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fomc | 1,996 | Governor Lindsey. | 3 |
fomc | 1,996 | I am certainly no advocate of withdrawing from the world, Two issues have been raised. The first has to do with what I would call the dual purposes here, which is concern about withdrawal from the world versus a domestic political consideration. As some members have emphasized in this discussion, there certainly will c... | 394 |
fomc | 1,996 | Iran. | 2 |
fomc | 1,996 | Iran, okay. We do not need a repurchase agreement with Iran right now. | 17 |
fomc | 1,996 | They have their own printing press! [Laughter] | 11 |
fomc | 1,996 | Let us think about the Indian rupee or the Chinese renminbi. | 15 |
fomc | 1,996 | These are repurchases involving U.S. Treasury securities. | 11 |
fomc | 1,996 | All right, let us pick the case of a repurchase agreement with China. | 16 |
fomc | 1,996 | In dollars. | 3 |
fomc | 1,996 | In dollars. Let us think about the odds that the transaction would be used to prevent systemic contagion to the U.S. banking system versus the odds that it would be used for domestic political considerations because the Chinese are selling us too many shirts or whatever it is. Do you want to give me the odds on that? I... | 356 |
fomc | 1,996 | I would be astounded, since you addressed the question to me, if the duration were more than a few days. My main motivation for getting the reverse repo capability for the Desk is that I do not want to deprive us, the FOMC, of a useful tool for our own purposes. I am not really motivated by the objective of helping oth... | 413 |
fomc | 1,996 | I agree. | 3 |
fomc | 1,996 | President Stern. | 3 |
fomc | 1,996 | I have just a couple of comments. I think swaps have outlived their usefulness. My recollection is that one of the problems we have encountered with them is that foreign central banks have wanted to draw on their swap lines at times we did not think it was such a good idea. I remember some balance sheet window-dressing... | 280 |
fomc | 1,996 | President McTeer. | 5 |
fomc | 1,996 | I am not a fan of intervention by the United States in foreign exchange markets, and in any event we probably do not need swap arrangements for that purpose. However, our swap partners might have such a need, so I am not sure what we would gain by giving up the flexibility to accommodate that need before we have an alt... | 175 |
fomc | 1,996 | President Melzer. | 4 |
fomc | 1,996 | Alan, I cannot add anything that has not already been said on the swaps issue. I do want to say that I have a lot of sympathy for what Bill McDonough said in terms of how we ought to be thinking about this issue looking forward. We ought to focus on making sure that we maintain the U.S. dollar as the principal reserve ... | 239 |
fomc | 1,996 | Any further comments? | 4 |
fomc | 1,996 | I just want to reiterate what Gary Stern said before. For better or for worse, my understanding of the way swaps work is that there is an activation process of some sort and then an actual use. There are principles and rules that apply and so on. I think we need to be very flexible as we move forward, and I think we ou... | 195 |
fomc | 1,996 | Further remarks or questions? If not unless I hear an objection, I think we probably ought to move forward and see whether we can get some responses on this general issue from our counterparties and bring those observations back to the Committee the next time we discuss this operation. Is that okay with everybody? | 59 |
fomc | 1,996 | Mr. Chairman? | 4 |
fomc | 1,996 | Yes. | 2 |
fomc | 1,996 | Could I remind Committee members that there is an opportunity to submit revisions of their forecasts? It would be very helpful to us if those could be sent to me by close of business on Monday to give us time to incorporate them in our draft of the Humphrey-Hawkins report. | 56 |
fomc | 1,996 | If I could just add a remark that is probably gratuitous and unnecessary, but I will make it anyway. There were many references to the tremendous importance of the upcoming Humphrey-Hawkins testimony, and that testimony is going to be infinitely more meaningful if all of us maintain a very studied silence in the meanti... | 63 |
fomc | 1,996 | Do you have a date for that testimony? Mr. COYNE. It's scheduled for Thursday, July 18. | 24 |
fomc | 1,996 | The next meeting is August 20th. We will adjourn for lunch. | 17 |
fomc | 1,996 | The first item on the agenda is approval of the minutes of the July 2-3 meeting. Would somebody like to move them? | 27 |
fomc | 1,996 | Move approval. | 3 |
fomc | 1,996 | Without objection. Peter Fisher, you are on. | 10 |
fomc | 1,996 | Thank you, Mr. Chairman. I will be referring to the two pages of color charts distributed this morning. [Statement--see Appendix.] | 28 |
fomc | 1,996 | Peter, I think we have all been aware of a tendency that seems to go against our theoretical preconceptions. I am referring to occasions when we have seen a significant rise in long-term interest rates, which one would presume would have a firming effect on the dollar. Yet, what obviously was happening on some days was... | 151 |
