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fomc | 2,003 | In recent days there has been some discussion among those in the international oil markets that OPEC is becoming increasingly sensitive to the fact that the dollar is declining. The notion is that the OPEC price range of $22 to $28 a barrel that they allegedly are endeavoring to maintain is becoming obsolescent, largel... | 155 |
fomc | 2,003 | I cannot answer the specific question regarding oil consumption in Europe, although I will follow up on this. We do judge that there is an exchange rate effect in the market determination of oil prices in the sense that the demand for oil reacts to local currency prices everywhere on the globe. So as those currencies f... | 256 |
fomc | 2,003 | It looks as if the OPEC price is $2 to $3 a barrel under that for West Texas intermediate. Is it something like that? | 29 |
fomc | 2,003 | Yes, I think $2 is the number we usually cite. So both of these factors are at work. We think we see the exchange value of the dollar showing through to the gold prices, for example, and we think we see it in some commodity prices. It certainly comes through to oil in the sense of where the demand curve is. There is th... | 85 |
fomc | 2,003 | The issue came up at the Board meeting yesterday about the relationship between the gap and the rate of inflation outside the United States. In other words, the model in the United States is reasonably robust for that type of calculation. Historically we've never been able to get reasonable estimates of a relationship ... | 86 |
fomc | 2,003 | Well, for places where one looks the hardest, say Europe, I'm not aware that people see it as a data problem. I believe it's still the case that what we would call a Phillips curve analysis is not well confirmed in empirical estimates for most major foreign industrial countries, with maybe one or two exceptions. People... | 295 |
fomc | 2,003 | Do we have any explanation of why a phenomenon such as we observe with some robustness in the United States could conceivably exist here and not in similar market-oriented economies abroad? | 35 |
fomc | 2,003 | Let me mention two possibilities. Just in terms of cross-country comparisons of wage and price determination, there was a line of work that suggested that in the United States nominal wages are sticky but real wages are flexible whereas in Europe everyone's wages are so tightly indexed that there is more real wage rigi... | 119 |
fomc | 2,003 | It was somewhat the story of the 1980s. That's when a lot of this work went on and where the word "hysteresis" came from. I think people do look to labor markets for the explanation. I can't say that I've seen studies that have revisited this question the way it was looked at in the '80s and have concluded that nothing... | 328 |
fomc | 2,003 | President Hoenig. | 4 |
fomc | 2,003 | David, in reading the Greenbook and listening to your comments this morning, you've indicated that, as we go through the next several months and through 2005, the economy will move back to its potential. Yet the associated real fed funds rate at the end of the period is less than 1 percent. If one were to look at this ... | 130 |
fomc | 2,003 | Let me state emphatically at the outset here that what we put down in the Greenbook was not a policy prescription. I understand your question, but our forecast was not meant to advocate a particular path or strategy for you to take. I do think, however, that it's not an implausible baseline assumption--obviously it's s... | 215 |
fomc | 2,003 | I understand. | 3 |
fomc | 2,003 | But suppose at the end of 2005 the nominal funds rate is at 2 percent and you thought that a 4 percent nominal funds rate--a 3 percent real funds rate and 1 percent inflation--was where the rate had to go. Could this Committee raise the funds rate 200 basis points in 2006? I think you certainly could. You raised it 250... | 245 |
fomc | 2,003 | Thanks. | 2 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | I have two questions on the inflation outlook, and I'll put them in the context of the Phillips equation, which has an inflation expectations term, a gap term, a shock term, and a disturbance term or random term. You talked about the inflation expectations terms. You talked some about the gap term. Certainly from Orpha... | 192 |
fomc | 2,003 | First of all, the standard errors are large on both the output gap and the natural rate of unemployment. | 21 |
fomc | 2,003 | Whichever way you want to express the gap. | 10 |
fomc | 2,003 | Yes. So I would certainly say that a percentage point band around our estimate of the natural rate of unemployment is probably a one standard deviation event. As you know, over the years we've made adjustments in our estimates, both for things that we could identify in terms of structural changes in labor markets and a... | 162 |
fomc | 2,003 | That's for the total or the core? | 8 |
