this point might be misinterpreted as a degree of panic on our part. It would be at a minimum very un-Fed-like, and we certainly would not want that. [Laughter]",721
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Let me start with the world situation. Like many others, I find the world economy both sad and scary. The saddest part is that so many millions of people in developing countries in Asia and Latin America are being thrown into desperate circumstances just at the point when they were beginning to have hope for the long-run future. Many of them have not been in the modern world all that long. They left villages and in many cases their home countries in search of jobs in modernizing economies. Now they are being thrown back into insecurity and a struggle for bare necessities with no idea if or when the economic opportunities for them will reopen. I stress that because I think we sometimes tend to sit around this table and act as though all the losers were investors and high flyers. They definitely are not. The scary part is that those of us who believe strongly and rightly in the power of capitalism to improve peoples' lives do not know where the current downslide will end or what we can do that will effectively stop its spreading contagion. We already knew, of course, that when large amounts of capital are moving freely in search of higher returns that investors can be victims of their own excessive optimism and then get caught in a wave of excessive pessimism. We also knew that capital flows were far greater than ever before, that world markets were more interlinked, and that financial movements were more rapid in an age of instant global communications. But I don't think we knew how big an impact that might have. We knew that very clever self-assured people were placing huge bets with other peoples' money on relationships that they could only guess about, that sooner or later some of them would guess wrong, and that the consequences could be serious. But now that the exuberance has turned to pessimism and risk aversion and so many of the weaknesses in the world's financial structure have been revealed--some we knew about and some we are just learning about--the economic policymakers in industrial countries are struggling to figure out how best to manage the crisis and where and how to build firebreaks in hopes of containing the meltdown so the rebuilding can begin. That is a very difficult job, but it is not our job around this table. The job of this Committee is a much narrower one. It is to keep the U.S. economy growing at a healthy rate, not only for the well being of Americans themselves but so we can play as strong a role as possible in bringing the rest of the world back to economic health. For the last couple of years, indeed the whole time I have been part of this group, we have been primarily worried that the United States was growing at an unsustainably high rate. Now many of the signs point to slowdown, although it is striking that the anecdotes about the domestic economy are a lot more negative than the real statistics so far. Nevertheless, the risks have shifted, and clearly one risk to worry about is that if the United States slides into stagnation or even recession--although that is not likely to happen soon--we will further exacerbate the world crisis. I don't think we have a hard choice today. We need to take a small step in the direction of monetary ease. We need to stand ready to take more steps if necessary, but I certainly agree with those who feel that rushing quickly ahead would gain us little and probably would be, as Ned Gramlich said, an un-Fed-like thing to do.",686
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"Conditions in the Eighth District, as we have heard around the table with regard to other Districts, are largely unchanged in the real economy. I think it's fair to say that the mood is less buoyant than it was earlier. The financial market upsets, again in terms of the real economy, have been I think largely a spectator sport so far, although one that is much less fun than watching Mark McGuire. I want to reemphasize the point that Bill McDonough made. The stock market decline is a very typical decline; its size is nothing abnormal, but the spreads that we have seen open up in lower quality credits indicate a very abnormal state of affairs. The spreads were too narrow before, but they are now much too wide. If those spreads remain that wide, they will be an indication of a very serious drawing back in the very near future. So, I interpret the conditions in my own District and the stories that we hear as simply reflecting the fact that the financial market upsets have not yet registered in the lending and spending activities that affect the real economy. The stock market declines should make us feel good in a sense, but I will confess that every decline, especially the big declines, give me a very uneasy feeling. Every recovery that we have had in these volatile markets has made me breathe a little easier. As I see it, the situation is quite uncertain right now. The variance of the outlook has certainly increased. The soft landing scenario is something of a central tendency, with a fairly wide range of perfectly plausible outcomes on either side. It may be the best bet down the middle, but there is some significant probability on both sides. That suggests we may have a lot of business ahead of us as the information comes in. If we get the soft landing, then I would suppose that the spreads will have to narrow because everything will seem to be coming out all right and the financial markets should settle down. That obviously is what we want. Clearly, we will continue to see adverse effects coming from abroad. The recessionary trends abroad are affecting U.S. exports and the import-competing industries; steel is a good example. Those effects are very real and to some extent we are going to end up with an economy that is going in two directions, with some domestic activities very clearly impacted by the foreign sector. But the external sector is not by any means the largest segment of the national economy. If the home-grown industries--the service industries, construction, housing, domestic investment--can all remain solid, we are going to come out all right on a national average basis, although the hurting industries will to continue to hurt until conditions improve abroad. With regard to the outlook, it seems to me that we have something of a race between two forces here. Interest rates on low risk credits have declined. Borrowers who are very well situated, such as homeowners who can put down substantial equity, are going to have their activities stimulated by this environment. On the other hand, the more risky borrowers are going to be held back. They are going to have projects cancelled. So, we have a race between these two forces that will determine exactly how the economy comes out over the next quarter or two. Of course, that will then determine whether the economy tips over into a genuine recession or whether it in fact ends up with a soft landing. So, I certainly agree that the balance of risks has tipped very decidedly over into the negative side. I think that the flight to quality does explain recent rapid money growth, but I want to emphasize that the dramatically increased spreads in the financial markets are highly abnormal. They just do not represent business as usual.",739
-fomc-corpus,1998,Thank you. Governor Kelley.,6
-fomc-corpus,1998,"Mr. Chairman, events are moving quite rapidly. It was only last July that the Committee began to get concerned about the emerging bifurcation being introduced by an ongoing very strong domestic economy interacting with a deteriorating international situation. In less than 90 days, policy risks have shifted dramatically to the downside. If the Committee should respond to this situation this morning by easing policy, I will support that decision but not without considerable hesitation and misgivings. While growth in overall economic activity clearly has been slowing recently, our domestic economy remains remarkably robust. Though decelerating from earlier this year, final sales remain strong; labor compensation is rising; new jobs continue to be created; consumer sentiment remains high; long-term credit is available at rates not seen in decades to support housing and motor vehicle sales; and the stock market has slipped but it has not collapsed. If this beat goes on for long, the slippage in capital spending could soon reverse and an up-cycle in inventory spending could once again emerge. It may well be that we will experience no more than the moderate slowing of the expansion that we have long expected and for which we fervently have hoped. The odds have become lower that this is all the weakness that will occur yet it is highly questionable in my view that slower economic growth alone would call for an immediate reduction in interest rates. Of course, far more is involved as this situation plays out against a background of ailing world economies, fragile financial markets that could turn very ugly very quickly, and a continued quiescent inflation rate in the United States. I am concerned that we are now at risk of falling behind the curve. It would seem on balance that we have an opportunity here to take out a modest and relatively inexpensive--in terms of risk--insurance policy, and I believe we should do so. Consideration of actions stronger than that should await the unfolding of future events. Thank you.",382
-fomc-corpus,1998,"Finally, Governor Meyer.",5
-fomc-corpus,1998,"Thank you, Mr. Chairman. What has changed between the last meeting and today that could justify an easing? That clearly is the question of the day. The answer is not the initial conditions, in terms of very tight labor markets, nor the near-term pace of the expansion. Second-half GDP growth still looks to be close to trend, at least to my estimate of trend. That is, of course, a significant slowdown relative to the rate of growth in the first half, but it is in line with earlier expectations and it will leave labor markets still very tight at the end of this year. Nor do I see anything in the most recent data relating to the strength of the expansion to justify a change in policy. The forecast? Well, that's a different story and that is my point. Any policy action today must be based squarely on and be defended in terms of the forecast for 1999, specifically on the change in that forecast justified by recent developments. The staff did an excellent job of identifying and quantifying the effects of three recent developments. The first is the downward revision to foreign growth due importantly to a downward revision in growth prospects for Latin America. The second is the sharper-than-anticipated decline in equity prices that suggests a downward revision to consumer spending and quite likely to business fixed investment and residential construction as well. The third is a widening of risk spreads and a generally reduced appetite for risk that might well have an incrementally adverse effect on spending. Taking the direct impacts of the first two, adding a smidgen for the difficult to quantify latter factor, and then applying an appropriate multiplier gets me to something in the range of a 3/4 percentage point downward revision to my growth forecast for 1999, albeit from a somewhat higher initial forecast than that in the last Greenbook. The change in the forecast can perhaps best be understood by differentiating what I call phase two of the global turmoil from phase one. I date phase two from the Russian moratorium and devaluation and the increased pressure on Latin American economies that immediately followed. Interestingly, phase two does not appear to have an especially adverse effect in terms of its incremental effect on net exports, certainly when compared to the effect of the crises among developing Asian economies and the deterioration of the Japanese economy during phase one. However, whereas phase one was accompanied by offsetting positive shocks in the form of lower U.S. interest rates stemming from safe-haven capital flows and lower oil prices, phase two in contrast is accompanied by the reinforcing adverse effects of a decline in equity prices and an increase in risk spreads as well as by a coincidental increase in oil prices due to supply cutbacks. A second likely difference is that whereas phase one was accompanied by an unexpected and largely unexplained surge in private domestic demand, phase two will likely be accompanied by a spontaneous unwinding of that exceptional strength. I have emphasized previously the distinction between central tendencies and asymmetric risks in the current forecast, and I believe this aspect of the outlook is also relevant to the policy decision. I have to admit that when I hear someone say that the risks in their forecast are asymmetric, my first inclination is to encourage them to rethink that forecast and return when they have managed to produce one where the risks are symmetric. I believe our staff has followed this philosophy more than most forecasters. They assume, for example, a break in Brazil's exchange rate regime and a fairly sharp adjustment in growth in Latin America, and they have a further decline in the stock market on top of the recent correction. Nevertheless, when there are potentially important one-sided discontinuities in the outlook, as I believe there are today, risks can legitimately be asymmetric. As a result, there could be an important difference between the modal forecast--the best guess and the most likely outcome--and the mean of the probability distribution of outcomes. Both are relevant to the policy decision. On balance because my previous forecast for 1999 was not as pessimistic as that in the August Greenbook, I end up with a somewhat higher growth forecast for 1999, even allowing for a similar downward revision to growth. But I do expect growth to be decidedly below trend next year. Given my expectation of somewhat faster growth than in the Greenbook and therefore a slightly lower path for the unemployment rate, I anticipate a bit higher inflation than is projected in the Greenbook. However, I agree the weaker growth now in prospect and the projected rising path of the unemployment rate should restrain inflation going forward. The policy question, of course, is whether the projected slowdown crosses the line from benign to undesirable. I will save that assessment for my policy statement.",931
-fomc-corpus,1998,Thank you very much. Let's now move on to Don Kohn.,14
-fomc-corpus,1998,"At your conference call last week, most of you seemed to favor easing policy at this meeting. I will briefly review the case for an easing action before discussing the factors bearing on how large the cut in the federal funds rate should be. The case for easing does not rest on incoming data about the economy. As many of you have noted, the information that has become available since your last meeting indicates that the economy continues to expand at a pace around the growth rate of its potential. That has kept the unemployment rate flat at a very low level, and inflation has edged higher on a 12-month basis, at least as measured by the core CPI. Thus, a standard, backward-looking Taylor rule that called for a 5-1/2 percent federal funds rate in August would continue to do so today. Rather, the case for easing relies on projections that have been marked down by developments overseas and in U.S. financial markets. Most significantly, the sea change in investors' perceptions of risk and their apparent heightened unwillingness to take those risks has continued to spread globally, hitting the Americas with greater intensity. Financial conditions have become more restrictive throughout the hemisphere, especially in our important export markets in Latin America and Canada where the authorities have had to tighten monetary policy to defend their currencies. While Committee members may have had stronger economic forecasts than the staff, it is likely that most of your projections also have been reduced noticeably by these events. In that case, if you considered the federal funds rate to be at an appropriate level in August, it probably should be lower now. Even if Committee members had not marked down their forecasts of the most probable outcome for economic growth by very much--or only by enough to become more comfortable with the inflation outlook--the lower tail of the distribution undoubtedly has gotten a good bit fatter. In that regard, the Committee might see these as the appropriate circumstances in which to take some risks on the side of trying to ensure that U.S. economic growth comes close to being as robust as possible, consistent with continued low inflation. Prolonged sluggish expansion in the United States would seriously undermine recovery prospects in the rest of the world and eventually feed back on our own economy. Much of the benefits of an easing move was realized for financial markets when expectations came to embody action today. That process helped to level out risk spreads in some domestic markets and to reduce spreads on Brady and other dollar-denominated sovereign bonds on international capital markets. It probably also has helped to halt the drop in equity prices after their sharp fall in August. Failing to follow up by actually easing could undo much of that. To be sure, it is important not to be, or to be seen as, attempting to support particular values in capital markets. A good part of the market adjustment, at least in the United States, probably has reflected appropriate reassessments of business risks and prospects. And in some markets, such as that for U.S. equities, the reappraisal may not be complete. But the Federal Reserve can try to keep the real economy on an even keel as financial market adjustments are made, and the Committee may see that objective as now requiring some reduction in a real federal funds rate that had been kept at an unusually high level in part because of financial market exuberance. A cautious approach to easing, characterized by a 25 basis point reduction in the federal funds rate, might be justified by the situation now prevailing in the economy. With the unemployment rate well below most estimates of its sustainable level, the Committee has long been of the view that economic growth needed to slow substantially from the pace of the last few years--most likely to below trend--just to keep inflation from accelerating. As yet, there are few signs that the economy already is slowing enough to begin to relieve labor market pressures, much less that it is decelerating so sharply as clearly to require monetary policy easing. Inflation risks associated with the tight labor market are heightened by the possibility that some of the factors damping price increases in recent years may already be reversing--the dollar is falling against currencies of other industrial countries, health care costs are rising faster, and oil prices have begun to firm. Whether inflation expectations will remain subdued as these influences turn around is an important uncertainty in the outlook. Caution in not moving the federal funds rate by very much also may be seen as consistent with basing the action primarily on projections rather than actual data, particularly since it is difficult to be confident about the effects of a change in the federal funds rate in the current highly skittish financial market environment. To be sure, a series of tightenings in 1994 was initiated largely on the basis of projections, but the Committee waited until it was sure the economy was strong, and much of the subsequent policy firmings occurred against the background of surprisingly robust growth and early signs of rising inflation pressures. The analogous strategy at this time might be to begin with a small action and build on it should further developments in either the financial markets or the economy indicate that the shock to spending was in fact turning out to be substantial. Lastly, holding the action to 25 basis points may have some appeal if the Committee thought both that the act of easing in any amount would itself usefully reassure financial markets, households, and businesses that the Federal Reserve recognized and was responding to potential problems and that in total not much easing would ultimately be necessary to support adequate economic expansion. In these circumstances, a relatively modest action now would be desirable so that one or more further easings could be undertaken in response to changing conditions without risking excessive stimulus to growth and a potential intensification of inflation pressures. Reducing the federal funds rate by 50 basis points might be appropriate if the Committee instead saw the situation as one that required, or was highly likely eventually to require, substantial policy easing. In the staff forecast, a decrease in the federal funds rate of 75 basis points is needed to keep the economy from dropping below the level of its potential in the year 2000. Absent such policy easing, the added restraint on aggregate demand that emerged in the period between the August and the September Greenbook projections would reduce the growth of the economy by almost one percentage point next year. While the most likely outcome is that credit conditions will end up only moderately less accommodative, recent financial market developments suggest that the odds may have increased of a significant further tightening in credit availability with associated downside risks to the economy. Questions about the financial soundness of a number of financial firms have intensified in the wake of the near failure of Long-Term Capital Management. Were this process to continue, or the settling down in the market that the staff has anticipated fail to occur, the result could be greater disruptions than in the staff forecast in the access of households and businesses to credit, in part as intermediaries incurred higher costs and turned more cautious in their lending to conserve capital. The longer volatility and uncertainty persist in financial markets, perhaps the higher are the risks that they will feed back on business and household confidence and spending plans. An easing of 50 basis points, if accompanied by a sense that the Federal Reserve would then be on hold for a while, would reduce one source of volatility in markets for a short time--that is, guessing about immediate Federal Reserve action and parsing statements of Federal Reserve officials for the probabilities of such action. Because markets would be somewhat surprised by a full 50 basis point reduction today, there might be an adverse initial reaction in the prices of riskier assets should participants infer that the Federal Reserve saw the situation as difficult enough to take a somewhat unusual action. Over time, however, market participants could find reassuring your willingness to act forcefully. Because a 50 basis point easing at this meeting is not fully built into the structure of interest rates, it would provide some added help to emerging market economies running tight monetary policies to defend their currencies. The associated drop in the exchange value of the dollar might even nudge the monetary authorities in the United Kingdom, continental Europe, and Canada to ease their policies. It would be of no help to Japan--since the added demand in the United States for Japanese exports arising from higher income here would be offset by the effects of a higher yen--unless it induced the Bank of Japan to use the remaining 25 basis points between its policy rate and zero! Presumably, an easing of 50 basis points would be associated with adoption of an unbiased directive. A smaller decline of 25 basis points might be associated with either a symmetrical directive or one that was asymmetrical toward easing. The latter would connote that the Committee wanted to remain especially sensitive to the potential need to ease further, perhaps because it still saw a relatively greater potential for surprises--in foreign economies and domestic financial markets and in the spending plans of businesses and households in reaction to ongoing developments--that would imply considerable further restraint on demand in the United States.",1782
-fomc-corpus,1998,"Questions for Don? If not, let me proceed. A number of you have argued, quite persuasively in my view, that there are only limited hard data that suggest any loss of momentum in the current expansion. I can find only two statistics that point to some weakening, although I am sure there are more. One is a significant drop in the production of steel ingots in the last two weeks.",82
-fomc-corpus,1998,Only you would know that!,6
-fomc-corpus,1998,"Well, I hesitated to mention it because it is such a small item. Second, the latest data indicate a fairly dramatic decline in construction awards for nonresidential building. Beyond that, we do not find significant weakening in equipment orders. Retail sales are not terrific, but obviously they are not doing too badly. Motor vehicles, which are a crucial factor, are softening a little but hardly enough to take note. Actually, the ratio of used car prices to new car prices, which has not been a bad short-term indicator, has turned up a little. Homebuilding may be off a bit, but it is still quite elevated by any objective measure. So, as we look across the board, it is very hard to find any indicators of significant softening. To be sure, the labor market is exceptionally tight, although we have had a modest increase in insured unemployment. It popped up with the GM strike and did not reverse fully after the strike was settled. I might add that the low level of initial claims relative to insured unemployment probably reflects declines in both hires and layoffs in relation to the number of employed workers. That is showing up, incidentally, in the household data as well. A more relevant indication of a weakening labor market would be an upturn in the level of insured unemployment. That level has risen a little but scarcely enough to argue that we are seeing a significant development. The crucial development, which has been mentioned numerous times around this table, is that we are observing an important shift in attitudes toward risk. The reason is that one can generalize and explain the business cycle, perhaps in an overly simplistic way, as reflecting shifting views toward risk. When there is a general sense of declining risk, there is a tendency to reach out into the future. That is another way of saying that the cyclically sensitive areas of the economy--capital investment, construction, consumer durables--all accelerate as the result of efforts to invest in the future. The downside of the cycle occurs when there is a widespread perception of rising risks. We would certainly expect to see a change in psychology before any significant erosion in the real variables of the economy became apparent. Such a change in psychology clearly is what we are observing. The opening up of risk spreads is a very significant indication of increased risk aversion. As we know, that means in effect that commitments are being pulled back. We see in the balance sheet data that are now emerging and that Governor Ferguson was referencing a fairly pronounced weakening of cash flows in the business sector coupled with an ever-increasing difficulty of raising capital externally. If we have a contraction in both internal and external sources of funds, the question then arises as to how the momentum will be maintained in the capital goods markets, a sector of the economy that has been an important factor in the significant expansion of economic activity in recent years. So, what we should be looking for, and indeed what is implicit in the Greenbook forecast, is a process by which the combination of increased risk aversion in the market, reflecting changed attitudes toward the future, and the effects of higher perceived risks on the balance sheets of business firms all point in a single direction. That is, they suggest a decline in capital investment. From the perspective of the way our models operate, the reason would be that the cost of capital has gone up. In terms of what actually is happening in the real world, the reason is basically that people are pulling back, and those who are not pulling back are finding it difficult to finance their activities either internally or externally. I was mentioning in a short conversation during our coffee break that I suspect that if we had September capital appropriations data for corporations, we would see a fairly significant decline. That would be the first hard evidence in the forward data. We do not see any general weakness in the order books thus far. We do in steel where imports have caused steel industry orders to collapse, but that is a specialized industry effect and we do not yet have indications of any overall contraction in orders for equipment. But if we are at all correct in evaluating how the system is functioning, that should be on the fairly near-term horizon. I believe that the stock market decline has had a very profound effect, and indeed one can argue that a goodly part of the increased risk aversion is itself a consequence of the collapse in stock market values. As best I can judge, that collapse is not all that much a result of a contraction in earnings expectations, at least on the part of security analysts. It clearly is far more the result of rising discount factors against those earnings in the sense of a rise in equity premiums, as least as we measure them. What that indicates is a foreshortening of forward time preferences or, looked at another way, an increase in risk aversion. So, in one sense differentiating equity markets and the credit markets is not something that is very meaningful because both very much reflect the same underlying process of pulling back. As I indicated earlier, the approximately $3 trillion capital loss in the aggregate value of equities in the United States, most of which are held by U.S. residents, just cannot be occurring without considerable breakage of crockery somewhere. A stock market decline of the magnitude we have experienced probably was far less significant 20 or 30 years ago than it is today. This is largely because the aggregate size of stock holdings relative to income is so much higher now and so many more people have equity investments that the effects of stock market declines on economic choices is almost surely higher. Clearly, our exposure to stock market developments is much greater than it is in Europe. In any event, I think that what we are observing is a development that is occurring at the fulcrum of a turn, for want of a better expression, in the psychology of anticipatory evaluations that will be reflected at some point in hard numbers relating to the performance of the economy itself. I think, however, that it is a mistake to expect the latter to happen very quickly. The economy's momentum in 1997 and the first quarter of 1998 and the big surge in stock market values in the first half of this year are all working their way through the income and product accounts. I would be very surprised to see that momentum disappear in the near term. I do anticipate a significant decline in capital appropriations, new orders, and contract awards. But these take time to work their way into actual purchases of capital goods and spending on projects that are under way. Therefore, a presumption that we are going to see a significant effect on capital expenditures before 1999 is probably unrealistic. Nonetheless, it would be wrong to say that the change in psychology is all ephemeral just because we have not seen it in the hard data yet. In the forecast process, we have to look at people's value judgments. It is the change in value judgments that alters the real world. We have evidence that those value judgments are changing in a very significant way, and that is no longer a forecast. As a consequence, we are likely to see this process continue and perhaps accelerate. I thought the evidence of fairly widespread tightening in the senior loan officers survey was quite startling in terms of its discontinuity with bank lending practices in the previous survey. We picked up indications of that at our meeting with the Federal Advisory Council several weeks ago, well before the latest loan officers' survey was conducted. What was extraordinary is how depressed that group was. None of them was saying that their loans were declining. None of them was saying that their local economies were experiencing a major contraction. But the essential conclusion is that the risks really are perceived as having increased in a way that I had not seen earlier, and that conclusion is now being solidified in the senior loan officers' survey, which is far broader and more detailed. What we are seeing in our financial markets is essentially a mirror image of financial developments abroad, including a remarkable similarity in timing. The concurrence between developments here as measured by domestic yield spreads and the dramatic events abroad as measured by the weighted Brady stripped spreads indicates that we are not currently observing a lead/lag phenomenon. In effect, the same contagion that has so gripped the rest of the world is spilling over to our economy. We are becoming infected. This is evidenced by a widening of domestic yield spreads. I come out of all of this with a set of conclusions or probabilistic evaluations that suggest to me that the Greenbook is essentially on the right path. But I do think that we have to be careful to recognize that yield spreads that can become dramatically adverse also can work their way back toward previous norms. We have seen several spikes in the international stripped Brady data that have involved reversals. To be sure, this one is a much more deeply seated one, and it has spilled over to the United States. However, we cannot presume that the process of deterioration is 100 percent irrevocable. That defies history. The probability of a substantial reversal at this stage is, I think, less than 50/50, but it is by no means zero. Therefore, those who have urged a degree of caution in moving the funds rate lower, in keeping with the tentative decision during our telephone conference last week to move at this meeting, have the best case as far as I am concerned. Accordingly, I would suggest a reduction of 25 basis points in the federal funds rate and not 50 basis points. I think that there is a better argument for a tilt toward ease in that the latter has somewhat greater support in terms of the historical experience. Nonetheless, it is conceivable that we may end up viewing this action not as the first in a series of moves but as an insurance premium, as Governor Kelley pointed out. If that outcome is felt to be more likely, then the argument for symmetry is more compelling. I'm not sure the tilt is all that critical at this stage because I think events are going to drive us far more than our predispositions at this meeting. I would be less inclined to base our future actions on whatever we conclude at this stage than I would on what I might see in a newspaper, say, two weeks from today that reported on significant developments over the next couple of weeks. So, I don't think that the tilt is going to matter all that much. The reason is that in my view this economy is either going to weaken further as a consequence of the very significant shift toward greater risk aversion and very large capital losses in our equity markets or it is going to stabilize. Brazil may suddenly look better; Latin America more generally may look better; we may get a further decline in the Brady yield spreads, which we have seen in the last few days; junk issues may suddenly look a lot less uninteresting in the American market. In other words, we cannot rule out the possibility that at some point the economic outlook may look far more like the August Greenbook projections and what we discussed at the August meeting than it has in the last few weeks. My own impression is that economic conditions are eroding at this point. I do not believe we are behind the curve because I think recent economic developments are to a very large extent what we were anticipating. It is not as though there is a shock element involved. You may remember that in Jackson Hole a number of us got together and expressed the hope that we would be able to wait until today's meeting to take whatever action was consistent with developments in our domestic economy. We did not want to be seen as rushed into action by events external to the United States and associated market forces. We felt that having to move earlier than today would clearly be seen as evidence of a central bank that was scurrying to catch up. We have succeeded in staying on schedule, if I may use that term, and hopefully we will continue to do so. Accordingly, I am putting on the table a proposal to reduce the federal funds rate immediately by 25 basis points and a recommendation that we move to asymmetry toward ease. I would add that my preference for a tilt in that direction is a lot less strong than what I see as the desirability of a clear action to move the rate down by 25 basis points. Vice Chairman.",2455
-fomc-corpus,1998,"Mr. Chairman, I agree with your proposal to cut the fed funds rate by 25 basis points. Being the resident theologian on the meaning of ""tilt,"" I would say that a tilt in the direction of further ease is more reflective of what the Committee thinks is likely to happen and where the risks are located. So, I, rather more strongly than you, prefer an asymmetric directive.",80
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Mr. Chairman, I agree with your recommendation for a 25 basis point cut. I would be more comfortable with a symmetric directive at this point simply because I think we still are not, as you point out, seeing real evidence of a slowing domestic expansion. If the reality of a rate cut, as opposed to its promise, results in calmer markets--and Don Kohn suggested that they have calmed a little in recent days--we may see a shorter rather than a longer period of market turmoil and a return to an economic situation resembling the one that we had in August. At that point, the domestic economy was still displaying a good deal of strength, and we had some concerns on the upside as well as the downside. So, I would be significantly in favor of a symmetric directive, given that I am not entirely convinced that the economy is headed down an irrevocably slippery slope. I say that despite the fact that the market turmoil is significant and the overreaction in credit markets has been much greater than we anticipated at the August meeting.",210
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Mr. Chairman, I too agree with your recommendation of a 25 basis point reduction. In my view, a larger move is unnecessary, and it likely would be interpreted as evidence that the Fed must really be worried. I don't think we want to convey that impression. I would also concur with the proposed downward tilt in the directive despite the discussion that we had at the beginning of our meeting this morning. If we were going to announce our decision on the tilt today, I might be more inclined toward a symmetric directive. I would worry that the reaction to asymmetry might be to question why we didn't reduce the rate by 50 basis points if we are that concerned.",134
-fomc-corpus,1998,Aha! [Laughter],7
-fomc-corpus,1998,"I'm sorry, but where do you come out given that we decided not to announce our decision on the tilt today?",23
-fomc-corpus,1998,"Since we decided not to publish the tilt today, I come out in favor of a 25 basis point reduction and asymmetry toward easing.",28
-fomc-corpus,1998,Thank you. Governor Kelley.,6
-fomc-corpus,1998,"Mr. Chairman, I support your 25 basis point move, and I prefer symmetry for two reasons. First, that is what the facts of the situation call for in my judgment. Secondly, lowering the fed funds rate could well ""spook"" this market if such a move is combined with an asymmetric directive. The market might see the Committee as badly frightened rather than responsibly concerned. This could induce the very sequence of adverse events that policy is intended to discourage in the first place. Should evolving conditions so warrant, we can just as well move policy further from a symmetric directive.",116
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation of a 25 basis point cut in the target federal funds rate. As I noted earlier, an easing has to be justified as a preemptive response to a significant change in the forecast. In regard to that forecast, we have changes that involve some combination of a lower central tendency for growth next year and wider downside risks. The question we face in reaching this decision is the location of the threshold where such a projected slowdown crosses the line from being benign to becoming unacceptable. There is no question in my mind that a slowdown of the dimension projected by the staff meets that test. It is a closer call from the standpoint of my less pessimistic forecast, but taking into account my sense of asymmetric downside risks, I believe an easing is clearly justified today. An easing can be viewed as either a step toward filling an expected hole in growth in 1999 and/or providing insurance against a bad draw from the unpleasantly fat tail of the probability distribution of outcomes. An easing also can be justified in terms of the minimax framework I previously suggested in relation to our March 1997 tightening. We should look at each of our options, in this case no change or an easing, and ask what would be the worst possible outcome under each option. Then, we should select the option that yields the least-worst outcome. As I balance these risks today, I am convinced that the greater danger comes from an unacceptably sharp decline in growth and that an easing is therefore justified. The next question is the size of the move. It is useful to make a provisional judgment about the path of the funds rate in relation to the forecast. The path of the funds rate should be set so as to partially offset the projected slowing in growth in 1999. The objective is to leave growth below trend next year so as to reverse in part the prevailing tightness of the labor market and also to avoid overshooting in the year 2000 as foreign growth begins to recover. The magnitude and timing of the rate cuts in the Greenbook look about right based on the above considerations relative to the Greenbook forecast. Since my forecast is less pessimistic, I would not want to move more aggressively than the funds rate path assumed in the Greenbook. I also agree with your recommendation of an asymmetric posture toward further easing. In my view, such a posture better reflects where we are, assuming that we implement a 25 basis point move today. I would favor that posture whether or not we were to announce it today.",510
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"I would like to review briefly where I am coming from, Mr. Chairman. Despite the rising turbulence in the international economy over the last year or so, I have been primarily focused on the upside risks until recently. I am still focused on them at least to some extent. Until recently, I have felt that the effects of the foreign shocks were primarily two-sided in terms of their implications for GDP growth. The drag on GDP growth from reduced net exports was offset to a considerable degree in my view by lower interest rates due to the flight to quality and by downward pressure on domestic prices occasioned by the stronger dollar and lower commodity prices. With that offset in place, I tended to look through the international problems to the domestic economy where I saw very rapid growth in M2 and a high level of economic activity. That for me translated into an inflation risk. That situation clearly has changed dramatically. The huge increase in perceived risk in financial markets, if it persists, may well short-circuit the earlier, mainly favorable, impact of foreign developments on U.S. financial conditions. In this new environment, we no longer have that offset. Bob McTeer will be happy to know that I am no longer in favor of tightening monetary policy. While the downside risk in the domestic outlook clearly is greater than it was, that alone would not be enough to persuade me that we need to ease monetary policy, at least not quite yet. I see a continuation of very strong conditions in the economy and not much evidence that they are going to weaken significantly in the near future. If there is a case for easing now, from my standpoint it would be to signal that we are not indifferent to the growing risks in world financial markets and that we are prepared to be flexible going forward as emerging developments may require. In my view, 25 basis points is a sufficient signal to get that message across. I think a 50 basis point reduction would go well beyond what is necessary. As far as the symmetry of the directive is concerned, since I think a1/4 point reduction is going to put us a little ahead of the curve--I may be the only person in the room who feels that way but I do feel that way--I would prefer a symmetric directive.",451
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. My position is not a 1ot different from that just expressed by Al Broaddus. I had been hoping for quite some time for the emergence of investor caution. Rational optimism is desirable, but investor sentiment was well beyond anything that I would have called rational optimism. Having both lenders and other investors be a little more reasoned in weighing risks is certainly desirable, but we got there too fast. It went too far, and we now are dealing with a crisis of confidence. We do not want to see a seizing up in financial markets, domestic or foreign. Foreign financial markets have seized up to a large extent. So, I am hoping that this uncertainty will dissipate rapidly and that we can turn back to a situation that is more reflective of the fundamentals. I think that any action that we take will be more symbolic--a message that may have a political component--than needed in a fundamental sense. I hope that turns out to be the case. For that reason, I think it is desirable to do the minimum that we can get away with. To do otherwise would be to ignore to our peril the rapid acceleration that we have seen in all of the money, reserve, and credit aggregates. We have to be careful about that. As far as the symmetry is concerned, I always prefer symmetric directives. But I do not feel strongly enough about asymmetry or symmetry that I would dissent from an asymmetric directive.",288
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I support a 1/4 point reduction in the funds rate. I also think the current situation may require more than one 25 basis point cut in the funds rate in the future, and therefore I would prefer a directive with asymmetry toward ease.",55
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I also support a 25 basis point reduction. As to the tilt, I would much prefer no tilt for a couple of reasons. Number one, I don't think the facts today warrant it. Number two, I think you are correct in your observation that events will drive what we do next, and changing circumstances may well require a discussion at a telephone conference before a decision is made.",81
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"A 25 basis point reduction captures my feeling. I think it is the right measure of response at this point. As far as the tilt is concerned, I'm almost indifferent about it. I believe that we are going to be so driven by events that the tilt is likely to have no substantive influence on what we do. If we had a different disclosure policy and there were an announcement effect, I think it would be worth spending more time on this question, but I am happy to go along with your recommendation.",102
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I support the proposed cut of 25 basis points. I have a preference for symmetry, but I don't believe the issue is very important. In the long run what we do is what determines the outcome, although I believe that what we say can be extremely important in the short run. So, we need to be clear about our direction and our purpose. We have to emphasize that our intention is to focus on the U.S. economy not because we are unconcerned with what is going on abroad but because we have only one policy instrument. At best, we can serve one policy objective and that should be to achieve price stability or maintain low inflation in the United States. That is a very important message that we need to repeat continuously. Market expectations are very important in terms of how monetary policy exerts its effects in the short run. We have seen a large decline in interest rates in recent months. That is not just good luck. It is not just an accident. It is a consequence of the market's understanding of the Federal Reserve's objectives and what its policy is going to be in the long run. That decline in interest rates could not have occurred if the market did not believe that the incoming data were consistent with low inflation and that we would in time act to bring interest rates down as required to keep the economy in'the neighborhood of full employment. So, I think that the consistent message that we send about the importance that we attach to our long-run objective of price stability is essential to having built in stabilizing effects from market fluctuations in rates. I would like to comment briefly on the discount rate. In the long run, I would like to see the discount rate closer to the federal funds rate, but I think that this is not the time to make any such adjustment. I hope that the Board will accept a 1/4 percentage point cut in the discount rate so that the change in the federal funds rate at this time will be viewed as perfectly normal and will not send any possibly confusing messages to the market.",408
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation for a 25 basis point reduction in the fed funds rate. In my opinion, going beyond that clearly would be seen as an overreaction and some would view it as panic on our part. It is important for us to keep in mind that we are basing this policy action on projections, as you said, and we have to be somewhat humble about our record on projections. On the tilt in the directive, I am almost indifferent. If we follow the logic of how we have been using symmetry, I would have a slight preference for asymmetry since I am assuming that there is a better than 50 percent probability that we will have to lower rates again. I hope I am wrong about that, but that is my assessment of the outlook at this point.",161
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I endorse your recommendation for a decrease of 25 basis points in the federal funds target rate. As I said in my earlier statement, I think we are acting somewhat preemptively, and while I believe we should take action at this point, we should not overreact. With respect to your policy recommendation for moving to asymmetry, I endorse that as well. Like President Moskow, I feel that further cuts are slightly more likely than not, and I think it is important to signal that at least internally. Therefore, I would move to asymmetry.",119
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"I also support both proposals. Given all that we have discussed, I believe some rate cut is important, and I think 25 basis points is about right. I am not embarrassed about basing this policy move on the forecast. I think the forecast has it about right. We may find that we have to do more than 25 basis points, and therefore I would also support asymmetry toward easing.",81
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"I, too, support the recommendation for a 1/4percentage point reduction in the fed funds rate. It seems to me that that is the prudent thing to do given the risks as I perceive them. I view such a policy adjustment mainly as on the margin of our effort to insulate the domestic economy from the series of negative developments that has engulfed the world in recent months. As far as symmetry and asymmetry are concerned, as I have commented before, I have a long-standing preference for symmetry most of the time. This is one of those times, mainly for the reasons you cited, Mr. Chairman. I think events will determine what happens and I do not feel that asymmetry buys us very much in this setting.",148
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Mr. Chairman, I think I have done my colleagues a real service today in suggesting that we may be behind the curve. I gave them all a chance to say we were not, and an opportunity to vote to ease monetary policy while still sounding hawkish! [Laughter] Just to clarify my views on that--",64
-fomc-corpus,1998,I don't think you need to! [Laughter],11
-fomc-corpus,1998,"I'm willing to quit! I do not believe we are behind the curve on the real economy. On the other hand, I do think that had we lowered the fed funds target by1/4 percentage point prior to the Jackson Hole conference, we might have avoided some of the financial market turmoil that we have seen since then. But starting from here and now, I would just point out that at 5-1/4percent the federal funds target rate will still be above 30-year bond rates. The yield curve will remain inverted. As the earnings reports for the third quarter come in below current expectations, I think that having a lower interest rate at that point and a lower discount factor would help cushion some of the further stock market deterioration. If you wanted to approve a larger reduction and make it look mild and involving all deliberate speed, you could put periods rather than exclamation points in the announcement! But I realize that I'm not going to win this argument, so I defer to your better judgment, Mr. Chairman, and that of all my colleagues on that. I don't care much about the tilt either, but going back to my earlier comment, our discussion today does illustrate how convenient it would be not to have to vote on the tilt and therefore not to have to announce a decision on the tilt. We would still know how we feel without having to take the risk of publicizing it.",280
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, I agree with the proposed 25 basis point easing move and I would prefer no tilt for the reasons that you articulated with regard to that choice and that Gary Stern reinforced in his comments. Thank you.",44
-fomc-corpus,1998,"There is unanimity for a 25 basis point reduction and the smallest of majorities for asymmetry. So, will you read the directive accordingly.",30
-fomc-corpus,1998,"I will be reading from page 14 of the Bluebook: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with decreasing the federal funds rate to an average of around 5-1/4 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a slightly higher federal funds rate might or a somewhat lower federal funds rate would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the growth in M2 and M3 over coming months.""",130
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan Yes Governor Kelley Yes Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes,43
-fomc-corpus,1998,"Our next meeting will be on Tuesday, November 17. We will now go into a short recess for lunch. When we resume our meeting, Bill McDonough will report on what has been going on with Long-Term Capital Management. [Recess]",51
-fomc-corpus,1998,"I have the draft of a press release, which I will ask Don Kohn to read.",19
-fomc-corpus,1998,"It reads as follows: ""The Federal Open Market Committee decided today to ease the stance of monetary policy slightly, expecting the federal funds rate to decline 1/4 percentage point to around 5-1/4 percent. The action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically. The recent changes in the global economy and adjustments in U.S. financial markets mean that a slightly lower federal funds rate should now be consistent with keeping inflation low and sustaining economic growth going forward. The discount rate remains unchanged at 5 percent.""",125
-fomc-corpus,1998,Sounds good.,3
-fomc-corpus,1998,"Vice Chair, do you wish to comment?",9
-fomc-corpus,1998,"Yes, Mr. Chairman. I want to give the Committee members some background about the involvement of the Federal Reserve Bank of New York in helping a number of private sector financial institutions arrive at a decision to inject capital into Long-Term Capital Portfolio (LTCP). Long-Term Capital Management (LTCM), a hedge fund management company established in 1994, created a set of funds that collectively are called Long-Term Capital Portfolio. The founder was John Meriwether. His senior colleagues are David Mullins, formerly of this Board, and two Nobel Prize winning economists/ mathematicians, Bob Merton and Myron Scholes, plus some others, most of whom were recruited from Salomon Brothers where Meriwether had worked before. They were quite successful in 1994 and very successful in 1995 and 1996. In each of those two years they returned to their investors over 40 percent of their initial investments after the deduction of very considerable fees by the management company. All their investors were either firms or high net worth individuals who invested a minimum of $10 million. During this period, the fund's performance exhibited a very low level of volatility. They were consistently successful, and, not surprisingly, they apparently began to believe very firmly in their ability to continue to be successful. They did not take essentially one-sided bets on transactions. Rather, they were speculating on spreads of the kind that Peter Fisher described earlier, and over time they also went into spreads on equities as well as fixed-income instruments. In 1997, they were somewhat less successful. If I remember correctly, they had a return of about 17 percent. At the end of the year, they decided that market opportunities were not as great as in previous years and that they could not profitably use as much capital as they had previously, so they returned about $2.8 billion to their investors. The year 1998 has been considerably less successful; by the end of August, they had lost 52 percent of the capital that they had at the start of the year. During August, LTCM officials approached some very prestigious financial firms in New York to see if additional investors could be brought in. On Wednesday, September 2, Meriwether sent a letter to the investors of LTCP. Knowledge of that letter became quite widely spread. Meriwether reported the losses, but he also expressed a great deal of confidence. He said in his letter that he thought there were investment opportunities and he encouraged his existing investors to invest more. At the same time, as I mentioned, he was seeking new investors, both directly and through some securities firms. Meriwether and Mullins informed me on September 15 that they had to raise a significant amount of additional capital--about $1 to $1-1/2 billion--in order to support the risk positions of LTCP and have the staying power that they needed. Two days later, they informed our Bank that they had been unsuccessful in that regard. That is, they were not able to raise the money directly or through the securities firms they were using. You may remember that the markets were very turbulent on September 18. In such situations I make an effort, as did all my predecessors in this job, to talk to the heads of the major banks and securities firms in New York. My purpose is to get a feel for two things--what they think is going on in the markets and how their own firm is doing. Early in the day I had heard from Messrs. Meriwether and Mullins who told me that their losses were continuing. I thanked them for the information. It was fascinating to me that every head of the 8 to 10 firms that I talked to subsequently during the day brought up the problems of LTCM/P independently of anything that I said. They gave particular emphasis to what in their view would be the very serious problems that a failure of that firm would create in financial markets. They were not talking particularly about the problems that such a failure would cause for their own firms but rather about the problems that it would cause for the financial markets in general. The reason those problems could arise is that LTCM, because of its previous success, was able to take positions with its counterparties in the market that essentially involved creditors lending to them with no initial margin. That is, if LTCP were financing a position of 100, their creditors would lend them 100. So, LTCP did not have any limitation on the size of its positions based on the need for an initial margin. The result was that the firm's positions in a variety of instruments around the world were very large. What my contacts were talking about was the effect that the failure of the firm would have on world markets if all these positions had to be dumped on the markets. People who thought they had an offsetting position with LTCP would suddenly find that they did not have one. They would find themselves with big open positions that they had to worry about. Late in the day on September 18, a major securities firm that had been very involved in trying to find equity investors for LTCP informed me that they had asked LTCM if they, the securities firm, could share with the Federal Reserve their knowledge of the positions and condition of Long-Term Capital Portfolio. Long-Term Capital Management said that they would rather explain their situation to us directly. I agreed on Saturday, September 19, that Peter Fisher would lead a group of people to visit the firm in Greenwich on Sunday. To make a long story somewhat shorter, he and his group, which included Dino Kos and some others, were joined by Mr. Gensler of the U.S. Treasury. At that point I was in an awkward position because, wearing my supervisor hat, I had to go to London to give a speech and hold a press conference. The nature of my position is such that if I did not make my scheduled speech at a time when rumors were circulating in New York about a number of securities firms--not just LTCP--market participants might conclude that a firm was about to fail. That was not a signal that I wanted to give. Fortunately, my distinguished colleague, Mr. Fisher, could remain in New York and set up a team. He did a lot of the dealing with LTCM. He and I engaged in lengthy discussions, and we shared the view that the collapse of Long-Term Capital Portfolio would create chaotic financial markets around the world and that nobody could make a good estimate of what the likely damage would be. By this time we knew that view was shared by Goldman Sachs, Merrill Lynch, JP Morgan, and shortly after, UBS. To go back to some conversations that we had earlier today, it was our view that the effect of the firm's failure would be to depress equity markets and to create widening spreads in fixed-income markets. What the downside effect of that would be on many economies, including that of the United States, could not be easily ascertained. It also became clear that even though LTCM had been working with at least the four firms that I mentioned, they had not been able to establish enough of an identity of interests to make it possible for the private investors to get the interested parties together. These were deemed by this time to be approximately 17 financial institutions around the world that had very large counterparty positions with LTCP. We essentially saw only two likely scenarios since we were convinced that the private sector group could not get itself in a room to work out a possible solution. Either there would be a failure of LTCP or the Federal Reserve Bank of New York would play its traditional role in this type of situation. We knew that our intervention would put the prestige of the Bank on the line; put the Federal Reserve, of which it is a part, in the morning newspaper; and put the personal reputation and prestige of the President of the Bank who made the decision on the line. As I saw it, our intervention was preferable to letting the firm collapse in the belief that we were good at damage control. So, I made the decision that we had to play that role, working through Peter Fisher for a good portion of its implementation. Peter held a series of meetings, but the climactic meeting occurred last Wednesday at which 15 firms were represented. I began the meeting by explaining that if it was possible for the private sector firms to reach a decision in their interest--one that was freely arrived at by them because there would be no public money involved--that would be in the best interests of markets in general and of the people who depend on markets. At the end of the day, the private sector firms reached a conclusion after a very long struggle. We stayed out of the fray, but it was perfectly clear in light of the fact that we were present--I was in the room; Peter was in the room; the chairman of the New York Stock Exchange was in the room--that we had an interest in their coming to a conclusion. The conclusion reached, including all the terms and the conditions, was theirs, not ours. It was not suggested by us; it was not guided by us. In a subsequent series of meetings, the details were finally worked out with some difficulty. Late in the afternoon on Friday, I was asked by the person presiding over the private sector group if the Federal Reserve Bank of New York would ""authorize a meeting of the seniors,"" that is, the people who had been in our board room on Wednesday, or invite them to the meeting, or attend the meeting, or ask Peter Fisher to attend the meeting. I said ""None of the above. We got you folks to a point where you could all be in the room and where you could find it possible to arrive at a decision. But if there still are difficulties in your closing the deal, you have to resolve them."" The problem with our convening the meeting and sitting there glowering at people to induce them to reach an agreement is that if they were not able to solve the problem, then it would be our deal. The Federal Reserve would be excessively, inappropriately, and unwisely involved. So, the involvement of the Federal Reserve Bank of New York was essentially to bring the parties together because we agreed with the heads of four of the major securities firms in the world that a failure of LTCP would bring chaotic market conditions, with immeasurable and essentially inestimable damage to economies around the world. That was a sufficiently great danger that we believed we should use the premises and the good offices of the Federal Reserve Bank of New York to bring people together so they would have an opportunity to reach a conclusion. Peter Fisher can answer any number of questions you might have on the details, but my summary is essentially the story regarding the Federal Reserve's involvement. We put the name of the Federal Reserve Bank of New York on the line, and of course it is part of the Federal Reserve System. I put on the line my personal prestige of being in that business most of my life and therefore being considered by the other participants in the room as having a knowledge of these things. I believe we did the right thing, but I certainly understand why others could say we went a little too close to the edge or we went over the edge. Thank you, Mr. Chairman.",2282
-fomc-corpus,1998,"Bill, did those in the room think that their own firms would benefit from an agreement, or were they looking solely at the macroeconomic effects of being good citizens?",33
-fomc-corpus,1998,"They were looking at both in my view. There was a good deal of concern about the macroeconomic effects. There also was a belief or assumption that if the LTCP collapsed, spreads would widen put, it would be very difficult to mark positions to market, and there could be some chaos for a week or two where it would be very difficult for markets to function. During that period, certainly, the mark-to-market losses for the firms would be moving in all directions. Therefore, there is no question in my view that they thought they would be better off if there were a solution. They get paid for making that kind of judgment in the interest of their shareholders. There also was quite a lot of discussion, which sounded rather sincere, that they as the ""seniors"" of the financial services business in New York had a responsibility to the financial system. But were they also strongly motivated by the best interests of their firm? Without question.",190
-fomc-corpus,1998,"Could you go back and tell us what you know about the position of our bank examiners regarding the practices, which I think you described as less than optimal, that were followed by the institutional lenders to LTCP?",43
-fomc-corpus,1998,"Richard Spillenkothen might be able to pick this up better. A staff group from the Board of Governors and the New York Reserve Bank made a number of visits last December to the major banks, both national banks and state member banks, and put out a memorandum on the subject in April.",59
-fomc-corpus,1998,"I should probably point out that this was not an on-site examination. Our staffs met with the managements of these institutions. I think they came away with a feeling that, generally speaking, the banks were saying the right things in terms of the kinds of risk management processes they had in place. The bankers talked a lot about how their involvement with hedge funds was becoming a bigger part of their overall business activities, and they noted that they actually had staff who managed their relationships with the big hedge funds because of the nature of the business. I gathered that the bankers were indicating that they had the policies and procedures in place to deal in a fairly effective way with the risks that generally were involved. In terms of this situation, I think that the issues either then or going forward are threefold. One is the extent to which the banks actually are applying these risk management policies in the course of their activities. That application of policies has to be looked at in the context of the examination process. We indicated in the memorandum, as Bill McDonough mentioned, that this was an area that we needed to continue to focus on in the course of the examination process. Secondly, in terms of the issues here, I think the robustness with which the banks applied their own policies was adversely affected by their perception of the reputation of the people who ran LTCM/P. The final point is that in terms of lessons learned, a lot of the focus here has to be on collateral and collateral management. One thing that this experience has underscored--and actually we have known this for some time--is that collateral is only one aspect of the overall control of credit risk, but it is not a replacement for the banks' analysis of the overall creditworthiness of the borrower. At this point, we think the banks had the right policies and procedures in place. The question is how effectively the banks were implementing those policies and procedures. We have people visiting the three major state member banks today, and tomorrow they will be at Salomon, to talk about the overall exposure of these institutions to hedge funds, their exposure to LTCM, the extent to which they actually are following the policies that they said they had in place, and whether they treated LTCM differently from other hedge funds for whatever reasons. I think the basic answer is that we were reasonably comfortable that they had the policies in place, but the question is how effectively the banks were actually implementing them in the case of this particular institution. We still have to look into that.",502
-fomc-corpus,1998,"When we conduct our examinations, I know that we check to see whether bank policies are being implemented, but how did we do that with respect to, say, Morgan and LTCM? Did we actually evaluate the loan portfolio that represented Morgan's claims against LTCM/P to see whether, in fact, Morgan abided by the principles that you just outlined?",71
-fomc-corpus,1998,"We typically do some transactions testing to see if banks are carrying out their policies with respect to counterparties. Actually, the Bankers Trust and Morgan exams are now under way. Just before I came to this meeting, I looked at the previous examination, and there was no mention of LTCM in it. But that firm grew rapidly, and the banks may have had a fairly modest amount of exposure at the time of the previous examination. At this point, I cannot say whether we looked at the particular relationship you mentioned, but we do look at and test to see whether a bank's policies are being implemented. We do not do that for every counterparty by any means. We do a spot check.",141
-fomc-corpus,1998,"Rich, it could well be that, with the rapid growth of LTCP and the increasing involvement of banks in dealing with hedge funds, the banks may not even have been dealing with LTCP at the time of the previous exam.",46
-fomc-corpus,1998,"Yes, that previous exam probably would have been as of the middle of 1997. That exam would have been over a year old. That's a question we have to go back and take a look at.",42
-fomc-corpus,1998,"Where we are most vulnerable is with regard to the adequacy of our examinations. We rarely come up against a situation where we say this is awful, the institution is falling apart, and we did not spot the deterioration. For example, when we looked into the Japanese operation in New York in which the embezzlement occurred--SEVERAL. Daiwa.",73
-fomc-corpus,1998,"Daiwa, yes. What Daiwa exposed is how complex these situations are and how few troops we have to look into them. if we had to meet the standards that people think exist, we would have five times as many examiners We would examine them to death, and they would not have any breathing room. What we need at this stage is some sense of whether we are examining very specifically what actually happened in the LTCM situation. When I was in the private sector, I remember looking at the details of particular loans that were shown to bank directors. I was on the loan committee of one of these major banking institutions, and we actually went through the loan portfolio major client by major client. The bank's senior loan officers would provide a basic review. They would take the loan portfolio and point to the vulnerabilities and strengths of the borrowers and give their evaluations of the risks that were involved. The review was quite thorough. I knew that I was getting a bit of a snow job--the type of thing where mistakes never are made and everything is perfect. But even adjusting for that, the examination was at a level that would not have allowed this LTCP problem to happen. But it did happen and a number of extraordinarily effective counterparties were involved. The question is why it happened in this case. Is it just that the lenders were dazzled by the people at LTCM and did not take a close look?",285
-fomc-corpus,1998,I think there was in place a credit management system that appeared to make a great deal of sense.,20
-fomc-corpus,1998,Whose? LTCM's?,7
-fomc-corpus,1998,"No, the lenders, including the institution with which you were once associated. One may question the notion that at least for some lenders there was no initial margin requirement. Beyond that issue, it should be emphasized that the lenders had very good collateral management systems so that if the LTCP began to lose on a position, it would need to put added collateral in place. What we have to get our hands around conceptually is whether there was something that we missed that could have provided us with some notion of just how big the overall position of LTCP had become. I don't know how we could have done that. We do not regulate that firm. But given the number of institutions they dealt with around the world, was there a way that should have enabled us to be more aware of their overall position? One is inclined to say, ""you bet."" But exactly how we could have done that I am not so sure.",184
-fomc-corpus,1998,Somebody mentioned to me that Bankers Trust had an August balance sheet for LTCM. Is that true?,22
-fomc-corpus,1998,"Yes, but the balance sheet is a relatively small piece of the whole action because so much of the latter is off-balance-sheet.",27
-fomc-corpus,1998,I don't think they had an August balance sheet on September 1.,14
-fomc-corpus,1998,They may have one now.,6
-fomc-corpus,1998,"They may have had one during the weekend, eight days ago. I don't think anyone had seen one before the weekend of September 19 and 20.",31
-fomc-corpus,1998,"It is one thing for one bank to have failed to appreciate what was happening to LTCP, but this list of institutions is just mind boggling.",30
-fomc-corpus,1998,This tells us that there was something in the way that the financial services institutions as a group were dealing with at least this firm that allowed a position to be built up that was very dangerous.,38
-fomc-corpus,1998,What type of collateral would ordinarily be required on this type of loan?,14
-fomc-corpus,1998,"Let me try to answer your line of inquiry, Mr. Chairman, with a hypothesis. I want to be very clear that this is just a hypothesis. On August 31, the firm has a $125 billion balance sheet against $2.8 billion of capital, which they have lost. Essentially, $125 billion of assets are out under repo. There are no assets in the firm. One kind of transaction they are doing with their counterparties is a repo transaction.",95
-fomc-corpus,1998,Involving U.S. Treasuries?,9
-fomc-corpus,1998,"U.S. Treasuries, Danish government bonds, BBB credits--you name it.",18
-fomc-corpus,1998,There are not a lot of triple Bs outstanding.,10
-fomc-corpus,1998,"There is a fair amount of government credit in these assets, but there are a lot of other assets also. Swap agreements are their instrument of choice, and that is how they got to a $1.45 trillion off-balance-sheet position on August 31. By the time we were looking at that position during the weekend eight days ago, the firm clearly had lost a lot of capital. Other firms that looked at their position in greater detail than we were able to thought the off-balance-sheet had shrunk to around one trillion dollars by the third week of September. The balance sheet leverage ratio was 55 to 1 by the time we looked. The off-balance-sheet leverage was 100 to 1 or 200 to 1--I don't know how to calculate it. Let me try to explain by way of a hypothesis. A counterparty looking at LTCP and contemplating secured financings involving repo transactions and a lot of total-rate-of-return swaps and other swap transactions might decide not to take any initial margin. The counterparty would consider itself secure because it had taken five years of data and seen what the daily and two-day price moves can be. It would be managing its risk exposure on the basis of the same five years of data that the experts at LTCM were using and had concluded that not all the correlations would go to one. Both counterparties would be using risk management systems--this is now a hypothesis--where they have become increasingly comfortable with zero initial margin because the daily cash flow is enough to let them think they only have a 1-day move to consider. That is, when they look at five years of data and a potential 1-day move on that basis, they conclude that they can handle that 1-day risk. On the basis of that same five years of data, the partners inside LTCM have persuaded themselves that the correlations will never go to one between Japanese, German, and U.S. government bonds. They are making the assumption that they will have a globally diversified portfolio. That in part is how the counterparties also get comfortable with zero initial margin. But from the System's point of view, zero initial margin permits an essentially unlimited amount of leverage. There is no constraint other than exhaustion on the part of counterparties.",458
-fomc-corpus,1998,"The biblical justice in this situation is that the principals of LTCM apparently believed so firmly that this system would continue to work that they appear to have borrowed rather heavily to increase their own risk positions in their firm. So, there is a general and spreading belief that we may have some extraordinarily elegant people in private bankruptcy court in the fairly near future.",69
-fomc-corpus,1998,How many more LTCMs are there?,8
-fomc-corpus,1998,"We do not know of any other hedge fund that would be remotely of the size of LTCM/P. If John Meriwether can do it, there certainly would have to be other smart individuals with computers who could engage in the same sort of activity. So, there have to be little versions of LTCM/P. Most of the other very well known hedge funds operate much more in the direction of one-way bets. They can lose $2 billion in Russia, and one can say that is a shame. Well, it is a shame for them but not of much concern for anybody else.",119
-fomc-corpus,1998,"As we get under way with our F-6 study of systemic risk, I think this is an important episode for us to study. We are trying to decide what is systemic risk and what is not--where we can draw the line. I think we need some further analysis of this episode to help us decide whether this was an appropriate involvement of the Federal Reserve. There will always be a matter of judgment involved, but this certainly was a close call. We need to think about that. Secondly, we have the supervisory issue. I think we are going to be called on to explain whether or not our examinations and other sources of information provided us with what we needed to know. There also is an issue that I would be remiss not to at least mention, namely that of overseeing how these lending and investment decisions get made. Rather well along in this process, I was getting telephone calls from reporters who knew more about LTCM than I did. I don't think that was the way it should have been.",202
-fomc-corpus,1998,"Let me go back. Can you explain to me how, if everybody is 100 percent collateralized--not 110 but 100 percent--we can end up with these huge losses for lenders?",40
-fomc-corpus,1998,"The lenders continue to be collateralized as the firm starts to lose money but only so long as the firm has capital to continue to provide added collateral to make up for the losses. As the losses continue to mount, the firm at some point--",49
-fomc-corpus,1998,"But, are we looking at losses in the value of the collateral or is collateral being withdrawn? If I am a bank lender and I lend $200 million to a hedge fund, ordinarily I would be over-collateralized. I would hold more than $200 million in, say, U.S. Treasury bills.",64
-fomc-corpus,1998,"Remember, on day one there was no initial margin.",11
-fomc-corpus,1998,I am talking about my position as a bank lending to LTCM.,14
-fomc-corpus,1998,"You made the loan but since there was no initial margin, there was no collateral.",17
-fomc-corpus,1998,There is collateral but no margin.,7
-fomc-corpus,1998,"If I lend $100 to LTCP they give me an asset worth $100. If the market value of that asset goes up 5 percent today, I give them back $5 dollars; if it goes down 5 percent tomorrow they give me $5 dollars.",54
-fomc-corpus,1998,That is a 100 percent collateralized mark-to-market position.,13
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,"Now, in order for me as a bank to lose in this situation, I either have to find that the collateral I have is not legally available under certain circumstances or its market value has declined. Which was it in this case?",46
-fomc-corpus,1998,It was the latter. The collateral lost market value.,11
-fomc-corpus,1998,"So, the collateral lost value and LTCP did not have the resources to make up for the loss.",21
-fomc-corpus,1998,That's right.,3
-fomc-corpus,1998,"I want to be clear, Mr. Chairman. We are talking about a balance sheet of $125 billion and an off-balance-sheet of $1.4 trillion. Now, we know the total was not all collateralized at 100 cents on the dollar. It was only the balance sheet financing that was fully collateralized.",66
-fomc-corpus,1998,Let's leave the derivatives out.,6
-fomc-corpus,1998,"I realize it is notional, but we do not know how to scale the notionals.",19
-fomc-corpus,1998,The off-balance-sheet presumably goes the same way as the balance sheet.,15
-fomc-corpus,1998,"There are two ways of coming at this. There are certain transactions between counterparties in derivatives where net positions are fully collateralized or up to X percent and in some cases there is no collateral at all. Straight lending usually is fully collateralized. I don't know what bankers are going to write off on these losses, but what I'm trying to get at is where the losses to the banks are coming from. Are we looking at uncollateralized derivative positions that went against LTCP and in favor of a bank, which theoretically has a net position of $20 million but discovers that it really has a $20 million credit problem? In other words, where are the losses coming from as best we can see?",142
-fomc-corpus,1998,"Initially, these transactions in derivatives were in a sense unsecured. Once the exposure reached a certain point, then the lender, the bank, had the right to demand collateral to cover that. That is, when the mark-to-market position and the current exposure built up to a certain point, then the banks asked for the collateral. According to the numbers we have now, it appears that the mark-to-market positions of these big institutions are largely covered by collateral. So, it does not seem that there is much loss in their current mark-to-market positions and other derivatives positions. One of the problems is the potential future exposure. I am going to say this in English. If markets keep moving away from them in the wrong direction, their future exposure could be very large and they might not have the collateral at that point in time to cover that exposure.",169
-fomc-corpus,1998,"That is a different issue. As far as bookkeeping is concerned, banks do not book those anticipatory losses unless some real commitments are involved. What I am trying to focus on is where the losses are coming from.",43
-fomc-corpus,1998,"Let me try to work through some of the sources of the losses that were discussed. Long-Term Capital Management did an analysis of its top 17 counterparties on just 12 trades. These represented a very small percent of the hundreds of trades that they had on their books, but they were their big trades. For example, 2 of these 12 had losses of $1/2 billion over a period of 30 days; there were some offsets involving very complicated transactions. The scenario that LTCM worked out attempted to take into account negative movements in each of the asset markets. That is, if the market moved against the position in the direction where liquidation was likely to occur, there would be an acceleration of the losses. But neither the people at LTCM nor I nor others who looked at this thought a meltdown scenario was involved. The losses actually were the result of discrete bad days in each of these markets. They had generated a counterparty loss of $2.8 billion that was spread among the top 17 lenders. That was at a time when the net asset value of the collateral was about $1 billion or $1 billion plus, so there were $1-1/2 billion or so of losses to be shared among the top counterparties. I think a number of us who eyeballed that analysis thought that it was one thing to focus on just the trades in question; but if all the trades of those firms were included, this direct loss could rise to $3 to $5 billion. That was a number that the other firms that were actively looking at the numbers also thought was a plausible forecast of a liquidation scenario involving just the top 17 lenders.",337
-fomc-corpus,1998,"I suggest that what would be valuable for the Committee, for all of us, would be to make certain assumptions about market developments and then see what the bookkeeping effects would be. How does firm X suffer a loss because of its relationship with LTCP? This gets us into very sophisticated accounting and complex analyses of losses. I think we are all trying to make estimates on the fly, but that is not going to give a very accurate description of how it really works.",93
-fomc-corpus,1998,"What I think we are going to need for our testimony on Thursday is a general summary of what we do as examiners, how often we do it, and why banks with a huge amount of experience in lending got caught in this kind of thing. We need an answer. The answer is not that it should not have happened. Part of banking involves losing money. Banks never make a loan that they do not expect to be repaid. In that sense, every loss is an error. The issue is to define the error.",106
-fomc-corpus,1998,"I agree that we are going to need that information for our testimony, which is being prepared by some of the people who are sitting at the end of this table.",33
-fomc-corpus,1998,"If we indicate what we are doing to find the answers, that is fine. This to me is where the issue of the responsiveness of the Federal Reserve is going to be.",35
-fomc-corpus,1998,"I assume that one of the things we will want to talk about is the fact that we had staff, other than those who were conducting examinations, who were meeting with the management people to examine the nature of their dealing with hedge funds. In their report, the staff mentioned LTCM/P as one of the customers of some of the institutions. What did we learn there? What might we have learned in addition? It is not as if we were asleep. I think that as we write the testimony, which already is in process, we will have a story. The only fully convincing story is that the problem did not happen, and we know that is not the case. [Laughter]",138
-fomc-corpus,1998,All I care about is that we produce accurate testimony.,11
-fomc-corpus,1998,I agree.,3
-fomc-corpus,1998,"I would like to offer one final perspective on the numbers that I discussed. One of the surprises for people who went to look at LTCP's position, myself included, was the tremendous size of their equity and equity volatility positions. People knew they were dabbling in that sector of the markets, but everyone including a lot of the press had thought of LTCP as a fixed-income shop. Some of the firms who looked at LTCP's position in more detail than I, who had the weekend to investigate, felt that the preponderance of the exposure, if one uses the $3 to $5 billion number, that needed to be stabilized was the equity position and the equity volatility position. That's in trades with LTCP in total-rate-of-return swaps. A lesser part of the losses was in the fixed-income financing area. So, the bigger risk was this huge equity volatility position that LTCP had taken on.",184
-fomc-corpus,1998,One of the things that we have to be able to say to Congress is whether the state-chartered banks that we supervise participated in the equity piece or not. I do not know the answer at this point.,42
-fomc-corpus,1998,"Have we developed a series of questions for the testimony that we are asking ourselves? I think that would be very useful. In other words, in the testimony we should identify the questions to which we do not yet know the answer.",46
-fomc-corpus,1998,"We will say what we know, and then we will say what we do not know and are trying to find out.",24
-fomc-corpus,1998,It has to be a full report on what we know and do not know.,16
-fomc-corpus,1998,"Two questions come to my mind. One relates to reports that some of the institutions were not just lenders but also investors. Those, I presume, mainly have been investment banks. Do we think there also are some section 20s or others that may have been involved?",54
-fomc-corpus,1998,"There was a foreign bank, UBS, that was a large investor and its investment accounted for a good chunk of the loss that the bank announced last Thursday.",31
-fomc-corpus,1998,Did they participate through an American affiliate or directly from Switzerland?,12
-fomc-corpus,1998,"We think it was Switzerland, but that is again a fact that we have to establish. It also has now been reported in the press that some senior officers of the securities firms, we think not of the banks, were involved as individuals either through a retained earnings fund for senior executives at their institutions or directly as investors in Long-Term Capital Management.",69
-fomc-corpus,1998,"My other question is one that I also ask to make sure that we will have an answer. It involves an issue that is similar to the one that Larry Meyer was raising. Does this experience in any sense bring into question the approach we are taking with respect to risk-based supervision? To some extent, it involves what we do and when we do it. We need to figure out how that approach might have to be adjusted based on this experience.",89
-fomc-corpus,1998,This tells you that the move toward risk-based supervision is the right way to be going.,18
-fomc-corpus,1998,If you do it right! [Laughter],10
-fomc-corpus,1998,"We should try to get enough facts to make sure that they are doing what they say they are doing. That is what is needed to give an intelligent answer to the question. If I sound a little anxious, it is because the people who should be writing the testimony are here involved in this discussion, including me. Much as I want to share all of this with you, we have to be sitting down before Mr. Leach at 10:00 a.m. on Thursday morning. There's a lot of work to be done before then.",109
-fomc-corpus,1998,"I would like to ask one quick factual question of our legal counsel. Virgil, you raised an issue with respect to whether in fact a particular group of new investors in LTCM were investing in violation of the 5 percent equity cap. What have you concluded, if anything, on that question?",60
-fomc-corpus,1998,"I do not know what has happened, but I suspect that fund has gotten rid of everything over 5 percent.",23
-fomc-corpus,1998,"So, it is in compliance with the Bank Holding Company Act?",13
-fomc-corpus,1998,"Nobody has told us, but I read in the paper that they have been dumping equities, so I assume that they are trying to get down below 5 percent.",33
-fomc-corpus,1998,Ah! That explains it!,6
-fomc-corpus,1998,"Mr. Chairman, some of the banks can take an equity position in LTCM in satisfaction of a previously contracted debt, but some of the foreign banks may have reached the 5 percent limit of the Bank Holding Company Act.",45
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Just to follow up on Alice's question, tell me again how we know that there are not a lot more large hedge funds like LTCP out there, accidents waiting to happen.",36
-fomc-corpus,1998,How do we know? We do not know.,10
-fomc-corpus,1998,We do not know!,5
-fomc-corpus,1998,"We have our usual antennae out. That is how we learned from a variety of sources that LTCM/P was getting into trouble. We can surmise on the basis of what has happened to spreads that, although they may get worse, anybody who had an opportunity to get into trouble certainly had a tremendous opportunity. If nothing else, one would think that the rumor mill would have brought to our attention that firm X was having difficulties. We hear all kinds of rumors in the financial markets, but we have not heard of a hedge fund that would appear to be remotely of the size and macroeconomic risk potential of a LTCM/P.",127
-fomc-corpus,1998,"It was something of a signature for this firm to insist that if a counterparty wanted to deal with them, there would be no initial margin. Not many other firms have gotten away with that.",39
-fomc-corpus,1998,It goes to your bedazzlement effect.,9
-fomc-corpus,1998,"I might mention something that we found out that came as a bit of a surprise, namely that some of the loans made by some of the large lenders were participated out. So, we see shares in banks in our District of both collateralized and uncollateralized lines to LTCM/P.",59
-fomc-corpus,1998,"I think there were two major credit lines, one of which was drawn down. It was a $900 million line of which slightly under $500 million was drawn down and participated out. I think, however, that most of the transactions we have been talking about here involve counterparties rather than syndications.",61
-fomc-corpus,1998,I realize that but there were at least two syndicated pools.,12
-fomc-corpus,1998,"Yes, one to the management company and one to the partnership.",13
-fomc-corpus,1998,I was wondering whether any of this showed up in the review of shared national credits last year.,19
-fomc-corpus,1998,"As I recall, the credit was $700 million. It was $500 million initially, but it subsequently was increased.",24
-fomc-corpus,1998,Did this program produce a default of any loan?,10
-fomc-corpus,1998,No.,2
-fomc-corpus,1998,"Then how can the investments be a part of DPC [debt previously contracted], Virgil?",20
-fomc-corpus,1998,They were anticipating that the market would move and that they would lose their position. The DPC exemption does not require an actual default. The exemption is also available in anticipation of a default.,38
-fomc-corpus,1998,Another form of collateral!,5
-fomc-corpus,1998,"It looks as though their current positions are covered by collateral, but the issue is potential future exposure in these markets. I have to pin these numbers down, but from the numbers I've seen, it looks as though they did a pretty good job of getting collateral to cover their mark-to-market positions. But the potential future exposures seem rather large, and if they were to materialize under these market conditions one has to wonder where any collateral would come from in the future. That is part of the problem.",100
-fomc-corpus,1998,"I would like to draw an analogy. As you may know, we use the VAR model to measure market risk. The danger is that this analysis does not cover potential losses in extremely volatile situations. In those markets we have to do stress testing to uncover what exposures are there. The same distinction is important here, and I think it lies at the heart of the problem. LTCM is using a VAR-type model, the same basic technology as our VAR, to measure potential future exposure. But that model estimates exposure in normal markets on the basis of one-day movements, perhaps at a 95 percent confidence level. It does not deal with the kind of markets we are seeing today. The latter are extremely volatile and currently very illiquid. For example, Peter Fisher talked about equity option positions. Now, suppose investors have to close those positions out and try to replace them by going into the market. There is no liquidity whatsoever in that market. It is completely illiquid. I think this emphasis on initial margin actually is misplaced. The reason is that if investors had decided to collect initial margin, they would have collected enough margin to cover their estimate of potential future exposure. By hypothesis, they seriously underestimated that exposure, so they would be still left with a serious shortfall in their margin.",257
-fomc-corpus,1998,All this relates to the question of how this financing got to be so big and nobody realized it was happening.,22
-fomc-corpus,1998,"What technically happens in that kind of model is that if we are resting on the last five years of experience during which the structure of the markets is essentially stable, that is, there were no severe contractions or even expansions, the covariances that we are going to pick up out of that five years are correct covariances for that population and that environment. What we were dealing with in the Russian situation, if we look at the data, was something that clearly was not a simple, steady state. In that environment, the coefficients in an econometric model either collapse to zero or to one. If we took the covariance matrix that would be implicit in that environment, it would give wholly different risk parameters than we would get in a system in which we are taking five years of special experience and saying the losses were never more than ""x"" on a daily basis. So what? That begs the question of what will happen in the future.",189
-fomc-corpus,1998,That is what stress testing is all about.,9
-fomc-corpus,1998,"Yes, exactly.",4
-fomc-corpus,1998,"We have to be very careful because as horrendous as this experience was, if we assume that the normal market is that the Russians are going to default once a week, the cost of capital would go so high that nobody would ever invest in anything.",50
-fomc-corpus,1998,"That is the whole point. These are very special cases. In fact, as some of my colleagues know, my favorite speech is one where I discuss separating the risks that confront the monetary authority from the risks that the commercial banks have to face. I have always argued that the commercial banks are responsible for 99.95 percent of the risks with their own capital. The rest are these 50-year events, which the central bank will handle. The trouble is that this is what this event clearly was.",101
-fomc-corpus,1998,That is why this central banker was happy to call a meeting but wanted to make it absolutely clear that our money was not going to be made available.,30
-fomc-corpus,1998,That was very wise. Al Broaddus.,10
-fomc-corpus,1998,"I didn't have a question, just a 15-second comment in the context of this Committee's broader responsibility. Bill, I would not second-guess your decision for a minute. It is the most natural thing in the world to respond to a request for our good offices in a situation like this. But this kind of action does create expectations with respect to what we might do going forward that in turn create expectations about monetary policy. So, this issue clearly is an FOMC matter in my view, and I appreciate it being brought to this Committee. The problem, of course, is that there is no time for the FOMC to deliberate a situation like this on a case-by-case basis.",141
-fomc-corpus,1998,It is not something a committee can do.,9
-fomc-corpus,1998,"Right. Against that background, it might be constructive for us to have a discussion at some point in which we would explicitly address the tradeoff and how we balance the need to intervene in a crisis.",40
-fomc-corpus,1998,"That is Larry Meyer's committee, I presume.",10
-fomc-corpus,1998,"Well, if we could do that, it would give us some sense of how we as a group view the tradeoff. So I think that would be helpful.",33
-fomc-corpus,1998,In one respect the Fed is a bank supervisor; in another the Fed as the central bank has some degree of responsibility for financial stability. I think that implies a broader discussion.,35
-fomc-corpus,1998,It is the latter context that I had in mind.,11
-fomc-corpus,1998,Our committee will certainly be engaging in a broader dialogue with all of you as we think about this.,20
-fomc-corpus,1998,It sounds as if we have exhausted this interesting subject for now or at least it has exhausted me.,20
-fomc-corpus,1998,"Unless you get up and run, you will find that you are mistaken. [Laughter] In all seriousness, does anybody have any quick additional issues to raise?",33
-fomc-corpus,1998,Let's run quickly!,4
-fomc-corpus,1998,The meeting is adjourned. Thank you all very much.,13
-fomc-corpus,1998,"Before we get started I would just like to reflect on the fact that it is Bill Dewald's last meeting. He is sitting over there seeing that we do the right thing, a struggle requiring infinite patience among other things. He has been the Director of Research at the St. Louis Bank for six years. We will miss you, Bill, and hopefully your replacement will do as good a job as you have done.",84
-fomc-corpus,1998,Is applause appropriate?,4
-fomc-corpus,1998,Yes. [Applause] Who would like to move to approve the minutes of the September 29 meeting?,23
-fomc-corpus,1998,So move.,3
-fomc-corpus,1998,"Without objection. As you know, in two or three of our recent meetings, we have been contemplating ways to improve a number of the procedures that we use to communicate to the public. We seem to have reached a consensus around this table that the wording in the operational paragraph of the directive requires some revision. We have considered a number of different versions, and at this point I will call on David Lindsey to introduce today's discussion by describing the state of play at the moment.",94
-fomc-corpus,1998,"Mr. Chairman, beginning on page 15 in the Bluebook for today's meeting, we list three options for Committee consideration. Option 1 is the traditional language. Option 2, which was included in a memorandum that I wrote to the Committee in early November, reflects the revisions that President Hoenig suggested at the September meeting. There are optional inclusions of some ""furthers"" in options 2 and 3 that the Committee may wish to consider. The purpose of the latter is to pick up the possibility that after the Committee has moved at a meeting, it may wish to reflect that fact in the wording of the tilt sentence. I have indicated in the note on page 16 of the Bluebook how some presidents and one Board member have reacted to the proposed addition of a sentence in Option 2 concerning potential adjustments to policy during an intermeeting period. I think I should turn the discussion of Option 3 over to President Minehan, since it is her proposal.",196
-fomc-corpus,1998,"I would like to apologize to everyone because I really didn't mean to complicate needlessly or in any event to extend the discussion to yet another alternative. What I thought I was doing in responding to the request for possible rewording was to include a reference to the balance of risks in the paragraph. On the basis of my notes at the September meeting, that was an idea that Tom Hoenig brought up and that most of the members appeared to endorse. At least that is what my notes say. In any event, the inclusion of a reference to the Committee's view of the balance of risks is the major difference in my alternative. I differentiate between the ""tilt"" and the ""no tilt"" language. In the ""no tilt"" language, there is an explicit reference to the Committee's perception of risks as being balanced at least for the intermeeting period and a related belief that no change or a slight upward or downward move might be equally likely. In the ""tilt"" language, the perceived balance of risks is not explicitly mentioned but is implicit in the Committee's adoption of an upside or a downside tilt. Also, I would agree with Presidents Boehne and Parry and with Governor Kelley with regard to the desirability of dropping the next to last sentence in Option 2 that starts with ""Any potential changes...."" I don't think it is needed. I don't have any pride of authorship, but I do have some warm and fuzzy feeling for the idea of mentioning the balance of risks in the directive.",306
-fomc-corpus,1998,"I never heard anybody talk about risks as ""warm and fuzzy."" [Laughter] President Jordan.",20
-fomc-corpus,1998,"Cathy, your alternative wording for a tilt in the directive refers to economic, financial, and monetary developments; that is fine. Option 2 talks about prospective developments, tilt or no tilt; that is fine as well. I am agreeable to talking about risks, but your ""no tilt"" sentence refers to ""risks to the economic outlook."" That stopped me because it could be interpreted to mean real growth rather than ""economic, financial, and monetary developments."" As we saw very recently, a variety of near-term risks may cause the Committee to do something that may not translate in the view of every outsider as pertaining to the economic outlook.",129
-fomc-corpus,1998,"My intention was that the reference to the economic outlook would be modified by the subsequent phrase about changes in ""economic, financial, and monetary conditions"" so that the two expressions would be considered to be equivalent in the context of that sentence. But I see the problem that you're talking about.",57
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"Mr. Chairman, I understand the logic of Option 3, but when we talk about risks to the forecast, we are engaging in internal Fedspeak. Jerry Jordan has picked up on the concern I would have about mentioning risks in this context, namely that the average American would conclude that we thought economic growth was a risky thing. In popular use, it is a word that could get us into some trouble. So, I end up being very comfortable with the alternative language of Option 2. With some amendments from Tom Hoenig to the earlier version, that option captures what we found reasonable at the last meeting. I believe that even when we have no tilt, we need the disputed sentence, ""any potential changes in the federal funds rate operating objective during the intermeeting period should be considered in that context."" That sentence makes it clearer that the Chairman has the power--in fact there is no question about that in my view--and the good will of his colleagues on the Committee so that if circumstances in the intermeeting period should indicate the desirability of a change in policy, he can implement the change. The courtesy that you have shown us, Mr. Chairman, at least in the years that I've been sitting here, has been such that I don't think there's the slightest worry 5-1/2 that that power would not be used wisely and well. So, I think it's very important that the sentence in question be retained.",289
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I think that either Option 2 or Option 3 would be a significant improvement over what we have now. For the reasons that Jerry Jordan mentioned, I would have a preference for Option 2. In my view, it is a little more compact and a little clearer. I would agree with those who feel that we should remove the third sentence. If we do so, I would suggest a change at the end of the preceding sentence. Where there is a reference to ""the federal funds rate in coming months,"" I would prefer to see the words ""in coming months"" changed to ""in the intermeeting period."" That would make the period that we are talking about a little more explicit and definite. Finally, if we can get the language changed, I hope we will then move on to the next and I think equally critical question of whether or not we will release this information to the public shortly after the meeting at which the directive is set.",194
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I prefer Option 2. In my view, it captures what we have been talking about around the table. I would drop the sentence beginning with ""Any potential changes."" My only reason for suggesting its deletion is that I think it is basically redundant, though it is substantively harmless. We need to have a Chairman who is fully effective. A fully effective Chairman needs to be able to change the federal funds rate between meetings. If dropping or adding this sentence in any way affects that, I am for whichever strengthens the Chairman's hand to be fully effective.",111
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I prefer Option 2, and I would like to remove that third sentence because I, too, believe it is redundant. It seems to me, though, that both Options 2 and 3 are a tremendous improvement over the wording we have been using in recent years.",59
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"I think Option 2 would be a distinct improvement and I favor that. I think dropping that sentence about ""any potential changes"" is probably a good idea because it seems redundant to me, but I don't feel very strongly about it.",47
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"I want to join what seems to be the emerging consensus. I, too, prefer Option 2, and I would eliminate the sentence in question. I don't think it adds anything, and whatever is briefer and more to the point is better. I also would echo the view that it would be desirable for us to move at some point to the immediate release of this language after our meetings. Thank you.",82
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I, too, after thinking Cathy Minehan was on the right track, am back to Option 2 because it is simpler. The subtleties of the sentence that is under consideration for removal had escaped me, so I was in favor of taking it out. I still favor dropping it unless there is some subtlety that can and should be conveyed. But if it is that subtle, and I have been here 2-1/2 years, maybe it really is unnecessary.",97
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I think either option would be an improvement over what we currently have, but I, too, have a slight preference for Option 2 mainly because I think our discussion about risks is very internally focused. On the other hand, I hope we will decide to release the directive and, therefore, I would like something that is written in relatively plain English. In my view, Option 2 does that quite nicely. With respect to the added sentence, I will follow what I think is the emerging consensus that it be dropped, though I don't feel strongly about that.",116
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I favor Option 2, and I agree that the sentence about ""any potential changes"" does not add to the clarity of the directive. A new issue that I would like to raise relates to the last sentence of the directive concerning M2 and M3. I would hope that we would not have a ritual expectation of slowing monetary growth if we do not in fact have such an expectation. I think, for example, that slower growth probably was not our expectation in the recent past. So, I would hope that if we are going to have this sentence in the directive, it actually will reflect the judgment of the Committee and not be just ritually inserted.",132
-fomc-corpus,1998,Do you mean that you would refer to it as a staff forecast as distinct from a Committee statement?,20
-fomc-corpus,1998,"Perhaps, yes.",4
-fomc-corpus,1998,"We actually were using monetary growth numbers in that sentence earlier. When the Committee downgraded the monetary aggregates further in 1993, we changed the wording of that sentence to eliminate the numbers and include a qualitative description. Our intent always has been to provide a qualitative description that exactly describes the staff forecast over coming months--not always over the next month or two but, for example, over the 6-month horizon that is currently in the Bluebook. Unfortunately, as 1998 has progressed we have been hit with continuing upside surprises in relation to our forecast. So, we have been somewhat embarrassed by not having the slowdown that we predicted.",129
-fomc-corpus,1998,"There is a potential problem here. I agree with Al Broaddus that the federal funds language should refer to the intermeeting period, but I think it's clear that the reference to growth in the monetary aggregates covers more than the intermeeting period. So, we should put in some language that has a longer horizon for the aggregates.",66
-fomc-corpus,1998,"Mr. Chairman, could I explain why, unlike some others, I feel as I do on the Option 2 sentence in question?",27
-fomc-corpus,1998,Let's first finish our discussion of the money supply issue. Does anybody else have any views about how to handle that question?,24
-fomc-corpus,1998,"I think that President Poole is bringing up an extraordinarily good point. It is almost an embarrassment to use over and over a standard sentence that incorporates an expectation that can only sometimes be right. If we want to include this reference in the directive, we should adjust it to reflect changes in the money growth forecast.",62
-fomc-corpus,1998,"Does anyone have any further insights? I think that raises a quite unanswerable question, but we do have to resolve it one way or another. It is a problem in the sense that if the contemplated reserve conditions are constantly changing but are always consistent with some moderation in the growth of M2, it strikes me that we are implying a good deal more about the extent of our knowledge of how the system is working than evidently is the case.",89
-fomc-corpus,1998,"In recent memory, which includes the last couple of years, we have altered the wording in that sentence to say ""consistent with moderate growth of M2 and M3 in coming months"" when we thought such growth would continue to be moderate. While actual monetary growth has been strong this year, we have had a persistent staff forecast of moderation in the future. So, the wording of that sentence this year has continuously reflected our staff forecast of moderating growth.",91
-fomc-corpus,1998,"It turned out that the sentence was wrong, but that wording was not locked in.",17
-fomc-corpus,1998,Exactly. It is not locked in. It just happens to describe the staff forecast over coming months.,20
-fomc-corpus,1998,"The choice should be ""moderate"" or ""some moderation.""",13
-fomc-corpus,1998,"When it has been appropriate in terms of our forecast, we have said ""moderate.""",18
-fomc-corpus,1998,I think President Minehan has the right answer.,10
-fomc-corpus,1998,"That's a good point. At meetings in the future, the Committee could choose what the exact wording will be. The Committee may want to do that henceforth.",32
-fomc-corpus,1998,Is everyone in agreement that that is advisable? SEVERAL. Yes.,15
-fomc-corpus,1998,"Vice Chair, you have the floor on the other sentence.",12
-fomc-corpus,1998,"I just wanted to clarify my view on the ""any potential changes"" sentence and why it should be included in the directive. Those who say that it should not be there are saying that it is redundant, and for us around this table it is redundant. But we are not the only audience. There is a whole world out there filled with Fed watchers and journalists. I am firmly persuaded that, however abnormal it may appear, these outside observers would read the absence of that sentence right after an intermeeting easing of the funds rate as an indication that the Federal Open Market Committee decided to take a power away from the Chairman, which he traditionally has had. I can assure you that that's how it would be interpreted. That is not our intent, but our intent is not very relevant. That would be the way it would be interpreted. It would involve us in a big brouhaha about nothing. If those who object to the sentence think it is redundant, that's a very small price to pay to avert a highly political event that would dismay all of us. I really encourage us not to do that.",220
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"I agree with the consensus to go with Option 2. I think the sentence that President McDonough is referring to is redundant and unnecessary. I just wonder if there is some other way to deal with the problem that you raise, Bill, which is a real problem. We might put out a statement when we notify the public about our future use of different language in which we would say that the rewording does not reflect any change in Federal Reserve policies. It is just an effort to clarify the meaning of our directives. That in fact is exactly what we are trying to do.",118
-fomc-corpus,1998,"I think such clarifications tend to get lost, and this problem would be perpetuated meeting after meeting. In the effort to eliminate redundancy, we really would be inviting a problem that we don't need to have.",42
-fomc-corpus,1998,"Would President Broaddus's recommendation resolve this? One possibility is to combine the sentences to read in part ""more likely to warrant [a further] increase/decrease than [a further] decrease/increase in the federal funds rate in the intermeeting period"" instead of ""in coming months."" It might be an interesting way of combining the sentences.",70
-fomc-corpus,1998,"May I speak to that point, Mr. Chairman? I may be a minority of one in thinking that your suggested revision doesn't do what we need to do. Okay, I may be speaking for others! As I read our use of the tilt, it covers a longer period than the specific intermeeting period. If we collapse the two, we will leave a false impression that we are focusing only on the intermeeting period as opposed to indicating that we may end up adjusting policy in a given direction over a longer period of time.",106
-fomc-corpus,1998,"Why don't we say ""in the intermeeting period and in coming months?"" Would that do it?",20
-fomc-corpus,1998,That answers my particular problem.,6
-fomc-corpus,1998,"The problem that I have with a longer time frame is that we review the tilt sentence routinely at every meeting. We may not come to the same conclusion from meeting to meeting, though we tend to do so more often than not. In any event, the tilt adopted at a given meeting is operative only in the intermeeting period because we always review it at the next meeting.",75
-fomc-corpus,1998,"That, I think, is the magic of the original drafting. It picked up the ""in coming months,"" which is longer than the intermeeting period, but it gave the Chairman the power to adjust policy in the intermeeting period. It explained with the greatest clarity how we, in fact, behave.",61
-fomc-corpus,1998,It is not power; it is authority. Power is irrelevant.,13
-fomc-corpus,1998,Agreed. Correctly stated.,7
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, I found working through this issue much like eating the first raw oyster I ever ate. The more I chewed on it, the bigger it got and the harder it got to swallow. [Laughter] Our discussion this morning has not made this issue any easier to swallow. I certainly agree with others who say that Option 2 is an improvement over the language that we have today. I came to this meeting with a preference, and I think I still have it, for the language in Cathy Minehan's option. I say that because I think that adding a reference to the risks to the outlook, although that creates some ambiguity, avoids what Option 2 seems to imply, namely in the minds of at least some people a forecast of the next policy move. That may be providing more information than we really intend. So, I would be more comfortable with Option 3, but Option 2 would be an improvement over what we have today. Thank you.",197
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I am on record as in favor of taking out the sentence that has been under discussion, and that is still my preference. I do agree that the sentence is redundant, but I also think that it would be confusing to the public. Its subtleties are rather deep. I have no problem with the sense that the sentence is attempting to convey. I certainly agree with the Vice Chairman that this Committee, under your leadership, does not have a problem in this area at all. But I find the sentence confusing, and for that reason I don't think it serves us well. I also would like to repeat that I support the notion of changing the timing reference in the previous sentence from ""in coming months"" to ""in the intermeeting period"" as suggested by President Broaddus.",161
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, after listening to this discussion, I would mention first that I think the solution that you and Al Broaddus proposed of placing ""intermeeting period"" at the end of that sentence strikes me as a good suggestion. I would then take out the sentence we have been talking about. I agree with Governor Kelley that it is confusing. It confused me and I think it will confuse others. The authority is clear in the previous statement without that additional sentence, especially if we put in a reference to ""intermeeting period.""",107
-fomc-corpus,1998,"It becomes clear only if you put in ""intermeeting period.""",13
-fomc-corpus,1998,I agree with that.,5
-fomc-corpus,1998,"This becomes a language question. I do concur, however, with the point that Governor Kelley made that the previous positions taken by this Committee are void as of the next meeting. In that sense, we may continue with a given tilt indefinitely, but it does require renewal every time we meet. We give the Desk authority to move only during an intermeeting period and without any presumption about further moves thereafter nor with authority to anyone thereafter. I don't know whether the sentence solves the problem, but Governor Gramlich is going to tell us whether it does.",110
-fomc-corpus,1998,"That is just what I was going to do! [Laughter] First, I am for Option 2. I was all set to support Bill McDonough on keeping the sentence in question just to point out to the world that there could be changes in the funds rate in the intermeeting period. But I think your proposed insertion of ""in the intermeeting period and the coming months"" in the previous sentence does that. It makes it clear, in Roger Ferguson's sense, that we are talking about symmetry or asymmetry into the future, but it also calls attention to the fact that there could be changes in the intermeeting period. If that modifier is in the tilt sentence, then we can in my view take out the other sentence, as Mike Kelley and Ed Boehne suggested. So, I am for Option 2, adding ""in the intermeeting period"" to the sentence on the tilt and deleting the next sentence. I also hope that we will get a chance to discuss the issue of immediate release because I would favor the immediate release of this paragraph.",216
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Mr. Chairman, I just wanted to weigh in on the time period question. I am fully in agreement with you and Governor Kelley that we should confine the tilt sentence to the intermeeting period. I changed the language in my alternative to be very explicit about that. So, I think the change that you and President Broaddus have suggested--to insert a reference to the intermeeting period in the tilt or no tilt sentence--is the right way to go. I also favor taking out the next sentence and then qualifying the reference to the aggregates in the last sentence by providing alternatives such as ""moderate/some moderation"" to get the potential range of growth into the discussion of M2 and M3. So, I could go with Option 2 the way it has been revised today.",160
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"On the sentence relating to the tilt, I would like to substitute ""the intermeeting period"" for ""in coming months"" and to delete ""in coming months."" I do, though, want to ask that the staff think about that last sentence on money and the aggregates. The only thing I like about this sentence is that the constant repetition of some expected moderation is a subtle acknowledgement that growth has been immoderate, [laughter] that we are embarrassed, and that we would like to do something about that. However, I never look at M3. I look at the monetary base and to some extent at MZM. Once upon a time, we used the expression ""monetary aggregates."" I would like the staff to think about that and maybe come back to it when it refers to money. What is it about money that we really care about?",174
-fomc-corpus,1998,"That is a problem. I feel very uncomfortable about our inability to understand fully what the monetary aggregates are telling us. I fear that we are missing something subtle, something we have not yet grasped. President Parry.",44
-fomc-corpus,1998,"Mr. Chairman, I forgot to note that if we do eliminate that sentence, there is in my view an advantage to referring to ""the federal funds rate operating objective"" instead of just to the ""federal funds rate."" The former is really what we deal with.",54
-fomc-corpus,1998,"Mike Kelley has given me a note that I think is to the point, namely that we have made considerable progress today. We are not quite there, but I think we are now down to Option 2. We are down to a couple of variations of the tilt sentence. We are down to options on how we should handle the M2-M3 sentence. Since we are only five weeks away from another meeting and we have been dithering on this for so long, delaying a decision for one more meeting is not going to be all that significant. I believe that at this stage we should be able to refine the wording. We are quite close. We could, if we wanted to, spend more time on this right now, but it is not worth it. Let's get another draft and have another round of discussions. We may at this point have the equivalent of a notation vote in favor of a change.",182
-fomc-corpus,1998,"I am happy to wait another month, but when we reconsider the language can we also have on the agenda the issue of the immediate release of the operational paragraph?",32
-fomc-corpus,1998,"I see that as a separate issue. I do think that we can and should put it on the agenda, but we don't have to decide both questions the same way.",34
-fomc-corpus,1998,We cannot immediately release something we have not agreed on. [Laughter],15
-fomc-corpus,1998,"I acknowledge that! Let us put that issue on the table again. Hopefully, we will get this wording issue resolved at the next meeting and perhaps make considerable progress, even come to a conclusion, on the release issue. President Poole.",48
-fomc-corpus,1998,"I just wanted to emphasize the release issue, too. I do not want to miss the discussion of immediate release.",23
-fomc-corpus,1998,We finally got through! Peter Fisher.,8
-fomc-corpus,1998,"Thank you, Mr. Chairman. I am going to be referring to a package of colored charts that you should find in front of you.1/ My report today will be in two parts. First, I will discuss market conditions and review domestic open market operations, answer your questions, and seek your ratification of our open market operations. After that vote, I will seek your approval on the two special matters identified in the revised agenda. Turning to the first page of colored charts, the top panel shows forward rate agreements in red for the United States. While the forward rates have backed up from the lows they reached in late October, both the 3-month forward and the 9-month forward 3-month rates are still trading below 5 percent. The 9-month forward rate is still trading slightly below the 3-month forward rate. This certainly continues to suggest a decidedly downward slope to interest rate expectations here in the United States. Turning to Germany and its forward rate panel in blue, I would make four points. First, it is interesting to note that German forward rates broke below the current 3-month rate following this Committee's September 29 decision to lower rates by 25 basis points. Secondly, it is worth at least observing that rate cuts in the periphery of Euroland had no impact on German interest rate expectations. Indeed, the German rates have backed up gently and consistently throughout a period of rate cuts by other European countries. Third, much ado has been made of the political pressure on the Bundesbank to lower rates following the German election, but we do not see that in the forward rates. At least we don't see any downward or upward movement after the initial break downward in the forward rates following this Committee's action. I think there unfortunately is also a certain sense 1 / Copies of the charts used by Mr. Fisher are appended to the transcript. of irony in that political outbursts may be preventing both the Bundesbank and perhaps the European Central Bank from making a rate cut that they might be inclined to make absent the political outbursts. Finally, it is worth noting that the German 9-month forward rate is also trading below the 3-month forward rate. So, there still is a decidedly downward tilt to interest rate expectations in Germany. In the bottom panel relating to Japan, we can see the rather steady trading in a clump of forward rates around and just below the current 3-month rate, reflecting the Bank of Japan's policy of providing ample liquidity. But these narrow ranges, I think, mask a number of other developments in Japanese money markets. If you turn to the second page, in the top panel, you can see one measure of the Japan premium, which is expressed here as the spread between the 3-month Bank of Tokyo/Mitsubishi $LIBOR rate, and the $LIBOR rate fixing in London. You can see that the spread is rising much earlier this year than it did last year. The real shock that occurred to the Japan premium last November and into the year-end followed the bank closings in Japan. This year, we see more of a persistent updrift from the summer through the fall, reflecting I think the broadening and now generalized negative sentiment toward the Japanese financial sector and, more recently this autumn, the effects of risk aversion and credit line cutbacks to Japanese banks by non-Japanese banks. In their search for alternative sources of dollar funding, the Japanese banks have turned away from the Eurodollar market and toward the foreign exchange swap market where they buy dollars and sell yen spot, and simultaneously enter forward contracts to sell dollars and buy yen. As the Japanese banks have swarmed into the swap market eager to swap out of yen and into dollars, implicit costs of yen funding have fallen toward and through zero for non-Japanese banks, as you can see in the bottom panel. Here, the red line depicts the 3-month yen interbank borrowing rate in Tokyo--the average borrowing rate for Japanese banks--and the green line is the implied yen borrowing rate for non-Japanese banks taken from the prevailing spot-forward swap and $LIBOR rates, assuming covered interest rate parity. The extraordinary movement into negative territory reflects at least two factors. There is reduced demand for yen funding in general in global financial markets, with the general delevering and the unwinding of the carriage rate that has been abruptly occurring throughout the fall. There also is the increased supply of yen coming into the swap market from Japanese banks looking for dollar funding. These two, the demand/supply nexus, together caused the non-Japanese banks to express their reluctance to take more yen by posting zero or slightly negative yen/LIBOR rates at the fixing in London. Not depicted here but occurring simultaneously is another effect you may have seen reported in the papers, namely the glut of yen in the hands of non-Japanese banks that they now seek to invest to avoid credit risk. This is driving Japanese Treasury bill rates toward and through zero, not at the auctions but in secondary market trading. Turning to the top panel of the next page, you can see selected credit spreads in the U.S. markets depicted in various time slices: first, at the time of your last meeting; second, just before the intermeeting rate cut; and third on November 13 which was last Friday. The table also shows the highs and the lows for this year. The simple observation one can make is that spreads are down from their highs and from where they were in mid-October, but they are not down a great deal. The more interesting problem in my view is that it is very hard to judge where spreads should be. I don't want to pretend that I have any idea. I think that uncertainty is a real problem for the market. Most people know and understand that the highs were somewhat uncomfortable. Most people understand that the lows of last spring were probably unsustainable. But what that means in these rather risk averse year-end funding markets is that the market as a whole has yet another challenge of just trying to find a new equilibrium for these various credit products. That in itself is quite a challenge. In the bottom panel, we have depicted the spreads between the top tier and second tier for 90-day and for 30-day commercial paper, with the former spread shown in the blue line and the latter in the red line. I should be careful to point out that these spreads are based on indices. This panel, in brief, shows the more pronounced than normal year-end effect we are experiencing this year. There usually is some year-end aversion to A2/P2 paper. This year it is a bit more pronounced than it has been in the past, reflecting the general reluctance to hold the lower grade paper over the statement period at year-end. Turning to domestic operations, we did not do quite as well as I would have liked since your last meeting in containing the fed funds rate around the Committee's target. So, I thought this might be a useful time to show you a little about how we assess our own performance. On page 4 we have depicted the distribution of daily observations of one standard deviation of the fed funds trading range and of the deviation of the fed funds effective rates from the target. On the vertical axis, we have a measure of volatility expressed in terms of the number of basis points of the trading range contained in one standard deviation. On the horizontal axis, we have similarly measured the negative or positive divergence of the daily effective rate from the Committee's target, expressed as zero. Each dot represents one day. The red dots represent days when we know there is going to be some difficulty because of high payment flows, such as a quarter-end, a month-end, a maintenance or a coupon settlement date. The blue days are all other days. The period here is for the year through the end of July of this year. In the upper right-hand corner, you can see the little red dot for last June 30 when the effective rate was almost 160 basis points above the target and one standard deviation of the trading range was almost 350 basis points. As you may recall, that day was a rather volatile day. Luckily for us, most of the other observations are clustered much more tightly around zero, which indicates the Committee's target. This cluster is depicted on the next page, where we take the same sample of data for the same 12-month period within the constrained range of approximately 50 basis points. The two small boxes drawn on the chart depict the two smallest areas in which we can contain 25 percent and 50 percent of the observations, respectively. Luckily for us and gratifyingly, the 25 percent box falls exactly plus or minus 1/16 percentage point around the Committee's target, the 50 percent box being of course somewhat larger. This gives us some notion of the norm for the calendar year through the end of last July as a comparison for how we have done in the last few months. On the next page, we show in the same constrained range the data from August 1 through last Friday, distinguishing two subperiods within this more recent period. The hollow dots are for the August 1 to September 28 subperiod and the filled-in dots for the September 29 through November 13 subperiod. The contents of the two boxes are summarized in the lower left-hand corner of this chart. You can see there that from August 1 to September 28, we got about 30 percent of the observations inside the 25 percent box and 58 percent inside the 50 percent box. Now, this included the period of late August and September when there was considerable volatility and convulsion in global financial markets, but that disturbance did not flow through to the funds market. However, in the next period from September 29 through last Friday, we had a much tougher time. Only 19 percent of the observations fell within the 25 percent box and only 25 percent within the 50 percent box. It is rather hard to avoid the conclusion that the market conditions that have prevailed since your last meeting indicate at the very least that we have not lived up to our own standard that we set during the prior year. On the next page, there is a chart that I normally show you to illustrate conditions in the federal funds market. In the top panel, the green dashed line is the Committee's target, the blue vertical lines represent the federal funds trading range on each day, the red horizontal tick is the daily effective rate, and the red vertical line shows one standard deviation of the fed funds trading range. In the bottom panel, the blue bars depict on the left-hand scale the daily excess reserves we in fact provided to the banking system, and the red dots indicate on the right-hand scale the deviation of the daily effective federal funds rate from the target. Looking at both of these panels at the same time but focusing on the top panel, two background factors came into play that I think are useful for you to note. First, there was a rather significant shift of volume into the fed funds brokered market in late September and October. This shift reflected a cutting back of credit lines and a general aversion to risk in the term funding markets by both buyers and sellers. On the lending side, there was an aversion to lending money at longer term and over year-end, and that created a reluctance to post offers. On the buying side, there was an aversion to be seen placing bids high enough to attract the limited amount of money the other side was willing to sell--a reluctance to post bids. So, we saw a literal thinning out of the market, with a paucity of offers and bids and a consequent shift of both demand and supply to the overnight market. But the rush of this volume into the overnight market induced the kinds of behavior patterns that contributed to volatility. The second consistent background factor during this period was that the major banks that normally would be willing to act as two-way traders tended to hold on to funds through most of the day in this period. They were willing to sell those funds late in the day at very low rates, which they viewed as the expected cost of minimizing the risk that they might have to come to the discount window. This was true not only of banks that were subject to rumors. Discount window aversion affected the full range of depository institutions. The first challenge we faced after the rate cut at the September 29 meeting was the month- and quarter-end on September 30 when markets usually are quite tight. You can see that we had a wide trading range and a firm market on that day. We supplied reserves in an effort to lean against the market's firmness on that day and on subsequent days when the firmness seemed to carry over. The resulting excess reserves led to the soft rates that were hard to counter toward the close of that period. During the second maintenance period, it was widely assumed that the intermeeting announcement of lower rates at 3:15 p.m. on October 15 reflected an abrupt action to deal with one or two troubled institutions. This then caused an extreme level of discount window aversion over the subsequent days, particularly as you can see in the chart on October 16, 19, 20, and 21. We faced a trading range that was consistently above the target, the blue line, during the morning on those days as banks held on to as many reserves as they could to avoid late day surprises and the risk that they might have an overdraft on their reserve account. Once they reached a comfort level where they felt they were not likely to see an overdraft at the end of the day, they were all willing to sell their funds in the market at quite low rates. The surplus reserves we had been providing to lean against the heightened rates then began to show through. I should acknowledge that during this period we were reluctant to be stingy late in the period for fear that a negative miss on our part might spike the funds rate upward or force a reluctant bank to the discount window. That would make it even harder for us to lower the rate to the intended level on subsequent days. We faced similar difficulties around the October month-end, which was in the next maintenance period, but as you can see on the chart market conditions may now be stabilizing. It is my hope that we can do better, but I think, to be candid, that we may continue to face an extreme form of discount window aversion and some volatility through year-end and into January. Finally, I would like to discuss a few matters relating to our outright operations. We have reduced the size of our normal purchases of Treasury coupon securities that we do at one time to about $600 or $700 million. In the relatively illiquid conditions we have seen, going into the market for smaller and smaller bites at any given time means that we cause less and less disruption in the market. I am quite pleased that despite the volatile conditions we have experienced, our operations have become something of a non-event. That is precisely the objective toward which I have been aspiring. A second item I want to mention--and give you an opportunity to express an opinion, if you wish--is my intention to purchase inflation-indexed securities in our outright operations. We have not been purchasing such securities in the secondary market. We have been acquiring them at auction. I know that when we began doing so, a couple of members of the Committee expressed a degree of reluctance, wondering why the Federal Reserve needed inflation protection. [Laughter] I would like to be clear. We do not buy them because we need inflation protection. We buy them because the Treasury issues them. The general asset class involved in all our purchases is U.S. government credit. As the Treasury has shrunk the size of its bill issues, we have not been able to purchase bills in the same proportion to coupon securities as we did in the past. We do not purchase agency securities outright. We accept them in repo, and I have no particular desire to acquire them on an outright basis. But if we should have the good fortune to confront federal government surpluses going forward, we are going to face the challenging question of finding new asset classes to add to SOMA over time. So, as long as the Treasury is issuing indexed securities, I think it is useful for us to buy them at least in rough proportion to their issuance by the Treasury. I mention this because as an operational matter, it doesn't make any sense for us to purchase the indexed issues at the same time we're buying the regular coupon securities. We cannot judge the relative value of regular coupons and indexed securities. So, to make this operationally practical, I propose to go into the market and do a mini pass of the entire index yield curve. I suppose we would start out by purchasing around $300 to $500 million. I'm not entirely sure how much we might purchase in a mini pass of the index yield curve. For every $5 to $7 billion that we purchased of regular coupon securities, we would periodically conduct one or two passes to buy a small tranche of the indexed securities benchmarked against each other to allow us to make some relative value choices about the prices the dealers were showing us. But I did not want to do this without informing you in advance and giving you an opportunity to express your views on the subject. Mr. Chairman, we had no foreign exchange intervention operations during the period. I will need the Committee's ratification of our domestic operations. I would be happy to answer any questions on any aspect of my report, but I think our plan is to seek a vote on the ratification and then go on to the two special items.",3573
-fomc-corpus,1998,"I have observed that we are continuously getting a glut of yen and a disinclination to hold them, but the oversupply does not seem to be spilling over into the foreign exchange markets in any significant way. It is a fact that the total size of the Bank of Japan's balance sheet is greatly expanded, and there are very large amounts of yen out there that somebody has to hold. Why doesn't that have an impact on the exchange rate?",89
-fomc-corpus,1998,"That is a very good question, and I wish I had a precise answer to it. I think that it is important to look at the last two months. I didn't talk a lot about the big move in the dollar/yen that we had. That was an extraordinary event, obviously, in terms of the standard deviation of the move. It was also an extraordinary event in terms of the factors that came into play. One major fund began to move rapidly out of a series of positions as has been reported in the markets. Other funds then had positions that triggered--",113
-fomc-corpus,1998,This was a yen-carry reversal?,8
-fomc-corpus,1998,This was the unwinding of the yen-carry reversal and a move down in the dollar/yen.,21
-fomc-corpus,1998,You just expressed that in terms of a double negative!,11
-fomc-corpus,1998,"Right! I see the big move down in the dollar/yen as just a reflection of the delevering. That delevering was going on in many places, and one place where it showed up was in the dollar/yen exchange rate. The latter then triggered a series of extraordinary movements that developed into a big technical move down, forgive the term. In the general back-up of the dollar against the yen in markets dominated by considerable uncertainty and reluctance to take risks, I think we were seeing precisely the effect that I believe you are trying to explain. The glut of yen has been spilling over gradually and not in the shocking way in which the downward move occurred. But we are getting a move back up in the dollar. The market has gone from 111 back to the 120-123 range. If we were not looking at that against the standard of a move from 124 down to 111, the size of this move back up would seem impressive.",195
-fomc-corpus,1998,"Any other questions for Peter? If not, President Jordan.",12
-fomc-corpus,1998,"Are we discussing the whole range of topics, including the purchase of indexed securities?",16
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"In a very important sense, when we buy Treasury securities we effectively cancel that part of the government's debt. The word ""monetize"" is used to describe that result. Wright Patman used to say that the bonds owned by the Federal Reserve might as well be burned because the Treasury gives the Fed interest on those bonds, and for the most part, the Fed gives the interest back to the Treasury. Those bonds do not exist in an economic sense any more.",93
-fomc-corpus,1998,We didn't know that there were no bonds in our portfolio! [Laughter],16
-fomc-corpus,1998,"Whatever the Treasury's reasons might be for wanting to increase the outstanding stock of index-linked securities, I would be troubled if we were, in effect, to undertake to cancel some of those securities by monetizing them. As I understand it, a problem with that market has been its illiquidity; it is not a market that has developed breadth and depth, and all those things. For us to buy up some of these securities and remove them from the market when it is still in its early stages of development would be troubling, so I think we should proceed very slowly and carefully before engaging in this activity. And then there's the notion you alluded to, regarding the public policy perception of the central bank buying inflation protection.",145
-fomc-corpus,1998,"There is something of a ""Catch-22"" about the liquidity issue. I'm particularly sensitive to that issue because, while Wright Patman was free to have his views, one of the jobs the Committee has assigned to me is to worry about what I would do if I had to sell large amounts of securities within a short period of time. What if I have to make changes to the System's balance sheet along the lines that we talked about a couple of years ago? In that context, I feel I need to be as diversified as possible among the full range of assets that I am allowed to hold, so that I will have maximum flexibility in the event that I have to shrink the size of the SOMA portfolio to a major extent. We currently hold about 30 percent of the Treasury bills outstanding, about 10 percent of the coupon issues outstanding, and 5 percent of the index-linked securities outstanding. Now, the share of Treasury bills in SOMA has been declining recently because I can not in good conscience, and the Treasury is rather uncomfortable as well, continue buying such large amounts of Treasury bills as to dry up the supply in the public market. So, I am constrained on the bill side. On the coupon side, our operations currently are geared toward trying to smooth out our holdings so we will have roughly a 10 percent share across the coupon spectrum. Once we have reached a smooth distribution across all maturities, then we will have to step up our purchases of coupon securities. In my discussions with the dealers, I tell them that they are responsible for fostering a deep, liquid market; and, in turn, they suggest that I also have some responsibility in that regard. Now, you may feel that this is a camel's nose coming into the tent but if the System, having purchased Treasury indexed securities at auction, were never to purchase them in outright operations, the market would see that as a rather big black eye for those securities. But I'm not sure I want to be providing such a negative signal to the market about a type of security that the U.S. Treasury is offering. Consistent with the spirit of your concern, President Jordan, I want to proceed very carefully. I certainly have no intention of holding a larger share of the outstanding indexed debt than I do of the regular coupon debt, and I would move in that direction very gradually and episodically. However, I have a problem in terms of the asset classes that I hold, and I feel some constraint on where I should go. And as you and I were discussing before the meeting, it will only get worse next year in the Y2K environment. So I'm feeling somewhat hemmed in, and if people have alternative solutions for me, I am all ears.",551
-fomc-corpus,1998,You also should point out that you are hemmed in by the constraint that you have to hold a certain amount of securities on your balance sheet in order to implement the directives that the Committee gives you. Although I guess you could buy furniture!,48
-fomc-corpus,1998,You would have to authorize me to do that I think! It is a choice of asset class.,20
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"We could, of course, unbalance the budget to make it easier. [Laughter] Peter, I was already persuaded that you have a very hard job and that you do it well, and this little schematic of how hard it has been recently was very persuasive. However, I didn't hear anything that could be of help to you other than the possible reduction in the aversion of depository institutions to utilizing the discount window. Is that the message, or is there something else that this Committee ought to do to make it easier for you to hold the funds rate on its target?",117
-fomc-corpus,1998,"The discount window aversion is probably the message. Don Kohn and I have been working for several years with the discount officers in the System. We have been talking with money center banks, trying to get them away from the discount window aversion that was prominent in the late 1980s and early 1990s. We have seen all our good work evaporate in a very short period of time. The problem is that the people who were the CFOs eight years ago are now the chairmen of the big banks. So, they have been there and it didn't take much of a scratch of the old wound to have it all come back. It will be interesting to see whether this is just a year-end effect or we are really going to see a new round of discount window aversion.",162
-fomc-corpus,1998,Let's go back to the TIPS issue for a moment. You are operating under authority that has been given to you. The ability to choose the classes of assets in which you invest is also implicit in those regulations.,43
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"The point that I am raising is that you have the authority to buy TIPS, unless the Committee decides to rescind it. Am I correct?",30
-fomc-corpus,1998,"Yes, absolutely. There is going to be a headline effect: When I enter the market to do a coupon pass exclusively for TIPS, it will generate a certain amount of news. I have the authority to do this, but I didn't want to do it without informing you in advance.",58
-fomc-corpus,1998,"The reason I raise the issue is that if there is a very strong predilection that it is a bad idea, it is better that you know it beforehand.",33
-fomc-corpus,1998,That's why I'm raising the issue.,7
-fomc-corpus,1998,Now is the time to speak up if anyone has a strong objection. Silence presupposes acquiescence.,22
-fomc-corpus,1998,It would make a wonderful column by Alan Abelson.,11
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I agree with Jerry Jordan that it does not matter, in buying securities at auction, whether the Treasury is issuing conventional bonds or TIPS. In either case, we are just taking them off the market. So, I don't think it's a good idea to buy them at auction either. I think TIPS are an experiment. It has not been under way all that long, but I am concerned about the message that we might be sending to the market. I think we might interfere with the information value of these bonds if we're in the market, particularly if we're in the secondary market, because then the game for the dealers becomes one of trying to figure out when we are going to come in and at what price we are going to come in. I want to leave that market alone and let it function on its own. The larger the amount of floating supply, the more likely it is to be a liquid market. So I am opposed to dealing in these bonds at all.",195
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I have no doubt that Peter has a real problem that needs to be worked on, and I wish I had an answer for him. However, I very much identify with Presidents Jordan and Poole in that I would prefer to stay out of this market. It seems to me, Peter, that given the very small size of these issues, if you buy indexed bonds in the same proportion that you buy regular bonds, you would be buying so few that you probably would not alleviate the problem in this market.",105
-fomc-corpus,1998,"If I can first respond a little further to President Poole, I then will address your question, Governor Kelley. The Treasury knows in advance what we are going to be buying. They make the decision regarding the size of a floating supply they want to have. Part of their decision is based on knowing what we will tend to hold on average along with a recognition that our securities lending program gives a little elasticity to the floating supply. By the way, I'm going to be coming to the Committee in the near future to seek some changes in the lending program. The Treasury's reaction to the question of our participation in the first TIPS auction was one of encouragement. We wanted to participate so that we would have securities to lend out, to provide elasticity to the public supply as a means of avoiding the problems of squeezes and so forth. We are not interfering with the Treasury's judgment about what the floating supply should be, and I don't think we're going to make a big difference in the liquidity of the market by buying $300 or $400 million periodically. That is not going to be a big issue. However, it already is a big issue that we have not bought any. So I see the shoe as being on the other foot, at least from where I sit, Governor Kelley. Dealers are asking the Treasury, and occasionally me, why the Treasury and the Fed are not doing more to promote these securities when the Treasury requires that dealers bid on them in auctions. But I take your point. We can not make this market liquid all by ourselves. It's up to the market to create the liquidity.",321
-fomc-corpus,1998,I guess it's a new notion to me that we would be promoting the market by buying some of these bonds and retiring them from circulation.,27
-fomc-corpus,1998,"We are part of the U.S. monetary authority and the largest holder of U.S. Treasuries. The dealers view our periodic coupon passes, through which we expand our holdings of securities, as a normal part of our support for the Treasury market. And our purchases are seen by the dealers as a process that thins out their inventories of securities.",71
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I have just two comments. The first is on the issue that is on the table right now. I understand where Peter is coming from, but I would feel more comfortable if the TIPS market were deeper; with time it may become deeper, and in that event we would have less impact on it. I recognize that Peter has had discussions with Treasury officials and that this may be worked out, but I certainly would feel more comfortable if we waited. On the second point, I would like to come back to Governor Rivlin's inquiry about the discount window. This is not the time, but I know that some work has been done on how the discount window could be put to better use. Some papers were written and some options were explored but not followed up. I think there were some good suggestions in those papers that could make the discount window an instrument that the market might be more comfortable using and in the process help us smooth or reduce some of that volatility in the market. I would encourage us to revisit this matter.",209
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"I agree strongly with Jerry Jordan, Bill Poole, and Mike Kelley on the TIPS issue. It seems to me that from a policy standpoint the great advantage of this market is the possibility that it can give us a clearer read on inflation and price level expectations down the road. We should not confuse that picture in any way, so I would much prefer to stay out of it.",77
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"I would like to applaud what Tom Hoenig just said about finding ways to make the use of the discount window a more normal step in American banking circles. On the TIPS issue, it seems to me that by our inactivity in the TIPS market we have been saying that indexed securities somehow are different from other Treasury securities. And our failure to treat them like other government securities says either that we do not approve of them or that we are refraining from buying them in order to help them to become a more reliable predictor of inflation. However, it seems to me that by treating indexed securities differently and by not having our normal relationship with the dealers in regard to these securities we adversely affect the supply and demand for indexed securities relative to other securities. It would be better, as a marginal enhancement to the liquidity of the SOMA and to have a balanced view of U.S. Treasury securities in general, to buy indexed securities along the lines of the very modest program that Peter Fisher has suggested than not to buy them.",203
-fomc-corpus,1998,"Let me just say that the ability of these securities to give a useful view of long-term market inflation expectations is being significantly impaired by what is undoubtedly a very large and variable illiquidity premium in these markets. Anyone looking at the difference between nominal and TIP yields on 30-year bonds and interpreting it as a forecast of inflation expectations would find it very difficult to explain how the difference got down to 1.2 percent. Surely, no one would argue that the published BLS index is going to average 1.2 percent over the next 30 years. The difference between a realistic expectation of the yield spread, which clearly should be more than 2 percent and probably is closer to 3 percent or perhaps even more, and the current spread is indeed reflecting an illiquidity effect that unfortunately has been changing quite dramatically over the period. So, I think the presumption that the difference in yields for those two securities is very useful as an inflation indicator is dubious at this point. But I do think the issue is important, because one of the reasons for selling indexed securities is eventually to achieve a useful inflation indicator. Reaching that goal comes down to the question of how to get adequate supply and on-the-run characteristics that either will remove the illiquidity premium or stabilize it in a form that would make the yields on indexed securities useful. I don't know where that comes out with respect to the issue that Peter Fisher is raising, but I think it is important to recognize that the indexed-securities market has a long way to go before it will become very useful to us. Governor Gramlich.",321
-fomc-corpus,1998,"I think I support Peter Fisher and Bill McDonough on that. I polled the chairman on this, but I couldn't quite tell where he was coming out. [Laughter]",37
-fomc-corpus,1998,"If you can figure out where I stand, let me know! [Laughter]",17
-fomc-corpus,1998,"I will not pretend that I know much about New York money markets, but it is true that these securities have a liquidity problem, and that does make it hard to interpret their inflation signals. Peter and Bill are arguing that our present behavior has actually distorted the market a little, and I agree with them. It is not that we would be taking these securities out of the market. It is that we would be trying to make the TIPS market function like normal securities markets. Let me also say something that I have said before on other aspects of what we do. If this does not work, we can change it. This is not something that we will be doing for all time. So, at least on an experimental basis, it makes sense to go along with Peter, and so I would support it.",162
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I want to go back to the issue of the volatility of the federal funds rate, which has been mixed in with the discussion of indexed bonds. First of all, I don't quite understand the concern over volatility. There are simple ways of reducing volatility if we really want to do so. For example, we could post very narrow buying and selling rates, perhaps 1/16 percentage point on either side of the target rate. It also would be perfectly feasible to eliminate volatility completely, although there may be very good reasons for not doing it. Second, the Desk used to intervene more frequently during the day, but it has ceased doing that, probably for good reason. More importantly, however, I just don't think that the volatility of the federal funds rate should be of much concern to us. Peter does a good job with the situation he has, and we should just accept that some volatility is inherent in the way we choose to operate.",187
-fomc-corpus,1998,"I agree with that. I think the issue should really be how aggressive the Desk should be in its operations. The funds rates that fall out from those operations are what the market is telling us, and volatility in funds rates is market information that we can very readily suppress if we wish. I like the little boxes in Peter's charts. They are very interesting, but I think there is a question as to what they tell us. President Minehan.",90
-fomc-corpus,1998,"I want to extend this discussion on volatility just a little further. I totally agree. I think that volatility has been used in the past as an estimate of whether the Desk is doing a good job or not. But I think it is useful to see how much volatility there is and how hard it can be on some days for the Desk to achieve the results that it wants; it does tell us something. So I don't regard that as necessarily a measure of the Desk hitting its stride operationally or not. It is useful to have this information, and I think it tells us a good deal about what has been going on in the fed funds market, and a good deal about the hesitancy to use the discount window. I agree with President Hoenig and President McDonough that we should review the use of the discount window once again, but I must say that as long as the media can learn who is using the discount window, or make guesses that turn out to be reasonably accurate, there is going to be a continuing hesitancy to use the discount window.",215
-fomc-corpus,1998,I think the alternative is to indicate that only those of superior moral fiber would have access to the window. [Laughter],25
-fomc-corpus,1998,What test are we going to use for that?,10
-fomc-corpus,1998,Good question.,3
-fomc-corpus,1998,"With regard to indexed securities, I must say that I am not enamored with them. I thought that the decision to begin issuing them just as we were getting inflation under control did not say anything very positive about economic policy in the United States. However, the fact is they exist, and if we are going to get any useful information out of them, we should treat them like other Treasury securities. So, I am in agreement with Peter Fisher's suggestion. Maybe over time they will be useful; I have my doubts but maybe.",107
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"As I listened to the discussion on TIPS and SOMA, I was struggling with it for a while. When I heard the Chairman's remarks, they seemed to summarize my views just perfectly [laughter] because I wasn't quite sure where I would be. Then when I heard Governor Gramlich, I thought he really put it together very, very well. [Laughter] On balance, I think that it makes sense to treat them like other securities and to allow operations in TIPS as well as other securities.",104
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Just one other comment on your comment, Mr. Chairman, on the forecasting usefulness of TIPS. I think it's important to keep in mind that we are in a period of very low inflation and very low inflation expectations. If we were to move back into a situation where there was more inflation, I think we can foresee that indexed securities would be a more useful forecasting tool. I guess, Ned, if we are doing these operations and find ourselves in a situation where we might want to pull back, I would be concerned that it might be very difficult to do so.",114
-fomc-corpus,1998,"You are probably right in the sense that the illiquidity premium almost surely does not fluctuate with the inflation premium. As a gross measure, it must be useful to some extent. At this point, I would suggest that there has been enough discussion about the TIPS issue, and I think it might be useful for David Lindsey to make a quick survey of everyone's view on this question and provide his survey results to Peter Fisher to give him a sense of where the Committee members stand on the issue. Then, if Peter feels that he does not have Committee support, it will be up to him to get on the telephone and try to muster it. I suggest that we try to deal with this informally and hopefully more expeditiously. What is your deadline on making a decision, Peter?",158
-fomc-corpus,1998,"We will be adding a fair amount permanently to the System portfolio over the next 30 days. It would be nice to make the purchases in the next 30 days, but we will see how it goes. It is not vital. I think you've made a very good suggestion, Chairman Greenspan.",60
-fomc-corpus,1998,"Mr. Chairman, could we also get information from foreign central banks? After all, the U.K. has been involved in this a good bit longer than we have. And we may get some useful information from experience abroad.",45
-fomc-corpus,1998,There are very few foreign central banks that have the kind of permanent portfolio that we have. There is also information from the U.K. and other countries about their experience with inflation-indexed securities. I don't think it is going to be apropos central bank operations.,53
-fomc-corpus,1998,"When I made reference to the Committee a little earlier, I was really referring to all 18 people around this table. This is a long-term issue, and on certain questions that go beyond one year, the views of all of us are important, not just the Committee members at any point in time. Peter Fisher.",64
-fomc-corpus,1998,I need a vote on my operations during the period.,11
-fomc-corpus,1998,Would somebody like to move approval?,7
-fomc-corpus,1998,So move.,3
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,Without objection.,3
-fomc-corpus,1998,"I have two other items, which I hope can go a little more quickly. First, I need a vote authorizing renewal of our swap agreements with the Bank of Canada and the Bank of Mexico. By my silence and your inaction, all our other swap arrangements would lapse as described in Mr. Truman's memo and my memo to you of September 28. This is consistent with what we have discussed in recent years. Karen Johnson is working with other central banks to insure that the announcement of this action in the FOMC minutes that will be released shortly after the December meeting will be consistent with statements that might be issued by other central banks. That issue is still being worked on. With regard to the second item, I am seeking your approval of an amendment to the Domestic Authorization to allow repo operations of up to a 60-day maturity. This was explained in my memo to you of November 10. I would be happy to answer questions on either of those two items. I seek your vote on both.",204
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"On the swaps, Peter, I would applaud you and all the others who have worked very hard to get to the point where we are with most of these arrangements. In the memorandum you and Ted Truman distributed at the time of the last meeting, you made reference to your intention to talk with the Bank of Mexico about their swap line. Could you update us on any progress on that?",77
-fomc-corpus,1998,"I had a conversation with a fairly high-level staff person at the Bank of Mexico. They are still persuaded that it is useful for them to have this swap line. They believe that the market sees them in a different light from the other industrial central banks. The language that we are going to use, suggesting that the long period of disuse and the changed character of international financial markets makes the swap lines no longer necessary, does not apply to Mexico. They would like this swap arrangement to continue.",99
-fomc-corpus,1998,"If I may add, our Canadian colleagues, who face the Quebec issue at this moment, feel even more acutely than the Mexicans that this is not the time to let go of those swap lines.",41
-fomc-corpus,1998,I am not concerned about the timing of not doing it now. But I just hope that on our agenda going forward we would always listen to--,29
-fomc-corpus,1998,We certainly have that in mind.,7
-fomc-corpus,1998,"Yes. The presumption that these are truly balanced bilateral swap lines is clearly false. Swap lines are becoming increasingly obsolescent. I was surprised at how successful we were in unwinding the others. I thought we might have a shot at these last two, but it turned out, for the reasons that Peter Fisher mentioned, that we were mistaken. So we still have these two lines, but hopefully the two other parties will feel sufficiently comfortable at some point to agree to unwind them.",98
-fomc-corpus,1998,"Mr. Chairman, if I could make a comment. The Mexicans are not so much interested in the swap lines per se. They would like to have the world begin to think of Mexico as part of North America, not Latin America, and anything that appears to foster that view is very important to them.",62
-fomc-corpus,1998,Further questions for Peter? Would somebody like to move approval of the reciprocal currency arrangements with Canada and Mexico?,21
-fomc-corpus,1998,So move.,3
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,Without objection. Would somebody like to move the proposed change in the authorization for System repurchase agreements?,20
-fomc-corpus,1998,Move approval.,3
-fomc-corpus,1998,May I ask a question about that?,8
-fomc-corpus,1998,Certainly.,2
-fomc-corpus,1998,I do not understand to what extent the extension of the repo maturities is solving a problem for the dealers rather than solving a problem for us. I think our responsibility is to solve our own problems rather than the dealers' problems.,46
-fomc-corpus,1998,"It is very much about solving a problem for me, though the dealers are comfortable with the notion, so in that sense there is reciprocity here. We had been discussing this long before the emergence of the credit market conditions of the last two months. We had been thinking about this particularly in terms of Year 2000 problems when we expect a rather large increase in the demand for currency, which we hope will run off rather quickly. But it is also something that Sandy Krieger and I have talked about for several years in terms of the difficulty that we sometimes have in getting collateral for shorter maturity RPs. When we have a hard time getting collateral for a large volume of two- or three-day repos, we often find that the dealers are willing to offer a lot of collateral for 10-day operations. That has led us to believe that it might be worthwhile to try to do a 20-day or 25-day repo to meet occasional longer-term peaks, and in the case of the year-end, maybe 30- or 45-day RPs. This would let us to lay a foundation by doing occasional smaller operations at longer maturities, so that we would not be put in a bind in the infrequent circumstances when we need to do a big operation for which we cannot get enough short-term collateral. I want to be clear that it doesn't happen very often that we get insufficient propositions from the dealers, but I think it should never happen and it is not a situation I want to be in. I am proposing it now because I want to practice this year-end before I come to year-end 1999.",326
-fomc-corpus,1998,"We should not be taking any responsibility for the term structure, and that is the advantage of focusing our operations on the very short end. I would not like to see us possibly affect--or be viewed as affecting--the term structure even in just this maturity segment.",53
-fomc-corpus,1998,"First, I think it is important that we are working in the repo market, not in the fed funds market. There are very different dynamics involved. There are different supply and demand dynamics for funds and securities. Secondly, I do not think we are going to affect the term structure; we are price takers; we do not set a price. The dealers know there is risk involved if the Desk does a 30- or 60-day operation and there's an FOMC meeting during that interval. And they are going to price accordingly. That also is relevant to our outright open market operations vis-a-vis TIPS; we hold an auction. We do not publish the price at which we operate in the repo market. The dealers attempt to discover the stopout rate, but I don't want that to be an issue and so we don't publish it. Their estimates of stopout rates reflect only rumor and gossip. You are raising a good issue, but I think we are unlikely to affect the term structure, and we certainly have no desire to do so.",212
-fomc-corpus,1998,Is there a second to the repo request?,9
-fomc-corpus,1998,Second.,2
-fomc-corpus,1998,Without objection. Let us move on to Mike Prell and Karen Johnson.,15
-fomc-corpus,1998,"Thank you, Mr. Chairman. Over the past couple of weeks, participants in the financial markets have become less certain that this meeting will bring another easing step. My sense is that they continue to perceive that you're strongly committed to keeping the economic expansion intact, but that they see recent developments in the markets and in the economy as raising some question about at least the urgency of further policy action. The sources of this uncertainty about what you will decide to do have their parallels in risks that we noted in Greenbook. While our forecast hasn't changed very much from that presented at the last meeting, this doesn't mean that we have a great deal of confidence that this is what would transpire under the assumed policy. We are still confronted with an uncomfortably broad range of plausible outcomes. For example, it's not difficult to imagine a scenario in which the credit markets continue their healing process, the stock market moves to new highs, and aggregate demand barrels along. You can get a sense of what that might look like by blowing up the differential between the baseline and the ""higher stock prices"" simulation in the Greenbook, which involved only maintenance of last week's market level. On the other hand, it's just as easy to imagine a scenario in which there is another significant disturbance to the world economy and financial system, perhaps precipitated by a ""meltdown"" in Brazil; we have offered a far from extreme version of this in the Greenbook as well. Karen will have something to say about the international outlook but, before that, I would like to offer a few comments on the forces currently at work domestically. First, the fact that GDP growth in the third quarter apparently outstripped our expectations invites the conclusion that we've once again underestimated the momentum of demand in the economy. However, the upside surprise appears to have been pretty much an inventory story. In that regard, I should note that this morning's report on retail inventories showed that, outside of auto dealers, stocks were little changed in September--probably implying only a marginal downward revision to our third-quarter guess. As we said in the Greenbook, we don't think that there is a major overhang of unwanted stocks in the aggregate; but inventory-sales ratios have climbed, and they are quite high in a few industries. At a minimum, I believe we should anticipate that businesses, at least outside the auto sector, will be attempting to curb the pace of accumulation. That may well be one reason why the tenor of news from the manufacturing sector has been quite negative of late. Over the past couple of years, we've often underestimated the desire of businesses to maintain rapid rates of inventory accumulation, basically because we underestimated the strength of final demand. But, recently, domestic final demand has not been any stronger than we anticipated; it wasn't in the third quarter, and last Friday's figures showing a hefty October advance in retail sales were closely in line with our expectations. Moreover, the greater growth of output evidently has not generated any extra jobs and labor income. Instead, payroll growth has slowed more than we expected, and there seems to be some pickup in corporate downsizing announcements. This may be one reason why the early November Michigan SRC survey--while showing a considerable bounceback in the sentiment index--didn't show much improvement in employment expectations. The flip side of the more moderate growth of labor income may have been a shade healthier corporate profit performance than we anticipated. But the trend of profits is still weak over the past several quarters and, though hope springs eternal in the stock market, the deterioration in corporate cash flow is a negative for capital spending. The anecdotal evidence suggests that, whether for that reason or simply because they don't see current and prospective demand warranting further additions to capacity, many firms--especially manufacturers--are gearing back their investment programs. I've not mentioned the developments in the debt and equity markets, per se, in my comments on the spending picture. The jury is still out on whether the recent turmoil is going to leave a substantial mark on the real economy. On the credit side, the bond markets have reopened for business in terms of new issuance activity, and spreads are narrowing. The commercial paper market is having some difficulty accommodating the over-the-year-end borrowing by firms that are not in the top credit rungs, but banks are filling in--sometimes reluctantly--and those tensions presumably will be behind us in a couple of months. Nonetheless, we still think it's reasonable to anticipate that it will take a while for the sting of the recent experience to wear off fully, and that the capital markets will continue to show a greater sensitivity to liquidity and credit risk considerations. The commercial banks are not insulated from the capital markets, and they too have learned something about the risks facing them in their lending activities; consequently, we don't expect the recent tightening of loan terms and standards to be reversed immediately. And, although the decline in the level of interest rates for prime borrowers, supported by the Fed's easing, takes some of the bite out of this tightening, credit terms overall have deteriorated for some higher risk enterprises and certainly the trend toward ever easier access to credit has been halted. Similarly, despite the rousing rally that has occurred in recent weeks in the stock market, unless that rise continues we also should see the impetus from wealth effects waning in the coming months. As we indicated in the Greenbook, this is a real wild card in the outlook. We believe that the market is skating on thin ice, at best, given the trend of profits; in that context, our prediction of a 10 percent price decline might even be said to be conservative, as it would leave the averages considerably above their recent lows. But tell that to an investor who has once again seen demonstrated the virtues of buying on dips and who hears market gurus chanting the mantra that ""you don't fight the Fed."" And one might ask what earnings have to do with share prices, anyway, when any company with ""dot com"" can generate a huge market capitalization overnight on a base of nothing but losses. In sum, while we believe you should view financial conditions as having shifted in a less accommodative direction since August, this clearly is a situation that will have to be monitored closely in the coming weeks. We're dealing with volatile phenomena, the implications of which can be difficult to judge. In any event, even if we have the aggregate demand outlook right, that still leaves considerable uncertainty about the prospects for inflation. Recent news has been quite ambiguous on this score. The ECI for the third quarter, on the face of it, raised some serious questions regarding our forecast of a peaking in wage and compensation increases, but it was followed by hints of a moderation in the trend of average hourly earnings. Among the major price indexes, with an increase of two-tenths last month the year-on-year change in the core CPI dropped back to 2.3 percent--not far above its low point. However, the chain price index for GDP apparently decelerated further last quarter. Going forward, the recent softening of the dollar suggests that the prices of imports may not continue to exert so great a disinflationary effect, but anecdotally one hears that the oncoming flow of cheap Asian goods will result in significantly lower retail prices in the first half of next year. There is something for every taste in this wage-price stew. I think we've taken an honest sampling from the pot, rather than picking out the bits that most appeal to us; but you may disagree, and we'll be happy to answer any questions you may wish to put to us regarding our view. But, first, if I may, let me turn the floor over to Karen.",1538
-fomc-corpus,1998,"As we stated in the Greenbook, our forecast this time for the external sector is not much changed from that in September. We have chosen not to assume that the depreciation of the dollar during the intermeeting period will be significantly reversed. As a consequence, our path for the dollar going forward is about 3 percent lower in the near term, and about 2 percent lower toward the end of the forecast period, than last time. Such a change in our outlook for the dollar by itself would tend to stimulate exports and restrain imports. Offsetting this stimulus for exports to some extent is a somewhat weaker projection for real output growth in our trading partners. By far the biggest downward revision in our outlook for growth abroad has been to our view on Japan. We now expect that the trough in real output will not occur until sometime in 2000. This more negative outcome is expected despite injections of fiscal stimulus of about 1-1/2 percent of GDP next year. We are thus expecting continuing declines in private domestic demand, particularly business investment, with little or no help from the external sector. Since the Greenbook was published, we have learned some additional detail about the latest fiscal package proposed by the Japanese government. The package contains 6 trillion yen of personal and corporate tax cuts, an estimated 6 trillion yen of ""real water"" expenditures, and an additional array of measures that are expected to provide little direct economic stimulus. Accordingly, the actual stimulus contained in the package is probably not more than half the 24 trillion headline value and is broadly in line with the Japanese fiscal assumptions in the November Greenbook. Given the lags in implementing these packages, we expect that the effects of these measures will be felt during the second half of 1999, as the effects from the April 1998 package, which we think are now becoming visible, begin to wane. The other country of particular interest in this forecast round is Brazil. In putting together the forecast, our strategy has been to assume that the international rescue package for Brazil succeeds in the sense that no abrupt change in the exchange rate regime is forced upon Brazil, and no contagion in that respect spills over to Argentina or elsewhere. Real GDP in Brazil is expected to decline this quarter and through 1999, but the trough is now projected to occur in early 2000, and some recovery begins that year. This contraction results from the high interest rates already in place, which are projected to ease some, and the fiscal restraint that is part of the policy program Brazil has announced. We have built into the forecast some contraction of output elsewhere in South America as well. There are many pitfalls in the months ahead that could put the Brazilian program off track. In the near term, Brazil and its private creditors must reach an understanding such that most, but not necessarily all, of the short-term external credits to Brazil are maintained. Domestic creditors also must refrain on net from moving capital out of Brazil. The fiscal agenda must proceed; in particular, the Brazilian Congress must enact crucial proposed measures so that an IMF review planned for February 1999 will be successful. We recognize that it is far from certain that all this will proceed smoothly. In the Greenbook, it seemed to us more useful to present in the baseline the implications for the foreign sector under the assumption of ""success,"" as at the moment that outcome is being actively pursued by officials in Brazil and at the IMF. We did include as an alternative scenario, a model-based version of the impact of ""meltdown"" in Brazil and contagion elsewhere in the region. In that event, with no policy adjustments here, U.S. GDP growth would be reduced 1/2to 3/4percentage point in 1999 and in 2000. On balance, we look for the external sector to subtract nearly 1 percentage point at an annual rate from U.S. GDP growth this quarter and about half that in 1999 and 2000. This is a bit less than we had been thinking in September, particularly for the current quarter. We would now be happy to take questions.",827
-fomc-corpus,1998,Questions for either?,4
-fomc-corpus,1998,"For Mike Prell, in Part 2 of the Greenbook, page III-19, there is a sentence that says ""Growth of retail money market mutual funds and of currency outstanding, both domestically and overseas, was strong over the most recent two months."" Do we have any indication of overseas holdings of currency, whether they have increased significantly, and whether we ought to be taking that into account when we look at the growth rate of M2?",91
-fomc-corpus,1998,Dave Lindsey follows that more closely than I do.,10
-fomc-corpus,1998,"We were actually prompted by a question from Governor Gramlich a couple of months ago to look intensively into this question. We have considerably improved our estimation procedures, including our seasonal adjustment procedures. We have come up now with a series that we find to be the best estimate we can produce. What that shows is that whereas in recent years there has been an effect of a little less than 1/2 percent on the growth of M2 coming from demand abroad, that seems to have lessened some most recently. Let me give you some figures to suggest what I'm talking about. In September and October, our estimate is that foreign holdings of U.S. currency grew at 13.8 percent and 8.5 percent respectively. That implied, however, growth of domestically held U.S. currency in September and October at even percent respectively. When we contrast the growth of M2 with the faster rates, 18-3/4and 12-3/4 inclusion and the exclusion of foreign currency holdings, it turns out not to make too much of a difference in those recent months. For example, M2 as we normally calculate it, including the foreign currency holdings, grew at a 14.8 percent rate in September. Without the foreign currency holdings, we have estimated the growth to be 14.9 percent. In October, the two numbers are 12.3 percent and 12.6 percent respectively. So, on balance in recent months and recent quarters, it doesn't make a material difference whether we look at our overall estimate of M2 or our estimate of M2 stripping out the foreign currency holdings.",329
-fomc-corpus,1998,"That seems kind of intuitive to me, given what is going on overseas.",15
-fomc-corpus,1998,"You might remember that the U.S. economy is growing much more strongly than many of these overseas economies, and that is supporting profits and growth of M2. One might think that shipments to these countries have risen some but that they just have not risen as much as demand for currency in the United States has risen. That is not the benchmark that would determine them.",73
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"A question for Karen Johnson: When the Brazil agreement was announced recently, although the way it was discussed was confusing, there seemed to be at least a portion of it that was going to be handled under what might be characterized as a new philosophy that was incorporated in either the G-7 agreement or the Treasury's statements on the subject. Is some of the financing going to be distributed faster?",78
-fomc-corpus,1998,"The standby encompasses different ways of financing the sum of money involved. A substantial portion of the initial tranches will be done under what is called the SRF, which is actually a facility that was created at the time of the Korean crisis. Now there is a variant of that under discussion, which would have contingent elements to it. It was referred to in the G-7 communique and has been discussed in the press and elsewhere. The contingent element was not really in play for Brazil because events overtook the debate, so to speak, but the characteristics of the SRF part are that it will be at a penalty rate and it will be disbursed in large quantity initially in an effort to discourage contagion and speculation and so forth. But that is under the umbrella of the standby arrangement. The term ""standby"" can refer to financing this way or financing through some of the other devices at a different pace. In that sense, it is not absolutely new. But, yes, this option will be used for Brazil.",207
-fomc-corpus,1998,"So, to get to the heart of the matter, you mentioned the IMF review in February.",19
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,They could get money before that.,7
-fomc-corpus,1998,"They will. The first tranche will be disbursed upon the vote of the executive directors of the IMF, and that money will come immediately. The conditions of that first tranche have already been met. They were set and they had to do with some of the items in the fiscal package that were already announced and actions that the Brazilians have already taken, so that is a given. The next tranche will come up for review in February of 1999.",92
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Karen, I think it was a little more than a year ago that we looked at a worse case alternative for East Asia. One of the two countries that played a role in that was Brazil, and it is obvious from our discussion why that was the case. The other one, of course, was China. It seems to me that there are interesting things going on in China about which it might be worthwhile to update the Committee either at our next meeting or even as part of one of the Monday morning briefings. China's growth rate, at 8 percent at least by the official statistics, is remarkably good. Their external position is quite strong. Yet at the same time, one does see some financial problems with the ITICs in some of the provinces. Of course, they are experiencing actual deflation, which might suggest that the renminbi is overvalued. I would find it interesting, and perhaps some of my colleagues would as well, to know what your latest thoughts are about either why they have been so successful in dealing with the problems of East Asia or whether we, in looking at the official statistics, are being deluded by what might indeed be the pressures in China.",239
-fomc-corpus,1998,"I certainly take your point. The 8 percent number was somewhat unexpected. We have not really had the opportunity to look into it, and it is hard to do so with China because we don't get a lot of detail and can not get behind the scenes. I am skeptical but I can't cite good reasons for that skepticism other than that we know Asia as an economic area is in trouble, and it is hard to believe that China is escaping as it would seem. We will certainly view this as something that we should look into and get more information through various channels and give it to the Committee.",119
-fomc-corpus,1998,"Of course, their approach to the problems is quite different with exchange controls and so forth.",18
-fomc-corpus,1998,"Yes, capital controls and the like. We expect them to be able to maintain the present exchange regime into 1999, something we had assumed previously with some trepidation, and it seems to be happening. But I think we probably do need to question the sequence of events and the policy choices they are making and ask some hard questions about that. We will try to do more about it.",80
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I want to go back to the monetary aggregates. My friend from Texas referred to the currency component of the aggregates, although I thought Texans always concentrated on bigger things than currency. Let's talk about savings deposits for a minute, which are three times the size of currency. When we look at the detail on the aggregates, the really rapidly growing areas are savings deposits and money market funds. We know that banks are filling some of the gaps in the credit market arising from the partial seizing up of the securities markets. Large denomination time deposits, which banks often use for funding their credit growth, are shown as essentially flat in the table, but banks are meeting their funding needs from money market sources as well. Banks are funding themselves very comfortably with very rapid growth of liquid deposits, probably mostly from households. Savings deposits are mostly from households because it does not make sense for businesses to hold such deposits. The money market mutual funds also are growing very rapidly. So, it looks to me that there is extremely rapid growth in the liquidity position of households, and it is not tapering off with the recovery of the equity markets. I could understand the story that households were apparently taking funds out of the equity markets when those markets were weak and parking them temporarily in money market funds, or somewhere. But there is always the question about the people on the other side of the equity markets because for every dollar that comes out of the stock market, somebody else puts money into the market. It is just the prices that change. What insight can you offer as to what to make of this, Dave? It has been a phenomenon just since August, but my interpretation is that there clearly have been very rapid increases in liquidity in the household sector.",344
-fomc-corpus,1998,"Yes, there is no question about it. Everything you have described is quite accurate. For example, look at the chart of M2 velocity versus its opportunity cost--in honor of Bill Dewald I will mention a piece he has published using opportunity cost defined as the bond rate less the own rate on M2; Board staff tend to look at the three-month Treasury bill rate less the own rate on M2. With either chart, you will see an upswing in velocity that occurred in the early 1990s extending through mid-1997. Then velocity started coming back down, and since mid-1997 it has fallen every quarter. Depending on where the opportunity cost line is placed and if the velocity shift is deemed to have ended around 1993, then velocity is shown as returning to that opportunity cost line. One interpretation, particularly if one chooses a scale that shows the cluster of points to be fairly narrow, as Bill Dewald did, is that velocity is more or less returning to normal. Another interpretation, on which I personally tend to put more weight, is that we saw a continued increase in velocity after 1993 that was somewhat inexplicable. Now we have seen a reversion to declines in velocity, which also are not completely understandable. Indeed, for this quarter, if we take the Greenbook forecast of nominal GDP along with the money forecast, which we do our best with but as I indicated before is not always perfect, we get a velocity decline of 8.7 percent. In other words, much of the liquidity that you have been describing seems to be showing up in the ratio of M2 to GDP rather than in GDP either currently or in a predicted sense, at least if one believes the Greenbook forecast. We have some explanations. We can always come up with them after the fact. But the truth is, as I mentioned to someone yesterday, I sat in that seat in February of this year telling the Committee that it could expect M2 growth of 31/2 percent this year, given the Greenbook forecast. We now have a forecast of 9 percent growth in M2, a slight error in our February projection. [Laughter] The Greenbook forecast admittedly underestimated the strength of spending this year and maybe there was a signal from the monetary aggregates to that effect. But there was a lot more to it than that. Velocity took up a great deal of that error.",488
-fomc-corpus,1998,"President Poole, may I try to move from the big picture to the very small picture? Looking at the flows in the last few weeks--and recognizing your point about somebody is paying someone and that makes it a little difficult to track this sensibly--it does look to me in the data that I have, though I think we may have more recent estimates, that savings deposits have leveled out in the last few weeks and money market fund growth has decelerated substantially. This coincides quite precisely with the time when we see the reflow of money into the equity mutual funds, not in quite the same proportions we saw in the first part of this year but still substantial. So, there does seem to be a correspondence here that is consistent with the story that people were hesitating and parking money in these very short-term assets. And with Treasury bill yields having come down so sharply the opportunity costs actually had narrowed for putting the money in savings accounts.",192
-fomc-corpus,1998,But we do have to be careful about the magnitudes. Money market funds have decelerated in October to an annual rate of 31.5 percent.,32
-fomc-corpus,1998,I am looking at weekly numbers where growth has been inching up by comparison.,16
-fomc-corpus,1998,"Yes, I understand.",5
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Just a quick question on Brazil. I found this alternative scenario in the Greenbook very helpful. I took note of the U.S. GDP projection of minus 0.4 in 1999 and 2000, but you were careful to mention that this is by no means the worst case concerning a potential meltdown in Brazil. I was wondering if you could give us some idea of the relative probabilities of this alternative scenario or even a worse case.",90
-fomc-corpus,1998,"While you're at it, the timing as well! [Laughter]",14
-fomc-corpus,1998,"All derived from by the model, of course.",10
-fomc-corpus,1998,"I think the next three weeks are crucial for at least the initial success of the Brazilian program. The time between now and the signing of the letter of intent, which will be on one of the first days in December, is the first hurdle that has to be gotten over. People even less cynical than I might think that chances are that what is needed to get a positive vote at that first hurdle will take place because it is in the interests of many parties to have that happen. The critical feature is whether or not the private creditors of Brazil, both those within the country and external to the country, appear to be carrying their fair share. If so, the governments that have money to be extended both through the IMF and through bilateral mechanisms will feel that it is appropriate to vote ""yes"" and the program will go forward. So, one might think that that will happen, although I would not characterize it as 100 percent sure by any stretch of the imagination. But it certainly is still possible that things will unravel between then and February of 1999, and one way it will become obvious that things are unraveling is if Brazil again starts to lose reserves rapidly. I would guess the likelihood that the baseline Greenbook scenario will occur is in the neighborhood of 50 percent, maybe a little more. We thought it had a good chance or we would not have given it any credence. The meltdown scenario is a fairly contained one; it has spillovers for Argentina, it has some implications for Mexico, and it would be messy. Exactly how this would take place is not clear. It might include a combination of some unilateral actions on the part of Brazil, some forced exchange rate adjustment, and then a return to the IMF and an attempt to restart negotiations--all of which would certainly play out over some period of time. I guess I would give this scenario a big chunk of the remaining probability. So, if the probability of the Greenbook scenario is 55 or 60 percent, this alternative may be another 25 to 30 percent. But there is at least a 5 to 10 percent probability that Brazil could fall so hard that Hong Kong, for example, would become threatened again, a possibility that is not in this scenario. Hong Kong is the other fixed exchange rate regime that has been tested repeatedly since this crisis began. If Hong Kong is forced off of its peg, then the progress that we have seen to date in Korea and Thailand might be called into question because capital markets would again become skeptical of their viability, and the citizens of those countries would begin to feel that they should move their capital elsewhere. That could trigger a worse scenario that I would not give a lot of weight to, but one whose probability is not zero by any means.",555
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,"Further questions? If not, let's break for coffee and come back in 10 minutes.",18
-fomc-corpus,1998,Who would like to start off the Committee's discussion? President Poole.,15
-fomc-corpus,1998,"I didn't realize I was going to be that close to the top of the list! [Laughter] Let me talk a bit about the Eighth District first. I think our situation is largely a microcosm of the national picture. I would like to comment particularly on a new source of information that I am in the process of developing. I have this information under a pledge of our confidentiality. With regard to national economic conditions, I would note that although the forecast for the fourth quarter in this Greenbook is down from that in the last Greenbook, the third quarter came in higher than was expected and therefore the second half of 1998 now looks somewhat stronger than at the last meeting. It's just by a few tenths, but generally the picture is for a little more strength than we had been expecting. My sense is that output has overshot full employment and that the labor market has been pushed temporarily beyond its long-run sustainable capacity. If that view is correct, we are going to see growth in the near term below the long-term trend for a while as the economy returns to its sustainable path. That is my sense from all the information that we have about the labor market and the pressures that we've seen, particularly all the unfilled jobs and the difficulty in finding people to fill certain job positions. So, the question for me is whether this below-trend growth, let's say over the next year or so, is going to occur with or without rising inflation. I think the financial turmoil around the globe has passed its peak. My reading of Asia is that we're seeing some progress, with the very important exception of Japan. Prices in many of the Asian equity markets are a little higher, exchange rates are a little stronger, the bond spreads are a little narrower, and conditions generally seem to be getting a little better there. I don't know where the appropriate place is to bring up this matter today, but included in my FOMC packet that was delivered to the hotel last night was a letter from the National Association of Manufacturers (NAM) urging this Committee, urging me in particular, to lower interest rates. I hope that in the future the staff will not include such letters that come from outside sources in my FOMC packet. If word gets around about this, my briefcase will not be big enough to carry home all the mail I might receive. I am happy to respond to the NAM folks if they write to me in St. Louis, but I don't think it is appropriate for their letters to come here. Thank you.",511
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, overall activity slowed in our District in the third quarter as it did elsewhere, but my sense is that it has strengthened on balance over the period since our last meeting. Consumer spending in October in particular was considerably stronger than anticipated. Automobile sales and outlays for other durable goods were especially robust in October, supported by well above average refinancing activity. In general, retailers seem to be considerably more optimistic in our region than they were a few weeks ago. Housing activity, both sales and construction, also appears to remain quite solid throughout our District on the basis of anecdotal information we are getting from our directors and others. One director we have from the District of Columbia described conditions in the housing market here as booming. The main weak spot in our region, as elsewhere I guess, is manufacturing due to the disproportionate impact of negative international developments on that sector. Farming also is down, owing to weak prices and income. One of our directors from South Carolina said they did not have any agriculture in South Carolina this year. On the financial side in our District, bank business lending has increased very sharply recently, especially at the larger banks as companies that have been shut out of the securities market have turned to the banks for credit. My sense is that credit is readily available for all but the lowest-rated borrowers in our region, albeit at higher rates than earlier in the year. To round out information on the District, I would just add that yesterday I attended the meeting of the Committee on Revenue Estimates for the Virginia Governor, with 20 Virginia CEOs in the meeting. I was struck by the number who still emphasize the tightness of labor markets and the difficulty they are having finding qualified people at all levels of the experience and knowledge spectrum. With respect to the national economy, the Greenbook is projecting a deceleration of real growth to a below-trend rate next year, even with an assumed further easing of monetary policy. There is no question in my mind that this is a plausible forecast, but it depends heavily on a halving of growth in consumer spending next year. That could happen, but it seems to me far from a sure thing. Certainly there is not much evidence of any marked deceleration of household spending currently. Problems in capital markets do not appear to be constraining consumer credit to any significant degree. Some have argued that the low recent saving rate could crimp consumer outlays going forward. But some empirical work and research we have done at our Bank shows that on average over the last 20 or 25 years low saving rates have preceded increased rather than diminished growth of consumer spending. A weaker stock market certainly could damp such spending, but clearly we cannot feel very comfortable in forecasting either the stock market or its impact on consumers. There also is Bill Poole's comment and observation during the question period about the strong growth in household liquidity. In short, it seems to me that consumer spending could decelerate less than is projected in the Greenbook. If it did, overall GDP growth would be close to potential, which would be a favorable development in my view. I think that scenario is not much, if any, less plausible than the Greenbook projection. Obviously, the still unsettled conditions in capital markets pose continuing downside risk to the economy, but the aversion to risk in capital markets has clearly diminished greatly in recent days. A number of yield spreads have narrowed significantly. Risk premia, of course, are still higher than they were before August, but the overall credit intermediation process seems to be adjusting to this. Credit flows that would have bypassed the banks in the more normal circumstances that prevailed before August are now going through the banking system. Bank credit rose at a 27 percent annual rate in October on a reported basis, and the accelerated growth of M2 indicates, as you would expect, that the size of our open market operations has increased as the demands for liquidity are being met. In sum, the economy may not be out of the woods yet, but prospects seem distinctly better now than they were at the time of the September meeting. I think that may justify a little caution on our part when we address policy later. Thank you.",839
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Since our last meeting and particularly since our mid-October actions, a degree of calmness seems to have replaced at least some of the unsettled conditions of late September. However, our contacts remain more nervous and uncertain about the future than they were in mid-summer. In many respects, conditions in the Seventh District are quite similar to what I reported in late September. Growth in our manufacturing sector has slowed further, although activity levels generally remain high. Housing activity remains strong, and consumer spending continues to be relatively healthy. Price pressures remain benign despite tight labor markets. The latest Manpower survey of hiring plans for the first quarter of 1999 suggests little change from the strong plans reported for the current quarter as well as from a year ago. These results will not be made public until next Monday, November 23, so they should be considered confidential until then. The key point from the survey is that aside from normal seasonal movements, there is no indication that the labor market is facing significant layoffs or downsizings. We continue to see signs of slowing in our manufacturing sector, but conditions there are mixed. Foreign markets are adversely impacting producers of electronics, steel, and agricultural equipment. In the steel industry, the production decline from a year ago is now greater in our District than for the nation as a whole. Domestic producers continue to be challenged by steel imports, which doubled their U.S. market share from about 20 percent to 40 percent this past summer. The head of one steel company told me that he believes that world steel prices are bottoming and that firms are more likely to shut down capacity now than to reduce prices any further. In contrast, domestic demand continues to support fairly strong activity at our heavy and light motor vehicle producers as well as housing-related manufacturers. One contact in the heavy truck industry described business as booming, but he immediately said his firm was making extensive contingency plans for next year that would be implemented quickly if necessary. Industry sources suggest that auto and light truck sales this month will be strong, though not as robust as the annual rate of 16-1/2 million units in October. Because of the recent financial market volatility, we made a special effort to contact some market participants at the Chicago futures and options exchanges. Although our contacts believe they have successfully weathered the extraordinary volatility of late summer and early fall, many were apprehensive about the market's ability to withstand future shocks. One concern is that market depth may suffer in the months ahead. Banks face pressure to get exposure off their books and consequently they have cancelled lines of credit to some clearing members. Further, year-end redemptions by hedge fund customers may stress the markets. The second key issue is that some over-the-counter swap market participants are apparently concerned about the condition of some of their large money center bank counterparties. As a result, these participants are increasingly substituting away from over-the-counter contracts into relatively more expensive futures contracts. These contracts reduce the participants' credit risk by substituting the AAA-rated exchanges as counterparties in place of many of the money center banks. Conditions in the agricultural sector remain weak. Our latest survey of agricultural banks showed third-quarter farmland values down on average for our five District states. Bankers also reported an increase in loan extension requests and expect that loan repayment difficulties will emerge. The inflation picture generally remains quite good. The auto industry, for example, is negotiating a 3 percent reduction in steel prices in next year's supply contracts. However, two different retailers noted to me that construction costs for new stores had risen considerably in the last year. Turning to the national economy, although somewhat more balanced than at our last meeting, I still believe that the risks remain greater on the downside. Three factors seem especially important at this time. First, although stock market prices have rebounded sharply in recent weeks, market volatility remains high and that should restrain consumption spending somewhat in the months ahead. Second, although credit spreads have narrowed since our intermeeting rate cut, financial markets remain jittery and spreads could easily climb again. Finally, the risks of rising inflation appear to be relatively low. Although labor markets continue to be tight and wage growth is rising, productivity growth has been strong enough to largely offset those gains. Moreover, declining profit margins going forward are likely to stiffen the resolve of many firms to hold the line on wage increases. These factors combined with the continued dismal international outlook--we were talking about Japan and Brazil earlier--lead me to the view that the risks remain greater on the downside.",914
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, the Twelfth District economy has expanded at a solid pace in recent months, although the disparity across states has increased and the pace of growth has moderated from earlier this year. Employment growth in our fastest growing states, Arizona, Nevada, and Washington, is averaging between 3 and 5 percent on a 12-month basis. It is interesting that the State of Washington is also the state that probably is among the most vulnerable to developments in East Asia in terms of trade. Five other District states, Alaska, Idaho, Hawaii, Oregon, and Utah, are expanding at or below the national pace of growth. In California, employment growth remains solid at 2.8 percent, although it is significantly slower than the 3.8 percent pace of expansion in 1997. Construction and services as well as finance, insurance, and real estate have continued to be the strongest sectors of the District economy. Slower overall growth has yet to loosen District labor markets significantly. District unemployment in September was just 0.1 percentage point above the average for 1997. Returning to California, the East Asian economic slowdown has reduced employment growth throughout the state, but its impact has varied significantly across regions. Strong trade ties to East Asia, especially in the high-tech manufacturing area, have pushed employment growth in the San Francisco Bay area below that for the state as a whole for the first time in three years. In contrast, the more diversified southern California economy has remained relatively immune to global economic turmoil, with little deceleration in growth from last year. The changing pattern of growth in California is helping to equalize the levels of economic activity in the Bay Area and Southern California following the deep recession and slow recovery in the Los Angeles/Long Beach Area. Turning to the nation, we believe the outlook for economic activity has improved since the Committee met in September largely because of the easing of monetary policy, the decline in the value of the dollar, and increases in U.S. stock prices. Under the assumptions of an unchanged federal funds rate and no further changes in the stock market or the dollar, we have raised our forecast of real GDP for 1999 by about1/2 percent to 2 percent. I see risks on both sides of this forecast. On the upside, growth in the economy has outperformed most forecasts for the past three years, and this certainly could continue. On the downside, the stock market is still overvalued according to most models, and although U.S. debt markets have stabilized somewhat in recent weeks, risk spreads are still elevated, and confidence remains vulnerable. There obviously are still many risks in the international arena as well. Under our forecast, there is continuing upward pressure from tight labor markets on wage and price inflation next year, although the magnitude of this effect diminishes over time as the unemployment rate rises. However, price inflation continues to benefit from low inflation expectations, ample industrial capacity, falling commodity prices, higher trend growth in productivity, and negative speed effects as the economy slows. As a consequence, we expect inflation in the core CPI to average 2-1/4 percent both this year and next, and that is using a consistent definition for the CPI. Overall, if we assume an unchanged monetary policy, our projections show a constructive outlook for the economy with moderate real GDP growth and moderate inflation as well. Thank you.",675
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"The Eleventh District economy is showing increasing signs of slower growth especially in the goods-producing sectors including energy, petrochemicals, semiconductors, and now commercial construction as well; the latter had been quite robust until recently. Commercial construction is being held back by financing considerations, higher credit standards, reduced REIT activity, and so forth, but there is some feeling that that is not altogether bad. It may be a timely constraint on a new round of overbuilding. Employment growth in the goods-producing sectors has decelerated from vigorous in the first quarter to barely positive in the third. Employment has declined in oil and gas extraction and in oil service industries. Our Texas index of leading indicators has declined for the past five months. The declines have been broad-based, with seven of the eight components declining. Our forecasting model of Texas employment growth, which has been very accurate over the past three years, forecasts employment growth of 0.3 percent in 1999. Our leading index for the Mexican economy also signals more slowing there in 1999 than we have seen thus far, with negative implications for the Eleventh District. This is consistent with a reduction of spending by Mexican nationals in Texas border cities, which we have noticed, and with a reduction of U.S. currency flowing into our San Antonio branch from border areas and from Mexico itself; this probably reflects Mexican fears of further peso depreciation more than an actual decline in activity so far. On the national front, I have no unique insights to offer. Risk and liquidity premiums have declined since October 15 but remain high. Financial markets around the world continue to be vulnerable. There have been arguments on both sides of the policy question. I guess where I come out is that the fire department has only a limited amount of water to deliver to a fire. It is better to get there earlier rather than later. [Laughter]",377
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. The New England economy continues to perform quite well, but growth is slowing and uncertainty seems to occupy a larger proportion of anecdotal conversations. Nonetheless, at least for some areas of New England, notably Greater Boston, some slowing could be welcome if it increases commercial vacancy rates, if it stabilizes or slows the growth in home prices and apartment rents, if it puts a brake on medical cost increases, and if it adds a little more breathing room to the labor markets. It is not quite a tale of two cities. But with international and financial uncertainty hitting some firms and others hampered only by their inability to get workers, one can get a very different picture of New England depending on where the data originate and whom one talks to. New England labor markets remain quite tight, with employment growth slower than the nation's but a bit faster than historical levels, and unemployment rates well below the national average. Employment growth varies considerably by industry. Construction, tourism, finance, insurance, and real estate employment are growing at solid rates, while manufacturing employment has declined in six of the last seven months. Gillette, Raytheon, and Pratt and Whitney have announced layoffs as have a number of smaller firms. These layoffs appear to be very closely related to the spreading ripples of the Asian situation. Retail contacts, as well as those in a wide range of high-tech businesses, report difficulties in attracting and retaining workers even for seasonal jobs, and firms have reported slowing growth due to a lack of new employees. This at least partially reflects a reversal in the growth of the region's labor force due to a decline in the participation rate and a decrease in net in-migration from other states. There is, however, no translation that we can see from the arguably tighter-than-average labor market in New England to generally higher wages than those paid in the nation as a whole, except in certain industries. The Boston CPI rose by 2.6 percent, a little higher than the national rate, but this difference seems almost totally the result of medical care cost increases, which climbed almost 9 percent over the past year. As of the second quarter, the region's merchandise exports were 3 percent below a year earlier, but almost all of this decline was concentrated in Asian markets. Consumer and business confidence, while still positive, reflects the possibility of reduced growth in spending and economic activity. Most of this involves readings of future expectations, however, with both consumers and businesses positive about the current picture but uncertain about the future. Financial market volatility clearly has played a role in heightening the levels of uncertainty. Some continue to see this period as simply a swing back from the very low spreads of the summer, while others are concerned that liquidity is not back to normal levels and that funding constraints could hamper future economic growth. But here again the story varies quite a lot depending on whom you speak to. Money managers are worried, to say the least, but small businesses continue to report a great deal of competition among banks for their business. Some bankers believe that the supervisory message of concern about REIT and other real estate lending is really affecting their business, as no New England banker who survived the regulatory travails of the early 1990s wants to go down that road again. On the other hand, a major real estate developer told me recently ""the markets have saved us from ourselves."" Clearly, speculative real estate deals throughout the region are now on hold, a welcome sign given the speculative excess that preceded the early 1990s recession. Commercial and industrial lending shows little in the way of slowing, however. Based on data from the three large banks in the region, C&I loan growth has reached nearly double the pace of the nation's in recent weeks, with some tightening of standards at one institution but none at the other two. Clearly, First District banks have helped to pick up the slack from the tightening of bond markets, particularly as it affected non-investment-grade borrowers. In sum, while conditions by industry are mixed and the various states and cities in the region have their own particular stories, the New England economy continues to grow and thrive--perhaps at a slower pace--not unlike the national picture. Turning to the nation, we agree with the Greenbook that the economy seems poised to make a transition to a lower growth path. Job growth is slowing; consumer sentiment is off a bit but still at a rather high level; the personal saving rate may not remain negative; and business fixed investment should slow given the rise in wages and lower, if not negative, profit margins. We agree that an inventory correction probably looms ahead, but the size of the correction projected in the Greenbook and its suddenness seem to us a little large. We also believe equity prices may flatten or fall, given the profit picture, and that this will feed back to consumer spending as families feel less wealthy. However, when we take all these factors together, our forecast puts us about at potential for the fourth quarter and for 1999, albeit with a lower unemployment rate than the Greenbook and some uptick in core CPI even without the additional 25 basis point ease that is incorporated in the Greenbook forecast. We do not think this is a particularly bad outcome. We think it is not inconsistent with the rebound in equity prices, the reduction in risk spreads, and the current strength in motor vehicle sales, durable goods orders, and retail sales. In fact, there is some risk that growth in the near term could be stronger, particularly if the stock market increases hold, consumer spending remains healthy, inventory accumulation in the third quarter turns out to be more intended than unintended, and financial panic dissipates as it now seems to be doing. In that event, we might see a good deal stronger picture in 1999 than we project. We do admit that there are downside risks. Equity prices could fall further than either we or the Greenbook project. Various aspects of the external environment could turn more sharply negative, particularly in Brazil and Japan. The financial panic could resume. Consumers and businesses could retrench to a greater degree than now seems likely. Moreover, it also seems that financial markets remain fragile, at least for the near term. There is some widespread expectation that we will ease either now or at our next meeting to address that fragility. However, I believe we do not want to go all the way back to the conditions in the credit market that existed earlier this year. Those were no more healthy than the current degree or the previous degree of fragility. I think we face a delicate balance given the rebound on the equity side and given the strength in consumer spending, at least in the short run. So, in that regard I believe that vigilance, which has served us well for most of this year, may continue to be the answer now.",1371
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Signs of moderation or at least a leveling off in the rate of growth have begun to emerge in our District also. While some of that can be traced to international developments, perhaps more reflects a pause or a respite in a maturing expansion. People clearly are being more cautious in their spending and lending. I am hearing economic activity described as good, or very good, or pretty strong as compared with the extraordinary adjectives that we were hearing a few months ago. Reflecting the moderation that I referred to, retail sales increases in our region have been more modest recently and inventories have risen slightly. Our most recent manufacturing survey and industry contacts indicate that factory production, new orders, and employment have increased only modestly. At the same time, strength in our tourism and hospitality industry continues to help stabilize the regional economy; and despite the short-term adverse impacts of Hurricane Georges, bookings are strong and theme parks are expected to be packed over the Christmas holidays. To be sure, there are pockets of special difficulties in our region. For example, regional steelmakers have recently announced layoffs and are seeing inventories build. Someone remarked recently that steel has gone from just-in-time inventory management to just-put-it-over-there. [Laughter] We are also seeing some definite indications that housing may have peaked in our area, and there is evidence that the very strong commercial real estate sector has begun to soften. In South Florida, there are concerns that weakness in South America and Asia may begin to have a significant impact on tourism, but we have not seen that in any meaningful way yet. Hardest hit in our region have been the pulp and paper, forest products, and energy sectors. Lower oil and gas prices have discouraged drilling, and the rig count is now the lowest that it has been in three years. Finally, despite continuing tight labor markets, employers still seem to be resisting wage increases, and we continue to get fragmentary reports that labor shortages have delayed the expansion plans of some firms. We made a special effort to determine what, if anything, we could detect about prospective corporate investment spending plans and found that the evidence is mixed. Some firms are cutting back, some are being more cautious, and some are simply continuing to expand. Our manufacturing survey outlook index for capital expenditures declined nearly 3 percentage points, yet we found numerous examples of firms continuing their investment plans. In general, we learned that cutbacks are being planned exactly where one would expect, in the traded goods area that is being adversely affected by international problems, while expansion is continuing in service industries and domestically oriented production. We also, like others, made some attempts to assess whether there has been significant change in the availability and terms of credit. Reports that we get from talking to lenders indicate that the credit adjustments seem to have been dictated by prudence rather than a pulling out of lending markets. The one area where funding seems to have dried up has been in REIT lending for development in the Southeast. Overall, I would not characterize these financial market developments in our area as a credit crunch. By contrast, our people on the ground in Latin America continue to come home with reports of severe contractions in lending, including trade loans, in that part of the world. On the national front, I'm a bit more optimistic about the pace of growth in the period ahead than is the Greenbook. Certainly, recent data suggest that the U.S. economy has considerable resiliency and remains relatively strong, perhaps stronger than many of us anticipated. Looking beyond the near term, I agree that a slowdown, but a gradual one, seems to be in the offing. While employment has softened a little, early pessimism for holiday sales seems to be abating. While we certainly see some slowing in investment spending, especially in the goods-producing sector, it is my sense that spending on productivity-enhancing equipment will continue to be strong and that those businesses in the service area and those producing primarily for domestic markets will continue to invest. In hindsight, our intermeeting policy move was timely, and financial markets, as everyone else has observed, appear to have calmed considerably. The adjustments that have taken place in lending standards and terms are probably a good thing. Echoing President Minehan's comment, the rationing of credit for real estate development in markets that had become a bit frothy should help damp the boom/bust cycles that we have seen so many times in that industry. In the spirit of letting markets adjust, we should also be comfortable to let equity markets adjust to underlying fundamentals. Clearly, we remain vulnerable to further international shocks. The more I learn about Japan, the more I realize that a big turnaround there is not likely to come very soon. As the part of the country that is most closely attached to Latin America, I clearly understand how unsettled things are there. We have enjoyed a number of weeks now without a big, bad development or revelation, and it is difficult to judge just how fragile our economic psyche is at the moment. All that said, with acknowledgement of the downside risks, it seems to me that we are in a period where we can afford to be a bit cautious and patient and let things play out. Thank you, Mr. Chairman.",1050
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. As is usually the case, conditions in our District are partly like those in the Eighth District but especially like those in the Seventh District with regard to motor vehicles and so on. One big difference that I had failed to note, until a director pointed it out to me a couple of Saturdays ago, was the sudden, dramatic plunge in consumer confidence when Ohio State lost to Michigan. [Laughter] I assume that there was an offset in East Lansing. One director at a recent meeting argued that we are suffering from a severe shortage of people. Our problem in the region is that we cannot fill up the hotels, the motels, the shopping malls--although they are pretty packed--the houses, and the office buildings that are being built because there just are not enough people. One major homebuilder in southwest Ohio and northern Kentucky said that 1999 will be the best year ever. Builders tell us that taxpayer-financed construction in 1999 will exceed that of 1988 if they can find the workers needed to build all of it. So, we need a strategy for the region to get more people to do the work and to fill up all these places. About the only things that we seem to be able to build and fill readily are the prisons. I am tempted to suggest that we go down to Texas to try to recruit some people there, but I am skeptical about how effective that effort would be. That's because the head of the construction trades union on our board told us that the scarcity of labor is so severe that construction workers are complaining that they're not getting their usual time off for deer hunting. So, I'm not sure we can recruit the workers that we need. In conversations with directors and advisory councils since the last meeting, references to the notion of a credit crunch or credit crisis came up frequently. A common comment was that they were mystified in that what they understood was going on in global capital markets simply didn't apply to their customers. Some bankers said that they had looked hard for financial strains. They figured that would give them an opportunity to deploy some of their excess liquidity more profitably than in the past, but they were not able to find such opportunities. Business loans are still being made at fixed rates of 7 and 7-1/2 percent for up to 15 years and no personal guarantees. One banker reported a deal with a 10-year maturity at a fixed rate of less than 7 percent. There are complaints that the competition is still bidding down the pricing on loans to medium and small businesses. It is not an issue for them of having survived a credit crunch; it simply did not happen. There is a disparity in the outlook in that the communities and the businesses tied to steel in particular are in a very gloomy mood and say that 1999 is not going to be that great a year. If anything, we are going to see more plant closings and more layoffs in businesses related to metals. Agriculture is also suffering some strains. There are record crop volumes, but that has not fully offset the depressed prices. In retail, there is a nervous optimism. The malls are packed now, but retailers are worried that it will not last. Bankers and others are trying to draw a connection between the stock market and consumer optimism, but they seem to want to have the causality going both ways. I really don't know what to make of that. One banker, an active member of our community bank advisory council, said that an indication of consumer optimism is that 80 percent or more of the ballot initiatives in the region passed. He said he thinks that when the voters approve anything for bond financing or tax increases, they must be feeling good. One banker believes an indication of trouble is that a chain of 16 pawnbrokers is reporting record traffic. Maybe people are just hocking things so they can buy more Asian goods; I don't know. Labor turnover continues to be a problem in the retail industry. Frequently mentioned are rising starting wages, overall compensation, and of course the poor quality of the people who apply for jobs. Some bankers in the area have reported that a withdrawal of the Japanese lenders has allowed them to increase margins and gain back some lost customers. One regional bank was telling us that loan demand bounced back dramatically and was surprisingly strong in the third quarter and will probably be even stronger in the fourth quarter. We had a meeting with the senior credit officers of eight of the largest banking companies in the area and asked them about their policies. They said that, having received letters from the Board and the OCC about tightening credit standards, they felt more reluctant in the course of putting the largest amount of loans on their books in a very long time. At least they had their attitudes right, because they all smiled about it! One banker contends that the jolt, as he puts it, to the capital markets was very much needed and has brought back realistic pricing for risk in his view. Auto production, as Mike Moskow reported, is very strong. All the auto communities are very buoyant. Heavy truck production is not only operating at high levels, but the order backlog going into 1999 is reported to be at historically high levels. In contrast, makers of construction and agricultural equipment are telling us that orders recently have been falling off sharply and production will be lower next year. On the national economy, I want to say a few words about money and monetary policy and the conjecture that what we have seen in terms of some of the monetary aggregates--notably mutual fund balances, money market balances, and various types of savings balances--is related to the stock market. Saying that the behavior of money just reflects a decline in velocity is, of course, tautological; it doesn't help us to understand the causality. Any statement about velocity is a statement about the demand for money. If it had anything to do with increased uncertainty related to the capital markets and the stock market, then we would expect the rise in velocity to be reversed at some point in the context of a decline in the broad money measures. Earlier in the decade when we saw no growth in broad money measures like M2 and M3, I reached a comfort level with that because other measures were growing very rapidly. Usually when we have these explanations about depositors, whether it is households or others that are shifting their behavior, there are disparate movements of the various narrower and broader measures of money and credit. This time we are not seeing that. What we are seeing is that the monetary base adjusted for sweep accounts, MZM, M2, M3, total bank credit--all of these measures--have simultaneously been increasing very dramatically. I think this is an issue in search of an explanation that can let us feel comfortable with what we can see going on and that will leave us unconcerned about the implications down the road. But I'm concerned about the implications down the road. I think there's at least a risk that we're going to see that monetary growth showing up in ways, whether it's in the asset markets or in the goods markets, that we are not going to be happy about.",1438
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. As far as the Ninth District economy is concerned, there has been no appreciable change in recent months. Labor markets remain very tight. If anything, they have tightened further because we are getting the normal increase in seasonal part-time demand for workers. Consumer spending has been strong and that appears to be continuing. My unscientific survey of mall parking lots suggests that they are operating close to capacity, or in some cases even beyond. Construction remains strong. Banks are seeing strong loan demand in part, no doubt, because other investors and lenders have disengaged to some extent. My impression is that bankers are both willing and able to accommodate the demand that they are seeing. Less favorably, conditions in both manufacturing and mining are mixed, depending on their exposure internationally, and agriculture has problems of one degree or another throughout much of the District largely as a consequence of both crises. If you're looking for change in our District, you have to look to the governor's office in Minnesota! [Laughter] As far as the national economy is concerned, I would use the phrase ""broadly acceptable"" to describe what is going on. I am referring to recent developments and conditions in the economy and the outlook, as I see it, for both economic growth and inflation. I certainly would say that recent trends in financial markets are broadly acceptable, and better than I might have guessed a month ago, or certainly six or seven weeks ago. No doubt part of this is due to the policy changes we made, and there is now a danger of overreacting to the last six or seven weeks of readings on these various things. But taking a step back, all this reminds me of something that I think we have known for a while, and that is that our economy is fundamentally very resilient. I believe that is what we are seeing.",373
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I think the evidence is accumulating that the real U.S. economy is run by a bunch of cheerful little elves [laughter] who do not like forecasters. Every so often they get together and say, ""Okay, guys, if we work real hard, maybe we can surprise them again."" But don't knock the elves; they've been doing quite a good job for most of the 1990s and we have all benefited. The U.S. domestic economy has certainly shown heartening resilience in the face of global downdrafts in the last year and particularly in the last three months, much as it showed resilience and adaptability to upward pressures and threats of overheating in the previous couple of years. Consumers are spending cheerfully, buying houses and cars and maintaining a fairly robust outlook on their situation. In their role as small investors, some of the same people are reinforcing their own optimism by continuing to buy stocks in companies whose near-term earnings prospects would not seem to justify their purchase. Elsewhere in the economy, the effects of the world slowdown are evident. Agricultural prices and exports are suffering. Manufacturing is feeling the difficulty, laying off some people, and beginning to pull back on expansion plans. Investors are still wary of any risky venture despite some melting of the frozen capital markets of a few weeks ago. The elves have to do their job and we have to do ours. I believe that most of the signs point, as the Greenbook indicates, to a substantial slowing of the U.S. economy as we go into 1999. We have an extraordinary responsibility to make sure that the U.S. economy, as the linchpin of the global economic system, does not slow too much. That is why I believe we should take the downside risks very seriously and reinforce our last two easing steps by taking one more today. If we did not have the world depending on us, we could afford to wait and see whether we have done enough already. But the world still looks very fragile to me, and whether we like it or not, the U.S. economy is carrying a heavy load in the world's recovery. Asia is barely turning up, if it is. Russia is a total disaster. Western European countries seem quite myopic in their preoccupation with their own affairs, but they are revising their forecasts down. Latin America, as we have discussed, seems extremely fragile; there is hope but by no means a certainty of staving off disaster in Brazil and another round of contagion. So, it does seem to me that we have to worry a lot about that. On the other side, I see little downside domestic risk in worrying too much about our responsibilities to the world. Inflation is not a near-term threat, although we may see some wage increases. The stock market is clearly a concern; we might encourage investors too much. But I still believe, experience notwithstanding, that rationality will reassert itself in the stock market as earnings fall. So, I think we have a close question today, and it may be a comforting thought that we cannot do a lot of harm. On balance, I see the risks on the downside, especially internationally, and feel that we have a special responsibility to take them very seriously.",648
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"Business conditions in the Philadelphia region have been steady overall, but there is a continuing weakness in manufacturing. Looking ahead, business contacts expect some slight improvement in economic activity going into next year, but there is a cautious tone to this forecast. In the interest of moving the meeting along, I will skip the District details. Clearly, the national economy is currently showing a lot of resiliency, given the turmoil in financial markets. Perhaps the economy will escape major damage and continue to move forward at a healthy clip. The most likely outlook, however, is for a slowing of growth for the reasons already given, particularly the international ones. In short, the risks are on the downside. With inflationary pressures subdued, we have the flexibility to take out some additional insurance against excessive weakness in demand. Financial markets have improved from their earlier unstable condition, but they are not yet back to normal. We need to continue to facilitate a return to normalcy. Financial markets currently are like a sick person who feels better after taking antibiotics for a few days but still needs to stay on medication to avoid a relapse and to aid a return to good health. In short, in both the real sector and the financial markets, we have downside risks that, in my judgment, need to be counteracted.",255
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Let me say a few things about the Tenth District. The regional economy is still growing moderately. There are some signs of slowing in the data and in some of the anecdotal reports from business contacts, but the degree to which growth is slowing is not at all apparent. Employment growth continues to be steady in our District, although it is slightly behind the national economy. Manufacturing activity, as others have reported for their regions, is slowing in our District as well. Our factory survey in October was flat. On the other hand, retail sales are generally good across the District, and some of our retailers have indicated that they are anticipating a very strong holiday shopping season. The construction sector remains generally strong. Some builders are reporting an easing of activity but one of our largest construction firms, which is active in both the Midwest and the Pacific Northwest, indicates that some of this has been due to the REIT activity that others have talked about; the firm feels that reaction probably has been very healthy in terms of stanching some of the excess that they thought was building in their markets. Energy activity remains weak, obviously due to the low oil and gas prices and the uncertainty there. Our agricultural sector has tended to stabilize a little; although prices are still low, they have stabilized and crop production has been good. There has been a recent infusion of funds by the Congress, but my contacts in both ag and the ag banking sector assure me that next year certainly will be a disaster. Despite signs of slowing, the District labor markets are still very tight. More than half of our Beigebook and business contacts are talking about raising wages more than what they consider normal. Still, we have not seen the effect on prices in the District at all. On the national front, our outlook and the Greenbook are quite different in terms of the projections for the next five to six quarters, with the Greenbook showing a much sharper deceleration in growth than we are projecting. Beginning with slower growth in the fourth quarter, the Greenbook has five quarters of below-trend growth whereas we have growth in line with trend or slightly below. As a result, we have a less favorable inflation outlook, although we do not anticipate that inflation will be a substantial problem. We think the risks are more balanced than they were at the time of the last meeting. We believe that the financial markets are more stable and are pricing more realistically. We think domestic demand is remaining fairly stable, and it could actually be stronger depending on the stock market and other factors because, as others have reported, consumer confidence is relatively high. On the downside, manufacturing could slow more than we're expecting, especially given the international uncertainty. But on balance, we think that it would be prudent, given that there are only five weeks to the next meeting, to wait and watch in this intermeeting period.",577
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Second District economy is slowing. The manufacturing sector in northern New Jersey and western New York is participating in the general slowing of manufacturing nationally and the growth in the service sector is not sufficient to make up for it. The housing area is also somewhat weaker. Commercial construction is slowing, largely because of restricted availability of credit. Retail sales were weak in September and bounced back some in October and early November. Nationally, I believe that the Greenbook has it about right. Like the Greenbook, we see economic growth well below trend in 1999, with recovery to something more like trend growth in 2000. Inflation is clearly well controlled. We think that the weakness in fixed income markets, although somewhat reduced, is still a potentially serious risk to the real economy. When we look at the likely pressure on the banking sector, it is worth remembering that about 25 percent of C&I loans come from the money center banks and about another 25 percent come from foreign banks operating in the United States. Both the money center banks and the foreign banks are dependent, just as their commercial customers are, on purchased money. We believe that year-end pressure on the money center banks, which they are very concerned about and already are seeing, could well exacerbate the problem in fixed income markets. Certainly, the pressure that the money center banks will face will be more than that experienced by the foreign banks. Consequently, I think there is a possibility, not a probability but a distinct possibility, that the month of December could be a particularly difficult one and that the problems in the financial sector could mean that Main Street, which has been holding up very resiliently as many have pointed out, will be adversely affected. Therefore, I believe that the risk coming from the domestic economy and the considerable risk coming from the foreign sector indicate that the Greenbook forecast, whose growth in 1999 I would not find adequate, is more likely than not the better of the cases that we can expect. Thus, the downside risk is still very considerable and points to the need for some additional action on our part. Thank you, Mr. Chairman.",433
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. As we have already heard, there are significant and reasonable scenarios on both sides of this discussion. On the one hand, we can believe that the most recent strength in the real economy will abate, but just slightly, and that the economy that has surprised us on the upside time and again will continue to do so. In this reality, labor and households reign supreme. GDP growth comes in for a soft landing without further help from monetary policy. After all, one might say, in the third quarter the economy grew at an annual rate of 3.3 percent. Household spending is still growing about 4 percent. This strong growth is fueled by jobs--as some have indicated, labor markets are still tight--and wage and salary growth, and credit. In the optimistic scenario, financial markets are described as fragile but recovering. The stock market continues to defy reasonable analysis and gives added impetus to consumer spending, and possibly to capital spending. Most importantly in this optimistic scenario, Asia already has turned the corner and Brazil avoids the worst outcomes due to timely international intervention. For me this picture is very, very attractive, but I'm afraid that it reflects only a limited reality. I believe that growth due to labor and household consumption, which underpins the most positive scenario, is limited. Job creation does seem to have slowed considerably of late. Secondly, I note that last quarter's GDP growth was heavily fueled by inventories, which seems unlikely to repeat. Finally, in what I describe as the more pessimistic scenario, there is a great focus on capital and capital investment. Business fixed investment fell in the last quarter at about a 1 percent annual rate, which I think is the first decline of that magnitude since 1990 or 1991; BFI admittedly was retarded by nonresidential construction, but even investment in producers' durable equipment barely budged. More disturbingly, anecdotal and survey evidence suggests that capital spending plans for many firms have been revised downward. This slowdown reflects a realization that profits may not be as robust as in the past. Internal cash flow will not be as strong. As others have indicated, financial markets are still uncertain. In any event, businesses may decide they do not need to add to their capital budgets because inventories are adequate and export orders are lagging. It is this that I think brings the Greenbook home. So, in this pessimistic scenario, one would say financial markets have not yet returned to normal liquidity and risk spreads, and stock market evaluations will soon catch up with the much changed profit outlook. Finally, the pessimistic scenario involves international concerns that have been alluded to by others. Japan, obviously the largest economy in Asia, continues to be mired in recession. Brazil's economic performance is likely to be weak. I am concerned that its ability to defend against devaluation, were that to be necessary, is limited given its reserve position. Finally, as others have indicated, China may not prove to be as strong as the current official numbers support or suggest. So, we have these two scenarios. The question is which one we believe. If we believe the optimistic one, obviously monetary policy is probably properly positioned now. On the other hand, while it is not at all a certainty, for my money the more pessimistic scenario does seem all too possible. If the domestic and international components of this scenario do come to pass, the consequences for the U.S. economy are dire. The good news in some ways is that we do not have to choose between these scenarios today. Fortunately, by most measures, inflation is subdued and likely to stay so. Just as limitations in pricing limit corporate spending, they also limit the risk of inflation. Therefore, as I think at least one other person has said, we can afford to buy some insurance at this time. I think the premiums are manageable. I think the risks of not buying some insurance are just too great for my taste. Thank you.",800
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. While the most extreme manifestations of the credit crunch have abated, risk spreads are still high, and the real federal funds rate is still high also. I think the period of the credit crunch is not entirely behind us. I like Ed Boehne's metaphor on that: It's probably a little too soon to go off the medication. On the forecast, I have no complaints with the Greenbook. The numbers show that final sales already have gone down to below trend, and the Greenbook forecast has the GDP falling below trend. I think we all recognize it, but let me repeat that that is with an assumed further cut in the federal funds rate. Even then, there is a fairly prolonged period where GDP is below trend, with unemployment rising above 5 percent. There are not as many risks on the downside this time around, partly because of actions that we already have taken. But I think there are still two. One is the stock market. Even though the Greenbook forecast does program in some decline in the stock market, it is not that great a decline and it could be more significant if the likely effects of the earnings forecasts come to pass. The second is the foreign troubles, about which we have talked a lot. Karen Johnson gave the pessimistic Brazil forecast a significant probability; as I remember it was 30 percent or so. If we look at that forecast, we do have a fairly soft GDP situation. On the inflation side, I am beginning to feel as if I am in the audience of the play, Waiting for Godot. We have had steady unemployment at below 5 percent for seven quarters now, and the signs of acceleration of inflation still are not much more visible now than they were then. I don't know what is going on here; it is possible that the natural rate model should be amended, and it is possible that 5-1/2 percent is the wrong estimate of the NAIRU. I don't know what the latter is, but I think the paucity of signs of accelerating inflation this long into a period of unemployment under 5 percent is really quite striking. We rarely discuss fiscal policy at these meetings. In fact, I don't think I have ever heard it discussed. But let me bring that up because there is increasing talk in Washington of dealing with a recession, if it comes, either on the spending side by having some more spending or on the tax cut side. My view of what macro textbooks used to call the assignment problem in an era of flexible exchange rates is that the proper role of monetary policy should be to stabilize the economy and the proper role of fiscal policy should be to worry about the overall national saving rate, which is very low in this country and should not be lowered still further by expansionary fiscal policy. At this point, I will switch to Bob McTeer's analogy and say that the right course is for us to keep control of the firetrucks. My last point is that one very clear advantage of monetary policy is its flexibility. It strikes me that things are still a little soft. I would still like to see a little more adjustment, through the ""use of water"" in Bob's analogy. This may prove not to be the right thing to do, but if it proves not to be right, we can observe that and act accordingly. So, I believe the flexibility of monetary policy gives us a degree of freedom here, and I would like to see us use it. Thank you.",704
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Let me start off by focusing on what I think has changed and what has remained the same in the outlook since the last meeting and particularly since the intermeeting move. First, the second half looks stronger, with growth at or above trend. This reflects both the surprise in third-quarter GDP and the general resilience in the spending data. Second, I think the forecast going forward has been bolstered by depreciation of the dollar and particularly since our intermeeting move by the resurgence in equity prices and some relaxation in financial stress. Third, the announcement of the Brazil package and some other developments in the international realm have added at least a bit of optimism that the worse case scenario for global turmoil might be avoided. What has remained the same? I think the general answer is the qualitative forecast going forward. It still appears that growth will be clearly below trend next year, though some modest upward revision along the lines of the Greenbook forecast appears justified. It still appears that inflation will remain well contained. And it still appears that downside risks predominate though perhaps less so than before. I think the main difference is that there is renewed appreciation of some upside risk going forward. Why so little change in the forecast? First, I think the upward revision to the third quarter was concentrated so heavily in inventory investment that it is more likely to be reversed than extrapolated going forward. Second, the rebound in equity prices appears to be incompatible with a forecast of slowing growth and declining profits, and therefore it also is likely to be reversed going forward. Third, while the depreciation of the dollar is certainly a positive, its effect is offset by some further slowdown in foreign growth, as in the Greenbook forecast. Finally, while the financial stress has been partially unwound, financial conditions, at least outside of equity markets, have nevertheless significantly deteriorated since July. Here is how I would characterize the broad qualitative features of the outlook. First, private domestic demand appears to have decelerated to about a 4 percent growth rate in the second half from the 8 percent rate in the first half, returning to its average rate over the previous two years. This is very consistent with the gravity story that I told earlier. A further slowing in private domestic demand, as in the Greenbook forecast, toward roughly a trend rate over 1999 looks plausible. This partly reflects a diminished stimulus from the wealth effect, assuming equity prices do not rise further, and it reflects, in addition, the effect of the recent deterioration in financial conditions along with the projected further correction in equity prices. This spreads the effects of global turmoil from the external to the domestic sector. Given the slowdown in private domestic demand, even the slower rate of decline in net exports over 1999 is enough to push overall growth below trend. The slowdown is reinforced over the next couple of quarters by a reduction in inventory investment from its unsustainable third-quarter pace. I think it is also reasonable to anticipate that growth will rebound to about trend in the year 2000. I would put my best guess of growth next year just a shade higher than in the Greenbook forecast, but I would also take into account the still asymmetric downside risk that I see to that baseline in setting monetary policy. I'm a little less optimistic about the course of nominal wage change and a bit more concerned about the size and inflationary effect of the depreciation of the dollar than is the Greenbook, but I still believe inflation will be well contained. I think what we do at this meeting is a close call. But were we to move one more time, which I would support, it would seem to me that that would bring to a conclusion the cumulative adjustment in monetary policy that seems appropriate in light of the discrete change in the outlook that has occurred. We should find some way to perhaps signal that as well. Thank you.",774
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will bat cleanup here. The fundamental worldview of hawks and doves is always evolving, but I do think that both of those birds are alive and well. To oversimplify, a hawk's view of policy today might well be that, with the U.S. economy strong and the world's financial structure shaky, our policy should be to insure that our financial system remains a rock-solid anchor to windward. That is the best thing that we can do to help both the world and ourselves, hence a bias toward firmness. A dove's focus might be on the U.S. economy as the engine whose forward drive is essential to the world's stability and recovery, and U.S. policy should insure that that engine stays in high gear, hence a bias toward ease. I find much that is appealing in both of these arguments and I don't want to have to choose one path over the other. Fortunately, if we stay focused on the same mission that we have pursued for so long--namely, seeking maximum sustainable growth fostered by price level stability--I think we can reasonably seek both of those objectives, and the best policy, as before, still lies there. How do we identify that policy path? As always, that comes from assessing the risks and trying to determine how strong they are and where the balance lies. I believe the balance of risks has migrated to the downside, particularly as it relates to the likely timing of potential shocks. To be sure, upside risks remain and could readily resume their dominance of only just a few months ago. First of all, of course, our primary concern for many quarters now is still with us. Economic activity is still very strong, labor markets are still very tight, and that means that inflation is still a major potential threat. But I believe that that scenario is of diminished probability for all of the reasons with which we are familiar. The good news timing-wise is that if we should see that scenario evolving, its latent risks should materialize slowly enough for us to have time to counter them if need be. I worry more today about the potential for very serious mischief that could arise in the stock market if it should boom to new highs. That could put us in severe jeopardy of a crash that could bring down a great deal more of the world and, indeed, our own economy with it. My hope is that, as a slowing economy results in declining corporate earnings, this market will self-correct in an orderly way. However, a real crash has too high a probability to give me much comfort, and easier policy may heighten the chances of a plunge in the market. The downside risks seem to be growing and, perhaps of even more importance, could burgeon much more quickly, perhaps severely and without much warning. The international risks, we know, certainly have those characteristics. There could well be others yet to unfold in this dynamic environment. That the U.S. economy is slowing seems to be a growing probability. While that may be desirable within limits, once a downward trend gains momentum, it is hard to know how far and fast it may go and what it might take to arrest a decline if that becomes necessary. In today's world, I think that is a more than usually important factor. I do think we should keep a wary eye on deflation. There are some signs that its impetus may be slowing, but in the context of an increasingly sluggish U.S economy, if that is what should ensue, it could become a real danger. To sum up, Mr. Chairman, I do not believe that we are behind the curve, but I do believe that the ground is shifting. Perhaps we need to shift a bit more with it. I see little reason to wait as any upside risk would likely emerge rather slowly over time, whereas the existing downside risks could appear suddenly and soon. The respective time frames are quite asymmetric. My mother used to say ""a stitch in time saves nine."" We have taken two so far, and three might do it.",814
-fomc-corpus,1998,Thank you very much. We now can move on to David Lindsey.,14
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Committees's choice today would seem to boil down to standing pat or easing by another 25 basis points. The Committee's last two easing actions were of a preemptive nature, taken to ward off undesirable economic weakness prospectively, as opposed to being based on softer economic data already in hand. The economic data received since the last FOMC meeting, while somewhat mixed, would not necessarily alter that perspective. That is, they continue to paint a picture of satisfactory real growth looking backward, turning into a significant slowing in the future. The inflation outlook is little changed. In the staff forecast, credit market stresses gradually unwind further in coming quarters, but conditions do not return to their earlier lax state, while stock prices move back down, damping spending. Financial problems are not predicted to intensify in Latin America. Because resources gradually return to a more sustainable utilization rate while the rise in inflation is limited, the Committee could well find the staff forecast to be an acceptable outcome. The Committee also could consider the forecast to be plausible as a point estimate. Ironically, the staff forecast can be read as providing support for either standing pat or for easing slightly at this meeting. The Greenbook forecast assumes one more quarter point of policy ease later this year. Easing now simply would move forward the staff's assumed action by a little more than a month, while standing pat to await further information on the impact of previous policy easings could still accord with deferring an easing until the next meeting as assumed in the staff forecast. Of course, these two courses of action would presumably have basically indistinguishable macroeconomic effects, assuming no disproportionate differential impact on financial markets. For that matter, the outlook presumably would not be altered greatly if there were no further quarter point easing at all, again absent an unusually adverse financial market reaction. Instead, the Committee's decision today would seem to hinge, as many have pointed out already, on its assessment of where the forecast could go wrong--that is, on where the most important risks to the forecast may reside. In the present circumstances, several areas of possible downside surprises come to mind, and they could provide a rationale for the quarter point easing of alternative A. Despite the support package put together for Brazil, that country, as well as others in Latin America, could be further affected by financial contagion, as Karen has noted. Closer to home, potentially sizable further losses could be felt by key banks and other players in our financial markets. Also, the projected decline in corporate profits could foster a greater stock market correction than the staff has built into its forecasts of consumption and investment spending. The still tender state of other securities markets means that the reversal of extreme risk aversion since the mid-October policy easing is still incomplete and somewhat tentative. This condition has raised the concern in some market circles that a decision not to ease today could be enough of a disappointment to market participants to spark a short-circuiting of the recovery in risk spreads and trading conditions. This concern has lost some force with the recent scaling back of expectations of Fed easing. The probability of easing at this meeting built into fed funds futures quotes has receded from more than two-thirds two weeks ago to somewhat better than even odds as of yesterday, in part because financial market stresses have continued to unwind on balance. Even so, as the Bluebook discussion suggested, not easing today probably would induce some immediate widening of risk spreads, as private rates back up more than rates on Treasuries, especially those ""on the run."" Some increase in liquidity premiums, and shrinkage in trading volumes, also could be expected to occur right away. But on the assumption that markets still will perceive the Federal Reserve as closely monitoring financial developments and prepared to ease again if necessary to head off any reversion to extremely unsettled conditions, the adverse market reaction is likely to be essentially limited in scope and duration. Another, perhaps related, concern that might add support to alternative A has to do with the likelihood of unusually severe year-end financing pressures, especially for borrowing institutions not viewed as being of top-notch credit quality. Already some commercial banks have reported restricting their interbank lending to certain domestic institutions and to Japanese and, to a lesser extent, European counterparties generally. As Peter noted, banks also have tended to shorten the maturity of their interbank loans to overnight. In the commercial paper market, contracts extending over the turn of the year now embody a substantial interest rate premium. Although a policy easing may not appreciably affect the extent of year-end-related increases in rates on loans and securities in the money market, at a minimum it would lower the base interest rate levels on which those pressures would operate, muting some of the adverse effects on credit costs for affected parties. A phenomenon likely to be longer lasting is the firming of conditions on bank loans to nonfinancial borrowers. A large share of commercial bank respondents to the November Senior Loan Officer Opinion Survey reported tightening standards and terms for C&I loans to large- and middle-market businesses and for commercial real estate loans. Evidence also surfaced in that survey of some, though less pronounced, firming of standards and terms for small businesses. And large commercial banks on balance have seen an appreciable rise in their costs of funds in capital markets. The staff does not foresee much further deterioration of credit availability through banks, but the Committee may consider this possibility as a nontrivial risk to the economic outlook. Certainly, the episode of the early 1990s vividly demonstrated that a credit crunch can involve the banking sector and that aggressive easing can be a necessary monetary policy response. However, I think some important differences between that earlier episode and the present situation suggest that this credit influence could easily be overstated in today's context. Banks then were partly motivated to restrict their lending by impaired capital positions that needed rebuilding. Today, banks are generally much better capitalized. Then, actual loan growth was quite sluggish, while today it has been rapid. And, finally, then the growth of the broad monetary aggregates was anemic. Now, although admittedly the velocity of M2 has been dropping since mid-1997, the quite rapid growth of this aggregate, especially of late, is at least worth a passing mention. The strong growth of the monetary aggregates, including M3, may be suggestive of upside risks more broadly to the staff forecast, emphasis on which would enhance the attractiveness of alternative B. Even with an unchanged funds rate, financing conditions may normalize more promptly than in the staff forecast. Moreover, the possibility that a policy easing could spur a further run-up of equity prices--in contrast to the Greenbook forecast of a decline--that could combine with the recent rebound in consumer confidence to impart added impetus to spending, may strengthen the case for staying the Fed's hand at this meeting. Also, in light of the support package for Brazil and the recent narrowing of Brady spreads, the global financial crisis may mend more rapidly than we can reasonably assume now. For these and other reasons, the extent of the output slowdown that is predicted by the staff is not a foregone conclusion. Finally, the stronger-than-expected third-quarter employment cost index against the backdrop of still tight labor markets may be viewed as highlighting the risk of higher inflation. If the Committee places much weight on these considerations, it may wish to adopt a ""wait-and-see"" posture--standing pat until more actual evidence of a slowing economy shows itself. But given the staff's prediction that such a slowdown is impending, if the Committee chooses not to act today, it may still wish to maintain an asymmetric tilt toward ease. The Committee also may want to keep the tilt toward ease if it does decide to ease. Alternatively, it may judge that a prompt further easing would bring the risks to the economic outlook into balance. If so, the Committee may decide not to go on record as suggesting that further decreases in the funds rate are an especially likely prospect. Mr. Chairman, that concludes my briefing.",1605
