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fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | Yes. I support Governor Warsh's suggestion for raising the price. It is hard for me to believe that confidence in any of these institutions depends materially on 100 basis points of the price. It is the access, the funding, that they would be able to use to fund withdrawal or flight by somebody. I think it sends the ri... | 143 |
fomc | 2,008 | Remember that we are doing moral suasion as well. I mean, we are not really allowing investment banks to use this as a profit center. So I'm not quite sure what the marginal effect would be on incentives. | 43 |
fomc | 2,008 | But this would also place less weight on moral suasion to discourage and would use the price system a bit. | 22 |
fomc | 2,008 | It also might increase the stigma. It is a very complicated calculation. | 14 |
fomc | 2,008 | There are many things that I would love to do. I would like to make them pay for it and say that we are not going to extend it unless they pay for it. I would like to say that we are not going to extend it unless they pre-fund some liquidation facility for one of their little counterparties. There are a million things ... | 200 |
fomc | 2,008 | Governor Warsh. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. So just on behalf of the troublemaker caucus, [laughter] let me make a suggestion. It doesn't strike me as though the deltas between Vice Chairman Geithner's formulation and what I proffered are that large. That is, I think we collectively agree that we need, as part of an extension of the faci... | 272 |
fomc | 2,008 | Bill Dudley, did you have a comment? | 10 |
fomc | 2,008 | The real issue may be that the PDCF borrowing may be de minimis. In that environment, it's not really clear what raising the price really means. It might even be confusing to people if you raise the price at the time the borrowing was de minimis. So I think that is just one consideration. | 62 |
fomc | 2,008 | Okay. If there are no other pressing comments, thank you very much for this discussion. I heard general support for the short-term strategy, which means, I hope, that if we do come to ask you for an extension of the TSLF we can do it by notation vote without a videoconference meeting, unless things change. There clearl... | 403 |
fomc | 2,008 | Good morning, everybody. Today is the last meeting for our colleague, Governor Mishkin. Rick has attended 16 FOMC meetings as a Committee member and 23 additional meetings, I assume mostly as the research director for New York. We are certainly going to miss your singular interventions--[laughter] as well as your insig... | 401 |
fomc | 2,008 | 1 Thank you, Mr. Chairman. I am going to be referring to the handout in front of you. It seems to be getting thicker at every meeting. Since the June FOMC meeting, financial markets have been characterized by two distinct phases. Until the middle of July, share prices weakened substantially, and credit spreads widened.... | 3,493 |
fomc | 2,008 | Thank you very much, Bill. Any questions for Bill? President Evans. | 15 |
fomc | 2,008 | Thank you, Mr. Chairman. Bill, at our recent intermeeting call, I wasn't expecting the characterization of the financial stresses to sort of backtrack to the point that it feels like March. Maybe somebody said it was as scary as March. I have noticed in a lot of our speeches that many have noted that financial conditio... | 194 |
fomc | 2,008 | Okay. That is a big question. [Laughter] | 12 |
fomc | 2,008 | I think this is a good time to revisit our strategy and what we are thinking about accomplishing here. It is my understanding that the Chairman has asked you to look at unusual and exigent circumstances. | 39 |
fomc | 2,008 | I think the first thing we can say is that market participants expect this to last a long time. The fact that the forward LIBOR-OIS spreads are elevated, looking out a year or two years, suggests that the market views the balance sheet adjustment process as taking quite a long time. Second, I would say that how long is... | 318 |
fomc | 2,008 | Please, no baseball analogies. [Laughter] | 11 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | Thank you, Mr. Chairman. I want to follow up on that a little because it seems to me that, over a year ago now, there was a lot of discussion by various parties that had to do with risk premiums being very low. People were worried that the economy and the financial markets were underpricing risk. Now, all of a sudden, ... | 297 |
fomc | 2,008 | I think it is a fair point that we shouldn't assume that "normal" is returning to the LIBOR-OIS spreads that applied before August 2007, so we have to look at a broader set of indicators. For example, I think that it would be worthwhile looking at the spread between jumbo mortgage rates and conforming mortgage rates as... | 326 |
fomc | 2,008 | How about volumes? | 4 |
fomc | 2,008 | I think that the market function has varied, frankly. In the middle of the GSE turmoil, the agency market was basically shut down. With the passage of the legislation, it has improved. Haircuts are still quite elevated. Liquidity is certainly not as good as it was back before this crisis. The cost of funding through th... | 216 |
