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fomc | 2,001 | Let me be careful in my answer. We do RPs with our counterparties and they pledge a mix of collateral that they have in inventory. We can set the credit criteria of what we'll accept. We worked long and hard on the criteria for the investment of our foreign currency reserves, which I discussed with you last fall, in or... | 188 |
fomc | 2,001 | I think it's important to emphasize that these are transactions with counterparties. Our primary call is against the credit of the counterparty and the collateral is a really secondary issue. One can view that collateral as a debenture against the counterparty. If we emphasize the collateral, I think we could run into ... | 103 |
fomc | 2,001 | Any other further questions or comments? Peter, would you now raise the individual items on which you would like a vote? | 24 |
fomc | 2,001 | Yes, thank you. | 5 |
fomc | 2,001 | Let me just state before we proceed that it is my understanding that the General Counsel is satisfied with the nature of the requests that are being made in this regard. Go ahead. | 35 |
fomc | 2,001 | In my memo of January 25th to the Committee I indicated the three proposals on which I'd be asking you to vote. The first one, I hope, involves no controversy. I'd like the Committee to renew for one year the Authorization for Domestic Open Market Operations, substituting 65 business days for the reference to 90 calend... | 99 |
fomc | 2,001 | Would somebody like to move that request? | 8 |
fomc | 2,001 | Move approval. | 3 |
fomc | 2,001 | Is there a second? | 5 |
fomc | 2,001 | Second. | 2 |
fomc | 2,001 | Without objection, that is approved. | 7 |
fomc | 2,001 | Thank you. The second vote is on the Guidelines for the Conduct of System Operations in Federal Agency Issues, which we've just been discussing. I'd like to ask the Committee to extend the temporary suspension of paragraphs 3 through 6 of these Guidelines for one year, until the Committee's first scheduled meeting in 2... | 64 |
fomc | 2,001 | Is there any discussion on that issue? If not, would somebody like to move approval? | 18 |
fomc | 2,001 | Move approval. | 3 |
fomc | 2,001 | So moved. | 3 |
fomc | 2,001 | Without objection, so ordered. | 6 |
fomc | 2,001 | Thank you. The third vote, Mr. Chairman, is on the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations. As explained on the second page of my memo, I ask the Committee to reaffirm those documents as they stand. | 59 |
fomc | 2,001 | Is there discussion? | 4 |
fomc | 2,001 | Mr. Chairman, I'd like to comment on the Authorization for Foreign Currency Operations. I wrote out a few notes, which I'm going to read. I spoke in some detail at our October meeting about foreign exchange market intervention. I continue to oppose intervention and want to discuss briefly some considerations beyond the... | 710 |
fomc | 2,001 | I think there's fairly general agreement around this table on the principles that you stipulated. You may recall that I said at an earlier time that the proper sequence here is for me to talk to the senior Treasury officials of the new Administration when they are ready to listen, which should be within the next few we... | 200 |
fomc | 2,001 | Yes, thank you. | 5 |
fomc | 2,001 | President Jordan. | 3 |
fomc | 2,001 | Thank you. That was very helpful, so I can be brief. Will your discussion include the warehousing facility? | 23 |
fomc | 2,001 | I think all aspects of this are on the table. | 11 |
fomc | 2,001 | I am not currently a member of the Committee so I won't get a vote this time around, but it's comforting to know these discussions will be taking place before this issue is on our agenda again. With a new Administration, I think this is an especially opportune time--and one we shouldn't miss--to discuss the subject of ... | 74 |
fomc | 2,001 | Vice Chair. | 3 |
fomc | 2,001 | Mr. Chairman, I assume that we would be better off to have you go into those discussions with the Authorization for Foreign Currency Operations in place, which means we should renew the authorization today. | 38 |
fomc | 2,001 | I think so. | 4 |
fomc | 2,001 | If, as a result of your conversations there is some reason to change it, we can do so later. | 22 |
fomc | 2,001 | I think that's implicit in the proposal that President Poole made, yes. President Hoenig. | 19 |
fomc | 2,001 | Mr. Chairman, just to clarify: On the request to explore securities of foreign sovereigns for repos--one option we're considering--when you say as we go forward we will give context to this, do you intend that we would have a broader discussion of this whole topic? In other words, here is one solution for the short ter... | 106 |
fomc | 2,001 | Yes. | 2 |
fomc | 2,001 | Okay, thank you. | 5 |
fomc | 2,001 | Do you need a motion for the foreign currency instruments? | 11 |
fomc | 2,001 | I do indeed. | 4 |
fomc | 2,001 | So move. | 3 |
fomc | 2,001 | Is there a second? | 5 |
fomc | 2,001 | Second. | 2 |
fomc | 2,001 | Without objection, so be it. When do you want to break for lunch? | 16 |
