Source stringclasses 1
value | Date int64 1.98k 2.01k | Text stringlengths 2 27.1k | Token_count int64 1 5.57k |
|---|---|---|---|
fomc | 2,003 | Second. | 2 |
fomc | 2,003 | Without objection. Thank you very much. We have a staff memorandum proposing FOMC rule changes that redefine a meeting quorum, rescind the outdated Emergency Interim Committee, and authorize the appointment of an interim Manager in an emergency. These do not seem particularly controversial. I wondered if anybody had an... | 84 |
fomc | 2,003 | Move approval. | 3 |
fomc | 2,003 | Second? | 2 |
fomc | 2,003 | Second. | 2 |
fomc | 2,003 | Without objection. Now we are back to the usual formal structure of our meetings. I ask your approval of the minutes for the meeting of December 10, 2002. | 35 |
fomc | 2,003 | Move approval. | 3 |
fomc | 2,003 | Approved without objection. We now go to an interesting issue on which we've gotten a significant amount of briefing material. We will hear from Messrs. Sack, Tetlow, Croushore, and Rudebusch. Mr. Sack, would you start us off? | 53 |
fomc | 2,003 | 1 Yes. I am going to refer to the charts that were distributed. They don't have a cover on them, but the words "Smoothness of the Federal Funds Rate" are at the top of the first chart. For some time, economists have noted that monetary policy rates in major industrialized countries tend to change only gradually. A case... | 321 |
fomc | 2,003 | Do you have an R2 on that? This is one case in which the lagged dependent variable has policy implications. | 24 |
fomc | 2,003 | Right, so the R2 is very high--it's 0.96--reflecting that the lagged dependent variable soaks up a lot of the explanatory power. 1 The materials used by Messrs. Sack, Tetlow, Croushore, and Rudebusch are appended to this transcript (appendix 1). | 67 |
fomc | 2,003 | That means that historically our decisions have been almost right but not quite. [Laughter] | 18 |
fomc | 2,003 | One can also express the R2 in terms of the model's ability to predict interest rate changes instead of the level, and there it falls off a good degree--down to 0.42. So part of this, as you noted, is that the level of the funds rate is very predictable. | 61 |
fomc | 2,003 | But we don't like to be predictable! | 8 |
fomc | 2,003 | That means our value added is 0.04. [Laughter] | 15 |
fomc | 2,003 | Of course, simple rules such as this one provide only a rough description of actual policy decisions, and it would not be surprising if the parameters of these rules would change over time. One possible incidence of this is hinted at by the easing of 2001, highlighted in the bottom right panel, which was more rapid tha... | 2,409 |
fomc | 2,003 | Exhibit 5 addresses the issue that the macroeconomic variables used to formulate real-time monetary policy decisions are sometimes poorly measured. There are two potentially important sources of measurement error. The first is that initial releases of key macroeconomic data are imprecise and subject to revision. To qua... | 1,382 |
fomc | 2,003 | Were you planning to move to questions and comments now? | 11 |
fomc | 2,003 | You can ask a question whenever you want to, Mr. Chairman. But our intention was to take questions at the end of the presentations. | 28 |
fomc | 2,003 | I don't know if Glenn's presentation is a formal part of the preceding ones or whether there's a discontinuity. | 22 |
fomc | 2,003 | They are two separate presentations, but they are on the same topic. | 14 |
fomc | 2,003 | Well, the reason I ask is that some of the issues that may come up may be addressed in your remarks. | 23 |
fomc | 2,003 | Yes. | 2 |
fomc | 2,003 | Yes, that is certainly the case. That is why we thought we'd run them all together, Mr. Chairman. | 23 |
fomc | 2,003 | My presentation is entitled "Monetary Policy Inertia," and I will be referring to a handout that was distributed. Based on monetary policy rules estimated from quarterly data, many economists hold the view that the Fed adjusts monetary policy at a very sluggish pace, specifically, that it distributes desired changes in... | 2,663 |
fomc | 2,003 | It's a very interesting set of papers, gentlemen. As a practitioner of sorts, since what is supposedly being focused on are how the equations fit, let me see if I can come at it from the other direction. There is a stipulation that we should be looking at the data sets as they existed at the time decisions were made. W... | 1,346 |
fomc | 2,003 | In terms of policy rule estimates, the view in the literature very often is that there was a structural break in the 1980s. So policy rules in the 1970s are considered-- | 40 |
fomc | 2,003 | But there is an economic structural break in the 1980s in that regard. | 17 |
fomc | 2,003 | The statistics generally indicate a break some time in the 1980s in terms of the policy rule estimates. There appears to be a different behavior in the 1970s than in the 1990s if you regress the funds rate on the output gap and inflation. For example, the coefficients on inflation--that is, the response to inflation--d... | 76 |
fomc | 2,003 | That raises an interesting question. Let's say we go back to the 1960s and 1970s and fit our fixed-coefficient models into that period. The implication is that we're saying that the economic forces moving today are the same ones in principle that were moving back then. Why should policy be any different? I don't know w... | 81 |
