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fomc | 2,000 | Mr. Chairman, everything you said convinced me that a 1/4 point seems right. Inflation is not taking off and in fact a lot of the evidence suggests some easing off in the expansion. Moreover, I don't think we should be validating the market necessarily. I think we should be looking at what is in front of us, and 1/4 po... | 172 |
fomc | 2,000 | President Guynn. | 4 |
fomc | 2,000 | I strongly support your recommendation, Mr. Chairman. I think all of the right arguments have already been made. Thank you. | 25 |
fomc | 2,000 | President Poole. | 4 |
fomc | 2,000 | Mr. Chairman, I support your recommendation. I'd also like to speak to the issue that Tom Hoenig raised. I think we want to be careful not to confuse gradualism and predictability. While the goal of predictability is extremely important, we can't always make policy predictable. Sometimes we are going to have to surpris... | 591 |
fomc | 2,000 | Governor Ferguson. | 3 |
fomc | 2,000 | Thank you, Mr. Chairman. I support both halves of your recommendation. Let me take just one minute to explain why. I think we are in the business here of trying to find a mini-max solution, if you will, to minimize the maximum regret we will have in terms of the effects of our actions on society and the economy. One wa... | 361 |
fomc | 2,000 | Governor Gramlich. | 4 |
fomc | 2,000 | I support both parts of your recommendation as well, Mr. Chairman. I think we have to get rates higher and that aggregate demand and aggregate supply are just not balanced. There is still tremendous momentum on the up side and I think the balance of risks is still on that side. I do believe that at some point, perhaps ... | 125 |
fomc | 2,000 | President Parry. | 4 |
fomc | 2,000 | Mr. Chairman, it seems clear to me that we need to tighten policy further at this meeting, and I enthusiastically support your recommendation for a 50 basis point increase. I also believe that the balance of risks remains weighted toward higher inflation, and incorporating that view in the press release is for me an im... | 69 |
fomc | 2,000 | President Moskow. | 4 |
fomc | 2,000 | Thank you, Mr. Chairman. I strongly support your recommendation for a 50 basis point increase and for a balance of risks sentence tilted toward higher inflation. I recognize that there is some uncertainty about how far we will need to go and I personally think we are going to have to do more. | 59 |
fomc | 2,000 | President Broaddus. | 5 |
fomc | 2,000 | Mr. Chairman, I support your recommendation and I do so enthusiastically. I would simply add the point that if in fact inflation expectations are now rising, this move of 50 basis points is really not that much more aggressive than the moves we have been taking up to this point. While some differences of opinion have b... | 98 |
fomc | 2,000 | President Jordan. | 3 |
fomc | 2,000 | I fully support the 50 basis point move at this meeting. My preference would be to say that with such a move the risks are balanced. But I recognize the risk that such a statement would be misinterpreted, and that would be undesirable in my view. But to my mind saying that the balance of risks is still tilted toward in... | 291 |
fomc | 2,000 | First Vice President Stone. | 5 |
fomc | 2,000 | Mr. Chairman, I support both parts of your recommendation. I think a larger action by the Committee today will forestall any rise in longer-term expectations of inflation. And in my view, not moving the funds rate up 50 basis points probably would lead to long-term expectations of some increase in inflation. | 61 |
fomc | 2,000 | Governor Meyer. | 3 |
fomc | 2,000 | Mr. Chairman, I support your recommendation. I do have to admit that I got to this decision by a rather different route than you did, but it is nevertheless good to end up with the same conclusion. I am concerned that our challenge is much more demanding than slowing the expansion to trend. The further increase in util... | 333 |
fomc | 2,000 | Governor Kelley. | 3 |
fomc | 2,000 | I support your recommendation, Mr. Chairman, for all of the reasons that have been stated around the table. | 22 |
fomc | 2,000 | President Minehan. | 4 |
fomc | 2,000 | I, too, support your recommendation. I think we may be seeing some incipient signs of slowing in the economy but I don't think it's enough. Our own forecast and the Greenbook forecast say that the slowing will not be enough. Also, I see the 50 basis point move, while different from the moves we have been making, as con... | 324 |
fomc | 2,000 | President Stern. | 3 |
fomc | 2,000 | Thank you, Mr. Chairman. I'm fully comfortable with your recommendation in all its aspects and I share the thinking that real interest rates should be going up from here. Let me just add one other thought, which is that I assume we will be open-minded about where we are going to go next and at what pace. One reason I t... | 223 |
