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April 27–28, 2010 Authorized for Public Release Appendix 1: Materials used by Mr. Sack 173 of 206 April 27–28, 2010 Authorized for Public Release Class II FOMC - Restricted FR Material for FOMC Presentation: Financial Market Developments and Desk Operations Brian Sack April 27, 2010 174 of 206 April 27–28, 2010 Authorized for Public Release 175 of 206 Class II FOMC – Restricted FR Indexed to 100= 8/1/08 Exhibit 1 (1) Equity Prices 12 110 FOMC 100 10 90 8 80 6 70 4 60 2 50 0 S&P 500 MSCI World 40 30 08/01/08 01/01/09 -2 06/01/09 11/01/09 04/01/10 Source: Bloomberg -4 01/01/90 01/01/95 01/01/00 01/01/05 01/01/10 Source: Federal Reserve Board of Governors. Last observation is 04/21/10. (3) Corporate Bond Spreads BPS (2) Equity Risk Premium BPS 2500 2000 BPS BPS 1200 3500 1000 3000 FOMC 800 1500 (4) CMBS Spreads Junior Mezzanine Super Senior FOMC 2500 2000 600 1500 1000 400 500 200 High Yield (LHS) Investment Grade (RHS) 0 0 08/01/08 01/01/09 06/01/09 11/01/09 04/01/10 Source: Bank of America 30 25 20 500 0 08/01/08 01/01/09 06/01/09 11/01/09 04/01/10 Source: JP Morgan (5) Bank Equities Percent 1000 BPS Change from 4/15/10 to 4/26/10 1400 Change from 3/15/10 to 4/15/10 1200 15 (6) Peripheral Euro-Area Yield Spreads to German Debt* Intermeeting Change 3/15/2010 Level 1000 10 800 5 0 600 -5 400 -10 200 -15 -20 GS DB Source: Bloomberg UBS JPM BAC WFC MS C Regional Bank Index 0 Portugal Ireland *2-yr yields. Source: Bloomberg Greece Spain April 27–28, 2010 Authorized for Public Release 176 of 206 Class II FOMC – Restricted FR Exhibit 2 (7) Implied Federal Funds Rate Percent (8) Average Probability Distribution of First Policy Rate Increase Percent 2.5 40 4/23/10 2.0 35 3/15/10 30 25 1.5 20 15 1.0 10 0.5 5 0 0.0 04/01/10 08/01/10 12/01/10 04/01/11 08/01/11 12/01/11 Source: Federal Reserve Bank of New York Policy Survey, including responses from primary dealers and buy-side firms Source: Federal Reserve Bank of New York (9) Treasury Yields Percent Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2010 2010 2010 2011 2011 2011 2011 2012 2012 (10) Swap Spreads BPS 4.5 200 2-yr 5-yr 10-yr 2-yr FOMC 10-yr FOMC 150 3.5 100 2.5 50 1.5 0 0.5 08/01/08 01/01/09 06/01/09 11/01/09 04/01/10 Source: Bloomberg -50 08/01/08 01/01/09 06/01/09 11/01/09 04/01/10 Source: Bloomberg (12) Average Probability of Federal Reserve Treasury Redemption Policies (11) 10-Yr Treasury Term Premium BPS 150 130 FOMC 2010 Q2 2011 Q2 2012 Q2 All 23% 24% 23% Some 11% 26% 34% None 66% 50% 43% 110 Treasuries Redeemed 90 70 50 30 10 -10 -30 -50 08/01/05 08/01/06 08/01/07 Source: Federal Reserve Bank of New York 08/01/08 08/01/09 Source: Federal Reserve Bank of New York Dealer Policy Survey April 27–28, 2010 Authorized for Public Release 177 of 206 Class II FOMC – Restricted FR $ Billions Exhibit 3 (13) Weekly Pace of Purchases 40 $ Billions Agency 35 (14) MBS Weekly Trading Volumes* 2000 1800 MBS 1600 30 1400 25 1200 20 1000 15 800 600 10 400 5 200 0 12/10/08 04/10/09 08/10/09 12/10/09 04/10/10 Source: Federal Reserve Bank of New York BPS 08/01/08 03/01/09 10/01/09 *4-wk moving average. Source: FR2004 (1/2 interdealer + customer) (15) MBS Spreads* 100 0 01/01/08 BPS (16) Impact on Yields from Purchase Programs 0 OAS to Treasury OAS to Swap 75 50 -20 End of the LSAPs -40 25 -60 0 -80 -25 -100 -50 01/01/09 -120 06/01/09 11/01/09 Maximum Effect 04/01/10 * Fannie Mae fixed-rate current coupon spreads; Source: Barclays Capital (17) Probability of Asset Sales 10-yr Treasury Yield MBS Yield Current Effect Effect in 6 Months Source: Federal Reserve Bank of New York Policy Survey, including responses from primary dealers and buy-side firms BPS (18) Impact on Yields from MBS Sales 60 Time Horizon 2 Yrs 50 MBS Yield 5 Yrs 40 Treasuries 15% 25% Agencies 20% 50% 30 MBS 25% 70% 20 Source: Federal Reserve Bank of New York Policy Survey, including responses from primary dealers and buy-side firms 10-yr Treasury Yield 10 0 $50 Bln Sales/Year $150 Bln Sales/Year $300 Bln Sales/Year Source: Federal Reserve Bank of New York Policy Survey, including responses from primary dealers and buy-side firms April 27–28, 