The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
April 30-May 1, 2013 Authorized for Public Release Appendix 1: Materials used by Mr. Potter 211 of 240 April 30-May 1, 2013 Authorized for Public Release 212 of 240 Class II FOMC – Restricted (FR) Material for FOMC Presentation: Financial Market Developments and Desk Operations Simon Potter April 30, 2013 April 30-May 1, 2013 Authorized for Public Release 213 of 240 Class II FOMC – Restricted (FR) Exhibit 1 (2) Japanese Yen Exchange Rate Changes (1) Economic Surprises and Equity Prices Since Early Election Announcement (11/13/12) Since BoJ Meeting (04/03/13) Yen G10 Equity Indices* (LHS) G10 Economic Surprise Index (RHS) Indexed to 03/01/12 Depreciation Index Level 115 Draghi Speech 110 Japanese Election Announced 105 60 FOMC Thai Baht 40 Euro 20 100 0 95 Chinese Renminbi U.S. Dollar -20 90 85 -40 80 03/01/12 -60 07/01/12 11/01/12 Australian Dollar South Korean Won 03/01/13 35 *Index of benchmark equity indices for G10 countries, weighted by GDP. Source: Bloomberg, IMF, Citigroup 35 30 25 20 15 10 5 0 Fed* BoJ** ECB*** BoE**** BoJ 1.8 Japanese Kuroda Election Nomination Announced Announced 1.6 Percent 2.4 2.2 5 Fed* BoJ** ECB*** BoE**** BPS (6) Ten-Year Japanese Sovereign Yield Intraday Volatility* 2.5 BoJ Purchase Schedule Changed 2.0 1.4 2.0 1.2 1.8 1.0 1.6 0.8 1.4 0.5 1.2 0.0 01/01/13 1.5 0.6 10-Year (LHS) 30-Year (RHS) 0.4 03/01/12 Source: Bloomberg 1.0 02/01/13 03/01/13 04/01/13 1.0 07/01/12 11/01/12 03/01/13 0 *Based on median projection for purchases from Survey of Primary Dealers. **Assumes new policy continues through 2014. ***Assumes no new purchases and no use of OMT. ****Assumes Asset Purchase Facility remains constant at £375 billion. Source: Central banks, country treasuries, OECD (5) Japanese Sovereign Yields Percent 10 WAM of Total Sovereign Debt Market WAM of Central Bank Portfolio: End-2012 WAM of Central Bank Portfolio: End-2014 (Proj.) WAM of Current Central Bank Purchases 18 16 14 12 10 8 6 4 2 0 *Based on median projection for purchases from Survey of Primary Dealers. **Assumes new policy continues through 2014. ***Assumes no new purchases and no use of OMT. ****Assumes Asset Purchase Facility remains constant at £375 billion. Source: Central banks, IMF 20 15 Percent (4) Sovereign Debt Weighted Average Maturity Years End-2012 End-2014 (Projected) 25 Source: Bloomberg (3) Central Bank Securities Portfolios in Excess of Currency as Percent of GDP Percent 30 *10-day moving average of daily standard deviation of 10-year JGB yield, sampled every 5 minutes. Source: Reuters April 30-May 1, 2013 Authorized for Public Release 214 of 240 Class II FOMC – Restricted (FR) Exhibit 2 (7) Changes and Levels of Ten-Year Sovereign Yields (8) Factors Contributing to Ten-Year Yield Decline Over Intermeeting Period* BPS 10 Importance Average Interquartile Range 5 0 0.59% -10 1.21% -20 1.74% -30 -40 -50 1.66% 4.49% 6.38% -60 South Africa Brazil 3 2 Level 9.63% 4 1 Weaker Growth Over Intermeeting Period Week After BoJ Meeting Mexico France U.S. Germany Japan Source: Bloomberg BPS 0 120 1.00% Safe Haven Flows Front-Month Brent Crude (LHS) Spot Gold (LHS) 5-Year, 5-Year BEI (RHS) Indexed to 09/01/12 -1.51% Asset Purchase Expectations (10) Commodity Prices and Breakeven Inflation -10 -20 Lower Inflation *Responses are expressed in terms of importance of each factor, where 1 is not important and 5 is very important. “Other” also received average 2.5 response. Source: Federal Reserve Bank of New York Survey (9) Changes in One-Year Forward Rates Over Intermeeting Period Pre-BoJ (03/19/13 - 04/03/13) Post-BoJ (04/03/13 - 04/26/13) Global Portfolio Rebalancing Percent Sept. FOMC 3.1 Mar. FOMC 3.0 110 2.9 -30 -40 0.63% Level 2.8 100 2.7 3.48% -50 2.6 90 -60 Nominal Real Nominal 3 Years Ahead 2.5 Real 9 Years Ahead 80 09/01/12 (11) ECB Policy Rates Main Refinancing Rate EONIA Market-Implied EONIA Path* Deposit Rate 1.75 1.50 (12) Euro Area Sovereign Yield Spreads* 700 600 500 1.00 400 0.75 300 Pre-February ECB (02/06/13) Current 0.25 