fomc | 2,003 | That's for the total. That's a pretty small effect. On the energy side, following what we see as expectations in the futures markets, we think that energy prices are likely to come down and that that will feed through favorably not just to indirect business costs but also on the inflation expectations side. In terms of... | 328 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Dave, your comments today as well as a memo that was sent to the FOMC contained a discussion of how rapidly employment is likely to grow. The view is that employment growth basically is going to be consistent with what we've seen in the past. Frankly, I don't really have much of a problem with that view. But one certai... | 155 |
fomc | 2,003 | Again, hard data on the magnitudes of outsourcing are not available. But I'm skeptical about that being a major impediment to employment growth. Many of these forces have been in operation or have been under way for the past decade in a period when our economy was generating lots of employment growth. We had a very str... | 292 |
fomc | 2,003 | Maquiladoras were emerging in the 1990s with far greater numbers of people outsourcing from the United States as our unemployment rate continued to fall. | 30 |
fomc | 2,003 | Well, I think what's involved now is a rather vocal group of skilled workers, who are getting a lot of attention. We hear stories about financial analysis being conducted in India. | 35 |
fomc | 2,003 | Do you want to know something? These workers are not as skilled as some people think. The entire skill level in the United States continues to rise, and these jobs that are being outsourced require what we now would call below-average skills. We're not sending off to India the work that requires really sophisticated so... | 107 |
fomc | 2,003 | I agree. But nearly everybody one talks to believes this is happening. That's the point I'd make. | 20 |
fomc | 2,003 | Some of what people believe just "ain't so." President Moskow. | 15 |
fomc | 2,003 | We even believe the Cubs are going to win the World Series! [Laughter] | 17 |
fomc | 2,003 | No, I think it's going to be the Red Sox. [Laughter] | 16 |
fomc | 2,003 | I want to get back to the discussion of inflation expectations in this alternative scenario that you said is a risk. I think it's a risk that we have to take very seriously because it would be a great shame if inflation expectations did in fact increase significantly. I'm certainly hearing a lot of comments about infla... | 241 |
fomc | 2,003 | I mentioned the five-year inflation expectations, in part, because we don't think the five-to-ten-year inflation expectations are conditioning current wage and price setting decisions. I don't think anybody is setting a wage contract over the next year or two or three based on five-to-ten-year inflation expectations. B... | 179 |
fomc | 2,003 | I don't have too much to add to that. I would just note that probably the mortgage-hedging activities that were very prominent in the summer did play a role, and that makes it a little difficult to interpret the exact timing of the movements in the inflation expectations series. But I personally wouldn't be inclined to... | 91 |
fomc | 2,003 | The other point I'd add, President Moskow, is that the difference between the nominal and the indexed yield is inflation compensation that includes both inflation expectations and an inflation risk premium. So it wouldn't be that far-fetched to say that, while market participants may not believe that the Committee's vi... | 115 |
fomc | 2,003 | Are we seeing it in the tranches of the longer-term issues--say the thirty-year bond or even the ten-year note? Are those tranches moving up? Or as you pointed out yesterday, is this a reflection of improving liquidity in the TIPS market to the extent that we're getting a lower TIPS yield and hence an artificial liquid... | 87 |
fomc | 2,003 | There are two points to make about that, Mr. Chairman. The first is that we do think the TIPS market is more liquid. That's in part a reflection of the fact that more instruments are tied to TIPS, including some exchange-traded products that are priced relative to TIPS. So that provides more liquidity and more opportun... | 199 |
fomc | 2,003 | What has happened to the one-year maturity ten years out? | 12 |
fomc | 2,003 | In terms of implied forward rates? | 7 |
fomc | 2,003 | Yes. | 2 |
fomc | 2,003 | Over the intermeeting period that forward rate structure really hasn't changed much at all. | 16 |
fomc | 2,003 | Is it correlating with what is conceptually identical to inflation expectations for a forward period? Do the two give the same answer? My recollection is that they do not. | 35 |
fomc | 2,003 | They don't in part because the inflation risk premium and the potential for differential term premiums between the indexed and the nominal securities drive-- | 25 |
fomc | 2,003 | Which is not an inflation premium issue. | 8 |
fomc | 2,003 | Right. So one can't read it as an inflation premium. We've found historically that the slope of the term structure does not do a particularly good job in forecasting either activity or inflation. There's a little information on the further-ahead forward rates but not a lot. It is the case that the very far ahead forwar... | 141 |
fomc | 2,003 | Yes, but President Moskow is raising a question based on looking at that chart. I think he called it scary, and it is scary if you believe what it implies. If it is indeed is telling us something, it's obviously very important for policy. If it is not, it's important that we know that. | 63 |
