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December 15–16, 2015 Authorized for Public Release Appendix 1: Materials used by Mr. Potter and Ms. Logan 148 of 195 December 15–16, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Developments and Open Market Operations Simon Potter and Lorie Logan December 15, 2015 149 of 195 December 15–16, 2015 Authorized for Public Release Exhibit 1 Class II FOMC-Restricted (FR) (1) Market-Implied Probability of a Rate Hike At or Before December FOMC* Asswnptions for the EFFR: 0-'-.'-.�Max/Min -25th/75th -Median Percent 100 80 -� �"'l'-�v����W,, 150 of 195 � �; (2) Comparison of Implied Fed Funds Rate Paths* -Before October FOMC (10/27/2015) Percent 1.5 -CwTent (12/11/2015) Oct. , , 1.0 60 Nov. 40 NFP � 20 RMB 0 06/17/15 Deval. Sep. Oct. FOMC 08/17/15 NFP 0.0 10/17/15 *Assumptions from the Surveys of Primary Dealers and Market Participants' PDF-implied means for the EFFR immediately after liftoff. Probabilities are derived from January fed funds futures contract and are capped at 100%,. Source: Bloomberg, Federal Reserve Bank of New York Desk Calculations BPS 130 120 (3) Average Expected Pace of Tightening After Liftoff* ! ...,..Year 1 ...,..Year 2 _.,............ 2 4 6 8 10 12 14 16 18 20 22 24 Months Ahead *Derived from federal funds futures and Eurodollar futures. Source: Bloomberg, Federal Reserve Bank ofNew York Percent 3.5 3.0 (4) Year-End Market-Implied and Survey-Implied Fed Funds Rate* = December Swvey Average ◊CwTent Market-Implied Rate 2.0 100 1.5 90 1.0 0.5 80 0.0 Dec '14 Mar '15 Jun '15 Sep '15 Dec '15 *Averages from the Surveys of Primary Dealers and Market Participants' PDF-implied means for the expected pace of tightening for the first and second years following liftoff. Responses are conditioned on not returning to the zero lower bound. Source: Federal Reserve Bank of New York Indexed to -Long Rates* -Equities -C1lll'encies 08101115 350 Oct. FOMC Aug. 24th 300 250 200 150 100 09/01/15 10/01/15 *I-month swaption with 10-year underlying. Source: Bloomberg, CBOE 11/01/15 2017 2016 *Based on all responses from the Survey of Primary Dealers and Survey of Market Participants. Dots scaled by percent of December Survey respondents. Dots shaded so that the higher the probability respondents place on not returning to the zero lower bound, the darker the dot. Source: Federal Reserve Bank of New York Desk Calculations (6) Commodity Prices (5) Implied Volatility Indices* 50 08/01/15 0 2.5 110 70 Sep '14 0.5 -Bloomberg Industrial Metals Index (LHS) -Brent Crnde (RHS) Indexed to 01/01/15 105 100 tf 95 90 85 80 75 70 Crisis Low* 65 04/01/15 12/01/15 01/01/15 $/Bbl. 70 � Oct. FOMC 65 60 55 50 45 40 35 07/01/15 *Brent Crude oil closed on 12/24/08 at $36.61/Bbl. Source: Bloomberg 10/01/15 December 15–16, 2015 Authorized for Public Release 151 of 195 Exhibit 2 Class II FOMC-Restricted (FR) (7) High-Yield Credit OAS -HY Energy OAS (LHS) -HY ex. Energy OAS (RHS) Percent 12 Oct. FOMC (8) Breakeven Inflation Measures* Percent 7.5 6.5 10 5.5 9 4.5 1.75 8 3.5 1.50 7 2.5 6 1.5 0.5 04/01/15 07/01/15 10/01/15 -Basis(RHS) -offshore RMB(LHS) -onshore RMB (LHS) Oct. RMB! Deval.! FOMC 6.4 6.3 -----1 i I 6.2 6.1 6 01/01/15 04/01/15 2.00 1.25 1.00 0.75 01/01/15 04/01/15 07/01/15 10/01/15 Pips*"' ■Year-to-Date 0 Source: Bloomberg (11) U.S. and German Two-Year Nominal Rates and Interest Rate Differential -Interest Rate Differential (RHS) -Gennany (LHS) -U.S.(LHS) BPS 160 120 0.50 80 0.25 40 0.00 0 -0.25 -40 -0.50 01/01/15 -80 Source: Bloomberg 10/01/15 5 10 Percent 15 (12) Asset Price Changes Around ECB Meetings* 0.75 07/01/15 ■Since Oct. FOMC 2500 Bloomberg Dollar Index 2000 Onshore Chinese RMB 1500 Ew-o 1000 Canadian Dollar 500 Mexican Peso 0 Japanese Yen -500 Korean Won *Basis is calculated as the Offshore RMB less the Onshore RMB. 04/01/15 10/01/15 (10) U.S. Dollar Appreciation Against Major Trading Partners **A «pip"is 1/l00 th ofa cent. Source: Bloomberg Percent 1.00 07/01/15 Source: Bloomberg, Federal Reserve Board ofGovernors, (9) Onshore and Offshore Renminbi* 6.5 Oct. FOMC 2.25 *Dashed lines show 5-year averages. Source: Bloomberg, Barclays RMB/ USD 6.6 ------------- ----- 2.50 11 5 01/01/15 -Five-Year, Five-Year Breakeven -Five-YearBreakeven Percent 2.75 Daily Change on Dec.ECB Meeting Change Since Oct. ECB Meeting Sovereign Debt Yields 10-Year Treasmy 10-Year Genmn +13BPS +20BPS +lOBPS -3BPS Equities S&P 500 fudex EuroStoxx50 fudex -1.4% -3.6% -0.3% -2.1% Foreign Exchange Euro-Dollar +3.1% -3.1% Asset Source: Bloomberg 20 December 15–16, 2015 Authorized for Public Release 152 of 195 Exhibit 3 Class II FOMC - Restricted (FR) (13) Overnight Interest Rates* (14) RRPs Outstanding and Foreign Repo Pool* -GCF Treaswy Repo Rate -Tripa1ty ex. GCF Rate -Effective Federal Funds Rate -ON RRP Award Rate -IOER i I I ■ ON RRP Outstanding ■ Tenn RRP Outstanding ,I, BPS 50 45 40 35 30 25 20 15 IO 5 0 01/01/15 I 600 I i i 500 400 300 200 100 04/01/15 07/01/15 0 01/02/15 10/01/15 *Dark trip wires indicate quarter-ends, light trip wires indicate month-ends. Source: Bloomberg, Federal Reserve Bank of New York (15) Expected Level of Money Market Rates After Liftoff BPS 75 50 25 0 • ·, Market ..< Survey • Market ' . ·:::: � -.:::-}::: Smvey Survey GCF Triparty Ex.GCF *Range: for market defined as the implied rate assuming 75% to 99% probability of liftoff, for sU£Vey defined as the 5th and 95th percentile from Desk SU£Vey, ex. one dealer that does not expect Dec. liftoff. **Base case: for market defined as the implied rate assuming a 90% probability of liftoff, for sU£Vey defined as the median response from Desk SU£Vey, ex. one dealer that does not expect Dec. liftoff. Source: Federal Reserve Bank of New York, Bloomberg (17) Spread Between GCF Repo and Tri-party Excluding GCF Repo Rates* $ Billions 900 800 700 600 500 400 300 200 100 0 10/20/15 aMedian Headroom** ■ Median Demand *Based on all responses from the December SU£Vey of Primary Dealers and SU£Vey ofMarket Participants **Headroom is calculated as the RRP Cap less RRP Demand. When respondents indicate "no cap" the approximate size of the Treasury SOMA portfolio, $2.2 trillion, is used as a proxy. Source: Federal Reserve Bank of New York (18) Three-Month LIBOR Less GC Repo and Five-Year Swap Spread BPS -5-Year Swap Spread -LIBOR less GC Repo 25 -�f9•1 25 15 20 10 15 5 10 0 5 -5 Source: Federal Reserve Bank of New York, Bloomberg 08/07/15 Immediately One Year Three Years Following Liftoff Following Liftoff Following Liftoff 20 - *Tri-party Ex. GCF Data series begins 01/08/13 05/28/15 Source: Federal Reserve Bank ofNew York 30 0 01/08/13 07/08/13 