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fomc | 2,007 | Thank you, Mr. Chairman. In my views, I associate most closely with President Stern. So I will avoid going through all eight questions and will provide perhaps three further thoughts on what President Stern talked about--first, on what our dominant goal is; second, on what the benefits of going forward are; and third, ... | 1,295 |
fomc | 2,007 | Thank you. President Moskow. | 7 |
fomc | 2,007 | Thank you, Mr. Chairman. As I thought about the alternatives before us for making forecasts, I had an even greater appreciation for the way we've done this to date. I looked at the Monetary Policy Report, of course, and other things that we've done, and I think we've been well served by the approach we've taken to date... | 1,584 |
fomc | 2,007 | Thank you. Governor Kroszner. | 9 |
fomc | 2,007 | Thank you very much. The question that Presidents Poole, Minehan, Fisher, and others asked--Why are we doing this?--is always the important one. You always have to think about the objective and what you're trying to achieve, so that question has to be taken very seriously. As part of our general obligation to improve t... | 1,541 |
fomc | 2,007 | Thank you. Vice Chairman Geithner. | 9 |
fomc | 2,007 | Thank you, Mr. Chairman. I want to say just a few things quickly about internal transparency, about the analytical framework that we use to make decisions about monetary policy, and then about the external dimension of the forecast process. First, on internal transparency, I think that it makes sense for us to be a lit... | 974 |
fomc | 2,007 | There is research on that by the St. Louis Bank. | 12 |
fomc | 2,007 | Good. And about forecast error? | 7 |
fomc | 2,007 | Yes. | 2 |
fomc | 2,007 | Finally, I have just a few quick points about the external dimension of the discussion. I'm in favor of exploring a narrative that describes the story of the Committee's central tendency about the outlook. It's worth doing, and the range of issues on the table today in that direction I feel really quite comfortable wit... | 667 |
fomc | 2,007 | Thank you. President Poole. | 7 |
fomc | 2,007 | May I raise a very quick question? From time to time, the politics of budget deficits get all tangled up with differences between CBO and OMB forecasts of the economy. Do we know whether Fed forecasts have ever been dragged into that argument? | 49 |
fomc | 2,007 | Not to my knowledge. | 5 |
fomc | 2,007 | I think that the longer the forecast period and the more that it is a Committee forecast, the more likely it is that the FOMC may get pulled into that argument--whether we're on this side or that side of the argument. I just raise the question because we ought to be sure we're clear about that before we make our own fo... | 75 |
fomc | 2,007 | First, let me thank both the staff and all members. People clearly took this assignment very seriously, and it has been extremely useful. I won't try to summarize. [Laughter] Fortunately, we have a tape recorder. I would like to make a few brief comments. I believe that we ought to increase our emphasis on the projecti... | 1,598 |
fomc | 2,007 | I know you don't want to prolong this meeting, and I don't either, but I'm interested in what you think it feels like to all of us and to the market to have a two-day meeting, to have a minutes-style summary of a range of forecasts come out, and then a week and a half to two weeks later have the minutes come out. How d... | 156 |
fomc | 2,007 | I think it's more informative to combine numerical estimates with a qualitative description. | 14 |
fomc | 2,007 | Then a week and a half later have another qualitative description. | 12 |
fomc | 2,007 | Well, that's not a reason not to do this. I think that you could reproduce the information in the minutes; there would be further amplification and discussion in the minutes. I am just thinking out loud here. The description I have in mind would be a page or two, nothing substantial. The minutes would be an opportunity... | 77 |
fomc | 2,007 | As President Hoenig's suggestion, President Moskow's suggestion, and your suggestion implied, there is a range of variance around that, and that's one of the things we'll have to work through as well as how this fits within a set of existing processes and disclosures that we're going to preserve. | 58 |
fomc | 2,007 | There's also a question of how it relates to the statement. That's absolutely right. Are there other comments? President Fisher. | 24 |
fomc | 2,007 | Mr. Chairman, I thank you, and my mother thanks you, for addressing the skepticism issue. May I just add one other thing? You were very polite at the beginning of this conversation, but I'd like to reinforce what I interpret you as having said. The article from the New York Times a couple of days ago really bothered me... | 209 |
