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<s>[INST] Hoenig and Rosengren, Presidents of the Federal Reserve Banks of Kansas City and Boston, respectively Mr. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Mr. Madigan, Secretary and Economist [/INST] Ms. Danke r, Deputy Secretary Mr. Skidmore, Assistant Secretary Ms. Smith, Assistant Secretary Mr. Alvarez, General Counsel Mr. Ashton, Assistant General Counsel Mr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rolnick, Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors March 18, 20081 of 127 Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Liang and Messrs. </s>

<s>[INST] Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Hoenig and Rosengren, Presidents of the Federal Reserve Banks of Kansas City and Boston, respectively Mr. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Mr. Madigan, Secretary and Economist [/INST] Ms. Danke r, Deputy Secretary Mr. Skidmore, Assistant Secretary Ms. Smith, Assistant Secretary Mr. Alvarez, General Counsel Mr. Ashton, Assistant General Counsel Mr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. </s>

<s>[INST] Rolnick, Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board [/INST] of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors March 18, 20081 of 127 Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Liang and Messrs. Re ifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Gover nors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Ban k of Richmond March 18, 20082 of 127 Transcript of the Federal Open Market Committee Meeting on March 18, 2008 CHAIRMAN BERNANKE. </s>

<s>[INST] Connors, English, and Kamin, Ms. Mester, Messrs. Rolnick, Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board [/INST] of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors March 18, 20081 of 127 Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Liang and Messrs. Re ifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Gover nors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. </s>

<s>[INST] Re ifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors [/INST] Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Gover nors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Ban k of Richmond March 18, 20082 of 127 Transcript of the Federal Open Market Committee Meeting on March 18, 2008 CHAIRMAN BERNANKE. Good morning, everybody. </s>

<s>[INST] Rolnick, Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors March 18, 20081 of 127 Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Liang and Messrs. Re ifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors [/INST] Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Gover nors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Ban k of Richmond March 18, 20082 of 127 Transcript of the Federal Open Market Committee Meeting on March 18, 2008 CHAIRMAN BERNANKE. </s>

<s>[INST] Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal [/INST] Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Ban k of Richmond March 18, 20082 of 127 Transcript of the Federal Open Market Committee Meeting on March 18, 2008 CHAIRMAN BERNANKE. Good morning, everybody. Let me extend a welcome to First Vice President Sapenaro, who is sitting in for St. Louis this morning. </s>

<s>[INST] Re ifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Gover nors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal [/INST] Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Ban k of Richmond March 18, 20082 of 127 Transcript of the Federal Open Market Committee Meeting on March 18, 2008 CHAIRMAN BERNANKE. Good morning, everybody. </s>

<s>[INST] Let me extend a welcome to First Vice President Sapenaro, [/INST] who is sitting in for St. Louis this morning. A quick comment on special topics : I’m sure we’re all disappointed that we won’t have further conversations on the communications strategy, [ laughter] but that being the case, we have the opportunity to have special topics again. In April we will be discussing interest on reserves, as we mentioned before. </s>

<s>[INST] Good morning, everybody. Let me extend a welcome to First Vice President Sapenaro, [/INST] who is sitting in for St. Louis this morning. A quick comment on special topics : I’m sure we’re all disappointed that we won’t have further conversations on the communications strategy, [ laughter] but that being the case, we have the opportunity to have special topics again. </s>

<s>[INST] A quick comment on special topics : I’m sure we’re all disappointed that we won’t have further conversations on the [/INST] communications strategy, [ laughter] but that being the case, we have the opportunity to have special topics again. In April we will be discussing interest on reserves, as we mentioned before. We asked for suggestions for October, and a number of B anks proposed to look at inflation modeling, which seems obviously a good and policy -relevant topic. </s>

<s>[INST] Let me extend a welcome to First Vice President Sapenaro, who is sitting in for St. Louis this morning. A quick comment on special topics : I’m sure we’re all disappointed that we won’t have further conversations on the [/INST] communications strategy, [ laughter] but that being the case, we have the opportunity to have special topics again. In April we will be discussing interest on reserves, as we mentioned before. </s>

<s>[INST] In April we will be discussing interest [/INST] on reserves, as we mentioned before. We asked for suggestions for October, and a number of B anks proposed to look at inflation modeling, which seems obviously a good and policy -relevant topic. So that is what we propose to do in October. </s>