-fomc-corpus,1998,"Thank you. Questions for David? If not, let me get started. This is a more difficult call than that at the last meeting. There is very little question that there has been considerable easing in a number of the areas where we are concerned. The one area where things have eased regrettably more than I would have liked is the stock market. In a certain sense that has created a major question in my judgment as to whether we should move. If the Dow Jones industrial average were 200 to 300 points lower, I think the case for moving one additional time and then putting policy on indefinite hold would be fairly strong for a number of the reasons that have already been discussed today, as well as additional ones that I would like to raise. I do not think that inflation has become a problem; if anything, it is the reverse. I do think the concerns about an asset bubble are not without validity, and that is where I have my greatest concerns about easing. Let me first, however, address the inflation issue. The crucial question we have to ask ourselves is how we should measure inflation. If we look at the core CPI, it has clearly accelerated in the last year or so and at the moment is running in the area of somewhat under a 2-1/2 percent annual rate. In contrast, the core PCE has been decelerating fairly dramatically and depending on whether we are using 3-month, 6-month, or 12-month rolling averages, the increase is barely more than 1 percent. More than half of the difference in these measures of core inflation reflects the difference in the weights for housing. As you know, owners' equivalent rent is over 20 percent of the CPI and total housing is close to 30 percent, as I recall. In the PCE, they are about half that. The difference occurs to a substantial extent as a consequence of two elements. First, the weight in the CPI is based on individuals' views of the potential rental value of the houses in which they live. In the PCE, it is derived from more detailed macro data. Second, the scope of the PCE is much broader in that it covers a much wider area of consumer expenditures and obviously, other things equal that would lower the weight for housing in the PCE. So even though the actual price changes for housing and owners' equivalent rent are close in both the PCE and the CPI, the mere difference in the weights and the fact that housing costs are rising faster than average has created a very dramatic widening in the spread between CPI core inflation and PCE core inflation, which now is 1-1/2 percentage points. I seriously question whether housing should be a component of any measure of underlying inflation. I don't want to get too involved in this, but I think all the other measures that we are looking at--the PPI, the intermediate prices, the commodity prices, the data from the purchasing managers--are all suggesting, in my judgment, that the inflation rate is still falling. To put it another way, the real funds rate is rising. When we look at the unit cost structure for nonfinancial corporations, which I have discussed on numerous occasions before, we get a similar story. Average hourly compensation for that sector, and that measure is more relevant than the ECI for the analysis of unit costs, has accelerated somewhat but so has output per hour for nonfinancial corporations. The consequence is that unit labor costs have been rising at a rate of less than 1-1/2 percent in recent quarters and total unit costs, which include declining unit nonlabor costs, have been increasing at a shade above 1 percent. With corporate prices generally stable, this implies a decline in profit margins. Indeed, the profit margin for the nonfinancial corporate sector has been declining over the past year. The importance of these data, as best I can judge, is that they suggest underlying inflationary forces are continuing to recede despite the tightness in labor markets. I would point out that there is very little evidence that those markets are tightening further at this time, but I also would not want to argue that we are seeing any significant labor market easing. The measure that I have found most useful recently in measuring the degree of labor market tightness, the sum of those who are unemployed and those who are not in the labor force but would like a job, fell quite rapidly from 1995 through 1997 but stabilized at the beginning of this year and since then has moved hardly at all. In addition, the diffusion indexes in the payroll employment series are clearly falling very sharply, suggesting that the recent slowdown has been widespread across industries. In any event, it is the case that the price pressures and the wage pressures are not behaving the way they have in the past under comparable circumstances. Something different is going on. It is this overall downward pressure, which I think is coming to a great extent from international forces, that clearly has undercut to a substantial extent the pricing power of manufacturing industries. As you know, these prices have been weakening quite measurably in recent months. I think the pressure on profit margins is beginning to affect capital investment. Many of the company executives to whom I speak and much of the secondary information that I pick up from a number of different company sources clearly indicate that there is a scaling back of capital appropriations. It is not very large as yet, but obviously something is very gradually exerting downward pressure. The underlying diminished growth, which I think is fundamentally being caused by the squeeze on margins, has not yet shown up in the consumer areas, as best I can judge. Consumer markets continue to be strong, and the wealth effect has not yet had a measurable damping effect. Motor vehicle sales, which were sharply higher in October largely because of incentives, have eased some this month, as Mike Moskow indicated. Officials from the auto companies whom we talked to the other day all suggested that sales are running below expectations, but I think their expectations are probably quite high. Having said all that, I think the likelihood that consumer spending will continue to grow rapidly is somewhat questionable. We do have a continued high level of housing sales; I see no real evidence that they are deteriorating, but there also is no evidence of a pickup. There has been some backing up of inventories. There also is the broad and very important question of the financial issues. It certainly is the case that yield spreads and risk aversion, which had been quite substantial through October and have eased quite measurably in the last several weeks, have stopped easing. In fact, there actually has been some minor upturn, especially on commercial paper, and I have run into the same issues that Bill McDonough has raised with respect to year-end effects. I think we are beginning to see some potential year-end effects emerging in the banking area. To be sure, the weakening in the availability of funds in the capital markets has spilled over into the commercial banking sector, and we have seen a very dramatic acceleration of C&I and other lending generally. A number of banks are quite unhappy about having to accommodate this additional loan demand largely because, as you know, they have backup lines on commercial paper that were issued and priced on the assumption that the lines would never be used. If you speak to banks, especially the money center banks, it is by no means clear that they are eager to accommodate the spillover in loan demand from the capital markets. As a consequence, I think the presumption that we are going to see a gradual return to full and fluid capital markets is only a hope at this stage and a hope that I don't think is about to materialize very quickly. I must say that the risks in the Brazil situation are significant. The meeting that occurred yesterday in New York seemed to suggest that the American banks were going to be helpful in stabilizing Brazil's funding. Having spoken to a number of them fairly recently, I have the impression that each will participate only if everyone else does. At the first sign that that will not the case, they will back off. I judge the risks here at close to 50/50, maybe a little less. I'm a shade less optimistic than Karen Johnson on this, but I grant that conditions have improved from where they were. Three weeks ago, I would have said that the Brazilian situation was really dangerous. Since then it has improved to close to 50/50 in my view, but it strikes me that maintaining the Brazilian exchange rate is going to be very difficult. An exchange rate that is under pressure from 40 or 30 percent interest rates, capital account deficits, and programs that are presumably very good on the fiscal side suggests that something is not right. I am a little concerned that we have not yet seen the worst of this. I agree with Mike Kelley on how one evaluates all of this. If we move rates down and we are wrong, it will be very easy to move them back up. With the inflation rates where they are and the real funds rate where it is, the question is more an issue of where the rate should be rather than whether it should be going up or down. As best I can judge, the funds rate that appears to be appropriate in current circumstances, with all the risks we have talked about, is closer to 4 percent than it is to 5 percent. My judgment at this stage--and I grant you that it is not a clear-cut call in all respects--is that if we hold steady at this time and things begin to deteriorate and we then move the funds rate down, we would look as though we are behind the curve and are reacting to events, and that could create a very unfavorable atmosphere in the marketplace. I see very little risk in moving down another 25 basis points today, provided we indicate that we are on hold. I think the clear thing to do at this point is to move down and go symmetric, largely because the economy is in fact doing reasonably well. The extent of deterioration is modest. I believe we are moving to a slower path of economic growth and a potentially less inflationary environment, but there could be a far more deleterious outcome ahead and I agree with many of you that a little insurance at this stage is probably wise. The cost of the insurance is very small, and I suspect it is probably not a bad thing at this stage to take out the insurance but then to stop at that point, stay on hold, and watch events as they materialize over the weeks and possibly even months ahead. At that point, we would be poised to move rates lower if necessary, but there is no obvious need in my judgment to be assuming such a move at this time. Vice Chairman.",2165
-fomc-corpus,1998,"Thank you, Mr. Chairman. I agree fully and rather enthusiastically with your recommendation. One might wonder why those of us who have talked about year-end pressures would find symmetry appropriate. The reason I do is that if we have severe year-end pressures and have to react, the need would be so obvious that there would not be a whole lot of debate. I am hopeful that that will not be necessary. Therefore, I think symmetry is the right answer.",92
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I agree with you that this is a tough call but let me just get the other point of view on the table. As I see it after listening to all of this, there are two principal arguments for easing policy today. One is the downside risks in the economy, the possibility that the actual outcome will be weaker than the Greenbook projection. The other is the need to act to prevent a reemergence of the extreme risk aversion of a few weeks ago. I just respectfully do not believe that either of those two arguments is very compelling today. They may be compelling a few weeks down the road but not today. It seems to me that recent developments and a lot that we have heard around the table this morning suggest that growth may decelerate to trend rather than below trend as in the Greenbook. On the other point, it seems to me that the financial system is adjusting, as a number of people have said, and working reasonably well. In a situation like this, there is always a tremendous bias and pressure on the Fed to do something. But I would point out that we are already doing something even if we don't reduce the funds rate today. Just given the way we operate, we are providing additional liquidity to meet the additional demand for it and at a 50 basis point lower price than that liquidity was being provided just a few weeks ago. One other point I would make is that I see some risk in moving today because it is always difficult to tighten monetary policy. With all respect, I think it might be difficult to change our policy course and it might be hard to do it as quickly as we would like. Given all of that, I would have a strong preference for alternative B.",349
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I support both halves of your recommendation. I believe that we have achieved much of our goals from the two earlier policy easings. Credit market conditions have improved but are probably not normal. Just to follow up on what President Broaddus had to say, some may ask why we should not wait until December, given the possibility of further improvement. My answer to that question is that if we do not take this opportunity to complete our work, we risk losing the advantage that we have now. I am concerned that if we do not act, the markets may return to their very disturbed state of a few weeks ago. That would then require us to adjust policy, perhaps by larger amounts and perhaps again in an intermeeting move. If contrary to my expectation, the easing proves to be premature, I do think we can undo it. I believe the move to symmetry is an important internal signal that we are prepared to go either way if the facts so indicate. That is why I support symmetry as well. Finally, as you have pointed out, given the direction of inflation, we perhaps have tightened passively. The tightening was appropriate earlier in the year, but I am now in favor of the proposed easing and moving to symmetry.",249
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"As I noted in my earlier comments, after a difficult balancing process in thinking about this, I came to this meeting clearly in favor of waiting to see what happens for the rest of this quarter and considering a possible move in December. I have listened very carefully to all of the arguments. I do believe that we face some risks that relate to the ebullience in the stock market and the feedback from rising levels of stock market prices into consumer confidence and spending. Sooner or later, that is going to come to a halt. I think we are all in agreement on that. The prospects for profit margins just are not where they were earlier in this cycle. Sooner or later, reason is going to prevail. Governor Kelley's comments earlier on that topic were right along the line of my thinking. If the stock market does not go a whole lot higher, we are better off than if it does because eventually the rise will come to a halt and the overall impact on the economy will be worse at that time. So, I think that is one of the risks we face if we move at a time when a lot of the basic signals from the domestic economy, the real economy, are showing resilience if not strength, which almost everybody has commented on. I also think that almost everything that has happened since our last monetary policy move--the intermeeting ease that I think was extremely well done in the sense of getting the markets to function better than they were--has been on the positive side. It seems a little strange at this point to be thinking about a further easing of policy against a lot of the positive developments, although all of them involve a significant degree of downside risk. I see a process where easing now creates a risk in the short term that things could get a little beyond us. Whereas over the longer term, if the slowdown in the expansion occurs and if financial conditions turn more negative than we expect, we might see more of a downward ratcheting of the economy than if we had not moved. Those are my basic concerns. My thinking is more in line with that of President Broaddus, but I am not going to dissent because I think it's a close call. The people who are closer to the markets than I are worried about year-end financing and overall fragility and uncertainty, and I know that has been factored into your thinking as well, Mr. Chairman. There is something to be listened to there, so I will support your proposal to ease, but I am nervous about it.",505
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. It seems to me that we have been playing catch-up to a discrete change in the outlook. The question today is whether we have caught up, and if not, whether we should complete the likely further move sooner rather than later. It is clear from the discussion around the table today that it is a close call. On balance, my judgment is that another quarter point move would complete what I think would be an appropriate adjustment to the discrete change in the outlook. Because the slowdown is projected to be around the corner, a case can be made that the additional easing should be sooner rather than later. These considerations lead me to support your recommendation, Mr. Chairman, to cut the funds rate a quarter point today and return to a symmetric directive. The move to a symmetric directive signals the pause that I believe is in order after the move and highlights the possibility that the move may have completed an appropriate response to the change in the outlook.",193
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation of both the 25 basis point cut and the move to a symmetric directive. I don't have much to add to the discussion, but I would like to emphasize the point that it is important for us to stay ahead of the game, and I think this does it.",62
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I support your recommendation. In the interest of time, I associate myself with the remarks of Governor Ferguson.",21
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, as I mentioned in my comments, I think the risks clearly are on the downside. I agree with others that this is a close call. Coming into the meeting I agonized over this, but I came to the conclusion that we are either going to move now or in December. It is difficult to imagine that real growth in 1999 is going to reignite to any unsustainable rate, but it is relatively easy to imagine scenarios where growth is going to slow abruptly. So, I felt that we definitely would move at one of these two meetings, and therefore we might as well do it now. I don't see any reason to wait. Inflationary pressures appear to be modest. There is an opportunity to balance the risks now by lowering the funds rate by 25 basis points. When I add in the Brazil risk, which I am very concerned about, I agree completely with your recommendation on both counts, for a 25 basis point reduction and a symmetrical directive.",198
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I would prefer to leave the funds rate unchanged at the present time for a couple of reasons. First, despite the forecast to the contrary, the economy continued to show some strength in the third quarter, and the few available monthly data that we have for the current quarter indicate solid growth. Second, I believe that the chance of a recession or major slowdown in the economy in the quarters ahead has been significantly reduced by recent financial developments, including the two federal funds rate cuts. I recognize that prospects for our economy could change rather suddenly given the continuing vulnerability of our financial markets and of many foreign economies. While this could require another change in policy in the near future, I would prefer to retain the 5 percent funds rate for now along with the asymmetry toward easing.",157
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Mr. Chairman, I support both parts of your recommendation. In the interest of lunch, I will not elaborate.",23
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Me, too! [Laughter]",8
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"Mr. Chairman, I will support your recommendation, but with considerable reluctance. I think this is another example where immediate disclosure of our decision on symmetry would be very useful to us in terms of providing a signal to the markets. I fear that the markets will interpret this adjustment as another in a string of easing actions yet to come. I would hope that along the way in coming weeks, when the time seems appropriate and the market tone seems acceptable, you could indicate to the market that it looks as if our easing is finished for the time being, whatever is the right way to do that. I think this is a case where disclosure would help the Committee. I am concerned that we are pouring gasoline rather than water onto this economy. The fact that the growth of money is unexplained is not a great comfort to me. It would help if we could explain what is going on by pointing to some statistical anomalies, to some institutional changes, to money going abroad, or to whatever, but the fact is we cannot come up with any good explanation. I fear we may be pouring a great deal of liquidity into an economy that is bound to be slowing anyway for the reasons that I talked about earlier. The economy currently is fully employed, its growth rate needs to be a little slower, and therefore I am not at all concerned about the forecast of slower growth. If it comes true, that is going to be very good news.",286
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"Mr. Chairman, I have a mild preference for alternative B for two reasons. First, I consider the case for alternative A far from overwhelming. Secondly, I think there is something to be said at this stage for patience, not necessarily for patience's sake but because the next meeting is only five weeks away and because we want to make sure that any action we take will be consistent with our long-run objectives.",82
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"For the reasons that several people have stated, I think it would be better to wait.",18
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, although I understand your arguments, I too would be most comfortable with no policy change today. Respecting the clock, I will not repeat the arguments that Presidents Broaddus and Minehan made. I want to underscore the point that President Poole made, wishing that we had had our discussion about an early announcement so that we could tell the world that a symmetric directive is in place. Thank you.",84
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, for reasons that others have cited, my preference would be to wait. I think President Poole said it best, that we could be pouring gasoline on this economy. I have concerns that a bubble economy syndrome may be building. I believe it was in place before the more recent events, and I think it may again come into being as a factor. You mentioned the stock market, and that gives me real pause. However, like others, I am not going to dissent for several of the reasons that they gave. One, the point you made, is that I do not see inflation as an immediate threat. Secondly, I understand the international circumstances that we face; I'm not sure this easing move is going to make a whole lot of difference to those circumstances, but we will see. Thirdly, I might hold others to their statement that if this easing does prove to be more than we need, we will be firm in our resolve to move back if that is called for.",200
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I unequivocally support your recommendation, but I must say that I have a lot of sympathy with the views of those who would prefer to maintain a steady policy.",37
-fomc-corpus,1998,"Okay, I think we have a majority for ""A"" symmetric, 25 basis points.",19
-fomc-corpus,1998,"I have a question, Mr. Chairman, regarding the final sentence.",14
-fomc-corpus,1998,"David Lindsey, we are still using the old directive. Do we still want to use the word ""moderation""?",23
-fomc-corpus,1998,"""Moderate"" instead of ""some moderation""?",10
-fomc-corpus,1998,"No, I would stick with the language we have been using, ""some moderation."" That is the staff forecast for coming months.",26
-fomc-corpus,1998,Less immoderate? [Laughter],9
-fomc-corpus,1998,"The directive language is: ""In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with decreasing the federal funds rate to an average of around 4-3/4 percent. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a slightly higher federal funds rate or a slightly lower federal funds rate would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in growth in M2 and M3 over coming months.""",120
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan No Governor Kelley Yes Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes,43
-fomc-corpus,1998,"I put together some words just in case we needed a press release. I tried to suggest that we have gone as far as we are going to go. Let me just read it to you quickly. ""Although conditions in financial markets have settled down materially since mid-October, unusual strains remain. With the 75 basis point decline in the federal funds rate since September, financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued."" That is Fed language for symmetric. The next meeting is on December 22. The Federal Reserve Board should retire to my office and make a decision on the discount rate. Afterward, we will go directly to lunch.",139
-fomc-corpus,1998,"A housekeeping item: We are releasing the minutes of the November meeting tomorrow, I believe.",18
-fomc-corpus,1998,"Tomorrow at 2:00 p.m., yes.",11
-fomc-corpus,1998,They are being released earlier than is our usual practice partly because of Christmas and partly because of coordination with the other central banks on the swap issue that we have discussed previously. Would somebody like to move the minutes of the November 17 meeting?,48
-fomc-corpus,1998,So move.,3
-fomc-corpus,1998,Without objection. Peter.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. I will be referring to the four pages of colored charts you should find in front of you. 1/ Beginning on the first page with the deposit rates, you can see by the red lines in the top panel that the U.S. forward rates are little changed since your last meeting. But it is worth noting that both the 3-month and the 9-month forward rates continue to trade below the current 3-month deposit rate, suggesting some expectation of an ease coming in the first half of next year, but without much specificity to it. The two forward rates are trading on top of one another, so it does not look as if they imply a series of easings, but some further easing seems to be priced in here. Looking at the German forward rates, you can see that those rates partially anticipated, in late November and into early December, the December 3 rd Euroland rate cut. And the forward rates continued to drift a little lower after that. Also, the forward rates in Germany are trading below the current 3-month rate, suggesting again some expectation of an easing in the coming year. You can't see it in this chart, but let me note that there is very little evidence of greater year-end pressure this year than last year in German funding markets. It does seem to be worth noting, given the coming of the euro that the markets do not seem to have priced in any extraordinary year-end effect. That is also in contrast to the pronounced year-end effect we are seeing already for the year after next--for the year 2000. So there's not much special pressure in German funding markets surrounding the anticipation of the euro. In the bottom panel showing the Japanese rates, you can see that on this scale, which is comparable to the top two panels, the deposit rates show a barely detectable rise. But, as small as it is here on this chart, by Japanese standards this really is noticeable. Let me say that I think we have found too many, rather than too few, explanations for this gentle backing up in Japanese money market rates: whether it's that the economy is expected to bottom out in the first half of the year or that the yields on Japanese government bonds (JGBs) are backing up, as I will get to in a moment, or that the Bank of Japan is not being quite so generous in its provision of reserves. None of the explanations is entirely satisfactory to me, but there clearly has been a gradual backup in Japanese money market rates. Turning to the second page, the three panels give something of a review of the last six months in financial markets. In the top panel, we have major exchange rate pairs indexed to 100 as of July 1 st . It shows marks per dollar, yen per mark, and yen per dollar, and their percentage change over the last six months. In the middle panel are the three major equity indices, also indexed to July 1st at 100. In the bottom panel, for the moment please ignore the red line which depicts the JGB yield; I will come back to that shortly. But the other three colored lines in that bottom panel show various spreads as they have traded from July to the present. My point in bringing these three panels together is to show that there were really two very distinct episodes of delevering, which occurred roughly in the weeks following the Committee's August and September meetings. There has been a third more modest delevering event in the last few weeks associated with the year-end. The very pronounced decline in both the mark and the dollar against the yen seen in the top panel coincided with the significant turmoil in early October. You can see in the bottom panel that the three triangles point to the peak spreads reached also early in October. In the middle panel you can see where equity markets, at least in Germany and Japan, reached their nadirs during that period, and the Dow almost reached its nadir and began coming back. More recently, there has been some gradual decline in the dollar against the yen, but it has been relatively muted, more or less associated with year-end thinness, with some reversal of that move in the last day or so. Also in the bottom panel you can see that swap spreads and the on-the-run/off-the-run spread have backed up a little. I would emphasize the thinness of markets rather than anything else here. But in the middle panel you can see the somewhat manic behavior of our equity markets. It seems to me rather pronounced and in contrast to the events in the other markets. Focusing now on the red line in the bottom panel, which depicts the benchmark Japanese government bond yield, in the last few days--and since your last meeting in fact--there has been an extraordinary backup in this yield. The bond was trading at a yield of around 80 basis points at the time of your last meeting or just before. It traded at 150 basis points yesterday. It was off a further 40 basis points earlier today, or up to 190. It has come back a little from that level, having traded the limit down today both in the Tokyo and London futures markets, and it is now at about 180 basis points. The Japanese government first began leaking and then yesterday announced its borrowing plans for the coming year, which in their forecast will amount to roughly a 65 percent increase in the amount of Japanese government bonds to be absorbed by the public portfolio--that is, by private sector demand. The bond market has begun to price this in. Back in September Japanese banks were given a choice by the Ministry of Finance either to treat their bonds on a mark-to-market or on an original cost basis. Most of the banks, virtually all, elected to do it on an original cost basis. In my view, that simply is going to delay the day of reckoning as yields back up, given that the holdings of JGBs on the balance sheets of all kinds of financial intermediaries are rather significant as a credit substitute. As the yields back up and approach the average cost of any one institution's JGBs, that institution will have an extraordinary incentive to sell out its positions. That already seems to be under way and is providing something of a continuing accelerator for the backup in Japanese government bonds. Given the extraordinary scope of this backup in just a couple of days, I think it is reasonable that the U.S. and European bond markets have been backing up a little, as Japanese accounts experiencing these losses are off-loading some of their holdings of U.S. and other fixed-income instruments. Now, all this is in anticipation of the rather exciting year Japanese government bond markets are going to have in 1999, so we have that to look forward to. We in all likelihood have the specter, in my humble opinion, of the Ministry of Finance trying to change the accounting rules again at the end of the fiscal year if these losses become too extreme on insurance company and bank balance sheets. Turning to domestic operations on the next page, the funds market has been a little less stable than normal, but there has been some improvement over the last intermeeting period in terms of some reduction in the extreme volatility. This chart is similar to the one I presented at your last meeting. On the vertical axis are the basis points contained within one standard deviation of the daily trading range, and on the horizontal axis is the basis point variation of the daily effective rate from the target. The hollow dots represent observations in the intermeeting period between your September and November meetings. The filled in dots represent days since your last meeting. And as I did last time, I have summarized in the lower left-hand box the results, roughly speaking, against the benchmark period of the prior year before August. As you can see, while we had fewer days with very low volatility, where trading was in a tight range around the expected rate, we had roughly the same number of days within the 50 percent box. Without counting the dots, let me point out a different way of looking at this. In the September-to-November period, fully 1/3 of the days observed had a standard deviation of greater than .4, whereas in the more recent period only 1/6 of the days had a standard deviation of more than .4. So we haven't come to the point of a quiet market, but we have reduced some of the extreme volatility. I think this has been caused by a reduction in credit concerns and some greater access to term funding markets, which have opened up to a wider number of participants. Also, early in this intermeeting period we leaned rather heavily against firmness, being quite generous in our reserve-supplying operations, and when we began to take that away from the market, it actually took the market a while to figure that out. They assumed, perhaps, that we were being more generous than we in fact were. On the last page I have shown the comparable data for the same period exactly one year ago. I would note that the red dots represent the days with high payment flows--tax payment dates, bond settlement dates, or maintenance period settlement dates. They are really the days when one would expect to see the higher volatility, and that is what we see here. In the 1997 period the dots on normal days are much more densely clustered than in the comparable period this year, where we see a mix of blue and red dots at the higher volatilities, indicating the higher volatility we still are facing. But I think that has calmed down somewhat. Let me note that we did conduct a pass to purchase indexed securities and we also undertook three longer-term repo operations. These elicited relatively little market reaction and went much as I had hoped. We already have $12 billion in repos on the books for the turn of the year, which will help us unwind automatically as reserve needs diminish after the peak year-end period. Mr. Chairman, we had no foreign exchange intervention operations during the period. We have completed the renewal of our swap arrangements with our Mexican and Canadian colleagues, but all our other swap arrangements have lapsed. I will need two votes, however. I have circulated to the Committee a request to add the euro to the currencies in which we are authorized to operate. I would propose to come back to you at a meeting early in the new year to discuss removing the legacy currencies. But for the moment I thought we would leave those alone. So, I am seeking a vote to add the euro to the foreign currency authorization. I will also need ratification of our domestic operations. I would be happy to answer any questions.",2145
-fomc-corpus,1998,"Let me go back to the issue that you mentioned with respect to the incentives of Japanese banks to sell their JGBs. The banks are carrying them at book and they are engendering very large capital losses. Those losses are not being charged against capital, but would be if the JGBs were sold before maturity. I didn't quite get the point that you were making.",76
-fomc-corpus,1998,"My understanding is that once the price of the JGBs declines below the cost at which they were purchased, the banks will have to recognize a loss.",31
-fomc-corpus,1998,Is it cost or market or both?,8
-fomc-corpus,1998,"It is cost or market, whichever they chose. They were given a choice. Virtually all chose cost. I may be wrong, but I went over this with the Ministry of Finance representative in New York just yesterday, and my understanding is that once the market price reaches cost, the banks will then have to recognize a loss.",66
-fomc-corpus,1998,"That is the old-fashioned market or cost basis if it's below market. Once they reach cost, it becomes a loss.",24
-fomc-corpus,1998,"That's right. But I think the way they will view this is not on a bond-for-bond basis. They will look at the average cost of their JGB portfolio. And as the market price approaches that level, they will want to be liquidating the portfolio before the breakeven point is pierced.",62
-fomc-corpus,1998,Why? I can see it on a bond-by-bond basis. They may have a different way of keeping their books. We do it bond-by-bond; you are saying they do not.,40
-fomc-corpus,1998,"I think there may be a distinction. The accounting probably is bond-by-bond. But if you are managing the portfolio, you are going to say: ""It is approaching breakeven so I better get rid of it."" I think the accounting would be the way you described, but the managerial approach would be to bunch these securities.",68
-fomc-corpus,1998,"It is poor management if I understand what they are trying to do, which is to hide their losses.",21
-fomc-corpus,1998,"Well, would it surprise you if that were--",10
-fomc-corpus,1998,"I won't comment on that! On a seemingly related subject, I noticed that in the bottom graph on page 2 you show the U.S. 10-year swap spread over Treasuries, which is somewhat more than 80 basis points. In Britain it is also about the same order of magnitude. On the continent, as I recall, it is about 30 basis points. Does this reflect a presumption in the market that there is more sovereign backing of commercial bank liabilities on the continent than either here or in Britain? If that is not the answer, why is there such a significant difference in spreads?",123
-fomc-corpus,1998,"I have not found an acceptable explanation of that myself. It is something I have tried to follow. So my first response is that I see it as a bit of a mystery. I think it's especially a mystery if you realize that these swap spreads, as most of us measure them, are from a common panel of major international banks. So the difference in spreads should be a credit issue, but it is hard to pull that out when one is looking at a common panel of global players who are the ones we look to for quotes on these swap spreads. That mean that is somehow embedded in--I don't even know how to express it. No term comes to mind to express this; I'm at a loss.",142
-fomc-corpus,1998,"There has to be an answer because somebody is bidding 30 basis points for one and 80 basis points for another, which suggests that they see a difference and are doing it for a reason.",39
-fomc-corpus,1998,There are some in the market who think that European central banks are active in this market.,18
-fomc-corpus,1998,That is a potential explanation.,6
-fomc-corpus,1998,"Yes, that would be.",6
-fomc-corpus,1998,That goes to the sovereign credit issue.,8
-fomc-corpus,1998,"It is coming in through the demand side rather than the supply side, if you will. But I have not interrogated my foreign central bank counterparts enough to determine this.",34
-fomc-corpus,1998,"If you have a chance, could you track it down?",12
-fomc-corpus,1998,"Yes, I may be able to do so.",10
-fomc-corpus,1998,"The only reason I raise the issue is that it may be telling us something about the issue of subsidization in the system, which is a useful insight if proven.",33
-fomc-corpus,1998,"Yes, we will try to look into that further.",11
-fomc-corpus,1998,Any further questions?,4
-fomc-corpus,1998,Is this the appropriate time to bring up the issue of indexed bonds that we talked about last time?,20
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,"I happened to be on the morning call when the Desk first bought indexed bonds, and there was a very large reaction in the marketplace. It seems to me that this experience raises the question that I brought up before, about whether we should be buying indexed bonds for the FOMC portfolio. I am still opposed to it. In my view it produced a substantial change in the yields when we went in that day. I think our operations in this market are going to muddy the interpretation of the information we can get from the market.",106
-fomc-corpus,1998,"You saw a rather significant 1-hour reaction, President Poole. I think the 1-day and 3-day and 3-week reaction was rather muted. So, my first point is that trying to measure this on a minute-by-minute basis involves working with too short a time horizon. My second point is that I really do not understand the logic of your position. We are active occasionally in purchasing securities on the other side of this spread whose purity you care about; we purchase 30-year and 10-year and 5-year nominal bonds. If what you care about is the clarity of the spread, the logical position is that we should operate either on both sides of that spread or on neither. I do not see the logic in suggesting that we should operate on only one side of the spread. I view the market reaction to which you refer as a short-term reaction to our first purchases of these securities. I would expect an abrupt reaction on the first day we operate in any new area of the market. But I think it largely disappeared and was very hard to find on subsequent days.",220
-fomc-corpus,1998,"On the first day--not just the first hour, but the first day--the longest indexed bond, which I believe is the one that we purchased, was up 16/32. The neighboring bonds were down 12/32, 14/32, 19/32, and 20/32. In the general market that particular day the non-indexed conventional bonds also were dropping in price. As I understand the process, when the Desk is going to buy securities in the secondary market for the System portfolio, it asks for propositions from the market. And it is your standard practice to look for the propositions that are attractively priced from our perspective, and that means the ones that are a little out of line on the general yield curve. Would that be a correct interpretation of what you do?",163
-fomc-corpus,1998,That is one thing we look at; it is not the only thing. We are also looking at our holdings of securities and trying to keep a balanced portfolio across the whole yield curve. That is really the first order of importance.,46
-fomc-corpus,1998,"Okay. I can understand picking up some that are trading at a peculiar price relative to the adjacent issues, but you can't make that decision on the indexed bond without taking a view as to what the relationship between the indexed bond and the conventional bond would be.",51
-fomc-corpus,1998,"No, I disagree with you completely on that. That is precisely why I wanted to do a TIPS-only pass: So the only relative value statement we would be making would be vis-a-vis other TIPS issues. Thus, when we purchased TIPS I would make a judgment as to the rough order of magnitude, how many hundreds of millions should be purchased. Then the traders' judgments are restricted to making a relative value choice across the range of TIPS propositions they are given. That's precisely so we will not be making a comment on the appropriate spread relative to the nominal yield.",117
-fomc-corpus,1998,"Mr. Chairman, I will only note that I am not convinced by the argument.",17
-fomc-corpus,1998,"Let me suggest this: Why don't the two of you have a bilateral discussion and if you can add any additional light, report it to the rest of us.",32
-fomc-corpus,1998,That is certainly a reasonable proposition. Thank you.,10
-fomc-corpus,1998,Any further questions?,4
-fomc-corpus,1998,Move approval of the Desk's actions and adding the euro to the current list of designated currencies.,19
-fomc-corpus,1998,Without objection I assume approval of both. We now move on to Karen Johnson and Mike Prell.,20
-fomc-corpus,1998,"We received October trade data after the Greenbook forecast was prepared, so I would like to start by describing the implications of those data for our understanding of the foreign sector during the current quarter. Both exports and imports surprised us on the upside, but the surprise was significantly greater for exports. In terms of trade categories, exports of machinery--other than computers--and industrial supplies both surprised us by the size of their increases. The miss was not in aircraft or other items where large-size transactions can introduce noise into monthly data. This surprising strength in exports may be a signal that recovery is proceeding a bit more rapidly in some parts of the world than we have allowed for in the forecast, but we have no direct evidence of that yet and hesitate to put too much weight on one month's trade data. The October data nevertheless lead us to expect fairly robust growth of exports in the fourth quarter, after three quarters of decline. Combining stronger exports with a small revision to our outlook for imports results in a downward revision to our estimate for the quarter of the negative contribution of net exports to U.S. GDP growth from 0.7 percent at an annual rate to 0.3 percent. For 1999 and 2000, we still look for the drag from net exports to ease from about 1/2percentage point next year to close to 1/4percentage point in 2000 after an estimated 1 percentage points for this year as a whole. Our expectation that the drag exerted on real GDP growth by the external sector will diminish over the forecast period depends importantly on the modest rebound of exports that we are forecasting. The impetus for that rebound lies partly in the waning effects of past dollar appreciation and partly in the strengthening we anticipate in average foreign output growth, which has been exceptionally weak in 1998. In the Greenbook, the recovery in foreign growth entails a return to low but positive growth in the developing countries of Asia, some slowing in Latin America but not collapse, and a substantial reduction in the rate of decline in output in Japan. For each of these regions, our forecast is relatively conservative in that it is less optimistic than is the latest consensus forecast. As in November, our outlook for developments abroad incorporates the assumption that the international financial package put together for Brazil, including successful implementation of the macroeconomic policies laid out in the IMF program, restores market confidence. As a consequence, although real activity in Brazil declines sharply, the Brazilian exchange rate regime remains in place and contagion to other economies in the region or elsewhere is kept to a minimum. As we indicated in the Greenbook, we view the risks to this baseline forecast of a less favorable outcome in Brazil as somewhat greater now in light of the failure of the Brazilian Congress to pass all the elements of a public sector pension reform package put before it earlier this month. Moreover, capital continues to flow out of Brazil on a net basis most days. Last week, Brazil made an initial drawing on both the funds available through the IMF program and the funds available on a bilateral basis, for a total of just over $9 billion. These resources have been added to Brazil's international reserves. The Brazilian government has announced its intention to resubmit to the Congress next year the measures that did not pass in December and to proceed to implement the other elements of the IMF program. We look for those steps to put a halt to private net capital outflows and to contribute to improved financial market conditions, but we recognize that a return to crisis conditions in Brazil, and spillover to Argentina, Mexico, and other emerging markets, is still a distinct possibility. For that reason, we again included in the Greenbook an alternative scenario that incorporates a more pessimistic projection for Brazil, including a break in the exchange rate regime and the spread of contagion in Latin America. That scenario implies that U.S. real GDP growth would be 1/22 to 3/4 percentage point lower in 1999 and 2000, respectively. Mr. Prell will continue our presentation.",810
-fomc-corpus,1998,"As Karen noted, the October trade report seems to point to a considerably higher level of net exports than was built into our Greenbook estimate of real GDP growth in the current quarter. However, yesterday we received the Monthly Treasury Statement (MTS) for November, and it points to lower federal purchases than we were expecting. The two adjustments are almost offsetting, leaving us now just a hair above the 3.1 percent GDP figure in last Wednesday's Greenbook. That said, activity this quarter appears once again to have surpassed our previous forecasts. What is the explanation this time? Unfortunately, I can't give as neat an answer as I would like. Clearly, one piece of the story is our earlier underestimation of the rise in motor vehicle production, which accounts for about half the extra growth of GDP in the current quarter. Some of this reflects the automakers' competition for retail market share, but heavy trucks have been strong, too. Another piece of the story is that, while we thought that homebuilders had a sizable backlog of demand to meet, we couldn't foresee that the weather would be as cooperative as it has been. Builders have been able to keep workers on construction sites, avoiding a good part of the normal seasonal downswing in activity. Of course, the fact that this Committee chose to ease policy faster than we'd assumed hasn't hurt either the auto or the housing markets. Beyond that, though, things get murkier. That's partly because of the incoherence of the current picture in the industrial sector, outside of motor vehicles. In particular, one might think from many company reports and surveys that the output of other manufacturers would be weaker than our industrial production estimates show them to be. But, to deepen the mystery, the IP data themselves are weaker over the second half of this year than would be suggested by the corresponding expenditure components of GDP. Perhaps subsequent data will narrow these gaps, but for now all this raises some question about just how strong the economy has been of late and it makes it more difficult to get a handle on the dynamics of the situation. That brings me to the prospects for the further slowing of GDP growth in 1999. As you know, we're putting a lot of weight on the notion that accelerator effects should be shifting into reverse over the coming quarters. That is, the flatness of output growth for a while now implies that we should expect the level of investment to tend to stabilize. As the perceptions of businesses and households regarding the prospects for their sales and incomes moved up in recent years, they presumably wanted to expand their stocks of capital goods to levels that would help provide the larger flows of production and consumption services. Spending on business equipment, houses, and consumer durables consequently rose markedly. At this point, though, such spending is so high that, even if it leveled off, the net additions to the stocks of these goods would remain substantial. For producer and consumer durables, declining relative prices likely will continue to elevate desired ratios of capital to output, but we doubt that it will be by enough to override this basic accelerator mechanism. How can we be sure that this pattern will play out in the near term? We can't be. But the evidence of low capacity utilization and profit compression in many segments of manufacturing gives some concreteness to this model, and reports of companies actually planning to trim their capital outlays or seeking to take out capacity through mergers do give some credibility to the prediction. One might even be tempted to argue that the recent upside surprises in investment expenditures reinforce the case for anticipating a moderation going forward because they have further elevated the rate of capital accumulation. However, there are a couple of obvious retorts to this assertion. First, the mere fact that there have been surprises in investment spending underscores the imprecision of this analysis. It's not easy to gauge the desired stocks and the time profile of the adjustment processes. Second, the desired stocks can change over time for a variety of reasons. Among them are changes in the cost of capital or in household wealth, and in this regard the behavior of the equity markets has repeatedly confounded us in our forecasts. The stock market remains a major wild card in the outlook. Heartened at least in part by what has been viewed as a supportive Fed, investors have been willing to stick with equities even as corporate earnings have declined. PE ratios have reached very high levels. Neither our earnings forecast nor our interest rate forecast would seem to justify a further rise in share prices over the next couple of years, and thus we're expecting that wealth effects will ebb, taking a good deal of the steam out of aggregate demand. The behavior of stocks like eBay and Amazon.com might suggest that we're applying an obsolete paradigm for share valuation. But, it may be noted that the market as a whole really hasn't made much further headway on net since the early spring, when the year-on-year profit comparisons began to turn negative. We're essentially predicting that share prices will continue to fluctuate around the average level that has prevailed since that time. A continuation of crummy earnings and poor returns might provide the basis for a deeper market correction, but we're hesitant to predict it when the market has shown such a capacity for levitation and when we aren't anticipating any monetary policy tightening. Indeed, as our selection of alternative simulations in the Greenbook suggested, we wouldn't rule out a further rise in share prices, and another year or two of double-digit increases could trump the reverse accelerator effects that are key to our forecast. The market surge of the past three trading days is perhaps a sign in that regard. Finally, a few words about the supply side of our forecast: The recent upside surprise in GDP growth does not appear to reflect any unexpected improvement in productivity trends. Rather, what we've seen has been consistent with the trend we have been assuming. So, going forward, our higher output path has translated into a lower unemployment rate. We've raised our inflation forecast, but not quite commensurately. Recent news on wages and prices has been favorable, even in the face of tighter labor markets and higher capacity utilization rates than we had anticipated would be prevailing. In addition, the prices of oil and other raw materials have fallen out of bed recently, and these lower input costs will be passing through the production pipeline for a while, in the process helping to hold down inflation expectations. One might question whether this commodity deflation is an unalloyed blessing in terms of international economic stability, but it is one more timely shock helping to check inflation here. That completes our presentation, Mr. Chairman.",1314
-fomc-corpus,1998,"Karen, am I correct in assuming that the imports into the United States have been tracking under what our models would have suggested?",25
-fomc-corpus,1998,"Yes, but not by much. The import equation has been doing fairly well.",16
-fomc-corpus,1998,So there is no evidence at this stage that the differences between income elasticities on the export and import side are showing any change from what we have seen over the years?,34
-fomc-corpus,1998,"Not convincing evidence yet, no. The thought is in my mind, given the enormous changes in potential GDP growth everywhere. The fact that we see potential in the United States going up--and we certainly have written down the potential for Japan and other countries a great deal--suggests that whatever the deeply embedded fundamentals that give rise to these elasticities are, they may be changing, too. We can look at that question again, but there is nothing about the past six months or so of data that would cause one to think that that must be happening.",111
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, I have a comment and a question. First the comment: Karen, I would like to thank you for the memo on China that was done by John Fernald. It was very responsive to the questions I raised at the last meeting and also provided a lot of good information. It explained why China has performed better over this period, particularly since July of 1997. If any of my colleagues have not had an opportunity to read the memo, I would highly recommend it. Second, in Part II of the Greenbook there was reference to an attempt by Boeing to make a lot of deliveries in the month of December. My recollection from the past has been that at times that has had impacts both on production and certainly on the composition of GDP, particularly if a lot of those deliveries were to foreign buyers. Can you tell me what some of the effects of that are likely to be and if they are included in the fourth-quarter numbers?",192
-fomc-corpus,1998,"We try to track their production and delivery plans as closely as possible, with the help of some inside contacts. One of the uncertainties at this point is whether, indeed, they will be able to make the volume of deliveries to foreign customers that they hoped to make, because there seem to be financing problems still to be worked out.",66
-fomc-corpus,1998,So they end up in inventory?,7
-fomc-corpus,1998,"They have been in inventory. We think those inventories are being reduced in this quarter, and that is part of our forecast. There is coherence in our arithmetic. In fact, in the ultimate GDP numbers--when we try to sort through all of this--we can't find the coherence that we have as we put these numbers together ourselves. So ex post, it is very hard to trace.",78
-fomc-corpus,1998,Right.,2
-fomc-corpus,1998,"But, in terms of our forecast, we have taken into account their production intentions and their delivery patterns.",21
-fomc-corpus,1998,They are one of the few companies where a change in their sales can show up in the GDP numbers.,21
-fomc-corpus,1998,"It is potentially significant on a quarter-to-quarter basis. I think we sometimes overestimate the importance of aircraft in total producers' durable expenditures in the United States, but certainly it can be a significant quarter-to-quarter swing factor.",45
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"We had several area academic economists in for a meeting a week or so ago, including some from M.I.T. and Harvard, and I had some people from the investment community in for breakfast earlier this week. Almost everybody's projection for the fourth quarter is well above 3.1 percent. Many are hedging their bets, saying fourth-quarter growth is likely to be in the 3-1/2 to 4-1/2 percent range. But at least a couple of people who usually are on track on this had point projections above 4 percent. I wonder what you think about that type of projection and what it means for early 1999.",134
-fomc-corpus,1998,"There is a lot of room to maneuver at this point with the data that are now in hand. I would not put 4-1/2 percent out of the range of possibilities. They did not have the benefit of the MTS, though. That can be pretty tricky to read. We made that effort and it did chip a bit off the fourth-quarter number. Another possibility is that people have not interpreted the net export figures the same as we did. We have one month of data, the first month of the quarter. Does one extrapolate an upside surprise or anticipate an offset? I think Karen's colleagues scrutinize these data perhaps with greater care than others, but it is still very difficult to judge whether this component or that component will drop off. Finally, on that score, one needs to look also at whether there are offsets in domestic expenditures. Relative to what we had assumed, the net exports of capital goods were stronger in October than we had anticipated. That means less of the flow of shipments will be going to domestic customers. So there was a significant offset in producers' durable equipment expenditures as we did the adding up. But in the end one is looking at production indicators: employment, hours, the industrial production data, and so on. As we balanced these things out, we felt uncomfortable going higher than we did because there just seemed to be considerable tension. We wrote down a relatively low inventory investment number--much lower, I think, than did many of those outside forecasters. That is a product of this balancing act. We had some low October inventory numbers but there is still a lot of room for November and December to surprise us. That was one of the balancing factors. I suspect that if you looked at these other forecasts, you probably would not find inventory investment as low because others didn't feel as constrained as we felt by these production-side indicators.",377
-fomc-corpus,1998,So you think the balance of the risks is on the upside?,13
-fomc-corpus,1998,"I guess I feel the fatter tail of this probability distribution is on that side. On the other hand, as I pointed out, there are inconsistencies in some of the information we are getting. It is really hard to determine where all these goods are that supposedly have been produced. Anecdotally, it does not sound right; and our own statistics just do not show it. And that is true over the second half of the year as a whole.",93
-fomc-corpus,1998,My own investigations in the last couple of weeks would suggest that they are in Bloomingdales! [Laughter],24
-fomc-corpus,1998,"In inventories for the time being, I take it.",11
-fomc-corpus,1998,Is that where all the steel is? [Laughter],12
-fomc-corpus,1998,I don't know. There's lots of inventory there.,10
-fomc-corpus,1998,A lot of imported apparel.,6
-fomc-corpus,1998,"Any further questions for either of our colleagues? If not, who would like to start our discussion? President Broaddus.",25
-fomc-corpus,1998,"On balance, Mr. Chairman, the Fifth District economy appears to be continuing to expand at a moderate pace. Retailers are reporting very busy stores, brisk holiday sales, and the strength seems to be broadly based. Specialty stores and apparel shops, big box discounters, building supply stores, and hardware stores all appear to be doing very well. told us that their credit card receivables increased more than 10 percent in November over October, which obviously is a huge increase. We are also hearing of increased strength in residential and commercial real estate. Local housing markets in Virginia, the two Carolinas, and particularly here in the District of Columbia are all stronger than they were a few weeks ago. Notably, institutional financing for office and retail space construction appears to have returned to at least some parts of the District after disappearing for a while in the third quarter as a result of the market turbulence. On the other hand, our contacts in the manufacturing sector continue to report that District plants and factories are feeling the effects of lower commodity prices and increased foreign competition. As you know, we do a monthly manufacturing survey and it showed that employment dropped sharply in the manufacturing sector, particularly in the tobacco industry, machinery fabrication, and textiles. But on the more encouraging side, the survey also indicated that factory shipments rose in November to a level we have not seen for some time. We have a question in that survey about expectations of future shipments and, somewhat encouragingly, that figure rose in November for the first time since May. So, there may be some signs of a bottoming out in this sector, although the signs are still fairly weak. As far as labor markets in our region are concerned, it's hard to believe but, if anything, they seem to be getting even tighter in the service sector, especially in the information technology sector. We get more reports of labor shortages now than we did a while back, and efforts to hire and retain workers are really very aggressive. They were already aggressive but, if anything, that aggressiveness has become even more visible recently. At the national level, we agree with the staff that the most likely outcome in coming months is that real GDP growth will decline to a rate closer to trend. It certainly seems reasonable to expect business investment in particular to decelerate, given the prospective slowing in corporate earnings. But a good deal of the current momentum in consumer spending should carry through, underpinned by the recent strong growth in jobs and in real wages. I think the important point here is that even if overall growth does in fact slow to trend, that will not necessarily relieve the current extraordinary tightness in labor markets. It will only stop the tightening that has been accompanying above trend real growth from increasing further. In other words, even with the slowing, we may still be above the maximum path on which the economy can grow without an increase in inflation at some point down the road. It certainly proves that inflation currently remains exceptionally well behaved. We can take some credit for that, I think, and we should. But some time next year the decline in commodity prices and in import prices of manufactured goods should end as Asian economies begin to heal. At that point, goods price inflation could well bottom out and begin to rise rather than offsetting the service price increases as has been the case recently. With this in mind, and as we enter a period where our focus is shifting from trying to achieve price stability to trying to maintain price stability, I think we need to ask ourselves how we judge whether the policy choices we are making now are laying the foundation for continued low inflation or a resurgence of inflation, or for that matter deflation. The Greenbook forecast and the assumptions underlying it serve as the basis for the Committee's discussion of this crucial question at each meeting. Of course, the Greenbook, as we know, presents a forecast that is conditioned on a funds rate path. Presumably that path is the one the staff believes is consistent with the maintenance of the nearly stable price level we have now managed to achieve. In effect, the Greenbook prejudges to some extent where the funds rate needs to be. But it does not routinely present the core model and judgment used in arriving at that path for the funds rate, which makes it harder, for me at least, to evaluate whether the path is the appropriate one or not. In the current situation, for example, the Greenbook projects that a constant funds rate at its present level would be consistent with no acceleration in core inflation over the next couple of years. I'm not necessarily criticizing that assumption; it is a reasonable assumption, I suppose. I'm just saying that I personally do not understand fully the basis for that assumption. It would be really helpful to see in more detail the core model and the analysis that is used in making that call. I don't mean to sound critical of the staff on this. In my opinion, the staff does a consistently fine job with a nearly impossible assignment. But I do think, especially in this new situation we face, that the Committee would be in a better position to make the best policy decision going forward if we could see a little more into the ""green box,"" if I can put it that way.",1047
-fomc-corpus,1998,"Mr. Chairman, if I could just respond briefly. I am not sure I fully grasp the point that President Broaddus is making. I will follow up bilaterally with him to make sure I have an understanding. But just to be clear on the basis of our assumption for the funds rate, let me say that our default is to assume a stable funds rate unless we see when we run through our projection that we end up with an outcome that is glaringly at odds with what the Committee in its discussions and its policy decisions has suggested would be acceptable. Having listened to the discussions at recent meetings, people have basically said they would be very happy if we had an outcome like that. So, I do not have a sense that, with our forecast based on a stable funds rate assumption, we are giving you something that does not provide a baseline for discussion. Then, obviously, we try to give some indication of what different interest rate paths might produce. So, that is how we approach this. I hope that's helpful in some degree, but I will try to clarify it.",218
-fomc-corpus,1998,"Let me just respond to that, Mike. You say you run it through the model. A more explicit discussion of how that is done and what judgments are made so we can feel comfortable with a constant funds rate in this forecast would be helpful to me.",51
-fomc-corpus,1998,"That is going to be very difficult to portray because there is a good deal of judgment involved. In addition to the use of the quarterly model, we get input from sector experts and so on. As you know, we have invited Reserve Banks to send staff members--and they have--to join us during a portion of our forecasting process so that they can get a better handle on the various steps and the different inputs. If your Bank hasn't sent someone recently or if your staff's memory of what they saw has faded, we certainly invite you to send someone in the near future. I think that is perhaps the best way to understand what goes on.",130
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"Mr. Chairman, economic activity in the Twelfth District has expanded at a solid pace in recent months, and our business contacts are less downbeat concerning growth prospects than they were during the summer and early fall. Total payroll employment has grown by 2.6 percent at an annual rate since midyear, above the 2 percent rate of growth in the rest of the country. California's expansion remains on track, and growth in the San Francisco Bay area picked up recently after slowing earlier in the year. Growth is rapid in several other states, with Nevada and Arizona ranked first and third in the national employment growth ranking. Construction activity in the District has been robust. Construction employment has grown rapidly all year, largely due to strong demand for new homes. Although nonresidential construction plans have fallen a bit in the District this year, conditions in commercial real estate markets remain healthy, with low office vacancy rates in most areas of the District and only limited effects of the year's turmoil in the market for commercial real estate finance. The ongoing slowdown in manufacturing is the weak spot in the District economy. After earlier gains that far outstripped the national pace, employment in District manufacturing has fallen since the first quarter. The role of East Asia has been critical. For example, the declines in California's exports to East Asia have worsened as the year has progressed. Relative to the same periods a year ago, California exports to East Asia in 1998 fell 12.7 percent in the first quarter, 17.5 percent in the first half, and 20.6 percent in the first nine months. Moreover, the employment situation at Boeing has exerted a moderating influence on the Washington State economy. This restraint will become more pronounced as Boeing implements a 20 percent cut in its workforce during the next two years. The impact on Boeing and its suppliers in the Los Angeles area already is evident in the loss of nearly 1,500 aircraft manufacturing jobs so far this year. On the national front, just three months ago it appeared that the chance of a U.S recession, or at least a major slowdown, was uncomfortably high. This prospect, in my view, had shrunk noticeably by our November meeting and has fallen further since then. Although the economy faces substantial risks, the most likely outcome over the next year appears favorable. Recent data on economic activity in the third and fourth quarters have continued to follow the pattern of surprisingly strong output growth and low inflation that we've seen for about three years. In addition to this factor, the outlook has improved since November because of our most recent funds rate cut, the better-than-expected economic performance in the rest of the world in the second half of this year, and the rebound in the stock market. Our forecast for real percent under the GDP growth in 1999 has been revised up by 3/4 percentage point to 2-3/4 assumption of no further change in either the funds rate or the U.S. stock market. We expect inflation to hold steady next year despite upward pressure from tight labor markets. The familiar list of favorable inflation factors seems likely to apply: robust productivity growth, ample industrial capacity, low commodity prices, and subdued inflation expectations. Overall, we expect inflation in the core CPI to come in at around 2-1/4percent in 1999. Although the most likely outcome for the economy next year appears favorable, the risks are large. The potential problems stemming from fragility in many Asian and Latin American economies as well as in international and domestic financial markets are obvious. But on the other side, the pattern of positive surprises in our economy could continue, especially in light of the very rapid growth in money and credit this year. Thank you.",751
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Conditions in the Seventh District generally remain quite similar to what I reported in November, with the major difference being that the anxiety level among our contacts seems to have come down somewhat. Uncertainty about the domestic and global economies remains high, but the heightened concerns about credit availability that were so apparent in September and October have eased somewhat as a result of our actions to lower interest rates as well as similar moves taken by other central banks around the world. Our District's economy continues to show trends similar to what I mentioned last time. Housing activity remains strong; consumer spending continues to be relatively healthy. Warmer-than-normal weather has helped maintain construction activity at high levels, but it has hurt sales of winter apparel, auto batteries, and snow removal equipment. More generally, sales so far this season have been reasonably good, though mixed by type of retailer. Department stores generally have been disappointed and have stepped up promotional activity. In contrast, the discounters, the specialty apparel chains, and home-oriented stores have reported strong sales. I guess Bloomingdales is not in that category! Light vehicle sales are expected to be strong again in December, boosted in part by especially intense competition between the Toyota Camry and the Honda Accord for best selling car of 1998. On balance, manufacturing activity continues at a high level, with strength in some industries offsetting weakness in others. Reflecting these offsetting forces, the Chicago Purchasing Managers' Composite Index for December shows a slight pickup in overall activity from 50.2 percent in November to 50.9 percent in December. This information will not be released to the public until December 31, so it should be considered confidential until that time. Manufacturing contacts reported strong demand for aluminum, housing-related products, and both light and heavy motor vehicles. But weaknesses in foreign markets and low commodity prices continue to have an adverse impact on producers of oil-related products, steel, and agricultural equipment. One steel producer indicated that annual contracts now being negotiated with customers for 1999 are averaging a decline in prices of about 5 percent from 1998 levels. More generally, conditions in the agricultural sector remain weak, particularly among hog producers, as has been widely publicized especially in our District. Hog prices in mid-December were almost 75 percent below a year ago, although retail prices have not fallen nearly as much. The price declines are largely due to substantial production hikes. The large operators are hoping that existing facilities will be grandfathered under potential legislation that is likely to limit future expansion due to environmental concerns. Overall, price pressures remain benign. District labor markets are still tight, although the unemployment rate for our five states did edge up slightly last month to 3.7 percent from 3.6 percent in October. Turning to the national outlook, our forecast is similar to that of the Greenbook. We hosted our annual economic outlook symposium earlier this month, and the consensus outlook from that group of 31 Midwest economists was quite similar as well. The strength of consumer demand has been very impressive of late and some slowing seems most likely. Despite heightened media attention to the low personal saving rate, wealth levels and confidence remain high and interest rates remain low. Therefore, we expect consumer spending growth to continue reasonably strong. The deterioration of the profits picture and, as Mike Prell mentioned, the lack of accelerator effects should cause investment spending growth to slow but only back to more normal levels. So, overall, we expect aggregate demand to remain strong enough to keep labor markets quite tight. However, except for swings in energy prices, we do not see a noticeable pickup in inflation. Our chief downside concerns remain the poor prospects for growth abroad, the Brazilian situation that Karen Johnson discussed, and still somewhat fragile financial market conditions, although our policy actions appear to have helped settle the markets. Still, with the full effects of our recent policy actions yet to be felt, the risks to the outlook seem to be relatively balanced.",797
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"Mr. Chairman, local conditions in the Eighth District are largely unchanged. I would note that comments from these sources are confidential, of course. There is no question that the agricultural regions in our District are hurting. Many of the farmers have taken substantial losses. At this point their credit is not really impaired, although some may have problems obtaining credit for the next planting season. As a consequence of the weakness in the agricultural regions, there is a very pronounced slowing in the agricultural machinery sector. Sales of farm equipment are down substantially, and I think we see that in our national statistics. Homebuilding, without question, is strong except in the agricultural areas. We had a report from southern Indiana that homebuilders are on allocation for bricks, believe it or not. A contact in Kentucky reports that builders have a two-year backlog. I think that situation is generally quite typical in the urban areas. The labor market is very strong in most areas, again except in the agricultural regions. On the national outlook, the staff forecast looks about right to me. However, I believe that our inflation risks are clearly on the upside rather than the downside. I continue to be concerned about the high rate of money growth. I wonder whether the staff outlook on investment is not giving enough weight to the very tight labor markets, which provide an incentive for firms to invest to substitute capital for labor. I think our traditional accelerator models may be missing the connection between the labor markets and business investment. That is all I have for now.",301
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. There is not a whole lot new in New England, at least since the last Committee meeting. The regional economy continues to grow, albeit at a pace a bit lower than earlier in the year. Unemployment varies by state but in the aggregate is about a percentage point lower than in the rest of the country. Job growth, in contrast, is slower than in the nation as a whole, with New Hampshire having fewer jobs than a year ago for the second month in a row. As I noted at the last meeting, some of this slowness in job growth reflects the region's demographic trends. Population in New England simply grows more slowly than in the rest of the nation. We frequently hear stories that growth in certain industries, medical care for example, is hampered by the lack of available labor supply. The fastest growing industries in the region continue to be construction, the general area of finance, and services. Manufacturing jobs declined in all six states again in October, reflecting a decrease, we think, in merchandise exports to the troubled Asian areas. Defense-intensive industries by contrast added employment, even in the generally weaker environment for manufacturing. We think this is because national defense spending is scheduled to rise in real terms in fiscal year 1999 after more than a decade of decline. The jury is out on how this will affect the New England defense industry, but there is at least some prospect that major firms will hold their own. Real estate markets, especially in Boston, remain relatively upbeat. Speculative construction has largely halted but some new space is coming on line nonetheless. Wall Street financing dried up during the late summer and fall market turmoil but other investors filled the gap, albeit at higher financing rates. Outside the Boston metropolitan area, both residential and commercial real estate markets are more mixed. Residential construction slowed a bit and new home sales were down despite the quite advantageous financing situation. On the commercial side, Hartford continues to be soft. That probably explains in part the city's willingness to give away the store to the New England Patriots! But New Haven and Stamford, and the State of Rhode Island are all doing well. Lending at the region's largest banks remained quite strong, particularly on the commercial and industrial side, where quarterly annualized growth rates were 35 percent versus around 20 percent for the nation as a whole. This largely reflects growth in C&I lending at the Bank of Boston where customers chose to access credit lines in the fall when Wall Street financing became difficult or impossible to come by. Finally, as I mentioned before, we held a meeting of the Bank's academic advisory council last week with several of the deans of the economics profession in attendance. Opinions in the group were divided about prospects for the economy. Some believed, based on this quarter's surprising strength, the tightness of labor markets, and the ease in monetary and financial conditions, that 1999 could test whether 3.9 percent unemployment is compatible with price stability. Others saw the risks more on the downside, with a negative saving rate, declining corporate profits, and the troubled external sector posing threats and trimming growth to rates below potential. However, there was almost no support for further near-term easing even among those who perceive the downside risks as significant. A wait-and-see policy was counseled. There also was concern that financial and especially stock market conditions might have been accorded too much weight in monetary policymaking of late. Turning to the national outlook, we were pleased to see the change in the Greenbook forecast from November. The Greenbook now projects rates of GDP growth and levels of unemployment in 1999 that are quite close to our own. We differ a bit on the inflationary path, as we have over time. But we have been continually wrong in that area, so I must say I am a bit humble in that regard. Overall, both the Greenbook and our own forecast describe an economic picture that may be the best of all possible outcomes: a relatively smooth slowdown in the expansion with very few downside risks, on the domestic front anyway. The question is whether this outcome will actually occur. Others have spoken about risks and I, too, think that there are large risks. And they occur on both sides. On the plus side, the momentum from 1998 could propel growth in 1999 and tighten labor markets further. In this scenario, consumers would not retrench and the negative impact of a slowing economy might not affect corporate profits as significantly. If this coincided with some luck on the external side--if Japan's growth, for example, turned slightly positive or the euro acted as a major positive for growth in ""Euroland""--then conditions might be right for an even greater spurt of inflationary pressure than we project. On the downside, and maybe more significant in terms of probability, growth could be slower if consumers did decide that the risks posed by higher layoffs, declining corporate profits, and a volatile stock market require them to save more and spend less than projected. Waning corporate profits could cause the stock market to decline sharply rather than to move roughly sideways, as we and the Greenbook have projected, and could encourage further consumer retrenchment. Bad luck on the external side--Brazil, for example--could well add to the negative effect. As I consider these risks both on the upside and the downside, I must say I am struck by the high cost of being wrong. From where we are now, necessary policy changes to correct situations could well produce negative results, at least initially. If U.S. and world growth is stronger than projected, it seems inevitable that financial markets will soar and inflationary pressures will rise. The question will be whether we can intervene in time. Policy correction runs the not inconsiderable risk of producing a boom/bust scenario. If growth is slower, further easing might well be necessary. However, at least in the short run given current market conditions, an easing could propel markets to new highs only to risk a sharper correction later. The Greenbook forecast assumes no change in policy and our forecast does as well; and for right now that seems to be the best course. But I think we all better hope that the forecast is right because it seems, to me anyway, that the room to maneuver in the case of error is very small.",1271
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"The regional economy in the Philadelphia District is healthy, although weakness in manufacturing persists. Attitudes are positive and prospects for continued expansion are good. Retail sales appear to be matching expectations. Consumers are shopping, though, with an eye for bargains. High-end brands that offer good values are moving while high-end brands that simply offer prestige are sitting on the shelf. Supermarkets have been responding to value-concerned consumers as well by upgrading the quality of their store brands while holding prices below those of nationally advertised brands. As a result--and I think this is an interesting statistic--the store-brand share of sales has risen recently to 25 percent from about 15 percent. Auto dealers report the same value consciousness because they have to offer discounts to move cars. Pressures on profit margins are mentioned frequently by business people. Wage costs are up some, but raising prices is not competitively feasible. In commercial construction, there appears to be a reasonable balance of supply and demand. The rental market is strong and vacancy rates are low, but there are a few signs of overbuilding. The market is expected to stay on a solid footing, with vacancy rates stabilizing around 10 percent and with no building boom. All in all, the regional economy appears to be on track for moderate growth during the coming months, with labor markets tight and inflation in check. For the national economy, I think we have an unusually wide spectrum of plausible outcomes. I can envision an economy that expands well above the Greenbook forecast. The economy has shown a lot of resiliency. There is an internal dynamic there that could provide the wherewithal for a surprisingly strong growth rate next year. I can also envision an economy that comes in on the weak side. There are vulnerabilities and we all know them; I don't need to tick them off. A combination of adverse factors could make for a very bearish performance. The Greenbook forecast is a reasonable guess among these wide-ranging alternatives. Who knows, it might actually come to pass, more or less. That is a compliment! [Laughter] The good news is that we are operating in a low inflation, high employment environment that allows some maneuvering room for monetary policy should the unexpected occur. But in the current relative calm, we still need to stay awake and remain alert.",461
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, over the past six weeks, the Sixth District has continued to grow at a healthy but slower rate than was the case earlier this year. We expect that same pace to continue into next year. The big stories this time around in our District are tourism and energy. The outlook for Florida tourism has been noticeably less upbeat than it was earlier in the year. Negative fallout from the turbulence in foreign markets has adversely affected South Florida and the Gulf Coast. Particularly, there has been a falloff in Latin American tourism and there is concern that the middle-income tourist especially will opt not to come to Florida this year as evidenced by the bookings information at some moderately priced South Florida hotels. Although occupancy rates are up 1 to 2 percent from last year, 3-month forward bookings are off some 6 percent. There is further concern that a weak Canadian dollar will keep away tourists from Canada, a particularly important market for the west coast of Florida and the panhandle of the state. Even small declines in tourism are significant because of the sheer size and importance of the tourism industry, which dwarfs the entire economies of several smaller states in our District. Declining energy prices are having depressing effects on Louisiana and other oil-producing parts of our District. State revenues in Louisiana are down significantly because of the drop in oil and severance taxes. It has been reported that the price of a barrel of crude is only 25 cents less than the price of a barrel of gasoline, and a gallon of gasoline now costs less than a gallon of bottled water! The result has been a steep decline in drilling activity. The rig count in our area is down to 150 from a high of about 210. It is having its effect on supply boats and other support activities. There also is concern about the merger announced between Exxon and Mobil, which could put as many as 10,000 Louisiana jobs at risk. And yet, Bob McTeer, those jobs are likely to show up in the State of Texas. Finally, although payroll employment growth has slowed, labor markets remain extremely tight. There is still concern about rising wages but the bigger concern, as others have said, relates to the availability and quality of the remaining workers. The only area where there is significant evidence of price increases is in health care where costs are expected to increase at a double-digit rate for many large employers. At the national level, our broad outlook, like others, is not markedly different from the Greenbook but with some differences in composition. I expect some slowing in consumer spending, business fixed investment, and housing, but to date there is little concrete evidence that those trends are beginning to develop. Indeed, the near-term outlook is more positive now, given the revisions to the estimated third-quarter GDP and the likelihood of a strong fourth quarter as well. My view is that the more pessimistic forecasts may be giving too much weight to further deterioration in the international sector and its implications for U.S. growth. It is my sense that we probably have already experienced the brunt of the declines that will take place and that our domestic economy remains quite strong. Employment growth continues at a strong pace; unemployment is down; consumer incomes are up; and energy, steel, and other commodity input prices continue to come down. The view that declining corporate earnings projections will both damp investment expenditures and depress share prices, thereby cutting back on consumer spending, implies stronger impact multipliers than we have seen to date. Interestingly, some of our recent research shows much less of a direct relationship between corporate profits and real GDP growth than one might intuitively expect. Additionally, the effects of the past three rate cuts have not yet fully worked their way through the economy. Our model simulation suggests that only 40 percent of a policy move's total effect on GDP occurs within two quarters and that it takes some six quarters before 80 percent of its effect is reflected. As others have suggested, the largest downside risk seems to be in Latin America. Clearly, a major key lies in whether there is further financial turmoil in Brazil, whether authorities there can engineer an orderly depreciation of the real, which would permit an easing of interest rates, and whether any currency depreciation will be supported and accommodated peacefully by Brazil's multilateral creditors. However, should Brazil experience another crisis, the regional outlook will suffer if contagion spreads to other Latin American markets. Putting everything together, I think we have a good chance of a moderate slowdown in near-term growth going forward. Despite the fact that the risks to the economy remain large and may even be larger because of recent events, I see the risks as being relatively balanced and symmetric at the current time. Thank you, Mr. Chairman.",940
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. At the broadest level, the District economy remains healthy. There is very little question that it is continuing to expand. But that generalization applies principally to the major metropolitan areas where construction, both residential and nonresidential, is strong and consumer spending is robust. Labor markets remain very tight and there are clear signs of wage pressures, especially for entry-level jobs where firms have to bid up salaries in order to attract people. On the other hand, parts of the District that have been struggling for some time continue to struggle. Agriculture, and especially livestock, is one example of that; mining and the energy sector are a second; and parts of the manufacturing economy are a third. I would say that in those sectors, if anything, the problems have become more significant and attitudes have deteriorated a bit further. Of course, most people and the bulk of the economic activities are in the major metropolitan areas, so in trying to put this together one doesn't want to exaggerate some of those out-state problems, as it were. As far as the national economy is concerned, two aspects of it have struck me for some time. One is its resilience. If you think about the events that have buffeted the national economy over the last 10 or more years and counterpose that with its performance, there is no question that resilience has been a characteristic of this economy. The other somewhat related aspect is that while we clearly have had a lot of turmoil coming from abroad, principally in the last 18 months or so, the economy seems on net to have weathered that well. Of course, when you cut through it all, those developments are not entirely negative either in terms of their implications for interest rates and inflation or for the interest-sensitive sectors of our economy. I think the outlook for the economy in general is positive in terms of sustainable real growth. There are a couple of significant downside risks that people have commented on. One is the Brazilian situation and another is, at least in some people's judgment, an excessively elevated equity price. But I don't know what probabilities to attach to possible corrections in those situations. In fact, it is my view that we probably will get more real growth or at least more growth in aggregate demand than is indicated in the Greenbook over the next year or two. Taken by itself that is certainly positive. The question is what rate of inflation is likely to accompany it. So far at least, the surprises in the inflation numbers have been on the downside and that is to the good. And the weakness in commodity prices suggests that that may continue. On the other hand, I must say that the rapid growth in the monetary aggregates and generally accommodative credit conditions do give me some pause. They are a source of at least some potential concern. At a minimum we need to monitor that closely.",570
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"Texas employment growth has decelerated from fast to moderate during the course of 1998--from about 4.6 percent in 1997 down to about 2 percent lately. Three head winds or drags are causing this growth to moderate. One is tight labor markets. They have been tight for a long time, but we have less and less ability to attract workers into Texas from the rest of the country because the markets are tight everywhere now. The low oil prices that Jack Guynn mentioned have hit us very hard. Incidentally, our contacts expect oil prices to remain very low for longer than the futures markets are suggesting. In our District, extraction employment has declined by about 5,000 and the rig count has declined around 37 percent. Of course, low oil prices are not nearly as harmful to our region of the country now as they were back in 1986. Not only are we more diversified, but we have more energy-using industries that benefit from low oil prices than we did then. Another factor slowing our economy is the weakened state of foreign markets for Texas exporters. Earlier, in late 1997 and early 1998, there was a sharp decline in exports to Asia. That decline is pretty much over; there is still a slight movement down in the trend line, but it's almost flat now. Added to it, however, have been some declines in our exports to Canada and to Mexico and Latin America more generally. On the national economic scene, I don't really have any new or unique insights to offer. The main point I would make is that while some risks are associated with the strong momentum in the real economy at year-end--as evidenced by the possible reversal of the net export drag, the continued tight labor markets, and rapid money growth--those developments continue to occur in the context of worldwide deflationary pressures and in particular a continuing decline in commodity prices, even since our last meeting.",390
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. There are disparate developments in our District as well as all over the country. In particular, directors and others we talk to focus attention on steel and how hard times have been for the steel sector. Twenty years ago when I lived in Pittsburgh, one of the large corporations headquartered there was among the largest in the world--the United States Steel Corporation. They decided they were too dependent on steel so they diversified into oil. [Laughter]",90
-fomc-corpus,1998,That's how they got there in the first place!,10
-fomc-corpus,1998,"So, we do hear those stories about just how difficult it is for certain companies and certain communities that are related to either metals or energy. But virtually everything else is about as strong as it can get, and everybody talks about 1999 being even stronger. The motor vehicle industry is exceptionally strong. Mike Moskow mentioned Honda and Camry; they are both produced in our District. In fact, four of the top six selling automobiles are produced in our District and three of the top selling so-called light trucks are produced in our District. So, employment in that industry is strong and the automobile producers would like it to get stronger if they could find the workers. Toyota announced last week that they are going to develop 86 acres in northern Kentucky across from Cincinnati and build an 840,000 square foot facility, and they are going to import the labor from somewhere. Most of the communities around the District talk about importing labor from someplace else. Expectations generally are that holiday retail sales will be excellent; the malls are packed. People are earning good incomes and they are spending. In banking, C&I loan demand is reported by one director to be the strongest that he can recall in the time he has been in the banking industry. Bankers have expressed concern about the continued overbuilding of retail space and hotel and motel space. They also worry that depressed commodity prices are eventually going to depress farmland prices, but they continue to report that for the moment farmland prices keep going up. One director with the construction workers' union said that labor shortages are going to worsen in the region in 1999 because of all of the new projects. One director in the asset management business reported that the equity market is being driven by what he calls ""perpetual great expectations,"" which he considers to be unrealistic. He voiced concern that company pension plans and individual retirement plans have been increasing the share allocated to equities in recent months. I have seen--probably everyone has now seen--newsletters, advisory letters, talking heads on CNBC, and so on saying that there is no risk that the stock market is going to go down because if it even started down, the Fed would ease policy to prop it back up. So, in their view, the market can only go up from this point. I think there are more and more people coming to that belief and acting on it. One note in retail distribution that I found interesting is that catalog sales are reported to be growing at very rapid rates and that sales to corporations for promotions and gifts are extremely strong. It was noted that apparel sales are now the fourth largest category of Internet sales, accounting for 23 percent of total sales on the Internet and rising at double-digit rates of increase, reported that his company plans to raise wages 10 to 12 percent across the board in 1999 in order to reduce their reliance on temporary workers and to lower the turnover of their work force. And while they are doing that, they plan to invest heavily in labor-saving equipment. Since the last meeting, I had an opportunity to be in a more tropical climate than Cleveland. Of course, Cleveland has been somewhat tropical this year. I had daily reminders of what somebody once said: ""Inflation is like bananas. Once you start to see the brown spots, it's too late."" [Laughter]",664
-fomc-corpus,1998,A very soft report!,5
-fomc-corpus,1998,"So, we all look for signs and evidence that prices of goods and services are starting to rise at a somewhat more rapid rate. There are some signs, and the staff forecast for the next year or two is that the rate will be modestly higher. But even if that forecast is accurate and prices of goods and services rise only moderately faster in the next couple of years, low measured inflation is a necessary but not a sufficient condition for monetary stability. We and others around the world have experienced monetary and financial instability and ultimate economic difficulties even during extended periods when prices of goods and services were rising only very slowly. So in an important sense, stabilizing the dollar involves more than just wages or prices of goods and services. We all know that equity prices cannot continue to rise at double-digit rates as they have over the last few years. Forecasting an end to that in one sense is easy. There is no such thing as: The change in the rate of change can increase indefinitely. Inevitably, the rate of increase in equity prices must slow, and I would have been happier in that regard if we hadn't had this recent very strong rebound in equity prices from the lows of last fall. We also know that the rates of growth of the whole constellation of measures of money are going to have to slow. They have accelerated dramatically; they will moderate. Somehow, someway, their growth must slow. Either we'll get lucky and they will slow or we'll take action to slow them down. We know the growth of bank credit and all of its components cannot continue to rise at double-digit rates. It must slow down, sometime, someway. We know that the rate of increase in real estate prices--house prices, commercial real estate prices, and farm prices that have all been accelerating--must slow. There must be a deceleration, a negative second difference. So, we know these things are in our future. It's just a matter of when and how we get there.",396
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, our District economy continues to chug along at a pretty good pace. We have some weak areas, and one of those, of course, is agriculture. The impact is not as dramatic as I mentioned last time because of the recent transfer payments to that sector. The concern is the longer term. We don't know what the Freedom to Farm Bill will mean or whether transfer payments will have to increase in the future if these price pressures continue. That is an issue in our part of the country. The other weak area is energy. Obviously, the low price of oil is hurting our District economy right now, although we, like others, are more diversified now. Of course, mining, especially the coal industry, is under a lot of pressure; capacity and price pressures are quite damaging to that industry right now, I am told. Conditions in the manufacturing sector are more mixed in our region. Activity in some manufacturing industries is slowing as a result of competition with foreign, especially Asian, products. Our electronic components manufacturers are feeling some pressure. On the other hand, our auto industry is doing well as are some of our metals manufacturers that are exporting. They have worked very hard to increase their productivity and they probably are going to have their best year ever in some instances. So, we see mixed signals in the manufacturing sector. Of course, housing is strong as are services, including retail. Our banking industry is quite active right now. Our banks are competing very vigorously for loans and they are competing on price. They tell me their margins are certainly narrowing as a result. We continue to have tight labor markets. There is some relief perhaps around the edges in some of the manufacturing industries that have seen a slowdown. But as a general principle, labor markets are still very tight. As for the national outlook, I would describe our view as having come closer to the notion that growth will slow toward trend because of two factors that are not completely predictable. I think we will have very strong domestic demand going forward. We have the continuing impact of recent rate cuts, and M2 growth is quite strong. I think those portend a stronger economy and some future upside risks for the economy. Obviously, though, capacity has increased in the economy and that will help restrain some of the price increases. We also have the external sector exerting deflationary pressures and we see many uncertainties with situations like Brazil. So balancing out those two effects, I would say that growth will come back toward trend but that the upside risks are noticeable.",507
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. The Second District's economy has generally shown increasing signs of strength in the past month. Private sector job growth in both New York and New Jersey accelerated modestly in November. The unemployment rate held steady at 5.1 percent. Purchasing managers when surveyed say that they see some strengthening in manufacturing. The purchasing managers also saw continued brisk growth in the nonmanufacturing sectors in the month of November. Our part of the country is really not very dependent on trade with Asia; the trade flows are in other directions. The retailers, as in most parts of the country, report that sales are below plan, especially in winter outerwear. Manhattan's office market, which has been very strong, is showing some signs of softening in the fourth quarter: Office vacancy rates picked up a little in October and November and price increases slowed. The purchase prices for other commercial properties turned down. That is probably very closely related to the weakness in the financial services sector in the third quarter. We think the domestic economy is well balanced and should grow at about trend or slightly below in 1999 and 2000. This expected slowdown is likely to keep inflationary pressures under control on the assumption that we will maintain the present policy stance. Foreign influences are likely to continue negative, with Brazil clearly the major danger and one that is growing, unfortunately. Our policy actions this fall--our three reductions in official rates and the related though not coordinated reduction in interest rates in Euroland--have helped reduce the considerable danger in fixed income markets. The likelihood that both the Federal Reserve and the European Central Bank will maintain official interest rates for the early months if not a bit longer next year is a very good background for a successful introduction of the euro. And I think that will have a somewhat stabilizing influence. It is much to be hoped that the transition will go smoothly. If it does not, since it is so much easier than the year 2000 transition, I think it would increase the anxiety level considerably for the Y2K change. The New York Reserve Bank's board, which had been very much in favor of our policy easing actions as indicated by voting twice for a reduction in the discount rate, has shifted its position, as I believe it should have. Their thinking now is that it is very important for the Federal Reserve to show that it accomplished what it sought to accomplish and that further easing actions should take place only if there is clear and new evidence of weakness. I think the risks are very well balanced now. The fixed income markets have not completely returned to normal but I think we could expect, Brazil permitting, that they will probably return to somewhat greater normalcy as we get past the year-end and into 1999. The domestic economy probably has a little more threat--in a nice sense--of being stronger if left to its own devices, but the dangers from the emerging markets are still sufficient for me to view the overall risks as very well balanced. To me that does encourage us to maintain the position of watchful waiting as the appropriate policy stance.",619
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, the Greenbook and most forecasts foresee a slowing in the U.S. economy. I share that view because, after all, as we've heard this morning, the manufacturing sector is slowing and related to that net exports continue to deteriorate, although we hope the rate of change will decelerate. Consumer savings have gone all the way into negative territory, and for that and other reasons consumption seems sure to slow. Investment has been on a tear for a long time. That seems bound at least to moderate to a more normal pace. Profits are already slowing, which implies risks to the stock market and an attendant wealth effect. And so forth. However, what do we see going on around us? The fourth quarter of 1998 appears to be substantially stronger than we had earlier believed, giving the economy a lot of momentum going into 1999. Interest rates have been coming down since our last meeting. The effects on the real economy of our earlier rate reductions are only beginning to kick in. The dollar is a little weaker, which will be stimulative if it continues, as it is forecasted to do. New job creation continues to be strong. Unemployment is actually going lower it would appear. Consumer sentiment remains high. Retail sales are strong, particularly in the cyclically sensitive areas like housing and autos. With an important possible exception of Brazil, which many have mentioned, foreign financial pressures on the real economies in many areas seem to be easing at least for now. To date, there has been no great change evident in the pattern of inflation. All in all, Mr. Chairman, at this moment I am not at all clear in which direction the next policy move should be, let alone when it should occur.",350
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Thank you, Mr. Chairman. Our job all year has been to try to bring about a soft landing. In the first half of the year it looked as if we might never have any landing at all. In the second half of the year a crash landing seemed more likely. Now, for one of the first times this year, conditions look about right. One can take either the Greenbook forecast or the Blue Chip forecast and it is hard to write down a better scenario for a soft landing. In that sense, I am relatively comfortable with the present stance of policy. There are risks. Others have talked a lot about the risks and I don't have anything in particular to add except that it seems that the risks will become more evident over time and we will have time to act against them, provided that we are willing to use monetary policy in a flexible way. Others have talked about the money supply and I don't have much to add about that either, except to note that there could be a variety of special factors influencing the rapid growth of the money supply. Those who worry a lot about money supply have to admit that the money supply would have been a particularly poor guide to policy this year. That doesn't mean it will be from now on, but if we look at it in retrospect I think it would have been. I would like to take the opportunity to talk a bit about monetary policy strategy and in particular about a memo that we all get called ""Monetary Policy Rules,"" which I hardly ever hear referred to. It relates to the Taylor Rule, which is actually quite a favorite among the academic economists. I have been looking at that rather hard this year and, in my view, it has not been that helpful. For most of the year, if one looked at its various predictions, it could have been interpreted as arguing for higher or lower interest rates, depending on how one estimates the equation and some other technicalities. Now it seems to be saying that we should be raising interest rates when one could make a case that interest rates are about right. I think the problem here is the output gap term. And the deeper problem is that to apply this rule, we must have point estimates of our targets for both inflation and unemployment. At the very best I think we have bands; we do not have point estimates. As one listens to the way all of you talk about monetary policy, you seem to have different approaches to how to think about it. Suppose for the sake of argument that inflation and unemployment are reasonably within their target bands if not at one's point estimates. As long as inflation is neither accelerating nor decelerating, we seem to be striving to maintain existing conditions. Partly this involves watchful waiting on acceleration or deceleration, not necessarily on inflation as such but on leading indicators of inflation such as those on the output side. And in part this involves aiming policy so that future growth in aggregate demand equals the trend growth in aggregate supply, which is roughly 2-1/2 percent under most models. At the last meeting, I said that the trend growth in aggregate demand was too low and that the economy needed some further stimulus. At this meeting it looks about right--at least to me, maybe not to some others. But I think that most of us have this more informal way of keeping things on an even keel for stable noninflationary growth. I believe this is what most of us do and I think it is working. Thank you.",698
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. In view of the unusual constellation of real economic and financial conditions, both domestic and international, I believe the outlook for the economy is ""murky,"" which I think is the word Mike Prell used. I would say it's perhaps even murkier than the staff presentation might suggest. The data released in the last few weeks do indicate that the economy entered the final quarter of 1998 with substantial, and I think perhaps even surprising, forward momentum. Real GDP growth was revised up for the third quarter and the Greenbook shows that the staff forecast for the fourth quarter also has been revised up based on early information. As Governor Gramlich indicated, both the staff forecast and broad consensus forecasts show significant abatement of this growth in the early part of 1999 with a bit of below trend growth and then returning to what is described as a soft landing with low inflation. As others have said, and it's a view I endorse, there are numerous risks to this outlook. The downside risks are quite clear and I will not repeat all of them except to point out two. One is that Japan's economy is remarkably weak and seems to be experiencing what I can only describe as real crowding out in which their long-term interest rates seem to be going up as the government attempts to stimulate the economy through fiscal actions. Secondly, as Vice Chairman McDonough remarked, Europe is about to enter a very new and interesting phase that I think is going to test their ability to have the right amount of flexibility in both monetary policy and fiscal policy. Thus far, they have shown good flexibility with respect to monetary policy, but they may not have as much room on the fiscal side. So, there are some risks because Europe's economy seems to be slowing somewhat. While these downside risks are real, I am also concerned about the upside risks. Others have mentioned this. As President Boehne indicated, the staff's scenario is plausible and might even happen. I certainly hope that it does. But the economy has surprised us continuously with the upside capabilities it has shown. And next year, we are going to face a situation in which there will be a waning impact of the dollar's appreciation and there may be some surprises with respect to economic growth abroad. And though oil prices are now low, there is a possibility that they may turn upward, and that may undercut a bit the benefits we have had over the last couple of years. In this world of risks on both sides--and I do believe they are balanced--I think the current posture of monetary policy is probably about correct. If the inflation forecasts prove accurate, we can afford to adopt a wait-and-see posture. We have shown that we are prepared to move quickly and forcefully to offset downside concerns. If it becomes necessary, and I don't know that it will, I hope we can move as forcefully to offset upside risks. For now, though, my two watchwords are ""caution"" and ""vigilance."" Thank you.",608
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Let me make three general points about the situation we find ourselves in at year-end. One is that the continued sterling performance of the U.S. economy is really remarkable, and it is going to be worthy of some serious scholarly attention for some time to come. A year or two ago the press, economists gathered at meetings, and even the FOMC were full of talk about a possible new era. We did not all endorse it, but we all talked about it. Some of us were trying to explain how labor markets could remain so tight without causing wage inflation to accelerate. Others were suggesting that some combination of the long heralded but unrealized impact of information technology on production plus the new competitiveness of management had put the U.S. economy on a higher productivity trend. Then we all got distracted by the worldwide economic crisis and our effort to maintain our island of prosperity in the midst of global turmoil for the world's sake as well as our own. But while we were distracted, the U.S. economy continued to chug along, pumping out goods and services, making better and better use of limited labor supply, rewarding skill with wages that provided incentives to acquire more skill, handing out bonuses to high performers, but not shifting into the mode of general wage inflation. Moreover, good productivity growth continued even in manufacturing where demand slackened and payrolls were falling. The urge to modernize and computerize remained robust in the face of macroeconomic forecasts that might have prompted retrenchment in earlier eras. The U.S. economy really does seem to be working better than it used to work. It is more flexible; it is less inflation prone. The good performance is more remarkable the longer it continues. Second point: It is possible that one of the things we all thought we knew about monetary policy has to be unlearned, namely that it operates with very long lags. Jack Guynn referred to this in the opposite direction, but I don't think he and I are saying anything inconsistent. He was reminding us that the full effects of the policy moves of the last couple of months have not yet been felt, something we would not have needed to be reminded of a few years ago. We would not have expected the effects to be completely incorporated yet. We used to think that central bankers had to take big leaps into the dark because our policy instrument, while powerful in the long run, affected the economy only over periods of 6 to 18 months or more. But now we find ourselves with a tool that seems to work faster. Our actions in September through November are credited with strengthening--or sometimes credited with overheating--the U.S. economy in the current quarter, not to mention the prospects for the first half of next year. One reason is the increased importance of equity markets both in financing business expansion and more importantly in enhancing consumer wealth. I think the wealth effect is not going to be temporary. It will only become more important as prosperity and longer lifespans combine to increase the portfolio of the average family. That is not so true in Europe yet, but it surely will be in the coming decade and elsewhere around the world as well. So, we have to learn to accept wealth impacts on consumer behavior as an increasingly important aspect of the monetary equation. Another phenomenon that has cut the lags is the growing importance of consumer credit and home mortgages. The ease of refinancing home mortgages and home equity loans makes the transmission of monetary policy moves into consumer behavior more direct and faster. The growth of global equity flows and sensitivity of global markets to information also magnifies the effect of policy moves by the world's important central banks, namely us and the soon to be created ECB. So, we have a hotter instrument in our hands than we used to have and we had better get used to it. Third point: The world is still a scary place. I won't argue with the Greenbook forecast, but I believe we will all be lucky if it comes to pass. While there are some upside risks, which have been mentioned, it seems to me that the risks are mostly on the downside. There is Brazil, which is still very uncertain. There is Russia, where more chaos is possible and the world community seems absolutely paralyzed about what to do. There is Japan, where the worst may be over, but we have said that a lot of times before and the possibility of a spiral of deflation is also there. And there are countries all around the world that we have not focused on. There is also an uneasy knowledge that whatever blows up next, the turmoil will spread rapidly through world markets in unpredictable ways. So, despite my optimism about the fundamentals at home, I think we had better look carefully for world trouble and hope that we know enough to use our increasingly short-lagged policy tool appropriately if we have to.",967
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Thank you, Mr. Chairman. Like most forecasters, I responded to the downward revision in foreign growth prospects and the abrupt deterioration in domestic financial conditions after midyear by revising down my expectations for U.S. growth over 1999. Unlike most forecasters, I was in the position to ratify my earlier forecast by participating in monetary policy decisions to lower the funds rate by 75 basis points. I appreciate being in this unique position. [Laughter] But monetary policy actions have not been the only developments that have supported an upward revision to expectations for growth next year. Three other developments are of note. First, the stronger-than-anticipated growth in the second half, maintaining the continuous pattern of positive demand surprises over the past three years, is evidence of continued resilience in demand and suggests greater momentum going forward and upside risks to the forecast for next year. Second, the external drag from declining net exports appears to be diminishing faster than expected. After subtracting more than 2 percentage points from growth in the first half, net exports appear to be subtracting only 1/2 percentage point in the second half. Third, the deterioration of financial conditions that seemed so worrisome a short time ago now appears less so. The equity market correction has simply disappeared. While private risk spreads have widened in the capital markets, the absolute level of private borrowing costs, weighted across risk classes, is about what it was at the end of last year and only modestly above lows for the year reached at about midyear. On balance, financial conditions, thanks in part to recent monetary policy actions, continue to be supportive of growth going forward. There are nevertheless plausible grounds for projecting a slowing of growth. The rationale for the slowdown is well presented in the Greenbook, though it should be admitted that virtually all the arguments, including the dissipation of the positive stimulus from the wealth effect, the dissipation of accelerator effects, etc., were considerations that underpinned the projected slowdown for 1998. On balance, I expect growth to slow to about 2-1/4 percent in 1999 and I see a somewhat better balance now in upside and downside risks. I think the upside risks principally reflect the experience of continued positive demand shocks that after some point make me wonder what we might be missing about the fundamentals driving this expansion. The downside risks have been well discussed around this table. They relate principally to Brazil, to questions about the sustainability of current equity prices, and to other pressure spots in the world economy. Let me note two upside risks relative to the staff's inflation forecast. As I have noted at recent meetings, I find the Greenbook forecast of a slowing in nominal wage growth somewhat aggressive. The risk here can perhaps be seen by comparing the forecasts for nominal wage change based on wage-price and wage-wage versions of the Phillips curve, two specifications that are routinely tracked by the staff. The forecasts for the wage-price specification point to a slowing of nominal wage changes going forward--and perhaps a significant slowing--as the response to the recent decline in inflation and the projected modest rise in the unemployment rate dominate the effect of the prevailing low level of the unemployment rate. Some of the wage-price specifications indicate a slowing of as much as a percentage point in the rate of nominal wage gains in 1999. On the other hand, the forecasts from the wage-wage specifications suggest a sizable increase in the pace of nominal wage gains going forward. Both of these specifications have yielded similar errors over the past four years, and they are now generating forecasts that differ by as much as 1-1/2 percentage points over 1999. I think this highlights the considerable uncertainty about inflation going forward. Second, the Greenbook allows for some diminution in the favorable factors that have been suppressing inflation: a reversal of declines in oil prices; some further depreciation of the dollar; a reversal of the recent decline in non-oil commodity prices; and a faster pace of increase in health care and health benefit costs. The dissipation of the contribution from these special factors is the basis for the convergence of actual to core inflation in the Greenbook forecast. But I am concerned that the projected rebounds in these components could result in somewhat higher inflation than in the staff forecast and that in addition there is a particular upside risk from a sharper-than-projected depreciation of the dollar. Thank you.",880
-fomc-corpus,1998,Thank you. I think we have ended as close to 11:00 as we have in a very long time. I assume coffee is out there.,31
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,We are on schedule for a change.,8
-fomc-corpus,1998,Mr. Kohn.,5
-fomc-corpus,1998,"Thank you, Mr. Chairman. The announcement of your last easing suggested that, as a consequence, the federal funds rate might be positioned to sustain growth and keep inflation contained. The incoming information since then could be seen as reinforcing that judgment, at least for now. Economic activity has been stronger than expected and the unemployment rate lower. But moderation in hourly earnings and steep declines in oil and other commodity prices suggest that, even if the economy operates a bit further beyond its long-run potential than anticipated at the last meeting, any increase in pressures on prices that might develop is likely to be quite limited for a while. Such a shallow upturn would probably offer the Committee sufficient leeway to react in a timely manner at a later date should evidence begin to emerge that a sustained upward movement in inflation might be coming. In addition, changes in financial conditions since the last meeting, on balance, do not point unambiguously to either greater stimulus or greater restraint on spending. Yield spreads show mixed movements over the intermeeting period. And while many longer-term nominal interest rates are down somewhat, rates on indexed securities are unchanged, suggesting that at least a portion of that decline owes to decreases in inflation expectations rather than in the real cost of credit. While widespread easing of monetary policy in Europe and Asia should help to bolster demand, that easing was triggered in part by weaker economic prospects, at least in Europe. In Latin America, Brazilian problems have made the situation, if anything, dicier over recent weeks. The Greenbook forecast sees flat short-term interest rates here in the United States as consistent with moderate growth and only a limited uptick in inflation, attributable mainly to the projected turnaround in energy prices. Against this background, and with financial markets even less liquid and more volatile than usual ahead of this year-end, the Committee may wish to keep policy unchanged at this meeting. There are, to be sure, substantial risks on both sides of the moderate growth and low inflation outcome, which the Committee will need to weigh as it considers the tilt in the directive and as it monitors incoming information over coming months. On the side of a need to be especially alert to having to ease policy, there are still ample reasons to worry about the same small-probability, high-cost events that occupied the Committee's discussion in November. As Karen noted, the ability of Brazil to maintain its exchange rate regime has, if anything, become more problematic. While the passage of time and slow erosion of confidence in that country's policies undoubtedly have allowed counterparties and interested bystanders to take anticipatory protective actions, serious contagion from a loss of confidence in Brazil is still a distinct possibility. In domestic financial markets, the backup in risk and liquidity premiums over the second half of the intermeeting period highlights the continuing heightened sensitivity of these markets to shifts in sentiment. Greater resiliency may develop after year-end, when participants should feel more willing to open their books to taking on risks. Nonetheless, markets are likely to remain vulnerable and increased caution by lenders would be a natural reaction to the slower growth in income and lower profits expected in most forecasts. Another source of downside risk is the potential for inflation--or more precisely, inflation expectations--to drop further, perhaps inappropriately raising real interest rates. But making that determination depends importantly on the source of the downward surprise in prices. Lower inflation that resulted from unexpected increases in productivity would be associated with higher equilibrium real interest rates because wealth would be higher and incentives for capital spending stronger. Easing policy under those conditions as inflation fell would risk greater price pressures down the road. Even declines in inflation from decreases in the price of oil and other imported commodities require careful judgment about whether real rates shouldn't be allowed to rise. Such price declines can bolster real incomes and spending, especially if they are not the result of an appreciation of the dollar. But inflation surprises from other sources--decreases in inflation expectations not associated with these factors or unexpectedly weak wage growth--could require the Committee to reduce the nominal funds rate to avoid undesirable increases in real interest rates. Finally, financial market participants and many Wall Street economists apparently see the risks to growth and inflation as tilted to the downside, in that they have built further Federal Reserve easing into the yield curve and into their economic forecasts. Weakness in a number of the economists' projections comes from another potential source of shortfall in demand--a squeeze on profits. In these forecasts, persistently weak profits lower equity prices, impinging on consumption; and low profits, together with developing capacity overhangs, depress business investment. But the risks are not all to one side. Aggregate demand has been strong, and financial conditions now may be no tighter--and might even be a little easier--than those of last summer and before. And presumably these are the conditions that have contributed to the recent robust economic growth, given the lags. Investors in bond markets have come to discriminate more carefully among borrowers, but on average yields haven't changed much, with increases for below-investment grade credits balanced by decreases for many better credits. As a consequence of policy easing, the costs of short-term credit to most businesses appear to have decreased despite higher spreads. For households, mortgage rates, which are tied closely to Treasury yields, have fallen appreciably. In foreign exchange markets, the dollar is lower than it was six months ago, potentially lessening some of the restraining effects of foreign competition. And not only has the stock market recovered previous peaks, but its resilience in the face of earnings warnings suggests upside potential for equity prices, as Mike noted. To be sure, current financial conditions may not be so accommodative as to keep real growth at 3-1/2 percent. After all, it took continued outsized increases in equity prices over a number of years to produce this result. Instead, the danger may be that these financial conditions will slow growth only to the rate of increase in potential, preserving the current tautness in labor markets. As compared with the staff forecast, this would raise the odds on the emergence of greater price pressures when recovering economies abroad foster a turnaround in resource prices and a weakening dollar. Interpreting the rapid growth of money may also help to assess the degree of risk that policy may be too accommodative to contain inflationary pressures. Broad money growth, which has been strong all year, accelerated in the fourth quarter. Growth in M2 far exceeds the likely rate of increase of nominal GDP, and the resulting decline in velocity is much larger than can be explained with standard money demand models. This suggests a lack of stability in the underlying demand for money--one of the necessary conditions for money to be a reliable indicator. Indeed, some of the very recent strength in money seems to owe to greater desires by households for safe and liquid assets, itself symptomatic of problems in financial markets that would damp aggregate demand. Such an outward shift in the demand for money would indicate a need for a greater supply of money to support any given level of spending. These sorts of considerations would argue against a close linking of money growth and current or future spending or inflation. Yet, in a very broad and imprecise sense, rapid money growth through this year may have been indicative that financial conditions at least were supportive of continued strength in aggregate demand. Positive surprises in money growth have been associated with positive surprises in spending, even if the numerical relationship between them has not been close. Moreover, some of the overage in money growth relative to the standard models this year may reflect household responses to rising levels of wealth and lower long-term interest rates--both important stimulants to spending. Finally, even the implications of the surge in M2 and M3 growth late this year might not have been entirely negative for the future path of spending. It did suggest the willingness and capacity of a well-capitalized banking system to absorb flows of funds diverted from markets, cushioning the potential impact of financial market disruptions on economic activity. The staff, again, is projecting a substantial slowing in money growth over the months ahead. This forecast is predicated on the decelerating path of spending in the Greenbook and on some reversal of the flight to liquidity and safety of late summer and early fall. M2 growth has moderated in November and, on a partially projected basis, in December as well. If this slowing falters--if money growth remains very rapid--it may connote stronger than expected spending, but it will be important to examine closely the reasons for the overshoot. Whatever your decision on the symmetries or asymmetries of the policy stance in the operating paragraph of the directive, the Bluebook on pages 13 and 14 presented three alternatives for the associated language. The first alternative is the existing language; the second is the alternative presented in November; and the third is a modification of that alternative incorporating the suggestions members made in November. We offered alternative two again because over the intermeeting period one of you indicated a desire to consider retaining the separate sentence on intermeeting moves in order to keep it conceptually distinct from the likely path of policy over the intermediate run. Also, in your discussion of what is now alternative three, several of you, including Governor Kelley, President Broaddus and others, were of the view that the directive should only reference the intermeeting period and not include the reference to ""in coming months."" That remains an open issue. We have also included alternatives for the wording of the sentence on the prospective growth of the monetary aggregates, responding to the discussion initiated by President Poole at the last meeting. That language already had a degree of flexibility, since it had been the Committee's practice to adapt it to fit the staff's forecast for money over coming months. And, in fact, it has changed several times this year. We can continue to offer alternative wording in the Bluebook for money growth expectations, as we have done for this meeting. The Committee might have different projections than the staff and, even if it didn't, it might want the opportunity to describe the staff forecast in different words than we suggest. Another option would be to drop that sentence altogether from the operating paragraph--a suggestion made by President Guynn in September. The sentence has evolved over time from one that included specific numerical ranges for growth, whose violation could trigger a policy response, to the current vague expectation. That evolution has paralleled the Committee's de-emphasis of money in its policy deliberations. The Committee now makes no attempt to tie its annual ranges for money to expected or desired economic performance over the year, and the growth of money relative to its ranges plays no special role in policy decisions, as you have repeatedly informed the Congress. As a result, the Congress has displayed no interest in using the behavior of money to guide its assessment of the conduct of policy. Consequently, while you are cleaning up directive language, you might want to consider deleting this sentence. An earlier paragraph in the directive would continue to report the Committee's long-run ranges, consistent with the requirements of the Federal Reserve Act.",2206
-fomc-corpus,1998,"Incidentally, Don, when are we scheduling the next senior loan officer survey?",16
-fomc-corpus,1998,It will be before the February meeting. We will do the survey in the middle of January with the results coming in during the week before the February meeting. Preliminary results are usually in the Greenbook and the final results in the Greenbook Supplement. So you will have the results on the Friday before your February meeting.,63
-fomc-corpus,1998,"Other questions for Don? If not, I will start off with some comments on developments relating to policy. I think all of you commented on the continued momentum in the economy. Even the labor market data, which appeared to be weak or at least potentially weak at the time of our November meeting, now seem to have stabilized. While the gap between the household employment figures and the payroll numbers, which has created a crucial issue in labor market evaluations, has not yet closed, it has narrowed as a consequence of a very large increase in estimated household employment in the latest survey. You also may recall that the statistical series that includes the number of unemployed plus those not in the labor force who would like to have a job seemed to have flattened during most of 1998, but it tilted down again in the most recent data. So, we see in effect a reversion to what existed earlier this year, not only with respect to a number of financial variables, as Don Kohn mentioned, but also with respect to many of the characteristics of the labor market. What has not changed in any material way is the seeming lack of pricing power in the economy. I see virtually nothing that suggests upward pressure on prices despite the ongoing weakness in profit margins as indicated by available data for the fourth quarter. We see in the latest estimates of S&P 500 earnings per share that the trend finally has turned negative for the fourth quarter. Sales for the S&P 500 firms presumably have not gone down in nominal terms, but profit margins continue to decline. In the manufacturing sector, the data show a continuation of rather strong productivity gains and further declines in unit labor costs, but they also show a decline in margins, though mainly as a consequence of downward pressure on prices. So, what we are observing is a remarkable and, in fact, almost surely unforecastable economy that is expanding at a fairly rapid pace. We also see labor markets that, if anything, are growing marginally tighter, little evidence of wage acceleration, and no evidence of price acceleration. I assume that some of you believe that this can go on for a considerable period of time. I cannot believe it, but then again I said that six months ago. [Laughter] I guess we should enjoy it while it lasts. As a number of you have indicated, the risks on both sides have widened. To a very substantial extent in my view, the risks probably reflect the extraordinary behavior of the equity markets over the last several years. The dramatic decline in the saving rate, which arithmetically is a very big factor in the continued growth of personal consumption expenditures and hence in final demand, seems to be attributable almost entirely in the last two or three years to capital gains increases not only in the equity markets but, as I will explain shortly, in housing as well. If we disaggregate the household sector, we end up with a decline of a couple percentage points in the saving rate as a result of the wealth effect and another percentage point or so as a consequence of higher capital gains taxes. As I recall, the latter currently are running a little more than $70 billion per year according to our estimates. Their rise since 1993 has been equivalent to 1 percent of the current level of disposable income. In other words, the capital gains tax accounts for a decline of about 1 percentage point in the saving rate. Another percentage point or so can be attributed to significantly flattened requirements for contributions to defined benefit pension funds because the equity holdings in such funds have appreciated substantially. If these employee contributions had remained about the same as they were in 1993 in relation to income and had gone up with the rise in income, that would have added about 1 percentage point to the saving rate. So these factors taken together account for most of the 5 percentage point decline in the saving rate in recent years. Superimposed on all of that is the very difficult problem of estimating the effects on the saving rate of developments in housing and in the process avoiding potential double counting. There has been a dramatic increase in sales of existing homes. Since the prices of homes have been rising substantially with very few periods of stabilization or decline, the moving average of price increases over the typical holding period for a home, which is about eight or nine years, has been positive for an appreciable period of time. As a consequence, realized gains associated with the sales of homes have been significant. The increase in mortgage debt that one can attribute to existing home sales may be derived by taking the net change in mortgage debt on single-family homes and subtracting from it the debt that one would anticipate if there were no turnover of existing homes--that is, new debt taken out on new home sales less scheduled amortization on existing mortgage debt. The net of those two subtracted from the total outstanding debt is a reasonably good estimate of the increase in debt on existing homes. That number looks remarkably close to independent estimates of capital gains on the sale of homes. The assumption here is that that money is extracted from the home market, which of course it is. Obviously, part of mortgage debt is in the form of home equity loans, but the major part occurs as a consequence of the turnover from sales. The seller of a home that has appreciated in value gets back not only the down payment and amortization payments on the home but the realized capital gain. The latter is largely reflected in the higher mortgage debt, which the buyer takes out on the home relative to what the seller writes down. As a consequence, the aggregate amount of realized capital gains in housing and, in a rough sense, the amount of net debt on existing homes have been going up commensurately with the dramatic rise in sales of existing homes. Theoretically, one can say that if the cash received by the seller is unencumbered, which of course it is, there is no reason why it will not be used to make purchases. The economics literature is consistent with the view that consumer spending and cash flows move hand in hand. More specifically, evidence based on econometric analysis suggests that about half of the funds acquired from windfall cash flows such as realized capital gains are spent. So realized capital gains on homes, even if financed through an increase in mortgage debt, will have an influence on personal consumption expenditures. The trouble, unfortunately, is that the stock market and existing home sales are not uncorrelated. This makes it difficult to form a judgment as to whether what we think is the stock equity wealth effect is really in part the housing wealth effect. The reason this is important is that when the stock market declines, if ever, it does not necessarily follow that the same pattern will occur in existing home sales. As a consequence, unless we are able to disaggregate the wealth effects that are involved--and we are going to do some of that analysis to get a sense of those effects--the forecast of final domestic demand in the next year or two will be a very complex undertaking. The conclusion I draw from all of this is that in addition to income, capital gains have become a very important factor in the overall behavior of final demand. Obviously, the important issue here is how we view the stock market outlook. While it is true that we are seeing earnings expectations fall in the very short run and it is certainly the case that security analysts have dramatically reduced their earnings expectations for the year 1998, they have not decreased their earnings expectations for the longer run. As a consequence, if their earnings per share numbers for five years out have not changed materially, the lowering of estimates for the near term implies higher expected growth rates of five-year earnings. This effectively explains how the stock market can rise with earnings expectations falling. The answer is: They are not falling; it's long-term earnings that are relevant for stock prices, not short-term earnings. I don't know how all of this is going to turn out. The presumption that stock market prices can continue to grow 20 percent a year seems absurd, as I think some of you said, but so do a lot of other things. The presumption that the market is going to level out is probably the least unsupportable position and that presumption is consistent with the Greenbook's predicted impact of the market on personal consumption expenditures. There also has to be a non-negligible probability that the market could go down very substantially. I'm not entirely certain how we would respond to that. However, I do know that the presumption we have discussed in the last year or so that we can effectively manage a bubble is probably based on a lack of humility. As I've said before, a bubble is perceivable only in retrospect. I think uncertainties on the financial side are going to be increasingly difficult for us to factor into our policy deliberations over the next year. The reason is that, as Cathy Minehan said earlier today, the probabilities have risen quite substantially on both sides. What we observe in today's economy is an extraordinary momentum coming out of the 1993 and more importantly the 1995 period. The very substantial expansion of the asset side of balance sheets obviously is affecting capital expenditures as well as personal consumption expenditures. If the economy's performance in 1999 essentially replicates the Greenbook outlook, we will be lucky and fortunate indeed. Knowing that this transcript will be read five years from now, I suspect that comment will be perceived to be very precocious. [Laughter] The bottom line on policy clearly is, as far as I can see--and indeed as most of you have indicated--that we should stay where we are because, as Mike Kelley said, it is not obvious in what direction the next policy move should be. I think we moved very effectively during the fall. I believe we broke what was a dangerously eroding financial situation. In my view, we now are in the position, having completed that episode, where our policy is back to balance and we should be looking to both the upside and the downside in judging the potential direction of our next move. Vice Chair.",2019
-fomc-corpus,1998,"Mr. Chairman, I interpret that, as I'm sure you intended, as a recommendation for ""B"" symmetric, which I heartily endorse. As far as luck goes, I am reminded of the immortal words of Lefty Grove: ""It is better to be lucky than good."" In that year, he won 31 and lost 6.",70
-fomc-corpus,1998,"If he had been right-handed, he would have lost eight. [Laughter] President Parry.",21
-fomc-corpus,1998,"Mr. Chairman, I believe our easing of policy and the associated stock market rebound have significantly reduced the chance of recession or a major slowdown over the next year or so, and for now I think we should leave the funds rate at 4-3/4 percent. Although I believe the upside risks to growth, at least in terms of the rate of growth forecast in the Greenbook, are greater than those to the downside, I can support a symmetric directive for this meeting. Do you want comments on the options?",104
-fomc-corpus,1998,I should have mentioned that. Why don't we conclude this policy discussion and afterwards go back to the directive wording issue instead of taking that up now.,29
-fomc-corpus,1998,Okay. That's all I have for now.,9
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"I, too, support an unchanged federal funds rate. But I want to talk about looking further out into the future than just the current situation. Mr. Chairman, you emphasized what I regard as indeed the key feature of our economic environment, the lack of any pricing power. I think that comes from what are now, fortunately, very, very deeply embedded views about price stability or continuing low inflation. Back in the 1970s when firms would raise prices, other firms would use that as a good excuse to raise their prices also. Now when firms raise prices, other firms do not follow, and the original price increase gets rolled back. And understanding that process, firms don't try it in the first place. So we have a very deeply embedded environment of low inflation. I view that as a great strength in our situation. But I ask myself this question: What would we expect to observe from a dose of monetary stimulus in an environment with entrenched expectations of low inflation? In other words, the stimulus is not going to flow through, at least in the near term, to goods prices but it is going to flow through to something else. What I would expect to see is that it would flow through to some combination of asset prices and output if it cannot flow through to goods prices. I would note that M2 growth at roughly 9 percent is high but not explosive. We are not dealing with an explosive situation in money growth, but it is high. So, it seems to me that what we have observed is fairly consistent with the picture that I am drawing, that the dose of money growth has been flowing through to higher-than-expected output. We certainly see it in consumption; we see it in investment. The economy as a whole is operating at a high level. We have seen it flow through to many asset prices, though not all. This is consistent with the stock market story. I'm talking now not about recent weeks, but in a perspective of about the last 12 to 18 months and what has been going on with the high money growth. Certainly the picture with bond prices is consistent. Interest rates have gone down a lot; bond prices have gone up in the last 18 months. We have talked about house prices and real estate prices more generally. Here again, the rate of increase is not explosive, but there is no question that it is a change from what we had earlier in the 1990s. Some of this I think is a consistent story that money creation has been showing up in house prices and apparently even in agricultural land prices. Despite the weakness in current farm goods prices, agricultural land prices are not plummeting. There are important exceptions to this hypothesis that I am offering. Until the last few months, the dollar has tended to be strong rather than weak. We have not seen increases in prices of foreign assets relative to the dollar. Certainly oil and other commodity prices have gone down sharply. Oil is an important asset that can be held in the ground; it does not have to be produced. But I am persuaded that the money growth that we have seen is showing up more or less as we would expect in the economy and that it explains a great deal of what we see in the current situation. Ned Gramlich earlier talked about the difficulties of explaining the money growth that we've seen. I would like to present an analogy here. Suppose we saw a jump, let's say, in the ECI. If we could explain that jump as a consequence of some anomalies in the data or faulty seasonal adjustment or something like that, we might feel comfortable with the jump. But if we could not explain that jump, I think all of us around this table would assume that, lo and behold, we were finally starting to see the results of the labor market pressures in that number. So, the fact that we cannot explain in detail where this money growth is coming from or where it is showing up is not a source of comfort to me but a source of concern. If it were not for the fact that a tightening today would be a very large shock to the market, given our recent easing moves, I think there would be a case for tightening now because we are working through the credit market disturbance. The bond market is functioning normally again; the number of new issues is back more or less where it was. But I do believe that it is very important that monetary policy be consistent and predictable over time. Therefore, I would not favor a move today because it would be regarded as very, very peculiar in the light of what we have done recently and in the light of the expectations that we have established.",932
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"Thank you. I can agree with ""no change"" today. Even though I disagreed with the funds rate reduction in November, I would not reverse it as of today. I don't know what is going to happen in the future because of the potential for external shocks from Brazil or Russia or elsewhere that will influence the way the domestic and international financial markets function. But holding that aside, I think domestic considerations are going to require at some point that we start to raise the level of the overnight interbank nominal rate in order to slow the growth of money and credit. On the issue of pricing in goods and services markets, the area I would watch very carefully is that 13 or 14 percent of the economy we call the health care sector. Significant upward pressures are already emerging in that sector. We also see prices being raised, at least in our region of the country, in a broad range of leisure goods industries including recreation, travel, tourism, entertainment, and restaurants. So, I think that we are seeing the brown spots.",207
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Mr. Chairman, I concur with the ""no change"" and a symmetric directive. I think the risks are on both sides, but they are of a somewhat different nature. The upside risks would probably emerge gradually and not surprise us by their virulence. The downside risks, I think, are likely to be reflected in big changes if they materialize, although the probability may be smaller.",78
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I, too, endorse your view of ""B"" symmetric. I also agree with Governor Rivlin that the risks are likely to be somewhat different. The downside risks, as they have over the last year, seem to have a low probability of developing but are likely to be highly visible if they do. Actually, I do slightly disagree with her. I think the upside risks are likely to sneak up on us. While I don't think we will necessarily be behind the curve, I do think it will be important to be very vigilant.",111
-fomc-corpus,1998,They won't sneak up on Jerry Jordan. He already has them factored in. [Laughter],20
-fomc-corpus,1998,"I think we are, as you indicated, back to a posture very similar to where we were earlier this year.",23
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"Mr. Chairman, I also favor ""no change"" with a symmetric directive today. I think the case for that has been made very well around the table. As I was reflecting during the break, I was struck by the number of people today who in the earlier go-around identified and quantified the upside risks, certainly to a greater degree than was the case last time. I would associate myself with those who have encouraged us to be as ready to move on the upside to tighten policy as we were very recently to ease on the downside. I think such behavior would reinforce and preserve our credibility for the next rainy day. But I am very supportive of ""no change"" and a symmetric directive today.",139
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I support ""B"" symmetric without any agonizing! [Laughter]",15
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I support ""B"" symmetric with a little bit of agony. [Laughter] I agree with your description of the risks. However, I do want to emphasize, as have others, that we have made progress against inflation but that our forecast for 1999 shows inflation edging up a little. We all know it's because of energy price increases, but I think it does require careful monitoring since we do not want to give up the underlying gains that we have made against inflation. I also want to make a brief comment about your description of the earnings forecasts by Wall Street analysts, with the short-term earnings forecasts coming down but the long-term forecasts staying where they were before. It reminds me of my years when I was in private industry and looked at many, many business plans, as I am sure you did as well. The head of a business would often come in and say, ""Earnings this first year are going to be down, but wait until years two, three, four, and five. They are going to go right up!"" We called this the hockey stick approach because we saw it so frequently. So, I would be very skeptical about the forecasts that the Wall Street analysts are making about long-term profits.",250
-fomc-corpus,1998,I tried not to convey a view that was other than that. President Stem.,16
-fomc-corpus,1998,"I, too, support ""B"" symmetric.",10
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Mr. Chairman, I support your recommendation for no change in the funds rate target and to retain the symmetric posture for the policy directive. I believe it is sometimes useful to think about monetary policy in terms of the desired path for the growth of output instead of the desired path for the funds rate. The path of output for 1999 projected in the Greenbook seems about ideal to me. It shows a slowdown to below-trend growth, which I think is very important, and some unwinding of the exceptional tightness now in labor markets but leaving plenty of room, given the potential downside discontinuities in the forecast. This means that no policy action is warranted today and none would be warranted when and if the economy slows to the projected path. Looking beyond that, if we do not get a realization of those downward discontinuities, I am struck by how brief the period of below-trend growth is in the forecast and how modest the shortfall is relative to potential growth. To me that means, after we get a better sense that we have avoided these downward discontinuities, that we are going to have to be very vigilant against potential upside risks to inflation going forward.",234
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I also agree with your recommendation of ""B"" symmetric. I agonized before, so I'm not going to do it now.",26
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"I support ""B"" symmetric. I would just like to make one point about something that Alice Rivlin said about the short lags, which I tend to agree with. The implication is, I believe, that it gives us a little time. We can wait until we see some brown spots before we have to do anything. We don't have to eat the banana when it's still green! [Laughter]",82
-fomc-corpus,1998,The agony of bananas!,5
-fomc-corpus,1998,"Can you top that, Tom Hoenig?",9
-fomc-corpus,1998,"I am speechless! But I'm going to say a couple of things anyway. First, I support your recommendation completely. Without getting into bananas or agonizing, I would caution us about how we look at the need for future policy actions. Here I associate myself a little with Bill Poole. I think we need to look at the actions we take in terms of the risks, especially the risks to the domestic economy, and the systematic forces that are in play that lead to the upside risks: our policy easings, the rapid monetary growth, strong domestic demand, and robust income growth. I think those factors do give us pronounced upside risks. On the other side, the downside risks, as Governor Rivlin said, are risks of shocks, which are impossible to forecast. I'd suggest that we consider not holding off too long on the unwinding of our recent easing actions as we worry about the downside risks from shocks that might occur but also might not occur. So I want to be thinking about unwinding our earlier actions unless some real shocks emerge.",210
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,I agree with your recommendation.,6
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,I agree with your recommendation.,6
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"I agree with your recommendation, Mr. Chairman, not with agony--that would be too strong a term--but with at least some sense of unease. What I especially agree with in your recommendation is your statement that we are now back at the point of looking at the risks on both sides of the equation. My feeling is that they are now probably skewed to the upside. I agree with the comments that Larry Meyer made and Bill Poole as well. I am comfortable with a symmetric directive at this meeting but had you recommended an asymmetric directive toward tightening, I would have been perfectly happy with that as well.",124
-fomc-corpus,1998,"Okay. Before we move to an official vote, let us now go back to the issue of the directive language. Remember that there are two issues to be resolved, presumably finally, after our previous discussions. One involves the question of the deletion of the phrase ""in coming months,"" which is the basic distinction between option 2 and option 3. The other is the possible deletion of the sentence on the growth of the money supply at the very end of the directive. As I understand it, on the basis of our previous discussions, there is strong support for option 3 at this point. Some members of the Committee have focused on the question of deleting the language in the middle of option 3 regarding the months ahead, I believe, and some have raised a question about deleting the money supply language. It would be helpful if we went around the table fairly quickly to get a statement from each of you on those issues. It may be that if we get a significant modal value on these, we can finally bring this discussion to a conclusion.",209
-fomc-corpus,1998,"May I ask one question, Mr. Chairman? I was one who, just for language purposes, wanted to drop the sentence: ""Any potential changes in the federal funds rate...."" Some expressed a concern that one of the subtleties of that wording related to your authority to act on the Committee's behalf between meetings. One view was that dropping that sentence somehow might be interpreted or perceived as compromising your authority between meetings. My question to you is: Do you believe that the deletion of that sentence in any way creates a perception of compromising your authority?",111
-fomc-corpus,1998,"I do not, mainly because the members around this table said it did not. And that is the ultimate determination.",23
-fomc-corpus,1998,Thank you.,3
-fomc-corpus,1998,President Hoenig.,4
-fomc-corpus,1998,"Mr. Chairman, I like option 3. I agree with the language in the middle sentence that includes both the coming months and the intermeeting period. I would have no problem with deleting the sentence on the money supply but I certainly would not get into an argument if we left it in.",59
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I think I would prefer option 3, although I don't feel strongly about most of the differences. I would delete the sentence Ed Boehne talked about on potential changes in the funds rate because I view it as more confusing than helpful. I do feel rather strongly about taking out the ""in coming months"" phrase, which appears in both versions, options 2 and 3. I think it is irrelevant because we always review our stance of policy at every meeting. ""In coming months"" has no meaning and could easily be harmful in the sense that it might appear to commit us to a direction for policy over whatever period some people might interpret as ""in coming months."" And our views on that could change quite radically. On the final sentence on the monetary aggregates, I have no strong feeling. I don't think it is doing any harm and the day may well come, perhaps soon, when we would be glad to have it in there. So, I would leave it alone.",201
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I would prefer option 3 but, like Governor Kelley, I have a rather strong preference for taking out that phrase ""in coming months."" This is an operating paragraph that is supposed to focus on our plans for the operating instrument over the operating period, which is the period until the next meeting. As a matter of logic and clarity, that phrase just seems to clutter things up and could cause some unnecessary confusion. With regard to the money sentence, I have a preference for leaving it in. It does not refer to an operating instrument. However, this is monetary policy, and I would like to see a reference to money in a statement about monetary policy.",135
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"I support option 3 and taking out the ""in coming months"" for the same reasons that Governor Kelley and President Broaddus have stated. I have a slight preference for getting rid of the monetary aggregates sentence, but I don't feel strongly about it.",51
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I, too, favor option 3. I feel very strongly about taking out ""in coming months"" for the reasons that Governor Kelley and President Broaddus stated earlier. As for the M2 and M3 sentence, it could go or stay; I don't have a strong opinion. But since monetary trends do seem to provide us with some information, at least at the present time, on balance I come down in favor of keeping it in.",90
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"I would delete the sentence in question in option 2, thereby going with option 3. I would actually prefer to leave in the phrase ""in coming months"" in option 3. It goes to the question of what we mean by symmetry and asymmetry. Does it refer to the intermeeting period or is it a statement about the balance of risks that we see that might influence when the next move might occur over some reasonable forecast horizon? I like the broader context. I think that is what symmetry or asymmetry means. Most importantly, it is not positioning ourselves for either the intermeeting period or the next move but to provide some broader concept of how we see the balance of risks. With respect to the last sentence, I would prefer to delete it because I don't think it has to do specifically with the directive itself. It could go elsewhere in any discussion of the underlying forecast, but I don't think it belongs here.",186
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"Actually, given that Larry Meyer was so convincing, I will stand behind him: Option 3; retain ""in coming months;"" and drop the last sentence.",32
-fomc-corpus,1998,President Stem.,3
-fomc-corpus,1998,"I prefer option 3. I think the last sentence on the monetary aggregates should be retained. I don't feel that strongly about the debate over ""in coming months"" versus simply ""during the intermeeting period."" On balance, I'd keep the sentence the way it is and leave it in.",58
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"I will be a purist on this, Mr. Chairman. Since this is a directive, I think the phrase ""in coming months"" should come out and the last sentence should come out too. I don't feel as strongly about the last sentence as I do about the phrase ""in coming months.""",60
-fomc-corpus,1998,Are you for option 3?,7
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,President Parry.,4
-fomc-corpus,1998,"In option 3 I would take out ""in coming months"" for the same reason that President Moskow indicated. I also have a preference for removing the last sentence.",34
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"I have a slight preference for option 2, but the consensus seems to be going toward option 3. So, I will go with that since it does what I think we need to do. With respect to the issue of ""in coming months,"" I would retain it for the reasons that Governor Meyer indicated. I would also retain the last sentence for much the same reason. The entire tone seems to be expectations over a foreseeable period having to do with the risks and also with M2 and M3 growth.",103
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I am for option 3. I would drop ""in coming months"" for the same reasons and with the same degree of conviction that Governor Kelley expressed. I am practically indifferent about the last sentence. On balance, I would probably keep it in.",50
-fomc-corpus,1998,Vice Chair.,3
-fomc-corpus,1998,"Mr. Chairman, atypically for me, I am fairly relaxed about the whole thing. [Laughter] I have a marginal preference for taking out the words ""in coming months."" Perhaps inconsistent with that, I would leave the money sentence in on the theory that to spend the next year of our lives having knock-down, drag-out battles with the monetarists of the world is not worth the struggle.",82
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"Mr. Chairman, I would go for option 3. I would take out ""in coming months"" because I view this as the operating directive that applies until the next meeting. I believe that a sense of the longer-run perspective of the Committee can be and is given in the minutes that are released at the same time as the directive. I feel strongly that the last sentence referring to M2 and M3 should come out because I believe that in the interest of accuracy it should reflect what the role of money is in the Committee's deliberations. I also believe that it could serve as a useful policy device at some point. If and when money is regarded as being more important in our deliberations, it can be put back in; and markets are going to notice if we put it back in. If there is a change in our view on this matter, then it seems to me we would want a way to convey that. And putting it back in would be a clear way to convey it.",201
-fomc-corpus,1998,So you are taking it out?,7
-fomc-corpus,1998,I would take it out now because in the interest of accuracy it does not belong there.,18
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,"I'd go with option 3 and remove ""in coming months"" for the reasons Governor Kelley gave. I'd keep the last sentence for the reasons Al Broaddus gave.",34
-fomc-corpus,1998,President Guynn.,4
-fomc-corpus,1998,"I, too, favor option 3 and would delete the last sentence on the aggregates. I would leave ""in coming months"" in for the reason Governor Meyer articulated. I would delete the last sentence for the reasons that President Poole referred to. I hope that helps in reaching a consensus. [Laughter]",63
-fomc-corpus,1998,We need a debate between Governors Meyer and Kelley.,10
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,"I prefer option 3 and I'd delete the reference to ""in coming months."" My first preference would be to keep the sentence on money if it were read and interpreted by everybody as a true proviso clause: If, for example, it meant that if money growth does not slow down as currently indicated in that sentence, we would change something. But since we do not use the sentence that way, I think it has to come out.",88
-fomc-corpus,1998,That covers all the speakers. If you can give the Secretariat just a minute to assess where the Committee comes out on the wording-- [Laughter],30
-fomc-corpus,1998,The decision is so clear from that discussion!,9
-fomc-corpus,1998,We have only been discussing this for a year now. I went to New Zealand hoping that this issue would be settled before I returned! [Laughter] Dave Lindsey let me down.,37
-fomc-corpus,1998,You are going to have to write the minutes summarizing this discussion.,14
-fomc-corpus,1998,"We might just say: ""The Committee then turned to the directive language. At the end of the discussion....""",23
-fomc-corpus,1998,"The vote is unanimous in favor of option 3. There are small majorities in favor of eliminating the ""months ahead"" reference and the ""money supply"" sentence, but the votes are not overwhelming. The three of us who were tabulating the preferences during the discussion get the same results, so I assume that our count is accurate. Unless I hear an objection, we will use that wording in the current directive. Would you read the new wording with the policy the members have endorsed, namely ""B"" symmetric.",104
-fomc-corpus,1998,"Mr. Chairman, could I raise a quick question? Are we going to return at some point to the question of when this would be released?",29
-fomc-corpus,1998,Yes.,2
-fomc-corpus,1998,It's the next item on the agenda.,8
-fomc-corpus,1998,"The wording is on page 14 of the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 4-3/4 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",97
-fomc-corpus,1998,Call the roll.,4
-fomc-corpus,1998,Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan Yes Governor Kelley Yes Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes,43
-fomc-corpus,1998,"We will now go back to the old issue of disclosure policy. A summary of our past discussions and positions on this issue and a proposed solution have been written out and I will proceed to read it. The Committee has had two very productive discussions this year on disclosure issues other than the tilt language, at the June-July meeting and the September meeting. However, the Committee's views seem to have evolved mainly into two disparate positions, both of which have presented very cogent arguments in their favor. One group, a small majority of the 18 governors and presidents, supports: (1) releasing the operating paragraph of the directive, which includes the tilt, immediately after every FOMC meeting; (2) releasing a brief announcement immediately after those meetings in which either the policy stance or the tilt is changed; and (3) releasing the minutes of the meeting as soon as feasible after every FOMC meeting, presumably a couple of weeks earlier than now. Another group, a sizable minority, advocates keeping the status quo in all these respects. That is, the operating paragraph would continue to be released along with the minutes after the next meeting, and immediate announcements would routinely be made only after policy changes. Finally, two presidents would drop the tilt entirely from the operating paragraph. My impression is that in general the Committee's views have become held with increasing conviction and have polarized into these two main groups. As Chairman of the Committee I would strongly urge that on a matter like this one, where any change will be irrevocable in practice, the FOMC should not adopt a reform based on a narrow favorable vote, with a sizable minority of the governors and presidents strongly opposed. A small shift in the voting balance toward status quo would not enable us to reverse policy any more than a death sentence is reversible after being carried out.",365
-fomc-corpus,1998,Wow!,2
-fomc-corpus,1998,"Instead, I would propose a compromise solution, which we can try out on an experimental basis at least for the time being. That compromise, which I may say was crafted by Don Kohn in a Solomonesque insight, would be for the Committee to continue its current practice of releasing the operating paragraph and minutes after the next meeting but to expand the coverage of its immediate announcements to include those instances where, even when policy has been kept unchanged, the Committee wants to communicate to the public a major shift in its views about the balance of risks or the likely direction of future policy. This announcement would be reserved for situations in which the consensus of the Committee clearly has shifted significantly, though obviously not enough to change policy, and in which markets would be informed that our thinking has changed in order to avoid seriously misleading them. It would not apply every time the tilt was changed where these changes in the tilt encompass only small shifts in the center of gravity of Committee thinking or where in the context of incoming data the markets have already surmised the shift in Committee thinking. The announcement itself would not necessarily reference the tilt but instead would concentrate on the change in the Committee's assessment of economic prospects. For example, under the compromise we presumably would have made an immediate announcement after two FOMC meetings this year when we did not change policy. An immediate announcement after the late March meeting would have indicated that the Committee had seen a shift away from a situation in which prospective forces were roughly offsetting to one in which the risks of greater inflation seemed apparent. Such an announcement would have avoided some confusion over the intermeeting period as market participants attempted to interpret our remarks, and an unauthorized disclosure of the tilt occurred. An immediate announcement after the August meeting would have conveyed the Committee's perception of a change in the risks from rising inflation to a more balanced outlook. In the event, as you recall, with your agreement I revealed the shift in a speech at Berkeley following our Jackson Hole discussion. It would have been better communicated, in my judgment, with a Fed statement. As was demonstrated after the last FOMC meeting, an announcement can be used to convey the message that the Committee has changed its assessment of risks, including a sense of the tilt, even without the release of the operating paragraph. The compromise, which is suggested by Don Kohn and which I fully support, boils down to a commitment at times of a major shift in the Committee's sentiment to take advantage of the current disclosure policy in which the Committee has reserved the right to make an announcement in the absence of policy changes. When the FOMC announced its new disclosure procedures in February 1995, the statement said in part that it would ""announce each change in the stance of monetary policy, including intermeeting changes, the day they are made. When no change is made at a meeting, the Committee will normally just announce when the meeting ended and that there are no further announcements. However, in some infrequent circumstances, the Committee might decide to issue a statement even when no policy action is taken."" With respect to the implementation of this particular change in policy that is being recommended, because the recommended compromise represents an implementation of the Committee's current policy with variations, assuming that an informal consensus of the Committee agrees with the idea, I do not think that a formal vote today would be needed. I should point out that should you concur with the compromise, it would not foreclose later shifts in procedures in either direction based on our experience with this approach. In fact, I suspect our experience might help us to reach a consensus. Finally, news of this approach will get out when the minutes of this meeting are released in early February, and I could discuss it further in my February Humphrey-Hawkins testimony. If so, these procedures would be put in place by the March FOMC meeting. I would be most interested in comments.",781
-fomc-corpus,1998,"Clarification, Mr. Chairman. I may not have listened carefully enough but I am not clear: Would this be a statement from the Committee and would the statement be reviewed by the Committee at the meeting after which it is to be released?",48
-fomc-corpus,1998,"Yes. At the moment, we now discuss our position with respect to policy in terms of alternatives A, B, or C, and, secondly, with respect to tilt. When it appears appropriate, there would be a third element in the discussion, which would be a statement the Committee might wish to make. And that statement would be cleared and edited by the Committee.",74
-fomc-corpus,1998,"That process, Mr. Chairman, would be approximately the same one followed when there are policy changes now. That is, you would read to the Committee a draft of the proposed statement and ask for their comments.",42
-fomc-corpus,1998,That is correct; that would be my intention. President Parry.,14
-fomc-corpus,1998,"Mr. Chairman, I think the compromise proposal you have made makes some sense. To me it is a move in the right direction. As I'm sure you will recall, I have indicated in the past that I would like to see the directive included in the statement released immediately after each meeting. But there is no question that if we do that, we cannot go back if we find that we are not comfortable with that in practice. So to me at least, this is a step in a direction that I think many of us wish to go. As you indicated, if it looks as though we might want to go even further, we will have that alternative available at a later point. So I view this as a reasonable compromise and one that I certainly can live with.",154
-fomc-corpus,1998,Governor Meyer.,3
-fomc-corpus,1998,"Mr. Chairman, your proposal is a compromise that I can heartily endorse. Indeed, I think I would argue that it is better than either the status quo or at this point going to the immediate release of the operating paragraph. As you know, I have been an advocate of the immediate release of the operating paragraph in general and the decision on the tilt in particular. But I also agree with you that a change like this should not be made unless there is a stronger consensus than now exists. It seems to me that what your proposal does is that it respects the views of the majority by affording an opportunity to make announcements about symmetry on those occasions when it would be most constructive. In that regard, this approach goes a long way toward fulfilling the objectives that I have. But it also respects the views of the minority by not making a formal change in the operational procedures that cannot be easily reversed. And, as you also indicated, there is a chance to experiment. Let's see what happens. Let's see how useful in practice these announcements are, and let's also get a feel for the degree to which they affect the dynamics of our decisionmaking and consensus-building. The discussions we have had around this table over the last couple of meetings have given me a better appreciation of the potential costs as well as the likely benefits of an immediate release. Given the uncertainty about this balance, I think your compromise is a perfect solution.",283
-fomc-corpus,1998,President Minehan.,4
-fomc-corpus,1998,"I think the compromise makes a lot of sense as a way to try out a simple recitation of the reason why no policy change was made. I have long felt that no policy change is as much a decision as a change in policy is--that there is a policy content to whatever we do at all of our meetings. At times it could be very useful, as you have suggested, to release an explanatory statement. I think the experience we had with the short statement after our last meeting gave us an indication that this could be quite positive in terms of how the market reacts to what we are doing. In that case, the statement was made in the context of a policy change. Still, it provided a little explanation of it, and that gives us some insight into how a simple discussion of the understandings of the Committee beyond no policy change would be reacted to in the future. So to me it is very definitely a step well worth taking. I also agree with your view that making a major move in what we say to the public about what we are doing without full consensus, without everybody buying in, could potentially be a real problem and that we could not go back.",236
-fomc-corpus,1998,President Broaddus.,5
-fomc-corpus,1998,"Mr. Chairman, I certainly understand the dilemma we face and I agree that we need to have a strong consensus before we make a fundamental change. I suppose this is probably a good step, but I'm not quite as sure or confident of that as other people. I think there is some risk that it could cause confusion in the markets and for the public generally. I guess I'm thinking of a situation where there is no change in basic policy but where we change the tilt. As I understand it, sometimes we would announce it and sometimes we would not; I don't know what the criteria will be and I think there is going to be some head scratching out there about that. I can certainly support your suggestion. However, I think it would be very useful to have a formal commitment that a year from now we will revisit this issue and evaluate in some detail how it has worked. Then at that point we can decide whether it has been a plus or a minus and whether we should go forward or backwards.",200
-fomc-corpus,1998,I think that will be automatic.,7
-fomc-corpus,1998,Okay.,2
-fomc-corpus,1998,President Moskow.,4
-fomc-corpus,1998,"Mr. Chairman, I think your suggestion is an excellent one. In preparation for this meeting I did go back and read the transcript of the discussion we had on this issue at the July meeting. It really was an excellent discussion, pointing out the different views that people had on this subject. Since I am one of those who were in the minority, with a strongly held view, I think this is an excellent next step to take. We can review it after a year and see what results we've had with it.",103
-fomc-corpus,1998,Governor Kelley.,3
-fomc-corpus,1998,"Mr. Chairman, I will go along with this suggestion out of respect for the majority view that I know exists and also your effort to try to resolve the issue. But I do so with considerable trepidation. For one thing, I think it is going to put you particularly as well as the rest of the Committee in the position of having to make some very difficult judgments as to when we should make a statement and when we should not. More often than not, that is probably going to be a very close call. The second observation I would make is that once we start this, no statement immediately becomes a statement. Let us not kid ourselves about making a statement occasionally. We are going to be making a statement at every meeting, even those where we make no actual statement.",157
-fomc-corpus,1998,"If that happens, this is a mistake. I do not envisage that as what this compromise is.",20
-fomc-corpus,1998,"I believe that the market will come to see our lack of a statement as indicating that there was essentially nothing going on at the meeting and that everything is just rolling along at wherever it was perceived to be before. And I think that is a statement. It will be an implied statement. I also have considerable skepticism about whether we would have the ability to go back to the current status quo should that turn out to be desired. I think President Parry hit it on the nose when he said it was a step in the right direction. It is a step! [Laughter] It will clearly be difficult to go backwards should we subsequently, for whatever reason, desire to do so. But I will go along for the reasons stated.",147
-fomc-corpus,1998,Governor Rivlin.,4
-fomc-corpus,1998,"Mr. Chairman, I am quite strongly with the majority and I believe that more communication to the public is better than less. I view this as a step in the right direction. I would like to know how we nominate Don Kohn for the Nobel Peace Prize. [Laughter]",57
-fomc-corpus,1998,The war is not over yet! President Hoenig.,11
-fomc-corpus,1998,"Mr. Chairman, it is a good suggestion and I am in favor of it. I think we should learn from it and then decide if we need to do anything differently sometime in the future. But I'm very comfortable with it now.",47
-fomc-corpus,1998,Governor Ferguson.,3
-fomc-corpus,1998,"Mr. Chairman, I support your suggestion. I think we have discovered that the markets tend to work better when there is more information as opposed to less. I think that the Committee can in fact draft the kinds of statements that are necessary and that this will be, as you observed, an important learning experience for us.",64
-fomc-corpus,1998,Vice Chairman.,3
-fomc-corpus,1998,"Mr. Chairman, I believe this is a step in a good direction also and I have confidence in the Committee. Actually, maybe I have even more confidence in the Committee's counselor. In my misspent youth I was a student of the Old Testament. The wisest man in the Old Testament was not Solomon but an advisor of David called Ahithophel. The passage is ""and the counsel that Ahithophel gave in those days was as if a man were to speak with God!"" [Laughter]",104
-fomc-corpus,1998,It will just go to his head.,8
-fomc-corpus,1998,There is a burning bush on the table.,9
-fomc-corpus,1998,"I think he'd prefer the Peace Prize of the month! How can he improve on that? When you get to the top, you can't go any higher.",31
-fomc-corpus,1998,He can help us by proving that Governor Kelley is wrong.,12
-fomc-corpus,1998,That would be a good way.,7
-fomc-corpus,1998,You do not have to sacrifice a baby in this process.,12
-fomc-corpus,1998,President Jordan.,3
-fomc-corpus,1998,I support the proposal.,5
-fomc-corpus,1998,President Boehne.,5
-fomc-corpus,1998,"I believe Don Kohn deserves to be complimented, but I don't think I'd go as far as others have! [Laughter] I think it is a learning step. It is a good compromise. I hope that we all keep open minds and indeed do learn from it. At some appropriate time we can then weigh the evidence and decide what we want to do. It may indeed turn out to be a good step; it may not be a good step. But I think a learning step is a step in the right direction.",107
-fomc-corpus,1998,"Do you want to speak again, Jack?",9
-fomc-corpus,1998,"Yes, please, if I may. Mr. Chairman, I support the compromise primarily because it represents more transparency and more information. I also want to identify with Al Broaddus's comments. This is not going to be without risk and agony, going back to our earlier discussion. I would hope that the small majority that favors the full step can continue to work with the rest of the Committee and that we can build a bigger majority over time as we gain experience with this. Thank you.",99
-fomc-corpus,1998,President McTeer.,5
-fomc-corpus,1998,I support your recommendation.,5
-fomc-corpus,1998,President Stern.,3
-fomc-corpus,1998,"I think the suggested approach is an excellent one. It gives us the opportunity to provide more information in a timely way when appropriate, and we can learn from that experience.",34
-fomc-corpus,1998,President Poole.,4
-fomc-corpus,1998,"Yes, I also support the proposal.",8
-fomc-corpus,1998,Governor Gramlich.,4
-fomc-corpus,1998,"I support it. I would like to compliment some combination of you and Don Kohn. I believe Mike Kelley raised some good, sobering thoughts, but I think the way to deal with his concern is to use this new tilt announcement procedure only in rare circumstances. In my view that is how it should be done.",64
-fomc-corpus,1998,"Okay, we will adopt that policy. It does not require a nd             rd vote at this point. We can adjourn to lunch. The next meeting is February   2        and   3",41
-fomc-corpus,1999,"Good afternoon, everyone. Before we get started, I would like to welcome Bob Rasche, the new Director of Research at the St. Louis Bank. Also, it has been brought to my attention that today is Bill Conrad's fortieth anniversary of service at the Chicago Bank. [Applause] It is a rare event when somebody can tolerate the rest of us for that long! We will start off, as we do in the first meeting of each year, with the election of officers. I will turn the gavel over to Governor Rivlin to bring us a Chairman and Vice Chairman for this year.",124
-fomc-corpus,1999,Thank you. It is not clear by what authority you were making those announcements! [Laughter] I would like to open the floor for nominations for Chairman of the FOMC. Governor Kelley.,40
-fomc-corpus,1999,"After long and careful consideration, I nominate Alan Greenspan.",12
-fomc-corpus,1999,Is there a second? SEVERAL. Second.,11
-fomc-corpus,1999,Any discussion at this point?,6
-fomc-corpus,1999,I would like to hear Governor Kelley's long and careful reasoning!,14
-fomc-corpus,1999,That's confidential!,3
-fomc-corpus,1999,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1999,Opposed? I believe we have a Chairman.,10
-fomc-corpus,1999,"I thank you, everyone.",6
-fomc-corpus,1999,"Since I still have the gavel, I will entertain nominations for Vice Chair of the FOMC.",21
-fomc-corpus,1999,I nominate President McDonough of the New York Fed.,12
-fomc-corpus,1999,Good idea. SEVERAL. Second.,9
-fomc-corpus,1999,"Any further nominations? All in favor say ""aye."" SEVERAL. Aye.",18
-fomc-corpus,1999,Opposed? We have a Vice Chair.,9
-fomc-corpus,1999,Thank you all.,4
-fomc-corpus,1999,Democracy works again. I would like to ask Normand Bernard to read the list of potential staff officers.,22
-fomc-corpus,1999,"Secretary and Economist, Donald Kohn; Deputy Secretary, Normand Bernard; Assistant Secretaries, Lynn Fox and Gary Gillum; General Counsel, Virgil Mattingly; Deputy General Counsel, Tom Baxter; Economists, Michael Prell and Karen Johnson; Associate Economists from the Board: Lewis Alexander, Peter Hooper, David Lindsey, Larry Slifman, and David Stockton. Associate Economists from the Federal Reserve Banks: Stephen Cecchetti proposed by President McDonough; William Hunter proposed by President Moskow; Richard Lang proposed by President Boehne; Arthur Rolnick proposed by President Stern; and Harvey Rosenblum proposed by President McTeer.",135
-fomc-corpus,1999,Would somebody like to move that list?,8
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,Is there a second? SEVERAL. Second.,11
-fomc-corpus,1999,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1999,"The ayes have it. The next item on the agenda is the selection of a Federal Reserve Bank to execute transactions for the System Open Market Account. That, of course, has traditionally been the New York Bank, and unless I hear objections, I will presume that the Committee has again authorized the same Bank. Next is the selection of the Manager of the System Open Market Account. Our incumbent is Peter Fisher. I assume that his nomination is acceptable to the New York board?",95
-fomc-corpus,1999,It is indeed.,4
-fomc-corpus,1999,"If there are no objections except mine, [laughter] I will assume that the Committee is again authorizing our incumbent, Peter Fisher. We have an examination report on the System Open Market Account. Are there any questions on that report? If not, I will assume that it is acceptable without objection. Next we have a review of the System's security lending program and a related proposal to amend the Committee's Authorization for Domestic Open Market Operations. Peter, would you like to review briefly what this involves?",101
-fomc-corpus,1999,"Yes, let me mention a few points, if I may. The Committee reviews the Authorization for Domestic Open Market Operations at the first meeting each year. I have proposed an amendment to the Authorization for the Committee to consider. You have a rather lengthy memo from me on the subject. There are a few points I would like to try to cover again. I think I could have done a better job in the memo in providing a clearer contrast between the existing program and the proposed program. Let me try to do that very briefly. Under the current program we lend securities for one week. We do it in accordance with the rather low limits on bills and coupon securities as described in the memo. We charge a flat fee of 150 basis points, regardless of the security's current value in the market, and there is a prohibition on short selling. That is, we are not supposed to lend to dealers who have sold the security short, even though that is virtually impossible for us--and in some cases for the dealer--to determine with accuracy. A major change we are proposing is that instead of charging a flat fee, we would hold an auction with a minimum reserve fee of 100 basis points. In effect, for the dealers who want the security, this provides an allocation mechanism that involves something other than a first-come first-served, helter-skelter basis of who calls the Desk first. An auction is also a mechanism that allows us not to waste public assets, so to speak. That is, when we charge a flat fee of 150 basis points for something that is worth more than 150 basis points ""on special"" in the Treasury financing market, we are giving away System property, if you will, by accepting less income than the System could receive. The second change that we are proposing is in the limit structure. Instead of the rather low limits, higher limits are proposed, as explained in the memo. The most important shift is from the one-week term of the lending to overnight lending. I don't think I underscored quite enough in the memo what an important shift that would be. I have previously described to the Committee my concern that any change in this program should not simply move both the demand and supply curves out equally. That would not accomplish very much. The longer we thought about this, the more we realized that the willingness of dealers and market participants to short securities is really based on term financing. No one shorts a security and plans to finance it through a series of overnight borrowings. They think in terms of one-week or longer time periods when they are trying to finance their short sales. That is where the demand and supply for shortening securities come from. By limiting the System's lending to an overnight program where transactions occur only at noon, which is rather late in the day, I think we would do a better job of providing a lending facility that addresses clearing issues and keeps the market moving, without encouraging dealers to short securities. We are trying to stand apart from short selling activities. On the 25 percent limit that I suggested we begin with, we would actually be lending less than we are lending currently, as a rough-cut calculation. I noted that I would clearly expect to raise that limit somewhat as I saw increased demand, but I certainly would not do so without talking to this Committee. As I also indicated in the memo, it is hard to imagine raising that limit at any one auction to anything higher than 50 percent of our total holdings in an issue. We think of the proposed program changes as enhancements that will better enable us to achieve our existing objectives. These changes are designed to provide a little grease for the clearing mechanism and to enable the dealers to avoid some of the games that go on when a security is so scarce that borrowing it has essentially the same cost as failing to cover. Then people may not try to cover shorts at all and that creates some perversions. That is the nature of the proposed program. As we have designed it, it is still intended to be a limited program. I would be happy now to answer any questions about what I have just said or about any aspect of the memo that I circulated to the Committee.",840
-fomc-corpus,1999,"Peter, thank you for the memorandum. It was very detailed and complete. In a sense, the memorandum presents this as an operational issue, but it seems to me that this proposal is closely related to broader issues about how we manage our portfolio and where along the maturity curve we operate and so forth. There is something of the sentiment of the old ""bills only"" controversy that the Committee had around this table many years ago. I have a comment that is perhaps half observation and half question. The memo seems to imply that in order to run monetary policy effectively and engage in open market operations effectively, we have to operate all along the curve including issues of longer maturity. I am not sure that is true. It seems to me that we could run monetary policy entirely, if we needed to, by operating only at the short end of the curve. The question I have is: Doesn't this proposal raise some potential problems and issues? It seems to me that by getting involved in this kind of operation, we could become engaged in arguments as to why we decide to make a loan of securities in a particular case and not make one in some other case. Whenever we conduct one of these operations, especially if it involves a thinly traded issue, we are likely to affect prices. And in such a situation, somebody is going to lose and somebody is going to gain. I don't think it is too much of a stretch to think that conceivably some moral hazard issues might arise if we conduct lending operations on a regular basis. I just wanted to throw that out and ask if you have thought about some of these broader issues in addition to the more detailed technical issues that you covered in the memorandum.",339
-fomc-corpus,1999,"It certainly was not my intent that any aspect of the program would suggest anything about the maturity structure of the portfolio; and if the memo suggests that, I want to correct that misimpression. In fact, the demand for borrowing comes as much from the bill sector as the coupon sector. So, I really think this proposal is independent of the structure of the portfolio. We could talk about that, and we have in the past, but I think this proposal stands apart from that debate. On your second point, we have tried to establish a set of rules that will avoid our using any discretion. I am not sure I would characterize the issue as involving a moral hazard problem. I want a set of rules that will enable this procedure to operate every day without our having to make any discrete decisions affecting prices or changing our behavior. If we were to change any of the program's major features, the big change would be to move from overnight lending to, say, one-week lending. I would imagine that in a situation like the Drexel crisis, we would have to come back to the Committee to propose such a change. I would add that we probably have had a rather bizarre, if marginal, impact on current prices by giving away the scarcity value of the securities to whatever dealer happens to call the Desk first in the morning. So, while the lending program clearly has some impact on the price-setting process, I think the open auction feature of the new program will result in a more transparent and less egregious impact on prices.",307
-fomc-corpus,1999,"I think the proposals in the memorandum are an improvement over present procedures. There's no question about that. I am really asking the basic question of whether we need to engage in this activity at all. According to market analysts, the market is rather liquid and deep. Do we really need to do this?",60
-fomc-corpus,1999,"The short end of the market currently is not very deep, though I know we all come with habits of mind about ""relative to what."" In fact, the bill market is as tight as a drum, and the Treasury supports the proposed change. As I have noted a couple of times, we have a bit of ""after you, Alphonse"" on whose proposal this is. They do not want to be telling us to do it or not to do it. Their interest in this actually is focused on the short end because the bill sector is so tight that if we decide to lend a little more in that area, they think that would be helpful. That conclusion is based only on my conversations with Treasury officials. As I pointed out in the memo, if we had wanted to get out of this business in the late 1980s and early 1990s on the grounds that the market was very deep and liquid and we really didn't need to lend securities, that could have been a compelling argument. But we have seen a decline of 25 percent in the number of primary dealers in the last two years. Issue size is contracting. As I will discuss later in the day, the spread between the on-the-run and the twice off-the-run 30-year bond is still at 20 basis points. This moment in history, when the markets are going through this supply-shock transition, would seem to be a rather awkward time to say these markets are deep and liquid and can take care of themselves. That would be my counter to the argument you are making.",316
-fomc-corpus,1999,"I think one could also argue that an entity that holds a huge portfolio of Treasury securities and is not allowing them to be lent on the market in itself creates potential distortions. We are a very large part of the market. Certainly, the Federal Reserve has been concerned about price distortions in the Treasury securities markets, dating most recently at least from the Salomon Brothers case. There is the potential for shortages in that market to distort and reduce liquidity over time. This proposal is in my view an attempt through the auction technique to keep the Fed out of the price-setting process except when the shortages are quite acute and fairly large overall. I view it as a public policy objective to keep those shortages low and to promote liquidity in the market in which we operate.",151
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"I don't have any objection to the proposed program, but I might understand it better if the following were explained: What difference would we see in the marketplace if we did no lending at all versus lending as outlined under this proposal? Tell me what I would look for with and without the lending.",58
-fomc-corpus,1999,"May I add to that question? You mentioned in your memo, Peter, that at a time of market crisis it had proved helpful in the past to raise the lending limits above those that were in place. It would help me to understand this issue if you explained that.",54
-fomc-corpus,1999,"At the extreme, one is worried about--I hope I can get all of my signs right--the problem that arises when the specials price approaches zero. That occurs when a security is so scarce that to get me to lend the security to you, you have to give me the cash collateral for free. At the Desk, we lend bonds against other bonds as collateral because cash collateral would drain reserves from the banking system and we want to avoid that; however, the market practice is to use cash collateral. Once the specials rate goes to zero, everyone in the market who has a short position in that security is encouraged to ""fail."" There is then a tendency for the problem to escalate because those who have an obligation to unwind short positions and deliver the securities to others have an economic incentive to do nothing and create a series of ""fails""--failures to settle. The multiplier effect kicks in and worsens the adverse market impact. The result is a series of fails that generally make life miserable and divert attention from price discovery to back offices and lead to settlement shortages and unsecured positions. And this situation creates other perverse incentives. I imagine you get the picture. So, at the margin we are trying to reduce the frequency with which that happens. When I first brought up this issue at the May meeting last year, I think it was President Hoenig who asked me whether we could do all this discreetly. Could we just lend securities when it looked as if we were on the cusp of a problem? But as we thought long and hard about it, that seemed to pose the moral hazard issue that we are now discussing. What is the right specials price? That is, we would be deciding when to interject ourselves, and we would end up intervening in the Treasury market in a manner similar to our intervening in the foreign exchange markets, trying to pick a level and decide when to intervene. We don't want to go that route. That would create big problems for us. So, if we want to have some impact on the margin, we think the better way is to use this lending device and do what we can with our large supply of securities. Now, in the spirit of this, let me be clear. This relates to what Don said. With the hats that the Committee and the Treasury have given me, I am engaged in market surveillance to prevent the next Salomon Brothers episode from happening. I go around giving talks to dealers, telling them that if they have a long position, they ought to be lending it back into the market. Well, we have a long position and a lot of securities. If we are concerned about the smooth functioning of the markets and if we think good behavior of portfolio managers involves being on both sides of the market to help keep it deep and liquid, then I think we have a duty in that regard, too. We really live in the financing market. That is where our operations are. And I think we owe something to the market to help keep it as liquid as possible. So, that is the positive reason. I have also described what we will be trying to avoid, which is the risk of fails and specials rates approaching zero. That happens from time to time, and I don't want to say that we are going to prevent that from happening. But at the margin should we be leaning against that with our large portfolio? I'd say ""yes."" Let me go back to the bills we now hold in our portfolio. Having sat still and not bought a bill in a bill pass for a couple of years, we have gone from owning 23 percent of bills outstanding to 30 percent. That illustrates how much Treasury issuance has contracted. So, in the bill sector in particular, we may really have something to offer in terms of trying to keep the market liquid. And that market does indeed have a very close connection to the money market in which we operate.",784
-fomc-corpus,1999,"Peter, I certainly am not trying to give you a hard time. I understand the kind of pressure you are under, dealing with these people day in and day out, and I know you feel you have certain obligations. The difference is that we are the central bank, and there are sensitivities that I hope we will be very aware of. The memo tries to deal with some of these problems; it really does. But it makes me nervous that we have this kind of relationship with this market. I think it is risky over the longer run.",110
-fomc-corpus,1999,"But, Al, you do think this proposal is preferable to what we do now?",17
-fomc-corpus,1999,"Yes, absolutely. I was raising a broader question.",11
-fomc-corpus,1999,Further questions for Peter? Would somebody like to move the Treasury securities lending authority he is requesting?,19
-fomc-corpus,1999,"I move the authority that is requested, Mr. Chairman.",12
-fomc-corpus,1999,"Without objection, so ordered. The next item on the agenda is the review of the Foreign Currency Authorization, the Foreign Currency Directive, and the Procedural Instructions with respect to Foreign Currency Operations. Are there questions for Peter on the memorandum, which I assume all of you have read? If not, would somebody like to move approval of the changes he has proposed in the memorandum?",75
-fomc-corpus,1999,Move approval.,3
-fomc-corpus,1999,"Without objection. Finally, before we get to the main substance of the meeting, you have received a memorandum from Don Kohn on proposed changes to the Program for Security of FOMC Information. Are there any questions for Don?",46
-fomc-corpus,1999,"I would like to clarify a few points, Mr. Chairman, if I may.",17
-fomc-corpus,1999,Why don't you go ahead.,6
-fomc-corpus,1999,"I was trying to respond to a series of issues that have arisen over the last couple of years in the course of the investigations of leaks of confidential FOMC information and in conversations with Committee members and staff. In this proposal we are trying to accomplish a couple of objectives. One is to make clear that confidential information extends beyond the physical or even electronic documents that people possess into what one learns at FOMC meetings--the informational content of meetings. Our intent is to define better what is confidential. Secondly, we want to facilitate policy discussions among staff at the Reserve Banks and here at the Board and between Committee members and the staff. So we recommend reclassifying the Bluebook to Class II to give it a wider circulation and clarifying that Committee members and Board and Bank senior staff can have conversations about research issues that arise at meetings with staff who do not have Class I clearances. Conversations like that can occur. Those conversations would not be about what happened at a meeting, or who said what, and would not be about the results or the vote but about research issues that need to be pursued between meetings. Thirdly, we want to protect the confidentiality of the decisionmaking process and the policy decision itself by continuing to classify the directive, the transcript, and the draft minutes as Class I documents. We would continue to limit the number of people at each Reserve Bank who can see those documents to about 4 or 5--basically the people who are authorized to attend meetings. There is some confusion about this in the document itself, and we will try to clear that up. The new program also avoids a confusion that apparently existed about the distinction between what is currently Class I and who is authorized to see the directive. So, we are shrinking the number of Class I documents by taking the Bluebook out of that category. We are making Class I more clearly aimed at what goes on at FOMC meetings, the most confidential information that people have. Finally, after reading through this and getting comments from several people around the room, I recognize that some points still need to be clarified. We weren't as clear as we could have been in every case. I would appreciate having comments either at this meeting or after the meeting from Committee members and the staff around the room. I would suggest that the best way to proceed would be for us to incorporate your comments, clean up the draft, and get back to the Committee in March with a cleaner draft that says what we want it to say. If you don't vote on this today, the current program will continue in effect for another seven weeks until the next meeting. So, it's not as if we wouldn't have something in effect. That would be my recommendation, Mr. Chairman.",547
-fomc-corpus,1999,It seems reasonable. Does anybody have any objection to that? Let's do that then.,17
-fomc-corpus,1999,"If some people have comments, I'd be happy to hear them.",13
-fomc-corpus,1999,"I have just one quick comment. I worry a little about the degree of restrictiveness being proposed for what is now going to be Class I, which involves any discussion of what actually happens at a meeting. If we limit Class I information to four people, as I understand the proposal, at my Bank that would mean me along with Marvin Goodfriend and only two other people. The way we operate now, I involve five or six people in discussions that get into this kind of detail, and this change would be limiting for me. There is also the matter of involving new people, giving them incentives to get interested in policy and become more knowledgeable about what goes on at these meetings, because at some point they will have to take over. I would hope that in reviewing this proposal, you will think about that aspect. That is the one point that I really choke on.",174
-fomc-corpus,1999,"Is there a way to have a general set of rules and then, under certain conditions, to have temporary alterations or rules that endeavor to address a specific situation? That strikes me as the type of issue you are raising, President Broaddus.",49
-fomc-corpus,1999,"There is already in these rules, Mr. Chairman, the authority to make exceptions for specific situations. I think President Broaddus is raising a broader issue about how many people normally have access to these documents.",42
-fomc-corpus,1999,"What I am trying to say is that I can conceive of the number of people given access as being flexible, depending on the particular situation and circumstances. We might be wise to be sensitive to that because the purpose is not to withhold information from those who should have it within the System but to classify it. The obvious way in which we could restrict information is to make certain that nobody knows about it by passing out amnesia pills at the end of each meeting! There has to be some balance here. It is a tough balance to determine.",109
-fomc-corpus,1999,"I talked with Don about this a couple of times. Based on your comments, Don, I assume you plan to do away with the current arrangement in which the same group of people who brief a Reserve Bank President also know the outcome of a meeting. You are proposing wider access to the Bluebook which in the future will no longer include the directive; a smaller group would be allowed to read the directive; and an even smaller group could discuss what went on at the most recent meeting.",97
-fomc-corpus,1999,"I think that second distinction would go away. Its inclusion was an error and is one of the things I would clean up. The directive would be Class I, so the distinction between Class I and directive access would go away. The second investigation by the Inspector General pointed to the limited access to the directive as one of the rules that a lot of people were confused about. I think that if we can correctly set the number of people who should be given access to information about policy discussions at meetings, that distinction would not be necessary and should be eliminated.",110
-fomc-corpus,1999,Let me then put in a request that we take one step back and ask ourselves how much sense this makes. How many people in most Banks get access to all the policy alternatives and are part of the very intimate group of people who are advising the President on what he or she should do at the meeting? Can we ask ourselves whether it makes sense not to let all those who advise the President know what went on at a meeting? I know the rule limiting access to the directive existed before and a lot of us didn't know about it. I am questioning that rule.,113
-fomc-corpus,1999,"Obviously, it is up to the Committee whether it wants to give more people access to information about what goes on at meetings. Maybe that's a choice we could give the Committee at the next meeting: How many people do you want to have access to Class I information? You know the risks on both sides. We were trying to make a distinction between knowing what went on at a meeting in the sense of what issues arose and what staff work needed to be done versus knowing what went on in terms of information that could cause a problem if leaked to the newspapers.",111
-fomc-corpus,1999,"I know. Obviously, there have to be restrictions. But to treat as outsiders, in terms of what went on at a meeting, people one considers part of one's close circle or people who are involved in discussions of the issues one brings to the table really does not sit very well with me.",59
-fomc-corpus,1999,"Communicate to Don whatever issues you would like to raise. We will try to close this at the next meeting, but it may spill over to the meeting after that. The ultimate requirement is to get general agreement on all of this. We will now go to the substance of the meeting and our regular meeting format. Would somebody like to move approval of the minutes of the December 22 meeting?",79
-fomc-corpus,1999,Move approval.,3
-fomc-corpus,1999,"Without objection. Peter Fisher, you have the floor.",11
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will be referring to the package of colored charts that begins with the chart on 3-month deposit rates. You should have that package somewhere in front of you on the table. 1/ The charts depict forward rate agreements as they have traded over the past seven months since July 1st. As you can see in the top panel for the United States, the 9-month forward 3-month rate has been rising rather consistently since November. That trend continued in January, with some fits and starts, and that rate is now above the current 3-month rate, while the 3-month forward rate is trading just below current rates. The point of interest here, I think, is that the positive spread in the 9-month forward over the 3-month forward is now the widest since June 1997. For the first time in the period shown in this panel, expectations are upward sloping, with the 9-month forward trading above rather than below the 3-month forward. Looking at the middle panel--for Germany or the euro zone--I think the continued fall in both the current and forward rates reflects the expectation that the European Central Bank will respond to signs of weakness in the continental economies with further easing, even if that occurs a little later this year. The weekend conversion to the euro went quite smoothly, as did our conversion of 32.4 billion of System and Treasury holdings of deutschemarks into 16.4 billion of euros. There were some problems related to volume in the European payments system and the target system that links the national payment systems. This caused some frustration with lags in moving funds around the euro zone, but those seem to be working themselves out now after a month of transition. Looking at the bottom panel for Japan, the 9-month forward Japanese 3-month rate backed up a fair amount in late December and into January and has been trading as much as 20 basis points over current 3-month rates. There is much going on in Japanese money markets that I don't pretend to understand, but the simple point I have come to understand is that since October Japanese government T-bill rates have backed up approximately 30 basis points. Having come off their zero and below zero levels, they have backed up 30 basis points in a period when the Ministry of Finance has increased bill issuance by about 20 percent. This increase in bill rates seems to have flowed through to the money market. On January 11, with dollar/yen having broken through 109, the Japanese authorities intervened by purchasing This seemed to provide some stability to the exchange rate at around 111 or 112. Last week the yen traded up toward 115 on the increasing perception of the U.S. economy's robust performance. It is back down to around 111 to 112 this week. There is still a fair bit of noise in the dollar/yen market but, again, I wouldn't pretend to understand why. Instead of focusing the rest of my remarks on the Japanese economy or the U.S. equity markets or Brazil, which have received a fair amount of attention in our own written reports and elsewhere, I thought I would focus on two areas that have been getting less attention. Nevertheless, these areas have generated a great deal of uncertainty as well. The first is how to price the dollar/euro and the second is how to price fixed income markets in general. On the second page you will see a 10-year history of a synthetic euro, based on a methodology developed by Hong Kong Shanghai Bank. There are a number of methodologies out there, but over the 10-year history there is not much difference among them. This chart is for broad-brush purposes. A basic fact to keep in mind is that the euro is quoted in dollars per euro. The dollar was weakest--at the top of the chart--in 1992 when it traded at almost $1.50 per euro; it was strongest--at the bottom of the chart --in 1989 and 1997 when it traded through $1.05. To give some perspective, we have indicated weeks in which the U.S. authorities intervened in dollar/mark, but we did not include dollar/yen interventions. They are not marked here, but clearly there were occasions when we intervened in dollar/yen, and that intervention had a rather strong impact on dollar/mark as well. This just lists the dollar/mark interventions to provide reference points. My point in bringing this to your attention is, first, that there seems to be relatively little awareness in the markets about how strong the dollar has been recently; it traded around 10-year highs during most of 1997 and 1998. Secondly, it is not at all clear what people mean when they say that they expect the euro to be a strong currency. Do they mean that they expect it to trade above its launch rate of about 1.18? Do they mean that they expect it to trade up into the 1.30s during a normal cycle? Or do they mean that they expect its average rate over the next 10 years to be higher than its average rate over the past 10 years? The fact of the matter is that people speak rather loosely about this. That reflects, in my view, a great lack of conviction on how to price this currency. Even though people think they know about dollar/mark, dollar/euro is really a different animal. To give you some flavor of that lack of conviction and the jitteriness in the markets: In the first week of the euro's existence, it lost a cent because the target system closed one hour late. Mr. Chairman, at the last meeting you asked me if I could explain the differential between U.S. and U.K. swap spreads and those on the continent, and I feebly mumbled something about central bank trading. On some reflection, I would not want to hang my hat on that answer. I know that staff at the Board and New York have tried to come up with some explanation, but we are still uncomfortable with our lack of understanding of that phenomenon. One reason I am uncomfortable is that the longer I look at the relationships, the more I realize how much I don't understand about the underlying relationships among government bond yields, which are shown at the top of page 3. The top panel shows the yields since last July 1 on U.S., U.K., Italian, French, and German 10-year government bonds as well as the yield on the U.S. Treasury inflation-indexed 10-year bond, which is depicted by the dotted red line. You can see that there was quite a rally in European government bond markets in November and December. That brought us to the moment on January 5, which was the day before an auction of new U.S. inflation-indexed 10-year securities, when the yield on both the outstanding Treasury indexed security and the outstanding Italian government nominal 10-year bond stood at an identical 3.94 percent. While the U.S. inflation-indexed yields have fallen about 15 basis points since then and the Italian nominal yields have traded sideways, both German and French government 10-year bonds have traded through the U.S. inflation-protected 10-year rate. We know that the pricing of our inflation-indexed security is problematic, but the problems are likely measured in tens of basis points. I don't pretend that I have a magic rule here, but we know we are dealing with a premium for illiquidity and in particular for the tax treatment that the dealers complain about quite a bit. But there must be something happening on the European side of this equation as well. The optimists in Europe would like to explain the low government bond yields as a reflection of the rush of capital into the euro and the confidence that global investors have in the ECB. Others, perhaps more plausibly at least so far, suggest that the declining yields reflect the deteriorating outlook for the continental economies. But if the euro's own economies are as weak as these yields suggest, where are the tax receipts going to come from to help these governments avoid issuing a lot more bonds? To make the general point, let me offer what is clearly my own opinion: That fixed income markets have been slow to recognize that the so-called short-run supply/demand dynamics have recently been having a much bigger impact on yield curve movements than have changes in inflation expectations, at least over the most recent period. Consider the U.S. Treasury market over the last 2 years with decreases in new issuance and the flight-to-quality buying. Consider the Japanese government bond market over just the last 2 months. There is also considerable unease in the U.S. government bond market. In the bottom panel, you can see that the Brazilian shock had relatively little impact on spreads that were greatly affected by the events of last August, September, and October. The traders in U.S. Treasuries are still not at all comfortable. Liquidity remains at a very high premium. The bottom red line shows that the twice off-the-run spread is still around 20 basis points, as contrasted with the 2 to 5 basis point spread that had prevailed for most of the last 5 years until the events of the past few months. Again, let me make clear that I am offering my own opinion. While the events of last fall effectively knocked fixed income markets off their then-existing equilibrium, markets have not yet found a new equilibrium that they are comfortable with. I don't mean to suggest that markets are fragile, but I do mean that they are still groping and do not have a great deal of conviction about their pricing of fixed income instruments. It would be fair for any member of the Committee to point out that I may be having problems getting supply and demand right in my own backyard of the fed funds market! Turning to the next page, let us go over our operations in the domestic markets for the last several reserve maintenance periods. In the two periods depicted in the top two panels, we set out to be quite generous--to lean against the tightness that we had been seeing during the late fall and in early December and against the normal year-end funding pressures. We then found that our generosity in supplying reserves was heavily supplemented by unanticipated weather-induced float from the winter storms across the Midwest and the Northeast. In the first maintenance period, our generosity was aimed at avoiding a firm end-of-period settlement date, which we feared might set us up for a tight year-end that coincided with the first day of the settlement period. We debated at some length among ourselves how best to prepare the market for the December 1999 year-end Y2K event. We debated whether we should be intentionally generous to calm anxieties or intentionally stingy to engineer a tight close this year in order to encourage everyone to think they had better lock in their funding in advance for the next year-end. We chose the generous route and were rewarded at least in one sense with a noticeable decline in the 1999 year-end premium, as evidenced by futures prices over the last couple days of the year. In the second period, bad weather contributed to especially high, unpredictable float and we drained reserves aggressively on several occasions. In the third maintenance period, I have only myself to blame for the softness. I thought we had room to do a term operation of modest size and thereby avoid the need to operate each day with overnight RPs of different sizes and still leave room for any additional float or change in other factors. I was either wrong or unlucky or both, and we ended up with a little more float and a soft rate through the middle of the period. Overall, I am glad that we now have the long-term RP in our tool kit, and I thank the Committee for adding it. We are going to continue to reflect on our experience of this past year-end as we begin to plan for the coming year-end. Mr. Chairman, I will need a vote to ratify our domestic operations, and I would be happy to answer any questions.",2439
-fomc-corpus,1999,Are there questions?,4
-fomc-corpus,1999,"Peter, I probably should know this from something else you have sent us, but when you converted our holdings of securities denominated in deutschemarks to securities denominated in euros, what did you do?",40
-fomc-corpus,1999,"We did a series of foreign exchange trades with ourselves, which is really what everyone did to convert. These are not done with any counterparty. We just take out all the assets denominated in marks and then put them back in denominated in euros, asset by asset. Then the challenge is to confirm that with all our counterparties and custodians down the supply chain, if you will, to make sure we get to the same numbers. But essentially the conversion involved a rather rudimentary process of doing a foreign exchange trade with oneself; that was the case for us and for all the market participants.",121
-fomc-corpus,1999,You leave us hanging. Did you check to see if it worked?,14
-fomc-corpus,1999,"Yes. I meant to cover that. I did say that our conversion went quite well; maybe I covered that too quickly. We were among those who experienced some of the glitches in the new European payment system. We were holding our breath sometimes to make sure we did not fail on our delivery of euros while waiting for the queue to work through, but we avoided any problems with that. The real issue came in the first week when the German payment system did not seem to be up to the volume, which is curious because the volume was much reduced. The Germans had put through some changes in their own domestic payment system simultaneously with the shifted target. That taxed the capacity of the German payment system and there were some bottlenecks.",146
-fomc-corpus,1999,"The portfolio now has euro-denominated deposits at the Bundesbank, euro-denominated German government securities, and euro-denominated deposits at the BIS?",29
-fomc-corpus,1999,"Yes, and euro-denominated repo agreements with our counterparties, with Deutsche Bank as our custodian.",21
-fomc-corpus,1999,Okay. Under what circumstances would we wind up having in the portfolio euro-denominated obligations of other taxing authorities besides the Germans?,25
-fomc-corpus,1999,"We will not, until this Committee discusses whether I should buy some other assets. That is, we are limiting our repos to German government instruments. I think I mentioned some months ago that we will see how the markets develop, and we may come back to the Committee to discuss diversifying. In particular, the French short end is much more liquid, so the issue is whether we would want to migrate there if we want our holdings to be more liquid. The Desk will not make that decision--the Committee will make it--though we may recommend going one way or the other. I already have a list of people from non-German EU government finance ministries who want to come visit with me. I am very much looking forward to being able to say: ""I'm happy to consider your proposal but I have to talk to the FOMC before we make any decisions.""",174
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,"Incidentally, I noticed that the issuance of euro bonds in the international market in January exceeded the issuance of dollar-denominated bonds and exceeded the combination of those denominated in the previous currencies that went into the euro. Is this a short-term, one-time adjustment? Or are we looking at the longer-run impact of presumably narrowing bid-ask spreads on the euro vis-a-vis the predecessor currencies? In short, does the introduction of the euro represent a major development in the international bond markets or one that is going to fade once the one-time impact dissipates?",112
-fomc-corpus,1999,"That is a well phrased question. My view is that a lot of issuers want to test the market quickly. That is, we are talking about the issuance of new bonds. Everyone wants to get in because in their sector of the euro market they can be the benchmark, just as all European governments are debating who is going to be the benchmark. If Philips or whatever corporate entity can get in and create a name for itself, will it have a leg up on others? Some corporations may find it works very well for them, and they may expand their program. I have a sense that it's a matter of ""Let's try it and see how it goes."" If I followed your question, I'm not quite sure I see a smooth transition from that to how the euro/dollar exchange rate will trade and what its bid-ask spread will be.",170
-fomc-corpus,1999,"No, I wasn't referring to the exchange rate. I was referring to the notion that as the aggregate issuance of euro securities increases, one would expect the bid-ask spread in the single euro currency to be narrower than the average bid-ask spread in its predecessor currencies. Even though differences still exist with respect to taxes and even though there are all sorts of other concerns, the liquidity differences presumably will narrow the average euro bid-ask spread, and that should increase both the demand for and the supply of new issues in the euro market. The question I am putting to you relates to my recollection that the predecessor currencies accounted for 30 to 35 percent of the issuance market but in January issuance in the euro market was 40 percent of the total. Now, that can be either an indication of the broadening of the market or the mere novelty of it. Perhaps people who had been thinking of doing an offering in deutschemarks decided to wait another few weeks to do it in euros. That's the nature of my question.",205
-fomc-corpus,1999,"Right. I think the January effect we are observing is a curiosity effect. Your other hypothesis may well prove right over time, but I don't expect a smooth movement from where we are now, given what happened in January.",44
-fomc-corpus,1999,"Is the increase in the offerings, which effectively means going short in euros, a factor in the euro's decline from its initial offering price?",28
-fomc-corpus,1999,"That is something some of us have speculated on. I don't think we have firm evidence that there will be a lot of borrowing by people who don't live in the euro zone, since they have to take their proceeds out. So, the first-run effect of such borrowing would be to weaken the euro. Some of us have been telling ECB and NCB officials for some years that having a deep and liquid capital market is not a one-way-up ticket for the exchange rate, and I think there may be some of that. I still ascribe the thinness of the market and most of the tentativeness in exchange rate trading to that.",129
-fomc-corpus,1999,Further questions?,3
-fomc-corpus,1999,"Mr. Chairman, I move approval of the domestic operations.",12
-fomc-corpus,1999,"Thank you. Approved without objection. Let's move on to the Chart Show and Messrs. Prell, Alexander, and Stockton. Gentlemen.",29
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will start the presentation. We will be referring to the package of charts entitled ""Staff Presentation on the Economic Outlook,"" which may be at the bottom of the pile of papers in front of you. 2/ Chart 1 provides a basic summary of the staff economic forecast. As you know, the BEA published its advance estimate of fourth-quarter GDP on Friday; it was a half point above our 5 percent guess. However, given that the BEA numbers do not really point us in a different direction--and they are only tentative, in any event--we have stuck with the Greenbook figures for our presentation today. The top panels of the chart show our projection for real GDP, on a four-quarter percent change basis. We are looking for a substantial deceleration, from 4 percent in 1998--4.1 percent, according to Friday's report--to around 21/2 percent this year and next. As the bars in the left panel indicate, the slowing is entirely accounted for by domestic spending: The negative contribution from net exports is expected to diminish considerably over the forecast period. Though the growth of output is much slower, it is pretty close to our estimate of the trend rate for potential, so that the unemployment rate--the red line in the middle panel--changes little from where it was last quarter. The chart also shows the movements in the factory utilization rate. Over the past year, we observed the odd pattern of the plant utilization rate dropping somewhat below its long-term average even as the jobless rate was reaching a 28-year low. We are anticipating that these indicators of supply pressures will continue to send conflicting messages, each of them changing little on net over the next two years. As Dave will be discussing later, we have given greater weight to the labor market tautness in arriving at the inflation forecast shown in the bottom panel. We foresee a noticeable pickup in the pace of price increase over the next two years--about a percentage point as measured either by the CPI or by the GDP chain index. Chart 2 presents some of the financial backdrop for this projection. The basic assumption is that the federal funds rate will be unchanged through next year. As you can see in the top panel, given our forecast of rising inflation, this implies a further decline in the real funds rate-proxied by the nominal rate minus the recent inflation rate. In fact, it is not at all clear that inflation expectations have come down as far as actual inflation in the past year, so this measure may overstate the current level of the real rate--and consequently may exaggerate the decline that lies ahead. But I would characterize our forecast as incorporating a real short-term interest rate that is at the low end of the range since 1995. The real short rate is scarcely an unambiguous or comprehensive gauge of the financial impetus to demand, so it is worthwhile to look at a few other indicators of credit market conditions. The picture is mixed. In the middle left panel, you can see that nominal yields on Treasury and investment grade corporate bonds have fallen over the past couple of years--probably by more than longer-term inflation expectations. Junk bond yields also eased a bit until the market was jolted by the Russian default shock last summer. The junk rate index plotted here is now up roughly 11/2 percentage points from a year ago, suggesting that the typical low grade firm is facing a considerably increased long-term borrowing cost. The senior loan officer survey--the basis of the right panel--indicates that businesses also are facing a little less friendly reception at commercial banks, with loan underwriting standards having been tightened some in recent months, especially in the case of larger firms. Credit has not dried up, however, as may be seen in the bottom panel, which plots the real debt growth of households and businesses combined. Through the fourth quarter, the end of the solid portion of the line, debt growth remained rapid. We are forecasting a moderation, but this is scarcely a credit-crunch scenario--as might have been feared for a while last fall. Lenders have turned a bit more cautious, but most of the explanation for the projected slackening in debt expansion comes from the demand side. If there are corresponding signs of increased caution in equity markets, they are rather difficult to find. Share prices have continued to soar, and where they are headed from here clearly is a crucial question for the economic outlook. The top panels of Chart 3 don't answer that question, but they provide some provocative perspective by comparing the performance of the U.S. stock market in the 1990s with a couple of other impressive bull markets of yesteryear--Japan in the 1980s and Wall Street in the 1920s. Given the amount of artistry involved in choosing the base periods and thus aligning these curves, I would recommend taking the pictures with at least a grain of salt. But, if you have a taste for salt, perhaps they are suggestive of some of the risks confronting us. The middle panels come at the issue from an angle that is perhaps a bit more analytical. At the left, I have repeated an exhibit I've used in prior presentations to demonstrate why share prices had to peak soon. Perhaps you should stop me before I do it again! [Laughter] The latest observations are rough approximations, given yesterday's prices and our estimates of earnings through year-end. The S&P 500's aggregate P/E is at an unprecedented level. And, to underscore the abnormality, it has achieved this multiple not when earnings had a cyclical upturn in front of them but rather, as you can see in the bottom left panel, when the profit share of GNP has risen to a multi-decade high. And, if the S&P multiple is remarkable, that for the NASDAQ composite--at the right--is astonishing, moving rapidly toward triple digits! Although some analysts would say--indeed, have said--that earnings are beside the point in valuing stocks in this New Era, we have not been able to break the habit of looking at them--which may help to explain our forecast errors. I have shown, in the bottom right panel, annual percent changes in NIPA corporate profits--the black line--along with those for S&P 500 earnings per share. The accounting concepts and coverage of the two series differ, but they have tended to move together. In that light, the divergence between our forecast of NIPA profits in 1999 and the S&P predictions of Wall Street strategists is worth noting. It suggests that the market will continue to have to cope with earnings disappointments in the months ahead. If we had an adequate sample of the Wall Street expectations for 2000, I suspect that the story would be reinforced. Such disappointments have not stopped the market to date, but we have assumed that--from such high valuations--it will be difficult to extend the uptrend in prices. If we prove to be anywhere close to right about the trend from here, the market will cease to provide the impetus it has to spending over the past couple of years. Chart 4 summarizes some of the key considerations in our forecast for domestic demand. Because these are familiar stories, I shall just run through the list very quickly. The upper left panel highlights the fact that though we have the wealth-income ratio declining, the lags in the effects on spending lead us to expect that consumer outlays will continue to grow faster than income for a while longer, pushing the saving rate still lower. But spending growth does moderate. In the housing market--depicted at the right--we expect that with mortgage rates remaining near current levels, the monthly payment burden of home-ownership will remain attractively low. This should keep housing demand from falling sharply as income and wealth growth weaken. In the business sector, the slowing of output growth, depicted in the middle left panel, will turn the accelerator effects on capital spending negative. But that should be partly offset by the favorable effect of a continuing decline in the relative price of equipment--charted at the right. Inventory investment, the red line in the bottom left panel, is expected to move pretty closely with final sales. Not much of a story there. And, finally, government purchases are projected to run a little stronger on balance over the next two years. In the state and local sector, surpluses are growing to the point where we would expect to see some greater expenditure on infrastructure. In the federal sector, real purchases are expected to come closer to bottoming out, with some obvious upside risks in defense and other outlay categories. The pickup in government spending, however, is only a modest offset to the slackening in the growth of private demand that we foresee. Lew will now shift the focus from the domestic side to the external sector.",1787
-fomc-corpus,1999,"The main changes in our forecast on the international side have been driven by events in Brazil. Our previous assumption that Brazil's exchange rate peg would hold has obviously been proved wrong. Your next chart focuses on recent developments in Brazil and highlights the key policy problems facing the Brazilian authorities at this time. As can be seen in the upper left panel of Chart 5, the Brazilian real depreciated by more than 40 percent in the last three weeks through last Friday. The real has appreciated about 81/2 percent following the announcement that Arminio Fraga, a former intern in the Division of International Finance, [laughter] would replace Francisco Lopez as the head of the Brazilian Central Bank. Early in January, a dispute over intergovernmental debts between the state of Minas Gerais and the Brazilian Federal Government, though relatively insignificant by itself, highlighted the lack of consensus on the need for fiscal consolidation within Brazil's complicated federal political system. As the dispute threatened to widen to other states, pressures on the real mounted. On January 13, the Brazilian authorities attempted a controlled devaluation of 8 percent. Significant capital outflows continued and the real was allowed to float two days later. The anticipated fallout from the collapse of the real--including continued high price-adjusted interest rates, heightened economic uncertainty, a greater burden of foreign currency denominated debt, and pressures on the financial system--is projected to cause a severe downturn in economic activity in Brazil this year. As shown at the upper right, we now expect the downturn in Brazilian GDP to steepen in the first half of this year and to extend, although at a diminishing rate, for the remainder of the forecast period. Brazilian policymakers now face a dilemma. With the change in the exchange rate regime and the sharp devaluation of the real, it may be necessary to keep interest rates high to contain inflation. But Brazil's fiscal position remains precarious, owing in part to high debt service costs. The red bars in the middle left panel indicate that Brazil's public sector borrowing requirement was over 8 percent of GDP last year, even with a modest surplus on the non-interest, or primary, part of the budget. Fiscal policy actions enacted since last fall are expected to increase Brazil's fiscal balance by about 3 percent of GDP this year. But a substantial overall deficit will remain unless interest costs decline. Over the last year, domestic short-term interest rates in Brazil--the black line in the middle right panel--averaged about 28 percent, while inflation--the red line--was only about 3 percent. Roughly two-thirds of the government's domestic debt carries an interest rate that is linked to overnight interest rates. At the end of last year, Brazil's federal debt was already equal to about 50 percent of GDP, up from just 35 percent in 1996. Persistent high interest rates could put Brazil's government debt on an explosive path. On the other hand, high interest rates may be necessary to contain inflation expectations. One of the critical uncertainties facing Brazilian policymakers at this time is the degree to which the recent devaluation will pass through to inflation. The bottom two panels offer some perspective on this problem. The bottom left panel shows the exchange rate, domestic interest rates, and inflation for Mexico over the period from 1994 to 1996. In this case the sharp devaluation of the peso at the end of 1994 was followed by a burst of inflation that peaked at an annual rate of over 100 percent. The lower right panel shows the same three variables for Korea over the last two years. The devaluation of the Korean won at the end of 1997 was roughly the same magnitude as the devaluation of the Mexican peso, but in the Korean case inflation only reached a peak of about 30 percent. Before 1997 Korea had less historical experience than Mexico with either large exchange rate depreciations or high inflation, and this may have helped to limit the passthrough of the depreciation to inflation expectations and hence to domestic inflation itself. Our forecast for Brazilian inflation over the next year falls somewhere between the Korean and Mexican examples. Empirical analysis of exchange rate passthrough in Brazil, covering the period before the adoption of the real plan in 1994, would have suggested a pattern more like the Mexican example. But over the last four years the Brazilian government has pursued policies intended to limit inflationary dynamics. For example, explicit indexation of wages was banned in 1995. Obviously, there is considerable uncertainty about our inflation forecast for Brazil. Your next chart focuses on our outlook for other emerging market economies. Our current forecast does not anticipate extreme contagion to other emerging markets from recent events in Brazil. To some degree, this represents a change in our thinking, in that in our previous ""worse case"" analyses we assumed that a failure of Brazil's program would likely generate severe financial pressures on other emerging market economies. This change in our thinking reflects the fact that over the last several months financial markets have increasingly distinguished Brazil from other emerging market economies. The top left panel of Chart 6 shows yield spreads relative to U.S. Treasuries, for Brazilian, Mexican, and Argentine Brady bonds. In the immediate aftermath of the Russian devaluation and default in August, these spreads generally moved together. But since December Brazilian Brady spreads have moved up more sharply than those for Argentina and Mexico. Domestic interest rates in Mexico and Argentina, shown in the top right panel, are up some since the middle of January, but these increases are modest compared with those seen in August and September. Perhaps not surprisingly, the financial contagion from Brazil to Asian emerging markets is even more modest. Credit spreads for Korean and Thai sovereign bonds--the black and red lines in the middle left panel-ticked up when the real was devalued, but those increases have been reversed. The events in Brazil raised some speculation about the viability of currency pegs in Hong Kong and China, but these pressures were relatively mild. As shown in the middle right panel, the 1-month Hong Kong interbank interest rate has increased about 150 basis points since mid-January. Interest rates implied by offshore forward contracts for the Chinese renminbi moved up somewhat more but this was probably related to the Chinese government's decision not to give preferential treatment to foreign investors in the bankruptcy of GITIC, a failed Guandong investment company. Our outlook for GDP growth for emerging market economies, other than Brazil, is shown in the lower right panel. The repercussions from Brazil's economic difficulties are expected to have negative impacts-lower exports to Brazil and some spillover of financial market pressures-on other Latin American countries. Consequently, we expect the rest of Latin America to suffer a recession in 1999, with real GDP in these countries falling about 11/2 percent before rebounding 23/4 percent in 2000. In contrast, real GDP in all five of the so-called ""Crisis Asia"" emerging market economies--all of which experienced serious financial crises and sharp declines in output in 1998--is expected to bottom out and return to positive growth by the end of 1999. As you can see in the lower left panel, industrial production has already returned to positive territory on a year-over-year basis in Korea, and Thailand is not far behind. We continue to assume that Hong Kong's peg to the dollar will hold, but at the expense of somewhat higher interest rates. Accordingly, real GDP in Hong Kong is now expected to decline 2 percent in 1999. Real GDP in China is expected to grow by about 6 percent in 1999, a slower pace than estimated for 1998. Your next chart presents the staff's outlook for Japan and Canada. We continue to be very pessimistic about the prospects for recovery in Japan. Since mid-November long-term Japanese government bond yields --the red line in the top left panel--have moved up more than 11/2 percentage points, and the yen--the black line in that panel--has appreciated about 6 percent relative to the dollar. The sharp increase in bond yields followed the mid-December announcement of a 1999 budget and associated financing plans that envision somewhat greater fiscal expansion and greater bond issuance this year than most market participants had expected. The change in Japan's cyclically adjusted fiscal deficit, shown in the upper right panel, is expected to exceed 2 percent of GDP this year and to be about 3/4 percent of GDP next year. There are few signs of a reversal in the downward trajectory of underlying private domestic demand, however. In the fourth quarter of last year, housing starts and new car registrations fell to their lowest levels in over a decade, and the labor market remains depressed. Since the beginning of the year Japanese bank stocks--the red line in the middle left panel--have been buoyed by potential mergers and the perception that the Japanese authorities may be beginning to move more aggressively to reform the banking system. Such optimism may be premature. In late January, Moody's downgraded the long-term credit rating of five large Japanese banks, including Bank of Tokyo-Mitsubishi. We project that Japanese real GDP--the black bars in the middle right panel--will continue to fall over the forecast horizon even with significant fiscal stimulus. Japanese consumer prices--the red bars--are expected to fall 2 percent in 1999, but part of this decline is the reversal of special factors that artificially elevated consumer prices at the end of last year. Our outlook for other industrial countries is not so gloomy. Declines in commodity prices over the last two years put downward pressure on the Canadian dollar, shown in real effective terms as the black line in the bottom left panel, particularly in the first three quarters of last year. Given that we now project a pickup in both oil and non-oil commodity prices this year, we expect the Canadian dollar to appreciate somewhat against the U.S. dollar this year and next. Our outlook for Canada is shown in the lower right panel. Canada should register growth near 21/2 percent this year and in 2000--the black bars--with only a modest uptick in inflation, as shown in the red bars. The staff outlook for Europe is presented in Chart 8. Exchange rate strength has been an important factor in a tightening of monetary conditions in Europe over the past year and a half. The black line in the upper left panel shows a constructed series for the real effective exchange rate for the euro area, using the DM as an historical proxy. Although the real value of the effective euro has fallen since October, this move retraced only partially the steep appreciation that occurred following the outbreak of the Asian crisis in mid-1997. The real value of sterling--the red line--experienced an even greater appreciation, which started earlier, before it, too, eased somewhat in recent months. The latest data suggest that momentum behind European growth has ebbed lately and the outlook for Europe has softened. This has been especially apparent in Germany, but has started to show through in other key European countries as well. As shown in the middle left panel, indicators of business confidence in both Germany and France--the black and blue lines, respectively--have fallen steadily since the spring of last year. Despite a sharp uptick in late 1998, U.K. business confidence--the red line--still is well off its early-1997 level. Euro-area labor market conditions improved somewhat last year, as illustrated by German and French unemployment rates in the middle right panel. But the declines in unemployment rates have been modest and, as activity has slowed recently, those rates have leveled off. The upper right panel shows three-month interest rate futures in Europe. In view of increasing signs of deceleration in Europe, markets appear to have factored in a modest decline in euro-denominated short-term interest rates over the near term. Futures rates also suggest that market participants expect the Bank of England to cut rates further following substantial declines already implemented since October. The staff forecast is consistent with this pattern. The European outlook for real GDP growth is summarized in the lower left panel. Growth in both the euro area and the United Kingdom should slow by about 1/2 percentage point this year before recovering somewhat in 2000. U.K. inflation, the top line in the lower right panel, should stay on target at 21/2 percent. Although inflation rates will vary across the euro area, they should stay low on average and well within the target range of zero to 2 percent specified by the ESCB. My next chart outlines the influence of the foreign outlook on the U.S. external accounts. The top left panel depicts trends in the value of U.S. exports to our principal export markets. U.S. exports to Europe--the black line--and to Canada, the green line, advanced steadily last year. Exports to Latin America--the blue line--remained relatively strong throughout 1998 as well. U.S. shipments to Asia--the red line--fell sharply last year. The jump in shipments in the fourth quarter to Asian markets was largely due to aircraft. U.S. exports have been restrained by weak economic activity abroad and a strong dollar. Turning to line 1 in the table in the top right panel, we estimate that economic growth in the foreign industrial countries was below trend last year; we project that growth will pick up only slightly during the next two years. Strength in Canada and Western Europe will only partially offset the effect of the recession in Japan. As shown in the middle left panel, the dollar had appreciated sharply in real terms during the past two years, by nearly ten percent against major currencies--the red line--and by more than 15 percent against those of our other important trading partners--the black line--before depreciating during the past few months. In our forecast, the dollar remains essentially flat in real terms, appreciating against the currencies of Latin America and depreciating with respect to most of the currencies of Asia and Europe. This assumption reflects a balancing of risks, with the prospect of strong U.S. growth tending to support the dollar and concerns about the widening U.S. external deficit tending to depress the dollar. The middle right panel depicts the arithmetic contribution of U.S. exports and imports to U.S. GDP growth. Real exports of goods and services, the black bars, fell during the first half of last year before rebounding last quarter. We project that exports will decline again during the first half of 1999 and then stage a slow recovery. We project that imports--the red bars--will continue to advance at a slower, but still strong, pace this year and next. The U.S. external accounts are plotted in the lower left panel. We estimate that the nominal U.S. trade balance--the red line--in current dollars in the fourth quarter recorded a deficit of $182 billion, nearly $70 billion larger than in the fourth quarter of 1997. With accumulating U.S. current account deficits and the resulting deterioration in the U.S. net international investment position, net investment income--the blue line--is projected to continue its decline through 2000. We project that the deficit in the current account--the black line--will increase to $374 billion in 2000 which, as shown in the lower right panel, is equivalent to 4.0 percent of U.S. GDP, noticeably above the peak reached in the 1986-87 period. In recent months financial market participants have focused increasingly on the widening U.S. external deficits and their implications for the exchange value of the dollar. Your next chart considers the relationship between the value of the dollar over the medium term and the likely path of the U.S. net investment position--that is, U.S. foreign assets less U.S. liabilities owed to foreigners. The top right panel shows the ratio of the U.S. net investment position to GDP, on an inverted scale, over the next 20 years under two assumptions about the path of the real exchange rate. The black line shows the path under the assumption that the dollar depreciates, in real terms, at a rate of about 11/2 percent per year after the end of the Greenbook forecast period. The projection is based on an updated version of the long-term model the IF Division used in its Current Account Sustainability project two years ago. One of the conclusions of that project was that a steady depreciation of the dollar of 11/2 percent per year was sufficient to stabilize the net investment position. As the black line in the upper left panel indicates, that conclusion is no longer valid. The red line on the chart indicates that even a 3 percent rate of depreciation is not quite enough. The main factors that change the basic result are shown in the upper right panel of the chart. First, the dollar has appreciated substantially relative to the baseline that was used in 1997. Second, the current account deficit over the last two years has been above the 1997 baseline. Finally, our new higher estimate of U.S. trend growth makes a substantial difference because the income elasticity of U.S. imports is estimated to be substantially higher than the income elasticity of the demand for U.S. exports. The bottom two panels of the chart show the net investment position to GDP ratio and real effective exchange rates since 1980 for Canada and Australia. These are the only two major industrial countries that in recent decades have had negative net investment positions of the size we are projecting for the United States. In both cases their exchange rates have trended down but with considerable variation. That these projections have changed so much over the last two years is indicative of the fact that in such long-run projections initial conditions matter a lot. Moreover, there is no way to know, as the experience of Australia and Canada suggests, exactly how large a country's net investment position could be, nor when the prospect of further deterioration would prompt a financial market reaction. But these projections do suggest that the potential problem for the dollar has gotten worse rather than better over the last two years, and the prospect of widening U.S. current account deficits is likely to exert downward pressure on the dollar at some point in the future. Dave will now continue our presentation.",3681
