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fomc | 2,002 | In terms of the direction, it's a variety of regions. | 12 |
fomc | 2,002 | It's everything. It's from a number of regions, and there's also a slowing in the domestic component. Really, the growth in currency is slowing in all areas. | 32 |
fomc | 2,002 | Domestic currency growth is around 4 percent. | 9 |
fomc | 2,002 | Do you have any explanation for that? | 8 |
fomc | 2,002 | The uncomfortable one is that domestic currency is contemporaneously correlated with spending. | 14 |
fomc | 2,002 | The question is, is it? No, let me put it this way: What is the correlation between currency outstanding and spending, let's say, knocking off the $100 bills which-- | 37 |
fomc | 2,002 | The domestic component of currency is correlated with contemporaneous spending. The correlation is not particularly high though. | 20 |
fomc | 2,002 | Something like .3? | 5 |
fomc | 2,002 | I hesitate to give you a number, but we certainly will. | 13 |
fomc | 2,002 | Unfair question, good answer. | 7 |
fomc | 2,002 | The last time we had a Middle Eastern conflict, in the Gulf War, I think currency went way up. Is that right? | 26 |
fomc | 2,002 | The inflation rate was much higher then. | 8 |
fomc | 2,002 | Actually, Mr. Chairman, in terms of a staff model of currency the r squared is around 1/2, and it's highly correlated with nominal PCE with a significant t statistic. | 38 |
fomc | 2,002 | What is happening to corporate yields in Japan? What do the spreads look like? We very rarely hear discussions of that. | 24 |
fomc | 2,002 | It's an excellent question. And the problem at least in part is that the data are not great. What one hears are anecdotal reports. | 28 |
fomc | 2,002 | I'm just asking about prices. Do you mean the prices are not available? You don't have them? | 20 |
fomc | 2,002 | Yes, but I think what people typically focus on is the cost of credit, which often is provided by the banks. So if the question is what is the cost of credit and the borrower is getting credit from the banks, that information is a little harder to get. I don't have the exact spreads on the tip of my tongue. | 67 |
fomc | 2,002 | Mr. Chairman, I do. | 7 |
fomc | 2,002 | Oh, do you? Good. | 7 |
fomc | 2,002 | I have a chart of Japanese corporate versus government debt spreads. The AA has been a little choppy, but the spread is about 15 basis points; the BBB is around 50 basis points. Both have been spiky, up and down a bit, in the last week or so. | 59 |
fomc | 2,002 | But the spreads are not rising? | 7 |
fomc | 2,002 | There is no discernible trend. | 7 |
fomc | 2,002 | The reason I raise the issue is that if there is a propensity to hold JGBs for fear of private credit risk, especially in the banks, one would have expected a very significant opening up of corporate yields. And I gather your chart doesn't show that. Unfortunately, the Japanese don't have a securities market in the sen... | 66 |
fomc | 2,002 | Right. I can't tell you what issuance has been, so I have no idea if this is a reflection of no issuance and no trading and so forth. Actually, the spread has been trending down a bit in the BBB from the middle of this year to most recently. So there is no sign here that spreads are blowing up or even widening. | 69 |
fomc | 2,002 | I've tried to make a big point that the Japanese don't have a securities market and that all of their intermediation is in banks. I guess it's true! [Laughter] President Poole. | 40 |
fomc | 2,002 | I just want to offer a quick observation. You talked about the tremendous oversubscription on the Japanese Treasury securities despite little or no yield on those investments. Given that there's an obvious alternative, which would be U.S. Treasuries that have a positive yield, there must be an overwhelming view in Japa... | 105 |
fomc | 2,002 | I think the answer from all that I've seen--and I've looked at this in considerable detail--is that one cannot explain these yield differentials without adverting to some notion of the equivalent of "Buy American" in Japan, where in a sense the presumption is that one must support Japanese institutions. I say that beca... | 98 |
fomc | 2,002 | Unless one is convinced that the yen is going to appreciate over the long run against the dollar. Otherwise it just doesn't fit. | 25 |
fomc | 2,002 | Yes, and that argument-- | 6 |
fomc | 2,002 | It doesn't make any logical sense either. | 8 |
fomc | 2,002 | Exactly. So I conclude, merely as a fallback explanation--having examined a la Sherlock Holmes all of the alternatives and found them wanting--that therefore the missing alternative must be the true one. But that is the type of reasoning that the logic courses will tell you is very, very fragile. President Jordan. | 61 |
