CHAIRMAN GREENSPAN. President Melzer.
MR. MELZER. First of all, I think the prospect of rising inflation is the biggest risk we are facing in the economy in the coming months.
There is no question in my mind about that.
I also think policy is in an accommodative stance from a number of different perspectives.
So, I conclude that we ought to move now, and I would be inclined when we do move to do so aggressively.
By that I mean that I would raise the federal funds rate by 50 basis points, and I would combine that with a 50 basis point increase in the discount rate.
TO BE CONTINUED ...
MINUTES OF JULY 3, 1996 FOMC MEETING
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Guynn.
MR. GUYNN. Thank you, Mr. Chairman.
As I indicated in the earlier go-around, I, like most others, expect the economy to slow in the coming quarters, leaving us with a rate of growth without increasing price pressures that perhaps can be achieved with our current policy stance.
I would like to give things a chance to play out a bit more.
Certainly, this position requires that one be of the view that our current policy position is not accommodative.
Unfortunately, like many of the other issues we have faced and talked about in the last two days, we cannot demonstrate that categorically.
Based on my review of information from financial markets as well as competing forecasts, I am not convinced that current policy is adding fuel to the current inflation environment.
As Don reminded us this morning, it is equally clear that we probably are not reducing general price pressures at the moment except to the extent that a continued experience of slow, relatively stable inflation works to temper concerns about our commitment to a low inflation environment.
I would prefer to see us keep policy unchanged for the moment.
I, too, would be comfortable with an asymmetrical directive as long as it is not an irreversible leaning, making us feel compelled to move at the next meeting even if conditions do not seem to support that move.
Thank you.
TO BE CONTINUED ...
MR. GUYNN. Thank you, Mr. Chairman.
As I indicated in the earlier go-around, I, like most others, expect the economy to slow in the coming quarters, leaving us with a rate of growth without increasing price pressures that perhaps can be achieved with our current policy stance.
I would like to give things a chance to play out a bit more.
Certainly, this position requires that one be of the view that our current policy position is not accommodative.
Unfortunately, like many of the other issues we have faced and talked about in the last two days, we cannot demonstrate that categorically.
Based on my review of information from financial markets as well as competing forecasts, I am not convinced that current policy is adding fuel to the current inflation environment.
As Don reminded us this morning, it is equally clear that we probably are not reducing general price pressures at the moment except to the extent that a continued experience of slow, relatively stable inflation works to temper concerns about our commitment to a low inflation environment.
I would prefer to see us keep policy unchanged for the moment.
I, too, would be comfortable with an asymmetrical directive as long as it is not an irreversible leaning, making us feel compelled to move at the next meeting even if conditions do not seem to support that move.
Thank you.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Governor Kelley.
MR. KELLEY. Mr. Chairman, it is very correct to be suspicious of the notion that this time things have changed.
That is a classic trap.
It is frequently a loser's cry, and I find myself very uncomfortable supporting that notion.
By conventional standards I think the case to move now is somewhere between strong and compelling.
But I also think that there are very strong indications that things have indeed changed.
Maybe the better question--it is at least for me--is whether this change is temporary and whether it will turn around very soon.
If it does go back toward a more conventional experience, will it look the same as it did historically?
I would compare this to the recent history of M2 that we discussed earlier this morning.
M2 tracked along very well, very conventionally for some number of years, went badly off the track for a while for reasons that were hard to understand at the time, and now seems to be coming back again.
The nature of the M2 episode is beginning to be better understood.
That may be in the process of happening here as well.
But the presumption either that things have not changed or, if they have, they will immediately return to the traditional relationship, carries its own dangers and its own uncertainties.
The better part of valor is to try to get as good a reading as we can get as things progress before we commit one way or the other.
As a consequence, I strongly support your notion of a "B" directive and can support asymmetry.
TO BE CONTINUED ...
MR. KELLEY. Mr. Chairman, it is very correct to be suspicious of the notion that this time things have changed.
