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fomc | 2,008 | Governor Mishkin, to state the obvious, we'd want to avoid that situation completely. We want preparation and consultation with banks ex ante as to how they would react under various subparameterizations. | 38 |
fomc | 2,008 | Okay. Thank you. | 5 |
fomc | 2,008 | As Steve noted, we already have $7 billion in required clearing balances with a rate of remuneration that's only 80 percent of the T-bill rate. So in all likelihood, we would have a positive number. How large that number would be is the question mark. | 54 |
fomc | 2,008 | President Yellen. | 4 |
fomc | 2,008 | I have a comment, not a question. | 9 |
fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | Thank you. This represents a once-in-a-generation opportunity to reengineer our monetary policy operational framework, and I think it's important that we do our best to get it right. I want to start by applauding the staff for taking a very deliberate, very thoughtful approach to this project. I was able to attend the ... | 2,290 |
fomc | 2,008 | Thank you. Just a procedural question. You kind of segued into the positions. Does anyone have a short question of fact? Governor Kohn. | 30 |
fomc | 2,008 | I actually have a couple of questions rather than positions. One is a bit more about what we've learned in this period of stress. For example, on page 26, you list a bunch of banks that don't seem to have taken advantage of primary credit. I assume that you have talked to them, and I wonder how they had rationalized th... | 276 |
fomc | 2,008 | If I may start with the last question, we can work our way up or around the list. On pursuing legislative authority, the Federal Reserve is interested in accelerating that authority. We have had some conversations with congressional staff about this. For instance, the staff of Senate Minority Leader McConnell has asked... | 257 |
fomc | 2,008 | We think we could implement it pretty quickly. Another benefit would be not just addressing the crashes of the funds rate late in the day but also enabling us to actually expand our balance sheet if needed. | 39 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | Just to clarify, what are the implications for scoring? | 11 |
fomc | 2,008 | It's pretty small if you just confine it to excess. | 12 |
fomc | 2,008 | My impression is, as Bill said, that it is small and there may not even be positive costs if you confine it to excess. The issues of paying interest on required reserves are possibly a little more troublesome, but that may be viewed as a worthwhile cost to undertake at this point. | 58 |
fomc | 2,008 | Let me interject. If there's a sense of the Committee that this is something we should escalate, let's move it up the ladder and do that. But anyone who wants to comment on that during the go-around, please feel free. There was a second part about the United Kingdom, I believe. | 60 |
fomc | 2,008 | With respect to the U.K. system during the period of turmoil, banks' initial reaction was to lower their reserve deposits, their contractual commitments. But they came to their senses and realized that holding more rather than less was a more sensible approach, and the Bank of England accommodated the banks' desire bot... | 70 |
fomc | 2,008 | Pretty dramatically, in fact. | 6 |
fomc | 2,008 | Quite dramatically, to avoid the end-of-period spike in rates. In terms of rate volatility, the Bank of England, the ECB, and the Fed all achieved about the same rate volatility during the period of market turmoil. For the Bank of England, the spikes just tended to be more on the upside than the downside, but that had ... | 88 |
fomc | 2,008 | I assume it was the stigma problem as well. | 10 |
fomc | 2,008 | Though they had a few trades above their lending rate, in fact that was not much of a problem. Their system worked quite well. Interestingly, the country with the smallest rate volatility during the whole period of market turmoil was Canada, and that's because they knew the demand for balances at the end of every day a... | 86 |
fomc | 2,008 | Other short questions? President Fisher. | 7 |
fomc | 2,008 | A very short question having nothing to do with what everybody else has asked about--but going back to page 33, what are the governance issues, and how do you resolve them, in 30 seconds or less? [Laughter] | 48 |
fomc | 2,008 | Well, the governance issues are that the FOMC is in charge of open market operations and setting the target for the federal funds rate, at least under current approaches to policy. The legislation specifies that the Board is in charge of setting the rates paid on balances to institutions. For instance, there may be dif... | 141 |
fomc | 2,008 | President Stern. | 3 |
fomc | 2,008 | My question is about intraday and day-to-day volatility in the funds rate. I would think that as long as we hit the target on average, that kind of volatility wouldn't have any significant macroeconomic consequences. So why would we care? | 48 |