fomc | 2,002 | Thank you. Dino, with regard to your reference to the possibility that the decline in longer-term U.S. Treasury yields is associated with Fannie Mae's hedging needs, I've seen that mentioned in the press too. I know nothing about the flows through Fannie Mae. But the presumption must be that the amount that they requir... | 131 |
fomc | 2,002 | Let me make two points, President Jordan. First, the commentary from the markets was that generic mortgage hedging and hedging of mortgage-backed securities portfolios was associated with the decline in yields, which was one aspect of the story. Then in the last week, since Fannie Mae announced its duration gap, this o... | 186 |
fomc | 2,002 | Okay. But that still leaves me a little puzzled about how good of a hedge this is. Except for the idea of callable debt, which I hadn't thought about as a course of action they could take, what are the alternatives? If they had previously hedged, whether by using ten-year Treasuries or something else, and we got this k... | 200 |
fomc | 2,002 | I can't speak for the interworkings of how they manage their hedging. What I was trying to do was to explain the commentary in the Treasury market. My point was that Fannie Mae has other means of hedging--alternatives in terms of accepting the risks, which may have an impact on their earnings if rates go the wrong way ... | 109 |
fomc | 2,002 | I understand, but it still leaves me uncomfortable thinking that hedging activities by Fannie Mae work the same way as hedging activities by anybody else. That's not obvious to me, given the nature of what they would have to do if rates were to move substantially against them. | 55 |
fomc | 2,002 | That's a possibility, yes. | 6 |
fomc | 2,002 | President McTeer. | 5 |
fomc | 2,002 | Mr. Chairman, you and President Poole partially answered the question I wanted to ask. I was going to ask Dino what his answer would be if his second cousin from Texas called him and asked why people in Japan were willing to go to the trouble to buy a bond with zero interest. I can see that there may be a patriotic rea... | 107 |
fomc | 2,002 | Well, I think some of that is going on as well, though perhaps not as much as in Argentina where people have been buying safes. But certainly we have heard some commentary about people keeping cash as opposed to putting it into a bank. Let me make one other point regarding your question about why residents haven't take... | 211 |
fomc | 2,002 | But why bonds rather than literally hold cash in Japan? | 11 |
fomc | 2,002 | Well, I think in part there may be an aversion to credit risk. Earlier this year we were hearing that one thing the Japanese banks were doing to fund their dollar assets was foreign exchange swaps, swapping U.S. dollars for yen. They were doing these trades with foreign banks, non-Japanese banks, which then had yen tha... | 152 |
fomc | 2,002 | Any further questions? Vice Chair. | 7 |
fomc | 2,002 | Move approval of the domestic operations. | 7 |
fomc | 2,002 | Without objection. We now move on to David Stockton and Karen Johnson. | 14 |
fomc | 2,002 | Thank you, Mr. Chairman. A year ago, as we gathered here to discuss the outlook, we on the staff struggled mightily to make a useful contribution to the economic analysis of the fallout from the unprecedented terrorist attacks that had just occurred. For once, the overused phrase of economic forecasters everywhere--tha... | 2,419 |
fomc | 2,002 | The staff outlook for real economic activity in the rest of the world is slightly darker than that we presented in the August Greenbook, as some of the recent data have failed to meet our expectations and have disappointed markets. In response, we have revised down a bit our outlook for foreign real GDP. We still belie... | 1,414 |
fomc | 2,002 | Questions? President Broaddus. | 7 |
fomc | 2,002 | I have a question for David. The staff forecast certainly seems reasonable to me, David, but obviously there are always risks of error on both sides of a forecast such as this. In that context, I always find the alternative scenarios provided in the Greenbook helpful and useful to think through. With that in mind, I wo... | 204 |
fomc | 2,002 | Let me make a couple of remarks on your points. Obviously, we can construct considerably grimmer scenarios than the ones we presented in the Greenbook. And as I think we've mentioned on a couple of occasions, that is an area of research we're working on. One of the weaknesses in the alternative scenarios that we presen... | 255 |
fomc | 2,002 | Incidentally, am I correct that there has been a fairly significant increase in corporate liquidity in the last year or so? | 24 |
fomc | 2,002 | Yes, corporations have been taking advantage of what has been a receptive bond market to acquire a lot of liquid assets and in fact have a lot of liquid assets on their books. | 35 |
fomc | 2,002 | There's been a grossing up in a sense. | 10 |
