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fomc | 2,002 | One could say that the interest rate equation in it is not stable, reflecting the shift in policy, and we do take account of that. And that's really the only test we would apply. One could actually look closer at it. | 46 |
fomc | 2,002 | Governor Gramlich. | 4 |
fomc | 2,002 | Well, as long as we're into that, I had a few questions about your model, too. First, as I understand it, on Un you take the demographic adjustments that Dave has talked about and incorporate them into the variable. Is that right? You take from outside the relative price shocks and unit labor costs you talked about and... | 129 |
fomc | 2,002 | That's correct. | 3 |
fomc | 2,002 | Okay. Let me make a couple of comments about Art's paper. First, I think there are two problems with using the time period of the last fifteen years. One was mentioned by the staff and also by Cathy Minehan, which is that, if the central bank is successful in holding inflation close to, shall I say, a target, then any ... | 472 |
fomc | 2,002 | Vice Chair. | 3 |
fomc | 2,002 | Looking at the second panel on your exhibit 4, where structural productivity growth was taking off--with a drop-off recently that is about typical of the reduction in productivity growth during a recession--I would think that the improving productivity trend is still very much alive. The question, I think, is why it to... | 333 |
fomc | 2,002 | President Parry. | 4 |
fomc | 2,002 | Thank you, Mr. Chairman. I certainly agree with the three factors that the staff has pointed to as having played a significant role in restraining inflation. But I do have a question about the weights assigned to them in terms of their relative importance. And it seems to me that the recent experience of other develope... | 241 |
fomc | 2,002 | One comment I might have on that is that the weight we give to monetary policy in the experience of the last five years is associated with our notion that policy changes the sensitivity of inflation to the gap between unemployment and the natural rate. For monetary policy to receive a bigger weight in our analysis ther... | 133 |
fomc | 2,002 | President Jordan. | 3 |
fomc | 2,002 | Thank you, Mr. Chairman. First a comment: Microeconomic principles would have led me to think that a move from a high inflation environment to a low inflation environment would cause an increase in what we call productivity, though I don't know how I would go about directly trying to test or reject that hypothesis. Nex... | 201 |
fomc | 2,002 | I'm not sure we have an explanation for that. One general point I could make is that although the change in monetary policy is part of our story, there's nothing that says that the change in monetary policy--this speaks to President Parry's question as well--was the same across all countries. In some countries that had... | 137 |
fomc | 2,002 | President Broaddus. | 5 |
fomc | 2,002 | Mr. Chairman, I don't have any questions, just a couple of comments. Let me say first that I very much enjoyed working through both of these papers. They focus on issues that a lot of us have been dealing with for heaven knows how many years, and I think they do shed some new light on the subject of inflation. For me t... | 714 |
fomc | 2,002 | Oh, but you wouldn't do that, would you? | 11 |
fomc | 2,002 | I'll get back to you on that! [Laughter] Seriously, while I'm not questioning the econometrics, I just think it would be a mistake to draw the broad conclusion from these results that policy played a secondary role in reducing inflation in the 1990s. I'm not necessarily suggesting that you're saying that, but I see tha... | 517 |
fomc | 2,002 | Mr. Chairman, may I make one clarifying comment just so there isn't any confusion about what David and John have shown on exhibit 6? In our model of the economy, inflation is a monetary phenomenon. And you as policymakers take all the credit and all the blame for the long-run movements of inflation, including the disin... | 165 |
fomc | 2,002 | I just want to make sure we get credit not only for the 12 but for the 63 and the 25! [Laughter] | 29 |
fomc | 2,002 | Another part of this chart that is not shown is the rise in inflation to 14 percent in 1979 and the decline to 5 percent in 1982. That's all on your plates as well! | 42 |
fomc | 2,002 | I think David's record on psychology and diplomacy has just gone up to match his skill as an economist! [Laughter] | 25 |
fomc | 2,002 | President Poole. | 4 |
fomc | 2,002 | I think most of us agree that, in the long run, money growth determines the price level. I don't think there's any argument about that. But certainly money growth is not very helpful for predicting inflation in the short-term periods that we work with around this table. I think one of the problems here is that, with al... | 931 |
fomc | 2,002 | Governor Ferguson. | 3 |
fomc | 2,002 | Thanks. I'd like to pick up on a point that President Poole made in passing, this whole issue of the so-called supply shock and the beneficial nature of it. Your point about why it is that we have benefited from this makes a lot of sense. But then another point you make is that to some extent the question now is our re... | 236 |
fomc | 2,002 | I'd like to make one clarifying point about the productivity story that relates both to what President Poole said and what you just said. I don't think it's necessary in explaining the productivity story to believe that workers are fooled and that they don't know for a long time what aggregate productivity growth is. I... | 137 |
