I think that’s right. I think the median view would be that they’re looking for some acknowledgement of the soft data that were mentioned earlier.

I think that’s probably another factor, which would not be mutually exclusive with the other explanations. It would just be yet another one.

The cynic in me would say that a lot of money has been allocated into the credit space. A lot of money has gone into things like credit-default and credit-derivative products. Investors want exposure to credit to enhance yield. They are getting that exposure more and more through derivatives. You ...

That’s a great question. It has been asserted, without proof, that some of the major central banks moved into euros very aggressively in December 2004. I don’t know whether that’s true, but there is some evidence to suggest that it might have been the case and that ...

If I could answer that question, I’d be rich by now. [Laughter] It’s hard to know. I don’t pretend that I can give you a precise answer. Certainly, the markets have been in this benign situation for some time, and we’ve been struggling with this question ...

Yes, I think that’s correct.

Thank you very much, Mr. Chairman. Thank you for those words. The most striking aspect of the intermeeting period was the conviction that markets developed about a benign 2007 outlook both for the economy and for monetary policy. Until Friday’s employment report, most of the incoming data were viewed ...

Thank you.

I’m not retiring, though. [Laughter]

Thank you, Mr. Chairman. I will be referring to the charts that were distributed, and I will divide my comments into two parts. First, a slimmed-down report on market developments in the intermeeting period, and then I’ll touch on the highlights of the memo I circulated last week regarding ...

There’s probably some short-term effect. I think there may be something to what you suggest, but my own assertion is that it would probably have a short-term effect on prices. Whether that’s a matter of days or weeks or maybe longer, it’s hard to put a time ...

Well, the early return has to be returned early in the morning. Also, we know anecdotally, and the data seem to support it, that most of that trading takes place roughly 24 hours before delivery. Now that’s a characterization of a very small segment of the market. To have ...

That’s a great question. It’s not clear. It seems to be a wide range of institutions. I don’t know that we’ve seen a distinct pattern yet. Again, the sizes are pretty small as a percentage of the overall market. I’m not quite sure why it ...

I was willing to go that far. [Laughter]

I would not be so bold as to go that far.

Yes. Energy prices will tend to have a bigger effect during the first two or three years of a TIPS curve.

At the short end, it’s going to be affected by energy, right?

The bank that’s returning the funds.

No, I don’t think it’s a risk premium. It just reflects the 1 or 2 basis point differential for the bank. It just changes their procedures, so it adds to their costs in terms of returning funds earlier and not having additional funds to use for making other ...

Yes, most of the trading occurs between 8:00 and 9:30 in the morning. It’s an early morning market for trading, and it’s an early morning market for returns. So it actually does end up being roughly a 24-hour market. It’s just that the trading takes ...

Just to be clear, right now there isn’t an intraday rate. This is an overnight rate, and the way that it works out, it really is roughly a 24-hour rate because most of this trading takes place in early morning to midmorning.

I haven’t made that precise comparison, but in general I would say that where you started out was perhaps the most interesting part, which is that the Committee cares about the 24-hour rate. Now, that’s something that I’m not aware has actually ever been articulated before. What ...

That’s correct—it could. Again, despite forecasts by some traders and brokers in the market, so far that has not happened. In part, it’s because the GSEs have been using term fed funds more than overnight funds for cost reasons.

Yes, it does affect it. Now, the effect that it has is fairly small—I think it’s less than 1 basis point overall.

Yes, it does.

Thank you, Mr. Chairman. Among market participants, September has a reputation for being difficult on portfolios, for sudden bursts of volatility that lead to risk aversion and wider spreads, and for sometimes spectacular blowups in the speculative community. The ERM crisis in 1992, Long-Term Capital Management in 1998, and the ...

Thank you, Mr. Chairman. At your last meeting I focused on the higher level of volatility that was concentrated in specific and fairly narrow asset classes, particularly emerging market currencies and equities. In the intermeeting period, volatility declined in those asset classes while staying low in a broader set of ...

I don’t want to speculate. I don’t think my guess would be any better than anybody else’s. Another view is that the markets that had been priced furthest from fair value are the ones that are adjusting, and a case can be made that, once they equilibrate ...

From a market perspective, that is the most interesting question. I recall an exchange that President Fisher and I had a couple of meetings ago, when we were talking about the zloty and the Icelandic krona and whether that was sort of a precursor, perhaps the beginning of a longer ...

It’s reasonable that all of those factors would have had some influence. I suppose another factor would be the extent to which some market participants may have seen not only positioning but also future weakness from the global tightening that is occurring, especially in the industrial countries but also ...

Yes, I think one of the interesting points about this period is that very question. Some of the high-risk assets that had been bid up are where we have the most-pronounced price moves, and that does perhaps suggest that positioning is a bigger part of the story because bond markets ...

Thank you, Mr. Chairman. For the last several meetings I have begun my comments by saying that this long period of low volatility and tight spreads continued. Today I have to modify that. During this intermeeting period, some markets were very volatile. But others were either calm or characterized by ...

Again, the three words that the market would be looking for are “further policy firming.” Those are the three that they will be looking for and that will be taken as the signal of likely action in June. Now, what follows actually creates a bit more uncertainty because it is ...

It would raise it.

Very briefly, I circulated a memo that comes around at this time every year asking you to vote to approve renewal of the swap lines to Canada and Mexico.

Yes. The volume expansions are something we can probably get data on. I’m not sure that doing so will answer the question that you would like answered, which is how much of the price movement is linked to certain classes of participants.

We could look into it.

We looked at it a couple of years ago, and we noted it, but I think it was just too unstable.

Yes, usually in this part of the year. That relationship has not been stable, but one has noticed that there has been that tendency.

I’ve spoken about that in the past actually. There has been some seasonality. It has happened before—that some seasonal moves upward have occurred in the first part of the year.

I can speak only for myself. I have worked on the presumption that we would set it, as you started out, below the funds rate, so we would in effect be creating something of a corridor with the primary credit rate on top and a deposit facility at the bottom ...

But those are transitional, operational hurdles.

I don’t think so. Spence?

We would welcome that. It would make our life a bit easier.

Well, as somebody said in another setting just the other day, risk premiums are something we don’t know a lot about, and they are difficult to disentangle. I haven’t done the exercise, but with energy prices rising, I don’t know that the carry effects have been huge.

Thank you, Mr. Chairman. We all know that asset prices can be volatile, sometimes too volatile. Well, the last few months have not had that quality. Volatility in all asset classes, with the exception of commodities, continues to be low. And yet, despite that low volatility, over the past six ...

Thank you, Mr. Chairman. Financial markets were characterized by a continuation of the fairly benign trends that we have observed over the past few months, with narrow spreads, low volatilities, strong equity markets, and flat yield curves—all set against a favorable macroeconomic backdrop.

The top two panels graph the ...

I have heard a few anecdotes regarding CEOs who have been very surprised and become angry when they saw that their unfunded pension fund cost them earnings over the past few years. They basically directed the CFO and, in turn, the pension managers not to let this happen again. Thus ...

I think it can be looked at. I think the other point that you hinted at, which is very important, is that it’s not just U.S. managers looking at U.S. TIPS but European managers looking at U.S. inflation-linked securities. It’s a very good point. I ...

I think what we’ve learned from the U.K. case is that it can be. In a sense, the thirty-year gilt in the United Kingdom became disengaged from the rest of the curve some years ago. And we had an upward-sloping curve to about ten, and then it became ...