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fomc | 1,994 | I very much share the view that the effect of a 50 basis point move today in the marketplace is highly unpredictable. It's sufficiently likely to be damaging in cracking the markets that I think it's a step we should not take. | 45 |
fomc | 1,994 | Look, the stock market is at an elevated level at this stage by any measure we know of. We could set off a sequence of events here that I think could make the policy path that we have been developing here a difficult one. Governor Phillips. | 50 |
fomc | 1,994 | Well, I do have a preference to tighten 1/2 point immediately. It's probably too strong to say that a 1/4 point move is following the market but a good deal of that is already built into the market. I do think that because of the cyclical influences a 1/4 point move won't have as much effect. I don't see anything on th... | 120 |
fomc | 1,994 | Governor Kelley. | 3 |
fomc | 1,994 | Mr. Chairman, I'm in the camp that prefers 25 basis points. I am not sure whether we are early or just right or late; I don't know how history is going to judge that. But I am reasonably confident that we're not seriously late and that conditions are not in the process of running away from us on the up side. I just don... | 210 |
fomc | 1,994 | Governor LaWare. | 4 |
fomc | 1,994 | I certainly buy the fact that this is the time to make a change in policy toward more constraint. But I really favor the 50 basis point move at this point, and I respectfully disagree with the assessment that such a move would crack the markets. I think the markets have already discounted a 25 basis point move and are ... | 194 |
fomc | 1,994 | President Keehn. | 4 |
fomc | 1,994 | Mr. Chairman, I certainly favor moving and, like others, I have debated in my own mind the difference between a move of 25 and 50 basis points. I was impressed with the tone of the comments yesterday. It does seem to me that there has been a very significant shift toward strength in the reports that we heard yesterday ... | 284 |
fomc | 1,994 | President McTeer. | 5 |
fomc | 1,994 | To me the question remains: If you're going to cut off the cat's tail, what is the optimum number of snips? Normally the answer to that is one. In a policy context, I think that translates to the 50 basis points, but I could certainly live with your recommendation of 25 basis points plus the announcement effect. | 68 |
fomc | 1,994 | You know, I rarely feel strongly about an issue, and I very rarely sort of press this Committee. But let me tell you something about what's gnawing at me here. I am very sympathetic with the view that we've got to move and that we're going to have an extended period of moves, assuming the changes that are going on now ... | 703 |
fomc | 1,994 | Mr. Chairman, you certainly made your points very strongly and they are points that one wants to take into account. I think the concern of some who are favoring 50 basis points may be related to the long time between now and the next meeting. Is it possible, as something of a compromise, that we could have an agreement... | 137 |
fomc | 1,994 | That's perfectly fine with me. | 6 |
fomc | 1,994 | Mr. Chairman, if we could make it specific, I would recommend that we do 25 basis points today and have a conference call within two days after your Humphrey-Hawkins testimony. | 39 |
fomc | 1,994 | Upon what evidence? | 4 |
fomc | 1,994 | May I ask a procedural question? I favor Bob's suggestion. I would be a little concerned about setting a precise date just because we're in this process of change. The announcement, for example, is a change and these are all things that we will openly discuss later on. I think we have to be careful that what we're anno... | 69 |
fomc | 1,994 | Let me put it this way. I've been Chairman of this Committee now for over six years. I hope I have enough credibility to know when a telephone call is appropriate. I'm watching the same developments that you are. I'd just as soon not set a date. It may turn out that way, Larry, but I don't-- | 65 |
fomc | 1,994 | But there will be a phone call? | 8 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | I wouldn't put a fixed date. | 7 |
fomc | 1,994 | I would very strongly prefer that we not set a precedent that the Chairman, particularly this Chairman, has to agree in advance on the need for a phone call. His record is that he's going to call us if there's something to talk about or if a few of us call him and say we think there's something to talk about and reques... | 118 |
fomc | 1,994 | I agree with that. | 5 |
