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fomc | 1,995 | Part I is classified as Class II. | 8 |
fomc | 1,995 | Right. The number having access is now 7 and President Hoenig's suggestion is to raise that to 10. I guess I'd like to think about it and see whether there is a ground swell from the rest of the Committee. | 47 |
fomc | 1,995 | Why don't we bring this back then at the next meeting? There is no urgency about it. Does anyone else have any views that would be helpful? | 30 |
fomc | 1,995 | I just pulled out a confidential Class II-FOMC document here. It reports on exchange rates. I read the document very carefully and I don't see why it is confidential. | 35 |
fomc | 1,995 | The reason, Governor Lindsey, is that we often do report intervention numbers in that document. We can't say it's Class II when it has intervention numbers, and it's not classified when it doesn't have intervention numbers because then we would be revealing something. That is the point. That's why it's always Class II ... | 71 |
fomc | 1,995 | The presumption is that since it reports the intervention numbers when intervention occurs, the absence of such a report means intervention was zero, which also is classified information. That is sort of putting it backwards! Does anyone else want to raise any issues with respect to this before we reconsider it at the ... | 144 |
fomc | 1,995 | So move. | 3 |
fomc | 1,995 | So move. | 3 |
fomc | 1,995 | Without objection. The next issue, which also was moved from the February meeting, is the review of (a) the Foreign Currency Authorization, (b) the Foreign Currency Directive, and (c) the Procedural Instructions with Respect to Foreign Currency Operations including a review of the "warehousing" authority incorporated i... | 110 |
fomc | 1,995 | Mr. Chairman, is this the time to say something about warehousing if we have views on that? | 21 |
fomc | 1,995 | Yes. | 2 |
fomc | 1,995 | I have just a few comments if I could make them briefly. Ted Truman sent out a lot of background materials regarding warehousing and I reread most of it and reread the memorandum that Virgil and his colleagues did earlier. I think the memo makes it clear that from a legal standpoint the Fed definitely has the authority... | 273 |
fomc | 1,995 | Do you mean market risk? | 6 |
fomc | 1,995 | No, I mean the risk to the institutional position of the Federal Reserve. That is really the issue I am trying to focus on, Mr. Chairman. I think we can get some sense of that in the public's reaction to the Mexican support package. I don't want to go into that in any detail. I just think it's an example that is very r... | 384 |
fomc | 1,995 | One of the reasons why I was very careful to indicate to the Congress that we indeed had this warehousing facility with respect to the Mexican deal was precisely to put it up front. Now, some members of Congress may not have understood it, but I must tell you that I got no negative responses, and the types of questions... | 365 |
fomc | 1,995 | I appreciate that and I am sorry to keep raising these issues. I do think that this is not a short-term risk; it's not the sort of thing that is likely to hit us in the face immediately. But I worry that over time those who really would like to compromise the position of this institution in the government, if they are ... | 83 |
fomc | 1,995 | The strongest argument they have is monetary policy. | 9 |
fomc | 1,995 | Okay. | 2 |
fomc | 1,995 | Mr. Chairman, just to make a technical point on the warehousing issue: I don't want to comment on the political aspects of it; that is not my role. But as a technical matter the Treasury could conduct its warehousing transactions with the market or with another financial institution. So the notion that warehousing as a... | 221 |
fomc | 1,995 | When it's done with us, though, basically it does not show up in the budget, is that right? | 22 |
fomc | 1,995 | It wouldn't show up in the budget either way. What the Treasury does is to swap their DM or their yen with us. They sell it to us spot and buy it back forward. They can do that on exactly the same terms with Citibank or Chase or Deutsche Bank or the Bank of Tokyo, whatever institution it might be. That would have exact... | 79 |
fomc | 1,995 | The fiscal effect occurs when the ESF funds are created. At the moment the ESF has a big set of assets and a big set of liabilities. Nobody is talking about expanding the size of the ESF or increasing its capital through appropriations. What we are talking about is refinancing its assets on a different basis and that h... | 70 |
fomc | 1,995 | My feeling is that if it can be done with private institutions and the market, we ought to see what we can do to push the Treasury to do that. Whatever convenience the Treasury is gaining from doing it with us is, from our standpoint at least, offset by the longer-term risk of our continuing with these operations. | 64 |
