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fomc | 2,003 | Right. | 2 |
fomc | 2,003 | I don't think anybody is of the opinion that a federal funds rate of 1 percent will cause the money market mutual funds, for example, to dissolve into non-existence. If we go 50 basis points, then the issue arises that anything we do beyond that may have to involve so-called nontraditional operating techniques and, ind... | 265 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | But as for what that means beyond that, I would be very vague. The major reason is that I don't think we will know until we start to address the issue. As we do so, we're going to learn far more about how the markets are functioning than we can anticipate. I have in mind that this would work in very much the same way t... | 152 |
fomc | 2,003 | One thing you're saying that I appreciate hearing--because I would feel very uncomfortable talking about it--is to stay away from specific discussions about targeting rates out the yield curve. I want to endorse that. I also understand the need for vagueness, given that we can't anticipate what the future will hold for... | 63 |
fomc | 2,003 | Yes, we have a whole set of tools that in principle could be used and should address this issue effectively. We know in the abstract which combinations of tools would be the best and how they would interact with the economy in a way that we would consider satisfactory. I don't think we can know in advance, however, whi... | 556 |
fomc | 2,003 | I, too, was impressed, in the context of Athanasios's paper and the paper on Japan that Karen talked about, by the idea that in the periods of deflation under review the monetary authorities had been focused on some different objective and not on avoiding deflation. In the case of the 1930s, the concern was about infla... | 800 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | Let me try to link the discussion about our situation with the point that Roger was raising about Japan because I think the Japanese experience does provide some important lessons. I don't have the data in front of me, but in the early '90s the money stock actually fell in Japan for several years running. Japan made th... | 609 |
fomc | 2,003 | Let me interrupt. I suggest that you say that around this table only, unless you want to get very prominent headlines in the press. The size of these institutions is very large, but you're quite right in suggesting that they are ephemeral. We could expand and collapse what is essentially overnight short-term intermedia... | 145 |
fomc | 2,003 | That sometimes happens, yes. [Laughter] But I think the danger of a very quick collapse, if you want to use that term, is easy to overestimate. I believe there's likely to be a lot more continuity in the process. First of all, we'd probably find that there's a range of money market mutual funds with different expense r... | 480 |
fomc | 2,003 | President Stern. | 3 |
fomc | 2,003 | Thank you, Mr. Chairman. I came out pretty much where you did with regard to the four questions--so I'll attenuate my remarks--but let me briefly explain why. We're having this conversation, at least from my perspective, because of our concerns about the possibility of deflation. If I ask myself why I might be concerne... | 403 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I would agree with you that, if we were thinking about answering the four questions in order to come up with a tactical plan, the exercise wouldn't be very productive. But it seems to me, based upon the information provided by Vincent and his colleagues, that there's a lot of information that c... | 255 |
fomc | 2,003 | Thank you, Bob! | 5 |
fomc | 2,003 | President Broaddus. | 5 |
fomc | 2,003 | Thank you, Mr. Chairman. I agree with you that the presentations we've heard and the three background memos that were prepared for this discussion were all excellent. I enjoyed reading the papers and I took a lot away from them. To Vincent, Dino, and David, I want to say that I think the memo you did with your colleagu... | 1,402 |
fomc | 2,003 | President Moskow. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I, too, want to congratulate the authors of these papers. I think they did some very fine work, and I believe it has been extremely helpful for all of us who are trying to think through these very difficult issues. I just have a few comments. I would at this point clearly stay away from targeti... | 356 |
fomc | 2,003 | I think the short answer is that I have every confidence in Dino, [laughter] but he may have to do transactions in very large size. One could imagine, for instance, the Committee calling out a ceiling on the five-year note yield--one would hope that would be consistent with the expectations it was trying to engender th... | 161 |
fomc | 2,003 | We wouldn't be changing dramatically what we do now in the sense that the operating target would still be the fed funds rate. We would still be targeting--in your example, let's say, a 1 percent fed funds rate--and we'd have a secondary objective of enforcing a ceiling. But at that point, as Vincent says, we would be o... | 175 |
