Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 29-30, 2013 : Tealbook A

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Prefatory Note

The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

Content last modified 01/11/2019.

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Report to the FOMC
on Economic Conditions
and Monetary Policy

Book A
Economic and Financial Conditions:
Current Situation and Outlook
January 23, 2013

Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System

Authorized for Public Release

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Domestic Economic Developments and Outlook
The information on economic activity that we have received since the December
Tealbook has been a mixed bag. In the labor market, the unemployment rate has come in
a little lower than we projected in the December Tealbook, while payroll employment
growth has been very close to our expectations. However, we estimate that real GDP was
roughly flat in the fourth quarter of 2012, as compared with a projected rise of almost
1 percent in our previous forecast. The weakness in real GDP growth was concentrated
in the volatile categories of defense spending, inventories, and net exports, and we do not
expect it to persist into 2013. Instead, we estimate that real GDP will step up to a
2¾ percent pace in the first quarter, up 1 percentage point from our previous projection.
Most of this upward revision reflects changes in our fiscal policy assumptions—most
notably, the one-year extension of the EUC program that was enacted in early January.
The broad contour of the medium-term projection for real GDP growth is
essentially unchanged from the December Tealbook, as the revisions to the key
background factors shaping our forecast have been small and largely offsetting.
Moreover, although the legislation enacted at the turn of the year to address the “fiscal
cliff” left several issues unresolved, the enacted policies were broadly consistent with our
previous assumptions. We expect real GDP to increase 2¾ percent this year, 3¼ percent
in 2014, and 3½ percent in 2015.
Despite the similar projection for real GDP, our path for the unemployment rate
is a little lower in this projection, as we have interpreted the constellation of available
evidence as suggesting that the current level of potential output is a bit lower than we had
previously assumed (and hence the gap in resource utilization is slightly narrower than
we earlier estimated). We now expect that the unemployment rate will decline from
7¾ percent at the end of 2012 to about 6¼ percent at the end of 2015, roughly
¼ percentage point below the path in the December Tealbook.
Readings on consumer prices have come in a bit softer than we had expected, but
the fundamental inflation picture remains unchanged: With long-term inflation
expectations assumed to remain well anchored and slack in resource utilization expected
to persist for some time, inflation should remain subdued. In response to the gradual
reduction in resource slack over the medium term, core PCE inflation is projected to edge
up from 1.6 percent in 2013 to 1.7 percent in both 2014 and 2015, essentially unchanged

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Key Background Factors underlying the Baseline Staff Projection

Federal Funds Rate

Long-Term Interest Rates
Percent

Quarterly average

10
Current
Previous Tealbook
Market, expected rate

Percent

11
Quarterly average

BBB corporate yield

6
3

3
5

2008

2010

2012

2014

5
4

10-year
Treasury yield

2008

2010

2012

2014

House Prices

Equity Prices
140
130

6
Conforming
mortgage rate

4
3

Ratio scale, 2007:Q1 = 100
Quarter-end

120

140
130

Ratio scale, 2007:Q1 = 100

105
100

Quarterly

105
100

120
95

100

110
100

Dow Jones
U.S. Total Stock Market
Index

2008

2010

110

2012

2014

Crude Oil Prices
Dollars per barrel

140

Imported oil

120

100

80
West Texas
Intermediate

2008

2010

2012

2014

2007:Q1 = 100

110

Quarterly average

2008

Broad Real Dollar

140

120

CoreLogic
index

2010

2012

2014

105

100

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2008

2010

2012

2014

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from the December Tealbook. Total PCE inflation is projected to run a little below core
inflation over the medium term as energy prices move down.
In this Tealbook, we have consolidated our discussion of recent developments and
the outlook for the labor market and inflation into its own section, which begins on
page 17.

KEY BACKGROUND FACTORS
Monetary Policy
We have adjusted our procedure for setting the federal funds rate trajectory in
order to take on board the Committee’s guidance in its December statement that the
federal funds rate is likely to remain within the current target range of 0 to ¼ percent at
least as long as the unemployment rate is above 6.5 percent and inflation between one
and two years ahead is projected to be below 2.5 percent. Once either one of these
thresholds is crossed, we assume that the federal funds rate will subsequently follow the
prescriptions of an inertial version of the Taylor (1999) policy rule.1 In the current staff
forecast, the unemployment rate is below 6.5 percent in the fourth quarter of 2015, so we
assume that tightening begins at the end of that year, the same as in the December
Tealbook.
Our assumptions about the Federal Reserve’s balance sheet are unchanged
relative to the December Tealbook. We assume that the Federal Reserve will purchase
about $85 billion of longer-term securities per month through June 2013. We also
continue to assume that market participants anticipate a longer-lived asset purchase
program with cumulative purchases approximately $500 billion higher than our
expectations, and that they will gradually learn about the true size of the program during
the first half of this year.

Other Interest Rates
The 10-year Treasury yield has increased about 25 basis points since the
December Tealbook to a bit more than 1¾ percent. Broadly, this increase was about
what we had expected, and we think it mostly reflects a combination of an abatement of
investor concerns after the year-end fiscal negotiations and the ongoing movement of the
10-year valuation window through the period of extremely low short-term interest rates.
1

This rule generates a path for the federal funds rate after mid-2015 that is similar to the one in the
December projection.

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We project that the yield on 10-year Treasury bonds will rise to about 4 percent in the
fourth quarter of 2015, with a somewhat steeper trajectory earlier in the forecast period as
investor risk appetite continues to strengthen and investors learn more about the
dimensions of the LSAP program.
Yields on investment-grade corporate bonds have edged up only a few basis
points since the December Tealbook, reducing their implied risk spread by about 20 basis
points. We expect this spread to hold steady through much of 2013, and then to decrease
about ½ percentage point by the end of 2015. Conventional 30-year mortgage rates have
increased slightly from their December historical low of about 3¼ percent and are
expected to rise in line with benchmark Treasury yields to about 5½ percent by the end of
2015.

Equity Prices and Home Prices
A broad index of U.S. stock prices has risen by more than 6½ percent since the
December Tealbook, in line with the reduction in investor concerns and encouraging
early reads on corporate earnings in the fourth quarter. Equity prices are projected to rise
at an average annual rate of about 8 percent over the next three years. On average, the
trajectory of equity prices is about 3¼ percent higher than in the December Tealbook.
Recent readings on home prices from CoreLogic, along with other house price
indicators, have once again been a little stronger than our expectations, and we have
boosted our projection of house price gains a bit throughout the medium-term forecast.
In particular, we now forecast that house prices will rise 4½ percent in 2013 and then
decelerate to a 3½ percent rate in 2014 and 2015 as higher mortgage rates weigh on
housing affordability. At the end of 2015, the level of house prices is about 2½ percent
higher than in the previous projection.

Fiscal Policy
The legislation enacted at the turn of the year settled many of the issues associated
with the fiscal cliff. The box “Fiscal Policy Developments” describes the key provisions
of the legislation and specifies the relatively small adjustments to our policy assumptions
that we have made as a result. The key point is that we continue to expect fiscal policy to
be a significant drag on economic growth over the projection period. As a result of the
improving economy and fiscal consolidation, the federal budget deficit is projected to fall
steadily over the projection period, from 7 percent of GDP ($1.1 trillion) in fiscal year
2012 to 3 percent of GDP ($550 billion) by fiscal 2015.

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Fiscal Policy Developments
On New Year’s Day, the Congress passed the American Taxpayer Relief Act (ATRA), which resolved a large
portion of the federal tax and spending policy issues associated with the “fiscal cliff.” The provisions of the
act were roughly in line with the policy assumptions we had built into recent projections, but considerable
uncertainty remains around several important issues that will need to be addressed in the next couple of
months.
The new legislation made the 2001–03 tax cuts permanent for most taxpayers, extended the Emergency
Unemployment Compensation (EUC) program and the 50 percent bonus depreciation provisions for
one year, and increased income tax rates on top-income earners. 1 The new law is estimated to raise tax
revenue about $40 billion in 2013 and roughly $600 billion over 10 years. The Congress also allowed the
temporary payroll tax cut to expire, a move that is expected to increase revenue an additional $110 billion
this year. Notably, the Congress did not resolve this year’s scheduled spending sequestration but agreed to
delay its implementation until March 1.
Overall, our current fiscal policy assumptions remain quite close to those in the December Tealbook, with
the most important change reflecting the extension of the EUC program. With regard to the sequestration,
we continue to assume that it will eventually be replaced by a more gradual amount of deficit reduction
from a combination of lower spending and additional tax increases. As shown in the table below, the
staff’s measure of fiscal impetus is now projected to be a little less negative in 2013, largely as a result of
the extension of the EUC program, and slightly more negative in 2014, as we assume that the EUC and the
bonus depreciation provisions will be allowed to expire at the end of this year.
Although uncertainty about fiscal policy has diminished somewhat with the enactment of ATRA, it remains
elevated, as protracted negotiations are likely to ensue on the contentious issues the act did not resolve.
The Treasury is expected to be constrained by the current statutory federal debt limit sometime after midFebruary, though the House leadership has proposed legislation suspending the debt ceiling until May. In
March, in addition to addressing the spending sequestration, the Congress will also need to tackle the
expiration of the continuing budget resolution, which appropriates funding for discretionary defense and
nondefense programs. The results of the negotiations over these issues are highly uncertain and could
have material effects on the staff forecast. For example, if the full sequestration were allowed to take
hold, fiscal impetus would show a ½ percentage point greater drag on real GDP growth this year, compared
with our current forecast. We expect that wrangling over the debt ceiling will adversely affect consumer
and business confidence for a time and could unsettle financial markets; of course, an actual failure to raise
the ceiling could have vastly worse consequences.