fomc | 2,008 | President Bullard. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. I'm just following up here. I mean, as much as I love exhibits 14, 15, and 16--and I have used a lot of them myself when I talk about the economy--it is not really appropriate to look at these as measures of stress. You could just say that these are the equilibrium prices in an economy that is ... | 223 |
fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | I thought that part of President Evans's question was whether markets are back to normal for a period in which they are adjusting to hundreds of billions of dollars of losses on mortgage loans. So I would be interested in your characterization of how markets are working relative to how well they ought to work in that c... | 61 |
fomc | 2,008 | I guess we don't have a lot of observations to know what normal is in that environment. I think that the markets are generally doing somewhat better, as I said, relative to the flow of new information. I don't think the information flow has improved, but I think the markets are responding a little better to the bad inf... | 73 |
fomc | 2,008 | If I could follow up, the reactions you described sound warranted by the information coming in. The market is digesting information about the location and magnitude of losses and the extent to which housing is going to recover. | 42 |
fomc | 2,008 | I think the market is reacting pretty appropriately to the information it is seeing, although I would say that the risk premiums are still high in a pretty broad array of assets relative to what one would think would be normal. Haircuts are high, and market liquidity is still impaired. We are definitely not back to nor... | 73 |
fomc | 2,008 | But when you use "normal" in that sentence, you mean a time period without hundreds of millions of dollars of losses that we don't know quite the magnitude of, right? | 35 |
fomc | 2,008 | Yes. It is hard to benchmark how markets are supposed to behave in a period with hundreds of billions of dollars of losses--because how many times have we actually gone through this experience? | 37 |
fomc | 2,008 | So if I could just follow up--in these graphs, what would you point to as the effects of our actions or our lending? | 27 |
fomc | 2,008 | The effects of our actions have been to mitigate the rise in term funding pressures and to somewhat mitigate the forced liquidation of collateral because of the inability to obtain funding. Because of that, our actions have helped prevent the kind of pernicious margin spiral that we saw in March, when volatility was go... | 136 |
fomc | 2,008 | Thank you. I guess I would comment that there is an asymmetry here, which is the possibility of systemic risk. There are situations in which failures--major collapses of certain markets--can have discontinuous and large effects on the economy. We have seen that in many contexts across a large number of countries. These... | 145 |
fomc | 2,008 | We have never argued that the role of our facilities is to prevent the adjustment. We have always argued that the role of the facilities is to allow the adjustment to be orderly rather than disorderly. That is what we have been going for. | 48 |
fomc | 2,008 | I would be interested in seeing a model, Mr. Chairman. Thank you. | 16 |
fomc | 2,008 | Certainly. Any other questions for Bill? If not, let me turn to David Wilcox for the economic situation. | 23 |
fomc | 2,008 | Thank you, Mr. Chairman. In putting together the economic outlook for the current Greenbook, we confronted three main changes in circumstances relative to the situation as it stood in June. First, the labor market looked distinctly weaker than we had anticipated. In the employment report that was released in early July... | 2,298 |
fomc | 2,008 | For the next couple of weeks, millions of people around the world will be watching the Olympic games in Beijing. For those of us charged with forecasting the global economy, of course, China-watching is a year-round task. But notably, the most salient developments since your last meeting have arisen outside of China. C... | 1,616 |
fomc | 2,008 | Thank you. Questions for our colleagues? President Fisher. | 11 |
fomc | 2,008 | David, in terms of the relatively benign outlook for core inflation now and for headline inflation, I'm wondering what your assumptions are about margin compression and for the ability of corporations to pass through price increases. By the way, I found the core revisions somewhat alarming because they're well above 2 ... | 171 |
fomc | 2,008 | By our highly imperfect measure of margins, which we see through the filter of the national income and product accounts, margins at this point are somewhat above the average over the past 30 years, and we have them coming down for the nonfarm business sector. We have them coming down a little, but not very much. So we ... | 132 |
fomc | 2,008 | Obviously the implication of this more dire outlook for economic growth is that movement of the top line will be very, very difficult, so again, more pressure comes into the margin side to see that one can satisfy shareholders that things aren't as bad as they might be. That's really the nature of my concern. I don't k... | 199 |
fomc | 2,008 | Well, the short answer is that we don't have enough consistent sources of data to square it. But you certainly point to a factor that many people have talked about--the rapidly increasing wages, particularly in those industrial areas on the seaboard that are responsible for most of the manufacturing. It's hard to squar... | 286 |
