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fomc | 1,999 | Yes, I understand. I just want to focus on the problem that we already see today of growing levels of anxiety and uncertainty on the part of financial intermediaries, both banks and securities firms, which they are communicating to their customers in ways that are very unhelpful. Let me elaborate on that. The banks are... | 821 |
fomc | 1,999 | Vice Chair. | 3 |
fomc | 1,999 | Mr. Chairman, I have more of a comment than a question. I think our approval of what Peter is recommending here is extremely important and in fact vital. The first three resolutions we've already agreed to really had to do with being able to carry out our normal responsibilities at the end of the year plus having some ... | 410 |
fomc | 1,999 | Not exercised and not even purchased. | 7 |
fomc | 1,999 | That would be even better! I think the likelihood is that the dealers will purchase them. And Peter is absolutely right in that we need to have the agreement of the Committee in order to go out and have meaningful discussions with the dealers. We can't go out and say, "Well, we're thinking of doing this; maybe we will ... | 157 |
fomc | 1,999 | President Parry. | 4 |
fomc | 1,999 | Mr. Chairman, I don't have any question about the need for these types of tools. But I do have a question--if we can put on our BS&R hat for just a moment--that relates to us as a central bank. If a bank or other financial institution were to engage in these types of activities, we would be interested in whether or not... | 188 |
fomc | 1,999 | If I could respond, President Parry, I think a major difference between this institution and the private institution you're referring to metaphorically is that our cost of covering this option is quite different. If a private firm were to write options on financing, their cost of cover would be market-based. They would... | 384 |
fomc | 1,999 | I'm sure there are differences. Does that lead you to conclude that looking at such simulations is not appropriate? | 21 |
fomc | 1,999 | I'm sure it would be appropriate if I thought we could do it. You've seen the confidence interval I have on my estimate of reserve needs for the fourth quarter. It's around $100 billion. I ask you to think for a moment how much better I could do in trying to anticipate what the use of this program would be, especially ... | 88 |
fomc | 1,999 | President Parry, I think Peter's goal is to achieve the FOMC's objectives for keeping the federal funds rate in a range around its target. The very high likelihood is that if people wanted to exercise the options because rates were high, that would be a day on which Peter would be doing lots and lots of RPs. So, in eff... | 305 |
fomc | 1,999 | Bob, I think you can see from Peter's and Don's comments that we've done an awful lot of thinking about the "what ifs" and "maybes" and what could go wrong. Even though it has been done at a level of Board staff and the Chairman and the New York Reserve Bank staff and me, we haven't been remiss in putting this through ... | 81 |
fomc | 1,999 | President Broaddus. | 5 |
fomc | 1,999 | I think the case for this is pretty persuasive. But in the spirit of Bob Parry's question, on the issue of the Fed operating in options and the Fed doing derivatives I have a sense that the public perception of that might be of some concern to us. I think we should be aware of that. I know this is a vote on a temporary... | 107 |
fomc | 1,999 | That's the reason why it's essential that most of this new authority gets sunset. President Jordan. | 18 |
fomc | 1,999 | Thank you. I have a question along the same lines. In view of all the other things that are in place--the special liquidity facility and all the things we are going to be doing to make sure that everybody knows we will be making markets and operating to the full extent--I can still see some concerns among individual ma... | 259 |
fomc | 1,999 | Obviously, and I think my memo was candid about this, the problem of setting a reservation price and what we would ask the dealers to bid for in the auction is a major challenge and one of the primary reasons I want to talk to the dealer community. I think an auction sale is the right approach to take; the problem is h... | 619 |
fomc | 1,999 | May I ask a follow-up question? You mentioned already that, in their scenario, when the currency is going out banks are also going to be thinking about that currency coming back in. What are they going to do with it? Are they going to get to count it toward meeting their reserve requirements? I can see those in the ban... | 211 |
fomc | 1,999 | I mean to offer these as examples, because I believe the reactions are likely to be quite diverse. The anxieties of the major money center banks, and therefore of the major bank dealers, tend to be focused on what to do with the surplus cash they're going to have. They are afraid of being excessively liquid. So I think... | 310 |
