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fomc | 1,994 | But if we have any confidence that markets can be stabilizing factors--I picked 85 because I was trying to take a worst case scenario of the dollar/yen fall and I thought 85 was so low that the rate would not get there--wouldn't we view a fall to such a level as the foundation for a rally in the bond market? I would th... | 109 |
fomc | 1,994 | I haven't said anything about irrationality. I'd like the meeting tape to be very clear on that because I don't think people betting millions and billions of dollars are doing anything irrational. They are trying to serve their interests as they see them in the short run. That's very important to me. That's the questio... | 120 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | Would somebody like to move to ratify the transactions in the foreign exchange markets? | 16 |
fomc | 1,994 | Thank you! | 3 |
fomc | 1,994 | So move. | 3 |
fomc | 1,994 | Is there a second? | 5 |
fomc | 1,994 | Second. | 2 |
fomc | 1,994 | All in favor say "aye." SEVERAL. Aye. | 14 |
fomc | 1,994 | Opposed? | 3 |
fomc | 1,994 | No. | 2 |
fomc | 1,994 | One opposed. [Secretary's note: Mr. Jordan also voted "no" and so informed the Chairman immediately after the end of the afternoon session. His voice vote was not heard by the Chairman or members of the Secretariat.] | 45 |
fomc | 1,994 | Shall we now move to Joan Lovett who, I hope, will be treated with slightly more upbeat questions! [Laughter] | 27 |
fomc | 1,994 | I feel I am starting on an uneventful note here, and I am. I was going to comment that reserve management was relatively uneventful over the intermeeting period. [Laughter] And I was going to go on to say that that occurred notwithstanding the huge flows in reserve markets. [Statement--see Appendix.] | 66 |
fomc | 1,994 | Questions for Joan? If not, would somebody--Governor Blinder. | 14 |
fomc | 1,994 | Since there weren't any questions about the immediate strategy, could I ask a longer-run question about the maturity structure strategy? | 23 |
fomc | 1,994 | Of the System's portfolio? | 6 |
fomc | 1,994 | Yes. As I look at the report, since the last meeting I see that the System added about $5 billion in bills. And when I look at the notes and bonds, it's a sort of swap. That's the outcome for the whole six-week period as was described in the table in your report. Should I read anything into that? Or could you just talk... | 98 |
fomc | 1,994 | Let me start out by saying that when we make additions to the portfolio on a permanent basis, we usually do so when we see a protracted need to supply reserves. If we really don't see that, if it looks as if there are going to be short-term swings, we will address most of that reserve need with repurchase agreements an... | 92 |
fomc | 1,994 | I was looking at Roman numeral IV of your report. | 11 |
fomc | 1,994 | The New York Desk report? | 6 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | Okay. On an outright basis, the portfolio went up by $4-1/4 billion during the period. That increase reflected $3-3/4 billion of bill purchases in the market and securities purchased directly from foreign accounts that were essentially all bills. The data you see in the middle of that table partly reflect the exchange ... | 292 |
fomc | 1,994 | Would somebody like to move to ratify the transactions of the Domestic Desk? | 15 |
fomc | 1,994 | So move. | 3 |
fomc | 1,994 | Second. | 2 |
fomc | 1,994 | Without objection. Let us now move on to the Chart Show with Messrs. Prell and Truman. | 21 |
fomc | 1,994 | Thank you, Mr. Chairman. I'll give you all a second to locate the Chart package that was distributed to you. [Statement--see Appendix.] | 30 |
fomc | 1,994 | [Statement--see Appendix.] | 6 |
fomc | 1,994 | Revisions of individual member forecasts may be submitted to you, Mike, through when? | 17 |
fomc | 1,994 | We have tentatively indicated that next Monday, July 11, might give us ample time for completing the report and reassessing the members' forecasts. | 30 |
fomc | 1,994 | Questions for Messrs. Prell or Truman? | 10 |
fomc | 1,994 | I have one. I'm not sure this is quite the right place. In the Greenbook, there was a discussion or intimation that we are starting to see more inflows into bond funds and stock funds. Could you comment a little more on that? Maybe that should be addressed to you, Don, I don't know. | 65 |
fomc | 1,994 | We had outflows from bond funds mostly in March. That situation stabilized and subsequently we had some small net inflows. Inflows to the stock mutual funds actually were quite strong. However, the data received as the Bluebook was going to press or perhaps shortly thereafter showed that in the most recent week both st... | 178 |
fomc | 1,994 | What about money market mutual funds? | 7 |
fomc | 1,994 | Initially, they had very large inflows in the period in which the bond funds had the outflows. But since then, they have cooled down quite substantially; their pluses match bond fund minuses reasonably well. | 43 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | President Parry. | 4 |
fomc | 1,994 | A question for Mike and one for Ted: Mike, regarding the growth of potential output, when you look at labor force growth, is there no longer a decline in hours worked? | 36 |
fomc | 1,994 | Do you mean in the longer-term trend in the workweek? | 13 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | It's not apparently obvious in the very recent data, but our presumption is that eventually we will see that occur. In the forecast, we have the workweek shortening in the near term from its very high recent level and not changing a great deal thereafter through the forecast period. Our assumption is that perhaps there... | 120 |
