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fomc | 2,008 | Thank you. Governor Warsh. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me begin by agreeing with Don Kohn on two things. This is the toughest economic period I can remember in his lifetime, [laughter] and I support alternative A. I think the inflation trends and the trends in the global economy give us flexibility, which six months or so ago I did not think we... | 579 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thank you very much. Well, I've not been able to convince myself not to agree with President Evans. As everyone has said, we have this very significant global shift that has stepped down real activity and financial activity. The inflation environment has changed dramatically from a number of months ago with the change ... | 566 |
fomc | 2,008 | Thank you. Governor Duke. | 6 |
fomc | 2,008 | Thank you. I confess I find myself torn between the position of President Plosser and the equally compelling arguments of Governor Kohn, and that makes alternative B quite attractive as a way, not because of any optimism about the economic outcome, but I really do question the effectiveness of any move in the fed funds... | 332 |
fomc | 2,008 | Thank you. Vice Chairman. | 6 |
fomc | 2,008 | Mr. Chairman, I support alternative A, both the action and the language for the reasons I said earlier. I just want to make a couple of other points. I think the only way to be predictable in a crisis like this is to be predictably inert or to be late. I don't understand the basic argument that you add to confidence by... | 1,082 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | I'd just like to just take a moment to react. I'm not sure whom you heard saying that the result was primarily a result of this Committee's actions or the Chairman's actions or anyone else's actions. If those were words you were putting in my mouth, that was not what I said, President Geithner. I do think I have been s... | 172 |
fomc | 2,008 | Okay. Thank you. Let me just offer some thoughts that may be somewhat more expansive than usual in response to the questions that have been raised. Some of this is extemporaneous, so you'll have to bear with me. Let me first talk about the strategy we pursued thus far and where we are and then think about where we migh... | 3,459 |
fomc | 2,008 | First, I would like to thank you, Mr. Chairman, for that very thorough and clear elucidation. I meant to mention earlier that I actually agree with President Evans. It's worthwhile now and then evoking Ronald Reagan. What I mean by that is not his "Where's the pony?" comment, but more important, the reason he was so su... | 216 |
fomc | 2,008 | Thank you. Other questions? President Plosser. | 11 |
fomc | 2,008 | Just a question or thought. As the staff prepares the review of the 2003 studies and memos and thinks about what zero effectively means and how we might operate in those circumstances, one thing I think would be useful to include is a discussion of whether or not when that time comes we announce that publicly and say, ... | 144 |
fomc | 2,008 | I think there's no problem doing that. I can do that. That is not a problem. President Lacker. | 23 |
fomc | 2,008 | Yes, I also strongly support your charge and direction to the staff to assemble with all due haste updated information for the Committee about what the effective lower bound on nominal interest rates is. But I'd urge you, along the lines of what President Plosser suggested, to include in that charge what we would do on... | 175 |
fomc | 2,008 | Mr. Chairman. | 4 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | I also think it would be helpful, as the staff looks at the policy options going forward, that they do other parts of the communication options, too--not just those but also other ways to think about how to make policy for looking at and communicating a path that are different from what we did in 2003. It would be good... | 94 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | Just to follow up on that--I think that's a very excellent suggestion, President Geithner. To be very specific about that, in our trial run, one thing that we did was to look at what we thought was the steady state. One way to engender some communication about the longer run might be to include what the Committee thoug... | 136 |
fomc | 2,008 | Okay. Other comments? Would you call the roll, please, Debbie? | 15 |
