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fomc | 2,004 | Thank you, Mr. Chairman. A lot has changed since the June Greenbook forecast was put to bed. Unfortunately, a lot has changed since the August Greenbook was put to bed, too. [Laughter] In particular, in the June Greenbook, we forecasted that payroll employment gains would average about 300,000 per month in the second a... | 2,190 |
fomc | 2,004 | As David has discussed, it now appears that the pace of U.S. economic activity in the second and third quarters has been and likely remains somewhat less robust than we thought in June. Such a development naturally leads us to question whether we should reduce our forecast for activity abroad, as the strength of demand... | 1,572 |
fomc | 2,004 | In evaluating the oil price impact in the United States, we tend to look at the issue from the crude price; essentially a change in the value of crude imports is viewed as a tax effect. But I wonder if there is not something a little different going on at the moment, or at least through the spring, with the very signif... | 368 |
fomc | 2,004 | But it matters if demand is being underestimated. | 9 |
fomc | 2,004 | Yes. And that's where this missing barrel question comes from. It seems extraordinarily odd that after remarkably flat world consumption--at a little over 80 million barrels a day for a long period--suddenly demand has just taken off. We didn't see that during the 1990s, as I recall. | 62 |
fomc | 2,004 | That is where all the anecdotes about China come in, I think. Our information about what is really going on in China is poor, at best. We know, for example, that the electricity grid in that country is not up to the task of meeting current demands, and China's economy is growing rapidly. And we know that, in response t... | 149 |
fomc | 2,004 | Hasn't their oil consumption gone from 4 million to 6 million barrels a day in a couple of years, or something like that? | 28 |
fomc | 2,004 | The story, though, is that to build capacity you need to stock it with an original endowment and some of that is happening. | 27 |
fomc | 2,004 | It's the in-process inventories that are building up. If that is indeed the case, then it's not consumption. | 22 |
fomc | 2,004 | Right, but we don't know. All these anecdotes are out there, but no one has real data. | 21 |
fomc | 2,004 | In large measure they don't have room to store more oil. In fact, they're behind schedule on building their strategic reserve because they don't have storage capacity. Where is it all going? Maybe there's a big hole in the ground that they're filling in. | 49 |
fomc | 2,004 | Mr. Chairman, another uncertainty that I'd highlight with respect to the timing of how this plays out is that the sources of the increase in the price of oil may have a different profile recently than was the case over the first half of the year. My sense qualitatively is that strong world demand was perhaps more a fro... | 84 |
fomc | 2,004 | Well, certainly in the intermeeting period, not only the spot price but I think the farther-out futures have reacted enormously to the Yukos story, which is not really about production today. Actually, it might be about production today because overnight the Russian authorities seized control of a big production unit o... | 103 |
fomc | 2,004 | Is there any credible scenario in which the Russians would allow that oil production to decline at these prices? | 20 |
fomc | 2,004 | It is hard to imagine that they would allow that to happen for any period of time, but I'm sufficiently skeptical about their business competence that I wouldn't assume that they can do all this shifting and achieve their political aims and not disrupt supply temporarily. But there is certainly no incentive for them to... | 61 |
fomc | 2,004 | I think they have an incentive to make believe they are cutting back to get the price up but to keep selling the oil. | 25 |
fomc | 2,004 | To exert some leverage over the rest of the oil producers or for a host of reasons. | 18 |
fomc | 2,004 | President Moskow. | 4 |
fomc | 2,004 | May I just finish the thought? The consequences for U.S. activity could be quite different, depending on the mix of supply and demand factors. If that mix changed over the first and second halves of the year, it could add to the uncertainty about the timing that you were highlighting in your comment, Mr. Chairman. | 64 |
fomc | 2,004 | I think that's a good point to make. | 9 |
fomc | 2,004 | I also wanted to follow on this discussion about oil prices. It seems that every time I've looked at this futures market for oil--and I don't look at it on a regular basis--when the spot price is in the 30s or 40s, the price of oil is always shown as coming down in the future. Now it is projected to be coming down, but... | 157 |
fomc | 2,004 | Well, you're asking someone whose expertise in this matter is more limited than I wish it were. It's normal for this curve to display a downward slope, but it's not always the case that it does. There have been times when the front portion of the futures curve has sloped up; that would not be considered an unprecedente... | 474 |
fomc | 2,004 | There's an interesting history here. Incidentally, there have been significant periods of a so-called contango curve. | 22 |
