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fomc | 1,996 | It is not the first time. | 7 |
fomc | 1,996 | President Jordan. | 3 |
fomc | 1,996 | Peter, I have a question about your domestic operations. When I see something like a 50 percent fed funds rate, it catches my attention. In your comments you made some reference to the inefficiencies and anomalies in the distribution of reserves yesterday and again today that initially led banks to think that the marke... | 231 |
fomc | 1,996 | Let me try to take the second leg of that first. The skewing of the demand for reserves toward the end of the maintenance period is a normal pattern but one that we have seen become more pronounced in the past year. My initial reaction to that was to try to force banks to smooth their demand for reserves, force them to... | 682 |
fomc | 1,996 | Will what you come back with address the fundamental issue of the current reserve settlement structure, which as I recall was set up in the early 1980s to improve the control of Ml? That was the motivation, which is no longer relevant, for setting up this kind of settlement procedure. | 58 |
fomc | 1,996 | We do have some folks looking at what you are referring to--the notion of contemporaneous reserve accounting versus lagged reserve accounting. There would be transition costs to going back to lagged accounting and the issue is whether those costs would be outweighed by the benefits of reduced reserve requirement uncert... | 79 |
fomc | 1,996 | Vice Chairman. | 3 |
fomc | 1,996 | I would like to state a hypothesis and then ask Peter how he would evaluate it, since he is closer to the foreign exchange market these days than I am. It seems to me that one of the reasons that people are writing a lot of options--because that is where profitability is available--is driven by developments in the fore... | 263 |
fomc | 1,996 | Yes, I think it does, particularly in the foreign exchange market. The early to mid-'90s was a period when these firms were building up capacity. The great successes in income terms in '92, '93 and '94 for many dealing rooms led them to build up their capacity and their fixed costs just as you described, and I think th... | 93 |
fomc | 1,996 | How would the implied volatilities and the historical volatilities move with respect to the magnitude of exchange rate movements? | 24 |
fomc | 1,996 | The exchange rate movements follow changes in historical volatility but with a lag. | 14 |
fomc | 1,996 | What is the order of magnitude? | 7 |
fomc | 1,996 | I am sorry I can't calculate that off the top of my head. | 14 |
fomc | 1,996 | One of the issues that raises is that, if you have a structural problem in the supply and demand for options, it would tend to reflect itself in an inefficient options market which in turn would tend to reflect a pattern that differs from the actual volatility in the exchange market. One way of testing this hypothesis ... | 94 |
fomc | 1,996 | Well, let me try this on you. I hope this is helpful. I talked with one person at a firm in this market for whom I have a great deal of respect, and he referred to the current level of options as both too high and too low. Implied volatility was too high because it was still considerably above the recent historical exp... | 99 |
fomc | 1,996 | I don't know what I am learning, but I am learning something! | 14 |
fomc | 1,996 | I think the hypothesis checks out, but we can go back and do some work on that. | 19 |
fomc | 1,996 | Yes, we will go back and work on that. | 11 |
fomc | 1,996 | Governor Phillips. | 3 |
fomc | 1,996 | Peter, I just wanted to ask what the source of these options data was that you use for your calculations and charts. | 24 |
fomc | 1,996 | A couple of investment firms gave us the data. | 10 |
fomc | 1,996 | The back data were provided by a couple of investment banks. We have been collecting more recent data routinely off the screens ourselves. | 25 |
fomc | 1,996 | These are fresh 1-month and 12-month implied volatilities on OTC options that are collected every day; the data are not obtained from the exchanges. | 32 |
fomc | 1,996 | So, they are basically over-the-counter. Do you think they are comparable going back as far as you do? | 23 |
fomc | 1,996 | They are the best data we have been able to get. | 12 |
fomc | 1,996 | Well, okay. | 4 |
fomc | 1,996 | Any further questions? Would somebody like to move approval of Peter's domestic operations? | 16 |
fomc | 1,996 | I move approval. SPEAKER(?) Second. | 9 |
