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fomc | 2,004 | Good morning everyone. Mr. Oliner, would you start us off? | 15 |
fomc | 2,004 | 4 Thank you, Mr. Chairman. We have received a lot of information about economic activity since the April FOMC meeting. Focusing first on the data in hand when we closed the Greenbook, the top left panel shows that labor demand has clearly strengthened. Private payrolls increased at an average pace of 300,000 per month ... | 2,835 |
fomc | 2,004 | Chart 6 presents the broad contours of our outlook for the labor market. As shown in the top left panel, we expect that, as firms shed the last vestiges of the unusual caution of the past few years, they will continue to add significantly to their payrolls, partly to relieve some of the pressures on workforces that cur... | 2,939 |
fomc | 2,004 | Your first international chart focuses on developments in international financial markets. As shown in the top left panel, yields on long-term government bonds in the major industrial countries have moved up over the past several months, in line with mounting evidence of global recovery and prospective monetary tighten... | 2,990 |
fomc | 2,004 | Your final chart displays your economic projections for 2004 and 2005. As shown in the top panel, the central tendency of your projections for the growth of real GDP this year is only slightly different than it was at the February meeting, and the central tendency for the unemployment rate in the fourth quarter is unre... | 261 |
fomc | 2,004 | I have a question for David. First, I want to applaud the analytical focus on the behavior of the price markup since it obviously has swung a lot in the last couple of years and it is a key swing determinant in the inflation outlook. I was wondering to what extent the markup is a forward-looking variable in the models ... | 125 |
fomc | 2,004 | We have a new specification of FRB/US that incorporates explicitly forward-looking behavior in the setting of prices by firms. In a manner that's often referred to as a neoclassical synthesis, we have some sort of momentum-based or backward-looking influence on price setting as well as some explicitly forward-looking b... | 373 |
fomc | 2,004 | With respect to chart 5, I notice that the profit share is shown as the ratio of economic profits before tax to GNP. Why not to corporate GDP? Or if you want to include the foreign earnings, put that in on the denominator as well. Why are you using GNP? | 59 |
fomc | 2,004 | I think just because that's a convention we've had for a long time, but we can plot it to GDP. | 22 |
fomc | 2,004 | Let me put it this way. Some conventions get outmoded. We are no longer driving the Model T Ford, so why are we doing this? | 31 |
fomc | 2,004 | We can certainly change that. | 6 |
fomc | 2,004 | I know the Greenbook uses this measure. It has always struck me as a fairly historical practice from a time when we didn't have data sources. | 29 |
fomc | 2,004 | We'll be happy to change it. The impression that one gets from alternative measures of the profit share using a denominator of the type suggested basically-- | 28 |
fomc | 2,004 | Well, it's slightly different. In the chart, the 2001 low is higher relative to 1980, and a few other relationships here are different. That's because there is a significant moving share involving lots of noncorporate GDP trends. Second, with respect to nonresidential structures, I haven't looked at the relationship be... | 165 |
fomc | 2,004 | I would offer a couple of observations. The first is that there is a long-term trend over the past twenty to thirty years for corporate investment to be shifted toward shorter-lived assets and away from structures because of pronounced price declines in real terms. So the stock of structures in the NIPA has not been gr... | 76 |
fomc | 2,004 | I think it always has. | 6 |
fomc | 2,004 | Yes, I think that's right. And in the past couple of years the stock has been growing particularly slowly because construction has been at a low level. At the same time, there's a lot of unused space out there. When we look at vacancy rates for the office sector, they are still close to the highs that we saw in the las... | 99 |
fomc | 2,004 | If you combine all the vacancy rates--well, we don't have data for the service sector, which is growing. The reason I raise the issue is that, if we're getting concerned about our measures of gap, there are alternate tests of shortages and we ought to look at them because that's obviously crucial to our assessment of t... | 74 |
fomc | 2,004 | Thank you. It didn't pass my notice that the first part of the presentation was in the form of a financial stability report, which I found very useful, and I commend the staff for that. I have a question about chart 4 for the household sector and about chart 5 for the business sector, where you show the average interes... | 142 |