01/08/14 07/08/14 01/08/15 07/08/15 03/17/15 *Dashed lines indicate intenneeting periods. (16) ON RRP Expected Demand and Headroom* Exp. Target Range ■ Range of Estimates* • Base Case** EFFR BPS 35 ■ Foreign RP Pool $ Billions 700 � -"-- -10 -15 01/01/13 09/01/13 Source: Bloomberg 05/01/14 01/01/15 09/01/15 December 15–16, 2015 Authorized for Public Release Exhibit 4 Class II FOMC - Restricted (FR) (19) Importance of Factors Explaining Recent Narrowing in Swap Spreads* Rating 5 4 3 2 □ ♦Median GJ GJ l 0 Balance Sheet Costs Foreign Res. Selling Corporate Issuance *Based on all responses from the December SU£Vey ofPrimary Dealers and SU£Vey ofMarket Participants. A rating of 1 implies that the factor is not important, while a rating of 5 implies the factor is very important. Boxes show interquartile ranges. Source: Federal Reserve Bank ofNew York (21) Expected Timing of End to Some or All Reinvestments Relative to Liftoff* Months �18 16 14 12 10 8 6 4 2 $0 • • • •• ••• •• • • • -• • • -Median � I • •' •a � • I• Oct '141 Oc�'l5 Dec '15 Oct '14 Oct '15 Dec '15 Treasury AgencyMBS *Dots scaled by percent of respondents from the Survey ofPrimary Dealers and SU£Vey ofMarket Participants. Source: Federal Reserve Bank ofNew York (23) Treasury Security Reinvestment Policy • • • • (20) Three-Month FX Swap-Implied Basis -USD-JPY -EUR-USD -GBP-USD BPS 80 70 60 Relative Cost of l Bonowing USD 50 40 Reduced Counterparty 30 Cost 20 Impact Swap Rate 10 Impact TreasuryRate Desk will continue to roll over maturing Treasw-ysecurities at auction Desk places bids for the SOMA at Treasw-y auctions equal in par amount to the value ofholdings matw-ing on the issue date and allocated proportionallybyoffer size o Bids are place as noncompetitive tenders and are treated as add-ons to announced auction sizes SOMA holdings are cw1·entlylimited to not more than 70 percent of total outstanding issuance amount of anyone Treasurysecurity o Desk observes this limit when rolling over maturing securities at auction Desk plans to publish a list of FAQs shortlyafter meeting outlining details ofpolicy 153 of 195 Oct. FOMC I •�t 0 -10 01/01/14 06/01/14 Source: Bloomberg 11/01/14 04/01/15 09/01/15 (22) Expected Reinvestment Phase Out Period* Months �18 16 14 12 10 8 6 4 2 0 • • • • •• • • - - - - t ' t t • • -' -Median • � I • • • July'15 Oc;'l5 Dec '15 July'15 Oct '15 Dec '15 Treasury AgencyMBS *Dots scaled by percent of respondents from the SU£Vey ofPrimary Dealers and SU£Vey ofMarket Participants. Source: Federal Reserve Bank ofNew York December 15–16, 2015 Authorized for Public Release 154 of 195 Exhibit 5 Class II FOMC - Restricted (FR) (24) Fed Funds and Eurodollar Volumes -FR 2420 Fed Funds -Brokered Fed Funds $ Billions 300 250 -FR 2420 Eurodollars -Brokered Eurodollars i Revised Repo1ting i Instmctions I (25) Volume-Weighted Median Overnight Rates BPS 16 14 12 I IO 200 f -FR 2420 EFFR -Brokered EFFR -FR 2420 OBFR Brokered OBFR 8 150 6 100 4 2 0 10/20/15 Source: Federal Reserve Bank of New York 11/17/15 12/01/15 Source: Federal Reserve Bank of New York (26) EFFR and OBFR Implementation • 11/03/15 Publish Desk statement on January 6 th , just after the December meeting minutes release announcing: o Details about effo1ts to increase transparency o Policies intended to align the production of the EFFR and OBFR with intemational standards for financial benchmarks • FR 2420 data allow us to publish more details about the unsecw·ed ovemight market compared to the data we receive from brokers • Staff is examining whether additional data should be released v.iith a lag (27) Tri-party Treasury GC Repo Rate • NY Fed collects and analyzes daily transaction data from the tri-pa1ty repo market o Useful for analysis of operations and market monitoring • In 2014, the Federal Reserve convened the Altemative Reference Rates Cormnittee or ARRC o A group of major U.S. dollar swap dealers tasked with identifying robust altemative reference rates • Staff is exainining the possibility of the NY Fed publicly producing an altemative reference rate based on Treasury GC Repo transactions (28) Update on Counterparty Review A,erageMOC Finn Aggregate Trades (#) Aggregate Trades ($mm) % of Total Pm-chases Avg Trade Size ($mm) Average Small Primary Dealer* Offers Awards Offers Awards 7 1,136 65 126 20 26,917 3,339 259 0.02 0,01 0.99 1.96 3 22 *Average of the six smallest pnmary dealers- BNP, Cantor, Daiwa, Jefferies, Mizuho and SocGen. MOC firms are Brean Capital, Loop Capital and Mischler Financial. Source: Federal Reserve Bank of New York • • Benefits associated with transacting with smaller broker dealers is greatly outweighed by the costs Unlikely to recommend that dealers with less than $50 million in capital be eligible to be a primai-y dealer • Staff continue to study potential adjustments to the counterpa1ty framework • Will present advised ad1ninistrative policies to the Committee for approval December 15–16, 2015 Authorized for Public Release Exhibit 6 (Last) Class II FOMC - Restricted (FR) (30) Operational Readiness Status of Operation or Facility (29) Euro Portfolio Income € Millions 90 _..,_ Realized -<>-• Projected 80 70 60 50 40 30 20 10 0 -10 2010 Ql 2011 QI 2012 Ql 2013 QI Source: Federal Reserve Bank of New York 155 of 195 2014 Ql 2015 Ql 2016 Ql • In Production: Active - Operation ctmently in use. Staff are fully trained across locations, procedures are documented, business continuity plans are in place. • In Production: Standby - Operation not cwTently active but ready to be implemented within tv.•o days' notice; Desk conducts small-value exercises each year to ensure readiness. Otherwise complies with "In Production" guidelines. • Rapid Deployment: (<2 weeks) - Operation not cwTently in use. High-level processes and procedures have been . developed and a deployment plan is in place. Internal mock operations are conducted where feasible. • Extended Deployment*: (<3 months)- Operation not cw1·ently in use. Several months would be needed for the operation to be deployed in scale so that technical infrastmcture can be built and tested, legal agreements signed, etc. • Significant Development Required*: (>3 months) Operation still in fonnation phase. Si gnificant resources would be needed to design, build and test the operation, as well as negotiate and sign legal agreements. *Includes many operations that are not anticipated to move up in operational readiness level. December 15–16, 2015 Authorized for Public Release Appendix 2: Materials used by Messrs. Roberts and Gruber 156 of 195 December 15–16, 2015 Authorized for Public Release 157 of 195 Class II FOMC – Restricted (FR) Material for Staff Presentation on the Economic and Financial Situation John M. Roberts and Joseph W. Gruber December 15, 2015 December 15–16, 2015 Authorized for Public Release 158 of 195 Exhibit 1 Class II FOMC - Restricted (FR) Recent Developments 1. Change in Total Payroll Employment* 2. Unemployment Rate Thousands of employees Percent 400 Unemploym ent rate Natural rate• 200 10 9 0 8 -200 Monthly payroll change S ept Oct Nov. 145 142 298 185 211 180 Dec. TB Oct TB 7 -400 6 -600 5 -800 2008 2010 2012 • Excluding decennial census hiring. Note: Three-month moving average. 