fomc | 2,002 | Absolutely. | 2 |
fomc | 2,002 | So the job opportunity aspects are realized gradually. | 9 |
fomc | 2,002 | Well, that's what I meant by the Internet and help supply and all those job market developments that tend to allow that competitive pressure to go through more quickly into wages. It's not just that workers are fooled. Ultimately I guess my question is this: Given these structural changes, aren't we likely to see a sit... | 103 |
fomc | 2,002 | Indeed, on the productivity story per se, we have tried to emphasize the uncertainty about the adjustment speed. But having said that, we believe we are probably coming to the end of it fairly soon, if we have not already. As for the other factors we talked about perhaps having more-durable effects on the natural rate,... | 79 |
fomc | 2,002 | We think the productivity effect indeed may be just about played out, but we do believe that the other labor market developments are going to be more durable. So that portion we expect to continue. | 38 |
fomc | 2,002 | May I add one more point to the answer to your question? There's no sense that there is any payback from the benefits of productivity that has to be met at some point. So while we're saying that the productivity story has played out, we have reached this lower rate of inflation. In our view, there's no reason for infla... | 92 |
fomc | 2,002 | But this does get to a point that I think Al Broaddus was making, which is that the opportunistic disinflation that has occurred over the last several years, in part because of the productivity shock, is not something that we can be complacent about. And since in some sense I've mortgaged my house based on keeping infl... | 95 |
fomc | 2,002 | Governor Bies. | 4 |
fomc | 2,002 | I found the papers very interesting. I think a few of you know that I have been trying to learn more about where the research stands on productivity and monetary policy. But as someone coming from the private sector there is one comment--an observation--I'd like to make. When I look at exhibit 5 and the factors you sho... | 505 |
fomc | 2,002 | Governor Olson. | 3 |
fomc | 2,002 | This follows up a bit on what Susan was just saying and also on what Vice Chairman McDonough was talking about. I was very interested when I read the material on the relationship between productivity and pricing power. It struck me as I was reading it, that this is a zero-sum game--there are winners and losers--and the... | 198 |
fomc | 2,002 | It certainly is a story for why investment collapsed and why it might not rebound right away. I think you are right that people do seem to be more cautious now. | 33 |
fomc | 2,002 | But I hadn't thought of it from a timing perspective. If indeed timing is an issue now that the economy is soft and caution seems to be the watchword, then timing would also be important once the economy turns around. It would suggest that the participation rate might move a lot faster on the upside also. I don't know,... | 74 |
fomc | 2,002 | President Minehan. | 4 |
fomc | 2,002 | I was going to say something very similar to what Governor Bies talked about. I was surprised that it took as long as it did in this staff paper to get to the role of pricing power. I think the issue is to some extent a question of what comes first--the chicken or the egg, the low inflation environment or the concern a... | 338 |
fomc | 2,002 | President Minehan, one aspect of what we saw in the late 1990s certainly lends some support to that view. One hypothesis, or one of the previous empirical stylized facts, was that late in expansions we get sags in productivity as lower-skilled workers are brought into the labor force. But what happened in recent years ... | 121 |
fomc | 2,002 | On the global issue, we obviously observe considerably less pricing power, at least from our data systems, for manufactured goods or tradable goods generally. What is not clear is whether the difference is an issue of productivity, which is internal, or whether it relates to the competition coming from tradable goods. ... | 252 |
fomc | 2,002 | Our reading of the literature on where productivity comes from and where technological progress comes from is that whether or not greater competitive pressure is a factor driving greater productivity growth seems to be an open question. One shred of evidence in that regard comes from international comparisons of growth... | 80 |
fomc | 2,002 | And I assume we would infer from that that it's the productivity and not the population growth that is relevant in that regard? | 24 |
fomc | 2,002 | Absolutely. I meant productivity growth. In open economies output per person grows faster. | 16 |
fomc | 2,002 | May I offer an observation on pricing power? If you think about what happened in the medical area in the mid-1990s, the change in competitive conditions pushed down the rates for hospitals or at least controlled them. But clearly prices can't be pushed down so far that it sends companies into bankruptcy. What has happe... | 271 |
fomc | 2,002 | You know, it's not at all clear that medical prices are going up. What we do know is that the aggregate dollar amount spent on medical care and insurance is going up. But we have no way from the data system that exists to argue against the hypothesis that unit medical prices haven't moved at all in recent years. | 63 |