Total Fiscal Impetus
(Percentage point contributions to real GDP growth, calendar years)
Measure
Current
Previous

2012
-.3
-.2

2013
-.8
-1.1

2014
-.5
-.4

2015
-.2
-.2

Source: Staff estimates.
1

Notably, for joint tax filers with income above $450,000 (and individual filers with income above $400,000), the top
marginal tax rate on ordinary income increased from 35 percent to 39.6 percent and the tax rate on capital gains and
dividends increased from 15 percent to 20 percent.

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Foreign Activity and the Dollar
We currently estimate that foreign economic growth picked up in the fourth
quarter of 2012, albeit to a still anemic annual rate of 2¼ percent. Disappointing data in
the euro area and Canada were offset by stronger-than-expected indicators in Asia,
especially China. We expect overall foreign growth to pick up further, to a pace of
3 percent in the first half of this year, supported by an acceleration of U.S. economic
activity, further easing of financial stresses in Europe, a continued strengthening of
growth in emerging markets, and generally accommodative monetary policies abroad.
The projected easing of fiscal and financial pressures should enable the European
recovery to gain traction over the remainder of the forecast period, which helps push
foreign growth up to about 3½ percent in 2014 and 2015. We revised up somewhat our
projection of foreign activity for 2013, in light of more momentum in the Chinese
economy, greater policy stimulus in Japan, and less stressed financial conditions in
Europe than we foresaw in December. For the remainder of the forecast period, our
outlook is about unchanged.
The broad nominal dollar has declined a bit on net since the time of the December
Tealbook, as a modest depreciation against most currencies was partly offset by an
8 percent appreciation against the Japanese yen. We continue to assume that downward
revisions over the next few months in market expectations for the Federal Reserve’s asset
purchases will put some upward pressure on the level of the dollar this year. Over the
forecast period as a whole, however, we expect the broad real dollar to depreciate at
about a 2½ percent average annual rate. This pace of depreciation is slightly less than
projected in the previous Tealbook, as the recent improvement in European financial
conditions has brought forward some of the reversal in safe-haven flows that we had
expected would take place later in the forecast period.

Oil and Other Commodity Prices
Oil prices are revised up slightly in this projection. The spot price of Brent crude
oil closed at about $113 per barrel on January 22, about $2 per barrel higher than in the
December Tealbook. The price of West Texas Intermediate (WTI) crude oil has
increased about $7 per barrel from the December Tealbook, moving the price of WTI
toward the Brent price, as recent pipeline expansions have better integrated the
mid-continent oil market with the Gulf Coast and global markets. Our forecast for the
price of imported oil has been revised up by $2 per barrel since the December Tealbook.
Overall, the price of imported oil is projected to remain at about $100 per barrel for much

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of 2013 and then slowly decline over the remainder of the forecast period, reaching
$90 per barrel at the end of 2015.
Nonfuel commodity prices have increased on net relative to the previous
Tealbook, as higher prices for some metals were only partly offset by falling prices for
agricultural products. Prices for tin and iron ore have risen sharply, reflecting
improvements in Chinese demand and some supply disruptions. Meanwhile, a betterthan-expected supply outlook has pushed down agricultural prices, extending their retreat
from the drought-induced peak in mid-2012. Nonfuel commodity prices are projected to
remain relatively flat through 2015.

RECENT DEVELOPMENTS AND THE NEAR-TERM OUTLOOK FOR REAL GDP
As noted earlier, weak readings in the erratic categories of defense spending,
inventories, and net exports help inform our estimate that real GDP was about flat in the
fourth quarter, rather than rising 1 percent, as in the December projection. In contrast,
private domestic final purchases appear to have risen at an annual rate of 3½ percent last
quarter, somewhat faster than in our previous forecast. In the first quarter, we now
project that real GDP growth will step up to a 2¾ percent pace despite the drag imposed
by the end of the payroll tax holiday; growth this quarter should be boosted by a rebound
in farm output from last summer’s drought and a recovery in activity that had been
depressed by the hurricane. Relative to our December projection, the forecast for real
GDP growth in the first quarter has been revised up about 1 percentage point, mostly
reflecting the extension of EUC benefits.

Household Spending
Real PCE appears to have increased about 2¼ percent in the fourth quarter of last
year—about as expected in our December Tealbook projection. Sales of light motor
vehicles rose to an annual rate of 15 million units last quarter, and real spending in the
retail sales group also posted a solid gain. In contrast, the growth in services spending
has been weak and uneven. In the current quarter, we expect real PCE growth to slow
somewhat to a 1¾ percent pace as households begin to adjust their spending in light of
the substantial increase in payroll and income taxes. Relative to the December Tealbook,
our forecast of real PCE growth in the first quarter is up about 1 percentage point, as that
earlier projection had not assumed an extension of EUC benefits.

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Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
2012:Q4

2013:Q1

2013:Q2

Measure

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business fixed investment
Government purchases
Contributions to change in real GDP
Inventory investment1
Net exports1
Unemployment Rate2
PCE Chain Price Index
Ex. food and energy

.9
2.9
2.1
14.8
5.4
-3.5

.1
3.4
2.2
13.1
9.6
-5.6

1.7
1.1
.6
17.0
1.1
-1.8

2.7
2.1
1.7
15.0
2.2
-1.1

2.5
3.7
2.6
22.6
6.4
-1.5

2.4
3.5
2.6
25.1
5.0
-1.5

-.8
.0
8.0
1.5
1.2

-1.4
-.2
7.8
1.2
.8

.9
.2
7.9
1.1
1.7

.9
.2
7.8
.9
1.6

-.3
.1
7.9
1.4
1.6

-.2
.0
7.7
1.9
1.7

1. Percentage points.
2. Percent.
Recent Nonfinancial Developments (1)
Manufacturing IP ex. Motor Vehicles and Parts

Real GDP and GDI
4-quarter percent change

8
6

Gross domestic product
Gross domestic income

8
6

3-month percent change, annual rate

15
10

10
Dec.

5
4

-5

-10

-15

-20

-25

Q3
2

Q3
0
-2

-2

-4

-6

2004

2006

2008

2010

2012

-6

-30

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

2004
2006
2008
2010
2012
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Sales and Production of Light Motor
Vehicles

Real PCE Goods ex. Motor Vehicles

Millions of units, annual rate

Billions of chained (2005) dollars

3200
3100

18
Dec.

Sales

-30

3200
3100

Dec.

3000

2900

2800

2700

2600

2500

2400

2300

2300
2004
2006
2008
2010
2012
Note: Figures for October, November, and December 2012 are staff
estimates based on available source data.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

Dec.
10

10
Production

2004
2006
2008
Source: Ward’s Auto Infobank.

2010

2012

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Although the recent data on residential construction have been a little stronger, on
net, than we had expected, we suspect that most of the upside surprise reflects the
unusually warm weather in December. Following a slight dip in November, singlefamily housing starts rose about 8 percent to an annual rate of approximately 620,000
units in December, about 30,000 higher than we anticipated. By contrast, permits—
which provide a better gauge of the underlying pace of new construction and, in
particular, are less sensitive to weather anomalies—have increased more gradually.
Meanwhile, new and existing home sales have continued to pick up, indicators of
homebuilder and realtor sentiment have improved substantially, and—as noted earlier—
house prices have risen from their lows in late 2011. All told, we project single-family
starts to average about 610,000 units in the first quarter, just a bit below the outsized
December reading.
Some of the factors restraining home purchases have fueled demand for rental
units, leading to falling vacancy rates and rising rents in the multifamily sector. In
response, multifamily starts and permits have trended up relatively strongly. Although
we do not expect the spike in multifamily starts in December to be sustained, we do
expect to see continued growth in this sector as the supportive fundamentals persist.

