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fomc | 2,008 | So the target range is to be between those two numbers. | 12 |
fomc | 2,008 | All right. Okay. Scratch it. Paragraph 1 is the same. That's simple. Paragraph 2 is the same, including the additional sentence about financial markets, no longer bolded. Paragraph 3, President Stern was right about "quickly." Why don't we say "appreciably"? Now, a lot of people have talked about inflation targets. I t... | 276 |
fomc | 2,008 | So the last sentence will have "continue to" or not? | 13 |
fomc | 2,008 | Okay. Let's see. Yes, I think it has to be there. "The Federal Reserve will continue to consider ways of using its balance sheet." I think we have to say that because we have used it. | 43 |
fomc | 2,008 | Would that say "the Committee"? | 7 |
fomc | 2,008 | Sorry? | 2 |
fomc | 2,008 | Would that say the "Committee will" or "the Federal Reserve will"? Perhaps "the Committee will continue to consider ways to use the Federal Reserve balance sheet." | 32 |
fomc | 2,008 | "The Committee will continue to consider ways of using the Federal Reserve's balance sheet." I think we should leave it where it is. Just leave it ambiguous for now, if that's okay. So those are the changes. Brian, would you like just to read that? Are you able to read it that? Do you have the information? | 67 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | Would you go ahead and read the thing? | 9 |
fomc | 2,008 | "The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined... | 337 |
fomc | 2,008 | And then the related action. President Plosser. | 11 |
fomc | 2,008 | This is a clarification, Mr. Chairman. I hate to be difficult, but in thinking about this as a step, we talked about an inflation target. What other steps do you see that we need to clarify as we try to make this process more--I'm looking for some forward-looking language here. | 60 |
fomc | 2,008 | Well, we need to talk about it. I think there are two promising directions. One is to have an inflation target or something close to an inflation target, depending on how the Committee decides, what we think is feasible, and so on. The other would be to develop a more formalized structure for discussing the integrated ... | 233 |
fomc | 2,008 | Just one further clarification. By sustaining the balance sheet at a high level, we're not promising that it won't fall from here, right? Just that it will be higher than it ordinarily would be. | 39 |
fomc | 2,008 | That it's going to be above $800 billion for some time I would think is a fair statement. Does anyone else have a comment? Governor Warsh. | 31 |
fomc | 2,008 | I apologize for the bad English that I offered before, but an alternative to the first sentence that you read that would, I think, be English to Jeff's fair point--it would be to delete the word "target." So it says, "To establish a range for the federal funds rate between zero and 1/4 percent." So those are your two o... | 75 |
fomc | 2,008 | But it's the same issue. "Range" is the noun, and you're saying that the range lies between those things, and you're not telling everyone what the range is. | 34 |
fomc | 2,008 | It would be a range of 0 to 1/4 percent. I think that would be right. PARTICIPANTS. Right. | 28 |
fomc | 2,008 | Withdrawn. | 3 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | Mr. Chairman, I can't support that, and I'll tell you why. I do feel that we had an elegant solution in alternative A. I firmly believe that if we target 0 to 25 basis points--the effective funds rate we all know is trading at 1/16--it is going to create enormous backlash. It is unacceptable to me to say that the banke... | 348 |
fomc | 2,008 | I think confusion is an extraordinarily dangerous thing for us. | 11 |
fomc | 2,008 | The key is paragraph 4 in alternative A--that is what we're doing. | 16 |
fomc | 2,008 | No, I agree with that. What B says is that this is the end of one regime and the beginning of another. The first one says that this is the end, and then we say what are we doing going forward. I think that clarity is needed. If we did what you're suggesting, I don't know for sure what would happen, but I think there wo... | 128 |
fomc | 2,008 | I'd like to ask one question just, again, about going forward. We talked about what you would do differently tomorrow under alternatives A and B and determined that it was nothing. What would you do going forward if federal funds started to trade above 25 basis points under alternative B? | 56 |
fomc | 2,008 | Well, I guess we would stop doing reverse repos to signal our protesting of the fact that the fed funds rate is trading soft to its targets. That's the first thing we'd do. I have to say that I think the probability of this happening is extremely remote because banks are balance sheet constrained and therefore aren't g... | 144 |