2010 Authorized for Public Release 178 of 206 Class II FOMC – Restricted FR Percent Exhibit 4 (19) Treasury Repo and Fed Funds Rates (20) Excess Reserves and the Fed Funds Rate Percent 0.25 0.25 Treasury GC Fed Funds 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 1/2/09-3/2/10 3/3/10-4/23/10 0.00 0.00 10/01/09 12/01/09 02/01/10 04/01/10 400 600 800 1000 1200 Excess Reserves, $ Billions Source: Federal Reserve Bank of New York Source: Federal Reserve Bank of New York (21) Fed Funds Futures Rates Percent (22) Factors Leading to Increase in Fed Funds Rate* 0.25 Announcement of SFP Increases in Treasury Supply Decreases in Reserves GSE Delinquent Buyouts Increase in Primary Credit Rate 0.20 0.15 0.10 May Contract April Contract 3.17 2.94 2.47 2.24 1.47 March Contract 0.05 02/01/10 0 02/19/10 Source: Bloomberg 03/09/10 03/27/10 04/14/10 1 2 3 *Ratings were constructed by assigning the following values: Not important=1, Somewhat Important=2, Important =3, Very Important=4. The weighted average was then taken to construct the average rating. Source: Federal Reserve Bank of New York Dealer Policy Survey 4 April 27–28, 2010 Authorized for Public Release Appendix 2: Materials used by Mr. Madigan 179 of 206 April 27–28, 2010 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Strategies for Asset Sales and Redemptions Brian Madigan April 27, 2010 180 of 206 April 27–28, 2010 Authorized for Public Release 181 of 206 Table 1: Possible Longer-Run Approaches to Redemptions and Asset Sales Characteristics Assumed in the Staff Analysis Treasury Redemptions Begin Sales of agency-related securities Average pace $billion/month Start Finish Conditionality of Sales Option 1: No asset sales None $0 N/A N/A N/A Option 2: Asset sales after increase in target May 3 $15 One quarter after target increase Five years after sales commence Moderate Option 3: Conditional pace of sales May 3 $15 Before increase in the target, but increase in target under Option 3 would be later than under baseline. Five years after sales commence, depending on developments Strong Option 4: Reverse taper May 3 $5 in 2011 $10 in 2012 $20 in 2013‐15 January 2011 December 2015 Virtually none Option 5: Rapid sales May 3 $30 July 2010 June 2013 Limited April 27–28, 2010 Authorized for Public Release Exhibit 2 Balance Sheets 182 of 206 Greenbook-consistent Projections SOMA holdings MBS holdings Monthly $ Billions Option 1 Option 2 Option 3 Option 4 Option 5 Option 6* Monthly $ Billions 2500 Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 2250 2012 2014 2016 2018 1250 2000 1000 1750 750 1500 500 1250 250 1000 0 750 2010 1500 2020 -250 2010 2012 2014 2016 2018 2020 * Redemptions for Treasury and agency securities, redemptions and prepayments for agency mortgage-backed securities; no asset sales. Treasury holdings Reserve balances Monthly $ Billions Monthly $ Billions 2000 Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 1750 1500 1250 1500 1000 1250 750 1000 500 750 250 500 0 250 0 2010 2012 2014 2016 2018 2020 -250 2010 2012 2014 2016 2018 2020 April 27–28, 2010 Authorized for Public Release Exhibit 3 Macroeconomic Consequences Under Alternative Balance Sheet Strategies 183 of 206 Greenbook-consistent Projections Federal funds rate 10-year Treasury interest rate Percent Percent 5 Option 1 Option 2 Option 5 Option 6* 6.0 Option 1 Option 2 Option 5 Option 6 4 5.5 5.0 3 4.5 2 4.0 1 3.5 0 2010 2011 2012 2013 2014 2015 2016 3.0 2010 2011 2012 2013 2014 2015 2016 *Redemptions for Treasury and agency securities, redemptions and prepayments for agency mortgage-backed securities; no asset sales. 