Business Investment
After falling at an annual rate of about 2½ percent in the third quarter, real
business spending on equipment and software (E&S) appears to have risen about
14 percent in the fourth quarter. Although the expected expiration of the 50 percent
bonus depreciation at the end of last year may have contributed slightly to the sharp
turnaround in spending, experience from previous episodes suggests that this factor was
not of primary importance. Smoothing through the recent volatility, real E&S spending
increased only about 5 percent over the second half of last year, similar to the pace in the
first half. We project spending to rise only modestly this quarter, reflecting both the
sluggish growth in business output and some continued caution on the part of businesses
in response to uncertainty about the European crisis and the U.S. fiscal situation. On
balance, forward-looking indicators of business investment appear consistent with
continued moderate gains in near-term spending: Although the ISM nonmanufacturing
index of business conditions has improved, the manufacturing index remains subdued,
and indicators of capital spending plans remain at low levels.
Incoming data suggest that investment in nonresidential structures outside of
drilling and mining fell about 2½ percent in the fourth quarter, similar to the pace of

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Recent Nonfinancial Developments (2)

Single-Family Housing Starts

Single-Family Home Sales

Thousands of units, annual rate

2100

Thousands of units, annual rate

7000
6500

1800

1500

1200

5000

900

4500

1200

6000

Dec.

600

Starts
Adjusted permits

300
0

2004

2006

600

Existing
(left scale)

5500

Dec.
600

4000

2008

2010

2012

Nov.

2500

2004
2006
2008
2010
2012
Source: For existing, National Association of Realtors;
for new, U.S. Census Bureau.

Billions of dollars

Nov.

Billions of chained (2005) dollars

400

Shipments

350

300

250

250
Nov.

200
45
40

400

Orders

Nonresidential Construction Put in
Place

Nondefense Capital Goods ex. Aircraft
75

300

3000

Note: Adjusted permits equal permits plus starts outside of
permit-issuing areas.
Source: U.S. Census Bureau.

900

3500
300

1500

New
(right scale)

200

45
2004
2006
2008
Source: U.S. Census Bureau.

2010

2012

150

1.8

200

1.7

180

2004
2006
2008
2010
2012
Note: Nominal CPIP deflated by BEA prices through
2012:Q2 and by staff’s estimated deflator thereafter.
Source: U.S. Census Bureau.

Inventory Ratios ex. Motor Vehicles

Exports and Non-oil Imports
Months

1.8
1.7
1.6
1.5

150

1.6

160

Billions of dollars

200
180

Non-oil imports

Nov.

160

1.5

140

1.4

Staff flow-of-goods system

1.4

120

1.3

Census book-value data

1.3

100

1.2

1.1

Dec.

1.2
1.1

Nov.
2004

2006

2008

2010

2012

Note: Flow-of-goods system covers total industry ex. motor
vehicles and parts, and inventories are relative to consumption.
Census data cover manufacturing and trade ex. motor vehicles
and parts, and inventories are relative to sales.
Source: U.S. Census Bureau; staff calculation.

Exports

60
2004
2006
2008
2010
2012
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis;
U.S. Census Bureau.

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decline in the third quarter. Although we anticipate a small boost to this category of
investment from rebuilding after Hurricane Sandy, high vacancy rates and low
commercial real estate prices should continue to weigh on investment. Moreover,
although there are hints of easing in financing conditions for existing commercial real
estate, credit availability for new construction remain tight. All told, nonresidential
investment (excluding drilling and mining) is projected to increase only modestly in the
near term, in line with leading indicators like the architectural billings index, which has
improved lately but remains in neutral territory.
In the drilling and mining sector, investment flattened out in 2012 after posting
strong gains in the prior two years. While new drilling techniques and relatively high
crude oil prices have kept spending at an elevated level, the decline in natural gas prices
has restrained it from moving even higher. We expect outlays for drilling and mining
structures to increase modestly in the near term, in line with the projected trajectories of
oil and natural gas prices.
After an unusually large increase in the third quarter, real inventory investment in
the nonfarm business sector appears to have slowed sharply in the fourth, subtracting
nearly 1½ percentage points from the rise in real GDP. Estimates from the staff’s flowof-goods system, book-value measures of inventory-to-sales ratios, reports on dealer
inventories of motor vehicles, and surveys of inventory satisfaction all point to stocks that
are fairly well aligned with sales. Accordingly, we expect nonfarm inventory investment
to have a relatively neutral influence on GDP growth in the current quarter.

Government
The contraction in the state and local sector continues to abate. After having
declined at an annual rate of about 1½ percent in the first half of 2012, we estimate that
real state and local purchases edged down just ¼ percent in the second half. We expect
real purchases to be about flat in the current quarter, as budget conditions continue to
slowly improve.
The defense outlays reported in recent Monthly Treasury Statements suggest that
real federal purchases plunged in the fourth quarter, more than reversing the anomalous
jump in the third quarter. For 2012 as a whole, we estimate that real federal purchases
fell about 2 percent, and we anticipate a similar decline in the first quarter.

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Projections of Real GDP and Related Components
(Percent change at annual rate from final quarter
of preceding period except as noted)

2012
Measure

2011
H1

Real GDP
Previous Tealbook

2013

2014

2015

2.0
2.0

1.6
1.6

1.6
1.8

2.7
2.5

3.2
3.2

3.5
3.6

1.7
1.7

2.1
2.1

1.9
1.8

2.5
2.3

3.0
3.1

3.5
3.6

Personal consumption expenditures
Previous Tealbook

1.9
1.9

2.0
2.0

1.9
1.8

2.3
2.2

3.3
3.3

3.5
3.6

Residential investment
Previous Tealbook

3.9
3.9

14.3
14.3

13.3
14.3

17.9
16.8

12.7
11.8

13.8
12.7

Nonresidential structures
Previous Tealbook

6.9
6.9

6.6
6.6

-.2
.4

4.2
2.9

2.5
2.5

2.1
2.1

Equipment and software
Previous Tealbook

11.4
11.4

5.1
5.1

5.3
2.0

5.7
6.1

5.8
7.0

6.0
6.2

Federal purchases
Previous Tealbook

-4.2
-4.2

-2.3
-2.3

-2.1
.0

-3.9
-4.5

-4.9
-4.3

-3.3
-2.3

State and local purchases
Previous Tealbook

-2.7
-2.7

-1.6
-1.6

-.2
.3

.3
.3

.9
.9

1.2
1.2

Exports
Previous Tealbook

4.3
4.3

4.8
4.8

-1.3
2.1

5.3
5.1

6.1
5.9

7.1
7.3

Imports
Previous Tealbook

3.5
3.5

2.9
2.9

-1.5
1.3

3.9
3.8

4.8
4.8

5.3
5.2

Final sales
Previous Tealbook

Contributions to change in real GDP
(percentage points)
Inventory change
Previous Tealbook

.3
.3

-.4
-.4

-.3
.0

.2
.2

.2
.1

.0
.0

Net exports
Previous Tealbook

.0
.0

.1
.1

.1
.0

.0
.0

.1
.1

Real GDP
4-quarter percent change

10
Current
Previous Tealbook

10
8

-2

-4

-6

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Page 12 of 112

2012

2014

-6

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Foreign Trade
International trade data for October and November suggest that both exports and
imports in the final quarter of last year were much weaker than we had been expecting in
the December Tealbook. We now estimate that real exports of goods and services fell at
an annual rate of 4½ percent in the fourth quarter of 2012, dragged down, in part, by a
continued falloff in exports to the euro area. We expect export growth to rebound in the
first quarter of this year to an annual rate of 5¼ percent, a pace more in line with our
projections for the dollar and foreign activity. Real imports of goods and services are
now estimated to have fallen 2½ percent in the fourth quarter, a second consecutive
quarter of decline. As with exports, imports were weaker than their key determinants—
U.S. GDP and the dollar—would have implied, and we anticipate import growth to
bounce back to a 3 percent pace in the first quarter of 2013. We estimate that, in all, the
external sector subtracted ¼ percentage point from GDP growth in the fourth quarter,
compared with a neutral contribution in the December Tealbook, and that it will add
¼ percentage point to growth in the first quarter.