fomc | 2,003 | The other important concern you identified, President Moskow, is that the more two points on the yield curve had to be enforced by large-scale transactions, the more likely the targeted longer-term security would be disconnected from the rest of its neighbors on the yield curve and then from private rates. That could h... | 135 |
fomc | 2,003 | Yes, we couldn't target just the five-year note. It would involve the six-year and the four-year notes and so forth; it would have to be a smooth curve, I assume. | 38 |
fomc | 2,003 | I think that, in principle, we could set the price of any point on the yield curve. There'd be obvious questions about why we'd want to do that if our goal was to affect private rates. More likely than not, the operations would involve, as was the case in the experience of 1942 to 1951, targets all along the yield curv... | 74 |
fomc | 2,003 | Governor Gramlich. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. This discussion is going to be impossible for anybody to make sense out of because we're all throwing our wisdom, or lack of it, out there! I will do likewise, and let somebody else worry about where it goes. My first point is that I agree with you that the uncertainties about this are so impon... | 785 |
fomc | 2,003 | Let me suggest that we break for coffee. The list of those who want to speak on this subject is very long, so it is going to consume a large part of today's session--and I think for good purpose. | 44 |
fomc | 2,003 | We need coffee to get through it? | 8 |
fomc | 2,003 | We do. Let's keep the break to ten minutes. | 11 |
fomc | 2,003 | Governor Kohn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Let me try to react to some of what I've heard today. I certainly agree with you and the many others who say that we don't need to make decisions or announce anything immediately. Among other things, reading the materials and listening to this discussion have changed my mind. So what I would ha... | 566 |
fomc | 2,003 | But that's what people think. The truth is of secondary consequence at the moment. | 16 |
fomc | 2,003 | Right. So if the other members of the Committee are in rough agreement, I certainly would like you to clarify in your testimony, Mr. Chairman--or in the question-and-answer period that follows--that we don't view 75 points as the lowest we can go. I think that will give us some additional flexibility here. Another prob... | 737 |
fomc | 2,003 | Governor Bernanke. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I find it useful in thinking about monetary policy at the zero bound to view it as working in one of three broad ways. First, it works by affecting expectations of future short-term interest rates, which affect longer-term interest rates and other asset prices. Second, it works through mechanis... | 717 |
fomc | 2,003 | President Santomero. | 5 |
fomc | 2,003 | Much has been said that I would have said also. As I was thinking about my comments, I considered just repeating the names of those who said what I had intended to say and let you fill in the blanks. But that shorthand is a bit inadequate. Let me first of all say "thank you" to the staff. This is in fact a useful exerc... | 481 |
fomc | 2,003 | Governor Bies. | 4 |
fomc | 2,003 | I, too, am going to echo some of the comments of others, but I have a couple of points I'd like to make. One is that, while I'm not so worried about the money market funds, say, I am concerned--putting on my supervisory hat--that we're telling everybody to make sure they understand their credit exposures. At some point... | 651 |
fomc | 2,003 | I'd just like to interject here that one thing we have not talked about, and obviously we will if we get closer to the zero bound, is private credit instruments. What will happen to spreads as rates get down to very low levels, and what does that imply about elements of risk and stability in the financial system and in... | 157 |
fomc | 2,003 | Thank you, Mr. Chairman. Let me first start with the context, and here I agree with Gary Stern and others that the context of all this--as I think you've just indicated--is reigniting economic growth. We'll talk more about that tomorrow, but we shouldn't lose track of the point that President Stern raised--namely, that... | 1,131 |
fomc | 2,003 | Governor Olson. | 3 |
fomc | 2,003 | Let me mention a couple of other points of view. As I read the material--especially the matrix of the various effects in the marketplace--it struck me for the first time that, while we are still in the process of thinking through what we might need to do and when, a lot of strategic decisions have already been made by ... | 417 |
fomc | 2,003 | President Pianalto. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I also want to thank the staff. I thought the papers and the presentations were excellent, and they did add to my knowledge on these issues. I just want to make a couple of brief comments on managing expectations. I don't make it a point to go around talking about deflation, but increasingly I'... | 216 |
fomc | 2,003 | President Guynn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. As others have commented, not much is left to be said! I'd start by observing, though, that having put the subject of deflation squarely on the table as part of our statement after the last meeting, I think we created an enormous, compelling need to do a lot of learning and to do it quickly. Th... | 584 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | I have a very brief comment about managing expectations. First of all, we don't want expectations that are formed now at our urging to be falsified by events. That's not good for anybody. I view that as extremely important, and I think that's in part what Ned was talking about. We need to be vague regarding the things ... | 235 |
