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fomc | 2,005 | Good morning, everyone. Mr. Kos, will you start us off, please? | 17 |
fomc | 2,005 | 1 Thank you, Mr. Chairman. I'll be referring to the handout that is in front of you. With the year-end approaching, I thought I'd look back at 2005 a bit. One of the more surprising market developments has been the steady--if low-key--appreciation of the U.S. dollar. That strength is all the more surprising after the d... | 2,094 |
fomc | 2,005 | With respect to your yield curves on page 2, implicit there are three observations from which you could presumably get what you're trying to get at, namely, some form of weighted interest rate differential for the three observations. These do move the exchange rate. What happens if you take this back in time? Is there ... | 69 |
fomc | 2,005 | I didn't look at it that closely. I suspect that if one looks at the relationship over a long enough period, probably not a whole lot. That's a suspicion. | 33 |
fomc | 2,005 | I thought we found approximately zero. | 7 |
fomc | 2,005 | This is a longstanding paradox in international economics. When you run uncovered interest parity and embody the forward rate as the expected future spot rate, you actually get the coefficient with the wrong sign in those regressions if the time series is long enough. And you never get it to confirm interest rate diffe... | 118 |
fomc | 2,005 | Well, this is a very interesting chart, and I like the colors. But what does it tell us? [Laughter] | 26 |
fomc | 2,005 | Well, there are times when interest rate differentials seem to be the right story, and this is one of them. | 24 |
fomc | 2,005 | I do suspect that the price of pork bellies on occasion--[Laughter] | 17 |
fomc | 2,005 | In defense of this chart, let's just say that there are also theoretical reasons why at times there is this relationship. | 23 |
fomc | 2,005 | Then there's a question of whether the theory has any fact behind it. | 14 |
fomc | 2,005 | We need to believe in something! [Laughter] | 11 |
fomc | 2,005 | Anyway, let me move on to my second question. You mentioned with regard to the performance of equity markets that on the bottom of page 3, if you took the S&P exchange-rate-adjusted, it would look more like the rest. But you already do that when you're showing everything in U.S. dollar terms. | 65 |
fomc | 2,005 | That was my point. I'm sorry, I was not clear. My point was that the S&P looks as if it underperformed the others, but when you look at it in common terms against the dollar, the S&P doesn't quite look like the laggard that it does in local currency terms. | 60 |
fomc | 2,005 | Okay. President Poole. | 6 |
fomc | 2,005 | You commented on currency growth slowing down as a consequence of domestic issues, but is it still true that about half of our currency is held abroad? Probably a lot of it circulates in places like Russia that have been unstable. So, one explanation could be that there's a growing stability in some of these areas that... | 84 |
fomc | 2,005 | Yes, that's a good point, and we've had that discussion here in the past. In fact, the estimates are that two-thirds of the currency is overseas. | 32 |
fomc | 2,005 | Two-thirds? Okay. | 5 |
fomc | 2,005 | We have good data on shipments. The shipments data say that the currency is coming back. What we don't know is how much is going out by other means, whether legal or illegal, through things like remittances, for example. If one looks at the other indicator that is used, which is the number of $100 bills issued, and mak... | 150 |
fomc | 2,005 | In terms of the seasonal? | 6 |
fomc | 2,005 | In terms of the seasonal, yes. | 8 |
fomc | 2,005 | I might add, President Poole, that we do make estimates of the growth rate of the domestic component as well as the growth rate of the foreign component. According to our estimates, the deceleration over the past several years has occurred in both components. But we estimate that growth for the domestic component would... | 140 |
fomc | 2,005 | Further questions? If not, Vice Chair, would you kindly make the appropriate motion? | 17 |
fomc | 2,005 | So moved. | 3 |
fomc | 2,005 | Without objection, the transactions of the Desk are approved. Mr. Stockton. | 15 |
fomc | 2,005 | Thank you, Mr. Chairman. In the spirit of the season, I am tempted to report that I bring you great tidings of comfort and joy. However, this is, after all, the Federal Reserve, so it is probably more appropriate to simply note that tidings have improved modestly over the intermeeting period. While not quite in the mir... | 2,670 |
fomc | 2,005 | This is the time of year when folks young and old look forward to receiving a pleasant surprise or two--and not necessarily something that can fit inside a single stocking. We in the International Division have found ourselves pleasantly surprised by the strength of global economic activity during the third quarter, wh... | 1,123 |
fomc | 2,005 | This is Comedy Central! [Laughter] I have the impression, and I don't know whether the hard data actually confirm it, that the emerging countries, adjusting for policy, politics, history, whatever, seem to be doing a good deal better than one ordinarily projects. The EMBI spread has continued to come down through all s... | 185 |
