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fomc | 2,007 | Okay. So the alternate would serve until the next president was in office. That has certainly been the practice; my question was about the wording. Thank you. | 32 |
fomc | 2,007 | Are there other questions about the memo? I need a vote. In favor? Opposed? Thank you. Third, we need to select a Federal Reserve Bank to execute transactions for the System Open Market Account. Governor Kohn, would you like to make a proposal? [Laughter] | 58 |
fomc | 2,007 | I nominate the Federal Reserve Bank of New York, once again. | 13 |
fomc | 2,007 | Comments? Objections? Without objection. The fourth item is that we need to select the Manager of the System Open Market Account. Governor Kohn. | 30 |
fomc | 2,007 | I'd be very pleased to nominate Bill Dudley as the Manager of the System Open Market Account. | 19 |
fomc | 2,007 | You have to put your head down, Bill. [Laughter] | 14 |
fomc | 2,007 | Second. | 2 |
fomc | 2,007 | Thank you. Without objection. Thank you. | 9 |
fomc | 2,007 | I think we should rule out humor. [Laughter] This is an important annual process, and New York plays an important role. | 27 |
fomc | 2,007 | So it will not say "laughter" in the margins. [Laughter] | 17 |
fomc | 2,007 | I think we've started on the wrong tone here. [Laughter] Item 5, we need authorization for the Desk operations. We have two items to vote on separately. On the domestic side, we have a memo from Bill Dudley proposing to change the accounting of repurchase agreements so they will be booked on the SOMA rather than on the... | 130 |
fomc | 2,007 | 1 Thank you. In terms of market developments, I would like to focus on three major topics. First is the sharp adjustment in market expectations concerning monetary policy since the last FOMC meeting. Second, I will talk about the persistence of high risk appetites in credit markets, with a focus on what may be the most... | 1,666 |
fomc | 2,007 | Thank you. Are there questions for Bill? President Poole. | 13 |
fomc | 2,007 | I was astonished when I saw the note--I think it was in the Wall Street Journal a couple of weeks ago--that oil consumption actually fell worldwide in '06 relative to '05, which really surprised me. I don't know quite how to explain that because the economies around the world are pretty strong. I'm assuming that the lo... | 100 |
fomc | 2,007 | I think that is definitely part of the story. Another part of the story is that in some countries, especially emerging market countries, the oil was heavily subsidized, and some of those subsidies are now coming off because continuing to subsidize as the oil price climbs entails a rather heavy budgetary burden. So you'... | 149 |
fomc | 2,007 | If I may add a footnote--I think you also need to watch the pattern of how inventories have behaved. When prices were being pushed up in the process from, say, the end of 2003 to their various local peaks, the incentive to hold inventories rose. At some point in 2006, inventories were very high--we had basically filled... | 177 |
fomc | 2,007 | President Fisher. | 3 |
fomc | 2,007 | Bill, if you talk to the producers and the refiners--you'll find out that I like to do that kind of thing--there has been some concern, although one can't measure it with any precision, that the so-called city refiners in London or on Wall Street, meaning the speculators, do affect prices. We have had some discussions ... | 87 |
fomc | 2,007 | As you know, this topic is undergoing a lot of further research. The academic literature that I've surveyed has yet to uncover a strong causal relationship between a climb in speculative open interest and the effect on price. One reason that is hard to imagine happening to a powerful degree in the end is that the specu... | 121 |
fomc | 2,007 | But we're still working on it. | 7 |
fomc | 2,007 | Vice Chairman Geithner. | 6 |
fomc | 2,007 | Bill, could you or Dave remind us what share of the total outstanding stock of mortgages consists of subprimes or what share of the housing stock do we think is financed at the subprime level? My recollection is that the share is still small even though it has been a large part of the recent flows. | 63 |
fomc | 2,007 | It's quite a bit smaller share of total outstanding because the average life of the subprime mortgage loan, I'm told, is only two or three years. In other words, if your credit quality improves, you will refinance out of your subprime mortgage into a higher quality mortgage. So originations are 24 percent, but the actu... | 79 |
fomc | 2,007 | We reported in yesterday's briefing that subprime borrowers constituted only about 13 percent of all mortgages outstanding. | 21 |
fomc | 2,007 | President Lacker. | 4 |
fomc | 2,007 | Ex post subprime mortgage-backed securities seem to have been overvalued in the sense that they underestimated default risk for some market segments. So the presumption would be that such information gets taken on board and reflected in the prices of new mortgage-backed securities and that it would translate into highe... | 96 |