-fomc-corpus,1999,"Your next few charts focus on the aggregate supply side of the economy, beginning with a question raised at a number of recent meetings, ""Just how low is inflation?"" The upper left panel of Chart 11 displays the four-quarter changes in two alternative measures of consumer prices, the PCE chain price index--the black line--and the CPI-the red line. Prior to 1995, these two indexes increased at roughly the same pace, on average. Since then, however, PCE inflation has been running consistently below that of the CPI, with the difference last year about 3/4 percentage point. For the measures excluding food and energy, shown at the right, the gap was even larger last year--about 11/4 percentage points. The middle left panel highlights the major differences between the CPI and the PCE indexes. One important difference is the aggregation formulas. The CPI uses fixed weights at both the detailed and more aggregate levels, while the PCE index uses weights that vary with spending patterns from period to period. All told, these aggregation differences account for about three-fourths of the gap between the reported inflation rates over the past couple of years. A second difference is the scope of the two indexes. The CPI covers the out-of-pocket expenditures of urban workers, while the PCE measure covers total consumer spending. For example, PCE includes third-party payments of medical costs by insurance companies and the government. The PCE index also includes services provided to individuals by nonprofit institutions. A third difference is that, while the PCE index is mostly constructed using components of the CPI, the BEA occasionally uses price data from other sources. Most prominently in recent years, they have been using a measure of medical service prices that has increased considerably less than the corresponding measure in the CPI. Finally, the weights used in the indexes are developed from different source data; the CPI uses spending reported by households in the Consumer Expenditure Survey, while the PCE weights are derived from various economic censuses. One notable difference is that the weight of housing in the CPI is considerably larger than that in the PCE index. Because housing prices have been rising relatively rapidly, this has given an added push to the CPI. To get a sense of the importance of the weighting and price differences, we recalculated the CPI using weights derived from the PCE data and the PCE's measure of medical service prices. As you can see by comparing the red and blue lines in the middle right panel, this exercise suggests that about another 1/4 percentage point of the difference can be accounted for by these factors. The lower left panel lists some of the pros and cons of the PCE price measure relative to the CPI. Clearly, as a measure of the cost of living, the chain formula of the PCE index is superior to the fixed-weight structure of the CPI, because it avoids substitution bias. In addition, the PCE program has been more flexible in introducing new measurement techniques, and the index can be revised to incorporate new source data. For example, unlike the PCE index, the historical CPI data will never be revised to incorporate the geometric mean weighting that will be introduced this year. That said, the PCE price index does have one significant shortcoming and that is its reliance on imputed measures of service prices for some major components. These imputations, about 31/2 percent of the total index, are not actual measures of market prices, but rather are BEA constructions, most using input cost information of questionable reliability. These imputed prices have had a pronounced effect on the pattern of PCE inflation of late. The deceleration in core PCE over the past year is almost entirely attributable to the slowdown in imputed service prices. As shown in the lower right panel, excluding these prices, the increase in core PCE was 11/4 percent last year, the same as in 1997. The bottom line of our analysis is that consumer price inflation almost certainly has been running below the rates suggested by the CPI, but the extent of the slowing suggested by core PCE is considerably less certain. Of course, we think that even these low rates of measured PCE inflation are still biased upward; PCE prices suffer from many of the same deficiencies of quality adjustment that afflict the CPI. The shaded band in the upper left-hand panel of Chart 12 shows a one percentage point wide confidence interval around our estimate of the upward bias in the PCE price index, which we put at about 1/2 percentage point per year. By this assessment, we may well have been at price stability last year. As may be seen, our projection anticipates some turnaround in inflation over the next two years. By 2000, total PCE inflation picks up about one percentage point and the change in core PCE increases by about 1/2 percentage point. Some of the acceleration reflects our expectation that imputed service prices will rebound from the unusually low increases of the past year. More important, we are anticipating some reversal of the favorable influences that have been helping to hold down inflation over the past couple of years. Food prices--the black bars in the middle left panel--are expected to be a neutral influence. But, retail energy prices-the red bars in the middle left panel--are projected to post modest increases over the next two years, after plunging in 1998. Moreover, core non-oil import prices--the middle right panel--are expected to register their first increases since 1995. As Mike noted earlier, indicators of tautness in product and labor markets, as measured by capacity utilization and the unemployment rate, continue to diverge. As shown in the lower two panels, that difference does not appear to be a statistical artifact. Business reports on vendor delivery performance, the left panel, reveal few if any signs of production bottlenecks. In contrast, the percent of households that perceive jobs as plentiful--the black line on the right--exceed those reporting that jobs are hard to get--the red line--by a very wide margin. Turning to the upper panel of Chart 13, tight labor markets have been an important factor driving an acceleration of real wages, measured here as ECI compensation per hour deflated by the nonfarm business price index. However, owing to low price inflation, hefty real wage gains have required only a modest acceleration in nominal compensation over the past couple of years. To be sure, favorable price shocks provided an extra boost to real wage growth that we are expecting to recede as these influences are partly reversed in coming quarters. But more fundamentally, we expect the legacy of the recent low inflation to put a lid on inflation expectations, and thus nominal wage demands, despite the tightness of labor markets. The simulations presented in the middle panel highlight some risks surrounding this outlook. A model in which wages are a function of, among other variables, past consumer price inflation and the unemployment rate--the dashed blue line--projects increases in ECI compensation per hour that are even lower than the staff projection. The picture is quite different, however, if wages are determined not by past price inflation or inflation expectations, but rather by the past momentum in wage increases. A model with these characteristics--the red line--projects a substantial acceleration in compensation per hour over the next two years. Barring a further increase in productivity growth, a step-up in labor costs of this dimension likely could not be absorbed entirely in business profit margins and would result in more serious upward pressure on price inflation than is envisioned in our forecast. As you can see, the staff projection--the black line--is shaded toward the wage-price model. We read the statistical evidence as favoring this specification, but our projection is above this model because we are skeptical that inflation expectations have fallen as much as suggested by this model's straight reading of lagged prices. And, we remain impressed by the anecdotal reports that wages are under upward pressure. In the lower panel, the staff projection for core PCE is compared with two reduced-form models in which price inflation depends on lagged prices and alternative measures of resource utilization. The staff price projection--the black dashed line in the lower panel--is a bit higher than a reduced-form model using the unemployment rate--the red line--largely because we do not believe some of the special factors that have held down core PCE, most notably the imputed services, will carry forward. An identical model that uses manufacturing capacity utilization as the measure of resource utilization, the blue line, suggests a more serious departure from the staff projection. Over the longer haul, the empirical evidence provides a slight edge to the unemployment rate formulation, though in the past couple of years the capacity utilization model has been closer to the mark. Taken together, the model results suggest that, while there may be some upside risk to our wage projection that could well feed through to prices, the low expected rate of factory utilization implies that the inflation risks are not one-sided. Your next chart reviews the productivity projection. As you know, last spring we revised up our estimate of trend productivity growth--line 3 in the upper panel--to 1.8 percent at an annual rate. As may be seen on line 4, the investment boom of recent years has lifted considerably the pace of capital deepening--that is, the increase in capital per worker. And, the available data hint at some step-up in the growth of multifactor productivity--line 6. The recent behavior of labor productivity appears to have conformed reasonably well with our estimate that some acceleration has occurred in the underlying trend. The middle panel shows our estimate of trend productivity (the thin black line), actual productivity (the thick black line), and a simulation of a productivity model that attempts to capture cyclical variation around that trend (the red line). As can be seen, simulated productivity closely matched actual last year. The recent behavior of the unemployment rate also provides some support for our productivity assumption. The lower panel shows the actual unemployment rate--the black line--and a simulation of Okun's law starting in 1990--the red line. As you can see, the simulation using our estimate of potential output growth of 2.1 percent in the first half of the 1990s and 2.8 percent since then has tracked the unemployment rate closely in recent years. While the recent data have been kinder to this aspect of our projection than many others, it's far too soon to feel confident. It should come as no surprise that putting additional breaks in our estimate of trend productivity improves the fit of these equations, and it is certainly possible that after we complete this business cycle our upward adjustment of the trend will have proven too optimistic. On the other hand, if we are in the midst of an ongoing improvement in the pace of technological advance or organizational efficiency, further upside surprises could be at hand. The greater productivity implied by last Friday's GDP release, if it should hold up through revisions, would provide some support to that view. In assembling this Chart Show, we briefly contemplated dispensing with a discussion of our baseline Greenbook forecast in favor of presenting only alternatives, given that the experience of the past year might suggest that this Greenbook's alternative will be next Greenbook's baseline. [Laughter] In the end, we decided not to take that approach, but your next chart is offered in that spirit. Perhaps one of the largest risks surrounding the performance of the domestic economy is associated with the course of the stock market. In this chart, I consider the consequences of both a continued boom and of an abrupt bust in the market. In the boom scenario, we have assumed that the gains in the stock market continue apace, with a decline in the equity premium sufficient to boost the stock market--the blue line in the upper left panel--by 20 percent in each of the next two years, all else equal. Monetary policy is assumed to respond to this shock according to the Taylor rule. In contrast to our baseline assumption of no change in the federal funds rate through the end of 2000--shown as the black line in the upper right panel--the stronger activity prompted by the booming stock market results in a 100 basis point increase in the funds rate by the end of next year. This tightening of policy leans against the strengthening of activity, but it is not prompt enough or large enough to prevent the unemployment rate--the lower left panel--from falling below 4 percent. Despite that, the inflation rate--the lower right panel--remains about unchanged from that in the baseline; in the model's view, the increase in interest rates would boost the exchange value of the dollar enough to offset the inflationary effects of tighter labor markets. In the bust scenario--shown as the red line in all four panels--we have assumed an increase in the equity premium that would, all else equal, produce a 40 percent decline in the stock market by the third quarter of this year. In this simulation, the Taylor rule calls for a cut in the funds rate of 125 basis points by the end of next year. The unemployment rate rises to 43/4 percent by the end of next year. Again, the inflation rate is little changed from the baseline path. In constructing these scenarios, I have deliberately kept the alternatives simple. In neither case have I allowed for any special disruptions to financial markets or to the real economy not already accounted for by the structure of the model. However, if either scenario were to materialize, it is not difficult to envision a considerably more challenging policy environment. For example, a continuing boom could, at some point, spill over more noticeably into other asset markets--adding extra stimulus to activity and inflation. On the other hand, a steep decline in the stock market could have more adverse consequences for the behavior of capital markets and for credit provision than is embodied in these simulations. Moreover, if such a decline were to trigger an abrupt shift in the economic outlook of businesses or households, the risks of a sharp cyclical downturn would increase markedly. The final chart presents your economic projections for 1999. The central tendency of your forecasts shows expected growth of nominal GDP of 4 to 41/2 percent this year. This is accompanied by growth of real GDP between 21/2 and 3 percent, leaving the unemployment rate in the 41/4 to 41/2 percent range. The increase in the CPI is projected to be in the neighborhood of 2 to 21/2 percent. Mr. Chairman, that concludes our presentation.",2938
-fomc-corpus,1999,"That was a particularly impressive performance by the three of you. I thought it most interesting in all respects. I found the results of the forecast scenario that assumes the largest change in stock market prices somewhat startling in the sense of how restrained the secondary effects were. If we look at the end result, we find that a stock market ""bust"" brings the unemployment rate to just over 5 percent. Five or six years ago we thought 5 percent was just terrific, an exceptionally low number. The inflation rate in that scenario is under 21/2 percent. Again, that is something history would suggest is fully acceptable. So, if someone were to say that a bust in stock market prices would leave us with 5 percent unemployment and an inflation rate of 21/2 percent, some might say ""Bring it on!"" That tells us something about our inability to create, with a limited number of equations, some of the history of past extraordinary events. As Dave Stockton pointed out, the endeavor to hold everything else the same is clearly misleading. Were these types of shocks to occur, I suspect the end results would be quite different. But it is very difficult to capture exactly what those results would be. Nonetheless, I think the forecast exercise is suggestive of the types of issues that are involved. Questions for our colleagues?",266
-fomc-corpus,1999,"I have a couple of questions. First, on Chart 1, the inflation rate as measured by the CPI goes up almost a percentage point over the forecast horizon. In your opening comments, Mike, you said that you were leaning toward giving somewhat greater weight to labor market tightness in the inflation picture. Yet, as I look at the projected performance of the CPI, it seems to me that it is mostly driven by the dissipation of the declines in energy prices. The effect of labor market tightness is there only marginally in the next year. This year the labor market tightness is still being fully offset by other forces. Is that a fair statement?",133
-fomc-corpus,1999,"The rise in oil prices that we have assumed is accounting for a very substantial portion of the overall CPI increase in the forecast. In thinking about the story in terms of underlying resource pressures, as Dave indicated, we have leaned more toward the unemployment rate as the indicator of resource pressures rather than capacity utilization. But the core price measures definitely do not accelerate the way the overall CPI measure does.",77
-fomc-corpus,1999,"I had a question, too, about Chart 10, entitled ""U.S. Current Account Sustainability."" You talked about the factors that have affected the sustainability of the current account deficit since 1997, including the appreciation of the dollar and the deterioration of external accounts. It seems that many of these developments reflected cyclical phasing and the crisis in Asia, for example. So, I am wondering why at some point in the future--when the cycles in the United States, Japan and Europe become more in phase and we get to the other side of the Asian crisis--we won't recoup some of the losses in the current account. Are these transitory and related to the cyclical crisis or are they long-term structural changes?",147
-fomc-corpus,1999,"I think in part what you are picking up are the initial conditions and compounding effects. If we have a cyclical swing that makes the situation worse now and if the other economies come back later, we will in the interim experience a further increase in our net external debt position. And because of the compounding, that matters. An underlying assumption in the Greenbook forecast is that there will be some strengthening in foreign economic activity during the forecast period, but faster-than-trend growth abroad is delayed until the period beyond the Greenbook horizon. So, part of the problem is that if we have a boom and therefore a bigger trade deficit in the current account now, we will accumulate additional foreign debt; and the interest cost of that will mount. In part, therefore, the growing external deficit is the effect of the compounding.",166
-fomc-corpus,1999,"That's a very good point. Just one last comment: I was a little surprised in Chart 15 by the limited impact on inflation of whether there was a positive demand surprise or a negative demand surprise. The Taylor rule, with the exchange rate consequences, just offsets that. Was that not surprising to you?",61
-fomc-corpus,1999,"Yes, it was.",5
-fomc-corpus,1999,Okay. Thank you.,5
-fomc-corpus,1999,"Incidentally, as I think you are aware, the implicit assumption for the crude oil price embodied in the forecast does exceed the price implied by the forward futures market for the rest of this year and next. If you had substituted the market's estimate for the staff's estimate, would that have made much of a difference in the CPI forecast?",68
-fomc-corpus,1999,"It would have taken a couple of tenths off the forecast. Our price is just a dollar or so higher than the market's, so the effect would be a tenth or two. If one wanted to assume that oil prices stay flat going forward, that would take another couple of tenths off, roughly speaking. The assumptions we have made on both the import price side and on the oil price are critical factors in explaining the upturn we have forecast in inflation.",93
-fomc-corpus,1999,"There is a wage/price interaction, which means that the change in the crude oil price gives us a multiplier in the inflation rate. Are you counting that in the 0.2 and 0.3 or are you doing just a direct accounting translation into the product prices in the CPI?",59
-fomc-corpus,1999,"We are doing the full accounting. On PCE price inflation, flat oil prices and, let's say, 1 percent slower non-oil import price inflation would take about 0.2 off the forecast we are showing in 1999 and 0.4 off in 2000, including all of the feedback effects.",66
-fomc-corpus,1999,"That is what I am getting at. It is a full simulation effect. I would presume that if the price of crude oil went down, it would have even more of an effect. So, in a sense a not insignificant part of the forecast is dependent on an endeavor to make judgments about a very difficult issue. We do the best we can, but it is important to realize that we could be wrong on either side of that. We could very readily get an increase in West Texas Intermediate to $15 a barrel, and that would make a difference; or it could go down to $9 a barrel and that would throw the whole forecast off. It is important for us to recognize that so we can monitor this and make certain we make some good judgments about where we are. President Parry.",160
-fomc-corpus,1999,"Mike, I want to ask you a question about the performance of equity markets over the last several years. Typically, one talks about that in terms of earnings and P/E multiples. Does it make sense to focus on risk premia in equity markets and look at it from the viewpoint suggested in some of the studies by Ibbotson and Sinquefield? Those studies indicate that over the longer term there is a significant premium in equity markets in the sense of a greater return on equities than on risk-free Treasuries that is mainly a reflection of the risk premium. Is there reason to think that over this period as a result of persistent growth of earnings and volatility--perhaps almost all in one direction--that the market's perception of the risk in equity markets may have changed? If that risk premium is coming down, obviously a given trajectory of earnings could have a powerful impact on the level of equity prices. It's another way of talking about P/E multiples that has a little more analytical basis, I think.",203
-fomc-corpus,1999,It certainly has an analytical basis. It is an abstract notion that is unmeasurable.,19
-fomc-corpus,1999,That is why it's worth spending time talking about it.,11
-fomc-corpus,1999,"Yes. One of the active hypotheses is that investor perceptions of the holding periods over which they need to assess the volatility in different assets may have changed, so that investors are not as preoccupied with the greater short-run volatility of equities as they were historically. People may have recognized that they had been giving up excessive amounts of yield historically by avoiding equities, given this new perception of risk. That might make higher valuations sustainable for given earnings trajectories and interest rate levels. That said, we are really squeezing these things down by some estimates to very, very narrow risk margins. And there is a certain euphoria that one senses in the markets; people may be exaggerating the safety of equity investments. So if a shock occurs that jars investors out of this complacency, if that's what it is, we could see a reversion to wider equity premia that, on top of more realistic earnings expectations, could result in a very marked adjustment of equity prices. I might note that the simulations that Dave Stockton presented were concocted basically by assuming changes in the equity premium. So it is essentially a totally autonomous shock of this sort that leads to these numbers.",230
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you. The bottom panel of Chart 13 shows a set of projections, one of which uses the capacity utilization equation. I believe you commented that recent history would seem to be a bit more consistent with this view of the world. That raises in my mind the fact that manufacturing capacity focuses on a relatively narrow part of the economy. Have you thought about other factors that this measure might be picking up? Is it a proxy for something? If you wanted to explain why it seems to work, what explanation would you offer?",105
-fomc-corpus,1999,"I would say it works principally because the manufacturing sector is the most cyclical component of the entire economy and therefore involves enough variation to pick up some correlation with what is going on in product markets more generally. It certainly amplifies, in some sense, what is happening in product markets more generally. But your basic observation that this is focused on a very narrow portion of the economy is precisely what makes us hesitant to go the full distance toward this model. We know that in the current circumstances, given what is happening to our trade accounts, there should be special stress in the manufacturing sector and that, therefore, it might not be as reliable an indicator of overall economic conditions as it has been in the past when we have not seen such disparate behavior between the goods sector and the rest of the economy.",159
-fomc-corpus,1999,"I doubt that there is much that I can add to Dave's expertise on this, but one thing we have talked about among ourselves is whether the models that we use really pick up the importance of the dollar and import price movements. Given the confluence of events recently and the way they have impinged on the manufacturing sector, this alternative is perhaps picking up a bigger import-price effect than is manifest in the model simulation we have used for the unemployment rate version of the Phillips curve.",97
-fomc-corpus,1999,What happens if you use the GDP gap instead of the unemployment rate?,14
-fomc-corpus,1999,The outcome is quite close to the unemployment equation results.,11
-fomc-corpus,1999,Doesn't that address President Stern's question?,9
-fomc-corpus,1999,"It does that except one has to remember that the way we construct the GDP gap is basically a version of Okun's law. It is a little more complicated than that, but it does not bring much additional information to bear relative to what is already incorporated in Okun's law.",57
-fomc-corpus,1999,"In order words, these are two independent methods, and the combination of the two doesn't add anything?",20
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"I have a quick question of fact on financing conditions in the U.S. corporate bond market. I should know the answer, but I don't. Roughly speaking, what fraction of the new issues is at the lower-rated end and what fraction is at the higher-rated end? Your chart emphasizes the corporate junk bond rate, and that is up substantially. How important is that quantitatively? I'm just asking for a ballpark figure on that.",88
-fomc-corpus,1999,"To be honest, I don't have a good number in mind. It has varied considerably over time. The table on page III-2 in Part II of the Greenbook shows the gross issuance of bonds by U. S. corporations in 1998. Sales of investment grade issues averaged $14 billion a month, whereas those at the speculative grade were $9.5 billion per month.",78
-fomc-corpus,1999,So the percentage breakdown is roughly 60/40.,11
-fomc-corpus,1999,"If one wants to take into account the degree to which these data represent refinancing, this becomes a tricky question to deal with. One of the problems in trying to examine the changes we've seen in credit market conditions over the past year is that the variations depend not only on a firm's credit rating but on which institution it turns to for financing and also the maturity range. Take, for example, a non-prime borrower looking at bank loans, where the money market rates have been coming down considerably. Even if the spread widened a bit--and it may not have yet--the firm might still be borrowing more cheaply at a bank as opposed to trying to sell securities in the bond market. The cost may not be unambiguously higher. It is a very difficult situation to assess. My judgment would be, taking the totality of this picture going forward with our stock market assumption, that we do have perhaps a modest degree of overall financial restraint. But it is hard to read at this point, and thus you might not have discerned a clear-cut bottom line in my presentation. I think it is a mixed bag.",223
-fomc-corpus,1999,We have fairly detailed information on the outstanding stock of debt by credit ratings. I think the median is just at the edge of investment grade versus noninvestment grade.,32
-fomc-corpus,1999,I suspect so.,4
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"I am back on the bottom chart on Chart 13, and my question is an offshoot to Gary Stern's question. There is a lot of uncertainty about the NAIRU. I believe your equations have it in the low to mid 5 percent area, perhaps 5.3 or 5.4 percent. This chart actually helps to get at a question that I have worried about, which is: How important is that uncertainty? I think one might take the capacity utilization equation as a proxy for things about as they are now, as if we are roughly at the NAIRU. Your wage projections would be based on the notion that we are substantially below NAIRU. So I think the answer to my question is that over a period of a couple years we get about l percentage point more in inflation depending on whether this NAIRU assumption is 51/2 or 41/2 percent. Is that roughly correct?",189
-fomc-corpus,1999,"Over this two-year period that is exactly in line with the basic rules of thumb, yes. It is certainly true that there is enormous uncertainty in all these estimates. Indeed, in terms of the capacity utilization type equations, we are in essence below the model's estimate for the natural rate of capacity utilization. It might even suggest, as this simulation indicates, that there could be some further downward pressure on inflation if that in fact were the measure of overall resource utilization.",93
-fomc-corpus,1999,"In the Bluebook, Governor Gramlich, there is a simulation with a 41/2 percent NAIRU, which does exactly what you said. The economy is at equilibrium. Nominal and real rates are where they need to be and inflation ends up about 3/4 of a percentage point lower than in the baseline.",67
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I found the paper that you circulated on the PCE versus the CPI measures very interesting, and the charts are interesting as well. What I found myself asking, however, was this: If price stability is characterized by people not taking inflation into account when they are engaging in decisions--along the lines of the Chairman's definition of price stability--it is not clear to me which of these measures does a better job of measuring the inflation that people perceive and care about. For a long time we thought it was the CPI; in fact, I thought that was what the CPI was constructed to do. There obviously are technical as well as nontechnical reasons to prefer the PCE. But some aspects of that measure seem very arcane to me in terms of whether people really see what is going on. Have I missed the point here somehow?",167
-fomc-corpus,1999,"I think the clearest area where the PCE has that kind of problem is that it includes prices associated with nonprofit institutions such as religious organizations and other charitable organizations. If prices in those areas are changing because the statisticians are imputing prices for labor costs and so forth, I don't think that affects anybody's expectation very much. Clearly, one might argue that the nonmarket price portion of the PCE is not so relevant. On the other hand, I think that most people probably are not looking only at their out-of-pocket expenditures in considering what is happening with the overall price situation. For example, in the area of insurance costs they might very well care about third party payments or the part that the government is picking up. I view the weighting structure in the PCE as clearly superior and probably closer to what most people perceive. It does not involve a fixed market basket of goods that people were consuming five or six years ago but is more a period-to-period type of weighting structure that probably is much closer to what people perceive is happening.",209
-fomc-corpus,1999,Are you saying that the CPI or the PCE weighting is better?,14
-fomc-corpus,1999,The PCE weighting is probably more appropriate and closer to most people's thinking than the fixed-weight structure of the CPI.,23
-fomc-corpus,1999,"Well, let's assume that the CPI weighting is wrong, because it clearly is a sample and people make very poor judgments as to what the weights are with respect to what they spend. But that is indeed what they think they are doing. The point is that their perception of the inflation rate may be wrong from an economist's point of view. But if you view it in the context of the point President Minehan is raising, it is an interesting question of whether their perception is the relevant one or not. Remember that in the University of Michigan Survey, for example, their view of the rate of inflation is usually higher than it is in reality. The broader question is whose perception matters--the perception of the business community or the consumer community? I thought the memo demonstrated conclusively that the true rate of inflation is far better measured by the PCE. But the question you are raising is a different one.",181
-fomc-corpus,1999,"Yes, it is a different one.",8
-fomc-corpus,1999,"I would add just one comment on that. Part of the difference in reporting in the consumer expenditure survey that is used for the CPI is probably deliberate. It is not necessarily a misconception. The fact is that consumers significantly underreport their consumption of alcoholic beverages and tobacco. Now, it could very well be that they just don't remember. [Laughter]",70
-fomc-corpus,1999,"There is some evidence that suggests that the more you drink, the less you remember!",17
-fomc-corpus,1999,And the less you care!,6
-fomc-corpus,1999,"People certainly remember how much they paid for that last pack of cigarettes. I suspect that even if they are underweighting it in the survey, it is on their minds.",35
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"I want to ask about the last chart because it goes into the Humphrey-Hawkins report and does get some attention from the public. I was struck that the central tendency on the real GDP numbers and on the CPI numbers stayed the same as those we had last summer but the nominal GDP range went down. That implies, I suppose, that our idea of what deflator is appropriate was revised down compared to what we thought last July.",88
-fomc-corpus,1999,"We don't get the members' estimates of the deflator. I must say that, when I look at the numbers you give us, I can see that in some cases people are not distinguishing between the CPI and the deflator in getting to the nominal GDP number. People may have been on top of that more this time than at a prior time. There is, I think, a considerable looseness in these numbers. Also, we simply eliminate the high three and low three from the individual distributions to get the central tendency and there can be a lack of coherence across the components in some instances. I don't know whether that was the case, but that distortion can creep in.",135
-fomc-corpus,1999,Last Friday's report on economic activity in the fourth quarter had nominal GDP growth at 61/2 percent?,22
-fomc-corpus,1999,"Yes, it was 61/2 percent.",10
-fomc-corpus,1999,"Incidentally, speaking of Humphrey-Hawkins, I ought to remind you that Mike Prell will accept revisions to your individual forecasts through the close of business on Monday, February 8. Are there any further questions for our colleagues? If not, would somebody like to start the go-around? President Parry, you have been drafted.",69
-fomc-corpus,1999,"Mr. Chairman, the Twelfth District economy expanded at a strong pace in 1998 and entered the new year with substantial momentum. Initial estimates indicate that total payroll employment in the District grew by 2.7 percent last year, nearly 1/2 percentage point faster than the nation. Following a slow third quarter, District employment regained lost momentum during the fourth quarter, when net hiring stepped up noticeably in the retail trade and construction sectors. However, the District's employment growth rate in 1998 was about one point below its 1997 pace and our growth rate advantage over the nation fell substantially. The key weak spot was the durables manufacturing sector, which was hindered by deterioration in the District's East Asia export performance. Among subsectors, a sharp contraction in the aircraft and parts manufacturing sector has begun, with 3,600 jobs lost during the fourth quarter in Washington State and another 1,800 jobs lost in Los Angeles County during the past year. Manufacturers of computers and other high-tech equipment also had to face a slowdown. As a result, employment in the San Jose metropolitan portion of the San Francisco Bay area was flat during most of 1998. Despite the slowdown in durables manufacturing in California, wage and salary growth in the state has been sustained by the creation of high-wage jobs in other sectors of the California economy. The largest contribution came from finance, insurance, and real estate, which grew rapidly in 1998. Among other states, Nevada and Arizona were at the top of the national employment growth ranking in 1998, and growth during the fourth quarter surged in Oregon, Utah, and Idaho, where it had fallen nearly to a standstill earlier in the year. Turning to the national economy, our outlook has changed little since the December meeting. We continue to forecast a slowdown in real GDP growth to around 23/4 percent this year and unchanged core CPI inflation of 21/2 percent or slightly less both this year and next. Along with the expected slowdown in growth, we have an assumption of an unchanged stock market price level, reflecting the random-walk nature of stock prices. In fact, the waning of the expansionary effect of past increases in stock market prices contributes to slower consumption growth this year. I suppose I should mention that we forecasted a similar growth slowdown last year, along with an unchanged stock market. It is not hard to think of developments that could alter this year's outcome. Recent problems in Brazil serve to remind us of the potential downside risks stemming from fragility in many Asian and Latin American countries, as well as their implications for international and domestic financial markets. But on the other side, last Friday's data on economic activity in the fourth quarter followed the familiar pattern of strong output growth and low inflation. It seems more and more likely that our economy is benefiting from a more rapid expansion of potential GDP, probably due to advances in technology. In fact, our staff has looked at a consumption-based measure of potential GDP, which has the potential to pick up shocks to the supply side of the economy. It shows a considerably faster expansion in potential output last year than do conventional measures. This factor also would help to explain why inflation has been so well behaved in the face of strong labor markets and why the stock market has been so strong. Thank you.",669
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Seventh District economy generally continues to show trends similar to what I reported in December, namely strength in consumer spending and housing activity, mixed signals in manufacturing, tight labor markets, and a few signs that inflation will accelerate in the near future. Consumer spending remains healthy, boosted in part by robust activity in the housing sector, including refinancing activity. Two of our directors, one a major bank credit card issuer and the other a major retailer, reported that consumers have been paying down outstanding credit balances, in part reflecting strong mortgage refinancing activity. Most of our retailers experienced better-than-expected sales during December, and that continued into January. Sales have been particularly strong for big-ticket items such as appliances, consumer electronics, and cold weather products. The blizzard we had in early 1999 forced some merchants to close stores temporarily, but the impact on sales for the month was said to be minimal. Light vehicle sales were in the stratosphere in December but came back to earth in January. Some early January sales were included in the December figures. Inclement weather crimped sales a bit in January, but sales continued to be boosted by high incentives. Automakers have revised 1999 sales forecasts upward, although they still are not quite as high as in the Greenbook. Continued strength in the motor vehicle industry, including heavy trucks where there is a 13-month order backlog, stands in sharp contrast to the weakness still being reported in our steel and agricultural equipment industries. In the steel industry, two small firms declared bankruptcy last year. Three more may do so in the first quarter of this year. A couple of recently opened mini mills are now up for sale. Among the major steel producers, half were still profitable in the fourth quarter, but all are likely to lose money in the first quarter. This will make it easier for the industry to demonstrate injury from steel imports. Production in the farm equipment industry this year is expected to be down 25 percent. Moreover, since Brazil is a major soy bean producer, the devaluation of the real will likely put downward pressure on prices and exacerbate conditions for our soy bean farmers and ag equipment makers. District labor markets generally remain tight, although some easing is reported in locales affected by weakness in certain manufacturing sectors and in agriculture. In terms of prices, firms continue to report that as a result of intense domestic and foreign competition they lack the ability to raise prices. Firms continue to press suppliers for lower prices, and we had several reports recently of larger firms, both within the same industry as well as across different industries, establishing purchasing alliances to increase their bargaining power with suppliers. But some firms have managed to increase prices. Magazine advertising prices have been raised 5 percent. Also, several of our directors expressed concern about higher prices for construction projects. I asked our directors to report on 1999 capital spending plans. It appears that a few of our District firms altered their capital spending plans in response to last fall's financial market turmoil. Changes that have been made appear to be driven by prospective business conditions. Y2K issues are not driving changes in their current plans at the moment. Turning to the nation, our outlook for economic activity in 1999 has strengthened somewhat since our December meeting. Our analysis suggests that real GDP growth will be around 2.6 percent this year and that CPI inflation will be about 2.3 percent. Our forecast is similar to the Greenbook's, although the Greenbook has traveled a greater distance to get there than we did. Last week we met with our Academic Advisory Council. They continue to look for a strong economy in 1999, with inflation remaining around 21/2 percent. Though they indicated that the current setting of monetary policy is about right for now, they expect inflation to accelerate somewhat in the year 2000. I share this concern about accelerating inflation. As we have discussed before, the special factors that led to the 1998 CPI inflation rate of 11/2 percent are not likely to recur this year. Since we see aggregate demand decelerating only to the growth rate of potential output, resource imbalances are unlikely to diminish soon. Last fall there were very real concerns that the financial turmoil could negatively affect creditworthy borrowers and institutions. This Committee's aggressive actions were an appropriate response to those shocks. But if and when those risks diminish sufficiently, an appropriate response would be to move toward a more neutral policy setting. The uncertainties about the Brazilian situation probably mean that it is still too early to tell if its financial crisis has passed, but we may not be too far from knowing.",929
-fomc-corpus,1999,"Incidentally, I have noticed that I am losing a number of you for coffee. Is that an indication that we ought to take a short break?",30
-fomc-corpus,1999,Do we deserve it?,5
-fomc-corpus,1999,Let's keep it to 15 minutes.,8
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The situation remains about the same in New England. Labor markets are tight, with the regional unemployment rate at 3.2 percent in December. Connecticut and Rhode Island reported the two largest declines in unemployment among the nation's states in the month, and both states achieved new lows for this decade. Job growth continues to be slower than that for the nation as a whole, as it has been for most of 1998, and a wide array of businesses complain that a lack of workers, skilled and unskilled, hampers growth. Even manufacturing firms that are shrinking noted that labor markets are tight. Terminated workers do not remain out of work for long. One firm used furloughs around the holidays to avoid layoffs. They feared that layoffs would cause them to lose workers to other businesses and that they would face search, recruitment, and training costs to get new employees when they needed them. Consumer prices rose measurably faster in Boston than for the nation as a whole throughout the year, with prices of food and medical care rising markedly faster--at a pace at least twice as fast in Boston as in the nation. However, tight labor markets and local price pressures did not seem to lead to rising wages generally, at least in 1998. But we continue to see large premiums being paid for workers in various skilled occupations. At least part of the success in holding wages down has involved increased investment in capital goods. A wide range of firms, from dairy farmers to jewelry manufacturers, reported that they were increasing capital spending as well as engaging in in-house training and offering more incentive pay to offset the rising cost of labor and to make such labor more productive. Interestingly, while both retailers and manufacturers expect a slower 1999, most retailers and about half of the region's manufacturers expect significant capital expansions in 1999. Real estate and credit markets are healthy. Residential real estate indicators exceed those of a year ago, with the market for newly built homes in the greater Boston area very strong and prices up smartly. On the commercial side, the speculative wind was taken out of the sails of developers and financers starting in the spring of 1998, after the supervisory warnings on REIT lending. Major developers and lenders both tell me that securitization may now be playing a role in stabilizing real estate cycles. The speed with which the market corrects the cost of financing makes projects less feasible more quickly than the more traditional process used by commercial mortgage bankers, who I am told never saw a building project they didn't love. More broadly, credit spreads, while wider than at earlier points last year, do not seem to be shutting out borrowers. Moreover, lenders across a broad range of financial firms in Boston report very good conditions for their own profitability. One large insurer reported very solid yields on lending activity and the lowest rate of delinquencies in at least a decade. Finally, amid the doom and gloom of reports about the U.S. agricultural industry, there is a bright spot. New England's dairy industry is reporting the best year ever. This is due to higher milk prices and lower costs for feed and other--I should hesitate to use this term--inputs. [Laughter] Even in dairy farming, however, there is a shortage of workers. One contact, a cheese manufacturer, is running his cut-and-wrap operation on a 7-day-a-week schedule and is speeding up installation of labor-saving devices. On the national scene, the data we developed for our Humphrey-Hawkins forecast for 1999 differ very little from those in the current Greenbook, although we, like Chicago, had a little less far to travel. We, too, project a flat stock market and stable oil prices, and we see consumption and business spending slowing to about half the 1998 pace. Our forecast of overall GDP growth is a bit higher than the Greenbook's and the unemployment rate drops a bit even from its current low level. The continuing pressure in labor markets and the flattening of oil prices produce a modest rise in inflation, with both the core and the overall CPI rising to just below 3 percent by year-end 1999. In view of this, for the Humphrey-Hawkins forecast we have projected a modest tightening in mid to late 1999 and probably would see another modest tightening in 2000 as well. Even with this, it is hard to imagine a more sanguine forecast than either ours or the Greenbook's. One has to wonder whether either is just too good to be true. We have all talked about upside and downside risks to Greenbook forecasts for the past year. However, the risks that have materialized all seem to have been on the upside. We have seen lots of growth, which is good, but lots of upward pressure on asset prices and labor markets, which could be bad. Moreover, since the financial panic last fall, credit and capital markets seem to have resumed financing just about anything, albeit with greater spreads than earlier last year and with increased volatility. Some fragility in these markets remains, but it seems quite small compared with the problems we seemed to be facing in October. Arguably, monetary policy is stimulative, given the available liquidity in markets and the reduction in real interest rates brought about by the 75 basis points of easing in the fall. The question we have to ask is whether we really want to stimulate the economy right now or whether it might be prudent to bring policy closer to neutral, recognizing how difficult it might be to measure where neutral is. I do not say that because of a near-term threat of inflation. I say it because whether one thinks we face risks on the down-side from a large market break or from an international situation, or on the upside from continuing pressures on labor capacity and wages, stimulative policy right now seems to run a greater risk of making things worse later in terms of a big drop in the market--a bursting of the asset bubble, if there is one--or more price pressures, if and when they begin to build.",1224
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The regional economy was very strong in the fourth quarter of last year, but that no doubt reflected the weakness at midyear associated with the auto strike. But it is creating what I think of as a ski jump effect. Inevitably we are going to reach a point where people's expectations are going to be disappointed. The anecdotal reports suggest that people are expecting 1999 to be a stronger year than 1998, but that may just be a reflection of how strong autos, construction, and other sectors were as we finished the year. We are told that the backlog of presold, not-yet-built houses is at record levels and was rising as of year-end. Construction employment this year is expected, by the construction trade unions anyway, to exceed the levels recorded in 1998. Overall, the labor markets continue to be very tight. One of the large regional banks that operates in a number of states in the Great Lakes region said that as of the end of last summer they had 3,000 open positions. In order to cut that, they significantly increased their use of retention bonuses. For example, any teller who was on the payroll on September 1, 1998 will get a $1,000 cash bonus if he or she is still on the payroll on February 28, 1999. I'm going to call in the early weeks of March and find out what happened after tellers get their bonuses! The company also was planning an across-the-board increase of 4 to 5 percent in base wages for 1999. Reports from people in the retail sector almost never square with the subsequent data. That may reflect overcapacity in that sector or it may just be unrealistic expectations by the people in the sector. The retailers complained in December about warm weather hurting sales; then they complained in January about cold weather hurting sales. Even in the last week of December they were saying that retail sales were soft or disappointing and they subsequently reported that it was the best Christmas since 1984. A director from the retail sector says that no matter what happens in 1999, we will hear retailers saying that it was not as good as 1998. Bankers report that C&I loan demand is very strong. One of the regional banks said that at the end of the year loans in the pipeline were at the highest level ever, and they are now able to improve their profit margins. Earlier in the year they felt their margins were being squeezed. Even the hard-hit steel industry struck a note of optimism recently. Steel prices in the fourth quarter of last year were said to have been down 6 percent on average from a year earlier but some view that as the bottom. That may be wishful thinking. And it was asserted that steel imports, especially from Japan, had peaked sometime last fall and are now declining. With consumption last year at a record and expected to be as high or better this year, steel industry executives are starting to turn optimistic. I agree with what Mike Prell said about the earnings numbers. LTV reported a big loss for the fourth quarter, but even they are less bearish going forward. Turning to the national economy, I have the same problem with this Greenbook as I have had with other recent ones, especially for the Humphrey-Hawkins projection period, in that I like the Greenbook forecast; I just don't believe it. I continue to want to believe it because it looks so good. For the first meeting of the year, I look back over the forecasts of the last several years. This forecast is now the highest current year forecast for real growth that we have had, at 2.6 percent on a fourth-quarter-to-fourth-quarter basis. That looks really good. It's higher than last year's 2.4 percent. The year before it was 2.4 percent and in 1996 I think the forecast at the first meeting of the year was only about 1.8 percent for the four-quarter period. Growth substantially exceeded that initial forecast in each of the last three years and inflation came in lower than projected. It's hard to beat that. It's easy to say: I want more of the same--faster growth, lower inflation. This is the first time in the last couple of years, though, where the unemployment rate is not rising in the current year and the out year. I also like that outcome, but I doubt that, given what we inherited from 1998, we have conditions in place that will produce that result again. Certainly in my region, but I think nationally as well, a significant portion of the surge in economic activity reflected an acceleration of final demand--fueled by what I consider to be very rapid growth in all of the reserve, money, and credit measures--to a pace that was associated in part with large and growing current account deficits. That, as the Chart Show illustrated, gave the appearance of a virtuous cycle of rapid growth, strong demand, and low inflation that cannot be sustained. Some components of that are going to start to reverse on us and will give us a disappointing result of less output and more inflation. The longer we wait to start to rein in some of the nominal aggregate income growth and spending growth, the longer we are subsequently going to have to endure a period of very weak growth in output and employment in order to lean against the rise in inflation. So, at some point we have to contemplate an adverse transitory tradeoff, and I think the sooner the better.",1117
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"For the sake of variety let me start off by saying that not everything is great in our District. Agriculture is hurting in our region as elsewhere. The dairy farmers, as in Cathy Minehan's District, are doing better than the others, but overall the agricultural sector is very weak. Currency depreciations in a number of competing countries have really hammered apparel manufacturers in the Carolinas, and there have been some significant layoffs in that industry. So, we have a few holes in our region. But, by and large, our District economy is probably as robust now as at any time I can remember in my career. Even in manufacturing, which apart from agriculture is the weakest sector of our region, there are pockets of strength. The furniture industry in Virginia and the Carolinas, which has been in the doldrums for a long time, has been revived to a remarkable degree by the strength of new and existing home sales. Elsewhere, consumer sentiment and spending remain very strong essentially across the board. We had a good holiday selling season, according to the anecdotal information anyway. There is a lot of speculative building in the Washington region, especially around Dulles Airport, and in several other cities in our District, notably Charlotte. Labor markets remain very tight except in the areas I mentioned a little earlier where there are some layoffs. State unemployment rates are below 4 percent in four of our six jurisdictions. Generally, the picture is pretty strong. Let me make my comments on the national economy in the context of our Bank's Humphrey-Hawkins forecast. We are asked to submit a forecast based on what we regard as an appropriate monetary policy. I have always had a little difficulty with that procedure because in some situations I am not at all sure that the Committee, in its wisdom, is going to adopt what I personally think is appropriate monetary policy. It usually does not do that. [Laughter] In that case, my projection would be misinterpreted if somebody thought it was a statement of what I think is the most likely actual outcome for the economy over the year. So, a little less ambiguous and perhaps more informative way to proceed in my view would be simply to assume that there is not going to be any change in policy, and that is what I have done in generating our forecast this year. As it turns out, of course, that is the same assumption as the one underlying the Greenbook projection, but we do use a different model to derive ours, namely a small six-equation VAR model. We get broadly similar but somewhat different results: Our real GDP growth projection is 3 percent as against 21/2 percent in the Greenbook; and we have a somewhat higher inflation rate of 21/2 percent. At first glance, as we have been saying, both our numbers and those of the Greenbook look pretty good. But the 21/2 percent CPI inflation rate we are projecting, while obviously a big improvement over what we had not too many years ago, still worries me. That is really the main point I want to make today. The Labor Department has now corrected about 1/2 percentage point of the 1 percentage point upward bias in the CPI that is usually associated with the Boskin Committee Report results. So our 21/2 percent CPI projection is equivalent to an unbiased projection of 2 percent, which I personally believe should be the upper bound of our tolerance range for inflation going forward. That seems to me as good a place as any to draw the line on inflation, given where we are now. In this regard, it is worth noting also that the core CPI rate increased from 2.2 per cent in 1997 to 2.6 percent in 1998 on a consistently measured basis, which is not an inconsiderable move in the wrong direction. The lower PCE inflation numbers certainly are comforting to some degree, and I enjoyed the discussion about that today. But the fact is--and this is related to what Cathy Minehan was saying--the CPI is still the nation's inflation standard. I think it, more than any other measure of inflation, drives people's expectations and perceptions of aggregate inflation in the country. So for now, at least until that changes, it seems to me that the CPI is what we should focus on. I would add just two quick final points. First, last fall's 3/4 percentage point reduction in the funds rate was done because unsettled financial market conditions threatened to restrain aggregate demand in the future, but the negative shock did not really materialize. I am not sure that the implications of this are captured in our own model's estimation and hence in our forecast that I just summarized. If not, then our forecast may understate and underestimate the potential lagged stimulus that could still be coming in the months ahead from last fall's easing. That could hit the economy at a time when it is already in full stride. That, to me at least, represents a clear upside risk. Second, M2 growth last year overshot the top of its target range by 4 percentage points; if I am correct, that is the biggest overshoot by a substantial margin since the late 1970s or maybe 1980. I recognize that some of this problem is due to anomalous factors affecting money demand. But keep in mind that our money targeting procedure--and here is a blast from the past--still allows base drift. So last year's overshoot will now be ratified by the targeting procedure. That big potential monetary impulse will still be out there as we move through 1999, even if we are able to keep M2 growth within whatever target range we set for 1999. So, bottom line, I think the balance of risks in the outlook has now shifted back to the upside.",1174
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"I could just say that the District economy is doing well and that the risks to the national economy are balanced, but I will bow to Committee tradition and elaborate some. The regional economy in the Philadelphia District remains strong and, if anything, has picked up a little strength recently. Manufacturing has accelerated in recent weeks, following several months of deterioration. Retail sales have held up, with notable strength in autos. Home building has been on the rise. Commercial construction is doing well without the emergence of the kind of boom/bust signs that have characterized the industry in past expansions. Labor markets remain tight. There are layoffs among some of the larger firms, but smaller firms are hungry for employees. Large signing bonuses for some job specialties such as programmers are common, but general wage pressures are not showing through in the form of higher prices. Looking ahead, most business people feel confident about the outlook for 1999, but on the whole they expect a less robust year than in 1998. The risks to the national outlook are still broadly balanced with perhaps a shade more upside than downside risk because of the momentum from domestic demand coming into the new year. Nonetheless, the downside risks are there, mostly in the form of potential turmoil emanating from international developments. With inflation low and not likely to accelerate quickly, we have the luxury of watching and waiting.",268
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Sixth District has begun 1999 on a moderate growth path, consistent with a healthy and balanced expansion. Residential building has moderated, at least for the moment, but that should be offset by a healthy commercial real estate sector. Factory activity was sluggish again in December, and new orders and production are soft compared to a year ago. However, the outlook indicators from our latest survey are positive. The strength is in the high-tech area. The exceptions are apparel and paper, which continue to be weak, but that is not a new story. As for our important tourism industry, in recent meetings I have noted some sluggishness in future bookings but the outlook is promising this time. While there was some disappointment regarding the traffic over the year-end holiday season and some continuing concern about a falloff in Latin American visitors, the Super Bowl provided a big shot in the arm. And domestic tourists with money to spend fleeing the cold weather in the North should ensure a strong first quarter. Airline flights to Florida and the Florida resorts are fully booked through February, and the cruise industry is bullish on 1999 due to strong bookings. Low energy prices continue to pose a problem for Louisiana. The rig count declined still again in December and now stands at 147, the lowest since August 1995. The only clues about capital spending plans in the region come from our December manufacturing survey. It showed that expected capital expenditures six months out were more positive than in November. About one-third of our respondents said they expect an increase in capital outlays over the coming period. Consistent with the national price data, price inflation in the District generally remains subdued. However, as others have said, labor markets remain tight; and we are now getting reports of growing wage pressures, with increases in the 15 to 20 percent range being necessary to retain key employees with certain specific skills. It is not clear to us whether these wage gains are being fully picked up by the ECI data because many of the increases are in areas other than regular wages, such as incentive pay, premium pay, and bonuses. The only other area where we continue to get reports of price increases is health care, as others have noted. Brazil's problems have worsened the outlook for the District's exports to Latin America, damping earnings prospects for regional companies investing heavily in that part of the world. Although not huge in the total scheme of things in 1997, companies based in the Southeast exported $2.6 billion to Brazil, accounting for about 20 percent of the value of the nation's shipments to that country. We think Florida is the state with the largest exports to Brazil, with about two-fifths of the value of the state's shipments attributable to computer equipment, electronics, and transportation. At the national level concerns clearly remain about the international sector. I will turn to that in just a moment. I suggested last time that I saw a danger in having our attention diverted from the stronger-than-sustainable growth and the inflationary pressures that may now be building within the domestic economy. I am no less concerned now than I was at the last meeting. Although our judgmental forecast, like that of the Greenbook and most others, sees some slowing in the pace of growth over 1999, as of yet there are few measurable signs of that slowing. Our concern that growth may once again turn out to be stronger than expected is further influenced by the projections of our Bank's econometric model. That new VAR model, which has tracked the performance of the economy quite well over recent years, is now suggesting a significant upturn in inflation during 2001 to a rate approaching the 4 percent level as measured by the CPI. Importantly, that model also suggests that a significant increase in the federal funds rate--to a level above what we may be comfortably willing to contemplate--will be required to keep inflation at even a 3 percent pace. While I am not campaigning for a monetarist label, I would also note that the growth of the monetary aggregates shows no signs of abating and in fact continues to accelerate. The longer that continues, the greater the risks may be of an outbreak of inflation. I expressed the view last time that with the lags that we know exist, the implications of this relatively long period of strong money growth may not yet have shown through in our inflation measures. Governor Rivlin also made some observations about lags at our last meeting, suggesting that for a number of reasons we may now have the luxury of waiting longer to institute needed policy changes because the economy has become more responsive to shocks than it was previously. That hypothesis piqued our curiosity and we attempted to investigate it a bit. We did so by examining differences in the impulse responses in our model, estimated over different periods of time. Indeed, as was hypothesized, that modeling work does suggest a faster response recently to real side shocks than was the case previously, although the quantitative response to those shocks appears to be smaller. At the same time, we found no evidence that there was any change in the economy's response to monetary policy shocks, which continue to work with long lags, requiring over two years for 80 percent of the total response to be reflected in measures of inflation. Obviously, we have a limited number of recent data points from which to do such modeling but, in addition to the other reasons I suggested for caution, the results of that work are flashing caution lights for me. Turning very briefly to international developments: We have followed recent problems in Brazil with special care, given the ongoing bank supervision work we do in Latin America, working with central banks and other supervisory authorities. Early in the year my staff was telling me that the major key to possible developments in Brazil lay in whether authorities could engineer an orderly depreciation of the currency and whether it could be accommodated peacefully by Brazil's multilateral creditors. We did not expect that the depreciation would come so soon or that the value of the real would decline by 40 percent or more. The good news, it seems to us, is that there has not yet been much spillover effect to other countries as might have been expected. After initial declines, the Mexican and Chilean pesos have recovered somewhat. Argentine authorities have assured that peso/dollar convertibility would be maintained, and Venezuela does not appear to be under substantially more pressure than it was prior to the Brazilian problems. Moreover, trade ties with Brazil and the rest of Latin America, except for Argentina, are relatively limited. In summary, the international situation certainly remains fragile, and we could have to contend with the shock of worsening problems in Brazil, added contagion from the Brazilian problem, or both. Having said that, I don't think we should give undue weight in our policy deliberations at this meeting to what could happen in that part of the world and too little weight to the still very strong domestic economy, given inflationary tendencies that have been identified by both the Greenbook and the independent work at some of our Reserve Banks. Thank you, Mr. Chairman.",1419
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Kansas City District continues to do well and its economy is basically sound. Our weak areas continue to be agriculture and energy, and there has been some slowdown in certain areas of our manufacturing sector. Of course, there is some concern on the manufacturing side about the Brazilian situation, particularly if that were to spread to Mexico, on which we are much more dependent. Having said that, the economy otherwise is doing very well even in some of the manufacturing sectors as well as in the housing sector and construction generally. Retail sales continued strong, even in January. Overall, our major cities are still booming. On the national front, I expect the economy's growth to moderate toward trend this year with low inflation, as others have said. In other words, basically we see the economy continuing to grow. The issue we face continues to be very strong domestic demand set against the backdrop of weak international demand, which is further complicated by the possibility of adverse shocks. That has not changed much in the last several months. Nevertheless, compared to last fall I believe that the risks to the outlook are now far more balanced because of the earlier rate reductions taken to offset the global financial turmoil. As a result, as others here have indicated, I am becoming more focused on the potential upside risk to inflation if we continue to maintain our current monetary stance. To me, a key issue for this Committee at this meeting or very soon is whether, when, and how fast the policy actions of last fall should be unwound. Thank you.",309
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The economy of the Ninth District remains strong outside of some parts of agriculture and mining. But aside from that, consumer spending is continuing to expand, construction is very strong, and labor markets remain very tight. The Twin Cities economy without question is booming, and that is a term I do not use often. As just one indication of that, the unemployment rate in the Twin Cities metropolitan area is now about 11/2 percent, which obviously means that everybody who wants a job has one or probably several. So that area is going along very well. There are wage pressures but selective ones. They tend to be for some entry-level positions, for some information technology professionals, and so forth, but they by no means seem to be generalized. When we ask business people whether they are seeing inflation or deflation, the answer we get back most frequently is ""neither."" The one thing that gives me real pause about the District economy--and it is a little disconcerting--is that bankers still seem to be chasing deals very aggressively. That is my general sense from conversations with them and with some of their customers. As far as the national economy is concerned, let me say first that I was impressed with both the number and the variety of the scenarios presented in the Greenbook, the Bluebook, and in this afternoon's presentation. I believe they help us think about the risks and about how we ultimately might want to be positioning monetary policy. But an equally intriguing question is the reasonableness, or the accuracy, of the baseline forecast. In that regard, I would say that I am a bit more optimistic about real growth in 1999. That is as a consequence of both the momentum behind aggregate demand as we go into the year and also because I am more positive about productivity trends and, therefore, the supply side. So, I think we might see somewhat greater real growth than in the Greenbook. Another reason for being positive about the real outlook is that our VAR forecasting model is quite positive. It has been reasonably accurate in 1996, 1997, and 1998, so it is harder to dismiss the model forecast than it used to be since it is building up a bit of a track record. I agree with the Greenbook's view of a modest uptick in inflation mainly because I think there will be some unwinding of the effects of the favorable shocks that we have experienced in recent years. But I must say the anecdotes about essentially no inflation give me some pause as I think about that.",516
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"I am glad I stimulated research in Atlanta. I am interested in seeing it. A couple of meetings ago I referred to the cheerful little elves who run the U.S. economy and get their kicks out of proving the cautious forecasters wrong. The only thing that can be said about the economic news since our last meeting is that the elves have scored again. When I heard that the estimate of the 1998 fourth-quarter GDP was likely to be about 5 percent, I said, ""Wow!"" Then the official estimate turned out to be 5.6 percent with the possibility of an upward revision to perhaps over 6 percent. The elves clearly have been working overtime and they have gotten more ingenious. They have figured out how to control the weather, at least temporarily, and how to keep productivity growth increasing when any reasonable elf would suspect that all the reengineering and restructuring and computerizing that could be done had been done already. Most amazing of all, they seem to have figured out how to keep unemployment rates lower than what the NAIRU enthusiasts have said for a long time is the drop-dead rate, while wage increases actually have decelerated and inflation does not seem to be a danger at present. The elves are clearly beginning to undermine the confidence of their opponents, the Greenbook forecasters, [laughter] who are starting to doubt their own models, or at least are getting a little defensive about them, and perhaps even doubt their common sense. To be sure, the Greenbookers are too sophisticated to fall for the elves' more brazen gimmicks like the weather ploy, or the bounceback from the auto strike, or perhaps even the extraordinarily low oil price. They think those cannot be sustained, so they are boldly forecasting a relatively quick slowdown to trend and some acceleration in prices. But after pointing out for some time that stocks were overvalued and that the stock market likely would come down, the Greenbookers are now saying that those stocks are even more overvalued than the last time they looked. And although they expect profits to decline further, they do not expect stock prices to fall. They will only move sideways. What can be the explanation of that? It's only the fear that the elves have been right so often that the Greenbookers would be embarrassed to be caught wrong again. Besides, nobody can predict the stock market. The question now is: Have the elves run out of tricks or can they beat the game one more time? If it were not for the rest of the world, I would bet on the elves. However, I am not sure they speak Portuguese. I am not sure they can move the Brazilian political system into higher gear fast enough to reassure a nervous world market. I am not sure the elves, for all their ingenuity, can control the mood swings of international investors or control the contagion that might flow from a collapse in Brazil or from some other major negative event as yet unpredicted. So despite history, I am left thinking that the Greenbook may actually win this time, though I must admit that I also thought that about the Atlanta Falcons. [Laughter] There is some risk that the economy may prove stronger in the early part of the year than the Greenbook forecast. I also have my doubts about whether the increase in the oil price will be as much as they think. On the other hand, the Greenbookers may have overreacted to the elves on the stock market and could be understating the chances of a negative wealth effect. On the domestic front, I see the risks of upside and downside surprises around the Greenbook forecast as approximately balanced. However, internationally, I see the risk as principally on the downside and possibly quite serious. As for the FOMC, I believe we should watch the game very carefully from our comfortable seats on the sidelines but resist getting into the action. Right now, any action, or even any indication of possible action, is likely to do more harm than good.",805
-fomc-corpus,1999,I kept hearing green eye shade when I know that is not what you said! President McTeer.,21
-fomc-corpus,1999,Do I have to? [Laughter],9
-fomc-corpus,1999,No!,2
-fomc-corpus,1999,"I will be very brief. I think Alice ought to write a poem entitled ""The Elves versus the Greenbookers.""",25
-fomc-corpus,1999,It doesn't rhyme.,4
-fomc-corpus,1999,"Little has changed in the Eleventh District since our last meeting, so I will be very brief. As I said then, the growth rate in the Eleventh District economy slowed throughout 1998, and that has continued in recent weeks. With oil prices hovering in the $12 range and not expected to pick up appreciably in the near future, consolidations and layoffs in the energy sector will likely continue for quite some time. Mexico, which accounts for nearly 40 percent of Texas exports to foreign countries, continues to weaken due to lower oil prices and the higher interest rates they experienced in the weeks following Brazil's currency devaluation. This does not bode well for the Texas economy in the months ahead. On the other hand, our contacts in the semiconductor industry, which also has been a source of weakness recently, indicate that there are signs that demand has bottomed out and that shipments have begun to improve. We recently learned that some of the workers who have been laid off in the semiconductor and communications sectors have been rehired as contract workers. Other segments of the economy that continue to show strength are all the areas of construction. Labor markets remain exceptionally tight, and the only group that we hear has pricing power is computer programmers; everyone else says they have none. Office rents, which were rising very steeply in the first half of last year, have been increasing much more slowly as new supplies have come on the market. Other than in these two areas, there is little or no talk of inflationary pressures in our District. Regarding the national economy, I am looking for 1999 to be pretty much a repeat of 1998. I expect the expansion to slow only slightly, due primarily to labor force constraints, but for inflation to maintain its downward tilt. Our contacts in the oil industry are considerably more pessimistic than the Greenbook staff regarding oil prices over the next year or two. I guess outside of Texas that pessimism would translate as optimism!",393
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, in the Eighth District the story is primarily an echo of recent months. The Eighth District was not much affected by the credit market disturbances last fall and, therefore, we have not been much affected by the weakening of those disturbances. Rather than repeat the echo of what we have seen, I would just like to make one comment: It seems to me that more and more firms are learning to live successfully with what they had regarded as labor shortages. They still do not see the pricing power needed to raise prices and, therefore, they are learning to get along with what they previously regarded as a short-staff situation. We just do not hear so much about that any more, although when we ask people they tell us about all their unfilled positions. On the national level, my contacts at UPS and FedEx say that they see steady growth in the United States. They see the situation in Europe as solid. They see a bottoming process in Asia and they see Latin America as weak, though they do not have extensive business there. I would comment with regard to Brazil that the market response to the Brazilian upset has seemed to me very sensible and measured. The markets have made distinctions that make good sense; that is completely unlike the response in August to the problems faced in Russia. I think the situation is entirely different. The staff forecast makes good sense to me. We could all quibble with a tenth or two here or there. I think the staff has done a fine job of incorporating everything that is reasonably forecastable. What is going to get up and bite us at some point is something that we cannot foresee, but I am not going to criticize the staff for not forecasting the unforecastable. That's all I am going to say at this point.",357
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The forecast revisions in the Greenbook are very similar to my own and in my view constitute somewhat of a sea change in the economic outlook. It doesn't seem to me that most of you share that view, so let me explain why I think that is so. Previously the Greenbook, the consensus forecast, and my own forecast projected what I refer to as a reverse soft landing. Growth slowed to below trend and the unemployment rate gradually increased, unwinding some of the exceptional tightness currently prevailing in labor markets and reducing the inflation risk posed by the above-trend growth and the very tight labor markets. The revised forecast has the economy slowing, but now just toward trend. And the result is that the unemployment rate stabilizes at a lower level than for any quarter in the previous Greenbook forecast. My first question is: Should such a sea change in the outlook have a counterpart in monetary policy? When I talk about policy here, I really am not referring to the targeted funds rate for the intermeeting period that we will talk about tomorrow. I am talking about policy in terms of the path of the funds rate that we think would be consistent with our outlook over the next year or two and whether or not that should change in light of the changed forecast. Let me just say a word about the inflation forecast. It does not seem to have changed dramatically, but it has changed a bit. First of all, we have mainly what I call a convergence story in 1999. That is, although core CPI does not really change, we have an increase in both the overall inflation rate and in GDP chain inflation as these measures converge toward more normal relationships to the core rate, with overall inflation rising because of the dissipation of the favorable supply shocks, particularly in the energy area. But thereafter, with labor markets very tight, the Greenbook and my own forecast would expect continued increases in inflation going forward. I think that is what we have to worry about. I pay a lot of attention to the policy prescriptions from the Taylor rule. Sometimes the different rules that are in the standard packet yield quite different implications for policy. Today, while they offer a variety of prescriptions for the current rate setting, there is one commonality. Whether one looks at the CPI or the chain GDP price version, at the versions with imposed or estimated coefficients or with the backward- or forward-looking specification, the prescription for the federal funds rate in the current quarter is higher than the prevailing target. For example, it ranges from 5.1 to 6.3 percent for the rules with imposed coefficients. So, I ask myself: How have we ended up departing so aggressively from the Taylor rule prescriptions? First, we hesitated to tighten in the face of global instability following the crisis in Korea and then again following the turbulence after the devaluation and default by Russia. But neither of those events to date has slowed the expansion. Second, our forecast generally called for a slowing to trend growth just around the corner, so we waited for the spontaneous slowdown rather than imposing a policy-induced slowdown. Of course, while we waited for the slowdown, continued above-trend growth kept pushing the unemployment rate lower until we ended up at a 41/4 percent unemployment rate. And now we find ourselves at that rate with one of the highest Greenbook growth forecasts in some time and many other forecasts also are pointing to relatively robust growth. Another reason we have ended up there certainly is the possibility of a structural change suggested by the combination of declining inflation along with a declining unemployment rate. That provided a good reason for not slavishly following any historical regularity. Let me end with a suggestion on how we might want to think about the strategy of monetary policy going forward. We ought to follow and think about what I refer to as an incremental asymmetric Taylor rule. To start off, I would consider setting the initial specification of that Taylor rule by calculating what NAIRU would have to be to make the current setting of the funds rate the Taylor rule prescription. The answer is that in the Taylor Rule with imposed coefficients, the NAIRU would have to be about 41/2 percent. I think that is very much on the low side, but some might find it a plausible number. That is fine. It seems to me that going forward we should at the very least follow the Taylor rule incrementally, raising the funds rate if continued above-trend growth was pushing the unemployment rate even lower. That is, going forward we should be careful to begin again to lean against a cyclical wind; otherwise we will continue to accommodate and indeed reinforce any and all positive demand shocks. On the other hand, if the unemployment rate were to rise modestly, given its already very low level, I would resist easing immediately. Hence the asymmetry in my approach. If inflation increases--and here I mean increases in the core CPI rather than a convergence of the overall rate to the core CPI--then I think we should respond as in the Taylor rule with more than proportionate increases in the nominal funds rate. On the other hand, if inflation declines modestly further, I would passively accept an increase in the real federal funds rate in light of the very low level of the prevailing unemployment rate. That again is an asymmetric response. So, I offer that as food for thought as we turn to discuss policy strategy in more detail tomorrow.",1087
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Second District's economy retained strong momentum going into 1999, with price pressures largely in check. Private sector job growth in New York and New Jersey accelerated to a 3.1 percent annual rate in the fourth quarter. New York City registered its strongest annual job growth on record, 2.7 percent; the previous high had been 2.2 percent in 1969. Retailers report brisk post-holiday sales in January, buoyed by a later-than-usual cold snap, a relaxation for eight shopping days of the sales tax in New York City, and I suppose the view that since it got cold people needed winter coats after all. Availability of office space in the New York City area was tight but stable in the fourth quarter. Vacancy rates stopped falling and rents rose at a less frenzied pace. Our District's housing market showed more signs of strength in December as indicated by rising home construction, brisk home sales, and sturdy price appreciation. A benevolently warm, delightful December might have had something to do with that. Surveys of Purchasing Managers indicate continued weakness in the region's manufacturing sector. Hotel occupancy rates in Manhattan remained exceptionally high in December, with room rates continuing to run about 10 percent ahead of a year ago. In spite of all that, the CPI in the metropolitan New York City area rose only 1.6 percent in 1998. That is the lowest since 1964, and I assume that the mayor is extraordinarily unhappy that he cannot run for reelection. At the national level, our forecast for growth is very much like that of the Greenbook. The Greenbook suggests 2.6 percent in 1999 and we have it at 2.5 percent; we have growth at 2.3 percent in 2000 as compared with 2.4 percent in the Greenbook. We are a little more concerned about--or at least our forecast shows a higher increase in-inflation. We have the CPI at 2.8 percent in 2000 compared with the Greenbook's 2.4 percent. The question of the balance of risks is an interesting one at the moment. If one were looking only at the domestic economy in the United States, there is no question in my mind that the balance of risks would be on the upside. That is, the economy is likely to grow faster than we anticipate. On the other hand, the risks on the international side would have a negative effect. But I think they are likely to be understandable more quickly than has been the case in the past. Japan is weak and could get weaker because of the combination of and terribly low consumer and business confidence. Continental Europe and the United Kingdom are slowing down a bit, but probably not to a point where some policy action couldn't turn those economies around. The interesting case, obviously, is Brazil. Brazil is a country that I think is very, very different from just about every place else. It has immense natural resources and a very diversified high quality population. They are given to considerable swings of confidence and to periods of believing that the national leader is capable of great and wonderful things. For a quite understandable reason, they thought that President Cardozo would be able to continue to lead the economy and to make good his commitment to the exchange rate design, which was both the economic and perhaps more importantly the psychological base of the real plan. The law of gravity prevailed, or markets prevailed, and that was no longer possible. The leadership in the country had been so committed to what they were doing that they did not have contingency plans ready. That is not surprising; most people don't have contingency plans ready. Therefore, the Brazilians are still going through a period of trying to figure out what to do. However, just in the last couple of days, it looks as if people are beginning to find a more positive view of the situation. Now, that could reverse because as one bumps along a psychological trough it is difficult to know whether the next bounce will be down or up. The important thing is that between now and our next meeting, the Brazilians either are going to restore their sense of confidence in their leadership and their country or they will not. If they do, the Brazilian shock probably will be less great than we now think it is likely to be. On the other hand, if they don't regain their confidence, the shock will be a bit greater and the contagion effect on Argentina and Mexico a bit more severe. Therefore, at the present time watching and waiting clearly makes a great deal of sense for us. We do have to be careful not to fall into the trap of thinking that we are the central bank of the world because we are not. With any luck, we will have a much better opportunity at our next meeting to calculate more accurately what Brazil is likely to do. Then we will be in a position to make a more accurate judgment about what policy path we should follow and how quickly we might need to adjust our current policy.",1016
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I felt the fourth-quarter growth statistics were significant news. They pushed the slowdown further into the future. There is still a slowdown in both the Greenbook and the Blue Chip forecast but it is smaller. The Greenbook now has only one quarter of growth below 2.5 percent. It seems to be nearly a perfect soft landing in both forecasts without requiring policy changes. The question is: Is that too good to be true? The slowdown in the Greenbook forecast hinges on three factors. I would like to discuss each one briefly. The first is the international situation. I am beginning to change my view about that because in a way we have taken the full shock. We are now on the pessimistic outcome track for Russia, Japan, and Brazil, along with having a modest slackening in Europe. The effects are noticeable, but as we saw in the Chart Show earlier, they have done relatively little damage to U.S. demand growth. The U.S. economy may not be an oasis of prosperity, but at least it seems to be a cluster of palm trees. [Laughter] On the stock market, even the Greenbook seems to have given up waiting for the market to drop and now projects only a sideways movement. Actually, I more or less agree with that. My own reasoning is similar to the point that Bob Parry's question brought out earlier, which is that the earnings/price ratios are not out of line with falling real interest rates over the past few years. So I think the Greenbook forecast on stock prices is roughly accurate, and that has actually changed the staff's forecast some. The third factor is something we have not talked about much here; it is the investment accelerator. Investment is slowing down from the rapid pace of a few years ago, but it is still growing more rapidly than output in the forecast. With the prevalence of information technology investment, it's not clear to me how much of an accelerator-induced slowdown we should expect in investment any more. In summary, my view is that each of these negative factors that could generate a slowdown is either partly digested, weakened, or in some doubt. There are still grounds for expecting some slowdown, but as far as I am concerned the balance of risks may be shifting. At the same time, I think it is too early to change policy because I also see very few signs of price acceleration yet. There is some in the Greenbook forecast, but that is partly due to special factors such as oil and partly due to an estimate of NAIRU that I am growing uneasy with, though I don't want to write down my own number. There is not much acceleration of inflation in the Blue Chip forecast. So, all things considered, it is difficult to proclaim that we see an acceleration yet. The second factor is productivity growth, which Dave Stockton illustrated in his charts earlier. That growth may be stepping up by a fairly noticeable amount, which actually gives us more room for vibrant demand growth. The third factor is the lags in monetary policy, the subject that Governor Rivlin put on the table at our last meeting. Unlike the Atlanta Fed, I was not able to do any research on this in the last month, so I accept what she said. I do believe that monetary policy operates more quickly these days, and I think that does give us the luxury of waiting for evidence. We still have to be alert. We have to move quickly. But we don't have to move in advance of real evidence of acceleration in inflation which, as I said, is not available yet. All this adds up to me as an argument for sitting tight. But as a result of the continued strong growth in the U.S. economy, I do think the balance of risks is changing. Thank you.",763
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. As we start the new year, we are clearly faced with a different situation from the one we faced last year, and we probably will have some difficult decisions to make in the not-too-distant future. Last year, our forecast of slowing obviously was being driven by external events; now we have a forecast that suggests slowing will be driven to a large extent by internal forces, namely private domestic final purchases. It is obvious that just as domestic forces proved much stronger than the drag from deteriorating net exports last year, so too the forward momentum of the economy may prove to be stronger than the forces for domestic slowing featured in the current forecast. As the Greenbook notes, the near term will probably reflect some unwinding of special factors that led to the upside surprise in the fourth quarter, namely unusual weather and an auto strike rebound. Certainly there is some truth to that. But the major factor for the long-term slowing, as I read the Greenbook, appears to be a forecast that the bull market has run its course and that the household wealth-to-income ratio will decline. I must admit that to me, as to others, the stock market does seem to be levitating above what one might think of as reasonable levels. But it is also true that we simply do not know enough about the forces that drive the stock market to put significant weight on a forecast that has a flat stock market as a prominent feature. Therefore, it is really unclear to me that we are going to see the slowing that we all seem to have in our forecasts. The risks seem to be mainly to the upside. It is easy to determine what those risks are and what may drive economic growth above the forecast: plentiful jobs, accommodative credit conditions, and upbeat consumers. The external sector was a major downside risk last year. This year much of that has been resolved with the obvious exception of Brazil. Brazil is still a large and troubling question mark, but the contagion thus far has been contained and market reaction has been muted. Most of the other issues that we were concerned about last year seem to have resolved themselves. They are reasonably well understood and probably have already had their strongest impact on the U.S. economy. Emerging Asia seems to have bottomed out. The most credible forecast for Japan is that while it will not strengthen in the next several years, the deterioration will be moderate from this time forward. Europe shows some slight weakening, but there are reasons to believe that monetary policy there can offset that. Therefore, despite the uncertainty created by the Brazilian situation, we have probably seen the worst of the risks from the external sector. While citing these forces for faster growth, one must also admit that there are few signs yet of emerging inflation. The economy has achieved this benign price picture through a combination of special factors and possibly through increasing productivity growth. However, there are some risks to the inflation outlook. One is that the special factors will unwind more quickly than we currently expect. Another is that labor market tightness will worsen at a faster pace than businesses can offset. It is not only that the unemployment rate is at a generation low, we also have fewer excess reserves, if you will, in the labor market. The number of people of working age who are not in the labor force but want a job has been decreasing at a fairly steady pace and is now at its lowest level since 1970, when that statistic first began to be tracked. Given the string of surprises we have had, including the strength of the fourth quarter, like many others here I approach a forecast of slowing with some skepticism and see the risks both internationally and perhaps even domestically as shaded slightly to the upside compared to the baseline forecast. I think the appropriate response for us is to rely less on a future as predicted by models and more on inferences, both quantitative and qualitative, that come in with the latest data. Obviously, for those of us who take this approach there are some challenges. By necessity we are likely to have a shorter time frame for action. However, the corollary is that once the evidence is more clearly in hand, we should not hesitate to move decisively if the data so warrant. We are not precluded from acting preemptively if new information were to tip the balance of risks to the outlook much more decisively toward an unacceptable probability of higher inflation. Such a probability, if it were to emerge, would in my judgment warrant a policy response. We are not there yet in my view, but we may be soon. We must be careful not to misinterpret the signals that we receive.",927
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you. Mr. Chairman, I would not have thought it possible, but somehow the Committee's policy dilemma continues to deepen rather than to show signs of beginning to resolve itself. The economy continues to surge ahead. We all, or at least most of us, believe that it should and will slow. But we have had good reason to believe that for some time and yet the pace, if anything, has accelerated and there are few signs of slowing so far. If the pace of growth begins to slow as we expect, we likely will have to address the possible need for further easing at some point. If, however, the present pace or something close to it should continue, we soon will almost surely need to consider at what point policy will have to lean into that strength in the interest of sustainability. I say this realizing fully the difficulty that such a policy move could present internationally. But even if one adopted the most optimistic reasonable scenario of the strength and durability of the current virtuous cycle--and I am pretty much in that camp--it is still necessary to realize that it has limits beyond which unsatisfactory conditions begin to gain momentum. At the pace the economy has been growing, we are very likely getting close to those limits. In the Humphrey-Hawkins forecast made at this time last year for 1998, we were well off the mark. Everything turned out to be much better than we expected. Growth was stronger, unemployment lower, yet inflation quiescent. The outcome was literally wonderful. Can we reasonably expect a repeat? I doubt it. At the moment, working with the available data, the risks appear to be decidedly on the upside. But I can envision the possibility, perhaps the likelihood, that this could be reversed very quickly for any of a combination of reasons arising from the domestic or international, real or financial economy. I continue to be uncertain as to which direction our next move may be or when we should take it. But my sense is that the upside risks will have to begin to dissipate soon or they are going to need to be addressed.",418
-fomc-corpus,1999,Thank you. We are running a little behind schedule but not by much. We will adjourn until 9:00 a.m. tomorrow.,29
-fomc-corpus,1999,We will turn to Tom Simpson for a presentation on the Humphrey-Hawkins ranges for 1999.,22
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Committee must decide whether to adopt the provisional money and debt ranges it chose last July or to modify them. In the Bluebook, we did not present alternatives to the provisional ranges because of the Committee's previous skepticism about the reliability of the relationship between these aggregates and economic performance and hence their usefulness as guides to policy. Instead, the Committee has for some time chosen ranges for money that it viewed to be benchmarks under conditions of price stability and of velocity behavior that conforms to typical historical experience. The Committee has not found that this practice has impeded its ability to extract and use information from the monetary aggregates as an input to its decisionmaking. In the case of debt, the Committee has chosen ranges based on expected growth--not the price stability benchmark--but the inconsistency between the money and debt ranges has not been a problem. Today, I would like to review the staff's projections and to discuss recent experience with money as an economic indicator. Your first exhibit presents the provisional ranges and the staff's projections of money and debt growth for 1999 consistent with the Greenbook economic forecast. 3/ Also shown are actual outcomes in 1998. The staff foresees growth in both M2 and M3 slowing this year, but remaining rapid with respect to their provisional price stability ranges and with respect to growth in nominal GDP. Debt of domestic nonfinancial sectors also is projected to decelerate this year but to finish the year around the 5 percent midpoint of its provisional range. We believe that the behavior of money market mutual funds is an important element in understanding recent and projected declines in monetary velocity. As shown in the lower panel of the exhibit, money funds in both M2 and M3 have grown at double-digit rates in recent years, and both types of funds registered a pronounced acceleration last year. Of course, if growth in these components came solely at the expense of the other components in M2 and M3, their strength would not have implications for overall growth in money. However, we are of the view that much of the expansion in money funds in recent years reflects other influences that have had the effect of boosting growth in M2 and M3. At the M2 level, we think that money funds may have been benefiting from efforts by households to diversify portfolios swollen by the surge in equity values. Illustrative of this process is the top panel of your next exhibit showing shares of mutual fund assets. Even with the hefty double-digit increases in money funds, the money fund share of total mutual fund assets had been drifting down until the middle of last year. It turned up in the third quarter amid the market turmoil and heightened demand for liquid and less risky assets and then turned back down in the fourth quarter. Looking ahead, in an environment of essentially stagnant equity prices, as assumed in the staff forecast, growth of total assets will diminish. But investors are expected to view money fund returns as more attractive in relative terms than they have in the recent past and to seek to rebuild somewhat the money fund portfolio share. In short, we foresee money funds continuing to grow fairly rapidly, lifting M2 growth again this year. As a consequence, M2 velocity should decline further this year even though stable short-term interest rates imply little change in opportunity costs, as shown in the bottom panel of the chart. The 2 percent expected drop in velocity and the staff's forecast of 4 percent growth in nominal GDP imply the 6 percent forecast for M2 in 1999. Turning to M3 and Exhibit 3, money market mutual funds are believed to have contributed to growth in this aggregate beyond their impact on M2. In particular, those funds in M3 only, so-called institution-only funds, have become an ever-popular cash management instrument, substituting on business balance sheets for direct holdings of money market assets outside M3, such as Treasury bills, as well as other balances in M3. Firms can outsource this function to money funds and thereby dispense with in-house time and effort required for the frequent placing of liquid balances in the market. We believe that this trend will continue for the foreseeable future, boosting M3; however, with no further declines in money market interest rates, and thus no appreciable spreads favoring money funds reemerging, money funds in M3 only should decelerate from last year. Another factor that boosted M3 growth last year was a surge in bank credit and associated funding needs, shown in the bar chart in the middle of Exhibit 3. This was caused in part by the disruptions to financial markets beginning late in the summer that led some businesses to tap bank lines instead of market sources and banks to hold rather than securitize loans and to acquire securities having unusually large spreads. In the less turbulent market setting anticipated for the current year, we are forecasting that growth in bank credit will slow some, contributing to a slowing in growth in overall depository credit, the bottom panel. As a result, growth in depository credit should move closer to that of total debt of domestic nonfinancial sectors. With the distribution of funding between M3 and other sources similar to last year, we are led to a still considerable 8 percent expansion in M3 this year, implying more than a 31/2 percent drop in its velocity, which is smaller than in 1998. The anticipated slowing of debt growth this year shown in the chart-to 51/4 percent--is accounted for both by a larger run-off of federal debt, owing to a $100 billion projected fiscal surplus, and to some moderation in business and household borrowing. Nonetheless, growth in total debt again exceeds that of nominal GDP by about the same margin as in 1998, as spending remains tilted toward credit-intensive consumer and producer durable goods and housing and as debt-financed merger activity stays brisk. Last year, both money and income growth exceeded staff expectations, resurfacing the question of whether the monetary aggregates may have become more reliable as indicators of economic performance. As I noted earlier, some of the unusually strong growth in M2 and M3 last year reflected not only income growth but also outsized declines in their velocities, much of which had not been anticipated. Still, the surprises in money and income were large and correlated, however loosely. Certainly, the rapid money growth in the fall was suggesting that the banking system was able to intermediate credit without serious strains. To examine the question of whether the monetary and debt aggregates may have become more useful as indicators, I have presented some evidence on Exhibit 4--evidence that should be regarded as illustrative and not definitive of indicator properties. Each panel contains the coefficients and t-statistics for sixteen-quarter rolling regressions that relate growth in nominal GDP on a quarterly basis to growth in money or debt on a contemporaneous and one-quarter-lagged basis. Large, and positive, values for the coefficients and t-statistics imply value of the aggregate as an indicator of quarterly growth in nominal GDP growth. As shown in the top panel for M2, the last time the t-statistics approached the important level of 2 was in the mid-1980s. In recent years, coefficients have been very small and statistically insignificant at standard levels, suggesting by this metric that M2 has had little value as an indicator of nominal GDP. Moreover, the story doesn't change much for M3 and debt, shown in the middle and bottom panels, respectively. It is worth noting that these are quite simple statistical exercises and there may be times when surprises in the monetary aggregates, allowing for special factors that may be affecting velocity, are giving off clearer signals that the economy is departing from expectations, especially when those surprises are corroborated by other indicators. Thus, at this point we are hard pressed to suggest that you treat the broad monetary or debt aggregates any differently as indicators than you have in recent years.",1582
-fomc-corpus,1999,Questions for Tom?,4
-fomc-corpus,1999,"In Exhibit 4, what does a negative t-statistic mean? Does that mean that there's a negative sign?",23
-fomc-corpus,1999,The coefficient has turned negative.,6
-fomc-corpus,1999,"Tom, is there any evidence to suggest that the big surge in velocity that occurred, contrary to expectations, from opportunity costs in the early 1990s may be in the process of reversing itself?",40
-fomc-corpus,1999,"That's a possibility, but it is rather hard to come up with the economic intuition as to why that might be happening.",24
-fomc-corpus,1999,"Any more so than was the case with respect to the economic intuition in 1990? What happened subsequent to 1990 was far more of a surprise than a reversal would be today, if I may put it that way.",46
-fomc-corpus,1999,"I think that by 1991 we were beginning to get some sense of what was going on--specifically, that banks were getting into the mutual fund business. Mutual funds in particular were much more freely available to households, and households were diversifying their portfolios out of deposits. That was encouraged at the time by a steeply upward sloping yield curve which, to be sure, is reversing. So there were a lot of purchases-",88
-fomc-corpus,1999,"We knew about that but we didn't forecast a change in the gap between opportunity costs and M2 velocity as a consequence, as I recall.",28
-fomc-corpus,1999,"If you look back at our forecasting in 1990 and 1991, that development caught us somewhat by surprise. But toward the end of 1991 and in 1992 we were doing a better job of forecasting.",46
-fomc-corpus,1999,You were putting in add factors.,7
-fomc-corpus,1999,"Yes, because we knew that the world had changed, so the old equations weren't working. Exactly.",20
-fomc-corpus,1999,"I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decisionmaking process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well. Don, do you think we ought to discuss the Humphrey-Hawkins issue before we go into this or after?",155
-fomc-corpus,1999,"It's up to you. You need to do two things here. One is to decide whether to readopt the ranges you had on a provisional basis. If people have views on that, maybe while they are giving those views they can also comment on-",50
-fomc-corpus,1999,"Let me suggest the following: If we are all of the same view as we were the last time--to stay essentially with the noninflationary or price stability ranges for M2 and M3--maybe we can get that out of the way and then discuss what to do with debt. If it turns out after we go around the table that we have significant differences of view, it may be desirable to discuss both issues together. That way we can have a single conversation covering not only what we want to do today but what, if anything, we want to recommend to the Congress with regard to potential revisions in our reporting requirements under the Humphrey-Hawkins Act. So, I would appreciate getting a quick sense from everybody as to whether they would like to stay with the preliminary M2 and M3 targets. We will learn very quickly whether or not to go on to the next discussion. The simplest way to do that is to start with you, Governor Rivlin.",196
-fomc-corpus,1999,"I would stay with the preliminary ranges because I don't feel that I have any basis for a new set of targets. [Secretary's note: In the subsequent go-around, all Board members and Reserve Bank Presidents indicated that they concurred with Ms. Rivlin's statement.]",54
-fomc-corpus,1999,"On the debt range, we have a little inconsistency. What would be your recommendation on what to use for debt?",24
-fomc-corpus,1999,I think you've done very well with what you have been doing. No one has really noticed this inconsistency. [Laughter] Seven months ago I gave up on this!,35
-fomc-corpus,1999,What specifically are we using for debt?,8
-fomc-corpus,1999,"The preliminary range was 3 to 7 percent, and the projection is that growth in debt will be right in the middle of that range.",29
-fomc-corpus,1999,"Does anybody disagree with adding the debt range to the vote on the M2 and M3 ranges? Hearing no objections, I suggest we vote on the three of them.",34
-fomc-corpus,1999,Do you want me to read the directive language?,10
-fomc-corpus,1999,"Yes, please.",4
-fomc-corpus,1999,"The language is shown in the Bluebook on page 23 under the heading ""1999 ranges"": ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1998 to the fourth quarter of 1999. The range for growth of total domestic nonfinancial debt was set at 3 to 7 percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",157
-fomc-corpus,1999,Call the roll.,4
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes Governor Rivlin Yes President Stern Yes,45
-fomc-corpus,1999,"Let me take a minute to explain this issue of the Humphrey-Hawkins reauthorization. Unbeknownst to 104 percent of the world, [laughter] a piece of legislation went through the Congress a few years ago which effectively sunset virtually every report required to be issued by various governmental agencies. One reason it happened that way was because the legislation said that all reports listed in some obscure source would be ""included under this Act,"" and that list included absolutely everything. Nobody here caught it except Don Winn, who does that sort of thing for a living. It came as a great puzzlement to everybody. So it turns out that under law the reporting requirements in the Humphrey-Hawkins Act--not the Act itself but the reporting aspect of it, I gather, Don--will expire at year-end.",165
-fomc-corpus,1999,"It is the reporting requirement that expires, not the goals of the Federal Reserve Act. This doesn't have anything to do with the goals of maximum employment, price stability-",33
-fomc-corpus,1999,I understand. Do you know offhand if our testimony is included in the reporting requirements? How is that stipulated?,23
-fomc-corpus,1999,"The way the Federal Reserve Act reads, we are supposed to submit this report on a semi-annual basis and then we are to consult with the Congress on the report. The ""consulting with the Congress"" has meant the testimony. If there is no report, it is hard to see how there is any obligation to testify on anything.",68
-fomc-corpus,1999,"So, effectively, one can read the sunsetting as applying to both the report and the testimony?",20
-fomc-corpus,1999,That is my understanding.,5
-fomc-corpus,1999,"Clearly, when that information rolled its way onto somebody's agenda, it created a few sparks. The general presumption was that there would be some automatic rollover or reauthorization of the Humphrey-Hawkins reporting requirements and that would be that. Someone asked the newly ensconced Chairman of the Senate Banking Committee, Phil Gramm, whether in fact that would be the case and when he was going to put reauthorization on the Committee's agenda. He said that it wasn't clear to him that such legislation was needed, and that response opened up a host of repercussions. Within hours, Chairman Leach of the House Banking Committee indicated that he was adamantly opposed to any change. We are now in the position where, as best I can judge, Phil Gramm isn't saying he is going to fight this to the death but just that he thinks we ought to discuss it. It is clear, however, that it's an issue about which he doesn't feel all that strongly. But there is a secondary issue here, which is not irrelevant to the consideration of this reauthorization. And that is that we do have an opportunity, if we so choose, to offer recommendations on changes in the nature of what we report and how we report it. So, rather than just having an extension of the existing legislation with no alteration, it is quite conceivable that recommendations from the Federal Open Market Committee would have some influence on the Congress in terms of how the reauthorization would go forward. Since this is not anything urgent, there is no need to come to any conclusions today. But if you have some suggestions that you would like to raise today, that would be useful. And if you have a suggestion at a later time, communicate with Don Kohn. In the process, when the time for the actual reauthorization rolls around and we are requested to give our views--indeed, it is conceivable that I will be asked at the Humphrey-Hawkins hearings on February 23--",392
-fomc-corpus,1999,I think it is inconceivable that you will not be asked.,14
-fomc-corpus,1999,"I guess that's right. So, it would be helpful to hear from you on any change that you think might be useful. Obviously, the sooner you bring it up, the better, but it need not be today. Having said that, if anyone has any thoughts at the moment triggered by the memo that was sent to you earlier, it might be useful to get them on the table so that we can get a sense of the Committee's tentative views on this. President Boehne.",98
-fomc-corpus,1999,"I'd just like to comment on the broad issue rather than make specific suggestions for change. One of the criticisms traditionally leveled at the central bank is that we are a peculiar institution in a democracy in that we are not accountable and somehow are out there on our own. While the Humphrey-Hawkins reporting has not eliminated that criticism, it does seem to me that it goes a long way toward saying that indeed we are accountable. It gives us an opportunity to explain what we are doing and to consult with the Congress. So, I think Humphrey-Hawkins has turned out to be very useful, not only for us as a central bank but also because it probably has enhanced understanding to some extent on Capitol Hill. In terms of the broad issue, I think we ought to come down foursquare in support of a continuation of the basic nature of the Humphrey-Hawkins report and the testimony. That said, there probably are some modifications that might be put on the table that could improve it or bring it more into line with some of the things we actually do. I'd like to give some further thought to what those modifications might be specifically. But on the broad question of its reauthorization, I think we ought to be for continuing it.",250
-fomc-corpus,1999,"Yes, I think the few people I have talked to on this subject would fully agree with you on that. If anything, we ought to over-emphasize that particular point because that is the crucial part of the Humphrey-Hawkins Act, even if there are elements within it, which I suspect there are, that are just fillers and do not represent any useful communication from the Federal Open Market Committee to the Congress. Those elements really ought to be eliminated; they are a waste of time for a lot of people here in Washington and throughout the Federal Reserve. President Minehan.",117
-fomc-corpus,1999,"I am totally in agreement with what Ed Boehne has said. I think there is a real downside risk if we do not report on a frequent basis to the Congress. We do have our autonomy to be concerned about. If we are not accountable, that can be taken away. We have to demonstrate that we think about the right things and that our actions are well motivated. And the Humphrey-Hawkins report is one way of doing that. I have one question, though. I'm not all that familiar and I don't know whether my staff is all that familiar with this ""filler""--to use your language--that is required by the Humphrey-Hawkins Act. That might not be all that obvious to us. Is it just the estimates on GNP, inflation, and unemployment that we prepare or are there a lot of other things the staff has to put in the report?",180
-fomc-corpus,1999,"Brian Madigan has copies of Section 2A of the Federal Reserve Act, which covers that. Why don't you pass them out, Brian.",29
-fomc-corpus,1999,"I think a lot of it relates to our interpretation, as distinct from what is statutorily required.",21
-fomc-corpus,1999,"Right. Obviously, the monetary aggregates ranges are in there, but so is the requirement to take account of past and prospective developments in employment, unemployment, production, investment, real income, productivity, international trade, payments, and prices. And there is the point about discussing the relationship of all that with the goals in the President's Economic Report.",69
-fomc-corpus,1999,"So we have to weigh that Report, which we get after it is given to Congress. And as far as the staff is concerned, almost all of that is required as opposed to things we have added?",41
-fomc-corpus,1999,"To a considerable extent we feel they are required. The Act has been amended over the years to include additional emphasis on international developments. In response to that, we have beefed up the international sections.",40
-fomc-corpus,1999,"Obviously, our treatment of a lot of things included in that list probably could be modified in some way or another.",23
-fomc-corpus,1999,That is the type of recommendation that would be helpful for me to get.,15
-fomc-corpus,1999,I figured that might be what you had in mind.,11
-fomc-corpus,1999,"I have my own ideas, but it would be very helpful to me to get a good sense of the Committee's thoughts, as distinct from my own, on any specific issue. I might be unaware of strong support for including certain things that I thought people might not want to include. So I would like to get a sense of the Committee's views.",71
-fomc-corpus,1999,"I can't comment on all the details, but there is one thing I'm sure we ought to do. We ought to convey the view that while there may be real information in the monetary aggregates conceptually, we believe the specific ranges suggest a precision about our knowledge of the relationship of those ranges to economic performance in the upcoming years that is somewhat lacking. We have told Congress that. I think some of the detailed information we are required to produce on that may not be serving us well and may not be conveying anything about what we really think is going on.",110
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"I don't have a lot of detailed suggestions, Mr. Chairman. More generally, a key point to me about the Humphrey-Hawkins reports, which we do twice a year, is that they are very useful both internally and externally from the standpoint of developing a strategy. Naturally, at our FOMC meetings we are focused on current developments and the immediate policy issues; this semi-annual reporting requirement gives us a chance to stand back and think a bit more strategically. I think that helps us internally and it helps us in terms of communicating to the public by giving them a background against which to interpret our short-term actions and statements. I think that is a key value of this reporting requirement. In terms of the changes, I agree with what has been said about the ranges for the monetary aggregates. It seems to me that, in terms of communicating our strategy, we need to supplement those numbers with something. As I have said in these meetings a number of times before, my own feeling is that something like inflation targets would be a particularly promising direction in which to move. We now have some experience with other central banks doing this. I would hope, now that the issue of the report is going to come up in any event, that one of the things we might consider seriously is adopting an inflation target of some sort. I would suggest one other change. One of the key parts in the report is the summary of the individual projections we provide, which are encapsulated in the central tendency projections in the report. To clarify those, it would be helpful if we all made them contingent on a uniform assumption of no change in policy. That would in a sense put us all on the same page and eliminate any ambiguity or confusion or lack of clarity that might result from the fact that different members of the Committee may be using different policy assumptions in generating their own individual forecasts. It seems to me one of the advantages of that would be that it would help to signal the undesirable consequences of not taking policy actions in one direction or the other that we need to take. It might put us in a position to be more proactive in presenting our policy stance and perhaps less defensive in public discussions of monetary policy. I believe that is the procedure the Bank of England uses in its current reporting approach. That is another suggestion I think we ought to look at.",469
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"I agree with much of what has been said. Just to add to a point that Cathy Minehan was making: This does seem to present us, as a Committee, with an opportunity to discuss in the testimony what we think the role of the aggregates should be. We have spent a great deal of time over the years talking about this issue, and we end up giving the targets more prominence than most of us think is warranted. This may be an opportunity to adopt a procedure that would more closely reflect what we in fact do and what we believe in terms of the weight these statistics versus others should be given.",122
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, it seems to me that everybody here is in agreement that the Humphrey-Hawkins testimony is a great opportunity and should be continued. I have a little difficulty, just procedurally, hearing people say they like this, that, or the other thing because that results in a disorderly debate. People make suggestions, some of which I think are grand and some of which I think are quite bad. If people gave their ideas to Don Kohn, as you suggested, then at the next meeting we could have an orderly discussion of the ideas that have been offered rather than have somebody announce an idea and others by their silence give the impression that they agree with it. In some cases I agree and in some cases I don't. But we could spend the rest of the week here if we debated every idea brought forward.",168
-fomc-corpus,1999,The difficulty is that the February 23 testimony is before our next meeting. One possibility is for Don Kohn to send around a questionnaire and list the various suggestions that would involve changes to the statute. Changes on things not mandated by statute we can make any time we want.,55
-fomc-corpus,1999,I was of the impression that at the testimony on February 23 you would be asked what you thought and you would give a generic answer that the testimony is appropriate and that we will be thinking of suggestions on the content of the reauthorizing legislation.,50
-fomc-corpus,1999,"Yes, I could do that. In fact, that is what I would plan to do. What do you think, Don?",26
-fomc-corpus,1999,"I think this could be a two-stage process. That is, you could make it very clear on February 23 that the FOMC strongly supports the continuation of a reporting regime of some sort embedded in law. And you could say that we would be more than happy to work with the Congress over time on designing a reporting regime that meets their needs and that we think is reasonable. So, I don't know that we need to reach a conclusion before February 23 about what we want in the legislation except that we want the regime to continue and that we will be more than happy to work with Congress on how that process will go.",127
-fomc-corpus,1999,That strikes me as a quite reasonable approach.,9
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"Why don't we leave it there, then?",9
-fomc-corpus,1999,"May I raise a technical point as a word of caution? If we start to indicate what we would like future Humphrey-Hawkins reports to include, in terms of what we would want specified in the law, we will not get the last word. They will. Every member of the Banking Committee is going to have an idea about what ought to be in the law, and the easiest thing for the Chairman of that committee to do is to put them all in. I think we should not encourage a rewriting of the law, even though I personally would like to get rid of the monetary ranges, because once we start down that road we might end up a lot worse off than we are now.",140
-fomc-corpus,1999,That is indeed a thoughtful comment.,7
-fomc-corpus,1999,That's a good point.,5
-fomc-corpus,1999,"The more I think about it, the more it strikes me as being subtly obvious.",17
-fomc-corpus,1999,"Yes, I agree.",5
-fomc-corpus,1999,We may actually be better off with the same legislation.,11
-fomc-corpus,1999,We can make some changes without changing the Act.,10
-fomc-corpus,1999,We can make a lot of changes ourselves because the statute itself is not all the explicit.,18
-fomc-corpus,1999,I think Alice has spoken wisely; I think she's right.,12
-fomc-corpus,1999,You earned your pay today! President Moskow.,10
-fomc-corpus,1999,I think Alice's caution is very well stated. In looking at this though--and this is really the first time I have looked at it carefully--I assume this is the entire reporting requirement.,39
-fomc-corpus,1999,That is the Act.,5
-fomc-corpus,1999,"The section is entitled ""Monetary and Credit Aggregates."" All the reporting is under monetary and credit aggregates, which is rather ironic given the discussion we just had about the limitations of the aggregates themselves. I recognize that there is some risk in trying to come up with changes to this, but it really is misleading to the American people to have the reporting requirements in a section entitled ""Monetary and Credit Aggregates."" I would hope that we could do something better than that in terms of how we are going to communicate.",106
-fomc-corpus,1999,"If none of us has read it, you can rest assured very few other people have. [Laughter]",22
-fomc-corpus,1999,I'm not sure whether that title is something we put on the document or--,15
-fomc-corpus,1999,"Yes, Virgil Mattingly says it is.",11
-fomc-corpus,1999,"It is our title, not what is in the law. So the next time we reprint the Federal Reserve Act, we can change the title.",30
-fomc-corpus,1999,Can we legally do that?,6
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,It is just an editorial-,6
-fomc-corpus,1999,That is not in the literal Act itself? I am learning things that I did not know.,19
-fomc-corpus,1999,Let's do it tomorrow. Why wait?,8
-fomc-corpus,1999,"I am learning all these things, though I'm not sure of what conceivable value they are. [Laughter] Why don't we leave this issue for now. I think Alice has raised a more fundamental question. Let's think about it for a while and then Don Kohn can poll us before the hearing to get a sense, at least, of how we would like to answer the question at the hearing. And then we can go on from there. Is that satisfactory to everyone? Let's do it that way. Let's move on then to Don Kohn.",110
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will begin my briefing today with a discussion of the simulations presented in the Bluebook, and I will be referencing the charts in the Bluebook in the process. These exercises were designed to shed light on the economic and policy environment embedded in the staff's Greenbook forecast, and they may have implications for the Committee's policy strategy. The baseline scenario, shown on Chart 3 following page 8, extends the Greenbook forecast. It was designed to be consistent with the underlying logic and economic trends of that forecast, and hence preview what could be in store after 2000. The staff's assessment is that the economy is now in disequilibrium in that the unemployment rate is below its sustainable level; moreover conditions are not in place to correct this situation. Real interest rates are lower than their natural levels and fall further over the next two years as the nominal interest rate is held constant while inflation and, by assumption, inflation expectations rise. Decreasing real rates do not produce an even greater intensification of inflation pressures because some of the economic strength of 1998 is seen as transitory and because the equilibrium real rate is falling. Over the long run, the wealth-to-income ratio declines as the stock market levels out, government debt is paid down, and foreign indebtedness grows, raising household saving and depressing the natural interest rate. This disequilibrium implies that policy must firm at some point and that the economy must experience subpar economic growth to limit inflation. In the baseline, the policy response was assumed to be delayed and the Committee satisfied with capping inflation at 23/4 percent. To hold inflation down by more, as in the price stability scenario, the Committee must begin to tighten sooner and be willing to continue to firm policy even as the unemployment rate rises. The disequilibrium in the baseline arises from a judgment that the surprisingly favorable inflation performance of recent years has been the product in part of transitory factors depressing prices and labor costs. The lower NAIRU scenario in the second set of simulations, shown on Chart 4 after page 9, considers the consequences if instead the disinflation is assumed to have been a result of lasting changes in the structure of labor and product markets. If the NAIRU is as low as 41/2 percent, the economy is not in disequilibrium at present and nominal and real interest rates are close to sustainable levels. Under these conditions, keeping the federal funds rate at 43/4 percent over the next several years will be associated with a slight uptick in inflation as oil and import prices turn around, but only to a steady state rate of 2 percent. As it happens, a 41/2 percent NAIRU also would help to reconcile the current stance of monetary policy with the results of Taylor-type rules. Governor Gramlich noted at the last meeting and Governor Meyer yesterday that the versions of this rule the staff calculates all tend to show that the federal funds rate is too low. This undershoot results from the existence of a large gap of actual over potential output, by standard calculations. If the NAIRU is at the lower 41/2 percent level, however, the gap about disappears, and the current funds rate is more nearly consistent with the Committee's past pattern of reactions to actual and forecasted levels of output and inflation and with Taylor's rule. Of course, it is possible to look at the results from both types of experiments from another perspective: For the current level of the funds rate not to be too accommodative over time, structural changes in labor and product markets must be very substantial and persistent. The surprises over recent years have been in aggregate demand as well as aggregate supply, and the simulations shown on Chart 5 after page 10 look at the implications of situations in which aggregate demand deviates from the baseline. We chose alternative paths for the demand for producers' durable equipment because that has been an important source of unanticipated strength in aggregate demand in recent years and feeds back on supply as well. Greater capital spending does raise the productivity of labor and the level of potential output over time, but its more significant effect in the short run is on demand. Thus, policy must be appreciably firmer if demand surprises on the upside, even if it is productivity-enhancing spending that constitutes the surprise. The simulation follows the Taylor rule to tighter policy; perhaps the more general point is that with labor markets already stretched, policy needs to respond promptly to unexpected overshoots in demand to hold down the rise in inflation. Against this background, the decision at this meeting would seem to rest in part on whether the Committee agrees with the basic message in the staff forecast that existing and prospective pressures on resources and the likely recovery in oil and import prices point toward higher inflation. If the Committee views the risks as strongly skewed in this direction, it might want to consider a firming of policy, if not at this meeting, then in the near future--as might be indicated by a tilt toward firming in the directive. Growth has yet to slow from an unsustainable pace, and labor resource utilization is higher than expected when you eased in November. From a somewhat longer perspective, over the past year both the unemployment rate and the federal funds rate have been reduced significantly. Other things equal, policy interest rates and unemployment rates ought to move in opposite directions, since the lower unemployment rate generally raises inflation risks. Of course other things haven't been equal. For one thing, inflation and, to a lesser extent, inflation expectations were falling in 1998, raising real short-term rates. But a good portion of the decline in nominal short-term rates since last summer probably has fed into real rates, offsetting much of the previous increase. In addition, inflation expectations may be less likely to fall going forward to produce such a passive tightening with the nominal funds rate unchanged. Even if the staff has given too little weight to the possibility that the economy is much less ""inflation prone,"" transitory factors surely have played some role in holding down prices. Absent additional serious problems abroad that reduce commodity prices and put upward pressure on the dollar, those factors will abate, giving underlying cost pressures more of a chance to show through to prices and price expectations over time. Another thing that wasn't equal last year was the financial market disruptions that led to a tightening of credit conditions for a time. However, the expansion of economic activity has been supported by reasonably well functioning financial markets of late. Growth of money has been strong, and credit has been readily available in markets as well as at banks. While risk spreads remain high in some sectors of the markets, they have stabilized for the most part; despite higher spreads, the cost of credit for many borrowers has declined on balance since last summer, owing in part to Federal Reserve easings. And increases in equity prices have boosted wealth and reduced the cost of equity capital. Improved conditions in credit markets have been signaled by their resilience to year-end pressures and to the difficulties of Brazil. Indeed, to the extent your easing last November was undertaken to protect against the possibility of major financial disruptions from these particular events, that protection might seem to be less needed now. Despite the ongoing risks of greater price pressures, however, inflation has remained very well behaved. Moreover, threats persist to U.S. economic performance from developments abroad. In these circumstances, the Committee may be inclined to leave policy unchanged today, and also to consider the odds on tightening in the near future remote enough to justify retaining a symmetrical directive. The benign inflation news, especially when coupled with a lack of acceleration in nominal compensation, might suggest that the potential for higher inflation has not yet been demonstrated. Uncertainties about the supply side of the economy make preemptive policymaking especially difficult. Although the Committee may not want to await the ""smoking gun"" of a string of higher inflation numbers before it firms, it might want more indicators that current levels of pressures on resources were raising costs than it now has. And in this price environment, it may have the scope to wait for confirmation that growth remains above potential before leaning against tightening labor markets. Moreover, our economic performance may be viewed as still subject to downside risks from developments overseas. A highly unsettled Brazilian situation has the continuing potential for financial contagion to other countries beyond that assumed in the staff forecast. And industrial economies aside from the United States appear to be weakening. In Japan and Europe, the risks to growth prospects may be tilted to the downside partly as a consequence of constraints on monetary policy from the zero bound in Japan and from the desire to gain credibility and impose discipline on fiscal policy in the Euro zone. Financial markets looking at the information on the U.S. and foreign economies have taken out their previous expectations of ease, but they have not built in any odds of a tightening in the foreseeable future. With inflation low and expected to remain contained for some time, and with economic prospects around the globe still more likely to be dismal than encouraging, the potential benefits of sitting tight may be seen as outweighing the potential costs of risking a possible future buildup of inflation pressures. As a reminder, the implementation of the new announcement policy is slated to begin in March, after it has been published in the Minutes and explained by the Chairman in his testimony. Should the Committee change the symmetry in the directive or otherwise feel that it has made a significant change in its view of the risks, an announcement of that without this preparation might provoke an especially sharp market reaction and an expectation of imminent tightening. In any event, the Committee will have an opportunity to give a nuanced view of its assessment of the economic and policy outlook in the monetary policy report and testimony on February 23.",1954
-fomc-corpus,1999,Questions for Don? President Parry.,8
-fomc-corpus,1999,"Don, I have a couple of technical questions and then a comment. On page 10 of the Bluebook there is a reference that says ""the real funds rate is now at its natural rate."" I am familiar with what an equilibrium real rate is; I don't know what a ""natural"" funds rate is.",63
-fomc-corpus,1999,"I was using it as a synonym for the equilibrium real rate, as in the ""natural rate"" of unemployment--the same thing.",27
-fomc-corpus,1999,"Turning to Chart 4, the top right-hand chart, I was a little surprised at the difference in real funds rates in the simulations, particularly the one called ""Lower NAIRU."" Why would that produce analytically such a different real equilibrium rate? The equilibrium rate has to be there somewhere. Do these converge in some year some time out in the future at something different from 3 percent? I'm asking because I don't think of the equilibrium real funds rate as being 3 percent. Do you?",101
-fomc-corpus,1999,Let me address the first question first: Why is the rate with the lower NAIRU lower than the other two?,24
-fomc-corpus,1999,Or why is the nominal rate so low in that simulation?,12
-fomc-corpus,1999,"The reason is that the economy can produce at a substantially higher level with a NAIRU that is one percentage point lower than assumed in the baseline. As a consequence, interest rates need to be lower to stimulate the demand to use that additional production. That is a level adjustment of production out into the infinite future. Production can be higher by a couple of percentage points than at the higher NAIRU, and a lower interest rate is needed to stimulate the demand to use the extra production that is now available at the lower NAIRU.",108
-fomc-corpus,1999,"Don, I might suggest that another way to think of this is as follows: If the NAIRU is really more like 41/2 percent, we might be around the NAIRU now and looking at the prospect of a steady inflation path, which is the sign that we are essentially around the natural rate of interest. That's different from what is in our forecast, which suggests that we are headed toward an acceleration of prices at the prevailing level of interest rates. I think that's a very simple way to look at that.",106
-fomc-corpus,1999,I see.,3
-fomc-corpus,1999,"As for the level of the natural rate, it is higher than it has been in some of the past forecasts, although as I noted it drifts down over time as the wealth-to-income ratio drifts down. I think the height is a result of the fact that the wealth-to-income ratio is a lot higher than we thought it was--or thought it was going to be a year or two ago--given what has happened to the stock market. Demand has been much stronger. In effect the experience, in terms of the level of the wealth-to-income ratio and the strength of demand at previous interest rates, has led us to think that the natural or equilibrium rate is a lot higher than we used to believe and a lot higher perhaps than it has been in history. If the strength of demand for producers' durable equipment and so forth persists, the saving rate, even if it is creeping up, is going to be lower than it has been historically, and then the natural real rate will be high relative to history.",205
-fomc-corpus,1999,"Interesting. I have a comment about the simulations. They suggest that we are going to have to make decisions in the next year or so that indicate whether or not we are serious about price stability. Secondly, if I can go back to one of my favorite topics, which is opportunism--clearly locking in the gains to date--there are not many simulations where we lock them in, are there?",81
-fomc-corpus,1999,"Except for that price stability one, which does a little more than lock them in, that's right. But that is the underlying premise of the staff forecast that you all talked about yesterday: That the economy is producing a bit beyond its potential. How much beyond is unknown, but it's somewhat beyond. In the staff forecast the assumption is that potential is at a level of unemployment nearly a percentage point higher than where it is right now and that ultimately, over time, that is going to show through in inflation. If you believe that analysis, the simulations show you the implications of that analysis and those assumptions. And then in fact, yes, nominal and real interest rates will have to rise from here.",139
-fomc-corpus,1999,It is very troubling that PCE inflation is 23/4 percent in all of the alternatives but one. In that one it is 2 percent.,31
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,"The same simulations five years ago had a wholly different level with the same model, as I recall.",20
-fomc-corpus,1999,That is true. You only know what you know at a given time.,15
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, during my years in Chicago, I know I chatted with Milton Friedman about the natural rate of unemployment, but I have managed to spend about 58 years of my life without ever hearing that the NAIRU was confusing economists by its existence. So, taking advantage of not being a Ph.D. economist, let me tell you what I see in comparing Charts 3 and 4, or at least give a possible interpretation. Chart 3 says that this is the world that used to exist and, based on the last couple of years of experience, probably does not exist any more. But central bankers are supposed to be hardboiled fighters against inflation, so let's make believe that the world is the way it used to be and launch ourselves into a fight against inflation. Chart 4 says that this is the world that we in fact have been living in rather successfully for the last couple of years. It doesn't appear to me that we have to make an act of faith that it will continue forever in order to think that this world, which produces a much better climate for our citizens, could be allowed to continue. We may get some evidence that in fact this is not the real world--that it has involved a series of lucky breaks and that the real world is going back to something more like what is depicted in Chart 3. If we do get such evidence, we would not want to be in a position of believing that Chart 4 will last forever because that would lead us to make mistakes that would be quite dangerous if in fact the world of Chart 3 were the real world. But based on what we have been seeing, even though we do not fully understand it, the world of Chart 4 seems to me closer to the world we now appear to be living in. And I'm not sure why we shouldn't give that world a chance to endure. Am I missing something?",382
-fomc-corpus,1999,I wondered whether that was a question or not! [Laughter],14
-fomc-corpus,1999,I had to put in a question mark at the end because this is the time for questions. My question is: Would the gentleman not agree? [Laughter],33
-fomc-corpus,1999,"The gentleman would agree. A key element in interpreting what has happened over the last few years is this: To what extent has there been a fundamental shift in the structure of labor and product markets that will persist? And to what extent do the favorable results of the last few years stem at least partly from factors that are not fundamental to labor and product markets such as the very sharp appreciation of the dollar through the middle of 1998 that lowered import prices, the collapse of economies abroad, the collapse of commodity prices and similar developments? These factors not only lowered inflation directly but helped keep inflation expectations down. In effect, the staff has chosen to assume it was a little of each. We used to have, not that long ago, a NAIRU of 6 percent or perhaps a little more than 6 percent. We have interpreted the good inflation numbers as reflecting in part a lowering of the NAIRU by 1/2 or 3/4 percentage point, depending on what day we talk to people about it, and in part as the product of some of these other factors. But I totally agree that it is in large measure a judgment call. The reason we showed Chart 4 was to indicate that if you had the other interpretation--that the favorable inflation results reflected almost entirely a change in structure and that the declining oil prices and rising dollar really were not important factors--then you would come out with the lower NAIRU path as shown in Chart 4. These two charts were an effort to give you a way of doing what you just did, which is to compare across charts and make a judgment. But the key judgment relates to what accounts for the good price performance of the last three years and what is the mix between a change in structure and one-time price effects.",360
-fomc-corpus,1999,"In a sense there is some link between what you just said and what the Chairman said earlier. I may not have known exactly what charts the Chairman had in mind from prior years' simulations, but if you view what has happened as having benefited from some supply-side shocks, basically those things have become engrained in the inflation expectations. And as long as the Committee follows a policy that doesn't lead to excessive pressures in the market, it can consolidate that progress and continue the lower path. But if these are transitory developments and you pretend or hope that they are changes in the structure, then you could be faced with a very severe turnaround. And what we could be looking at a year or two from now is a much-elevated set of simulations of inflation paths going forward. It is a judgment call that each of you has to make at this point as to just what has led to the positive surprises on inflation. It's not at all clear that it is entirely due to permanent structural changes. I think one can see clear risks in the medical care market, for example, that the benefits from some structural changes there may have run their course and that costs pressures are turning things around in that area.",239
-fomc-corpus,1999,If I could make a comment: I think an appropriate degree of skepticism is no doubt appropriate. [Laughter],23
-fomc-corpus,1999,As always.,3
-fomc-corpus,1999,That is by definition a safe statement! President Hoenig.,12
-fomc-corpus,1999,"Don, having looked at the analysis in the Bluebook and at the various charts, including Chart 3, and having listened to your comments this morning, I want to talk a little about something I mentioned yesterday. That is the possibility of wanting to unwind the actions we took earlier. Last fall we were projecting growth in the fourth quarter to be less than half the growth we apparently got, and we were expecting even lower growth in the first quarter of this year. We took actions to ease partly because of those projections and the financial turmoil that was occurring. We have moved into a much more stable financial environment. You did mention the idea of perhaps unwinding our easing moves. I assume for the sake of discussion that one reason we are not looking more favorably at unwinding at this juncture is the continuing concern and uncertainty about external factors. Is that why you touched on it but did not really develop an alternative for unwinding our earlier actions?",190
-fomc-corpus,1999,"I mentioned it as a possibility. That is, to the extent that you were buying insurance against a hurricane and the hurricane season has passed and you don't expect another season, then you don't need the insurance. But in part the decision involves a judgment, in terms of the risks, as to whether the hurricane season really has passed, if I can stretch the metaphor beyond its breaking point. [Laughter] Certainly most of us were pleasantly surprised by how well the financial markets, not only in the United States but in other Latin American countries, weathered the Brazilian crisis. But the crisis is not over yet, so that is still a potential issue. The other thing that has happened over the last couple of months is that we all were probably once again surprised not only by the strength of the economy but by how well behaved inflation has been excluding the tobacco price increases. In particular, the ECI and nominal wage compensation have exhibited very good performances. That is another factor you might think about going forward. We've not only had positive surprises on the real side, but we have some pleasant surprises still coming in on the price side to balance the other concerns.",230
-fomc-corpus,1999,That's a good point.,5
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"I'd like to address the point that Bob Parry brought up on whether we have locked in progress on inflation. Let me refer everybody to Chart 13 that Dave Stockton showed yesterday. The bottom panel of that chart shows that if we take out food and energy in the PCE and use the capacity utilization approach, which is in effect a proxy for the lower NAIRU--or in Bill McDonough's terms the issue of whether the present situation can go on--in fact, we have locked it in. The only reason there is a little uptick in Chart 4 is because of food and energy prices. It may be that we want even more aggressive action to get to lower inflation. But if it is true that something like the present regime can go on, which means either that capacity utilization could be a standard or that NAIRU is at about the current level of the unemployment rate, then arguably we have locked in our gains.",190
-fomc-corpus,1999,I don't understand that.,5
-fomc-corpus,1999,"Well, in Chart 13 the inflation rate actually goes down.",13
-fomc-corpus,1999,What about its behavior in terms of the long-run simulation on Chart 4 of the Bluebook?,20
-fomc-corpus,1999,"Chart 13 is a long-run simulation of PCE without food and energy, and the inflation rate actually goes down in that simulation. Apparently the only reason it goes up in Chart 4 is food and energy. So if we lock in the endogenous part of prices, leaving aside food and energy, then I think we could arguably say that this regime does lock in the progress on inflation.",78
-fomc-corpus,1999,"But that's not true in terms of the long-term simulation shown on Chart 4, which goes beyond the year 2000.",26
-fomc-corpus,1999,They give slightly different results.,6
-fomc-corpus,1999,"If you thought that the capacity utilization equation was the more accurate equation in terms of predicting PCE, then as you remarked yesterday, Governor Gramlich, it would be very much like the lower NAIRU situation. It would indicate that the structure of the economy had changed and that capacity utilization was a better measure than the unemployment rate. Then you would be in the lower NAIRU world rather than the unemployment rate world.",85
-fomc-corpus,1999,"You don't even need a structural change. If somehow, for reasons we don't understand, capacity utilization really is the true measure rather than the unemployment rate, then that simulation reflects the fact that the level of economic activity is actually below the natural rate of capacity utilization. There is slack in the economy, putting downward pressure on inflation. If you were looking at the unemployment rate and you thought the NAIRU was 41/2 percent or a little below, it would be a close call. We are in the neighborhood, but that means we would not have the depressing effect that we would have by looking at capacity utilization. What we noted yesterday is that, as an approximation, that approach may be telling us roughly the same story and not that we are a point below somebody's notion of the NAIRU at this juncture.",166
-fomc-corpus,1999,"So, for these purposes any differences are small, they are hard to predict in the long run, and they may not concern us too much.",29
-fomc-corpus,1999,"I would just add a note of caution on the basis of bitter experience, which does not have to be repeated admittedly. When one studies the history of the past few cycles, it is not unusual to see a tendency to reinterpret capacity constraints because the inflation turnaround isn't in sight. I think it is manifest in the current episode that there have been extraordinary shocks in terms of world activity, exchange rate movements, declining import prices, and structural changes in various markets. And there may be still more structural changes on the horizon after the electricity deregulation and so on. A lot of these developments are, in the abstract, in the nature of one-time shocks, which we can't depend on being repeated. But we can consolidate the gains we have made if we are able to figure out where that level of sustainable resource utilization is in this model.",166
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"This is not so much a question as a plea for perhaps a different structuring of the problem next time around. I think the difference between the world depicted in Charts 3 and 4 is very interesting, but it becomes dramatic only if one assumes that we stay with the policy implied by one or the other for a very long time. I don't know whether we are in the world of Chart 3 or Chart 4, and asking me to decide is silly. There is no way I can know that. What we have to focus on, given that we don't know and that the truth is likely somewhere in between, is what the costs are of making a mistake and how to move back from one to the other if we do make a mistake. I don't know how you could help us think about that, but that is what I believe we need to be thinking about for the next several meetings.",181
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"When I raised my hand, I didn't know there would be so many people talking after Bill McDonough. I basically wanted to associate myself with his remarks. I would associate myself with Alice Rivlin's comments, too. We now have had three years during which economic growth has been faster than most people's estimate of potential and the unemployment rate has been below most people's estimate of NAIRU. Three years is a long time. So, we have a real economy that we can match up against simulations, and I'm not sure why we wouldn't use the real economy rather than some of the simulations. I don't know if you remember the comedian Richard Pryor, but if he were here he would say something like: Who are you going to believe--me and my simulations or your own lying eyes? [Laughter]",163
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"I am struck as I look at Chart 4 that we are being asked to make an either/or decision. That is, we have to think either that the NAIRU has dropped or that adverse price shocks are going to hit us. Is there no simulation that actually suggests some of both--that the NAIRU may indeed be below 5.3 percent, and perhaps at 41/2 percent, but also that these other special factors have been hitting us? It strikes me that that does not necessarily end up being your baseline because your baseline has a somewhat different set of assumptions in it. Even though I understand what Bob McTeer had to say about believing your own lying eyes in some sense, is there a simulation that does a little of both? I'm sure that is doable, but is there one that has been done?",169
-fomc-corpus,1999,"We have not done that, though the baseline does do a little of that in the sense that the NAIRU in the baseline is considerably lower than it would have been a couple of years ago. That's part of what the Chairman was talking about. But the baseline does take some of the favorable price and output news as stemming from supply shocks. We have not done an interpolation with an assumption, say, that the NAIRU is 5 percent. But we could easily do that. One can do that visually by looking between the two charts. Then in fact the interest rate would be a little too low, but not a lot. The Committee would have to tighten at some point, but the urgency of a move would perhaps be less than indicated in the baseline. One can do an ocular regression and figure out that we are somewhere in the middle of these two scenarios.",175
-fomc-corpus,1999,Okay.,2
-fomc-corpus,1999,"I should note that we did the simulation showing the adverse price shocks, the dotted lines in Chart 4, in part to illustrate the power of supply shocks. Those are not very big supply shocks relative to the baseline assumptions. There is a $5 difference in the price of oil and a 1 percent faster growth in benefits costs, which translates into only 1/4 percent faster growth in compensation. Those supply shocks noticeably raise the inflation rate. And with the Fed leaning against increasing inflation-not in a really aggressive way but at least by raising the funds rate right away--we get a higher unemployment rate and a higher inflation rate simultaneously with these adverse shocks. Think about the flip side of that. We have had a lot of favorable shocks over the last couple of years, and that has given us both lower unemployment and lower inflation than we would have expected. The dotted line was put there in part to let the Committee members think about that and about what might have been if we had not had the favorable price shocks over the last few years. These price shocks are very powerful in shaping economic performance.",220
-fomc-corpus,1999,"Let me ask one other thing on the locking-in point. Ned was going back to Chart 13, but doesn't the bottom panel of Chart 4 get to the issue of the long term? That strikes me as suggesting that even if one believes the NAIRU has dropped to the 41/2 percent you have assumed there, we will end up in the long run with a PCE excluding food and energy of about 2 percent. I think that goes back to Bob Parry's question.",101
-fomc-corpus,1999,"If I understand the construction of this--please correct me if I'm wrong, Don--basically this represents the staff's baseline assumptions naturally extended, at least for the near term. Those assumptions include a rebound in oil prices and the turn of the dollar and so on. So in a sense this is already the lower NAIRU path. It adjusts down the NAIRU, but it doesn't remove that modest reversal of the favorable supply shocks that we have experienced.",93
-fomc-corpus,1999,Including most importantly the depreciation of the dollar.,9
-fomc-corpus,1999,"Okay, thank you.",5
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I am attracted somewhat to the construct that Alice talked about of not really knowing where we are between Chart 3 and Chart 4, because I really don't know how much of the good news we have been hearing for the last couple of years is temporary or permanent. But I am drawn to thinking about where we were last August or even last July. At that time, with the fed funds rate 75 basis points higher than it is currently, many of us were thinking--using the usual constructs and equations and so forth and given the resource constraints--that we were facing a real risk of an inflationary increase over the forecast horizon. Some of that, not a lot, was built into the Greenbook forecast as well. At that point, with the fed funds rate 75 basis points higher than it is now, I think we were still betting that we were somewhere between Chart 3 and Chart 4. We thought we faced an adverse shock stemming from developments in financial markets that we expected to have a big impact on the real economy. We moved the funds rate lower, but the expected impact on the economy did not materialize. So where is our betting now? Our betting, it seems to me, is much more weighted than it was last summer toward the view that everything has changed. A lot of us were not comfortable with that bet last summer. So why isn't Tom Hoenig's logic in favor of reversing a little of the easing not good logic now as a tactical matter, if not as a worry about near-term inflation? I would view that as a way of expressing where we think we really are between Charts 3 and 4. Is that a question? I am trying to find a question! [Laughter]",349
-fomc-corpus,1999,"One reaction, though, is that in a sense you are beginning to bring Chart 5 into the picture.",22
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"That raises the question of whether some of the demand-shock surprises we have been experiencing will be sustained. My sense of the discussion yesterday, as we were thinking about the coloration of the Humphrey-Hawkins report, is that this group might see greater risks that we will have stronger demand, other things equal, than is assumed in the current staff forecast. It does raise the question of whether you want to blend in some of the flavor of Chart 5 in terms of the policy content.",99
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"This is really a question, even though it might sound like a comment! [Laughter] If we try to choose between the world in Chart 3 and the world in Chart 4, I think we have to be somewhat agnostic and have a fair amount of humility. But as long as we're being humble and as long as we're being somewhat agnostic, how do we know there isn't a Chart 5 that represents a different world? How do we know that the NAIRU couldn't be 4 or 31/2 percent? If one goes back, for example, to the 1960s there was a lot of talk that we could have price stability and unemployment rates of 31/2 percent or certainly 4 percent. I think the term used was ""3 to 4 percent."" I don't know whether that is realistic or not. I believe if any of us had been asked two or three years ago if we thought we could have a 41/2 percent unemployment rate and inflation still falling, we would have said that was a pretty nutty idea. How do we know that the string has run out? How do we know that we can't have a still better world? The question is whether we have looked at that possibility analytically. I ask because I think we do have some historical experience where unemployment of 3 to 4 percent without rising inflation was considered realistic.",282
-fomc-corpus,1999,"That proved to be an error, in a sense. The economy got very overheated partly because of the optimism about how low an unemployment rate could be sustained without inflation. To go back to what your eyes have been perceiving, labor markets clearly have been tight and wages have been accelerating. Pressure has been manifest in the labor markets. Now, that hasn't fed all the way through to prices, depending on what measure one examines. If one looks at the core CPI adjusted for the technical changes, that has been accelerating. The PCE measures and the GDP measures look a whole lot better. The answer is not entirely clear. We may have had a productivity surprise that helped. We could get another. I think the case for a substantially lower level of unemployment that is sustainable without a buildup of inflation is perhaps a bit wishful, though I can't rule it out. But we on the staff resist that notion pretty strongly at this point. I would not be as resistant to the notion that the NAIRU might be below 5 percent or maybe significantly below 5 percent. It is hard to be strongly opposed to that notion based on recent experience.",230
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Chart 3 has a price stability simulation, which Chart 4 does not have. I have what I think is a simple question. Roughly speaking, what would the federal funds path be in Chart 4, assuming the NAIRU were lower but the same end result--converging on 3/4 percentage point less inflation per year than the baseline--is desired? To get that in Chart 4, presumably we would have a federal funds rate somewhere between the baseline and the dot-dash line. Is that correct?",108
-fomc-corpus,1999,"Right. On Chart 3 there is a difference of about 2 percentage points between the inflation rates, and you're talking about a scenario that might result in an inflation rate roughly one percentage point lower than the baseline. So I would take about half the difference between the real funds rates of the two simulations on Chart 3 and load it into Chart 4 to get the inflation rate for that scenario.",80
-fomc-corpus,1999,"So Chart 4 is built under the assumption that we are satisfied to converge more or less on the existing rate of inflation. That addresses the question of what we have to do if the NAIRU is lower, if we're satisfied with where we are on the inflation rate. But for those who have an objective of a lower rate of inflation, we'd need to add that to Chart 4 in our discussion of the implications for policy of Chart 4.",91
-fomc-corpus,1999,"Right. Looking back at Chart 3, you would have to tighten by about 1/2 percentage point, let's say, in the near term, but run with a substantially higher real funds rate over the next couple of years, though not as high as in the price stability case.",58
-fomc-corpus,1999,A simple rule-of-thumb exercise using our model is that a 100 basis point higher funds rate implemented immediately and sustained would knock about 1/4 percentage point or a little more off the inflation rate in the first year. The inflation rate in the second year would be about 3/4 percentage point lower. I suspect there would be overshooting in terms of getting that inflation rate to flatten out.,81
-fomc-corpus,1999,A hundred basis points sounds too--,7
-fomc-corpus,1999,"I think that would be more than enough to get you there very promptly, so Don's response of perhaps 1/2 percentage point sounds about right.",31
-fomc-corpus,1999,"At the beginning of this trajectory, where we are right now, even if the NAIRU is as low as 41/2 percent we need a higher funds rate to start to work the inflation rate down or we are at risk of actually seeing the inflation rate rise. That is what the baseline tells us even at the current unemployment rate.",69
-fomc-corpus,1999,"Right, that's the lower NAIRU scenario.",10
-fomc-corpus,1999,"Anybody else? If not, let me get started and try to focus on some of the same issues that many of you raised. The Committee discussion that we had yesterday elicited general agreement around the table that, with the exception of energy, agriculture, and some manufacturing and mining industries, the economy has been exhibiting substantial, and what many analysts regard as unsustainable, strength. The strength is especially evident in interest-sensitive areas such as housing and light motor vehicles. That, of course, would suggest that our monetary stance is too loose and unless economic growth slows quickly, the failure to tighten will reaccelerate inflationary pressures. Many of you have noted that the sequence of crises and decided weaknesses abroad clearly have had no broadly negative impact on the rate of growth in the United States, at least not yet. I have not heard it argued specifically, but our 75 basis point action last fall was directed at countering a freezing-up of financial markets, which constituted a demonstrable threat to the stability of our economy, and arguably we have largely succeeded. It is true that one can still observe some residual impact of the liquidity problems that we have experienced, with yields on junk bonds remaining significantly above Treasuries and even obligations rated A and AA still running spreads against Treasuries that we haven't seen for a very long time. If it is correct that we have succeeded, then one could argue that we ought to reverse at least part of our easing moves. There has been a legitimate concern about stock prices that, as an inadvertent side effect of our easing actions, have returned to record levels--a development that clearly has augmented effective demand. All of this makes a compelling case, indeed. There is little question in my mind that, unless we see a pronounced slowing in the expansion of economic activity, some form of preemptive action may be called for. I say ""preemptive"" because there is remarkably little evidence that inflation pressures are building. There is none in the data, and I heard very little commentary about price pressures in our round-table discussion yesterday. Everyone was arguing that the pressures were there, but no one was saying, at least that I heard, that anything was happening to prices as a consequence. Indeed, the CPI change for December, if we take out the tobacco price increase, was slightly negative for the total CPI and only slightly positive for the core CPI. The same is essentially true for the PCE data. If this is inflation, something is wrong with our data system. The point is that we are at the tail end of a series of years in which, by all our historic measures, growth has been above trend. Price pressures should be mounting at this stage, but instead they are going in the other direction. This involves, in my judgment, a major issue that we need to understand before we move forward with a policy shift. The discussion that has just been joined relates precisely to this issue. I find the resumption in the fourth quarter of the steep decline in the number of those seeking work to be the most compelling evidence of an unsustainable, and perhaps an unstable, economic expansion. That statistic, of course, includes the unemployed plus those not in the labor force who nonetheless say they would like a job if they could get one. You may recall that through the first three quarters of last year we had a sharp divergence between the still strong growth of payroll employment and the apparently stagnant growth indicated by the household data. The surge in household employment and the decline in unemployment in recent months have now fully closed the gap. Our great dilemma is that although the labor market has tightened, and tightened quite appreciably in a statistical sense, gains in compensation per hour have slowed! It is not that they haven't risen, but their growth has slowed. Doubtless, the ECI change for the fourth quarter is biased downward. As I have indicated before and as a number of you have argued, it is very likely that to some extent wage increases are being masked as promotions in one form or another. But even if the ECI is biased in that regard, compensation per hour is not. Preliminary data for compensation per hour in the fourth quarter, at least for the nonfinancial corporate sector that I believe probably mirrors the total, indicate an average annual growth rate of 3.7 percent. That is down from an average of about 4 percent in a number of previous quarters. Indeed, for the nonfinancial corporate sector, it was running 4.4 percent in the middle part of last year on a four-quarter-change basis. For the fourth quarter of last year, year-over-year, it was estimated at 4 percent. Moreover, despite our tightened labor markets, when we disaggregate the data, there is only very weak evidence of significantly greater compensation gains in areas where the unemployment rate is demonstrably below the national average. The national average unemployment rate currently is 4.4 percent. Gary Stern was mentioning yesterday that Minneapolis had a 11/2 percent unemployment rate. Their manufacturing wage increases over the past two years have been close to the national average. If we look at other cities, Boston with an unemployment rate of 2.2 percent has had average hourly earnings increases over the last two years only somewhat higher than the national average. Indeed, the only two cities on my list with low unemployment rates that have experienced wage increases significantly above the national average are Charlotte and Richmond. What are you doing, right or wrong, Al? [Laughter] San Francisco has a 21/2 percent unemployment rate, and its average hourly earnings growth over the last two years is about average. Denver unemployment is 2.6 percent, and its average wage increase is well below the national average, as indeed are the increases for Phoenix and Dallas. So, there is very little evidence, granted all the qualifications we want to make with regard to these data, that the NAIRU is alive and kicking. It may exist, but it certainly is in hiding, no matter how we look at it. Using NAIRU in our structural models is in effect like using a phantom. Chart 4 in the Bluebook is the real world; the NAIRU got lost somewhere. If we look at compensation gains, they are virtually fully matched by the acceleration in productivity. Total unit costs over the four quarters of 1998 rose just 0.2 percent. Indeed, unit labor costs for nonfinancial corporations over the latest four quarters, as estimated by Larry Slifman who never makes a mistake, increased only 0.2 percent. That estimate is comprised of compensation per hour of 4 percent, as I mentioned before, and productivity growth of 3.8 percent. The productivity growth figure for the fourth quarter is 4.8 percent, preceded by 4.7 percent in the third quarter. Clearly, something is happening. As I said before, absent the cigarette price hike, we cannot find inflation in either the CPI or the PCE index for December, and we surely do not find it in the pipeline data anywhere in the system. I submit that interpreting these results requires a fundamental reassessment of how we look at the world. I will take a shot at this and try to describe what I think we know and what we don't know. How is it possible, first, for hourly compensation growth to be flat or falling in an ever-tightening labor market? Let me begin by suggesting what does not explain it. You may recall that two or three years ago I was arguing that fear of job obsolescence was a major factor suppressing the nominal increase in compensation per hour. That factor clearly has not gotten worse; if anything, it has eased. The International Survey Research Company is the source of the data that I was quoting back in 1995 and 1996, as you may remember. When workers were asked whether they frequently were concerned about being laid off, 46 percent responded ""yes"" in 1995 and 1996 compared with figures in the teens or in the twenties throughout the 1980s. The 46 percent number is now down to 37 percent. Statistics on job leavers, another indicator I would use, likewise do not indicate any significant change. So an increase in uncertainty and the fear of job loss amongst workers cannot account for this extraordinary combination of low unemployment and no acceleration in hourly compensation. The evidence, anecdotal and otherwise, suggests that the explanation lies in pressure coming from employers, who have apparently lost virtually all pricing power--an issue that a number of you raised in our discussion yesterday. We saw quite similar episodes during the long period of the gold standard, which produced price stability on average prior to the 1930s, although obviously there was a lot of price volatility. During that period, wage increases were limited by the exogenous price capping of the gold standard. The technologically driven process that is breaking down barriers to cross-border trade today has apparently created an environment that simulates the old gold standard forces. One way of looking at this is that in earlier decades when there may have been excess capacity or excess potential in one part of the world, it didn't matter because that excess could not be moved to another part of the world. But in the current more technologically advanced environment, as barriers come down we get an increase in potential supply relative to total actual physical capacity in the world economic system. And it is conceivable, but by no means provable, that globalization--the major force that people are talking about--may be having an impact on the price level, and our price measures may be reflecting that. It may also be, with regard to my previous discussion of compensation gains, that the data are capturing that phenomenon, although the argument I am making is global as distinct from a specific manufacturing issue. The argument is basically that tradable goods prices are being significantly held down by excess world capacity and that the arbitraging into the nontradable goods areas that occurs within economies, largely through wages, is the reason why service price inflation, which arguably has very little in the way of direct international globalization components, also has been restrained appreciably. In the United States this process has been augmented by a dramatic increase in the backlog of new technologies, which is an issue we have discussed in the past. This really gets down to the question of whether the synergies that have evolved over recent years have created a large pool of potential capital investments that firms can dip into to obtain a rate of return in excess of the cost of capital. We have seen considerable evidence of this in the sense that rates of return everywhere seem to be moving up. There has been a very interesting pickup since 1994 in the average rate of price decline in the high-tech area of the economy. Through the early 1990s, the deflator for computers, communications equipment, and other high-tech goods was going down at an annual rate of about 4 percent. Starting in 1994, the rate of price decline fell off the chart, and the most recent data suggest that high-tech prices are dropping at an annual rate somewhere in the area of 17 to 18 percent. Thus, even though that sector's share of GDP is only a few percent, these price declines are having an appreciable influence on the overall inflation rate. What this implies is that we are getting a rapid increase in opportunities for investment in new technology. It is overwhelming the expansion of demand, and the acceleration in the downward adjustment of prices suggests that we have a very large backlog of unexploited investments that, as they are implemented, are displacing labor and effectuating a very significant increase in multifactor productivity. That in turn has spilled over into labor productivity. Indeed, estimates produced by the staff's econometric model suggest that we have seen a fairly dramatic pickup in recent years in multifactor productivity consistent with this process. I don't believe that transitory factors can explain the failure of models to forecast successfully in recent years. I suspect that what we have here is a missing variable, if I may put it that way. Certainly, judging from the slowing in the rate of PCE inflation, supply generally appears to be overwhelming demand despite the evident continued decline in unemployed job seekers. I might say parenthetically that the level of these job seekers--that is, the sum of unemployed plus those not in the labor force but seeking a job--is currently ten million; and it has been falling by almost one million annually. We have no way to judge how far down that number can go before there occurs an inevitable acceleration in nominal wage demands. Unless the laws of supply and demand have been repealed, there has to be some level of labor market tightness at which nominal wages begin to accelerate. The truth of the matter is that we don't know where that is; we only know that the number of job seekers has been reduced by almost a million in each of the last several years, and nothing has happened. That is like my falling off a building and saying when I reach the fifth floor on my way down that I am in great shape. Something has to give, but we don't know when. I think the presumption that we do know is very difficult to maintain. The Greenbook forecast of a renewal of inflation statistically rests in part on a marked decline in the growth of multifactor productivity, and hence in the growth of output per hour. Indeed, without a slowing in multifactor productivity growth, we obviously could not have a deceleration in labor productivity growth unless we significantly lowered the forecast of capital deepening or labor quality, and that is very unlikely to be the case. So what we have is a projected slowdown in multifactor productivity growth, which is based in turn on a substantial slowing in the pace of overall economic growth. I am not saying that the internal workings of the model actually have that linkage; they do not. Nevertheless, if you plot the multifactor productivity that is implicit in the staff's forecast along with the change in economic activity, you will see a fairly high correlation. I assume that the reason we have this dramatic falloff in multifactor productivity growth in 1999, after very strong gains in the two previous years, is the forecasted slowdown in economic growth. But if the slowdown in economic growth does not occur, then presumably productivity growth will not slow much either. And unless there is a really dramatic rise in nominal wage increases, unit costs will not move very much. I am having difficulty knowing where this higher inflation in the model forecast would come from if I leave that out. That is especially the case when the pairing of multifactor productivity growth and low unit costs is essentially combined with an oil price increase to get the CPI increase. As we discussed yesterday, the oil price increase is based on the presumption that we know more than the market about the long-term direction of the price for West Texas Intermediate. Now, that may well be the case, but history has been less than helpful in that regard. I would not bet the ranch that one could buy December futures for WTI and know for certain that it would result in a profit. Our structural and VAR models that are projecting this price acceleration are not properly specified, in my judgment, unless some means are found to capture the technologically driven price-capping variable. Lagged dependent variables do not do it. VARs may appear to give us good results, but they are begging the question on the crucial missing variable. Moreover, it is evident that whenever nominal wage pressures have surfaced, producers have chosen to dip into the available technology to substitute profitable capital for labor. This has made the growth of potential output per hour variable; indeed, it's a function of nominal wage increases. The reason is that if nominal wage increases pick up, there is clear evidence in recent years that producers will endeavor to dip into that untapped pool of technological capital projects. We have had many anecdotal conversations on this subject. We had a discussion yesterday in which I mentioned talking about this issue with the head of British Telecom. He was saying that the availability of new technologies and synergies is accelerating at such a pace that they don't know what to invest in. Everything is terrific. It is a question of which of the individual rates of return is higher. They are all above the cost of capital. Larry Meyer mentioned a discussion he had with a senior Microsoft researcher who was confirming the same thing. Something different is happening here, and our models are missing a crucial variable. As we all know, when econometricians get regression results that appear out of line with the real world, as Bob McTeer was saying, they have to look for the missing variable. I submit that there is a missing variable, and we are learning more about the nature of its characteristics. I think it may be about time to try to substitute this variable for NAIRU. Let me put it this way: Neither one is an observable phenomenon, but neither was the planet Pluto before 1930. Scientists figured out that there had to be something there, given the extent to which Uranus and Saturn were deviating from their forecast orbits. Well, I submit that at some point we are going to come to the conclusion as statisticians that the simultaneity of a falling inflation rate and an ever tightening labor market is trying to tell us something. My plea is that we try to do something to see whether we can get some answers that do not give us Chart 3 and Chart 4, which in their present form are not terribly helpful. There is very little evidence at this stage that the expansion is slowing. I know it is supposed to decelerate significantly in the first quarter, and I don't deny that the motor vehicle segment is going to reduce it by some 2 percentage points. I also gather that we will get some further deceleration from government and probably from trade. But these are forecasts. As of the moment, we have a 5.6 percent annual rate of growth in the fourth quarter, and the impression I have is that that number will be revised up, not down. In the first quarter, some points may be taken off the possible 6 percent fourth-quarter growth number, but it has to go down by a significant amount. I recognize that productivity increases cannot explain all of the growth because if they could, then we would not be getting a reduction in the total number of people who are either unemployed or out of the work force looking for jobs. So, something has to give here at some point. The inflation rate, as we measure it, is at zero currently; if we got the measurement right, it probably would be negative. Given that there is still some bias in these statistics, we certainly can wait a while. But it is conceivable that the data we are going to see in the weeks ahead will confirm something that we have not seen to date, namely underlying inflationary forces. I don't mean strong economic growth. That tells us little except that productivity is accelerating. But what is happening in the labor market may tell us something. We may indeed find that the labor market issue is becoming significant. We may find when the data are published at the end of the week that average hourly earnings will show a spike, and we may see another spike the month after. Clearly, that would suggest that something different from what we've been seeing is happening. What I would recommend after this long discussion is that we stay where we are at the moment. I would be disinclined to go asymmetric toward tightening at this stage because the data may turn out to be softer than I suspect, and flipping the symmetry back and forth would not help us. If it turns out, however, that the labor market data we get on Friday really tighten up or if the data we get on the CPI or the PPI show that something is stirring, I think a fairly strong signal in the Humphrey-Hawkins testimony that we might tighten would be wholly appropriate. Indeed, I would say it would be highly desirable. I don't think we have reached that point yet, but I can readily conceive of the possibility that we will. I would suggest that we wait a few weeks before we show our hand and leave it for the Humphrey-Hawkins testimony to suggest some asymmetry toward tightening if that seems appropriate. If I were to sum up the general discussion at this meeting, I would say that the consensus is probably a shade in the direction of asymmetry. I request that we do not adopt asymmetry, but that really depends on our strategy. I don't sense any pressure to move today, but I do detect some inclination on the part of a significant number of the Committee members to move in the direction of asymmetry toward tightening. I frankly would prefer not to do that. Whichever way we go will probably have zero impact on when and to what extent we move or do not move in the weeks ahead or on what we decide when we meet again on March 30. If inflation were not actually dead in the water at this stage, I would say that we would have to be far more concerned about being preemptive. I don't see the necessity for that at this moment. Vice Chair.",4265
-fomc-corpus,1999,"Mr. Chairman, I fully support your recommendation. Clearly, it seems inappropriate to change policy. And with inflation dead in the water, I also believe this is not the moment to go asymmetric toward tightening. I agree that the Humphrey-Hawkins testimony gives you, representing the Committee, an opportunity to discuss that. With the additional data becoming available between now and that time, I think that's the right thing to do.",85
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"I also strongly support your recommendation, Mr. Chairman, for the reasons ably stated by the Vice Chair. But I would be a bit cautious about sending a signal in the Humphrey-Hawkins testimony. We have seen so little inflation that I'm not sure we will see anything in the near term that could convince us that we should move up soon.",71
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"I certainly support your recommendation, Mr. Chairman. Let me make a few somewhat random, but hopefully not too random, comments. First of all, I enjoyed your analysis, especially the point about the importance of global capacity and the arbitrage between the manufacturing and service sectors. It is something I have been trying to convince my staff of without a great deal of success to this point, and perhaps you have aided in that effort. I must say I am a little puzzled by the fascination with NAIRU. I thought work done by Stock and Watson and others suggested that if there is a NAIRU, it lies somewhere between 4 to 7 percent or some range like that, which is quite wide. If that is right, it is not a terribly useful concept for policy. So, I have been reluctant for some time to go down that path very aggressively. Let me also add a thought about wages and compensation. At least as far as our employees are concerned, and this is confirmed by the labor leader on our board as well, the issue we hear most about is the scarcity of time. What many employers are doing--I know we are--is offering more flexibility in work hours to make it easier for people to do the routine tasks of running a household and taking care of family obligations that obviously take a lot of time. My guess is that at the end of the day this is probably productivity enhancing. If it shows up in wages or compensation at all, it may not affect unit labor costs adversely if it has a positive effect on productivity. I am a little suspicious about attributing a lot of the recent favorable inflation performance to special factors. Back in my youth when I was doing bottom-up forecasting, one could always find special factors to explain virtually everything. It seems to me that this subdued inflation behavior has gone on long enough now that it probably reflects a lot more than special factors. And I am struck by the fact that most, if not all, of the major central banks around the world are committed to a low inflation policy. The fact that we are getting low inflation and some surprises on the downside is perhaps not so surprising, if you get my drift. That to me is the policy regime that we probably have in the world today. The one thing that concerns me in the current situation is a communications issue. I have the perception that financial market participants and others feel that we cannot change policy in either direction in the current circumstances and that we will not. I certainly don't feel that we should any time soon, but I do think we should make an effort to communicate that indeed we are prepared to change policy if and when it is appropriate to do so. As for what we might point to as a rationale for changing policy in either direction, right now I don't think there is any such rationale, which is why I came out where you did. But it seems to me that we would want to put people on notice that indeed we are prepared to move under some circumstances. We might want to call people's attention to money growth, exchange rates, nominal interest rates, the bond market, and so forth, and say they have informational content and that we are going to be paying attention to those variables among other things in assessing the appropriate stance of policy going forward.",658
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Mr. Chairman, I support both halves of your recommendation. I also want to comment a bit on the strategy, which I strongly endorse. As I said yesterday, in periods when models do not seem to be working very well--and we seem to be in one of those periods--I think it is quite important to weigh the incoming data more heavily. To some extent that is what you were suggesting. That doesn't mean that our hands are tied in any sense. It does mean that once the data become clearer, we should be prepared to move. And I sense that that is where we are. I'd say one other thing. You put some emphasis, appropriately, on productivity. But we are aware that productivity is quite cyclically related, and I'm not sure we have parsed out those cyclical differences well enough yet. There may be some studies of the data that do that. One of the things we have to continue to look at is the degree to which we can pull apart the cyclical components from the underlying changes in productivity. I also would agree with President Stern's point with respect to NAIRU. It has never been measured very accurately, and I'm not sure it is going to be measured any more accurately in the future. It is an interesting concept, but we should not put too much weight on it for policy purposes.",268
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I support your recommendation. I would like to talk a bit about what I regard as a very important issue, which Larry Meyer emphasized yesterday. And that is that we need to be talking not just about the setting of the federal funds rate, but about the policy strategy from which the current rate setting arises. It is clear that the central fact occupying us is this ongoing surprise in the relationship between real activity and the rate of inflation, which we call the Phillips curve. The Phillips curve framework has been around in its current form essentially since the late 1960s. We have worked with what we call the expectations-augmented Phillips curve. I believe there is far too much emphasis on the NAIRU and not enough emphasis on the expectations part of the behavior in these markets. To me the experience over the last couple of years indicates that expectations trump the unemployment rate in determining the current rate of inflation--that the expectation of continuing low inflation is the factor dominating this outcome. Firms say over and over again that they don't have pricing power, and that is because their competitors won't follow any price increases they have tried to put into place. Competitors behave that way because they think the inflation rate will remain low and, therefore, if they can retain control over their costs, they are happy to grab more market share. So prices remain very much under control. I agree with you that emphasizing the exchange rate and oil prices as special factors is not the way to look at those variables. Those above all are expectational variables. Oil is a storable commodity. Oil is behaving so well in good part because it is expected that prices will remain low in the future. Oil is not a good store of value any more with the rate of inflation down. The same is true of the exchange rate. It has behaved so well because of the sustained low rate of inflation in the United States. Now, that does not mean that the unemployment rate is not below what is sustainable in the long run. There are so many stories about the existence of labor market pressures and shortages and so forth that we probably are operating below the NAIRU. It is just that the expectations part of it is dominating the outcome in terms of the current rate of inflation. The ideal situation, if we knew how to do it, would be to peg the rate of inflation at a very low level and go for price stability, letting the real economy run wherever it wants to run. What we would all like to see happen is to have the maximum possible employment and productivity growth consistent with price stability. The problem is that there seems to be so much evidence that the real economy leads the cyclical process, with inflation coming later. So, to say that we can ignore the real economy in setting current policy seems to me likely to be a mistake in the long run. Therefore, I come down to saying that we are going to have to pay attention to the fact that the real economy is growing very vigorously and that the unemployment rate is low. We should not ignore the anecdotes about very tight labor markets. Credit conditions and monetary growth are both very clearly on the stimulative side. The financial turmoil that motivated this Committee last fall appears to be mostly behind us. Over the course of this year, starting sometime this spring, I think it is going to be appropriate to be tightening up on the funds rate. I would like to come back to the original point that I was making about the importance of expectations. I think we need to do everything we can to seal in this expectational environment. That is what makes all this possible in my view. That means that if we get some bad news on the inflation rate, we need to be prepared to pounce in order to demonstrate that we are not going to let that continue. To show that we take inflation very seriously is to me the most constructive thing we can do. Whether or not we want to act before we get some uptick in inflation is another matter. But we are not faced with that issue immediately at this meeting. Thank you.",815
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"I support your ""B"" symmetric recommendation. I believe watching and waiting is the right approach at this point. I think most of us feel that we are sitting on a situation that is really very positive; or at least our experience over the last several years has been favorable. We may have some inner sense that it will not last or that we are going to have to do something over the next few months. Maybe we will or maybe we won't. I have a completely open mind as to what the next move on policy might be. I do think that when reality tells us something different from the models that we ought to take a new look at the models. Your contribution this morning was helpful in that regard. As far as NAIRU is concerned, my personal view is that it is a useful analytical tool for economic research but that it has about zero value in terms of making policy because it bounces around so much that it is very elusive. I would not want our policy decisions to get tied all that closely to it, especially when most of the NAIRU models have been so far off in recent years. As far as your testimony goes, I think it would be appropriate to lay out the possibility that we may have to tighten and for you to describe the kinds of circumstances that might lead us to that. On the other hand, that discussion ought to be balanced in the sense that there may be a set of circumstances in which we do not have to tighten. So, the possibility of tightening ought to be raised, but the possibility that we might not have to tighten also ought to be discussed.",322
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I am satisfied with your recommendation. As I mentioned yesterday, we have put some additional stimulus into the economy over the last several months and I think there is a case to be made for some unwinding of that, perhaps in the not-too-distant future. Depending on unfolding developments, that might be appropriate to mention in your Humphrey-Hawkins testimony, as you suggested. So I am fine with your recommendation.",88
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Mr. Chairman, I like your recommendation, including the handling of the symmetry issue. I hope, like others, that you will use the Humphrey-Hawkins setting to put people on notice that we are in fact prepared to tighten if circumstances suggest that is appropriate. I was particularly pleased that you resurrected the notion of ""preemptive"" policymaking this morning, something we have gotten further and further away from as we have gotten caught up in the euphoria of good experiences recently. Last night I was reflecting on yesterday's discussion and I was struck by how many of us have fallen back on our models recently. I know we have all been using them, but we talked about them more yesterday than in the past. I think we did that perhaps as a second check on our loss of peripheral vision, as a check against just going on our instincts. Those models, even with their flaws and possible missing variables--and you gave them another licking this morning--do serve to remind us that there is a danger of making the mistake of waiting too long to tighten policy and that there is in fact a price associated with that. So I am pleased that we at least have left the door open to a preemptive move. Thank you.",250
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"As my comments over the last couple of days probably have indicated, I can accept not changing policy but I am a little more uncomfortable with not changing the symmetry. In our meetings last summer we discussed--though you were much more expansive in your discussion today--the various aspects of what is going on and how difficult that is to measure and to capture in our equations. But it is easy to see, if one looks at it closely, that in terms of global capacity and changes in technology and so forth you could have given that same speech last July. To some extent you did. We had forecasts then that looked toward no change in policy going out over a period of several years and the trajectories didn't look terribly different from what we are looking at now, in that growth was a little slower and we had some small pickup in inflation. As I recall, your Humphrey-Hawkins testimony reflected that in July. Some of us were uneasy then, and we had a bias toward tightening at that point in time. What has changed? We experienced some financial turmoil. We changed monetary policy to provide protection to the real economy. The need for that has largely dissipated. We have an easier monetary policy now, and we have the same kinds of concerns that were disturbing me at least in the spring and the early summer. I'm talking about credit conditions, monetary growth conditions, stock market conditions, and asset market conditions more generally that seem to be stoking things to a point where, no matter what one feels about the future, we could be facing some real problems down the road. The higher everything flies, the farther it has to fall. For me anyway, it is not a situation of when we see the ""eyes of inflation"" but of what we are building in with regard to overall conditions. I think that relates to the expectations issue. It feeds into what people expect. I don't have any problem with it right now. But if people continue to see not just the same market conditions as last year but those same market conditions and an easier monetary policy, there is a point where they will begin to think that we aren't going to change our policy--that nothing can convince us to change in a preemptive fashion. That could feed into a negative expectations process that will defeat us in the end. So I am very worried about where we are. I do not have a vote so I can't dissent, but I am really concerned.",487
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"When I think about the inflation process and the inflation dynamic, I always point to two things: excess demand and special factors. I don't know any other way to think about the proximate sources of inflation. When I think about excess demand, I think about NAIRU. If we eliminate NAIRU and that concept of excess demand, it moves us into very dangerous territory with monetary policy. I would remind you that in the 20 years prior to this recent episode, the Phillips curve based on NAIRU was probably the single most reliable component of any large-scale forecasting model. It was very useful in understanding the inflation episode over that entire period. Certainly, there is greater uncertainty today about where NAIRU is, but I would be very cautious about prematurely burying the concept. I was also surprised to hear how many people believe that special factors--the appreciation of the dollar, health care cost developments, and so forth, which I feel have been so important over this recent episode--have been so immaterial in their views of inflation. Declines in oil prices from $26 to $12 per barrel seem to me quite relevant in understanding the recent inflation experience. So, I think we have to keep some balance in this. Even if productivity growth has moved upward, we know it has been above trend because we know the unemployment rate has been declining. So I come back to my story about the incremental Taylor rule. If you think NAIRU is as low as 41/2 percent, fine. But that still means to me that if the economy is growing above trend, there is a considerable prospect that it will continue to do so and that we should put some discipline in monetary policy by leaning against the cyclical winds. Otherwise, every time there is an upside demand shock, we will allow monetary growth to accelerate to accommodate it and wait for the day of reckoning. In terms of symmetry and asymmetry, the risks seem reasonably balanced around trend growth. Does that mean we should have a symmetric or an asymmetric directive? The problem I have is that I believe the initial conditions are such that we are already operating beyond the point of sustainability in labor markets. If we have balanced risks around trend growth, that tells me that we should have an asymmetric directive. Growth a little lower than trend would not call for any easing of monetary policy, but any growth above trend would call for a tightening of monetary policy. Mr. Chairman, I can certainly accept your recommendation and wait a little longer on the asymmetry story. But I hope some of these concerns will be reflected in your testimony. Thank you.",524
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Mr. Chairman, I am happy to support your recommendation for sitting tight. I think Larry Meyer made a useful contribution yesterday. I have been thinking in my own mind about how to resuscitate the Taylor rule. I may not agree with everything he said, but I view it as a reasonable strategy. One thing it means is that as soon as we see evidence of any acceleration in inflation, we have to move against it. I'd say that almost everybody around the table would agree with that. Models have taken a hit this morning, so let me say a good word for them. For many years they have been a useful framework for thinking about the economy. Actually, I think the staff should be commended for this week's presentations because they have employed models very well in illustrating the issues, even though the models did not resolve all uncertainties. The models say that we ought to be a little nervous about the current situation, and I am, even though I am happy to sit tight and follow your recommendation. On the other hand, you and others have made some very telling criticisms of the models, and a lot of you set your staffs to work on points that came up at the last meeting. Some points have come up at this meeting that would be worth exploring. Bill Poole raised a point about expectations. For a long time, how to factor expectations into the models has been a real puzzle. The treatment of expectations has always been fairly haphazard, and it may be that expectations are much more important now in a different way from what has been built into the models. We ought to take a serious look at that. You also raised a very important point on the price-capping issue. I don't know exactly what adjectives to use to describe it. I consider it important; I have been mulling it over myself. It may be time, and there may be enough data, to try to work that into the models. Let's try to have the models step up to the challenge and see if they can deal with some of these issues that clearly ought to be dealt with. Thank you.",420
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, in terms of the earlier discussion about the way the world works, I want very much to believe my lying eyes but I am having difficulty doing that. I don't doubt that there is a missing variable out there. Your point on that is very well taken. But the fact is that we really don't know what it is exactly. We do not yet have a very clear understanding of its strength or its likely persistence. That is the background against which I will present my own way of approaching the current situation. The comments that Larry Meyer and Cathy Minehan made, and especially Bill Poole's comments on expectations, really resonated with me in terms of the way I view the world today. It seems to me that even if we knew what this missing variable was and could somehow specify it and analyze it, we still would very likely conclude that domestic demand is growing at an unsustainable pace. I think we would also suspect that in the months immediately ahead it may be sustained and even boosted by the lingering and lagged effects of the easing actions that we took last fall and possibly also by the strong growth in the monetary aggregates. I worry about where all of this is going to take us. What worries me the most now is that the markets seem to be discounting almost completely--others have made this same point--any tightening action on our part, despite these continuing upside surprises in the data. At a minimum we need to send a clear signal that there is at least a possibility that at some point in the near term we might tighten. I think that would help sensitize the markets. There is a ball game going on here and we just are not in it. We need to get back in it in some way so that if we have to act on short notice, or maybe on no notice, at least we will not be so much of a lightning rod. I am probably the only person in the room who feels this way, but I believe one could make a case for undoing at this meeting some of the easing that we did last fall. Actually, in the Bluebook on page 19 the staff made a good case for that. Of course, they made some other cases as well. That's the problem. [Laughter] Speaking for myself, I would strongly prefer an asymmetric directive this time. If we don't do that, I hope, as you have already suggested, Mr. Chairman, that you will strongly signal in your testimony that there are upside risks in the current situation.",504
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, I support your recommendation with regard to the federal funds target. But I share many of the concerns that have been expressed by my colleagues, particularly President Minehan and Governor Meyer. I also believe that it is less clear, certainly less clear than at the last meeting, that the risks to the outlook are symmetric at this point. I think a case could be made for asymmetry, but we will be getting lots of information between now and the next meeting and perhaps we can probe that issue more deeply at our next meeting.",108
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,I agree with and support both parts of your recommendation.,11
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Mr. Chairman, I certainly support your recommendation. But I also would like to associate myself with the many concerns and reservations that have been expressed by a number of members of the Committee. Let me add just one additional brief caution. We frequently speculate about whether or not this Committee should or should not be preemptive. If we believe, and I think we all do, that policy affects the economy with long and variable lags, then we should keep in mind that we are always, every day, unavoidably being preemptive. Even taking no action at a meeting is preemptive, in the sense that any decision is going to impact the economy a year or two years out, or however long those lags may turn out to be. I think it is useful to keep in mind that we are always being preemptive.",170
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. Quite a few references have been made to the role of expectations. I did not come into this meeting with any expectation that there would be an adjustment in the funds rate at this meeting. I didn't know what the reasons for not making an adjustment might be, but I did not expect an adjustment. However, I still stand by my dissent on the cut in the funds rate taken in November, and I think it should be reversed. I don't think this would be the time to do it, with due respect to Al Broaddus and others whose views are that perhaps it should be done now. A reason for acting at this time that I would not find desirable would be that the economy is growing too fast. In fact, there is a potential that the economy would not grow so fast if we tightened at this meeting. There is the potential for an unfortunate, undesirable misinterpretation, coming after last Friday's report on real growth, that the Committee thinks that there is too much growth and too much employment and that we are unhappy about that. That would not be desirable. In fact, I believe we ought to go the other way by trying to emphasize how delighted we are with this strong growth, how delighted we are with the low unemployment rate, and how delighted we are with low inflation and, therefore, we did not take action. Nevertheless, expectations going forward are going to be a dominant concern to us and to everybody who watches us. As much as we and the world are happy that the average level of current consumable goods and service prices is not changing very rapidly, that is the necessary condition for successful monetary policy but it is not a sufficient condition. If it were a sufficient condition, we would still be under the gold standard. In fact, the Federal Reserve would not exist if it were a sufficient condition. We have had cases in our history and cases in other countries' history where the present price of claims to future consumption moved very substantially--sometimes too far up and then sometimes very rapidly down. This creates financial instabilities that are unhealthy for the performance of an economy. Otherwise, 1907 would not have happened; 1893 would not have happened. Central banks and monetary policy are designed to try to correct some of the flaws inherent in a pure gold standard type of environment. That means that we have to take into account things, such as the present price of future consumption, that are missing in our usual measures of goods and services prices. For some time, people have been purchasing equities in the expectation of selling them to somebody else at a higher price, with not a thought as to what the earnings potential or real value is--and it's probably more than just my three kids. [Laughter] There are people making real estate investments for residential and other purposes in the expectation that prices can only go up and go up at accelerating rates. Those expectations ultimately become destabilizing to the economic system.",588
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. It is clear from our discussion that there is a lot we don't know. I think we all feel this conflict--I certainly do--between what economic theory and economic models are saying on the one hand and what we have seen as the reality in recent years. We all have been over-forecasting inflation and under-forecasting growth for at least three years. Someone raised the question as to what has changed. The way I look at it, the longer it goes on, the more it becomes such a puzzle and the more one questions it. So I certainly agree with the thrust of your comments that we should be questioning our forecasting models with regard to the help they give us in policymaking. But having said that, I am concerned that our current monetary policy stance may be too loose because of the actions we took last fall. I don't think the risks are strongly skewed toward the upside, but I believe they are somewhat skewed to the upside at this point. I agree with the comments that have been made today that we have to be prepared to move very quickly when we see some evidence of inflation in the pipeline. It doesn't have to be in the actual numbers, but we have to be sure that we see some evidence. Clearly, we have not seen any evidence in recent years. So, I support your recommendation at this time. But we have to be very, very vigilant.",287
-fomc-corpus,1999,"There is a substantial majority in favor of ""B"" symmetric and I would like Norm to read the directive accordingly.",23
-fomc-corpus,1999,"This language begins at the bottom of page 23 of the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 43/4 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",98
-fomc-corpus,1999,Call the roll.,4
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes Governor Rivlin Yes President Stern Yes,45
-fomc-corpus,1999,"Thank you. Our next meeting, as you all know, is on Tuesday, March 30.",20
-fomc-corpus,1999,"I have just one question on something Don Kohn said earlier. Next meeting we will be under the new regime where if some significant change in the Committee's consensus develops, in the sense that we talked about at the last meeting, we would announce that in the afternoon. Is that right?",58
-fomc-corpus,1999,"If it involves a significant shift in the Committee's consensus, that would have to be considered. Yes, the new regime would be in effect.",29
-fomc-corpus,1999,But we are not required to say anything?,9
-fomc-corpus,1999,We are not required.,5
-fomc-corpus,1999,But the regime is in effect?,7
-fomc-corpus,1999,The regime is in effect.,6
-fomc-corpus,1999,"Just as another minor housekeeping matter: Could everyone let me know whether or not they want to change their individual forecasts? That way, even if there is no change, I will know that we haven't missed anyone. That would be helpful.",47
-fomc-corpus,1999,"Good morning, everyone. Would someone like to move approval of the minutes for the February 2-3 meeting?",23
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,Without objection. We will turn to Peter Fisher.,10
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will be referring to the three pages of colored charts that should be on the table in front of you. 1/ As you can see in the top panel, this time I have added in the 6-month forward 3-month rate as a black dotted line; it should not be infected with any end-of-year Y2K premium, at least for the next few days. You will recall that I used to include routinely the 6-month forward rate in all of these panels until all three of the money market yield curves became so compressed that they were too hard to see on the charts. Looking at the top chart on the U.S. dollar forward rates, you can see that the upward drift in money market rate expectations began in mid-to-late January and was accelerated significantly by the market's initial reaction to the Chairman's Humphrey-Hawkins testimony. These heightened expectations began to unwind rather quickly over subsequent days, however, as data came out indicating an absence of price pressures and comments by members of the Committee suggested an absence of urgency for a monetary policy move. But even ignoring the peaks of late February and early March, as shown in the chart both the 9-month forward 3-month rate and the 6-month forward 3-month rate are almost 40 basis points higher today than they were in mid-January. In particular, I would note that the 6-month forward 3-month rate, the black line, has been trading for the last few days at a premium of about 15 to 20 basis points over the current 3-month rate. And that is the widest spread between that forward rate and the current rate since the June-July 1997 period. The middle chart depicts the German mark and euro forward rates. It is intriguing to see, even with an eventual further ease by the ECB being widely discussed, the extent to which those forward rates moved up in late February and early March coincident with the rise in the dollar forward rates. In the bottom chart, on the Japanese forward rates, I would suggest that the spread shown there between the 9-month forward and the current rates probably reflects a Y2K premium and should be interpreted that way and not as the anticipation of a significant upward movement in Japanese rates. Turning to the second page, let me go over some yield and spread relationships. In the top panel you can see yields on selected 10-year government bonds for the United States, the United Kingdom, Italy, and Germany and for the 10-year U.S. inflation-indexed security. A very simple point to note in this panel is that during the period from October through December some rather dramatic changes in the relationships among major G-5 government bond yields emerged, and those changes occurred abruptly. But from January forward--dating roughly from the time of the real float on January 15th--you can see that these bond yields began to march in parallel, giving the market a rather strong sense that U.K. and continental government bond markets are following the lead of the U.S. Treasury market. The middle panel shows a series of spread relationships over the on-the-run Treasuries. In the top orange line, you can see that there was a narrowing in the mortgage-backed spread as long-term rates backed up in this country, reflecting a reduction in the prepayment risk for the mortgage-backed portfolios. It is interesting that the other spread relationships have remained rather constant, notwithstanding the backup in the U.S. Treasury yield curve and the rather heavy issuance of securities in the fixed-income market. I think this at least suggests a growing comfort level in fixed-income markets with the current spread relationships. On the other hand, the bottom red line, the twice off-the-run U.S. Treasuries, shows that while this spread has narrowed a little to around 15 basis points, or roughly half its October peak of 30 basis points, it is still 3 times its pre-Russian-crisis norm of around 5 basis points. So, while there has been some unwinding of anxiety in that area, there still is a rather pronounced desire for liquidity in fixed-income markets; market participants seem anxious to hold instruments that they can sell quickly if they want to. In the bottom panel, you can see that both Mexican and Argentine Brady spreads have returned to, or just past, their pre-Russian-crisis levels. And the Brazilian bond is now trading at a spread against Treasuries that prevailed in December of last year, before the intensification of the problems in Brazil. Turning to domestic open market operations, page 3 has a scatter plot similar to one I have shown you before in which each dot represents a day. The horizontal axis shows the divergence of each day's effective funds rate from the target rate. And the vertical axis depicts a measure of volatility expressed by the number of basis points contained within one standard deviation of trading around the effective rate. The blue dots on the chart cover the period from September 30th of last year through February 3rd and the red dots cover the days since your last meeting. Eyeing the chart, you can see that the red dots are giving us a rather better cluster around the target rate, showing a tendency toward lower volatility than we experienced in the rather difficult period from the end of September through your February meeting. In the lower left corner is a panel with a more precise measure of this to give you a sense of how the funds market is calming down. That panel shows the median value of the daily divergence of the effective rate from the target rate regardless of sign and the median value of the daily standard deviation. Looking at the first line, in 1997 there were as many days on which the effective rate diverged from the target by less than 7 basis points as there where days on which it diverged from the target by more than 7 basis points. Similarly, on roughly half the days the standard deviation was less than 9 basis points and on roughly half the days it was more than 9 basis points. As you can see, those values were more or less maintained through much of 1998 until the end of September. After that we experienced a rather significant period of volatility, when roughly half the days had an absolute deviation from the target of more than 15 basis points and a volatility standard deviation of more than 24 basis points. But, as seen in the red line covering the period since the last FOMC meeting, the values have returned to more normal levels. Looking back, I think it is quite clear that in the fourth quarter of last year we faced a very anxious funds market, with elevated and erratic demand for excess reserves leading to volatility and firm rates. To be candid, in January we on the Desk probably were slower to reduce our anxiety than the market; we were just a little behind the market in unwinding those anxieties and we were probably tending to be a bit generous in the provision of reserves. But that effect was overwhelmed by the generosity that the weather-induced float provided, giving us some rather volatile and squishy-soft days in January. But we seem to have come through that, and in the last intermeeting period the funds market appears to have returned to much more muted and normal conditions. Let me conclude by noting that starting this coming Monday we will be moving our routine operating time to around 9:30 a.m., one hour earlier than has been our practice. I want to thank the staffs of the Board and the Reserve Banks as well as the Treasury for their efforts to provide data on reserves to us more quickly so we can do this and participate in the market when it is a little more deep and liquid than later in the day. We had no foreign exchange intervention operations to report. We concluded the foreign currency rebalancing that the Committee authorized, which we will report on in full in the written quarterly report we will be sending you during the month of April. I will need the Committee's ratification of our domestic operations. I will be happy to answer any questions.",1626
-fomc-corpus,1999,Questions for Peter?,4
-fomc-corpus,1999,I have a quick question regarding the on-the-run and off-the-run Treasuries. Could you remind me what the normal relationship has been over the last 20 years or so?,37
-fomc-corpus,1999,"I have data going back about 15 years, and the difference has been around 5 or 6 basis points.",24
-fomc-corpus,1999,I just wanted to be sure that the less than 7 basis points you were talking about is not the anomaly against the norm.,26
-fomc-corpus,1999,"No, it is not.",6
-fomc-corpus,1999,The September 30 through January relationship is the anomaly.,11
-fomc-corpus,1999,"Yes, the 5, 6, 7 basis point difference was the long-term trend for many, many years.",25
-fomc-corpus,1999,"Peter, what has been happening to the bid/asked spreads of both on-the-run and off-the-run forward Treasuries?",26
-fomc-corpus,1999,I don't have that on the tip of my tongue.,11
-fomc-corpus,1999,"Peter, your staff provided me some information on that; let me see if I can remember it. The on-the-run bid/asked spreads are back to normal levels. [Laughter]",38
-fomc-corpus,1999,"If you are trying to embarrass Peter, you are succeeding!",13
-fomc-corpus,1999,No embarrassment as long as my staff gets the credit!,11
-fomc-corpus,1999,"The on-the-run spreads are back to typical levels in all sectors of the market--in bills and both short and long coupon issues. The off-the-run spreads have come down a lot, but they are not back to where they were before the Russian crisis. They are close, but not quite there. They're still a little wider.",67
-fomc-corpus,1999,Any further questions for Peter?,6
-fomc-corpus,1999,I move approval of the domestic operations.,8
-fomc-corpus,1999,Thank you. Without objection. We will move now to Mike Prell and Karen Johnson.,18
-fomc-corpus,1999,"Thank you, Mr. Chairman. For the benefit of those of you who didn't get your fill of basketball cliches over the last few days, I perhaps should characterize the U.S. economy as continuing to hit ""nothin' but net""--rapid expansion and low inflation. In any event, as you know, GDP came in even higher in the fourth quarter than we anticipated at the last meeting, and we've now raised our sights on first-quarter growth the better part of a percentage point, to about 31/2 percent. Meanwhile, recent readings on wages and prices have been even more benign than we expected. Under the circumstances, I guess I'm obliged to explain why we won't just get with the new era program and simply extrapolate the good news--rather than predicting, once again, that the economy will decelerate appreciably and that inflation will pick up. I'll be brief, just emphasizing a few key points in the Greenbook. Our basic thesis is still that domestic demand growth will slow enough over the next several quarters to more than offset a lessening drag from the external sector. The two key elements in that story are by now familiar--indeed, in danger of becoming quite shopworn. The first is that the stocks of consumer durables, houses, and business equipment are already growing so rapidly that, absent some deceleration, they'll get way out of whack with longer-term income and output trends. The second element is that if share prices continue rising at anything approaching the pace of the past several years, they'll get way out of whack with profit trends. Of course, there can be an interaction between the two elements--a virtuous cycle up to a point, but one that can carry too far on the basis of unrealistic expectations. So, what are the most recent signals as to whether we are on the verge of some moderation? Frankly, on the face of it, there aren't many signs of slowing as far as household and business investment is concerned. Real expenditures for consumer durables appear to be headed for about a 12 percent annualized gain in the first quarter; residential investment appears to be headed for about a 12 percent gain; and business equipment outlays appear to be headed for--you guessed it--about a 12 percent gain. But, let me try to put a little spin on these numbers. In the case of business equipment spending, our guess for the first-quarter growth rate is off considerably from the 17 percent increase last year, and the recent orders data and other indicators suggest further moderation ahead. Meanwhile, for both consumer durables and residential investment, one can point to special factors that have boosted activity of late and that might reasonably be expected to prove transitory. One of these is the intense competition among automakers sparked by GM's effort to regain market share. The companies are making enough money on light trucks that they probably can afford to continue this competition for some time, but it seems unlikely that they would escalate the pricing battle enough to push sales above the recent elevated pace-especially given their capacity constraints. More likely, with some demand having already been pulled forward by incentive programs, sales will fall this spring. Another special factor is the mortgage-refinancing wave, which is now receding. Pinning down the effects of refinancings on spending hasn't proven an easy thing to do, but intuition, anecdote, and some statistical work suggest that demand has received an extra boost from refinancings stimulated by lower interest rates last fall. Finally, the further run-up in housing starts in recent months likely has reflected the efforts of builders to satisfy the backlog of orders that built up with the surge in demand last year--efforts aided by a mild winter. Going forward, tight supplies of construction workers could make it difficult to achieve, from where we have been of late, the normal seasonal pickup in activity. But builders may not even want to try, given the recent hints of peaking demand for homes. Consequently, we are projecting a substantial negative swing in residential investment over the next couple of quarters. Of course, other components of household demand conceivably could pick up the slack, if the fundamentals of income and wealth are still favorable. This is where the stock market comes in. With some trepidation, we stuck with our assessment that the bull market has pretty much run its course. We were encouraged in this regard by the nervousness that has been expressed by market analysts about high valuations and earnings prospects. Time will tell whether the enthusiasm of breaking the Dow 10,000 barrier will override those concerns. As the simulations in the Greenbook indicate, though, it probably would take quite large further increases in share prices to totally undermine our forecast of demand deceleration. It could happen, but it is far from a certainty. This brings me, in a way, to the supply side of the picture and the inflation outlook. The bull market might be said to need a continuation of low inflation--and thus no greater threat of substantial Fed tightening--and strong productivity growth to extend the recent uptick in profits. We've become more optimistic on both these scores, but not enough to transform the picture and lay out a really upbeat scenario. Labor productivity increases in the fourth quarter and, on our estimate, in the first quarter have been impressive. Looking at how the various relationships in the economy fit together in light of those readings-and recognizing that we could be making a mole hill of a pebble--we've tacked on a tenth of a percent per year to our assessment of the average pace of structural improvement in productivity since 1995. In addition, considering what seems to be going on with respect to investment and the apparent unceasing drive for efficiency, we've extrapolated that small increment through 2000. The cumulative effects of this slight change in trend productivity are great enough to offset most of the effect of our higher GDP path on the prospective level of the unemployment rate and also to ease somewhat the apparent squeeze on the markup of prices over trend unit labor costs. Consequently, we've been able to carry the recent good news on inflation through in the forecast. Owing to the backup in oil prices, however, the picture is still one of a noticeable rise in headline inflation over the coming months. By this summer, we'll probably be looking at year-on-year CPI increments in the 2s, once again. It is, of course, arguable that the latest productivity numbers are a sign that we're entering a period of even better performance than we've anticipated. If so, that's clearly a good thing. But, if it means that the demand for capital goods is stronger, it could reinforce the assessment in our baseline forecast that interest rates probably will have to be raised at some point to maintain economic stability. Karen will now offer an update on some of the key external influences in the outlook.",1377
-fomc-corpus,1999,"The basic picture from the external sector is very similar to that in the January Greenbook. We expect net exports to continue to be a drag on GDP growth, but to a diminishing extent going forward. In the very near term, exports are a negative factor as some elements that boosted exports strongly in the fourth quarter of last year are unwound. That combined with the upward revision to U.S. activity and thus to import growth results in a more sizable drop in net exports for the first half of this year than we expected in January. Exports should rebound in the second half of this year and grow moderately next year, even after we take into account the somewhat stronger level of the dollar that we now see as likely. Two developments in particular since January inspire some confidence in our positive view toward the prospects for exports. One is the move in Japan to significantly more aggressive monetary ease, coupled with signs that financial sector reform is proceeding. Although we continue to have activity weakening in Japan through the middle of next year, we now are looking for an upturn to begin during the second half of 2000. Financial market participants seem to have applauded the latest policy moves in Japan more than we would, and ample downside risks remain there. Nevertheless, there are reasons to see developments in Japan over the past two months as movements in a positive direction. Recent developments in Brazil have also lent credence to the view that meltdown can be avoided in Brazil and, therefore, that the risk of contagion to its neighbors is limited. As a consequence, we have revised slightly upward our outlook for Mexico. The Brazilian real has retraced some of its decline in terms of the dollar, even in the face of a reduction in the overnight interest rate by the central bank of Brazil. Thus far, support among Brazil's bank creditors is holding up, and last week one Brazilian bank was able to return to the global market and raise voluntary funds with a one-year maturity. The reform program still faces many hurdles, and success is not assured, but events in the past several weeks have been encouraging. There are still places in the world where new economic crises could erupt. We have seen one such case in Ecuador, but so far it seems contained, with no signs of further contagion. A potentially more serious case is China, where major domestic problems would no doubt have greater implications for its neighbors. We see real output growth slowing this year in China and have built into the forecast a gradual move in its exchange rate next year. A more severe deceleration, or a more abrupt change in the exchange rate, would threaten the signs of recovery now evident in the developing countries of Asia and could risk another round of financial and real macroeconomic turmoil in emerging markets. Finally, there is now the possibility of the events in Kosovo triggering some financial market reaction or undermining consumer or business confidence sufficiently to affect economic activity, particularly in Europe. At the moment, any economic consequences seem very limited, but further escalation of the conflict could change that.",602
-fomc-corpus,1999,Questions for either?,4
-fomc-corpus,1999,"I have a question for Karen. You are projecting a further deterioration in the trade balance currently and in the near-term future, but the projection for the dollar shows it fairly steady or actually increasing a bit. I know that last year we had a worsening trade deficit and the dollar actually appreciated, but there was a huge inflow of capital as a result of the flight-to-quality movements, which I would imagine we are not expecting this year. So, I am wondering how confident you are that the dollar will hold up, given this situation going forward.",110
-fomc-corpus,1999,"The compromise forecast of a basically flat nominal dollar-or an upward tilt in the real dollar, which is what matters in the forecast--comes about primarily because U.S. inflation is projected to be slightly higher than the very, very low inflation we expect to see in most other industrial countries. So in some sense, we are forecasting a generally flat nominal dollar as the offset of forces whose size we can't really project. Therefore, the notion that the dollar will likely be flat is somewhat of an agnostic forecast rather than one in which we have great confidence. On the one hand, we see the European and Japanese economies as still quite weak. We expect monetary conditions in Europe to be eased at some point and we expect Japanese monetary conditions to remain very, very aggressively easy. The sense that the U.S. economy has experienced positive surprises that are not going to end abruptly vis-a-vis the monetary easing that we expect abroad might actually have led us to forecast an appreciation in the dollar. What stopped us from moving that far is our concern about the ongoing widening of the external balances. So we have put together those factors--one likely having positive effects and one likely having negative effects-and have tried to come up with a neutral compromise by positing a flat nominal dollar and a rising real dollar. In fact, we even have the euro coming back up some on the grounds that weakness in Europe is not so pronounced and that our external deficits will become a more important factor.",291
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mike, I have a question about real wages. With the forecast that you have for the ECI and the core CPI, real wages are up about 11/4 percent in 1999 and about 1 percent in the year 2000. I know that represents a continuation of the pattern that seems to have existed at least since 1992 in terms of the Greenbook numbers. But it seems perplexing given the fact that you have productivity, one assumes, growing at an average rate of 1.9 percent and also very tight labor market conditions. In such a case one would normally expect the growth rate of real wages to be in excess of 2 percent. Do you have any ideas about what is happening and how realistic that forecast might be for the next two years?",159
-fomc-corpus,1999,"Well, our forecast for real compensation in terms of the employment cost index is greater than 2 percent over 1999-2000 when measured against product prices--for example, nonfarm business prices. And I think that is the more appropriate metric to look at in this context. It is more consistent with thinking about the shares going to labor and to capital. It also makes more sense of what we saw in 1998 when we had not only a tight but a tightening labor market. So, that is what we have been focusing on and I think our forecast makes reasonable sense in that regard. There are still questions, too, about what the nominal wage might do and I think we tried to be quite clear--for example, in the Chart Show last time--about the uncertainties that surround that aspect of the forecast and the different models one can apply. But in terms of real wages, I think we have fairly sensible numbers.",188
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"I want to ask something that doesn't really have an answer. But I'd like to get your views from the domestic and international side in trying to tie together some thoughts and observations about the U.S. economy and the rest of the world and which is more likely to change and why. Looking back on 1998, for the U.S. economy everything was, if anything, better than expected in terms of output, employment, inflation, and other measures we talk about. Looking at the rest of the world, economic performance was, if anything, worse than hoped for or expected. In our efforts to understand the U.S. economy, we use words like technology, innovation, and various business efficiencies to try to explain its extraordinary performance. Then, in thinking about what is going on in the rest of the world, at least in the non-English-speaking world, it is tempting to think that technology, efficiencies, and so on do still recognize borders, which is probably not likely. So if it is not a uniquely American phenomenon or even a phenomenon of English-speaking countries, as some people might argue, what is likely to change? Also, on Al Broaddus's question about the exchange rate, I don't know to what extent we ought to be thinking that it is a pull phenomenon-where everything is wonderful here, which allows the capital inflow and a worsening of the current account deficit and yet we don't have a problem. Or how much of it is push? If everything is so bad every place else, when are they going to get their act together and figure out what we are doing right? That would help us understand at what point this large and growing current account deficit and external debt will become a problem for us. Will it be either when we stop doing things so perfectly or when the rest of the world starts doing things a lot better? Any comments or observations?",376
-fomc-corpus,1999,"I have posed the essence of your question to a lot of people. The question I have pondered is: If technology, productivity, computers, internets, or whatever are the fundamental explanation for why the U.S. performance has been better-not just for 1998 but for about the past three years--why is it that we don't see it elsewhere? One might expect to see it especially, say, in Canada, where we see it a little but not a lot. We actually are looking into how much of it is apparent in Canada. When I ask this question of Europeans, I get answers that have a lot to do with the well-known structural problems that beset the European economy, but I also sometimes hear surprisingly optimistic accounts that at the micro level people are beginning to see a change. I have even had similar accounts about Japan from people who have been to that country recently and to whom I have posed this question. My contacts say they have heard stories from people they talked to last week or last month that suggest that at individual firms and in selected industries this phenomenon is beginning to make its way into the economies of Europe and Japan. That makes some sense in that we know from studies of past major innovations--the introduction of electricity to replace steam, for example--that the actual economic impact came long after the invention. It took a very long time for people to figure out how to do things differently and how to exploit the particular advantages of the new technology as opposed to just mimicking the old technology. Given the structural problems in Europe and the degree to which risk-taking and mobility are limited there, it is not implausible that it would take longer in Europe than it might take in the United States. I honestly don't know how much credence to put in the stories that, in fact, there is something bubbling under the surface and that a global technology event really will become visible. But it is at least a little reassuring that, in some micro-type anecdotes, there is an echo of what we see in the United States that suggests there is hope for Europe.",417
-fomc-corpus,1999,"Let me touch briefly on another aspect of your question. There is a school of thought--John Makin comes to mind, for example--arguing recently that an improvement in the economies of Japan and some other Asian countries will have negative effects for the United States. The view is that demand abroad will reduce the supply of savings--which as you indicated has been flowing readily into the United States because we appear to be a safe haven or an area with fast improving technology--and that will exert general upward pressure on interest rates, which will be damaging. It is rather hard for me to get my arms around the thought that better economic performance in the rest of the world is a detriment to the United States. But I suppose when one thinks about 1998 and the shocks that we've had and the beneficial effects in our financial markets, the argument is that the accommodation that in a sense the Fed provided actually added to aggregate demand and pushed the unemployment rate perhaps below sustainable levels. There might be something to the view that we have to give that back at some point if we have overshot sustainable levels of resource utilization. That is another version of the worry about the reversal of the ""supply shocks"" that we have been experiencing and how we might have to cope with that.",255
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Mike, in the introduction to your comments you implied that the forecast does not reflect in some way a belief in the ""new economy."" But over the last three or four years I have seen your trend rate of productivity growth first go down to less than 1 percent--say, to about 0.7 to 0.9 percent--and then just about double to where it is now. Two questions: If you were a believer in the ""new economy,"" how high would that number be? [Laughter] And second, if in fact productivity growth had been a little more stable than that and what we are seeing is really more cyclical, how sensitive is the timing of the inflation increase in your forecast? Could inflation actually rise by 1/2 percentage point later this year?",160
-fomc-corpus,1999,"I'm sorry, I'm not sure I caught the last part of your question. I was thinking about answering the first part and I lost the thread on the last part.",33
-fomc-corpus,1999,Sorry. The second part of the question is: If you were to take a trend productivity number that was slightly less than the one you have now--let's say 1.7 percent--how sensitive is your inflation forecast in terms of the timing? You have inflation up by about 1/2 percentage point or something like that by the end of 2000. With a lower productivity number would that increase actually occur a lot sooner?,89
-fomc-corpus,1999,"The latter question is extremely difficult to answer, as is the first one. There are questions of definitions here. What do we mean by ""new economy"" or ""new era"" and so on? I don't think that's easy to pin down. In many accounts it is something that rejects all the known rules of economic behavior, or what we thought were known rules. In other views, as I suggested in a briefing some time back, it may be that what we need isn't necessarily a new paradigm but simply some new parameters. We know that productivity historically has not grown at the same rate in all eras. We know that the composition of the workforce and other factors can affect the natural rate of unemployment. So we are always in search of what the current values of those parameters are. As we have gained experience with how the economy is operating, what we have been trying to do is to put those numbers into better alignment with the facts. And that is what we have been doing over the past few years as we have seen better productivity performance than we thought could be reconciled with a continuation of the weak trend we had seen in the post-1973 era. We could also see that investment was at a very high level, producing considerable capital deepening. That emboldened us to move apart from most of the pack and raise our estimates of productivity trend. And as we looked at the experience of the past year or so in our latest forecast round--and we looked at all the various behavioral relations in the economy--we once again thought that edging up that productivity trend estimate a bit further was warranted. If we were to go to the new era concept, I think we would probably start by saying that resource utilization levels have absolutely no influence on inflation. That seems to be one of the tenets. It is not clear what does determine the rate of inflation in this new paradigm, but the new era tenet certainly seems to be rejected by most people. And it is not part of our forecast; we haven't incorporated that. We basically just jiggled the parameters of a fairly conventional model. Now, if we had knocked a couple of tenths off the productivity trend, the effects would depend on where we started and whether we sensed that trend was perceived by people in the real world or not. I guess I'd have to say that the outlook for inflation, if we reached back a couple of years and changed this productivity trend, would deteriorate fairly rapidly relative to our baseline. To the extent that we give any weight to the markup over trend unit labor cost, which is a fairly conventional model of price determination--and I must say we don't give it the preponderance of weight--we would find that the markup was being squeezed considerably over the past few years with a 1.7 percent productivity trend. And that would have negative implications going forward, especially in the tight markets that we have; firms would be trying to restore their markups, and the price pressures would show up fairly promptly. We're talking tenths in terms of the differences but, given that we already have an upward tilt, it would perhaps make a material difference in our perception of the upturn in inflation.",639
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"I have a labor market question. We know that the labor market in the aggregate has done very, very well. We expected solid performance and it has come in better than expected. The participation rate has gone to postwar highs, I believe. At the same time, we know that manufacturing employment has been on the weak side; that is related in good part to the problems in Asia. My question is this: Do we know anything about the laid-off workers in manufacturing or perhaps even something about physical capacity in manufacturing? Have these workers been absorbed permanently or on some sort of long-run basis elsewhere in the economy? Or are a lot of people sitting around unemployed so that the aggregate numbers reflect other people who have come into the labor force? What will happen when demand for manufacturing, because of eventual Asian recovery, comes back? Will these resources come back into manufacturing in the United States? Or do we have steel capacity that is permanently shut down and workers that have been dispersed to other industries? Do you have any feel for that?",206
-fomc-corpus,1999,"Not as much as we'd like. We've actually been thinking about examining the data on some aspects of that. One assertion that has been made is that wages are being held down because manufacturing has been weak and thus manufacturing wages haven't been rising, and that might be a sort of pattern-setting element in the picture. We don't find any systematic relationship over time in that regard. It is an interesting hypothesis but not one for which we have been able to find confirmation in the data. It is possible to look at the movements of workers. One question I raised was whether this trend in manufacturing employment could be providing some relief in the construction industry. People who could not get jobs on assembly lines or had lost jobs on assembly lines might be filling the gap there.",149
-fomc-corpus,1999,Similar skills are involved.,5
-fomc-corpus,1999,"Well, they are not always similar; the skilled construction worker has special skills that someone who has worked at a steel plant doesn't necessarily have. But in terms of the opportunities available, a relatively low skilled construction job might be attractive as opposed to working at McDonalds. At this point we have looked at this hypothesis in only a limited way and we haven't found much confirmation of it--statistical or anecdotal. I'm really not sure precisely what has happened on unemployment in manufacturing; I don't have the data in front of me. Those are shaky numbers because the survey asks what a person's last job was, and a laid-off manufacturing worker could have been employed elsewhere after he lost his manufacturing job. Those data would be one place to look, and perhaps I should, to see if there is evidence that idled manufacturing workers are still lingering out there among the unemployed. My suspicion is that the decline in manufacturing employment hasn't been going on long enough that these people have totally abandoned their hopes of getting another manufacturing job. Unfortunately, in our forecast manufacturing does not grow rapidly enough to generate any increases in employment. While trade is improving, we really are going to be generating little, if any, additional employment in manufacturing over the forecast period.",245
-fomc-corpus,1999,"Any further questions for our colleagues? If not, who would like to start the Committee discussion? President McTeer.",24
-fomc-corpus,1999,"The economy in the Eleventh District appears to be maintaining its overall health and positive growth trend. Recent revisions to Texas employment data suggest that Texas employment grew 21/2 percent at an annual rate in the fourth quarter of last year, which is a bit higher than indicated in the original numbers. The data also show that employment was growing at a rate of around 31/2 percent during the first two months of this year. Signs of stabilization in some Asian economies and a rebounding of prospects in Mexico have turned around the export picture for the Texas economy, boosting the electronics industry in particular. Total exports from Texas grew modestly in the fourth quarter after falling for the first three quarters of 1998. The electronics industry in Texas experienced employment gains in January and February after eight consecutive months of decline. Due to growing Asian demand and above average computer replacement demands stemming from Y2K, we have seen a marked increase in chip sales. This has been accompanied by increases in DRAM prices of over 20 percent as inventories have declined. Oil prices have increased about 20 percent over the last couple of weeks, following the OPEC agreement to cut output; the permanency of this increase is debatable, but it may slow some of the hemorrhaging in the Eleventh District energy industry. Our directors still believe that the problems in the oil and gas industry are structural in nature and that the trend in oil prices is more likely down than up. They also believe that OPEC is no more likely to hold down output this time than it did the last several times. Characteristic of the pessimism in the energy industry was a remark made by one of the members of our Small Business and Agricultural Advisory Committee last week. He said that he was just as likely to see a working oil rig in the Texas panhandle as he was to see a dinosaur crossing the road. [Laughter] I also learned in that meeting that for a lot of the operators of small oil wells, the price they actually get at the wellhead is significantly below the benchmark of West Texas Intermediate. Construction activity remains strong, but signs are beginning to emerge that activity is at or near a peak. Contract values have already edged down. In Dallas, builders completed 6,000 more apartments than they leased in 1998. In Houston, the supply of apartments expected to be brought on stream this year is generally thought to be excessive unless the energy industry turns around. A year ago I was reporting commercial and office rent increases of 20 to 30 percent but, as expected, market signals worked and now the completions of new office space have begun to outpace new leasing activities. Office rent concessions of up to 4 months have already been reported in Dallas and Houston early this year. The abundance of real estate capacity should reduce inflationary pressures in that sector. Low capacity utilization levels in manufacturing promise to do the same. As for agriculture, the outlook for a continuation of weak commodity prices is decimating our rural communities as depopulation accelerates. And while labor markets remain tight in most of our large urban areas, wage increases have been in line with national productivity trends. That allows me to be comfortable with the Greenbook forecast, which does not see wage acceleration as a source of inflationary pressures. At the national level, a long period has elapsed since our last meeting, so we have had two complete rounds of statistical reports and they show mostly more of the same. Output and employment growth remain strong and unemployment continues favorable. Contemporary measures of inflation remain flat. The CPI rose 0.1 percent in both January and February; inflation in the pipeline and leading indicators of inflation continue to be favorable; and most commodity price indexes are down further. The dollar is somewhat stronger. Capacity utilization remains low in the United States and is even lower globally. Oil prices are the exception, although in my part of the country it is dangerous to complain about the rebound in oil prices. In any case, money growth has slowed, which is good news everywhere.",809
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Economic activity continues unabated in New England. Labor markets continue to be tight, with the unemployment rate for the region more than a percentage point below that of the nation. Employment growth continues above trend for the region, but it is still below that for the nation. Research done at the Bank attributes this lower level of job growth to a lack of labor supply. This is confirmed by anecdotal reports in which almost every type of worker is said to be hard to find. However, except for high-tech workers, wage increases are in the 3 to 6 percent range, depending on the industry. In addition, growth in the Boston area's CPI seems to have moderated. It had been rising faster than the nation as a whole but it now appears to be matching the national experience. Staff at the Bank spent some time since the last FOMC meeting talking with temporary help firms in New England in an effort to understand their perspectives on local and national labor markets. The five firms contacted reported strong demand and difficult supply conditions; that is, their clients were requesting additional employees and workers were very hard to come by. Nonetheless, firms reported increases both in workers on assignment and revenues, with wages rising steadily. Three of the five firms noted that they are unable to increase client charges as much as wages, so profits are being squeezed. The tone of these conversations was much more upbeat than when the last contacts were made in November. Several of the firms contacted act both as recruiters for permanent staff and as suppliers of temporary help. They report that the mix of assignments is shifting toward permanent positions. Early in the recovery, temporary help seemed cheaper and labor was more plentiful. Now it has become more difficult and expensive to find temporary workers and to deal with the inevitable issues of high turnover and training costs. Real estate markets remain strong. Residential construction surged in December and likely in January as well because of good weather. Existing home sales dipped a bit and price increases moderated, at least as reflected in regional data. Anecdotally, however, house prices are said to be rising rapidly in the Boston metro area. And we could use a few of the apartments that they are building in Dallas! Commercial real estate supplies have expanded a bit with the addition of some new space, and vacancy rates in Boston have leveled out, albeit at very low numbers. As I have noted before, there is not a lot of speculative building going on; credit market conditions over the past year have not made financing speculative new projects very easy. Thus, the business of commercial real estate remains ""very sweet"" in the words of one contact, with strong demand and high rents. One item of local interest relates to the continuing decline in manufacturing jobs in the region. Manufacturing jobs appeared to be on the rise marginally in early 1998 but now are declining faster than for the nation as a whole. This captures the attention of local people who, despite very low unemployment rates, see this as a negative trend. Growth in construction jobs, albeit from a low base, and in retail trade and services has more than absorbed the decline in manufacturing jobs. However, many do not see service jobs in particular as the equivalent of those in manufacturing. This is a topic that has engaged local labor leaders and politicians, especially considering that tax breaks granted over the past two to three years were directed at manufacturing firms and were given in the expectation of keeping jobs in the states of the region. Credit market conditions continue to be regarded as favorable, with spreads wider than a year ago but funding readily available. Local lending growth has declined since last fall, in line with national trends. I spent some time recently with two partners of local venture capital firms, one specializing in high-tech start-ups and the other in larger firms in the entertainment and media areas. They both noted that deals were being made at extremely rich prices and that new entrants into their businesses were winning deals based on offers that to these two contacts seemed nonsensical. In the words of one, ""This is a time for selling, not buying."" A former Bank director and partner in another very large venture capital firm corroborated these accounts and noted that his firm is completely out of the market for the time being, as they were in the late 1980s. Several people in the investment community with whom I meet regularly echoed this cautionary tone. They all view economic conditions and financial markets as frothy, bordering on excessive. Their sense was one of times being too good and a concern about what will happen when the party stops. Certainly, the fact that we were meeting as the bombing in Kosovo was intensifying did not help this sense of foreboding. On the national scene, our forecast is not terribly different from the Greenbook's on the growth side. However, we see a bit more stable trend rate of productivity growth and thus a decline in the unemployment rate to a little less than 4 percent--3.9 percent in 1999 Q4. We also see inflation rising earlier than does the Greenbook, though, as I've said before, we have to be humble about any projection on that front. I am puzzled by the moderation in wage inflation in the last couple of months and confounded by the strength I see everywhere except in pricing power. Downside risks on the international side seem to have moderated considerably and we, like the Greenbook, have a slightly higher external growth forecast than we did in January. However, we do continue to see a drag on growth of about 1/2 percentage point or maybe a little greater than that from the external deficit in 1999 as a whole. On the other hand, considerable risk remains that growth will exceed current estimates for the first half of this year, driven by consumer spending on houses, cars, and other durable goods. The stock market remains exuberant, to say the least; credit is plentiful; and the boom in interest-sensitive sectors suggests that the cost of capital is too low. It is true that inflation is also quite low, and therein lies the issue. The exuberance of the economy may well come back to haunt us, even if inflation does not take off in the near term. To paraphrase William McChesney Martin: The party seems to be in progress and the question now is, ""When can the punch bowl justifiably be taken away?""",1281
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, the economy in our District continues to perform quite solidly. Employment growth in February was a bit flat, but we think that may have reflected an absence of supply of workers as much as anything. Retail sales and construction are both very strong in our metropolitan areas, and our surveys show a very high level of consumer confidence. Manufacturing activity, as in other areas, has cooled off a little, and the number of manufacturing jobs in the District fell a bit in February and is actually below year-ago levels. That's the first time we've seen that since 1992. Energy activity declined in January and, of course, people on the producing side have hopes--from their vantage point--for the oil price increases that they see stemming from the OPEC discussions. The District labor markets remain very tight, even with the weakness I talked about in manufacturing, and we have seen in our surveys a slight uptick in wage pressures. District labor markets now have an unemployment rate of about 3.3 percent, and that actually may understate the real decline slightly because we have a very high participation rate, well above the national average. The other area of some weakness, obviously, is the agricultural sector. That sector continues to struggle with good supplies and a falloff in demand, especially from Asia. And we are hearing more and more discussion about whether a farm aid package will be needed again in 1999 as in 1998. As for how that will go, we'll have to wait and see. Even with the continuing troubles in agriculture, economic growth in our region is strong, driven by the strength in the metropolitan areas and even in some of the rural areas. On the national level, our forecast is fundamentally very similar to the Greenbook's. The difficulty is that we have as much confidence in our forecast as Mike Prell does in the Greenbook's. In any case, the projected strength in the economy leaves us a bit uneasy. I want to raise again, though it may be a little early in the meeting, the issue of where we were last summer and the actions we have taken since then as an insurance policy. I think those easing actions were wise. But as I look back over the three years ending in 1998, we have had for much of that period a funds rate of about 51/2 percent, steady growth, and declining inflation. And I can't help but continue to wonder if we should not be unwinding some of our easing if the circumstances warrant. With that I will stop. Thank you.",513
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I am beginning to sound like a broken record, but the story for the Seventh District economy is quite similar to what I reported in the last two meetings. Reports continue to suggest strength in consumer spending and housing activity, mixed signals in manufacturing, and tight labor markets, but few signs that inflation will accelerate in the near future. Housing remains robust, although there are signs that activity may have peaked. Strong housing markets continue to support consumer spending for home-related items, and most retailers reported higher-than-expected sales, with discounters still faring better than general merchandisers. Light vehicle sales were exceptionally strong in February, and industry contacts indicated that sales so far in March were still running above 151/2 million units. Earlier this month, the automakers again revised up their sales forecast for this year. Manufacturing activity continues to be mixed, but the sector overall may be showing some early signs of improving. And that may be a little different from some of the other reports we have heard this morning. The Chicago Purchasing Managers' survey results for March, to be released tomorrow morning, will show activity moving higher, from 52.9 percent in February to 57 percent in March. Perhaps of some concern, however, is that the ""prices paid"" component moved above 50 percent for the first time since last April, from 41.6 percent in February to 52.5 percent in March. That information, of course, should be treated confidentially until it is released tomorrow morning. The strength in the motor vehicle and construction industries is offsetting softness in steel and agricultural equipment. Heavy-duty trucks appear headed for a record year. Demand for construction equipment and materials remains very strong. Construction equipment producers expect to benefit significantly from the 6-year highway funding program, and one gypsum wallboard firm operated at 101 percent of capacity last year by working holidays. There have been reports of wallboard being imported, which is a very rare event in our country. Price increases for wallboard have been announced and 25 percent additional capacity will be coming on stream over the next two years. Steel imports have come down sharply since November and there are signs that activity in the District steel industry may be bottoming. In addition, reports indicate that steel output between now and the end of July may be boosted by efforts to build inventories to meet auto industry demand ahead of a possible strike by steelworkers. Their contract expires this summer. However, one of our directors who heads a major steel firm believes that a steelworkers' strike is unlikely. And, of course, we have automobile labor negotiations later this year as well. Farm equipment makers still expect sales and production to be down sharply this year. Comments made at our Agriculture, Small Business, and Labor Advisory Council meetings a couple of weeks ago echoed reports we have heard from other contacts: That conditions in parts of the agricultural sector are bleak and that employers are learning to cope with tight labor markets. Also complementing the council member reports, a contact at a large temporary help firm said that wages were not going up more rapidly than before. Relevant to Bill Poole's question earlier about manufacturing workers, this contact also said that there has been some modest pickup in the demand for blue-collar industrial workers early this year. That has been true for several months now after eleven consecutive months of declines. He also saw some softening in demand for high-tech employees on a national basis. Turning to the national economy, the data since our last meeting have been surprisingly strong. Given the momentum that we've seen so far this quarter and the calmer financial conditions, we have upped our forecast for this year's real GDP growth from 2.6 percent to around 3 percent, which is in the same ballpark as the Greenbook forecast. Of course, the inflation numbers also have continued to come in quite favorably, suggesting that such high levels of economic activity are not currently straining productive capabilities. Given the very heartening productivity growth we've seen lately, the relatively good inflation performance may well continue. Indeed, we have even lowered our core CPI forecast a bit for 1999. However, the prospect of some upturn in inflation in 2000 from the low rates we've been experiencing remains worrisome. I recognize the difficulty we all have had in forecasting inflation, but all of our statistical models that forecast low inflation for 1999 expect core CPI inflation to accelerate noticeably next year. As economic growth around the world picks up over the forecast horizon, many of the special factors restraining inflation will dissipate. Given what I still believe are substantial lags in the transmission of monetary policy, we need to keep in mind the likelihood of accelerating inflation in formulating policy over the coming months.",955
