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fomc | 2,008 | Mr. Chairman. | 4 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | We have not been in touch with them directly to get a sense about their risk profile and so forth. We have had extensive conversations with the New York State Insurance Commissioner, who is the lead supervisor of many of them, but not all of them. It turns out that office also has very little information, particularly ... | 119 |
fomc | 2,008 | Another thing that is not very well known is what their assets consist of. We have rating buckets, but we don't know what those ratings actually apply to. We don't know who they have reinsurance with. Some people think that they're reinsuring each other to an extent or they have reinsurance with subsidiaries that they ... | 89 |
fomc | 2,008 | We have better information on the protection that banks purchased from the monolines--by monoline and by underlying asset--and it is important, of course, to have that. | 36 |
fomc | 2,008 | President Rosengren. | 5 |
fomc | 2,008 | Yes. I would just note with the TAF experience, going back just for a minute, that the Boston financial community has been overwhelmingly supportive. I don't know whether you have gotten the same sense when you talk to the financial community in New York, but whether people were bidding or not, they actually thought th... | 301 |
fomc | 2,008 | Well, I think the presumption is very much that it went in the right direction in terms of the Treasury market because basically the Treasury has auctioned off larger weekly one-month, three-month, and six-month bills to replace those that we were redeeming. So the floating public supply of bills went up. | 62 |
fomc | 2,008 | President Poole. | 4 |
fomc | 2,008 | Very quickly, we should not be surprised that banks like the TAF. It increases the bank's profits because of the difference between the funding costs. The issue is whether the TAF improves the way the markets are functioning, not whether it's feeding profits into the banks and whether they happen to like it. | 61 |
fomc | 2,008 | Mr. Chairman. | 4 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | I think it's clear in Bill's presentation that there's a very strong case that the TAF, the associated measures by other central banks, and, as important, the commitment and the signal that we would continue the TAF longer than was necessary have been very important to the improvement of market functioning and very imp... | 332 |
fomc | 2,008 | Are there any other questions for Bill? If not, I need a vote to ratify domestic operations. | 21 |
fomc | 2,008 | I move that we ratify the operations. | 9 |
fomc | 2,008 | Objections? Without objection. Thank you. We turn now to the economic situation. We begin with Dave Reifschneider, whenever you're ready. | 30 |
fomc | 2,008 | 2 Give me one second. On balance, the news we have received since the December Greenbook has been disappointing. The top panel of your first exhibit sorts some of the main indicators into two categories--those that were surprisingly weak and those that came in to the upside of our expectations. As you can see, the list... | 2,439 |
fomc | 2,008 | As discussed earlier, Treasury yields and stock prices are down sharply since the December FOMC meeting on news that indicated greater odds of a recession and large writedowns at financial institutions. As shown by the blue line in the top left panel of exhibit 6, the fall in stock prices pushed up the ratio of trend f... | 2,730 |
fomc | 2,008 | Your first international exhibits focus on the recent strength of the U.S. external sector. As shown in the top panel of exhibit 11, U.S. exports are now seen to have expanded at a moderate 41/2 percent pace in the fourth quarter, following the 19 percent surge in the third quarter. With import growth in the fourth qua... | 2,322 |
fomc | 2,008 | 3 I will be referring to the separate package labeled "Material for FOMC Briefing on Economic Projections." Table 1 shows the central tendencies and ranges of your current forecasts for 2008, 2009, and 2010. Central tendencies and ranges of the projections made by the Committee last October are shown in italics. As for... | 1,656 |
fomc | 2,008 | Thank you. That's quite a bit of information to digest. Does anyone have questions for our colleagues? President Evans. | 23 |
fomc | 2,008 | Thank you, Mr. Chairman. I have a couple of questions that are somewhat different. On the labor front, I'm curious if you could offer some thoughts on how deterioration in the labor market might be coming about--whether or not it would be from the hiring front or the job-destruction front. As the research literature ha... | 222 |
fomc | 2,008 | Do you want me to take that last question, or do you want to? | 16 |
fomc | 2,008 | Well, I could start if you would like. | 10 |
fomc | 2,008 | Go ahead. | 3 |
