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fomc | 1,998 | Thank you, Mr. Chairman. Economic conditions in the Eighth District are consistent with full employment of the region's economic resources. District labor markets remain very tight, with measured unemployment rates showing no indication of departing from their lowest levels in 20 years. The diminished pool of qualified... | 509 |
fomc | 1,998 | Thank you very much. This appears to be the appropriate time for us to adjourn for the evening, and I look forward to seeing you tomorrow morning. | 31 |
fomc | 1,998 | We will now turn to a discussion of the long-run ranges for the monetary aggregates, and I will call on Dave Lindsey. | 25 |
fomc | 1,998 | The Committee was given some colorful charts yesterday, but today I will be referring to the colorless charts entitled, "Material for Staff Presentation on Long-Run Ranges." 3/ The first page of your handout reproduces the table on page 11 of the Bluebook except for a revision to the M2 and M3 growth rates for 1997 in ... | 1,622 |
fomc | 1,998 | I am looking at the lower frame of Chart 6. It illustrates clearly the independent rise in V2 at any given opportunity cost, because the opportunity cost has not moved very much. | 37 |
fomc | 1,998 | On balance, it has not; that's right. | 10 |
fomc | 1,998 | The behavior of V2 since mid-1994 had suggested to us earlier that the relationship of V2 to opportunity cost was moving back to its previous pattern in the period from 1959 through 1989. Does the more recent pattern alter that view or merely emphasize that even this shift back, so to speak, has meaning only in the con... | 84 |
fomc | 1,998 | That is the open question. It is true that we think the velocity of M2 since mid-1994 has moved more closely to its behavior over the three decades prior to the 1990s. However, it also is true--and we sent the FOMC a memo to this effect--that we can fit an equation with only M2 velocity, opportunity cost, and a time tr... | 389 |
fomc | 1,998 | You mentioned the stock market as being the reason for bringing down V2 through the forecast period, other things equal. Have you tried to put stock prices in as an additional variable in your model to see if anything happens? | 44 |
fomc | 1,998 | We have estimated a variety of M2+ and M3+ models in an effort to capture the non-M2 or non-M3 components of those broader measures. We have had some success but not a perfect success. One issue is that inflows to stock mutual funds were negatively correlated with inflows to M2 until the last two years. Inflows to both... | 156 |
fomc | 1,998 | In a technical memo that was circulated some six months ago, we put in stock and bond mutual funds, and we came away at that time with some sense that when the growth of those funds was strong, M2 was weak. So, that result gave us a little confirmation of a tradeoff. Recently, I saw a chart that suggested the two had b... | 163 |
fomc | 1,998 | When we normalize M2, stock mutual funds, and stock market prices by consumption or income or some parameter of that nature, does the sign reverse on the relationship between M2 and mutual funds? | 39 |
fomc | 1,998 | The original equation of a year or so ago had income in it, so income was being taken into account. I don't know about the more recent modeling experience. As I noted, the chart that I saw suggested that the two recently had tended to move together, but I don't know whether income was held constant in the model. | 65 |
fomc | 1,998 | Expressing them as ratios to income or consumption is not the same thing as regressions that include those variables. | 22 |
fomc | 1,998 | It is a different form. | 6 |
fomc | 1,998 | It should be if it isn't. Further questions for David? | 12 |
fomc | 1,998 | Can I be forgiven a rookie question? | 8 |
fomc | 1,998 | Those are the unanswerable questions. | 8 |
fomc | 1,998 | All these Bluebook ranges are four percentage points wide. Is that writ on a stone tablet somewhere? It strikes me that with all the financial uncertainties and the institutional changes that are occurring in the financial markets, it is very hard to pin these relationships down whether one uses "S" curves or whatever.... | 69 |
fomc | 1,998 | That, of course, is a matter that gets decided by this Committee. The historical precedent is that the ranges through 1987 were three percentage points wide and the Committee raised them to four in 1988. | 43 |
fomc | 1,998 | So, now we are in 1998 and might it go to five? [Laughter] | 20 |
fomc | 1,998 | When it was widened, Governor Gramlich, it was as a result of some increasing uncertainty about what demand for M2 would be consistent with the Committee's expectations for nominal GDP over the coming year, especially since M2 does retain considerable response to opportunity costs. At the beginning of 1988, the Committ... | 117 |