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, the pace of economic activity in the Twelfth District has been solid in recent months and only a little slower than last year's rapid pace. In the State of Washington, the overall job count recently increased at about a 11/2 percent annual rate despite the beginning of large cutbacks in the aerospace sector. Arizona also has been able to shrug off cutbacks by major manufacturers. Despite job losses in the Phoenix area, the local unemployment rate is still below 3 percent. In California the economy also is strong outside of manufacturing. A pickup in state population is boosting activity in retail trade and the housing-related sectors such as construction and real estate. And state tax authorities report strong receipts from sales taxes and personal income withholding in early 1999. Initial claims for unemployment insurance have remained low in California. With a relatively low rate of layoffs and continued strength in hiring, the state unemployment rate drifted down further in the last few months. Tightness in the labor and housing markets is particularly evident in the San Francisco Bay area, where the unemployment rate has remained below 31/2 percent and housing prices have jumped 15 percent in the past year. Turning to the national economy, developments since our last meeting have not caused us to change the tenor of our outlook for this year. We continue to think that the most likely outcome is a slowdown in real GDP growth to around 23/4 to 3 percent, with inflation in the GDP price index of 1 to 11/2 percent. The slowdown of the economy in our forecast results in part from the waning effects of past increases in stock market wealth. I felt more confident about that assumption when we ran the model than I did when I was putting this report together last evening after yesterday's stock market rise! While this appears to be a reasonable forecast, there are large uncertainties. The economy has defied expectations of a slowdown for several years, and I am more convinced that we are seeing the effects of a favorable supply shock, perhaps related to technological developments, that is not being picked up by standard models. I believe that recent data have reinforced this view. I am referring to the evidence for the fourth quarter of even more rapid real GDP and productivity growth and very low inflation, as well as indications for the current quarter of very low CPI inflation in combination with moderately strong growth. I would not be at all surprised if this year's growth once again exceeded our forecast. On the other hand, we can't ignore other possible developments that could undermine economic activity this year. For example, growth could be seriously reduced if some shock were to undermine the U.S. equity market. However, neither of these uncertainties, from a positive supply shock or a negative financial shock, would seem to pose a great threat to inflation in 1999. Prospects for inflation next year, however, are more uncertain and, I believe, more troubling. Thank you.",584
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. For the past couple of meetings, I have reported that the Atlanta District economy has been on a slightly lower expansion path than the economy as a whole. However, now it looks as if the District economy has once again edged ahead of the nation and is expanding at a robust rate. While reports for retail sales have been mixed, showing mainly better sales for discounters relative to traditional department stores, manufacturing according to our Southeast manufacturing survey improved in February. Notable gains were reported in current production, employment, the factory workweek, and also in the outlook indicators. With regard to the latter, capital investment for six months out surged in February. Tourism and travel remain healthy, with substantial additions to hotel and cruise ship capacity planned. Construction prospers despite shortages in wallboard. The main negatives in our region are trade, agriculture, and energy; none of those negatives is surprising or new. The trade gap at our District ports over the last year rose from $5 billion to $12 billion, almost six times the rate of deterioration nationally, as exports through those ports declined and imports increased. Latin America is in our backyard and has special implications for our region. Because of that I would like to offer a few brief observations about Brazil, which has been given so much play recently. Our people spend a lot of time in that region and I had the benefit of paying a personal visit to Brazil since the last FOMC meeting. I talked with a number of domestic and foreign bankers and business leaders about what is going on in the Brazilian economy. It is the case that Brazil has made some progress on both the financial and the fiscal fronts. But I must say I came away with three broad impressions that caused me some worry. First, I sensed that the depth of Brazil's fiscal problems and the political difficulties the country faces in addressing them are more serious, longer term in nature, and more difficult than one may appreciate from reading the popular press. Second, I did not detect the broad-based sense of urgency to address those problems that might have been expected. Interestingly, a number of Brazilian businessmen and bankers told me that they knew how to continue to operate profitably should Brazil return to an inflationary environment, and thus they could muddle through. Finally, I found that several large U.S. companies headquartered in my region are more than a little uneasy about their investments in Brazil. They are uneasy because of the reneging on some concessions, including tax forgiveness, that were made by Brazilian authorities at the time those investment decisions were made. That kind of environment does not encourage additional investment. I would guess that we have not seen the end of troublesome developments in Brazil. The decline in domestic energy production that I have reported on previously continues. As Bob McTeer indicated, rig counts are down; Louisiana's seasonally adjusted rig count is down to 138, the lowest level since June of 1995. To emphasize the ripple effects of this decline in energy production domestically, the largest oil drilling service company notes that their benchmark supply boat, which last year rented for $10,000 a day, is now going for $2,500 per day. Labor markets continue to be tight; and while there are scattered indications of wage and benefit increases, there are few new signs of overall price pressures. I might mention a conversation I had last week with one of the largest, if not the largest, commercial builders in the Southeast who is doing work for us. He reported that the fees they are now able to charge as a percent of the project cost have gone from 21/2 to 3 percent to 31/2 to 4 percent; that's a 25 percent increase in the fees they can charge. In addition, he says they can now extract additional fees for doing up-front consulting work during the design phase. This may be a regional phenomenon, but given the fact that his company does work across many markets in the Southeast, I find it interesting that he has been able to get those kinds of margins. Two other smaller commercial builders on our board of directors reported that they have quit bidding on jobs and will only entertain work on a negotiated basis. So, the commercial construction sector, at least in our region, is very strong. At the national level, I continue to see some downside risks stemming from international developments, as does everyone else, despite the recent period of relative quiet and more settled conditions. Brazil, China, Japan, Russia, and other nations we can name are candidates for new, negative developments. At the same time, and deserving much greater weight in my view, we have a domestic economy that continues to surprise us with its strength and staying power and apparent resistance to inflation. It appears that our economy very likely is operating beyond sustainable levels at the moment. We have to continue to watch for the strains and bottlenecks that may be associated with that. Despite the absence of a smoking gun in the data, it is the case that our near-term inflation outlook shows some pickup. This is due to relative price changes as energy and commodity prices return to more normal levels. More troublesome for me, however, are the longer-run inflation paths in the Greenbook simulations and our own Bank's modeling work. The simulations, as well as the charts on inflation-targeting rules contained in the most recent financial indicators package supplied in connection with this meeting, all imply that a significant increase in the fed funds rate would be required to keep inflation even close to its current path. The implication also is that the longer we wait, the higher interest rates will have to be to accomplish this task. It is hard to know whether we should take back right now at least a portion of the rate decreases we delivered last fall or whether we should wait a while longer. But it is my guess that Y2K concerns may make consideration of a policy shift more difficult as we move into the latter part of the year, unless the case is compelling or we face some very unexpected developments. For me, that is another reason to be ready to move sooner rather than later. I find myself leaning at this point toward at least a tilt toward tighter policy. And I would like for us to talk at least about the possibility of using our newly initiated change on disclosure of the tilt in the directive in order to lay the groundwork for future policy moves. This would give us more flexibility to make a policy move before late in the year without either surprising market participants or committing ourselves to a policy change if it proves not to be needed. Thank you, Mr. Chairman.",1319
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. Conditions in our District for the most part mirror the robust national economic situation. Consumer spending remains very strong. Indeed, our latest service sector survey suggests that retail sales are now rising more rapidly than they have at any time in the last year. Residential construction and housing sales are extremely robust pretty much across our District. Commercial real estate activity is less uniformly strong, but it is very strong in certain markets, including the one right here. There is very little available office space in the District of Columbia and rents are rising. Labor markets remain very tight. In answer to Bill Poole's question, textile companies are the main source of layoffs in our District, and they are laying off a lot of people. The service sector and construction companies are going after these displaced employees and are hiring them. Of course, the textile job losses are permanent, so what is going to happen in the long run is an open question. But the losses may be having some moderating effect on wages elsewhere in our economy. In any case, wages generally in our District still seem to be rising quite moderately, although we hear from some of our contacts now that wage offers are a little richer than they were a few months ago. Still, on the whole, final prices in our region show little upward movement. At the national level, the beat goes on. The incoming first-quarter data, as everybody knows, suggest continuing considerable upside risk in the near-term outlook. When one thinks about it, as we have gone through the first quarter, the changing prospects for the quarter, as they evolved, really have been extraordinary. At the time of the last FOMC meeting, the Greenbook--along with just about everybody else--was forecasting about 2 percent growth in domestic final demand for the quarter. In the current Greenbook, that projection has been raised to close to 7 percent. I believe it is important that we understand as clearly as we can the reasons for this extraordinary strength in spending and its implications. It seems to me that two main factors are involved. The first is the apparent increase in trend productivity growth. The resulting greater return on investment is keeping business investment spending at an advanced level, and the current and expected higher real wages are helping to keep household spending high. A rise in productivity growth, I might just note parenthetically, normally implies an increase in real interest rates. So that is one factor. The second factor, I think, is the high credibility of our low inflation strategy. That supports the increases in real income and allows labor markets to operate at much lower unemployment levels without generating the potentially inflationary wage increases that have been typical historically. As I see it, maintaining this credibility is the key to what we can do to help sustain the expansion. In order to do that, I think we need to be sure we interpret the risks in the outlook as accurately as we can. I would like to make a particular comment about this. In the second half of 1997 and last year, there was a lot of concern, understandably, that the East Asian crisis would have a significant negative effect on the U.S. economy. There certainly were some negative effects. But there also were very powerful offsetting effects in the form of a big capital inflow that helped hold U.S. interest rates down and in that way helped hold domestic demand up. At the end of the day, as I see it, the Asian crisis really didn't have a terribly marked negative effect on the U.S economy. And I think these offsetting factors played at least as significant a role in this as our easing of policy last fall. In my view it is desirable, and I think important, to avoid a similar possible premature conclusion going forward. In that regard, as I mentioned earlier, the Greenbook is projecting a significant further deterioration in net exports this year, which is portrayed not only here but by a lot of other forecasters as a significant drag on U.S. growth. In the Greenbook, this deterioration is projected to be accompanied by a modestly stronger dollar which, of course, would help keep inflation in check. I can think of an alternative scenario, which is probably closer to John Makin's point of view, where the trade deficit indeed widens, but in the absence of any tightening of U.S. policy or some fortuitous capital inflow into the United States as we experienced last year, the dollar declines. I think there is ample historical precedent for such a scenario. With the dollar depreciating, foreign central banks might well feel they have more room to ease policy. But with the outlook for much of the rest of the world improving and the U.S. economy already operating well above potential GDP, a worldwide easing of policy could cause commodity prices to snap back. And that, along with the decline in the dollar, could well turn inflation expectations back up in this country. We could then find ourselves in a situation where we are forced to tighten sharply to contain inflation, with all that might imply for the expansion going forward. Now, we may see this coming in plenty of time to act in a measured way to prevent it, but I wouldn't count on it. I hope that we will consider later in the meeting some near-term preventive action that will reduce the risk that something like this scenario will unfold.",1073
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, the Second District's economy showed more signs of brisk growth in the first quarter, with little increase in overall price pressures. In fact, the 12-month CPI increase in New York City at the end of February was 1.4 percent, so it was even lower than the national average. Unemployment in New York and New Jersey fell to a cyclical low of 4.9 percent in February, while private sector employment grew at a 2.4 percent annual rate. Anecdotally, to go back to the discussion earlier about where manufacturing workers go, we have a rather interesting microcosm in the area between Albany and Buffalo--or probably an even smaller area between Syracuse and Buffalo--where manufacturing jobs continue to be lost. The people find other jobs rather quickly or they migrate. The unemployment rate in that area is quite low, in the 3 to 4 percent range. We have phenomena like firms from Cleveland, Ohio holding a job auction in Buffalo, an indication of the benefit to our society of its ability to be flexible. I would like to talk first about the international side and then go back to the domestic side. I continue to be concerned about the possible negative effects, even greater than those reflected in the Greenbook, on our economy from events abroad. Let me start with Japan, which we all know is in a serious recession. I am not at all optimistic that their recapitalization of the banking sector, although a good thing in and of itself, is going to have any positive effect on the economy in terms of ending the credit crunch. This seems to be a time of year when we have virtually nonstop visits by CEOs of Japanese banks. And I have yet to find one who is planning to have his newly recapitalized bank become more aggressive in lending. Their posture is very much a defensive one. They have no additional ability to actually get rid of the underlying assets, which I think is essential to end the credit crunch in time. But probably more importantly, the Japanese visitors I've met with, from both the official and the private sectors, are talking more and more about their country being in the greatest cultural crisis in their history--even greater than that of the period of the Meiji restoration or the period after the Second World War. What they are seeing is a breakdown in the traditional ability to make decisions and to arrive at policy. It is not likely in that kind of environment that the economy will pull itself out of its recession faster than we think. In fact, it seems to me more likely that the economy will continue to weaken simply because of an ever deteriorating level of confidence, both at the consumer and at the business levels. The recovery in the rest of Asia is spotty. One can see it in Thailand and Korea, especially in Korea. In Thailand one can see some recovery by looking pretty hard, but it certainly is slow. In China, I think a leading indicator of what is going on is the The reason for that, I believe, is that the government is getting more and more concerned that the Achilles heel of their restructuring--that is, the level of unemployment as they restructure the state-owned enterprises--could be reaching the point of getting out of hand. They are doing some in order to try to keep the lid on, but that is a very finely balanced approach. It always has been. I view that indicator as rather worrisome. In Europe, economic growth is slow. There is very little going on at the governmental level, except in the United Kingdom, to bring about the structural reforms that are required. Even though one does see bits of light at certain well managed companies in continental Europe, those economies are still a long way from the kind of structural reform needed. I agree with earlier speakers that the Brazilian situation is better but also risky. It is a confidence-building effort in which the Brazilians may have overcompensated by making the program appear to be too successful too soon. As a technical matter, their lowering of interest rates by 3 percentage points probably made sense. But it does have the significant risk of making everybody think that things are wonderful again. The Brazilians are wont to believe that. If there is a slowdown this summer, we could see a reversal in confidence that would be quite damaging. The conclusion I draw from all that is this: Although one need not be unnecessarily pessimistic about what is going on in the rest of the world, it is very difficult to be optimistic about it or to think that there will be a positive effect on the United States that we don't anticipate. Rather, it seems to me that the risks are on the downside. As for our domestic economy, it seems to be behaving exactly in the way that the Federal Reserve should wish it to behave. We have sustained economic growth and we have price stability, which to the best of my knowledge is what the Congress of the United States has told us is our mission. Our Bank believes that we will continue to have a healthily growing economy. And though our models forecast some increased inflation in 2000, our models have been consistently wrong in forecasting inflation, as have everybody else's models around this table. Therefore, I think we should be somewhat modest about basing any policy change on that forecast. It seems to me that the present stance of policy is extremely well balanced. Thank you, Mr. Chairman.",1085
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. Economic activity in the Philadelphia District remains strong and shows few signs of slowing. Labor markets continue to be tight, but competition remains fierce and there appear to be few inflationary pressures. The outlook is also positive whether one talks to manufacturers, retailers, auto dealers, homebuilders, or commercial real estate people. That said, however, one does not get the feeling that we are crossing over from strong growth to boom conditions. There is an absence of inflationary pressures in the pipeline. Businesses are still operating on the basis that prices will not rise. There is, to be sure, some upward pressure on wages, but productivity gains and cost-cutting are acting as effective offsets. And even in real estate, one does not get the sense of the kind of boom conditions that prevailed ten years ago, even in areas that are prone to such conditions. I think much the same can be said about the national economy. We see strong growth, few signs of a buildup of inflationary pressures, and the absence of boom conditions. As for the risks, the upside risk to the domestic economy is still there, as it has been; and the downside risk from abroad is also still there, as it has been. The risk of financial contagion, while still there, appears to have subsided--a little anyway. While a case can be made for tinkering with the federal funds rate to cancel, in effect, some of the insurance we took out last fall, I am much more persuaded that we should leave well enough alone for now and continue to see what unfolds in this truly remarkable economy. And it is remarkable in the sense that it is about everything one could wish for.",342
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. With regard to the District economy, overall conditions remain quite favorable and, if anything, activity has picked up a bit. Retail sales have been strong in recent months, manufacturing activity for the most part has been positive, construction activity has certainly been healthy, and labor markets of course have remained tight. In the interest of balance, I should note that agricultural and other natural resource industries are continuing to struggle. Home sales in the Twin Cities metropolitan area have slowed a bit, although realtors tell us that it is due to a lack of supply rather than a lack of demand. And bankers are expressing a little concern about the credit quality of their commercial loan portfolios--or rather the other guy's commercial loan portfolio. [Laughter] As far as the national economy is concerned, I find myself in agreement with the general pattern of the Greenbook forecast. By that I mean that the current quarter is turning out very well once again and that the moderation in real growth going forward, certainly relative to last year and maybe to the last three years, is something with which I agree--without getting into details about the precise magnitudes. I also would expect, as does the Greenbook, some modest acceleration of inflation. Having said that, my feeling is that the risks to the forecast, if anything, have diminished recently. Or maybe I was simply too pessimistic earlier. On the upside, of course, the concern is not the rate of real growth but the rate of inflation that might accompany it. And certainly in recent years I have been reducing my inflation forecast with some frequency. My sense is that many of the rest of us have been doing the same thing, or have been reducing the level of the federal funds rate that goes with any inflation forecast, or both. On the downside, I have been impressed at the lack of repercussions from events in Brazil on the rest of Latin America and elsewhere in the world. My feeling, for what it's worth, is that we are in a better situation than I anticipated and that the risks going forward have diminished, if anything.",419
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. As I was preparing for today's meeting, I was thinking about what has changed in the economy that might require a change in the stance of monetary policy. I came to the conclusion--similar to what others have expressed--that a great deal has happened but in some ways very little has changed. With respect to what has happened, the economy to date obviously gives little evidence of a domestic demand-driven slowdown. Personal consumption and business investment spending are both quite robust. I suppose this should not be surprising given the strength in employment and the relative ease of access to credit for both consumers and businesses. Secondly, as Gary Stern commented, the international economic outlook, though far from settled, seems a lot better than it has been at almost any time in the last eighteen months or so. Developing Asia is healing. I was interested to note just yesterday that short-term interest rates in Korea and Thailand are both lower than they were at the start of the crisis, while their currencies have not in any sense gone down. In fact, they have stabilized and gone up some. Moreover, contagion from Brazil continues to be quite mild with respect to most countries, Argentina being a major exception. And Europe, while softening, clearly has some room for further monetary response. I suspect and would not be surprised to see that occur. Japan obviously is a question mark. It is facing a daunting set of very unattractive policy alternatives, but it does at this stage seem to be bouncing along a relatively shallow bottom and probably will continue to do so for the foreseeable future. I will not deny that there are some risks there, but exactly how things are going to turn out is not yet clear. The third thing that has happened since we last met is that inflation seems to be doing something of a disappearing act. It is a bit like that cat in the musical ""Cats"" who, when the case is solved, is not there. Inflation seems to have disappeared, at least currently and as far as one can see in the pipeline. One thing that has not changed very much is the contour of the Greenbook forecast. But I suspect, as with other forecasts, that we will take that with a grain of salt. Therefore, given the constellation of incoming data and the uncertainty we all have at this stage with respect to our models, I believe that growth is likely to be greater than forecast. There is a possibility that the special factors that have held down inflation may start to unwind, but that may well occur in the context of an uptick in trend productivity growth. Therefore, while I can imagine some reason to unwind a portion of the insurance that we took out last year, I think at this stage ""steady as she goes"" is probably the better policy approach. Thank you.",558
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The staff's revised forecast features once again an upward revision to growth and a downward revision to inflation and hence a more favorable outcome for 1999 than was projected in the last Greenbook. Nevertheless, the staff forecast raises an important question for monetary policy going forward: How will the economy make a successful transition to sustainable growth and labor market equilibrium without an unacceptable increase in inflation? The forces that threaten to raise inflation over the forecast horizon are the prospect of a dissipation of favorable supply shocks and the expected persistence of very tight labor markets. Of course, the staff forecast may be wrong and inflation may continue to decline. For my part, I admit that to date I have not been able to retire from my discussions of economic performance the phrase ""stronger-than-expected growth and lower-than-expected inflation."" Nevertheless, if one accepts the staff forecast, and I do, then it seems to me they have asked the right policy question and left it to us to answer it. The key to the outlook in the context of monetary policy, therefore, is not the blissful state projected for 1999 but the pattern of rising inflation, especially in 2000, and the prospect of further increases thereafter based on the continued labor market tightness at the end of the forecast horizon. The key policy question, therefore, is whether and when to adjust policy to improve the prospects of a better outcome in 2000 and beyond. It is hard to make such a policy adjustment appear urgent today and, indeed, it is not. But I hope we can focus attention today less on the decision about what the target funds rate should be during the period from March 30 to May 18, 1999, and more on whether and when an adjustment in policy might be appropriate in light of the forecast through 2000. I would also note that if a tighter policy appears justified, it might be better to move in that direction sooner, while the economy is still growing above trend, than later when growth may already have slowed spontaneously to below trend. I accept in broad outline and in most details the staff forecast for growth over the forecast horizon, assuming unchanged policy. The key developments recently have been stronger-than-expected momentum in domestic demand in the first quarter, partially offset by sharper-than-expected declines in net exports and more-moderate-than-expected inventory building. But the upward revision to GDP growth and the more favorable mix of GDP projected for the first quarter provide two reasons to expect stronger second-quarter growth relative to the last forecast: stronger momentum in demand and a positive contribution from inventory building. My main quibble with the staff forecast relates to the further upward revision to their estimate of trend productivity growth. That revision, though small, lowers the staff inflation forecast by perhaps as much as 1/4 percentage point by the end of 2000. As a result, I am a little more pessimistic than the staff about the inflation outlook in 2000 and beyond. But the key to the inflation forecast is that the initial conditions--the very tight labor markets--would make it very difficult to avoid a significant increase in inflation without an adjustment to policy, even if the economy were to slow to trend immediately. To put into perspective the implications of the initial conditions in the staff forecast, let me pose the following question: How well will we take advantage of the extraordinary disinflationary forces during this expansion, given the staff forecast or my slightly more pessimistic scenario, in order to lower the underlying inflation trend going forward? Another way of asking this question is: To what degree will the current episode be an example of opportunistic disinflation? Inflation measured by the core CPI was 3.1 percent over 1995 before the coincidence of favorable inflation developments impacted the economy. How much will we lower inflation over the expansion from this point with the help of the extraordinary disinflationary forces that are so clearly important? Let's take the staff forecast first. To put inflation on a methodologically consistent basis, I add 0.6 percentage point to their estimate of 2.5 percent for the core inflation rate over the year 2000. So the staff's forecast says that we have not lowered the underlying inflation rate at all. We get the same conclusion if we use the GDP chain measure of inflation. Of course, inflation is rising at the end of the forecast period, so we can infer that before this expansion is over inflation actually will have increased despite the extraordinary disinflationary forces at work. In my forecast, the latter outcome is more evident and emerges earlier. What is driving this outcome? Blessed with a combination of positive supply shocks and supply-enhancing structural changes, monetary policy is the critical factor shaping how the benefits of these developments are shared between higher output and lower inflation during the expansion and, therefore, how they will affect the underlying trend of inflation beyond this expansion. To date their benefits have been split between higher output and lower inflation. However, in the process--in the staff's judgment and mine as well--we have allowed the economy to move beyond its sustainable capacity. The low overall CPI inflation during the period of supply shocks will be partly reversed as the supply shocks dissipate. That is an important part of the inflation story this year. And the benefits of a possible upward shift in the productivity trend itself are transitory, unless taken advantage of by monetary policy. To be sure, recent economic developments have been exceptional. It has been a wonderful ride, and we have all enjoyed it. But we will ultimately be graded--and indeed we will grade ourselves--on the effect of current policy on the inflation trend in coming years. Might we not achieve a higher grade on the final exam by accepting a less exceptional growth performance in the near term? That is the question we have to answer in coming months.",1179
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The basic condition of the economy in this country is well known by everybody here. It has been very well articulated this morning and I will not try to recite again all the factors involved. At our last meeting I felt that the risks faced by policymakers were balanced but that if the upside risks brought on by overly strong growth did not begin to moderate soon, they would need to be addressed. That moderation has not become evident as yet and the case can be made that the time may have come to take a first step. I find myself pulled toward an asymmetric directive. But two factors give me pause. First, an asymmetric directive, if immediately announced under our new policy, would quite likely cause a spontaneous increase in market rates, especially since it would come as a surprise to many. Such a response might well turn out to be premature but, more importantly, would be undesirable because of my second reason. That second reason is that we seem to be moving ever closer to what could become a very nasty war in the Balkans. Indeed, it has begun. We all pray for an early peaceful solution, but we cannot know what will happen. At a moment such as this, if the Committee considered it necessary to raise rates for whatever reason, it should and would do so. If, however, the Committee were merely inclined to get a preemptive jump on a likely threat, I question whether it would be wise to do so at a time like this, rather than await further developments in a potentially dangerous situation. Like the military itself when it is heading toward a fight, it probably would be a good idea to keep our powder dry.",335
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"Those of you who are careful listeners will remember my comments about the little elves who get their kicks out of confounding the experts and modelers and doomsayers by making the U.S. economy perform just a bit better than any of those folks imagined that it could. Well, as I read things, not only have the elves been scoring again on all fronts, they have driven the enemy from the field. Now they are writing the Greenbook! [Laughter]",94
-fomc-corpus,1999,Is that a short person joke? [Laughter],11
-fomc-corpus,1999,"Despite Mike Prell's denial of ""new era"" thinking, the Greenbook forecast actually looks pretty good. And as Cathy Minehan pointed out earlier, a good deal of the shift in the staff's thinking over time reflects changing views about productivity and hence about potential growth. As I read what they are saying at the moment, it is that the economy could grow at roughly 3 percent for quite a while, with unemployment below 4.5 percent and with not very visible internal pressure on inflation, although one has to worry about risks from outside supply shocks. The favorable current picture has been detailed around the table and seems to validate the Greenbook optimism. We have the phenomenon of growth slowing from the improbably torrid pace of the fourth quarter to a still strong but seemingly more solid rate at present. We have continued extreme tightness in labor markets everywhere but no sign of general wage inflation--indeed suggestions of deceleration--well predicted by our staff, it should be said. We have rapid productivity growth plus a wildly competitive economy in which no one thinks they have any pricing power, which apparently allows real earnings to rise and be combined with declining inflation without putting any stress on profits. We have a core CPI that has risen only about 2 percent over the last year despite outsized jumps in tobacco prices. The latter have to be considered good news if they induce some people, particularly young people, not to smoke as much. We have other inflation indicators still falling. And the outlook for the next year or two, while showing some acceleration in inflation, is so benign that I think the elves are getting bored or becoming bureaucratized. Even the worries that Brazil might fall apart and precipitate another overseas downward spiral, which seemed quite real at the time of the last FOMC meeting, have receded somewhat. The view has turned into some modest optimism of ""the worst may be over variety"" and an expectation of slow but sure recovery in the world economy. Are there risks? Certainly there are. On the upside there is the risk that the stock market's apparently unwarranted continued upward price march may accelerate again to even more bubbly heights, leading to a devastating crash when the bubble bursts. Another risk is that all the things that have held inflation in check for so long will suddenly reverse, leading to an upward jolt to prices that might be sufficient to rekindle inflationary expectations and leave inflation fighters playing catch-up. Another is that some unforeseen set of events in an unnamed country much bigger than Ecuador--some have named China--will set off a new round of investor panic on the international scene. These are all possible. But the risk of rapid shifts seems a little far-fetched. The more likely moderate turns for the worse that might occur seem likely to do so in the context of a fairly firm atmosphere of confidence among investors and consumers in the United States and of low inflation expectations so that rapid snowballing effects are unlikely. The sustained solid good news for quite a long time now on both growth and inflation seems to me to have brought us to a point where we will have time to react even if the good news begins to turn. So I see the risks as fairly balanced, with not a great deal of urgency for us to be preemptive. In the meantime, there is a serious task for economic analysts all around the country--not so much at the Board, although here too--to try to find out why things are going so well and what we can do to keep them going well. That analysis must focus on what is really happening at the firm, the household, and the market levels. It is hard not to conclude from recent events that tight labor markets are good for productivity growth, or can be under certain circumstances. What is happening to make this true? Is it that new management attitudes see scarce labor as an opportunity to reengineer processes or substitute capital for labor, or both? Is it that an awareness of the importance of skill acquisition and adaptability, combined with new techniques for training both on the job and in newly flexible and relevant educational institutions such as community colleges, has given new opportunities for productivity improvements? Is it that new workers moving into the tight labor markets have a major contingent of unusually ambitious and upwardly mobile immigrant workers? Does it relate to the unusual backlog of technological innovations flowing out of new kinds of practical research and development? The answers are not going to be found in macro statistics or in models. We have to get into the interstices to find out what is happening and how we can keep it going. But that is not such a bad assignment for analysts--to investigate the causes of the good news.",938
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, economic conditions in the Eighth District are largely the same. Some industries and some geographic regions are doing a little better and some are doing a little worse, but the overall picture is certainly one of steady, sustained growth without undue strains or problems. Two of my contacts, one at FedEx and one at UPS, both report steady growth in their domestic business. My contact at FedEx had some detailed comments about the company's international business. He said that Fed Ex is seeing the first pickup in a year in its international business--an increase of 18 percent in the latest quarter on a year-over-year basis--led by strong shipments originating in Asia and going both to the United States and to Europe. That would suggest that exports are flowing out of Asia. South Asia had the best growth, Japan showed single-digit rates of increase, and growth in Europe was slowing a bit but still fairly strong. However, there was no growth whatsoever in the traffic from the United States to Japan, and that would be consistent with what we know from other sources. I was particularly interested in talking with contacts and others about the labor market situation. I heard from these people the same stories we have been hearing about problems in recruiting entry-level employees and problems with increased turnover. I have been trying to make sense out of that situation. I certainly do not get the impression that the business leaders I am talking to believe this is anything approaching a crisis situation. They are learning to live with it. Nevertheless, I have the distinct impression that they regard the situation as inherently temporary; it's not something they want to see continue nor do they expect it to go on indefinitely. They are expecting some of the pressure to come off. Of course, that is the same story we have been hearing for eighteen months now, and the pressure has not come off. But the strains have not been so severe as to cause them to do anything very dramatic. There continues to be pressure around the edges in compensation that is not showing up in the wage numbers. is providing tuition scholarships because a lot employees are part-time and so forth. So, is recruiting people in a city with great labor market pressures, is by providing tuition assistance at the local university. had an interesting comment on the labor situation. He said is able to extract--that's my word, not his--a fair amount of what he called ""discretionary effort"" from the labor force. By having its labor force work somewhat longer hours of overtime and perhaps at a somewhat faster pace, the firm is able to handle its problem of a shortage of entry-level employees. He said that his firm was pressed to the limit at the time of and could not have continued the pace for any great length of time. Fortunately, the and that took the pressure off. has fewer people in its training program than the firm would like--my contact would feel comfortable with about double the number--he does not anticipate any problem through the fall. The fall, of course, is the peak season for but it all depends on demand coming out more or less as anticipated. Let me add one comment on the policy front. We have drifted a little into the policy discussion and I don't want to go any further in that direction at the moment. But I would like to suggest that some of the differences around the table may reflect different views on what our inflation target really ought to be. My own view is that our inflation target ought to be in the neighborhood of 1 percent on the CPI. Given the not completely understood discrepancy between the CPI and the GDP chain index, perhaps I should say 11/2 percent on the CPI. My suspicion--though of course I would let everyone speak for himself on this--is that some people around this table are more comfortable with allowing the inflation rate target to be somewhat higher because they believe it is inappropriate to try to push it down. So, certainly, my policy views reflect in part my belief that we are clearly on the high side of the appropriate inflation target. I just throw this question out as something we ought to be clear about: To what extent do our policy differences reflect differences in our views about the outlook and the risks, and to what extent do they depend on differences in where we really want to go in the long run?",861
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Before I comment on current events, I would like to step back to another interesting time, the 1960s. At that time we thought the rate of productivity growth was high and the NAIRU was low, though we didn't call it NAIRU then. It turned out we were wrong on both counts. Both variables, which one might expect to change at rather glacial rates, seemed to change rather abruptly--the NAIRU in the late 1960s and productivity growth in the early 1970s. It is difficult to proclaim that now is another era of abrupt shifts--the truth only becomes known many years after the fact--but there is some evidence in favor of that hypothesis. The staff has done calculations of productivity and it looks as if there is enough evidence to suggest an upturn in productivity growth rates of about 1/2 percentage point beginning in about 1995. The staff has also done NAIRU calculations. While these are much more speculative because the NAIRU is not directly observable--and many things could be responsible for the good price behavior--at least one interpretation of the data is that the NAIRU shifted down by about 1/2 percentage point also in about 1995. One could make a justifiable case for an even larger shift in the NAIRU. The evidence is still murky. But this could be a time when the unfavorable shifts of the late 1960s have been reversed and, as then, the shifts could have taken place rather abruptly. I won't get into causes. There could be many, and a number of you have raised interesting hypotheses. But the implication is important. If we have had this dual shift, the implication is that output could grow at a rate of nearly 3 percent a year without sparking new inflation and that unemployment could stay in the neighborhood of 5 percent or perhaps even a bit below that, again without sparking new inflation. One apparent casualty here is the Taylor rule, which is now telling us that we should be raising interest rates significantly. As I have noted before, and others have also, that rule needs precise point estimates of the inflation and unemployment targets. If the estimates are off, the advice is off. We could get around these uncertainties by supplanting the Taylor rule with what I will call a speed limit rule: That we should target growth in aggregate demand at about 3 percent, or perhaps a bit less, and stay with that policy as long as inflation does not accelerate. On the demand side, conditions look about right. The current Greenbook forecast for 1999 is exactly 3 percent, with some slowdown forecast after that. I will not go through all the forecasting uncertainties; they have been talked about at length. But I will point out that most Blue Chip forecasts are in a very similar neighborhood and, as many of you have said, most Reserve Bank forecasts are as well. On the inflation side, the Greenbook does forecast a moderate pickup, but it is partly due to special factors such as oil, with only a relatively small amount due to tight labor markets. The latest evidence, after stripping out various kinds of shocks, seems to suggest a slight deceleration, not acceleration, in the trend of both prices and wages. Surveys of inflation anticipations do not show much evidence of acceleration. There has been a very slight increase recently in anticipated inflation based on a comparison of long-term nominal and real interest rates. But this increase is more likely explained by the reversal of flight-to-quality factors that had previously lowered nominal interest rates more than real rates. The Blue Chip forecasters continue to write down their inflation forecasts even as they write up their real output forecasts. Putting it all together, it is hard for me to find much evidence of accelerating inflation right now. But this all involves guesses and estimates. What if we are wrong? In that regard we may benefit from another welcome change. Monetary policy may work more quickly than we had thought previously. There is lots of uncertainty about that as well. It is a good area for research. But in addition to the reasons that Alice Rivlin brought up earlier, another factor is how anticipatory credit markets have become. The Chairman could change long-term interest rates by 25 basis points, if he wanted to, by just frowning in a certain way! [Laughter] So, if the lags are shorter, being wrong does not trouble me quite as much as it did a while back. We should look at the evidence carefully, particularly on inflation and demand growth, and change rates quickly if we need to. But as others have said, I don't think we have to be preemptive now. This all adds up to an argument that our present policy stance is about right. Thank you.",972
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. In the material we received at the hotel last night was the proposed draft statement of the directive, which begins: ""The information reviewed at this meeting suggests that the expansion in economic activity has moderated in early 1999."" I was curious whether I would hear that view expressed around the table because I certainly did not hear it in my District. I have not heard it around the table. If that sentence is supposed to convey something about the real GDP number, I don't think it fully captures what we have been hearing and feeling about economic activity, whether from the Purchasing Managers' Report or anything else. The directors and Advisory Council members in my District continue to be generally upbeat about the first quarter. While we've had some reports of a slowing in demand in these first few months compared to the fourth quarter of last year, which was surprisingly strong to most people, those were more than offset by reports of further increases in sales and orders in the first quarter. Retailers, who had expected a slowing after the surprisingly strong year-end numbers, are now reporting that the first quarter will show further increases. They also say that their inventories are below desired levels and that they want to try to get them up. One retailer said that catalog sales were up sharply compared to in-store sales, about 30 percent in the first two months of this year versus last year. They break their sales figures into two components, those from 800-number calls and those from Internet orders. The Internet share has risen dramatically, and the profit margin on the Internet sales share is significantly higher than on the 800-number catalog sales. The labor markets continue to be tight throughout the District, especially in the southwest Ohio and central Kentucky metro areas where reported unemployment is less than 2 percent. As others have noted, temporary employment agencies say they have more requests for workers than they can meet. One large regional commercial bank that is headquartered in the Cincinnati area but operates in several states said it currently has over 500 approved openings that it is unable to fill. Companies, both large and small, continue to report an escalation of health care costs. Some of the increases they report are really very, very high. Some companies are trying to contain these costs by cutting coverage or by raising the deductibles. They are targeting prescription drugs especially because they say those costs are rising very, very rapidly; so they are trying to get the employees to pay more of the cost for prescriptions. One company with a unionized workforce is bargaining for what they call a ""total compensation increase"" over the life of the contract and letting the union and the employees decide how much will go into the paycheck and how much will go into benefits. They say that if they can contain the increase over the life of the contract to a total of 6 percent per year for the two components, they will be satisfied. Construction spending is accelerating further from the record 1998 pace, and unions are reporting that contractors are now offering bonuses to previously retired construction workers to come back into the workforce, especially to train and tutor apprentice workers. We even have had some reports of retailers giving as their reason for going out of business the difficulty and cost of attracting and retaining workers. Bankers continue to report strong loan demand. Home sales have been so strong that there is a growing backlog of appraisals to be done. As Mike Moskow reported, steel companies are feeling a lot better about their situation, especially since steel exports from Japan have dropped off sharply. They do mention that there has been some increase in steel coming from Europe and Mexico. Nevertheless, consumption of steel has continued to be extremely strong, and price increases have been posted for the second quarter. We don't know if those price increases are going to stick, but the industry is quick to point out that the increases are only a reversal of price cuts taken last year that they considered too large. So, in their view, the price hikes are not inflationary. Turning to the national scene, I would note that also in our hotel rooms last night was a copy of the Board staff's briefing yesterday on domestic nonfinancial developments. I thought that did a very good job of summarizing what the implications of an improving productivity trend--technological efficiencies or those other labels we have talked about in analyzing the real growth numbers--might be for monetary policy. I would encourage the staff to go further in that analysis to develop an understanding of the implications for the financial sector, not only for banks but for other financial intermediaries. There may be implications for asset-based lending or income-stream or working-capital-based lending if lenders begin to make some mistakes. There is a tendency to overshoot especially when negative second differences come into play and the rate of change starts to slow. Both short-run business earnings and market valuations of assets can be influenced by the dynamics that are described in that analysis. If so, an inherited approach to credit risk analysis would subsequently prove to have been a myopic way to look at the risk/return relationship. One does not have to have been a lender in Southern California, Arizona, Texas, or some other places in the 1980s to see how those dynamics work out. But the people who made those mistakes back then are now retired, so I guess there's a new group that has to repeat those mistakes. The tendency is for positive productivity surprises, by their very nature, to be reflected in favorable earnings reports. If that tendency has been amplified by a failure of workers or their union leaders to fully appreciate that the value of the marginal product of labor has in fact risen, then there is going to be a further but temporary acceleration in returns to capital versus returns to labor. And those dynamics at some point have to reverse. A reversion to conditions where real wages do reflect the value of the marginal product of labor, which we know will ultimately happen, requires a mirror image of surprises on the returns to capital. The risk to financial stability depends on the ability of lenders, both banks and financial intermediaries, to absorb those adverse surprises. As I've said before, stability in various measures of average prices of consumer goods is not a sufficient condition for overall monetary and financial stability. It is a bigger issue than that. Thank you.",1252
-fomc-corpus,1999,I think we can break for coffee.,8
-fomc-corpus,1999,Don Kohn has the floor.,7
-fomc-corpus,1999,"I will be referring to the table marked ""Financial Conditions."" 2/ Once again the Committee is faced with considering policy against the backdrop of unexpected strength in output and weakness in inflation. Central to that consideration would seem to be the need to determine whether financial conditions are consistent with economic growth slowing to trend reasonably promptly, preventing substantial further tightening of the labor market. If they are, the case for continued ""watchful waiting"" would be strengthened, though the question of whether the level of production when growth finally slowed was too high to be sustained without inflation pressures emerging would still be open. To help with judging the appropriateness of current financial conditions, I have distributed a table showing information on key financial returns, prices, and quantities. I chose two time periods to compare with current conditions: The first is the average of June and July of last year, which predates the Russian crisis and subsequent turmoil in financial markets; and the second is mid-November, just before your last easing action. Other things equal--most importantly the underlying strength of demand--over time, unchanged financial conditions in real terms should be consistent with output growing around its long-term trend rate. In the context of the current situation, such financial conditions ought to contribute to a slowing of the pace of economic expansion to around the rate of growth of its potential, although the average level of output would not necessarily line up with the level of the economy's potential. Looking across these periods, what is striking is how little effect monetary policy easing has had on many of these measures. Short-term borrowing costs for businesses, lines one and two, have fallen, of course, but tightening standards and non-price terms at banks over this interval have probably offset the effect of some of the recorded drop in the average bank loan rate. Lower short-term rates have not shown through to the cost of longer-term business credit, lines 3, 4, and 5, perhaps the more important determinant of spending. Investors have become much more discriminating, and while the highest quality borrowers have experienced a decline in the cost of bond finance, lower-grade issuers are paying more. On average, it would appear that the nominal cost of long-term credit to businesses has changed little on balance since November and has increased a bit since early last summer. With longer-term inflation expectations dropping since then, as shown by the survey results on lines 16 and 17 at the bottom of the table, real long-term borrowing costs most likely have risen. In the household sector, nominal interest rates are about unchanged on fixed-rate mortgages, line 7, but have declined on consumer credit, here represented by auto loans at banks, line 8. Trend growth in the monetary assets of households and others, shown by M2, line 11, remains quite rapid. However, expansion in broad money has slowed more sharply in March than had been expected, suggesting that more of the spurt of last autumn might have been attributable to market turmoil than we had estimated and that a slower growth trend may be emerging. The foreign exchange value of the dollar, lines 12 and 13, has fallen modestly on balance since last June and July, but has appreciated since November. In fact, after the recent firming of interest and exchange rates, markets have already taken out many of the effects of the third easing last November, and they have done so without building in expectations of an imminent tightening on your part. The notable exception to this pattern of generally moderate and mixed changes in financial conditions, of course, is the stock market. The cost of equity capital for business, line 6, apparently has dropped considerably further and the impetus to spending from outsized increases in household wealth remains substantial. The longer-run moving average of equity price increases, line 10, is weighted to capture the lagged effects of stock market wealth on consumption; it suggests that the contribution of equity appreciation to growth above trend has eased only modestly since last summer. In the staff forecast, equity prices decrease slightly and interest and exchange rates remain near current levels so that financial conditions are roughly unchanged for some time. This stability stands in sharp contrast to the substantial declines in long-term interest rates and increases in equity prices in the year leading up to last June and July, which undoubtedly contributed to above-trend growth. Stable conditions should, other things equal, tend to slow economic growth to a rate more in line with the economy's trend rate of growth. Of course other things in addition to the changes in financial markets captured in the table have not been equal over the last nine months. Importantly, prospective foreign demand has been revised down considerably as the emerging market crisis has spread to Latin America and the Japanese and European economies have weakened. At the same time, domestic demand has been more resilient than anticipated. However, Mike has discussed a number of stock-flow or accelerator-type relationships that work in the staff forecast to reinforce the tendency for the economy to slow at the stable financial conditions assumed in that forecast. As noted, reasonable prospects that such a slowing will occur before very long would seem to be an important factor behind a decision to keep policy unchanged in the near term. Halting the intensification of strains on labor resources at some point is a necessary condition for keeping inflation in check. It may not be sufficient: Inflation pressures still may build, as they do in the staff forecast, even around current levels of labor utilization. In that case, the funds rate will eventually need to be raised to contain inflation pressures. But in light of the considerable uncertainty about the relationship of labor market tightness to inflation, if the economy is expected to slow, the Committee may opt to await firmer evidence that costs and prices are likely to accelerate. The recent downturns in 12-month averages of inflation in core CPI and nominal wages serve to underline these uncertainties and also should help to keep inflation expectations in check as the Committee sorts through the incoming data for early signs of building inflation. In contrast, expectations that growth will continue to exceed its longer-run trend for some time might warrant consideration of near-term policy firming, even without hard evidence in hand of an upturn in price inflation. A significantly delayed economic slowing could leave labor markets noticeably tighter and potential inflation pressures more intense than today. The subsequent tightening of policy and induced weakness in economic activity needed to correct those imbalances would tend to be larger and hence more disruptive. Moreover, the possible downside risks to the forecast that the Committee was in part insuring against in its easing moves last fall have diminished in recent months. Emerging market economies generally have weathered the effects of Brazilian problems and shown increasing signs that investors are regaining confidence. In domestic financial markets, liquidity has improved substantially, and risk appetites and assessments look more reasonable. Markets would be surprised by a near-term tightening of policy and hence would react strongly. In a situation that called for policy firming such a reaction might be seen as a necessary aspect of imparting restraint on demand, provided it were orderly and did not precipitate a renewal of exaggerated flights to quality and liquidity. In that regard, the improving trends in domestic and foreign financial markets have not been hindered by the appreciable backup in intermediate- and long-term interest rates in the United States over the intermeeting period. To be sure, the effect on markets of building in expectations of a policy firming in the next year is not likely to be the same as the effects of experiencing such a firming today. But the reaction of markets may indicate at least that the chances of disruption from a policy tightening today are considerably smaller even than they were from not easing a short time ago. If the Committee saw the probability of a turnaround in inflation as having risen, and as now more sizable than the probability of undue softness in activity, but not by enough to tighten policy at this meeting, it might want to consider adoption of an asymmetrical directive. Such a directive has meant different things to different people at different times. But based on past experience, an initial shift to asymmetry might connote that, in light of those risks, the Committee saw its next move as more likely to be a firming than an easing and that such an action probably was more than a theoretical possibility in the distant future. The Committee has reaffirmed its option to announce immediately such a shift in its outlook. As a reminder, the Minutes and the Chairman's testimony noted that not every change in tilt would be published immediately and that those that were would meet a couple of criteria: They would represent a significant change in the Committee's thinking, one that was not appreciated by the public or the markets, and one in which that lack of understanding or knowledge could seriously mislead the public and markets. At this time, markets have built in expectations that your next move is more likely to be a tightening than an easing, but not any time soon. Market reaction to publication of a shift to asymmetry is difficult to predict, and could be shaped to a degree by the accompanying announcement. We did, unfortunately, have one recent test--the leak of the March 1998 shift to asymmetry. In reaction to that story, federal funds futures markets moved up their implied probability of firming at the next meeting to 30 percent, and intermediate- and long-term rates backed up 10 basis points even though markets already had built in a 10 percent chance of firming. A case could be made for a more muted response today on the grounds that markets would take into account the fact that after March 1997 the many asymmetrical directives toward tightening were not reliable predictors of subsequent Committee action. But the Committee did say that it was reserving announcements for significant shifts that it wanted to alert the markets to; and with no near-term policy firming now built into the yield curve, an even larger reaction than a year ago is a distinct possibility. Markets might build in substantial odds on tightening in May or June, and ratchet up expectations of short-term rate levels for the rest of 1999 and 2000 as well. Moreover, with the Committee having alerted the market to its readiness to act, market participants are likely to scrutinize incoming data especially hard for their implications for the next meeting. If the Committee sees firming action over its next few meetings as considerably more probable than is now built into the markets, it might want to consider publication as well as adoption of an asymmetrical directive. Presumably, the Committee would be contemplating such a possibility because it was concerned about the strength of demand and its implications for inflation. In this circumstance, the market reaction would be helpful, putting in place some probably needed restraint more quickly than if the Committee had simply waited and then tightened. If, on the other hand, the adoption of an asymmetrical directive was seen as a more marginal shift, reflecting a changing balance of risks but not necessarily significantly higher odds of tightening at upcoming meetings, then the extent of market misunderstanding is relatively less, as is the need for immediate restraint. Indeed, encouraging the market to build in a significant chance of tightening would itself be misleading. In this case, the Committee could allow the asymmetry to be published in the Minutes of this meeting to be released in May, explaining why it did not choose to publish it immediately.",2259
-fomc-corpus,1999,"Questions for Don? If not, let me get started. For quite a while our Greenbook and indeed all models have been projecting slower economic growth and higher inflation than actually have materialized. Looking back, it is conceivable and perhaps likely that the major explanation for these projection errors is that the models have missed the extent of the acceleration in productivity. By that I mean that the cyclically adjusted rate of increase in productivity, as now shown in the data, has been rising appreciably since the mid-1990s. The evidence of this in the underlying data is fairly clear-cut. That is, the speed-up of productivity growth can explain to a large extent both the significant acceleration in GDP from the supply side, as a number of you have indicated, and the suppression of unit labor costs and total unit costs more generally, which in turn explains the softness in inflation. The interesting question, however, is how to project that trend of acceleration in productivity. It is clear arithmetically, and indeed it is in the nature of any structural model with fixed coefficients, that if we continuously underestimate one fundamental variable that is rising faster than its underlying coefficient would suggest, then once we stabilize its rate of growth, we engender the type of forecast that we have in the Greenbook, namely, a forecast that implies a slowdown in economic activity or economic growth and an acceleration in inflation. That is algebraically necessary. I think the question on the table is whether we are looking at an aberration or at the emergence of a new era. If we take away the new era alternative and ask ourselves what the cyclically adjusted productivity growth rate was for a significant part of the pre-1995 period, it was flat. Indeed, one of the more interesting statistics that corroborates this independently is that terribly flawed number that we often discuss, the expected long-term growth in earnings per share of the S&P 500 as estimated by security analysts. Such analysts throughout the country predict the individual company earnings that are aggregated in an averaging process of the I/B/E/S organization. As we are all aware, those forecasts are highly biased on the upside. Nevertheless, if we look at the history of these long-term earnings expectations, from 1983 until late 1994 the data fluctuated in a very narrow range of about 1 percentage point. If we presume that the bias in those numbers has not changed significantly over the years--and there is no evidence that it has--we then see a major breakout of this series in late 1994. Between late 1994 and the current month, the rise is almost 3 full percentage points. What does that mean? It means basically that the earnings expectations for individual companies, as evaluated by the security analysts who obviously are speaking to corporate management and getting an excess dose of optimism, are changing very dramatically. These are long-term earnings expectations of individual companies that are not unrepresentative of the economy as a whole. I will argue that the noncorporate sector, which is not included, does raise very interesting statistical problems. In any event, we are looking at something that raises a question as to why the analysts are changing those estimates. Roughly 40 percent of the earnings stem from foreign affiliates and are foreign directed. It just is not credible that the acceleration in long-term earnings expectations in the last year has been the result of a major increase in expected long-term earnings of foreign affiliates. This underscores the likelihood that increased earnings are basically domestic. Since pricing power is clearly nonexistent, the improved earnings expectations have to be the result of cost containment of some form or another, which on a consolidated basis is essentially labor productivity for the economic system. We therefore have a variable missing from our models, if I may put it that way, which is essentially this change in expected long-term earnings. Those of you who have seen the chart know that there was a dramatic acceleration that started in late 1994 and has persisted. The rise is not a cyclical change; the line just keeps going straight up. It slowed a little during the crisis in the summer of 1998 and previously in the crisis in 1997, but it did not go down; it just flattened out and then it took off again. If we could forecast that variable, it strikes me that we would have a very important insight into the process. But implicit in the Greenbook forecast, and indeed in everybody else's forecast, is that this variable will flatten out because a constant cyclically adjusted long-term growth rate in output per hour is also implicit. That has not occurred in the last four years or so. However, this process is incomplete, meaning that it still has some distance to go. You may recall the anecdotal comments at our last meeting about technological synergies. Reportedly, they are occurring at a pace that implies that rates of return on new capital facilities vis-a-vis the cost of capital still have not crested. Anecdotally, people we speak to in businesses such as computers, software, telecommunications, and obviously the Internet all say that the backlog of potential profit-making investments is still rising. That is what the security analysts are saying. The latter obviously are not independent observations. It is just that the security analysts' expectation is a far broader sample measuring the same phenomenon. As a consequence of all this, we were all concerned at the last meeting, and I think rightfully so, that we were experiencing a major acceleration in aggregate demand. And if anything, the acceleration is even greater now. The numbers for private domestic final purchases are truly awesome, as everyone has been observing. Everyone has been concerned about weakness in manufacturing, but I suspect that manufacturing activity may have turned up. Indeed, some of the numbers we use to estimate industrial production suggest that the manufacturing component of industrial production could very readily be up 1/2 percentage point in March. That is showing up in the Chicago Purchasing Managers' report as well as in a lot of anecdotes relating to the manufacturing sector. There is no evidence of which I am aware of any acceleration in prices. I think the uptick in the Chicago Purchasing Managers' prices-paid survey reflects the rise in oil prices. Everybody has seen an oil price increase, and the proportion of people who report that they have seen price increases goes up every time there is an increase in oil prices. But oil prices are not what they used to be in this economy. The extent to which energy affects manufacturing industries has declined dramatically, and the impact of oil on GDP and inflation has fallen quite markedly. We have to be careful in our assessment of the CPI. That measure of prices can show a big increase, and it has. But the CPI is a flawed statistic; it is a statistic that overweighs housing and overweighs a significant part of personal consumption expenditures. The big difference between the PCE chain-weighted index and the CPI is largely in the weights. That is, if we ask people what they spend money on, which is the basis of the CPI survey, they remember their housing costs. When we match the housing costs, mortgage payments, and all the big ticket items against known retail sales, we discern a very significant bias in the weighting system of the CPI that is creating a considerable divergence from the far superior PCE deflator. Nonetheless, in the first two months of this year the two measures have shown the same thing, virtually zero inflation, both on the total and on the core. That is going to change for the March data as the oil prices come in significantly higher for the CPI than for the PCE. What is more interesting are the wage data, which I find increasingly difficult to understand. Why are wage increases slowing down in this exceptionally tight labor market? To be sure, the fall in inflation is a major factor, but it really does not explain the extent to which wages have decelerated in this period when the labor markets are so tight. Nonetheless, the combination of a slightly slower rate of increase in compensation per hour and accelerated productivity has lowered the growth in unit labor costs for the nonfinancial corporate area to 0.1 percent over the last four quarters, a significant improvement. That is a lower increase in unit labor costs than in the preceding period. As a consequence, the change in value-added prices in the nonfinancial corporate sector-that is, the deflator for gross product originating from corporations--is actually negative and has been negative for a number of quarters. The difficulty that I have in looking at overall business sector productivity is an issue that we have discussed previously, namely that the measurements we see in the corporate and the noncorporate areas cannot be reconciled. The margins of noncorporate profits, if I may use the term, are not bad. Yet the implicit output per hour number in total business sector productivity or nonfarm business sector productivity is picking up an implicit output per hour number in noncorporate business that has been declining, on balance, for two decades. For example, in industries where we have very significant amounts of noncorporate business--the legal profession, the medical profession, and business services--measured annual productivity has declined about 2 percent per annum on average since the late 1970s. That is just not credible. So, we have a major measurement error problem in the noncorporate area that distorts our view of what is happening to productivity. As a result, the corporate data-especially nonfinancial corporate data--are far more reliable. When we look at manufacturing, the numbers are rising at a very sharp pace, more than for all nonfinancial corporations. I might add that the January-February data for manufacturing show strong productivity growth, to the extent that we have hard data, and they show unit costs going down. Indeed, if anything, overall margins in the most recent quarters are starting to open up after being constrained through a good part of last year. And the numbers for farm productivity, for which we have hard data, are rising over 4 percent per year. So, the crucial statistic that is throwing this whole forecast off is the growth rate of productivity, properly measured. When the increase in that number slows, then I think the new era will be over. We will go back to the relationships where the fixed coefficients, the NAIRU, and all the other factors that are being overridden by this variable come back into place. We have not reached that point yet. At the moment, if we want to look at the evidence both anecdotally and in the security analysts' forecasts, March is virtually unchanged from February. We may be seeing the beginning of the topping-out process, but it follows a very sharp acceleration. Nonetheless, I think we are confronted with the fact that labor markets are very taut. Initial claims are unbelievable. The tightness in markets is such that, as Cathy Minehan points out, there is evidence that production in the First District is being restricted by a lack of workers. And I dare say that is probably true in one way or another throughout the whole country. We may at some point soon begin to see the wage acceleration, but we are not yet at the point where inflation is beginning to move in the pipeline. While I think it is exceptionally likely that the next move the Committee will be making will be on the upside, I do think--with inflation effectively at zero and with no evidence yet that the acceleration in productivity has come to an end--that we have time. Indeed, if this acceleration in productivity continues, I believe we are going to start to see prices falling, although that would not be deflation in the usual sense of things imploding. As a consequence, even though in one sense I feel inclined toward asymmetry toward tightening because I think that is the likely direction of our next move, I am a little concerned about adopting an asymmetric directive today. I am assuming that we will choose not to move, which is what I generally heard in the comments around this table this morning. I would be disinclined to move toward asymmetry if for no other reason than I think, were we to do that, that we would have to announce it. I agree with Mike Kelley; I am getting very queasy about this Kosovo war. I see potential dangers here. The antiseptic wars that we have been experiencing--the Gulf War and the more recent air attacks on Iraq and Serbia--have given us, I think, a mistaken view of what war is. We are moving very quickly toward using American ground troops in Kosovo. The situation is getting scarier and scarier. As Mike Kelley points out, if there were any urgency about moving toward a firming at this stage, I would say we would have no choice. We would just do what we have to do. But considering that we do have some time and flexibility, I would recommend that we stay where we are at this point both with respect to moving interest rates and with respect to remaining neutral on symmetry. Vice Chair.",2613
-fomc-corpus,1999,"Mr. Chairman, I not only support but applaud your recommendation. I think an announcement of a tightening in policy at the present time would make us seem oblivious of what is going on in the world. But perhaps even more seriously, with a complete absence of inflation, it would put the Committee on record as being opposed to economic growth. Inevitably that is how a tightening move would be perceived, and I don't think that would be an appropriate message for us to send.",96
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, if I were a voting member I would, with respect, dissent from your recommendation. I want to explain why. First of all, I believe the appropriate inflation goal, properly measured, is zero in principle. As I translate that into price indexes, it gives me a CPI somewhere in the area of 1 or 11/2 percent, given the ambiguity of the reading that we are getting out of the chained price index. So if we stated the target as a CPI of 11/2 percent, plus or minus 1 percentage point, it seems to me that we are already at the upper end of that range and probably heading a little higher. Secondly, in the absence of the credit market disturbances last fall, most of which have dissipated, I think it is very unlikely that we would have cut rates then. So now that the markets are mostly back to normal, I believe it is time to unwind those cuts and bring monetary policy back on course. Thirdly, I think the balance of the risks is on the upside. I would illustrate that point by comparing the following two options: One option is to raise rates now and have it turn out ex post not to have been necessary; the other option is to hold rates steady now and have it turn out after the fact that we should have tightened. I would much rather deal with the former situation than the latter because I believe it would be much easier to reverse a tightening than to have to catch up if it turns out that we are behind. I absolutely agree with you that if we have a tilt in the directive, it ought to be disclosed given the changed announcement policy. If the information regarding the tilt were released six weeks from now after our next FOMC meeting, the market would be confused about what our new disclosure policy means. So, if we are going to have a tilt, we should disclose it. And that, I think, is a good reason not to have a tilt. I also believe that at present we have as good an opportunity as we are ever going to have to emphasize that our objective is low inflation and not an attempt to control the rate of growth of GDP or the unemployment rate. I say that because there is a widespread expectation that the increase in oil prices will lead to an increase in the price indexes in the months ahead. Whether that means that we should act now or wait until we actually see that in the price indexes is a matter for discussion. I think it would be better to act ahead of time before we see it in the indexes. Thank you.",518
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"I support ""B"" symmetric. I don't think there has been enough of a change since the last FOMC meeting to warrant a change in our basic directive. As far as what we stand for, I don't think our primary objective is zero inflation. In my view, our primary objective is maximum sustainable growth, and low inflation is simply a means to that end. Therefore, I think we need to see something in the pipeline, even very preliminarily, that suggests that the economy is beginning to experience a buildup in inflationary pressures that puts sustainable economic growth in jeopardy. Or we need to see something, even if it is very preliminary, that suggests that we have the beginning of boom conditions. Neither strong growth alone nor a low unemployment rate alone is a reason to tighten monetary policy. So, I favor steady as she goes. Our next move may indeed be a move to tighten. But that in and of itself doesn't justify a change from ""B"" symmetric at this point.",198
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, my views on policy are related to a couple of the points I made earlier in the economic go-around. First, as the Greenbook indicates and as you have stated very eloquently, we are looking at an acceleration of productivity in this country. If that is true, that implies an increase in real interest rates. That is not antigrowth; that is just the way the macro economy works, as I understand it. And I worry that if we fail to validate that increase, we risk over-stimulating the economy and eventually producing inflation. Secondly, whereas the increase in the trade deficit last year reflected widespread weakness abroad, it seems to me more likely that an increase this year could reflect excessive domestic demand in the U.S. economy, which could lead to a depreciation of the dollar and inflationary impulses from that direction. What worries me the most, ironically, is that our high credibility may in some sense be permitting us to delay confronting this inflation risk. But if things ever begin to go in the other direction, I think they could unravel very quickly. So, as I said at the last meeting, I think it is time for us to get back in the ball game. In my view, a step toward an asymmetric directive would be a good way to do that. I hear your comment about Kosovo. I don't know exactly how to read that in the sense that I think, as you suggested, it is likely to be a lengthy conflict. And it is a very dangerous situation. But the longer we wait, the more difficult it will be to move. It seems to me that we might want to try to preempt that problem by moving sooner rather than later.",340
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, I basically agree with your recommendation. I am somewhat more inclined to favor the adoption of an asymmetric directive to the upside. But, quite frankly, there does not seem to be much risk in waiting to see how events unfold between now and the next meeting.",55
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, based on our discussion today, the most serious concern is the inflation outlook for the year 2000. Our current policy stance is too expansionary relative to the acceleration in inflation projected in the Greenbook and in our outlook as well. I don't think it is important to shift policy now but if we accept these inflation forecasts, then it will be important to increase rates later this year. The key, of course, is whether we accept these forecasts, and we have had a lot of discussion about that. Given the fact that we have very low inflation rates now, I agree that we have to see some indication of wage increases or price inflation or inflation in the pipeline before we would want to take some action. In this environment, it is important that we not become complacent about our current economic good fortune. But I agree with your recommendation on both counts--on maintaining the current funds rate objective and also the symmetric directive.",189
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"I support your recommendation of ""B"" symmetric. I will elaborate very briefly by saying that if I were a betting man, given initial conditions, I would bet that our next move is more likely to be an increase in the federal funds rate than a decrease. But I don't have any conviction about its timing and I don't see anything significant to be gained by adopting an asymmetric directive now or by becoming more aggressive now. So I am comfortable with your recommendation. I would add, with regard to the actions we took last fall to reduce the funds rate, that nothing I have seen in subsequent developments has led me to believe that things have gone wrong in the wake of those actions. So I see no reason to want to undo them at this point.",149
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Mr. Chairman, as is evident from my comments during the earlier go-around, I am a little less comfortable with waiting to have obvious inflation ""in our faces,"" as the teenagers say, and I am perhaps at least a bit more inclined to support forward-looking and preemptive policymaking. Having said that, if I had a vote this year, I would support your recommendation today because I don't think the case for a move is compelling, or at least compelling enough. That said, I am going to continue to worry and try to weigh the consequences of erring on both sides of what will turn out after the fact to have been the optimal policy. I think there is a chance that we are underestimating the importance of good policy and the payback from the low inflation expectations that we have helped engender in this current policy environment. And I hope we will continue to stay extremely alert and be willing to revisit this issue if the need for tightening becomes more obvious. Thank you, Mr. Chairman.",203
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I support your recommendation for ""B"" symmetric. I am asymmetric in my head but, as long as there is the luxury of time, I think we can afford to move against an acceleration of inflation or super rapid economic growth when we see it. Otherwise, I don't think we should act because we are sure to be misinterpreted. While I do think we have the luxury of time, I will also say that it may be necessary to move sharply later, and we should recognize that as well.",108
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I agree with your position on policy, Mr. Chairman. I might be a little more comfortable with an asymmetric as opposed to a symmetric directive, but if I had a vote, I probably could live with a symmetric directive as well. For some time I have been concerned about what I referred to in my comments earlier as a party building up again, as it clearly was at this time last year. I think the stance of policy is contributing to that. I don't think we are seeing the party as much as we may ultimately see it in the real estate markets, but we certainly are seeing it in other asset markets. The price-earnings ratios may be appropriate because they do reflect expectations of a better return on capital going forward than we have had in the past, and that may have to do with major changes in productivity. I am a bit agnostic about all of that. But I think it is possible that we will have significant problems with our economy working itself up higher and higher without seeing signs of inflation, so that ultimately when conditions do change--either we tighten or something else happens--the fall may be a lot farther than we would otherwise experience. We saw that in Japan. We are not like Japan; a lot of things separate us, not the least of which is the health of the financial sector in our economy versus the Japanese situation. But I think there are some lessons to be learned from the Japanese experience. Also, with regard to your comments about Kosovo, I think the rest of the world is looking to us for leadership. That leadership goes to our stance on the economy broadly speaking, with respect to financial markets as well as everything else. And in that regard I would opt, actually, for a more conservative rather than a less conservative position, given what is going on in the rest of the world. So, as I said, I can live with your recommendation for now. I just hope we have our eye on the ball and don't wait until we see significant signs of inflation before we decide to move, because at that point it might well be too late.",419
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I support both halves of your recommendation. I think we are struggling with an important issue: Do we act based on forecasts or do we, as Don Kohn said in his statement, look for evidence in the incoming data? In part the challenge is that since the forecasts have been inaccurate, we are forced to look more and more at the incoming data. As you indicate, the incoming data do not show even the earliest buildup of inflation. If they did, we should act. In some sense what we are trying to understand in this economy is: What is its maximum sustainable growth? We aren't really sure. So, since there is very little pressure on inflation now or in the pipeline, and since we haven't in any sense prepared the markets for a policy move in a way that would avoid an adverse market reaction--including a move to asymmetry which, if we made one, I think we should announce--I believe the more prudent action at this stage is to wait and see.",204
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I can support your recommendation for no change in the federal funds rate target today. In my view, however, monetary policy should be biased toward tightening going forward. Let me explain why and then confront the issue of whether or not a move to an asymmetric bias should be made and announced at this meeting. I think there are three important considerations that relate to possible adjustments in monetary policy in the period ahead. First, there is the reassessment issue, which the Chairman articulated very clearly in his Humphrey-Hawkins testimony. That is, given what I see as an improvement in financial market conditions and given a significant upward revision in our forecast compared to what it was at the time we implemented the recent easing, we need to reassess whether the full amount of that easing is still justified. Second, and here is where I place most of my emphasis, there is the question of how policy should respond to developments going forward, specifically to changes in the unemployment rate and inflation. I suggested at the last meeting that we follow a strategy that I call an incremental asymmetric Taylor rule. This is a policy that is not forward-looking but reactive; it responds not only to changes in inflation, but also to changes in the unemployment rate. Following the strategy would entail raising the real federal funds rate in response to declines in the unemployment rate and to increases in inflation. Based on the staff forecast, following such a strategy would indeed result in an increase in the federal funds rate over the next year. Third, there is the question of how monetary policy should respond if there is in fact an acceleration in productivity growth under way. This is an issue that the staff has addressed recently and that President Broaddus talked about today. I think the conclusion that we reached in that analysis is that such acceleration in productivity growth raises the equilibrium real interest rate of the economy and requires, in order to maintain an unchanged stance of monetary policy, an increase in the real federal funds rate. Governor Kelley along with the Chairman made a persuasive case, nevertheless, for not changing the policy bias at this meeting given prevailing international tensions and the prospect that the first announcement of such a change in the tilt could produce a particularly large financial market response. So I can accept the Chairman's recommendation for continuing the symmetric posture under these circumstances with the understanding, as I'm sure we all agree, that this is no obstacle to changing policy going forward.",483
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"I also concur in your recommendation, Mr. Chairman. I don't see any evidence that inflation is a clear and present danger in the United States at the moment. I concur with Ed Boehne and others that what we really should be focused on is maximizing sustainable growth. We don't know exactly what that is. And I am unconvinced that at the moment we are operating at a rate which is unsustainably high or that we will be in the near future. I see risks on both sides. I concur with your feeling that Kosovo introduces more uncertainty, although it is not clear which way the risks would cut. I also see plenty of time for action if we turn out to be wrong. So I would stay where we are.",148
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I agree with what Bill McDonough said at the outset: It is highly likely that if we were to take a firming action today, it would be interpreted in view of the strong growth numbers as being antigrowth, and that would be very undesirable. It is also true, in view of the stock market finally closing above 10,000 yesterday, that a tightening step could easily be interpreted-unfortunately, and in my view wrongly--that we considered that undesirable and we reacted to it. What is troubling about that is that it leads to the implication that we have to wait until growth slows sharply and the stock market drops and then it will be safe to raise rates. [Laughter] I don't know how to get out of this box because, certainly, once the need for a move is obvious it is too late. It is easy for monetary policy steps to be taken when it is obvious to everybody that they are appropriate. I believe, however, that some of our greatest successes in the past have occurred when we were willing to take actions that were not, in fact, obvious to everybody. If my memory is right, our May FOMC meeting will mark the second anniversary of our looking at domestic conditions and forecasts of the future, taking account of our concerns and the lags and saying: Well, we probably should move in an anticipatory or preemptive way, but there are certain external reasons for not doing so. Since then we have had a whole succession of reasons. Sometimes they have been compelling--for example, in the fall of 1997 and even last fall when the newsletters were full of stories about how the Asian crisis was going to bite us if we waited just a little longer. We have had some discussions around this table in the past about the partial analysis of the negative impulses and the partial analysis of the positive impulses affecting the U.S. economy coming from events abroad. It is very difficult to net these factors out. But it is hard for me to imagine that the economy today in the United States would be even stronger had these events not happened. So it is easier to come to the conclusion that the netting would lead to the view that we have had more beneficial than adverse consequences, though certainly not every sector or industry would agree with that. But we cannot live on just-in-time crises around the world to sustain this economy. At some point the effects on our economy have to come from internal decisions. I don't believe that recessions are caused by the economy running out of gas, with demand just drying up for lack of stimulus. Rather, I believe they are caused by the kinds of conditions that Japan created for itself: Dramatically expanding domestic industrial capacity far beyond the ability to absorb it internally and creating conditions in its financial sector that they have been trying to work off for a decade. If we get to a point where we have to have a protracted period of no growth or a contraction, it will be because we have overstimulated on the front end, not because we ran out of stimulus to demand.",622
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"I support your recommendation, Mr. Chairman.",9
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"I support your recommendation and I agree with it in both respects. At our last meeting we voted for no change and a symmetric directive. As I indicated earlier, two months of statistics have come in since then. They continue to show employment growth, a low unemployment rate, very strong output growth, and contemporary measures of inflation that are flat, with no inflation in the pipeline. So I agree with Bill McDonough that if we were either to tighten or adopt an asymmetric directive toward tightening, we would be interpreted as being antigrowth and probably rightfully so. I don't think that is the way we should be perceived. So I agree with your recommendation.",131
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, understanding the difficulties of these decisions, I would still recommend that we tighten and that we present the tightening as an unwinding of the actions that we took in the midst of the crisis last fall. Last summer we were continuing to experience strong growth in economic activity and jobs. We took some easing actions because of the Asian crisis. We introduced additional stimulus into this economy, which is playing out now. I think we could legitimately and forthrightly explain a tightening move as an unwinding of those earlier actions; that would make it more acceptable. In the long term such an action would be healthy. Having said that, I would make the directive symmetric if the Committee adopts a no-change policy, as it appears it might, because we probably will not act during the intermeeting period and I don't think we should suggest otherwise. So my preference is to unwind. However, if we don't, I would not have an asymmetric directive.",189
-fomc-corpus,1999,"Thank you. The majority of the voting members appears to favor ""B"" symmetric. Could you read the directive, including the change that has been recommended in the general paragraphs?",35
-fomc-corpus,1999,"I will begin with that, Mr. Chairman. There is a change in the very first sentence of the general paragraphs. Basically, it involves dropping the words ""has moderated."" So the first sentence would read: ""The information reviewed at this meeting suggests that the expansion in economic activity is still robust."" Moving on to the operational paragraph, the draft language is shown on page 13 of the Bluebook. It would read: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 43/4 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",168
-fomc-corpus,1999,Call the roll.,4
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes Governor Rivlin Yes President Stern Yes,45
-fomc-corpus,1999,May 18 is the date of our next meeting. We will now adjourn for lunch.,19
-fomc-corpus,1999,Who would like to move to approve the minutes of the March meeting?,14
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,"Without objection they are approved. Mr. Fisher, you have the floor.",15
-fomc-corpus,1999,"Thank you. I will be referring to the package of charts in front of you.1/ I will be discussing three distinct topics this morning: first, recent interest rate and exchange rate developments; second, the recent behavior of the funds rate and Desk operations; and third, some preliminary thoughts about the Y2K issues the Desk may be facing. Turning to the first chart on forward rate contracts for 3-month deposits, you can see in the top panel that after the last meeting U.S. forward rates drifted lower and then began rising, intriguingly, from about the time of the European Central Bank (ECB) rate cut. Subsequently, they rose significantly further after the release of the first-quarter GDP data and the Chairman's May 6 remarks in Chicago. Of course, last Friday the CPI data caused an even bigger jump in the forward rates, with the 9-month forward 3-month rate backing up 21 basis points to 5.51 percent and the 3-month forward rate backing up 10 basis points to 5.18 percent. The September fed funds futures contract rose 8 basis points on the day to 4.50 percent and the long bond backed up 17 basis points to around 5.92 percent. In the middle panel you can see that the ECB managed to surprise the markets a bit with a 50 basis point cut in its repo rates about a week after your last meeting. And forward rates have shifted lower more recently, with the 3-month forward 3-month rate right on top of the current 3-month rate. The bottom panel shows rate movements in Japan. While a few brave souls were suggesting a few weeks ago that there may be evidence of a reviving Japanese economy--the Wall Street Journal, for example, brought out the old hackneyed story about a rise in golf club memberships --there are no such signs in the forward interest rate market. Looking at interest rate markets, it is hard not to notice that at this point, almost 1 / A copy of the material used by Mr. Fisher is appended to the transcript. halfway through the year, the U.S. economy seems to be chugging right along, while the rest of the world is at best sluggish. Turning to the second page, the top panel shows selected 3-month deposit rates in terms of the change in basis points from January 4 and the bottom panel shows the percentage change in various currencies against the dollar, indexed to January 4. Without going through all the details--the specifics are covered in our written report--twelve central banks have cut rates since your last meeting, six of them more than once. As you can see, much of the world has declining 3-month rates and declining currencies relative to the dollar. But as can be seen clearly in the bottom panel, two interesting exceptions are Mexico and Canada, whose currencies have been strengthening against the dollar. However, it may be worth considering the possibility that the weakening of our exchange rate with our North American counterparts could reflect the strength of the U.S. economy and its spillover to the north and to the south. The charts on the third page display changes in the Treasury yield curve over the last two years. The top panel shows rates for on-the-run coupon securities from May 1, 1997 through May 14, 1999 and the bottom panel depicts selected yield curves. Again, as a consequence of the CPI release last Friday, you can see that the long end of the on-the-run curve has backed up to about where it was a year ago. That backup is a little hard to see in the top panel because of the brownish-orange vertical line, but the bottom panel shows it more clearly; the yield on the 30-year bond rose to 5.91 percent and the 10-year rate went to 5.61 percent. But it is worth pointing out in the micro picture of the last few days that the 30-year bond had backed up--you cannot see it in this scale--to 5.86 percent on Wednesday in anticipation of the PPI numbers to be released on Thursday. Those data gave the market something of a pleasant surprise and the bond closed Thursday at 5.75 percent. So the market had been bracing itself for a negative inflation shock, got a head fake from the PPI numbers Thursday, and then got faked out again Friday. This morning, the long bond is actually trading at 5.87 percent, only 1 basis point higher than the close on Wednesday. It certainly was a big move, but it is worth noting that some of it had already occurred, was taken away, and then given back. Of the four yield curves shown in the bottom panel, the steepest was on May 1, 1997, which is before any of the pressures developed in Thailand. The panel also depicts the rather flat yield curve of May 1998, the inverted curve of last October, and last Friday's yield curve. The floating diamonds reflect the twice off-the-run 30-year bond yield, which I have noted there as a placeholder. I think of that rate as providing something of a crude measure of market uncertainty about the level of long-term rates. Which way to look at the liquidity premium is something worth pondering. To anticipate what the Chairman may ask me after my remarks: Yes, bid/ask spreads on both on-the-run and off-the-run securities are a good bit wider today than they were at the time of your last meeting. They had come in a little further by the end of April, but the noise of the last few days has moved them out a bit. Turning to open market operations, the top chart on page 4 shows the trading range of the funds rate over the last four maintenance periods. As shown in the upper left portion, covering the first maintenance period from March 25 to April 7, we supplied a high level of excess reserves to try to get through the quarter-end and month-end period, but we faced fairly typical pressures for such a period. However, the intriguing interval was the second period, depicted in the upper right portion of the chart, when we never quite appreciated the speed with which banks shifted to a desire to be on the short side of meeting their reserve requirements. You can see there how softly the funds rate traded over the period, when we supplied only $900 million of excess reserves on average. Initially, lower-than-expected tax receipts through most of April were a contributing factor, as receipts lagged our daily estimates. They caught up at the end of the month, leaving the market initially in the next period with higher reserve levels than we intended. There also seems to have been some hangover effect from last year when we had a very soft funds rate. To bring pricing back in line, we left excess reserves in rather short supply at the start of the April 22 maintenance period, which was compounded by a bit of a miss and gave us a rather firm market on April 26 with a standard deviation of 197 basis points. That did seem to shock the market back to a trading level a little closer to the target. But, again, we have seen some oscillation. Yesterday's funds market was a bit firmer than we had hoped, but rather typical for a quarterly refunding day; the effective rate was around 5.01 percent. The average rate for the period we are in now is still just 4.76 percent, including yesterday's firm rate. Turning to the next page, I've provided a quick summary so you can see that this year's tax season was roughly similar to last year's tax season. The blue dots represent 1998 and the red dots 1999. Funds have traded around zero for the effective rate minus the target rate, as is evident by the cluster of dots near zero on the vertical axis showing the standard deviation. If you look rather carefully--perhaps if you squint--you can see that the softness of last year was not entirely repeated. The shorthand way to see that is to note that there are slightly more red dots than blue dots to the right of the zero, i.e. on the firmer side. But the pattern was roughly similar to last year's. Let me mention a few other issues regarding our open market operations. We commenced the securities lending program on April 26. Since then we have lent securities on 16 different days, and on 5 occasions we had overbidding in the 30-year bond, beyond our lending limit of 25 percent of our holdings. There were also 3 occasions when we had more bids than we needed in the 10-year area. There were 4 days of no borrowing. Interestingly, on 8 days we lent bills and coupons that were not being actively traded. I view that as a very good sign for the program --that it really involved securities loans that were very close to maturity and might have led to fails; so, that was very helpful. Let me be clear that I think this program is going well. As I mentioned last time, I am likely to want to raise the limits at some point in the future, but before doing so I will complete a more thorough analysis of our experience with the program, which I will share with the Committee and the Treasury. In our outright operations since your last meeting, we added a net of $11.74 billion to the SOMA portfolio in 16 different pass operations over 12 different days. We did a TIPS pass where we purchased $303 million of inflation-indexed securities against bids by the dealers of $3.9 billion. The reaction to our purchases in the TIPS market was very muted. I would note that currency in circulation has been growing more rapidly this year than last year, which explains in part the extent of our outright operations through April. The currency component of M1 has grown at an average annual monthly rate of 10.9 percent versus 6.7 percent last year. For the coming intermeeting period, we are now forecasting a $9.9 billion growth in currency as opposed to $5.3 billion over the same period last year. A number of you have asked me about our preliminary thinking at the Desk on Y2K issues. I thought it would be helpful to share with you some thoughts on this, but I want to be clear that these are very preliminary views. I am not committed to these ideas, but it might be helpful to take you through them, even though I am not looking for approval or concurrence at this time. If you turn to the next page, I have listed some of our preliminary thoughts on this subject. First and most importantly, I think there is an increased likelihood that later in the year the Desk will be operating on both sides of the market, alternately adding and draining reserves in any given period of time. Secondly, the Special Lending Facility that the Board addressed yesterday, if used as intended, will provide a means for the System's balance sheet to expand as we lend to small banks, who may be perceived to be less well prepared than the large banks to handle any Y2K problems. Small banks may lose deposits either through outright withdrawals or transfers of deposits to larger banks that are perceived to be better prepared. Now, the large banks may not be comfortable with either holding high levels of excess reserves or recycling deposits back to lesser credits. This could lead to a tiering in the funds market, with the System acting as an intermediary--providing added reserves to the small banks through the Special Lending Facility and perhaps needing to drain reserves from the large banks. Thus, the System's balance sheet may expand through the use of the Special Lending Facility as well as through our outright and longer-term repo operations. We are likely to need to fine-tune more frequently, alternating the use of repos and matched sale transactions. Perhaps the simplest way to put this is just that we may have greater uncertainty; and in a period of greater uncertainty, the Desk is likely to need to be on both sides of the market. A separate and much narrower issue is that as we approach the year-end, if there appears to be a developing scarcity of collateral, as some fear, we may be inclined to oversupply reserves intentionally early on with term repos. Then we can fine-tune total reserves over the turn of the year through matched sale draining operations, where we provide the collateral; thus we would not be dependent on the securities markets to come forward with the collateral for our operations. Also, we are giving some consideration to the need for late-day operations. We are still thinking this through, but we think we might need to conduct some operations late in the day; otherwise there might be pressure around the time of the regular 3 p.m. close of the securities wire. To drain reserves, we might do matched sales late in the day, though we would have to find some means of crediting the collateral to the dealers' accounts after what would be the normal close of the wire. To add reserves, we are giving some consideration to the use of a third-party custodian--really just Chase and Bank of New York who could act as custodial agents for us--in the acceptance of certain types of collateral. The Desk's systems simply are not geared up to take some forms of collateral that in fact are eligible for use in our operations. Finally, the next page is a chart of the year-end butterfly trade for 1999/2000, the red line, and for the previous three year-end periods. The difference between the yields on the 3-month December Eurodollar contract against the average of the two surrounding contracts is an expression of year-end funding anxiety. You can see the rather extraordinary levels to which that differential rose over this past year-end and early this year. It has come off quite a bit since then. While it was trading at the higher levels, we gave some consideration to the question of how we might respond, if you wished us to, to anticipated year-end pressures in the funding market. The only tool that we have in our arsenal now would be a forward RP--to inject reserves by doing forward RPs that the dealers might execute with us. I have to say that gives me some pause in terms of putting on our books operations that may not be necessary. It seems to me to be a less-than-optimal approach. Conceptually, a tidier tool would be the use of options: We would sell options on both repo and matched sale transactions at strike prices out from the Committee's target and allow the dealers to bid for those as a way of getting assurance that year-end financing would be available. I want to repeat that this is really a conceptual issue regarding how we might respond if this premium began to rise again and the Committee were concerned about funding in the year-end market. That is really all I can say at this point on these Y2K issues that a number of you have asked me about. I hope this gives you a sense of our thinking on the subject. In conclusion, Mr. Chairman, we had no foreign operations during the period but I will need the Committee's ratification of our domestic operations. I have a separate issue to bring before the Committee about the renewal of our Mexican and Canadian swap lines. I sent a memo to the Committee explaining that the appropriate timing for a vote on that is now rather than later in the year. So, I will also need a vote on that issue. I would be happy to take questions on any aspect of my report, and then, as you wish, we could take the two votes separately.",3159
-fomc-corpus,1999,"Peter, in the event, a low probability event, of very significant runs on smaller banks for currency withdrawals or deposit transfers, do those banks have enough collateral to come to the discount window and liquefy the asset side of their balance sheets to weather that drain?",53
-fomc-corpus,1999,I would not consider myself the System's leading expert on the subject. I think they have collateral. At the discount window we can take pretty much anything they have in terms of customer notes.,38
-fomc-corpus,1999,"I know we can do that, but I am wondering what they have.",15
-fomc-corpus,1999,"Well, if your question relates to what collateral we currently have in our possession, I should note that we also take on-site collateral in some cases. The discount officers have been working on this issue, writing letters encouraging the banks to get their collateral in and pledge it, but we are not there yet.",61
-fomc-corpus,1999,"Suppose a bank holds a note of a long-term friend of the bank's president, which is 10 percent of the asset side of the balance sheet. Let's say everything about the loan looks fine: It's a performing loan and the bank itself is perfectly comfortable with it; indeed, it is a terrific loan. Can we accept that?",68
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"Yes, with a haircut. If it's a loan, there is a haircut because it is not marketable and is therefore hard to value. And there's a further haircut if it is a long-term loan.",41
-fomc-corpus,1999,"Now the premise changes and the good friend of the president of the bank is in evident difficulty, not in servicing the loan but in repaying it at the end of its term. What is the point at which we effectively throw these people into bankruptcy?",50
-fomc-corpus,1999,"That is the issue that I think the most thoughtful institutions in the market are anxious about in terms of Y2K concerns: What will be good business practice with regard to closing out counterparties? How many grace days are going to be appropriate? Will this be a one-day hurricane and then everything will be back to normal, or will it be something more than that? Swap agreements have three days, repo agreements have two days; a grace period is written into the contracts. So having the loan as collateral makes things a bit easier, but there are a huge number of instruments out there that are on what might be considered hair triggers. It is a very awkward subject, and not just for us. We will be part of a larger community that will be grappling with that question.",157
-fomc-corpus,1999,But we are the only lender of last resort.,10
-fomc-corpus,1999,"Absolutely. But if you think of banks as big as Chase or Citibank, it's a virtual certainty that some of their customers will have computer problems.",31
-fomc-corpus,1999,I think our supervisors would be looking at the fundamental soundness of those customers and whether the liquidity problem is a short-term or a long-term problem. I thought your question had to do with whether this particular customer might be in a difficult long-term situation so the viability-,54
-fomc-corpus,1999,I am concerned about our being in a position where we are unprepared to make judgments on which banks we effectively will shut down because we are not going to accept their paper at the discount window and by definition there is no other lender of last resort.,50
-fomc-corpus,1999,"Our supervisory people are working very closely with the other supervisory authorities through the FFIEC to make sure that the lines of communication are open and that thought has been given to these very points in advance of the year-end. So it is very much on the agenda of the contingency planners. I don't know if that provides any comfort, but people are thinking about precisely the issue you've raised.",76
-fomc-corpus,1999,"Communication is fine. But suppose somebody at the other end of the line says: ""Hey, I am drowning. What are you going to do for me?""",32
-fomc-corpus,1999,"Well, I would point out that in the middle 1980s in Chicago and through the late 1980s and early 1990s in New England and Texas, we made huge volumes of loans to banks that had a lot of bad assets without ever impairing our collateral position. For most banks, if we look hard at the assets they have, I think we can get enough collateral for comfort.",83
-fomc-corpus,1999,I think that is the judgment we have to make. All I am suggesting is that we try to make it in advance.,25
-fomc-corpus,1999,"That is why, as Peter noted, we are urging very strongly that banks come in ahead of time to pre-position collateral and talk to the discount officers.",31
-fomc-corpus,1999,"Mr. Chairman, Don is correct that we are doing that. The discount officers are urging both small banks and large banks to have their borrowing documents up-to-date and their collateral in place ahead of time. But given the number of people involved and the speed with which this is happening, it seems clear that many banks are not going to have done this in advance. So there will be a lot of last minute scurrying around.",87
-fomc-corpus,1999,"We can make a judgment as to whether we are looking at a systemic risk, in which case we can act under certain provisions specified in the Federal Reserve Act. But what do we do if the risk is not obviously systemic but a very significant problem for, say, Texas or some other area where there is a multitude of small banks?",67
-fomc-corpus,1999,"Don, are banks executing all-asset pledges? Isn't that a way to--",17
-fomc-corpus,1999,"I am not sure, Bob.",7
-fomc-corpus,1999,We have done that in the past.,8
-fomc-corpus,1999,"We have done that with banks. The Bank of New York is a classic example where we took the building, the furniture, virtually everything as collateral. In this case, we have the complication of the Home Loan Banks.",44
-fomc-corpus,1999,I think we did some variant of that for smaller institutions at the time of the New England banking crisis. We can do these things fairly fast but it is hard to do so for multiple institutions fairly fast.,41
-fomc-corpus,1999,But there is a problem with the Federal Home Loan Banks.,12
-fomc-corpus,1999,Right. We are working on that.,8
-fomc-corpus,1999,The other issue we have been tracking on a monthly basis is how many banks versus how many thrifts have filed their documentation and pledged collateral. We are at close to 70 percent on the banks. The thrifts are the concern.,47
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,I have a very quick comment. My impression is that a lot of the small institutions are not setting up lines with us because they are assuming that the Home Loan Banks will provide the liquidity. It is not obvious to me that the Home Loan Banks know where they are going to get their liquidity. So I would think that's a critical point to straighten out with the Home Loan Bank System. We need to make sure that we somehow either backstop that system or that they tell their banks in no uncertain terms what those lines are going to be. That will force the smaller banks to set up arrangements with us.,121
-fomc-corpus,1999,"If we backstop that system, it will be difficult to unwind it because they are going to want to keep it in place.",26
-fomc-corpus,1999,"I agree with that. That is why I think we might be able to get them to be more explicit about how much they will be able to provide through their own resources so that the banks will realize that they must backstop themselves with us. In my conversations with small banks, there is this presumption that it is all taken care of and that their Home Loan Bank will take care of them. I don't think they have really thought that through.",90
-fomc-corpus,1999,Certainly not on the cash side.,7
-fomc-corpus,1999,Vice Chairman.,3
-fomc-corpus,1999,"The Home Loan Banks put out a statement, over the weekend I believe, which I read as saying: We will take care of all the banks we deal with but maybe we won't, so then you will have to go to the Fed. That puts us in an untenable position. We have to increase the pressure as we get into the summer because we really cannot wait until the last days of December and have some banks that have been asleep all year wake up and decide they have a problem. I think we have to be banging on their doors or banging on their heads, if necessary, to bring this to their attention. We also have an issue regarding the large banks that will be the recipients of large flows of funds. Some of them are getting very concerned about the flows getting so large that they could become less than well capitalized.",168
-fomc-corpus,1999,"We have that worry, too.",7
-fomc-corpus,1999,"I think we have to find a way consistent with our regulations that allows the banks to do exactly what we want them do to--that is, to bring in the funds and recycle them even though they will blow up their balance sheets as a result. Work is going on in the System now on how to handle that problem.",65
-fomc-corpus,1999,"Any further questions on open market operations? If not, who would like to move to ratify the domestic transactions?",23
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,"Without objection they are approved. Mr. Fisher, you wanted to discuss our swap arrangements with Canada and Mexico.",22
-fomc-corpus,1999,"Yes, I sent the Committee a memo on May 13 about the renewal of our swap arrangements with Mexico and Canada that were established under the North American Framework Agreement. A reading of the fine print--indeed Mr. Truman's reading of the fine print--made us realize that under the terms of these swap arrangements 6 months' notice is required to terminate them. Therefore, the appropriate time for the Committee to decide to renew or not to renew them at year-end is now and not, as has been our custom, in November. Given some of the Y2K issues as well as the separatist issue still afoot in Canada, our counterparts in Mexico and Canada may be particularly anxious about them. So it is my recommendation that the Committee vote to renew these two agreements at this time.",160
-fomc-corpus,1999,"Questions for Peter? If not, would somebody like to move that?",14
-fomc-corpus,1999,"Move approval, Mr. Chairman.",7
-fomc-corpus,1999,Is there a second? SEVERAL. Second.,11
-fomc-corpus,1999,Without objection. Thank you very much. Let's turn now to Mr. Prell.,17
-fomc-corpus,1999,"Thank you, Mr. Chairman. The April Consumer Price Index, published the day after we printed the Greenbook, obviously is occupying center stage in the financial markets and I would guess that it's a pretty prominent question mark for many of you today. But, before getting into the nuts and bolts of that report and our interpretation, I'd like to say a few words about the broader aggregate demand and supply setting. First, on the demand side, the picture is still one of strength overall. We think, however, that the first-quarter increase in real domestic final purchases of 7 percent greatly overstates the underlying trends. A variety of transitory factors combined to boost outlays: the dip in interest rates last fall, since reversed; the stepped-up incentives for auto-buyers, as GM drove to restore its market share; the abnormally mild winter weather; and so on. Given those considerations, it's quite reasonable to anticipate a noticeable slackening of expenditure growth this quarter. And the latest retail sales figures support that assessment--although we didn't realize it fully when we finished our forecast last Thursday. The surprisingly large increase in goods prices in Friday's CPI report implied that the softening in real spending was even more marked last month than we had thought on the basis of the nominal retail sales data. If we're right, real PCE growth in the current quarter will be somewhere in the neighborhood of 4 percent, at an annual rate--scarcely a weak number, but one that would be at the low end of the range of recent quarters. Another area of deceleration in our forecast for the second quarter is residential investment. Our thesis has been that, although the demand for homes probably hasn't fallen off much, builders would find it difficult-perhaps practically impossible--to maintain the seasonally adjusted level of starts they recorded during the late fall and winter months. This morning's report is consistent with that notion. Actually, single-family starts fell more than we anticipated, 11 percent; but, as we thought last month, the single-family permits figures may be telling a more accurate story, having fallen about 41/2 percent in March and another 3 percent in April. The final major element of deceleration in spending this quarter is state and local purchases--especially outlays for construction. In this case, we still have no useful data beyond March, but it just doesn't seem plausible to extrapolate the surge that we saw this winter. Unusually favorable weather almost certainly helped move building ahead of schedule, and some reversion to trend is to be expected in the near term. This is not to deny that the underlying trend in public construction could be relatively steep at this time. Among other things, the transportation bill passed last year is helping to spur activity, and states and localities have been experiencing a bit of a wealth effect themselves, as their revenues reflect, directly or indirectly, the capital gains taxpayers have been enjoying. The wealth effect remains central to our projection of domestic demand and economic activity through next year. To be sure, we believe that waning accelerator effects should be a moderating force with respect to houses, consumer durables, and business capital goods--and, as we noted in the Greenbook, one can discern some hints of this already in various categories of expenditure. But, if the stock market continues to soar, consumers' perceptions of their permanent income will rise and so too will businesses' perceptions of their sales prospects; target levels of household and business investment goods will move still higher. So, the fact that we've anticipated that the market will peak soon is crucial to our prediction that GDP growth will moderate over the coming year. As it is, the run-up in stock prices last month prompted us to raise our forecast of demand growth during the next several quarters. However, this has shown through to output rather than to prices because of the more favorable supply-side environment we are now projecting. Perhaps most notably, we've raised our sights on the prospects for gains in labor productivity, and that has permitted us to raise projected output without commensurate increases in pressures on labor markets. Our reassessment of the productivity outlook is yet one more in a sequence of adjustments we've made on the basis of incoming data over the past few years. We'd prefer to rely on deep analytical insights, but the fact is that the behavior of productivity is not well understood, let alone readily predictable; if it were otherwise, economists wouldn't still be scratching their heads over the post-1973 deterioration in the trend of economic growth. Consequently, we've had to feel our way on this. In our view, the pickup in output per hour over the past year or so has been greater than is likely attributable simply to the rapid growth of output--the so-called ""cyclical"" influence. Firms do seem to be achieving substantial structural gains in efficiency through technological innovations, investments in more and better equipment, improved information management, and reorganization of production and distribution processes. Given the continuing high level of investment and what we hear from business people about their efforts to improve productivity, there doesn't appear to be any reason to anticipate that these gains will fall off markedly in the near term--apart from some tendency for reductions in worker hours to lag those in output as the rate of GDP expansion slows. And even that cyclical element might be weaker than in the past, given the heavier use of contingent workers and the pressures on executives to deliver strong earnings quarter after quarter--except, I suppose, in the dot-com sector. So, putting this all together, we've added several tenths to the rate of increase in output per hour through the year 2000. Obviously, the outlook for productivity is a consideration in the near-term prospects for inflation. Among other things, the recent surge in productivity has helped boost profit margins and thereby given firms more room to compete for market share without forgoing acceptable rates of return on equity. Moreover, the compensation part of the unit labor cost ratio is also looking more favorable. Even taking the first-quarter ECI with a large grain of salt, we now have some evidence that, perhaps in part because of a lagged response to the lower price increases of the past couple of years, nominal pay gains are not moving up--despite a tight labor market. These considerations encouraged us to take a smidgen off our core inflation forecast--as did the surprisingly low price numbers through March. But, especially with oil prices and other ""special factors"" already, or expected soon to be, taking a turn for the worse, we've maintained our view that an unemployment rate in the low 4s will in time prove incompatible with stable or declining inflation. The question is whether the four-tenths leap in the April core CPI is telling us that the day of reckoning actually has arrived. We're inclined to be fairly sanguine on this score at this point. In part, this is simply because what we hear from businesses doesn't suggest that there's been anything approaching a sea change in the pricing environment. But on the statistical side, while it's almost always possible to slice and dice these data to find some residual that fits your priors, we think there are elements in the April CPI report that provide at least some grounds for skepticism that the burst in the core index is truly a sign that the trend of inflation has now turned upward. For example, the sizable increase in apparel prices merely reversed surprisingly large declines in the first quarter; we expected an offsetting firming of prices somewhere along the line, and we may simply have missed the timing. And the rebound in tobacco prices after some discounting in March probably is telling us little about fundamental macro imbalances in the economy. Incidentally, it's perhaps worth noting that, setting aside tobacco prices, which have risen 33 percent since last April, the twelve-month change in the core CPI is the same as it was a year ago, even after we add back in the effects of the technical changes in the index. All that said, though, we didn't anticipate the outsized April increase and we wouldn't feel comfortable ignoring it. If we were redoing our projections now, we'd tack a tenth or two onto our inflation projections for 1999 and 2000. This would not really alter the basic conclusion that we, and now many bond market commentators, have reached: that the best news on inflation is behind us and that prices will most likely tend to accelerate over time unless domestic demand softens considerably or we experience additional fortuitous external shocks. Given that we cannot divine those shocks, we've pointed to the likely need for some monetary policy tightening aimed at reining in aggregate demand. The fixed-income markets have been firming on their own in recent weeks--especially in the case of Treasury securities. But it isn't clear that this is wholly a real tightening, as opposed to an escalation of inflation premiums. Moreover, many lower quality corporate bond issuers have seen rates fall and their market access improve of late, and the stock market has weathered the negative news of recent days in remarkably good fashion. Barring further adverse news, we can easily see stock and bond prices turning back up in the coming weeks. Thus, we don't believe that the markets alone can be relied upon to do the work of curbing the financial support for unsustainable levels of aggregate demand.",1861
-fomc-corpus,1999,"Mike, in line with the notion you raised about the inability of maintaining the seasonally adjusted level of housing starts as we move into the period where the seasonals start to rise, I do recall that the unadjusted April starts figures were down. Were the permits down unadjusted?",58
-fomc-corpus,1999,I don't have any additional detail beyond the knowledge that total starts were down something under 3 percent in April.,22
-fomc-corpus,1999,Unadjusted starts?,5
-fomc-corpus,1999,"Yes. But, given that the level of starts looks low relative to permits at this point, I suspect that in reality we probably did not have an unadjusted decline in permits. That is a rough judgment at this point and I don't have the additional data to refine that immediately.",57
-fomc-corpus,1999,"You don't recall whether the permits, unadjusted, were down?",14
-fomc-corpus,1999,I don't have that information.,6
-fomc-corpus,1999,We do have that?,5
-fomc-corpus,1999,"Yes, we do.",5
-fomc-corpus,1999,"Okay, it is not crucial. Does anyone remember whether or not the seasonal for May goes up over the April seasonal?",24
-fomc-corpus,1999,"I think the seasonals do continue to move in that direction to some degree. I have those numbers with me, so let me check. Well, actually, the seasonal factor in May is about the same as in April and then June is the low point for the seasonal factor. It is just a little lower. We have had the major swing in the seasonal factors in the last two months.",79
-fomc-corpus,1999,Really from February to April is the big surge?,10
-fomc-corpus,1999,"It's basically February to April. The surge starts in February, but from January to April is the story.",21
-fomc-corpus,1999,Other questions for Mike? President Moskow.,9
-fomc-corpus,1999,"Mike, I want to ask you about your statements regarding productivity. That, of course, is something in which we are all very interested. I thought I heard you say in your comments that because of structural improvements and efficiencies you have added several tenths onto your productivity forecast for 1999 and 2000. Part 1 of the Greenbook on page 13 has a reference to an increase of 1/2 percentage point in your forecast of labor productivity gains. One question is: Are we talking about the same number here? My second question relates to your comment that you didn't think there was any reason to expect this to fall off in the near term. The question is: What is your sense as to what is going to happen beyond 2000 on these structural improvements?",158
-fomc-corpus,1999,"On the first question, part of the increase in the productivity growth that we have in our forecast reflects the stronger demand trends and the cyclical component. I would say that a little more than half, roughly, of the increase in productivity growth going forward is attributable to the more positive view we have of the structural improvements in productivity. The second question is obviously very important if one is in the business of making 10-year budget forecasts or 75-year social security forecasts. It is not a totally uninteresting question for us, either, even with our shorter time frame, in part because one would want to have a sense of what expectations might be and what would be built into peoples' permanent income views. If people felt that we were just experiencing a brief period of prosperity with these huge productivity gains, they might behave differently than if they viewed this as a new era, as it were, that will last decades. I think in a sense the stock market is probably behaving as if it is a new era. That is the way one can best understand the longer-term profit forecasts and so on. So, while we prefer to be noncommittal, it appears that what is going on in the economy may be more reflective of an extrapolation of the kind of performance we built into the forecast, if not a better one. I can easily see this productivity performance not persisting. I can also see this as being a transition phase into a sustained period of more rapid growth. After all, we have had periods of more than decades in duration in which productivity growth has averaged 3 percent. The numbers we are working with are in line with the very long-term trends in the United States. So we are not looking at a radically high productivity advance here in a broader historical context.",357
-fomc-corpus,1999,"I agree that it is not radically high in an historical context; but compared with three or four years ago when we were talking about a 0.9 percent increase in productivity on average, it is a very significant difference.",45
-fomc-corpus,1999,"Some of this reflects changes in measurement--the introduction of new weighting that has altered the history by a few tenths. But, as we look at it, we also had a period in the late 1980s and early 1990s when in particular capital was shallowing, and the low levels of investment did not help to boost productivity in that period. In the mid-1990s and since then, we have seen that change considerably. So there are factors that are readily identifiable. It isn't possible to pin down what contribution investment is making, but the normal kinds of calculations one can do suggest that investment has been a significant element in boosting productivity improvement in recent years. On top of that we do seem to be getting some extra productivity increase, so-called multifactor productivity gains. All that fits with one's sense of what has been going on in the business sector--that firms have been taking advantage of new technologies, have reorganized the way they do things, and so on. It has not been just the brute force addition of capital goods that has promoted this improvement. We are extrapolating this out for a limited time here, given our projection period.",236
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mike, I have two questions, and the first one is on productivity as well. Estimates of the productivity trend seem to have been revised quite frequently in the last few years. To me, this suggests greater uncertainty about the productivity forecast. Wouldn't you have to conclude that the uncertainties associated with our forecast of real output and inflation must be greater given the uncertainties that are associated with the productivity forecast?",79
-fomc-corpus,1999,"If the locus of the uncertainty is productivity, I'm not sure that we are more uncertain about it now than we were three years ago or six years ago. I think there has always been a considerable band of uncertainty around the prospects for productivity. We were puzzled by why productivity gains were so low for many years. I guess I don't feel any more uncomfortable on that score. The only way I feel uncomfortable is that, in a sense, we are moving a bit beyond the pack. But I think others are moving up their assessments of productivity trends, too, as they overcome the basic scientific skepticism reflected in the often heard statement that this recent experience isn't yet a statistically significant deviation from the previous trends.",139
-fomc-corpus,1999,"The second question relates to the fact that the Y2K effect in the Greenbook forecast appears quite large. Compared with the consensus of Blue Chip forecasters, for example, it is considerably larger. Do you want to comment a little on what your thought process was?",54
-fomc-corpus,1999,"This is an area where many forecasters have been reluctant to take a position, and thus it probably hasn't shown up in their forecasts. I know that the National Association of Business Economists just completed a poll of their members, and they indicated that they expected about a 1/4 percent addition to third-quarter GDP growth and a 1/2 percent addition in the fourth quarter. But there is still some reluctance, given the lack of hard information, to go out on a limb and write down a number that will stick out in any way. Now, I might note that the latest forecast by Goldman Sachs, which I just received yesterday, looked somewhat like our forecast. They have a considerable increase in inventory investment in the fourth quarter, driving GDP growth up to about 4 percent and then a drop-back in inventory investment in the first quarter, though not to a very low level, which gets their first-quarter GDP down to around zero. I know from having talked with their economists that their security analysts are hearing reports from various companies that firms are planning to do some precautionary stock building. It is not across the board, but they are hearing this and I think gradually economists are probably building something into their forecasts. But this is an area of enormous uncertainty. It is very difficult to quantify. What we have in our forecast is a very small increase in the number of days' supply; in fact, it isn't even a day's supply. So there is a lot of room to maneuver here if people begin to get worried. In some sense this is just flagging the fact that something may happen. There probably is going to be some turbulence in the data. I am afraid we are going to have a hard time sorting out the underlying trends late this year and early next year.",358
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"I have a question about the outlook for investment, which is driven importantly, as it should be, by acceleration considerations. My sense is that investment has been very strong both because of the labor market tightness and the need to substitute capital for labor and because of the attractiveness of new technologies designed to improve productivity. When you look at capacity utilization, do you have a sense of how much of the reported capacity is really genuine capacity, given the newer technologies that are coming in? I remember what happened in the early 1980s, for example, when the steel industry was being hit hard. There was a lot of steel capacity on the books that, in fact, was never put back to work even though the economy revived. I would guess that we might have something similar going on now with the rapid growth of these new technologies that are simply making some of the old capacity on the books no longer relevant for capacity utilization considerations. Do you have a sense of that?",194
-fomc-corpus,1999,"I would say that we have some reasonable anchors for our assessment of capacity utilization. The series is periodically benchmarked to Census data in which companies report what they perceive to be their level of capacity utilization based on a given definition. That definition has been uniform over time, so we think we have a consistent time series. The National Association of Purchasing Managers semi-annually asks its members to report on what they believe their capacity utilization to be. It usually isn't exactly our number. But the two series track together over time, and the readings through the end of last year still looked reasonably aligned. We should get another reading in a few weeks in the midyear survey of the purchasing managers. Finally, if one looks at vendor performance, which historically has been pretty well correlated with capacity utilization, we don't see anything to suggest that we are far off the mark. One additional point is that there is nothing in the behavior of producer prices that is signaling that the capacity utilization numbers are leading us astray. Now, one might wonder--given a world in which many goods are available overseas and have relatively low transportation costs and where plants may have the flexibility to adjust their production on a tighter schedule and so on--whether the supply curve has precisely the same slope in the short run that it used to have. That is an interesting analytical question, which we need to continue to explore. But in terms of the reading on capacity use at this point, I don't think we are any further off now than we have been in the past in judging that.",306
-fomc-corpus,1999,"I remember that steel issue. My recollection is that a lot of plant managers knew at the time that they had open hearth furnaces and rolling facilities which were clearly of an earlier age. It would be interesting to know whether in the Census Bureau data, as distinct from the American Iron and Steel Institute data, the plant managers were reporting that as true capacity under the Census definition, which has a cost element in it as I recall. That is, the question is not sheer physical facilities but what can be brought into production at a reasonable marginal cost. I would doubt very much that those steel facilities would have met that definition back then. I guess we would have to argue at this particular stage that individual managers who are reporting to the Bureau of the Census are aware of whether what they have is obsolescent or not. They can be wrong, but it is their judgment, and I don't know how we could do better than that.",188
-fomc-corpus,1999,"There is a strong tendency on these forms for people to put in about the same number they did last year, as we all know.",27
-fomc-corpus,1999,"Sure. But I think the point that Mike is making is that we don't project capacity independently. What is projected is the operating rate. We get capacity by division, and that is essentially--",38
-fomc-corpus,1999,That is true of the estimation of capacity utilization up to a point.,14
-fomc-corpus,1999,Then you smooth it out.,6
-fomc-corpus,1999,"Then we look at investments and so on to judge what capacity growth would be going forward. I think the question they are asked to answer is what is their capacity utilization rate given a normal operation of their plants, not allowing for additions of extra shifts and those sorts of things. It is a question that is consistent over time. So whatever it is measuring, it is measuring it on a reasonably stable basis. Given all the other pieces of information, I don't see anything that seems particularly odd.",98
-fomc-corpus,1999,"The point is that it may be consistent over time, but you don't want it to be consistent over time if the underlying pace of technology has suddenly changed dramatically. A whole lot of new technology is coming in. That's not unlike the change in the exchange rate in the early 1980s, which permanently put under water a whole lot of U.S. manufacturing capacity.",74
-fomc-corpus,1999,"They are not reporting that they have the same capacity as before nor that they are using the same amounts as before, but the question they are responding to is consistent. So, conceptually what they are trying to measure is consistent over time. As I said, I just don't see anything that looks particularly odd in the variables that we would expect to respond to capacity utilization.",74
-fomc-corpus,1999,"We have two measures--the ones I assume you are talking about--which are the lead times on the deliveries of materials and the number of items in short supply. The lead times are stretching out some, especially in steel with the prospect of a steel strike. The number of items in short supply, which are reported on a reasonably consistent basis by the purchasing managers, has been zero for a long period of time. So the symptoms of capacity restraint are not there and what we see is not inconsistent with the 80 percent or so capacity utilization rate that we show for industrial production in manufacturing.",118
-fomc-corpus,1999,"The other point to raise is one that the Chairman reiterated in a speech recently. And that is, if you see incipient labor cost pressures, how readily can you adjust the productive capacity of your plant? How quickly can you purchase and install capital goods? That is another element that one would have to think about in terms of the dynamics going forward. I might just respond to the Chairman's earlier question on permits. My colleague handed me the press release, which I didn't have with me earlier. The permits for single-family homes in April were the same as they were in March; the drop was in multifamily permits.",124
-fomc-corpus,1999,Unadjusted?,4
-fomc-corpus,1999,"Yes, unadjusted.",6
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I have a couple of questions about some issues that have been talked about already. First, on the Y2K effect, you have GDP growth moving from somewhere in the high 2 percent to the middle 3 percent area through 1999 down effectively to zero in the first quarter of 2000. That seems to be driven both by the change in business inventories and the change in consumer expenditures on nondurables, which in some sense is a double whammy. I am sure it is extremely well thought out [laughter] but it just seems--",114
-fomc-corpus,1999,"Need I say more? [Laughter] I wish I could! We are flying blind again. Maybe we are overly influenced by our experience with snowstorms in Washington D.C. when everybody runs out and buys milk and toilet paper and cleans off the shelves of the grocery stores. I think we should expect, even if we don't get all kinds of dramatic Y2K programs on television and scary stories on talk radio, that people are going to be concerned. Polls suggest that if people are prompted to think about the Y2K issue, they say: ""Yes, we will take some precautions."" So the notion is that people will buy some extra food and those who are dependent on prescription drugs will try to refill their prescriptions early so they don't have to worry about computer glitches creating a problem in early 2000. There are various things I think people will want to buy, figuring that they will just use them up in January if they don't need them over the year-end period. We also hear stories about people planning to buy guns and ammunition, dehydrated food, electrical generators, and wood burning stoves. These things are happening. The question is whether they are economically meaningful. But some little movement at the end of the year seems inevitable.",251
-fomc-corpus,1999,Do you recommend that we move our February FOMC meeting back to December? [Laughter],20
-fomc-corpus,1999,"From what I understand about the thorough preparations that people are making at the Federal Reserve Board, I suspect we would be able to meet here even on January 2nd if we wanted to.",38
-fomc-corpus,1999,I was just wondering whether people will be building up an inventory at home of some of the same things that businesses will be building and how much double counting there might be.,34
-fomc-corpus,1999,We have allowed for that on a very limited scale in both cases.,14
-fomc-corpus,1999,"The other thing I wanted to ask you about is the distinction you draw between the productivity that is driven by additional demand and that which reflects some underlying trend increases. I am wondering how it is that we can be at all sure about that. I know from our own business advisory councils that in many different industries people are beginning to say they are in a sense hanging on by their fingernails. They don't want to add people; they don't want to add to costs; they are driving their own production facilities as fast and as hard as they can. In our own Bank the volumes in our check-clearing operations recently are double our normal volumes for a variety of reasons. And I have heard stories from employees at breakfast about staff running pell-mell to the elevators with cartloads full of checks to try to make the courier times because processing has been so much heavier than usual. I don't think this has anything to do with the economy; it has to do with banking reorganization in our District. Our own productivity undoubtedly looks really great right now, but we would not be able to continue to move this volume of checks out the door for very long. Reconcilement issues and other kinds of issues would come back to bite us if we did that for very long. I am just wondering how you tell the difference.",263
-fomc-corpus,1999,"It is obviously very difficult and it is a judgment call. But I think the kind of situation you are describing, though complicated, is one reason to anticipate that at least some companies will hire additional workers. You say companies are working beyond sustainable levels of labor utilization, but you also say they are absolutely determined not to add workers. In other cases, I think people are working very hard, and firms would like to add workers but are finding it difficult to do so in a very tight labor market. For the latter group, we would anticipate that, even if business begins to flatten out, some of these firms will follow through on their hiring plans to reach a more comfortable position.",136
-fomc-corpus,1999,And they would be entry workers.,7
-fomc-corpus,1999,"And that would be a source of a cyclical weakening in productivity. On the other hand, there is still obviously a very strong culture of cost control--that may be your first group--and managers will do absolutely anything they can do to keep their labor force to an absolute minimum. And where they use temps and other contingent workers, those people will probably find their hours or employment reduced fairly rapidly. So I think there is a balance in this prospect.",91
-fomc-corpus,1999,"I think there is a distinction here on which we cannot put a number, but we can get a judgment. The point I was making at Mike Moskow's conference earlier this month, and I may have mentioned it at our last FOMC meeting as well, strikes me increasingly as the really crucial element in making that differentiation. A number of years ago--maybe 5, 8, or 10 years ago--those of us who were working as business consultants of some kind or another spent a very considerable amount of time addressing the fact that all key business decisions were made with a probability distribution around them. And in order to protect either the level of production that the firm needed or the value of the franchise, a company had to introduce layers of safety stock inventory on the one hand and redundancies of people on the other. And as information technology gradually reduced the variance of error in the decision-making processes--in a sense knowledge became more and more crucial--the need to have all of these redundancies gradually dissipated. When they are stripped out of the system, they are permanent structural productivity changes; output per hour is permanently changed. The type of productivity you are discussing is not in a sense real productivity. Well, I guess you could call that productivity, but it certainly is not trend productivity. It is, I would say, a cyclical dynamic. And that is the reason why we try to cyclically adjust the productivity data; we try to get a rate of change with that cyclical factor removed. And the truth of the matter is that I don't see how we will know which is which until after the fact.",328
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,"Further questions for Mike? If not, would somebody like to start the go-around? President Broaddus.",22
-fomc-corpus,1999,"Mr. Chairman, the Fifth District economy remains robust overall. I think I have probably started my comments at the last eight or nine FOMC meetings with that same statement.",35
-fomc-corpus,1999,I don't know why I even ask for your report! [Laughter],15
-fomc-corpus,1999,"Nevertheless, that is definitely the case. But, if anything, there seems to be some evidence of a possible acceleration in activity over the last several weeks. Manufacturing is still a very important part of the economic base in our region; you name it; we make it in the Fifth District. And manufacturing activity clearly seems to have bottomed out and turned up. Consumer spending is very strong. We had expected it to be strong, but its recent strength has exceeded even those expectations. Probably the strongest sector in the District's economy now is construction, both residential and commercial. We are sitting in one of the hottest markets in the region right here in the D.C. area; that's true in the District of Columbia as well as in the Virginia and Maryland suburbs. There is plenty of money around to finance all of this building, maybe too much. The only apparent constraints that we are seeing and hearing about in construction are the shortages of skilled workers and certain materials. Elsewhere, both commercial and consumer credit are readily available. So far we do not have any significant evidence of a decline in credit quality. But we are hearing from experienced bankers, anecdotally at least, that the competition for loans is very, very strong--probably excessive--which may be laying the foundation for problems down the road. On the price and wage side, retail price increases in the region have been accelerating lately, slowly but steadily according to the service sector survey we do monthly. At our last board meeting the Chairman of Reynolds Metals, who has been complaining about weak metals and other commodity prices for at least a year and a half, told us that prices of a broad range of items--not only metals but other commodities he deals with in his business--have turned up. Finally, while there is not yet a lot of hard evidence regarding rising wages in the District, we are hearing more and more anecdotal comments regarding pay increases and a speeding up of wage increases here and there in different industries. At the national level, it seems to me that when one puts last week's CPI and industrial production reports in a longer-term context, they indicate that the risk in the outlook has now moved pretty sharply to the upside. Back in November when we put in place the last of our three policy easings, we did so because we were concerned that the financial turmoil and the credit crunch that might come with it could push the economy into a recession. There is no question that those easing moves did calm financial markets at the time. But they also delivered, in my view, a very strong monetary impulse to an economy which, even then, was arguably at risk of overheating. I think we have seen and are seeing the results. Private domestic final purchases rose at a 71/2 percent rate in the first quarter. I agree with you, Mike, that that is probably above trend, but it's probably not too much above trend; I think final purchases grew 61/2 percent last year. And given the number for the first quarter of this year, the staff has increased its projection of real GDP growth over the next two years by 1/2 percentage point and now sees the unemployment rate as low as 4 percent by the end of the year. That is the context in which we have to view this April CPI report. Obviously, I don't want to put too much weight on one figure, especially one that may have some seasonal adjustment problems, as I gather this one may have. But against the background I just reviewed it is worrisome to me because it offers the first direct evidence in some time that inflation pressures may be building. The breadth of the increases in the core index I found especially troubling. But even the headline figure--reflecting the jump in oil prices--had a big impact. The oil price increase is going to get some attention if it stimulates increased inflation expectations going forward. And sooner or later, if it continues, it is going to show up in the core price component of the index. Finally, the 20 basis point jump in the long bond rate to almost 6 percent, which came on top of an increase after mid-April of about 15 basis points, makes it clear that the markets have taken this report reasonably seriously and have not just dismissed it as monthly noise. So for me, the bottom line is that at this point everyone is watching us. People in the markets especially are watching to see how we are going to respond to what may be direct evidence of rising inflation pressures. Just one additional thought if I may, Mr. Chairman: The monetary stimulus we injected in 1998 I think is a bit reminiscent of the stimulus we injected in 1987 in the immediate wake of the stock market crash. With that in mind, I think it is worth remembering that the latter was sufficient to help set off an increase in overall CPI inflation--briefly to 6.3 percent in 1990. Oil prices were a factor then, but the core rate also went up in that period. It is true, of course, that we have more credibility now than we did then, but demand is stronger now than it was then. Labor markets are a lot tighter. I know I have been crying wolf around this table for a long time and my fears have not been realized, but we have to take each day as it comes, I guess. So, wolf! [Laughter]",1086
-fomc-corpus,1999,You've made it impossible for anyone else to come after you! [Laughter] Who wants to try? President Moskow.,25
-fomc-corpus,1999,"I was hoping it was not going to be me! [Laughter] The Seventh District economy continues to expand at a moderate pace. However, we are starting to see some subtle changes. Consumer spending remains healthy and housing activity is at high levels, but we are now seeing a few signs of moderation in these areas. Conditions in the ag sector generally remain depressed, but results from our recent survey of agricultural bankers suggest that there has been no further deterioration in farmland values. Despite the continuing problems in steel and farm equipment, our manufacturing sector is performing well and may be picking up steam. As evidence, the Purchasing Managers' Surveys from Chicago, Detroit, and Milwaukee indicate that expansion of overall manufacturing activity has picked up in the past three months. Motor vehicle producers continue to experience strong sales. April sales of light vehicles again surprised us on the upside, and heavy-duty truck backlogs are still quite high. In fact, the automobile industry is doing so well that profits are high, leading one senior official at a major automaker to mention to me that he expected very difficult labor negotiations later this year. Tensions are high and there is a strong potential for labor disruptions. One major issue in the negotiations, of course, will be the use of outsourcing. More generally, our labor markets remain tight, and the puzzle of slowing compensation growth is even more pronounced in the Midwest than in the national numbers. Our business contacts are starting to report less customer resistance to price increases than was apparent a year or two ago. This is not a sea change, as Mike Prell discussed, but we are hearing more anecdotes, and I thought I would mention a few. One of our former directors with a large trucking operation noted that his firm was negotiating contracts with higher prices for the first time in many years. A major printing firm reported that advertising rates are increasing. A national specialty retailer mentioned to me that wholesale prices for furniture were up sharply; he added that costs for building new stores, including land, had risen 50 percent over the last three years. Last time I noted that the prices paid component from the Chicago Purchasing Managers' Survey moved above 50 percent in March for the first time since April 1998. That component moved even higher this April, from 52.5 to 56.7 percent. And purchasing managers from Detroit and Milwaukee also reported that prices paid moved above 50 percent in both of those months. The Milwaukee report provides evidence that energy was not the only culprit, as 11 of the 21 commodity prices surveyed were above 50 in April. This regional pricing news leaves me quite sensitive to the data contained in Friday's CPI report. As Al Broaddus mentioned, of course, we should not make too much of a single month's data, though the increases appear to be broadly based. In fact, my biggest concern remains not inflation this year, but rather the acceleration in core inflation expected next year, perhaps from a higher level than we forecasted before. In addition, incoming data have remained strong since our last meeting when we raised our forecast of real GDP growth for both this year and next; if productivity growth remains as rapid as it has been for the past few quarters, then this projected real growth would be sustainable. But if, as my somewhat pessimistic staff keeps telling me, trend productivity growth has not picked up as much as the Greenbook asserts, we could face a substantial increase in inflation by the end of next year. Thus, I think the risks have become tilted decidedly to the upside, and I think the time has come to reevaluate our policy stance.",721
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, economic growth in the Twelfth District has shown some signs of moderation, but it is still rapid. In Nevada and Arizona, the pace of job growth has slowed somewhat from last year's very fast pace, but these states still rank first and third in terms of employment growth over the past twelve months. In the Pacific Northwest, employment growth picked up in Oregon but cutbacks in aerospace manufacturing jobs held down such growth in the state of Washington. California's relatively rapid pace of job growth also moderated a bit in recent months as a contraction of the state's manufacturing payrolls partly offset employment gains in other sectors. Overall, California employment has grown at roughly a 2 percent rate so far this year, which is down about 1 percentage point from last year's pace. Even so, California's unemployment rate of 5.6 percent is down significantly since the end of last year. Turning to the national scene, obviously the data have revealed a stronger- than-expected economy once again, causing us to revise our real GDP forecast upward. The contour of the forecast has not changed very much, however. We still expect the economy to slow, only now the phrase ""slowing economy"" means a growth rate of about 31/4 percent for the remaining quarters of the year. The GDP price index is projected to grow at a rate of about 1 to 11/2 percent over the same period. However, recent forecast errors suggest that there is considerable uncertainty associated with this outlook. We are all well aware that real output has consistently grown faster than predicted in recent years. And if we had somehow known how fast the economy would grow over this period, we would have overpredicted inflation even more than we actually did. It seems clear that we are experiencing a positive supply shock but one whose magnitude and duration are hard to determine. The existence of a supply shock makes it hard to judge inflationary risk by looking at real output growth, since such shocks tend to change the output/inflation mix in the economy. A reasonable response to this uncertainty is to follow a strategy that is fairly robust in the face of such shocks. One such strategy would be to pay more attention to the growth in nominal GDP or spending. As supply shocks change output and inflation growth in opposite directions, they will obviously have a smaller impact on nominal GDP. Keeping an eye on spending would allow us to keep inflation within reasonable bounds, even if we are unsure about the economy's potential growth rate. Using nominal GDP in this way--that is, as an indicator--is similar to the way that we actually employed the monetary aggregates before velocity shifts made them hard to interpret. The data show that nominal GDP growth has averaged close to 51/2 percent over the previous three years. This suggests to me that, despite the uncertainties associated with the supply shock, the policy choices made during this period have been appropriate. By allowing growth to come in higher and prices lower than anticipated, we have in effect been stabilizing nominal GDP to some degree. In this light, however, the recent acceleration in nominal GDP in the past two quarters causes me some concern. Thank you.",631
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. Discussions with directors and advisory council members since our March 30 meeting have gone in the direction of reconfirming that the regional economy is very strong. Even the communities that are most influenced by steel, which had been registering some concern earlier, have reported that business conditions never got as bad as they had feared and that they have started to show some improvement. Wheeling Steel, for instance, is already recalling workers. Structural steel orders are still strong and it was suggested that some ""strike hedge"" stockpiling may be going on at the present time, with the backlog building. Because of worldwide overcapacity, steel industry people expect to see significant consolidation in the steel industry. In particular, they expect Western European companies to be acquiring U.S. producers. In the first quarter, an overall decline in steel imports had been expected, based on the view that less Japanese steel would be coming in. And there was a decline in Japanese steel and Russian steel. However, that was more than offset by an increase in Korean and Brazilian steel. So, steel imports in the first quarter were up 41/2 percent versus a year earlier. In motor vehicles, production is reported to be flat out at the plants around the District, with some of the larger plants, at General Motors in particular, operating 7 days a week. And the workers are getting tired of it. One of the truck body manufacturers responded to a shortage of welders by starting to offer courses in the high school, where he pays his employees to go and teach welding shop. We have an interesting situation with Honda. They have a number of plants in Ohio and they have in the past been considered a model of labor/management relations in the non-unionized sector. The UAW attempted to organize them twice, in 1985 and 1989. Early this year, a petition from workers asked the UAW to try again. The UAW declined, based on a low expectation of being successful, so the workers went to the Teamsters. The Teamsters went to the UAW and the UAW said the attempt would not work and they were not interested in trying again, so the Teamsters decided to try. Out of 8,000 workers at the various plants, they have already collected 3,800 cards--they have not certified them all and they need to have about 2,400 certified--which got the UAW's attention very quickly. The UAW has petitioned for a hearing, which is being held today, to decide whether or not the Teamsters do in fact have jurisdiction or whether they will have to turn the organizing effort over to the UAW. A contact in the Teamsters local in Columbus said that they had not expected the organizing drive to be successful the first time around. They were caught completely off guard by the response of the workers. So, that is one we plan to monitor closely. Union communications workers just settled with a company in Cincinnati; the contract is for three years and the package is 6 percent per year for the three-year period. In construction, the situation has been described as a surge of new business, even though there continue to be shortages of workers with various crafts and skills. Some said those shortages are worse than before. The Ohio building trades now expect to have at least two more years of high levels of construction activity. On the residential side, builders say the problem with starts activity is that they are so far behind schedule on existing projects that they are seeing more delays, longer times to complete projects when they do start new ones, and thus they are reluctant to extend the pipeline any further. People from Pittsburgh say that the city is in the early stages of a major construction boom that will last five years; and that includes the building of stadiums, convention centers, theaters, bank operation centers, downtown retail space, tunnels, and bridges. Earlier, people from western Pennsylvania had been saying that they were lagging considerably behind Ohio and Kentucky but now they claim that they have closed the gap. They have experienced very rapid growth and have labor shortages in an increasing number of communities. A contact from one of the community banks in southwest Pennsylvania said that a significant employer for their community decided to go out of business and laid off 200 workers. So the bank joined with some others to co-sponsor a job fair for the displaced employees. But they had to cancel the job fair because the workers had all found jobs before the fair took place. A food processing company in Ohio reported continued strong sales at both what they call the in-store retail and their 800 Internet services or catalog sales. They are very happy about that. But they are not happy on the cost side: Freezer storage rates in the first quarter were up 13 to 18 percent from a year earlier; health care costs in 1999 are now budgeted to be up 14 percent from a year earlier; and prices of corrugated packing material in the first three months of the year were 15 percent above year-earlier levels. Other manufacturing reports included tool and die companies who say they have now fully recovered from the earlier loss of business to Asian imports. A manufacturer of safety equipment for mining and manufacturing companies reports that in addition to continued strong U.S. orders, they have recently seen some pickup in orders from both Asia and Europe. Bankers in the region report strong loan demand in every category. We asked our Community Bank Advisory Council why we no longer hear the stories we were hearing a couple of years ago about people walking in and turning over the keys to their vehicle because they could not afford to pay for the car, the truck, or whatever it was. And the bankers did not really have a coherent response. They said these stories have stopped totally. Some guess that it has to do with wealth effects from the stock market, the equity taken out from refinancing homes, and debt consolidations. They mention various reasons why they conjecture that those ""stretched"" consumers no longer exist. But no one had any stories to tell. In agriculture, conditions in our area sound a little better than in Mike Moskow's District. Bankers and one agricultural supplier have told us that it has been a very good planting season; all the planting has been done. They experienced falling seed, fertilizer, and energy prices during the planting season and--assuming they get appropriate amounts of rain--they are optimistic at this point about having a good year, the first in three years. We still hear references to, in one person's words, ""outrageous prices"" being paid for farmland. The reports are that it is not the neighbor farmer buying the land but somebody coming from somewhere else, and often these are cash deals. Another banker said that he tracks what he calls the debt service per acre of farmland and it is the highest level he has ever seen. Let me turn to the national scene for a moment. I always have trouble using the word ""inflation,"" mainly because of the way people also use words like ""deflation."" So instead I think in terms of the purchasing power of our currency and I try to give some meaning to the expression ""price stability."" What we mean by price stability is that people make decisions in the expectation that the purchasing power of a dollar in the future is going to be the same as it is today. When that condition is met, we get efficient allocation of resources at the business level and the household level, and we get maximum growth in our standards of living. We have had the experience of people revising downward their expectations for the future about what we call inflation, though perhaps not by as much as the decline in the reported numbers for late last year and the early months of this year. And that was, in words that we used some time ago, a period where we could have exercised ""opportunistic disinflation policy"" and locked that progress in. We clearly missed that opportunity and did not lock it in. It's much more likely that people expect the purchasing power of the dollar to decline faster in the future than has been the case in their recent experience. I think we have to anticipate that from this point forward people are going to expect higher rather than lower inflation.",1656
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The economy in the Kansas City District remains quite strong: Employment edged up again in March; retail sales remain generally strong; and construction indicators are quite strong. The price of construction materials has increased significantly so far this year, both in the region and more broadly. As a side note, I will tell you that about 10,000 homes and businesses were destroyed or severely damaged by the recent tornadoes in Oklahoma and Kansas. While the short-term effect is obviously devastating, that does imply some additional building boom coming our way. That will be a factor in our District. More specifically, though, one of our directors who is in the construction industry has seen sizable price increases on materials in that industry since the beginning of the year. Prices of rock, gravel, and aggregates are up 10 percent, lumber 6 percent, concrete 41/2 percent, and sheet rock, of course, is up about 50 percent. While manufacturing activity has been a little sluggish in the District up until recently, it is picking up. Some of our manufacturers are seeing an increase in demand from Asia, and that includes China, despite some of the other developments in that region. Also, at least from our directors' point of view, some of the recovery in aluminum prices reflects increased demand in Asia. Energy activity within the District has steadied in the sense of not declining any longer; firms in that industry are waiting to see to what extent these energy price increases will stick before making their own plans for future activity. Wage pressures appear to be increasing in the District, at least somewhat. Our unemployment rate is about 3.4 percent and we have a very high participation rate, so we have very strong pressure on our labor markets. In fact, in the construction industry, which is obviously under the most pressure, and in the crafts industries such as carpentry and plumbing, contracts for wage increases of 51/2 percent per year for the next three years have recently been signed in our area. Retail prices have edged up, as someone else mentioned. And I would echo the point, based on talking with business people in our region, that there is a hint of a different attitude toward price increases. There is a sense of challenging the status quo and seeing if perhaps price increases will stick this time, with more of an expectation that they will. Whether that will occur will only be known in time, I realize. The farm economy remains fundamentally weak. Supplies are large and export demand has not picked up that we can see. Despite this, farm finances remain strong, and there is a lot of anticipation about what will come out of Congress this year on that issue. Our land values have remained resilient despite these kinds of pressures, although our last survey indicated about a 1 percent decline in land prices in the aggregate. Turning to the national economy, I see another year of strong economic activity. While growth in GDP may moderate, I think it is going to moderate to a rate well above its longer-term trend and remain significantly stronger than the FOMC central tendency forecasts from our February Humphrey-Hawkins meeting. I must say that I am struck by the strength of the domestic economy. Over the last four quarters private domestic spending has grown about 61/4 percent and we are forecasting that it will grow about 5 percent this year. If one put trend productivity at a very optimistic 4 percent-higher than I think one might expect--and added on 1 percent for labor force growth, that would result in potential output of, let's say, 5 percent. And private domestic spending at least has been growing faster than that. Offsetting this, of course, has been the weakness in net exports; in a sense the deterioration from the external sector has been the relief valve. But I think some of the relief now is coming from domestic demand rather than the weaker external or foreign demand. That is something we have to keep in mind in terms of the pressures on global resources going forward. In sum, what I am saying is that I see increasing upside risks to our forecast. Look at the Greenbook forecast, for example, which shows a $450 billion deficit in net exports by the end of next year--though I know the staff may reduce that--and still good growth in the 31/2 percent range. Should our domestic demand or foreign exports pick up, we could have even stronger growth. The point is that against this background I have become, as I think Al Broaddus has, increasingly worried about the current stance of policy and our ability to maintain low inflation going forward.",930
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Little has changed in the Eleventh District economy since our March meeting. Overall, the economy in our region continues to show healthy growth. Over the last six months employment growth has averaged about 3 percent, and the near-term outlook is for more of the same. Activity in both commercial and residential construction has been robust. In recent weeks concerns about commercial overbuilding have become more common as the credit strains that developers faced last September and October have eased. Just in the last month or two the residential market, particularly in the Dallas area, has heated up. For the first time in many years used homes have been selling the day they are listed, sometimes above the listed prices. Were it not for the continued shortage of cement and some other building materials, building activity would be even stronger, and perhaps we would see less upward pressure on existing home prices. To some extent the shortages will get worse in the coming months as crews and materials are diverted to Oklahoma to rebuild areas destroyed by tornadoes a few weeks ago. Efforts to relieve some of the short-term capacity constraints are in the works. U.S. Brick completed a new and entirely automated plant adjacent to its existing facility; the $17 million plant will produce 60 million bricks a year, tripling output at the site. Fifteen new jobs will be created, a testament to productivity increases. Texas Industries, a firm on whose board Governor Kelley used to serve I believe, is also expanding capacity that will make its facility the largest cement plant in the United States. That $200 million project will increase cement capacity from 1.3 to 2.8 million tons per year by the fall of the year 2000. The energy industry continues to consolidate and contract in spite of the higher oil prices in the last few months. The Texas rig count is at a 30-year low and our projections are that Texas drilling activity and oil and gas employment may not have bottomed out yet. The rebound in oil prices has surprised our industry contacts and they remain skeptical that these prices will last. The computer and telecommunications industries have rebounded slightly. However, we are beginning to hear complaints that more and more sectors of the business are becoming commodities with falling prices and shrinking, razor-thin margins. A few years ago it was DRAM chips; more recently it's pagers. Now there is talk of saturation in the market for inexpensive computers. The higher oil prices together with a stronger peso have boosted consumer and business confidence in Mexico. Our border cities have been seeing very strong retail demand from Mexican shoppers. In spite of ever-tighter labor markets, we are hearing less and less discussion of upward pressure on wages. With capital becoming increasingly substitutable for labor, tight labor markets are less likely to add to inflationary pressures unless the cost of capital rises significantly. The main development in the national economy was the giant mood swing in financial markets in April. Suddenly everyone decided that the crisis countries had bottomed out and that, given the flattening in commodity prices and the rebound in oil prices, the best days on the inflation front were behind us. Interestingly, the bad news on oil prices for the country has not been celebrated as particularly good news in our area. As I said, our industry contacts didn't expect the rebound and they question its durability. The blockbuster, of course, was Friday's CPI report. I will have to concede that it was only one month's data; however, the risks have shifted upward.",692
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, conditions in the Eighth District are largely unchanged. The only significant development is the announcement, which I think everybody is aware of, that Boeing will be laying off about 7,000 workers from a defense plant. But, of course, that business is going to go to some other defense plant; those aircraft, though different models, will be built someplace else. My contacts at FedEx and UPS reported that conditions were largely unchanged domestically but that the volume coming out of Asia was substantially stronger. They both made a point of emphasizing to me the pickup in Asian markets. And both said that Latin America remained weak while Europe was solid--neither strong nor weak, but just solid. My FedEx contact reported that their labor situation is easing a little due to aggressive recruiting, but the company is still short of labor. The UPS representative said that the labor market in Louisville is the tightest the company has ever seen. One other point about FedEx I thought was interesting: Domestic volume for shipments of auto-related parts has expanded substantially. I guess Fed Ex does a lot of last minute delivery of auto parts coming out of Mexico and from within the United States. And that would confirm the other evidence we have that the auto industry is operating at a fairly high rate. As for the national outlook, I think that depends critically on our policy, so I am going to delay my discussion of the outlook until I fold it into the policy discussion in the next go-around. Thank you.",301
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you. The District economy remains robust, which is not a change in conditions. That is true virtually across the board, whether one looks at consumer spending, tourism activity, or manufacturing activity. Construction is very strong, both residential and commercial, and houses are selling as soon as they hit the market. The one obvious exception is agriculture, which remains in the doldrums. Despite the problems in that sector, I think it is worth remembering that they are not nearly as severe as they were in the mid-1980s nor do they have the implications for the banking system, at least at this point, that they had back then. I had a meeting recently with a range of representatives from the financial services industry in the Twin Cities, and generally they confirmed this very positive view of regional conditions as well as broader conditions. There was a sense in their conversations about the economy that is a bit different this time from past experience. One might expect that from some of the financial people, at least those who are close to the equity market. I think one reason they feel that way relates to the international situation. They see the U.S. economy as being able to tap into capacity abroad, both traditional manufacturing capacity as well as labor. They also feel, of course, that the United States is playing a particularly critical role at the moment in the global economy. As far as the national outlook is concerned, I believe the prospects for real growth are favorable. I don't think there's much question about that. Aggregate demand is strong and I am relatively optimistic about aggregate supply. I agree that we have a lot of problems in measuring productivity, much less forecasting it. But I ask myself what I think determines productivity. If one approaches the analysis in that way, there is reason to believe that productivity is on a more durable and positive trend. And I think it is worth bearing in mind that business people have been saying for quite some time--well before it started to show up in the statistics--that they were getting sizable increases in productivity. As far as inflation is concerned, that CPI number captured lots of attention, I think justifiably. It is worth reminding ourselves, though, that we have been anticipating a modest acceleration of inflation. In my judgment the problem with getting too comfortable with that observation is that that modest acceleration may depend crucially on monetary policy assumptions. Thank you.",476
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Southeast economy continues to operate at a very high level of utilization and that constrains us from experiencing the kind of growth rates that we saw earlier in the expansion. Recent retail sales gains in our area have been modest, and single-family housing activity has been up only slightly. At the same time, office and other commercial construction has been a bit stronger since our last FOMC meeting. Manufacturing has picked up. Our important tourism industry continues to do well, especially along the Mississippi Gulf Coast where another huge gambling casino has just opened. That grand opening and the associated demand for another 5,000 casino workers have given rise to the latest tight labor market story. The casino operators reportedly bought or leased a complete apartment complex to house workers they are now bringing in from other less tight labor markets throughout rural Mississippi. Of the specific areas of regional weakness that I noted last time--namely, energy, agriculture, and trade--problems in our energy sector have moderated slightly to the extent that wells are no longer being capped; but we have not been experiencing increases in production and drilling yet. There is no sign of a turnaround in the District's trade deficit with Latin America or with Asia for that matter, and agriculture continues to suffer from low commodity prices. Anecdotal information on regional price pressures is quite similar to what I have been reporting, as have others. Labor markets are clearly tight. Business people are complaining about finding workers. Our directors and other contacts continue to emphasize the growing role of nontraditional compensation--bonuses, signing bonuses, and incentive pay--with those non-base salary types of compensation being pushed further and further down the organizational level in many firms. One director reported that truck drivers are being paid a $5,000 signing bonus in order to get more trucks on the road. Benefits are also being made more widely available, especially in small companies, but at the same time some companies are restructuring some benefits, notably medical, to control their costs. Two final observations from our regional contacts: First, one large regional retail chain has reportedly scheduled several van loads of spring goods from China for delivery two months early as a hedge against possible Y2K disruptions; and secondly, to build on Al Broaddus's comment a few minutes ago, our bank examiners tell me that they see some evidence of a deterioration in credit quality. From their field work they have found that lenders are concerned about over expansion in the hotel/hospitality industry and some relaxed credit standards and increased credit risks in the health care sector. At the national level, like others, I have continued to enjoy observing and talking about this good ride that we are experiencing. That's something that someone at the last meeting reminded us all to take the time to stop and do. Like others, my staff and I continue to think through the arguments for why some slowing of the pace of growth and consumer and investment spending should begin to show through. Compared with the construct of the Greenbook, we're inclined to attribute a bit more of the strength in consumer spending to current income, some of which we suspect we may not be fully capturing and measuring, and somewhat less to the wealth effect. Although I would not argue that the fundamentals have changed significantly since our last meeting, I find myself still, and perhaps increasingly, uneasy about the inflation outlook. My staff, most other forecasters, most other people who have spoken around the table this morning, and now it appears the bond markets see some gradual deterioration in core inflation looking ahead to 2000 and 200l. The perceived recent improvement in inflation by some measures has to be viewed in the context of the technical adjustments that have masked some of the upward pressures. It seems to me that there is good reason to be concerned about the inflation outlook regardless of which economic model one subscribes to. We are already seeing some reversal of the favorable trend in commodity prices, and some part of that very likely will begin to feed through to prices sometime soon. Labor markets are very tight and unemployment is below even recent estimates of the natural rate. The money supply, as several people have already noted, has been overly expansive for the past two-and-a-half years, and that may begin to show through in inflation pressures. The seesaw pattern of productivity gains over recent decades, even allowing for the sea change that may have taken place most recently, leaves me at least somewhat cautious about counting on the extraordinary productivity gains we've experienced most recently to offset most or all other upward cost pressures. Of course, the trick is to know when to say when, as the commercial suggests. It seems to me that if we come to a shared sense that it is time to begin at least leaning in the direction of tighter policy, we have a window of opportunity to do that right now. The international situation is at least somewhat less fragile than it was the last time we contemplated a tightening. The U.S. economy is still sufficiently balanced that a tightening move is not likely to be terribly disruptive. If we were to move today or lay the groundwork for a possible move at our next meeting, we could get ahead of what I think we will come to see as a problematic period later in the year, when I imagine we will give considerable weight to preparing for Y2K uncertainties and possible volatility and will prefer policy stability. Thank you, Mr. Chairman.",1076
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. The regional economy of the Philadelphia District remains on an upward trend. Manufacturing is strengthening. Retailers report growth in sales. Construction has been increasing. Business lending has picked up. Labor markets remain tight in most areas. Apart from oil and tobacco prices, inflation is benign and pricing power remains largely nonexistent according to most business contacts. The outlook for the regional economy is positive. Turning to the national economy, the strength in domestic demand continues unabated and prospects mostly are for more of the same. There may be a moderating trend out there, but it is elusive. Financial markets, fixed-income markets in particular, look increasingly normal following their seizing up last summer and fall. Developments abroad, although mixed and still worrisome in some areas, look better or at least not as bad as feared a few months ago. Taken together, these developments--robust domestic demand, more normal financial markets, and less bearishness abroad--indicate to me that the balance of risks has more of an upside tilt than at our last meeting. At the same time, inflation remains quite benign despite recent headlines. Core CPI, absent tobacco, is very tame. The broader measures of inflation are mostly decelerating. Compensation and productivity are still in a virtuous cycle. So, while risks on the demand side of the economy have shifted somewhat to the upside since our last meeting, developments on the supply side remain largely favorable. To me that means a somewhat heightened state of alert for policy is called for. How that heightened state should be expressed is better discussed later in the meeting.",322
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. New England's economy remains much the same as it has been for the last several meetings. The region's job growth continued to be slower than the nation's but the unemployment rate is well below the nation's as well. The supply of labor continues to be a concern. Jobs would grow faster if there were people to fill them. Wages, however, still don't reflect this lack of supply; in fact, almost everywhere one is greeted with anecdotes about how business is coping by offering largely non-wage incentives--training and that sort of thing--to keep employees. Manufacturing jobs continue to decline at a faster pace in New England than nationally. However, merchandise exports are picking up, particularly to the Asian region. Manufacturers also report raw material cost increases and not just in oil. Aluminum, copper, silicon, oil-based products, chemicals, paper, leather, and other such inputs are all rising in price. Some manufacturers are now beginning to talk about trying to increase profit margins. They are perhaps not ready to raise prices as yet, but there is talk about price increases in the range of 3 to 5 percent. Residential real estate markets are very active, especially in the Boston area. Rents are rising precipitously and house prices are up. New home building, particularly in the suburbs, is focused on very high-end homes. Commercial real estate is healthy as well. We are beginning to see new hotel and office building construction in Boston proper and in the surrounding areas, as well as some speculative building. Over the course of the last several weeks we've had many opportunities to discuss Y2K issues with banks and businesses, large and small, around New England. In general, banks are confident about their own readiness and that of their large customers. On the inventory side, by no means is there a consensus on the need to build inventories as the year comes to an end. Rather, most comments reflect a rather balanced view, and many see the challenge not so much in Y2K terms but in the normal inventory planning for year-end. Cash inventories at banks seem to be a special case, however. In that regard there is much concern about consumer panic and much encouragement for whatever proactive statements or action the Fed can take to calm things down. We recently held a meeting of the Bank's Academic Advisory Council which, as you all know, includes two or three Nobel Prize winners and people from Harvard, MIT, Yale, and so forth. The discussion focused on issues related to productivity growth, labor market tightness, and asset market bubbles. The group was lively, to say the least. But some consensus was reached on the need for action that might take the wind out of asset markets, even in the absence of tighter monetary policy, perhaps through increased margin requirements or increased supervisory oversight on credit extended, particularly in the day trading operations. On the national scene, the Greenbook forecast with its higher growth, stable and very low unemployment rates, and inflation that only creeps up in 2000, strains credibility. Yes, we can agree that productivity has improved over the last two or three years or so, and that for a time anyway the potential of the economy to grow without inflation might be 3 percent or so versus the roughly 21/2 percent we had thought. However, even given that, with about the same growth we see unemployment falling to the high 3 percent area and inflation ticking up by year-end 1999. Even if that forecast is viewed with some level of agnosticism--and here I should say ""wolf"" along with Al Broaddus--credit conditions are now coming back to the narrower spreads and are reminiscent of the ease we had last summer. At the same time, corporate debt is soaring along with household debt. True, affordability is better than in the late 1980s and banks are supplying less of the credit and are better capitalized, but the signs of excess are beginning to show. Stock markets, real estate markets, and corporate and personal debt may not all be similarly extended, but they are getting there. Thus, whether one comes at this economy with concerns about inflation or concerns about imbalances and excesses, I think the concerns are real and actions related to policy corrections need to be considered, if not taken.",863
-fomc-corpus,1999,Vice Chairman.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Second District's economy continues to grow at a sturdy pace, with few signs of increased price pressures. Private sector employment grew at a 1.8 percent annual rate in the first quarter; that's down from 2.2 percent in the fourth quarter of last year. Retailers report that sales were at or above plan in March and April, but a bit less robust than in January and February. They also note modest declines in selling prices. Residential and commercial real estate continue to flourish in the New York City area. Home prices have risen sharply and both new construction and remodeling activities gained momentum in the first quarter. While Manhattan's office market remained tight in April, rent inflation has slowed markedly from a rate of more than 20 percent in 1998. Purchasing managers indicate that manufacturing activity continued to expand in April, though at a slower pace than in March. Those in the New York City area report an uptick in commodity prices and persistent increases in the cost of service inputs. The latest Banker's Survey shows a pickup in loan demand, tightening lending standards on commercial and industrial loans, and further declines in delinquency rates. Looking outside the Second District, let me speak first of the growing view that the international crisis, which began in July 1997, is substantially over. There is no doubt that the crisis is less severe by a reasonably large degree than it was last fall, but it surely isn't over. I believe Japan has made virtually no progress in restoring growth and has increased its public sector debt to a level that is dangerously high, especially considering the strains on the Japanese public sector that their aging population will bring in the very near future. At our last meeting I raised a concern about what I called in China as a sign that the massive economic restructuring of the state-owned enterprises is not going as well as Premier Zhu Rongji had hoped. The orchestration by the government of the very strong response to the bombing of the Chinese Embassy in Belgrade heightens my concern. I believe that the leadership felt--for some reason not connected with the restructuring but rather to the happenstance of a memorial date in Chinese history of a student uprising in the last century on the fourth of May--that they had no choice but to allow the young people to demonstrate. But the size of the demonstration I believe also indicates that the leadership felt they had to use it to let off pressure from the domestic situation. And that makes me even more concerned. Korea is growing, but unfortunately one of the results of the growth has been that the restructuring of the Chaebols, which is absolutely necessary for the long-term health of the economy, is very much less certain. And in the best of cases it will not be as complete as one might have hoped it would be. Thailand's recovery is spotty even though it is slightly positive. But the principal author of the recovery, the finance minister, seems to be in increasing political jeopardy. Europe's growth is sluggish at best, with Germany very weak. As for Russia, even with a bit of luck, I think the most we can hope is that it will hold itself together financially and politically until the very uncertain outcome of the Presidential and Congressional elections next year. The performance of the domestic economy I think gives us a difficult, if delightful, challenge, perhaps especially in how to describe it. Until last Friday's CPI the performance of the economy had been characterized by good, solid growth fueled by productivity. Now outside economists talk of growth as being somehow dangerous. But it seems to me that our job as central bankers is in fact to seek sustained, noninflationary growth. In this regard, I think we have to be rather careful in our public speeches and statements to remember that we know a lot more than our audiences do. We have to be very careful to note that the enemy is inflation. It is not solid economic growth and it certainly isn't people finding jobs. Now, what does last Friday's report of an increase in the core CPI tell us? Clearly there is a lot of noise in the data, and one could decide to dismiss them and just wait for another month to see what happens. However, we've tried to take apart the data statistically to see if there is any considerable likelihood that an increase of that amount could be giving some sort of signal that we ought to be concerned about. And we've come to the conclusion that the statistical probability is sufficiently high that the increase actually is telling us something important that I believe we definitely have to take it into consideration in our discussion of policy. Thank you, Mr. Chairman.",923
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. At the last meeting, and indeed for some time before that, it seemed that the risks to the outlook were balanced, with a slow, steady drift to the upside. That continues with little sign of a significant moderating trend setting in. Like others, I have been expecting such a shift for a long time, but I would like to be more confident than I am now that it will emerge spontaneously. Industrial production has resumed vigorous growth. We've continued to generate a quarter of a million jobs per month, which is wonderful of course. Inventories are low, and major cyclical swing factors like housing, autos, and capital spending, which should have eased before now, simply have not done so. Of course, I should note that we have some contrary news on housing this morning. The stock market continues to create wealth. Inflation remains remarkably quiescent, but here again I would like to be more confident that this will continue. The April CPI was a jolt of yet to be determined significance. But beyond that commodity prices may have begun to turn and, of course, energy prices already have turned up. Foreign growth should improve and will have an impact on commodities and other import areas. And unemployment in the United States, driven by demand pressures, appears to be headed to 4 percent or lower. The magnificent productivity gains of recent quarters, even if they are largely continued, cannot be depended upon to hold these forces at bay indefinitely. At the last meeting two factors seemed to inhibit the Committee from considering any action and both of those have dissipated. Six weeks ago any change by the Fed would have been a great shock to the market, but not today. The Balkans was an important unknown then but, for better or worse, it now appears to be headed for a stand-down. To be sure, there are still downside risks and we have no clear and present inflation danger. And we could bask in this virtuous cycle for some time yet. The question before us, of course, as it has been, is how best to help prolong this excellent economic era for as long as possible. The emergence of an inflationary surge with some gain in momentum would surely mark the beginning of the end of that. No actual move would appear to me to be required today, but it may well be time to assess how best to start leaning into the wind. Thank you.",484
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. For the last few meetings, I have been trying to determine rules of thumb or guides for how we should be making our decisions. The Taylor Rule, a favorite of many academic economists studying monetary policy, does not work well when it is difficult to define operating targets for inflation or unemployment. As we have discussed often in this room, this difficulty may now be showing up particularly with respect to the unemployment term, given the problems in identifying the NAIRU. One could make a case that the NAIRU is 6, 5, or 4 percent. There are several substitute approaches. One is just to drop the unemployment term from the Taylor Rule, in which case the rule becomes an inflation-targeting rule. Under this modification, the Fed would move against inflation deviations or in the present circumstances accelerations of inflation. Another approach, which I have championed here, is to go to a change rule. Assuming both inflation and unemployment are in their desired band, the Fed would try to lead the growth in aggregate demand to be equal to the long-term growth in aggregate supply. This rate used to be about 2.5 percent per year, but now may be as high as 3.25 percent if one is a productivity optimist. A third approach is Bob Parry's nominal GDP standard. I haven't thought about that thoroughly, but I think most of the time that would give the same suggestion as my change approach. Whatever the approach, I felt we were in policymaking equilibrium up to our last meeting. As long as inflation was not accelerating--and it did not seem to be seven weeks ago--the inflation-targeting approach called for no change in the funds rate. As long as the forecast rate of growth in aggregate demand was under 3.25 percent, as it was then, the change approach did not either. But seven weeks can make a difference. The recent bad news on the CPI, even if one adjusts for special factors, suggests a possible acceleration, as do the balance of the Reserve Bank anecdotes. But the news on inflation suggests only a possible acceleration because the numbers are for only one month and anecdotes are anecdotes. Yet, there is a definite new inflation threat in the data. The change rule is also pointing differently because the Greenbook growth forecast now averages slightly above 3.25 percent until this growth is contained later on by a rise in the funds rate included in the baseline forecast and by Y2K. The Blue Chip forecasters are even more out of line. Their forecast rate of growth is 3.8 percent, even further above the long-term trend. We focus on the disturbing CPI numbers, but in fact it is true that a number of additional signs are beginning to point in the direction of a tightening of policy. This reasoning is either based on very recent information or on forecasts, so I suppose there is some time before we have to act, but not too much. As has been pointed out often in this room, the good recent performance of the economy is no doubt due partly to a feeling that the Fed will move against inflation. We risk losing this credibility if we tarry too long. There are strong arguments for doing something pretty soon, perhaps a modest step but a clear step. The market seems to expect us to and we'd miss Jack Guynn's window of opportunity if we didn't. Let me address one final matter. Suppose we move; does this box us in? If we were to take the modest step of introducing a tilt, in more than half the recent cases an upward tilt was not followed by a rise in rates. So I don't interpret that as boxing us in. If we took the more drastic step of actually raising rates, we might find that a bit harder to undo; but I would still repeat an argument I have made here before, which is that a huge policymaking advantage for monetary policy is its flexibility. We could take advantage of this flexibility. So, I personally do not find the box-in argument very persuasive. Thank you.",814
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I, like others, have come to recognize that the forecast outcome is quite desirable, but I think the risks are really to the upside. A number of people have already talked about the CPI. I agree with Mike Prell in that the latest CPI number does not to me indicate that the day of reckoning has arrived. If one looks at the details, besides apparel, owners equivalent rent, lodging away from home, and airfares seem to be the drivers, along with the category called ""other services."" None of those is unimportant, but on the other hand they don't necessarily suggest that inflation--or if you will, the wolf--is at the door. To go to another view, there are some straws in the wind that I think we do have to be focused on. First obviously, as Governor Gramlich has indicated, almost regardless of what one thinks the NAIRU is, it is probably somewhat higher than 4.2 percent. Therefore, one should expect some increase in labor costs at some point. The most recent ECI would not bear that out, but that index was obviously driven in part by the fact that commissions and bonuses turned down, perhaps because of a slowing in some of the underlying activities. On the other hand, a complementary measure, the NIPA measure, showed quite an increase in labor costs, and I don't think we can necessarily reject that. That is at least one of the cautionary flags that labor costs may be rising. The other thing that one might look at, of course, is the aggregates; a few others have talked about the behavior of the money supply. I was looking at commercial bank credit, which showed strong loan growth across the board in the fourth quarter of last year and continuing, though somewhat abating, growth in the first quarter of this year. There clearly seems to be a great deal of demand for credit out there and, indeed it turns out, a great deal of availability of credit. If one looks to the international side, I also think some of the risks that we have been most concerned about have abated. The fat tail that we were concerned about at the end of last year has become a lot thinner. I agree fully with the Vice Chairman's comment that the difficulties abroad certainly are not over yet. All things have not settled down internationally, but a start has been made. If one looks at the stripped Brady bond yield, there is some indication, at least from the markets, that they expect some turnaround in that area. One might also look at import prices and at the BLS indicators. All suggest, particularly industrial supplies and capital goods, that the decline in import prices has bottomed out. It is a forecast in some cases, but I think it's a reality as well. So that is another one of these trends. President Minehan and others have talked about increases in the prices of a number of different commodities. Indeed, if one looks at spot prices, those are pushing in the same direction. I strongly agree with the comments that the Vice Chairman made. I don't think it is our job to lean against growth; I don't think it is our job to stop the creation of jobs or the creation of wealth necessarily. But I believe that we do have to be concerned about how nominal GDP is split between solid, sustainable growth versus inflation. And my concerns now are that the risks are moving a little more to the inflationary side.",697
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I continue to be impressed by the recent exceptional growth in productivity. The case for an increase in trend productivity growth is now more compelling after the strength in productivity over the last five quarters--and especially after the last two quarters--than it was based on the data for 1996 and 1997. And I believe the staff's pattern of incremental upward steps in trend productivity growth makes sense, with some acceleration in productivity beginning in late 1995 and a further acceleration in 1998. My problem with the staff forecast is that its projection of a 21/4 percent productivity trend over the forecast period is just too aggressive for my taste. This revision to the productivity forecast basically drives their entire forecast. It allows a significant upward revision in growth over the two-year horizon with little effect on the unemployment rate and, hence, on inflation. It is important to note, however, as the Greenbook makes very clear, that the revision of the productivity trend delays but does not remove the day of reckoning that is still implicit in the staff forecast. It is interesting that this ""day of reckoning"" seems to have become the theme of this meeting. The tight labor market gets still tighter. The favorable price shocks are still dissipating further. Ultimately, the very tight labor markets and the dissipation of supply shocks put inflation on an upward trend. This is an important message. Growth does not cause inflation; excessive utilization rates do. But another unexpected shift in the productivity trend, as assumed in the Greenbook, imparts another disinflationary bonus and allows rapid growth to be accommodated for a while longer with relatively stable inflation. My less optimistic assessment of the underlying productivity trend essentially moves forward in time the rise in inflation that current initial conditions make so likely. I do believe that we are at an important turning point in this episode. Inflation, after falling throughout the last few years, is stabilizing in the near term, I believe, and is poised to move higher going forward. That's how I read the recent CPI data. The continued favorable financial conditions and high level of consumer confidence are helping to sustain robust demand. While I still expect growth to slow somewhat going forward, I believe it is more likely that growth will be above trend than below trend in the near term, and that growth will not spontaneously slow enough over the forecast horizon to prevent a rising trend in inflation. It might be useful to recall the forecast that motivated the easings in monetary policy last fall. At our September meeting, the staff projected a 1.2 percent growth rate in 1999, assuming an easing in monetary policy. The current staff forecast has growth almost three times as fast. The unemployment rate by this point was projected to be 43/4 percent, 1/2 percentage point above where it is today. It was projected to rise toward 51/2 percent by the end of 2000, 11/4 percentage points above the current forecast. And equity prices have rebounded by about 40 percent from their trough in early October. To be fair, the other major developments since the September forecast were the much-sharper-than-expected increase in productivity growth in 1998 and the upward revision to trend productivity going forward. Productivity growth over 1998 turned out to be almost double what the staff projected at the September meeting--2.7 percent versus 1.5 percent. And the trend productivity assumption is 1/2 percentage point higher now in the staff forecast than the 13/4 percent assumed at the time of the September meeting. One question we have to ask is whether we have become sufficiently optimistic about the productivity trend going forward to justify keeping in place the full amount of the decline in the federal funds rate that was motivated by a forecast that has since been so significantly revised and by a set of financial conditions that have so dramatically improved. The second question we have to ask is whether we should maintain the current policy setting for the funds rate if growth continues strong and labor markets tighten further while inflation remains steady in the near term and is projected to increase thereafter. I will pick up from here in my policy position statement.",841
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"I was quoted in a recent New Yorker article, one of the flood of articles on our Chairman and the new era, as being ""mystified in a pleasant way by the recent performance of the economy."" I think that describes the mood that has captured this group for quite a while now. Now, we weren't mystified about everything. Much of what was happening was explainable: the global pressures on commodity prices; the decline of agricultural prices; and the weakness of exports to Asia, which now seems to be turning around. Much of the domestic growth was explainable: the strength of consumer demand as employment and incomes rose and stock prices soared; the housing boom as interest rates fell; the durables boom as people furnished those houses and bought new cars. Also explainable was the downward pressure on prices from the strong dollar and commodity prices--that fierce global and domestic competition. Other parts of the puzzle seemed less clear, basically pleasantly mysterious. Why was wage growth so subdued in the face of labor market tightness and the persistent anecdotes around this table about reported wage increases and shortages of workers? Above all, why did productivity accelerate so rapidly in the last two quarters? There were plenty of plausible reasons, but no certainty that the reasons were the right ones or that they would last. There were cyclical factors, capital deepening, the timing of the technology revolution, and new management skills and attitudes. None of it was very conclusive but the numbers were there. Through all the pleasant mystification, our collective common sense kept saying things like ""good things don't last forever."" Some of the positive forces, such as the strong dollar, will turn around--supply and demand laws still work. Eventually we'll run out of workers and wages will push up costs and/or consumer prices will begin to rise for some exogenous reasons--oil or whatever--and keep going up. And then we must be prepared to act. Are we at that point or close to it? The CPI is worrisome, but it's only one month's number and we are used to a good deal of volatility in that measure. Cost factors still seem quite benign. Wage growth, though, is not accelerating, at least in the statistics. Productivity is on a roll. The ECI still seems to be coming down with profits rising. Market alarm at the CPI has sent long rates up a bit more, to do our work for us. So the question is: Do we need to reinforce this with a hint or a tilt? I would be inclined to wait, but I can see the case for telling everybody that the Fed is awake.",523
-fomc-corpus,1999,Thank you. I think coffee awaits!,8
-fomc-corpus,1999,Mr. Kohn.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. At your last meeting, many of you remarked that you were concerned that inflation would eventually turn up and you therefore saw monetary policy as more likely to firm than to ease, though you weren't sure when such action would be appropriate. The question for today's meeting would seem to be whether the time has drawn closer--perhaps even close enough to tighten or, at least, to shift to an asymmetric directive and let the public know right away that the Committee's concerns about inflation had increased significantly. Many of you may view the period ahead as an especially important one for the inflation outlook. As Mike noted, some of the one-time price declines that have played a role in damping inflation are expected to be ebbing or reversing. Among them, energy prices have already risen substantially, the prices of other important commodities have turned around lately, and declines in other import prices should come to an end as the effects of a more stable dollar since last summer and strengthening in foreign economies are felt. How domestic inflation responds to these developments may help to resolve questions about the causes of the recent inflation performance. And the decision you make could be important in determining the degree to which these price level changes become embedded in inflation expectations, thereby affecting longer-run inflation trends. However, judging the need for a change in the stance of policy has been complicated by uncertainties about the supply side of the economy and the associated lack of confidence in forecasts of inflation. Preemptive actions that turn out to be unwarranted would tend to create unnecessary variations in economic activity and increase uncertainty, impeding planning by businesses and households and impinging on economic growth. At the same time, however, waiting for compelling evidence of an actual upturn in inflation before changing policy also would lead to sizable adjustments in financial conditions and economic output. In the circumstances, the Committee presumably will want to be as forward-looking as possible, searching for early signs of changes in inflation prospects and acting, perhaps forcefully, when it detects tendencies that could reasonably be expected to impair economic performance over time. Since the last FOMC meeting, developments on the demand side of the economy would seem to weigh on the side of greater concern about future inflation. Demand has been strong and economic growth has continued at a pace in excess both of prevailing expectations and of most estimates of the long-run expansion of potential. Moreover, indicators of a prospective moderation in spending are still quite tentative. Unless productivity is even stronger than the upward revised estimates of the staff forecast, growth will have to slow appreciably from the pace of the last few quarters, if labor markets are not to come under increasing pressure. Changes in financial conditions over the last six weeks probably have not materially added to the restraint on demand needed to moderate expansion. Rather, the run-up in yields on Treasury securities in recent weeks seems to owe in part to the rolling back of the earlier flight to quality as investors appear to have reduced their concerns about risk and increased their appetite for assuming it. As a result, the nominal cost of business credit has remained about flat on average over the intermeeting period. And equity prices have climbed further, boosting wealth and spurring consumption. More troubling, the movements in Treasury interest rates likely also evidence some deterioration in inflation expectations, as yields on indexed debt have edged lower and the foreign exchange value of the dollar has slipped off some even as the interest advantage of U.S. nominal instruments has widened. Of course, some caution in interpreting this deterioration seems warranted. To some extent, you may only be looking in a mirror and merely seeing the market's perceptions of the Federal Reserve's concerns, rather than an independent assessment of emerging price pressures. In addition, inflation fears may not have penetrated Main Street, where the spending decisions are made, judging from the lack of movement in price expectations in the Michigan survey. But those judgments are difficult, given the inertia in household decisionmaking and the lags in surveying. Lastly, developments in international markets may also suggest the increased potential for greater inflation pressures. At a minimum, the resilience of foreign markets and economies suggests that the asymmetrical downside risks that concerned the Committee last fall have greatly diminished. As already noted, the dollar has edged off recent highs in the exchange market; a persistence of this trend would put upward pressure on prices and demand in the United States, reversing the stabilizing role that the strong dollar and deteriorating trade balance have played over the last several years. For now, the relatively flat dollar means that productive resources in the United States will not be shielded from the additional demand brought about by policy easings and returning confidence abroad. As a consequence, the staff forecast now embodies a sustained growth in exports. But, the economy has demonstrated a remarkable capacity to absorb demand without generating cost and price pressures. Four percent growth in output over the last four quarters has barely nudged down the unemployment rate. Moreover, some broad measures of nominal wage and price increases fell further through the first quarter. The extraordinary increase in productivity that has enabled demand to be met without appreciably lowering unemployment has also helped to keep cost pressures subdued. Unit labor costs show no sign of picking up, despite an unemployment rate at or below 41/2 percent over the last year. Moreover, except for energy we have seen only small and very recent increase in the prices of commodities and intermediate goods in the pipeline. If, in light of this mixed evidence, the FOMC does not wish to tighten policy at this time but still sees the inflation risks as having risen, the Committee should consider whether to adopt an asymmetrical directive toward tightening and whether such a directive should be announced. It is difficult to predict how markets would react to an announcement that has no precedent. And details will matter in that the response will depend in part on the wording of the associated announcement. The market's reaction will be influenced by the height of the hurdle the Committee set for itself when it reaffirmed its disclosure policy. The Committee said it would reserve such announcements for significant shifts in its thinking, especially where the absence of an announcement risked seriously misleading the public and the markets. With the bar set at that relatively high level, the market is likely to build in substantial odds on tightening at the June or the August meeting if the Committee announces a tilt, perhaps on the order of 50-50. Friday's data moved market participants in the direction of expecting an announcement of a tilt today and raised their assessment of the chances of policy firming in coming months. But market prices do not yet incorporate 50-50 odds of a tightening until the fall. The Committee may well be in a situation in which, because of its announcement policy, it cannot leave markets unaffected by its decision today, even if it follows the strong market consensus and makes no change in the stance of policy. Announcing the Committee's heightened concern about inflation is likely to raise rates; omitting such an announcement is likely to lower them. If in fact the Committee is now more concerned about inflation and hence more likely to give serious consideration to tightening at the next few meetings, it might consider adopting and publishing an asymmetric directive. In the context of greater inflation risks, the resulting further back-up of yields and restraint on equity prices would tend to contribute to economic stability; a reversal of recent rate increases and equity price declines would be counterproductive. Indeed, not publishing a tilted directive might be seen as misleading markets in that it would lead to a structure of market interest rates that inadequately reflected the Committee's assessment of the economic situation. A tilt would be taken as indicating that the Committee might be especially sensitive to information suggesting that price pressures were likely to build. With the markets on notice that policy action was under consideration, responses to incoming data are likely to be relatively intense and markets volatile. But, to the extent participants understood your concerns and hence could anticipate your actions reasonably well, the resulting price movements should be constructive and stabilizing, on balance. If, on the other hand, the Committee were not so sure inflation risks had risen appreciably, it might choose to retain the symmetrical directive. The Committee might be hesitant to act before it had more concrete information that prices were likely to accelerate. Such evidence could come from data on costs and prices or from added pressures on resources-that is, a further decline in the unemployment rate. Because neither of these sets of indicators has moved much of late, the Committee might believe that it was unlikely to get definitive enough evidence in the next few months on these pressures to take action. If this were the Committee's view, then publishing a tilted directive and encouraging the market to build in expectations of tightening could ultimately be misleading and could lessen the power of asymmetry to convey information over time. Indeed, some rally in credit markets, which would be expected to accompany no announcement, might well accord with such a less concerned view of the inflation outlook, particularly if the Committee saw the sharp reaction to Friday's data as overdone.",1791
-fomc-corpus,1999,Questions for Don?,4
-fomc-corpus,1999,"Don, since you spent a fair amount of time on whether we should go asymmetric or symmetric, my question has to do with the wording in the directive that relates to the tilt. The way the current wording reads, the tilt applies to ""the intermeeting period;"" it does not say that we might act on the tilt at the next meeting or the meeting after that. How important is the fact that it is confined to the intermeeting period and not longer term in influencing your thinking of whether we should put that language in the directive?",107
-fomc-corpus,1999,"The Committee has discussed at length whether it should change the wording in the directive to be less specific about the intermeeting period and has had trouble finding a consensus about how to make that change since everybody seemed to have a different interpretation of the meaning of asymmetry. I think that problem could be handled in the announcement that accompanies a shift to asymmetry if that's the way you choose to go. First, I wouldn't mention the words ""over the intermeeting period"" in the announcement; secondly, I might put in wording about looking at information ""over the coming months."" If the announcement is clear, I doubt that people will care about the specific wording in the directive.",133
-fomc-corpus,1999,"Further questions for Don? If not, let me get started on the policy side. I would like to differentiate between history and forecasts. The history at this particular stage, with only very slight variations that have surfaced anecdotally in the last two or three weeks, is unequivocally that of a period of declining rates of increase in unit costs. In fact, the numbers for the nonfinancial corporate sector have gone down to zero change in total unit costs over the four quarters ending in the first quarter of 1999. I don't recall a four-quarter number that low in the current expansion. The zero change reflects quite subdued growth in unit labor costs and a decline in the level of unit nonlabor costs. Prices generally are flat, but they have been associated with a rise of modest dimensions in profit margins, on average, in the past few quarters. In the manufacturing area where we have data through April, we see similar results in that unit costs remain very subdued. Indeed, the monthly numbers on costs are quite soft and profit margins were rising significantly further in April. All the reports on projected profits that we pick up from security analysts point to an improvement in the second quarter. I don't mention that as a forecast but as a report of what people are saying. The data indicate that productivity continues to accelerate. Indeed, we have very little evidence as yet that the upsurge in cyclically adjusted productivity has leveled out. The first sign that that is occurring may be reflected in the long-term earnings forecasts of the security analysts, which as you know have moved up about 2 percentage points. The earnings forecasts and productivity growth rates may differ, but the two are interrelated. Because we are talking about a forecast with no change in labor's share, an increase in expected earnings over five years has to show up either in an acceleration in the rate of inflation, in the rate of productivity growth, or in the rate of hours growth. The latter is extremely unlikely, strictly as a matter of demographics. There is very little evidence to date of a pickup in inflation expectations, and until very recently the notion regarding pricing power in the business sector has been uniformly that it is zero. Theoretically, it is possible that foreign affiliates are increasing their share of the earnings. But given what has happened to oil, that seems doubtful. Therefore, we are led to the conclusion that the earnings expectations are essentially projections of productivity growth. The rate of growth in productivity has been rising during the past several years. In the past two or three months, however, we have seen some indications that the growth rate might be leveling out. That suggests that companies are no longer telling security analysts that productivity growth is on an ever rising trend. If we look strictly at the current data, what we end up with are increasing profit margins and noncredible reductions in the rate of increase in average hourly labor costs. The latter come from the figures on aggregate wages and salaries in the NIPA data divided by hours or they come from the average hourly earnings in the payroll data; both show a very dramatic drop in the rate of gain in average hourly labor costs. I believe it was you, Roger, who was raising the issue of the NIPA data; those data are obviously picking up a larger aggregate hours figure. The trouble with the NIPA data is that we are dividing an uncertain numerator by an uncertain denominator, and the result is perfection!",685
-fomc-corpus,1999,That's a fair point.,5
-fomc-corpus,1999,"The trouble unfortunately is that, as a number of you have commented, the ECI cost data are probably not picking up a number of the nontraditional ways of paying people--training costs, stock options, and a few other forms of compensation. But leaving aside the uncertainties that are involved in measuring wages, the interesting issue is why wages are not rising faster if productivity is doing what all the evidence suggests it is doing. We have a unique anomaly. Nonetheless, granted all of this, we still have erosion in the pool of people seeking work who do not have jobs. To be sure, that number has not gone down as fast in the last year as it did in preceding years, but it is still going down at a 500,000 annual rate. That is a substantial decline. The current level is at or below its previous low in the history of this series, which goes back to 1970. We know that has to have inflationary consequences at some point even if the acceleration in productivity has damped the influence of tight labor markets on wage increases. I also find a bit of an anomaly in the anecdotes concerning what is happening to prices. A number of you have referred to anecdotal reports that it is now easier to raise some prices. I suspect that may be right, given the extent of overall vibrancy in this economy. Nonetheless, participants in the Business Council meeting in Williamsburg said the other day that such pricing behavior absolutely was not occurring and that they had not seen it for quite a long period of time. I don't know whether that phenomenon is just starting to be built into the pricing structure. There is some evidence that commodity prices may have tilted up to some extent after declining earlier and then flattening out. Copper and aluminum prices are up modestly, but they are well beneath their recent highs. Steel scrap prices are little changed. It is hard to find anything resembling upward price pressures on non-oil commodity prices. Nonetheless, I can't get away from the fact that the growth in aggregate demand still exceeds the rate of increase in productivity and is continuing to put pressure on the system. I find it very difficult to uncover any useful evidence that suggests the increase in aggregate demand is slowing. Obviously, we are absorbing goods from abroad at an unprecedented pace. This situation could go on for a while, as Governor Kelley has said, but credulity gets strained more and more the longer it goes on. It is hard to avoid the conclusion that there is an increasing imbalance here that we have to address. While I am not ready to move rates, I do think that those of you who have raised the issue of moving to a tilt toward restraint have the arguments strongly on your side. And if we do go to a tilt in this particular environment, I can't see how we can avoid announcing it. I think failing to do so would be exceptionally confusing to the market. As far as I can see, we do not have strong evidence of rising inflation, especially if we move away from what I consider to be a flawed consumer price index. If we look at the implicit PCE deflator, the numbers don't look as bad. Indeed, the April rise in the PCE deflator is 0.3 for the core and 0.5 for the total. The three-month average for the core PCE is a rise at an annual rate of 1.1 percent. This is not evidence that somehow we are far behind the curve, that inflation pressures are mushrooming, and that we had better move. I see very little to be lost at this stage in going to an announced tilt except perhaps in using a tool that we might be able to use more effectively later. What it does in my view is to position us to move in light of a lot of small indications in the CPI that may suggest a rise in inflation. I suspect that is the case but I do not know for certain. In other words, even adjusting for the measurement problems in the CPI with regard to the abnormal weight that it puts on apparel and on owner-occupied rents, there are indications in the latest numbers that the decline in inflation is coming to a halt. There is very little evidence that I can see that the rate of inflation is still moving down. But we also have seen very few, if any, signs that it is turning up. And therefore I think we will be in a position where we can move if necessary at the next meeting or the meeting after that and not be caught by what I consider to be a relatively low, but by no means zero, probability of having to move suddenly. We have been in a situation for so long where we have seen labor markets tighten continuously with nothing happening to prices that we may lull ourselves into the belief that markets don't turn quickly. They have turned quickly in the past. Such behavior will not show up in our models largely because models, by having fixed coefficients reflecting average characteristics, cannot produce a rapid change. But markets can. And even though I think such an outcome has a low probability, I believe it finally is time for us to start to position ourselves. I am far from convinced that we will need to act on an asymmetric directive in the near term. But not having such a directive in place and then being forced to act by events that come upon us fairly quickly, which may mean acting during an intermeeting period, could in my view create market forces that might ultimately be destabilizing. So while I sense that it is definitely premature to move rates, it is by no means premature to move toward a tilt and to announce it as well. Vice Chair.",1127
-fomc-corpus,1999,"Mr. Chairman, I fully support your conclusions and the associated reasoning. I believe it would be very ill advised to raise rates today. Such a move would be taken as a knee-jerk reaction to the CPI number regarding which all of us have some questions. But to fail to adopt an asymmetric directive toward firming also would be ill advised, and it would be very ill advised not to publish such a decision. Oddly enough, by publishing a tilt toward tightening, I think we actually will have more flexibility. It is not necessarily the case that we will in fact have to tighten, though I am a little more inclined to think we will have to do so than you just suggested, Mr. Chairman. But I believe adopting a tilt and shocking the market without preparing it would create some very serious problems for the economy, which we can easily avoid by announcing the tilt.",176
-fomc-corpus,1999,Governor Rivlin.,4
-fomc-corpus,1999,"Mr. Chairman, I agree with your proposal. I don't see strong economic reasons for not waiting another month before making your proposed change even though only a tilt is involved. After all, the only really disturbing economic news is the core CPI for one month. But we may have to move in the next few months and, if so, I have concluded that psychologically there are some good reasons for moving to a published tilt now. Indeed, if a slowdown in the expansion is in prospect and we reinforce its probability with the higher rates and lower equity prices that might follow our announcement of a tilt, the markets may do our work for us and we may not have to move at all.",136
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, what you are proposing is certainly a step in the right direction, but my preference would be to go ahead and move the funds rate up 1/4 percentage point today. I would respectfully disagree with Bill McDonough about the interpretation of such a move as a knee-jerk response. Some people might read it that way, but I really don't think it has to be seen that way. As I have said at some earlier meetings, I believe there has been a case for tightening our policy for some time now on a lot of different grounds. We have talked a lot about productivity trends at this meeting. To me it seems increasingly likely that trend productivity growth is rising. Some may see that as a reason to stand pat on policy, but higher trend productivity growth will lead at least some households and businesses to expect higher incomes in the future. Some are going to try to act on that expectation now by borrowing to increase their spending even though the actual increase in output is not yet available. In that situation, interest rates need to rise to keep demand from becoming excessive. The extraordinary growth in domestic demand of late seems clear if one looks at a measure like private domestic final purchases, which grew at an annual rate of 71/2 percent in the first quarter after growing at a rate of 61/2 percent last year. That has to be above any reasonable estimate of the sustainable growth in output, and it is one reason for tightening policy. Beyond that, as Governor Meyer mentioned earlier, when we last reduced the funds rate in November, I believe a lot of people around this table saw that move as extra insurance, so to speak, against the possibility that the financial difficulties we had experienced would undermine the general economy. Those fears clearly have not materialized, so I think there is a case for taking back that last rate reduction. With regard to the CPI for April, again it is only one number. But it comes at a time when we are already on the lookout for rising inflation on the basis of a variety of other developments and at a time when financial markets clearly are taking the risk of higher inflation seriously. We have fought long and hard to win the credibility we now have, and going forward I think our credibility can be an enormously powerful weapon for keeping inflation under wraps at minimum cost in terms of lost output and jobs. I don't pretend to know exactly what we have to do now to preserve that credibility, but I have a sense that we need to show the flag, get back in the ball game--whatever metaphor you want to use--and to do so more decisively than by just moving to a tilt. So, I would favor alternative C.",540
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Your recommendation of announcing a tilt captures my sense of what we ought to do today. I think it strikes the right balance between showing that we are indeed awake at the switch and at the same time showing the appropriate restraint. Even more importantly, I believe it positions us either to act on the tilt in the future, should that be necessary, or not to act. But I do think it sends the right signal, and I fully support what you are proposing.",92
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"I support your recommendation as well, Mr. Chairman, and I would echo the comments that President Boehne has just made. I also identify with President McDonough's comment that we may get an added kick from the announcement effect since it will be the first time that we inform the public about a change in the tilt immediately after a meeting. In addition to the arguments that you made, I am pleased that such an announcement will not leave all of us vulnerable to having our individual public statements or even our body language picked apart over this next period. I think a leak would be a most unfortunate way for people to learn about a change in the tilt, and I see that risk as a very important reason to make the announcement. Thank you, Mr. Chairman.",154
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I felt last time and I feel now that we could appropriately identify an immediate move as an unwinding of our earlier effort to stabilize financial markets--an effort at which we were successful. I would prefer that explanation. At the same time, I would buy your recommendation today in terms of the tilt. I would be careful about what the announcement says with regard to the period to which the tilt may apply, whether it is the intermeeting period or some longer period, but I certainly would accept your tilt recommendation.",106
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I certainly concur with your recommendation. I am a little concerned, however, about the interpretation of the tilt. In my view the Committee should not feel that it locks us in to an early move. Everyone no doubt recalls that last summer our directive was asymmetric toward tightening for three meetings from late March until mid-August and we never did tighten. Subsequently, of course, we eased in the fall. Something unforeseen could happen again. We should be open to that possibility and remain flexible. One further thought, Mr. Chairman: I would hope that in our public statement we will de-emphasize the April CPI number and stress the underlying trends that I think are really motivating us.",143
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I support your recommendation for no change in the federal funds rate target and enthusiastically support your recommenda tion for a move to an asymmetric directive that would be announced after the conclusion of this meeting. The balance of risks in my view is toward continued strong growth, possibly even tighter labor markets, and ultimately higher inflation. As other members of the Committee have noted, a case could be made for an increase in the funds rate to reverse some of our easing during the fall in light of the upward revision to the forecast and the improvement in financial conditions since that time. It is especially important in my view for us to respond to any further tightening in labor markets or to any increase in inflation because I believe the unemployment rate is more likely to decline than to rise in the near term. And because I think it is more likely that inflation will be rising rather than falling over the next several months and quarters, I believe an asymmetric directive is appropriate at this time. Long-term interest rates have risen in response to the Chairman's recent speech and in response to the recent CPI and industrial production data. Some might argue that this rise in long-term interest rates alone provides a desired restraint and removes the necessity of Fed action. However, the rise in long-term interest rates reflects the expectation of bond market participants that monetary policy will tighten in the not too distant future, presumably in response to the considerations that I have just outlined. The bond market is in effect pricing in relation to the market forecast and our perceived policy reaction function. Such preemptive pricing in the bond market is in my view desirable and stabilizing, but it will occur only if we consistently ratify the expectations on which it is based when those expectations match our own. There has been some concern that the first time we move to a bias and announce the change will have an unusually large effect on the market. But today's meeting provides an opportunity to implement such a move with a relatively modest effect precisely because the bond market has already priced in some expectation of a near-term policy move. While there is very little or no expectation of a change in the federal funds rate target at today's meeting, financial market participants are to an important degree expecting the FOMC to move to an asymmetric directive. In fact, I would expect that the response to no announcement, which might be viewed by the market as implying that there was no change in the bias, might be greater than the response to an announcement of a change in the bias. Thank you.",502
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Mr. Chairman, I too think that your recommendation is a step in the right direction. But, like President Broaddus, I would be more comfortable with an increase of 25 basis points in the funds rate that would in effect undo the last decrease that we made last fall. I think such a reversal could easily be justified in our public statement without reference to the CPI increase; we could say that it reflects the stability--in fact, the improvement--that has occurred in our financial markets since last fall. Looking back to a year ago, we had an asymmetric directive toward tightening for three months or so, as Governor Kelley has reminded us. We were facing an outlook at that time that we never expected to be as good as the situation we are facing now. We have witnessed a recovery from many of the problems that the economy was experiencing during the fall. I for one hope they cannot be repeated, at least in terms of their seriousness. At this point I think we are looking at underlying levels of demand and labor market pressures that are far greater than those we were seeing last year at this time and a monetary policy that is definitely easier. So in my view there is a good case to be made for increasing the funds rate and taking back that last decrease. If we go ahead with the tilt, which appears to be the likely action at this meeting, I agree that announcing our decision would be desirable. Don Kohn made one striking comment, I thought, about the fact that there would undoubtedly be a rally if we did not make an announcement. That is the last thing we need at this point. So, if we go ahead with the tilt, we definitely should publish.",338
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I support your recommendation. The most important thing to me in all of this is that we make an announcement because I believe it is very important at this stage that we give the public some sense of our thinking in the current environment. I would second Mike Kelley's emphasis on inserting some thoughts in that statement about longer-term trends as opposed to focusing on the latest CPI number.",82
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"I support your recommendation, although I still hope we won't have to follow through anytime soon. Also, I don't see why we couldn't make a modest change in the directive to refer to the ""coming months"" rather than to the ""intermeeting period.""",50
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I believe that the reference to the tilt needs to be announced this afternoon. That is the correct thing to do. I also associate myself with those who believe that a modest firming should be put in place now. I'd like to talk briefly about the analysis that underlies my views on policy. I don't think there is any question that financial conditions are accommodative as measured by money growth, the ease of financing in markets, and the behavior of the equity markets. The issue is how fast the economy can grow, assuming there is an ample amount of money. We have talked a lot about productivity, but I think it is important to keep in mind that one thing that economic theory tells us about productivity growth is that it determines the gap between wage growth and price growth; it does not determine the level of either one. With the uncertainty about productivity growth, I believe we ought to be splitting it about down the middle. That is, if we have a favorable upward surprise in productivity growth, we should let half of it go into wages and half of it come out of prices rather than try to hold price inflation where it is and let it all show through in faster wage growth. There is an argument for taking some of it out of prices. In any event, there is no question that the outlook for productivity is subject to a great deal of uncertainty going forward. There are lots of different ways of formulating this. To make it very simple and straightforward, if we look at this in terms of a Phillips curve issue, there is a lot of concentration on growth or on the gap or whether the natural rate of the NAIRU has changed. In fact, I think the expectations component of the Phillips curve is at least as important and that the best way to understand what has happened in the last couple of years is to say that expectations have trumped the gap. The reason that we have been able to run an economy as well as it has unfolded is that there have been firm expectations of continuing low inflation. But expectations will not continue to trump the gap forever. The underlying realities of the pressure on resource markets will gradually take hold; and once we lose the advantage on expectations, I believe it is going to be painful and difficult to get it back. So, my policy recommendation stems to a large extent from the view that allowing any substantial risk that price expectations will get away from us is a very great risk to run. In the staff's inflation forecast--though we can always quibble over the point estimates here because we all know what the standard errors are--I think the probability of an outcome 1/2 point higher on the inflation rate is substantially higher than the probability of 1/2 point lower on the inflation rate. And given that assessment of the probabilities, it seems to me that we need an appropriate policy bias to reflect that bias in possible outcomes. If we do not tighten policy soon and if for whatever reason we are unlucky and the rate of inflation rises, we will then face the real risk that expectations will start to turn against us. We will find ourselves playing catch-up. And once the market comes to believe that we are falling behind, our effort to catch up is going to be very painful for the market and for us. On the other hand, if we tighten and inflation remains low, I believe it would be easy for us to reduce the funds rate later. That is part of the analysis underlying my view that to raise rates in present circumstances is in some sense a safety play. I anticipate a tightening trend. Some people have expressed the hope that we won't have to move, but for those of us who believe that some tightening is going to be required, I think we need to have some idea of how much that is going to be. That to me is important because once we are seen to be in motion it is possible that the markets will move long-term interest rates higher than we might consider justified. I think we are now at about the outer time limit of being able to make a credible case that we are simply undoing some of the policy easing from last fall. The more distant in time that becomes, the less credible it will be to appeal to that as a way of providing some cap on market expectations of where this tightening process might take us. But if we have some bad luck on some of the inflation numbers coming in over the next few months, I believe we will find it difficult to manage under those circumstances. And that is why I believe it would be better to get ahead of the curve now.",917
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, I agree with your recommendations of an asymmetric tilt and an immediate announcement. I am concerned about the high level of aggregate demand and the related outlook for inflation. It is important that we show we are concerned about inflation and are ready to take action. In my view, this step will help us to maintain our credibility. There were a couple of considerations mentioned by Don Kohn that I thought were important. He said if we change the tilt we should announce it if we think: (1) it is a significant change in our thinking; and (2) if the absence of this step would mislead the public. My assessment is that the current situation fits both of those criteria. So, I think it is important that we change the tilt and announce it right away.",158
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, since we met in March we have had a number of conflicting signals about the future course of core inflation. Taken as a whole, however, I believe there are upside risks to inflation, although they may not be sufficient to warrant an increase in the funds rate at the present time. I must admit it would not take much more evidence of upside risk to convince me to raise the rate. So, I would be enthusiastic in supporting an announced upward tilt to the directive at this time.",100
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I, like others, support your recommendation for a publicly announced tilt toward tightening. I believe the risks, supported by some very early signs in the data, are sufficient for us to change at least our tilt. In my view publicly announcing the tilt will give us sufficient room to move if the cost pressures do emerge, but they are not, as you observed, yet evident. That doesn't mean that we should wait until they become full-fledged inflationary pressures, but I do think we have a little more time. As others have indicated, the markets have already priced in some of this policy tightening, so we need not be concerned about an outsized reaction on their part, although there may be some as Don Kohn has indicated. Like others here, I would be concerned that if we don't move to asymmetry and announce it now, there might be an undesirable reaction in both the equity and the fixed income markets. Also, I believe not changing the tilt would, in fact, be viewed as an indication that we are not being vigilant to early inflationary signs and that might lead to some small erosion in our credibility. For all these reasons, I support your recommendation.",241
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. As probably everyone knows and as Peter Fisher's charts showed, the level of intermediate- and long-term government yields in May of 1999 is almost exactly where it was in May of 1998. So, in looking at nominal interest rates and the yield curve, we are right back where we were a year ago, and I thought policy was too expansionary then. I still am from the school of thought that believes a steeper yield curve indicates a more expansionary monetary policy rather than one that is less expansionary, and the yield curve is distinctly steeper today than it was a year ago. Governor Meyer said that the markets moved the rates back up in expectation of our tightening policy--raising the funds rate. I hope so because I don't like the alternative explanation. That explanation would be that the markets don't expect us to tighten, and for that reason interest rates have risen and will keep on rising. That would be especially disturbing. The shock of last August and September was exactly that--an external shock that is unpredictable by its very nature. Those things happen. They have happened before. For a time they lead the central bank to suspend the normal considerations that go into its monetary policy decisions. I strongly suspect that it happened to the Committee with the onset of the Gulf War in 1990. It certainly happened in the fall of 1987 with the stock market crash in October of that year. I dread all Octobers, and since we are having a meeting this October, I am going to dread it, too. [Laughter]",320
-fomc-corpus,1999,Let's all go away for October!,7
-fomc-corpus,1999,"Right, let us just skip October. But I still believe in long lags, in variable lags too, but especially in long lags. I think our policy stance on balance has been more expansionary than was necessary or desirable for the environment in which we found ourselves. I say that even though we would have had to interrupt the policy that I would have thought appropriate a year ago because of what happened in August and September. Now, we should get back on the track that we otherwise would have been on. We are not back on that track and in my view monetary policy right now is more expansionary than desirable. With regard to the issue of announcing a change in the tilt, I am bothered by the idea of saying we have cocked the gun but hope that we don't have to use it. That bothers me a lot. I don't like that practice in foreign policy let alone monetary policy, namely telling people that if one more thing happens--I don't know what that one more thing is--we are going to use this tool. Also, once we adopt an asymmetric directive and announce that decision--with the understanding that we are providing information about a shift in our thinking about policy--then I assume at a later point we would have to announce a decision to remove the tilt if we determine we will not use it. To do otherwise would be to misinform the marketplace. Announcing the adoption of a tilt and not being very clear about the circumstances under which we would or would not use it is in my view going to lock us into making further announcements. I am not sure whether such a practice will give better information to the markets or not.",333
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I'll support the notion of instituting a tilt and announcing it. I am very glad we established this disclosure procedure because I think it gives us the ability to communicate more clearly. I am sitting four-fifths of the way from you to Al Broaddus both geographically and policywise. [Laughter] I have something like four-fifths agreement with him and also with Bill Poole, Cathy Minehan, and Jerry Jordan that we should be raising rates. Four-fifths is not 100 percent so I won't dissent, but that's where I am.",121
-fomc-corpus,1999,"I think there is a consensus among the voting members in favor of alternative B asymmetric and an announcement. There is a question about the reference to the ""intermeeting period"" in the directive. I have a preliminary version of a press statement that we would use if the vote on changing to asymmetry is affirmative. It does talk about ""the coming months"" as distinct from ""the intermeeting period."" Does anybody have strong views as to what we might or might not do about the language in the directive on the presumption that we go ahead on the asymmetry? We have to decide that now because legally we have to vote on a specific directive. Don Kohn, do you have a recommendation as to how we ought to handle this?",148
-fomc-corpus,1999,"Well, as my answer to President Hoenig suggested, I think you could go ahead with the present wording of the directive. It strikes me that people may not want to change the wording on the fly but would prefer to have a chance to think about the pros and cons before reaching a decision. So the Committee may want to retain the current wording for now as long as the press statement makes the intent clear.",82
-fomc-corpus,1999,"Okay, why don't we just leave the directive as is, but leave the issue open in the event that we want to go further. So, read the directive as is.",35
-fomc-corpus,1999,"I am reading from page 13 of the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 43/4 percent. In view of the evidence currently available, the Committee believes that prospective developments are more likely to warrant an increase than a decrease in the federal funds rate operating objective during the intermeeting period.""",95
-fomc-corpus,1999,Call the roll please.,5
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes Governor Rivlin Yes President Stern Yes,45
-fomc-corpus,1999,"Let me read a proposed statement and get your reactions to it. ""While the FOMC did not take action today to alter the stance of monetary policy, the Committee was concerned about the potential for a buildup of inflationary imbalances that could undermine the favorable performance of the economy and therefore adopted a directive that is tilted toward the possibility of a firming in the stance of monetary policy. Trend increases in costs and core prices have generally remained quite subdued. But domestic financial markets have recovered and foreign economic prospects have improved since the easing of monetary policy last fall. Against the background of already-tight domestic labor markets and ongoing strength in domestic demand in excess of productivity gains, the Committee recognizes the need to be alert to developments over coming months that might indicate that financial conditions may no longer be consistent with containing inflation.""",161