0.00 01/01/11 01/01/12 01/01/13 03/01/13 BPS 1.25 0.50 01/01/13 Source: Bloomberg, Federal Reserve Board of Governors Source: Federal Reserve Board of Governors Percent 2.4 11/01/12 01/01/14 *Risk-neutral projection based on forward EONIA swaps. Source: ECB, Barclays 200 100 03/01/12 Draghi Speech OMT Details Announced Italian Election Spain Italy 07/01/12 Cyprus Plan Announced 11/01/12 03/01/13 *10-year spreads to Germany. Outright levels of 10-year yields are 4.28% and 4.06% for Spain and Italy, respectively, compared to euro-era lows of 3.01% and 3.22% on 09/21/05. Source: Bloomberg April 30-May 1, 2013 Authorized for Public Release 215 of 240 Class II FOMC – Restricted (FR) Exhibit 3 (13) Coverage Ratios for Treasury Purchase Operations Overall, Excl. 20- to 30-Year Sector* 20- to 30-Year Sector** New Program Multiple 5 4 3 2 1 0 11/01/11 04/01/12 09/01/12 Percent March Projection April Projection 30Y 3.5% 30Y 3.0% 30Y 2.5% All 15Y 140 120 100 80 60 40 20 0 Oct 12 02/01/13 Dec 12 Feb 13 Projected Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 *Based on adjusted TBA-eligible issuance. Realized coupon distributions proportionate to share of purchases allocated to each coupon, with total bar height indicating SOMA purchases as percent of monthly gross issuance. Source: Federal Reserve Bank of New York, BlackRock, eMBS, KDS *30-day moving average. **4-operation moving average. Source: Federal Reserve Bank of New York (15) 30-Year MBS Delivered to SOMA by Weighted-Average Loan Age (WALA) During New Program Percent 60 3.0% 3.5% 50 (14) SOMA MBS Purchases as Percent of Monthly Gross MBS Issuance* (16) 30-Year Fixed Rate TBA MBS Outstanding by WALA (Excluding SOMA Holdings) $ Billions 350 >20 15-20 10-15 5-10 0-5 Months 300 250 40 200 30 150 20 100 10 50 0 0 0 2 4 6 8 10 12 14 16 18 20 22 24 2.0 Source: Federal Reserve Bank of New York 100 50 3.0% Front Month 3.0% Next Month Sept. 3.5% Front Month FOMC 3.0 3.5 4.0 Source: FNMA, FHLMC, GNMA, KDS (17) Dollar Roll Implied Financing Rates* BPS 2.5 Coupon (Percent) WALA at Delivery (Months) (18) Federal Reserve Dollar Roll Sales* $ Billions Mar. FOMC 20 Percent Total (LHS) As Percent of Expected Settlements (RHS) 15 20 10 15 -100 10 5 -150 -200 -250 03/01/12 5 Fails Charge 0 0 Nov 11 07/01/12 30 25 0 -50 35 11/01/12 03/01/13 *30-year FNMA dollar rolls. Front month is currently May-June roll; next month is June-July roll. Source: J.P. Morgan Jan 12 Mar May 12 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 *By settlement month. As a comparison, dollar roll sales during LSAP 1 averaged approximately 20% of expected settlements; during new program, dollar roll sales have averaged approximately 8% of expected settlements. Source: Federal Reserve Bank of New York April 30-May 1, 2013 Authorized for Public Release 216 of 240 Class II FOMC – Restricted (FR) (20) Expectations for Slowing and End of Asset Purchases (19) Probability Distribution of SOMA Portfolio Holdings (Average End-2014 Forecasts) Percent 50 Exhibit 4 (Last) April October 2012 Survey* March Survey April Survey 40 Median End Date Dealers with Different End Date by Asset 30 March Q2 2014 Q1 2014 5 3 Treasury Purchases End Last 2 3 20 M BS Purchases End Last 3 0 10 Median Slowing Start Date Dealers Expecting Slowing 0 <2500 25003000 3000- 3500- 40003500 4000 4500 Par Amount ($ Billions) 45005000 >5000 *First survey with balance sheet PDF. Source: Federal Reserve Bank of New York Survey $ Billions 4,400 Treasury Slowing 19 19 M BS Slowing 17 16 Source: Federal Reserve Bank of New York Survey MEP & Reinvestments Only (21) SOMA Portfolio Holdings Growing Portfolio (Median Forecasts) Stable Portfolio Shrinking Portfolio Tapering Purchase End Sales Start Start +1 Year (If Sales Occur) Current Purchases First 35% Probability of Sales End Rate Hike Median: 12 Months After First Rate Hike 4,000 U3: 7.1% PCE: 1.8% NFP Level: 138m 3,600 3,200 Prev. NFP Peak: 138m Avg. NFP: 183K 2,800 2,400 End-2011 Q1 2014 Q4 2013 19 19 2012 2013 2014 Avg. NFP: 203K ΔU3: -0.6 ppts PCE: 1.9% Source: Federal Reserve Bank of New York Survey, Bureau of Labor Statistics 2015 2016 2017 2018 April 30-May 1, 2013 Authorized for Public Release Appendix 2: Materials used by Mr. Wascher 217 of 240 April 30-May 1, 2013 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Forecast Summary William Wascher April 30, 2013 218 of 240 April 30-May 1, 2013 Authorized for Public Release 219 of 240 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals Based on FRB/US Stochastic Simulations Real GDP Forecasts from the Factor Model Percent change, annual rate 10 4/24/13 4/29/13 8 Real GDP 10 Percent change, annual rate 10 April TB March TB 70% confidence interval 10 8 8 6 6 6 6 4 4 4 4 2 2 2 2 0 0 0 0 -2 -2 -2 2012 2013 2012 2013 8 2014 2015 -2 Note: The blue shaded area gives the 68% confidence interval for the 4/24 model forecast. Unemployment Rate Change in Total Payroll Employment* Percent 11 April TB March TB September TB 70% confidence interval 10 9 11 300 10 250 9 150 100 100 5 50 50 4 0 7 6 6 2012 2013 2014 2015 250 150 7 4 H1 H2 H1 2013 H2 *Average monthly changes. PCE Prices PCE Prices Excluding Food and Energy 5 0 2014 *Effect of emergency unemployment compensation and state-federal extended benefit programs. Percent change, annual rate 300 200 8 Natural Rate with EEB* April TB March TB September TB 200 8 5 Thousands Percent change, annual rate 5 5 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 -1 -1 April TB March TB 70% confidence interval 4 -1 2012 2013 2014 2015 Page 1 of 1 April TB March TB 70% confidence interval 2012 2013 2014 5 4 2015 -1 April 30-May 1, 2013 Authorized for Public Release Appendix 3: Materials used by Mr. Clouse 220 of 240 April 30-May 1, 2013 Authorized for Public Release 221 of 240 Class I FOMC – Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Jim Clouse April 30, 2013 April 30-May 1, 2013 Authorized for Public Release 222 of 240 Monetary Policy Alternatives Federal Funds Rate Total Projected SOMA Security Holdings $ Billion Percent 5500 Alternative A Alternative B Alternative C Median Dealer Projection 5.0 4.5 Alternative A Alternative B Alternative C 4.0 4500 3.5 3.0 3500 2.5 2.0 2500 1.5 1.0 1500 0.5 0.0 500 2012 2015 2018 2021 2024 -0.5 2012 Unemployment Rate 2014 2016 2018 2020 PCE Inflation Percent Four-quarter average Percent 9.0 Alternative A Alternative B Alternative C 5.0 Alternative A Alternative B Alternative C 8.5 4.5 8.0 4.0 7.5 3.5 7.0 3.0 6.5 2.5 6.0 2.0 5.5 1.5 5.0 1.0 4.5 0.5 4.0 2012 2014 2016 2018 2020 0.0 2012 1 of 13 2014 2016 2018 2020 April 30-May 1, 2013 Authorized for Public Release 223 of 240 MARCH FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longerterm interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations 2 of 13 April 30-May 1, 2013 Authorized for Public Release 224 of 240 continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 3 of 13 April 30-May 1, 2013 Authorized for Public Release 225 of 240 FOMC STATEMENT—APRIL-MAY 2013 ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in January March suggests a return to moderate that economic growth following a pause late last year activity has been expanding at a moderate pace, on balance, in recent months. However, the pace of improvement in labor market conditions have shown signs of improvement in recent months but appears to have slowed, and the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive is restraining economic growth. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects judges that, with appropriate without further policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate might not be strong enough to generate a sustained improvement in labor market conditions and The Committee also anticipates that inflation over the medium term likely will would continue to run below its 2 percent objective. Moreover, the Committee continues to see downside risks to the economic outlook. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional will increase the pace at which it purchases agency mortgage-backed securities at a pace of $40 to [ $45 ] billion per month and longerterm Treasury securities at a pace of $45 to [ $55 ] billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions will increase the Committee’s holdings of longer-term securities more quickly and should maintain put additional downward pressure on longerterm interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. 4 of 13 April 30-May 1, 2013 Authorized for Public Release 226 of 240 5. Moreover, to support continued faster progress toward maximum employment and price stability, the Committee expects that intends to maintain a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that now intends to retain this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ 5½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 5 of 13 April 30-May 1, 2013 Authorized for Public Release 227 of 240 FOMC STATEMENT—APRIL-MAY 2013 ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in January March suggests a return to moderate that economic growth following a pause late last year activity has been expanding at a moderate pace. Labor market conditions have shown signs of some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive is restraining economic growth. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longerterm interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as 6 of 13 April 30-May 1, 2013 Authorized for Public Release 228 of 240 long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 7 of 13 April 30-May 1, 2013 Authorized for Public Release 229 of 240 FOMC STATEMENT—APRIL-MAY 2013 ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in January March suggests confirms a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Although the unemployment rate remains elevated, it has declined further, and other indicators of labor market conditions have shown additional improvement in recent months. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become is somewhat more restrictive. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace in coming quarters and then pick up, and the unemployment rate will gradually continue to decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below close to its 2 percent objective. The Committee sees the risks to both economic growth and inflation as roughly balanced. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, Based on the improvement in its outlook for the labor market since last September, the Committee decided to expand its asset holdings at a slower pace. In particular, the Committee decided to continue purchasing will purchase additional agency mortgage-backed securities at a pace of $40 [ $30 ] billion per month and longer-term Treasury securities at a pace of $45 [ $30 ] billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions will increase the Committee’s holdings of longer-term securities by $60 billion per month and should maintain sustain downward pressure on longer-term interest rates, support mortgage markets, and help to make keep broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. 8 of 13 April 30-May 1, 2013 Authorized for Public Release 230 of 240 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 9 of 13 April 30-May 1, 2013 Authorized for Public Release 231 of 240 MARCH DIRECTIVE Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 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. 10 of 13 April 30-May 1, 2013 Authorized for Public Release 232 of 240 DIRECTIVE FOR APRIL-MAY 2013 ALTERNATIVE A Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. Beginning with the month of May, the Desk is directed to continue purchasing purchase longerterm Treasury securities at a pace of about $45 $55 billion per month and continue purchasing purchase agency mortgage-backed securities at a pace of about $40 $45 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 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. 11 of 13 April 30-May 1, 2013 Authorized for Public Release 233 of 240 DIRECTIVE FOR APRIL-MAY 2013 ALTERNATIVE B Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 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. 