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fomc | 2,005 | Leaving it at the end? | 6 |
fomc | 2,005 | Yes, leaving it at the end. That is the policy-significant story here, and I think that picks up the general tone around the room. So I'm weighing in fairly strongly on not making this change. I understand the grammatical point that President Poole made. But in terms of the policy message, if we end with "pressures on ... | 123 |
fomc | 2,005 | Governor Bies. | 4 |
fomc | 2,005 | Mr. Chairman, I support your recommendations. I really like paragraph four the way it is for the same reason Governor Ferguson just mentioned. I want to leave people with the message that inflation pressures are out there and are elevated, and I want to make sure that that message gets through. So I rather like it the ... | 78 |
fomc | 2,005 | Vice Chair. | 3 |
fomc | 2,005 | I support your recommendation, and I agree on the arguments made in favor of retaining the structure of paragraph four. Let me just add one argument to those already made. Bill, if we look at your structure in terms of what we would be changing from the June language in section four, all we'd be doing is adding the tho... | 149 |
fomc | 2,005 | I must say that I was also pushing toward somewhat better syntax and a little better use of the English language. The trouble, unfortunately, is that the only way to do that is to move the last phrase up, and that creates policy issues in my judgment. So I'd prefer to have poor but clear language [laughter] because we ... | 135 |
fomc | 2,005 | I'll be reading the directive and the risk assessment from page 23 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 condit... | 165 |
fomc | 2,005 | Call the roll. | 4 |
fomc | 2,005 | Chairman Greenspan Yes Vice Chairman Geithner Yes Governor Bies Yes Governor Ferguson Yes President Fisher Yes Governor Kohn Yes President Moskow Yes Governor Olson Yes President Santomero Yes President Stern Yes | 40 |
fomc | 2,005 | Thank you. Shall we have a short recess so that the Board members can convene and address the issue of the discount rate? [Recess] | 30 |
fomc | 2,005 | The Board of Governors unanimously approved the requests of all 12 Reserve Banks for an increase in the discount rate of 25 basis points to 41/2 percent. Our next meeting is Tuesday the 20 of September. But in the interim we will all meet, I gather, at Jackson Hole for thoughtful discussion and perhaps some golf and te... | 74 |
fomc | 2,005 | Good morning, everyone. We'll start with Mr. Kos. | 12 |
fomc | 2,005 | 1 Good morning, Mr. Chairman. Thank you. I'll be referring to the charts that are in front of you. During this intermeeting period, market participants were principally occupied with the economic impact of Hurricane Katrina and alternating their judgment as to whether the growth or inflation effects would dominate. The... | 1,982 |
fomc | 2,005 | There is obviously some perceived advantage in taking delivery of the securities rather than just going into the market and purchasing them. The sort of non-conspiratorial view is that a lot of people think something is going on and, therefore, they might as well sit and accept delivery even though that was not their i... | 95 |
fomc | 2,005 | Well, I'll let Bob Elsasser fill in some texture here. Certainly, larger investors are more active in the futures market and are using those contracts in more ways than they had, say, 10 or 15 years ago. So the prospect of a-- | 52 |
fomc | 2,005 | Is this Fannie and Freddie disproportionately by any chance? Obviously, they do use the securities. | 19 |
fomc | 2,005 | Yes, but I'm not specifically referring to them. So, as these larger entities have become more active in the futures, for them the prospect of buying a multibillion dollar position through the futures market is not daunting. It's something that they're easily capable of doing, whereas probably 15 or 20 years ago taking... | 200 |
fomc | 2,005 | Instead of a scheduled close-out. | 7 |
fomc | 2,005 | Yes. Now, there were some other dynamics this summer that I don't want to get into having to do with position limits that the Board of Trade instituted, which affected the situation at one point. But on the whole, yes, if you had intended to close out a position, you might be more inclined to take delivery if you obser... | 72 |
fomc | 2,005 | Another point I would make, Mr. Chairman, is that the contract allows you to make delivery of any securities maturing between 61/2 and 10 years. The Chicago Board of Trade has a set of adjustment factors that are appropriate when the yields are at 6 percent. And if the yield curve were flat at 6 percent, any of those s... | 209 |
fomc | 2,005 | Yes. I'm rather fascinated by the open interest being higher, as you get close to the end of the contract, than the total stock of the issue. That's the counterpart of what used to be the old corn squeeze. The same guys are doing it-- | 51 |
fomc | 2,005 | Right. And they used to trade May Maine potato futures when there were no potatoes in Maine in May. [Laughter] | 25 |
fomc | 2,005 | They did that all the time. [Laughter] | 11 |
fomc | 2,005 | Is this what the Treasury is looking at? Or is it something else that the Treasury has its task force studying? | 23 |
