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April 29–30, 2008 Authorized for Public Release Appendix 1: Materials used by Mr. Dudley 192 of 266 Authorized for Public Release April 29–30, 2008 193 of 266 Class II FOMC – Restricted FR Page 1 of 12 (1) U.S. Equity Indices Stabilize August 1, 2007 – April 25, 2008 Index to 100 on 8/1/07 120 Index to 100 on 8/1/07 120 110 110 100 100 90 90 S&P 500 80 80 Nasdaq 70 70 S&P 500 Financials 60 60 08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08 Source: Bloomberg (2) Corporate Credit Spreads Decline January 1 2007 – April 25 2008 1, 25, Percent 12 11 10 9 8 BPS 900 800 700 600 500 400 300 200 100 High-Yield Yield (LHS) Investment Grade Yield (LHS) High-Yield Spread (RHS) Investment Grade Spread (RHS) 7 6 5 4 3 0 01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 Source: Bloomberg (3) Global Credit Default Swap Spreads Narrow March 1, 2007 – April 25, 2008 BPS 800 BPS 200 ITRAXX Crossover (LHS) CDX IG (RHS) 600 150 400 100 200 50 0 0 03/01/07 05/01/07 Source: JP Morgan 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 Authorized for Public Release April 29–30, 2008 194 of 266 Class II FOMC – Restricted FR Page 2 of 12 (4) Implied Volatility Decreases January 1, 2007 – April 25, 2008 BPS 200 Percent 50 MOVE (LHS ) 160 40 VIX (RHS ) 120 80 30 20 1-Month Dollar-Yen Vol 40 10 1-Month Euro-Dollar Vol (RHS ) 0 0 01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 Source: Bloomberg (5) Prices for AAA-Rated Tranches on ABX Indices Rise January 1, 2007 – April 25, 2008 Dollars 110 Dollars 110 2006-01 100 90 90 AAA-Rated Tranches on ABX by Vintage 80 100 2006-02 2007-01 2007 01 70 80 70 60 2007-02 50 60 50 40 40 01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 Source: JP Morgan (6) Ten and Thirty Year AAA –Rated Municipals* Recover January 1, 2007 – April 25, 2008 Ratio Ratio 1.2 1.2 10-Year 1.1 1.1 30-Year 1.0 1.0 0.9 0.9 0.8 0.8 0.7 0.7 0.6 0.6 01/01/07 03/01/07 Source: Bloomberg 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 *This chart shows the ratio of municipal debt yields to Treasury yields Authorized for Public Release April 29–30, 2008 195 of 266 Class II FOMC – Restricted FR Index to 100 on 01/01/08 120 Page 3 of 12 (7) Investment Bank Equity Prices Stabilize January 1, 2008 – April 25, 2008 Index to 100 on 01/01/08 120 100 100 80 80 Morgan Stanley Equity Goldman Sachs Equity 60 60 Lehman Brothers Equity Merrill Lynch Equity 40 40 01/01/08 02/01/08 03/01/08 04/01/08 Source: Markit and Bloomberg (8) Investment Bank CDS Spreads Narrow January 1 2008 – April 25 2008 1, 25, BPS 500 BPS 500 Morgan Stanley CDS Goldman Sachs CDS 400 400 Lehman Brothers CDS Merrill Lynch CDS 300 300 200 200 100 100 0 0 01/01/08 02/01/08 Source: Markit and Bloomberg 03/01/08 04/01/08 Authorized for Public Release April 29–30, 2008 196 of 266 Class II FOMC – Restricted FR Page 4 of 12 (9) Collateral Haircuts Stabilize at Higher Levels February 1, 2008 – April 9, 2008 COLLATERAL Treasury Agency Debt g y Agency MBS Date 9-Apr 10-Mar 3-Mar 1-Feb 9-Apr 10-Mar 3-Mar 3M 1-Feb 9-Apr 10-Mar 3-Mar 1-Feb Overnight Average High 0.5% 1.5% 0.3% 1.5% 0.2% 1.5% 0.2% 1.5% 1.3% 3.5% 0.7% 2.0% 0.6% 0 6% 2.0% 2 0% 0.5% 2.0% 5% 7% 5% 7% 3% 3% 3% 5% Low 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 0% 0.0% 3% 3% 3% 2% Maturity 1-Month Average High 0.6% 1.5% 0.4% 1.5% 0.3% 1.5% 0.2% 1.5% 2.1% 7.5% 1.9% 7.5% 1.1% 1 1% 3.0% 3 0% 1.1% 3.0% 6% 8% 5% 8% 3% 3% 3% 6% 3-Month Low Average High 0.7% 0.0% 2.0% 0.0% 0.4% 1.5% 0.0% 0.4% 1.5% 0.0% 0.3% 1.5% 0.0% 1.6% 5.0% 0.0% 1.7% 5.5% 0.0% 0 0% 1.4% 1 4% 4.5% 4 5% 0.0% 1.2% 4.5% 3% 6% 9% 3% 6% 10% 3% 4% 5% 3% 4% 5% Low 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 0% 0.0% 3% 3% 3% 3% Non-agency MBS Prime Alt-A 9-Apr 10-Mar 3-Mar 1-Feb 9-Apr 10-Mar 3-Mar 1-Feb 21% 18% 16% 13% 38% 28% 14% 19% 28% 28% 18% 20% 43% 43% 18% 43% 15% 10% 15% 5% 30% 18% 10% 10% 27% 19% 16% 11% 36% 28% 16% 16% 35% 28% 18% 20% 43% 43% 20% 43% 15% 12% 15% 4% 30% 18% 10% 10% 25% 19% 18% 14% 33% 30% 35% 28% 18% 20% 43% 43% 15% 15% 18% 7% 23% 18% 28% 43% 13% 9-Apr 10-Mar 3-Mar 1-Feb 9-Apr 10-Mar 3-Mar 1-Feb 17% 12% 11% 10% 36% 28% 26% 25% 25% 25% 25% 25% 70% 70% 70% 70% 10% 5% 3% 3% 19% 10% 9% 6% 18% 15% 13% 10% 39% 27% 27% 24% 25% 25% 25% 25% 70% 70% 70% 70% 11% 5% 3% 3% 25% 15% 10% 10% 19% 18% 18% 13% 39% 36% 35% 28% 25% 25% 25% 25% 70% 70% 70% 70% 12% 15% 15% 3% 25% 25% 20% 10% Corporate Debt High Grade High Yield Source: Survey of 14 Hedge Funds and 1 REIT Authorized for Public Release April 29–30, 2008 197 of 266 Class II FOMC – Restricted FR Page 5 of 12 (10) Bank Term Funding Pressures Revive: One-Month Libor–OIS Spread August 14, 2007 – April 28, 2008 BPS 120 BPS 120 U.S. 100 100 U.K. Euro-Area 80 80 60 60 40 40 20 20 0 0 08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08 Source: Bloomberg (11) Three-Month Libor – OIS Spread August 14, 2007 – A il 28 2008 A t 14 April 28, BPS 120 BPS 120 100 100 80 80 60 60 40 40 U.S. U.K. Euro-Area 20 20 0 0 08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08 Source: Bloomberg (12) Range of One-Month LIBOR Rates from 16 Contributing Banks April 4, 2008 – April 28, 2008 Percent 3.00 Percent 3.00 WSJ Article on LIBOR M anipulation LIBOR Fixing g 2.90 2.90 2.80 2.80 2.70 2 70 2.70 2 70 2.60 2.60 04/04/08 04/08/08 Source: Bloomberg 04/10/08 04/14/08 04/16/08 04/18/08 04/22/08 04/24/08 04/28/08 Authorized for Public Release April 29–30, 2008 198 of 266 Class II FOMC – Restricted FR Page 6 of 12 (13) Three-month FX Swap Financing Cost to Three-Month LIBOR August 1, 2007 – April 28, 2008 BPS 140 BPS 60 Spread between 3-Month LIBOR and OIS Rate (LHS) 120 Spread between Implied 3-Month FX Swap Financing and 3-Month LIBOR Rate (RHS) 50 100 40 80 30 60 20 40 10 20 0 0 -10 08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 Source: JP Morgan Percent 8.00 (14) Spread between Jumbo and Conforming Mortgage