The Industrial Sector
Manufacturing production, which fell sharply in October because of Hurricane
Sandy, rebounded in November and December to a level that was a bit more robust than
we had expected in the December Tealbook; the upward surprise likely reflected, in part,
a larger boost to production from rebuilding efforts and the warm weather last month.
Most of our near-term indicators of production—including the new orders indexes from
regional manufacturing surveys—suggest little change in factory output in coming
months. Nevertheless, a strong reading for manufacturing IP in December sets up a
robust first quarter, with factory output now expected to rise at an annual rate of 4 percent
following three quarters of little change. This projection is about 1 percentage point
stronger than in the December Tealbook.

THE MEDIUM-TERM OUTLOOK FOR REAL GDP
The broad contour of the medium-term projection for real GDP growth is the
same as in the December Tealbook, as the revisions to our fiscal policy assumptions
affect only the timing of the projected recovery and the changes to our other conditioning
assumptions are small and offsetting. As in previous Tealbooks, we are projecting real
GDP to accelerate over the forecast period, supported by further improvements in
financial conditions, an easing of the financial crisis in Europe, a reduction of uncertainty
related to fiscal policy at home, and rising household and business confidence. Even so,

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January 23, 2013

Components of Final Demand

Personal Consumption Expenditures
4-quarter percent change

Residential Investment
4-quarter percent change

5
Current
Previous Tealbook

-5

-10

-15

-1

-2

-20

-3

-25

-4

-30

2008

2009

2010

2011

2012

2013

2014

2015

Equipment and Software
20

-5

-10

-15

-20

-25

2008

2009

2010

2011

2012

2009

2010

2011

2012

2013

2014

2015

-30

Nonresidential Structures

4-quarter percent change

2008

2013

2014

2015

-25

25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35

Government Consumption & Investment
4-quarter percent change

4-quarter percent change

2008

2009

2010

2011

2012

2013

2014

2015

25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35

Exports and Imports
4-quarter percent change

-1

-2

-10

-3

-15

-4

-20

15
10
Exports

-4

2008

2009

2010

2011

2012

2013

2014

2015

-5

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Page 14 of 112

Imports

2008

2009

2010

2011

-5

2012

2013

2014

2015

-20

Authorized for Public Release

January 23, 2013

we continue to anticipate that several headwinds will restrain the pace of economic
activity over the medium term, including fiscal policy that will remain restrictive (even if
less uncertain) and still-tight credit conditions for some households and businesses. All
told, real GDP is projected to increase 2¾ percent this year, 3¼ percent in 2014, and
3½ percent in 2015. Relative to the December projection, growth is a bit stronger in
2013 and a bit weaker in 2015, leaving the level of real GDP at the end of 2015
essentially unchanged from the December Tealbook.
Part of the fiscal restraint in our forecast is reflected in the projected contraction
in government purchases. In particular, after falling an estimated 2 percent in 2012, real
federal expenditures are expected to decline at an average pace of 4 percent per year over
the next three years, owing to ongoing fiscal consolidation efforts and the winding down
of overseas military operations. Meanwhile, despite slowly improving budget conditions,
growth in the real purchases of state and local governments is projected to remain
sluggish throughout the medium term, averaging less than 1 percent per year.
Another significant part of the drag from fiscal policy shows through in the form
of restraint on the growth of the after-tax incomes of households and hence their
spending. The main elements of this restraint are the expiration of the temporary payroll
tax cut that has now gone into effect, an increase in income taxes—including both the
already enacted taxes on high-income households and some additional tax increases that
we assume will be enacted as part of an agreement to replace the automatic
sequestration—and the eventual expiration of the EUC program.2 Despite this significant
fiscal restraint, we are projecting a solid recovery in consumer spending, as the drag from
fiscal policy is more than offset by rising household wealth, increasing consumer
confidence, and an improving labor market. In total, real PCE is expected to rise
2¼ percent this year before stepping up to an average pace of about 3½ percent per year
in 2014 and 2015; this projection is little changed, on net, from the December Tealbook.
Growth in residential construction spending is projected to benefit from the same
factors that are supporting consumer spending, including increasing confidence and rising
income and wealth. However, these effects are offset to some extent by the substantial
increase in mortgage interest rates that we project over the medium term as well as by a
continued tight supply of mortgage credit to borrowers with lower credit scores.
Moreover, although the homeowner vacancy rate has declined noticeably, the stock of
2

As noted previously, the one-year extension of EUC benefits changes the timing of the fiscal
restraint relative to our earlier assumptions but not its overall magnitude.

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Aspects of the Medium-Term Projection

Personal Saving Rate

Wealth-to-Income Ratio
Percent

8
Current
Previous Tealbook

8
7

1995

2000

2005

2010

2015

Ratio

6.8

6.4

6.0

5.6

5.2

4.8

4.4

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

4.4
1995
2000
2005
2010
2015
Note: Household net worth as a ratio to disposable personal
income.
Source: For net worth, Federal Reserve Board, flow of funds
data; for income, Dept. of Commerce, Bureau of Economic Analysis.

Single-Family Housing Starts

Equipment and Software Spending
Millions of units

2.00

6.8

Share of nominal GDP

2.00

10.0

1.75

9.5

1.50

9.0

1.25

8.5

1.00

8.0

0.75

7.5

0.50

7.0

0.25

6.5

0.00

6.0

0.00

1995

2000

2005

2010

2015

1995

2000

2005

2010

2015

10.0

6.0

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

Source: U.S. Census Bureau.

Current Account Surplus/Deficit

Federal Surplus/Deficit
Share of nominal GDP

Share of nominal GDP

-1

-2

-2
-3

-3

-4

-6

-4

-8

-5

-10

-6

-12

-7

4-quarter moving average

-12

1995

2000

2005

2010

2015

1995

Source: Monthly Treasury Statement .

2000

2005

2010

2015

-7

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.

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vacant homes held off the market remains quite elevated. Once put on the market, this
“shadow” inventory, which includes many bank-owned properties, may redirect some
demand from new construction to existing homes, although the magnitude and timing of
this effect are quite uncertain. As a result, we expect the recovery in residential
construction to take place gradually. Although residential investment is projected to
increase an average of 15 percent per year over the medium term, the pace of total
housing starts rises only to about 1.5 million units in 2015, still below its long-run trend.
The external sector is expected to be about neutral for real GDP growth over the
medium term. Both exports and imports are projected to accelerate, reflecting
strengthening economic growth at home and abroad, while the dollar’s expected
depreciation helps support exports over imports. Our projection for net exports is
essentially unrevised from the December Tealbook.
With rising demand emanating from the consumer and foreign sectors, and with
businesses’ concerns about Europe and the U.S. fiscal situation anticipated to wane over
time, we project a slight acceleration in real E&S spending, from about 5¼ percent in
2012 to an average of about 6 percent over the medium term. We are projecting a modest
rise in nonresidential building investment, as we expect only very gradual improvement
in vacancy rates, commercial real estate prices, and credit availability.

THE OUTLOOK FOR LABOR MARKETS AND INFLATION
On the whole, conditions in the labor market appear to have improved at a
somewhat faster pace in the past couple of months than we had expected in the December
Tealbook. Increases in private payroll employment averaged 180,000 per month in the
fourth quarter of 2012, a little above our expectation in the previous forecast, although
government employment came in a little softer than expected. In addition, the
unemployment rate declined to 7.8 percent in November and held steady at that rate in
December, whereas we had projected it to be 8 percent in both months.3 Meanwhile, the
average workweek moved up from 34.3 hours in October to 34.5 hours in December, also
a little higher than we had anticipated. In contrast, the labor force participation rate fell
to 63.6 percent in November and was unchanged in December, whereas we had expected
it to stay flat at 63.8 percent in both months. Given these labor market readings and our

At the end of each calendar year, the BLS updates the seasonal-adjustment factors for the
household survey. The latest update caused the unemployment rate in November to be revised from
7.7 percent to 7.8 percent.