30-year mortgage rate Real GDP growth* Percent Percent 8.0 Option 1 Option 2 Option 5 Option 6 6.0 Option 1 Option 2 Option 5 Option 6 7.5 5.5 5.0 7.0 4.5 6.5 4.0 3.5 6.0 3.0 5.5 2.5 5.0 2010 2011 2012 2013 2014 2015 2016 2.0 2010 2011 2012 2013 2014 2015 2016 *Q4/Q4 growth rate Unemployment rate Core PCE inflation* Percent Percent 10 Option 1 Option 2 Option 5 Option 6 2.2 Option 1 Option 2 Option 5 Option 6 9 8 2.0 1.8 1.6 7 1.4 1.2 6 1.0 5 0.8 4 2010 2011 2012 2013 2014 2015 2016 0.6 2010 2011 *Q4/Q4 growth rate 2012 2013 2014 2015 2016 April 27–28, 2010 Authorized for Public Release Appendix 3: Materials used by Mr. Madigan 184 of 206 April 27–28, 2010 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on FOMC Participants’ Economic Projections Brian Madigan April 27, 2010 185 of 206 April 27–28, 2010 Authorized for Public Release 186 of 206 Exhibit 1. Central tendencies and ranges of economic projections, 2010–12 and over the longer run Percent Change in real GDP 5 Central tendency of projections Range of projections 4 3 Actual 2 1 + 0 _ 1 2 2005 2006 2007 2008 2009 2010 2011 2012 Longer run Percent Unemployment rate 10 9 8 7 6 5 2005 2006 2007 2008 2009 2010 2011 2012 Longer run Percent PCE inflation 3 2 1 2005 2006 2007 2008 2009 2010 2011 2012 Longer run Percent Core PCE inflation 3 2 1 2005 2006 2007 2008 2009 2010 2011 2012 NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual. April 27–28, 2010 Authorized for Public Release 187 of 206 Exhibit 2: Economic Projections for 2010-2012 and Longer Run Real GDP Growth Central Tendency January projections Range January projections Memo: Greenbook January Greenbook 2010 2011 2012 Longer Run 3.2 to 3.7 2.8 to 3.5 3.4 to 4.5 3.4 to 4.5 3.5 to 4.5 3.5 to 4.5 2.5 to 2.8 2.5 to 2.8 2.7 to 4.0 2.3 to 4.0 3.0 to 4.6 2.7 to 4.7 2.8 to 5.0 3.0 to 5.0 2.4 to 3.0 2.4 to 3.0 3.5 3.6 4.4 4.7 4.7 4.5 2.5 2.5 Unemployment Rate Central Tendency January projections Range January projections Memo: Greenbook January Greenbook 2010 2011 2012 Longer Run 9.1 to 9.5 9.5 to 9.7 8.1 to 8.5 8.2 to 8.5 6.6 to 7.5 6.6 to 7.5 5.0 to 5.3 5.0 to 5.2 8.6 to 9.7 8.6 to 10.0 7.2 to 8.7 7.2 to 8.8 6.4 to 7.7 6.1 to 7.6 5.0 to 6.3 4.9 to 6.3 9.3 9.5 8.2 8.2 6.7 6.1 5.2 5.2 PCE Inflation Central Tendency January projections Range January projections Memo: Greenbook January Greenbook 2010 2011 2012 Longer Run 1.2 to 1.5 1.4 to 1.7 1.1 to 1.9 1.1 to 2.0 1.2 to 2.0 1.3 to 2.0 1.7 to 2.0 1.7 to 2.0 1.1 to 2.0 1.2 to 2.0 0.9 to 2.4 1.0 to 2.4 0.7 to 2.2 0.8 to 2.0 1.5 to 2.0 1.5 to 2.0 1.3 1.4 1.0 1.1 1.1 1.3 2.0 2.0 Core PCE Inflation Central Tendency January projections Range January projections Memo: Greenbook January Greenbook 2010 2011 2012 0.9 to 1.2 1.1 to 1.7 1.0 to 1.5 1.0 to 1.9 1.2 to 1.6 1.2 to 1.9 0.7 to 1.6 1.0 to 2.0 0.6 to 2.4 0.9 to 2.4 0.6 to 2.2 0.8 to 2.0 0.9 1.2 0.9 1.1 1.1 1.2 NOTE: See Table 1 for variable definitions April 27–28, 2010 Authorized for Public Release 188 of 206 Exhibit 3. Risks and Uncertainty in Economic Projections Number of participants Risks to GDP Growth Uncertainty about GDP Growth April projections January projections Lower Similar Number of participants 18 April projections January projections 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Downside Higher Balanced Number of participants Uncertainty about PCE Inflation Lower Similar 18 Upside Number of participants Risks to PCE Inflation Higher 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Downside Balanced Upside April 27–28, 2010 Authorized for Public Release Appendix 4: Materials used by Mr. Sheets 189 of 206 April 27–28, 2010 Authorized for Public Release 190 of 206 Europe: Average Residual Maturity of Outstanding Government Debt 14.0 Years 12.5 12.0 10.0 In 2007, 98.5 percent of Greek debt issuance had maturity of at least 5 years. 8.0 6.0 6.0 6.4 6.7 6.8 6.8 7.1 Spain Ireland France Italy 7.6 4.0 2.0 0.0 Germany Portugal * Average residual maturity of marketable debt, as of April 15, 2010. Greece United Kingdom April 27–28, 2010 Authorized for Public Release Appendix 5: Materials used by Mr. Sack 191 of 206 April 27–28, 2010 Authorized for Public Release 192 of 206 FEDERAL RESERVE SYSTEM Date: April 28, 2010 To: Federal Open Market Committee From: William English, Brian Madigan, and Brian Sack Subject: Redemption of Treasury Securities Under Alternative Approaches In yesterday’s discussion of the redemption strategy for the Federal Reserve’s holdings of Treasury securities, several FOMC members raised the possibility of running down our holdings of longer-term securities while continuing to reinvest in shorter-term issues. The table below summarizes the amount of redemptions achieved under several potential strategies