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fomc | 1,998 | Further questions from anyone? Who would like to start the roundtable? President Moskow. | 18 |
fomc | 1,998 | Thank you, Mr. Chairman. Since our last meeting, economic prospects at home and abroad have changed considerably, yet much of the data that we typically use to gauge the forces at work in our economy have changed only marginally. In some respects, conditions in the Seventh District remain little changed since mid Augus... | 887 |
fomc | 1,998 | President Parry. | 4 |
fomc | 1,998 | Mr. Chairman, solid overall economic growth continued in the Twelfth District in recent months, although the pace slowed from earlier in the year. Between June and August, District payrolls expanded by 2.3 percent at an annual rate, down from the 3 percent pace of the first half of the year. Construction and services a... | 563 |
fomc | 1,998 | President Minehan. | 4 |
fomc | 1,998 | Thank you, Mr. Chairman. Not a lot has changed in New England during the intermeeting period. The regional economy continues to expand nicely, with respectable job growth vis-a-vis the nation's and very low unemployment rates. Labor markets remain very tight despite August job losses in three of our states and anecdote... | 1,228 |
fomc | 1,998 | President McTeer. | 5 |
fomc | 1,998 | The Eleventh District economy continues to perform at a healthy level, although it is retreating from the strong growth we saw earlier in the year. District employment picked up slightly in the first two months of the third quarter after a weak second quarter. The pickup is masking a tale of two economies: a strong ser... | 1,294 |
fomc | 1,998 | President Boehne. | 5 |
fomc | 1,998 | The Philadelphia District economy, while still operating at high levels, is showing some early warning signs of deterioration. Business people have become more uncertain and in some cases apprehensive. This anxiety began in manufacturing and is now spilling over to other businesses as well. The outlook now is significa... | 310 |
fomc | 1,998 | President Guynn. | 4 |
fomc | 1,998 | Thank you, Mr. Chairman. In one sense, it is difficult to find much of significance that has changed in the Sixth District since the July and August meetings. Our District's economy continues to expand at a moderate pace, but with signs of some modest slowing. Indications of some slowing showed up in the manufacturing ... | 943 |
fomc | 1,998 | President Stern. | 3 |
fomc | 1,998 | Thank you, Mr. Chairman. As far as the District economy is concerned, general conditions remain favorable, although I think it's fair to say that the trends are a little more mixed than was the case earlier in the year. Attitudes have not changed dramatically, but I do think there is a little more caution and a little ... | 586 |
fomc | 1,998 | Why don't we take a break at this point. President Jordan will have the floor when we come back. | 21 |
fomc | 1,998 | President Jordan. | 3 |
fomc | 1,998 | Thank you. We had a joint meeting in September of our three boards of directors. What was notable about the meeting was that about half of the group said that there had been a change in confidence and the other half said there was none. At earlier meetings, virtually no one had said that there was any concern on the do... | 1,386 |
fomc | 1,998 | President Hoenig. | 4 |
fomc | 1,998 | Mr. Chairman, if you were to ask how the Tenth District is doing today, you would get two answers. If you looked at any metropolitan area, you would see that its economy is still very strong, with tight labor markets and unemployment rates that are extremely low. When you looked at retail sales, you would find that the... | 292 |
fomc | 1,998 | Is the 40 percent for the Tenth District or nationwide? | 13 |
fomc | 1,998 | Nationwide, but I would say that percentage is not too far off the mark for the Tenth District as well. We are having some bumper crops this year, 20 percent increases in some areas. That is on top of earlier increases. So, prices obviously are down. Our banks are saying that their loan portfolios currently are in sati... | 482 |
fomc | 1,998 | Vice Chair. | 3 |
fomc | 1,998 | Thank you, Mr. Chairman. The Second District economy has slowed somewhat during the third quarter, with continuing job losses in the manufacturing and government sectors. Not surprisingly, the anecdotal evidence is considerably weaker than the data. There is real concern throughout the District about the growth prospec... | 540 |
fomc | 1,998 | President Broaddus. | 5 |
fomc | 1,998 | At least for the time being, overall economic activity in our District remains at a very high level. Revenue growth in the broad service-producing sector slowed in August but picked up again in September. There was a noticeable rise in retail activity essentially across the board in September. As in many other District... | 1,098 |
fomc | 1,998 | Governor Ferguson. | 3 |