Rates Remains Wide January 1 2007 – April 25 2008 1, 25, BPS 180 Conforming Mortgage Rates (LHS) 7.50 150 Jumbo Mortgage Rates (LHS) Spread (RHS) 7.00 120 6.50 90 6.00 60 5.50 30 5.00 0 01/01/07 03/01/07 05/01/07 Source: Bloomberg 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 (15) TAF Auction Results December 20, 2007 – April 21, 2008 BPS Billions of Dollars 90 60 Auction Size (RHS) 75 50 TAF Stop-out Spread to Minimun Bid Rate (LHS) p p ( ) 60 40 45 30 30 20 15 10 0 0 12/20/07 12/27/07 01/17/08 Source: Federal Reserve Board 01/31/08 02/14/08 02/28/08 03/13/08 03/27/08 04/10/08 04/24/08 Authorized for Public Release April 29–30, 2008 199 of 266 Class II FOMC – Restricted FR Page 7 of 12 (16) Federal Reserve Term Securities Lending Facility Results Auction Settlement Term Collateral Amount Minimum Stop-out Fee Rate Rate 3/28/2008 28 Days Schedule 2 $75 b 0.25% 4/4/2008 28 Days Schedule 1 $25 b 4/11/2008 28 Days Schedule 2 4/18/2008 28 Days 4/25/2008 28 Days Propositions Bid/Cover 0.33% $86.1 b 1.15 0.10% 0.16% $46.9 b 1.88 $50 b 0.25% 0.25% $40.0 b 0.68 Schedule 1 $25 b 0.10% 0.10% $35.1 b 1.40 Schedule 2 $75 b 0.25% 0 25% 0.25% 0 25% $ 59.5 b 59 5 0.79 0 79 Source: Federal Reserve Board Percent TSLF 3.00 2.50 2.00 TSLF TSLF 4.00 4 00 3.50 (17) GC Treasury Repo Market Improves as a Result of TSLF Auctions February 1, 2008 – April 25, 2008 TSLF Percent 1.50 4.00 4 00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 1.00 0.50 Overnight GC Treasury Repo Rate Target Fed Funds Rate 0.00 0.00 02/01/08 03/01/08 04/01/08 Source: F d l R S Federal Reserve B k of N Y k Bank f New York (18) One-Month Libor -OIS Spread Declines After Fed Actions August 1, 2007 – April 28, 2008 BPS 120 Increase TAF size DW Rate Cut 100 80 Increase TAF size and Term M BS Repo FOM C Cuts Policy Rate by 50 bps 60 Intermeeting Rate Cut BPS 120 DW Rate Cut and PDCF Introduced 100 80 60 40 40 20 TAF Introduced TSLF Introduced 0 20 0 08/01/07 09/01/07 10/01/07 Source: Bloomberg 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08 Authorized for Public Release April 29–30, 2008 200 of 266 Class II FOMC – Restricted FR Page 8 of 12 Percent (19) Fed Funds Futures Curve Shifts Upward Percent 3.50 3.50 1/29/2008 3/17/2008 4/25/2008 3.00 3.00 2.50 2.50 2.00 2.00 1.50 1.50 1.00 1.00 Apr-08 M ay-08 Jun-08 Jul-08 Sep-08 Oct-08 Nov-08 Dec-08 Fed Funds Futures Contracts Source: Bloomberg Percent Aug-08 Percent (20) Eurodollar Futures Curve: A Bigger Upward Shift 4.00 4.00 3.50 3.50 3.00 3.00 2.50 2.50 2.00 2.00 1.50 1/29/2008 3/17/2008 1.50 4/25/2008 1.00 1.00 Jun-08 Sep-08 Source: Bloomberg Dec-08 M ar-09 Jun-09 Eurodollar Futures Contracts Sep-09 Dec-09 Authorized for Public Release April 29–30, 2008 201 of 266 Class II FOMC – Restricted FR Page 9 of 12 (21) Distribution of Expected Policy Target Among Primary Dealers Prior to April 29-30 FOMC Meeting Percent 4.5 S urvey Response -size indicates freq 4.0 April Average Forecast 3.5 Market Rates as of 4/21 3.0 2.5 2.0 1.5 1.0 0.5 Q2 2008 Q3 2008 Q1 2009 Q4 2008 Q2 2009 Q3 2009 Q4 2009 Source: Dealer Policy Survey (22) Distribution of Expected Policy Target Among Primary Dealers Prior to March 18 FOMC Meeting Percent 4.5 S urvey Response -size indicates freq 4.0 March Average Forecast 3.5 Market Rates as of 3/10 3.0 2.5 25 2.0 1.5 1.0 0.5 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Source: Dealer Policy Survey (23) Probabilities for Policy Rate Outcomes for April FOMC Meeting March 1, 2008 – April 25, 2008 Percent 100 1.75 Percent Target Rate 80 2.00 Percent Target Rate 2.25 Percent Target Rate 60 40 1.75 Percent Target Rate 20 0 03/01/08 03/06/08 03/13/08 03/20/08 Source: Federal Reserve Bank of Cleveland 03/28/08 04/04/08 04/11/08 04/18/08 04/25/08 Authorized for Public Release April 29–30, 2008 202 of 266 Class II FOMC – Restricted FR Index to 100 on 1/1/07 200 Page 10 of 12 (24) Recent Commodity Price Pressures Concentrated in Energy Index to 100 on 1/1/07 January 1, 2007 – April 25, 2008 200 GSCI Spot 180 180 GSCI Energy GSCI Agriculture 160 160 GSCI Industrial Metals 140 140 120 120 100 100 80 80 01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 Source: Bloomberg Percent 3.40 ( ) (25) TIPS Implied Average Rate of Inflation: 5-10 Year Horizon p g August 1, 2007 – April 25, 2008 Percent 3.40 Barclays 3.20 3.20 Federal Reserve Board 3.00 3.00 2.80 2 80 2.80 2 80 2.60 2.60 2.40 2.40 2.20 2.20 08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 Source: Federal Reserve Board and Barclays Capital 01/01/08 02/01/08 03/01/08 04/01/08 Authorized for Public Release April 29–30, 2008 203 of 266 Class II FOMC – Restricted FR (26) Volatility in the Fed Funds Market January 1, 2008 – April 25, 2008 Percent 6.00 Page 11 of 12 High on 1/7: 7% 5.00 Percent 6.00 High on 4/4: 4/4 10% High on 4/23: 4/23 10% 5.00 4.00 4.00 3.00 3.00 2.00 2.00 Effective Rate ff i 1.00 1.00 Target Rate 0.00 0.00 01/01/08 02/01/08 03/01/08 04/01/08 Source: Federal Reserve Bank of New York (27) Primary Credit Facility and Primary Dealer Credit Facility Borrowing January 1, 2008 – April 25, 2008 Billions of Dollars 60 PDCF 50 PCF 40 30 20 10 0 01/01/08 01/21/08 02/08/08 Source: Federal Reserve Bank of New York 02/28/08 03/19/08 04/08/08 Authorized for Public Release April 29–30, 2008 Class II FOMC – Restricted FR 204 of 266 Page 12 of 12 APPENDIX: Reference Exhibits Percent Percent (28) Treasury Yield Curve Shifts Upward 4.50 1/29/2008 4.00 3/17/2008 4.50 4/25/2008 4.00 3.50 3.50 3.00 3.00 2.50 2.50 2.00 2.00 1.50 1.50 1-Year 2-Year Source: Bloomberg (29) Dollar Remains Weak January 1, 2006 – April 25, 2008 y , p , Index to 100 115 110 105 100 95 90 85 80 75 70 10-Year 7-Year 5-Year Tenor 3-Year 1.00 Index to 100 115 110 105 100 95 90 85 80 75 70 Dollar Appreciation 1.00 Broad Trade-Weighted Dollar: Index as of Jan 97 Dollar Depreciation Yen vs. Dollar: Index as of Jan06 01/01/06 04/01/06 Euro vs. Dollar: Index as