fomc | 2,002 | I don't disagree with that except that there is a significant change from the trend in the mid-1990s. For example, if medical prices today are going down per unit of value delivered, they're not going down as fast as they were five years ago. That's my only point there. | 58 |
fomc | 2,002 | That may well be. In other words, deflation in medical prices is assuredly less than it was five years ago if indeed those prices are deflating. | 33 |
fomc | 2,002 | Exactly. And another example would be universities; we're seeing a lot of tuition increases now. State universities in particular are putting through increases because of the pressure on state budgets. I don't know whether there's a productivity story you want to try to tell there [laughter] but that's certainly a diff... | 59 |
fomc | 2,002 | There I will stipulate that it's hard to find. | 11 |
fomc | 2,002 | Those are real price increases. | 6 |
fomc | 2,002 | To be sure. President Moskow. | 8 |
fomc | 2,002 | This is just a further elaboration on the point Roger Ferguson was making earlier that the productivity effect will fade but may persist a while longer. And, of course, your point that the productivity acceleration represents 63 percent of the difference between the two simulations makes it extremely important. I was w... | 246 |
fomc | 2,002 | Well, one answer is that the model we're using to provide these quantitative estimates makes use of the labor share as one of the explanatory variables that enters into the dynamics of inflation--price inflation and wage inflation. But the view of this model is that the labor share goes up and down over a period of tim... | 157 |
fomc | 2,002 | It's helpful. I guess I had thought that the labor share was near its historical high now, not the average. Am I wrong on that? | 29 |
fomc | 2,002 | The labor share has come back up to near its average. | 12 |
fomc | 2,002 | To its average? | 4 |
fomc | 2,002 | Yes. And in our view, that is indicative of the productivity story having played itself out. We would expect, as the productivity story is played out, that the labor share would tend to come back to its historical average. | 45 |
fomc | 2,002 | So, underlying your statement that the growth in productivity may persist awhile longer is a view that it is getting less and less likely? | 26 |
fomc | 2,002 | The key is that we're anticipating some acceleration in productivity again as capital accumulation picks up. So we expect to get an additional benefit for a while. | 29 |
fomc | 2,002 | But it probably will be small relative to what we've seen in the past several years. | 17 |
fomc | 2,002 | So our job gets more difficult going forward. | 9 |
fomc | 2,002 | Vice Chair. | 3 |
fomc | 2,002 | Two remarks, Mr. Chairman. As my earlier comment indicated, I think the staff may be confusing cyclical and secular trends. That is, I believe the pickup in participation of labor is a result of the recession and very likely will not continue. On the international comparisons of productivity, we've been spending a fair... | 379 |
fomc | 2,002 | Arthur, do you want to have the closing words? Since you terminated your presentation there have been a lot of implicit attacks on your paper. | 28 |
fomc | 2,002 | Yes, there is one comment I'd like to make. A number of people have made the point that Robert Lucas made a number of years ago, which is that in an environment with high and variable inflation we're going to see this correlation between unemployment and inflation. And indeed, unemployment then helps us predict inflati... | 270 |
fomc | 2,002 | Shall we take a break? It has been an excellent conversation and I compliment all of the participants. It was very useful. | 26 |
fomc | 2,002 | We'll now go to the chart show, which will be presented sequentially by David Stockton, Steve Oliner, and Karen Johnson. | 26 |
fomc | 2,002 | 4 Thank you, Mr. Chairman. We're going to be referring to the package of materials entitled "Staff Presentation on the Economic Outlook." Your first chart presents a broad overview of the staff forecast. The upper left panel provides an update of our Greenbook projection of real GDP growth by including data that we rec... | 1,181 |
fomc | 2,002 | Your next two exhibits survey the financial backdrop for our forecast, starting with the corporate sector. On the whole, we think this sector is in reasonably good financial shape, though there are clearly pockets of stress. One indicator of this stress, shown in the upper left panel, is the elevated default rate on co... | 2,517 |
fomc | 2,002 | Your next exhibit presents our current take on the strong performance of productivity growth in recent quarters. The upper left panel addresses the simple question, "Did it really happen?" In this panel, I use two independent measures of output--one measured on the product side and the other measured from the income si... | 1,468 |
fomc | 2,002 | Your first international chart presents financial market developments in the major foreign industrial countries. The top left panel shows the decline in the nominal exchange value of the dollar that has occurred since shortly after the January chart show in terms of the euro, the yen, and the index of the currencies of... | 3,045 |
fomc | 2,002 | The final chart presents your forecasts for 2002 and 2003. As seen in the upper panel, you have revised up your projection for the growth of real GDP in 2002 and lowered your forecast of the unemployment rate. Your projection for PCE prices this year has been raised a touch. Your projections for next year are displayed... | 125 |
