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fomc | 2,000 | Ed, would you move to approve the minutes? | 10 |
fomc | 2,000 | So move. | 3 |
fomc | 2,000 | Second. | 2 |
fomc | 2,000 | Without objection. Thank you so much. Peter Fisher. | 11 |
fomc | 2,000 | Thank you, Mr. Chairman. I will be referring to the package of materials in front of you, which includes charts and some text.1 First, I will briefly review interest rate developments and ask for ratification of our domestic operations. Then I would like to go over some background material in anticipation of Item 2.C o... | 725 |
fomc | 2,000 | Questions for Peter? If not, would someone like to move approval? | 14 |
fomc | 2,000 | Move approval of the domestic operations. | 7 |
fomc | 2,000 | Without objection. | 3 |
fomc | 2,000 | Mr. Chairman, turning to page 3 of my handout, I have outlined some significant changes in conditions in the fixed-income markets over recent months. Coincident with the inversion of the long end of the yield curve, daily volatility of the 30-year bond has risen above the volatility of both the 5-year and 10-year notes... | 2,399 |
fomc | 2,000 | Peter, as I listened to you and as I read through the materials, technically speaking you are requesting only a temporary extension? | 25 |
fomc | 2,000 | That is correct. | 4 |
fomc | 2,000 | As a practical matter, though, you are setting up a framework that would make the rescinding of that extension virtually impossible at the end of the day. I exaggerate only in part. If, for example, the Committee were to decide at the behest of the U.S. Treasury that our heavy commitment in agency issues was not conson... | 309 |
fomc | 2,000 | I have tried to structure this proposal in a way that allows for an exit strategy, but I take your point, Mr. Chairman. Maybe I did not say it bluntly enough in my written materials, but I see the Committee as having a very difficult choice to make. One choice is to create a wrenching and straining experience for the U... | 201 |
fomc | 2,000 | As a practical matter, what alternatives do you have to Treasuries? What substitutes are you planning to employ in our portfolio other than agencies, if any? | 32 |
fomc | 2,000 | There are no substitutes. There is U.S. Treasury debt. There is straight agency debt, which we have been taking for a long time--that is, the debt securities of Freddie Mac, Fannie Mae, and other agencies. And there are mortgage-backed securities, including Ginnie Maes, which we have only been taking since October of l... | 133 |
fomc | 2,000 | Let me ask you this. Supposing we were to urge the Treasury to conclude its evaluation, which it is currently going through, at a particularly rapid pace? How much time do we have before you get to the point where such a large block of your portfolio is in agency issues that we don't have an exit strategy? | 64 |
fomc | 2,000 | I have reserve needs by June of $30 billion. The hypothesis you are offering is relying exclusively on Treasuries to meet this? | 27 |
fomc | 2,000 | No, I am merely asking you at what point in your funding requirements do you reach a point from which it is very difficult to work back? For example, if Treasury could get these issues resolved in three weeks, or six weeks, or two months, would that provide a basis for a solution? If you can give me an order of magnitu... | 193 |
fomc | 2,000 | We would create, if the Committee approves what I'm suggesting, a rolling book of 30-, 60-, and 90-day forward RPs of rather modest size. Small amounts would mature every day, so we would ladder in what we would accept in each case of Treasury, agency debt, and mortgage-backed collateral. And we would take the relative... | 205 |
fomc | 2,000 | So you are suggesting to me that there really is no timeframe in which it would be particularly useful to you to get this issue resolved? | 27 |
fomc | 2,000 | We have a $20 billion underlying reserve need now. We face significant reserve demands in April because of the tax season. I would hope to have this issue resolved before we hit the tax season, frankly, to give us some flexibility. | 47 |
fomc | 2,000 | When do you think the tax season begins? | 9 |
fomc | 2,000 | You want this issue resolved, not the issue the Chairman's referring to? | 15 |
fomc | 2,000 | Yes, my issue. I would like the flexibility to take a look across all the assets and have a broader pool-- | 24 |
fomc | 2,000 | We have no problem--or at least I have no problem--getting that issue resolved today. That is not what I am concerned about. My concern is whether, having created the authority--which is essentially what you are requesting--we will have an exit strategy. And in what specific timeframe would that exit strategy be viable... | 109 |
