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fomc | 2,008 | Should we have Brian's presentation? | 7 |
fomc | 2,008 | Yes, of course. I was about to turn to that. If that's acceptable, let's turn to Brian and have your discussion. | 26 |
fomc | 2,008 | 2 I will be referring to the package labeled "Material for FOMC Briefing on Monetary Policy Alternatives and Trial Run Survey Results." The results of the survey are shown in exhibit 2. In the interest of time, I will not cover them this morning. The Subcommittee on Communications plans to be in touch with the Committe... | 937 |
fomc | 2,008 | If I could add a few thoughts on market expectations about this meeting--I think it looks as though easing is priced in for two reasons. One, dealers do expect the federal funds rate to trade soft as we add excess reserves, so I would not take the softness in the September federal funds futures contract as indicative o... | 330 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | Could I ask for a little clarification here? The indication of sentiment is important, is it not, in terms of expectations from the population that you're talking about? The signaling of our direction would be important here? | 42 |
fomc | 2,008 | Well, I think the market participants would gain some comfort to the extent that the Federal Reserve as an institution indicates concern about what's going on in the financial markets. But in some ways the Desk has already signaled that concern by its intervention, so I'm not sure that additional indications are needed... | 98 |
fomc | 2,008 | Just on the issue of trading soft, though, the October-December has also come down, and there is certainly some shift in the actual policy expectation. | 31 |
fomc | 2,008 | That is true. I think on Friday the mood was basically that the funds rate was going to be flat for a long time. Probabilities placed on either easing or tightening were quite low, and since then the probability of easing has gone up fairly significantly. But I think it's hard to interpret because it's really not about... | 114 |
fomc | 2,008 | Other questions? All right. If not, let's begin with President Lockhart. | 16 |
fomc | 2,008 | Thank you, Mr. Chairman. I finalized the thinking that went into my prepared remarks late last week, which seemed like a good idea at the time. But I should follow the philosophy of Charlie Brown, who I think said, "Never do today what you can put off until tomorrow." [Laughter] Obviously, we can't ignore the events of... | 884 |
fomc | 2,008 | Thank you. President Rosengren. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. I will be brief. This is already a historic week, and the week has just begun. The labor market is weak and getting weaker. The unemployment rate has risen 1.1 percentage points since April and is likely to rise further. I am not convinced that the unemployment rate will level off where the Gre... | 247 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | Mr. Chairman, I see no reason to focus on the details of the forecast. Clearly, the economy is under stress, both as we look at the economic growth forecast and as we look at the inflation forecast. So I recognize the amount of stress we are under here. I would say to you, in dealing with that stress, I am fully suppor... | 431 |
fomc | 2,008 | Thank you. President Yellen. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. During the past several weeks, my head office and Branch directors have become decidedly more pessimistic about the economic outlook. My own assessment of incoming data coincides with theirs. My contacts also report that their businesses are still raising prices in response to past increases in... | 1,081 |
fomc | 2,008 | Thank you. President Bullard. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I am going to start with the national economy in the interest of brevity here. Concerning the national outlook, it is difficult and probably unwise to try to assess growth and inflation prospects in the immediate aftermath of an event like the Lehman bankruptcy. I expect to see more failures am... | 714 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. New data and survey and anecdotal information in the Third District suggest that the economy in our District continues to be weak. There have been further declines in some industries and deceleration of growth in others, but generally data are coming in as expected. Employment growth was flat o... | 1,525 |
fomc | 2,008 | Thank you. President Stern. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. Well, even before the events of the last several days, I thought that this was the most severe financial crisis, certainly, that I have seen in my career. And the last several days--as well as some of Bill's comments about possible contagion spreading from breaking the buck and so on and so for... | 551 |
