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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 05/27/2010. STRICTLY CONFIDENTIAL (FR) CLASS I FOMC AUGUST 5, 2004 MONETARY POLICY ALTERNATIVES PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Strictly Confidential (F.R.) Class I – FOMC August 5, 2004 M ONETARY POLICY ALTERNATIVES Recent Developments (1) The decision at the June 30 FOMC meeting to increase the target federal funds rate by 25 basis points to 1¼ percent was anticipated in financial markets. Nonetheless, investors revised down their expectations for the path of policy upon the release of the accompanying statement. In particular, investors noted that the Committee attributed some of the recent increase in inflation to transitory factors, again characterized the risks to sustainable growth and price stability as balanced, and reiterated its belief that policy accommodation could be removed at a pace that is likely to be measured.1 Subsequently, the Chairman’s monetary policy testimony, which indicated that recent softness in consumer spending should prove short-lived and emphasized the FOM C’s commitment to price stability, spurred a rise in expectations for the path of policy. Over the intermeeting period to date, though, policy expectations have been revised down on net, as incoming data have pointed to weaker-than-anticipated spending and more subdued core inflation (Chart 1). Money market futures and options prices, as well as the Desk’s survey of primary dealers, suggest that market participants are virtually certain of a 25-basis-point increase in the target federal funds rate at the August meeting. Nearly all the primary dealers expect the Committee to retain balanced risk assessments for both growth and price stability, and many commented that they expect it to repeat the “measured pace” language or some variant of it. Looking further out, futures quotes now indicate that investors 1 The effective federal funds rate averaged 1.27 percent over the intermeeting period. The Desk expanded the System’s outright holding of securities by $6.5 billion, with purchases from foreign official customers of $1.2 billion of Treasury bills and purchases from dealers of $5.3 billion of Treasury coupon securities. The volume of outstanding longterm RPs decreased $7 billion to $12 billion. Chart 1 Interest Rate Developments Policy Expectations Futures Market Dealer Survey (median) Expected Federal Funds Rates* Percent 4.5 Expected Federal Funds Rate (percent) August Meeting Year-End 1.50 2.00 1.50 2.00 August 5, 2004 June 29, 2004 4.0 3.5 3.0 Assessment of Risks (number of dealers) Risks to: Sustainable Growth Price Stability To the Upside 0 1 Balanced 19 18 2.5 2.0 Almost Equal 3 3 1.5 1.0 0.5 Aug. Note: Expected funds rate from futures market based on money market futures prices as of August 5, 2004. Dealer expectations based on a Trading Desk survey conducted July 30 and August 2. Treasury Yields* Daily May Aug. 2005 Nov. Policy Uncertainty* 7 FOMC Feb. Feb. 2006 *Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments. Percent Ten-Year Two-Year Nov. 2004 Daily 6 Basis Points 400 Twelve Months Ahead Six Months Ahead FOMC 350 300 5 250 4 200 3 150 2 100 50 1 0 Jan. Apr. July 2003 Oct. Jan. Apr. 2004 Apr. July 2003 Oct. Jan. Apr. 2004 July *Width of a 90 percent confidence interval for the federal funds rate computed from the term structures for both the expected federal funds rate and implied volatility. *Par yields from an estimated off-the-run Treasury yield curve. Survey Measures of Long-Term Inflation Expectations Inflation Compensation* Daily Jan. July Percent FOMC 5 to 10 Years Ahead Next 5 Years Percent 3.5 4.5 Monthly FRB Philadelphia Michigan 3.0 4.0 3.5 July 2.5 3.0 2.0 2.5 Q2 1.5 2.0 1.0 1.5 1997 Jan. Apr. July 2003 Oct. Jan. Apr. 2004 July *Based on a comparison of an estimated TIPS yield curve to an estimated nominal off-the-run Treasury yield curve. 1998 1999 2000 2001 2002 2003 2004 Note: The black line measures median ten-year inflation expectations by the Philadelphia FRB survey. The red line plots the Michigan survey median five- to ten-year inflation expectations. Note: Vertical lines indicate June 29, 2004. Last daily observations are for August 5, 2004. 2 expect the funds rate to rise to around 2 percent by the end of this year and 3¼ percent by the end of 2005, down about 25 and 45 basis points, respectively, from the time of the June meeting.2 (2) Yields on intermediate- and long-term nominal Treasury securities fell about 20 to 30 basis points on balance over the intermeeting period, consistent with the downward revision to policy expectations and perhaps also reflecting heightened concerns about terrorism. Standard measures of volatility and liquidity in the Treasury securities market appear to have held fairly steady at typical levels. (See the box on page 3 for a discussion of recent survey evidence on liquidity in funding and derivatives markets.) Yields on inflation-indexed issues declined a bit less than those on nominal Treasuries since the last meeting, leaving inflation compensation measures narrower and as much as ½ percentage point below their highs of mid-spring. Survey measures of inflation expectations also ticked down in July. The most recent data suggest that corporate credit quality remains strong, and credit spreads on investmentand speculative-grade bonds changed little over the intermeeting period (Chart 2). In equity markets, most broad indexes fell 5 to 6 percent, but the Nasdaq index dropped about 10 percent. Although earnings grew rapidly in the second quarter, equity investors reacted negatively to the cautious outlook for sales reported by some major companies, particularly technology firms. Investor sentiment was also said to be adversely affected by the sharp increases in spot and futures prices for crude oil over the intermeeting period (Chart 3). (3) In foreign exchange markets, the dollar was about unchanged on balance against other major currencies since the last FOM C meeting. The dollar appeared to be supported by Chairman Greenspan’s monetary policy testimony as well as the announcement of a narrower U.S. trade deficit for May, but it was weakened by signs of softer U.S. growth. On a bilateral basis, the dollar climbed most versus the yen, rising more than 3 percent over the intermeeting period. The yen was pressured by 2 Market quotes reported in this Bluebook are as of the close of business on Thursday, August 5. Chart 2 Capital Market Developments Higher-Tier Corporate Bond Spreads* Lower-Tier Corporate Bond Spreads* Basis Points 200 400 Daily FOMC Ten-Year AA Ten-Year Swap 160 Basis Points Daily FOMC Ten-Year BBB (left scale) Five-Year high-yield (right scale) 350 300 1150 950 120 250 80 750 200 150 40 550 100 0 Jan. May Oct. 2002 Mar. Aug. 2003 Jan. May 2004 350 Jan. *AA spread measured relative to an estimated off-the-run Treasury yield curve. Swap spread measured relative to the on-the-run Treasury security. May Oct. 2002 Mar. Aug. 2003 Percent of outstandings May 2004 *Measured relative to an estimated off-the-run Treasury yield curve. Bond Default Rate of Nonfinancial Companies Bond Ratings Changes of Nonfinancial Companies Jan. 30 Upgrades Percent of outstandings 5 Monthly* 20 Q1 4 Q2 10 3 0 10 2 20 30 Downgrades 1990 1992 1 40 1994 1996 1998 2000 2002 2004 June 0 50 1990 Note. Data are at an annual rate. Source. Moody’s Investors Service. 