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August 10, 2010 Authorized for Public Release Appendix 1: Materials used by Mr. Sack 142 of 160 August 10, 2010 Authorized for Public Release Class II FOMC - Restricted FR Material for FOMC Presentation: Financial Market Developments and Desk Operations Brian Sack August 10, 2010 143 of 160 Authorized for Public Release August 10, 2010 144 of 160 Class II FOMC – Restricted FR Exhibit 1 (1) Implied Federal Funds Rate Percent (2) Modal Forecast of First Rate Hike Nov 11 1.5 8/6/10 Aug 11 6/22/10 4/27/10 1.0 May 11 Feb 11 0.5 Nov 10 Aug 10 Apr 09 Aug 09 Nov 09 Jan 10 Apr 10 Aug 10 0.0 09/01/10 12/01/10 03/01/11 Survey Date 06/01/11 Source: Federal Reserve Bank of New York Dealer Policy Survey Source: Federal Reserve Bank of New York (3) Probability of Policy Actions by Year-End 5.0 Percent 80 75th Percentile 25th Percentile (4) Treasury Yields Percent 2-yr 5-yr 10-yr FOMC Median 4.0 60 3.0 40 2.0 20 1.0 0 Reduce IOER Rate Modify Policy Language Reinvest MBS Repayments Expand Balance Sheet 0.0 08/01/08 02/01/09 08/01/09 02/01/10 08/01/10 Source: Bloomberg Source: Federal Reserve Bank of New York Dealer Policy Survey Percent 2.00 Percent (5) 10-Year Term Premium 4.0 FOMC 1.75 3.0 1.50 1.25 2.0 1.00 1.0 0.75 FOMC 0.50 0.0 0.25 -1.0 0.00 -0.25 01/01/02 (6) Breakeven Inflation Rates 5Y Spot 5Y5Y Forward -2.0 01/01/04 01/01/06 Source: Federal Reserve Board of Governors 01/01/08 01/01/10 08/01/08 02/01/09 08/01/09 Source: Federal Reserve Board of Governors 02/01/10 08/01/10 Authorized for Public Release August 10, 2010 145 of 160 Class II FOMC – Restricted FR Indexed to 08/01/08 Exhibit 2 (7) US Equity Prices (S&P 500 Index) (8) VIX Index Percent 120 90 110 80 70 100 FOMC 60 90 50 80 40 70 30 60 FOMC 50 20 10 08/01/08 02/01/09 08/01/09 02/01/10 08/01/10 Source: Bloomberg 02/01/09 08/01/09 02/01/10 08/01/10 Source: Bloomberg (9) Euro Area Bank CDS* BPS 08/01/08 BPS (10) LIBOR-OIS Spreads (3-Month Rates)* 80 800 Italy Portugal 700 Spain Ireland FOMC 3-Month Forward Spread Spot Spread 70 600 60 500 50 400 40 300 30 200 20 100 10 0 0 08/01/08 02/01/09 08/01/09 02/01/10 08/01/10 *Average bank CDS by country. Source: Bloomberg Indexed to 08/01/08 $ Billions 10/01/09 01/01/10 04/01/10 07/01/10 (12) Net Primary Dealer Borrowing 700 US Trade-Weighted Index (without Euro) Euro/Dollar 130 07/01/09 *Forward rates derived from FRA and OIS. Source: Bloomberg (11) US Dollar Indexes 140 FOMC 600 500 120 400 110 300 100 200 Dollar Appreciation 90 FOMC 80 08/01/08 100 0 02/01/09 08/01/09 02/01/10 Source: Bloomberg, Federal Reserve Board of Governors 08/01/10 01/01/01 01/01/03 Source: FR2004 01/01/05 01/01/07 01/01/09 Authorized for Public Release August 10, 2010 146 of 160 Class II FOMC – Restricted FR Exhibit 3 $ Billions (13) MBS Fails* 800 (14) MBS Settlements Values in $ billions 700 Coupon Unsettled on 6/23 (1) Coupon Swap Activity (2) 4.5 1.6 9.2 - 10.5 0.3 5.0 6.0 0.0 - 4.0 2.1 5.5 9.2 - 9.2 - 0.1 0.0 600 500 400 Other Unsettled Settlements on 8/6 (3) (4) 300 200 100 0 01/01/02 01/01/04 01/01/06 01/01/08 01/01/10 Source: Federal Reserve Bank of New York *4-week moving average. Source: FR2004 (16) Agency MBS Net Issuance (15) MBS Spread to Treasury BPS $ Billions 150 250 125 200 Historical Proj. Fed Portfolio Paydowns Proj. Future Net Issuance 100 150 75 50 100 25 50 0 0 -25 -50 -50 01/01/02 01/01/04 01/01/06 01/01/08 01/01/10 Mar 00 Jun 02 Source: JP Morgan Chase * Fannie Mae fixed-rate current coupon OAS. Source: Barclays Capital (18) SOMA Financial Condition (17) Cumulative SOMA Paydowns $ Billions Values in $ billions MBS Agency Debt 800 Sep 04 Dec 06 Mar 09 Jun 11 Market Value Unrealized G/(L) Realized Income Over 12-Months* Treasury 869 64.6 24.6 Agency 171 5.2 3.0 MBS 1,180 44.8 40.4 Total 2,220 114.6 67.9 700 600 500 -50 BP Shift Baseline 400 300 2011 Q4-End 200 100 0 02/09/09 02/09/10 02/09/11 Source: Federal Reserve Bank of New York 02/09/12 *Realized income = interest income net of funding costs + realized gains Source: Federal Reserve Bank of New York, JP Morgan Chase August 10, 2010 Authorized for Public Release Appendix 2: Materials used by Chairman Bernanke 147 of 160 August 10, 2010 Authorized for Public Release Class II FOMC - Restricted (FR) Page 1 of 3 148 of 160 Authorized for Public Release Class II FOMC - Restricted (FR) August 10, 2010 149 of 160 NFIB Survey Results on Most Important Problem for Small Businesses (selected categories) Percent 35 35 Monthly 30 July 25 30 25 Weak demand 20 20 15 15 10 10 5 0 July Interest rates and finance 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 5 0 Not seasonally adjusted. Percent 35 35 Monthly 30 30 Taxes 25 25 July 20 20 July 15 15 Government regulations 10 10 5 5 July Inflation 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Note. Respondents