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The Federal Reserve recently released transcripts from its
meetings in 2008. Given the significant
financial events that occurred in that year, it seems worthwhile to go through
the transcripts in some detail.
As I work through the entire set of transcripts, in addition
to a blog post I will post my comments in a new tab, entitled “Federal Reserve
Transcripts 2008.” I will do the same
thing for each new post – likely covering one meeting at a time.
First, a quick recap: how did 2007 end at the Fed? From my
post on the released 2007 transcripts:
The Washington Post chimes in:
It was December 2007, and
officials at the Federal Reserve were torn between two visions of what was in
store for the nation’s economy: a mild slowdown or outright recession.
A staff presentation described a
highly unlikely, worst-case scenario that included a 10 percent drop in the
stock market.
The New York Daily News:
“I do not expect insolvency or
near insolvency among major financial institutions,” Bernanke said at the Fed’s
December 2007 meeting, as the economy was already starting to spiral into the
Great Recession.
To summarize the Fed’s views at year-end 2007:
·
“a mild slowdown or outright recession,” but no
mention of the possibility of the greatest financial calamity to hit the United
States and much of the world since the Great Depression;
·
“a highly unlikely, worst-case scenario that
included a 10 percent drop in the stock market,” missing the mark by just a wee
bit as the S&P 500 fell by more than 50%;
·
Bernanke did “not expect insolvency or near
insolvency among major financial institutions,” well Lehman went belly up in
the largest bankruptcy in history and the entire lot of them would have
followed along had not the Fed and Treasury intervened.
With that, let’s see how 2008 unfolded through the eyes of
the official
Federal Reserve transcripts.
Conference Call of
the Federal Open Market Committee on January 9, 2008
While reading the transcripts, keep in mind the for-public-consumption
mandate of the Fed:
The Congress established the
statutory objectives for monetary policy--maximum employment, stable prices,
and moderate long-term interest rates--in the Federal Reserve Act.
So how does the Fed start the meeting? Bernanke opens the floor to Mr. Dudley:
Market function has improved
somewhat since the December FOMC meeting. This can be seen most notably in the
term funding, foreign-exchange swap, and asset-backed commercial paper markets.
In addition, some of the risks of contagion—for example, from troubled SIVs and
from financial guarantors to money market mutual funds or the municipal
securities market—appear to have lessened slightly.
Nothing referencing the objectives of the mandate. But I can give the Fed the benefit of the
doubt – efficient functioning of markets is buried somewhere in the Fed’s job
description; given the risks to the financial system that had to be obvious
even to the oblivious, it is at least arguable that Bernanke should start here.
As can be seen on the first page of
the handout in exhibits 1, 2, and 3, term funding spreads have fallen sharply
for dollar, euro and sterling rates. For example, the one-month LIBOR–OIS
spread is now 31 basis points, down from a peak of more than 100 basis points
in December.
The use of LIBOR as a measure of financial market health has
been exposed as less than valuable – it seems the Fed may have known something
about the manipulation of this self-reported rate as
early as 2007:
The Federal Reserve Bank of New
York may have known as early as August 2007 that the setting of global
benchmark interest rates was flawed.
Dudley goes on to report improvements in various financial
markets. All is not rosy, however:
Despite these positive developments
in terms of market function, financial conditions have tightened as balance
sheet pressures on commercial and investment banks remain intense and as the
macroeconomic outlook has deteriorated. This can be seen in a number of
respects.
First, large writedowns and larger
loan-loss provisions are cutting into bank and thrift capital and pushing down equity prices.
Second, corporate credit spreads
and credit default indexes have widened sharply in the past few months, with a
significant rise registered since year-end.
Third, equity markets are under pressure. For example, as illustrated in
exhibit 11, the S&P 500 index declined in the fourth quarter and, up
through yesterday, has fallen about 5 percent so far this year. Moreover, the
equity market weakness has broadened out beyond the financial sector. For
example, as of yesterday’s close, the Nasdaq index, which has little weight in
financials, had fallen 8 percent this year. Global stock market indexes have
also generally weakened.
Equity prices are at issue in two of the three comments he
makes.
