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fomc | 2,007 | Thank you. Governor Mishkin. | 7 |
fomc | 2,007 | Thank you, Mr. Chairman. Obviously, I support alternative B. It seems from a policy perspective that our outlook hasn't really changed. We want to change as little as possible in our statement. My SAT scores in English were much lower than my SAT scores in math, so I'm not going to comment on the issue of the phrase "o... | 556 |
fomc | 2,007 | Thank you. Vice Chairman. | 6 |
fomc | 2,007 | I think we're in a fairly good place in terms of the policy and the signal. The language in March and in alternative B today preserves a nice balance between the need to signal concern that we may not get as much moderation in inflation as we'd like and acknowledgement of some of the dispersion of views around the Comm... | 288 |
fomc | 2,007 | Thank you, and thank you for all the comments. On the action, I think we're clear that we want to stay where we are. I just want to make the observation that for almost a year now we have taken a very steady approach, not only in keeping policy at a given level but in terms of our rhetoric and in terms of our confidenc... | 966 |
fomc | 2,007 | I'm against it. | 4 |
fomc | 2,007 | Against eliminating it? | 4 |
fomc | 2,007 | No. Against "on balance." | 7 |
fomc | 2,007 | Well, that's your proposal, right? | 8 |
fomc | 2,007 | Yes, my proposal. | 5 |
fomc | 2,007 | We are fine with your proposal. | 7 |
fomc | 2,007 | We've given up on English and have now gone to sign language. [Laughter] | 17 |
fomc | 2,007 | How will that be represented in the transcript? [Laughter] | 13 |
fomc | 2,007 | Let's have a vote. | 5 |
fomc | 2,007 | I'll be reading the directive and the risk assessment from page 23 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 condit... | 172 |
fomc | 2,007 | Thank you. Let's just take a moment to update the communications situation and hear, very briefly, any comments on the dry run. But let me turn it over to Governor Kohn for some comments. | 40 |
fomc | 2,007 | Thank you, Mr. Chairman. I have just a few points, building on what you said a few minutes ago. Just to clarify on the federal funds rate path: There was a consensus on the Committee not to publish the fed funds rate path, so we are collecting that just to understand what people's policy assumptions are and how they fi... | 548 |
fomc | 2,007 | Thank you. Are there questions for Don or any comments? President Plosser. | 17 |
fomc | 2,007 | I understand the concern about the fed funds rate assumption, how we interpret that, and what we ought to do. I have two suggestions. One, I still believe that it ought to be part of the practice. I've expressed that view before. Two, at least for internal purposes, for this next dry run it would be helpful to get that... | 165 |
fomc | 2,007 | Why don't we include that in the survey and see whether people want to do it or not? | 19 |
fomc | 2,007 | Fine. | 2 |
fomc | 2,007 | President Lacker. | 4 |
fomc | 2,007 | I'd second being a little more transparent within the Committee about the fed funds rate. Compared with other elements of the sausage factory that get revealed in the transcript five years from now, I don't see why that should be so sensitive. More broadly, though, looking at these charts, I was really struck by the di... | 192 |
fomc | 2,007 | Governor Mishkin. | 4 |
fomc | 2,007 | I just want to mention--I don't know if this is true of other people--that I had two big problems when I was doing this dry run. So though it will come out in the survey, I have a feeling that other people might have views on this. One problem was that I really had difficulty thinking about the confidence interval beca... | 456 |
fomc | 2,007 | Vice Chairman. | 3 |
fomc | 2,007 | You know, we're going to have to talk through a lot of substantive issues on this. I thought, if we're going to do it, let's do it now. But you've all raised some of those questions. I'm looking at the clock. My suggestion is this. I don't know what we are planning for June--June is a two-day meeting, right? | 72 |
fomc | 2,007 | Right. | 2 |
fomc | 2,007 | So I don't think we can have these conversations before the next round. Let's make sure that we give ourselves time in June and beyond so we can start to talk through this--so that those who didn't speak today about their initial reactions aren't left without the opportunity to engage in this because there's a whole ra... | 74 |
fomc | 2,007 | President Minehan. | 4 |