1992 1994 1996 1998 2000 2002 2004 *6-month moving average. Source. Moody’s Investors Service. Corporate Earnings Growth Stock Prices Percent Q1 Quarterly* 30 Index(12/31/01=100) 120 Daily FOMC Wilshire Nasdaq Q2 20 100 10 90 0 S&P 500 EPS NIPA, economic profits before tax 80 -10 70 -20 60 -30 1989 1992 1995 *Change from four quarters earlier. Source. I/B/E/S for S&P 500 EPS. 1998 2001 2004 110 Jan. May Oct. 2002 Note: Vertical lines indicate June 29, 2004. Last daily observations are for August 5, 2004. Mar. Aug. 2003 Jan. May 2004 Chart 3 International Financial Indicators Commodity Prices $U.S./ounce 460 Nominal Trade-Weighted Dollar Indexes Index(12/31/02=100) $U.S./barrel FOMC Daily Gold (left scale) Oil (right scale) 50 Daily Broad Major Currencies Other Important Trading Partners 45 440 FOMC 105 40 420 100 35 30 400 25 380 95 20 15 360 90 10 340 5 320 Jan. Apr. July 2003 Oct. Jan. Apr. 2004 July 0 Ten-Year Government Bond Yields Jan. Apr. July 2003 Oct. Jan. 85 Basis Points 3.0 Daily July EMBI+ Index Percent 5.5 Apr. 2004 FOMC 800 Daily FOMC UK (left scale) Germany (left scale) Japan (right scale) 5.0 2.5 4.5 2.0 700 600 4.0 1.5 500 3.5 1.0 3.0 0.5 2.5 400 0.0 Jan. Apr. July 2003 Oct. Jan. Apr. 2004 July 300 Jan. Apr. July 2003 Note: Vertical lines indicate June 30, 2004. Last daily observations are for Aug 5, 2004. Oct. Jan. Apr. 2004 July 3 official comments early in the period suggesting that policy tightening was not imminent in Japan and by disappointing sales and production data. Higher oil prices and lower earning expectations at Japanese firms also may have contributed to theweakness in the yen. The dollar gained ½ percent against the euro over the intermeeting period, but lost about 2¼ percent versus the Canadian dollar. Yields on long-term government bonds in foreign industrial countries declined by amounts that either matched or were somewhat smaller than the drop in yields on corresponding U.S. securities. Foreign equity prices moved down 2 to 6 percent over the period.3 Financial Market Conditions Financial institutions and markets seemed to have taken the June policy tightening in stride, with few signs of the volatility and market stress that accompanied the onset of some past episodes of policy tightening. A variety of indicators of market stress—including implied volatilities for equities and long-term bonds, credit default swap spreads for financial firms, and on-the-run premiums and bid-ask spreads for Treasury securities—have been fairly steady in recent weeks. A recent survey of primary dealers asked the respondents to characterize conditions in longand short-term funding markets and interest-rate derivatives markets. A total of eighteen dealers responded to the survey. For both long- and short-term funding markets, a sizable net percentage of respondents indicated that dealers’ willingness to act as market makers or underwriters was above normal. Moreover, about half of the dealers judged investors’ willingness to bear risk and overall market liquidity to be normal. However, several assessed these characteristics as below normal, hinting at some caution in markets that is not evident in risk and liquidity spreads, which are relatively narrow. A few respondents commented that some market participants were hesitant to take large positions, given expectations for continued policy tightening. The net percentage of dealers reporting below-normal liquidity in interest-rate derivatives markets was somewhat larger than for cash markets, reportedly reflecting, in part, scaled-back activity of mortgage investors and hedge funds. 3 . 4 (4) The dollar was also essentially unchanged over the intermeeting period against an index of currencies of our other important trading partners. In Brazil, signs of improvement in the domestic economy, as well as continued strong export performance, boosted stock prices and helped push the real up 2 percent versus the dollar. Brazil’s EMBI+ spread narrowed 50 basis points to about 6 percentage points. The Mexican peso also gained slightly versus the dollar, as the Banco de Mexico tightened in late July, citing inflation risks. China’s slower growth and the somewhat weaker outlook for some major high-tech firms weighed on share prices in Asian equity markets, and the Korean won and the Taiwanese dollar both declined somewhat versus the U.S. dollar. Russian financial markets were roiled by an ongoing dispute between the government and the country’s largest oil producer and, for a time, by runs on several banks. Russian stock prices fell almost 6 percent, and Russia’s EMBI+ spread widened somewhat to about 3¼ percentage points. (5) In U.S. credit markets, growth in overall business debt was subdued in the second quarter, but it appears to have picked up a little in July as an increase in short-term borrowing more than offset a net paydown of corporate bonds (Chart 4). On a month-average basis, commercial and industrial (C&I) loans rose in both June and July, the first successive months of growth since 2001. On net, about a third of the respondents to the July Senior Loan Officer Opinion Survey reported that demand for C&I loans had increased over the past three months, with firms indicating that the loan proceeds were used to finance inventories, accounts receivable, plant and equipment, and mergers and acquisitions. Supply conditions likely are playing a role in the recent growth of business loans, as significant net fractions of banks reported easing business credit standards and terms for the third consecutive survey. Net issuance of commercial paper, which had turned positive in the first half of 2004 after three years of run-offs, jumped in July, likely owing to some of the same demand factors driving C&I lending. Household borrowing, while still brisk, appears to have