-fomc-corpus,1999,That's good. It gets in all the elements.,10
-fomc-corpus,1999,Is that acceptable?,4
-fomc-corpus,1999,Excellent!,2
-fomc-corpus,1999,We will issue this at 2:15 p.m. Our next meeting is June 29th and 30th and we adjourn for lunch.,31
-fomc-corpus,1999,"Good afternoon, everyone. Would somebody like to move approval of the minutes of the May 18 meeting?",21
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,Without objection. Mr. Fisher.,7
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will be referring to the usual package of colored charts that is in front of you. 1/ Mr. Chairman and members of the Committee, four perceptions are currently influencing financial market behavior. It seems to me that each of these perceptions contains certain elements of truth but also, I fear, certain fallacies that could come back to haunt us. These perceptions are: First, that signs of a pickup in European growth are causing a rise in expectations for a European Central Bank (ECB) rate hike later this year; second, that the strength of the U.S. economy has been the major factor causing the weakening of the euro over the last six months; third, that the Japanese monetary authorities can be relied upon to stabilize the yen with verbal and official intervention; and fourth, that the levels of interest rates and of economic activity in the United States will be principally determined by the words and deeds of the members of the Federal Open Market Committee. In my remarks, I will address each of these perceptions in turn. In the charts on the first page of the package, you can see that the forward rates jumped a bit on the Committee's announcement on May 18 but stabilized or even rallied a bit until May 27 and then began to back up through most of June. I will return to the issue of the course of U.S. interest rates later when I discuss the bond market. For now, I would like to focus on the euro forward rates, which appear to have followed U.S. rates up. Euro-area 6-month and 9-month forward 3-month deposit rates are up 25 basis points or so since your last meeting. There have been a number of positive signs for the euro-11 economy, including greater-than-expected first-quarter GDP in Germany, increased German manufacturing orders, and improvement in German and French business sentiment. But some less upbeat data have also been reported in Europe, including an increase in German unemployment in May, a decrease in German retail sales in April, weak French exports in April, and weak Italian production in April. So, while some signs of a bottoming in the European economy have emerged, I don't think that translates directly into concrete expectations of an ECB rate hike. Rather, evidence of a slight pickup in activity coupled with strong expectations for U.S. rate increases, against the backdrop of a weak euro, have completely eliminated any expectations of further rate cuts by the ECB and in that sense have increased the risks of a rate hike. But this has left euro-area interest rate markets without any direction, leaving them highly susceptible to being dragged around by the movement in U.S. rates. Unfortunately, I did not include in these charts a panel on the German yield curve. But in the period since your last meeting the 10-year German bund and, most surprisingly, the 2-year German bund have marched along with our yield curve almost in lock step as they too have backed up over the last 60 days. It may turn out that the euro-area economy has turned and will pick up steam from this point forward, but most of the backup in euro-area interest rates appears to me to be a case of their following our lead. In the bottom panel of this chart, which depicts Japanese forward rates, you can see that the 9-month forward 3-month rate backed up following the report of a much stronger-than-expected GDP number for the first quarter. Then, it seems to me, the data go berserk in this panel. Even though we have checked and doubled checked them, this is the best we have been able to come up with. But you should also recognize that this scale is twice that of the other panels on this chart in order to provide any view at all of Japanese interest rates. There is a level of noise in the Japanese markets that I don't even pretend to understand. But I will hold with my assessment that I don't think anyone really expects the Bank of Japan to raise rates any time soon. There is much seesawing in views about what to expect in the Tankan survey. Every few days authorities step forward to say they still think the economy is weak, and this has been going on for some time. Turning to the next chart, the steady weakening of the euro against the dollar since its launch in January has been widely attributed to the surprising strength of the U.S. economy. Obviously, the relative strength of the U.S. economy versus the European economies has played a role in the movements of the dollar against the euro but it does not explain the weakness of the euro against the yen. It strikes me that if one wants to make the case that Europe's growth differential with the United States has been the principal cause of the euro's weakness, one needs to look at the relationships among all three currencies. If one does that, I think it is evident that the yen has been playing a dominant role, both in the last six months and over the last two years. In the third page of charts, the top panel presents a view of G-3 exchange rates from the dollar's perspective, depicting the value since January of 1997 of one dollar in terms of the euro in red and the value of one dollar in terms of the yen divided by one hundred in green. The bottom panel provides a view of exchange rates from the yen's perspective, depicting the value of one hundred yen in dollars, the green line, and the value of 100 yen in euros, the blue line. With the naked eye I think you can see that the yen-based pair in the bottom panel track each other much more closely than the dollar-based pair in the top panel. Comparing the correlation coefficients noted in the subperiods in the top and bottom panels, you can see that the only period in which the daily changes of the dollar pair tracked more closely was from January through April of 1997. From May 1997 onward, when the unwinding of the yen carry trades began to put pressure on the Thai baht, the daily changes in the yen pair have correlated much more closely. Now, neither of these graphs nor the correlations is proof that the yen is the principal driver of the G-3 exchange rates. But I do think the data powerfully suggest that the differences between North America on the one hand and Europe on the other are much less significant than the differences, as expressed in exchange rates, between Japan on the one hand and North America and Europe on the other. If euro/yen and dollar/yen are moving to the beat of one drum, there is only so much room left for independent expression in the euro/dollar exchange rate. Again, I certainly believe that differences in growth prospects between the United States and the euro-11 influence the euro/dollar exchange rate. But I also think that the weak Japanese economy and the crippled Japanese financial system have had an oscillating influence on portfolio allocations that in turn have had a significant impact on the major exchange rates--an impact that has been ignored by those who do not take the time to consider all three sides of the triangle. Turning to the fourth page of charts, the top panel depicts euro/yen and dollar/yen exchange rates as they have traded since the start of the year. The bottom panel shows the implied volatilities of one-month options on all three of the major currency pairs since the start of the year. Now, the third perception I mentioned at the outset was that the Japanese authorities can be relied upon to stabilize the yen with verbal and official intervention. The germ of truth in that perception is that the Japanese authorities have stabilized the yen so far this year, at least to some appearances. The problem is that the market's apparent reliance on the authorities' ability to do so is likely to be misplaced. On January 12, indicated by the vertical line on the left in the top panel, the Japanese authorities purchased And the shaded area on the right indicates the of dollar intervention and the of euro intervention the Japanese authorities conducted in mid-June. While there was a modest uptick in the implied volatilities, as shown in the bottom panel, what surprises me is how little and how short-lived that reaction was. Indeed, dollar/yen and euro/yen implied volatilities are back to their lows of the year. Anecdotal evidence from the market suggests strongly that many who have exposures are simply leaving them unhedged and that others are eager to write options and collect premiums, leaving themselves unhedged, all in the expectation that the Japanese authorities will keep the yen contained. It is possible that the yen will stabilize; I don't want to rule that out entirely. But I think it is more likely that the reliance on that expectation will simply delay the position adjustments--or worse, will encourage an entirely new round of yen carry trades. The fifth page of charts addresses the last perception I mentioned-that the levels of interest rates and of economic activity in the United States will be determined principally by the words and deeds of the members of this Committee. I should, of course, point out that there is an element of truth behind that perception also, particularly with respect to the predictable impact of the Committee's deeds on short-term rates. Within the last few weeks, in the absence of what we might normally think of as noteworthy data, it seems to me that bond yields have been pushed higher by a medley of unattributed voices. The top panel depicts several stages of the bond market's movements since your last meeting. First, I think it is worth noting that in the days following the Committee's announcement on May 18 the bond market rallied. The long bond rallied every day that week; along the rest of the yield curve other bonds backed up on the day after the announcement but rallied for the rest of the week. Now, in defense of the market, I don't think its initial reaction was unreasonable. After all, the 10-year Treasury had already backed up 50 basis points in yield from early April. I think the market took some pleasure in seeing that the central bank was preparing to react to the perceived risk of inflation but did not plan to do so abruptly or in a knee-jerk fashion. I think it is also worth noting that many market participants interpreted the FOMC's announcement as implying a heightened risk of a 25 basis point increase in rates. However, beginning on May 27, the market began receiving a series of reports about the views of the Committee, including comments by FOMC members and other Fed officials suggesting that a more aggressive tightening should be expected. This threat, giving the market a new sense of risk, triggered a backup in yields and anxious reactions to several not particularly significant data releases. On June 1 the long bond backed up 11 basis points after the NAPM prices paid index came in at 55.2 rather than closer to the expected 53.3. On June 4 the bond market backed up only 3 basis points in reaction to the release of the data on employment and average hourly wages; but then on June 11 it backed up 9 basis points after the report of a 1 percent increase in retail sales versus expectations of 0.7 or 0.8 percent. Subsequently, the release of the flat CPI on June 16 and the Chairman's June 17 testimony before the Joint Economic Committee calmed the market with a perception that a moderate tightening was in store. But as you can see on the chart, the ""relief rally"" was short-lived. By early last week, the market was once again on the receiving end of a chorus of voices threatening more aggressive actions. In my judgment, if you had tried to trade in the bond market during this period and had followed only the FOMC's announcement on May 18, the data releases as they came out, and the Chairman's Joint Economic Committee testimony, you would have lost a lot of money. On the other hand, if you had subscribed to all the high-priced insider rags and carefully tracked the utterances, attributed and unattributed, of FOMC members, you would have fared a good bit better. Looking at the bottom two panels on this page, you can see that credit spreads and volatilities did back up a little, but not very much--less than I would have expected, given all the fits and starts in the bond market. I think it is particularly noteworthy that the implied volatility on the S&P futures contract was actually lower on the period. In sum, there seems to be a very odd mix of anxiety and complacency in this market, which I don't pretend to understand fully nor do I yet see how it will work itself out. Finally, turning to domestic open market operations, the chart on page 6 depicts the volatility of the fed funds rate. We had significantly less volatility and a much better contained funds market during this period than we had earlier in the year. The red dots cover the intermeeting period and the blue dots cover the period from January 14 through May 18. As you can see, the median value of the effective deviation from the target in absolute terms was only 5 basis points and the standard deviation was down to 8 basis points during the recent intermeeting period. So we have had a much calmer funds market and funds have traded a bit on the soft side. The rather extraordinary conditions in the current maintenance period have posed something of a challenge for the Desk. The market had a very low appetite for reserves coming into this period, expecting to hold large quantities of excess reserves at the quarter-end. And even as we left reserves quite short, the market traded on the soft side. Last Thursday, as the market began to turn its attention to the shortage for this week, we arranged a 3-day forward RP for settlement Monday to inject about $7 billion to cover these last days. But given the combination of events tomorrow--a quarter-end, a maintenance period end, and a very high expectation that the Committee will raise rates--it has been rather hard to get the funds rate to trade very far below 5 percent, even though I think we have finally succeeded in that effort today. I will be candid, however; I have some fears that our efforts to do this over a Monday and Tuesday will lead to a fed funds rate of zero by tomorrow night, notwithstanding your announcement, whatever it may be. I should mention that over the first six months of the year the SOMA portfolio has expanded by almost $30 billion, which is a record expansion of our outright holdings. This has been in response principally to currency in circulation, but we have been adding to the portfolio all along the maturity spectrum. Even with the slightly stronger currency growth, we still think that the normal $12 billion leeway will be adequate for the coming intermeeting period. Mr. Chairman, we had no foreign exchange operations during the period but I will need the Committee's ratification of our domestic operations. And I would be happy to answer any questions.",3027
-fomc-corpus,1999,Questions for Peter?,4
-fomc-corpus,1999,"Just a quick question on your chart discussion, Peter: On the third page where you were talking about the cross rates, I am wondering as I read the portion of the bottom panel covering 1999 whether things may be changing. It looks as if the correlation between dollar/yen and euro/yen is diminishing in relation to what it was in earlier periods. Maybe the opposite is happening in the top panel. Am I looking at that right?",89
-fomc-corpus,1999,"Our perception is very much that the daily changes are still being driven by the yen. The anxiety of the Japanese authorities is now as much focused on euro/yen as dollar/yen, and they intervened in euro/yen for the first time ever during this period. I agree with you but I think some other things are going on here; I don't mean to suggest that this encompasses all of the inputs that determine exchange rates. Still, during these six months and even in recent weeks, the daily changes up and down in euro/yen and dollar/yen seem to be moving together. Although I did not refer to this in my remarks, we hear anecdotally that there is a sense among market participants, both in Europe and in Japan, that a lot of the pressure on the yen reflects Japanese investors who had established positions in Europe and are coming back into yen now that they are deeply under water. What you can't tell from this panel, because it is not expressed in terms of exchange rates, is that at the end of September of last year, the end of Japan's fiscal half-year, euro/yen was at 160. Now it is at 124 or so. So, anyone from Japan who took on a position in euro assets at that earlier point is deeply under water. It is actually a widespread perception in Tokyo that the Ministry of Finance's incentive to intervene was to try to help institutional investors get out of those positions without strengthening the yen. So, other things are certainly going on. The sense of the strong U.S. economy vis-a-vis Europe is also certainly apropos.",323
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Peter, I have a question for you or Karen about the huge Japanese support of the yen. Has this intervention been sterilized completely or partially? The numbers are so large that they would have great significance for their monetary base, and I just wondered what the policy is.",54
-fomc-corpus,1999,"The normal course that I believe the Bank of Japan is following is that they sterilize this intervention. It is a very complicated arrangement. It's as if the Exchange Stabilization Fund, the equivalent accounting entity, could actually issue its own bills to the market to finance itself. That's in effect what the Bank of Japan does on behalf of the Ministry. So in the first step, the Bank of Japan gives the Ministry yen liquidity. But the Ministry then has to finance that by borrowing yen in the markets and issuing securities directly to repay the Bank of Japan; it would be the accounting equivalent of the Exchange Stabilization Fund issuing its own bills directly. So it is sterilized. I think that question is different from the question of the extent of accommodation in the Bank of Japan's monetary stance. It is still a very accommodative stance. They have managed to keep their overnight rate trading at 2 or 3 basis points, which is the brokers' spread. So that rate has been effectively zero throughout the period.",202
-fomc-corpus,1999,"I think that ""zero"" is the magic word. Whatever intervention the Bank of Japan chooses to do, whether it is in domestic assets or in foreign exchange-and the latter is what they have been doing--they no longer have room on the downside at the very short-term end of the money market to lower interest rates any further. So in that sense there is no such thing as unsterilized intervention because there is no place to go. There are lots of people out there arguing about whether or not allowing the monetary base to continue to expand under those circumstances has expansionary influences, and through what channels. We are obviously looking for the latter in Japan. But in the most ordinary sense of sterilized and unsterilized intervention, both in terms of what happened on the balance sheet and whether it did or did not affect short-term money market interest rates, the answer would be that they have sterilized.",183
-fomc-corpus,1999,"That is rather interesting because, of course, we often think about sterilization not necessarily in terms of the impact on rates but on the monetary base.",30
-fomc-corpus,1999,"At this point, the change in the Japanese monetary base doesn't seem to be having any particular implications. At least changes of this order of magnitude can't be perceived as being followed by changes, for example, in better lending conditions and increased bank credit creation.",50
-fomc-corpus,1999,"I think it is instructive that the Japanese are creating what essentially are very useful experiments in intervention, whether we call it sterilized or otherwise. As you may recall, they sold in U.S. dollars and bought yen a while back with very modest, if any, effects. They have done the reverse this time, except they have added another or so in euro, with little effect. Many economists would argue theoretically that sterilized intervention cannot affect exchange rates materially. What the Japanese have succeeded in doing is proving that proposition. Vice Chair.",108
-fomc-corpus,1999,"Peter, considering that the earlier version of the yen carry trade contributed so dangerously to the Thai baht explosion in July 1997, are you and your colleagues at other central banks able to track reasonably well the buildup of that so we can take any supervisory action that is appropriate?",56
-fomc-corpus,1999,"At the aggregate level, it is quite hard; the data are rather poor. At the firm level, I presume one can find out what decisions individual firms have made. Tracking this involves relying on anecdotal information. There was an attempt to tabulate some data for Japan, which was not very satisfactory. The results were published by some outfit here in Washington whose name I don't recall, but the data were pretty poor once you scratched the surface. When I checked with the Bank of Japan, they told us to be very suspicious of those data. So unfortunately, the answer is no, we cannot track that at an aggregate level. But it is something we are always talking about with others in the market and we get some anecdotal information. I don't know how accurate that is.",156
-fomc-corpus,1999,So some supervisory sniffing around might be appropriate?,10
-fomc-corpus,1999,"Yes, it is certainly easier to try to get a handle on it at the firm level.",19
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Peter, I think you have gotten a little too subtle for me and I am not sure I'm following you. Why did you choose to focus on this issue of whether it is a yen thing or a dollar phenomenon? What significance do you think that has for the Committee?",54
-fomc-corpus,1999,"I am worried about the risk that people perceive it as a dollar thing when in fact I think it is a yen thing. I think sloppy policies, sloppy policy reactions, and uninformed market behavior can result if people think they are responding to one stimulus when that stimulus really isn't the dominant one. So my first instinct is to make sure my thinking is as clear as I can make it regarding what may be influencing exchange rates. That is really the major thrust of my message, nothing more than that.",100
-fomc-corpus,1999,Did Japan ever intervene with marks?,7
-fomc-corpus,1999,"No, they did not. They hold a few marks but I don't believe they ever formally intervened in marks. MR.MCTEER. So this could be the beginning of the euro as an intervention currency? This is the first time it was ever used that way?",55
-fomc-corpus,1999,"It was the first time it was used by the Japanese. I think it reflected a certain flamboyance on the part of the Ministry of Finance, trying to grab attention for itself in Tokyo. But also, to be fair, a lot of the pressures were emanating from the movement in euro/yen. So to the extent they wanted to respond, they realized that if they only intervened in dollar/yen, it would be a release valve and would be hard to get their hands on the problem. So there was a tactical reason, but I think flamboyance might also have been a reason. I was very surprised to see the ECB begin a relationship by intervening as agent on behalf of the Japanese authorities because the Bundesbank had always resisted doing that. I should be clear that this normal courtesy may increasingly become something of an artifact since most of the foreign exchange market trades through a single computer, or at least the price setting takes place in the electronic brokering system (EBS) terminal. So liquidity is not a geographic phenomenon; it is a temporal phenomenon of when people are connected to and are watching the EBS. So we may get away from this notion of geographic intervention, but that hasn't quite happened yet.",247
-fomc-corpus,1999,I believe your fourth point was that people seem to be reacting to rhetoric more than to the statistics. What was the significance of bringing that to our attention?,31
-fomc-corpus,1999,"I think the bond market has been focused on the words of members of this Committee, both for attribution and not, to an extent that I have not seen in my admittedly not very long tenure in this position. I find that disturbing in terms of the influence on policy. It looks to me as if this bond market has priced in a 25 basis point move about four times. I can't prove that and I don't know that.",86
-fomc-corpus,1999,Cumulatively?,4
-fomc-corpus,1999,"They have taken that 25 basis point increase in and out. I am not suggesting that that has any profound macroeconomic effect. But the in and out pricing repetitions have been in response to the rhetoric, not the economic data. That was my point.",51
-fomc-corpus,1999,Do you think the announcement of the bias in the directive is part of this?,16
-fomc-corpus,1999,"Clearly something very different happened after the last meeting with the announcement of a bias. I said at the end of my remarks that there is a strange mix of what market players are anxious about and what they are complacent about. I looked for a way to express to the Committee what I thought they were anxious about and what I thought they were complacent about. I think their focus is misplaced but, to be candid, I can't quite put my finger on it. They seem to have some expectation that words from this Committee, whether individually or collectively, will somehow remove all the uncertainties. That is rather naive and myopic. But they hang on every word as if it were going to solve the uncertainties for them. I just don't think it will. Indeed, it hasn't, as you can see by how the bond market has behaved. So if I was not clear enough, I hope that helps.",180
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Some of the initial commentary I saw after the announcement by the Japanese in early June of their first-quarter number was along the lines that it was a statistical fluke or window-dressing. The view was that it wasn't real and that by year-end we would see the Japanese economy back in the tank again. A fair amount of the commentary had the tone of: ""This is something we did not forecast so it couldn't possibly be true."" More recently, I have seen more commentaries suggesting that the first quarter may have represented a turning point, though the GDP number may be exaggerated, and that from this point forward Japan would be viewed as having seen the worst. Is there any dominance of one opinion or the other in the street?",146
-fomc-corpus,1999,"I certainly defer to Karen for a view on the real merits of what you've suggested. In terms of the view on the Street, I think most non-Japanese observers are still highly skeptical. They are not yet in the camp that thinks this is for real, although they are intrigued and are wondering where the opportunities may be. After all, the Nikkei turned up. So there is a little bait-on-the-hook dangling there for them. I think the Japanese are quite anxious and wondering if it is time to bring their money home. The quantities do not matter, but the price should. So in Tokyo there is a lot of anxiety about that. There also is a lot of anxiety about what the impact on Japan might be of any action by this Committee. It doesn't make any sense to me, but they think that if this Committee raises rates, it will strengthen the yen. And that actually is an issue within Japan as well. So I think the anxieties about this being a turning point are somewhat geographically separated, if I can put it that way. But if Karen wants to add anything on the specifics-",223
-fomc-corpus,1999,"I will defer my comments on that until after the Chart Show, since we are going to go into some of those issues as we return to honest-to-goodness real economics! [Laughter]",39
-fomc-corpus,1999,"Any further questions for Peter? If not, would somebody like to move to ratify the transactions?",20
-fomc-corpus,1999,Move approval of the domestic open market operations.,9
-fomc-corpus,1999,Without objection. Let's move on to the Chart Show. Mike Prell.,15
-fomc-corpus,1999,"I don't know how real the economics are, but there are tangible charts to which we will be referring. 2/ I thought I'd begin with a brief update on the second quarter, taking into account a few data we've received since the Greenbook was completed. As usual at this point, we're still attempting to blend the labor market data with the expenditure figures to get a fix on current-quarter GDP. The relationship is loose, but the weaker growth of production worker hours in April and May, shown in the upper left panel of Chart 1, suggests that we should look for a moderation of real output growth this quarter. Considering the spending numbers as well, our best guess for the real GDP increase is still about 3 percent. Yesterday's report on consumer spending for May contained no major surprises. Anticipating a moderate increase in June, we see real PCE this quarter running something over 4 percent--off markedly from the 63/4 percent first-quarter pace. Housing starts, at the middle left, fell off considerably on average in April and May--we think mainly because of limited supplies of labor and materials, rather than any shortage of demand. Owing to the lags between 2 / A copy of the material used by Mr. Prell and Ms. Johnson is appended to the transcript. (Appendix 2) starts and construction outlays, real residential investment probably will be up, but only modestly, this quarter. As plotted at the right, last week's advance report from manufacturers showed that shipments of non-defense capital goods, excluding aircraft, were strong through May. This reinforces our view that there will be a hefty increase in PDE this quarter, although various anecdotes and the NAPM survey would suggest that some of the rise in shipments of capital goods might show up in export sales. In that regard, the panel at the lower left shows that overall exports firmed in April. Even so, the trade gap still was somewhat larger than the first-quarter average, as we continued to exhibit an enormous appetite for imports. Turning to the right panel, it would appear that few of those imports ended up in business inventories in April. The book value of manufacturing and trade stocks, ex motor vehicles, rose only modestly-roughly matching the first-quarter rate of accumulation. All told, then, the picture is one of a step-down in GDP growth this quarter. But final demand can scarcely be said to have turned weak--and inventories probably are lean enough that desires to build stocks will spur production in coming months. With that prelude, let me turn to the summary of the staff forecast, contained in Chart 2. As has been the case for a long time now, we are projecting a considerable moderation in the trend of real GDP growth. The quarterly numbers represented by the bars in the upper left panel gyrate later this year and in early 2000 because of our allowance for some Y2K effects, but the general drift is toward a slightly sub-par growth trend. Being just slightly sub-par, though, that growth probably would be sufficient to hold the unemployment rate in the low 4s through next year. Largely, but not solely, because of the continued tightness of the labor market, we're expecting that the rate of inflation will trend higher, as may be seen in the bottom panels. The recent rebound in crude oil prices generates an acceleration of the overall CPI to a 21/4 percent increase this year; a leveling of oil prices holds total CPI inflation at the same average pace in 2000 even as the core component accelerates. The acceleration in overall GDP prices is smoother, because the direct oil price effects on this index are smaller. As we emphasized in the Greenbook, the stock market outlook--the subject of the next chart--is quite central to our forecast. With the ""drag"" from the external sector likely to be diminishing, the projected moderation of GDP growth hinges on a substantial slackening in the growth of domestic demand. The half percentage point funds rate increase we've assumed to occur in the next several months and the sustained higher level of intermediate- and long-term interest rates should work in that direction. However, a cessation of the uptrend in share prices is an important ingredient as well, and whether that is indeed at hand is open to question. The top left panel updates the provocative comparison of the 1920s and 1990s bull markets that I included in the last chart show. We're still pretty much on track, with some upside ahead of us. Certainly, the fact that the market has given up so little ground in the recent period of interest rate run-up is testament to the abiding exuberance of investors. That point is given further emphasis by the right panel, which shows the current extraordinary narrowness of the equity premium, as proxied by the gap between the earnings yield on the S&P 500, based on analysts' profit expectations for the coming twelve months, and the real 10-year Treasury rate. The middle panels plotting price-earnings multiples alone are perhaps less insightful analytically--but may still be of some interest. The left panel in particular illustrates that the run-up in PEs has been unusual in that it has occurred at a time so distant from a cyclical trough in profits. Together, as we've suggested repeatedly--and evidently wrongly-these indicators would seem to suggest that the market could be vulnerable to a quite sizable decline, if and as rosy corporate profit expectations are disappointed. Nonetheless, we've projected only a flattening in share prices. That still produces the decline in the household wealth-income ratio charted in the lower left panel, however, which should help take the steam out of consumer demand. The little table at the right is intended to highlight the relative potency of stock market effects today. Because of the huge run-up in the wealth-income ratio since the end of 1994, a given percentage change in share prices translates into a much greater consumption effect than before. As indicated, when we apply our standard rule of thumb to a 10 percent decline in share prices, the effect on real PCE growth in the ensuing year is now 0.4 percent, twice what it was earlier. In the Greenbook, we simulated a rapid 25 percent decline in the market, which had notable but not devastating effects on the growth of activity. Looking at the panels above, one might be able to envision a much deeper bear market. But, even with the simulation we performed, it might be asked whether there could not be greater effects on demand than predicted because of financial imbalances that our model cannot capture. This is no simple matter to pin down, but Chart 4 provides a few clues. First, the upper panel tends to allay one concern. Although the volume of margin debt outstanding has skyrocketed, when scaled by the value of equities, as it is here, it doesn't look so startling. However, this is a very narrow measure of leveraging and consequent risk exposure. The right panel shows two aggregate ratios of households' indebtedness to their holdings of liquid assets. The black line reveals that debt has been rising considerably relative to holdings of the most liquid of financial assets--deposits, money funds, and governments. But the red line indicates that debt has been falling relative to a broader range of assets that comprises as well corporate and municipal securities and mutual funds. So, there's not much sign here that even though debt has been growing appreciably faster than income, household balance sheets in the aggregate have become more illiquid. Is there something lurking out there at a disaggregated level that might imply a different assessment? We've generated some preliminary tabulations from the 1998 Survey of Consumer Finances to address that issue, and these are laid out in the middle panels. I'd note on the left panel that there's been a considerable shift in the distribution of household debt from those without stock (a smaller portion of the population today) to those who have significant amounts of stock--defined in the second column as a holding equal to at least one-half year's income. But, if shareholders have taken on a larger amount of debt, they've not incurred extraordinary debt-service burdens. As indicated in the second column of the right panel, the median monthly payment burden as a percent of income for significant shareholders has increased, but it is somewhere between the ratios for households with smaller or no shareholdings. I should add the caveat that the income concept in these ratios often includes realized capital gains, which might suggest the possibility of some greater exposure for the shareholding households, but another fact is that the significant shareholders also have relatively large amounts of other assets. Thus, even if one were to assume a very deep drop in the stock market, it would not generally have drastic effects on their ability to cover their debts. The bottom panels focus on another conceivable point of vulnerability, the banking system. As you can see at the left, the black line indicates that almost all banking assets are held by institutions that are well capitalized. The comfort one might draw from that fact today is perhaps a little less than would have been the case a couple of years ago, however, because--as shown by the red line--the margin by which the banks exceed their regulatory capital requirements has shrunk a bit. If one were to think about how the banking system might be affected by a stock market plunge, at least one can rule out the more direct links that proved devastating in Japan when their bubble burst. Having consulted with our supervisory folks, it appears that the greatest concern might be that loans have been made to firms that have engaged in aggressively priced acquisitions, with the expectation that those loans will be repaid out of proceeds of subsequent stock or junk bond issues. The junk bond market looks better today than it did last fall, as reflected in the yield spread at the right; but with defaults already rising the spreads have remained appreciable. A broad retrenchment in stock prices might cause an edgy junk market to turn very sour and leave banks with either losses or impaired assets that would in turn make them more cautious lenders. My sense though, is that--short of a severe market setback--we are not talking about financial dislocations of such a scope and intensity that we need to mark up the customary wealth and cost-of-capital effects substantially. The kinds of pressures financial markets will face obviously will depend considerably on the amount of inflation that lies ahead. Chart 5 summarizes the labor market forces impinging on wages. Our forecast of labor demand is premised on what is, relative to prevailing professional norms, a pretty optimistic assessment of the dimension of recent and prospective structural gains in labor productivity. As you can see in the top panel, however, we're expecting that growth in output per hour will slow in the near term, not because the structural improvements will ebb, but because we expect that hiring won't be geared down immediately and commensurately as production decelerates. In any event, we don't foresee much relief from the labor market tightness. The labor force participation rate, plotted in the middle left panel, has been fluctuating in an essentially sideways direction for a while, after having risen a bit as people perhaps were drawn into the workforce partly by the perception that jobs were readily available. As indicated at the right, the percentage of respondents to the Conference Board survey who say that jobs are easy to get seems to be leveling out, and we're expecting labor force participation to remain in the recent range. In this tight labor market, workers have achieved some leverage in the wage-setting process, and we're forecasting that compensation increases, plotted at the lower left, will be tending to grow. We believe that we were probably correct in expecting that the low rate of price inflation in the past year or two would be moderating nominal wage increases, but the first-quarter fall-off in the ECI measure of compensation looks too low to believe. In fact, doing some rethinking, partly in light of other information that has come in of late, we have moved our ECI forecast back up noticeably this time, after having initially dropped it quite markedly in response to the first-quarter surprise. But, the basic point, conveyed in the forecasts of both the ECI and the Productivity and Costs series for hourly compensation, is that tight labor markets--with a helping hand from Uncle Sam on the minimum wage front--are likely to produce ongoing large real pay increases. The right panel documents the real compensation gains in the forecast, responding in part to questions that have arisen at past meetings. I've based this on the Productivity and Costs series in part because it relates more directly to the movements in income shares in the NIPAs. The point that is highlighted here is that, though the projected real pay gains may look rather skimpy relative to productivity trends when they are measured against consumer prices, when they're measured against product prices they are quite sizable. Workers have been capturing a bigger share of the pie. This spells a squeeze on profit margins--unless businesses can find some leverage of their own on the pricing side. We don't think that they will do so, but there are some risks. As you can see in the top panel of the next chart, we have core consumer prices accelerating over the next year and a half. This reflects in part the labor cost pressures I've just described. In addition, there will be some pass-through into core prices of the rebound in oil prices via higher transportation costs and other channels. The middle left panel highlights another unfavorable factor--namely, the turn that is likely to occur in non-oil import prices as the dollar peaks and foreign economies manage to generate more domestic demand for their output. One can already observe that import price trends have become somewhat less favorable than they were earlier, with a rise in materials prices being a significant element in that pattern. Looking for signs of whether the tide might be turning in domestic prices, one indicator that people sometimes consult as a measure of so-called ""pipeline"" inflation is the PPI core intermediate component, graphed at the right. These prices don't bulk large in terms of their weight in overall production costs, but they can be an early indicator of broader inflationary pressures. They've probably now posted their first quarterly increase since 1997. Some of this is metals prices, which rallied in part on Asian growth prospects; some of it is the effect of higher petroleum feedstock costs; and some of it is the pressures on capacity in the construction materials industry. These don't quite smell like a broad-based inflationary surge, though. Moreover, the below-average overall factory utilization rate in our forecast, shown at the lower left, suggests that, although competitive pressures from abroad may ease a bit, a major flare-up in goods price inflation is not in the immediate offing. There have been some comments in Reserve Bank reports that consumers have become somewhat less price conscious. This might suggest some shift in inflation expectations. The final panel shows the Michigan SRC median readings on 1 year and 5-to-10 year expectations. On the moving average basis plotted here to filter out some of the noise, both series are off their lows, but whether the downtrends of the past several years are in process of reversing is not clear. A sanguine--and quite plausible--interpretation would be that expectations were damped to an extra degree last year by the plunge in energy prices and that we have seen a one-time adjustment back up in light of the recent rebound in those prices. The pattern here is not dissimilar to those in the charts of the price series themselves: In neither case is the direction unambiguous and as a result they perhaps serve best as a sort of Rorschach test for one's degree of inflation phobia. Karen will now discuss the international picture.",3168
-fomc-corpus,1999,"The general tone of developments abroad since the February chart show has been favorable. On balance, the repercussions of the spread of the global financial crisis to Latin America have not been as dire as we feared in February; signs of recovery in Asia have added to the sense that the crisis, as such, is at or near its end. Nevertheless, there is no lack of risks embedded in the current foreign outlook. A major element of the more sanguine outlook for the rest of the world is the perception that various financial market indicators are signaling progress in the real economy. Chart 7 shows selected real exchange rates and stock market indexes. The top pair refer to the major industrial countries. The black line on the left panel shows that on balance during 1999 the dollar has risen in real terms relative to an average of the major foreign currencies. In large part, that rise reflects the strengthening of the dollar relative to the euro (the blue line). The dollar has also risen on balance in real terms against the Japanese yen during 1999, but it remains far below the value it had reached in the middle of last year. In the forecast, we expect a gradual depreciation of the dollar in real terms against these currencies, as relative macroeconomic conditions become less supportive of the dollar and as market participants become more aware of the growing U.S. external imbalance--a topic to which I shall return at the end of my remarks. Stock prices for these countries, on the right, are among the financial indicators signaling optimism during the past several months. Although they declined sharply last August and September during the turmoil following the Russian debt moratorium, they have increased on balance so far in 1999, including the Japanese index. The middle panels show the same variables for selected Asian countries. In real terms, the dollar has reversed much of its appreciation against the Thai baht and Korean won that occurred as the crisis spread in 1997. Most recently, those currencies have been fairly stable in nominal terms and inflation has been quite contained, developments that we expect will continue. We have incorporated into the forecast a stable Hong Kong dollar peg to the U.S. dollar, but some nominal appreciation of the dollar against the Chinese renminbi in 2000. With U.S. inflation generally above that in Hong Kong, the result is slight real dollar appreciation in both cases in our outlook. Asian stock market indexes are among the most euphoric and may be overstating how much progress has been made in addressing the structural problems laid bare by the crisis. In recent months, the foreign sector of the Chinese stock market (the black line) has risen particularly sharply. The three major Latin American countries are shown at the bottom. We are projecting that the Brazilian real will remain near current levels in nominal terms. With Brazilian inflation contained but above U.S. rates, the real should appreciate some in real terms, i.e. dollar depreciation. Controversy over the Argentine peso convertibility regime abounds. Proposals for dollarization are still actively discussed, yet there have been market rumors of ending the peg. With little firm basis to judge how this issue will be resolved, at least until the election in October, we continue to expect the peg to hold. In that event, with Argentine inflation expected to remain below U.S. rates, the dollar should rise slightly in real terms against the Argentine peso. The stock markets in Brazil and Mexico have shared in the optimism being expressed elsewhere. In Argentina, ongoing market concerns have restrained increases. Your next chart presents our outlook for foreign growth, with some details on the industrial countries. As is evident in the top left, we anticipate a convergence of U.S. real GDP growth with the average of that abroad in 2000. Our view that real output growth abroad should pick up this year is bolstered by the surprisingly robust first-quarter results that have been reported for some countries, including Japan. We see some of that strength as transitory, however, and so look for some offset in the current quarter and, in general, have not extrapolated even stronger growth performance into next year. As can be seen at the right, the lion's share of the improvement is expected to occur in developing Asia, with somewhat less acceleration in Latin America. Industrial country growth is projected to firm. In the middle left panel, the latest data on industrial production reflect the somewhat lackluster performance in Europe in recent quarters in contrast to the vigor in Canada. The latest data for Japan show some improvement, but not enough to explain the 7.9 percent annual GDP growth in the first quarter that was recently announced. Our projection for sustained expansion in these countries rests in part on the accommodative monetary conditions that are visible in the middle right panel. Some improvement in business confidence, seen in the lower left panel, is another factor leading us in that direction. The Japanese Tankan report for the second quarter is due to be released shortly. A significant move in the positive direction is widely expected, especially in light of the fact the survey was taken shortly after the strong Q1 real GDP data were released. The top panels on Chart 9 document the recovery that is unfolding in the Asian crisis countries. Industrial production has been rebounding since the middle of last year, with production in Korea moving above its pre-crisis peak. Dollar interest rate spreads have moved back down, though not to the levels of early 1997. This narrowing reflects improved market confidence in these economies, but also the recognition that spreads before the crisis were too low. The recovery in the developing Asian countries remains vulnerable, and a major disruption elsewhere could renew pressures on them. Although we are expecting that China will experience sustained moderate growth and financial stability, developments in that country are one possible source of renewed volatility in Asia. The middle left panel highlights some external issues. The Chinese trade surplus (in black) has been shrinking since mid-1998. At first, a sharp drop-off in exports narrowed the trade balance; in recent months, exports have recovered somewhat but imports have surged. The higher rate of recorded imports may reflect anti-smuggling initiatives taken recently by the Chinese. The red line shows foreign direct investment in China. While there seem to be seasonally low inflows in the first quarter, the data for this year are below those for the first quarter in both 1997 and 1998. Foreign direct investment has tended to go into the export sector and to support investment in the non-state sector. The real depreciation of other Asian currencies has put pressure on the Chinese export sector and may weaken inward direct investment. The right panel illustrates the deflation that China has been experiencing, another symptom of the depressed demand within China. Industrial production bounced back in the second half of last year from some slowing earlier. The most recent months' data suggest that production continues to expand moderately; as a consequence, our forecast is for somewhat slower growth in China than has been the case in the past, but we are not looking for a deflationary spiral to become established. The lower left panel suggests some risks for the developing Asian economies. The emergence of recovery and the return of financial market confidence could undermine the momentum behind the reform process. In Korea and other countries, where difficult issues of industrial relations and corporate governance need to be addressed, moderate growth may lessen the sense of urgency and the political will for reform. In many of these countries, banking sector problems continue and non-performing loans are still a large share of total bank loans. Moreover, the corporate sector needs resolution of these debts so that private investment can resume efficiently. In addition, weakness in the Chinese economy might spark political turmoil there and could derail recovery in Asia in general. The Latin American countries are featured on Chart 10. As you can see in the upper left, production in Mexico has largely withstood the spread of financial volatility to Latin America. In Brazil and especially Argentina that is not the case; production has been significantly reduced. For all three countries, the stripped spreads on dollar-denominated Brady bonds have moved back down following the previous spikes. The most recent segment of all three of those lines shows the backup in spreads that has occurred in response to uncertainties in Argentina about the government's fiscal program and the commitment to the peg of the currency to the U.S. dollar. Market nervousness was heightened by the announcement in May of your move to a tightening bias and the possible implications of a slower U.S. economy and higher dollar interest rates for Latin America. The middle left panel illustrates that improvement in the external balances of these countries has been limited despite currency adjustment in Brazil and Mexico and slower domestic demand. Continued dependence on capital inflows implies that these countries remain vulnerable to events that might disrupt global financial markets. Still, on balance, events in these countries have been more favorable than we were expecting in February. One bit of evidence is that Brazilian domestic interest rates have come down, without negative repercussions, as shown in the middle right panel. Lower domestic rates are critical in keeping the domestic debt in Brazil from swelling at an alarming rate. The surprisingly moderate response of inflation to the currency decline, shown by the red line, has been an important factor behind the decline in domestic interest rates. The immediacy with which market spreads reacted to disappointing news in Argentina suggests that the situation in Latin America remains fragile. If key financial variables shift abruptly, the forecast of moderate growth on average in the region could be derailed. The major risks appear to be those listed in the lower left panel. Some of the fiscal steps taken to date by Brazil were one-time measures. Evidence of significant forward progress on a permanent basis is lacking. If markets sense continued fiscal problems in Brazil, they will be quick to move rates, which in turn will exacerbate the fiscal problems. In Argentina, both domestic and foreign investors are essential to the maintenance of the currency peg and to the financing of Argentina's external deficit. Despite some insurance that the government has taken out against financial contingencies, Argentina remains vulnerable to a loss of confidence. Elections this year in Argentina and next year in Mexico add to the markets' sensitivity to any indications of policy missteps by those governments. My final two charts focus on U.S. trade. The top panels of Chart 11 show exports and imports for selected trading partner regions. Exports to developing Asia stalled in 1997 and then declined; exports to Latin America followed suit a bit later. Exports to Europe and Canada have, on balance, grown in nominal terms, but not by much. In contrast, U.S. imports from these regions have been a source of expanding demand that has helped them to sustain expansions or mitigate declines of production. In the oil market, an agreement in March among producers to restrict supply and some evidence to date of compliance with that agreement have been successful in raising spot oil prices. We expect that U.S. oil import prices will follow this path, but that both those prices will move back slightly as some producers succumb to the temptation to increase output at the higher prices. Non-oil commodity prices fell sharply in 1998, in part in response to weaker global demand. As Mike noted, we do not expect that disinflationary element to be present going forward. The bottom two panels explain the elements of our forecast for core import prices--that is the prices of goods other than oil, semiconductors, and computers. We look for those prices, the red line, to move from showing small declines to showing small increases by the end of the year. Next year, core import prices should rise, but less than 2 percent for the year as a whole. This acceleration in import prices owes to the disappearance of the downward effect of global commodity prices, shown as the bars in the left panel, and to a shift from downward to upward pressure imparted by the combined effect of foreign prices and the exchange rate, the bars in the right panel. The top panels of Chart 12 decompose the elements of our forecast for the quantities of core exports (goods excluding agricultural products, semiconductors, and computers) and core imports (goods excluding oil, semiconductors, and computers). For exports, we look for foreign GDP growth to return to being a strong positive factor while the negative impact of past dollar appreciation wanes and ceases to be important. For imports, stimulus both from U.S. GDP growth and from relative prices (largely the exchange rate) lessens over the forecast period; accordingly, we see core import growth slowing to about 6 percent. If all those pieces do fall into place, real net exports, the middle left panel, will continue to exert a negative influence on U.S. real GDP growth but to a diminishing extent. The nominal trade deficit will continue to widen, however. And despite a boost from some revisions to data for our investment position, and therefore some adjustments to estimates of flow income, the current account deficit will continue to expand, reaching some very large numbers. Relative to GDP, the current account balance is less startling, but we anticipate that during the current year it will breach the low reached in the late 1980s. If global recovery proceeds more or less along the lines we have suggested in the Greenbook, so that no new crisis elements command the attention of markets, then the rapid pace at which the U.S. external deficit is widening and the magnitudes that it is reaching may receive more attention. We revisited our slightly more aggregated model that simulates longer-term relationships. The continued strength of the dollar and the relative cyclical strength of the U.S. economy over the past two years have made the starting point of our analysis relatively unfavorable. Evidence that the potential rate of growth of the United States has increased recently, while that abroad has not, imparts an even greater sustained tendency for the U.S. external deficit to widen over time than conventionally accepted. The panels at the bottom of the chart show the current account relative to GDP, on the left, and the net international investment position relative to GDP, on the right. The baseline assumes that both in the United States and abroad, output returns in the near term to equal potential and then grows at potential rates thereafter. We have also incorporated some sustained real dollar depreciation into the baseline, 11/2 percent at an annual rate. Nevertheless, the baseline shows chronic widening of the current account and deterioration of the net investment position. Such an outcome implies the underlying variables are not mutually consistent and some adjustment in one or more of them would be needed. The parameters of this model, based on historical experience of the past two decades, suggest that, were the adjustment to come solely through the price competitiveness of U.S. goods, the real depreciation of the dollar would have to average 41/4 percent per year in order for these ratios to stabilize as shown by the red line. Alternatively, adjustment could come from income channels rather than price channels. If foreign industrial output were to move to a higher rate of potential growth, perhaps as a consequence of some of the factors that have increased productivity in the United States, and if U.S. imports were to shift over time to being less responsive to U.S. income growth, then the adjustment path shown by the blue line would result. Clearly, actual adjustment will likely entail both channels. These results suggest to us that greater market attention to the path for U.S. external balances is likely although the timing of that attention is still uncertain. Mike will now complete our presentation.",3107
-fomc-corpus,1999,"The final chart summarizes your forecasts. In short, the central tendencies--constructed here by dropping the high three and low three of the distributions for each variable--are closely in line with the staff's Greenbook numbers. Y2K effects are minimal. Perhaps more interesting--and potentially more relevant in light of the statutory requirement that the Humphrey-Hawkins report comment on the relationship of the Fed's monetary policy objectives to the Administration's forecast--is the comparison of your forecasts to those in the right-most column of the table, drawn from yesterday's Mid-session Review budget document. Your central tendencies are noticeably more optimistic about real GDP growth this year and next than they are, but little different with respect to CPI inflation. I'm not in a position to read your minds or those of the Administration forecasters. However, I'd note two things: First, it would appear that the Administration forecasters have anticipated no change in short-term rates, so monetary policy does not seem to be key to their slower growth forecast; second, although they've raised their assumption regarding trend productivity growth, at only 1.6 percent for nonfarm businesses it lies well below the 21/4 percent implicit in the Greenbook projection.",242
-fomc-corpus,1999,Thank you very much. Questions for our colleagues? President Parry.,14
-fomc-corpus,1999,"Mike, I have a question about the Y2K effects. The quarterly impact of Y2K in the forecast is primarily an inventory effect. One gets the impression that there could be some effect--I don't know the size of it--that could work in an opposite direction in the sense that we hear of companies postponing projects. Many banks, for example, have delayed combining their data systems as they have merged, and I imagine there probably are examples in other industries. The assumption at least is that sometime in the year 2000, though perhaps not immediately, they are going to begin those projects--and not all of them are IT projects. Is there the potential for a significant reverse effect that we are not taking into account?",148
-fomc-corpus,1999,"We have taken account of three categories of effects here. One is a precautionary stockpiling, and we have a very modest amount of stockpiling occurring on the part of both households and businesses. Businesses in many cases will want to have some extra supplies on hand beginning in 2000 just in case the normal supply channels are disrupted. The second element is some disruption. There will probably be, somewhere, some malfunctions--electrical outages or whatever--that disrupt some public services at the beginning of next year. But again, we made the assumption that those will be very minor and quickly resolved. The third set of considerations relates, I think, to the point you are raising. In our case, we focused it entirely on the computer area. We have assumed that the remarkable strength of computer purchases in 1998 and hefty purchases in the first part of this year reflect in part some speeding up of replacement cycles to replace non-compliant equipment. And we think there will be, at least in some firms, a lockdown of computer systems in the latter part of this year, a falloff in computer outlays, and probably a lot of scurrying around to get the last minute fixes done. So there may be some subtraction from productivity on that score. Next year there will probably still be some fixing up of glitches that are discovered early in the year. But as we move through the year, we would anticipate a rebound in computer outlays and perhaps associated investments as firms feel that they are in the clear and can go back to the normal strategies for their companies. We scaled all of these things, I think, pretty small. The computer swings are quite marked, but I think the inventory question is really quite open at this point. Our sense is that a lot of firms have not yet really settled their plans on how much they are going to stockpile. They are still in contact with their suppliers, trying to get assurances that there won't be problems and trying to assess where the risks may be. We anticipate that they will firm up those decisions over the next few months and, therefore, that most of the inventory building will occur in the latter months of this year. That is when the production effects will probably show up for the most part.",453
-fomc-corpus,1999,Okay.,2
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I have a follow-up question to that. I know that the numbers work out right and all of that, but the thought of having a first quarter with no growth that seems to be driven to a large extent by a Y2K inventory swing just doesn't feel right. I recognize that we are going into a period of slowing growth around that time, so some portion of the slowing reflects that. But to go from growth of something like 3.9 percent in Q4 1999 to something close to zero in the first quarter of next year just doesn't square with all the information that we have been gathering about where people are with Y2K. We had a session on Y2K issues with a wide range of industries on Friday and we invited the media. We had representatives from the electrical and telephone industries, from supermarkets, police departments, and banks. We had the FAA there, too. The theme was exactly the same in every single industry: Somewhere between 85 and 95 percent of their systems are Y2K compliant, ready to go just as ours are. And there is a lot of near-term focus on both contingency plans and outreach. We had no trouble getting the key people to come in and talk. We populated the audience with media people, including some from cable television. I have seen television programs about Y2K on the local cable stations almost ad nauseam since then. There is a lot of desire on the part of these industries to get out the message that they are ready. We've seen some Gallup poll surveys that tell us the more people know about the banking situation and so forth the less they are likely to do strange things or think about doing strange things at year-end. So I am wondering whether--as cautious as I know you have been and as accurate as I know the numbers are--we are really going to see that kind of swing over that short a period of time as a consequence of Y2K.",393
-fomc-corpus,1999,"I would just reiterate the thought that we have really very small effects built in here. When they are annualized, they whip these numbers around. In the recent NAPM survey at midyear, one of the questions asked of the purchasing managers was what they might do. We tried to do some back-of-the-envelope calculations based on those numbers. And I can tell you from just looking at that, in manufacturing materials it is a multiple of the inventory effects we have built in here. If people begin to get a little panicked--if they get stirred up by the end-of-the-world TV programs or articles that undoubtedly will be offered in the closing months of this year--the $25 worth of precautionary expenditures per household that we built into this forecast will be a fraction of what will occur. Now, some of this will just mean that stocks will run down in some places because firms will not have produced enough to accommodate that demand, so it will all come out in the wash here. But I think the potential is for even bigger swings than this. It may be that people will be sufficiently reassured only to take a few hundred dollars out of their bank account, but that's symbolic of the kind of concerns that will lead people to do some other things as well. I guess I'm somewhat conditioned by my experience here in Washington, D.C. when there is the slightest hint of a possible snowstorm and people buy six months' worth of toilet paper. People do get carried away at times. And for a purchasing manager, the cost of ending up with a few extra materials on the shelf that can be used up in the first weeks or months of 2000 is not very high as opposed to being short in what is needed to keep the production lines running. So we are highlighting something that potentially could make for a considerable amount of noise in the data. In terms of your numbers and what we would be presenting to the Congress in the Humphrey-Hawkins report, on a fourth-quarter-to-fourth-quarter basis the effects are so small as to be trivial. So I don't think there is cause to make any big to-do about this other than to highlight the bit of uncertainty that exists about what might occur at the end of the year.",453
-fomc-corpus,1999,"I have one question on a different subject. On your Chart 4 on financial fragility, when we measure debt levels against either the value of household financial assets or household net worth or we look at corporate debt relative to measures that incorporate the value of the stock market, are we kidding ourselves to some extent? Shouldn't we be looking at it against something that doesn't take into account the value of assets that, when they decline, might tend to weaken the positions that we think are strong only because equity assets are so overvalued?",107
-fomc-corpus,1999,"I think there is much to be said for that point, and that is why I focused on the ratios I have here. I focused in these Survey of Consumer Finance runs on proportions of payments to income, thinking that that represents people's ongoing cash flows. As I noted, for shareholders that may include some realized capital gains. But even if the market goes down, I suspect some people in their panic might realize some capital gains, so they will get some cash from that in some instances.",97
-fomc-corpus,1999,But hasn't corporate debt as a percentage of GDP gotten fairly sizable these days?,15
-fomc-corpus,1999,"As a percent of GDP, sure. In the recent period, corporate debt has been rising relatively rapidly. Again, it's a question of what balance sheet ratios one wants to look at. Many firms have a good deal of cash right now, so I don't think the corporate balance sheet picture looks particularly troublesome. And I don't think the behavior of the rating agencies suggests that there has been any clear deterioration.",80
-fomc-corpus,1999,That certainly has not happened.,6
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"On the Y2K issue, I don't think there is any potentially important event since I have been an economist about which we have less professional basis for speculating. [Laughter] I really don't. It seems to me that the role for us here is to ensure that the things we say try to minimize the impact of this event. The kind of thing we should say is that, based on everything we know about all the preparations that we and everybody else have made, there is no reason for any rational consumer or any rational business to do anything that is going to show up in the aggregate data.",121
-fomc-corpus,1999,"Go for it, Bill!",6
-fomc-corpus,1999,"That is what I think we could offer as economists. As for trying to speculate about things on which we have no professional knowledge, I just don't know what to say about them.",36
-fomc-corpus,1999,Further questions or comments?,5
-fomc-corpus,1999,"Karen, on your chart 12 entitled ""U.S. Current Account to GDP Ratio"" what assumptions do you have for your baseline? How did you get the baseline?",34
-fomc-corpus,1999,The baseline starts with the Greenbook forecast and the initial extension that is sort of implicit in the Bluebook.,22
-fomc-corpus,1999,"In the Bluebook, okay.",7
-fomc-corpus,1999,"The baseline brings growth in activity abroad and in the United States back to potential and then holds it at potential. That is of critical importance to this particular model because the minute we decide what that growth rate is going to be and multiply it times elasticities, we've answered a lot of the questions about what is going to happen to trade. The elasticities are given so that there is no scope within this model for any type of feedback between the factors that might be driving demographics or driving savings and investments to change the propensities to import and to export. But we did in the blue line sort of exogenously adjust those to see what would happen if we thought there were reasons to believe that they might move back in a favorable direction. We were addressing the questions of ""how much would that have to be?"" and ""what would it look like if it happened?"" But otherwise it's our best guess of what potential is in the different countries that we modeled, plus the Bluebook assumptions with respect to the United States and a 11/2 percent real appreciation of the dollar. Embedded in that also are some assumptions about interest rates and the like that have to be there to flesh out the current account.",241
-fomc-corpus,1999,"Refresh my memory, what is the import elasticity used in the baseline?",14
-fomc-corpus,1999,For the United States it is approximately 2.,10
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,"I had not seen the Administration forecast shown here. Is this the growth forecast in the recent budget estimates that just came out in the newspapers that added something like a trillion dollars to the surplus over a 10-year period? Given the size of their addition to the surplus, their estimate of growth is very, very modest. So by the FOMC's standards even that would be an underestimate, right? Does all that follow?",86
-fomc-corpus,1999,That's what I was suggesting. These are the numbers from the Mid-session Review that was published yesterday. They have characterized it as being in line with the Blue Chip forecast and conservative.,36
-fomc-corpus,1999,In point of fact it is quite a bit below the Blue Chip.,14
-fomc-corpus,1999,"I don't know what the longer-term numbers they might have from the Blue Chip forecast look like. But I must say that they have tended to err on the low side, I think publicly and purposely in their process, which makes some sense if they are trying to be cautious about counting revenues. On the other hand, it may skew a fiscal policy decision by suggesting that things are tighter than the numbers might otherwise have indicated. There is clearly a political element in that decision.",94
-fomc-corpus,1999,"They were on the low side in February, too, you know.",14
-fomc-corpus,1999,"Yes, they've tended to be very, very low.",11
-fomc-corpus,1999,"One has to be a little careful about translating that growth forecast into the surplus numbers because the so-called technical adjustments are overwhelmingly important. It is quite possible--I don't know if this is true, I'm just saying it's a possibility--that their GDP forecast can come in low and they overwhelm it by technical adjustments that would create a big surplus. So, we have to look at the detail.",78
-fomc-corpus,1999,"In fact, what little insight we have would suggest that their surplus numbers look on the low side relative to ours in part because they put in higher expenditure numbers than seem to be in train at this point, as opposed to it being simply the difference in our economic assumptions.",54
-fomc-corpus,1999,But they are making very significant projections into the future.,11
-fomc-corpus,1999,"Sure. Fortunately, we have not gotten into 15-year budget forecasting yet.",16
-fomc-corpus,1999,I hope you don't have to bite your tongue! [Laughter] President Stern.,17
-fomc-corpus,1999,"Karen, I would like to go back to the baseline forecast on the bottom of Chart 12 that Tom Hoenig mentioned. As I understand it, in those baseline numbers you have the dollar depreciating mildly in real terms. If I understood Peter's litany of things that might come back to haunt us--having to do especially with the euro and the yen--they seem to imply that the euro and the yen might both depreciate relative to the dollar once market perceptions change. That is, the attitude right now may be that the Japanese are succeeding in stabilizing the yen, but we don't expect that to last. If that is right, these numbers would look even worse, presumably.",138
-fomc-corpus,1999,"Well, the model that is embedded in these two charts was put together by the International Finance Division two years ago. And it came to somewhat less fearsome conclusions because the dollar is two years' worth of appreciation lower now and we have not had two years of full-blown U.S. deficits piling up and so forth. We said the same thing then, and in fact the world went completely the opposite way. Even though we said then that the current account would begin to get alarming and the projections were inevitable, the numbers have gone in the other direction for two years. So there is no sense in which I mean this chart to be telling you what is going to happen starting tomorrow.",138
-fomc-corpus,1999,"No, I understand that. That's fine.",9
-fomc-corpus,1999,"I'm only flagging the problem that is out there, which is that to the extent Japan's economy turns down, there is some possibility that markets may react negatively once the dust is all settled and what is really going on is clear. And if Japan continues to drag its feet about some of the more important policy adjustments, we could indeed see yet more years in which the problem in fact gets worse before it gets better.",84
-fomc-corpus,1999,"If I could just clarify my comments, in the short run I am more worried about a rapid yen appreciation such as the one we had in 1997-98--that kind of episode that they're currently bottling up. That's not a forecast of where it will all come out in the wash once the Japanese economy settles down. But it's the oscillation of the portfolio effect in and out of the Japanese financial sector--rushing out, rushing in--that could give us a burst. That's what they are resisting now, they think. So there's just more volatility there in the short run. In the long run I wouldn't stake my bets there. The weak euro/strong yen is the short-run scenario.",142
-fomc-corpus,1999,"Any further questions? If not, why don't we take a short break for coffee.",17
-fomc-corpus,1999,Would somebody like to begin the round table discussion? President Parry.,14
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Twelfth District economy has expanded at a solid pace in recent months, with growth accelerating from earlier in the year. District payrolls increased at an average annual rate of 31/4 percent during April and May, as rapid growth in some states more than offset a slight slowing in others. The acceleration was dominated by California, where payrolls expanded at a 33/4 percent average annual pace in April and May, well above the 2 percent pace of the first quarter. Payrolls also grew rapidly in Arizona, Nevada, and Utah. In Alaska, Idaho, Oregon, and Washington employment growth slowed in recent months, falling below the national pace of growth. The construction and services sectors continue to be the strongest sectors of the District economy. Employment growth in construction was particularly rapid, up by 101/2 percent at an annual rate during the two months ended in May. The rate in the services sector was 51/4 percent. District manufacturing payrolls have declined slowly in 1999, although employment has stabilized in recent months. Increased demand for computers, consumer electronics, and telecommunication products, as well as the resurgence of many economies in Asia, are boosting sales and orders throughout the high-tech manufacturing sector. Although improved market conditions have yet to generate significant job growth among District high-tech manufacturers, employment levels have stabilized and output is rising. Thus far, productivity gains and increases in the average workweek have allowed many high-tech manufacturers to meet production goals without boosting employment. However, these firms will likely need to increase employment in the near future since they anticipate an acceleration in the growth of sales and orders and most have absorbed what had been excess capacity in their existing employment bases. Turning to the national outlook, data since the last meeting have done little to change our perception of the basic forces shaping the economy. In our forecast, demand is expected to remain strong in the near term, allowing real output growth to average more than 3 percent over the remainder of this year. However, recent increases in interest rates combined with an expected flattening of the stock market should start restraining demands toward the end of the year. Consequently, we expect real output growth to slow to about 23/4 percent next year. Recent high levels of demand have not translated into high inflation because of the favorable developments on the supply side. Consequently, core CPI stands roughly unchanged in our forecast. However, as I mentioned last time, the recent history of forecast errors makes it hard to be very confident about any forecast of this split between output growth and inflation. Because there is no way to determine the size or persistence of the current supply shock at this point in time, it is really hard to tell how fast the economy can grow without inflationary pressures. Forecasts that utilize the level of the output gap can be quite misleading, as illustrated by the staff papers distributed by Don Kohn. This uncertainty suggests placing more emphasis on nominal GDP growth, which tends to internalize offsetting movements in inflation and output growth. And its use as an indicator can be similar to the way we used the monetary aggregates in the past. In this framework, the small deceleration in annual spending growth over the last three years to a rate around 5 percent helps me to be more reasonably optimistic about inflation. However, I am not completely comfortable with recent developments, as nominal GDP has grown at a 61/2 percent rate over the last two quarters. Thus, I will be watching the spending numbers carefully to determine whether this is a one-time event or the beginning of a sustained increase in nominal spending. Thank you.",727
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Kansas City District's economy remains quite solid, as I reported last time. Retail sales are well above year-ago levels. Real estate sales and construction activity remain quite healthy. Manufacturing activity actually shows some further signs of improving, following an earlier period of weakness. Factory managers are reporting to us that capacity utilization is up considerably from earlier months this year and nearly back to year-ago levels. Energy activity has continued to improve in June according to our producers in the region. The farm economy remains in a deep slump, and I would say that we are hearing increasing reports from rural America that the farm downturn is beginning to hurt Main Street and that we are going to see some repercussions on the banks. Having said that, the labor market in our District remains extremely tight. The District's unemployment rate edged down to about 31/2 percent this past month. And there is now some additional anecdotal evidence that persistently tight labor markets are limiting growth in some District areas. Just as one example, American West announced it will move 180 jobs from the Kansas City area because it cannot find people to fill the jobs there. Now, where they are going to move them to isn't all that clear, but certainly they can't fill the jobs in the Kansas City area. Turning to the national scene, I continue to expect the trend in economic activity to moderate by the end of next year. For now, though, I foresee another year of strong economic activity, with real GDP growing on average about 4 percent this year and slowing to an average of just above 3 percent next year. As for my views on the inflation outlook, I would note a couple of points. Similar to what Bob Parry just said, my stronger forecast represents yet another upward revision in the outlook. I notice in the consensus forecast that others share that view. I continue to be impressed by the momentum of the U.S. economy as we make these adjustments, and I also continue to be impressed by the fact that the inflation numbers are still coming in at a modest level. Having said that, I still judge that the risks on the inflation outlook are on the upside. First of all, as I have said before, the funds rate is 75 basis points less than it was a year ago when the economy was already expanding at a fairly good pace. Since then, the financial turmoil that occurred last fall has largely subsided, risk spreads are in fact lower, and growth is projected to remain strong. So in that context, I think the stance of monetary policy is accommodative. When one looks at M2 growth, while it has slowed most recently, it remains relatively strong--increasing by about 8 percent over year-ago levels. And as others have noted in a different context, there are some signs that inflation expectations are rising. The inflation premium embedded in the Treasury inflation-protected securities has been rising since last fall. So, while recognizing that inflation is modest, I believe there is some upside inflationary risk in the context of this very strong economy right now.",619
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Business conditions in the Seventh District remain quite good. Light motor vehicle sales in May matched their 12-year high reached last December, and industry contacts suggest that June sales will exceed the strong year-to-date sales pace of 16.4 million units. Net orders for medium and heavy-duty trucks continue to run above long-run averages. Commercial construction activity in Chicago has gained momentum in recent months but with few signs of speculative activity. Lenders and investors are requiring that 50 percent of office space be pre-leased, and that is one reason some previously announced projects are not making it off the drafter's table. More generally, our manufacturing sector is still performing well. For example, the Chicago Purchasing Managers survey results for June show the overall index moving further above the 50 percent level, from 57.9 percent in May to 60 percent in June. That survey is going to be released to the public tomorrow at 10:00 a.m. Even the steel industry reports a bit of improvement, as capacity utilization rates have risen noticeably over the past few months, although they remain significantly below typical operating levels. Moreover, as Tom Hoenig just mentioned, conditions in the ag sector generally remain depressed, with no significant improvement likely for some time even with improving conditions abroad. Nonetheless, our District labor markets are still extremely tight. We spoke with contacts at two national temporary service firms headquartered in our District and both reported continued difficulty in finding workers to satisfy clients' demands. One contact even said that he had shifted all of his marketing expenditures to finding workers and none to finding clients. Both firms also indicated that we have passed the peak for Y2K-related hiring of technical personnel. On the price side, we increasingly hear reports of price increases that stick, both for final and intermediate goods. Auto dealers and some casual dining establishments have been able to raise prices modestly, and a few retailers indicated that strong sales results were not as dependent on promotional activity as before. The Chicago Purchasing Managers Report for June again indicated that relatively more respondents were experiencing increases in prices paid than declines. The prices paid component, seasonally adjusted, went from 52.5 percent in May to 57.2 percent in June. That is the fourth consecutive month above 50 percent, and it is the highest since December of 1997. Before turning to our national outlook, I'd like to summarize some recent discussions about productivity that we had at our Bank. At our most recent board of directors meeting, which the Chairman attended, we heard some very optimistic assessments of the prospects for e-commerce to increase productivity in several sectors of the economy. Our directors reported on how advances in computer technology have affected their particular companies and industries--manufacturing, retailing, banking and services in particular--and on the potential for these technological advances to fundamentally change the nature of our economy. The reports consistently noted that technology has enhanced productivity pretty much across the board and that its potential to yield further productivity improvements seems limitless. On the other hand, at our Academic Advisory Council meeting one participant presented a paper suggesting that the recent pickup in productivity growth is due only to: (1) measurement changes; (2) the normal cyclical response of productivity; and (3) acceleration of productivity growth in the computer industry itself--not in industries using computers but in the information processing and equipment sector alone. The analysis suggests that productivity gains in the computer manufacturing sector have not spilled over to the rest of the economy, at least in the data, casting some doubt on how widespread productivity increases have been. Obviously, productivity growth is a key issue confronting us today. Turning to the national outlook, our views are reasonably similar to those in the Greenbook. Our forecast for core CPI inflation is, however, a couple of tenths higher for next year. More importantly, even with a tightening in policy similar to that assumed in the Greenbook, we see further acceleration in inflation in 2001. So the upside risks remain substantial. The downside risks, on the other hand, are considerably less than those we faced when we last adjusted policy. Most of the news on the world economy is suggesting more strength than previously expected. Moreover, risk spreads, while still somewhat elevated, are back to more reasonable levels, and creditworthy borrowers are finding financing. Meanwhile, the same factors that have been propelling the rapid expansion of domestic demand--high income growth, high wealth levels, and high consumer confidence--remain in place. So it seems to me that it's the time to begin the process of tightening policy.",918
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The New England economy remains strong, with tight labor markets reportedly constraining business growth, and strong residential and commercial real estate markets, particularly in the Boston metropolitan area. In the words of one of the Bank's directors, Boston is ""absolutely booming,"" though this description likely does not apply equally to all cities in the District. In May, the total number of people employed in the region fell a bit from its April level, but employment continues to expand at a pace that is higher than its long-term trend. The unemployment rate remains well below the nation's, although it has bounced around a bit in some states and ended slightly higher in May than in April. After virtually no growth in 1998, the region's labor force in 1999 is growing in every state except Massachusetts. Given all the stories one hears about hard-to-find labor, however, one has to believe that these new entrants to the labor force do not have the skills for the jobs being created. All of the Bank's contacts recently have complained that hiring difficulties are constraining growth. Technical staff have been hard to come by for some time, but job vacancies seem to abound in every service and retail establishment. The job market for summer teenage employment is strikingly good if my 17-year old and his friends are any indication of that market. All of them don't have minimum-wage jobs as compared with the experience of my daughter and her friends a couple of years ago. In fact, my son is now making $9 an hour for selling CDs, which he would probably do for free. [Laughter] Moreover, we hear stories--and I know of actual examples--of temporary help firms reaching out to teenagers who have keyboard skills and offering them $12 to $14 per hour to fill the vacancies the firms have during the summer. Our contacts with temporary help firms more generally, like President Moskow's, see business as good to great, but with revenues constrained by a lack of workers. IT staff are hardest to come by, as has been the case for a while. Some temporary help firms have broadened their base of workers to light industrial staff simply because there is a better supply of low-wage workers; according to one contact, even former welfare recipients are getting lucrative offers now. Amazingly, wage and price increases continue to be moderate. Inflation as measured by the CPI abated slightly in the Boston metropolitan area in recent months, largely due to a more sizable decline in fuel costs locally than nationally. Wages in manufacturing and retail are reported to be growing in the range of 3 to 5 percent this year, even given the dearth of supply. Firms report that changes in organizational structure and in non-wage job enhancements such as training are being pursued in favor of wage increases. Residential real estate prices for the region grew faster than for the nation as a whole, and commercial real estate conditions are strong in several metropolitan areas. Until quite recently, Boston enjoyed the lowest Class A office space vacancy rate in the country and very low rates for Class B space as well. Rents for commercial space continue to rise and now exceed those in both New York and San Francisco. While high rates obviously mean profits for Boston building owners, they could also deter new or expanding businesses from locating in Boston. Indeed, the latest data show downtown vacancy rates have doubled from their extremely low level, though they continue to be below the national average. Assuming these data are not an aberration, there may be some evidence of a cooling of demand at current price levels. Turning to the national scene, our forecast--like those of others--is similar to the Greenbook forecast. Economic activity is projected to slow this year and next as a result of moderating growth in consumption due to buyer satiation and a waning wealth effect from leveling stock market prices. Business investment also slows in our forecast, especially for computers, and net exports exert a continuing though smaller drag. Actually, in our forecast the growth in exports turns moderately positive this year, given expectations about growth in foreign countries. In our view GDP growth in 1999, Q4 over Q4, will be about 31/2 percent, not unlike the Greenbook, and will then decline to the high 2 percent area in 2000. We, like the Board staff, have now provided for a slightly higher growth potential for the economy at about 23/4 percent, at least for a period of time. And in our view, growth in 2000 will slow to about that level and thus unemployment will stay roughly flat. However, without a policy change, our forecast suggests that core inflation could rise in 2000--as does the Greenbook forecast--but the increase is larger and takes core price inflation to around 3 percent, which is clearly unacceptable in my view. Now, there is no doubt that this forecast is surrounded by a cloud of uncertainty. Certainly all the papers we have received since the last meeting have pointed to the various sources of that uncertainty and the reasons to be agnostic about projections of both output gaps and inflationary growth. Indeed, when I look at our track record at the Federal Reserve Bank of Boston and the track record of the Committee in general, we have been underestimating growth and overestimating inflation for some period of time. Perhaps our assessment of a positive output gap is wrong and later data will provide ample evidence of why we've been seeing such low inflation. But perhaps later data will confirm both our current assessment and our concern that temporary factors have played a large role in the current run of economic good fortune. The effect of some of these temporary factors is clearly waning. In particular, estimates of trade-weighted external growth are rising for both 1999 and 2000, which should affect both the demand for U.S. exports and the supply of excess capacity worldwide. Absent tighter policy, financial imbalances now evidenced in high stock market PE ratios and in the sizable growth in corporate and personal debt, even though it's affordable, may well deepen and pose threats when policy does tighten or a slowdown occurs as a result of other factors. Clearly, there are risks on the downside--the external deficit and the related low saving rate, just to name a couple. But the upside risks of increased pressure on capacity from worldwide growth and the potential for growing financial imbalances now seem both greater and more pressing.",1292
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"For the sake of variety, let me reverse the usual order of my regional comments and tell you that not everything is great in our District. We have two problem sectors: agriculture and textiles. Agricultural and farm prices remain low for the most part, as does farm income. That situation has been exacerbated most recently by a drought; we have had very little rainfall. With respect to textiles, we continue to hear reports of plant closings in Virginia and the Carolinas; most of the business is going to Mexico. These closings depress the areas where these plants are located--and especially in those three states that's usually small towns--even though many laid-off textile workers are able to find alternative employment in the currently very tight labor market. Outside of these two sectors, though, it's generally the same old story around our region: robust consumer spending and housing activity, a revival in many manufacturing industries, and continued exceptionally tight labor markets pretty much across the board. According to the information we have--both anecdotal and a few hard numbers-consumer spending may actually have accelerated in our region in May and June. Car sales and sales of appliances and other housing-related durable goods have been particularly strong. A lot of that hefty household spending obviously is coming from consumer borrowing. Some of our banking directors tell us that delinquencies are rising and that they are seeing, and are more concerned about, consumer bankruptcies. So there are some hints of imbalances in the market for consumer credit, at least in our area. But the most significant imbalance that we have in our region clearly is still in labor markets, especially for skilled and semi-skilled construction workers. Shortages of these workers are widespread now, despite a fairly significant influx of guest workers from Canada and especially Mexico into the Carolinas and Virginias. Some builders tell us that they are actually turning away business because of this dearth of workers. Beyond skilled construction workers, many businesses tell us that it's increasingly hard to find reasonably competent entry-level workers for just about any business. We're told that some McDonald's stores are now stuffing employment applications in the bag with the burger and fries. We hear the same stories that Michael Moskow and Cathy Minehan mentioned about the temp agencies. They have to scrape the barrel and it's hard to find anything resembling quality workers. Not surprisingly in this environment, we hear an increasing number of anecdotal reports about more aggressive wage demands than we've seen heretofore and some actual increases in wages in particular industries and local areas. I have a brief report about the First District for you, Cathy. One of our economists has a close friend who has a house in the Boston area. The friend got an estimate last year for an addition to his house but didn't have the work done. He got an estimate again just recently, a year later, and it's up about 30 percent. That's really extraordinary! On the national economy, I'll be brief. I don't have any special insights on the outlook at this point. I was very pleased to see the May CPI report. Obviously, the April CPI really scared me; if we had gotten a repeat of that in May, I would have been concerned that we were behind the curve. I suspect a lot of other people would have been concerned as well. So the May report was a relief, but I don't think we're out of danger yet. The Greenbook is projecting a fairly sizable deceleration in the growth of domestic demand in the second quarter now ending and in the third quarter. I think the staff makes a good case for this; I, too, expect some deceleration in demand. Heaven knows, I hope we get some deceleration! But, frankly, I just don't see much hard evidence of it yet; certainly I don't see it in my region. What I see is continued robust household demand for goods, services, and housing, big increases in our trade deficits, and help wanted signs all over the place. In short, we seem to have a fairly significant overall macroeconomic imbalance currently. More specifically, I think we have a classic case of excessive growth in domestic demand. I'm worried that we may well be fueling that with an excessively accommodative monetary policy. Thank you.",843
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. As is usually the case, conditions in our region have changed only at the margin between meetings. Retail sales remain quite healthy. A number of retailers are actually telling us that they expect the third quarter to be as good as or even better than the second quarter. As I've noted before, tourism is a particularly interesting part of our economy and an area where we often get early signals of a turn in activity or of people's outlooks. In the tourism industry bookings remain strong; they are not growing quite as fast as they were a year ago but are still at very high levels. This is the first time in a while in our surveys of the District's tourism people that we haven't heard grumbling about the falloff in visitors from Latin American, Canada, or Europe. There is a growing sense that there may have been some overbuilding in new tourist attractions in the Orlando area. If you haven't been in the area for a while, come on down! [Laughter] Construction is still at high levels. We are seeing some slowing in the rate of growth in single family permits, but that's offset by quite strong nonresidential construction. We've recently heard new concerns about overbuilding in commercial projects in Orlando. In oil and gas, the higher oil prices that have prevailed for a while now have shown through in a modest uptick in drilling activity after a long period of decline. That should pick up further if oil prices continue to hold at their current levels. Our manufacturing activity, as measured by employment growth, may be a bit less robust than for other District reports included in the Beigebook. Our import-sensitive industries like apparel, paper, and primary metals have seen declines. At the same time, there's an optimism that we will begin to see, or may already be seeing, some turnaround as the economies of our trading partners begin to improve. An old story: Labor markets are still tight, and outsized wage increases are still being reported, mostly in certain high-skilled jobs. A recent example of noticeably large increases was at Ingalls Shipyard, where a three-year contract provides for a 16.3 percent increase. Pricing pressures seem to have increased a bit at the margin since the last meeting. As one our directors put it, many of the business people she talks to are increasingly determined to pass on their cost increases. Health care is a good example in our region. It's an area where pressures are great and where we are seeing some relatively large upward price adjustments. who is a major homebuilder in the region, also reports that he has been able to pass through many of the cost increases that he's seen in the building trades. On the national front, real GDP growth is still outpacing my expectations. Other than the effects of oil and energy costs, measured inflation is not yet showing the upward drift I thought we might see by now. Nevertheless, there have been some marginal changes to the outlook in my view, suggesting our assessment that the inflation risks are on the upside was in fact correct. Our GDP projections for most of the recently depressed Latin American and developing Asian economies have been revised upward. While the turnarounds have not yet been reflected in increases in U.S. exports and commodity prices or in capital markets, we expect that the demands for and prices of real goods and services and productive inputs will rise. This should reverse many of the favorable shocks that have slowed U.S. real GDP growth and temporarily reduced the rate of increase in prices. Furthermore, I see little on the domestic side to suggest that there will be a significant slowing in domestic demand during the rest of this year. Employment remains strong and consumer income and spending are up. Business investment spending may slow some, but it appears likely to continue to run ahead of past experience in a mature expansion. Should the reversal of the positive external shocks occur as expected, that raises a fundamental question about the overall stance of monetary policy. Would the associated run-up in measured inflation reflect embedded inflation that has been temporarily masked by a series of favorable events? Or would the increase be temporary due to the nature of the fixed-weight inflation measures and the fact that only relative prices of energy and commodities have increased? In general, relative price movements aren't inherently inflationary and they should be permitted to play themselves out. Such price pressures would dissipate quickly as real and financial resources are reallocated, as long as our policy stance prevents these relative price adjustments from being passed on through the economy as a general price level adjustment. However, if we persist in maintaining interest rates below what I believe is likely to be their pre-shock equilibrium levels, we may inadvertently be pursuing an easier and inherently inflationary monetary policy. Thank you, Mr. Chairman.",947
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The District economy continues to perform very well. Indicative of this, the unemployment rate in the Twin Cities metropolitan area is now 1.6 percent. Actually, it has been at that level for several months, so I don't believe it's an aberration. Estimates of the District unemployment rate are harder to come by, but that rate is probably 3 percent or lower. Residential construction activity is very strong. This probably will be a record year for both homebuilding and sales in the Twin Cities area. Commercial construction is also strong. Some of the national developers based in the Twin Cities tell us they are seeing good business basically throughout the country. Consumer spending remains healthy, tourism is doing fine, and manufacturing for the most part is doing fine. Agriculture remains the blight on the landscape. As far as the national economy is concerned, not surprisingly our VAR model remains quite optimistic. My own view is similar. I might briefly comment on where I think the risks don't lie. I don't think there is a risk of a precipitous slowing of domestic aggregate demand; that seems very unlikely to me. The risks abroad relative to what we thought six months or more ago clearly have diminished; indeed, we've already talked today both about better performance materializing abroad and forecasts for economies abroad being marked up. So I think in this environment we can concentrate on sustaining the economic expansion by keeping inflation low.",284
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. The economy in the Philadelphia region continues to grow steadily, with tight labor markets and low inflation. The outlook is for more of the same. Residential construction is strong, with prices rising especially for upscale housing. Nonresidential construction is brisk but not booming. Manufacturers report further gains and retailers are generally doing well. Hiring and retaining skilled employees remain the major challenge. Although there are special incentives for particular skills, the norm for annual wage increases is still mostly in the 31/2 to 4 percent range and increases for unionized employees tend to fall in that range as well. Turning to the nation, we are at the point in this remarkable expansion when the risk of accelerating inflation has to be taken seriously. Raising the federal funds rate as insurance against an overheating economy is largely a foregone conclusion at this meeting. The more important issue now is how to position ourselves going forward. Credibly resisting inflation also means being a credible evaluator of the inflation threat. To use an analogy, we need to be able to tell the difference between a wolf and the family dog. Let's be honest with ourselves: Current and pipeline indicators of inflation look more like the family dog than a wolf, and our forecasting models have for several years cried wolf when there has been no wolf. How well will a preemptive rationale for raising the funds rate hold up with that kind of support? Going forward we need to position ourselves so that we can evaluate the inflation risks on an ongoing basis and adjust monetary policy accordingly rather than box ourselves in unnecessarily.",311
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"The pace of economic growth in the Eleventh District has slowed somewhat in the last few months. Slower activity has been concentrated in three areas: construction, energy, and exports, particularly exports to Mexico. Concerns about overbuilding have surfaced recently, and construction activity of all types, both residential and commercial, has dipped. Energy companies are behaving as though current levels of oil and gas prices are not sustainable. Their slowness to boost the rig count is probably driven in part by concerns about OPEC's ability to restrain output. Most OPEC member countries and others have not cut production to the full extent of their agreement, and fiscal pressures may necessitate increased output, particularly by Venezuela. Mexico seems to be having second thoughts about agreeing to restrain its oil output. Mexico's difficult fiscal situation has reduced its ability to raise spending on public works, a practice that is common in the year prior to a presidential election. Next year's election is expected to be close, so the incentive to augment revenues from higher oil production increases every day. Future oil prices will be determined by a race between increased OPEC and Mexican cheating on output quotas and the growth of world demand. Given the history of OPEC's output production agreements, Texas oil producers have good reason to remain cautious. Turning to the national scene and focusing on issues that are relevant to the policy decision, I think what I'm going to do today is cry ""dog."" [Laughter] Referring to Ed Boehne's foregone conclusion about what we are going to do tomorrow, what worries me about that is that we may trigger an end to the grand experiment that we've been engaged in without seeing how far it could go. We held back while output surged and unemployment declined to below levels previously thought inflationary, but inflation declined instead. And we've been rewarded with the lowest misery index in history. If we end this experiment, whether we intend to or not, we will never know how far it could have gone. What has changed? We had the April CPI report. But what about the May report? The twelve-month CPI, the headline number, has risen to converge with the core rate, but the change over that twelve-month period was driven more by dropping off the first month of the period than it was by anything that's happened more recently. We're rightly worried about accelerating inflation, but we're still in a deflationary world environment. We still haven't seen the end of the effects of the collapse of the iron curtain--all the new consumers and workers entering the world economy for the first time. Beyond the iron curtain, we've had the collapse of the curtain of protectionism in Latin America. We've had globalization in general. We've had the Internet and the convergence of technology. These are all deflationary forces. On the issue of a preemptive move, we had preemption redemption in 1994, so why not now? What's different now? In 1994 we had inflation in the pipeline. Sensitive commodity prices were rising rapidly throughout that year. Now they aren't rising. They are barely off their multiyear lows. Another important difference between 1994 and 1999 is that we began 1994 with the pedal to the metal. We had 3 percent nominal short-term interest rates and about 3 percent inflation, yielding real short-term interest rates of zero. Now we have a 43/4 percent federal funds rate and 2 percent inflation--or less by some measures. So we have real short-term interest rates of about 3 percent now and maybe 4 percent real long-term interest rates. Asia has perhaps started to heal, which will remove a deflationary force on our own economy. But, remember, commodity prices were falling before the Asia crisis. Developments in Asia and Russia just accelerated the decline. The bulk of our price improvement in recent years came from lower import prices due to the strong dollar, but the dollar is still pretty strong. On the question of slack in our economy, the low unemployment rate suggests that we have little or none. But the low capacity utilization rate, under 80 percent, suggests otherwise. And our economists tell me that capacity utilization is a better predictor of future inflation than unemployment. We should not forget the slack elsewhere in the global economy: Asia still has slack, both in labor and manufacturing capacity; Europe is weak and sluggish; and much of Latin America is still in recession. If it's real growth we're worried about, I for one believe that rapid supply side technology-driven real growth is disinflationary, not inflationary. But if you're a strict demand sider, take heart from the Dallas Fed's recent forecast of real growth in the second quarter. Our forecast was, believe it or not, 2.9 percent, and that was before our staff saw the Greenbook. We're really good at forecasting backwards! [Laughter] With labor productivity growing an average 4 percent over the fourth quarter and the first quarter, it could decline by half and still be 2 percent. Add on a 1 percent increase in labor supply and that would give us noninflationary 3 percent growth for some time to come. Turning to Peter Fisher's fourth point a while ago, I think the biggest argument for tightening at this meeting is that so many of us have threatened it that the Committee would probably lose face and lose credibility if it didn't raise the funds rate by at least 1/4 point. But even then, if we kept the asymmetric directive, I think the markets would remain nervous and turbulent over the next Fed-watch period. If I had the deciding vote, I probably would vote for a small tightening just because of the box we're in. But since I won't have the deciding vote or even a key vote, I remain to be convinced.",1164
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Second District's economy remains strong, though growth has clearly slowed from its brisk first-quarter pace. There are no indications of broad-based price pressures. Employment in the District grew at a 11/2 percent annual rate in April and May, matching the first- quarter pace but down from 2 percent in 1998. Retailers report that sales were strong in May and early June, with less downward pressures on selling prices than earlier in the year. The housing market remains generally strong, though new construction has cooled from its vigorous first-quarter pace. Manhattan's office market has been stable in the second quarter, with vacancy rates little changed and rents rising at a more subdued pace than in 1998. Purchasing managers indicate that manufacturing activity was mixed in May, while there were reports of an upturn in commodity prices. Local banks report a dip in loan demand, some tightening in lending standards, and ongoing declines in delinquency rates. The national economy, based on the most recent data, is continuing to grow rapidly and without increased inflation, because productivity growth is not only maintaining the approximately 3 percent level we have seen since late 1998 but if anything is improving. Our read on the second quarter is that productivity may have grown at an annual rate of 4 percent or even more. As one of the later converts to the view that the economy is behaving remarkably differently from the past, I think it is important to remind ourselves what we should believe in and what we do not have to make any leap of faith to believe. To deny that the economy has been showing much better productivity since 1995 is simply to deny the facts. How long will this improved productivity last? At what level of improved productivity will the economy settle? We do not know the answers to those questions. Should this lack of certainty about the future confuse us in the present? I do not think it should. We don't have to know how long the productivity improvement will last nor at what rate productivity will settle. Those answers will be known only in the future. We don't even know when. More importantly, we do not need to know. Most of us believe that the lag in the effect of monetary policy is one to two years. That is as far into the future as we need to peer. To try to look farther merely confuses us and perhaps makes us unwilling to believe the reality that is staring us in the face. I can see nothing that would alter my belief that productivity will rise at least 21/2 percent during the next one to two years. That means that the economy can enjoy noninflationary growth well within the forecasts of the Greenbook or of the New York Reserve Bank. We all say that labor markets are tight, but they have been tight for several years and workers have been found--many of them in pockets of poverty where finding a good job, or any job, was a forlorn hope. Should we be fighting that highly positive development for the good of the American people? I think not. And yet the American public and markets everywhere are waiting for us to pounce on growth and job creation and stifle them. Since I do not believe we should do that, I believe that our challenge is to clarify our strategy--first to ourselves, then to the public and the markets. The markets are spending their time psychoanalyzing this Committee rather than analyzing the real world. That is highly counterproductive because it deprives our nation's economy of the balancing effects of the normal pulls of supply and demand in financial markets. Never-ending heavy breathing by market watchers is convincing the American people that we want to deprive them of inflation-free growth. Clearly, the general posture of the Federal Reserve should always be to remain highly alert to imbalances, to forces which could end sustainable growth. Our policy regarding price stability on a continuing philosophical basis should be seen as symmetric, as being against both deflation and inflation. Our strategy, on the other hand, should vary with conditions. Deflation is sufficiently unlikely at this time that we should have a strategic position of concern about inflation. But we should not be in a tactical position of being constantly poised to attack an enemy that does not appear visible to me. We need to find a way to tactical symmetry--to a position where we, the public, and the markets think we are watchfully waiting but not looking for windmills to knock down. Because of the public perception of where we are, I do not think we can achieve tactical symmetry by taking no action at this meeting. However, when we discuss what action to take in a later portion of the meeting, tomorrow morning, I am absolutely convinced that it must take us to tactical symmetry, even against a strategic background of concern about inflation. Thank you.",964
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, it's obvious that everyone around the table is ""chafing at the bit"" to discuss policy, and I'm going to do my part to behave in a disciplined fashion here by just discussing the outlook. In the Eighth District the story is very simple; it's the same old story. We're seeing exactly the same kinds of things that we have been seeing for a good number of months now. I make a special point of trying to talk to my contacts about what seems to be different, what seems to be on the radar screen that hasn't been there. My impression is very clearly that firms are successfully managing their labor market pressures. For example, is very concerned about the labor market situation for his company. He says that its needed employees at the Louisville hub. He says that the company is having a hard time all around the country--except in Philadelphia, Ed, by the way. He says he's having no problem in Philadelphia; I don't know why the situation there is different. higher hiring referral bonuses and retention bonuses. So, clearly, that company is concerned. On the other hand, who was quite concerned about his labor situation earlier in the spring, says that now his folks are able to find labor pretty readily though they are behind on IT staffing. What seems to be happening is that case-by-case firms are coming up against the labor market pressures and they are able to manage the situation successfully. Of course, managing the situation in some cases means that they are paying more wages or retention bonuses or something, so there's perhaps some up-creep in wages involved, although obviously it is not showing up in the national statistics. Another thing that has come on our radar screen is that our bank examiners are expressing a little concern--I want to emphasize it's a small degree of concern--about loan administration in the banks. Credit demands are strong enough and loan officers are in tight enough demand that our examiners have the sense that some of the banks they examine are simply not able to have disciplined loan administration. So there may be a bit of sloppiness in that area that could produce some problems later on. No one is very concerned about it, but I mention it because it was the first time I really had heard about that from our examiners. We have the same situation in agriculture and so forth that has existed for some time and has already been commented on by others, so I have nothing to add.",486
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. Several meetings with bankers in sixteen of the western and northwestern counties of Ohio two weeks ago revealed somewhat of a paradox in that area in terms of a very strong regional economy but simultaneously a very vulnerable economy. It's an area where manufacturing often runs double the national average as a share of total employment; most of that is motor vehicle-related production. Auto companies and their various suppliers are by far the largest absolute employers throughout that part of our region. So employment levels and personal income growth are very high and spending growth has been exceptionally strong. But bankers increasingly express their worries about personal bankruptcies; the stories about people who were current and then suddenly file for bankruptcy have returned. They say it is fairly common to have two adults in a household using the entire paychecks from all four of their jobs, including all the overtime they could get, to service their debts. So when there is a loss of one of the jobs or loss of overtime or illness or divorce, then that's it. They can no longer service the debts. One banker emphasized the condition of his customers this way: He said he is not worried about withdrawals around the time of the century date change because his customers don't have any money in their accounts to withdraw.",246
-fomc-corpus,1999,"We have heard that, too!",7
-fomc-corpus,1999,"They said that their business customers continue to experience difficulty hiring, especially for entry-level positions. The bankers said they are often paying 18-year old teller trainees $11 to $12 an hour. Then they can't hold the inexperienced people long enough to take advantage of their productivity after the period of training, but it has been impossible to recruit experienced people. We also did a roundup of what was going on in tourism in the region, so if you haven't been there recently, come on up! [Laughter] Given that the south shore of Lake Erie is a major tourist destination [laughter] and tourism companies are a big employer there, we talked to people at Cedar Point, Geauga Lake, Sea World, and King's Island Park to see what they were doing. Ticket prices are typically up 10 to 15 percent this year and these places are having a great deal of difficulty in recruiting employees. Cedar Point had openings for 3,700 summer workers and in June they are running still about 200 short of their goal. They went to Europe, again hoping to recruit 500 workers as they did last year, and were able to get only about 350. They increased the amount of subsidies for housing and for employee and employee family discounts. And they increased their season-end retention bonus by 50 percent; a worker receives $650 if he or she stays the full 14 weeks of the summer season. We hear similar stories from the other parks. Sea World and Geauga Lake contacts said that a significant number--about 1/5 of the total--of their concession stands haven't been opened and probably will not open this summer. Bankers are reporting strong loan demand for all types of loans and in addition are expressing concerns about credit quality. Some of our examiners also are starting to say that they are seeing very early signs of things they are not comfortable with. The ag sector is in very good shape in the sense that the planting was all done on time, conditions for planting were excellent, and since then we've had just the right amount of moisture and sunshine. So, as one said: All the farmers need to do now is sit and wait for a drought or a flood someplace else! But even the low crop prices are not restraining the price of farmland. One banker said that he has customers who recently have been acquiring new land at $2,000 to $2,500 an acre that will not produce cash flow of $1,000 an acre at current crop prices. So buyers are either counting on commodity prices to go up or they plan to use the land for something else. I'm not sure what the logic of that is. Also, for the first time in a while for us, we heard reports of foreign investors--Swiss and Canadians in particular--buying farmlands or even raw wooded lands. That may reflect capital preservation efforts on the part of some of the foreign investors. Our Small Business Advisory Council described commercial real estate activity, particularly shopping centers, as booming. One referred to an ""explosion"" of orders in the spring for hot tubs and in-ground and above-ground swimming pools. The problem is that labor shortages make it difficult to get the work done. So he went to Miami to recruit 20 workers, some with families--he claims they have green cards--and besides moving them to Columbus, Ohio, he provided them with housing as well. We also heard reports of rising medical costs, all of that usual thing. In the building sector, we were told that framing contractors weren't even bidding on some proposed new projects. Additionally, for some projects they had planned to start this summer it now looks as if they may not even start digging or preparing the sites. We did hear some reports, especially in machine tools, of some new orders coming in from Asia and Latin America. So that may be an early hint of positive developments there. We were told that a number of fast food restaurants in both central and northwest Ohio are often now open for drive-through business only. They don't open the eat-in facility because of a lack of staff. So I assume that, quality adjusted, one might call that a price increase. A director in the national retail trade business said that this year is going to be phenomenal and will go down as a banner year for retailer earnings. He said retailers are worried that they are going to go into year-end with stocks that are too low to meet what they think is going to be seasonally very strong demand for clothing and other nondurables. We heard a lot of reports of food processing costs--refrigeration, transportation, container costs and so forth--rising fairly strongly. A director who specializes in came into this year expecting 800 number and Internet sales for all of 1999 to range between $300,000 and $400,000 but already had booked $5 million in such sales in the first five months of this year. Whether that is a reflection of aggregate demand or a shift in demand, I don't know. She feels that discretionary income is high and rising very rapidly. Also, we heard reports that the structural steel industry is improving. Industry contacts said, in fact, that right now order books are full through the third quarter and that because of large construction projects, especially stadiums, they expect to finish the year with a full book. Turning to the national economy, I wouldn't know what assumption to make about the fourth quarter of this year and the first quarter of next year in any case. While it is no doubt true that Y2K will foster some buying to accumulate stocks of various nondurable goods in particular, I don't know how I would go about making assumptions regarding consumer behavior or business expenditures for durable goods or plant or equipment or even recruiting and hiring decisions. If Y2K gets to be a media event with the degree of hysteria or concern about the future on the order of what we saw in the fall of 1990 looking toward Desert Storm and the Gulf War, we could have a very substantial negative impulse in the fourth quarter. And we would have to wait to see if that then reverses in the first quarter. I wouldn't know how to quantify the magnitude of that. I can see it going both ways. Also, if people want to enter the year-end period with a high degree of liquidity, that does imply, other things the same, a slower rate of spending for something. So Y2K may influence the balance sheets and cash flows of firms as well as of households in a way that I wouldn't know how to put into a forecast. I have commented over the last year, year-and-a-half about the very rapid growth of personal income. In the spring of 1998 we were looking at Greenbook projections of personal income decelerating into the 31/2 to 4 percent range and it has run 1 to 11/2 percentage points faster than that. And that's great, as long as it stems from income that people are really earning based on what it is they produce. I heard last week--and I haven't had a chance to follow-up to see if it can be documented--that right now we're experiencing an inflow on the order of 1 million workers a year from foreign countries, augmenting the labor force. Now, as for how many of those are illegal and how many are permanent, I don't have any information. But the total is a very large number--much larger than I would have thought--and it certainly would contribute to rapid personal income growth. We can see what the effect of the rapid growth of demand is on the domestic economy and, of course, we can see it in the rapid growth of imports at a rate that I certainly consider unsustainable. I take that as the strongest piece of evidence of excess aggregate demand in the domestic economy, and at some point that surely has to be reversed. So I do continue to be concerned about too much demand chasing what we're able to produce in the longer run in this economy. I have a couple of comments on inflation. We continue to do research on various measures of inflation: We track the median CPI; we've also been looking at the regular CPI but using PCE weights. While the level of the latter measure may not be statistically significant, it has moved up appreciably. In the first five months of this year it ran right at 3 percent, even with the drop we had in May. Now, for the first time in a couple of years, that measure is running ahead of both the regular CPI and the median CPI that we track. So, that measure is another way of looking at the concerns about inflation that we have. All I'm saying about it at this point is that it's moving in an upward direction compared to what it has done in the last two years. One more comment on inflation numbers: We began a project some time ago, and are building a track record now, with our own consumer price outlook surveys to compare with the Michigan survey's perceptions of current inflation and forecasts of future inflation. Our surveys have some different questions and a lot more detail in terms of the breakdown on respondents. First, both perceptions of current inflation and expectations about future inflation have moved up sharply. It's the direction that's important, not the levels, as far as I'm concerned at this moment. Some of the information that is starting to become available on the breakdown of income levels, education levels, males versus females we're not sure how to interpret. Consistently, females' perceptions of current inflation and future inflation run 1 to 11/2 percentage points ahead of males' perceptions. We don't have an explanation for it. We even break the data down as to whether the respondent is a member of a household and whether he or she is working or not working outside the home. So, without getting into too much detail about levels right now, since the beginning of the year all of these measures have turned upward in each successive survey.",2002
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. When the Committee made the third of its three cuts last fall, which was the final one that brought the federal funds rate to the level we have today, it was a close, difficult call. After a good deal of soul-searching, that action was taken largely--and please excuse the use of this old war horse once again --as an inexpensive insurance policy, which could easily be reversed if the economy appeared to be too strong. Very soon thereafter what had at that time appeared on balance to be financially driven downside risks began to migrate. For a while, the risks appeared to be balanced, but more recently they seem to have moved ever more clearly to the upside. Two groups of factors seem to me to be driving this change. For one, the world economy generally appears to have survived last fall's financial crisis and to be beginning to turn upward. This is a healthy and welcomed development, of course, but it does cause problems for U.S. monetary policy because several things that have helped our policy mix may well be changing. Our exports could increase, adding to already very robust economic activity. World commodity prices could firm; indeed, oil already has done so. The dollar's foreign exchange value could begin to weaken, adding further to exports and raising import prices in the United States. All of this is potentially inflationary. Then there's our remarkably strong economy, which should slow on its own but so far has refused to do so. Consumer confidence is still sky high. Real wages are rising. Wealth continues to grow. Despite the recent hesitancy, the Dow Jones industrial average is up over 14 percent so far this year, and that's not too shabby. Consumption continues to increase at a rapid pace, led by the big-ticket cyclicals like autos and homes. Inventories are low and are likely to be a short-term source of further strength. Clearly, labor markets continue to tighten as the economy strains to keep up the beat. So far, strong productivity growth has made it possible to do so without visible inflationary pressures. But it seems to me that it would be a dangerous assumption to be confident that this could go on indefinitely. Things have been and indeed remain wonderful. But there are limits out there somewhere beyond which could lie serious trouble. Policy must, of course, focus one or more years out, not on today. And within the context of that time frame, I think we're quite possibly in the danger zone now and should begin to respond.",501
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I think the obvious question we've all been addressing or attempting to address in our own ways is: What has changed since the last meeting? In some sense I think not much has changed since then. The incoming data continue to point to vigorous growth, which may well be above trend and therefore is of some concern, I think, to everybody around the table. Consumers are clearly the major engine for this growth, as the recent personal income and consumption data amply indicate. And while PCE growth may slow at some point, it is not slowing yet. The other side of this, as we all know, is that labor markets continue to be tight. The unemployment rate has been at 4.2 or 4.3 percent for three or four quarters now. That is starting perhaps, and I say perhaps, to spill over into compensation. Mike Prell's chart number 5 indicates that average hourly earnings of production workers decelerated a bit over the last twelve months compared to the previous twelve months. But if one looks more closely at the last three months--that is, the early part of this year--average hourly earnings seem to be picking up again to somewhere in the 4 percent range. This obviously puts into stark relief the importance of ongoing improvements in productivity. There is continuing evidence that businesses are investing heavily in productivity-enhancing technologies. The recent shipments and orders data for communications equipment remain on a steep uptrend, as do the orders and shipments of office and computer equipment. The major issue, obviously, is whether or not this capital deepening will translate into further increases in the rate of productivity growth. On this issue I think there's anecdotal evidence on both sides, but the jury is out. Against this backdrop of ongoing labor market tightness, there are a couple of conditions that may have changed. Here I'll say nothing new but I will reiterate what others have said. One change, obviously, is that the international environment is not as threatening as it has been for much of the last eighteen months. The staff forecast clearly shows some uptick. More importantly, in April our exports posted the first gain in six months. Two industries where weak foreign demand has depressed shipments-construction machinery and metal working machinery--both posted sizable increases in May. We've already talked a bit about commodity prices, so I will simply echo the view that it seems as though commodity prices have bottomed out; the evidence is broader than just the oil side of it. Another perspective that I consider important is to look at how interest-sensitive sectors of the economy are behaving. Purchases of durable goods posted some healthy gains in May. I think the housing market is showing us a little of both strength and weakness here. The information in front of us indicates that sales of new homes and similarly sales of existing homes fell in May. But if one looks at more timely measures, such as builders' ratings of new home sales or applications for home mortgages, those have risen from April through June. So in addition to the auto sales that Governor Kelley referred to, there's some evidence of strength in other interest-sensitive sectors. As Vice Chairman McDonough indicated, however, we're not here to slow growth. Nor are we here to destroy jobs or to destroy wealth. We should be looking for the earliest signs of inflation. We had a bit of a surprise in the CPI number for April, but I think we were wise not to put too much weight on that; as the subsequent numbers indicated, perhaps some of what we saw in April was a bit of a fluke. The early indicators of inflation are very hazy but all point in the same direction. I've talked about commodity prices and average hourly earnings. In addition, Mike Prell brought to our attention the PPI for intermediate materials, which moved up in March, April, and May-three upticks after declines in that index in each of the 10 previous months. There are a number of anecdotal stories about faster increases in prices and wages, as we've heard around the table. When I put all this together, it does seem to me prudent to take out a little insurance--to use that phrase--but not to react more strongly than the incoming information warrants. We can debate whether or not we see a wolf or a wolf in sheep's or dog's clothing or even the family dog, whichever it may be. But speaking of clothing, even in a balmy June it's important that the emperor not be seen in public without clothes whatsoever! [Laughter]",909
-fomc-corpus,1999,"Try to top that, Governor Meyer!",8
-fomc-corpus,1999,"That will be difficult! I read the incoming data on demand and production as generally consistent with a slowdown to about trend growth in the second quarter but not at all definitive on whether we are in the process of a more sustained slowdown from the 4 percent rate of growth experienced over the last three years. On the inflation front, the last CPI report reduced concern that we are already seeing a move toward higher inflation. But the recent pattern in CPI reports is consistent, in my view, with the interpretation that core inflation has now stabilized and that, therefore, the best inflation news is behind us. Concern that we may, in addition, be poised for an uptrend in inflation going forward comes mainly from the labor market, where there are some hints that demand pressures are now beginning to be felt in wage changes. This is the tone of the Beigebook. We also have the upward revision to the average hourly earning series and the rebound in the 3- and 6-month rates of increase in average hourly earnings in the last several months relative to the 12-month increase, following a period of deceleration. On top of this are reports of higher health insurance costs that are expected to boost the employer benefits component of the ECI going forward. The change in the Greenbook forecast, while not dramatic, certainly is in the direction of supporting the case for a higher federal funds rate target. While I thought the rhetoric of the Greenbook was modified somewhat more than the forecast, I appreciated both changes. The 0.4 percentage point increase in core CPI in 2000 relative to 1999, the 2.7 percent core CPI inflation rate in the fourth quarter of 2000, and the momentum toward still higher inflation thereafter are the central stories in the Greenbook. This is consistent with my own concerns. Now, at Humphrey-Hawkins meetings, the staff also offers an extended forecast. This puts us in a better position to consider the longer-run path of monetary policy that is consistent with our policy objectives, rather than focusing exclusively on the decision about the target for the funds rate between today and the next FOMC meeting. This also provides an opportunity to consider the inflation risks associated with initial conditions in terms of current utilization rates and the prevailing momentum in economic growth. Let me note some of the important features of this extended forecast. Despite the 50 basis point tightening over the Greenbook horizon and the cumulative 150 basis point tightening over the extended forecast horizon, inflation moves up measurably. And the rise in inflation may be steeper than it appears on the surface. The reference price index is the PCE, which has been running and is expected to continue to run about 3/4 percentage point below the CPI. The rise in the PCE inflation rate from just below 11/2 percent this year to just above 2 percent by 2001 and to a peak later of about 21/2 percent translates into an increase in core CPI from 2 percent over the last 12 months to about 23/4 percent in 2001 and a peak of around 31/4 percent. Add another 0.6 to 0.7 to put this number on a methodologically consistent basis with a 3.1 percent increase in core CPI over 1995. I think this helps to underscore the point I made at the last meeting: That there is a danger that we could squander a most extraordinary set of disinflationary forces over the last several years and allow this episode to be a transition to higher rather than lower inflation. The Greenbook forecast and my own, of course, reflect key assumptions about trend growth and NAIRU. Our forecasts have admittedly been very poor over the last few years. There is no question that there is an unusual degree of uncertainty on all counts. But the reasonable possibility of a significant rise in inflation is a concern that I will weigh in my monetary policy position tomorrow morning.",798
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. We're being increasingly admonished to fight inflation and not real growth. I wish it were that simple. Everybody loves growth. It improves living standards and a consonant growth in overall liquidity keeps inflation low. But even though growth is desirable, a nation can have too much of a good thing. If there is little economic slack as measured, say, by unemployment and discouraged workers, and if there are lags in monetary policy, the main way the Fed can control inflation is to control growth--that is, to keep the prospective growth in aggregate demand close to that of aggregate supply. To make a judgment of whether it is close, we must rely on forecasts. Even with an upward shift in productivity growth, a reasonable forecast for growth in aggregate supply over the next few years is around 3 percent, perhaps a bit above. A forecast for demand growth is harder to come by, and the staff's has certainly not been perfect. But the staff has learned from its misses and has incorporated those lessons into its new forecasts, so I'm willing to assume that they are now probabilistically unbiased. The baseline forecast that many of you referred to does already include a higher federal funds rate. The version that I prefer of the staff forecasts assumes no change in the funds rate. This shows that the forecast growth in aggregate demand is coming in above that of aggregate supply. Even including the flat Y2K quarter, the average growth in real aggregate demand in the unchanged funds rate version of the forecast is 3.3 percent over the next year-and-a-half; taking out this flat quarter, it rises to 3.8 percent. The true estimate is probably somewhere in between the two. This is not a huge supply/demand imbalance, but I think there is some imbalance. Since the forecast begins at a time when resources are tight, forecast inflation gradually accelerates by about 1/2 point per year in 2000 as opposed to 1999, with more acceleration in later years. Roughly the same pattern is shown in the Blue Chip forecast. This acceleration has been a standard, though largely unrealized, feature of the forecast for some time now. I've always been worried about it, but I'm getting a little more so lately for five reasons. One is that the long-awaited natural slowdown in the U.S. economy seems not to have materialized. Second, the world economy is beginning to recover. Third, commodity prices have stopped dropping and may even be turning up. Fourth, there are now more tight labor market anecdotes than before in the Beigebook and elsewhere. Fifth, there are early if intermittent signs of acceleration in prices and even a touch in wages. After a long spell, it may now be time to worry about the gradual acceleration of inflation and to think about tightening policy. The same suggestion is given by targeting rules. A forward-looking inflation targeting rule would tell us to tighten. A forward-looking nominal income targeting rule would tell us to tighten. If the real interest rate is in the neighborhood of 3.8 percent, which is taken from the possibly biased TIP market, the nominal funds rate is probably too low from a long-term standpoint. None of these indicators is perfect, but all are starting to point in the same direction. Let me step ahead and talk about the ""tap on the brakes"" issue. Should there be a slight tap on the brakes or a stronger tap? The argument for a slight tap is that there is still a great deal of forecasting uncertainty in all of this and there is still time to make future changes if new data confirm our suspicions. Until we see the whites of the eyes of inflation, premature Fed moves do not let the new high productivity American economy reach its full potential. The arguments for a stronger tap are that the present funds rate may be too low by more than a slight amount, that it is difficult to raise interest rates, and that there are lags both in monetary policy and in the inflation process. In being too cautious and not taking advantage of windows of opportunity, delayed Fed moves let inflation heat up again after years of painful sacrifice to bring it under control. I'm not going to say where I am on this except to say that these were years of painful sacrifice. [Laughter]",859
-fomc-corpus,1999,"We will now adjourn until 9:00 a.m. tomorrow morning. Before we do, let me just remind you that the forecasts that you've submitted to Mike Prell are subject to revision, as you know. He would appreciate having any changes in your forecasts by close of business on Wednesday, July 7. Wednesday, June 30--Morning Session",72
-fomc-corpus,1999,"Mr. Madigan, you have the floor.",10
-fomc-corpus,1999,"This briefing provides background for your review of the ranges for money and debt for 1999 and your decision regarding provisional ranges for 2000. I'll be referring to the charts and tables from the Bluebook that have been distributed separately to you this morning in a package labeled ""Staff Presentation on Money and Debt Ranges."" 3/ Last February, the FOMC reaffirmed the growth ranges for 1999 that were chosen provisionally one year ago: 1 to 5 percent for M2, 2 to 6 percent for M3, and 3 to 7 percent for domestic nonfinancial sector debt, shown in Chart 1. The Humphrey-Hawkins report in February noted the FOMC's continued uncertainty regarding appropriate rates of money growth in the intermediate term and stated that the Committee intended the monetary ranges to be benchmarks for growth under conditions of price stability, sustainable economic growth, and historical velocity relationships. In addition, the report pointed out that the monetary aggregates could exceed their ranges during 1999. As shown in the top panel of the chart, M2 has indeed been running above its range so far this year, with growth through June at a 61/4 percent annual rate. M3 growth for the year to date has been about 6 percent at an annual rate, just at the top of its range. Debt, by contrast, has been comfortably within its range. The relatively rapid expansion of M2 this year importantly reflects the brisk pace of nominal income growth. In addition, it has mirrored a further decline in V2, shown by the solid line in the top panel of Chart 2. To a small degree, the decline in V2 over the first half of this year probably was a lagged response to the drop in opportunity cost--the dashed line in the upper panel--late in 1998 following the easings of monetary policy. In the middle panel, the lower solid line, labeled ""Fit from 1959:Q2 to 1989:Q4,"" shows the historical association between opportunity cost--the horizontal axis--and V2, the vertical axis. Points corresponding to the experience over the period since mid-1994 are shown in the box and are repeated in magnified form in the lower panel. That scatterplot suggests that the demand for M2 may retain an interest sensitivity somewhat similar to that apparent in earlier decades. Since its peak in mid-1997, however, V2 has dropped considerably while this measure of opportunity cost has changed little on net. We can't pin down the reasons for the downtrend, but it seems reasonable to suspect that wealth may be playing a role. Large stock market gains have boosted wealth but have left portfolios skewed toward equities. As investors, in response, have diversified some of their wealth into other assets, such as deposits and money fund shares, M2 has been growing more quickly than nominal income. Nonetheless, econometric studies have not identified a clear role for wealth in M2 demand, and considerable uncertainty continues to surround the determinants of M2. Chart 3 shows the velocity of M3 in the upper panel and the velocity of debt in the lower panel. In 1999 V3 has continued to drop at a pace a bit quicker than its trend from 1960 to 1985. The velocity of debt has remained roughly flat, as was the case before the mid-1980s. Table 1 summarizes the staff projections for 1999 and 2000. As shown in the third column, M2 is projected to expand 6 percent over 1999, outpacing the 51/4 percent gain in nominal income forecast by the staff in the Greenbook and the similar central tendency of income growth in your own forecasts. The projected decline in V2 reflects an assumption of continued, albeit diminishing, portfolio influences and a small boost to M2 demand from Y2K concerns. These effects are partly offset by the assumed tightening of monetary policy this year. Next year, M2 growth is expected to slow further to 5 percent, owing in part to the deceleration in nominal income, which is anticipated by your own forecasts as well as the Greenbook. A reversal of the Y2K effects and the continued fading of the portfolio effect on money demand, given the projected leveling-out of the stock market, also contribute to M2's expected deceleration. M3, the second line of the third column, is forecast to expand 61/4 percent this year. The sharp slowing from last year's pace of nearly 11 percent mainly reflects a steep drop-off in bank credit growth after the surge that resulted from last year's market turmoil. Next year, M3 growth is seen as edging off to 6 percent, with the effects of the deceleration in M2 being partly offset by a strengthening in bank funding needs as bank credit picks up some. Domestic nonfinancial sector debt is projected to expand 51/2 percent in 1999 and 41/4 percent next year, about in line with nominal income. The contraction in federal debt steepens, owing to the widening budget surplus, while nonfederal debt expands briskly, again outpacing nominal income, although it does slow. Table 2, on the following page, shows the two sets of ranges for money and debt presented in the Bluebook for Committee consideration. Both sets were developed under the presumption that the Committee would wish to retain its current, long-run price-stability rationale for the monetary ranges and the current projection rationale for the debt range. Under Alternative I, the Committee would keep the existing ranges for 1999. The ranges for M2 and M3 under this alternative are centered on growth rates that would likely prevail under conditions of price stability and historically typical velocity behavior, with a trend in potential GDP more in line with performance earlier in this decade--before the apparent recent improvements in productivity growth. For instance, the M2 range of 1 to 5 percent under Alternative I would be consistent with potential real GDP growth of 21/2 percent, the staff estimate of 1/2 percentage point bias in inflation measured using the GDP deflator, no true inflation, and flat V2. Under this alternative, the same monetary ranges presumably would carry over to next year since the underlying assumptions would be unchanged. By contrast, the monetary ranges for Alternative II are designed to be consistent with an expectation that the stronger productivity gains of the past year or so will persist, with implications for more rapid growth in potential GDP. The M2 range of 2 to 6 percent could be roughly consistent with potential GDP growth of 31/4 percent, as in the Greenbook, the staff estimate of 1/2 percentage point bias in inflation using the GDP deflator, near price stability, and flat V2. For domestic nonfinancial sector debt, the Committee has not applied the price-stability rationale but instead has selected a range that has been approximately centered on its expected growth. Consistent with this approach, both alternatives propose ranges for debt that are roughly centered on staff projections. With the staff forecasting debt growth for this year of 51/2 percent, the existing 3 to 7 percent range would still be approximately centered on the expected outcome. Given the staff's projection of a slowdown in debt growth next year to 41/4 percent, the Committee might want to consider reducing the debt range to 2 to 6 percent on a provisional basis for 2000 as proposed in both alternatives. As it happens, such a range would be the same as one based on price stability considerations under the assumption of more rapid growth in potential GDP that is the basis for the Alternative II monetary ranges.",1558
-fomc-corpus,1999,"Thank you. It strikes me that we have an interesting dilemma, which is merely a variation of the ones we've had previously, and that is to try to maintain a set of monetary growth ranges that we perceive as consistent with price stability. That problem was easy to deal with when we were talking about stable trend productivity growth; when that didn't vary very much it was easily interpretable into potential GDP and into specific money ranges. The issue that has been raised here, obviously, is an important one. If our true evaluation were that we needed to find the particular set of ranges that is consistent with price stability, the argument would have to be that we should raise the ranges. The only problem I have with doing so is that for some reason--mostly luck, I guess--we have managed to take this whole issue off the table completely. If we change the targets and we try to explain why, what of necessity is going to come out in the explanation is that we have changed our structural productivity growth measure from 1 to 21/4 percent, and that is something we have avoided doing. I would be inclined to stay where we are, but in the Humphrey-Hawkins testimony in which this is discussed allude to the fact--since there will be other elements of the Humphrey-Hawkins report covering the issues of productivity and potential--that clearly these are minimal targets. The language would somehow suggest that these are not quite right but they're not that important. Were we to change them, we would only be changing them by a relatively small amount, which would not look all that much different on the charts. If you visualize what we're looking at, it's really not going to matter that much. All we would be doing if we change them, as far as I can see, is to open us up to discussing what the staff's trend productivity number is and then we'd get involved in defending it or not defending it. I feel like the politician who spends most of his time trying to avoid having certain questions asked. This is one of those questions I would just as soon not have raised because I think there are differences of view among the people in this room and it would serve no useful purpose of which I'm aware to get into this discussion. So, my personal preference is to stay where we are because I don't see that much has changed since the February meeting. Obviously, I don't feel strongly about it because one can't feel strongly about this [laughter]--and we shouldn't. That's my general view and I'd be curious to get reactions from everybody else.",514
-fomc-corpus,1999,"I think your advice and recommendation are right on target. I think we ought to keep this off the table. We have enough difficulties explaining where we are and what we are trying to do with monetary policy; it would serve no purpose to confuse matters with this unimportant issue now. So, I support your recommendation.",63
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, on this issue I feel strongly only about one thing and that is that the fellow who has to go up and explain this should have the option of deciding what he wishes to explain or not explain. Therefore, I support fully your recommendation.",51
-fomc-corpus,1999,"I thank you, sir. President Moskow.",10
-fomc-corpus,1999,"Mr. Chairman, I agree completely. I don't think it serves any useful purpose to open this up to a wide range of discussion at this point. So, I agree with your recommendation.",38
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,I totally agree with your recommendation. There is one thing I feel strongly about and that is not conveying the sense to the world that we have a settled notion of what long-term trend productivity is now.,40
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Mr. Chairman, I strongly support your views on this. Another consideration, given the importance of the monetary aggregates in our decisionmaking, is the less said about them the better. [Laughter]",40
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. I agree with your recommendation of not changing the ranges. As far as discussing it in the Humphrey-Hawkins testimony, and perhaps as a way to initiate more public dialogue about these issues, I would ask that some weight be given to the idea that in industries where we know productivity gains have been extraordinary--in the computer and communications industries, for example--prices are falling, as they should. And the wealth gains to businesses and households are manifested in an increase in the purchasing power of money because those prices are falling. The idea of price stability more broadly means that we would then accept more rapid increases in prices in other areas where there are no productivity gains so that the average stays the same, and it's not clear to me that that's optimal.",153
-fomc-corpus,1999,"That is a very important point. In fact, that's the issue I raised last night with Eddie George: What is a true, stable price level? In other words, is a stable price level one that is conceivably going down at a measurable and known rate provided the rate of return on investment is stable? Obviously, price stability per se becomes a much more complex question when we get into this technology area. We're using price stability, as best I can judge, as a general proxy with that caveat in it-at least I hope we are.",111
-fomc-corpus,1999,"I hope so, too!",6
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,I think the Vice Chair put it well. I support your recommendation.,14
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Mr. Chairman, I agree as well. In addition to the arguments people have made, another matter is the timing. We may be in a period--we'll see in a few minutes--where we want to underscore our commitment to a low inflation policy. And to raise the targets at that same time might send a message to some people that we have a greater tolerance for-",76
-fomc-corpus,1999,We would have to explain it.,7
-fomc-corpus,1999,I certainly agree.,4
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,I agree with your recommendation.,6
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"I, too, agree with the recommendation, although I do think this raises an interesting question, mostly for the longer term. As a matter of logical consistency, if we do become convinced at some point that trend productivity and therefore trend output have accelerated, I think we are going to have to make an adjustment. But I don't think this is the point.",71
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,Me too!,3
-fomc-corpus,1999,That's ungrammatical! [Laughter],10
-fomc-corpus,1999,I as well. [Laughter],8
-fomc-corpus,1999,Well done! President Broaddus.,8
-fomc-corpus,1999,I as well.,4
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,Let sleeping wolves lie. [Laughter],9
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"I concur, Mr. Chairman.",7
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,Why don't we have a single vote then? Will you read the paragraph?,15
-fomc-corpus,1999,"This language is shown on page 21 of the Bluebook: ""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee reaffirmed at this meeting the ranges it had established in February for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1998 to the fourth quarter 1999. The range for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent for the year. For 2000, the Committee agreed on a tentative basis to set the same ranges for growth of the monetary aggregates and debt, measured from the fourth quarter of 1999 to the fourth quarter of 2000. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets.""",200
-fomc-corpus,1999,Shall we vote?,5
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes President Stern Yes,41
-fomc-corpus,1999,Thank you very much. Mr. Kohn.,10
-fomc-corpus,1999,"Thank you, Mr. Chairman. The long-run strategies section of the Bluebook highlighted two potential imbalances shaping the U.S. economic outlook. One, the domestic saving/investment imbalance and the related current account deficit, has been a continuing concern to policymakers. Although the contrasting cyclical circumstances between the United States and the rest of the world have exacerbated the current account deficit in recent years, the deficit and the saving/investment imbalance importantly also reflect the pickup in productivity growth here. That pickup has boosted wealth and permanent income, encouraging our residents to cut sharply their saving out of current income; foreigners are willing to supply the added saving needed to fund domestic investment because that investment has such high rates of return. The process is not sustainable: In the United States, saving is so low that the wealth-to-income ratio will begin to decline once capital gains abate; abroad, portfolios are becoming increasingly weighted toward dollar assets. There is little monetary policy can do to speed the adjustment. Tightening policy, for example, would damp income but appreciate the dollar so as to have modest net effects on the current account. The issue for policymakers is what price changes will be put in motion as this imbalance begins to correct itself. Once productivity growth levels out, current income will begin to catch up to permanent income; and domestic saving out of that current income will increase, reducing the equilibrium real interest rate in the United States and the dollar's real exchange rate. The latter would help to sustain demand in the United States and to contain the current account deficit. The role of monetary policy, if all goes smoothly, would be to lower the short-term interest rate, following the equilibrium rate down. However, events do not always go smoothly. There may be scope for alternative policies, depending on the way the dollar falls and how foreign investors react and on cyclical circumstances in the United States and foreign countries. Portfolio shifts away from dollar assets, for example, would call for a firmer monetary policy, as would downward pressure on the dollar from unexpected strength in foreign economies and their interest rates. The second imbalance highlighted in this section of the Bluebook has more immediate monetary policy relevance--and that is the possible imbalance in the labor markets. Behind the staff forecast and baseline extension is a judgment that the unemployment rate is now about a percentage point below its sustainable level and that the real federal funds rate is more than a half percentage point below its equilibrium level. Structural productivity growth is projected to remain at its recently elevated level of 21/4 percent. However, because productivity growth does not accelerate further, the effects of the overstretched labor market will begin to be felt. The rise in the nominal federal funds rate assumed for the second half of 1999 only prevents the real funds rate from declining over the forecast horizon. As a consequence, the imbalance in labor markets persists, and inflation continues to accelerate in 2001. The two long-run strategies presented in the Bluebook both deal with the economic and policy disequilibrium by raising the nominal federal funds rate 11/2 percentage points. If the increase is rapid, before inflation has a chance to pick up much, the real funds rate rises quickly and by enough to put significant slack in the economy, which counteracts the inflation pressures now in train and ultimately produces price stability. If the increase in the nominal funds rate is spread over three years, as in the baseline strategy, the pickup in inflation over this period implies that the real funds rate rises more slowly and only by enough to return the unemployment rate to the NAIRU, capping PCE inflation at the 21/2 percent level. Revisions to the assumed NAIRU and to potential GDP growth have been unusually large in recent years, responding in part to overprojections of inflation. This experience suggests that uncertainty about the specifications of the supply side of the economy in the staff forecast and its extension might be quite sizable. The studies you received by Orphanides and by Orphanides, Porter, Reifschneider and Tetlow highlighted the extent to which estimates of potential, and hence the gap between actual and potential output, have been revised over the years. They also addressed the influence on appropriate monetary policy of uncertainty about the measurement of potential. They concluded that, because reacting appreciably to mismeasured output gaps will tend to add to variations in both output and in inflation, faced with such uncertainty you should reduce your response to estimated output gaps, with the reduction increasing more than in proportion to the degree of uncertainty. As the authors note, the Committee in fact appears to have been doing this in the past two years. Except when you are extraordinarily uncertain, however, the estimated gap should receive some weight in your policy deliberations. One alternative in response to uncertainty is not giving the level of the gap any weight in your policy reactions and instead paying attention only to the growth rate of nominal GDP relative to a targeted growth rate, which reflects a change in the output gap and inflation. This is a risk-averse strategy--very similar to monetary targeting when velocity is well behaved--which may be less than optimal, but would avoid large mistakes if the output gap turns out to be substantially different than perceived when policy decisions are being made. This research suggests that in a situation where the Committee is rather uncertain about the true level of labor resource utilization, it might attach the highest priority to seeking growth in the economy that would maintain the prevailing level of labor utilization unless evidence begins to accumulate that this level of utilization is inappropriate. To put this in practice in the current situation, the Committee would want to set its policy stance to provide some assurance that labor markets will not become tauter, but not necessarily to seek some easing of labor market pressures. Under this cautious approach, however, if the Committee began to see signs that cost and price pressures were emerging, tending to confirm suspicions that the economy was producing beyond its potential, it would want to react promptly and decisively. The Committee would need to make the determination of how much tightening is needed to bring the growth of aggregate demand back down in line with the expansion of aggregate supply. In this regard, is taking back the 75 basis points cumulative easing of last fall necessarily a good benchmark for policy going forward? To be sure, the market disruptions and tightening credit conditions that the easier policy was designed to offset have largely abated, and the real funds rate remains lower than it was last summer despite only modest net changes in unemployment and inflation rates since then. Moreover, when the Committee eased, it was motivated in part not by the most likely economic forecast, but rather by the perception that the risks to that forecast were seriously skewed toward the possibility of major disruptions in global financial markets and foreign economies. The evening out of the distribution of those risks, without any other change in the forecast, would argue for some firming of policy. Finally, a reluctance to reverse course now, when market conditions have improved and labor market imbalances threaten, might make the Committee more hesitant in responding to rapidly deteriorating economic or financial conditions in the future. So, changing circumstances since the Committee last eased do provide a rationale for tightening, other things equal. But much has changed since last summer, with complex implications for the inflation outlook. Notably, even more rapid productivity growth has held inflation down despite a robust economy, and in financial markets credit conditions and bond yields are higher, while on the other side equity prices have risen as well. Moreover, the real funds rate last summer was not necessarily at its optimal level. Just as in 1988, the degree of any eventual firming should not be keyed to the size of the previous easing, but presumably would depend on the economic situation and the Committee's objectives--and could be more or less than 75 basis points. In the staff forecast, a fairly modest firming of the federal funds rate--50 basis points over the second half of the year--is sufficient to slow growth to a bit below the rate of growth in potential output, at least for a while. If it turns out that growth in potential output is higher because productivity continues to accelerate, real GDP need not moderate so much to stabilize labor utilization. But that more vigorous productivity performance will also likely induce stronger demand growth than projected by the staff as profits and equity prices are boosted. In that circumstance, some further policy firming may still be necessary to keep labor markets from tightening. Data becoming available since the last meeting do not suggest an economy or inflation process gathering the sort of steam that would require a sizable backup in rates to contain. In fact, economic expansion is estimated to have slowed in the second quarter to around the pace of its potential. Though compensation trends may be a bit less favorable than expected, 12-month changes in average hourly earnings remain damped and CPI inflation is probably a little lower than many on the Committee had feared at the last meeting. Financial flows also do not suggest an accelerating pace of spending. Money growth seems to be on a slightly slower track in recent months, even after allowing for the give-back of the surge of late last year, and credit growth continues to average in the neighborhood of 6 percent. Moreover, the recent growth rates of aggregate demand and of money and credit do not reflect the backup in interest rates of the last two months, which is too recent to have had much effect yet. Still, the signs of slowing are tentative, and, if labor markets are in the process of tightening further, the longer the slowing is delayed, the more cost and price pressures will build. Under these circumstances, the substantial easing of financial conditions that would follow a decision not to validate at least the first policy-firming step already built into markets could be counterproductive. Hence, even a cautious approach to preemptive policy might suggest a 25 basis point increase in the federal funds rate to assure better that aggregate demand will rise no faster than aggregate supply. In addition to its decision about the stance of policy immediately after the meeting, the Committee also needs to consider its posture going forward. Such deliberations have always played a role at your meetings, but their importance has been heightened by the Committee's policy of giving a public rationale for its action and by the option to announce changes in the tilt of the directive. Beyond the action you choose today, there are three mechanisms available to convey your message to financial markets: the wording of the accompanying announcement, the tilt to the directive, and the tone of Chairman Greenspan's Humphrey-Hawkins testimony in three weeks. How you mix and match from these possibilities will importantly shape how markets react to your direct action and to the data releases and other events in the weeks that follow. If the Committee were concerned that a cautious approach to policy firming posed unnecessary risks that inflation would end up higher than was consistent with the good performance of the economy, it might see, and want to indicate, the possibility of an appreciable increase in the federal funds rate. An example is the price stability alternative and the incorporated 150 basis points of tightening in relatively short order. Even if the Committee were not intent on conducting policy over coming quarters to achieve literal price stability, it might have doubts that a less aggressive policy, as in the baseline, would serve even to cap the rise in inflation at a reasonable rate. These concerns would be heightened if the Committee were skeptical that the growth of aggregate demand would slow as in the staff forecast because, for example, such a slowdown depends on a leveling out of equity prices. Furthermore, the Committee may have sufficient confidence that a 41/4 percent unemployment rate is unsustainably low that it wishes to take strong, prompt actions to ease pressures in the labor markets before inflation begins to pick up. In these circumstances, the Committee might want to consider a 50 basis point increase in the intended federal funds rate, or a 25 basis point rise today with the strong presumption of a like rise within a few months. Such sentiments would be accurately reflected in an asymmetrical directive and perhaps in heightened inflation concerns expressed in the associated announcement and testimony. Any backup in rates this combination would cause would contribute to achieving the Committee's objective, given its view of the need for forceful action to contain inflation. The choice of the tilt in the directive is less clear-cut if the Committee were to take a more measured approach to preemptive action in light of aggregate supply uncertainties. The Committee might still suspect that another tightening will be needed this year just to align the growth of demand with that of supply, as in the staff forecast. A reasonably strong presumption in this direction, and a sense that such a tightening is a real possibility in the next few months might lead the Committee to adopt an asymmetrical directive. The asymmetry would not come as a surprise to market participants, who would examine the announcement especially carefully for indications of whether your asymmetry extended beyond the next firming. But if the Committee saw that next action as somewhat uncertain--quite dependent on incoming data and not a precursor to a more extended series of firmings absent more concrete evidence of stronger oncoming inflation--it might want to adopt an untilted directive. Such a directive might also have some appeal because, by reducing the sense that action was imminent, it might help to forestall a market dynamic that risked building in stronger expectations of near-term firming than the Committee found comfortable. It would not preclude the Committee's giving its views that it continued to need to be especially wary of the potential for increasing inflation. And the expression of such concerns in the announcement and reinforced in the Chairman's testimony would help to limit any market rally that tended to emerge from moving to a balanced directive.",2749
-fomc-corpus,1999,Questions for Don?,4
-fomc-corpus,1999,"Could I ask about the change in the saving rate and the equilibrium interest rate that you talked about in the earlier portion of your remarks? Your comments seemed to imply that you do not perceive the current saving rate as the ultimate equilibrium rate and that you believe saving is going to move back toward the equilibrium rate. I'm wondering if that's really true. As I look at the extended simulations--and I can't be sure of the data that I have--that's not the story I see. To me the story in the extended simulations is that we have a decline in the wealth-to-income ratio and that the decline in that ratio leads to the readjustment of the saving rate. So it's really a question of whether the equity market is in equilibrium today. If the equity market isn't in equilibrium today, as it moves back into equilibrium it brings about that change in the saving rate. Is that what's going on?",179
-fomc-corpus,1999,"I think it's all part of the same phenomenon. The wealth-to-income ratio declines for a couple of reasons. One is that equity prices don't rise so rapidly relative to current income. There is a projected flattening out in the next two years, as you know, and very modest increases thereafter in the equity wealth-to-income ratio. But it's more than that because it's not only the behavior of the stock market, it's the fact that people are not saving enough out of current income. We, the residents of the United States, are not buying enough of this wealth that's being created to keep our wealth-to-income ratio from falling at the current saving rate. So I think what happens here is that in a sense the growth in productivity levels out and this helps to level out the stock market because we don't have the continued capital gains and rise in profitability. It also brings current income up to permanent income. All those things work together to raise current saving out of income. So, the flattening of the stock market, the leveling out of the growth rate of permanent income, the catch-up of the growth rate of current income, and the increase in the saving rate are all a part of the same phenomenon, which is basically the leveling out in the growth of productivity. I think one could look at it either way: That the wealth-to-income ratio is falling and that's why people save more, or that the wealth-to-income ratio is falling in part because people save so little and that induces them to increase their saving.",302
-fomc-corpus,1999,What about the equilibrium interest rate? We had some discussions previously about the role of the increase in the productivity trend in raising the equilibrium real interest rate. It levels out but at a higher level.,39
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,How do we sort that out in terms of what happens to the equilibrium rate when all is said and done?,22
-fomc-corpus,1999,"Well, when all is said and done, it ought to be at a higher rate than it was four years ago.",24
-fomc-corpus,1999,Okay.,2
-fomc-corpus,1999,"But it ought to be at a lower rate than it is currently given the low rate of saving out of income and a very rapid rate of investment. As productivity growth levels out, investment tends also to level out. So the equilibrium interest rate should be lower later than it is now and on a downtrend as saving picks up, but at a level that's higher than it might have been 5 or 10 years ago.",85
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Don, I am going to try to ask this question clearly. In the Bluebook and in your comments you touched on a couple of issues. One was whether we need to move 50 basis points over the course of this year and then how we might go forward from there. My question is: If one were to assume for the moment that we will need to move 50 basis points, what is the best way to go about that? If we say 25 basis points now, assuming we move at all, that would create uncertainties regardless of the tilt of the directive we adopt. A symmetric directive would give a false sense to the market and to Main Street that we're satisfied with that 25 basis points, and things would begin artificially moving forward again. If we say 25 basis points, asymmetric, that would raise uncertainty as to how much and when the next move will be. If we say 50 basis points, symmetric--suggesting that is sufficient at least for now--would that create more disruption because it's larger than the market expects? Or would that settle the market in the sense of saying, ""This is what we're doing and it's enough""?",233
-fomc-corpus,1999,"If you were confident that you needed to move 50 basis points and it wasn't really dependent on the incoming data over the next couple of months, I don't think there would be anything gained by doing 25 now and waiting to do 25 later. So, in the case where you were confident that you needed to do 50 and didn't want to see more data, then you ought to do 50 and announce symmetry. I think initially the market would be very surprised and there would be a reaction. Depending on the announcement, the market might tend to build in a lot more tightening later. You would have to be very clear in the announcement that this is it for a while, as the ECB tried to do. I think those announcements are tricky. You don't ever want to tie your hands for very long after you've made a move. You don't know what's coming next. The sort of in-between situation is the one where you're fairly confident you need to do 25 now and you're not that confident about the next 25. If you're reasonably confident about the next 25 and see its likelihood as pretty high--it would take some unusual data to dissuade you and you're planning on doing the additional 25 at the next meeting or the meeting after that--I think asymmetry would accurately represent your views. The market would get wound up and build that tightening in, at least after its experience during the last intermeeting period, especially if its expectations were confirmed at this meeting. And that would be okay because in this in-between situation you actually do intend to do that next 25. But if you were less certain--if you thought the next 25 might be necessary but you weren't sure when, and if it were highly dependent on the information you'd be getting over the next couple of months--then you might be concerned that doing 25 plus putting in the asymmetry would end up creating expectations of a further move. You would come to the August or October meeting with these high expectations embedded in the market but you might not want to move and you'd have given the market a false signal. The other option I tried to put on the table is that of going to symmetry and trying to calm things down a little--not creating strong expectations of a move at the next meeting. But in addition you could indicate in the announcement and in the Humphrey-Hawkins testimony that your major concern was still on the side that inflation pressures might be building and you might need to move. You just weren't so sure about that and, therefore, you didn't put in the asymmetry.",516
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Don, I have a question about the long-term simulations. Both of them indicate that there is a lot to do in terms of policy in the next year or two to reach our objectives. Since obviously we don't have much detail here, I was interested in hearing your views on the impacts of the alternative simulations relative to where we are today on such things as the stock market, the bond market, the foreign exchange market, and other vulnerable economies in the world. It seems to me that with the kind of policy changes indicated in either of those alternatives, but particularly in the price stability one, those impacts could be very significant. My experience would be that a long-run simulation isn't going to pick up much of that. The other point, somewhat on the other side, is that if we moved according to the price stability alternative, it's conceivable that we could see the sacrifice ratio change as well because such a move would be a very dramatic indication of our resolve with regard to monetary policy. As you put these simulations together, did those kinds of considerations come up?",211
-fomc-corpus,1999,"Let me take the second one first. We have built in a market learning process in the price stability alternative. The public, not just the markets but businesses and households, learn about this over about two years. So in some sense the actual goal is phased in and then the markets' learning about it is phased in. We smooth that through, but it is there. So whatever the Committee is targeting, markets and households do perceive it. It just gets built in gradually. The gradual adjustment of the funds rate differs from an even sharper increase in the funds rate in the near term that would be indicated by the Taylor rule. So there is total credibility here. It happens over a couple of years, but it's built into the forecast. Unlike the old MPS model, which was totally backward-looking, this has forward-looking expectations and the credibility effects get built in.",173
-fomc-corpus,1999,I see.,3
-fomc-corpus,1999,"It obviously includes effects on exchange rates and the stock market and that sort of thing. But what it doesn't include is some nonlinearity, shall we say. It doesn't take into account some unusual reactions that might occur because foreign economies, say, or even domestic financial markets are unusually nervous or unsettled at this point and might be more subject than they have been historically to a very sharp, sudden move in Federal Reserve policy. Basically this builds in how all these markets have reacted on average over time. We did not deviate from that. We did not in our simulations take account of the fact that the current state of the world may not be equal to the average over history and that reactions might be very much stronger in certain situations.",147
-fomc-corpus,1999,"Okay, thank you.",5
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. Don, the discussion about wealth, permanent income, measures of income and savings and all that in a domestic context is certainly very important. We're seeing more focus not on the creation of wealth but on the sharing of the wealth in a domestic context. We saw in the Chairman's JEC testimony recently some questions related to that--for example, is everybody participating equally? These are important comments, politically driven important comments. When the context is broadened to the global economy, the issues become much more complex in that the United States has been creating a great deal of wealth in recent years. We have our own interests about sharing the wealth and the distribution of income. But in a global context, in most of the places where we look at wealth and measure it we would say that they have been destroying wealth. The effect of the destruction has been most severe on those with lower incomes--Latin America, Asia, and so on--worsening their income distribution. Now, suppose the rest of the world, not only the old industrial world of Europe but Asia and Latin America, starts to get its act together a bit, or maybe a lot--whether that involves the enforcement of property rights, tax reform, tax reduction, or deregulation--and they start getting the keys right to create wealth. Suppose they also address some of their other problems about the distribution and sharing of that wealth. Under circumstances where the rest of the world finally starts to perform well, what implications do you see for the United States?",304
-fomc-corpus,1999,"This is similar, in my mind, to what Karen was showing in the Chart Show yesterday--that is, the possibility of a portfolio shift in which dollar assets become less attractive relative to foreign assets, not because dollar assets are less attractive but because foreign assets are more attractive. From your perspective on the Committee, this might tend to accentuate any decline in the dollar. It would look like a portfolio shift against the dollar. In fact, it would be a shift in favor of foreign assets, but it would be a relative portfolio shift. It would put downward pressure on the dollar. And perhaps even in this very benign scenario of rising saving and downward pressure on equilibrium interest rates in the United States it would mean that you would need to have a less marked easing of policy as things corrected, or even a tightening of policy. Obviously from a global perspective this would be a positive development for the world. But it would mean that the United States would stand out less from the rest of the world than it has over the last few years. And I think portfolio preferences would shift as a consequence, and that would have an implication on our forecast--perhaps, as I say, accelerating the downward movement of the dollar.",242
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Don, I think we all feel that probably the most important thing this Committee has going for it is our credibility, the credibility of the Chairman. I was wondering about the effects on our credibility if we took the last option that you presented--if we went up 25 basis points and returned to symmetry--but soon felt that we had to raise rates further. If the inflation numbers in the coming months start to deteriorate and we feel that we have to increase rates, we would be doing so from a symmetrical directive not an asymmetrical one. Are you concerned at all that a symmetrical directive would affect our credibility in the marketplace when right now they're assuming that we will have more than one increase this year?",141
-fomc-corpus,1999,"President Moskow, I don't think I am concerned if your concerns and your outlook are accurately expressed in the announcement and the Chairman's testimony. That is, you could move to symmetry but still express the view that the major development you're most concerned about that would threaten the good performance of the U.S. economy would be a pickup in inflation. You would indicate that you will be especially alert for that, but you don't have enough confidence that such a pickup is coming along to be able to say there's a high probability of moving at the next meeting or the meeting thereafter, which retaining asymmetry might imply. So I don't see a credibility problem with going to symmetry, provided the accompanying explanations express your concerns. There's nothing about symmetry that means you can't move if the information that comes in suggests that you need to move. The Committee has frequently taken policy actions from symmetrical directives. If the markets are surprised, so be it. The most important thing you do, obviously, is to make monetary policy. That you can prepare the markets and be accurate forecasters and tell them where the risks are coming from is a nice bonus. If you're right, that will help markets react in a stabilizing way consistent with your concerns. It's quite possible that you will expect one thing and something else will happen, but you could still react. I don't see symmetry and then action from symmetry as doing anything to the Federal Reserve's credibility, assuming the Committee gave an honest and full explanation of its assessment of the risks. And perhaps the nuances involved in that assessment could be conveyed better in that way than through the symmetry/asymmetry on/off switch.",324
-fomc-corpus,1999,You obviously don't feel that the very strong reaction to the tilt announcement at the last meeting changes the historical view of how people look at our making a move from symmetry.,33
-fomc-corpus,1999,"My concern actually would be the other way. After you announced your tilted directive, a lot of observers noted that it had had very little meaning in the past--that only a small proportion of such directives had actually led to a tightening. But somehow that tilt put the spotlight on the Federal Reserve. And the interaction of that asymmetry and the statements coming from the Federal Reserve built in a much stronger presumption of tightening than I think most of the Committee members had in mind when you made that move in May. So in some sense your concern might be that announcing an asymmetrical directive would provoke a market reaction that would not be consistent with how you plan to approach your next couple of meetings. I think an announcement of asymmetry has a problem also in terms of potentially misleading the markets about how you view your policy stance.",164
-fomc-corpus,1999,May I ask a follow-up question on that?,10
-fomc-corpus,1999,Go ahead.,3
-fomc-corpus,1999,Maybe this question is for Peter Fisher since it has to do with the markets; I don't know. Wouldn't a switch to symmetry suggest that the risks are in fact balanced?,35
-fomc-corpus,1999,"My view is that you can give a sense that the risks are not balanced, but they're just not so unbalanced that you see a high probability of action at the next meeting. Yes, we're slicing the baloney very thin here! [Laughter] I think the Committee is in a very difficult position. The attention on its statements has become very intense; each word is examined. It's very, very hard to convey accurately the subtleties of a position where future actions are highly data-dependent. Yes, you think the next action is more likely to be a tightening than an easing, but you're not sure when. That's the information the markets are looking for and that's the sort of thing that used to be conveyed in the minutes and the Humphrey-Hawkins testimony. That is now conveyed in the announcements and the publication of the symmetries, but you have less opportunity to explain the nuances--to say on the one hand or on the other hand. So the Committee is in a difficult position. It is a position, I guess, in which you might argue that neither symmetry nor asymmetry, as the markets potentially see it, accurately represents your perspective. Given the potential reactions to the announcements, the question is how to walk through that minefield, how to least mislead market participants.",261
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Don, even though in the 1994-1995 period we didn't announce a tilt until after the following meeting, do I remember correctly that we did seven consecutive firming moves and that each and every one of them was from a symmetric directive?",50
-fomc-corpus,1999,"I know that we went to symmetry after each move. I'm not sure of the subsequent moves because they weren't at every meeting. Sometimes we skipped a meeting. I don't know. Norm Bernard, do you know whether the subsequent moves were from a symmetric directive? I know that every tightening was accompanied by a shift to symmetry but I'm not sure whether there was a shift to asymmetry in the interim.",79
-fomc-corpus,1999,And the world didn't think that we had stopped being a responsible central bank just because we went to a symmetric directive? That's a question!,27
-fomc-corpus,1999,I guess not! [Laughter],8
-fomc-corpus,1999,That's a good answer.,5
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Don, do you believe that the markets in the future will view a change in symmetry as a change in policy?",23
-fomc-corpus,1999,"I'd say they would view a change from a symmetrical to an asymmetrical directive as being a strong forecast of the next move. I guess one concern would be that they might come to interpret it as a stronger forecast than the Committee intended. Now, this may come out of the Committee's attempt to retain as a policy choice the option of asymmetry that wouldn't necessarily be published. In the process of explaining the Committee's policy on announcing tilts in the directive, we said the Committee would only publish strong asymmetries. The markets perhaps reacted to that, which may have made it worse. Peter Fisher's chart yesterday I thought was revealing. Bond rates actually went down in the week after the asymmetry was published. So the publication of the asymmetry per se didn't build in this tightening. I don't have a fed funds futures table in front of me, but my memory is that those futures moved a couple of basis points--3, 4, or 5 basis points on the publication--but didn't do much thereafter, or may even have come off a little. I think the publication of the asymmetry interacted with subsequent events to build this tightening in; it put more attention on the statements of the Chairman and other Committee members and then that built in the tightening. Now, what we don't know is what the markets will read from this last intermeeting period if, in fact, the Committee tightens today. We don't know whether they'll say: ""See, we were right; you published asymmetry and then you tightened."" If there were a couple of instances where you went to asymmetric directives, published those asymmetric directives and didn't tighten, I think the market over time would learn that asymmetry isn't necessarily a serious indication of an imminent policy move. But you would have to be willing to live with markets building in something, then taking it out, which isn't awful if you want to retain the asymmetry as a softer indication of the balance of risks. But I think it would involve a learning process for the markets.",404
-fomc-corpus,1999,Any further questions for Don?,6
-fomc-corpus,1999,"I have just one quick question and perhaps I should direct it to Peter Fisher. Peter, is there any active discussion--and if so, to what degree--that market participants are looking at the symmetry/asymmetry decision as opposed to the move itself at this meeting? How much explicit discussion is there of that?",63
-fomc-corpus,1999,I think a great deal of the markets' attention over the last couple of weeks has not been on how many basis points the Fed will move at this meeting but on what the wording of the announcement will be and whether there will be symmetry. Our traders have responded to foreign central banks wanting to know the rules this Committee follows in deciding whether to say something about symmetry or not. The whole world is really interested in the second part of the announcement,88
-fomc-corpus,1999,That's what I thought. I just wanted to make sure.,12
-fomc-corpus,1999,They are interested in the process.,7
-fomc-corpus,1999,"I think the more general point, President Broaddus, is that what the world is really interested in is the Committee's views of where it is going from here. They have the 25 basis points built in. Now they want whatever clues they can get about where you are going; the symmetry/asymmetry is a clue but it may not be the only one.",75
-fomc-corpus,1999,I'm trying to figure out how to do that.,10
-fomc-corpus,1999,"Any further questions for Don? If not, let me get started by saying that I think we have to move at this meeting, but before I comment on that I would like to bring a much broader issue into the discussion. The reason is that, at least from my point of view, that issue comes to grips with a number of the crucial questions that we have to answer in order to get an effective policy. We would like to go where the economy and the financial system suggest we ought to go, whereas everybody else is looking merely at where they think we are going irrespective of why. At the last meeting, I thought I saw signs that the surge of cost-cutting and hence productivity acceleration were beginning to crest. I was mistaken. After a short hiatus of continuous upward revisions of company five-year earnings expectations, the upward revisions resumed late last year and, if anything, have accelerated. The forecasts this month of five-year cyclically adjusted growth of expected earnings per share for the S&P 500 are a full 1/2 percentage point higher than late last fall. I can't say that I believe the rate of long-term annual earnings has truly shifted up 1/2 percentage point in so short a time frame, only that companies are telling security analysts that that is the case. Some of this revision surely reflects a pickup in projections of foreign affiliate earnings in Europe, Japan, and developing Asia where those data have been showing some strength in the most recent quarters, but most of the pickup of necessity reflects domestic earnings. There is little evidence that the explanation is a change in long-term price forecasts. Indeed, the forecasts have been holding for quite a long period of time to the notion that there is no ""pricing power."" Nor is it an upward revision in long-term population growth; that I am almost certain is true. Further, it probably does not reflect a major increase in the share of profits relative to wages. What we are observing in the earnings forecast series, as best I can judge from a disaggregation of these numbers that was carried out in considerable detail, is the statistical reflection of the anecdotal evidence of dramatic breakthroughs in information technology and most recently the surge of Internet applications. The presentation last week to the board of the Federal Reserve Bank of Chicago was one of many that I have heard in the last several months on this issue. What I found particularly interesting in the discussion that Mike Moskow organized was the concern going forward of regarding indications that Internet commerce suddenly appeared to be accelerating. Very substantial actions were going to be required on the part of counter the competition coming from this very different, low-cost distribution system. is in the process of making a major shift from its conventional ""brick and mortar"" stores toward the Internet and related technologies, with very profound effects on its employment. And while we are acutely aware of the very dramatic changes in productivity that have occurred in the manufacturing area as a consequence of just-in-time inventory management and capital flexibility, it is less clear how much of that has been happening in the distribution sector. But it now seems, on the basis of a number of very recent reports, that we are seeing an acceleration of activity in this area that suggests the early development of some form of critical mass that will enhance productivity in the distribution sector over time. I am not sure whether the 4 percent annual rate of increase in productivity estimated by the New York Bank for the second quarter is right, but we do have fairly good evidence that manufacturing productivity in the second quarter has accelerated quite significantly from the most recent trends. Indeed, if we take what we reasonably know about manufacturing productivity, the number in the Greenbook for the second quarter for nonfarm productivity growth implies that either nonfinancial, nonmanufacturing corporate productivity growth is down sharply or, as I suspect, noncorporate productivity is negative--or some combination of both. In short, the possibility that our Greenbook's second-quarter nonfarm productivity estimate is on the low side, given the harder numbers for manufacturing, is not to be dismissed. So while your 4 percent number, President McDonough, was probably grabbed out of the air, more or less, it may well turn out to be correct. Algebraically, the percentage increase in long-term expected earnings in the context of a stable long-term profit-to-wage relationship is equal to the sum of the expected inflation, the expected percentage rise in aggregate hours or population, depending on the way one may want to look at it, plus the expected percentage increase in productivity. It is not likely that the upward revisions in forecast earnings since late last year reflect revisions in expected inflation or population growth. And assuming the earnings of foreign affiliates are not distorting this picture too much, the implicit revisions in earnings forecasts that are being reported by business firms seemingly reflect the equivalent of a 1/2 percentage point rise over the past several months in the expected trend productivity growth rate. Now, I'm not saying that they are right. I'm merely indicating what the broad sum of anecdotal information filtering into a large number of security analysts who are evaluating S&P 500 companies is in effect saying. This raises, in my judgment, some really important questions. Our Greenbook forecasters have chosen to use the same trend growth rate for all quarters of their forecasts. They have always done that. It's automatic. They don't make a distinction from one quarter to the next even though I would suspect that when we look back on this period, we are going to get a nonlinear, or more exactly an accelerating, longer-term growth path as the only way to fit the data. With the econometric structure we employ, an unchanging productivity trend algebraically requires inflation to accelerate if we have an estimated NAIRU that is above the unemployment rate, which we do. If trend productivity is accelerating, however, the forecast inflation rate can stabilize or even fall. So the implicit forecast of rising inflation that we have had in all of our discussions this morning logically requires that the productivity growth rate be stable or at least accelerate only very modestly. Does the funds rate need to be increased by 50 or 75 basis points as is indicated in the Greenbook forecast? The answer is ""yes"" if our models capture reality. Obviously, once output per hour stabilizes even at a high rate, the acceleration of inflation resumes provided, of course, that the NAIRU remains above the unemployment rate. We have no evidence at this stage of which I am aware, however, that indicates the acceleration in productivity has ended. All of our experience and courses in Econometrics 101 induce a visceral antipathy to such persistence in productivity gains, especially for me since I have the oldest gut in this room. [Laughter] What is increasingly evident is that something seems to be happening that none of us has ever witnessed before--perhaps a once-in-a-century structural shift in how goods and services are produced. People in the front lines of business operations, such as Jack Welch of GE and Lou Gerstner of IBM, say this is a true revolution. They have seen nothing like this in their experience. And I venture to say that if we get on the phone with a number of business people who have been around a long time, we are going to hear this view from all of them. No one is saying that this accumulative, technology-driven productivity growth is showing any signs of slowing. I would not go that far, but I believe something profound is happening. We are observing market capitalizations that are telling us something very interesting even as we simultaneously argue that stock market prices are overvalued. We are seeing a very dramatic shift in the changing capitalizations of high-tech versus low-tech companies. But even the low-tech companies are not showing any significant real destruction of market values, though that's only because there are no low-tech companies anymore. The least efficient types of steel operations, such as those employing blast and oxygen furnaces and old-fashioned rolling mills, if that's all they were, would long since have disappeared from the industrial scene. But they have stripped workers out of rolling mills at a rate that is unbelievable, and we are left with high-tech steel operations--to the extent that we can have them with that obsolete structure of making steel. I had a conversation with on the question of what will happen to the market values of real estate in malls if indeed we experience a significant shift to cyber space types of distribution. In that event, the commercial buildings will no longer have the importance that they now have. The one saving grace in all of this, as I believe I said is that shopping is not a fully economic activity. In fact, most people actually seem to shop for entertainment and other reasons. So, shopping malls are places involving what might in a sense be viewed as cultural activities. Shopping is what people do. We are not dealing with a wholly economic issue. I am not saying that it is appropriate for with their huge real estate investments, to be significantly worried. But there is something going on in the economy, something profoundly important, and we don't know where it is going to lead. The mere fact that some profound economic change occurs every century must put us on guard to make sure that it doesn't happen on our watch without our being aware of it. If it's real, it is crucially important and very significantly complicates our task in setting monetary policy. How do we know when an economy is overheating? We cannot tell from the rate of economic growth by itself. Obviously, if output per hour is accelerating, so are real income and GDP. And if output is accelerating, that of necessity has to show up in the spending components since the accounts must balance. Currently, motor vehicle sales are running well in excess of past trends. Housing sales are absurdly high. Capital investment is strong. So, are we really saying that the economy is overheating because we are looking at a 17-plus million annual rate of automobile sales and new home sales that are moving up to a 1 million annual rate? That, in and of itself, says nothing about the degree to which this economic system is overheating. We cannot tell until we look at the combination of aggregate supply and aggregate demand. The reduced form view of all of this is whether or not we have slack in the product and/or the labor markets. If we have a situation in which effective demand exceeds potential supply, then prices rise. If it is the other way around, they fall. What we have now is clearly an ambivalent set of circumstances in that we are getting a very dramatic acceleration in aggregate demand but we are not seeing the usual effect in prices. Or more exactly, from the point of view that I think is relevant, we are not seeing it in unit costs. Indeed, the data that we put together, or more exactly that Larry Slifman puts together by extending the information that we get from the BLS and Commerce on unit costs in nonfinancial corporations, suggest that for the quarter just ending--and this is consistent with the Greenbook which, remember, I suspect has a low productivity estimate--the change in unit costs is effectively zero over the past four quarters. Prices are up somewhat because margins seem to be rising in certain areas. Overall, margins have risen a good deal from the fourth quarter of 1998. The reason is not that prices have been accelerating. It is that unit cost growth rates have been falling. In that regard, when we look at a system where short-term earnings expectations are accelerating quite pronouncedly--certainly that is the case for the first quarter and also for the second--that is telling us that profit margins are opening up in the context of a decline in unit cost growth. This is scarcely an indication that effective demand is exceeding potential supply at this particular stage. We certainly don't see it in terms of product market tightness. We don't see any particular shortages. Where we do have a problem is in the labor markets. If we had a fully balanced system in which output and demand were equal to working age population growth plus trend productivity growth, then one would presume that we had a stable system. We don't have that at the moment. We are continuously reducing the number of people who would like to work but don't have a job. That number is going down, though it is going down less than it was a year ago when the pool of available workers was shrinking at an annual rate of a million people. That number is now down to about 500,000, which is roughly equivalent to 1/2 percentage point in potential GDP growth. In other words, aggregate demand is currently running in excess of potential growth by about that amount. And that, as best I can judge, is being engendered wholly by a wealth effect. In fact, our estimate of the wealth effect is greater than that. The point I am trying to make here is that we have a situation that is out of equilibrium. We don't see it in the price data currently. What we do see is a situation that, if it continues indefinitely, must create some problems in the labor market and eventually in unit labor costs and prices. At that point we clearly will be experiencing a real-time inflation process. The one thing I find a little puzzling at this stage is why the rates of decline in both the unemployed and the broader category of job seekers are slowing. One argument obviously could be that we are running out of people and are scraping the bottom of the barrel. But if that were the case, we would see far more in the way of anecdotal reports, not to mention statistical data, on increasing average hourly earnings. It may be that when the data for June come out on Friday we will see a big pop, and we will then be able to say ""problem solved."" But that is by no means evident. To be sure, the last Beigebook did show a little more evidence of labor market pressures. But we do not have clear-cut, unequivocal evidence at this stage that the economy is in the process of accelerating. If we believe the economy we have today is truly captured by the forecasting structure in the Greenbook and in the extended projection of the Bluebook, then the policy issue that Tom Hoenig raised would be up front on the table and in my judgment definitive. My answer to Tom is that if we believe the staff forecast, the argument for 50 basis points and going symmetric would I think be overwhelming at this point. My problem is that as I see it the structure that is actually governing this economy is not being properly captured in the models used for the forecasts. I believe the evidence that we have to date suggests that the 21/4 percent trend productivity number is already obsolete. I suspect we are going to find that to be the case as the year goes on unless the individuals in the business community with whom we interact are completely missing the boat. We would not be seeing the profit figures and the economic growth that we are observing if what all these people are saying is wrong. And we surely would not be seeing declining rates of inflation in unit costs. Indeed, after this extended period of economic expansion we would not be seeing a four-quarter average change of zero, or actually -0.1, in the unit costs of nonfinancial corporations and of 0.2 in unit labor costs. This is not the type of economy that is well captured by the econometric structure we have built into our Greenbook forecasts. One only needs to go back and look at the Greenbook forecasts to see that the projected trend productivity number is higher in each successive Greenbook. I don't know whether the surge of cost-cutting and the acceleration of productivity have reached a peak. As I said at the beginning, I thought at the time of the last meeting that there was some evidence that that was indeed the case. The stabilization that I felt was happening has disappeared and productivity has surged dramatically higher. I do feel uncomfortable with the funds rate at 43/4 percent, and I think the appropriate thing is to move it up to 5 percent if for no other reason than to undo part of the 75 basis point reduction that we put in place during the fall. That clearly was a reaction to events which, as Don Kohn just said, have changed. There is the longer-term issue of our labor markets still being out of equilibrium even if we can explain why wage pressures are not as strong as I, at least, think they really are. I know our wage-price equations do capture this in part, but I am frankly a bit skeptical and fearful that a little data mining is involved in this process. If we are looking at the issue of symmetry versus asymmetry, I don't think the realistic question relates to the most likely direction of the next move we are going to make. Unless the economy comes apart unexpectedly, I think the chances of our having to move the funds rate lower are close to zero. The next move we are likely to make is almost surely up. If that is indeed our expectation, we would have concluded under our past regime that that calls for asymmetry. But we are now in a new regime and those terms no longer mean what they did in the past. I was startled by the extraordinary market talk after we announced an asymmetrical directive following the May meeting, though the correction in the federal funds rate that actually occurred was modest. We might as well have raised rates at that point as far as I am concerned. What I find quite bothersome is the existence of at least some evidence, although Don Kohn tells me it's somewhat dubious, that a lot of corporate treasurers are allegedly borrowing ahead for the purpose of beating the Fed to the punch. Indeed, what we are looking at is a long-term interest rate that is moving up because market participants think the Fed is going to move. In the process we are losing our ability to understand what the markets are telling us. I am concerned that we are looking in the mirror. What we are endeavoring to do is to evaluate objectively what is going on in the economy and to craft monetary policy to appropriately address what we observe. But with our new announcement procedure, I am fearful that we may inadvertently have created a situation in which financial players are reacting to what we are doing and in the process causing the markets to run ahead and give us signals that are inappropriate. I believe it was Ned Gramlich who pointed out that the federal funds rate is lower at the moment than the real implicit long-term rate. I suspect there is a good policy argument there, but I'm not sure that the real long-term rate is the market rate. I think it may be the Fed viewers' rate of the day, and I am not sure that helps us because we can then get ourselves caught in a bind. I know that sounds a little peculiar, but I think the way Don Kohn put it is probably what we ought to be doing, namely to go to formal symmetry. We also would, as we have in the past, suggest that our real concern is the risk of rising inflation. We do have potential imbalances in that direction and very little evidence on the other hand that our next move is going to be to lower rates. So I would suggest, for discussion at least, that we raise the funds rate 25 basis points today, go back to formal symmetry, but include wording in our announcement that we have used in the past when we were going asymmetric. That's a longer speech than I had intended to make.",3918
-fomc-corpus,1999,Very interesting.,3
-fomc-corpus,1999,Vice Chairman.,3
-fomc-corpus,1999,"Mr. Chairman, I agree fully with your recommendation and let me explain why. In my view there is no question that we should raise the fed funds rate. A failure to do so would create an extraordinarily strong reaction in markets; I think the first trade would be up and I'm not quite sure where the second trade would be because people would wonder where Federal Reserve policy was now headed. The issue really becomes the question of the announcement and the tilt. I agree with you fully--and as I mentioned yesterday--that financial markets are simply not functioning in a way that a market economy needs to have them function. Markets have to have bulls and bears and buyers and sellers to function effectively. Instead, what we have is people trading off a new breed of Fed watchers who are more involved in politics and amateur psychoanalysis than the old Fed watchers who tended to look at all the numbers and variables. This phenomenon, I think, is extremely counterproductive and something that we need to move against by shifting our approach. I tried to make the distinction yesterday between the philosophical role of the central bank, which is clearly price stability on a symmetric basis, and the need in a shorter time frame to distinguish between strategy and tactics. I believe the intermeeting tilt should be described as tactical. Since it is not clear when we will have to make the next tightening move, it seems to me that tactical symmetry is appropriate and that is what I believe you recommended. The question is: How do we go about establishing what I would describe as strategic asymmetry, if the likely imbalances in the market develop in the direction of requiring further tightening? I think we have to do that through the new vehicle of the statement regarding the policy objectives of the Federal Reserve that will accompany our action this afternoon. I also agree that if we were absolutely certain that we had to increase the funds rate by 50 basis points, we ought to do it today and go symmetric. However, I think that would be very, very difficult to manage. We have had a poor record in this Committee in trying to give a signal that we have done something and that's it; and certainly the recent experience of the European Central Bank would not lead one to believe in such an approach. The last time I remember our doing that was in August of 1994 and it was a mistake then. I think a lot of us were rather queasy about what we said then. We should have been because it was the wrong thing to say given that we did continue to tighten after that, and rather soon after that. In addition to the fact that it would be very difficult to manage, there are two other reasons why it isn't altogether clear that we need to raise the funds rate another 25 basis points this year. I have a feeling, in one of the older stomach linings in this room, that the new once-in-a-century type of phenomenon is actually likely to be happening. But as central bankers, with monetary policy lags of one to two years, we don't need to sign up for that view now. All we need to do is have a reasonable degree of confidence that it is likely to continue for the next one to two years. And I think there is every reason to believe that. Lastly, on the issue of labor force tightness: Without any question all of the anecdotes that we hear that markets are very tight here and there--in fact, in most places-are clearly right. But just as the economy is changing, I think the labor force and the availability of people in it are changing too. We have within our society fairly large numbers of people who really thought jobs were not available for them. We are changing that. The nature of the way the economy is behaving, the beneficial effects of what has been-- either by good luck or good guidance or some of each--very effective monetary policy is making it much more likely for many people to think that they can really have a job. The data on the labor force--data measuring those who might like to be in the labor force-- don't pick up such people very well. If we can continue to find that difficult-to-define pool and bring these fellow citizens into the labor force, I think that is a very good thing. We can't base monetary policy on the hope that that will happen; it may happen, it may not. But it's another reason to be observant of that change in the labor force and in the availability of people to join the labor force--changes that flow from the changes in the real economy. That's something else we have to be aware of. Thank you.",924
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. First of all, let me thank you for those extremely provocative remarks. I look forward to working on digesting them as soon as the transcript is available to us. But on a much more prosaic level, let me say initially that I strongly support your recommendation. I think there are two sets of reasons to be cautious about moving too aggressively right now. The first revolves around the uncertainties of today's economic situation, and in that regard I would make a couple of points. This economy could slow spontaneously. In fact, it is doing so in the second quarter relative to the first quarter. If we look at consumption and include housing as a consumption item, that represents over 70 percent of GDP. If we throw in capital expenditures, it's well over 80 percent. I can think of a number of reasons why a great many of those components could very easily grow more slowly. Even if they remain at a high level, their rates of growth could be substantially lower. Just because they haven't done that so far doesn't necessarily mean that they can't or won't. Secondly, and this is partly what you referred to, Mr. Chairman, the trends of the recent past could very easily extend for a long time. Extremely strong productivity may very well have a long life ahead of it. Inflation may stay quiescent as it has been. If the economies of the rest of the world stay somewhat more sluggish than we are implicitly thinking, that may happen; and it would have a strong impact. Lastly, we have a stock market that is in a very precarious position. It's very fragile and I think very shock prone. Investors can take their chances, but the concern is that stock market developments could have a strong impact on the real economy. Another factor in play here--and this harkens back again to your remarks, Mr. Chairman, and to the dialogue with Don Kohn a few minutes ago--is the dynamic that we may have set in place with our new policy of releasing the Committee's views much more freely. I think our first venture out with an announcement of our tilt in May really went quite well. The markets seemed to understand it quite accurately and accept it for what it was. Why we did it was interpreted fairly well. Markets moved. And here we are, we're moving. It worked okay this time around; I think the reaction was quite responsible. But I think we ought to be careful about being too comfortable that this is always going to be the case. This new policy we have now is being watched with unbelievable intensity and apprehension, not just by market players but also by the man on the street for perhaps the first time. My sense is that it is broadly perceived by Wall Street and Main Street that under the old regime, as they came to understand it, these tilts meant very little to them but that under the new regime they probably mean a lot more. And they just don't know what that meaning might turn out to be. That is a perfect setup, I think, for a very serious misinterpretation or overreaction on the part of the public. To avoid that, this Committee should be very judicious and very cautious in how we bill this policy and its announcement. I fear that if we do more than just a 25 basis point tightening today, then we are going to run a wholly unnecessary risk of losing control of events here and of very possibly creating substantial and unpredictable mischief. Let's remember, of course, that we can tighten any time we feel it's necessary; and we can do it, and have many times, from a symmetric directive. We can so indicate in the announcement that we release this afternoon. Thank you.",743
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Greenbook forecast, which is not far from either the consensus forecast or my own, suggests that we will not be able to stabilize inflation at an acceptable rate without multiple tightening moves. Given the risk of higher inflation, the 50 basis point tightening this year that is incorporated into the Greenbook forecast would in my view be prudent and appropriate. That would mean doing the 25 basis points today and another 25 basis points later in the year, subject to the condition that data in the interim do not disconfirm the need for a second move. I believe there are few risks of moving in this direction, given the strength of the economy today, initial conditions in terms of labor market tightness, and our ability to reverse course if necessary. There is, on the other hand, considerable risk in doing nothing. This is another example of the maximin strategy: Consider the worst outcomes under various policy alternatives and select the policy with the least bad outcome. Mr. Chairman, you talked about the possibility that productivity is still accelerating, and that might be the case. If it is, I expect it also means that the equilibrium real interest rate is rising as well; and in that case it seems to me that there is little damage to be done by such a modest increase in interest rates. I want to spend some time talking about policy rules and the issue of how to operate with uncertainty about the measurement of the output gap. The papers that were prepared for this meeting were, I think, very provocative and interesting and deserve some comments. The policy prescription from the simple Taylor rule would yield a more aggressive near-term tightening than the one I suggested. But a similar trajectory over time is in the Greenbook in the extended forecast. The policy called for under the Taylor rule would fall into two phases. The first phase would be what I'd call the reassessment or the releveling phase. That is, the rule would call for immediately reversing at least the easings of last fall for a return to the prescribed path for the target funds rate. The second phase would be in response to changes in the unemployment rate and the inflation rate going forward. Now, the Orphanides et al. work on uncertainty about the output gap suggests attenuating, though not eliminating, the response of the funds rate to changes in the output gap. It suggests, therefore, only a partial return to the level-based Taylor rule prescription, but would yield the same ""phase two"" increase in the funds rate in response to higher inflation. The conclusion in these papers that policymakers should downweight their response to changes in the output gap in the face of uncertainty about its measurement is both very intuitive and very sensible. But there is a difference, as emphasized in these papers, between downweighting the response to the output gap and ignoring the output gap altogether. This is the difference between uncertainty and total ignorance. I would note also that the Orphanides, et al. prescription is symmetric. For those inclined to applaud the downweighting of the output gap at the current policy decision point, keep in mind that the same logic implies that we should also respond by less to increases in the unemployment rate as the economy weakens. We can't have it both ways--to be aggressive to a weakening in the economy and passive to a strengthening unless, of course, we want to guarantee higher inflation over time. These papers highlight very effectively the importance of flexibility in using policy rules. Policy rules are best used to inform judgment, not to displace judgment. At times we might be willing to respond to the data; at times we will want to respond to the forecast. Sometimes we may have the confidence to implement level-based rules; sometimes we may want to be more cautious along the lines of change rules. Whether we're prepared to be more aggressive or more cautious in responding to changes in the output gap may also depend upon initial conditions, in particular where we are relative to the range of estimates of the output gap. The question remains how to apply the insights from this work. I don't find appealing the change or growth rule offered by Orphanides. It suggests that we raise the funds rate when growth is above trend, then lower the funds rate when growth falls back to trend. Given that the underlying model implies that inflation depends on utilization rates and not growth, the change rule does not seem like a sensible strategy to me. It implies raising the funds rate when the utilization rate is rising, then lowering the funds rate when the utilization rate stabilizes at the higher level. The problem is that it's difficult to design a sensible rule in the face of uncertainty if constrained to linear rules. The rule I suggested at previous meetings is a nonlinear one. It allows for a downweighting of the response to the output gap when the gap is in a range around the best estimate, but for a sharper response once the gap has increased to the point where one is more confident that the economy has moved beyond the level of sustainable capacity. This is consistent with the sensible view that we should be cautious about fine-tuning, interpreted to mean aggressive responses to small changes relative to our targets. But we should recognize the gains of ""crude-tuning,"" interpreted as more aggressive responses to changes in output once output has moved farther away from the target. Applying this nonlinear rule to today's decisions would imply returning toward, but not all the way to, the simple Taylor rule prescription. A 50 basis point increase in the funds rate implemented over the next few meetings would, for example, be consistent with a halving of the response parameter of the output gap in a simple Taylor rule. But my nonlinear rule would also call for returning to a more aggressive response to further increases in the output gap going forward, given that the unemployment rate is already so low relative to estimates of NAIRU. A 25 basis point move today could be viewed as a partial reversal of the ease that was implemented last fall, in effect a partial return to a level-based Taylor rule. This is also consistent with a preemptive effort to limit the upward trend in inflation that appears likely to emerge going forward. Let me emphasize a consideration favoring the second move, if it's to be made, at the next meeting or two as opposed to later in the year. My presumption is that we will be disinclined to tighten after October through the end of the year because of possible volatility in financial markets related to Y2K and to shifts in the demand for liquidity. While a move in November is certainly not out of the question, I suspect we will be reluctant to take such action. Now, I think the decision about whether or not to retain an asymmetric directive today is somewhat less important in light of the fact that there will be an announcement, presumably, if we raise the funds rate. We can use this announcement to convey our sense of the balance of risks. Nevertheless, I have a preference for an asymmetric directive. Let me note, however, that I think we are likely to encounter problems whether we opt for a symmetric or an asymmetric directive. If we return to a symmetric directive, the markets are likely to interpret today's move as the one and only one that we expect to make this year, unless they doubt we really mean a symmetric directive. As a result, market participants will revise downward their expectations about the funds rate in coming months, resulting in a rally in the bond and equity markets. I would prefer a more market neutral result. We could try to achieve this by combining a symmetric directive with asymmetric language in the announcement, but that seems destined to look confused as well as to confuse. If we choose an asymmetric directive, on the other hand, we could feed the anxiety in the markets about an even larger set of increases than the 50 basis points I expect to be appropriate. In addition, we want to keep our options open for a further rate increase as we assess the data over the next couple of months, rather than definitively signal that it's a sure thing My preference is for an asymmetric directive with a somewhat calming announcement, followed by a return to a symmetric directive after the second move--if we opt for a second move. This has the advantage of conveying the most useful information to the markets about our intentions and of being truthful. An added benefit is that moving to a symmetric directive after the second move would be a very effective way of signaling that we do not expect further near-term moves. It would be less informative if we moved to a symmetric directive today and then raised rates in August or October.",1716
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I am at least a modified new economy kind of guy. I have argued in the past here that there is reason to believe that we have had a shift up in productivity and a shift down in NAIRU. The staff models have incorporated this and, as I said yesterday, I'd be willing to take their modification as probabilistically accurate. I read the materials carefully over the weekend and I concluded that a 50 basis point increase was appropriate. When Don Kohn circulated the Orphanides paper, I probably had a perverse reaction to it because it reminded me of the 1960s, and I think I'm haunted by that. We let inflation get out of control then; we got behind in the game. And I certainly don't want to do that again. I'm sorry that Alice Rivlin can't be here for what I'm about to say next. We often talked about making the FOMC meeting more like a meeting--that is, not having canned remarks so much but actually having an interchange of ideas. I will say in that light that, frankly, you've all talked me out of a 50 basis point change. The discussion yesterday was less hawkish than I would have imagined. A number of you surprised me in what you said. The Chairman had a couple of bites at the apple, and he eroded my faith in the 50 a little bit each time. So I'm now okay with 25. Frankly, I don't see a huge difference between 25 basis points with symmetry and somewhat hawkish talk versus 25 basis points with asymmetry and some language in our announcement that says this is not the start of a 300 basis point increase or something on that order. It's hard for me to be certain, but my uninformed understanding of markets is that they tend to evolve to reflect what people say over time. There will be an announcement today. There will be future testimony. So I don't have a huge preference on that issue. I suppose I'm a bit on Larry Meyer's side of that because every time I've tried to slice baloney I've cut my thumb! So I'd rather do it in a fairly simply way. But the other could work, so I'm certainly not going to dissent from that. I want to say a few things about the FOMC, though. My main point is that, whatever we do today, I think we are placing a lot of importance on future data. So we have to be very careful that we are alert to respond if our present uncertainty gets resolved in one way or another, as indeed we responded last fall. I think we have to repeat that vigilance and readiness to respond now. Along that line let me make two suggestions on things we might do. One is--and this may violate some traditions I'm not aware of--that I actually liked the experience last fall with intermeeting changes and, since we all have telephones, we might want to do more of that. That might cut some of the wind out of the Fed-watching industry, which I think we would all favor. The second is that lots of times in our meetings people have come up with new indicators that we ought to look at that don't quite suggest what some of the other indicators have suggested. The Chairman does this more than anybody else, but everybody does it to some degree. I wonder if it would be possible to give some thought to having the staff track information on what I'll call ""leading indicators of inflation"" and circulate it to the Committee. One thing that might be in it is the unit cost number that the Chairman just talked about; another is this modified unemployment rate, which includes discouraged workers in the calculation of the unemployment rate. There are various kinds of price indices that might be leading indicators of what could happen with what are known as the headline price indices. If we had all of those made available to us on a very current basis, first of all we would all be more informed and, secondly, we'd tend to be more on the same page. Therefore, when we get together and think about what is going on, there would be less chance of being surprised with new information at the meeting that we hadn't really thought about. So I would put on the table the suggestion that we might improve our process, if you will, in that way. I'd like to see the staff give some thought to that. Thank you.",883
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, I respectfully but strongly would oppose the move back to symmetric directive language. If I read market expectations at all accurately, I think market participants are widely expecting the 1/4 point move and they are also expecting a further move of at least 1/4 point in the not too distant future. So if we change the directive language to symmetry, in effect we are going to be changing those expectations. Since we are now announcing the tilt under our new procedures, I think it is going to be very difficult to do so in a statement along the lines that Don Kohn suggested. I respect his point of view, but I'm just not at all sure that the language of the statement that we issue is going to offset the fact that we moved to symmetry. So to me it's a credibility issue. When I heard you suggest earlier what your own expectations are, what I heard is in my view best described as asymmetry toward tightness. I think as a matter of credibility we need to report that. More fundamentally, I think a 1/4 point increase combined with a change in the directive language is just not strong enough in the current situation, even given the points that you made in your comments. Actually, I was thinking that the question might come down to whether to do 50 basis points with symmetry or asymmetry. I had decided on the basis of this kind of logic that even if we did 50, it might be misleading to have a change of language to symmetry. If I may, let me make some comments on the Orphanides paper. I thought we were going to have a more extended go-around about that, but I would just make a couple of comments because I don't think they are unrelated to the short-run issue. First of all, I thought the Orphanides paper was extremely interesting; it was one of the most enjoyable staff papers I've read in a long time, and I think it's very useful in many respects. Apart from the particular policy conclusions it suggests, I think it could make an even broader contribution if it led us to evaluate, on a more systematic basis, our past decisions and actions retrospectively. The military, for example, have been doing this for years. They devote a lot of resources--time, money, and personnel--to trying to learn systematically from their experience, and I think we ought to consider doing the same thing. After all, monetary policy is not unlike a military campaign. It involves strategy, tactics, uncertain information, and a rapidly changing environment. And the stakes are very high. I think a good way to approach this would be to develop some additional real time series and also to start routinely keeping real time data going forward. Some of that is already going on in the System. But if we were to do the kind of thing I have in mind, I think it would have to be centered here at the Board. With regard to the paper's specifics, Orphanides shows that real time output gap data are subject to significant measurement problems. And he concludes that we should reduce the weight that we give that data, or more fundamentally that we should move the funds rate only very cautiously in reaction to incoming data on the output gap. That would mean, in the context of the paper, that we would react primarily to deviations of actual inflation above an inflation target. But arguably--and this is really the simple point I want to make--our main policy successes in the 1980s and 1990s have come when we have acted more preemptively. The go/stop cycles that all of us remember in the 1960s and 1970s were, in my view at least, often the result of not reacting aggressively enough to early signs of rising inflation pressures. If there are problems with the output gap, then maybe we could find some other variable--some forward-looking measure of inflation expectations--to use in this context, if we use that sort of rule, such as survey information or bond rates. So it may be a good exercise to take on to see if we could develop some of these real time data series to see how a Taylor rule would work with those. Finally, I'd like to point out a deficiency in the Taylor rule as I see it; I think it is fundamentally the one identified in the Orphanides paper. And that is that the rule suggests that we only need to move the real funds rate away from a fixed constant, given by the historical average, if in fact an output gap or an inflation gap arises. But as Larry Meyer suggested earlier, even if these gaps were zero, macroeconomic developments can make it necessary for real short rates to move and for us to follow and accommodate those rate changes. An example, one Larry cited earlier--and I've made this point in some previous meetings--is that an increase in trend productivity growth means that real short rates need to rise. Just to repeat, the reason is that households and businesses would want to borrow against their perception of higher future income now in order to increase current consumption and investment before it's actually available. So the rate needs to rise to induce those consumers and business to defer that spending until in fact the output is available. The Taylor rule doesn't give any attention to that kind of real business cycle reason for a move in rates. It only allows reaction to inflation gaps and output gaps. So bottom line, while I really enjoyed reading this paper and I think it was extremely valuable, I'm not entirely comfortable with what I see as one of its major implications, which is that this Committee should be even more circumspect than it is now in moving the funds rate. I believe a case can be made that just the opposite is true. And then we can get rid of this situation where we have 500 reporters and 600 cameras around this building when we have one of these meetings! Thank you.",1185
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. I certainly agree that a move today is appropriate. As far as the strength of the action and the way it's interpreted, I'd prefer to do that with or without discount rate increases. Since I believe that a stronger action now is appropriate, I hope the Board will consider the issue of the discount rate on behalf of my directors anyway. Unlike Al Broaddus, though, I'm going to disagree on the issue of the symmetry. I favor a permanent move to a symmetric directive. [Laughter]",102
-fomc-corpus,1999,I might buy that!,5
-fomc-corpus,1999,"The happy state of affairs is one where the collective view of the group, when we meet, is that the risks are in fact balanced. I prefer symmetry in our behavior more than in our words, and it troubles me when there's asymmetry in our behavior with or without asymmetry in our words. Last fall, when the opinion of the Committee shifted toward the view that the risks were on the downside, we moved very promptly over a fairly short period of time to a position where the collective judgment of the Committee was that the risks were in fact balanced. I think we should be symmetric about that on the upside as well. When the collective view of the Committee is that the risks are on the upside, we should move as promptly, at meetings or between meetings, to get back to where we feel that the risks are balanced. As far as the announcement of symmetry/asymmetry, I think Professor Eisenberg has bitten again, or as the British would say ""Goodhart's law has hit us again."" We and most other central banks have known that announcing exchange rate targets or levels or something of that nature is a rather foolish thing to do; it comes back to haunt us. We have learned with monetary targeting that if the wisdom of the market is that they know the trigger point--that if some growth rate of some money measure is epsilon above or below a certain level, that is going to trigger a policy action--it isn't going to work. That's because it doesn't elicit the behavior in the marketplace that would occur if they didn't know what the trigger was. Imagine the absurdity if we were to announce this afternoon that the Committee voted today to raise the funds rate 1/4 point at its next meeting on August 24 and, therefore, we plan to save the airfare and the travel time and just not show up then because we've already decided we are going to do that. Well, that's rather absurd. So I think announcing something that is interpreted by the market as meaning that we have already decided to raise rates at our next meeting, as I think the May announcement was interpreted, gets us into an undesirable position. I can tell you already that I don't want to go into the October 5 meeting with a predisposition to raise rates because I don't want to be blamed for the crash of the stock market in October! [Laughter] I also know that I want to get to the December meeting--and possibly even the November meeting, but I'm much more certain about the December meeting--clearly feeling that the risks are balanced. If anything, we ought to feel that we have as much chance of lowering rates as raising them once we get to December and into the next year. We ought to be ready to go in either direction. We know there's going to come a time when things will again be changing rapidly in a downward direction, and I would prefer to enter that environment with the risks in balance. We do not have balanced risks right now. I think we need to get to a position where we're comfortable that the risks are symmetric as soon as we can.",618
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"I think we do need to raise the funds rate 25 basis points today. It seems to me that we are largely boxed in by our rhetoric and we ought to do it and get this episode behind us. There is a reasonable economic rationale for this, given the uncertainty that we're facing, and that is a ""take-back"" rationale from last fall, with financial markets and the rest of the world doing better. But I think we want to leave open the question of how much of a take-back we need to do. It may be 25, it may be 50, or it may be 75. Who knows? I think we ought to shift the focus back to the economy and back to the data that come in. If, for example, we become more confident about productivity increases, if we have a continuation of the pattern of prices and wages that has prevailed over the past several years, then 25 may be fine. If, on the other hand, we become less confident of the productivity increases and we begin to see some early warning signs that inflation is picking up, then we are going to have to do more. And we ought to do more in those situations. As for the tilt, I think we ought to go back to a symmetric directive today. We need to calm things down. We need to shift the public's emphasis away from psychoanalyzing this Committee and back to the economy; in my view a symmetric directive would help do that. Announcing the tilt, at least in this initial experiment, turned out to be a cruder instrument than I think we had anticipated, largely because of the interaction of rhetoric. At this point we just don't know enough to say how much, or if, we have to raise rates further, and therefore we shouldn't box ourselves in for the future. We ought to see how reality plays out and go from there.",379
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, I support your recommendation for a 25 basis point increase. I would favor asymmetry because I think it more correctly reflects what I believe the risks are to the outlook and policy. I would be against symmetry because I fear first of all that, in itself, it doesn't correctly reflect our assessment of the risks. Secondly, I am also concerned that it would be misinterpreted by the market. Obviously a statement accompanying symmetry could clarify things and indicate why the risks are not really symmetrical. But if we are going to go that route, even Jerry Jordan's recommendation becomes more attractive to me. And I really begin to wonder whether referring to symmetry accomplishes anything.",136
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I, too, support your recommendation for a 25 basis point tightening at this stage. We are in a period of some uncertainty and we should weigh the data a little more heavily than the forecast. I think the data support a small move. The forecast, with a 50 basis point increase built in, is perhaps indicative of the need for a further move, but it's not mandatory today based on what we know. I think there is also some evidence that because of the high wealth-to-income ratio and also a larger share of imports in GDP that we may have a more powerful tool here than we thought. That is something Alice Rivlin raised when she was sitting in that seat a few meetings ago. As to the question of the tilt, I have a slight preference for maintaining the asymmetric tilt. I'm concerned that if we raise rates and go to symmetry and then put out a somewhat hawkish message saying we're still leaning in that direction, we will create more rather than less of a tendency to psychoanalyze what the 17 or 18 of us are thinking. Frankly, in my ideal world what we would have is a decision, a tilt announcement, and complete silence from the Committee. We are not going to get there, but I think we at least ought to continue the process of trying to help markets understand what these tilts do or do not mean. I'm concerned about creating another tool in the form of a well crafted legal/economic document that will give the market something else to chew over. This is obviously not a strong point of view, and if we go to symmetry with a well-crafted announcement by Don Kohn, I will applaud Don's efforts and try to get him something for his gray hair! But I don't think that's the better way to deal with the situation at this stage.",370
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I support your recommendation. I came into this meeting wanting at least a discussion of a 50 basis point increase, and I got that, which I appreciate very much. It was very helpful. Along those lines and in listening to you, my assessment has been shaded in terms of the issue--the issue being the degree and the durability of productivity improvements that we're all trying to decipher. So, I would go with the 25 basis points. It is a move up, which I think is appropriate. And it represents a continuation of the gradualist approach on which we have built a pretty high degree of credibility over time, and that has served us well. Given all that, I would very strongly support a symmetric directive for this meeting. I believe it represents the consensus of the FOMC and I don't think we should be anticipating the next move until one of two things happens--either we get new information that addresses some of the earlier issues you raised, or we as a group have a change in judgment. If either occurs, then we can change the rate again in the intermeeting period or at the next meeting. I think that is the right approach in terms of dealing with the market and the information we share.",249
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Mr. Chairman, I support your recommendation of a 1/4 point tightening. My thoughts on symmetry mirror Bob Parry's very closely and the views Larry Meyer and Al Broaddus expressed earlier. I judge the sentiment around the table, certainly my own, as a judgment that one 25 basis point tightening is probably not enough to deal with what is likely to be coming. So I still think the probability of our needing to tighten further is fairly high. To me it is more intellectually honest and more credible to go ahead and tell people that, rather than to try to back into it with a symmetric directive. I also am afraid that moving back to symmetry mutes our policy move and makes it too timid. My two-year-old granddaughter when she finishes eating says ""all done"" and has this cute hand signal to say she's finished. I am afraid that not only financial markets but lenders, builders, and others will get the sense that we saw the need to tighten further as only a tiny threat and will quit helping us in trying to lean against what we see coming. Also, to me, moving back to symmetry suggests that we're smart enough to make one small 1/4 point tightening move and fine-tune with a precision that I don't think we have. Finally, I'm concerned, despite the reminders that we frequently have made a policy move from symmetry, about the view that we can tell markets ""so be it"" if we decide we need to move. Just as we have created a new device with the symmetry/ asymmetry announcement, I think we have created--either intentionally or unintentionally --an expectation that we will try very hard, perhaps harder than in the past, to let people know where we are headed. I am concerned that even though the data may begin to nudge us in the direction of additional tightening, we may want to cycle back through and move to an asymmetric directive and then to a tightening move later. That would push the move to later in the year than is necessary and--as Larry Meyer reminded us and as I said at the last meeting--will get us into the period when I suspect we will prefer not to be meddling in markets while the Y2K situation is in play. So I would have at least a modest preference for an asymmetric directive.",462
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I support the recommendation for a 25 basis point increase in the federal funds rate. I think the issue on symmetry is complicated by the fact that the language in the directive refers explicitly to the intermeeting period. The sentiment around the table seems to be that we may or may not need an increase in the intermeeting period or at the next meeting; I think that's the way the markets are going to interpret symmetry. But the sentiment around the table is that, more likely than not, we are going to need some increases later in the year, perhaps at the next meeting or sometime later. So I think the problem is that we are getting into a box with the precise wording of that symmetry clause. If it's confined strictly to the intermeeting period and if we can make that clear in what we say, then it seems to me that a symmetrical directive is probably appropriate. I don't think we want to give a firm signal that we are rather confident that we will need to increase rates before or at the next meeting. My judgment, in reading what people said around the table, is that we are not confident about that. I would very much defer to your desires in how you want to craft the directive language and the associated wording of the press release. Getting away from the issue of the wording--which is a very important issue and I'm not trying to belittle it at all--I certainly count myself among those who believe that the Phillips curve is an unreliable policy guide. What that means is that the predictive content for the inflation rate--and I'll emphasize the ""predictive""--of the estimated employment gap or GDP gap, however you want to put it, seems to be very low. But having said that, it is still true that we must somehow regulate the thrust of monetary policy to keep it in line with the economy's capacity to produce goods. We can't get away from that underlying responsibility of trying to match the monetary thrust with the economy's capacity to produce. If it is true that output growth and employment provide little insight into the inflation rate in the short run, this Phillips curve idea, then I also want to emphasize that the converse is also true--that the inflation rate does not have predictive content for employment and growth. We believe the proposition that as a long-run matter the inflation rate can settle wherever it might be more or less independently of the unemployment rate. But we can't have it both ways. We can't believe, it seems to me, that the Phillips curve works only in one direction or that it doesn't work in one direction. If there's no content in one direction, there's no content in the other direction either. That leads me to emphasize that we should not believe that a monetary policy thrust designed to yield, let's say, a lower rate of inflation is going to have any predictable implication for employment and growth. I have no doubt that a highly restrictive policy could tank the economy. I think we all believe that we can take the economy by surprise and we could produce a significant downturn by making a mistake. But I continue to believe that that's not the likely course of events. I think the greater risk to employment is that inflation will drift up and will drift up to the point where it will unsettle market expectations, and that will put us in the box of saying we just can't allow this to continue. We will get ourselves off on one side and market expectations will be destabilized. So I believe that the greater risk to employment stems precisely from a drifting up of inflation. That is my reading on that. I'd like to make a suggestion about the directive language. It seems to me that in the general paragraph of the directive--I'm referring to the version called the draft directive which has a brown cover--we ought not to be implying in any way that we are opposed to high employment and high growth. So I would suggest that we move the language on inflation, which is in lines 13 to 17, up to the front so that when we talk about the state of the economy we put the inflation discussion first. I'm looking at this draft that was sent around to us with line numbers on it.",829
-fomc-corpus,1999,Which line numbers?,4
-fomc-corpus,1999,"The document begins with ""the general paragraph,"" which says: ""The information reviewed at this meeting suggests a continued vigorous expansion in economic activity."" In other words, we start off by talking about economic activity. What I'm suggesting is that we start off by talking about the inflation environment. The wording can't be moved exactly the way it is written there, but the language about inflation is down in lines 13 to 17. I'd emphasize that our concern is with inflation rather than have the very first thing in this directive be a commentary on the growth of the economy. I understand very well that there may be a problem changing the wording of something like this on very short notice. But I would like to throw out for consideration anyway trying to change the thrust of this so it doesn't look as though somehow we are opposed to vigorous growth by starting right off the bat with that as an observation about the economy.",179
-fomc-corpus,1999,"Let me make a suggestion. Clearly, we can't do it now because it will create a problem.",20
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,"Why don't you write a memorandum and give it to Don Kohn. He will circulate it to the rest of the Committee and will collect comments. If there is sufficient support for your position, we could bring it to the next meeting for determination. Is that satisfactory?",53
-fomc-corpus,1999,"Absolutely. In the press release for this meeting, if there is a press release, we could put the emphasis on inflation and productivity growth and the uncertainties about them ahead of the discussion of the real economy. Anyway, I throw that out just as a possibility. Let me say that I continue to believe that greater clarity in our inflation objective would be constructive. I talked about this a couple of meetings ago. I'm not going to say that there's a convincing case that a CPI of 11/2 percent for the year is going to yield a better economic performance than a CPI of 21/2 percent. But I do believe that uncertainty about that matter is worth in the end 100 basis points in long bonds, whether we settle at 11/2 or 21/2 percent. I think most people would say that uncertainty that adds 100 basis points to market interest rates is going to affect the way the economy works. So I continue to believe that more clarity about what our real objective is in that area would be useful. In terms of the market discussion about our policy and the language used last time, the disclosure of the asymmetry--the way I would like to put it in Wall Street language--means that ""the fed funds rate is now in play."" There was a period in which it was pretty stable and now it is in play. The whole issue is up in the air and that's going to be true until things seem to settle down and the rate settles down. The ideal situation would be that both we and the market draw the same conclusions from the incoming data about what actions are necessary to be consistent with low inflation. That is the sort of expectational equilibrium that we would most like. I believe the right way to handle this process is to be sure that the market is very clear about our objectives and about our willingness to act to achieve those objectives. As the data arrive on both the real economy and the inflation rate and on productivity and everything else we look at, we would hope that the market would come to the same judgments as we would about how to interpret that data. The hope is that we're not just looking at ourselves in the mirror when we try to assess market reactions to the data. We should try to give to the markets a sense that we're all in this together in terms of trying to make sense out of the incoming flow of data and that we don't have an absolute conviction by any means about where all of this is going to take us. That is, we don't have a conviction about how much the federal funds rate is going to have to move or even in which direction necessarily. Given that we're not very far off of the right place to be, we think the rate is going to depend on how the data come in. I have a mild preference for an asymmetric directive, I suppose, because I think it accurately describes the tenor of the Committee's feelings about this. But I think also that we need to have some discussion that emphasizes to the market that asymmetry should not be interpreted as a forecast of an automatic 25 basis point increase at the next meeting independently of what happens.",626
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I, too, favor a 1/4 point increase in the fed funds rate. I think it's appropriate economically and the markets are prepared for it. As far as the question of symmetry is concerned, I am on this issue where I usually am, which is that I have a deep-seated, built-in bias toward symmetry. So, I feel that way this time. My preference is simply to assess the incoming information and act if action is appropriate. If we want to accompany that with some semi-hawkish language about how we view the prospects, that's fine with me. But I must admit I'm not at all sure how the market will take that or any other statement. It seems to me that it's shorthand to say that the market is simply trying to psychoanalyze the Fed and guess what's going to happen next. Another way of saying that, along the lines Bill Poole talked about, is that they're looking at the same information we're looking at and they're trying to piece it together and understand what it means for prospective economic performance, monetary policy actions, and so on. Maybe the effort to do that has become more intense. But even if that's true, this won't be the first time there has been a lot of intensity in that effort.",258
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"We don't know and can't know what is over the horizon. Inflation may be on the verge of accelerating or it may not be. Certainly a strong case can be made that it is. But a similarly strong case could have been made this time last year and this time the year before. Had we tried to enforce the speed limit based on contemporaneous estimates of NAIRU over these last few years, we would most likely not today have inflation under 2 percent and unemployment near 4 percent. I'd hate to see us lose our nerve at this point and risk bringing the experiment to a premature end. I'd rather continue to test the growth limits of the new economy unmodified. But if we have to have a modest tightening, I hope it can be accompanied by a return to a neutral bias to take some of the nervousness out of financial markets. That was the statement I wrote just before you talked earlier, Mr. Chairman. Here's what I wrote afterwards. [Laughter] This is just a shorter version of the same thing: For reasons that you described so eloquently a while ago, I would prefer to keep our foot off the brake and continue to test the limits of the new economy that you described. Your comments led me to believe that if the Committee were not boxed in, you would have recommended at this meeting no change in the fed funds rate. Therefore, to get out of the box, we should adopt an unbiased directive at this meeting and, as Ed Boehne put it, calm things down. Longer term we may want to revisit my earlier suggestion that we stop voting on a directive bias or Jerry Jordan's alternative that we make a permanent move to a symmetric directive.",339
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I have just a few comments on the longer term. First, I too was very impressed by the discussion we had at our board meeting of the Chicago and Detroit directors when they gave their presentations about electronic commerce. We did it a little differently. We divided the board ahead of time into groups on banking, services, retail, and manufacturing--we had done a background paper for them ahead of time as well--and then they organized the presentations themselves. Many of them did a lot of work preparing for them and I think the presentations really were very enlightening. I came away from that discussion, and from other things that I have read and heard in talking to people about this, with the feeling that something profound is clearly happening in electronic commerce and its impact on firms. I just don't know how significant it is in terms of its impact on the economy. It's an area where we are all learning and we're going to continue to learn in the coming months and years. And I look forward to studying in more detail your very helpful comments at this meeting. As for the decision today, I certainly agree with the 25 basis point increase. On the tilt, I think it's a very close call. I thought the earlier discussion with Don Kohn and your comments, Mr. Chairman, were very helpful. I think we are somewhere between the full tilt and symmetry at this point. On balance, I come back to the point I mentioned before: that our credibility--or more specifically, your credibility--is extremely important and at this point it's extremely high, too. So, I would defer to you on this question. But my preference would be for asymmetry. Under the current circumstances I think 25 basis points and no tilt will be misinterpreted unless accompanied by a very strong statement and strong language in your testimony. Even then, it still may be misinterpreted as ""that's it,"" as I believe Jack Guynn said. So, I prefer the asymmetric directive but I will defer to you on this. On the question of the tilt itself, I think we clearly have some learning to do before we know how to use this new tool effectively. To quote you, Mr. Chairman, this is one area where we're engaged in ""on-the-job training."" It's a new tool and we're in a new environment. We have tightened before from symmetrical directives, but this is new. I recall your mentioning at a meeting several years ago that back in 1994 when you were planning to start a series of tightening moves, you had a great deal of difficulty signaling that intention to the market at that time. Clearly, there's no difficulty today in that type of signaling. We've said that we are going to be more transparent with this tool. If we go with symmetry, I view that as being less transparent. That's my own personal view. In my mind there are questions about the usefulness of the tilt itself. Just listening to the discussion around the table today, it's clear that there are very wide differences among the members of this Committee as to exactly what the tilt means. If we keep the tool in place, I think we will be using it a lot less than we did before, as was predicted last year when we discussed this.",653
-fomc-corpus,1999,I think the conversation around the room is making us more Jordanian than we had been. President Minehan.,22
