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fomc | 2,000 | President Stern. | 3 |
fomc | 2,000 | I do, too! [Laughter] | 9 |
fomc | 2,000 | It will be hard to write the minutes! | 9 |
fomc | 2,000 | Will you read the appropriate language? | 7 |
fomc | 2,000 | Yes, Mr. Chairman. I will be reading from page 11 of the Bluebook. The directive wording is: "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 immediate future see... | 140 |
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 | As you all know, we have received the initial installment of the SOMA study and Tom Simpson is here to brief us on it. | 27 |
fomc | 2,000 | Do you want to look at the announcement first? | 10 |
fomc | 2,000 | I am terribly sorry, yes! I took a look at the clock and decided it was running fast! Let's look at the draft announcement. [Pause] | 31 |
fomc | 2,000 | Bravo! | 2 |
fomc | 2,000 | Yes, the second page of the handout shows the changes from last time. | 16 |
fomc | 2,000 | Approved by silence it appears! | 6 |
fomc | 2,000 | It sounds good! | 4 |
fomc | 2,000 | I presume that silence indicates acceptance? SEVERAL. Yes. | 13 |
fomc | 2,000 | Tom Simpson. | 3 |
fomc | 2,000 | Carol is passing out some materials that I will refer to in my remarks.2 Last week, you were sent two papers representing the first installment in the Committee's wide-ranging SOMA project. The other parts of this broad effort--covering selection criteria for alternative Federal Reserve assets, potential alternative ma... | 1,341 |
fomc | 2,000 | Questions for Tom? Governor Gramlich. | 8 |
fomc | 2,000 | Tom, on Exhibit 2--and let me stick to fiscal policy B just for the sake of simplicity--in the top panel you basically worked that off the budget forecast and the 25 percent limit to compute our Treasury holdings? | 46 |
fomc | 2,000 | Right. | 2 |
fomc | 2,000 | Then in the bottom two panels you put that together with your estimates of currency demand to compute what other assets have to be on the balance sheet to finance the currency demand and make this all work. So it is a combination of your fiscal policy assumptions and your currency assumptions, right? | 56 |
fomc | 2,000 | Yes. Actually, the middle panel is more of a mirror image of the upper panel. What we have done in the upper panel is to forecast the stock of Treasury debt and also the growth in our balance sheet, which has been driven almost mainly by currency demand. | 53 |
fomc | 2,000 | Okay. Anyway, these two things are going on: We have declining Treasury debt, of which we are taking a share, and we have rising currency demand. So then we have these alternative assets that have to get huge in a few years. I take it what you're telling us is that we don't yet know what these alternative assets are. I... | 99 |
fomc | 2,000 | Right. This project was broken up into several pieces. We thought the first step was to get some idea of what the Treasury market is going to look like and what kinds of constraints we are going to face if we choose to continue to rely on that market in the coming years. And the tough stuff is yet to come! | 65 |
fomc | 2,000 | The fun stuff is still to come! | 8 |
fomc | 2,000 | This tells you how big the animal behind door No. 2 is. It just doesn't tell you what the animal is! | 25 |
fomc | 2,000 | I know! I think we all know it's a big animal. I just wondered whether it has stripes or spots. | 23 |
fomc | 2,000 | We're not saying that yet! | 6 |
fomc | 2,000 | President Parry. | 4 |
fomc | 2,000 | Mr. Chairman, I think this information is very helpful and certainly provides a good grounding for what is to come. And I am sure that is going to be extremely interesting and also challenging. First, I was wondering if we know anything about the lead times we would have in terms of being able to look at the material p... | 108 |
fomc | 2,000 | Well, we can replicate what Bill McDonough was suggesting for the December meeting at some point. This is important enough. | 25 |
fomc | 2,000 | This is one of the more significant issues we will have to deal with. | 15 |
fomc | 2,000 | Of course the new administration and the Congress may take the issue out of our hands and make it all moot. | 22 |
fomc | 2,000 | Of course. | 3 |
fomc | 2,000 | But it strikes me that one question that has to be on the table is: Do we maintain the same form of open market operations that we always have? If you look at the size of these required alternative assets, you could buy a lot of baseball teams. I know one I'd like to sell you! [Laughter] | 65 |
fomc | 2,000 | We're okay, thanks. | 5 |
fomc | 2,000 | President Minehan. | 4 |
fomc | 2,000 | I don't think the people who are working on the alternative assets part of this study have quite taken into account baseball teams! | 24 |