can report that their most important problem is: weak demand, interest rates and finance, inflation, taxes, government regulation, cost and availability of insurance, quality of labor, cost of labor, competition from large businesses, and other. Not seasonally adjusted. Page 2 of 3 0 Authorized for Public Release Class II FOMC - Restricted (FR) August 10, 2010 150 of 160 Inflation Expectations and Inflation in Japan 1. Survey Measures of Inflation Expectations Percent Start of ZIRP Start of QEP Exit conditions clarified 2.5 End of QEP 2.0 End of ZIRP 1.5 1.0 0.5 0.0 1 year ahead 2-5 years ahead 5-10 years ahead -0.5 -1.0 -1.5 1995 1996 1997 1998 Source: Consensus Economics 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2. Consumer Price Inflation Percent, YoY Start of ZIRP Start of QEP Exit conditions clarified 3 End of QEP End of ZIRP 2 1 0 Headline CPI ex. food and energy -1 -2 -3 1995 1996 1997 1998 Source: Haver, with staff adjustments 1999 2000 2001 2002 2003 Page 3 of 3 2004 2005 2006 2007 2008 2009 2010 August 10, 2010 Authorized for Public Release Appendix 3: Materials used by Mr. English 151 of 160 August 10, 2010 Authorized for Public Release 152 of 160 Class I FOMC – Restricted-Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Bill English August 10, 2010 August 10, 2010 Authorized for Public Release 153 of 160 Class I FOMC - Restricted Controlled (FR) JUNE FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time. 2. Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. 3. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. 4. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. Page 1 of 8 August 10, 2010 Authorized for Public Release 154 of 160 Class I FOMC - Restricted Controlled (FR) AUGUST FOMC STATEMENT—ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in April over recent months has increasingly suggested suggests that the economic recovery in economic activity and the labor market is proceeding at an unsatisfactory pace and that the labor market is improving gradually. Household spending is increasing only gradually but and remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly is rising less rapidly than earlier in the year, and the contribution of inventory investment to growth is likely to wane. ; however, Investment in nonresidential structures continues to be weak, and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become somewhat less supportive of economic growth in recent months, on balance, largely reflecting developments abroad. and bank lending has continued to contract in recent months. Nonetheless,Although the Committee still anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time the near-term outlook for economic activity has weakened. 2. Prices of energy and other commodities have declined somewhat in recent months, and Measures of underlying inflation has have trended lower in recent quarters. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued remain, for some time, below levels that the Committee considers most consistent with its mandate to promote maximum employment and stable prices. 3. To support the economic recovery, the Committee will maintain decided to reduce the target range for the federal funds rate at to 0 to ¼ ⅛ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Consistent with this reduction, the Board of Governors cut the remuneration rates on required and excess reserve balances to 10 basis points effective with the reserve maintenance period beginning August 12. The Committee anticipates maintaining this range for the federal funds rate until resource utilization and underlying inflation have moved appreciably closer to levels consistent with its longer-term objectives. 4. To provide additional support for the economic recovery in a context of price stability, the Committee will maintain the Federal Reserve’s holdings of longerterm securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities [alternatively: in agency mortgage-backed securities]. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature. 5. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. The Open Market Desk will issue a technical note shortly after the statement providing operational details on how it will carry out these transactions. Page 2 of 8 August 10, 2010 Authorized for Public Release 155 of 160 Class I FOMC - Restricted Controlled (FR) AUGUST FOMC STATEMENT—ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in April June suggests indicates that the economic pace of recovery in output and employment has slowed in recent months is proceeding and that the labor market is improving gradually. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time more modest in the near term than had been anticipated. 