fomc | 1,999 | Along that line, one good outcome might be that the dealers would simply pass these options through to their customers. That is, if they took the options and in turn entered into the same contract with their customers--customers who don't have access to the Federal Reserve either through the primary dealer network or b... | 154 |
fomc | 1,999 | Forgive me for interrupting, but I would like to underscore what Don just said. I think the only reason to do this is to have the dealers pass the benefits through directly or indirectly. There are accounting issues that I'm not going to be able to think through here as to how this would all work, but we will strongly ... | 107 |
fomc | 1,999 | President Hoenig. | 4 |
fomc | 1,999 | Mr. Chairman, I understand the importance of Y2K concerns, but I want to follow up a bit on what Jerry Jordan was saying. I know that Peter Fisher and others have scrubbed this proposal pretty carefully, but in terms of the analysis I'm not as clear as I'd like to be. And I am a true believer in the law of unintended c... | 340 |
fomc | 1,999 | Let me just comment. I think there is no question that there will be adverse consequences. We're going to change certain types of behavior in ways that are very difficult to anticipate, and presumably some of those changes are going to be adverse. One of the advantages of having this as a temporary program--one would p... | 124 |
fomc | 1,999 | That does give me some solace. | 7 |
fomc | 1,999 | If you think about it, the potential downside risks of not doing some of these things are just awesome. | 21 |
fomc | 1,999 | I understand. | 3 |
fomc | 1,999 | Could I add a comment? In your package of charts, page 10 is a background chart that I did not discuss but would like to point out to you, President Hoenig. I have given some considerable thought to adverse consequences, and the one I'm most concerned about is whether we would discourage market intermediation in some w... | 102 |
fomc | 1,999 | Very good. | 3 |
fomc | 1,999 | What the chart shows, starting from October 15 of last year across the top panel and March 23 of this year across the bottom, are the rates on repos on Treasury collateral in blue, the rates on mortgage-backed securities collateral in red, and the morning federal funds rate. The latter is based on an informal survey we... | 447 |
fomc | 1,999 | Let me make a comment that I hope will be helpful to President Hoenig and others. The way we envision introducing this to the primary dealer community is at a meeting at which the heads of the firms would be invited to the Reserve Bank and I would be their host, with Peter Fisher joining me. We will make it very clear ... | 257 |
fomc | 1,999 | President Minehan. | 4 |
fomc | 1,999 | While I recognize that there is some risk on the opposite side, let me relay an anecdote from a recent conversation with a very senior person at one of the major investment banks who is responsible for a lot of their funding operations. He said, after an anguished discussion about all of the fourth-quarter concerns tho... | 209 |
fomc | 1,999 | President Moskow. | 4 |
fomc | 1,999 | Mr. Chairman, I think this is a very good idea and I'd do it on a temporary basis. I agree with Cathy Minehan that it is an innovative approach and would show that we are trying to address a very important problem. Three or four years ago I went to a conference of central bankers and this idea of central banks engaging... | 126 |
fomc | 1,999 | I'm not aware of any that are using this in their management of domestic interest rates. I know the ECB has made a point of saying that they have the authority to use all instruments; if they want to use options and other derivatives they can. They have often stated that they have the full arsenal of weapons if they ne... | 187 |
fomc | 1,999 | Governor Gramlich. | 4 |
fomc | 1,999 | Actually, Mike Moskow already asked the first half of my question. The second half is--and given your answer to Mike, I'm not saying it's necessarily a bad thing--whether there is any risk that we're going to be the insurance provider of last resort for the whole world if other central banks don't do something like thi... | 65 |
fomc | 1,999 | I think there is that risk today in our money market, which is why we're proposing these extraordinary measures. As I alluded to earlier, the Bank of Japan wants to find ways to be sure it can take U.S. Treasuries as collateral when they lend yen to their banks. European banks and others are doing the same thing. The w... | 153 |
fomc | 1,999 | What would be the implications of that? | 8 |
fomc | 1,999 | I didn't mean to say it should be viewed as a risk. It may be good that somebody in this whole world is going to do this. But these are the implications. | 35 |
fomc | 1,999 | Well, an obvious question arises here. Is there a limit to the number and volume of options you'll be willing to sell? | 25 |