Page 17 of 112

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January 23, 2013 (Corrected)

Decomposition of Potential GDP
(Percent change, Q4 to Q4, except as noted)
Measure
Potential real GDP
Previous Tealbook
Selected contributions1
Structural labor productivity
Previous Tealbook
Capital deepening
Previous Tealbook
Multifactor productivity
Previous Tealbook
Structural hours
Previous Tealbook
Labor force participation
Previous Tealbook
Memo:
GDP gap2
Previous Tealbook

19741995

19962000

20012010

2011

2012

2013

2014

2015

3.0
3.0

3.4
3.4

2.2
2.2

1.5
1.5

1.8
1.8

1.9
2.0

2.1
2.1

2.1
2.2

1.4
1.4
.7
.7
.5
.5
1.5
1.5
.4
.4

2.6
2.6
1.5
1.5
.8
.8
1.0
1.0
.0
.0

2.1
2.1
.7
.7
1.2
1.2
.6
.6
-.3
-.3

1.3
1.3
.4
.4
.8
.8
.5
.5
-.4
-.4

1.4
1.4
.5
.5
.8
.9
.6
.6
-.3
-.3

1.5
1.6
.6
.6
.8
.9
.6
.6
-.3
-.3

1.7
1.7
.7
.7
.9
.9
.6
.6
-.3
-.3

1.8
1.8
.8
.8
.9
.9
.6
.7
-.3
-.4

-2.4
-2.4

1.9
1.9

-4.2
-4.2

-3.8
-4.0

-4.0
-4.1

-3.3
-3.6

-2.2
-2.6

-.9
-1.3

Note: For multiyear periods, the percent change is the annual average from Q4 of the year preceding the first year shown to Q4 of the
last year shown.
1. Percentage points.
2. Percent difference between actual and potential GDP in the final quarter of the period indicated. A negative number indicates that
the economy is operating below potential.

Structural and Actual Labor Productivity
(Nonfarm business sector)

Chained (2005) dollars per hour

54
Structural

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: U.S. Department of Labor, Bureau of Labor Statistics; Bureau of Economic Analysis; and staff assumptions.

Manufacturing Capacity Utilization Rate

GDP Gap
6

Percent

-2

-4

-6

-8

-10

1995
2000
2005
2010
2015
Note: The GDP gap is the percent difference between actual
and potential GDP; a negative number indicates that the
economy is operating below potential.
Source: U.S. Dept. of Commerce, BEA; staff assumptions.

-10

Percent

90
85

Average rate from
1972 to 2011

1995
2000
2005
2010
2015
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research.

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estimate of real GDP growth, it appears that labor productivity in the fourth quarter of
2012 was lower than we had expected in the December Tealbook.

Potential GDP and the Natural Rate of Unemployment
The decline in the unemployment rate since mid-2012 in the face of relatively
modest output gains led us to make some further small modifications to our supply-side
assumptions; these revisions help to alleviate the tension between our estimates of the
GDP gap and the unemployment gap. (See the box “The Recent Decline in the
Unemployment Rate” for further discussion.)
We made two adjustments. First, we revised down our estimates of structural
productivity over the past several years by enough to lower the level of potential output
by ¼ percent at the end of 2012. We carried forward some of this slower productivity
growth into this year, trimming potential output growth by roughly 0.1 percentage point
in 2013. Second, the faster-than-expected decline in the unemployment rate led us to
reconsider our path for the natural rate of unemployment. We have assumed for some
time that the natural rate was boosted during the recession by mismatches between labor
demand and labor supply, and that, when the labor market strengthened sufficiently, the
natural rate would begin to fall back toward its pre-recession level. In previous
Tealbooks, we assumed that this decline in the natural rate would not begin until 2015.
However, some indications of declines in mismatch, while not conclusive, now hint at the
possibility that the natural rate has already started to decline.4 Accordingly, we have
nudged our estimates in that direction. In particular, although we have continued to
assume that the natural rate reaches 5¾ percent by the end of 2015 (and decreases further
thereafter), we now assume that a very gradual decline began in 2012, which helps to
account for last year’s drop in the unemployment rate.

See, for example, the recent papers by Lazear and Spletzer (Edward P. Lazear and James R.
Spletzer (2012), “The United States Labor Market: Status Quo or a New Normal?” paper delivered at “The
Changing Policy Landscape,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in
Jackson Hole, Wyo., August 30–September 1) and Şahin, Song, Topa, and Violante (Ayşegül Şahin, Joseph
Song, Giorgio Topa, and Giovanni L. Violante (2012), “Mismatch Unemployment,” NBER Working Paper
Series 18265 (Cambridge, Mass.: National Bureau of Economic Research, August)). That said, other
analyses we look to for guidance on the evolution of the natural rate, such as the decomposition of the
Beveridge curve by Barnichon and Figura (Regis Barnichon and Andrew Figura (2012), “The Determinants
of the Cycles and Trends in U.S. Unemployment,” unpublished paper, Board of Governors of the Federal
Reserve System, Division of Research and Statistics, October) and the staff’s state-space model, do not yet
show any decline in the natural rate.

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The Recent Decline in the Unemployment Rate
During the second half of last year, the unemployment rate declined nearly
½ percentage point, from an average of 8.2 percent in the second quarter to an
average of 7.8 percent in the fourth quarter. (See the top figures of the “Labor
Market Developments and Outlook” exhibit.) In our view, this decline in the
unemployment rate reflects an improvement in labor market conditions, as it was
accompanied by relatively solid gains in payroll employment (the bottom figures).
However, this improvement in the labor market appears at odds with the tepid pace
of real GDP growth in the second half evaluated against our December Tealbook
assumptions for potential output growth and the natural rate of unemployment.
What might account for this discrepancy?
One possible explanation is that our supply-side assumptions in the December
Tealbook were wrong. Indeed, we cannot observe either potential output or the
natural rate of unemployment, and we must instead infer them from the joint
behavior of the unemployment rate and real GDP as well as other indicators. The
observed decline in unemployment—along with some evidence suggesting that labor
market mismatch might be beginning to improve—was an important factor causing
us to think that the natural rate may be starting to reverse the modest increase that
we think occurred during the recession. We now assume that the natural rate began
to edge down in 2012 and will continue to decline slowly to reach 5¾ percent at the
end of 2015, the same level as in the December Tealbook. In addition, we made a
further downward adjustment to our estimate of structural productivity growth in
recent years, which is how we had typically resolved these discrepancies in previous
Tealbooks. All told, after taking into account our new supply-side assumptions—and
also the staff’s estimates of the effects on the unemployment rate of the decline in
the number of people receiving emergency and extended Unemployment Insurance
benefits—GDP growth appears consistent with much, but not all, of the decline in the
unemployment rate during the second half of last year.
To be sure, misalignments between unemployment and real GDP growth are relatively
commonplace, and we did not feel compelled to make large enough revisions to our
supply-side assumptions to fully eliminate the discrepancy. For one thing, some of the
discrepancy may reflect changes in labor supply, such as labor force exits by
unemployed workers who have become discouraged by their job prospects. In
addition, real GDP is subject to considerable measurement errors, and, importantly,
the Bureau of Economic Analysis has not yet published an estimate for the fourth
quarter. Finally, it is possible that the unemployment rate has “gotten ahead of
itself,” and we could see unemployment coming down a bit less over the medium
term than one might have otherwise predicted in response to the projected
narrowing of the GDP gap. For these reasons, our projection for continuing declines
in the unemployment rate through the medium term depends crucially on our
anticipated pickup in real GDP growth.

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The Outlook for the Labor Market and Productivity
Given our revision to the level of structural productivity, the level of actual
productivity in the fourth quarter stood about ½ percent above our estimate of its longerrun trend, suggesting that firms continue to be stressing their workforces in a way that
they will not be able to sustain over the medium term. As in previous projections, we
expect firms to step up their hiring to reduce these pressures as they become less
apprehensive about the economic outlook.
Our projected path for gains in private payroll employment reflects this fading
apprehension as well as the anticipated acceleration in real GDP. In particular, we expect
private job gains to step up from 160,000 per month in the current quarter to about
170,000 per month in the second half of this year.5 As real GDP accelerates further after
2013, net hiring continues to strengthen to about 200,000 per month in 2014 and 250,000
per month in 2015. With this pace of hiring, the unemployment rate falls throughout the
projection period, dropping below the Committee’s threshold of 6½ percent on a
quarterly average basis in the fourth quarter of 2015.
The top-right figure of the “Labor Market Developments and Outlook” exhibit
compares our unemployment projection with our projection from September 2012, when
the Committee first tied its asset purchase decisions to an improvement in the outlook for
labor market conditions. Since last September, we have revised down our forecast for the
unemployment rate by 0.4 percentage point, on average, both over the second half of
2013 and over the whole of next year.6 By the fourth quarter of 2014, we now have the
unemployment rate reaching 7.1 percent, down from the 8.1 percent rate that prevailed
last August, the latest reading available to the Committee at the time of the September
FOMC meeting. Meanwhile, as shown in the middle-right figure in the exhibit, the
outlook for payroll employment growth has changed relatively little.