fomc | 2,005 | Well, the Treasury did issue a large-position report request last week for this particular security. So, those with large positions will have to report that by a particular date--it's sometime this week. | 39 |
fomc | 2,005 | So they are looking at this situation? | 8 |
fomc | 2,005 | I know that they're concerned about the situation, and there was certainly a signaling effect perceived by the market when the Treasury issued that request for large-position reports. We saw some decay accelerating right after that request, so perhaps some of the longs took that as a signal that they should reduce thei... | 59 |
fomc | 2,005 | Further questions? If not, would someone like to move the ratification of the transactions by the Desk? | 21 |
fomc | 2,005 | So moved. | 3 |
fomc | 2,005 | Without objection, they are approved. We now move on to the economic situation. Karen Johnson and David Stockton. | 22 |
fomc | 2,005 | Thank you, Mr. Chairman. Spot prices for crude oil were especially volatile over the intermeeting period, as uncertainty about the consequences of possible hurricane damage, along with other risks, drove up prices before Katrina hit the Gulf shore and as evolving expectations of the near- and medium-term implications o... | 909 |
fomc | 2,005 | In adjusting our forecast of the U.S. economy to incorporate the consequences of Hurricane Katrina, we were forced to rely more on economic judgment and assumption than our models. Perhaps that is just as well, given what I heard last month in Jackson Hole. At various turns, the staff was criticized for building models... | 3,149 |
fomc | 2,005 | Questions? President Lacker. | 6 |
fomc | 2,005 | Yes. I want to ask you about the effects of Hurricane Katrina on output and potential output. You read off a list of effects. Obviously, there has been some destruction of capital stock. Workers have been displaced; there has been a break in relationships between them and their employers, and obviously there will be so... | 121 |
fomc | 2,005 | The part that we actually incorporated into our estimate of potential output was the destruction of the capital stock--the $75 billion drop there. That is just such a tiny fraction compared to the overall size of the capital stock that, in fact, it rounded to a tenth on the capital intensity contribution but rounded to... | 331 |
fomc | 2,005 | Well, the reason I ask has to do with high-frequency movements. You used the word "structural" there, which tends to be associated with slowly moving trends--variables with bars over them or that kind of thing. And in an instance like this, I think a key factor is the extent to which some high-frequency or rapid change... | 170 |
fomc | 2,005 | Obviously, in terms of the transmission of that output gap in thinking about inflation, our Phillips curve in essence is so flat and that slightly higher output gap is so briefly encapsulated in the forecast that it doesn't really have any noticeable effect. But we did think about how we should communicate the conseque... | 105 |
fomc | 2,005 | President Moskow. | 4 |
fomc | 2,005 | I wanted to ask you a question about inflation expectations, which is a key part of the forecast, as you described. In the Greenbook, you say that you assume "surging energy costs and other factors have caused inflation expectations to drift up since 2003." And then you have the alternative scenario in which inflation ... | 123 |
fomc | 2,005 | In terms of how the price forecast has evolved over the last couple of years, the single biggest factor is the higher energy prices. But we've also had to contend with an acceleration--of modest dimension, but an acceleration--in import prices and an increase in other materials prices. So, in terms of decomposing the s... | 348 |
fomc | 2,005 | So you have core inflation actually going up next year, in 2006, and then it comes down a bit in 2007. | 28 |
fomc | 2,005 | Core PCE goes up to 21/4 percent next year and then comes back down to 2 percent, as the indirect effects of lower energy prices begin to work through. And then we'd probably see some beneficial effects in alleviating inflation concerns--this would be beyond the forecast period--which would help push inflation down a b... | 68 |
fomc | 2,005 | Thank you. | 3 |
fomc | 2,005 | I know we use the various measures of inflation expectations as a critical variable, which presupposes that the market has a superior capability of anticipating change than normal forecasting procedures. The mechanism, as you point out, through which we think inflation expectations largely reflect themselves in higher ... | 106 |
fomc | 2,005 | Surprisingly, or at least surprisingly to me, the Michigan survey has had a reasonably decent record over many years--better than you might think. | 29 |
fomc | 2,005 | Do you mean on their long-term inflation forecast? | 10 |
fomc | 2,005 | Well, on the year-ahead inflation forecast. The longer-term forecast actually has not been around long enough to develop a lot of observations on that. The evidence is mixed when you more or less throw all of the determinants of inflation into an equation. In fact, it's a matter of some controversy among the researcher... | 92 |
fomc | 2,005 | No. I wasn't referring to only the Michigan survey, but to all of the various measures we have of inflation expectations, including basically just the level of interest rates as such. What I'm trying to get at is that we make presumptions about the insight of markets into the future that none of us personally has. I'm ... | 111 |