fomc | 2,008 | Yes. This vote encompasses the language of alternative A that was in the package passed out earlier today as well as the directive from the Bluebook, which states the following: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in ... | 133 |
fomc | 2,008 | All right. I'll need the governors to join me in my office for just a moment. Everyone else, let's all take a twenty-minute coffee break. When we come back, maybe we can start at that point with your briefing, David, on the TARP, and around 12:15 we'll break and get lunch and hear the end of the briefing, if that all w... | 79 |
fomc | 2,008 | The expected duration of the next part of our meeting is four hours, three hours? [Laughter] | 21 |
fomc | 2,008 | We should be done by 1:00. | 10 |
fomc | 2,008 | It's not part of the meeting. | 7 |
fomc | 2,008 | The nonmeeting part of the meeting? | 8 |
fomc | 2,008 | It's only a briefing, not a meeting, once we come back. Okay. A twenty-minute break now and then we'll have a briefing and lunch. [Recess] | 34 |
fomc | 2,008 | Well, let me officially get to the point of adjourning the FOMC meeting just by first noting that the next meeting is Tuesday, December 16. Put that on your calendar. | 39 |
fomc | 2,008 | That's a long way away. [Laughter] | 10 |
fomc | 2,008 | Can't we meet before then? [Laughter] | 10 |
fomc | 2,008 | I'd like to remind you that you have until 5:00 p.m. on Thursday to submit revisions to your economic projections, in case the markets change your views. | 34 |
fomc | 2,008 | Only through today's meeting. | 5 |
fomc | 2,008 | Sorry--using information only through the end of today's meeting. All right, the FOMC meeting is adjourned. Thank you. | 28 |
fomc | 2,008 | Good afternoon, everybody. We welcome Chris Cumming, who is sitting in for New York. As you know, under the extraordinary circumstances we added an extra day to the meeting. The purpose of the meeting taking place today is to discuss the zero lower bound and related policy and governance issues, and I hope that the dis... | 265 |
fomc | 2,008 | 1 Thank you, Mr. Chairman. Unfortunately this package is a little thicker than usual, but that's the way it goes, I guess. The stimulus provided by monetary policy to the real economy depends not only on the level of the federal funds rate but also on the health of the financial system. The ability of market participan... | 3,524 |
fomc | 2,008 | Thank you. There was a sharp decline in the spike in the fails recently? | 16 |
fomc | 2,008 | Yes. There are two potential explanations, and it's really hard to sort out what's driving it. One is just that trading volumes have come down, and as trading volumes have come down, fails have come down. So that's part of it. It's just tied to trading volume. The second explanation is that the Treasury Market Practice... | 169 |
fomc | 2,008 | Thank you. Questions for Bill? President Hoenig. | 11 |
fomc | 2,008 | Bill, in your discussion on exhibit 13 and around the idea that a number of resets are coming for mortgages--the earlier seven-year ARMs and so forth--and as you also look forward to where mortgage rates are, why are you anticipating trouble with the ability to refinance, given the outlook for mortgages rates? | 63 |
fomc | 2,008 | I think you have to distinguish between conforming mortgage markets and everything else. The conforming mortgage market is doing fine. Some spreads are a little wider than they have been historically, but our actions seem to have been pretty successful in bringing those spreads in a bit. So the conforming mortgage mark... | 99 |
fomc | 2,008 | Right. Okay. That clarifies. Thank you. | 11 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | Bill, has the FDIC's temporary liquidity guarantee program interfered with or added to the confusion in the purchase and sales of fed funds, or has our excluding sales under one month changed the picture? | 40 |
fomc | 2,008 | I don't think it has created much confusion. The biggest confusion is who is guaranteed and who is not and which instruments are guaranteed and which instruments are not. I think people will have trouble sorting that out. Most of the issuance has been long term--three years. People say, "Well, if I'm paying 75 basis po... | 112 |
fomc | 2,008 | Is that pretty well understood in the marketplace? | 9 |
fomc | 2,008 | I think so. | 4 |
fomc | 2,008 | Then speaking of guarantees, I have just one more question, if I may, Mr. Chairman. In chart 14, are these net of credits that might have some kind of government guarantee? | 39 |