of Jan06 07/01/06 10/01/06 01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/08 Source: Bloomberg and Federal Reserve Board (30) Dollar Tracks Interest Rate Differentials January 1, 2007 – April 25, 2008 BPS 120 $/Euro 1.28 Eurodollar-Euribor* (LHS) 80 $ per Euro ( p (RHS) ) 1.32 40 1.36 0 1.40 -40 1.44 -80 1.48 120 -120 1.52 1 52 -160 1.56 -200 1.60 01/01/07 03/01/07 Source: Bloomberg 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 * Based on December 2008 calendar spread. April 29–30, 2008 Authorized for Public Release Appendix 2: Materials used by Mr. Madigan 205 of 266 April 29–30, 2008 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on FOMC Participants’ Economic Projections Brian Madigan April 29, 2008 206 of 266 April 29–30, 2008 Authorized for Public Release 207 of 266 Table 1: Economic Projections of Federal Reserve Governors and Reserve Bank Presidents 1 2008 2009 2010 Central Tendencies Real GDP Growth January projections 0.3 to 1.2 1.3 to 2.0 2.0 to 2.8 2.1 to 2.7 2.6 to 3.1 2.5 to 3.0 Unemployment Rate January projections 5.5 to 5.7 5.2 to 5.3 5.2 to 5.7 5.0 to 5.3 4.9 to 5.5 4.9 to 5.1 PCE Inflation January projections 3.1 to 3.4 2.1 to 2.4 1.9 to 2.3 1.7 to 2.0 1.8 to 2.0 1.7 to 2.0 Core PCE Inflation January projections 2.1 to 2.4 2.0 to 2.2 1.9 to 2.1 1.7 to 2.0 1.7 to 1.9 1.7 to 1.9 Real GDP Growth January projections 0.0 to 1.5 1.0 to 2.2 1.8 to 3.0 1.8 to 3.2 2.0 to 3.4 2.2 to 3.2 Unemployment Rate January projections 5.3 to 6.0 5.0 to 5.5 5.1 to 6.3 4.9 to 5.7 4.7 to 5.9 4.7 to 5.4 PCE Inflation January projections 2.8 to 3.8 2.0 to 2.8 1.7 to 3.0 1.7 to 2.3 1.5 to 2.0 1.5 to 2.0 Core PCE Inflation January projections 1.9 to 2.5 1.9 to 2.3 1.7 to 2.2 1.7 to 2.2 1.3 to 2.0 1.4 to 2.0 Ranges 1. Projections of real GDP growth, PCE inflation and core PCE inflation are fourth-quarter-to-fourthquarter growth rates, i.e. percentage changes from the fourth quarter of the prior year to the fourth quarter of the indicated year. PCE inflation and core PCE inflation are the percentage rates of change in the price index for personal consumption expenditures and the price index for personal consumption expenditures excluding food and energy, respectively. Each participant's projections are based on his or her assessment of appropriate monetary policy. The range for each variable in a given year includes all participants' projections, from lowest to highest, for that variable in the given year; the central tendencies exclude the three highest and three lowest projections for each variable in each year. Authorized for Public Release April 29–30, 2008 208 of 266 Exhibit 2 Uncertainty and Risks in Economic Projections Degree of Uncertainty about Growth Outlook Risk Weighting around Growth Outlook Number of Participants Number of Participants 16 16 15 January April January April 14 15 14 13 13 12 12 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 Lower Historically Normal Higher 0 Weighted to Downside Degree of Uncertainty about Outlook for Total Inflation Number of Participants Broadly Balanced Weighted to Upside Risk Weighting around Outlook for Total Inflation Number of Participants 16 15 January April 14 16 15 January April 14 13 13 12 12 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 Lower Historically Normal Higher 0 Weighted to Downside Broadly Balanced Weighted to Upside April 29–30, 2008 Authorized for Public Release Appendix 3: Materials used by Mr. English 209 of 266 Authorized for Public Release April 29–30, 2008 210 of 266 Class I FOMC – Restricted Controlled (FR) Material for the FOMC Briefing on Monetary Policy Alternatives William B. English April 29-30, 2008 April 29–30, 2008 Class I FOMC – Restricted Controlled (FR) Authorized for Public Release 211 of 266 Table 1: Alternative Language for the April 2008 FOMC Announcement March FOMC Policy Decision Rationale Assessment of Risk Alternative A Alternative B 1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent. 2. Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters. 3. Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1-3/4 percent. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. Inflation has been elevated, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully. The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. 4. Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability. The Committee judged that a further reduction in interest rates was appropriate to foster moderate growth over time and to mitigate the risks to economic activity. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability. Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. April 29-30, 2008 Alternative C The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2-1/4 percent. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. Inflation has been elevated, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, but uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully. Although downside risks to growth remain, the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. April 29–30, 2008 Authorized for Public Release Appendix 4: Materials used by Mr. Stockton 212 of 266 Authorized for Public Release April 29–30, 2008 213 of 266 Class II FOMC - RESTRICTED (FR) Gross Domestic Product (percent change at an annual rate) 2007-Q4 Final Real GDP 2008-Q1 Greenbook Advance 0.6 0.4 0.6 2.4 -0.3 -0.2 2.3 2.0 1.2 2.8 1.0 -7.0 -0.9 3.6 1.0 -6.1 -1.3 3.4 6.0 12.4 3.1 -1.1 -2.8 -0.2 -2.5 -6.2 -0.7 -25.2 -30.9 -26.7 Government Federal State and Local 2.0 0.5 2.8 0.7 1.9 0.1 2.0 4.6 0.5 Exports 6.5 6.2 5.5 Imports -1.4 2.4 2.5 -21.7 -2.4 2.7 2.2 0.8 -0.7 -503.2 -492.4 -495.9 3.9 3.5 3.5 2.5 2.1 2.2 Final Sales Personal Consumption Durables Nondurables Services Business Fixed Investment Nonresidential Structures Equipment and Software Residential Investment Level in chained 2000 dollars: Change in nonfarm business inventories