2. Prices of energy and other commodities have declined somewhat in recent months, and Measures of underlying inflation has have trended lower in recent quarters. and, with substantial resource slack continuing to restrain cost pressures and longerterm inflation expectations stable, inflation is likely to be subdued for some time[, at levels lower than are desirable over the long run]. 3. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. 4. To help support a more timely return to those objectives the economic recovery in a context of price stability, the Committee will maintain the Federal Reserve’s holdings of longer-term securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longerterm Treasury securities [alternatively: in agency mortgage-backed securities]. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature. 5. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. The Open Market Desk will issue a technical note shortly after the statement providing operational details on how it will carry out these transactions. Page 3 of 8 August 10, 2010 Authorized for Public Release 156 of 160 Class I FOMC - Restricted Controlled (FR) AUGUST FOMC STATEMENT—ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in April June suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing and but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. business spending on equipment and software has risen significantly continues to advance however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Financial conditions have become less somewhat more supportive of economic growth on balance in recent weeks, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Though underlying inflation has trended lower, longer-term inflation expectations have remained stable. The Committee believes that a sustainable economic recovery is under way and Nonetheless, anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time. 2. Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. 2. The Committee will decided to maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period some time. The Committee will continue its approach of not reinvesting payments of principal on mortgage-backed securities and maturing agency debt held by the System Open Market Account. As a further step toward reducing the size of the Federal Reserve’s balance sheet and the level of reserves in the banking system, on [September 1] the Committee will stop reinvesting the proceeds of maturing Treasury securities. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. Page 4 of 8 August 10, 2010 Authorized for Public Release 157 of 160 Class I FOMC - Restricted Controlled (FR) DIRECTIVES June 2010 FOMC Directive The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability. Page 5 of 8 August 10, 2010 Authorized for Public Release 158 of 160 Class I FOMC - Restricted Controlled (FR) August 2010 FOMC Directive — Alternative A The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ ⅛ percent. The Committee directs the Desk to purchase longer-term Treasury securities during the intermeeting period to maintain the total face value of the System Open Market Account’s holdings of Treasury securities, agency debt, and agency mortgage-backed securities at approximately $2 trillion. The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities [alternatively: in agency mortgagebacked securities]. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 6 of 8 August 10, 2010 Authorized for Public Release 159 of 160 Class I FOMC - Restricted Controlled (FR) August 2010 FOMC Directive — Alternative B The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to purchase longer-term Treasury securities during the intermeeting period to maintain the total face value of the System Open Market Account’s holdings of Treasury securities, agency debt, and agency mortgage-backed securities at approximately $2 trillion. The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities [alternatively: in agency mortgage-backed securities]. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 7 of 8 August 10, 2010 Authorized for Public Release 160 of 160 Class I FOMC - Restricted Controlled (FR) June 2010 FOMC Directive — Alternative C The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions. To gradually reduce the size of the Federal Reserve’s balance sheet over time, the Committee directs the Desk to not reinvest the proceeds of maturing Treasury securities held by the System Open Market Account, effective September 1, 2010, and to maintain its practice of not reinvesting the proceeds of maturing agency debt and payments on agency mortgage-backed securities held by the System Open Market Account. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 8 of 8
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