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fomc | 1,998 | Let me go back to the issue that you mentioned with respect to the incentives of Japanese banks to sell their JGBs. The banks are carrying them at book and they are engendering very large capital losses. Those losses are not being charged against capital, but would be if the JGBs were sold before maturity. I didn't qui... | 76 |
fomc | 1,998 | My understanding is that once the price of the JGBs declines below the cost at which they were purchased, the banks will have to recognize a loss. | 31 |
fomc | 1,998 | Is it cost or market or both? | 8 |
fomc | 1,998 | It is cost or market, whichever they chose. They were given a choice. Virtually all chose cost. I may be wrong, but I went over this with the Ministry of Finance representative in New York just yesterday, and my understanding is that once the market price reaches cost, the banks will then have to recognize a loss. | 66 |
fomc | 1,998 | That is the old-fashioned market or cost basis if it's below market. Once they reach cost, it becomes a loss. | 24 |
fomc | 1,998 | That's right. But I think the way they will view this is not on a bond-for-bond basis. They will look at the average cost of their JGB portfolio. And as the market price approaches that level, they will want to be liquidating the portfolio before the breakeven point is pierced. | 62 |
fomc | 1,998 | Why? I can see it on a bond-by-bond basis. They may have a different way of keeping their books. We do it bond-by-bond; you are saying they do not. | 40 |
fomc | 1,998 | I think there may be a distinction. The accounting probably is bond-by-bond. But if you are managing the portfolio, you are going to say: "It is approaching breakeven so I better get rid of it." I think the accounting would be the way you described, but the managerial approach would be to bunch these securities. | 68 |
fomc | 1,998 | It is poor management if I understand what they are trying to do, which is to hide their losses. | 21 |
fomc | 1,998 | Well, would it surprise you if that were-- | 10 |
fomc | 1,998 | I won't comment on that! On a seemingly related subject, I noticed that in the bottom graph on page 2 you show the U.S. 10-year swap spread over Treasuries, which is somewhat more than 80 basis points. In Britain it is also about the same order of magnitude. On the continent, as I recall, it is about 30 basis points. D... | 123 |
fomc | 1,998 | I have not found an acceptable explanation of that myself. It is something I have tried to follow. So my first response is that I see it as a bit of a mystery. I think it's especially a mystery if you realize that these swap spreads, as most of us measure them, are from a common panel of major international banks. So t... | 142 |
fomc | 1,998 | There has to be an answer because somebody is bidding 30 basis points for one and 80 basis points for another, which suggests that they see a difference and are doing it for a reason. | 39 |
fomc | 1,998 | There are some in the market who think that European central banks are active in this market. | 18 |
fomc | 1,998 | That is a potential explanation. | 6 |
fomc | 1,998 | Yes, that would be. | 6 |
fomc | 1,998 | That goes to the sovereign credit issue. | 8 |
fomc | 1,998 | It is coming in through the demand side rather than the supply side, if you will. But I have not interrogated my foreign central bank counterparts enough to determine this. | 34 |
fomc | 1,998 | If you have a chance, could you track it down? | 12 |
fomc | 1,998 | Yes, I may be able to do so. | 10 |
fomc | 1,998 | The only reason I raise the issue is that it may be telling us something about the issue of subsidization in the system, which is a useful insight if proven. | 33 |
fomc | 1,998 | Yes, we will try to look into that further. | 11 |
fomc | 1,998 | Any further questions? | 4 |
fomc | 1,998 | Is this the appropriate time to bring up the issue of indexed bonds that we talked about last time? | 20 |
fomc | 1,998 | Yes. | 2 |
fomc | 1,998 | I happened to be on the morning call when the Desk first bought indexed bonds, and there was a very large reaction in the marketplace. It seems to me that this experience raises the question that I brought up before, about whether we should be buying indexed bonds for the FOMC portfolio. I am still opposed to it. In my... | 106 |
fomc | 1,998 | You saw a rather significant 1-hour reaction, President Poole. I think the 1-day and 3-day and 3-week reaction was rather muted. So, my first point is that trying to measure this on a minute-by-minute basis involves working with too short a time horizon. My second point is that I really do not understand the logic of y... | 220 |
