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fomc | 2,008 | Bill Dudley. | 4 |
fomc | 2,008 | I think you could get your result if people took the action as that the Federal Reserve's view was that the economy wasn't as great a risk. So risk premiums would come down, the dollar would rally, and the stock market would do better. I mean, it's possible. | 55 |
fomc | 2,008 | This speculation is perilous. | 6 |
fomc | 2,008 | Yes. I just wanted to ask a question. | 10 |
fomc | 2,008 | But I think it goes exactly to what both Bills just said, in that it depends fundamentally on whether the disappointment is reassuring or troubling. We have had two examples of disappointment that have been troubling, and we have had one example of disappointment being reassuring--the most recent one being the latter. ... | 219 |
fomc | 2,008 | It is also being significantly driven by the subsequent data. | 11 |
fomc | 2,008 | Well, this just illustrates the point. It's not as clear-cut as one might guess. Thank you. | 21 |
fomc | 2,008 | President Evans. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. I have a couple of questions, unfortunately. I am very sympathetic to your point about how difficult it is to understand what the relationship is between the equilibrium fed funds rate and where we are with respect to financial stress. Actually, my question is for the Greenbook team--if you cou... | 374 |
fomc | 2,008 | Yes, it's hard to know what to read into that. It could be that the forecasts have more inertia to them. | 24 |
fomc | 2,008 | Oh. I thought these were the smart guys who really were on top of it. | 17 |
fomc | 2,008 | But forecasts don't change that fast, so it is hard to know; but that could be one factor. | 21 |
fomc | 2,008 | Dave, did you want to respond? | 8 |
fomc | 2,008 | Yes. First, you are absolutely right. The equilibrium funds rate calculation has no reference to inflation. It shouldn't be viewed as a policy recommendation or where the fed funds rate should be. In essence, it is one transformation of the IS curve interacting with the supply side of the economy--set the real funds ra... | 389 |
fomc | 2,008 | Governor Mishkin first, and then President Bullard. | 11 |
fomc | 2,008 | Is yours on this point? | 6 |
fomc | 2,008 | It's related to this. | 5 |
fomc | 2,008 | Then why don't you take my slot, and I'll come in after. | 14 |
fomc | 2,008 | Is it a regime-switching kind of model in which you enter the recession state--you call it the recession state--and then add-factor down further? | 31 |
fomc | 2,008 | Yes, though that may be putting it too scientifically. In essence, we were looking at a configuration of data that, at the time of the March meeting, appeared to indicate recession. Even though we did not have the spending data in hand--and, as Governor Kohn indicated, we still haven't seen these correlated negative er... | 139 |
fomc | 2,008 | Then, is that calibrated against the 1990-91 recession or the 2001 recession? | 20 |
fomc | 2,008 | Basically, we did an average of the residuals in recessions since 1970. | 18 |
fomc | 2,008 | Oh, is 1980-82 in there? | 11 |
fomc | 2,008 | Yes, 1980-82 is in there. Again, the composition of where these residuals are is obviously heavily tilted in this case to housing, some of which is already behind us. So it isn't quite as though all of this weakness is prospective. Some of this weakness we have already had, and so there are very big negative residuals ... | 82 |
fomc | 2,008 | Governor Mishkin. | 4 |
fomc | 2,008 | Just to ask Bill a question--first the tall Bill, but the shorter Bill can answer afterward. [Laughter] On alternative B, you indicated that this would be very much in line with market expectations and, therefore, shouldn't have much impact. I was wondering about the statement aspect, in particular the assessment-of-ri... | 117 |
fomc | 2,008 | In recent days the stories we have been hearing from market participants and observers are that they think there may well be something--maybe not signaling strongly that we're done but talking about slowing down or possibly a pause. So I think this really is pretty close to what is built in. | 55 |
fomc | 2,008 | Yes, a soft pause rather than a hard pause is the way I would think about what the market is looking for. | 24 |
fomc | 2,008 | Okay. Good. Thank you. | 7 |
fomc | 2,008 | Other questions for Bill? All right. Well, we have overnight to reflect. We will also have the GDP data in the morning. I'm sure that they will be informative. We will reconvene tomorrow at 9:00 a.m. There is a dinner and reception, for those of you who would like to attend, and we'll see you there. | 71 |
fomc | 2,008 | Good morning, everybody. Why don't we start with the report from Dave Stockton on the data. | 19 |
