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fomc | 2,007 | President Fisher. | 3 |
fomc | 2,007 | I would agree with that. Now, that doesn't say that pricing has changed. Let me give you an example. Kimberly-Clark last week went to market on $2 billion in debt. They couldn't move it unless they had a change-of-control provision. No price impact. So it is part of the risk premiums, but we're not seeing pricing per s... | 84 |
fomc | 2,007 | Governor Kroszner. I'm sorry. You were next. | 13 |
fomc | 2,007 | Yes, in principle I think that is a good way to characterize what's going on. But going back to the criteria that I was using, in many cases the risk premiums have simply moved close to historical levels from record lows. So if they stay at historical averages over time, that's not necessarily something that's wrong or... | 150 |
fomc | 2,007 | Well, just to say "have increased" and then have the next phrase say "credit conditions have become tighter" also makes no value judgment on whether they're appropriate. | 33 |
fomc | 2,007 | Mr. Chairman. | 4 |
fomc | 2,007 | Governor Kohn, do you have a comment? | 10 |
fomc | 2,007 | Yes, I do. I see why you want to take out "volatile," and I agree with that. Unlike President Lacker, I think it is important to keep credit conditions in there because it's more than just price. So I was a little concerned that saying "risk premiums have increased and credit conditions have become tighter" puts it all... | 113 |
fomc | 2,007 | I am okay with that. | 6 |
fomc | 2,007 | I prefer "risk premiums." | 6 |
fomc | 2,007 | You could just go back to the original language in the Bluebook. It says essentially the same thing. Just change the sentence around. | 27 |
fomc | 2,007 | I think that is a good idea. Credit conditions are becoming tighter. We saw that in the bank surveys before any of this happened. | 27 |
fomc | 2,007 | That is in the Bluebook. | 7 |
fomc | 2,007 | I understand, but I think that some acknowledgement of the effects of financial market developments in the recent weeks on the economy is needed just to make sure that people understand that we're awake. | 36 |
fomc | 2,007 | So the proposed language is "risk premiums" and "financial markets"? | 14 |
fomc | 2,007 | "Have increased, credit conditions have become tighter." And the housing. | 14 |
fomc | 2,007 | Fine with me. | 4 |
fomc | 2,007 | I just want to point out, Mr. Chairman, that those two clauses seem to overlap to a considerable degree, "tighter risk premiums" and "tighter credit conditions." It's not clear to me precisely what distinction we're trying to draw there. | 50 |
fomc | 2,007 | Well, "credit conditions" is more general because it can encompass both price and nonprice. | 19 |
fomc | 2,007 | So it raises a question in my mind as to why the first clause is necessary. | 17 |
fomc | 2,007 | Well, think of it as being market-traded assets, and "credit conditions" sounds like mortgages, retail type of credit provision. President Hoenig. | 31 |
fomc | 2,007 | I'm okay if you want to put "premium," the Vice Chairman's language, in there. But I think that the markets have become more volatile, and nothing is wrong with saying that, and credit conditions have tightened, which is a fact, and people are thinking about the volatility of the markets. So that is on their minds. We'... | 84 |
fomc | 2,007 | Okay. Let me just get a sense around the table, if I could. I think President Hoenig makes the point that volatility in financial markets could be viewed as having an effect on the economy through uncertainty and those sorts of factors. One option is "financial markets have been volatile in recent weeks." The second op... | 94 |
fomc | 2,007 | I guess I would. | 5 |
fomc | 2,007 | Oh, great. [Laughter] All right. | 11 |
fomc | 2,007 | We flip a coin? | 5 |
fomc | 2,007 | You have the deciding vote. | 6 |
fomc | 2,007 | Okay. | 2 |
fomc | 2,007 | One factor for me is that "volatility" is a very broad term, and "risk premiums" refers to a narrow set of markets, and this way shifts the focus off equity markets. | 39 |
fomc | 2,007 | Okay. I apologize profusely for bringing this up. Why don't we just leave it? [Laughter] So after all the discussion, my proposal is to follow President Plosser and to replace paragraph 3 with the June version. Please call the roll. | 54 |
fomc | 2,007 | I'll read the directive wording from the Bluebook and the balance of risk assessment from Brian's handout. "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 immedi... | 175 |
fomc | 2,007 | The next meeting is September 18. Let me remind you that we will be discussing briefly on September 18 and in October the communication issues. Let me ask you, please, to be reticent about discussing this; please be nontransparent about transparency [laughter] in our discussions so that we don't front-run ourselves too... | 133 |