Expectations by the market of possible Fed action are also
in focus:
As the economic outlook has
deteriorated, market participants’ expectations of monetary policy easing have
increased markedly…. Although it is difficult to be precise about this, my best
guesstimate is that the market has priced in about a 1-in-4 chance of a 25
basis point intermeeting rate cut. Although that means that a rate cut today
would be a big surprise to market participants, it probably would be well
understood in hindsight.
At the end of his presentation, Dudley finally gets to
inflation (of prices, not money and credit):
Finally, despite the rise in
headline consumer price inflation, the uptick in core consumer price inflation,
and the atmospherics created by firmer gold and oil prices, market-based
measures of inflation expectations remain very well behaved.
Atmospherics? What
does this mean?
Next, Bernanke turns to Dave Stockton (sadly, not Stockman) to speak regarding forecasts:
Our forecast for economic growth in
the first quarter is unrevised at an annual rate of ¾ percentage point.
This forecast is made at the beginning of the quarter in
question – not for the next quarter, not for the next year; the current
quarter. So, how did he do?
Turning to the labor market, the
jump in the unemployment rate in December in combination with our weaker
outlook for growth in real GDP going forward has led us to raise our projected
level of the unemployment rate to 5.2 percent at the end of 2008 and 5.3
percent at the end of 2009.
This one was just as big a miss: Actual year end 2008: 7.3%;
2009: 9.9%.
As for prices, the recent news on
inflation has been disappointing. Total and core PCE prices came in above our
expectations in November.
Expectations in November were apparently missed in
December. I would be disappointed also
if my ability to forecast was this poor.
Stockton provides a note of caution:
Let me just say a few words about
how the risks to the forecast have changed. I believe that the adjustments that
we have made to this provisional forecast actually are quite reasonable in
light of the developments and the data that we have been contending with, but
I’d have to admit that the downside risks to our projection have become more
palpable to me.
He goes on to identify housing, labor, and manufacturing as
all deteriorating. Yet:
We are not ready to make a
recession call yet.
That’s too bad; the recession had already begun by the time
Stockton said these words, according
to the NBER.
Following a question by Lacker on the sophistication of
econometric modeling used by the Fed, Stockton replies:
I believe in nonlinear dynamics.
[Laughter] I think I have even experienced them, and probably you have as well
on occasion, in terms of the difficulty that we have in forecasting recessions.
Our forecast isn’t just some sort of “push a button on a linear model and here
is the result.”
Why do they have to invent another term – “nonlinear
dynamics”? Why not just call it what it
is – Human Action? Then they could all
just pack up and go home – oh, wait.
That’s why not….
But I do think the current
situation illustrates to me why it is, in fact, so hard for us and why we don’t
forecast recessions very often.
The Fed is not good at forecasting recessions – go figure. What is the point of economic central
planning via econometric models created by the most sophisticated economists in
the world if they cannot forecast a recession?
How can they central plan for something they cannot see?
Bernanke follows with some general comments:
…I think the downside risks to the
economy are quite significant and larger than they were. Speaking as a former
member of the NBER Business Cycle Dating Committee, I think there are a lot of
indications that we may soon be in a recession. I think a garden variety
recession is an acceptable risk, but I am also concerned that such a downturn
might morph into something more serious…
The “more serious” thing Bernanke is concerned about is the
big banks:
Let me talk a bit about banks,
which are at the center of this set of issues. I’m going to talk a bit about
the 21 large, complex banking organizations (LCBOs).
He goes on to list several measures of bank capital that
have demonstrated deterioration, or are forecast to be at risk.
The BIS, at the meeting I attended
over the weekend, looking at the 20 largest international banks, estimated $600
billion [of bank capital shortfall]. We don’t know how much it is going to be,
but the banks themselves are somewhat unsure about potential exposures.
Since then, the Fed has pumped well over $3 trillion into
the system, with most of this held by the banks as excess reserves. This is far in excess of $600 billion.
Loan-loss reserves are quite low
for this stage in the cycle, about 1.4 percent, compared with, say, 2.5 percent
during the headwinds period of the early 1990s, and that is partly a result of
the SEC regulations, which have forced banks to keep their reserves low.
The changes in accounting rules that took place after the
calamity began (mark-to-fantasy) and the multi-year ZIRP both helped to keep
loan losses low – another case of bank accounting practices forcing subsequent Fed
action.
Finally—and I think this is one of
the most worrisome things to me—we are beginning to see some credit issues
outside of housing and mortgages. Credit card delinquencies have jumped in a few
banks’ home equity lines. There are concerns in commercial real estate,
particularly in some regions like Florida and California.