Resource Utilization
Labor market slack is expected to persist throughout the medium-term forecast,
with the unemployment rate at the end of 2015 still ½ percentage point above our
5

The slight deceleration in job growth in the first quarter relative to the fourth quarter largely
reflects distortions to seasonal adjustments because of the timing of the recession, which we think
exaggerated the reported pace of job growth in the fourth quarter. Adjusting for this distortion would lower
average employment growth in the fourth quarter to about 160,000 per month.
6
Because we now assume that the decline in the natural rate of unemployment begins in 2012
rather than 2015, the revision to the forecast of the unemployment rate slightly overstates the revision in the
projection of labor market slack during the intervening quarters.

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The Outlook for the Labor Market
(Percent change from final quarter of preceding period at annual rate)
2012
Measure

2011

2013

2014

2015

.1
1.2

1.2
1.0

1.8
1.8

1.8
1.9

157
157

160
153

165
158

205
200

253
262

64.1
64.0

63.7
63.7

63.7
63.8

63.6
63.7

63.5
63.7

63.4
63.5

8.7
8.7

8.2
8.2

7.8
8.0

7.6
7.8

7.1
7.4

6.3
6.5

.6
.6

.7
.7

Nonfarm private employment1
Previous Tealbook

175
175

Labor force participation rate2
Previous Tealbook
Civilian unemployment rate2
Previous Tealbook

Output per hour, nonfarm business
Previous Tealbook

1. Thousands, average monthly changes.
2. Percent, average for the final quarter in the period.
Source: U.S. Department of Labor, BLS; staff assumptions.

Inflation Projections
(Percent change at annual rate from final quarter of preceding period)
2012
Measure

2011

2013

2014

2015

1.4
1.6

1.4
1.3

1.5
1.4

1.6
1.5

1.0
1.0

1.3
1.5

2.2
2.3

1.1
1.1

1.5
1.5

11.9
11.9

-3.3
-3.3

8.0
7.5

-3.2
-4.4

-1.5
-1.7

-1.1
-1.6

Excluding food and energy
Previous Tealbook

1.7
1.7

2.0
2.0

1.0
1.2

1.6
1.6

1.7
1.6

1.7
1.7

Prices of core goods imports1
Previous Tealbook

4.3
4.3

.5
.5

-.5
-.1

1.7
1.1

1.5
1.5

2.5
2.5

1.6
1.6

Food and beverages
Previous Tealbook

5.1
5.1

Energy
Previous Tealbook

PCE chain-weighted price index
Previous Tealbook

1. Core goods imports exclude computers, semiconductors, oil, and natural gas.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

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Labor Market Developments and Outlook

Measures of Labor Underutilization
Percent

12
U-5*
Unemployment rate
Part time for economic
reasons**

11
10
9

12
11
10
9

8.5

Unemployment rate
Previous Tealbook
September 2012 Tealbook

9.0
8.5

8.0

7.5

7.0

6.5

Dec.

Percent

9.0

2002

2004

2006

2008

2010

2012

6.0

2012

2013

2014

2015

6.0

* U-5 measures total unemployed plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached
to the labor force.
** Percent of Current Population Survey employment.

Labor Force Participation Rate
Percent

67.5
Labor force participation rate*
Estimated trend**

67.0

67.5

66.5

66.0

65.5

65.0

64.5

64.0

Dec.

63.5
63.0

64.5

Labor force participation rate
Previous Tealbook
September 2012 Tealbook

67.0

66.5

Percent

64.5

64.0

63.5

64.0
63.5

2002

2004

2006

2008

2010

2012

63.0

2012

2013

2014

2015

63.0

* Published data adjusted by staff to account for changes in population weights.
** Includes staff estimate of the effect of Extended Employment Benefits.

Change in Payroll Employment*
Thousands

400
200

Dec.

400

200

300

200

100

-200

-400

-600

-600
Total
Private

-800
-1000

2002

2004

2006

2008

2010

2012

Thousands

400

-800

-100

-1000

-200

Total
Previous Tealbook
September 2012 Tealbook
2012

2013

-100

2014

2015

* 3-month moving averages in history; average monthly changes in each quarter during the forecast period.
Note: In September 2012, judgmental projections were prepared through 2015 for the Summary of Economic Projections variables including the
unemployment rate, while projections for other variables, including the labor force participation rate and payroll employment, were prepared only
through 2014. This exhibit therefore reports a 2015 projection from the September 2012 Tealbook only for the unemployment rate.

Page 23 of 112

400

-200

Domestic Econ Devel & Outlook

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January 23, 2013

Labor Market Developments and Outlook (2)
Initial UI Claims*
Thousands

700

500

650

475

600

450

550

500

700

Jan.
12

450

Thousands

500
475

Jan.
12

425

450
425

400

375

450

400

350

300

325

250

300

2002

2004

2006

2008

2010

2012

2011

300

2012

* 4-week moving average.
Source: U.S. Dept. of Labor, Employment and Training Administration

Hires and Quits*
Percent of private employment

5.5

Hires
Quits

5.0

4.5

4.0

3.5
3.0
Nov.

2.5

3.0

2.5

1.5
2006

2008

2010

1.0

2012

4.0

3.5

1.5
2004

4.5

3.5

2.0

2002

4.0

Hires
Quits

3.5

2.0

1.0

Percent of private employment

4.5

Nov.

2.5

2.0

1.5

1.0

2011

1.0

2012

* 3-month moving average.
Source: Job Openings and Labor Turnover Survey.

Job Openings
Percent*

4.5

4.0

3.5

Percent*

3.25

3.00

Nov.

3.0

2.5

2.0

1.5

2002

2004

2006

2008

2010

2012

3.25

1.5

2.75

2.50

2.25

* Percent of nonfarm payroll employment plus unfilled jobs, 3-month moving average.
Source: Job Openings and Labor Turnover Survey.

Page 24 of 112

2011

2012

2.25

Authorized for Public Release

January 23, 2013

estimate of the natural rate. We estimate that the level of real GDP was 4 percent below
its potential level at the end of 2012, and this gap is projected to narrow slowly to
1 percent by the end of 2015.
There appears to be less slack in the manufacturing sector than in the broader
economy, largely because of unprecedented declines in production capacity from 2007
to 2010.7 In particular, capacity utilization in manufacturing stood at 77.4 percent in
December, only about 1½ percentage points below its long-run average. The factory
operating rate is projected to move up to about its long-run average by the end of this
year.

The Outlook for Prices and Compensation
Recent data on consumer prices have been a bit softer than expected. Based on
the December CPI and PPI, we estimate that core PCE prices rose at an annual rate of
about ¾ percent in the fourth quarter, about ½ percentage point below the December
Tealbook and a substantial deceleration from the 2 percent pace in the first half of 2012.
The deceleration in prices since midyear was reasonably broad based. However, we
believe that some transitory factors have been holding down inflation recently, and we
anticipate core prices to increase about 1½ percent in the current quarter.8
Recent readings on inflation expectations have remained in the relatively narrow
range occupied over the past several years. Median 5-to-10-year expected inflation from
the Michigan survey ticked up to 2.9 percent in December—in line with its average over
the past 5 years—and remained at that level in the preliminary January survey.
Meanwhile, TIPS-based measures of inflation compensation for the next 5 years and for
5-to-10 years ahead have both edged up about 0.1 percentage point from their values at
the time of the December Tealbook.
Core import prices declined, on net, in the second half of 2012, likely contributing
to the softness in consumer price inflation in the past few months. Recent dollar
depreciation and higher commodity prices are expected to push up core import prices by
2½ percent in the current quarter; over the remainder of the projection, we expect core
7

We estimate capacity in the industrial sector based largely on survey data that attempt to capture
the highest level of output that plants can sustainably maintain based on realistic work schedules and
assuming that inputs like materials and labor are sufficiently available.
8
Some of the pickup in inflation over the near term reflects the observation that, for the past few
years, there has been a pattern of low inflation late in the year followed by higher readings early in the next
year, which we attribute to residual seasonality in the price data.

Page 25 of 112

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January 23, 2013

Inflation Developments and Outlook
(Percent change from year-earlier period)

Headline Consumer Price Inflation
Percent

6
CPI
PCE

3
Dec.

2
Nov.

-1

-2

-3

PCE - Current
PCE - Previous Tealbook

Percent

-3
0
2002
2004
2006
2008
2010
2012
2012
2013
2014
2015
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis.

Measures of Underlying PCE Price Inflation
Percent
4.0

4.0
Trimmed mean PCE
Market-based PCE excluding food and energy
PCE excluding food and energy

3.5
3.0
2.5

3.5

3.0

Core PCE - Current
Core PCE - Previous Tealbook

3.5
3.0

2.5

2.0

1.5

1.0

0.5

2.5
Nov.

2.0

1.5

1.0

0.5

0.0

Percent

3.5

0.0
0.0
2002
2004
2006
2008
2010
2012
2012
2013
2014
2015
Source: For trimmed mean PCE, Federal Reserve Bank of Dallas; otherwise, U.S. Dept. of Commerce, Bureau of Economic Analysis.

