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January 27-28, 2004 Appendix 1: Materials used by Mr. Kos 195 of 238 January 27-28, 2004 196 of 238 January 27-28, 2004 Appendix 2: Materials used by Mr. Reinhart 197 of 238 January 27-28, 2004 198 of 238 January 27-28, 2004 199 of 238 January 27-28, 2004 200 of 238 January 27-28, 2004 201 of 238 January 27-28, 2004 202 of 238 January 27-28, 2004 203 of 238 January 27-28, 2004 204 of 238 January 27-28, 2004 205 of 238 January 27-28, 2004 206 of 238 January 27-28, 2004 207 of 238 January 27-28, 2004 208 of 238 January 27-28, 2004 209 of 238 January 27-28, 2004 Appendix 3: Materials used by Mr. Kos 210 of 238 January 27-28, 2004 211 of 238 Page 1 Current U.S. 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements October 1, 2003 - January 26, 2004 LIBOR Fixing 3M Forward 6M Forward Percent 2.50 10/28 FOMC 11/7 Oct. NFP: +126K 12/5 Nov. NFP:+57K 9M Forward Percent 2.50 1/9 Dec. NFP: +1K 12/9 FOMC 2.00 2.00 1.50 1.50 1.00 10/1 1.00 10/15 10/29 11/12 11/26 12/10 12/24 1/7 1/21 Treasury Note Yields Percent Percent 5.0 January 1, 2003 - January 26, 2004 5.0 6/25 FOMC: -25 BP 4.5 12/9 FOMC 4.5 4.0 4.0 3.5 3.5 10-Year Note 3.0 3.0 2.5 2.5 2-Year Note 2.0 2.0 1.5 1.5 1.0 1.0 0.5 1/1/2003 0.5 3/1/2003 5/1/2003 7/1/2003 9/1/2003 Basis Points 120 9/16 FOMC 115 110 10/28 FOMC Investment Grade Corporate Index OAS 105 Basis Points 120 12/9 FOMC 550 115 525 110 105 1/1/2004 High Yield and EMBI+ Spreads September 1, 2003 - January 26, 2004 Investment Grade Corporate Debt Spread September 1, 2003 - January 26, 2004 Basis Points 11/1/2003 Basis Points 9/16 FOMC 10/28 FOMC 12/9 FOMC Merrill Lynch High Yield Bond Index OAS 500 450 450 95 95 400 90 375 9/1 9/20 10/9 10/28 11/16 12/5 12/24 1/12 500 475 100 Source: Lehman Brothers 525 475 100 90 550 EMBI+ 425 425 400 Source: Merrill Lynch, JP Morgan 9/1 9/20 10/9 10/28 11/16 12/5 12/24 1/12 375 January 27-28, 2004 212 of 238 Page 2 Select Foreign Currencies Versus U.S. Dollar Index: 100 = 8/1/03 Index: 100 = 8/1/03 August 1, 2003 - January 26, 2004 105 12/9 FOMC British Pound 100 105 1/4 Bernanke AEA Speech 100 Euro Canadian Dollar 95 95 90 90 Japanese Yen 85 Australian Dollar 80 8/03 85 1/12 Trichet comments on euro U.S. Dollar Depreciation 9/03 10/03 11/03 12/03 80 1/04 Global Equity Returns January 1, 2003 - January 26, 2004 Percent Percent Index Returns 70 Returns in Euro Returns in Yen Returns in Dollars 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 S&P 500 Nasdaq DJ Euro Stoxx Nikkei Interest Rate Differentials: Select 3-Month Government Spreads to U.S. Treasuries Interest Rate Differentials: Select 10-Year Government Yields less U.S. Treasury Yields January 1, 2003 - January 26, 2004 January 1, 2003 - January 26, 2004 Basis Points Basis Points Basis Points 400 400 350 200 Australia 350 150 Australia 300 Basis Points 200 150 300 Great Britain 250 250 200 200 100 100 Canada Great Britain 150 50 0 Canada 50 0 150 Germany 100 100 50 50 Germany 1/03 3/03 5/03 7/03 9/03 11/03 1/04 -50 1/03 -50 3/03 5/03 7/03 9/03 11/03 1/04 January 27-28, 2004 213 of 238 Page 3 Japanese Yen Versus U.S. Dollar August 1, 2003 - January 26, 2004 Yen per Dollar Yen per Dollar 125 125 12/9 FOMC 120 120 Japanese Intervention in the Intermeeting Period: $80.5 bn 115 115 110 110 105 105 8/03 9/03 10/03 11/03 12/03 1/04 Japanese Net Yearly Intervention in Dollar-Yen USD Billions USD Billions 1989 - 2004 210 210 180 180 150 150 120 120 90 90 60 60 