fomc | 1,995 | That is a legitimate question. In my view the issue essentially is that if the Treasury requests us to do it, we have to give their request very serious consideration. Their view may be that while the transaction is technically feasible in the private market, the inconvenience involved in arranging relatively large sum... | 185 |
fomc | 1,995 | I understand those points. I just hope that we can continue that process and widen that gap a little further. | 22 |
fomc | 1,995 | I personally am not uncomfortable with what we are doing. I am uncomfortable with the thought that we might have to pick up the entire $20 billion warehousing, but that obviously is a very remote contingency. President Jordan. | 44 |
fomc | 1,995 | All the things that Ted sent out ruined my weekend as well! I read all this material before, one time or another, but I always have to reread it because there is so much that I can't remember all of it. I am satisfied that from a technical standpoint and a legal standpoint there is not really an issue to be discussed b... | 590 |
fomc | 1,995 | The question really is whether or not our role or central function is to provide dollar liquidity to other nations on an ongoing basis or on an ad hoc basis. If you are going to raise the argument that the international financial markets have changed from where they were under the Bretton Woods structure, the emergence... | 415 |
fomc | 1,995 | Mr. Chairman? | 4 |
fomc | 1,995 | Yes. | 2 |
fomc | 1,995 | I don't have any objection, but this is an issue that has to have been discussed at tables like this around the world, given what has happened in Mexico, Argentina, and other countries. I am wondering what rethinking is going on internationally with regard to how these sorts of things play out and what can be done. | 64 |
fomc | 1,995 | On the basis of the meetings that I at least have been involved in--and some of our colleagues have been in similar meetings--I think there is a general recognition that the size of the problem that emerged in Mexico and the size of the international facility that was perceived to be necessary to address it clearly rul... | 100 |
fomc | 1,995 | The moral hazard is extraordinary. | 6 |
fomc | 1,995 | Yes, including what I am sure the IMF would like, which is for the IMF to become a world bank lender of last resort. That is about the last resort I should think for anything. This has led us to the question of whether it is possible to have bankruptcy statutes for sovereign nations. As you know, at the moment that doe... | 144 |
fomc | 1,995 | The Mexico situation, for better or for worse, has clearly given the Halifax Summit something to focus on--something more than just chit-chat about stable exchange rates, if I may put it that way. Doing something in the bankruptcy or orderly workout area is one of the ideas that is under some discussion. It's also fair... | 152 |
fomc | 1,995 | I would think that whatever rethinking we do about what the Federal Reserve's response should be and how we view these things has to take place in the context of how the rest of the world is thinking about these issues. | 44 |
fomc | 1,995 | Yes, certainly there are big and small issues involved and both types have been raised here in this discussion. That's partly because we started with Mexico, which on the one hand is a country-specific type of problem. On the other hand, Mexico is regarded as symptomatic, as the Chairman has said, of the nature of the ... | 406 |
fomc | 1,995 | It's probably not right to think that we can dot every "i" and cross every "t" and have a set process that we follow in all circumstances. But what you're suggesting would be helpful, I think, in terms of our understanding this better. | 51 |
fomc | 1,995 | Vice Chairman, you have been as much involved with this as anybody. | 14 |
fomc | 1,995 | Yes, Mr. Chairman. I think that a very basic issue that exists even in light of the very changed international financial markets is whether an individual country is responsible for its own conduct, including paying the price for its own mistakes. The debates that were very difficult on occasion in the Mexican situation... | 599 |
fomc | 1,995 | If there is no further discussion, I would like to combine the three foreign policy instruments and move them simultaneously. Would somebody like to make a motion? | 30 |
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 finally to our regular agenda and I call on Peter Fisher. | 18 |
fomc | 1,995 | Thank you, Mr. Chairman. [Statement--see Appendix.] | 13 |
