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fomc | 2,008 | Brian, it might be helpful if you would circulate your remarks about the new exhibit 3 and its implications after the meeting. That was very helpful. But I just want to clarify one thing. Could you just repeat what you said--looking forward under any of these basic measures, where do you expect the real fed funds rate ... | 73 |
fomc | 2,008 | The actual real federal funds rate is above r* under any measures--so in other words, our outlook is the same. These are just different yardsticks for assessing our basic view of the stance of policy. | 42 |
fomc | 2,008 | If there are no further questions, why don't we begin our go-round? President Evans. | 18 |
fomc | 2,008 | Thank you, Mr. Chairman. I'd like to start by saying that I agree with your comments yesterday about how we should proceed with the Committee approach and think very collaboratively about the policies and delicate strategies that we're facing. Although we disagree on a number of the elements of the outlook, I think tha... | 1,386 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | A two-hander, Mr. Chairman. | 9 |
fomc | 2,008 | Governor Kohn. | 4 |
fomc | 2,008 | President Evans, so you are arguing that the re-intermediation process is going to raise the NAIRU. I thought that the NAIRU depended on the structure of the labor markets, job matching, and stuff like that, so I didn't quite understand the connection. | 55 |
fomc | 2,008 | I'm alluding, without understanding or working out, to a sectoral-shifts model of unemployment and how that search process could be more difficult. You're just taking resources that over some period took a while to allocate to the financial sector and now they have to be reallocated somewhere else. | 57 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. Recognizing, as I do, where we're coming from and its dangers, I think more-recent data suggest that the downside risks to growth have diminished, and in my judgment the current stance of policy is much more accommodative than necessary to address these risks. I continue to believe that the two... | 606 |
fomc | 2,008 | Thank you. President Lacker. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. The growth outlook has improved over the last two months, but the inflation picture has not. If anything, it has deteriorated. I think it's clear, as President Hoenig argued, that we should be tightening policy soon. The extent to which we brought the funds rate down was predicated on downside ... | 396 |
fomc | 2,008 | Thank you. President Yellen. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I favor alternative B with the proposed wording. Given the forecast and the risks around it, our next move on the funds rate is likely to be up, and the question is when. Assuming that the data on growth and inflation come in roughly as I and the Greenbook expect, I would envision beginning to ... | 477 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. In my view the economy is evolving in a way that suggests that we need to take back sooner rather than later some of the insurance we put in place against downside tail risk. I base this view on several points. First, economic activity remains weak. I don't dispute that. The data since our last... | 1,341 |
fomc | 2,008 | Thank you. Governor Kohn. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I support the action and language of alternative B; Brian's striking of "near-term" is fine with me. This is a tough situation, as we all remarked yesterday. Commodity prices are at the center of the problem that we find ourselves in. In my view, we didn't cause the rise in commodity prices. We... | 765 |
fomc | 2,008 | President Pianalto. Oh sorry, President Plosser. | 12 |
fomc | 2,008 | Governor Kohn, a question, or a comment, about interest rates. A lot of our discussion has been centered on how accommodative we think policy is and how we interpret it in the current environment. If I want to quantify the magnitude a bit, at least the way I think about it, even if I believe that the economy is weak en... | 180 |
fomc | 2,008 | It's very difficult. We don't know what inflation expectations are. We're all using proxies, as came forth very strongly at the Cape Cod conference where we both were, President Plosser. We don't even understand very well how expectations are formed, and I think what we're looking for is how people perceive the cost of... | 275 |
fomc | 2,008 | Thank you. I guess just to say it more simply, all the rates that have determined behavior--for example, mortgage rates, auto rates, or corporate bond rates--are higher than a year ago. Now, unless there has been a major change in long-term inflation expectations, which the TIPS data don't suggest, there don't seem to ... | 104 |