fomc | 2,003 | And that's where we are expending a lot of effort to try to figure it out. | 18 |
fomc | 2,003 | We've certainly seen no corroboration in any other survey of inflation expectations that there has been any deterioration. | 20 |
fomc | 2,003 | Coming back to your question on forward rates, Mr. Chairman, over the past year it looks as if one-year forward rates of the ten-year maturity haven't really done anything on balance. They did decline in the spring and then moved back up in the summer. They have been roughly flat in recent months. | 61 |
fomc | 2,003 | President Santomero. | 5 |
fomc | 2,003 | This is interesting, but I want to switch gears a bit and ask a question about the real net export dynamics in our forecast, if I could. The depreciation of the dollar has improved the outlook for real net exports in a lot of private-sector forecasts, but hasn't done so in the Greenbook. What are the reasons for that d... | 108 |
fomc | 2,003 | To be honest, I haven't checked what the private-sector forecasts are saying, so I can't comment on that. It's certainly not the case that the projection for the dollar has not shown through to our forecast. In fact I tried to suggest in the Greenbook that we're finally at the point now where past dollar appreciation h... | 639 |
fomc | 2,003 | That is what forecasters in the private sector have. I was curious about how it worked and why that difference exists. | 24 |
fomc | 2,003 | If I give Dave any more GDP he's not going to buy it anyway! | 15 |
fomc | 2,003 | President Pianalto. | 4 |
fomc | 2,003 | I'm going to switch gears back to the inflation issue. In your comments, Dave, you addressed some of the risks toward higher inflation. Of course, our statement still says that the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation. In June you prepared and shared with us s... | 102 |
fomc | 2,003 | We've continued to tinker with both the models and our definition of deflation since June. Let me put it on a consistent basis with the numbers we provided in June so you can actually compare how economic events have changed those probabilities. We would calculate that the probability in 2004 that core PCE prices would... | 211 |
fomc | 2,003 | Thank you. | 3 |
fomc | 2,003 | Any further questions? President Minehan. | 8 |
fomc | 2,003 | I realize that this discussion is going on a little longer than we probably all expected, but let me just follow up with one more question. In the '90s I think all of us were struck by the degree to which companies said that they were never going to raise prices. They felt that global competition or domestic competitio... | 307 |
fomc | 2,003 | I think one reads and hears more about a return of pricing power than was the case a few years ago. I'm not quite sure what that means. There has obviously been a significant firming, as I indicated, not just in commodity prices but in intermediate materials prices too as the economy has picked up some speed. Again, we... | 118 |
fomc | 2,003 | Right. | 2 |
fomc | 2,003 | I would note two things that I think are relevant. First, given the spectacular increases in productivity, if one assigns even some small portion of that going forward as an increase in underlying productivity, that's still a major factor that will be relieving cost pressures on the business side. Second, we think ther... | 368 |
fomc | 2,003 | Who would like to start the Committee discussion? | 9 |
fomc | 2,003 | Could I just ask one other brief question? I know we've gone on for quite some time, but this is just a quick question for Karen building on the same theme. Karen, do you have any sense that any of the weakness in the dollar may reflect concerns in foreign exchange markets, and especially on the part of foreign investo... | 102 |
fomc | 2,003 | I guess I'd say "no" as a short answer. It's certainly true that some other central banks comment from time to time on their sense of monetary accommodation. But there are other central banks with a different position. For example, the Bank of England has already raised rates, and the Reserve Bank of Australia has rais... | 162 |
fomc | 2,003 | Well, isn't it mainly the issue of house-price inflation that is scaring both of those central banks you mentioned rather than-- | 25 |
fomc | 2,003 | Well, that's certainly a piece of it, although both of those banks I think quite legitimately see themselves as having a zero output gap. The Australian economy has performed remarkably strongly. So they need to have their policy rates much closer to equilibrium than we do. | 51 |
fomc | 2,003 | Well, we just discussed the notion that the output gap doesn't make any difference there. | 17 |
fomc | 2,003 | Well, I would use that language even if they don't. And I would say that they are growing-- | 21 |
fomc | 2,003 | With speed limits. | 4 |
fomc | 2,003 | For various reasons their economy has been growing around 4 percent at times and rather consistently. Now, in England, I think there is an enormous tension over the housing prices on the one hand and other prices on the other. Not all prices are rising. There's a sense of the service sector of the economy versus the ma... | 220 |
