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fomc | 1,996 | President Boehne. | 5 |
fomc | 1,996 | I support your recommendation, Mr. Chairman. | 9 |
fomc | 1,996 | President Minehan. | 4 |
fomc | 1,996 | This is a tough period, and I have some sympathy for what President McDonough had to say. But I do think that a healthy discussion of where we all are should not be divisive or problematic to our staffs. In fact, I think the worst message that we could send would be to stop doing that at these meetings because people w... | 787 |
fomc | 1,996 | President Melzer. | 4 |
fomc | 1,996 | Thanks, Alan. I think there is considerable risk in waiting. The economy has enjoyed great benefits from this period of low and stable inflation, particularly given how expectations have been affected. I agree with what Don Kohn said earlier--namely, that we should not lose sight of the fact that the credibility of the... | 275 |
fomc | 1,996 | Governor Rivlin. | 4 |
fomc | 1,996 | Mr. Chairman, I strongly support your recommendation both with respect to current monetary policy and with respect to asymmetry. I am intrigued, as others I think are, by your disaggregation of the productivity data because it provides us with at least a partial explanation of the mystery of why wages have been rising,... | 127 |
fomc | 1,996 | Governor Kelley. | 3 |
fomc | 1,996 | I support your recommendation, Mr. Chairman. | 9 |
fomc | 1,996 | President Hoenig. | 4 |
fomc | 1,996 | Mr. Chairman, I am uneasy about waiting. I think that cost pressures are building. I, like President Moskow, was fascinated by the productivity discussion and would like to see that analysis. If I were voting, I would say that I prefer to move now, but I would accept your recommendation. | 61 |
fomc | 1,996 | Governor Phillips. | 3 |
fomc | 1,996 | I support your recommendation of "B" asymmetric. | 10 |
fomc | 1,996 | President Guynn. | 4 |
fomc | 1,996 | Mr. Chairman, I could support a decision not to change policy at this time, and if I had a vote this year, I would vote "yes." As Governor Rivlin noted in the earlier go-around, we can take great pride in the low inflation and the strong real activity that we have achieved. At previous meetings, I was among those who a... | 533 |
fomc | 1,996 | Governor Meyer. | 3 |
fomc | 1,996 | My decision at this meeting is more difficult than at the past two meetings. Indeed, leading up to this meeting, I was feeling the pain associated with fence sitting, hoping the data would push me decisively in one direction or the other. No such luck. I believe that increases in utilization rates should in general be ... | 421 |
fomc | 1,996 | Governor Lindsey. | 3 |
fomc | 1,996 | Thank you, Mr. Chairman. I was very struck with the group of prominent economists that Cathy Minehan assembled at her Bank. That is in part because I learned a lot of economics from the people in that group, and I do not think that they are at all unrepresentative of what I would consider mainstream academic thinking. ... | 379 |
fomc | 1,996 | President Stern. | 3 |
fomc | 1,996 | I agree that it is a close call. At the broadest level, the performance of the economy has been favorable. It has been characterized by growth at or above trend and by low inflation. In recent months, it appears that the pace of the expansion and demand are slowing as anticipated and inflation has been quiescent. If I ... | 348 |
fomc | 1,996 | Governor Yellen. | 4 |
fomc | 1,996 | Thank you, Mr. Chairman. I can support your proposal to adopt an unchanged policy with an asymmetric directive and to continue to evaluate incoming data as it bears both on the degree of momentum in demand and the inflationary pressures latent in the current environment. But I find myself very close to the margin and w... | 524 |
fomc | 1,996 | Thank you. Would you read "B" asymmetric? | 11 |
fomc | 1,996 | The draft directive wording is on page 13 of the Bluebook: "In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and givin... | 111 |
fomc | 1,996 | Call the roll. | 4 |
fomc | 1,996 | Chairman Greenspan Yes Vice Chairman McDonough Yes President Boehne Yes President Jordan Yes Governor Kelley Yes Governor Lindsey Yes President McTeer Yes Governor Meyer Yes Governor Phillips Yes Governor Rivlin Yes President Stern No Governor Yellen Yes | 47 |
fomc | 1,996 | We will now go on to the next item on the agenda. | 13 |
fomc | 1,996 | Mr. Chairman? | 4 |
fomc | 1,996 | Yes. | 2 |
fomc | 1,996 | I have a procedural question. When would it be good to stop for lunch? [Laughter] | 20 |
fomc | 1,996 | I had not looked at the clock but that is a very valid question! | 15 |
fomc | 1,996 | It was Mike Prell's question and I agree with it. The members and staff could get their lunch and return to this room with it; it could be a break of about 5 minutes. | 40 |
fomc | 1,996 | I will take it not as a suggestion but as a mandated response to somebody who knows. We will adjourn for lunch, but we will still be in the meeting when we return. [Lunch break] | 41 |