fomc | 1,995 | Questions for Peter on either the domestic or the foreign side? | 12 |
fomc | 1,995 | Peter, there's been some press commentary to the effect that the dollar's role as the dominant international reserve currency is on the wane, that we are following the pound sterling's earlier slide. Yet the facts are, as you have reported, that central banks around the world have substantially increased their holdings... | 102 |
fomc | 1,995 | I think a number of central banks are holding more dollar reserves than some people within those central banks think they ought to be holding. I wouldn't pretend to say that is the official posture of all the central banks, but I think the leakage into the markets occurs as a result of that. There are a number of centr... | 171 |
fomc | 1,995 | One final question: In particular, do you know how the Bundesbank and the Bank of Japan feel about the exchange translation that has been eroding their dollar assets? | 33 |
fomc | 1,995 | I talk to them from time to time about that. They are not happy about it, but the Bundesbank is fully committed to a single reserve currency--the dollar. They have no appetite for diversifying their portfolio. I think the Bank of Japan at a policy level is still more or less committed to a dollar reserve policy. They h... | 90 |
fomc | 1,995 | President Parry. | 4 |
fomc | 1,995 | This is a question for either Peter or Ted. In terms of causes of the weakness in the dollar, you referred to the change in expectations about future U.S. fiscal deficits. One way to look at the effect of deficits is that if monetary policy has an inflation objective, the impact of greater deficits is to increase the r... | 161 |
fomc | 1,995 | I'll take the short term and leave Ted with the long term! In the short term, I think the fiscal picture weighs on the dollar as I mentioned principally in terms of the competence issue as it relates to U.S. economic management, not in the sense of forecasting a macro economic effect. Whether analytically correct or no... | 162 |
fomc | 1,995 | Well, on the tougher question, I think you are absolutely right about the result that the standard macro models will give you: A cut in the fiscal deficit will produce lower interest rates and that in turn will translate through to reducing the external deficit through lower interest rates and a lower currency. One way... | 137 |
fomc | 1,995 | I guess the point I want to make is that it keys off what monetary policy-- | 17 |
fomc | 1,995 | There is one other argument for which there is some support in the literature. It is a longer-term argument that would run from a lower deficit to more investment, a more competitive currency, and therefore an appreciation of the dollar. That is a very long-run argument. A slightly different argument has a timing featu... | 197 |
fomc | 1,995 | Governor Blinder. | 4 |
fomc | 1,995 | I want to make a comment on Bob Parry's point and then pose a question. On Bob's point and the answers to it, isn't it relevant that over the last three months, six months, nine months, twelve months--pick your timeframe; it almost doesn't matter--surveys of inflationary expectations in the United States have shown no ... | 262 |
fomc | 1,995 | No. | 2 |
fomc | 1,995 | No. I only wish I had thought of it. | 11 |
fomc | 1,995 | Now the question I was going to pose: Peter, I thought you said--correct me if I just misheard what you were reading --that the short end led interest rates down since the last FOMC meeting. Did you say that? | 49 |
fomc | 1,995 | That is our sense that the short end-- | 9 |
fomc | 1,995 | I am reading the Greenbook table-- | 8 |
fomc | 1,995 | I think Peter was referring to the shorter intermediate term, the 1- to 3-year area. | 21 |
fomc | 1,995 | I am very sorry if that was not clear. I was referring to the 2-year maturity of the coupon curve. | 24 |
fomc | 1,995 | Okay. Fine. I have no question in that case. | 12 |
fomc | 1,995 | Peter, you mentioned that the dealers were surprised by the demand for Treasuries and that was what made the difference in terms of the price and yield moves in the Treasury market. Clearly, people are not buying dollars to get into the Treasury market. Has there been a big change in the ownership of these securities f... | 77 |
fomc | 1,995 | No, I don't think there has been a big rush of foreign demand for Treasuries. The sense is that the money has been coming out of the investment community, the mutual funds, and the real money crowd into the dealer community. The dealers have been surprised by that. Their tendency had been to play the market from the sh... | 238 |
fomc | 1,995 | It's not big enough to affect the Treasury market. | 10 |
fomc | 1,995 | So, these stories are more in the nature of anecdotes floating around than anything we have been able to pin down. | 23 |