fomc | 2,008 | President Evans. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. The unfolding financial situation is injecting enormous uncertainty into the economic outlook and policy picture. Although this analogy is imperfect, today's uncertainty reminds me of March 2003. Then, on the eve of the invasion of Iraq, the FOMC decided that geopolitical uncertainty was so gre... | 823 |
fomc | 2,008 | Thank you. President Pianalto. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. The recent financial market news is shaking people's confidence dramatically. But even before recent events, the evidence was already pointing to more effects of the financial crisis on the real economy than I had built into my projection at our last meeting. The reports from my District contac... | 1,004 |
fomc | 2,008 | Thank you. President Lacker. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I'll be brief. The Fifth District hasn't changed much; it pretty well aligns with the national outlook. On the national outlook, I find myself, all except for the policy path, aligned well with the staff. There have been a lot of economic reports since the last meeting about particular categori... | 986 |
fomc | 2,008 | President Lacker, I have a question. I really would like your advice on this. Historically, if we look at situations like Japan and Scandinavia, ultimately there comes a point at which the banking system is decapitalized and dysfunctional and the government intervenes on a large scale. Those interventions have been ver... | 163 |
fomc | 2,008 | We have a legislated program of fiscal intervention--deposit insurance--and the boundaries around that are very clear. Which liabilities are insured and which ones are not are very clear. Around the edges there's some lack of clarity about what least-cost resolution means and the extent to which deviations from that ca... | 141 |
fomc | 2,008 | But I think this is a historical fact--that, once the banks became decapitalized, there were also capital injections into the banks in both of those cases. | 33 |
fomc | 2,008 | Sure. Those were fiscal actions. | 7 |
fomc | 2,008 | Right. | 2 |
fomc | 2,008 | And the FDIC does exactly that when it resolves a failed institution. | 14 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | Mr. Chairman, I have thought about this considerably because I think we have come to a time in our history when we have institutions that clearly ought to be and may in fact be too big to fail. I think we tend to react ad hoc during the crisis, and we have no choice at this point. But as you look at the situation, we o... | 425 |
fomc | 2,008 | I certainly agree--and the Treasury Secretary and I have said publicly--that we need a strong, well-defined, ex ante, clear regime. But we have the problem now that we don't have such a regime, and we're dealing on a daily basis with these very severe consequences. So it is a difficult problem. | 63 |
fomc | 2,008 | I think what we did with Lehman was the right thing because we did have a market beginning to play the Treasury and us, and that has some pretty negative consequences as well, which we are now coming to grips with. | 45 |
fomc | 2,008 | President Rosengren. | 5 |
fomc | 2,008 | I think it's too soon to know whether what we did with Lehman is right. Given that the Treasury didn't want to put money in, what happened was that we had no choice. But we took a calculated bet. If we have a run on the money market funds or if the nongovernment tri-party repo market shuts down, that bet may not look n... | 225 |
fomc | 2,008 | Okay. President Fisher. | 5 |
fomc | 2,008 | Mr. Chairman, it may surprise you that President Yellen and I agree, [laughter] at least with the recommendation, as I do with the majority. I also agree firmly with President Hoenig. David wanted to know a little more about Houston, so I will start out with that, and then I'll quickly go to the policy matter. The stor... | 1,195 |
fomc | 2,008 | Thank you very much. Coffee is ready. Why don't we take about thirty minutes? I have a couple of calls to make. See you at about 11:20. | 35 |
fomc | 2,008 | Okay. If we're ready, we can reconvene. First Vice President Cumming. | 17 |
fomc | 2,008 | Thank you, Mr. Chairman. In our forecast, we do show a downgrade in real activity in the near term since the August meeting. Downside risks to the economy we see as still very considerable, and I would probably say that they really have increased quite a bit. I'll say a few more words about that. I'll also talk about t... | 642 |
