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fomc | 1,999 | I would like to clarify a few points, Mr. Chairman, if I may. | 17 |
fomc | 1,999 | Why don't you go ahead. | 6 |
fomc | 1,999 | I was trying to respond to a series of issues that have arisen over the last couple of years in the course of the investigations of leaks of confidential FOMC information and in conversations with Committee members and staff. In this proposal we are trying to accomplish a couple of objectives. One is to make clear that... | 547 |
fomc | 1,999 | It seems reasonable. Does anybody have any objection to that? Let's do that then. | 17 |
fomc | 1,999 | If some people have comments, I'd be happy to hear them. | 13 |
fomc | 1,999 | I have just one quick comment. I worry a little about the degree of restrictiveness being proposed for what is now going to be Class I, which involves any discussion of what actually happens at a meeting. If we limit Class I information to four people, as I understand the proposal, at my Bank that would mean me along w... | 174 |
fomc | 1,999 | Is there a way to have a general set of rules and then, under certain conditions, to have temporary alterations or rules that endeavor to address a specific situation? That strikes me as the type of issue you are raising, President Broaddus. | 49 |
fomc | 1,999 | There is already in these rules, Mr. Chairman, the authority to make exceptions for specific situations. I think President Broaddus is raising a broader issue about how many people normally have access to these documents. | 42 |
fomc | 1,999 | What I am trying to say is that I can conceive of the number of people given access as being flexible, depending on the particular situation and circumstances. We might be wise to be sensitive to that because the purpose is not to withhold information from those who should have it within the System but to classify it. ... | 109 |
fomc | 1,999 | I talked with Don about this a couple of times. Based on your comments, Don, I assume you plan to do away with the current arrangement in which the same group of people who brief a Reserve Bank President also know the outcome of a meeting. You are proposing wider access to the Bluebook which in the future will no longe... | 97 |
fomc | 1,999 | I think that second distinction would go away. Its inclusion was an error and is one of the things I would clean up. The directive would be Class I, so the distinction between Class I and directive access would go away. The second investigation by the Inspector General pointed to the limited access to the directive as ... | 110 |
fomc | 1,999 | Let me then put in a request that we take one step back and ask ourselves how much sense this makes. How many people in most Banks get access to all the policy alternatives and are part of the very intimate group of people who are advising the President on what he or she should do at the meeting? Can we ask ourselves w... | 113 |
fomc | 1,999 | Obviously, it is up to the Committee whether it wants to give more people access to information about what goes on at meetings. Maybe that's a choice we could give the Committee at the next meeting: How many people do you want to have access to Class I information? You know the risks on both sides. We were trying to ma... | 111 |
fomc | 1,999 | I know. Obviously, there have to be restrictions. But to treat as outsiders, in terms of what went on at a meeting, people one considers part of one's close circle or people who are involved in discussions of the issues one brings to the table really does not sit very well with me. | 59 |
fomc | 1,999 | Communicate to Don whatever issues you would like to raise. We will try to close this at the next meeting, but it may spill over to the meeting after that. The ultimate requirement is to get general agreement on all of this. We will now go to the substance of the meeting and our regular meeting format. Would somebody l... | 79 |
fomc | 1,999 | Move approval. | 3 |
fomc | 1,999 | Without objection. Peter Fisher, you have the floor. | 11 |
fomc | 1,999 | Thank you, Mr. Chairman. I will be referring to the package of colored charts that begins with the chart on 3-month deposit rates. You should have that package somewhere in front of you on the table. 1/ The charts depict forward rate agreements as they have traded over the past seven months since July 1st. As you can s... | 2,439 |
fomc | 1,999 | Are there questions? | 4 |