fomc | 1,996 | We have not tried systematically to segregate those episodes. We have observed the phenomenon that you referred to, and that is something we could try to do, although it is quite tricky. I think the causation tends to run in both directions at times such as those you are referring to. So I am not sure-- | 64 |
fomc | 1,996 | What is required here is that sales of securities denominated in U.S. dollars occur against purchases of foreign currencies. The mere sale of U.S. securities does not in and of itself have any impact on the dollar. Is there any additional evidence related to those episodes that could conceivably give us some insight in... | 89 |
fomc | 1,996 | I do not want to be quoted as saying it is hopeless, [laughter] but it may be akin to looking for a needle in a haystack. | 32 |
fomc | 1,996 | You will look nevertheless. [Laughter] | 9 |
fomc | 1,996 | It will be quite a challenge. Let me think about that, and maybe Don Kohn and I can come up with ways to sort it out. It really is tough to do much better than to talk to as many of the major market participants as one can and get a sense of what they were seeing major accounts doing. Sometimes those accounts are liqui... | 222 |
fomc | 1,996 | Could we at least look at the Desk's records to identify these episodes and see what proportion were associated with a weakened dollar and what proportion with a strengthened dollar? | 32 |
fomc | 1,996 | Yes, we will. | 5 |
fomc | 1,996 | That might be helpful just to see what the trends are. | 12 |
fomc | 1,996 | We can certainly look at the daily correlations, Mr. Chairman, to see how the bond and the exchange markets were moving. I think it is still true, though Charles Siegman may want to comment on this, that over time the dollar and interest rates tend to move together. But there is a lot of ceteris paribus behind that ten... | 97 |
fomc | 1,996 | On the famous Fridays once a month, we get a lot of evidence of spikes in both directions, and that might be a useful laboratory to see what happens. | 32 |
fomc | 1,996 | Don's comment about real interest rates is obviously important. If other news in the market is interpreted in a way that leads to rising inflationary expectations, then long-term interest rate movements need not necessarily affect the dollar. | 43 |
fomc | 1,996 | You are really confirming what Peter Fisher said. Jerry. | 11 |
fomc | 1,996 | I want to turn to domestic operations, Peter. Looking at the daily information you reported and your problems over this intermeeting period, it seemed to me that there were at least three significant parts of the story that were not mutually independent. But I could not tell from your reports which was the most importa... | 304 |
fomc | 1,996 | Let me try to answer that, and I invite Don to jump in after I have made the first stab. Your three factors were sweep accounts, demand for currencies from overseas, and then just general demand for reserves. | 43 |
fomc | 1,996 | Derived from bank credit growth. | 6 |
fomc | 1,996 | Right. The nexus that we have been looking at is really the first and third together. As sweep accounts continue to "sweep" the nation, the level of vault cash that is applied to bank reserves becomes much more important. What we are observing here is a weekly, moving phenomenon, with Friday flows in and out for weeken... | 169 |
fomc | 1,996 | President Jordan, with respect to the third factor, I think the evidence for unexpected demands for money and credit or intermediation services through the banks is not strong in this period. If anything, money growth in July came in weaker than we were expecting. While it strengthened in August, it is still growing al... | 174 |
fomc | 1,996 | This week-to-week, day-to-day problem is clearly something we are spending a great deal of time focusing on. I think this episode reflected a unique confluence of events; everything conspired against us at the same time. But we are still focusing nonetheless on how to track the week-to-week changes. | 61 |
fomc | 1,996 | Any further questions for Peter? If not, would somebody like to move to ratify the operations of the Domestic Desk? | 24 |
fomc | 1,996 | So move. | 3 |
fomc | 1,996 | Without objection. You may remember that at our last meeting, Bill McDonough and I were sent on a mission to the BIS to discuss the issue of swap arrangements I thought I would bring the Committee up to date on our discussions and suggest where I think this leaves us in terms of moving forward on the range of issues we... | 415 |
fomc | 1,996 | Mr. Chairman, I share the view that, since the swap lines are essentially anachronistic, it would have been better if we had had a more receptive response But certainly your report on our meetings with them is absolutely accurate both in content and tone. Since those conversations took place in July, the atmosphere of ... | 203 |