fomc | 2,000 | We are going to start to run out of alternatives. | 11 |
fomc | 2,000 | Yes, I think that is right. That takes me to the real point I wanted to raise, which is that cash is driving this. And cash not only has an impact on our balance sheet, it has an impact on our fiscal infrastructure as well. | 51 |
fomc | 2,000 | You mean currency? | 4 |
fomc | 2,000 | Currency needs, and so forth. Are we doing anything--and maybe I should answer that question--to look at whether there are ways in the future to diminish the supply of cash that is necessary or reduce the growth rate of currency? The balance sheet needs on the liabilities side are driven by the increasing growth in the... | 70 |
fomc | 2,000 | Most of the growth is overseas. | 7 |
fomc | 2,000 | That's right. | 3 |
fomc | 2,000 | That's right. I know it's mostly overseas. | 9 |
fomc | 2,000 | We don't have anything as part of this project to look at ways to diminish the growth of currency. And I wonder as a policy issue, do we want to diminish the growth of this noninterest-earning debt out there? | 45 |
fomc | 2,000 | It's at least worth looking at. | 7 |
fomc | 2,000 | Why? | 2 |
fomc | 2,000 | We have always responded passively to demands for currency. | 11 |
fomc | 2,000 | The seigniorage is good! | 8 |
fomc | 2,000 | It beats taxes. | 4 |
fomc | 2,000 | There is an implied tax on it. | 8 |
fomc | 2,000 | For the holders. | 4 |
fomc | 2,000 | Yes, in terms of all of the vaults that we are building and the infrastructure that we have. | 21 |
fomc | 2,000 | It's a very low interest rate. | 7 |
fomc | 2,000 | We spend $2 billion a year more or less and we get back $28 billion a year. | 20 |
fomc | 2,000 | Well, that's right. | 5 |
fomc | 2,000 | I'd rather do profit sharing! [Laughter] | 10 |
fomc | 2,000 | Okay. | 2 |
fomc | 2,000 | I think what this tells us is that this whole issue is much closer up front than I think most of us have intuitively suspected. It is very difficult to get around the fact that if the off-budget items stay off budget and this actually acts as a unified budget surplus, the arithmetic is awesome. | 60 |
fomc | 2,000 | Mr. Chairman, it is, but in a way we do have some time to consider the right decision, particularly if we are willing to change the 25 percent. I agree that there is a sense of urgency but what really comes through is the importance of the issue, I think. | 58 |
fomc | 2,000 | Okay, any further questions? Shall we go to lunch? The next meeting is Wednesday, November 15th. | 23 |
fomc | 2,000 | Good morning, everyone. Would someone like to move approval of the minutes of the October 3rd meeting? | 22 |
fomc | 2,000 | So move. | 3 |
fomc | 2,000 | Without objection. Peter Fisher. | 6 |
fomc | 2,000 | Thank you, Mr. Chairman. I will be referring to a package of colored charts that should be in front of you.1 On the first page I have depicted all on one panel the forward deposit rates for the dollar, the euro, and the yen from May 1999 through November 13th. To give some perspective on changes in these rates, I have ... | 241 |
fomc | 2,000 | Run that by me one more time! | 8 |
fomc | 2,000 | That's the Chairman's language! At any rate, the dollar's 9-month forward 3-month rate is about 100 basis points above its euro counterpart. The ECB has raised their policy rates 100 basis points since May of this year, but their 9-month forward 3-month rate has not changed. It's essentially trading at the same level a... | 1,991 |
fomc | 2,000 | I'm not forecasting this, but suppose we had an unanticipated need for significant easing. Is the structure in the markets out there thick enough for us to be able to do it without creating some problems? | 40 |
fomc | 2,000 | I believe so. I can't think of any problem that would-- | 13 |
fomc | 2,000 | Are we anywhere near the point where you're getting concerned about the supply? Theoretically, as you know, we can get to a point where we could have significant disruptive effects in the markets if we stayed with our current procedures and had to introduce a dramatic amount of ease into the marketplace. But is it your... | 74 |
fomc | 2,000 | I can't think of a variable over the next six or eight months that would really press us in that way. If we had to add a lot of reserves, we could affect some spreads. But I don't think there would be a capacity limit. | 49 |
fomc | 2,000 | No, I'm not referring to spreads. I'm referring to the extent to which we create distortions in the marketplace that have adverse secondary effects. | 28 |