fomc | 1,994 | I agree with that and I also agree with that from another perspective. In being fully open and honest, which we should be, in what we discuss when we release the minutes for this meeting, we don't want half a picture conveyed. We don't want to say that there has been a dramatic change in process and that we went along ... | 153 |
fomc | 1,994 | Yes, I think Bob is saying precisely the same thing. | 12 |
fomc | 1,994 | I'm willing to defer to your judgment on the market reaction, but the logic of that position is that if 50 basis points really would be the correct move except for constraints of the market, then once we've done the 25 basis points and overcome any concerns about market reaction we would come in with the second install... | 65 |
fomc | 1,994 | I'm of the belief that if this economy behaves as strongly as it has been behaving recently, it means that our forecast is wrong and that more is required rather than less. I think it's too soon to make that judgment. But if this economy continues to move, especially if the inventory issue which I raised begins to show... | 410 |
fomc | 1,994 | You answered my question. | 5 |
fomc | 1,994 | With that I would request that you read a symmetrical directive with a somewhat tighter-- | 16 |
fomc | 1,994 | I'll be reading from the Bluebook on page 24: "In the implementation of policy for the immediate future, the Committee seeks to increase somewhat..." | 30 |
fomc | 1,994 | I would say "slightly," Norm. | 9 |
fomc | 1,994 | "...to increase slightly the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly les... | 89 |
fomc | 1,994 | Okay, call the roll. | 6 |
fomc | 1,994 | Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Forrestal Yes President Jordan Yes Governor Kelley Yes Governor LaWare Yes Governor Lindsey Yes President Parry Yes Governor Phillips Yes | 40 |
fomc | 1,994 | I thank you for that. I think it's the right move. I think in retrospect when we're looking back at what we're doing over the next year we'll find that it was the right decision. | 38 |
fomc | 1,994 | What is your intention now for implementation? | 8 |
fomc | 1,994 | I think we're going to make a short announcement. | 10 |
fomc | 1,994 | Alan, what is your judgment on adding--I'm talking about the part of our directive where we're just reciting historically what has occurred--some reference to the behavior of narrow aggregates and taking the edge off of the relatively weak growth in the broader ones? | 50 |
fomc | 1,994 | I would be inclined to change as few things as possible. We are making a very large announcement at this point. Let's put that on the table. | 30 |
fomc | 1,994 | That's fine. I just think it may help in terms of people understanding that the aggregates aren't presenting a clear picture of the stance of monetary policy. | 29 |
fomc | 1,994 | Well, you know it might be best to handle that in the Humphrey-Hawkins testimony. | 20 |
fomc | 1,994 | Yes, whatever you decide on that is okay with me. I put that forward as a suggestion that might be helpful in terms of defending our position. Thanks. | 32 |
fomc | 1,994 | Okay. Here's the statement I plan to release. "Chairman Greenspan announced today that the Federal Open Market Committee decided to increase slightly the degree of pressure on reserve positions. This action is expected to be associated with a small increase in short-term money market interest rates. The decision was ta... | 122 |
fomc | 1,994 | Perfect. | 2 |
fomc | 1,994 | Good. | 2 |
fomc | 1,994 | Perfect. | 2 |
fomc | 1,994 | Fine. | 2 |
fomc | 1,994 | Why don't we break at this stage for coffee, assuming it's there. | 14 |
fomc | 1,994 | You will release that now? | 6 |
fomc | 1,994 | Yes, well, we have to release it ahead of "Fed" time. We are going to release it before 11:00 a.m. | 30 |
fomc | 1,994 | So we are are adjourned or recessed or whatever. | 12 |
fomc | 1,994 | I will be referring to page 8 in the Bluebook in the course of my report. [Statement--see Appendix.] | 25 |
fomc | 1,994 | As I understand it, we have basically two ways of looking at the monetary aggregates. Either we're going to look at them and make them usable and useful in policy determination or we are not. If they come back into vogue and they are working, what we want is a range that is consistent with price stability. As I underst... | 82 |
fomc | 1,994 | Right, assuming a flat velocity. | 7 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | The monetary aggregates could come back in a sense of predictable velocities. In fact, we haven't done that poor a job of predicting them in recent years, but we believe it's not a stable situation. But you're right; if the M2 velocity comes back to its flat path, the 1 to 5 percent range would be approximately the rig... | 70 |