fomc | 2,008 | But you would be able to pull it back down. | 11 |
fomc | 2,008 | I don't know how quickly we could pull it back down. Look. I don't think that this is going to happen under almost any conceivable circumstance, but if it were to happen, we would basically add reserves to protest what we're seeing. Time would pass. We'd have another FOMC meeting, and we would make an adjustment to the... | 79 |
fomc | 2,008 | First Vice President Cumming. | 6 |
fomc | 2,008 | I think that, if we see the risk of institutional factors, like the way the prime rate is linked to rates, really getting in the way of good policy, we have an obligation to work with the banking community, work with other regulators if necessary, and work with the SEC if necessary to clear those institutional obstacle... | 119 |
fomc | 2,008 | No, clearly the banks are not required to move their prime rate with anything in particular. | 18 |
fomc | 2,008 | Of course. They can always have their markup, but you can also reverse the argument and say, so why do you want to cut rates? Again, I think we're pushing on a string here, Mr. Chairman. Forgive me for speaking, but the guts of what we're doing and the importance of what we're doing, which I fully support, are in parag... | 91 |
fomc | 2,008 | I agree with what you're saying about the important part, but it is nevertheless the case that--as President Yellen pointed out--if we wanted to, we could raise the funds rate if we put on enough pressure. Therefore, in an important sense a decision is being made here to end this particular policy approach and to move ... | 138 |
fomc | 2,008 | In terms of what we're going to be speaking about regarding the new regime, I think it was easier when we had alternative A and we were going to a new regime than when we're saying, "Well, okay, we're going to end this regime here." I'm giving this speech; I get questions. We're going to end this regime, and we're goin... | 154 |
fomc | 2,008 | No. Today is the end of the old regime. We have hit zero. We can't go further. Going forward, this is what we're going to do. I think that's clearer. Again, I'm just concerned about not saying what we're doing with the funds rate. Are we going to let it do whatever it wants to do from today? I think that's just going t... | 88 |
fomc | 2,008 | For what it's worth, Mr. Chairman, I agree with you. I think the market will be more confused about alternative A than alternative B. If that's important, then that should be part of the decision. | 42 |
fomc | 2,008 | But I asked you that during the question period. | 10 |
fomc | 2,008 | I said substantively we're not going to conduct policy any differently, but the market will be more confused about A than about B in terms of having to process what this means. Now, it will get to the right answer eventually, but it will be more confused in terms of processing information, in my opinion. | 62 |
fomc | 2,008 | I just want to underscore that, because that was my concern in moving toward B rather than A because I certainly agree that the economic substance is the same. But I do think there's much more of an opportunity for misinterpretation by the market, and for us to say that we don't have control of the fed funds rate is th... | 176 |
fomc | 2,008 | I heard eleven people argue the case for alternative A. I counted them. | 15 |
fomc | 2,008 | Most of them said it was pretty close, and it's a matter of communication. It's my judgment that we are just going to cause a lot of criticism and a lot of concern and confusion if we do it now. I also agree that it's fairly close. But my feeling is that the concern of clarity is more important to me. Others? Would you... | 76 |
fomc | 2,008 | Mr. Chairman. | 4 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | There is also the issue of the directive. | 9 |
fomc | 2,008 | The directive would stand as we've written it, with the additional sentence at the end? | 17 |
fomc | 2,008 | Yes, that's right. The vote will encompass the statement as Brian Madigan read it and the draft directive for alternative B as was shown in the handout. Since it is longer this time and we are short of time, I won't read it. Chairman Bernanke Yes First Vice President Cumming Yes Governor Duke Yes President Fisher No Go... | 101 |
fomc | 2,008 | Thank you. Could we bring lunch back? Would that work? | 13 |
fomc | 2,008 | That doesn't usually work well in a recorded session. | 10 |
fomc | 2,008 | That doesn't work well? All right. Let's have half an hour for lunch. | 16 |
fomc | 2,008 | The Board meeting, Mr. Chairman. | 8 |