fomc | 2,000 | Our current level of operations is not trivial in size as we look to the year-end. I don't think we're disturbing spread relations now as we anticipate increasing the book to about $30 billion. I'm sure there are extreme scenarios under which we would have a temporary effect on spreads over the next six months if we ha... | 125 |
fomc | 2,000 | I would only add, Mr. Chairman, that if the Committee wanted to ease interest rates quite considerably, I think the extra reserves we would have to add would be very, very small, given the very low level of required reserves and the inelastic demand for reserves. Actually, we would have to buy very few extra securities... | 72 |
fomc | 2,000 | That's an important part of the answer. | 8 |
fomc | 2,000 | It's just not that much. | 6 |
fomc | 2,000 | That leads me to a related question on an issue you didn't mention--the fairly significant opening up of spreads between A-2 industrial corporates and swap rates between May and now. Are we seeing strictly credit risk there? | 44 |
fomc | 2,000 | I worry that we don't know enough to answer that with any certainty. Had I plotted the Fannie Mae or Freddie Mac yields on these four panels, on this scale they would have smothered the swap rates and not come through on the page. | 50 |
fomc | 2,000 | I'm sorry, what do you mean by smothered? | 12 |
fomc | 2,000 | You wouldn't have been able to see the distinction on the chart. They would have been so close together that there would be no gap between them. | 29 |
fomc | 2,000 | Between Fannie and Freddie yields and the swaps? | 10 |
fomc | 2,000 | Yes. Those agency yields would have been right on top of the swap rates. The impression I have from talking to people at those agencies and in the market is that the agencies use the swap market very actively to manage their interest rate exposure. And I have a fair amount of concern about which is the tail and which i... | 129 |
fomc | 2,000 | It's as if Fannie and Freddie are co-opting the swap market-- | 15 |
fomc | 2,000 | That's a concern I have. I want to be clear that I can't put a finger on it. But looking at financial conditions, I'm suspicious of the notion that the financial sector, whose credit stands behind the swap rates, is somehow improving so much more in these circumstances than A-2 industrial corporates. That seems to me t... | 148 |
fomc | 2,000 | What happens to the benchmark debate under these conditions? | 10 |
fomc | 2,000 | That's a concern I've had for some time, whether agencies or swaps are the right benchmark. If the two are moving in tandem, then neither one of them is going to be a very good benchmark under certain conditions of stress. | 45 |
fomc | 2,000 | We also have a sense, Mr. Chairman, that the spreads on marginal investment grade yields have widened, even aside from the special effects. I agree with Peter--I think he probably put his finger on what's going on between the swaps and the agencies--that marginal investment grade yields probably have risen relative to ... | 99 |
fomc | 2,000 | Finally, with respect to the notion that the strong dollar is creating real problems for our trading partners, are they recommending that we lower interest rates or intervene or what? I'm just asking, because I haven't heard this. In other words, who is doing the drawing in, if I may put it that way? My understanding i... | 85 |
fomc | 2,000 | I agree with you completely, Mr. Chairman. I was trying to give members of the Committee a flavor of the angst among some of our colleagues. | 30 |
fomc | 2,000 | They should be raising serious questions with their citizens. | 10 |
fomc | 2,000 | I don't disagree with you, Mr. Chairman. | 10 |
fomc | 2,000 | So, they're not talking about blocking the inflow of capital into this country by putting up barriers or imposing tariffs? | 23 |
fomc | 2,000 | No. I think you hear these voices as clearly as I do, and perhaps more so. But I thought the Committee should understand the level of anxiety about this in the central banks around the world. | 40 |
fomc | 2,000 | You understand my question is purely rhetorical. | 8 |
fomc | 2,000 | I'm making sure it's fully reflected in the transcript! | 10 |
fomc | 2,000 | Further questions for Peter? | 5 |
fomc | 2,000 | Mr. Chairman, I have a question, but first I have an observation on that point. I don't think it matters which way the exchange rate is moving. From the perspective of the rest of the world, it's always our fault if somebody else is having problems. That's my reading of the history of that! On the yield curves on page ... | 330 |
fomc | 2,000 | I think it's a good one. Further questions? If not, would somebody like to make a motion? | 21 |
fomc | 2,000 | Move approval of the domestic operations. | 7 |
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