fomc | 1,998 | Further questions? Who would like to start the Committee discussion? Governor Meyer. | 15 |
fomc | 1,998 | Whenever we talk about the monetary aggregate ranges, it seems to me we are always caught between two kinds of decisions: whether we want to confirm or change the interpretation we give to the ranges and what boundaries we want to set. The staff presentation today reminds us that the ranges are set inconsistently in te... | 590 |
fomc | 1,998 | President Broaddus. | 5 |
fomc | 1,998 | On the ranges, I think the main thing we need to do is to leave the M2 range where it is today at 1 to 5 percent. That would serve both as a signal of our continuing commitment to price stability and operationally as a likely rate of M2 growth that would be consistent with maintaining the low inflation environment we a... | 982 |
fomc | 1,998 | President Parry. | 4 |
fomc | 1,998 | Mr. Chairman, I basically agree with the points made by Governor Meyer and would favor alternative I. It seems to me that the reasons for not changing the ranges that we have cited in the past, some of which Governor Meyer mentioned, are applicable today. Eventually, it will make some sense to go to what is shown as al... | 109 |
fomc | 1,998 | Vice Chairman. | 3 |
fomc | 1,998 | I prefer alternative I, Mr. Chairman. | 9 |
fomc | 1,998 | Governor Kelley. | 3 |
fomc | 1,998 | I also prefer alternative I, and I would like to associate myself with Governor Meyer's remarks. We have to formulate these ranges against the realities of our forecast for the real economy. I am not attracted to alternative II, but I feel a lot of attraction to alternative III because of the consistency of its ranges ... | 133 |
fomc | 1,998 | Governor Phillips. | 3 |
fomc | 1,998 | I also prefer alternative I. It is interesting to observe that M2 growth is coming into closer alignment with the Committee's goal of price stability. I could at some point live with alternative IIIfor many of the reasons that Governor Meyer stated. At this point, no change would be needed in the M2 and M3 ranges and t... | 184 |
fomc | 1,998 | President Minehan. | 4 |
fomc | 1,998 | Governor Meyer did some of us a big favor by articulating at the outset all the good reasons to stay with alternative I, and I agree with him on that. I but for now I would like to leave the ranges alone and not am attracted to alternative III, draw any further attention to the aggregates. | 61 |
fomc | 1,998 | President Hoenig. | 4 |
fomc | 1,998 | I am going to sound very similar. I prefer alternative III in order to bring the ranges into a consistent formulation, but given the uncertainties surrounding the M2 and M3 forecasts, I can very easily accept alternative I as well. | 46 |
fomc | 1,998 | Governor Rivlin. | 4 |
fomc | 1,998 | Despite the enormous ingenuity of the staff, I don't think we understand these M relationships very well at all. My guess is that our understanding will not get much better. We may get some comforting returns for a while to some relationships with which we are familiar, but that might not last. I think the optimum posi... | 220 |
fomc | 1,998 | You favor alternative zero? | 5 |
fomc | 1,998 | I would prefer alternative zero, but as a practical matter I am opting for alternative I. | 18 |
fomc | 1,998 | President Boehne. | 5 |
fomc | 1,998 | I support alternative I largely for the reasons articulated by Governor Meyer. Regarding the point that Governor Rivlin raised about consistency, we probably ought to postpone that debate for a long time because it will open up deep theological arguments that do not tend to get us very far. | 53 |
fomc | 1,998 | President McTeer. | 5 |
fomc | 1,998 | Maybe alternative III later but alternative I today. | 9 |
fomc | 1,998 | President Moskow. | 4 |
fomc | 1,998 | I favor alternative I. If we did make a change, it would be interpreted as our placing increased emphasis on the aggregates, and I don't think we are even close to being in a position to explain that to the American people. | 46 |
fomc | 1,998 | President Stem. | 3 |
fomc | 1,998 | I too favor alternative I. The only thing I might add to our discussion is that I think it is worth paying some attention to the aggregates, at least in the long run. | 36 |
fomc | 1,998 | Governor Gramlich. | 4 |
fomc | 1,998 | I have been waiting for somebody to say something I agreed with [laughter], and I think Governor Rivlin got closest. I could certainly go with alternative I for now if we do not want to attract attention to the aggregates. But if we are looking to make a change somewhere, my preference would be to go in the direction o... | 99 |