fomc | 1,998 | Thank you, Mr. Chairman. For much of this year, as others have said, we have been waiting for a financial upset to hit our shores, and it looks as though that is about to happen. While many of us have migrated to a view of noticeably weaker growth, and I am among them, I think it's important to reiterate two realities ... | 898 |
fomc | 1,998 | Governor Gramlich. | 4 |
fomc | 1,998 | Thank you, Mr. Chairman. Coming late in this discussion, there is not too much to say that has not been said many times already. That is the good news. I would point out that there has been a quite important change in the general comments of the Reserve Bank presidents in the past several meetings, though maybe not a s... | 721 |
fomc | 1,998 | Governor Rivlin. | 4 |
fomc | 1,998 | Let me start with the world situation. Like many others, I find the world economy both sad and scary. The saddest part is that so many millions of people in developing countries in Asia and Latin America are being thrown into desperate circumstances just at the point when they were beginning to have hope for the long-r... | 686 |
fomc | 1,998 | President Poole. | 4 |
fomc | 1,998 | Conditions in the Eighth District, as we have heard around the table with regard to other Districts, are largely unchanged in the real economy. I think it's fair to say that the mood is less buoyant than it was earlier. The financial market upsets, again in terms of the real economy, have been I think largely a spectat... | 739 |
fomc | 1,998 | Thank you. Governor Kelley. | 6 |
fomc | 1,998 | Mr. Chairman, events are moving quite rapidly. It was only last July that the Committee began to get concerned about the emerging bifurcation being introduced by an ongoing very strong domestic economy interacting with a deteriorating international situation. In less than 90 days, policy risks have shifted dramatically... | 382 |
fomc | 1,998 | Finally, Governor Meyer. | 5 |
fomc | 1,998 | Thank you, Mr. Chairman. What has changed between the last meeting and today that could justify an easing? That clearly is the question of the day. The answer is not the initial conditions, in terms of very tight labor markets, nor the near-term pace of the expansion. Second-half GDP growth still looks to be close to t... | 931 |
fomc | 1,998 | Thank you very much. Let's now move on to Don Kohn. | 14 |
fomc | 1,998 | At your conference call last week, most of you seemed to favor easing policy at this meeting. I will briefly review the case for an easing action before discussing the factors bearing on how large the cut in the federal funds rate should be. The case for easing does not rest on incoming data about the economy. As many ... | 1,782 |
fomc | 1,998 | Questions for Don? If not, let me proceed. A number of you have argued, quite persuasively in my view, that there are only limited hard data that suggest any loss of momentum in the current expansion. I can find only two statistics that point to some weakening, although I am sure there are more. One is a significant dr... | 82 |
fomc | 1,998 | Only you would know that! | 6 |
fomc | 1,998 | Well, I hesitated to mention it because it is such a small item. Second, the latest data indicate a fairly dramatic decline in construction awards for nonresidential building. Beyond that, we do not find significant weakening in equipment orders. Retail sales are not terrific, but obviously they are not doing too badly... | 2,455 |
fomc | 1,998 | Mr. Chairman, I agree with your proposal to cut the fed funds rate by 25 basis points. Being the resident theologian on the meaning of "tilt," I would say that a tilt in the direction of further ease is more reflective of what the Committee thinks is likely to happen and where the risks are located. So, I, rather more ... | 80 |
fomc | 1,998 | President Minehan. | 4 |
fomc | 1,998 | Mr. Chairman, I agree with your recommendation for a 25 basis point cut. I would be more comfortable with a symmetric directive at this point simply because I think we still are not, as you point out, seeing real evidence of a slowing domestic expansion. If the reality of a rate cut, as opposed to its promise, results ... | 210 |
fomc | 1,998 | Governor Rivlin. | 4 |
fomc | 1,998 | Mr. Chairman, I too agree with your recommendation of a 25 basis point reduction. In my view, a larger move is unnecessary, and it likely would be interpreted as evidence that the Fed must really be worried. I don't think we want to convey that impression. I would also concur with the proposed downward tilt in the dire... | 134 |
fomc | 1,998 | Aha! [Laughter] | 7 |
fomc | 1,998 | I'm sorry, but where do you come out given that we decided not to announce our decision on the tilt today? | 23 |
fomc | 1,998 | Since we decided not to publish the tilt today, I come out in favor of a 25 basis point reduction and asymmetry toward easing. | 28 |
fomc | 1,998 | Thank you. Governor Kelley. | 6 |
fomc | 1,998 | Mr. Chairman, I support your 25 basis point move, and I prefer symmetry for two reasons. First, that is what the facts of the situation call for in my judgment. Secondly, lowering the fed funds rate could well "spook" this market if such a move is combined with an asymmetric directive. The market might see the Committe... | 116 |