Change in farm inventories Net Exports Price Indexes: Total PCE Chain Price Index Core PCE Chain Price Index Page 1 of 1 April 29–30, 2008 Authorized for Public Release 214 of 266 Appendix 5: Materials used by Messrs. Madigan, Meyer, Clouse, Hilton, and Dudley Authorized for Public Release April 29–30, 2008 Implications of Interest on Reserves for Monetary Policy Implementation Presentation by Federal Reserve Staff at Joint Meeting of Board of Governors and p Federal Open Market Committee April 30, 2008 Class I FOMC - Restricted Controlled (FR) 215 of 266 Authorized for Public Release April 29–30, 2008 216 of 266 New powers effective October 2011 Board may authorize Reserve Banks to pay interest on balances maintained by depository institutions at a rate or rates not to exceed the general level of shortterm interest rates Board may set required reserve ratios on transaction deposits i a range of 0 t 14 percent ( d it in f to t (currently 8 t tl to 14 percent) Permits effective elimination of reserve requirements q April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 2 of 52 Authorized for Public Release April 29–30, 2008 217 of 266 Remaining statutory constraints Reserve requirements can be applied only to transaction deposits, nonpersonal time deposits, and eurodollar liabilities Only depository institutions subject to reserves Reserve requirements were designed to facilitate control of M1 Prohibition against payment of interest on demand deposits by depository institutions Statutory constraints on open market purchases Statutory requirements for cost recovery on priced services Absence of interest payments to Treasury and foreign central banks on their Fed accounts April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 3 of 52 April 29–30, 2008 Authorized for Public Release 218 of 266 Process to date Chairman asked staff to begin background work System workgroup undertook a preliminary study of a range of options for implementing monetary policy System workgroup initiated work on implications for priced services and accounting Board hosted a workshop on monetary policy p y g implementation attended by five foreign central banks Today’s joint Board-FOMC meeting April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 4 of 52 April 29–30, 2008 Authorized for Public Release 219 of 266 Outline of briefing Overview (Madigan) Current approach to implementing U.S. monetary policy (Meyer) Discussion of five options (Clouse and Hilton) Concluding comments (D dl ) C l di t (Dudley) April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 5 of 52 April 29–30, 2008 Authorized for Public Release 220 of 266 Following the briefing, we will seek your comments on: Criteria for evaluating options Options Process and Timeline April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 6 of 52 Authorized for Public Release April 29–30, 2008 221 of 266 Implementing U.S. Monetary Policy: p g y y Current Framework and Operating Procedures Summarize Focus on policy implementation in normal times banking system’s demand for central bank balances Desk’s management of the supply of balances equilibrium in the federal funds market brief discussion of policy implementation since August Conclude with strengths and shortcomings of current approach April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 7 of 52 Authorized for Public Release April 29–30, 2008 222 of 266 Demand: Reserve Requirements 2008 Reserve Requirement Ratios Type of liability Requirement (% of liabilities) Net transaction accounts $0 to $9.3 million 0% > $9.3 million to $43.9 million 3% > $43.9 million $ 10 % Nonpersonal time deposits 0% Eurocurrency liabilities 0% For details on the multitude of complex definitions, rules, carryover provisions, etc., see the 135 page Reserve Maintenance Manual April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 8 of 52 Authorized for Public Release April 29–30, 2008 223 of 266 Demand: Reserve Requirements DIs meet reserve requirements by holding currency in vaults and ATMs reserve balances at a Federal Reserve Bank balances at a correspondent bank No remuneration, so DIs try to reduce required reserves t th level of vault cash and b l to the l l f lt h d balances th they would hold if there were no requirements sweep p g p programs reduce reservable deposits p only 1,500 of 17,000 DIs need to hold reserve balances required reserve balances ≈ 0.1% of total deposits April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 9 of 52 Authorized for Public Release April 29–30, 2008 224 of 266 Demand: Contractual Clearing Balances Many DIs want working balances larger than their required reserve balances to clear Fedwire and other payments to provide a cushion against overnight overdrafts Thousands of DIs hold contractual clearing balances accrue “earnings credits” at 80% of 3-month T-bill rate credits can be used only to offset fees for priced services April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 10 of 52 Authorized for Public Release April 29–30, 2008 225 of 266 Required Reserve Balances & Contractual Clearing Balances 16 Required Reserve Balances weekly average, billions of $ a s 14 12 10 8 Contractual Clearing Balances 6 April 30, 2008 Class I FOMC - Restricted Controlled (FR) Apr 2 2008 r Jan 2 2008 n Oct 3 2007 t Jul 4 2007 l Apr 4 2007 r Jan 3 2007 n Oct 4 2006 t Jul 5 2006 l Apr 5 2006 r Jan 4 2006 n Oct 5 2005 t Jul 6 2005 l Apr 6 2005 r Jan 5 2005 n Oct 6 2004 t Jul 7 2004 l Apr 7 2004 r Jan 7 2004 n 4 Page 11 of 52 Authorized for Public Release April 29–30, 2008 226 of 266 Role of Required and Contractual Balances Establish a predictable lower bound on period periodaverage demand for balances levels of required & contractual balances are set before each reserve maintenance period Averaging provision, carry-over, & clearing band make demand for balances interest elastic interest-elastic until final