fomc | 2,007 | Thank you. The next meeting will be a two-day meeting, March 20 and 21. Oh, David Stockton. | 25 |
fomc | 2,007 | We'd like to get updates to forecasts by Friday. | 11 |
fomc | 2,007 | Okay--updates of forecasts are to be sent in by Friday. Thank you very much. The meeting is adjourned. | 25 |
fomc | 2,007 | Good afternoon, everybody. Let me be the first to welcome Dennis Lockhart sitting in for the Federal Reserve Bank of Atlanta. We'll start with Bill Dudley. | 32 |
fomc | 2,007 | 1 Thank you, Mr. Chairman. Financial markets have become much more turbulent since the last meeting--especially in subprime mortgages and associated securities, in U.S. and global equities, and in foreign exchange markets. The good news is that markets have generally remained liquid and well functioning, with a minor e... | 3,031 |
fomc | 2,007 | Thank you. Are there questions for Bill either about the outlook or the housekeeping matter? President Fisher. | 20 |
fomc | 2,007 | Bill, you talked about subprime mortgages in some detail but not about alt-A mortgages in great detail. My understanding is, and I just want to check to see whether I'm correct, that 20 percent of the 2006 purchase-dollar originations were alt-A, roughly the same percentage as subprime. It's my further understanding th... | 137 |
fomc | 2,007 | Well, unfortunately, the information on the alt-A market is not very good. In fact, there is disagreement about exactly what an alt-A mortgage is. If you can't define it, it's pretty hard to measure. That is problem number one. A good way of thinking about the mortgage market is as a continuum of loan quality extending... | 201 |
fomc | 2,007 | May I ask of Bill, Mr. Chairman, that we continue the analysis on this front and keep probing? | 22 |
fomc | 2,007 | Absolutely. | 2 |
fomc | 2,007 | Thank you. | 3 |
fomc | 2,007 | President Minehan. | 4 |
fomc | 2,007 | This is a continuation of the same question because I was intrigued by your chart that shows 2006 sixty-day and over delinquencies for subprime ARMs tracking with 2001. I don't recall the world as we know it coming to an end in the subprime market in 2001, but I also wonder how big the subprime market was and how much ... | 107 |
fomc | 2,007 | You're absolutely right. The market was much smaller at that time. I would characterize the deterioration that you saw in 2001 as probably mostly driven by the macroeconomy, and the deterioration that you saw in 2006 as driven mostly by two things: more laxity in the underwriting process and a change in the trajectory ... | 117 |
fomc | 2,007 | President Geithner. | 5 |
fomc | 2,007 | You made a distinction at the beginning between something that was fundamental and something that was about a change in risk perception. Just conceptually, how do you distinguish between those two things? Is the latter something that you can't attribute to a change in observable economic conditions? | 52 |
fomc | 2,007 | The distinction I'd make between fundamentals and risk reduction is that the latter occurs when people adjust their portfolios not because they change their view about the quality of a particular asset but because they are reducing the amount of risk exposure to the market that they want to have. So when you have a big... | 166 |
fomc | 2,007 | I guess my question is, How do you know? | 11 |
fomc | 2,007 | You don't. | 3 |
fomc | 2,007 | You don't know. Thank you. | 7 |
fomc | 2,007 | You don't know with certainty. You make an inference. | 11 |
fomc | 2,007 | Mr. Chairman, may I follow up? | 9 |
fomc | 2,007 | Yes. | 2 |
fomc | 2,007 | Bill, one of the factors you said that might account for the gap between the primary dealer expectations about the fed funds rate at different horizons and the average market pricing might be the flight to quality. It's not quite a flight to quality, but it reflects the demand for safer assets. | 56 |
fomc | 2,007 | Or assets that would do well in a bad economic environment as a hedge to the rest of your risk. | 21 |
fomc | 2,007 | A flight to liquidity or something like that. Do you think the same story might account for what happened in far forward interest rates in the Treasury market as well? Would you say that perhaps the same kind of phenomenon might account for that? | 47 |
fomc | 2,007 | Going out on the curve to ten years, it's possible. The Eurodollar market is probably the most liquid market in which one could do this very, very quickly. So I guess I would view what happened in the longer-dated Treasuries is probably more reflective of emerging downside risk to the economy, but there's probably some... | 81 |
fomc | 2,007 | President Lacker. | 4 |
fomc | 2,007 | What institutional or quantitative constraints are there on traders who would be positioned to take the other side of the movement into Eurodollar futures for the hedging operation? You paint a picture of everyone knowing that the fed funds rate path is above what's implied by Eurodollar futures and of no one being abl... | 68 |
