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fomc | 2,005 | So moved. | 3 |
fomc | 2,005 | Without objection, they are approved. Let's move on to the chart show presentations by Steve Oliner, Dave Wilcox, and Mike Leahy. | 29 |
fomc | 2,005 | 7 We have received a fair amount of data since we closed the Greenbook. Just this morning, BEA reported that real consumer expenditures, shown in the top left panel, were flat in May. This was actually a bit stronger than we had expected, but there was also a small downward revision to April. For the second quarter as ... | 926 |
fomc | 2,005 | As you know from the Greenbook and as is shown in the upper left panel of exhibit 4, the unemployment rate is currently just a tenth of a percentage point above our estimate of the NAIRU. To put the matter delicately, however, the most impressive aspect of our estimate of the NAIRU may be the imprecision of it: Accordi... | 3,073 |
fomc | 2,005 | We will now focus on a set of key financial issues for the outlook. Your next exhibit explores whether markets appear to have built in sufficient allowance for risk--in effect, taking yesterday's discussion of asset valuation to markets beyond housing. The top panel begins with the equity market, and plots the staff's ... | 1,784 |
fomc | 2,005 | The top left panel of exhibit 11 presents our outlook for foreign real GDP growth. We forecast total foreign growth to move back up this quarter from a soft first-quarter pace and to rise a bit further going forward. The pickup is modest and reflects our assessment of the balance between some opposing forces. On the on... | 1,954 |
fomc | 2,005 | The final chart displays your economic projections for 2005 and 2006. As shown in the top panel, the central tendency of your projections for the growth of real GDP this year came down slightly from the projections in February, while the central tendency of the projected rise in core PCE prices was revised up a bit. Th... | 169 |
fomc | 2,005 | On chart four, suppose we took the lower left chart, "Jobs Hard to Fill," as being representative not only of small business, but literally of the economy as a whole. Wouldn't that, in fact, be the best measure we could possibly get to determine the slack in the system? Wouldn't that be measuring it right at the point ... | 73 |
fomc | 2,005 | I think there would be something to be said for that. As I look at these indicators, I see profiles that look very similar across the six panels, and so-- | 34 |
fomc | 2,005 | Do they ever diverge significantly, as far as the signal they are giving? | 16 |
fomc | 2,005 | Well, our interpretation has been that the labor force participation rate, shown in the upper right panel, has been sending a little different signal from the unemployment rate over the last year or so. That the participation rate--whose sources we understand imperfectly-- declined suggests that there is a little more ... | 85 |
fomc | 2,005 | On exhibit 5, in looking at P&C compensation, it's not only that it surged at the end of last year, which we attributed largely to bonuses and the exercise of stock options, but it has surged really since the second quarter of 2004. Since that time the quarterly increases have been 6.0, 5.5, 10.2, and 6.3 percent. How ... | 106 |
fomc | 2,005 | As I look at the upper right panel, I see two indicators that seem to be swinging around each other. P&C comp per hour had been a little to the soft side of the ECI for a time and then it moved a little to the high side of that. I don't have a particular story for the change in the profile from earlier. | 70 |
fomc | 2,005 | Mainly it was the second and third quarters of last year that were significantly above expectations and, indeed, quite above the ECI. Yet I don't recall our attributing that to stock option exercise or anything like that. | 44 |
fomc | 2,005 | No. | 2 |
fomc | 2,005 | I assume it's not just benefits but wages and salaries also. | 12 |
fomc | 2,005 | I think that's correct. | 5 |
fomc | 2,005 | We didn't think at the time that we needed much special explanation because, as you can see in David's upper right-hand panel, the four-quarter change in comp per hour was still below 5 percent and it only edged a bit above the ECI. So, we didn't really see that as a divergence. As David noted, we went through a period... | 173 |
fomc | 2,005 | Now we have the April and May data. Roughly, what do they tell us about the second-quarter annual rate? | 24 |
fomc | 2,005 | Well, in a sense, we're carrying two sets of books. And this mystery isn't going to get unwound for quite some time because it won't be until August that the UI [unemployment insurance] data are incorporated for the first quarter, and that will give us the beginnings of a read on whether we were right or not. | 66 |
fomc | 2,005 | So, essentially, the BEA wage and salary data are merely extrapolations. Indeed, from an economic point of view, they don't really give us new evidence; they are just extrapolating the basic change. | 44 |
fomc | 2,005 | Our understanding is that they've taken down a wedge--to run off some of that--but we think it's going to come down a lot more in the final statistics. | 33 |