fomc | 2,007 | It's not that markets won't work. It's just the economics of originating subprime loans and selling them into the market would no longer work. In other words, at some point, if the actual capital markets are not willing to accept those subprime mortgages at the right price, then the ability of the person to originate t... | 168 |
fomc | 2,007 | So quantities would go down. | 6 |
fomc | 2,007 | You could think of the situation as credit availability to that sector diminishing, which could have feedback effects on price. That's the risk. | 26 |
fomc | 2,007 | Are there other questions? We need a vote to ratify domestic operations. | 15 |
fomc | 2,007 | So moved. | 3 |
fomc | 2,007 | Without objection. We turn now to the economic situation. Mr. Slifman. | 17 |
fomc | 2,007 | 2 Thank you, Mr. Chairman. I'll wait for my colleagues to come to the table. We'll be using the chart package that you all should have on the economic outlook. Separating the signal from the noise in the recent economic data has not been easy--what with the motor vehicle anomaly, the defense spending pull-forward, and ... | 2,138 |
fomc | 2,007 | The top panel of exhibit 5 summarizes our assumptions about the supply side of the economy. As indicated in line 1, we assume that potential output growth will edge down over the forecast period, from 2.7 percent in 2006 to 2.5 percent in 2008. This slowing primarily reflects our assumptions about trend hours growth (l... | 2,173 |
fomc | 2,007 | Your first international exhibit (exhibit 9) covers recent market developments. As shown by the green line in the top left panel, oil prices dropped further this month, bringing the West Texas intermediate spot price back to pre-Katrina levels. The IMF index of nonfuel commodity prices (the red line) was little changed... | 2,374 |
fomc | 2,007 | The final exhibit presents your forecasts for 2007 and 2008. I'll be mercifully brief. The central tendency shows real GDP increasing 21/2 to 3 percent this year and roughly the same next year, with the unemployment rate holding in the range of 41/2 to 43/4 percent during both years. The central tendency of your projec... | 111 |
fomc | 2,007 | Thank you. That was very interesting. I have a couple of questions about your counterfactuals. In exhibit 6, you look at the simulated rate of unemployment, assuming that gross domestic income is the true measure of output, and you find that unemployment fits Okun's law. But then below you also use GDI to measure produ... | 126 |
fomc | 2,007 | That's right. The potential output measures are based on a GDP concept, and productivity in the nonfarm business sector is the measure of structural productivity that we're using for potential GDP. The upper panel is just to illustrate what might happen if, for example, the real GDP numbers for last year were revised u... | 72 |
fomc | 2,007 | Okay. The other question is about exhibit 8, where you consider a simulation with a decline in productivity and an increase in labor participation and you get a higher rate of core inflation. In that simulation, the decrease in productivity and the increase in participation offset each other, on both the aggregate dema... | 202 |
fomc | 2,007 | Well, real wages wouldn't be different, but the adjustment could come either through flexible nominal wages or faster increases in prices. In the FRB/US model, which is used to generate these simulations, trend unit labor costs do cause an increase in the rate of price inflation, which is what you see here, and that he... | 71 |
fomc | 2,007 | For a given level of resource utilization, you're getting more cost pressures, and you're getting more upward pressure on prices. So it's not a matter of their absorbing all of it in their profit margins when they've got that increase in costs. You're absolutely right. In our basic framework, we don't think that actual... | 138 |
fomc | 2,007 | You also have to assume that the Fed accommodates with increased nominal GDP growth as well. | 17 |
fomc | 2,007 | Correct. | 2 |
fomc | 2,007 | Thank you. Are there other questions for our colleagues? President Fisher. | 14 |
fomc | 2,007 | Just to follow up on your point and go to exhibit 12, about foreign GDP growth rates, which Joe talked about. In terms of any pressures on unit labor costs that you see developing, I didn't quite catch your statement, or I may have misinterpreted it, but basically I thought I heard that these growth rates are not likel... | 75 |
fomc | 2,007 | That's correct. | 3 |
fomc | 2,007 | So I would be curious as to what your observation is in terms of trend unit labor costs in our important trading partners. | 24 |
fomc | 2,007 | Actually, I'm not sure of the answer about unit labor costs per se, but these growth rates are close to what we think these countries can sustain without exceeding their capacity limit. | 35 |
fomc | 2,007 | So it's a gap analysis. | 6 |