<s>[INST] A quick comment on special topics : I’m sure we’re all disappointed that we won’t have further conversations on the communications strategy, [ laughter] but that being the case, we have the opportunity to have special topics again. In April we will be discussing interest [/INST] on reserves, as we mentioned before. We asked for suggestions for October, and a number of B anks proposed to look at inflation modeling, which seems obviously a good and policy -relevant topic. </s>

<s>[INST] We asked for suggestions for October, and a number of B anks proposed to [/INST] look at inflation modeling, which seems obviously a good and policy -relevant topic. So that is what we propose to do in October. We look forward to R eserve Banks taking the lead on presentation and research in this area, and there will be meetings among the research directors and the S ystem Research Advisory Committee to figure out how to go forward, but obviously we have about seven months to get to that. </s>

<s>[INST] In April we will be discussing interest on reserves, as we mentioned before. We asked for suggestions for October, and a number of B anks proposed to [/INST] look at inflation modeling, which seems obviously a good and policy -relevant topic. So that is what we propose to do in October. </s>

<s>[INST] We look forward to R eserve Banks taking the lead on presentation and research in this area, and there will be meetings among the research directors [/INST] and the S ystem Research Advisory Committee to figure out how to go forward, but obviously we have about seven months to get to that. We look forward to having special topics. So the first item, Mr. Dudley, if you’re ready. </s>

<s>[INST] So that is what we propose to do in October. We look forward to R eserve Banks taking the lead on presentation and research in this area, and there will be meetings among the research directors [/INST] and the S ystem Research Advisory Committee to figure out how to go forward, but obviously we have about seven months to get to that. We look forward to having special topics. </s>

<s>[INST] To start, I just want to update people [/INST] on what happened overnight in markets. Equities rebounded a bit in both A sia and Europe, and bond yields reversed some of the decline that they saw on Monday. The dollar was slightly weaker against the yen and the euro but still in the range that it established. </s>

<s>[INST] 1 Thank you, Mr. Chairman. To start, I just want to update people [/INST] on what happened overnight in markets. Equities rebounded a bit in both A sia and Europe, and bond yields reversed some of the decline that they saw on Monday. </s>

<s>[INST] Equities rebounded a bit in both A sia and Europe, and bond [/INST] yields reversed some of the decline that they saw on Monday. The dollar was slightly weaker against the yen and the euro but still in the range that it established. It did not go back below the lows that it reached early on Monday. </s>

<s>[INST] To start, I just want to update people on what happened overnight in markets. Equities rebounded a bit in both A sia and Europe, and bond [/INST] yields reversed some of the decline that they saw on Monday. The dollar was slightly weaker against the yen and the euro but still in the range that it established. </s>

<s>[INST] The dollar was slightly weaker against the yen and the [/INST] euro but still in the range that it established. It did not go back below the lows that it reached early on Monday. I would say that generally the markets’ function was okay. </s>

<s>[INST] Equities rebounded a bit in both A sia and Europe, and bond yields reversed some of the decline that they saw on Monday. The dollar was slightly weaker against the yen and the [/INST] euro but still in the range that it established. It did not go back below the lows that it reached early on Monday. </s>

<s>[INST] It did not go back below the lows [/INST] that it reached early on Monday. I would say that generally the markets’ function was okay. The big issue was bank funding pressures in Europe were evident for dollar funding. </s>

<s>[INST] The dollar was slightly weaker against the yen and the euro but still in the range that it established. It did not go back below the lows [/INST] that it reached early on Monday. I would say that generally the markets’ function was okay. </s>

<s>[INST] The big issue was bank funding pressures in [/INST] Europe were evident for dollar funding. The funds rate bid as high as 3¾ percent, which is quite surprising on the eve of a meeting in which we are likely to reduce the federal funds rate target. Term funding pressures, if you look at the one -month or three -month LIBOR –OIS spread , are basically unchanged from Monday, when they were up quite sharply from last Friday. </s>

<s>[INST] I would say that generally the markets’ function was okay. The big issue was bank funding pressures in [/INST] Europe were evident for dollar funding. The funds rate bid as high as 3¾ percent, which is quite surprising on the eve of a meeting in which we are likely to reduce the federal funds rate target. </s>

<s>[INST] The funds rate bid as high as 3¾ percent, which is quite surprising on the eve [/INST] of a meeting in which we are likely to reduce the federal funds rate target. Term funding pressures, if you look at the one -month or three -month LIBOR –OIS spread , are basically unchanged from Monday, when they were up quite sharply from last Friday. Before talking about what mark ets have been doing over the six weeks since the last FOMC meeting, I’m going to talk a bit about the Bear Stearns situation. </s>

