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fomc | 1,996 | But without knowing what their overall deficit financing strategy is, it would be hard for us to-- | 19 |
fomc | 1,996 | There is no doubt that the Treasury's reaction to this would be 110 percent negative before they heard the end of the sentence. That does not make it the right answer. | 35 |
fomc | 1,996 | I think this is an issue because regimes and ideas at the Treasury change periodically. Like Ed Boehne, I think that increasing the liquidity of our portfolio is the right thing to do. Liquidity is not just a primary portfolio objective. It is so far out in front that I do not even know what the second objective is. An... | 93 |
fomc | 1,996 | We do not care about the earnings aspect and we should not because it is merely a bookkeeping transfer between ourselves and the Treasury. I do not know if there is a problem here. There would be a big problem if the net issues of Treasury debt to the public were disproportionately in the form of short-term bills becau... | 88 |
fomc | 1,996 | But why wouldn't it if we are adding to our short-term portfolio in an era of, say, low deficits? Why wouldn't that allow the Treasury to ease off on its issuance of long-term debt and move the whole maturity structure of the debt toward short term issues? | 53 |
fomc | 1,996 | If you move the debt to short term, it is the outstanding debt, not the budget deficit, that determines the impact of-- | 26 |
fomc | 1,996 | I would imagine that to accommodate a growing money supply and a move toward liquidity on our part over time the Treasury is going to have to respond in an era of low deficits by lowering the average maturity of the debt structure. I think that is the incentive we are creating. | 54 |
fomc | 1,996 | Versus doing what? | 5 |
fomc | 1,996 | If the deficit comes down and we are increasing our take of the short-term debt, why wouldn't they have to respond by moving into supplying more short-term debt? | 32 |
fomc | 1,996 | Some 20 percent of the $6 trillion debt rolls over every year and needs to be reset at the average 5-year maturity of the existing debt. The Treasury needs to refund over a trillion dollars of maturing debt every year | 46 |
fomc | 1,996 | Vice Chairman. | 3 |
fomc | 1,996 | Raising the issue of being able to do swaps with Treasury would add another item to the list of possible liquidity resources in Peter's paper. Rather than working out a deal that would involve 2-day paper, or perhaps 20-day paper, we probably should instruct our Manager, in dealing with Darcy Bradbury's successor, to s... | 117 |
fomc | 1,996 | Why don't you talk to them over there and see whether they slam the phone down before you can get a couple of words in. They are more than disinclined to listen to anything that complicates their task because they think they are over their heads with work. If you impose any more work on them, you are not a friend. Any ... | 76 |
fomc | 1,996 | Thanks, Alan. I have one question for Peter. After looking at this, I would agree with what has been said. I think liquidity is the most important objective, and as you said, what we earn on our portfolio does not really matter. It is not like the foreign portfolio where there is some tradeoff between liquidity and ear... | 68 |
fomc | 1,996 | Those are real earnings! | 5 |
fomc | 1,996 | That's right. The question I have, Peter, relates to the loans of Treasury securities by the Desk to dealers in government obligations if there is a delivery squeeze involving particular issues. If we went all the way and at some point got to a "bills only" portfolio, would your inability then to lend securities create... | 75 |
fomc | 1,996 | That is a good question. I am somewhat uncomfortable with our current securities lending program, to say the least. The program itself goes back to the period before government securities were in book entry form. It was designed to deal with the tardiness in the paper clearing process. With the development of book entr... | 164 |
fomc | 1,996 | Okay. | 2 |
fomc | 1,996 | But perhaps on another occasion I may come back and talk to the Committee about some of those more mechanical issues. | 22 |
fomc | 1,996 | Maybe you can get rid of it in the context of this portfolio issue. | 15 |
fomc | 1,996 | We might be able to. I might add that even if our coupon portfolio went down to 20 percent or 30 percent or 40 percent of the total, we would still have plenty of securities to lend, given the kinds of limits that we impose. But that would not be an obstacle to me, and I do not think it would be viewed as a serious mat... | 79 |
fomc | 1,996 | If we went to bills only, the earnings of the System would be highly correlated with the federal funds rate. Would it be assumed that as earnings go up we are going to use those funds to go out on the town or something like that? | 49 |
fomc | 1,996 | Probably. | 2 |
fomc | 1,996 | I am sure someone would assume that. | 8 |
fomc | 1,996 | We could use the profits to support our "airforce"! | 12 |
fomc | 1,996 | Governor Phillips. | 3 |
fomc | 1,996 | I agree with the recommendation of trying to increase the liquidity of the System portfolio. I am not sure that I know what the right percentage is, but I take your point. I also appreciate your efforts, Peter, to try to identify and analyze the previous portfolio objectives. I take it that what you plan to do followin... | 146 |
fomc | 1,996 | Absolutely. I am hearing some encouragement of the super preeminence of liquidity, which will be reflected in our effort. | 24 |