That is a classic trap.
It is frequently a loser's cry, and I find myself very uncomfortable supporting that notion.
By conventional standards I think the case to move now is somewhere between strong and compelling.
But I also think that there are very strong indications that things have indeed changed.
Maybe the better question--it is at least for me--is whether this change is temporary and whether it will turn around very soon.
If it does go back toward a more conventional experience, will it look the same as it did historically?
I would compare this to the recent history of M2 that we discussed earlier this morning.
M2 tracked along very well, very conventionally for some number of years, went badly off the track for a while for reasons that were hard to understand at the time, and now seems to be coming back again.
The nature of the M2 episode is beginning to be better understood.
That may be in the process of happening here as well.
But the presumption either that things have not changed or, if they have, they will immediately return to the traditional relationship, carries its own dangers and its own uncertainties.
The better part of valor is to try to get as good a reading as we can get as things progress before we commit one way or the other.
As a consequence, I strongly support your notion of a "B" directive and can support asymmetry.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President McTeer.
MR. MCTEER. Mr. Chairman, I can support your recommendation.
I could also have supported a recommendation for tightening today, had you made it.
On principle, I prefer not to tighten monetary policy on the basis of strong output and employment growth or even a low unemployment rate.
I know that we should not wait to see the "whites of inflation's eyes" before acting, but I do think we might well wait for some leading indicators of rising inflation before we act.
That they are strangely missing does suggest to me that something is
different in 1996.
With respect to symmetry, I believe the Baptist religion prefers symmetry, but I do backslide occasionally [laughter] and am happy to do so today.
MS. MINEHAN. Baptists have a point of view on this?
TO BE CONTINUED ...
MR. MCTEER. Mr. Chairman, I can support your recommendation.
I could also have supported a recommendation for tightening today, had you made it.
On principle, I prefer not to tighten monetary policy on the basis of strong output and employment growth or even a low unemployment rate.
I know that we should not wait to see the "whites of inflation's eyes" before acting, but I do think we might well wait for some leading indicators of rising inflation before we act.
That they are strangely missing does suggest to me that something is
different in 1996.
With respect to symmetry, I believe the Baptist religion prefers symmetry, but I do backslide occasionally [laughter] and am happy to do so today.
MS. MINEHAN. Baptists have a point of view on this?
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. Try to top that, Governor Yellen!
MS. YELLEN. I can't, Mr. Chairman!
I agree with your analysis and many of you have been eloquent in expressing thoughts that I agree with: the Vice Chairman, Governor Meyer, Governor Rivlin, President McTeer, and others among you.
I can certainly support the recommendation to leave the funds rate where it is with an asymmetric directive.
I agree that the risks are unbalanced at this stage, and I certainly can envision a set of data between now and our next meeting that would justify in my mind a move following a phone call.
But I agree with you that there is a great benefit to waiting and watching a while longer to decide how things are going.
I consider this a period of great uncertainty.
To my mind, the most serious risk at this stage is that we simply do not know how demand is likely to behave going forward.
I think that if we have significantly underestimated the continuing robustness of aggregate demand so that we see a significant reduction in labor market slack in coming months or, alternatively, if our assumption that something has changed in labor markets is clearly proving to be incorrect, we will be compelled to move and I will certainly support those moves.
I found the Bluebook policy simulations and also the Taylor Rule computations useful.
To my mind, they mean that we are roughly correctly positioned at this point; we are in the neighborhood of the equilibrium real funds rate.
So, I do not feel that our policy stance is way off from where it should be, and I think we can wait and see how these things materialize.
I don't think we need to jump the gun in order to establish our credibility to prove to markets that we are prepared to act.
All we need to do is actually to act when we see that the circumstances justify it.
TO BE CONTINUED ...
MS. YELLEN. I can't, Mr. Chairman!