0.0

Labor Cost Growth (Private Industry)
Percent

3
Employment cost index
Average hourly earnings
Compensation per hour

2
1
0

2002

2004

2006

2008

2010

2012

Compensation per hour - Current
Compensation per hour - Previous Tealbook

3
Sept.
Dec.

Percent

2
1
0

Note: Compensation per hour value for 2012:Q3 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Page 26 of 112

2012

2013

2014

2015

Authorized for Public Release

January 23, 2013

Inflation Developments and Outlook (2)
(Percent change from year-earlier period, except as noted)

Commodity and Oil Price Levels
1967 = 100
Dollars per barrel
220
Brent crude oil history/futures (right axis)
CRB spot commodity price index (left axis)
1560
156
2200

1220

1967 = 100

1480

Dollars per barrel
200
Brent crude oil history/futures (right axis)
CRB spot commodity price index (left axis)
148
112

2000

122

880

Jan. 22 88

1120

540

Jan. 22 54

760

Jan. 22
76
Jan. 22
200

20
400
2002
2004
2006
2008
2010
2012
2011
2012
Note: Futures prices are the latest observations on monthly futures contracts.
Source: For oil prices, U.S. Dept. of Energy, Energy Information Agency; for commodity prices, Conference Research Board (CRB).

Energy and Import Price Inflation
18

Percent

Percent
PCE energy prices (right axis)
Core import prices (left axis)

15
12

50
40

10
Dec.

Nov.

-3

0
-10

-6

-20

-9

-30

-12

2002

2004

2006

2008

10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3

2010

2012

-40

Percent

PCE energy prices (right axis)
Core import prices (left axis)

25
20
15
10

Nov.

5
Dec.

0
-5

2011

-10

2012

Source: For core import prices, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis.

Long-Term Inflation Expectations
Percent

4.25
5-to-10-year-ahead TIPS
Michigan median next 5 to 10 years
SPF PCE median next 10 years

3.75
3.25

Jan. (p)

2.75

4.25

Percent

4.25

3.75

3.25

2.75

5-to-10-year-ahead TIPS
Michigan median next 5 to 10 years
SPF PCE median next 10 years

3.75
3.25
2.75

Dec.
2.25

2.25

Q4
1.75

2002

2004

2006

2008

2010

2012

4.25

Q4
1.75

1.75

2011

2012

Note: Based on a comparison of an estimated TIPS (Treasury inflation-protected securities) yield curve with an estimated nominal off-the-run
Treasury yield curve, with an adjustment for the indexation-lag effect.
p Preliminary.
SPF Survey of Professional Forecasters.
Source: For Michigan, Thomson Reuters/University of Michigan Surveys of Consumers; for SPF, the Federal Reserve Bank of Philadelphia; for
TIPS, FRB staff calculations.

Page 27 of 112

1.75

Domestic Econ Devel & Outlook

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import prices to increase at a 1½ percent pace, in line with the relatively flat trajectory for
commodity prices and the assumed pace of dollar depreciation.
We continue to expect that inflation will remain subdued over the medium term
due to stable long-run inflation expectations, relatively small movements projected for
commodity and import prices, and persistent slack in resource utilization. In response to
a modest reduction in resource slack, core PCE inflation edges up from 1.6 percent in
2013 to 1.7 percent in both 2014 and 2015, essentially unchanged from the December
projection.
Food prices, after increasing at an annual rate of only ½ percent in the third
quarter, are estimated to have increased about 2 percent in the fourth quarter, likely
reflecting some pass-through to retail prices of the sharp run-up in crop prices associated
with last summer’s drought. We expect food price inflation to remain elevated in the first
half of this year but then to slow thereafter as the effects of the drought wane.
Meanwhile, our forecast for consumer energy prices—a moderate rise in the fourth
quarter and a sharp drop-off in the first, followed by gradual reductions throughout the
remainder of the projection—reflects the projected path of crude oil prices and is little
revised from the December Tealbook.
All told, after registering at an annual rate of 1½ percent in the third quarter of
2012, total PCE price inflation appears on track to slow to 1¼ percent in the fourth
quarter and 1 percent in the current quarter—both about ¼ percentage point below our
December projection. In contrast, our medium-term projection is just a touch higher than
in the December Tealbook, with total PCE price inflation averaging 1.5 percent per year.
Thus, throughout the medium term, the projection for PCE inflation remains well below
the Committee’s threshold level of 2½ percent.
Increases in labor compensation remain subdued. Average hourly earnings
(AHE) in November and December were slightly higher than expected; nevertheless,
recent data on personal income suggest that compensation per hour, which includes
additional sources of labor income and covers a broader range of workers than the AHE
measure, advanced at an annual rate of 1 percent in the fourth quarter, ¾ percentage point
less than our December Tealbook forecast. For the first quarter of this year, our forecast
for compensation growth is little revised at an annual rate of about 2½ percent. We
expect growth in compensation per hour to rise gradually over the medium term, from
2¾ percent in 2013 to 3½ percent in 2015, as the labor market gradually tightens.

Page 28 of 112

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January 23, 2013

The Long-Term Outlook
We have extended the staff’s forecast through 2020 using the FRB/US model and
our assumptions about long-run supply-side conditions, fiscal policy, and other factors.
The contour of the long-term outlook depends on the following key assumptions:


Monetary policy seeks to stabilize PCE inflation at 2 percent over the longer
term, consistent with the Committee’s strategy statement after the January
2012 meeting. As was noted earlier, the Committee’s threshold for
unemployment is crossed in the baseline projection in late 2015. In the
extension period, the federal funds rate is therefore set according to the
inertial Taylor (1999) rule.



The Federal Reserve’s holdings of securities continue to put downward
pressure on longer-term interest rates in 2016 and 2017, albeit to a
diminishing extent. By 2018, the process of portfolio normalization is
essentially complete.



Risk premiums on corporate equities and bonds continue to decrease gradually
to normal levels, and financial institutions further ease their lending standards.



The federal budget deficit (measured on a NIPA basis) begins to widen after
2016, primarily reflecting fast-rising transfer payments for retirement and
health-care programs. Federal debt stabilizes temporarily at around
75 percent of GDP but then rises to 78 percent of GDP by the end of the
decade.



The real foreign exchange value of the dollar depreciates 1¾ percent per year
in 2016 and 2017 and moves down more slowly thereafter. The price of crude
oil declines slightly in 2016 and then holds steady in real terms. Foreign real
GDP growth is 3¼ percent in 2016 and slows to a 3 percent annual rate late in
the decade.



The natural rate of unemployment continues to decline in 2016 and 2017,
from 5¾ percent at the end of 2015 to 5¼ percent in the fourth quarter of
2017, as labor market functioning improves further; it remains at that level in
the longer run. Potential GDP increases at an average annual rate of just over
2 percent in the 2016–20 period and moves up to a 2¼ percent pace in the

Page 29 of 112

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January 23, 2013

The Long-Term Outlook
(Percent change, Q4 to Q4, except as noted)

Measure

2012

2013

2014

2015

2016

2017

Longer run

Real GDP
Previous Tealbook

1.6
1.7

2.7
2.5

3.2
3.2

3.5
3.6

3.2
3.2

2.1
2.5

2.3
2.5

Civilian unemployment rate1
Previous Tealbook

7.8
8.0

7.6
7.8

7.1
7.4

6.3
6.5

5.6
5.8

5.3
5.4

5.2
5.2

PCE prices, total
Previous Tealbook

1.5
1.6

1.4
1.3

1.5
1.4

1.6
1.5

1.8
1.8

2.0
1.9

2.0
2.0

Core PCE prices
Previous Tealbook

1.5
1.6

1.6
1.6

1.7
1.6

1.7
1.7

1.8
1.8

2.0
1.9

2.0
2.0

Federal funds rate1
Previous Tealbook

.2
.2

.1
.1

.3
.4

1.8
2.0

2.8
3.2

4.0
4.3

1.7
1.7

2.8
2.8

3.5
3.6

4.1
4.2

4.3
4.4

4.2
4.4

4.8
5.1

10-year Treasury yield1
Previous Tealbook

1. Percent, average for the final quarter of the period.

Real GDP

Unemployment Rate
4-quarter percent change

Potential GDP

Real GDP
2004

2008

2012

2016

Percent
5
4
3
2
1
0
−1
−2
−3
−4
−5

2020

10
Unemployment rate

8
Natural rate
with EEB
adjustment

7
6
Natural rate
5
4

2004

PCE Prices

2008

2012

2016

2020

Interest Rates
4-quarter percent change

Percent
5

Total PCE prices
4
BBB corporate

10-year Treasury

2
PCE prices
excluding
food and
energy

1
0

Federal
funds rate

−1
2004

2008

2012

2016

2020

2004

2008

2012

2016

2020

Note: In each panel, shading represents the projection period, and dashed lines are the previous Tealbook.
Page 30 of 112

