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fomc
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I would say that that econometric model rivals the one that the staff has built up over the years!
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I support your recommendation.
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I support your recommendation.
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I'll read the directive and the risk assessment language from page 29 of the Bluebook. "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks con...
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Call the roll, please.
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Chairman Greenspan Yes Vice Chairman Geithner Yes Governor Bernanke Yes Governor Bies Yes Governor Ferguson Yes Governor Gramlich Yes President Guynn Yes Governor Kohn Yes President Moskow Yes Governor Olson Yes President Santomero Yes President Stern Yes
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Before we close, Vincent has a few remarks he'd like to make.
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Over the intermeeting period, I surveyed you about whether the summary of your economic projections should be expedited--that is, released next week rather than three weeks later when the Chairman delivers the Monetary Policy Report in testimony to the Congress. My experience in surveying you has been that if I ask the...
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We get an extra day.
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You get the weekend. Feel free to use it all!
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The next meeting of this Committee is March 22. Before we close this meeting, let's take a brief recess while the Federal Reserve Board deliberates on the requests we have for discount rate changes. We shall return. [Recess]
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I wish to announce that in record time the Federal Reserve Board acted expeditiously to change the discount rate, and you all know the direction and the amount. As a consequence, I now adjourn this meeting and suggest that we go to lunch.
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Good morning, everybody. We used to start off these meetings with a vote to approve the minutes of the previous meeting. I thought there was a mistake when that was not on the agenda for today, but we have a new regime [laughter] and we're not required to do that. That will cut the time of the meeting by 3.7 seconds. D...
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1 Thank you, Mr. Chairman. At the Committee's last meeting I characterized markets in the preceding weeks as "more of the same," inasmuch as trends, such as the gradual rise of short-term interest rates, a flattening yield curve, narrowing credit spreads, and low volatilities, were continuing their well-established pat...
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Go over again what is in the CRB index. This is the spot index. What's in there?
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Yes. Oil is a little less than a quarter of that index.
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That's a big number.
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Yes, it's about 23 percent, but that compares to about two-thirds or three-quarters weighting that energy has in the Goldman Sachs and the Dow Jones-AIG indexes, for example. The other components are--
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What else is in there?
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"Softs," as they are called--things like agricultural commodities and metals.
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Agricultural commodities. But grain prices have come down in the most recent data. I assume iron ore is in there?
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I don't know if iron ore is in there but copper is; copper scrap is in there, I think.
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That couldn't have done that much. Steel, for example, is actually down.
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I don't think steel is in the CRB.
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It's a very unusual index. The reason I raise the issue is because it doesn't look like any commodity index I'm used to watching--unless oil is a very big component. Do we know that? We can factor out the oil part of this.
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The biggest contributor to its movement has been oil, but all of the other components also had increases. So they all contributed to it, whereas, in the earlier period, when oil was rising some of the other components actually were declining. So it's a mixture of effects.
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But if you take it as a meaningful index, that's a very impressive move. And the point is that it's the first time I've seen anything like that in the commodities area. I've always looked at the CRB futures, which does look something like this, but I assumed it was a third-order matter. Anyway, enough of that.
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Mr. Chairman, I just wanted to note that the index, I think, is simply an equal weighting of all the various contracts that are traded. It makes no attempt at weighting.
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There's no weighting?
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No weighting.
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Then how does oil get to be 25 percent?
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Because there are a number of different contracts that are traded.
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It takes all of them and they're unweighted.
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It's an unweighted index.
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There is no economic content weighting.
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So wool tops have the same weight implicitly in the index as, say, a contract on gasoline or copper.
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So you have several gasoline contracts.
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And each is included. So it's not a terribly rigorous--
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Could you just take a look at that and let us know what is involved?
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It is the case, however, Mr. Chairman, that there has been a broad-based upward movement in commodity prices in the last four weeks. So--
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Yes, iron ore is up over 70 percent. Copper is up and aluminum is up; steel is not.
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Steel is not. Steel is the principal one that hasn't moved up.
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And the weight of steel is much larger than copper and aluminum combined. So it's an odd sort of commodity index.
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There's a definition of these indexes in a footnote in Part 2 of the Greenbook on page 33.
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That's the chart I remember. Thank you. Other questions? Would someone like to move approval of the Desk's transactions?
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So moved.
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Without objection, they are approved. Let's turn now to Dave Stockton and Karen Johnson.
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Thank you, Mr. Chairman. By virtually all measures, the economy has been humming along at a very solid pace in recent months. We are estimating that real GDP expanded at a 41/4 percent annual rate in the fourth quarter of last year and is likely to grow at about that pace in the first quarter of this year. The contribu...
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One of the most important changes made to the forecast in this Greenbook relative to that of January is the increase in the projected path for oil prices. That increase reflects developments in global oil markets over the intermeeting period. Since late last week, spot WTI oil prices have been at new highs, over $56 pe...
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There has been considerable discussion, David, as you know better than I, about the failure of firms to capitalize a lot of what is currently expensed, especially in conjunction with the installation of a lot of high-tech capital equipment. Is there any way of looking at the data to see to what extent, if at all, they ...
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Well, we have not undertaken a calculation like that, Mr. Chairman, and it strikes me that it would be relatively complicated to construct. But we could certainly take a look at it. From our perspective--and this is one of the reasons we are giving for the improvement in multifactor productivity--investment in informat...
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Well, one would expect to be able to pick it up from the capital expenditures for high-tech equipment, on the presumption that the amount of expensed items would be somehow related to that. But you already do that implicitly in creating a capital services measure, and it would theoretically just show up in the coeffici...
