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fomc | 2,003 | In a recent paper, Professor Ito calculated that the Japanese actually have made significant profits because of the carry--the interest rate spread between the cost of financing, which has been essentially zero in the last few years, and what they've earned on their treasuries. So there has been a significant profit. E... | 90 |
fomc | 2,003 | Anybody else? | 3 |
fomc | 2,003 | Is there any regular pattern or expected pattern in Japan as to what fraction of the intervention is sterilized? | 21 |
fomc | 2,003 | The way that the MOF finances its intervention is that it issues financing bills, which in the first instance are underwritten by the Bank of Japan. Subsequently, some number of weeks later, the MOF sells new financing bills to the market, and then it can refinance and repay the Bank of Japan. So the one-to-one yen rel... | 169 |
fomc | 2,003 | So essentially the mechanism involves full sterilization of the exchange market intervention except for this period of a few weeks? The way you described it, that's how it sounded to me. | 35 |
fomc | 2,003 | Yes, but what I'm describing is the mechanism involved and what the people at the Bank of Japan have said to me. | 24 |
fomc | 2,003 | Okay. | 2 |
fomc | 2,003 | I'm confident in saying that this is not unsterilized intervention. I think that's as far as I want to go. Whether it's something in between--a little of this and a little of that--I'm not so sure about that. | 48 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | Could I move us from Japan to the subject of page 2, where you gave an impression of some concern about what I'd call financial stability? You commented about a lack of fear with regard to the dramatic drop in corporate debt spreads. I would say that what you were pointing out is certainly factual and correct in the fi... | 171 |
fomc | 2,003 | I think you make a good point that spread relationships in a low interest rate market might be somewhat different from those in a high interest rate environment. Again, I don't want to overstate what is depicted here on page 2. I thought it was somewhat noteworthy that we were seeing some interesting levels that we had... | 163 |
fomc | 2,003 | Governor Ferguson, may I just add an observation? It is a low inflation, low interest rate environment. It's also one of an improving U.S. economy. | 32 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | So for domestic assets it may very well be the case that investors are thinking that recovery rates in the event of default may be better and the default risk itself may be lower. Spreads could be narrowing independently of investors' aversion to risk because their perception of the risk has gone down. | 58 |
fomc | 2,003 | Good, thank you. | 5 |
fomc | 2,003 | If there are no further questions, would somebody like to move to ratify the domestic open market operations? | 21 |
fomc | 2,003 | I'll move to ratify the domestic open market operations. | 11 |
fomc | 2,003 | Without objection. We turn now to Dave Stockton and Karen Johnson. | 13 |
fomc | 2,003 | Thank you, Mr. Chairman. Karen and I will attempt to be brief this morning. We suspect that this may be an occasion where we may have an easier time explaining our economic outlook to you than you will have figuring out how to explain your economic outlook to others. As a consequence, we intend to yield back the balanc... | 2,163 |
fomc | 2,003 | As we reported in the Greenbook, the information about economic activity abroad that we have received since the September FOMC meeting has confirmed our view that foreign real GDP growth has rebounded from the weak pace of the first half of the year. Based on various indicators from a variety of countries plus the more... | 1,394 |
fomc | 2,003 | David, I see you don't have an estimate for real adjusted durable goods for September yet. Do you have a sense of the order of magnitude? The reason I raise the issue is that the extraordinary difference between total durable goods and real adjusted durable goods for the month of August-- | 55 |
fomc | 2,003 | We should be able to have that calculation, I would imagine, by the coffee break or shortly after the break. | 23 |
fomc | 2,003 | I've found it to be a very useful statistic over the years, and I'd like to get a sense of it. President Hoenig. | 27 |
fomc | 2,003 | David, looking at 2004, your estimates for consumption are strikingly strong. It would be great if the figures came out that way. But you estimate consumption to be as strong as it was in the late '90s. You touched on your reasoning, but could you again give me your rationale for that? I ask because your forecast is an... | 85 |
fomc | 2,003 | There are really three principal reasons that we show as much strength as we do in consumption for 2004. The most important is that we're expecting a very significant improvement to occur in the labor market. As has been noted a few times around this table, our forecast is that job gains are going to be running 350,000... | 267 |
fomc | 2,003 | Well, I question only the third reason relating to the wealth effects. When we had these kinds of growth rates in PCE previously, the wealth effects were much more positive. So in my view the wealth effects returning to neutral--while granted they are no longer a drag--won't produce quite the boost that might be expect... | 99 |