fomc | 2,005 | Yes, but that doesn't tell us anything. That just tells us what they are guessing at. | 19 |
fomc | 2,005 | That's exactly right. I have here the quarterly pattern that we have written down for comp per hour, and I'd be happy to give it to you. It's a little misleading because what we've done is assumed that that runoff is going to happen over the course of 2005. | 55 |
fomc | 2,005 | You actually have answered my question. You won't have any real new data until August. | 17 |
fomc | 2,005 | That's correct. That's when the UI data will be incorporated for the first quarter. | 16 |
fomc | 2,005 | Governor Gramlich. | 4 |
fomc | 2,005 | Sticker shock question: In the history of the world, has a country ever run a $1 trillion current account deficit? | 24 |
fomc | 2,005 | I don't think so. [Laughter] | 9 |
fomc | 2,005 | Is that your question? | 5 |
fomc | 2,005 | Yes. I didn't say it was heavy! [Laughter] | 13 |
fomc | 2,005 | That's called truly rhetorical. President Hoenig. | 9 |
fomc | 2,005 | I may be asking your question over again, Mr. Chairman, but I'm looking at exhibit 6--at the PCE projections and the explanations for why core PCE is increasing. I guess what you're saying is that these are the reasons why. Then, going back to your discussion of labor costs, there's no discussion of productivity. So, a... | 123 |
fomc | 2,005 | You're correct. In our analysis, these are the key drivers, in terms of the factors that are shaping the contour of-- | 25 |
fomc | 2,005 | Not compensation and not the possibility of productivity coming down and being less able to absorb that factor in the future? | 22 |
fomc | 2,005 | No, that's correct. In terms of the factors contributing to the deceleration in core PCE price inflation between 2005 and 2006, what I've shown here--energy prices, import prices, and these other relative prices that I've chosen to proxy by the intermediate materials prices--are taking off somewhere between 1/4 and 1/2... | 203 |
fomc | 2,005 | Part of what leaves me uneasy is that in the Greenbook the last several times we have recognized that PCE inflation has been higher than we thought it would be and we are projecting it to turn back down again. In this sense, there's a continuation of the view that these things are temporary and that they will back off ... | 68 |
fomc | 2,005 | This chart is trying to get at exactly that sort of iterative process of a futures market that, meeting by meeting, ratcheted up its expectation of oil prices, as illustrated in the upper right-hand panel. And yet, meeting by meeting, the futures market--and we along with it--figured that oil prices would level out fro... | 110 |
fomc | 2,005 | The way we handle the oil price is really a technical assumption. | 13 |
fomc | 2,005 | Futures prices of oil cannot move up at an exceptionally rapid pace and stay significantly beyond the cost of storage and interest because there's an arbitrage there that will convert the forward demand back to the spot demand. So, if you have a run-up in spot prices, it's almost never the case that the futures market ... | 82 |
fomc | 2,005 | I agree with that, but the profile of oil prices is markedly different now, with an extraordinary skyrocketing of the far-dated futures. One of the most amazing developments over the last-- | 38 |
fomc | 2,005 | I'm really surprised. I mentioned that in a speech recently; the spread between the six-year futures price and the spot price has closed. And no one has picked that up. It's unbelievable. | 38 |
fomc | 2,005 | It's illustrated in Mike Leahy's exhibit 15, on the chart in the middle left panel. There has been a marked change in the relationship between near-dated and far-dated futures. | 39 |
fomc | 2,005 | I get quoted on everything under the sun that is irrelevant, but that was a really meaningful insight and it got lost! [Laughter] Vice Chair. | 31 |
fomc | 2,005 | Let me just follow this conversation a little further. If I get this right, what is new in the forecast, based on this conversation today, is that you're anticipating a little more persistence in what we view as the underlying rate of the core PCE deflator. And it ends the forecast period higher than we previously expe... | 211 |
fomc | 2,005 | In part I'd answer that question by saying that I don't view our funds rate path as a prescription. We are not trying to convey to you what you should do. In our thinking about this, we were confronted with a couple of crosscurrents in the forecast this time around that led us just to leave the funds rate path unchange... | 281 |
fomc | 2,005 | If I understood the Bluebook discussion of this correctly, in that optimal control exercise, whatever its merits, with your assumption about the symmetrical tolerance or intolerance to deviation from your objectives, still you have the nominal funds rate going to 4 percent with an inflation objective assumption of 11/2... | 105 |
fomc | 2,005 | I think part of the purpose of putting that in the Bluebook was to suggest that if you in fact view your objective as 11/2 percent on core PCE inflation and you want to react in the way that optimal path suggests, you would need to be tighter than in the baseline assumption in the Greenbook. Those differences are prett... | 119 |