fomc | 2,000 | President McTeer. | 5 |
fomc | 2,000 | While I would have preferred 1/4 point, I can also agree to 1/2. Looking forward, I would just remind us that this afternoon the prime will go to 9-1/2 percent, and that's getting close to that psychologically important double-digit level. | 57 |
fomc | 2,000 | Well, we can revise our method of estimating and reporting it to a monthly basis! The majority appears to be in favor of 50 basis points with the balance of risks sentence toward inflationary pressures. Would you read the directive that would capture that? | 50 |
fomc | 2,000 | I'll be reading from the Bluebook page that unfortunately did not make its way into the Bluebook. [Laughter] "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the imme... | 142 |
fomc | 2,000 | Call the roll. | 4 |
fomc | 2,000 | Chairman Greenspan Yes Vice Chairman McDonough Yes President Broaddus Yes Governor Ferguson Yes Governor Gramlich Yes President Guynn Yes President Jordan Yes Governor Kelley Yes Governor Meyer Yes President Parry Yes | 40 |
fomc | 2,000 | I'd like to adjourn the FOMC meeting temporarily while the Board of Governors goes into my office to confront requests from several of your Banks on the discount rate. [Recess] We are back in session. I'll just announce to your great surprise that the Board of Governors voted to move the discount rate up 50 basis point... | 84 |
fomc | 2,000 | Thank you. In that event, shall we adjourn for lunch? | 14 |
fomc | 2,000 | President Boehne has arrived. | 7 |
fomc | 2,000 | Good afternoon, everyone. Bill Stone will be representing the Philadelphia Bank today and the rest of the members are here, I presume. Shall we get started and approve the minutes of the May 16th meeting? | 42 |
fomc | 2,000 | So move. | 3 |
fomc | 2,000 | Without objection they are approved. I would like a motion to elect David J. Stockton as Economist to serve until the election of his successor at the first meeting of the Committee after December 31, 2000. Is there a motion? | 48 |
fomc | 2,000 | So move. | 3 |
fomc | 2,000 | Is there a second? | 5 |
fomc | 2,000 | Second. | 2 |
fomc | 2,000 | Without objection. Peter Fisher, please. | 8 |
fomc | 2,000 | Thank you, Mr. Chairman. I will be referring to the package of charts in front of you that begins with the chart on forward rates.1 In the top panel on U.S. dollar forward rates you can see that for much of the last few months the 9-month forward and the 6-month forward 3-month rates have been trading right on top of o... | 1,778 |
fomc | 2,000 | Questions for Peter on any of the subjects he has addressed? | 12 |
fomc | 2,000 | I thought you were supposed to be very nice to your large creditors! | 14 |
fomc | 2,000 | We are going to be as nice as we can be to our large creditors! We have for some time, in our rather modest participation in the Ministry of Finance's auctions, had to compete directly by putting in competitive bids to buy Japanese Treasury bills. We have had no preferential treatment in Japan. Their procedure has been... | 181 |
fomc | 2,000 | Are the amounts from the Japanese too big just to let them submit noncompetitive bids? | 17 |
fomc | 2,000 | Yes. The Treasury, I think, would like to have the total of foreign noncompetitive bids be around $1 billion, summing up the needs of all the small countries. The Japanese Ministry of Finance is routinely rolling over in Treasury bill auctions. | 50 |
fomc | 2,000 | What would happen if there were only noncompetitive bids? | 11 |
fomc | 2,000 | That is clearly a problem. I don't think the Treasury can go that way; part of the answer here, no matter what else is done, is to get the big accounts into the competitive process. Obviously, they can't sustain an auction process in which--. | 52 |
fomc | 2,000 | I just thought you would be so imaginative that you could figure out a way! [Laughter] | 20 |
fomc | 2,000 | I hit a wall there! I'm open to suggestions and I'll be happy to relay them to the Treasury. But if someone isn't prepared to put out a few prices as to where they think the market will clear, I'm not sure we can get there. | 50 |
fomc | 2,000 | I am. I know you can't! [Laughter] Other questions? If not, would somebody like to move to ratify the transactions? | 29 |
fomc | 2,000 | Move approval of the domestic operations. | 7 |
fomc | 2,000 | Thank you, Mr. Vice Chair. Without objection they are approved. Let's move on to what we used to call the "Chart Show" and I guess we probably still ought to do so. David. | 41 |
fomc | 2,000 | I think we will! I, along with Karen Johnson and Larry Slifman, will be referring to the materials labeled "Staff Presentation on the Economic Outlook." 2 Your first chart provides a brief overview of our outlook for the U.S. economy over the next year and a half. As you know from reading the Greenbook, we lowered our ... | 1,893 |
