Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

  • Good morning, everyone. To begin today’s meeting let me turn the floor over to Governor Ferguson for the election of the Chairman and Vice Chairman of the Committee.

  • Is there a nomination for Chairman of the FOMC?

  • I nominate Alan Greenspan to serve as Chairman of the Committee.

    SPEAKER(?). Second.

  • All in favor say “aye.”

    SEVERAL. Aye.

  • Approved without objection. Is there a nomination for someone to serve as Vice Chairman of the FOMC?

  • I nominate William J. McDonough of the New York Federal Reserve Bank for Vice Chairman.

  • Okay. Is there a second?

  • All in favor say “aye.”

    SEVERAL. Aye.

  • Gentlemen, democracy has ruled yet again. Let me turn the floor over to the person who should actually run the meeting, our re-elected Chairman.

  • Thank you. Should I make an inaugural speech?

  • If you feel so obliged! January 29-30, 2002 Page 4 of 194

  • The first item of business is to elect the staff officers of the Committee. Norm has a list of nominees, and I would appreciate his reading them.

  • Secretary and Economist Donald Kohn Deputy Secretary Normand Bernard Assistant Secretary Gary Gillum Assistant Secretary Michelle Smith General Counsel Virgil Mattingly Deputy General Counsel Thomas Baxter Economist Karen Johnson Economist Vincent Reinhart Economist David Stockton

    Associate Economists from the Board Thomas Connors David Howard David Lindsey Steve Oliner David Wilcox

    Associate Economists from the Christine Cumming Reserve Banks Loretta Mester Arthur Rolnick Harvey Rosenblum Mark Sniderman

  • Would somebody like to move that slate?

  • I’ll move the slate.

  • Without objection. Next, as you know, we need to select a Federal Reserve Bank to execute transactions for the System Open Market Account. I believe the New York Bank traditionally has been the one selected. Would somebody like to move that we continue that particular historical practice?

  • I’ll move New York.

  • Thank you. Is there a second?

    SEVERAL. Second. January 29-30, 2002 Page 5 of 194

  • Good. I assume that there are no objections. If there are, tell me later! [Laughter]

  • We are prepared to serve, Mr. Chairman.

  • I don’t recall asking you any questions, Mr. Vice Chairman. [Laughter] The Manager of the System Open Market Account is currently Dino Kos. I would entertain a nomination for him to continue to serve in that position, subject to his appointment being satisfactory to the Federal Reserve Bank of New York.

  • Without objection. Congratulations, Dino. I will now turn the floor over to Dino for a discussion, if necessary, of the authorizations and directives that we need to approve.

  • Thank you. First, on the domestic side, we recommend that the Committee reaffirm the Authorization for Domestic Open Market Operations and the Guidelines for the Conduct of System Operations in Federal Agency Issues in their present forms. I would note with regard to the “Guidelines” that a reaffirmation would involve the continued suspension of paragraphs 3 to 6. This will allow us to continue to take mortgage-backed securities as collateral in our domestic open market operations, a practice we’ve engaged in since October 1999.

  • Would somebody like to move that?

  • Without objection. You still have the floor, Dino.

  • On the foreign side, the Desk operates under the following Committee instruments: the Authorization for Foreign Currency Operations, the Foreign Currency Directive, January 29-30, 2002 Page 6 of 194 and the Procedural Instructions with Respect to Foreign Currency Operations. I recommend that they all be renewed without amendment.

  • Before we go into a discussion on that, let me note that I have recently had conversations with the Secretary of the Treasury in which he reiterated the Treasury’s position with regard to foreign currency intervention. It is about as close to ours as you can get. The general view at Treasury is that the history of intervention shows clearly that it has not been effective. And except under extraordinary circumstances, which would be less economic and perhaps more political in an international sense, there is no inclination on their part to do any intervention. Consequently, I think the discussions we’ve had with previous Treasury officials when we’ve had activist Treasury Departments are not relevant in this case. I can indicate to you that as far as I can see I believe there is no need to be concerned about problems arising with respect to differences we may have with Treasury about either intervention or warehousing. Would anybody wish to discuss this issue?

  • Mr. Chairman, especially with that background, I enthusiastically move approval.

  • I would like to make a comment on this. I am, of course, very pleased to hear that the prospects of intervention are very low. It does seem to me, though, that sometimes conditions change and under the press of circumstances people do things that one wouldn’t have anticipated. I think back particularly to the most dramatic example in my professional experience, the oft-repeated statements of President Nixon and his people that wage and price January 29-30, 2002 Page 7 of 194 controls were out of the question. Then suddenly on August 15, 1971, we had wage and price controls. I would like to see us position ourselves so that in some future circumstance we might not be able to imagine now it would take a special act of this Committee to authorize any such intervention. I recommend that we provide for that in order to reduce the probability that we would, in fact, find ourselves intervening in such a set of circumstances.

  • I would oppose our taking such a measure, first because I don’t think it is necessary. Indeed, I’m sure it is not necessary. But more importantly, if we did—and of course we’d make it public of necessity—we would raise questions that I don’t think this particular Secretary of the Treasury and this Treasury Department deserve, if I may put it in those terms. They are as strongly opposed to intervention as we are. I don’t deny, obviously, that conditions can change. They are likely to change, however, under circumstances that would be extraordinary. At that particular point we always have the ability to call a meeting of this group. We could probably do it in ten or fifteen minutes I suspect. So if actions are contemplated that might seem appropriate only to certain circumstances, I think we could act then. I don’t think it’s appropriate to do it beforehand, frankly. That’s my judgment anyway. President Jordan.

  • A question. Quite aside from intervening in the narrow and short-run sense, have your conversations gotten into issues of long-term considerations about the appropriate level of our holdings of securities denominated in foreign currencies? We hold securities in two currencies right now, and we got it down to those two over a long period of time. But we’ve just been sitting with the inherited inventory of assets denominated in foreign currencies, and it doesn’t seem as if that is necessarily the right thing to be doing. January 29-30, 2002 Page 8 of 194

  • No, I think the Treasury would agree with that. Their conclusion, however, is that the best thing to do is to leave it alone. From their point of view we should not do anything one way or the other on the grounds that, if we start to do something in that regard, it implies that we’re open to other types of manipulation. Again, a circumstance may arise where that may change. But should it change, since that clearly would involve actions that affect our balance sheet, it would require a discussion on our part to decide whether or not we wish to advise the Treasury otherwise or wish to act differently on our own behalf. Any further comments? If not, I would entertain a motion.

  • Sorry about that. You did, indeed.

  • It has been seconded. All in favor say “aye.”

    SEVERAL. “Aye.”

  • Opposed? The “ayes” have it. Would somebody like to move the minutes of our meeting of December 11?

  • Thank you. Without objection, they are approved. Dino Kos, you have the floor again on open market operations.

  • Thank you, Mr. Chairman. I’ll be referring to the charts that were circulated earlier this afternoon. The top panel of the first page shows three-month cash and forward dollar deposit rates, represented by the red lines. Those rates moved in a relatively narrow range during most of the intermeeting period. They did fall following the Chairman’s January 11 speech but quickly retraced their decline over the next two weeks. The three-month forward rates are now above the cash rates for the first time since November 2000; the current spread is about 3 basis points. In the euro area the three-month cash deposit rate, the solid green line, was stable for much of the period, but forward rates rose as market participants came to view

  • [Coffee break]

  • [Meeting recessed]