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fomc | 2,008 | President Bullard. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. In the Bluebook here, it says, "Additionally, the Swiss National Bank announced plans to draw on its swap line to help finance up to $60 billion in purchases of assets from a major Swiss bank." So is that really what you have in mind here for a country like Brazil--that they'll draw on their sw... | 78 |
fomc | 2,008 | No, and maybe the folks in New York want to talk a bit more about this. The transaction with the Swiss National Bank was a very special transaction that occurred outside the typical constraints of the swap lines that we'd be agreeing to with these folks. In the swap lines with these folks, they would have to tell us up... | 124 |
fomc | 2,008 | Well, if you think that there are systemically important institutions in these countries, why not? | 19 |
fomc | 2,008 | Again, we're drawing lines here. I am not prepared to give these folks carte blanche. That's why we've added additional safeguards and additional governance structures to these facilities. Maybe the Committee has a different view on that, but I wouldn't be prepared to let them do whatever they wanted with these resourc... | 58 |
fomc | 2,008 | President Lockhart. | 4 |
fomc | 2,008 | To continue to grill you, Nathan-- | 8 |
fomc | 2,008 | I'm earning my pay today. | 6 |
fomc | 2,008 | You know, the atmosphere right now is largely precautionary on their part--they are well capitalized with foreign currency reserves. But if we want to deal with hypotheticals, let's assume that some of these recipients of the swap lines get into a liquidity crisis. Is the European Central Bank being approached for swap... | 108 |
fomc | 2,008 | I don't have details on that. As I've mentioned, I know that they have created a facility with the Hungarians, a EUR5 billion facility. They were also approached by Iceland at the same time that we were. I would speculate, but I don't have any basis for that speculation, that given the emerging tensions in Central and ... | 87 |
fomc | 2,008 | My understanding is that they have been approached. I don't know what decisions have been made other than the ones that may have been mentioned. In addition, they have opened a swap line with the Danish Central Bank in euros, which was virtually identical to the dollar arrangement that we have with the Danish Central B... | 91 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | I just want to clear up the question. I think Tim and Nathan may have both answered this, but it's a question that President Lockhart raised earlier. In Mexico's case, for example, where almost all the major banks are foreign owned--EU banks, Spanish banks--those banks clearly have access to dollars through the ECB swa... | 111 |
fomc | 2,008 | The collateral isn't always in the right place. You are absolutely right if the collateral could be easily moved; but the collateral oftentimes isn't in the right place. | 32 |
fomc | 2,008 | Let me ask Nathan a question to follow up, if I may. Obviously you've been approached by the governor of the Central Bank of Mexico--Ortiz has been here to visit. | 36 |
fomc | 2,008 | Indeed. | 2 |
fomc | 2,008 | So what's his argument? I would assume that you asked these questions. | 14 |
fomc | 2,008 | Yes, absolutely. | 4 |
fomc | 2,008 | So inform us as to what his justification is. | 10 |
fomc | 2,008 | Mexico is experiencing increased financial stresses, particularly in its corporate sector, where recently some bad bets on structured finance products have emerged, and Ortiz was very concerned about continued confidence in the Mexican economy. Now, that said, from what he had to say, dollar funding pressures had not y... | 121 |
fomc | 2,008 | Just to add to that, he said that, to deal with the issue that Nathan raised about the problem with their businesses and the kind of dollar needs they had, they were meeting those needs out of their own foreign exchange reserves. So they were not going to engage in a swap with us in order to meet that particular proble... | 87 |
fomc | 2,008 | If it's okay, maybe we could just go ahead with the votes on this. I'd like first to do the open market operations, which I hope are not too controversial. There was no discussion of the New Zealand swap line. I'll ask to see if there is any comment on that. Then on this issue, I'll take a set of positions from the vot... | 86 |
fomc | 2,008 | I move that we approve. | 6 |
fomc | 2,008 | Without objection. The New Zealand swap. | 8 |
fomc | 2,008 | I move we approve that, too. | 8 |
