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fomc | 2,003 | On the MBS coupon distribution, the dates on your charts are not adjusted to the actual period when the refinancings or other mortgage loans occurred. In other words, there's a two- or three-month lag, so the current mortgage rate is really not the relevant one. Or more exactly, with these MBS coupon distributions, the... | 93 |
fomc | 2,003 | I agree. I presented the picture in this way for simplicity because of the difficulty of making that kind of calculation--locking in the closing date and the like--which is what one would really need to do to calculate this with precision. I was not trying to be absolutely precise but to give a sense of scale in terms ... | 89 |
fomc | 2,003 | Further questions for Dino? | 5 |
fomc | 2,003 | Could you talk a little about the fails that have been happening? How have dealers been able to react when there has been a fail so that it hasn't disrupted the liquidity in the marketplace or added to the volatility? | 42 |
fomc | 2,003 | The volume of aggregate fails has been very large. It actually has been larger in the aggregate than what we saw in the aftermath of September 11. The biggest component of the fails has been in the current on-the-run ten-year note. The precise cause is difficult to pin down. Certainly there seems to be a large short ba... | 324 |
fomc | 2,003 | No, fails always worry me when they reach that magnitude. I worry what that does to the day-to-day functioning of the dealers. | 27 |
fomc | 2,003 | They've been functioning fine. I think the situation has created concern among some of the dealers that as these fails age, higher capital requirements will kick in under the SEC's rules. So there's been an effort to get some regulatory relief, if you will, on that side. | 55 |
fomc | 2,003 | Further questions? | 3 |
fomc | 2,003 | This may be a question that's impossible to answer, but I'm going to ask it anyway. You mentioned that the downward trend in ten-year yields had a lot to do with our move of only 25 basis points and the discussion of deflation in our statement. But ten-year yields and mortgage rates had been coming down for some time. ... | 129 |
fomc | 2,003 | I would agree with your opening statement that it's impossible to answer that with any precision. It's very hard to assign percentages to the causes. In my own mind, the dynamics in the mortgage market clearly were a very important factor. Anecdotally, dealers do suggest that some of them in fact believed that so-calle... | 92 |
fomc | 2,003 | That had to be the frosting on the cake or the fuel for the fire because I think there was something already there. | 24 |
fomc | 2,003 | Well, there was something already there. But it's interesting to look at the chart on the breakeven rate on page 1, which I like a lot, in part because it suggests that, at least in this segment of the market, people were not really buying the deflation story. So, yes, there were some disconnects here, and it's hard to... | 84 |
fomc | 2,003 | But that's the ten-year compensation noted on the first page. | 12 |
fomc | 2,003 | I would point out, President Minehan, that there's some empirical work that suggests that hedging flows on the order that we saw over the intermeeting period would be associated with a 20 percent rise in implied volatilities on longer-term rates. So just to get a sense of perspective, hedging activity doesn't ultimatel... | 100 |
fomc | 2,003 | Further questions? If not, would somebody like to move to ratify the transactions since the last meeting? | 21 |
fomc | 2,003 | I'll move to ratify the transactions. | 8 |
fomc | 2,003 | Without objection. Dino, you wanted to talk about Ginnie Maes. | 15 |
fomc | 2,003 | Yes, let me say a quick word on that. The Committee will remember that last November you directed the staff to come up with a proposal about how we might incorporate Ginnie Mae mortgage-backed securities into the System Open Market Account. This was part of the alternative assets work that we began some time ago. We've... | 229 |
fomc | 2,003 | Any comments? That's fine. We now move to the economic situation, and I call on David Wilcox and Karen Johnson. | 25 |
fomc | 2,003 | Thank you, Mr. Chairman. As you know from the August Greenbook, we received quite a few encouraging indicators during the intermeeting period. Let me mention just a few. Sales of light vehicles in July ran at a 17.2 million unit annual clip, up 1 million units from the average selling pace in the second quarter. Chain ... | 2,053 |
fomc | 2,003 | The staff outlook for real GDP abroad in the current Greenbook is little changed from the one we presented last time. Again this round we are looking for real growth in the rest of the world to strengthen on average from less than 1 percent in the first half to about 21/2 percent in the second half of this year and to ... | 1,551 |
fomc | 2,003 | Questions for our colleagues? President Moskow. | 9 |