fomc | 1,999 | That is even more challenging than the reservation price. My guess is that we will go out with a proposal of $200 billion, as I suggested, telling the market that with the Committee's review and approval we might raise that limit if we saw a demand. I would try to go out with a program involving a limited number of con... | 97 |
fomc | 1,999 | If you price appropriately, you'll get as large a volume as you want. | 15 |
fomc | 1,999 | There's an interaction of limits and pricing. | 8 |
fomc | 1,999 | The desire to create a very low price may not be the wisest of all operations. | 18 |
fomc | 1,999 | As I say, it should be low enough so that we are making insurance available to the market to calm it down but high enough to provide some constraint on demand. | 33 |
fomc | 1,999 | It's called subsidized insurance. That's what it is. The fact is that they can get it from the private sector but the price they would pay would embarrass the seller of the insurance. The difference is the subsidy. | 44 |
fomc | 1,999 | Exactly. | 2 |
fomc | 1,999 | It's the sovereign credit of the United States. It is like the FDIC; it is precisely the same issue. | 23 |
fomc | 1,999 | We seem to be learning a lot. | 8 |
fomc | 1,999 | The question is what they are going to charge their customers for this. | 14 |
fomc | 1,999 | It would beat the subsidy. | 6 |
fomc | 1,999 | The subsidy is going to get smaller the further out the chain one goes. | 15 |
fomc | 1,999 | Gary, that may well be the type of thing that Tom Hoenig is concerned about. | 18 |
fomc | 1,999 | It's my recollection that the publication of the primary dealer list is a consequence of the New York Fed asking the dealers to report to us their inter-dealer transactions. The dealers said, in effect, "We'd love to report our inter-dealer transactions; you just have to tell us who the other dealers are." And that is ... | 115 |
fomc | 1,999 | My guess is that as we have these discussions the notion of how high the price should be will continue to go up. We don't want the subsidy to be too low or too high. Whatever it is, what we want is- | 46 |
fomc | 1,999 | Once the money is available, it's impossible to trace it to individual contracts or relationships. So, in effect, it will be hard to see how the subsidy gets passed on. I guess every economist would say that the subsidy stays with the dealer. | 49 |
fomc | 1,999 | It is with that in mind, though my plans are a little inchoate, that I have thought of auctioning set amounts each day. That way there will be a price today, but more will be coming online tomorrow and more will be coming online the next day. | 55 |
fomc | 1,999 | If you have an auction, basically you have not solved the problem but you've limited it. | 18 |
fomc | 1,999 | Yes, precisely. | 4 |
fomc | 1,999 | With a limit they will bid up the price, depending on how they think they can turn this onto their customers. That will tend to reduce the subsidy. | 31 |
fomc | 1,999 | In fact, the price will tell us something about how the program is going in the market. | 19 |
fomc | 1,999 | Absolutely. That is another reason daily auctioning somehow seems preferable to me. | 15 |
fomc | 1,999 | I had the impression that you were thinking of setting the price. | 13 |
fomc | 1,999 | No, I mean to set a minimum price. We don't want people to put in a bid of zero or $1 at the auction. We'd have a minimum or reservation price and they would bid upward from there. | 43 |
fomc | 1,999 | Is there a reservation price on Treasury bill auctions? | 10 |
fomc | 1,999 | I don't think so. | 5 |
fomc | 1,999 | No? The question is: Why would you want one on this? | 14 |
fomc | 1,999 | Because we are uncertain about the supply--whether we are going to provide an unlimited supply. That is, we haven't yet figured out- | 27 |
fomc | 1,999 | But that reservation price doesn't help you for that. It is the wrong side of the question; that's all I'm saying. | 24 |
fomc | 1,999 | I just mean that we are talking about a reservation price because we are uncertain about whether we are going to set an upside limit on the supply and, if so, where. Those are two ways of talking about the same thing. I am agreeing with you, I think, Mr. Chairman. | 59 |
fomc | 1,999 | If it turns out that indeed the demand is very low or they set a very low price, you'd be required to give it to them at a negligible price, and that may not be desirable. Okay. Governor Kelley. | 44 |
fomc | 1,999 | Peter, if we are ready for a more nuts and bolts type question here, I'm wondering about the timing of this. It seems to me highly desirable, if we are going to do this, to do it as rapidly as possible. But there is a lot of work to do. How is this going to flow as far as the timing is concerned for these inquiries, pr... | 87 |
