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President Lacker.
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Thank you, Mr. Chairman. Fifth District economic activity appears to have expanded at a quicker pace from mid-August through mid-September. For the most part, production and sales in our area were not substantially affected by Hurricane Katrina. Shipments from District factories accelerated from August's modest upturn,...
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President Stern.
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Thank you, Mr. Chairman. Let me start with a few pertinent facts about the District economy, both pre- and post-Katrina. Overall, the District economy remains healthy. Employment is continuing to advance modestly; and in at least a few geographic areas, it seems likely that employment gains are being constrained by a l...
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President Hoenig.
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Thank you, Mr. Chairman. There has been a lot of discussion on the national economy and Katrina, and I don't think I'll repeat that. But I would say that I am in agreement with the scenario the Greenbook has outlined here; we do expect a temporary slowdown in the economy this year and then a pickup next year and beyond...
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President Poole.
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Thank you, Mr. Chairman. I want to focus on a couple of anecdotal reports on the weak side of the projections going forward. But I don't want this to be misunderstood; the general tenor of reports I've heard is clearly on the positive side. I do want to say also that we seem to have merged the first and second go-round...
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President Pianalto.
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Thank you, Mr. Chairman. The contours of the economic effects of Hurricane Katrina that are laid out in the Greenbook baseline look about right to me. But in the aftermath of the hurricane, and with the fragility in the energy markets, I found myself focusing more on the alternative scenarios in the Greenbook. In the c...
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Vice Chair.
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Thank you, Mr. Chairman. The balance of evidence since our last meeting still supports, in our view, a reasonably positive outlook for output and inflation. If we look through, as we should, the transitory effects of Katrina and the reconstruction, and if we factor in what the futures market tells us about the expected...
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Governor Kohn.
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Thank you, Mr. Chairman. Like President Geithner and many others of you, I do view this as one of those rare situations in which we can truly say the outlook is more uncertain than usual. [Laughter] But that should not deter us from proceeding with our "measured pace" of rate increases. The pre-Katrina data themselves ...
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Governor Ferguson.
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Thank you, Mr. Chairman. Beyond the tragic and sobering consequences of Katrina that we saw, the effect of Katrina with respect to monetary policy I think has been to create greater uncertainty, not just about the near term but also the intermediate term. Katrina clearly has become more policy-relevant than the previou...
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Governor Olson.
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Thank you, Mr. Chairman. Dave Stockton's introduction today suggested that this Greenbook analysis was a combination of the use of judgment and models. And as I reviewed the input, I noted it reflects that combination. To wit, the Greenbook said that Katrina will restrain economic activity for the remainder of the year...
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Governor Bies.
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Thank you, Mr. Chairman. As many of you have already remarked, preparing for this meeting was a lot more challenging than preparing for other recent meetings. The economy was poised for strong growth in the third and fourth quarters before Hurricane Katrina. And the forecast that the staff has developed in the Greenboo...
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Mr. Reinhart.
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2 Thank you, Mr. Chairman. I will be referring to the material that Carol Low is now passing around. And out of deference to Governor Bernanke, I'm going to start reading before everybody has a copy of the material. As Dave explained, there is a lot going on underneath the newly revised green sheets, as the effects of ...
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Questions for Vincent? If not, I'll start. I think the interesting question we have to answer is this: If Katrina had done the destruction that it did without affecting energy prices, how would we view it? We've had over the post-World War II period innumerable supply-side shocks. I remember the very prolonged steel st...
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I support your recommendation.
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President Hoenig.
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Mr. Chairman, I support your recommendation. And having listened to your comments, I would like to invoke the central banker's prayer from Jackson Hole this year. It says, "Lord, if there be shocks, let them be varied and preferably moderate ones so that we can stress test our systems." [Laughter]
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Governor Ferguson.
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Mr. Chairman, I support your recommendation. I agree with you on the indeterminacy of the supply and demand considerations. And I think your analysis of the '70s and our understanding or lack of understanding of productivity growth at the time is important. I'll close with one other thing, the central banker's anxiety,...
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Governor Kohn.
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Thank you, Mr. Chairman. I support your recommendation. I'm not sure we're building a buffer here. I think this is a question of what we need to do. And to keep going, at least until we get some more clarification, I believe is the right thing to do.
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I support your recommendation, Mr. Chairman, and I agree with Governor Kohn that it is the right thing to do in spite of the greatly increased uncertainty.
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President Moskow.
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I support your recommendation, Mr. Chairman. And having lived through the '70s and played some part in economic policy in those days, I just remember that it was not pretty.
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Governor Olson.
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Mr. Chairman, I continue to support alternative A. I would emphasize, however, in any description of it that it is a vote for leaving the funds rate unchanged as opposed to a pause. Indeed, that is what the wording would say--that we deferred further policy firming in light of the uncertainties surrounding Hurricane Ka...
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Governor Bies.
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Mr. Chairman, I support the increase of 1/4 point today. I remain mainly concerned about the inflationary risk, and I think we need to continue on our path.
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President Pianalto.
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Mr. Chairman, I support your recommendation.
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President Guynn.
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Mr. Chairman, I support your recommendation. I have the same uneasiness I had at the last meeting--perhaps elevated this time--about one part of the statement. I'm not sure that the words about the inflation situation and the risks in the inflation outlook truly capture the tone of the discussion I heard in the last fo...
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Well, it will be reflected in the minutes, which are now coming out three weeks after the meeting.
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And that will help.
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President Santomero.
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I support your recommendation both in terms of the rate movement and the statement.
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Thank you. President Stern.