fomc | 2,008 | It's directly on this point. It seems that in the situation we're in, with very elevated spreads in LIBOR, there are almost no contracts in the real markets that are related directly to fed funds. It's usually through three-month LIBOR, and we know that the spread is now roughly 70 or 75 basis points higher than it use... | 128 |
fomc | 2,008 | President Lacker will back President Plosser up though. | 12 |
fomc | 2,008 | This is like pro wrestling. [Laughter] | 10 |
fomc | 2,008 | Just a brief observation. Spreads always rise in recessions. We always lower real rates in recessions. So to say that the fact that spreads have risen by itself doesn't make this an exceptional circumstance. | 41 |
fomc | 2,008 | The magnitude is somewhat greater, though. | 8 |
fomc | 2,008 | For some; not for others. Corporate bond spreads aren't as high. | 14 |
fomc | 2,008 | President Pianalto, we apologize. | 7 |
fomc | 2,008 | I apologize. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. I support keeping the fed funds rate target at its current level and the language in alternative B. I see some hopeful signs that stress in financial markets has diminished as has the threat of a sharp recession. Despite these recent signs, I expect that the growth momentum in the economy will ... | 293 |
fomc | 2,008 | Thank you. President Bullard. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. U.S. economic data have been stronger than expected during the intermeeting period. The earlier, very aggressive moves in January and March taken by the FOMC were viewed in part as insurance against the possibility of a very serious downturn brought on by financial market turmoil. That very ser... | 429 |
fomc | 2,008 | Thank you. President Stern. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. Well, first of all, I believe that policy is well positioned for now from a couple of perspectives. For the next quarter or two, I think there is still some potential for significant disappointment in terms of economic growth--but only for a quarter or two. Beyond that, a pickup in real activit... | 509 |
fomc | 2,008 | You have your Strunk and White style manual with you, I can see. [Laughter] Thank you, President Stern. President Rosengren. | 31 |
fomc | 2,008 | I support alternative B. At this time, there are significant downside risks to the economy and financial markets, as the collateral damage from the housing problems works through the economy and financial institutions. At the same time, continued increases in oil and food prices raise the risk that some part of these s... | 206 |
fomc | 2,008 | Thank you. President Lockhart. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I also prefer the fed funds rate recommendation and language of alternative B. It captures the delicacy--I think that word was used yesterday--of the current tradeoffs and leans fairly heavily rhetorically against inflation and inflation expectations. I note that inflation and inflation expecta... | 394 |
fomc | 2,008 | Thank you. President Fisher. | 6 |
fomc | 2,008 | Mr. Chairman, I listened very carefully to what was said around the table yesterday, and I especially listened very carefully to you. You made a very good and interesting point about the differences from the 1970s. I would add that there are significant differences from the 1970s. We didn't have the Internet in the 197... | 783 |
fomc | 2,008 | Thank you. Governor Warsh. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me say just a few things. First, to state the obvious--there are risks on all sides of these decisions. Second, I will try to wade into the debate briefly on this accommodation point. My own view is that policy is accommodative--the degree of that is why we are having this debate. I think a... | 539 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thank you very much. Obviously, as we have all discussed, we are facing enormous challenges from the continuing strength in prices and price changes in energy and raw materials. Now, some of those are relative price changes that we don't have the tools to address directly. Recently, we have seen wheat come down as Aust... | 557 |
fomc | 2,008 | Thank you. Governor Mishkin. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I do support alternative B and the current language in the statement. I have no problem with that. I think it conveys what we need to convey. Although I think that the next move is very likely to be up and it maybe should be done quite soon, I would argue that we still need to have a lot of fle... | 945 |
fomc | 2,008 | Before the python gets it. [Laughter] | 10 |
fomc | 2,008 | Before the python gets it. I think another consideration is very important. I have to commend you on the Bluebook this time--it just had some great boxes. [Laughter] It would be nicer if they had a little color to them. As a textbook author, I think they could have been a little ritzier and have had a little color, but... | 338 |
