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fomc | 2,004 | President Lacker. | 4 |
fomc | 2,004 | I support your recommendation, Mr. Chairman. I think it is appropriate that we maintain a high hurdle as we go forward before skipping a beat. I believe this measured approach is important, as Governor Bernanke said, to maintain the credibility of our commitment against inflation. Even with a few more soft patches as w... | 169 |
fomc | 2,004 | President Hoenig. | 4 |
fomc | 2,004 | Mr. Chairman, I think we should move toward neutral, and I find the rationale for doing so as stated here pretty good, so I'm fine with that. I would like to leave in the sentence about energy prices because energy is the elephant in the room and I think we should acknowledge it. And I don't think we need to modify the... | 77 |
fomc | 2,004 | President Guynn. | 4 |
fomc | 2,004 | Mr. Chairman, I support your recommendation. I have one question and one observation. I think I got confused in the course of your exchange with Bill Poole. Is the last phrase under the assessment of risk in or out? I thought there was some question about putting a period after "needed." What is the proposition on the ... | 76 |
fomc | 2,004 | Do you mean the very last statement under "assessment of risk"? | 13 |
fomc | 2,004 | Yes. | 2 |
fomc | 2,004 | It reads, "Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." | 26 |
fomc | 2,004 | Okay. Now for my observation. I may have not followed your discussion about the labor market and how we deal with it--and maybe this is what Ned was talking about. As I read the statement, it seemed to me that we may have contributed to the emphasis that people are putting on our judgment about labor market conditions ... | 105 |
fomc | 2,004 | No, there's nothing wrong with discussing the condition of labor markets. It is part of our overall evaluation of what is going on in the economy. But the argument that I was making is that we are overemphasizing the importance of employment as an economic activity issue. In other words, one often hears that the purpos... | 147 |
fomc | 2,004 | That's helpful. Thank you, sir. | 8 |
fomc | 2,004 | President Stern. | 3 |
fomc | 2,004 | Thank you, Mr. Chairman. I, too, support the 1/4 point increase in the funds rate at this stage. Also, I think that the "measured pace" language and the conditional clause have served us remarkably well so far. I believe that people in the marketplace pretty much understand what we're trying to do and where we're going... | 132 |
fomc | 2,004 | President McTeer. | 5 |
fomc | 2,004 | I agree with your proposal, including no diddling with the language. | 15 |
fomc | 2,004 | Governor Kohn. | 4 |
fomc | 2,004 | I agree with your proposal, Mr. Chairman, in all its particulars, including the language. I think it is most likely that economic growth will pick up and that the output gap will begin to close again, and therefore, we should continue with our measured pace of tightening. I do think that I would put a little more empha... | 97 |
fomc | 2,004 | It's not as good an indicator as when productivity is not moving around. | 14 |
fomc | 2,004 | Right, but it is something of an indicator of whether we're putting people back to work. In fact, it's a very good indicator of that. [Laughter] And there is slack in the economy, so I wouldn't ignore it entirely. I agree that we need to get back to neutral as soon as we can, but I would say as soon as we can consisten... | 209 |
fomc | 2,004 | Actually, you're raising the issue that Governor Gramlich raised, which is the level of employment as distinct from the change and the level of the unemployment rate. These are other indicators and goals of policy. I'm talking mainly about working off the employment statistics in our analytic evaluation of how the econ... | 138 |
fomc | 2,004 | Thank you, Mr. Chairman. I agree with your recommendation for this meeting and with your defense of the statement as outlined in alternative B. I won't go into all the issues about energy prices, et cetera. To some extent I am both following Governor Kohn in sequence and agreeing in intellectual approach here. I agree ... | 331 |
fomc | 2,004 | Are we doing that? | 5 |
fomc | 2,004 | No, I'm not suggesting that we are. I'm saying that a few members have suggested that perhaps we are. But I know you would not tolerate that! [Laughter] I am doing what a Board member should do, which is supporting the Chairman in reinforcing the law. People have laughed about it, but to me it's pretty clear that we ha... | 87 |
fomc | 2,004 | Vice Chair. | 3 |
fomc | 2,004 | I'm comfortable with the statement and with your recommendation. I just want to raise a question about your "no surprises" rule. That's not quite the way you framed it. I'm a little uncomfortable being in a regime where we never surprise-- | 47 |
fomc | 2,004 | That's not what I said. | 6 |
fomc | 2,004 | No, no, I'm not trying to say that you did. | 13 |