fomc | 1,996 | Peter Fisher has laid out what seems to be a reasonable proposal on the issue of our foreign currency investments. He is requesting that we replace the current 12-month maturity constraint on the investment of System foreign currency holdings with an 18-month duration constraint. Before you hold forth on your positions... | 80 |
fomc | 1,996 | I understand the issue of trying to get some of these holdings off the Bundesbank's balance sheet. What are our alternatives in terms of doing that? Is this proposal the only option? I can think of some theoretical alternatives, but I do not know whether they are worth much. For example, we could diversify into some sh... | 114 |
fomc | 1,996 | Certainly we have. We have not thought about reducing the D-mark position. That is, I take my responsibilities in the investment of our foreign currency reserves to be independent of their level. So, I am left with the task of taking a given quantity of deutsche marks and investing them. There are other avenues and oth... | 538 |
fomc | 1,996 | What does extending the maturity of our foreign currency investments do in terms of exposing us to greater loss? This comes to mind because we have this issue of our surplus, and that gets us into potential foreign currency losses among other things, | 46 |
fomc | 1,996 | It does nothing unless the Board changes the accounting rules, and we start marking the securities to market. We currently do not mark the securities value of the SOMA portfolio, the domestic portfolio, to market. We have not marked to market the securities value of the short-term foreign currency bonds that we hold no... | 211 |
fomc | 1,996 | President Jordan. | 3 |
fomc | 1,996 | Peter, I agree that we need to get our deutsche mark holdings off the Bundesbank balance sheet, and I would agree with that even if Maastrict had not put them on an euthanasia program. [Laughter] Eventually, you are going to be getting out of mark-denominated assets because there won't be D-mark assets. I think the iss... | 126 |
fomc | 1,996 | If I could just interrupt, we could not buy any private assets other than bank deposits. We should have mentioned that in the memo. It may be useful to note as background that, before the Monetary Control Act, we could only hold our foreign currency balances in the form of bank deposits. The Monetary Control Act added ... | 86 |
fomc | 1,996 | I think that is something we need to preserve, and other central banks around the world would be wise to do the same. On the subject of duration, there are people around the table who know more than I do about it and how to use it appropriately. I understand that it has had a very profound and a very desirable effect o... | 269 |
fomc | 1,996 | I would like to comment on that. After spending much of the last five years looking at the foibles of other central banks and their investment strategies and trying to make sure that we do not fall into some of those traps, I think there are two problems--you point to one of them--that can arise in using any kind of be... | 662 |
fomc | 1,996 | Have you thought about how the Bundesbank might implement the eventual transition to the new euro? | 18 |
fomc | 1,996 | I have begun to think about that. It has been my assumption that we would leave our deutsche mark holdings unchanged as they are transfigured into euros. And when that happens, we would then be a participant in the novel question of what the euro yield curve will be--whether, for example, German paper will determine lo... | 107 |
fomc | 1,996 | Can I ask a follow-up question? I assume that whether our deutsche mark portfolio becomes a euro portfolio has to do with what we decide is the key intervention currency. | 33 |
fomc | 1,996 | Yes. | 2 |
fomc | 1,996 | The reason we are in deutsche marks is not because we love deutsche marks. It is because it is the right intervention currency and therefore we sold our relatively small holdings of French francs, Swiss francs, pound sterling, and so on and put it all in deutsche marks. If we came to the conclusion over time that we wo... | 130 |
fomc | 1,996 | Governor Lindsey. | 3 |
fomc | 1,996 | Peter, the word "euthanasia" has been used and I think it is appropriate. One of the options you did not address was to dispose of our DM holdings. President Jordan may be right in saying that this is not the time to consider that issue, but we need to decide at some point why we are still in this. Why do we still hold... | 154 |
fomc | 1,996 | Our deutsche mark reserves will not disappear; they will be converted into euros. The euro will be a major reserve currency of the world even if it is subject to a great deal of volatility. It is my forecast that there will be some volatility, indeed quite a bit I would think, in the early years of the euro. And I beli... | 254 |
