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fomc | 2,008 | In the CP market itself? | 6 |
fomc | 2,008 | You can look at credit ratings, for example, or what's happening to their profitability. It is highly likely that the strains in the CP market are more dramatic than any change in the underlying financial condition of the A2/P2 borrowers. | 47 |
fomc | 2,008 | You could think about what the default risk is, say, for the corporate sector. You could break down a pretty simple model of defaults conditional upon our outlook for the economy, and that would have the default rate rising. | 44 |
fomc | 2,008 | But you don't observe investors' expected defaults themselves. | 10 |
fomc | 2,008 | You don't, but you can take a guess at what you think that is, and it is higher. It is not at Great Depression levels under any of the models I've looked at. It's not even at the levels of default rates in 2002. | 51 |
fomc | 2,008 | So you are saying that this paper is underpriced. Is that how you measure strains? I am always curious as to what strains mean. | 28 |
fomc | 2,008 | The way that I'm referring to it is just that risk premiums are really, really large. I'm not saying that they are necessarily irrational. I am just saying that they are really, really large. | 39 |
fomc | 2,008 | Thanks. Great job. | 5 |
fomc | 2,008 | President Evans. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. I have a question or observation, which is of the optimistic variety although it presents sort of a challenge. In the medium-term outlook in exhibit 4, if you focus on 2010, the Greenbook projection has real GDP growing at 2.4 percent. We're beginning to come out of this. The unemployment rate ... | 233 |
fomc | 2,008 | My guess is that, if our baseline forecast evolves in the way we are expecting here, you are still going to be worried about the downside risk to inflation even if, in fact, we were in the process of bottoming out because there will still be a very substantial output gap. On the commodity price side, things are fairly ... | 232 |
fomc | 2,008 | Thanks. | 2 |
fomc | 2,008 | President Bullard. | 4 |
fomc | 2,008 | On the same topic--the medium-term outlook and, in particular, the optimal control exercise at the bottom, which is showing us how we're constrained--is there some quantitative policy that we could undertake that would get us to the green lines here, maybe by creating more inflation than we would think desirable in the... | 64 |
fomc | 2,008 | The point of constructing this optimal control is to say that, gee, if you weren't constrained, here is how we thought optimal behavior--the sort of optimal outcome--would be, given the shocks. You're asking me whether or not there are quantitative policies that you could put in place. I was actually hoping that you fo... | 150 |
fomc | 2,008 | Sometimes what people do is they say, okay, suppose you could just control inflation directly, which we know is hard, but suppose then you just trace out an optimal path for inflation that would get you to the green line. | 45 |
fomc | 2,008 | Obviously, if you could levitate inflation expectations, that would be one thing. The other thing is that note 21 in the package we sent you included some exercises that suggested, if you took actions that could significantly reduce the long-term Treasury rate and compress mortgage spreads, there would be ways in which... | 118 |
fomc | 2,008 | This optimal control exercise then would have an objective that would be a quadratic objective in some real output or unemployment-- | 22 |
fomc | 2,008 | Minimizing the unemployment rate and the deviations of inflation from its target. | 15 |
fomc | 2,008 | That's saying that you wouldn't be willing to suspend your inflation target for a while to improve things on the real side. I think that might be helpful as well because then the Committee could think about what those tradeoffs are. In ordinary times, you might have a certain weight on the two objectives, but you might... | 68 |
fomc | 2,008 | If I can also just put this in a little more context--by the end of 2010, the gap on the unemployment rate between the baseline and the optimal control is about 1 percentage point. So if you use a simple rule of thumb from an Okun's law type of model, that would be a couple of percentage points on the level of GDP. GDP... | 113 |
fomc | 2,008 | President Lockhart. | 4 |
fomc | 2,008 | Question for Nathan. In an earlier meeting, if I recall correctly, there was mention of the European banks' exposure to emerging-market sovereign debt--a concern about the trend lines in that sovereign debt. Are you tracking that in any sense? My concern is that there could be another full-blown debt crisis of some kin... | 92 |
fomc | 2,008 | The European banks are particularly exposed, much more so than U.S. banks or Japanese banks. A big chunk of that exposure is to central and eastern Europe, and as you suggest, we see significant risks to the European banks as a result of that exposure. What makes it even a little dicier is that exposure is concentrated... | 387 |
fomc | 2,008 | Nathan, you would probably have been arrested for treason if you had said that in Latvia--literally. The economist who gives a negative forecast is arrested for treason. Stay here. [Laughter] | 42 |
