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fomc | 1,994 | I support your recommendation. | 5 |
fomc | 1,994 | Governor Phillips. | 3 |
fomc | 1,994 | I also support your recommendation. It seems to me that it is appropriate to go ahead and make our statement in the market, and I think this proposal would do so. When we started this series of moves of 25 basis points, we talked about the notion that when we think the series of moves should come to an end we should so... | 74 |
fomc | 1,994 | It was at the point when we thought that the structure of the financial markets could take more. | 19 |
fomc | 1,994 | Right, right. | 4 |
fomc | 1,994 | At the very beginning we were concerned that we would be hitting the markets too hard. | 17 |
fomc | 1,994 | I don't know whether we're at neutrality or not. There is an argument that we may well be at neutrality because we may be getting more of a kick from our tightening actions as a result of the increase in long-term rates. So, in any case, I support your recommendation. | 56 |
fomc | 1,994 | President Jordan. | 3 |
fomc | 1,994 | Your initial remarks I think are very important. We can learn a fair amount if we think more about what's going on with relative yields. Normally when we think about a relative move it's either by quality spreads, by currency denomination, or by maturity. At one time I studied the behavior of interest rates in periods ... | 723 |
fomc | 1,994 | Vice Chairman. | 3 |
fomc | 1,994 | I support the 50 basis point increase in the funds rate and the symmetric directive. I think it is going to be seen as a very powerful action by the marketplace both inside the United States and out. I do think that we have to make a statement. There will be people whose only view of the world is based on their own tra... | 279 |
fomc | 1,994 | Governor Kelley. | 3 |
fomc | 1,994 | Mr. Chairman, I support the recommendation and I would particularly like to associate myself with Governor LaWare's comments about the elegance and appropriateness of the statement that you proposed. | 35 |
fomc | 1,994 | Governor Lindsey. | 3 |
fomc | 1,994 | I support the statement, Mr. Chairman. I think we will be coming back. I thought President Jordan made a very good point, and probably nine days ago I was about where he is. But I think this is the right move for right now and I don't know if I can pick any number where I could go out and say that the probabilities of ... | 118 |
fomc | 1,994 | I'll be reading from page 15 of the Bluebook. "In the implementation of policy for the immediate future, the Committee seeks to increase somewhat the existing degree of pressure on reserve positions, taking account of a possible increase in the discount rate. In the context of the Committee's long-run objectives for pr... | 120 |
fomc | 1,994 | Call the roll. | 4 |
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 | The next meeting is on July 5 and 6, the Humphrey-Hawkins meeting. This meeting is adjourned. | 27 |
fomc | 1,994 | Before we get started on our formal proceedings, I have several announcements. First, we'd like to welcome the new Vice Chairman of the Federal Reserve Board to his first Federal Open Market Committee meeting. | 38 |
fomc | 1,994 | Thank you very much. | 5 |
fomc | 1,994 | And my next news--the unwelcome news--is that Si Keehn is leaving and this is his final meeting. It says here that his first meeting was on July 6, 1981. Si, of course, will return for the retirement luncheon following the August 16 meeting. This is also First Vice President Bill Conrad's first meeting. Bill is an obse... | 159 |
fomc | 1,994 | So move. | 3 |
fomc | 1,994 | Is there a second? | 5 |
fomc | 1,994 | Second. | 2 |
fomc | 1,994 | Without objection. I'd now like to turn to Peter Fisher for the report on foreign currency operations. Peter. | 21 |
fomc | 1,994 | Thank you. [Statement--see Appendix.] | 9 |
fomc | 1,994 | Questions for Peter? Ed. | 6 |
fomc | 1,994 | How much discretion did you have here working with the Treasury in terms of the timing of the intervention? | 20 |
fomc | 1,994 | Well, the events of the morning gave me precious little time. The final decision to intervene was not made until sometime between 9:15 and 9:30 a.m. There had been an uptick in the dollar shortly after 9:00 a.m. I must tell you I fear that was the result of some leakage out of European central banks. I was very nervous... | 133 |
fomc | 1,994 | And the immediate response of market participants was to sell dollars? | 12 |