The implications of this, even if
the economy continues along, say, the Greenbook’s estimates, are that lending
is going to be quite tight.
I have had a lot of opportunities
to talk to bankers. We had a meeting over the weekend in Basel between the
central bankers and about 50 private-sector representatives. The thrust that I
got was that things are going to be pretty tight. “We are going to meet our
regular customers’ needs, but all of this is conditioned on no recession.” As
one banker put it in our meeting, “There is no Plan B.”
It turns out that there wasn’t even a Plan A.
If the housing market continues to
be weak and if credit continues to be tight, then the possibility of a much
more significant decline in house prices, particularly in some regions, is
certainly there; and that, in turn, would have significant effects on credit markets
and on the economy.
The other question I raised was,
Have we done enough? We have done 100 basis points. Of course, it is hard to
know.
It isn’t “hard to know” if a central planner has done enough
or not – it is impossible to know.
…when you have these kinds of
risks, the best way to balance the growth and inflation risks is to be
aggressive in the short run but to take back the accommodation in a timely way
when the economy begins to stabilize.
We must still be in the short run…six years later.
What followed was a discussion around the presentations –
each member stated points of agreement and disagreement, and consideration
about taking an action in this “intermeeting” meeting. A few commented on the likelihood of recession
in the year 2008. As to inflation, the
statements clearly focused on price inflation as measured by the CPI. There was little if any concern raised about
the consequences of inflation in the money supply.
Most suggested to not take an intermeeting rate cut. Yellen was one who disagreed:
I agree with both the concerns that
you expressed and the analysis that you offered. Based on the data we now have
in hand, I support a 50 basis point reduction in the federal funds rate in the
near future. I think a very good case can be made for moving down 25 basis
points today, and it would be my preference.
Stern referenced the possibility of blowback, in a manner of
speaking:
I think you made an effective case
that resilience in this situation could be further inhibited by potentially
serious problems in the banking system. I have been concerned for a long time,
as you know, that we don’t have incentives right there. While certainly this
isn’t proof of anything, I guess we can’t dismiss the possibility that some of
the chickens are coming home to roost, and that could affect the outlook as
well.
That turned out to be quite a lot of chickens.
Additionally, he sees a “significant policy response” as
beneficial to improving the “attitudes” of those on Wall Street:
Also, attitudes, at least in some
quarters, seem quite sour today. In particular, the closer people are to Wall
Street, the more negative the attitudes appear to be. So all of this suggests
to me that the outlook at the moment is not very promising, and a significant
policy response on our part is appropriate.
Your attitude would be “quite sour” too if you saw your
eight-figure-a-year-for-shuffling-paper annuity stream about to go poof.
Stern ends his comments with an interesting exchange with
Bernanke:
Stern: One footnote, since you
mentioned it—this is a discussion for another day—as you know, I viewed at the
time and I continue to view the 2003 disinflation experience a bit differently
than you do, and I think we may want to be careful about the lessons we draw
from that experience. Thank you.
Bernanke: If one of the lessons is
that we need to take the accommodation back, I agree with you on that one.
Based on Bernanke’s performance throughout the period until
his retirement in January 2014, it seems he didn’t learn the lesson.
Plosser, at least in this case living in reality, noted the
Fed’s poor track record of taking back accommodation:
…I also share the view of President
Lacker that, although we may want to take accommodation back quickly, the
history of this institution is that it doesn’t do that very well.
Hoening shared this concern:
My concern—as others have
expressed, but it is a very serious concern on my part—is that we say we can
reverse the policy position or raise interest rates later.
This was such a serious concern that it has been ignored for
six years…and counting.
Kohn wanted to make clear he was “not going to get pushed
around by the market”:
If you look at the market—and,
President Fisher, I assure you I am not
going to get pushed around by the market—I do think the market is telling
you that there are a lot of people out there who think that the funds rate has
to drop 100-plus basis points more, and they don’t think that will be
consistent with a pick up in inflation.