fomc | 2,004 | Pickup, yes. | 4 |
fomc | 2,004 | In 1985, for example, the curve sloped up. Something unusual happened about three to four years ago. Prior to then, the far distant six- to seven-year futures huddled around $18 to $20 a barrel, which appeared to be the general judgment of what the marginal supply price was in the long term outside of OPEC. And the six... | 580 |
fomc | 2,004 | Or it will come down just with the passage of time. If among those purchasers are people who envision some reason for using oil, they don't need to buy in the spot market because they will have already bought forward. If they are just speculating, as it gets close to the time when they're going to get delivery of this ... | 116 |
fomc | 2,004 | I think the best way of visualizing it is this: When what I'd call the OPEC premium rises, the underlying ex-ante demand to hold inventories worldwide rises. If supply exceeds consumption, inventories will rise to the level at which that demand is sated, and at some point it will be sated. The only issue is, Where is t... | 73 |
fomc | 2,004 | And somewhere out there are alternative energy sources--tar sands, other kinds of materials, or whatever. They often used to be cited as putting a limit on how high the oil price could be. | 39 |
fomc | 2,004 | If oil goes to $80 a barrel you'll be surprised at what-- | 14 |
fomc | 2,004 | Even ethanol looks good. | 5 |
fomc | 2,004 | I guess the staff's estimates are that the supply of oil is close to unitary elasticity over the long run in the United States and that it's very inelastic in the short run. But with enough time, we just price ourselves out of the market. | 51 |
fomc | 2,004 | But if one imagines that the citizens of India and China, which would total about 3 billion people, raise their per capita consumption of energy to, say, half the average of that in industrial countries-- | 42 |
fomc | 2,004 | That's a very important point. | 6 |
fomc | 2,004 | That would result in an altogether different picture of the long-term energy supply-demand balance in the world. And the effect of that has to feed back at some point. Now, if that were really what was driving everything, one might think that investment in the energy sector would just be taking off, and I don't see tha... | 126 |
fomc | 2,004 | Governor Ferguson. | 3 |
fomc | 2,004 | I don't want to prolong this discussion too much. The Chairman made the point I wanted to make--that how the marginal cost of energy is determined has moved from a secure low-risk environment to a very high-risk environment. One of the things I think we're seeing with the news regarding Yukos and other developments tha... | 136 |
fomc | 2,004 | It's certainly true that the role of Saudi Arabia as the swing producer was a deliberate and explicit policy adopted by the Saudis. They would restrict production or they would expand production in an attempt to set a sort of horizontal supply curve for oil at a specified price. That has just broken down. It has broken... | 109 |
fomc | 2,004 | Further questions for our colleagues? If not, who would like to start the Committee discussion? President Moskow. | 22 |
fomc | 2,004 | Thank you, Mr. Chairman. The two big questions facing us are whether the recent soft patch in economic activity is temporary and to what degree underlying inflation has picked up. On the first question, we get a sense from our Seventh District contacts that their business is good but apparently not robust enough to gen... | 252 |
fomc | 2,004 | Excuse me--was that for light vehicle or total sales? | 13 |
fomc | 2,004 | Light. Automakers will need a good August and September to clear dealer lots of their '04 model year cars; otherwise, they will need to reduce production schedules for their '05 models. Other sectors never really experienced much of a slowdown in June, and their activity remains strong. This pattern has been evident in... | 531 |
fomc | 2,004 | President Poole. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. Almost all my contacts said that they had nothing new to report; essentially the story was the same as last time. I would mention two things that are perhaps a little different. My Wal-Mart contact said that the pace of sales in August has definitely downshifted. The Wal-Mart public story is an... | 386 |
fomc | 2,004 | President Pianalto. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. The pace of economic activity in the Fourth District, although sound, has been slower this summer than in late winter and early spring. My conversations with business persons throughout the District have reinforced my view that the region is still poised for solid economic growth for the remain... | 960 |
fomc | 2,004 | President Santomero. | 5 |
fomc | 2,004 | Thank you, Mr. Chairman. In contrast to the nation and my next door neighbor, economic activity in the Third District is expanding a little faster now than it was at the beginning of the year. Job growth in our region had been lagging that in the nation, but it has strengthened in recent months, at least through June, ... | 1,297 |
