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fomc | 1,998 | I haven't even heard the idea floated of an intervention to support the ruble, though it has been floated with respect to some of the other currencies that have come under pressure in the last year. | 39 |
fomc | 1,998 | South Africa? | 3 |
fomc | 1,998 | No. We have operated as agent for the account of South Africa, but that is a standard reciprocity practice among central banks. We've done it routinely over the last ten years for the Reserve Bank of Australia, so routinely that you never hear about it. It is rather hard to turn down the Reserve Bank of South Africa wh... | 156 |
fomc | 1,998 | The complications with Russia stem from the fact that it is important to the United States politically and less important economically and financially. It is much more important economically and financially to our European colleagues. The basic problem in Russia is that although they have made better progress than I th... | 331 |
fomc | 1,998 | The major concern in the Russian situation is that the time is rapidly approaching when a major crisis could occur. As you probably know, the Russian authorities have found it increasingly difficult to refinance maturing obligations in their new Treasury bill market. As their outstanding bills have matured, the Russian... | 454 |
fomc | 1,998 | The Russians are aggravating the problem further in their handling of their short-term workout, if there is one, by doing some borrowing in dollars and other hard currencies and pledging export earnings as collateral. | 40 |
fomc | 1,998 | That gives them a day or two! President Moskow. | 12 |
fomc | 1,998 | I want to return to Japan briefly. I had a question for Peter Fisher on the recent intervention. Can you tell us how market participants viewed this intervention and also what they see as the outlook for possible future interventions? | 43 |
fomc | 1,998 | The intervention in which we participated on June 17 certainly took the market by surprise. We had a much bigger price effect than I and, I think, a number of my colleagues anticipated. Some large speculative players seemed to have been extending their long-dollar/short-yen positions, and as the yen strengthened from 1... | 176 |
fomc | 1,998 | Didn't it strengthen to 143? | 7 |
fomc | 1,998 | It peaked this time in the high 142's, briefly touching 143. It is clear that the market is going to be on guard for further intervention. I would be the first to say that intervention without some message is not going to be very effective, as our South African friends found when they orchestrated their own interventio... | 304 |
fomc | 1,998 | Yes, thank you. | 5 |
fomc | 1,998 | President Minehan. | 4 |
fomc | 1,998 | On the Japanese situation again, we received what I thought was a fascinating paper on the policy options available to the Japanese. It certainly emphasized the fact that they need to do something that is fairly aggressive and strong on the fiscal side. The paper also discussed the topic that Al Broaddus brought up, na... | 106 |
fomc | 1,998 | It depends on which trade-weighted basis one uses. It is a fact that the yen has not depreciated as much on a broad trade-weighted basis--it has depreciated slightly on that basis--as it obviously has against the dollar. In fact, that is part of the argument. But having said that, as Peter Fisher pointed out in his ref... | 380 |
fomc | 1,998 | Further questions for Peter? If not, would somebody like to move ratification of the foreign currency transactions since the last meeting? | 25 |
fomc | 1,998 | Move approval, Mr. Chairman. | 7 |
fomc | 1,998 | Second. | 2 |
fomc | 1,998 | All in favor say aye. SEVERAL. Aye. | 13 |
fomc | 1,998 | Opposed? Without objection. | 6 |
fomc | 1,998 | I also move ratification of the domestic operations. | 10 |
fomc | 1,998 | Is there a second? | 5 |
fomc | 1,998 | Second. | 2 |
fomc | 1,998 | Without objection. Thank you very much. We will now go to the staff report to be presented by Messrs. Prell, Stockton, and Hooper. Gentlemen. | 35 |
fomc | 1,998 | We will be using the set of charts titled "Staff Presentation on the Economic Outlook."2/ But before I turn to the first exhibit, I want to take a minute to update you on the implications of the late-breaking data--particularly Friday's report on personal consumption. As you know, the downward revisions to spending in ... | 1,115 |
fomc | 1,998 | Developments in international financial markets, which are reviewed in Chart 3, continue to be dominated by turbulence in Asia as Peter Fisher has indicated. Movements of exchange rates in that region, shown at the top left, can be divided into three groups of currencies: first, sharp declines in the dollar values of K... | 3,212 |
fomc | 1,998 | I think the domestic demand picture is sufficiently familiar to you that I can run through the highlights quite quickly. We are expecting a substantial deceleration of both household and business spending. Chart 10 summarizes the household side. The Greenbook predicted a quite noticeable drop-off in the growth of consu... | 1,070 |
fomc | 1,998 | The upper panel of your next exhibit lays out the key components of the supply side of our projection. We use a variety of approaches for estimating potential output. The one displayed here is a growth accounting framework. As may be seen on line 1, we are projecting that growth of potential output, on a consistently m... | 2,981 |