<s>[INST] The big issue was bank funding pressures in Europe were evident for dollar funding. The funds rate bid as high as 3¾ percent, which is quite surprising on the eve [/INST] of a meeting in which we are likely to reduce the federal funds rate target. Term funding pressures, if you look at the one -month or three -month LIBOR –OIS spread , are basically unchanged from Monday, when they were up quite sharply from last Friday. </s>

<s>[INST] Term funding pressures, if you look at the one -month or three -month LIBOR –OIS spread [/INST] , are basically unchanged from Monday, when they were up quite sharply from last Friday. Before talking about what mark ets have been doing over the six weeks since the last FOMC meeting, I’m going to talk a bit about the Bear Stearns situation. In my view, a n old-fashioned bank run is what really led to Bear Stearns ’s demise. </s>

<s>[INST] The funds rate bid as high as 3¾ percent, which is quite surprising on the eve of a meeting in which we are likely to reduce the federal funds rate target. Term funding pressures, if you look at the one -month or three -month LIBOR –OIS spread [/INST] , are basically unchanged from Monday, when they were up quite sharply from last Friday. Before talking about what mark ets have been doing over the six weeks since the last FOMC meeting, I’m going to talk a bit about the Bear Stearns situation. </s>

<s>[INST] Before talking about what mark ets have been doing over the six weeks since the [/INST] last FOMC meeting, I’m going to talk a bit about the Bear Stearns situation. In my view, a n old-fashioned bank run is what really led to Bear Stearns ’s demise. But in this case it wasn’t depositors lining up to make withdrawals; it was customers moving their business elsewhere and investors’ unwillingness to roll over their collateralized loans to Bear. </s>

<s>[INST] Term funding pressures, if you look at the one -month or three -month LIBOR –OIS spread , are basically unchanged from Monday, when they were up quite sharply from last Friday. Before talking about what mark ets have been doing over the six weeks since the [/INST] last FOMC meeting, I’m going to talk a bit about the Bear Stearns situation. In my view, a n old-fashioned bank run is what really led to Bear Stearns ’s demise. </s>

<s>[INST] In my view, a n old-fashioned bank run is [/INST] what really led to Bear Stearns ’s demise. But in this case it wasn’t depositors lining up to make withdrawals; it was customers moving their business elsewhere and investors’ unwillingness to roll over their collateralized loans to Bear. The rapidity of the Bear Stearns collapse has had significant contagion effects to the other major U.S. broker–dealer s for two reasons. </s>

<s>[INST] Before talking about what mark ets have been doing over the six weeks since the last FOMC meeting, I’m going to talk a bit about the Bear Stearns situation. In my view, a n old-fashioned bank run is [/INST] what really led to Bear Stearns ’s demise. But in this case it wasn’t depositors lining up to make withdrawals; it was customers moving their business elsewhere and investors’ unwillingness to roll over their collateralized loans to Bear. </s>

<s>[INST] But in this case it wasn’t depositors lining up to make withdrawals; it was customers moving [/INST] their business elsewhere and investors’ unwillingness to roll over their collateralized loans to Bear. The rapidity of the Bear Stearns collapse has had significant contagion effects to the other major U.S. broker–dealer s for two reasons. First, these firms also are dependent on the repo market to finance a significant portion of their balance 1 The materials used by Mr. Dudley are appended to this transcript (appendix 1). </s>

<s>[INST] In my view, a n old-fashioned bank run is what really led to Bear Stearns ’s demise. But in this case it wasn’t depositors lining up to make withdrawals; it was customers moving [/INST] their business elsewhere and investors’ unwillingness to roll over their collateralized loans to Bear. The rapidity of the Bear Stearns collapse has had significant contagion effects to the other major U.S. broker–dealer s for two reasons. </s>

<s>[INST] The rapidity of the Bear Stearns collapse has had significant contagion effects [/INST] to the other major U.S. broker–dealer s for two reasons. First, these firms also are dependent on the repo market to finance a significant portion of their balance 1 The materials used by Mr. Dudley are appended to this transcript (appendix 1). March 18, 20083 of 127 sheet s. Second, the $2 per share purchase price for Bear Stearns was a shock given the firm’s $70 per share price a week earlier and its stated book value of $84 per share at the end of the last fiscal year. </s>