fomc | 1,999 | Peter, I probably should know this from something else you have sent us, but when you converted our holdings of securities denominated in deutschemarks to securities denominated in euros, what did you do? | 40 |
fomc | 1,999 | We did a series of foreign exchange trades with ourselves, which is really what everyone did to convert. These are not done with any counterparty. We just take out all the assets denominated in marks and then put them back in denominated in euros, asset by asset. Then the challenge is to confirm that with all our count... | 121 |
fomc | 1,999 | You leave us hanging. Did you check to see if it worked? | 14 |
fomc | 1,999 | Yes. I meant to cover that. I did say that our conversion went quite well; maybe I covered that too quickly. We were among those who experienced some of the glitches in the new European payment system. We were holding our breath sometimes to make sure we did not fail on our delivery of euros while waiting for the queue... | 146 |
fomc | 1,999 | The portfolio now has euro-denominated deposits at the Bundesbank, euro-denominated German government securities, and euro-denominated deposits at the BIS? | 29 |
fomc | 1,999 | Yes, and euro-denominated repo agreements with our counterparties, with Deutsche Bank as our custodian. | 21 |
fomc | 1,999 | Okay. Under what circumstances would we wind up having in the portfolio euro-denominated obligations of other taxing authorities besides the Germans? | 25 |
fomc | 1,999 | We will not, until this Committee discusses whether I should buy some other assets. That is, we are limiting our repos to German government instruments. I think I mentioned some months ago that we will see how the markets develop, and we may come back to the Committee to discuss diversifying. In particular, the French ... | 174 |
fomc | 1,999 | Thank you. | 3 |
fomc | 1,999 | Incidentally, I noticed that the issuance of euro bonds in the international market in January exceeded the issuance of dollar-denominated bonds and exceeded the combination of those denominated in the previous currencies that went into the euro. Is this a short-term, one-time adjustment? Or are we looking at the longe... | 112 |
fomc | 1,999 | That is a well phrased question. My view is that a lot of issuers want to test the market quickly. That is, we are talking about the issuance of new bonds. Everyone wants to get in because in their sector of the euro market they can be the benchmark, just as all European governments are debating who is going to be the ... | 170 |
fomc | 1,999 | No, I wasn't referring to the exchange rate. I was referring to the notion that as the aggregate issuance of euro securities increases, one would expect the bid-ask spread in the single euro currency to be narrower than the average bid-ask spread in its predecessor currencies. Even though differences still exist with r... | 205 |
fomc | 1,999 | Right. I think the January effect we are observing is a curiosity effect. Your other hypothesis may well prove right over time, but I don't expect a smooth movement from where we are now, given what happened in January. | 44 |
fomc | 1,999 | Is the increase in the offerings, which effectively means going short in euros, a factor in the euro's decline from its initial offering price? | 28 |
fomc | 1,999 | That is something some of us have speculated on. I don't think we have firm evidence that there will be a lot of borrowing by people who don't live in the euro zone, since they have to take their proceeds out. So, the first-run effect of such borrowing would be to weaken the euro. Some of us have been telling ECB and N... | 129 |
fomc | 1,999 | Further questions? | 3 |
fomc | 1,999 | Mr. Chairman, I move approval of the domestic operations. | 12 |
fomc | 1,999 | Thank you. Approved without objection. Let's move on to the Chart Show and Messrs. Prell, Alexander, and Stockton. Gentlemen. | 29 |
fomc | 1,999 | Thank you, Mr. Chairman. I will start the presentation. We will be referring to the package of charts entitled "Staff Presentation on the Economic Outlook," which may be at the bottom of the pile of papers in front of you. 2/ Chart 1 provides a basic summary of the staff economic forecast. As you know, the BEA publishe... | 1,787 |
fomc | 1,999 | The main changes in our forecast on the international side have been driven by events in Brazil. Our previous assumption that Brazil's exchange rate peg would hold has obviously been proved wrong. Your next chart focuses on recent developments in Brazil and highlights the key policy problems facing the Brazilian author... | 3,681 |