fomc | 2,005 | Our indexed securities markets have not been around long enough to develop a really significant track record. I think the evidence on the indexed securities from other countries is that there is information content in those expectations, but I don't know what their general track record has been. | 51 |
fomc | 2,005 | Yes. They have been around the longest in the United Kingdom and in the early years indexed securities were very clearly held in response to the tax incentives. So there was a certain disconnect; there wasn't a notion that people who viewed those expectations as differing from their own would trade and the market would... | 103 |
fomc | 2,005 | There are two aspects of the TIPS market that make it hard to do such comparisons using those securities. The first is that we think there were significant liquidity effects, as in the United Kingdom, early on. Our estimates of the liquidity premium have come down a lot. That is, TIPS were a real bargain in the first t... | 165 |
fomc | 2,005 | Several years ago I recall that we ran a correlation with the gold price against levels of inflation. We actually came out with some forecasting capability. Has that been rerun in recent years? | 37 |
fomc | 2,005 | Not by us. MR. STOCKTON: Not by me. I think we did that at your request. [Laughter] And we were not so convinced by the evidence that we've maintained that particular series for forecasting. | 44 |
fomc | 2,005 | I think you actually alternated your requests--asking each one of us in turn--and we haven't updated that in a long time. | 27 |
fomc | 2,005 | The problem is that it kept coming out, for reasons I can't understand, with some information capability. The reason I raise it, as you know, is that we have a big, fat spike here, and I don't know what to make of it. | 51 |
fomc | 2,005 | Yes, a 17-year high. I volunteer to run the gold price. [Laughter] | 20 |
fomc | 2,005 | Provided that you don't tell anybody you're doing it! | 10 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | Governor Ferguson. | 3 |
fomc | 2,005 | Two points--a comment and a question. I'm actually somewhat surprised at the answers you got on your last question, Mr. Chairman, because staff members from both R&S [Research and Statistics] and Monetary Affairs did a series of memos for me on just this question, and I talked about the results at the last meeting. We ... | 307 |
fomc | 2,005 | Indeed, we did not get as much downward revision as we were expecting and, in essence, we built into this forecast more persistence to the level of compensation. But the growth rate of compensation as we moved into this year still looks like a big spike, and the growth rate going forward hasn't been that much higher. S... | 206 |
fomc | 2,005 | Great. Thank you. | 5 |
fomc | 2,005 | I think the ECI is a very interesting issue. Each March, as I recall, we get data on actual dollar amounts of compensation of the various types that are in the ECI. And I believe we used to take the March data year-on-year and try to determine what part of the ECI was a mix change. In view of the quite extraordinary di... | 140 |
fomc | 2,005 | I don't recall whether the ECI data, when we looked at it this spring, actually resolved the tension between the various measures. David Wilcox indicates that it did not. Okay. So we have looked at that, but-- | 46 |
fomc | 2,005 | It is conceivable, for example, that the March compensation data in this series actually show the same pattern as the total, which would imply a very significant internal shift change. And that would be a fully comprehensible explanation because in the past they have not been all that close | 54 |
fomc | 2,005 | Well, when we looked at it, that didn't in fact resolve the tension between them. | 18 |
fomc | 2,005 | So we didn't learn anything from there. President Fisher. | 11 |
fomc | 2,005 | Mr. Chairman, I have two questions. One is to Karen with regard to the energy futures markets. Have we seen any change in the dynamics of those markets during the trading activity--higher numbers of contracts or size changes--from what we saw pre-Katrina? | 54 |
fomc | 2,005 | I have not looked at that enough in the last few days to give you an answer to your question. There have been, obviously, over the past year or more, periods of time in which the nature of trading in the energy futures market seemed to be evolving. Indeed, energy futures came to be thought of as an asset class for whic... | 437 |
fomc | 2,005 | The reason I'm curious about this is because I think we have been struggling with trying to determine what the speculative element is in those markets. Clearly, those who did speculate for whatever reason on an event, such as the one you just mentioned, have been rewarded. But sometimes the complexion of those people w... | 125 |
fomc | 2,005 | We do know something. We know that subsequent to Katrina the noncommercial interests are net long and the commercial interests have turned net short. | 27 |
fomc | 2,005 | Yes. | 2 |