fomc | 2,008 | Thank you. Governor Kohn. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I think that, even before the recent intensification of financial market turmoil, there were trends becoming increasingly evident over the summer, since late June, that suggested that the economy was on a substantially slower path than it had been before. Resource utilization was falling apprec... | 1,254 |
fomc | 2,008 | Thank you. Governor Warsh. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me do three things. I'll talk first about a modal forecast but probably give it short shrift; second, about financial market conditions; and third, about policy. Working under the assumption that our modal forecast doesn't look quaint a week from now, if the world were somehow to hew to a r... | 1,738 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thank you very much. Since the last meeting, there have obviously been a number of flare-ups in the fires that have been burning in the financial markets--the GSEs and then certainly what's come this past weekend and what's likely to come over this week and into the future. A number of people have mentioned things rang... | 1,244 |
fomc | 2,008 | Thank you. Governor Duke. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. I continue to focus on the traditional commercial bank structure. I looked at two large retail banks, three regional banks, and three community banks, and two things came out of this. First, capital is driving everything, and the amount of capital that the banks need is now being driven more by... | 1,375 |
fomc | 2,008 | Thank you very much, and thanks, everyone, for very helpful comments. Let me try to summarize, and I will just make some comments, and then we can turn to the statement and policy. The group indicated, of course, that economic growth has slowed and looks to be quite sluggish in the second half. I didn't hear a great de... | 3,465 |
fomc | 2,008 | My sense is--and this is certainly open for discussion--that we want the focus to be that we are really watching market developments closely. We are not trying to monitor the broader economy, which we might not be able to measure too much. I will admit that we have "economic and financial markets," with "closely" modif... | 93 |
fomc | 2,008 | Okay. So I think that's useful, although I do note that, all else being equal, there's a slight barrier for making any change, and that one word is a change. President Fisher. | 39 |
fomc | 2,008 | I am sort of indifferent about this, but I don't want to forget what Governor Duke was talking about. It's not just financial markets; it's financial developments. We are also talking about the internal dynamics of what is happening in the banking system and the credit contraction you spoke of. So we lead off with fina... | 100 |
fomc | 2,008 | All right. Let me open it up for any other comments on the statement or the policy action. President Evans. | 23 |
fomc | 2,008 | Thank you, Mr. Chairman. It is really just a question. What type of reaction do we think will be engendered by inserting "closely"? Everybody understands that we monitor financial developments very carefully. So we are bringing attention to this. Will there be a presumption that we are likely to do something intermeeti... | 84 |
fomc | 2,008 | I would say that the markets will take it as a statement that is conditional on what happens in markets. If markets get sufficiently bad, if there is some threshold of deterioration, that can potentially provoke an intermeeting move is the way I think they would take it. Brian, would you agree with that? | 61 |
fomc | 2,008 | I agree. The fact that the first sentence of the risk assessment has a parallel treatment of the upside and downside risks may communicate a bit the sense that you are not ready to ease immediately. | 38 |
fomc | 2,008 | Okay. We will decide. We will take a vote on it, if necessary. President Lacker. | 21 |
fomc | 2,008 | Yes. I echo President Evans's concern. My recollection is--and I haven't consulted the record recently--under your predecessor there was some phrasing like "watch market developments closely" that came to be widely understood as a signal of an intermeeting move. | 52 |
fomc | 2,008 | I think it was "monitor closely." Is that what it was? | 14 |
fomc | 2,008 | "Monitor closely" or some language like that. | 10 |
fomc | 2,008 | Yes, "monitor closely." Maybe you're right. | 10 |
fomc | 2,008 | Yes, and that gives me pause. Then, about "market"--like a lot of economists, I am willing to construe the word "market" very broadly to include intermediation mechanisms of all types and the market for commercial credit in, you know, Dillon, South Carolina. [Laughter] But I am not sure that market participants are goi... | 115 |