fomc | 1,999 | Your next few charts focus on the aggregate supply side of the economy, beginning with a question raised at a number of recent meetings, "Just how low is inflation?" The upper left panel of Chart 11 displays the four-quarter changes in two alternative measures of consumer prices, the PCE chain price index--the black li... | 2,938 |
fomc | 1,999 | That was a particularly impressive performance by the three of you. I thought it most interesting in all respects. I found the results of the forecast scenario that assumes the largest change in stock market prices somewhat startling in the sense of how restrained the secondary effects were. If we look at the end resul... | 266 |
fomc | 1,999 | I have a couple of questions. First, on Chart 1, the inflation rate as measured by the CPI goes up almost a percentage point over the forecast horizon. In your opening comments, Mike, you said that you were leaning toward giving somewhat greater weight to labor market tightness in the inflation picture. Yet, as I look ... | 133 |
fomc | 1,999 | The rise in oil prices that we have assumed is accounting for a very substantial portion of the overall CPI increase in the forecast. In thinking about the story in terms of underlying resource pressures, as Dave indicated, we have leaned more toward the unemployment rate as the indicator of resource pressures rather t... | 77 |
fomc | 1,999 | I had a question, too, about Chart 10, entitled "U.S. Current Account Sustainability." You talked about the factors that have affected the sustainability of the current account deficit since 1997, including the appreciation of the dollar and the deterioration of external accounts. It seems that many of these developmen... | 147 |
fomc | 1,999 | I think in part what you are picking up are the initial conditions and compounding effects. If we have a cyclical swing that makes the situation worse now and if the other economies come back later, we will in the interim experience a further increase in our net external debt position. And because of the compounding, t... | 166 |
fomc | 1,999 | That's a very good point. Just one last comment: I was a little surprised in Chart 15 by the limited impact on inflation of whether there was a positive demand surprise or a negative demand surprise. The Taylor rule, with the exchange rate consequences, just offsets that. Was that not surprising to you? | 61 |
fomc | 1,999 | Yes, it was. | 5 |
fomc | 1,999 | Okay. Thank you. | 5 |
fomc | 1,999 | Incidentally, as I think you are aware, the implicit assumption for the crude oil price embodied in the forecast does exceed the price implied by the forward futures market for the rest of this year and next. If you had substituted the market's estimate for the staff's estimate, would that have made much of a differenc... | 68 |
fomc | 1,999 | It would have taken a couple of tenths off the forecast. Our price is just a dollar or so higher than the market's, so the effect would be a tenth or two. If one wanted to assume that oil prices stay flat going forward, that would take another couple of tenths off, roughly speaking. The assumptions we have made on both... | 93 |
fomc | 1,999 | There is a wage/price interaction, which means that the change in the crude oil price gives us a multiplier in the inflation rate. Are you counting that in the 0.2 and 0.3 or are you doing just a direct accounting translation into the product prices in the CPI? | 59 |
fomc | 1,999 | We are doing the full accounting. On PCE price inflation, flat oil prices and, let's say, 1 percent slower non-oil import price inflation would take about 0.2 off the forecast we are showing in 1999 and 0.4 off in 2000, including all of the feedback effects. | 66 |
fomc | 1,999 | That is what I am getting at. It is a full simulation effect. I would presume that if the price of crude oil went down, it would have even more of an effect. So, in a sense a not insignificant part of the forecast is dependent on an endeavor to make judgments about a very difficult issue. We do the best we can, but it ... | 160 |
fomc | 1,999 | Mike, I want to ask you a question about the performance of equity markets over the last several years. Typically, one talks about that in terms of earnings and P/E multiples. Does it make sense to focus on risk premia in equity markets and look at it from the viewpoint suggested in some of the studies by Ibbotson and ... | 203 |