fomc | 2,003 | Thank you, Mr. Chairman. I had a question for David on the ten-year rates looking ahead. The assumption you're making, which you explained very thoroughly, is that we will get a 60 basis point decline in ten-year rates next year. Well, suppose it is now next spring and we've seen real GDP growth of over 4 percent for s... | 158 |
fomc | 2,003 | We would interpret that as a further tightening of financial market conditions. It would certainly come as a surprise to us if that were to occur. Let me step back a bit and put as clearly as I can the contour of rates we see for next year. We have rates easing back, as you noted, despite the fact that ordinarily--abse... | 282 |
fomc | 2,003 | The accompanying productivity rate would have something to do with that particular scenario. | 14 |
fomc | 2,003 | Indeed. I was interpreting President Moskow's question as involving a sort of disembodied upward drift in interest rates. If it were to emanate from a different view about productivity growth, then the implications might be different. But even in that case, it might still signal a wider gap than we had been projecting ... | 69 |
fomc | 2,003 | President Stern. | 3 |
fomc | 2,003 | Yes, speaking of productivity, the numbers in the Greenbook forecast for next year that jumped out at me were the very large employment gains and the very slow productivity improvement. I'd like to know the intuition underpinning those projections because I'm not sure those are the numbers I'd write down if I were tryi... | 63 |
fomc | 2,003 | The intuition is that, as best as we can figure out, a large amount of restraint on the part of employers is an important factor at the moment. We think that shows up in the sluggish payroll employment gains of recent quarters; and it is mirrored by the fact that we have actual productivity now well above structural pr... | 160 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Dave, for some time now, market forecasts of inflation have been quite a bit higher than the forecast of the Board staff or for that matter of the Committee members. As an example, the inflation forecast for next year of the 10 lowest Blue Chip forecasts is about 1/2 percentage point higher than ours, and of course, th... | 144 |
fomc | 2,003 | As to why there's a gap between our projection and outside forecasts, I think part of the explanation is that we have a substantially more optimistic view about the rate of growth of the economy's productive capacity. If one compares our forecast with the Blue Chip forecasts, implicitly we have potential growing more r... | 142 |
fomc | 2,003 | I know. | 3 |
fomc | 2,003 | So we've seen nothing of late to cause us to call into question either our assumptions about the rate of growth of structural productivity or potential GDP or the inflation outlook. As I mentioned in my briefing, the only surprise we've had lately was in the somewhat irritating so-called non-market-based component of t... | 77 |
fomc | 2,003 | Well, what about the second point I made--that, if others were to change their forecasts and become more convinced about the possibility of inflation rates being lower, that could put some downward pressures on inflation rates as well going forward. | 46 |
fomc | 2,003 | That's not an element of our projection. It would be a factor putting downward pressure on nominal bond rates. That's in part the mechanism by which we see the market and the outside world learning about or coming into line with, if you will, our view of the world. On our forecast, they should see a combination of stro... | 101 |
fomc | 2,003 | President Broaddus. | 5 |
fomc | 2,003 | David, to what extent do you think that the recent and presumably prospective fuel price increases might offset the tax cut effect in the next six months or so? | 31 |
fomc | 2,003 | We certainly have assigned a big role to the very sizable increases in cash flow that are occurring. We have disposable income growing over the second half of this year at nearly a 5 percent rate of increase. Importantly, that reflects the $35 billion in additional cash flow--not at an annual rate--that's accruing to h... | 116 |
fomc | 2,003 | President Minehan. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I have another question about the shape of your forecast versus the shape of others. The strength of producers' durable equipment spending in both halves of 2004, but particularly in the second half, and the overall Q4-over-Q4 increase is quite remarkable. Now, I grant you that the investment t... | 194 |
fomc | 2,003 | It is an important driver of the contour of our forecast. But I'd come back exactly to your statement that firms will ramp up investment only when they feel they need it. It's that kind of logic that has led us to be rather restrained in our assessment of the prospects for the second half of this year. A lot of the ane... | 96 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | By next year, with a very strong acceleration in business output, we think firms are going to be feeling the need to engage in a substantial expansion in their E&S spending. The importance of that factor is illustrated in one of the alternative simulations in the Greenbook. That simulation indicates that if a surge in ... | 101 |
