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As currencies tremble, World Gold Council pitches fashion
11:56p ET Wednesday, February 22, 2006
Dear Friend of GATA and Gold:
Are the Federal Reserve and the U.S. Treasury Department
preparing for a major program of intervention in the
currency markets?
Even the official acknowledgement that such intervention
MIGHT become policy would seem to be big news, since the
U.S. government long has maintained that it has not been
intervening in the currency markets, leaving that kind of
thing to other central banks, even though the U.S.
government already has the legal authority.
But while a program of currency intervention was spelled
out in the minutes of the Federal Open Market Committee
that were released this week, it appears that nobody in
the news media has really noticed it yet.
If Internet searches are any guide, the only mention
came in a Bloomberg story from yesterday, appended here,
which contained a brief and uncomprehending reference,
arising from the opposition to currency intervention
that was expressed by of one of the FOMC's board members,
the president of the Federal Reserve Bank of Richmond,
Jeffrey Lacker.
But the FOMC's minutes suggest careful preparations for
something big.
The relevant section of those minutes is also appended
here.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Fed Members Saw Inflation Above 'Desirable' Level, Minutes Show
By Scott Lanman
Bloomberg News Service
Tuesday, February 21, 2006
http://www.bloomberg.com/apps/news?
pid=10000103&sid=aI9cFe8sOMhw&refer=us
WASHINGTON -- Federal Reserve policy makers, in Chairman Alan
Greenspan's last interest-rate meeting, said more rate increases may
be needed because inflation has been "somewhat higher" than
acceptable, minutes of the session showed.
"In the view of some members, the possibility of additional policy
moves was reinforced by readings on core inflation and inflation
expectations that were somewhat higher than was desirable over the
long run," the Federal Open Market Committee said in documents
released today in Washington.
The Fed is nearing the end of the longest cycle of interest rate
increases in a quarter-century, and investors are looking for signs
of when the Fed may stop. Greenspan's Fed voted unanimously on Jan.
31 to raise the main U.S. rate for the 14th straight time, to 4.5
percent, and said more increases "may be needed" to keep inflation
under control. Ben S. Bernanke, who became chairman Feb. 1, told
Congress last week he agreed with that view.
"All members agreed that the future path for the funds rate would
depend increasingly on economic developments and could no longer be
prejudged with the previous degree of confidence," said the minutes,
released with the Fed's customary three-week lag.
Members expressed concern about the risks to inflation from tighter
labor markets, busier factories and higher energy costs. Even so,
the effect of the increased prices so far on the cost of other
goods "had remained subdued," and any such "pass-through effects"
may be temporary provided they don't push up inflation expectations.
... Currency Intervention
Separately from the interest-rate discussion, Richmond Fed President
Jeffrey Lacker dissented from FOMC votes to authorize the New York
Fed's trading of foreign currencies, including the euro and yen, and
to reaffirm a Fed directive to counter "disorderly market
conditions" when trading foreign currencies.
Lacker dissented "to indicate his opposition to foreign currency
intervention by the Fed," the minutes said. "In his view, such
intervention would be ineffective if it did not also signal a shift
in domestic monetary policy. And if it did signal such a shift, it
could potentially compromise the Federal Reserve's monetary policy
independence."
In the statement after the Jan. 31 interest-rate meeting, Fed
officials stopped saying rates may rise at a "measured" pace, a
phrase used at each meeting since May 2004. Today's minutes didn't
explain why "measured" was removed. In the minutes of the prior
meeting, on Dec. 13, the Fed said it kept that word to avoid the
possible misperception that it might raise rates by more than a
quarter point at one time.
... Forecasts
Investors' expectations for more Fed rate increases have jumped
since a Feb. 3 report showed the January U.S. unemployment rate fell
to a four-year low, while the Fed's preferred inflation measure rose
at a 2.2 percent annual rate in the fourth quarter. That exceeds
Bernanke's 1 percent to 2 percent range for acceptable inflation.