I agree with your analysis and many of you have been eloquent in expressing thoughts that I agree with: the Vice Chairman, Governor Meyer, Governor Rivlin, President McTeer, and others among you.
I can certainly support the recommendation to leave the funds rate where it is with an asymmetric directive.
I agree that the risks are unbalanced at this stage, and I certainly can envision a set of data between now and our next meeting that would justify in my mind a move following a phone call.
But I agree with you that there is a great benefit to waiting and watching a while longer to decide how things are going.
I consider this a period of great uncertainty.
To my mind, the most serious risk at this stage is that we simply do not know how demand is likely to behave going forward.
I think that if we have significantly underestimated the continuing robustness of aggregate demand so that we see a significant reduction in labor market slack in coming months or, alternatively, if our assumption that something has changed in labor markets is clearly proving to be incorrect, we will be compelled to move and I will certainly support those moves.
I found the Bluebook policy simulations and also the Taylor Rule computations useful.
To my mind, they mean that we are roughly correctly positioned at this point; we are in the neighborhood of the equilibrium real funds rate.
So, I do not feel that our policy stance is way off from where it should be, and I think we can wait and see how these things materialize.
I don't think we need to jump the gun in order to establish our credibility to prove to markets that we are prepared to act.
All we need to do is actually to act when we see that the circumstances justify it.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Moskow.
MR. MOSKOW. Mr. Chairman, I think the risks are clearly on the up side, as we all have said.
The issue is whether the rate of economic growth will slow in the second half of this year.
I think that it will based on the evidence we have seen.
The business people with whom I have been in contact also sense that the economy is slowing.
The question is whether it is going to slow enough to have the effect that we will need.
Obviously, the people with whom I come into contact are not a random sample.
You mentioned the issue of inventory accumulation, which I think is very important as we look through the rest of the year.
The Greenbook assumes that appreciable inventory rebuilding will occur over the second and third quarters and that subsequent inventory accumulation will be relatively modest.
Of course, that was not the pattern that we saw last year when sizable accumulation continued for a number of quarters.
If such accumulation does spill over into the fourth quarter, we will not see the second half deceleration in economic growth that will be necessary.
So, I support the asymmetrical directive.
I think it is crucial that we watch carefully.
I also support having a phone call before making any decision between meetings.
I think the Humphrey-Hawkins testimony that you are going to be giving is very important at this particular stage of the expansion and policy formulation.
It would be an excellent opportunity to alert the Congress and the American people to our concerns regarding the risks in the economy at this time.
TO BE CONTINUED ...
MR. MOSKOW. Mr. Chairman, I think the risks are clearly on the up side, as we all have said.
The issue is whether the rate of economic growth will slow in the second half of this year.
I think that it will based on the evidence we have seen.
The business people with whom I have been in contact also sense that the economy is slowing.
The question is whether it is going to slow enough to have the effect that we will need.
Obviously, the people with whom I come into contact are not a random sample.
You mentioned the issue of inventory accumulation, which I think is very important as we look through the rest of the year.
The Greenbook assumes that appreciable inventory rebuilding will occur over the second and third quarters and that subsequent inventory accumulation will be relatively modest.
Of course, that was not the pattern that we saw last year when sizable accumulation continued for a number of quarters.
If such accumulation does spill over into the fourth quarter, we will not see the second half deceleration in economic growth that will be necessary.
So, I support the asymmetrical directive.
I think it is crucial that we watch carefully.
I also support having a phone call before making any decision between meetings.
I think the Humphrey-Hawkins testimony that you are going to be giving is very important at this particular stage of the expansion and policy formulation.
It would be an excellent opportunity to alert the Congress and the American people to our concerns regarding the risks in the economy at this time.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. President Jordan.
MR. JORDAN. I think the reasons for a change in the direction of policy have to be even more convincing than for a change in the same direction as prior moves.
Our action in early 1994, which subsequently was viewed as having been correct by people on the outside, was very important in that regard.