fomc | 2,005 | But are you assuming a higher implicit inflation objective in the way you think about the Greenbook construct? | 20 |
fomc | 2,005 | You could view that either as a higher inflation objective or, as I'm assuming, more patient monetary policymakers--a case in which you achieve that objective over a longer period of time. | 36 |
fomc | 2,005 | I wanted to ask a different question on the international side. Karen, on the external forecast, how much of a change is this view of where the current account-GDP ratio goes relative to your expectation six months ago or thereabouts? It seems to me that it looks slightly darker. | 57 |
fomc | 2,005 | I think it's the dollar. | 6 |
fomc | 2,005 | Yes, that's my point. Where do you expect it to stabilize now? | 15 |
fomc | 2,005 | The dollar? | 3 |
fomc | 2,005 | No. What happens to the current account if you project out a little longer than the forecast horizon you have now? | 23 |
fomc | 2,005 | Sticker shock, sticker shock, and more sticker shock. | 11 |
fomc | 2,005 | I know, but it crosses 8 percent and goes to what? | 14 |
fomc | 2,005 | It depends on how far into the future you want to go. It's an unsustainable path. | 19 |
fomc | 2,005 | Absent a dollar depreciation that's now probably on the order of 8, 9, or 10 percent, the deficit is going to steadily worsen. If the dollar were to start depreciating, that would slow the rate of deterioration. If the dollar depreciation that we put into the forecast were to get as high as 8 or 9 percent, that might p... | 76 |
fomc | 2,005 | One thing we can be sure of is that the value of the dollar will be worth 100 cents. [Laughter] David, do you contemplate that the end-of-month NIPA revisions could alter the intermediate history, which could have an effect on the forecast? | 53 |
fomc | 2,005 | At this point, obviously, what we don't know dwarfs by several orders of magnitude what we do know. We do know from the Annual Survey of Manufacturers that the M3 data probably overstated the growth rate of capital spending in 2003. That could be a source of downward revision. And the annual retail sales revisions also... | 133 |
fomc | 2,005 | Gross domestic income has started to run well ahead of gross domestic product. Is that something that is likely to be exaggerated or ameliorated? Do you have any notion of that at all? | 38 |
fomc | 2,005 | If I had to guess, I'd say ameliorated in the sense that in the last couple of quarters when that gap has gotten quite large, it was being driven by the very rapid gains in compensation per hour. Now, another reason for us to think that these increases are probably reflective of something like stock options is that if ... | 212 |
fomc | 2,005 | Even there, though, the timing within the year is very uncertain. We don't know how they parse it out across the quarters and whether it would line up tightly with the stock option story. | 38 |
fomc | 2,005 | President Poole. | 4 |
fomc | 2,005 | I want to take up the issue of oil sticker shock and particularly the distant futures prices. The revisions over the past 18 months or two years have really been extraordinary--essentially a doubling in the long-term price of oil. My impression is that the market revisions have been driven probably by upward revisions ... | 209 |
fomc | 2,005 | I think we're seeing attempts now in some parts of the Middle East, such as Saudi Arabia, to try to expand capacity for oil. As for these alternative sources, I don't know if we've reached the trigger points yet where expanding their production has become profitable. | 51 |
fomc | 2,005 | I understand that with alternatives like shale and that kind of thing. But how about the more conventional alternatives, which I guess would be coal, by and large? There must be expansion opportunities there; it's important for generating electricity. | 45 |
fomc | 2,005 | I'm not sure. | 4 |
fomc | 2,005 | To the extent that China's electricity system is a source of demand, China has a lot of coal reserves, whereas they have no petroleum reserves. So in principle they could expand their electrical capacity--which is obviously a big part of the infrastructure effort that's going to be necessary for China to keep growing--... | 220 |
fomc | 2,005 | What about on the demand side? What do those longer-run elasticities look like? | 17 |
fomc | 2,005 | One issue is the fact that some of these countries subsidize. That is, the price run-up to date has been passed through only partially to consumer demand in many of the emerging Asia countries. And as a consequence, some of these governments have had a big hit to their budget deficits because of these subsidies. Now, i... | 199 |
fomc | 2,005 | What would the demand elasticity be in the United States? We passed those through pretty quickly. | 18 |
fomc | 2,005 | I can't give you an actual number, but I'm sure in the longer run it's minus 1 or something like that. People will say that in the short run it's almost zero. I think even that is an exaggeration. You can always turn down the heat, or whatever. But I think you'd get a reasonable number like minus 1 if you looked over a... | 77 |