fomc | 2,002 | Thank you very much. I ought to comment that any revisions in these forecasts that you may wish to make should be submitted to David before close of business on July 5. Questions for our colleagues? President Hoenig. | 44 |
fomc | 2,002 | Karen, I have a question on the dollar and capital flows. You broke out the reduction in capital flows between equities and other U.S. securities. Is there any insight that you can share with us on that? Why the larger drop-off in bonds, other than perhaps inflation fears? Why, with a declining dollar, do we see capita... | 75 |
fomc | 2,002 | At this point, these data are sufficiently new to us--and the revisions actually caught members of my staff by surprise--that I don't have any further explanation. Since bond issuance has been fairly strong, there is no obvious explanation as to why it should go down. I think the answer is that I don't really have a go... | 67 |
fomc | 2,002 | Fair enough. | 3 |
fomc | 2,002 | Any other questions for our colleagues? President Moskow. | 11 |
fomc | 2,002 | My question is on the alternative simulation with the weaker dollar. I understand that you had a 20 percent reduction in the dollar, but was it spread out over a year? | 35 |
fomc | 2,002 | Yes, four quarters. | 5 |
fomc | 2,002 | Four quarters. I was just wondering if you had any thoughts on what would happen if that weakness occurred sooner--say, in the next several months--in terms of the impact on output, employment, and also our policy response. | 46 |
fomc | 2,002 | Well, to be honest, I don't think my model would tell us anything very interesting about the differences in those two alternatives because the model is quite linear. There would be some little differences here and there. The monetary policy reaction function would behave differently, which would have some effect. But c... | 490 |
fomc | 2,002 | President Stern. | 3 |
fomc | 2,002 | Thank you. Karen, the commentary in the Greenbook seems to suggest that foreign economies in general are expected to do a bit better going forward than we had earlier anticipated. My question is, Does that reflect something fundamental going on abroad, or is it primarily just an extrapolation of the most recent informa... | 74 |
fomc | 2,002 | More the latter than the former in that we had some positive surprises. Emerging Asia was even a little stronger than we expected--and not only in the high-tech countries. Thailand, for example, which we don't ordinarily put in that category, had a very strong first quarter. Canada surprised us a bit on the upside. I'm... | 141 |
fomc | 2,002 | Okay. | 2 |
fomc | 2,002 | President Minehan. | 4 |
fomc | 2,002 | Looking at chart 5 on financial conditions and the health of the banking sector and recognizing that at times banking performance variables lag the rest of the economy, I'm wondering how confident you are about the rather optimistic perspective there. We're starting to see more CAMELS downgrades than upgrades. And that... | 112 |
fomc | 2,002 | I'm not really trying to say that I think all these ratios will look as good one or two or three quarters down the road as they do now. I'm just saying that the starting point right now is very different from what we experienced ten or fifteen years ago. | 52 |
fomc | 2,002 | Further questions? If not, let me just remind you that we're due at the British Embassy at 7:30 p.m. and that vans will pick up the presidents at the Watergate at about 7:10 this evening. We will resume tomorrow at 9:00 a.m. Morning Session--June 26, 2002 | 69 |
fomc | 2,002 | Good morning, everyone. Dave Stockton has some new information to report. | 14 |
fomc | 2,002 | Mr. Chairman, I thought I'd just bring the Committee up to date on the orders and shipments figures for nondefense capital goods that were released this morning. Somewhere in front of you on the table you should see a sheet of paper that we distributed. It shows the orders and shipments figures for nondefense capital g... | 301 |
fomc | 2,002 | Thank you very much. We're now at the point for Committee discussion. Who would like to start off? President Parry. | 25 |
fomc | 2,002 | Thank you, Mr. Chairman. The pace of economic recovery in the West has been moderate since our last meeting, although employment growth has remained lackluster. Consumer spending continues to be the primary driver of the recovery, fueling growth in retail trade, travel and tourism, and many service-producing industries... | 858 |
fomc | 2,002 | President Moskow. | 4 |
fomc | 2,002 | Thank you, Mr. Chairman. Reports from our contacts in the Seventh District continue to validate our basic outlook. Our economy is recovering but at a moderate pace. As we discussed last time, some sectors are recovering faster than others, so it's not surprising that reports continue to be mixed. We're still not hearin... | 920 |
fomc | 2,002 | President Minehan. | 4 |
fomc | 2,002 | Thank you, Mr. Chairman. Since the last Federal Open Market Committee meeting we have had regular meetings of our small business and academic advisory councils; we've held three bankers' forums in various areas of the District, involving a couple hundred or so regional bankers and bank directors; and we've met with gro... | 1,095 |
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