If I were as convinced as some of the people around the table that the current stance of policy is too expansionary, I would not only support a 1/4 point change, I would say, let's move at least 1/2 point to get to where we need to be.
If I were as convinced as my own staff that the reduction in January of this year was wrong, I would want to reverse it.
I am not convinced of either of those things, and I am not at all convinced that an action in August will be warranted.
If the staff forecast is anywhere in the right ballpark, we will see in the second half of this year a lower rate of change in most of the price measures and a lower rate of growth in most measures of real economic activity: housing, autos, real GDP, and job growth.
An action now at the beginning of a period when everything will start to show a significantly decelerating expansion would subsequently look like we came from a different planet.
The asymmetry issue is troubling to me because, as some others have mentioned, I have a problem in principle as to what it means and the message it sends.
I would not want support of asymmetry to mean a predisposition to tighten policy in August.
But I am concerned about how going asymmetric now and going back to symmetric in August would be interpreted.
It is almost as if, once we adopt an asymmetric directive, we are forced to go ahead and take the action so that we can go back to symmetric again.
That is troubling.
But I would not dissent if you want to go asymmetric.
TO BE CONTINUED ...
MR. JORDAN. I think the reasons for a change in the direction of policy have to be even more convincing than for a change in the same direction as prior moves.
Our action in early 1994, which subsequently was viewed as having been correct by people on the outside, was very important in that regard.
If I were as convinced as some of the people around the table that the current stance of policy is too expansionary, I would not only support a 1/4 point change, I would say, let's move at least 1/2 point to get to where we need to be.
If I were as convinced as my own staff that the reduction in January of this year was wrong, I would want to reverse it.
I am not convinced of either of those things, and I am not at all convinced that an action in August will be warranted.
If the staff forecast is anywhere in the right ballpark, we will see in the second half of this year a lower rate of change in most of the price measures and a lower rate of growth in most measures of real economic activity: housing, autos, real GDP, and job growth.
An action now at the beginning of a period when everything will start to show a significantly decelerating expansion would subsequently look like we came from a different planet.
The asymmetry issue is troubling to me because, as some others have mentioned, I have a problem in principle as to what it means and the message it sends.
I would not want support of asymmetry to mean a predisposition to tighten policy in August.
But I am concerned about how going asymmetric now and going back to symmetric in August would be interpreted.
It is almost as if, once we adopt an asymmetric directive, we are forced to go ahead and take the action so that we can go back to symmetric again.
That is troubling.
But I would not dissent if you want to go asymmetric.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. I should say that there have been occasions in the past when we have gone asymmetric and withdrawn it.
But the point you make is well taken.
I think the broad mode of the Committee is Alternative B, asymmetric.
I will ask the Secretary to read the appropriate language for that motion.
MR. BERNARD. This is on page 21 of the Bluebook: "In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions."
"In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period."
"The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months."
CHAIRMAN GREENSPAN. Would somebody like to move that?
VICE CHAIRMAN MCDONOUGH. So move.
CHAIRMAN GREENSPAN. Is there a second?
MR. LINDSEY. Second.
CHAIRMAN GREENSPAN. Call the roll.
MR. BERNARD.
Chairman Greenspan Yes
Vice Chairman McDonough Yes
President Boehne Yes
President Jordan Yes
Governor Kelley Yes
Governor Lindsey Yes
President McTeer Yes
Governor Meyer Yes
Governor Phillips Yes
Governor Rivlin Yes
President Stern No
Governor Yellen Yes
TO BE CONTINUED ...
But the point you make is well taken.
I think the broad mode of the Committee is Alternative B, asymmetric.
I will ask the Secretary to read the appropriate language for that motion.
MR. BERNARD. This is on page 21 of the Bluebook: "In the implementation of policy for the immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions."
"In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, somewhat greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period."
"The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months."
CHAIRMAN GREENSPAN. Would somebody like to move that?
VICE CHAIRMAN MCDONOUGH. So move.