2014 2016 -1000 2008 2010 2012 Percent Labor force participation rat e Trend' (Percent change, annual rate) 66.5 2015 66.0 H1 e 65.5 65.0 64.5 64.0 63.5 63.0 62.5 L.L&..L&..L&..L&..L&..L.&..L.&..L.&..L.&..L.&..L..L..I...L..I...L..I...L..I...L..I...L.l...&..L.I 2010 2012 2016 4. Manufacturing IP 3. Labor Force Participation Rate 2008 2014 • Staff estimate including the effect of extended unemployment benefits. 2014 2016 Manufacturing 2. Oct. TB 0.4 1. Manufacturing ex. motor vehicles 4. Oct. TB 3. e: Q3f 3.4 Q4f 1.5 0.4 2.5 -1.4 -0.1 2.1 2.0 -0.2 1.3 -0.5 Staff estimate. f: Staff forecast 62.0 • Staff estimate including the effect of extended unemployment benefits. 5. Real PCE 6. Real GDP Percent change, annual rate - Dec. TB D Oct.TB PCE Retail Sales Group S ept. Current 0.2 Dec. TB 0.2 Oct 0.2 0.2 Nov. 0.6 0.5 7 6 Percent change, annual rate - D ecemb erTB D OctoberTB 2.5 5 2.0 4 1.5 3 1.0 2 2015 e: Staff estimate. f: Staff forecast. Q1 f 2016 3.0 0 2015 Q4 f e: Staff estimate. f: Staff forecast. Page 1 of 8 Q1f 2016 0.0 December 15–16, 2015 Authorized for Public Release 159 of 195 Exhibit 2 Class II FOMC - Restricted (FR) Medium-Term Outlook 1. Real GDP 2. Key Determinants of the Contour Q4/Q4 percent change 3_0 2.5 2.0 1.5 1.0 0.5 • Net exports expected to continue to be a substantial drag in 2016 and 2017. • After several years in which fiscal policy restrained the recovery, it now provides a modest boost. • The high level of wealth is expected to continue to boost consumer spending. 2011 2012 2013 2014 2015 2016 2017 2018 Note: Red lines are the Q4/Q4 change in potential output for the year. 4. Fiscal Impetus 3. Contribution of Net Exports Contrib. to Q4/Q4 change, pp. Contrib. to Q4/Q4 change, pp. 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 -1.0 -1.0 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 6. Unemployment Rate* 5. Wealth-to-Income Ratio Ratio Percent 7_0 Current June 2015 TB 6.5 6 4 5.0 _._..._.&......I........._, 4.5 2000 2003 2006 2009 2012 2015 2018 9 7 5.5 L...l ..........&......._L-I-L...&.......... L-I-L...&-................ 10 8 6.0 1997 1.0 3 2011 2012 2013 2014 2015 2016 2017 2018 • Gray shaded area gives 70% confidence interval based on FRB/US stochastic simulations. •• Adjusted for effect of extended unemployment benefits. Page 2 of 8 December 15–16, 2015 Authorized for Public Release 160 of 195 Exhibit 3 Class II FOMC - Restricted (FR) Inflation 2. Total and Core PCE Prices 1. Near-Term PCE Inflation (Percent change, annual rate) 12-month percent change Core PCE Total PCE 2015 4.0 3.5 3.0 1.3 1. Total PCE 1.3 2. Core PCE 0.0 1.2 I 0.0 ✓ \. 2.5 \' Novf 1.4 f Staff forecast (December TB) , 2010 2011 2012 2013 f: Staff forecast (December TB). Contrib. to Q4/Q4 change, pp. - 2015 4-quarter percent change Dec. TB Jun. TB 2015 2016 2017 2018 3. Resource utilization 4. Other factors 5. Underlying inflation ✓ 1.5 1.0 0.5 0.0 -0.5 4. Core PCE Prices* 3. Decomposition of Core PCE Inflation 1. Core PCE inflation 2. Enerw arid lmpo pnces 2014 ,. 2.0 4.0 3.5 3.0 1.30 1.40 1.70 1.90 -0.45 -0.40 -0.10 0.00 1.5 2.5 2.0 -0.05 0.05 0.10 0.10 0.00 -0.10 -0.10 0.00 1.0 1.80 1.80 1.80 1.85 0.5 0.0 ................................................................................................&..l ............. Note: Rounded to the nearest 0.05. 2011 2012 2013 2014 2015 2016 2017 2018 _o.5 • Gray shaded area gives 70% confidence interval based on FRB/US stochastic simulations. 5. PCE Prices* 6. Labor Compensation 4-quarter percent change Dec. TB Jun. TB Percent change from year earlier 4.0 Comp per hour (P&C) Employment cost index Average hourly earnings• 3.5 3.0 8 7 6 2.5 5 2.0 4 1.5 3 1.0 2 0.5 0.0 ..&..I...................................................................... -0.5 L..L ...... ..&..l.................. 2011 2012 2013 2014 2015 2016 2017 2018 • Gray shaded area gives 70% confidence interval based on FRB/US stochastic simulations. 0 ......_.__L...I____._L...l_.__._......'-L.............'-L........................L...11 -1 2010 2011 2012 2013 2014 2015 • All employees. Page 3 of 8 December 15–16, 2015 Authorized for Public Release 161 of 195 Exhibit 4 Class II FOMC - Restricted (FR) A Recession at the ZLB 1. Recession Risk 2. Calibration • Based on the five more-moderate recessions since 1960. • Recessions don't die of old age. • Nonetheless, there is about a 15-to-20 percent chance that a recession will occur in any given year-and thus close to a 50 percent chance over medium term. • GDP falls 0.75 percent from peak to trough. • The federal funds rate falls 275 basis points. • We consider the implications of a recession that starts in 2016:02, when the federal funds rate is forecast to still be near the ZLB. 3. Unemployment 4. Core Inflation Percent Dec. Tealbook With ZLB Without ZLB I I I - \ \ ,. ./ 2014 2016 5. Federal Funds Rate 4-qtr percent change 8 Dec. Tealbook With ZLB Without ZLB 7 Dec. Tealbook With ZLB Without ZLB 2.4 2.2 \ \ Percent 2.6 .\ \, 1.6 �" .._ 2018 2020 1.4 5 \ .I . 1.2 4 2014 2016 2018 2020 1.0 5 4 ·/ 1 ✓ 1.8 6 2 0 I -1 -2 V 2014 2016 2018 2020 6. Additional Considerations • As the economy recovers and the funds rate rises, there will be more room to cut the funds rate. • Starting in 2018, there would be room to accommodate a 275-basis-point funds rate cut. • However, a recession may not be moderate; taking account the severe recessions as well, the average drop in the funds rate has been 400 basis points. • Moreover, in our scenario, EDO's estimate of the equilibrium funds rate drops by 650 basis points. Page 4 of 8 6 '- 3 2.0 ,1·, . \\ ,/ • Assumes no unconventional policy. -3 December 15–16, 2015 Authorized for Public Release 162 of 195 Exhibit 5 Class IIFOMC - Restricted (FR) The Foreign Outlook 1. Real GDP* Percent change, annual rate Q1 1. Total Foreign October Tea/book 2. Emerging Market Economies Of which: 3. Emerging Asia ex.China 4.China 5. Brazil 6. Advanced Foreign Economies Of which: 7.Canada a.Japan 9. Euro Area 10. UK Q2 2015 2016 2017 2018 2.3 2.8 2.8 2.9 2.4 2.8 2.8 Q3 Q4 1.8 1.3 1.7 1.1 2.4 2.3 3.0 2.8 3.5 3.8 3.9 3.4 5.7 -3.3 1.0 1.9 7.2 -8.0 0.6 3.6 7.2 -6.7 1.8 3.6 6.5 -4.2 1.7 4.2 6.3 -0.7 2.0 4.1 6.1 1.6 1.8 4.1 6.0 2.1 1.9 -0.7 4.4 2.2 1.5 -0.3 -0.5 1.6 2.6 2.3 1.0 1.2 1.9 2.0 1.0 1.4 2.3 2.1 1.1 2.0 2.5 1.9 -0.3 2.1 2.4 1.8 1.0 2.1 2.3 2.5 2.0 2.9 • GDP aggregates weighted by shares of U.S. merchandise exports. 