moderated somewhat in the second quarter, as higher interest rates weighed on mortgage debt growth and the slower advance in consumption spending limited the need for consumer credit. Federal debt continued to grow rapidly in the second Chart 4 Debt and Money Changes in Selected Components of Nonfinancial Business Debt $Billions Monthly rate Changes in C&I Loan Standards and Demand Percent 60 60 50 Total C&I Loans Commercial Paper Bonds Demand 40 Q3 30 e 80 Quarterly 40 20 20 0 10 0 2003 Q3 -10 -40 -20 -60 -30 2002 -20 Standards -80 1992 1994 1996 1998 2000 2002 2004 Note. Data are the fraction of respondents reporting (tighter standards / increased demand) less the fraction reporting (looser standards / decreased demand) for large and medium-sized firms. Source. Senior Loan Officer Opinion Survey. Q1 Q2 Jul 2004 Note. Commercial paper and C&I loans are seasonally adjusted, bonds are not. e Estimated. Mortgage Refinancing Activity Growth of Household Debt Percent Quarterly, s.a.a.r. Consumer Credit 21 14000 Index(3/16/90 = 100) $Billions Monthly, s.a. 18 12000 15 10000 450 Monthly, s.a. 400 350 300 Q2 e Q2 e Home Mortgage 12 8000 6 1993 6000 3 4000 0 2000 July 150 Applications (left axis) 1996 1999 2002 July Net Inflows to Equity and Bond Mutual Funds 50 0 1990 1993 1996 Source. Staff estimates. e Estimated. 1999 2002 M2 Velocity and Opportunity Cost $Billions Monthly rate, n.s.a. 70 8.00 Percent Velocity Opportunity Cost* (left axis) 4.00 Equity Funds Bond Funds* 50 40 2.3 Quarterly 60 Total 200 100 -3 1990 250 Originations (right axis) 9 2.2 2.1 2.00 30 20 2.0 1.00 Velocity (right axis) e 10 0 Q2 1.9 Q2 1.8 0.50 -10 2002 2003 Q4 Q1 A M J J 2003 2004 * Includes hybrid funds but excludes reinvested dividends. e Estimated. -20 0.25 1993 1995 1997 *Two-quarter moving average. 1999 2001 2003 5 quarter, but state and local government debt issuance dropped, partly as a result of the improving fiscal conditions of many states. Total domestic nonfinancial sector debt is estimated to have advanced at about a 7½ percent annual rate in the second quarter, more than a percentage point below the first-quarter pace. (6) Following several months of robust expansion, M2 grew at only a 1½ percent pace in June and appears to have contracted slightly in July. Some of the recent weakness can be attributed to the decline in mortgage refinancing activity this spring and the related runoff of the earlier inflows to liquid deposits. In addition, retail money market funds experienced outflows in June and July, as households apparently found capital market investments more attractive. Flows into equity mutual funds, which had lagged in May, picked up in June and July, and bond funds experienced modest inflows last month following three months of outflows. In contrast to other components of M2, currency growth strengthened over the past two months, partly as a result of strong demand from Iraq and Russia. The opportunity cost of holding M2 edged up in the second quarter for the first time in two years as short-term market interest rates rose in anticipation of the June 30 monetary policy action. Nonetheless, M2 expanded briskly on balance in the second quarter, resulting in a modest decline in velocity. 6 Policy Alternatives (7) Weaker-than-expected incoming data on spending have led the staff to mark down its projection for GDP growth in 2004 to about 4 percent, significantly below the previous forecast and also below the 4½ to 4¾ percent central tendency of forecasts made by Committee participants at the June meeting. As a consequence, the staff has trimmed its assumed path for monetary policy, with the federal funds rate now reaching 2¾ percent by the end of next year. The staff anticipates that yields on longer-term securities will edge down further over the projection horizon, as the lift from rising short-term rates is more than offset by a shallower trajectory for the funds rate than currently incorporated in market prices. Equity prices are expected to rise enough from current levels to generate risk-adjusted returns in line with returns on fixed-income instruments, while the nominal trade-weighted index of the dollar’s value against major foreign currencies is assumed to fall at an annualized rate of ½ percent. Oil prices are anticipated to decline to about $38 per barrel by the end of next year, $4 per barrel higher than in the June forecast. In 2005, less accommodative monetary policy and a shift toward fiscal restraint contribute to a moderation in the advance of GDP to around 3½ percent, still a tad faster than estimated growth in potential GDP. As a result, the output gap is projected to contract gradually over the forecast period and the unemployment rate to edge down to 5¼ percent, a little above the staff’s estimate of the NAIRU. The staff continues to forecast core PCE inflation of about 1¾ percent for 2004, but its forecast for overall PCE inflation has been boosted to around 2½ percent, reflecting higher energy prices. Core inflation is projected to edge down to 1½ percent in 2005, owing to the pass-through of falling energy and non-oil import prices as well as lingering economic slack, while total PCE price inflation drops to 1¼ percent. (8) Table 1 presents three alternatives for near-term policy for the Committee’s consideration, including draft language for the announcement. Under Alternative A, the existing stance of policy would be maintained at this meeting. Alternative B would raise the target for the federal funds rate 25 basis points to 1½ percent. Alternative C would boost the funds rate 50 basis points to 1¾ percent. Table 1: Alternative Language for the August FOMC Announcement June FOMC Policy Decision Rationale Alternative B Alternative C The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/2 percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 1-3/4 percent. 1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1-1/4 percent. 2. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The Committee believes that the accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. 3. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. The evidence accumulated over the intermeeting period indicates a moderation in output growth and some slowing in the pace of improvement in labor market conditions. The evidence accumulated over the intermeeting period indicates that labor market conditions continue to improve. Although output growth has moderated in recent months, the economy appears poised to expand at a solid pace going forward absent significant further increases in energy prices. The evidence accumulated over the intermeeting period indicates that output growth has moderated but appears poised to resume a stronger pace going forward and that labor market conditions continue to improve. 4. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors. Recent inflation data have been somewhat elevated, though a portion of the rise in prices evidently reflects transitory factors. Recent inflation data have been somewhat elevated, though a portion of the rise in prices evidently reflects transitory factors. Although a portion of the rise in inflation this year appears to have been due to transitory factors, continuing and substantial increases in energy prices are putting persistent upward pressure on costs and overall prices. [Unchanged] [Unchanged] 5. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. Assessment of Risk Alternative A 6. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to promote price stability and sustainable growth. [Unchanged] [Unchanged] The Committee continues to believe that robust underlying growth in productivity is providing ongoing support to economic activity. In current circumstances, the Committee believes that the existing degree of policy accommodation, if sustained over the next few quarters, could foster economic growth that is more likely to be above than below its long-run sustainable pace. Similarly, with respect to the Committee’s goal of price stability, such an unchanged policy stance implies greater risks to the upside than the downside. [None] 7 The first two alternatives propose a structure of the announcement fairly close to that employed at the last meeting. Alternative C, however, offers a substantial departure from the form and substance of recent announcements. It involves an assessment that the risks to growth and inflation are tilted to the upside— conditioned explicitly on an unchanged stance of policy following the action—and elimination of the “measured pace” sentence. Paragraph 18 discusses a hybrid of Alternatives B and C in which the funds rate would be increased 25 basis points while some of the language proposed for Alternative C would be incorporated in the announcement. Regarding the rationale section of the announcement, the Committee’s characterization of the labor market, and possibly of the economic outlook more generally, may be affected by the release on Friday of the employment report for July. If that report comes in about as the staff expects, the Committee might wish to indicate, as under Alternatives B and C, that “labor market conditions continue to improve.” However, if the report is again on the soft side, as in June, the Committee might wish to cite “some slowing in the pace of improvement in labor market conditions,” as in Alternative A. (9) Although the recent pace of economic growth has been less vigorous than projected in the June Greenbook, the Committee may still judge that the economy is poised for significant expansion going forward, as in the current staff forecast. Under this view, a gradual tightening of monetary policy should be consistent with a pace of growth sufficient to make some headway in reducing economic slack while keeping inflation well contained. If the Committee subscribes to such an outlook, it may find it appropriate to continue paring the degree of monetary policy accommodation and thus be attracted to the 25-basis-point firming at this meeting of Alternative B. Policy likely will need to be firmed considerably over time: The real federal funds rate, measured as the difference between the nominal funds rate and lagged four-quarter core PCE inflation, remains negative and below the estimates of its equilibrium value implied by selected staff models (Chart 5). And given recent inflation trends, as well as the continued climb in crude oil prices in recent weeks, a further tightening of policy might be viewed as desirable to reduce the odds of an upturn in inflation expectations and more generally to help ensure that Chart 5 Actual Real Federal Funds Rate and Range of Estimated Equilibrium Real Rates Percent 6 Quarterly Actual Real Funds Rate 5 4 TIPS-Based Estimate Historical Average: 2.62 (1964Q1-2004Q2) 3 2 1 ● Alt. C B ● Alt. A 0 ● Alt. -1 -2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Note: The shaded range represents the maximum and the minimum values each quarter of four estimates of the equilibrium real federal funds rate based on a statistical filter and the FRB/US model. Real federal funds rates employ a four-quarter moving average of core PCE inflation as a proxy for inflation expectations, with the staff projection used for 2004Q3. Equilibrium Real Funds Rate Estimates (Percent) Statistical Filter - Two-sided: Based on historical data and the staff forecast June Bluebook - One-sided: Based on historical data* June Bluebook FRB/US Model - Two-sided: Based on historical data and the staff forecast June Bluebook - One-sided: Based on historical data** June Bluebook Treasury Inflation-Protected Securities June Bluebook 2002 ____ 2003 ____ 2004H1 ______ ______ 2004Q3 -0.2 -0.1 0.0 0.0 0.0 0.2 0.4 -- 0.1 -0.2 -0.3 -0.1 0.3 -0.2 0.3 -- 2.3 2.0 1.9 2.0 2.4 2.2 2.2 -- 1.7 0.7 1.0 1.2 1.9 1.0 1.4 -- 3.5 3.0 2.8 2.8 3.5 3.0 2.8 -- * Also employs the staff projection for the current and next quarters. ** Also employs the staff projection for the current quarter. 8 core inflation does not rise above acceptable levels. At the same time, the Committee may believe that a gradual pace of policy adjustment will likely be sufficient to foster achievement of its goals, particularly given the apparent persistence of economic slack, which should help restrain inflation. Also, the recent data may be read as hinting that the sluggishness in spending of the past few months might prove more protracted than forecast in the Greenbook, arguing for only a modest firming step at this meeting. Estimated policy rules generally suggest that a such a tightening at this meeting would be consistent with the Committee’s past policy conduct (Chart 6). (10) In announcing implementation of Alternative B, the Committee would presumably want to modify its previous statement that “output is continuing to expand at a solid pace” to acknowledge both the softness in economic activity in the past few months and the potential effects on economic prospects of energy price developments. One way to accomplish this would be to note that “Although output growth has moderated in recent months, the economy appears poised to expand at a solid pace going forward absent significant further increases in energy prices.” With regard to recent price developments, core consumer