fomc | 2,004 | In the household sector, we definitely think there are pockets where financial problems still exist. The bankruptcy rate has come down over the past half year from where it was at the end of last year, but it is still quite high. Most delinquency rates have been coming down as well, but the levels of some of them are s... | 146 |
fomc | 2,004 | Thank you. | 3 |
fomc | 2,004 | President Minehan. | 4 |
fomc | 2,004 | I want to follow up a bit on what Jeff was asking--not so much on the markup question but on the uncertainty analyses regarding inflation. I notice that in the Greenbook the path for the CPI is similar to that for the PCE--i.e., there's a blip up this year that fades off toward the end of the year and into next year, f... | 112 |
fomc | 2,004 | No reasons come immediately to mind on why the main qualitative findings of chart 10 wouldn't hold true with respect to the CPI as well. Energy prices have an important influence on core CPI. | 37 |
fomc | 2,004 | The mechanics of it don't make the result look any different? | 12 |
fomc | 2,004 | There are differences in weights, so I'm sure that there would be small changes, but I can't think of why qualitatively it wouldn't be quite similar. | 30 |
fomc | 2,004 | My recollection is as well, from the general Greenbook projections we do, that the sizes of the confidence intervals around our core CPI forecast are similar to those around our core PCE forecast. | 39 |
fomc | 2,004 | Just looking at the most recent three-month change in the core CPI, an annual rate number beginning with 3 has an impact on the way people think about future inflation. I still think people look more at the CPI numbers than at the PCE numbers just because people are used to seeing the CPI and it is more relevant to the... | 103 |
fomc | 2,004 | That could be, through an expectations channel. As I noted with respect to the channel in the bottom right corner of chart 7, that's one of the reasons we think the Michigan survey results for the short-term expectations have moved up as sharply as they have. It reflects the inflation that individuals are experiencing. | 61 |
fomc | 2,004 | Yes. There's hardly anybody who believes that prices for them are increasing at only a 11/2 percent rate. | 23 |
fomc | 2,004 | Right, but that was true even when we think prices really were increasing at 11/2 percent! | 21 |
fomc | 2,004 | That's very true because for most people the things they care about most were going up more than that. | 20 |
fomc | 2,004 | President Moskow. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. I just wanted to compliment the staff on the work in the chart show on inflation. I thought it was quite thorough and shed a lot of light on an obviously very important area of concern for this Committee. I was hoping that you would shed a little more light on the expectations side, which you d... | 203 |
fomc | 2,004 | Again, with reference to that panel in the bottom corner of chart 7, we would expect to see short-term inflation expectations come back down as commodity prices and energy prices moderate. When we run a very simple regression of this short-term inflation expectation on some lagged values of actual top-line consumer pri... | 212 |
fomc | 2,004 | We'll be watching this very carefully. | 7 |
fomc | 2,004 | As will we. | 4 |
fomc | 2,004 | President Hoenig. | 4 |
fomc | 2,004 | Thank you. I think the discussion of the inflation outlook has been helpful, but it does raise some questions about the sense of optimism in the projection in terms of inflation coming back down as quickly as it does. I'd just like to ask for your reaction because it has been our experience, both when inflation comes d... | 327 |
fomc | 2,004 | Let me try to give you some defensive content without the defensive overlay. | 14 |
fomc | 2,004 | Fair enough. Thank you. | 6 |
fomc | 2,004 | First of all, I think one way to phrase your question would be to say, How sure are you that inflation is going to come back down? I'd say that is about a 60-40 bet, which is pretty close to even money. But given the range of those confidence intervals, I'm trying to point out to the Committee that there's a lot of unc... | 342 |
fomc | 2,004 | Thanks. | 2 |
fomc | 2,004 | Governor Ferguson. | 3 |
fomc | 2,004 | I have two types of questions. First, on the inflation topic we've been talking about, I was struck that in chart 10 you are arguing that the inflation we've seen derives from primarily two sources. One involves a gap-type analysis that you're evaluating in terms of the NAIRU, and the other involves elements of pass-th... | 199 |
fomc | 2,004 | First, with respect to the two types of channels, I would like to underscore that the decomposition that is presented here in this chart is partial. It is not an exhaustive decomposition of all sources of uncertainty. In particular, one thing that we didn't display was a confidence interval associated with the error te... | 438 |