fomc | 2,001 | Lunch is available. | 4 |
fomc | 2,001 | I think we are probably at an ideal point to break for lunch and to congratulate ourselves on what in my view has been one of the most successful deliberative sessions this Committee has had in a very long time. [Lunch recess] | 46 |
fomc | 2,001 | Let's take a few minutes for Don Kohn to give us his impressions of how we should move forward after this morning's discussion. | 26 |
fomc | 2,001 | Thank you, Mr. Chairman. I think there are a couple of avenues on which to proceed forward from here. For the very short run, of course, you have authorized Peter and me to explore with appropriate individuals in the political process and financial markets the possibilities of doing RPs against foreign sovereign and el... | 567 |
fomc | 2,001 | The Federal Home Loan Bank lending program is a major existing competitor for the ACF. I'd be curious to see how we would view the constraints or opportunities that would arise if the ACF and the Home Loan Bank lending facilities existed concurrently. | 47 |
fomc | 2,001 | The study pointed out that to a certain extent the ACF would replace Home Loan Bank advances--not an entirely bad consequence. | 25 |
fomc | 2,001 | An entirely good consequence if it were true, but I don't-- | 13 |
fomc | 2,001 | I do believe that there may be lessons to be learned from the experience of the Home Loan Banks. | 20 |
fomc | 2,001 | You mean that if you give out free money, nobody will take it! [Laughter] | 19 |
fomc | 2,001 | Yes, the effects of that free money on the behavior of the depository institutions receiving it would give us some insights into the issues that President McDonough raised in that regard. | 36 |
fomc | 2,001 | It is the very active marketing of that facility by the Home Loan Banks that makes me worry about the effect it has on how well people manage their depository institutions. | 33 |
fomc | 2,001 | Yes. So the ACF ought to get a very careful look both in terms of lessons to be learned and also practicality. If we were to go forward with it, we would have to address the point that Peter raised about organizing an auction and the concerns that several of you raised about risk management issues and controlling the c... | 540 |
fomc | 2,001 | When would you contemplate an action-forcing event beginning to emerge? What timeframe for leisurely discussion do we have? | 22 |
fomc | 2,001 | Well, we would expect to move forward on some of this work over the next six months--having the public dialogue and assessing the foreign sovereign and municipal securities options. Starting that dialogue in and of itself will spark a lot of debate, so that will be a useful step in the right direction. In our memo we i... | 229 |
fomc | 2,001 | Yes. Also, several members of the Committee mentioned the near-term political uncertainty relating to spending and tax measures under consideration. A year from now we may have budget proposals from this Administration that will provide a clearer picture of when those initiatives might have an impact--in a year or two ... | 87 |
fomc | 2,001 | Don, it was fairly late in the morning when the Chairman articulated the concept that this problem may turn out to be an interim one. It could be reversed and go back the other way. To me there is a fair probability that if we view this whole episode in that context, it may change the way we look at some of the alterna... | 133 |
fomc | 2,001 | Right. That's one reason why exploring the ACF and the RP collateral issue has a lot of appeal. | 21 |
fomc | 2,001 | Governor Gramlich. | 4 |
fomc | 2,001 | Let me raise one question. I've been pushing for a Lombard facility, as you know. I take it that the sense of the meeting is that if we do that, it would be at best a handmaiden to the ACF. Is it the Committee's view that we ought to see where we are on the ACF first and perhaps take up the issue of the Lombard facilit... | 120 |
fomc | 2,001 | I'm not a member of the Committee, but I'd like to speak for the Desk and its role in conducting open market operations. The Lombard facility would make adjustment credit more useful and increase its use, and that would be a helpful aspect of managing reserves in the banking system. I may be an outlier, but by raising ... | 163 |
fomc | 2,001 | How do you coordinate a Lombard facility with an auction? | 12 |
fomc | 2,001 | They're just different tools. | 5 |
fomc | 2,001 | If you had a daily auction, you couldn't have a Lombard on top of it, could you? | 21 |
fomc | 2,001 | Sure you could. | 4 |
fomc | 2,001 | The Europeans do. | 4 |
fomc | 2,001 | Yes, the Lombard facility is for borrowing at the end of the day. | 16 |
fomc | 2,001 | In other words, it couldn't be an auction at the end of the day? | 16 |
fomc | 2,001 | No, it's not an auction; it's discount window borrowing. | 12 |
fomc | 2,001 | In those countries that have both auctions and Lombard facilities--the Swiss, for example--the Lombard rate is defined as x basis points over the auction rate. So it moves constantly with the auction rate. | 42 |