fomc | 1,998 | Governor Meyer. | 3 |
fomc | 1,998 | Mr. Chairman, I support your recommendation of a 25 basis point cut in the target federal funds rate. As I noted earlier, an easing has to be justified as a preemptive response to a significant change in the forecast. In regard to that forecast, we have changes that involve some combination of a lower central tendency ... | 510 |
fomc | 1,998 | President Broaddus. | 5 |
fomc | 1,998 | I would like to review briefly where I am coming from, Mr. Chairman. Despite the rising turbulence in the international economy over the last year or so, I have been primarily focused on the upside risks until recently. I am still focused on them at least to some extent. Until recently, I have felt that the effects of ... | 451 |
fomc | 1,998 | President Jordan. | 3 |
fomc | 1,998 | Thank you. My position is not a 1ot different from that just expressed by Al Broaddus. I had been hoping for quite some time for the emergence of investor caution. Rational optimism is desirable, but investor sentiment was well beyond anything that I would have called rational optimism. Having both lenders and other in... | 288 |
fomc | 1,998 | President Parry. | 4 |
fomc | 1,998 | Mr. Chairman, I support a 1/4 point reduction in the funds rate. I also think the current situation may require more than one 25 basis point cut in the funds rate in the future, and therefore I would prefer a directive with asymmetry toward ease. | 55 |
fomc | 1,998 | President Hoenig. | 4 |
fomc | 1,998 | Mr. Chairman, I also support a 25 basis point reduction. As to the tilt, I would much prefer no tilt for a couple of reasons. Number one, I don't think the facts today warrant it. Number two, I think you are correct in your observation that events will drive what we do next, and changing circumstances may well require ... | 81 |
fomc | 1,998 | President Boehne. | 5 |
fomc | 1,998 | A 25 basis point reduction captures my feeling. I think it is the right measure of response at this point. As far as the tilt is concerned, I'm almost indifferent about it. I believe that we are going to be so driven by events that the tilt is likely to have no substantive influence on what we do. If we had a different... | 102 |
fomc | 1,998 | President Poole. | 4 |
fomc | 1,998 | I support the proposed cut of 25 basis points. I have a preference for symmetry, but I don't believe the issue is very important. In the long run what we do is what determines the outcome, although I believe that what we say can be extremely important in the short run. So, we need to be clear about our direction and ou... | 408 |
fomc | 1,998 | President Moskow. | 4 |
fomc | 1,998 | Mr. Chairman, I support your recommendation for a 25 basis point reduction in the fed funds rate. In my opinion, going beyond that clearly would be seen as an overreaction and some would view it as panic on our part. It is important for us to keep in mind that we are basing this policy action on projections, as you sai... | 161 |
fomc | 1,998 | Governor Ferguson. | 3 |
fomc | 1,998 | Thank you, Mr. Chairman. I endorse your recommendation for a decrease of 25 basis points in the federal funds target rate. As I said in my earlier statement, I think we are acting somewhat preemptively, and while I believe we should take action at this point, we should not overreact. With respect to your policy recomme... | 119 |
fomc | 1,998 | Governor Gramlich. | 4 |
fomc | 1,998 | I also support both proposals. Given all that we have discussed, I believe some rate cut is important, and I think 25 basis points is about right. I am not embarrassed about basing this policy move on the forecast. I think the forecast has it about right. We may find that we have to do more than 25 basis points, and th... | 81 |
fomc | 1,998 | President Stern. | 3 |
fomc | 1,998 | I, too, support the recommendation for a 1/4percentage point reduction in the fed funds rate. It seems to me that that is the prudent thing to do given the risks as I perceive them. I view such a policy adjustment mainly as on the margin of our effort to insulate the domestic economy from the series of negative develop... | 148 |
fomc | 1,998 | President McTeer. | 5 |
fomc | 1,998 | Mr. Chairman, I think I have done my colleagues a real service today in suggesting that we may be behind the curve. I gave them all a chance to say we were not, and an opportunity to vote to ease monetary policy while still sounding hawkish! [Laughter] Just to clarify my views on that-- | 64 |
fomc | 1,998 | I don't think you need to! [Laughter] | 11 |
fomc | 1,998 | I'm willing to quit! I do not believe we are behind the curve on the real economy. On the other hand, I do think that had we lowered the fed funds target by1/4 percentage point prior to the Jackson Hole conference, we might have avoided some of the financial market turmoil that we have seen since then. But starting fro... | 280 |