12 of 13 April 30-May 1, 2013 Authorized for Public Release 234 of 240 DIRECTIVE FOR APRIL-MAY 2013 ALTERNATIVE C Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. Beginning with the month of May, the Desk is directed to continue purchasing purchase longerterm Treasury securities at a pace of about $45 $30 billion per month and to continue purchasing purchase agency mortgage-backed securities at a pace of about $40 $30 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 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. 13 of 13 April 30-May 1, 2013 Authorized for Public Release Appendix 4: Materials used by Ms. Duke 235 of 240 April 30-May 1, 2013 Authorized for Public Release 236 of 240 Class I FOMC – Restricted Controlled (FR) May 1, 2013 Suggestions for Modifying the Draft FOMC Statement 1. Governor Duke suggests inserting the following language between the third and fourth sentences of paragraph 4: The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. Page 1 of 1 April 30-May 1, 2013 Authorized for Public Release Appendix 5: Materials used by Mr. Meyer 237 of 240 April 30-May 1, 2013 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Exit Strategy Principles Stephen A. Meyer May 1, 2013 238 of 240 April 30-May 1, 2013 Authorized for Public Release 239 of 240 June 2011 Exit Strategy Principles 1. The Committee will determine the timing and pace of policy normalization to promote its statutory mandate of maximum employment and price stability. 2. To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA. 3. At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate. 4. When economic conditions warrant, the Committee’s next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. During the normalization process, adjustments to the interest rate on excess reserves and to the level of reserves in the banking system will be used to bring the funds rate toward its target. 5. Sales of agency securities from the SOMA will likely commence sometime after the first increase in the target for the federal funds rate. The timing and pace of sales will be communicated to the public in advance; that pace is anticipated to be relatively gradual and steady, but it could be adjusted up or down in response to material changes in the economic outlook or financial conditions. 6. Once sales begin, the pace of sales is expected to be aimed at eliminating the SOMA’s holdings of agency securities over a period of three to five years, thereby minimizing the extent to which the SOMA portfolio might affect the allocation of credit across sectors of the economy. Sales at this pace would be expected to normalize the size of the SOMA securities portfolio over a period of two to three years. In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy. 7. The Committee is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments. Page 1 of 2 April 30-May 1, 2013 Authorized for Public Release 240 of 240 Discussion Questions 1. In your view, when would be the best time for the Committee to adopt and release any revision to its exit strategy principles – after one of the next couple of FOMC meetings or further out in the future? 2. What approach would you suggest for the revision of the exit principles in light of policy developments of the past two years? For example, how should the exit principles accommodate the Committee’s new threshold-based forward guidance? 3. Would you want to retain a commitment to eliminating agency securities from the SOMA portfolio over a particular time frame? Would you prefer a more general commitment to eliminate holdings of agency securities without specifying a time frame? Or would you prefer to introduce flexibility to maintain some agency MBS in the SOMA, subject to future Committee decisions? 4. What are your views on sales of MBS or shorter-term Treasuries during exit? Would you favor announcing specific plans with regard to those securities in revised exit principles? Page 2 of 2
@FedFRASER