2.RealExports 201201 = 100 3. China 125 120 115 110 105 100 2012 110 2013 2014 2015 95 13 100 95 90 4. Composite PMI Diffusion index 12 60 Retail sales 10 12 8 11 6 10 Industrial production 4 9 8 5. Brazil 2012 = 100 2 2014 Percent Industrial production index 105 3-mo./3-mo. per. chg., a.r. Nov. 2014 2015 6. Commodity Prices 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 85 ��������-��������� 4.0 2012 2013 2014 2015 210 2005 = 100 2015 $ per barrel 110 190 100 - - October TB 90 170 150 80 IMF metals index 70 60 130 50 40 110 90 Page 5 of 8 120 30 2014 2016 2018 20 December 15–16, 2015 Authorized for Public Release 163 of 195 Exhibit 6 Class II FOMC - Restricted (FR) Monetary Policy 1. Euro Area Inflation 4-qtr percent change 2. Japan Inflation* 4-qtr percent change 3.0 2.5 2.0 2.0 2.0 1.5 1.5 1.5 1.0 1.0 1.0 0.5 0.5 0.5 0.0 0.0 -0.5 -0.5 2017 2015 -1.0 2017 5. Euro Area Interest Rates Percent - Leneling rate MROrate Euribor 1-month Deposit rate • Expanded assets available for purchase to include regional and local government debt. • Reinvestment of APP holdings as they mature. 1.0 0.8 -1.0 2017 6. AFE Policy Rates Percent 5 Uniteel Kingelom 4 0.4 3 0.2 2 1 Japan -0.2 2014 7. Ten-year Sovereign Yields Percent 2015 2.0 1.5 United Kingdom -0.4 1.0 0.5 Japan Nov Dec 2006 2010 110 105 0.0 2014 -1 2018 Percentage points May 1, 2015 = 100 U.S. over AFE spread• 1.3 1.1 0.9 100 0.7 95 Oct 0 8. Policy Divergence 2.5 6 0.6 0.0 • Reduced the rate on deposit facility by 1 O bp to minus 0.30 percent. Sep 2015 • Exclueling the effects of April 2014 anel planneel 2017 tax hil<es. • Extended duration of current asset purchase program (APP) by six months to March 2017. Aug 3.0 2.5 4. ECB Dec. 3 Policy Action Jul 4-qtr percent change 3.0 2.5 -0.5 2015 3. United Kingdom Inflation - 90 85 80 2014 • 24-month aheael policy rate expectations. Page 6 of 8 0.5 AFE exchange rate 0.3 0.1 2015 -0.1 December 15–16, 2015 Authorized for Public Release Exhibit 7 Class II FOMC - Restricted (FR) Liftoff 1. Real Dollar - - October TB 201301 = 100 Broad 2014 --- - - . 2016 2. Dollar Moves Around the Start of a Tightening Cycle Broad dollar index = 100 at start of tightening cycle 125 FOMC decision ----- 120 115 2009 = 100 98 105 96 100 94 2018 -3 4. U.S. GDP 4-qtr percent change 125 Alt. Scenario 100 90 2014 6. EME Exchange Rates 99 98 97 96 r U.S. Appreciation 24-month ahead policy expectations 95 94 93 92 EME exchange rate Jul Aug Sep Oct Nov Dec 1.5 99 98 1.4 97 1.2 95 1.3 2016 May 1, 2015 = 100 $ per barrel Appreciation 7.0 6.5 6.0 5.5 5.0 94 0.9 92 93 4.5 2014 2016 8. China RMB 65 60 55 2018 RMB/$ RMB appreciation Page 7 of 8 6.15 6.25 6.30 6.35 45 Jul Aug Sep Oct Nov Dec 4.0 6.20 50 EME exchange rate 8.0 7.5 1.5 2018 96 1.1 1.0 Percent 3.0 7. EME Exchange Rates 1 _6 5. U.S. Unemployment Rate 1.0 95 92 +6 2.0 105 Percent +3 2.5 110 May 1, 2015 = 100 0 Months • Historic tightening cycles: 1987, 1994, 1999, 2004. 115 2018 100 110 120 2016 104 102 Forecast Alternative Scenario - Stronger Dollar 3. Real Dollar 2014 164 of 195 6.40 40 6.45 Jul Aug Sep Oct Nov Dec December 15–16, 2015 Authorized for Public Release 165 of 195 Exhibit 8 Class II FOMC - Restricted (FR) U.S. Trade 1. Real Exports of Goods and Services 4-qtr percent change • D D Data/Forecast Model Contribution of Foreign GDP Contribution of Dollar 2. Real Imports of Goods and Services 4-qtr percent change 12 - Data/Forecast 10 • Model D Contribution of U.S. GDP Contribution of Dollar -Oil □ 8 6 2 -2 ........... ....LL. ..........L......U.....U......U........... ....., ............................ ..........., -4 2016 2017 2018 10 4 f-+-¾---H--l+--+1---H--+Hlll�H---f,��t!+-"'l+-+l---f!----++---f+--ff---f+-+---l 0 2015 12 6 2 2014 14 8 4 ����������������� -6 16 0 -2 ����������������� -4 2014 2015 2016 2017 2018 3. Trade in Real Goods and Services* 2014 Growth Rates (percent, annual rate) H1 2015 Q3 04 2016 2017 2018 1. Exports 2.4 -0.6 0.7 0.8 0.5 1.8 0.5 1. 1 1.6 2.2 3.8 4.2 2. Imports 5.4 5.1 1.9 4.4 3.8 6.4 7.2 6.7 4.7 4.0 3.6 3.2 -0.5 -0.7 -1.0 -0.9 -0.5 -0.4 -0.1 -0.0 October TB October TB Contribution to Real GDP Growth (percentage points, annual rate) -0.5 3. Net Exports October TB -0.9 -0.2 -0.6 • Updated from December Tealbook for recent data. Percent change from final quarter of preceding period to final quarter of period indicated. 4. Selected Import Categories 4-qtr percent change - Consumer goods - Capital goods - Non-fuel industrial supplies 12 10 8 6 4 2 2013 2014 2015 Page 8 of 8 December 15–16, 2015 Authorized for Public Release Appendix 3: Materials used by Mr. Wu 166 of 195 December 15–16, 2015 Authorized for Public Release Class I FOMC- Restricted Controlled (FR) Materialfar the Briefing on the Summary of Economic Projections Jason Wu December15,2015 167 of 195 December 15–16, 2015 Authorized for Public Release 168 of 195 Exhibit 1. Medians, central tendencies, and ranges of economic projections, 2015-18 and over the longer run Peroout - Change in real GDP -Median of projections ■ Central tendency of projections I R,ange of projections Actual - 4 3 � � � I I EB 2 + 0 2010 2011 2012 2013 2014 2015 2016 2017 Longer run 2018 Peroout _ Unemployment rate -10 9 8 7 6 2010 2011 2012 2013 2014 2015 � � � � 2016 2017 2018 Longer run - 5 4 Percent PCE inflation E5 � � I - 3 - 2 - 1 � 2010 2011 2012 2013 2014 2015 2016 2017 Longer run 2018 Percent Core PCE inflation � 2010 2011 2012 2013 2014 2015 2016 � 2017 � 2018 I - 3 - 2 - 1 Longer run NOTE: The data for the actual values of the variables are annual. The percent changes in real GDP and inflation are measured Q4/Q4. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Page 1 of 5 December 15–16, 2015 Authorized for Public Release 169 of 195 Exhibit 2. Economic projections for 2015–18 and over the longer run (percent) Change in real GDP 2015 Median . . . . . . . . . . . . . . . . . . . . . . . . 2.1 September projection . . . . . . 2.1 Range . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 – 2.2 September projection . . . . . . 1.9 – 2.5 Memo: Tealbook . . . . . . . . . . . . . . 2.1 September projection . . . . . . 2.0 2016 2017 2018 2.4 2.3 2.0 – 2.7 2.1 – 2.8 2.5 2.1 2.2 2.2 1.8 – 2.5 1.9 – 2.6 2.0 2.0 2.0 2.0 1.7 – 2.4 1.6 – 2.4 1.9 1.8 Longer run 2.0 2.0 1.8 – 2.3 1.8 – 2.7 1.9 1.9 Unemployment rate 2015 5.0 Median . . . . . . . . . . . . . . . . . . . . . . . . 