along these lines. Cumulative Redemptions of Treasury Securities Under Alternative Approaches ($ Billions) 2010 2011 2012 2013 Full Redemption Strategy 60 130 268 330 Redeem Holdings of Longer-term Securities Original Maturity of 3 Years or More Original Maturity of 5 Years or More Original Maturity of 7 Years or More 16 12 3 58 46 8 192 105 18 254 158 34 Reinvest Maturing Holdings into Short-term Instruments Invest in Bills at Auction 39 Invest in Bills and 2-yr Notes at Auction 16 Invest in Bills, 2- and 3-yr Notes at Auction 0 Invest in Bills in Secondary Market 0 99 30 0 0 216 102 0 0 264 123 0 0 All figures are year-end amounts assuming redemptions begin May 3. April 27–28, 2010 Authorized for Public Release Appendix 6: Materials used by Chairman Bernanke 193 of 206 April 27–28, 2010 Authorized for Public Release 194 of 206 Class II FOMC – Restricted (FR) Comparison of Taylor Rule Prescriptions Percent 10.0 Inflation Measure: CPI or GDP Deflator 8.0 6.0 4.0 2.0 0.0 ‐2.0 2000 ‐4.0 ‐6.0 2001 2002 2003 Fed Funds Rate Taylor (1993) GDP Deflator Taylor (1999) GDP Deflator Taylor (1993) CPI Taylor (1999) CPI 2004 2005 2006 2007 2008 2009 2008 2009 ‐8.0 ‐10.0 Percent 10.0 Inflation Measure: Core CPI or Core PCE 8.0 6.0 4.0 2.0 0.0 ‐2.0 ‐4.0 ‐6.0 ‐8.0 ‐10.0 2000 2001 2002 2003 Fed Funds Rate Taylor (1993) Core PCE Taylor (1999) Core PCE Taylor (1993) Core CPI Taylor (1999) Core CPI 2004 2005 2006 2007 April 27–28, 2010 Authorized for Public Release 195 of 206 Class II FOMC – Restricted (FR) The Unemployment Gap and the Commencement of Tightening Percent 6.0 June‐83 February‐94 June‐04 Oct‐09 4.9 Real Time 5.0 Ex Post Nov‐82 4.3 4.0 3.7 3.0 Jun‐92 2.3 2.0 Jun‐03 1.4 1.2 1.0 0.7 0.0 0.0 ‐1.0 ‐2.0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Net Changes in Nonfarm Payrolls Dates Nov. 1982 to June 1983 June 1992 to Feb. 1994 June 2003 to June 2004 Oct. 2009 to March 2010 Millions 1.24 4.04 1.60 0.12 Percent 1.4 3.7 1.2 0.1 The Recent Evolution of Consumer Prices and M2 (Annualized Changes through March 2010, in Percent) 3-Month 6-Month 12-Month CPI Core CPI 0.9 1.7 2.3 -0.2 0.6 1.1 CPI ex. OER 1.5 2.4 3.1 Core CPI ex. OER 0.1 1.1 1.6 M2 -1.5 1.3 1.5 2010 April 27–28, 2010 Authorized for Public Release Appendix 7: Materials used by Mr. English 196 of 206 April 27–28, 2010 Authorized for Public Release 197 of 206 Class I FOMC – Restricted-Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Bill English April 27-28, 2010 April 27–28, 2010 Authorized for Public Release 198 of 206 Class I FOMC – Restricted Controlled (FR) March FOMC Statement 1. Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. 2. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. 3. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. 4. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgagebacked securities and on March 31 for loans backed by all other types of collateral. Page 1 of 9 April 27–28, 2010 Authorized for Public Release 199 of 206 Class I FOMC – Restricted Controlled (FR) April FOMC Statement—Alternative A 1. Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is showing signs of improving. Although growth in household spending has picked up recently, it is likely to remain constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. 2. Although longer-term inflation expectations have remained stable, recent data suggest inflation has been trending down in response to substantial resource slack. The Committee anticipates that inflation is likely to be quite subdued for some time. 3. To promote a more robust economic recovery in a context of price stability, the Committee anticipates maintaining the target range for the federal funds rate at 0 to ¼ percent for an extended period—until economic conditions such as appreciably higher rates of resource utilization, increasing inflation pressures, or rising inflation expectations warrant a less accommodative monetary policy. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. 