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fomc | 1,994 | Okay. You did my calculations for me, I thank you. Any further questions for Joan? If not, would somebody like to move to ratify the actions of the domestic Desk since the last meeting? | 41 |
fomc | 1,994 | So move. | 3 |
fomc | 1,994 | Without objection. Let's now move on to Mike Prell and the staff report on the economic outlook. | 20 |
fomc | 1,994 | Thank you, Mr. Chairman. [Statement--See Appendix.] | 13 |
fomc | 1,994 | Questions for Mike? | 4 |
fomc | 1,994 | The profile that you have for growth over the next 15 months or so I find somewhat puzzling. The economy has a fair amount of momentum, and yet you have a rather significant falloff in the rate of growth out into next year with a yield curve that is still sloping upward. I think that you would have to have more flatten... | 213 |
fomc | 1,994 | President Boehne, I think the first question is more a forecasting question. The second one perhaps is more a policy question, though there are obviously ingredients of both in the two questions. We hinted in the Greenbook that, in essence, we see the probability distribution as skewed a bit in the direction your first... | 379 |
fomc | 1,994 | President Parry. | 4 |
fomc | 1,994 | Mike, in your verbal presentation and also in the Greenbook you twice referred to more lenient lending terms by banks as a factor in the strength of the economy. I want to make sure I understand the point. Are you saying that banks are more lenient than one typically would see at this stage of the cycle, or is this jus... | 139 |
fomc | 1,994 | This is hard to pin down, but my sense is that the credit availability cycle has been out of sync with the normal pattern this time around. | 29 |
fomc | 1,994 | A little later? | 4 |
fomc | 1,994 | In the sense that, when interest rates were coming down in 1991-1992, we were still seeing the tendency toward tightening of bank credit terms. | 32 |
fomc | 1,994 | Right. | 2 |
fomc | 1,994 | And, as we have been tightening money market conditions, our loan officers' survey and the preponderance of the anecdotal evidence have suggested that the banks have become increasingly aggressive in their business lending and obviously have been increasingly willing to extend consumer credit as well. We looked back at... | 217 |
fomc | 1,994 | I guess I'm a little surprised that in the past we have seen a tightening of terms in the first year of rising interest rates. I would have thought that it would have come later. | 37 |
fomc | 1,994 | I don't want to put too fine a point on it, but I think the main point is that this seems to have been an offsetting influence over the past year to the rising market interest rates. | 40 |
fomc | 1,994 | I don't think there is any doubt about that. I really wonder if that's unique. | 17 |
fomc | 1,994 | It is not. There is a bias in the measure of the degree of ease in the loan officers' survey. What is the size of it? Do you remember, Don? | 36 |
fomc | 1,994 | The Richmond Fed did a study once that showed that, at least back in the 1970s, it looked like the responses were biased toward showing tightness. Now, the psychology of everything has shifted so radically in the current cycle that I wonder whether that same bias is there. | 57 |
fomc | 1,994 | The trouble is that if you cumulated the first differences, you got a progressively greater degree of tightening, which at the end of the day should have strangled the total financial system. | 37 |
fomc | 1,994 | Right. That was true back in the 1970s when the bias was found. | 18 |
fomc | 1,994 | In other words, there is no evidence that that has been the case since then? | 17 |
fomc | 1,994 | We just don't know. | 5 |
fomc | 1,994 | President Jordan. | 3 |
fomc | 1,994 | Mike, I've got two quite different types of questions. The first one has two parts and it is about productivity: What has been going on and what do you foresee going on? In the past four quarters, growth in manufacturing productivity is reported to be something on the order of 6 percent or so, and for the overall econo... | 258 |
fomc | 1,994 | As a technical matter, the productivity numbers for manufacturing that are published along with those for overall productivity growth are in essence based on a separate system in the current period. The recent period is based on industrial production data rather than industry gross product data. Those numbers will be r... | 118 |
fomc | 1,994 | Actually, Mike, when we separate the GDP into its factory value components, don't we get results that are not all that different from numbers based on industrial production? | 32 |