fomc | 2,007 | I take Vice Chairman Geithner's comments very seriously, but I want to raise just one thing because I would like it to get into the survey. We were offered one way of reflecting uncertainty regarding forecasts. There might be other ways--for example, alternative scenarios, qualitative discussions of risk, or that sort ... | 123 |
fomc | 2,007 | President Moskow. | 4 |
fomc | 2,007 | Just a logistical question, Don. On the survey, I thought I heard you say that you were going to send it out in the next couple of days? | 32 |
fomc | 2,007 | I would like to. I didn't look at Vincent when I said that. [Laughter] I mean, I think we ought to get feedback soon. | 31 |
fomc | 2,007 | The only question I had is about the other iteration we're going to go through now, commenting on the staff draft over the next two weeks. I think it would be good for us to go through that experience before you send the survey out. | 48 |
fomc | 2,007 | Good point. Remind us when you can update your projections? | 13 |
fomc | 2,007 | Through opening of business tomorrow. | 6 |
fomc | 2,007 | Fine. So you have, I guess, the rest of the day to update your projections if you like. [Laughter] Governor Kroszner. | 32 |
fomc | 2,007 | I just want to underscore this point. It's not at all clear to me that providing the median of the 70 percent confidence bands is going to be useful to the markets. I think that we have to think about what will be useful to the markets. It is important to convey some sense of the uncertainty--and I very much look forwa... | 199 |
fomc | 2,007 | I just want to say that this exercise is already a success in terms of the kinds of questions it's making us confront. So I appreciate that everyone is taking this very seriously. We had very good, detailed responses from everyone. Let me just close the meeting with a few quick announcements. First, the next meeting is... | 222 |
fomc | 2,007 | Good afternoon, everyone. Today begins Cathy Minehan's last FOMC meeting. Cathy has been a regular participant since August 1994. We will have an opportunity later in the fall to say goodbye to Cathy more officially, but I think this will be a good opportunity to thank you for your collegiality and for thirteen years o... | 86 |
fomc | 2,007 | It has been truly an honor and an incredible experience, something I never expected to happen and a joy through the ups and downs and ins and outs of every meeting. So I thank everybody around the table who has been here and made it that way. | 50 |
fomc | 2,007 | Thank you, and now it is time for the report on desk operations. | 15 |
fomc | 2,007 | 1 It is hard to follow that. Thank you, Mr. Chairman. Today, I want to focus on the significant rise in long-dated Treasury yields that has occurred since the last FOMC meeting. As you can see in exhibit 1, Treasury yields have moved sharply higher over the past six weeks, although they have recovered a bit in the past... | 2,619 |
fomc | 2,007 | On the breakeven inflation rates, the five-by-five rose more, I believe, than either the five or the ten arithmetically because the ten rose more than the five and it's in the spread. It seems odd that a change in the near-term growth outlook would have significant implications for five-to-ten-year inflation expectatio... | 99 |
fomc | 2,007 | Well, I think there is an issue. You have to wait for the market to settle down. To the extent that you are taking a snapshot at a time that more convexity hedging is influencing the ten-year and the five-year has not caught up, that can be a phenomenon. Also, people in the marketplace say that people in the nominal Tr... | 180 |
fomc | 2,007 | Thank you. Are there other questions for Bill? President Minehan. | 14 |
fomc | 2,007 | My memory of the Long-Term Capital Management situation was that the dollar amount that went into the original program that the investment banks put together when they started to manage the situation wasn't that much bigger than the money that Bear Stearns is throwing at its hedge funds, yet the effect on the market se... | 162 |
fomc | 2,007 | Well, I think there's a difference in terms of people's assessment of how much risk Bear Stearns is actually taking on in terms of their hedge fund. My understanding is that they are extending credit, and they are basically taking out the credit that was extended by the counterparties for the less highly leveraged of t... | 187 |
fomc | 2,007 | But then they managed it so that they did come out ahead over a period of time--at least that's my memory. | 24 |
fomc | 2,007 | I'm sorry. Is this two-handed? | 8 |
fomc | 2,007 | I was going to follow up on Cathy's point, but I think Don is, too. | 19 |
fomc | 2,007 | I was going to do the same. | 8 |
fomc | 2,007 | Governor Kohn. | 4 |