30 30 0 0 YTD -30 -30 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 TIC Data: Cumulative Foreign Treasury Note and Bill Purchases January 2003 - January 2004 USD Billions 150 USD Billions 150 130 110 90 70 50 30 10 -10 -30 Private Purchases Official Purchases 1/1 3/1 5/1 7/1 9/1 130 110 90 70 50 30 10 -10 -30 11/1 FRBNY Custody Holdings of Treasury and Agency Securities January 2003 - January 2004 USD Billions USD Billions 900 225 850 800 200 Treasuries (LHS) 750 Agencies (RHS) 700 175 650 600 150 1/1 3/1 5/1 7/1 9/1 11/1 1/1 January 27-28, 2004 214 of 238 Page 4 Current Euro Area 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements October 1, 2003 - January 26, 2004 LIBOR Fixing 3M Forward 6M Forward 9M Forward Percent Percent 3.00 3.00 12/9 FOMC 2.75 2.75 2.50 2.50 2.25 2.25 2.00 10/1 2.00 10/15 10/29 11/12 11/26 12/10 12/24 1/7 1/21 Japanese Yield Curve Percent Percent 1.5 1.5 January 26, 2004 1.0 1.0 January 24, 2003 0.5 0.5 June 13, 2003 0.0 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 0.0 Japanese Topix Index and Select Sub-Indices January 1, 2003 - January 26, 2004 Index 100 = 1/6/2003 170 Index 100 = 1/6/2003 170 Bank Sub-Index 150 150 130 130 Electronics Sub-Index 110 110 Topix 90 90 70 1/03 70 2/03 3/03 4/03 5/03 6/03 7/03 8/03 9/03 10/03 11/03 12/03 1/04 January 27-28, 2004 Appendix 4: Materials used by Mr. Slifman 215 of 238 January 27-28, 2004 216 of 238 Orders and Shipments of Durable Goods (Percent change from comparable previous period, seasonally adjusted) 2003 2003 Category Q2 Q3 Q4 Oct. Nov.r Dec.a Monthly rate Annual rate Nondefense capitalgoods Orders Aircraft Excluding aircraft Computers and peripherals Communications equipment All other 12.9 2140.8 3.2 65.1 -31.2 1.0 17.9 36.1 17.1 26.6 80.8 7.6 5.0 1.1 5.1 0.9 -56.2 21.0 2.4 31.1 1.4 -.8 16.3 -.8 -6.0 -14.5 -5.6 0.1 -48.5 2.4 0.2 13.7 -.4 2.0 -21.3 1.4 Shipments Aircraft Excluding aircraft Computers and peripherals Communications equipment All other 5.7 8.6 5.6 35.8 -6.5 2.7 16.4 32.6 15.6 43.5 35.2 8.4 7.4 -8.5 8.3 3.4 7.9 9.3 0.3 -9.6 0.8 4.6 2.8 -.3 0.4 18.8 -.4 -2.4 -1.3 0.2 -.2 -13.2 0.5 -1.3 -1.0 1.0 Supplementary orders series Durable goods Real adjusted durable goods -.8 -1.6 17.1 17.8 15.9 3.9 3.1 -2.3 -2.4 -.0 Capital goods Nondefense Defense 10.8 12.9 -2.1 14.9 17.9 -3.8 9.7 5.0 47.2 4.7 2.4 23.2 -5.3 -6.0 -1.3 0.2 0.2 0.1 r Revised. a Advance. * Contains industry detail not shown separately. January 27-28, 2004 Appendix 5: Materials used by Messrs. Slifman, Struckmeyer and Kamin 217 of 238 January 27-28, 2004 STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC* Material for Staff Presentation on the Economic Outlook January 28, 2004 *Downgraded to Class II upon release of the February 2004 Monetary Policy Report. 218 of 238 January 27-28, 2004 219 of 238 January 27-28, 2004 220 of 238 January 27-28, 2004 221 of 238 January 27-28, 2004 222 of 238 January 27-28, 2004 223 of 238 Chart 5 Financial Developments Nominal Dollar Indexes Dollar Exchange Rates* Index, Jan. 4, 2002=100 Index, Jan. 4, 2002=100 115 June FOMC Weekly 130 June FOMC Weekly 120 105 Broad* 110 Mexico Other important trading partners 100 Korea 95 90 UK 80 Euro area 85 Major currencies Japan 2002 75 2003 2002 70 60 2003 *Trade-weighted average of exchange rates against major currencies and currencies of other important trading partners. *Foreign currency/dollar. Ten-Year Government Bond Yields Stock Price Indexes* Percent Index, Jan. 4, 