fomc | 2,008 | Other questions? If not, let's start our go-round with First Vice President Cumming. | 18 |
fomc | 2,008 | Thank you. I thought I would make a couple of points that underscore the substantial increase in the downside risks that we incorporated into the forecast that you all received on Friday. That change was really encouraged by our economic advisory panel, which suggested that the downside risks were much larger than we w... | 620 |
fomc | 2,008 | Thank you. President Rosengren. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. As requested, I will be brief. Like the Greenbook, we see an economy in which the unemployment rate remains very elevated, and inflation is below my target for several years. Our own equations would indicate that these elevated unemployment rates are likely to put even more downward pressure on... | 364 |
fomc | 2,008 | Thank you. President Lacker. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. The economic news since the last meeting has certainly been grim, and our presentation today bore that out. Our directors and other District contacts are quite gloomy, and their reports are also consistent with a broad-based pullback in discretionary outlays by consumers and firms. In these cir... | 808 |
fomc | 2,008 | Including over salad. [Laughter] | 8 |
fomc | 2,008 | All of these strategies are time-inconsistent, of course. So we have to be willing as a Committee to sit here and accept higher-than-normal inflation ex post. I just point that out. We have to ask ourselves if we would be willing and if the public would be willing to accept that. | 60 |
fomc | 2,008 | "Time-inconsistent" is another way to say that they require commitment. | 15 |
fomc | 2,008 | I understand. I'm just saying that there are also different ways to do it. We could also just target a higher inflation rate, which is probably another way of doing it. | 35 |
fomc | 2,008 | Right. You could target the inflation rate not falling. I mean, we don't have to go all the way. This is the subtle thing about this. I think the pure Taylor rule overstates our credibility, but people do not think that we are going to follow it perfectly. They don't have very diffuse priors over what policies. We are ... | 130 |
fomc | 2,008 | I would just comment--and I think that your point is a good one--as we go forward, we are going to be thinking hard about how to influence expectations. Absolutely. Your point is also right, as we discussed earlier, about why we need additional policies besides our zero rate policy, either other kinds of quantitative p... | 93 |
fomc | 2,008 | No, I do not think so. The point I was making about the base is that none of those is sufficient to rule out deflation without specifying what the base is. | 35 |
fomc | 2,008 | Okay. President Pianalto. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. The reports from my contacts have been very weak for several weeks now. Sadly, I feel as though the data have been catching up with the anecdotal comments that I have been receiving for a while. I have been hearing a lot of comments along the lines of "orders have fallen off a sheer cliff," "th... | 492 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | Thank you, Mr. Chairman. The Third District economic news is similar to the national news. It's all bad. Our December business outlook survey, which remains confidential until Thursday, will post another very weak number. In November the number was minus 39.3. The December reading will be released, and it will be minus... | 836 |
fomc | 2,008 | Thank you. President Lockhart. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I think President Fisher at the last meeting actually proposed that, since we all knew where the economy was, we just suspend discussion and get on to what to do about it. Forgive me for a six-week reaction function here, President Fisher, but I tend to agree with that. I will be very brief. Th... | 509 |
fomc | 2,008 | Thank you, and if there has been any intervention in hedge funds, the Chairman is unaware of it. [Laughter.] | 25 |
fomc | 2,008 | I am relieved to hear that. | 7 |
fomc | 2,008 | He just wanted you to know about it, Mr. Chairman. | 13 |
fomc | 2,008 | You said "has been"? [Laughter] | 10 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. The Tenth District's economy, like the others, has systematically worsened. Layoffs are increasing. Our retail sales are down. The housing market is certainly not improving, and manufacturing has weakened. In our two stronger areas, energy is showing a pretty good slowdown with these falloffs i... | 476 |
fomc | 2,008 | Thank you. It was a good suggestion. I have looked at that example and had a chance to talk with Stefan Ingves, who is the Governor of the Central Bank of Sweden and was very much involved in that. It was a very good and prompt response, but it was different from our current situation in that the banks were already mos... | 144 |
fomc | 2,008 | I agree with that, but at the same time, I see the similarity. When you don't go in and try to drive it back quickly, you get the Japanese outcome of prolonging it. I don't know where the banks are yet, but I know that things are getting worse and that the intermediation process is broken. So just maybe there is someth... | 138 |