fomc | 2,007 | Good morning, everybody. I'd like to welcome Charlie Evans to the table. Charlie is no stranger. He has been attending these meetings since February 1995, certainly ahead of me. So congratulations and welcome. | 42 |
fomc | 2,007 | Thank you very much. | 5 |
fomc | 2,007 | I'd also like to thank Cathy Minehan in absentia [laughter] for being willing to postpone her celebratory lunch until the next meeting, but we will do that in October. The first item of business is to select associate economists. With Brian Madigan becoming the secretary and Mr. Evans taking on a new role, we need to a... | 100 |
fomc | 2,007 | Moved. Discussion? Thank you. All right. Let's turn now to the Desk operations. Bill. | 20 |
fomc | 2,007 | 1 Thank you, Mr. Chairman. I'll be referring to the handout that you have in front of you. In my mind, there are three key questions. First, how did the problems in the subprime mortgage area--with losses that probably will ultimately turn out to be in a range of $100 billion to $200 billion--lead to such broad market ... | 3,119 |
fomc | 2,007 | Are there any questions for Bill? President Plosser. | 12 |
fomc | 2,007 | I appreciate your comments on this last point, but I think that the fact that the fed funds rate has been trading so low for so long is problematic. Certainly around August 9, when we started the interventions, that's all understandable. But the Committee made it very clear at that time that it wasn't changing the targ... | 424 |
fomc | 2,007 | Turning first to your first question, why we do it the way that we do--well, with the new authority to pay interest on reserves, we are going to take a pretty broad look at the whole issue of how we target the federal funds rate and how we manage reserves more generally. So I think that's a legitimate question, and it ... | 204 |
fomc | 2,007 | But you see the rate. | 6 |
fomc | 2,007 | We do see the rate. We could be more aggressive and push people to the window, but I think it is important in this environment not to be contributing to market turmoil. We felt that the right thing to do was to err on the side of not pushing people forcibly to the window when the market was under some distress. I would... | 161 |
fomc | 2,007 | President Fisher. | 3 |
fomc | 2,007 | Thank you, Mr. Chairman. Bill, I just want to make sure that I understand what you said in your excellent presentation. I think I heard you say that, as time passes, investors in the markets will become more discriminating. Already we're seeing signs of returning stability. I'm trying to differentiate between what we h... | 303 |
fomc | 2,007 | Well, it's difficult to sort out exactly how much of that term premium that we see in the term funding markets represents counterparty risk versus balance sheet constraints. I think in the United States that it is probably more of a balance sheet issue. In Europe it's probably more counterparty risk. The general sense ... | 222 |
fomc | 2,007 | We talked about the conduit question somewhat on the calls. Again, I assume we've done sensitivity analysis to the degree that we can in terms of the potential for having to absorb some of that risk and bring it onto the balance sheet. Is that correct? | 50 |
fomc | 2,007 | The analysis that has been done has suggested that the banks are well capitalized and should, with one or two exceptions, be able to handle this balance sheet expansion reasonably well; but they can't say that with absolute certainty. | 44 |
fomc | 2,007 | Of course, of course. | 6 |
fomc | 2,007 | Another thing happening is that there is a potential problem on the earnings side. You can imagine a worst case scenario in which you can't syndicate any of the loans and then the loans have to be marked down significantly. That has an earnings consequence. So then the balance sheet is going to be affected not just by ... | 118 |
fomc | 2,007 | May I ask one more question, Mr. Chairman? At the last meeting I asked about commercial paper risk in Europe and got nods of not a great risk. Is there anything that you see or that you can think of that we don't know or that hasn't been in this presentation that would indicate significant potential for risk? | 64 |
fomc | 2,007 | I would hesitate to say that I know with any great clarity that there's nothing else there in Europe. I think we have all been a bit surprised by the size of some of the conduits that some European banks were sponsoring relative to their capital. I would be very hesitant to say that we have transparency regarding that ... | 73 |
fomc | 2,007 | Thank you, Mr. Chairman. | 7 |
fomc | 2,007 | President Stern. | 3 |
fomc | 2,007 | I would like to return to the issues that President Plosser raised, which I think are very serious for this Committee. Maybe the question is what you would have done differently with the benefit of hindsight to have come closer to the target. My "back of the envelope" calculation starting with August 9 or August 10 is ... | 196 |