He then followed this bold stand against Wall Street by saying
he would support an immediate rate cut based on recent performance in the
market:
In sum, I agree that we need to
reduce rates substantially just to get close to buying insurance. I would do it sooner rather than later. I would have been prepared to support an
intermeeting move today. I think the
data are weak enough; we are far enough behind the curve. To me, looking at the equity market declines,
what we have seen since the middle of December is a bit of a loss in confidence
in the financial markets that we will do enough soon enough to keep the economy
on an even keel.
Ah, the pesky prop-up-the-equity-market mandate. Wait, did I miss something?
Warsh echoed Bernanke’s concerns about the large financial
institutions:
The problems among large financial
institutions are very serious, and unlike financial market functioning, which
has improved, I think the state of these institutions has not improved since we
met last. While it is true that they
have been raising capital, both in the form of equity and convertibles, the
process of writedowns and capital-raising is far, far from being complete.
The inability of the banks to act as “shock absorbers,”
given the condition of the bank balance sheets, as well as the lack of
stimulative fiscal policy, has Warsh feeling lonely:
If you think about that in terms of
other shock absorbers that might be available, including fiscal policy, I think
there is reason for the seventeen of us on this conference call to feel
relatively lonely in thinking about policies that can be brought to bear, both
from the private sector and the public sector.
The lonely feeling can be easily avoided – leave decisions
about money and credit to the market.
Hundreds of millions of people will then keep you company.
Kroszner notes the off-balance sheet tools that the large
banks have used to increase credit over the preceding several years:
Basically, over the last five years
or so, the reason that financial institutions could provide so much
intermediation and so much support is that things didn’t stay on the balance
sheets. Now, because there is an impaired
ability to get things off the balance sheets, it requires much more capital to
support the same amount of funding that had occurred in the past. Just to try to keep funding at the same old
levels is going to require dramatically more capital.
So not only were banks overleveraged – they levered-up their
overleverage via off-balance sheet entities.
He further touches on inflation – it’s all in the
expectations:
With respect to inflation, as a
number of people have mentioned, there are some disturbing readings
recently. But something that is
heartening, and for me is really the most important thing, is that I don’t see
much evidence so far of a significant change in expectations, because that is
really where the long-term costs of our policy moves come in.
Mishkin also focused on the expectation of inflation:
One concern that people have raised
is the potential upside risks to inflation.
I am less worried about that than some other members of the FOMC for the
following reasons. Very importantly,
inflation expectations seem very solidly grounded. We have had no indication of any
deterioration in terms of inflation expectations, despite our previous easing
moves and the very high increases in energy prices.
As long as people don’t expect inflation, apparently there
won’t be inflation.
Second, when I think about what
drives inflation and what are the dynamics of the inflation process, what is
important are expectations not only with respect to inflation but also with
respect to the future path of output gaps.
It’s also apparently about idle capacity.
In particular, I do not see at this
juncture that people are worried that we are going to allow the economy to get
overheated.
Perhaps this is why the Fed has allowed the economy to
remain under-heated in the six years since this meeting? The arrogance of Mishkin’s statement – as if the
Fed has god-like power: “we are going to allow the economy.” Allow?
In fact, it is the opposite right
now. We are more worried about the downside
risks, where there will be increased economic slack in the economy, and of
course, that is consistent with the forecast coming from the Board staff. So when I think about the inflation process,
I think in terms of underlying inflation, which is inflation not over the next
year but over the longer run, which is appropriate for monetary policy and when
we can have an effect. I do not see that
the upside risk is huge there; in fact, this is very important in terms of
allowing us to be aggressive in this situation of financial disruption.
At least as price inflation is commonly measured, he has
been right so far – and may continue to be right for some time to come.
Geithner, Vice-Chairman at the time, wants to go in
guns-a-blazin’:
I think there is more risk to us
now in gradualism than in force.
They always like to use force.
His comments were otherwise the squishiest of all – like he
didn’t want words of any substance on the record.
Bernanke thought to keep news of this intermeeting meeting
secret – news of it would not come out until three weeks after the regularly
scheduled meeting to be held three weeks hence:
It will be described, I assume, in
the minutes, which will be three weeks after the next meeting, so it will be
six weeks before this is reported. It
will be reported, I assume, as a consultation and discussion of the
economy. I would advise you not to
discuss this with your directors. If it
gets into the market, it could cause confusion and uncertainty. So if possible, I would not discuss it.
This ends the first meeting of 2008 – a telephonic
intermeeting. No action was taken on
rates.