fomc | 1,996 | Without objection. We now move on to the Chart Show presented by Messrs. Prell and Truman. MESSRS. PRELL and TRUMAN. [Statements--see Appendix.] | 38 |
fomc | 1,996 | Going back to your analysis of world oil markets, I notice in Chart 8 that North Sea oil production is still increasing but at a slower pace. Are these statistics millions of barrels per day? | 39 |
fomc | 1,996 | They are changes in production in barrels per day. Production is expected to peak in 1997 and to turn down after that. | 26 |
fomc | 1,996 | I gather that the Norwegian expansion has been accelerating very recently. Is that going to peter out? | 19 |
fomc | 1,996 | Well, as you probably know better than I, every time we have looked at North Sea production over the last 10 years, it was going to diminish in 2 years. The people who look at this, and they include the experts of the International Energy Agency, expect that Norwegian production will level off at a peak level in 1997 a... | 129 |
fomc | 1,996 | This table implies that we will reach oil inventory equilibrium at the end of this year. Is that going to happen considering the extreme shortfalls that we have experienced? | 32 |
fomc | 1,996 | Well, one issue has to do with the question of Iraqi production coming on stream. In fact, we had assumed in our forecast that the 800 thousand barrels per day from Iraq in the second half of the year would be enough to plug the hole in stockbuilding that was created over the first half of the year. If that were not to... | 143 |
fomc | 1,996 | And the assumption is that there will be no endeavor by other producers as a group to pull back on their oil production? | 24 |
fomc | 1,996 | Yes. In fact, we probably will have a little more cheating. | 14 |
fomc | 1,996 | President Parry. | 4 |
fomc | 1,996 | Mike, when I compare the current forecast to the May forecast, there appears to be virtually no change in the economy-wide measures. I guess an exception is the CPI in 1996. Yet, as I read the Greenbook, and the same impression came through in your presentation today, you seem to have shifted your assessment of the ris... | 131 |
fomc | 1,996 | I think there have been some occasions when we have indicated that the risks in our outlook were asymmetric. I would characterize our forecasts over the years as an effort to present a meaningful, modal forecast of the most likely outcome. When we felt that there was some skewness to the probability distribution, we tr... | 337 |
fomc | 1,996 | Thank you. | 3 |
fomc | 1,996 | Governor Lindsey. | 3 |
fomc | 1,996 | Ted, in Chart 10, you have given us a nifty tool of analysis. I had a question about one of your assumptions. The policy assumption in the chart is that U.S. and foreign monetary authorities target nominal GDP. To my knowledge the nominal GDP developments in the developing countries, including much of East Asia and Lat... | 92 |
fomc | 1,996 | Well, you have uncovered a sleight of hand. Actually, the formal assumption that we make for the developing countries in the model simulations is that their interest rates follow our interest rates. So, if we damp our nominal GDP or lean against a surge in nominal GDP by raising our interest rates, their rates go up, t... | 131 |
fomc | 1,996 | But your added constraint certainly isn't -- | 7 |
fomc | 1,996 | We got that result without specifying the policy mechanism by which nominal GDP is held down for those countries, but in terms of trying to control the impetus to the U.S. economy, we have achieved that modest result. In fact, when we did it another way, we came up with a huge expansion in the developing countries beca... | 170 |
fomc | 1,996 | Why wouldn't an exchange rate peg work in that model? It would be a somewhat more relaxed assumption than the one you made, but less relaxed than in an unconstrained model. | 35 |
fomc | 1,996 | Yes, but the model runs off interest rates and the exchange rates of the developing countries do stay pretty much in line with the dollar. That is one of the reasons, in fact, why we have a different exchange rate in the two scenarios. In the first case interest rates go up more in the industrial countries than they do... | 125 |
fomc | 1,996 | Vice Chairman. | 3 |
fomc | 1,996 | I would like to refer to Chart 14 relating to the labor markets. On labor productivity, which obviously is a key consideration for the forecast, I think the most recent economic data have productivity trailing off even more than this trend line would indicate. Indeed, you have productivity improvement in 1997 at 1 perc... | 67 |