fomc | 2,000 | Your next chart reviews developments in selected international financial markets since the February meeting. As can be seen in the top left panel, the average foreign exchange value of the dollar in terms of the currencies of the other major industrial countries--the black line--has risen on balance so far this year, a... | 2,908 |
fomc | 2,000 | Your next chart presents our productivity forecast. The upper left panel provides some longer-run perspective, while the upper right panel magnifies the current situation. We are projecting that the rate of growth of structural productivity in 2000 and 2001 will be a bit higher than it was in the preceding two years. I... | 1,849 |
fomc | 2,000 | In Chart 15, I offer a few shreds of evidence on the question raised at the last meeting about whether we might be in the process of overdoing this period of tightening to an extent that could result in a hard landing for the economy. The upper panel dusts off a statistical technique developed by my colleague Glenn Rud... | 805 |
fomc | 2,000 | Thank you. As an aside, the probability distribution based on the leading indicators looks remarkably good, but my recollection is that about every three years the Conference Board revises back a series that did not work during a particular time period, so the index is accurate only retrospectively. I'm curious to know... | 95 |
fomc | 2,000 | Right. We use the data as they are currently published and the probabilities per se as they are calculated by reestimating the model on those data. Though that index looks reasonably good, it clearly did not do very well, even on these reestimated data, in that 1990 episode. Even when we were in a recession, the index ... | 158 |
fomc | 2,000 | The second, however, is a more complex structural model from which we would expect something like that. The alleged advantage of the leading indicators, which may be viewed as a simple reduced form small sample forecast, is that they are supposed to do all the macro model is supposed to do. So in a sense they are leadi... | 134 |
fomc | 2,000 | In the Bluebook I think there is a simulation that has a NAIRU that's basically the current unemployment rate. | 23 |
fomc | 2,000 | I am raising the issue, in a sense, more in the Greenbook context. What I am trying to get at is how crucial the NAIRU estimate we have now, which is 5-1/4 percent, is to the conclusions that are emerging. That's because, as Larry points out, we are dealing with unit labor costs, which essentially are moving at a lower... | 312 |
fomc | 2,000 | I guess the first thing I would say is that within the context of the Greenbook forecast, in an economy with no additional tightening we would see the unemployment rate drifting down a bit further from where it is currently. So even if one were to take as the NAIRU the 4 to 4-1/4 percent unemployment rates that have pr... | 115 |
fomc | 2,000 | I purposely defined it as being equal to the unemployment rate. Let me stipulate that. I don't want to go too far. The law of supply and demand says that there is a level of the unemployment rate that must of necessity drive compensation increases beyond the rate of increase in productivity. But there is a crucial issu... | 540 |
fomc | 2,000 | Let me make a couple of comments. One, I would not want to overstate how well this paradigm has worked in the past either. It's not as if this "fit like a glove" previously and suddenly something has gone so far off track that we can clearly see evidence of considerable structural change. Two, to answer your question a... | 212 |
fomc | 2,000 | And these are picking up structural misspecifications as well as exogenous data input errors? | 18 |
fomc | 2,000 | Yes, in the sense that these are full confidence intervals. | 12 |
fomc | 2,000 | But I'm trying to understand what the confidence interval is in fact measuring. | 14 |
fomc | 2,000 | It is measuring all of the above--the uncertainty about the model, based on how it has performed in the past, as well as the uncertainty about what goes into that model. | 36 |
fomc | 2,000 | In other words, in a sense, analytically it is the structural specification errors, missing variables, misspecified coefficients, as well as inaccurate exogenous inputs into the forecast system? | 36 |
fomc | 2,000 | Yes, pretty much. I suspect this does not include the coefficient uncertainty about the parameters on variables; it has a coefficient uncertainty in terms of the intercepts in the models. But as you can see, that confidence interval widens out to over 2 percentage points on price inflation, so there is considerable unc... | 293 |
fomc | 2,000 | That is useful. Thank you. | 7 |
fomc | 2,000 | Could I just follow up on that? I think the staff provided some very good information that in my view is quite responsive to the Chairman's concerns when they ran a simulation with a NAIRU that is a percentage point below the staff estimate. Maybe you would like to talk about that simulation. I think it is a good way o... | 83 |