fomc | 2,003 | President Moskow. | 4 |
fomc | 2,003 | I had a question for David. In comparing the consensus forecast to the Greenbook forecast, the Blue Chip forecast is much higher on inflation than you are and in fact than we are in Chicago. The Blue Chip has a much higher expected path for the nominal fed funds rate, too. First of all, why do you think it is that the ... | 154 |
fomc | 2,003 | On your last point I think roughly speaking these scenarios are additive. For most intents and purposes the model is reasonably linear, so I think you could probably perform the analysis that way. As for your first question, I've been puzzled by the consensus inflation forecast as well, especially when our forecast is ... | 397 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | My question is related to that of President Moskow. At the end of the forecast period, when the output gap in the baseline is close to zero and inflation is close to 1 percent, a neutral nominal federal funds rate would be around 31/2 percent, which is about where financial markets actually expect it to be. Isn't that ... | 80 |
fomc | 2,003 | I guess I'm forced to say "no"! [Laughter] We still think that in essence the equilibrium real funds rate is going to be below its historical average by the end of 2005. One reason is that the level of the dollar is still relatively high despite the fact that it has come down. Second, the investment share in GDP is sti... | 301 |
fomc | 2,003 | It would seem to me that perhaps one reason the financial markets might have higher expectations with regard to inflation is that they're looking at different models. Those models could have expectational effects that would be quite pronounced if our exogenous assumptions about interest rates were to be incorporated. | 53 |
fomc | 2,003 | That's a risk that I think we tried to highlight here. Obviously that is very difficult for us to forecast. We don't view that as the most likely outcome in part because, with energy prices declining rapidly, headline inflation actually is going to be quite low. I don't think that's a situation in which we'd anticipate... | 76 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | President Stern. | 3 |
fomc | 2,003 | Dave, I have a couple of questions related to the labor market and other variables. For quite some time you've forecast a very strong improvement in employment beginning relatively early next year and extending through 2005. I assume at the end of the day that it must be intuition rather than a purely model-based resul... | 108 |
fomc | 2,003 | I think that is where the rubber meets the road. In fact, we are following our models quite closely here, but the underlying assumption is that structural labor productivity is growing 23/4 percent. If we're wrong and it is considerably higher, then the first-round effects would be that the economy will be able to grow... | 274 |
fomc | 2,003 | Well, let me pursue this one step further. Obviously, we can get this path of real GDP growth with almost any combination of hours and productivity growth. If we got employment gains of, say, 200,000 to 250,000 a month rather than 300,000 to 340,000 a month going forward and the difference was made up by productivity, ... | 125 |
fomc | 2,003 | It would indeed. It would give that lower inflation through its effects on the aggregate amount of slack. There would be less employment and, therefore, a greater amount of slack in the labor market. If it were also a reflection of an underlying improvement in structural labor productivity growth that was greater than ... | 76 |
fomc | 2,003 | It would give us deflation? | 7 |
fomc | 2,003 | As we showed yesterday, inflation is so slightly above our estimate of measurement bias there, it wouldn't take much to do that. Now, on the anecdotal side, as I've indicated, we've seen a few tentative signs that some improvement may be under way. This is the first time we've revised up our employment-- | 62 |
fomc | 2,003 | Well, I think some improvement is under way. I question whether it's going to reach the magnitudes you have projected in the Greenbook. | 28 |
fomc | 2,003 | One change we did make was to trim some of the strength we had in first-quarter employment because we didn't see enough in the forward-looking indicators to provide us with confidence on that. We trimmed some in Q1 and have stronger employment growth for the remainder of next year. It's a forecast. | 58 |
fomc | 2,003 | Okay. | 2 |
fomc | 2,003 | President Minehan. | 4 |
fomc | 2,003 | I had the same question about the degree of difference between this forecast and ones we see from major outside forecasters. At our Bank we usually construct a little chart that plots the Greenbook forecast relative to other forecasts. We have the respective forecasts for real GDP on the x axis and the change in the CP... | 237 |
fomc | 2,003 | At least the optimistic staff of the central bank! [Laughter] I leave it to you to decide how optimistic you wish to be. You're right--our forecast is an outlier. We really struggled with that in the sense that if we were to be less optimistic about the aggregate supply side of our projection, we would be showing even ... | 192 |