fomc | 1,999 | It certainly has an analytical basis. It is an abstract notion that is unmeasurable. | 19 |
fomc | 1,999 | That is why it's worth spending time talking about it. | 11 |
fomc | 1,999 | Yes. One of the active hypotheses is that investor perceptions of the holding periods over which they need to assess the volatility in different assets may have changed, so that investors are not as preoccupied with the greater short-run volatility of equities as they were historically. People may have recognized that ... | 230 |
fomc | 1,999 | Thank you. | 3 |
fomc | 1,999 | President Stern. | 3 |
fomc | 1,999 | Thank you. The bottom panel of Chart 13 shows a set of projections, one of which uses the capacity utilization equation. I believe you commented that recent history would seem to be a bit more consistent with this view of the world. That raises in my mind the fact that manufacturing capacity focuses on a relatively nar... | 105 |
fomc | 1,999 | I would say it works principally because the manufacturing sector is the most cyclical component of the entire economy and therefore involves enough variation to pick up some correlation with what is going on in product markets more generally. It certainly amplifies, in some sense, what is happening in product markets ... | 159 |
fomc | 1,999 | I doubt that there is much that I can add to Dave's expertise on this, but one thing we have talked about among ourselves is whether the models that we use really pick up the importance of the dollar and import price movements. Given the confluence of events recently and the way they have impinged on the manufacturing ... | 97 |
fomc | 1,999 | What happens if you use the GDP gap instead of the unemployment rate? | 14 |
fomc | 1,999 | The outcome is quite close to the unemployment equation results. | 11 |
fomc | 1,999 | Doesn't that address President Stern's question? | 9 |
fomc | 1,999 | It does that except one has to remember that the way we construct the GDP gap is basically a version of Okun's law. It is a little more complicated than that, but it does not bring much additional information to bear relative to what is already incorporated in Okun's law. | 57 |
fomc | 1,999 | In order words, these are two independent methods, and the combination of the two doesn't add anything? | 20 |
fomc | 1,999 | Right. | 2 |
fomc | 1,999 | President Poole. | 4 |
fomc | 1,999 | I have a quick question of fact on financing conditions in the U.S. corporate bond market. I should know the answer, but I don't. Roughly speaking, what fraction of the new issues is at the lower-rated end and what fraction is at the higher-rated end? Your chart emphasizes the corporate junk bond rate, and that is up s... | 88 |
fomc | 1,999 | To be honest, I don't have a good number in mind. It has varied considerably over time. The table on page III-2 in Part II of the Greenbook shows the gross issuance of bonds by U. S. corporations in 1998. Sales of investment grade issues averaged $14 billion a month, whereas those at the speculative grade were $9.5 bil... | 78 |
fomc | 1,999 | So the percentage breakdown is roughly 60/40. | 11 |
fomc | 1,999 | If one wants to take into account the degree to which these data represent refinancing, this becomes a tricky question to deal with. One of the problems in trying to examine the changes we've seen in credit market conditions over the past year is that the variations depend not only on a firm's credit rating but on whic... | 223 |
fomc | 1,999 | We have fairly detailed information on the outstanding stock of debt by credit ratings. I think the median is just at the edge of investment grade versus noninvestment grade. | 32 |
fomc | 1,999 | I suspect so. | 4 |
fomc | 1,999 | Governor Gramlich. | 4 |
fomc | 1,999 | I am back on the bottom chart on Chart 13, and my question is an offshoot to Gary Stern's question. There is a lot of uncertainty about the NAIRU. I believe your equations have it in the low to mid 5 percent area, perhaps 5.3 or 5.4 percent. This chart actually helps to get at a question that I have worried about, whic... | 189 |
fomc | 1,999 | Over this two-year period that is exactly in line with the basic rules of thumb, yes. It is certainly true that there is enormous uncertainty in all these estimates. Indeed, in terms of the capacity utilization type equations, we are in essence below the model's estimate for the natural rate of capacity utilization. It... | 93 |