<s>[INST] But in this case it wasn’t depositors lining up to make withdrawals; it was customers moving their business elsewhere and investors’ unwillingness to roll over their collateralized loans to Bear. The rapidity of the Bear Stearns collapse has had significant contagion effects [/INST] to the other major U.S. broker–dealer s for two reasons. First, these firms also are dependent on the repo market to finance a significant portion of their balance 1 The materials used by Mr. Dudley are appended to this transcript (appendix 1). </s>

<s>[INST] First, these firms also are dependent on the repo market to finance a significant portion of their [/INST] balance 1 The materials used by Mr. Dudley are appended to this transcript (appendix 1). March 18, 20083 of 127 sheet s. Second, the $2 per share purchase price for Bear Stearns was a shock given the firm’s $70 per share price a week earlier and its stated book value of $84 per share at the end of the last fiscal year. The disparity between book value and the purchase price caused investors to question the accuracy of investment banks’ financial statements more generally. </s>

<s>[INST] The rapidity of the Bear Stearns collapse has had significant contagion effects to the other major U.S. broker–dealer s for two reasons. First, these firms also are dependent on the repo market to finance a significant portion of their [/INST] balance 1 The materials used by Mr. Dudley are appended to this transcript (appendix 1). March 18, 20083 of 127 sheet s. Second, the $2 per share purchase price for Bear Stearns was a shock given the firm’s $70 per share price a week earlier and its stated book value of $84 per share at the end of the last fiscal year. </s>

<s>[INST] March 18, 20083 of 127 sheet s. Second, the $2 per share purchase price for Bear Stearns was a shock given the firm’s $70 [/INST] per share price a week earlier and its stated book value of $84 per share at the end of the last fiscal year. The disparity between book value and the purchase price caused investors to question the accuracy of investment banks’ financial statements more generally. The contrast in the behavior of investment bank equity prices versus credit default swap ( CDS ) spreads is revealing. </s>

<s>[INST] First, these firms also are dependent on the repo market to finance a significant portion of their balance 1 The materials used by Mr. Dudley are appended to this transcript (appendix 1). March 18, 20083 of 127 sheet s. Second, the $2 per share purchase price for Bear Stearns was a shock given the firm’s $70 [/INST] per share price a week earlier and its stated book value of $84 per share at the end of the last fiscal year. The disparity between book value and the purchase price caused investors to question the accuracy of investment banks’ financial statements more generally. </s>

<s>[INST] The disparity between book value and the purchase price caused investors to [/INST] question the accuracy of investment banks’ financial statements more generally. The contrast in the behavior of investment bank equity prices versus credit default swap ( CDS ) spreads is revealing. Share prices fell sharply, but the CDS spreads narrowed a bit, indicating a lower risk of default. </s>

<s>[INST] March 18, 20083 of 127 sheet s. Second, the $2 per share purchase price for Bear Stearns was a shock given the firm’s $70 per share price a week earlier and its stated book value of $84 per share at the end of the last fiscal year. The disparity between book value and the purchase price caused investors to [/INST] question the accuracy of investment banks’ financial statements more generally. The contrast in the behavior of investment bank equity prices versus credit default swap ( CDS ) spreads is revealing. </s>

<s>[INST] The contrast in the behavior of investment bank equity prices versus [/INST] credit default swap ( CDS ) spreads is revealing. Share prices fell sharply, but the CDS spreads narrowed a bit, indicating a lower risk of default. For example, Lehman’s stock price fell 19 percent , but its CDS narrowed by 20 basis points, to 450 basis points, yesterday. </s>

<s>[INST] The disparity between book value and the purchase price caused investors to question the accuracy of investment banks’ financial statements more generally. The contrast in the behavior of investment bank equity prices versus [/INST] credit default swap ( CDS ) spreads is revealing. Share prices fell sharply, but the CDS spreads narrowed a bit, indicating a lower risk of default. </s>

<s>[INST] Share prices fell sharply, but the CDS spreads narrowed [/INST] a bit, indicating a lower risk of default. For example, Lehman’s stock price fell 19 percent , but its CDS narrowed by 20 basis points, to 450 basis points, yesterday. This underscores the difference between the $2 per share buyout price for Bear Stearns —less value than people thought—and the introduction of the P rimary Dealer C redit F acility (PDCF) —a reduction in the risk that a liquidity problem could drive a firm into insolvency. </s>