fomc | 2,007 | But I would just reemphasize the fact that we did try to be stingy. Our ex ante provision of reserves was less than what we thought that the market needed, and we thought that would push up the federal funds rate. We do not have control over all the factors that affect the demand for reserves, and unfortunately they co... | 147 |
fomc | 2,007 | Mr. Chairman. | 4 |
fomc | 2,007 | Vice Chairman Geithner. | 6 |
fomc | 2,007 | Just to reinforce what Bill said--of course, we spent a lot of time thinking through exactly the risks that you are worried about in this context, and we'll have a lot to reflect on in terms of the nature of the regime and what the legislative authority gives us going forward. But I think that Bill and his people reall... | 534 |
fomc | 2,007 | One complexity in this whole period is that there is a surprisingly large demand for dollars in Europe, which of course is early in the day. So the fed funds rate was opening very, very high, very tight, and then there were judgments about how to bring it down during the peak trading period of the U.S. markets. That le... | 121 |
fomc | 2,007 | We still love Bill, by the way. | 9 |
fomc | 2,007 | Oh, we all love Bill. [Laughter] | 11 |
fomc | 2,007 | For the record, I laughed. | 7 |
fomc | 2,007 | President Lacker. | 4 |
fomc | 2,007 | I want to ask about the term funding market, and I want you to help us understand what we know about that. In typical times, like before this, do we know how much lending was done at term in the fed funds market? Do we know what names were typically involved--is there a flow across the banking system of some particular... | 168 |
fomc | 2,007 | On the question about volume, there's no question that volume went up considerably in the overnight market--about 20 percent, as near as we can judge over this period. Since the term market was mostly shut down, especially in term fed funds, there has been very little in term fed funds trading. You can almost infer tha... | 383 |
fomc | 2,007 | If I could just follow up, I know the Desk tracks overnight fed funds trades, and you get from the dealers the quantities at different rates in order to calculate the effective rate. Are you inferring term volume from that, or do we have any other independent quantitative sources on the volume of term funding? | 61 |
fomc | 2,007 | I haven't actually seen any volume data on term. They may, in fact, exist. What we did, though, is look at the volume in the overnight federal funds market, and we saw that go up about 20 percent. So if you start with the premise that the banks that have excess funds to lend aren't going to change much month to month, ... | 89 |
fomc | 2,007 | Both large banks in our District have gone from being net borrowers to being large net lenders. One, in fact, says it's the largest in the market and lends $10 billion to $15 billion every night overnight, and they used to borrow a couple of billion dollars every day. Could something like that account for the volume in... | 69 |
fomc | 2,007 | Yes, obviously that moves in that direction, but if I remember correctly, the number on the volume of the fed funds market is in the $400 billion to $500 billion range. Twenty percent on that kind of level is quite a bit bigger than what you're seeing. | 54 |
fomc | 2,007 | Okay. | 2 |
fomc | 2,007 | That would include brokered trades and nonbrokered trades. | 12 |
fomc | 2,007 | But, Mr. Chairman, if I'm not mistaken, I think that the term market for interbank liquidity is largely offshore in Europe, not in fed funds onshore. I'm not sure that helps when we get into this context. | 46 |
fomc | 2,007 | Right. I was asking about the demand. I was curious about what we know about the domestic part. | 21 |
fomc | 2,007 | Our research people have tried to figure out whether they could infer or take from Fedwire data other indications of who's lending at what maturities and who's borrowing at what maturities and what the balance is. My own sense from looking at this, and maybe I just haven't figured it out yet, is that it doesn't give yo... | 74 |
fomc | 2,007 | It's an over-the-counter market, and in most over-the-counter markets we do not have the kind of volume data we would like to have. | 29 |
fomc | 2,007 | Just one tiny thing--in the overnight market, from the brokers, we have volumes traded at different rates. For the term fed funds rate, which is showing up in a graph or two--I can't remember where--does that come off broker screens? We don't have trades on that, do we? | 61 |
fomc | 2,007 | I don't know the answer to that. | 8 |
fomc | 2,007 | There is not a regular data source. | 8 |
fomc | 2,007 | All right. Thanks. | 5 |