fomc | 1,999 | In the Bluebook, Governor Gramlich, there is a simulation with a 41/2 percent NAIRU, which does exactly what you said. The economy is at equilibrium. Nominal and real rates are where they need to be and inflation ends up about 3/4 of a percentage point lower than in the baseline. | 67 |
fomc | 1,999 | President Minehan. | 4 |
fomc | 1,999 | I found the paper that you circulated on the PCE versus the CPI measures very interesting, and the charts are interesting as well. What I found myself asking, however, was this: If price stability is characterized by people not taking inflation into account when they are engaging in decisions--along the lines of the Ch... | 167 |
fomc | 1,999 | I think the clearest area where the PCE has that kind of problem is that it includes prices associated with nonprofit institutions such as religious organizations and other charitable organizations. If prices in those areas are changing because the statisticians are imputing prices for labor costs and so forth, I don't... | 209 |
fomc | 1,999 | Are you saying that the CPI or the PCE weighting is better? | 14 |
fomc | 1,999 | The PCE weighting is probably more appropriate and closer to most people's thinking than the fixed-weight structure of the CPI. | 23 |
fomc | 1,999 | Well, let's assume that the CPI weighting is wrong, because it clearly is a sample and people make very poor judgments as to what the weights are with respect to what they spend. But that is indeed what they think they are doing. The point is that their perception of the inflation rate may be wrong from an economist's ... | 181 |
fomc | 1,999 | Yes, it is a different one. | 8 |
fomc | 1,999 | I would add just one comment on that. Part of the difference in reporting in the consumer expenditure survey that is used for the CPI is probably deliberate. It is not necessarily a misconception. The fact is that consumers significantly underreport their consumption of alcoholic beverages and tobacco. Now, it could ve... | 70 |
fomc | 1,999 | There is some evidence that suggests that the more you drink, the less you remember! | 17 |
fomc | 1,999 | And the less you care! | 6 |
fomc | 1,999 | People certainly remember how much they paid for that last pack of cigarettes. I suspect that even if they are underweighting it in the survey, it is on their minds. | 35 |
fomc | 1,999 | President Jordan. | 3 |
fomc | 1,999 | I want to ask about the last chart because it goes into the Humphrey-Hawkins report and does get some attention from the public. I was struck that the central tendency on the real GDP numbers and on the CPI numbers stayed the same as those we had last summer but the nominal GDP range went down. That implies, I suppose,... | 88 |
fomc | 1,999 | We don't get the members' estimates of the deflator. I must say that, when I look at the numbers you give us, I can see that in some cases people are not distinguishing between the CPI and the deflator in getting to the nominal GDP number. People may have been on top of that more this time than at a prior time. There i... | 135 |
fomc | 1,999 | Last Friday's report on economic activity in the fourth quarter had nominal GDP growth at 61/2 percent? | 22 |
fomc | 1,999 | Yes, it was 61/2 percent. | 10 |
fomc | 1,999 | Incidentally, speaking of Humphrey-Hawkins, I ought to remind you that Mike Prell will accept revisions to your individual forecasts through the close of business on Monday, February 8. Are there any further questions for our colleagues? If not, would somebody like to start the go-around? President Parry, you have been... | 69 |
fomc | 1,999 | Mr. Chairman, the Twelfth District economy expanded at a strong pace in 1998 and entered the new year with substantial momentum. Initial estimates indicate that total payroll employment in the District grew by 2.7 percent last year, nearly 1/2 percentage point faster than the nation. Following a slow third quarter, Dis... | 669 |
fomc | 1,999 | President Moskow. | 4 |
fomc | 1,999 | Thank you, Mr. Chairman. The Seventh District economy generally continues to show trends similar to what I reported in December, namely strength in consumer spending and housing activity, mixed signals in manufacturing, tight labor markets, and a few signs that inflation will accelerate in the near future. Consumer spe... | 929 |
fomc | 1,999 | Incidentally, I have noticed that I am losing a number of you for coffee. Is that an indication that we ought to take a short break? | 30 |
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