fomc | 2,008 | If you can indulge just one more observation, which is that one thing we learn from these episodes is that the political economy matters tremendously. The public is very reluctant to get involved in putting money into banks, and only when they become persuaded that doing so is essential do you get that result. In Japan... | 90 |
fomc | 2,008 | May I just make one comment on that? For those of you who have not read about the Nordic experience, Seppo Honkapohja, who is a member of the Board of the Bank of Finland, has given a speech within the last two months. You can probably go to the Bank of Finland web page. There may be other information, but that is just... | 94 |
fomc | 2,008 | Thank you. President Yellen. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. In my view, cumulative recessionary dynamics are deeply entrenched, with mounting job losses leading to weaker consumer spending, tighter credit, more job losses, and so on; and this nasty set of economic linkages is gaining momentum. Like the Greenbook, I anticipate a long period of decline, a... | 774 |
fomc | 2,008 | Thank you. President Evans. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. As gloomy as our last meeting was, conditions have deteriorated substantially further since then. Practically all of my contacts reported that economic events had turned sharply lower once again in the last three to five weeks. This goes well beyond the auto sector and other parts of the Distri... | 554 |
fomc | 2,008 | Thank you. President Stern. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. Well, as just about everyone has said--and I certainly agree--the near-term outlook is grim. Virtually all the anecdotes of any consequence that I have received recently have been negative. Payroll employment has been, obviously, dropping significantly; and if you look at the trajectory, if tha... | 292 |
fomc | 2,008 | President Bullard. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. I will be brief. In the Eighth District, there is a clear and sharp downturn, as in the national picture. There is a clear turn to survival strategies, and you really see that when key CEOs and other figures start talking about lower capital expenditures for 2009, cutting the lower levels in 20... | 854 |
fomc | 2,008 | Thank you. President Fisher. | 6 |
fomc | 2,008 | Mr. Chairman, thank you. President Rosengren talked about micro behavior, and at the beginning, First Vice President Cumming talked about the hunkering-down mentality. I have been focused on the microeconomic behavioral responses to our current situation. As one of my CEO contacts outside my region said, we are basical... | 604 |
fomc | 2,008 | Thank you. Governor Kohn. | 7 |
fomc | 2,008 | I am not going to even try to top either of those anecdotes or jokes. I agree certainly with the thrust of the comments around the room. The economy is in a steep decline. There was a break in confidence somewhere in September that took what had been a gradual decline in employment, production, and output and made it m... | 780 |
fomc | 2,008 | Thank you. Governor Warsh. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Several quick points. First, the latest leg of deterioration, which began in mid-September, is showing few signs of abating, as Governor Kohn suggested. I think the November retail sales data look like a head fake. Revisions to September and October, as the Greenbook suggested, make us think th... | 1,025 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thanks. President Lockhart's forecast about what members would say about the forecasts I think has turned out to be right, and I certainly don't want to disappoint. [Laughter] So I agree with what others have said, and I think most everything has been said about the intensification of the recessionary flames around the... | 1,132 |
fomc | 2,008 | Thank you. Governor Duke. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. Yesterday I talked about the income statement of the banks. I would like to talk a bit about the balance sheets now. Up to this point, for the small and medium-sized community banks, it has been pretty much business as usual. But now even those banks are finding it increasingly difficult to len... | 771 |
fomc | 2,008 | Thank you. And thanks, everyone, for a very concise but also very informative roundtable. Why don't we take a coffee break until 11:30. Thank you. | 35 |
fomc | 2,008 | Why don't we reconvene, have a brief summary of our go-round, and then I will make just a few additional comments. The participants noted that the economic downturn has intensified sharply recently with significant downside risks to the outlook. Recessionary dynamics have set in, with interplays among real and financia... | 1,746 |
fomc | 2,008 | 4 Thank you, Mr. Chairman. I will be referring to the package labeled "Material for FOMC Briefing on Monetary Policy Alternatives." This package includes the October policy statement, draft policy statements for this meeting, and associated draft directives to the Desk. Alternatives A and B have been revised somewhat r... | 2,121 |
fomc | 2,008 | Thank you. Questions for Brian? President Lacker. | 11 |
fomc | 2,008 | Thank you, Mr. Chairman. Brian, the first sentence in alternative B says, "The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent." In the staff analysis of various options for implementing interest on excess reserves, I think option 4 was the one that... | 261 |