fomc | 1,995 | There is one explanation that I'm not sure is right, but it helps to answer the question of why the dollar was weak relative to many of the European currencies over this period. One story that can be told is that there has been some degree of flight from emerging markets, or shifts in demand for emerging market instrum... | 80 |
fomc | 1,995 | The most important of these are the Brady bonds. Those bonds have taken a tremendous hit over the first quarter of this year. Although U.S. investors hold some of the Brady bonds, they also are held around the world by all kinds of investment funds. It's not irrational for those funds, many of which are Japanese--after... | 216 |
fomc | 1,995 | One of the central banks that we ought to be concerned about other than the Bundesbank and the Bank of Japan, as large holders of dollars that they are not going to relinquish, is the Bank of Taiwan. It holds close to $90 billion in Eurodollars and direct claims against the U.S., largely in Treasury securities. They ar... | 165 |
fomc | 1,995 | We wouldn't have the data unless they are held at the New York Bank. | 15 |
fomc | 1,995 | We have data on what they hold with us as custodian, but that is only a portion of what most central banks hold. | 26 |
fomc | 1,995 | Have you checked the data? | 6 |
fomc | 1,995 | I don't have an exact view. I don't have any of those data here. | 16 |
fomc | 1,995 | Peter, what has happened to the total custodian holdings of Treasury securities in the last 10 weeks or so? | 23 |
fomc | 1,995 | In the last 10 weeks they have gone up. We had an extraordinary rise of $10 billion in one reporting period. There has been some back and forth movement in such holdings. | 37 |
fomc | 1,995 | Is that because of the Caribbean--? | 8 |
fomc | 1,995 | No, it didn't include the Caribbean. The market all read it as entirely the Bank of Japan. Ironically, it was to a substantial extent other Asian central banks who were thought to be sellers of dollars. | 42 |
fomc | 1,995 | Who in fact were buying dollars! | 7 |
fomc | 1,995 | Who just happened to be shifting. | 7 |
fomc | 1,995 | You have to remember that as a statistical matter they can move investments from Eurodollar holdings to the Federal Reserve Bank of New York and that will show up as custodian holdings but it doesn't have any currency implications at all. | 45 |
fomc | 1,995 | We did have a period when our custodial accounts went down quite a bit, net, but I haven't looked at the figures. There was a period where some of the Asian central banks----went into bills, came out of them, and went back. That created some volatility in our custody holdings. So those holdings probably are a little hi... | 86 |
fomc | 1,995 | I assume there is no concern about the American dollar in the context of our holding dollars as custodians for foreign official accounts! I only got a chuckle out of the Vice Chairman! | 37 |
fomc | 1,995 | That was with my President of the Federal Reserve Bank of New York hat on. That's why I chuckled. | 22 |
fomc | 1,995 | I realize that. | 4 |
fomc | 1,995 | If I could comment, going back to the reserve currency status issue, it is interesting that the markets all chatter about how the dollar is losing its reserve currency status. Yet, the dollar bill is in heavy demand around the world. | 46 |
fomc | 1,995 | You mean the hundred dollar bill? | 7 |
fomc | 1,995 | The hundred dollar bill, yes. The greenback. It's an interesting offset to the concept that the dollar is losing its reserve currency status. | 28 |
fomc | 1,995 | Any further questions for Peter? | 6 |
fomc | 1,995 | Peter, I understand that some Fed watchers, in trying to decide whether to blame the Federal Reserve for the weakness of the dollar, have pointed to the fact that the dollar price of gold has not gone up very much while the mark and yen prices of gold have gone down. On that basis they pretty much absolve us from blame... | 92 |
fomc | 1,995 | A tiny tiny bit. I don't particularly! [Laughter] | 13 |
fomc | 1,995 | To what degree do you think we have a dollar problem as opposed to a mark and yen problem? | 20 |
fomc | 1,995 | I think we have a dollar problem, as I mentioned, in the way the foreign exchange market looks at the relationship between our interest rates and our current account. I don't mean that should drive the policy decided around this table, but that is the chain around our ankle, if you will, that we have to deal with; it's... | 181 |
fomc | 1,995 | Further questions for Peter? If not, would somebody like to move approval of the actions of the foreign Desk? | 22 |
fomc | 1,995 | So move. | 3 |
fomc | 1,995 | Is there a second? | 5 |
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