fomc | 2,004 | The other question I have deals with chart 3, on housing prices. My question is about the footnote, which says that the rent-price ratio is adjusted for biases in the trends of both rents and prices. Is that where you pick up demographics and lifecycle factors? What are these biases in the trends, and how does one thin... | 114 |
fomc | 2,004 | The biases referred to in that footnote were really technical biases in the construction of the two measures shown here, the rent measure and the price measure. Had we not adjusted for them, the rent-to-price ratio would have been much lower at the end point. So it would have looked more alarming. In part we think the ... | 245 |
fomc | 2,004 | Governor Gramlich. | 4 |
fomc | 2,004 | I, too, thought the presentation by the staff was very good this morning. I must say, as one who is going to talk about similar things in my own remarks, mine is going to sound a little lame in comparison! But there was one issue that you didn't talk about this morning, and not much was said about it in the briefing on... | 127 |
fomc | 2,004 | We think wages are being supported by the rapid productivity growth that we've had over the last few years. We think that is adding a tenth this year, for example, compared with last year and another couple of tenths next year. On the other hand, overall we don't see ECI compensation accelerating greatly. One of the in... | 228 |
fomc | 2,004 | Governor Gramlich, those figures did get our attention, though. There were upward revisions to the nonfarm business comp hours starting in the fourth quarter of last year, and we also missed on the ECI in the first quarter--it came in higher than we had projected. That was one of the factors that prompted us to go back... | 179 |
fomc | 2,004 | President Pianalto. | 4 |
fomc | 2,004 | I want to follow up on what you just said, David. You mentioned that less slack wasn't the major contributor to the bulk of the rise in inflation, but you didn't comment on exactly how much your estimate for slack has changed. Can you tell us how much you reduced that estimate from the time of the May Greenbook? You ma... | 122 |
fomc | 2,004 | I'd say that two factors are behind the revisions we made to the federal funds rate assumptions that underlie our forecast. One, importantly, was the downward revisions we made to potential output. In essence, those downward revisions suggested to us that you needed to be closer to neutral by the end of our forecast pe... | 181 |
fomc | 2,004 | President Stern. | 3 |
fomc | 2,004 | Dave, one thing that surprised me about the baseline forecast and also about most of the simulations was the flat ten-year Treasury rate. If I want to take, say, the market-based funds rate scenario and assume that the ten-year rate goes up about half as much as the funds rate over that period, then as a first approxim... | 93 |
fomc | 2,004 | Maybe I'll just start off by talking for a moment about how we got the assumption for the ten-year rate. We begin by asking ourselves where we think the ten-year rate would go by the end of our forecast period under the market-based assumption for the funds rate. Our guess is that it would be up about 1/2 percentage po... | 149 |
fomc | 2,004 | In our alternative simulation for that market-based funds rate, we have the ten-year Treasury bond rate coming up 20 basis points by the end of the forecast period. | 33 |
fomc | 2,004 | Right. I was speculating that it might be more than that. Presumably you've got a greater impact on the ten-year rate in the market-based scenario. | 32 |
fomc | 2,004 | Obviously, it depends a little on whether rates move up earlier in our projection period or later. My guess is that if there were a significant surprise on long-term interest rates next year, most of the impact of that would probably be felt late in the year and moving into 2006. | 58 |
fomc | 2,004 | Okay. | 2 |
fomc | 2,004 | President Stern, I asked the staff to calculate for me if we followed exactly the path of the funds rate that is now built into markets, where the ten-year rate would be a year from now. And their answer was 30 basis points higher than it is today. So, it is not 50 percent of the rise in the funds rate. | 70 |
fomc | 2,004 | Governor Bies. | 4 |
fomc | 2,004 | I have a question on chart 3 on the commercial real estate valuation. Having lived through the 1986-91 period when the NOI(net operating income)-price ratio was down to the levels it is today, I look at that period as abnormal because we had tax changes that were retroactive, which basically put a lot of real estate pr... | 148 |
fomc | 2,004 | I was actually here at the Board during that period, and I remember that we were concerned as well in the late '80s about real estate valuations and the amount of construction still going on given that the tax benefits had been withdrawn in 1986. We did not really understand what the rationale was in the market. Ultima... | 249 |
fomc | 2,004 | President Lacker. | 4 |