<s>[INST] The contrast in the behavior of investment bank equity prices versus credit default swap ( CDS ) spreads is revealing. Share prices fell sharply, but the CDS spreads narrowed [/INST] a bit, indicating a lower risk of default. For example, Lehman’s stock price fell 19 percent , but its CDS narrowed by 20 basis points, to 450 basis points, yesterday. </s>

<s>[INST] For example, Lehman’s stock price fell 19 percent , but its CDS [/INST] narrowed by 20 basis points, to 450 basis points, yesterday. This underscores the difference between the $2 per share buyout price for Bear Stearns —less value than people thought—and the introduction of the P rimary Dealer C redit F acility (PDCF) —a reduction in the risk that a liquidity problem could drive a firm into insolvency. I have a few words about the PDCF, before moving to a discussion of market developments since the January FOMC meeting. </s>

<s>[INST] Share prices fell sharply, but the CDS spreads narrowed a bit, indicating a lower risk of default. For example, Lehman’s stock price fell 19 percent , but its CDS [/INST] narrowed by 20 basis points, to 450 basis points, yesterday. This underscores the difference between the $2 per share buyout price for Bear Stearns —less value than people thought—and the introduction of the P rimary Dealer C redit F acility (PDCF) —a reduction in the risk that a liquidity problem could drive a firm into insolvency. </s>

<s>[INST] This underscores the difference between the $2 per share buyout price for Bear Stearns —less value than people thought—and the introduction of the P [/INST] rimary Dealer C redit F acility (PDCF) —a reduction in the risk that a liquidity problem could drive a firm into insolvency. I have a few words about the PDCF, before moving to a discussion of market developments since the January FOMC meeting. The PDCF should help to restore confidence among repo investors. </s>

<s>[INST] For example, Lehman’s stock price fell 19 percent , but its CDS narrowed by 20 basis points, to 450 basis points, yesterday. This underscores the difference between the $2 per share buyout price for Bear Stearns —less value than people thought—and the introduction of the P [/INST] rimary Dealer C redit F acility (PDCF) —a reduction in the risk that a liquidity problem could drive a firm into insolvency. I have a few words about the PDCF, before moving to a discussion of market developments since the January FOMC meeting. </s>

<s>[INST] I have a few words about the PDCF, before moving to [/INST] a discussion of market developments since the January FOMC meeting. The PDCF should help to restore confidence among repo investors. It essentially creates a tri -party repo customer of last resort —us. </s>

<s>[INST] This underscores the difference between the $2 per share buyout price for Bear Stearns —less value than people thought—and the introduction of the P rimary Dealer C redit F acility (PDCF) —a reduction in the risk that a liquidity problem could drive a firm into insolvency. I have a few words about the PDCF, before moving to [/INST] a discussion of market developments since the January FOMC meeting. The PDCF should help to restore confidence among repo investors. </s>

<s>[INST] It essentially creates a tri -party repo [/INST] customer of last resort —us. When investors have concerns about the ability of a dealer to fund itself, they are reluctant to roll over their own repo transactions. The reason is the fear that the clearing bank may not send their cash back the next morning when the overnight repos mature. </s>

<s>[INST] The PDCF should help to restore confidence among repo investors. It essentially creates a tri -party repo [/INST] customer of last resort —us. When investors have concerns about the ability of a dealer to fund itself, they are reluctant to roll over their own repo transactions. </s>

<s>[INST] When investors have concerns about the ability of a dealer to fund [/INST] itself, they are reluctant to roll over their own repo transactions. The reason is the fear that the clearing bank may not send their cash back the next morning when the overnight repos mature. This fear may not be misplaced. </s>

<s>[INST] It essentially creates a tri -party repo customer of last resort —us. When investors have concerns about the ability of a dealer to fund [/INST] itself, they are reluctant to roll over their own repo transactions. The reason is the fear that the clearing bank may not send their cash back the next morning when the overnight repos mature. </s>

<s>[INST] The reason is the fear that the clearing bank may not send [/INST] their cash back the next morning when the overnight repos mature. This fear may not be misplaced. If the clearing bank is worried about whether investors will stay put, the clearing bank may decide to keep the cash. </s>

<s>[INST] When investors have concerns about the ability of a dealer to fund itself, they are reluctant to roll over their own repo transactions. The reason is the fear that the clearing bank may not send [/INST] their cash back the next morning when the overnight repos mature. This fear may not be misplaced. </s>