fomc | 2,003 | The other question I wanted to raise relates to a statement by one contact--one of what seems like a zillion I've talked with over the last four or five weeks--who likened the uptick in consumption over the summer to a sugar high associated with the greater fiscal stimulus. We're a little more downbeat in New England t... | 185 |
fomc | 2,003 | I think that's clearly a downside risk. Again, our forecast is predicated on the notion that the spending pattern this summer wasn't fully a sugar high related to the fiscal stimulus. We believe that the overall environment for consumer spending--with some improvement in balance sheets, some step-up in sentiment since ... | 324 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | Dave, on the monetary aggregates--both M2 and MZM show no net growth over the last three months, and bank credit has actually declined a bit. Is there a story or anything interesting behind those observations? | 43 |
fomc | 2,003 | I'll let Vincent speak to the monetary aggregates, but in terms of short-term borrowing, businesses did a whole lot of borrowing in the second quarter in the environment of very low interest rates. They built up their liquid assets and solidified their balance sheets quite significantly. Corporate cash flow and interna... | 137 |
fomc | 2,003 | With regard to C&I loans, I would note that in the latest Senior Loan Officer Opinion Survey, banks reported that demand had been weak over the last three months. That is consistent with declining inventories, although the answers to more forward-looking questions provided a little glimmer of hope in that regard. As fo... | 151 |
fomc | 2,003 | President Santomero. | 5 |
fomc | 2,003 | I, too, was struggling with the staff's inflation forecast and had noticed what Cathy Minehan talked about in connection with the Greenbook relative to other forecasts. It started me thinking about what I'll call the integrity of our forecasting processes in a changing environment. We know our model has long adjustment... | 192 |
fomc | 2,003 | May I just add to that? You emphasized before that we're dealing with a linear model. How many observations do we have that indicate that, as the inflation rate moves down, the marginal changes in the gap are indeed linear? Or are we possibly looking at a situation in which the model works fine with an inflation rate o... | 169 |
fomc | 2,003 | I suggest that comparing the Board's bureaucracy to something that would move at the speed of light is pushing that analogy! [Laughter] First, I think you're obviously right. Any time you're using a model estimated with historical data to forecast a future period with events that are toward or outside the limit of what... | 524 |
fomc | 2,003 | David, do you think that the revisions in the NIPA data could significantly alter our view about some of the key relationships we're now taking as being fitted with some robustness? The BEA doesn't have new data on the most recent periods, does it? | 50 |
fomc | 2,003 | Well, I have a hard time imagining that the NIPA revisions are going to alter the output and inflation nexus fundamentally. The unemployment rate is not going to be affected at all by this, of course. The price figures, although they get revised, tend not to be revised dramatically or persistently enough for the relati... | 200 |
fomc | 2,003 | Isn't the latter the most likely problem because that figure is a residual and often has been revised far more substantially than the other elements of the system? | 30 |
fomc | 2,003 | We've had very big revisions on the income side, some of them flowing through quite often into the saving rate. So I think that is a real possibility. | 31 |
fomc | 2,003 | Further questions for our colleagues? If not, who would like to start off the Committee's discussion? President Moskow. | 24 |
fomc | 2,003 | Thank you, Mr. Chairman. Economic activity in the Seventh District continued to improve in September and October, although we still appear to be lagging national trends. Our business contacts, including those attending our recent advisory council meeting, are increasingly optimistic, though they're not breaking out the... | 711 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Recent economic growth in the Twelfth District appears to have kept up with the national pace. In fact, Nevada and Hawaii have grown quite rapidly with a boost from strong tourist trade. Arizona also has had relatively strong growth, though our contacts tell us that this comes in part at the ex... | 685 |
fomc | 2,003 | First Vice President Stewart. | 5 |
fomc | 2,003 | By most measures the Second District economy appears to be on the rebound in absolute terms and particularly relative to the nation as whole. Private-sector employment has trended up in New Jersey but has held near its cyclical low in New York. Our Empire State manufacturing survey, which had been signaling steady grow... | 671 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. You may have seen several weeks ago a Wall Street Journal article on the transportation industry. Given that several major transportation companies are located in the Eighth District, I thought I would comment on that industry. My FedEx contact said that he was not as bullish about the outlook ... | 1,737 |
fomc | 2,003 | President McTeer. | 5 |
fomc | 2,003 | Bill was talking about life in the trucking industry. There's a fine song that describes that. It says, "Peter built a truck for a man to drive. It's a pretty good livin' but it ain't no life." [Laughter] It appears that the tide has turned somewhat in the Eleventh District. The tentative recovery, which was characteri... | 707 |