CHAIRMAN GREENSPAN. Is there a second?
MR. LINDSEY. Second.
CHAIRMAN GREENSPAN. Call the roll.
MR. BERNARD.
Chairman Greenspan Yes
Vice Chairman McDonough Yes
President Boehne Yes
President Jordan Yes
Governor Kelley Yes
Governor Lindsey Yes
President McTeer Yes
Governor Meyer Yes
Governor Phillips Yes
Governor Rivlin Yes
President Stern No
Governor Yellen Yes
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
CHAIRMAN GREENSPAN. I think we can break for coffee.
Then we will come back to a discussion of swaps and intervention.
[Coffee break]
CHAIRMAN GREENSPAN. You will recall that we twice postponed this discussion until we could be joined by our two new colleagues.
That is one more reason I am delighted that they finally came on Board.
The staff paper prepared by Messrs. Fisher, Kohn, and Truman raises a number of interrelated issues.
Our objective today should not be to try to reach firm conclusions on any of those issues, but rather to have an open, preliminary discussion with a view to having one or more subsequent discussions aimed at reaching a consensus on the wisdom of some of these matters.
The excellent paper that has been presented to us focuses on a relatively narrow, nonetheless complex, set of issues associated with the future of the swap network and a possible alternative mechanism to deal with the short-term dollar liquidity needs of foreign central banks.
However, in reading over the staff paper, I was struck by the fact that it does not address directly the deeper principles that should govern us in our dealings with other central banks.
We have discussed our foreign exchange transactions at great length in recent years, and we have endeavored to define a set of operational principles to bridge our somewhat ambiguous relationship with Treasury as well as with institutions such as the G-7.
I am not suggesting we go back and review these particular issues at this point, but we have not recently reviewed our longstanding procedures on RPs and our reluctance to engage in reverse RPs with other central banks.
I gather the latter results from the fact that when the Committee last focused on these issues, the nature of central bank bilateral relationships was far less complex, as indeed was the international financial marketplace.
Last year, we initiated an arrangement with the Bank of Japan to set up a procedure to liquefy Japanese holdings of U.S. Treasuries.
We also have recently entered a broadened swap facility with Mexico and Canada.
But what is our generic policy in such arrangements?
We have chosen to accept foreign exchange risks with our larger-than historic holdings of foreign currencies, yet we will not accept market risk on central bank credit transactions.
Is this a general principle we wish to promulgate?
Do we wish, however, to lend even without risk, for example, through reverse RPs, to any central bank that requests such an accommodation?
Are there foreign policy concerns in this regard that should attract our interest?
Does the RP pool of the Federal Reserve Bank of New York as currently operated reflect such principles?
Finally, does the broader set of issues surrounding our role in a changing international and political environment, in which new financial centers are emerging and cross-border financial linkages have intensified, require our focus before we decide on how best to deal with future requests to meet the liquidity needs of our sister central banks?
These developments have the potential to change both the character and the origin of systemic risks compared with what we experienced in the past.
They may have implications as well for the way we perform our responsibility as the central bank for the U.S. dollar.
In your comments on the issues raised in the staff paper, you might touch on these broader issues as well.
My sense is that it would be useful to try to achieve a consensus on the conceptual framework for our international operations before we try to reach final decisions on the specific issues raised in the staff paper.
However, in an effort to limit the scope of our discussion somewhat, I would request that we remember that our purpose today is to have a free-ranging, but preliminary, discussion.
What I hope the Committee will offer is some guidance about how we can move forward on some of these issues on the basis of an updated conceptual framework with which we all are reasonably comfortable.
Vice Chairman.
TO BE CONTINUED ...
Then we will come back to a discussion of swaps and intervention.
[Coffee break]
CHAIRMAN GREENSPAN. You will recall that we twice postponed this discussion until we could be joined by our two new colleagues.
That is one more reason I am delighted that they finally came on Board.