fomc | 1,998 | The last exhibit is the usual summary of the projections you submitted for Humphrey-Hawkins purposes. If you scan down the second column, where we have listed the central tendencies, you will see that most of you are expecting real GDP to grow 3 to 3-1/4 percent over the four quarters of 1998, with CPI inflation runnin... | 315 |
fomc | 1,998 | I think that was one of the better presentations this Committee has heard in a while. The outlook is very complex, and I think you all handled it exceptionally well. Peter, what is the potential outcome in Latin America of current account deficits that appear to be getting out of hand? There seem to be political and ot... | 116 |
fomc | 1,998 | In the more pessimistic simulation that we did, we had Asian growth falling by somewhere between 5 and 10 percent at an annual rate across countries. We assumed that this weakness would spread to Latin America and growth there would fall on the order of 2 to 3 percent. There is obviously a risk that it could fall a goo... | 321 |
fomc | 1,998 | David, in Chart 14 you have a table that shows real compensation per hour and trend productivity. Is that real consumption per hour number deflated by the CPI? | 33 |
fomc | 1,998 | It is deflated by the nonfarm business price index. So, it is a product price deflator. | 22 |
fomc | 1,998 | Further questions for our colleagues? President Broaddus. | 11 |
fomc | 1,998 | I have a question, Mr. Chairman, but first I would like to echo your comments about the staff presentation. I have been watching these presentations for a long time, along with Ed Boehne, and I thought this one was particularly well done, especially the focus on the international context. My question has to do with inv... | 152 |
fomc | 1,998 | As you know, there are no direct observations on this. One significant element in the rapid accumulation of inventories in the first quarter was oil. Clearly, the greater flexibility in supply in the short run will be on the import side as opposed to domestic production. So, as that buildup in oil stocks unwinds, we wo... | 275 |
fomc | 1,998 | We did get a calculation that supports what Mike Prell is saying. On average, about a quarter of inventories are imported goods. Assuming all of the increase in oil inventories in the first quarter was imports, considering the limited capacity of the domestic production system, and making a lot of assumptions with resp... | 146 |
fomc | 1,998 | Mike, on Chart 10 you have a fairly dramatic decline in the growth rate of real personal consumption. I understand that part of that comes from the peaking of the wealth-to-income ratio--the stock market weakness. What other factors create that downdraft? | 53 |
fomc | 1,998 | Part of it is simply an assessment of what the underlying trends would be and the fact that consumer spending was at such a high level in the first quarter. Even if second-quarter consumer expenditures were to drop off to the 4 percent plus growth area, or somewhat below our forecast, the first half would still be very... | 126 |
fomc | 1,998 | President Poole. | 4 |
fomc | 1,998 | I would like to make three comments. The first is a plea on terminology dealing with net exports. We know as a matter of arithmetic that I plus C plus G minus net imports equals output; that is arithmetic. But to say that net imports are a drag on output is making an assumption about causation that I do not think shoul... | 70 |
fomc | 1,998 | I think we crossed the Rubicon on this. We recognize that it is hard to express this thought, but we have come to the conclusion that everyone understands this area. | 34 |
fomc | 1,998 | I'm not so sure about that, but I think it is very easy to express that in a different way. We can simply say that total spending exceeds total output when net exports are negative. I think it is too easy to slip into a wrong frame of mind on this. My plea is to be accurate on the terminology here. Secondly, when I loo... | 390 |
fomc | 1,998 | Peter Hooper will say something in response to your question about oil prices. | 15 |
fomc | 1,998 | Just to address the oil price question, I think the jump in the futures reflected OPEC's recent agreement to cut production by somewhat more than we had assumed in our forecast. Our oil experts doubt that OPEC will come through and actually restrain production as much as the agreement suggests. But there is some upside... | 76 |
fomc | 1,998 | I think one has to ask, too, whether the current prices are not abnormally low because of the oil storage constraints. We are getting a contango in the market that may be extreme. There also are some fine points in the current situation that may be exaggerated. | 54 |
fomc | 1,998 | Peter Hooper is right. You are a little ahead of us in terms of looking at the newspapers this morning. The Greenbook as of the time it went to bed actually had an implied monthly forecast through the end of the year that was almost the same as the market futures. There was a slight variation as we went out into 1998, ... | 209 |
fomc | 1,998 | As to the general outlook for domestic demand, your point is well taken. There is an alternative view in which the multiplier-accelerator effects that flow from the external shock and the inventory investment correction are inadequate to precipitate the kind of slowing of employment growth and domestic demand expansion... | 300 |