fomc | 1,996 | The reason is that the interest rate risk that you are discussing is trivial in comparison to the exchange rate risk, especially in the transition to the euro. That is why it comes back to you. But if we are going to consider this question another day, I am reassured. Let's consider it another day. | 62 |
fomc | 1,996 | President Hoenig. | 4 |
fomc | 1,996 | Just a follow-up, Peter. I want to make sure I understand the reason for your average duration proposal. Did you choose the 18-month duration because that leaves you within the bounds of intervention amounts that we have done in the past? What is the reason for the 18 months if it does not relate to that? | 65 |
fomc | 1,996 | If we just take the norm of historic interventions, we would not have to go out to 18 months in order for me to have a 10-month maturity duration target. But the day could come when the decision would be made to intervene using, say, half of our reserves, which would be three times the largest intervention amount used ... | 229 |
fomc | 1,996 | President Melzer. | 4 |
fomc | 1,996 | Thanks, Alan. I want to pursue an issue that Ed Boehne brought up. Peter, I understood what you said about how we account for this, but regardless of the accounting, there is an economic exposure. Could you give us some idea of our exposure right now with the 12-month maturity limit, given how we typically invest our c... | 166 |
fomc | 1,996 | We have been spelling out some of the risks in the quarterly report that we have been sending you. The immediate answer that I have to your question is what I referred to in the memo. We did a simulation over an entire interest rate cycle and looked at what would happen if we were marking to market the entire portfolio... | 67 |
fomc | 1,996 | Yes, that is the question I am asking. | 10 |
fomc | 1,996 | There was no quarter in which a deutsche mark portfolio structured as proposed would have had a net loss; that is, the capital value loss would have been exceeded by the earnings. | 35 |
fomc | 1,996 | The interest earnings offset the capital losses? | 8 |
fomc | 1,996 | Yes, over the last 10-year interest rate cycle. Moving 15 percent of our holdings as proposed implied a pickup over a normal investment cycle of about 20 or so basis points over the income produced by our current approach to investing. Now, I do not have immediately in mind an answer to your question in the way you str... | 69 |
fomc | 1,996 | Okay. | 2 |
fomc | 1,996 | Governor Meyer. | 3 |
fomc | 1,996 | Peter, let me ask you a question to help further my education. I took two things out of the memo. One, you want to switch to an average duration limit as a way of measuring the overall liquidity of the portfolio. The second issue was more interesting and seemed to be the real question, i.e., whether there was a case fo... | 246 |
fomc | 1,996 | We tried to make clear several other points in the memo. First, I do not urge the Committee to adopt the 18-month duration limit solely for its liquidity measurement purposes. I think it is a replacement for the current 12-month maturity ceiling which was intended to limit both price risk and force a certain amount of ... | 574 |
fomc | 1,996 | I thought the compelling story was the German balance sheet, but some of the same issues come up when we talk about the liquidity of the SOMA portfolio. | 31 |
fomc | 1,996 | They are similar. | 4 |
fomc | 1,996 | The difference is that the way you buy differs from the way you sell, and that is really my question. You have the same situation domestically in that liquidations occur at the short end but buying occurs over a wide maturity range. I want to understand what you achieve by buying over a wider maturity span than you int... | 67 |
fomc | 1,996 | I'm sorry; I meant to answer your question there as well. I do not mean to say that I will automatically liquidate only at the short end when there is a need to liquidate large amounts. Indeed, many central banks--the European central banks--discovered during the period of market tensions in the early 1990s that it is ... | 180 |
fomc | 1,996 | There is one other factual point that it might be useful to note, and I think you referred to it in the memo, Peter. That is that one of the characteristics of the German money market is that they do not have a lot of short paper. That reflects a policy decision on the part of the Germans, and I might add a policy deci... | 225 |
fomc | 1,996 | It would be my hope and something of an expectation that in the event we move to euros, we will find a deeper short end. And when it is all denominated in one currency, we may find it much more comfortable to be invested in French government bills and to have a shorter duration to the portfolio. | 62 |
fomc | 1,996 | Any further questions for Peter? | 6 |
fomc | 1,996 | I was going to move approval. | 7 |
fomc | 1,996 | Let's first have the Deputy Secretary read what we will be voting on. | 14 |