fomc | 1,998 | On the first day--not just the first hour, but the first day--the longest indexed bond, which I believe is the one that we purchased, was up 16/32. The neighboring bonds were down 12/32, 14/32, 19/32, and 20/32. In the general market that particular day the non-indexed conventional bonds also were dropping in price. As... | 163 |
fomc | 1,998 | That is one thing we look at; it is not the only thing. We are also looking at our holdings of securities and trying to keep a balanced portfolio across the whole yield curve. That is really the first order of importance. | 46 |
fomc | 1,998 | Okay. I can understand picking up some that are trading at a peculiar price relative to the adjacent issues, but you can't make that decision on the indexed bond without taking a view as to what the relationship between the indexed bond and the conventional bond would be. | 51 |
fomc | 1,998 | No, I disagree with you completely on that. That is precisely why I wanted to do a TIPS-only pass: So the only relative value statement we would be making would be vis-a-vis other TIPS issues. Thus, when we purchased TIPS I would make a judgment as to the rough order of magnitude, how many hundreds of millions should b... | 117 |
fomc | 1,998 | Mr. Chairman, I will only note that I am not convinced by the argument. | 17 |
fomc | 1,998 | Let me suggest this: Why don't the two of you have a bilateral discussion and if you can add any additional light, report it to the rest of us. | 32 |
fomc | 1,998 | That is certainly a reasonable proposition. Thank you. | 10 |
fomc | 1,998 | Any further questions? | 4 |
fomc | 1,998 | Move approval of the Desk's actions and adding the euro to the current list of designated currencies. | 19 |
fomc | 1,998 | Without objection I assume approval of both. We now move on to Karen Johnson and Mike Prell. | 20 |
fomc | 1,998 | We received October trade data after the Greenbook forecast was prepared, so I would like to start by describing the implications of those data for our understanding of the foreign sector during the current quarter. Both exports and imports surprised us on the upside, but the surprise was significantly greater for expo... | 810 |
fomc | 1,998 | As Karen noted, the October trade report seems to point to a considerably higher level of net exports than was built into our Greenbook estimate of real GDP growth in the current quarter. However, yesterday we received the Monthly Treasury Statement (MTS) for November, and it points to lower federal purchases than we w... | 1,314 |
fomc | 1,998 | Karen, am I correct in assuming that the imports into the United States have been tracking under what our models would have suggested? | 25 |
fomc | 1,998 | Yes, but not by much. The import equation has been doing fairly well. | 16 |
fomc | 1,998 | So there is no evidence at this stage that the differences between income elasticities on the export and import side are showing any change from what we have seen over the years? | 34 |
fomc | 1,998 | Not convincing evidence yet, no. The thought is in my mind, given the enormous changes in potential GDP growth everywhere. The fact that we see potential in the United States going up--and we certainly have written down the potential for Japan and other countries a great deal--suggests that whatever the deeply embedded... | 111 |
fomc | 1,998 | President Parry. | 4 |
fomc | 1,998 | Mr. Chairman, I have a comment and a question. First the comment: Karen, I would like to thank you for the memo on China that was done by John Fernald. It was very responsive to the questions I raised at the last meeting and also provided a lot of good information. It explained why China has performed better over this ... | 192 |
fomc | 1,998 | We try to track their production and delivery plans as closely as possible, with the help of some inside contacts. One of the uncertainties at this point is whether, indeed, they will be able to make the volume of deliveries to foreign customers that they hoped to make, because there seem to be financing problems still... | 66 |
fomc | 1,998 | So they end up in inventory? | 7 |
fomc | 1,998 | They have been in inventory. We think those inventories are being reduced in this quarter, and that is part of our forecast. There is coherence in our arithmetic. In fact, in the ultimate GDP numbers--when we try to sort through all of this--we can't find the coherence that we have as we put these numbers together ours... | 78 |
fomc | 1,998 | Right. | 2 |
fomc | 1,998 | But, in terms of our forecast, we have taken into account their production intentions and their delivery patterns. | 21 |