fomc | 2,007 | Well, another explanation is that the economists who make the dealer forecasts are not the traders who execute the Eurodollar futures positions. So that's a possible alternative explanation. Generally, there's a disequilibrium. A number of people that I've talked to in the markets have said that this is what they thoug... | 134 |
fomc | 2,007 | Let me just follow up. I look at Eurodollar futures every day. You're an experienced, savvy market guy and I want to learn how to understand these markets. My presumption would be that, if that takes place, there's something limiting the capital of people who could take the offsetting position. How could markets be so ... | 74 |
fomc | 2,007 | Let me just say for the record that I don't think Bill is saying that the market is mispricing the value. | 23 |
fomc | 2,007 | I thought that was clearly what he said. | 9 |
fomc | 2,007 | I think he is just saying that the primary dealers whom we survey, who are a strange group, [laughter] have a view that's somewhat different from the view of the markets. | 37 |
fomc | 2,007 | No, he said that people told him not to take the Eurodollar price as indicative of the expected value of the Eurodollar rate at that date. Is that what you were saying? You said "disequilibrium." I'm trying to understand how financial markets work here. | 57 |
fomc | 2,007 | When people are in risk-reduction mode, they don't want to take on more risk. So there may be an imbalance temporarily between those who want to hedge versus those who want to take more risk. To take the other side of that bet, they're basically increasing their risk. The ABX market is another example of that. Why did ... | 133 |
fomc | 2,007 | I think it's the other point, President Lacker, about how much confidence you put in the green dots, which are the survey of, to use the Vice Chairman's words, that strange group that the New York Fed contacts. | 46 |
fomc | 2,007 | This isn't about the green dots. This is about the Eurodollar. | 15 |
fomc | 2,007 | No, no, no. Because primary dealers' economists, quite often, probably are reporting their modal forecast because they're telling a story about where the Committee was going forward and painting an overall picture of the economy, whereas the Eurodollar contracts reflect averaging across all the states of nature. What w... | 112 |
fomc | 2,007 | That's helpful. But, still, apart from the green dots, he's telling us there's some mispricing that's systematic. | 23 |
fomc | 2,007 | It's a possible explanation. Vince's explanation, which I made in fact in my prepared remarks, is probably one I would put a greater weight on. | 30 |
fomc | 2,007 | President Moskow. | 4 |
fomc | 2,007 | I just want to get back to the subprime market for a quick question. There have been a lot of newspaper stories about people who default on the first payment in these mortgages, which is a bit of a puzzle to me, unless it's just pure fraud. I was just wondering if you had any information about whether there has been an... | 90 |
fomc | 2,007 | First, a simple explanation--I don't know if this is correct--is that, if home prices are going up and you're getting 100 percent loan to value, you're getting basically a free option to see if the home prices will keep going up. If they don't go up, you decide, okay, thank you very much for your loan, and I'm not goin... | 135 |
fomc | 2,007 | Have you seen any data or hard evidence on this? | 11 |
fomc | 2,007 | No. | 2 |
fomc | 2,007 | Thank you. | 3 |
fomc | 2,007 | President Pianalto. | 4 |
fomc | 2,007 | Actually, Michael, the CEO of a large bank that originates mortgages, with whom I had a conversation, commented that this indicator is a bit confusing because it has to do with the fact that the owners of these loans change. By the time the person makes the first payment, it is a struggle to figure out to whom that pay... | 134 |
fomc | 2,007 | That is a fair point. In fact, that's why we like to look at sixty-day-plus delinquencies and try to push people away from looking at thirty days--it takes time for the payment to find the actual loan holder. | 47 |
fomc | 2,007 | He mentioned that a number of 3 percent was attached to first payments in default and that number is just way out of whack. | 27 |
fomc | 2,007 | I had been puzzled about the quantitative relationship between the subprime problems and the stock market. I think that the actual money at risk is on the order of $50 billion from defaults on subprimes, which is very small compared with the capitalization of the stock market. It looks as though a lot of the problem is... | 100 |