fomc | 1,998 | Humphrey-Hawkins statutorily requires that we set monetary ranges. Now, I don't think we would be put in jail if we stopped doing it, but the law is the law. | 40 |
fomc | 1,998 | The law requires that you indicate your plans and objectives for the growth of money and credit. | 18 |
fomc | 1,998 | Yes, the law is the law, but we could also write paragraphs. | 15 |
fomc | 1,998 | I think we have been doing that for some time. | 11 |
fomc | 1,998 | Governor Ferguson. | 3 |
fomc | 1,998 | I agree with alternative I. I think Governor Rivlin said it best. It would be nice in some sense to be more clear about what we are doing, but precedent, previous interpretation, ease of communication, and pragmatism--none of which has anything to do with monetary policy I suppose [laughter]--all suggest alternative I. | 69 |
fomc | 1,998 | Mr. Rives. | 5 |
fomc | 1,998 | We support alternative I for now and eventually moving to alternative IIIas Governor Meyer suggested. | 17 |
fomc | 1,998 | President Guynn. | 4 |
fomc | 1,998 | I am fine with alternative I also. I actually came to this meeting with a willingness to change the M3 range if that would make people comfortable. But I think the wisdom of leaving it alone and not calling attention to the aggregates probably still is the prevailing view, and that would be my thought. | 60 |
fomc | 1,998 | President Jordan. | 3 |
fomc | 1,998 | I cannot tell the difference between any of these alternatives either in the way the Committee operates or in the way we communicate with the public. I believe we should start to articulate a view as to what monetary policy is all about quite aside from the prices of goods and other assets denominated in units of money... | 391 |
fomc | 1,998 | I think that we are not looking at price stability per se as a goal because prices at the end of the day are not that clearly measurable. What we really are endeavoring to do is to reduce the implicit anticipated change in the purchasing power of money that imbeds itself in long-term nominal interest rates. We are tryi... | 358 |
fomc | 1,998 | I would like to follow up for just a moment because there are two things along that line that we do know as economists, even if we are not able to communicate that knowledge effectively to the Congress, let alone to the public at large. Our theories tell us that if we have a world in which the purchasing power of money... | 276 |
fomc | 1,998 | If we cannot explain to the American people in understandable words, and not very many of them, what it is that we are trying to achieve, then we are not carrying out our function to create public policy as servants of the people. | 47 |
fomc | 1,998 | Can we be employees instead of servants? | 8 |
fomc | 1,998 | You would rather be an employee than a public servant? | 11 |
fomc | 1,998 | No, than a servant. [Laughter] | 10 |
fomc | 1,998 | Four or five years ago, I began to think that a target range for some version of the CPI had the merit that it could be explained and it would be understandable. But as time has gone on, I have come to believe that that does not work. That does not meet the very understandable verbal definition of price stability that ... | 95 |
fomc | 1,998 | That is in fact what Jerry Jordan is talking about. | 11 |
fomc | 1,998 | I agree. But I wouldn't worry about figuring out some new, very erudite way to express price stability because we already have the way to express it and it works beautifully. I think it is something we ought to stick to. | 47 |
fomc | 1,998 | May I make a comment? I agree that it is a wonderful definition, and I think it has served us well. The problem is that the concept is difficult to communicate to the public. When the public thinks about the price level, it thinks about the CPI and similar measures. That's why I think we could strengthen our position i... | 95 |
fomc | 1,998 | Could I add a point? It is not just our ability to communicate to the public, it is our own internal deliberations that are at stake here. We might ask where we are heading. Do we think we are where we want to be or do we think we want inflation to move down 1/2 percentage point, 1 percentage point, 1-1/2 percentage po... | 130 |
fomc | 1,998 | It is a nice problem to have. I think there is a general consensus on alternative I. Would you read the appropriate language? | 26 |
fomc | 1,998 | This wording is from page 21 in the Bluebook. The paragraph begins with the general sentence on the Committee's goals: "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 objectives, the Committee a... | 162 |
fomc | 1,998 | Call the roll. | 4 |
fomc | 1,998 | Chairman Greenspan Yes Vice Chairman McDonough Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes President Jordan Yes Governor Kelley Yes President McTeer Yes Governor Meyer Yes President Minehan Yes Governor Phillips Yes Governor Rivlin Yes | 47 |