fomc | 1,996 | You do have it as the first item in your list, but then I can't quite tell where else it fits in. | 24 |
fomc | 1,996 | Any other comments? President Minehan. | 8 |
fomc | 1,996 | This may be a naive question, but is liquidity absolutely determined by the percentage of bills in the System portfolio? A priori, the more bills, the more liquidity? Are not the other securities that are commonly used in repo transactions every bit as liquid or is that not accurate? | 55 |
fomc | 1,996 | There is certainly a good deal of depth to the long end of the yield curve, but given the history and current structure of the Treasury securities market, there is no doubt in anyone's mind that the bill sector is much more liquid. Now, I think that we have to stay in touch with a possible evolution at the Treasury on ... | 109 |
fomc | 1,996 | That is less liquid, yes. | 7 |
fomc | 1,996 | That is not an immutable fact, but it is a fact today and has been a fact for the last couple of decades. | 25 |
fomc | 1,996 | I know the presumption is that the bill area is more liquid; there are more securities at that end, although I believe that the Treasury has been extending the overall maturity structure. | 36 |
fomc | 1,996 | The Treasury has shortened the debt structure. | 8 |
fomc | 1,996 | Liquidity through repos, or the ease with which one can arrange them, decreases in a crisis atmosphere. It is precisely then that we may really need a liquid portfolio. There is never a question about, say, 12-day bills, whereas finding counter-parties may be difficult when we want to do repos during a crisis. Everyone... | 72 |
fomc | 1,996 | The other point on the liquidity of bills, President Minehan, is that we could absorb reserves very readily by simply allowing them to run off at maturity. | 31 |
fomc | 1,996 | Right. | 2 |
fomc | 1,996 | That was one reason why the Committee decided in the mid-1980s to shift more of the portfolio toward bills because that meant that outright sales in the market would not be required to accomplish a large amount of reserve absorption. | 45 |
fomc | 1,996 | I would just note that we are also using the traders' definition of liquidity, which is the ability to execute transactions in volume without moving price. Clearly, the long end is less liquid in that sense. The further out the maturity curve we go and the more we are selling, the bigger the price effect we will have. | 65 |
fomc | 1,996 | Right. But I would think that if we went to an all bills strategy, we would have complications associated with how large a share we are of the auction and perhaps how large a share we own of any given issue. That might be a problem as well. So, I think some gradual move to a more liquid position without going all the w... | 102 |
fomc | 1,996 | I think in the past the Committee has talked about conducting at least some transactions in the coupon end of the market just to be in the market from time to time, and the possibility of buying coupons in certain unusual circumstances probably should not be ruled out. It is something that the Desk has done in the past... | 94 |
fomc | 1,996 | Further comments or questions? Peter, do you think you have enough to move forward? | 17 |
fomc | 1,996 | I will take a stab at the next step. Thank you. | 13 |
fomc | 1,996 | Very good. The next meeting is scheduled for Wednesday, November 13. We have now concluded this meeting. | 22 |
fomc | 1,996 | Good morning, everyone. The first item of business is to welcome John Moore, who as you know is First Vice President of the San Francisco Bank and is attending his first meeting. It means that Peter Fisher has to be on his best behavior! | 49 |
fomc | 1,996 | Why me? [Laughter] | 7 |
fomc | 1,996 | But before he exhibits that good behavior, I would like somebody to move approval of the minutes for the meeting of September 24. | 26 |
fomc | 1,996 | I move it, Mr. Chairman. | 8 |
fomc | 1,996 | Without objection. Now, Mr. Fisher. | 9 |
fomc | 1,996 | Thank you. [Statement--see Appendix.] | 9 |
fomc | 1,996 | Questions for Peter on either subject? | 7 |
fomc | 1,996 | I would like to congratulate Peter on his record period of nonintervention. | 15 |
fomc | 1,996 | I would like to second that. [Laughter] | 11 |
fomc | 1,996 | Congratulate the Chairman | 5 |
fomc | 1,996 | Yes, I think congratulations are due at the other end of the table, but since I get beat up occasionally down here, I will take what I can get! | 33 |
fomc | 1,996 | If you had not run the Desk as well as you did, we would not have had a choice up here. If there are no questions on either subject, would somebody like to move the renewal of the reciprocal currency arrangements, which expire during December, and ratification of the domestic transactions? We will vote separately on ea... | 83 |
fomc | 1,996 | The Committee would be giving me the authority to negotiate their renewal. | 13 |
fomc | 1,996 | So move, Mr. Chairman. | 7 |
fomc | 1,996 | Is there a second? | 5 |
fomc | 1,996 | Second. | 2 |
fomc | 1,996 | All in favor of the authority to renew the swap lines say "aye." SEVERAL. Aye. | 22 |
fomc | 1,996 | Any opposed? | 3 |
fomc | 1,996 | Hearing none, they are approved. The second motion-- | 12 |
fomc | 1,996 | To ratify our domestic operations. | 7 |
fomc | 1,996 | All in favor say "aye." SEVERAL. Aye. | 14 |
fomc | 1,996 | Opposed? The Secretary will note that both motions passed unanimously. Would you like to move to our domestic discussion? [Laughter] Wait a second! Have we ratified the domestic market transactions? SEVERAL. Yes, we did. | 49 |