fomc | 1,998 | They are one of the few companies where a change in their sales can show up in the GDP numbers. | 21 |
fomc | 1,998 | It is potentially significant on a quarter-to-quarter basis. I think we sometimes overestimate the importance of aircraft in total producers' durable expenditures in the United States, but certainly it can be a significant quarter-to-quarter swing factor. | 45 |
fomc | 1,998 | Thank you. | 3 |
fomc | 1,998 | President Minehan. | 4 |
fomc | 1,998 | We had several area academic economists in for a meeting a week or so ago, including some from M.I.T. and Harvard, and I had some people from the investment community in for breakfast earlier this week. Almost everybody's projection for the fourth quarter is well above 3.1 percent. Many are hedging their bets, saying f... | 134 |
fomc | 1,998 | There is a lot of room to maneuver at this point with the data that are now in hand. I would not put 4-1/2 percent out of the range of possibilities. They did not have the benefit of the MTS, though. That can be pretty tricky to read. We made that effort and it did chip a bit off the fourth-quarter number. Another poss... | 377 |
fomc | 1,998 | So you think the balance of the risks is on the upside? | 13 |
fomc | 1,998 | I guess I feel the fatter tail of this probability distribution is on that side. On the other hand, as I pointed out, there are inconsistencies in some of the information we are getting. It is really hard to determine where all these goods are that supposedly have been produced. Anecdotally, it does not sound right; an... | 93 |
fomc | 1,998 | My own investigations in the last couple of weeks would suggest that they are in Bloomingdales! [Laughter] | 24 |
fomc | 1,998 | In inventories for the time being, I take it. | 11 |
fomc | 1,998 | Is that where all the steel is? [Laughter] | 12 |
fomc | 1,998 | I don't know. There's lots of inventory there. | 10 |
fomc | 1,998 | A lot of imported apparel. | 6 |
fomc | 1,998 | Any further questions for either of our colleagues? If not, who would like to start our discussion? President Broaddus. | 25 |
fomc | 1,998 | On balance, Mr. Chairman, the Fifth District economy appears to be continuing to expand at a moderate pace. Retailers are reporting very busy stores, brisk holiday sales, and the strength seems to be broadly based. Specialty stores and apparel shops, big box discounters, building supply stores, and hardware stores all ... | 1,047 |
fomc | 1,998 | Mr. Chairman, if I could just respond briefly. I am not sure I fully grasp the point that President Broaddus is making. I will follow up bilaterally with him to make sure I have an understanding. But just to be clear on the basis of our assumption for the funds rate, let me say that our default is to assume a stable fu... | 218 |
fomc | 1,998 | Let me just respond to that, Mike. You say you run it through the model. A more explicit discussion of how that is done and what judgments are made so we can feel comfortable with a constant funds rate in this forecast would be helpful to me. | 51 |
fomc | 1,998 | That is going to be very difficult to portray because there is a good deal of judgment involved. In addition to the use of the quarterly model, we get input from sector experts and so on. As you know, we have invited Reserve Banks to send staff members--and they have--to join us during a portion of our forecasting proc... | 130 |
fomc | 1,998 | Okay. | 2 |
fomc | 1,998 | President Parry. | 4 |
fomc | 1,998 | Mr. Chairman, economic activity in the Twelfth District has expanded at a solid pace in recent months, and our business contacts are less downbeat concerning growth prospects than they were during the summer and early fall. Total payroll employment has grown by 2.6 percent at an annual rate since midyear, above the 2 p... | 751 |
fomc | 1,998 | President Moskow. | 4 |
fomc | 1,998 | Thank you, Mr. Chairman. Conditions in the Seventh District generally remain quite similar to what I reported in November, with the major difference being that the anxiety level among our contacts seems to have come down somewhat. Uncertainty about the domestic and global economies remains high, but the heightened conc... | 797 |
fomc | 1,998 | President Poole. | 4 |
fomc | 1,998 | Mr. Chairman, local conditions in the Eighth District are largely unchanged. I would note that comments from these sources are confidential, of course. There is no question that the agricultural regions in our District are hurting. Many of the farmers have taken substantial losses. At this point their credit is not rea... | 301 |
fomc | 1,998 | President Minehan. | 4 |
