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fomc | 1,995 | Not the legislation--but operations for three years. | 10 |
fomc | 1,995 | But you indicated that in fact that might not be the way it falls out. | 16 |
fomc | 1,995 | I was trying to live up to Governor Lindsey's entreaty that I suggest the questions one could ask as well as the answers. | 27 |
fomc | 1,995 | You said this might be outstanding to the ESF for what--10 or 20 years? | 19 |
fomc | 1,995 | We have used these arrangements five times since 1982. | 12 |
fomc | 1,995 | The oil? | 3 |
fomc | 1,995 | The provision for payment from oil export proceeds. We never have had to have recourse to them. | 20 |
fomc | 1,995 | I don't mean that. Has the ESF ever been used to provide financing, as I think you said earlier was a possibility, that was outstanding for as long as 10 or 20 years? | 40 |
fomc | 1,995 | Ten. | 2 |
fomc | 1,995 | Ten years. Is there any precedent for that? The law seems to contemplate short-term bridge financing. | 20 |
fomc | 1,995 | The earlier ESF balances agreement also ran for multiple years. Whether it ran as long as 10 years I can't remember, but it is unusual to go that long. There is a difference between whether it is legal and whether there are precedents for having done it. It is unprecedented in that the loans are expected to be outstand... | 80 |
fomc | 1,995 | May I ask a question about the $40 billion that was in the proposed legislation? I believe that legislation did not contemplate giving the Mexicans any money but was offering loan guarantees that in effect would have substituted the credit of the U.S. government for the credit of the Mexican government. Presumably, the... | 105 |
fomc | 1,995 | And to allow them to stretch out the debt--to replace short-term debt at high rates with long-term debt. | 23 |
fomc | 1,995 | Okay. Now we have stopped talking about the $40 billion; now we are talking about a certain number of billions but the whole nature of it has changed. Have they said what they are going to use this money for? I think it's different from what they were going to do if we had given them the loan guarantee. Is this just st... | 84 |
fomc | 1,995 | I think the Treasury's intention is to secure a financial plan from the Mexicans about what they will do with that financing--that is, their whole debt-management strategy. This, of course, would have to be worked out by agreement between the Treasury and the Mexicans and we would participate in terms of our own part i... | 96 |
fomc | 1,995 | This does not address their credit risk problem, though. Anybody who invests in their paper still has that to overcome. | 23 |
fomc | 1,995 | The Mexicans would in effect be substituting credit from the U.S. government or the Exchange Stabilization Fund rather than from the private market as under the previous guarantee program. | 35 |
fomc | 1,995 | So, instead of taking our money and using it in their operations in their financial markets, they will be taking our money and offering it as a promise of repayment. Is that what you are saying? It just seems that the whole nature of the thing has changed, and we have not gotten rid of the credit risk problem. | 65 |
fomc | 1,995 | In one case they would have borrowed the money with the full faith and credit of the United States in the private market--in the guarantee mechanism. | 29 |
fomc | 1,995 | Right. | 2 |
fomc | 1,995 | In the second case they either do that, which is one possibility, or they would borrow the dollars from the United States Treasury which would borrow in some sense from the ESF. The ESF does not have dollars but it has Treasury bills that it could sell, and the proceeds would be invested in Mexican obligations. | 63 |
fomc | 1,995 | But we have moved from loan guarantees to direct lending. | 11 |
fomc | 1,995 | Yes, to direct lending; we are in more of a credit risk position than we were before. | 20 |
fomc | 1,995 | Ted, why is the Federal Reserve involved in this? Is it because of a liquidity problem for the ESF? | 23 |
fomc | 1,995 | We are involved for two reasons. One, the ESF does not have the liquidity, so that involves us in the warehousing. The other relates to our participation--this would be short-term participation--through the existing swap line, the enlarged swap line, and the suggested super enlarged swap line. | 60 |
fomc | 1,995 | The latter would have us involved for how long? For the ten years that was mentioned earlier? | 19 |
fomc | 1,995 | No, I think for one year. That is one of the reasons why I did not put a specific proposal to you today. What I had been thinking, but I wanted to do it tomorrow morning when I had a clearer head, is that you might want to set something up so that they could draw up to $6 billion. But once they had drawn $6 billion and... | 209 |
fomc | 1,995 | Okay. | 2 |
fomc | 1,995 | Could I ask a question? Ted, this is a slightly different issue. A couple of days ago there were rumors in the market that the reserves of the Mexican government had dropped from post devaluation levels of about $6 billion to $2 billion. The Bank of Mexico immediately denied that those levels had gone down so much. Now... | 121 |
fomc | 1,995 | They announced on the 9th of January that their reserves were $5.6 billion. | 19 |
fomc | 1,995 | Yes, but they quickly denied that their reserves had slipped to the $2 billion level. | 18 |
fomc | 1,995 | As of yesterday their reserves were above $2 billion. | 11 |
fomc | 1,995 | My question is: What is this announcement going to do to the market confidence? | 16 |