fomc | 2,008 | Thank you. Thank you, Mr. Chairman. | 10 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. I have two questions. First, on the Greenbook forecast, one thing that struck me is that there was a fairly large revision in your forecast for nonresidential structures going forward. In fact, after a pretty good showing in the first half of this year, you marked down the second half of this y... | 160 |
fomc | 2,008 | We don't quite understand why this sector seems to have resembled the cartoon character that keeps running along when we think there shouldn't be any support underneath it. [Laughter] We are staunchly negative about the second half for this sector, and that view is informed by the precipitous drop in the architectural ... | 179 |
fomc | 2,008 | But the change is not just in the second half of this year. You've got a big change for '09, too. | 25 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | If we think about the phrase that people use--"financial headwinds"--and the credit problems that we see, my interpretation of how the staff has modeled that is on the demand side--of restrained credit limiting demand. But I can also think of the financial sector as having been hit by a very significant productivity sh... | 225 |
fomc | 2,008 | I'll take that because we did have a bit of an internal debate on that issue awhile back. In particular, Spencer Dale, who was visiting us from the Bank of England, was basically making exactly the same point you're making and raising that issue. | 49 |
fomc | 2,008 | So maybe I'm not so kooky after all. [Laughter] | 14 |
fomc | 2,008 | No. | 2 |
fomc | 2,008 | But we sent him out of the country. [Laughter] | 13 |
fomc | 2,008 | One test is whether in previous periods of financial stress like this, we saw what might be more upward inflation pressure than we otherwise could explain or productivity performance that we had trouble explaining. After looking at the experience during the early 1990s in the headwinds period and trying to think about ... | 173 |
fomc | 2,008 | So in the way you've modeled this in your forecast, are you thinking of yourselves as modeling that net effect, or do you think of yourselves as modeling and forecasting just one side? Have you made any effort to incorporate both sides of this potential effect? Even though it may be small, the question is how small it ... | 65 |
fomc | 2,008 | We've made no explicit adjustment for that in the potential output assumptions we have going in. Looking back, it was hard to see that there was much, if any, effect, but that's a risk knowing that there could be some productivity effect and it's just hard to find. | 54 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | May I just augment my earlier answer? I spoke about the nonresidential building sector. Another factor taking down overall nonresidential spending is that the lower energy price trajectory reduces our expectation for drilling and mining expenditures, which have also fallen. | 48 |
fomc | 2,008 | President Lockhart. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. A question for Steve. Could you review your thought process on core import prices and comment on how sensitive our inflation projections are to the assumption of, I believe, moderation in core import prices in 2009? | 49 |
fomc | 2,008 | Sure. As I mentioned, core import price inflation shot up very rapidly to over 10 percent in the second quarter, and our approach toward modeling and predicting core import price inflation focuses on three main sources of increase. First are increases in foreign cost pressures, which we proxy by CPIs, which have not be... | 373 |
fomc | 2,008 | Steve, you might want to define "core import price inflation." It's not analogous to the other core. | 21 |
fomc | 2,008 | Right. So, yes, thank you. In the case of core imports, we exclude oil, which is very important, as well as computers and semiconductors. | 34 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | I have a question similar to President Plosser's. Both the financial shock--the housing adjustment--and the big relative price shock you could say all in different forms could hurt the rate of growth of the economy's productive potential. You could say that they all might, in some dimension, reduce the near-term expect... | 121 |
fomc | 2,008 | No. One of the facts that we learn from microeconomic data about, for example, job flows is that there is always a huge, astonishing amount of churn--job destruction and job creation--just astonishing; and that's true even in normal macroeconomic times. So the background radiation level is not zero. But we haven't inco... | 114 |
fomc | 2,008 | There's one minor qualification to what David just said. We do keep track of rough estimates of what we think that the rise in energy prices over the past few years is possibly doing to trend productivity, and we've come up with estimates that maybe it's 0.1. We think that effect has been ongoing, and it is built into ... | 112 |
fomc | 2,008 | I was just going to say that I thought the interesting thing about that scenario was that it doesn't really change your view about the appropriate path of monetary policy going forward. It's basically at the baseline. So even if you were to build in a material change in potential growth, because of the effects on deman... | 74 |
