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fomc | 1,997 | It could alter the slope. | 6 |
fomc | 1,997 | I don't know how significant it is, but it does raise some questions. Since we have so few observations, it is not clear to me what is happening. President Parry. | 36 |
fomc | 1,997 | Also with reference to Exhibit 3, it seems to me that developments in the last couple of years clearly are encouraging. If we focus on the bottom panel of the exhibit, it also seems clear that velocity is continuing to change. In particular, if one had run that regression to include the forecast period, it would have p... | 96 |
fomc | 1,997 | Right. As was mentioned in the Bluebook, we thought that M2 velocity was being boosted somewhat this year by continuing very large inflows to mutual funds, presumably involving diversions from M2 accounts. | 41 |
fomc | 1,997 | It is also the case that when we fit these things econometrically, we find small time trends both for the period covered by the bottom line and for that covered by the top. Thus, the charts show bigger misses relative to the fitted line than there are in our models because the models have this time trend in them. But I... | 97 |
fomc | 1,997 | If you look at the upper panel, an alternative interpretation would be that the big upward movement in the early part of the 1990s has slowed rather than come to an end. | 37 |
fomc | 1,997 | Other questions? President Jordan. | 6 |
fomc | 1,997 | A couple of things: With regard to your question, Mr. Chairman, we too have looked at this with gross domestic purchases instead of nominal GDP and also the command basis of GDP. That's because we are trying to relate money held to household income and the command of U.S. citizens over resources. It does change the pic... | 255 |
fomc | 1,997 | As I mentioned, with a supply shock of this sort and particularly if the Committee wanted to see more of that shock show through in terms of real output, we would get more nominal GDP and more money growth. | 42 |
fomc | 1,997 | On that low NAIRU alternative, we would have small effects on nominal GDP and lower inflation. It is not clear which way nominal GDP would go since we would have higher output and lower inflation. Actually, I think nominal GDP would be a bit lower in that scenario than in the baseline scenario. Interest rates would not... | 121 |
fomc | 1,997 | Any further questions for Tom? Governor Phillips. | 9 |
fomc | 1,997 | Tom, could you expand a bit on Exhibit 1, which shows growth in federal debt turning up? | 21 |
fomc | 1,997 | That is basically in keeping with the slightly larger deficit that we are projecting for 1998. | 19 |
fomc | 1,997 | Does that take the current budget negotiations into account? | 10 |
fomc | 1,997 | It has our assumed fiscal package. | 7 |
fomc | 1,997 | Okay. | 2 |
fomc | 1,997 | You will recall that our unified deficit forecast for the next fiscal year is somewhat larger than the deficit for this fiscal year. On a calendar-year basis, because of the timing of borrowing and other means of payment or cash flows in the federal government, we have more of a step-up in borrowing than one would have... | 76 |
fomc | 1,997 | Any further questions for Tom? It strikes me that M2 is creeping its way back into potential use. This creates interesting questions including the need to review issues that were raised yesterday such as reserve requirements and contemporaneous reserves. All these issues, including the longer-term target ranges, are in... | 353 |
fomc | 1,997 | I agree with that to the extent that we decide not to change the way we use the ranges for the monetary aggregates. But in anticipation of the possibility that in one, two, three or more Humphrey-Hawkins hearings down the road we may want to give a little different weight to the information M2 is providing, I think it ... | 260 |
fomc | 1,997 | We actually have started to do that at the fringes in Congressional testimony. If these relationships hold, I think we will gradually increase our emphasis on the aggregates. In that event, this Committee is going to reach a crucial point when we will have to decide whether we should start to do something more formal. ... | 141 |
fomc | 1,997 | Mr. Chairman, I agree with your suggestion and support alternative I. It seems to me that M2 velocity is coming closer to stabilizing, but I don't think we have enough evidence yet to put more weight on the aggregates at this time. | 49 |
fomc | 1,997 | President Hoenig. | 4 |
fomc | 1,997 | Mr. Chairman, I also agree with your suggestion and would prefer to stay with alternative I. I want to comment, though, on a point that Jerry Jordan made. As I read the Bluebook this time, I found myself facing a choice. If I concluded that I wanted to use these aggregates as indicators of our projections, then I would... | 152 |
fomc | 1,997 | I have an old P-star memo sitting at the bottom of my desk that might help. I could blow off the dust and pull it out! President Minehan. | 33 |
fomc | 1,997 | I, too, agree we should not change the ranges for all the reasons that people have given here today and that I mentioned the last couple of times we talked about this. Until we know exactly how we are using these measures of money in the formulation and implementation of monetary policy, I think we are well advised to ... | 93 |