Conference Call of
the Federal Open Market Committee on January 21, 2008
This is the second inter-meeting meeting in the month,
called apparently on short notice:
BERNANKE. Good afternoon, everybody.
Thank you for taking time on your holiday. The purpose of this meeting is to
update the Committee on financial developments over the weekend and to consider
whether we want to take a policy action today.
The holiday is Martin Luther King, Jr. Just twelve days earlier, in the previous
inter-meeting meeting, it was determined not to take any policy action.
Bernanke turns the floor over to Dudley, to give an update
of the markets; as in the previous meeting, after a brief comment on various
credit markets (including the known-to-be-manipulated LIBOR), he turns to
equity markets:
…the macro outlook and broader
financial market conditions have continued to deteriorate quite sharply. The
S&P 500 index, for example, fell 5.4 percent last week; it is down almost
10 percent so far this year. Today it fell another 60 points, or 4.5 percent,
so that means that the cumulative decline in the S&P 500, if it opens near
where the futures markets closed today, will be nearly 15 percent since the
start of the year. Global stock markets were also down very sharply
today—Monday. Depending on where you look, the range of decline was anywhere
from 3 percent to 7½ percent, pretty much across the board.
Losses at Merrill Lynch and Citigroup are noted, indicative
of further write-downs in subprime, credit card, and other loans.
A newish wrinkle here in terms of
bank markdowns reflects the deterioration of some of the monoline guarantors.
Merrill Lynch, for example, announced a multibillion dollar charge for its
exposure to ACA, which is the most impaired of the monoline guarantors.
What is a “monoline
guarantor”?
An insurance company that provides
guarantees to issuers, often in the form of credit wraps, that enhance the
credit of the issuer. These insurance companies first began providing wraps for
municipal bond issues, but now provide credit enhancement for other types of
bonds, such as mortgage backed securities and collateralized debt obligations.
The rapidity of deterioration is noted, for example:
The problem with the monoline
guarantors is that raising capital has become much more difficult. Ten days
ago, for example, MBIA issued 14 percent surplus notes, which are now trading
at about 70 cents on the dollar.
Further downgrades of these monoline guarantors are likely,
and will affect money-market funds, municipal bond funds, and other financial
institutions – this last risk is interesting, as Dudley explains:
The monoline insurers don’t have to
mark to market the consequences of the deterioration in, say, the structured-finance
product they insured. All they have to do is pay out, as it is incurred, the
interest that the structured-finance product can’t pay out. So their losses are
going to be realized only very gradually over a long period of time. There is
no sort of foreshortening of all that into the present. In contrast, if a
monoline guarantor gets downgraded and so the financial institution no longer
has the support of that monoline guarantee, they have to write down
instantaneously the value of the assets that were wrapped by that guarantee. So
it’s quite a big difference in terms of the market impact as you transfer that
risk from the monoline guarantors to the financial institutions that bought
that insurance.
The markets are pricing in further rate cuts:
At this point, monetary policy
expectations have priced in a lot of easing over the near term. As of Friday’s
close, there were about 67 basis points priced in through the January meeting
at the end of the month and about 110 basis points priced in through the March
meeting (if you look at the April federal funds futures contract).
Bernanke then offered his thoughts. He was reluctant to call this meeting – after
all, less than two weeks earlier the decision was made not to take an inter-meeting
policy action:
However, I think there are times
when events are just moving too fast for us to wait for the regular meeting. I
know it is only a week away, but seven trading days is a long time in financial
markets.
It will be seven trading days until the regularly scheduled
meeting. Bernanke treats these seven
days as if they encompassed the events described in Genesis 1.
As Bill described, over the
holiday, global stock markets have been falling very sharply, both in Asia and
in Europe. As he mentioned, even though the U.S. markets are closed, the
S&P 500 was off about 60 points today, close to 5 percent. That makes the
cumulative decline in the S&P 500 since our last FOMC meeting 16½ percent.
Don’t worry; even though the chairman is obviously focused
on stock markets, he isn’t really focused on stock markets. Really.
Obviously, it is not our job to
target stock values or to protect stock investors, but I think that this is a
symptom of both sharply mounting concerns about the economy and increasing
problems in credit markets.
See, he said so himself.