5.0 September projection . . . . . . Range . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 September projection . . . . . . 4.9 – 5.2 Memo: Tealbook . . . . . . . . . . . . . . 5.0 September projection . . . . . . 5.0 2016 2017 2018 4.7 4.8 4.3 – 4.9 4.5 – 5.0 4.7 4.9 4.7 4.8 4.5 – 5.0 4.5 – 5.0 4.6 4.8 4.7 4.8 4.5 – 5.3 4.6 – 5.3 4.5 4.7 Longer run 4.9 4.9 4.7 – 5.8 4.7 – 5.8 5.1 5.1 PCE infation 2015 0.4 Median . . . . . . . . . . . . . . . . . . . . . . . . 0.4 September projection . . . . . . Range . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 – 0.5 September projection . . . . . . 0.3 – 1.0 Memo: Tealbook . . . . . . . . . . . . . . 0.4 September projection . . . . . . 0.3 2016 2017 2018 1.6 1.7 1.2 – 2.1 1.5 – 2.4 1.2 1.5 1.9 1.9 1.7 – 2.0 1.7 – 2.2 1.8 1.7 2.0 2.0 1.7 – 2.1 1.8 – 2.1 2.0 1.9 Longer run 2.0 2.0 2.0 2.0 2.0 2.0 Core PCE infation 2015 1.3 Median . . . . . . . . . . . . . . . . . . . . . . . . 1.4 September projection . . . . . . Range . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 – 1.4 September projection . . . . . . 1.2 – 1.7 Memo: Tealbook . . . . . . . . . . . . . . 1.3 September projection . . . . . . 1.3 2016 2017 2018 1.6 1.7 1.4 – 2.1 1.5 – 2.4 1.4 1.4 1.9 1.9 1.6 – 2.0 1.7 – 2.2 1.7 1.7 2.0 2.0 1.7 – 2.1 1.8 – 2.1 1.9 1.9 * The percent changes in real GDP and infation are measured Q4/Q4. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Page 2 of 5 December 15–16, 2015 Authorized for Public Release 170 of 195 Exhibit 3. FOMC participants' assessments of the timing of and economic conditions at liftoff Appropriate timing of liftoff □ December projections September projections -16 -15 -14 15 -13 -12 -n -10 - 9 , - - J 8 7 6 5 4 3 2 2015Q3 2015Q4 2016Ql 2 2016Q2 CorePCE inflation December Economic Projections : 2.0 :···············:······························ : ... .... ... ... . ..... ... ... .. ... ..... ..... ..... ..... ..... ... ... ..... .. ..... ..... ... ..... . .... .... . .... .... ... ..... ... . .. ············· ··············· : � 1. 5 2016Q3 2016Q4 2017Ql 2017Q2 September Economic Projections 2017Q3 Core PCE inflation : 2.0 :···············:······························ : . ..... ... ... ... ... .. ..... ... ... ... . ... ... ... ... ... .. ..... ... ... . ... ... ... ... ... .. ..... ... ..... .. I I ·�·. . �···············i◊··········! ···············� 1.5 I H···············t··············t··············b LO ¢oo .. ... ... ... ... ... .... ... .. H···············t·············· ··············b. 4.5 4.5 5.0 5.5 Unemployment rate 6.0 t Year and Quarter of Firming 6.2015Q3◊2015Q4 Q 2016Ql T2016Q2 5.0 5.5 Unemployment rate 1.o 6.0 ■ 2017Q3 NOTE: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target range for the federal funds rate from its current range of 0 to 1/4 percent will occur in the specified calendar year and quarter. In the lower panels, percent change in core PCE is measured Q4/Q4 and when the projections of two or more participants are identical, larger markers, which represent one participant each, are used so that each projection can be seen. Page 3 of 5 December 15–16, 2015 Authorized for Public Release 171 of 195 Exhibit 4. Overview of FOMC participants' assessments of appropriate monetary policy December projections of the appropriate pace of policy firming J\}rceot Target federal funds rate or midpoint of target range at year-end • December projections , 5 =:"77:���i�,j������;�;�:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::= ··- 3.5 -······································· ........................!.............. ,•. ..I,........ ·········- = ♦ Median prescription based on Taylor (1999) rule : ! .. • 1+�:;... ff I • 4. 5 4 3 2.5 2 eeH• ;··························-······································ ································································· -··································e�co···ce;e·····························································:;··························- 1-5 -······································ ································································:··························-··········································································································•··························I "" -··········································································································,··························- 0.5 -··········································································································'··························0 I I •• 2015 2016 2017 Longer run 2018 September projections of the appropriate pace of policy firming Target federal funds rate or midpoint of target range at year-end - ·i· �Jfa���e������d on·Tu.ylo�·(im)' rui�.................................................... ·I·.........................- �i� 5 i -··········································································································t··························- 4.5 - 1· )! ���;�•�\�� '�} J -······································· ........................ t,...................... i �;;;_ ...........!....Q•O·O·O·O·O·····- ,: ········a�a�a···················�·�·�········•i···········.�.············- 3 -············ ·························o·······················o·o····································· ··························- 2.5 -·····································o·o······················o·o·····································::··························2 0 ······························································ 0 0 -··········· ·····················o·o· ;··························,i -··········································································································•··························- 1 .5 -···································o·o·o· o·····························································,I ··························- .......... · · · · · · · · · · · · · · · · · · · · · · · · ·::.