fomc | 1,998 | Thank you, Mr. Chairman. There is not a whole lot new in New England, at least since the last Committee meeting. The regional economy continues to grow, albeit at a pace a bit lower than earlier in the year. Unemployment varies by state but in the aggregate is about a percentage point lower than in the rest of the coun... | 1,271 |
fomc | 1,998 | President Boehne. | 5 |
fomc | 1,998 | The regional economy in the Philadelphia District is healthy, although weakness in manufacturing persists. Attitudes are positive and prospects for continued expansion are good. Retail sales appear to be matching expectations. Consumers are shopping, though, with an eye for bargains. High-end brands that offer good val... | 461 |
fomc | 1,998 | President Guynn. | 4 |
fomc | 1,998 | Mr. Chairman, over the past six weeks, the Sixth District has continued to grow at a healthy but slower rate than was the case earlier this year. We expect that same pace to continue into next year. The big stories this time around in our District are tourism and energy. The outlook for Florida tourism has been noticea... | 940 |
fomc | 1,998 | President Stern. | 3 |
fomc | 1,998 | Thank you, Mr. Chairman. At the broadest level, the District economy remains healthy. There is very little question that it is continuing to expand. But that generalization applies principally to the major metropolitan areas where construction, both residential and nonresidential, is strong and consumer spending is rob... | 570 |
fomc | 1,998 | President McTeer. | 5 |
fomc | 1,998 | Texas employment growth has decelerated from fast to moderate during the course of 1998--from about 4.6 percent in 1997 down to about 2 percent lately. Three head winds or drags are causing this growth to moderate. One is tight labor markets. They have been tight for a long time, but we have less and less ability to at... | 390 |
fomc | 1,998 | President Jordan. | 3 |
fomc | 1,998 | Thank you. There are disparate developments in our District as well as all over the country. In particular, directors and others we talk to focus attention on steel and how hard times have been for the steel sector. Twenty years ago when I lived in Pittsburgh, one of the large corporations headquartered there was among... | 90 |
fomc | 1,998 | That's how they got there in the first place! | 10 |
fomc | 1,998 | So, we do hear those stories about just how difficult it is for certain companies and certain communities that are related to either metals or energy. But virtually everything else is about as strong as it can get, and everybody talks about 1999 being even stronger. The motor vehicle industry is exceptionally strong. M... | 664 |
fomc | 1,998 | A very soft report! | 5 |
fomc | 1,998 | So, we all look for signs and evidence that prices of goods and services are starting to rise at a somewhat more rapid rate. There are some signs, and the staff forecast for the next year or two is that the rate will be modestly higher. But even if that forecast is accurate and prices of goods and services rise only mo... | 396 |
fomc | 1,998 | President Hoenig. | 4 |
fomc | 1,998 | Mr. Chairman, our District economy continues to chug along at a pretty good pace. We have some weak areas, and one of those, of course, is agriculture. The impact is not as dramatic as I mentioned last time because of the recent transfer payments to that sector. The concern is the longer term. We don't know what the Fr... | 507 |
fomc | 1,998 | Vice Chair. | 3 |
fomc | 1,998 | Thank you, Mr. Chairman. The Second District's economy has generally shown increasing signs of strength in the past month. Private sector job growth in both New York and New Jersey accelerated modestly in November. The unemployment rate held steady at 5.1 percent. Purchasing managers when surveyed say that they see som... | 619 |
fomc | 1,998 | Governor Kelley. | 3 |
fomc | 1,998 | Mr. Chairman, the Greenbook and most forecasts foresee a slowing in the U.S. economy. I share that view because, after all, as we've heard this morning, the manufacturing sector is slowing and related to that net exports continue to deteriorate, although we hope the rate of change will decelerate. Consumer savings have... | 350 |
fomc | 1,998 | Governor Gramlich. | 4 |
fomc | 1,998 | Thank you, Mr. Chairman. Our job all year has been to try to bring about a soft landing. In the first half of the year it looked as if we might never have any landing at all. In the second half of the year a crash landing seemed more likely. Now, for one of the first times this year, conditions look about right. One ca... | 698 |
fomc | 1,998 | Governor Ferguson. | 3 |
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