The problems are expanding well beyond sub-prime, the
contained little nuisance from just a few short months ago:
I think there is a general sense—I
certainly feel in talking to market participants—that it is not just subprime
anymore and that there are real concerns about other kinds of consumer
credit—credit cards, autos, and home equity loans—and that there is fear of
housing prices falling enough that contagion will infect prime mortgage loans.
Imagine how exciting it must be to be sitting in the
driver’s seat of during the trip through the end of the world. Is it possible that Bernanke somewhat enjoys
this?
Bernanke wants to take action; meaningful, inter-meeting
action:
I think we have to take a
meaningful action—something that will have an important effect. Therefore, I am
proposing a cut of 75 basis points. I recognize that this is a very large
change.
Has the Fed decided, unlike the meeting a few days earlier,
that the economy is in recession? The
recession that actually began three weeks before this meeting?
…on Friday I had a briefing from
Dave Stockton [Fed economist] and his team about their Greenbook forecast for
next week’s meeting. They have not made an explicit recession call, but they do
forecast very weak growth going forward.
No recession call, but somehow the economy needs a “meaningful”
boost.
Additionally, Bernanke believes the Fed is behind in cutting
rates, by 100 basis points. He discusses
the potentially significant recession on the horizon:
…a paper by Carmen Reinhart and Ken
Rogoff has been circulated in the past couple of days, which compares some
indicators of our economy with other major financial crises and finds that we
rank at the moment among the five largest financial crises in any industrial
country since World War II. Given what their indicators show, they conclude
that, if we have only a mild recession in the United States, it would be a very
fortunate outcome.
Price inflation will be watched, but it is of little
concern. The potential magnitude of the
upcoming events is the concern. Bernanke
doesn’t want to discuss it any longer; it is time to act:
We can no longer temporize. We have
to address this crisis. We have to try to get it under control. If we can’t do that,
then we are just going to lose control of the whole situation.
Bernanke goes around the (virtual) room. Evans is supportive of the proposed 75 basis
point reduction, indicating he was ready for action at the last inter-meeting
meeting. Stern supports the proposal as
well, with an interesting comment:
What has really caught my attention
is the breadth of the weakness of the incoming data and the extent of the
financial problems, some of which Bill Dudley covered.
In the previous meeting, he did not make a strong case for a
reduction. Yet, in 12 days he is
captured by the breadth of the weakness.
Yellen is also supportive:
I strongly support your proposal
for a 75 basis point funds rate cut today, and I like the proposed wording of
the statement. The outlook has deteriorated, not only since December but since
our conference call. The downside risks have clearly increased. I think the
risk of a severe recession and credit crisis is unacceptably high, and it is
being clearly priced now into not only domestic but also global markets.
Rosengren is supportive as well.
Poole puts a fly in the punch bowl:
I accept all the discussion about
the risks of recession and the risks of the financial markets. All those are
relevant to what we do next week. But the key issue for me is what we get by
acting now rather than nine days from now.
His concern seems to be one of timing and therefore
message. He believes a move at this
inter-meeting meeting will be seen as reacting to stock market declines, and
otherwise a sop to the stock market, nothing more. He asks for further discussion regarding the
pros and cons of moving now as opposed to in a few days.
Geithner is all in.
He pooh-poohs Poole’s concerns, labeling these as “irresponsible”:
If we were to wait until the
meeting, we would be taking just too much risk. I think it would be
irresponsible to take the risk that we would see a substantial further
deterioration in confidence and in market prices, which would do substantially
more damage to market functioning than we have witnessed so far.
Hoenig offers several interesting comments:
I am troubled by this, I will
admit. I understand the arguments, and it is difficult to argue against dodging
a crisis. It is a very daunting thought to think about a crisis that you might
have avoided had you just taken certain actions.
He is suggesting that the Fed blew it before, leading to
this current situation.
I would echo Bill Poole a bit in
terms of understanding what we will get out of this and how we will deal with
backing away from this in the future because part of the reason we have the
problem today, of course, is the last crisis.
The problem lays in the Fed’s reaction to the last crisis.
The desire is to intervene, to get
the market rates down, and to bring confidence; but then our ability to pull
out of that is compromised because we can’t be sure in an uncertain world of
how strongly the economy might be coming out of something. Therefore, we often
delay and create the next issue that we have to deal with—as we are today.
He admits the Fed flies blind.
I know we are being driven heavily
by these markets.