fomc | 2,008 | That's our impression, that it doesn't have macro consequences. Maybe it's a tempest in a teapot, but for the participants in that market, the uncertainty and the costs that are borne by borrowers and lenders are an important issue. But the macro fallout, the effect on longer-term rates, doesn't seem to be significant. | 63 |
fomc | 2,008 | What we don't know is whether that volatility somehow has consequences for term funding. How do you know the linkage between the two because they're happening sort of simultaneously? But I agree with Spence that we don't think there's any significant macro effect. There may be some marginal effect of volatility creatin... | 70 |
fomc | 2,008 | There is an effect on swaps, like foreign exchange swaps, right? | 14 |
fomc | 2,008 | Well, for a lot of what we seem to get--like the Eurodollar rates and LIBOR and foreign exchange swaps and the way they relate to what goes on in our overnight funds market--the typical intraday pattern is firm in the morning and coming off late in the day. Those higher morning rates are the ones that are linked to the... | 98 |
fomc | 2,008 | The high morning rate could conceivably affect other rates in a way that's-- | 16 |
fomc | 2,008 | It sounds like an obvious arbitrage opportunity. | 9 |
fomc | 2,008 | Well, we're not seeing much arbitrage. | 9 |
fomc | 2,008 | We are finding a great reluctance to do intraday arbitrage. We're hearing this from the banks that in the past would do that from time to time. Coming back to one of the other questions that Don had about what we are hearing about stigma from some of the banks, one of our better contacts, Citibank, as Jim mentioned, us... | 204 |
fomc | 2,008 | The TAF auction results underscored the idea of stigma at the primary credit facility. It's possible that we have actually a bit more stigma now than we did before because you can just see very clearly that there would have to be stigma for people to be bidding that much in the TAF auction. | 60 |
fomc | 2,008 | President Evans had a two-hander. | 8 |
fomc | 2,008 | My primary comment in all of this is related to what President Stern, I think, said. The way the objectives are worded here is "enhanced monetary policy implementation," and the memo is worded more like, "How do we get our federal funds rate target effectively?" or something like that. But there is really no discussion... | 284 |
fomc | 2,008 | Governor Warsh. | 4 |
fomc | 2,008 | Governor Kohn shamelessly stole my question. [Laughter] | 14 |
fomc | 2,008 | Governor Kroszner, do you have a question? | 12 |
fomc | 2,008 | Yes. In a lot of the discussion you just take as given the stigma associated with the primary credit facility, and you were just discussing that related to the publication of information about the facility. Is that something that could also be on the table? That seems to be potentially an instrument for which we might ... | 98 |
fomc | 2,008 | I think that's worth some further thought, Governor Kroszner. One issue though, as I'm sure you know, is that the Board is required by law to publish weekly information on the individual Banks' balance sheets as well as the consolidated balance sheet with a certain amount of detail. I don't remember the exact legal wor... | 119 |
fomc | 2,008 | For sure, but just thinking about whether there are other things that we could do related to stigma might be worthwhile in this context. | 26 |
fomc | 2,008 | Absolutely, we agree. Of course, when the Board adopted the primary credit program in 2003, we gave a lot of thought before that and did considerable work after that to try to minimize the amount of stigma by trying to make very clear to banks that in our view use of the window didn't entail stigma. But the fundamental... | 109 |
fomc | 2,008 | President Plosser, did you have a question? | 11 |
fomc | 2,008 | Yes, just an implementation question. One thing you talked about was in periods of stress, the way we've conducted policy intraday, you have had firmness in the funds rate in the morning and then weakness in the afternoon causing some intraday volatility. The difficulty of hitting the target was partly the fact that we... | 145 |
fomc | 2,008 | I would say, as a general characterization, that the common practice is to intervene only once a day, in the morning--not unlike what we do. Where there's an exception, it's like with the Bank of Canada. They have access to information that would allow them to know with precision late in the day what the supply of rese... | 261 |
fomc | 2,008 | Just to make this clear, Spence, is it the number of banks that make that information more accessible in Canada, or is it something else? Is it fundamentally that they have just five banks? | 40 |
fomc | 2,008 | No, it is that they know the balance sheet. They know it by late in the day with certainty. They have few sources of uncertainty to begin with, and their major source of uncertainty, government balances, is something that perhaps the small number of banks they're dealing with facilitates. But it is that they know by la... | 78 |