fomc | 1,994 | If that's the right one, then the question is what do we do in the interim? We have a choice of making them lower, in which case we're basically saying that M2 doesn't matter. As Paul Sarbanes said, we've shot the bullet and then drawn the circle around the bullet hole. If M2 starts coming back and we have a 0 to 4 per... | 137 |
fomc | 1,994 | Why lower it and have to raise it? | 9 |
fomc | 1,994 | I think raising it gives the wrong signal. We've been trying to get the M2 range to price stability, and we finally got it here. It may be true that M2 isn't working, but the range is working! [Laughter] And if M2 comes back, we actually will not be pressured to move on it. Anyway, that was supposed to be a question! | 77 |
fomc | 1,994 | Mr. Chairman, a possible answer may be that when we made some of those recent adjustments, we did emphasize their technical nature in response to some recent developments in the behavior of the aggregates, so there might be some feedback. | 45 |
fomc | 1,994 | Yes, but I have this technical problem where if it's technical we're not using it, and if it works we want it to be right. And to make it right by raising it, I find difficult. Governor Lindsey. | 44 |
fomc | 1,994 | Mr. Chairman, I agree with you completely on a 1 to 5 percent range for exactly the reason you gave. My question is on debt, however. If you look at Chart 4, the world was lovely until about 1981 or 1982, then it fell out of bed. And unlike M3 and the rest of them, it didn't even change course. It looks as if during th... | 195 |
fomc | 1,994 | I think it's a balancing of a couple of things here--the federal government versus the private sector. The private-sector debt growth as you know was very low and total debt growth actually was close to GDP, as you can see by the flatness of that line, largely because the federal government was such a heavy borrower. N... | 160 |
fomc | 1,994 | You are basically predicting an elasticity of one with respect to nominal GDP and debt spending. | 17 |
fomc | 1,994 | Although I think that's what works out of a complicated underpinning in which we say, as Mike pointed out yesterday, there will be more corporate use of external funds over the coming year or two because their cash flow is slowing relative to their spending. Household borrowing growth, on the other hand, is expected to... | 65 |
fomc | 1,994 | But there has been a secular change in the relative costs of debt and equity in the corporate sector. They are voting with their feet now and issuing new equity, particularly IPOs and what have you. | 40 |
fomc | 1,994 | You could greatly overstate these trends. We are talking about $20 to $25 billion a year of net equity issuance, which is a very small part of the overall external financing activity in the economy. So that isn't a major element of the financial flows at this point. | 55 |
fomc | 1,994 | In the takeover of Paramount, what I find striking about the composition of that offer is how heavily equity oriented it is compared to offers five and six and seven years ago. | 34 |
fomc | 1,994 | But it's less so than a lot of the other transactions. In fact, that one includes some cash, whereas most of the major transactions have just been stock or stock swaps. So, indeed in our forecast we're assuming we're going to see some trickle of cash buyout transactions over the coming years because our sense is that t... | 121 |
fomc | 1,994 | Well, I don't know if I would make that conclusion for the aggregate effect of the taxes. I might argue the other way. | 26 |
fomc | 1,994 | Well, okay, I was just looking at the marginal taxes. | 13 |
fomc | 1,994 | But while I agree with the alternative I M2 and M3 target ranges, I prefer alternative II on debt. | 23 |
fomc | 1,994 | Governor LaWare. | 4 |
fomc | 1,994 | I have a question. I'm probably the next to the oldest person in this room and I remember Ml. The precipitous decline in M1 growth shown on page 13 puzzles me. What's the rationale or the reasoning behind that? | 46 |
fomc | 1,994 | Going from 1993 to 1994, we have two special factors. One is the mortgage-backed securities situation, which added a couple percentage points to M1 in 1993 and will subtract a little in 1994. We are assuming that the refinancings of mortgages will settle down or actually decline, and they have, and that subtracts from ... | 379 |
fomc | 1,994 | So, the major effect is in the demand deposits segment of Ml? | 14 |