fomc | 1,996 | This would amend Paragraph 5 of the Authorization for Foreign Currency Operations. The new wording is found at the bottom of page 1 of Mr. Fisher's memo dated September 13, and it would replace the first two sentences of the existing wording in the Authorization. The new wording is as follows: "Foreign currency holding... | 129 |
fomc | 1,996 | Would you like to move it? | 7 |
fomc | 1,996 | I move approval, Mr. Chairman. | 8 |
fomc | 1,996 | Is there a second? | 5 |
fomc | 1,996 | Second. | 2 |
fomc | 1,996 | All in favor say "aye." SEVERAL. Aye. | 14 |
fomc | 1,996 | No? The "ayes" have it. The next item, which is the final item on the agenda, is a request from Peter Fisher for the members' views on the liquidity management and maturity structure of the System's domestic portfolio. Does anyone have any questions to ask Peter before we move to the specific views of the members? Gove... | 69 |
fomc | 1,996 | I think this is where the issues come up that I started to get into with respect to the investment of our foreign currency reserves. It seems to me that what you are talking about in terms of the portfolio is a compromise between two ideas that I call buy-side neutrality and sell-side liquidity. I am struggling to lear... | 278 |
fomc | 1,996 | Yes, I think it is. Let me make one comment because it might help other members to comment on it: I wish I had made this point clear in my memo. In addition to the two different kinds of neutrality you are pointing to, there are two very different kinds of sell-side neutrality. One is a very short-run, sell-side neutra... | 261 |
fomc | 1,996 | Any further questions? What Peter needs to have from the members is some reaction to his memorandum so that he can move forward. | 25 |
fomc | 1,996 | I think the case for moving toward a somewhat more liquid portfolio makes a lot of sense. I don't know whether it ought to be 60 percent bills, or 2/3 bills, and the rest coupons, but I think Peter rather persuasively laid out the case that we need to move in that direction. Perhaps the way to do it would be to move to... | 132 |
fomc | 1,996 | While Sandy Krieger thinks about how long the transition might take us, I would note that to move in that direction we probably would need to have the Treasury treat us explicitly as an "add-on" in the bill auctions. They do not do that now because, as deficits have come down, they have been contracting their bill offe... | 179 |
fomc | 1,996 | I think we ought to move in that direction and then take another look at it. We might not wait five years but might look toward getting a progress report two or three years from now to judge if the 60 percent makes sense. I don't think there is an absolutely right number, but I think we know the direction in which we o... | 79 |
fomc | 1,996 | In the past, we have discussed the possibility of having an agreement with the Treasury to swap maturities with them in the event of a need on our part to liquefy a significant amount of our portfolio. I have forgotten what the answer was. Does anyone recall what it was? | 57 |
fomc | 1,996 | I do not recall. | 5 |
fomc | 1,996 | I do not have a sense of a definitive answer from the Treasury on that. | 16 |
fomc | 1,996 | Let me start from scratch. If we have a maturity structure problem that would prevent us from selling a desired amount of securities at specific times, that would make us lean toward a much more liquid portfolio. But what is there to prevent us from making an agreement with the Treasury to have them swap two-day bills,... | 71 |
fomc | 1,996 | I do not know of any constraint on that. | 10 |
fomc | 1,996 | As we sold the bills, it would make the average maturity of the debt in the hands of the public much shorter. | 24 |
fomc | 1,996 | Exactly. I am only raising the issue of the difficulty of selling coupon issues in the market and as a consequence either affecting the price or affecting our earnings. If on the other hand we made a straight swap with the Treasury, that presumably would not be an issue. | 53 |
fomc | 1,996 | That approach would help in terms of averting the effect on prices in the market if there were a concern about selling coupons because there was a flight to liquidity as well as to quality. Presumably, the Treasury would do it at the market value of the securities. | 53 |
fomc | 1,996 | You can't conclude that there would be no effect on market prices because if we swapped out of coupons into short-dated bills that are going to mature, the Treasury would have to issue new debt. We don't know what their marketing strategy would be, so we don't know what the price effect would be. | 60 |
fomc | 1,996 | What we would effectively have done is to require them to refinance fairly quickly. But depending on the maturity of the bills, even if we made it a 20-day maturity, that would not really affect our ability to sell the bills, but it could make it easier for the Treasury to choose an appropriate time frame to refinance.... | 87 |
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