fomc | 2,002 | Yes. | 2 |
fomc | 2,002 | Is it basically long-term liabilities and short-term assets, as best we can judge? | 17 |
fomc | 2,002 | Yes, we've seen an increase in both. As I think we showed yesterday in the staff briefing, the ratio of liquid assets to total assets has increased in the corporate sector over the past year or so. | 41 |
fomc | 2,002 | So that can be read in one of two ways or perhaps even in two ways. One is that it is a measure of the extent to which caution has confronted the business community in the last year and they are feeling vulnerable, which is the other side of pulling back on capital expenditures. On the other hand, corporations have the... | 110 |
fomc | 2,002 | Yes, I would agree that that's the general picture we see currently. The weakness in borrowing has been largely demand-driven, not a supply constraint. Better corporate credits can go to the market and raise funds. They have been doing that, presumably in some sense to protect themselves against markets that might turn... | 108 |
fomc | 2,002 | President Jordan. | 3 |
fomc | 2,002 | Thank you, Mr. Chairman. It's a comfort to me to know that Al Broaddus is worrying about deflation because it means that I'm free not to give it much thought. [Laughter] I want to ask Karen a question about Canada and how much we really know about the current situation as a basis for the staff forecast. In your staff's... | 246 |
fomc | 2,002 | To be honest, I don't. I sincerely hope that there are many people who for other reasons are paying a lot of attention to immigration controls in Canada. But it is not something that has been raised in the context of the economic debate about the reasons that Canada has led the way in this recovery. They have had a hou... | 179 |
fomc | 2,002 | President Moskow. | 4 |
fomc | 2,002 | I have a question for you, David, about the discussion on productivity in your remarks today and also the alternative scenario with faster productivity growth included in the Greenbook. You talked about two possible explanations for this extraordinary growth in productivity. One is that structural productivity has incr... | 157 |
fomc | 2,002 | First, let me say that I wouldn't necessarily characterize it as a favored explanation. In fact one of the ways that I mentioned in which businesses could be getting more output out of their existing resources is that they actually are learning how to use the equipment that they currently have available to them. The ca... | 314 |
fomc | 2,002 | President Parry. | 4 |
fomc | 2,002 | Thank you, Mr. Chairman. Dave, when I read the Greenbook one of the things that struck me was how little inflation is projected to decline over the period. I appreciate your taking the time to explain why that is the case. But it seems to me that over a two-year period a more conventional rule of thumb--along the lines... | 156 |
fomc | 2,002 | Obviously, there are many different estimated Phillips curves. Our forecast actually is reasonably consistent with our estimates of the Phillips curve. Ours at least has a relatively small coefficient on that gap variable. So I don't think we view this forecast as necessarily at odds with our estimated relationships. A... | 256 |
fomc | 2,002 | Thank you. | 3 |
fomc | 2,002 | President McTeer. | 5 |
fomc | 2,002 | Karen, I was going to ask you why Canada has done so well in terms of economic growth and if you thought that the relatively long term decline in the Canadian dollar rate was a primary factor. I don't believe you mentioned that in responding to Jerry earlier. | 51 |
fomc | 2,002 | No, and I think that is a good point. I appreciate your mentioning it. The industrial country that on the whole did the best through the recent downturn and the upturn is Australia. I've asked myself over and over again why it is that Australia has done so well. And now in terms of the recovery, Canada is coming right ... | 296 |
fomc | 2,002 | Does this lead you to believe that we could use a little more currency depreciation ourselves? | 17 |
fomc | 2,002 | Well, I'm always the one who is sitting around worrying about the current account deficit and our net external indebtedness. It's not that I don't think the U.S. economy can be maintained at full utilization of its resources either way. But I think that in the long run some dollar depreciation is a necessary step, so I... | 314 |
fomc | 2,002 | Thank you. | 3 |
fomc | 2,002 | President Stern. | 3 |
fomc | 2,002 | Thank you. Dave, you mentioned along the way that the initial claims data seemed more consistent with small declines in employment rather than small increases, and yet you've maintained the small increases in the Greenbook forecast. Could you give me a sense of your thinking that has led to that more optimistic conclus... | 59 |