-fomc-corpus,1999,"Thank you, Mr. Chairman. I have thought for some time that we needed to take back at least a portion, if not all, of the ease in monetary policy that we enacted last fall in the face of chaotic financial markets. Certainly, the prospects for external growth, the fact that we have not yet seen a rise in inflation, and that some of the temporary factors that have been keeping it at bay are unwinding give me even more cause to think that we should unwind that easing in monetary policy. So the question today for me was not whether to tighten but how much to tighten. I know there's a great deal of uncertainty now and I accept the point of the research on this subject, which is that the more uncertain we are the more slowly we should move, taking time to assess things. That strikes me, as others have said, as rather intuitive. Now, both the Greenbook and our own forecast suggest that at least 50 to 75 basis points of tightening are needed this year just to keep a lid on inflation in 2000. Keeping the lid on inflation thereafter will require much more, as the longer-run analyses suggest. It's true that these analyses are done in a traditional way, using the traditional constructs of most of our models, and they are subject to a lot of uncertainty. They incorporate some estimates of the output gap; they incorporate a revision to trend productivity; and they also incorporate assumptions about NAIRU. Some people would debate the validity of this structure. Certainly, if we continue to have accelerating productivity growth, these estimates of output gap and NAIRU and so forth may be wrong. But in a time of uncertainty, it certainly seems that relying on constructs that have helped us bring about nearly 20 years of better economic conditions--milder cyclical turns, ever lower inflation, lower unemployment, and more sustained growth--has validity. It seems appropriate to look back on the things that have helped us create the kind of environment that President McDonough referred to, one in which more people are working, more people have that experience of working, and the benefits of growth are shared more fully by all. I think the argument really turns on whether we want that environment to continue. If we want it to continue in a way that extends the experience of those 20 years, then we need to be careful in containing inflation and in following the constructs that have helped us get where we are. So, assuming monetary policy should be forward-looking even in a time of uncertainty, we do need to tighten policy now. I agree with the proposal for 25 basis points. The next question is what to say about it. Based on the analysis both in the Greenbook forecast and in our own forecast, I do think we are likely to need to do more. In that regard, I favor keeping an asymmetric directive. Jack Guynn outlined all of the many reasons why I think asymmetry makes more sense at this time. I wonder whether what we're seeing now in terms of the market reaction to what we've said about our tilt is as much a reaction to the change that we've introduced in announcing the tilt as it is to anything else. Over time, as market participants get used to our announcing this and moving or not moving at the next meeting, I wonder if their reactions are going to calm down considerably; perhaps as we get used to it the market will get used to it as well. In my view one of the reasons we decided to do this was to improve information to the market from the Committee itself rather than from disparate members of the Committee. In that regard, the premium is on honesty. In order to be honest about what I feel the course of future actions should be, the directive should be asymmetric. Finally, to reiterate another point that I believe Jack Guynn mentioned, 25 basis points, no tilt, but some hawkish language, as has been suggested, may well create a bigger market reaction when all that comes out. There will be more uncertainty about how we're using this language. Frankly, without an asymmetric tilt, I think we're likely to see the market get ahead of itself--experience a somewhat euphoric increase, thinking that we are not engaged in the kind of tightening that I believe most people think is necessary.",859
-fomc-corpus,1999,"Thank you. As I read the Committee, we're strongly in support of a 25 basis point increase and modestly in support of symmetry. So I would suggest that we read the directive in that context and then proceed to vote.",46
-fomc-corpus,1999,"This time we're on page 22 of the Bluebook, at the bottom of the page: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the federal funds rate to an average of around 5 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",100
-fomc-corpus,1999,Let's vote.,3
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer No Governor Meyer Yes President Moskow Yes President Stern Yes,41
-fomc-corpus,1999,"I have drafts of a number of different announcements concerning this decision, and I'll read the one that I think most closely reflects the Committee's views: The Federal Open Market Committee today voted to raise its target for the federal funds rate 25 basis points to 5 percent. Last fall the Committee reduced interest rates to counter a significant seizing-up of financial markets in the United States. Since then much of the financial strain has eased, foreign economies have firmed, and economic activity in the United States has moved forward at a brisk pace. Accordingly, the full degree of adjustment is judged no longer necessary. Labor markets have continued to tighten over recent quarters, but strengthening productivity growth has contained inflationary pressures . Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC has chosen to adopt a directive that includes no predilection about near-term policy action. The Committee, nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth. Is that wording satisfactory?",220
-fomc-corpus,1999,I think that's good. SEVERAL. Yes.,11
-fomc-corpus,1999,Okay.,2
-fomc-corpus,1999,A Nobel prize for Don Kohn!,8
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"We're early for lunch, but coffee is available. [Laughter] August 24 is the date of the next meeting.",25
-fomc-corpus,1999,"Good morning, everyone. Would somebody like to move approval of the minutes for the June 29-30, 1999 meeting?",27
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,"Without objection. We need to elect Ms. Cumming and Mr. Howard as Associate Economists to serve until the election of their successors at the first meeting of the Committee after December 31, 1999. President McDonough, would you nominate your colleague?",54
-fomc-corpus,1999,"Yes, I would like to nominate Christine Cumming for that position. She has a Ph.D. in economics from the University of Minnesota and is a very highly regarded career professional at the Federal Reserve Bank of New York. Most recently, before we put her in charge of our research group, she was the brain trust for the bank supervision function of the Bank. She's a very good economist and I'm very happy to nominate her.",85
-fomc-corpus,1999,"First of all, would somebody second the motion? SEVERAL. Second.",16
-fomc-corpus,1999,"Any discussion? All in favor say ""aye."" SEVERAL. Aye.",17
-fomc-corpus,1999,"The ""ayes"" have it. Karen Johnson, would you do the honors for David Howard? You do know him, I hope!",27
-fomc-corpus,1999,"Yes. Dave Howard has been a member of the Board's Division of International Finance for almost 25 years and has worked in several of the areas of the division. Recently, owing to the passage of time and the departure of some people, he was promoted to Deputy Director of the division. He has a Ph.D. from the University of Virginia, is very well rounded in open economy international macro issues, and is a very thoughtful economist. I think he would be an asset to the Committee and I recommend him to you.",105
-fomc-corpus,1999,Move approval.,3
-fomc-corpus,1999,Second.,2
-fomc-corpus,1999,"I assume no discussion is required, at least I trust not. If so, the presumption is that David Howard is elected unanimously. I'd also like to recognize First Vice President Jamie Stewart who is attending his first meeting. We welcome you. Peter Fisher, would you review developments in foreign currency and domestic financial markets and domestic open market operations?",68
-fomc-corpus,1999,"Thank you, Mr. Chairman. In front of the members of the Committee is a package of charts, similar to the one I usually show.1/ I will begin by addressing agenda item 3, my report on markets and the Desk's activities. The first page, covering the period from June 1 through August 20, presents a slightly different configuration of charts than I usually show you. The top panel depicts U.S. deposit rates, current and forward; the middle panel shows yields on U.S. Treasury securities; and the bottom panel shows the percent change in various equity market indices. In the top panel, you can see that from the time of the Committee's last meeting on June 30 until the Chairman's Humphrey-Hawkins testimony on July 22, current and forward 3-month deposit rates moved more or less sideways. They began rising fairly consistently after the Chairman's testimony through the time of the release of ECI and GDP data and the nonfarm payroll employment numbers, and then came off noticeably following the publication of the PPI on August 13 and, two days later, the CPI. Even more interesting than that movement in rates is the changed structure of the forward rates from the beginning of June to the beginning of August. On June 1, shown at the far left-hand side of the chart, the 6-month forward 3-month rate and the 9-month forward 3-month rate were trading rather closely together at around 5.8 percent and the 3-month forward rate was around 5.4 percent. Now, I would suggest that the proximity of the 6-month forward and the 9-month forward rates had to do with the market's expectations that the Committee was likely to tighten a bit in the future. They didn't quite know when, and they didn't know what would happen after that. There might be just one move. So, some of the term premium between those two maturities was squeezed out. By August 1, you see that the 6-month forward rate had shifted and was then trading in line with the 3-month forward rate. Several things happened in the month of July, I think. Obviously, the market's attention 1 / A copy of the material used by Mr. Fisher is appended to the transcript. was focused on the Chairman's Humphrey-Hawkins testimony, particularly his comment that the Committee would act promptly and forcefully. There was increasing attention during the month on the funding pressures anticipated in the fourth quarter and in early January as a result of the century date change. Also, there was the rolling forward of the maturity of these contracts, which changed each day. To make the point very specifically, on August 1 the 3-month forward 3-month rate involved a deposit whose term covers precisely the period when the greatest pressures are expected--November, December, and January. If you look at the early August period on the chart, you see that the 3-month forward rate actually traded below, even if just a few basis points, the 6-month forward rate. Now, I'm not sure the market's expectations are correct. But the forward rates are showing us that the market is pricing up considerably the deposit rates for this 3-month window, erasing whatever term premium one might expect to exist between the 3-month forward and the 6-month forward because of the anticipated pressures around the year-end. Turning to the middle panel on Treasury yields, you can see that those yields more or less followed the same pattern relative to the data releases. However, just before the release of the nonfarm payroll data on August 6, there was a two-day rally across the yield curve after the Treasury's refunding announcement in which Treasury officials discussed the introduction of buy backs and the elimination of the 30-year auction in November. That rally was short lived, unwinding after the release of the nonfarm payroll data. I'd note that the 30-year bond from Friday, August 20 through today traded at a rate identical to the rate at which it closed on June 30, the day of your last meeting, whereas both the 10-year and the 2-year rates are roughly 10 basis points higher. In the bottom panel you can see that equity markets here in the United States more or less tracked inversely the movements in yields. If we include yesterday's change in the DOW on that panel, the increase in the DOW would be 6.6 percent. Turning to the second page and to European markets, the top panel shows the forward rates and current rates for 3-month deposits on euros. As is evident in the middle of the top panel, the 9-month forward 3-month euro deposit rate jumped appreciably following the European Central Bank's press conference on July 15, during which President Duisenberg suggested that there was bias creeping into the ECB's deliberations. Several days later, on the release of German IFO survey data on business confidence, which was somewhat stronger than expected, there was a very abrupt jump in the 3-month forward deposit rate; but that was completely unwound subsequently. What I think is noticeable both in the top panel and in the middle panel depicting European bond yields is the extent to which these rates moved in response to U.S. data releases and moved more or less in a pattern similar to that in U.S. markets. The bottom panel shows the euro-dollar exchange rate. One can see that the euro has moved up a bit off its lows against the dollar, particularly in the week of July 19 to July 23. There are two stories circulating in foreign exchange markets about movements in exchange rates. One is that a revival of global growth, especially in Europe and Japan, will be narrowing growth differentials with the United States. The second is that the Fed is about to tighten and that that will be bad for U.S. assets and bad for leverage and, therefore, for the dollar. Now, both of these stories could be true. I don't mean to discount that possibility. But I would note that many observers, particularly in the foreign exchange markets, have tended to focus in their conversations on the first story--the narrowing of global growth differentials. But it seems to me that the asset market movements reflect more of the latter story--that is, the fear that a Fed tightening will be bad for assets and bad for leverage. In the bottom panel, one can see that in the week beginning July 19, following Duisenberg's comments about creeping bias, the dollar came off quite abruptly. That Monday morning several large asset managers thought it was an opportune time to buy euros. They did not expect the kind of exchange market reaction that occurred. They found a very, very thin market and the dollar moving downward quite briskly. It appears to me and to others, in hindsight, that the market was very thin partly in anticipation of the Chairman's Humphrey-Hawkins testimony. That dollar trend accelerated some on the release of the German IFO survey data even though, as you can see in the other panels on the page, the IFO survey had very little impact on forward rates or on the yield curve. I would underscore that the dollar is still quite strong against the euro. If my chart depicted it through this morning, it would be trading at 1.05. Translating this morning's rate into a rate more familiar to us all, the dollar-mark, that rate would be 1.86. So, I just want to emphasize that, regardless of its movements against the euro, the dollar in historic terms is quite strong. Turning to the third page, which depicts Japanese markets, you can see on the left side of the top panel that Japanese forward rates rose a bit following the release on July 29 of stronger-than-expected Japanese industrial production data for June. Japan's IP was plus 3 percent on a month-over-month basis as opposed to minus 1 percent in May. But it is hard not to notice that, again, Japanese forward rates more or less in their own muted way also are tracking the pattern of U.S. forward rates and U.S. interest rate expectations. There has been much attention paid to the Japanese equity market of late, and its movements are shown in the middle panel. But all that chatter is now overshadowed by the extraordinary performance of bank shares in the Japanese market following the merger announcement of last week. On this scale, if the bank index included Monday's trading, the Topix Bank Index would show a 26.8 percent increase over its June 1st level. The bottom panel shows the value of the yen expressed against the dollar and the euro. Since your last meeting, the Japanese authorities intervened on three occasions--on July 5 in conjunction with the release of the Tankan Survey and again on July 20 and 21--for a total of We acted as their agent on one occasion. I think there are two distinct periods to focus on here in terms of the dollar's movements. During the week of July 19, the dollar weakened against both the euro and the yen. But as you can see in the blue line on this panel, the euro yen rate was mostly unaffected. That was the week during which the markets were most intensely interested in the global growth differential story, and bond yields started backing up. I would note that the anxiety about a Fed tightening being bad for assets was particularly acute in Tokyo. Market participants and also Japanese officials, I'm afraid, have coalesced around the view that a Fed tightening in 1999 is likely to have the same impact on the dollar as the 1994-95 Fed tightening episode. I don't share that view. I think that's a bit of a stretch. But that view has become rather widely held in the Tokyo market and also by the Ministry of Finance. In the more recent episode last week, the yen appreciated against both the dollar and the euro. At the start of last week Governor Hiyami suggested to Japanese corporate leaders, I think wisely, that they should take more responsibility for hedging their own foreign exchange positions. That had quite an impact on the mood in Tokyo. Later in the week, former Vice Minister Sakakibara somewhat less wisely let slip that further intervention by the Japanese authorities was not likely until the yen/dollar rate reached 110, and the market promptly obliged him and traded down toward that level. Turning to the next page, the chart depicted there for the period from May 1, 1998 to August 20, 1999 is similar to a chart I've shown before on various spread relationships between private instruments and comparable U.S. Treasuries. Several of these spreads have widened to levels above those of last October. In particular, note that the 10-year Fannie Mae benchmark and the 10-year U.S. swap rates, shown at the bottom of the chart, have backed up above their prior peaks of last October 12 and 7, respectively. The index of 10-year A2 investment grade corporate securities, the green line, and the mortgaged backed securities, the red line, haven't quite backed up to their prior peaks, but they also have been rising. Corporations and federal agencies have been eager to lock in what they perceive as rather low rates. They used the swap market initially to try to lock in those rates, and the aversion of swap market intermediaries to holding on to fixed rate risk has led to the sharp backup. Now, I want to be very clear that I think this is quite different from what was happening last October. There is no sense of panic in these markets. That said, however, we have to recognize that these markets are quite thin and that the intermediaries are quite reluctant to hang on to risks. We have triple checked the data for the period of marked volatility in the swap rate last week, when it oscillated 10 and 15 basis points from one day to the next, and those are valid data points. The other thing I would point out is that the lower grade credits, the more risky credits if you will, such as mortgage backed securities which are shown on the chart and junk rated issues not depicted here, have not backed up to their peaks of last fall. I would not want to suggest, however, that that is an indication that everything is warm and fuzzy in those markets--on the contrary. But there is very little being issued in those markets as opposed to the rather strong issuance of higher grade credits. So part of the reason why those rates haven't backed up further is because of a reluctance to issue in those markets. Finally, turning to domestic operations, on the next page you can see that there was very little of note in the fed funds market during the intermeeting period. Deviations of the funds rate from target and the intraday standard deviation in the volume were quite moderate. The only point of note was that the demand for excess reserves appeared to run a little below the allowance of $1.2 billion that we had in the path. Mr. Chairman, during the intermeeting period we had no foreign exchange operations on behalf of the System or the Treasury. I will need the Committee's ratification of the domestic operations in the period. Also, I sent to the Committee a memorandum on August 9, explaining my intention to raise the per-issue limit in our securities lending program from 25 percent to 45 percent. I would be happy to answer any questions about that at this time or on any other aspect of my report, before your vote to ratify the domestic operations.",2751
-fomc-corpus,1999,Questions for Peter? President Minehan.,8
-fomc-corpus,1999,"Peter, I don't have a problem with the proposed change in the limits under the SOMA securities lending program, but I do have a question. Apparently you have identified more than one dealer misusing the program, trying to gain some kind of dominance in a particular issue at a particular time. I know that in such cases you disallow their participation in the program until they give some evidence of having changed their strategy, but I just wonder whether that's a significant enough punishment. There are aspects of this that go to the Salomon situation. I wonder whether their primary dealer relationship should be at stake.",119
-fomc-corpus,1999,"Let me distinguish a couple of things. First, if I thought the management of any dealer firm was not taking seriously the intent of our program, we would escalate the issue rather quickly. I believe the problem we've had in the first three months of the program is that some traders looked to take what advantage they could of it and did not understand the last resort nature of our program. So, in each case where this has happened--where a dealer appeared to have a large position and was also bidding in our auction--we suspended their bidding for that issue until such time as we were persuaded that their position was more in line with the intended usage of our program. We have discussed already, Cathy, that if there were multiple infractions from a single dealer and the management didn't amend its ways, the first step would be to suspend them from use of the program for a year or some period like that. We are still discussing what constitutes a ""strike"" and whether our rule should be two strikes or three strikes and you're out. I would be inclined to pursue it that way--by prohibiting them from using the program. I think the analogy to the Salomon case is a little extreme. I don't want to overplay it, but raising the limits per issue-",253
-fomc-corpus,1999,That will help.,4
-fomc-corpus,1999,But not changing the per-dealer bid I am hopeful will reduce the potential for dealers thinking they can make something of this. So that is one incentive for us to raise the limits at this time.,40
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Peter, I have another question along those lines. When you brought this before the Committee the concept, as you've just suggested, was more or less as a lender of last resort. But the frequency of use over the period strikes me as being far more than last resort; it seems to me to be part of an everyday facility. Why the frequency of use if it is a last resort facility?",79
-fomc-corpus,1999,"There are quite a few different U.S. Treasury securities outstanding. For any one of them, I don't think the frequency of use is continuous other than for on-the-run issues. But one of our major incentives in this program was to try to reduce the risk of fails to deliver in the on-the-run issues. So we always anticipated that the use would likely be frequent with respect to those issues. It is not the same dealer borrowing every time. That gives me some comfort, and I hope would give the Committee comfort, that the program is being used by the vast majority of dealers appropriately as a last resort. I want to underscore the overnight borrowing constraint we put in the program. We only lend securities overnight now, whereas previously we lent them for a one-week term. The dealers themselves view that as a fairly onerous condition. They would much rather finance a short position for a one-week or a one-month term. To have to come back every day means that in an operational sense borrowing from us truly is much more like a last resort for them. So in that sense I think it really is consistent with how we set up the program, although in a period when Treasury supply is contracting as rapidly as it is, I believe one can understand why the facility is being used as much as it is.",262
-fomc-corpus,1999,We probably should expect at least as much usage going forward?,12
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,Further questions for Peter?,5
-fomc-corpus,1999,Shall I move approval of the domestic operations?,10
-fomc-corpus,1999,"I would suggest that somebody had better do so. [Laughter] Without objection, they are approved. Item 4 on the agenda is a very important issue being brought before this Committee. It is one that probably is ripe for discussion and certainly it was not at an earlier stage. But by now I believe we are all beginning to get a sense that, while we cannot pin down the whole array of Y2K effects, the broadened range of things that could potentially go wrong has grabbed our concerns. I don't know how the rest of you feel about what is going on, but I'm feeling an increasing uneasiness about a low probability--and perhaps very low probability-development. And that is the potential for a very significant adverse event in the financial markets as a consequence of liquidity concerns, currency withdrawals, and uncertainties of a general nature. I think we can all probably assume, as the Greenbook assumes, that things will essentially work their way out. I don't deny that that is a very, very high probability. But we are the central bank, and what I'm concerned about is that we have a fiat money system. This means in effect that with some limitations--both legal and from our own rules --we can expand money as much as we choose. What I hope does not happen--and this is the reason why it is quite relevant for Peter to address these issues at this time--is that we will find that very low probability event occurring and our ability to address it somehow hobbled solely by our own rules of operation. The issues that Peter will raise and the authorizations that he will request, with the exception of the authority to do 90-day RPs, are solely for the purpose of handling potential Y2K problems and, therefore, should be sunset. What we will want to do, of course, is to review how all of this worked out after the year-end period. We can make judgments at that point on whether those authorizations should be allowed to expire, as I think we all hope at the moment, or whether some should be retained or even expanded. But the essential issue here is one of insurance, with a relatively modest premium, against a potentially catastrophic, very low probability event. With that, Peter, would you outline your proposals to us?",460
-fomc-corpus,1999,"Thank you, Mr. Chairman. Included in my package of charts are two pages of outline notes that you can follow as I speak. You also have a one-page document containing a revised list of the votes that I will be requesting. They provide a guide to my specific requests. In that regard, there is some revision from those in the memo I sent you on August 17. To begin, as I explained in my memo of August 17, my first proposal is to remove the constraint of the guidelines that restrict our operations in federal agency securities. These ""Guidelines for the Conduct of System Operations in Federal Agency Securities"" have been in effect since 1977. The formal proposal I would like to make is to ask the Committee to suspend the guidelines until April 30, 2000. At the FOMC meeting in March of next year I would expect to review thoroughly our experience with temporary operations in agency securities and, as I'll explain in a minute, our use of tri-party arrangements in our operations in agency securities in general. So, that is the first item I would plan to request. As my memo spells out, Board staff and New York staff see reasonable potential for reserve needs to grow during the fourth quarter by around $100 billion. I want to be clear that that is not a forecast; it is a scenario. I'd also like to be clear that my own seat-of-the-pants judgment is that our range of potential error is about the same size; that is, reserve needs might be $50 billion or they might be $150 billion. I don't know how I could tell you with any confidence where reserve needs are going to fall within that band. If they come in at $50 billion, that will be just terrific and we won't have the kind of strain that I'm concerned about. If they come in at $150 billion, triple the amount we've ever injected into the banking system at a time of peak demand for reserves, we will face some considerable challenges. As I outlined in the memo, but perhaps I should have given some more emphasis to this, the supply of Treasury securities and straight agency debt in which we conduct our temporary operations is going to be subject to some considerable demand. The entire private sector is going to be engaged in a flight to quality and will be looking for liquidity. There was an article in yesterday's Wall Street Journal about the many corporate issuers who were so proud of themselves for borrowing all the money they need through year-end in the third quarter instead of the fourth quarter. Nowhere in the article did it mention what they were going to do with that money now that they've borrowed it. They aren't going to put it under their mattresses! They are going to try to put it in Treasury bills or in short-term deposits and make the banks put it in Treasury bills. I'd also like to underscore the fact that foreign central banks are busy changing their operating procedures in order to accept U.S. Treasury securities as collateral for their open market and discount window lending operations. So the whole world is thinking that around the year-end the place to be is in U.S. Treasuries and, as a close substitute for that, straight agency debt--precisely the markets we have relied upon for our collateral. Therefore, I'd like to expand the pool of collateral that we can accept in our temporary operations around the year-end. In framing this proposal we focused on the language of the Authorization for Domestic Open Market Operations itself. That authorization allows the Desk to operate in all U.S. Government securities, ""securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States."" Significantly, that would include mortgage-backed securities that are agency pass-throughs because they are ""guaranteed as to principal and interest"" and thus would fall within the scope of the Authorization. There are two constraints on our ability to do this. One constraint is the Desk's own custody systems and our competence in valuing mortgage-backed securities. I'm not trying to disparage my colleagues and our staff, but we simply have never developed the skills to value mortgage-backed security collateral. We do not have the custody systems. And I blush to think what kind of supplemental budget authority I'd have to request for the second half of the year to try to build those systems, which probably would be impossible, or to acquire the necessary staff, which would be nearly impossible. The other constraint relates to the 1977 ""Guidelines,"" which in practical effect constrain us in two ways. First, because of the structure of the Authorization for Domestic Open Market Operations, we presume that we can conduct temporary operations only to the extent that we can conduct outright operations. Since the Authorization limits the types of securities that can be used as collateral in our repo operations to those securities that are eligible for purchase--and since the Guidelines set rather low thresholds for outright operations in federal agency securities--that restriction would carry over and constrain our temporary operations. In today's market, however, when we accept collateral we simply aren't in a position to pick and choose the collateral dealers offer us or to set very precise limits on that collateral. That is not how the repo market works today. The other principal effect of the Guidelines is that they effectively preclude us from operating in GNMA securities, which is particularly counter-intuitive given the structure of the three major agencies. Therefore, in order to expand the pool of collateral during the fourth quarter and early in the first quarter, we need to set up tri-party custodian arrangements with the two major clearing banks, Chase and Bank of New York. The entire dealer community uses these two banks; half of them are with one and half are with the other. And we would simply try to piggyback in this very short time horizon on their existing tri-party custody arrangements. As noted in my memo, this would be more or less identical to the arrangements we currently have with Deutsche Bank in Frankfurt for the management of our euro-denominated German government securities posted as collateral on the repos through which we invest System and Treasury foreign currency reserves. I should add, as mentioned in my memo, that the tri-party custody arrangement would also permit us to take Treasury STRIPS, which our current systems are not configured to do, also expanding somewhat the pool of collateral. I guess that about summarizes the major points. So, focusing on this first request, my view is that suspending the 1977 Guidelines until April 30, 2000, as I mentioned at the outset, would give us a window of opportunity to expand the collateral pool so we can hope to meet the year-end upside risks. Then, as I say, we would review at the time of the March meeting the tri-party arrangements and all our operations in agency securities before the temporary authority lapses. I'd be happy to answer questions on the reserve needs or on this proposal.",1385
-fomc-corpus,1999,Let's do that now.,5
-fomc-corpus,1999,"Peter, I don't have a big problem with what you are proposing, but I think some of the principles in the 1977 Guidelines are quite valuable. I'm thinking especially of the first two. I'm wondering if we really need to suspend those to get what you want. Might it not be possible to suspend some of the guidelines but not all of them?",71
-fomc-corpus,1999,"As you may recall, in my August 17 memo I proposed that the Committee act upon my request with the understanding that we would still adhere to the principles incorporated in those first two paragraphs. I suggested that a statement to that effect could be included in the minutes of this meeting. I'm agnostic about the precise wording on which the Committee votes. The Secretary of the Committee may have a view. I'd be happy to suspend only paragraphs three through six of the document.",93
-fomc-corpus,1999,"It's mainly the fourth one that gives you the difficulty, right?",13
-fomc-corpus,1999,It is paragraphs four and five that are giving him difficulty. I think keeping the first two paragraphs and suspending the rest would be fine. That would accomplish the objective.,34
-fomc-corpus,1999,That is basically what was suggested in the memo.,10
-fomc-corpus,1999,This would be a more formal way of doing that.,11
-fomc-corpus,1999,It is identical in spirit to what I was suggesting in my August 17 memo. I'd be happy not to suspend those first two guidelines.,28
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,I have a question about the reserve needs. The Treasury balance is expected to be twice as high as usual at year-end. What are the major reasons for that?,33
-fomc-corpus,1999,"The Treasury is forecasting its total cash balance at roughly double what it was last year. I'm not expert in this; Don Kohn or someone on his staff may be better qualified to respond, but $20 billion of that has to do with the rules Congress passed for--",54
-fomc-corpus,1999,Credit unions.,3
-fomc-corpus,1999,So that bumps the level up considerably. Then the rest is a safety buffer for the Treasury.,19
-fomc-corpus,1999,That's so they can meet their obligations very early in the year if people have trouble getting cash to them. They want to be certain they will have plenty of cash to meet their needs.,37
-fomc-corpus,1999,"Let me underscore that our problem in this area is that the Treasury's starting point, when they told us about this, was that they were going to put all this cash comfortably in Treasury Tax & Loan (TT&L) accounts. I just don't believe it is going to sit there. I think the banks are going to push that back to us. I might even be more comfortable if the Treasury were to leave some rather large share of that cash on our balance sheet. That would put us in a better position to reduce the volatility of day-to-day fluctuations stemming from what comes out of the TT&L accounts and what comes back to us.",130
-fomc-corpus,1999,"I assume, incidentally, that that will increase the supply of Treasury securities available as collateral by a comparable amount.",23
-fomc-corpus,1999,"Yes, but the TT&L banks will have to have additional-",14
-fomc-corpus,1999,"No, I wasn't referring to the TT&L accounts. I'm saying that if Treasury uses the cash to build up its TT&L accounts or its balances at the Federal Reserve, it would not be paying off Treasury securities.",45
-fomc-corpus,1999,"That's right. If the cash is in the TT&L system, the banks have to have collateral against that; and if it is on our balance sheet, we'll have to get collateral somewhere. It won't be one-for-one in Treasury bills. There will be a little more supply out there, but the asset side of the balance sheet-",68
-fomc-corpus,1999,I'm trying to say that they are supplying a goodly part of the net new demands as a consequence of that.,23
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,So it's largely a zero-sum game in this particular discussion.,13
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"I have another question on needs with regard to currency. There is no indication at this point, is there, that the estimates on currency needs are anything different from what we've been assuming?",37
-fomc-corpus,1999,"Well, currency in circulation is still running ahead of normal, obviously, so there is some early store of value accumulation going on.",26
-fomc-corpus,1999,But I mean the amount that we've accumulated is also running far ahead of normal.,16
-fomc-corpus,1999,"Yes, by some $300 billion.",8
-fomc-corpus,1999,"We don't see any reason to think that the Federal Reserve won't have many times the amount of currency that will be demanded in the fourth quarter. That's not an issue. I think the issue is how much will be outstanding in the hands of the public and, therefore, how many assets the Federal Reserve will need to hold to offset that.",67
-fomc-corpus,1999,Exactly. But I was wondering if anything has led us to revise our estimates on that?,18
-fomc-corpus,1999,"No. We've done some analysis of the surveys that have been done of households. Interestingly, they tend to cluster around the $500 per household level--if we make some assumptions and drop out the extremes--that we used for our planning purposes. Now, even that may be high. But, as best we can ascertain, the intentions of households and of banks to get currency are all roughly consistent with the estimates we used in the planning that we were doing some time ago.",95
-fomc-corpus,1999,Okay.,2
-fomc-corpus,1999,"We have been doing some thinking about this in New York. One issue that is novel, at least in my thinking in the last month, is that if currency is going to flow more quickly through the banking system--that is, when banks draw on us and the cash goes out--there will be less of a benefit in holding vault cash. That's because, having moved to lagged reserve accounting, they actually take a debit. They ask for cash from the Fed and they have to pay us, so that's a debit to reserves. They get the cash in their vault and it counts four weeks later. If it's moving faster through the system, that vault cash is never there to be counted as reserves for them. If it's still on hand it can be counted, but if it is flowing more quickly--. I don't fully understand the implications of that yet, but we think there may be a little difference in how we view that.",187
-fomc-corpus,1999,"When the ""howl"" level goes up, you'll understand it very much more quickly!",18
-fomc-corpus,1999,"Yes, I think you're right. There are a lot of uncertainties here.",15
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I just want to speak to that issue and partly to the issue you raised at the outset, Mr. Chairman. My own view is that there is a very big gap at present between reality and perception, particularly in the markets. The reality is that at least with regard to U.S. domestic markets, things are in really good shape, as you've pointed out. There's a very low probability of a big problem--though we're likely to see glitches here and there--at least in my view. The perception, however, is focused a little more heavily on that probability and there is also this self-reinforcing logic in the market that is making everybody really nervous about having no liquidity in the fourth quarter of the year. I hear this from a lot of different sources--from State Street and other investment people in the First District. I was at a conference last week in Aspen and among the market people there I heard this sort of chatter. It gets worse every time it is discussed in the sense of feeding into people's fears. So I think this proposal, as well as the others, is a very good way of closing that gap between reality and perception. These actions should make market participants comfortable that even if there are little glitches, we are going to go out of our way to make sure that we can either inject or sop up excess liquidity so that funding will be available in the fourth quarter if they need it. In particular, I feel strongly that the use of tri party arrangements is a great idea, particularly since it allows us to operate after the close of the book entry wire. If reserves need to be absorbed, the Desk can handle it. Bringing this issue before the Committee was a really good idea. The writing of the memo in its entirety was extremely well done. It was very interesting and provided a lot of information for us to evaluate, and it contained some pretty original and useful suggestions on how to deal with this problem. The sooner we can announce something to the dealer community along these lines the better off we are going to be because the gap I mentioned would start to close.",418
-fomc-corpus,1999,Further questions for Peter? Would somebody like to move the authority?,13
-fomc-corpus,1999,"So move, Mr. Chairman.",7
-fomc-corpus,1999,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1999,"Opposed? The ""ayes"" have it.",10
-fomc-corpus,1999,"Turning to Item B, I would like to ask the Committee to amend the Authorization permanently to give the Desk authority to operate for periods of up to 90 days in our repurchase agreement operations. To be candid, as my memo says, with the benefit of hindsight I wish I had asked for that authority last year when the Committee raised the maximum maturity on repos to 60 days. I think the normal difficulties we face over almost every year-end period would be well met by 90-day repos. The 90-day term is also the standard in the marketplace and I see no reason why we should intentionally be different from the standard market practice. If we had a good reason, I'd be happy for our practices to be different, but I think there is some benefit in trying to operate in a way that is consistent with market practice. And particularly this year, we would like to start to address the buildup of pressures as we approach the year-end through term operations that would roll off in early October and then extend them through the end of February. As I said, I wish I had asked for 90 days when we discussed this last year. I think it is the right place for us to be permanently in any event. So I'd like to ask for 90-day authority.",256
-fomc-corpus,1999,Questions for Peter on this issue?,7
-fomc-corpus,1999,"Move approval, Mr. Chairman.",7
-fomc-corpus,1999,Is there a second?,5
-fomc-corpus,1999,Second.,2
-fomc-corpus,1999,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1999,"The ""ayes"" have it.",7
-fomc-corpus,1999,"Item C, to amend temporarily the Authorization for Domestic Open Market Operations to authorize reverse repurchase agreements, I would like to try to explain in some detail. Matched sale purchases and reverse repurchase agreements are functionally equivalent transactions. But the prior view in the System had been that we were only authorized to do matched sale purchases and not reverse repurchase transactions. In recent years, as I think the various memos in your package explained, the evolving view was that reverse repos are within our authority. The dealers have for many years been strongly urging us to move from the matched sale paradigm to the reverse repo paradigm. Our outside auditors have been pressing us to do this. They are much more comfortable with the accepted market practice of reverse repos and would like us to get away from the involved accounting methodology used for matched sale transactions. The legal memos in the package suggest that the switch would be acceptable to our lawyers, though recognizing that it would be a change from a prior view. Let me be clear that I have been planning for some time to ask the Committee for the authority to do reverse repurchase transactions--as you can see from the dates of the memos --in conjunction with the Desk's acquisition and development of a new trading and processing system. We are currently finishing up a proposal that we will be bringing to the Board to seek approval to spend the monies on a new system. As part of putting in place a new system, I had been intending to ask for this authority. However, we won't be able to do reverse repos as part of our regular operations until we build a new system, which will be at least 18 months or 2 years from whenever we begin and maybe longer. We plan to have a phased introduction of the new system in all our operations. Now, in considering the use of tri-party arrangements, we realized rather early on in our thinking that tri-party operations offer us the opportunity to operate later in the day, as Cathy Minehan has already alluded to, on both the add and the drain sides. The add side presents us with no particular problem; we can pursue that as we talk to the clearing banks. But on the draining side, if we are trying to get this done for year-end and just want to piggyback on their existing systems, there is no possibility of getting the dealers and the clearing banks to rebuild their systems. They might not want to do it anyway, but there is certainly no prospect of accomplishing it ahead of the Y2K date change to accommodate our current matched sale accounting system. So if we want to pursue the development of a contingency plan--and I want to be very clear that I'm not certain we can make this work, though I'm hopeful that it could be a useful tool for us--it will depend on some systems we haven't yet built. And it will depend on the willingness of the dealers to accommodate us late in the day, to change their balance sheets in response to our needs. If there's too much liquidity in the banking system, they ought to be willing to do that, but I don't want to pretend to you that I can go out and make this happen all by myself. However, to do that we would need to adopt the reverse repurchase authority so that we could do those transactions through tri-parties. Given that we're not going to be able to put this in our new system for at least a couple of years, temporary authority to do reverse repos is certainly what we need just to get us through the fourth and the first quarters. But you are on notice that I'm interested in this for the long run, too. We can see how it goes over the turn-of-the-year period. So, I'd like to ask the Committee to amend temporarily the Authorization for Domestic Open Market Operations to authorize reverse repurchase transactions by adding the language shown as paragraph 1(c) in Attachment VIII of my August 17 memo.",785
-fomc-corpus,1999,"I would suggest, since your coughing suggests that you're dying, that we have Norm Bernard read the paragraph!",21
-fomc-corpus,1999,"This would involve an additional paragraph to the Authorization under section 1, as Mr. Fisher was just mentioning. The new paragraph 1(c) would read: ""To sell U.S. Government securities and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to dealers for System Open Market Account under agreements for resale by dealers of such securities or obligations in 90 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers.""",122
-fomc-corpus,1999,Questions for Peter on that?,6
-fomc-corpus,1999,"Move approval, Mr. Chairman.",7
-fomc-corpus,1999,Is there a second?,5
-fomc-corpus,1999,Second.,2
-fomc-corpus,1999,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1999,"The ""ayes"" have it. Let's move to Item D.",13
-fomc-corpus,1999,"Mr. Chairman, turning to Item D, I'd like to ask for temporary authority to sell options on repurchase agreements, reverse repurchase transactions, and matched sale purchase transactions through the end of January 2000. The language, which we will come to, was in Don Kohn's memo to you of yesterday, which was included in your packages last night. Let me give my views on this and explain why we're seeking this authority. As the Chairman said at the outset, there is a small risk of some extreme events at the end of the year that I think it prudent for us to lean against. From my perspective, I'd just like to offer the view that to a certain extent we are seeing some expectations among market participants that are already a problem. There is a problem now. Cathy Minehan referred to it and the Chairman was alluding to it.",173
-fomc-corpus,1999,The point I was making was not solely the technical problem. I was referring even more to the psychological problem.,22
-fomc-corpus,1999,"Yes, I understand. I just want to focus on the problem that we already see today of growing levels of anxiety and uncertainty on the part of financial intermediaries, both banks and securities firms, which they are communicating to their customers in ways that are very unhelpful. Let me elaborate on that. The banks are telling their customers: ""We may apply quotas. We may not take your deposits. We may give you a zero or negative interest rate."" And securities firms are telling their customers: ""Don't count on us; we may not be able to finance you in the last week of December. Go look elsewhere."" And that is creating uncertainties about the functioning of financing markets, particularly repo markets, in the weeks around the year-end which go beyond the problem just of how much collateral we can get. One of my motives for this request is to try to put some limit on the upside risk of that potential development. It is not just a quantity issue. That is, if the markets are not functioning--if the dealers are not willing to be on both sides of the market for us in some depth--regardless of the amount of collateral we're prepared to extend, we may find it quite difficult to carry out our objectives. So I see appreciable risks that market conditions may frustrate the Desk's ability both to add and drain reserves in the period around the year-end and to keep the funds rate trading around the Committee's target. I feel it would be imprudent of me not to seek your approval for the tools that I believe are necessary for the Desk to carry out the directive. As I outlined in my memo and as I mentioned, I think, at the May meeting, our having the ability to write options on repos, reverse repos, and matched sale transactions could be quite effective. In my view it has not just a reasonable prospect but the greatest prospect of enabling the Desk to carry out its mission in what could be extraordinarily illiquid markets. Whether or not something goes wrong in the markets, we are reasonably certain that these markets will be very illiquid. Now, whether some triggering event or some extreme circumstance will occur is the risk we're uncertain about, but I'm reasonably confident that these markets will not be tame. The idea, as my memo explained, is to auction options on repos and matched sale purchases for exercise during the days or weeks immediately surrounding New Year's Day at rates that would be in some band around the Committee's fed funds target. Now, I want to be candid about a dilemma we face. I believe the greatest impact this device could have is the announcement effect. Its secondary impact would be in actually providing low-cost assurance to the intermediaries that the money markets would not become dysfunctional and that funds would be available in some band around the Committee's target rate. However, it would be a measure of success of the program if very few of these options were exercised. If they are purchased, that will give the market some comfort. So if they are exercised, that would be fine; but it would be even better if market players came to the conclusion that they didn't need to exercise them. The dilemma is that, while I believe the greatest impact would be in the announcement effect--at least I hope it would be--I'm not quite sure that we can develop the precise details of the program I would like to ask you to approve without talking to the dealers. I think we need a candid back and forth flow of discussions with the dealer community on how to structure this program. We have some ideas. I outlined them in my August 17 memo. But a practical issue is that we have to put a good face forward and show that we have some confidence in announcing this and also work out the details with the dealers to make sure this approach is really practical and will have the intended effect. And thus Don's memo to you of last night indicates that we seek this rather broad authority--I'll be candid about that-fully understanding that we'll have to work out quite a few details to make it actually fly. I'd be happy to answer any questions I can about this request.",821
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, I have more of a comment than a question. I think our approval of what Peter is recommending here is extremely important and in fact vital. The first three resolutions we've already agreed to really had to do with being able to carry out our normal responsibilities at the end of the year plus having some damage control capability. Damage control is something I've lived with for a long time because in my first job in the U.S. Navy I was a damage control officer. One thing that you figure out on a ship that is very capable of sinking is that the best way to control damage is not to have any. So you're always better off to be in the risk-avoidance business. And this essentially is the situation we have here. Probably until about a month ago, I was of the view that the damage control capabilities that we have already agreed to would be adequate--that we could get financial intermediaries to respond essentially in the way that we got them to respond last fall. And that is that they pulled up their socks and decided to make markets, which is part of their job. But as President Minehan has suggested, it is also very clear to me that regardless of how much we lean on the financial intermediaries to make markets at the end of the year-and I probably would do the leaning--it is likely that those efforts will not be successful. It is sufficiently likely that we are well advised to use this additional tool. The conversations I've been having with very responsible heads of major institutions are much like those Cathy has had. They feel their responsibility to their shareholders and their customers is such that they have to protect themselves. And if we were in their jobs, that's essentially what we would do. They are not paid for being patriots; we are. Therefore, I'm absolutely convinced that we need this capability largely to avoid risk or at least to reduce risk. And as Peter has suggested, if we're completely successful in the message we give, we may never have a single one of these options exercised. That would be victory.",410
-fomc-corpus,1999,Not exercised and not even purchased.,7
-fomc-corpus,1999,"That would be even better! I think the likelihood is that the dealers will purchase them. And Peter is absolutely right in that we need to have the agreement of the Committee in order to go out and have meaningful discussions with the dealers. We can't go out and say, ""Well, we're thinking of doing this; maybe we will and maybe we won't."" If there is anything that will make us look ludicrous as an institution and a Committee that would be it--even though, as you could see from Peter's memo, that's where he started or where he started with my support. But as time has gone on, I've come to the view that we absolutely have to have the capability to say that the Committee has approved our doing this and now we are figuring out the details.",157
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, I don't have any question about the need for these types of tools. But I do have a question--if we can put on our BS&R hat for just a moment--that relates to us as a central bank. If a bank or other financial institution were to engage in these types of activities, we would be interested in whether or not they had conducted simulations to ascertain what the impact of these activities was likely to be on that institution. Then we'd expect that to be shared with management and their board of directors, and so forth. Is that a step we should take? And if so, should that step be taken before we approve this? In my experience that is something we think is very important for private institutions. It seems to me that we could have simulations showing extreme events that could have rather important impacts on the Federal Reserve System and the financial system, and I think it is something we ought to look at.",188
-fomc-corpus,1999,"If I could respond, President Parry, I think a major difference between this institution and the private institution you're referring to metaphorically is that our cost of covering this option is quite different. If a private firm were to write options on financing, their cost of cover would be market-based. They would have to find financing out in the marketplace. That is the risk of options to private participants. In this case, we would only be writing options on our own balance sheet. While there are upside risks in terms of the growth of our balance sheet, and that's obviously what I'm trying to constrain, our cost of cover is not a real constraint. I think the challenge for us is how to price the premium sufficiently low, because in market-based terms we face no real risk here. We have some transactional risks. There are risks, I want to be clear, but we don't face the kind of risk a private institution would face in providing this service. And that is really why it works at all. If we were a private institution, this would be a very risky undertaking. Early on in my thinking about this--this was a month or so ago--one dealer told me that a customer approached them and asked them to provide an option on over-the-weekend financing for December 31. The dealer thought about it and said ""no."" He said there was no premium they could charge that customer that they would be prepared to have known publicly because of how they saw the risks. In their view, the risk to their reputation was too great. They would have to charge such a high premium that they didn't want the charge for that risk known in their customer base. For our balance sheet, just the reverse is true. It's hard to figure out how low to price this because we do not face a market-based risk of covering the option. I do think that makes a considerable difference in a comparison to a private institution.",384
-fomc-corpus,1999,I'm sure there are differences. Does that lead you to conclude that looking at such simulations is not appropriate?,21
-fomc-corpus,1999,"I'm sure it would be appropriate if I thought we could do it. You've seen the confidence interval I have on my estimate of reserve needs for the fourth quarter. It's around $100 billion. I ask you to think for a moment how much better I could do in trying to anticipate what the use of this program would be, especially where the ultimate goal is not to have it used. Our hope is to minimize the exercising of the options.",88
-fomc-corpus,1999,"President Parry, I think Peter's goal is to achieve the FOMC's objectives for keeping the federal funds rate in a range around its target. The very high likelihood is that if people wanted to exercise the options because rates were high, that would be a day on which Peter would be doing lots and lots of RPs. So, in effect, I don't think this presents a risk to us. It may actually help to limit the risk that he wouldn't be able to meet his objective of calming markets down. So, if anything, it reduces the risks relative to his objective. Secondly, there are issues having to do with where the RP rate is relative to the federal funds rate. But the very high likelihood is that if the RP rate is very high--so that people want to do these RPs with us--the federal funds rate would be very high. And that would be a day on which the Desk would be adding a lot of reserves, and the exercise of these options would be only the first step in what would likely be a long list of reserve-supplying operations that day. On the other side, in the case of a reserve-absorbing operation--if the rates are so low that they're in effect doing the matched sales with us--we'd probably be doing matched sales that day also. So, if anything, these market instruments reduce the risk that Peter won't be able to hit his objective, which is obviously very different from the profit and loss risk that a commercial bank would face.",305
-fomc-corpus,1999,"Bob, I think you can see from Peter's and Don's comments that we've done an awful lot of thinking about the ""what ifs"" and ""maybes"" and what could go wrong. Even though it has been done at a level of Board staff and the Chairman and the New York Reserve Bank staff and me, we haven't been remiss in putting this through every stretch exercise we could imagine.",81
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"I think the case for this is pretty persuasive. But in the spirit of Bob Parry's question, on the issue of the Fed operating in options and the Fed doing derivatives I have a sense that the public perception of that might be of some concern to us. I think we should be aware of that. I know this is a vote on a temporary authority, but temporary things sometimes become permanent. And certainly before we decide to do anything like this on a permanent basis, we ought to consider the broader implications relating to public perceptions.",107
-fomc-corpus,1999,That's the reason why it's essential that most of this new authority gets sunset. President Jordan.,18
-fomc-corpus,1999,"Thank you. I have a question along the same lines. In view of all the other things that are in place--the special liquidity facility and all the things we are going to be doing to make sure that everybody knows we will be making markets and operating to the full extent--I can still see some concerns among individual market players. I'm not sure whether you're worried more about bank dealers or nonbank dealers; my guess is nonbank dealers. And I think they still would be concerned about the distribution of liquidity. It's not that the aggregate is a problem, but rather the distribution, with everyone trying to get through the door at one time. You've used a few words that get near but don't quite answer what I've been puzzling about. You've said ""auction;"" you've said ""insurance;"" you've talked about the pricing. But auction implies supply as well as demand, so you have to decide on an amount you're going to auction. Then there has to be a demand. So describe for me, and for everybody else I guess, how somebody in a dealer operation would explain, to whomever they have to get approval from, that they want to bid at the Fed's auction to buy an option. What is it that they're gaining and how much should they be willing to pay for it?",259
-fomc-corpus,1999,"Obviously, and I think my memo was candid about this, the problem of setting a reservation price and what we would ask the dealers to bid for in the auction is a major challenge and one of the primary reasons I want to talk to the dealer community. I think an auction sale is the right approach to take; the problem is how much to auction. We want to have it open; we want to have competitive bidding and a reservation price set quite low. I don't have an absolute answer on what the right quantity is to auction each day or how to conduct the auction. Again, that is why I want to talk to the dealers. So I want to give you a scenario that's in my mind but I don't want you to think that I'm invested in any one of the details. I would imagine that there would be a two-week period on either side of the year-end in which the dealers could exercise overnight options either on matched sales, reverse repos, or repos. I'd say that sometime in October we would begin auctioning each day a set quantity of overnight options for any one of those 20 business days. One way of thinking of the arithmetic would be that we might be prepared to put up to $200 billion on either side of our balance sheet. If we had 40 days' worth of auctions, we'd be auctioning $5 billion a day for each of the one-day overnight windows the dealers could bid on. I think I will have to put out some proposal like that as a straw man in talking to the dealers in order to get their creative juices flowing on how to think about the reservation price. We want to set it very low, but we don't want the option to be a free good. They will want it because it's cheap, but not because it's free. In earlier discussions about this I said I didn't want them to think it was as cheap as water, but under the drought circumstance I've learned that everything has a price! So it would be something like that. I'd be tempted to begin discussions by talking about setting a rather low limit. It's easier to raise the auction limits than lower them in that environment. I'm just trying to think about ways of creating an auction process the dealers would participate in. The idea of having a small amount auctioned each and every day would be a way to get the dealers to anticipate their demands and not wait until the end--to try to smooth out their demand and buy a little each day. For this to be successful and involve the right kind of pricing, it is not that I want to see the price start high, but I'd like to see it trend lower as the market relaxes about the availability of year-end financing. Nevertheless, I want to be clear that I don't know today what the right limits are. I think there are limits. There are some very tricky issues we would have to think about, such as what assets we would be putting out for doing the matched sales and whether we'd be doing them through tri-parties or through our DVP system, which is why both are mentioned in Don's proposed paragraph.",619
-fomc-corpus,1999,"May I ask a follow-up question? You mentioned already that, in their scenario, when the currency is going out banks are also going to be thinking about that currency coming back in. What are they going to do with it? Are they going to get to count it toward meeting their reserve requirements? I can see those in the banking industry doing their own exercises--seeing times when they are concerned about adequate liquidity and they want some insurance and then seeing periods of excess liquidity and wondering how to get rid of it. I can imagine both. It seems to me that it would be important in your conversations with the dealers to ask them their ideas about quantities and prices and so on. I'd also want to find out if we offer this and if they buy this insurance--these rights to get liquidity or put liquidity to us--what is it that they otherwise would have done that they will not be doing as a consequence of our making this available. I say that because we are going to alter their behavior from their own contingency planning that assumed this program didn't exist.",211
-fomc-corpus,1999,"I mean to offer these as examples, because I believe the reactions are likely to be quite diverse. The anxieties of the major money center banks, and therefore of the major bank dealers, tend to be focused on what to do with the surplus cash they're going to have. They are afraid of being excessively liquid. So I think they would likely buy in on the cash-put collateralized option drawn on us. My hope is that that would permit them to be less obnoxious in talking to their customers about the risks of zero or negative overnight interest rates on corporate deposit accounts because the banks would be more confident that they can pay some kind of market-based rate. So that's a behavior we do want to see changed. On the dealer side, the premier dealers in the world have been telling customers not to count on them for financing around year-end and it's making their corporate customers very anxious. I think the behavior change we'd like to see among the major dealers is that they would be less obnoxious in telling their customers to go away and not count on them to finance their inventory of securities during the last two weeks of December and the first two weeks of January. So those are the two behaviors I know I want to change. I agree with you that there are bound to be other behaviors that would change that I haven't anticipated. But those are the two I'm aiming at; I'm trying to get the intermediaries to behave more like intermediaries and less like risk avoiders. My hope would be that the markets would behave more as we would like them to.",310
-fomc-corpus,1999,"Along that line, one good outcome might be that the dealers would simply pass these options through to their customers. That is, if they took the options and in turn entered into the same contract with their customers--customers who don't have access to the Federal Reserve either through the primary dealer network or because they're not commercial banks or other depository institutions--that would afford those customers some degree of confidence. They would know that they could put the securities back to the dealer, who would in turn put them back to the Fed or they could borrow from the dealer on a collateralized basis, and the dealer in turn could borrow from the Desk collateralized. So, having these pass through the primary dealer system to the other market participants I think would potentially be a very positive development.",154
-fomc-corpus,1999,"Forgive me for interrupting, but I would like to underscore what Don just said. I think the only reason to do this is to have the dealers pass the benefits through directly or indirectly. There are accounting issues that I'm not going to be able to think through here as to how this would all work, but we will strongly impress on the dealers that they are to make the benefits of this available to their customers. That's the purpose of the exercise. It is not to have the dealers sleep better at night while their customers don't.",107
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I understand the importance of Y2K concerns, but I want to follow up a bit on what Jerry Jordan was saying. I know that Peter Fisher and others have scrubbed this proposal pretty carefully, but in terms of the analysis I'm not as clear as I'd like to be. And I am a true believer in the law of unintended consequences. When you want to do things and get them done for the right reasons, you think of all the positives. But without some fairly rigorous analysis, you tend not to think of the other side. I worry, given the speed with which we're taking this forward, that we may not have thought of all the negative consequences, and that leaves me uneasy. One other comment I would make is that necessarily--and I understand the reasons-there is a great deal of vagueness in this proposal; one uncertainty is even the strike price. I hope in structuring this that we keep in mind many of the conditions we have in the special liquidity facility as we go to these individual dealers, because we are treading on new ground as far as how we conduct monetary policy. And even though the authorization is temporary, it does have implications going forward that I haven't had the opportunity to think through. I hope that as the details are worked out we will be briefed again on what is being decided with regard to the strike price and the reservation price. I know you have to talk with the dealers, but it leaves me uneasy to think that they might be structuring this program. So, those are my concerns. I know Y2K is important and I don't diminish that, but I do have these reservations that I wanted to raise.",340
-fomc-corpus,1999,"Let me just comment. I think there is no question that there will be adverse consequences. We're going to change certain types of behavior in ways that are very difficult to anticipate, and presumably some of those changes are going to be adverse. One of the advantages of having this as a temporary program--one would presume--is that we will see a number of the adverse outcomes and we will not be locked in to maintaining the program. I think the argument that we perceive of this as a temporary reaction to an idiosyncratic event tends to limit the types of institutional changes that might occur as a consequence of it.",124
-fomc-corpus,1999,That does give me some solace.,7
-fomc-corpus,1999,"If you think about it, the potential downside risks of not doing some of these things are just awesome.",21
-fomc-corpus,1999,I understand.,3
-fomc-corpus,1999,"Could I add a comment? In your package of charts, page 10 is a background chart that I did not discuss but would like to point out to you, President Hoenig. I have given some considerable thought to adverse consequences, and the one I'm most concerned about is whether we would discourage market intermediation in some way when, in fact, we're trying to encourage it. I've at least thought through what the worst perverse consequences would be if we discouraged market intermediation and arbitrage opportunities.",102
-fomc-corpus,1999,Very good.,3
-fomc-corpus,1999,"What the chart shows, starting from October 15 of last year across the top panel and March 23 of this year across the bottom, are the rates on repos on Treasury collateral in blue, the rates on mortgage-backed securities collateral in red, and the morning federal funds rate. The latter is based on an informal survey we take in the morning that tells us where funds are trading. There is an extraordinary correlation here, which is wonderful to see; it shows that markets work and arbitrage takes place. Most of the spikes on the chart are at month-end or on Treasury refunding dates or tax payment dates. It's all rather predictable behavior. I'm drawing it to your attention to show that even in the chaos of last fall, shown at the upper left, the range in which these repo rates moved during the morning, the most active time of the day, was contained at 4.25 to 5.75 percent. And that even includes the period through the year-end last year, and I'm sorry that precise date isn't shown. So, in my memo I discussed a 150 basis point corridor on either side of the then-existing funds rate target. That's something we will want to talk about. I think it is going to be hard for it to be any tighter, with the precedent of the special lending facility on the one hand and the coincidence of the negative 150 basis points, which is our minimum bid when we lend out securities and put out collateral. So if we were to do matched sales and put collateral out at a tighter spread, I think we would be creating some perversions. Now, I want to be able to talk to the dealers about this and think about it. As you can see, the corridor in which rates actually vary is very narrow. So a range of 150 basis points is considerably wider than the range in which normal arbitrage takes place. Therefore, with respect to the issue of the most perverse unintended consequence, I think anything like the spreads we're going to talk about is really going to be the disaster insurance. We're trying to offer the market disaster insurance to get them more comfortable intermediating within that range. I just wanted to be clear that we've done some of the work here.",447
-fomc-corpus,1999,"Let me make a comment that I hope will be helpful to President Hoenig and others. The way we envision introducing this to the primary dealer community is at a meeting at which the heads of the firms would be invited to the Reserve Bank and I would be their host, with Peter Fisher joining me. We will make it very clear to them that this is not the ""Primary Dealer Benevolence Society Act,"" but rather that we expect them to behave in a responsible way, as we are, in carrying out their function as a financial intermediary. If they try picking us off, they might succeed. But we want them to know--and we will let them know--that the price of that will be very high and will last very long. So, I think we can make sure that they don't get confused about that. They shouldn't think that because this involves matters they are more experienced with and more clever about than we are, which is true, that therefore they can lead the holy innocents off to slaughter, so to speak. We will make sure they understand that if they try to do that, they'll get caught and the price will be extremely high. I personally would not be willing to support this if we were not prepared to make that very clear to them. Thank you.",257
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"While I recognize that there is some risk on the opposite side, let me relay an anecdote from a recent conversation with a very senior person at one of the major investment banks who is responsible for a lot of their funding operations. He said, after an anguished discussion about all of the fourth-quarter concerns those in the investment bank community have, and I quote, ""We will not be heroes."" His comment was quite passionate and heartfelt. By showing that we are willing to be more innovative and a little fleeter of foot than usual and that we are willing to work with them on the details, I think we could be a bit of a hero. And we should be as the central bank. As a side point I would reiterate what Tom Hoenig said in that I'd love to hear what the details are after you've had your discussions with the dealers. Not to be doing this would really risk a lot of potential damage in the period around the turnover to the new millennium. I'm very much in favor of this, as I've said before.",209
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, I think this is a very good idea and I'd do it on a temporary basis. I agree with Cathy Minehan that it is an innovative approach and would show that we are trying to address a very important problem. Three or four years ago I went to a conference of central bankers and this idea of central banks engaging in options activities was discussed. This was not related to Y2K but was just a discussion of the general concept, and I actually commented on a paper on it at that time. I am just curious as to whether any other central banks are doing this or even considering it at this time.",126
-fomc-corpus,1999,"I'm not aware of any that are using this in their management of domestic interest rates. I know the ECB has made a point of saying that they have the authority to use all instruments; if they want to use options and other derivatives they can. They have often stated that they have the full arsenal of weapons if they need it. A number of central banks use options in their investment activities in foreign currencies, in managing their foreign currency reserves and limiting the risks. The Bank of Mexico uses a nonsymmetric option in its intervention strategy. That is, when they're accumulating reserves they do it through an option that avoids having their operations exert an impact on the day's price. In other words, it is always backward looking. When the exchange rate strengthens, they accumulate a few reserves. The bank's exercise of options is one-sided. I may be mistaken, but I'm simply not aware of any central banks that use options for domestic interest rate management.",187
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Actually, Mike Moskow already asked the first half of my question. The second half is--and given your answer to Mike, I'm not saying it's necessarily a bad thing--whether there is any risk that we're going to be the insurance provider of last resort for the whole world if other central banks don't do something like this?",65
-fomc-corpus,1999,"I think there is that risk today in our money market, which is why we're proposing these extraordinary measures. As I alluded to earlier, the Bank of Japan wants to find ways to be sure it can take U.S. Treasuries as collateral when they lend yen to their banks. European banks and others are doing the same thing. The world is focusing on our money markets and financing markets as their adjustment mechanism. I think that's where some of the pressures are coming from that we're seeing. So, yes, if we're trying to address our money market problems, I think there is a risk that the benefits and the demands will spread beyond our nation's markets. But that's the reality we confront to begin with, so I don't think we can do anything about it.",153
-fomc-corpus,1999,What would be the implications of that?,8
-fomc-corpus,1999,I didn't mean to say it should be viewed as a risk. It may be good that somebody in this whole world is going to do this. But these are the implications.,35
-fomc-corpus,1999,"Well, an obvious question arises here. Is there a limit to the number and volume of options you'll be willing to sell?",25
-fomc-corpus,1999,"That is even more challenging than the reservation price. My guess is that we will go out with a proposal of $200 billion, as I suggested, telling the market that with the Committee's review and approval we might raise that limit if we saw a demand. I would try to go out with a program involving a limited number of contracts per day and tell them they should price accordingly, but give them notice that there's a risk that the quantity could be raised if we saw the demand.",97
-fomc-corpus,1999,"If you price appropriately, you'll get as large a volume as you want.",15
-fomc-corpus,1999,There's an interaction of limits and pricing.,8
-fomc-corpus,1999,The desire to create a very low price may not be the wisest of all operations.,18
-fomc-corpus,1999,"As I say, it should be low enough so that we are making insurance available to the market to calm it down but high enough to provide some constraint on demand.",33
-fomc-corpus,1999,It's called subsidized insurance. That's what it is. The fact is that they can get it from the private sector but the price they would pay would embarrass the seller of the insurance. The difference is the subsidy.,44
-fomc-corpus,1999,Exactly.,2
-fomc-corpus,1999,It's the sovereign credit of the United States. It is like the FDIC; it is precisely the same issue.,23
-fomc-corpus,1999,We seem to be learning a lot.,8
-fomc-corpus,1999,The question is what they are going to charge their customers for this.,14
-fomc-corpus,1999,It would beat the subsidy.,6
-fomc-corpus,1999,The subsidy is going to get smaller the further out the chain one goes.,15
-fomc-corpus,1999,"Gary, that may well be the type of thing that Tom Hoenig is concerned about.",18
-fomc-corpus,1999,"It's my recollection that the publication of the primary dealer list is a consequence of the New York Fed asking the dealers to report to us their inter-dealer transactions. The dealers said, in effect, ""We'd love to report our inter-dealer transactions; you just have to tell us who the other dealers are."" And that is how we got backed into having a list. It has already occurred to me that we will want to ask the dealers--""ask"" politely--to report to us secondary market transactions on similar contracts so we can keep track of the pricing.",115
-fomc-corpus,1999,"My guess is that as we have these discussions the notion of how high the price should be will continue to go up. We don't want the subsidy to be too low or too high. Whatever it is, what we want is-",46
-fomc-corpus,1999,"Once the money is available, it's impossible to trace it to individual contracts or relationships. So, in effect, it will be hard to see how the subsidy gets passed on. I guess every economist would say that the subsidy stays with the dealer.",49
-fomc-corpus,1999,"It is with that in mind, though my plans are a little inchoate, that I have thought of auctioning set amounts each day. That way there will be a price today, but more will be coming online tomorrow and more will be coming online the next day.",55
-fomc-corpus,1999,"If you have an auction, basically you have not solved the problem but you've limited it.",18
-fomc-corpus,1999,"Yes, precisely.",4
-fomc-corpus,1999,"With a limit they will bid up the price, depending on how they think they can turn this onto their customers. That will tend to reduce the subsidy.",31
-fomc-corpus,1999,"In fact, the price will tell us something about how the program is going in the market.",19
-fomc-corpus,1999,Absolutely. That is another reason daily auctioning somehow seems preferable to me.,15
-fomc-corpus,1999,I had the impression that you were thinking of setting the price.,13
-fomc-corpus,1999,"No, I mean to set a minimum price. We don't want people to put in a bid of zero or $1 at the auction. We'd have a minimum or reservation price and they would bid upward from there.",43
-fomc-corpus,1999,Is there a reservation price on Treasury bill auctions?,10
-fomc-corpus,1999,I don't think so.,5
-fomc-corpus,1999,No? The question is: Why would you want one on this?,14
-fomc-corpus,1999,"Because we are uncertain about the supply--whether we are going to provide an unlimited supply. That is, we haven't yet figured out-",27
-fomc-corpus,1999,But that reservation price doesn't help you for that. It is the wrong side of the question; that's all I'm saying.,24
-fomc-corpus,1999,"I just mean that we are talking about a reservation price because we are uncertain about whether we are going to set an upside limit on the supply and, if so, where. Those are two ways of talking about the same thing. I am agreeing with you, I think, Mr. Chairman.",59
-fomc-corpus,1999,"If it turns out that indeed the demand is very low or they set a very low price, you'd be required to give it to them at a negligible price, and that may not be desirable. Okay. Governor Kelley.",44
-fomc-corpus,1999,"Peter, if we are ready for a more nuts and bolts type question here, I'm wondering about the timing of this. It seems to me highly desirable, if we are going to do this, to do it as rapidly as possible. But there is a lot of work to do. How is this going to flow as far as the timing is concerned for these inquiries, preparations, announcements, putting it in place, and so forth?",87
-fomc-corpus,1999,"I alluded to the timing--probably too briefly--in my memo of August 17. I believe it is very important for us to work with the custody banks, BONY and Chase, before we go public, so we can set a reasonable date certain on when we could begin tri party operations. We would propose to begin immediately, tomorrow morning, working with the two clearing banks in the hope that over the next business week and a half we could resolve the various issues. Then we would be in a position shortly after Labor Day to announce at least a date certain. My hope is that by the first full week of October--for the reserve management needs I mentioned earlier--we will be laying in the 90-day RPs so that we could begin tri-party operations in the broader collateral pool then. Now, that's my hope. We want to work out some of the nuts and bolts details with the clearing banks so we can announce with certainty that we will be doing tri-party operations, using the collateral pool, and doing 90-day repos. So, a day or two after Labor Day, we certainly will be announcing that we have the authority. We would begin working with the senior leaders among the dealers about the same time we would be making public that we have this authority and plan to offer these options. We would be developing the details with the dealers, and I would hope to be able to conduct the auctions on the models I'm roughly thinking of, if not by the first full week of October, by the middle of October. That would give us roughly two months of auctioning until we get to the period when these options are likely to be exercised by the dealers in the last two weeks of December.",344
-fomc-corpus,1999,"If you can meet that timetable, that would be excellent. I think it is pretty ambitious, but we need to try to do it that way.",30
-fomc-corpus,1999,We envision having the meeting with the heads of the firms on the Wednesday after Labor Day. The reason we don't want to do it before then is that we won't be finished arranging for the tri-party agreements with the agent banks and also because this is the time of year when too many people are away.,60
-fomc-corpus,1999,Further questions for Peter? Why don't you read the Authorization as it is being amended?,17
-fomc-corpus,1999,"This would involve an addition to the Domestic Authorization, paragraph 4, as described in Don Kohn's memo, which was circulated overnight. The new paragraph is: ""In order to help ensure the effective conduct of open market operations during the transition period surrounding the century date change, the Committee authorizes the Federal Reserve Bank of New York to sell options on repurchase agreements, reverse repurchase agreements and matched sale purchase transactions for exercise no later than January 2000.""",94
-fomc-corpus,1999,"Move approval, Mr. Chairman.",7
-fomc-corpus,1999,Is there a second?,5
-fomc-corpus,1999,Second.,2
-fomc-corpus,1999,"All in favor say ""aye."" SEVERAL. Aye.",14
-fomc-corpus,1999,"The ""ayes"" have it. Thank you very much, Peter.",14
-fomc-corpus,1999,"Mr. Chairman, before we leave this subject, I think we owe Peter, the New York Bank, and the staff here our gratitude and an enormous ""thank you"" for their efforts on all of this. Life is going to get messy; these likely will be extraordinary times. But this kind of extraordinary thinking and extraordinary planning really shows that the Federal Reserve can operate not just in ordinary times but in extraordinary times. My confidence level in our ability to deal with all of these potential problems has gone up as a result of this conversation, in large part due to you, Peter, and your associates.",120
-fomc-corpus,1999,"Hear, hear!",4
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,Mike Prell,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. At first blush, it might seem odd that in this edition of the Greenbook we'd be talking about heightened inflation risks and raising the assumed fed funds path in our baseline forecast. After all, real GDP growth was surprisingly weak in the second quarter, and the core CPI increased only a tenth-and-a-half per month on average in June and July. Given that you've all perused the text, I'm sure that you appreciate the compelling logic that lay behind our forecast revisions! [Laughter] But, just for the record, Karen and I shall highlight for you some of the key considerations. Because a significant part of the explanation comes from the international side--and because some interesting developments have occurred in that sphere in the post-Greenbook publication period-Karen will lead off.",161
-fomc-corpus,1999,"There are two elements of the external picture that I believe need to be highlighted this morning. One is the shift in our thinking toward the view that recovery among many of the crisis countries has taken hold; our outlook for output growth abroad for the rest of this year and next year is now stronger than we previously thought. This more optimistic tone is present in the Greenbook, but I think it merits some comment, including some cautions. Second, since the Greenbook forecast was finalized, we have received the trade data for June. Those data showed more imports than we were expecting, and we would shade our forecast of the external sector just a bit from that in the Greenbook as a consequence. Additional data showing very strong real output growth in several developing countries have convinced us that activity in some of these countries is rebounding sharply from the depressed levels reached last year. For several important Asian economies, including Korea and Malaysia, we have raised our estimates of the level of output reached in the second quarter and have extrapolated firmer growth over the forecast period. There have been positive surprises with respect to some Latin American countries as well, in particular Mexico and Brazil, and we have revised upward the average growth we expect for that region but less markedly than we did for Asia. Taken together, these upward adjustments imply output growth for developing countries that is 3/4 percentage point stronger at an annual rate during the second half of this year and a percentage point stronger next year than we had in June. Although we now read the signs of recovery in many emerging economies as more persuasive, downside risks remain that should not be underestimated. In Asia, the economic and political situation in China is clouded. With output growth slowing and deflation continuing, market talk of an imminent devaluation of the currency has resumed. We are anticipating a gradual decline in the nominal value of the renminbi during next year. If, instead, there is an abrupt adjustment, financial stresses for other economies in the region could result. Given China's substantial holdings of international reserves and capital controls, we believe that officials are in a position to manage this decision, but we cannot rule out that circumstances could force their hand. Downward pressure on the Brazilian real over the past four weeks appears to be a sign of heightened market concern. Despite very strong real GDP performance in the first half of the year, progress on permanent fiscal reform is questionable, with both court challenges and political commitment continuing to pose problems. The government of Brazil has struggled to normalize access to global financial markets: The agreement of Brazil with its major bank creditors to maintain their lending positions is about to expire, and Brazilian authorities have announced that they have no plans to draw on the third tranche of their IMF or bilateral support funds. However, with the external accounts still in deficit, Brazil is dependent on attracting foreign capital; a further loss of market confidence could trigger a swift resumption of contractionary forces. Financial markets in Latin America are generally somewhat skittish. The recent announcement by Ecuador that it may miss a payment due shortly on its outstanding Brady bonds had a moderate effect on spreads elsewhere in Latin America and could lead to further volatility if talks with the IMF make no progress. Although we see the situation in some parts of the global economy as still fragile, the overall picture is nonetheless considerably brighter than in June. With the significant positive revision to the forecast for output in the developing countries and a small upward adjustment to that in the foreign industrial countries, we have output abroad growing at 3 percent over the forecast period, about the same as forecast for the United States. Stronger growth abroad should boost exports some, and we have raised their projected growth accordingly. The nominal trade deficit in June, which was released after the Greenbook forecast was final, revealed slightly more exports and significantly more imports than we had incorporated into the second-quarter estimate. All categories of imports were buoyant, and no special factors or statistical anomalies seem present. We are inclined to adjust the level of imports--and exports--in the second quarter, but to retain our path for quarterly growth rates over the forecast period. The higher level of imports in June implies that the negative contribution of net exports remained substantial in the second quarter. Going forward, with foreign output growth solid, and the path for the real exchange value of the dollar trending down slightly, as we have in our forecast, the negative contribution of real net exports should diminish. The positive surprise to imports of capital goods in June suggests that the level of PDE in the advance second-quarter release should be revised up somewhat. Taken together, these data revisions imply an annual growth rate of 1.5 percent for second-quarter GDP, compared with 1.9 percent in the advance release.",946
-fomc-corpus,1999,"Even with the revision to net exports, the biggest surprise in the second-quarter GDP picture, relative to our last projection, still is the very low rate of inventory accumulation. A forecaster's fairly typical response to such a surprise, especially when it occurs against a backdrop of solid final demand, would be to assume that the shortfall will translate into additional impetus to subsequent output growth, as firms seek to bring their stocks back into normal alignment with expected sales. Unfortunately, however, one must judge just what the normal alignment is; and that is something that can shift over time in response, among other things, to changes in price expectations or interest rates, or structural improvements in ""supply-chain management."" In the present case, the persistent--and now sizable--decline in the aggregate inventory/sales ratio in recent quarters and the lack of evidence that this is causing any discomfort have caused us to reassess our judgment about firms' objectives for stocks. In essence, we're putting considerable weight on the structural improvement story and, consequently, we're not looking for any meaningful rebound in the stock-sales ratio. But, on the assumption that firms will not seek still lower ratios in the near future, we still get a step-up in inventory investment that makes a positive contribution to GDP growth similar to what we had in our previous forecast. So, in addressing the question of where our heightened inflation risk came from, inventories are not the answer. Nor, of course, is it from recent domestic financial market developments. Indeed, though we'd been expecting that the markets would be afflicted with Y2K anxieties, we didn't anticipate that the fears would exert the force they apparently have so far before the end of the year. To be sure, the recent backup in interest rates didn't arise solely because of anticipated Y2K pressures; concerns about monetary policy tightening contributed as well. But it seems quite clear, as has already been noted this morning, that the concern that market liquidity would dry up later this year gave rise to pressures on an array of rate spreads for which there were not the arbitrage resources available to offset fully. The further rise in longer-term interest rates--especially those on home mortgages--should exert some additional restraining force on domestic demand in the coming months. But we anticipate that the spread widening, which already has reversed some this month, will reverse more fully once we've negotiated the century date change. This is one reason we've assumed another 50 basis points of tightening by next spring. All else equal, if the System failed to validate the market's expectation of at least that much firming in short rates, the tendency probably would be for corporate bond yields and mortgage rates to drop back even more than we've anticipated. Moreover, the absence of tightening could well provide the all-clear signal that would help the stock market to extend its uptrend. The rally of the past few days, as the markets became a little more sanguine about Fed policy, I think underscores that risk. The final point I'd make on the domestic demand side is that the outlook for the federal budget has turned a tad more stimulative for the coming quarters, with the addition of about $20 billion of outlays for the coming fiscal year that was not anticipated in our previous projection. Obviously, this amount isn't a big deal in a $9 trillion economy, but it comes on top of the additional impetus expected from export demand. So, on balance, aggregate demand growth prospects--even with a notch more nominal monetary tightening--look to us to be at least as strong for the coming year or so as they did at the time of the last meeting. But our inflation concerns stem also from the supply side, where there are indications that cost pressures are mounting to a greater degree than we'd perceived before. All the recent wage readings have surpassed our expectations, some by quite substantial margins. Admittedly, all the measures have their limitations as representations of the cost elements that might be influencing short-run pricing behavior, but it would seem wrong to discount them entirely as factors that could contribute to larger increases in the prices of goods and services. In addition, recent news on crude and intermediate materials prices has been disappointing, with the increases in the core PPI measures as well as in oil prices pointing to more pipeline inflation. We don't expect that either of these will provide a major jolt to core inflation, but the picture is less favorable at this point than we thought it would be. The prospect that the recent weakness of the dollar will foster an earlier upturn in non-oil import prices reinforces that concern. All told, then, we felt that a modest elevation of our wage and price inflation forecasts was appropriate, and the 25 basis points of additional fed funds increase that we tacked on did little more than keep the real short-term interest rate path as high as it was last time. Clearly, if the recent sinking spell of the dollar continues, the alternative 10 percent depreciation simulation in the Greenbook potentially comes into play, and the inflation problem could be significantly intensified. We didn't see that as the most likely outcome, but as a quite clear risk that is worthy of your attention. To put it in terms of an overused fairy tale analogy, it could well be that Goldilocks, the international investor, has pretty much gotten her fill of U.S. dollar porridge--be it hot, cold, or just right--and has begun to develop an appetite for some Kobe beef or Euro truffles. That concludes our prepared remarks, Mr. Chairman.",1103
-fomc-corpus,1999,Questions for Mike or Karen?,6
-fomc-corpus,1999,"I have a couple of questions, Mike, on different topics. First, on inventories, your remarks this morning as well as what I read in the Greenbook surprised me a bit by suggesting that there is a lack of anecdotal reports on inventory problems. We've all been reporting on certain shortages, for example that there are no 2x4s around and so on.",75
-fomc-corpus,1999,Drywall and some other construction supplies certainly would be the exception.,13
-fomc-corpus,1999,"We had noted in our Beigebook report that in the auto sector certain models simply aren't available. So my staff looked at the Beigebook reports of other Reserve Banks, and a couple of them also cited drains from retail inventories. One of my directors reports to us regularly about the retail sector, and he has been saying for a few months that major retailers are increasingly worried that their efforts to build stock are being aborted by those darn consumers who keep clearing out their shelves! He believes retailers are going into the year-end period with significantly less inventory than they wanted. I always think that means they are inevitably going to overshoot, as they find themselves trying to catch up to some level and miss it. So I was just wondering how confident you are that you've got the picture right on inventory. It seems to me a significant risk to the forecast.",170
-fomc-corpus,1999,"I don't think one can ever have confidence in an inventory forecast, and I certainly don't at this moment. We are conscious of some areas in which it is likely that firms would want to build stocks. I'm not sure that's the case in retailing on a broad front, but it certainly would be true in many areas of building supplies. There are still industries, by all reports, with more inventories than firms would like to have--construction equipment, farm equipment, chemicals still to some degree, and so on. Our sense is that if there are cases where inventories are leaner than desired, it is not a pervasive phenomenon. If one looks at survey evidence--for example, the purchasing managers' reports on perceptions of customer inventories--nothing has happened recently to suggest that firms in general have been greatly surprised by the strength of sales and that their inventories have been depleted beyond levels they would be happy to live with. Going forward, we are expecting a substantial step-up in inventory accumulation, augmented over the remainder of this year by some Y2K hoarding. So we do have a substantial contribution to GDP growth from inventory investment over the next several months. We are hopeful that with the cooperation of the Reserve Bank research staffs we will be able to come up with a little more concrete notion of just how big the Y2K inventory hoarding effort will be, and we will report on that before the next meeting. That's certainly a wild card in the picture.",291
-fomc-corpus,1999,"The other question relates to inflation, anticipating that at our October meeting you are going to give us a first look at your forecast for 2001. As I look at this Greenbook forecast, which goes out to the fourth quarter of 2000, your forecast for the CPI excluding energy seems to be on a track that will produce a number over 3 percent in 2001. Am I right about that?",84
-fomc-corpus,1999,I think we'd edge above the 3 percent mark in core inflation on the assumption that the unemployment rate will be drifting up ever so slightly as we move through 2001.,35
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mike, given the surprisingly strong growth of income, profits, and also tax receipts in recent years, can we draw any inferences about what we might see with the October benchmark revision--in particular, what it might imply for real GDP and, of course, productivity?",54
-fomc-corpus,1999,"We have some bits and pieces of information from various censuses and some notion about what the reports from the unemployment insurance system are suggesting about revisions to wage and salary income. On both sides of the ledger, the information points to upward revisions in the level of GDP this year. I should caution though that this is fragmentary. There will also be some changes in the scope of GDP, in a sense, as they introduce computer software; what the year-to-year growth pattern will be there, one cannot be sure. Even on the compensation side, we really only have information about one very important component of compensation--wage and salary income. There is still the possibility that other labor income could be revised in ways that would alter the picture. Based on what we know, we'd anticipate that we are not talking about more than a couple of tenths on the current definition of GDP in terms of what the higher trend output growth might have been over recent years. That's sort of the upside limit based on the fragmentary information we have at this point.",209
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"I can offer a little, but not much, insight into the Y2K inventory issue. My contact at UPS says that for its own planning purposes his company has been surveying its top 300 shippers. We are going to get more information on this survey before too long, but at this point he could share with me that their shippers expect some acceleration of shipments before the turn of the year when it is feasible to do so. As a consequence, UPS is going to have a smaller cutback in its capacity in that period than usual. Ordinarily, starting pretty much on Christmas day, they cut back capacity by about They are going to cut back by and then make their normal seasonal reductions. That is all I have at this point on their survey results, but my contact will provide me with more detailed information later.",166
-fomc-corpus,1999,"Further questions for our colleagues? If not, who would like to start the Committee roundtable discussion? President Minehan.",24
-fomc-corpus,1999,"Thank you, Mr. Chairman. Economic growth in New England remains about the same as it has been for some months. Employment is expanding at a bit above what could be considered a normal rate for the region and unemployment rates in all six states are quite low. In fact, New Hampshire is one of only a few states in the country with an unemployment rate below 3 percent, and the rates in Connecticut and Massachusetts are close to that level as well. The regional labor force grew by about 1 percent during the first half of the year versus the same period in 1998, as opposed to a decline in 1998 versus 1997. And labor force participation remains above that for the United States as a whole. Thus, there may be reasons for less concern that the lack of availability of labor will be a deterrent to regional growth. Contacts continue to report average wage increases in the range of 3 to 5 percent notwithstanding tight labor markets. As I've noted before, there is a wider use of flexible or performance-based pay increases, as well as non-monetary incentives such as increased training for staff. Recently, we've also noticed that some firms are using pay strategies that seem particularly unsustainable for the longer run. For example, one firm noted that it was attracting new hires with a combination of signing bonuses, performance sharing, stock options, and relocation packages, while existing employees were getting small or no wage increases. This would not work at a Reserve Bank for very long and I doubt it is going to work there either! Regional price growth has recently been moderate. The July data now show prices in the Boston area, as measured by the CPI, growing at a pace somewhat faster than the nation in almost all categories. In particular, medical costs are growing at better than a 4 percent pace. Despite these CPI data, regional contacts still report very little pricing power, given the competitive nature of the economy. There continues to be a real effort to improve productivity and to control the cost of inputs by managing suppliers' prices-- ""a la Wal-Mart,"" as one contact put it. Residential real estate sales slowed a bit, largely because of a lack of supply and a shortage of construction workers and building supplies. Not surprisingly, the prices of new and existing homes for sale rose at a rate above that for the nation as a whole. Reportedly, some of this increase also reflects high demand for expensive second homes in the region. Looking forward, measures of state business confidence and consumer confidence are very high. New England consumers apparently continue to view current conditions as either as good as it gets or perhaps too good to last, since the future expectations component of the confidence index is lower than the measure of current conditions. Finally, business confidence is close to an all-time high and has not been near current levels since early 1998. Manufacturing as well as nonmanufacturing industries report strong confidence on both the current and the future basis. One very interesting side comment in our contacts with manufacturers this month was their perspective on inventory building for Y2K. Several mentioned that they saw few problems with domestic suppliers but were concerned about foreign sources. Thus, they expected to build inventories largely in the form of imports. Perhaps if this tendency is widespread, it could begin to account for some of the unexpected worsening in the trade deficit in recent months. On the national scene, we are largely in agreement with the Greenbook forecast. We view the second-quarter slowdown as an aberration, not the beginning of a trend, and see the rest of the year and 2000 much along the same lines as the Greenbook. As I've noted before, we see a bit more inflation risk, largely driven by wage costs, which do seem to be turning up a bit--whether in the latest ECI data, average hourly earnings, or the purchasing managers' data. Moreover, I am not as sanguine as is the Greenbook about the recent increase in oil prices backing off in 2000. Last week I attended a conference that involved public and private sector participants from a variety of areas around the world. One CEO of a major foreign oil company and a senior investment banker specializing in trading commodities spoke about their expectations for oil prices. Both believe that neither Brent nor West Texas Intermediate prices are likely to back off much from current levels in 2000 and could overshoot a bit before falling back as the year-end approaches. They regard current levels as not ideal for producers, but as reflective of a balance between providing sufficient income for the major current suppliers while not enough to attract new high-cost providers. The main concern they cited was managing production to adapt to expected further increases in world demand while keeping prices relatively stable. Thus, I think we are seeing the gradual unwinding of many of the temporary factors that have contributed to the economy's extended period of success. World growth is accelerating, commodity prices are increasing, the dollar is more likely to weaken, and wage costs are growing. To be sure, continued productivity growth helps, and overall measures of inflation have not yet accelerated. But the need to be proactive and forward thinking remains. It is true, as we discussed earlier, that financial markets have been fragile and volatile of late. Nevertheless, some widening of spreads is not unhealthy nor is a moderation in the continuing upward trend in stock market indices and PE ratios--though, given yesterday's market behavior, one wonders if that actually has happened. One antidote to this volatility, however, may well be a greater certainty about the stance of Fed policy in the short run, both our stance with respect to interest rates and our stance with regard to Y2K. Finally, one keeps hearing comments about even the small amount of tightening in monetary policy we've implemented already or may be contemplating as being anti-growth. Certainly, I've heard it from my own directors. However, there is good reason to believe that proactive monetary policy--monetary policy that anticipates rather than waits for inflation to occur--is more supportive of stable growth than the alternative of potentially letting inflation get out of hand. Thank you.",1220
-fomc-corpus,1999,Let's go to President Moskow and then we'll break for coffee. I see some heads nodding. [Laughter],24
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Seventh District economy continues to expand at a moderate pace, with tight labor markets increasingly being cited as a factor constraining growth. Activity in the motor vehicle industry remains a key source of strength in the District. Industry contacts continue to expect 1999 to be a record high year for sales of both light vehicles and heavy-duty trucks. The CEO of a major automaker told me that one reason is that the affordability of light vehicles is at a 35-year high. Elsewhere, manufacturing conditions are still mixed. But based on purchasing managers' surveys from across the District, overall activity is expanding. For example, the Chicago Purchasing Managers' Report for August, which I'll caution will not be released to the public until a week from today, will show continued expansion but at a somewhat slower pace than in July. The composite index was 56.1 in August, down from 60.5 in July. The Chicago survey for August also showed the prices paid component at above 50 percent for the sixth consecutive month and at the highest level in more than four years. In terms of specific industries, some gypsum wallboard producers are delaying normal maintenance in order to keep running overall at 100 percent of capacity. The steel industry continues to show improvement as the import-related inventory overhang is worked down. On the other hand, construction equipment shows a few signs of slowing, and farm equipment makers have trimmed production plans again. For one major farm equipment producer in our District output this year is expected to be down 30 to 40 percent from last year, and that seems to be representative of the industry. There is no doubt that some farmers have been adversely impacted by low commodity prices. Ironically, it is possible that net cash farm income could be at a record high level this year if the additional farm subsidy package being considered in Congress is enacted and if funds are disbursed this year. As all of us have been reporting for a long time, labor markets are very tight. The rate of unemployment for our five-state area fell back to 3.5 percent in July, after having moved up to 3.7 percent in May and June. Actually, though, four of our five states were below 3.5 percent in July. The exception was Illinois where we've seen a rather sharp increase in the unemployment rate recently from 3.9 percent in April to 4.6 percent in June and July. An economist at the state employment agency did not view the increase as a sign of weakness but rather attributed it to a surge in the labor force, particularly reentrants who had been out of the work force for over a year. There has been a pickup in demand for temporary industrial workers, according to my contacts at Manpower. In addition, Manpower's latest survey results, which won't be released publicly until next Monday, show hiring plans for the fourth quarter to be very strong again. What is not clear, though, is whether all these jobs will be filled. Increasingly, contacts are reporting that labor shortages are constraining business activity, either in the form of scaled-back expansion plans or business lost because of the inability to fully staff current activities. This is a widespread phenomenon in our District, with such reports coming from home builders and other construction firms, retailers, dining establishments, temporary help firms, and trucking firms just to name a few. Turning to the national economy, our outlook is reasonably similar to that contained in the Greenbook though we, like Cathy Minehan, remain slightly more pessimistic about inflation next year. Data received since our last meeting continue to suggest that the economy will gradually return to trend growth rates. However, this moderation in growth is not likely to be enough to alleviate increasing inflationary pressures. Indeed, the recent data on wages, the further increase in oil prices, the rise in other commodity prices, and the weakness of the dollar all suggest less optimism about cost pressures in the months ahead. Meanwhile, the factors that have been driving the recent rapid expansion of demand--high levels of wealth, confidence, and income growth--remain with us. It appears unlikely that the policy adjustment we made last time will be enough to significantly lessen the risk of increasing inflation. Without some further adjustments, we risk the kinds of imbalances that would endanger the economic expansion. Thank you, Mr. Chairman.",878
-fomc-corpus,1999,Let's recess for coffee.,5
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, the Twelfth District economy has expanded at a solid pace so far this year, although the disparity across states has increased. District payrolls expanded at a 2.4 percent rate during the first seven months of the year, down from the 3.1 percent pace of 1998. Employment growth rates in the fastest growing states--Arizona, California, Nevada and Utah--averaged between 2.5 and 4.2 percent. In five other District states--Alaska, Idaho, Hawaii, Oregon, and Washington--employment expanded at or below the national pace. Despite slower overall growth, District labor markets remain tight. Construction and services as well as transportation, communication, and public utilities have continued to be the strongest sectors of the District's economy. In contrast, District manufacturing payrolls have declined at a 1.6 percent pace this year. Employment reductions have occurred in both the durable and nondurable sectors. In the durable sector reductions have been broad-based, although employment has declined most rapidly in the aircraft and resources-related industries. In the state of Washington, Boeing and its suppliers have cut 11,000 jobs since last December. In the nondurable sector weak demand for agricultural commodities has continued to damp employment growth in the food-processing industry. During the past few years, prices and profits of agricultural producers in the Twelfth District have been held down by weak export demand caused by the appreciation of the U.S. dollar and the economic crisis in Asia. District exports of agricultural products fell by nearly 20 percent between 1997 and 1998, and data for California suggest that agricultural exports have continued to decline in 1999. As a result, gross sales and net farm income in the District have fallen. However, relative to other areas of the United States, District agricultural producers are in reasonably good shape since only a small percentage of the District's production is in the bulk commodities experiencing the largest price declines. Turning to the national economy, from 1995 to 1998 core price inflation measures, even on consistently measured bases, generally were trending downward. This decline probably reflected favorable supply shocks that more than outweighed strong demand. However, several special factors helped out as well. Since mid-1998 this disinflation has stalled. Price inflation and survey expectations of future inflation appear to have flattened out. This halt in the progress toward our goal of price stability sounds a cautionary note in assessing the current stance of policy. This is particularly true given the context of tight labor markets and our forecast, which predicts strong output growth through the rest of this year and steady to slightly rising core inflation through next year. Such a path does not continue the gains that we have made toward price stability during the past few years and may even give up some of those gains. We have examined a variety of risks to this outlook, some of which are similar to the alternative scenarios in the Greenbook. In one alternative not covered in the Greenbook, the favorable supply conditions of the recent past are assumed to dissipate by lowering underlying trend productivity growth for the forecast period from 21/4 to 11/4 percent. In 2000, real growth slows by 1/2 percentage point and inflation begins to accelerate. I believe this scenario demonstrates that an unwinding of the positive productivity shock poses a risk to our recent progress toward price stability. Thank you.",684
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, we have not had a lot of change in our District since the last meeting. To jump to the bottom line, with one exception I'll mention in just a minute, we see relatively few signs of any deceleration in activity in our region. At the last meeting, I reported that consumer spending had been especially robust in May and June, and all reports suggest that that is continuing. Car sales remain at an exceptionally high level. One of our bank directors recently told us that new car loans at his bank, were at an all-time high. This strong auto demand may soon be stimulating some additional manufacturing activity in our District, which generally is already fairly strong. As you may know, BMW has a big new plant in Greenville, South Carolina. As I'm sure Jack Guynn is aware, people down there like to say that in South Carolina BMW stands for Bubba Makes Wheels! [Laughter] Anyway, that is a big plant and they've announced plans for a $650 million expansion in part to make sports utility vehicles at that plant to meet the strong demand for those vehicles. Elsewhere, construction is the sector in our region where imbalances and bottlenecks are most apparent. Skilled construction workers are still in very short supply. We hear lots of anecdotal reports about pay increases and special bonuses for that particular category of labor, which seems consistent with what Mike Moskow was saying about wages generally. Materials are also in short supply. I heard a report from one our directors that somebody had hijacked a truckload of drywall somewhere in Maryland! [Laughter] So we really do have some of those kinds of conditions. And I think that situation reflects continued very strong demand for housing in our District, despite the recent increases in mortgage rates--or maybe because of them, if people fear further increases. As a result of that demand, I've seen a number of reports recently of a quicker pace of price increases for both new and existing homes. The two weak spots in our District are still textiles and agriculture. As I am sure most of you are aware, our farmers are suffering from what may be the worst drought in the last half century in this part of the country. The problems for farmers, of course, have been exacerbated by the low prices worldwide for agricultural commodities. Also, I might just note that I got a call yesterday from who runs a rather big furniture company in North Carolina. He said that his business had fallen off fairly noticeably over the last 90 days or so, so I thought I should report that. But that is really an outlier. With that exception, we don't see many signs of a slowing in overall activity at the regional level. We don't see many signs at the national level either. The Greenbook points out that the widening U.S. current account deficit could produce a sizable depreciation of the dollar, with potentially inflationary implications. I think it's also possible that some of our major trading partners could ease their monetary policies going forward to prevent their currencies from appreciating, which could stimulate foreign growth perhaps even beyond what is now anticipated. Either of those developments could increase U.S. net exports or at least moderate the rate of decline, with potentially inflationary consequences given the already tight labor market conditions in the United States. So it seems to me that the weight of the risk in the national outlook is still skewed to the upside. At the same time, I would certainly acknowledge that there are downside risks, specifically the possibility that a sharp decline in the stock market might scare consumers and precipitate a sudden collapse of confidence and spending. Obviously, we cannot rule out a sharp market correction. But even if one occurs, there are a few reasons for thinking that in the current situation the negative impact of such an event on demand and employment could be contained. I'll just mention a couple of points. First, back in 1987 I think we saw and learned that if we react quickly and appropriately we can contain the downside impact of a market break. Also, we are talking here about wealth effects and it is worth keeping in mind that physical capital constitutes about 30 percent of aggregate wealth in the United States while human capital constitutes about 70 percent. So if monetary policy keeps the job market on track, I think workers can still have reasonable confidence about their longer-term income prospects, which would moderate the negative effects on spending that might otherwise come from a market break. Finally, the situation is a bit less precarious precisely because the Fed now has credibility and is expected, I think quite generally in the markets, to take the actions that are needed to contain inflation. Because of that, over the course of this year at least, bond rates have been rising well ahead of actual policy actions, preparing the market for additional restraint and in a sense creating a continuity--maybe smoothness would be a better word--of monetary policy. I think that can reduce the likelihood of a really sharp market break, though it doesn't eliminate it. The bottom line, Mr. Chairman, is that while there are downside risks in the outlook, at this point they seem to me still pretty clearly outweighed by the upside risks and the potentially costly inflationary implications of those upside risks.",1043
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Growth in the Sixth District remains healthy. Our regional economy seems to be expanding at approximately the same rate as the nation at the current time, although I continue to expect some slowing in housing. Residential construction is relatively stronger than the national numbers suggest, perhaps because the inventory of available housing units remains low. Permits are up even more strongly than in the nation. Reports of materials shortages and scarcities have pushed up housing prices and may act to damp both demand and supply growth somewhat. But the strong permits data suggest that this may be a temporary development. Regional industrial production was up, according to the latest Southeastern manufacturing survey, hinting of the strength in the national statistics. And while shipments and new orders were off slightly, respondents indicated that production is expected to increase over the coming months. Regional consumer confidence, as measured by the Florida Consumer Confidence survey, is high; the index is only 2 points below its all-time high of last February. This is reflected in robust District retail sales. Prospects for the Christmas season look especially bright, gauging from the extremely strong buying reported at the Atlanta Gift Mart Christmas Show, where both regional and national retailers come to do their looking and buying for the upcoming Christmas season. I have been expecting some pickup in the Gulf Coast oil and gas industry. Based on a substantial run-up in crude prices and the lower extraction breakeven point now prevailing, one would have expected drilling to rebound. It still has not and we interpret that as saying that the drillers are less confident than most economic forecasters that the cartel's production quotas and, consequently, pricing will hold. Long-term prospects for that industry in our region just had a big boost from BP-Amoco's announcement last month of the largest deep water find ever in the Gulf, an estimated 1 billion barrels of oil a mile down and some 124 miles southeast of New Orleans. To retell an old familiar story, District labor markets remain quite tight. Our regional year-over-year payroll growth of 2.6 percent is outpacing that of the nation. The District unemployment rate has now declined by another 0.2 percentage point to 3.9 percent, and that rate is the lowest in some 20 years. However, despite that tightness, we still see little evidence of general broad-based wage acceleration. Similarly, prices for raw materials and finished goods also remain stable, with the exception of prescription drugs and selected building materials, whose prices have increased, as others have already mentioned. Turning to the national picture, my interpretation of the most recent incoming data, combined with anecdotal information, is that the economy is maintaining substantial forward momentum. Fundamentals of job growth, income growth, and confidence remain quite favorable. The improving economic outlook for the economies around the world that Karen Johnson talked about should begin to spur exports. And the propensity of government to increase spending may provide marginal stimulus in the period ahead. Although one can point to some signs of slowing or potential slowing--including the effects of higher mortgage rates on housing and related industries--I share the view that the sharp downturn in GDP growth in the second quarter will be reversed in the current quarter and over the forecast period. Of course, for us the crucial question is whether the expected pace of growth can be sustained without increasing inflationary pressures. Our Bank's own judgmental forecast and our VAR modeling work, like most other forecasts, suggest an upward drift in expected inflation of nearly 50 basis points next year and somewhat more beyond that. With some humility, which others have already expressed in previous meetings, I acknowledge that we have had such forecasts for some time now, and measured inflation has continued to defy those forecasts. So the difficult question for me is what underpins those forecasts of higher inflation and how much confidence we should put in them this time around. After sorting through what seems to be happening and pressuring my own staff for evidence, I conclude that the probability of inflation trending upward is high enough, and higher than it has been, that we should continue to lean against it. For me no one factor or development makes that case. Rather, the cumulative probability of pressures from various sources, including the reversal of favorable commodity prices, the more positive outlook for Latin American and Asian economies, the expected boost to U.S. exports, and rising import prices from a decline in the value of the dollar, all point in that direction. I do not consider myself a Philips curve devotee, but I think very tight labor markets and a low unemployment rate are at least signaling that policy remains somewhat accommodative. Finally, I do not think we should always feel compelled to validate financial market developments. But should we decide not to provide the modest policy firming that is now widely expected and apparently priced into the market, we may lose some of the market discipline and caution that is in play and instead get a dose of added stimulus that we don't want and don't need. I see this as a unique opportunity to take out some additional inflation insurance at little or no cost. Thank you, Mr. Chairman.",1022
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The economy in the Kansas City District remains quite healthy. It has slowed from the rather strong pace of last year but remains overall a very strong economy. Employment has improved modestly, although the growth rates have slowed, but we suspect that is as much a supply issue as a demand issue. Construction activity remains brisk; it's down a bit from the torrid pace of last year but is still very strong, and we are continuing to see price pressures on resources in that industry. Manufacturing activity remains subdued compared with past very high levels, but through our surveys we have picked up an obvious increase in demand for exports coming from some of the improvements in Asia and South America. Others have spoken of activity in the energy sector. In our District the rig count is up about 25 percent from last April, but it is still about 25 percent below a year ago. Nevertheless, there is some pickup in activity in that sector. As for wages, there are wage pressures. They are not accelerating sharply, but we are now well aware of steady pressure on wages. Our labor markets are extremely tight and our unemployment levels are very low. Our participation rate is very high and that is affecting our labor markets. I'll share a bit of anecdotal information on both sides of this issue. In Colorado, contracted with 600 software engineers in India because the firm could not find anyone in their own area to do the job. In Kansas City, our major construction companies have imported skilled workers generally and in particular have hired bricklayers and others in the higher skilled professions from both Canada and Mexico to fill a crying need. In fact, we have found in talking with school districts throughout the region that they are having a problem replacing math and science teachers who are being recruited and hired away by private industry. On the other side, we had an interesting discussion with one of the major accounting firms, which has changed its accounting and operations systems to bring automation into its work papers and analysis. The firm is counting on productivity improvements to the extent that it is actually budgeting for the improvements by budgeting down the number of people it will bring on board. That's a fairly risky position on their part but they really are looking for some productivity improvements because they are paying very high premiums for professional help. I will talk just briefly about our farm economy. I know that the Northeast and East more generally are in a drought. That is not the case in our area. We are expecting a very large harvest; for both corn and soybeans we think it will be a record. The wheat crop, with even less planting, was very strong. I talked with one of the major co-ops last week and they are actually bringing back on line elevators that they had abandoned earlier in order to store the surplus they have. Livestock producers are doing better; cattlemen are actually making money and, of course, the hog industry is now making money. On the financial front, the farmers did come in with much stronger balance sheets this season. Frankly, the benefits from government payments and prospective increases in those payments are really going to buoy their net income flows. So, while we are seeing a deterioration in some farm operations--and as a result of that, in some Main Street operations--we are not seeing major problems surfacing in loan portfolios. The nonperforming loans are increasing, but nowhere near as sharply as they did the last time we went through this kind of situation. Turning to the national side, I will only add a bit to what others have said. I would say first of all that we are projecting continued economic growth, though not as strong as the Greenbook projection. Certainly, some of the favorable factors seem to be reversing, but we do see strong domestic demand. And if the global economy picks up as we believe it might, we may have some strong pressures on the demand side in the economy that we have to be mindful of as we go forward. With that I'll stop.",798
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. The regional economy in the Philadelphia District continues to move up. Manufacturing has advanced modestly. Retail sales and tourist activity have been strong. Construction has increased. Employment is on an upward trend. Conditions in the financial sector are so-so, with loan demand reported flat. Agriculture, because of the drought, is hurting, and some of the smaller banks that service mostly farm communities almost surely will suffer as well later in the year and going into next year. Anecdotally, I am beginning to pick up a subtle shift in tone about pricing power. I have the sense that more business people feel a stronger need to raise prices to protect financial performance, and they feel they may be able to make price increases stick. In part, this feeling reflects a view, whether accurate or not, that both consumers and businesses are less inclined to shop for the lowest price or the best deal than they have been. I don't want to make more out of this point than warranted; it's just a subtle change. I don't think it is a major shift nor is it a view held by a majority of business people, but I just have not sensed it up until fairly recently. The national economy is clearly stretched. The outlook both for growth and inflation, however, remains unclear. There is a reasonable case for a decelerating trend in demand growth going forward, largely based on less of a kick from equity gains. But we could be fooled again. On the inflation side, productivity gains may continue to hold down inflationary pressures--and I suspect they will--but that may not happen either. On balance, the risk to the economy of raising the funds rate a notch is less than not raising it. A more important issue today is how we position ourselves going forward and how we manage our rhetoric during the coming days and weeks, topics for later in the meeting.",377
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, the Second District's economy has shown renewed signs of strength in recent weeks, after some slowing in the second quarter. Despite increasing price pressures, there is no evidence of any broad-based pickup in inflation. Private sector job growth accelerated to a 3.1 percent annual rate in July from 1.7 percent in the second quarter. Retailers report that sales retreated in July and were close to plan, following unusual strength in May and June. Most attribute this downshift to lean inventories, but it was so oppressively hot that a lot of people might just have decided to stay home. Prices paid by retailers remain steady, but selling prices have firmed up just a little. The housing market has gained momentum since the last report. Residential building permits rebounded sharply in June, led by a surge in the multifamily sector. We've had double-digit price appreciation in most of the downstate New York housing markets. Office markets in and around New York City remain tight, with vacancy rates hovering near record lows and rents rising moderately. Purchasing managers indicate that manufacturing activity expanded moderately in both June and July, while price pressures increased. Banks report a seasonal dip in loan demand, tightening credit standards, and stable delinquency rates. Our view on the domestic economy is that we will continue to see positive real growth, about 31/2 percent in the second half of 1999 and about 21/2 percent in 2000. My colleagues in the research group are anticipating a growth recession in 2001, which is very conveniently timed to help keep inflation under control. But, unlike most of what we've been hearing around the table, our view is that the inflation pressures, which we too have been forecasting for the last few years, are in fact much better contained. It may be that if you leave your research staff alone--just as if you leave your kids alone they grow up okay-eventually they will decide that inflation really isn't going to happen after all. I rather share that view. I think what we have now should be called price stability; that is, it is not something toward which we are working to achieve. And, therefore, our view of the inflation forecast is that we will continue to enjoy price stability, which is our statutory assignment. The global situation is certainly better, as Karen Johnson described. It is much better than it was last fall when this Committee correctly exercised both responsibility and leadership by easing monetary policy three times to respond to a world financial crisis. But the global situation is still highly problematic even though Karen's forecast is, I think, a very reasonable bet. I believe that Japan is still having tremendous difficulty trying to figure out what to do to solve its very basic economic problems. Until and if it figures that out, it will continue to be a source of systemic risk both to the rest of the world and certainly to its own people. In addition, I find the situation in China getting worse, in the direction of pressure going forward, as a result of the developments on the political side. And on the economic side, there is little positive effect coming from a great deal of pump priming of a Keynesian variety that is also blowing air into the domestic stock markets. South Korea took a highly positive and very courageous step in the dismantling of Daewoo, but that is a very, very tough workout situation in a country with absolutely no experience in workouts. The situation in our hemisphere, I think, is getting more troubling. Two of the countries, Brazil and Argentina, are potentially serious problems. Karen described very well what's going on there, but in my view the biggest problem is I believe the dangers to that country's economy are very real. Argentina's success of recent years has been, in my view, mainly the result of excellent leadership from President Menem. He is about to leave office. The candidate from his own party certainly doesn't sound like him. And the candidate from the other party, who is ahead in the polls, represents a coalition that has agreed only that they would like to win the election. They have no agreement on policy matters and, therefore, the policy they would follow is a matter of very considerable uncertainty. So it is not surprising that market pressure is being felt there. Mexico, at least according to Moody's, is improving. And yet next year is the sixth year of a presidential term, always a problem period, and one in which the political result is so uncertain that a weakness of public confidence and a weakness in investor confidence both within Mexico and outside are very real possibilities. Ecuador is highly likely to default on its Brady bonds; and even though it is a very small country, that would be the first default on Brady bonds. And it makes rather dramatic the point that there are now four countries--Pakistan, Ukraine, Romania, and Ecuador--in which the International Monetary Fund, correctly in my view, has not found enough private sector support to justify the use of public funds. Russia is not only a mess in and of itself, but is bringing very severe pressure and criticism on the IMF, which will likely have the effect of making the Fund less capable of carrying out its responsibilities. Growth in the Euro area is slow and spotty, and in some of the countries, particularly Germany, the government is having trouble keeping a coalition together to follow the policies that they think--and I agree--are necessary. Well, that is not a very pretty picture! It certainly is a much less pretty picture than the one we all thought we were looking at in the spring of 1997. And even though it is a lot better, or less bad, than the one that we were looking at last fall, it seems to me one that we have to keep in mind. Although we are not the central banker of the world, given the fact that we are the unique world super power and the main economy with the main currency, we have to do two things in this Committee. The first is that we have to do the right thing on monetary policy. But, as Ed Boehne suggested, in our rhetoric we have to try to get out the message and then stick to it in terms of what it is we are doing and what we intend to do. Thank you, Mr. Chairman.",1263
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. On cars, trucks, and steel, which are all very important in our District, I can just say ""ditto"" to what Mike Moskow said: All are very strong in every dimension. Construction in the District also is very strong. is involved with the construction unions said that the best sign of the prosperity in construction labor markets is that the local breweries all seem to be expanding! He regularly reports to us now about warnings being given by the AFL-CIO that wages of workers are not being kept up. He's starting to stress what he considers to be the need for a catch-up in compensation. So, at least from that one source, there's a suggestion that a bit more labor militancy might be forthcoming. On the steel side, the strikes settled with increases in the range of 8 to 10 percent over the full three-year period and that sounds pretty good. But they doubled the pensions. So they avoided the bigger problem of disruption by promises about the future rather than the present. Our directors are telling us that there will not be a strike in the auto industry--that Ford, which is the target, will settle. They believe Ford will settle and then Chrysler and GM and the others will just fall in line. Let me skip some of the other points in my prepared notes because it would just be repeating what a number of other people have mentioned. In labor markets we are hearing about a couple of new wrinkles. One is a ""show-up"" bonus: If the workers come to work five consecutive days they get a bonus! [Laughter] And one firm pays a daily bonus for workers who show up in the morning on time and finish a full shift. That is probably not showing up in wage and ECI data. One banker asserted that we are experiencing a lot of wage inflation, but it does not show up in the figures because businesses that he's familiar with are paying the same or somewhat more for considerably less qualified people than previously. Somebody earlier mentioned that schools were losing people to the private sector, but the bankers in our area claim that they are losing people to the schools, that the school districts and local governments are flush with funds from tax receipts and are bidding aggressively for people. Nevertheless, the schools opened for the fall term with shortages in teaching positions and in some staff positions and a reported ""severe"" shortage of substitute teachers. We took an in-depth look at what is going on in labor markets in the health care sector. Health care is a huge industry in the District, with the Cleveland Clinic, University Hospitals, and others in Cleveland and Pittsburgh as well. You may have seen the Wall Street Journal story yesterday about the health quality program in our city that the Cleveland Clinic managed to kill off. That sort of thing is not the real problem. The problem is that they do not have enough people. We have been told of shortages throughout the District of nurses and other staff to support the hospitals. One contact claimed that it is an ongoing crisis. One hospital said it had gone to a work schedule of three 12-hour days with four days off for the nurses, and that getting floor coverage in hospitals on a 24-hour basis is becoming increasingly problematic. The hiring coordinator at the Cleveland Clinic said the shortage is the worst she has seen in 20 years. Others, including Meridian Health Systems, described the situation similarly. They say it is not just a shortage of nurses but of support staff as well. When one talks to people in the health care industry it is not uncommon for them to use words like acute and critical, but they are usually talking about their patients. In this case they are talking about their staff levels. Ohio State University reported that its critical care unit and operating rooms are not adequately staffed with competent people. So they are using retention bonuses, referral bonuses, and premium pay for those working overtime, special hours, or weekends. The VA hospital said that the shortage of staff is so severe that they've decided to close some inpatient units, such as their long-term care unit, simply because they could not staff it. If that's not bad enough--probably other areas of the country are experiencing this, too--a race is going on between Rite-Aid and CVS to see who can overbuild the most and the fastest and they are bidding away the pharmacists on hospital staffs. Our VA contact said that pharmacists are getting $8,000 to $10,000 more in salary to move to the retail side. On the national economy, if I were focusing on the domestic side alone, I'd say that the risk is on the upside on inflation and that policy is not balanced for that risk. Yet the international dimension--and Bill McDonough described in some detail the political risks--is where I think all of the risks are in the other direction. I agree with Karen Johnson's description about the near-term economic outlook in Japan, Europe, and elsewhere. But with that shaky coalition in Japan, it is very hard to have confidence about what is going to happen there. I think Chancellor Schroeder faces extraordinary challenges over the next couple of months in Europe, and what happens is going to be extremely important for the outlook for the rest of Europe. The Italians are certainly not going to attack pension reform if the Germans do not come through with solid reform. The good news about the ongoing saga in Russia is So, that's the silver lining. We will have to be prepared at all times for an easing action that could be necessary because of some development on the external side. I would rather go into that situation feeling that monetary policy is positioned where it ought to be in terms of our domestic risk, so we can respond to unforecastable international developments when they happen.",1151
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"The Eleventh District is apparently doing better than the Fourth District, where schoolteachers are moving into industry and bankers are beginning to teach school! Growth is still very strong in the District, but it has slowed just a little. Construction has been flat, net, due to concerns about overbuilding, rising interest rates, and shortages of personnel and materials. Energy producers are responding to higher prices, but very cautiously. The rig count is up only a bit; it's still below the level of last December when oil was $11 a barrel. The outlook for Mexico is cautiously improved. All of Mexico's leading indicators were positive in the second quarter, suggesting a strong second half. But the peso and the stock market have given back some gains this quarter, tempering the outlook for early 2000. And, of course, as Bill McDonough mentioned, an election is coming up. Labor markets are extremely tight in Texas. At the last San Antonio board meeting I attended, the director from Brownsville mentioned that a milestone had been reached in Brownsville: The unemployment rate had fallen into single-digits for the first time anyone there could remember. We looked it up and the last time it was below 10 percent was in 1981. While unemployment is still high in the border areas, only the town of McAllen had an unemployment rate well above 10 percent; it is around 13 percent or so. In El Paso it is right at 10 percent, but the other border towns now report rates of slightly below 10 percent. Most of the larger non-border cities in Texas and in the Eleventh District more generally have unemployment rates below 4 percent. And labor participation rates in our major cities are far above the national average. I am told that in Austin and Dallas there are almost 9 jobs for every 10 residents between the ages of 16 and 65. However, to paraphrase Professor Tobin, higher labor costs are everywhere but in the data. District employers tell us that they are paying more for everyone from programmers and engineers to temporary workers, truckers, and legal staff. We have not seen these increases in our wage statistics, but the statistics have limited industry coverage and they don't count stock options and other fringe benefits. The anecdotal evidence relating to the price picture is mixed. Our Beigebook contacts reported more increases in prices than reductions. However, house prices rose more slowly than in the past. Energy prices were up and there was a slight price increase in the retail sector, but prices were down for timber, concrete, and memory chips. And, of course, the Chairman has pushed down farm prices all by himself! On the national front, I believe that inflation remains under control, even while the economy remains very strong. If one were worried about inflation, the most important statistics to look at would be the various measures of inflation. These statistics offer little reason for concern. Core inflation is about as low as it was last year--significantly lower by some measures, a little higher by some. The core CPI increased at a 1.7 percent annual rate during the first seven months of 1999, compared to a 2.4 percent increase in all of 1998. The core PCE deflator increased at a 1.4 percent annual rate during the first two quarters, compared to a 1.2 percent rise in all of 1998. Is higher inflation in the pipeline? The core PPI is down 0.2 percent for the first seven months of the year. The ECI signals little threat, either, if one considers the low first-quarter increase along with the larger second-quarter rise. The index rose at a 2.9 percent annual rate during the first two quarters, compared to an increase of 3.3 percent in all of 1998. Looking beyond the inflation numbers, we will get shortly a revised second-quarter GDP number, which will probably be below 2 percent. If it is below 1.8 percent, it will be the lowest quarterly increase in real GDP in at least a couple of years. Employment growth remains vigorous. Even manufacturing employment has increased. The decline in unemployment has not only reached into the border areas of Texas, but it has reduced minority unemployment nationwide. With inflation low and with the economy strong, I am concerned that any tightening today would be interpreted as a vote against prosperity.",889
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. Most of the major economic trends in our District remain in place or have intensified recently. Consumer spending is healthy. Housing and nonresidential construction activity are strong. The manufacturing sector is doing well; the agricultural sector is not. Labor markets remain tight and I think it is fair to say, at least based on the anecdotal evidence, that wage increases have notched up a bit. I would not say the same thing about inflation, although I do have the impression that discounting has diminished, and that is the other side of the price coin I suppose. As far as the national economy is concerned, the outlook is good. My principal concern in the current circumstances has to do with aggregate supply and productivity. I think aggregate demand is growing at a satisfactory pace at least and is likely to continue to do so. We all know that we have very tight labor markets and it's clear that the rate of increase in compensation has been accelerating. I believe there is a chance that it will continue to do so. This may all play out fine as long as aggregate supply and, in particular, productivity grow rapidly enough to offset that acceleration and keep demand and supply in balance. The risk is that that won't happen. And if it doesn't, the inflationary consequences concern me.",260
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, conditions in the Eighth District are as they have been. The environment is good, and I do not have any particular news to report. I want to spend a couple of minutes on the information I have gotten from FedEx and UPS, which is rather interesting because it is a bit mixed in terms of the domestic economy. But first, both of my contacts report that their international business is doing fine, better than anticipated. FedEx says that it sees increasing growth abroad; volume from the United States to foreign markets and from markets abroad into the United States is growing, especially for Asia. In fact, FedEx reports that the international business is 3 to 5 percent stronger than had been anticipated in the months of June and July. On the domestic side, my FedEx contact thought that there was a clear sign of some slowing in volume--not dramatic, but clearly perceptible. FedEx reported that its own business was slower year over year for the first time in a long time. That was not, however, the view of my UPS contact. He said that the economy was booming and that UPS volume was exceeding projections, domestically and internationally. Through July, year-to-date volume was up 4.6 percent over the comparable months of last year, versus an expected increase of 3.9 percent, so that is significantly above what they had planned. Growth was especially strong in domestic ground business. My UPS contact had just returned from meetings at As I said, both UPS and FedEx agreed that business with Asia was really picking up. My FedEx contact reported that there is no question that fuel prices are hurting. He said that FedEx has put a surcharge on West Coast less-than-truck-load traffic, and he expects more surcharges to be put into effect if fuel prices remain high. FedEx is not concerned about wage pressures; my source said the company is making up wage increases with productivity gains. My UPS contact said that his company has continuing severe problems in the labor market. UPS has a lot of part-time employees who are college students. In trying to reduce employee turnover, which has become a significant problem-and this of course should remain confidential until UPS decides to announce it--UPS expects to reopen its labor union contract. I would also note that UPS has had to divert traffic out of Chicago--Mike Moskow talked about the pressures in the Chicago labor market--since the company cannot handle the volume in Chicago because of the labor shortage there. So, those are a few anecdotes from those two sources. One of our research department people put together some data on employment growth that I thought was interesting. In the last year employment growth among both males and females in the 25 to 54 age bracket was 0.8 percent. That is pretty much in line with the demographics. The employment growth has been coming entirely from what labor economists call secondary workers, including a lot of older people. Growth in employment of workers 65 and over, male and female, was 41/2 percent; among those aged 55 to 64, people who should be working anyway but had opted for early retirement, it was 4.3 percent. So it is clear that the employment expansion has been coming in these demographic breakdowns that have relatively low participation rates. In principle, there is a lot of room for expansion. On the other hand, most people over 65 have retired for good reasons, so presumably there has to be some limit to how many of those can be brought back into the labor force. In the course of our budget work at the St. Louis Fed, we were quite taken aback by the increase in health care costs that we are facing. I asked our HR people to do a survey of all the other Federal Reserve Banks. I thought that would be easy information to get. Of course, these are tentative guesses and some of the final contracts may be different, but let me just read you those numbers. In terms of health care costs, the Reserve Banks are looking at the following increases: Boston, 14 to 20 percent; New York, 6 to 11 percent; Philadelphia, 9 percent; Cleveland, 10 percent; Richmond 71/2 to 15 percent; Atlanta, 10 to 20 percent; Chicago 13 to 15 percent; at our own Bank in St. Louis, 14 to 15 percent; Minneapolis, 15 percent; Kansas City, 7 to 8 percent; and Dallas, 8 to 10 percent. San Francisco had a very accurate forecast of somewhere between 2.4 and 23.8 percent! [Laughter] I don't know what the average there is going to be.* I found this rather interesting because I wondered to what extent our experience in the St. Louis area was peculiar. But, in fact, this is a very, very general phenomenon and these costs are clearly up quite a bit from what we've seen in recent years. I think we can regard that part of labor costs as pretty much baked in the cake. So we can anticipate that those costs will be showing up in the ECI as those contracts are actually signed and take effect next year. In terms of the prospects ahead of us, the Greenbook forecast, of course, is for somewhat lower real growth and somewhat higher inflation. I think we have to be ready to deal with the prospect that growth will turn out to be a little lower and inflation a little higher than forecast; in my view that outcome has a much higher probability than the reverse. And that will be an uncomfortable situation. It means that the financial markets are going to be whipsawed. One day they are going to get data showing lower growth and they will say, ""Oh, the Fed is going to ease."" The next day they are going to get data that suggest the inflation problem is worse than anticipated and they will expect the Fed to tighten. We are going to have a tricky problem of setting a steady course. That is all I am going to say at this point. Thank you.",1226
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. My bottom line today is that I think the FOMC ought to do what it has to do at this meeting and then leave financial markets alone for a while, at least until the end of the year. What do we have to do? I would argue that rates are a bit low from three standpoints. Even if labor markets and inflation were in balance, for the longer run the funds rate might be a bit too low. The real interest rate based on the TIP bonds is now 4 percent; adding a reasonable amount for target inflation puts the equilibrium funds rate in the mid-5 percent area. Even if we assume that there is some * Secretary's note: Subsequent to the meeting Mr. Parry indicated that the 2.4 percent is the increase in medical plan premiums and the 23.8 percent refers to the increase in the dental plan premium. The weighted average increase for the San Francisco District is 5.8 percent. liquidity premium in the TIP rate, we still get an equilibrium funds rate that is a bit above the actual funds rate. But labor markets may not be in balance. The Greenbook gives scattered, early evidence of accelerating wage gains. The evidence is not only scattered and early but each particular piece of evidence is debatable. Nevertheless, wages do seem to be rising more rapidly than earlier. We can look at labor markets in any number of ways: We can compare NAIRU with actual unemployment rates; we can add in discouraged workers; we can take all the Beigebook anecdotes. I even heard several anecdotes on National Public Radio the other day. They all seem to suggest that labor markets are very, very tight and that wage gains may finally be accelerating. Even if labor markets were in balance now, they might not stay that way. In the constant funds rate forecast of the Greenbook, which is my favorite, the rate of growth in aggregate demand after the Y2K quarter averages about 4 percent. I think that would be greater than anybody's estimate of aggregate supply growth, however enhanced by the productivity changes. And if the forecast is accurate, there would be a further tightening of labor markets. To me, therefore, a number of indicators suggest that the funds rate is a bit low. Let me make a quick digression on a point that I raised last time about leading indicators of inflation. The ever-responsive staff has looked into this and written a nice memo--nice, but I must say from my point of view disappointing. Indices of leading indicators had more or less worked up until 1990 but did not predict well at all in the 1990s. Moreover, many of the actual component series are already labor market indicators. And when controlling for these structural model variables, leading indicators are not even close to being significant predictors of inflation. At times a particular series may have predicted a phenomenon, but as a general rule I must reluctantly admit that that approach doesn't seem to help us any. So, to get back to my earlier point, I think we ought to make some adjustment today. But after that--Peter Fisher's memo thoroughly scared me as I think it probably scared others--we probably want to have as few moving financial parts as possible as we go toward the end of the year.",664
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I read the recent data as consistent with a continued momentum in aggregate demand that is likely to support growth at or above trend in the period immediately ahead and maintain very tight labor markets. I see core inflation stabilizing amid signs of a dissipation or reversal of many of the favorable supply shocks that have contributed to low and declining inflation over the last couple of years and stirrings, perhaps, of higher wage gains. This sets the stage for a test of the role of tight labor markets on inflation going forward. I expect we all look forward to learning a little more about just how new the new economy really is. The story in the Greenbook--and one that I can definitely relate to--is that the dissipation or reversal of favorable supply shocks, including the stabilization in trend productivity growth, will allow the effects of prevailing tightness in the labor market to show through. We will maintain growth at near trend over the forecast horizon with gradual upward pressure on inflation. The result is a core inflation rate that in the Greenbook forecast moves from about 2 percent recently to 23/4 percent by the end of next year, with the momentum pointing to a further increase in 2001, even allowing for two 1/4 point tightening moves. An interesting feature of the forecast is that the initial step-up to a 21/2 percent rate is already in train and is reflected in the quarterly data in the forecast for the fourth quarter. In addition, the 23/4 percent rate at the end of 2000 would be higher on a methodologically consistent basis than the core CPI inflation rate over the year 1995, before the coincidence of powerful disinflationary forces took hold. One of the issues that we face and will continue to face in our policy deliberations is how much to take into account a forecast of rising inflation as opposed to the realization of utilization and inflation rates going forward. That is, how proactive and forward-looking are we prepared to be in light of uncertainties about the structure of inflation dynamics and the poor forecasting record of recent years? Let me point out, relative to the Greenbook baseline forecast, a couple of contingencies that I think are particularly important and deserve mention--that is, a correction in equity prices and a sharper-than-projected decline in the dollar. The combination in the Greenbook forecast of a tightening monetary policy, slowing growth, rising inflation, and a declining dollar appears to raise the potential for an equity market correction. However, I certainly would not want to temper a tightening of monetary policy by relying on an expected equity market correction to slow growth. Rather, we have to be prepared to adjust monetary policy in light of how overall financial conditions evolve in response to our policy actions. I read the Greenbook as suggesting that the staff has an asymmetric probability distribution with respect to the exchange rate, with a much greater chance of a lower than a higher exchange rate evolving over the forecast horizon. Given the difficulty in forecasting exchange rates and particularly timing the effect on exchange rates of a large and widening current account deficit, the best way to handle the situation may be, as the staff has done, by providing an alternative simulation with a sharper decline of the dollar. But the recent upside surprises to foreign growth and the high and rising U.S. current account deficit should weigh heavily on the dollar going forward. This may temper any slowdown in 2000 and reinforce upward pressure on inflation. Thank you.",696
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. It seems to me that the questions before us today are both factual and tactical. At a factual level, I believe the issue is whether or not we really are facing an end to the good news on inflation. There are certainly some reasons, based on the data, to believe that that may be the case. Over the past 12 months the core CPI has gone up about 2.1 percent, which is certainly moderate by anyone's measurement. But the annual rate of change in the core CPI has moved up from a little under 1 percent in Q1 of 1999 to about 2.3 or 2.4 percent in Q2 of 1999. More significantly, there may be some potential signs of early inflation, so-called pipeline inflation, in the most recent PPI. But without putting too much weight on that, in the context of strengthening growth overseas, a commensurate weakening of the U.S. dollar, expected strength in exports, and a likely rise in both oil and nonoil import prices, I think we can well expect a further firming tendency in U.S. prices. Obviously, this is against the backdrop of labor markets that are tight by anyone's estimation. Whether or not they are below one's estimate of NAIRU is less relevant than the fact that we have seen already some uptick in hourly compensation figures. As Karen Johnson has already indicated, we are in a period of unusual asynchronous global growth patterns that have arguably allowed us to enjoy a very benign growth and pricing picture. At the end of this asynchronous period I think we will also see an end to some of the factors that have allowed us to enjoy benefits of excess capacity and slack demand from overseas. That will put a further spotlight on the question of growing productivity here in the United States. Unfortunately, just when the importance of that factor has become a little clearer to us, the data have become a lot less clear--particularly the issue of measuring the economy from the product side versus the income side, which I suspect we'll come back to during the course of the year. Against the background of this factual uncertainty, I think we're faced with a very important tactical question. From my perspective there are some risks to the forecast. One, for sure, is that it depends at least in part on a waning of wealth effects. And we know from experience that calling for a slowing of the equity markets has proven to be a triumph of hope over experience. Secondly, we also see in this forecast some expectation that the desired level of inventories in the private sector, or expectations regarding the relationship between inventories and projected sales, may have changed a bit. I think that may be true because of some structural changes. But we also have to be mindful that in the year 2000 we may see some other forces that cause inventories to be higher than perhaps businesses would otherwise like to have. Finally, from a tactical standpoint we have to be mindful of the fact that we are in an unusual period. Year 2000 fears do make markets skittish. And if the general inclination of the Committee is that we want to firm a bit as an insurance policy if you will, I suggest we do so sooner rather than later. Whenever we are in the process of raising rates, even by a small amount, we are about as popular as a skunk at an outdoor wedding reception. But if that is the case, I think we should do a little defensive spraying--at least for the bride and her mother.",711
-fomc-corpus,1999,That is an improvement. I thought it was an indoor wedding.,13
-fomc-corpus,1999,We are at least outdoors!,6
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I believe I am the final hitter in the lineup today and the day is getting on, but let me offer a brief summary of the situation as I see it, although this is admittedly rather repetitious. The economy continues to exhibit a great deal of fundamental strength though we may be getting a bit of the long-expected slowdown. However, the consensus expectation for the second half is for growth of 31/2 percent or likely more than that, which would mark a return to a pace above a sustainable level. Left unconstrained, this could go on into and perhaps through next year, which would introduce substantial additional upside risks. So far, the overheating this threatens has been more than damped by strong productivity gains, with important assistance from special world cyclical factors. While this could well continue for a time, it seems to me increasingly dangerous to depend too heavily upon productivity alone to hold inflationary pressures in check, as the reinforcement provided by a weak world economy seems likely to be dissipating. If overheating were allowed to occur and ignite a cost-driven rise in inflation, it could be quite difficult to deal with. Serious downside risks to economic activity exist, as always, with the most readily identifiable potential culprits liable to be the sky-high stock market and the still fragile world economy and exchange rate structure as well as the ever-present possibility of exogenous shocks. But at this juncture the downside risks would seem to be of both lower magnitude and probability than the upside risks. The federal funds rate is still 50 basis points below the level that existed prior to the financial crisis of a year ago. While one cannot by any means say that all vestiges of that episode have disappeared, conditions have improved markedly. I can see little motivation in recent experience or likely short-term prospects for continuing all or perhaps any of the remaining degree of stimulus put in place at that time. Thank you.",385
-fomc-corpus,1999,Let's move on to Don Kohn.,8
-fomc-corpus,1999,"Thank you, Mr. Chairman. Judging from the remarks of policymakers, a further small increase in the federal funds rate would seem to be in the works at this meeting. Private domestic demand is expected to remain strong, at a time when the restraining effects of fiscal policy and of developments overseas will be diminishing. Deepening problems abroad and their spillover to the U.S. economy and financial markets have played an important role in justifying holding policy steady from late 1997 through last summer and then easing last fall. In effect, the Committee has allowed relatively accommodative financial conditions to boost domestic demand in order to offset the depressing effect on domestic production of lower exports and higher imports--and the FOMC has had additional scope to do so while keeping inflation contained as foreign developments damped import prices. The easings last fall in particular were designed to protect not only against the anticipated effects of global financial market turmoil, but to take account of heightened downside risks as well. In large measure because of these policies, the United States not only remained an ""oasis of prosperity"" but--to stretch the metaphor to the breaking point-provided water to the rest of the world in the form of strong demand for its goods and services. But now domestic demand abroad is strengthening and import price declines are coming to an end. As Karen noted, recovery seems to have taken hold in a number of emerging market economies, and, while the vigor of the European and Japanese economies may be in question, at least the downside risks in those economies appear to have greatly diminished. Under these circumstances it becomes increasingly important to trim the strength of domestic demand here if we are to avoid putting additional pressures on U.S. resources. The turnaround abroad is occurring when the level of labor resource utilization here at home is extraordinarily high. The unemployment rate is as low as it has been on a sustained basis since the late 1960s, and some recent data on labor costs at least hint at the possibility that it might be too low to be consistent with containing inflation. Even if the Committee is not yet ready to judge these recent data as the beginning of an uptrend in unit labor cost increases, as in the staff forecast, it may still see the current unemployment rate as low enough to justify tilting policy on the side of forestalling any further declines in the unemployment rate. The slowing of domestic demand needed to keep the unemployment rate from falling is likely to depend, as Mike noted, on retaining the greater degree of restraint in financial markets that evolved over recent months as private long-term interest rates rose 75 basis points and stock prices leveled off. That restraint, in turn, owed importantly to growing expectations that the Federal Reserve would tighten policy. A firming at this meeting, together with the action taken in June, would validate those expectations and should tend to keep interest rates and equity prices near current levels. If the Committee decides to raise its target for the federal funds rate by 1/4 percentage point, as in alternative C in the Bluebook, you will also need to decide what your view is of the balance of risks going forward and how to convey that view to the public. An inflation outlook similar to that in the staff forecast would offer a rationale for adopting and announcing an asymmetric directive. In that forecast, the unemployment rate is judged currently to be appreciably below its sustainable level and financial conditions not yet restrictive enough to damp demand sufficiently to raise that rate. Consequently, inflation is on an upward trend in 2000 and beyond, even with the assumption of a near-term firming of policy and another tightening next spring. An alternative model simulation in the Greenbook indicates that something like 150 basis points of tightening would be needed by mid-2000 to cap inflation at a little over recent rates. With actual or anticipated century date change disruptions in markets possibly constraining policy increasingly over the fourth quarter, if the Committee thought it might want to raise rates by a substantial amount by next spring, it might want to give serious consideration to tightening again in October. In this case, an asymmetric directive would give due warning that the Committee saw the inflation risks as remaining serious and was determined to take action in the near term to forestall a prolonged acceleration in prices. Tightening in October ought to be far enough in advance of year-end to avoid aggravating market dislocations stemming from last-minute century date change preparations. An asymmetrical directive after a 25 basis point rate increase would come as a surprise to market participants, and their responses would help to impose added restraint the Committee would find helpful if it were still quite concerned about inflation risks. Interest rates would rise somewhat and markets would remain volatile, pressuring spreads, which have retreated in recent days when benign price data seemed to reduce the odds on a policy tightening in the fourth quarter. Judging from the response to the May tilt announcement and the July testimony, with a tilt toward tightening markets would be likely to react more strongly to incoming data that tended to confirm intensifying price pressures than to information that did not point in that direction, and there is a high probability that they would build in a further rate increase in October unless the data were consistently to the weak side. If, on the other hand, the Committee saw the inflation risks as having been reduced enough by its two tightenings to allow it to observe incoming data for a while without the presumption of a near-term tightening, it might want to adopt and announce a symmetrical directive. After 50 basis points of federal funds rate increases this year and little apparent change in inflation expectations, the Committee will already have raised real interest rates appreciably in the last few months. Those increases, as they came to be expected, were largely responsible for pushing many private long-term rates up to their highest levels since the end of the 1994-95 series of tightenings, and they have contributed to sustaining a slower growth trend for money and credit. Recent data on several components of final sales already suggest a moderating trend, with these readings taken even before most of the effects of the rise in interest rates and flattening of equity prices have been felt. As a consequence, the Committee may see the risks around the forecast of slowing growth as much better balanced than they have been for some time. Uncertainties about the growth in productivity, the level of the NAIRU, and the supply side of the economy more generally also may support the case for a spell of watchful waiting. Such uncertainties make preemptive policy more difficult, and may argue, as noted in the papers sent to the Committee before its last meeting, for tempering the response to estimated output gaps relative to that on incoming inflation data. In these circumstances, with core inflation still quite subdued, if the economy looked like it was slowing to the growth rate of its potential, the Committee might want somewhat more evidence that labor costs were on a sustained upward trend relative to the growth of productivity--and that therefore the unemployment rate was too low--before deciding that it needed to tighten further. Finally, financial markets remain unusually skittish and sensitive. After the crisis of last summer, participants are less willing and less able to arbitrage spreads back down once they have begun to widen. Moreover, widening spreads on Brady bonds and weakening equity markets in a number of emerging market economies in recent weeks suggest that confidence is fragile and that downside risks persist in these economies and are perceived to be heightened by increases in interest rates in the United States. Even at home, reduced liquidity has made markets more vulnerable to shocks, such as positioning in advance of the century date change and shifting perceptions of monetary policy intentions. A symmetrical directive would reduce one source of uncertainty and volatility, perhaps leaving markets better able to cope with other problems, such as century date change preparations. A symmetrical directive would not rule out a near-term policy action should developments take a significant unexpected turn. But such a directive could convey the Committee's feeling that in the near term, absent such an eventuality, it would be content to evaluate the data and the effects of actions already taken. If this were the Committee's intention, care would be needed to ensure that this came through in the announcement, so that market participants did not interpret the symmetry as merely a repeat of the symmetry in June, which they have been told was more fundamentally asymmetric than they first perceived.",1675
-fomc-corpus,1999,"Questions for Don? If not, let me proceed. Following up on a number of the issues that Peter Fisher raised at the beginning of our meeting, I have become increasingly concerned, somewhat surprisingly in a sense to myself, about what is looming out there in the Y2K area. My concern centers mainly on the increasing evidence of potential illiquidity problems, as people in the business community and financial community keep talking to one another about possible year-end developments. Everybody seems to be focusing on what they should do to protect themselves at year-end in a situation where the cost of appropriate precautions is not perceived to be all that large relative to the cost of the potential outcomes. I think we are addressing the year-end issue, and I don't believe there is likely to be a significant problem in the financial area. However, even though I agree with Mike Prell that the declining inventory/sales ratios do not at this stage seem to have caused a sense of a shortfall, it is just not credible that the tightness of just-in-time inventory management that businesses have created in this country can continue, as we move ever closer to the end of the year, without generating some precautionary buildup of various supplies along various pipelines. We've seen several surveys that suggest many people are inclined to take such precautionary measures. The crucial consideration is that we don't need very much stocking up to create a quite large increase in seasonally adjusted inventory investment. Indeed, my recollection is that a one percent increase in real business inventories is about $50 billion at an annual rate. And an increase of that order of magnitude from one quarter to the next adds more than 2 percentage points to the GDP growth rate. An additional one percent change in inventories investment is not a big number. So even though my perception is that the Greenbook forecast is probably right, the risk to the forecast is on the upside and very substantially so. The question that arises is how that inventory is going to be financed. When I look at the nature of markets and how the flow of funds may emerge in the year-end period, I can envision some potentially very worrisome developments. I do not perceive that as a necessary or most likely outcome. Indeed, I don't believe it will happen. But I think the risk is sufficiently large that I would very strongly be in the group that wants to tighten up on monetary policy today if for no other reason than that we want to go into a period like that with a somewhat tighter than looser policy stance. As Don Kohn pointed out, we've not only had the June funds rate increase but we've also had a very significant increase in the real long-term investment grade yield in recent months. Indeed, as I recall from the charts I looked at yesterday, the BAA real rate is up just about a full percentage point since the beginning of the year. That's a fairly substantial amount of tightening that has taken place. My own perception is that it is likely to be adequate for our purposes. The reason I think so at this stage is that the outlook for rising inflation is still a forecast. If we look at the detailed data, as a number of you have pointed out, there is nothing there. In fact, the twelve-month change for the core CPI excluding tobacco--which had that artificial, very sharp rise last December--is well under 2 percent. I think it is 1.7 percent. That is a more relevant statistic, if we are going to use the CPI, than any of the other numbers we're looking at. But as I've argued before, I think the CPI is a flawed measure of inflation. The personal consumption expenditure deflators are far more important and not only because of the weight differences, which are quite important. Indeed, a number of the ""component"" or ""detailed"" price indices are far more accurate than those in the CPI. I think there is a question of which of the various broad-based inflation indexes to use, but I agree with the Vice Chair in that I believe we have arrived at price stability by any measure we can employ. And the argument that the rate of inflation has stabilized I think is probably accurate, although it's difficult to tell in certain respects for reasons I will get to in a minute. The point is that we are at the level we need to be; it is not as though we have stalled out at some higher level of inflation and, therefore, will require additional effort to bring inflation down. The concerns that a lot of people around the table have raised with respect to this issue I think are quite valid. The oil price increase has been more than we would have expected, certainly more than I would have expected. And you cannot just subtract energy out of your price indexes as though there is some core aberration in the way that you can with agriculture. In a certain sense when food was a crucial issue in the CPI and affected wages, taking food out of the CPI was questionable. But taking food out of the CPI now is not questionable because it clearly is fairly exogenous. However, oil is not. Oil eventually works its way into the core price indexes, through transportation costs, petrochemical feedstocks, heating costs, and a variety of other areas. So it is not as though the oil price is extractable from the overall price index; its impact is just delayed. To be sure, oil--and energy more generally--doesn't have the weight that it had 20 years ago in the GDP, but it is still a prominent force and, therefore, I would not diminish its inflationary implications. The intermediate materials of the PPI are largely construction materials, which are being pressured by a very, very tight housing market. The nonresidential markets, as you all know, are weakening. Indeed, some company reports show orders for construction equipment falling off; and even in the data on residential markets that we get from the National Association of Homebuilders, a sample of large homebuilders shows a significant weakening in home sales in July. I would be a little careful translating that into starts because, as several here have mentioned, there is a very serious inventory problem of new homes. Demand has to fall a lot before it begins to affect the starts figure significantly. One element that nobody has discussed--I'm not sure how important it is but it could become so--is owner-equivalent rent. As you know, it has been in the CPI at one-tenth of a percent per month for quite some time. Some statistical techniques that we've employed, which endeavor to extract near-term signals from that BLS procedure of using a six-month moving average, suggest that that figure may move up from 0.1 to something like 0.3 in the August CPI. That wouldn't be very important except that it is one-fifth of the total CPI. But it is a much smaller fraction of the PCE. So, while it may have an impact on the CPI if indeed our statistical procedures are accurate, it will have a very much more subdued effect on the PCE price index. The bottom line on all of this, however, is really the question of wages and wage costs and unit labor costs generally. We've all commented on the ECI and average hourly earnings. I think the ECI may be stronger than is shown in the Greenbook, but it certainly is still below the rate of change of a year ago. The average hourly earnings figure, which in July was 0.5 on the basis of data supplied to us by the BLS, suggests that some of that increase reflected changes in the mix and that the fixed weight structure of wages probably rose less than that. But, fundamentally, the crucial issue is not what is happening to average hourly compensation. I suspect that neither the average hourly earnings measure nor the ECI is as useful as the aggregative data on employment costs per hour. Even though the latter measure is a dubious statistical calculation, it probably is more representative of reality because it takes into account all of the secondary sources of labor costs. So the annual rate of increase of a little over 4 percent that we've seen in that statistic is probably the best estimate, in today's context, of the real rate of wage increase. That gets us down to the question of what is happening to productivity. From the data I look at, I find no evidence yet that the increase in the rate of growth of productivity has slowed at all. To be sure, the official published data for the second quarter, which showed productivity growth of 1.3 percent and will be revised to below 1 percent, would suggest a very significant slowing. The problem is that about 2 percentage points of that number reflects the change in the statistical discrepancy. And that published second-quarter number is not in any way consistent with what we know is going on out in the real world--namely, that while there may be some evidence of firming in prices, there is little evidence of corporate pricing power. I must say that the anecdotal reports I hear from people to whom I talk--even though they do bring up the point of the lesser discounts-suggest no really significant change in pricing power on the part of companies. If that is indeed the case and if operating domestic profit margins rose in the second quarter--we don't have official data on that as yet but the evidence points to an increase, judging from all the individual company reports we see--certain algebraic conclusions follow. Algebraically a stable price level and rising operating profit margins necessitate a decline in the rate of change in unit costs. Since labor costs are 70 percent of unit costs and the indications in the nonlabor cost area suggest only modest declines, it necessarily follows that the rate of increase in unit labor costs declined in the second quarter. And indeed that is precisely what shows up on the income side in an evaluation of costs and prices. As I've indicated previously, when we look at the nonfarm business sector from the income side, we estimate that over the last four quarters unit costs rose less than 1/2 percent. Unit labor costs were up about 3/4 percent. The growth rate of income, of course, was also significantly stronger than the growth rate of product-based GDP. I will grant that there are lots of arguments about what that statistical discrepancy is showing, but leaving that aside, I would say that we don't even need to look at any of these data on the product or income side. We can infer a decline in unit labor costs wholly independently of those data. And no matter what data we use on average hourly compensation, whether it's average hourly earnings, the ECI, or the compensation data, we still get rising increases in output per hour. The figures in the data that we are looking at from the income side show productivity growth over the four quarters ending in the second quarter of around 31/2 percent. I might add that the difference between the 31/2 percent and the 4.3 percent in compensation per hour is indeed a unit labor cost increase of 3/4 percent. The point that I'm trying to make here is that we don't have any real evidence that inflation has risen. Indeed, we are still looking at declining rates of increase in unit costs. And if profit margins are rising, that basically says that some of the increase in prices or the lack of decline in prices has to be reflected in widening profit margins. So there is still a gap there. In other words, the inflationary pressure is not there. Now, I don't deny that if we proceed with the product-based GDP numbers and project a stable productivity growth rate, that will produce an acceleration in the CPI growth rate. There is no algebraically conceivable alternative to that. But that is begging the question, because unless and until we see some slowdown in productivity growth, then the argument that inflation is about to bite us is not credible. I do not deny, as I've said previously, that the growth of output per hour is going to slow down, but I don't know when. There is no evidence of that yet, and there is no reasonable upper limit in the near term. The crucial point here is that we became so used to a 1 percent increase in productivity growth over a very long period of time--from the '80s into the '90s--that we have looked at the gap between potential and actual as entirely a demand-side phenomenon. Certainly the demographics haven't changed that much. And if we have stable demographics--say, a little more than 1 percent growth in the working-age population including immigration--and a 1 percent trend productivity growth rate, then potential is a little over 2 percent. And if that does not change, our evaluation of inflation can ignore the supply side and look at the demand side, which is what we typically do and why we argue in terms of an overheating economy. But now we have the supply side moving, and the question of whether the economy is overheating and inflationary pressures are mounting cannot be strictly an issue of what is happening on the demand side. That's because if productivity is accelerating, of necessity it has to be balanced in some manner, as I said last time, by very high expenditures for motor vehicles, housing, construction--big everything--unless we get a big statistical discrepancy--bigger than the one we're looking at now. The truth of the matter is that we have a very strong economy with very marginal indications of any slowing. But the question that is still up in the air is whether, in fact, it is an overheating economy. An important element of that, obviously, is what is going on in the supply and demand for labor. There is no question that the pool of people seeking jobs is continuing to erode. We continue to see shrinkage in the number of those who are working part-time, so we are seeing ever increasing hours. But the rate of decline in the pool of job-seeking people who haven't gotten a job has itself been slowing. We know the gap between potential and real output is in the area of less than 1/2 percent without claiming any knowledge of what the actual potential is because we don't need to know that. All we need to know is the difference. What I'm suggesting is that we still should be looking for the answer to the question of ""Where is the inflation?"" It is not showing up anywhere in the basic price data, at least that I can tell. And the people out in the business world with whom I talk, and it's a fairly extensive group, keep complaining about their inability to raise prices. I do think that wages will continue to increase if productivity growth continues to rise. But since this would mean that unit labor costs would be little changed, that won't be a source of price pressures. In any event, having said all of that, so far as the domestic side is concerned I think the availability of resources is very tight. Inflation is clearly prone to acceleration should the increase in the growth of productivity slow or even stabilize. That hasn't happened yet as far as I can tell. Finally, let me say something about the international side, which is an issue a number of you have raised. I think something ominous is going on. It's not the economics; it is the politics. The Vice Chair mentioned that, as did President Jordan. The situation in is deteriorating. I don't mean the economics. On the contrary, the economics look fairly good, especially in But the economics are a lagging indicator. Mr. political strength has deteriorated very dramatically. As I recall, his approval ratings went down and he is being largely abandoned by a number of his strong supporters. It is very difficult to know what is going on in . The situation is technically better, but the politics there are just as bad. The long-lasting is obviously coming to an end at the close of this particular session, because none of the candidates shows any signs of becoming that type of president. So there is a possibility that we could be confronted with a crisis that ironically could create another period of strength in the dollar as fears of the international political situation and other concerns emerge. The flight to the dollar would resume. I think one of the things we have learned, to our chagrin, is that the hardest thing to forecast is the American exchange rate. I know how much effort Karen Johnson and her people have put into it, and theirs is the most sophisticated analytical process you will ever see. And I can't say that the result is all that impressive. [Laughter] So if she can't do it, I don't think any of us ought to consider ourselves to be in a position to do it. My bottom line is that I think we have to tighten by 25 basis points. I would argue that we should make that move and stay with symmetry, as I think Don Kohn mentioned. If it turns out that we have to move again in October, symmetry does not preclude us from doing so. But we ought to be careful in the wording of our press statement, if we go in that direction, not to construct an ""asymmetric"" symmetric directive, which we consciously and purposefully did the last time and for good reason. I would argue that that is probably not the desirable thing to do at this point. I have gone on far longer than I anticipated. Who would like to speak next? Vice Chairman.",3491
-fomc-corpus,1999,"Mr. Chairman, I fully support your recommendation. Let me just express a couple of thoughts. Since I believe that we are enjoying price stability and since I believe very firmly in the rather brilliant analysis that you have just presented, one might ask: Why are we tightening at all? In my view, the reason is that the domestic economy can certainly bear it. The worst case scenario is that we will have moved the funds rate up by 25 basis points that we didn't absolutely need. But the strength of the domestic economy and the tightness of the labor market are such that a move of 25 basis points is certainly a bit of insurance that is in the interest of the American people. Another reason--which you just alluded to, as I did in my earlier remarks--is that the international situation is tenuous enough that it is best for us to be in the position of having domestic policy just where we want it or maybe a tiny bit on the snug side. It will give us much greater flexibility to respond to any unanticipated weakness in the domestic economy, which is always possible, or to the more likely event of some shock coming from outside the United States. So I believe very firmly that ""C"" symmetric is the right solution.",250
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I, too, very much agree with your recommendation, Mr. Chairman. Although I might be a bit more inclined than others to view the prospects for increases in interest rates as more probable rather than less probable, at this point in time I think it is important to make a move and give some indication of then standing pat for a while. I believe that would be very helpful in terms of overall market conditions. I think President McDonough is right on target in saying that it would be to our advantage to have monetary policy close to where we want it as we go into the last part of the year, which is going to be a tricky period.",131
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I support the recommendation for a 25 basis point increase. The market expects it and not to move at this point would confuse the market. As for Y2K issues, I think our position ought to be that as we approach the close of the year we won't hesitate to change our policy if necessary. After all, we have said again and again that we are ready for Y2K and the banking system is ready. So there is something peculiar about saying that the Y2K issue has to be an absolutely controlling consideration. In my view if we have good reason to move, we should move. Y2K should be one of the considerations involved in any decision, and it might tilt us in the direction of not moving. But I do not think we should foreclose moving if there is a compelling case to move. Obviously, we might see strains in the market that are greater than those that we now think are likely, in which case that would elevate the importance of Y2K considerations. My view is that over the last two years, until the beginning of this year, financial conditions were quite accommodative and perhaps even expansionary. But that situation has changed. Rates are up. Money growth is slower this year. I think we will be not very far from where we ought to be with the increase in the fed funds rate today. If we are starting out after today pretty close to where we ought to be, I think we have to make clear to the markets that our future policy moves are going to be driven by what we see happening. And if we end up with more inflation than we currently anticipate, we have to be ready to respond to that. That seems very important to me; we shouldn't try to preordain or give any very firm view about our policy direction in coming months. My preference is very strongly for a symmetrical directive. I firmly believe that the market is quite unclear about what the symmetry/asymmetry clause means; we need to defuse the speculation about that and try to get the market to pay less attention to it. I think we ourselves around this table are unclear about what that clause means. It is awkward for us as we talk to people around our Districts and to the press to have to stumble and mumble about what this clause that we voted on means. In my view, the best way to defuse this is for us to adopt a symmetrical directive for the foreseeable future until we ourselves are clear about what we mean by that clause. Thank you.",508
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Mr. Chairman, like Governor Meyer, I look forward to the debate on the new economy and to seeing how the actual new economy will play out. But the test of the new economy will be marred if we burden it with interest rate increases based only on demand side considerations without equal consideration given to supply side factors. We had a productivity growth rate of only 1.3 percent, or even lower, in the second quarter--a period of rapid growth in hours worked--after it averaged almost 4 percent in the previous two quarters. I expect to see the higher productivity growth trend show through as labor supply growth slows. My guess is that the true productivity growth trend will turn out to be much closer to 3 percent than to 1 percent. Wages may in fact rise even faster than that and unit labor costs may rise, but after years of a profit boom and after years of an investment boom that has raised capacity faster than output, it seems to me that higher wages are appropriate. I was taught that wage-push inflation does not occur through higher wages alone without validation from monetary expansion. While we never know what the appropriate rate of monetary expansion is, it is heartening that money growth has decelerated in recent months. So I would prefer no rate increase at this meeting.",261
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,I agree with your recommendation to raise the funds rate 25 basis points and I strongly agree that we need a symmetric directive and that we ought to stay with that.,33
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"I support ""C"" symmetric, truly symmetric. I've never studied the statistical discrepancy and I don't want to get into the question of whether we ought to be looking at the income side or the product side; I take no position on that. But I do like it when you talk about this because it makes me less worried about inflation, and I hope you're right. [Laughter]",77
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,I have to endorse what Governor Gramlich said on all counts.,13
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"I favor both aspects of your recommendation, Mr. Chairman--that is, the increase in the federal funds rate objective and the symmetric directive. I would add that I will be mildly surprised if we don't wind up deciding that we need to move the funds rate up a bit further before too long. But I think a symmetric directive permits us to do that, and I'm comfortable with what you are proposing.",80
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, I support your proposal for a 25 basis point increase and a symmetric directive. However, on the directive I just want to associate myself with what President Poole said about symmetry and asymmetry. In my view we should not be using that tool for the foreseeable future even though I agree with President Stern in that I personally think the odds are that we are going to be increasing rates again in the not too distant future. In my view we should just make announcements regarding symmetry or asymmetry if we think they are appropriate. The language on the tilt is no longer useful. I think we misunderstood the impact it would have in the financial markets when we used that tool in May. But the fact that we now announce it right after the meeting just confuses the markets even more. So my personal preference is to drop its use completely in the future.",173
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, I'm increasingly concerned that aggregate supply may not keep up with aggregate demand, particularly in light of a probable pickup in foreign demand. If that turns out to be the case, we risk an acceleration in inflation at a time when I'd personally like to see further progress toward price stability. I, too, would prefer to raise the funds rate 1/4 point at this meeting. Although we might have to move again this year, I would prefer a symmetric directive in part because we don't know how fast aggregate supply will continue to grow and also because I agree with much of what President Poole said about the symmetry issue.",127
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I agree with your recommendation on the rate increase, and I strongly support the symmetric directive. I say that because if we do in fact make the 1/4 percentage point move, we can sit back and analyze its effects, analyze the data, and then move again when a change is called for. I don't think we need to have an asymmetric directive of any kind.",79
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I support your recommendation for a 1/4 point increase in the funds rate and the continuation of the symmetric directive. I want to focus a bit, though, on the issue of whether we need not just a symmetric directive, but a ""truly symmetric"" directive. And I'm going to give a contrary perspective. The bond markets today still have the expectation built in that if we move today, it won't be our final move--that there are still further, though modest, increases coming down the road. I don't think it would be particularly useful to use the directive and our announcement to remove that expectation from the bond market. Indeed, I think it is a very reasonable expectation. It involves the same kinds of considerations that we have talked about around this table. There is a lot of momentum in the economy. Labor markets are very tight. The supply shocks are beginning to dissipate. So, I think the task we have before us is a rather difficult one. We need to combine the rate move, the tilt, and the announcement so as not to put into place expectations of an immediate move--keep our options open to be sure--but not to squeeze out of the markets what I think is a very sensible and rational expectation right now. I think we should try to be market neutral. Now, one reason that I support the symmetric directive is the reason that Presidents Poole and Moskow and others have noted. Right now we have the problem that symmetry and asymmetry seem to mean different things to different members of this Committee. Until we solve our internal problem, it is very difficult to communicate our intentions to the public effectively. So, first things first. During the interim while we clean this up, I think we have to be more reluctant to use changes in the tilt and, if possible, stick with a symmetric directive. But again, the challenge is how to balance that approach with the announcement so as not to convey an incorrect set of expectations about our policy intentions going forward.",406
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Mr. Chairman, I think a 1/4 point tightening is the right move today, and for all the reasons that have been articulated I think a symmetric directive is the right place to rest until we can sort this issue out. I also want to comment, although it is not to be decided by this group, that I hope the Board will consider a catch-up increase in the discount rate. It is part and parcel of our total policy posture. A catch-up in the discount rate would help to underscore and anchor, at least to some extent, the policy adjustment that we made at the last meeting and the one it appears as if we are about to make this morning. Thank you.",139
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"I concur with your recommendation, Mr. Chairman, for all the reasons that have been expressed around the table.",22
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, I agree with your recommendation to increase the rate. As far as the tilt is concerned, my position is still what it was before. I recognize all the issues that have been raised here. But looking at all of the information we have and giving full weight to your comment that we are probably going to have to move at least one more time, given the way we have been operating, my sense is that an asymmetrical tilt toward tightening is better. If I may, I'd like to make one other comment about the tilt. I certainly agree with what Bill Poole and others have said about the need to get our act together and make sure we all are on the same page. Nevertheless, there has been a sentiment expressed by Jerry Jordan and others about not using a tilt in our directive, and I certainly understand those arguments. But I have a slightly different perspective on this. As I see it, under our current operating procedures monetary policy works to a very large extent by influencing the yield curve. One of the most important determinants or channels of that influence is market expectations regarding our future policy actions. The key point is that those expectations are always out there. In a sense one could say that there is always a market perception of a tilt in one direction or another or of no tilt, whether we use tilt language in the directive or not--and if we do, whether we announce it or not. That is a key issue that we need to keep in mind. And given that, the issue as I see it is how that inevitable market perception of a tilt or the absence of a tilt gets determined. If we don't use symmetric or asymmetric language in the directive at all--or if we do and don't announce it--then those expectations would be formed largely, and I think obviously appropriately, by the Chairman's public statements. They might also be influenced from time to time by what some of the rest of us say and more generally by how markets guess we are going to react to incoming information about the economy. By telling the markets what our consensus view is, it seems to me that we cut out a lot of that guesswork, or at least some of it. That should make it easier for markets to move ahead of our actions and create the kind of continuity and smoothness in monetary policy and its implementation that I referred to awhile ago in my statement on the economy. So, I just offer that perspective. One quick final point: To my mind, an asymmetric directive is a statement about a propensity. It has never really been, as I see it at least, an unconditional promise of future FOMC action, and it never should be interpreted as such a promise. So, if we are going to use anything like that in the future, we need to make that clear.",562
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"A large and rapidly growing trade deficit or current account deficit says to me that demand for products in the United States has been growing at an ever faster rate relative to the pace at which we can produce them. So far, we've been blessed by the savings of the rest of the world, as poor as the rest of the world is, coming to our benefit. That is unsustainable. That will turn around. They will want to take their savings home and we will need to start making our savings available to them. That means U.S. domestic demand must slow. Current policy is not positioned to accomplish that. If the move today were designed to signal that we're on hold for the balance of the year, my preference would probably be to go ahead and do 50 basis points and say this is a ""we're done"" type action. That is really not my first choice, though. My first choice is what Jack Guynn has suggested, a move on the discount rate. I think that is more important. I've thought about an increase of 25 basis points on both rates but I like his idea of a catch-up, so I'd favor 25 basis points on the funds rate and 50 basis points on the discount rate.",247
-fomc-corpus,1999,"We have a consensus on ""C"" symmetric, 25 basis points. Would you read the appropriate language?",22
-fomc-corpus,1999,"I'm reading from page 15 of the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the federal funds rate to an average of around 51/4 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",94
-fomc-corpus,1999,Call the roll.,4
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer No Governor Meyer Yes President Moskow Yes President Stern Yes,41
-fomc-corpus,1999,"At the termination of this meeting I'm going to ask that the Board of Governors meet separately to consider the requests of a very large number of the Reserve Banks to move the discount rate up 25 basis points. In the event that the Board goes along, I would propose to release the following statement with respect to our decisions: The Federal Open Market Committee today voted to raise its target for the federal funds rate by 25 basis points to 51/4 percent. In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 43/4 percent. With financial markets functioning more normally, and with persistent strength in domestic demand, foreign economies firming, and labor markets remaining very tight, the degree of monetary ease required to address the global financial market turmoil of last fall is no longer consistent with sustained, noninflationary, economic expansion. Today's increase in the federal funds rate, together with the policy action in June and the firming of conditions more generally in U.S. financial markets over recent months, should markedly diminish the risk of rising inflation going forward. As a consequence, the directive the Federal Open Market Committee adopted is symmetrical with regard to the outlook for policy over the near term. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco. The discount rate is the interest rate that is charged depository institutions when they borrow from their District Federal Reserve Banks. There is one additional item on the agenda, which addresses the question of the tilt. Bill Poole and a number of other Committee members have raised the question as to whether the Committee shouldn't come to an agreement on what the tilt language in the directive really means. This has always been an awkward question, but obviously it has taken on added importance with our announcements. Most of us are also at least slightly uncomfortable with how the new announcement policy has been working out in practice and wonder if it might not benefit from at least some tinkering. I don't think we can resolve any of these interrelated issues at this meeting. In fact, I would prefer to have considerably more experience under our collective belts before making any new decisions on these matters. But I do think it is important to get a process under way to review the language of the directive, its meaning, and what we announce. That's the reason I asked Don Kohn to add this topic to the agenda at the last minute. What I propose is that Roger Ferguson head a small subcommittee of the FOMC to examine these issues and come back with some recommendations or at least choices for us to consider. Roger will consult the Presidents and Board members to come up with the other members of this subcommittee. Theirs will be no easy task and it will benefit from added experience, as I already noted. My inclination is to ask Roger and his colleagues to get back to us in early spring. Is that satisfactory to everybody? You have all raised the issue in one form or another, and we have to come to some form of agreement on what to do about it. Having said that, may I request that the Board members adjourn to my office?",663
-fomc-corpus,1999,Would someone like to move approval of the minutes for the meeting of August 24th?,18
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,"Without objection, they are approved. Mr. Fisher.",11
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will be referring to the package of colored charts that should be in front of you. 1/ I offer the array of forward rates shown in the first chart as a precaution against any thought that there is a simple, single description of interest rate expectations, given the pronounced Y2K effects we're seeing in conjunction with some shifts in expectations about the outlook around the world. In broad brush strokes, you can see in the top panel of this chart that U.S. rates drifted sideways after your last meeting and then moved a bit lower before ticking up late last week on some data releases that suggested continued strength in demand in the U.S. economy. Euro rates have moved up more or less consistently since your last meeting. And they increased quite a bit at the end of last week, as forecasts for Euro area growth were revised up and as the market became filled with the thought that the European Central Bank might actually raise rates before the end of this year. Japanese forward rates generally declined throughout the period and were down substantially until the speculation around the time of the Bank of Japan's September 21st policy meeting created some noise. But clearly, the show was stolen by the current 3-month Libor rates, which are usually the sleepy flat line at the bottom. As we moved into the fourth quarter and the end dates of that contract included the turn of the year--both the December 31st and January 3rd dates--those rates shot up. Now, this may be just a brief effect and may calm down a bit, as we have seen with other Y2K spikes over the past year. I hope so, but I don't think we know in any way for certain. There is also, as you can see particularly in the Euro rate chart, a sort of fanning out of these rates as one reflection of the uncertainty. Anecdotally our traders report, as we have moved into the fourth quarter, increasingly diverse pricing by our counterparties for a number of instruments--sort of idiosyncratic firm approaches to pricing for the year-end. Some firms think one thing is going to happen and other firms think something completely different is going to happen. So a lot of the data sources we look at--the data points we take off of Bloomberg, for example--are going to be the blended averages of some very disparate rates as firms take increasingly idiosyncratic approaches to the uncertainties about the year-end. And I think we should be even more cautious than usual in interpreting these interest rate charts. 1 / A copy of the material used by Mr. Fisher is appended to the transcript. Turning to the second page, the top panel shows exchange rates since the start of the year: yen per Euro in green; yen per dollar in red on the left-hand scale; and dollars per Euro in blue on the right-hand scale. Interestingly, the two scales happen to match in percentage terms with a slightly different location of the decimal. When I look at this chart, what I see is the herding behavior of Japanese institutional investors rushing back into the yen in the third quarter. You can see the shift beginning at the time of our meeting on June 30th. Now, it may be that economic fundamentals change abruptly with calendar quarters, but to my way of thinking it is much more likely that it is investor behavior that changes abruptly with calendar quarters. I don't know what to expect with this change of calendar quarters, but when I look at the third-quarter picture I see a rush of Japanese investors back into the yen. The bottom panel depicts 1-month option implied volatilities on each of these exchange rate pairs. If there are anxieties being expressed in foreign exchange markets, those anxieties to me seem focused on the yen and not the dollar, at least so far this year. As you can see, the green and red yen-based volatilities tracked one another and spiked as we came to the end of the third quarter. The euro/dollar implied volatilities traded at a rather calm pace. Turning to page 3 and domestic open market operations, during the three maintenance periods since your last meeting, with the exception of last Thursday and Friday, the fed funds market behaved in a fairly typical and calm manner. The deviation of the effective rate from the target and the intra-day volatility, expressed in the standard deviation, were both moderate and similar to the experience of other recent months. Last Thursday, September 30th, was actually a fairly typical month-end day. Friday, October 1st, also a day of big flows in the market, was a little less typical. We ended up providing sufficient reserves on the day to have the effective rate trade on the target, as you can see with the red horizontal tick right on the dotted line. But in doing so we clearly provided a sufficiency of reserves that was more than the market looked for in terms of the standard deviation, and we had a very wide trading range and a whopping 60 basis points standard deviation of the trading range. But that's in effect what it takes to try to get the fed funds rate to trade on average at the target on a day of volatile payment flows. I'd just note that currency in circulation has continued to grow at a rather rapid clip of about 10 percent per year. That is consistent with the rates we have seen this year, but well ahead of past years. I don't know about the Board's staff, but we have not found any evidence suggesting that consumer demand for currency is Y2K-related. We do see what appears to be some stockpiling of currency by small banks in anticipation of consumer demand, but we don't yet see anything we could pinpoint as indicative of consumer demand for notes. Turning to the next page, the fourth chart depicts spreads on selected longer-term instruments to comparable U.S. Treasuries. I included this chart to emphasize the noticeable impact on September 8th when we announced our special year-end operations and again on September 14th when we had a meeting with the primary dealers to discuss the details of our operation and get some feedback. You can see that both of those events seemed to have had a pronounced effect, particularly on mortgage-backed spreads, the 10-year swap spread, and the Fannie Mae benchmark, but they obviously had hardly any effect on the corporate index. I want to be careful not to overstate the impact. Our announcement came just a few days after Labor Day when traders were coming back and were likely to bring more volume into the market. The backup in spreads that occurred in the thin markets of late August was going to unwind at some point in September absent some exogenous shock. We may have just provided a bit of the impetus to pull the spreads down a bit--and a little more quickly than they might have come down otherwise. But all in all we were pleased with the market reaction to our announcement and we received quite a lot of feedback on it. In the next few pages I have outlined some notes to try to take you through a number of issues associated with our year-end operations. Forgive me for this format, but I thought it would be the most efficient way. With respect to the expanded collateral, tri-party, and longer-term operations, we've now completed the legal documents. The basic operational procedures are in place and we expect in the next few days to be able to start the tri-party operations with a broader array of collateral. I want to be quite blunt that I think we are going to scuff our knees a few times as we try to figure out the best way to do this. We have different classes of collateral, and a number of dealers have urged that we provide separate pricing for each of the major types of collateral. At the same time, there is a difference between tri-party settlement and fed-wire settlement, and some other dealers want us to price that. We cannot do all of those things at once. It would just be an operational rat's nest if we tried to do all that. So we are going to learn something from doing and we will just try to get a feel for how we can slice the operations to try to let the dealers price as efficiently as possible. Another point is that I'd like to announce the pricing details of the Desk's temporary operations. By tradition, the Desk has not announced the lowest repo rate at which we operate nor any details of dealer propositions. The philosophy has been that we're managing quantities of reserves and that there is no operational--and certainly no policy--significance to this stop-out rate, or lowest rate at which we operate. However, given the intense interest in turn-of-the-year financing rates and to avoid rumors about rates paid on our operations, I'd like to begin announcing the details of rates submitted in our operations, both for repos and matched sales. It would be possible to limit these announcements just to those operations that span the year-end. But I think trying to maintain that distinction would be awkward and probably unsustainable given dealer interest in pricing other time horizons, not just the turn-of-the-year period. Moreover, a number of central banks now routinely provide this information and, taking a step back and thinking about it, I concluded that we also should provide this information. I would plan to include a review of this announcement practice in March of next year when we present the Committee with a complete review of our year-end operations. At the top of page 6 I have listed in detail what we propose to announce after each operation: the range of repo rates submitted by dealers; the total volume of propositions submitted; the stop-out rate, i.e. the lowest repo rate accepted; the volume-weighted average of repo rates accepted; and the volume of propositions that we accepted, and thus the reserves we injected. The latter we have been announcing for some time now. We would make similar announcements on the breakdown of information on matched sales used in reserve draining operations. And, obviously, if we have different classes of pricing, we would make the announcements for each class of collateral that we price. Turning to the standby financing facility in the options proposal, we received a number of comments from the dealers and we sent the dealers another revision to that program last Wednesday, which I circulated to you in memo form last Wednesday. I would plan to announce the details of those auctions also. Along with the results of the auctions, we would provide pricing information to the dealers, the range of bids submitted, the volume of bids submitted, the lowest bid accepted-which in the Dutch auction would be where all awards are priced--and the volume-weighted average of all accepted bids. Consistent with our practice of announcing the amount of reserves injected, we would also plan to announce the dollar volume of options exercised each day during the period of time when options can be exercised. We've received from the dealer community and from other market participants a fairly wide range of indications of the potential demand for these options. If one listened to the money market mutual fund managers and some of the big corporate players in financing markets, one would think we would be writing $100 billion or $150 billion of these options. Making a guesstimate on the basis of listening to the CFOs of dealer firms, the number of options we would write would measure roughly in the tens of billions, probably in the several tens of billions. If one listened just to the repo dealers, who are very picky and think these things are deeply out of the money and rather a nuisance, they suggest that we might need to provide an amount in the $5 billion to $20 billion range. So we have a full range of reactions from the market. Just in the last few days, in response to our revised proposal, we've gotten the sense of the demand going up a little even in the CFO community--the ones who really do want to take out the flood insurance. And I think we've structured this whole package on the premise that we're going to meet demand. We're going to sell enough for that constituency to be comfortable. So, we may need to revise up the amounts for our initial auction that I put in the revision last week and make those a little higher. Inevitably, we're going to need to adjust to the demand as it becomes evident in the first auction and over the series of auctions. But I'd like to be clear, since meeting demand is one of our objectives, that an unfilled auction is not going to be an embarrassment but one sign of success. We're not looking for a high bid-to-cover ratio here but rather the opposite. We're trying to meet the communities' demand. After we have launched the expanded collateral and tri-party operations and the stand-by financing facility auctions on repos, we will then turn our attention and the dealers' attention to the practicalities of late-day operations and possibly provide options on matched sale transactions. As I noted on the last page of my package, some dealers and some money market fund managers have continued to press us to write options on matched sales and reverse repos. The longer one scratches the surface of that, though, it is clear that the impulse behind that request is the desire of the money market funds to save a few basis points. It really isn't an issue of the functioning of markets; they'd just rather get a slightly higher rate of return. We will continue to listen to their views once we get the other pieces in place and will talk about this some more. But my interest has shifted to just trying to ensure that we have the flexibility to add or drain reserves on any day. Even some of the money market fund managers admit that if we are leaving the market roughly in balance each day, that really addresses their concern, even if we are not addressing their individual set of leaky pipes, if you will. But if demand for Treasury securities becomes sufficiently high to push the general collateral rate on overnight repos toward zero for a prolonged period of time, that could create a negative spillover on confidence and the functioning of financing markets. If that were the case, we might then want to consider undertaking matched sale or reverse repo transactions in order to add to the supply of Treasury collateral available in the market. But we'd look at the systemic issue of the functioning of the markets, not whether some money market funds feel they are missing out on a few basis points in their return. Mr. Chairman, we had no foreign exchange operations during the period. I will need the Committee's ratification of our domestic operations. I would be happy to answer questions on any aspect of my report, including our year-end operations.",2931
-fomc-corpus,1999,Thank you. Questions for Peter? President Broaddus.,12
-fomc-corpus,1999,"Peter, with respect to the last point, I remember that about a year ago-or maybe not that long ago--we talked about your securities lending program. Are you going to use that at all in the year-end program? Would you use that if you had a shortage of collateral?",57
-fomc-corpus,1999,"Earlier this summer we raised the amounts we're auctioning off through that program and it is in a sense on autopilot. Without getting too far into the arcana, that program actually is one of the things I'm worried about. We price that at a negative spread, 150 basis points off of the general collateral rate. If the general collateral rate were to trade down toward zero because of the scarcity of Treasury collateral, we could be running with a negative rate there, which we would have to think through. That's not somewhere we'd want to go. While that's on autopilot and will be available to the dealers, it really will not address a systemic issue--if, say, all Treasury securities were trading at such a premium that they were being financed at rates approaching zero. It helps at the margin, but it is not going to be an answer. That's one of the issues of concern. We are consistently providing supply through that program at predictable amounts, which we spent a long time designing it to do. The dealers are happy with that. If we divert our supply of Treasury bills into some intervention in the market, we'll then be crimping what we can put out through that structured program. So that's exactly one example of the issues that create complexities for us in the matched sale area.",258
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Don Kohn in the Bluebook discussion and you in your discussion of the weekly data referred to the rather positive impact, in terms of spreads and so forth, of your announcement of these year-end facilities to deal with Y2K uncertainties. But there has been a bounceback subsequent to that. What do we know about that? Is that Y2K-related or is it reflective of credit market conditions?",81
-fomc-corpus,1999,"I think two factors are involved that are hard to put one's finger on. Traders at many different firms have talked to us about the fact that our options program provided them some relief but in their minds provided the Committee with more flexibility to raise rates in November and December. As I say, they talk about that, but it is hard to find evidence of it in the fed funds futures pricing. The other factor is that as we approached September 30th, a whole host of contracts--like the 3-month Libor I showed on my first chart--then captured the year-end date. And all sorts of rates traded up in sympathy with that year-end pressure--some rationally and some maybe not so rationally. I think that had a general and pervasive effect on a lot of interest rate pricing. Those are the two stories that I can cite.",171
-fomc-corpus,1999,But do you really have a sense that some of the--I don't know how to characterize it--feeding frenzy or hysteria has abated a bit?,31
-fomc-corpus,1999,"The dealer firms certainly now feel a little more comfortable that they have a flexible tool or ""flood insurance"" to manage their balance sheets at the end of the year. I think that has put them in the position that they can't turn around and tell their customers, ""Gee, we just can't do anything for you."" It has forced that discussion, rather awkwardly, clearly onto price. That may be having a spillover effect in some of the interest rate markets. It is all about price now; it's not about availability. That's how I would put it.",113
-fomc-corpus,1999,"Concerning the issue of liquidity, is ""flood insurance"" the appropriate language? [Laughter]",21
-fomc-corpus,1999,I'm sorry. I got that term in my mind in late August and I should take it out again. I have some neighbors who had some serious flood damage who didn't have flood insurance.,37
-fomc-corpus,1999,Call it drought insurance.,5
-fomc-corpus,1999,"I would just add that I think one important reason the swap spread came down and stayed down was the announcement effects on the mortgage-backed securities market in particular, which is closely related to the swap market. But another reason was that the flood of issuance that had been anticipated for September really did not happen. And one of the things we're hearing is that issuers are a little more relaxed about the possibility of coming to market in October and November. So, we are hearing less of those stories about people believing they had to get all their financing done before September was over or at least before October was over. At the very least one could say that the frenzy hasn't gotten any worse. Things may have calmed down a little. But the spreads that you cited suggest that people are still being very, very cautious about extending credit--particularly unsecured short-term credit over the turn of the year. That is where the risks are.",183
-fomc-corpus,1999,"Further questions for Peter? If not, who would like to move approval?",15
-fomc-corpus,1999,Move approval of the domestic operations.,7
-fomc-corpus,1999,Without objection they are approved. Shall we move to the staff reports of Mr. Prell and Ms. Johnson?,23
-fomc-corpus,1999,"Thank you, Mr. Chairman. As we noted in the Greenbook, the information received since the last meeting has strongly confirmed the notion that the low GDP growth reported for the second quarter grossly overstated any moderating tendencies in the economic expansion. Indeed, the data available as of last Wednesday persuaded us to raise our sights regarding the pace of output growth over the second half--bringing us back up to the 3.7 percent Q4/Q4 total that we discussed in the midyear Chart Show. The incoming statistical data and the anecdotal evidence found in the Beigebook paint a fairly consistent picture of robust private domestic demand in recent months. Consumer spending has continued to rise at a fairly brisk pace, with the advance of light vehicle sales to around the 17 million unit mark underscoring that households remain confident enough to tap into their accumulated assets or borrow to finance their purchases. The same positive fundamentals seem to have buoyed the residential real estate market well into the summer in the face of higher mortgage rates. The initial estimate of August new home sales that was released late last week and showed them rising monotonically since the spring, likely was biased upward by some technical problems. But, that said, it's our assessment that demand for homes will be subsiding only gently over the remainder of the year and that a backlog of projects will help to sustain building activity. The biggest surprise of the third quarter was the apparent acceleration of business fixed investment. I say ""apparent"" because there are considerable gaps in the source data in hand, and these numbers can be quite erratic. But the strength of the computer and communications equipment industries seems pretty clear, and shipments from that sector likely paced a large increase in overall equipment spending. Finally, on the private spending side, the fragmentary evidence suggests that inventory investment picked up this summer from the very low pace of the second quarter. Still, by all reports, stocks remain comfortable, if not lean, overall, leaving room for further appreciable accumulation in the coming months. All told, then, there's no reason to doubt that domestic demand has retained substantial positive momentum into the fall. Moreover, as Karen will be discussing, improving foreign economies are giving an increasing lift to our export sales. Though some of the demand in the economy is leaking abroad in a very steep rise in imports, there's enough left over to this point to provide ample impetus to domestic production. Indeed, under the circumstances, one might reasonably ask whether our projection of a slackening in the pace of expansion in the coming year, with only a little further policy tightening, is realistic. In responding to that question, I want to begin by noting that, as impressive as the economy's strength has been of late, it does appear that the expansion actually may already have moderated somewhat this year. On our estimate, real GDP growth thus far this year has been about 31/2 percent, at an annual rate, versus the 41/4 percent increase registered in 1998 as a whole. Granted, this is a thin reed statistically--perhaps especially on the eve of a major revision of the national income accounts--but it's certainly not at odds with our longstanding expectation of deceleration. Furthermore, a little of the strength in demand we've observed lately could be a Y2K phenomenon, and thus inherently transitory. We highlighted in the Greenbook our hunch that the recent surge in computer sales was in part simply a more exaggerated version of the story of information system remediation and then lock-down than we previously had allowed for. Likewise, it's also possible that the economy is already beginning to feel the effects of Y2K-inspired precautionary stocking by households and businesses. That said, I wouldn't push either of those points very far. And I'd give at least as much consideration to what may be one of the major upside risks to our forecast of moderating aggregate demand in the intermediate term. As we've emphasized, that forecast hinges importantly on the flat path for equity prices that we have anticipated. To be sure, past, and what we have assumed to be prospective, increases in interest rates imply some restraint on activity going forward. However, that restraint--occurring against a backdrop of a depreciating dollar, a rebounding world economy, and a somewhat more expansive fiscal policy--doesn't seem great enough to outweigh the impetus to demand that would be supplied by a resumption of a stock market rise even remotely resembling the average performance of the past few years. As we indicated in the Greenbook, we can see a rational basis for anticipating an even weaker market than we've built into our forecast, but we've said the same in the past, only to be trampled by the bulls of Wall Street. From a policy standpoint, it would seem a central issue whether you want to bet on this recent correction being a major break-point in the market trend, or whether you will want to take the initiative yourselves to impose some added restraint on demand. Obviously, there would be no reason to worry about restraining demand if it weren't for the danger of an unsatisfactory inflation outcome. In our forecast, that danger is manifest. However, a forecast is a forecast; it's not a fact. And the facts are ambiguous at this point. The broadest measures of goods and services inflation have picked up this year, but if one parses the indexes, the story is the sharp reversal of oil prices. Indeed, some measures of ""core inflation"" have even slowed--for example, the CPI excluding food and energy. One must of course exercise some caution in engaging in such slicing and dicing in the effort to assess the underlying trends. It usually makes sense to try to filter out the noise in short-term movements in indexes like the overall CPI that stems from erratic elements like energy prices; but this becomes an increasingly risky approach when you do it over ever-lengthening time spans. At some point, you have to take the overall price measures as the better indication of the macro phenomenon of inflation. Put differently, over time the movements in energy prices influence those of other prices--either through their effect on production and distribution costs or as a factor influencing wages. In this regard, last year's sharp drop in oil prices probably contributed significantly to this year's favorable wage and price performance, and this year's even sharper run-up in oil prices is likely to leave its mark on wages and core prices in coming quarters. We can already see some of that effect in the behavior of intermediate materials prices. The PPI for core intermediate materials has risen considerably in recent months and the September jump in the NAPM index of prices paid probably bodes ill for the PPI measure in the near term. Items for which petroleum is an important input have played a significant part in this surge. But oil isn't the only factor. Another is the strengthening of foreign economies and the peaking of the dollar on exchange markets. These have brought a cessation of the declines in core non-oil import prices that we enjoyed in 1998 and early 1999. This undoubtedly has contributed to the pickup in ""pipeline"" inflation. If our expectations about foreign growth and the dollar prove correct, one can anticipate a further lessening of the disinflationary force from the external sector. That still leaves the crucial questions of productivity and compensation. Recent productivity developments have been pretty much in line with what we would expect, given the strength of output and our basic assumptions about the ""trend"" of output per hour. On the other hand, they cannot be said to rule out a still more optimistic view that structural improvements in efficiency are in an ongoing escalation, which might translate into a temporarily more favorable trade-off between unemployment and inflation. This is one of the issues that we shall have to review carefully when we get the revised NIPA data at the end of the month. As regards pay rates, the most recent average hourly earnings figures have shown no intensification of wage inflation--quite the contrary. But there have been some disturbing signs as well. On the benefits side, it's becoming increasingly clear that health insurance premiums are in a substantial acceleration. And the recent auto agreements, coming on the heels of the Boeing settlement, suggest that labor has gained some bargaining power in a tight economy. With Congress seemingly headed for an agreement to raise the minimum wage next year and this year's higher consumer price inflation likely to be showing through in pay decisions, there is in our view a likelihood that nominal compensation will accelerate. Thus, though there clearly are many interesting things going on in terms of technological innovations and other changes in the business environment, under the present circumstances we think the odds favor an upward drift in inflation over our projection period.",1732
-fomc-corpus,1999,"The basic message from the external sector this round is that economic activity in the rest of the world seems to be strengthening even more than we--and most other forecasters--had expected. There were several positive surprises concerning activity in the second quarter, such as small, positive real GDP growth in Japan and double-digit growth in some emerging market economies in Asia. Some signs to the contrary--for example in Brazil the recent weakening of production and court decisions just announced on Monday that appear to be at least a partial set-back in the fiscal reform process--have tempered our optimism. Nonetheless, on balance we have raised our projection for foreign output growth through next year and we expect additional firming in 2001. As described by Peter Fisher earlier, the yen/dollar rate fluctuated quite widely during the intermeeting period. In part, these fluctuations reflect swings in views on the current cyclical position of the Japanese economy and its outlook for growth over the rest of this year and next. The positive change in second-quarter real GDP reinforced the impact of the very large first-quarter number and contributed to a general reassessment in asset markets and among forecasters, including the staff. Moreover, some indicators that have been released since the Greenbook was completed suggest that we may still have been overly cautious in our thinking about the very near term for the Japanese economy. During August, industrial production surged and housing starts posted an unexpectedly strong rebound from July's steep decline. Unemployment edged down in August. However, the Tankan survey of business confidence, just released yesterday, seems to have partly disappointed the markets. Whereas there was a sizable, positive swing in sentiment for large manufacturing firms, outside this sector and for the total index the shift was much less. Importantly, firms in the survey continue to plan large cuts in fixed investment expenditures, consistent with their outlook for negligible sales growth. On balance, we judge our upward revision to the forecast for real output growth in Japan to be appropriate and we might even shade up the numbers for the rest of this year and both 2000 and 2001 in response to the additional data. Nevertheless, we retain the view that expansion will slow from its rapid first-half pace to around 1 to 11/2 percent over the forecast period. That assessment reflects our continued serious concerns about the underlying strength of Japanese domestic demand, particularly private investment, given headwinds from corporate restructuring, persistent difficulties in the financial sector, and possible loss of confidence as a result of yen appreciation over the past year. There have also been some additional positive indicators for near-term activity in Europe and Canada in the past few days. Canadian production in the third quarter appears to be above expectations. The latest survey data for the United Kingdom and the euro area reinforce the upward revisions that we made to their forecasts and suggest possible upside risk for real output growth in Europe. This recent evidence confirms a stronger picture for prospects in the industrial countries and complements the substantial upward revision we made to the Greenbook forecast for the Asian developing economies. With foreign output-aside from small fluctuations owing to Y2K--set to grow somewhat below the extremely rapid rate of the first half of this year but at a robust pace over the forecast period, we see U.S. export volumes expanding at rates much above the pace of last year and the first half of this year. The change in the relative cyclical positions of the United States and our trading partners is one of the factors behind our thinking in incorporating a depreciation of the dollar into the forecast. With other global problems attracting reduced attention, we expect that the large and expanding U.S. external deficits will contribute to market sentiment for declines in the dollar as well. With no basis on which to predict the timing of an abrupt dollar change, we have projected a moderate move down in real terms of the exchange value of the dollar spread over the forecast period. This dollar depreciation should add to the projected improvement in our export performance. As a consequence, we see the external sector as continuing to subtract from GDP growth, but at a much reduced pace, over the forecast period. We'd be happy to answer any questions.",826
-fomc-corpus,1999,Questions? President McTeer.,7
-fomc-corpus,1999,We keep hearing that the yen's appreciation is a result of expectations of a stronger Japanese economy. You just indicated sort of the opposite as far as the United States is concerned--that the change in relative cyclical positions is expected to cause the dollar to depreciate. Why the difference? Why is Japanese strength supposed to strengthen the yen and relative U.S. weakness weaken the dollar?,76
-fomc-corpus,1999,"Well, I think the directions are consistent. Generally speaking I would attribute it to expectations about the interest rate consequences of stronger activity in the one economy, not necessarily weaker activity in the United States. The relative change is all that is needed. If the rest of the world begins to operate closer to capacity, those countries will experience a rise in interest rates owing to demand effects and to possible monetary policy responses that will come. We've already seen rumors in the markets about action by the European Central Bank, with some people even speculating that it will come as early as Thursday. That seems to be very early in the process of some strengthening in Europe. But it's that expectation of relative monetary policy moves and relative interest rate changes that would feed through into the exchange rates.",152
-fomc-corpus,1999,Capital accounts are becoming more important than current accounts?,10
-fomc-corpus,1999,"Well, more important, less important. The current account goes the same way in that such a move in exchange rates would tend to lessen surpluses that are apparent in Europe and Japan and remedy to some extent deficits in the United States. So in that sense these factors are not in conflict but are just reinforcing one another.",65
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Karen, the recent Greenbook forecast of real GDP for China indicates growth of 3.4 percent in 1999 and 5.4 percent in the year 2000. Of course, those growth rates are much below what China had experienced in the previous five years or longer. Is that consistent with a gradual, as opposed to a sharp, decline in the value of the renminbi, continued reform of state owned enterprises, and further financial modernization?",93
-fomc-corpus,1999,"In our view, the Chinese authorities will make a discretionary decision about the renminbi. Because of their very strong reserve position and the fact that they are still running surpluses, we don't see market forces triggering an event there. So the decision that they will make at some point in time to introduce some flexibility in their exchange rate is something over which they have more control than some other monetary authorities might have. Even so, they may decide to make a one-step adjustment. We are not presuming to rule that out. It is just impossible for us to know whether that could be their choice and when they might actually act. So, for forecast purposes we tend to put in a smooth adjustment, but in no sense does that mean that we are betting that that is the way it will necessarily happen and that it will not happen in one or two steps. It is the political process within China that might lead to a quicker reaction, as slower growth creates pressures on employment and standards of living and political support for different factions in China. As the effort to continue reforms for the state-owned enterprises is in conflict with that--and to create a source of demand to offset perhaps the spillovers from the dilemmas with the state-owned enterprises--I think they would choose at some point to introduce some exchange rate flexibility. But exactly when and how is more than we are prepared to take a position on.",280
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"I'd like to pursue a bit more the question that Bob McTeer raised about the role of the current account. We certainly do hear discussion about the exchange value of the dollar moving in the direction of becoming weaker, given that the U.S. current account is in such a substantial deficit. Let me focus on Japan and give you a back of the envelope calculation, which I am sure you can correct, to convey the nature of my thinking on this. Japan, of course, has a large current account surplus. But my instinct is that to a large extent that reflects the fact that the economy has been so weak and, therefore, import demand is weaker than it otherwise would be. Let's suppose--and this is the back of the envelope calculation that you can fix--that Japan is operating at 10 percent below potential in terms of output, and suppose its propensity to import is 0.15. If Japan were operating at full capacity, imports would be 11/2 percent of GDP higher and its current account surplus would be a whole lot lower. And the case for the yen to appreciate would be weaker because the current account surplus would suddenly look quite different if Japan were importing a whole lot more. Obviously, this analysis applies to the United States as well. In part, the deficit in our current account reflects the fact that exports have been weaker than anticipated because so many economies around the world have not being doing very well. So, although it is true that revival abroad will raise interest rates abroad and its effect on the capital account will tend to weaken the dollar, it is also true that the demand for U.S. goods will rise quite substantially. Can you give any sense, just in the context of the Japanese example because that is where the focus of attention is right now, how much of the Japanese surplus is a consequence of the fact that their economy has been going nowhere for a decade?",381
-fomc-corpus,1999,"I hesitate to attempt to do the arithmetic on the spot. My guess is that we would probably say that 10 percent is too large an estimate of the output gap in Japan, in part because a whole decade of largely reduced capital accumulation has had a bearing on the size of that gap. And with labor force growth essentially zero at this point, we see Japanese potential as radically different from what it had been in previous decades-- perhaps as low as 11/2 to 2 percent or something like that. But let's say for the sake of argument that Japan could grow at 5 percent, the gap is 5 to 6 percent, and its rate of growth could rise steeply. It could be 2 or 3 years before they close the gap. Japan's propensity to import is not as strong as that of some other countries, and I think it is probably unit elastic on income. That would be my guess, so an increase in imports could well occur. The dilemma is that to the extent Japan can close the output gap, that feeds through and no doubt has a positive effect on the U.S. economy. Indeed, our stronger export picture in this Greenbook does lead to our net export contribution becoming almost zero by the end of the forecast horizon. But for Japan, the greater vigor that such a scenario--growing at 2 to 3 percent for three years, closing the gap, and then growing at potential--would impart to the domestic economy, would make Japan a much more attractive place for Japanese investors to invest than the United States. Thus, their investment in the United States would slow. So even though there is a reduced current account surplus, each and every month Japan will have to make net investments in the rest of the world. And that will fight the tide, as it were, of a Japan that seems to be the place that is gaining cyclical vigor but where interest rate and exchange rate adjustments nonetheless make it look like a good idea for them to invest abroad. So while it is true that these adjustments through the income channel in some sense add to the capital account problem, there is a need for interest rate and exchange rate adjustments that attract money out of Japan despite its cyclical strengthening. How all that balances out will depend a great deal on risk premiums, expectations, and investor preferences. And we do not claim that the number we've written down is in any sense the result of a truly analytical calculation. We have tried to indicate what we think is the general direction and we put a magnitude in there that will show through. But the econometric art of balancing these things and their effect on the exchange rate is in the Dark Ages somewhere.",538
-fomc-corpus,1999,Not for want of trying.,6
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,I understand that.,4
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Speaking of prospects for Japan, what is the current and prospective state of play of policy in Japan these days, including their attitude toward intervention, either unilateral or joint?",33
-fomc-corpus,1999,"Of course, that attracted much attention over the weekend of the G-7 meeting and the preceding week and was a factor in some of the buffeting of the yen/dollar rate that occurred. At the moment they apparently have no plans for intervention. Just today, for example, a Japanese official--I've forgotten exactly which one--was quoted as saying that if the yen were to stabilize in the 105 to 106 yen/dollar range, intervention would not be necessary. So that was the latest statement from them. And that's perhaps indicative of the fact that their propensity to talk is higher than might seem constructive. We see fiscal policy coming through with a supplemental budget large enough to yield the forecast that we have put in the Greenbook. We have a view of when it will happen and how much it will be, but that is designed to give us the forecast that we have here. We believe Japanese authorities have committed certainly to an additional supplement this fall. And we believe that they will have another next year, given the huge negative shock that would occur were that not to happen. We think that such a policy will have smooth sailing. The Bank of Japan seems to be considering some alternative monetary policy measures in order to get reserves out into the economy more effectively than with their present procedures; the latter leave a lot of excess reserves in the banks and in these broker firms called Danchi who just tend to sit on them. In their mind that practice is futile. There is no point in adding to those reserves; they are not doing anything. And the Bank of Japan has stated on several recent occasions that it does not want to do that. So they have suggested that they are considering some alternatives that might be available to them should they decide they need to find a way to ease even further. They have discussed perhaps doing foreign exchange swaps, which would be to some degree focused on the yen/dollar exchange rate. But those actions would be at the discretion of the Bank of Japan and its policy board as opposed to a decision of the Ministry of Finance. In the last couple of days, they have been leaving 11/2 trillion yen in excess reserves in the system instead of 1 trillion yen, which is something they said they would not do or did not see the point of doing. And they have been explaining those on the grounds of seasonal factors relating to the end of the half fiscal year. So in principle they could leave in 11/2 trillion instead of 1 trillion yen or maybe decide to implement some of these additional tools. I think they are at least trying to give the market the impression that there are other possibilities. They are stepping back a bit from the statement they made on September 21st that suggested there were no options and they were not thinking about any options. There will be another meeting of the policy board on October 13th. I don't know that we will get a statement from them that soon, but we might get one indicating that they are prepared to take certain actions if needed. That's what I would look for. At the moment the market seems to think that such a statement or such a modification in their policy course is a possibility.",637
-fomc-corpus,1999,"Are there any further questions for either of our colleagues? If not, would somebody like to start the general discussion? President Broaddus.",28
-fomc-corpus,1999,"Of course, the principal development in our region since the last meeting was hurricane Floyd. It did some damage in eastern South Carolina but, as I am sure you know from the news reports, the brunt of the storm was borne by eastern North Carolina and the coast of Virginia. Apart from the resort areas on the Outer Banks, I would describe eastern North Carolina as a moderately depressed, thinly populated, agricultural region. It contrasts very sharply with the central part of the state where so much is going on. So, while the farmers and others who were hit directly by the storm are really devastated in many cases, at the end of the day I don't think the overall impact on the District's economy is going to be that great. And any impact at the national level is likely to be relatively small. I gather the staff does have a slight increase in its housing starts forecast to cover the rebuilding, and I think that is about right. Apart from that situation, as far as the District economy as a whole is concerned, the story is basically the same old story I have been telling you all year. We don't see any signs of a significant slackening in demand in our region. We do a monthly survey of retail activity, and when we conducted that survey in August we detected a little deceleration in spending. But sales came back very strongly in September, so the August report was probably noise. Demand is strong essentially across the board, especially for automobiles but also for furniture and other durables, for soft goods--you name it. All of our directors and other contacts who sell to consumers, or know people who do, have stressed the extraordinary strength of household spending at this stage of the expansion. A lot of them refer to it as a household spending ""binge,"" and nearly all doubt that it can be sustained. Elsewhere, labor markets remain very tight in our region. We continue to hear a lot of individual reports of sizable wage increases in certain markets, though I wouldn't say that is the general pattern. The bottom line on the District is that if you are not under water, you are probably doing pretty well, at least for now--and maybe too well. In a broad way, as I read the Greenbook and listened to the staff's comments this morning, I think that description applies to the national economy as well. It seems clear at this point that economic activity in the third quarter was a lot stronger than we thought it was going to be when we discussed it at our August meeting. All indications are that household and business spending were truly robust across the board in the quarter. As we all know, a lot of that spending spilled over into imports, and that propensity seems to have intensified recently. The current Greenbook projects that real net exports will reduce GDP in 1999 by 11/4 percentage points as opposed to 1 percentage point at the time of our August meeting. Also, the exceptionally strong demand for cars and for computing and communications equipment has revived the manufacturing sector very nicely. The level of industrial production in August, I think it is worth pointing out, was 11/4 percentage points above the second-quarter average. That's about 4 or 5 percent at an annual rate, and that is a lot! So the growth of aggregate demand is continuing to outstrip the growth of potential GDP, it seems to me, further straining labor resources. According to the Greenbook, aggregate hours worked currently exceed the second-quarter average by close to a percentage point--that is not annualized--and that also is a lot. So for me at least, it is very hard to see how these trends can continue. As I see it, a couple of things principally have allowed the economy to sustain this boom situation to this point without any run-up in inflation. I doubt that this is news to any of you, but I think it is useful to point them out. Clearly, it's basically two things. First, higher productivity growth has enabled firms to pay the higher wages needed to attract additional workers in these very tight labor markets. If nominal wage increases at some point begin to exceed the growth in productivity, I think we would have a problem. We would have a profit squeeze that would likely produce some combination of higher inflation and declining stock prices. Second, imports, supported by capital inflows, have been a safety valve as I see it, relieving some of the pressure we otherwise would have experienced in labor markets. That valve would tighten if net exports were to improve, and we do have a projection of higher U.S. exports in the current Greenbook, given the signs of revival in Asia and Europe and the weaker dollar. I believe we need to keep a very close watch on both of these factors, which have been supporting our noninflationary expansion. If either gives way, it seems to me that the expansion will be threatened. And the perception in some quarters is that they are weakening; I think that has been a factor in the recent decline of the stock market. What I worry about is that things could unravel pretty quickly if these pessimistic perceptions were to build rapidly. And I don't think we necessarily have a lot of time to react once a process like that gets under way. So, bottom line, I think we need to be especially vigilant at this stage and in my view we at least ought to consider seriously a further preemptive action later in the meeting.",1090
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. In line with Al's comments, I'd say the most significant thing that has happened in New England recently had nothing to do with floods, thankfully, but with a golf game, the Ryder Cup tournament. We've seen the impact on the economy of that, but certainly there was an impact from national and international press coverage-not necessarily all favorable, I should add, for the New England District. The District economy overall continues to expand at a moderate pace. In fact, there are a few straws in the wind that suggest that growth is picking up and that wage and price pressures are as well. In particular, while manufacturing jobs continue to decline on a year-over-year basis, the August data showed an increase, which likely reflects an upturn in regional merchandise exports. Second-quarter figures show a rebound in exports, particularly to Singapore and the crisis areas of Asia and to Mexico. So this one rather weak part of the New England economy is starting to look brighter again. Indeed, anecdotes from our Beigebook contacts suggest that many manufacturers believe that the worst is over in terms of their trade with Asia and that the future bodes quite well. Labor markets in the region remain extremely tight and even manufacturing firms report difficulty in hiring and retaining production workers, a trend that is likely only to get worse as regional exports grow. The regional unemployment rate hit 3 percent in August, which equals its low for the expansion and is the lowest rate since 1988. Beigebook contacts in every industry reported shortages of workers at all skill levels, from technical to production to office and secretarial workers. Temporary employment firms contacted in September reported a continuation and deepening of earlier trends: solid growth in their business revenues, with a potential for much greater returns if an additional supply of labor could possibly be found. Temporary help firms are actually recruiting. Some are using signing bonuses but most are trying to tap new sources of workers such as retirees, the otherwise unemployed--including former welfare recipients--and even refugee populations. We also hear from temporary firms that they are doing some retraining of workers themselves. The tourism industry has been particularly hard hit by labor shortages. Members of the Bank's small business New England Advisory Council reported that restaurants and other tourist-related businesses in southern Maine were forced to close a couple of days during the week over this past summer because there just was not sufficient staff to keep them open. This situation became increasingly difficult in late August when college students left for school. Looking at the other seasonal industry, the ski resorts, one ski area owner reported that he paid the summer medical insurance premiums for key seasonal workers and their families in order to ensure that the workers will return this winter. Given the tightness in labor markets, the continued commentary in the Beigebook of moderate wage increases in the range of 3 to 5 percent remains a bit of a puzzle. Indeed, we are seeing some increase in manufacturing wages in the aggregate regional data and an increase in the rate of growth in the Boston CPI. In addition, manufacturing contacts report that input price increases are now more prevalent than decreases, which is a shift from earlier reports. There is also a concern about accelerating costs for health insurance. Businesses in the region appear to be fighting to retain control of costs and are linking compensation to revenues as much as possible. While it is hard to see it yet in the aggregate data or to reconcile it with the reports of moderate wage increases, one gets the sense that they may be slowly in the process of losing that battle on both the wage and the raw material sides. One area of the region where the battle clearly has been lost is real estate, both residential and commercial. The Boston office market is red hot, with very low vacancy rates and rising rent prices. It is not likely to get much better even with new construction since the vast majority of new space under construction is already leased. Beyond Boston, the suburban office markets are vibrant as well. Even the long depressed city of Hartford is staging a comeback, with lower vacancy rates and rising prices. Finally, the prices of residential real estate continue to climb at a faster rate than for the nation as a whole. Turning to the nation, we have no major disagreements with the Greenbook forecast. It is quite similar in shape to our own. Incoming data on the real domestic economy are considerably stronger than we and others had expected earlier in the year, and we see considerable momentum through the last part of this year and into 2000. Foreign growth is surpassing expectations, and rising exports are bringing manufacturing back to life after the Asian problem. Indeed, it would seem that all the temporary factors that acted to restrain price increases in the face of extremely tight labor markets and above-trend growth--declining commodity prices, excess world capacity, the strong dollar, declining health benefit costs--are now slipping away. Will increased productivity growth save the day? Can we really count on stabilization or decline in the stock market and widening credit spreads to rein in consumer and business spending? Even if we can count on productivity growth and stock market restraint, that really only puts us in line for what looks like a considerable upturn in prices next year, if one believes the Greenbook forecast. Should one believe the Greenbook forecast? Is this forecast of increasing price pressures more believable now than it was earlier this year, or a year ago, or even two years ago? My own view is that it is more believable because of the waning effects of the beneficial temporary factors and the beginnings of pipeline inflation that Mike Prell referred to in his comments. Moreover, we are clearly running the risk that the very strong rates of near-term growth could exacerbate rather than damp the imbalances reflected in unrealistic asset prices and in high and growing levels of consumer and business debt.",1164