Traders see about a 96 percent chance of a 15th straight quarter-
point increase at the next FOMC meeting on March 27-28, Bernanke's
first, based on the price of futures contracts at the Chicago Board
of Trade. That's up from about 60 percent on Dec. 13, the Fed's
final rate meeting of 2005. Traders predict about a 70 percent
chance of an increase at the May 10 meeting, up from zero as
recently as Jan. 27.
"The risk exists that, with aggregate demand exhibiting considerable
momentum, output could overshoot its sustainable path," and may
put "further upward pressure on inflation," Bernanke told House and
Senate panels last week in his first congressional appearance since
becoming chairman.
"In these circumstances, the FOMC judged that some further firming
of monetary policy may be necessary, an assessment with which I
concur," he said.
... Higher Rates
Economists surveyed by Bloomberg News from Jan. 31 to Feb. 8 expect
the Fed's main rate to reach 4.75 percent by the end of March and
hold there until June 2007, based on their median forecast.
Some forecasters are predicting more rate increases. Bear Stearns &
Co. today raised its outlook for the fed funds rate to 5.25 percent
from 5 percent because of faster inflation and a lower jobless rate
than the Fed predicted last week. Citigroup Global Markets Inc.,
which a month ago said the Fed would be done raising rates at this
point, now expects the central bank to lift its main rate twice more
to 5 percent.
"With the economy operating at close to full capacity, it's
important that the Fed be vigilant about the possibility of some
acceleration in inflation," said Alfred Broaddus, former president
of the Richmond Fed Bank of Richmond.
The U.S. economy expanded at a 1.1 percent annual rate in the final
three months of last year, the slowest pace since 2001. Since then,
the economy has accelerated, based on January reports. Retail sales
increased the most since May 2004, builders broke ground on the most
new houses in more than three decades and the share of industrial
capacity in use held near a five-year high. Bernanke last week said
he expects a "significant" recovery this quarter.
... Economic Growth
St. Louis Fed President William Poole, who is not a voting member of
the FOMC this year, agreed, and said Feb. 16 that recent economic
data have been "on the high side."
"We had a substantial slowdown in gross domestic product in the
fourth quarter, but we can reasonably" attribute that "to a variety
of special factors that are unlikely to be carrying forward," he
said.
Energy prices, which Bernanke and other members also called a risk
to inflation, have remained under control. The cost of natural gas
plunged by more than half since December after a warmer-than-normal
January, and the price of crude oil has dropped about 11 percent
from its high this year. The retail price of gasoline is about the
same as it was in July, before Hurricane Katrina struck.
The March interest-rate meeting may be the first one in a year to
feature a fully staffed Fed. Last week, the two White House nominees
for the Fed's Board of Governors, Randall Kroszner and Kevin Warsh,
were confirmed by the Senate after a hearing before the legislative
chamber's Banking Committee. Once sworn in, the pair would fill
slots vacated last year by Bernanke, who left to run the White House
Council of Economic Advisers, and Edward Gramlich, who returned to
the University of Michigan.
* * *
Minutes of the Federal Open Market Committee
January 31, 2006
http://www.federalreserve.gov/fomc/minutes/20060131.htm
A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in
Washington, D.C., on Tuesday, January 31, 2006 at 9:00 a.m. ...
With Mr. Lacker dissenting, the Committee approved the Authorization
for Foreign Currency Operations with an amendment to paragraph 5
which clarifies the language about permissible investment activities
for the foreign portfolio and brings that language into alignment
with that present in the authorization for the domestic portfolio.
Accordingly, the Authorization for Foreign Currency Operations was
adopted, effective January 31, 2006, as shown below.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
(Amended January 31, 2006)
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account, to
the extent necessary to carry out the Committee's foreign currency
directive and express authorizations by the Committee pursuant
thereto, and in conformity with such procedural instructions as the
Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or forward transactions on the open
market at home and abroad, including transactions with the U.S.
