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fomc | 1,997 | To round us out, President Jordan. | 8 |
fomc | 1,997 | Thank you, Mr. Chairman. I want to mention only a few things from the District that relate to the national outlook and to convey some of my concerns about where we are or may be in a few months. On the retail outlook question discussed earlier, the head of a major retail company, said that the first half of this quarte... | 1,851 |
fomc | 1,997 | I think this is an opportune time to break for coffee. | 14 |
fomc | 1,997 | Mr. Kohn. | 5 |
fomc | 1,997 | Thank you, Mr. Chairman. As background for the Committee's decision today, I will begin by taking a few minutes to discuss real interest rates, concentrating on the real federal funds rate, given its occasional use as an index for the stance of monetary policy. In the course of my discussion, I will be referring to the... | 2,347 |
fomc | 1,997 | Let's see if we can make some progress on this. I have the general impression that there is a consensus around the Boehne alternative for the first sentence. I will assume that is the case unless somebody wishes to raise an objection here. [Pause] Not hearing one, I will assume that we will make that change, which real... | 82 |
fomc | 1,997 | Should we stop? | 4 |
fomc | 1,997 | I think we have to focus on whether we should leave the second sentence alone, apart from the minor adjustment that Don Kohn has mentioned, or try to go further. | 34 |
fomc | 1,997 | Leave it alone. | 4 |
fomc | 1,997 | The major problem I always have had with this directive has been in the first sentence. I find all the proposed variations of the second sentence to be circumlocutions in one way or another. The difficulty is that we are trying to reflect differing opinions as to how we should view the question of asymmetry. That is an... | 166 |
fomc | 1,997 | No lunch would be the consequence! [Laughter] | 11 |
fomc | 1,997 | That is a very thoughtful way of putting it. [Laughter] | 14 |
fomc | 1,997 | Thoughtful and practical. | 5 |
fomc | 1,997 | After going through a lot of the possible variations with Don Kohn, it strikes me that we are not going to succeed in resolving this issue at this stage, and it probably is not worth the effort of the Committee to try to force something that would make a number of us feel uncomfortable. I am inclined to put on the tabl... | 85 |
fomc | 1,997 | Could you repeat that, Don? I'm sorry, I didn't mean to interrupt. | 16 |
fomc | 1,997 | I'm just opening the issue up for questions. Don, in that context would you read the operational paragraph of the directive with those changes? | 27 |
fomc | 1,997 | Okay. I'm on page 13 of the Bluebook and I will start with the "New Alternative." If you chose Alternative B and translated the July directive into this, it would read: "In the implementation of policy for the immediate future the Committee seeks conditions in reserve markets consistent with maintaining the federal fun... | 129 |
fomc | 1,997 | That wording is not satisfactory to everybody, but it is everybody's second choice, if I may put it that way. I would be inclined to go with that, but I would like to hear the Committee's views. Governor Phillips. | 47 |
fomc | 1,997 | What is the purpose of differentiating between "somewhat" and "slightly?" | 17 |
fomc | 1,997 | It gives you the asymmetry in effect. | 9 |
fomc | 1,997 | We have not worked that out. | 7 |
fomc | 1,997 | We have two methods of establishing that; the other is the use of "would" and "might." | 21 |
fomc | 1,997 | The two methods together have been used when we wanted to express a strong degree of asymmetry. | 19 |
fomc | 1,997 | "Somewhat" is stronger than "slightly?" | 11 |
fomc | 1,997 | Yes. | 2 |
fomc | 1,997 | Well, this has not been clear to me in the past! [Laughter] | 17 |
fomc | 1,997 | It wasn't supposed to be! [Laughter] | 10 |
fomc | 1,997 | I am going to write that down so I won't forget it next time. | 15 |
fomc | 1,997 | Governor Kelley. | 3 |
fomc | 1,997 | Well, Mr. Chairman, I would say that you are in error in one respect. It is not everybody's second choice. It is my first choice. | 32 |
fomc | 1,997 | I am delighted to be corrected. In a hidden sense it is mine, too. President Broaddus. | 22 |
