FOMC Transcript 2008 Transcript of the Federal Open Market Committee Meeting on September 16, 2008

FOMC Transcript 2008 below

CHAIRMAN BERNANKE. Good morning, everybody. Sorry for the late beginning. The markets are continuing to experience very significant stresses this morning, and there are increasing concerns about the insurance company AIG. That is the reason that Vice Chairman Geithner is not attending, and Chris Cumming will sit in his place.

I want to turn in a minute to Bill Dudley for his usual report, and he will be able to give you more information about the situation. There is another action item I would like to add, given what is happening, which is that there are very significant problems with dollar funding in other jurisdictions—in Europe and elsewhere. After Bill makes his presentation and we have our discussion, I would like to put on the table a request for authorization for swap lines. I prefer not to put a limit on it, so I know I’ve got my own bazooka here. [Laughter] There is a Foreign Currency Subcommittee that consists of myself, the Vice Chairman of the FOMC, and the Vice Chairman of the Board. Again, after Bill’s discussion, I would like to discuss the possibility of giving us a temporary authority to use swap lines as needed.

FOMC Transcript 2008

Before I turn to Bill, let me say one other thing. Obviously, we started late. We have a lot to talk about. I would like—just for today, if you would indulge me—to condense our discussion to one round. In your discussion, please include your tentative views on the policy decision. Obviously, that is not ideal because you will not have heard everyone else’s views, but we will have an opportunity afterward for people to amend, revise, and give additional thoughts. But in the interest of time, I think it would be more efficient at this time just to do it that way. Without further ado, let me turn to Bill and ask for a report.

FOMC Fed FOMC Transcript 2008
FOMC Transcript 2008

MR. DUDLEY. Thank you, Mr. Chairman. I am not going to go through this in great detail. You can look at these charts at your leisure.1 I am going to focus on

what is going on right now, how we have responded to it, and what I think the issues are. Just to give you a snapshot of what has happened since Sunday evening, stocks are down worldwide—4 percent plus everywhere. Yesterday, the U.S. stock market was down about 4½ percent, and S&P futures indicate a lower opening today. As you might expect, there has been a big flight to quality, especially into the Treasury bill market. Ten-year Treasury note yields fell about 30 basis points yesterday, and there has been a big rally throughout the Treasury curve. The big thing, where there has probably been the most severe stress in the market, is in dollar liquidity for foreign banks. As you remember, foreign banks, especially in Europe, have a structural dollar funding shortfall, and they look to execute foreign exchange swaps or borrow in the dollar LIBOR market to fund that. There was significant upward pressure in that market—overnight LIBOR rates today were 6.44 percent—and that pressure in Europe is leaking over into our market. Yesterday the federal funds rate opened at

3 to 3½ percent. Despite our doing a $20 billion repo at our normal 9:30 a.m. time, the upward pressure on the funds rate yesterday continued. It rose to as high as

6 percent in the late morning, and that is why we came in with a second operation of $50 billion around noon yesterday.

FOMC Transcript 2008

To try to have more effect on this issue, this morning we came in much earlier than we normally do—around 8:00 a.m. We did a $50 billion overnight repo. The funds rate at the time was trading at 3¼ percent. I think this means that we are obviously adding way too many reserves for the current maintenance period; but the good news is that, when this maintenance period is over a week from tomorrow, we get a fresh start. So at the current time I think we will see essentially a lot of firmness in the funds rate in the morning and then the funds rate trading down to zero late in the day. Where the funds rate averages relative to the target is going to be somewhat difficult to say. Yesterday, despite the collapse in the funds rate to essentially zero at the end of the day, the funds rate was quite firm relative to the target. I don’t remember the numbers, but it was in the 2½ percent range. We are going to try to hit the target on average, but it is going to be very difficult. In the current circumstances, it probably is more sensible—at least my advice would be—to err on the side of providing enough liquidity to the market rather than trying to be cute and worrying just about the target federal funds rate.

FOMC Transcript 2008

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