fomc | 2,008 | The reason is that it operates like a classic supply shock, which presents monetary policy with just simply a less pleasant policy menu to choose from; and in the context of that costly sectoral reallocation, the economy is running closer to its productive capacity. Let's see. I lost my train of thought here. | 61 |
fomc | 2,008 | Well, basically you can just stop there. [Laughter] It's the tradeoff between the two. Obviously, if you were more concerned about inflation outcomes than real activity outcomes, you might tilt it a different way. | 44 |
fomc | 2,008 | Isn't it true, though, that changes in potential growth also have demand effects as well--to some extent offsetting? | 25 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | Yes. It means that it's another way of saying that you wouldn't expect the estimates of the now-prevailing equilibrium real fed funds rate to be higher. Not to stretch this too far, but another way of saying why the likely expected path or the appropriate path of policy doesn't change in terms of the nominal fed funds ... | 74 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | President Evans. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. Regarding a comment that Bill Dudley made about housing prices, for financial institutions, it's going to matter a lot whether we're looking at a decline from 15 percent to 20 percent or from 15 percent to 30 percent. Housing inventories, unsold homes, are very high, and I guess I'm wondering a... | 196 |
fomc | 2,008 | I guess I would push back on the premise that we don't have a pretty significant adjustment in house prices built into our baseline. We have house prices as measured by OFHEO declining 7 percent this year and another 5 percent in 2009, and I wouldn't anticipate any rebound in 2010. You know, our ability to measure wher... | 244 |
fomc | 2,008 | The staff has been way out front in projecting the housing decline, and that has been very helpful. Is there any dissonance between what Bill said and your pretty substantial expectation of housing-price declines? | 40 |
fomc | 2,008 | I don't think so. | 5 |
fomc | 2,008 | Was it 15 to 20 or 15 to 30? | 14 |
fomc | 2,008 | I think what makes it complicated, though, is that there's a nonlinearity. If the housing-price declines do turn out to be on the higher side, it then puts more stress on the financial system and on credit availability, which then leads to a weaker economy, which then puts more stress on the housing sector. So small di... | 73 |
fomc | 2,008 | I agree with that chain and those risks, but what I thought I was hearing from David was that the staff estimate has in it quite a substantial adjustment process in housing, and then I would expect financial players to share that assessment. | 46 |
fomc | 2,008 | I wasn't really addressing the point estimate of where housing was going as opposed to the uncertainty around that estimate. I would argue that the uncertainty around that estimate is still quite wide. At some point it will be resolved. When it is resolved, that will be a favorable development, but I don't think we're ... | 63 |
fomc | 2,008 | I would just augment Bill's comment with two other observations. There's plenty of probability mass out in the tail. I think it actually is two-sided risk. We illustrated one side of that risk in our "severe financial stress" scenario. The other point I would make is that our projection for national house-price decline... | 145 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | Vice Chairman, did you have an intervention? | 9 |
fomc | 2,008 | I was just going to say this. I think that you can do crude estimates of likely total losses across the U.S. economy and credit markets in a scenario like the baseline scenario in the Greenbook, and if you use Nellie Liang's study or the stuff done in New York, there's a huge amount ahead still. Even though financial m... | 229 |
fomc | 2,008 | They do seem to be taking out a lot of insurance on the downside, right--like your Merrill Lynch put option? | 24 |
fomc | 2,008 | They've had to pay a lot for not very much insurance in the case of Merrill Lynch. | 19 |
fomc | 2,008 | President Rosengren--sorry. President Lacker, an intervention? | 14 |
fomc | 2,008 | Thank you, Mr. Chairman. Just to point out that it must be the case that lower house prices have a positive effect on the homeownership rate. So there must be some mitigation, some good effect. We're obviously getting to where we need to get eventually. The question I have for the staff about this is, Have you thought ... | 138 |
fomc | 2,008 | We expect starts to stabilize next year, and that will be followed by a pretty considerable period of several quarters with house prices finally stabilizing. But we think that builders will look ahead and see that they've cut their additions to supply by enough to make even more rapid progress against their inventory o... | 267 |
fomc | 2,008 | President Lockhart. | 4 |
fomc | 2,008 | I just want to point out that we hear a fair amount of anecdotal feedback suggesting that just determining what is the net real price for a house is not so easy because of incentives, particularly in multifamily but also new homes in general. You pay list, but you get a Mercedes and a year's worth of gasoline and your ... | 108 |
fomc | 2,008 | I don't know what the OFHEO does to capture the quality of automobile that comes in the driveway. [Laughter] I suspect that there's no adjustment for that. | 34 |
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