fomc | 2,004 | Just to follow up on what Roger was asking about the panel in chart 3 on housing valuations. In that panel the relative movement of the two measures is somewhat key to at least the intuitive persuasiveness of the argument that housing might be overvalued. I understand the units of the real long-term Treasury yield. I d... | 76 |
fomc | 2,004 | The rent and the price data come from different sources; they are not part of an integrated system. The rent data are from the CPI, which is itself only an index number. So there is no way to say the rent-price ratio is 8 percent--like an earnings-price ratio, for example. | 61 |
fomc | 2,004 | It is proportional to whatever that number would be. | 10 |
fomc | 2,004 | Yes. We could make the level of the red line anything we wanted to, but we could only move it in a level adjustment up and down. | 30 |
fomc | 2,004 | But you set the scale, too, right? You could set it so that the zeroes are the same on both axes? | 26 |
fomc | 2,004 | Right. With creative charting we could make the relationship between the two series shift up and down however we wanted. That's why we're stressing-- | 28 |
fomc | 2,004 | But that's not so for the ratio between those two series. That is invariant to the scale. | 19 |
fomc | 2,004 | Yes, that's true; they ought to have the same zeroes it seems. | 16 |
fomc | 2,004 | No, no. If you have a relative measure that is an actual ratio, the ratio of the two numbers is invariant to what the relative number is. | 31 |
fomc | 2,004 | That's right. But in the chart, the staff has the zero set at very different places on the two scales. | 23 |
fomc | 2,004 | You can't trust them to do it right! [Laughter] | 13 |
fomc | 2,004 | I'm just wondering, how did you decide where to put the zero? If you put it much closer to where the zero is for the long-run Treasury rate, the squiggles in the red line would be a lot smaller. | 46 |
fomc | 2,004 | You can make the squiggles as small or as large as you want. | 16 |
fomc | 2,004 | Right. And your argument has to do with the size of the squiggles? | 17 |
fomc | 2,004 | No, I think the argument has to do with the size of the gap between the two. And the current gap relative to its average over history-- | 30 |
fomc | 2,004 | The scale will not change the fact that the gap is closing. The conclusion is independent of the scale. You could try any variation you want, and that gap will always close. | 36 |
fomc | 2,004 | The gap between these two lines? | 7 |
fomc | 2,004 | Yes. | 2 |
fomc | 2,004 | No matter what we used for our charting convention, the gap would be relatively narrow now compared with its historical average. | 24 |
fomc | 2,004 | Just take the ratio of the two ratios, and it will be going down. | 16 |
fomc | 2,004 | That's fine for now. | 5 |
fomc | 2,004 | Further questions? I noticed in some of the monthly data that the productivity numbers in the second quarter seem to be coming in under the 2.4 percent Greenbook forecast. Is that your sense? I note that the compensation per hour seems okay, but the figures implicit in the personal income data at least suggest that we ... | 80 |
fomc | 2,004 | In the Greenbook we had nonfarm business productivity at 2.4 percent. A quick update of that based on the information that we received on Friday and Monday would put it at 1.9 percent. | 43 |
fomc | 2,004 | So it's a somewhat higher unit labor cost? | 9 |
fomc | 2,004 | Unit labor costs are up 0.4, right. | 12 |
fomc | 2,004 | Okay. Who would like to start the Committee discussion? President Moskow. | 15 |
fomc | 2,004 | Thank you, Mr. Chairman. The expansion in the Seventh District now appears extremely broad-based. Very few sectors are weak, and some are booming. This may be hyperbole, but several of our contacts said that the business climate was as strong as they can remember. One of our directors, whose private S corporation shows... | 966 |
fomc | 2,004 | President Minehan. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. By almost any measure, economic activity has picked up in New England and shows signs of being on a solid upward trend. Regional employment grew for the third consecutive month in May, bringing the region's job count even with its year-ago level. Only in Massachusetts has the employment level c... | 1,343 |
fomc | 2,004 | President Santomero. | 5 |
fomc | 2,004 | Thank you, Mr. Chairman. Economic activity in the Third District continues to expand and, in contrast to the last time we met, I can now report that we've seen solid job growth in the region. Payroll employment in our three states rose 0.6 percent from the first quarter to the first two months of the second quarter, ma... | 1,613 |
fomc | 2,004 | President Pianalto. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. Business conditions in the Fourth District began to improve noticeably just before our last meeting in May, and the outlook remains somewhat positive. After a long period of relative quiet, my business contacts are now busy adjusting to higher sales volumes. They are installing new capital equi... | 965 |
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