fomc | 2,004 | President Guynn. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. Like many others coming into this meeting, I have been trying to understand why some of the wind seems to have gone out of the sails of consumer spending and employment. Consumer spending has been such an important anchor both during the recession and during the recovery, as other sectors one b... | 1,043 |
fomc | 2,004 | President Hoenig. | 4 |
fomc | 2,004 | Mr. Chairman, conditions in our District reflect much of what I've heard so far around the table today, but I think a couple of developments are worth noting. Our labor markets have shown further signs of improvement, actually. Employment rose in June for the fourth straight month. Major hiring announcements stayed at ... | 446 |
fomc | 2,004 | President Minehan. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. New England seems to be experiencing what we hope is the same summer lull as the rest of the country. The job market didn't improve from May to June, and some companies--most notably in the technology and consumer product sectors--saw weaker demand than expected. As one director put it, "techno... | 1,169 |
fomc | 2,004 | President Stern. | 3 |
fomc | 2,004 | Thank you, Mr. Chairman. There has been little change in the District economy recently; that is, a broad-based expansion is under way and is continuing. Labor demand appears to be strengthening. Manufacturing has been a particularly bright spot recently, especially for larger firms that operate and sell internationally... | 429 |
fomc | 2,004 | President Yellen. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. The Twelfth District economy has expanded at a solid pace in recent months. After a pause in June and early July, District consumers appear to have opened their wallets again--spending more on entertainment, travel, and a range of services. Even with higher fuel prices, District tourist destina... | 1,019 |
fomc | 2,004 | Vice Chair. | 3 |
fomc | 2,004 | For the national economy, the underlying pace of growth seems to have moderated since our last meeting, as have inflation risks. On the assumption that monetary policy follows roughly the path now priced into markets, we foresee a somewhat softer path for the expansion than we had in June, with growth moving back to a ... | 799 |
fomc | 2,004 | Governor Kohn. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. At our last meeting, many, myself included, were concerned about possible upside risks to inflation, even if policy tightened at a measured pace. Although the staff forecast for core inflation hasn't changed materially, I see a number of reasons to be less concerned about those upside risks now... | 1,281 |
fomc | 2,004 | Governor Gramlich. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. I normally speak after the break, so I was intending to pass out a chart.2 Let me quickly do that. Just when it looked as though everything was on track for a gradual tightening of policy, an energy shock seems to have hit the economy. How does this change our calculus? We've talked a lot about... | 1,349 |
fomc | 2,004 | Let's break for coffee and return in ten or fifteen minutes. | 12 |
fomc | 2,004 | Governor Bernanke. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. The economy appears to have lost some momentum, and unfortunately the recent slowdown may be more pronounced than can be accounted for by the rise in energy prices alone. For example, we would normally expect households confronted with higher energy prices to reduce their saving in order to smo... | 1,013 |
fomc | 2,004 | President McTeer. | 5 |
fomc | 2,004 | The economy of the Eleventh District continues to improve, although the pause that was apparent at the national level in June was also evident there. We also saw some deceleration of price pressures that had built up. We still expect the Texas economy to expand over the course of the year, and our regional economists a... | 618 |
fomc | 2,004 | Governor Ferguson. | 3 |
fomc | 2,004 | Thank you, Mr. Chairman. At the last meeting, I expressed some concerns about the uncertain outlook, and unfortunately, most of the incoming data have verified those concerns. At this meeting, I think President Moskow opened by asking the right two questions. The first is, Are we witnessing an emergence of another peri... | 1,708 |
fomc | 2,004 | Governor Olson. | 3 |
fomc | 2,004 | Thank you, Mr. Chairman. In preparation for today's meeting, I surveyed a major regional bank and two large community banks, one in the Southeast and one in the Midwest. Based on those conversations, I have both some general and some specific observations. In general, commercial lending activity has increased, although... | 596 |
fomc | 2,004 | Governor Bies. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. Many of you have already talked about this soft patch that we're going through, and as I prepared my notes for today my main concern was how long this soft patch is actually going to last. As President Guynn said earlier, the consumer really has kept the economy moving through this overall busi... | 642 |
fomc | 2,004 | President Lacker. | 4 |
fomc | 2,004 | Thank you, Mr. Chairman. The Fifth District economy expanded at a somewhat slower pace in July, as manufacturing and retail sales softened but services strengthened. In manufacturing, our diffusion index for shipments, just released today, fell last month but remains in positive territory. The manufacturing employment ... | 815 |