fomc | 2,007 | It's hard to know how connected the subprime market and the stock market have been in the past month or two. Clearly, people are nervous about the positive feedback loops of less mortgage origination leading to less housing demand leading to lower home prices leading to a weaker economy--and then that feeding into corp... | 99 |
fomc | 2,007 | Does anyone have any questions about the call procedure? Are there any other questions? Then we need a vote to ratify domestic operations. | 27 |
fomc | 2,007 | So moved. SPEAKER. Second. | 8 |
fomc | 2,007 | Without objection. Thank you. It's time for the economic situation. Dave Stockton. | 16 |
fomc | 2,007 | Thank you, Mr. Chairman. On the whole, the staff forecast has survived the economic news and financial events of the past seven weeks reasonably well. Although we revised down our projection for the growth of real activity, we don't really see the fundamentals of the economy as having changed significantly over the int... | 2,842 |
fomc | 2,007 | Constructing our outlook for the rest of the global economy this time entailed assessing the information in and implications of varying indicators of activity from different regions, the somewhat weaker prospects for U.S. output growth, and the backup in global oil prices. In addition, we struggled to understand the li... | 1,490 |
fomc | 2,007 | Thank you very much. Are there questions? President Poole. | 13 |
fomc | 2,007 | Dave, I have a question related to housing. I gather that a good part of the projection that the drag from housing will work off by the end of this year comes from the belief that sales will gradually clean out the inventory of unsold homes and, once that happens, construction can return to the rate of sales. That's th... | 183 |
fomc | 2,007 | That's possible. We have not taken that view. Overall housing construction had some unexplained strength over the past year, not from a bottom-up demographic addition but just in terms of what we would have expected given the growth in employment, income, and wealth. Admittedly, the evidence is still very tentative, bu... | 241 |
fomc | 2,007 | Recovery in that sector could take much longer. | 9 |
fomc | 2,007 | Yes. | 2 |
fomc | 2,007 | President Stern. | 3 |
fomc | 2,007 | Dave, I have a question about the significant downshift in employment that you have starting around midyear because I notice that output per hour continues to move along quite nicely throughout the period through the end of next year. Is that just a bet that most of the expansion on the supply side will come from produ... | 70 |
fomc | 2,007 | It's a combination of two bets that are probably both risky. One is that in fact productivity will continue and that what we've seen more recently is a little more pronounced cyclical sag in productivity growth and not a sign that underlying structural productivity is weaker than we're estimating. The second bet is tha... | 87 |
fomc | 2,007 | The unemployment rate does go up. | 7 |
fomc | 2,007 | Those are two elements of the forecast that we're struggling with. Over the past few months there has been a little evidence perhaps that the participation rate has been a bit higher than our model was forecasting. That might suggest some upside risk on the labor force growth. On the other hand, the productivity figure... | 78 |
fomc | 2,007 | President Fisher. | 3 |
fomc | 2,007 | Just for clarification, David, from peak to trough in terms of housing starts, what percent change in construction do you forecast? | 25 |
fomc | 2,007 | We're thinking of a decline something like 35 or 40 percent at this point. | 17 |
fomc | 2,007 | So 2.1 million, is that right? | 11 |
fomc | 2,007 | In our forecast, we're not too far from the bottom. We made the bottom a little deeper this time and put it off just a little bit longer. I said before that we saw signs that demand was stabilizing. In some sense, the adjustment that we've made for these recent subprime developments suggests to us that there will be an... | 129 |
fomc | 2,007 | Are there other questions? If not, we are ready for the economic go-round. President Yellen. | 21 |
fomc | 2,007 | Thank you, Mr. Chairman. Recent data on economic activity have been downbeat in many sectors, and I agree with the general tenor of the Greenbook that the near-term outlook is weaker than before. Indeed, we have cut expected growth this year almost 1/2 percentage point, to 21/4 percent. This pace of growth is substanti... | 1,194 |
fomc | 2,007 | Thank you. President Moskow. | 7 |
fomc | 2,007 | Thank you, Mr. Chairman. Conditions in the Seventh District are similar to what I reported last time. Business activity continues to expand at a modest pace. However, while my contacts expressed some increased uncertainty, most of them maintained a positive view about the outlook for the second half of the year. As we ... | 989 |
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