Bingo.
Lacker also supports the 75 basis point cut, but would also
wait until the regular meeting. Lockhart
supports the reduction now.
Fisher prefers to wait.
He offers an interesting comment about process:
Unlike President Rosengren,
although I am only about 30 percent of my way through my CEO calls in preparing
for the meeting, I don’t hear a widespread expectation of recession. I do hear
a concern about slowing down, and we have seen that in all of the indexes that
I like to talk about in the meetings from the credit card payables,
delinquencies in payments, the Baltic index, et cetera, et cetera. But the
words “severe recession” I have yet to hear from the lips of anybody but those
in the housing business, and for them, it gets more severe with each passing
moment.
Even talking to major business leaders does not offer enough
information to centrally plan the market for money and credit.
Pianalto would move now, as proposed:
My conversations with the bankers
in my District indicate that the earnings reports that are coming out will
demonstrate that problems have spread beyond just the mortgage sector. They are
also seeing deterioration in credit card and other consumer debt.
Plosser joins the crowd that is concerned that such a move
now will be seen as nothing more than a reaction to stock markets. He is supportive of the reduction at the
regularly scheduled meeting. Rapid rate
cuts at the interim meeting will do little for the areas of most fragility:
It is not clear to me that the
fragility that exists in the market in fact will be solved by rapid cuts in the
funds rate. I share President Lacker’s concern that it is not clear that
lowering the funds rate is a solution to the problem of the monoline insurance
companies or others.
He further notes the poor track record of the Fed at
withdrawing such measures:
I share Governor Mishkin’s view
that if, in fact, we are to get aggressive, we also have to be willing to take
it back when times change. I understand that view, and I can live with it,
except the history of this institution is that we haven’t been very aggressive
in doing that or demonstrating our ability to do that.
Poole adds:
In terms of the problems in the financial
markets, the monoline insurers and others, that is a problem of the capital of
those firms. Cutting the funds rate does nothing to build up capital for those
firms.
Kohn supports Bernanke’s proposal. He takes exception to the comments regarding
the Fed’s inability to withdraw such measures in a timely manner:
In terms of taking it back, the
point that President Hoenig made, I think the history of what we have done is
pretty complicated and more complex maybe than that we are always too late
taking it back. If we were always too late, we would have seen an upward trend
in inflation. But we haven’t. We have seen a downward trend in inflation for
the past 25 years. So it seems to me that the proof of the pudding is in the
inflation eating…
His evidence is solely regarding price inflation. Not one mention of the booms and busts – no
dotcom bubble, no housing bubble, none of it.
This is consistent with my view that as long as common measures of
consumer price inflation remain benign, the easing will continue – regardless
of the economy or any other factors.
Warsh sees the end of the world if the Fed doesn’t do
something today; Armageddon:
My judgment would be, if we chose
not to act today, that we would in all likelihood not make it until next week….
just because we don’t have a panacea, just because monetary policy can’t solve
the monoline problem and can’t solve some of the other problems, doesn’t mean
that we shouldn’t be doing our part. It strikes me that by taking action today
we are doing our part.
Kroszner is also supportive of an immediate move, advising
only some word-smithing to the statement regarding the Fed’s keen eye on
inflation.
Hoening comments that a strong move today is likely only
going to result in making a strong move at the official meeting. Perhaps doing 50 basis points now and 50
basis points next week is a better answer.
Bernanke reiterates a point from the previous meeting – he
knows how to take away the punch bowl when necessary, learning the lessons from
past mistakes:
I think we have learned from that.
I think we will be very sensitive to that.
Six years and counting – no demonstration of a lesson
learned yet.
Bernanke wants to plough ahead. Hoening makes another very interesting
observation:
I think if we make this statement
as strong as we can about the need to watch inflation, and if we understand
among ourselves that, as we take this action today and the follow-up actions
that I am certain we are going to take, we will watch these inflation numbers,
including broad asset values…
Ultimately he capitulates:
I do not wish to be dissenting on
this, as troubled as I am about it. I do understand the psychology of it. For
those reasons, I am willing to go along with this.
After this, the vote is taken. Only Poole votes “no,” adding:
And you could add this sentence of
explanation, “President Poole does not believe that current market conditions
justify policy action before the regularly scheduled meeting next week.”
This ends the second inter-meeting meeting in January.
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