fomc | 2,008 | Is there any discussion or concern? All right. Without objection. Now, turning to the resolution on the EME swaps, in the interest of time I propose--and I hope it is okay--to go through the voters and ask each one to state whether you are in favor or opposed. You can say what you want and, if you want, whether you hav... | 133 |
fomc | 2,008 | Any conditionality? | 4 |
fomc | 2,008 | I think we should be fairly tough at this point. Vice Chairman. | 14 |
fomc | 2,008 | I'm in favor. On the basic question of how you would deal with other requests beyond the four, Nathan gave two options. One is that you delegate to the subcommittee discretion to make those judgments. The second option was to say, "No, not without coming back to the Committee." I do think it makes sense to see how the ... | 203 |
fomc | 2,008 | Governor Duke. | 3 |
fomc | 2,008 | I'm in favor. | 4 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | I'm in favor Mr. Chairman, and I would also favor, in terms of the screening device for future requests, that you come back to the full Committee. Thank you. | 35 |
fomc | 2,008 | Okay. That's understood. Governor Kohn. | 9 |
fomc | 2,008 | I'm in favor, Mr. Chairman. I think these boundary problems are difficult. I agree with the Vice Chairman that our having the IMF there mitigates them. I was encouraged by Nathan's sense that there are some people interested in the IMF, so there might not be much stigma there. I would be in favor of very strongly encou... | 75 |
fomc | 2,008 | Governor Kroszner. | 6 |
fomc | 2,008 | I, too, favor the facility. I think it's very important that we are tranching this and using somewhat different ways of providing the money to these countries than we have with other countries because, as President Bullard and others mentioned, if we're not careful, this could be used for purposes with which we are not... | 184 |
fomc | 2,008 | President Pianalto. | 4 |
fomc | 2,008 | I'm also in favor of the program, and I agree with Vice Chairman Geithner's comments that this announcement along with the IMF program should be sufficient. But if there are other requests, I think it is important to bring them back to the Committee. | 51 |
fomc | 2,008 | Understood. President Plosser. | 8 |
fomc | 2,008 | I guess I'll approve, but with reluctance. I think this is a very slippery slope. I'm worried about other central banks ganging up on us as a group, saying that they have to have this. I would prefer that even these large countries use some combination of the IMF facility plus their own reserves to meet these needs. I ... | 106 |
fomc | 2,008 | President Stern. | 3 |
fomc | 2,008 | I'm reluctantly in favor of this. I won't elaborate very much. I'm just not persuaded that this is a very valuable contribution, as best as I can judge it. I would be in favor of limiting it to these four countries. I don't know if that's credible, though. Certainly I would be in favor of any additional considerations ... | 72 |
fomc | 2,008 | Governor Warsh. | 4 |
fomc | 2,008 | Mr. Chairman, I support the proposal on the floor. I think the safeguards are meaningful and real and should help. I think the bar for further consideration, as Nathan described, should be high, but we shouldn't overstate what that bar is, given how circumstances can change quickly. I wouldn't want to have to change th... | 141 |
fomc | 2,008 | Okay. Thank you. So the sense I hear is that people are willing to accept it, but the bar for additional countries should be high. We should bring any country that we propose to add back to the FOMC for approval, and we will keep you well briefed on the conditionality, the draws, and anything else that happens. Okay? M... | 78 |
fomc | 2,008 | So moved. | 3 |
fomc | 2,008 | I am going to say without objection because we had a unanimous view. Okay. Thank you. Let me go on next to the economic situation. | 29 |
fomc | 2,008 | Mr. Chairman. | 4 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | Do we have time for a brief question for the Manager about the funds market? It has behaved a little unusually in the last period. | 27 |
fomc | 2,008 | Go ahead. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman--I appreciate this. I have a three-part question. As you said in your presentation, the effective funds rate (the average of brokered transactions) has been below the interest rate on reserves, and there are all of these institutions that apparently aren't eligible to earn interest on reserves. ... | 196 |
fomc | 2,008 | Okay. Let me take them in reverse order. I don't like to give up, but if I could just exclude that portion of it, it's possible that you might want to consider the interest rate on reserves or some reasonable facsimile thereof as your target because that is essentially the risk-free rate that banks face. That may be th... | 332 |