fomc | 2,007 | I was just going to remark that the situation was quite different. LTCM followed the Russian debt default. The markets were already in considerable disarray. All those correlations had already begun to turn, and then on top of that you had the fire sale effects of LTCM. You can see some of that in the subprime market, ... | 93 |
fomc | 2,007 | I think there is a presumption in the Long-Term Capital Management case that a lot of people had similar positions in place. In the Bear Stearns case, we certainly don't have all the information at this point, but the general thought at this time is that there are not a lot of other people with the same positions in pl... | 67 |
fomc | 2,007 | Vice Chairman, did you have a comment? | 9 |
fomc | 2,007 | I agree with all of that, but the relative size is much smaller--much narrower in the type of positions to which they're exposed. The state of the world is dramatically different. Direct exposure of the counterparties to Bear Stearns is very, very small compared with other things. Bill is exactly right. These guys are ... | 156 |
fomc | 2,007 | That was the general opinion. | 6 |
fomc | 2,007 | But these guys were regarded as very smart people, who knew the business well, and this is just a good example of how little one can know in some sense and what leverage does to your exposure to liquidity risk. In this case, people were just not willing to give them the time to realize whatever value might be in these ... | 99 |
fomc | 2,007 | President Fisher. | 3 |
fomc | 2,007 | Mr. Chairman, I would argue that there are similarities in that, with Long-Term Capital, most of the stress-testing had been just computer-model driven. Then when actual market prices began to be quoted, you saw the deterioration. That is clearly the case here. The ABX is a technical index. For a lot of the CDO-squared... | 468 |
fomc | 2,007 | We can monitor the situation here and in New York. I don't know, Vincent, if we have any reports or materials that we can share with President Fisher. | 32 |
fomc | 2,007 | Well, Bill and I can get together. | 9 |
fomc | 2,007 | Maybe we could just have a common briefing. I think it would be very helpful, Mr. Chairman. | 21 |
fomc | 2,007 | I don't think, Richard, you need to be in a position to offer an opinion on what happened in Bear Stearns in particular. I don't think you need to or want to be in the business of doing that in that particular case. Regarding a broader understanding about the implications of what we see in these markets, Bear Stearns i... | 138 |
fomc | 2,007 | Well, again, Tim, I would suggest that we not comment on this. None of us should comment on it. But (1) it would be good to have an understanding, and (2) if it gets worse, more intense, or troublesome, the Committee will have to respond in some way, and it would be nice to at least have a common understanding as we go... | 87 |
fomc | 2,007 | There are a couple of themes. One is that the subprime problems are still being worked through the financial markets. The second is that subprime is an example of a broader class of structured products that are difficult to value, and that creates some uncertainty in the markets in periods of stress. President Lacker. | 62 |
fomc | 2,007 | I am always in favor of more understanding, but for this Committee, what I know about this now suggests that there isn't any reason for us to be involved. I compliment Vice Chairman Geithner on not serving sandwiches in this case. [Laughter] I agree with Vice Chairman Geithner--there's a certain danger of our commentin... | 102 |
fomc | 2,007 | Thank you. We are happy to share all the information we have about the specific case and its broad implications with everybody--in confidence, of course. | 30 |
fomc | 2,007 | Other questions for Bill? If not, I need a motion to ratify domestic operations. | 18 |
fomc | 2,007 | So moved. PARTICIPANT. Second. | 9 |
fomc | 2,007 | Without objection. We will turn now to the economic situation, and we call on David Wilcox. | 20 |
fomc | 2,007 | 2 Thank you, Mr. Chairman. My colleagues and I will be referring to the packet entitled "Staff Presentation on the Economic Outlook." Your first exhibit summarizes our economic forecast. As shown in the top panels, we have edged up our forecast for the growth of real GDP this year and next. Taken by itself, the increas... | 2,443 |
fomc | 2,007 | The next four exhibits focus on financial conditions in the corporate and household sectors. As shown by the black line in the top left panel of exhibit 6, operating earnings per share for S&P 500 firms for the second quarter are currently forecasted by analysts to be up about 5 percent from a year ago, a deceleration ... | 2,312 |