fomc | 2,008 | Thank you. Vice Chairman. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. I just want to say at the beginning that I think the way you framed your remarks yesterday had perfect pitch and balance, and it is really important that we not get ahead of ourselves in taking too much comfort from the fact that the first half was not as bad as we thought and think that the ri... | 599 |
fomc | 2,008 | Thank you very much. In April, we signaled that, following our aggressive rate actions and our other efforts to support financial markets, it was going to be a time to pause and to assess the effects of our actions. That was not that long ago, and I think it is appropriate to continue our watchful waiting for just a bi... | 1,071 |
fomc | 2,008 | I appreciate the adoption of the language. I think it is much better. | 15 |
fomc | 2,008 | I think President Stern's suggestion is interesting. I am a little worried that it might go just a bit too far in suggesting that we have discounted the downside risks. I am struggling with the "considerable" in alternative B, paragraph 2. I have sort of heard two for and two against. I don't know if others have a view... | 149 |
fomc | 2,008 | I thought Vice Chairman Geithner's characterization of markets was pretty good, but it is compatible with your suggestion. | 23 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | If we look back and try to recalibrate at each meeting whether things are getting better or things are getting worse, we would regret each zig and each zag. So I would just say that we have a suite of facilities in place. They are in place today. They are exceptionally significant in terms of a change in policy. They a... | 140 |
fomc | 2,008 | I think the Vice Chairman raises an interaction that I hadn't thought of, which is that our facilities are existing under the premise of unusual and exigent circumstances, and we don't really want to undercut that. President Fisher. | 44 |
fomc | 2,008 | I would support what Vice Chairman Geithner mentioned because I think we may be faced with a situation of having to raise rates even though there is considerable risk in the financial market. So I think showing sensitivity to that is very, very important. On a second point, Mr. Chairman, I do appreciate the change in t... | 90 |
fomc | 2,008 | Yes. President Plosser. | 7 |
fomc | 2,008 | Given that I suggested removing the word "considerable," my purpose there was merely to indicate, as many people around the table have said, that things are somewhat better. I don't think that we should suggest that problems are solved, because things are still under stress. I agree with Vice Chairman Geithner in that ... | 154 |
fomc | 2,008 | And it will come out in the minutes. | 9 |
fomc | 2,008 | Of course, all of these subtleties will. | 11 |
fomc | 2,008 | As they always do. | 5 |
fomc | 2,008 | I would like to propose no change in alternative B as given in exhibit 1. Any further comment? If not, could you please take the roll? | 31 |
fomc | 2,008 | Yes. This vote applies to the directive as well as the language of the statement in alternative B of exhibit 1. "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 i... | 124 |
fomc | 2,008 | Thank you. Why don't we take a fifteen-minute coffee break, and we will come back and discuss investment banks. | 23 |
fomc | 2,008 | Why don't we commence, then. This is a joint FOMC and Board meeting, and so I need a motion to close the Board meeting. | 30 |
fomc | 2,008 | So move. | 3 |
fomc | 2,008 | Without objection. Okay. Our topic for this morning is investment banks, their supervision, and related policy issues. Let me turn it over to Art Angulo of the New York Fed, who will introduce the topic. Art. | 45 |
fomc | 2,008 | 5 Thank you, Mr. Chairman. We're now in the handout. Why don't we start on page 2, and I'll give you an overview of where we are headed this morning, at least from my section. First I'll talk a bit about the objectives and the approach of our monitoring program. Then I'll talk about how we're focusing primarily, but no... | 852 |
fomc | 2,008 | Art, could you define "leverage" in this picture. | 13 |
fomc | 2,008 | This is gross leverage, so it is just equity--in this case, a ratio of equity over total assets--a very blunt measure. Page 6 gives us a more current view. In the left-hand panel is the tier 1 capital ratio for the four largest securities firms. As I think you know, the SEC has made a decision to use and hold investmen... | 2,817 |