The staff paper prepared by Messrs. Fisher, Kohn, and Truman raises a number of interrelated issues.
Our objective today should not be to try to reach firm conclusions on any of those issues, but rather to have an open, preliminary discussion with a view to having one or more subsequent discussions aimed at reaching a consensus on the wisdom of some of these matters.
The excellent paper that has been presented to us focuses on a relatively narrow, nonetheless complex, set of issues associated with the future of the swap network and a possible alternative mechanism to deal with the short-term dollar liquidity needs of foreign central banks.
However, in reading over the staff paper, I was struck by the fact that it does not address directly the deeper principles that should govern us in our dealings with other central banks.
We have discussed our foreign exchange transactions at great length in recent years, and we have endeavored to define a set of operational principles to bridge our somewhat ambiguous relationship with Treasury as well as with institutions such as the G-7.
I am not suggesting we go back and review these particular issues at this point, but we have not recently reviewed our longstanding procedures on RPs and our reluctance to engage in reverse RPs with other central banks.
I gather the latter results from the fact that when the Committee last focused on these issues, the nature of central bank bilateral relationships was far less complex, as indeed was the international financial marketplace.
Last year, we initiated an arrangement with the Bank of Japan to set up a procedure to liquefy Japanese holdings of U.S. Treasuries.
We also have recently entered a broadened swap facility with Mexico and Canada.
But what is our generic policy in such arrangements?
We have chosen to accept foreign exchange risks with our larger-than historic holdings of foreign currencies, yet we will not accept market risk on central bank credit transactions.
Is this a general principle we wish to promulgate?
Do we wish, however, to lend even without risk, for example, through reverse RPs, to any central bank that requests such an accommodation?
Are there foreign policy concerns in this regard that should attract our interest?
Does the RP pool of the Federal Reserve Bank of New York as currently operated reflect such principles?
Finally, does the broader set of issues surrounding our role in a changing international and political environment, in which new financial centers are emerging and cross-border financial linkages have intensified, require our focus before we decide on how best to deal with future requests to meet the liquidity needs of our sister central banks?
These developments have the potential to change both the character and the origin of systemic risks compared with what we experienced in the past.
They may have implications as well for the way we perform our responsibility as the central bank for the U.S. dollar.
In your comments on the issues raised in the staff paper, you might touch on these broader issues as well.
My sense is that it would be useful to try to achieve a consensus on the conceptual framework for our international operations before we try to reach final decisions on the specific issues raised in the staff paper.
However, in an effort to limit the scope of our discussion somewhat, I would request that we remember that our purpose today is to have a free-ranging, but preliminary, discussion.
What I hope the Committee will offer is some guidance about how we can move forward on some of these issues on the basis of an updated conceptual framework with which we all are reasonably comfortable.
Vice Chairman.
TO BE CONTINUED ...
Re: MINUTES OF JULY 3, 1996 FOMC MEETING
VICE CHAIRMAN MCDONOUGH. Mr. Chairman, I do not have any prepared remarks, but let me make just a few comments if I may.
The approach that the Federal Reserve has to foreign central banks is very much a product of the rather unusual structure of the Federal Reserve, with the Board of Governors and the 12 Reserve Banks.
The Federal Reserve Bank of New York historically has played a particularly important role because we are in the nation's financial center and because we do the intervening in both the domestic and the foreign exchange markets.
The attitude that foreign central banks have toward the Federal Reserve is, thank heavens, one of great respect.
They take us immensely seriously, including not only central bankers from small countries that you might think would take us seriously because of our being a superpower, but also those from the other G-10 central banks as well.
I think one of our strengths is that we respond to people in a flexible and unbureaucratic way.
For example, some of the G-10 central bank officials deal very actively with staff at the New York Bank and the Board and certainly with you personally, Mr. Chairman, and we never get into a mode of telling them that they really ought to be talking with Joe instead of me.
This approach works very well because we are rather good at keeping everybody else informed.