fomc | 1,997 | Governor Phillips. | 3 |
fomc | 1,997 | I am delighted to see that M2 is doing better. I thought that the more detailed memo that we received was very helpful and moved the ball a little farther down the field. I agree with your proposal, Mr. Chairman; I do not think we should change the ranges at this time. But I would align myself with Jerry Jordan's comme... | 89 |
fomc | 1,997 | President Broaddus. | 5 |
fomc | 1,997 | Mr. Chairman, I certainly agree with your recommendation. I have to say that I am impressed by the increasing evidence that M2 may be coming back on track. We produced some supporting research at our Bank to supplement the excellent staff paper that was done here. On the basis of the analysis that I have seen, I think ... | 1,108 |
fomc | 1,997 | I think we were well aware of what would happen when we shifted to an explicit federal funds rate target. As you may recall, we fought off that apparently inevitable day as long as we could. We ran into the situation, as you may remember, when the money supply, nonborrowed reserves, and various other non-interest-rate ... | 440 |
fomc | 1,997 | I agree with all of that. My point is that while we currently have low inflation, we do not really have what I would regard as a firm nominal anchor in a forward-looking sense. In that kind of environment, the operating regime that we have, as you said, presents risks. I don't know if there is an easy way to do it, but... | 140 |
fomc | 1,997 | President Moskow. | 4 |
fomc | 1,997 | Mr. Chairman, I agree with your recommendation. As I understand it, we would describe the money ranges as we did last time, namely as benchmarks for what we would normally expect under conditions of reasonable price stability and historic velocity behavior. With regard to the discussion you were having with Al Broaddus... | 156 |
fomc | 1,997 | I will tell you, Mike, one thing that has to be considered here is the moral tone. In the NYU speech, I said that it is irresponsible to take the risks that are involved in not trying to contain inflationary imbalances. If we give only the other side of the argument, they will beat us nine times out of nine on a moral ... | 231 |
fomc | 1,997 | I agree with everything you have just said. I believe that we need to spend more time thinking about how we can best communicate that message. | 28 |
fomc | 1,997 | I absolutely agree with that because the focus of outside commentary on monetary policy in recent months has not been as good as it should have been. Considering what is going on in the world, it is really unbelievable. Vice Chair. | 45 |
fomc | 1,997 | Mr. Chairman, I agree that we should adopt alternative I. I think it is far too early to conclude that the recent fit in V2, and therefore the use of M2, is anything like a sure thing. One of the things I believe we have to be aware of is the effect of a change in market focus on a monetary measure. We may have a monet... | 359 |
fomc | 1,997 | Yes, granted how far we have come. I think the only way we could go back to some non-interest-rate regime--let's assume it involved a net borrowed reserve number--would be if we believed that analytically such an approach had become the most efficient means to implement policy. We could identify our net borrowed reserv... | 246 |
fomc | 1,997 | I would be very comfortable with that. | 8 |
fomc | 1,997 | I think we could defend it. Governor Meyer. | 10 |
fomc | 1,997 | Thank you, Mr. Chairman. Tom Simpson's presentation of the Bluebook alternatives for the Humphrey-Hawkins ranges identified two distinct decisions that we have to make today, and also a third decision that we might want to talk about and contemplate. The first is the interpretation of the ranges; the second is the boun... | 508 |
fomc | 1,997 | I would say that what you are suggesting, and I would agree, is that when we get to the point of discussing these issues we should combine them because they are interrelated | 35 |
fomc | 1,997 | Right. It is premature to get into that at this point, but I thought the discussion in the Bluebook was quite interesting and challenging. Even if we do not want to go back to the earlier practice, there might be a case for upgrading a little the role of the monetary aggregates in our deliberations. We could ask the st... | 281 |
fomc | 1,997 | To return to the issue of whether or not we are against inflation or for jobs, was I mistaken, Jerry, or were you quoted in the James Glassman newspaper column yesterday or the day before? | 40 |
fomc | 1,997 | I hope not. | 4 |
fomc | 1,997 | I thought it was you that he quoted. He was talking about the issue of job creation, and the example came up as to why somebody in a Chinese city had everyone working with shovels to build a dam. Was he quoting you? | 49 |
fomc | 1,997 | That may have come from a speech that I gave. | 11 |
fomc | 1,997 | Why don't you set it straight for us. This actually refers to the issue of whether it is jobs or growth that we ought to be focused on. | 30 |
