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fomc | 2,006 | President Hoenig. | 4 |
fomc | 2,006 | I would not change the language. I would leave it as it is because inflation expectations are contained, and we want to make sure they stay contained. That is what the two sentences independent of one another do. I think it is a good balance. | 50 |
fomc | 2,006 | President Pianalto. | 4 |
fomc | 2,006 | I agree with President Hoenig and Governor Kroszner. | 13 |
fomc | 2,006 | First Vice President Stone. | 5 |
fomc | 2,006 | Even though I said I certainly would think about it, I am satisfied from what I have heard around the table about the balance between part 4 and part 3. The probability is of doing more harm than good with changing that, and so even modest changes in the wording are probably not worth making. | 61 |
fomc | 2,006 | President Fisher. | 3 |
fomc | 2,006 | Mr. Chairman, in the subsequent sentence we have "the potential to add to inflation pressures," and then in the first sentence in paragraph 4 we say that "further policy firming may be needed to address inflation risks." So you want to be careful you do not have overkill here, even though I am very worried about inflat... | 69 |
fomc | 2,006 | Thank you for these comments. If it is all right with you, President Moskow, I would like to hold off on this until the evidence is a little clearer that inflation expectations have moved up. Other comments? Governor Bies. | 47 |
fomc | 2,006 | Mr. Chairman, in number 5, I always felt it was redundant when we had clearly communicated we were on this long trajectory. But when we are near a turning point or a pausing point, it is probably more important to remind the market that things can happen that we do not expect, that it is not a precise forecast, and I f... | 114 |
fomc | 2,006 | President Lacker. | 4 |
fomc | 2,006 | I can see that taking out "remain contained" would signal a change in our container size that would probably confuse the markets, but I am broadly sympathetic to Michael's point, and as inflation expectations evolve further, I am going to be more sympathetic to that. With regard to five, taking it out strikes me as lik... | 138 |
fomc | 2,006 | President Minehan. | 4 |
fomc | 2,006 | I am in favor of taking it out unless someone can tell me what different thing it says other than what is said in the last part of sentence 4. Maybe I am missing something, but I think sentence or row 4, whatever we call it, says that we are going to firm, to address inflation risks, but we emphasize that the extent an... | 103 |
fomc | 2,006 | The slight difference is that it refers specifically to firming whereas the last paragraph says that as a broad general principle. | 23 |
fomc | 2,006 | Do we think that the last sentence gives us the ability then to reduce rates in the context? | 19 |
fomc | 2,006 | If necessary. | 3 |
fomc | 2,006 | Because there are ways you could change the language in row 4 to deal with that. But if that is what you think, if you feel that that gives us a little more flexibility, I guess I do not have a problem with it. | 49 |
fomc | 2,006 | Governor Kohn. | 4 |
fomc | 2,006 | I support leaving row 5 in, and I support it because the old row 5 referred to the dual objectives of price stability and sustainable growth, which came in row 4. The new row 4 does not refer to sustainable growth at all. This is vague, but if challenged, we could at least say that we have not forgotten about our dual ... | 103 |
fomc | 2,006 | Yes. | 2 |
fomc | 2,006 | I would append to Governor Kohn's remark and just say that for that reason, President Minehan, it does have the benefit of adding to flexibility. | 31 |
fomc | 2,006 | President Yellen. | 4 |
fomc | 2,006 | I strongly support what Governor Kohn said. | 9 |
fomc | 2,006 | All right. President Fisher. | 6 |
fomc | 2,006 | This is slight heresy, but after the word "information" in row 4, I would just put "in support of the attainment of our objectives" or "its objectives." Take out the black stuff. It is a slight change. That achieves what Cathy wants. | 55 |
fomc | 2,006 | There are easy ways to modify row 4 to make it do the same thing. | 17 |
fomc | 2,006 | That is what I mean. | 6 |
fomc | 2,006 | At this point, having heard the discussion, I would like to propose to the group that we keep line 5 where it is. Line 4 talks specifically about this firming proposal and the possibility of a pause. Line 5 responds to both of our objectives and re-emphasizes the fact that we do have, of course, symmetric employment/in... | 120 |
fomc | 2,006 | I would like to ask Vince if he would give us a judgment about how the language of alternative B is likely to affect the market's probability of action in June. | 33 |
fomc | 2,006 | Oh, I thought that question was directed to Dino. [Laughter] | 15 |
fomc | 2,006 | I would be happy to have you both address it. | 11 |
fomc | 2,006 | In yesterday's quotes, the July fed funds contract was at 5.07; so that is basically a 7-out-of-25 chance that the Committee would act. In the design of B, we thought that the probability would move it up into the 50-50 to 60-40 range. I think it is probably a little tougher than what is in the Bluebook, so I am a litt... | 95 |