4. [To gradually reduce the size of the Federal Reserve’s balance sheet and return it to a more normal composition over time, the Committee will maintain its approach of not reinvesting the proceeds of maturing agency debt and payments on mortgage-backed securities held by the System Open Market Account. The Committee is continuing to roll over maturing Treasury securities.] 5. In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgagebacked securities; it closed on March 31 for loans backed by all other types of collateral. Page 2 of 9 April 27–28, 2010 Authorized for Public Release 200 of 206 Class I FOMC – Restricted Controlled (FR) April FOMC Statement—Alternative B 1. Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. 2. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. 3. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. 4. [To gradually reduce the size of the Federal Reserve’s balance sheet and return it to a more normal composition over time, the Committee will maintain its approach of not reinvesting the proceeds of maturing agency debt and payments on mortgage-backed securities held by the System Open Market Account. The Committee is continuing to roll over maturing Treasury securities. OR To gradually reduce the size of the Federal Reserve’s balance sheet over time, the Committee will maintain its approach of not reinvesting the proceeds of maturing agency debt and payments on mortgage-backed securities held by the System Open Market Account. In addition, on May 3 the Committee will stop reinvesting the proceeds of maturing Treasury securities.] 5. In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgagebacked securities; it closed on March 31 for loans backed by all other types of collateral. Page 3 of 9 April 27–28, 2010 Authorized for Public Release 201 of 206 Class I FOMC – Restricted Controlled (FR) April FOMC Statement—Alternative C 1. Information received since the Federal Open Market Committee met in March indicates that economic activity has continued to strengthen and that the labor market is improving. Though investment in nonresidential structures is declining, housing starts have edged up, growth in household spending has increased, and business spending on equipment and software has risen significantly. While bank lending continues to contract, financial market conditions have become more supportive of economic growth. With economic recovery under way, the Committee anticipates a gradual return to higher levels of resource utilization. 2. Although energy prices have risen on balance in recent months, inflation has remained subdued. The Committee will adjust the stance of monetary policy as necessary over time to ensure that longer-term inflation expectations remain well anchored and that inflation outcomes are consistent with price stability. 3. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and now anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for some time. 4. The Committee will maintain its approach of not reinvesting the proceeds of maturing agency debt and payments on mortgage-backed securities held by the System Open Market Account. In addition, on May 3 the Committee will stop reinvesting the proceeds of maturing Treasury securities. To further reduce the size of the Federal Reserve’s balance sheet, and to return the balance sheet to a more normal composition, the Committee anticipates that it will soon begin gradual sales of agency debt and mortgage-backed securities. The timing and pace of such sales will depend on evolving economic and financial conditions. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. 5. In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgagebacked securities; it closed on March 31 for loans backed by all other types of collateral. Page 4 of 9 April 27–28, 2010 Authorized for Public Release 202 of 206 Class I FOMC – Restricted Controlled (FR) Table 1: Overview of Alternatives for the April 28 FOMC Statement March Statement A April Alternatives B C Economic Activity Recent Developments has continued to strengthen has continued to strengthen has continued to strengthen has continued to strengthen Labor Market is stabilizing; high unemployment; employers remain reluctant to add to payrolls is showing signs of improving; high unemployment; employers remain reluctant to add to payrolls is