Treasury, with the U.S. Exchange Stabilization Fund established by
Section 10 of the Gold Reserve Act of 1934, with foreign monetary
authorities, with the Bank for International Settlements, and with
other international financial institutions:
Canadian dollars
Danish kroner
Euro
Pounds sterling
Japanese yen
Mexican pesos
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to
receive or to deliver, the foreign currencies listed in paragraph A
above.
C. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in
paragraph 2 below, provided that drawings by either party to any
such arrangement shall be fully liquidated within 12 months after
any amount outstanding at that time was first drawn, unless the
Committee, because of exceptional circumstances, specifically
authorizes a delay.
D. To maintain an overall open position in all foreign currencies
not exceeding $25.0 billion. For this purpose, the overall open
position in all foreign currencies is defined as the sum
(disregarding signs) of net positions in individual currencies. The
net position in a single foreign currency is defined as holdings of
balances in that currency, plus outstanding contracts for future
receipt, minus outstanding contracts for future delivery of that
currency, i.e., as the sum of these elements with due regard to
sign.
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements
("swap" arrangements) for the System Open Market Account for periods
up to a maximum of 12 months with the following foreign banks, which
are among those designated by the Board of Governors of the Federal
Reserve System under Section 214.5 of Regulation N, Relations with
Foreign Banks and Bankers, and with the approval of the Committee to
renew such arrangements on maturity:
Foreign bank ...............................Amount of arrangement
(millions of dollars equivalent)
Bank of Canada ............................. 2,000
Bank of Mexico ............................. 3,000
Any changes in the terms of existing swap arrangements, and the
proposed terms of any new arrangements that may be authorized, shall
be referred for review and approval to the Committee.
3. All transactions in foreign currencies undertaken under paragraph
1.A. above shall, unless otherwise expressly authorized by the
Committee, be at prevailing market rates. For the purpose of
providing an investment return on System holdings of foreign
currencies or for the purpose of adjusting interest rates paid or
received in connection with swap drawings, transactions with foreign
central banks may be undertaken at non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central
banks for the coordination of foreign currency transactions. In
making operating arrangements with foreign central banks on System
holdings of foreign currencies, the Federal Reserve Bank of New York
shall not commit itself to maintain any specific balance, unless
authorized by the Federal Open Market Committee. Any agreements or
understandings concerning the administration of the accounts
maintained by the Federal Reserve Bank of New York with the foreign
banks designated by the Board of Governors under Section 214.5 of
Regulation N shall be referred for review and approval to the
Committee.
5. Foreign currency holdings shall be invested to ensure that
adequate liquidity is maintained to meet anticipated needs and so
that each currency portfolio shall generally have an average
duration of no more than 18 months (calculated as Macaulay
duration). Such investments may include buying or selling outright
obligations of, or fully guaranteed as to principal and interest by,
a foreign government or agency thereof; buying such securities under
agreements for repurchase of such securities; selling such
securities under agreements for the resale of such securities; and
holding various time and other deposit accounts at foreign
institutions. In addition, when appropriate in connection with
arrangements to provide investment facilities for foreign currency
holdings, U.S. Government securities may be purchased from foreign
central banks under agreements for repurchase of such securities
within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs
shall be reported promptly to the Foreign Currency Subcommittee and
the Committee. The Foreign Currency Subcommittee consists of the
Chairman and Vice Chairman of the Committee, the Vice Chairman of
the Board of Governors, and such other member of the Board as the
Chairman may designate (or in the absence of members of the Board
serving on the Subcommittee, other Board members designated by the
Chairman as alternates, and in the absence of the Vice Chairman of
the Committee, his alternate). Meetings of the Subcommittee shall be
called at the request of any member, or at the request of the
Manager, System Open Market Account ("Manager"), for the purposes of
reviewing recent or contemplated operations and of consulting with
the Manager on other matters relating to his responsibilities. At
the request of any member of the Subcommittee, questions arising
from such reviews and consultations shall be referred for
determination to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed
agreement or understanding with the Secretary of the Treasury about
the division of responsibility for foreign currency operations
between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the
Secretary on policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and
information to the National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit
pertinent information on System foreign currency operations to
appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign
currency operations for System Account in accordance with paragraph
3G(1) of the Board of Governors' Statement of Procedure with Respect
to Foreign Relationships of Federal Reserve Banks dated January 1,
1944.