fomc | 1,998 | There is an interesting issue here. Everyone has been wrong by underestimating domestic demand and wrong in the other direction by overestimating inflation. The area where the error is crucial has been productivity because as productivity growth has accelerated, expectations about earnings over the long run have moved ... | 529 |
fomc | 1,998 | There is an obvious circularity in our forecast in that, were it not for the slowing of demand, we would not have the cyclical deceleration in productivity that Dave Stockton talked about and the related deterioration in profits. It's not that we are anticipating any deterioration in the productivity trend. In fact, we... | 163 |
fomc | 1,998 | Governor Meyer. | 3 |
fomc | 1,998 | Peter, I just wanted a few more details on the pessimistic Asia scenario. When you start out with the yen depreciation in that scenario, do you "add factor" down any other parts of Japanese aggregate demand or is that the hit on it? | 50 |
fomc | 1,998 | We "add factored" both the yen and aggregate demand. | 13 |
fomc | 1,998 | Okay. | 2 |
fomc | 1,998 | We stipulated that we were going to reduce growth. What we did was to impose an exogenous negative psychological or confidence effect on Japanese aggregate demand in the model. Everything else equal, if the yen were to depreciate to the extent that it does in the pessimistic scenario, the model would normally give us a... | 87 |
fomc | 1,998 | So, the falling Asian GDP is imposed exogenously. Let us come back, then, and follow through on President Broaddus's suggestion that we let the yen depreciate, whether it is to 160 or 175. If you had not imposed the exogenous shocks to aggregate demand in Japan and the rest of Asia and had just assumed that the prevail... | 105 |
fomc | 1,998 | If all you do is let the yen go, this is positive for Japan. The effect of this currency shock on the rest of Asia is not that large in the model. The model does not pick up the related uncertainty and confidence effects. | 48 |
fomc | 1,998 | So, the Chinese currency would hold and the Hong Kong spillovers would be contained. | 17 |
fomc | 1,998 | Another shortcoming of the model is that it does not capture borrowing denominated in foreign currencies, and the wealth effects are rather minimal. | 27 |
fomc | 1,998 | Governor Meyer, I think the problem here, if you want to put it in a slightly different way, is that these Asian countries whose currencies have lost 30, 50, or 80 percent of their value and have negative growth rates of 20 percent of GDP present a challenge for economics to explain. Whether we talk about the functioni... | 217 |
fomc | 1,998 | Thank you. | 3 |
fomc | 1,998 | President Jordan. | 3 |
fomc | 1,998 | Thank you. I want to ask a general question about the way we think about Japan. This may build on Governor Meyer's question. A number of the Committee members recently have been in Japan, and I would be interested in their views about the problem and potential solutions, as well as staff comments. We sometimes read com... | 589 |
fomc | 1,998 | The World Bank just released a study on purchasing power parities a few weeks ago that designated what it costs to live in cities around the world. Cities in Japan are still very high on the list. | 40 |
fomc | 1,998 | Even better, the Big Mac index comes to the same conclusion. [Laughter] | 17 |
fomc | 1,998 | The Big Mac index used to be worthwhile until it began to include too much fat! [Laughter] | 21 |
fomc | 1,998 | Did you have to eat one to find that out? | 11 |
fomc | 1,998 | There has been a longstanding dichotomy of views about the equilibrium exchange rate for the yen. Most PPP indices have it somewhere between 150 and 200, depending on which one we look at on which date. Most models that focus on the external balance would put it between 100 and 120. Perhaps one way of looking at it is ... | 130 |
fomc | 1,998 | Isn't the arbitrage value of the yen vis-a-vis the dollar under 100 if we go ten years out? | 24 |
fomc | 1,998 | That comes from the 10-year bond yield. | 10 |
fomc | 1,998 | I gather that bond yield spreads imply a covered rate for the yen, which, as I recall, is well under 100 for a ten-year horizon. That is the type of issue that President Jordan is raising, namely the real disequilibrium in the current yen exchange rate. | 56 |
fomc | 1,998 | You have to build in deflation in Japan in order to get the internal economy and external economy back in balance. | 23 |
fomc | 1,998 | To come to that part of your question, it seems to me that two aspects are involved. One is that, as with everything else with Japan, it is difficult to tell. In particular, as you mentioned, part of the dimension of the disinflationary process has to do with the current level of asset prices. There, in particular, the... | 327 |
fomc | 1,998 | They have a very rich economy, with income and wealth rather well distributed. That gives them a capacity to continue an inappropriate policy for a fairly extended period of time. They also have a relatively content electorate so that there is not the pressure on the elected officials that would normally come in some c... | 316 |
fomc | 1,998 | Governor Gramlich. | 4 |
fomc | 1,998 | I have a different question, but I am intrigued by this discussion. My question about Japan gets back to the forecast. As I recall our previous financial crisis in this country, whose severity I would judge to be about one-tenth that of Japan's current financial crisis, it was some time before there was sufficient reco... | 286 |