fomc | 2,006 | It would raise it. | 5 |
fomc | 2,006 | I will tell you my instinct is that the part that is in red will be viewed as actually producing a presumption that the first part will not be carried through. As it says, "policy firming may yet be needed." But then the part in red, it seems to me, tempers that very, very substantially, and it is not clear to me at al... | 99 |
fomc | 2,006 | The test I would apply would be what the odds are as of October. There is the possibility that there might be some shifting in timing between, say, June and August, for example. | 38 |
fomc | 2,006 | Obviously this is something that is very hard to gather any evidence on in advance. I am just telling you my gut feeling for what's going to happen is that this will reduce the market's expectation about action in June, and I would be surprised if that were just simply switched out later in the year. | 60 |
fomc | 2,006 | Well, President Poole, the most unsatisfying paragraphs in the Bluebook meeting after meeting are the ones that try to divine what the market reactions to alternative statements will be. We do not have a scientific way of doing it. | 47 |
fomc | 2,006 | The reason I raise the question is that I agree very much with Jeff that we do not want language that reduces the market expectation of another action in June, unless the data between now and then change the outlook sufficiently. | 43 |
fomc | 2,006 | There are two parts, though. Part is the effect today. My guess is that it will be hawkish on net, but there is a lot of uncertainty, and so you may be right. The other part of this is the indication of responsiveness to data. So if the intermeeting data--and I noted how many different things we are going to be seeing-... | 116 |
fomc | 2,006 | Again, the three words that the market would be looking for are "further policy firming." Those are the three that they will be looking for and that will be taken as the signal of likely action in June. Now, what follows actually creates a bit more uncertainty because it is not as direct as some previous statements hav... | 105 |
fomc | 2,006 | One last point is that the second part of the sentence in row 4 is partly already in markets because it is a repetition of what was in the Joint Economic Committee testimony. So in that sense, I agree with Dino that they will be looking at the earlier words. | 54 |
fomc | 2,006 | Are there any other comments? Yes. | 8 |
fomc | 2,006 | I just had a question. It is a slight, minor change, but would it make any difference if you took out the two words "emphasizes that" from number 4? | 38 |
fomc | 2,006 | I think it would make a difference because it would focus the market very much on the first part of the sentence, which basically is saying that we are going to move again in June. What we want to do is retain the flexibility to move or not move, depending on the flow of data between now and then. | 63 |
fomc | 2,006 | So it is intentional that those two words are in there. | 12 |
fomc | 2,006 | Yes. Any other comments? | 6 |
fomc | 2,006 | I will be reading the directive 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 conditions in reserve market... | 201 |
fomc | 2,006 | The Governors need to join me. [Recess] | 11 |
fomc | 2,006 | Thank you, everyone. There are a couple of other quick items. First, I would like to ask Governor Kohn to give a brief report on his subcommittee on communications. | 36 |
fomc | 2,006 | Thank you, Mr. Chairman. Presidents Stern and Yellen have agreed to serve with me on this subcommittee, the full-frontal subcommittee, I guess. [Laughter] We see our mission as helping the Committee--bringing issues to the Committee, helping frame the discussion, trying to figure out the topics and the logical order in... | 244 |
fomc | 2,006 | Thank you. We have now had experience with both a two-day and a one-day meeting. I hope that maybe in June we will be able to make some kind of decision about how to schedule meetings going forward. I am going to ask Vincent to poll everyone during the intermeeting period about preferences as to meeting structure, sche... | 154 |
fomc | 2,006 | Good afternoon, everybody. I'd like to start off by recognizing Tom Simpson. This is Tom's last FOMC meeting. After twenty years, he is retiring in August. [Applause] Thank you. The first item on the agenda is action to approve the FOIA plan and delegation. Debbie Danker is here on this. Are there any questions on the ... | 94 |
fomc | 2,006 | Without objection. Thank you. The next item is foreign currency and domestic open market operations. Mr. Kos. | 22 |
fomc | 2,006 | 1 Thank you, Mr. Chairman. For the last several meetings I have begun my comments by saying that this long period of low volatility and tight spreads continued. Today I have to modify that. During this intermeeting period, some markets were very volatile. But others were either calm or characterized by moderate levels ... | 2,215 |
fomc | 2,006 | Thank you. A lot of the discussion of the stock market volatility points to uncertainty about monetary policy. But the bond market suggests very little uncertainty about monetary policy. Can you talk about that paradox? | 39 |