fomc | 2,003 | I think the assumption is that there is a learning curve. Although very often the other equations in the model appear stable, at least to a first approximation, the interest rate equation--the equation that summarizes monetary policy or Fed behavior--appears less stable over time. I believe the conventional view is tha... | 72 |
fomc | 2,003 | There's a very large learning curve at the Fed on the construction of various models if we go back historically. It's interesting because the Fed may be a unique institution in that it has a sufficient history and constancy to enable one to see how the models actually have changed. In contrast, private-sector models do... | 145 |
fomc | 2,003 | Mr. Chairman, you may recall the paper that Christine and David Romer presented at the most recent Jackson Hole conference, in which they characterized the process as one of learning, forgetting, and then relearning. The thing that is most unstable about the Taylor rules, as Glenn mentioned, is the inflation target. It... | 170 |
fomc | 2,003 | In terms of the economic modeling, two things about the 1970s come to mind. One is the emergence of the natural rate hypothesis--that there is not a long-run tradeoff between output and inflation. Also, the sacrifice ratio was considered at the time to be very much higher than we imagine it is now. | 65 |
fomc | 2,003 | I've monopolized the floor for long enough. Let me see the list of others who wish to comment or ask questions. Governor Gramlich. | 28 |
fomc | 2,003 | Well, this is a puzzling issue because both sides had very good papers and, of course, you're arguing positions that are the exact opposites. I'd like to focus on the episode of year 2001 because I think the question is really joined there. The Board staff says there is a lot of inertia, and Glenn says there is not. I ... | 285 |
fomc | 2,003 | In terms of this picture, I actually didn't look around that much at other periods. This one seemed to work, so I stuck with it. But in terms of the underlying analysis, even though this episode demonstrates the point, it does not provide the strongest test. A lot of people have looked for this type of interest rate pr... | 320 |
fomc | 2,003 | May I also try to clarify that? The estimated policy rule from our analysis would actually be consistent with your impression of the 2001 episode. That episode did look as if the policy moves were much more rapid than would have been predicted by the estimated policy rule. It's hard to assess because there are only a f... | 136 |
fomc | 2,003 | You can see that in my handout in the chart at the bottom of page 2. There is a Taylor rule without inertia--that is, there is no lagged funds rate in it--and a Taylor rule with inertia. During 2001, those two rules both did fairly well. | 60 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | It doesn't matter that much. The difference in the rules comes in 2002, when for the rule without inertia a persistent deviation emerges. I would argue that there's something other than strict Taylor rule determinants acting during this episode, perhaps some reaction to a collapse of the tech bubble in stock prices or ... | 79 |
fomc | 2,003 | Governor Gramlich, before you leave the topic with the sense that the distinction between the people sitting on the two sides of the table is that stark, Brian has done some work estimating policy rules in which he allows a serially correlated error in addition to the lagged dependent variable. I would ask him to comme... | 67 |
fomc | 2,003 | In a recent research paper that I wrote with two colleagues, we show that it is possible to estimate policy rules directly allowing for both factors. So we don't necessarily have to turn to the term structure evidence to separate them. What our paper and several other papers have found is that clearly Glenn's point is ... | 152 |
fomc | 2,003 | You can reduce the degree of inertia by attributing some of that explanatory power to some other error out there that happens to have serial correlation, right? | 30 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | So part of the problem is that what appears to be inertia actually is not. We've just responded consistently to something that's the same for a period of time. | 31 |
fomc | 2,003 | Well, perhaps. I'd point to the part of exhibits 2 and 3 where we use the FRB/US model. Now, that is a large model with lots of persistence in it; a large number of lagged states and lagged errors are at work there. Let's say you ask what the optimal parameterization of this simple policy rule would be. You ask it to p... | 321 |
fomc | 2,003 | Rational expectations in terms of financial markets, not necessarily the rest of the economy? | 17 |
fomc | 2,003 | Yes. | 2 |
fomc | 2,003 | I think we would agree on the general point of our briefing. We're bickering about what the coefficient is on the lagged federal funds rate in the estimated policy rule, but these issues don't affect our calculations of the optimized rules and don't affect the main conclusion of our briefing. What we find is that these... | 180 |