fomc | 1,994 | No, I don't think that was the immediate response. The morning operation had a more beneficial effect. The dollar moved up--I don't remember the exact figures right now. It moved up appreciably over the course of an hour or so. It then began to come off when we pulled out of the market and in the afternoon when we trie... | 82 |
fomc | 1,994 | President Boehne, just one comment on your first question from an historical perspective, which I think is the perspective you are coming from: The decision to intervene on that day was a joint decision, so in that sense Peter had no discretion. That is no different than it has been. But once the decision was taken, it... | 140 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | Governor Lindsey. | 3 |
fomc | 1,994 | Reading the transcript from the last meeting--unfortunately these transcripts will come back to haunt us all--but I am going to haunt you for a moment, if I may. [Laughter] The reason given for the previous intervention in late April and early May was that it was to underline a change in policy. Was there any change in... | 75 |
fomc | 1,994 | No, and I think that may have been one of its problems. I think when I spoke previously we were referring to both Treasury and Federal Reserve policy. | 31 |
fomc | 1,994 | Right. | 2 |
fomc | 1,994 | Looking back at last week, I think there was a change in Treasury policy. The clarity with which it was expressed evolved over the course of the week in which we operated and only became clear, I would say, toward the end of the day and subsequently. There was a change in the statements Treasury officials were making. ... | 78 |
fomc | 1,994 | The market's reaction to that increased clarity, as I recall, was to send the dollar down. | 20 |
fomc | 1,994 | I don't think the increased clarity was sending the dollar down. I really don't view it that way. Late Friday afternoon an unnamed Treasury official finally said they would rather have the dollar go up than down, not in so many words but that was the gist of it. I don't think that caused the dollar to go down rather th... | 229 |
fomc | 1,994 | Did the Treasury know about the President's forthcoming statements? | 11 |
fomc | 1,994 | I was not aware of the President's interview prior to seeing it come across the wire. | 18 |
fomc | 1,994 | Was the President aware that we were going to intervene? | 11 |
fomc | 1,994 | I don't know that for a fact. I think he had been briefed on the Treasury's views on Thursday. But as I said, the final decision to intervene was made by Secretary Bentsen between 9:15 and 9:30 a.m. on Friday morning for their part. | 60 |
fomc | 1,994 | I have a follow-up question. The transcript for the last meeting reads that I was asking you "How long do you expect the latest intervention to hold? I suppose the intervention last August bought us 9 or 10 months. I assume the second intervention"--which we had just had in late April and early May--"will buy us someth... | 195 |
fomc | 1,994 | I think it has bought us more than twenty minutes. I wouldn't tell you it would buy us any great amount of time in terms of weeks or months. As I said, I do think the relative stability of dollar/yen in a trading level below 100 is very different from what all of us were expecting. The risk of a drop through the floor ... | 215 |
fomc | 1,994 | Given the interest rate differential--this is the last question, I promise--what is your expectation of the yen or DM exchange rate or both a year from now? | 33 |
fomc | 1,994 | You're trying to make me enjoy the transcripts even less! [Laughter] I don't have any forecast that far out myself. | 25 |
fomc | 1,994 | Higher or lower, how does that sound? | 9 |
fomc | 1,994 | I haven't a clue. | 5 |
fomc | 1,994 | Governor Lindsey, just on your first question, it is correct to say that one of the purposes of the May 4 operation was to send a message. That doesn't necessarily mean that the purpose of every intervention should be to correct a policy misperception. | 51 |
fomc | 1,994 | Well, Ted, I don't want to dig it out of the transcript, but I can swear that Chairman Greenspan, who I guess is authoritative in these matters, said that if one were to list the reasons for intervening, underlining policy was about the only reason. I will find the quote for you. It may be in one of our Board meeting m... | 90 |
fomc | 1,994 | I am not quite certain what you've accused me of. [Laughter] | 15 |
fomc | 1,994 | I was accusing you of being quite correct actually in making the very wise statement that, if one looks to reasons for intervening, the most legitimate reason one can think of is to underline a change in policy. | 42 |