fomc | 2,005 | Well, two or three things come to mind. No one of them alone would seem to explain it, but in conjunction they may be a partial answer to your question. One is that following the Asian financial crisis, and no doubt in part in response to what has been happening in the United States, particularly since say, '95 or '96,... | 346 |
fomc | 2,005 | Is there considerably more exchange rate flexibility now? | 9 |
fomc | 2,005 | Well, most of their exchange rates are floating, yes. | 12 |
fomc | 2,005 | Yes, that's what I'm saying. | 7 |
fomc | 2,005 | Yes. So very few are trying to peg to an overvalued exchange rate. Even a country like Malaysia gave up on its pegged exchange rate. So the floating rates have certainly improved the situation. But, you know, the peso and the real are strengthening vis-a-vis the dollar. So it's not mercantilist. It's not that these cou... | 332 |
fomc | 2,005 | Well, that's actually a fairly encompassing explanation. It implies that the lessons from 1998, when they were trying to fund in dollars and lend in the domestic currency--trying to unwind the rules of accounting, which got them all into very serious trouble--have been learned, essentially. | 57 |
fomc | 2,005 | There are still shortcomings, no doubt. It's still the case that Asian market capitalism is not Anglo-Saxon market capitalism. And China could still find that the enormous task it has set itself of changing that economy at a very rapid pace could run into troubles. These are not guarantees, but I think it's in some sen... | 126 |
fomc | 2,005 | President Santomero. | 5 |
fomc | 2,005 | David, could you give us a risk assessment on your consumer spending forecast? In 2006 and 2007, you have consumer spending growth of 31/2 percent, while the housing market cools and savings are accumulating. Would you just comment on how comfortable you are with that forecast? You made reference to it in the formal co... | 88 |
fomc | 2,005 | Well, I'm certainly uncertain about it. [Laughter] There's no doubt about that. But I actually see some risks on both sides of that forecast. On the upside, we are banking on a rather steep increase in the saving rate over the next two years. If our large-scale quarterly econometric model wants to extend the surprising... | 217 |
fomc | 2,005 | President Poole. | 4 |
fomc | 2,005 | I want to go back to the conversation with Karen. It seems to me that it would be helpful in the Greenbook to have much more analysis of the capital account than we do. In the Greenbook Part 1, there's a brief mention--you repeated it now--of the growing current account deficit. And I think we all understand that thing... | 354 |
fomc | 2,005 | Just as a quick answer, we have put assumptions into the Greenbook about the size of those capital flows, as a financing of our deficit. They don't influence the current account because the earnings on U.S. investments abroad are booked as occurring on a flow basis--when they happen--whether they are repatriated or not... | 310 |
fomc | 2,005 | My plea, obviously, is not so much about that specific event, but about the analysis of the capital account in general, because I think it really does make a difference how much of the capital flow is direct investment. And what's going on there I think is very important for understanding-- | 57 |
fomc | 2,005 | I certainly don't dispute that it is useful to know things like the amount of private versus official financing, and the nature of some of the flows, and so forth. But let me caution you that, in the end, the actual data recorded for capital flows will conform to the current account balances. There are certain market e... | 137 |
fomc | 2,005 | We will certainly take on board your recommendation to expand more of our analysis of the aggregate supply side. I would just say that this is an area where, in the past several years, we have made very significant changes in the underlying structure of the way we've produced the forecast. We present a great deal more ... | 230 |
fomc | 2,005 | President Fisher. | 3 |
fomc | 2,005 | Very quickly, on the Chairman's question to Karen. Clearly, there is virtue to massive competition. My most delicious irony is the fact that similarly dated Vietnamese debt now trades on a price basis richer, and on a yield basis lower, than that of Ford Motor Company. [Laughter] It wasn't too long ago that we were kil... | 312 |
fomc | 2,005 | President Minehan. | 4 |
fomc | 2,005 | Well, at the risk of going back into a discussion that I think President Santomero began and President Poole picked up on, I was struck by the slow pace of hiring that is in your projection. You have job gains going from 85,000 a month in the second half of next year to 50,000 per month in 2007. Having come through the... | 205 |
fomc | 2,005 | Well, I'll just add a couple of further comments that relate to your concerns. One is that, given our forecast of labor force participation--which is pretty mild, as you know--we think you should be lowering your sights as to what the underlying trend employment growth would be on the establishment survey. We're now pu... | 76 |