fomc | 2,008 | 4 We left at your place, and I hope you have found, a GDP advance release for the first quarter. It came in at plus 0.6 percent versus our Greenbook forecast of 0.4. It was really very close to our expectations, both for the total and for the individual components. There were a few small differences. Nonresidential str... | 448 |
fomc | 2,008 | Any questions for Dave? All right. If not, yesterday we had an introductory presentation by Bill English on the alternatives. You will be pleased to know that there have been no further changes in the proposed statements. So why don't we take comments now from the participants. President Plosser. | 58 |
fomc | 2,008 | Thank you, Mr. Chairman. What I would like to do--it will probably come as no surprise--is to make the case for why we should stand pat today and make no change. My case is built on a number of points, and I'd like to articulate those as best I can. First, as we all know, the economic outlook has weakened since the sta... | 1,624 |
fomc | 2,008 | Thank you. President Evans. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. I, too, favor maintaining the federal funds rate at 21/4 percent today. The current real interest rate provides accommodative monetary conditions for an economy that is struggling near recession or is in mild recession. Our lending facilities are probably doing as much as can be expected to mit... | 1,133 |
fomc | 2,008 | Thank you. President Lockhart. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I must say that I am sympathetic to the "hold" advocates and the view that we are already accommodative. I think an apt anecdote is a conversation I had in the past six weeks with a cruise line CEO who doesn't know how to drive his ships but who has in fact been at the helm a couple of times. H... | 589 |
fomc | 2,008 | Thank you. President Stern. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. Well, I have given serious consideration to both alternatives B and C, and I think a credible case can be made for either one. There are, of course, risks associated with adopting either one as well. On balance, I come out in favor of alternative B, for the following reasons. First, we are cert... | 417 |
fomc | 2,008 | Thank you. President Rosengren. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. There seems to be a groundswell of opinion in financial markets, and perhaps around this table, that given the easing to date we are at or close to a point where we should pause and assess the impact of both fiscal and monetary stimulus already provided. Should we pause at a fed funds rate belo... | 379 |
fomc | 2,008 | Thank you. Governor Kohn. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I think I can be brief by just associating myself with the comments of President Stern. This is a difficult decision. You could make a case for either of these. But on balance, I think we should be lowering interest rates 25 basis points, as under alternative B. As President Stern said, I don't... | 903 |
fomc | 2,008 | Thank you. President Fisher. | 6 |
fomc | 2,008 | Well, Mr. Chairman, I was listening very carefully to Governor Kohn, as I do the rest of my colleagues. I noted your comment that it doesn't buy us much. I'm worried that it may cost us much. Had I gone first, I would have made arguments similar to those of President Plosser and President Evans. I am in favor of a paus... | 750 |
fomc | 2,008 | Thank you. President Yellen. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I favor alternative B with the wording that has been proposed. But I do appreciate that there is a case for alternative C as well, and I understand and appreciate the arguments that have been made in favor of it. On the pure economic merits, I definitely support a 25 basis point cut. As I noted... | 661 |
fomc | 2,008 | Thank you. President Bullard. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. The FOMC is badly in need of a stopping rule on the federal funds rate. Continued reaction to bad economic news--and there is likely to be bad news in the coming months--is going to set up serious future problems for this Committee. The fragile credibility of the Committee is being eroded as we... | 336 |
fomc | 2,008 | Thank you. President Hoenig. | 7 |
fomc | 2,008 | Mr. Chairman, I'm glad that reasonable people can differ. I do continue to hold the view that easing policy today is a mistake. If I were voting on it, I would vote to hold where we are. With the fed funds rate at the level it currently is, I think that continuing to ease policy in an environment of rising inflationary... | 271 |
fomc | 2,008 | Thank you. President Pianalto. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. My concerns about the real economy are similar to those that I had in March. I continue to believe that residential real estate markets could deteriorate even further than what I have in my baseline projection and could exert even greater downward pressure on business activity. Financial market... | 248 |