fomc | 2,004 | Let's turn now to Brian Madigan. | 8 |
fomc | 2,004 | 3 Thank you, Mr. Chairman. I'll be referring to the material that was passed out at the break labeled "Material for FOMC Briefing on Monetary Policy Alternatives." As shown in the top panels of exhibit 1, the incoming indications of softer-than-expected economic growth--especially Friday's employment report--have had a... | 2,272 |
fomc | 2,004 | Questions for Brian? If not, let me get started. I think one of the problems we run into is that monthly estimates of employment have an exceptionally wide potential variance. Remember, we're dealing with 130 million workers, and 1 percent of that is still a huge number. It is readily ascertainable that if we have sign... | 1,835 |
fomc | 2,004 | It has a nice ring. | 6 |
fomc | 2,004 | What that essentially means is that, given an unbiased balance of risks at this stage, we should be choosing to raise rates, and we should endeavor to get back to a neutral policy stance as quickly as we can. The more successful we are in doing so, the better policy will be. I am a little concerned about leaving gaps i... | 758 |
fomc | 2,004 | Mr. Chairman, I support your recommendation completely. I think, as Ben put it, that we need to stay on track. The only suggestion I would have in terms of the statement is that I think there a number of things besides energy prices that may be responsible for what we're seeing in the data. I have a whole list of them ... | 188 |
fomc | 2,004 | I would argue against it. | 6 |
fomc | 2,004 | Okay. I have a preference for including it on the grounds that, if we get another employment report and perhaps other data of the sort that we've already had, we might want to pause in September. | 40 |
fomc | 2,004 | There's nothing that prevents us from doing that. | 9 |
fomc | 2,004 | I understand that. But my preference would be to condition the market to that possibility and read that as it stands. I don't feel strongly about it, but I'm explaining my preference. | 36 |
fomc | 2,004 | Well, it's another side, but there is an interesting reason for my position. If we're going to make the statement that accommodation can be removed at a measured pace and then we say, "Nonetheless, the Committee will respond to changes in economic prospects as needed," that is clearly related to price stability on the ... | 238 |
fomc | 2,004 | Thank you, Mr. Chairman. Number one, I support your approach. I agree also with the notion that, at least this time, we should not fiddle with this statement very much. We are on track to have a more thorough discussion of the language in our statements in the near future, and I think the minor adjustment approach is t... | 436 |
fomc | 2,004 | President Minehan. | 4 |
fomc | 2,004 | I certainly agree that your proposal is the right thing to do at this time. I like your concept of "opportunistic disaccommodation." I don't know exactly what it means, but I like that concept! We are in a position to move now, and a move today will be well understood. It's well priced into the market. It won't have a ... | 396 |
fomc | 2,004 | President Moskow. | 4 |
fomc | 2,004 | Mr. Chairman, I agree completely with your recommendation. I think the sooner we get back to neutral, the better off we are, and I agree that we should have a high hurdle for not raising rates at meetings while we're in this period of removing accommodation at a measured pace. And I think it's important not to leave ga... | 194 |
fomc | 2,004 | Well, that thought is implicit. If we don't believe that, why are we moving the funds rate up 25 basis points? So, essentially, it is implicit in our actions. | 37 |
fomc | 2,004 | As I said, I don't disagree with it, but I think it is different from what we have been saying in the past. | 26 |
fomc | 2,004 | Oh, absolutely, it is. And one of the things that I think we are finding with the statement is that the increased flexibility we have created for ourselves by working through the phraseology in the Bluebook gives us greater latitude to do these statements in ways in which each meeting is handled idiosyncratically. From... | 76 |
fomc | 2,004 | Mr. Chairman, I might just point out that the sentence before that--where we say that a portion of the rise in inflation is transitory--is itself predictive. So, it isn't unprecedented to be giving some sense of an outlook in the rationale part of the statement. | 55 |
fomc | 2,004 | Governor Bernanke. | 4 |
fomc | 2,004 | I support your recommendation, Mr. Chairman. I think we might encounter circumstances under which we'd want to skip a meeting in our measured pace of removing policy accommodation--perhaps to "undisaccommodate." [Laughter] But I agree with Governor Gramlich that a moderate rise in energy prices would not be a rationale... | 90 |
fomc | 2,004 | President Santomero. | 5 |
fomc | 2,004 | I support your recommendation, Mr. Chairman. I like the basic strategy of keeping the pressure on to try to get us back to neutral. In answer to President Minehan's question of where is neutral, my answer has always been "north of here," so I'd keep going in that direction. Neutral may not mean a single number, and the... | 170 |
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