inflation was subdued on a monthly basis in June although the twelve-month inflation rate was higher than a year earlier. The Committee may wish to retain the sense of its previous announcement regarding inflation while not putting excessive weight on the latest monthly data by saying “Recent inflation data have been somewhat elevated, though a portion of the rise in prices evidently reflects transitory factors.” If the Committee finds the staff projection of aggregate demand and supply conditions plausible, it could reiterate its previous assessment that the risks to the attainment of sustainable growth and price stability are balanced for the next few quarters. The Committee might again wish to communicate a view of the likely pace of policy adjustment by stating that, “With underlying inflation still expected to be relatively low . . . policy accommodation can be removed at a pace that is likely to be measured,” while also retaining the indication that it would tighten at a faster pace if necessary to maintain price stability. (11) Market participants apparently have viewed the incoming data, in the context of the FOMC’s June announcement and the Chairman’s monetary policy Chart 6 Actual and Assumed Federal Funds Rate and Range of Values from Policy Rules and Futures Markets Percent 10 Percent 10 Actual federal funds rate and Greenbook assumption Market expectations estimated from futures quotes Shaded region is the range of values from rules 1-5 below 8 8 6 6 4 4 2 2 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0 Values of the Federal Funds Rate from Policy Rules and Futures Markets 2004 2005 Q2 Q3 Q4 Q1 Q2 2.25 1.47 1.27 2.96 2.30 1.44 3.23 2.73 1.99 3.07 2.63 2.29 2.97 2.55 2.44 1.16 1.26 1.16 1.25 1.39 1.10 1.47 1.45 1.61 1.68 1.72 1.63 1.33 1.29 ** 1.46 1.72 1.99 2.22 1.40 1.75 2.00 2.25 Outcome-based Rules 1. Baseline Taylor 2. Aggressive Taylor 3. Estimated Forecast-based Rules 4. Estimated with Greenbook forecasts 5. Estimated with FOMC forecasts 6. First-difference rule* From Financial Markets 7. Estimated TIPS-based rule* Memo: Expected federal funds rate derived from futures Memo: Greenbook assumption 1.00 * Not included in the shaded region in the figure. ** Computed using average TIPS and nominal Treasury yields to date Note: Rule prescriptions for 2004Q3 through 2005Q2 are calculated using Greenbook projections for inflation and the output gap (or unemployment gap), except for 2004Q3 of line 5, which uses FOMC projections. For rules that contain the lagged funds rate, the rule’s previous prescription for the funds rate is used for 2004Q4 through 2005Q2. It is assumed that there is no feedback from the rule prescriptions to the Greenbook projections through 2005Q2. Rules Chart: Explanatory Notes In all of the rules below, it denotes the federal funds rate, Bt the staff estimate at date t of trailing fourquarter core PCE inflation, (yt-yt*) the staff estimate (at date t) of the output gap, it-1 the lagged federal funds rate, gt-1 the residual from the rule’s prescription the previous quarter, (yt+3|t-yt+3|t*) the staff’s three-quarter-ahead forecast of the output gap, () yt+3|t-) yt+3|t*) the staff’s forecast of output growth less potential output growth three quarters ahead, Bt+3|t a three-quarter-ahead forecast of inflation, and (ut+3|tut+3|t*) a three-quarter-ahead forecast of the unemployment gap. Data are quarterly averages taken from the Greenbook and staff memoranda closest to the middle of each quarter, unless otherwise noted. Rule Specification Root-meansquare error 1988:12004:2 2001:12004:2 Outcome-based 1. Baseline Taylor Coefficients are benchmark values, not estimated. it = 2 + Bt + 0.5(yt-yt*) + 0.5(Bt2) .94 .95 2. Aggressive Taylor Coefficients are benchmark values, not estimated. it = 2 + Bt + (yt-yt*) + 0.5(Bt-2) .72 .73 3. Estimated Outcome-based Rule includes both lagged interest rate and serial correlation in residual. it = .53it-1 + 0.47 [1.07 + 0.97(yt-yt*) + 1.51Bt]+ 0.48gt-1 .24 .26 .25 .27 .45 .66 .83 .32 .43# .47 Forecast-based 4. Estimated Greenbook Forecast-based Rule includes both lagged interest rate and serial correlation in residual. 5. Estimated FOMC Forecast-based Unemployment and inflation forecasts are from semiannual “central tendency” of FOMC forecasts, interpolated if necessary to yield 3-qtr-ahead values; ut* forecast is from staff memoranda. Inflation forecasts are adjusted to core PCE deflator basis. Rule is estimated at semiannual frequency, and projected forward using Greenbook forecasts. 6. First-difference Rule Coefficients are benchmark values, not estimated. it = .72it-1 + 0.28 [0.41 + 1.08(yt+3|t-yt+3|t*) + 1.67Bt+3|t] + 0.33gt-1 it = 0.49it-2 + 0.51 [0.26 ! 2.10(ut+3|t-ut+3|t*) + 1.60Bt+3|t] it = it-1 + 0.5() yt+3|t-) yt+3|t*) + 0.5(Bt+3|t-2) From Financial Markets 7. Estimated TIPS-based Bcomp5|t denotes the time-t difference between 5-yr nominal Treasury yields and TIPS. Sample begins in 1999 due to TIPS volatility in 1997-8. # RMSE calculated for 1999:1-2004:2. it = 0.97it-1+ [-1.18 + 0.63Bcomp5|t] 9 testimony, as implying that the FO MC will firm policy another 25 basis points at this meeting, again assess the risks to growth and inflation as balanced, and retain the reference to a “measured pace.” Moreover, a range of indicators continues to suggest that investors generally remain well prepared for gradual policy tightening.4 Thus, the market reaction to implementation of this alternative would likely be rather muted, as in June. However, the mention of crude oil prices as a factor potentially influencing future economic growth could prompt investors to focus more closely on evolving energy price developments in revising their expectations for monetary policy. (12) If the Committee is concerned by the slow pace of progress in reducing resource slack projected in the Greenbook or is worried that the forecasted rebound in growth could fail to materialize, it may prefer the unchanged policy stance of Alternative A. The sluggish consumption spending of late and the still-limited pickup in capital investment—even ahead of the expiration of the partial-expensing tax provisions at year-end— might be read by policymakers as suggesting that aggregate demand could remain soft for some time. Such concerns about prospects for economic activity could intensify if the labor market report for July turns out to be surprisingly weak. The possibility that business and consumer confidence could be impaired by heightened terrorist threats might also be seen as posing some downside risk to spending and output. With inflation apparently moving down somewhat from its elevated levels of earlier this year and inflation expectations apparently contained, a brief hiatus in the process of firming policy might involve little risk of higher inflation and would permit the accumulation of additional data that could be helpful in assessing whether spending is rebounding in line with projections. (13) The announcement accompanying a decision to leave rates unchanged could point to the evidence of “a moderation in output growth” and possibly, as mentioned above, a slowing in the pace of improvement in labor market conditions. The inflation sentence could well be similar to that under Alternative B. If FOMC 4 See “Market Preparedness for Monetary Policy Tightening,” to be distributed to the Committee on August 6, 2004. 