fomc | 1,996 | We have to be careful not to allow what are essentially financial anachronisms to continue to embody themselves in our financial system. Were these swap arrangements a potentially dangerous or malignant problem, one could trade off the concerns of against other considerations. But that does not seem to be the problem. ... | 99 |
fomc | 1,996 | I very much agree with that. I would hope that the staff could do their work so that we would be in a position to discuss the reverse repos in September. As I mentioned at the last meeting, I think the likelihood of our using a reverse repo capability would be very, very low, and we would make sure that there were all ... | 231 |
fomc | 1,996 | There are, however, foreign policy considerations involved here. | 11 |
fomc | 1,996 | Exactly, yes. | 4 |
fomc | 1,996 | Which I think the staff will address. Governor Lindsey. | 11 |
fomc | 1,996 | Mr. Chairman, I agree that this is not the time to dismantle the swap lines, but I have a question as to whether there really is ever going to be a good time. The establishment of the European Central Bank is not a foregone conclusion, although the odds may favor it. It is also unclear who is in and who is out. Even if... | 150 |
fomc | 1,996 | I think we will revisit this issue during the spring of 1998. At that point, we may conclude that the EMU is active, alive, and the ECB is about to happen. Because so many of our swap lines are with those EMU countries, we will have a window to reshuffle all our central bank financing arrangements. If it does not happe... | 104 |
fomc | 1,996 | Let us think about what the ECB is going to look like in 1998. I do not have the complete list of countries that we have swaps with, but I would wager that some will be in and some will be out. | 47 |
fomc | 1,996 | That may be, but the ones that will be in will provide an opportunity for us to readdress the issue. We can use that as the vehicle. | 31 |
fomc | 1,996 | Would it not be even more disruptive if we started to talk about getting rid of the swap lines at a time when, say, there was a great debate as to whether France or Britain met the criteria--I am just using that as an example--and we had some of Europe in and some of Europe out when the decision was made to go ahead wi... | 113 |
fomc | 1,996 | It is conceivable that you may be right. I doubt it myself, but I think our conversations with | 20 |
fomc | 1,996 | That is, not now? | 6 |
fomc | 1,996 | Not now. It may well be that when we review that again in the spring of 1998, if that is our plan, we will at that point conclude that we face such a mess that we will bite our tongue, so to speak, and say nothing about the issue. My guess at this stage is that the probabilities of the swap network disappearing by mid-... | 145 |
fomc | 1,996 | I have a question and a suggestion also. In your recommendation that we put this aside for two years, could you elaborate for us on Mexico and maybe Canada too with regard to the arrangements that we have with them? | 43 |
fomc | 1,996 | I think the NAFTA arrangements are essentially independent of this issue, and because they involve a different issue we will evaluate them completely separately from the other swap lines. | 32 |
fomc | 1,996 | Okay. Then, concerning what happens two years from now, I know this Committee cannot bind the Committee two years from now, but in the past we have been in the situation where the presumption was, it seems to me at least, that we would continue such arrangements unless somebody bore the burden of persuading the Committ... | 177 |
fomc | 1,996 | I certainly do not want to take a vote on this question. But if you are asking me personally, I agree with you. | 26 |
fomc | 1,996 | Good. | 2 |
fomc | 1,996 | President Broaddus. | 5 |
fomc | 1,996 | I was going to make basically the same point that Jerry Jordan did, Mr. Chairman. I understand the timing problem currently, but I think Larry Lindsey is right. It is very difficult to find a convenient time to do this. I am concerned that we are going to continue to drift with this issue, and I was happy to hear your ... | 132 |
fomc | 1,996 | It is conceivable that something may happen. The EMU may break down. Events may differ from what we expect. We all know the types of changes that can occur in the international financial system, both planned and otherwise, and circumstances could alter that system. All I am saying is that this issue will be back on our... | 94 |
fomc | 1,996 | Charles Siegman will start us off this morning, Mr. Chairman. | 14 |
fomc | 1,996 | Thank you. [Statement--see Appendix.] | 9 |
fomc | 1,996 | [Statement--see Appendix.] | 6 |
fomc | 1,996 | It had been the conventional wisdom in the business community that a strike tends to be inflationary in the sense that it creates an artificial degree of pent-up demand. That demand gets unleashed when the strike terminates and potentially induces some acceleration of economic activity that would not have occurred with... | 69 |