<s>[INST] If the clearing bank is worried about whether investors will stay [/INST] put, the clearing bank may decide to keep the cash. In that case, the investors would be stuck with the securities that collateralize the repo transactions. The PDCF should break that chain of worry by reassuring the clearing bank that the Fed will be there as a lender to fund the repo transactions. </s>

<s>[INST] This fear may not be misplaced. If the clearing bank is worried about whether investors will stay [/INST] put, the clearing bank may decide to keep the cash. In that case, the investors would be stuck with the securities that collateralize the repo transactions. </s>

<s>[INST] In that case, the investors would be stuck with [/INST] the securities that collateralize the repo transactions. The PDCF should break that chain of worry by reassuring the clearing bank that the Fed will be there as a lender to fund the repo transactions. The repo investors are reassured that the clearing bank will send back their cash the next day and thus are willing to roll over their repo transactions. </s>

<s>[INST] If the clearing bank is worried about whether investors will stay put, the clearing bank may decide to keep the cash. In that case, the investors would be stuck with [/INST] the securities that collateralize the repo transactions. The PDCF should break that chain of worry by reassuring the clearing bank that the Fed will be there as a lender to fund the repo transactions. </s>

<s>[INST] The PDCF should break that chain of worry by reassuring the clearing bank that [/INST] the Fed will be there as a lender to fund the repo transactions. The repo investors are reassured that the clearing bank will send back their cash the next day and thus are willing to roll over their repo transactions. At least that’s the theory. </s>

<s>[INST] In that case, the investors would be stuck with the securities that collateralize the repo transactions. The PDCF should break that chain of worry by reassuring the clearing bank that [/INST] the Fed will be there as a lender to fund the repo transactions. The repo investors are reassured that the clearing bank will send back their cash the next day and thus are willing to roll over their repo transactions. </s>

<s>[INST] The repo investors are reassured that the clearing bank will send back their cash [/INST] the next day and thus are willing to roll over their repo transactions. At least that’s the theory. As noted, the PDCF should provide some comfort to the counterparties of the se firms that these firms will, in fact, be able to fund their obligations. </s>

<s>[INST] The PDCF should break that chain of worry by reassuring the clearing bank that the Fed will be there as a lender to fund the repo transactions. The repo investors are reassured that the clearing bank will send back their cash [/INST] the next day and thus are willing to roll over their repo transactions. At least that’s the theory. </s>

<s>[INST] As noted, the PDCF should provide some comfort to the counterparties of the se [/INST] firms that these firms will, in fact, be able to fund their obligations. Yesterday, the major money market mutual fund complexes did roll their outstanding repos with the major investment banks. However, the jury is still out on whether the PDCF will be sufficient to stabilize confidence. </s>

<s>[INST] At least that’s the theory. As noted, the PDCF should provide some comfort to the counterparties of the se [/INST] firms that these firms will, in fact, be able to fund their obligations. Yesterday, the major money market mutual fund complexes did roll their outstanding repos with the major investment banks. </s>

<s>[INST] Yesterday, the major money market mutual fund complexes did roll [/INST] their outstanding repos with the major investment banks. However, the jury is still out on whether the PDCF will be sufficient to stabilize confidence. High use of the PDCF would result in a large increase in the amount of reserves added to the banking system. </s>

<s>[INST] As noted, the PDCF should provide some comfort to the counterparties of the se firms that these firms will, in fact, be able to fund their obligations. Yesterday, the major money market mutual fund complexes did roll [/INST] their outstanding repos with the major investment banks. However, the jury is still out on whether the PDCF will be sufficient to stabilize confidence. </s>

<s>[INST] However, the jury is still out on whether the [/INST] PDCF will be sufficient to stabilize confidence. High use of the PDCF would result in a large increase in the amount of reserves added to the banking system. I think it is important to go on record on that because, if that were to occur , over the short run the N ew York Desk might not be able to drain reserves sufficiently quickly to keep the federal funds rate from trading extremely soft to the target. </s>

<s>[INST] Yesterday, the major money market mutual fund complexes did roll their outstanding repos with the major investment banks. However, the jury is still out on whether the [/INST] PDCF will be sufficient to stabilize confidence. High use of the PDCF would result in a large increase in the amount of reserves added to the banking system. </s>

<s>[INST] High use of the PDCF would result in a large increase [/INST] in the amount of reserves added to the banking system. I think it is important to go on record on that because, if that were to occur , over the short run the N ew York Desk might not be able to drain reserves sufficiently quickly to keep the federal funds rate from trading extremely soft to the target. We will make all efforts to make the “short run ” as short as possible. </s>