fomc | 1,999 | I alluded to the timing--probably too briefly--in my memo of August 17. I believe it is very important for us to work with the custody banks, BONY and Chase, before we go public, so we can set a reasonable date certain on when we could begin tri party operations. We would propose to begin immediately, tomorrow morning,... | 344 |
fomc | 1,999 | If you can meet that timetable, that would be excellent. I think it is pretty ambitious, but we need to try to do it that way. | 30 |
fomc | 1,999 | We envision having the meeting with the heads of the firms on the Wednesday after Labor Day. The reason we don't want to do it before then is that we won't be finished arranging for the tri-party agreements with the agent banks and also because this is the time of year when too many people are away. | 60 |
fomc | 1,999 | Further questions for Peter? Why don't you read the Authorization as it is being amended? | 17 |
fomc | 1,999 | This would involve an addition to the Domestic Authorization, paragraph 4, as described in Don Kohn's memo, which was circulated overnight. The new paragraph is: "In order to help ensure the effective conduct of open market operations during the transition period surrounding the century date change, the Committee autho... | 94 |
fomc | 1,999 | Move approval, Mr. Chairman. | 7 |
fomc | 1,999 | Is there a second? | 5 |
fomc | 1,999 | Second. | 2 |
fomc | 1,999 | All in favor say "aye." SEVERAL. Aye. | 14 |
fomc | 1,999 | The "ayes" have it. Thank you very much, Peter. | 14 |
fomc | 1,999 | Mr. Chairman, before we leave this subject, I think we owe Peter, the New York Bank, and the staff here our gratitude and an enormous "thank you" for their efforts on all of this. Life is going to get messy; these likely will be extraordinary times. But this kind of extraordinary thinking and extraordinary planning rea... | 120 |
fomc | 1,999 | Hear, hear! | 4 |
fomc | 1,999 | Thank you. | 3 |
fomc | 1,999 | Mike Prell | 3 |
fomc | 1,999 | Thank you, Mr. Chairman. At first blush, it might seem odd that in this edition of the Greenbook we'd be talking about heightened inflation risks and raising the assumed fed funds path in our baseline forecast. After all, real GDP growth was surprisingly weak in the second quarter, and the core CPI increased only a ten... | 161 |
fomc | 1,999 | There are two elements of the external picture that I believe need to be highlighted this morning. One is the shift in our thinking toward the view that recovery among many of the crisis countries has taken hold; our outlook for output growth abroad for the rest of this year and next year is now stronger than we previo... | 946 |
fomc | 1,999 | Even with the revision to net exports, the biggest surprise in the second-quarter GDP picture, relative to our last projection, still is the very low rate of inventory accumulation. A forecaster's fairly typical response to such a surprise, especially when it occurs against a backdrop of solid final demand, would be to... | 1,103 |
fomc | 1,999 | Questions for Mike or Karen? | 6 |
fomc | 1,999 | I have a couple of questions, Mike, on different topics. First, on inventories, your remarks this morning as well as what I read in the Greenbook surprised me a bit by suggesting that there is a lack of anecdotal reports on inventory problems. We've all been reporting on certain shortages, for example that there are no... | 75 |
fomc | 1,999 | Drywall and some other construction supplies certainly would be the exception. | 13 |
fomc | 1,999 | We had noted in our Beigebook report that in the auto sector certain models simply aren't available. So my staff looked at the Beigebook reports of other Reserve Banks, and a couple of them also cited drains from retail inventories. One of my directors reports to us regularly about the retail sector, and he has been sa... | 170 |
fomc | 1,999 | I don't think one can ever have confidence in an inventory forecast, and I certainly don't at this moment. We are conscious of some areas in which it is likely that firms would want to build stocks. I'm not sure that's the case in retailing on a broad front, but it certainly would be true in many areas of building supp... | 291 |
fomc | 1,999 | The other question relates to inflation, anticipating that at our October meeting you are going to give us a first look at your forecast for 2001. As I look at this Greenbook forecast, which goes out to the fourth quarter of 2000, your forecast for the CPI excluding energy seems to be on a track that will produce a num... | 84 |
fomc | 1,999 | I think we'd edge above the 3 percent mark in core inflation on the assumption that the unemployment rate will be drifting up ever so slightly as we move through 2001. | 35 |
fomc | 1,999 | President Parry. | 4 |
fomc | 1,999 | Mike, given the surprisingly strong growth of income, profits, and also tax receipts in recent years, can we draw any inferences about what we might see with the October benchmark revision--in particular, what it might imply for real GDP and, of course, productivity? | 54 |
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