fomc | 1,995 | I don't think anyone thought five days ago that their reserves were still at $5 to $6 billion. There is no credibility loss because they are down closer to $3 billion. Yesterday, the market was saying that they were at $2 billion; the Mexicans denied it and said that they were above $3 billion. Now, one can split hairs... | 92 |
fomc | 1,995 | They were at $3.4 billion. | 9 |
fomc | 1,995 | Yes, $3.4 billion. We are getting down to small numbers, but no one thinks there will be a credibility loss because they were at $6 billion earlier and tomorrow they will announce $2 billion. | 43 |
fomc | 1,995 | In other words, you don't think that the announcement tomorrow will in any way offset what has been done by the President and our facility? | 27 |
fomc | 1,995 | It's not going to offset it entirely. People will, as people in this room did, sort of take a little breath and say, well, that is a low number. But I think the President's package and all the things that have come out today should mitigate the effects of that to a great extent. | 62 |
fomc | 1,995 | What are the implications of the Treasury just dusting out what they have in the ESF to provide liquidity to the ESF? | 26 |
fomc | 1,995 | Do you mean sell those foreign currency assets in the market? In this case, it would be just like any other exchange market intervention, I think. | 30 |
fomc | 1,995 | Are they liquid holdings? | 5 |
fomc | 1,995 | Yes, Peter holds them for the ESF. They are reasonably liquid. | 15 |
fomc | 1,995 | Yes, they are reasonably liquid instruments. I think the sum jumped up today. The dollar/mark today was--well, I think dollars had been a little oversold and people were covering back. But some of it was rumors that, in order to do anything, the United States might be selling all the marks and yen immediately. Now, tha... | 96 |
fomc | 1,995 | Although that might explain some of the behavior of the dollar today. | 13 |
fomc | 1,995 | Yes. | 2 |
fomc | 1,995 | It is fair to say that as a policy measure, one of the reasons why the Treasury chose to go with the loan guarantee originally rather than using the ESF was that by going to the ESF, even with our cooperation, they felt there might be some sense that their ability to defend the dollar with existing foreign exchange bal... | 137 |
fomc | 1,995 | Okay. Shall we call it an evening? | 9 |
fomc | 1,995 | We need some sense of the Committee's view on the "drawing" or whatever word you want to use. | 22 |
fomc | 1,995 | Yes. As Ted indicated, we think it would be useful in this context to agree to our billion dollar lockup of reserves to Mexico. The reason for the lockup, frankly, is that until we know that everything is in place, I would not feel comfortable exposing ourselves even with the collateral. But if we get a take-out and ev... | 105 |
fomc | 1,995 | It may take us a little while to work out the take-out. | 14 |
fomc | 1,995 | Is there any objection to our authorizing a $1 billion drawing from the $4-1/2 billion swap line to be locked up for the Bank of Mexico? | 34 |
fomc | 1,995 | As president of the Bank where the money will be kept, I can assure you that we will keep a very close eye on it! | 27 |
fomc | 1,995 | Is this a matter that needs Committee approval or are you just consulting? | 14 |
fomc | 1,995 | No, actually it does not need approval, but I would feel uncomfortable if there were a significant negative response even though you have already given me the authority. This situation is changing and has changed sufficiently that I want to make certain that there are no significant changes of views on the overall posi... | 58 |
fomc | 1,995 | I am very concerned about the overall proposal and how it would involve the Federal Reserve. To the extent that a further drawing would involve us further in this arrangement, I do have concerns. At the same time I recognize that you have the authority to do it and that you are being prudent in terms of how that money ... | 160 |
fomc | 1,995 | We are going to get to the other issues first thing tomorrow morning. Yes, Tom. | 18 |
fomc | 1,995 | I have to ask you, when you say "lock up"--Are we committing to this now? Is this something that, if we have a change of heart after our discussions later, we can not take back because we are in this now? | 49 |
fomc | 1,995 | I don't think so. | 5 |
fomc | 1,995 | As President Melzer said, previously--the action was taken on December 30th--you approved a special increase in the Mexican swap line for a short period of time. Now, in fact the drawings by Mexico are still within the $3 billion swap line that existed before it was expanded with the special arrangement on the 30th of ... | 82 |
fomc | 1,995 | I understand and I hear what Tom Melzer said. What the Chairman is saying is that things are changing quickly. Yes, we have approved it, but what are we buying into? That's what I just do not know. | 45 |
fomc | 1,995 | The answer, I suppose, is that participation in this current phase requires action on the warehousing limit for one. Secondly it involves acting on the proposal with respect to raising the $4-1/2 billion swap line to some number, or not raising it, and articulating how long the enlarged amount would be outstanding befo... | 91 |
fomc | 1,995 | Jerry. | 2 |
fomc | 1,995 | I am not voting this year but if I were, I would oppose the package because of the warehousing. Once this Committee is in on the warehousing, we are in and we are going to be in-- | 43 |
fomc | 1,995 | The only thing I object to is that that is a subject for tomorrow. | 15 |
fomc | 1,995 | Okay. | 2 |
fomc | 1,995 | You can be the first one on the floor tomorrow! I am just saying the clock is ticking. Let's get out of here. | 26 |