fomc | 2,003 | Yes, and then the numbers, at the top level anyway, would start to look more like the mainstream of the Blue Chip forecasts. | 27 |
fomc | 2,003 | If there are no further questions, who would like to start the roundtable? President Moskow. | 20 |
fomc | 2,003 | Thank you, Mr. Chairman. The Seventh District economy is still sluggish. Many of our contacts, as well as the available data, indicate that the Midwest has been underperforming the rest of the nation. Nevertheless, we are seeing a few signs of improvement. We're hearing that more firms are releasing funds for capital e... | 645 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. The Twelfth District economy appears to have gained some momentum coming into this quarter, although attitudes are still more cautious than optimistic. Consumer spending is holding up generally and is actually picking up for leisure-related businesses such as restaurants. The recent rise in mor... | 833 |
fomc | 2,003 | First Vice President Stewart. | 5 |
fomc | 2,003 | The economy in the Second District has shown increasing signs of strength in a variety of sectors. Employment has expanded in the past three months. Retailers have reported strong sales results, and one major firm suggested that the tax cut is showing up at retail cash registers. Reports indicate that the finances of t... | 856 |
fomc | 2,003 | President Guynn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Readings on economic activity from our Southeast region were still somewhat mixed in June and early July, but there were encouraging signs. Anecdotal information suggests that retail sales in June and early July exceeded year-ago levels, and sales very recently were boosted by what has become a... | 934 |
fomc | 2,003 | President Santomero. | 5 |
fomc | 2,003 | Thank you, Mr. Chairman. Economic conditions in the Third District have improved slightly since our last meeting, and our District appears to be faring somewhat better than the nation. Regional manufacturing has been firming. In July our Business Outlook Survey index of general activity advanced further into positive t... | 1,238 |
fomc | 2,003 | President Pianalto. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Reports from the Fourth District are consistent with the story of the U.S. economy: slow, steady growth and slowly improving conditions, coupled with mixed economic signals and still a great deal of lingering anxiety. The one bright spot in the Fourth District's economic scene is Lebron James. ... | 708 |
fomc | 2,003 | President Minehan. | 4 |
fomc | 2,003 | Thank you very much, Mr. Chairman. Not a lot has changed in the New England economy, but the tone of comments and attitudes, especially about prospects for the second half, has brightened a bit. To be sure, the labor market remains in the doldrums, with unemployment stable in June and employment levels still on the dec... | 1,489 |
fomc | 2,003 | President Broaddus. | 5 |
fomc | 2,003 | Thank you, Mr. Chairman. On balance, economic activity has picked up a little in our District over the past several weeks. Consumer spending appears to have accelerated at least a bit. Tourist-related activity, in particular, has shown some renewed strength in our region despite the wet weather--somewhat in contrast to... | 358 |
fomc | 2,003 | That's a leading indicator! | 5 |
fomc | 2,003 | The one sector in my area where optimism is still scarce-- actually nonexistent--is the old-line, traditional manufacturing industries such as textiles and furniture in the Carolinas. Most recently, the Pillowtex company based in North Carolina folded, wiping out about 5,000 jobs in that state alone, which I think was ... | 841 |
fomc | 2,003 | President Stern. | 3 |
fomc | 2,003 | Thank you, Mr. Chairman. As far as the Ninth District is concerned, overall economic activity is stable to improving. Let me just cite a few examples of that. On a year-over-year basis, employment is stable in virtually all District states, but I'd say that the undertone of the labor market has improved. There clearly ... | 551 |
fomc | 2,003 | President McTeer. | 5 |
fomc | 2,003 | We do have some recovery in the Eleventh District, but it is underwhelming. The high-tech, communications, and transportation sectors and the Mexican economy are all drags on the local District, while the defense and energy sectors provide a mild boost. There are some signs of growth in interest-sensitive sectors such ... | 924 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. From a wide variety of contacts in the Eighth District, including fairly large firms like the May Company and Enterprise Rent-A-Car as well as a lot of small companies, the overall assessment of the business situation is along the lines of "not yet." It's not that the economy is sinking but jus... | 860 |
fomc | 2,003 | Why don't we break for coffee and come back in ten or fifteen minutes. | 15 |
fomc | 2,003 | President Hoenig. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. The Tenth District economy has strengthened since the last meeting. Although economic growth is certainly not robust, it is at least showing some positive signs. The labor markets are still soft, but they do appear to be improving slightly. Employment has slowly edged up since the end of the Ir... | 1,018 |