fomc | 2,005 | To keep pace with the growth in the labor force. | 11 |
fomc | 2,005 | To keep pace with our slight downward trend in labor force participation. So if we're right about that--and as you know, there is considerable uncertainty about that piece of the forecast--then you're going to have to start thinking of 90,000 as a pretty good number. Now, we're actually able to manage above 90,000 over... | 225 |
fomc | 2,005 | Right. | 2 |
fomc | 2,005 | And we think that shift would have a small negative effect for aggregate demand. The negative effect is not as big as you might imagine because, obviously, to the extent that the income distribution is going toward capital, the stock market would be strong, so the wealth effects on consumption would be a little larger ... | 107 |
fomc | 2,005 | Yes. I wondered about that as a downside risk. The numbers jumped out at me, even recognizing your take on labor force participation. Thank you. | 30 |
fomc | 2,005 | President Lacker. | 4 |
fomc | 2,005 | I share President Poole's longing for more understanding of the productivity forecast. My understanding is that what you call "structural" is essentially a moving average. I'm interested for this forecast, since there is such a big markup in that, to know the extent to which the markup in the structural productivity ou... | 114 |
fomc | 2,005 | I'd be happy to, if you're really willing to listen to it! [Laughter] | 18 |
fomc | 2,005 | If it's too much, we could do it offline. And more broadly, I'm interested in understanding the framework you have for forecasting this. It's not clear how that works. If there is a memo or paper that you could refer me to that laid out all the machinery, I'd really appreciate it. | 59 |
fomc | 2,005 | We'd be happy to do that as well. In principle, the upward revision in our forecast for structural productivity growth this time was due to two factors. One was that productivity was a lot stronger than we thought. But it wasn't just that productivity was stronger; so it's not just this moving-average error term. It's ... | 502 |
fomc | 2,005 | Okay. If I could just follow up for a second: In the late '90s, your forecast of productivity growth seemed to display a cyclicality--almost a responsiveness to recent productivity growth--that in hindsight took it up above where productivity growth came in and then down below it. Are you worried about the sensitivity ... | 70 |
fomc | 2,005 | Well, the answer to that question is yes. [Laughter] But actually I'm not terribly worried that we're doing that in this kind of filtering, which uses the structural model and some statistical filters. We are downweighting the most recent observations because they haven't been through annual revisions. And there are pl... | 101 |
fomc | 2,005 | Okay. I didn't realize that. Thanks. | 9 |
fomc | 2,005 | Any further questions? If not, before we do the roundtable, let me reiterate something that I think has been communicated--namely, that Brian is going to discuss in some detail some of the back and forth that has been occurring here in recent days on the language of the statement. So please abstain from commenting on t... | 95 |
fomc | 2,005 | We're a resilient group, Mr. Chairman. [Laughter] We don't get discouraged easily. Developments in the Seventh District have been mixed. The data released since our last meeting indicate that manufacturing expanded at a moderate pace, while housing slowed and employment continued to be weaker than the national economy.... | 1,120 |
fomc | 2,005 | Thank you. President Hoenig. | 7 |
fomc | 2,005 | Thank you, Mr. Chairman. I'd describe the outlook for the U.S. economy as solid, as the Greenbook has described it. Obviously, several factors contribute to this, including the forward momentum that's in the economy, the lagged effects of past monetary accommodation (which we've talked about in the past), very supporti... | 418 |
fomc | 2,005 | President Guynn. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. First, let me share a few thoughts on what we're seeing in our Southeast region. Overall, growth in our District continues at an acceptable pace, with most of the data and most of the anecdotal reports from directors and other contacts being positive across almost all sectors. Recovery from the... | 745 |
fomc | 2,005 | President Fisher. | 3 |
fomc | 2,005 | Mr. Chairman, Texas and the Eleventh District are even more surprisingly strong than the surprisingly strong rest of the United States. We see growth in retail sales and manufacturing employment, strength in housing starts, and high occupancy rates. Houston is 100 percent occupied in terms of apartments, as part of the... | 1,053 |
fomc | 2,005 | President Yellen. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. Incoming data since our last meeting have been quite encouraging. Economic growth over the next few quarters should be boosted by rebuilding and the full return of energy production in the Gulf. As rebuilding winds down and the lagged effects of monetary policy tightening take hold, it seems pl... | 1,354 |
fomc | 2,005 | President Minehan. | 4 |