fomc | 2,006 | Yes, I think one of the interesting points about this period is that very question. Some of the high-risk assets that had been bid up are where we have the most-pronounced price moves, and that does perhaps suggest that positioning is a bigger part of the story because bond markets were relatively tame not just in the ... | 187 |
fomc | 2,006 | As for the turn in metals, can you talk about the relative importance of risk factors, higher interest rates, and inflation expectations? | 26 |
fomc | 2,006 | It's reasonable that all of those factors would have had some influence. I suppose another factor would be the extent to which some market participants may have seen not only positioning but also future weakness from the global tightening that is occurring, especially in the industrial countries but also in China--that... | 102 |
fomc | 2,006 | Other questions for Dino? President Minehan. | 9 |
fomc | 2,006 | Thank you, Mr. Chairman. I just want to continue with the first question that you posed to Dino. What you said in your presentation, Dino, is very close to what people have been telling me about how they are seeing the market. Some people at the top of hedge funds and mutual funds have said that market participants saw... | 221 |
fomc | 2,006 | From a market perspective, that is the most interesting question. I recall an exchange that President Fisher and I had a couple of meetings ago, when we were talking about the zloty and the Icelandic krona and whether that was sort of a precursor, perhaps the beginning of a longer phase of a downscaling of risk. There ... | 104 |
fomc | 2,006 | It's impossible to see these things beforehand, but everyone is nervous about the idea of crowded trades--what havoc they could cause. Clearly, Iceland saw a bit of it. It's probably too much to ask to gain a sense of what could possibly be a problem here, other than that we need to be conscious that problems could be ... | 68 |
fomc | 2,006 | I don't want to speculate. I don't think my guess would be any better than anybody else's. Another view is that the markets that had been priced furthest from fair value are the ones that are adjusting, and a case can be made that, once they equilibrate, we shouldn't have spillover effects. Now it's hard to know which ... | 83 |
fomc | 2,006 | Any other questions for Dino? If not, we need a vote to ratify open market transactions. Motion? | 22 |
fomc | 2,006 | So moved. | 3 |
fomc | 2,006 | Without objection. Thank you. We'll turn now to the economic situation. | 14 |
fomc | 2,006 | 2 Thank you, Mr. Chairman. Many of the spending indicators that we've received over the past few weeks have been coming in to the weak side of our expectations. As you can see by comparing the red and blue striped bars in the top left panel of exhibit 1, in the Greenbook we responded to the weaker numbers by revising d... | 2,583 |
fomc | 2,006 | Exhibit 6 turns to the outlook for compensation. The first column of the top left panel shows that recent readings on the productivity and cost measure of compensation have been quite choppy. Increases in the employment cost index, shown in the right-hand column, have been smoother but have been puzzling in their own r... | 2,460 |
fomc | 2,006 | In contrast to the mixed news on economic activity coming out of the United States and despite the international financial volatility that Dino described, readings on foreign economic activity have been generally positive. Importantly, some of the areas of the global economy that had been weak in previous years are sho... | 2,639 |
fomc | 2,006 | The final exhibit presents your forecasts for 2006 and 2007. Compared with February, you have edged down your projections for the growth of real GDP in both years and raised your forecast of core inflation. The forecast for the unemployment rate is essentially unchanged. That concludes our presentation, and we will be ... | 69 |
fomc | 2,006 | Any questions for our colleagues? President Lacker. | 10 |
fomc | 2,006 | I have some more questions about latent variables. During my exchange with David at the last meeting, I was asking about inflation expectations. I learned that you didn't have a single number for expected inflation but that there were multiple measures. You offered to write a number down on an envelope for me but cauti... | 248 |
fomc | 2,006 | I'll jump in, given that it looks as though you're still looking at me. [Laughter] This may either dismay you or encourage you. I wasted a great deal of staff time in the past four or five weeks actually asking our folks whether or not they could create a measure that would be useful to you, verifiable, and auditable. ... | 768 |
fomc | 2,006 | Thank you very much, David. I'm glad to hear that you've devoted so much staff time to this, and I appreciate the effort. That number--expected inflation--isn't the objective. As you know, inflation dynamics are central to what we do. There is significant scientific uncertainty about how policy interacts with those dyn... | 139 |
fomc | 2,006 | Well, we can give you a bunch of threads, and I hope you'll be able to weave them together. [Laughter] | 26 |