The other Reserve Banks, depending on the part of the world involved and to a degree the personality of the staff or the President at any given time, play very important roles as well.
So, I think that this customer-oriented view of dealing with foreign central banks has great merit and should be continued.
We should not try to force a method of dealing with the Federal Reserve System on people, but we should just let them deal with us as they have in the past in the context of continued very amicable relationships among the various parts of the Federal Reserve System and especially among the key staff members involved as well as the Board members and Bank presidents.
We also, I think, have to be very aware of how the world is changing.
Historically, our very important relationships have been with the G-10 central banks, basically Europe, Canada, and Japan.
In addition, we have developed very important relationships with the central banks of our hemisphere, an area in which I particularly get involved because of the historical accident of speaking Spanish very fluently.
The new area where central bankers are very much interested in us is Asia.
People from that part of the world have very active relationships with the San Francisco Reserve Bank, especially in the bank supervision area, very active relationships with Board staff, and very active relationships with us in New York.
One of the areas that I hope we will concentrate on and eventually resolve, but not today, relates to developments in the repo market.
When the Committee set up the RP authorization to the Desk, and really the last time it was looked at in great depth was in the 1970s, the government securities market was very different.
The Committee did not envision in the 1970s that we had to do anything for the central banks around the world in the way of providing liquidity other than allowing them to take part in the repo pool at the New York Bank.
For example, at the present time we are somewhat inconvenienced by having $3 billion of while they hold $3 billion of our collateral.
The funds are sitting in New York as a pool in case wants to use them to meet the liquidity needs of in our time zone.
We cannot deal with them in reverse repos, which would allow us to take their holdings of U.S. government securities and give them money for a day or two, because nobody thought such a financing arrangement was necessary 20 years ago.
So, the Desk does not have the authority to make reverse repos [with another central bank].
Leaving aside for the moment whether it is important in our dealings with foreign central banks to have that capability, I think it is very important from the standpoint of our management of bank reserves and to meet our responsibilities to the U.S. securities market.
That's because we are in the awkward position that, if at a given point in time we wanted to provide liquidity--not to accommodate their interests but to serve our own--and we wanted to do so on a temporary basis instead of purchasing the securities outright to meet a liquidity need that might last for a couple of days, we would not have the authority to do that.
I do not think that is in our interest in as complex a government securities market as exists now.
It is essentially an anachronism.
When we look at the foreign central bank aspect to it, the debate on how many angels can fit on the head of a pin is kids' stuff compared with the debate among lawyers, accountants, and economists on whether a reverse repo is a securities transaction or an extension of credit.
Since good and decent people can argue it is an extension of credit, I think we would have to be very careful in how we use that capability.
My own view would be that at some point, when we actually make a recommendation, it should include the condition that it would be done only with the previous approval of the Chairman.
If the Chairman were not available, then it would be done with the previous approval of the Vice Chairman, wearing my hat as Vice Chairman of this Committee but looking at the convenience that I happen to be in New York where the Desk is.
That, I think, would give us adequate protection against the Desk ever thinking that this was a tool that they would use in the normal course of business.
Having run the Desk myself, I know that a Manager takes very seriously ringing up the Chairman even via the ever loyal Don Kohn and saying, by the way, I would like to do something that I am supposed to do very infrequently, but now is the time.
A Manager thinks that through a few times before making that phone call, and I believe that would be appropriate.
Thank you, Mr. Chairman.
TO BE CONTINUED ...
The approach that the Federal Reserve has to foreign central banks is very much a product of the rather unusual structure of the Federal Reserve, with the Board of Governors and the 12 Reserve Banks.
The Federal Reserve Bank of New York historically has played a particularly important role because we are in the nation's financial center and because we do the intervening in both the domestic and the foreign exchange markets.
The attitude that foreign central banks have toward the Federal Reserve is, thank heavens, one of great respect.