day of maintenance period April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 12 of 52 Authorized for Public Release April 29–30, 2008 227 of 266 Demand: Excess Reserves Large DIs seek to hold zero excess reserves on avg avg. Small DIs hold $1.5 billion of ex. res. on avg. but level varies widely from day to day, reflecting volume of Fedwire payments may need a cushion against overdrafts but not use priced services, services so contractual clearing balance unappealing Total balances (required + clearing + excess) vary between $10 and $25 billion per day in normal times; wider variation since August April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 13 of 52 1/ 1/ 0 7 1/ 16 / 0 7 6 1/ 3 1/ 0 7 2 / 15 / 0 7 5 3/2/07 3 / 17 / 0 7 7 4 / 1/ 0 7 4 / 16 / 0 7 6 5 / 1/ 0 7 5 / 16 / 0 7 6 5 / 3 1/ 0 7 6 / 15 / 0 7 5 6/30/07 7 / 15 / 0 7 5 7/30/07 8 / 14 / 0 7 4 8/29/07 9 / 13 / 0 7 3 9/28/07 10 / 13 / 0 7 3 10 / 2 8 / 0 11/ 12 / 0 7 2 11/ 2 7 / 0 7 12 / 12 / 0 7 2 12 / 2 7 / 0 1/ 1 1/ 0 8 1/ 2 6 / 0 8 2 / 10 / 0 8 0 2/25/08 3 / 1 1/ 0 8 3/26/08 b illi n s o f $ io April 29–30, 2008 April 30, 2008 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 228 of 266 Depository Institutions’ Total Balances at Federal Reserve Banks (daily, January 2007 to March 2008) 55 50 45 40 35 30 25 20 15 10 5 Page 14 of 52 Authorized for Public Release April 29–30, 2008 229 of 266 Daylight Credit Reduces Demand for Balances Fedwire processes > 0 5 million interbank payments 0.5 (with a value of ≈ $2.5 trillion) per day Rather than holding large non-interest-bearing balances at the Fed, DIs make heavy use of daylight credit to clear interbank payments. sum of end-of-minute overdrafts averages ≈ $60 billion per day Proposed revision to PSR Policy may further reduce demand for balances Fed now charges 36 basis points/yr for daylight credit proposal would make collateralized daylight credit free April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 15 of 52 Authorized for Public Release April 29–30, 2008 230 of 266 Supply of Balances Desk s Desk’s tries to keep S = D to keep ffr = target Desk seeks to offset changes in autonomous factors and discount window credit that affect supply of balances also seeks to accommodate changes in demand Outright purchases/sales, plus 14- & 28-day repo, supply a base of balances < projected demand Temporary open market operations add (or drain) balances almost every day Desk trades with 20 primary dealers interbank markets distribute balances April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 16 of 52 Authorized for Public Release April 29–30, 2008 231 of 266 Supply: Autonomous Factors and D.W. Credit Unanticipated changes in autonomous factors can make supply of balances differ from projected level currency in circulation float Treasury balance (Treasury deposits at FRBs) foreign repo pool Unexpected changes in PDCF credit also can make pp y projection supply of balances differ from p j Changes in TAF credit are known in advance, and offset April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 17 of 52 Authorized for Public Release April 29–30, 2008 232 of 266 Supply: Temporary Open Market Operations Desk executes repo almost every day Size typically from $2 billion to $20 billion Maturities from 1 to 7 days, depending on persistence of projected need Daily o.m.o. are in addition to 14-day & 28-day repo Replacing maturing repo with larger repo adds to supply of balances Replacing maturing repo with smaller repo (or none) reduces supply of balances Reverse repo to drain balances are rare April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 18 of 52 April 29–30, 2008 Authorized for Public Release 233 of 266 How well does our current approach work? In normal times current approach usually keeps times, effective funds rate close to target But current approach allows larger deviations during periods of stress in interbank markets April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 19 of 52 April 30, 2008 Class I FOMC - Restricted Controlled (FR) ar Ma 26 2008 Mar 6 2008 Feb 15 2008 b Jan 28 2008 n Ja 8 2008 an Dec 19 2007 c Nov 29 2007 v No 9 2007 ov Oc 22 2007 ct O Oct 2 2007 Sep 12 2007 p Aug 23 2007 g Au 3 2007 ug Ju 16 2007 ul Jun 26 2007 n Ju 6 2007 un May 17 2007 y Ap 27 2007 pr A Apr 9 2007 Ma 20 2007 ar Feb 28 2007 b Fe 8 2007 eb Jan 19 2007 n Ja 1 2007 an perc centage points April 29–30, 2008 Authorized for Public Release 234 of 266 Effective FFR minus Target: Normal Times vs. Market Turmoil (daily, January 2007 to March 2008) 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 -1.2 Page 20 of 52 Authorized for Public Release April 29–30, 2008 235 of 266 Equilibrium in the Federal Funds Market (1) DIs DIs’ demand for balances varies from day to day day, reflecting reserve requirements, clearing balance commitments, and volume of payments In morning, fed funds usually trade at or near target rate because DIs expect Desk to supply enough balances t make ff ≈ t b l to k ffr target t a firm or soft rate signals excess demand or supply Desk conducts open market operation to make day’s day s projected supply = forecast of quantity demanded April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 21 of 52 Authorized for Public Release April 29–30, 2008 236 of 266 Equilibrium in the Federal Funds Market (2) As day progresses autonomous factors and demand progresses, are realized; banks make and settle payments and trade fed funds; and actual ffr is determined Desk cannot adjust S of balances late in day, so if realized S ≠ actual D, ffr will deviate from target because balances are not remunerated, an excess supply can push ffr down to zero in the afternoon reluctance to borrow means an excess demand can cause ffr to rise above primary credit rate in the afternoon a small volume of trades at very low or very high rates can make effective (daily average) ffr