· · · · · · · · · · · · · =:: : :�:�:�:�:�: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : := 0 0 0 2015 2016 I 0.5 + 0 -··········································································································1··························0.5 II 8888888 I -·········o· o·o·························································································,··························I 0 0 -··········································································································,··························2017 2018 Longer run NOTE: In the two panels above, each circle indicates the value (rounded to the nearest 1/s percentage point) of an individual participant's judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The red diamonds for each year represent the median of the federal funds rate prescriptions that were derived by taking each participant's projections for the unemployment gap, core PCE inflation and longer-run nominal federal funds rate for that year and inserting them into the non-inertial Taylor (1999) rule. The whiskers represent the central tendency of the prescriptions of the non -intertial Taylor (1999) rule using participants' projections. Page 4 of 5 December 15–16, 2015 Authorized for Public Release 172 of 195 Exhibit 5. Uncertainty and risks in economic projections Number of participants Numbe:r of part-icipa.ots Uncertainty about GDP growth □ Risks to GDP growth December projections September projections - 18 - 16 - 14 - 12 -10 - 8 - 6 - 4 2 Lower Broadly similar □ December projections September projections � �r��l =- ===--==-1�---�ji...s-�_ _ _ _ _��� :l - 14 Weighted to downside Higher - 18 - 16 Broadly balanced Weighted to upside Number of participants Numbe:r of part-icipa.uts Uncertainty about the unemployment rate Risks to the unemployment rate - 18 - 16 - 18 - 16 - 14 - 14 - 12 - 12 -10 - 8 - 6 6 4 �---� ,- 2 2 Broadly similar Weighted to downside Higher Broadly balanced Risks to PCE inflation - 18 - 16 - 14 - 12 -10 - 8 - 6 ,,. - 4 2 Lower Weighted to upside Number of participants Numbe:r of part-icipa.uts Uncertainty about PCE inflation - 8 L---- •- - 4 Lower - 10 I iJ Weighted to downside Higher Broadly similar --- Numbe:r of part-icipa.uts Uncertainty about core PCE inflation - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 Broadly balanced - - - - ,7 Weighted to upside Number of participants Risks to core PCE inflation - 18 - 16 - 14 - 12 -10 - 8 - 6 - • �--- --� Lower Broadly similar 2 Higher - 4 2 - 18 - 16 - 14 ����--- _-_-_.I_J�_-_-_ -_j.,_�- --____..a._,�, l ---- 12 - 10 Weighted to downside Page 5 of 5 Broadly balanced Weighted to upside December 15–16, 2015 Authorized for Public Release Appendix 4: Materials used by Mr. Laubach 173 of 195 December 15–16, 2015 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Monetary Policy Alternatives Thomas Laubach December 15–16, 2015 174 of 195 December 15–16, 2015 Authorized for Public Release 175 of 195 Exhibit 1: Policy Alternatives A, B, and C Current and Expected Economic Developments Labor Market • All alternatives report further improvement in the labor market Inflation • Alternatives B and C o Both characterize inflation as continuing below the Committee's objective o Alternative B describes market and survey measures of inflation expectations, respectively, as low and having edged down while alternative C characterizes these measures as stable o Both B and C reaffirm the expectation that inflation will rise to 2 percent over the medium term and state reasonable confidence in that forecast o Alternative B retains the need to monitor inflation closely in paragraph 2 and emphasizes that intention in paragraph 4 • Alternative A o The Committee is not sufficiently confident in the outlook for inflation o Cites "subdued" inflation, core inflation, and gains in labor compensation; also cites "low" measures of inflation expectations o Current shortfall from 2 percent is "only partly" attributable to transitory factors that will "eventually" dissipate o Committee is prepared to add accommodation if information does not soon indicate inflation moving up toward 2 percent Communicating the Expected Funds Rate Path • Adjustments will be gradual if the economy evolves as expected o Alternative B: The Committee's economic outlook is consistent with "gradual adjustments" and economic conditions are likely to "evolve in a manner that will warrant only gradual increases" o Alternative C refers to "appropriate adjustments" in paragraph 2 and omits "only" in paragraph 4. o Both state that the funds rate is likely to remain, for some time, below levels expected to prevail in the longer run • Adjustments will be conditional on economic conditions o Both state that "the timing and size of future adjustments" will depend on "realized and expected economic conditions" relative to objectives and o The actual path "will depend on the economic outlook as informed by the incoming data" Page 1 of 14 December 15–16, 2015 Authorized for Public Release 176 of 195 Exhibit 2: Monetary Policy Expectations Federal Funds Rate Projections Dec. SEP Median • Dec. PD Survey Median Implied Federal F unds on Dec.11, 2015 Expected Pace of Tightening during the Year Following First Rate Increase Percent Percent 3.5 • • Feb.4, 1994 June 30,2004 Dec. 16,2015 3.0 3.5 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.0 2016 2017 2018 2019 Note: The implied federal funds rate path is estimated using OIS quotes with a spline approach and a term premium of zero basis points. Source: Bloomberg, FRBNY Primary Dealer Survey sell-side results, December 2015 SEP, and staff calculations. Survey-based Probabilities of Year-Ahead Real GDP Growth Outcomes < 0% 0-1% 2-3% 3-4% 4_0 0.5 .,,. ""'""'-"" � =--... 0-0 ......__,_3"'""' '"' ......-�o-...... � ........20 00--2""" 00 ---100 100 0 300 Days Days Note: Expected pace of tightening is the difference in he expected federal funds rate one year after first rate increase and federal funds rate upon first rate increase based on Eurodollar futures and basis swaps. Source: CME and Staff calculations Survey-based Probabilities of Year-Ahead Inflation Outcomes > 4% < 0% 0-1% 2-3% 3-4% > 4% Note: Data represent averages across respondents' individual probability estimates. Year-ahead estimates are calculated as weighted averages of estimates for the current and next calendar years. Source: Survey of Professional Forecasters. Note: Data represent averages across respondents' individual probability estimates. Year-ahead estimates are calculated as weighted averages of estimates for the current and next calendar years. Source: Survey of Professional Forecasters. Implied Distribution of 3-month LIBOR at the end of 2016 Probability (percent 5-to-10-Year Expected Inflation ■ Dec. 14,2015 - - Oct 27, 2015 50 Percent Standard Model Model with Random Walk End Points 45 40 35 r I L---. 