fomc | 2,008 | This is total. In fact, when you look at the issuance of investment-grade corporate debt recently, there's quite a bit of it, but most of it is the guaranteed stuff. | 36 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | So excluding the guaranteed stuff, the issuance volumes do not look as robust as the aggregate number suggests because so much of that is the guaranteed stuff. | 29 |
fomc | 2,008 | So for 2009? | 6 |
fomc | 2,008 | I don't have the number off the top of my head. | 12 |
fomc | 2,008 | It's not this total? | 5 |
fomc | 2,008 | No. | 2 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | Any other questions? President Bullard. | 8 |
fomc | 2,008 | At the beginning of your comments, you said that you expected further big mark-to-market losses. Do you mean over and above what markets anticipate now? | 30 |
fomc | 2,008 | No. I mean that in the fourth quarter they will reflect the decline that occurred from August 30 to November 30 for the investment banks. September 30 to December 30 just hasn't been yet recorded on their balance sheet. They haven't announced it yet. | 52 |
fomc | 2,008 | You cited that Goldman number of $2 billion, but that's been widely reported. | 16 |
fomc | 2,008 | That has been widely reported. Morgan Stanley is also going to report this week, and it is highly likely they will have similar losses. | 27 |
fomc | 2,008 | Then I just want to understand--on exhibit 2 you said something about a fully discounted default rate last seen in the Great Depression. What did you mean by that? | 34 |
fomc | 2,008 | Well, if you basically take that 21 percent and compare it with the default rates in the Great Depression and write down some numbers for recoveries, if you had a default rate equal to the Great Depression default rate and you had a 20 percent recovery, you'd actually do pretty well owning high-yield debt at these leve... | 79 |
fomc | 2,008 | In fairness, these are junk bonds. These are low-rated companies. | 14 |
fomc | 2,008 | Well, yes. It is possible that we could have default rates greater than those of the Great Depression. I'm just saying that these levels discount that kind of outcome. Obviously, the high-yield debt market today is different from general default rates. Yeah, I think that's a fair point. | 58 |
fomc | 2,008 | Do we know? Was there something like a junk market in the Great Depression that we can compare this with? | 22 |
fomc | 2,008 | Well, there were certain leveraged utility companies that you could argue were pretty junky. | 17 |
fomc | 2,008 | Corporate grade became junk in the Great Depression. | 9 |
fomc | 2,008 | Michael Milken hadn't been born yet. [Laughter] President Lacker. | 16 |
fomc | 2,008 | That's a calculation that embeds risk neutrality into the extrapolation? | 12 |
fomc | 2,008 | Well, you could solve for the risk premium that was left over, and we did a back-of-the-envelope calculation in New York on that. It was an excess return of about 600 basis points. | 41 |
fomc | 2,008 | Doesn't that depend on the assumption about the correlation between-- | 12 |
fomc | 2,008 | Look. This is back of the envelope. Obviously, you'd have to dig down pretty deeply to try to separate what's the default rate and what's the risk premium. But the point here is that the market is discounting very adverse outcomes. | 47 |
fomc | 2,008 | I just want to follow up on that. Would you say that that represents a tremendous amount of pessimism out there, or are you saying that you think we're going to get default rates like the Great Depression? | 42 |
fomc | 2,008 | No, I think it's some combination. I don't think you can really separate how much of it is default rate versus how much of it is risk premium. The point is that there's probably a considerable amount of both. Clearly the risk premiums are high because we see risk premiums on safe assets being very, very high. The class... | 122 |
fomc | 2,008 | President Lacker has a two-hander. | 9 |
fomc | 2,008 | First, about the risk premium, it's either a lot of pessimism or a lot of correlation between defaults and bad states of the world and essentially low growth. The second thing, I took a look at the student-loan-asset-backed securities that you talked about--FFELP. I think you have a chart here. It turns out that the tr... | 179 |
fomc | 2,008 | I think what you're describing is the perspective from the issuer of the obligation. The issuer of the obligation has a problem because on one side they get commercial paper and on the other side they get LIBOR, and so they have a mismatch. They have essentially a basis risk. But about where securities are trading in t... | 112 |
