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August 11–12, 2009 Authorized for Public Release Appendix 1: Materials used by Mr. Sack 150 of 165 August 11–12, 2009 Authorized for Public Release Material for FOMC Presentation: Financial Market Developments and Desk Operations Brian Sack August 12, 2009 151 of 165 August 11–12, 2009 Authorized for Public Release 152 of 165 Class II FOMC – Restricted FR Exhibit 1 (2) Proportion of S&P 500 Companies Exceeding Consensus Earnings Estimates (1) US Equity (S&P 500) Indexed to 100= 8/1/08 Percent 90 105 % Positive Surprise Average* 80 90 70 60 75 50 40 60 30 FOMC Source: Bloomberg Q2-09 Q2-08 Q2-07 Q2-06 Q2-05 Q2-04 Q2-03 Q2-02 Q2-01 Q2-00 Q2-99 08/01/09 Q2-98 04/01/09 Q2-97 12/01/08 Q2-96 08/01/08 Q2-95 20 45 *Average computed since 1991 Source: Reuters, Bloomberg Percent (3) Equity Market Volatility (VIX) $ Billions 1750 90 (4) Money Market Mutual Fund Assets (Government Funds*) FOMC 80 1500 70 1250 60 1000 50 40 750 30 20 10 FOMC 500 250 08/01/08 12/01/08 Source: Bloomberg 04/01/09 08/01/09 08/01/07 02/01/08 08/01/08 02/01/09 08/01/09 *Includes funds that hold Treasury, Agency, and Repo only Source: iMoneyNet (5) Corporate Debt Spreads BPS Indexed to BPS 100= 1/1/08 900 120 2250 FOMC 2000 800 115 1750 600 1250 400 100 300 95 200 100 90 110 500 105 1000 Indexed to 100= 1/1/08 130 US Broad Dollar (LHS) MSCI EM Index (RHS) 700 1500 (6) USD and Emerging Market Equities 750 High Yield (LHS) 500 Investment Grade (RHS) 250 08/01/08 12/01/08 Source: Bank of America 04/01/09 08/01/09 110 90 70 50 FOMC 30 08/01/08 12/01/08 04/01/09 08/01/09 Source: Federal Reserve Board of Governors, Bloomberg August 11–12, 2009 Authorized for Public Release 153 of 165 Class II FOMC – Restricted FR Indexed to 100= 8/1/08 Exhibit 2 (7) US Equity Indices for Financial Firms (8) Commercial Bank CDS Spreads BPS 700 140 FOMC 120 JPMorgan Chase Citigroup Bank of America Wells Fargo 600 Large Bank Index 500 Regional Bank Index 100 400 300 80 200 60 100 40 08/01/08 12/01/08 04/01/09 08/01/09 08/01/08 (9) US Libor-OIS Spreads 300 02/01/09 05/01/09 08/01/09 (10) Bank Debt Spreads BPS 1000 400 350 11/01/08 Source: Markit Source: Bloomberg BPS FOMC 0 FOMC NonGuaranteed FDICGuaranteed 800 1-Month 3-Month 600 250 200 400 150 100 200 FOMC 50 0 0 08/01/07 04/01/08 Source: Bloomberg 12/01/08 08/01/09 12/01/08 02/01/09 04/01/09 06/01/09 08/01/09 *Indices comprised of debt from Bank of America, Goldman Sachs, JPMC, Citigroup, and GE with maturities between 2010 and 2012. Spreads are to Treasuries of comparable maturity Source: Bloomberg (11) AAA-Rated Consumer ABS Spreads (12) CMBS Spreads BPS BPS 700 3500 600 3Y Prime Auto 3Y Credit Card 500 Junior Mezzanine Super Senior PPIP details announced 3000 2500 400 2000 300 1500 200 1000 100 0 TALF announced 08/01/08 11/01/08 Source: JPMorgan Chase First TALF subscription 500 0 02/01/09 05/01/09 08/01/09 08/01/08 11/01/08 Source: JPMorgan Chase CMBS added to TALF 02/01/09 05/01/09 08/01/09 August 11–12, 2009 Authorized for Public Release 154 of 165 Exhibit 3 Class II FOMC – Restricted FR (13) Treasury Yields (14) Implied Federal Funds Rate Percent Percent 5.5 4.5 3.5 FOMC 2-Year 5-Year 10-Year 30-Year 3.0 2.5 3.5 2.0 1.5 2.5 1.0 1.5 0.5 0.5 6/23/09 8/7/09 0.0 08/01/08 11/01/08 Source: Bloomberg 02/01/09 05/01/09 08/01/09 (15) Average Probability of Fed Funds Rate 12 Months Ahead Percent 08/15/09 02/15/10 Source: Bloomberg Percent 80 80 60 (16) Average Probability of Fed Funds Rate 18 Months Ahead 40 20 08/01/11 60 40 11/01/10 20 0 0 0.25% 0.50% .75 1.00% 1.25 1.50% 1.502.00% 0.25% 2.25- > 2.50% 2.50% Source: Dealer Policy Survey 0.50% .75 - 1.25 - 1.50 - 2.25 - > 2.50% 1.00% 1.50% 2.00% 2.50% Source: Dealer Policy Survey (18) Probability Distribution of CPI Inflation Rate in 2014-2019 (17) Breakeven Inflation Rates Percent Percent 3.0 FOMC 40 2.5 35 2.0 30 1.5 August 25 1.0 0.5 June 20 5Y Spot 15 5Y5Y Forward 0.0 10 -0.5 5 -1.0 08/01/07 02/01/08 Source: Barclays 0 08/01/08 02/01/09 08/01/09 1.0% 1.0-1.5% 1.5-2.0% 2.0-2.5% 2.5-3.0% 3.0% Source: Dealer Policy Survey August 11–12, 2009 Authorized for Public Release 155 of 165 Class II FOMC – Restricted FR $ Billions 150 Exhibit 4 (20) Dispersion of Treasury Yields (Fitting Error of Nominal Yield Curve) (19) Monthly Pace of Large-Scale Asset Purchases BPS 25 Agency Debt Treasury MBS 125 20 100 15 75 10 50 25 5 0 0 Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 08/01/01 08/01/03 08/01/05 08/01/07 08/01/09 *Calculated from securities with 2-10 year maturities Source: Federal Reserve Bank of New York Source: Federal Reserve Bank of New York $ Billions (22) Large-Scale Asset Purchases Program Size Relative to Market (21) Weekly Treasury Cash Volumes 3500 3000 Weekly Volume 3-Month Moving Average 2500 2000 1500 Source: Federal Reserve Bank of New York, JP Morgan Chase, Barclays Capital 1000 500 08/01/01 08/01/03 08/01/05 08/01/07 08/01/09 Source: FR2004 BPS (23) Fixed-Rate Mortgage Spreads* (24) Mortgage Spreads BPS 550 350 300 MBS Option-Adjusted Spread (OAS) 250 Conforming Mortgage Spread 3/1 ARM Spread to Treasury Conforming Spread to Treasury 450 200 350 150 250 100 50 150 0 -50 08/01/00 50 08/01/03 08/01/06 08/01/09 08/01/00 08/01/03 08/01/06 *Spreads calculated relative to blended 5- and 10-year Treasury yields *ARM spread is to 2-year Treasury; Conforming spread is to blended 5- and 10-year Treasury Source: Barclays Capital Source: Barclays Capital, Bloomberg 08/01/09 August 11–12, 2009 Authorized for Public Release 156 of 165 Class II FOMC – Restricted FR $ Billions 3000 2500 Exhibit 5 (25) Balance Sheet Assets by Category $ Billions 1750 All Other Lending to Systemically Important Institutions Short-Term Liquidity Facilities Large-Scale Asset Purchases Legacy Treasuries 1500 1250 2000 1000 (26) Federal Reserve Short-Term Liquidity Facilities PCF PDCF AMLF CPFF FX Swaps TAF 1500 750 1000 500 500 250 0 08/01/08 0 11/01/08 02/01/09 05/01/09 08/01/09 Source: Federal Reserve Bank of New York 08/01/08 11/01/08 05/01/09 Source: Federal Reserve Bank of New York (27) Balance Sheet Baseline Scenario Forecast Source: Federal Reserve Bank of New York 02/01/09 08/01/09 August 11–12, 2009 Authorized for Public Release Appendix 2: Materials used by Mr. Madigan 157 of 165 August 11–12, 2009 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Monetary Policy Alternatives Brian Madigan August 12, 2009 158 of 165 August 11–12, 2009 Authorized for Public Release 159 of 165 June FOMC Statement Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. August 11–12, 2009 Authorized for Public Release 160 of 165 AUGUST 10, 2009 August FOMC Statement – Alternative A 1. Information received since the Federal Open Market Committee met in June suggests that the pace of economic contraction has abated significantly. Conditions in financial markets have improved somewhat further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses appear to have made progress in bringing inventory stocks into better alignment with sales but are still cutting back on fixed investment and staffing. 2. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. 3. With the anticipated economic recovery likely to be weak initially and inflation expectations well-anchored, the Committee has decided to provide additional monetary stimulus by increasing its purchases of Treasury securities to $450 billion, up from the previously announced amount of as much as $300 billion. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities. The Committee anticipates completing the full amounts of its purchases of Treasury and mortgage-backed securities by year-end. The Committee will also buy up to $200 billion of agency debt by the end of this year. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. [The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. | The Committee anticipates that economic conditions are likely to warrant maintaining the 0 to ¼ percent target range for the federal funds rate at least through mid-2010]. August 11–12, 2009 Authorized for Public Release 161 of 165 AUGUST 10, 2009 August FOMC Statement – Alternative B 1. Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved somewhat further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but have made progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in the context of price stability. 2. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. 3. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgagebacked securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as its purchases of Treasury securities come to an end, the Committee has decided to gradually slow the pace of these transactions and expects them to be completed by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of agency debt and mortgage-backed securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. August 11–12, 2009 Authorized for Public Release 162 of 165 AUGUST 10, 2009 August FOMC Statement – Alternative B' 1. Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved somewhat further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but have made progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in the context of price stability. 2. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. 3. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgagebacked securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as the current program of purchases of Treasury securities comes to an end, the Committee has decided to gradually slow the pace of these transactions and expects them to be completed by the end of October. The Committee is prepared to consider resuming its purchases of Treasury securities in light of the evolving economic outlook and conditions in financial markets, and it will continue to evaluate the timing and overall amounts of its purchases of agency debt and mortgage-backed securities. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. August 11–12, 2009 Authorized for Public Release 163 of 165 AUGUST 10, 2009 August FOMC Statement – Alternative B (revised) 1. Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in the context of price stability. 2. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. 3. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgagebacked securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. August 11–12, 2009 Authorized for Public Release 164 of 165 AUGUST 10, 2009 August FOMC Statement – Alternative C 1. Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out and that downside risks are diminishing. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but have made progress in bringing inventory stocks into better alignment with sales. Meanwhile, conditions in financial markets have improved further in recent weeks. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will continue to contribute to a gradual resumption of sustainable economic growth in a context of price stability. 2. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. 3. In view of the improved economic outlook, the Committee has judged that some reduction in overall monetary stimulus is appropriate. The Committee now expects that its purchases of agency mortgage-backed securities (MBS) and agency debt will cumulate to about $1 trillion and about $150 billion, respectively, somewhat less than the previously announced maximum amounts. The Federal Reserve is nearing completion of its purchase of roughly $300 billion of Treasury securities. To promote a smooth transition in markets as its purchases of Treasury securities, agency debt, and agency MBS come to an end, the Committee has decided to gradually slow the pace of these transactions. Consistent with these adjustments, the Committee now expects that its purchases of Treasury securities will be completed by the end of October, and it continues to anticipate that its purchases of agency debt and MBS will be completed by the end of the year. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is carefully monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. The Committee now anticipates that economic conditions are likely to warrant maintenance of the current 0 to ¼ percent range for the federal funds rate at least through the end of this year. August 11–12, 2009 Authorized for Public Release FOMC CLASS I – RESTRICTED CONTROLLED (FR) 165 of 165 August 10, 2009 Table 1: Overview of Alternative Language for the August 11‐12, 2009 FOMC Announcement June FOMC August Alternatives A B / B′ / B(revised) C Forward Guidance on Funds Rate Path “for an extended period” same as in June or “at least through mid-2010” “at least through the end of this year” “for an extended period” Treasury Securities Purchases Total Amount up to $300 billion “full amount” of $450 billion $300 billion Pace ----- ----- by autumn by year-end pace will “gradually slow” by the end of October pace will “gradually slow” Completion “roughly $300 billion” by the end of October Agency MBS Purchases Total Amount up to $1.25 trillion “full amount” of $1.25 trillion up to $1.25 trillion “will cumulate to about $1 trillion” Pace ----- ----- ----- pace will “gradually slow” Completion by year-end by year-end by year-end by year-end Agency Debt Purchases Total Amount up to $200 billion up to $200 billion Pace ----- ----- ----- Completion by year-end by year-end “will cumulate to... about $150 billion” pace will “gradually slow” up to $200 billion by year-end by year-end Evaluation of LSAP Timing and Overall Amounts adjustments to all LSAPs will continue to be evaluated adjustments to all LSAPs will continue to be evaluated adjustments to agency debt and agency MBS will continue to be evaluated “prepared to consider resuming” Treasury purchases; adjustments to agency debt and agency MBS will continue to be evaluated adjustments to all LSAPs will continue to be evaluated adjustments to all LSAPs will continue to be evaluated
@FedFRASER