fomc | 2,007 | Are there other questions for Bill? If not, I need a vote to ratify domestic open market operations. | 22 |
fomc | 2,007 | So moved. | 3 |
fomc | 2,007 | Without objection. Thank you. May we turn now to the staff presentation on the economic situation? Dave Stockton and Karen Johnson will start with the economic overview, and then Brian will make a few comments on the projections that we submitted. Dave. | 48 |
fomc | 2,007 | Thank you, Mr. Chairman. "This has been a far from placid time. Indeed, the intermeeting period has been marked by financial tumult of such a magnitude as to significantly alter the outlook for the economy. A deeper retrenchment in U.S. stock markets, more-cautious credit provision, and more-serious disruptions to econ... | 2,676 |
fomc | 2,007 | In the International Division, we, too, were challenged to assess the avalanche of events and information that arrived during the intermeeting period and to make our best judgment as to how these developments would affect the rest of the global economy and the U.S. external sector. One striking feature of the baseline ... | 1,600 |
fomc | 2,007 | 2 I will be referring to the table in the package labeled "Material for FOMC Briefing on September Trial-Run Projections." I will first focus on the near term. The upper panel of the table shows the forecasts for the second half of the year that are implied by the estimates that you submitted for the first half of 2007... | 672 |
fomc | 2,007 | Thank you. Mr. Stockton has been reading Upton Sinclair, I think. [Laughter] Questions for our colleagues? President Evans. | 28 |
fomc | 2,007 | Dave, your presentation seemed to hit on all the right points with regard to the forecast. I am reminded, though, that Chicago is no longer the hog butcher capital of the world. [Laughter] Still, I have a forecasting question. In the briefing yesterday, you quantified the financial stress effects on GDP growth that you... | 227 |
fomc | 2,007 | In this particular forecast, the housing revision is basically all driven off our assumptions about the difficulties in financial markets. There are no additional sentiment-type effects there. On commercial real estate, I'd say pretty much the same thing. As I noted in my briefing, the area where we have ventured into ... | 480 |
fomc | 2,007 | President Plosser. | 5 |
fomc | 2,007 | Thank you, Mr. Chairman. My first question was very much related to what Charlie just asked. First let me say that I appreciate the tour of the sausage factory. It was a little bloody, but I want to commend you in that I think it was a fairly balanced way of looking at what the risks are in various places. But I want t... | 197 |
fomc | 2,007 | That is basically correct. I mean, we expect some recovery. We weren't expecting that August figure to prevail through the forecast period. If that were to occur, we would be looking at an even weaker outlook than we are seeing. Again, in all these things, I don't want to make it sound too precise, but we do think unde... | 200 |
fomc | 2,007 | That would be a significant change from the standpoint of how you are viewing the forecast. | 17 |
fomc | 2,007 | That would raise the forecast, as I said. | 10 |
fomc | 2,007 | My impression from studies and empirical work is that consumer sentiment usually is a much bigger coincident indicator than it is a forecasting tool. | 26 |
fomc | 2,007 | Yes, it helps for forecasting near-term consumption. But you are right, I don't think the low level of consumer sentiment that we have seen through the middle of September is telling us a great deal about where consumer spending will be early next year. There is not a lot of predictive content that way. | 60 |
fomc | 2,007 | Yes. That's really my point. | 7 |
fomc | 2,007 | Therefore, in some sense, to be consistent with the forecast, we would have to continue to expect that consumers are going to be worried and more downbeat. Again, while I would say that's obviously a significant source of uncertainty, I don't think that's necessarily unreasonable in an environment where there will cont... | 92 |
fomc | 2,007 | I appreciate that clarification. The other question I had has more to do with the NAIRU and employment issues. I wish you could clarify a bit for me--the downward shift in employment numbers for the past three months is for me significant. At the same time, I say to myself, "Well, you know, now it is about at the level... | 236 |
fomc | 2,007 | On that last point, I think it probably would have been a little higher. But if we hadn't revised the NAIRU, we might also have had a higher unemployment forecast going forward. It wouldn't be just like "everything else equal" if we lowered the NAIRU. I think it did contribute to a slightly larger output gap in this fo... | 343 |
fomc | 2,007 | Thank you. | 3 |
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