10 members are especially concerned that the recent weakness in spending might prove persistent, they might consider an assessment that risks to sustainable growth are weighted to the downside. However, the Committee may judge that, especially given the easing of market interest rates that would likely accompany an unchanged policy stance, the risks to both sustainable growth and price stability would remain in balance. Assuming that the Committee still sees a need to move over time toward a neutral stance, it probably would want to retain in the announcement the judgment that policy accommodation can likely be removed at a “measured pace.” Consistent with its motivation for selecting Alternative A, the Committee might also wish to note that policy will be adjusted as appropriate to promote “sustainable growth” as well as price stability in the last sentence of the risk assessment section. (14) Unless market expectations for the decision at this meeting are altered substantially by a weak employment report for July, announcement of an unchanged policy stance would come as a considerable surprise to investors and might trigger a sizable drop in short-term interest rates, a rally in bond prices, and some depreciation in the foreign exchange value of the dollar. The drop in bond yields would tend to support equity prices, but that influence could be offset if the policy announcement led investors to believe that economic activity and corporate profits were likely to be weaker than previously anticipated. The declines in market interest rates and in the dollar would likely be even more pronounced, and a fall in equity prices more likely, if the FOMC provided an assessment of net downside risks to sustainable growth or otherwise communicated concern about prospective economic weakness. (15) If the Committee sees the recent slower growth of aggregate demand as likely to be transitory but suspects that the pickup in core inflation could well be more durable than the staff anticipates, it might choose to raise the funds rate 50 basis points at this meeting, as in Alternative C. FOMC members may consider inflation already to be close to the top of an acceptable range and see several reasons to question the decline in inflation in the staff forecast. With inflation expectations remaining in a 2 to 3 percent range, well above the Greenbook forecast, the Committee may believe that underlying inflation has considerable momentum. Also, 11 high energy prices may prove to be longer lasting than anticipated by the staff forecast and the markets, providing less downward pressure on overall inflation. Policymakers may see less slack in prospect than in the Greenbook projection, because they may perceive the economy as already close to its potential or the growth rate of potential output as lower than estimated by the staff. Finally, Committee members might be uneasy about inflation prospects if they place less weight on the most recent spending indicators and foresee more robust growth in aggregate demand than in the staff forecast, perhaps along the lines of the “Spending Rebound” scenario in the Greenbook. In light of these considerations, the FOMC may judge a 25-basis-point move at this meeting—which would leave the real funds rate in negative territory—as insufficient, whereas a 50-basis-point move would at least bring the real rate to around zero. (16) With market participants interpreting a “measured pace” as implying at most 25-basis-point moves, policymakers probably would want to alter that phrase significantly or drop it from an announcement of Alternative C. While some policymakers might prefer not to provide guidance about the likely pace of policy change, they may be comfortable giving an indirect indication of its probable direction. If so, the last sentence of the announcement might read: “In current circumstances, the Committee believes that the existing degree of policy accommodation, if sustained over the next few quarters, could foster economic growth that is more likely to be above than below its long-run sustainable pace. Similarly, with respect to the Committee’s goal of price stability, such an unchanged policy stance implies greater risks to the upside than the downside.” 5 Given the explicit conditioning on the stance of policy in this assessment, a reference to the role of monetary accommodation in the first sentence of the rationale paragraph would be redundant. That paragraph might instead begin: “The Committee continues to believe that robust underlying growth in productivity is providing ongoing support to economic activity.” If the Committee thinks that the “soft patch” in the economy is probably behind us and that 5 See “A Potential Change in the Wording of the Risk Assessment,” memorandum to the Federal Open Market Committee from Vincent Reinhart, August 5, 2004. 12 conditions are in place for a robust snap-back, it might also want to state that output growth “appears poised to resume a stronger pace going forward.” To underscore its concerns about the effect of energy price increases on the inflation outlook, the Committee might want to say: “Although a portion of the rise in inflation this year appears to have been due to transitory factors, continuing and substantial increases in energy prices are putting persistent upward pressure on costs and overall prices.” (17) Unless the employment report for July turns out to be exceptionally strong, market participants would be quite surprised by the combination of a 50-basispoint move and the announcement proposed under Alternative C. The assessment of upside risks to growth and inflation and the deletion of the “measured pace” language would reinforce the sense that the trajectory of policy would be steeper than previously anticipated. Market interest rates would likely increase sharply, while stock prices would drop and the foreign