fomc | 1,996 | I am not aware of any. Certainly, in this particular set of circumstances, were there not to be a major damping of underlying demand trends--and I do not see why that would necessarily occur from a strike of plausible duration--the attempt to make up the lost production to meet the pent-up demand for autos would press ... | 136 |
fomc | 1,996 | What is the earliest date that a strike can occur? | 11 |
fomc | 1,996 | Our understanding is it would not occur before the expiration of the contract, which I believe is September 14. So, we presumably will have some information around the time of the next meeting. The strike target is, as I gather, to be announced on August 22. | 55 |
fomc | 1,996 | August 22. | 4 |
fomc | 1,996 | President Minehan. | 4 |
fomc | 1,996 | My memory on the subject of strikes is short because I have not been coming to these meetings for very long, but I was struck by the number of times the notion of a "strike" appeared as a factor underlying the analysis in the Greenbook, particularly in Part II. There were references to strikes that had just ended and t... | 208 |
fomc | 1,996 | That would depend on how the strike came out, whether, for example, it was a significant management victory. | 22 |
fomc | 1,996 | Yes. But just the fact that a strike occurred, I think, is something that is-- | 19 |
fomc | 1,996 | Well, I wonder. That is not so clear to me. There have been significant strikes in the past where evident union defeats had a very damping effect on labor unions. For example, the flight controllers' strike, which was quashed, did more to suppress union power than almost anything else in the 20th century. | 65 |
fomc | 1,996 | Yes, but I think that was in an environment in which people generally felt that unions were detrimental to the overall competitiveness of U.S. industry. They may still feel that way, but I think there is much more of a feeling now that the wage earner is the one who is bearing the brunt of efforts to improve U.S. compe... | 70 |
fomc | 1,996 | I would just note that in this auto industry situation there also are peculiarities that people will be focusing on in terms of whether the union is able effectively to set a pattern after they have negotiated an agreement with one of the auto makers. I think there are major questions about the mechanics of this negoti... | 88 |
fomc | 1,996 | President Jordan. | 3 |
fomc | 1,996 | I want to ask Mike Prell two questions. But first let me comment on what we have heard on the strike issue from auto supply companies and competing firms in our area. Maybe you have been hearing some similar or perhaps different things, Mike. Our contacts tell us that for General Motors, if they decide to take a strike... | 315 |
fomc | 1,996 | There is little I can say at this point because I do not really know the details of these revised data. One obvious implication is that, if our estimates are correct, we will have stronger final sales and stronger output. We also will get the same kind of inventory level that we estimated before, which suggests that in... | 145 |
fomc | 1,996 | Again, we have few details. For example, with respect to the composition of the decline of more than $2 billion in imports, about one fourth is accounted for by automobiles, and automobile exports went up a little. Inventory movements play a role in this sector. We just do not know how that will work out. Imports of in... | 159 |
fomc | 1,996 | The other question, Mike, has to do with Greenbook projections for the period. I was struck by the increase in nominal GDP of about .3 percentage point from the last half of this year to the end of 1997 with the same assumed federal funds rate. I noticed that starting with the fourth quarter of 1994, your four- to six-... | 143 |
fomc | 1,996 | This nominal GDP change is so small that it is going to be very hard to pin down all the factors that go into it from different directions. I don't think there is a major story here because, as I have said before, we do not approach the forecast in terms of taking interest rate assumptions and from that drawing directl... | 230 |
fomc | 1,996 | I have thought about that linkage, but the problem with that response is that I cannot convince myself that it is not circular. If you assume that we have had an inflation surprise, for whatever reasons, and you now think inflation could be higher than you previously thought--and as a result real interest rates would b... | 111 |
fomc | 1,996 | We have a monetary accommodation implicit in our forecast. | 10 |
fomc | 1,996 | Then you are saying faster money growth. | 8 |
fomc | 1,996 | We let the money stock be whatever it will be. Whether it actually comes out faster in our forecast is also a function of how the recent developments have influenced our views of the money demand relationship. We do not have faster money stock growth in this forecast. | 51 |
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