fomc | 2,005 | Thank you very much, Mr. Chairman. I think a fair reading of New England's economy is that it continues to be a bit weaker than the nation's as a whole. To be sure, this sense is skewed by conditions in Massachusetts, which alone accounts for about half of the region's employment. Nonfarm employment declined again in O... | 995 |
fomc | 2,005 | President Lacker. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. On balance, economic activity is growing at a solid pace in the Fifth District, though auto sales are faltering and housing markets are cooling. On the upside, employment conditions have been strengthening, with signs that the job numbers are increasing even at District factories. Outside of au... | 881 |
fomc | 2,005 | President Santomero. | 5 |
fomc | 2,005 | Thank you, Mr. Chairman. There has been little change in Third District economic conditions since our last meeting. The regional economy continues to expand at its potential pace, which is somewhat lower than in other parts of the country. Payroll employment is increasing steadily in our three states, and the tri-state... | 929 |
fomc | 2,005 | President Pianalto. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. What a difference six weeks can make. At our last meeting, the Greenbook offered two alternative scenarios--stagflation and a consumer sentiment slump--which at least from the Fourth District's perspective seemed plausible and worrisome. In early November, we had to consider the possibility tha... | 925 |
fomc | 2,005 | Okay. President Poole. | 6 |
fomc | 2,005 | Thank you, Mr. Chairman. I've been debating whether we should characterize the expansion as vigorous or solid. I decided that it's vigorously solid. [Laughter] On the consumption front, to give you an idea how strong demand is, my Wal-Mart contact says that 30 percent of the TVs they sell are now digital, up from 5 per... | 569 |
fomc | 2,005 | Why don't we break for coffee at this time and come back in fifteen minutes. | 16 |
fomc | 2,005 | President Stern. | 3 |
fomc | 2,005 | Thank you, Mr. Chairman. Let me try to restart this discussion by saying, first, that I largely agree with the Greenbook assessment of the economy and, in particular, with the overall positive economic outlook it presents. This is consistent with the incoming data on the national economy that we've received recently an... | 465 |
fomc | 2,005 | Vice Chair. | 3 |
fomc | 2,005 | Our forecast for the national outlook has not changed substantially since the last meeting, and relative to the discussions so far, I guess we're slightly at the stronger end. The recent data have been encouraging both here and internationally. The underlying pace of demand growth seems pretty good to us--good enough t... | 831 |
fomc | 2,005 | Governor Kohn. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. The news over the intermeeting period has suggested some shift in the nature of the inflation risks faced by the economy. Low and stable core consumer price inflation together with declining retail energy prices and some continued edging lower of inflation expectations seem to imply a reduced t... | 985 |
fomc | 2,005 | Governor Ferguson. | 3 |
fomc | 2,005 | Thank you, Mr. Chairman. The concept of the known unknown came to the national consciousness about a year or two ago, and I sense that it's very much in this room today. The baseline forecast calls for a very nice, soft landing to potential growth with contained inflation if we just tighten our policy one or two more t... | 1,139 |
fomc | 2,005 | Governor Olson. | 3 |
fomc | 2,005 | Thank you, Mr. Chairman. At each of our last eleven or twelve meetings there has been a presumption in the analysis for several more moves of tightening. And while I agree that a 1/4 point increase in the funds rate is appropriate for today, I no longer find in our analysis a presumption of multiple moves to raise it f... | 372 |
fomc | 2,005 | Governor Bies. | 4 |
fomc | 2,005 | Thank you, Mr. Chairman. I want to echo Dave Stockton's analogy of tidings of great joy in this forecast. I think the upward revision in growth and the downward revision in inflation are developments that we all welcome at this point in the economic expansion. As I tried to assess some of the information to see where I... | 1,255 |
fomc | 2,005 | Mr. Madigan. | 5 |
fomc | 2,005 | 2 Mr. Chairman, earlier you referred to the comedic talents of my two colleagues to the right. For my part, in drafting the Bluebook over the past week, I fear that I may have been engaged in tragedy. [Laughter] That is, there certainly was drama depicting a protagonist--yours truly--engaging in a significant struggle ... | 1,799 |
fomc | 2,005 | Questions for Brian? If there are no questions, it implies that everyone agrees with everything you just said. [Laughter] | 25 |
fomc | 2,005 | I expected no less. [Laughter] | 9 |
fomc | 2,005 | It's interesting to listen to the discussion around this table today because the underlying facts are really somewhat different from what we had perceived at our last meeting. There is evidence that the economy is moving at a pace and in a direction that I don't think we would have anticipated six weeks or two months a... | 2,672 |
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