fomc | 2,006 | Thank you very much. I appreciate that. I have one separate question for David Wilcox. In exhibit 9, "Pass-Through of Energy Prices," the middle panel reports on some empirical work. When I try to find the counterpart in the model economy for the empirical exercise you do, it's hard to picture it not having embedded wi... | 117 |
fomc | 2,006 | You're entirely right. Both of these models are very partial equilibrium in their extent. That's especially true of the backward-looking model, which is strictly a reduced-form specification that takes no explicit account of inflation expectations. But even the partly forward-looking model doesn't have a sort of satell... | 328 |
fomc | 2,006 | Well, more broadly, if we're not to take these as exogenous because they reflect some public sense of our reaction function, we could strive to make them zero--that is to say, to view these kinds of coefficients as something we're going to influence over time. | 53 |
fomc | 2,006 | I suppose that would be a policy choice available to you. In thinking about how to do that, you'd want to think about the horizon at which you would want to do this. I sliced into probability space at a horizon of eight quarters. I have no idea whether you'd want to aim to cause these shocks to have zero effect after f... | 119 |
fomc | 2,006 | Is that a two-handed intervention? | 7 |
fomc | 2,006 | Whatever. [Laughter] I forget the code here, but just a little intervention there? It may be that the effect of oil-price increases on inflation is lower than it was two or three decades ago. But, say, over the past two years, 2004 to 2006, given that we've had a number of oil shocks, if you want to call the oil-price ... | 186 |
fomc | 2,006 | There are many ways to do this accounting. But on one accounting, the falloff that we have in core inflation in 2007 relative to 2006 is due entirely to the cessation of the indirect effect of energy prices passing through into the core. If you look at the top right panel of exhibit 7, you can see that core prices in 2... | 84 |
fomc | 2,006 | I remember that. | 4 |
fomc | 2,006 | A substantial part of the pickup since then by our calculation is due to the energy-price pass-through. My recollection is that it's on the order of 0.6 or 0.7 percentage point. | 42 |
fomc | 2,006 | That's part of what we're thinking it was. A lot of this recent uptick in core is due pretty much to energy. | 25 |
fomc | 2,006 | Yes. | 2 |
fomc | 2,006 | President Fisher. | 3 |
fomc | 2,006 | Mr. Chairman, I want to thank the staff for the global presentation, particularly for the beginning of this analysis on resource utilization, which as you know I find useful. It is noteworthy that we're beginning a process or, maybe, continuing a process and have not enough information yet to understand or to analyze i... | 276 |
fomc | 2,006 | My pleasure. We're keenly aware of the fact that the United States economy plays a leading role in the global economy. During the last downturn, at the beginning of this decade, when the U.S. economy started to slow, our European colleagues often said, "Well, we're probably not going to experience a slowdown ourselves ... | 421 |
fomc | 2,006 | If I could just rephrase the question--is it reasonable to assume that the emerging economies that you list would maintain these rates were we to slow down significantly? | 32 |
fomc | 2,006 | Do you mean would they slow down more than is embedded in our baseline forecast? | 16 |
fomc | 2,006 | Right. | 2 |
fomc | 2,006 | That seems quite likely the case. If the U.S. economy were to slow to a significantly greater degree than embodied in the baseline forecast, probably many economies, particularly the Asian economies that depend on us very heavily for their export markets, would indeed slow down much more than we are anticipating at thi... | 61 |
fomc | 2,006 | It's not a straightforward thing to calculate in some sense. The world does seem to have two engines instead of one. That is to say, we would argue strongly that the global experience in the late 1990s would not provide a clear, accurate benchmark for what we would think today. China, in particular, has reached a statu... | 309 |
fomc | 2,006 | Thank you. President Moskow. | 7 |
fomc | 2,006 | Thank you, Mr. Chairman. I have two questions. One is just a quick one on steel since President Fisher mentioned exhibit 12 and you showed this big increase in China's steel capacity in '05--much greater than the annual steel production increase--and I have heard about this a lot. But steel prices in the United States ... | 283 |
fomc | 2,006 | I will answer the small question. Then Larry can answer the big one. [Laughter] I agree with you that there is actually a certain disjuncture, if you will, between the fact that steel prices have stayed up and the growing capacity in China. I don't have a full answer to your question, but I would offer just a couple of... | 230 |
fomc | 2,006 | Thank you. | 3 |
fomc | 2,006 | Let me start, and then Dave may want to add a few comments as well. Clearly, we did revise down the forecast. The downward revision was based in part, as I said in my briefing, not only on the incoming data but also on some of the other factors that I highlighted in exhibit 2. But I also want to emphasize that the news... | 263 |
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