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, the Twelfth District's expansion has gained momentum since early in the year. Following moderate growth in the first quarter, job growth picked up to a 2.8 percent rate during the second quarter and that pace was maintained in July and August. Economic activity has been expanding more quickly in California than in the rest of the District. This has helped California attract jobs and residents from other states and has spurred substantial gains in construction activity. Nonetheless, conditions outside of California have remained robust. For example, Nevada's economy has picked up steam recently with gaming revenues growing at their fastest pace since 1994. Rapid job growth has tightened District labor markets. After remaining roughly constant in 1998, the District unemployment rate has fallen by 1/2 percentage point so far this year. This is due to improved conditions in California where the August unemployment rate of 5.1 percent was the lowest recorded since 1969. Although the unemployment rate remains higher in the Twelfth District than in the rest of the nation, labor compensation costs have risen more rapidly in the West, with a strong upward trend evident over the past several years. Moreover, tight labor markets have prompted employers to find alternative methods for attracting and retaining workers. These methods include the provision of on-site benefits that conserve workers' time and enable them to spend more hours on the job. Despite strength in the economy as a whole, the District's high-tech and aerospace manufacturers face significant challenges. California's makers of semiconductors have begun expanding again, but employment in that industry remains below its peak of early last year. Manufacturers of computer equipment throughout the District have continued to shed jobs in recent months, with makers of disk drives being especially hard hit. Moreover, the recent earthquake in Taiwan interrupted that country's extensive semiconductor and computer equipment production and that has clouded the outlook for prices and the availability of computer components in the fall and winter. In the aerospace sector, Boeing is well on its way to its target of 53,000 job cuts by the end of 2000, having eliminated about 35,000 since early last year. Most of these cuts have been in Washington State, but the rate of reduction picked up recently in Southern California where Boeing is phasing out several models of aircraft that it inherited from McDonnell Douglas. In contrast to the computer hardware and aerospace sectors, computer software and service providers have been expanding employment and output at a torrid pace. That has caused total employment growth in the Seattle area actually to pick up in spite of the cuts at Boeing. It also has kept Silicon Valley's economy healthy despite job losses in the hardware sector. As a result, housing prices in Silicon Valley rose about 15 percent during the 12 months ending in July. Turning to the national economy, the data made available since we met in August certainly suggest that the supply shock of recent years has not yet run its course. Based on recent monthly data, we have revised up our estimate of third-quarter real GDP growth from 31/2 to 41/2 percent, similar to the projection in the Greenbook. This has combined with favorable news on the core CPI in August, which brought the most recent 12-month increase to just under 2 percent. This apparent supply shock makes forecasting especially treacherous, but our best estimate continues to show a modest slowdown in the rate of real GDP growth next year. Under the assumption of no further change in the federal funds rate, we now project a 3 percent increase in real GDP in 2000 as domestic demand slows in response to the recent tightening of monetary policy, combined with an assumed flattening of the stock market's trajectory. Growth at this pace would leave labor markets tight next year and continue to indicate upward price pressures. We are showing a 21/2 percent increase in the core CPI next year despite a slowing of GDP growth to just below trend. And with labor markets projected to be tight through the end of 2000, more upward price pressures would be forthcoming in 2001. Obviously, there are a number of important risks to this outlook. First, the modest drop in the dollar and a pickup in foreign growth could add significantly to inflationary pressures if they were to gain momentum. Second, the recent modest drop in equity prices reminds us that the economy remains vulnerable to a much larger stock market correction from today's very high levels. And finally, there is simply no way to determine the size or persistence of the current supply shock. A review of forecast errors in recent years indicates that this shock has consistently surprised us on the positive side. Although we don't know how long the supply shock will last, I don't think there is reason to believe it has ended yet. Its continuation, supported by recent data, reduces the chance of an inflation problem in the foreseeable future. Thank you.",971
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Although the overall pace of growth in the Southeastern region appears to have moderated, our economy still seems to be on a path that is slightly above that of the nation as a whole. Our important and thriving Florida tourism industry dodged the Hurricane Floyd bullet with only a modest temporary impact, including the closing of Disney World for the first time in its 28-year history. Perhaps I should publicly apologize to my friends in North Carolina for wishing the storm would go somewhere else and having it end up there.",106
-fomc-corpus,1999,I'll pass your apology along!,6
-fomc-corpus,1999,"Our energy sector finally seems to be responding to the higher oil prices with some pickup in oil and natural gas drilling, but the increased rig count has not yet had much trickle-down effect on the boat-building and other support businesses. Our contacts in that industry still say, however, that the major players in the business are giving higher priority to drilling in other parts of the world and are somewhat distracted by their mergers. The moderation in our region is coming from a couple of places. Single-family residential home building and sales have slowed measurably in all of our areas except Florida. Manufacturing activity is a mixed bag. A regional survey of manufacturers in August showed some slowdown in both current activity and in the outlook. This is reflected in our port activity, which is still very unbalanced, with imports continuing to flood in while exports have been slow to respond. One more time: Labor markets remain very tight. Some say they are even a bit tighter than earlier in the year. Unusually large wage increases still seem primarily confined to services at this point. As has already been commented on by a couple of others, reports of large health insurance cost increases have become more prevalent, and people in that industry say, ""Get used to it."" One of my Rotary Club colleagues told me yesterday at lunch that if we are waiting to find the flow-through effect from higher oil prices, he clearly sees it in the added cost of his asphalt business. Our staff members who talk to contacts just before each FOMC meeting were struck by, and remarked on, the noticeable lack of comments this time around about competition holding down price increases. That had become a very predictable message. And it gives me some pause to think that these competitive pressures, perhaps attributable now to rising prices for some competitive imports, may be abating and fueling the hope for some long postponed price increases. On the national level, as others have already observed, most of the current data surprises have once again been on the upside, and the overall strength of the economy has been much greater than I expected at the time of our last meeting. The Greenbook does a good job of highlighting where that strength is coming from. I found myself during most of the intermeeting period getting more comfortable with the notion that large productivity gains are very likely still ahead of us. In the absence of compelling data to make that case, we have pressed our 44 District directors for two months now for their sense of where those productivity gains are coming from and what is ahead. Almost without exception we are told that we may have seen only the tip of the iceberg in terms of the long-term potential of inexpensive computers and communications technology. We have been given examples of the opportunities that are still ahead for all kinds of businesses, large and small. Having said publicly that I was skeptical that we could fully count on the continuation of recent large productivity gains, I am getting more comfortable that higher productivity and, therefore, a higher rate of economic growth may be more sustainable than we thought. I also began to take some comfort in the unfolding inventory story. Here again, we have turned to our District directors for some business insights into what is really going on. Interestingly, the overwhelming consensus is that the recent inventory rundown is likely permanent. The reasons given are heavily dependent on the spread of technological advances in communications and the broad use of more sophisticated analytical approaches to inventory management. Equally interesting was the fact that most of the people we have been talking to about this feel that the process is not nearly complete. These insights suggest to me that we may not get large additional stimulus in the period ahead from inventory building and that we may be less burdened with an inventory overhang following any correction in the future. These comforting insights into productivity and inventory management, taken along with the direct and signal effects of our two recent tightening moves, were giving me the sense that we might have some breathing room with policy for the moment. However, the FOMC meeting preparation period this time has rekindled my uneasiness about what may lie ahead. I do not like the run-up in inflation forecast in the Greenbook. I do not like the same run-up in inflation forecast in my own staff's analytical work, including the signals of higher inflation given by our VAR model--even adjusted for the extraordinary energy price increases. And these forecasts based on the analytical work are not inconsistent with the unfolding story of continued strength in so many sectors of the economy. We see continued strong job and income growth, continued strong consumer and investment spending, persistent strength in housing, an improving outlook for exports, prospects for higher-than-expected government spending, and indications of price pressures in some recent data and anecdotal reports. Monetary policy may still be too accommodative, so we have a more difficult, more interesting, and more important policy discussion ahead this morning than I thought likely just a couple of weeks ago. Thank you, Mr. Chairman.",987
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. The regional economy for the Philadelphia District continues to operate at high levels, with tight labor markets and benign inflation. Consumers are spending freely. The market for homes is robust. Recent increases in mortgage rates have caused more homebuyers simply to shift to variable rate mortgages. Commercial real estate is also very active, with low vacancy rates for office buildings. Some uptick in rents is occurring, although given the amount of new building there is a consensus that the increases may be short-lived. Manufacturers report moderate growth, capacity appears adequate to handle the increase in demand, and output prices are stable. The labor market is especially tight for middle and lower level workers and mixed for professional people. For example, bank tellers are in short supply but senior level banking people are available. Accountants are in short supply but lawyers are in ample supply. [Laughter]",176
-fomc-corpus,1999,Does that mean the price is coming down?,9
-fomc-corpus,1999,"The stress in the health care industry is becoming widespread. Hospitals and medical schools are increasingly squeezed financially. Physicians are more amenable to unionization or dropping out of government insurance programs. Patients are turning to politicians more and more to seek relief from the ""deny and delay"" tactics of insurers. The frustrations associated with non-price rationing techniques are becoming more acute. The Philadelphia area is disproportionately dependent on the health care industry, and the fallout from health care stresses is clearly negative for the regional economy. Turning to the national economy, incoming information points to a strong second half with labor markets becoming even more stretched. Yet inflation remains tame. The longer this favorable combination lasts, the more I consider faster productivity growth to be a more important factor holding inflationary pressures down than the assortment of temporary factors. Nonetheless, there still is a large element of uncertainty about the outlook for productivity. This kind of uncertainty can be resolved only with time, tempered by policy actions motivated by an ongoing assessment of where the balance of risks lies. Against a background of continuing benign inflation, two recent increases in the federal funds rate, and more edginess in financial markets, my assessment is that the risks are sufficiently balanced to warrant a wait-and-see approach to policy for now.",249
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Seventh District economy, with the notable exception of the agricultural sector, remains on a moderate growth path with activity in most sectors at very high levels. A key driving force continues to be the strength in demand for automobiles and light trucks. Sales of light vehicles again were quite robust in September, as Mike Prell mentioned, and automakers have raised their sales forecasts for next year. Similarly, many small and medium sized manufacturing firms surveyed by our directors are forecasting good economic performance in their sectors for as far as two to three years ahead. Producers of consumer durables, such as appliances and lawn and garden equipment, are benefiting from a relatively strong regional housing market. The District's share of domestic steel production has increased significantly in recent months and solid performance continues to be reported by contacts in the printing and publishing industry. Some producers of heavy-duty trucks, paper and packaging, food equipment, and some housing construction materials reported a recent moderation in activity, but none voiced concern because activity has remained at very high levels. For example, orders for heavy-duty trucks are still considered to be good, although they have come down recently in part because order books are being cleared out, which is the normal practice at this time of the year. The agricultural sector remains weak, though there has been some slight improvement from what I reported at our last meeting. Over the past few weeks I have met with members from the Illinois Farm Bureau as well as our own Agriculture Advisory Council. Council members noted that dairy farmers are benefiting from low feed costs resulting from unbelievably good hay production and a good corn crop. Members also reported that they were pleased with corn yields except in Indiana where dry summer weather limited yields. Of course, with the low grain prices, grain farmers are still under a great deal of pressure. Moreover, egg, poultry, and hog prices are below the cost of production, which will lead to adjustments over the next 12 to 18 months that will result in reduced supplies and higher prices. In addition, farm equipment manufacturers have announced further production cuts that will result in layoffs. Labor markets remain tight, with scattered reports of shortages for entry-level workers, truck drivers, farm laborers, construction workers, and some management positions. However, contacts generally indicate that wage gains remain in the same range seen over the past two years or so; that is in contrast to the national data on average hourly earnings and employment costs, which show some moderation. The labor contract negotiations in the automobile industry have proceeded rather smoothly so far. My contacts at the major automakers describe the terms of the Daimler-Chrysler and the GM contracts as definitely more expensive than last time. Wage gains are 3 percent per year plus a cost of living allowance, and signing bonuses and pensions were improved. The new contracts place some restrictions on outsourcing, but they are not as severe as reported in the press. Automakers are required to send a letter to suppliers requesting them to be neutral on unionizing efforts, but the letter is not expected to have any significant effect. The new contracts are for four years rather than three years. Nonetheless, neither the automakers nor the United Automobile Workers expect the contracts to set a pattern for suppliers or for labor negotiations in other industries. In terms of price developments, there are some concerns about the future but so far a pickup in the underlying inflation rate is not evident. Several manufacturers noted that higher energy prices were likely to raise their input costs in the future. Sharp increases in health insurance costs, especially for prescriptions, were also noted. I had an interesting conversation with a national specialty retailer who has stores all over the country. He noted that higher construction costs are significantly increasingly his occupancy costs and resulting in 1 to 2 percent increases in his overall operating costs for new stores as compared with existing stores. For the most part, however, firms continue to have little pricing power and seek to lower costs through various means or increased labor productivity, or both. As one of the members of our Small Businesses Advisory Council put it, ""We continue to look for more efficiencies since no one is interested in paying us more money just because our health insurance premium rose 21 percent recently."" Turning to the national economy, our outlook is quite similar to that in the Greenbook. The strength of domestic demand has been very impressive since our last meeting. The third quarter appears to have been remarkably strong and some of the momentum should carry forward. The slowing in domestic demand that we continue to expect seems no closer now than at our last meeting. Moreover, while there clearly are downside risks, foreign demand continues to pick up and we are losing that safety valve. Given those trends, the labor market could tighten even a bit more, raising the risk of accelerating inflation. Of course, we've been forecasting an acceleration of inflation for a while and core inflation has continued to edge down. But, clearly, some of the factors that have contributed to that decline have turned around--the value of the dollar, the price of oil and other commodities, and health insurance premiums. One can now even point to at least some evidence of pipeline inflationary pressures in the PPI data. So, even with the policy actions we have taken to date, in my judgment the risks still seem to be tilted to the upside.",1060
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Tenth District's economy continues to operate at a relatively high level of activity. Our year-over-year employment growth was 1.3 percent, and that is from already high levels of labor participation and employment. Retailers have reported that sales are flat but at high levels, and they expect to continue to experience good levels of activity. Despite the slowing in employment growth in some areas, construction remains our fastest growing sector in the District. Energy activity in the District has turned around significantly--60 percent above the level in March--although it is still slightly below year-ago levels in terms of employment. In manufacturing, few jobs have been added but that is due in part to cutbacks by Boeing in Missouri and Kansas. Taking that into account, exports of manufactured goods out of the District are estimated to be at pre-crisis levels. So there has been a very strong recovery in that area. The District's unemployment rate edged down to about 3.4 percent in August and we continue to have tight labor markets. We hear an increasing number of anecdotal reports of wage pressures, especially in our metropolitan areas such as Denver and Kansas City. Consumer prices have shown very modest increases, although on the input side prices of some manufacturing and construction materials have edged up or have increased significantly, depending on the particular type of input one is speaking about. The farm economy, of course, is the area that remains weak. But government payments are keeping farm incomes and finances at good levels and recent legislation may put farm support payments at or near the record levels that we saw in the 1980s. Overall, though, the District is doing very well. At the national level, I have no major disagreements with the Greenbook. I understand and recognize that forecasting is a risky business in and of itself. I think it is important, then, to look at the circumstances we face at this time. Demand is very strong--some would suggest excessive-with GDP growth well above 3 percent when, in thinking about labor growth and productivity, potential may be in the 3 percent range. In many ways we are comfortable with that because inflation remains modest and productivity gains continue. But it is important to look at some of the other factors that are in play. The strong demand is being accommodated importantly by a trade deficit and a current account deficit that are at record levels. Personal saving rates are estimated to be in the negative range, labor costs are rising, and labor demand remains very strong. When we talk to business people about wage pressures, they give some indication that they're paying ""above normal"" to retain workers. But the definition of ""normal"" is moving higher. So we're continually seeing an increase in the so-called normal rate that gives me some pause. When I look at the demand in the economy in terms of both the consumer and corporate sectors, consumer debt is rising to record levels and corporate debt is increasing. I think we have to take that into account. Margin credit is rising to record levels as well. The question for us, of course, is whether monetary policy is accommodating this debt increase. We've had two recent funds rate increases and that is worth noting. But at the same time, the growth rates in the monetary aggregates remain at or above our projected targets. I think that has to be taken into account as well as we look at all these other factors. So, I believe our policy involves some continued upside risk for inflation and we should be mindful of that as we enter the policy discussion phase of the meeting.",713
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. To convey the story of our District it is often tempting to say, ""It's motor vehicles."" If motor vehicles are booming, the economy is booming. And as you all know, motor vehicles are booming. Like Mike Moskow, I was hearing reports from directors, especially those from steel companies, on how they characterized the auto contracts. They were talking about them as being generous or even extravagant. But unlike the views Mike encountered, they were claiming that the auto contracts were pattern-setting, and they are concerned about the effects. The AFL-CIO is putting out some talking points for the press about how generous this package was. That has been disturbing to small business owners because their employees see that. Besides, they live next door to some of the autoworkers benefiting from those contracts. One very large company headquartered in the District that supplies the motor vehicle industry and housing markets worldwide had what I considered a very strong report about increasing export demand combined with reduced import competition. It means that they have the best opportunity for raising prices they have seen in years. The instruction has gone out throughout the organization that they are to work to raise prices at any and every opportunity. They do see their own raw materials prices rising, but they also feel that they're going to be able to pass those increases along. Labor cost pressures continue to intensify. We hear the same kinds of stories about benefit costs increasing at double-digit rates that everybody has been talking about. The general sense is that, as far as health care costs are concerned, it has been bad in 1999 and it will be worse next year. People mention severe shortages of nurses, aides, and other health care workers. Those in the health care industry talk about the packages they have to pay to attract people or to retain workers. One executive at a small manufacturing company said it got hit hard by the increase in its health care costs--he used the same 21 percent figure that you did, Mike--and expects the increase in the next year to be higher if anything. As an indication of what's going on in construction, a comment was made that the demand has been so strong that union contractors are now subcontracting to nonunion firms just to try to get the work done. One small businessman in the mid-Ohio area, a supplier of luxury consumer goods --swimming pools, hot tubs, patio furniture, and the like--said they had a very strong June. They saw a leveling off at what they considered to be a very high level in July and August, but then in September sales took off like gangbusters. It was surprising to them, given the nature of the products they sell, to see September come in so strong. Another company that supplies the trucking industry said that it is expecting to finish out this year with about an 8 percent increase in sales and is budgeting for an increase next year in the 10 to 15 percent range. As we've done before at this time of year, we took a look at what has been going on in the race horse auction business. At Keeneland this year gross sales for September were up 37 percent and at $253 million reached an all-time record for any thoroughbred sale anywhere in the world. The average price was up 30 percent and the number of horses sold was up 5 percent. The prior record for the number of horses sold at $1million or more was 17. This year they sold 23, with one horse going at $3.9 million--the highest ever recorded. I wanted to probe a little deeper, beyond the issue of prices, to find out where the buyers were coming from. Were they all people from Microsoft or Wall Street? I was told that after a slump last year, there was a rebound in Japanese purchases. Also evident was a return of demand out of the Middle East. In total, where the source could be identified, foreigners spent $52 million in the September sales this year versus $32 million last year, for a large gain. Some of the issues that came up in our Advisory Council meetings caused us to look into Y2K planning in a different way than we had before. Companies, both banks and others, were saying that they didn't expect to have cash around for their own operations or to meet employees' needs for cash. They plan to send their employees to check cashing facilities. So we decided to contact the check cashing facilities and found none that is planning to add to its currency holdings. They don't view that as being the business they are in and they don't expect to do so. One simply said, ""If we run out of cash, we'll just close the door for a few days."" Another Y2K-related item that came from an Advisory Council member who is in the warehousing business caught our attention. He said that Proctor and Gamble has been moving through the area taking up additional warehouse space because it wants to accumulate several months of extra inventory by the time we get to December. Let me report one more example, in a somewhat different area, where the idea that there's no pricing power is becoming an increasingly quaint notion. We looked at tuition increases at public and private universities, and they are quite sharp. All of the public universities in Ohio that we contacted said that their tuition charges were up by 4 percent or more. The big three-University of Akron, Ohio State, and Ohio University--were all up 6 percent. They said they would have done more but several years ago the state legislature imposed a maximum tuition increase of 6 percent in one year, so they'll just have to raise tuition prices again next year. Carnegie Mellon in Pittsburgh raised the tuition for entering freshmen by 11.3 percent and that for returning sophomores, juniors, and seniors by 3.5 percent. On the national economy, it's nice to have a Greenbook forecast that final demand, or nominal spending, will decelerate somewhat next year and the year beyond. But we've had that forecast before and there is just nothing in the numbers to suggest that that is going to happen. Growth in nominal spending this year is not just a lot above the rate forecast a year ago, it has doubled. That may have been because of the pessimism coming from Asia. But even if we go back six months, it's much stronger than what was expected then. Again we have a forecast that the expansion is going to slow down. But that is just a forecast and I can't see anything in the recent data that supports it. There certainly is nothing in any of the monetary statistics or the credit statistics we're seeing. So I'm very skeptical that we've already calibrated policy to insure that nominal demand slows to a rate consistent with nonaccelerating inflation.",1354
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Economic growth in the Eleventh District continues to expand at a brisk pace. Employment growth in recent months has been running over 3 percent, well above the national average. The improved condition of our trading partners, especially Mexico, has been an important factor. The purchasing power of the Mexican peso is up by more than 10 percent since the beginning of the year. And other leading indicators of future Mexican economic activity, especially real oil prices and inventories, suggest that the expansion will continue. Rising oil prices are beginning to provide a slight boost to the District economy. However, I need to emphasize that the Texas economy was growing strongly in late 1998 and early 1999, when oil prices were hovering around $12 a barrel and were anticipated to fall still further. Texas is only about one-fourth as sensitive to changing energy prices as it was a little more than a decade ago. Rising oil prices have triggered a modest increase in drilling activity, although most industry insiders continue to believe, along with the futures market, that today's high prices are not sustainable. The Texas rig count has increased 43 percent since June but would need to increase another 45 percent to reach the level that prevailed the last time prices were above $20 a barrel. Most other sectors of the regional economy are doing well. Construction activity remains steady and retailers report good sales growth. The growth in demand for both computers and semiconductors has been stronger than anticipated a few months ago. The wage data in our region continue to appear benign, while the anecdotal information signals some upward pressure on labor costs. Some firms are hiring workers with fewer skills than usual. One contact reported that ""the unemployable are now being employed."" The rising tide appears to be raising more boats. We see this dramatically along the Texas-Mexico border where unemployment rates have fallen to single-digit levels in three of the four major metro areas that typically experience unemployment rates above 12 percent. The pull of a strong labor market in other parts of Texas and elsewhere in the United States has been working wonders on boosting economic opportunity for those at the bottom. We must not forget that this has taken place in recent years against the backdrop of declining inflation. Turning to the national economy, I'm looking for growth over the forecast horizon to remain in the 31/2 percent range that we've experienced so far this year. This may be on the optimistic side given the condition of financial markets. Most major stock market indexes have fallen by about 10 percent since our last meeting and there has been a noticeable pickup in yield spreads, both of which should restrain spending behavior by households and businesses. Perhaps our growing current account deficit is already acting to restrain future capital inflows, thereby reinforcing the tightened stance of monetary policy. I'm not foreseeing any significant pickup in inflation in the next year or so. Most broad measures of inflation, including the core CPI, the PCE deflator, and the GDP deflator, are running below 2 percent. The core PPI for finished goods has declined at a 0.4 percent annual rate over the last eight months, suggesting mild deflationary pressure. Commodity prices other than oil have stabilized or risen only slightly from their lows. Indeed, it is surprising how little the uptick in commodity prices has been, given the pickup in demand from Asia and Europe combined with the need to build inventories to deal with Y2K concerns. To me this suggests a continued relative absence of inflation in the pipeline.",698
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The major trends in the District economy remain intact, which is to say that outside of the agricultural sector the District economy is very healthy. Consumer spending is strong; auto sales are particularly strong. My casual observation, for what it's worth, is that one of the things going on in the automobile area is that an increasing number of households now have more cars than drivers. There seems to be specialization; people are buying cars for particular purposes. Some of that might be weather-related in our District; nevertheless, that's clearly occurring. Housing activity is also strong. Home prices in the Twin Cities metropolitan area have been rising significantly and home improvement activity is robust. I suspect it's limited only by the availability of contractors because in any neighborhood I drive through I see evidence that people are improving their homes by remodeling or adding to them. Employment growth in the District has slowed. I think that's basically because we're running out of workers. Apropos that, the unemployment rate in the Twin Cities metro area has dropped below 2 percent again, and there is a mid-sized city or two where the unemployment rates are even lower than that. The only other thing I would pass on about the District is that I expect to see some deterioration in credit quality at the banks, which is partly related to agriculture, of course. But beyond that, in talking to bankers it seems to me that they are still chasing the marginal customer. And sooner or later I think that will come home to roost. My view of the national economy is similar to my view of the District in the sense that I think the trends that have been in place for some time will continue. It seemed likely that the second-quarter slowdown in growth was an aberration and that turns out to be right. Inflation has remained modest. As we all know, if we take a step back and think about the last several years, the national economy has performed remarkably well. We've had rapid growth and modest inflation, which is quite consistent with what our VAR model was forecasting over that period of time. If this keeps up, I'm going to have to develop some confidence in that model! I would note that the model continues to forecast essentially more of the same. But I think the Greenbook raises the right question: Is inflation going to accelerate from here? Several people have commented, and I agree, that it depends a lot on how productivity performs in the future. I'm relatively optimistic about that, but I'll reserve the rest of my comments until later.",501
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, as I travel around the Eighth District I try to press people on what's new or what's different. There's usually a silence and then somebody will talk about the pressures in the labor market. Of course, that's not really new. So what I'm hearing is just a broken record. When I press people about the labor market, they say it's awfully hard to find workers, but they are finding them. At the end of the day they're hiring people, though they have to struggle to do so. They get people who apply for receptionist jobs who have body piercing in any number of places. [Laughter] They wonder how these people have the nerve to walk in, but they do. Apparently the employers end up coaching them or whatever and put them in those positions. So, those are the kinds of stories we hear. Essentially there is nothing new except a few amusing anecdotes along the way. My contacts at UPS and FedEx confirm the strong recovery in U.S. exports, particularly to Asia. They emphasize especially that the resurgence in activity in Korea and Japan is very clear though Malaysia and the Philippines still have problems. They say that they just can't get enough capacity out of Hong Kong--that the market is very strong there. Exports to Latin America are fairly flat; I get the impression from my contacts that nothing much is going on there. In terms of export volume, UPS at the beginning of this year was anticipating an increase of At this point UPS is projecting volume in the year 2000 to be over this year. So, UPS is anticipating in U.S. exports to those markets. I continue to hear stories about the difficulties of keeping staff levels up but, again, UPS and FedEx are finding ways to do it. On the Y2K issue, UPS is expecting some surge in both U.S. exports and imports--some shift of shipments that would have occurred in January into December for precautionary purposes. I think all of the things we're hearing along those lines make sense. The FedEx picture is very much the same, so I won't say anything specific about that. On the national picture, I think we can reasonably forecast that we will have an upward creep in pressures on inflation and an upward creep in the possibilities for productivity growth. It is somewhat of a race as to where those two will come out. I must say that I would be a lot happier if money growth were coming down during this period of rising interest rates. Obviously, with rising interest rates, we'd generally say that, other things equal, there would be less money demanded. Yet money supply growth is continuing above the growth of nominal spending, or at least what is a reasonable track for nominal spending. So I am certainly concerned about that. On the inflation outlook, besides the ""creeping"" part, whether it does creep up really depends critically on expectations. And as long as expectations remain very, very solid, as they are, I think we're not going to be faced with any sudden outbreak. On the other hand, we play the critical role in keeping those expectations where they are. Thank you.",624
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Second District's economy appears to be expanding at a rather steady pace despite intensifying price pressures in the manufacturing and construction sectors. Consumer price inflation apparently remains in check. Private sector employment grew at a 1.7 percent annual rate in August, down from July's robust 3.2 percent pace but matching the second-quarter pace. Retailers report that sales picked up in early September following a sluggish performance in August. They also note that there was a good deal less discounting in the third quarter than a year earlier. Tropical storm Floyd caused some flooding and utility disruptions in New Jersey and may have affected retail sales in mid-September. However, its overall effect on the regional economy appears to have been modest. The housing market remains strong, though new construction is being hampered by widespread supply shortages and bottlenecks. Single-family housing permits have picked up in the most recent quarter and double-digit increases in home prices are reported in New Jersey and Manhattan. Office vacancy rates in Manhattan fell to cyclical lows in August but rents, though still increasing, have risen at a less frenzied pace than last year. Purchasing managers indicate that manufacturing activity was mixed but generally strong in September following brisk growth in August. Price pressures intensified a bit in September. Banks report steady loan demand, increasingly tight credit standards, and few delinquencies. As for the national economy, while listening to my colleagues around the table, a sign outside The Mayflower Doughnut Shop in my native city of Chicago kept passing through my mind. That sign was entitled the optimist's creed and said, ""As you wander on through life, brother, whatever be your goal, keep your eye upon the doughnut and not upon the hole."" It seems to me that some people look at the current situation and say: We are experiencing the soon-to-be longest economic expansion ever, we have a 4.2 percent unemployment rate, we have the unemployable being employed, and isn't that terrible! I don't think it's terrible at all. I think it's great and wonderful, especially if we remember that our goal in monetary policy is to promote sustainable economic growth and that the tool we are supposed to use is price stability. With a year-over-year rate of 1.9 percent in the core CPI at the end of August, I think we surely have price stability. The forecasting models of all the Reserve Banks and of the Board's staff have been consistently wrong in that they have forecast inflation increases. The same models predict that there will be inflation increases in the future. I wonder if at some point we shouldn't put in a humility discount based on past performance. Perhaps we should realize that these forecasts, since they have been consistently wrong, are likely to stay wrong and that, therefore, the inflation we are concerned about is rather like Don Quixote's windmills--a fiction of our own minds. We've also been very worried about tight labor markets and yet the tight labor markets have not in fact been resulting in inflation, even though we continue to worry about them. What concerns me a great deal is that all of us speak in shorthand and the American people don't understand our shorthand. If we continue to talk about tight labor markets as if that is a truly evil phenomenon, we are going to convince the American people that what we believe in is not price stability, which is for the good of everybody, but a differentiation in income distribution that goes against the working people. That is not a good signal to be giving. I'm sure it's not a deliberate signal but I think it's one we are increasingly giving. The most recent data on the distribution of income show the top quintile getting 49 percent of the income distribution and the bottom quintile getting just above 3 percent. I don't think that's a time when the central bank should be giving a signal that it is opposed to possible increases in remuneration, especially if those increases in remuneration are financed by productivity. As I've said at previous meetings, we don't have to have a firm belief that productivity improvements are here to stay and that we are experiencing one of those once-in-a-century phenomena, although I'm increasingly inclined to think that we probably are. All we really have to decide is whether that increase in productivity that has been financing the improvement in the lifestyles of the less fortunate--with the low unemployment rate--is likely to continue for the period to which our current monetary policy applies, which is one to two years. I am very convinced that that will be the case. As we consider our responsibilities, we have to be very careful that the goal we're looking toward is price stability and not anything else. That price stability is supposed to bring about sustainable economic growth, and it is. In my view we should declare victory on what has been a very good piece of work and stop worrying ourselves into believing that we have to stand in the way of something that I think is very positive. Thank you.",992
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. As I said at our last meeting, and a number of people have said again at this meeting, we are clearly faced with the issue of whether or not inflation has reached an inflection point. Or to put it another way, we have to decide whether or not aggregate supply and demand are out of balance or becoming out of balance. Many people around the table have cited arguments that suggest inflation is reaching an inflection point. Those tend to focus on two things. One is that we have tight labor markets, which is normally a precursor to some inflationary pressures. The other is that some of the short-term factors that have held inflation at bay appear to be weakening. Among those are that foreign economies, which have given us the benefit of some of their excess capacity, are generally strengthening and that the dollar, whose strength has kept import prices low, appears to be weakening. All of this is occurring against a backdrop of what is clearly a very strong domestic economy and one in which many interest-sensitive sectors clearly are showing some strength. However, there are some strong counter-arguments to this view. One is that there has been capital deepening, which is continuing. We aren't sure when the run of productivity growth that we've benefited from thus far is going to come to an end. The second counter-argument--and there are weaknesses in it--is that we've had an unemployment rate below 4.5 percent for most of this year and some of last year and wage demands have not been excessive. We have some new evidence that wage demands may have changed in some of the union bargaining situations. On the other hand, we're not yet sure if that is going to flow over into pricing or is simply going to be a case in which dividends will not be as attractive as they have been. With respect to the rest of the world, it's certainly true that many economies seem to be healing. But Japan, I think, still has a way to go, and its recovery depends very much on the ability of its government to borrow and spend. And in some Southeast Asian economies the fundamentals certainly aren't very strong. Finally, as a few people have noted, long-term interest rates have indeed trended up. Now, one might argue that they've trended up but have had no impact, or very little impact, thus far. Putting all of this together, the risks do seem slightly out of balance. On the other hand, we should be mindful of the fact that there are many things we don't know and that our models have been inaccurate for quite a while. So I do think we are faced with a very tough choice later today. But at this stage it seems to me that the risks are slightly skewed to the upside.",552
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. At the last meeting, I argued that we should do what we're going to do with interest rates and, absent jarring new information, leave them alone until the turn of the year. Markets pretty much expect us to do that and I'm reluctant to dissent from this happy consensus. Nevertheless, while the information that has come in since the last meeting may not qualify as jarring, it is at least disconcerting, and I fear that we may be close to the time when we have to think about changing policy. Most of this disconcerting information is on the demand side and some of it is based on theories of how the economy is supposed to work. Let me run down the list. First, because of gridlock problems on Capitol Hill, government spending is likely to be stronger than we had thought. Second, consumption seems to be rising at relatively rapid rates and consumer sentiment is very high, even with a fairly significant stock market correction. Third, investment soared in the third quarter. The staff has responded to that development largely by shifting investment out of the fourth quarter, making the overall forecast only a bit stronger. But it may be that investment demand is just simply stronger than we had thought. Fourth, there's an increasing upward drift in core inflation. That's partly tied to an unreliable estimate of NAIRU, I know, but it is augmented by increases in commodity prices, the minimum wage, autoworker wages, health care costs, and other such factors. Fifth, the unemployment rate is forecast to get to a pretty low level. I recognize what Bill McDonough said and I agree that the downward trend in unemployment is great, but reduced unemployment has to be sustainable. And sixth, after the Y2K quarter, the flat funds rate version of the forecast now has demand growth averaging about 31/2 percent, which is rather strong for an economy that begins with already extremely tight labor markets, even with a change in productivity trends. But in some ways the biggest concern of all is the dollar. Let me spend a minute discussing that. Previously, when the United States was growing at healthy rates and most of our trading partners were dealing with recession, the U.S. trade deficit rose sharply. Then we didn't worry about imbalances. After all, our trading partners were getting extra aggregate demand and the United States was trimming aggregate demand. Or from the capital account standpoint, our trading partners were investing their savings at higher rates of return and we were getting a foreign-financed investment boom. But now all that is changing and our trading partners are beginning to recover. The goods and services deficit, which is analogous to the primary deficit, is $272 billion this year, 3 percent of GDP. In the Greenbook forecast it rises to $345 billion in 2001, 31/2 percent of GDP. If we make the reasonable assumption that foreigners will want to limit the ratio of their assets here to GDP, this goods and services deficit must at some point drop to zero. Actually, it may be even less than zero if our real interest rate exceeds our GDP growth rate and/or there is modest dollar depreciation. But 31/2 percent of GDP is a long way from zero. What can bring the U.S. trade deficit into balance? The happiest scenario is for foreign GDP to grow more rapidly, but unfortunately that scenario cannot help much. The staff already has trade-weighted foreign real GDP growth at a 3.4 percent rate over the forecast horizon and realistically it cannot grow much faster than that. I asked the staff to simulate an extra 1/2 percent of foreign GDP growth and that only cut the goods and services deficit by $10 billion in 2001--essentially peanuts. That's not enough even to eliminate the rise in the ratio of the goods and services deficit to GDP. Another happy scenario would be to get there by low U.S. inflation. In the forecast our inflation rate averages 1/2 percent below the trade-weighted inflation rate of our trading partners. That does limit the growth in the trade deficit, but it doesn't restore the balance. And it will not help at all if our inflation rate increases. Unfortunately for this calculation, our trading partners either have had serious recessions or have been very good at fighting inflation, with the consequence that their inflation rates are already low enough to largely close off this channel. Then we get to less happy scenarios. We could reverse the Asian crisis by having a domestic recession, which I doubt anybody wants. The only reasonable and effective way to right the balance, I'm afraid, is for the dollar to decline by quite a lot--far more than the staff has already incorporated into the forecast. We may consider this a ticking time bomb or merely the inevitable after-effect of the healthy, stabilizing move in our trade deficit during the Asian crisis. But there are two implications for monetary policy. The first is that it's even more important than in normal times to stabilize prices. The best way to get the desired change in our prices relative to foreign prices is price stability here, and we should promote that especially in adjusting to the international imbalance. The second point is that we should remember that the Asian crisis kept a headwind on the U.S. economy. That headwind was a force that tended to push down rates of growth of both aggregate demand and inflation--a nice safety belt should the economy overheat. Now that is over, or at least changing. The world economy is rebalancing and for the next few years that headwind is likely to be replaced by a tailwind that will tend to push up real growth and U.S. inflation. Just when we need low inflation more, it will become harder to achieve. All of these factors are on the demand side and in principle there could be a productivity boom sufficient to handle all that demand without rising inflation. But for that to happen, the rate of productivity increase must increase. That is, the second derivative of productivity must be positive, which is a difficult requirement. And if it is not met, the economy is in danger of moving to higher, perhaps accelerating, rates of inflation.",1238
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. As we've all been saying, the economy is resurging after its second-quarter slump and the inflation news continues to be highly favorable. It's amazing to me that policy formulation can become more difficult when all the news is good, but it has. Recent news has made our choices still more difficult. As I look at the available policy alternatives, it seems to me that a perfectly plausible case can be made for at least three different policies. And there is a perfectly plausible rebuttal argument against each. Yet choose we must, and I'll leave that discussion for the next phase of our meeting. Let me make two brief observations. Many supply side factors that have contributed importantly to this favorable inflation performance are shifting adversely. Cheap oil has gone away; bargain commodity prices are firming; the dollar has ceased to strengthen and has begun to reverse; world demand for U.S. exports is beginning to increase, further straining our labor force; and interest rates have been rising. Our strong productivity surge has obviously been of vital importance and appears to remain vibrantly in place. But going forward, we must judge if it's safe to depend on that almost entirely to keep rising cost pressures at bay. Secondly, the demand side looks increasingly frothy to me. Consumption is surging, even as consumers continue to run with a negative saving rate. And that, I think, introduces the danger of fragility. Consumer sentiment is rising again from a consistently elevated reading. We will shortly get a new reading, but to date new job formation continues strong, with many reports of an inability to fill job openings. We seem to be entering an inventory cycle of unknown dimensions. Capital spending remains very strong and purchasing managers report slower deliveries and higher prices. Housing activity appears to be slowing, but auto sales continue to fly higher and higher, defying gravity. This Committee has been correct for several years in allowing the economy free rein to grow, and I feel comfortable that we have responsibly timed a course reversal in recent meetings. Is it now time to rest on our oars a bit? Perhaps, and a strong case can be--and has been--made for that. But I think it's worth noting that the fed funds rate today is 1/4 point below where it was on September 29th of last year, the date of our first downward move. At that time the unemployment rate was at 4.5 percent and the level of real GDP was 4 percent lower than today. The rate of GDP growth in the third quarter of 1998 was 3.7 percent, slightly slower than the rate now anticipated in the third quarter of this year. We must take great care not to risk losing the degree of stability in prices that we have worked so long and hard to achieve and that has served our economy so well. Thank you.",571
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I agree with Governor Kelley that today's decision is especially challenging. The recent data for compensation and core CPI have been remarkably benign. On that basis it would appear to be a reach to argue that there is an urgency to tighten. But the Greenbook tells a different story, one in which the interactions of tight labor markets, above-trend growth in the near term, and the dissipation or reversal of favorable supply shocks result in a steady rise in inflation over the forecast period. The challenge in our policy decision today is to reflect our assessment of the balance of risks appropriately. In my view, those risks are tilted toward rising inflation. The inflation news has been so remarkably good in terms of both compensation and core prices that it's easy to lose sight of a key reality. Overall CPI inflation is projected to increase by almost 11/4 percentage points this year relative to last year. This contrasts with a decline of about 1/2 percentage point in overall CPI inflation last year compared to the previous year. This year nominal compensation gains have been restrained by last year's decline in overall inflation. Next year, in contrast, compensation will be boosted by the rebound in overall inflation this year. This development highlights what may be a fundamental change in the inflation environment. Instead of lower inflation blunting the force of low unemployment rates on nominal wage changes, rising inflation going forward is likely to reinforce the effects of tight labor markets on nominal compensation gains. The Greenbook inflation story has many chapters. I'm in broad agreement with both the qualitative themes and the quantitative implications. By my count there are nine factors that contribute to higher inflation in this forecast: (1) tight labor markets today; (2) tighter labor markets around the corner; (3) rising capacity utilization rates; (4) a rebound in nonoil import prices; (5) the secondary effects of the sharp rise in energy prices this year; (6) a rebound in benefit costs; (7) an increase in the minimum wage; (8) an upward trend in nonoil commodity prices; and (9) the stabilization in trend productivity growth. There is an important partial offset from an assumed declined in energy prices over next year and the following year. But the cards seem stacked. To be sure, this is just a forecast. You might say, ""Been there, done that!"" [Laughter] Maybe productivity will accelerate further; I cannot rule that out. Maybe NAIRU is even lower than the staff estimate; it could be. But I find the Greenbook story line compelling. If it is wrong, it is likely to be a matter of degree rather than direction. Perhaps it will not take four or more 1/4 percentage point increases in the funds rate to limit the rise in core CPI to 21/2 percent over the forecast period. But how likely is it that we would come to regret another move this year? The case for tighter policy always seems more compelling when near-term above-trend growth is projected to aggravate already tight labor markets. That is a one-two punch that should be resisted. And once again the data point to faster growth than previously expected. The outlook for growth was revised upward from the last Greenbook. Growth appears to have moved again into the above-trend zone and remains quite strong, though slightly below trend, in 2000 and 2001. This is the case despite the assumed tighter monetary policy and flat equity prices in the Greenbook forecast. Persistence of strong growth reflects a combination of still favorable financial conditions even with a tightening, flat equity prices, stronger global growth, a declining exchange rate, and increased fiscal stimulus. The generally favorite forecast paradigm since at least mid-1996, when I arrived at the Board, has been slower growth and rising inflation. One can say the same paradigm is reflected in the current forecast. But the slowdown in growth is now much more modest and the rise in inflation more aggressive. Instead of looking like a transition from exceptional performance to a modestly uncomfortable period of stagflation, the forecast is beginning to look a little more like a boom/bust scenario, with the boom part admittedly more evident than the bust in this part of the forecast. Thank you.",851
-fomc-corpus,1999,I believe coffee is ready. Let's break for coffee.,11
-fomc-corpus,1999,Mr. Kohn.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. Committee decisions at this meeting would seem to be complicated not only by continuing uncertainty about the sources of the unusually good economic performance of the United States and how best to sustain it, but also by the possible effects on policy strategy over the near term of the coming century date change. Mike and Karen have described the forces in the staff forecast that give a distinct upward tilt to projected inflation over the next few years, even with a moderate amount of policy tightening next year. Of course, the Committee may not share the staff's concerns, in which case many of these complications recede. Broad measures of prices and wages behaved remarkably favorably over the intermeeting period--more so than before the August meeting. These data, along with the sideways movement of the unemployment rate this year, suggest that to date aggregate supply has been sufficient to satisfy aggregate demand, even with the economy operating at a high level and demand expanding rapidly. If the Committee believes that this balance has a good chance of continuing--or wanted to wait a while to see whether it did--it may see preemptive tightening as inappropriate at this time, especially after two preemptive actions at the last two meetings, and hold policy unchanged. Moreover, in this environment, the Committee may be sufficiently uncertain that inflation is headed higher to have no priors about the predominant weight of information that will be coming in for a time, making an unbiased directive a good description of its policy inclinations over the next few months. While market participants generally do not expect a change in the stance of policy at this meeting, a growing number have come to anticipate that the Committee will adopt and announce a biased directive. Moreover, markets have priced in significant odds on a tightening in November. If a symmetric directive is taken as a sign that the chances are good that the Committee will be on hold until next year, prices in financial markets could rise some. To the extent the Committee's choices were seen as driven more by Y2K concerns than a downplaying of inflation risks, firming actions for next year should continue to be built into the yield curve, limiting the extent of the rally. Still, a more substantial upward turn in bond and stock prices cannot be ruled out. Even a limited rally might be counterproductive to the Committee's goals, especially so if the inflation risks were viewed as substantial enough to raise the possibility of policy adjustments over the next few months. The misimpression that policy was on hold might make it more difficult for the Committee to act later in the year or make market adjustments more wrenching when it did so. And a rally would lessen any check on spending currently being imparted in financial markets. This would be especially serious if the Committee felt that domestic demand might not slow sufficiently to offset the pickup in worldwide growth that is already raising commodity prices and exerting pressure on the foreign exchange value of the dollar. As Mike noted, incoming data over the intermeeting period also showed surprisingly persistent strength in various elements of domestic spending. The Committee's strategy for dealing with such developments might depend on its assessment both of the degree of inflation risks and of whether Y2K considerations might constrain its actions at its next meeting in November. Considerable information will become available between now and then that could be of particular help in shedding some light on the various uncertainties the Committee faces. On the demand side, signs should be more evident about how domestic spending is responding to the tightening of policy and the more general increases in interest rates and leveling out of stock prices of recent months. On the supply side, substantial new data on labor costs--including an ECI and two readings on average hourly earnings--should aid in getting a better fix on whether pressures on costs and prices are likely to be mounting. And the two employment reports also will provide considerable new information on the balance of supply and demand. But at the same time, those incoming data will commingle the effects of precautionary Y2K purchases and the more fundamental strength in demand. The picture in financial markets will likely be even more obscure: Markets are likely to be thinner than usual in mid-November, as many borrowers will already have satisfied their borrowing needs and extended the maturity of their obligations to avoid the year-end. Yield spreads, particularly for short-term credits, should be wide as lenders draw back from taking risks, and are unlikely to provide reliable readings on assessments of borrower risk and credit conditions beyond the century rollover period. Moreover, the reactions to policy changes will be harder to predict, especially if the change is unexpected. If the Committee thought Y2K-related distortions to data and effects on the fragility of market conditions would be a substantial barrier to raising rates before next February or to publishing an asymmetric directive at this or coming meetings, and also saw the inflation risks as quite substantial and likely to intensify over the coming few quarters, it might be more inclined to tighten at this meeting. A delay of several months under these circumstances would tend to accentuate the overshooting of the economy and require considerably more disruptive adjustments down the road, especially if perceptions that the Committee was on hold sparked a substantial rally in financial markets. Indeed, if the Committee thought there was a considerable likelihood that tightening would be called for in the near term, taking that action at this meeting and indicating that another move was unlikely for a while might remove one element of uncertainty from markets--clearing the decks, so to speak, for participants to deal with Y2K. To be effective, however, such a statement would need to be credible. Reference to completing the retrenchment from the 75 basis points of easing last fall might be helpful. But, tightening at this meeting would follow a ""truly symmetrical"" announcement in August, possibly making market participants difficult to convince that this time you truly were on hold. Nonetheless, the greater likelihood is that Y2K effects will not rule out action in November. While markets may be thin, spreads may not be much different than they are now if many people succeed in getting their financing done early. And the backup mechanisms put in place for the discount window and open market operations should provide the Committee with some assurance of protection against some of the adverse consequences of even more intense flights to liquidity and safety. As noted, those who should be most sensitive to these considerations, market participants themselves, in their commentary and their asset pricing have not ruled out a November tightening. And, not all incoming information will be equally muddied by any precautionary stockpiling for the century date change. For example, such activity is likely to have a greater distorting effect on spending data than on broad measures of prices and costs, given the normal inertia of the latter, except in commodity markets. Adverse information on labor costs or inflation could cause markets to build in expectations of Federal Reserve action. Failing to meet those expectations, without a good economic rationale, might itself raise questions about the Federal Reserve's lack of confidence in the functioning of markets through the century date rollover period. If the Committee believes it should be able to tighten in November if necessary, it might want to keep policy unchanged but consider whether to adopt and publish an asymmetrical directive. The market's response to an asymmetric directive would be conditioned in part by recent history. Given the Committee's evident reluctance to announce an asymmetrical directive in June, markets might interpret such a directive at this time as indicating that the Federal Reserve was seriously considering near-term policy action. The Committee might be able to temper this response with the wording of the announcement. Still, market participants could price in a little higher odds on a firming in November than they now have, with an associated backing up of interest rates. Such a reaction would not be a problem if, in fact, the Committee was concerned about inflation risks, because any firming of financial conditions would impart some restraint sooner. Notice that the Federal Reserve was poised to act would tend to increase the response of financial asset prices to incoming information and to policymaker statements over the intermeeting period. The risk, of course, is that the markets might build in a considerably greater likelihood of tightening than is consistent with the Committee's assessment of the economic situation, complicating your choices in November. If the Committee were uncomfortable with this risk, but also uncomfortable with the potential interpretation and market response to the announcement of an unbiased directive, it could try to find a middle way. The experience in June suggests that this will be difficult to pull off effectively. In that instance, markets were surprised to find out well after the announcement that some bias toward tightening was embedded in a symmetric directive. One approach to this apparent inconsistency would be to suspend voting on the sentence containing the bias by removing it from the operating paragraph until the Committee has a chance to consider the working group's recommendations next spring, but to convey in an announcement the Committee's assessment of the balance of risks to economic performance. By focusing on what many members of the Committee already saw as the important information it had to impart to markets, this alternative might have some attractive features both as a near-term stop-gap measure and as a longer-term solution to excessive weight being placed on the Committee's choice of very few standardized words about future policy. And, it could well have the desired effect relative to asymmetry of damping market responses to any announcement today and to subsequent information. Its possible drawbacks include the potential for adding to market uncertainties about your attitude toward policy biases and their meaning, and the risk that the precedent it set would narrow the Committee's options when the subcommittee reports back next spring. Finally, the Committee could vote for an asymmetric directive.",1927
-fomc-corpus,1999,Questions for Don? President Jordan.,7
-fomc-corpus,1999,"Don, you began your remarks and then referred again later to the point that aggregate demand and aggregate supply, if anything, look better balanced now than before. You cited, if I heard you right, evidence of balance in the data that have been released on labor markets and price markets. If I were doing assessments of risks to the domestic economy, let alone other risks in other places in the world as I once did, I would not have looked at these data as indicative of a finely balanced situation. In looking at the numbers for the past and at the projections for the next two years, I would note how much of nominal spending is consumption, the negative saving rate, the growth in credit, and the growth in money. I would examine all the variables one might want to look at and I would say that there are some serious questions about the stance of policy in this country, and I would say the economy is not well balanced.",187
-fomc-corpus,1999,I think one can differentiate between where we've been and where we're projected to go in that regard. I absolutely agree with your characterization of the forecast. It is not a balanced forecast. Aggregate demand exceeds aggregate supply. There are upward pressures on inflation. And implicitly in the forecast the unemployment rate needs to rise by a significant amount before demand is brought down. Growth needs to slow and the unemployment rate needs to rise before demand and supply are brought into balance.,90
-fomc-corpus,1999,"I'm not at all convinced that the unemployment rate has to rise, but I am convinced that the trade balance cannot stay where it is, let alone continue to rise. Other people said it better than I did: We need to see this trend reversed. At some point the United States needs to stop being a net absorber of world savings and become a net supplier of savings to the rest of the world.",80
-fomc-corpus,1999,"Looking back, one could say that aggregate supply and demand have been in balance, at least in total, as evidenced by what has been happening to prices. But there are elements of imbalance within that total. We've talked about this before, certainly, and one such element is the current account deficit and the trade balance. Another that people often cite is the level of asset prices--particularly the level of stock market prices, which seem out of balance with reasonable expectations of earnings and reasonable discount factors for risky assets. I think how that international imbalance is corrected is very key. Governor Gramlich brought up a couple of possibilities. One possibility that we modeled in a previous Bluebook--that would have been in July, I think--was that of a rise in U.S. saving rates. That was a relatively benign possibility. The stock market levels out and starts heading down in part because other places appear to be better places to invest than the United States. U.S. saving rates begin to rise as wealth-to-income ratios fall. We cut back consumption, and exports begin to replace that consumption. In that example we actually had a fairly easy restoration of balance within the aggregate demand sector and kept the balance between aggregate supply and demand as well. It's very hard to tell what will happen. Certainly the risks, as Karen Johnson and others have pointed out, would be that before saving increases in the United States, the willingness of others to ship their savings to us to accumulate more dollar assets declines. And we'd have what looks like an exogenous shift in the demand for dollars, putting downward pressure on the dollar. So there is a risk involved that would add to inflation pressures as well as to demand on the United States. But I think it is very crucial how that correction occurs and what is happening to domestic demand at the time it occurs. Rather than focusing on just that piece by itself, the context in which these developments occur has to be taken into account as well.",391
-fomc-corpus,1999,"Any further questions for Don? If not, let me get started. We have a very difficult set of issues to evaluate. The reason relates largely to what I see as growing evidence that the models with which we have been trying to explain how the American economy functions are becoming increasingly obsolete. It is not that the econometric structure of the models is inappropriate, but certain simple assumptions are made in their structure that are driving the results we observe and are creating at least the presumption that we are missing something important. Let me just say very simply--this is really a repetition of what I've been saying in the past-that we have all been brought up to a greater or lesser extent on the presumption that the supply side is a very stable force. The assumption has been that the working-age population is increasing at a fairly predictable rate and that trend productivity is growing at a fairly stable one percent annual rate. So, the presumption has been that we could look at the supply side as an independent variable in the complex interaction of our equations. That presumption generally has been not challenged largely because it has worked. But what people around the table have been saying is that third-quarter growth has rebounded quite substantially. And indeed it has. So has productivity growth. In my judgment our models fail to account appropriately for the interaction between the supply side and the demand side largely because historically it has not been necessary for them to do so. A crucial variable in our models is trend productivity growth, and the conventional procedure in our quarterly forecasts is to specify a constant trend rate of productivity growth. Yet, our official figures indicate that the growth in productivity has been moving up at an annual rate of around 1/2 percent each year since early 1997. On top of that, the review of 1995 to 1997 in retrospect is adding another 0.3 percentage point to the annual rate of growth in the most recent years. So what we have, in effect, is a set of trend productivity values whose second derivative has been positive. We have two choices. We can either project a continuation of the positive second derivative for productivity, or we can assume that the second derivative goes to zero and we will have a flat productivity growth rate. You may say that there are arguments for both. And indeed, as I will make a case in a moment, there are. But we have chosen the second automatically. As a result, we--as well as everyone who has the same structural model--have created a necessary outcome because of the algebra of our models. It is algebraically necessary for such models to project a rise in inflation if they incorporate a constant rate of growth in productivity and we have a very low unemployment rate, which presumably creates some pressure for wages to increase more rapidly than the trend productivity rate. I will stipulate that that is exactly the situation we are looking at and one that has always been associated with rising inflation. What is the case for automatically assuming that the second derivative of productivity goes to zero? Certainly the most recent productivity data--whether we are looking at growth rates calculated on a four-quarter moving average basis, a two-quarter basis, or any other basis we want to use--do not confirm that assumption because all those data indicate that the rate of growth in productivity has been rising. Then the question is why this happens. When we engage in growth accounting analysis in an effort to get to the bottom of this, we find, as Governor Ferguson said, that there has been a very significant increase in capital deepening. That means, in effect, that we are getting very substantial acceleration in the growth of the stock of capital--or, to be more precise, capital services. In addition, we clearly are getting evidence of acceleration in multifactor productivity, the residual in growth accounting, which is another way of saying that the synergies of productivity-enhancing investments are coming together and in the process are creating an acceleration in productivity. What this implies, if it is true, is that we should be seeing a fairly marked upswing in profit margins or, another way of looking at it, in the ratio of profits to compensation or to a variety of other measures that productivity may spill into such as real wages. I have raised the issue before as a hypothesis, and I think the anecdotal evidence as well as the data are increasingly supportive. That is, there appears to be as a consequence of productivity gains a very marked and at the moment persistent rise in expected rates of return on new plant and equipment. We can get that from a number of different calculations. We can get it from one of the calculations I like to use, which is a rough endeavor to weight changes in productivity and in capacity--the two major elements toward which capital expenditures are directed. We try to infer using some simplifying assumptions what part of the increase in productivity that we observe plus the increase in capacity is attributable to a specific year's capital investment. When we do that we find, not unexpectedly, a very significant acceleration in the rate of return for each recent year's capital investment. I don't want to get into the embodied technology problems, which are tricky here, but the most revealing indication that the rates of return are very high and rising is to observe the behavior of capital investment. It simply is not credible that we could be getting the type of boom in capital investment that we are observing, and one that is accelerating, if the plant managers who are in fact initiating these investments have not been getting the returns that they expected. We also see, as I have mentioned previously, a fairly continuous upward revision on the part of security analysts of their long-term forecasts for earnings. The last observation we have is for the month of September, and this number is at a record high. It is continuing to rise. I'm not saying that these forecasts are any good as far as earnings projections are concerned. Indeed, they're awful. They are biased on the upside, as they are made by people who are getting paid largely to project rising earnings in order to sell stocks, which is the business of the people who employ them. But the question really is how much the bias has changed over the relatively short period of time in which there has been this dramatic acceleration of the rate of return in all the measures, starting in 1995. After talking to a lot of these analysts, the answer as far as I'm concerned is that corporate executives, from whom they get the information they use for projecting the earnings of the individual companies, are telling them that they are consistently lowering their costs. And the way they lower their costs is essentially through labor-displacing capital investment. They don't use the term ""labor-displacing;"" they use ""cost."" But as we know, on a consolidated basis, 70 percent of cost is labor. And if we are getting an increasing amount of labor-displacing investment, by definition we are getting an increase in output per hour. If we are getting an increase in output per hour, we also are getting an increase in real income. And if we are getting an increase in real income, we are going to get an increase in personal consumption expenditures. Indeed, if we look at the whole pattern that is involved, there's a very interesting question of when structural productivity growth is going to be adequate to offset the growth that is occurring on the demand side. I would argue that we may be asking the wrong question, because it may well be that it's the productivity acceleration that is engendering the growth on the demand side, directly and indirectly--directly obviously through income and indirectly through the increase in capital asset values. That is, leaving aside the question of price-earnings ratios and whether there is a bubble, there is no question that a significant part of the increase in the market value of equities and other assets reflects the fact that productivity has accelerated. If we look at a breakdown of the supply side of the economy, what we end up with is that the total change in GDP is algebraically equal to structural productivity growth plus the growth in the labor force or the working age population or some similar measure. And leaving aside a number of minor issues such as average hours and statistical discrepancies--which are not unimportant--we find that the measure of the difference between the change in GDP and the sum of labor force growth plus structural productivity growth is effectively some measure of changing unemployment. And declining unemployment is very likely the consequence of the wealth effect, which is boosting consumption over and above what is normally expected of PCE out of income. Whether in current circumstances it will be possible to offset the increase in demand on the cost side, I think, is the wrong question to ask. That's because it is by no means evident that the current expansion is going to slow at all. The reason is that if productivity is continuing to accelerate and we put that into our econometric model, we are not going to get a slowdown in economic activity. We are going to get motor vehicle sales possibly of 20 million at an annual rate instead of, say, 17 million. We are going to get housing starts of, say, 2 million and not 1.5 million because gross domestic income and gross domestic product--leaving out the discrepancy, as I have indicated previously--have to balance. The reason I raise this question is that we are seeing a remarkable acceleration in economic activity now, which under our old regime where the supply side is relatively stable would lead us to say that this expansion is getting dramatically out of hand. But let us turn the thing around by supposing that instead of putting a flat productivity growth path into our models we put in a positive second derivative. That would mean that productivity growth would continue to increase. I submit to you that if we do that and it happens, we are not going to get a slowdown in economic activity. We will come to the next meeting and say that the markets are going berserk and that there is a consumer binge in progress. Indeed, that is what has to happen. The key question we have to ask ourselves is whether this is an overheated economy. Is it unsustainable and do we need to apply the brakes? I think the answer at this stage is that we don't really know for sure. If I were doing a forecast, I could make the case as to why I might put in a non-zero second derivative for structural productivity--just leave it there, run our projection, and then discuss it. Or I might do precisely the opposite, which is what Mike Prell and his colleagues have done, and keep the structural productivity growth rate flat and discuss that. I will submit to you that neither case is easy to make and that there is evidence to support both cases, as I think Mike Kelley has indicated. The presumption that, logically and necessarily, the only choice we can make at this stage is to use the flat productivity growth rate is unverifiable in my view. As a consequence, I think it is important for us to recognize that this is a very unusual period. It is extraordinary to have, as the forecast in the Greenbook, a trend productivity growth rate that rises from an annual rate of about 1 percent to 2.3 percent when in effect we already have nonfarm productivity rising in the last four quarters to a rate of 3.2 percent. If we look at the growth of GDP from the income side and use the household hours-worked data, which are then consistent with the unemployment rate, we get a still faster acceleration in productivity. The reason why the unemployment rate has been stable at 4.2 percent or thereabouts at a time when our productivity growth numbers have not looked all that significant relative to the rapid growth of output is that we are measuring productivity with hours from the payroll survey. But the payroll survey numbers have been rising at an average of 50,000 to 70,000 people per month in excess of the rise in the adjusted household data. Average weekly hours look the same, meaning that the growth in total hours from the payroll survey has been far more in the last two or three years after being closely parallel to that of the household survey data. As a consequence, if we did nothing but look at the household data--the unemployment rate, the changes in employment, and the hours data--we would end up with a far more rapid rise in productivity growth. So, I would say that the issue is not whether productivity can grow fast enough to keep pace with demand growth. We are dealing with a simultaneously structured economy in which the very forces that are driving productivity--primarily technology--are boosting the income side and the capital assets side, both of which are having an impact on the demand side. I think it is essential for us to recognize that we have this kind of interaction. If we don't, we very well could be looking at a benign expansion on the demand side that is being fostered wholly by increased productivity and wrongly view it as overheating. I am not saying that the evidence is completely consistent with the argument I have just made. Even with that argument, we still have a significant wealth effect, so that actual demand growth is in excess of potential supply; but both are rising very rapidly. All I can say is that at this particular stage the number of workers who are seeking jobs is decreasing. As that number shrinks, real compensation per hour obviously will move well ahead of productivity at some point, in which case inflation will take place. So, even under my assumption that the second derivative is positive, all that does is to prevent unit labor costs from rising for a while. But at some point, that process engenders greater growth in real compensation per hour than in productivity, which itself is accelerating, and at the end of the day we end up with acceleration in prices. The difference between the two scenarios is that the time frames are dramatically different. In one case we are looking at acceleration in inflation almost immediately as we get into the year 2000, while the other scenario delays the whole process--perhaps quite significantly. Moreover, it may very well be, as I think a number of us are expecting, that the wealth effect will finally simmer down because of the existence of a bubble that can't persist and that the two effects will converge and there will be no inflationary imbalances. I didn't mean to get into this long lecture, but after listening to what we've been talking about I have the uncomfortable feeling that we are misreading the economic signals. That said, let me go on quickly to a couple of other issues. Two or three of you mentioned money supply growth. As you know, if velocity is constant the desired money supply growth for zero inflation should basically be the sum of the growth in the civilian labor force, the growth in productivity, and the extent to which the CPI is biased upward. That comes out very approximately to an annual rate of about 5 percent. That rate is not all that far from where we are, especially after adjusting for Y2K. So, looking at policy from the money supply side, I'm not terribly certain that we are very far off. You will recall that the annual ranges selected are based on a 1 percent productivity growth trend. We decided not to put in an allowance for higher productivity and I think advisedly so. But let's not fool ourselves as to the fact that normal money supply growth is affected by the rate of growth in productivity. Finally, let me just say that there are a number of things that we can spot to know that the economic process is running into trouble. For example, if we see domestic operating profit margins begin to flatten out or decline--after adjustment for IVA, I might add--we would know that productivity growth is no longer accelerating and that would be a signal that something is going wrong. That would mean the second derivative is no longer positive, or we are getting down to the bottom of the employment barrel where real compensation per hour begins to move well ahead of even accelerating productivity growth. We see nothing of that sort at the moment. Growth in total unit costs is still declining. Growth in unit labor costs is still declining. We have productivity growth data through the second quarter for the total and through August for manufacturing. The latter is not a forecast; the industrial production and hours data that we already have now show that productivity is up quite sharply. I submit that we have a very complex set of problems to deal with, and we have to exercise a bit of humility in looking at the models we are employing to reflect reality, as a number of you have said. Because we have used a zero second derivative for productivity in every forecast, we have underestimated real economic growth and overestimated inflation. A lot of you have mentioned that. I submit that we are doing it again. That does not mean it's the wrong thing to do, but I do wish to suggest that there is an alternative assumption. The difference is whether you consider the first derivative to be positive and constant or you wish to add a second derivative that is also positive. I am saying that the most recent trend would argue in favor of the second alternative, which is just an extrapolation of what has been occurring. The question is whether that assumption is valid. I come to the basic conclusion that we really don't know at this stage. We do know, as Jack Guynn mentioned, that a lot of people in the technology area are saying that we are only at the beginning of a big productivity growth process. That's probably true, but it doesn't tell us much about the outlook for actual productivity growth over the projection period. If, for example, as Lew Gerstner of IBM has suggested, we are a third of the way through the investment in unexploited technology, we still have two-thirds to go. It is quite possible that the one-third has been moving at a very fast pace and that the two-thirds will move at a much slower pace. Under those conditions productivity growth will fall, even though the level of productivity itself continues to rise. We can't simply argue that innovation has a long way to go and conclude that productivity growth will either stay up where it is or go higher in this period. That's a non sequitur. It depends entirely on the time horizon over which that remaining two-thirds of innovation is exploited. Having gone on far longer than I had anticipated, let me just get to what I hope is the bottom line. My own judgment is that having done 50 basis points and having seen a very significant rise in corporate bond yields--as you know they are up significantly more than Treasuries--I think we ought to wait at this point to see what happens as a consequence of that rise. Nonetheless, if we do vote for ""B,"" I would prefer not to give a message that we are necessarily through for the year. I think it would be a mistake in the current context to leave the presumption in the marketplace that the Federal Reserve is quiescent and is not concerned about what may emerge over the balance of the year. Consequently, I would favor asymmetry, and I would have no difficulty with that if we were still on our old regime where we just voted for asymmetry and published our decision about six weeks later. In my view we have a secondary set of disclosure problems, which Don Kohn raised, that are unrelated to the policy decision itself. As I see it, we created a very difficult problem when we started to announce our symmetry/asymmetry decision. I wish we had not done it but, frankly, I don't know how to get out of it. But if we are going to be fully forthcoming in our accountability to Congress and to the electorate, we are going to do things that in hindsight we probably will wish we had not done. The answer is not to stop doing them. We have to live with certain mistakes that we make because they are irreversible. I am not arguing that we should not have tried; I just regret that we did not succeed. All this leaves us with a very tricky question. If we agree to adopt asymmetry, we could announce our decision in the usual manner. That is, we would just announce it. My preference, which is not a big one I must say, would be to try to convey the same message in a press statement as distinct from indicating very specifically that we are asymmetric. In a sense that would amount to publishing our consensus of where we think we are likely to be after the usual six- or seven-week intermeeting period. I don't like the implication that we are committed in one direction. In fact, we never did say we were going to publish our asymmetry or symmetry decision after every meeting. All we said was that we would convey information about important changes in our thinking. We can convey that sort of information, probably in a more sensitive manner, in the language of a press statement. Therefore, I would prefer, if we adopt ""B"" asymmetric, that we convey the asymmetry in a statement rather than in a direct announcement of its adoption, which has all sorts of bells and whistles associated with it. There is an alternative, which would involve announcing that we have decided to put the issue of symmetry and asymmetry aside pending the outcome of the Ferguson subcommittee's evaluation and recommendations. That essentially would say that we are not going to incorporate any reference to symmetry in our directives for a while. That's a possibility and members of the Committee may find that useful. Frankly, I find none of the three alternatives ideal. The ideal would be for us to have stayed where we were, but we are beyond that now and I don't think we have the choice of going back. So, I have two recommendations to put on the table. One is my hope that we can at this stage put our policy on hold for a while. With Y2K apparently coming under some control, even though I am wondering about the inventory data, I don't see a problem should we decide to move in November. I do think we would have a problem in December, but I believe the November window is still open. If we conclude then, after looking at the substantial amount of data we will be getting in the interim, that a further advance would be appropriate in November, I see no reason why we can't move at that time. I don't think our policy stance is far from where we want it to be. I don't think we are behind the curve. My impression is that the markets have interpreted our policy moves as preemptive and regard us as credible. I don't think we are on the edge of a major breakout of inflation. I see that as the most non-credible prospect at this point. A price erosion on the upside is definitely possible, but not one that occurs rapidly. The more likely thing that may happen, if something happens abruptly, is in the other direction. The stock market could crash and, as the wealth effect implodes, we actually could end up eventually moving in the other direction. At any rate, I would like to put ""B"" asymmetric on the table and request some views on how we should proceed with regard to making our decision public. If we choose an asymmetric directive, our alternatives would seem to be: (1) issuing a statement with no reference to symmetry; (2) explicitly announcing that we went asymmetric; or (3) temporarily removing the symmetry question from our directive and announcing that we are doing that pending what we will decide after the Ferguson subcommittee completes its work. Vice Chair.",4719
-fomc-corpus,1999,"Mr. Chairman, I very much support the ""B"" part of your recommendation. As for how we handle the verbiage, you and others may remember that I've tried to make the distinction in previous meetings of asymmetry being either strategic or tactical. If we publish some verbiage that describes our assessment of the balance of risks but do not say that we are asymmetric, I think we would in fact be making that distinction between strategic asymmetry and tactical asymmetry. I believe that is a good thing. I share your view that at the November meeting we will be fully free to do what we think is appropriate. At the December meeting, since it's so close to the Y2K date, we might not have much freedom. But as you are all probably aware, I think our December meeting is always too late. The markets are essentially closed for the year and, therefore, it's a very awkward meeting for us to take any action. As we plan meetings for the future, I'd be very much happier if we could move the December meeting date forward so we'd still have some functioning markets when we might actually need them. As for the third possibility of announcing that we're putting symmetry and asymmetry aside until Roger Ferguson's group reports, I rather like that. But I think it would be very, very difficult to explain in a way that would not come across as a bit ludicrous. So I share your view that the best thing to do is to have ""B"" with strategic asymmetry, which means that we would use verbiage rather than the word ""asymmetric.""",319
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Mr. Chairman, once again your presentation was a most interesting one. I felt as if I was riding a roller coaster for a while. [Laughter] Sometimes when you start out and begin to talk about accelerating productivity, I feel a bit of discomfort. But I've heard it often enough to know that if I'm patient and just sit back, we're going to end up pretty much in agreement. Nevertheless, I was holding on to my chair! [Laughter] But soon enough you came back and we agreed that there are tight labor markets and potential inflation risks. The story is that we have two scenarios out there. We have the Greenbook scenario with constant trend productivity growth. That's the one I'm comfortable with and that's why I am concerned about inflation risks. We have your alternative--one that's certainly shared by others around the table--that we could continue to see accelerating productivity growth. Clearly, the task here is to make monetary policy fully respecting that uncertainty. That might be a little too simple, though, because we might really want to ask the question of just how much of an acceleration of productivity would be required to overturn the increase of inflation that's in the forecast. At any rate, at times like this I like a maximin type of strategy that looks at each of these scenarios and pairs it with the wrong policy action to see how bad the outcome is. It seems to me that if we have the wrong policy with the constant productivity growth scenario, we have a rather unpleasant outcome ahead of us. However, if we begin to tighten and you're right that productivity growth is accelerating, it's just hard to see, given the fact that rates of return are rising so aggressively in the economy, that very much damage is going to be done. The bottom line here is that I'd be very uncomfortable if you had said that in light of your optimism about productivity the place to be was at no change with a symmetric directive. I do appreciate the leadership you provided in bringing us toward a consensus. We have a variety of options and I think I could live with a number of them. I have more than a slight preference for going ""B"" asymmetric and publishing it because the artifice of saying that we're not going to say we're asymmetric but use language that reflects our bias in that direction will seem strange to everybody. People will note that we used asymmetric language in our policy release but didn't want to use the word in the directive and will then worry about that. In this circumstance we have the benefit that the markets expect, more than any other outcome, the decision today to be no change asymmetric. There was a survey in Stone and McCarthy in which 46 percent of the respondents expected that outcome. That was the largest single expectation. I think that gives us some opportunity to get the job done with an appropriate announcement. But if the preference were for doing it and saying that we weren't going to vote on symmetry or asymmetry but reflect it in the announcement, I think that would be fine too. I would prefer not to adopt ""B"" asymmetric and say we will let people find out in six or eight weeks. That I don't like. But I think an announcement to the markets that doesn't mislead them about what our assessment of the balance of risks is today would be appropriate.",655
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you. First, let me say that with respect to your overall recommendation, I think you're right on ""B"" and on some indication of asymmetry. I would join with Governor Meyer in saying--and this goes back to a staff paper that came out earlier--that if in fact productivity isn't picking up, then we clearly want to tighten to bring supply and demand closer into balance. If it turns out that productivity in the second derivative sense is continuing to grow, as Governor Meyer said and as I think the staff paper also indicated earlier, that is consistent with a higher equilibrium rate of interest. So in a sense, as hard as the decision is, in some ways it's an easy decision. On the communications issue, let me first tell the Committee what the working group talked about yesterday because we asked ourselves what we should do in the interim before we complete our task. We started with the thought that perhaps we should simply no longer vote on symmetry or asymmetry. But then we were concerned that we would be doing two things: (1) prejudging an outcome and (2) putting us in a position where we hadn't really thought through the implications. We would be rushing through something and we wouldn't be sure how to communicate it and so forth. Other members of the working group can speak to this, but I think we were most uncomfortable with your third option--announcing that we're thinking about this and therefore aren't voting on symmetry or asymmetry. As to my personal preference, I would be inclined to go in the direction that Governor Meyer indicated, which is to be quite clear that we've voted for a bias toward asymmetry. If the consensus is that we don't want to announce the asymmetry but let words about the balance of risks cover it, then I would be supportive of that. My reason is that, as I think about what happened when we first went down this path, the market reaction to our announcing the asymmetry was not particularly jarring. On the other hand, the market reaction to a number of statements that occurred afterwards started to get more jarring. So I think we should learn the lesson accurately. It was not being transparent that was the issue. It was much more, for lack of better words, a case of needing a bit of discipline. So I think we could manage an asymmetry announcement if we are a disciplined Committee. I have a slight preference for doing that because I know--or maybe I should say I assume--we will continue to be disciplined. Thank you.",503
-fomc-corpus,1999,Third derivative! [Laughter] President Jordan.,10
-fomc-corpus,1999,"Thank you. Let me start first with this question of symmetry or asymmetry. I think everybody knows my views on that, but I'd just like to remind everyone that there was an action in August following our adoption of a symmetric directive on June 30th. So having a symmetric directive now doesn't preclude an action. My basic assumption is that there will be enough speeches and press commentary and quotes for us to signal markets if that's necessary. It seems to happen all the time. On the question of policy objectives, though, it's one thing when we have a high inflation environment--whether it's a high, single-digit inflation rate let alone a double-digit rate--to bring it down using rhetoric like price stability, zero inflation, and other terms like that. I think it's quite different when we have achieved an environment that by most statistical measures is somewhere in the zone at least of what those words are taken to mean. That makes it more difficult to try to find a way of communicating why we do things when we do. That's because I think we mostly would agree that taking anyone's statistical measure as an objective of policy and saying raise this, plus or minus, would be the wrong thing to do. I agree that we're having a productivity surprise that is very positive and significant. I hope it continues. And I'm very willing to base policy on the assumption that it's true. But I also know that it's not evenly distributed throughout the economy. Certain sectors or industries have very pronounced favorable productivity surprises--computers, telecommunications, and the like. Others have none at all, like the marina where I keep my boat, which raised my fee 10 percent. And some even have a negative--declining productivity--because of a decline in the quality of the labor pool they have to work with and so forth. All that is no doubt true. I also know that when there is a favorable productivity surprise, it's like a bumper crop. We're going to have a relative price effect. Relative price effects can come about either from a decline in the price of the products with favorable productivity surprises or an increase in the price of things with no productivity rise or, more likely, some combination of the two. The question is: Do we have overall monetary stability when some prices--on items where there is no favorable productivity--rise? Clearly not. Under a gold standard, all of the wealth gains are manifested and distributed in higher purchasing power of money; when you don't have price rises at the marina, you have price declines at the establishment where you have coffee. Now, overall, I wouldn't worry about all this too much except for the intermediation process. The way the credit markets work through the banking system, I worry about asset price increases in a relative price sense--relative to goods prices--when those assets are financed in ways that make those price rises unsustainable. And though I know that a second derivative can be positive for a while, I also know that the second derivative for nothing in the universe is positive forever. It must always go to zero if not negative. So I worry about the second derivatives of asset prices being positive--financed by the banking industry or pension funds or life insurance companies--and the prices getting to unsustainable levels. When that inevitable point comes where the second derivative must go to zero or negative for asset prices, people will find out that they've made a mistake and then we will have a credit crunch. We will have a debt/deficit cycle that becomes a problem. So overall monetary stability in the zone we're in still leaves us with a challenge. Even if the projection for the CPI over the forecast horizon were 1 percent and not rising, I would still say that we have a challenge of achieving overall monetary stability that is sustainable.",753
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I support ""B"" asymmetric. I want to talk about the disclosure issue in a minute, but let me first say that I think ""B"" is the right place to be. Even though we have all these uncertainties about both productivity growth and labor force participation, there is always the possibility that with very favorable surprises we would end up with lower inflation than the point forecast. And I don't think that's a bad outcome, given that I still believe we have a positive, though very small, rate of inflation in the economy in a trend sense. The way I want to look at this situation is to recognize that a lot of the stabilization work is being done by the market and eventually, I'll say, ""ratified"" by the Fed--but granting that the Fed has established the basis for such a stable environment. So we want our communication with the market to be such that as data arrive the market moves interest rates in the right direction. It seems to me that if we do not publish some notion of asymmetry at this point, we may well be indicating to the market that we think our policy adjustments are completed. I think that's the way the market would read it. Therefore, upward surprises or very strong data, which are what we expect to see coming down the pike, might not move interest rates in the way that would be constructive over the longer run. So I believe we do want to indicate that we are asymmetric, whatever language we use, so that we will get the right market responses as the data come in. If the data come in on the low side or are very benign, then we would get the response that we need out of that, too. In terms of what to publish, part of the issue--maybe a good part of it--stems from our statement that we would publish symmetry or the lack thereof from time to time when we felt it was particularly important. So I think some of the market overreaction, as we read it, has come about because the market believes we're really trying to tell it something. In my view, the best way out of this is to indicate to the market that we expect to have a statement after every meeting, although in practice many of those statements might be very routine boilerplate that doesn't really say anything. But we could try to take some of the special ring out of a statement by saying that we now intend to issue statements routinely after every meeting. That to me is what I would call the least unsatisfactory way of getting out of the situation we find ourselves in at this point. Thank you.",520
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"I agree with the ""B"" option here. Given the two moves we've taken and balancing the supply side and the demand side uncertainties, I think ""B"" is right. However, I believe we could undo a lot of the good we're going to do with a ""B"" decision by fooling around with this asymmetry and symmetry issue at this meeting. Our experience with announcing asymmetrical directives has not worked very well. It may work better in the future. I'm hopeful that Roger and his colleagues will come up with something that will make it work. But a formal asymmetric directive, when it is at best a confusing tool and at a time when we want to keep open our options because of uncertainties about what's going on in the economy, really is foolhardy. I feel very strongly that we ought not have a formal asymmetric directive because it will end up doing more harm than good. I view the use of words as more promising, however, because words can help us lay out a framework for our thinking about incoming information and policy. We may very well want to tighten in November, but we may not want to tighten. So I don't think we want to box ourselves in by the language that we use, and an asymmetric directive runs a big risk of boxing us in. Words, if carefully chosen, can give the slant that we want without loading the dice. And this is a time above all when we want the markets to know that, yes, we may tighten, but we may not. It is not a foregone conclusion.",310
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, before I came to this meeting I concluded from reading the staff documentation that the Bluebook didn't make a very strong case for tightening but that the Greenbook really did. The Greenbook projection may be wrong but I'm just not prepared to discount it to the extent that I think you have. I believe the comments that you made--I had to hold on to my seat as Larry Meyer did--were a very useful reminder. I really do. But at the end of the day, I think we're still just very, very uncertain about what's happening to the second derivative of productivity growth. So that's where I'm coming from. And against that background, what we have is very strong growth in domestic demand and continued tightening in domestic labor markets. I agree with Bill McDonough that we don't want to fight either growth or lower unemployment. But to be concerned about the possibility that demand growth is not sustainable is a legitimate worry for this group. Moreover, the Greenbook at least is projecting a rather steady increase in core inflation from about 2 percent this year to 3 percent in 2001. That strikes me as a plausible projection, given what is happening to some intermediate prices and given the kind of anecdotal information Jack Guynn offered about attitudes toward pricing power. We hear a little of the same thing in our District. And finally, I was interested in one of the alternative simulations in the Greenbook, which suggested that in order to hold the line on inflation the funds rate needs to rise another point. We probably still have some time before we absolutely have to act, mainly because our credibility currently is so high, but I just don't see any particular reason to delay. I doubt that it is going to get any easier to tighten policy and it might get a lot harder. There is one other point that I consider quite important, which I think Larry Meyer mentioned. Even if you are right about productivity growth continuing to accelerate, in that situation an increase in interest rates is not necessarily inappropriate. We need to keep that in mind. If, as appears likely, we don't raise rates today but stay with ""B"" and have an asymmetric directive, I have a very strong preference for announcing that. I would be very concerned about trying to do that with language. I have the same feelings a lot of other people have expressed, but perhaps I have those leanings even more strongly. To me it's a matter of credibility. If we don't announce asymmetry, I'd probably prefer the third alternative--just saying we've changed the rules of the game. But when we first adopted the procedure we're now using we indicated that if we had a material change that would interest the markets, then we would announce it. To go back on that at this stage of the game would be a mistake.",559
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. First, my students back at Michigan would be delighted to know that the term ""second derivative"" has crept into policy discussions. [Laughter] I compliment you on that! On your criticism of models, I'll plead guilty to thinking for a long time in terms of matching aggregate demand with fixed or predictable levels of aggregate supply. There is nothing engraved on a stone tablet that says that's the way to do it. I believe you're right that we ought to get out of the box, if you will, and think about new ways to view the economy. I will try to do that. It's possible that we are on the verge of some kind of shift not only in economic outcomes, but also in the way of thinking about economics. That's a reasonable point to put on the table. In terms of more immediate policy considerations, I'm not totally against waiting to see what happens. I would make two points. One is that it is harder to raise the funds rate than to lower it. Secondly, in my heart--even with what I just said about new ways of thinking about economics--I would be more comfortable with a higher funds rate than the one we have now, in case we're wrong about the second derivative issue. I make no bones about that. I'm delighted to see that there seems to be a growing consensus that if we have to act, we could act in November. It's important to get that on the table because I believe we might have to act in November. In terms of what we do today, I have a preference for what I'll call straightforward asymmetry. I'll give three reasons for that. The first is that these are the rules that we agreed to live by and it's not a good idea to change the procedures until we've gone through the process of considering various alternatives, which is a process we are going through. I don't think that boxes us in. It has been pointed out statistically that asymmetry has been followed by rate increases less than half the time in the recent past. So I really don't accept the argument that asymmetry boxes us in. As a general matter, I think we have a tendency to try to do too much with language and I would prefer the more straightforward approach of ""B"" asymmetric.",453
-fomc-corpus,1999,And announcing or publishing it?,6
-fomc-corpus,1999,And announcing it.,4
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I agree with your recommendation of ""B"" asymmetric. And I certainly agree with your statement that we should be humble about our ability to forecast the future. We've talked about this, and it's a concern that nags us all. I do want to note two points about the forecast that I thought were worth mentioning to this group even though we have some questions about the forecast. But if we accept the Greenbook forecast as it is, I thought it was striking that, in the alternative scenarios the staff presented, core CPI in 2000 varied by only 0.1 of a point, from 2.7 to 2.8 percent. There was virtually no difference in any of the scenarios. It's almost as if that is baked in the cake already in this forecast. Of course, the output varies significantly. The second point is that if we adjust core CPI on a consistent methodological basis going backward, that 2.7 percent forecast for the year 2000 will be the highest rate of increase in core CPI since 1992 when it was 2.9 percent on that adjusted basis. So, those are two points that really concern me as I look at this forecast. Of course, the forecast may be wrong, as we all know, but these are the points of concern. On the question of how to disclose this to the public, I participated in the discussion yesterday with Roger Ferguson's group and I described our effort as looking for the ""least worst"" option among the three that you presented. None of them is really satisfactory at this point. I do not think we should freeze the use of this tool between now and the time the working group's report comes out and we make a decision on what we're going to do. I have a slight preference for the recommendation you made for using language instead of the tool itself at this point. We made a mistake when we adopted this procedure. I just remember the problems we had when we used it last time. So I would have a slight preference for using language instead of the actual tool of asymmetry.",422
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, before this meeting I favored ""B"" but concluded that the time for raising rates is probably not that far off. As a result of the discussion today, I think it's even nearer but I still would favor alternative B. With regard to the symmetry issue, I must admit that I found the experience we encountered--in terms of market reaction to the May press release about asymmetry--so distasteful that it makes me want to try to use words to describe our views about the risks to the outlook. Clearly, we are not talking about a symmetrical situation. So I'd like to indicate a preference to use words to deal with this issue of risks to the outlook. But if we can't do that in an efficient way, I certainly could buy an announcement of asymmetry.",158
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Mr. Chairman, I truly enjoyed your lecture a moment ago and when you publish it I recommend the title ""The Rediscovery of Say's Law."" I think it is important for us to give Say's Law at least equal billing with Keynes's Law in these discussions. During the go-around there was a lot of talk about favorable but temporary factors that have helped us out on inflation and how a lot of those are petering out. That is true, but I still believe the fundamental factor that has been helping us is the high-tech boom, which is not petering out and is not likely to peter out any time soon. That's the general phenomenon. And the specific phenomenon is the Internet, which is changing the whole world as we speak. When I refer to the high-tech boom, I'm talking about high-tech electronics, which is helping the GDP numbers. But high-biotech is also raising our standard of living in ways that probably don't improve those numbers. It may even have a perverse effect on the numbers. Cures of diseases, the prevention of diseases, and shorter hospital stays all may generate less GDP than diseases would. Another huge development that is not over yet, even though it has been going on for almost a decade, is the collapse of communism and hard core socialism around the world. The fact is that many more countries and many more workers are now part of the world market economy than before. And even where it hasn't involved a lowering of the iron curtain, there has been a lowering of the protectionist curtain--in Latin America, for example. So we have a big, new, world out there with lots of new people. There's a lot of catching up to do, a lot of consolidations are going on, and a lot of privatization. And there is still excess capacity in many places around the world, including the United States. We've been adding to capacity faster than we've been using it. So I feel good about the prospects for further progress on inflation. I know that the current account deficit is large and that we don't want to rely forever on capital inflows to augment domestic savings. But if it is true that a strong country leads to a strong currency, we are the premier country in this revolution. I think it's not unreasonable to expect the dollar generally to remain strong and to continue to give us the benefits of a strong currency in our inflation battle. On the policy decision today, I suspect it's no surprise that I like the ""B"" alternative of no change. In my view we've had three tightenings already. The first was the announcement of the asymmetric directive, which probably did more harm to the markets than the two other tightening moves we've had. I do think we created a monster with our new disclosure policy and the way we worded that policy. But it is still very new, and everybody--especially market participants--knows it's not working well. So it would seem very reasonable to me for us to announce that because it's not working as we had expected, we are going to reassess it--we have formed a subcommittee to reassess it--and that until that subcommittee reports, we're not going to be releasing any information about the symmetry in the directive. I would go even further and suggest that the Committee decide to bury it later on. As Ed Boehne said and I believe Bob Parry said, we can still use words to communicate anything we want. But if we could use the opportunity to get out of the box we're in on announcing the directive, it would be a very good thing.",716
-fomc-corpus,1999,"Between words or announcing the decision on asymmetry, which would you choose? I'm trying to get a sense of where everyone is to formulate a proposal for the vote. You seemed to imply that of the three variations, the least desirable is to publish the asymmetry. A second option would be to have asymmetry and not publish it, just use words to describe it. The first is what you're opposed to?",82
-fomc-corpus,1999,I'm for the third--to suspend our use and thus announcements of symmetry or asymmetry. I think it's a tie between the first and the second options. I'll go along with whatever you decide to do on that question. But I think we will miss a great opportunity to get rid of that bogeyman if we don't do it now. It would be a great time to say this is not working the way we intended and we're going to study it. And all we have to announce today is no change in the target fed funds rate.,108
-fomc-corpus,1999,I'm not sure there's a majority for that position at this stage.,13
-fomc-corpus,1999,"Well, that was before they heard my eloquent argument! [Laughter]",16
-fomc-corpus,1999,Touche! President Hoenig.,7
-fomc-corpus,1999,"Thank you, Mr. Chairman. I listened to your arguments with great interest, and they are very persuasive. At the same time, my own view is still that we should move the funds rate up 1/4 point now. While I believe productivity is truly increasing, as I said earlier, I think there are other important imbalances in the economy that, if addressed now, will result in a better economic performance in the long term. We should take advantage of that opportunity now. Also, to the extent that the productivity increases are positive in terms of the second derivative and are continuing, we can act now to address some of these other imbalances and not affect those strong gains. We should keep that in mind as we consider monetary policy today. On the issue of symmetry, I personally would like to leave the directive symmetric. My reason is that I don't think there has been a major change in our attitude. The last two times we met, we increased rates. We're obviously alert to the possible need for more firming. We're aware of it today. Because we don't take an action today doesn't mean we're not as concerned as we have been, especially as the data come out. However, if asymmetric is the way the Committee wishes to go, I think we're in the stew here in terms of announcing. The law of unintended consequences has manifest itself on this and we are somewhat bound to announce how we are leaning, although I will tell you that our original announcement does not say that we're necessarily going to disclose our decision on symmetry. But that's not what many people read. So I think we're compelled in a way and I would have to suggest that we disclose our decision if we go asymmetric. But I think we'd be wise not to go asymmetric.",351
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I, too, favor alternative B. Let me take just a few seconds to say why. First of all, as I said earlier this morning, I am relatively optimistic about productivity, and that gives me some confidence going forward. Secondly, that optimism assuages some of my concerns about inflationary pressures. I simply don't think the case for a significant acceleration of inflation is all that convincing at this point. And thirdly, I do believe we have a little time. We have moved the funds rate up. The markets, especially long-term markets, have moved rates up even more. I think we can wait to see what all that brings. So, I favor ""B."" On the symmetry versus asymmetry issue, normally I favor symmetry, and that's true today. But it's not a big deal to me. If we go asymmetric, given the procedures we have set up, we have to say something about it. I would come out about as Ned Gramlich did. Probably the least bad alternative under these circumstances is just to publish it. Also, I think the markets--or some participants in the market--are probably expecting asymmetry. Several people have commented along those lines. And it's probably not a bad idea to remind people that the door is not closed as far as the November meeting of the Committee is concerned.",273
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. As I listened to the go-around, I found myself identifying with those who would have preferred to go ahead and tighten today. But I am comfortable supporting ""B"" asymmetric, basically for three reasons. First of all, both in the context of what we've talked about here today and also for a number of other reasons, I'm delighted that the window still appears to be open for action in November. Secondly, there is an abnormally strong flow of data that will be coming in over the relatively brief period of time between now and our November meeting, and that should be of great benefit to us. Thirdly, how we do it is part of the reason for supporting ""B,"" in my opinion. We talked about this yesterday in Roger Ferguson's working group, and I am beginning to feel--I don't think I was alone in this view--that it could be very counterproductive if we did something in a new way today. It would be ad hoc. We haven't really thought it through in terms of where we're going or where we want to wind up. But more importantly, the market will not be prepared for it at all. It would introduce an additional complication at a time when we don't need any additional complications. It could induce considerable confusion, possibly volatility, and unfortunate speculation. So I'd be very careful about doing something new and different that was a departure from our past practices. I think that would be highly undesirable. The market is only now beginning to become a little more comfortable with the procedures we have recently adopted, and to change them on the fly scares me. What then does that call for? This is a change in the directive and it represents a change in the Committee's central thinking if, as I believe, we have a consensus for ""B"" asymmetric. And I think the most straightforward way to handle this would be to adopt an asymmetric directive, announce it to the public, and append a brief explanation to our statement.",396
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. I, too, could have been enthusiastic about increasing the fed funds rate by 25 basis points at this meeting and going with a symmetric directive. That would have conveyed to the markets our concern about the potential for a pickup in inflation--recognizing all the problems associated with forecasting--given the strength of the data and the unwinding of some of the temporary factors. And it would have cleared the decks, in my view anyway, for year-end. That said, I can support ""B"" for some of the same reasons that Mike Kelley just noted. We may have some time. Certainly, inflation is not going to jump up tomorrow. There is the ongoing question about productivity. I've spent a long time in the Federal Reserve System associated with the operations side; and when management gets involved, it's usually around the issue of productivity changes from improvements in operations. In my view, anyway, those occur in step functions. We make a big change and consolidate for a while, reorganize, and get the benefits out of the change and then go forward from there. Not very routinely does productivity keep going up in a constant arc nor do we routinely get year-after-year continued positive second derivative changes. You mentioned yourself that it will come to an end sometime. We don't know when. But we probably do have some time, because productivity improvements seem to have a momentum that is deeply engrained in the way the economy is running right now. It's also good that action in November continues to be a possibility. So I can support ""B."" I also feel that if we start now to change the process by which we communicate asymmetry --and I do think we should communicate how we feel about the balance of risks--the outcome won't be beneficial. It will introduce another level of surprise and uncertainty into the market. It may be that the markets reacted badly to the announcement of asymmetry last May, as we have discussed. But I'd rather stick with that language until we have a firm view on the way to go forward and can communicate that with some confidence. So, I'd go along with Governors Gramlich and Kelley and others around the table on ""B"" asymmetric, using the customary language.",443
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Mr. Chairman, I identify most closely with the comments Cathy Minehan just made and those of Ed Kelley and Ned Gramlich earlier. In my earlier comments, I indicated that I came into this meeting with the notion that I would be comfortable with another modest tightening move today. Even after discounting our forecast and our genetic tendency to worry--and even factoring in your reminder about productivity--I think one could still make the case that another modest tightening would perhaps be the cleanest, most honest, most expeditious way to get policy to the appropriate place. But I can be comfortable with no policy action today. As my colleague across the table reminded us last week, and as others have commented, the world is not going to come to an end between meetings--especially if we're open to considering a policy action again in November. I also came to the meeting thinking that the worst of all worlds was some kind of asymmetric directive. As Don Kohn first ticked off the alternatives and then you ticked off the alternatives, I was thinking that if there were a box labeled ""none of the above"" I would have checked it because none of them feels right. Having said that, and having listened to the discussion, I have changed my mind a bit during the course of this session. My sense is that we see some inflation risk, and I think we ought to go ahead and communicate that concern. I, too, am uncomfortable with the notion of introducing still another way of trying to convey that to the markets. As badly as we handled it the first time, I would rather try again very straightforwardly to see if we can get the words right this time to explain an asymmetric directive and be done with it. Thank you, Mr. Chairman.",351
-fomc-corpus,1999,"This has been an interesting discussion. I must admit, as I said earlier, that I would have preferred to go asymmetric and put out a press release but not announce our decision with regard to the asymmetry. But I find the arguments in the other direction actually quite convincing.",55
-fomc-corpus,1999,So do I.,4
-fomc-corpus,1999,"I am now inclined to announce the asymmetry. The current members preferred that option by a 5 to 4 margin, but if we include those who are not currently members of the Committee, there is a very clear majority in favor of announcing the asymmetry. On an issue such as this, which commits the Committee in a broader sense, I believe we should take into consideration the views of the nonvoting members even if that is not legally required. So what we will vote on at this point is ""B"" asymmetric with the understanding that we will publish our decision. Would you read the directive language?",123
-fomc-corpus,1999,"Yes, Mr. Chairman. I will be reading from page 13 of the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 51/4 percent. In view of the evidence currently available, the Committee believes that prospective developments are more likely to warrant an increase than a decrease in the federal funds rate operating objective during the intermeeting period.""",102
-fomc-corpus,1999,Call the roll.,4
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes President Stern Yes,41
-fomc-corpus,1999,"We have a draft statement, which I'd like to circulate so everyone can take a look at it instead of my reading it. I can read it but I think it would be helpful for you to have the text in front of you. I'll wait until it's distributed. [Pause] Does anybody have any comments?",62
-fomc-corpus,1999,"I have a question about something that wasn't raised in the discussion because I didn't think about it until after I listened to everybody. It may be too late to raise it for today but it may be useful for next time. Without in any way prejudging whether the Committee would want to take an action in November, what would be the implications of removing the asymmetry from the directive in November? Or does that matter? We could be in the situation we were in on June 30th where the action and the words seemed to convey different messages and we got varying market responses.",115
-fomc-corpus,1999,One of the things that I'd like to ask of the Ferguson working group is whether it can perhaps expedite its report if possible. You had a long discussion--,31
-fomc-corpus,1999,We can do it.,5
-fomc-corpus,1999,"If you can report to the Committee at the beginning of the November meeting, we could fold that into our deliberations. I think it would be quite useful if we could address that particular issue soon because we've got to resolve it. While looking forward to March seemed to be desirable because it would give us a lot of time and flexibility, it's turning out that we're struggling with this at each and every meeting. So the sooner we can come to a resolution, I suspect the better.",96
-fomc-corpus,1999,I think we can probably report by the next meeting.,11
-fomc-corpus,1999,"Mr. Chairman, given President McDonough's earlier comments and my own sense of this, is it necessary to spend so much time on the labor markets in this press release?",36
-fomc-corpus,1999,"Strangely enough, as a consequence of President McDonough's remarks, I put in additional words here to emphasize that the key question is inflation and its potential for undermining the impressive performance of the economy.",43
-fomc-corpus,1999,Right. But could we take out the labor market reference?,12
-fomc-corpus,1999,We ought to be careful. There is a sense of causality here; this is what we're worried about. I don't see any reason to hide that.,31
-fomc-corpus,1999,"Well, if we're going to do that, there are a lot of other things I'd like to list.",21
-fomc-corpus,1999,I had the same reaction. It seems awfully limiting to hang all of our hats on one item.,21
-fomc-corpus,1999,"The point here, it seems to me, is that the more serious problem is in the realization of above-trend growth in the form of high utilization rates. Do you want to mention what brought about the high utilization rates? This captures it pretty well.",51
-fomc-corpus,1999,I'm not convinced.,4
-fomc-corpus,1999,"One more comment. People continue to pound me with the question: What is it that you're looking at? The way this is worded, it essentially tells people to watch that one statistic and that one part of the economy, and whether that behaves or misbehaves will guide our actions. I think it's more complicated than that. I wouldn't want to limit ourselves by having that appear to be the only thing that will trigger a tightening move later on.",90
-fomc-corpus,1999,"Well, what we can do is to say that we need to be especially alert in the months ahead to potential cost increases that could lead to inflation pressures. SEVERAL. I like that.",39
-fomc-corpus,1999,"I disagree with that. Take a situation where we have cost increases and a 0.2 or 0.3 percentage point decline in the unemployment rate next time. I know where I'm going to be. If everybody else isn't there, that's fine. Are preemptive responses by us to changes in the balance of supply and demand appropriate even before those cost pressures show up? That's the question. If you're not prepared to respond to that-",89
-fomc-corpus,1999,"But if we say ""potential"" for cost increases, that gets to your point, I think.",20
-fomc-corpus,1999,That's fine.,3
-fomc-corpus,1999,I don't want to vote next time for a tightening of monetary policy because the unemployment rate went down.,20
-fomc-corpus,1999,Neither do I.,4
-fomc-corpus,1999,You don't have to! [Laughter],9
-fomc-corpus,1999,My colleagues won't want to either.,7
-fomc-corpus,1999,"It's hard to re-edit a statement 55 minutes before press time, but I think a good way out of this is to drop the word ""labor"" in front of costs. Labor costs are the biggest part of costs, but I don't think we need to single it out.",56
-fomc-corpus,1999,"Why don't we do this: ""In these circumstances, the Federal Open Market Committee will need to be especially alert in the months ahead to the potential for cost increases significantly in excess of productivity in a manner that could contribute to inflation pressures and undermine the impressive performance of the economy.""",55
-fomc-corpus,1999,That's fine.,3
-fomc-corpus,1999,"For Larry Meyer's peace of mind, we do discuss above the decrease in the pool of available workers.",21
-fomc-corpus,1999,I'm happy!,3
-fomc-corpus,1999,"Mr. Chairman, it seems to me that the most low-key way of doing this would simply be to take the first paragraph plus the last paragraph of the draft press release without the first three words. That would be a simple statement about what was done--period.",53
-fomc-corpus,1999,That says what we did but not why we did it. It goes against the notion that an announcement is supposed to give the rationale for what we're doing.,31
-fomc-corpus,1999,And it would be a departure from what we've done for the last few meetings. SEVERAL. That's right.,23
-fomc-corpus,1999,I'm okay with the latest changes.,7
-fomc-corpus,1999,Adjust it as the Chairman said and declare victory!,10
-fomc-corpus,1999,Let's quickly adjourn! [Laughter],9
-fomc-corpus,1999,"For everybody's benefit, I am not of the opinion that writing a press release by committee is the most productive way of doing it, but this is a crucial one. Let me just reread it to be sure that everyone feels comfortable. ""The Federal Open Market Committee decided today to leave its target for the federal funds rate unchanged."" That's very straightforward. ""Strengthening productivity growth has been fostering favorable trends in unit costs and prices, and much recent information suggests that these trends have been sustained. Nonetheless, the growth in demand has continued to outpace that of supply, as evidenced by a decrease in the pool of available workers willing to take jobs."" We're not saying that's the cause of it; that's merely a measure of it. ""In these circumstances, the Federal Open Market Committee will need to be especially alert in the months ahead to the potential for cost increases significantly in excess of productivity in a manner that could contribute to inflation pressures and undermine the impressive performance of the economy."" Okay?",197
-fomc-corpus,1999,That's fine!,3
-fomc-corpus,1999,"Yes, sir.",4
-fomc-corpus,1999,Why don't we just toss these copies in the middle of the table and get fresh ones?,18
-fomc-corpus,1999,"You read ""cost increases significantly"" rather than ""costs to increase""?",15
-fomc-corpus,1999,"Yes, he took out ""costs to increase.""",11
-fomc-corpus,1999,"""The potential for cost increases."" Plural.",9
-fomc-corpus,1999,"Then ""in a manner"" doesn't work.",9
-fomc-corpus,1999,"You want to take out the reference to productivity? SEVERAL(?). No, no.",19
-fomc-corpus,1999,"Fix it up, Don!",6
-fomc-corpus,1999,"Okay, fine. Sold! Our next meeting is November 16th.",15
-fomc-corpus,1999,"One reminder, Mr. Chairman. The Committee in its mail-in ballot, voted-including the nonvoting Presidents the vote was 10 to 3, I think--to change the order of the lead-in paragraph in the directive so that the inflation sentence is first.",55
-fomc-corpus,1999,"Yes, I forgot to mention that. The very substantial majority agreed with President Poole on moving the sentence. Are you all familiar with what I'm referring to? The only question on the table is not whether we want to do it but if we should do it now or as part of the Ferguson report. I would prefer to wait.",67
-fomc-corpus,1999,"I would prefer to wait, too.",8
-fomc-corpus,1999,"I do, too.",5
-fomc-corpus,1999,I think we should adjust all those things at once. SEVERAL. Let's do it all at one time.,23
-fomc-corpus,1999,Let's wait and do it then.,7
-fomc-corpus,1999,So we'll go with the old one?,8
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"Okay, we're done! Let's go to lunch.",10
-fomc-corpus,1999,Would somebody like to move the minutes for the October 5th meeting?,15
-fomc-corpus,1999,So move.,3
-fomc-corpus,1999,Without objection. Peter Fisher.,6
-fomc-corpus,1999,"Thank you, Mr. Chairman. I will be referring to the usual set of charts and some additional materials that should be on the table in front of you. 1/ As usual, the top chart in the package shows the current 3-month deposit rates implied by traded forward rate agreements. Looking at the top panel of the first chart, you can see that in the United States forward rates continued to back up after your last meeting and peaked with the release of the CPI on October 19th. They have been declining since then, particularly on the release of third-quarter GDP data and the ECI. Thus, 3-month expected rates for most of next year are now at the same levels as they were just prior to the Committee's meeting in October In Europe, forward rates have roughly the same pattern, but moved up to twin peaks on the release of our CPI and the release of Euro area M3 data on October 27th; they also have come off their peaks. Thus, despite a 50 basis point rate increase on November 4th by the ECB, expected 3-month rates in Europe for next year are now at the same levels as in early October. It seems to me that what has happened in Europe is that one or two rate increases that for some time had been expected to occur in the first half of next year have been brought forward into November of this year and nothing else has changed. In Japan, despite interest in political circles in Bank of Japan policy meetings, you can see from the bottom panel that forward rate expectations took quite little notice of those meetings. However, there has been an updrift in the current LIBOR 3-month rate, the black line in that panel. This appears to reflect some increased tiering in yen money markets of the type we have seen in past years but it is not yet anywhere nearly as severe. It also suggests, as I understand from our traders, some shifting back and forth in views about who will and who won't be lending money over the end of the year, causing changes in expected rates for the turn of the year in Japan. Turning to the second page, the top panel shows 10-year yields in the United States, the United Kingdom, and Germany. On the left side--the little numbers 1 / A copy of the material used by Mr. Fisher is appended to the transcript. there are basis points--are the 2- to 10-year spreads on July 1st and on the right side are the 2- to 10-year spreads as of last Friday. What I enjoy about this chart in particular, as it relates to what is of interest to me, is how little I understand about what's going on here. German and other Continental yields began to rally just ahead of, but through the release of Euro area M3 data, which to all observers were higher than expected. But the bond markets took off on a nice rally that continued with the release of our GDP data and then continued through the 50 basis point ECB rate increase. Now, this has been explained different ways in Europe. Most have focused on the idea that uncertainty about near-term ECB intentions has been removed and a related perception that the ECB is now on hold. Another theory is that the ECB has gained credibility by being pre-emptive and is now ahead of the curve. The first theory uncomfortably suggests to me that the uncertainty premia for anticipated central bank actions have a larger positive basis point impact on long-term rates than does an actual central bank rate increase. For the second argument about credibility to hold water, Europe would have to be more sensitive to short-term rates than to long-term, because otherwise the decline in long-term yields would undermine the restraining influence of short-term rates. But throughout my career and through current events, my colleagues in Europe have always told me that Europe is more sensitive to long-term rates than those silly Anglo Saxon economies that are so focused on short-term rates. So, I am not quite sure how the credibility argument plays here either. Looking at the United Kingdom, it's intriguing how the 10-year gilt yield has marched along with German and other Continental yields despite the fact that these countries are at very different points in the economic cycle. To draw a point on it, the 2- to 10-year spread in the UK is inverted to the tune of 85 basis points while the German spread, as you can see, is positive from 2- to 10-years in the amount of 115 basis points. Notwithstanding the economies being at different points in the cycle, these yields are marching along rather in lock step. Maybe the rally in gilts is what is pulling Continental yields lower. Looking at U.S. yields, I'd just note that with 2- to 10-year spreads having narrowed from 26 basis points on July 1st to 15 basis points last Friday--and I think to 12 basis points this morning--one might understand that there are few if any voices in our bond market who are prepared to join the ""bubble-ologists"" in proclaiming that the Fed is behind the curve. Looking down the page, the next three panels depict yield spreads of various instruments over U.S. Treasuries. In the first of these three panels you can see that the emerging market index spreads to U.S. Treasuries have been narrowing consistently since last summer's highs; and they have narrowed by an additional 150 basis points since the October release of the CPI. In the next panel you can see that the spread of the Merrill Lynch high yield index, or junk bond index, to Treasuries has been relatively stable but has widened recently, moving in just the opposite direction of the emerging market spreads. Market talk is focused on an explicit shift of funds out of U.S. high-yield instruments into emerging market high-yield instruments and also on increased sensitivity to rising default rates in domestic high-yield markets. Finally, in the last panel you can see that spreads on 10-year swaps and the Fannie Mae benchmark have come off their recent highs of last summer and returned more or less to the levels of early July. And corporate spreads are off their highs, but are still just a tad wider than in July. Turning to the third page and year-end funding markets, this chart shows the three components of the current butterfly. That is, it depicts the November, December, and January LIBOR 1-month contracts. As you can see, the decline in the December contract from late October to mid-November has been noticeable. That seems to reflect at least a couple of things coming together. First, in an exaggerated way the December contract follows the same pattern as the November and January contracts, I think reflecting the ebb and flow of expectations for rate action by the Committee, particularly following the release of the GDP and ECI data. However, it also seemed to get quite an impact from our third round of auctions of options on November 3rd and particularly from our announcement on November 4th that the Desk would hold four more rather than only two more auctions. Turning to the next page, let me go over the details of each of the auctions we've held. The vertical columns give you for each of the three strips the actual auction amounts, the total propositions, the bid-to-cover ratio, the awards we gave out or the stop-out rates on a Dutch auction, and the high and low bids. Having told the dealers we would try to meet demand for these options, we felt a need to respond to the high bid-to-cover ratios of the first two auctions. In all cases these were at rather elevated levels: 4 to 1, 4.7 to 1, 6.4 to 1, etc. So we raised the amount sharply for the third auction, doubling the amounts for both the turn of the year strip and for the January strip. While the bid-to-cover ratio came down in the third auction, the stop-out rates and thus the Dutch awards came in quite high. You can see that in the awards column in the third entry in each panel: 11 basis points, 16 basis points, and 11.5 basis points. So, after the third auction we left the amount for the turn of the year strip constant at $50 billion but raised the amounts for the surrounding strips. We also announced that we would hold at least four more auctions for a total of seven, rather than just two more for a total of five. We think this helped calm the dealers and their customers considerably, as reflected both in the December LIBOR contract and in the much reduced stop-out rates for the fourth auction. We've reduced the amounts for the fifth auction to be held tomorrow for each of the three strips to $15, $30, and $20 billion and, obviously, we will see how the subsequent auctions go. Looking forward, as I've mentioned previously, I would consider this operation a complete success if none of these options is exercised. The motivating principle still seems valid to me that the more we sell, the less likely it is that they will be exercised. But there still is a risk that they will be exercised. If relatively small amounts are exercised on any one day for reasons specific to an individual firm--its own funding position or its own collection of collateral--we should be able to drain sufficient reserves to manage the impact on the funds rate that day through our own matched-sales operations. But if all, or even substantial amounts, are exercised on any day it is harder to anticipate the impact on the funds rate. Any shock sufficient to cause a large-scale exercise of these options can also be expected to have a profound impact on the funds rate and on other short-term market interest rates. So, it is hard to know in advance with any clarity what it is we would be doing vis-a-vis that day's funds rate. In any event, if such an exogenous shock were to happen, we would likely be trying to drain reserves not to manage that day's funds rate, but to try to moderate the impact on cumulative excess reserves for the period--the impact over the rest of the period. But that is obviously something we'll have to decide on a case-by-case basis. Turning to the next page and our more traditional open market operations, the top panel depicts various forecast scenarios involving a cumulative reserve drain from currency in circulation. Reserve needs have continued to grow recently--reflecting, it seems to us, typical seasonal growth in currency in circulation and the strong demand from banks for increased vault cash in anticipation of Y2K-related demands of the public. Shown in the bottom dotted line of this panel is the New York staff's previous ""low"" projection for currency in circulation. We called that a base-case scenario in which we imagined there would be no Y2K impact. The higher dashed line is what we called a ""high"" forecast--not a worst case scenario but just a strong Y2K effect. The two solid lines reflect how we've revised up both of those forecasts because the actual levels have come in more or less right on track with our high, but not worst case, forecast. So, we've revised up our low forecast for currency by almost $20 billion for the turn of the year, based on the experience we've seen through mid-November. In the bottom panel is a chart depicting the pricing of our long-term RPs. Let me give you a little background on that before I describe the chart. We have conducted five long-term tri-party RPs that run through the turn of the year, totaling about $27 billion. We have done more than 20 overnight and short-term tri-party RPs. In each of these RPs we have separately priced U.S. Treasury securities, agency debt, and mortgage-backed collateral and have carefully tried to maintain a consistent relationship between our sense of current market rates for each type of collateral and our stop-out rates, consciously choosing not to violate the existing spreads. What is depicted in this chart is the cumulative propositions we've received on all five of these long-term--through the year-end--RPs. The vertical axis is the dollar value expressed in millions; therefore, the top amount is $55 billion of collateral propositions. Across the horizontal axis is the deviation of the rates given us from our sense of where market rates were for each type of collateral. So, the lower left corner represents 4 basis points above where we think market rates are and, moving across that axis, the progression goes to 44 basis points below our sense of market rates. In the table at the bottom is listed the collateral we accepted--about $13.7 billion of Treasuries, $2.2 billion of agency debt, and $10.5 billion of mortgage-backed collateral. On average, our stop-out rate has been about 4 basis points below our sense of where market rates were. Now, some observers in the markets have been disturbed about the quantity of Treasury collateral we have taken off the market--$13 billion--through our year-end operations. I felt pretty strongly that we should not be disturbing the existing spread relationships unless we made a very conscious decision to do that. So we have been trying to take collateral as the dealers have priced it. And the fact of the matter is that the dealers have shown us very lackluster--and they will concede greedy--pricing, particularly on agency debt and to some extent on mortgage-backed collateral. They have been more aggressive in pricing the Treasury collateral to us. We will continue to be disciplined about this. At some point the time may come when in order to calm widening spreads we might intentionally change our behavior and take disproportionate amounts of agency and mortgage-backed collateral. My sense at this point is that we would probably do that by simply reverting to one pricing. In that case the three types of collateral would all be given to us in one set of propositions, which would automatically advantage the higher yielding collateral. But so far we've taken the spreads as we have found them rather than taking on the job of setting the spreads ourselves. Finally, on the last page you can see that in the period since your last meeting the fed funds rate has traded slightly on the soft side except in the last couple of days, even though daily volatility has been relatively contained. For my taste, there appear to be too many unsatisfying explanations for this softness rather than any single persuasive one. Many have focused on our novel long-term operations and the general perception that we will be generous about year-end funding, but that doesn't quite get me far enough to explain the softness in the first two maintenance periods. In the last couple of days funds have been quite firm, and yesterday we had an elevated effective rate of 5.6 percent, even though we had $10 billion of excess reserves on the day. But yesterday was quite an extraordinary day. We had a Treasury refunding, a minor corporate tax date, some security problems at Bank of New York that delayed the close of the securities wire, and moves of 1/16th or 1/8th or so in the market in anticipation of Committee action today. All those factors contributed to a rather elevated rate yesterday. And the hangover from yesterday is with us today as the funds rate is trading at 51/2 percent. Mr. Chairman, we had no foreign exchange intervention operations during the period. I will need the Committee's ratification of our domestic open market operations and, of course, I'll be happy to answer any questions.",3133
-fomc-corpus,1999,"Would you give us a hypothetical scenario of what would happen if a very substantial number of these options were exercised on a single day, triggered obviously by some bank? How would you arrange to meet that? What would you do?",45
-fomc-corpus,1999,They would give us notice of exercise. We would then do RPs with them through the tri-party vehicle. Anyone who exercised an option would have to deliver collateral to the custody banks. And we would then be putting out the funds to them through the custody banks.,53
-fomc-corpus,1999,"And the amounts we are likely to be dealing with are well within your capacity, as best you can judge?",22
-fomc-corpus,1999,"Yes. On the reserve adding side, we have looked at this to make sure we have the capacity to do it. We are still reviewing it but we think we can handle the exercise of the options with no problems. The question is going to be how many matched sales we can do if we want to drain all the reserves back out again. We are working on that. There is a limit on our bill portfolio. Our traditional means of doing this is just against bills; we are mostly geared up to do matched sales against bills, which involve easier pricing than against coupon securities. That is one issue we are looking into. We are also looking into whether we can do matched sales or reverse repos through the tri-party agents, as I mentioned at previous meetings. There are operational issues that are throwing some sand into the gears--which we had a faint fear of before--causing us concern as to whether that will actually work. The bigger constraint, I feel, is whether we could do as much as $150 billion or $200 billion of matched sales to drain out the reserves we've put in. But I think it is possible that we will be able to drain amounts of around $100 or $125 billion or maybe even $150 billion. It will be a complicated operational exercise to do it. But we think the capability is there on both sides. The quantity of the reserves to be drained back out is the issue, not the exercise of the repos in the first instance.",296
-fomc-corpus,1999,I assume that in the turmoil of that sort of market the issue of draining the reserves is not all that immediately urgent.,24
-fomc-corpus,1999,"Absolutely. That is just what I meant by my remarks that our focus will really be on the impact on the cumulative average of excess reserves in the period. As to whether we will actually drain them all out that one day, I doubt it. But we will try to if what is involved is the sort of exogenous shock that you are imagining. That is just what I meant. We would not be pretending that we know where the funds rate should be trading or that we are trying to target it. Now, to get the scaling right, it's important to keep in mind that the total balances traded in the funds market run about $15 to $25 billion daily; $25 billion is more likely at year-end. Who knows what the upper range of the repo market is? But $600 billion and up is the turnover in the repo market, so the scale there is quite extraordinary. It is possible that once we announce significant exercise of these options, the fed funds traders will realize the rate is going to go to zero regardless of any exogenous shock. That is, we will smother whatever pricing up for fear may be there. That is going to be in the minds of the fed funds traders and the bank treasurers and it is very hard to anticipate.",255
-fomc-corpus,1999,Other questions for Peter?,5
-fomc-corpus,1999,"Just continuing this line of conversation: If a lot of funds go into the market because of the exercise of the options, it drives the funds rate down, as you said. But then I assume that reduces the probability of any further options being exercised later on. So in a sense it is a one-time hit.",63
-fomc-corpus,1999,That is a likely scenario.,6
-fomc-corpus,1999,"To make sure that my understanding is correct, I had a question about currency. My understanding is that currency outside the banking system is growing at a very normal rate. We do not see any particular increase in the hand-to-hand circulation as yet. Is that your sense?",54
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,Currency in circulation includes the currency in bank vaults?,11
-fomc-corpus,1999,"It is the vault cash that clearly has exhibited an extraordinary buildup. As for the rest, we think of it as a slightly stronger than usual seasonal impact but still in the range of the normal seasonal increase.",41
-fomc-corpus,1999,But not much more.,5
-fomc-corpus,1999,"Money stock currency has been growing at 9, 10, 11 percent.",17
-fomc-corpus,1999,As it has been earlier?,6
-fomc-corpus,1999,"It is in line with the rate at which it has been growing all year and it is comparable to the rate of growth last year. So there does not seem to be much, if anything, going on there.",43
-fomc-corpus,1999,"Other questions for Peter? If not, we need a motion to approve the domestic transactions.",18
-fomc-corpus,1999,"Move approval of the domestic operations, Mr. Chairman.",11
-fomc-corpus,1999,"Without objection, they are approved. Let's move on to Mike Prell.",15
-fomc-corpus,1999,"Mr. Chairman, Karen Johnson is going to lead off our remarks, but let me just mention to the Committee that we released industrial production data this morning--I trust a few minutes ago. We failed to put a copy of the release in front of you, so let me just tell you about it. There were some small net revisions to the data for August and September that left September IP down 0.1 percent instead of the 0.3 percent decline that was published previously. And the October increase in industrial production was 0.7 percent. In manufacturing we had a 0.1 percent increase in September, also an upward revision, and 0.6 percent in October. I think these numbers are significantly above market expectations, so perhaps those of you with electronic gadgets can see whether there has been any market reaction.",168
-fomc-corpus,1999,I just looked and the tape is delayed.,9
-fomc-corpus,1999,I'm not sure whether that's good news or not.,10
-fomc-corpus,1999,The reaction is delayed?,5
-fomc-corpus,1999,This gadget is very slow. [Laughter] Let's turn now to Karen Johnson.,17
-fomc-corpus,1999,"The news about the global economy that we have received over the intermeeting period has generally been quite favorable. The signs of strengthening activity, particularly in Asia, that we saw earlier in the year continue to be confirmed, and positive developments in real output growth now appear to be widespread across other regions of the globe as well, including importantly the other industrial countries. Taking into account what production data we have so far for the third quarter, along with indicators for the remainder of the year such as orders figures and confidence measures, we have revised up our estimate for total output growth in the rest of the world during the second half of this year from about 31/4 percent in September to 4 percent in the current Greenbook. In updating our forecast, we had to wrestle with the implications for 2000 and 2001 of these signs of more robust activity abroad. Embedded in them likely is some boost from transitory precautionary demands reflecting Y2K concerns on the part of households and firms abroad. Present also, at least for some countries, is the spurt of activity that can come in the initial phase of a cyclical rebound as a result of swings in inventories, the release of pent-up demand, and the stimulus of favorable financial conditions. Some moderation from the initially very high growth rates is normal under these circumstances. More fundamentally, some of the robust indicators we are now seeing no doubt signal strength in underlying demand. Moreover, to the extent that confidence is bolstered by the current strong growth, demand may expand further in the future. We have balanced these factors by revising up the near-term level of foreign output to reflect the positive indicators of the past several weeks, but we are projecting only very slightly higher growth than in the previous Greenbook on average over the remainder of the forecast period. As a consequence, the level of foreign activity is higher throughout this forecast than in September. The near-term upward adjustments are spread throughout the industrial and developing countries in the forecast. The small upward changes we have made to growth in 2000 and 2001 are notably in China and Mexico among the developing countries and in Japan and Canada among the industrial countries. With the dollar still projected to depreciate somewhat in real terms over the forecast period, we are looking for a rebound in the growth of real exports of goods and services from the low rates experienced in 1998 and the first half of this year. The upward revision we have made to projected foreign activity implies a rebound in exports that is just a touch stronger than what we expected in September. There is clearly a risk that these recent indicators of strength are not the result of transitory or cyclical factors. In that case, we are probably being too cautious in not extrapolating more of the recent good news from abroad into our forecast for foreign activity and for U.S. export growth over the next two years. To get a handle on the magnitude of the effect of a possible miss on our part, we included in the Greenbook a simulation of the implication for U.S. real GDP growth of expansion abroad that is 1 percentage point stronger at an annual rate, sustained over the coming eight quarters, than what we have in the baseline. Such an extremely buoyant outlook for foreign activity would raise projected U.S. real GDP growth by about 1/4 percentage point in 2000 and 3/4 percentage point in 2001. At the same time, it would raise the rate of U.S. core inflation by nearly 1/2 percentage point in 2001. Of course, even the cautiously optimistic outcome in the Greenbook baseline forecast is not assured. Considerable uncertainty remains in the foreign outlook. Among the most important unfavorable risk elements are: renewed weakness in Japan, perhaps as a consequence of withdrawal of fiscal stimulus; a premature end to the expansion in the euro area should tightening by the ECB prove excessive and/or confidence falter; and additional upward pressure on world oil prices from further OPEC production restraint or severe winter weather. Alternatively, the risk of a greater downward move in the value of the dollar than we are projecting, either by itself or in conjunction with pressures on other U.S. asset prices, cannot be ruled out. Such an exchange rate change would stimulate export demand more and result in additional upward pressure on import prices.",869
-fomc-corpus,1999,"I think it's pretty clear that, even gauged with our re-calibrated GDP thermometer, the economy has continued to run hot in recent months. The bigger issue right now would seem to be whether its temperature has reached the inflationary flash point. The recent indications have been mixed on that score, but as you know, we aren't very optimistic. We see underlying price trends moving in an inflationary direction, even as demand growth slows a bit from the recent pace. In that regard, we noted in the Greenbook that there have been some signs of moderation in the expansion of household spending since midyear. However, the news received in recent days has taken a bit of the edge off those signs. Friday's report on October retail sales showed a 0.4 percent gain at the so-called ""control"" category of stores. That isn't an especially large gain, but it's more than the chain store figures and anecdotal news had led us to expect. And what makes the surprise still more disquieting is the fact that the early results of the Michigan SRC survey point to a considerable resurgence in sentiment this month. Of course, PCE is not the only component of domestic spending for which ongoing moderation is less than assured. In the housing market, the rise in interest rates this year appears finally to have taken some of the wind out of builders' sails. However, with consumer confidence seemingly so strong and mortgage rates having slipped back some in recent weeks, we'll have to keep a close watch on the indicators of demand in this sector as well. As it is, continuing reports that short supplies of inputs have been delaying projects suggest that actual construction spending may hold up fairly well for a while. On the business investment side, apart from our reading of the zig-zags in computer shipments as supporting our notion of a near-term Y2K lock-down effect, there are no compelling signs that the strong uptrend in spending on capital equipment is weakening. Meanwhile, yesterday's retail inventory figures left the overall stock picture for the third quarter about as we anticipated it--lean, and ripe for some greater buildup in the near term, perhaps even apart from any Y2K hedging. The bottom line is that it's far from certain that we're on track for the substantial deceleration of domestic demand needed to offset the oncoming external impetus Karen described and thereby avoid a further escalation of labor market pressures. As you know, in our forecast, we only get there with 50 basis points of funds rate tightening over the next year and, importantly, a plateau in share prices. The renewed exuberance of the stock market this month seems to underscore the upside risks to demand coming from that realm. One might argue that such upside demand risks are of little concern because they in effect mirror an upside risk to aggregate supply in our forecast. As you know, looking at the patterns in the revised national income accounts, we've found grounds for upgrading the structural gains in labor productivity in the period ahead. It is, of course, possible that we didn't go far enough. It might even be asserted that the unanticipated strength of the stock market, especially with its focus in the tech sector, is an indication that we're still lagging beyond the reality of the information revolution. I'll admit to remaining more than a little skeptical that the market is providing an informed, rational assessment of the prospects in this regard. But, in any event, as we attempted to illustrate with a model simulation in the Greenbook, it would take a much greater improvement in productivity performance than we've allowed for to avert a deterioration in inflation trends. Another way we might avoid that deterioration would be for 4 percent unemployment to prove sustainable without putting pressure on real wage increases. A look at some of the data we've received in recent weeks could easily tempt one toward that conclusion. Certainly, the third-quarter ECI and October average hourly earnings figures were benign. Even the rather large, 43/4 percent annual rate, rise in nonfarm compensation per hour in the third quarter did not interrupt the broader deceleration since last year. But these observations don't provide much comfort with respect to the outlook if one buys our explanation for the slowing in nominal wage increases--namely, last year's particularly low price inflation, since reversed. Moreover, anecdotal indications of wage behavior have been less than propitious. While the picture is far from uniform, what I hear is that coping with a tight supply of qualified workers has become a preoccupation for many managers; that short-staffing is creating strains, with excessive pressure on workers and sometimes quality problems as a consequence; and that more employers are concluding that they will have to break down and raise wages by more or on a broader front. Of course, these stories aren't entirely new, and my perception that they've become more common and intense may be colored by my analytical priors. So you'll certainly want to check them against your own impressions. Switching gears, however, and looking directly at prices for the signs of mounting inflationary pressure, the data again are mixed. Awkwardly, the October CPI isn't coming out until tomorrow. Like private analysts, we're expecting that both the total and core indexes will post increases on the order of a quarter percent--something that would not alter significantly the recent trends in either measure. One question is which measure to regard as most informative about the prospective trends, and I'll repeat the thought I conveyed at the last meeting that we should not focus entirely on the more subdued core index. People and firms do buy energy products, and the rise in oil prices this year is likely to leave its mark on wages and core prices going forward. In this regard, the spurt in crude prices in the past few days is scarcely good news. But there are other indications as well that inflationary forces may be intensifying. The prices of non-oil imports have continued to rise, and this probably has contributed to the further noticeable increase in the core crude and intermediate PPIs. Manufacturers of final goods and retailers still complain that they lack pricing leverage, but these developments in the pipeline would seem to heighten the likelihood of at least some up-drift in inflation. Broadening the perspective a bit, I might say a few words about inflation in assets--a popular theme in some circles these days. I won't return to the matter of the stock market; nor will I talk about what has been happening in the rarified world of the art auction houses. Rather, I'll focus on the houses we live in. The latest numbers for house prices--the Freddie Mac repeat sales index and the Census constant quality new home index--show accelerated increases of about 6 percent over the past year. It isn't at all obvious that this is a reflection of increased inflation expectations; indeed, judging by the responses to the Michigan SRC survey, people haven't been buying because they view homes as an especially good investment. In the main, I think we're simply seeing the kind of relative price movement that occurs in a market where demand, driven by strong gains in jobs, income, and stock market wealth, is pressing on what is an inelastic short-run supply of land, labor, and materials. But, even if these price increases don't reflect heightened inflationary expectations per se, they're not irrelevant to the outlook. It is likely that the higher house prices will show through at some point in the CPI through higher owners' equivalent rents. And the price increases can themselves contribute to an inflationary psychology. Certainly, rising prices on reproducible assets like houses tend to spur more investment activity in the future and add to the general strength of demand--as may the increases in wealth enjoyed by the owners of the assets. As I've noted, this is not an economy in need of more positive wealth effects on demand. This brings me to a final observation. There has also been a lot of discussion recently about the internal and external saving imbalances in the economy. The NIPA revisions shuffled things around a bit, but the basic contours remain the same: The personal saving rate has plummeted in this decade; the private saving-investment balance has swung sharply into the negative, the counterpart being a considerable run-up in business and household debt that might someday prove burdensome; and we've opened up a big current account deficit, mirrored in a rapid growth of external liabilities that might weigh on the dollar. These patterns reflect a complex set of forces, one that I fear is beyond the state of the art to sort out. But it seems likely that part of the story is the ""crowding in"" of private investment by the shift in the federal budget, some of which has been structural. Another element undoubtedly is the recent slump in emerging market economies and the attraction of the United States and U.S. dollar assets as a safe haven. Probably the central question for you is to what extent these so-called ""imbalances"" are reflective of an unsustainable cyclical boom fostered by excessive financial ease. This, of course, just brings us back to the same fundamental issues I was discussing earlier. In essence, the ex post saving-investment balances don't seem to add much to the picture; they simply provide a different vantage point on the matter before you.",1839
-fomc-corpus,1999,Questions?,2
-fomc-corpus,1999,"Mike, you mentioned oil prices spiking. When I was reading the Greenbook, I was struck by the fact that in the very week in which oil prices were spiking, you were writing down a forecast that has the price going back down by $5 a barrel, 25 percent or so. Oil prices are among the many things that I have absolutely no confidence in my ability to predict, so I will go with your forecast. But I am curious about how sensitive your inflation outlook is to that, because there are a lot of volatile personalities who still have powerful positions in places in the world that produce oil. So, who can predict what will happen? Suppose we just draw a straight line and assume that for the next two years, the forecast horizon, oil prices remain the same as they are today. What would be the implications of that?",171
-fomc-corpus,1999,"That is a good question and one to which I do not have a precise answer. We do not anticipate a plummeting in oil prices; we have a gradual decline over the two years. The level clearly has moved up since we established our assumption; oil prices rose after the Greenbook was published. There is still a downward tilt in the futures markets, though maybe not quite as sharp as there had been earlier. The futures price is still pretty high for the next several months. But if the prices were to remain where they are now, it would add at least a little to the core inflation rate, particularly in 2001. I do not think it would create a night-and-day difference in the inflation outlook.",145
-fomc-corpus,1999,"President Jordan, based on our model, $5 a barrel more on oil prices over the forecast horizon would add roughly 1/4 percentage point to consumer price inflation in the next two years.",39
-fomc-corpus,1999,Other questions?,3
-fomc-corpus,1999,"Karen, you made the point that economic prospects in the United States are certainly affected by the improved situation in foreign countries. I wonder if you would comment briefly about how your views have changed on Japan. It seems to me that the situation there still looks quite troubling in the sense that the Greenbook projects deflation to continue through 2000 and really through 2001 since prices are flat in 2001. The fiscal stimulus program they are proposing is very large and it suggests that they have significant concerns about real growth prospects in the future. I just wonder how your views have changed about Japan, which is certainly an important ingredient to the foreign GDP prospects.",132
-fomc-corpus,1999,"I think we have done two things. We have recognized the fact that we were wrong about the second half of this year. In fact, everybody was wrong; even the Japanese are continuously surprised by the strength in the numbers they are producing. Secondly, we have widened enormously--although it is obviously not written down anywhere in the Greenbook--the confidence intervals that we are putting around our forecast for 2000 and 2001. If there is a locus of uncertainty anywhere, it is centered on Japan, at least in my mind. On the one hand, we are getting stronger indicators, at least to some degree, regarding what is happening now. Although we have not seen a private investment response, we were certainly surprised by the private consumption numbers we saw. Strength in the rest of Asia has helped Japan as well, and the combination has produced GDP numbers that are much larger than we were expecting. Earlier this year we had expected a negative offset to the very strong first quarter; we did not get that. We now are expecting a fairly substantial positive number for the third quarter. Yet one does not get the sense that domestic demand has become self-sustaining in Japan. Officials from the Bank of Japan in the statements they have made recently talk about having seen the trough and having seen a pickup. Yet they talk about demand perhaps not yet being sustained and say that for that reason they are prepared to keep the zero interest rate policy in place. So, we are looking at their fiscal policy and at what is happening in the rest of the world. The announcement of the 18 trillion yen package probably had a smaller share of ""real water"" spending than these packages have had in the past. We often use a rule of thumb of one-half as the estimate of real spending in the fiscal programs that are announced by Japanese officials, and we think this one does not come up even to that. Common assessments are more like 6 or 7 trillion, which is a number on the order of one-third as opposed to one-half of ""real water"" spending. But even that amount would not produce the forecast that we have written down. So, embedded in our GDP forecast for calendar year 2000 is the assumption that when they decide on the budget they will put in about another 1/4 percentage point of stimulus through the fiscal channel. That is not a certainty. No doubt the medium-term concerns about the size of the outstanding debt and even short-term concerns about financing problems--as they have been struggling with the issue of who is going to buy the Japanese government bonds and so forth-might lead them to take a less aggressive fiscal posture. And that would reduce their growth to less than we have forecast. Even so, I think we have a very cautious forecast--one that suggests still a lot of problems in the Japanese economy and growth that is going to remain very low. There are other forecasters around the world who see the acceleration of Japanese activity proceeding, as opposed to falling back the way we do. I think the basic answer is the one I gave you. There are upside risks and downside risks. The confidence interval around any forecast on Japan has to be far wider right now than would ordinarily be the case.",648
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Mike, I was interested in both the Greenbook discussion and your own comments about your reevaluation of the degree of structural versus cyclical change in productivity. It certainly has an implication for the potential rate of growth of GDP. I am wondering whether the decrease that we have seen in the unemployment rate since the beginning of the year, which has been about 0.4 or 0.5 of a point over the first ten months--. Wasn't it somewhere around 4.6 percent at the end of last year?",106
-fomc-corpus,1999,This is not going to materially affect the additional-,10
-fomc-corpus,1999,"No, but we have seen a decline of several tenths in the unemployment rate over the year.",20
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,How does one reconcile that with the idea of an increasing level of potential in the economy?,18
-fomc-corpus,1999,I think if potential had been as low as we previously had been gauging it--this gets a little confusing because we have changed the books here--one might have wondered why the unemployment rate had not fallen more. So I think this does fit. And indeed we have reestimated our Okun's Law relationship and feel reasonably comfortable with the conformity of our assumptions with what has occurred in terms of the movement in the unemployment rate.,86
-fomc-corpus,1999,So you feel that makes it more understandable rather than less understandable?,13
-fomc-corpus,1999,"Yes. It wasn't a really big problem, but it does seem to be compatible with our assumptions. Indeed, it is even compatible with Okun's Law relationships that are estimated from the income side of the national accounts. There doesn't seem to be a great mystery in that respect. The little uptick in labor force participation rates we have had recently is a bit of a comfort in terms of our understanding of the basic dynamics in the labor market. We don't feel too uncomfortable with things in that regard.",100
-fomc-corpus,1999,Potential is rising largely because of productivity.,8
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,It is not a labor force phenomenon.,8
-fomc-corpus,1999,"No, I realize that.",6
-fomc-corpus,1999,Further questions for our colleagues? I want you to understand that this is a record low number of questions! The Vice Chair predicts that you will catch up later. Who would like to start the Committee discussion? President Jordan.,44
-fomc-corpus,1999,"Thanks. The general sense of both business and labor contacts in the District is that the boom continues and that it will be even stronger next year. I have been expecting our region of the country to be among the first to show signs of flattening out. And I still think that's a reasonable expectation, given the composition of the regional economy; at some point, for example, the slowing of auto sales in the last couple of months should lead to production adjustments. But it still basically looks and feels like a supply-constrained economy. Business people complain that they could be doing more if only there were more warm bodies around that they could put into positions of all types. The idea of caution is almost totally absent from the discussions we have with bankers and other business people. In the last two meetings of both the Community Bank and the Business Advisory Councils we have asked the participants to discuss the conditions under which they would think about the possibility of a recession on the horizon. And they just dismiss it as utterly implausible and not a fruitful thing to spend time thinking and talking about. We tried to press the idea, especially on the bankers, that there is a downside risk. And some do admit that they know of deals that others are doing that they have walked away from, suggesting perhaps an element of caution someplace--but not among their competitors at least. I find that very troubling. It may work out that as the domestic absorption of goods produced in our region of the country levels out, some international demand will pick up and that will keep the level of activity in our area more or less even. But I still think the most likely scenario is that we are going to get back to what in the 1980s some of us called the souffle economy--one that is rather soft in the middle and firm around the edges. Activity up and down the West Coast and the East Coast may stay hotter longer. And if we see some weakness in our area, that will make it difficult for those of us in the middle part of the country to have a proper perspective on the appropriate national, let alone international, monetary policy. As a note on one of Karen's comments about Japan, one of our contacts from an industrial company just returned from Japan and said he detected a dramatic change, in a positive direction, in the mood he encountered there. His firm had a large pickup in orders for roller bearings for industrial inputs. All sectors of the labor market continue to be very strong. One of our construction contacts said that their union views the auto company contracts as a problem because they commit the auto companies to hire apprentices, which is going to draw on the pool of workers that otherwise would have been considered available for construction work. So, there is some sort of rivalry there. Honda motor company announced that they will not build a major plant in Ohio after all. Until now all of their production has been in Ohio. They said there is an inadequate pool of labor in Ohio, so they are going to build in Alabama instead, right next to where Boeing is building an enormous operation. So we'll see how they sort out the workers down there. We hear more stories of fast food restaurants going to a drive-through only operation and suspending their eat-in service because of labor problems. We are told that contractors in the region are hoping to avoid the usual winter curtailment of activity because they are concerned that if they were to shut down for the usual two or three months the workers simply would not return in the spring. One report from a construction union in Ohio now estimates that there are 25,000 Latino construction workers in the state alone and that at least 50 percent of them are illegal. And the complaints about higher health care costs occur without exceptions, really. Retail trade overall is reported to be strong, although the Bob Evans restaurant chain said that they have experienced a sharp slowing in traffic recently. They relate it to substantial increases in their menu prices that they felt they had to put through because of higher wages, higher health care costs, higher transportation costs, and unfilled vacancies in their restaurants. They boosted menu prices and people stopped coming; so their earnings fell and their stock price fell. In manufacturing, one director said his firm is in the early stages of getting some price relief in major industries. He thought that was a good thing. He said industrial companies have been put through an earnings squeeze in the past year or two and are now going to find it easier to improve profit margins. In conversations with directors as well as advisory council members and others, the suggestion that inflation over the next year or two might remain the same as it has been over the last year or two is simply not credible. The expectation that inflation is moving up just does not have any dissenters. And a surprising number think that that's not a bad thing. If I say to people that a reasonable forecast for the consumer price index for the next year might be that it will rise a percentage point or so faster than in the last twelve months or so, there is almost no reaction to that. A frustration has been that some bankers--and maybe a few others, but it is particularly worrisome about bankers--think an increase in the federal funds rate will have an adverse effect on interest-sensitive industries such as housing and autos. It's a sort of interest rate push idea that a rise in the overnight interbank rate pushes up all interest rates and, therefore, will hurt real economic activity which they care about. If you say to them that if it turns out later that the funds rate was artificially held down and inflation accelerates and that is what really hurts housing and autos and other interest-sensitive sectors--because intermediate- and long-term interest rates will rise more because of inflation premiums--it falls on deaf ears. It is simply not a story that resonates well at all. I think our biggest problem, if it is necessary to tighten in order to contain rising inflationary pressures, is how we explain the rationale behind such an action and find people who support it and applaud it.",1210
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Not a lot has changed in New England since our last meeting. Growth continues to be vibrant. Labor markets are very tight, and both published data and anecdotal evidence point to increasing cost pressures, especially as they regard health insurance premiums and rising materials costs. New England's unemployment rate fell slightly in September to 2.9 percent, equaling the series low since data began to be collected on a regional basis in 1969 and attained only once before in April 1988. Wage increases have accelerated this year, at least in manufacturing, by more than a percentage point over 1998. Moreover, the range of average prospective wage increases cited by Beigebook contacts rose as well, with the upper end now in the 6 percent rather than the 5 percent area. Even in the absence of wage acceleration, employers see compensation costs rising via significant increases in health benefits costs. Half the manufacturers contacted mentioned very substantial increases in health insurance premiums. In addition, while retailers reported vendor and selling prices as steady, manufacturing contacts reported rising materials costs. The most commonly mentioned price increases were for fuels, plastics, petrochemicals, copper, aluminum, paper, and cardboard. Real estate markets remain relatively strong as well. While construction of new homes has hit a bit of a lull, sales of existing homes remain solid and above year-ago levels. Home prices are a clear sign of market strength. The price of a typical home in New England rose by nearly 8 percent versus 5 or 6 percent for the nation; home prices rose 9 percent in Massachusetts and about 16 percent in the Boston metropolitan area. Office markets continue to be strong as well, with Class A space in Boston continuing to be the most expensive in the nation. Turning to the national outlook, both current data and prospects for the near term continue to defy expectations of a slowdown of any magnitude. To be sure, housing and durable goods sales were a bit slower, as were auto sales, but interest rates have backed off a bit, the stock market remains positive, and consumer confidence is high. We now also seem to have evidence more firmly in hand to explain the economy's current ability to grow without undue strain. With the revisions in GDP data, we are now looking back at higher rates of real growth, higher productivity, and a higher level of potential GDP. This is great stuff, but it is backward looking. One can hope the future will look like the recent past, but it may be wise to be a bit skeptical about whether it will. I find the Greenbook forecast to be very interesting, and I think Mike seemed to indicate that he does as well, because in many ways it's pessimistic. To be sure, it assumes that productivity is higher not only because of the revisions but also because of a larger share that is thought to be more structural than cyclical. It also assumes that potential is correspondingly higher, that monetary policy tightens by 50 basis points over the next year or so, and that the long awaited moderation in consumer demand and stock price growth actually take place. And even with all that, core inflation ticks up nearly 1/2 point from 1999 to 2000 and a bit more in 2001. It would seem that a rise in prices is baked in the cake, even if all of these moderating influences actually occur. But will they occur? To me the answer to that question revolves importantly around whether or not one believes productivity growth can continue to accelerate, not just as a reflection of output growth but as a reflection of a higher trend rate. I've thought a lot about productivity since our last meeting; it would have been hard not to. On the one hand, as I look around my District, it seems obvious that tight labor markets are bringing entry level workers and others whose skills are marginal into the workforce. This is a good thing for them and for society as a whole, since obviously work provides the best opportunity for them to improve their chances in life. But they are not exactly enhancing the firms' productivity, at least in the short run. On the other hand, I see wages being linked to profits more tightly than ever; and even very large companies are continuing to be very cost conscious. My 17-year old son, whom I have mentioned in the past, recently graduated from selling CDs at Circuit City for $9 plus an hour to selling small electronics. After a two-week training program, he is now totally on commission--no base salary at all unless he fails to make the minimum wage, in which case he will likely be back selling CDs. The company has a real time system that lets him know at any moment during the day how much he has earned so far that day or how much in the hole he might be because a customer has returned an item he sold. Believe me, he has become very focused on closing a sale! He knows what he makes from every single product. He may not know the exact price, but he knows his commission, and he is very focused on selling the right thing to the right customer. I also attended a conference at IBM at which Lou Guerstner talked for two hours or so about the restructuring of IBM's internal business processes using web technology, taking $6 billion or so off a $50 billion procurement budget, for example. Productivity increases are real. They are embedded in how people are paid and how businesses work. That seems undebatable. I think what is debatable is how long rising productivity growth will continue to provide the needed buffer between all the resource pressures in the economy and higher and potentially rising rates of inflation. In that regard, it would seem that there is an increasing degree of resource pressure. Labor markets show no sign of easing. Rising overall costs should cause employees to seek higher wage increases, and rising profits should lift bonuses, which fell off earlier this year. Benefits costs are rising, especially for medical insurance. Export growth is strengthening as foreign growth takes off, and the dollar is more likely to depreciate than not. That is a long-winded way of pointing out that all of the risks to the forecast seem to me even more firmly planted on the upside than they were at the last meeting. Accelerating rates of productivity growth may have provided breathing room, and who knows whether they will last. But in my view anyway, the direction if not the timing of the next needed move in monetary policy is less uncertain than ever. Thank you.",1308
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Economic activity in the Eleventh District advanced at a healthy rate in the third quarter, and employment growth continued to run at rates about twice the national average. In retrospect, it appears that the District was more adversely affected by the Asian crisis than we initially thought and we are now benefiting from the rebound. For example, exports are posting solid gains, the oil business is up, the chemical industry had an excellent third quarter, and District high-tech companies continue to do well. At least one chemical producer is expecting the best quarter in his company's history due to the rebound in Asian demand. The construction sector, which played an important role in sustaining employment growth for the first half of the year, has softened somewhat in recent months, in line with national trends. The single-family segment has softened. Houston homebuilders are reporting that they are beginning to catch up on past backlogs and that materials shortages are disappearing. Infrastructure projects, such as new sports stadiums in Dallas and Houston and expansion at Houston's airports and the port, are helping to sustain the construction sector in the face of a weakening in the housing component. The oil and gas sector also is recovering but cautiously. Many producers remain uncertain about how committed OPEC is to the round of production cuts announced earlier this year and are unwilling to make big bets that the recent increases in oil prices will stick. Thus, most of the increase in U.S. drilling activity since April has been directed to natural gas. Also, recent merger activity has immobilized some of the larger players. And if you would like a pun, one might say that Mobil has immobilized since they reorganized. All of the increase in recent activity is concentrated among the independents, although many of them are finding themselves financially constrained for having violated bank loan covenants during the period of low oil prices. On Mexico, there is little new to report on the macro front. GDP growth remains strong along with the peso. The main developments since the last FOMC meeting center on issues regarding the taxation of the maquilladoras and the possibility of tighter restrictions on cross-border movements of people and vehicles. Turning to national conditions, it is clear despite the broad-based--and likely to be upwardly revised--expansion of GDP in the third quarter that economic growth is slowing somewhat. The residential construction sector has clearly peaked and consumer spending has been decelerating over the course of the year. There are some signs that manufacturing slowed as we moved from the third quarter into the fourth. However, the pickup in global activity will provide a boost to growth as we move forward. On the inflation front, most of the deterioration in recent months has been in energy prices or other transitory phenomena such as the spike in cigarette prices and possibly distorted seasonals in auto prices. When stripped of the food and energy categories, our broadest measures of inflation, the deflators for personal consumption expenditures and gross domestic purchases, have been stable in the 1 to 11/2 percent range all of this year. We do not expect significant acceleration any time soon. I believe there are a number of reasons for optimism about the inflation outlook. While labor markets remain tight, or if anything have gotten tighter, we still don't see a significant acceleration in wage pressures. The evidence that there has been an increase in productivity growth is stronger now than it was early this summer. The pickup in productivity growth can account for a lot of the favorable developments we have seen at the national level recently, and to me there is no reason to believe that it will be reversed any time soon. Finally, other leading indicators of inflation such as commodity prices are giving mixed signals at best. Having said that, it must be acknowledged that a number of the inflation indicators are flashing red and warrant close monitoring. I am thinking in particular of the September PPI numbers, including the core rate. We've seen recent movements in the supplier deliveries and prices paid components of the National Association of Purchasing Managers' report on manufacturing, both of which have exceeded 50 percent for six consecutive months. The crude goods and intermediate goods PPI indexes, ex-food and energy, have accelerated steadily over the course of the year and we've seen a recent acceleration in non-oil import prices. However, on closer examination some of these trends are less disturbing than they appear. While non-oil import prices have posted increases in recent months, the fact remains that they are still down from where they were this time last year. Secondly, despite the recent adverse trends, the core crude and intermediate goods components of the PPI seem to have stabilized somewhat, looking at the 3-month moving average of the annualized monthly changes, which leaves only the Purchasing Managers' report as a real source of concern. While these indicators suggest the need for continued vigilance, in the absence of corroborating evidence of accelerating inflation these data in and of themselves do not constitute a clear and present danger.",980
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, the Twelfth District economic expansion continues to outpace the average for the rest of the nation. During the third quarter, employment grew at a 2.4 percent rate, exactly equal to the pace during the first half of the year. However, growth in most of our states, including California, has been slower this year than it was in 1998, so that the District growth rate has been edging down toward the national average. Other than Alaska and Hawaii, District states remain strong, though I would point out that tourist spending is producing even a further pickup in Nevada this year. California has been expanding a bit more rapidly than the remainder of the District, and the state unemployment rate has fallen just over a percentage point since the end of last year to 4.8 percent in October. The short-run outlook for the District expansion remains quite favorable. Housing market activity has been vigorous, although the increases this year mostly have been in fast-growing southern California. Growth has been somewhat slower elsewhere and residential construction activity has been flat or down in several urban areas. Slower appreciation in sales prices for existing homes is evident in some areas as well. On the upside, we are seeing renewed demand for District electronic products. Following three lean years, prices and sales of key semiconductor products have picked up this year, and in California electronics manufacturers have gained back many of the jobs lost during 1998. Turning to the national economy, labor markets certainly have tightened a bit further since we last met. The rapid real GDP growth in the third quarter led to a further slight decline in the unemployment rate, and our forecast for real GDP growth of about 31/2 percent next year is, of course, very similar to that of the Greenbook. This suggests that labor market pressures are unlikely to abate any time soon. But while labor costs may well pick up in the future, these costs do not appear to have been particularly burdensome to businesses in the recent past. Despite apparently tight labor markets the ECI has risen only 3.1 percent over the past year. And while compensation per hour has risen much faster, unit labor cost increases receded last quarter due to strong productivity growth. Moreover, rapid real GDP growth and low price inflation in the third quarter, together with what appears to be a pickup in profits, also suggest that aggregate supply has continued to expand at a robust pace. This provides room for at least guarded optimism about inflation. After balancing these signals, we come out with a slight upward trend for the core CPI. Our forecast shows a rise from 2.1 percent this year to 2.3 and 2.4 percent respectively in the next two years. Even such a slight upward trend in future price inflation is a concern. As we know, however, such an upswing has looked likely for several years but has not materialized. In deciding on policy, we will be faced again with whether to put more weight on forecasts of problems ahead or on past results that have been quite favorable. Thank you.",613
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Seventh District economy continues to be quite healthy, but reports from our directors and other business contacts suggest that activity is moderating somewhat in a number of sectors. At the same time, we are also getting more frequent reports of increasing wages as a result of still very tight labor markets. We have seen some slowing in housing activity, but that sector seems to be holding up better than elsewhere in the nation. Many of our retailers indicate that sales have been running below expectations recently, but they generally remain quite optimistic about the upcoming holiday sales season. Nationally, sales of autos and light trucks have come down from the stratospheric levels reported for the third quarter. Of course, the 161/2 million light vehicles sold in October still represents a very high sales level. Indeed, that base is 1 million above total sales for all of last year, which the industry considered a very good year. In fact, some of the automakers and suppliers we have talked to welcome some moderation in activity. Some suppliers tell us that they are actually losing money on incremental business when activity is as high as it has been because of their high marginal input costs. Some potential slowing is also apparent in the heavy truck industry where the backlog has been whittled down from 9 months to just over 7 months, but that is still higher than the historical norm. One of our former directors noted that shortages of truck drivers have led his firm to cut back in ordering new trucks. Reports also indicate some slowing in cement, paper, and printing, although business is still considered to be good in these industries. In contrast, the medium-duty truck industry shows no signs of slowing, our steel industry continues to improve, and gypsum wallboard shipments are still up sharply from a year ago. The District's farm economy, however, continues to struggle as a result of abundant supplies and low commodity prices. On the other hand, one large farm equipment manufacturer that I was talking to surprised me by saying that they plan to boost production next year and rehire workers they laid off even though demand for the firm's products is going to remain weak. The reason is that the firm significantly reduced dealer inventories this year. They took a lot of products out of the pipeline and they are going to have to restock next year. Our labor markets are still very, very tight. However, the latest Manpower survey of hiring intentions indicates that most industries will continue extensive recruiting efforts into next year's first quarter--more of the same. This report, of course, should be considered confidential until it is publicly released next Monday, the 22nd. So far actual price increases continue to be subdued. However, our latest survey of Michigan retailers indicates that they plan to raise prices over the next three months and most purchasing managers around the District continue to report paying higher prices for their inputs. Y2K, of course, remains a big question mark in the near-term outlook. We have checked with a wide variety of businesses, and the general sense we get is that companies feel they are prepared, although concerns remain about the readiness of firms abroad. We made a special effort to contact convention and tourism bureaus in our major metropolitan areas, and they said that they had not heard of any adverse impact on business plans for early next year. In fact, they were all pretty optimistic that Y2K would actually boost business for them. Turning to the national economy, the Board's staff has raised its forecast of output growth in the next few quarters, as Mike mentioned, but it has raised its estimate of trend growth even more. Thus in the Greenbook scenario, growth slows to below potential, easing some of the pressures in the labor market. Even so, core CPI inflation accelerates markedly by 2001 to a level that on a methodologically consistent basis would be the worst since 1995. We, too, have raised our estimates of productivity growth and potential output, although not to the extent of the Board's staff. But we don't see actual growth falling below these higher levels of potential over the forecast period. Certainly the higher long-term interest rates that have already impacted the housing market should act as restraint, but business and consumer confidence remains quite high, and the stock market, of course, has recovered most of its recent losses. More importantly, in contrast to the last few years, with improved conditions abroad we expect much less drag from the external sector, similar to the Greenbook. Thus we see growth slowing only to about its new trend and only after labor market conditions have become slightly tighter. Not surprisingly, we are even more pessimistic than the Greenbook about inflation. Hard evidence like consumer price pressures outside the energy sector is still scarce, but the continued increases in the PPI are worrisome. Thus, I think we need to be especially careful not to sacrifice the progress toward price stability that has been a cornerstone of this expansion. The low inflation environment is clearly responsible for some of the faster productivity growth that we have experienced, and we all want to maintain that momentum.",1017
-fomc-corpus,1999,President Broaddus,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. In our District, activity continues to grow at a solid pace overall, maybe even a bit more than solid. Sales in our region seem to have accelerated in October and those strong sales appear to be continuing in November. Generally retailers in our region are fairly optimistic about prospects for the holiday season. Activity elsewhere in the service sector is less buoyant, particularly in the real estate industry. Manufacturing activity remains on a rather significant upswing. The exceptions, as I have mentioned before in these meetings, are textile and apparel manufacturing in the Carolinas. A lot of those companies are moving their operations to Mexico. Like everybody else who has commented, what can I say except that labor markets are still very tight? But I would underline Mike Prell's comment that stories about pressures in labor markets seem to have become more common and intense. We are hearing not only the usual tight labor market anecdotal comments, but they are more frequent and they are much more emphatic on the part of employers than earlier. Also, over the last several weeks I have heard a number of employers talk, again emphatically, about very sizable wage increases. I attended the annual meeting of the Virginia Governor's Revenue Forecasting Committee yesterday, which includes a number of CEOs of large companies. At that meeting they have a business conditions go-around, and I would say that at least a third and maybe half of the participants mentioned recent increases in wages, which in some cases were sizable. One person talked about 10 to 15 percent increases for skilled workers. Firms are doing this in order to attract and to retain people. Often the wage increases are for skilled workers, but others are involved as well. With respect to prices, we still don't see any general increase in the price level in our area, but underlying pressures may be building. Intermediate prices appear to be rising broadly in the industrial sector according to many of our contacts. We hear the same kinds of comments a lot of others have already mentioned about rising health care costs. One of our Richmond directors who runs a hospital in Charlottesville referred to HMO costs as ""exploding"" and said it was clear that those costs would have to be passed on. That is the District situation. With respect to the national economy, I have read a lot of Greenbook forecasts over the years and, naturally, have found some more persuasive than others. But I found this month's projections and the reasoning behind them very persuasive. The bottom line as I read it--and I think it's the way Cathy Minehan read it--is this: While recent increases in long-term interest rates and a less buoyant stock market may slow the growth in aggregate demand to some extent in the period immediately ahead, we probably are already somewhat behind the inflation curve. And that is likely to become more apparent as time passes. Beyond this, the overall tone of the Greenbook--and also I think much of the recent economic data if one looks at them carefully-suggests to me that the risk of error in this even quite strong forecast remains on the upside. We hear some comments about signs of softening in the economy. That sounds to me a little like saying that Mark McGuire had a softer season this year than last year. Overall spending growth is currently still very strong despite the recent leveling off in home sales. The big jump in hours worked in October suggests to me that real GDP growth in the current quarter could well exceed the 4 percent Greenbook projection. And there is a possibility, as Karen Johnson mentioned, of a greater-than-expected depreciation of the dollar. In general, I think these upside risks compound the prospective deterioration in the inflation outlook that is already built into the Greenbook forecast. Let me make just a couple of other quick points. First, I think the Greenbook is quite correct in suggesting that the moderation in wage increases we have seen over the last two or three months may well reflect the drop in inflation last year. In fact, I think the record shows that wage-setting behavior in the last few years has generally responded to recent movements in prices. With both overall and core inflation accelerating lately, I think we can expect to see faster wage growth next year. And in my view that is consistent with the anecdotal information mentioned by me and by a number of others earlier. Second and finally, I was pleased to see the explicit recognition in the Greenbook that faster trend productivity growth implies higher real interest rates. I think one of the principal policy questions we need to ask ourselves later in the meeting is whether the tightening actions we have taken to date are sufficient to allow the upward adjustment in real rates that is necessary to keep the economy in balance, given recent productivity developments. The alternative is that we may be holding rates below where they need to be to accomplish that objective, with all of the inflation risk that would imply. Thank you.",980
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, the Tenth District also continues to do quite well; we have not seen a lot of change since our last meeting. On the basis of our surveys of District activity, there has been some slowing in the residential housing market from the earlier rapid pace and a bit of slowing in some areas of retail sales. In the manufacturing sector, the picture is somewhat mixed. While domestic demand has slowed some, there has been a pronounced pickup in foreign demand in some of our manufacturing industries. For example, a foundry and some of the metals manufacturers in our District have seen a very strong pickup in foreign orders. Our energy sector continues to expand right now as they look at these favorable prices. We are primarily natural gas driven and, of course, weather has some impact. But even with some of the current mild weather patterns, our producers still see a good outlook as they judge their supplies. Mike Moskow mentioned the weakness in the agricultural sector. We, too, have had very strong production this year, so prices remain low and that sector is very much dependent upon the continued strength in transfer payments. One of the secondary elements in our agricultural and rural areas is that, frankly, there has been strong demand for autos and especially trucks as these transfer payments have been made. So, actually, cash incomes remain fairly good, and that has been reflected in a strong economy in some of those agricultural areas. Overall, though, economic activity in our District is extremely strong. Labor markets are tight everywhere. We hear constant discussions about the difficulties that firms are experiencing in their efforts to find workers to fill jobs. Let me turn very briefly to the national outlook. We, too, see the growth in GDP to be at better than a 31/2 percent pace, and we also are taking into account some of the improvements in productivity in that outlook. Looking forward, we see the foreign sector picking up and offsetting some of the deceleration on the domestic side. So as we look at these various elements, the preponderance of evidence suggests to us that the risk to the forecast is on the upside in terms of total demand within the U.S. economy. Personally, I still think there is a good case for acting now, though we haven't quite come to that discussion, whether one looks at it as preemptive or as a reversal of the insurance policy we took out a year ago. We took that insurance in the face of a very strong real economy. Its effects are still working in the economy and I think that factor is aggravating the upward risk that I see. Thank you.",521
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Overall growth in the Southeastern region remains healthy, but with some unevenness across sectors. For example, manufacturing, which as I reported was a bit soft at the time of our last meeting, has bounced back, with current production and shipments higher and the outlook viewed as optimistic as well. Tourism, on the other hand, appears to have slowed, but a closer look reveals very large increases in capacity in hotel rooms and cruise ships, and thus the maintenance of past occupancy rates is difficult. Housing in our region continues to show some slowdown, mirroring the national reports, and that is being attributed to the rise in mortgage rates. Several large banks are reporting that their mortgage loan originations are off as much as 50 percent from six months ago. Other lenders tell us that the volume of refinancing is running less than 10 percent of the volume this time last year. Single-family new construction is flat and both nonresidential and multifamily construction has slowed somewhat. By contrast our energy sector continues to reverse earlier declines in drilling, with the rig count up still another notch from a month ago. Lenders report that corporate loan demand continues at a high level but is moderating. Interestingly, our international examiners tell us that they are now seeing significant capital flight out of Venezuela and Colombia, and some from Ecuador. Some of that money is going into second homes in south Florida. And some Colombians have moved their families to Florida and are commuting to and from Colombia each week. Our overall regional unemployment rate is below the national average, but the very tight labor market still has not yet resulted in widespread wage pressures. The most notable large price increases reported once again, as others have observed, are in health care. This month we asked our directors to probe hard in three areas: for evidence of potential liquidity problems at financial institutions and among their customers over the coming year-end period, for signs of a Y2K-related pull back in investment activities, and for evidence of credit quality problems. At this point, there is just no grass roots evidence of Y2K-related liquidity problems, as everyone seems to have locked in their financing needs for the end of the year. Indeed, we often heard that many still are expecting to see a significant inflow of funds into the United States, particularly from Latin America, over the remainder of the year. As best we can judge, Y2K is just not a big deal for people we talk to in our region. Our directors tell us, and our bankers confirm, that credit quality generally seems to be improving. There are exceptions in the health care industry and agriculture, and we have reports of a few isolated problems at community banks. On the national front, moderate inflation and further advances in employment, together with a recent upward revision in the GDP statistics, make the economy's performance even more remarkable when assessed against the historical record. We read the new data as suggesting at least a somewhat greater likelihood of continued strength in the consumer sector that will carry the expansion forward. The broader definition of personal savings suggests that consumer balance sheets are not as weak as some may have feared. Newly revised data on consumers' debt burdens suggest that consumers are carrying less debt relative to income than they did in the peak periods of the 1980s. Finally, bankruptcies appear to have leveled off. I think the fundamentals are still in place for strong growth. Despite the good news and favorable data on the price front, I think there are still valid reasons to be concerned about the inflation outlook. My own staff's judgmental and VAR model forecasts are similar to those contained in the Greenbook. Our work suggests only a small probability that inflation will average below 2 percent in 2000 and a not insignificant probability that it could move to slightly more than 3 percent. On a percentage basis that would be a very large and worrisome deterioration. In addition to the identified price pressure points that a number of people have referred to, I would note again that other than productivity many of the safety valves and mitigating factors that might have continued to cushion inflationary pressures have one-by-one turned against us. World economic growth is improving, exchange rates are responding to the U.S. trade deficit as expected, import prices are increasing, and energy and other commodity prices have reversed their moderating effects. Our policy choices today seem to me to be quite similar to what they were at our last meeting. We still have a good window of opportunity to provide modest additional low-cost insurance that will improve our chances of locking in our good inflation performance and tempering inflationary expectations. Thank you, Mr. Chairman.",932
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you. The District economy remains healthy. If anything, it has improved even further because a couple of the sectors that were lagging--namely, iron ore mining and oil exploration--have picked up recently, albeit in the case of oil exploration from a relatively low base. Otherwise, manufacturing is strong and construction activity is uniformly strong. Retail sales are robust and in general retailers are quite optimistic about the upcoming holiday season. Labor markets remain very tight. But interestingly--and I have no explanation for this--if you ask retailers about the availability of temporary part-time workers for the holiday season they say it's no problem finding them. How they are managing that I don't know, but that's the report. The exception to all of this is the same old exception, which is agriculture. The principal problem there, of course, is commodity prices. There is no question that problems in agriculture per se have spilled over to the rural economy more generally if one looks at employment measures in the rural areas. Those people don't have any trouble finding jobs in the cities, so they don't remain unemployed for long. But, of course, they do have the adjustment of moving or commuting from the farm to the city. As far as the national economy is concerned, it seems to me that we are in a circumstance where substantial real growth is assured and the question is what inflation will accompany it. What can we say about inflationary prospects? The Greenbook has what I, at least, consider to be a major new look at productivity and comes out, I think, with a significantly more positive picture. And the Greenbook forecast now is in many respects a lot like our VAR forecast. One might think that the more favorable path of productivity, other things equal, would lead to a diminution of concerns about prospective inflation and inflationary pressures. But the Greenbook basically has the same old song as far as inflation is concerned. And I guess I have to say that I'm just not entirely persuaded. Our model has for some time been more sanguine about the inflation outlook and it remains that way. I think it's very clear that a lot is happening on the supply side of our economy, perhaps more than we know. If we calculate productivity from the income side rather than from the output side, we continue to come up with significantly more favorable numbers. So, if anything, my uncertainty about the inflationary outlook has increased rather than diminished at this point.",486
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The economic growth in the Second District has moderated since our last report. Overall consumer price inflation has barely accelerated, though there are scattered reports of some rising prices--for example, in manufacturing inputs, housing, and hotel rooms. The unemployment rate continued to hover close to 5 percent in September, but private sector job growth slowed to a 1.1 percent annual rate, well below the 1.9 percent pace in the past 12 months. Retailers note that sales have been somewhat sluggish in recent weeks. They remain fairly optimistic, however, about the upcoming holiday season. But a number of retailers think that the pricing environment is shaping up to be more competitive than last year. Housing activity has moderated somewhat from a spring-summer boom, though markets remain quite tight. In the New York City metropolitan area a shortage of available homes has evidently crimped sales and spurred double-digit increases in both selling prices and in rents. Multifamily construction activity in the District remains brisk; single-family building has tapered off. Purchasing managers report some moderation in growth in October along with persistent price pressures. Banks report a decline in loan demand, a noticeable tightening in credit standards, and continued improvement in delinquency rates. There is much virtue in the banking sector, if you believe all they tell you. On the national outlook, we forecast growth at a 4 percent rate in the fourth quarter. We think growth will moderate further in 2000 and 2001. The primary cause of this slowing is the rise of long-term interest rates thus far in 1999, which has caused housing construction and sales to decline in recent months. Higher interest rates have also brought mortgage refinancing activity to a virtual halt; for many homeowners refinancing had lowered household debt service burdens and had provided a convenient way to extract equity from their homes. Finally, the rise of interest rates has been associated with a leveling off of stock prices, which may be contributing to the moderation in growth of consumer spending evident in the third quarter and apparently continuing in the fourth quarter. Net exports are expected to continue to exert a drag on the economy, while the boost from inventory building fades somewhat. We believe that the potential growth rate of the economy is now about 31/2 percent. Our growth forecast for 2000 is 3.2 percent and for 2001 it is 3 percent. If we are wrong, however, we think growth will be somewhat higher because of possibly stronger growth abroad and a possibly stronger wealth effect if stock and bond markets return to their upward trend. Since our baseline forecast has core inflation creeping up from about 2 percent now to 23/4 percent in 2001 under an assumption of no policy change by this Committee, a modest additional tightening would be appropriate insurance against aggregate demand exceeding the supply side's ability to produce goods and services. I should note, however, that I absolutely and vehemently disagree with any notion that this Committee is behind the curve. In addition to the likely help on price stability that a modest tightening would involve, I think it would also help to reduce the current account deficit somewhat. We have to be careful about the current account deficit. It's easy to finance it because of the attractiveness of U.S. assets. But it is clearly a longer-term problem. And when we have an opportunity to do something about it, we should take it.",684
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I can summarize the information from our contacts in the Eighth District in four points. First, housing activity is definitely a bit slower, but not a whole lot. Second, labor market pressures continue, but despite isolated areas of sizable wage gains there is no generalized break-out from the recent experience of modest wage increases. Third, product pricing remains under good control overall. Fourth, everyone is tired of talking about Y2K. Nobody has anything to say there; nothing in fact seems to be happening. My FedEx and UPS contacts both reported recent increases in volume. Measuring on a year-over-year basis, the August-September months are stronger than the earlier months. So, they see things accelerating. And UPS, anyway, is revising up its volume projections for next year. Both UPS and FedEx confirm the Greenbook view that Asia and Europe are strong. Latin America is relatively flat; not much is going on there. Firms continue to cope satisfactorily with the labor market pressures. UPS relies a great deal on college students as part-time labor. The firm has increased the rewards, and my impression is that students are coming out of the woodwork to throw packages. Changing gears to a different topic, I want to emphasize my view that the asymmetry announced at the last meeting did exactly what I certainly had hoped it would do. In response to the strong incoming data, market rates moved up. Then as the data came in benign later in the intermeeting period, rates moved back down. So I think the asymmetry did precisely what we, or at least I, expected it to do. That's all I want to say at this point.",335
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Using orthodox reasoning, I think a case for tightening policy at this meeting could be made fairly readily. The flat funds rate version of the Greenbook forecast has aggregate demand growing at a rate of nearly 5 percent in this half year and nearly 4 percent for the next two years. Starting from a position where labor markets are already very tight, this demand growth is even more than the upgraded estimate of potential GDP growth. It represents a little too much demand pressure even for our new economy and would seem to call for a tightening of policy to trim some of this pressure. But at the last meeting, Mr. Chairman, you challenged us to think about the economy in new ways. I'm afraid I don't have a new way of thinking about aggregate demand and aggregate supply, but there is a new way to think about monetary policy--one that we have not talked about much in this room but one that is sweeping the globe outside of this room. It is inflation targeting, a monetary approach that I'm told is now being used in 44 countries. In most of these countries inflation targeting has seemed to be successful in controlling inflation. And in many of them it has seemed to be successful in limiting output variation as well. First, on inflation targeting itself, one can get to it through a fairly logical progression. The idea of monetary targeting ran into difficulty because of shocks in liquidity demand. These shocks made it difficult to interpret the growth of the monetary aggregates. Did growth mean that the economy was overheating or simply that there was an upward shift in demand for liquidity? The next step was to move to nominal income targeting, an approach that many still favor. But again there are shocks, this time from productivity. If nominal income is growing rapidly, does that mean that the economy is overheating or simply that productivity has risen? Given these shocks, one might reasonably conclude that the central bank should target inflation directly. Inflation is what we are trying to stabilize, so we should just stabilize it. One could use either a model or a non-model approach for inflation targeting. In the present circumstances, the Greenbook model approach clearly suggests tightening policy. Acceleration of inflation occurs gradually in the flat funds rate version of the Greenbook forecast and it would take a fairly emphatic tightening of policy to stop it. As we all know, this occurs because the economy is now operating below the Greenbook's estimate of NAIRU. To be sure, there is growing professional doubt about this estimate. In early 1997, Staiger, Stock, and Watson had a piece in the Journal of Economic Prospectives in which they estimated a confidence band for NAIRU that ranged from 4.3 to 7.3 percent so that unemployment was not found to be a particularly good predictor of future inflation. Recently, a paper by Brainard and Perry built in coefficients that follow a random walk through time and are not constrained to revert to any particular level. This procedure gives estimates of NAIRU that are even below present unemployment rates. These papers are controversial, but that's just the point. It may make sense to look for other ways to target inflation. Turning to nonstructural approaches, these can be preemptive if there are lags in monetary policy. In that event, nonstructural approaches would involve finding leading indicators or other forecasts of inflation and having the Fed move on the basis of their signals. Unfortunately, there are not many good leading indicators. One that I will call the ""pipeline"" indicator is the core PPI. The latest numbers for that index are not very reassuring; the core PPI is growing at an annual rate of about 6 percent. Mike Prell cautioned us earlier not to look only at the core but at the total PPI. I don't have that figure here, but it would similarly be not very reassuring. Given the likely fall in the dollar and the strength in world commodity prices, not all of which are reflected in the core PPI, there could be even more price pressure in the pipeline. It's always risky to generalize from a few monthly numbers, but I would still consider these data as suggesting that policy should be tightened. A further approach might be to look at the inflation forecasts of others. The Greenbook Part II has useful information on this on page II-34. For the past three years now, the consumer surveys by Michigan have expected a rise in inflation, meaning that their forecast of inflation has been above current rates. On the other hand, their median forecast of inflation is now no higher than it was two years ago, indicating that they may not be fully current on the impact of supply shocks, tight labor markets, and so forth. It's hard to know whether to read this as a forecast of rising inflation or stable inflation. Things should be clearer for the professional forecaster, but they are not. Those surveyed by the Philadelphia Fed also have expected more inflation than actually occurred for the past few years. Again, these forecasters have not raised their forecasts in recent months. It is sometimes argued that that is because they expect the Fed to stabilize inflation. But these forecasters have also built into their forecasts only a very slight rise in short-term interest rates, as have the Blue Chip forecasters, which could be a partially overlapping group. The Blue Chip forecasters do not look for a particularly big rise in inflation and they seem to be forecasting that the Fed will only have to tighten policy very slightly to prevent this rise. In the end the forecasts of inflation do not help us much, though there may be a very weak vote for tightening policy. Where does all this leave us? To me, the structural model approach to inflation targeting suggests rather clearly that we ought to tighten. The pipeline approach suggests the same somewhat clearly, and the approach of consulting other forecasters gives only a weak vote. While the intensity varies, all indicators do point in one direction, however, and I am inclined to think we should point that way, too.",1205
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. At the last meeting I think many of us were willing to take a patient but vigilant attitude, recognizing that a great deal of data would become available during the intermeeting period. Now those data have become available and we seem to be faced with a choice between what I'll describe as policy optimism and policy caution. On the optimistic side, the most recent NIPA revisions do give a reason to believe that productivity trends have continued to rise. Capital deepening, I gather, is probably the source of this positive outcome as outlays for equipment and software have been extremely strong. While the staff's new estimate for trend labor productivity growth must be approached with some caution, I do note that a number of private sector forecasters also have revised upward their estimates over the last year or so. I think we should be open to the possibility that the staff, though perhaps ahead of others, may have gotten it right. However, policy caution also sets in when one recognizes that even if the speed limit is somewhat higher, the economy is still at this stage exceeding that limit at a time when labor markets are already stretched thin. While there is evidence of some slowing in housing and, as others have indicated, in other sectors as well, overall third-quarter GDP barreled ahead at an estimated annual rate of 4.8 percent that will probably be revised up. And the outlook, according both to Board staff and private forecasters, is for continued very strong growth that at this stage is probably above trend and may be slowing only gradually to trend. The major new factors that emerged during the period and that are a source of some concern I think are both domestic and international. Domestically, the pattern of tight labor markets continues and if anything those markets have tightened even further. Unemployment, which had been stable at around the 41/4 percent level or maybe a little lower, has clearly ticked down again. At the same time, the percent of the population not in the labor force who want jobs also has declined. The labor force participation rate has remained in a tight range around 67 percent since March 1998, which is quite unusual I think in such a strong economy. That suggests that perhaps the supply of available workers is indeed nearly exhausted, and this is occurring just as aggregate hours data show a continuing uptrend. So even if the productivity trend is somewhat higher, I think there is a real risk that sooner rather than later wage demands may try to catch up with productivity increases. Now, the tautness in the labor market is continuing just as the strength of the rest of the world is becoming a little clearer. Karen Johnson is right to caution us that there are still some risks that there could be policy mistakes in some places. Japan is certainly a question. But overall, I believe it's more likely that global healing is actually becoming a bit of a global recovery which, as someone said earlier, is taking away one of the safety valves that could prevent a potential overheating of the U.S. economy. In fact, that global recovery may be adding a bit more fuel to the fire. I think exports have probably turned the corner and will, I believe, continue to press on domestic resource utilization. Real exports grew at an annual rate of about 12.4 percent in the third quarter, which is about three times the pace of the previous quarter. And the final component, which Mike Prell alluded to in his remarks, is that the IP picture seems to be showing strength throughout the economy. So in a world of stronger global markets and increased industrial activity at home, I think we are seeing a bit of an impact, including some early signs of bottlenecks. Bob Parry alluded to the Purchasing Managers' survey, which did in fact show for both prices paid and for delivery times the worst relative performance in several years--since May of 1995, I believe. And while Bob is right to suggest that one survey does not necessarily present us with a smoking gun, I don't think it's appropriate to ignore bullets being put into the gun, if that's what is happening. So taken altogether, it appears that we have a tightening labor market, a firming of industrial and external conditions, and perhaps some early signs of emerging bottlenecks. And I think the risk, if anything, is skewed even more strongly to the upside. So, in my view the choice between caution and optimism is becoming even more stark.",896
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. We have a wealth of new and especially revised data to incorporate into our assessment of the outlook. On balance, the data suggest that both productive capacity and demand are advancing more rapidly than previously expected. The further upward revision of the estimate of trend productivity does translate, as reflected in the Greenbook, into a slightly more favorable inflation forecast over the next couple of years. That is, the temporary disinflationary force of higher productivity growth has been enhanced and renewed in this forecast. While this has taken some of the quantitative edge off the Greenbook inflation forecast, it has not changed the qualitative picture or the balance of risks, which in my judgment definitively continues to point toward an increase in core inflation over the forecast horizon. And I might note that if the Greenbook has lost some of its quantitative edge it hasn't lost any of its rhetorical edge, arguing very forcefully that inflationary pressures are building. The key to inflation prospects is not how fast supply or demand is advancing but rather the degree of imbalance today between supply and demand, particularly in the labor market, and whether or not this imbalance might be further aggravated going forward. In the Greenbook forecast growth slows to trend. There is some discussion at several points in the Greenbook that growth is slowing to below trend and that pressures in the labor markets are easing, but I do note that the unemployment rate is 4.2 percent at the end of 2001. So that 0.1 percentage point increase in the unemployment rate is not much of an easing in labor markets. At any rate, my point is that the slowdown projected in the Greenbook only prevents the degree of labor market tightness from becoming more acute. I agree with the staff that this degree of labor market tightness has prevailed for some time and has been offset in recent years by a combination of favorable price shocks and the disinflationary effect of the significant acceleration of productivity. But I think the situation has changed in a very important way with respect to the future. We already can see that overall inflation has increased significantly this year. So we can look forward now to reinforcing developments instead of offsets. Rising inflation this year will reinforce the already tight labor markets, putting upward pressure on nominal compensation next year. That will be reinforced by the effect of higher health care expenses, and the pass-through of those costs to inflation will be reinforced by further increases in import prices. One of the most critical aspects of this projection of trend growth is that at the end of the period--after which inflation has increased by perhaps as much as 3/4 percentage point--the degree of labor market tightness is the same as it was at the beginning of the period. Inflation is rising just as fast at the end as it was at the beginning, and it's hard to see how this process gets contained without inflation moving above 3 percent in the period going beyond the forecast horizon. If I take one thing importantly away from the Greenbook, it is that it's possible to be an optimist about productivity and a pessimist about inflation at the same time. I think that's important to keep in mind.",632
-fomc-corpus,1999,I wish to note that our governor is literally a one-handed economist. [Laughter] Governor Kelley.,21
-fomc-corpus,1999,"Thank you, Mr. Chairman. By this time of the morning most of what needs to be said has already been said. But let me briefly summarize how I see the state of play and offer several comments that I hope might be useful as we move toward our policy formulation. It seems clear that the economy remains very strong, with a lot of ongoing momentum. True, we do see some better defined indications of slowing activity, with housing apparently topping out and quite possibly autos as well. Other air pockets may well appear, but the momentum remains impressive. New jobs continue to be created in substantial number, driving unemployment down even further. Consumer sentiment has rebounded from its brief and shallow dip. The stock market paused for a time, but recently the strength appears to be broadening and the market seems to be moving into a new up leg. Foreign economic growth looks both more solid and more rapid--possibly a very potent influence on our own outlook. The year 2000 is an election year and those are generally strong. Inflation remains quiescent. One should always look for signs of serious potential weaknesses or a slowdown, but other than the ever-present danger of shocks it's hard to identify very many looming in the forecast period. In short, the risks seem distinctly on the upside. My formulation of the key question before us is: How and when might today's healthy strength deteriorate into unhealthy overheating? And the obvious second question to be addressed shortly is: What policy today is most likely to be beneficial a year from now? Let me make several quick observations. First of all, stronger world growth is highly desirable. However, it does complicate our inflation outlook. A lower dollar, stronger export demand, and a higher level of world resource utilization all put new upward pressures on our price level. This is an important reversal of the favorable disinflationary impact we got from a weaker world in the past several years. Second, the baseline Greenbook forecast calls for some tightening over the forecast period but still projects a rising rate of inflation through 2000. While a case can be made--but not by me--that the rate of inflation likely to be reached by the fourth quarter of 2001 would still be within acceptable limits, I'm concerned about what that rising trend might imply for policy. This Committee could be required to make very strong tightening moves to counter it. Finally, there is the apparently strong growth in the rate of productivity improvement, the Chairman's second derivative. It has served us wonderfully well. But going forward from here, what are the parameters of its likely impact? At one end of the spectrum the improvement could continue for some period of time, but as the Chairman observed it will not do so indefinitely, with overheating potentially a subsequent condition. At the other end, while the probability may be low, it could disappear very soon and we could find ourselves scrambling to avoid the consequences. To me perhaps the highest probability is that the rate of change will remain positive but will not be strong enough by itself to hold off the cost increases resulting from stronger world growth, the wealth effect, and ever tighter labor markets. And an earlier and stronger rise in prices could result. At the last meeting the Chairman summarized his analysis by observing that we are not far from where we want to be and we're not behind the curve. I agree. But we may need to move further in order to be sure that we stay there. Thank you.",688
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"The regional economy in the Philadelphia District continues to grow. Labor markets are tight, yet there are few signs of any upward trend in inflation despite rising raw materials prices. The outlook generally remains positive and there has been no basic change in recent months. One continues to hear stories about innovation, new ways of doing things that improve productivity. For example, the Internet is likely to have a major impact on the way people buy all kinds of goods, from food to automobiles. And while there are a number of examples that I could cite, given the hour I'll skip that. But the bottom line is that existing distribution networks are likely to become less expensive over time as a result of all of this. Turning to the national economy, demand remains strong. Resources are stretched, but productivity growth is also strong and inflation remains benign despite repeated predictions to the contrary. The traditional models have not held up and longer-term inflationary expectations remain well anchored. What does the future hold: More of the same or a less favorable mix? Even if a less favorable mix emerges, it is likely to emerge slowly. If more of the same emerges, then we can continue to have the benefits of higher growth without higher inflation. Vigilance and patience have much to offer in this situation. Thank you, Mr. Chairman.",258
-fomc-corpus,1999,We have just created another record. We are on time for coffee.,14
-fomc-corpus,1999,Let's turn to Don Kohn for his report.,10
-fomc-corpus,1999,"Thank you, Mr. Chairman. Based on the information received since your last meeting, most market observers have characterized your decision today on whether to raise rates or leave them unchanged as a ""close call."" And in the interest rate futures market the odds on a 25 basis point policy firming at this meeting are not far from 50-50. On one side, data related to costs and prices generally have continued to be favorable. Despite tautness in labor markets, nominal wage and compensation increases by most measures remained more moderate than many had anticipated and betrayed few signs of a pickup. Moreover, revised NIPA data have bolstered the case for accelerating productivity that could keep inflation pressures contained for a while. Taken together, this information has led the staff to flatten slightly the trajectory of price acceleration in the Greenbook forecast. An alternative simulation in the Greenbook suggests that even with an unchanged federal funds rate for the next two years, total CPI inflation would remain relatively damped by historic standards, probably at a little under 3 percent in 2001. Committee members have often noted the difficulty of making preemptive policy changes when they are unsure about the underlying relationships of the forecast. By leaving open the possibility that the NAIRU could be a lot lower than the staff has allowed for or that productivity is picking up faster, the information becoming available since the last meeting might be seen as only accentuating uncertainty about key supply relationships. Either development could allow the economy to operate at or below the current unemployment rate for some time without inflation rising. In such circumstances, tightening policy could well prove to be unnecessary or at least premature and could incur costs for the U.S. economy in the form of fewer jobs and lower income and wealth for a time than it was capable of producing. If this were a serious concern, the Committee might well want to await further information about likely developments in costs and prices, and stand pat on policy, choosing alternative B. Judging from surveys of households and economists and from the gap between nominal and inflation-indexed bonds, expectations that inflation will remain contained are firmly entrenched. Survey measures of long-term inflation expectations haven't changed in several years despite wide variations in headline consumer inflation and occasional bond market jitters. And, with overall inflation remaining muted in the staff forecast, inflation expectations seem unlikely to increase much in the near term in a way that would make the subsequent disinflationary effort especially painful should it turn out that tightening policy at this meeting was in fact an appropriate step. On the other side, however, incoming information on economic activity and demand also continues to indicate that the economy is growing at an unsustainable pace, in excess of the expansion of supply, as Mike discussed, further drawing down the pool of available workers. In the Greenbook forecast, financial conditions already in place are, in effect, sufficiently restrictive to bring the growth rates of supply and demand roughly into alignment. And they stay in approximate alignment over the next two years with only some gentle nudging on the funds rate next year to counteract the effects of the upward drift of core inflation on real interest rates and the strengthening of foreign economies. However, not only has this balancing of growth rates failed to occur yet, but the Committee may see significant risks that it will not materialize and labor markets will tighten further in the absence of a near-term firming of policy. Mike and Karen have mentioned several possible factors that might boost demand. I'd like to highlight in addition what appears to be a global shift toward more accommodative financial conditions, despite recent actions by a number of central banks. In the United States, most credit spreads are down somewhat over recent months. A portion of this decline may reflect reduced concerns about potential problems over the century date change, in which case it is only bringing forward by two months an anticipated shift that would have occurred next January. But some of the narrowing seems also to be related to greater optimism about long-run prospects for businesses and the economy. This same optimism is reflected in the more ebullient investor attitudes in equity markets and the associated run-up in stock prices in recent weeks. The shift appears to be even more pronounced for many foreign economies, judging from sharp increases in their stock prices and declines in emerging market debt spreads to levels predating the Russian debt default. The interplay between improved economic performance and reduced financial headwinds may produce stronger global growth than allowed for in our forecast. If so, pressures on prices in the United States could come not only from accompanying greater resource utilization, but also from a sharper decline in the dollar as foreign prospects come to seem relatively more favorable and foreign demands on the world pool of savings strengthen. The sense that financial restraint on spending in the United States is easing might be one reason why the Committee would favor a tightening of policy by 25 basis points, as in alternative C. Such a firming, by reducing the odds on more accommodative financial conditions developing, would provide the Committee with better assurance that at least the growth of demand will come into better balance with that of supply, though leaving the unemployment rate at an unusually low level. In the past few years, the Committee often has been willing to live with the risk and the fact of tightening U.S. labor markets. But it may see the situation as somewhat different at this juncture: The unemployment rate is already lower than it has been since the late 1960s. Decisions to remain asymmetric but not to tighten over extended periods in 1997 and 1998 were made against the background of continuing moderation in inflation. Today, growth in most broad price indexes has risen, while the rate of increase in core measures has been flat, with the notable exception of declining core CPI inflation. And, declines in oil and import prices are no longer holding down inflation, but instead are contributing to a pickup in pipeline price pressures. The cost of not tightening at this time if a firming turns out to have been needed could be a further overshooting of the economy beyond its long-run potential, and hence a larger or more prolonged and possibly more disruptive adjustment later. Equity prices may be a particular risk in this regard. The staff forecast has equity prices remaining near current levels with no near-term change in policy, but if an absence of tightening is read as suggesting a significantly lower path of interest rates going forward, equity prices could strengthen significantly, boosting consumption and investment. If such an increase pushed the economy further beyond its sustainable potential and equity prices further above their long-term levels, it would distort resource allocation and pose a greater threat of macroeconomic and financial instability when markets and the economy eventually adjusted. Century date change concerns should not prove a barrier to tightening policy at this meeting, if the Committee wished to take this step. To be sure, markets are still somewhat skittish and illiquid, so their response to a tightening may be a bit more volatile and unpredictable than usual, especially because it is not fully anticipated. In addition, deteriorating conditions between now and year-end remain a threat should lender caution intensify or household demands for currency build by even more than depositories have allowed for. But it is hard to see why a flight to safety and liquidity would be triggered by a 25 basis point increase in the federal funds rate, particularly since it would be seen as the last for the year--or why the effects of any such flight would be much accentuated if it occurred against the backdrop of a slightly higher federal funds rate. With regard to the symmetry or asymmetry of the directive, the Bluebook assumed that under alternative B you would retain the existing asymmetry. While the Committee might not see the incoming evidence as justifying tighter policy, the further rise in labor utilization presumably would suggest continuing risks of future inflation and the potential need to tighten policy before too long. If the Committee were concerned that a biased directive--under either alternative B or C--would add to volatility in financial markets in the weeks leading up to the century date change, the announcement could also indicate that the Committee was likely to postpone consideration of action until next year, given the special situation in the markets through year-end. Under alternative C, the Committee's choice of directive bias would depend importantly on whether you think that after tightening the risks were still pointed significantly toward higher inflation--enough so to make added firming in the early part of next year a realistic possibility. The Greenbook forecast might be seen as supporting a case for keeping a tightening bias under alternative C, especially if the Committee were intent on acting preemptively to truncate the rise in inflation in that projection. Indeed, the tighter policy alternative in the Greenbook suggests that 100 basis points of tightening by the end of next year may not be sufficient to cap inflation. But, as noted, the Greenbook forecast depends importantly on the judgment that an unemployment rate in the 4 to 41/2 percent range is decidedly not consistent with stable inflation over time. If the Committee had reason to question this judgment, or to believe it did not pose a pressing argument for substantial firming because of the possibility that productivity might continue to accelerate by more than in the staff forecast, it might view its strategy as having two stages. First, stabilize resource utilization. Second, evaluate incoming data for building inflation pressures at the existing resource utilization levels before tightening further. In this case, the Committee might be more agnostic about the amount and timing of additional tightening actions, justifying a symmetric directive. By reducing uncertainty and sending a signal that the Federal Reserve was a bit less concerned about inflation risks, the symmetric directive would offset some of the effects on financial markets of the partly unexpected tightening. But markets should not be greatly surprised by a symmetrical directive, which could be read as implying that the Federal Reserve did not necessarily see itself as most likely in the middle of a substantial upward movement in the federal funds rate. The yield curve and futures markets have a total of only around 50 basis points of tightening built in. At the same time, the spread between nominal and indexed bonds is in the neighborhood of only 2 percentage points. Taken together, these suggest that investors do not see the same potential for rising inflation as the staff has forecast and anticipate that relatively modest tightening will be needed to keep inflation well contained.",2054