deviate from target April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 22 of 52 Authorized for Public Release April 29–30, 2008 237 of 266 Burdens Imposed by Current Approach Reserve requirements deposit reports zero interest requirements, reports, on balances impose unnecessary burdens on society Reserves tax from zero interest on required reserve balances ≈ $380 million in 2006, $340 million in 2007 Sweep programs and other methods DIs use to minimize reserves tax waste real resources High costs to collect/process deposit data and to monitor/ensure compliance with complex rules for required reserves and contractual clearing balances April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 23 of 52 Authorized for Public Release April 29–30, 2008 238 of 266 Strengths & Shortcomings of U.S. Approach Usually keeps funds rate close to target in normal times but allows occasional large deviations Allows larger and more frequent deviations from target during periods of market stress Large deviations reflect: projection errors; reluctance to borrow; no remuneration of b l b ti f balances; i bilit t adjust inability to dj t supply of balances late in day Even sophisticated market participants find current approach hard to understand, somewhat opaque Reserve requirements & zero interest on balances impose burdens, but are not needed to hit ffr target April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 24 of 52 Authorized for Public Release April 29–30, 2008 239 of 266 Core Structural Elements Balance Targets: Mandatory Voluntary or None Mandatory, Voluntary, Bands Around Target Balances Maintenance Period: Single or Multiple Day Funds Rate Corridor Upper Bound: Standing Lending Facility Lower Bound: Interest on Excess Reserves (or Redeposit Facility) April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 25 of 52 Authorized for Public Release April 29–30, 2008 240 of 266 Possible Limitations: Stigma and the Standing Lending Facility Standing lending facility should, in theory, place a cap on the federal funds rate. But stigma may impair the effectiveness of the cap. Potentially d P t ti ll undermines effectiveness of systems th t rely h i ff ti f t that l heavily il on standing lending facility. Disadvantages institutions that are the least inclined to borrow. Overnight Borrowing in the Federal Funds Market (March 24 - April 24) Institution Name Citibank Bank of America JP Morgan Chase Wachovia State Street Bank of New York Wells Fargo April 30, 2008 Number of Trades 108 102 185 7 4 43 32 Average Trade Size ($ Millions) 340 338 345 239 312 381 199 Class I FOMC - Restricted Controlled (FR) Average Spread over Primary Credit Rate (Basis Points) 18 35 44 100 31 23 73 Page 26 of 52 Authorized for Public Release April 29–30, 2008 241 of 266 Multiple- and Single-Day Systems Multiple Day Systems Options 1 and 2 Intraperiod arbitrage to stabilize the funds rate Single-Day Systems Options 3-5 Standing facilities and rates of remuneration to stabilize the funds rate. April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 27 of 52 Authorized for Public Release April 29–30, 2008 242 of 266 Option 1: Remunerate Required and Excess Reserve Balances Key Structural Features y Standing lending facility sets upper bound on funds rate Interest on excess reserves sets lower bound on funds rate Mandatory requirements and two-week maintenance period How it Should Work Downward sloping demand curve on last day of maintenance period Demand curve on earlier days in the period relatively flat at the target rate o e over a wide range. de a ge Banks can substitute balances across days of the maintenance period Desk adjusts supply of balances each day to address daily demands and maintenance-period average needs. p g April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 28 of 52 Authorized for Public Release April 29–30, 2008 243 of 266 Option 2: V l O i 2 Voluntary B l Balance T Targets Key Structural Features y Voluntary Balance Target Multiple-day Period (between FOMC meetings) Relatively narrow target band y g Funds Rate Corridor How it Should Work Basic B i mechanics similar t option 1 h i i il to ti Longer maintenance period should allow more scope for substitution of balances across days of the period Might require less fine-tuning of daily balances but… Key question is the magnitude of voluntary requirements Low level could limit scope for substitution and arbitrage April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 29 of 52 April 29–30, 2008 Authorized for Public Release 244 of 266 Option 3: Simple Corridor Key Structural Features y No target balance Narrow symmetric funds rate corridor How It Should Work Downward sloping demand for reserves within the corridor Demand for reserves stems from precautionary motive to avoid overnight overdrafts Staff would estimate daily demand at the target rate Desk would supply daily balances to meet estimated demand at target rate Demand curve could be rather steep Funds rate could be volatile within the corridor April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 30 of 52 Authorized for Public Release April 29–30, 2008 245 of 266 Option 4: Fl O i 4 Floor with High B l i h Hi h Balances Key Structural Features y No target balance Asymmetric funds rate corridor Remuneration rate set just below target funds rate High balances to keep funds rate near the floor of the corridor How it Should Work Desk provides an ample supply of balances each day ($50 billion) Funds rate should trade near the lower bound of the corridor Fluctuations reser e Fl ct ations in reserve factors should sho ld have little impact on funds rate Could reduce daylight overdrafts Potential for strategic behavior? Minimal costs in holding large reserve position April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 31 of 52 Authorized for Public Release April 29–30, 2008 246 of 266 Option 5: Voluntary Daily Target with Target Band Key Structural Elements Voluntary Daily Balance Target Relatively wide target band Upper bound on full remuneration of balances Penalty for shortfalls Wide funds rate corridor How it Should Work Demand curve relatively flat within the target band But downward sloping near the boundaries of the target band. Desk D k supplies b l li balances each d close h day l to the midpoint of the target band. Key Questions: How large would aggregate level of targets be? How wide to set target band? ? April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 32 of 52 Authorized for Public Release April 29–30, 2008 247 of 266 General Issues Competitive issues Appropriate setting of remuneration rate Somewhat below target rate to reflect risk premium Governance: FOMC and Board Roles Restrictions on payment of interest on demand deposits FOMC target rate and Board-determined remuneration rate Transition Moving from current system to new system could be complicated April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 33 of 52 April 29–30, 2008 Authorized for Public Release 248 of 266 Assessment of Different Options: Objectives Reduce burdens and deadweight losses Enhance monetary policy implementation Promote efficient and resilient money markets and government securities markets Promote an efficient and resilient payments system P t ffi i t d ili t t t April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 34 of 52 Authorized for Public Release April 29–30, 2008 249 of 266 Option 1: Remunerate Required and Excess Reserve p q Balances Advantages: Disadvantages: Easy to implement given where we are now Tested basic framework that would represent an improvement over the status quo Retains R t i current administrative burdens t d i i t ti b d Limited flexibility in reserve averaging parameters Open Issues Uncertain by how much required reserve balances would rise April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 35 of 52 Authorized for Public Release April 29–30, 2008 250 of 266 Option 2: Voluntary Balance Targets Advantages: Disadvantages: Significant reduction in administrative burdens Also a tested basic framework Offers more flexibility in reserve targets Retains some administrative burden, for both DIs and FRS Open issues: Identifying Id tif i a system of voluntary targets that yields sufficient t f l t t t th t i ld ffi i t balances and is administratively workable April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 36 of 52 Authorized for Public Release April 29–30, 2008 251 of 266 Option 3: Simple Corridor Advantages: Disadvantages: Eliminates administrative burdens of reserve requirements/targets and reserve maintenance periods Should keep funds rate within a narrow corridor Funds rate would be more volatile within the corridor Heavy use of standing facilities under a narrow corridor increases role of Fed as market intermediary Open issues: Would our lending facility be sufficiently effective in limiting rates on the upside? May need a better ability to make late day reserve late-day adjustments April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 37 of 52 Authorized for Public Release April 29–30, 2008 252 of 266 Option 4: Floor with High Balances Advantages: Disadvantages: Eliminates administrative b d Eli i d i i i burdens of reserve f requirements/targets and maintenance periods Sharply reduces account management burden on DIs Substantial S bstantial balance sheet/reser e mo ements ma ha e little sheet/reserve movements may have impact on rates (although a possible double-edged sword) A radical change from the current framework, with limited experience of other central banks upon which to base informed judgments Open issues: Implications for reserve demand and the functioning of the interbank market, under both normal circumstances and periods of stress April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 38 of 52 Authorized for Public Release April 29–30, 2008 253 of 266 Option 5: Voluntary Daily Target with Clearing Band Advantages: Disadvantages: Significant reduction in administrative burdens Reserve smoothing parameters (voluntary target levels and bands) may be very flexible Retains R t i some administrative b d d i i t ti burden, f b th DI and FRS for both DIs d Limited experience with some features of this framework Open issues: Identifying a system of voluntary targets that yields sufficient balances and is administratively workable April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 39 of 52 Authorized for Public Release April 29–30, 2008 254 of 266 Overall Assessment Against Objectives 1. 1 Reduce burdens and deadweight losses 2. 2 All options eliminate the reserve tax, either by remunerating required reserves or eliminating requirements But some options have fewer administrative burdens than others Enhance monetary policy implementation All options set a floor for the fed funds rate, and most introduce additional features to help control rate volatility But B t some options may h ti have more fl ibl parameters th t flexible t that could be adjusted during periods of stress April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 40 of 52 Authorized for Public Release April 29–30, 2008 255 of 266 Overall Assessment Against Objectives 3. 