fomc | 1,995 | Since the Mexican discussion may be open-ended, I thought it would be desirable to put it at the end of the agenda and start this morning's session with Peter Fisher on both foreign currency and domestic open market operations. Peter. | 45 |
fomc | 1,995 | Thank you, Mr. Chairman. I will be referring eventually to the three colored charts on the single sheet of paper distributed this morning. [Statement--see Appendix.] | 33 |
fomc | 1,995 | Peter, we have seen the current account deficit of the United States rise continuously in recent years. Projections now suggest yearly deficits of around $200 billion in the next couple of years, and there is no evidence of any retreat. It has always been the conventional wisdom that, because of the prominence of the d... | 230 |
fomc | 1,995 | There are two aspects I would focus on. One is the trend, as you point out. What is disturbing, or important, to the foreign exchange market is the sense of rising current account deficits; the foreign exchange market sees the trend in the current account as being against the dollar. If there were to be forecasts of st... | 378 |
fomc | 1,995 | Any other questions for Peter? | 6 |
fomc | 1,995 | I have one. It has two parts, the first of which is probably unanswerable, but if you want to give it a shot, go ahead. The question is: What would you imagine the implications are, for the peso and the Canadian dollar, of another 50 basis points on the federal funds rate? | 64 |
fomc | 1,995 | With regard to Canada, I would expect the Canadians to add 50 basis points themselves. The Bank of Canada has leaned very strongly against the wind in the last few weeks and in doing that has impressed their markets. That is, the Bank of Canada raised its rates, and when market rates started to come back down, the Bank... | 158 |
fomc | 1,995 | Yes, compared to zero. | 6 |
fomc | 1,995 | If it is a 50 basis point increase in the federal funds rate compared to zero, I think zero would be quite bad for the Canadian dollar. I also think our own markets would be rather disturbed by zero and that it would be worse for the peso than 50 basis points. If one looks at where the market would like to price Mexica... | 105 |
fomc | 1,995 | Further questions? Yes, Tom. | 7 |
fomc | 1,995 | I had understood Ted Truman to say yesterday that $1 billion had been drawn down on our swap arrangement, and you just said $1-1/2 billion, Peter. | 35 |
fomc | 1,995 | Combined. The Mexicans drew $1 billion earlier, divided equally between the Federal Reserve and the Treasury. Last night they drew an additional $2 billion, of which $1 billion is from the System. | 41 |
fomc | 1,995 | Yes. I was referring to their total drawings for the month on the Federal Reserve. That is, we did $500 million earlier in the month and last night we accepted their request and locked up an additional $1 billion. | 45 |
fomc | 1,995 | So the total outstanding on our portion of that facility is $1-1/2 billion? | 19 |
fomc | 1,995 | That is right. | 4 |
fomc | 1,995 | I was talking about the combined amount for the United States and Peter was talking about the Federal Reserve portion. | 21 |
fomc | 1,995 | Okay. | 2 |
fomc | 1,995 | Further questions? If not, would somebody like to move to ratify the transactions of the domestic open market Desk? | 23 |
fomc | 1,995 | So move. | 3 |
fomc | 1,995 | Is there a second? | 5 |
fomc | 1,995 | Second. | 2 |
fomc | 1,995 | Without objection. Let's move on now to the staff report with Messrs. Prell and Hooper. | 21 |
fomc | 1,995 | Thank you, Mr. Chairman. [Statement--see Appendix.] | 13 |
fomc | 1,995 | [Statement--see Appendix.] | 6 |
fomc | 1,995 | How high is the unemployment estimate that the CEA is currently using? | 14 |
fomc | 1,995 | It looks like 6 percent is the fourth-quarter level that they are working with at this point. | 20 |
fomc | 1,995 | They cannot publish that in the CEA report. Going up to the Hill and saying "our program will raise the unemployment rate by more than 1/2 point" will hardly get ringing endorsements. | 40 |
fomc | 1,995 | Given that their projected output growth will be pretty much in line with their estimates of the trend of potential output, it will look somewhat anomalous on that basis. But when they were developing these numbers earlier, they were working from a much higher base. It is hard to tell but they could say in the Economic... | 89 |
fomc | 1,995 | Questions? | 2 |
fomc | 1,995 | Mike, in both the Greenbook and in your oral presentation you remarked that you had reexamined the economic model that you use, the approach that you use, in bringing these forecasts together, and you concluded that your model tracks well enough. It is within the confidence intervals for 1994. And as best you can tell,... | 317 |
fomc | 1,995 | I think we went through this last time, and I won't repeat the four-part harmony answer on the 1994 error. In a sense, we were thrown off by some movements in the numbers in 1993 that caused us to hesitate to follow the model religiously. Looking back over the past year--as you noted and we noted in the Greenbook--the ... | 242 |
fomc | 1,995 | I'm still missing something. If the difference between .8 percent above the NAIRU on last year's projection and .6 percent below it is only .3 percentage point in the CPI, how wide is your confidence interval around the NAIRU? | 49 |
fomc | 1,995 | I would say usually 1/2 percentage point. | 11 |
fomc | 1,995 | So the NAIRU is 6 percent plus or minus 1/2 percentage point? | 19 |
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