fomc | 2,000 | Let me just make sure I understand. In this case by "issue" you mean the issue of the Treasury's sentiment toward federal agency issues on the Federal Reserve's balance sheet? | 36 |
fomc | 2,000 | Correct. Vice Chair. | 5 |
fomc | 2,000 | Mr. Chairman, it has struck me in watching Peter and Don develop this work that even if the issue were not resolved until the first meeting of next year, the holdings of agency issues in the repo book would be of a size that would permit an orderly unwinding. We could do that if we were to decide that in addition to Tr... | 204 |
fomc | 2,000 | My general concern, assuming that the Committee authorizes this, is that it not be perceived as permanent--as indeed are all of the other authorizations we approve in February. The latter are legally temporary but for all practical purposes they are permanent. I want to make certain that this authorization is not perce... | 65 |
fomc | 2,000 | No, it will not be perceived as permanent. It is Don's intent and mine to try to get back to the Committee as soon as we can in the fall with a completed study and to put this whole subject on the table. We think there is a lot of staff work to be done. It will involve the disciplined task of comparing assets and comin... | 232 |
fomc | 2,000 | I would suggest, just for the record, that you say you are presuming that the surpluses that are currently projected in the unified budget will indeed persist through the years ahead. I say that because five years from now you will not want to look back and find that you did not take account of that projection. | 64 |
fomc | 2,000 | Mr. Chairman, I am referring to this year. We would be buying somewhere between $40 and $60 billion of Treasuries if we followed our previous norm. That is not a way-out forecast. That is a reasonable number in the circumstances. Last year we bought $45 billion. The Treasury market exploded on February 2nd when the Tre... | 133 |
fomc | 2,000 | I don't think there is any question about that. We are all observing that phenomenon. It is crucial that we confront this problem and get it resolved before it gets resolved inadvertently by our failure to act. I want to make certain that the timeframe on both the Treasury's side and our side is such that this issue ca... | 67 |
fomc | 2,000 | Mr. Chairman, I think Peter's and my view was that it could only be resolved from the Federal Reserve's perspective in the context of what are we going to do with our balance sheet. We felt we needed to look at all the alternatives since we can't rely on Treasury issues. | 57 |
fomc | 2,000 | Agreed. I just wanted to put this issue on the table. | 14 |
fomc | 2,000 | And very correctly so. | 5 |
fomc | 2,000 | Absolutely. | 2 |
fomc | 2,000 | President Hoenig. | 4 |
fomc | 2,000 | Mr. Chairman, walking into this meeting, I had an uneasiness about this issue similar to what you have just expressed. So I will make my comments a bit briefer. I know we have an immediate problem. But, depending on what we assume going forward about the Treasury's plans and budget surpluses--and what happens in the im... | 248 |
fomc | 2,000 | Don, what are your plans at the moment? | 10 |
fomc | 2,000 | We were going to meet after this meeting and formulate them. For my part, I have asked Dave Lindsey to play a major role in coordinating the study here at the Board. But beyond that, we do not have specific plans. | 46 |
fomc | 2,000 | Can I ask Committee members to respond to President Hoenig's suggestion? If you have any ideas on that, please come forward. President Jordan. | 29 |
fomc | 2,000 | Thank you. I read through this material, of course, thought about it, and gave it to a couple of people on my staff to read it. One reaction from my staff was along the lines of: Well, you don't have any choice but to approve this. I don't like to be in situations where I feel that I don't have any choice. In addition,... | 290 |
fomc | 2,000 | That's certainly one of the alternatives. It would be possible for the Committee today to give the Desk the authority to go to the full extent allowed statutorily. The Federal Reserve Act would permit us to do foreign currency swaps; it also allows us to take on state and municipal debt in anticipation of revenues--so ... | 276 |
fomc | 2,000 | Thus the study. | 4 |
fomc | 2,000 | Thus, we need to think about other assets. | 10 |
fomc | 2,000 | President Broaddus. | 5 |
fomc | 2,000 | I would just follow up on what Jerry Jordan said with a brief comment aimed at what you contemplate doing in the study, Don and Peter. I certainly understand the situation we are in and the need to look at options, but I would hope that in doing that we keep in mind the fundamental basic principles here. We must be abl... | 285 |