3 Promote efficient and resilient money markets and government securities markets 4. Most options would still rely on active short-term markets for the distribution of liquidity But there are possible differences in the Fed’s role as market intermediary, and in the impact on the interbank market Promote an efficient and resilient payments system All options are consistent with proposed PSR policy changes But some could yield a higher level of reserves than others as an alternative to daylight credit April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 41 of 52 April 29–30, 2008 Authorized for Public Release 256 of 266 Interest on Reserves in a Broader Context Consider as part of process of improving overall monetary policy framework Current system works well during normal times Less robust during times of stress April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 42 of 52 April 29–30, 2008 Authorized for Public Release 257 of 266 Weaknesses of Current Monetary Policy Framework Volatility of the federal funds rate PCF rate not a binding ceiling Potential loss of control of federal funds rate after large reserve adds Limited bilit to Li it d ability t constrain upward pressure i t t i d in term funding rates April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 43 of 52 Authorized for Public Release April 29–30, 2008 258 of 266 Federal Funds Rate Volatility (I) April 30, 2008 Class I FOMC - Restricted Controlled (FR) 3/1/2008 2/1/2008 1/1/2008 12/1/2007 11/1/2007 10/1/2007 9/1/2007 8/1/2007 7/1/2007 6/1/2007 5/1/2007 4/1/2007 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 -0.40 -0.50 0.50 -0.60 -0.70 -0.80 -0.90 -1 00 1.00 -1.10 -1.20 3/1/2007 P Percent Daily Average less Target Federal Funds Rate: March 2007 to Present Page 44 of 52 Authorized for Public Release April 29–30, 2008 259 of 266 Federal Funds Rate Volatility (II) Daily Fed Funds Rates and Ranges: March 2008 to Present y g 5 (6%) Percent 4 (10%) PCF spread to target rate lowered to 25bp; PDCF introduced 3 2 1 0 3/3/08 April 30, 2008 3/17/08 Effective Rate Fed Funds Target Rate 3/31/08 Primary Credit Rate Class I FOMC - Restricted Controlled (FR) 4/14/08 Page 45 of 52 Authorized for Public Release April 29–30, 2008 260 of 266 Implications for Interest on Reserves Consider in tandem with changes to overall framework f k Be willing to make significant adjustments to facilitate monetary policy implementation and market yp y p robustness Options 1 and 2 eliminate reserve tax distortions and Option 2 eliminates most of regulatory burden Option 2 has several advantages: Less regulatory burden, voluntary Averaging dampens shocks Considerable experience with this type of framework— similarities with the contractual clearing program Bank of England has been using it successfully April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 46 of 52 Authorized for Public Release April 29–30, 2008 261 of 266 Implications for Interest on Reserves But other proposals go further in altering fundamental framework Option 5 is potentially more robust than Option 3 or Option 4: Flexible in that number of parameters that can be adjusted—width of corridor and size of voluntary reserve dj t d idth f id d i f l t band As a result, it could be adjusted readily in response to experience and/or changes i market conditions i d/ h in k t diti But less empirical evidence available as no other central bank has adopted such a model April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 47 of 52 April 29–30, 2008 Authorized for Public Release 262 of 266 Recommendation – Interest on Reserves Reserve maintenance periods have advantages and disadvantages Smoothing reduces volatility but shocks get volatility, dispersed through the reserve maintenance period Single day systems, reserve shocks do not persist Recommendation: Develop best proposal within each broad class Focus on Options 2 and 5 April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 48 of 52 Authorized for Public Release April 29–30, 2008 263 of 266 Next Steps Identify workable systems of voluntary targets for reserves reserves, needed for either option 2 or 5 Critically assess relative merits of maintenance periods vs. daily clearing bands as a source of reserve management flexibility and optimum sizes of maintenance period and clearing band width Define the optimal width of a rate corridor under both options Set clear objectives for aggregate size and distribution across DIs Determine how such a system would be applied to a y pp heterogeneous banking system understand implications for rate dynamics and the functioning of the p y g interbank market under normal conditions and during times of stress Assess compatibility of either option with possible changes in counterparties and collateral for central bank credit operations April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 49 of 52 April 29–30, 2008 Authorized for Public Release 264 of 266 Possible Timeline (I) Apr-08 Apr 08 Board announces System studying approaches to policy implementation and will consult with public May-08 y Publish white paper on p p p possible approach(es) for pp ( ) three months of public comment Apr-08 to Nov-08 Intensive study of two options (options 2 and 5) – public comment consultation with S t bli t lt ti ith System groups and public Oct-08 FRBNY conference on monetary policy implementation Dec-08 Staff proposes specific approach to Board and FOMC April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 50 of 52 April 29–30, 2008 Authorized for Public Release 265 of 266 Possible Timeline (II) Jan-09 Jan 09 Board and FOMC discussion; preliminary decision on approach Jan-09 to Jul-09 Staff develops detailed proposal—further consultation with System groups and public Aug-09 Board publishes final proposal in Federal Register for public comment Oct-09 Board publishes rules Oct 09 Oct-11 Oct-09 to Oct 11 Prepare for implementation Oct-11 April 30, 2008 Implement Class I FOMC - Restricted Controlled (FR) Page 51 of 52 Authorized for Public Release April 29–30, 2008 266 of 266 We seek your guidance on several key issues Criteria for the evaluation of policy options In particular, the weight to place on reduction in burden and distortions associated with reserve requirements Specific options that should be studied further Process and timeline going forward g g Interaction with other aspects of policy implementation April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 52 of 52
@FedFRASER