2002=100 6 June FOMC Weekly Weekly 140 June FOMC 120 UK 4 United States Emerging markets Germany 100 80 Industrial countries 2 Japan 2002 60 0 2003 2002 40 2003 *Source: MSCI. Bond Spreads 1200 Cross-border Debt Issuance* Basis points Basis points 350 75 June FOMC Weekly Billions of dollars Billions of dollars 900 Industrial countries Quarterly 300 600 250 55 700 45 600 150 35 500 100 25 400 50 15 Emerging markets EMBI+ Euro-area BBB* 300 800 200 US BBB* 900 65 2002 *Corporate over government debt. 2003 1997 1999 *Source: Dealogic(Bondware, Loanware). 2001 2003 300 January 27-28, 2004 224 of 238 Chart 6 Foreign Outlook Global Trade and IP* Real GDP Growth: Industrial Countries Percent, SAAR* 102 Billions of dollars Monthly 2003 2004 2005 H1 H2 0.6 3.9 3.8 3.5 100 2. Indust. countries 0.7 2.4 2.9 2.8 400 Oct 101 1. Total foreign** 380 360 IP 99 of which: 340 3. Euro Area -0.2 1.8 2.4 2.4 2.0 98 2.2 2.0 4. Japan 1.8 5. Canada 0.6 2.4 3.4 1.5 3.4 3.0 320 97 2.5 Exports 3.3 6. United Kingdom 95 2001 2002 280 2003 *United States and 32 trading partners. IP weighted by 2002 GDP in dollars. Hong Kong and Indonesia IP through September. Oil and Non-fuel Commodity Prices Index, Jan. 2001=100 300 96 *Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2. **Aggregates weighted by shares of U.S. exports. 130 Index, Jan. 2001=100 Consumer Price Inflation* Dollars per barrel Four-quarter percent change 40 Monthly Quarterly 8 7 36 120 6 WTI spot 32 5 Latin America 110 4 28 3 100 24 Non-fuel commodities* 2 Industrial Asia 90 1 20 0 80 2001 2002 2003 2004 2005 16 2001 2002 2003 2004 2005 *IMF component indexes weighted by U.S. import shares. Euro Area - Industrial Sector Indicators 101 -1 *Aggregates weighted by shares in U.S. non-oil imports. Japan Index, Jan. 2001=100 Index, Jan. 2001=100 103 5.6 Percent Index, Jan. 2001=100 105 Monthly Monthly Jan 100 100 100 5.4 Euro area IP* 97 99 Unemployment rate 5.2 Nov Nov 94 98 90 5.0 91 97 96 95 88 German Ifo 2001 *3-month moving average. 2002 2003 85 85 Core machinery orders 4.8 4.6 2001 2002 2003 80 75 January 27-28, 2004 225 of 238 Chart 7 Emerging Market Countries Worldwide Semiconductor Shipments and Asian IP Real GDP Growth Percent, SAAR* 40 0.9 2.0 4.8 1.0 2.8 5.2 3.5 130 20 120 Asian IP* 4.2 3.5 10 0 110 1999 2000 2001 2002 2003 100 *Weighted by U.S. exports; includes Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand. China Exports by Developing Asia ex. China* Billions of dollars Four-quarter percent change Billions of dollars, AR 9.0 210 Quarterly** Trade balance 30 Nov 30 *Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2. **Aggregates weighted by U.S. exports. 36 140 Oct Total semiconductor shipments 4.0 1.6 -4.0 Index, June 1996=100 Monthly 2003 2004 2005 H1 H2 1. Total developing** 0.5 6.1 5.1 4.6 2. Developing Asia -0.6 11.0 5.7 5.4 of which: 3. China 6.3 13.6 8.3 7.7 4. Korea -2.2 4.8 5.2 5.2 5. Latin America of which: 6. Mexico 7. Brazil Billions of chips 7.5 24 6.0 18 4.5 12 3.0 6 1.5 0 190 0.0 170 to U.S. 150 to EU CPI inflation -6 -12 1999 2000 to China 130 110 90 -1.5 2001 2002 2003 -3.0 1999 2000 2001 2002 2003 70 *Includes Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. **2003:Q4 data through November for China and US and through October for EU. U.S. Imports from Asia Mexico Billions of dollars, AR Quarterly* 550 15.0 450 14.5 Nov Mexican exports 400 350 China 300 250 Developing Asia ex. China** 200 Japan 2000 2001 2002 105 103 14.0 101 13.5 Dec 99 13.0 150 100 Index, Jan. 2000=100 Monthly 500 TOTAL Billions of dollars Nov Mexican IP 97 U.S. IP 12.5 50 2003 *2003:Q4 data through October and November. **Includes Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. 