fomc | 2,008 | The Board meeting is adjourned. Hold on. The Board will go into my office. Everyone else, lunch. We will take a half hour break, and then we have just a few short items afterwards to complete. Okay? Thank you. [Lunch break] | 54 |
fomc | 2,008 | Let's reconvene briefly for a couple of other items. On consideration, in order to maintain a united front with the Committee, President Fisher changed his vote to vote "yes" on the resolution. We have two items. First, Governor Kohn is going to talk a bit about our longer-term projection, and then we would like just t... | 114 |
fomc | 2,008 | Thank you, Mr. Chairman. You should have gotten memos from the Subcommittee on Communications having to do with the longer-term projections. In considering the trial run and also the current situation, in which the '09, '10, and '11 projections really weren't settling down and didn't look as though they would soon sett... | 418 |
fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | I think the subcommittee ought to consider whether, if the Committee adopts a 2 percent or whatever inflation objective, it might be more confusing than clarifying for us to also be issuing these long-range convergence projections. My first cut at thinking this through--I haven't given this a lot of thought--is that, i... | 84 |
fomc | 2,008 | This is why they need to look at it now because I think they really are substitutes. | 18 |
fomc | 2,008 | Yes, I think they are substitutes. | 8 |
fomc | 2,008 | You might still need the output and unemployment. | 9 |
fomc | 2,008 | What for? We don't control--well, you know that--sorry. | 15 |
fomc | 2,008 | Any other comments or questions? | 6 |
fomc | 2,008 | I guess, given the zero lower bound issues that we have been discussing and some of the consequences of being there, the difficulty of dealing with policy in that environment, in previous meetings on this topic we have talked about the prospects of specifying the funds rate path or the range of the funds rate paths of ... | 144 |
fomc | 2,008 | Okay. Anyone else? All right. Let me turn to Bill, who very kindly learned that he was on the program about fifteen hours ago. | 29 |
fomc | 2,008 | It is better than the time I found out I had to discuss a Stiglitz paper in grad school about 12 hours ahead of time. That was harder. I read the Stiglitz paper three times, and then I started to understand it. [Laughter] What I thought I would do, if I could, is invert the order and start with the balance sheet issues... | 2,114 |
fomc | 2,008 | No, I don't think so. Again, I think the message, as Bill is saying, from the investors and the issuers was that a three-year term would greatly enhance the chances of success. Indeed, I think our friends in the Treasury Department, at least in the case of government-guaranteed loans, would like to go even longer than ... | 92 |
fomc | 2,008 | Three years gets you far enough along that reasonable people will believe that three years from now you might actually be able to get private-sector financing for this stuff. | 31 |
fomc | 2,008 | I am going to need to consult on an informal basis with the other Board members on this. But in the spirit of our discussion yesterday, I invite questions or comments, which will inform our thinking on this as well. Does anyone have any questions or thoughts on this? President Lacker. | 58 |
fomc | 2,008 | You said that investors who bought this and put this and got the lending would have the haircut at risk, right? | 23 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | They would get all of the upside? | 8 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | So if spreads close in the marketplace, then they get the upside--so we are essentially lending to them to make a leveraged bet on the securities. | 30 |
fomc | 2,008 | The purpose of this facility is not to give investors profits. The purpose of this facility is to address the fact that lending spreads on AAA-rated securities are extremely wide right now and the securitization market is closed. The idea is that, if you offer more-attractive terms than those available in the market, t... | 137 |
fomc | 2,008 | I understand. Now, why are spreads high? | 10 |
fomc | 2,008 | Our view is that spreads are high mainly because people can't get leverage--that is number 1. Number 2, the traditional buyers of these AAA-rated assets either have disappeared completely, like SIVs and bank conduits, or have balance sheet constraints. So the risk capital hasn't really been willing to come in because t... | 102 |
fomc | 2,008 | When I think about leverage and the demand for a given security, if I, as an investor, am going to make a leveraged purchase, then whoever is giving me a loan to make that is also taking a risk position in the security. So the demand that leveraged investors make is really a joint demand by them and the lenders. Everyt... | 83 |