fomc | 1,994 | There's a big gap between the industrial and the nonindustrial sector productivity measures even when we do this exercise. | 21 |
fomc | 1,994 | Okay. | 2 |
fomc | 1,994 | Maybe that isn't actually true; maybe there is an inaccuracy in the measurement of output. It would be affecting the GDP numbers. It also would be affecting our estimates of potential output growth. It is in fact neutral in terms of assessing what the output gap might be. All the measures are commensurately affected. A... | 269 |
fomc | 1,994 | Just as a comment on it, I'm not hearing anything that suggests to me that businesses--manufacturing or others --foresee fewer opportunities for productivity improvements in the next year or two than they have had in the last couple of years. What produces this quite dramatic slowing of productivity? I think this is tr... | 952 |
fomc | 1,994 | I don't think I can work my way through all the history you gave on the forecast. But I think the first statement you made about giving back the extra growth that we had recently is fundamentally correct. That extra growth, as we assess it, resulted in an overshooting of sustainable levels of resource utilization--leve... | 256 |
fomc | 1,994 | In fact, you're right, President Jordan, in the sense that the M1 that we have been getting for the last two years or so has been pretty much on the M1 demand curve. But that aggregate, of course, is very interest elastic. We are predicting even slower growth next year than the 2 percent that we have for this year and ... | 158 |
fomc | 1,994 | If the money demand relation still holds on M1 and you get a 5 or 6 percent drop in the absolute level of M1, what does that do to your M2? Unless you've got non-M1 components of M2 starting to take off suddenly-- | 54 |
fomc | 1,994 | We do have opportunity costs narrowing over the latter half of next year, and we do have M2 picking up then. We see those costs rising in the first half of the year when we expect very damped growth in M2. As you can see in your Bluebook, we have built in declines through March. We do have a bit stronger growth built i... | 179 |
fomc | 1,994 | President Minehan. | 4 |
fomc | 1,994 | An opposite question to President Boehne's: I was interested in the reference in the Greenbook to the cessation of speed effects that brings about the moderation of CPI increases in the last part of 1995. I wondered whether you had any estimates of what that CPI figure might be absent speed effect changes? Did you look... | 70 |
fomc | 1,994 | I don't think we can do a precise dissection. One of the things we've pointed out in the Greenbook is that in looking at the acceleration--I don't want to overstate this--what we are talking about in essence in the core CPI number is that we are going to get pretty much .3 increase a month rather than a mixture of .2 a... | 77 |
fomc | 1,994 | Yes, right. | 4 |
fomc | 1,994 | Whether we'll be able to perceive this month-by-month isn't entirely clear. But we see this as involving a mix of things that are sort of overlapping. We have had an exchange rate depreciation. We have seen raw materials prices increase. Some of those raw materials are internationally traded and are imported in some in... | 205 |
fomc | 1,994 | So you think it is more the special factors that are pushing the increase in prices to 3.8 and 3.6 percent rather than any uptrend? | 33 |
fomc | 1,994 | Right. We have a timing question here. It is hard to say but we think that we might get a little more of the price increase announcements at the beginning of the year. | 36 |
fomc | 1,994 | Yes. | 2 |
fomc | 1,994 | So, there is a considerable amount of guesswork involved here. But, yes, I think it is these speed effects or the exchange rate effects on import prices and so on that are giving the bulge. However, if we did not eliminate the excess pressures on resources during 1995, as we have in this forecast, the risk would be tha... | 128 |
fomc | 1,994 | Looking at the other side, you have a declining impact from inventories, but certainly a smooth one. Do you care to comment on that? | 28 |
fomc | 1,994 | Reality will never be that smooth! | 7 |
fomc | 1,994 | That's what we thought too! | 6 |
fomc | 1,994 | That's one of the risks we noted in the Greenbook. | 12 |
fomc | 1,994 | Right. | 2 |
fomc | 1,994 | An inventory adjustment could come more quickly: If final demand were to taper off and be perceived to have tapered off early next year, perhaps the inventory adjustment would be sharper. That could move us much closer to zero or even conceivably negative GDP growth for a quarter, but inventories might then come back i... | 89 |