fomc | 2,000 | How do you stand with respect to President Hoenig's suggestion? What I am hearing here is a suggestion that there be some sort of consultative subcommittee of the FOMC, which would not try to get into the details of the discussions and work going on, but would have a broad oversight role in looking at the process. I do... | 297 |
fomc | 2,000 | Mr. Chairman, I certainly agree that we need a thorough, ongoing study of these issues because they are much more than just technical issues. I also think that we ought not to prejudge the outcome of that study. As much as we may be uncomfortable with having impacts on the Treasury market in the meantime, I think the l... | 154 |
fomc | 2,000 | We do, remember, still have over $3.6 trillion of Treasury debt held by the public. | 21 |
fomc | 2,000 | There is quite a bit left out there, yes. | 11 |
fomc | 2,000 | Several weeks' salary for some of us! Governor Gramlich. | 13 |
fomc | 2,000 | I think it is more than several weeks for me! | 11 |
fomc | 2,000 | How about a month? | 5 |
fomc | 2,000 | I am in favor of a thorough study, overseen on a consultative basis by a subcommittee of the FOMC. I think we are in a difficult position. Frankly, I have nothing wise to add on this, but I do have a question. As I understand it, the problem with getting more into the repo market, which gets us into the agency market, ... | 193 |
fomc | 2,000 | No, I don't think so. The problem is that wherever we sit down we displace a lot of water. It doesn't matter whose obligations they are. And the further problem is that we have to sit somewhere. At the present we are giving the subsidy to Treasury and agency debt and to mortgage-backed bonds; it is spread around. If we... | 94 |
fomc | 2,000 | In the end the amount of subsidy we give depends in part, I presume, on the size of the market, right? If we're buying or holding as collateral just a tiny proportion of a given type of obligation, the subsidy is much less. | 49 |
fomc | 2,000 | Yes. | 2 |
fomc | 2,000 | So, when you and Don and whoever else get into this, I think a relevant number to determine and consider might be the amount of the subsidies--if you can convert them into basis points--given that we cannot be total purists and we're going to have to subsidize something. What I am a little at sea about is exactly how i... | 106 |
fomc | 2,000 | President Minehan. | 4 |
fomc | 2,000 | I also am in favor of a study of a broader range of assets that we may or may not find useful to include in open market operations. I thought that was what Don and Peter were suggesting. And if some of us or some of our research directors can be helpful in that regard, I am totally in favor of that. In a way I feel kin... | 146 |
fomc | 2,000 | That is their problem. | 5 |
fomc | 2,000 | Yes, that is their problem. | 7 |
fomc | 2,000 | But that is where we could come in. In other words, in this negotiation one of the things we could put on the table is for them basically to increase the 30-year funding. The reason they don't want to do that at the moment is that they have this projection that the debt will disappear in the year 2013 or 2016. And why ... | 159 |
fomc | 2,000 | I'm not so sure it is a really good idea for the debt to disappear. | 16 |
fomc | 2,000 | Well, there is a simple way we could avoid that. We could have the Federal Reserve Bank of New York accumulate as fiscal agent of the Treasury a lot of private securities. And they would be issuing public debt on the other side. Or we could think of some expenditure programs, if you like! [Laughter] | 64 |
fomc | 2,000 | No, I know that is not a good idea either. But when one thinks about the liquidity of the U.S. government securities market and all that it does as a safe haven, a store of value, and so forth, I don't know whether it is such a good idea to have it all disappear. | 62 |
fomc | 2,000 | President Parry. | 4 |
fomc | 2,000 | I certainly am in favor of the study and I think the suggestion that Tom Hoenig made was constructive. To deal somewhat with the issue Bill Poole was raising, is it possible to have the temporary suspension extended for a shorter period? In other words, is this study of sufficient importance that it ought to be done mu... | 80 |
fomc | 2,000 | Let me suggest that that is probably not a good idea. The reason is that we'd have to report the extension in the minutes because it involves a formal change to one of the Committee's instruments, the Authorization for Domestic Open Market Operations. It would create more attention and discussion of this issue than I s... | 137 |
fomc | 2,000 | May I ask the question a little differently? Let me ask Peter and Don the question. Do we need to extend this temporary authority before the study is completed? Is it so important to the effective conduct of open market operations that waiting until the study is done before we address this issue is critical? That was m... | 70 |