fomc | 2,004 | In fact, we purposely surprised the market in January 2001. We structured our announcement so that the market would truly be surprised, as you may recall, by moving the date up on when we actually made a move. So I'm not arguing that surprise has no value. I'm basically saying that, if we have to surprise the market, b... | 76 |
fomc | 2,004 | Well, with that qualification, I'm fine. I just say this because we're in a situation where the market is now pricing in moves of somewhat less than 25 basis points a meeting for the next two quarters, but we want to make sure that we have the capacity to move at that pace, if not faster, without creating the risk of a... | 184 |
fomc | 2,004 | We have on occasion run into situations where there was a 50 percent probability of our moving one way or the other, which meant that no matter what we did, it would be a significant surprise. That has not been the case recently. But I'm not sure we know how to avoid that. Governor Bies. | 63 |
fomc | 2,004 | Mr. Chairman, I support your recommendation, and I do like the wording in the third revised version better than that in the previous drafts. I think the changes were positive. That's all I have to say. | 42 |
fomc | 2,004 | President Yellen. | 4 |
fomc | 2,004 | Mr. Chairman, I agree with the proposal to raise the funds rate 25 basis points today and the idea that the default going forward should be to continue doing this on a regular schedule. But I agree with Governors Kohn and Ferguson that our decisions should be data-dependent. I am concerned about the downside risk and t... | 323 |
fomc | 2,004 | I happen to agree with you on that. I think it's a very difficult issue, and it's one that Vincent will discuss for a few minutes a little later. President Pianalto. | 36 |
fomc | 2,004 | Thank you, Mr. Chairman. I also support your recommendation for a 25 basis point increase in the fed funds rate target. And along with others I, too, like this version of the language better than the original. I also like the fact that we're not introducing a lot of change to the language since every word we change is ... | 81 |
fomc | 2,004 | Would you read the appropriate language, Mr. Secretary? | 11 |
fomc | 2,004 | First, with regard to the directive wording, which is on page 14 of the Bluebook: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth and output. To further its long-run objectives, the Committee in the immediate future seeks conditi... | 261 |
fomc | 2,004 | Please call the roll. | 5 |
fomc | 2,004 | Chairman Greenspan Yes Vice Chairman Geithner Yes Governor Bernanke Yes Governor Bies Yes Governor Ferguson Yes Governor Gramlich Yes President Hoenig Yes Governor Kohn Yes President Minehan Yes Governor Olson Yes President Pianalto Yes President Poole Yes | 49 |
fomc | 2,004 | Vincent? | 3 |
fomc | 2,004 | I have three brief items to bring to the Committee's attention. Let me deal with the two bureaucratic ones first. Dick Porter, now of the Federal Reserve Bank of Chicago, conducted a survey of readers of the Bluebook to see how they felt about the content and the distribution of that document. There are thirty-six sepa... | 579 |
fomc | 2,004 | Questions for Vincent? If not, let me confirm the date of the next meeting--September 21, 2004. This officially terminates the FOMC meeting, and I request that the Board of Governors meet in my office to discuss requests for changes in the discount rate. | 57 |
fomc | 2,004 | Good morning, everyone. Would somebody like to move approval of the minutes for our August 10 meeting? | 21 |
fomc | 2,004 | So moved. | 3 |
fomc | 2,004 | Without objection, they are approved. Dino Kos. | 10 |
fomc | 2,004 | 1 Thank you, Mr. Chairman. I'll be referring to the charts that Carol Low circulated a short time ago. In the intermeeting period, markets were generally calm, and investors perceived events with a generally positive outlook. Despite the Committee's tightening of policy on August 10, yields fell across the coupon curve... | 1,863 |
fomc | 2,004 | Shouldn't your next-to-last sentence be, "Noted and complimented"? [Laughter] Why do we bother intervening at all in the functioning of reserve markets a week or so before an FOMC meeting? | 45 |
fomc | 2,004 | Well, that's an excellent question. The charge that I at least believe I have from this Committee is to achieve-- | 23 |
fomc | 2,004 | That is readily changed. [Laughter] | 9 |
fomc | 2,004 | Well, okay. But in the regime under which we are now operating, as far as I'm aware I'm expected to try to achieve the target fed funds rate every day. So despite the fact that the market is expecting a higher funds rate, until the Committee decides to raise its rate objective, we're still working under the old directi... | 66 |
fomc | 2,004 | If I might say so, it sounds absurd on the surface, and it sounds absurd beneath the surface as well! [Laughter] | 27 |