fomc | 1,997 | Mr. Chairman, just a comment here: The only thing that bothers me about making these changes--and I think I made this comment at the meeting last time--is that what we are doing here is to be clearer about our operating instrument without making corresponding changes with respect to the language on our longer-term goal... | 208 |
fomc | 1,997 | That is a fundamental change. The words have been fudged in such a manner as to avoid stating that. I think you are quite right on the issue of giving prominence to the funds rate, and I think we all recognize that were we able to find financial aggregates that reflect the state of the money markets and that we could e... | 156 |
fomc | 1,997 | I was just going to say, Mr. Chairman, that you have made wonderful progress here this morning, and I do not think we ought to jeopardize it. We ought to support it as a group and consider it time well spent. | 48 |
fomc | 1,997 | Why don't you make a motion? | 7 |
fomc | 1,997 | If I could, I would. | 7 |
fomc | 1,997 | He's not a voting member. | 6 |
fomc | 1,997 | Can we make you an honorary one? [Laughter] | 12 |
fomc | 1,997 | I will make an honorary motion. | 7 |
fomc | 1,997 | I will second the honorary motion. | 7 |
fomc | 1,997 | Technically, it is true if we are taking a vote of the Committee as presently constituted. But as a practical matter, the vote has to include everybody around the table because we are making changes that will involve all of us. So, the "votes" of those who are temporarily nonmembers should be taken into account. | 65 |
fomc | 1,997 | Can I make it legal by moving the Boehne motion? | 13 |
fomc | 1,997 | You could do so. | 5 |
fomc | 1,997 | I second the Boehne motion. | 8 |
fomc | 1,997 | Would you read the Boehne motion, just to make sure we know what it says? | 19 |
fomc | 1,997 | The first sentence, assuming alternative B, would be: "In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 5-1/2 percent." | 49 |
fomc | 1,997 | And go on. | 4 |
fomc | 1,997 | The next sentence, if I have it down correctly and using the same tilt as in the July directive would read: "In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, a somewhat higher fe... | 78 |
fomc | 1,997 | Okay. Let's recognize that this is not a vote on the directive; this is a vote on the structure of the directive. | 25 |
fomc | 1,997 | You could ask for a show of hands maybe without doing a vote. That way everybody could be included. | 21 |
fomc | 1,997 | Let's have a show of hands rather than an official vote. This is in favor of it. All opposed? It carries unanimously. I congratulate Donald Kohn for a Solomonesque-- | 38 |
fomc | 1,997 | And President Boehne. | 6 |
fomc | 1,997 | And the Chairman. | 4 |
fomc | 1,997 | Well, I merely followed you two gentlemen. | 9 |
fomc | 1,997 | I would like to add Governor Rivlin for drawing attention to the practical consideration that got this discussion over with. | 22 |
fomc | 1,997 | I thank everybody. [Laughter] Are there any questions on the first part of Don Kohn's presentation relating to monetary policy? | 27 |
fomc | 1,997 | Don, before each FOMC meeting we are provided a memo on what various rules are indicating, the Taylor rule particularly. My recollection is that the equilibrium real interest rate constructed in that case is for a 2 percent real funds rate, using the chained GDP deflator. | 56 |
fomc | 1,997 | Right. | 2 |
fomc | 1,997 | Do you want to talk briefly about the table at the bottom of chart 10 in your handout and its implications? While I am a strong believer in some of the wisdom embedded in the Taylor rule, I have been concerned for a long time that we need to be more careful about how we set its level by coming up with a more reasonable... | 100 |
fomc | 1,997 | I think that if we took it literally, and I would have to look at that, it actually would be a little higher if we used the GDP deflator over time, which is what Taylor's rule is based on. These days the GDP deflator tends to run a little below the CPI, but over time I think it runs a little above. So, if we use the de... | 311 |
fomc | 1,997 | Don, I have a question for you that comes from page 1 of the Bluebook. In the fifth line down you state that "longer-term nominal yields were down 15 to 25 basis points, but yields on indexed debt were about unchanged, suggesting that a slight reduction" etc. Is part of the reason you use the term "suggesting" that you... | 116 |