fomc | 2,007 | As you know from the Greenbook, recent news on foreign economic activity has been generally upbeat, supporting our view that growth abroad will continue at a solid pace. The top panel of exhibit 10 shows our weighted average of total foreign GDP growth and our outlook. If our forecast is borne out, foreign growth will ... | 2,600 |
fomc | 2,007 | Thank you. That was an excellent report. We have time now for some questions for our colleagues. Any questions? President Lockhart. | 27 |
fomc | 2,007 | Aircraft constitute what share of capital goods exports, and might they have something to do with the competitive situation, particularly between Boeing and Airbus? | 27 |
fomc | 2,007 | Aircraft are an important factor in this. In the fourth quarter of last year, Boeing was essentially exporting all the aircraft it could produce; so coming into the first quarter, we didn't get much more because there weren't any more to sell. But that issue has been important. I don't know to what extent Boeing has be... | 85 |
fomc | 2,007 | Aircraft are roughly 5 percent of exports. | 9 |
fomc | 2,007 | Five percent of capital goods or of total exports? | 10 |
fomc | 2,007 | More like 20 percent of capital goods and 5 percent of exports. | 15 |
fomc | 2,007 | President Lacker. | 4 |
fomc | 2,007 | I want to take David back to exhibit 5 and try to pin him down, although I am not very hopeful. [Laughter] You took us back to the period from 1996 to mid-2004, in which inflation, by the core PCE measure, was between 1 and 2 almost all the time--I think the only exception was basically the last few months of 2001. Cor... | 130 |
fomc | 2,007 | I would say that the answer differs by series, so that if you tend to favor the short-term Michigan series shown in the top right, you might get a more alarming picture. But, for example, the Survey of Professional Forecasters' ten-year-ahead series is all the way at the other end of the spectrum, having been essential... | 155 |
fomc | 2,007 | I am wholly on board with you there. What I was most curious about was what you took away from this for your core inflation outlook, which you have going to 2.0 real soon and staying there, and whether you view current expectations as broadly similar to this period and your forecast as consistent with that period? Or d... | 87 |
fomc | 2,007 | I think we view the current constellation of expectations measures as not providing much impetus either upward or downward on inflation--it is just not going to be an important factor shaping the contour of inflation in our view. | 41 |
fomc | 2,007 | Okay. A question I had--and maybe Vince can help with this--is that the TIPS measures obviously don't go back that far; and going back only as far as they go, my sense is that most analysts don't view them in the earliest period in which we have quotations as representing prices and markets liquid enough to give us a s... | 151 |
fomc | 2,007 | Well, there is a picture in the lower right panel of chart 1 in the Bluebook. | 20 |
fomc | 2,007 | It goes back only to '04, doesn't it? | 11 |
fomc | 2,007 | Yes, that is right. | 6 |
fomc | 2,007 | Well, I was looking at Greenbook Part 2, page II-35, and it goes back to '01. | 25 |
fomc | 2,007 | In my conversations with some of the TIPS analysts on our staff, they suggested, as consistent with your statement, that 2003 was, roughly speaking, the period in their view in which the TIPS market emerged into the modern era with some tighter pricing. | 53 |
fomc | 2,007 | So there is some informational content there. Are you giving me some comfort in that regard? | 18 |
fomc | 2,007 | Yes. | 2 |
fomc | 2,007 | I think the thing to note, President Lacker, is that, if you look at the term structure of TIPS compensation, the five-year, five-year-forward in that has been a whole lot more stable. The quotes you are looking at are very much influenced by the first five years. In fact, at the end of 2001, again in 2002, and in the ... | 100 |
fomc | 2,007 | The TIPS spread measure? | 6 |
fomc | 2,007 | Yes, the TIPS inflation-compensation measure. During the same period, however, the five-year, five-year-forward basically bounced up and down around 21/2 percent. | 36 |
fomc | 2,007 | Right. So the longer-run expectations maybe weren't so anchored or weren't tied to the middle of this period. But we had a period in which there was an indication that expectations over the near term were around 11/2. I guess the thing I would be curious about, and maybe Vince's presentation is a more appropriate time ... | 156 |
fomc | 2,007 | President Fisher. | 3 |
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