fomc | 2,008 | The demand is low for these securities today. It is low because of lack of leverage. | 18 |
fomc | 2,008 | In other words, I'm saying that people who would provide funding also have a low demand or a low evaluation of the value of those securities. This all amounts to a bunch of people out there putting a low value on these securities. | 46 |
fomc | 2,008 | No, I don't think that is quite right. We are in basically a market disequilibrium, where the traditional buyers of these securities have vanished. In a normal market environment, it would be completely reasonable to lend against these securities on a leveraged basis. But the people who would do that lending--banks and... | 119 |
fomc | 2,008 | Do you mean they are not making purchases? They still exist--right?--you said buyers vanished. | 21 |
fomc | 2,008 | The lenders, I think he was saying. Some of the buyers vanished in the sense that they were SIVs or a lot of them were actually securities lenders who were reinvesting their cash collateral in this, and they have learned a lesson about doing that. | 52 |
fomc | 2,008 | What evidence do you have that their absence from the market doesn't reflect just adverse views about the value of the securities that we should treat the way we treat all other security evaluation decisions that market participants make? | 40 |
fomc | 2,008 | Well, I think the counterfactual is what the investors tell us. They tell us that that is not the case. | 25 |
fomc | 2,008 | Well, wait. These are the ones who would be aided by this program, right? | 18 |
fomc | 2,008 | If you look at AAA-rated assets, the historical credit risk on these assets is very, very low. | 21 |
fomc | 2,008 | Over the cycle or in a recession? | 8 |
fomc | 2,008 | Yesterday we talked about AAA tranches of student loans, which are 97 percent backed by the Department of Education. They are selling at LIBOR plus 300 or LIBOR plus 400. It is hard to say that those securities are priced there because of credit risk. | 55 |
fomc | 2,008 | What would a security like that have sold for in 1974 or 1981? | 18 |
fomc | 2,008 | I would be very surprised if you saw anything similar to what we are seeing today. | 17 |
fomc | 2,008 | Well, they didn't exist them, so we can't look it up, for one. So how do we know these are out of bounds with what they would have traded at? | 35 |
fomc | 2,008 | Jeff, this is all a judgment call. We have been making lots of judgment calls. | 18 |
fomc | 2,008 | Yes, I know. But you are not giving us any evidence about this, Bill. You are not bringing anything coherent that is-- | 27 |
fomc | 2,008 | There is an ongoing discussion about whether prices in markets are in some sense Pareto optimal prices or whether there is liquidity risk, other premiums, that the central bank could do something about. I don't know any way to resolve it. We have the same discussion each time. President Hoenig. | 58 |
fomc | 2,008 | All right. So we are going to give them a three-year term to give them assurances that they don't have to worry about rolling over. I am assuming that, as the market improves--and it should over the next year or 18 months--this would be almost self-liquidating because it would then become attractive to these parties to... | 86 |
fomc | 2,008 | Well, it really depends on what rate we are charging for the loan. Presumably we are going to charge for the loan at a rate that is attractive in times of extremis and somewhat expensive in normal times. So the question really is, Will the market financing improve quickly enough to make the market a cheaper source of f... | 117 |
fomc | 2,008 | That puts us at risk of taking a loss, then, if we should decide to reverse the policy action. | 22 |
fomc | 2,008 | But we could accelerate that process by raising the minimum rate at which we would lend and so make it a higher spread above LIBOR. If we are going to do it through an auction--there are still some questions about how to allocate the credit within this program--and if there is a minimum rate at which we would make fund... | 103 |
fomc | 2,008 | That would be the ideal--to push them back out as quickly as possible when the market straightens out. | 22 |
fomc | 2,008 | Well, I think the idea would be that the window for this program would not be three years. It would be a shorter period of time. So the program would come to an end by the end of 2009 perhaps, but the loans that we had made during that period could be outstanding for some time beyond that. | 65 |
fomc | 2,008 | But we're talking about a lot of assets on our books. | 12 |
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