fomc | 2,003 | This is also true, if I might add just one last point, in the "policymaker perfect foresight" simulation. Without the usual penalty on interest rate volatility--remember a policymaker in that case is taking everything into account, including the kinds of things that Glenn was referring to such as the tech bubble and cu... | 121 |
fomc | 2,003 | Governor Bernanke. | 4 |
fomc | 2,003 | You referred to term structure evidence. This is different from the fed funds evidence that Glenn was referring to or the same? | 24 |
fomc | 2,003 | When I said term structure, I meant the evidence that Glenn presented. | 14 |
fomc | 2,003 | I ask because I'm very interested in this basic point that the Fed should be more predictable in order to use the short-term rate to influence long-term rates and whether that is an important issue. In particular, your evidence is very interesting, Glenn. I was wondering if there had been evidence on whether or not the... | 119 |
fomc | 2,003 | Well, the expectations that are most informative are just a few quarters ahead. In ten-year expectations, say, policy inertia doesn't play as big a role. Those expectations aren't able to clarify whether there is inertia or not. So it is term structure evidence, but I'm just looking at the very short end--one year or l... | 209 |
fomc | 2,003 | The other point, Governor Bernanke, is that in the cottage industry of estimating event-study regressions--which might be another place we could look to see how far a given monetary policy surprise gets transmitted through the term structure of interest rates--we get the same sort of results we get in the time series t... | 116 |
fomc | 2,003 | One might argue that Glenn's interpretation of the Taylor rule is correct--that there is no inertia in the policy rule and that there should be more in order to get more effect on long-term rates. I think that's an open question. | 47 |
fomc | 2,003 | It might be useful to point out as well that, while policy actions three, four, or five quarters ahead are hard to predict, it's not that they don't get built into the term structure. The Board staff produces an expected path of the federal funds rate based on our readings of the futures markets, and it commonly has po... | 139 |
fomc | 2,003 | That's different. That's the interest rate responding endogenously to the expected evolution of the economy. | 19 |
fomc | 2,003 | Well, that's true; that could be the case as well. | 13 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | Let me carry on from this conversation and turn it just a little. If we compare the optimal rule and the estimated rule, the optimal rule is much more aggressive. It probably involves a lot more reversals, and the funds rate would look a lot less smooth if we drew a chart of it. Let's say we use the output from the mod... | 454 |
fomc | 2,003 | I think of reversals as being perhaps a bit shorter run. Again, an important point regarding optimal monetary policy the way economists usually construct it is that it's at a quarterly frequency; we use quarterly average rates. So, it's not as if at one meeting the rate is moved up 50 basis points and at the next meeti... | 184 |
fomc | 2,003 | Let me answer your question in a slightly different way than Glenn did. I interpret your question as saying suppose private-sector agents don't understand the rule or, even more generally, the model. In that case you might ask if there is a role that the Fed can play in the conduct of monetary policy that will assist p... | 288 |
fomc | 2,003 | I think there's inevitably a great deal of learning and evolution involved here in terms of furthering the completeness or sophistication, whatever you want to call it, of the markets' understanding of what we're doing. The environment is very different in that respect from what it was thirty-five years ago, let's say.... | 115 |
fomc | 2,003 | President Moskow. | 4 |
fomc | 2,003 | I want to ask about this financial fragility point a bit more, too. You mentioned that in transcripts of FOMC meetings some Committee members have cited concerns about financial fragility as a reason for smaller interest rate changes than they might otherwise have wanted. I just wondered whether there is any evidence o... | 92 |
fomc | 2,003 | Actually, I think there's surprisingly little research relating to that explanation compared with the huge amount of literature on parameter uncertainty and model uncertainty. As far as I know, financial fragility has more or less slipped by. | 42 |
fomc | 2,003 | All right, Brian, all you have to do is to take a poll of the FOMC members. That's your database. | 26 |
fomc | 2,003 | Right, and I'm getting the impression that financial fragility is important! [Laughter] | 18 |
fomc | 2,003 | Not important, it's determinant! If we think the market is fragile and it's not, that doesn't matter. | 21 |
fomc | 2,003 | It gets back to the risk-aversion point. | 10 |
fomc | 2,003 | Yes. | 2 |
fomc | 2,003 | We do know a few things, though. First, markets actually have become better at anticipating our policy actions since the early 1990s and especially since 1994. Second, presumably markets have become better at trading and allocating risk as well. These developments in the economy bear on this issue. But in terms of rese... | 82 |