fomc | 2,003 | President Minehan. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Economic conditions in New England have neither deteriorated nor improved very much since our last meeting, at least as far as we can tell. The intermeeting interval has been a rather busy period of regional outreach for us. In addition to the Beige Book survey, we've had meetings of our academ... | 1,595 |
fomc | 2,003 | Thank you. Let's break for coffee for ten to fifteen minutes. | 13 |
fomc | 2,003 | President Guynn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Last meeting I reported that economic activity in our Southeast region was showing tangible signs of forward momentum. That has continued into October. The retail sector remains reasonably strong, with some reports of increased sales of high-end merchandise, and our contacts are optimistic abou... | 728 |
fomc | 2,003 | President Hoenig. | 4 |
fomc | 2,003 | Mr. Chairman, the Tenth District economy continues to improve, and our business contacts have become somewhat more optimistic about the outlook. Let me talk a little about the labor markets. They remain soft but are showing some signs of firming. According to some of the payroll data we've looked at, employment was fla... | 927 |
fomc | 2,003 | President Broaddus. | 5 |
fomc | 2,003 | Thank you, Mr. Chairman. I would describe the information that we've received on our District's economy recently as generally mixed. Of course, a hurricane hit us shortly after our last meeting. The storm uprooted a lot of trees, caused extensive power outages, and forced some business closings for a while, but I don't... | 354 |
fomc | 2,003 | I just want the record to show that that is not the case! [Laughter] | 18 |
fomc | 2,003 | I withdraw that statement! Turning to the national economy, the lead story in this Greenbook, of course, is the 2 percentage point upward revision, to 61/4 percent, in the third-quarter growth rate. Given estimated potential GDP, there's a chance, as we all know, that the output gap has shrunk from around 3 percent in ... | 705 |
fomc | 2,003 | President Santomero. | 5 |
fomc | 2,003 | Thank you, Mr. Chairman. Most signs of economic recovery in the Third District have strengthened over the intermeeting period, unlike some of the reports we've heard from my neighboring Districts. The exception is the labor market indicators, which have not shown any improvement. The job market in our region has fared ... | 864 |
fomc | 2,003 | President Pianalto. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. The 2001 recession is now nearly two years behind us, and I believe that most people in the Fourth District have accepted, perhaps surprisingly, that the economy is expanding. Even our manufacturers are seeing evidence of improvement in business activity. Our steel producers report that the wor... | 748 |
fomc | 2,003 | President Stern. | 3 |
fomc | 2,003 | Thank you, Mr. Chairman. A preponderance of the reports on the District economy have been positive, but before I quickly summarize those findings let me just identify the sectors that are still soft. One, of course, is commercial construction, where activity is quite subdued. The second is tourism. Tourism has improved... | 416 |
fomc | 2,003 | Governor Kohn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Like others, I'll try to address two issues--the prospects for growth in activity and the prospects for jobs. With respect to demand and activity, the question is to what degree the strength of recent months can be sustained next year. It will come as no surprise to my colleagues in light of my... | 1,318 |
fomc | 2,003 | Governor Gramlich. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I don't have much to say this morning. We've planted the flowers. Now is the time to watch them grow. There are some risks that a number of you have spoken about--for example, labor demand and where that is. One risk that has not been discussed much is fiscal policy. The staff forecast has the ... | 287 |
fomc | 2,003 | Governor Ferguson. | 3 |
fomc | 2,003 | Thank you, Mr. Chairman. At every meeting we have to do three things: (1) assess the economy and risks to the outlook, (2) decide the policy implications, and (3) talk about communication. Recognizing that the third topic is going to be exciting today--one hopes--I'll try to be brief on the first two. On the assessment... | 997 |
fomc | 2,003 | Governor Olson. | 3 |
fomc | 2,003 | I have a couple of comments. After two people in a row have said that they're going to be brief, I think I should say exactly the same thing, and I will. Over the past week I've talked to a number of bankers whose comments essentially reinforced a lot of what we have heard around the table. Two community bankers, one i... | 636 |
fomc | 2,003 | Governor Bies. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I wanted to make one comment on current conditions and then talk a bit more about the longer-run part of the Greenbook forecast. I was struck as I looked at the Greenbook forecast about where we are with regard to business investment in this expansion and by some of the information on capital s... | 699 |
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