fomc | 2,008 | I think the points we are trying to make in that memo regarding inflation compensation were that, first of all, it's very difficult to make these judgments about what is going on with inflation expectations, inflation risk premiums, and so on; but our best reading of the evidence was that probably inflation expectation... | 207 |
fomc | 2,008 | I neglected to say how interesting that memo was. The analysis is really very good. I look forward to seeing more of it. | 26 |
fomc | 2,008 | The only thing I would add to Brian's statement is that I think uncertainty about inflation in the long run could be moving up noticeably without really bringing into play disinflation or something like that. In other words, you could be more worried about going down to 11/2 or 11/4 than you were before--I don't know--... | 82 |
fomc | 2,008 | May I have a two-hander on this? | 10 |
fomc | 2,008 | Governor Mishkin. | 4 |
fomc | 2,008 | When you think about what's going on, it is plausible that it is both up and down. That's the key point here. Because if you also look at the projections, there is a lot more uncertainty about what's going on in the real side of the economy. That could mean that inflation could drift down and longer-run inflation expec... | 157 |
fomc | 2,008 | That's what I was focusing on--the mean-preserving nature of that. | 15 |
fomc | 2,008 | I think it is consistent with your view, but I just wanted to clarify. | 16 |
fomc | 2,008 | On job destruction versus a slower pace of new job creation, it's hard to answer that one. Some of those patterns have changed over time; and in monitoring labor market developments, we're trying to keep track of those two elements and that sort of thing. Whether that would materially change the way we would look at, s... | 119 |
fomc | 2,008 | Obviously, we would be monitoring those developments. We are monitoring the gross flows in the labor market, and I think to a large extent the slowing that we have seen thus far in employment growth has come more from a slower pace of hiring than it has from an increase in layoffs. More recently, in the JOLTS data as o... | 134 |
fomc | 2,008 | I guess I was thinking that, if you talk to people, you hear more about the job destruction aspect, but you don't hear quite the same information about hiring, except you might hear more nervousness. That's all. | 44 |
fomc | 2,008 | Hiring plans have come off a bit in most of the surveys that we follow, but just a bit--not a lot yet. | 26 |
fomc | 2,008 | President Lockhart, did you have an interjection? | 11 |
fomc | 2,008 | Yes. My staff is suspicious that the employment numbers have actually been weaker than the data have shown. They have been focusing on the birth-death model and the payroll survey is based upon assumptions related to the birth of construction firms, which logically would not be creating jobs in this environment. Do you... | 66 |
fomc | 2,008 | Well, if Bill Wascher, who is our expert in this area, wanted to say something, I would certainly let him go ahead and say something. | 31 |
fomc | 2,008 | Sure. The birth-death model basically assumes that the cyclical properties of births and deaths are the same as for continuing establishments. The BLS has only about five years of experience with the birth-death model, so I think it is pretty difficult to judge whether they need to make any additional adjustments in bi... | 172 |
fomc | 2,008 | President Poole. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. Brian, I want to ask you about the projections. Well, it is more than an exercise now--the projections that we are offering are for real. What is the message that comes out of the projections--that is, if I am talking to the press or to others and they say, "What do I make of all of this?" My q... | 141 |
fomc | 2,008 | Well, that is a hard question, actually. You know, obviously in some sense the numbers at some level do speak for themselves. | 27 |
fomc | 2,008 | Okay. What are they telling us? [Laughter] | 12 |
fomc | 2,008 | I think they say that the Committee is expecting relatively slow growth in the period immediately ahead but that the economy avoids a recession. There is some recovery over the subsequent years. It is not extraordinarily brisk. It is a fairly gradual recovery in terms of growth. The unemployment rate moves up a little,... | 169 |
fomc | 2,008 | The reason I raise the question is that it seems to me very important that we have some interpretation as to what we make of all this and what we want the market to make of all this. In particular, let's say the observation that the projections or the risks are weighted to the downside. You might get some people saying... | 141 |
fomc | 2,008 | President Poole, I would just point out that when these are released it will be simultaneous with my testimony to the Congress, and so I will have opportunities to put some context on it at that time. | 41 |
fomc | 2,008 | I guess my question is directed as much to the Chairman as it is to Brian, which you will answer in the testimony. | 25 |