fomc | 2,004 | But, Mr. Chairman, the alternative would put Dino in the position of giving a signal of your action at the upcoming meeting. | 26 |
fomc | 2,004 | All he needs to do is to state what his intentions are in advance. In other words, he can indicate that he will supply a certain amount of reserves over a specific period. The current approach is clearly not the optimal policy procedure. I'm not sure it's doing any harm or causing problems, but I can conceive of a situ... | 110 |
fomc | 2,004 | Well, what you're suggesting would make our task easier. We felt somewhat uncomfortable with the result in that final reserve maintenance period in August, so I think doing what you suggest would make our life a lot easier. | 42 |
fomc | 2,004 | May I make a request? I'd like to ask you and Vincent to be a committee of two to do an analysis of this problem. And then will you submit possible alternatives to the current procedure at the next FOMC meeting? | 46 |
fomc | 2,004 | Yes. | 2 |
fomc | 2,004 | Is there agreement on that? Or would somebody like to make a comment? | 15 |
fomc | 2,004 | Of course, I have no objection to a study. But I think Vincent has it right when he says that the implications of the regime you are proposing, which as I understand it is for the Desk to pre-commit to some amount of reserves that it is going to add independent of-- | 58 |
fomc | 2,004 | I'm saying that may be a possibility. Let me put it to you this way: All I can say is that, on the surface, the way we're doing this now doesn't seem right to me. To be sure, we've gone through this experience several times, and it has had no adverse consequences. The reason it has had no consequences, possibly, is tha... | 176 |
fomc | 2,004 | I'm totally confused here. I thought the volatility came about as a result of Dino's implementing the existing directive of the Federal Open Market Committee. I would not like to see him implement anything other than that until the Committee meets and adopts a new directive. Maybe I'm misunderstanding you. I must be. | 59 |
fomc | 2,004 | Well, there have been very serious questions over the years about whether the Desk should be trying to lock in the desired federal funds rate every single day. So, first of all, the funds rate has not been at 11/2 percent. | 49 |
fomc | 2,004 | Correct. It hasn't. | 5 |
fomc | 2,004 | So whether that degree of rigidity should be involved here is no longer an issue. It's now a question of the degree of deviation from the objective, not whether there should be any deviation. In that sense, if we want to read the directive explicitly, Dino has breached the authority given him--which I'm glad he did. | 64 |
fomc | 2,004 | Yes. I tend to think of it as two forces at work; there's the market and then there's Dino. Dino is trying to do what we told him to do, and the market is trying to do what it wants to do. I agree with you that there may be some way to look at an average target over a period of days. I just thought you were saying that... | 78 |
fomc | 2,004 | Well, I think it would be very awkward to have any kind of pre-commitment--I'm not sure if that's the right word--about reserves unless we were to do that in every period. | 40 |
fomc | 2,004 | There could be other ways of doing it. I don't necessarily see all of the commentary about Desk operations. Has anybody commented on specific deviations from the funds rate target--other than the obvious anticipatory arbitrage against a potential rise? | 46 |
fomc | 2,004 | No. This situation has arisen only around the FOMC meetings; it is just in the maintenance period encompassing a meeting when this sort of activity begins. In the previous period of this intermeeting interval we were, as you know, close to the 11/2 percent objective. But as soon as we got into the current maintenance p... | 100 |
fomc | 2,004 | Remember, there's another aspect of this. By Committee desire, we have been changing the funds rate only at meetings. That was not the case in the past. So there's another element implicit in this to which the market is adjusting. All I'm saying, though, is that the current practice does not seem to me to be the optimu... | 96 |
fomc | 2,004 | Having a two-week reserve maintenance period and operating on a daily basis to achieve the funds target daily will result in the market trying to anticipate moves that may happen within the maintenance period. It's not a stable equilibrium. We'd have to give it some thought, but I'm not sure what the obvious solution t... | 62 |
fomc | 2,004 | Well, there are numerous people around this table who are far more familiar with the actual mechanical operations on a day-by-day basis than I. But just looking at the final result, it seems clear to me that something here doesn't work as well as it should and that there may be better ways of doing it. That's all I'm s... | 67 |