fomc | 1,994 | There actually is another that is important, and I think we have intervened for that reason on occasion. It is to break a psychology that is building up irrationally in the market. And if the intervention can accomplish that, maybe it can have a constructive effect. That's the only meaningful use of intervention in the... | 118 |
fomc | 1,994 | And would you view our last attempt as success or failure? | 12 |
fomc | 1,994 | I would say that for the last attempt we did not have the benefit of a net short position in the market. We knew that at the time, but we were at a point where there were no easy solutions. | 43 |
fomc | 1,994 | So, the intervention last time didn't meet your second criterion? | 12 |
fomc | 1,994 | I would think not, but I was one of those who supported it, so I can tell you that I had my fingers crossed; I was hoping. | 31 |
fomc | 1,994 | Okay. | 2 |
fomc | 1,994 | Governor LaWare. | 4 |
fomc | 1,994 | You implied in your comments that you thought there was a significant risk that if we had not intervened, the bottom would have dropped out of the dollar/yen relationship. Was there anything going on in the market that morning that indicated a disorderly market? | 51 |
fomc | 1,994 | Well, disorderly is different in one context from the risk of dropping through a trap door. | 19 |
fomc | 1,994 | I understand that. But an estimate of risk is absent or is just speculation in a disorderly market or at the beginning of a disorderly market. | 30 |
fomc | 1,994 | Well, on Thursday afternoon and Friday morning of that week I was looking at an options position, which I included in my written material but did not include in the charts circulated today. I am referring to risk reversals which are two equally "out of the money" options--one dollar put and one dollar call. The pricing... | 246 |
fomc | 1,994 | President Broaddus. | 5 |
fomc | 1,994 | I had a comment rather than a question if that is in order, Mr. Chairman. I just have to say that this intervention, particularly its outcome or lack of outcome, really bothered me a lot. I think just about everybody saw it as a generally unsuccessful operation--maybe not everybody but most people. It got a lot of atte... | 420 |
fomc | 1,994 | You know, it depends really on whether we expect markets to be wholly efficient and not run periodically into some significant abnormalities that an intervention could rebalance. This is the key question. You are telling me that we should not respond to this market at all; it's the Treasury which has to be convinced of... | 278 |
fomc | 1,994 | Well, I certainly respect your view, Mr. Chairman. I just hope that what I perceive as a significant cost of an outcome like this one gets factored into the equation. | 36 |
fomc | 1,994 | Governor Blinder. | 4 |
fomc | 1,994 | Could I just go back to the discussion we were having a few moments ago about the more generic exchange rate policy? This may be a rookie question, but I am highly uninformed. I thought the generic policy was that we did not intervene very much but that we did intervene to correct "disorderly markets." This might be tr... | 155 |
fomc | 1,994 | As the Chairman said, there were no shorts in the market; we weren't pricking anything speculative. | 20 |
fomc | 1,994 | You could argue that implicit in what you just said is an argument that the operation was doomed to fail. I don't think that was quite so obvious before the fact. But it seems to me the effort was predicated on the belief that there was a downward speculative bubble and that it was at least possible to prick it or to p... | 153 |
fomc | 1,994 | Vice Chairman. | 3 |
fomc | 1,994 | I'd like to make some comments in two areas: One is on the operation itself because, like the Chairman, I was involved in the decision to do it. The previous Friday at about midday, as Peter mentioned in his prepared statement, there had been a very significant weakening of the dollar on no volume. We had what is techn... | 632 |
fomc | 1,994 | President Jordan. | 3 |
fomc | 1,994 | I can agree with everything the Vice Chairman and the Chairman just said and still feel uncomfortable with this particular operation. Let me first ask Peter a follow-up question to the response he gave to Governor Lindsey about the 100 level on the yen and a floor and so on. Now, the rate is something under 99 and the ... | 77 |
fomc | 1,994 | I don't think there is one that has anything approaching the magic quality or aura of the 100 level. I think that the market looks to 95.50--actually 95--as a sort of floor; this is the view of the chartists of the world. That level would represent the bottom of the dollar/yen rate going back to the early 1960s, taking... | 114 |