exchange value of the dollar would rise. (18) If the Committee favors only a modest firming in policy at this time but wishes to move away from the “measured pace” language before long, it might wish to combine the 25-basis-point firming action and rationale of Alternative B with the conditional assessment of upside risks proposed for Alternative C. That assessment would imply a need for continued policy tightening and thus could facilitate dropping the measured pace language, perhaps even at this meeting. If that language were dropped on Tuesday, the market reaction to the announcement of conditional upside risks could be fairly sharp, approaching that expected under Alternative C, as market participants would probably conclude that the FOMC no longer believed that policy tightening was likely to be gradual. But if the “measured pace” wording were retained for this meeting, the response might be rather muted, with perhaps a small rise in market yields and a modest decline in equity prices. Money and Debt Forecasts (19) Under the Greenbook projection, M2 is expected to continue to expand at a subdued pace, averaging only around 1¼ percent from July through December. Historical evidence indicates that deposit interest rates are likely to respond sluggishly to rising short-term market rates, leading to a widening of the opportunity cost of 13 holding monetary assets. As a consequence, households are expected to shift their portfolios away from deposits and toward market instruments. The lagged effects on deposit balances of the continuing slowdown in mortgage refinancing activity are also expected to damp money growth, but to declining degree in the months ahead. (20) The growth of domestic nonfinancial sector debt is forecast to slow to a 7 percent pace over the second half of this year. Household debt should decelerate as higher mortgage rates slow residential investment and home price appreciation. By contrast, business borrowing is expected to increase as internal funds fail to keep pace with rising capital expenditures and as equity retirements quicken with increased merger activity. Federal debt growth is expected to moderate somewhat from its robust first half pace, but budget deficits are projected to remain sizable. As the fiscal positions of state and local governments continue to improve, and with long-term interest rates expected to remain about flat, growth of state and local debt should slow further. M2 Growth Under Alternative Policy Actions M2 No Change Tighten 25 bp Tighten 50 bp M2 Greenbook Forecast* Monthly Growth Rates Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 1.4 -1.1 1.7 1.8 2.4 3.0 3.5 1.4 -1.1 1.5 1.2 1.6 2.2 2.9 1.4 -1.1 1.3 0.6 0.8 1.4 2.3 1.4 -1.1 1.5 1.2 1.2 1.2 1.3 Quarterly Growth Rates 2004 Q1 2004 Q2 2004 Q3 2004 Q4 3.5 9.5 2.0 2.4 3.5 9.5 1.9 1.8 3.5 9.5 1.8 1.1 3.5 9.5 1.9 1.2 Annual Growth Rates 2003 2004 5.3 4.4 5.3 4.2 5.3 4.0 5.3 4.1 5.5 2.5 5.5 1.9 5.5 1.3 5.5 1.3 Growth From 2003 Q4 Jul-04 To Jul-04 Dec-04 * This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast. 14 Directive and Balance-of-Risks Language (21) Draft language for the directive and draft risk assessments identical to those presented in Table 1 are provided below. (1) Directive Wording 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 in the immediate future seeks conditions in reserve markets consistent with MAINTAINING/increasing/REDUCING the federal funds rate at/TO an average of around _______ 1¼ percent. (2) Risk Assessments A. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to promote price stability and sustainable growth. B. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. C. In current circumstances, the Committee believes that the existing degree of policy accommodation, if sustained over the next few quarters, could foster economic growth that is more likely to be above than below 15 its long-run sustainable pace. Similarly, with respect to the Committee’s goal of price stability, such an unchanged policy stance implies greater risks to the upside than the downside. SELECTED INTEREST RATES (percent) Short-term Treasury bills secondary market Federal funds 1 Long-term CDs secondary market Comm. paper Off-the-run Treasury yields Indexed yields Moody’s Baa Municipal Bond Buyer Conventional home mortgages primary market 4-week 3-month 6-month 3-month 1-month 2-year 5-year 10-year 30-year 5-year 10-year Fixed-rate ARM 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 03 -- High -- Low 1.45 0.86 1.26 0.75 1.22 0.81 1.28 0.82 1.32 0.93 1.28 0.91 2.11 1.09 3.60 2.06 4.80 3.29 5.61 4.37 1.84 0.77 2.48 1.56 7.48 6.01 5.50 4.78 6.44 5.21 4.06 3.45 04 -- High -- Low Monthly Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 1.40 0.92 1.37 0.73 1.51 0.87 1.79 0.96 1.67 1.04 1.43 0.97 2.97 1.49 4.10 2.65 5.03 3.84 5.68 4.77 1.57 0.42 2.25 1.35 6.90 6.03 5.45 4.73 6.34 5.38 4.19 3.36 1.03 1.01 1.01 1.00 0.98 0.95 0.91 0.91 0.94 0.89 0.97 0.96 0.94 0.95 0.92 1.05 1.03 1.02 1.04 1.01 1.08 1.08 1.10 1.11 1.10 1.03 1.02 1.02 1.02 1.03 1.89 1.70 1.75 1.92 1.90 3.36 3.16 3.17 3.27 3.25 4.64 4.45 4.45 4.45 4.41 5.46 5.30 5.30 5.27 5.22 1.53 1.34 1.24 1.29 1.26 2.32 2.19 2.07 1.97 1.99 7.01 6.79 6.73 6.66 6.60 5.43 5.30 5.27 5.15 5.11 6.26 6.15 5.95 5.93 5.88 3.79 3.86 3.74 3.75 3.76 04 04 04 04 04 04 04 1.00 1.01 1.00 1.00 1.00 1.03 1.26 0.84 0.92 0.96 0.90 0.90 1.04 1.18 0.90 0.95 0.95 0.96 1.04 1.29 1.35 0.99 1.01 1.01 1.11 1.33 1.64 1.69 1.06 1.05 1.05 1.08 1.20 1.46 1.57 0.99 0.99 0.99 1.00 1.00 1.13 1.29 1.75 1.73 1.57 2.09 2.56 2.78 2.64 3.10 3.05 2.78 3.38 3.86 3.93 3.70 4.28 4.22 3.96 4.50 4.88 4.88 4.64 5.13 5.06 4.87 5.28 5.56 5.54 5.36 1.11 0.88 0.55 1.05 1.37 1.43 1.32 1.88 1.77 1.48 1.90 2.09 2.14 2.02 6.44 6.27 6.11 6.46 6.75 6.78 6.62 4.99 4.86 4.78 5.13 5.39 5.40 5.29 5.74 5.64 5.45 5.83 6.27 6.29 6.06 3.65 3.55 3.41 3.65 3.88 4.10 4.11 Jan Feb Mar Apr May Jun Jul Weekly Jun Jun Jun Jun Jul Jul Jul Jul Jul Aug Daily Jul Jul Jul Jul Jul Jul Jul Jul Jul Aug Aug Aug Aug 4 11 18 25 2 9 16 23 30 6 04 04 04 04 04 04 04 04 04 04 1.01 0.99 1.01 1.01 1.19 1.26 1.25 1.25 1.27 -- 0.95 1.00 1.04 1.07 1.10 1.13 1.16 1.20 1.30 1.33 1.18 1.27 1.32 1.31 1.32 1.30 1.34 1.36 1.45 1.49 1.46 1.59 1.70 1.69 1.69 1.64 1.67 1.70 1.78 1.77 1.32 1.41 1.50 1.51 1.54 1.52 1.55 1.59 1.63 1.66 1.01 1.07 1.15 1.18 1.26 1.25 1.26 1.31 1.34 1.41 2.66 2.77 2.85 2.78 2.73 2.57 2.58 2.67 2.76 2.65 3.90 3.98 3.97 3.90 3.82 3.65 3.65 3.68 3.80 3.67 4.90 4.95 4.90 4.83 4.77 4.63 4.61 4.60 4.71 4.59 5.55 5.59 5.56 5.50 5.44 5.35 5.33 5.32 5.42 5.33 1.34 1.46 1.46 1.43 1.41 1.25 1.27 1.33 1.41 1.29 2.04 2.15 2.17 2.15 2.10 