fomc | 2,008 | I will answer in the testimony. [Laughter] President Fisher. | 14 |
fomc | 2,008 | First, I, too, wanted to thank you all for the paper on forward inflation compensation. I agree with the conclusion that it is difficult. Especially in times of strained trading conditions, I think that is the conclusion--whether you interpret the outcome the way it was interpreted in the paper or the way I do it more ... | 312 |
fomc | 2,008 | We are happy to hear that there is demand for a bigger international section. [Laughter] You had better be careful what you wish for. | 29 |
fomc | 2,008 | But I am very serious about this. Suddenly there is a falloff. Would you give us a sense of the risk? It can't be all one-sided. | 32 |
fomc | 2,008 | Right. Just a word of background. The rationale for the falloff is the expected decline in these commodity prices and the expected slowing of global demand. Now, thinking about the risks, I am reasonably convinced that global demand is going to slow, which I believe will translate into reduced demand for many of these ... | 353 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | Vice Chairman? | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. Nellie, I have two questions for you. One is on exhibit 9, where you forecast in the middle right panel the rate of increase in defaults on subprime ARMs. If you compare that with your reset rate estimate and your house-price assumption or the house-price assumption in the market, I wonder whet... | 113 |
fomc | 2,008 | We have revised this forecast up quite a bit since the first time we looked at this maybe in June or August, in part because of lower house prices and tighter credit conditions. The model requires as inputs defaults and prepayments, and the prepayment rates have been fairly slow but not zero. The 2006 vintage, as it ap... | 311 |
fomc | 2,008 | Thank you. My second question is about your projected credit loss, and I apologize if you said this in your introduction. Are these losses across all holders of that credit risk? | 35 |
fomc | 2,008 | Yes. We have not distinguished between who is holding the securities--banks or investors--so mortgages would include the 20 percent or so that are commercial banks, and it would also include those held by investors in the primary form. | 46 |
fomc | 2,008 | We, being the Fed, know a fair amount about what banks hold. Do you have a crude estimate of what share of this banks hold, or what share of this would end up being eaten by banks? | 42 |
fomc | 2,008 | In mortgages, 20 percent is actually probably a pretty good estimate. | 14 |
fomc | 2,008 | For all the credit? | 5 |
fomc | 2,008 | They have that much of the business sector and that much of the mortgages, so that pretty much covers it. | 22 |
fomc | 2,008 | I am just trying to get at how you interpret this. So 20 percent of the additional $600 billion relative to normal or relative to bank capital cushions now, is what? Is it a lot or not so much? | 45 |
fomc | 2,008 | One issue here is whether you want to do it relative to current capital cushions. Banks can raise capital. If they anticipate that they will need to raise capital, they can cut dividends further. I haven't done that sort of exercise. One way to think about this is that the average long-run rate is about 60 basis points... | 117 |
fomc | 2,008 | We have had some bad points in history. I am not trying to force you to give a prediction, but were you reassured by this or troubled by it, fundamentally, in terms of the capacity of the financial system to absorb it? | 48 |
fomc | 2,008 | No, I understand. I think the third alternative gets beyond what most are expecting at this point. | 20 |
fomc | 2,008 | Yes, I would agree with that. | 8 |
fomc | 2,008 | In that sense, it does represent a risk that you are going to get dynamic feedback between losses and household spending and lending--it is a high risk. So I wouldn't say "comforted." I think we were saying that this is beyond probably what our models could respond to in our typical way or it would be another dynamic f... | 77 |
fomc | 2,008 | President Plosser. Oh, I am sorry--a two-hander. | 16 |
fomc | 2,008 | Just a quick followup, this doesn't include losses from securities. It is only the loans, right? | 21 |
fomc | 2,008 | The loans could be packaged in securities. This is debt. It includes all debt. Now, whether it is repackaged into an MBS, it would be there. It wouldn't be if it got in a CDO or something. | 48 |
fomc | 2,008 | Just in corporate bonds, for example. | 8 |
fomc | 2,008 | Yes. It includes corporate bonds. | 7 |
fomc | 2,008 | Okay. Thank you. | 5 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | Thank you, Mr. Chairman. I have three questions. Let me go to Brian first. This is more of a comment. In your description of the forecast, you referred several times to the notion that there might be slack in the economy in 2010 based on these numbers. I guess my reaction to that, while I was kind of skeptical, I am no... | 268 |