fomc | 2,001 | I was going to make the point that when we talk about repos, cash is the other side of a security repo. There is little difference between auctioning repos and auctioning deposits. It's just looking at the process from the other side. RPs would be done in the morning when all the other auction activity occurs. That mig... | 111 |
fomc | 2,001 | Let me interject to avoid a misconception. In all likelihood we would institute a next-day settlement for an auction among the 8,000 or so depository institutions that might be eligible to participate. Such an auction may not even be in the realm of possibility for adjusting today's reserves, whereas the discount windo... | 75 |
fomc | 2,001 | That was the basic reason. | 6 |
fomc | 2,001 | I share Peter's view that if the Lombard rate, or whatever we call it, were above the fed funds rate--which is where it ought to be--institutions would be much more likely to use the window. | 45 |
fomc | 2,001 | In other words, it's like people who buy luxury cars. They can afford it! [Laughter] | 21 |
fomc | 2,001 | Exactly. I was a CFO in the heyday of banks worrying about going to the window. I can't tell you how many banks had somebody assigned to kick the computer from time to time so it would stop working and the bank could pretend that it didn't know its reserve position! | 55 |
fomc | 2,001 | I'm still wondering what we ought to do about discussing the Lombard facility. Should we take it up on a separate track or consider it with the ACF as one of the options? In a way I'd like to see it tied to the ACF. It is part of a whole package. | 59 |
fomc | 2,001 | But I think the ACF is key to a different problem. The Lombard is conceptually separate and it might even confuse matters to tie it with the ACF. | 34 |
fomc | 2,001 | So should I keep pushing? [Laughter] | 10 |
fomc | 2,001 | Yes. | 2 |
fomc | 2,001 | Okay. | 2 |
fomc | 2,001 | President Jordan. | 3 |
fomc | 2,001 | Thank you. I have a question on the very short term for Peter and one on the longer horizon for Don. Peter, based on our experience in April of the last two years, what is the order of magnitude of the challenge you are expecting this April? | 52 |
fomc | 2,001 | The Treasury keeps telling us that they will have enough capacity in the TT&L system and I keep worrying that they won't. But I don't have a good handle on that. Sandy, do you want to comment? | 43 |
fomc | 2,001 | Last year was not terrible. They managed their cash better. This year probably won't be awful, but I doubt that they will have enough capacity. Capacity is likely to fall rather than rise as a result of a number of other developments. | 47 |
fomc | 2,001 | I know that problem only comes up once a year, but it appears to have become a big challenge. | 21 |
fomc | 2,001 | It can be. | 4 |
fomc | 2,001 | On the longer term, I'm glad you're going to be thinking about the vision for the future and would ask whether you plan to include in that some issues related to the liability side of the balance sheet and to other institutional arrangements. Twenty years ago we began implementing a new regime, mandated by legislation,... | 432 |
fomc | 2,001 | I think there's a potential problem of overloading the system by trying to do too many things at the same time. One issue we've been tackling involved trying to pay interest on reserves. | 36 |
fomc | 2,001 | Which I'm opposed to but-- | 6 |
fomc | 2,001 | We've been unsuccessful in doing that and I don't think we're likely to be successful. We can take a look at this idea to see if perhaps something on that side is worth exploring. But I would hesitate to commit to a major study about reserve requirements and the clearing balances system when we're trying to work on the... | 94 |
fomc | 2,001 | I'll pay for the fourth beer and Marvin can convince you! | 12 |
fomc | 2,001 | President Minehan. | 4 |
fomc | 2,001 | Let me just clarify something. Are we looking at the ACF or the NACF? | 18 |
fomc | 2,001 | ACF. | 3 |
fomc | 2,001 | The NACF is more or less off the table, right? | 13 |
fomc | 2,001 | That was my understanding, yes. | 7 |
fomc | 2,001 | Okay, I was a little confused on that. | 10 |
fomc | 2,001 | Governor Ferguson. | 3 |
fomc | 2,001 | First I want to respond briefly to Jerry Jordan and support what Don said. If it's only a question of a few beers and pretzels, then I'd be supportive of looking at both sides of the balance sheet. If it involves anything more than that, I would suggest that we stay focused at this stage only on the one side of it. I'm... | 108 |
fomc | 2,001 | Right. Certainly on the short-run issues we would have to come back to you and we will provide an update on where we are on these longer-term efforts as well. It needs to be fewer than eight months before the Committee is next apprised of what the staff is doing in this area. In addition, we will keep you informed abou... | 94 |
fomc | 2,001 | Okay. | 2 |
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