fomc | 2,008 | Well, as you can tell from Art's presentation, there's been a significant amount of information-sharing and collaboration already between the Federal Reserve and the SEC. So we've taken this opportunity simultaneously with what's going on with the primary dealers to fashion a document that will lay out a framework for ... | 1,090 |
fomc | 2,008 | Thanks. I'm just going to go over the last few pages of the handout you have, pages 13 through 15. Page 13 is just a table reminding you who the primary dealers are and providing some basic information about their size, borrowing activity, and regulatory status. As you probably know, there are currently 20 primary deal... | 624 |
fomc | 2,008 | Questions for our colleagues? President Lacker. | 9 |
fomc | 2,008 | Thank you. Thank you, Art, Scott, and Patrick, for a very forthcoming presentation. Two things for you, Art: First, on page 8 you presented some information about the details of the stress test that you're applying, and the table lists various unsecured funding and secured funding from other sources, and you have numer... | 94 |
fomc | 2,008 | Correct. We went back to the firms and asked them to give us the information cut this way because it's not readily available from any public information that we have. We also asked them to give us, under a severe test scenario, what their assumption was. Based on the submissions that we got from the four, which we conv... | 85 |
fomc | 2,008 | I was going to say that you essentially asked the question, What does "severe" mean in your stress system? | 24 |
fomc | 2,008 | We left it somewhat in their hands, saying that it's going to be short of a full run. | 20 |
fomc | 2,008 | Then you had some iteration to get to an agreed-upon set of numbers for these. | 18 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | Okay. Now, you also said that you started your first iteration by asking them to give you the results of a Bear Stearns failure scenario. What numbers does that correspond to on this table? | 39 |
fomc | 2,008 | You would have a lot higher numbers on secured funding. You would have the numbers coming much closer to the illiquid, 100 percent, and you would have a-- | 34 |
fomc | 2,008 | Well, wait. I'm sorry. I lost you there. | 12 |
fomc | 2,008 | Under fixed-income finance, for example, under the secured funding, there's liquid and less liquid. Those are 20 percent and 50 percent. Those would have been approaching 100 percent. | 38 |
fomc | 2,008 | So the severity, that's how much of the money goes away. | 13 |
fomc | 2,008 | How much runs--exactly. | 7 |
fomc | 2,008 | Okay. So do you have those numbers for Bear--what they actually experienced? | 16 |
fomc | 2,008 | The SEC is working on a post mortem. They have promised to share it with us when they're done. They have folks--I wouldn't say forensic accountants--in there looking at that, trying to piece together what happened. So we did not have the exact numbers. | 54 |
fomc | 2,008 | You didn't have the exact numbers. | 7 |
fomc | 2,008 | No. | 2 |
fomc | 2,008 | But you knew roughly what they were. | 8 |
fomc | 2,008 | Things moved pretty quickly at the end. | 8 |
fomc | 2,008 | I see. Well, I was just interested in information on exactly how that transpired. If there's a chance that you could share with us that information when you get it, that would be very useful. A second question for you: You noted reputational risk from being in on the supervisory basis, and I want just to probe as to ho... | 83 |
fomc | 2,008 | I guess a couple. We're saying that we're looking at the capital position. I think Governor Kohn was careful to say in his testimony that we're looking at capital in relation to near-term earnings prospects. That gives us kind of a short window, but we know from examining banks that a capital number that's reported to ... | 197 |
fomc | 2,008 | So it's essentially the risk that, after the fact, marks are questioned, and they ask, "You guys were in there--why didn't you . . .?" I understand that. Thanks. The third question is for Pat. You talked about the repo market. My understanding is that some supervisory work under the LFI (large financial institution) um... | 150 |
fomc | 2,008 | I can't answer that, but that's a good question. I mean, the basic problem here is that you have a tremendous demand for investments that have essentially the characteristics of Treasury bills, but the supply of Treasury bills isn't nearly as large as that demand coming from money market mutual funds and from investmen... | 270 |
fomc | 2,008 | I mention that because it sounds as though it would be worthwhile knowing if it's important. Since we've asked the Congress twice now for permission to pay interest and they've declined, and if this was a factor in the recent crisis, we might want to point that out to them as part of our legislative dialogue with them ... | 76 |
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