<s>[INST] However, the jury is still out on whether the PDCF will be sufficient to stabilize confidence. High use of the PDCF would result in a large increase [/INST] in the amount of reserves added to the banking system. I think it is important to go on record on that because, if that were to occur , over the short run the N ew York Desk might not be able to drain reserves sufficiently quickly to keep the federal funds rate from trading extremely soft to the target. </s>

<s>[INST] I think it is important to go on record on that because, if that were to occur , over the short run the N ew [/INST] York Desk might not be able to drain reserves sufficiently quickly to keep the federal funds rate from trading extremely soft to the target. We will make all efforts to make the “short run ” as short as possible. But realistically, there is a good chan ce that the federal funds rate could trade soft relative to the target, especially through the end of the current reserve maintenance period. </s>

<s>[INST] High use of the PDCF would result in a large increase in the amount of reserves added to the banking system. I think it is important to go on record on that because, if that were to occur , over the short run the N ew [/INST] York Desk might not be able to drain reserves sufficiently quickly to keep the federal funds rate from trading extremely soft to the target. We will make all efforts to make the “short run ” as short as possible. </s>

<s>[INST] We will make all efforts to make the [/INST] “short run ” as short as possible. But realistically, there is a good chan ce that the federal funds rate could trade soft relative to the target, especially through the end of the current reserve maintenance period. In fact, yesterday we saw that, although it started the day quite firm, the funds rate crashed at the end of the day, and the effective fed funds rate for the day was 2.69 percent. </s>

<s>[INST] I think it is important to go on record on that because, if that were to occur , over the short run the N ew York Desk might not be able to drain reserves sufficiently quickly to keep the federal funds rate from trading extremely soft to the target. We will make all efforts to make the [/INST] “short run ” as short as possible. But realistically, there is a good chan ce that the federal funds rate could trade soft relative to the target, especially through the end of the current reserve maintenance period. </s>

<s>[INST] But realistically, there is a good chan ce that the federal funds rate could trade soft [/INST] relative to the target, especially through the end of the current reserve maintenance period. In fact, yesterday we saw that, although it started the day quite firm, the funds rate crashed at the end of the day, and the effective fed funds rate for the day was 2.69 percent. It depends, in large part, on the volume of use of the PDCF. </s>

<s>[INST] We will make all efforts to make the “short run ” as short as possible. But realistically, there is a good chan ce that the federal funds rate could trade soft [/INST] relative to the target, especially through the end of the current reserve maintenance period. In fact, yesterday we saw that, although it started the day quite firm, the funds rate crashed at the end of the day, and the effective fed funds rate for the day was 2.69 percent. </s>

<s>[INST] In fact, yesterday we saw that, although it started the day quite firm, the funds rate crashed at [/INST] the end of the day, and the effective fed funds rate for the day was 2.69 percent. It depends, in large part, on the volume of use of the PDCF. March 18, 20084 of 127 Stepping back from developments of the past few days, recent weeks have been marked by rapid and, at times, disorderly deleve raging of financial holdings within the global financial system. </s>

<s>[INST] But realistically, there is a good chan ce that the federal funds rate could trade soft relative to the target, especially through the end of the current reserve maintenance period. In fact, yesterday we saw that, although it started the day quite firm, the funds rate crashed at [/INST] the end of the day, and the effective fed funds rate for the day was 2.69 percent. It depends, in large part, on the volume of use of the PDCF. </s>

<s>[INST] It depends, in large part, on the [/INST] volume of use of the PDCF. March 18, 20084 of 127 Stepping back from developments of the past few days, recent weeks have been marked by rapid and, at times, disorderly deleve raging of financial holdings within the global financial system. As I discussed last week, the most pernicious part of this unwinding has been the dynamic of higher haircuts, missed margin calls, forced selling, lower prices , higher volatility, and still higher haircuts, with this dynamic particularly evident in the mortgage- backed securities market. </s>

<s>[INST] In fact, yesterday we saw that, although it started the day quite firm, the funds rate crashed at the end of the day, and the effective fed funds rate for the day was 2.69 percent. It depends, in large part, on the [/INST] volume of use of the PDCF. March 18, 20084 of 127 Stepping back from developments of the past few days, recent weeks have been marked by rapid and, at times, disorderly deleve raging of financial holdings within the global financial system. </s>