fomc | 1,994 | Finally, have you looked at the price effect when the ARMs that were issued this year kick in next year? The teaser rates this year have been very low. Some of these ARMs have new provisions to extend the maturity, but a good portion of them will kick in next year. | 58 |
fomc | 1,994 | It is going to be a factor affecting the cash flow of many households, but it is not a huge effect. It is less huge than one might have expected because what we've observed this year is that a substantial proportion of the ARMs originated this year have fixed rates for 5 or 10 years. This is something of an innovation ... | 114 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | Governor Blinder. | 4 |
fomc | 1,994 | Mike, I want to ask you a question about the projection for the automobile market, which in the Greenbook is peaking this quarter at about 15-1/2 million light vehicles--cars and trucks--and then declining very modestly, almost trivially. In the Greenbook, short-term interest rates are up 150 basis points more. In addi... | 226 |
fomc | 1,994 | I think we have a forecast that is middle-of-the-road. [Laughter] | 17 |
fomc | 1,994 | That's the question; why is it in the middle! | 11 |
fomc | 1,994 | A view that is certainly held in the industry is that there is considerable pent-up demand that could buoy sales of automobiles and light trucks but such demand really has not been fully seen yet because of capacity constraints. We think there is some element of truth to that story. On the other hand, it is true that, ... | 259 |
fomc | 1,994 | I just want to mention that the scrappage model that was developed by my former colleagues at Townsend-Greenspan is closely consistent with the numbers that we are getting from the income model. I meant to show it to you; I have a copy. As Mike said, there is an implicit scrappage demand element here that seems to be r... | 109 |
fomc | 1,994 | I think that's fair. One also could argue that we do not have as large an interest rate response here as we could have. Again, as President Boehne suggested in his original question, it is possible that we have not put in enough of an increase in interest rates to get the damping of aggregate demand in the Greenbook fo... | 68 |
fomc | 1,994 | Governor Lindsey. | 3 |
fomc | 1,994 | I had Governor Blinder's question. But I had another one on profits. You have a very sharp deceleration in profit growth in the forecast, and I have a cause and effect question about that. The cause question is whether the deceleration is due to a narrowing of margins. You were mentioning earlier your perception of the... | 132 |
fomc | 1,994 | Equity markets clearly have been buoyed, in the face of rising bond yields this year, by surprisingly favorable earnings reports. Our anticipation would be that those reports will not be pleasant surprises in 1995. That suggests some vulnerability to the stock market, at least in the early part of the year before the s... | 164 |
fomc | 1,994 | And the effect on investment? | 6 |
fomc | 1,994 | We think that investment has been benefiting to some degree from strong profitability and ample cash flows. As we go forward, cash flow does flatten out. We do get a growing nonfinancial corporate financing gap, and we do see that as an element that will be damping business fixed investment. Recall that you are probabl... | 219 |
fomc | 1,994 | You will also remember that you are looking at outlays, not appropriations. The relationship is closer between cash flow or profit margins and appropriations. You can view outlays as sort of a distributed lag against the appropriations data. It is a quite considerable lag. | 54 |
fomc | 1,994 | So that would begin with 1997? | 9 |
fomc | 1,994 | Yes. President Stern. | 5 |
fomc | 1,994 | Mike, as I recall when the household survey was changed by the Labor Department, a lot of people anticipated that at some point there would be a significant bump up in the unemployment rate, which has not materialized. Is that simply because it has been swamped by employment gains or what is the explanation for that? | 63 |
fomc | 1,994 | In all likelihood, the parallel survey that was conducted prior to the first of this year misled the Labor Department. It showed that the unemployment rate would be 1/2 percentage point higher with the new survey. The evidence from the survey that was conducted afterwards using the old relationships to other series suc... | 123 |
fomc | 1,994 | Thank you. | 3 |
fomc | 1,994 | Any further questions for Mike? Vice Chairman McDonough, did you have a question? | 18 |