fomc | 2,008 | Basically everything clears through their equivalent of Fedwire, so they know in real time what the balances are. | 21 |
fomc | 2,008 | Okay. Did you have a question? | 8 |
fomc | 2,008 | A comment about stigma. Every financial transaction that a substantive firm engages in that becomes known is relied upon by market participants to make inferences. There's a huge literature on the effect on equity values of the announcement of a bank line of credit; and like through this last crisis, if you talk to fun... | 150 |
fomc | 2,008 | Okay. Let's take positions and comments, keeping in mind that lunch is being held hostage. [Laughter] President Rosengren. | 27 |
fomc | 2,008 | Okay. Just a quick question, which doesn't have to be answered now--given all of the financial turmoil, it would be interesting to see whether in other countries that have these different arrangements there was a decrease in either overnight or term lending with counterparties. Given the extent to which you can just wo... | 418 |
fomc | 2,008 | Thank you. President Evans. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. As I mentioned earlier, I would find some discussion about the transmission mechanism useful--at what rate we think the markets would be picking up the price of risk-free yield curves. I think that would help. To the extent that we can align this with other foreign central bank experiences, we ... | 159 |
fomc | 2,008 | President Stern. | 3 |
fomc | 2,008 | I have only two comments. I would drop option 1. I just think it doesn't do enough to reduce the burdens and dead weight losses. As long as it's there, there will be a tendency to fall back to it for all sorts of reasons, given bureaucratic tendencies. So I would just discard it. I would not discard option 4, so I woul... | 133 |
fomc | 2,008 | President Yellen. | 4 |
fomc | 2,008 | Thank you. First, I do really appreciate all the excellent work the staff has done on this topic. I really learned a lot from these papers. I thought they were very clear and very comprehensive. I have just a couple of comments on the questions that Bill and Brian raised in the memo. The first one has to do with whethe... | 984 |
fomc | 2,008 | Thank you. President Bullard. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. This is a proposal for study. The timeline seems fine to me. The study period is pretty important in this case because it is not clear to me which option is best, and so I think maybe we should keep more of the options on the table. One question that I have is, To what extent are current reserv... | 469 |
fomc | 2,008 | On the public finance question, of course, the Congress has acted and they score it to cost. So in some sense that is moot from our perspective. President Pianalto. | 35 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me also start by commending the authors of the papers that were prepared on this topic. I found the material very informative and helpful. I agree with the objectives established by the staff to evaluate the set of proposals, and I also support the process and the proposed timeline for movi... | 243 |
fomc | 2,008 | Thank you. President Lockhart. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Just to answer the questions that were posed, I am comfortable with options 2 and 5, but I thought President Lacker's presentation made the case that option 4 deserves to remain in the mix. I think the objectives are appropriate. The only comment I have--and this is a bit vague, I realize--is t... | 333 |
fomc | 2,008 | Thank you. President Hoenig. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I would look at this meeting as an introduction to this topic, given the breadth of the discussion here, which I found extremely interesting and useful. I think we will need to come back to another discussion of it--not necessarily with another 100-page study. I wouldn't want to put that burden... | 266 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. This will be very brief. Option 2 looks very attractive to me. I think option 1 may be a fallback position, but like President Stern, given our tendency to move slow too quickly, if that makes sense, I would rather take the opportunity to make a larger step. So I think option 2 is fine. Option ... | 637 |
fomc | 2,008 | Thank you. President Fisher. | 6 |
fomc | 2,008 | Mr. Chairman, we have been in favor of paying interest on reserves for some time. This is an excellent paper. Like everybody else, I learned a great deal from all the papers that were sent and this superb summary that was just presented. I personally tend toward option 2, but I think it is worthwhile considering option... | 264 |
fomc | 2,008 | We don't want it. [Laughter] Governor Kohn. | 13 |