0 12.0 2000 2001 2002 2003 95 January 27-28, 2004 226 of 238 Chart 8 U.S. External Outlook Real Exports and Imports Real GDP Percent change, SAAR* Exports Imports Percent change, SAAR* 15 U.S. Total foreign** 7 6 10 5 4 5 3 2 0 1 2002 2003 2004 2005 -5 2002 2003 2004 2005 *Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2. *Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2. **U.S. export weights. Real Exchange Rate Outlook 0 Current Account Index, 2001:Q1 = 100 Percent 105 1 Billions of dollars Quarterly 100 100 -1 Broad index June 2003 Greenbook Level -100 95 -3 90 -5 85 -7 -300 Percent of GDP -500 Jan. 2004 Greenbook 2002 2003 2004 2005 1996 1998 2000 2002 2004 Financial Flows Billions of Dollars, SAAR 2002 1. Current account 2. Official capital, net 3. Private capital, net Of which: 4. Foreign purchases of U.S. securities 5. U.S. purchases of foreign securities 6. Foreign DI in U.S. 7. U.S. DI abroad *October and November. 2003:H1 2003:Q3 2003:Q4* -481 -556 -540 NA 88 194 170 247 440 387 323 NA 408 16 40 -138 418 -37 114 -129 246 -116 33 -150 309 -62 NA NA -700 January 27-28, 2004 227 of 238 Chart 9 Alternative Dollar Scenarios Real Exchange Rate Index, 2002:Q1 = 100 Scenario 1 Scenario 2 Scenario 3 115 110 105 100 95 90 85 Broad index 80 75 1984 1986 1988 1990 1992 1994 Dollar Scenarios 1996 1998 2000 2002 2004 70 Real U.S. GDP Growth Percent Scenario 1 Scenario 2 Scenario 3 Scenario 1: Dollar decline triggered by higher foreign growth Scenario 2: "Disorderly correction" Same dollar shock as above Stock prices fall 12% 10-year Treasury yields rise 50 bp 7 6 5 4 Scenario 3: Dollar appreciation triggered by strong U.S. growth 3 2003 2004 2005 2 Half years are Q2/Q4 or Q4/Q2. Foreign Real GDP Growth U.S. Current Account Balance Percent Billions of dollars -450 5 -500 4 -550 3 -600 2 Scenario 1 Scenario 2 Scenario 3 2003 2004 Half years are Q2/Q4 or Q4/Q2. 2005 Scenario 1 Scenario 2 Scenario 3 1 0 2003 2004 2005 -650 -700 January 27-28, 2004 228 of 238 January 27-28, 2004 229 of 238 January 27-28, 2004 230 of 238 January 27-28, 2004 231 of 238 January 27-28, 2004 232 of 238 Chart 14 ECONOMIC PROJECTIONS FOR 2004 FOMC Range Central Tendency Staff -------------Percentage change, Q4 to Q4-----------Nominal GDP 5½ to 6½ 5½ to 6¼ (June 2003) (4¾ to 6½) 6.2 (5¼ to 6¼) Real GDP (June 2003) PCE Prices (June 2003) 4 to 5½ 4½ to 5 (3½ to 5¼) 1 to1½ 1 to 1¼ (¾ to 2) 5.3 (3¾ to 4¾) (1 to 1½) 1.0 --------------Average level, Q4, percent--------------Unemployment rate (June 2003) 5¼ to 5½ (5½ to 6¼) 5¼ to 5½ 5.3 (5½ to 6) Central tendencies calculated by dropping high and low three from ranges. January 27-28, 2004 Appendix 6: Materials used by Mr. Reinhart 233 of 238 January 27-28, 2004 234 of 238 for Material Briefing on Monetary Policy Alternatives January28, 2004 STRICTLY CONFIDENTIAL (FR) CLASS I FOMC January 27-28, 2004 235 of 238 Exhibit 1 Probability Distribution of Time to the Beginning of Expected Federal Funds Rates* --------- December 8, 2003 January 27, 2004 11 I III1111 IIIIItII Jan. Percent May Sept. 2004 December 8, 2003 January 27, 2004 --------- I I1111 Jan. Percent Tightening 11 May Sept. 2005 Jan. 2006 5 10 15 Months Ahead *Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments. Implied