fomc | 1,996 | Oh, that was the second vote! | 8 |
fomc | 1,996 | We are just moving too fast! | 7 |
fomc | 1,996 | No, the trouble is jet lag, and even though Peter and I were on the same plane, his jet lag is different from mine. [Laughter] Slowing things down, we move to Mike Prell. | 44 |
fomc | 1,996 | Thank you. [Statement--see Appendix.] | 9 |
fomc | 1,996 | Mike, granted all the problems with the data, there seems to be a gradual uptrend in the last two or three years in the measured personal saving rate in the context of a very rapid rise in household wealth. If we were to take the published personal saving rate and adjust it for the econometric evidence of the impact of... | 91 |
fomc | 1,996 | I think there always is a question about the behavior of the saving rate, particularly when we are estimating it ahead of the annual revisions of the NIPAs. We have seen saving rate trajectories altered considerably by those statistical revisions. Given that we feel that GDP growth may have been underestimated, it is n... | 111 |
fomc | 1,996 | Is there any correlation between the saving rate and the statistical discrepancy? | 13 |
fomc | 1,996 | I cannot give you an answer to that off the top of my head. | 15 |
fomc | 1,996 | I would assume that Commerce would be doing that sort of analysis in looking for the causes of the statistical discrepancy and presumably making adjustments where they could. | 29 |
fomc | 1,996 | Obviously, each time they do their quarterly estimate, they try to reconcile the income and product sides. If they find income is stronger, they are presumably going to look for opportunities to find product and add it in. But I think they are limited by their source data. And now they are running behind on the updatin... | 421 |
fomc | 1,996 | President Parry. | 4 |
fomc | 1,996 | Mike, one interesting aspect of the forecast is the strength of consumption. PCE goes up 2.7 percent in 1997. I assume that one of the reasons is the strong growth of income--you have a strong 2.7 percent increase in real disposable income. A bit of a puzzle to me is why there is such a difference between the growth of... | 132 |
fomc | 1,996 | We do have some increase in real wages. We have diminishing profit shares. So, some shift is occurring in income shares. | 25 |
fomc | 1,996 | There is also the CPI-product price. | 8 |
fomc | 1,996 | Consumer energy prices, in particular, rose quite rapidly this year and are expected to be flat next year. The swing we get there acts to boost growth of disposable income. | 34 |
fomc | 1,996 | They push up real disposable income? | 7 |
fomc | 1,996 | Yes. Because we are a net importer of oil, declines in crude oil prices obviously are going to be one thing that helps push up disposable income. | 30 |
fomc | 1,996 | So maybe what one is using for the deflator shows up in disposable income versus GDP? | 18 |
fomc | 1,996 | That is consistent with the historical evidence. | 8 |
fomc | 1,996 | Okay. | 2 |
fomc | 1,996 | President Moskow. | 4 |
fomc | 1,996 | Mike, I am particularly interested in these methodological changes that BLS is making in the calculation of the CPI. You have a table on page 15 of Part I of the Greenbook that shows how these affect the CPI going out through 1998. Could you tell us more about this? I have a couple of questions. Is the BLS planning oth... | 121 |
fomc | 1,996 | I should defer to our foremost authority on this, Mr. Stockton. | 14 |
fomc | 1,996 | At this point, President Moskow, I think what we have built into the forecast through 1998 is all that the BLS has officially announced in terms of planned changes. If we pressed them, I am sure they would say that they have an ongoing program for improvement and there will be further changes down the road. Thus far, w... | 307 |
fomc | 1,996 | I should note that our estimates of the effects of these changes in method, or the market basket change in 1998, are somewhat conjectural. It is not a simple, mechanical arithmetic story, and that is truer in some cases than in others. But these are estimates; they are not engraved in stone. I would remind the Committe... | 125 |
fomc | 1,996 | But if it were not for these methodological changes, you would see a gradual updrift in the core rate of CPI inflation? | 26 |
fomc | 1,996 | That is right, yes. | 6 |
fomc | 1,996 | President Minehan. | 4 |
fomc | 1,996 | I have a question on the material you sent us last night. On the basis of the inventory data that were released last week, I see that you reduced your estimate of third-quarter GDP growth to a rate of 1.9 percent and traded that off with an uptick in fourth-quarter growth. How sure are we of third-quarter final sales? | 70 |
fomc | 1,996 | Well, final sales for the quarter could be changed at least noticeably, maybe not importantly, by a possible revision to September retail sales to be published tomorrow. Moreover, we have yet to receive the net exports data for September, which are always a wild card. At least some modest change in that number is possi... | 306 |
fomc | 1,996 | So you are still quite confident that the low level of consumption recorded in the third quarter, despite changes in inventories, is pretty much baked in the cake? | 31 |
fomc | 1,996 | I think the numbers will probably hold up fairly well. As I said, they may not be accurate numbers, but we have no basis for gauging a bias one way or the other. We do not perceive that the trend in the growth of consumption has moderated to the degree that those third-quarter numbers might suggest. | 63 |
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