fomc | 2,003 | Governor Kohn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. For quite a while we've been saying that a strengthening in the economy was coming but we didn't know its timing or extent. Like others, over the intermeeting period I saw a number of encouraging signs on the timing question that suggest growth in fact has already been strengthening. Data for t... | 1,189 |
fomc | 2,003 | Governor Ferguson. | 3 |
fomc | 2,003 | Thank you, Mr. Chairman. I'll divide my review of the intermeeting period into two sections. One I would describe as what we know, which is to say what happened. The second is what we think, or how we interpret the data. First, what do we know? As others have said, the data on the real economy during the intermeeting p... | 1,573 |
fomc | 2,003 | Governor Olson. | 3 |
fomc | 2,003 | I would also refer to a comment that Governor Kohn made regarding the need for the shift in psychology that apparently is beginning to occur. Last week I talked with four contacts at major banks--CEOs or others in senior leadership positions--and the most notable change in their description of recent developments at th... | 277 |
fomc | 2,003 | Governor Gramlich. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. The criticism of the Fed over the intermeeting period has been as intense as at any time since I've been here. Have we lost our touch, or are we dealing with a complicated set of new issues? While obviously I'm biased, my vote is for the complicated set of issues. I see four major ones. Number ... | 896 |
fomc | 2,003 | Governor Bernanke. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Like most everybody else, I'm encouraged by the recent data. The surprisingly good second-quarter GDP number looks even better when one takes into account the big negative contributions of the foreign sector and inventory investment, both of which should tend to reverse at least partially over ... | 899 |
fomc | 2,003 | Governor Bies. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I'm going to focus on a couple of issues that Governor Bernanke just discussed and that many of you have mentioned, too--namely, communicating our policy and our views about the issues facing us today. I want to talk about this from the point of view of the two dictates in our mission statement... | 767 |
fomc | 2,003 | Thank you very much. Let's turn now to Brian. | 11 |
fomc | 2,003 | 2 Thank you, Mr. Chairman. I'll be referring to the material labeled "Briefing on Monetary Policy Alternatives," which was distributed during the break. The sharp rise in market interest rates was, without a doubt, the major development in financial markets over the intermeeting period. As shown in the top left-hand pa... | 1,651 |
fomc | 2,003 | I vaguely recall seeing another survey of primary dealers, which showed 60 percent of them--or something like that--indicating that they thought we would move toward balanced risks. It was circulated today. I may have misread it. | 47 |
fomc | 2,003 | It was the Stone McCarthy one. | 8 |
fomc | 2,003 | That's the one. Did I misread it? How did that percentage get to be so significant? | 20 |
fomc | 2,003 | It was the Stone McCarthy survey, but part of the challenge is interpreting the words that were used. It says no change in the balance of risks. | 31 |
fomc | 2,003 | The previous one was a risk toward weakness. | 9 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | They got this different result so I assume-- | 9 |
fomc | 2,003 | If I could, I think one of the issues here was the wording of the question used to ask the dealers about their assessment of the likely balance of risks statement. We found that we had to go back to some of the dealers, in some cases more than once, to get clarity because they did not-- | 62 |
fomc | 2,003 | In other words, no change in the balance of risks means that they expect the same statement about the balance of risks that we made previously? | 28 |
fomc | 2,003 | That's the way that some dealers interpreted it, yes. | 11 |
fomc | 2,003 | I see. So Stone McCarthy thinks it is-- | 11 |
fomc | 2,003 | Again, the question may have been posed slightly differently, and there may have been different follow-ups. | 20 |
fomc | 2,003 | I did find that survey result rather startling when I saw it this morning. Questions for Brian? If not, let me proceed. Perhaps the most interesting development we are observing, and a number of you have commented on it, relates to the emergence of a clear divergence between the views of this Committee and a significan... | 2,019 |
fomc | 2,003 | Mr. Chairman, I support both parts of your recommendation. I will say to your broader philosophical question that I'm still struggling with whether or not being in a new world of greater uncertainty suggests more caution or more aggressive behavior, given where the price measures are and the outlook for inflation. But ... | 71 |
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