They take us immensely seriously, including not only central bankers from small countries that you might think would take us seriously because of our being a superpower, but also those from the other G-10 central banks as well.
I think one of our strengths is that we respond to people in a flexible and unbureaucratic way.
For example, some of the G-10 central bank officials deal very actively with staff at the New York Bank and the Board and certainly with you personally, Mr. Chairman, and we never get into a mode of telling them that they really ought to be talking with Joe instead of me.
This approach works very well because we are rather good at keeping everybody else informed.
The other Reserve Banks, depending on the part of the world involved and to a degree the personality of the staff or the President at any given time, play very important roles as well.
So, I think that this customer-oriented view of dealing with foreign central banks has great merit and should be continued.
We should not try to force a method of dealing with the Federal Reserve System on people, but we should just let them deal with us as they have in the past in the context of continued very amicable relationships among the various parts of the Federal Reserve System and especially among the key staff members involved as well as the Board members and Bank presidents.
We also, I think, have to be very aware of how the world is changing.
Historically, our very important relationships have been with the G-10 central banks, basically Europe, Canada, and Japan.
In addition, we have developed very important relationships with the central banks of our hemisphere, an area in which I particularly get involved because of the historical accident of speaking Spanish very fluently.
The new area where central bankers are very much interested in us is Asia.
People from that part of the world have very active relationships with the San Francisco Reserve Bank, especially in the bank supervision area, very active relationships with Board staff, and very active relationships with us in New York.
One of the areas that I hope we will concentrate on and eventually resolve, but not today, relates to developments in the repo market.
When the Committee set up the RP authorization to the Desk, and really the last time it was looked at in great depth was in the 1970s, the government securities market was very different.
The Committee did not envision in the 1970s that we had to do anything for the central banks around the world in the way of providing liquidity other than allowing them to take part in the repo pool at the New York Bank.
For example, at the present time we are somewhat inconvenienced by having $3 billion of while they hold $3 billion of our collateral.
The funds are sitting in New York as a pool in case wants to use them to meet the liquidity needs of in our time zone.
We cannot deal with them in reverse repos, which would allow us to take their holdings of U.S. government securities and give them money for a day or two, because nobody thought such a financing arrangement was necessary 20 years ago.
So, the Desk does not have the authority to make reverse repos [with another central bank].
Leaving aside for the moment whether it is important in our dealings with foreign central banks to have that capability, I think it is very important from the standpoint of our management of bank reserves and to meet our responsibilities to the U.S. securities market.
That's because we are in the awkward position that, if at a given point in time we wanted to provide liquidity--not to accommodate their interests but to serve our own--and we wanted to do so on a temporary basis instead of purchasing the securities outright to meet a liquidity need that might last for a couple of days, we would not have the authority to do that.
I do not think that is in our interest in as complex a government securities market as exists now.
It is essentially an anachronism.
When we look at the foreign central bank aspect to it, the debate on how many angels can fit on the head of a pin is kids' stuff compared with the debate among lawyers, accountants, and economists on whether a reverse repo is a securities transaction or an extension of credit.
Since good and decent people can argue it is an extension of credit, I think we would have to be very careful in how we use that capability.
My own view would be that at some point, when we actually make a recommendation, it should include the condition that it would be done only with the previous approval of the Chairman.
If the Chairman were not available, then it would be done with the previous approval of the Vice Chairman, wearing my hat as Vice Chairman of this Committee but looking at the convenience that I happen to be in New York where the Desk is.
That, I think, would give us adequate protection against the Desk ever thinking that this was a tool that they would use in the normal course of business.
Having run the Desk myself, I know that a Manager takes very seriously ringing up the Chairman even via the ever loyal Don Kohn and saying, by the way, I would like to do something that I am supposed to do very infrequently, but now is the time.
A Manager thinks that through a few times before making that phone call, and I believe that would be appropriate.
Thank you, Mr. Chairman.
TO BE CONTINUED ...