fomc | 1,996 | Roughly. | 4 |
fomc | 1,996 | Is that something that you are concerned about in terms of the possibility that it might be on the high side or is that something that, within the confidence factors for estimating productivity, you are feeling rather confident about? | 42 |
fomc | 1,996 | I would say that is one of the things that we feel the least discomfort about. We are forecasting fairly steady, moderate growth in productivity. We don't start off with any major disequilibria that we can see in terms of employers having hired well beyond production levels. A trend increase in productivity seems entir... | 166 |
fomc | 1,996 | Mr. Jordan. | 4 |
fomc | 1,996 | Mike, I want to ask a question to get your response from the standpoint of the forecast, but I also want to get Peter Fisher's response from the standpoint of how the market would react. You made reference to slight declines in longer-term interest rates; you used the 10-year rate in the chart. As I think about your fo... | 244 |
fomc | 1,996 | That is a quite reasonable question, and I certainly would not see it as implausible to have the bond market rallying beyond our assumption for some period of time. In my view, the only thing that would tend to limit such a rally in terms of how far down yields might go permanently is that we don't have a particularly ... | 261 |
fomc | 1,996 | I can't improve on that; I agree with Mike. | 11 |
fomc | 1,996 | President Stern. | 3 |
fomc | 1,996 | Mike, we recently had an auto industry consultant drop by the Bank. He had a couple of things to say that I, at least, found interesting and I want to get your reaction to it. First, he was quite sanguine about the outlook for light motor vehicle sales extending over a number of years; basically, he saw them continuing... | 170 |
fomc | 1,996 | I don't know how much useful excess capacity is left in the United States. I suspect that when we tote the numbers up it looks as if there is a lot, but when we look at current production problems, we see that, for those categories of cars and trucks that people want to buy, the manufacturers would like to build more t... | 289 |
fomc | 1,996 | President Minehan. | 4 |
fomc | 1,996 | Just a quick couple of questions, Mike. In the adjustments on the CPI that are more or less technical adjustments, have you gone back and redone the CPI over time, or perhaps back a couple of years, to see if we still have the same trend that we saw before? The striking thing about this Greenbook is that, because of th... | 111 |
fomc | 1,996 | Well, I will yield to my colleague, who is much more expert on this, but there is, in a sense, a discontinuity here. Some of the adjustments we are making have to do with the arithmetic that perhaps you can view as fairly predictable. When it gets to things like changing the way in which costs of medical care are calcu... | 83 |
fomc | 1,996 | They may not be the same. | 7 |
fomc | 1,996 | We have tried to make a sensible assessment of how movements in the old and new versions would go and that is what led us to make the adjustments that we did, but I think that all this is a little problematic. | 44 |
fomc | 1,996 | Maybe very minor. | 4 |
fomc | 1,996 | President Minehan, we have a long history of adjustments to the CPI; it goes back over the entire postwar period. Improvements are continually being made, but I believe there will be a concentration of them in this 1996, 1997, and 1998 period. In fact, we could see some discontinuities stemming from the improvements in... | 110 |
fomc | 1,996 | You also have to look back historically and ask yourself what was actually going on. If we combine all the adjustments and go back in time, it does show a different picture. We have been looking at a picture in which core CPI appears to have flattened out. | 52 |
fomc | 1,996 | Maybe it really has been declining. | 7 |
fomc | 1,996 | The mere change of the dubious medical price component in the CPI for the much better medical net output price in the PPI plus a change in the weights in and of itself takes what was a flat trend and turns it down. | 45 |
fomc | 1,996 | The Greenbook projects the core CPI to decline and then to come back up again. | 17 |
fomc | 1,996 | Well, it has not come back up if you look through the month of May. That's the whole point. In other words, the backup is a forecast. I will try to document this at some length tomorrow. It is a very relevant issue and it is very important for us to answer the question of what in fact the inflation rate has been. The p... | 108 |
