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December 14, 2010 Authorized for Public Release Appendix 1: Materials used by Mr. Sack 111 of 127 December 14, 2010 Authorized for Public Release Class II FOMC - Restricted FR Material for FOMC Presentation: Financial Market Developments and Desk Operations Brian Sack December 14, 2010 112 of 127 December 14, 2010 Authorized for Public Release 113 of 127 Class II FOMC – Restricted FR Exhibit 1 (1) Treasury Yields Percent (2) Intermeeting Change in 10-Year Yield BPS 100 4.0 FOMC 3.0 50 0 2.0 -50 1.0 -100 2-Year 5-Year 10-Year -150 0.0 01/01/10 04/01/10 07/01/10 10/01/10 Source: Bloomberg 01/01/08 01/01/09 01/01/10 Source: Bloomberg (3) Expected Size of LSAP Billions 01/01/07 (4) Implied Federal Funds Rate Path Percent 1,200 1.5 12/10/10 1,000 11/2/10 800 1.0 600 400 0.5 200 0 November December December (pre-fiscal news) (post-fiscal news) Source: Federal Reserve Bank of New York Policy Survey BPS 0.0 12/10/10 10/10/11 08/10/12 Source: Federal Reserve Bank of New York (5) Implied Volatility of Ten-Year Rate* (6) Asset Price Changes 200 FOMC 10Y Nominal 10Y Real 10Y BEI S&P 500 Corporate IG* Corporate HY* Dollar** 150 100 50 08/03/09 01/03/10 06/03/10 11/03/10 *Implied volatility of swap rate derived from swaption contracts expiring in 3-months. Source: Barclays Capital Jackson Hole to Since Nov. Nov. FOMC FOMC -6 +73 -61 +70 +55 +3 +12% +4% -19 -5 -107 -25 -5% +2% * CDX **FRB trade weighted dollar index Source: Bloomberg, Board of Governors December 14, 2010 Authorized for Public Release 114 of 127 Class II FOMC – Restricted FR Exhibit 2 (7) Euro Area 2-Year Yield Spreads to German Debt BPS 600 (8) Euro Area Bank CDS* BPS 1,600 Ireland Portugal Spain Italy 500 400 FOMC 1,400 Ireland Portugal Spain Italy 1,200 1,000 300 FOMC 800 600 200 400 100 200 0 0 08/03/09 01/03/10 06/03/10 08/03/09 11/03/10 01/03/10 06/03/10 11/03/10 *Average bank CDS by country Source: Bloomberg Source: Bloomberg (9) Global Equities Indexed to 08/03/09 (10) Euro-Dollar Exchange Rate $/€ 1.6 130 S&P 500 Euro Stoxx FOMC 120 FOMC 1.5 1.4 1.3 110 1.2 100 1.1 90 08/03/09 01/03/10 06/03/10 11/03/10 1.0 08/03/09 01/03/10 06/03/10 11/03/10 Source: Bloomberg Source: Bloomberg (11) Money Fund Holdings of Liabilities of European Financial Institutions BPS (12) 3-Month Funding Spreads to OIS 120 USD Billions Euribor Panel (Swapped to Dollars) Libor Panel 100 Level on 12/1/2010 Change Since 11/3/2010 80 France $238.1 2% 60 Germany $134.9 7% Ireland $0.0 0% Italy $21.6 -16% 20 Spain $25.5 -38% 0 40 08/03/09 Source: Confidential data from Investment Company Institute FOMC Source: Bloomberg 01/03/10 06/03/10 11/03/10 December 14, 2010 Authorized for Public Release 115 of 127 Class II FOMC – Restricted FR Exhibit 3 (13) Treasury Purchases by Maturity Percent (14) Trading Volume in Treasury Securities* $ Billions 30 200 FOMC 180 25 160 20 140 120 15 100 80 10 60 5 40 20 TIPS 17-30 10-17 7-10 5.5-7 4-5.5 2.5-4 1.5-2.5 0 Source: Federal Reserve Bank of New York CUSIPS (15) Number of Issues Trading Special* 0 01/01/06 140 FOMC 01/01/09 07/01/10 (16) Pace of Purchases $ Billions $75 per Month Actual Purchases Potential Path 100 160 07/01/07 *10-day moving average of all benchmark coupon securities Source: BrokerTec 80 120 60 100 80 40 60 20 40 20 (17) Projected SOMA Reinvestments $ Billions Jun-11 May-11 Apr-11 Mar-11 Feb-11 Source: Federal Reserve Bank of New York BPS 50 Jan-11 Nov-10 01/03/06 01/03/07 01/03/08 01/03/09 01/03/10 *10-day moving average. Trading special defined as having a repo rate at least 15 basis points below the general collateral rate. Source: BrokerTec Dec-10 0 0 160 (18) Spread Between 30- and 10-Year Treasury Yields November FOMC December FOMC 40 140 30 120 20 100 10 80 FOMC Source: Federal Reserve Bank of New York Jun-11 May-11 Apr-11 Mar-11 Feb-11 Jan-11 Dec-10 Nov-10 0 60 08/03/09 Source: Bloomberg 01/03/10 06/03/10 11/03/10 December 14, 2010 Authorized for Public Release Appendix 2: Materials used by Mr. English 116 of 127 December 14, 2010 Authorized for Public Release 117 of 127 Class I FOMC – Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Bill English December 14, 2010 December 14, 2010 Authorized for Public Release 118 of 127 Class I FOMC — Restricted Controlled (FR) NOVEMBER FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. 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 is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. 3. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. 4. 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 for the federal funds rate for an extended period. 5. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Page 1 of 10 December 14, 2010 Authorized for Public Release 119 of 127 Class I FOMC — Restricted Controlled (FR) DECEMBER FOMC STATEMENT—ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in September November confirms that the pace of economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment in output and employment continues to be slow. 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 is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing starts sector continues to be depressed. Longerterm inflation expectations have remained stable, but measures of underlying inflation have continued to trended lower in recent quarters downward. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been remains disappointingly slow. 3. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities. Moreover, in light of incoming information, the Committee now intends to increase its holdings of securities by a total of $800 billion—$200 billion more than announced last month—by purchasing longer-term Treasury securities at a pace of about $75 billion per month through the third quarter of 2011. In addition, the Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. 4. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to currently anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period at least through mid-2012. 5. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Page 2 of 10 December 14, 2010 Authorized for Public Release 120 of 127 Class I FOMC — Restricted Controlled (FR) DECEMBER FOMC STATEMENT—ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in September November confirms that the pace of economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment in output and employment continues to be slow. Household spending is increasing gradually at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing starts sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trended lower in recent quarters downward. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. 3. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. 4. 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 for the federal funds rate for an extended period. 5. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Page 3 of 10 December 14, 2010 Authorized for Public Release 121 of 127 Class I FOMC — Restricted Controlled (FR) DECEMBER FOMC STATEMENT—ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in September November confirms that the pace of recovery in output and employment continues to be slow is continuing. Household Spending is by households and businesses appears to be increasing gradually, at a moderate pace. but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising has decelerated, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. However, employers remain reluctant to add to payrolls. and housing starts continue to be depressed. Longerterm inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. 3. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities. However, in light of incoming information, the Committee now intends to increase its holdings of securities by a total of $400 billion—$200 billion less than announced last month—by purchasing longer-term Treasury securities at a pace of about $50 billion per month through the second quarter of 2011. In addition, the Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. 4. 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 for the federal funds rate for an extended period. 5. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Page 4 of 10 December 14, 2010 Authorized for Public Release 122 of 127 Class I FOMC — Restricted Controlled (FR) DECEMBER FOMC STATEMENT—ALTERNATIVE D 1. Information received since the Federal Open Market Committee met in September November confirms that the pace of economic recovery in output and employment continues to be slow is proceeding. Household Spending by households and businesses is increasing gradually, at a moderate pace. but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continues to be depressed. Longer-term inflation expectations have remained stable, but Although measures of underlying inflation have trended lower in recent quarters, longer-term inflation expectations have remained stable. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. 2. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, Based on this assessment of current and prospective economic conditions, the Committee decided today to discontinue the assetpurchase program it announced in November expand its holdings of securities. For the time being, the Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. 3. The Committee will 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 for the federal funds rate for an extended period some time. 4. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate promote maximum employment and price stability. Page 5 of 10 December 14, 2010 Authorized for Public Release 123 of 127 Class I FOMC — Restricted Controlled (FR) November 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 execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 6 of 10 December 14, 2010 Authorized for Public Release 124 of 127 Class I FOMC — Restricted Controlled (FR) December 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 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 $2.8 trillion by the end of September 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 7 of 10 December 14, 2010 Authorized for Public Release 125 of 127 Class I FOMC — Restricted Controlled (FR) December 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 execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 8 of 10 December 14, 2010 Authorized for Public Release 126 of 127 Class I FOMC — Restricted Controlled (FR) December 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 execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 $2.4 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 9 of 10 December 14, 2010 Authorized for Public Release 127 of 127 Class I FOMC — Restricted Controlled (FR) December 2010 FOMC Directive — Alternative D 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 execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase maintain the total face value of domestic securities held in the System Open Market Account to at approximately $2.6 $2.1 trillion. The Committee also directs the Desk to by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability. Page 10 of 10
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