1.99 2.01 2.02 2.08 1.99 6.80 6.84 6.78 6.75 6.71 6.63 6.60 6.58 6.66 -- 5.39 5.42 5.40 5.37 5.34 5.26 5.27 5.26 5.31 -- 6.28 6.30 6.32 6.25 6.21 6.01 6.00 5.98 6.08 5.99 3.98 4.14 4.13 4.13 4.19 4.05 4.02 4.12 4.17 4.08 20 21 22 23 26 27 28 29 30 2 3 4 5 04 04 04 04 04 04 04 04 04 04 04 04 04 1.25 1.25 1.26 1.25 1.27 1.27 1.29 1.30 1.29 1.28 1.24 1.22 -- 1.22 1.21 1.21 1.22 1.28 1.35 1.32 1.28 1.26 1.26 1.37 1.34 1.33 1.36 1.35 1.36 1.37 1.46 1.47 1.46 1.44 1.44 1.51 1.49 1.49 1.48 1.70 1.71 1.71 1.71 1.78 1.79 1.78 1.77 1.76 1.78 1.77 1.76 1.75 1.57 1.59 1.60 1.61 1.61 1.61 1.64 1.65 1.65 1.65 1.65 1.66 1.67 1.32 1.31 1.32 1.32 1.33 1.34 1.34 1.34 1.33 1.40 1.41 1.43 -- 2.67 2.72 2.70 2.69 2.74 2.83 2.80 2.76 2.69 2.66 2.65 2.66 2.64 3.69 3.73 3.72 3.70 3.74 3.86 3.83 3.82 3.72 3.69 3.67 3.67 3.65 4.61 4.64 4.63 4.60 4.64 4.76 4.75 4.74 4.64 4.62 4.59 4.59 4.57 5.33 5.36 5.35 5.32 5.36 5.47 5.46 5.45 5.36 5.34 5.33 5.33 5.31 1.35 1.37 1.35 1.34 1.40 1.50 1.45 1.40 1.32 1.29 1.27 1.30 1.27 2.05 2.04 2.02 2.01 2.05 2.15 2.11 2.08 2.02 1.99 1.98 2.00 1.96 6.59 6.62 6.61 6.58 6.60 6.71 6.71 6.69 6.60 6.61 6.59 6.59 -- -------------- -------------- -------------- NOTE: Weekly data for columns 1 through 13 are week-ending averages. Columns 2 through 4 are on a coupon equivalent basis. Data in column 6 are interpolated from data on certain commercial paper trades settled by the Depository Trust Company. Column 14 is the Bond Buyer revenue index, which is a 1-day quote for Thursday. Column 15 is the average contract rate on new commitments for fixed-rate mortgages (FRMs) with 80 percent loan-to-value ratios at major institutional lenders. Column 16 is the average initial contract rate on new commitments for 1-year, adjustable-rate mortgages (ARMs) at major institutional lenders offering both FRMs and ARMs with the same number of discount points. MFMA Strictly Confidential (FR)Class II FOMC Money Aggregates August 9, 2004 Seasonally adjusted nontransactions components Period M1 1 M3 In M2 In M3 only 2 3 4 5 Annual growth rates(%): Annually (Q4 to Q4) 2001 2002 2003 7.0 3.3 6.5 10.2 6.7 5.3 11.1 7.6 4.9 18.5 5.8 2.9 12.7 6.4 4.5 Quarterly(average) 2003-Q3 Q4 2004-Q1 Q2 6.5 2.4 6.1 6.4 6.9 -1.3 3.5 9.5 7.1 -2.3 2.8 10.3 6.1 -0.9 10.8 15.0 6.7 -1.2 5.8 11.3 2.3 7.5 -0.1 1.7 -0.1 9.1 8.0 8.0 -4.5 -3.1 -0.5 -0.7 9.5 8.1 -5.6 -4.4 -0.7 -3.4 14.5 -1.3 5.1 -4.3 -1.7 -0.6 10.0 5.1 -1.5 -3.5 -0.9 -0.7 -5.8 18.1 17.8 -2.0 -0.8 12.0 -11.1 1.5 9.9 9.3 9.4 13.5 1.4 -1.1 3.5 7.7 7.0 12.5 17.4 -1.5 1.6 20.7 10.7 16.1 15.0 16.4 12.9 -0.8 7.5 10.2 11.5 11.1 14.4 5.1 -1.0 1305.9 1325.3 1323.1 1322.2 1335.4 6120.4 6167.7 6215.9 6285.8 6292.9 4814.5 4842.5 4892.8 4963.6 4957.5 2847.4 2885.6 2921.6 2961.6 2993.5 8967.8 9053.4 9137.5 9247.4 9286.4 7 14 21 28 1312.4 1324.3 1337.3 1352.5 6282.9 6293.7 6289.2 6292.6 4970.5 4969.4 4951.8 4940.1 2979.8 3007.1 2999.6 3025.4 9262.8 9300.7 9288.8 9318.0 5 12 19p 26p 1333.9 1309.9 1316.8 1336.0 6287.1 6287.8 6286.5 6282.3 4953.2 4977.8 4969.7 4946.3 2975.3 2969.5 2993.0 3009.2 9262.4 9257.3 9279.5 9291.5 Monthly 2003-July Aug. Sep. Oct. Nov. Dec. 2004-Jan. Feb. Mar. Apr. May June July e Levels ($billions): Monthly 2004-Feb. Mar. Apr. May June Weekly 2004-June July p e M2 preliminary estimated Changes in System Holdings of Securities 1 Strictly Confidential (Millions of dollars, not seasonally adjusted) Class II FOMC August 5, 2004 Treasury Bills Treasury Coupons Net Purchases 3 Net Redemptions Net Purchases 2 (-) Change <1 1-5 5-10 Redemptions (-) Over 10 Net Change Federal Net change Agency total Redemptions (-) outright holdings 4 Net RPs 5 ShortTerm 6 LongTerm 7 Net Change 2001 2002 15,503 21,421 10,095 --- 5,408 21,421 15,663 12,720 22,814 12,748 6,003 5,074 8,531 2,280 16,802 --- 36,208 32,822 120 --- 41,496 54,242 3,492 -5,366 636 517 4,128 -4,850 2003 18,150 --- 18,150 6,565 7,814 4,107 220 --- 18,706 10 36,846 2,223 1,036 3,259 2003 QII 6,259 --- 6,259 2,209 1,790 234 --- --- 4,232 --- 10,491 -2,578 1,056 -1,522 2,568 3,299 ----- 2,568 3,299 --2,561 --3,188 1,232 1,350 150 20 ----- 1,382 7,118 --10 3,950 10,407 1,712 -561 -554 2,750 1,158 2,189 2004 QI QII 1,707 7,756 ----- 1,707 7,756 1,311 1,693 2,848 2,543 1,251 988 275 84 ----- 5,685 5,307 ----- 7,391 13,063 -772 1,133 -3,515 418 -4,286 1,550 2003 Dec 1,494 --- 1,494 --- 237 283 20 --- 540 10 2,024 -767 5,268 4,500 QIII QIV 2004 Jan 619 --- 619 --- --- --- --- --- --- --- 619 -424 -5,097 -5,520 Feb Mar 747 341 ----- 747 341 1,311 --- 1,555 1,293 510 741 235 40 ----- 3,611 2,074 ----- 4,358 2,414 -568 1,949 -2,423 -1,803 -2,991 146 Apr May 3,516 409 ----- 3,516 409 --1,693 --783 --713 --84 ----- --3,272 ----- 3,516 3,681 1,041 -637 1,355 710 2,396 73 Jun Jul 3,831 952 ----- 3,831 952 --1,898 1,760 3,078 275 244 --29 ----- 2,035 5,249 ----- 5,866 6,202 -1,738 1,120 1,824 -2,372 86 -1,252 2004 May 12 May 19 --67 ----- --67 --1,693 ----- ----- ----- ----- --1,693 ----- --1,760 -721 849 1,000 -1,000 279 -151 May 26 Jun 2 209 33 ----- 209 33 ----- 783 --- --713 --84 ----- 783 797 ----- 991 830 3,800 -564 --3,000 3,800 2,436 Jun 9 Jun 16 1,437 14 ----- 1,437 14 ----- 725 1,035 275 --- ----- ----- 1,000 1,035 ----- 2,437 1,049 -6,834 248 2,000 -2,000 -4,834 -1,752 Jun 23 Jun 30 172 2,202 ----- 172 2,202 ----- ----- ----- ----- ----- ----- ----- 172 2,202 6,762 -2,772 -4,000 4,000 2,762 1,228 Jul 7 Jul 14 480 403 ----- 480 403 ----- --1,682 --244 --29 ----- --1,955 ----- 480 2,358 1,465 -738 -1,000 -1,000 465 -1,738 Jul 21 Jul 28 69 --- ----- 69 --- 1,898 --- --1,396 ----- ----- ----- 1,898 1,396 ----- 1,968 1,396 -1,831 -2,004 ---3,000 -1,831 -5,004 Aug 4 --- --- --- --- --- --- --- --- --- --- --- 4,693 -1,000 3,693 2004 Aug 5 --- --- --- --- --- --- --- --- --- --- --- 6,072 -1,000 5,072 1,202 --- 1,202 1,898 3,078 244 29 --- 5,249 --- 6,452 -821 -7,000 -7,821 255.2 117.4 192.4 51.9 438.5 --- 693.7 -10.5 12.0 1.5 Intermeeting Period Jun 30-Aug 5 Memo: LEVEL (bil. $) Aug 5 1. Change from end-of-period to end-of-period. Excludes changes in compensation for the effects of inflation on the principal of inflation-indexed securities. 2. Outright purchases less outright sales (in market and with foreign accounts). 3. Outright purchases less outright sales (in market and with foreign accounts). Includes short-term notes acquired in exchange for maturing bills. Excludes maturity shifts and rollovers of maturing issues, except the rollover of inflation compensation. 76.8 4. 5. 6. 7. Includes redemptions (-) of Treasury and agency securities. RPs outstanding less reverse RPs. Original maturity of 13 days or less. Original maturity of 14 to 90 days. MRA:SCL
@FedFRASER