fomc | 1,997 | It was in a speech where I said that a Western businessman traveling in China visited a site where hundreds of workers were building an earthen dam with shovels. The businessman suggested that they could get an earth-moving piece of equipment to build that dam in an afternoon. The Chinese official asked what could be d... | 126 |
fomc | 1,997 | I don't think we ought to repeat that suggestion in too many places! It is in fact an effective argument against creating jobs directly rather than fostering economic growth to create jobs. There are stages that should not be short-circuited in that process; they involve controlling inflation in order to promote growth... | 67 |
fomc | 1,997 | Alternative I is all I was going to say. On this communications issue, I think we also have to be careful in terms of how we communicate. We use shorthand internally, but the public has the confused impression that we can affect inflation or we can affect growth. So, we need to talk about inflation in the context of ho... | 127 |
fomc | 1,997 | President Boehne. | 5 |
fomc | 1,997 | I say "ditto" to all the arguments for alternative I--keeping the long-run ranges the same. On the issue of the role of M2, I think we have to spend a fair amount of time talking about this among ourselves. It is not an easy discussion. The first issue is whether M2 will be an intermediate target or an indicator, and t... | 204 |
fomc | 1,997 | President Guynn. | 4 |
fomc | 1,997 | I, too, Mr. Chairman, would prefer to stay with the current ranges. I think the most important consideration for the moment is the signal effect, and in my view raising the ranges would risk sending the wrong signal. I have some notes from yesterday's discussion that I wanted to work into the conversation. I was going ... | 195 |
fomc | 1,997 | President Stern. | 3 |
fomc | 1,997 | I, too, would support alternative I. There are ways to improve this aspect of the policy process, and I look forward to discussing them in future meetings. | 32 |
fomc | 1,997 | Governor Rivlin. | 4 |
fomc | 1,997 | I, too, would go along with alternative I, but I think we should not do it just to kick a difficult decision down the road. The next few months may actually be an easier period in which to explain a change in thinking than later when one might imagine that we may be doing something really unpopular at a time when the e... | 173 |
fomc | 1,997 | President McTeer. | 5 |
fomc | 1,997 | Alternative I. I have an early flight, so I will not say any more. [Laughter] | 21 |
fomc | 1,997 | You already used up more time than you really intended. Governor Kelley. | 14 |
fomc | 1,997 | I concur, Mr. Chairman, with alternative I. I don't think I can add anything to the many valuable comments that have been made around the table. | 31 |
fomc | 1,997 | We have had a fairly thorough discussion. Before we get to a vote, there is a minor question about an adjective in the directive, the word "monitoring." Don Kohn, would you explain that issue? | 43 |
fomc | 1,997 | It has struck us in recent Humphrey-Hawkins write-ups that putting the word "monitoring" in front of debt makes it sound as if that aggregate has a quality to it that differs from the Committee's use of the monetary aggregates. I think the existing practice evolved when the monetary aggregates really were more indicato... | 209 |
fomc | 1,997 | Unless someone expresses an objection, I presume that would be appropriate. It will be fascinating to see if anyone notices the deletion. [Laughter] Would you now read the version reflecting alternative I? | 39 |
fomc | 1,997 | The wording for the paragraph on the long-run ranges is on page 29 of the Bluebook. It starts off with the usual general policy statement: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objecti... | 265 |
fomc | 1,997 | Call the roll. | 4 |
fomc | 1,997 | Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes President Guynn Yes Governor Kelley Yes Governor Meyer Yes President Moskow Yes President Parry Yes Governor Phillips Yes Governor Rivlin Yes | 41 |
fomc | 1,997 | Thank you. Mr. Kohn. | 8 |
fomc | 1,997 | Thank you, Mr. Chairman. I will begin with some thoughts on the longer-term strategy section of the Bluebook, and I will be referring to the charts in that document. I will talk a bit about how the results of those exercises might or might not relate to the current situation and finish with some comments on proposed ch... | 86 |
fomc | 1,997 | Well, I assume there are no questions! [Laughter] President Boehne. | 18 |
fomc | 1,997 | Don, I think the exercise you did on the various policy rules is quite useful, and you and your colleagues are to be complimented for helping guide us through this using that approach. As you quite properly point out, however, the Achilles heel of this is uncertainty. We do not know the underlying structure of the econ... | 175 |
fomc | 1,997 | I think "both" is the answer. The models actually do not have to differentiate as such between supply and demand shocks. In effect they do, but it should be noted that they are just reacting to output gaps and to inflation gaps. From the perspective of the rule, the ruler, I guess, does not have to say this is a supply... | 625 |
fomc | 1,997 | President McTeer. | 5 |