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I, too, support your recommendation, Mr. Chairman. I have some sympathy with your warning about the 1970s and the way things gradually kind of got away from us. Having said that, I'd like to think that we'll succeed in conducting policy in a more effective way this time around.
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I certainly hope so. [Laughter]
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Mr. Chairman, I retain my preference for no change but I note that the market has priced in almost a 100 percent probability of a 25 basis point increase today. However, it has reduced the fed funds trajectory in the future and, unless the statement and the minutes change the market's view, I think it's important that ...
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President Fisher.
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I support your recommendation for tightening. I still wish we would consider eliminating the words "measured pace." I like the last sentence in the first alternative that Vincent put forward as a substitute to that. I'd prefer adding that to alternative B without guidance. But if push comes to shove, I support you enti...
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President Minehan.
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I support your recommendation. I think it's the best way to manage the risks that we currently face. I agree with you that if in the future the downside risks predominate, there are ways to deal with that. Now, though, I think the risks to our credibility and to inflation expectations--in light of the various inflation...
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Vice Chair.
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I support your recommendation.
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Would you read the appropriate language?
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I'll be reading the directive wording from page 27 of the Bluebook and the assessment of risk from exhibit 6 in the material that was passed out. For the directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To fu...
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Call the roll, please.
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Chairman Greenspan Yes Vice Chairman Geithner Yes Governor Bies Yes Governor Ferguson Yes President Fisher Yes Governor Kohn Yes President Moskow Yes Governor Olson No President Santomero Yes President Stern Yes
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Okay. I request a recess and ask the members of the Federal Reserve Board to join me. [Recess]
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The Federal Reserve Board voted unanimously to approve the requests of the individual Reserve Banks for increases in the discount rate. Our next meeting is November 1. We are now well overdue for luncheon with Governor Bernanke, and I suggest we adjourn to Dining Room E.
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Good morning, everyone. Before we get started, I just want to thank you for what was an extraordinary evening for me and also a big surprise. I appreciate not only that all of you showed up but, as best I can judge, that virtually everyone else who was physically able to do so also showed up. So, it was great. On to of...
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1 Thank you, Mr. Chairman. The now lengthy period of tight spreads and low volatilities continued in the intermeeting period. That was despite some unexpected credit events, another hurricane, and increased talk about upside inflation risks. The top panel on page 1 graphs the 3-month deposit rate in black and the same ...
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Thank you. I notice that we still don't endeavor to calculate the implicit 2- or 5-year break-even inflation rates--subtracting out the implicit CPI forecast from what the futures markets are telling us about energy prices to get inferentially what the CPI ex food and energy would be if one presumes that the energy fut...
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I may be wrong, but didn't we do--
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We have a cottage industry, Mr. Chairman.
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I don't recall seeing any calculations recently.
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I think this question came up about a year ago, and Vincent was summarizing the work that had been done.
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What we do is take the energy futures curve, take the weight in the CPI--
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Yes, but I never saw the result.
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Actually, Governor Ferguson saw something very similar just this week.
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That still doesn't answer my question! [Laughter]
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I guess the answer is that you do have a need to know, and you will! [Laughter]
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Well, can you just give me a hint as to what I'm going to learn?
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In previous episodes, increases in spot oil prices had brought the spot rate well above the longer-ahead futures rate, which implied that market participants were expecting inflation compensation to be going down because of the anticipated decline in energy prices. Relative to those episodes, this time around the curve...
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Okay. Thank you. On page 2 in the upper left-hand chart, I notice that the relationship among these sovereign debt yields, which we've been looking at for a long time, have gradually morphed from fairly low correlation to extremely high correlation. Do we have any rolling correlation coefficients that suggest when that...
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You know, I haven't looked at the rolling correlation coefficients recently. Certainly, there have been episodes, going back at least a decade, when these rates moved very, very closely; 1994 was a period--
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For a while.
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Right. Then the correlation sort of breaks down and then it starts up again. I don't know if Karen knows more about a date, but over the past couple of years they have been moving pretty tightly.
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I would say that has been the case since moving out of the recession--since early 2003 or something like that. We benchmark this correlation from time to time. I don't know that we've done it quite as a rolling correlation but we easily could, and we will.
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You know, the rolling coefficient is a measure of the degree of globalization.
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It is. It's also, though, indicative of the nature of the shocks that are perceived by market participants. So, to the extent those are idiosyncratic to individual countries, it tends to cause the correlation to fall apart. To the extent they are perceived to be global, those rates move together. On top of that is the ...
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I've had the vague impression that it's been exceptionally tight over the most recent period, more so than I recall. This chart doesn't suggest spikes of any type, but it suggests just plain old-fashioned arbitrage. On the Brazilian and Colombian issuances you referred to, I presume these were issued in their local cur...
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Denominated in local currencies?
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Yes.
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The Brazilian issue was denominated in reals, but actually the payments will be in dollars. It's indexed back to reals, so the exchange rate risk is wholly with the investor.
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Why are they doing that? Why not just pay off in reals?
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Well, they are able to get a much more attractive rate. The spread that they're able to get--
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Do you mean the principal is guaranteed in dollars?
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The principal is repaid in dollars.
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You mean it's guaranteed in--
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No. The payment is in dollars.
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Okay.
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But it's indexed to the exchange rate.
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Wait a second.
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In other words, the flow of payments you receive is in dollars. When you get your money back, you will be paid dollars.
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For the old Brady bonds the principal was guaranteed in dollars. That is not what this is.
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That's right.
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Well, it's not clear to me why they are doing that. If you have a freely floating exchange rate--if I understand what you're telling me--the holder can just as easily get the payment in reals and convert it to dollars.
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For reasons that I can't fully explain, the spread that Brazil was able to get by doing it this way has been much tighter.
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