fomc | 2,008 | Excuse me. Without interest rates on reserves, there's that spread plus a scarcity factor, and we've essentially driven that scarcity factor down to zero--that's how I meant the question. | 36 |
fomc | 2,008 | Right, but I still think that generally a bank faced with a choice of having risk with the Fed or selling fed funds to another bank would want to be compensated for that risk of selling, so they are going to get some positive spread. | 48 |
fomc | 2,008 | I understand that. | 4 |
fomc | 2,008 | I would say that we may well be in a situation where the interest rate on excess reserves is the effective tool for controlling the federal funds rate, and there may be a spread. As Bill said, we are in the process of learning how this works, and it may well be the case that we need to push that interest rate on excess... | 77 |
fomc | 2,008 | It would not surprise me at all if, when we are finished with this process--I hope over the next six weeks as we go through a couple more reserve maintenance period rounds--that that margin might be zero and we might see the federal funds rate trading right on top of the interest rate on reserves. But we are going to h... | 225 |
fomc | 2,008 | There's not really a policy reason. I would say there's a legal reason. The statute allows us to pay interest only on balances held by depository institutions. My own view is that it would be a good thing if we were able to pay interest to the GSEs exactly for the reasons that we've been discussing. It might be somethi... | 79 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | Just a clarification. If we were to take that step, are there any other institutions that participate, other than the GSEs? | 27 |
fomc | 2,008 | Chile, Mexico-- | 4 |
fomc | 2,008 | We would have to look at that. I think there are more than just the three GSEs that we usually think of. But they're the biggest institutions that participate in the federal funds market. | 39 |
fomc | 2,008 | It is not at all clear that their behavior is going to persist necessarily, because they may decide to manage their short-term liquidity in a different way than selling at a very low federal funds rate to banks. | 41 |
fomc | 2,008 | Mr. Chairman, if I could. | 8 |
fomc | 2,008 | Oh, yes. | 4 |
fomc | 2,008 | As part of my preparation when I talked to the banks, I asked them specifically this question about interest on reserves, and every single one of them said, "We haven't had time to even focus on it. We don't even know what's going on with that. We're not changing anything." There's so much going on right now. So I thin... | 99 |
fomc | 2,008 | Learning theory in practice. Thank you very much. Very helpful. All right. Mr. Morin. | 21 |
fomc | 2,008 | 3 Thank you, Mr. Chairman. I'll be using the packet with the green lettering on the cover entitled "Staff Presentation on Nonfinancial Developments." Over the intermeeting period, the data we received on real activity were considerably weaker than we had been expecting. That, combined with the intensification of financ... | 2,862 |
fomc | 2,008 | 4 I'm referring to the next exhibits that are attached to the material you are already looking at. Since the September FOMC meeting, financial market distress has intensified and has spread around the world, threatening many emerging market economies that previously had been less affected by the U.S. and European credi... | 2,025 |
fomc | 2,008 | 5 I will be referring to the separate package labeled "Material for Briefing on FOMC Participants' Economic Projections." Exhibit 1 shows the central tendencies and ranges of your current forecasts for 2008; corresponding information about the Committee's most recent projections, those from June, is shown in italics, a... | 1,691 |
fomc | 2,008 | Thank you. Before we go too long, we'll take a coffee break, but now let's take some questions. President Lacker. | 26 |
fomc | 2,008 | In the forecast, the federal funds rate goes to 50 basis points, and I take it that's essentially as low as you think it can go. You treat that as sort of the lower bound on nominal interest rates. Is that right? | 48 |
fomc | 2,008 | That's how we were thinking of it. The 50 basis points, however, was not done on the basis of any deep analytical analysis of whether that, in fact, is the zero bound, and I think that's an issue that the staff will need to address pronto. But the message in the forecast with that funds rate path was that we think this... | 94 |