fomc | 2,008 | Okay. So the sentiment over here on this side is that nobody thinks "market" is important. Let's get rid of "market." We'll discuss "closely." President Plosser. | 38 |
fomc | 2,008 | I think "market" may be construed too narrowly. We don't really mean it that way, I don't think. | 23 |
fomc | 2,008 | "Market" is already gone. All right. Other comments, suggestions, or thoughts? Governor Kroszner. | 24 |
fomc | 2,008 | But I do think it is the delta, so it is the change. By including "closely," I think the markets are going to look very closely at that change, and they are going to think that we are clearly trying to convey something with that. I just think we have to make sure that we feel comfortable in doing so. Certainly some peo... | 155 |
fomc | 2,008 | Unless you are from the south. [Laughter] | 11 |
fomc | 2,008 | The sad thing is that Governor Kroszner is right. We have seventeen people debating over this word, and it actually does matter. Does anyone else want to weigh in? Okay. I think my sense is that there should be a barrier, a bit of a hurdle, to changing; so I am leaning toward sticking with what we have. Would that be o... | 83 |
fomc | 2,008 | On "closely"? | 5 |
fomc | 2,008 | Getting rid of "closely." | 7 |
fomc | 2,008 | Let me ask Brian and Bill. Brian, without "closely," how do you think the markets will react to that? | 25 |
fomc | 2,008 | That you are not particularly ready to change your stance of policy. | 13 |
fomc | 2,008 | I think the expectation going in is, for most people, that you are not prepared to ease today, but if things got really dark from here you would. So the question is, How do you convey that with the right word? You need something in between "closely" and-- | 58 |
fomc | 2,008 | I think the sentiment we are trying to suggest is watchful waiting. We are not indifferent, we are not clueless, we are paying attention, but we are not predisposed. Hence, Governor Kohn's suggestion. | 44 |
fomc | 2,008 | My suggestion was to substitute "carefully" for "closely." I agree that "monitor closely" had this other connotation, but I think we should be seen as paying more attention than usual. There might be another alternative. | 47 |
fomc | 2,008 | "The Committee will carefully evaluate economic and financial market developments." That means you are on the case. | 19 |
fomc | 2,008 | Well, it is not an analytical thing we are doing. We are just watching closely. | 18 |
fomc | 2,008 | Keenly? Carefully? | 6 |
fomc | 2,008 | Mr. Chairman? | 4 |
fomc | 2,008 | Yes. President Lacker. | 6 |
fomc | 2,008 | Including "closely," what does that imply about the opposite? I mean, are we going to be able to take that out? | 27 |
fomc | 2,008 | Well, we have done things like "in a timely manner" and other kinds of phraseology. | 20 |
fomc | 2,008 | Yes, but this is an adjective. | 8 |
fomc | 2,008 | No, it's an adverb. | 7 |
fomc | 2,008 | There goes my credibility. [Laughter] If we take it out, can we use the phrase without it? | 23 |
fomc | 2,008 | What we have done in the past is basically just use a new phrase. | 15 |
fomc | 2,008 | So that means we have to throw this phrase out. | 11 |
fomc | 2,008 | Mr. Chairman, I would support "carefully." | 11 |
fomc | 2,008 | Is that better? President Evans. | 7 |
fomc | 2,008 | Just to be clear, we have gone a long way just now from its being a semantic discussion to whether or not the Committee wants to hint at the possibility of a near-term action. I do not have a problem with that. In fact, in my comments I suggested that the resolution of uncertainty might improve in the next couple of we... | 94 |
fomc | 2,008 | No, you're right. But there is another issue, which I think is the thing we're concerned about and which motivates the change in alternative B, paragraph 2. We don't want the world to feel that we are not awake, that we are not paying attention. We know that very unusual things are going on in the financial markets; an... | 88 |
fomc | 2,008 | Right. So I fully support that sentiment, and if you find the right wording that captures it, that's fine with me. | 25 |
fomc | 2,008 | Other comments? President Plosser. | 8 |
fomc | 2,008 | As long as we are throwing monkey wrenches into the language, I think we do signal our concern. In paragraph 2, we put the very first sentence, which says, "Strains in financial markets have increased significantly." So we have acknowledged that at the very top of this statement. So there is no going back on that. I am... | 126 |
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