fomc | 2,008 | Thank you. President Lacker. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I find myself agreeing with my colleagues who have advocated alternative C. One way to think about our approach to the policy decision today is to look ahead and think about the probabilities associated with two bad outcomes. Will the economy go into a substantially deeper recession than we exp... | 766 |
fomc | 2,008 | Thank you. Governor Warsh. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I can support alternative B, but I must admit I can't do it with the conviction that I would prefer to have. I think market participants will look at our decision today and at the data over the next few weeks and try to measure whether we can hold up to the pause language that accompanies alter... | 685 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thank you, Mr. Chairman. As many speakers before me have said, this is a pretty close call, and reasonable cases can be made for both alternative B and alternative C. If you look at financial market conditions, you can see your favorite indicator and say whether things have eased or not eased. One indicator that I look... | 883 |
fomc | 2,008 | Thank you. Governor Mishkin. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Well, I'm in a very uncomfortable position here because I usually like to be very decisive, and I think in all past cases I've had a strong view before going into the meeting in terms of what is the appropriate alternative that the Committee should take, at least that I should take. I'm in a ve... | 925 |
fomc | 2,008 | But he has never seen a canary. [Laughter] | 13 |
fomc | 2,008 | I have seen a canary. But the key is that the canary has not keeled over. In fact, if you look at what's going on in the financial markets, the concerns in terms of inflation compensation have dissipated somewhat. I think the fact that they were moving up is an indication of greater inflation risk. They've come back do... | 534 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. The transcript says, "Mishkin says canary wheezing but hasn't keeled over." [Laughter] I support alternative B. I think you could frame this as a modest recalibration of policy with a hawkish soft pause. | 55 |
fomc | 2,008 | And a wheezing canary. [Laughter] | 11 |
fomc | 2,008 | I don't think the canary is wheezing. Look, I think there are lots of good arguments on both sides of this. I think all the good ones have been made. The markets have been giving us a pretty good test against the concern, which I think we all share, that if we move today we risk some significant erosion of our inflatio... | 396 |
fomc | 2,008 | Excuse me. Make sure that you say you're speaking for yourself, not for me, in terms of how I think about policy. | 27 |
fomc | 2,008 | Okay, but it is a surprising gap. So I think it would be worth some time to think through that. Obviously we also disagree about how inflation works in the United States, how relative price shocks take effect, and what we should respond to in that sense. That would be worth a little time, too. Again, it is a surprise t... | 699 |
fomc | 2,008 | Thank you all. The discussion was very good as usual, and let me just assure you that I listened very, very carefully. So I'm certainly hearing what you're saying, and I understand the concerns that people have expressed. I play Jekyll and Hyde quite a bit and argue with myself in the shower and other places. [Laughter... | 2,623 |
fomc | 2,008 | This vote encompasses the language of alternative B in the table that was handed out as part of Bill's briefing yesterday, as well as the directive from the Bluebook. "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To ... | 133 |
fomc | 2,008 | Thank you. I will ask the Governors to join me in the office for the discount rate decision. Everyone else, why don't you take a 20-minute coffee break. | 34 |
fomc | 2,008 | Okay. Why don't we recommence. The meeting that we are about to begin is a joint meeting of the FOMC and the Board, so I need a motion to close the meeting. | 39 |
fomc | 2,008 | So move. | 3 |
fomc | 2,008 | Without objection. The discussion is about interest on reserves. Let me turn to Brian. | 17 |
fomc | 2,008 | 5 Thank you, Mr. Chairman. We will be referring to the package of material labeled "Implications of Interest on Reserves for Monetary Policy Implementation." Today, the staff will report on work prompted by two changes the Congress made to the Federal Reserve Act in October 2006 and will seek your guidance on further w... | 897 |
fomc | 2,008 | As Brian noted, I will summarize our current approach. As indicated on page 7, I will discuss depository institutions' demand for central bank balances, how the Desk manages the supply of balances, and outcomes in the federal funds market. There are three components of demand. Some depository institutions (DIs) hold ba... | 2,364 |