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When you say "already in there"--
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Meaning, in other words, it's already being captured to some extent. But that can't be, because that's not the way those numbers are put together. The question I'm really asking is this: Is there a correlation between outlays on capital expenditures for high-tech equipment and what we now measure as multifactor product...
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I don't know the precise answer to that question. I'm not sure if Steve Oliner, who is our expert on this, would have any thoughts on the subject.
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Mr. Chairman, I think on a year-by-year basis the correlation is going to be loose at best. When we look back over the second half of the '90s, we had a lot of capital deepening in high-tech equipment, which directly contributed to labor productivity growth. It's true that multifactor productivity picked up and was str...
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But theoretically, if multifactor productivity were zero, you would be capturing all of the impact of capital investment on measured productivity.
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Right.
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So, to the extent that there's a gap, it's unexplained. I vaguely recall what you are saying, Steve, namely, that multifactor productivity does expand, and, indeed, it has started to expand again now.
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Right.
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That suggests not a close correlation, obviously, but some relationship. So there may be something to this proposition which, if true, may enable you to improve your estimates. Instead of guessing at multifactor productivity, which has ranged from 1/2 percent to 2 percent, you may be able to narrow it down quite signif...
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It is possible. What we're really talking about are the organizational efficiencies that are produced by high-tech investment, which don't necessarily occur contemporaneously with doing that investment. It takes some learning over time.
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Well, have a distributed lag. [Laughter] Your imagination is without limit!
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May I get in on this one? Steve, didn't your paper with Dan Sichel do that? I thought it did. I thought you had a little routine within multifactor productivity to do exactly what the Chairman was suggesting.
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Not exactly. What we did was to try to quantify the pickup in multifactor productivity growth from those industries that produce high-tech equipment or semiconductors and computers. That framework was important.
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It's not the ones that use the equipment but the ones that produce it.
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Right.
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It's the other way around. That's interesting. You still have the floor, Governor Gramlich.
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No, I just wanted to ask about that issue.
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I see. President Poole.
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Karen, you noted the enormous role of China in raising energy demand worldwide. Could you give me a sense of the energy demand in India? India is obviously a low-income country, but it is now growing quite substantially. It's a large country. In both parts of the Greenbook, there is only a very limited amount of inform...
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Well, the answer to your first question is that I don't know the energy demands of India. I don't even think they are on my list. I have a table here listing oil consumption by country, and I'm sure India is not on that list. But the fact that India is expanding mostly in its service-producing sector, rather than its m...
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Good. Thank you.
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Vice Chair.
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Karen, could you give us a fair and balanced view--[laughter]--of the significance of the changes to the Stability and Growth Pact? On net, are they really that bad? The market didn't seem terribly worried about what they mean for fiscal policy going forward. There were some aspects of the revised agreement that might ...
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Well, I have not read it or thought about it in sufficient detail to truly answer your question. My sense is that, in part, it was a recognition of the inevitable. That is, it was a political solution to the fact that certain realities of life were confronting several European countries. So rather than continue with th...
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That in itself is enough to bring the German deficit well down.
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Other kinds of restructuring expenditures were included. So there was an effort made to--
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The labor reform expenditures were also allowed to be taken out.
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Yes, the pension reform.
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Yes.
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In addition to sort of recognizing the inevitable, such as the German reunification piece, many of the other categories that were accorded new status I would describe as things that everybody agreed should be done. They agreed that it would be regrettable if, in the name of the Stability and Growth Pact, political pres...
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But they didn't accommodate greater cyclical divergence on their path.
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No.
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It really is accommodating structural changes that go in the wrong direction to the objectives even if those changes otherwise make some sense.
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Right. But by setting aside a class of expenditures that are going to happen, they have allowed the band, as defined, to embrace the countries. So the fact that they didn't change the cyclical thing doesn't matter so much anymore.
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PAYGO does not apply. [Laughter]
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That's correct.
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The basic purpose was to get them beyond the election. The presumption that everything is going to be fine beyond the election has no basis, because the next set of pressures will create different effects. What it demonstrates is that the general view that the system would hold together and work for the big countries i...
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Yes. But it seems to me what is flawed is not so much the Stability and Growth Pact as the Lisbon Agenda. Despite the rhetoric, the major countries in Europe have not taken steps to deregulate themselves, to become more efficient and more dynamic, and to do all the things that they pledged to do in Lisbon. Had they don...
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They're probably going to try to implement a new version of the Lisbon Agenda.
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Yes. And, at some level, Schroeder's initiatives have been appropriate and the right thing to do. But certainly there's not a broad consensus among the European population to go in that direction.
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Mr. Chairman, if I could just add a point on the market effect. As some of you know, Greece issued a 30-year bond recently at 26 basis points above the rate on Bunds, or about 1/2 point below the U.S. 10-year rate and about 100 basis points below the 30-year rate.
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Can we borrow from the Greeks? [Laughter]
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It's interesting, since they are at about double the 3 percent limit. So the markets are not punishing anybody for not complying.
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President Minehan.
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This is probably going on a little long, but I'll ask one quick question. I see that you have gone from a negative contribution to growth in the first quarter from equipment spending to a positive one. But in terms of the growth rate for the first quarter, you end up with a projection that's on the order of 10 percenta...
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The most significant component of the slowdown that we're projecting, as I indicated, is a substantial drop in purchases of light motor vehicles. We're basically trying to mimic the BEA [Bureau of Economic Analysis] in terms of calculating the share of light motor vehicle sales going to the business sector versus the h...
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So, do you think these other forecasts are not incorporating that?
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Well, I'm not quite sure. I don't want to impugn them that way. We could be wrong, obviously, about that component. The nontransportation component we have only a bit slower than it was in the fourth quarter of last year. So at this stage, we are just doing our best straightforward read of the incoming data. We are not...
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