fomc | 2,005 | You think it's even as big as minus 1? Over the horizon here, these long-term futures--that's six years out--you'd probably get a good part of that over a six-year horizon, if it's viewed as a permanent-- | 48 |
fomc | 2,005 | We know from past history that the oil intensity of GDP stepped down in the period immediately following the oil price shock event, but it did not continue to improve continuously. That chart is very much like a step-function; most of the gains occurred early on when we first experienced the significant changes in rela... | 194 |
fomc | 2,005 | Governor Ferguson. | 3 |
fomc | 2,005 | I'll continue to plow that ground just for one minute. I'm struck a bit by the fact that the stories on the run-up in commodity prices and oil prices are all about China and India. You have a forecast here where China's growth falls off fairly dramatically. Growth in the rest of the world I would describe as maybe more... | 156 |
fomc | 2,005 | In part it is the supply response in some of the metals and presumably in food and other-- | 19 |
fomc | 2,005 | You've told me in the past that the supply response in copper tends to take a year or two. The price has not been high enough necessarily, but one would have thought we'd start to see some supply response, getting these prices to come down even more quickly. | 52 |
fomc | 2,005 | These forecasts are based on the futures quotes. There may be some differences in view between our forecast for China compared with what the futures markets are thinking. They might be a bit more upbeat about the outlook for China. But we do have a little downward tilt here, and I think it's consistent with some slowin... | 64 |
fomc | 2,005 | Yes. And remember, what we've done is just decelerate foreign activity; and we've hugely decelerated commodity prices. | 25 |
fomc | 2,005 | I think that's a fair point. | 7 |
fomc | 2,005 | Governor Bies. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. Steve, I want to ask some questions about your exhibits 8 and 9, having to do with the high-yield debt market. If I put together the middle left panel of exhibit 8 and the middle right panel of exhibit 9, I begin to get worried about whether the market is pricing for risk appropriately. The upp... | 192 |
fomc | 2,005 | Earlier this year, we were really concerned that the market was underpricing risk. If you look at the panel you referred to at the middle left of exhibit 8, when the gap narrowed to its narrowest point there, we really did not understand what had caused that. Our view is that defaults are going to rise somewhat. You ca... | 251 |
fomc | 2,005 | Thanks. | 2 |
fomc | 2,005 | Mr. Chairman, could I just correct something that I said earlier? On the revisions to GDP, we have received data that we think will ultimately result in a downward revision to E&S spending, but it's not clear that they actually are going to get incorporated in the annual revision that comes out this year. Evidently the... | 107 |
fomc | 2,005 | President Minehan. | 4 |
fomc | 2,005 | I think I'm going to cede my time, Mr. Chairman. | 14 |
fomc | 2,005 | President Santomero. | 5 |
fomc | 2,005 | I found the exhibit 6 discussion on the evolution of the Greenbook forecast interesting and informative. There's one thing that I'm still a bit puzzled by as we look forward from here. The forecast has a gradual deceleration of price increases between this year and next. At least some of that is a deceleration associat... | 99 |
fomc | 2,005 | Is the question about the import prices or about going from import prices to the inflation measure? | 18 |
fomc | 2,005 | The import prices. | 4 |
fomc | 2,005 | Well, our forecast, obviously, is for import prices to decelerate. That's based on forecasts that the dollar will flatten out, roughly, or decline only moderately going forward, and that commodity prices will also be relatively flat. So, to the extent you put a lot of confidence into those forecasts, I think you could ... | 81 |
fomc | 2,005 | Okay. Let me put it more pointedly. Do you put much trust in those? I can do the arithmetic, but do we believe it? | 30 |
fomc | 2,005 | I think forecasting asset prices has a high standard error around it; it's not a very precise art. | 20 |
fomc | 2,005 | This is really an extension of the first point that President Geithner made--that the context in which we're making these policy decisions is a framework based on a forecast of inflation. To the extent that we're getting this--I'll call it exogenous--decline in the inflation pressures associated with imports, that says... | 144 |
fomc | 2,005 | But the risk that you are pointing to, President Santomero, is illustrated in the middle right panel. That shows the step-up from the trajectory in the December 2003 Greenbook (the dotted blue line) to the December 2004 Greenbook (the dotted red line). Now, as it happens, the revision to the outlook since December 2004... | 185 |
fomc | 2,005 | The dollar could well continue up. Much of this more favorable outlook owes to the fact that the dollar, on balance, has risen rather significantly over the course of 2005; and indeed it has risen rather significantly over the past six weeks. In looking at the global economy and listening to the chatter out there, I th... | 172 |
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