fomc | 2,007 | They are close to what we think their potential rates are, and they don't seem to be above or below their potential rates by very much in the aggregate. There are a few exceptions, of course--Argentina, perhaps, and Venezuela. | 47 |
fomc | 2,007 | Thank you. | 3 |
fomc | 2,007 | President Stern. | 3 |
fomc | 2,007 | I want to see if I understood something you said that pertained to exhibit 13. I think you said that U.S. exports were stronger than expected--stronger than the models would have predicted in '06--even though growth abroad turned out to be quite strong. Is that right? | 59 |
fomc | 2,007 | Yes. | 2 |
fomc | 2,007 | By about what order of magnitude? I'm just trying to determine whether this was really significant or we're talking about a tenth or two. | 26 |
fomc | 2,007 | Well, the export contribution to GDP growth last year was about 1/3 percent, and I would have to check, but I'm guessing that it might have still been zero if we hadn't had this surprise. It would have been close to zero. I can check on that. | 56 |
fomc | 2,007 | Well, you can let me know later. | 9 |
fomc | 2,007 | May I follow up on that? | 7 |
fomc | 2,007 | Governor Kohn. | 4 |
fomc | 2,007 | On the same chart, Joe, I was wondering whether there is any evidence that the foreign demand for our exports, that elasticity, is coming into closer alignment with our demand for imports. That difference has really been driving the trade imbalance, and I was looking for little clues that this wasn't all special factor... | 75 |
fomc | 2,007 | This topic is actually close to my heart in terms of research, and I wish I could say it was so and maybe it will be so. [Laughter] I thought it was so around 2000, when we had really strong exports we couldn't explain, and then it all went away with the recession of 2001-02, and it's only now coming back. But I looked... | 168 |
fomc | 2,007 | Vice Chairman Geithner. | 6 |
fomc | 2,007 | I have two questions. The first is about our inflation forecast. We've discussed several times the basic question about whether the now-prevailing level of long-term inflation expectations in markets is likely to provide support for forecasts of further moderation or likely to constrain the prospects for further modera... | 96 |
fomc | 2,007 | Well, your recollection is correct, I think. That was probably just a hazy answer, not a hazy memory on your part. In some sense our basic view is that getting to 2 percent is the gravitational constant that we currently see. We haven't really seen any evidence to suggest any significant shift in that view in recent mo... | 250 |
fomc | 2,007 | This is a different question for Joe. Your exhibit 10 describes broad trends in net official capital flows from emerging markets to the United States and global real interest rates. Has your view about the relationship between them changed? I thought we had sort of the conventional view. The accepted view within the Sy... | 109 |
fomc | 2,007 | The relationship between the official flows and the current account surpluses? | 14 |
fomc | 2,007 | No, between official flows and global--really industrial-country--real interest rates. | 16 |
fomc | 2,007 | People often talk about China's reserve accumulation affecting U.S. interest rates, but they are only two countries in a big world and you may think that the United States, Europe, and Japan have relatively open financial markets with a lot of mobility. If you look at all the industrial countries together and the flows... | 201 |
fomc | 2,007 | President Minehan. | 4 |
fomc | 2,007 | Just to clarify the response--overpredicted what? | 11 |
fomc | 2,007 | The positive contribution from net exports last year, about 1/3 percentage point, is entirely a surprise. In fact, it would have been negative, if I am reading our model correctly. | 39 |
fomc | 2,007 | So it was an upward surprise in terms of what your model would have predicted. | 16 |
fomc | 2,007 | Yes. | 2 |
fomc | 2,007 | I'm interested in the risks you see around the GDP growth rate in your forecast. I note a couple of things. First, some of the growth rate depends upon consumers getting the message that they really ought to be saving for the future instead of spending as they have been. I wonder why they'd do that this year if they di... | 152 |
fomc | 2,007 | Let me first comment specifically on our consumption forecast and the larger question that we raised. Dave may want to add some comments. With regard to our consumption forecast, as I had mentioned and as we suggested by the alternative simulation that we showed in Part 1 of the Greenbook, clearly the unexplained stren... | 317 |
fomc | 2,007 | You've got seven alternative scenarios there, if I recall correctly | 11 |
fomc | 2,007 | We were busy. | 4 |
fomc | 2,007 | Yes, you were. All kudos to you guys. Four of the simulations have slower GDP, higher unemployment, and a lower fed funds rate. In a couple of cases you had, even in the context of slower growth and higher unemployment, somewhat higher inflation. Then you have three or so that show stronger paths. I'm wondering, do you... | 146 |