fomc | 2,003 | President McTeer. | 5 |
fomc | 2,003 | I don't have a lot to add obviously, but I didn't want to be the only one not to say anything! [Laughter] I had my hand up earlier hoping to follow Michael Moskow's discussion of the new operation twist, and I was going to suggest that we could call it the Chubby Checker monetary twist. [Laughter] The other day I got a... | 366 |
fomc | 2,003 | As the rates have gone down, earnings have gone up--much to their surprise. | 17 |
fomc | 2,003 | Well, they're dead set against any further easing now because they keep expecting it to go the other way. I'm not sure what to make of that. | 30 |
fomc | 2,003 | I think the answer is very simple. If you are an institution that is doing well within the parameters under which you're used to functioning, you will fight any change without any notion as to whether that change is good or bad. That's because there's a very large uncertainty premium associated with the change. | 58 |
fomc | 2,003 | It's like the banker who was retiring after forty years and said he'd seen a lot of change and he had been "agin it all." [Laughter] | 31 |
fomc | 2,003 | That's a good way to end! Let me mention a couple of general points that I'd like to add to this discussion. One is that I don't think we know enough about how the private financial system works under these conditions. It's really quite important to make a judgment as to whether, in fact, yield spreads off riskless ins... | 957 |
fomc | 2,003 | Wouldn't it be easier just to solve this problem? [Laughter] | 15 |
fomc | 2,003 | Does anyone have anything else that they wish to communicate on this particular subject? | 15 |
fomc | 2,003 | Mr. Chairman, the depression-era deflation ended quite smoothly. Inflation was minus 8 percent in 1932 and plus 1 percent in 1933. So there's one example. | 38 |
fomc | 2,003 | My recollection is that I was taught in small-sample theory that with an observation of one there's a very high variance. Dino, would you start us off on the next part of our meeting? | 40 |
fomc | 2,003 | 3 Yes. Thank you Mr. Chairman. Moving on to the regular market report, I'll be referring to the paper with a class II cover. Since your last meeting, markets have been characterized by lower interest rates and expectations of further policy ease in the major economies, narrower spreads, higher equity prices, a weaker d... | 2,843 |
fomc | 2,003 | Questions for Dino? | 4 |
fomc | 2,003 | I was struck, when you were talking about the spreads for investment-grade credits, that you mentioned the search for yield and expectations regarding rates but you didn't say anything about underlying fundamentals. What can you tell us about market perceptions in the debt market? You said something about the equity ma... | 76 |
fomc | 2,003 | That's a good point. There is a perception that corporate creditworthiness is improving. Some of the issuance is being used to refinance debt--to delever for one thing--which, again, is better for the credit holder. But also liquidity is improving as maturities are being restructured. Now, in a sense the downside, as p... | 137 |
fomc | 2,003 | Governor Ferguson, some of this will be addressed in the chart show tomorrow morning, and there are also a number of indicators in Part 2 of the Greenbook about corporate credit quality. Just to underscore what Dino said, forward-looking measures of expected year-ahead defaults, for instance--a KMV-type measure--have c... | 104 |
fomc | 2,003 | Further questions for Dino? If not, would somebody like to move to ratify the domestic open market transactions since the May meeting? | 26 |
fomc | 2,003 | I'll move to ratify. | 6 |
fomc | 2,003 | Is there a second? | 5 |
fomc | 2,003 | Second. | 2 |
fomc | 2,003 | All in favor say "aye." SEVERAL. Aye. | 14 |
fomc | 2,003 | The "ayes" have it. We now go into temporary adjournment, or recess, until tomorrow. [Recess] | 26 |
fomc | 2,003 | Good morning, everyone. Steve Oliner, would you start us off? | 15 |
fomc | 2,003 | 4 Thank you, Mr. Chairman. Earlier this morning we received new data on orders and shipments of durable goods, and we've distributed a single page chart that I'll refer to in a moment as I review those data. I should also note at the outset that this single-page chart replaces one of the panels on page 5 of your chart ... | 2,566 |
fomc | 2,003 | Your first international chart presents an overview of developments in selected international financial markets. As can be seen in the top left panel, both the narrow index of the foreign exchange value of the dollar in terms of the currencies of the major foreign industrial countries (in black) and the broad index tha... | 2,758 |
fomc | 2,003 | Chart 10, your next chart, shifts the focus back to domestic considerations and outlines the major factors conditioning our outlook for inflation. As shown in the top left panel, we expect that a significant, though narrowing, margin of slack will persist over the forecast period--enough to take a couple of tenths off ... | 2,011 |