fomc | 2,000 | I'm sorry if the memo did not speak clearly enough on this point. If the temporary extension lapses, it is a very narrow issue. It is scheduled to lapse on April 30th and thereafter I would not be able to take Ginnie Maes. I could still take Freddie Mac and Fannie Mae issues, both straight debt and mortgage-backed secu... | 336 |
fomc | 2,000 | We can tighten policy and get rid of all of our bonds! [Laughter] | 17 |
fomc | 2,000 | Let me just comment that I think what Peter just said is important. And in some sense, responding to Bill Poole's thought, I think we have to be careful not to collapse both the tactical and strategic decisions here simultaneously. My sense is that the way we can do the least harm is to handle the tactical issue, which... | 203 |
fomc | 2,000 | Yes, I think that is wise. Let me suggest the following. One, I will take it upon myself to see if I can expedite the Treasury's decisions on this process and have them made as quickly as possible. I will communicate to them what our concerns are and what our problems are. I will consult with Don and others on the form... | 274 |
fomc | 2,000 | As soon after Labor Day as we can, given the sequence of meetings and topics. | 17 |
fomc | 2,000 | We should then be making a lot of major decisions, but it is quite important to make certain as we move toward that point that we leave ourselves the flexibility to make those decisions, which was my original point. Governor Gramlich. | 46 |
fomc | 2,000 | I have no problem with that. I think it is a good resolution of the issue. But I have a question, and that is: Who says what to the public about this? | 37 |
fomc | 2,000 | There are two points at which that will come up. The market is aware that our authority to take a broader pool of assets lapses on April 30th and that our reserve needs peak around that last week of April and into early May. The other point will be the minutes of this meeting. It would be desirable for me to say someth... | 136 |
fomc | 2,000 | Are there any further questions for Peter or comments on this issue? If not, would somebody like to move Peter's recommendation? | 25 |
fomc | 2,000 | So move. | 3 |
fomc | 2,000 | Is there a second? | 5 |
fomc | 2,000 | Second. | 2 |
fomc | 2,000 | All in favor say "aye." SEVERAL. "Aye." | 15 |
fomc | 2,000 | Opposed? The "ayes" have it. Thank you. | 13 |
fomc | 2,000 | I have a second issue on which I need a vote. I hope this will be quicker. Mr. Chairman, I sent a separate memo to the Committee on March 14th asking that Paragraph 1(c) of the Authorization for Domestic Operations, which gives us the authority to do reverse repurchase agreements, be retained as a permanent amendment. ... | 261 |
fomc | 2,000 | Questions for Peter? | 4 |
fomc | 2,000 | Peter, does this mean that until you have the new system in place you will continue with the tri-party arrangements and so forth? Have you ever used them? Did they work satisfactorily? | 38 |
fomc | 2,000 | The tri-party arrangements have worked reasonably well. They do involve more complications than our regular clearing system, but we are working on including that capacity in our new system as well. So I want to separate that issue. We did not do reverse RPs via tri-parties; we never found an occasion to do reverse RPs,... | 158 |
fomc | 2,000 | Let me ask one follow-up question. One of the reasons you wanted to go with tri-party custodians was that they were more capable of pricing the broader range of collateral you were going to be taking. Also, it gave you the capability to do operations later in the day to mop up reserves, a capability we did not have in ... | 82 |
fomc | 2,000 | Our new trade processing system we hope will facilitate such transactions. One of the reasons we did not use the reverse RPs to drain reserves had to do with the clearing bank systems. But the clearing bank systems did do the valuation of the collateral, which simply would have been impossible for us. So, I want to be ... | 130 |
fomc | 2,000 | So, you have not made up your mind whether you are going to-- | 15 |
fomc | 2,000 | We are going to push for that. It is a question of how many dollars we spend on it. | 21 |
fomc | 2,000 | Yes, or whether you continue to rely on the clearing banks. But you have not yet made up your mind. | 23 |
fomc | 2,000 | Further questions for Peter? If not, would somebody like to move his recommendation? | 16 |
fomc | 2,000 | Move approval of the second recommendation. | 7 |
fomc | 2,000 | Is there a second? | 5 |
fomc | 2,000 | Second. | 2 |
fomc | 2,000 | Without objection. Thank you very much. We put you through a lot of work today! Let's move on to the economic situation, and I call on Mike Prell and Karen Johnson. | 37 |
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