fomc | 2,003 | There is a minority that would say that the low interest rates here are affecting the dollar. They would also say that that doesn't mean that our policy isn't the right one. It's just that one of the side effects of having that policy is that the dollar will depreciate. | 54 |
fomc | 2,003 | Okay, can we move on to the economic discussion? President Moskow. | 15 |
fomc | 2,003 | Thank you, Mr. Chairman. The Seventh District economy continues to improve. Much of the uncertainty that was pervasive earlier in the year has dissipated, but many of our business contacts suggest that economic growth in the region is still somewhat less robust than what they see in the national numbers. The holiday sh... | 718 |
fomc | 2,003 | President Parry. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. The Twelfth District economy gained momentum in recent months, posting solid growth in a broad range of sectors. Consumers continue to do their part. Early reports for the Thanksgiving holiday weekend suggest that shoppers were out in force and were spending. Contacts noted that retailers are a... | 906 |
fomc | 2,003 | President Poole. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. My contacts have somewhat different views on the situation. A number of people have said that the economy just doesn't feel like one in which GDP growth is 8.2 percent. I think there may be some explanation for why the perception doesn't match the data. On the trucking side, my contact at J.B. ... | 1,089 |
fomc | 2,003 | President McTeer. | 5 |
fomc | 2,003 | With both political parties in California proposing to borrow money to get out of debt [laughter] and with UPS adding legs rather than wings to its planes, everything in Texas is relatively good! Our District economy has been showing signs of consistent but gradual improvement with each successive snapshot throughout t... | 1,409 |
fomc | 2,003 | President Guynn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Since the last FOMC meeting, economic activity in the Sixth District has continued to expand at a reasonable pace, with strength fairly broadly based. Compared with the rest of the nation, the region's growth appears robust, suggesting that our area may be leading again as we did in the recover... | 1,368 |
fomc | 2,003 | President Minehan. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Economic activity in New England continues to lag that of the nation, but much of the regional slowness seems concentrated in Massachusetts. Elsewhere there are indications that a more solid pace of growth is taking hold. For one, merchandise exports for the region climbed almost 13 percent in ... | 1,209 |
fomc | 2,003 | Thank you. President Santomero. | 8 |
fomc | 2,003 | Thank you, Mr. Chairman. Economic conditions in the Third District continue to improve, and business sentiment has turned more positive. Manufacturing activity in the region is expanding, and forward-looking signs are positive. The index of general economic activity in November from our business outlook survey was plus... | 1,081 |
fomc | 2,003 | President Broaddus. | 5 |
fomc | 2,003 | Thank you, Mr. Chairman. As for the District economy, things look fairly good, as appears to be the case elsewhere in the country from the comments we've heard so far. Based on our service-sector and manufacturing surveys, activity expanded strongly in October. It appears that activity may have slowed a little in Novem... | 729 |
fomc | 2,003 | President Pianalto. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. Conditions in the Fourth District have improved notably since our last meeting, as was described in some detail in our latest Beige Book report. Consumer spending and housing remained buoyant, and now a broader mix of business persons are willing to express satisfaction with their profitability... | 896 |
fomc | 2,003 | Let's take a break and be back in ten minutes. | 11 |
fomc | 2,003 | First Vice President Lyon, please. Welcome, incidentally. | 12 |
fomc | 2,003 | Thank you, Mr. Chairman. Overall for the current quarter economic conditions have continued to improve in the Ninth District. This improvement is attributable primarily to continued strength in residential real estate markets, an uptick in manufacturing, a modest increase in consumption, and an improved agricultural pi... | 706 |
fomc | 2,003 | Governor Kohn. | 4 |
fomc | 2,003 | Thank you, Mr. Chairman. I think we all could agree that the shift in sentiment around the table across almost all the Districts has been one of the more unusual changes in a positive direction that we've seen in a very long time. I think it provides us with further confirmation that we don't have to rewrite the textbo... | 1,083 |
fomc | 2,003 | Vice Chairman Geithner. | 6 |
fomc | 2,003 | Thank you, Mr. Chairman. You'll find that we're fairly close to the center of gravity in this discussion. Let me start with the greater New York region in the Second District, where we see growing signs of strength, most notably in the financial and the business investment sectors. Early results from our forthcoming De... | 917 |
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