fomc | 2,008 | Well, wouldn't investors want to discount or take into account the fact that the trust, which is their only source of payment, is earning about 300 basis points less than the coupon? Wouldn't that show up in a higher premium on what the investor is willing to pay? | 55 |
fomc | 2,008 | I don't see it that way. | 7 |
fomc | 2,008 | President Lacker, it's a complicated security, but it's wrapped by a guarantee that ultimately the Department of Education will make good on to the tune of 97 cents on the dollar. There's one little detail that is causing another piece of friction in the market, and that is that, if the servicer doesn't perform on the ... | 94 |
fomc | 2,008 | We think they're pretty safe--not perfectly safe, but pretty safe. | 14 |
fomc | 2,008 | Okay. | 2 |
fomc | 2,008 | Apparently the ability of the Department of Education not to make good on the guarantee is very rarely exercised. | 20 |
fomc | 2,008 | But the Department of Education doesn't guarantee LIBOR plus a 200 basis point coupon. It guarantees the commercial paper rate. | 24 |
fomc | 2,008 | I believe Bill's point is that it guarantees a return to the investor. | 15 |
fomc | 2,008 | That still doesn't seem that irrationally priced. Thank you. | 12 |
fomc | 2,008 | Okay. Other questions for Bill? If not, we need a motion to ratify domestic open market operations. | 22 |
fomc | 2,008 | I so move. | 4 |
fomc | 2,008 | Any objections? All right. Thank you. Let's turn now to Brian, and we'll have a staff presentation on the zero lower bound. I'm being reminded that this is a joint Board-FOMC meeting. I'm reconvening a Board meeting that began this morning. Thank you. | 56 |
fomc | 2,008 | Thank you, Mr. Chairman. As the Committee requested at your last meeting, the staff has provided background for your discussion today of issues related to the zero lower bound on nominal interest rates. Ten days ago, we sent you 21 notes covering lessons from the U.S. and Japanese experiences in disinflationary or defl... | 195 |
fomc | 2,008 | Thank you, Brian. By way of background, the Greenbook and many private forecasters project a sizable drop in real GDP from mid-2008 to mid-2009, followed by sluggish growth into 2010, even with short-term interest rates barely above zero and with substantial fiscal stimulus. The Board staff and the median forecaster in... | 2,246 |
fomc | 2,008 | 2 The staff provided eight questions to help frame your discussion, and those questions are included in the package we have placed before you--a single page with a blue cover sheet. I would like to comment briefly on each of them. The first question deals with the issue of whether policy adjustments should be accelerat... | 1,476 |
fomc | 2,008 | Thank you very much. I would like to give special thanks to the staff, some of whom are here and some of whom are not, for an extraordinary amount of work on these difficult topics over a short period of time. We very much appreciate those efforts. Are there questions for Brian or Steve or anyone else? If there are no ... | 3,445 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me echo your comments about the staff's work. They have provided us with a very comprehensive compendium of research and experiences relevant to the policy problems that we are facing now. And they have presented it in a surprisingly digestible form, all things considered. [Laughter] This w... | 1,909 |
fomc | 2,008 | I won't try to respond, but I do want to ask you what your interpretation of the Japanese experience is. They had enormous increases in the base, no increase in M1, and no inflation. | 40 |
fomc | 2,008 | First, let me say that there are models and sets of policy rules under which in the short run there is an irrelevance proposition, a kind of Modigliani-Miller theorem, about exchanges of monetary assets for short-term liquid securities that are virtually perfect substitutes and at the zero lower bound are definitely pe... | 205 |
fomc | 2,008 | President Fisher, you had a two-hander. | 10 |
fomc | 2,008 | Yes, sir. I just want to ask a question--again acknowledging that I am the least well educated on this subject matter and not as erudite in my understanding. So this is a tutorial question. What we have been doing is implicitly acknowledging that standard monetary tools are not as effective as they could be because of ... | 170 |
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