-fomc-corpus,1999,"Questions for Don? If not, let me get started. Some very interesting questions are being raised around this table today and around a lot of other tables where I have participated in discussions during the last month or two. What is coming across is a quite remarkable divergence of opinions. For example, those around this table are, as a group, much more concerned about upside inflationary pressures; and I must say that I'm more comfortable being here than elsewhere. But when you sit around the Business Council table, they will tell you that their pricing power is nonexistent, that their ability to offset cost increases has no limit, that their margins are in reasonably good shape, and that there just is no evidence of the inflationary pressures that a lot of us are talking about. The Business Round Table members gave me the same story. The question is why people who are looking at the same elephant are viewing it in quite dramatically different ways. I believe the reason is that there is something fundamentally important going on in the economy, and how one evaluates it is critical as to how one comes out in the end with respect to policy. My bottom line for today, frankly, is that the benefits of moving outweigh those of standing pat. However, I think the issue is very complex. First, on the side of those who are less inclined to move, there is growing evidence that interest-sensitive areas of the economy are beginning to slow, at least at the margin. Motor vehicles, which are a very big industry in a lot of areas around the country, were quite soft in October, and the Chairman of General Motors said to me that he views the market for motor vehicles as really quite weak. The calls that we made to industry contacts concerning November sales indicate very little change from the October data. So, as far as the first half of the month is concerned, there has been no evident rebound. I don't know whether you've picked up the same thing, President Moskow, but that's what our sources tell us. The housing market is a little more difficult to assess. We all have seen a significant decline from the peak in starts and in sales. The obvious cause is the increase in mortgage rates, though they have backed off their recent highs. This afternoon the National Association of Homebuilders is going to put out their early November survey of builders; their numbers show some bounce-back in housing sales currently and over the next six months. Conversely, a private survey of the larger builders that the National Association of Homebuilders has made available to us shows that sales remained weak in October. We know that the official numbers for September were down sharply--and probably in a certain sense a little noncredibly, since markets don't move as sharply as those numbers suggest. Nonetheless, I think it is safe to argue that some general softening is occurring in the interest-sensitive areas of the economy. That's not saying they could not rebound. A rebound has happened before, and I think we have to wait and see what materializes. On the productivity side, the data if anything continue to be strongly supportive of increasing rates of productivity gains. This morning's industrial production index for the month of October, when put into productivity terms and extrapolated for the rest of the quarter, engenders a quarterly output per hour growth figure of 7.6 percent at an annual rate. Two of the months for the quarter are forecasts, but the level in October is already high. I think all of you have seen the note distributed by Larry Slifman on the productivity data updated through the third quarter. We do not as yet have all the details because Commerce has not put together the detailed tables that we need for the full compilation of numbers that we usually send out. Nonetheless, it's quite interesting that on the product side the official number for nonfarm business productivity was up 2.9 percent in the third quarter from the third quarter of last year. That's obviously a significant acceleration. From the income side, reflecting the sharp widening in the statistical discrepancy over the last year, the number for the increase in productivity is 4.2 percent, year-over-year. In addition, if we recognize that the conceptually consistent denominator in the calculation of business productivity should be the work hours reported in the household survey instead of the establishment survey, the 4.2 percent number from the income side moves up to 4.4 percent. We need to keep in mind that the household survey of hours worked is the only one that's truly internally consistent with the unemployment rate. This distinction is quite important currently because, as I indicated at the last meeting, we have a difference in excess of 50,000 a month in the changes indicated by the conceptually identical definitions of household nonfarm business versus payroll employment. As a result we are getting quite different estimates of productivity. The official data indicate a 2.9 percent increase over the four quarters, but if we use the same conceptual framework with a change in both the numerator and the denominator, we end up with 4.4 percent. So the choice that Commerce makes is at the low end of a range whose upper limit is suggestive of far greater acceleration. It's really quite interesting to find that the escalation of productivity is far more pronounced, in terms of its second derivative so to speak, if we use both the income side measure of output and the household survey measure of hours to make the calculations over the past several years--indeed, going back into the 1980s. Just to give you a case in point, the estimate using the income side and household hours data for the decade of the 1980s indicates a productivity growth rate of only 1.1 percent. For the period from the fourth quarter of 1997 to the third quarter of 1999, the number is 41/2 percent, up more than 4 times. Cyclically adjusted, that number is only marginally lower. So something profoundly important has happened here. And the question is how that should be interpreted. One thing that is important to interpret is whether accelerating productivity engenders a stable economic system. The answer is, in fact, that it does not, and it's in this regard that accelerating productivity exerts upward pressure on real long-term rates. The reason is that if we get accelerating income-side or supply-side growth and the propensity to consume out of the income engendered from that is unchanged, then arithmetically we end up with demand equal to supply. The unemployment rate does not change. The associated inflation pressures are nonexistent. But there is a problem in the fact that if productivity is accelerating and if it is presumed that the underlying cause of that acceleration will change the long-term outlook for corporate earnings at any existing fixed discount rate, the expectation of higher earnings will engender an increase in stock market wealth. And of necessity if there is a wealth effect--and there is some dispute about that between New York Bank and Board staff--we invariably will get a decline in the propensity to save out of income. So, we end up with the need to satisfy aggregate demand in excess of domestic supply. We have been meeting that demand in two ways. One is by increasing the share of imports relative to total demand. Because of the increased productivity and its root cause, the uptrend in technology, we have had a much higher rate of expected earnings on new projects. Over the long run, the rise in expected earnings has been a major factor in facilitating the widening of our current account deficit in that the latter has been readily financed, as one can tell by the fact that the dollar hasn't gone anywhere. The net import-export balance, or the current account if you want to put it that way, has recently been adding close to a full percentage point to the aggregate supply available to satisfy domestic demand. Second, we have seen a continued decline in the pool of unemployed workers not currently seeking a job but saying they wish to work. Employers have been willing to hire these new workers even though their productivity is somewhat less than the average. The employment of these workers has added another 1/2 percentage point to GDP growth. That source of labor together with higher imports is how the gap between aggregate demand and aggregate supply has been closed statistically in the last several years. Clearly, neither of those adjustment processes can continue. As a consequence, what we will be ending up with is demand exceeding supply or its equivalent, investment ex ante exceeding saving ex ante. The pressure to move investment and saving together induces a rise in real long-term interest rates. The rise in long-term interest rates has been quite significant until very recently. Rates on U.S. Treasuries have risen somewhat less than a percentage point since before the Asian crisis, but the spread on BBB-rated obligations versus Treasuries has widened. And judging from the rise in inflation rate expectations, and at this point I'm using the TIPS to measure inflation expectations, there has been a very substantial rise in real BBB corporate yields, which are close to the average yield that most corporations have to pay. I think the process of restraint clearly has begun to work, as the behavior of housing and motor vehicles suggests. The trouble is that the lags are invariably quite long, and we do not know how much long-term rate tightening is required to bring supply and demand into balance. Since real rates have been rising for so long, the presumption is that the adjustment process has been fairly well established and the fact that the stock market is unchanged over the last six months is another indication that the pressure is there. The result of all of this is that we have a market that is adjusting to what is essentially --I don't know what the word should be--let's call it an ""unbalanced"" expansion that is being engendered by accelerating productivity. The reason that this acceleration creates imbalances is basically because of the wealth effect. And to the extent that real long-term rates are rising, the wealth effect increases are being neutralized or reduced and we are experiencing a slow adjustment process toward an equilibrium or balance. We have never seen anything like that phenomenon in this century to the best of my knowledge. It may have happened in the previous century with the huge changes in technology that occurred a hundred and more years ago, but data that would enable us to evaluate what was happening then are virtually nonexistent. The problem that I think we have in setting monetary policy is the relationship that was raised in a previous meeting by Governor Gramlich, namely the relationship between short-term real rates and long-term real rates. As best I can tell, the gap between them at this point, especially if we were to move the funds rate up another 25 basis points today, is not all that large. In other words, there is a slight upward tilt in the real yield curve but by no means one that would suggest an inflationary imbalance that we would infer from a very steep yield curve. We don't have such a curve at this point. So I agree with the Vice Chair. I don't think we are behind the curve, and I don't think that the markets are saying that we are. And indeed the implication of the forward markets is that they anticipate only a very modest increase in rates on our part, and they are looking at very much the same sort of evidence. The bottom line is that we really do not know how this system works. It's clearly new. The old models just are not working. And the reasons they are not working are essentially that we have a rapidly changing structure whose parameters are very difficult to estimate, and, therefore, we have to depend in part on anecdotal information and in part on some sort of risk evaluation. At this particular stage, if I were convinced that the hourly earnings data we saw in the last employment report--like that 2.7 percent rate of increase over the last three months--were real and if we were in a position to move in December, I would say that we could take a chance and wait until our December meeting. But that 2.7 percent number as best I can judge is not real because if we adjust it for mix, it turns out that the figure is not 2.7 percent; it's 4 percent. Now, 4 percent is not of great consequence when productivity is as strong as it is. When we look at total compensation per hour, the figures are closer to 5 percent, but unit labor costs are not accelerating; indeed, they are declining. I do not think the issue of import prices per se is of huge consequence largely because we can explain the disinflation wholly in terms of the gross product that originates internally. Import prices do have an effect on domestic prices but it is indirect. I'm not saying that there is no effect there. I'm just saying it's tough to evaluate. I'm a little more concerned about the price of oil. Even though it's clearly in the long-term interest of the major Gulf producers to keep the price down so as to keep competition from other sources down, we need to remember that they have very large oil reserves. And it's quite easy to demonstrate that it is not in their long-term interest to allow the value of those reserves to decline, which is what they would do if there is a sharp increase in the price of oil in the short run owing to the loss of market share. The difficulty is that the Gulf producers also have very severe fiscal and debt problems. There is always the inclination for OPEC producers to agree that the price of West Texas Intermediate should decline to, say, $18 a barrel and to agree that such a decline will happen eventually. But isn't it nice for now to get $25 a barrel! The revenues are coming in. The long run can wait until manana. And indeed there is a serious potential problem here: Even though the importance of oil in the U.S. economy has gone down quite significantly as the importance of energy more generally has gone down as a share of the GDP, oil can still have a potentially quite destabilizing effect, especially on consumer confidence. In conclusion, I think we have a lot of uncertainties at this stage and the bottom line is that as long as we have a continuing decline in the total number of people who are unemployed, including those not currently seeking a job, that is telling us that the growth of demand exceeds the growth of supply. That gap between the two has not been closing. It has been open at this level now for a quite significant period of time. And while it showed early signs of narrowing last year, it has reopened. In my judgment, as long as we have this gap and we can't move in December, it is much too risky for us to stand pat at this time. There are possibilities for all sorts of problems when we move interest rates up, but I think the risks currently are less than usual. I would prefer to see somewhat greater anticipation of a tightening move in the financial markets, but I don't think it is all that critical a factor. As a consequence, let me just end by saying that I would like to put on the table a 25 basis point increase today and a symmetric directive. The symmetry in this case is almost automatic in the sense that we effectively are saying that we are not going to move in December. Indeed, short of a very significant set of surprises, it's just not credible to me that we would risk such commotion so close to the century date change. Therefore, I would like your reactions to a 25 basis point move plus a shift to symmetry. Vice Chair.",3116
-fomc-corpus,1999,"Mr. Chairman, I agree fully with both the reasoning behind your recommendation and with the recommendation itself. I agree that we should increase the funds rate by 25 basis points. I think we must be symmetric or we will create uncertainty in financial markets during the end-of-the-year period, when markets are always somewhat illiquid. Given the Y2K effect on year-end markets, it simply would not be good public policy for us to be creating confusion in that kind of situation. So ""C"" symmetric seems to me exactly the right conclusion.",109
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"I find going up 25 basis points and the symmetric directive acceptable. I think whether we move today or not is a close enough call that reasonable people can differ, and the difference is so little that what one prefers and what one finds acceptable are fairly close together. I actually feel more strongly about the need for a symmetric directive. We have gone to extraordinary lengths to try to get through the year-end period and all this Y2K business. For us to have an asymmetric directive in the face of that would look as if the right hand doesn't know what the left hand is doing. I think we want to err on the side of calming markets rather than exciting them, even if the risk of exciting them is very small. So, I feel strongly about the symmetric directive and I find the 25 basis points acceptable.",164
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"I agree with your recommendation on the funds rate and, of course, with the symmetric directive. I was pleased to hear and interested in your analysis of how productivity changes, especially in a positive direction, can have secondary effects if one puts that acceleration into a larger general equilibrium context. I know the staff has been doing research on this. I have been reading some of their work and I would encourage them to do more so that we can flesh that whole idea out more fully. It's important because I believe that it's affecting not just the United States, but if we're lucky--and I think we all would hope it will turn out this way--the rest of the world may yet experience similar kinds of things. And understanding how the wealth creating process affects both goods prices and asset prices I think is going to be really important to us in the years ahead.",170
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"I agree with your recommendation, Mr. Chairman. I think an economic case could be made for retaining asymmetry, but I won't press my luck.",30
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I certainly agree with your recommendation, Mr. Chairman. I, too, think one could make a distinction between the economics associated with asymmetry and the potential for market uncertainties related to Y2K concerns at year-end. But on the whole, I'm persuaded that we're better off with a symmetric directive for the reasons that President Boehne articulated.",69
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"I can support your recommendation, Mr. Chairman.",10
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I support the recommendation. I'd like to offer two observations. First, in terms of low inflation expectations and the lack of pricing power, that's because the market trusts us to contain inflation. And, therefore, we can't use those low inflation expectations as a good signal about when it might be time to move. If we start to lose that trust, then we have gotten behind. But we haven't lost it and we're not behind. Secondly, if the data come in perfectly benign, right down the center of the point forecasts, it doesn't really matter whether we move today or not. It seems to me that what's important here is that we've positioned ourselves should we get data on the high side, with greater strength in activity and inflationary pressures. If we don't move now, then the market could well say we're frozen until the end of January. That would risk our getting behind. There's plenty of room for rates to go down should the data come in on the soft side.",197
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"I can accept your recommendation, Mr. Chairman. Although I think there is some chance that this action may be unnecessary, I doubt it will be harmful. Let me just reiterate my own uncertainty about what the appropriate model is in this environment. It seems to me that many of the conventional models that we've been looking at over the last several years have simply been wrong on the critical issue of the acceleration of inflation. I think we need to bear that in mind. An alternative explanation, undoubtedly also oversimplified, is that what we've seen in the last several years has been a series of positive supply shocks, presumably related to productivity, that have given us more growth and less inflation than we otherwise would have expected. It was just a movement along the demand curve. I don't know whether this will continue. I'm not sure what the appropriate policy stance is in this environment. I'll go along with the recommendation, but I think we are a bit at sea here.",192
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"I concur with your recommendation, Mr. Chairman.",10
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, I agree completely with your recommendation. I think the risks of not moving are much higher. I do feel asymmetric, but it would be very misleading and confusing to the markets for us to come out with an asymmetric directive. So I agree with both parts of your recommendation.",58
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"Mr. Chairman, this month we once again face the issue of how much weight to put on a forecast of rising inflation, a forecast that so far has been on the high side compared with the more favorable actual results. When the October meeting concluded, I was fairly confident that we would need to raise rates at this meeting. However, the wage and price inflation data in the intermeeting period have been better certainly than I expected. As a result, I would prefer to leave the funds rate unchanged at the present time and to retain a bias toward a tighter policy. But I must admit that if we do that, the strong likelihood that we will stand pat until at least mid-January makes me anxious, since I do believe our next move will be up. And that need could be compelling before we feel comfortable in moving in the new year.",169
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I think both your recommendations for a 1/4 point increase in the funds rate and a symmetric directive are prudent, and I support them.",33
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"I support your recommendations of a 25 basis point increase and a symmetric directive. Let me say one thing about process. At the November meeting Bill McDonough mentioned the awkward timing of our regular December meeting and Bob Parry just intimated a concern about that also. So, at some point we might look at the meeting schedule. The late December meeting doesn't seem to help us much and there might be a better way to arrange our meeting schedule so that we wouldn't be making policy for such a long period of time. I think that's something that whoever does the schedule might take into account. Let me also comment on your economic model, which I liked because it's a good way to tie together two imbalances that we often talk about, the labor market imbalance and the saving/investment imbalance. It strikes me that there are at least two implications from that. One is that given the saving/investment imbalance, there is a very natural reason why we ought to look for increases in long-term interest rates even apart from what we do at this table. The Greenbook touched on this, and I think it's something that we ought to talk about more. The second is that tying together the two imbalances may actually uncover a reason why we haven't seen more inflation. There are two ways that the steam can escape. Until now we've had a situation where the steam could come out in a very high level of imports and trade deficit. As that becomes less true, we might have to worry even more about inflation. But going back to the issue on the table, I support your recommendation.",317
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Mr. Chairman, I can support your recommendation for a 1/4 point increase in the funds rate and I can accept your recommendation for a symmetric directive. The problem I have is this: While I want to convey to the markets the view that there is little chance that we would make an additional move between now and our February meeting, I don't particularly want to convey to the markets that we now feel that we've done as much as is necessary, that we've rebalanced the risks, and that it's just as likely thereafter that rates will go down as go up. What I really want to avoid is turning a tightening into what appears to be an easing. We've had that problem before. Now, I could make a case that it's not that hard to convey what we actually mean in our announcement. I could argue that we could go asymmetric and tell the market that asymmetry doesn't mean that during the period leading up to the century date change we will tighten but that it reflects a policy tilt that would be in place thereafter. I can accept the symmetry, but I just want to raise the issue that we need to be careful about how we convey our message in the announcement. Now we've put added burden on the announcement, which is okay as long as we use it effectively.",254
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Mr. Chairman, I can support both halves of your recommendation. Let me say just one thing about the symmetry. In a strategic sense I think it's exactly the right place to be because I do think, for reasons that you and others have outlined, that there is a great deal of uncertainty about where policy is going to go next year. And I would prefer not to build in momentum in policy inadvertently by adopting asymmetric language that may have the effect of tying our hands. I think we really need to wait and look at incoming data, and I think symmetry is the right approach at this stage.",119
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"I agree with your recommendation for a 25 basis point increase and for symmetric directive language both because I think it's better to take the cloud off the markets and also because I'm not sure that move won't be the last in a series of tightening actions. I feel rather symmetric myself about where things will be around the middle or end of January. We had an estimated GDP number in the last quarter of 4.8 percent and we had an unemployment rate of 4.1 percent and a labor productivity number of 4.2 percent. In view of those strong numbers on the real economy, I would hope that in conveying our policy decision to the public we will focus on inflation, inflation in the pipeline, and leading indicators of inflation. I would not want us to give the impression that we're trying to slow the economy down or that we don't like these strong real growth rates. A lot of our critics really don't mind much what we do so long as they don't think we're doing it for the wrong reasons. And I tend to agree with that. So I would urge that the rhetoric be given some consideration.",221
-fomc-corpus,1999,We have a consensus on 25 basis points and symmetry. Would you read the appropriate directive?,19
-fomc-corpus,1999,"I'll be reading from page 14 in the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the federal funds rate to an average of around 51/2 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",95
-fomc-corpus,1999,Call the roll please.,5
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes President Stern Yes,41
-fomc-corpus,1999,"A draft press statement is being distributed so that we can all look at it. As we agreed last time, it's very difficult for us to write communiques in these meetings. Experience with the G-7 and other groups, as I've told you before, suggests that if we take the writing of our statement overly seriously, we're going to end up with two-thirds of our meeting spent on that task. So, while I'm acutely aware that there are phrases or sentences and perhaps even some substance that each of you might modify slightly, I would appreciate it if comments for any changes were limited to only those parts you find really unacceptable. [Pause] Has everyone finished reading the text? Okay, President McTeer.",143
-fomc-corpus,1999,"This says that ""the pool of available workers willing to take jobs has been drawn down further, a trend that must eventually be contained...."" I don't think we ought to say that. I think it ought to be drawn down until there's no one left.",51
-fomc-corpus,1999,That is the limit of how far it could go. [Laughter],15
-fomc-corpus,1999,"I understand the practical problem of achieving that, but it seems to me that we just shouldn't be saying that.",22
-fomc-corpus,1999,"Let me put it this way. We've said this a number of times in the past, and this is essentially the language we've used. So we don't want to convey something over and above what I think has been said previously on this issue. Governor Meyer.",51
-fomc-corpus,1999,"I'm concerned about the third paragraph. It talks about slowing growth down toward trend and I think there is a reasonable prospect that we might do that. But I heard concerns expressed around the table--and others can speak for themselves--that that might not be sufficient to contain inflation going forward, or that at least the risks would still be unbalanced and consistent with a likelihood that rates would have to rise more. So if we're going to be symmetric, I don't want to be so radically symmetric. The idea of being symmetric was to convey to the markets that we were unlikely to move in the very near term, but this wording conveys a different message. This says we think we're done tightening now. Okay, bond and stock markets, have a nice day!",150
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I think I would delete the second paragraph altogether. [Laughter] To be frank, it doesn't seem to me to add very much. Often it's better to say less rather than more unless we're convinced that what we're saying is constructive and will produce the result that we want. I also share Governor Meyer's concern about a possibly misleading reaction in the marketplace from some of the language in the third paragraph.",84
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"Mr. Chairman, I'm inclined to echo what Governor Meyer just said in terms of the impression we create in the market. Rather than give you another iteration of that concern, I'll leave it that. So, in terms of this statement, I'm in agreement with Governor Meyer.",54
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, I like the presentation as it exists. Let me say why. I think the second paragraph has to be included because it does say that at a certain point we just run out of resources and the likely resource that we're going to run out of is available workers. I also share Bob McTeer's view. There was a fascinating article in last Sunday's New York Times about mentally challenged people having jobs; I think that's wonderful. But in the real world at a certain point, if this drawing down of the available pool of workers continues, we will run out of workers, and I think this paragraph states it in a very sensible way. In the third paragraph there are some good central banker words and the last words of the second line are ""appears likely."" We don't make a theologically dogmatic statement. But what I like about it is that it says that we are in the growth business; we are in the business of allowing the American economy to grow as fast as the supply side of the economy makes possible. And I think that is something that we need to say.",219
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"I would like to associate myself with Larry Meyer's comment; I have the same concern. I don't know what substitute language to offer, but perhaps something along the lines of ""after taking three actions, we think this is sufficient for the time being but continued vigilance is needed"" as opposed to something that has this sense of finality about it.",69
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Mr. Chairman, if each of us sat down to write this statement, we undoubtedly would come up with somewhat different language and somewhat different emphases. But, frankly, while we'd all do it a little differently, I think this is close enough that we ought to accept it and move on to the next item on the agenda. It's not only the G-7 that has trouble doing this. If you've been around this Committee long enough, you know that we've tried at times in our past to edit draft language as a Committee and I will tell you that the effort is totally unproductive. I believe our attitude should be that this largely has to be left to the Chairman. I do think we have to have something that is broadly acceptable, and in my view this draft is in that broad area of acceptability and we ought to go with it.",170
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I have a great deal of sympathy for what President Boehne just said. I know rewriting by committee is really hard to do, having done it more than once myself on things of less importance than this statement. But I have two real concerns. First of all, I share Bob McTeer's concern about using the pool of available workers as the proximate cause for this change. I think we could say something like, ""as a consequence, tighter policy is necessary if inflationary imbalances are to remain in check,"" etc. Secondly, I agree with Governor Meyer on the time frame issue. Certainly, the second sentence in that paragraph says over the near term, but I think the first sentence is going to give the markets real reason to rejoice and take things to new heights over the next couple of months. Unless we can find some qualifying words in that sentence--and I don't think ""likely"" does it--we're going to have some real issues in the markets.",196
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Mr. Chairman, I am sympathetic with much of what has been said around the table, particularly President McTeer's views and those of Governor Meyer and President Minehan. But I really do believe that Ed Boehne has it right, that we just cannot do this by Committee. I hope you can find some ways to make some changes in this draft that will accommodate the views that are being expressed. But, basically, I think we have to leave it to you after you hear what the rest of us have to say.",106
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Let me associate myself with Mike Kelley's and Ed Boehne's comments. As you all know, I've been working hard with many of you to think about how we can best do this. [Laughter]",44
-fomc-corpus,1999,This is not how to do it!,8
-fomc-corpus,1999,"And this is not how to do it! In a more substantive way, I've read this four or five times as people have commented on it, and without question there are words that one could change. The reality is that if we all try to change those words, we'd end up with gobbledygook. What we have now is a message that is clear. We might not like every word, but it generally reflects what I heard as we went around the table. In particular with respect to the symmetry issue, all it says is that we are going to focus over the near term on being symmetric. To my mind that doesn't say it's all over. So I think both in terms of process and in terms of substance, we as a Committee are much better off leaving this statement pretty much as it is rather than trying to change it. Perhaps the Chairman will want to edit it slightly here or there, but I would be very cautious going down the path on which we seem to be headed. I've spent the last intermeeting period trying to think about a way to do this and this is not the way to do it.",225
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, I understand the difficulty of trying to do something as a committee, and ultimately I think we do have to defer to you on the language of this. But I do find the first sentence of the third paragraph troublesome. I think we could delete the sentence and just modify the following sentence about the directive and symmetry, and we'd have it right.",72
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"I really agree with Ed Boehne's point, but I can't resist! [Laughter]",20
-fomc-corpus,1999,That's the problem!,4
-fomc-corpus,1999,"So, let me make a couple of constructive suggestions. One is with regard to that reference to the pool of workers in the second paragraph. I would just drop that sentence. Whether we've said it before or not, I don't think really matters; I don't know why we'd want to raise it again. My only other comment is on the next sentence, the first sentence of the next paragraph. I think there should be a way to qualify that phrase ""appears likely"" a bit so that the markets don't get carried away.",105
-fomc-corpus,1999,Let's continue to go around. I have some suggestions on how to resolve this issue.,17
-fomc-corpus,1999,I yield. What's your suggestion? [Laughter],11
-fomc-corpus,1999,"First, let me just say that I think the second paragraph is essential because it's trying to convey a recognition that on the one hand the economy is showing at least some signs of slowing but that on the other hand the pool of available workers is being drawn down. And that is the measure of the gap between supply and demand. It's the best measure we have and that's what we're hanging on.",78
-fomc-corpus,1999,"Mr. Chairman, may I? [Laughter] My objection has more to do with saying that the trend must be contained. If we just referred to it as an unsustainable trend, I think it would serve your purpose and be a little milder.",52
-fomc-corpus,1999,"Well, an unsustainable trend is contained.",9
-fomc-corpus,1999,The sentence as it is now implies that we're going to stop this decline in the pool of available workers.,21
-fomc-corpus,1999,"Oh no, the market is. Market forces--",10
-fomc-corpus,1999,"Well, it's not the market that is issuing this press release.",13
-fomc-corpus,1999,This is an argument that the Chairman has made very consistently and I happen to think he's right.,19
-fomc-corpus,1999,"I do, too. And we know it's going to come to an end. The process has limits.",21
-fomc-corpus,1999,"It's not so important whether we think he's right or not, but he is the Chairman of the Committee. And if something like this weren't in the statement, I think Lynn Fox would get 85 phone calls in the first hour asking about the available pool of workers. Don't we worry about that anymore? I think we have to have this in here to be consistent with the Chairman's recent speeches.",79
-fomc-corpus,1999,"Well, I'm not worried about any comparison with my speeches. Does anyone else want to comment before I make this great recommendation? I think there's a legitimate question about the third paragraph because it's a substantive issue. The rest of the comments, I think, were more analytical. The alternative is to go back to something similar to our August release with some mild editing. My suggested language would read as follows: ""Today's increase in the federal funds rate, together with the policy actions in June and August and the firming of conditions more generally in U.S. financial markets over recent months, should markedly diminish the risk of inflation going forward. As a consequence, the directive the Federal Open Market Committee adopted is symmetrical with regard to the outlook for policy over the near term."" SEVERAL. That's better.",159
-fomc-corpus,1999,"It would be better if you take out the ""markedly.""",13
-fomc-corpus,1999,You better get rid of that.,7
-fomc-corpus,1999,"Take the ""markedly"" out.",8
-fomc-corpus,1999,"No, it's the real interest rate issue that I think is relevant. Listening to our discussion, that strikes me as an adequate solution to the problem. So why don't we do that?",37
-fomc-corpus,1999,"Mr. Chairman, could I make a minor suggestion?",11
-fomc-corpus,1999,Certainly.,2
-fomc-corpus,1999,"You referred to the firming of conditions in our financial markets ""over recent months,"" and there's been much discussion about the slight easing recently. So if you changed that to ""over the course of the year"" or something like that, the wording might accord better with the facts.",56
-fomc-corpus,1999,"I think that's a reasonable suggestion. Okay, why don't we substitute that rewording for the third paragraph? Is that satisfactory to everybody? Not really! Let me put it this way. By definition it can't be satisfactory to everybody, but we shouldn't care. [Laughter]",56
-fomc-corpus,1999,We shouldn't have these drafts floating around. I suppose we ought to turn them back in.,18
-fomc-corpus,1999,Throw them in the middle of the table!,9
-fomc-corpus,1999,Pass them to me.,5
-fomc-corpus,1999,"The Board of Governors is going to take a short recess and vote on a discount rate change. Luncheon is available. When we're finished we'll come back into session. The FOMC meeting will continue because Roger Ferguson has distributed a memo on disclosure issues for us to consider. We're obviously not going to complete our discussion of this topic today, but I think it's not a bad idea to spend a little time on it. Remember, we're assuming that we're not going to make any policy moves in December, so the resolution of the disclosure issues is really not necessary at this time. But it is probably worthwhile to try to make some progress in resolving them. [Lunch recess]",134
-fomc-corpus,1999,"If you don't mind, why don't we get going even though we still have some food to eat. Let me start by saying that what we would like to discuss in this part of the meeting is the reaction of the entire Committee to the November 10th memo that came from me. I signed that memo on behalf of the whole Working Group on the Directive and Disclosure Policy and it reflects a number of points of consensus in that group. There are a few points on which there were slight divergences within the Working Group itself, but on those points the memo may reflect broadly the views of the Committee as a whole. Let me explain what I would like to try to do. As the Chairman indicated, this will be the first chance we have to discuss these issues but not the last. So we should not necessarily look toward trying to reach a formal vote or anything of that sort today. This is simply the first opportunity for the whole Committee to look at what your Working Group has done and give us some feedback. Secondly, there are some elements in here where we have draft language and, if possible, I would prefer not to focus on the details of the wording just yet. Let's try to keep the conversation on a conceptual level for now. Thirdly, we have a number of points of agreement and then a few points on which there was not clear agreement among the members of the Working Group. It would be helpful if you would just give a general sense of your views on points 1 through 9 where there is agreement. But then if you will focus a bit more on the comments about the wording of the sentences for symmetry or asymmetry, which starts on page 4 of the memo, that would be useful. Again, I'm not talking about the specific wording but the two concepts laid out. With that preamble, let me tell you where the consensus did emerge. I think there is a strong consensus in the Working Group that there be an immediate announcement after every FOMC meeting, even if it's rather perfunctory. That announcement would convey the Committee's basic thinking and would include some expression about our views going forward; symmetry/asymmetry is the shorthand we're using here. Secondly, there was a strong consensus that the FOMC should at every meeting vote on both the intended fed funds rate and the symmetry or asymmetry, which is exactly what we do today. So, those points involve maintaining the status quo. The third point of agreement was that the operating paragraph should no longer contain any sentence referring to the Committee's consensus about symmetry or asymmetry. The theory in that case was that the operating paragraph is really meant to direct the Desk and its behavior during the intermeeting period; there is nothing specific in the symmetry/asymmetry that is a clear directive to the Desk, though it may provide context. The fourth point on which general consensus was reached, as of this meeting of the Working Group anyway, was that after the FOMC's vote a draft copy of the announcement would be passed out to the governors and presidents, with an opportunity for them to offer substantive reactions. That is where we came out. We did decide that we should not pass out any draft announcements prior to the vote. The concern was that the focus of the vote on policy would then be much more heavily weighted to the draft words as opposed to the actual substance of policy. And it seemed as though the focus of the voting should be policy and not the draft wording. The sixth point on which I think there was agreement was that the directive should be shortened to eliminate any backward-looking material describing recent developments. The seventh issue on which we reached agreement was that the directive should continue to be released on the Thursday after the next FOMC meeting and not earlier. And I will tie that in with number eight, which is that the minutes should also continue to be released on the Thursday after the next FOMC meeting and not earlier. The rationale there, just to be very clear, was twofold. One is just that the process of producing the minutes is time consuming, which makes it very difficult actually to get the minutes out much earlier than we do now. Secondly, I think there was a strong sense in our group that the Committee should speak once during a meeting cycle, not twice, and thereby avoid having the Committee be too actively engaged, if you will, in market deliberations during the periods between meetings. The ninth point of agreement was that there should be a clearer way of describing the Chairman's latitude to make intermeeting moves. The theory we had, after discussing this with Virgil Mattingly, was that there was some language that the Committee could adopt in its organizing meeting in late January-early February every year that would clearly outline what the Chairman's latitude is for making intermeeting policy moves. The reason this becomes important is that a number of people had looked to the symmetry or asymmetry of the language as giving some guidance and latitude for the Chairman to act on behalf of the Committee, and we thought it was better to be clear about that authority. Again, there is some suggested wording in the memo. Now, the area where there was slight disagreement within the Working Group was on how to describe our view of things going forward, if you will. Just to remind you, the current approach that we discussed after our vote today involves issuing a statement that effectively talks about potential adjustments of policy during the intermeeting period. I think most, but not all, people in the group seemed to feel that that is probably not a good approach, though there are arguments that perhaps it's not so bad. But within the Working Group we came up with two alternatives. One approach, and I'd like to focus on it at the conceptual level as opposed to the wording, is to try to get the forward-looking elements much more focused on what we have described as the balance of risks. The thinking behind that concept was that what the market really needs to know is what the Committee's concerns are or the risks that the Committee sees and what it will be looking at in the intermeeting period but without necessarily jumping to policy implications. The second approach was that in fact we should proceed further and include a reference to the policy implications. The thought behind this concept was that to do anything other than that is to stop without addressing the obvious question of ""so what?"" The policy implication is an issue we should speak to directly. Those issues are outlined on pages 4 and 5 of the memo. Now, with that perhaps too long introduction, what I'd like to do is to go around the table in the usual fashion and get reactions to the memo, since I know you have all read it. On the points where there is consensus in our Working Group if you have a strong reason to disagree, that's fine, please so indicate that. But more importantly, indicate whether your general preference is toward having the forward-looking elements of our announcements tied more to providing a sense of the balance of risks or whether you would prefer something similar to the current symmetry/asymmetry approach, which addresses possible adjustments in policy more explicitly. Those are the issues on which the Working Group needs some guidance. Let me mention one other process issue. We will take your guidance, obviously, and then go back and try to craft the appropriate wording. We have some draft language in the memo, but I don't want this discussion to become too heavily focused on the specific words we used, since we have plenty of time to continue to work on the wording. But if we can get guidance from you on whether or not we've generally got the consensus right and how you would handle the future-looking element, that would be most helpful.",1541
-fomc-corpus,1999,You know what I think would be useful? You have seven members on the Working Group?,18
-fomc-corpus,1999,"Yes, we have seven.",6
-fomc-corpus,1999,"Since you've all thought about this, it might be helpful to hear from the individual members about the reasons why they came to the views that they did.",30
-fomc-corpus,1999,"I think that's absolutely fine. Why don't we start with the one who is closest to me, Mike Kelley, and then we'll go around the table to the others.",33
-fomc-corpus,1999,"I would welcome an opportunity to review a little further the language that was suggested about the Chairman's latitude to act between meetings. I have no problem with the substance of it, but I would like to work with the language a bit more. Concerning the wording in the announcement that Roger referred to at the end of his remarks, I would strongly support alternative I--describing the balance of risks--because I think it's appropriately informative and accurate. And I like the fact that it avoids implying in advance that a determination has been made by the Committee to move one way or the other. We do not, in fact, make such a determination. We review the situation from a zero base at each meeting. So, in my view, what appears in alternative I is the more appropriate presentation of how the FOMC leaves each meeting.",167
-fomc-corpus,1999,Okay. Larry Meyer.,5
-fomc-corpus,1999,"I am not particularly wedded to the language in either of the options. But I strongly prefer the spirit of the second option, which focuses on the policy implications, and here is the reason. What is the tilt about? What is the market trying to learn about? Does the market say ""You are our favorite forecasters and we want to know how you view the balance of risks in the outlook so we can think about the forecast""? Or does the market want to glean some information about our policy intentions? Now, we can leave it and just say we're going to talk about the balance of risks, but then they will say that a balance of risks toward higher inflation means the Fed is more likely to tighten. There's no great damage in that; I'm just saying they are going to infer that. We can't hide it. Why would we want to hide that? If we want to hide that, we shouldn't get into the business of having a tilt at all. If we don't want to hide it, then we can just be more transparent about it and say here is what we think the balance of risks is and as a result of that we think it's more likely that rates will be rising rather than falling. The next question is: Can we really tie the hands of the FOMC with respect to the future? Of course not. I wouldn't want to do that. We are not tying anybody's hands. At every meeting we sit down and we start from scratch making an assessment about the economy and the outlook. We do the best job we can at that meeting. So the question is whether we also should provide some honest assessment of how we are leaning in the future. That's all we are doing, and we can do that every time. Is the market going to be more focused on the policy decision at the next meeting if we talk about it in terms of a policy leaning as opposed to talking about the balance of risks? I can't understand why. But if we're concerned about that, why don't we just communicate? We can tell the market that we don't view this tilt as having any particular focus on the next meeting. We are not saying that we prejudged that we are going to move and that's why we have the tilt-that we decided just not to do it this time but will do it next time. We can tell the market that our decision on symmetry encompasses a near-term horizon, typically perhaps a period of two or three meetings. Another factor that goes into my thinking is that I believe it's much more difficult to convey why we might want to tighten than whether we might want to tighten. There are a lot of nuances, a lot of different models, and a lot of different perspectives around the table. So we might have more difficulty--though this is probably a minor thing--talking about what exactly it is in the balance of risks that we're weighing. In the draft language in the memo we only have two things that drive our policy each time--the risks are weighted either toward weakness in economic activity or toward higher inflation.",609
-fomc-corpus,1999,Or balanced.,3
-fomc-corpus,1999,"Or balanced. I think that's a relatively minor point. But what I didn't like about the language was that it focused on the likelihood of a particular policy move. That is perhaps a little stronger than the language we have been using. Instead of saying that in the future we're more likely to tighten, now we simply say that we're more likely to raise rates than to lower rates. That's a much softer way of conveying an asymmetry as opposed to saying we're more likely to raise rates than to hold them constant. So I would have preferred to marry the balance of risks and the likely direction of interest rates. I'd give a simple statement about the balance of risks and say that as a result it is more likely that rates will rise rather than fall or that those risks are balanced, with an equal likelihood that rates will rise or fall. I'd go back to the same language that we have now in the directive, but precede that with a sentence on the balance of risks.",193
-fomc-corpus,1999,Bill Poole.,4
-fomc-corpus,1999,"I agree with Larry. I think the focal point of the decisionmaking is the interest rate decision, the federal funds rate decision. There will be many different views at any one time about why we converge on that particular decision, and trying to explain the different nuances is not going to be helpful. However this comes out, it should never be viewed as a prediction or forecast of what's going to happen at the next meeting. The fact that it has had and may continue to have low predictive value seems to me irrelevant. If it had high predictive value, that could mean we should have acted right away. We shouldn't want a high predictive value. I regard our aim as trying to give a sense of direction. I think it really is going to be easiest for us to reach a consensus on that if we focus entirely on a sense of direction with respect to the policy instrument, the federal funds rate.",179
-fomc-corpus,1999,Mike Moskow.,4
-fomc-corpus,1999,"I was with the majority on this one. I liked alternative I. The problem I had with alternative II, which is close to where we are today, is that phrase ""possible need for an adjustment in the stance of policy."" It just gives the impression that it is more likely that we're going to be making an adjustment in policy--that we are going to be changing rates-than if we take a step back and talk just about the balance of risks. So I like the balance of risks approach better. It appears less likely that we have our finger on the trigger and we're ready to pull the trigger and make the move at the next meeting. So, I favor alternative I.",136
-fomc-corpus,1999,Bob Parry.,4
-fomc-corpus,1999,I favored alternative II. [Laughter],9
-fomc-corpus,1999,"As you can see, this was a well-managed group!",12
-fomc-corpus,1999,"And it was for many of the reasons that were mentioned by Larry and Bill. I saw it as the alternative that would be consistent with the fewest additional sentences of explanation, which I viewed as a great virtue. And based on our experience today, I see that as a really big virtue for which to aim. Moreover, it seemed to me that the most important point was that the focus clearly be on the implications for policy. I think if we were somewhat more explicit about that, over time our experience would be good in providing that information.",109
-fomc-corpus,1999,Ned Gramlich.,5
-fomc-corpus,1999,"You all are getting the impression that this was a very divisive group. I would note to start with that we did all agree on each of the first nine points. [Laughter] On the point where we had trouble, I'm with the majority. I favor alternative I. I think the point about keeping the finger a little farther from the trigger is a factor but, as several people mentioned, since the market knows how to read these statements, in the end there isn't a whole lot of difference between the two alternatives. I suppose I favor alternative I because this sentence will usually be a part of a broader discussion about what we are up to and why--of the sort that we just talked about today. It strikes me that when there is a choice in language, we at the Fed always go for the understated, terse form and I would like to continue in that tradition. There is slightly less risk of misleading people the fewer words we say. I like the understated approach and I would like to keep the distinction between how we see the balance of risks and what we are likely to do. So, I'm more comfortable with alternative I.",228
-fomc-corpus,1999,"I was more comfortable with alternative I as well for the reasons that Ned Gramlich has articulated. I think there is a distinction between talking about potential unfolding macroeconomic developments and trying to link that too tightly to a certainty about them and, therefore, the policy reaction. The experience we've had before suggests that markets often, or at least occasionally, are prone to over-interpret where we are. And I would like to give them fewer words, if you will, with which to do that and, as Ned said, move the finger just a little bit away from the trigger even though it's not completely away. I think, as Larry has pointed out, that that movement away from the trigger is very helpful. So we ended up with a preference for alternative I by a margin of 4 to 3. I will say that as we did this many people said they could live with alternative I. Again, with regard to Ned's point about the group not being as divided as it might seem, our views weren't held with such a hard and fast force that individuals could never see moving to another option. So, that's where we were.",227
-fomc-corpus,1999,Could I ask a question?,6
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,"I'm confused on a point of fact. Is the proposal that, when we finally decide on the words, there will be three available statements, and at the end of each meeting we will choose either to use the statement that the risks are balanced or that there is a likelihood of economic weakness or heightened inflation pressures? Is the proposal that one of those three statements will be made at the end of each meeting without any additional prose?",85
-fomc-corpus,1999,"I think the proposal on the table is that one of those three statements will definitely be made after each meeting. There may be a bit of additional prose if we feel there should be more explanation as to why we voted in a certain way. But in terms of how we view the future, the intention of this working group was that that one sentence would handle the vast majority of the future statements. Now, we did have one experience, which I think drove us a bit. That was in our October meeting when we adopted asymmetry and had a follow-up sentence that suggested a bit of a time frame. There was a sense in our Working Group that if things were very closely balanced then we might need a follow-up sentence, and that's always an option. But the expectation would be that this sentence would carry most of the information on how we might weigh future developments. It was our hope--I don't know if we can achieve this or not--that we would end up with a situation in which markets are less focused on future policy decisions and much more focused on the existing policy decision.",217
-fomc-corpus,1999,"Bill, I'm not a member of the Working Group and I wasn't in on the deliberations, but I have the suspicion that one can figure out how all this happened. None of us likes the words ""symmetry"" or ""asymmetry"" so, therefore, people start to think about what can we do in lieu of it. And we end up with symmetry/asymmetry, [laughter] or in this case, asymmetry/symmetry. What this comes down to is merely a choice of words, which convey the same notion. The issue basically is whether we want to have a soft statement, which is a recognition in my judgment of the fact that we really don't know what our next move will be, or whether we feel sufficiently confident to have a forecast of what we are going to do. First of all, the differences between these two alternatives are not that big. The only issue I see here is that if we decide on alternative I, at a later date we can go to II. If we decide on alternative II, we can't go back.",216
-fomc-corpus,1999,I agree.,3
-fomc-corpus,1999,"I would be a little concerned about that because in a crazy way our experience over the last number of years is that we seemingly have understood what was going on in the economy. We may not have understood it as well as we would have liked, but we didn't make any major blunders in policy. We really were never far behind the curve. We really were never in a position where we were forecasting recessions that did not happen or vice versa. But that has not been the experience over the decades. And I'm concerned that we may have the impression that we're better than we are in fact. I think having our finger off the trigger or a bit removed from the trigger, as Ned put it, is a measure of humility. And as Larry pointed out, the markets will read it anyway. I think that's probably right. So I think the only question is whether we put more burden on them to be certain and less on ourselves. I myself would prefer alternative I, but the arguments Larry made are very formidable arguments, I think.",207
-fomc-corpus,1999,"Are there any other perspectives from those on the Working Group? I guess we will do this in the usual way, with a go-around. Jerry Jordan.",31
-fomc-corpus,1999,"As we saw in our actual deliberations earlier today, we need to take into consideration the risk that later on down the road with new information we will find out that we had the stance of policy calibrated wrong. Even if we take an action with the expectation of the risks being balanced in some way, the costs of changing are not symmetrical. As we've seen very often, we find it relatively easier to correct in one direction than the other. In part that is because the pressure on us from the outside is asymmetrical and always will be asymmetrical. That's a risk that I don't think it would be useful to put out in a press release. So I'm a minimalist on this. The least we can say about it the better, since we are not going to be talking about this other risk of suddenly changing course when we get new information and find out ""oops,"" we had it slightly wrong. So, saying something about the balance with respect to likely policy actions I think is going too far. Saying something about the balance of risks to the outlook for the economy and inflation is the most that I would like to see us do at this stage.",229
-fomc-corpus,1999,Al Broaddus.,5
-fomc-corpus,1999,"Roger, let me first say that I compliment your Working Group. You took on a tough set of issues and dealt with them I think very forthrightly and got all of the significant issues on the table. Let me make just a couple of comments about the points of consensus. Generally I'm comfortable to one degree or another with all of them, and very comfortable with the first one. On the fifth one, which recommends that we not get a draft statement in advance, I came into the meeting thinking I would like to have it in advance, but after the discussion today I won't worry about that. [Laughter] I guess the recommendation that I have serious reservations about is the ninth one, which involves the proposed change to the Authorization for Domestic Open Market Operations. I hope it goes without saying that in my mind the reservation is certainly not about Chairman Greenspan or any other chairman in particular for that matter, but about the crucial institutional relationship between the Chairman and the Committee. I can't say this absolutely, but to the best of my knowledge and that of staff members in Richmond who have studied the history of the Committee, I don't think the FOMC has ever previously authorized the Chairman to take policy actions without prior consultation with the Committee in a manner that would be-and this is the crucial part--so explicit, so public and, in my view at least, so permanent as is suggested in this recommendation. Instead, we have extended such latitude informally and internally and non-publicly. In my recollection in thinking back about it, the latitude has evolved over time with changes in our operating procedures, in the language of the directive, and as chairmen and members of the Committee have come and gone. I have two principal--and I think practical--concerns about this. The first is that if we were to change the Authorization language as recommended, we might get to a point in the future where the Committee is not so comfortable with giving some future Chairman this latitude. But if we had this language, it would be very difficult to remove it because if we didn't renew the Authorization in its existing form, it would be like a vote of no confidence and almost a constitutional issue. So once we change the language, I think it would be not impossible to reverse that decision but it would be very difficult. Secondly, it seems to me that doing this may expose the Chairman to more political pressure. Under the existing approach the Chairman is in a position where he can say, if pressure is put on him: ""I can't do this by myself; I have to go back to the Committee."" He would lose a bit of that cover. That may not be such an important point. The first of these two points is really the crucial one to my mind. As I understand the argument in the memo for doing this, it is that it is tied to taking the symmetry/asymmetry statement out of the operating paragraph. If that's a problem, then put it back in the operating paragraph. The language of the memorandum didn't strike me as indicating that removing it from the operating paragraph was urgent or truly compelling--desirable but not absolutely necessary. As far as the choice between the language of the two alternatives is concerned, I suppose I could live with either but I have a pretty strong preference for the second one. The use of the word ""possible"" suggests to me that the trigger isn't fully cocked. The problem I have with the first option, looking at it as a whole, is that it almost formalizes a simple Phillips curve tradeoff between inflation and a recession. It's quite possible, of course--we only have to remember our experience not too many years ago--to have the risk of both higher inflation and a recession simultaneously. In such circumstances, I think this choice would be problematic. We could change the language at that point, but after having argued about it for so many years in so many different forms I would hope that we can make a decision and stick with it forever.",800
-fomc-corpus,1999,You are an optimistic man! Cathy Minehan.,10
-fomc-corpus,1999,"Actually, I find myself more in agreement with Al Broaddus on other points than on the final one he discussed just now. I think the Working Group has done us a favor by de-linking the discussion of symmetry from the implied authority of the Chairman to change monetary policy between FOMC meetings. My understanding is that the asymmetry phrase always has been interpreted as having two meanings. One is that it gives the Chairman some latitude and the second is that it conveys some sense of our discussion of the balance of risks at the meeting. It seems to me that unlinking those two things is an obviously good thing to do. As for making the Chairman's authority explicit, I disagree with Al. I think it's better that it be explicit than not. It offers the Committee the opportunity to object because it requires that the Committee be consulted afterwards if the Chairman did not find it feasible to do so beforehand. And we do have an opportunity in our annual review process--though I can't imagine it ever coming to that--to renew this authorization or not. It seems to me a lot better to have this spelled out rather than have the degree of confusion surrounding the meaning of symmetry or asymmetry language I have seen in my experience sitting at this table. Often in the course of their comments on policy Committee members would give different interpretations of what they thought the symmetry or asymmetry phrase implied for policy. So I think it's better to be explicit about this and give the Committee an opportunity to say yes or no on an annual basis. As for the wording, I'm drawn to alternative I because it is less explicit about possible policy adjustments. And I think the Chairman has a good argument when he says we can go to alternative II if we find it necessary, but we can't move back to ""I"" if we start with ""II.""",364
-fomc-corpus,1999,"Ed Boehne, you were next.",9
-fomc-corpus,1999,"Thank you, Roger. I think that you and your colleagues on this Working Group have really done quite an extraordinary job to move us this far and you are to be complimented. My comments are intended within that overall framework. As for the two alternatives, I favor ""I."" The main reason is that the finger ought to be a little further back from the trigger. Risks sometimes materialize and sometimes they don't. When we add the policy side to our assessment of the balance of risks, we're really making a two-step statement whereas a description of the balance of risks makes it a one-step statement. And it is easier to go from ""I"" to ""II"" if we want than to do the reverse. So I come down for ""I."" As for the proposed wording of paragraph 2 of the Authorization, as shown near the top of page 4, I think the Chairman absolutely has to have the authority to move between meetings in extraordinary circumstances. I don't think that's debatable. The world is not always predictable and I think the Chairman simply has to have that authority. It has been implicit in the directive. In fact, we got into this symmetry and asymmetry language partially for that reason-to try to fine-tune the extent of the authority that the Chairman has between meetings. So if we are going to make the adjustment and de-couple this from the directive itself, then I agree with Cathy that we have to be clear about it and expressly state it. I do have some concern about the precise wording. I think it ought to be the Committee authorizing the Chairman to direct the Federal Reserve Bank of New York, etc., etc. I don't think we ought to be delegating authority directly to the Federal Reserve Bank of New York and putting the Chairman in a consultative position. But I agree with the basic premise that the Chairman has to have this authority; the precise wording is another issue. I have just one more comment, which relates to the points of consensus, and I don't feel strongly about it. Point two says that the FOMC's vote at every meeting should encompass both the intended federal funds rate and the symmetry or asymmetry. And point three says the operating paragraph no longer would contain any sentence referring to the Committee's consensus about symmetry or asymmetry. As I read it, on the surface at least, that appears to be an inconsistency. But I don't feel strongly about that issue.",488
-fomc-corpus,1999,"Roger, I think President Boehne was just practicing law. It seems ironic that the General Counsel would propose something different and I want to know why.",31
-fomc-corpus,1999,"I was actually pointing in the General Counsel's direction. I think it is important for everyone to know that the language proposed is Virgil Mattingly's language. He can continue to work at it, if you think that's appropriate.",47
-fomc-corpus,1999,"Virgil, if I had known it was your language, I would not have questioned it. [Laughter] But I'd still like to hear your explanation.",32
-fomc-corpus,1999,What is involved here is the fact that only the Committee can direct a Federal Reserve Bank to take action. What the Chairman's authority derives from is the ability to interpret that direction. And that's what this language is intended to address. I don't think it's possible for the Committee to give to the Chairman the authority to move monetary policy on his own.,69
-fomc-corpus,1999,I withdraw my suggestion on the words. My main point is the substantive issue that the Chairman needs such authority.,22
-fomc-corpus,1999,"The Working Group did change the draft wording to say the New York Bank could adjust the rate but only with the approval of the Chairman, instead of after consultation.",32
-fomc-corpus,1999,"Okay, that's fine.",5
-fomc-corpus,1999,I think Tom Hoenig was next.,8
-fomc-corpus,1999,"Thank you. On the alternatives, I strongly prefer alternative I. In my view it's more honest in the sense that we are balancing the risks. If we weren't, we could take the action only at the time of the meeting. So I think it is the better way of expressing how we see the likelihood of developments in the future rather than implying that we have our finger on the trigger. So I strongly prefer alternative I. In terms of the proposed amendment to paragraph 2 of the Authorization, I welcome it because the Chairman's authority to initiate a policy action between meetings has been a source of confusion in this Committee for as long as I've been a participant in these meetings. This defines and clarifies his authority and his responsibility for consulting with the Committee so we won't differ on what we think we've done in adopting symmetry or asymmetry. I consider it a clarification. It puts some understandable parameters around the Chairman's authority, which I think is a good idea. So I'm in favor of that.",199
-fomc-corpus,1999,"Gary Stern, I have you next on the list.",11
-fomc-corpus,1999,"With regard to the alternatives on symmetry or asymmetry, I strongly favor alternative I as well for the reasons that the other advocates have cited. With regard to recommendation number nine and the Chairman's authority, I'm in favor of something like what is proposed here. I'm willing to leave the decision on the exact language to others, but I certainly favor something like that.",72
-fomc-corpus,1999,Jack Guynn.,4
-fomc-corpus,1999,"In the interest of time, I'll echo Gary Stern's comments. I also strongly prefer alternative I. I think there's less chance of the statement being seen as a tentative policy decision. I, too, would like to see us be as explicit as possible in finding the right words for the Chairman's authority. I would emphasize the desirability of consultation with the full Committee whenever feasible, and I would hope that that would be the case in almost all instances. I, too, stumbled over the words about the New York Fed and consultation with the Chairman. I hope we will look at that some more.",120
-fomc-corpus,1999,Bob McTeer is next.,7
-fomc-corpus,1999,"I continue to think that the best thing for us to do is not to vote on a bias at the meeting and, therefore, there won't be one to report on. I think it creates too many opportunities for us to be wrong, to come up with a bias and then not follow through on it. Sometimes I worry that we might follow through on it because we had the bias in the first place. But the argument to so away with the bias statement is obviously not going to go anywhere. So given the choice presented by the Working Group, I find it a very close call. I guess I would go along with alternative I, but would urge some more thinking about the appropriate words to use. On the execution of the Committee's policy decisions between meetings, if Al Broaddus and Virgil Mattingly could get together and keep it legal I would hope that Al's points could be taken into account. I agree with Jack Guynn on the desirability of consultation with the Committee.",199
-fomc-corpus,1999,Bill McDonough.,5
-fomc-corpus,1999,"First of all, I respect highly the ability of the General Counsel to practice law. But I think we have to be careful that in the process of clarifying the Chairman's authority we don't overlook the fact that the Committee's agent to carry out its responsibilities is the Federal Reserve Bank of New York or whichever Reserve Bank is selected at our annual organizational meeting. We wouldn't want to be in a position where we had the world going up for grabs and have somebody decide that the Desk couldn't do anything until it had talked to the Chairman. The Desk obviously is not going to change the official fed funds rate, but surely it is going to provide the liquidity or drain liquidity if that's necessary. And I think we have to be very careful that the Desk's authority to do that is not placed in question by anything we do to solve this other problem.",168
-fomc-corpus,1999,"Does it actually say ""in consultation with the Federal Reserve Bank of New York""?",16
-fomc-corpus,1999,"No, what it says is that the Federal Reserve Bank of New York will consult with you.",19
-fomc-corpus,1999,Does it say the Federal Reserve Bank of New York?,11
-fomc-corpus,1999,This draft says the Federal Reserve Bank of New York.,11
-fomc-corpus,1999,We can't have that because we vote on that every year.,12
-fomc-corpus,1999,This would be voted on every year as well. The point is that both would be voted on annually.,21
-fomc-corpus,1999,This would be voted on after we decide which Reserve Bank will execute transactions for the System Open Market Account.,21
-fomc-corpus,1999,"Yes, after we have decided that. This is written with the current status quo in mind, but if we voted to select a different Bank, then we would make a conforming amendment in the Authorization. Bill, did you have a perspective on alternative I versus alternative II?",55
-fomc-corpus,1999,"My main desire is that we get away from the business of looking at ourselves in the mirror. Therefore, I like the idea that most of the time-ideally all the time--we would have one of three psalms. The 23rd psalm, my favorite, which starts out ""The Lord is my Shepherd,"" has been around for 2,850 years and it has been doing a pretty good job. So I think if we have our own 22nd, 23rd, and 24th psalms and the only thing we have to decide is which one we are going to use, that will supply the needed information to the market. That's option I. That would avoid the confusion caused by the modern version of the Fed watcher deciding that if we change this word or that comma, there are grave market implications in that change. What I like most of all is the consistency.",184
-fomc-corpus,1999,I think Larry Meyer had another comment.,8
-fomc-corpus,1999,"I just had a comment on the Chairman's latitude. When Ed Boehne talked about it, the first thing he said was something like: Of course, the Chairman must have the authority to move in exceptional cases. I didn't see anything here about ""exceptional cases,"" and that's part of my problem. If this were handed out as a public statement, I think it would seem to convey the notion that the Chairman has more latitude than the market might have expected. There's almost a sense of encouraging the Chairman to review the data during the intermeeting period and to make adjustments as he sees fit. I don't think that interpretation is something we want to encourage. Most decisions should be made in FOMC meetings; that's the best place to make them. In exceptional cases, though, it's important for the Chairman to have that authority. October 15th of last year was a perfect example of it being used to its best effect. That may be understood inside this organization, and I wouldn't want to convey an impression outside that this latitude was for other than those exceptional cases. The other question is linked or de-linked, coupled or de-coupled. It seems to me that this statement says any decision and adjustment should reflect the Committee's discussion and decision at the previous meeting. That might be a sufficient linkage. There should be some linkage. If the Committee's vote was for symmetry--if the Committee put out a statement that said there was little chance that a move was going to be necessary--that doesn't mean that a move couldn't be made in exceptional cases. It just raises the hurdle a bit higher than would otherwise be the case. Whereas if we thought it was more likely that the risks were tilted toward higher inflation, there would be less of a hurdle for the data to push the Chairman toward an interim adjustment.",364
-fomc-corpus,1999,"Larry, could you clarify your position? Are you saying that this paragraph should have stronger language?",19
-fomc-corpus,1999,I read this change as almost an encouragement of more frequent intermeeting adjustments. I would prefer it to say that the Committee appreciates that in rare cases the Chairman has the authority to act on the Committee's behalf.,42
-fomc-corpus,1999,All right.,3
-fomc-corpus,1999,"Let me say a couple of things. First, there is no intention to change our standard procedure. And when it comes time to adopt something like this language, I think the minutes should reflect that this is not intended to expand or contract the authority the Chairman normally has. Secondly, Virgil and others can look at this again and see if we can put more words around it to make sure it truly reflects the sense of the discussion here. Let me tell you where I think we have come out and what I would like the Working Group to do. I have a sense that there was general agreement, since I heard very few exceptions, on the consensus points reached by our Working Group. So I will assume that we will keep those on the table as they are. I did hear some questions or suggestions--though not significant changes--on the language with respect to the Chairman's latitude. Virgil is here and he heard the comments too, so we can continue to work on that. But I think the sense of the discussion was that we don't want to expand or contract the Chairman's authority and that we do want to keep the consultative process involved. We know we are looking for some consistency of interpretation. And the final thing was to make sure that we have some sense of this being the exception and not the norm; in no sense are we are encouraging the Chairman to do things that currently are not encouraged. On the issue of how we talk about the future--for which we will use the shorthand ""symmetry/asymmetry""--while a few people preferred alternative II, the vast majority seemed to prefer alternative I. Therefore, I would like the Working Group to go back and try to continue to polish those words and then present them to this Committee. Depending on how quickly we can do that, we will distribute another memo, hopefully in the upcoming intermeeting interval, with the expectation that at the next meeting the FOMC will make a formal decision to adopt the recommendations of the Working Group. That would include a decision on the language, with the focus on alternative I as the general direction. I think that's where we are.",428
-fomc-corpus,1999,"We got a lot more done on this than I expected. There are no other items on the agenda except to confirm the date of the next meeting, which is Tuesday, the 21st of December.",41
-fomc-corpus,1999,"Good morning, everyone. Would somebody like to move approval of the minutes for the November 16th meeting?",22
-fomc-corpus,1999,Move approval.,3
-fomc-corpus,1999,"Without objection. Peter Fisher, you wanted to discuss the report of examination, I understand?",18
-fomc-corpus,1999,"Yes. I wanted to elaborate a little on Louise Roseman's memo to Don Kohn about the unresolved difference between the internal accounting records of the Markets Group Accounting and Control Unit and those reflected in the Integrated Accounting System regarding the System's net interest accruals on foreign currency investments. I thought it would be helpful if I gave a couple minutes of background, if you will bear with me. Last spring, as members of the Committee will recall, we entered into a series of transactions with the ESF to re-balance our euro and yen holdings so we could come to a better split both in terms of total holdings and the currency mix. This involved a number of transfers of ownership of a series of investments and resulted in quite a significant amount of accounting activity. In the course of reviewing that, our own accounting staff identified an error that had been introduced in the prior year in our treatment of the premium on bonds held in the accrual account, overstating the accrual account by about $5 million. In the course of confirming that, they identified an additional $26.6 million overstatement in the accrual account for interest on foreign currency investments. We have had a number of staff members working full time trying to trace the source of that $26.6 million overstatement. They have worked back through the records to December 1994, before which detailed records at the transaction level just no longer exist due to the routine and appropriate destruction of documents. The Board examiners were at our Bank to conduct an examination of the System Open Market Account in September and PricewaterhouseCoopers also has looked over our methodology to try to trace this overstatement back through time and find its source. PricewaterhouseCoopers is confident that we have traced it back as far as we can. They have tested our work papers and agree with our conclusion that we simply can't go back any further. There are two possible causes of this overstatement that we have to confront. One is the diversion of funds and the other is error. Now, we cannot rule out the possibility of a diversion of funds. But people from our own audit function and from Pricewaterhouse-Coopers have reviewed the control procedures we've had in place for the last decade and are very comfortable with the conclusion that these control procedures are sufficiently robust that the likelihood of diversion is remote. It cannot be ruled out, but for diversion to have occurred it would have had to involve the collusion of many people--just an extraordinary number of people--on several different staffs. If anything, our control procedures run a little to the ""belt and suspenders"" direction in regard to control of the flow. So, there is reasonable confidence that no diversion of funds occurred. The much more likely cause is a simple accounting error. The failure to credit the accrual account when cash was received would have left this account overstated. But we have worked the accounting back as far as we can take it and cannot find the erroneous entry or entries. Dave Sheehy, the New York Fed's General Auditor, and I are both looking into a fundamental reappraisal of our control procedures. We have introduced an additional mechanical check to maintain detailed records of the accrual stream by instrument, so that when a final principal payment is received we can trace the record all the way back on each instrument and double check the accounting. More fundamentally and more importantly, what troubles us is how we could have gone for so many years without scrubbing this account more vigorously. That is something we are looking into and we are going to be revising our control procedures--both the audit procedures and those in our own Markets Group. The Board's staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks. Of course, for all of us with responsibilities for SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I understand that PricewaterhouseCoopers is comfortable with the conclusion of both our accounting and audit function and the Board staff that this is not a material event for purposes of disclosure for any Reserve Bank. I would be happy to try to answer any questions.",898
-fomc-corpus,1999,Is there any evidence of a surprising rise in standards of living of key people involved?,17
-fomc-corpus,1999,"No, there is not.",6
-fomc-corpus,1999,Has somebody looked?,4
-fomc-corpus,1999,"Yes, we have looked into that. Many of the staff people are still at the Bank, though others are not. But we have found nothing of that nature.",33
-fomc-corpus,1999,"Were it an embezzlement, prior to what period would it have occurred?",17
-fomc-corpus,1999,We only know that the difference existed prior to December 1994.,14
-fomc-corpus,1999,"It could have been any time prior to that? Is there a beginning point, other than 1914?",22
-fomc-corpus,1999,"The details certainly don't exist for pre-December1994 records, so I don't know how we could determine the beginning point--in 1973 or 1963 or where. Prior to 1994, the only interest income we were receiving in that account was coming from the BIS, the Bundesbank, and the Bank of Japan. So the source of the income was official institutions. It was really a very simple accounting process to bring that income in at that point; the complexities have been introduced since that time. So, as I say, Pricewaterhouse-Coopers and our audit function are confident in looking over the control procedures we have had in place that it's implausible that a diversion could have occurred. But we cannot rule it out.",151
-fomc-corpus,1999,Other questions on this issue? Let us go forward to your regular report.,15
-fomc-corpus,1999,"Turning to the packet of colored charts,1/ page 1 depicts the rates implied by forward rate agreements. As you can see in the top panel, in the period since your last meeting forward rates rose steadily until the release of the employment report on December 3rd when the market reacted to a lower-than-expected average hourly earnings figure, and the forward rates came off a little. The rates then bounced backed up again on the release of retail sales data, reaching highs for the year. In the middle panel you can see that euro forward rates continued to follow the movement in dollar forward rates. I think I have been harping on this all year, but let me say it one more time: To me, the most unnerving thing in markets today is not the state of equity markets, the dollar/yen relationship, or the weakness of the euro, but rather the extent to which European interest rates at the short end follow the peaks and valleys of U.S. forward rates. I find it, as I say, unnerving that those rates fall even as the ECB raises rates and rise when we raise rates. It is really very odd and hard to understand. In Japan, as you can see in the bottom panel, the forward rates backed up in mid-November. But this time the Nikkei was rallying and there was increasing anticipation of a strengthening recovery. By mid-November the 9-month forward 3-month rate, which as of now covers the fourth quarter of next year, had doubled since October. But with the release of third-quarter GDP numbers and the Tankan Survey, those rates began to wind down a bit. However, I should note that Bank of Japan officials have been candid, if muted, in explaining that they are beginning to look for an exit strategy from their zero interest rate policy, and that is seeping out into the markets a bit. So there is still a bit of lift in the Japanese forward rates. Turning to our extraordinary year-end operations, on the next page you can see that we have completed the auctions of options on repos, with the final auction held on December 1st. If you scan down the page in the columns labeled ""total propositions,"" ""bid-to-cover ratio"" and ""awards/ stop-out rate,"" you can see that those numbers were generally declining over the course of the auctions. In our view that reflected the fact that we did what we said we were going to do: We tried to meet demand--maybe not each and every last bid, but the serious bids for these options. The one exception to the general decline in these numbers was the last auction of the January 6 strip, as can be seen in the very bottom line. Total propositions jumped up from $36 billion in the prior week to $43 billion, the bid-to-cover ratio backed up, and the stop-out rate backed up a little from 21/2 to 4 basis points. I don't want to make too much of that, but I think it reflects an epiphany of something going on in the markets. The closer we come to the end of the year, the more the anxieties and uncertainties seem to be about the first two weeks of January--what will be on the other side of the great divide of the millennium--and less about liquidity in late December. That is progress at least in one sense. Turning to the next page, in the top panel you can see the cumulative reserve drain from currency in circulation. The two red dot-dash lines reflect the same projections--labeled ""high"" and ""moderate""--I showed you last time. In the middle line I've shown the actual experience to date and our current projection. That current projection is running a little closer to the high end than to the low end of our previous range of projections. Most of this still reflects growth in vault cash, although we do see some outflows to meet consumer demand that is higher than in prior years. We don't know whether to attribute that to Y2K or not, but we are beginning to see a little of the cash seeping out. In the middle panel are the New York Bank staff's estimates of free reserves or reserve needs through year-end, including yesterday's operations but not yesterday's actual performance. As you can see, this produces about a $42 billion need from here to year-end, not including whatever excess reserves we may need to put in on the last day, which might be around $10 billion. So, from this point to year-end in our current forecast it looks as if we will need to provide about $52 billion more. This past August, I suggested to you that we might face reserve needs from then forward of about $100 billion, with a band of uncertainty of $100 billion--$50 billion on either side of that estimate. At that point in August we had an underlying need of about $8 billion. Since then we have purchased just under $10 billion outright and have done $60 billion in term operations through the turn of the year. So on the present course, dating back to August and adding in the $50 billion for uncertainty, we are at about $120 billion. That's roughly our estimate of reserve needs from where we were in August through year-end. Looking toward the end of the year, some of the market estimates of year-end financing for mortgage-backed collateral that we were hearing about--and we were calculating ourselves--were coming close to and sometimes over 7 percent, which is the strike price for our options. That began to catch our attention. After thinking about it, we executed two forward transactions for the turn-of-the-year weekend. We thought we would take on in advance some of the mortgage-backed collateral that might be looking for financing over the century date change. Our reasoning was as follows: If it was going to be exercised as an option around the turn-of-the-year, we would have been taking it on anyway, so why not do it in advance? Also, as we thought more about it, we decided this would be an opportunity for price discovery both for us and for the market. Let me take you through this bottom panel on page 3, which represents a bit of the evolution of estimates of term financing. On the far left, you can see that the implied turn-of-the-year repo rates from our term operations on October 8th were about 7 to 71/2 percent for Treasuries, 10 to 12 percent for agency securities, and 111/2 to almost 14 percent for mortgage-backed securities. Now, I want to be clear that a lot of heroic assumptions are built in here. There were uncertainties about Committee policy and one had to make estimates of where other financing rates would be. But these are fairly typical of where most people in the market thought turn-of- the-year financing rates were, understanding they might be a little overstated. In the second column you can see the comparable implied rates from our longer-term operations on December 17th. The next two columns are the bid and offer rates taken off broker screens yesterday for Treasury and agency collateral. And on the far right are the rates, taking the high proposition and the low proposition, in the two turn-of-the-year RPs we executed. Both came in a little lower than the rates on broker screens. The high bid was 6.27 percent and the low bid was 4.5 percent on the first five-day RP we did for the turn-of-the-year period; 6.38 and 5.25 percent were the comparable rates on the second one. I think the tightening up in the second operation actually just reflected the market coming to a sense of the pricing. The low bidders in the first operation were wishful thinkers, hoping financing would be that low. So, I view it as a sort of healthy bunching up. But looking at these rates again does suggest to me that more of the uncertainty the market is pricing for is in the early days in January, not just the century rollover date. Some of the assumptions we have been making are probably in error, in that they attribute much of the premium just to December 23rd; more of it is probably an uncertainty premium for the initial days in January. One way to put it is that the market may believe that we can keep financing rates low on any one day in light of our operations, but it may be harder to believe that for the first two weeks of January. Finally, the last page depicts how the fed funds rate has traded since your last meeting. The upper right section shows the maintenance period surrounding Thanksgiving. In that period we had a slightly elevated funds rate as we faced pressures typical of the turn of the month and of Thanksgiving, especially when it comes so close to the beginning of December. In the next maintenance period, from December 2nd to 15th, we leaned rather heavily in the direction of generosity, with the 15th being the end of the maintenance period and a tax payment date. We wanted to be very certain not to have firm rates on that day, which might set us up for the end of the year. So we were quite generous in providing excess reserves from the early through the middle part of the period. Then we worked down the period average excess to just $1.1 billion, as you can see, but that gave us some soft rates over the last few days of the interval. That was intentional on our part. That is all I have to report. We conducted no foreign exchange operations in the period. I would be happy to answer any questions.",1939
-fomc-corpus,1999,Questions for Peter?,4
-fomc-corpus,1999,I have one little question.,6
-fomc-corpus,1999,I'm sorry. We have not yet approved the Examination Report of the System Open Market Account. That requires a motion.,23
-fomc-corpus,1999,I move that we approve the SOMA Examination Report.,11
-fomc-corpus,1999,Without objection. President Minehan.,7
-fomc-corpus,1999,"You mentioned a couple of times, Peter, that you think anxieties about Y2K have shifted from the actual turn-of-the-year period of 12/31/99 to 1/1/00 to the first couple of weeks in January. Is there anything more substantial to it than that? Are there particular concerns in the market? I know there is a lot of concern, at least among some financial institutions I know of, about having more liquidity than they want coming into the end of the year. Do you think that concern is going to disappear quickly at the beginning of the year, or is there anything more to it than that?",130
-fomc-corpus,1999,"It may just be a relative issue in that anxieties about the last few days of the year, when people thought markets would be most illiquid, have gone away. So relatively speaking, the state of anxiety, whatever it may be, is now about the first ten days of January.",58
-fomc-corpus,1999,It just got pushed out?,6
-fomc-corpus,1999,"Yes, it was just shifted out into the new year. There are certainly a number of people who are more worried about the state of settlements and heavy volume after an accumulation of slow days. If the whole system gets as sticky as molasses, the problem is not going to be on January 3rd and 4th; it is going to be on the 6th or the 10th if everyone is being a little too cautious. I think that is where a lot of anxieties are focused. There are a number of other markets in the world where, notwithstanding when banks are closed for holidays, the authorities have not been as vigilant as we have tried to be in making sure the banks do not de facto close down the markets. Some small non-euro European countries have allowed their banks simply to declare the first ten days not good value days for foreign exchange transactions, for example, even though the banks are going to be open. So their retail customers can walk in the door and take out money, but their corporate customers can't get their foreign exchange trades settled. That's the sort of thing that is gnawing at confidence about those first ten days.",234
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,I move approval of the domestic operations.,8
-fomc-corpus,1999,Without objection they are approved. Mike Prell and Karen Johnson.,13
-fomc-corpus,1999,"Thank you, Mr. Chairman. If I were to put the Greenbook in a seasonal nutshell, I suppose I would say that we've brought you tidings of great joy, but maybe not great comfort. In broad macro terms, the economy has been performing splendidly. Though we can't be especially confident at this point, it looks as if real GDP growth in the current quarter will be close to 5 percent, at an annual rate. If so, 1999 would be the fourth year running of growth of 4 percent or more. With job gains still strong, we've now enjoyed three straight years of average unemployment rates below 5 percent. The chain index for GDP prices has increased less than 2 percent for four consecutive years. Moreover, the outlook as described in our baseline forecast is almost as good. GDP growth is projected to fall a little short of the 4 percent mark over the next two years. But the unemployment rate is expected to remain near 4 percent and GDP price increases below 2 percent. This is among the most upbeat forecasts for the U.S. economy that you'll find today. So, if we're right, the basis for joy is pretty clear. You've entered Humphrey-Hawkins heaven. Unfortunately, you haven't been granted unconditional permanent residency there, and this is where the comfort side of the story comes in. We believe that the economy may be getting seriously overheated and in some ways significantly distorted. This Committee has, of course, announced its focus on the mounting pressures in the labor market as the most likely potential source of deteriorating inflation performance and thus cyclical instability. But, though there's a near consensus among employers that qualified workers are terribly scarce, the official data actually show decelerating wages. I'll make just three quick comments on this dissonance. First, we continue to think that the wage deceleration this year owes considerably to the downside surprise in price inflation that occurred last year when oil prices plummeted; on this view, this year's pickup in prices should be showing through in wages over coming quarters. Second, judging by the nonfarm compensation figures--though not by the less inclusive ECI--real wages (deflated by product prices) have been increasing quite substantially even this year. But, third, none of the official pay series seems equipped to provide an accurate reading on labor costs in today's world where plain vanilla wages are becoming less important relative to many other components, including deferred--and less certain--compensation in the form of stock and stock options. This latter point is underscored by the stream of stories about people passing up big salaries to go to young firms offering equity lottery tickets and about established companies restructuring themselves so that they can compete on those terms. This suggests that the linkage between compensation changes and price pressures--never an especially tight and predictable one --has become even more problematic. Given these vagaries of the wage picture and its interpretation, and on the thought that the proof of the inflation pudding might be in the eating, perhaps we should simply ask whether there's any evidence that prices themselves are beginning to accelerate. I would say that there is some evidence, though it may not yet be compelling. Certainly, we've seen an upturn in core PPI crude and intermediate goods prices. At the same time, and helping to explain the acceleration of the PPI pipeline measures, the prices of non-oil imports (ex computers and semiconductors) have begun inching up as the dollar has stopped appreciating on a broad basis and as foreign economies have recovered. At the final goods and services level, with some greater firmness in the monthly figures of late, the core CPI has edged a couple of tenths above its low on a twelve-month change basis. And, of course, as I've noted repeatedly, overall consumer prices have accelerated noticeably this year with the run-up in the cost of crude oil, something that may provide some momentum to inflation in the near term. One way in which that could occur is via expectations, and households' short-term inflation expectations do appear to have risen some this year. It might also be noted that the latest semi-annual NAPM survey showed purchasing managers expressing somewhat greater concern about increasing costs and inflation in 2000. All of this may well be stretching the point statistically, but I think it's worth sounding a note of caution that strong productivity gains and intense competition--even accelerating productivity and intensifying competition--do not by themselves ensure that there can be no step-up in inflation. Unless supply is completely elastic, which seems unlikely in the short run, demand can become excessive. That, we fear, is the current situation, with the rising stock market overriding the effects of monetary tightening. Once again in recent weeks, the market has defied our notions of valuation gravity by posting an appreciable further advance. Moreover, it has done so in a way that seems to highlight the risk that it will continue doing so. I refer to the incredible run-up in ""tech"" and e-commerce stocks, some of which have entered the big-cap realm without ever earning a buck. To illustrate the speculative character of the market, let me cite an excerpt from a recent IPO prospectus: ""We incurred losses of $14.5 million in fiscal 1999 primarily due to expansion of our operations, and we had an accumulated deficit of $15.0 million as of July 31, 1999. We expect to continue to incur significant...expenses, particularly as a result of expanding our direct sales force.... We do not expect to generate sufficient revenues to achieve profitability and, therefore, we expect to continue to incur net losses for at least the foreseeable future. If we do achieve profitability, we may not be able to sustain it."" Based on these prospects, the VA Linux IPO recorded a first-day price gain of about 700 percent and has a market cap of roughly $9 billion. Not bad for a company that some analysts say has no hold on any significant technology. The warning language I've just read is at least an improvement in disclosure compared to the classic prospectus of the South Sea Bubble era, in which someone offered shares in ""A company for carrying on an undertaking of great advantage, but nobody to know what it is."" But, I wonder whether the spirit of the times isn't becoming similar to that of the earlier period. Among other things, it may be noteworthy that the tech stocks have done so well of late in the face of rising interest rates. Earlier this year, those stocks supposedly were damaged when rates rose, because, people said, quite logically, that the present values of their distant earnings were greatly affected by the rising discount factor. At this point, those same people are abandoning all efforts at fundamental analysis and talking about momentum as the only thing that matters. If this speculation were occurring on a scale that wasn't lifting the overall market, it might be of concern only for the distortions in resource allocation it might be causing. But it has in fact been giving rise to significant gains in household wealth and thereby contributing to the rapid growth of consumer demand--something reflected in the internal and external saving imbalances that are much discussed in some circles. Whether our assumed 75 basis point increase in the fed funds rate would be a sufficient shock to halt this financial locomotive is open to question. A model simulation in the Greenbook gave some sense of what might happen if the stock market shrugged off that further tightening and continued rising. But another factor that will help determine just how much policy restraint is needed is what happens in the rest of the world economy, and Karen has a few words to say about the risks in that regard.",1530
-fomc-corpus,1999,"In my remarks I will first say a few words about the October trade data that were released after the Greenbook was completed and then will review what we perceive to be some of the risks confronting the global economy. In October, the U.S. nominal trade deficit in goods and services reached $25.9 billion, a new monthly record. Exports were about unchanged from their level in the previous two months, as increased exports of industrial materials about offset decreased exports of machinery, including computers. The value of imports jumped in October, with the largest increases registered in consumer goods and machinery. The October number was very close to that embedded in the Greenbook forecast. By themselves, these data suggest a fourth-quarter outcome of real net exports that is slightly weaker than in the Greenbook. However, in combination with small adjustments to some domestic components of GDP in response to these data, they imply little net change in our estimate of current-quarter GDP growth. Once again we have slightly revised upward our Greenbook projection for real output growth abroad during 2000 and 2001. This brings the total revision for 2000 to about plus 3/4 percentage point since June and plus 11/4 percentage points since last December. Our stronger outlook for the coming two years rests in part on the positive surprises in recent months for economic activity during this year for most regions of the world. It rests also on the likelihood that fiscal policy will be less contractionary in several regions while monetary policy remains generally accommodative abroad. The one major exception to the generally bright picture I am painting has been Japan, where although we have revised upward our forecast for next year, projected growth remains quite low, and we are somewhat pessimistic. Together with the stronger view for the U. S. economy that Mike just reviewed, the staff forecast now calls for a substantially more robust global economy over the coming eight quarters than seemed probable a year ago. One risk to this upbeat picture is that we, and other forecasters, are still not fully taking into account the mutually reinforcing positive impulses that can be shared across countries during a simultaneous expansion. We may be underestimating the upward momentum in individual countries that can come from the interaction of improved confidence, higher capacity utilization, and wealth effects. For the global economy, we may be failing to allow for generally stronger export demand everywhere as spare capacity is reduced in many economies at the same time. One class of markets where early indications of such growing momentum might become evident is global non-oil commodity markets. As yet, we do not see an indication that demand is putting severe pressure on supply in those markets. While prices have begun rising, it is from previously very low levels. Going forward, we will need to pay particular attention to those markets for signs of incipient inflationary pressures. At the same time, we need to be open to the possibility that the factors causing accelerating productivity in the U.S. economy are beginning to have similar effects in other economies, especially the other industrial economies. In that event, the global economy would be capable of faster growth without inflation risk than was previously the case. Provided foreign officials do not unnecessarily limit output growth from achieving its new potential, such a development could result in stronger demand for U.S. exports and more balanced growth in the global economy. Such a scenario is one version of a so-called soft landing. It now seems very likely that 2000 will see higher interest rates and more profitable investment opportunities abroad that could decrease demand for U.S. assets and raise the risk of downward pressure on the dollar. Such developments could in turn cause disturbances in other global financial markets as well. However, for the first time since the Asian crisis began in 1997, we need to be alert to the possibility of generalized global upside economic pressures and the challenges for policy that such a development would pose.",772
-fomc-corpus,1999,Questions for either of our colleagues? President Moskow.,11
-fomc-corpus,1999,"Thank you, Mr. Chairman. I want to ask Mike a question about the outlook for automobile sales next year. The Greenbook projection for sales of light vehicles is 16.6 million, and I am sure you know that the auto companies are estimating around 15.9 million. We had a symposium at our Bank a few weeks ago with a group of forecasters from the region, and they were coming in around that same level--15.9 or 15.8 million even. I am just curious as to why the Greenbook is so much higher than the consensus forecast and the forecast of the auto companies themselves at this point.",130
-fomc-corpus,1999,"Well, no one has had a particularly good track record on forecasting auto sales this year. Even the automobile manufacturers themselves, I think, have been quite surprised by the high level of sales. Our forecast of overall economic activity is, as I suggested, in the upper brackets of forecasts that one would find at this point and auto sales are a cyclically sensitive sector of the economy. I think therein lies a very important element of explanation. I don't think there is much more that I can say on this. We consult a number of models, and they give somewhat different results about the likely pattern of auto demand over the next couple of years. But as we look back at recent experience--at how much sales seemed to be above reasonable trends in the past two or three years--we don't see a compelling case for a precipitous decline from here, especially in a fundamentally strong economic environment.",177
-fomc-corpus,1999,"Mike, I thought the section in the Greenbook on alternative simulations was particularly interesting, especially the comparison between the baseline and the flat funds rate scenario. It seems to me, if one compares the effects of monetary policy actions on inflation expectations in the economy, that there is a greater sensitivity now than may have been the case a couple of years ago. And that makes sense to me. We are basically saying that markets are learning and responding to policy actions. But what is a bit confusing is that there is also, I would assume, considerable sensitivity to developments in equity markets as well. If one looks at those two Greenbook alternatives, there is a big impact on expectations as a result of the effect of a change in rates on equity prices. Could you talk a little about how expectations enter into the model now versus how they used to? Is there a greater sensitivity now to policy actions?",178
-fomc-corpus,1999,I'm not sure that I can provide a very good direct answer to the question of sensitivity to policy actions. We have looked to see whether the responses--in terms of long-term rate movements and so on--to changes in the funds rate are different now. I think there may be some small amount of evidence supporting that thesis.,65
-fomc-corpus,1999,"The most important change in the model, relative to where it was a few years ago, is the reaction of the economy and the agents in the economy when we don't tighten in a period when the economy is strong. In that case, people think we have revised up our inflation target, whereas in the past our model basically assumed that all agents were backward-looking. People just looked at where inflation had been; and the way that monetary policy influenced the inflation outlook going forward was simply through its effect on aggregate demand. Now there is some independent effect through forward-looking expectations that leads to a more rapid adjustment of inflation expectations. I think that is the principal difference. In looking at the response of the economy to changes in the funds rate, we were unable to convince ourselves that there had been a significant change in either the economic structure or the model's response to monetary policy at some deeper level. But I think the way the model is now constructed does make it more sensitive to the conduct of monetary policy. It wasn't even a question that arose in our old MPS model.",213
-fomc-corpus,1999,"I should say that one of the nice features of our model is the ability to change the expectations formation mechanisms. And the one that we have used in doing these simulations is a very simple, small model that is supposed to capture the way people will react to a certain set of variables. It isn't a fully consistent model of expectations in that we are not taking a full rational expectations kind of approach. That would be another way of doing this. This is one of the areas of active continuing research, and conceivably there could be some changes in this small model in the not-too-distant future that would perhaps enrich that a bit. One of the things that we have pointed out repeatedly in the presentation of our simulations is the difference in the effect of lower interest rates versus higher stock prices for the inflation outcome. That's because the interest rate change induced by monetary policy is affecting people's inflation expectations to a greater degree than the higher stock prices, even though they both create more aggregate demand. So, this is one of the areas that I think we need to work on a bit further in an effort to come up with something that would be a little more realistic.",231
-fomc-corpus,1999,One other area where over time there has been some structural change in the economy that has tended to increase the sensitivity of output to interest rates has been through the increasing openness of the economy and the exchange rate mechanism.,42
-fomc-corpus,1999,Thank you.,3
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mike, on the top of page 7 of the first part of the Greenbook, you say that you are expecting hours in the nonfarm sector to increase at a 21/4 percent rate this quarter. And you say that if we get nonfarm productivity increasing at a 31/4 percent rate we will get the 4.8 percent GDP forecast. That doesn't seem to add up. Does that imply that agricultural productivity is declining?",90
-fomc-corpus,1999,We have a government sector to account for and I think that is probably the--,16
-fomc-corpus,1999,The government and household sectors overwhelm it. Agricultural productivity is still accelerating according to the data that we have.,21
-fomc-corpus,1999,"Yes, that's why I couldn't figure out-",9
-fomc-corpus,1999,Although agricultural productivity might slump if genetically modified organisms were made illegal.,13
-fomc-corpus,1999,"On wages, is there any way to sort out the forward-looking expectations effects from the backward-looking effects of recent changes in the CPI, which I think you were using as a part of your outlook for wages?",42
-fomc-corpus,1999,"I don't think there is a particularly good way. And I'm not sure, in fact, whether in the real world we don't have a mixture of both occurring. In a mechanical way we have cost of living adjustments in various contracts, so that is clearly backward-looking. I would think that in many informal wage adjustment systems people are looking at what has happened to the CPI over the past year or some other recent period to get a sense of what might be an appropriate wage increase. In other instances, people may be more forward-looking and the question is how they shape those expectations. We have tried to capture that econometrically in various ways by using lagged prices, survey measures, and so on. I don't think we can really separate the two in a clear way.",154
-fomc-corpus,1999,"If you enter both the Michigan Survey's forward-looking expectations and lagged prices into a wage equation, typically both will have some explanatory power. Whether you really and truly have identified those two separate effects, given their co-linearities, would be a tough call.",52
-fomc-corpus,1999,"As you know, we are getting some preliminary evidence that the wealth effect may be larger than the 3 or 4 percent stemming from capital gains that basic distributed lagged econometric analysis produces. As a general proposition is it true that because of the random noise in the system any very significant reduced form type of calculation that you're currently making to pick up the wealth effect is biased downward by the nature of the construction of the test? Or do you have ways to filter out whatever noise there may be to come up with cleaner coefficients? For example, suppose that in the real world there is an exact 10 percent coefficient and that if you could measure it in every detail you would get that number. But to the extent there is random noise in the data, of necessity the estimated coefficient will be biased downward, and if there is enough noise in the system, at the limit it will go to zero. Do we have any sense, having looked only at one major upswing in stock prices to judge this, whether that 3 to 4 percent coefficient is realistic? Do we have actual useful evidence in the other direction? In other words, in the few periods of really significant declines in stock prices is there any evidence regarding the robustness of that coefficient?",250
-fomc-corpus,1999,"We have looked at how robust those estimates are, examining different estimation periods and so on, and one would find some variation in that respect. On a priori grounds, one might think that this effect would not necessarily be perfectly stable over time as the demographic distribution of wealth changes. If more of the wealth was held by people with shorter expected remaining life spans and there was not a strong bequest motive, one would think the coefficient would go up because people would be spending that wealth more quickly. If younger people are getting wealthy and they spread the spending over a lifetime, one would expect the coefficient to go down. I think there are any number of reasons to expect that the coefficient is not going to be perfectly stable.",143
-fomc-corpus,1999,"I'm not even raising the issue of stability. I am raising strictly the question of the size. It is perfectly possible to have all the things you are mentioning but for the bias to be there as a function of the data themselves. I'm just questioning whether or not--other than by disaggregating the data--we have any indication that we may be underestimating that coefficient. If you disaggregate the data, you clearly reduce the noise. That's the purpose of disaggregation. We have already started some modest disaggregation and we see some rather startlingly different results. I was just curious as to whether there was concern about that because if we are underestimating that coefficient on both the upside and the downside, it could be more destabilizing than even the less-than-optimistic appraisal of the overall outlook that you just gave.",167
-fomc-corpus,1999,"There is one piece of evidence, though, suggesting that our estimated wealth effect is not too far off base. And that is that the decline in the saving rate we have seen has been roughly consistent with what the consumption equation uses--that is, what a 3 to 4 cents on the dollar wealth effect would suggest should be the case. You are absolutely right that the hard part in estimating these effects is that we know we are estimating ultimately the consumption effect from changes in stock prices. Those are very noisy. What people are really reacting to, in essence, is their perception of the persistence of those stock prices. And what the distributed lag picks up is the fact that because the data are noisy we do not see an immediate response to every movement in stock prices. That's because many people, in making their decisions, are trying to determine how much of that movement in stock prices is, in fact, going to persist and how much is transitory. So the distributed lag would pick up smaller coefficients, let's say, of the effect of the stock price change in the first quarter simply because many people are uncertain as to whether or not that change will be permanent or transitory. If they knew for sure, the lagged coefficient would be biased down because they would, in fact, respond more strongly to that movement in stock prices. In terms of the disaggregated data, we have a lot of work yet to do. We have a variety of different data sets and projects that we are pursuing to try to pin down better the size of this wealth effect. I would feel more comfortable if I saw micro level evidence that supported our hypothesis that we are actually experiencing a wealth effect of the size that the time series evidence is purporting to pick up. I say that because, as our colleagues in New York have pointed out, there is uncertainty in these estimates for sure.",376
-fomc-corpus,1999,Have you tried at all to capture potential stock price volatility as a factor that would delay the sense of persistence of the gains? Or is the period just too short to provide any useful insight?,38
-fomc-corpus,1999,"I've asked our consumption experts that question. They claim that there has not been much success thus far in their effort to work the volatility in stock prices into those consumption functions. It may be a function of the fact that, when we are using the aggregate time series data, we are asking far too much from those data and more than they are going to be able to return. The micro level evidence may provide some better fix on that.",87
-fomc-corpus,1999,"Thank you. Any further questions? If not, who would like to start the roundtable discussion? President Parry.",24
-fomc-corpus,1999,"Mr. Chairman, economic activity in the Twelfth District has continued to expand rapidly in recent months, with the expansion broadly based across major District states. Every major sector in the District added jobs in recent months, with construction posting some of the largest gains. And manufacturing has been a new source of job growth in recent months despite a continued loss of aerospace jobs. A rebound is particularly evident for manufacturers of high-tech equipment, who recently have benefited from improved exports to Asian countries that had suffered recessions in the 1997-1998 period. High-tech firms have created a lot of jobs and wealth recently in the District, especially in California. This year a record-breaking amount of venture capital has been invested in California firms, particularly those in the Bay Area that are developing Internet applications. Proceeds from initial public offerings also have surged this year, following moderate amounts of IPO activity in 1997 and 1998. The strong performance of technology stocks is boosting spending not only in California but in other District states as well. For example, one of our directors reported that Californians are using their newfound riches to bid up the price of beachfront real estate in Hawaii. Analysis done by our staff suggests that successful IPOs have made a large number of employees wealthy, at least on paper. More than 150,000 persons are employed in the roughly 300 California- headquartered firms that have made IPOs in the last three years. About 125,000 of these employees probably have received stock or stock options as part of their compensation, giving them as a group about 15 percent ownership in their firms. Given the strong stock price performance this year, the aggregate market capitalization of these 300 firms recently jumped to about $450 billion dollars. As a result, about 125,000 Californians have seen the value of their stock or stock options jump to an average level of more than $300,000 per employee. Just as this newly created wealth is boosting demand, especially in California, it is clear that a collapse in market values would impose obvious downside risks. Turning to the national economy, recent data continue to show the rapid growth in economic activity and moderate inflation that we have seen for four years now. These data serve to reinforce the impression that the supply side of the economy is expanding rapidly. Our forecast under an unchanged federal funds rate and flat stock market shows growth of just under 33/4 percent and 31/2 percent respectively over the next two years. With regard to inflation, tight labor markets are expected to impart an upward trend to the ECI, which rises in our forecast to 41/4 percent by 2001. However, the acceleration of productivity in recent years can be expected to counteract part of this pressure on goods prices. Moreover, corporate profit margins remain high, providing a further cushion between wages and prices. Balancing these factors, our staff forecast shows a slight upward trend in core CPI from 2.1 percent this year to 2.3 and 2.4 percent in the next two years, considerably below the forecast in the Greenbook constant funds rate scenario. There are significant risks on both sides of the forecast. The evidence of a continuing supply shock represents a downside risk for inflation. This shock has proven to be difficult to model, and inflation, once again, could come in lower than expected. In addition, the possibility of a significant stock market correction cannot by any means be ruled out, and that also would reduce inflationary risks. However, labor market tightness could begin to show through to price inflation in a more dramatic way, as would be expected from historical experience. This risk is illustrated rather forcefully by the Greenbook with its forecast that CPI inflation would rise to 3.2 percent in 2001 with no further tightening of monetary policy. The key policy issues appear to remain the same. Accelerating productivity and actual results for inflation suggest room for guarded optimism, while labor market tightness implies problems ahead for inflation. While I am perhaps not as pessimistic as the Greenbook, I must admit that it has shifted my focus a bit toward the inflationary risks that we face with an unchanged federal funds rate. Thank you.",845
-fomc-corpus,1999,"Incidentally, parenthetically, President Parry has suggested a disaggregation of the wealth effect by regions. [Laughter] President Hoenig.",29
-fomc-corpus,1999,"Thank you, Mr. Chairman. The underlying trends in the Tenth District economy have not materially changed since our last meeting. The economy remains healthy, with manufacturing actually showing some continued rebound. I am hearing more comments throughout the District that higher interest rates have slowed some construction sectors, especially residential building. Growth in home sales in the District was about 3 percent third quarter over third quarter this year compared with about 10 percent last year. At the same time, we are hearing from several of our business contacts that increases in public works construction such as roads--actually jails for the most part--are offsetting the falloff in other construction. While private construction is slowing, manufacturing is continuing to show good signs of strength. Our Beigebook contacts reported high levels of capacity utilization last month. The recently released data on third-quarter manufacturing exports also showed continued improvement in foreign demand for District factory goods. Based on reports throughout the District, holiday shopping centers are quite busy; seasonal sales are very strong and many retailers are reporting the best season that they have had in five years. While the number of business contacts reporting labor shortages increased slightly last month, it was probably not a significant increase. Moreover, most of the increase came in the manufacturing sector, which has been expanding production in the last couple of months. The District's unemployment rate is about 31/4 percent. Except for New Mexico and Wyoming, all District states have unemployment rates below 31/4 percent, and some are much below that. District contacts report that wage and price pressures remain subdued, however; that is no different from what I have been hearing for some time and have reported in past meetings. Our energy sector has actually strengthened with the increase in prices and there are some signs now of wells being uncapped but very few new starts at this stage. The farm economy remains fundamentally weak, although there is some improvement in cattle prices. But for now that sector will continue to rely on transfer payments for its health. Turning to the national economy, my view of the outlook has not changed fundamentally since the November FOMC meeting. The economy obviously continues to grow well, with few signs right now of rising inflation. I expect economic growth to slow over the forecast horizon based on our actions earlier this year. And, frankly, I find it highly unlikely that with an unchanged funds rate we would have growth in the 4 to 5 percent range as suggested by the Greenbook. My view of the Greenbook right now is that it provides a reasonable description of the upside risks to the outlook rather than the most likely outcome. In my mind the risks are balanced. We do have upward pressures; there's no question about it. But there are some other factors, such as our last three funds rate increases, that I think need to play out. I agree with most people that core inflation is likely to rise to about 21/4 percent or maybe 21/2 percent in the year 2000 and beyond. However, at this point I am not convinced that it will rise to a rate higher than 21/2 percent in 2001. So in that sense, I think we do have some time to look at how things develop in the near future. Thank you.",653
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. In recent reports from directors, the focus has been as much on the outlook for the next year as it has on current or recent conditions, especially among those people who indicated they were in their profit-planning cycles or putting together business plans. We questioned them about the specifics they were putting in their business plans. One company that owns newspapers throughout the country said they expect ad revenue to be significantly stronger in 2000 than in the current year. But they are budgeting a 10 percent increase in newsprint costs and an 18 percent increase in corporate-wide medical costs. And they expect the rise in their total labor costs to be in the 6 to 7 percent range. A communications company reported what they refer to as an ""explosion"" of demand for communications equipment. Growth in data transmissions is currently running 10 times that of voice transmissions, and for the year 2000 they are budgeting for a 40 percent increase in fiber mileage that they expect to put into place. Previously, for the current year they had expected a fourth-quarter slowdown in orders and shipments because of the so-called lockdown effect. They said it did not occur. The quote is: ""If there was a lockdown effect, it only delayed a further acceleration in telecommunications equipment shipments."" And they will be watching for early signs to confirm that next year. A company that basically makes items out of specialty metals--they supply the aerospace industry and the medical profession--said it expects most of its growth in the next few years to be in exports to Asia and Europe. Some recent signs of such growth proved of interest compared to what they had been seeing over the last couple of years. A major supplier worldwide of safety equipment had an abysmal summer but reported that exports from September to November were great and they do not believe the improvement was Y2K-related. They said that they had been concerned that the improvement could be a blip, but they don't think so now. Their foreign orders were picking up nicely and they expect next year to be even better. The outlook for construction spending and employment in the region is reported to be one of continued strength but it involves mostly public spending on the highway infrastructure and the kinds of projects that Tom Hoenig also mentioned. It has been asserted by some of our contacts that the recent leveling in residential construction in the region reflects the lack of available labor, not the increase in mortgage rates. They feel it is really a deferral of residential construction because workers are not available. In unionized activity, our contacts say booming nonresidential construction has reduced the pool of available residential construction workers. They are simply being bid off to other kinds of projects. We hear more reports of companies delaying or canceling expansion plans for warehouse facilities or for other distribution operations, mainly because of the lack of labor. We are told that some fast food restaurants in central Ohio have now gone to a weekends-only policy because they simply do not have the staff to operate in the middle of the week. A western Pennsylvania company that produces air curtains reports that overall 1999 will be a record year. They are now expecting the fourth quarter to be the strongest single quarter they have ever had; the strength is in both domestic and foreign markets but the pickup has been in foreign markets recently. They think most of the growth in demand that they are seeing stems from retro-fit projects, not new construction. Another company that is engaged in specialty food processing and distribution said that they estimate their December sales will turn out to be 25 percent above last December's. Over the course of this year their catalog sales have risen 20 percent and the share that is from the Internet has accelerated dramatically. In January of this year Internet sales were 2 percent of catalog sales and in November they were 10 percent. Their corporate sales--pastries and other packaged foods that I would call luxury food items--rose 30 percent this year. Most of that is for gifts to employees, customers, and suppliers. In the steel sector, the orders for the first quarter are reported to be good. Price increases in the range of $10 to $20 a ton were put into effect in the fourth quarter. And price increases ranging from $15 to $30 a ton have been announced for the first half of the year; that would be about a 7 to 10 percent increase. If they are fully implemented--some of them don't take effect until April 1st--that would leave the average level of steel prices about 5 percent below where they were a year and a half ago in July of 1998. Export demand for plastic-manufacturing equipment has recently picked up, and it is expected that demand in 2000 will be stronger. Again, it is said that most of the growth in new orders is going to be from foreign markets. They think Europe is picking up very nicely and are hopeful about Asia. In the sports and entertainment sector, the average price of a ticket to an NBA game on opening day this year was up 11 percent versus a year ago on opening day. The average ticket price for entertainment events this year at Gund Arena in Cleveland--mostly for music performances--was 10 percent above 1998. Finally, let me cite one report on the labor markets in the region: We were told that in Pittsburgh this year the starting salary for a worker with a bachelor's degree in biology and with computer proficiency was $90,000. Thank you.",1096
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"Mr. Chairman, I would like to say a few words about the directive when we get to that later in the meeting, so I'll try to compensate by being especially brief here. In any event, I don't have any great insights on the economic outlook. In short, I don't detect a lot of change in conditions either in our District or in the national economy since the November FOMC meeting. Activity in our region continued to advance at a solid pace in November and early December according to our contacts and the surveys that we conduct. Consumer spending remains strong. Our retail contacts are looking for nominal increases in sales over last year in the range of 5 to 6 percent. Outside of the textile industry which, of course, is still declining, manufacturing continues to rebound. Prospects going forward look pretty good, with new orders rising in a large number of industries. There are a few signs of some deceleration in residential sales and construction in some local markets, but there is, of course, a lot of noise in the short-term housing data, especially at the regional and local levels. Activity remains at a high level in any event. Labor markets are still very tight in our area. We have heard a few reports recently of quite sharp wage increases in some service industries, but increases in the manufacturing sector remain fairly moderate. And many of our business contacts continue to report a lack of pricing power. The same kind of story seems to hold true at the national level. As I see it, projections of a deceleration in the growth of demand continue to be pushed forward not only by the Board's staff but by other forecasters as well. I think the continuing momentum in consumer spending is particularly striking, although not terribly surprising, given strong growth in jobs and personal income. As I mentioned earlier, the Greenbook projects growth in hours worked at a 21/4 percent annual rate this quarter. It is hard to see how that kind of growth can be sustained without at some point generating inflation and inflationary wage demands, especially if the core CPI is accelerating as the Greenbook is projecting going forward. One final point of interest: A teenage daughter of one of our Baltimore officers is reported to have been offered $250 to baby sit for a local dentist on New Year's Eve. She turned it down in order to go out with friends. We're not sure what that implies for the funds rate [laughter] but we still think the risks are on the upside and that we may be at least a little behind the curve. We're still working on it and we'll let you know when we figure it out!",522
-fomc-corpus,1999,"I think you've stopped this meeting cold! That's a new statistic, which we had better absorb! President Guynn.",23
-fomc-corpus,1999,"Mr. Chairman, I'm not sure I want to follow that! And I would also like to reserve a little time for the later discussion, but I won't trade away all of my time. The beat goes on. Growth in our region remains strong and relatively balanced, and our contacts across almost all of our geographic areas and industries are expecting more of the same in the period ahead. Consumer spending during the important Christmas buying season is now reported to be quite strong after a slow start prior to Thanksgiving. High-end items, including expensive jewelry, are reported to be hot. Big Box and other discounters are reporting sales increases of more than 5 percent on a year-over-year basis. As has been the pattern in recent years, sales at traditional department stores are not quite as strong. As I've reported at other recent meetings, real estate activity in our region has flattened noticeably. While current inventories of unsold units are at reasonable levels, one major builder in whose judgment I have a great deal of confidence told us recently that he expects to begin to see the first signs of overbuilding in some of our markets in coming months. Manufacturing in the region continues to increase at a modest pace, except for apparel, which is experiencing a long secular decline. Our latest manufacturing survey did suggest some caution in investment spending plans in manufacturing in coming months. International trade from our region continues to suffer from the weak growth in Japan and Latin America, which account for 10 percent and 40 percent, respectively, of our region's total exports. Our examiners report that loan growth, except for mortgages, continues to be strong. There is more evidence of credit quality problems in health care lending, and substantial loan loss provisions have been made by several of our large lenders recently. It has also been suggested that after the year-end liquidity concerns abate, we could see a pop in investment and credit extensions as that money is put back to work. The major threat to continuation of strong growth in our region is the availability of labor, which historically has been very dependent upon substantial in-migration to support our above national trend growth. And the pool of additional workers has dried up. The most notable price pressure points remain the same: health care, pharmaceuticals, and some commodities. At the national level, I continue to be amazed at the raw strength of the continued expansion. Clearly, the consumption numbers and the anecdotal information indicate that the economy is carrying significant momentum into the first quarter. Like the Greenbook, both our judgmental and our VAR model forecasts show some slowing in the coming year-for somewhat different reasons--but upside surprises have become the norm. While we may have some unusual patterns over the Y2K year-end period, there now appears to be enough momentum and perhaps pent-up investment spending to counter the early 2000 slowing we expected earlier. If anything, the economy looks even more resource constrained now on the labor side and is likely on a unsustainable growth path regardless of one's views of productivity and the NAIRU. Moreover, there are few signs that our previous rate hikes have yet begun to bite except for the moderation in housing. As others have suggested, higher real rates may be necessary to get a comparable degree of monetary restraint in the current environment. Like the Greenbook, our inflation forecast shows some gradual rise in measured inflation in 2000 and beyond. Like others, I find myself re-calibrating my expectations for productivity gains and reassessing other developments such as expanded world trade and its implications for the supply side and for pricing power. While I am comfortable building into my outlook and policy thinking some new views about sustainable increases in the potential for the economy to grow, I am not comfortable betting that all of the new-era phenomena are everlasting. Were it not for the special year-end considerations this year, I would be trying to develop the case more fully this morning for another snugging policy move. In my view, such a move would improve our chances of staying ahead of unsustainable developments that could threaten our gains against inflation and lead to a deterioration in inflation expectations. Thank you, Mr. Chairman.",821
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,"Thank you, Mr. Chairman. The regional economy in the Philadelphia District continues to operate at high levels, with a general sense that the good times will roll on. Retail sales are robust throughout the District. Some high-end car dealers are having trouble getting deliveries, not because the manufacturers can't produce the cars but because there aren't enough truckers and trucks to get the cars to the customer. Home sales are unusually brisk for December, in part, realtors say, because of the unusually mild weather. In commercial real estate, the demand for properties is strong, and I am hearing reports here and there of some speculative building; it's not a lot, but I haven't heard much about speculative building for a number of years. Labor markets are very tight. We hear of some examples of large increases in compensation and special perks, but the general pattern is still one of modest gains. The report from bankers around the District is that they believe that Y2K will be a non-event. They have lots of cash in their vaults but few customers requesting unusually large withdrawals. The national economy is clearly showing strong demand growth, with pressures evident on the supply side even with outsized productivity gains, and still generally benign inflation. Some further increases in interest rates to temper demand growth are highly likely as the new year unfolds. Our primary objective during the coming weeks, however, is to get into the new year with financial markets as settled as we can make them. We have gone to a lot of effort to do just that, and our decisions today should be consistent with those efforts.",313
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. New England continues its recent pattern of moderate growth, at least as measured by the increase in employment levels, which have been a full percentage point below the nation for some time. For most of the region, however, labor force growth has also been slower. And it has been slower than the growth in the number of jobs, which is giving rise to declining rates of unemployment in all states in the region. This also gives credence to the numerous anecdotes that it is the labor constraint itself that is preventing higher rates of regional job growth. Nonetheless, the region's employment growth does exceed the nation's in two areas--construction job increases and the moderation in manufacturing job losses. In the construction area, job growth reflects very good residential and commercial real estate markets in Boston and elsewhere. We continue to ask ourselves whether construction job growth could be a precursor to a 1980s type real estate boom. But so far, construction jobs do not comprise nearly as large a fraction of total employment as they did in the 1980s, and there is very little, though some, speculative construction going on. On the manufacturing side, regional job losses are more moderate than those for the nation as a whole, probably reflecting a turnaround in merchandise exports. Recent reports indicate that new orders for manufacturing goods in the region accelerated in recent months, led by a rebound in exports. Year over year New England exports grew fastest to South Korea, Mexico, and the Netherlands, though exports to South Korea are still not back to pre-crisis levels. As compared with earlier this year, contacts noted a somewhat increased willingness to pay higher wages and to raise prices, at least for retail goods. Consumer confidence is high and growing, with surveys pointing to especially strong gains in expectations about future economic conditions. This is in marked contrast to earlier this year when such expectations were more moderate. To the extent that expectations were affected earlier by Y2K uncertainties--and I am not really positive that they were--the apparent lack of concern in this area may be feeding into higher levels of consumer confidence. It is hard to find any Y2K panic or even deep worries out there, and believe me we've tried to find it. In looking around for signs of slowing in the region, I must admit I've had a hard time finding any. Bankers do report that mortgage originations are off. And while loans in general have been growing at a better pace than earlier this year, they are rising at only about half the pace for the nation as a whole. Aside from that, however, just about everything else seems to be going great. Stores are packed. The highways are jammed. Help in retail stores is extremely hard to come by. We held a series of bankers' forums this fall and the conversations among those present as well as among the bankers on our board were very upbeat. New England may be growing more slowly than the nation, at least as measured by overall employment, but our regional economy seems to have a very solid foundation for the foreseeable future. Turning to the nation, I am struck, as others have been, by the fact that even in the few weeks since the last meeting things seem to have gotten that much hotter in the overall economy. Growth this quarter will be somewhere close to 5 percent. Labor markets are, if anything, tighter. The stock market continues to surprise on the upside, and financial market conditions in general seem quite accommodative, notwithstanding our recent tightening. Foreign growth, despite the weakness in Japan, continues to be stronger than expected. And reflecting all of this, oil and other commodity prices continue on the upswing. True, there seem to be a few signs at the national level of slowing in interest-sensitive sectors; but we have seen these signs before and they've simply been pauses. On the broad wage and price front, the total CPI has leveled off and the core is rising to fill the gap between the two of them. The one thing that remains somewhat puzzling, to me anyway, is why, given labor market pressures, we haven't seen much escalation in overall wages and in fact actually have seen some reduction in the rate of growth. If one believes that is because overall prices were lower last year due to the impact of declining oil prices, then I think there is reason to assume that the reverse will happen in the coming months and we will begin to see more wage pressures. One has to remain agnostic because we have expected to see that for some time now. But it does give one pause, in light of everything that has happened--given the stock market and the wealth effect, the change in overall price levels, and the increase in labor market pressures. Even given productivity changes, one has to wonder when compensation levels are going to be such that they will outstrip the growth in productivity and start to be a factor in terms of overall prices. In that regard, as we prepared our forecast in Boston, we had some trouble accepting that trend productivity growth might be somewhere north of 21/2 percent and that potential might be 3.8 percent or so. We are also a little less bullish, especially with regard to PCE spending. But overall, if we look at our forecast with an assumption of no policy change and compare it to the Greenbook's flat policy alternative, the differences are not substantial. We are in agreement with the staff that policy does need to be tighter to keep inflation from rising above 3 percent by late 2000 or early 2001. The questions are by how much--75 basis points or more--and when. It is hard to know the answer to how much since it is difficult to know what will happen when we make the next move and step on the brakes. In my view anyway, the next move may be seen differently than the last three. After all, it could be argued that those three tightenings were simply taking monetary policy back to where it was before the Asian crisis. The next move would bring short-term rates higher than they were in the spring of 1998 when we first adopted a bias toward tightening. There is at least a bit of a risk that the market will overreact, particularly given how frothy it has been of late. When to move is also an issue largely because of Y2K. I, for one, don't see us putting at risk all the efforts we have made toward keeping markets calm and liquid through the century date change by making a policy change now that could just as easily be made early in 2000. Nonetheless, if it is risky to move now, which it might be, it is also risky to wait much longer. Thank you.",1342
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,"Economic growth in the Eleventh District has accelerated slightly over the last couple of months. Thanks to higher oil and natural gas prices, the energy sector has picked up somewhat, with the result that overall economic activity and optimism in Houston and the Gulf Coast area more generally have improved significantly. Houston had been the only spot of softness among our major metropolitan areas. Growth in our manufacturing industries has been robust of late. Higher interest rates combined with some overbuilding have acted to put a dent in the pace of new home and commercial construction activity. In spite of continued widespread talk about tight labor markets, retailers in the District report that, surprisingly, they were able to find a good supply of workers for the holiday season, contrary to Cathy Minehan's report on New England. Employers in the high-tech field continue to innovate in their practice of boosting non-base pay so that their overall increases in compensation are held within the boundaries necessary to maintain profit margins. The national economy, if anything, seems stronger--and uniformly stronger--than even the most optimistic forecasters had anticipated. I understand that the variance in state employment growth rates is at its lowest level ever recorded, which reflects a national economy without any significant regional shocks and an economy with very low frictional unemployment associated with the need for labor mobility. As forecasts are revised upward so, too, is the outlook for productivity gains and reduced unit labor costs. We seem to remain in the virtuous cycle of supply expanding in tandem with increased demand or vice versa. The improved growth prospects around the world do not seem to alter the situation. The Blue Chip median forecasts for the fifteen largest economies are uniformly positive--and significantly in all of them economic activity increased between March and November--consistent with Karen Johnson's report earlier regarding the staff's forecast for the rest of the world. But the strong performance of world equity markets suggests that growing world demand can be accommodated without higher inflation. In the coming weeks, the Fed should do nothing that will alter the markets' confidence that we stand ready to provide liquidity and stability to financial markets. After Y2K events are clearly behind us, we can address the longer-term policy issues at our February meeting. In my judgment, any public discussion of a bias in our thinking at this time can only cause disruption and should be avoided.",458
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. The Seventh District economy continues to be strong. Many of our retailers indicate that sales have been ahead of expectations since Thanksgiving. There are always some retailers who are nervous and, as one major retailer noted late last week, the play is at the plate. The light vehicles market continues to boom. We are seeing a modest shift in the composition of sales away from light trucks back toward passenger cars, and this shift bodes well for our District as we have a relatively higher concentration in the production of passenger cars than light trucks. The situation in the farm economy is unchanged, with large grain inventories and low commodity prices. Even so, bankers we have talked to in the agricultural areas are feeling more comfortable because of the government subsidy checks that have recently gone out to farmers; those checks have added substantially to total farm income. Our directors and other business contacts also continue to cite very tight labor markets and increasing wage pressures. Some restaurant chains that we look at have had substantial gains in productivity negated at least in part by increases in overtime costs. Ed Boehne mentioned the shortage of truck drivers. One of our former directors who runs a large trucking company noted that the shortage of truck drivers has led his firm to cut back on new truck orders. He maintains that he could use 500 more drivers if he could get them. In a similar vein, a major construction equipment manufacturer observed that his firm expects no growth in near-term sales because of the labor shortages facing construction contractors. Prices continue to be subdued; still, the pricing environment seems to be changing. Contacts in the steel industry reported some upward movement in prices. As Jerry Jordan mentioned before, not only have steel scrap prices gone up, so have contract prices for steel deliveries in the year 2000. These contract prices are up about 1 percent relative to a year ago. This compares with contract prices that were down 5 percent in 1999 relative to 1998. We are also getting reports that advertising prices are moving up. To give some idea of the high volume of advertising, one large magazine printer mentioned to me that several major business magazines, including Forbes and Fortune, are now limiting the amount of advertising pages they can accept because they have reached a binding constraint on their maximum page count. The Chicago Purchasing Managers' report indicates that the overall index as well as the prices paid and the supply and delivery components moved down in December, but all three components remained well above the 50 percent level. I would remind you that these data should be treated confidentially, as they won't be released until December 30th. Jerry Jordan, as for basketball tickets, I can assure you that the price of tickets for the Chicago Bulls games did not go up this year. [Laughter] They are still $80. Y2K remains a question mark in the near term. Firms in our District indicate that they have made extensive preparation and they are ready. Many have set up centralized Y2K communication centers. In fact, a large temporary help firm in our District indicated that it has seen a heavy demand for temporary workers to staff these centers. Finally, in response to a question about inventory building, the head of a national trucking firm observed that there was no need to worry about a buildup in retail inventories for Y2K. Business for his customers was so strong that they couldn't build inventories if they wanted to. Turning to the national economy, our views have changed little since we last met. We remain in broad agreement with the general contours of the Greenbook forecast. Final domestic demand continues to run quite strong, as consumers and businesses spend their way to the end of the year. Given this momentum in final demand, labor markets may tighten slightly more in the next few months even as output growth decelerates to trend. Despite this, incoming labor compensation data have remained benign as productivity growth has repeatedly exceeded our expectations. However, the data now in hand suggest that the deceleration in our price measures has ended. Indeed, it seems likely that price and wage movements will worsen in the year ahead as we see the lagged effects of previous oil price hikes and changes in the dollar exchange rate. Consequently, as has been true for some time, we are concerned that core inflationary pressures are likely to increase markedly over the next few quarters. Of course, I recognize that several key aspects of the outlook are quite uncertain. First, as we discussed earlier, we can't predict with any confidence the future path of stock prices or the wealth effects that they may induce. And I continue to be concerned about high valuation levels for the stock market, particularly for the Internet stocks. Second, we don't really know whether productivity growth will slow, remain high, or continue to accelerate. Third, although the futures market points to declining oil prices in the year ahead, the oil market has surprised us before, and consumer confidence may be quite vulnerable to such shocks. Despite these considerations, I believe the risks to the outlook are on the upside. However, given the uncertainties associated with the upcoming century rollover, this is not the time to be aggressive.",1024
-fomc-corpus,1999,President Stern.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. The District economy remains in good shape and I will only comment on a few things that have changed relative to previous discussions. Agriculture, it turns out, has had a somewhat better year than many had feared. A lot of that is due to government payments. But in addition crops turned out to be large, which helped, and the cattle market has improved a bit. Commercial construction has been strong in the District for quite some time and a number of new office buildings will be coming on stream in the Twin Cities market over the next one to three years. It is now anticipated that as a consequence vacancy rates will probably double or triple in the Twin Cities. But that really doesn't seem to have caused any alarm. It is, I guess, the other side of the coin when a lot of buildings are built in a short period of time. Employment gains in the District have slowed; that appears to reflect mostly just a lack of unemployed workers. Labor markets remain very tight. Wage gains start at 3 or 4 percent and go up from there; but the distribution is skewed and most of the increases really are in the 3 to 4 percent range. But, of course, that leaves out all of the other extras that might go into compensation. There is still a general lack of broad inflationary pressures. And overall I would say that most of our contacts are quite positive about the economic outlook for the year ahead. As far as the national economy is concerned, I have a fair amount of conviction about the outlook for economic expansion. Our model forecast is for growth of 31/2 to 4 percent in real terms over the next two years. That's actually a little below the Greenbook forecast but it seems to me that conditions are right for a continuation of pretty solid real growth. I have a lot less conviction about the inflation outlook. The Greenbook, of course, has a story of accelerating inflation. This is a familiar story and it has a certain logic to it. But the surprises to inflation over the last several years have been on the downside. There is a danger in extrapolating that kind of performance. On the other hand, we have been trying to do some serious statistical work on the unemployment/inflation/NAIRU relationship, and it looks as if that relationship really deteriorates a lot beginning in the mid-1980s. We are skeptical that there is any real relationship between unemployment and inflation if one concentrates on the period since about the mid-1980s. Now, I wouldn't bet the farm on this work just yet. We have more analysis to do. But our work thus far does suggest that we may want to look elsewhere for insights about inflation.",549
-fomc-corpus,1999,Vice Chair.,3
-fomc-corpus,1999,"Mr. Chairman, the Second District's economy continues to grow at a moderate pace. Despite continued widespread evidence of price increases for manufacturing inputs and housing, overall inflation remains subdued at the consumer level. You have all no doubt heard of the drama of the possible New York City transit strike. The Transit Authority reached an eleventh hour agreement with the transit workers union. The settlement calls for a 5 percent wage hike in the first year, 3 percent in the second year, and 4 percent in the third. That actually follows very much the pattern of the Long Island Railroad settlement about a year ago. Because the pension plan is well funded, employee pension deductions are being reduced substantially, boosting the average worker's take-home pay by an estimated additional 2.3 percent. The City's Transit Authority is actually funded through the State government. The Mayor is trying very hard to tell all the municipal workers whom he pays that the rather attractive settlement for transit workers should not confuse them into thinking that he is going to give them the same deal. So we may have some additional Sturm und Drang in New York on the labor front. There has been much discussion, and I won't repeat it, on the levels of national and international economic activity. But why should one be concerned? I think foreign growth, as Karen Johnson and others have said, is likely to be stronger. That will increase the demand for commodities and, ceteris paribus, increase their prices. It will also increase the demand for American exports, thus increasing overall demand in an economy in which demand already exceeds even the increased capacity of the supply side of the economy to provide goods and services. Despite probably higher exports, the current account deficit will still be very high. And, therefore, we are likely to have either a stable or somewhat weaker dollar. That will mean that we will not have the benefit in the next year or two of the very substantial help to core CPI that has come from import prices being significantly less strong than domestic prices. Our analysis, using a passthrough of about 0.4 of the exchange rate to import prices, tells us that the core CPI would have been 0.6 percent higher over recent years if we hadn't had that benefit from import prices, and I don't think we will continue to have it. Thus, we don't have to be concerned solely about whether we are going to run out of laborers, even though I think that is a valid concern. The mere things that I've cited--essentially the effect on the United States of international developments--leads us to believe that the core CPI will start creeping up and, left to its own devices, will hit about 2.8 percent in 2001. I don't think that is something that the Committee should wish to see happen. But I feel very strongly that we have done such a good job of defusing Y2K tensions that the time to interest ourselves in that problem, which I believe is a very real one, is on February 1st and 2nd and not today. Thank you.",617
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"Thank you, Mr. Chairman. Let me use my time to make some longer-term suggestions about how we should be operating, elaborating on some comments that I made earlier. Herb Stein once said something that comes close to capturing the essence of economics: ""Things that can't go on, won't."" What economists are good at, if anything, is putting together different logical postulates: demand, supply, arbitrage conditions, relationships between stocks and flows, and predictions of the way economies are likely to operate. In the end, economic forecasts rely on interactions between such basic logical assumptions. As I think about my two years on this Committee, much of what has happened refutes Stein's quote. Things that couldn't go on, have gone right on! [Laughter] They may not do so forever, but they have continued much longer than anybody has forecast. The first example is labor markets. Since I've been here we have been talking about very tight labor markets as indicated by the unemployment rate, other measures of labor tightness, and Beigebook reports. We have all felt that at some point wages would start to accelerate but as yet they really haven't--apart from some of the caveats that Mike Prell gave earlier. The second example is the stock market. Again, it has been seemingly overvalued since I've been here, but to this point stock prices have risen on balance. The third example is the dollar, which for a while now has seemingly been overvalued, if there is any limit at all on the accumulation by foreigners of dollar-denominated assets. But it is not yet falling. At the intellectual level we should, of course, keep studying these matters to see if we can improve our understanding of how the economy is operating. But studying and learning take time and in the meantime we have to know how to set monetary policy. As I mentioned last time, an approach that may help us in these particular circumstances is inflation targeting, which is being adopted on a pervasive basis around the world. Last time--I suppose in a fit of exuberance--I reported being told that the number of countries now using inflation targeting was 44. I have since tried to verify that total and could only come up with 30. And even that number counts the EU as 11. [Laughter]",464
-fomc-corpus,1999,"So, it's only 20!",7
-fomc-corpus,1999,"That's right. Perhaps it's only 20. The adoption of inflation targeting is not as widespread as I said earlier, but it's still widespread. And it has worked well where it has been tried, as documented by a number of research papers. Perhaps more telling, no country that I know of has tried inflation targeting and then abandoned it. What many academics like about inflation targeting is that it gives policy a nominal anchor and improves transparency and credibility. Those are important values. But I'd like to put inflation targeting on our table for a different reason. It seems to me that it would work well when we are facing just the sort of economic uncertainties that I mentioned above. First of all, when there are either productivity or competitive shocks in labor markets and wages just don't seem to be rising in the way forecast, inflation targeting permits us to follow the policy of watchful waiting we often talk about. Just what are we waiting for? It is really to see signs of an acceleration of inflation, in which case we can react by making appropriate policy changes. Another uncertainty that inflation targeting permits us to finesse is that of deciding just what our target rate of inflation is. Around the world, most inflation-targeting countries do have fairly specific quantitative targets. I'm not sure that this group could agree on a precise inflation target, but I don't think we have to agree. What I think we can all agree on is that we should move against an acceleration of inflation. In effect, this pragmatic form of inflation targeting, where we move against an acceleration of inflation, may provide us a reasonable framework for thinking about monetary policy in the presence of either productivity or competitive shocks. But even this pragmatic form of inflation targeting has one important difficulty. The big difficulty I see is in acting preemptively, which I think is necessary if we really are to stabilize inflation at present low levels. In order to act preemptively we must be able to forecast inflation, and that can present a problem. We could rely on modeling approaches to forecast inflation, but these have not been very successful precisely because of the supply shocks that have made the inflation-targeting approach attractive. We could rely on leading indicators, but there aren't many reliable leading indicators that are not already considered in models. We could rely on the forecasts of inflation of others, but those other forecasters may have the same trouble with their models or their leading indicators that we have. I do think we could make some headway here, but it's not easy to do so. If we were to go through a pragmatic inflation-targeting exercise today, I think we would find that some added tightening might soon become necessary, though we might be able to delay for a short time. But stepping back from these specifics, I think an important early challenge for us is to learn how to deal effectively with the economic uncertainties, perhaps by inflation targeting or perhaps in some other way. Thank you.",579
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, the comment that I hear around the Eighth District is that there is absolutely nothing new. That can't be quite absolute, but it is very close. After all, we met only five weeks ago and not all that much happens ordinarily in five weeks. In summary, our labor market continues to be tight but not impossible, pricing power remains limited for most firms, and there are small but noticeable effects in the housing industry from the increase in interest rates. On the Y2K front notes that Apparently were planning to curtail operations on those two days. had st planned not to operate on the 31 but had so many requests from customers that it will be operating, though it will not My sense of it is that are finding the capacity--that the industry has responded and there is really nothing more to be said about it. I'm guessing that at the end of the day we will find virtually all of this Y2K effect lost in the rounding error and we are not going to see much effect. On the national economy, I would make just one comment, namely that as far as I can tell there is no significant restraint from any quarter. Everything we're looking at is solid, strong. I don't see anything on the downside. I still react negatively to the term ""drag"" in terms of net exports. That term continues to annoy me. It seems to me that net exports are about as much of a drag as a Styrofoam boat anchor. [Laughter] Thank you.",302
-fomc-corpus,1999,A true sailor!,4
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I think we are entering a period, as others have said, that is going to be somewhat challenging for us. In the short run, we clearly do not want to destabilize markets as we go into the Y2K period. One always hates to see a marathon runner trip up at the end, and we certainly don't want to be the person from the stands who runs out and trips that runner up. In the longer run, obviously, as others have indicated, we don't want to lose our ongoing battle with inflation expectations and inflation, or risk any damage to our own credibility. During the intermeeting period, which has been short, we have received a variety of data, some benign and some more troubling. On the benign side, the latest reports do show that the rate of increase in core inflation has moderated even a bit more from that experienced over the previous 12-month period. Additionally, productivity seems to have ticked up again and growth in unit labor costs seems to be, if anything, slowing as opposed to picking up. All of this is, as others have admitted, somewhat puzzling. On the more troubling side, there are clearly growing signs of imbalances in our economy. Others have touched on a number of them. I will emphasize just one, which is the large and growing external deficit, a development I view as a sign of imbalance. As Karen Johnson indicated, there is a significant possibility that we will see interactions as a number of economies start to grow simultaneously. While our external balance will, I think, tend to be redressed as foreign economies return to health, there will be an increased demand for our exports, which might not be totally welcome from a price stability standpoint. Indeed, taking account of likely Y2K impacts, foreign demand for our goods does appear to be increasing already. As this happens, we can obviously expect some upward pressure on resource utilization, not just in labor markets but also in terms of capacity utilization. And I think the recent uptick in the latter measure may be just a precursor. While I recognize that there are some uncertainties in these international forecasts, I do think the risks internationally are more on the upside than the downside. Clearly, there are some difficulties in Japan. But it is instructive to note that comments by individual members of the Monetary Policy Committee of Japan and the most recent monthly economic report coming out of Japan both seem to have a much firmer tone to them than had been the case even a month or two ago. Certainly the European economies seem to be firming. There is a possibility that they may start to enjoy some of the productivity surprises that we've experienced, but that is not entirely certain. So, given this changing configuration, I think we would be well served to extend our cautious and prudent approach to policy. We should continue to recognize the benign effects of productivity improvements on unit cost structures, but we also should not be afraid to act in a well-modulated fashion in order to maintain our hard fought victory over inflation and also our credibility. Thank you very much.",618
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. I raised my hand this morning mainly to be recorded as present and participating in this section of the meeting. [Laughter] That's because little seems to have changed in recent weeks. The economy apparently continues to have a strong head of steam, the inflation news continues favorable, and productivity growth remains strong. Barring a significant shift in momentum or some external shock from Y2K or elsewhere, it appears likely that more tightening could well be required over the forecast period, with the Committee focused more heavily on how much and when. That outlook is juxtaposed against the substantial tightening of recent months that has not yet had its full impact on the economy, and which could possibly provide all or most of the restraint necessary in this episode. Consequently, it is fortunate that the challenging millennium rollover period, which is now at hand, is also on its merits an appropriate time to rest on our oars just a bit and assume as low a profile as possible. Thank you.",199
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Thank you, Mr. Chairman. There is clearly strong momentum in private domestic demand and at the same time few signs of rising core inflation. So far so good. The issue is sustainability. The Greenbook weighs in with an assessment that the current state is not sustainable--not at the current monetary policy setting or even with the 75 basis point increase in the funds rate assumed in the Greenbook forecast. This, we all understand, is only a forecast and just one forecast at that. And as several speakers this morning have noted, there are many elements of uncertainty surrounding the outlook, especially about inflation dynamics, NAIRU, and productivity. But I buy into the qualitative story of the Greenbook. I buy into the balance of risks that it identifies and into the message that I think it conveys about the challenges we may be facing next year. From my perspective the challenges are especially great because I think we face two reinforcing elements of unsustainability. We have an unsustainably rapid pace of growth on top of an already unsustainably high labor utilization rate. So, in short, I think we have our work cut out for us. I believe next year will be an especially key one for monetary policy. Even if we do move to tighten policy next year, the overall picture of growth and inflation might still look quite favorable, particularly if the staff is correct that we will face declining oil prices after the peak in the first quarter. But in the coming year we will have the opportunity to take the steps that will improve the prospects of containing inflation going forward and, by doing so, hopefully extend even further this remarkable expansion. Thank you.",330
-fomc-corpus,1999,Thank you very much. Is coffee available?,9
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,Coffee is served.,4
-fomc-corpus,1999,Let's turn now to Don Kohn for his report.,11
-fomc-corpus,1999,"The discussion in the Bluebook assumed that you would rule out a tightening at this meeting. While you might be troubled about the inflation outlook, a firming would come as a complete surprise to market participants. In the unusually illiquid conditions leading up to the century date change, such a surprise could have unintended consequences, including market disruptions. Moreover, any inflation threat would not seem so pressing that waiting six weeks to address it would make the problem materially worse. Neither surveys nor TIPS-nominal yield spreads indicate an upcreep in long-run inflation expectations; and these results suggest that economists, households, and market participants remain confident that the Federal Reserve will contain any emerging inflation pressures. If the Committee agrees with this judgment about the inadvisability of tightening at this meeting, what remains on the table is how to assess the risks to the economy going forward and their implications for future policy, and how to convey that assessment to the markets. Economic data over the last month followed the now-familiar pattern: Upward revisions to estimates and projections of economic growth in the second half of 1999 have been accompanied by mostly favorable indicators of cost and price pressures. In the latter category, CPI increases in the fourth quarter have been in line with staff expectations, and estimates of unit labor cost increases in the second half have been reduced noticeably, accentuating the deceleration in this measure from the first half of the year. The downward revision to unit labor cost increases, which occurred despite a small upward revision to the growth of compensation, owed to productivity gains that, again, seem to be coming in above projections. Faster productivity growth has helped to explain the limited drop in the unemployment rate this year; the unemployment rate and the pool of available workers cited in recent announcements were essentially unchanged last month despite the unexpected strength in the expansion of economic activity. If stable labor utilization over the last month along with continuing uncertainties about the level and growth of aggregate supply implied by recent cost and price data make the Committee no more convinced than it was at its last meeting that it will need to firm policy in the near term, it might want to consider retaining a symmetric directive. With broad measures of core inflation still subdued, the Committee may wish to see more and firmer indicators that price pressures are likely to intensify before it gives serious consideration to raising rates further. But one rationale for the symmetric directive at the last meeting was to allow the Committee time to gauge whether the cumulative tightening this year would begin to damp the expansion of the economy. Such a slowing is needed because, despite rapid productivity increases, a widening output gap and falling unemployment rate in the second half of 1999 clearly indicate that the economy has been expanding at a rate in excess of the growth of its potential. However, in that regard, the incoming data on the real economy have not been encouraging. Moreover, the Greenbook forecast has growth remaining a little above trend in the first half of next year abstracting from Y2K effects, and Mike noted the upward risks to the outlook beyond that from the impetus to consumption from rising wealth. While one might guess that the increasingly narrow base and speculative character of the stock market advance carries the seeds of its own correction, the assumption of such a correction would seem to be a risky basis for making monetary policy. Even if the Committee is agnostic for now about whether an unemployment rate in its recent range of 4 to 41/4 percent can be sustained without rising inflation, it may be particularly concerned about a potential further decline in that rate. If temporary factors played any role in damping core inflation in 1999 while the unemployment rate held in this range, the NAIRU is more likely to be higher than lower than the current unemployment rate. In that case, failing to resist a possible further tightening in labor markets runs a considerable risk of building in the need for larger and more disruptive adjustments later. The persistent strength of domestic demand suggests that avoiding a further decline in the unemployment rate may well require at least the current degree of restraint in long-term interest rates. Forward-looking financial markets have built in expectations of substantial policy tightening in 2000, without any pickup in inflation. Although supply-side uncertainties complicate the conduct of policy, markets are presuming that the Committee will be preemptive, at least when it comes to inflation risks that might arise from possible further increases in labor resource utilization. Any signal that the Committee was significantly less concerned about potential inflation than the market perceived it to be would probably produce a considerable decrease in interest rates and rise in stock prices. Hence, if the Committee did see the risks as significantly tilted toward higher inflation, it would be important to convey that view to the markets. An announcement that the Committee was asymmetrical in its outlook for the economy and policy next year would be unlikely to have a major effect on interest rates. Market prices have already built in a near certainty of a tightening at the next meeting--much higher odds than have normally followed the announcement of an asymmetric directive. And when surveyed, two-thirds of primary dealer economists indicated that they expect such a directive. But concerns about the sensitivity of thin and illiquid markets around the century date change may complicate how the Committee communicates its assessment. Presumably, the Committee would not want to add unnecessarily to market volatility at this time by leaving open the possibility that an intermeeting tightening was on the table. Moreover, it especially might not want to convey the impression that it might be sluggish in responding to a market disruption that looked like more than a transitory event. This suggests that the Committee might have three straightforward messages to convey to markets at 2:15 today: First, that it did not change the stance of policy; second, that it was concerned about inflation risks and would be giving serious consideration to the extent of the risks and the appropriate policy response at its next meeting; but third, that owing to uncertain market conditions around year-end it did not intend to respond to those risks before the next meeting and would be flexible over the century date change period. Unfortunately, the choice of bias in the directive to associate with those messages is much less straightforward than the messages themselves. Simply stated, there is a disconnect between the language the Committee votes on in its directive, which specifically references the intermeeting period only, and the meaning that has come to be attached to that language. That meaning is that the bias applies less to the intermeeting period than to the period encompassing the next few FOMC meetings. All of the options the Committee has to deal with this problem have more than a bit of improvisation in them, in that you would be skirting between what the words literally mean and the market conventions that have settled around them. For example, the Committee could couple an unbiased, that is symmetric, directive with a biased announcement that made it clear that the symmetry applied only to the intermeeting period. The Committee would count on the wording of the announcement to express its concerns about inflation risks and its intention to consider at its next meeting how to deal with those risks. A problem with this approach is that it could foster further confusion about the Committee's interpretation of the current directive. But so long as the announcement was clear about the Committee's present intentions and judgments, such confusion would not matter much since this is likely the last meeting that the current directive wording will be used. The second option would be to adopt an asymmetric, that is biased, directive based on the meaning it has come to have with respect to future meetings, but to use the announcement to clarify that in light of the century date change the Committee did not intend to tighten over the intermeeting period and recognized the need to be ready to respond flexibly to any developments in coming weeks. While this approach would be more consistent with recent uses of asymmetries, it would have the disadvantage that the Committee would be adopting words in the directive about the intermeeting period that it did not mean literally. And thus the media and markets might focus more on the choice of asymmetry than on the caveats in the announcement. In that sense transparency about your choice of bias might mislead markets about your very near-term intentions. Thank you, Mr. Chairman. That concludes my briefing.",1645
-fomc-corpus,1999,Questions for Don?,4
-fomc-corpus,1999,"Don, just listening to you tells me how difficult it will be to craft any kind of asymmetric announcement today. Wouldn't it seem practical to have this be one of those announcements where we say as little as possible--something along the lines of we met, we didn't do anything, and we'll see you next year?",63
-fomc-corpus,1999,"That's an option we talked about a bit in the Bluebook. The issue in my mind was whether the Committee was really intent on keeping the current degree of tightening in the markets. There would be a risk if you did what you propose, it seems to me, though it very well might work: The markets might say the FOMC is symmetric, or unbiased, and it's because of Y2K. They are not telling us anything else, so we will assume that that is the only reason they are unbiased. But I think you can't rule out the possibility, however small, that the market would say the FOMC is unbiased because of Y2K and, because they didn't tell us anything about their expectations for the future, maybe they are not quite as worried about inflation as we thought they were. With two-thirds of market economists expecting an asymmetric directive and with about 80 or 90 percent tightening built in, that's a dilemma. The Committee's objective might be to leave the markets at 2:30 today where they were before our announcement at 2:15. It's just very hard to craft the set of statements and votes that will do that. I'm not sure that a terse announcement would do it. It's possible that it would, but there is a risk that it wouldn't.",261
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"Don, I thought that was a particularly outstanding presentation except for the last sentence. In the very last sentence you expressed some concern that even if we were transparent and honest--if we told the market very clearly that our priority was to assure liquidity over the century date change and that we wouldn't be taking up the balance-of-risks issue until the February meeting--an asymmetric directive could, nevertheless, mislead the market. Do you really think so?",90
-fomc-corpus,1999,"I think either approach is likely to work: symmetry, but we're really asymmetric for the next meeting; or asymmetry, but we're really symmetric until the next meeting. It's a question of weighing, if you'll pardon the expression, the balance of risks-[laughter]--not with respect to the economy but with respect to the market reaction. I was trying to point out that I think there is a risk, perhaps a small risk, that the initial headline will be ""Fed goes asymmetric"" rather than ""Fed goes asymmetric but with a number of caveats."" An unqualified headline could provoke a little market reaction. There is no perfect way to do this. The risk on the other side is that the headline will be ""Fed goes symmetric,"" and the market doesn't read the announcement and begins to rally. I think probably after a day, after people have had a chance to read the announcement and newspapers have printed it, we would probably be in roughly the same place either way. It is just a question of what best represents what you intend and the clearest way to get that across. The other thing that bothers me a little about asymmetry is that the words in the directive literally say ""over the intermeeting period,"" and the announcement would literally have to say ""but we don't mean it.""",260
-fomc-corpus,1999,There's nothing new there! [Laughter],9
-fomc-corpus,1999,"I think either way would work, or at least I hope so. Either way would be intended to produce the same result.",25
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"You said one of the goals, and I totally agree with you, is to try to leave the market at 2:30 today the same way it was at 2:15.",38
-fomc-corpus,1999,Right.,2
-fomc-corpus,1999,"In that regard, since there is a heavy degree of expectation that we will be asymmetric, it seems to me that asymmetry would be more likely than symmetry to produce that kind of stability in the market. If symmetry is going to be a surprise and gives an extra boost to the market, isn't that where the greater risk lies?",66
-fomc-corpus,1999,"As I indicated in answer to Governor Meyer, I think the risk of publishing asymmetry is that it could produce a little more volatility. The risk of publishing symmetry is that the markets might rally a bit. Maybe the 2:30 comparison isn't the right one; maybe it's really where the markets are by close of business the next day.",68
-fomc-corpus,1999,But if the expectations are that we see the same risks that the market sees and that we are alive and functioning here despite Y2K--,28
-fomc-corpus,1999,"I think you could make that clear under either approach. It depends on the announcement and where you want to put the emphasis. If your emphasis is on the fact that you will be providing liquidity and you will be flexible over the intermeeting period-and that's the near-term focus--then maybe symmetry is better. If your emphasis is more on the fact that there is a good chance that you'll be giving serious consideration to tightening at the next meeting, then asymmetry may be better, with less focus on the intermeeting period.",104
-fomc-corpus,1999,"Further questions? If not, let me begin. I think the evidence of a slowdown is quite marginal at this stage. It is showing up in the housing industry at the edges, where we are seeing some slippage or at least a flattening of activity. However, anything resembling a contraction induced by interest rates strikes me as not even remotely visible as yet. Motor vehicles, which also are supposed to be interest-sensitive, weakened significantly a month or two ago, but they have come back fairly substantially. And if we look across the spectrum of the capital goods markets, there is very little evidence of any weakening. Obviously, we still have disproportionately large orders for high-tech equipment versus other types of equipment; but orders for conventional equipment are still substantial, with farm equipment being an obvious exception. In my view, what we have is a problem of whether to interpret developments as supply-side driven or demand-side driven. On the supply side, there is no evidence of any slowing in productivity growth. What we do have is some evidence from the industrial production numbers for October and November and from the hours data that is pointing to gangbuster gains in productivity for the fourth quarter. The notion that when we see this strong demand we are looking at the old classical case of an economy that is heating up is, I submit, the wrong view. We don't know that the economy is heating up unless by ""heating up"" we mean anything that raises the GDP growth rate. At this stage we have a very unusual situation. There are very evident imbalances in demand over supply, and indeed one can readily argue that virtually all of the problems stem from a wealth effect. Were it not for a significant rise in wealth-to-household income, we probably would find that the propensities to save would be relatively stable, that the unemployment rate would be very low but also stable, and that the current account deficit, while large, would not be increasing. All in all, the fact that underlying price inflation was not accelerating would argue against a scenario of an economy that is heating up. It would be a scenario of very strong growth--indeed, one credibly involving accelerating growth-but all of it stemming from the productivity numbers. All I'm saying at this point is that one could not argue that this economy is heating up were it not for the gradual decline in the pool of people who are willing to work and an increasing share of overall demand being met from the import side. The heat, if any, is coming from the wealth effect. And that clearly is something that cannot go on indefinitely. The bottom line is that the wealth effect--in line with Herb Stein's remark--cannot continue and, therefore, will not continue. The reason is that it creates a fundamental instability in that it fosters more effective demand than supply. The two must be balanced in some manner. They currently are being balanced, as I indicated last month and previously, by more domestic production coming from previously unemployed workers and by increased imports as a share of total demand. Neither of those two sources of supply can continue to satisfy rising demand without limit. Obviously, on the import side it is not credible that our economy can continuously attract investments to fund the current account deficit in our balance of payments. And on the labor side there is a level, called zero, where the availability of added employees disappears. The one caveat with regard to the availability of workers is immigration, which I will get to shortly. The reason I raise this issue is essentially to say that the wealth effect cannot continue to stimulate excess demand indefinitely. By wealth effect, I mean a rise in the value of assets in relation to income. Such a rise does accommodate higher equity values but it cannot continue at the pace we have been seeing. There are only two ways in which such a rise can be thwarted, as indeed it must. One is a decline in long-term expected earnings, for which I find no evidence. Indeed, if anything, it is the other way around. The other is a rise in the discount factor. This is basically true by definition when we disaggregate equity market values. To talk in terms of momentum, or price/sales ratios, or, even better, how much in losses a firm has experienced as reasons for higher stock prices is clearly just nonsense. The fundamental consideration is that a buyer is purchasing claims against future cash. If neither lower expectations of future cash nor a higher discount occurs, then stock prices presumably will continue to rise, maybe in excess of the rate of increase in household incomes. The crucial consideration here is that, while we may not be seeing a change in earnings expectations, we very clearly are seeing the beginnings of a significant rise in discount factors. Yields on BBB-rated corporates, which are very close proxies for the average corporate cost of capital, have been rising quite appreciably in real terms since late 1997. They have risen more than yields on U.S. Treasuries, as evidenced by widening spreads. One can evaluate the discount factors on equities in terms of risk, the rate of interest on corporate bonds, and then derive an equity premium. But it is far more useful to look at the bond equivalent rates in real terms to get a judgment of what type of discount factors are showing up. I think that discounting process is appreciably under way at this stage. Therefore, at the end of the day, I think the Greenbook has to be right that the Wilshire 5000 will flatten out despite continuous revisions in the data underlying that projection. It is only a question of how much of a bubble there is in this process. I think we have to be wary, however, of our disinclination to recognize that what is going on in this economy is really quite unprecedented in the post-World War II period in that productivity growth continues to rise. And it is rising to a very substantial extent in the multifactor productivity component--the residual in growth accounting. So, it is not solely increased capital investment that is driving up the productivity numbers. There is a very substantial rise in productivity growth--in fact it is almost 2 percentage points--which is not attributable to capital deepening. Cyclically adjusted, this rivals what went on in the 1950s and 1960s and through the oil embargo of early 1973. This basically suggests that we are getting increases in multifactor productivity on the order of magnitude that was occurring after World War II, but without the catch-ups of the earlier period. In one sense, the recent experience is far more significant than the labor productivity gains in earlier periods, which as you may recall were at fairly attractive rates of around 3 percent for quite a period of time. Part of that acceleration came from the move out of agriculture into industry; but what we are beginning to observe now is something beyond that. Acrophobia is a problem that confronts every statistician. The concern about putting down on paper a number that is larger than has been seen historically is very inhibiting. What I am saying is that that is happening. So, while we do have these extraordinary imbalances, I don't think we ought to be looking at demand and saying it's unbelievable and the economy is heating up. The point is that we do not have solely a demand-driven phenomenon here. The demand phenomenon stems from a wealth effect, and that should concern us because it has obvious repercussions. But we cannot look merely at demand and say that housing sales are high, capital goods orders are high, and consumption expenditures are high. Of course they are high. They had better be high or we are mismeasuring what is going on because gross domestic income is rising even faster than its conceptually equivalent counterpart, gross domestic product. It may well be that if we had better estimates we could resolve the question of which of these two is the relevant measure of economic growth. My own suspicion is that gross domestic income may be giving a better reading. The reason I say that is that gross domestic income is consistent with the data we see on prices, profit margins, and the underlying acceleration in productivity. And that is really saying that our estimates of retail sales are biased downward in one way or another or that some of the measures we have in other product areas are biased downward. If we had more accurate numbers, we would be inclined to say ""Wow!"" and it would be ""Wow!"" squared. What I want to say essentially is that we have to be careful about looking only at the demand side rather than the gap between effective demand on the one hand and supply on the other. The two taken together are what the widening current account deficit and the declining unemployment rate basically reflect. We need to know precisely what is causing our good fortune because when it changes, and it is certainly going to change at some point, our basic analysis will matter. And I am concerned that we might misread contractions in the economy or rates of growth, and as a consequence misunderstand where the forces in the economy are leading us. I don't think it matters in the current context because I believe the notion that at the end of the day we are going to need to tighten more comes out of any type of evaluation. It's when we are on the other side that I think we will have to be very careful. I mentioned previously that I see no overheating other than in the stock market. The price indexes are really quite benign. In this regard, I think we ought to set aside the consumer price index. The reason I say that is that the PCE deflator is far more usable for analyzing what is really going on. The owners' equivalent rent component in the CPI is 20 percent of the total index. Now, owners' equivalent rent is going to start to accelerate unless I misread how asset prices interact with consumer prices. The reason is that the ratio of owners' equivalent rent to the value of housing has been going down continuously, and the implicit rate of return that that is suggesting cannot credibly be expected to continue on a prolonged basis. So the little ""pop"" we saw in owners' equivalent rent in the most recent CPI is probably a harbinger of a slightly stronger number there. The reason the PCE deflator is a better indicator in my view is that it incorporates a far more accurate estimate of the weight of housing in total consumer prices than the CPI. The latter is based upon a survey of consumer expenditures, which as we all know very dramatically underestimates the consumption of alcohol and tobacco, just to name a couple of its components. It also depends on people's recollections of what they spent, and we have much harder evidence of that in the retail sales data, which is where the PCE deflator comes from. Why we should look at data based on a distorted sample when we have a universe whose data are more accurate is beyond me. The reasons that are given theoretically are that we want to measure urban or suburban consumer prices and that's not what gets picked up in the total. It would be so easy to make a simple adjustment in the aggregate data to cover only the urban component by using appropriate ratios if we want to do that. That is, we could use the base universe of what is consumed to give us our weights, but that is not what the CPI does. So if I had my way, the CPI would be abolished for all uses other than labor union contracts, Social Security benefits, and all the other uses that would create an undue amount of political noise if we tried to change them. It's not statistical noise that I am talking about at the moment. In sum, I think we have to be careful about any reading of inflation trends from the CPI. What I hear from everybody in business I talk to is that pricing power, if anything, has gotten tougher rather than easier. And while it is certainly the case, as Mike Prell points out, that a number of prices are going up, it is by no means clear how significant those increases are as yet. The one area where we may be underestimating supply-side potential is in population growth and the underlying expansion of the working-age population. We recently made an effort to find out why increases in household employment are running 50,000 a month less than those in payroll employment. We were trying to get a sense of which measure is giving us the better picture. If we look at the only really significant independent estimate of the number of households, measured by the number of electric meter accounts excluding the double accounts that a lot of people have, we should be able to get a reasonably good estimate of the number of households. Indeed, if we take the utility account numbers literally, they suggest that the CPS household estimates, which are based on population estimates, have been underestimated on a cumulative basis by something in the area of 1 percent since the 1990 Census. If that is in fact the case, given that we have some reasonably accurate numbers on the average size of households--remember, we estimate the average size of households from samples of 50,000--we can then apply that average to the population estimate extrapolated from the 1990 data. In doing that we must take account of estimates of births minus deaths plus immigrations, both legal and otherwise. A key question here is whether births and deaths are underestimated or biased. That is a possibility, but surely the immigration numbers are a real guess. If we take the household electrical connections numbers seriously, then the issue of closing the gap in the household employment data versus the payroll data moves forward a pace. The Census Bureau, which does not use the electric utility data to make its aggregated overall estimates but does use them for some of its local area estimates, argues that if we are getting a big increase in immigration we should see it in the births and the deaths data. But I wonder if many illegal immigrants have babies that are born in hospitals where somebody records the babies' names. If the parents are illegal immigrants, the last thing they want to do is to have births recorded. Clearly, deaths are another issue, but if there has been an acceleration of immigration, that should affect the death rate in 2010, not now. So there is a reasonable expectation that when the 2000 Census comes out, it's going to revise upward the population numbers, the household numbers, and the household employment growth numbers. I might say that it will also explain why housing starts are as high as they are with household formation being as low as it is. This hypothesis fits a number of holes in the data, but it also tells us that potential working-age population growth is higher. And, therefore, since our productivity numbers are based on payroll data, raising the working-age population will obviously also raise the long-term potential for economic growth. We won't know until we see the preliminary numbers coming out of the 2000 Census, which I guess we will get in 2002 or 2003. Mike, do you remember offhand when they will come out? Who knows how quickly that will get done with the computers they are working with now!",3031
-fomc-corpus,1999,They have to find some workers to do the census! [Laughter],15
-fomc-corpus,1999,"We may have it sooner than I suggested. Who knows! All in all, my point is that I think we have some statistical problems that are not irrelevant to intermediate- and longer-term monetary policy. Having said all that, my view on policy is, if I may reference Governor Kelley's comment about raising his hand and saying present, that I almost think the best way we could have gotten through this period would have been somehow to cancel this meeting. The reason is that markets, as far as I can see, seem to be pretty much where we as a Committee would like them to be. I don't know whether we will want the numbers in the markets at 2:30 to be the same as they are before our announcement at 2:15, but I think they currently are at appropriate levels. The crucial issue for this meeting, as Don Kohn very clearly pointed out, is to recognize that we have a Y2K problem. It is a problem about which we do not want to become complacent and presume that it doesn't matter. We want to communicate as effectively as we can that we have no intention of doing anything through the year-end and maybe for a short period thereafter. But we also don't want to remove the general view in the market that we retain an upward bias and have not completed the tightening that we think needs to be done. We therefore face a tricky problem of trying to find a way to communicate all of that, taking into account what we think the market perceives about what we may or may not do, if our purpose is not to disturb the markets one way or the other. With that in mind, we have endeavored to craft two possible announcements. One, as Don mentioned, would accompany a ""B"" symmetric decision and the other a ""B"" asymmetric decision. Both incorporate language that tries to produce precisely the same result in either case. Accordingly, in what is a rather unusual procedure for us, I would like to distribute both of these drafts. 2/ The evaluation of what we perceive the outlook to be is the same in both, but it is positioned in different paragraphs. And rather than request your comments on specific wording preferences, I would appreciate it if you would confine your comments to the alternative you feel more comfortable with, symmetry or asymmetry. I assume that nobody here wants to raise rates at this time. At least I didn't hear that view expressed in any of the comments today. So, if we are going to vote ""B,"" I would appreciate a judgment as to which of the two versions you feel most comfortable with. In this regard I switch back and forth between the two every 10 minutes! It just depends on what time I happen to be expressing an opinion. At the moment I feel slightly more inclined toward asymmetry; but by the time we vote it is just as likely, knowing how my view on this has changed frequently over the last day or two, that I will be on the other side. Frankly, I don't think our decision on this issue today matters one way or the other. It's only a question of one's judgment on minor issues, and I would appreciate any great insights. I might just note parenthetically in reference to what Don said about the issue of the intermeeting bias, that this will be the last directive that incorporates a sentence on symmetry on the old basis. However, this directive won't be published until after the next meeting and is very likely to be an anachronism by then, so it is not going to matter terribly much which alternative we choose. But there is the question, as Don correctly points out, about how we want to state our consensus. So let us take a few minutes to look at both of these versions and then I'll open the meeting up for discussion. I might note that both of these drafts are saying, in effect, that we are very likely to move rates at the next meeting. [Pause] Vice Chairman.",796
-fomc-corpus,1999,"Thank you, Mr. Chairman. For somebody who likes to have firm views on most subjects, it's difficult to have a firm view on this unless one is a theologian rather than a central banker. I think both draft statements make it clear, as you've said, that we will have a serious discussion about policy at the February 1st and 2nd meeting and that there is presently a bias toward tightening at that meeting. And both texts make it clear that we will not change the funds rate until then. 2 / The language of the two drafts is provided in Appendix 2. What I read in the marketplace now is a conviction that the Fed will tighten but that the tightening will be sensible and realistic. I am a bit concerned that if we put out an asymmetric directive, the marketplace would pick up not so much what we think but what some observers think we think. That could increase the likelihood of a tightening in markets--markets that may be very illiquid over the rest of this year--with possible difficulties in settlement systems in the first two weeks of next year. On the other hand, if we put out the draft with the symmetric language--which is probably the most hawkish symmetric language any human being has ever seen--I believe there is very little likelihood that the markets would think the Fed is somehow kinder, nicer and gentler so let's rally. Even if they did that for five minutes, market participants would read the text very quickly and the markets would settle down, maybe not within five minutes but rather quickly. I'm basing my view, frankly, on this being my 33rd year of very active involvement in financial markets. I think that the balance of risks is such that the symmetric language is very unlikely to have any negative result for us. With asymmetric language there is a possibility--I'm not stating that it's a certainty--that the market would price in additional Fed tightening over the course of 2000. And in my view the markets are just too slim and we've invested too much in the effort to ensure that the Y2K transition is a smooth one to take that risk. Where do I stand on it? I'm probably leaning 55/45, 60/40 at most, toward the view that symmetric is better than asymmetric. I certainly am not even remotely thinking of dissenting if there is a majority in the other direction. But I do have 33 years invested in looking at markets and that's my assessment of it.",495
-fomc-corpus,1999,President Jordan.,3
-fomc-corpus,1999,"Thank you. My first choice would be that at 2:15 p.m. today we issue a statement that says ""Happy Holidays,"" as I think Tom Hoenig was suggesting. It seems likely that in the very near future our directive language will no longer refer to likely future policy actions but rather to the balance of risks in the economy. If that is the case, I don't know why we would want to move from symmetry to asymmetry with respect to future policy actions when we will never do that again. To put out a symmetric directive today does no harm. I doubt that there is anybody in the world who doesn't think that we will have a very serious discussion at our meeting on February 1st and 2nd. I cannot imagine that that would be a surprise to anyone. Everyone knows that meeting will be a tough one. There will be a lot of new information, and maybe even some reliable information, although I don't know about that. So, I see nothing to be gained by putting out an asymmetric directive. I see potential negatives. And I don't see any negatives in putting out a symmetric directive.",225
-fomc-corpus,1999,President Broaddus.,5
-fomc-corpus,1999,"I guess I'll take the opposite position, Mr. Chairman. I can live with either of these statements. But the way I heard our discussion today, this Committee essentially is asymmetric and pretty clearly so except for concerns about the century date change. And I think we ought to say so. It seems to me that the last sentence in the main paragraph of the draft with asymmetric language says it very well. The whole tone of it and the way it's structured make that point very clearly. I wouldn't expect that to result in a market overreaction or concerns from a Y2K perspective. So, I think asymmetry is the best way to go.",129
-fomc-corpus,1999,President Poole.,4
-fomc-corpus,1999,"Mr. Chairman, I agree with Al Broaddus that the Committee is clearly anticipating, on the basis of what we know now, that we will make a policy move in February, provided that in the interim no data come in that would disconfirm that expectation. That is what I think is the sense around the table. And I believe that the asymmetric directive draft provides a better sense of that view.",81
-fomc-corpus,1999,President Moskow.,4
-fomc-corpus,1999,"Mr. Chairman, I agree it is a close call. I think both drafts accomplish the same objective. I happen to prefer the symmetric one. First of all, it's technically accurate, as you pointed out, whereas the asymmetric one is not technically accurate. If the markets don't understand it in 15 minutes, clearly they are going to understand the language as soon as they read it. I think it's very clear. And I agree with Jerry Jordan that, hopefully, we are going to change to a new announcement policy as of the February meeting, so I just wouldn't muddy the waters by using an asymmetric directive at this point.",125
-fomc-corpus,1999,President Parry.,4
-fomc-corpus,1999,"I favor, by a small margin, the symmetric directive as well. When I read the two, the symmetric one seems to speak a little more clearly about our thoughts and concerns. I don't see big differences, but if I had to state a preference it would be for the symmetric alternative.",58
-fomc-corpus,1999,Governor Gramlich.,4
-fomc-corpus,1999,"I'm for asymmetry. It is a close call and I could live with either. But I think asymmetry is a more honest description of where the Committee is at this point. I find the grammar of the asymmetric language a little simpler. There are fewer words like ""however,"" ""nonetheless,"" and so forth. It's a little more direct and I like that. I'm also persuaded by the fact that it is more in line with what economists think we will do. And if our objective is to not change markets, that wording is telling them that. I know you said we shouldn't make wording changes, but let me suggest just one. I would say a smooth transition ""into"" rather than ""to"" the year 2000 to show that we are not holding steady only for another nine days.",161
-fomc-corpus,1999,I will accept that. Does anybody disagree? We accept your apology! President Stern.,17
-fomc-corpus,1999,"I have a mild preference for the symmetric version. I've been struck in recent weeks by the fact that market participants seem to have been tracking right along with us. They have been interpreting the incoming data pretty much as we have. I doubt that anybody will be misled or surprised by the language of the symmetric directive and I think they will continue to do what they have been doing. And given that we do face uncertainties associated with Y2K and have invested a lot in avoiding Y2K-related disruptions, I don't see any particular advantage to an asymmetric directive at this stage.",115
-fomc-corpus,1999,Governor Kelley.,3
-fomc-corpus,1999,"Mr. Chairman, I can certainly live with either. In my view they are almost as broad as they are long. I do favor the symmetric language because I think it is our clear intention at this point not to change policy, and symmetry is the way to say we are not going to raise the funds rate. I do have one concern--with apologies, I think! It does seem possible that this Committee might feel forced into an intermeeting move as we get into January--well after the Y2K experience but before the February meeting. If that is a possibility, then the language of the symmetric directive tends to foreclose that when it says, ""At its next scheduled meeting the Committee will assess...."" I think we could fix that, again with apologies.",154
-fomc-corpus,1999,How would you fix it?,6
-fomc-corpus,1999,"I'd simply remove the word ""scheduled.""",8
-fomc-corpus,1999,That's right. We could have an unscheduled meeting.,11
-fomc-corpus,1999,"Then it would read ""at its next meeting.""",10
-fomc-corpus,1999,Governor Ferguson.,3
-fomc-corpus,1999,"Like everyone else, I think I could live with either. I have a slight preference for the symmetric one because in my mind it really does put the horse before the cart in that it says quite clearly that first we have the rollover to the year 2000 and then we have next year. And I think it's important to keep reinforcing that sense of priority of getting into the year 2000 and focusing then on the next move.",87
-fomc-corpus,1999,President Boehne.,5
-fomc-corpus,1999,I prefer the symmetric directive. This is a meeting that in many ways we didn't need to have and I think the symmetric approach essentially reaffirms where we are. And it comes closest to having perceptions after the meeting stay exactly where they were before the meeting.,52
-fomc-corpus,1999,President Hoenig.,4
-fomc-corpus,1999,"I prefer the symmetric one, Mr. Chairman. After all we have invested in Y2K preparations, with options and special liquidity programs, changing our bias as we get to this point near the end does not seem to me to be the best thing to do. To my mind the symmetric language makes clear to the market that a smooth Y2K transition is still our priority and that we will get through that period before we take up the issue of tightening again. So, I much prefer the symmetric directive.",102
-fomc-corpus,1999,President Guynn.,4
-fomc-corpus,1999,"I prefer symmetry as well. I hope that won't be interpreted as any lack of enthusiasm for getting back to our work after the first of the year. I think all the arguments have been made. To change from symmetry at this point and give people even six weeks to try to figure out why we did it and whether we anticipate doing something different soon after the first of the year is, in my view, a distraction that we just don't need. I'm part of the ""Happy Holidays"" camp as well. If we could get by with doing that, I would like it very much.",117
-fomc-corpus,1999,President Minehan.,4
-fomc-corpus,1999,"I could have gotten by with ""Happy Holidays"" as well. But given this choice--and not wanting to go into any on-the-fly editing of language--I would feel, for a lot of reasons, that asymmetry is marginally the better way to go. First of all, I don't like the additional words in the language for symmetry nor the focus on policy in the intermeeting period, which is after all very long. I believe the asymmetric language is more honest, as Governor Gramlich said, about where we feel things are. I think it is reflective of where the market is and where the market thinks we are. And it gives us the opportunity to do something after Y2K and before the next meeting if we want to, whereas the third paragraph of the symmetric press release I think forecloses that a bit. I'd be worried about that. I could go either way, but my concern about the symmetric directive is the wording ""in order to indicate the focus of policy in the intermeeting period."" That's a long period of time.",213
-fomc-corpus,1999,President McTeer.,5
-fomc-corpus,1999,Symmetric.,3
-fomc-corpus,1999,Governor Meyer.,3
-fomc-corpus,1999,"As I was thinking about this decision coming into this meeting, my inclination was for an asymmetric directive with language that during the intermeeting period we would be focused on insuring liquidity in financial markets. Basically I thought that would be the most transparent and honest approach we could take. But I must say that the symmetric directive draft is extremely well done and I would be very comfortable with that. I feel that's honest and transparent as well. I'm 51/49 asymmetric, but I'm quite comfortable with the symmetric one, too, because I think it is extremely well crafted.",113
-fomc-corpus,1999,It's the most hawkish symmetric directive in history!,10
-fomc-corpus,1999,"The arguments for symmetry have won the day. I think that is what we ought to read and vote upon. May I say before I conclude that I just raised the barrier a little: The two changes suggested were worthwhile getting. I think they both are very helpful. Now, the last sentence on each of the drafts is bracketed because whether we include that will depend on our subsequent discussion. The one thing I do not think it is advisable for us to say is that the Committee plans to make a public announcement in January, if for some reason we are not absolutely sure that that is going to happen. If we're not sure, saying it is, shall I say, a less than thoughtful thing to do. Inclusion of that sentence does have the advantage of indicating that we will be altering our policy perspective and it reinforces the fact that the symmetry issue is not a significant policy matter. But we have to be a little careful about forecasting that we will do something if it turns out that we are going to be unable to accomplish that. So let's leave the bracketed issue for judgment later; that judgment should be reasonably easy to make after we have our discussion. Please read the directive accordingly.",237
-fomc-corpus,1999,"The wording is on page 14 of the Bluebook: ""To promote the Committee's long-run objectives of price stability and sustainable economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 51/2 percent. In view of the evidence currently available, the Committee believes that prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during the intermeeting period.""",95
-fomc-corpus,1999,Call the roll.,4
-fomc-corpus,1999,Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes Governor Ferguson Yes Governor Gramlich Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Moskow Yes President Stern Yes,41
-fomc-corpus,1999,"Let us move on to consider the directive language and disclosure policy. Governor Ferguson, would you lead us as you have in the past?",27
-fomc-corpus,1999,"Thank you, Mr. Chairman. I'd like to refer to the memo that I sent to the Committee dated December 17, 1999. Let me start by simply reviewing the state of play, if you will. At our last meeting the principal issues we discussed related to whether or not we wanted to do two things: (1) change the directive language used to describe the Committee's assessment of prospective developments; and (2) define more precisely the Chairman's latitude for making an intermeeting move. On the first point, the issue was whether we wanted to move more toward language about the balance of risks to describe the Committee's view of the future and move away from what we call ""symmetry/asymmetry"" today. And the consensus, though there were objecting points of view, was that we did want to make that move. You sent your Working Group back to consider that language in a more detailed way, and revised language is now in this memo starting on page 5. That is one point that we need to discuss further. The second thing you asked the Working Group to do was to consider how best to express the Chairman's latitude for an intermeeting move. We took a look at the language that we had suggested and made some slight adjustments. That is on page 5, section B. A third question emerged, involving a couple of other recommendations from Cathy Minehan on how to handle the directive wording. That is on page 6. The fourth issue that emerged as we proceeded was an expectation that we would have some form of public announcement of this change in January. And the latter two pages of the memo describe what would go into an announcement, though it is not a draft. Let me also remind you that at our November meeting we looked at nine other areas on which there was a strong consensus within our Working Group, and I got no sense that there was any change from what we agreed on then. That is the state of play. Now, what I would like to do is as follows: Though a general consensus emerged in the FOMC and there was a clear majority in the Working Group that we wanted to move toward this language that focuses more on the balance of risks and is more tied to our legislative goals, a few people still clearly felt that we needed to make sure we are comfortable with that decision. So first I'd like to ask President Poole to give his perspective on why he as a member of the Working Group still feels uncomfortable with the balance-of-risks language. I just want to make sure we have thought this through carefully because, as pleasant as this experience was, I don't look forward to repeating it again next year! [Laughter] So, careful thought is important here. Then, I would like to call on the other members of the Working Group to give their perspectives on this issue. Also, as we go around to others, I'd like to hear your thoughts not just on the balance-of-risks language but on the other elements in our memo, including the language on intermeeting moves, Cathy Minehan's proposals on the directive language, and how we should communicate all this publicly. I hope that is reasonably clear. Bill Poole, let me turn it over to you; I see Bill has handed out a memo.",663
-fomc-corpus,1999,"I think I have enough copies to go around if you'll keep passing them on. I wanted to put my thoughts down on paper because that allows me to state things more concisely. The Working Group's proposal on the balance-of-risks language, what I am calling Option 1, has been slightly modified since we last discussed it. But my major concern has to do with the last part of it involving a statement by the Committee on its views about future economic conditions, and that is what I want to focus on. Let me go through my points. First, I think it is going to be much easier for us to agree on a possible policy action than on a statement concerning possible future economic conditions. Second, I believe that the Option 1 language has an implicit Phillips curve analytic framework behind it and in my view not every member of the Committee will be comfortable with that framework. Third, I think that many in the market will view the Option 1 language as essentially a code for the existing tilt language--that, in fact, it will be read as a Committee view about future policy. And it is important for us not to allow perceptions to develop that we're talking in code. Another issue, my point four, is why we would be talking about economic conditions rather than future policy action. If we are truly talking about economic conditions, why do we take a Committee vote on the matter--a statement about our forecast, if you will. So, I think the markets will tend to view our language about economic conditions as really code for future policy. Furthermore, I am concerned about the way in which the general public may interpret this language. I think we are inviting headlines that say ""Fed sees economic weakness ahead"" if we vote on a directive that says we see possible economic weakness. I don't think that is going to be helpful to us. I'm also concerned that the language in Option 1 has an analytical weakness. If we are successful in being preemptive, then the changing economic conditions we see will lead us to take a policy action and will not at the end of the day create either economic weakness or inflation. That's the whole idea we're trying to get across: We see the possibility of economic conditions that, if not offset by policy action, would generate economic weakness or inflation. We want to preempt the changes in the economy that we don't want to occur. So, I think the language proposed in Option 2 is really more accurate. The change in economic conditions that we see developing is going to generate policy action and will not, in fact, generate economic weakness or inflation. Lastly, I think the majority on the Working Group overreacted to the market's response to our announcement in May. We had explicitly told the market that we would disclose the tilt when the Committee wished ""to communicate to the public a major shift in its views about the balance of risks or the likely direction of future policy."" So it is not surprising to me that the market reacted when we first used that device because we said we would announce the tilt when we had something major to say. In fact, since May, I think the market has understood that we were using this device on a much more routine basis. And in my view the responses since May when we have used an asymmetric directive have been helpful and have not reflected an overreaction. So, those are my seven reasons for having a strong preference for what I'm calling Option 2. I must say that I wish I had had this all straight in my mind 10 or 12 weeks ago when I started to think about it, but my views have evolved as we've gone along. My initial view was one of a mild preference for what I'm calling Option 2 over Option 1. The more I've thought about it, the more I have become concerned about the Option 1 approach.",773
-fomc-corpus,1999,"Thank you. Let me just quickly summarize what I think the majority of our Working Group believes on this. I won't go point by point, but in general I think the majority is concerned that if we don't make a clear break away from the current language, we still risk the possibility that market participants will overreact, even though they are perhaps beginning to understand a little better what we are trying to convey. The majority of our Working Group does not suggest that the balance-of-risks language has no implications for future interest rates or policy moves. But we believe that language more accurately reflects what the Committee actually anticipates about the future because we all recognize that, indeed, the decisions about policy moves have not yet been made when we talk about the balance of risks. They aren't actually made until the vote occurs at a meeting or conference call, whichever it may be. Therefore, we don't want to leave too strong an implication that anything is baked in the cake. I think the majority felt that the existing language does leave too much of that implication. There was, just so you know, some exchange of views on the analytics. We ended up among Bill Poole, Don Kohn, Dave Lindsey, and myself in disagreement on the analytics. I'll spare all of you the details, unless you want to hear them, but let me just note that there is some disagreement on whether President Poole has the analytics exactly right. With that brief summary of the majority perspective, let me go to my Working Group colleagues first--just in the order in which they are sitting--and then we will go round robin. Mike Kelley.",324
-fomc-corpus,1999,"Yes, I'll start, Roger. I don't know that I can add much either to Roger's excellent memo or the summary he just gave or to Bill's very cogent disagreement, which everyone has given an enormous amount of attention to. I'm in the majority that favors Option 1. First of all, I would like to say relative to the analytics and other concerns that there are sophisticated market analysts who make a very good living--I carefully do not say earn a good living--opining, criticizing, and questioning the Fed. Some are academics and they have academic purposes, and others are either speculating or doing the intellectual work for speculators on the basis of the way they read the Fed. I doubt that any language exists anywhere that will foreclose this process completely. I don't think either of these options or anything else anybody would be able to craft can achieve that end, much as I wish we could. I believe that our objective here is to be as informative as we can while ensuring to the best of our ability that we are accurate and clear about what we actually say. We want to take care not to mislead the public, either explicitly by saying more than we intend to say or implicitly by opening up possibilities that we could be misunderstood through the implications that somebody could draw from what we say. I think all of our discussions have been focused on how best to do that. The facts are that at each meeting where we adopt a tilt, bias, or asymmetry or whatever you want to call it--or decide not to do so--it doesn't mean any more than what our proclivity is at the time of that meeting. It can't mean any more than that because conditions always change, as we know, and considerations always change. That's why we have a zero-based review at every meeting that we have. And the record will show, I think, that the tilt evaluation has very little or no predictive power concerning future policy moves over any particular time period. And in my view, we should be very careful not to leave any impression that it does. In my opinion, the best way to do that is simply to place the weight of the evidence on the scales as it relates to our two objectives, which we have in this proposed statement-price stability on the one hand and sustainable growth on the other. Then we should articulate how those scales read at the time we are looking at them. They will either be balanced or they will be weighted toward a danger in one direction or the other. If we feel that we have to expound further on that, it can be done through a statement released to the press. That is where I come down.",533
-fomc-corpus,1999,Thank you. Larry Meyer.,6
-fomc-corpus,1999,"Thank you. It was clear at the last meeting, as it has been during the deliberations of the Working Group, that I am part of a very small minority on this issue-maybe it's just Bill Poole and I. Nevertheless, I thank you for the opportunity to talk a little about my views because I am strongly in favor of language in the tilt that refers directly to prospective policy actions. I believe the best way to think about this is to reflect on why we are engaged in this process and what we are trying to accomplish. In my view, two concerns led to this reconsideration of our directive and disclosure practices. First, we became uncomfortable with the market's reaction to our announcements, particularly with its assessment of the immediacy and the certainty of a policy move whenever we announced a shift to an asymmetric directive. Second, there was an additional uncertainty engendered by the absence of a consistent interpretation of the tilt by members of the Committee. Now, the second problem is easy to deal with. We have a process under way to develop a consensus, and I think we have an agreement around the table that whatever that consensus is we are all going to be bound by it going forward, whether we agreed with it or not. But the first problem, which I'm going to call the immediacy/certainty problem, resulted in large part from the decisions we made when we adopted this disclosure policy last December. First, we decided only to announce a change in the tilt when the change was significant and important for the public to know. In retrospect, I think that was a mistake. It was as if we had said: ""If we are going to have a significant change in the directive, we want to have it flashing on that big neon sign in Times Square."" And then we were surprised about how intense the market response was! Second, by explicitly tying the tilt to the intermeeting language of the directive, we reinforced the presumption that the bias referred to a very short-term policy horizon. So, I think we unintentionally created the problems that we are trying to respond to today. Now what do we do? We have already reached consensus on three constructive steps to alleviate these problems. First, we are always going to announce changes in the tilt, thus removing the special sense of immediacy and certainty of announced tilts. Second, we are going to remove the tilt from the directive and not tie it to the intermeeting period language. And third, as I noted above, we are going to agree to be bound by the consensus interpretation. What more do we need to do? Here is where we differ. The majority also wants to change the language to focus on the balance of risks in the forecast in order to detach it from an explicit reference to policy. Two quite different reasons have been put forth for why we should not explicitly refer to the policy direction in expressing the tilt. The first is that by not linking the tilt directly to future policy prospects we are taking a further effective step toward resolving the immediacy and certainty problem. The logic is that if we don't mention policy, the markets will be less likely to infer from the announcement of a tilt a sense of immediacy and certainty of a subsequent policy action. That may be the case. But I'm not sure it will be. The second argument is that we can legitimately have an assessment of the balance of risks to the forecast, but that it makes no sense to have a policy bias because we can't commit a future FOMC to a policy decision. The view is that somehow the balance of risks is accurate, but we can't have an accurate policy bias. I don't understand it. I'll give you an example. We sat around this table today and discussed the outlook, and I think we all were talking as if it was very likely that we would have to tighten policy even at our next meeting in February. Does that mean when February comes along that we won't start afresh with a zero-based review of the data and the forecast? Of course not. Of course we will start afresh, as we are required to do. So I would reject that notion. I don't think that's a good argument. But there is a legitimate question as to whether or not the balance-of-risks language will deal with this certainty/immediacy problem. The markets really want to know about our policy bias and they will infer that policy bias however we express the tilt. We would be deluding ourselves to think otherwise. We can couch this bias in the language of the forecast, but the market will read right through it to our policy intention. Therefore, I prefer the direct, transparent approach. Specifically, I'd use the language we've been using rather than this alternative language that Bill Poole has suggested. And I would use the press release to set out our interpretation of the tilt--specifically, that we don't intend it to indicate a precommitment to action at the next meeting, but to indicate a greater likelihood of moving in one direction rather than the other over a longer time frame. If the majority view is nevertheless in favor of the balance-of-risks language, I would strongly urge that we not assume that this language alone will convey the message we want to send in terms of immediacy and certainty of subsequent policy action. We should make these points explicitly in the press release in exactly the same way we would do if we used the policy bias language. Thank you.",1096
-fomc-corpus,1999,"Before we continue, let me ask if any other members of the Working Group want to give their perspectives or elaborate on a majority or minority point of view. Mike Moskow.",35
-fomc-corpus,1999,"I'll be very brief. I just want to add a couple of points. I am in the majority here; I prefer the language that is in the Ferguson memo. I just want to point out that we discussed this at great length in the Working Group. Memos have been exchanged, e-mails have been exchanged, and I forget the number of meetings we've had but it has been many. So we have discussed it at great length already. The key here, as I see it, is that we are trying to educate the public; we are trying to get away from the notion that we are automatically going to move at the next meeting and that we have our finger on the trigger and are ready to act. That is really, from my standpoint, our key objective. And what the Ferguson language does is to take a step back and put the balance of risks on the table rather than the possible need for a change in the stance of policy. Larry Meyer said that the markets are going to read right through this to our ""true intentions."" I'm not sure that is going to happen because over time they are going to see that it isn't a good predictor of what we will do. If history is any guide, it predicts what we are going to do only half of the time. So, I think we may be able to educate the market over time. At least this takes a step back from the notion that we are automatically going to change our policy at the next meeting. That was driving my thinking on this issue from the beginning and I think the way the proposed language is phrased now follows through on that point.",324
-fomc-corpus,1999,"Bob Parry, do you want to add something?",11
-fomc-corpus,1999,"I started out at a position that was very close to Bill Poole's, although I indicated that I probably could live with either option. I've moved a bit more in the direction of Option 1 recently. The advantage of Option 2, of course, is that it's very direct. To me the disadvantage is that it may not accurately convey the probabilities of a change in policy. Clearly, we were using the tilt language in the past in a way that very often did not lead to a change in policy after we had adopted an asymmetric directive. And I even worry about the possibility that markets may almost force us to make a move if we've indicated asymmetry, as has been the case once in the recent past. With regard to Option 1, what I like about it is that it seems to capture how I've interpreted symmetry in the past: I concluded what I thought was appropriate with regard to the funds rate and then considered the question of where the balance of risks, in terms of the economic outcomes, was likely to be in the period ahead, knowing full well that things could change very quickly. So it seems to me that perhaps Option 1 would provide a little more flexibility than Option 2.",242
-fomc-corpus,1999,"Thanks. Ned Gramlich is next, and then we will open up the discussion to the rest of you.",22
-fomc-corpus,1999,"I've been for Option 1 by a close margin all along and I still am. I think Bill Poole and Larry Meyer have put their case very well, but I still like Option 1. Let me make three points. To me the biggest point all along has been what we are calling the ""trigger"" issue. That involves our standing back from policy changes a bit--being understated and letting the market make its interpretation but not predicting future developments that will not necessarily materialize. That has been the major issue to me throughout these deliberations. On Bill Poole's point 2, regarding an implied Phillips curve framework, I don't think this language means at all that the FOMC is a captive of Phillips curves. The wording that Mike Kelley worked out, which is on page 5 of Roger's memo, tries to make it a little clearer that the issue is not so much that we believe the Phillips curve but that price stability and sustainable economic growth are our mandates. On the ""talking in code"" issue, I don't consider it speaking in code if we say exactly what we're thinking at any particular point. In fact, that's one thing I find attractive about the balance-of-risks language. So I am still in the Option 1 camp, though Bill and Larry have weakened my resolve a bit.",266
-fomc-corpus,1999,I'd like to open up the discussion now and we'll use the usual approach. I would remind you that there are a number of different elements in the memo and I would appreciate it if you would indicate places where you agree or disagree. I will be assuming that if you don't indicate a disagreement that you are basically agreeing with what's in the memo. First on my list is Jerry Jordan.,76
-fomc-corpus,1999,"Thank you. We know, of course, that what matters from this point forward over the next two years or longer is what we do, not what we say. Whatever box one wants to run monetary policy through, it's our actions that influence economic activity, inflation, growth, and so on, not the words that we use. But it seems to me that we've gotten ourselves in a situation this year where more and more focus has been on our words and the transitory market reactions to our words and that has taken attention away from what we do. What mattered in 1998 was that we lowered the funds rate three times; what mattered this year was that we raised the funds rate three times. The reason I don't like Option 1 is the stress on both goals and the way that has been rephrased in the bracketed expression to imply more strongly that the goals are separable, which I do not believe. At a time when we would vote for asymmetry toward tightening, I would want the directive to say ""weighted mainly toward conditions that may generate heightened inflationary pressures, which would cause economic weakness."" It is increases in inflation that send false signals to market participants, producers, and households, and weakens economic growth. The other option, to leave out any reference to inflation at all and say ""weighted mainly toward conditions that may generate economic weakness""--that's asymmetry toward ease, I guess--I don't know when we would use this option. I can't imagine that we would adopt that kind of directive unless we foresaw something like the Asian crisis, the Russian default, or some other adverse shock. In such a case I think we'd do what we believe is the right thing to do--cut rates, as we did in 1998--rather than announce that we'll think hard about it at the next meeting. I don't see any benefit at all in trying to give these kinds of signals about future meetings and future actions.",389
-fomc-corpus,1999,Bob McTeer.,5
-fomc-corpus,1999,"I'm persuaded by Bill Poole's arguments. The argument he made that is most significant to me is point 2, having to do with the Phillips curve. In the language of Option 1, the opposite of economic weakness is inflation. That's a built-in Phillips curve, and for that reason I would go with Option 2.",67
-fomc-corpus,1999,Ed Boehne.,5
-fomc-corpus,1999,"Roger, I think you and your associates have done a first-rate job on this and I support the majority recommendations. To me the balance-of-risks approach is the preferred course and, separately, I think the language laying out the Chairman's authority is much improved. And if it's on the table, Cathy Minehan's editorial suggestions also have merit, in my judgment.",75
-fomc-corpus,1999,That is on the table. Al Broaddus.,11
-fomc-corpus,1999,"Roger, first, I would second Ed Boehne's compliments to you and your colleagues on the Working Group. You've done a lot of hard work. You've done a great job, I think, in framing the issues and getting them on the table. But I continue to have reservations about two aspects of the proposals: the balance-of-risks language and also the amendment to the Authorization for Domestic Open Market Operations, which has not been focused on so far. Let me just run through my views on these issues as quickly as I can. On the balance-of-risks issue, I'm very much in the same camp as Bill Poole and Larry Meyer, and I guess Bob Parry as well. Inevitably, in my view, this language is going to have the effect of reinforcing the short-term Phillips curve tradeoff mentality that pervades public discussion of monetary policy in particular and of economic policy generally. I recognize that the recommended language, if read and analyzed carefully, does not necessarily imply that the Committee in its decisions assumes such a tradeoff, although the language is certainly consistent with that assumption. But to most readers and to most reporters in particular, the language will almost certainly still seem to posit a choice between fighting inflation on the one hand and stimulating growth on the other. Again, while it doesn't necessarily follow, I think a lot of people will infer that we are implying that addressing one of these two objectives necessarily means neglecting the other. I think this is really important. The notion of a tradeoff between resisting inflation and stimulating growth is deeply ingrained in Americans, or at least among those people who think about policy. I believe it's arguably the single biggest obstacle that we face in communicating clearly to the public about policy. And I would hate to see us reinforce this perverse idea with the recommended new language, which to my mind inevitably it would do. I would much prefer something like Option 2 in Bill Poole's memorandum. In fact, I had written down wording that's amazingly close to that; it's almost identical. I don't think anything is lost by referring candidly and directly to prospects for policy. As I think Larry Meyer said at our previous meeting, people are not interested in our views on the balance of risks per se. They are interested in them only from the standpoint of their implications for policy. I don't think we are going to change that by avoiding the ""P"" word. And the risk is that we will tend to reinforce the popular notion that the Fed is not able to speak clearly and in a straightforward manner about policy. Let me shift now to the proposed amendment to the Authorization. This is obviously a tough subject to discuss here. We have a great Chairman currently, one who takes most of the heat that is directed at the Fed, and no one, including me, wants to seem to be advocating restrictions on his authority to act, especially in a crisis. But I have to tell you that I have tried to think this through and I'm still uncomfortable with the proposal. It represents a significant and, most importantly for me at least, permanent institutional change that could serve us poorly in the long run. The idea, as it has been presented, seems to be that we are simply codifying current practice or our current understanding about this. But if that's the case, I think it's fair to ask if we are all clearly on the same page with respect to exactly what the understanding is, how we arrived at it, and whether it's firmly grounded. When the amendment is made public, I think informed people are going to ask those kinds of questions as they try to figure out what we are really trying to do and what we really mean. At the present time at least, I'm not sure we have crisp and convincing answers to these questions. To be candid, I'm not sure that the current understanding has a firm basis. I'm not sure I'm clear on exactly what the understanding is, though I may be the only one here who feels that way. But that is where I am. More broadly, it seems to me to run counter to our federal structure. Of course, the fundamental question involved is whether a chairman should have the authority, either implicitly through some sort of understanding or explicitly through the Authorization, to act unilaterally even in clearly delimited circumstances--that is, whether it's wise and desirable for the Committee to confer that authority. Obviously, we always can. I recognize that I'm swimming upstream here and that some people--maybe everybody else at the table here--believe it is wise to do this. I don't pretend to be all knowing on this and I acknowledge that that may be true. But I have to tell you I'm still not convinced, after having tried to assess the benefits and the risks. It seems to me that the gains of doing something like this, either explicitly or implicitly, are small at best. Presumably we're talking here mainly about emergency or crisis situations. But under our current operating procedures, we can already accommodate increased demands for currency and reserves and the interest rate implications of that in a crisis by amending our funds rate target. The Chairman and other senior System people can and will--as they have historically--continue to exert strong leadership in managing a crisis, using the discount window and other tools at our disposal. Also in such circumstances, I think markets would generally expect us to move fairly promptly, so that is going to get reflected in the yield curve rather quickly in any event. And importantly, in a crisis I think it's really important for the public to understand that the whole Committee is fully behind any action that is taken and will follow through on it. It is hard to imagine that they wouldn't think that with Chairman Greenspan at the helm, but we don't know who is going to be Chairman in the year 2050, for example, and what the attitude might be. Finally, at just a practical level, with today's technology--we've been talking about that a lot around this table--it's pretty easy to get the Committee together quickly. So it's not clear to me that we buy a lot by conferring this authority. And I think the longer-term risks of doing so--I mean the real long-term risks, the permanent institutional risks--are not inconsequential. Most importantly, it seems to me that it is precisely in a crisis situation that a Chairman is most exposed to external political pressure. Full Committee deliberation and participation in a situation like that I think is a protection for the System and for the Chairman. If the President calls, the Chairman can say, ""I have to talk to the Committee"" and, of course, benefit from any deliberation that takes place. Also, full Committee participation ensures a detailed public record of what occurs, which I think is consistent with our very appropriate drift toward greater transparency and greater accountability. The bottom line--again, I realize I'm swimming upstream on this--is that I would urge the Committee to think very carefully about this. Before we do it, we should be really confident that this is in the best interests of the Committee and the Chairman in particular as well as the System and the country.",1434
-fomc-corpus,1999,Thank you. Cathy Minehan.,7
-fomc-corpus,1999,"Wow, it's hard to follow that! Let me start with first things first. I've long been of the opinion that we should announce something after every meeting. And if it's the bias discussion or the tilt discussion that gets us to the point where we are at the end of the meeting, I believe some reflection of that should be incorporated in the public announcement that will be made after every meeting. In fact, at one point or another I think I was the one who suggested the balance-of-risks language. Nevertheless, I must say that a couple of Bill Poole's arguments really resonate with me: point 5, the possible headline ""Fed sees economic weakness ahead;"" and point 6, the idea that we are supposed to be preemptive. If we see economic weakness ahead, shouldn't we try to do something about it or shouldn't we anticipate that we could alter policy so as to offset it, along the lines President Jordan talked about? So, I thought I'd be firmly in the Option 1 camp, but I can see some benefits to Option 2, frankly. Option 2 still talks about risks. And I don't think it commits us to any more than what the market thinks we're committed to--or not committed to as the case may be--because time will determine what we're going to do. Whether or not we in fact move with any greater frequency than we have to date after we change our language is what ultimately is going to decide how the market accepts this. I also believe that the basic thrust of President Poole's point 7 is right as well. When we started this announcement policy, we led the market to have unrealistic assumptions about what we meant by the language. And they overreacted. We encouraged them to overreact. We didn't mean to, but we did. I think the situation has gotten better since then and there's an improved understanding of our consensus on where we are going. So, I'm really on the fence and I could be a marginal Option 2 person. Before I get to Al Broaddus' second comment, let me just say a few words on my suggested modifications to the directive language. I assume that nobody has major objections, or you would have said so already, about what ends up being just an editorial perspective about shortening the directive. What I tried to do when I was analyzing the issues for this discussion was to go through all of our public announcements for the year and rewrite them the way they would have been written under the proposals made at the last meeting and in Roger Ferguson's subsequent memo. And as I tried to rewrite the directive, I found that all I was rewriting every month was a paragraph that focused on the monetary aggregates, which we really don't talk about at our meetings. Well, Don Kohn does--excuse me, Don. I felt that that kind of laser focus on that subject each and every month really didn't serve us well. So, that was basically where my suggestions for shortening the directive came from. Finally, turning to what Al was just saying, I am a firm believer that FOMC decisions ought to be Committee decisions. We have a responsibility; making policy decisions is what we are here for, for all the reasons that Al articulated much better than I ever could. My understanding in terms of this paragraph was that it was codifying an accepted position of the Committee that has changed over a period of years, but that this wording basically reflected current Committee practice. I had not really asked myself some of the questions that Al raised in his discussion, and I must admit they bear thinking about. So, I'm a little on the fence in that area, too.",734
-fomc-corpus,1999,"Okay, that's an acceptable place to be. Let me propose the following. It is now 1:00 p.m. Perhaps some food would be helpful as a way to make sure that we're still feeling our best. Is food available?",48
-fomc-corpus,1999,Yes.,2
-fomc-corpus,1999,We can just break for lunch and continue the discussion during lunch.,13
-fomc-corpus,1999,"Yes, let's take a brief recess and continue over lunch. [Lunch recess]",16
-fomc-corpus,1999,"Bill McDonough, may I ask you to interrupt your eating to give us your perspective on the issues on the table?",25
-fomc-corpus,1999,"I am in support of the recommendations in the Ferguson memo in all areas. Let me direct myself, however, to the discussion of the Chairman's intermeeting authority. We are not establishing anything new. If a member of the Committee doesn't know what the current practice is, I would think it is a matter of having failed to ask. When I joined the Committee, I asked what the understanding was and somebody told me--probably Don Kohn--so I knew what it was. So, we are codifying that which already exists--much against my wishes I should tell you, because I didn't think it was appropriate for the matter to be discussed since it already existed. The General Counsel thought it would be better to codify a practice that already existed, and that is why we have a General Counsel. So rather than practice law, I very reluctantly came to the view that we had to discuss this. The idea that we would take away the intermeeting authority from this Chairman is to me unthinkable. As for the question of whether a future chairman would deserve that confidence: If somebody were nominated for Chairman and I were still here and thought the person didn't merit that confidence, I would resign so I could go up to the Hill and testify about why the person shouldn't be approved by the Senate. Robert's Rules of Order dictate the way this Committee works. If at some stage the Committee decided that its Chairman had abused this authority, at the next meeting of the Committee we could say we hereby disapprove of the Chairman's action. And we could change the Authorization if we thought the Chairman at the time was capable of abusing the authority again. That is absolutely just a ""no-brainer"" application of Robert's Rules. So I think we should recognize that it is on the advice of the General Counsel that we are codifying a practice that already exists. And I can't imagine why we would think of doing anything else. Thank you.",388
-fomc-corpus,1999,Thank you. Gary Stern.,6
-fomc-corpus,1999,"Thank you, Roger. Let me comment first on the intermeeting authority issue that Bill McDonough just mentioned. I share Al Broaddus' concerns and perspectives on this, but I am persuaded when I look at this language that it is satisfactory. I think it does protect us adequately and I am not troubled by what has been proposed. With regard to the bias language, originally I was in favor of the recommendation in the memo, Option 1. As I've thought about it some more, I have to say--and I realize this is not the world's most constructive observation--I'm not entirely happy with either option. The reason is that staying with something close to the asymmetry wording we have been using does imply I think some presumption about a move at the next meeting, which history suggests often has not materialized. In Option 1, the option in the memo, I don't think this is necessarily a fatal flaw. But my reservation is that we could find ourselves from time to time in a somewhat awkward position of having changed policy but not changed where we think the risks lie. That is quite likely and in some cases appropriate. But it may also raise the question: If the Committee thinks that's where the risks are, why didn't we move more aggressively? Maybe that can be handled in subsequent statements or in other ways. If I had to vote, I would vote in favor of Option 1. But I must say I have some reservations about both options.",295
-fomc-corpus,1999,"May I speak to that? I think the general consensus of the majority in our Working Group is that, just as Gary has indicated, even if we adopt the new language in Option 1 we would provide an explanation of a vote for a bias if we thought that was necessary. There was a clear expectation that we may need to have a sentence or two that would flesh out our reasoning just to avoid that risk. So, I think that was thoroughly considered by the Working Group. Tom Hoenig is next and then Jack Guynn.",107
-fomc-corpus,1999,"Governor Ferguson, I've listened to all of the arguments, and they are all good arguments. When I sort through them, I'm back with the original recommendations of your Working Group. We can fool with this language to the nth degree and something is going to be wrong with it. Your draft language talks about risks and I feel more comfortable personally talking to the public about risks than I do talking about which way we are going to move the next time we take a policy action. The issue of the Chairman's authority to make intermeeting policy moves is a tough one, Al, and I have some sympathy for your point of view. But it is related to a longstanding practice and this amendment to the Authorization does codify that practice. To my mind, in some ways it sets the boundaries more clearly. If some future chair abuses the authority, that is something the Committee will have to deal with. But the way the Authorization reads now gives me a sense of confidence that it would be used only in the most dire circumstances, and I think the Chairman has to have some flexibility to act in a crisis. So, I can generally accept the Working Group's recommendations.",231
-fomc-corpus,1999,Jack Guynn.,4
-fomc-corpus,1999,"Roger, of the two options presented, I rather strongly prefer Option 1 as recommended by the majority in your Working Group. In fact, I'm very uncomfortable forecasting policy actions, which the second option implies, as Mike Kelly, Ed Boehne, and others have commented. What Bill Poole's dissection of Option 1 did for me was not so much talk me out of it but expose what I would refer to as fundamental flaws--Gary Stern used the term fatal flaw--or shortcomings in what we are trying to do here, even in my preferred option. And those flaws relate to Bill's point number 2--that we come here with forecasts, on which we base our judgment of the risks, from very different models. And if nothing else, that's going to lead to continued debate, the Chairman allowing it, about the statements we put out and the language we use to further describe the balance of risks. Actually, more fundamentally troublesome is the fact that each of our respective outlooks is conditional on the assumptions we have made about the stance of policy and future policy actions. That has been demonstrated very vividly in our Humphrey-Hawkins discussions; we have made very different assumptions at this table about future policy that are embedded in the forecasts we provide at Humphrey-Hawkins meetings. It always troubles me to see those added up and averaged to come up with numbers that purportedly reflect the Committee's outlook, when we admit that we have made very different assumptions. The final fundamental flaw or shortcoming in Option 1, which I still prefer, is that we have no formal target--no formal inflation target or GDP target or whatever--along the lines of Ned Gramlich's comments today. That leaves open the question of risks related to what. We have not been able or willing to answer that question. So, in my view, there are some fundamental problems--fundamental may be too strong a word--with even the good work that the Working Group has done. I, for one, think there is a high probability that, even after these repairs, people are going to find the repaired process still substantially flawed. In fact, I feel so strongly about it that I think we may want to re-open the question-either at this point or after we've tried these repairs--of whether at the end of the day we have made a contribution, as we were trying to do, in terms of transparency. I think it is still an open question. Finally, I have just a couple of quick comments on Al Broaddus' remarks. I want to swim upstream a bit with Al on that issue. I, too, share the thought that we are all trying to understand exactly what authority we have delegated to the Chairman. Even though the Working Group has responded to one of my comments and tried to fix the language to address my concerns, I still would like to see the circle drawn a bit tighter around that delegation. It's very likely that if the Chairman were acting between meetings he would be responding to developments we could not possibly foresee at our previous meeting or, in fact, we would have dealt with them. I suggested words like ""extraordinary,"" or some other term to emphasize that this authority would only apply when something very out of the ordinary--some very short-term problem not related to the long-term objectives of the Committee--had emerged. I would be most comfortable with a delegation of that kind as opposed to a more open-ended delegation, which I'm less than completely certain could be fixed after the fact. I just think it would be better to do that. Thank you for the chance to comment.",727
-fomc-corpus,1999,Thank you. Let me tell you where we are and then we have to decide two or three issues.,21
-fomc-corpus,1999,May I ask a question just for clarification?,9
-fomc-corpus,1999,Sure.,2
-fomc-corpus,1999,Suppose we had been operating under Option 1 at the October meeting and had adopted an upward tilt--using the balance-of-risks language--and then at the November meeting raised rates as we did. Do you think we would have retained that tilt with the balance-of-risks language or taken it off as we did under the old approach?,71
-fomc-corpus,1999,I'm not terribly comfortable speculating about that.,9
-fomc-corpus,1999,But to raise rates and then take off the balance of risks toward higher inflation would seem peculiar.,19
-fomc-corpus,1999,"I think there are two ways we might have handled it. Again, this is speculation; what we would have done, I'm not sure. We might have decided that the balance of risks was still tilted toward greater inflation but decided to take a ""wait and see"" approach because we already would have made three moves. So it is quite conceivable, Jerry, that we could have said at that meeting that we were not sure about the likely direction of our next move. The risks might be in the direction of greater inflation, but we would have wanted to be quite clear that we were waiting to see because we already had made three moves. Or we might have taken the view at that time that we had now done three moves and, in effect, we thought we were out of this for some time and in a wait-and-see posture. Therefore, we really thought that after these moves the risks were balanced. Now, where we would have ended up would have depended very much on how close that call was about where we thought the economy was going to be after the third move. That's why it's hard to say. One could have made a case either way, if I recall the meeting. That's one of the complications here.",244
-fomc-corpus,1999,And one would have to try to do that within the context of what we knew at that time--,20
-fomc-corpus,1999,Absolutely.,2
-fomc-corpus,1999,"--not what we know today, which is considerably more. More weight has been given to the risk of inflation than we knew would be the case at the time that statement would have been made.",39
-fomc-corpus,1999,"Yes. In hindsight, obviously, we'd know somewhat more. Let me summarize what I have heard and where I think we are. In some sense not surprisingly--though there are some caveats and a few people are in between--we still seem to have, as we did the last time, four people who feel on the core question of the balance of risks that the current language is clearly preferable. We have one person actually who would prefer neither. Then everybody else seems to feel, though they see some faults or have some concerns, that the balance-of-risks language is a step forward. We have two alternative courses of action. One alternative is simply to vote today on the recommendations in the memo--and this in some sense depends on the strength of our convictions on this--which will then set the ground rules for next year. That strikes me as a reasonable alternative, knowing that we have four people who will probably be uncomfortable about it but that everyone else, generally speaking, is ready to vote. The only other choice, frankly, is to say--and the Working Group may disagree because we have put in as many hours as we can on this to get the issues on the table--that we don't want to move forward on this. But if the Committee as a whole thinks we should not, recognizing that there are four people who clearly agree and don't want to move forward, then that is a Committee decision. I would be concerned about that decision because, effectively, it would mean that we are stuck with the status quo, and I'm not sure that that's terribly attractive. And frankly, after working on this for several months, I'm not sure that further discussion either in January or at the February meeting is going to help us go any further. The only other thing that makes this question complex is that we have to handle what goes into today's announcement. But I think we should leave that question to one side. Larry Meyer.",387
-fomc-corpus,1999,"We have gone through a process here and we have reached a consensus. It's a quite overwhelming consensus, though it's not 100 percent. So I'm perfectly satisfied that the process has worked. I got the chance to try to persuade others to my viewpoint and I was unsuccessful. And I would certainly consider myself bound by this consensus, so I think we ought to vote. SEVERAL. Agreed.",80
-fomc-corpus,1999,"Well, Larry Meyer has proven himself to be not just a great economist, but a diplomat.",19
-fomc-corpus,1999,And a gentleman on top of that!,8
-fomc-corpus,1999,"Well, we knew he was that! If that's the case, Mr. Chairman, could you ask for a motion on this?",26
-fomc-corpus,1999,"In the past, Governor Ferguson, we haven't actually had formal Committee votes on matters such as these. But, obviously, you might want to see a show of hands to make sure that people could ""live with"" the decisions. Among other things, the Committee has often wanted to include everybody, even nonvoting members, on these kinds of decisions since they have to live with the consequences.",79
-fomc-corpus,1999,"Yes, on a matter like this, it's everybody.",11
-fomc-corpus,1999,"It's clearly everybody. I was thinking more of just a show of hands from all, not dividing it by members and nonmembers.",26
-fomc-corpus,1999,I think it might be helpful to take each of the matters separately.,14
-fomc-corpus,1999,"Fine. We will go through the memo and basically have a show of hands on each issue, still being quite democratic. Section one dealt with nine general points on which there was consensus. I heard no one dispute those, but let me just ask for a show of hands on Section one, which deals with the nine points. Is there general agreement for those? There seems to be no objection on that. In Section two, I will turn your attention to the balance-of-risks language at the top of page 5, which has been the focus of most of our conversation. All in favor of adopting that as the way to deal with our perspective on the future, please raise your hand. Okay. And those opposed? There are four opposed. At the bottom of page 5 in Section B is language dealing with the Chairman's latitude for intermeeting moves. All in favor of handling the intermeeting latitude that way and making it a part of the Authorization when we vote on that in February raise your hand. Any opposed?",207
-fomc-corpus,1999,Two opposed.,3
-fomc-corpus,1999,"In Section C on page 6, Cathy Minehan has proposed a slight rewording of the directive. Although Cathy referred to it in our go-around, we did not have much discussion on it. Let me just ask for a show of hands on the language, which is actually on the top of page 7 in Section C. All in favor of that approach? Those opposed? I see none opposed. I think we are clear on what we are going to do with respect to the directive when we get to February. We have a new approach that I think has been determined democratically. Let me talk about the next step and then give some guidance. The plan, as you can see on pages 7 and 8, is that we will issue a press release some time in January that describes the major substantive changes that we have made. The expectation is that everyone will have a chance to look at a draft of that press release and send comments back to me or Dave Lindsey or Don Kohn. So, everyone will have a chance to review it. That will be the way we communicate to the public what our intentions were in making these changes. Then in February we will start using this new procedure. Are there any objections to that approach? Hearing none, I assume there are no objections. Now we can turn to the next issue, which is the announcement for today. You may recall that the Chairman pointed out the bracketed language at the bottom of the draft press release. Lynn Fox has now taken away all the copies of that announcement. Lynn, could you just read that bracketed language?",323
-fomc-corpus,1999,"The last sentence was: ""Separately, the Committee indicated that it plans in January to make a public announcement about future adjustments to its disclosure policy and the so-called 'bias' statement.""",38
-fomc-corpus,1999,"Does anyone have an objection to including that sentence in today's announcement? Yes, go ahead Peter.",19
-fomc-corpus,1999,"Could I just give a perspective from the market? In my view, if you put out that statement, it's like putting up a neon sign that says. ""Coming soon: A big change in our bias!"" I just don't think the market is going wait and give you a chance to draft a well crafted press release. The crescendo of interest in that, I think, is going to be extraordinary.",80
-fomc-corpus,1999,That's a good point.,5
-fomc-corpus,1999,I think that's a good point. Let's just put out the press release when it's ready in January.,20
-fomc-corpus,1999,Does anyone have a counterpoint to that?,9
-fomc-corpus,1999,One reason to include it in today's statement was to make sure that the market understood that there had been no change in policy today and that the changes would be announced later.,34
-fomc-corpus,1999,"I don't think that's really necessary. The press release on our vote today was pretty clear. It's unambiguous. That issue could surface, but I don't think it will.",35
-fomc-corpus,1999,"Our stance then, when we're asked about the Committee's decision, is to say that we have nothing to announce, period?",25
-fomc-corpus,1999,Right. At least the truth will set you free!,11
-fomc-corpus,1999,"That brings us to the end of our agenda, except for the pro forma announcement that our next meeting--as I'm sure you're all acutely aware--is scheduled for February 1st and 2nd. Merry Christmas everybody and hopefully a Happy New Year!",52