fomc | 1,997 | I am going to refer to chart 4 following page 12 in the Bluebook. I would like to get Don and perhaps you also, Mr. Chairman, to comment on an observation that I am going to make. I believe it is true that if each of us were polled individually and asked if we believe in the Phillips curve tradeoff, we would give an an... | 185 |
fomc | 1,997 | No, there is no long-term Phillips curve built into this. I think you have to be a little careful, President McTeer, about the scale of these charts. We are talking about small declines in inflation and fairly small output gaps. The sacrifice ratio built in is 3 over a very long run. That is consistent with many, many ... | 363 |
fomc | 1,997 | I guess I was struck more by the horizontal axis than the vertical axis. There seem to be a lot of years there. | 25 |
fomc | 1,997 | The implied sacrifice ratios are in line with what we have been using for quite a while. | 18 |
fomc | 1,997 | I think that the model reflects the importance of price expectations in this process in a very simple way. That is why we do not have the long-run tradeoff. If expectations change gradually over time, we are going to have short-run tradeoffs. | 50 |
fomc | 1,997 | There's a sentence on page 6 of the Bluebook that says: "In the staff model, the sacrifice ratio over five years is about 2; that is, a 1 percentage point reduction in inflation can be achieved only by pushing the unemployment rate above the NAIRU by the equivalent of about 2 percentage points for one year." At the end... | 136 |
fomc | 1,997 | I think we have been facing a situation in which there have been some very favorable supply developments, and that means we have not had this short-run tradeoff. | 32 |
fomc | 1,997 | The tradeoff is there in a sense, but it is obscured by the big drop in oil prices. That has shifted the short-run Phillips curve. | 31 |
fomc | 1,997 | I am going to address this issue in a somewhat different form. The basic problem is that the model has a whole series of consecutive short-term Phillips curves, and its structure does not change. If you accept that hypothesis about the short-term structure and you continuously work with no change in that structure, the... | 69 |
fomc | 1,997 | Life is a series of short terms. | 8 |
fomc | 1,997 | That is what the short-term Phillips curve is. We see this correlation historically. The trouble is that it veers off periodically, and that creates the nonexistence of a long-term Phillips curve. We are now in the veer stage! President Jordan. | 52 |
fomc | 1,997 | Don, I believe you provided a useful framework for thinking about demand side/supply side. The need to think about that is unavoidable. We do that implicitly. So, why not do it explicitly? It is very helpful to be forced into that framework as we think about what is going on and the policy regime with which we respond.... | 941 |
fomc | 1,997 | I don't think I have a lot to add to what you said, President Jordan. You indicated that you might not react as strongly to demand shocks as to supply shocks, and I wonder about that. If you really thought that demand had shifted up in the first half of this year, starting from a position in which the economy was close... | 272 |
fomc | 1,997 | I want to respond to your point about the demand-side shock late last year and early this year. That was a case where I became increasingly concerned that what was really going on related fundamentally to the supply side, and we were inadvertently converting it into a demand-side shock by holding the nominal funds rate... | 81 |
fomc | 1,997 | President Parry. | 4 |
fomc | 1,997 | I found the simulations on chart 4 of the Bluebook extremely interesting. I would like to ask a question about the opportunistic approach to monetary policy in that chart. I am sure that in a situation where you have an adverse supply shock or a positive demand shock that causes a rise in the forecast of inflation, the... | 191 |
fomc | 1,997 | If you turn back to page 10, you can see that in both the target zone and the opportunism simulations we had a strong reaction to inflation outside the target zone or outside the zone of indifference for opportunism. | 45 |
fomc | 1,997 | That's right. | 3 |
fomc | 1,997 | And certainly, almost by algebra, you are right. If you reduced those coefficients on inflation outside the zone from 2.5 to 1.5, then you would get a less strong reaction, and it would take longer to get to price stability. On the other hand, I think we have to be a little careful. Look at the Henderson-McKibbin delib... | 222 |
fomc | 1,997 | I see. | 3 |
fomc | 1,997 | President Minehan. | 4 |
fomc | 1,997 | I am coming from a different direction, but I wanted to make some of the same comments. I found these simulations very interesting even though I know that nothing can be carried on until the year 2030 with any reasonable level of reliability. I must say that if we are going to keep using this definition of opportunism,... | 359 |
fomc | 1,997 | But remember, she had to think of something to say this morning. [Laughter] | 18 |
fomc | 1,997 | I suppose. | 3 |
fomc | 1,997 | That change would give her six months' worth of new material! | 13 |
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