fomc | 2,008 | Well, whatever that lower bound is, I have a question that's kind of hypothetical. I wasn't a member of the Committee five years ago. My understanding, though, is that much thought was given to how we would conduct monetary policy if we needed to reduce the nominal federal funds rate to zero or its effective equivalent... | 135 |
fomc | 2,008 | May I? You can answer, but let me just make a suggestion, which is that there were a number of memos and studies done in 2003. I think we ought to look at them, update them, and circulate them fairly soon. So we'll do this in some detail; but by all means, let's hear the answer. | 69 |
fomc | 2,008 | President Lacker, I would say that there are a number of strategies that the Committee could think about if it were at the point that it felt it couldn't lower the federal funds rate any further, be that zero or some higher level. One would be communications that suggest to market participants a willingness to hold sho... | 247 |
fomc | 2,008 | The reason I ask is that my understanding is that the strategy of expanding the monetary base would work through increasing inflation or reducing deflation. | 27 |
fomc | 2,008 | That's not how I would think about it. I would think about it as giving, if it works, depository institutions increased incentives to expand their lending by providing them with a great deal more funding than they actually need and thereby increasing spending propensities. I would see this more as part of a package of ... | 118 |
fomc | 2,008 | My understanding is that economists such as Woodford and others who have studied this believe that, by using monetary assets to purchase other assets, we can make the price level and thus the inflation rate higher than it otherwise would be. Is that a fair understanding? | 51 |
fomc | 2,008 | I don't think that's right. I think the thrust of the elementary approach to quantitative easing is the old Milton Friedman idea--that changing the composition of money and other assets changes relative returns. So it's a way to bring down returns on other assets and create stimulus even if the policy rate is down to z... | 61 |
fomc | 2,008 | The mechanism Friedman sketched ultimately produces a proportionate increase in the price level, doesn't it? | 19 |
fomc | 2,008 | Eventually, but through the aggregate demand mechanism. | 9 |
fomc | 2,008 | Right. | 2 |
fomc | 2,008 | We should look at the Woodford thing, but I don't think that's quite the right characterization of his view. | 22 |
fomc | 2,008 | Well, the reason I ask all of this is that, with an interest rate on reserves above zero, that's effectively equivalent to a zero lower bound on nominal interest rates. So we are effectively doing this quantitative easing. | 43 |
fomc | 2,008 | We're pretty close, yes. | 6 |
fomc | 2,008 | Right. So the thought that sparks is that, if the mechanism involves creating inflation, then I'd wonder what checks we have on the scale of open market operations now to ensure that we're not, by expanding our balance sheet as much as we have, risking an increase in inflation. | 55 |
fomc | 2,008 | I don't think that's the right characterization, but I'd be happy to talk about it off line. President Plosser. | 24 |
fomc | 2,008 | I have a question. As you characterized the forecast in the Greenbook, it is really the result of very large adjustments to the financial constraints piece--in fact, they're about double what they were in the September Greenbook--and those adjustments or factors really account for a large portion, maybe not all, of the... | 495 |
fomc | 2,008 | I can give you some probabilities, but I don't know how seriously you should take them. [Laughter] | 22 |
fomc | 2,008 | You can give me a distribution. | 7 |
fomc | 2,008 | What we wanted to convey in the alternative scenarios that we showed this time--and we reduced the number because we thought the possible little risks that you might be facing were being swamped by some really big ones--was our sense that the likelihood function is pretty flat around the baseline and the two alternativ... | 648 |
fomc | 2,008 | One quick follow-on comment. In exhibit 3, in the middle left panel, if you look at our financial turmoil effects, with the gray shading, the bulk of the markdown in 2008 actually is what we're labeling the financial turmoil. But those are data we pretty much already have in hand. We are calling much of the shortfall i... | 121 |
fomc | 2,008 | I was looking at the table in the Greenbook, at the bottom. That's where I was trying to back out some of this. Thank you very much. | 32 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | I have a question and a statement disguised as a question. | 12 |
fomc | 2,008 | Not anymore. [Laughter] | 7 |
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