fomc | 1,994 | So, it's not a major factor in the calculation of potential output growth? | 15 |
fomc | 1,994 | It's a small factor. There are a number of small factors we have taken account of in getting from the nonfarm business sector to GDP. | 28 |
fomc | 1,994 | Ted, this isn't directly affecting the United States all that much, but I refer to your table on Chart 7 with regard to China. One of the issues, of course, for those who follow China is whether or not they are going to be successful in dealing with their economic overheating problem. I am trying to figure out from you... | 93 |
fomc | 1,994 | I think that's right. It's not clear how much they need to do in order to have great success. They have taken some of the bloom off but not a lot. Their expansion is running close to double-digit rates. | 44 |
fomc | 1,994 | It would be interesting, maybe not so much for this Committee, to look at the implications. | 19 |
fomc | 1,994 | I think that's one of the factors--a good point. If China were more successful, or if the cost of that success were 5 percent growth rather than 10 percent growth, the implications for Japan and the other Asian countries might not be entirely negative. There would be a risk. Definitely the Japanese will tell you, as I ... | 106 |
fomc | 1,994 | Right. Thank you. | 5 |
fomc | 1,994 | President Jordan. | 3 |
fomc | 1,994 | I have a couple of questions for Mike. In your initial oral presentation, you remarked on the role of long-term interest rates at current levels in maintaining growth of real economic activity in line with the economy's potential. You might recall that we had a discussion at the May meeting about the linkages in the mo... | 221 |
fomc | 1,994 | The reference to financial restraint was intended to have a broader meaning, encompassing all interest rates and also the nonrate terms of lending. As I noted in my presentation, we think that one ingredient in the current situation is a pretty substantial shift in credit availability from banks and, to some extent, ot... | 349 |
fomc | 1,994 | Well, I guess I am more puzzled than before! | 11 |
fomc | 1,994 | That might qualify me for elevation to a higher level position! [Laughter] | 16 |
fomc | 1,994 | But a liquidity premium can come out from either end of the yield curve, and you're trying to stay away from saying that if we don't raise the funds rate, long-term rates will fall or that the yield curve flattened from the long end because of the short rate. But at the May meeting, there was a lot of discussion about ... | 168 |
fomc | 1,994 | Well, there is no greater certainty attached to the relationships in this forecast as we perceive them than there was in the prior forecast. The major changes were a result, I think, of changes primarily in so-called exogenous factors. We have a higher oil price; we have a lower dollar, with the likelihood of there bei... | 254 |
fomc | 1,994 | Cathy Minehan, weren't you appointed acting president recently? | 12 |
fomc | 1,994 | No. | 2 |
fomc | 1,994 | When did I dream that? | 6 |
fomc | 1,994 | I think that was a reading by some newspapers of the wording in the Federal Reserve Act--in the absence of the president, the first vice president is the acting chief executive officer. | 36 |
fomc | 1,994 | I call on First Vice President Minehan. | 9 |
fomc | 1,994 | My question is very much the same, and I know there's a risk in comparing a range of forecasts arrived at in very different ways with a particular or specific forecast. But just comparing the central tendency to the staff's projections next year, the staff seems to be on the low side vis-a-vis real GDP and on the high ... | 117 |
fomc | 1,994 | There are two questions that you've raised. You're certainly correct that there's a symmetry here. We have a slower growth rate in 1995 than the central tendency, and we have a higher unemployment rate. I might note that we're sort of at the low end of the overall range for growth, and at the high end of the overall ra... | 105 |
fomc | 1,994 | It's sort of a lead-in to what do we get if we don't tighten? | 16 |
fomc | 1,994 | If you don't tighten, the effects are likely to be very modest on inflation even through 1995. A difference of 100 basis points would have a fractional effect on the level of real GDP over that forecast period and a very small, almost imperceptible, effect on inflation unless we get out of this some distinctly differen... | 110 |
fomc | 1,994 | I think it depends, as I indicated in my comments, on what you assume about the dollar, the reaction of other rates, and what else is going on at the same time. If the 100 basis points were to cause a several percent lower dollar, then because of the direct price effects you would get the price effects much sooner. And... | 100 |
fomc | 1,994 | I think the prospect would be an only slightly perceptible upward tilt to the inflation rate rather than this flat path that we have, if you simply isolated in the standard way that 100 basis point difference in the funds rate. But we also have been sensitive to these expectational considerations. | 57 |
fomc | 1,994 | The other point I would make, President Minehan, is that the Bluebook had tighter alternatives, a no change alternative, and no easier alternative. | 30 |
fomc | 1,994 | Right. | 2 |
fomc | 1,994 | We ran simulations with the funds rate flat, and as Mike said, we didn't get much effect on inflation by the end of 1995, but the unemployment rate was significantly lower. Given our assumption about where the NAIRU was, we started getting an uptick in inflation by 1995 and more noticeably in 1996 and 1997. We assumed ... | 160 |