fomc | 2,004 | We often consider alternative ways of implementing policy, and in light of this discussion, the committee of two will look into the issue, for sure, Mr. Chairman. I would just note another observation that Dino made in his briefing, which is that implied volatilities are quite low. So the cost associated with a somewha... | 85 |
fomc | 2,004 | And no adverse event occurs during the maintenance period. It's only that that matters. There's no credible argument, if there is no adverse event, that these intra-maintenance-period fluctuations have any lasting significance, as best I can tell. | 46 |
fomc | 2,004 | And I'd make another observation. If one looks at the pattern of fed funds futures contracts, in the months in which there are no meetings scheduled, one can see that the probability of an intermeeting move has gone down to as low as it gets. The Committee's decision to remove policy accommodation at a measured pace ha... | 112 |
fomc | 2,004 | President Lacker. | 4 |
fomc | 2,004 | The way we operate, Dino is asked to supply reserves against two different demand curves--a maintenance period demand curve and a daily demand curve. And there's a yield curve relationship within a maintenance period that ties the daily rates together. To ask him to make the funds rate do this step function I think is ... | 188 |
fomc | 2,004 | I'm not sure. | 4 |
fomc | 2,004 | I'm not sure. | 4 |
fomc | 2,004 | I would be very, very careful about asking the Desk to do anything that seemed to prejudge what our action would be at the next meeting. Moreover, it could be that the cost of having the Desk not prejudge that--the cost of this very aggressive daily supply of reserves, which we've gone to more and more over the last fe... | 104 |
fomc | 2,004 | Should the Desk today and yesterday create sufficient reserves to keep the funds rate at 1.5 percent? | 21 |
fomc | 2,004 | Yes. | 2 |
fomc | 2,004 | Why not? | 3 |
fomc | 2,004 | He's not doing it right. | 6 |
fomc | 2,004 | Well, he's trying. | 5 |
fomc | 2,004 | Now, wait a second. He has no limit on the amount of reserves he can create at will. You cannot tell me he is trying and failing; he's just not pushing the button hard enough. | 40 |
fomc | 2,004 | Mr. Chairman, if I could? One thing that President Lacker pointed out is that, if we operated more than once on the first day of the reserve maintenance period, we could create as much reserves as possible, and we'd probably do a better job of achieving the target rate on that first day. The cost of that, though, is th... | 117 |
fomc | 2,004 | I didn't mean to get into this. [Laughter] Unless others wish to raise significant issues about this today, let me ask you the following: Does everybody agree that this is a subject that we should at least get some further insight into and that we should leave it to our two professionals in this area to advise us? Go a... | 72 |
fomc | 2,004 | I just want to add one other point. One of the reasons this is happening is that we're communicating so well and we have a lot of credibility. Every desk manager and every banker knows pretty much when rates are going to move, and we give them the luxury of a two-week period in which to meet their required reserves. So... | 356 |
fomc | 2,004 | For the same reasons we've created the carry trade, because if you lock in with some permanence one leg of it, that reduces the risk-- | 28 |
fomc | 2,004 | Could I just make one small point? In a sense, after '94 the Desk was taken out of the business of signaling policy changes, which was a positive development. | 34 |
fomc | 2,004 | Absolutely. | 2 |
fomc | 2,004 | I think one thing we should be careful of is not to get back into that practice by having either a signal or a non-signal be taken from what the Desk does. That would not be something that I think this Committee would welcome. Certainly we at the Desk wouldn't welcome it. | 57 |
fomc | 2,004 | Governor Ferguson. | 3 |
fomc | 2,004 | I'll pass. Governor Bies just said what I wanted to say. | 14 |
fomc | 2,004 | Okay. President Santomero, do you want to say a word before we end? | 18 |
fomc | 2,004 | Let me just point out that there is a long literature on the mechanics of our intervention on a daily basis. I support your notion of updating that literature and looking into this; it might be useful. But this is not the first time we've looked at these kinds of issues. | 55 |
fomc | 2,004 | Strangely enough, it's the first time, in my recollection, that we have projected a potential path of monetary policy in a manner that was wholly credible to the market, which is what has created this very unusual situation. | 46 |
fomc | 2,004 | I agree 100 percent. But there is a literature on this subject that we can connect to. And the staff can do a good job of reviewing that and bring us up to date. | 38 |
fomc | 2,004 | Questions on other issues to Dino? If not, would somebody like to move to ratify the domestic transactions in the System account? | 26 |
fomc | 2,004 | So moved. | 3 |
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