With Mr. Lacker dissenting, the Foreign Currency Directive was
reaffirmed in the form shown below.
FOREIGN CURRENCY DIRECTIVE
(Reaffirmed January 31, 2006)
1. System operations in foreign currencies shall generally be
directed at countering disorderly market conditions, provided that
market exchange rates for the U.S. dollar reflect actions and
behavior consistent with IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign
exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected
foreign central banks.
C. Cooperate in other respects with central banks of other countries
and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for
currencies.
B. To provide means for meeting System and Treasury commitments in
particular currencies, and to facilitate operations of the Exchange
Stabilization Fund.
C. For such other purposes as may be expressly authorized by the
Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the
United States Treasury;
B. In cooperation, as appropriate, with foreign monetary
authorities; and
C. In a manner consistent with the obligations of the United States
in the International Monetary Fund regarding exchange arrangements
under IMF Article IV.
Mr. Lacker dissented in the votes on the Foreign Currency Directive
and Authorization for Foreign Currency Operations to indicate his
opposition to foreign currency intervention by the Federal Reserve.
In his view, such intervention would be ineffective if it did not
also signal a shift in domestic monetary policy. And if it did
signal such a shift, it could potentially compromise the Federal
Reserve's monetary policy independence.
By unanimous vote, the Procedural Instructions with Respect to
Foreign Currency Operations were reaffirmed in the form shown below.
PROCEDURAL INSTRUCTIONS WITH
RESPECT TO FOREIGN CURRENCY OPERATIONS
(Reaffirmed January 31, 2006)
In conducting operations pursuant to the authorization and direction
of the Federal Open Market Committee as set forth in the
Authorization for Foreign Currency Operations and the Foreign
Currency Directive, the Federal Reserve Bank of New York, through
the Manager, System Open Market Account ("Manager"), shall be guided
by the following procedural understandings with respect to
consultations and clearances with the Committee, the Foreign
Currency Subcommittee, and the Chairman of the Committee. All
operations undertaken pursuant to such clearances shall be reported
promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the
Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's
overall open position in foreign currencies exceeding $300 million
on any day or $600 million since the most recent regular meeting of
the Committee.
B. Any operation that would result in a change on any day in the
System's net position in a single foreign currency exceeding $150
million, or $300 million when the operation is associated with
repayment of swap drawings.
C. Any operation that might generate a substantial volume of trading
in a particular currency by the System, even though the change in
the System's net position in that currency might be less than the
limits specified in 1.B.
D. Any swap drawing proposed by a foreign bank not exceeding the
larger of (i) $200 million or (ii) 15 percent of the size of the
swap arrangement.
2. The Manager shall clear with the Committee (or with the
Subcommittee, if the Subcommittee believes that consultation with
the full Committee is not feasible in the time available, or with
the Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation that would result in a change in the System's
overall open position in foreign currencies exceeding $1.5 billion
since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank exceeding the larger
of (i) $200 million or (ii) 15 percent of the size of the swap
arrangement.
3. The Manager shall also consult with the Subcommittee or the
Chairman about proposed swap drawings by the System and about any
operations that are not of a routine character.
Among the organizational matters raised, the Committee indicated
that it intended to take up at a future meeting the relationship
between its formal vote and the policy statement issued after each
meeting.
The Manager of the System Open Market Account reported on recent
developments in foreign exchange markets. There were no open market
operations in foreign currencies for the System's account in the
period since the previous meeting.
The Manager also reported on developments in domestic financial
markets and on System open market transactions in government
securities and federal agency obligations during the period since
the previous meeting. By unanimous vote, the Committee ratified
these transactions. ...
----------------------------------------------------
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