<s>[INST] March 18, 20084 of 127 Stepping back from developments of the past few days, recent weeks have been [/INST] marked by rapid and, at times, disorderly deleve raging of financial holdings within the global financial system. As I discussed last week, the most pernicious part of this unwinding has been the dynamic of higher haircuts, missed margin calls, forced selling, lower prices , higher volatility, and still higher haircuts, with this dynamic particularly evident in the mortgage- backed securities market. I’ll be referring to the handout from here. </s>

<s>[INST] It depends, in large part, on the volume of use of the PDCF. March 18, 20084 of 127 Stepping back from developments of the past few days, recent weeks have been [/INST] marked by rapid and, at times, disorderly deleve raging of financial holdings within the global financial system. As I discussed last week, the most pernicious part of this unwinding has been the dynamic of higher haircuts, missed margin calls, forced selling, lower prices , higher volatility, and still higher haircuts, with this dynamic particularly evident in the mortgage- backed securities market. </s>

<s>[INST] As I discussed last week, the most pernicious part of this unwinding has been the dynamic of higher haircuts, missed margin calls, forced [/INST] selling, lower prices , higher volatility, and still higher haircuts, with this dynamic particularly evident in the mortgage- backed securities market. I’ll be referring to the handout from here. Over the past six weeks, we have surveyed a number of hedge funds and one REIT about the haircuts they face for financing different types of collateral. </s>

<s>[INST] March 18, 20084 of 127 Stepping back from developments of the past few days, recent weeks have been marked by rapid and, at times, disorderly deleve raging of financial holdings within the global financial system. As I discussed last week, the most pernicious part of this unwinding has been the dynamic of higher haircuts, missed margin calls, forced [/INST] selling, lower prices , higher volatility, and still higher haircuts, with this dynamic particularly evident in the mortgage- backed securities market. I’ll be referring to the handout from here. </s>

<s>[INST] Over the past six weeks, we have surveyed a number of hedge funds and [/INST] one REIT about the haircuts they face for financing different types of collateral. As shown in exhibit 1, the rise in haircuts has been most pronounced in non- agency mortgage -backed securities. But even agency MBS ha ve seen a significant widening of haircuts in recent weeks. </s>

<s>[INST] I’ll be referring to the handout from here. Over the past six weeks, we have surveyed a number of hedge funds and [/INST] one REIT about the haircuts they face for financing different types of collateral. As shown in exhibit 1, the rise in haircuts has been most pronounced in non- agency mortgage -backed securities. </s>

<s>[INST] As shown in exhibit 1, the rise in haircuts has [/INST] been most pronounced in non- agency mortgage -backed securities. But even agency MBS ha ve seen a significant widening of haircuts in recent weeks. The collateral funding pressures have been particularly evident for residential-mortgage- backed securities collateral. </s>

<s>[INST] Over the past six weeks, we have surveyed a number of hedge funds and one REIT about the haircuts they face for financing different types of collateral. As shown in exhibit 1, the rise in haircuts has [/INST] been most pronounced in non- agency mortgage -backed securities. But even agency MBS ha ve seen a significant widening of haircuts in recent weeks. </s>

<s>[INST] But even agency MBS ha ve seen a [/INST] significant widening of haircuts in recent weeks. The collateral funding pressures have been particularly evident for residential-mortgage- backed securities collateral. This is due to several factors including very unfavorable fundamentals for housing, a high level of uncertainty about the ultimate level of losses, and an overhang of product for sale, both currently and prospectively. </s>

<s>[INST] As shown in exhibit 1, the rise in haircuts has been most pronounced in non- agency mortgage -backed securities. But even agency MBS ha ve seen a [/INST] significant widening of haircuts in recent weeks. The collateral funding pressures have been particularly evident for residential-mortgage- backed securities collateral. </s>

<s>[INST] The collateral funding pressures have been particularly [/INST] evident for residential-mortgage- backed securities collateral. This is due to several factors including very unfavorable fundamentals for housing, a high level of uncertainty about the ultimate level of losses, and an overhang of product for sale, both currently and prospectively. In our discussions with market participants, unleveraged players have been unwilling to step in to buy “cheap” assets for several reasons. </s>

<s>[INST] But even agency MBS ha ve seen a significant widening of haircuts in recent weeks. The collateral funding pressures have been particularly [/INST] evident for residential-mortgage- backed securities collateral. This is due to several factors including very unfavorable fundamentals for housing, a high level of uncertainty about the ultimate level of losses, and an overhang of product for sale, both currently and prospectively. </s>