fomc | 2,003 | Steve, could you just repeat the statement you made with respect to corporate funding of pension funds? Did you say that, for investment-grade firms, 5 percent of cash flow was contributed to pension funds? Is that what you said? | 47 |
fomc | 2,003 | In 2002. That's right. | 8 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I have a question about the Greenbook baseline and also about the alternative simulations. First, after reading the text in the Greenbook, it seemed somewhat surprising to me that you had the real growth numbers for the second half of this year as low as they are. I'd be interested in what the ... | 228 |
fomc | 2,003 | Let me address first the question of what we did to our forecast for the second half of the year. We marked it up by less than one might have done simply on the basis of taking on board the changes in conditioning factors such as fiscal policy and financial conditions. We did that, I think, on the basis of two main con... | 323 |
fomc | 2,003 | Even the second-half result of 3.5 percent growth with the "weaker response to fiscal policy" alternative is impressive. | 26 |
fomc | 2,003 | I agree with you that it's impressive. Another impressive feature of the current situation is the amount of stimulus that is in the pipeline from various sources. They were enumerated by Steve: an unprecedented amount of federal fiscal stimulus, a significant depreciation in the dollar, a 20 percent rebound in the stoc... | 125 |
fomc | 2,003 | Okay, thank you. | 5 |
fomc | 2,003 | Obviously, we can always weave together a series of very plausible outcomes. For example, let's say we started with weaker productivity growth than we are currently forecasting. If that were to come as a substantial disappointment to financial market participants, one could imagine that, as we pushed out yet again the ... | 230 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | Governor Bernanke. | 4 |
fomc | 2,003 | Picking up on President Parry's comment and looking at the central tendency of the FOMC projections shown in chart 13, we more sage and conservative people also are predicting something above 4 percent for real GDP next year and about 1 percent inflation, which historically is a highly unlikely configuration. In a spee... | 245 |
fomc | 2,003 | This is an issue on which I think we really ought to come to a conclusion. We've procrastinated on it. The problem that occurs is that if we wait until my testimony to release these forecasts, they are usually obsolescent by then, and I find myself struggling to reconcile those old forecasts with the latest data. I don... | 106 |
fomc | 2,003 | Well, obviously you want to think through the full implications of this. With an earlier release of the FOMC central tendency forecasts, one difficulty you might face in your testimony would be that, with the added three weeks of data, people will be asking you to provide an update on it. You may or may not be in a pos... | 88 |
fomc | 2,003 | Well, I always have the obvious answer to the problem you mentioned. I can say that I have not spoken to more than a fraction of my nineteen colleagues on the FOMC since our meeting, and I can arrange for that to be the case! [Laughter] | 55 |
fomc | 2,003 | It probably would be a wise thing to do! | 10 |
fomc | 2,003 | We're going to have to make a judgment on this issue. An obvious alternative is to put this information in the announcement today, which I would frankly recommend against largely because these numbers don't seem to square exactly with what we're saying in the statement, though technically they do. These are fairly larg... | 249 |
fomc | 2,003 | On Thursday, yes, Mr. Chairman. I put a cover memo on the materials on communication policy that we circulated yesterday asking for the Committee's guidance as to when it would be appropriate to discuss general issues about transparency--whether it should be at a lunch, at a one-day meeting, or not until January. This ... | 78 |
fomc | 2,003 | Yes, I would think so. I assume nobody would object to that. We probably can't resolve this issue prior to my upcoming testimony, but we ought to discuss what we want our policy position to be on it. It shouldn't be decided ad hoc largely because I think it's a more important issue than we may have realized in the past... | 67 |
fomc | 2,003 | Just on this point, Mr. Chairman. I agree that it should be done in the context of a larger discussion of transparency because there may be some other things we want to announce at the same time. Also on this particular point, you do give the Reserve Bank Presidents and Board members a chance to change their forecasts ... | 74 |
fomc | 2,003 | Right you are. | 4 |
fomc | 2,003 | So we'd have to change that policy, too. | 10 |
fomc | 2,003 | Yes, and I don't think we want to change that policy. That's a good point, and I had forgotten about that. | 25 |
fomc | 2,003 | Just one other intervention. We're asked to do our individual forecasts in the context of what we consider to be the appropriate monetary policy, and we might not all have the same conclusion about what that is. | 40 |
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