fomc | 1,994 | Demand deposits but the NOW accounts as well. We think that rising interest rates will pull funds out of the NOW accounts into small time deposits which would have, obviously, no effect per se on M2 but would have a major effect on M1. | 50 |
fomc | 1,994 | What is the underlying assumption about the spread between a NOW account rate and a CD rate? | 18 |
fomc | 1,994 | We would assume that that spread would widen. Our experience is that the NOW account rates adjust very slowly and sluggishly whereas the small time deposit rates in recent years have come to adjust fairly rapidly. We would think that the retail CD rate would rise with a lag but fairly promptly as the fed funds rate ros... | 80 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | President Jordan. | 3 |
fomc | 1,994 | A couple of questions, Don, about your table on page 8. I realize the risk of making too much out of these projections, but the first question relates to the Chairman's remarks about the ranges. As I understand your M2 projection in the outer years, under all three of these alternatives M2 is in the upper, upper half o... | 134 |
fomc | 1,994 | Yes, although I think the baseline is a little toward the upper end, but we are assuming that these special trends in velocity do come to an end. We do have some declines in short-term rates in 1996 and 1997 in the tighter and easier alternatives, which push up money growth a little. We have long-term rates coming down... | 153 |
fomc | 1,994 | When I look at your nominal GDP projections and the M2 out at the end of your projection, I notice your velocities are zero for all three. It's the constraints that you impose; you've assumed that by that point-- | 44 |
fomc | 1,994 | Yes. When the interest rate effects die down in 1998 and 1999, we have assumed that velocity growth will be zero as you said, that the special shifts will-- | 37 |
fomc | 1,994 | Okay. It struck me, when I looked at the top and the bottom of the federal funds rate projections for the out years and the top CPI projections, that you have under all three alternatives either 4 or 4-1/2 on the funds rate. That means the funds rate--I don't like the words tighter and easier so I won't use them--on th... | 85 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | And even substantially above the nominal GNP. In Street jargon, policy is becoming relatively more restrictive going forward in that the inflation rate and inflation expectations are coming down more than the nominal yield and you're leaving the funds rate above nominal GDP six years out. | 50 |
fomc | 1,994 | It's two things. One is that we recognized when we talked about whether we should fine-tune this strategy, in particular when we got out there, that in fact real interest rates are rising in this tighter strategy. We have the unemployment rate still at 7 percent. I think that in fact if the Committee were to engage in ... | 259 |
fomc | 1,994 | Well, there's no doubt the lack of credibility has effects on this. But the last time we were running for a sustained period at 2 percent or less on the CPI--as in the period from 1997 through 1999--we had a lot lower short-term rates than you are suggesting here. | 62 |
fomc | 1,994 | President Boehne. | 5 |
fomc | 1,994 | I don't have any questions on this. | 8 |
fomc | 1,994 | Okay. Any further questions? If not, would somebody like to start the roundtable on what you want to do? | 24 |
fomc | 1,994 | I agree with what I think was implicitly the Chairman's suggestion, which is that I would leave these ranges alone. I understand the point that Larry raised on debt, and I could go either way with that. But my own personal view is that it risks putting a little too fine a point on this. That's a tactical issue; it's no... | 217 |
fomc | 1,994 | President Broaddus. | 5 |
fomc | 1,994 | Well, I don't think we should change the targets for the reasons that Dick Syron just went through. I agree with him. Given the kinds of uncertainties we're facing with M2, especially now, I do think that that raises a problem. Not having a nominal anchor in some explicit way raises a problem for monetary policy, but I... | 178 |
fomc | 1,994 | President Forrestal. | 4 |
fomc | 1,994 | Well, Mr. Chairman, I think there are so many uncertainties at this point with respect to M2 that we shouldn't change the range. And those uncertainties are magnified by the fact that if we do have an increase in rates, M2 could grow much more quickly, with defections from asset funds; this effect could in fact be heig... | 158 |
fomc | 1,994 | How do you stand on the 1995 publication? | 11 |
fomc | 1,994 | I don't think we ought to do that; I would just have 1994. | 17 |
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