fomc | 2,008 | Thank you, Mr. Chairman. I thought this was a great piece of work by the staff, and I thank them all. You did a good job of organizing it and laying out the general principles in a way that people can understand. Despite President Yellen's comments, I have no regrets about my testimony in favor of paying interest, perh... | 300 |
fomc | 2,008 | Governor Warsh. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me add my plaudits to those already expressed on the quality of this work, and then let me confine my comments to the timing and sequencing. First, with respect to the rollout of the white paper, it strikes me that, given that questions have been raised about what our flexibility is around ... | 312 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thanks. Great work, great presentation. It is impressive to get through fifty-two pages in less than fifty-two minutes, and so I applaud you on that. Basically I agree with a lot of the stuff that has been said before. The trick may be thinking a bit creatively about stigma issues, if there is any way to deal with thos... | 109 |
fomc | 2,008 | Well, I certainly think at this point the three that you mentioned first. At this stage, if we are going to go to with three, we might want to think about putting all five out, just to flesh out all parts of the spectrum and acknowledge that option 1 could be a fallback. We have to think about the pros and cons of that... | 87 |
fomc | 2,008 | Doing three of them seems perfectly reasonable. Thank you. | 11 |
fomc | 2,008 | Governor Mishkin. | 4 |
fomc | 2,008 | I am very comfortable with the analysis and the approach, so I don't have any major comments there. Although in the white paper you might mention them, I would like to take options 1 and 3 off the table. Option 1 has just too much administrative burden. We have enough tsuris already. Although option 3 may work well in ... | 229 |
fomc | 2,008 | Vice Chairman. Oh, sorry. President Lacker. | 11 |
fomc | 2,008 | Presumably, the rate we pay would be viewed as a risk-free rate. Presumably, any market rate would be priced relative to that to include a credit premium in the usual way. If any other dynamics are anticipated by the staff, it would be useful to know that. But the usual presumption we have is that observed market rates... | 93 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. I don't have a conviction yet on the options, but I agree that we should narrow our focus to options 2 and 4-5. I think we should design a process that tries to force us to get conviction more quickly on which option we would prefer. I think it is possible. You have made a huge investment alrea... | 914 |
fomc | 2,008 | Thank you. On those broader questions, Vice Chairman, we are going to talk at lunch about some initiatives by which we will address some of the broader regulatory and bank supervision issues. That process will be parallel to this. What I would say about this issue is that, as you go forward, you should keep in mind the... | 633 |
fomc | 2,008 | Good afternoon, everybody. Why don't we begin, as usual, with the Desk report and Bill Dudley. Bill. | 24 |
fomc | 2,008 | 1 Thank you, Mr. Chairman. I'm going to be referring to the handout that you should have in front of you. Financial markets have become more resilient to bad news in recent weeks. Although the news associated with several important groups of financial intermediaries--including investment banks, commercial banks, and th... | 2,808 |
fomc | 2,008 | Thank you, Bill. The quarter-end premium seems less this time, but am I correct that the dollar premium is higher than the euro and pound premiums? | 31 |
fomc | 2,008 | It is a bit higher, yes. | 8 |
fomc | 2,008 | Is there anything to be inferred from that? | 9 |
fomc | 2,008 | About 225 basis points are priced in for our dollar turn--maybe 150 basis points or 175 basis points elsewhere--but those are pretty small differences measured over just a couple of days. So I wouldn't read too much into it. The reality is that the European banks are structurally short of dollar funding, and so that ma... | 84 |
fomc | 2,008 | Other questions for Bill? President Lacker. | 9 |
fomc | 2,008 | Yes. I notice that in chart 18, in your TIPS-implied average inflationary plot to the ten-year horizon, you omit the Markets Group's estimate. Is that because of skepticism on your part that leads you to judge it as inferior or an overabundance of humility? [Laughter] | 62 |
fomc | 2,008 | The latter, of course. [Laughter] | 10 |
fomc | 2,008 | It does, of course, show a slightly different trend, right? | 14 |
fomc | 2,008 | It actually has increased a bit. But I have consistently shown just the Barclays and Board measures over the past few months, so this is not "pick and choose." | 33 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | Bill, by inference, talking about the Primary Dealer Credit Facility, two of the limited number of borrowers have been the two institutions you mentioned. Have there been many more or just one or two? | 39 |
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