fomc | 1,998 | President Guynn. | 4 |
fomc | 1,998 | Mr. Chairman, I agree with the proposed 25 basis point easing move and I would prefer no tilt for the reasons that you articulated with regard to that choice and that Gary Stern reinforced in his comments. Thank you. | 44 |
fomc | 1,998 | There is unanimity for a 25 basis point reduction and the smallest of majorities for asymmetry. So, will you read the directive accordingly. | 30 |
fomc | 1,998 | I will be reading from page 14 of the Bluebook: "In the implementation of policy for the immediate future, the Committee seeks conditions in reserve markets consistent with decreasing the federal funds rate to an average of around 5-1/4 percent. In the context of the Committee's long-run objectives for price stability ... | 130 |
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 Governor Meyer Yes President Minehan Yes President Poole Yes Governor Rivlin Yes | 43 |
fomc | 1,998 | Our next meeting will be on Tuesday, November 17. We will now go into a short recess for lunch. When we resume our meeting, Bill McDonough will report on what has been going on with Long-Term Capital Management. [Recess] | 51 |
fomc | 1,998 | I have the draft of a press release, which I will ask Don Kohn to read. | 19 |
fomc | 1,998 | It reads as follows: "The Federal Open Market Committee decided today to ease the stance of monetary policy slightly, expecting the federal funds rate to decline 1/4 percentage point to around 5-1/4 percent. The action was taken to cushion the effects on prospective economic growth in the United States of increasing we... | 125 |
fomc | 1,998 | Sounds good. | 3 |
fomc | 1,998 | Vice Chair, do you wish to comment? | 9 |
fomc | 1,998 | Yes, Mr. Chairman. I want to give the Committee members some background about the involvement of the Federal Reserve Bank of New York in helping a number of private sector financial institutions arrive at a decision to inject capital into Long-Term Capital Portfolio (LTCP). Long-Term Capital Management (LTCM), a hedge ... | 2,282 |
fomc | 1,998 | Bill, did those in the room think that their own firms would benefit from an agreement, or were they looking solely at the macroeconomic effects of being good citizens? | 33 |
fomc | 1,998 | They were looking at both in my view. There was a good deal of concern about the macroeconomic effects. There also was a belief or assumption that if the LTCP collapsed, spreads would widen put, it would be very difficult to mark positions to market, and there could be some chaos for a week or two where it would be ver... | 190 |
fomc | 1,998 | Could you go back and tell us what you know about the position of our bank examiners regarding the practices, which I think you described as less than optimal, that were followed by the institutional lenders to LTCP? | 43 |
fomc | 1,998 | Richard Spillenkothen might be able to pick this up better. A staff group from the Board of Governors and the New York Reserve Bank made a number of visits last December to the major banks, both national banks and state member banks, and put out a memorandum on the subject in April. | 59 |
fomc | 1,998 | I should probably point out that this was not an on-site examination. Our staffs met with the managements of these institutions. I think they came away with a feeling that, generally speaking, the banks were saying the right things in terms of the kinds of risk management processes they had in place. The bankers talked... | 502 |
fomc | 1,998 | When we conduct our examinations, I know that we check to see whether bank policies are being implemented, but how did we do that with respect to, say, Morgan and LTCM? Did we actually evaluate the loan portfolio that represented Morgan's claims against LTCM/P to see whether, in fact, Morgan abided by the principles th... | 71 |
fomc | 1,998 | We typically do some transactions testing to see if banks are carrying out their policies with respect to counterparties. Actually, the Bankers Trust and Morgan exams are now under way. Just before I came to this meeting, I looked at the previous examination, and there was no mention of LTCM in it. But that firm grew r... | 141 |
fomc | 1,998 | Rich, it could well be that, with the rapid growth of LTCP and the increasing involvement of banks in dealing with hedge funds, the banks may not even have been dealing with LTCP at the time of the previous exam. | 46 |
fomc | 1,998 | Yes, that previous exam probably would have been as of the middle of 1997. That exam would have been over a year old. That's a question we have to go back and take a look at. | 42 |
fomc | 1,998 | Where we are most vulnerable is with regard to the adequacy of our examinations. We rarely come up against a situation where we say this is awful, the institution is falling apart, and we did not spot the deterioration. For example, when we looked into the Japanese operation in New York in which the embezzlement occurr... | 73 |
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