beginning to improve; high unemployment; employers remain reluctant to add to payrolls is improving Outlook recovery likely to be moderate for a time; gradual return to higher levels of resource utilization --- recovery likely to be moderate for a time; gradual return to higher levels of resource utilization recovery under way; gradual return to higher levels of resource utilization Inflation Recent Developments substantial slack is restraining cost pressures; stable inflation expectations stable inflation expectations but recent data suggest inflation is trending down in response to slack substantial slack is restraining cost pressures; stable inflation expectations energy prices have risen on balance in recent months but inflation remains subdued Outlook likely to be subdued for some time likely to be quite subdued for some time likely to be subdued for some time policy adjustments will ensure inflation outcomes consistent with price stability Federal Funds Rate Target Intermeeting Period Forward Guidance 0 to ¼ percent 0 to ¼ percent 0 to ¼ percent 0 to ¼ percent economic conditions are likely to warrant exceptionally low levels for an extended period anticipate maintaining the 0 to ¼ percent target range for an extended period—until economic conditions such as . . . warrant a less accommodative policy economic conditions are likely to warrant exceptionally low levels for an extended period economic conditions are likely to warrant exceptionally low levels for some time Reinvestment and Sales of SOMA Assets Approach [do not reinvest proceeds of agency debt and MBS but continue to roll over maturing Treasuries] Page 5 of 9 [do not reinvest proceeds of agency debt and MBS but continue to roll over maturing Treasuries] OR [no reinvestment] no reinvestment; “Committee anticipates that it will soon begin gradual sales of agency debt and MBS” April 27–28, 2010 Authorized for Public Release 203 of 206 Class I FOMC – Restricted Controlled (FR) MARCH 2010 FOMC DIRECTIVE The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to complete the execution of its purchases of about $1.25 trillion of agency MBS and of about $175 billion in housing-related agency debt by the end of March. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 6 of 9 April 27–28, 2010 Authorized for Public Release 204 of 206 Class I FOMC – Restricted Controlled (FR) APRIL 2010 FOMC DIRECTIVE — ALTERNATIVE A The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. [To gradually reduce the size of the Federal Reserve’s balance sheet and return it to a more normal composition over time, the Committee directs the Desk to not reinvest the proceeds of maturing agency debt and payments on mortgage-backed securities held by the System Open Market Account.] The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 7 of 9 April 27–28, 2010 Authorized for Public Release 205 of 206 Class I FOMC – Restricted Controlled (FR) APRIL 2010 FOMC DIRECTIVE — ALTERNATIVE B The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. [To gradually reduce the size of the Federal Reserve’s balance sheet and return it to a more normal composition over time, the Committee directs the Desk to not reinvest the proceeds of maturing agency debt and payments on mortgage-backed securities held by the System Open Market Account. OR To gradually reduce the size of the Federal Reserve’s balance sheet over time, the Committee directs the Desk to not reinvest the proceeds of maturing Treasury and agency debt and payments on mortgage-backed securities held by the System Open Market Account.] The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 8 of 9 April 27–28, 2010 Authorized for Public Release 206 of 206 Class I FOMC – Restricted Controlled (FR) APRIL 2010 FOMC DIRECTIVE — ALTERNATIVE C The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. To gradually reduce the size of the Federal Reserve’s balance sheet over time, the Committee directs the Desk to not reinvest the proceeds of maturing Treasury and agency debt and payments on mortgage-backed securities held by the System Open Market Account. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 9 of 9
@FedFRASER