fomc | 1,994 | No questions. | 3 |
fomc | 1,994 | Okay. Do you want to start our tour de table? | 12 |
fomc | 1,994 | Whenever you are ready. | 5 |
fomc | 1,994 | Okay. You can start off. | 7 |
fomc | 1,994 | Let me begin, Mr. Chairman, with just a brief remark about the goings on in the Second District. The New York State economy is continuing to grow but at a slightly slower rate than that of the nation. The major source of strength is the consumer. Retail sales have been strong and the sales of existing houses have been ... | 1,240 |
fomc | 1,994 | President Minehan. | 4 |
fomc | 1,994 | Mr. Chairman, New England continues to recover gradually. But there is a distinction to be drawn between the incoming labor market data and other indicators, so I'll try to frame my comments about New England along those two lines. Unlike most of the rest of the country, New England has not yet recovered the jobs lost ... | 734 |
fomc | 1,994 | President Forrestal. | 4 |
fomc | 1,994 | Mr. Chairman, as I have been reporting for several meetings now, the Southeast economy is sustaining a broad-based expansion, although we have seen a little slowing of growth recently. There really hasn't been very much change in the situation in the Sixth District since the last meeting, so I'm not going to repeat a l... | 717 |
fomc | 1,994 | President McTeer. | 5 |
fomc | 1,994 | The economy in the Dallas District continues to show moderate to strong growth across the board. Virtually every sector seems to be expanding with the exception of livestock production. At our board of directors meeting last Thursday, the reports were uniformly upbeat. Every region within the District reported positive... | 355 |
fomc | 1,994 | President Parry. | 4 |
fomc | 1,994 | Mr. Chairman, the economic recovery in California appears to be taking hold while conditions in the rest of the District generally remain strong. Abstracting from month-to-month volatility, the California unemployment rate has fallen about 1 percentage point since the first quarter of the year, although it remains abou... | 296 |
fomc | 1,994 | President Hoenig. | 4 |
fomc | 1,994 | Mr. Chairman, the Tenth District remains strong, and the strength is spread generally across all our states. Activity is robust in most of our key industries, although there may be some signs of a slowdown in single-family housing; that has yet to be determined. Our farm income has weakened in 1994. The current data sh... | 558 |
fomc | 1,994 | President Boehne. | 5 |
fomc | 1,994 | Anecdotal reports suggest that the Philadelphia District is catching up to some extent with the rest of the nation. Manufacturing in particular is showing strength and the outlook is positive. Steel and auto products are notably brisk. Retailers generally report a pickup in sales, especially in apparel and appliances, ... | 389 |
fomc | 1,994 | President Broaddus. | 5 |
fomc | 1,994 | Mr. Chairman, my comments will be very similar to many of the others you have heard already. With respect to the District, last week I attended a meeting of leading business people in Virginia who advise the governor on revenue estimates. This group includes the CEOs of most of the state's large corporations--a couple ... | 1,008 |
fomc | 1,994 | President Stern. | 3 |
fomc | 1,994 | With regard to the District economy, there is not a lot new to report; it remains strong. Manufacturing is robust. Materials prices are going up. Employment is high throughout the District. In some of the metropolitan areas, the reports we are getting are that everybody who wants to work is working. What seems to be re... | 553 |
fomc | 1,994 | That's a legislative issue. | 5 |
fomc | 1,994 | Well, you certainly wouldn't want to do it without considerable political support. I agree with that. | 19 |
fomc | 1,994 | President Melzer. | 4 |
fomc | 1,994 | National economic activity is much stronger than earlier forecasts anticipated. Employment grew twice as fast as the labor force from January to October. There was a large rise in hours worked in both September and October, including an extraordinary amount of overtime. Wage pressures are building. Average hourly earni... | 645 |
fomc | 1,994 | President Moskow. | 4 |
fomc | 1,994 | Mr. Chairman, economic activity on balance in the Seventh District appears to be a bit stronger than at the time of our September meeting. Retail sales and manufacturing output have strengthened, and overall housing activity through September held up better than might have been expected given the rise in mortgage inter... | 759 |
fomc | 1,994 | Governor Lindsey. | 3 |
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