fomc | 2,005 | That in a sense gives you some speculative suppression because they're already out. And the question is the big surges which, as you know quite well, occur when somebody is short and they cover it and they go long. Currently they're already long. So it may be that part of the pressure is out of this market, although th... | 149 |
fomc | 2,005 | Again, as we talked about a couple of weeks ago, the point is the volatility--not so much the direction--and yesterday reinforced that concern. I'm just trying to get a sense of these dynamics. | 41 |
fomc | 2,005 | Today the gasoline price I last saw on the spot market, after being up over 20 cents yesterday, was down 10 cents. Today it's fairly stable. | 32 |
fomc | 2,005 | My other question is about the $85 billion fiscal stimulus assumption. Is that based on rational expectations of, say, the women and men who sit around this table? Or is it based on some soundings of the politicians on Capitol Hill? What is the source of the $85 billion figure? | 59 |
fomc | 2,005 | I think it was a little bit of both. As I indicated, the scale of that package we thought would be sufficient in some sense, given our estimates of the amount of damage that has occurred, to provide both the wherewithal to fund substantial amounts of the rebuilding and to provide significant offsets for income losses t... | 318 |
fomc | 2,005 | Thank you, Mr. Chairman. | 7 |
fomc | 2,005 | Vice Chair. | 3 |
fomc | 2,005 | Karen, do we know anything about the remaining capacity--or perhaps I should say, the will and capacity--of those other countries that have substantial stocks of refined products to release them to us if we had another significant supply shock that affects refined product capacity? | 51 |
fomc | 2,005 | Well, I can't speculate on how the domestic politics of this would play out in some of those countries. The IEA [International Energy Agency] authorized the sale of 60 million barrels from the strategic reserves of its members--30 million from us and 30 million from the others. Most of what we were going to release fro... | 563 |
fomc | 2,005 | President Santomero. | 5 |
fomc | 2,005 | David, I want to talk a little bit about how the Board's modeling incorporates higher oil prices on output produced elsewhere and imported into the United States. Is it just through import prices alone? The reason I ask is that we've spent a lot of time talking about the fact that higher energy costs haven't really imp... | 192 |
fomc | 2,005 | Well, regrettably it's not David's problem. It's mine. [Laughter] | 17 |
fomc | 2,005 | Maybe we'll get two answers! | 6 |
fomc | 2,005 | Let me take it in two halves. I'll talk a little about global energy use, and then we'll come to the import price part. We model energy demand, energy consumption, energy production, and the implied change in inventories on a global basis. And we do it using all of the information we can muster. But it is understood by... | 1,316 |
fomc | 2,005 | Other questions? If not, who would like to start? President Moskow. | 16 |
fomc | 2,005 | Thank you, Mr. Chairman. Overall, the fundamentals in the Seventh District continue to improve, although we are still underperforming the national economy. Prior to Katrina, most of our contacts thought that their businesses were expanding at rates consistent with the long-run trends in their industries. One exception ... | 735 |
fomc | 2,005 | President Guynn. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. Obviously, our Atlanta Bank's attention these past three weeks has been riveted on Hurricane Katrina and its aftermath, because of both our operational responsibilities in the areas affected by the storm and our concerns about the welfare of our New Orleans staff. In addition, we have been tryi... | 1,712 |
fomc | 2,005 | President Santomero. | 5 |
fomc | 2,005 | Thank you, Mr. Chairman. The Third District economy continues to expand at a moderate pace. Consumer spending for general merchandise has edged up. Retailers report that back-to-school shopping got off to a slow start in August, but attributed it to exceptionally warm weather, which hindered the sale of fall merchandis... | 1,507 |
fomc | 2,005 | President Fisher. | 3 |
fomc | 2,005 | Mr. Chairman, the Texas economy is faring better than the national economy. Pre-Katrina we saw very strong evidence of that in all nine of what we call our super sectors in the economy--including, by the way, the information and telecom sectors, which suffered serious setbacks in the bursting of the dot-com bubble and ... | 1,992 |
fomc | 2,005 | President Yellen. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. It goes without saying that the devastation caused by Hurricane Katrina has elicited a deep sense of empathy in our District. In terms of the economic effects, we're paying special attention to energy and international trade. So far, at least, the effects on the Twelfth District economy appear ... | 1,325 |
fomc | 2,005 | President Minehan. | 4 |
fomc | 2,005 | Thank you very much, Mr. Chairman. For the past couple of meetings I've been reporting a lull in economic activity in New England, with little employment growth and muted readings on confidence. Perhaps it was the weather or the impact of the Pentagon's base realignment and closure (BRAC) proposals on fragile labor mar... | 2,122 |
fomc | 2,005 | Okay. Shall we break for coffee? | 8 |
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