4 3 30 25 I 20 I 2 15 10 5 0 0.5 1 1.5 2 3-month LIBOR (percent) 2.5 0 >3 2007 2009 2011 2013 2015 Note: Based on latent factor term structure models fitted to nominal Note: Risk-neutral probability density function obtained from Eurodollar futures Treasury yields, TIPS yields, CPI inflation, and survey forecasts of inflation options expiring in Dec. 2016. Based on lognormal-mixture parameterization. short rates. The standard model assumes sta ionary factors. The model with random walk end points assumes that the most persistent factor follows Source: CME and staff estimates. a random walk. Source: FRBNY, BLS, Blue Chip Forecasts, SPF, and staff calculations. Page 2 of 14 December 15–16, 2015 Authorized for Public Release 177 of 195 OCTOBER 2015 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. 4. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions Page 3 of 14 December 15–16, 2015 Authorized for Public Release 178 of 195 may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 4 of 14 December 15–16, 2015 Authorized for Public Release 179 of 195 ALTERNATIVE A FOR DECEMBER 2015 1. Information received since the Federal Open Market Committee met in September October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, A range of recent labor market indicators, on balance, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. In contrast, both overall and core inflation has have continued to run below the Committee’s longer-run objective, only partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower remain low; some survey-based measures of longer-term inflation expectations have remained stable edged down. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices eventually dissipate. The Committee continues to will closely monitor measures of actual and expected inflation developments closely. 3. To support continued progress toward maximum employment and price stability With inflation, core inflation, and gains in labor compensation all subdued, and with market-based measures of inflation compensation and survey-based measures of longer-term inflation expectations both low, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the how long to maintain this target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. The Committee is prepared to provide additional accommodation if incoming information does not soon indicate that inflation is moving up toward 2 percent. 4. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency Page 5 of 14 December 15–16, 2015 Authorized for Public Release 180 of 195 mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 6 of 14 December 15–16, 2015 Authorized for Public Release 181 of 195 ALTERNATIVE B FOR DECEMBER 2015 1. Information received since the Federal Open Market Committee met in September October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, A range of recent labor market indicators, on balance, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of nonenergy imports. Market-based measures of inflation compensation moved slightly lower remain low; some survey-based measures of longer-term inflation expectations have remained stable edged down. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with appropriate policy accommodation gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace, with and labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate will continue to strengthen. Overall, taking into account domestic and international developments, the Committee continues to sees the risks to the outlook for both economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation expected to rise gradually toward to 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to ¼ to ½ percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. 4. In determining whether it will be appropriate to raise the timing and size of future adjustments to the target range for the federal funds rate at its next meeting, the Committee will assess progress–both realized and expected economic conditions– toward relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation Page 7 of 14 December 15–16, 2015 Authorized for Public Release 182 of 195 expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee anticipates expects that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 6. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 8 of 14 December 15–16, 2015 Authorized for Public Release 183 of 195 ALTERNATIVE C FOR DECEMBER 2015 1. Information received since the Federal Open Market Committee met in September October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, A range of recent labor market indicators, on balance, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of nonenergy imports. Market-based measures of inflation compensation moved slightly lower stabilized; survey-based measures of longer-term inflation expectations have generally remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with appropriate policy accommodation adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace, with and labor market indicators continuing to move toward will continue to strengthen levels the Committee judges consistent with its dual mandate. Overall, taking into account domestic and international developments, the Committee continues to sees the risks to the outlook for both economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation expected to rise gradually toward to 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. The Committee judges that there has been considerable improvement in labor market conditions this year, and is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to ¼ to ½ percent. Even after this increase, the stance of monetary policy remains accommodative. 4. In determining whether it will be appropriate to raise the timing and size of future adjustments to the target range for the federal funds rate at its next meeting, the Committee will assess progress–both realized and expected economic conditions– toward relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates expects that it will be appropriate to raise the target range for Page 9 of 14 December 15–16, 2015 Authorized for Public Release 184 of 195 the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term economic conditions will evolve in a manner that will warrant gradual increases in the target for the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and anticipates doing so at least during the early stages of normalization of the federal funds rate. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 6. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 10 of 14 December 15–16, 2015 Authorized for Public Release 185 of 195 OCTOBER 2015 DIRECTIVE (ALSO THE DIRECTIVE FOR DECEMBER 2015 ALTERNATIVE A) Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The 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 11 of 14 December 15–16, 2015 Authorized for Public Release 186 of 195 IMPLEMENTATION NOTE FOR DECEMBER 2015 ALTERNATIVES B AND C Release Date: December 16, 2015 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on December 16, 2015: The Board of Governors of the Federal Reserve System voted [ unanimously ] to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015. As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:1 “Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain such conditions the federal funds rate in a target range of ¼ to ½ percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17–18, 2015, meeting. “The Committee directs the Desk to maintain its policy of continue rolling over maturing Treasury securities into new issues at auction and its policy of to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” The 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. More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website. This directive supersedes the resolution on ON RRP test operations approved by the Committee at its December 16–17, 2014 meeting. 1 Page 12 of 14 December 15–16, 2015 Authorized for Public Release 187 of 195 In a related action, the Board of Governors of the Federal Reserve System voted [ unanimously ] to approve a ¼ percentage point increase in the primary credit rate to 1.00 percent, effective December 17, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of . . . This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy. Page 13 of 14 December 15–16, 2015 Authorized for Public Release 188 of 195 DESK STATEMENT FOR DECEMBER 2015 ALTERNATIVES B OR C Release Date: December 16, 2015 Statement Regarding Overnight Reverse Repurchase Agreements During its meeting on December 15-16, 2015, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed), effective December 17, 2015, to undertake open market operations as necessary to maintain the federal funds rate in a target range of ¼ to ½ percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 0.25 percent and in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations and by a per-counterparty limit of $30 billion per day. To determine the value of Treasury securities available for ON RRP operations, several factors need to be taken into account, as not all Treasury securities held outright in the SOMA will be available for use in such operations. First, some of the Treasury securities held outright in the SOMA are needed to conduct reverse repurchase agreements with foreign official and international accounts.1 Second, some Treasury securities are needed to support the securities lending operations conducted by the Desk. Additionally, buffers are needed to provide for possible changes in demand for these activities and for possible changes in the market value of the SOMA’s holdings of Treasury securities. Taking these factors into account, the Desk anticipates that around $2 trillion of Treasury securities will be available for ON RRP operations to fulfill the FOMC’s domestic policy directive.2 In the highly unlikely event that the value of bids received in an ON RRP operation exceeds the amount of available securities, the Desk will allocate awards using a single-price auction based on the stop-out rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stop-out rate and all bids at this rate awarded on a pro rata basis at the stop-out rate. These ON RRP operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and other similar trading conventions. Each eligible counterparty is permitted to submit one proposition for each ON RRP operation, in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time). Any changes to these terms will be announced with at least one business day’s prior notice on the New York Fed’s website. The results of these operations will be posted on the New York Fed’s website. The outstanding amounts of RRPs are reported on the Federal Reserve's H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6. The outstanding amounts of RRPs with foreign official and international accounts are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6. 2 This amount will be reduced by any term RRP operations outstanding on the day of each ON RRP operation. 1 Page 14 of 14 December 15–16, 2015 Authorized for Public Release Appendix 5: Materials used by Mr. Madigan 189 of 195 December 15–16, 2015 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Updated Implementation Note December 16, 2015 190 of 195 December 15–16, 2015 Authorized for Public Release 191 of 195 Class I FOMC – Restricted Controlled (FR) December 16, 2015 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on December 16, 2015: • The Board of Governors of the Federal Reserve System voted [ unanimously ] to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015. • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: 1 “Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain such conditions the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17–18, 2015, meeting. “The Committee directs the Desk to maintain its policy of continue rolling over maturing Treasury securities into new issues at auction and its policy of to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” The 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. More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website. 1 This directive supersedes the resolution on ON RRP test operations approved by the Committee at its December 16–17, 2014 meeting. Page 1 of 2 December 15–16, 2015 Authorized for Public Release 192 of 195 Class I FOMC – Restricted Controlled (FR) • In a related action, the Board of Governors of the Federal Reserve System voted [ unanimously ] to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 percent, effective December 17, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco. This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy. Page 2 of 2 December 15–16, 2015 Authorized for Public Release Appendix 6: Materials used by Ms. Logan 193 of 195 December 15–16, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Term RRP Operations Over Year End Simon Potter and Lorie Logan December 16, 2015 194 of 195 December 15–16, 2015 Authorized for Public Release 195 of 195 Class II FOMC-Restricted FR December 2015 Term RRP Operation Date Maturity Date Term Amount Offered Max. Rate (BPS) Dec 18 Jan 04 17 Days 50 ON RRP + 0 Dec 23 Jan 04 12 Days 100 ON RRP + 0 Dec 30 Jan 05 6 Days 150* ON RRP + 0 *Any undersubscribed capacity from either of the December 18 and December 23 term RRP operations will be added to the offering size of the December 30 term RRP operation. Page 1 of 1
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