fomc | 1,994 | Governor Blinder. | 4 |
fomc | 1,994 | I have two questions. I had one when I put my hand up, and now I have two. The first was for Ted about the forecast for central Europe. As you well know, there was a notable feature of the OECD forecast that went out yesterday--the question of to what extent was Germany especially, and Europe generally, relying on sell... | 153 |
fomc | 1,994 | Well, two points: The answer is that it is export-led in the sense that our assumption about Germany is that net exports will be a positive factor in their growth. I think we have a little less growth overall, and a little less growth in net exports for Germany than the OECD. I know that we do for the OECD countries ot... | 150 |
fomc | 1,994 | Secondly, I'd just like to pick up on the question that Cathy Minehan was addressing to Mike Prell. Quantifying the difference between 100 basis points on the funds rate between now and December, and say 0 or 25 or 50 basis points or something--say 0--would I be wrong to think that the effect on the 1995 fourth-to-four... | 93 |
fomc | 1,994 | I think our model, which is reasonably interest sensitive, and with the normal rather sluggish adjustment of long rates, which would be questionable, would show less than that over the course of 1995. But your order of magnitude would not be far off. | 51 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | Governor Lindsey. | 3 |
fomc | 1,994 | Mike, I may have misunderstood you, but when Jerry Jordan asked you why there was this 100 basis point shift in your assumption, you said that exogenous factors had changed including, for example, the price of oil. Now, this could just be another experiment. If a Mideast war broke out tomorrow and the price of oil went... | 84 |
fomc | 1,994 | It would depend on your objectives, short run and longer run. I think there would be a significant inflation jolt in the short run. Your policy dilemma would be to prevent that from tending to flow through into an ongoing inflation process where it had its initial price level impact but then perhaps got built into wage... | 154 |
fomc | 1,994 | Nominal GDP is unchanged in the forecast--essentially unchanged. In order to get that result--to have virtually the same nominal GDP as we had before--you are telling us we have to raise interest rates 100 basis points, and that's because of exogenous factors? | 55 |
fomc | 1,994 | The nominal GDP forecast is .3 of a percent higher in 1994 and .2 percent higher in 1995. | 25 |
fomc | 1,994 | I was looking at Chart 16 in the Chart Show. | 12 |
fomc | 1,994 | So, you are going back to the January forecast? | 11 |
fomc | 1,994 | I see; the previous estimate is the January forecast? | 11 |
fomc | 1,994 | Yes, I am sorry; we tried to make this comparable. | 13 |
fomc | 1,994 | But going back to these exogenous factors-- | 9 |
fomc | 1,994 | Right. The change in our assumption from the last Greenbook is 3/4 percentage point. I regard all of this almost on the order of hair splitting given the uncertainties, but certainly we wrestled with it and it gives some meaningful indication of where we think things need to go. | 58 |
fomc | 1,994 | But it would be your view or the model's view that an exogenous shock, such as leaving monetary conditions unchanged, would raise nominal GDP? | 29 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | If the price of oil went up, you'd have a higher nominal GDP level? | 16 |
fomc | 1,994 | If policy accommodated it. Certainly, if you held the funds rate, which is in an extremely accommodative posture in the face of that kind of shock, you would have astronomical GDP growth. But let me note, for example, that there was a footnote in the Greenbook reporting on a partial simulation of an exchange rate shock... | 116 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | I would also note that in the last Greenbook, and in my presentation, we emphasized that we thought the risks were that it was going to take higher rates than our assumption rather than lower rates. So in a sense, mentally, the adjustment isn't even quite the 3/4 percent that we made. | 62 |
fomc | 1,994 | To come back to Governor Blinder's question about the forecast for Germany, I just now recall that our outlook for year-over-year growth in Germany is almost exactly the same for 1995 as the OECD's, though in general we tend to be a smidgen weaker. However, OECD put their outlook together before they had the first-quar... | 127 |
fomc | 1,994 | President Hoenig. | 4 |
fomc | 1,994 | I need to ask Don and Mike for a clarification. When you were answering questions earlier about the fact that you assumed a higher short-term rate, Don, you said that in terms of aggregate demand you had different alternatives including maintaining the same rate or changing the rate. What were some of the factors that ... | 112 |
fomc | 1,994 | Are you talking about the alternative simulation in the Bluebook or simply why we raised the assumption in the Greenbook forecast? | 24 |
fomc | 1,994 | Why you raised the assumption. | 6 |
fomc | 1,994 | Well, as I said, I think the major consideration was how we could in essence cap the inflation rate close to where it has been in the face of these shocks. Implicitly, also, I think we probably have incorporated a sense of a little stronger underlying aggregate demand. We're not talking about a vast difference, but the... | 82 |
fomc | 1,994 | And that's taking into account in your model the effects of the moves to this point? | 17 |
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