fomc | 2,008 | Maybe I can respond to that. It is very inferential, and it is based partly on the two-tenths' difference from the October exercise when it was actually clear--I think clearer at that time--from participants' forecasts that many participants characterized their NAIRU as being in the vicinity of 43/4 percent. Unfortunat... | 98 |
fomc | 2,008 | I have two other questions that I would like to pose. One is the change in the Greenbook's assumption about the increase in potential GDP. In particular, I am curious because what it essentially does, it seems, is to build in a significant amount of slack or output gap in 2009 and 2010 that didn't exist in the last Gre... | 191 |
fomc | 2,008 | In terms of the rationale for increasing potential going back over history, some of that, as I think I mentioned, was just that actual productivity performance has been better than the last time we reviewed this in the summer, and we are taking that on board. That is part of the motivation. Another part of the motivati... | 516 |
fomc | 2,008 | So are you saying that your path of the gap would have been unchanged? | 15 |
fomc | 2,008 | The path of the gap would have been to a first approximation unchanged going forward. Some of the greater resource utilization now and going forward is a combination of the fact that we haven't really changed our view on the labor market, aside from once we took on board the new unemployment rate data, but that we did ... | 195 |
fomc | 2,008 | Well, it does really change the character of the forecast substantially, I think. | 16 |
fomc | 2,008 | If you think about the forecast as resource utilization and inflation, then it has an effect on resource utilization that is bigger now going forward in the product market. We also see a bigger effect in the labor market, and if that were the only thing, it would have put more downward pressure--but not a lot--on infla... | 100 |
fomc | 2,008 | My last question is also related to some adjustments that struck me in the panel you talked about where you constructed the revised estimates of r*. The first item on your list that you talk about was that the equity premium had gone up, and that was a big factor. So I have a couple of questions. That was an adjustment... | 150 |
fomc | 2,008 | No, it is not separate; the equity premium is a large reason that we had the big drop in stock values. | 24 |
fomc | 2,008 | But is the mechanism through a wealth effect on consumption growth? | 12 |
fomc | 2,008 | Mostly, but not totally. | 6 |
fomc | 2,008 | Well, what does that mean? | 7 |
fomc | 2,008 | I would say a couple of things. One, you can think of the cost of raising capital through equity as having some small influence on business investment. That is pretty small. The big effect would be primarily on consumption, as you mentioned. Wealth effects to a smaller extent would affect housing as well. But I think o... | 189 |
fomc | 2,008 | So are these "extra channels"-- if you want to call them that--typically part of the forecast change and how you evaluate? That is to say, in the fall, when the stock market booms 10 percent, are we going to get another kicker upward in r* due to these same factors? | 62 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | It might not happen. I mean, you could have a situation in which business sentiment would not take a hit, for example, simultaneously with the stock market tumbling, and you would not see some risk premiums on bonds going up. That would be very unusual. | 53 |
fomc | 2,008 | I am just reacting to this very large change in your estimate of r* and attributing it to equity premiums, and I was just trying to figure out both. | 33 |
fomc | 2,008 | We just had a really big drop in the stock market, and that is the biggest piece of what is going on. But we have also marked down considerably our housing forecast. That is in an exogenous shift in aggregate demand, the IS curve. That is another chunk of what is going on here. We have had some increase in risk spreads... | 113 |
fomc | 2,008 | Well, I am just trying to sort out how much of this is really due to the stock market moving around. | 23 |
fomc | 2,008 | A big chunk of this is due to the stock market, so I don't know what we can do other than to take that on board in our forecast. As Dave noted, there are a few other, small wrinkles, and we didn't just invent those extra wrinkles this time around. They have always been there. But most of this is working through the wea... | 143 |
fomc | 2,008 | I didn't understand that this was just primarily the wealth effect or whether you were referring to something different. | 20 |
fomc | 2,008 | No, nothing different. Again, the way the stock market and other elements of spending operate is a little more complicated than just a consumer spending channel, but it really is wealth effect. | 37 |
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