fomc | 2,007 | I don't think so. Personally, I could think of equally plausible reasons that we could get stronger aggregate demand growth or somewhat weaker aggregate demand growth over the next year. We highlighted one possibility in the Greenbook with regard to the weaker investment scenario. Another could be the housing forecast:... | 120 |
fomc | 2,007 | I think that's probably right. | 6 |
fomc | 2,007 | At the time of the last FOMC meeting, we were feeling as though the incoming spending data were coming in pretty darn close to our expectations and were pretty consistent with our story about entering a period of below-trend growth. As we noted, and President Moskow quizzed us about, the big fly in the ointment with re... | 570 |
fomc | 2,007 | Thank you. | 3 |
fomc | 2,007 | President Moskow. | 4 |
fomc | 2,007 | Thank you, Mr. Chairman. I just want to follow up on Vice Chairman Geithner's first question--on inflation. It seems to me that most of the factors that are leading to lower inflation in this forecast period are temporary--energy prices, owners' equivalent rent, and import prices. The longer-term factors are the pressu... | 161 |
fomc | 2,007 | Many of the factors that you're citing as temporary on the downside regarding inflation we see as having been temporary on the upside regarding inflation as well. The higher energy prices and the pickup in import commodity prices were some factors explaining how we got above 2 percent, and their dissipation is principa... | 206 |
fomc | 2,007 | So that's a key variable. | 6 |
fomc | 2,007 | To go back to what I said to the Vice Chairman, implicit in that long-run scenario is a 2 percent inflation expectation that is sort of pegging inflation. Obviously we could be seriously wrong about that. We could also be seriously wrong about the degree of resource utilization in the economy right now. That 2 percent ... | 233 |
fomc | 2,007 | Thank you. | 3 |
fomc | 2,007 | President Plosser. | 5 |
fomc | 2,007 | Thank you. I have a question that is related to this issue, but it comes out of the Bluebook. I think I understand how this model is working, but then I get a surprise, and I realize I really don't understand how it works. I noticed in the Bluebook that there was a jump of 50 basis points in the Greenbook-consistent es... | 165 |
fomc | 2,007 | Well, I can speak to the Greenbook-consistent measure, and perhaps Vincent will want to talk a bit about the simulations of the Bluebook. One thing that you have to keep in mind is that the Greenbook-consistent measure of R* is the level of a real interest rate that would be required for the output gap to return to zer... | 208 |
fomc | 2,007 | The 0.5 percentage point increase in the Greenbook-consistent R* is really due to a collection of factors. In the model, the estimated bond premiums come down a little, and the equity premium came down over the intermeeting period. That just means you need a higher real interest rate to get the same level of policy res... | 146 |
fomc | 2,007 | Other questions? President Lacker. | 7 |
fomc | 2,007 | I'll follow up on the question of Vice Chairman Geithner and President Moskow about the gravitational point of 2.0 percent. I remember asking you about the NAIRU and getting a response that suggested I should think of a cloud of probabilities surrounding that estimate. I'm essentially asking you for your characterizati... | 223 |
fomc | 2,007 | I'm not sure I have an empirically based response. We can actually estimate from the model a confidence interval around a parameter estimate of the NAIRU, which as I indicated, is wide; but I don't have a similar thing for inflation expectations. However, I would argue that, if you just look at the confidence intervals... | 225 |
fomc | 2,007 | The intervals are, no doubt, wide. In the materials we sent to you in October, when you were talking about your inflation goal, a staff memorandum looked at the gap between the CPI and the PCE price index. From 1994 to 2004, the minimum is minus 0.2, and the maximum is 1.2. They do move around. We found in the regressi... | 129 |
fomc | 2,007 | Seeing that there are no further questions, I propose that we start the economic go-round. Remember, we do have the two-handed option if anyone cares to exercise it. President Yellen. | 38 |
fomc | 2,007 | Thank you, Mr. Chairman. Recent data on economic activity have been loaded with upside surprises for most spending categories and also for labor markets. Our response, like the Greenbook, has been to boost our estimate of growth last quarter and our forecast for growth this quarter. For 2007 as a whole, we have revised... | 1,026 |
fomc | 2,007 | Thank you. President Moskow. | 7 |
fomc | 2,007 | Thank you. Mr. Chairman, some of my colleagues have told me they expected me to brag today because both teams in the Super Bowl are from the Seventh Federal Reserve District, but I assured them I would not do that. [Laughter] | 49 |
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