fomc | 2,002 | Sure. One factor was that when we put the Greenbook to bed we had only one week of initial claims at 424,000. [Laughter] Claims data are volatile enough that we just didn't take seriously that one week's data. Now, that level was sustained last week. There was an old rule of thumb in the division that we had to see at ... | 131 |
fomc | 2,002 | If nobody else has any questions, who would like to start the general discussion? President Moskow. | 20 |
fomc | 2,002 | Thank you, Mr. Chairman. On balance, the recovery in the Seventh District economy appears to be continuing but at a slow and uneven pace. At the last meeting I mentioned that I had started to receive some upbeat reports from a number of highly placed contacts. Unfortunately, the optimism has not spread, and in some cas... | 604 |
fomc | 2,002 | What a "fowl" thought! | 8 |
fomc | 2,002 | Well, I haven't had so much fun since I was deputy trade representative! Turning to the national outlook, the economy still seems to be on a bumpy road. We have absorbed an extraordinary number of shocks over the past year: September 11, the war on terrorism, international trade disputes, the failures in corporate gove... | 398 |
fomc | 2,002 | President Parry. | 4 |
fomc | 2,002 | Thank you, Mr. Chairman. The Twelfth District's economic recovery has been proceeding at a moderate pace, with perhaps a slight weakening this summer. Technology companies in the West continue to struggle with rapidly falling prices and weak earnings. Recent news from the sector indicates job reductions rather than exp... | 966 |
fomc | 2,002 | President Jordan. | 3 |
fomc | 2,002 | Thank you, Mr. Chairman. After listening to all kinds of people over the summer, I've come to the conclusion that perhaps I should always listen to equal numbers of manufacturers and retirees because manufacturers always want lower rates and retirees always want higher rates. Or maybe better yet, I should just save mys... | 446 |
fomc | 2,002 | I don't know if I should admit to this, but in the back room there were very peculiar things going on. [Laughter] | 27 |
fomc | 2,002 | So we heard! As for his view on the economy, this small businessman described it as "saw-toothed with a positive bias." That's just the way they talk in Kentucky, I think. The saw teeth are obvious in the month-to-month changes that are regularly reported. But ascertaining whether or not there is a positive cyclical tr... | 712 |
fomc | 2,002 | President Guynn. | 4 |
fomc | 2,002 | Thank you, Mr. Chairman. Economic activity in the Southeast has continued to advance at a lackluster pace since our last meeting. And it's my sense from conversations with business community leaders that we have lost some of the momentum and cautious optimism that we were seeing earlier in the year. Consumer spending i... | 1,224 |
fomc | 2,002 | President Santomero. | 5 |
fomc | 2,002 | Thank you, Mr. Chairman. At our last meeting in August, I reported that the recovery in the Third District appeared to be slowing from the pace seen earlier in the year. Incoming data reinforce this assessment. Although auto sales in the region remain robust, retail sales of general merchandise slipped from July to Aug... | 1,131 |
fomc | 2,002 | Vice Chair. | 3 |
fomc | 2,002 | Thank you, Mr. Chairman. I would describe the Second District as limping along. The regional economy is growing slowly, with very little job growth and essentially no price or wage pressures. Business sentiment is split. Wall Street, at least as reflected by the Bank's board of directors, is extremely pessimistic and r... | 408 |
fomc | 2,002 | President Minehan. | 4 |
fomc | 2,002 | Thank you very much, Mr. Chairman. New England's recovery appears to have stalled out. Employment continues to decline. Joblessness reached a high for the year, and hiring surveys indicate that most employers are not planning to add jobs. And forward-looking indicators embodied in consumer and business confidence surve... | 1,787 |
fomc | 2,002 | President Broaddus. | 5 |
fomc | 2,002 | Thank you, Mr. Chairman. The first sentence of the Beige Book summary says that economic activity has slowed in most Districts but with considerable variation across sectors of the economy. That describes my District very well. On the weak side, just to give you a bit of the detail, manufacturing activity has clearly s... | 1,260 |
fomc | 2,002 | President Stern. | 3 |
fomc | 2,002 | Thank you, Mr. Chairman. I'll be brief because in my view very little has changed on balance since our discussion at the last meeting. As far as the District economy is concerned, perhaps one way to characterize it is to distinguish between the consumer and business sectors. The consumer sector continues pretty much as... | 493 |
fomc | 2,002 | There's coffee outside. Why don't we break for fifteen minutes? | 12 |
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