Distribution of Federal Funds Rate About 6 Months Ahead* Percent Desk Dealer Survey - Onset of Tightening Number of Dealers January 27, 2004 I -I ) December 8, 2003 I l IL-t 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2004 Q1 2004 02 2004 H2 2005 H1 *Based on the distribution of the three-month eurodollar rate five months ahead (adjusted for a risk premium), as implied by options on eurodollar futures contracts. Desk Dealer Survey - FOMC Statement Output Risk 18 Balanced 4 Downside 2004 H1 H2 21 Balanced 1 Upside Inflation Risk Private Sector Forecasts Overall Risk 20 Balanced or None 2 Unwelcome Disinflation Considerable Period 17 Retained 5 Removed 2005 GDP Growth 4.5 4.0 3.7 Greenbook 5.4 5.1 3.8 1.1 1.4 1.7 1.2 1.1 1.1 5.8 5.7 5.4 5.9 5.4 5.1 Inflation (Core PCE) Greenbook Unemployment Greenbook January 27-28, 2004 236 of 238 Exhibit 2 TIIS Yield Curve 1 3 5 7 10 Implied One-Year Real Forward Rate Percent 20 30 1999 2000 2001 Percent 2002 2003 Maturity in Years The Case for Easier Policy The Case for Firmer Policy * Business confidence may remain impaired. * Considerable financial accomodation is in place. * Inflation is low and poised to go lower. * Inflation pressures may emerge more quickly than in the staff forecast. Change in Selected Financial Market Conditions Since Last FOMC Selected Money and Credit Aggregates 2004 2003 H1 Q3 Q4 Jan. 7.7 7.0 -1.8 -1.5 Basis Points Bank Credit -9.7 4.6 -0.5 Ten-Year Treasury -20 A Corporate M2 -22 2.2 Percent Business Loans -6.4 -13.9 -9.7 -7.4 Wilshire Major Currency Index 7.2 January 27-28, 2004 237 of 238 Exhibit 3 Alternative Strategies for Removing Policy Accomodation Inflation Expectations Case for Keeping Policy on Hold Percent Michigan Survey 10-year expected inflation Long-term inflation expectations seem well-anchored. * - TIS-based inflation compensation from 5 to 10 years ahead - * . Simulations suggest that policy can remain on hold for an extended period without fueling strong inflation pressures. 1999 Nominal Federal Funds Rate 2000 2001 2002 2003 Real Federal Funds Rate' Percent Percent 6 S5 Long-run inflation: 1% 5 1/2% ..... ... 11/2% 4 I 2 -* 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 0 2007 ~2007 2008 2009 2010 200A 2009 2010 - -2002 2002 Civilian Unemployment Rate 2003 2004 2005 2006 200 2003 2004 2005 2006 2007 2008 2009 2010 PCE Inflation (ex. food and energy) (Four-quarter percent change) Percent - 6.5 Percent 6 5 5 ------ C--------- 4 4 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 1. The real federal funds rate is calculated as the quarterly average nominal funds rate minus the four-quarter lagged core PCE inflation rate as a proxy for inflation expectations. 2010 January 27-28, 2004 238 of 238 Exhibit 4 The Considerable Period Sentence December 2003 FOMC Statement "With inflation quite low and resource use slack, the Committee believes that policy accomodation can be maintained for a considerable period." Considerable Period Options Retain Drop Modify * Confident economy will evolve in a benign manner. * Tightening within next few meetings not ruled out. * Outsized market reaction to dropping. * Or inflation on low side of desired range. * Costs of having to delay tightening or renege damaging. * "Patience" would imply gradual firming. Potential Alternative "With inflation quite low and resourse use slack, the Committee believes that it can be patient in removing its policy accomodation."
@FedFRASER