fomc | 1,998 | We see further weakness in Japan's private domestic demand. That clearly is a result of anticipated difficulties in the process of resolving Japan's banking crisis. Over the second half of the year, there is no question that the banking problem will continue to weigh on the performance of the Japanese economy. We have ... | 193 |
fomc | 1,998 | To follow up with a comment on Governor Gramlich's question about Japan: Just looking at these charts, I assume that if you have their real exports flat and real imports declining, then you have built in a very substantial decline in real domestic consumption in Japan. | 52 |
fomc | 1,998 | Yes, domestic private consumption in our forecast does fall through the second half of the year. | 18 |
fomc | 1,998 | Let me ask, Jerry, was the nature of your question to ask how far they have left to fall? | 22 |
fomc | 1,998 | That is part of it, insofar as deflation rather than depreciation of the currency is the solution. One of those two things has to happen. If the second solution reflects a correct interpretation of the environment, does any amount of monetary or fiscal pump priming do any good? | 56 |
fomc | 1,998 | On the fiscal side, there is no question. Over the past three or four years, the growth that we have seen in Japan has been largely associated with movements in Japan's structural budget deficit. In 1996, they had a large fiscally-induced expansion of GDP. At the time, we thought conditions were beginning to turn aroun... | 211 |
fomc | 1,998 | President Parry. | 4 |
fomc | 1,998 | I have two questions about Japan. First, I know that a program has been proposed on the fiscal side, but a lot of forecasters assume that perhaps only one-quarter or one-half of that involves actual economic stimulus. What assumption has been made in the Greenbook forecast? I hope it does not incorporate the announced ... | 67 |
fomc | 1,998 | We looked at the numbers carefully in this regard and made judgments based on the past relationship between the announced numbers and the so-called "real water" content of the package. The numbers on actual investment spending in the announced package account for about three-quarters of the overall spending and the tax... | 107 |
fomc | 1,998 | Where does the term "real water" come from? Is that the Japanese translation? What is "non-real water?" Does it have to do with priming the pump? [Laughter] | 39 |
fomc | 1,998 | With no water in it! My second question is how would you assess the extent of a credit crunch in Japan at the present time? I know there is some debate about that because banks obviously do not have an appetite to lend. At the same time, we do not see some of the typical characteristics of a credit crunch, notably risi... | 79 |
fomc | 1,998 | We see it as beginning to have a significant impact. Probably the best indicator is the Tankan survey of business perceptions of the lending attitudes of banks. The survey results are shown in the middle right panel on Chart 6. They indicate a rather large decline in the first half of the year in the perceived willingn... | 120 |
fomc | 1,998 | I would like to make a partial response to an issue that Jerry Jordan raised about what type of policy Japan should pursue. In the area of monetary policy, I think we cannot talk about that very effectively until we have had our discussion of the last item on today's agenda because I think theology may be required to a... | 70 |
fomc | 1,998 | Jerry, to return to your two descriptions of internal deflation or external devaluation, my observation of what is happening in Japan is that they have experienced an enormous amount of deflation that has not been recognized; they have put it off. I am referring to the portfolios of their banks, which are exerting enor... | 166 |
fomc | 1,998 | Further questions for anybody? If not, why don't we break for coffee and come back in 10 minutes. | 22 |
fomc | 1,998 | We have an announcement to make before we continue. | 10 |
fomc | 1,998 | Because the markets will be closing at 2:00 p.m.-and the futures market at 1:10 p.m. on Thursday, we will be releasing the minutes at noon on Thursday instead of 2:00 p.m. | 48 |
fomc | 1,998 | Would somebody like to begin the Committee discussion? President McTeer. | 14 |
fomc | 1,998 | On the national economy, as a new paradigm optimist, I am looking for somewhat stronger economic growth, somewhat less inflation, and lower unemployment rates in my Humphrey-Hawkins projection than the Greenbook forecast. I was pleased to see today that that puts me within the central tendencies on everything but the C... | 896 |
fomc | 1,998 | There is material for a joke in there somewhere! | 10 |
fomc | 1,998 | The Mexican economy slowed substantially during the first quarter, particularly after the correct seasonal adjustments are made to the official data. Mexican oil revenues have been hurt by lower oil prices and by Mexico's decision to join Saudi Arabia and Venezuela in a futile attempt to cut production in the hope of s... | 422 |
fomc | 1,998 | The tankers obviously are being used for storage. Is that mainly for storing crude, products, or a combination? | 23 |
fomc | 1,998 | I think it is crude, but I'm not positive. | 11 |
fomc | 1,998 | President Minehan. | 4 |
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