fomc | 1,998 | Thank you. Shall we move on to current monetary policy? I will call on Don Kohn. | 20 |
fomc | 1,998 | Thank you, Mr. Chairman. I will provide you with some more impalpable, intellectual product that you probably would pay me not to give you. [Laughter] I will spend a few minutes discussing the long-run scenarios in the Bluebook and use them as a lead-in to a discussion of the stance of policy. The Bluebook simulations ... | 2,030 |
fomc | 1,998 | Questions for Don? | 4 |
fomc | 1,998 | Don, you noted a few times in your remarks that from the standpoint of one financial indicator, the level of real short-term interest rates, the current stance of monetary policy may be interpreted as being restrictive. The measure you mentioned is the overnight interbank rate minus some index of prices--the CPI or som... | 168 |
fomc | 1,998 | I tried to indicate in my briefing that I do not place much confidence in that measure at this point for the reasons you cited, President Jordan, and certainly that notion is inherent in the staff forecast. We have the real funds rate staying rather high. It edges off a little measured against backward-looking inflatio... | 351 |
fomc | 1,998 | Don, I may not be asking this correctly but from reading the Bluebook and listening to you, I had the impression that if we allow the unemployment rate to fall below the NAIRU after a positive supply shock, analysis suggests that inflation will re-emerge. Intuitively, there is the differing view that if we have a meani... | 134 |
fomc | 1,998 | I see two aspects to that, President Hoenig. The model is driving the simulations. In the model, there is a NAIRU and if we put pressure on the labor markets, eventually that will show through in terms of rising labor compensation. That in turn will feed through to inflation if the unemployment rate stays below the NAI... | 314 |
fomc | 1,998 | It's a part of the struggle we have been having over the last year. | 15 |
fomc | 1,998 | Absolutely. | 2 |
fomc | 1,998 | I think as a way of characterizing this, Governor Meyer in his earlier incarnation frequently used the term "an effective NAIRU" as a short-run, maybe transitional, phenomenon in the context of a more permanent NAIRU. That permanent NAIRU would re-manifest itself after the shock had run its course. | 65 |
fomc | 1,998 | Thank you. | 3 |
fomc | 1,998 | Further questions for Don? President Minehan. | 9 |
fomc | 1,998 | Thank you. Don, I was intrigued by the final comment in your presentation about the danger of sluggish reactions of monetary policy on the upside or the downside. It made me wonder if you know of any work on whether there is asymmetry in terms of the amount of time it takes the economy to react to a change in interest ... | 77 |
fomc | 1,998 | I'm not aware of any asymmetry in the modeling exercises, but I think there is asymmetry in the normal course of raising and lowering rates. One point that I tried to convey and have the Committee begin to think about relates to situations when inflation and nominal interest rates are down to very low levels, though we... | 333 |
fomc | 1,998 | You cannot do that! | 5 |
fomc | 1,998 | You have a low rate of inflation and you might at least have in mind some asymmetries in the context of low inflation, particularly if it turns out to be much below 2 percent. | 39 |
fomc | 1,998 | I am trying to translate that into thinking about how forward-looking monetary policy needs to be. You seem to say that there is at least some logic to being more forward-looking if we think the economy is going to be weaker in the future, particularly given where we are. | 54 |
fomc | 1,998 | If we are at a very low rate of inflation. | 11 |
fomc | 1,998 | Right. Then, given where we are, can you really say that there is a greater necessity to be more forward-looking if we anticipate an economy that is getting weaker than if we expect inflation to rise slightly in the future? | 45 |
fomc | 1,998 | Ideally, of course, you want to have good foresight and act in a forward-looking way in both directions. Because inflation has been above its long-run target for a long time, the Committee may have a tendency to be a little more sluggish to react to downside shocks. After all, if inflation comes down another1/4 or 1/2p... | 162 |
fomc | 1,998 | May I just inject a thought? I do not want to deny the argument about the real interest rate level, but I would like to remind you of some analysis we have provided you in the past, for example, with regard to the Akerlof-Dickens-Perry notion that at very low rates of inflation, the economy is going to run into nominal... | 213 |
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