fomc | 2,008 | President Lacker, the forces that we were thinking would bring it above 1/4 were largely a risk premium--the difference between federal funds, which have some amount of credit risk, and deposits at the Federal Reserve, which of course do not. I think we would not anticipate that we would need to do anything very differ... | 134 |
fomc | 2,008 | Okay. Well, the reason I ask is that I am a little hesitant to set an upper bound on a range without understanding what sort of mechanism we would have for making that credible. That is why I asked about that. Two more questions. One, the word "zero"--can you help me understand the thinking about why we should be a lit... | 77 |
fomc | 2,008 | Well, one reason might be that, if you gave some weight to the view that very low interest rates do have costs in financial markets and you wanted to preserve some rhetorical or substantive leeway, you would want to have a somewhat positive interest rate, to the degree that you could achieve one, but still a low level. | 65 |
fomc | 2,008 | Okay. One final question. We, in the late 1970s, adopted a set of guidelines regarding agency debt and modified that in the late 1990s. I don't have a copy with me. I think the latest adoption of that was January 2003, and I believe it is permanent. I think it is still in effect. I think it states that our purchases ar... | 118 |
fomc | 2,008 | I do have that guideline here, and you are correct, President Lacker. The first paragraph of the guideline says that System open market operations in agency issues are an integral part of open market operations, designed to influence bank reserves, money market conditions, and monetary aggregates. The second paragraph ... | 136 |
fomc | 2,008 | They do seem inconsistent, though, and I think it is something, Mr. Chairman, that we ought to consider. | 24 |
fomc | 2,008 | Noted. I think I am somewhat at fault here. I did consult with everyone on the Committee and discussed what we were going to do. I would say that, going forward, we should probably bring all such plans to the Committee. | 48 |
fomc | 2,008 | Thanks. It would be good to have that public. It is a public document, is it not? Or it is not a public document yet. It is on the Committee records, right? | 39 |
fomc | 2,008 | I believe it is public. | 6 |
fomc | 2,008 | Okay. It would be nice to have that in conformance with what we are actually doing. Thank you, Mr. Chairman. I appreciate that. | 30 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | May I ask two questions, please? With regard to alternative A, I am curious, Brian, as to how you think the bankers would respond to that in terms of their pricing behavior and loans and prime. Second, our friend from the New York Desk, how do you think the markets might respond to alternative A--not overnight, by the ... | 84 |
fomc | 2,008 | On the former, just a guess, I would think that without any target federal funds rate--and given the well-known issues that we have been discussing about pressures on banks--it is possible that the prime rate would not be reduced by the full extent of the implicit reduction in the money market conditions that the FOMC ... | 84 |
fomc | 2,008 | I think the market will be slightly confused, but I think they will figure it out quite quickly. They will scan the document and figure out, well, what does this really mean? They will be surprised by the magnitude of the interest rate reduction. As I said yesterday, most of the dealers are clustered around a 50 basis ... | 72 |
fomc | 2,008 | Even though we are not stating a specific target, it would be implicit in the change in the level of the discount rate. | 25 |
fomc | 2,008 | We are saying here that we are at exceptionally low levels of the funds rate for some time. I think they will understand that this is it and that the funds rate is going to be very, very low. Obviously, the next day you will probably observe a federal funds rate that is no more than a couple of basis points, would be m... | 71 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | Just a follow-up on that. I am a little confused that we don't set a target but we are operating under an interest on reserves scheme by which we pay a deposit rate, which in fact we just lowered. Is there some kind of disconnect between what is in alternative A, paragraph 5--lowering the discount rate and the interest... | 144 |
fomc | 2,008 | I think the markets would look at this as saying it is a substantial rate cut. The funds rate has been trading soft to the interest rate on excess reserves by a considerable margin. The interest rate on excess reserves was cut considerably, so they will figure out that, therefore, the funds rate is going to trade at an... | 89 |
fomc | 2,008 | I guess my trouble is that the Committee judged that it is not useful to set a specific target for the funds rate and yet this will be interpreted as that we reduced the target in effect. | 38 |
fomc | 2,008 | We can discuss this in the go-round. President Evans. | 12 |
fomc | 2,008 | May I just ask Bill Dudley if he could describe how he anticipates his operations would differ between alternative A and alternative B? How would you do things differently? | 33 |
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