fomc | 2,000 | I saw that; that was helpful. | 8 |
fomc | 2,000 | Mr. Chairman, on the same point, if I may? Dave, let me ask the question the way I interpret the Chairman's query--or maybe I don't have quite in mind what he does. Suppose you set the NAIRU in the model simulation arbitrarily equal to the current unemployment rate. That short-circuits all of the wage/price mechanisms ... | 125 |
fomc | 2,000 | In a model in which the NAIRU in essence was last period's unemployment rate, I think you would still be able to pin down inflation. Monetary policy will ultimately determine the rate of price inflation even in a model with that specification of wage/price behavior. I'm not sure if there is a mechanism-- | 62 |
fomc | 2,000 | Governor Meyer actually had the floor. This is a very important discussion, so let's do it in a sequential manner. Governor Meyer. | 26 |
fomc | 2,000 | The dynamics are important here, and that is what I was thinking about. You don't need just the reduced forms in some sense, the static ones; you need the dynamic process. And the disequilibrium process through the gap is the mechanism that gets you from one inflation rate to another. I'm not sure, but I think if you i... | 109 |
fomc | 2,000 | We do have inflation expectations. | 6 |
fomc | 2,000 | Well, if there is no mechanism to generate higher inflation, why would inflation expectations go up? | 19 |
fomc | 2,000 | We didn't have it in the 1970s. We had stagflation, which did not involve a gap problem. | 25 |
fomc | 2,000 | You can always produce a series of shocks. | 9 |
fomc | 2,000 | That's right. If you have an increase in the price level that's fine, but not if you have an increase in the rate of growth in the money supply or some stimulus like that. You won't have a determinant process. | 44 |
fomc | 2,000 | You can still produce a series of shocks for that model that cause the unemployment rate to change and to create in essence a series of temporary gaps, which I think could move the inflation rate. | 38 |
fomc | 2,000 | The point here is that I think it would be dangerous to throw away a disequilibrium mechanism that underlies the inflation/wage dynamics without having anything to replace it. That's my concern. The issue is not the nature of the wage/price dynamics but what the critical value of that is that gives rise to the process.... | 123 |
fomc | 2,000 | I would just say the reason for that in part is that we see the growth of structural productivity as requiring some increase in interest rates eventually. That is not obviated by a low NAIRU. That is still there producing potential inflation if the funds rate is held at its current level. | 59 |
fomc | 2,000 | I think there are two sources of upward pressure on prices in this low NAIRU case, aside from the fact that the current unemployment rate is a tiny bit below even the low NAIRU. One is the depreciation of the dollar. The assumed depreciation of the dollar is a pretty powerful inflationary force in these simulations par... | 243 |
fomc | 2,000 | The crucial assumption here is that the second difference on productivity goes to zero. | 15 |
fomc | 2,000 | Actually, I think it could occur if we put the third derivative negative. That is, productivity could still be accelerating but if it were accelerating more slowly over time, the same mechanism would work slowly. | 40 |
fomc | 2,000 | I grant you your algebra. [Laughter] | 10 |
fomc | 2,000 | I did have a simulation run this morning with the optimistic assumptions on the supply side--a low NAIRU and accelerating productivity--and no depreciating dollar. And that is enough to stop inflation from rising, at least for a number of years. But we need all three to stop the inflation rate from rising here. | 64 |
fomc | 2,000 | President Poole. | 4 |
fomc | 2,000 | My instinct is that in a model that runs off the interest rate--there are no monetary quantities pinned down by this model, the policy assumption runs off the federal funds rate--the price level has got to be indeterminate. It just has to be, if you short-circuit the price-setting process by setting the NAIRU always eq... | 96 |
fomc | 2,000 | Which is usually the monetary authority. | 7 |
fomc | 2,000 | Which is usually the monetary authority. So, one really can't just run a simulation on the funds rate and short-circuit the wage/price mechanism. | 30 |
fomc | 2,000 | If I may argue, the fact is that the unemployment rate can only go to zero and there is a gap. You can redefine a structure, which is the unemployment rate minus zero, as a gap and you'll get the same structural response that you'll get from a NAIRU model. In other words, a fall in the unemployment rate will create inf... | 198 |
fomc | 2,000 | Clearly this is a pretty complex discussion about the model's properties under different assumptions. | 16 |
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