fomc | 1,996 | For me the question is not even what inflation is in absolute terms. It is what the trend is and that is hard to understand. | 27 |
fomc | 1,996 | I'll try to explain it tomorrow on the basis of the data we have put together. If we look at various broad measures of inflation including the core PCE chain price index, which is the best consumer price index by far as Roberts pointed out in his memo, it really makes a difference. Even looking at broader measures such... | 283 |
fomc | 1,996 | Thank you very much, Mr. Chairman. I have one other small question. Ted, on your Chart 7, Foreign Growth and U.S. Exports, is that merchandise exports alone or merchandise and services? | 43 |
fomc | 1,996 | The top chart? | 4 |
fomc | 1,996 | Yes, or any of those charts. Do they include services as well? | 15 |
fomc | 1,996 | No, the top chart in the top panel includes just goods. | 13 |
fomc | 1,996 | Are the rest of these just goods, too? | 10 |
fomc | 1,996 | These are all goods in nominal terms. | 8 |
fomc | 1,996 | It doesn't show on the charts on the next page or at least it doesn't show clearly as I understand this, but exports of services are growing more than exports of merchandise, are they not? | 38 |
fomc | 1,996 | My memory would be that, for example this year, we have exports of merchandise growing 7 percent and exports of goods and services together growing 5 percent. Next year it is 11 and 9 percent. | 43 |
fomc | 1,996 | So you have services pulling the overall rate of growth down? | 12 |
fomc | 1,996 | Yes, services are pulling it down. Last year services in the GDP accounts grew only 1-1/2 percent over the four quarters. I hesitate to offer a firm opinion because this calculation may not have been done correctly. There were revisions and we tried to incorporate them in the historical GDP numbers. Whether the revisio... | 102 |
fomc | 1,996 | Is there any reason to assume that the growth of services in foreign trade is being skewed by the relative performance of trade with developing countries versus industrial countries? | 31 |
fomc | 1,996 | Because you come from New England, you probably think that your region is providing a lot of services. | 20 |
fomc | 1,996 | That don't get measured, yes. | 7 |
fomc | 1,996 | That don't get measured in. I have the same bias, but I have not been able to convince anybody that the treatment is wrong. | 27 |
fomc | 1,996 | We believe that, but maybe like a lot of the other things we believe, it isn't true. | 20 |
fomc | 1,996 | President Hoenig. | 4 |
fomc | 1,996 | Mike, I have a question on the housing sector. We are seeing some quite good increases in the average price of houses in our area and some buying in the expectation of further increases. That may help to explain the run-up in mortgage rates. What do the data show more generally about housing prices? Are you seeing any ... | 80 |
fomc | 1,996 | If we look at the constant quality or repeat sales prices, there has been some pickup in house price inflation over the past year or so. This is uneven across the country. Your regional market may be experiencing some pressures that we wouldn't find elsewhere. | 49 |
fomc | 1,996 | Do you see it in terms of anticipatory buying more generally? | 13 |
fomc | 1,996 | I don't recall that that stood out in any major way in the Michigan Survey, for example, where people are able to cite that kind of factor as a reason why they think this is a good time to buy a home. | 45 |
fomc | 1,996 | Governor Meyer. | 3 |
fomc | 1,996 | Mike, at the top of Chart 14 there is a red line labeled productivity trend. "Trend" tells us about slope and growth rate, but is there a level connotation here as well? Is that similar to what we would get if we were asking what the level of output is relative to potential? | 62 |
fomc | 1,996 | We would take this as a reasonable representation of where productivity is relative to the trend and say that we are pretty close to trend growth, thus arguing against a big pickup or decline in the near term. | 40 |
fomc | 1,996 | Do you measure separately an actual potential output gap as opposed to a labor market utilization gap? | 18 |
fomc | 1,996 | We do have corresponding numbers. | 6 |
fomc | 1,996 | And is it just an Okun's Law transformation or is it done separately? | 16 |
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