fomc | 1,994 | Part of the reason I asked the question was that one of the things that troubles me is taking action because of a psychological barrier. The market participants now say, well okay, that level is not going to come back again, so as far as magic numbers-- | 52 |
fomc | 1,994 | Jerry, could I just say--I think the Treasury was acutely aware that what they did not want to do was to protect the 100 level. In fact, they have often made statements to the effect that if we could close our eyes and all of a sudden readjust the number to under 100 they would feel a lot more comfortable than trying t... | 76 |
fomc | 1,994 | But Peter argued it wasn't our view or even the Treasury's. Rather this was in the minds of the participants in the market. | 26 |
fomc | 1,994 | That's right. | 3 |
fomc | 1,994 | That was creating this situation that forced our hand. And if it was, we might call it irrational. | 21 |
fomc | 1,994 | Well, the dollar had traded below 100 earlier in the week and that was indeed one of the reasons why we didn't operate then and why we felt somewhat more comfortable--though I think it's fair to say not greatly so--about operating at that point, having approached the 100 level for the third or fourth time. First, the r... | 128 |
fomc | 1,994 | The dollar had traded briefly below 100 in rather discrete increments and we had all seen 99 on the screen several times; it did not stay there very long. So, it was a sort of episodic venturing below 100. | 48 |
fomc | 1,994 | Focusing on your reference to market participants, the magic number, and psychological aspects, I want to follow-up on something that Al Broaddus was referring to--the perception of success or failure. In a technical sense, it doesn't matter to me whether you sell $800 million of assets denominated in yen and deutschem... | 239 |
fomc | 1,994 | President Melzer. | 4 |
fomc | 1,994 | This is a question for either Peter or Ted. The question is whether you are concerned about the extent to which our current account deficit has been financed recently through central bank intervention and, as a practical matter, how closely we can monitor that. | 48 |
fomc | 1,994 | Well, I have some words in the Chart Show on this point. The extent to which our deficit has been financed recently by official sources is exaggerated because basically all that counts is the intervention by the major industrial countries. More than half of the financing last year, say, was by nonindustrial countries w... | 225 |
fomc | 1,994 | If one argues that the exchange rate is affected by the proportion of the current account deficit that is financed on official account, the implication is that sterilized intervention affects the exchange rate. I would argue strongly about that because a goodly part of our official support is coming from the Japanese; ... | 225 |
fomc | 1,994 | This is really for Don Kohn, but it is related to the foreign exchange operations and I wanted to pick up on a point that Bill McDonough mentioned. Suppose we had a change in price without any change in position. Let us just imagine something catastrophic--and for the recording of this meeting this is just hypothetical... | 92 |
fomc | 1,994 | Joan can comment on this as well, but I think the experience of the last month or so is that the bond markets would tend to react negatively. That is, they would be concerned about one of two things: One, that the decline in the dollar/yen relationship was itself indicative of inflation expectations, and that might end... | 171 |
fomc | 1,994 | There is also the implication that the dollar will continue to decline. If we get a sharp reduction and everyone thinks it is overdone, the bond market will rally. | 33 |
fomc | 1,994 | That would be my reaction, and that shows why I am not on Wall Street, Mr. Chairman. | 21 |
fomc | 1,994 | I think that has happened. | 6 |
fomc | 1,994 | I would think we'd have a big rally in the bond market if the dollar/yen rate suddenly went to 85. | 24 |
fomc | 1,994 | How the bond market is going to respond will depend on the circumstances that caused such an abrupt change and what that does to the expectations and how long it persists. | 32 |
fomc | 1,994 | I think you would have to have a sense of how confident the market was that it would stay at 85 or whether the next stop was 75. Now, if you were confident that it was stopping there, I would agree with your hypothesis for a rally in the bond market; that would be a plausible reaction. But if the market did not have co... | 96 |
fomc | 1,994 | But that's a problem in itself. | 7 |
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