fomc | 2,003 | May I make a very brief comment on this point, although I'm jumping in out of turn? The way in which dealers manage their positions is going to depend importantly on what kind of policy changes they think are conceivable. If they live in a world where the rate changes by 25 basis points most of the time, with moves of ... | 147 |
fomc | 2,003 | Another point is that, while the more aggressive rules would create volatility in the short-term interest rate, it's not really clear what they would do to the volatility of prices of longer-lived assets such as long-term bonds or stocks. To the extent that these rules are better at stabilizing the macroeconomy, they c... | 114 |
fomc | 2,003 | Remember, if we're moving the interest rate quickly, the loss function becomes very crucial, whereas if we're moving incrementally, it falls out so we don't really care about it. That can be a very crucial determinant on how we move. In other words, we start with a degree of uncertainty that is very high; it is much hi... | 233 |
fomc | 2,003 | See if there are any volunteers! | 7 |
fomc | 2,003 | I just want to stress again the difference between short-term policy inertia and quarterly policy inertia. A lot of the concerns about financial market fragility would refer just to short-term policy inertia and wouldn't necessarily show up in our quarterly average loss function. Very often in the past if you were goin... | 160 |
fomc | 2,003 | In fact, if you read the transcript of that meeting you will find that there was a very substantial debate within the Committee on exactly that theme. | 29 |
fomc | 2,003 | Right. But again, if you wanted to get to a total change of 100 basis points from the quarterly average of the first quarter to the quarterly average of the second quarter, that could be done over a sequence of four meetings--with limited concern about financial fragility. Financial fragility is something that operates... | 86 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Mr. Chairman, I'd like to ask two questions about the first paper. You looked at these three factors in isolation, and then you indicated in a caveat that the factors might interact. It seems to me that, indeed, they might and that could actually change one's conclusion. I can understand, if you're working with the FRB... | 123 |
fomc | 2,003 | There has been some research that did that, and I think it shows that when you add several of these factors together you get a lot closer to the estimated rule than the optimal rule. That's pretty convincing. | 41 |
fomc | 2,003 | Okay. There's another point I'd like to ask about. First of all, we had an interesting meeting in June in which papers on inflation modeling were presented. The discussion revealed some differences around the table in views about which model is relevant. In one case we had a paper based on a Phillips curve, and another... | 102 |
fomc | 2,003 | There is a literature on robust policy design in which there are a number of different ways to model this. The one that you seem to be pointing to is a rival model methodology where we put different models up and see what we get if we take the optimal rule from one model and put it into some other model. Most of the li... | 169 |
fomc | 2,003 | It seems a little counterintuitive. | 8 |
fomc | 2,003 | Well, let me give you one particular example. Suppose you had two models that differed in the degree of persistence in inflation--your Bank's random walk model is one of those examples. If you get a shock to the output gap in that kind of model, it produces a cycle of inflation that lasts for an extended period of time... | 188 |
fomc | 2,003 | That's interesting. By the way, that's President Stern's random walk! | 14 |
fomc | 2,003 | It depends, I think, on the structure of uncertainty. This is the argument that Milton Friedman made. His point was that not knowing the model--not being sure of the results--led him to argue against fine-tuning or, in this case, the aggressive policy responses. | 56 |
fomc | 2,003 | Governor Kohn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. This discussion has gone on awhile, so let me make just a few points. One is that I'd remind Brian Sack that people sat around this table in October 1979 and made the same argument he just made--that a policy that induced volatility in short-term rates would not get passed through to long-term ... | 976 |
fomc | 2,003 | You know, that's the issue of risk aversion right there. What prevents us from actually doing what you're suggesting is a fear that is asymmetric. It's very tough to get around that, but we're trying. | 41 |
fomc | 2,003 | We can do the psychiatric examinations, but I hope they're not subject to FOIA! [Laughter] | 21 |
fomc | 2,003 | Not only have we tried, we've succeeded very well. | 11 |
fomc | 2,003 | With that thoughtful thought, let's break for ten minutes and come back. We have a number of people who want to speak on these subjects. | 28 |
fomc | 2,003 | Shall we continue? Governor Ferguson. | 8 |
fomc | 2,003 | Thank you very much, Mr. Chairman. I'd like to pick up about where Bill Poole was and focus on the bottom of exhibit 3 in the paper that the Board staff put out. What that suggests to me is that, if we think the markets have become much more complete and therefore somewhat more forward-looking, then we'd do very well b... | 250 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.