fomc | 1,997 | That is one of the factors, President McDonough, in the sense that relatively small trades can push these rates around because these markets are not liquid, and I think we need to be careful about interpreting small ups and downs in the yields. On the other hand, I don't think the lack of liquidity in the market vitiat... | 321 |
fomc | 1,997 | I think you have it just right. I believe it tells us something, but we have to be very careful not to get overly caught up with it quite yet. | 33 |
fomc | 1,997 | The other point I would make about the sentence that you pointed to is that we characterize it as inflation compensation. There is another part to inflation compensation. It is not only expectations; it is the inflation risk premium. One had a sense, particularly over the spring through the end of July, that not only w... | 138 |
fomc | 1,997 | The term "inflation compensation" is really a word of art because what is being projected here is not true inflation expectations, including the risk premium, but a forecast of the CPI as published. And that may or may not be exactly equal to inflation expectations. But shouldn't the word "expectations" be in this sent... | 78 |
fomc | 1,997 | It is a reduction in the actual compensation that investors are demanding for buying a nominal bond. Its size would depend on their expectations for inflation and on the standard error or standard deviation-- | 36 |
fomc | 1,997 | It is based on their forecast of the CPI. | 10 |
fomc | 1,997 | Right. | 2 |
fomc | 1,997 | It is a kind of economist's 9-by-12, I think. [Laughter] | 20 |
fomc | 1,997 | Further questions for Don? If not, let me start. I will be a good deal briefer than I have been of late. To be sure, as Governor Kelley indicated, not all that much has changed in the period since the last meeting, but there are a few fundamentals that I think require a bit of evaluation. The most recent period is inte... | 2,741 |
fomc | 1,997 | I agree with your "B" asymmetric proposal. | 10 |
fomc | 1,997 | Governor Rivlin. | 4 |
fomc | 1,997 | So do I. | 4 |
fomc | 1,997 | President Parry. | 4 |
fomc | 1,997 | I agree as well. | 5 |
fomc | 1,997 | President Broaddus. | 5 |
fomc | 1,997 | I accept your recommendation. | 5 |
fomc | 1,997 | President Minehan. | 4 |
fomc | 1,997 | I accept your recommendation as well. | 7 |
fomc | 1,997 | President McTeer. | 5 |
fomc | 1,997 | Me too. | 3 |
fomc | 1,997 | Governor Kelley. | 3 |
fomc | 1,997 | I accept, Mr. Chairman. | 7 |
fomc | 1,997 | President Stem. | 3 |
fomc | 1,997 | I agree. | 3 |
fomc | 1,997 | President Hoenig. | 4 |
fomc | 1,997 | Agree. | 2 |
fomc | 1,997 | President Guynn. | 4 |
fomc | 1,997 | Agree. | 2 |
fomc | 1,997 | President Jordan. | 3 |
fomc | 1,997 | Agree. | 2 |
fomc | 1,997 | Governor Meyer. | 3 |
fomc | 1,997 | Agree. | 2 |
fomc | 1,997 | Governor Phillips. | 3 |
fomc | 1,997 | Agree. | 2 |
fomc | 1,997 | Has anybody been left out? | 6 |
fomc | 1,997 | I can accept your recommendation, Alan. I will not say much more other than to express the wish that we had the groundwork in place to lock in these lower inflation rates. I do not think we have. It would be an excellent time to act opportunistically, as I have said before. I worry a little about whether there will be ... | 93 |
fomc | 1,997 | I think it is going to be difficult. The reason is that the longer we are in a period where the economy remains exceptionally tight and price inflation continues to go down, the more difficult it will be for us to make a credible case for a policy tightening move, indeed around this table let alone how we explain it to... | 67 |
fomc | 1,997 | Just one last question because you raised the issue in your commentary. We have noticed an uptick in housing-related components of the CPI. There also are increases in other asset prices that people are worried about, obviously the stock market, nonresidential real estate, and so forth. | 56 |
fomc | 1,997 | Remember that the nonresidential real estate sector shows up in the CPI for hotels, lodging, and-- | 21 |
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