fomc | 2,008 | Thanks, Steve. As noted on page 25, the Interest on Reserves Workgroup developed a set of options for monetary policy implementation in the United States based on alternative settings for a small set of core structural elements. The first core element--so-called balance targets--is a central feature of many systems. In... | 2,243 |
fomc | 2,008 | Thank you, Jim. We have identified four critical objectives for a new operating framework, which are listed on page 34 of your handout. These are (1) to reduce burdens and deadweight loss associated with the current regime, (2) to enhance monetary policy implementation, (3) to promote efficient and resilient money mark... | 2,222 |
fomc | 2,008 | Building on the earlier presentations, I am going to focus briefly on four areas. First, I'd like to put the interest on reserves project in the broader context of monetary policy implementation. Second, I will discuss briefly the implications of our experience during the recent market turmoil in terms of how it might ... | 1,449 |
fomc | 2,008 | Well, let me first congratulate and compliment the staff for a really thorough piece of work, both the presenters and all the other people whom Brian mentioned. It is excellent work, particularly under very trying circumstances. I mentioned that in February a workshop was held here at the Board on monetary policy imple... | 136 |
fomc | 2,008 | Yes. Option 1 doesn't seem to be one of your recommendations, and yet it is something that basically people know how to do. The idea is to eliminate the pack so that you have the system already in place. It's simple; you can learn from it. Why wouldn't that be one of the options you'd pursue? I don't have any real oppo... | 96 |
fomc | 2,008 | President Hoenig, I would say that we believe we already have a fairly good sense as to how paying interest on the required reserve balances and on excess reserves would work, at least qualitatively. We do think it would be an acceptable means of implementing monetary policy. As Jim noted, it probably wouldn't be all t... | 178 |
fomc | 2,008 | Governor Mishkin. | 4 |
fomc | 2,008 | I'd like to understand this issue in terms of the voluntary targets. How are they deciding on these? Clearly a big part of the issue is whether or not they choose you. I was just completely confused about what their considerations in choosing these numbers would be and what implications that would have. Now, there is e... | 224 |
fomc | 2,008 | Maybe I could just take the second question, and Spence or Jim may want to take the first. On the corridor approach, for other countries that are using it--I'm thinking of the Bank of Canada in particular here--their institutional set-up allows them extremely precise control over the supply of reserves. Also the demand... | 99 |
fomc | 2,008 | It is five or six banks, right. | 9 |
fomc | 2,008 | So the communication with banks regarding their reserve management is extremely simple compared with what we could expect here in the United States. | 24 |
fomc | 2,008 | The determination of voluntary targets, as Spence mentioned, is a really big issue that we'd have to study much further. At least in the context of the simple models, banks will face some probability of an overdraft charge if they are operating with very low balances, so they might have an incentive to set up a volunta... | 138 |
fomc | 2,008 | The Bank of England has used a procedure like this. What has been their experience? Again, it may not be completely comparable. | 26 |
fomc | 2,008 | Well, for the Bank of England, the way the voluntary target rules are set is really very simple. The bank chooses its own voluntary target. It can't be below zero, of course, but they have a cap. It can't be any higher than a certain amount, and I think it's 2 percent of some measure of their liabilities on their balan... | 260 |
fomc | 2,008 | The big risk would be if the voluntary balances were really low. | 13 |
fomc | 2,008 | So let's say that actually happened, that they were zero. Then what? Let's say we implemented this and they came out at zero. What are our options? | 32 |
fomc | 2,008 | You'd have to change the incentives somehow. | 9 |
fomc | 2,008 | Right, and that would be the answer. | 9 |
fomc | 2,008 | But you could. You could raise the cost of daylight overdrafts. | 14 |
fomc | 2,008 | Right. You could raise the cost of daylight overdrafts, or you could adjust the interest rate that you pay on reserves to get it right. That could solve the problem. | 35 |
fomc | 2,008 | As long as you have enough parameters that you can adjust to change the incentives, you're probably going to be okay in that environment. But if you have a system in which there aren't any parameters that you can actually move, then you have a real problem. | 51 |
fomc | 2,008 | But in the context of the law, we would have the ability to adjust these parameters. | 18 |
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