10
9
8
7
6
5
4
3
2
1
0

Authorized for Public Release

January 23, 2013

longer run, which is ¼ percentage point lower than in the previous Tealbook
due to an adjustment in our projection of capital deepening.
The economy is projected to enter 2016 with output below its potential level,
unemployment above its natural rate, and inflation below the long-run objective of the
Committee. In the staff’s long-term forecast, further improvements in household and
business confidence, diminishing uncertainty, and supportive financial conditions enable
real GDP to rise 3¼ percent in 2016. Thereafter, gains in GDP move down closer to their
potential pace, reflecting the progressive withdrawal of monetary accommodation.
Unemployment falls through 2017 to 5¼ percent. Long-run inflation expectations are
assumed to remain well anchored, and with the margin of slack in labor and product
markets diminishing, consumer price inflation is close to 2 percent in 2017. The nominal
federal funds rate is above 3½ percent by the end of the decade and eventually stabilizes
at around 4 percent, ¼ percentage point lower than in the previous Tealbook, reflecting
the downward revision to long-run potential GDP growth.

Page 31 of 112

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January 23, 2013

Evolution of the Staff Forecast
Change in Real GDP
Percent, Q4/Q4
5

2012

2013

2014

2015

9/15

10/27 12/8

1/19

2010

3/9

4/20

6/15

8/3

9/14

10/26 12/7

1/18

2011

3/7

4/18

6/13

7/25

9/5

10/17

12/5

2012

1/23

3/13

4/24

6/12

2013

Tealbook publication date

Unemployment Rate
Percent, fourth quarter
10.5

10.5

10.0

9.5

9.0

8.5

8.0
7.5

8.0
2013

2012

7.5

7.0

2014

7.0

2015

6.5
6.0

6.5
9/15

10/27 12/8

1/19

2010

3/9

4/20

6/15

8/3

9/14

10/26 12/7

1/18

2011

3/7

4/18

6/13

7/25

9/5

10/17

12/5

2012

1/23

3/13

4/24

6/12

6.0

2013

Tealbook publication date

Change in PCE Prices excluding Food and Energy
Percent, Q4/Q4
2.5

2.5

2.0

2.0
2015

1.5

1.5
2014
2013

1.0

2012
0.5

0.0

0.5

9/15

10/27 12/8

2010

1/19

3/9

4/20

6/15

8/3

9/14

10/26 12/7

2011

1/18

3/7

4/18

2012

Tealbook publication date

Page 32 of 112

6/13

7/25

9/5

10/17

12/5

1/23

3/13

2013

4/24

6/12

0.0

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

International Economic Developments and Outlook
Recent indicators suggest a modest pickup in foreign economic growth in the
fourth quarter, albeit to a still sluggish pace of 2¼ percent. This reading is little changed
from our December Tealbook projection, as disappointing data in some regions were
offset by positive surprises in others. Economic activity in Europe appears to have
contracted a bit more in the fourth quarter than we had anticipated, and we also revised
fourth-quarter GDP release from China was very strong, and Japanese consumption was
surprisingly resilient.
In the first half of this year, we expect overall foreign growth to pick up further to
nearly 3 percent, as easing of financial stresses leads output in the euro area to level out
and the recent strength in the Chinese economy spills over into other emerging Asian
economies. Subsequently, as fiscal and financial headwinds wane, monetary policy
remains accommodative, and U.S. economic activity accelerates, foreign growth should
increase to 3½ percent in 2014 and 2015. Our projection for 2013 is revised up a bit
based on more momentum in the Chinese economy and greater policy stimulus in Japan.
For the remainder of the forecast period, our foreign outlook is about unchanged.
The risk of a slump in global economic activity has diminished amid continuing
improvement of European financial conditions and more-solid evidence of a pickup in
Asian growth, particularly in China. Nonetheless, Europe continues to face formidable
economic and political challenges in implementing fiscal consolidation, especially during
its recession. Accordingly, there remains a danger that the European crisis could
intensify with severe spillovers to the rest of the world, as discussed in the Risks and
Uncertainty section. Moreover, although the resurgence of the Chinese economy has, for
now, eased fears of a hard landing, we remain alert to the fact that still-inflated property
markets in China and in several of its neighbors pose a threat to the region’s growth. All
that said, the reduction of tail risks in Europe and China, as well as perceived progress in
addressing the U.S. fiscal cliff, have buoyed investor sentiment around the globe. This
improvement in sentiment could lead to higher spending and growth abroad than we have
written down in our baseline forecast, a scenario also described in the Risks and
Uncertainty section.

Page 33 of 112

Int’l Econ Devel & Outlook

down our estimate of Canadian GDP growth in light of weak exports. In contrast, the

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

Recent Foreign Indicators
Nominal Exports

Industrial Production
Jan. 2008 = 100

Int’l Econ Devel & Outlook

2008

2009

Jan. 2008 = 100

140

Foreign
AFE
EME*

Foreign
AFE*
EME**

130

2010

2011

2012

120
115

120

110

105

100

60
2013

* Excludes Venezuela.

2008

2009

2010

2011

2012

80
2013

* Excludes Australia and Switzerland.
** Excludes Colombia, Hong Kong, Philippines, and Venezuela.

Retail Sales

Employment
12-month percent change

4-quarter percent change

Foreign
AFE*
EME**

Foreign
AFE
EME*

5
4

15
3
10

2
1

0
0
-1

2008

2009

2010

2011

2012

-5
2013

* Excludes Australia and Switzerland.
** Includes Brazil, China, Indonesia, Korea, Singapore, and Taiwan.

Consumer Prices: Advanced Foreign Economies
12-month percent change
Headline
Core*

2008

2009

2010

2011

2012

-2
2013

* Excludes Argentina and Mexico.

Consumer Prices: Emerging Market Economies
12-month percent change
10
Headline
Ex. food--East Asia
Ex. food--Latin America
8

5
4

4
2
2
1

2008

2009

2010

2011

2012

-1
2013

-2

2008

Note: Excludes Australia, Sweden, and Switzerland.
* Excludes all food and energy; staff calculation.
Source: Haver Analytics and CEIC.

Page 34 of 112

2009

2010

2011

2012

-4
2013

Class II FOMC - Restricted (FR)

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January 23, 2013

The Foreign Outlook

2012
Q3

2013
Q2

2014

2015

2.7
2.6

1.8
1.8

2.2
2.1

2.7
2.5

3.1
2.9

3.3
3.1

3.4
3.4

3.5
3.5

Advanced foreign economies
Previous Tealbook

1.0
1.0

.2
.2

.3
.5

1.0
.8

1.4
1.2

1.8
1.6

2.0
2.0

2.3
2.3

Emerging market economies
Previous Tealbook

4.4
4.4

3.3
3.5

4.1
3.9

4.5
4.2

4.8
4.6

4.8
4.7

4.8
4.9

2.3
2.3

2.3
2.2

2.4
2.5

2.2
2.3

2.3
2.2

2.6
2.5

2.6
2.6

Advanced foreign economies
Previous Tealbook

1.4
1.4

.8
.8

1.7
1.7

1.3
1.2

1.7
1.6

1.7
1.7

Emerging market economies
Previous Tealbook

3.0
3.0

3.4
3.3

3.0
3.1

2.8
3.1

3.1
3.0

3.1
3.1

3.3
3.2

3.3
3.3

Real GDP
Total foreign
Previous Tealbook

Consumer Prices
Total foreign
Previous Tealbook

Int’l Econ Devel & Outlook

(Percent change, annual rate)

Note: Annualized percent change from final quarter of preceding period to final quarter of period indicated.

Real GDP
Percent change, annual rate
Current
Previous Tealbook

Percent change, annual rate

Emerging market economies

15
10

0
Advanced foreign economies

Total foreign

-5

-10
2008 2009 2010 2011 2012 2013 2014 2015

Consumer Prices
Percent change, annual rate

Total foreign

Percent change, annual rate
Emerging market economies

-2

Advanced foreign economies

-4
2008 2009 2010 2011 2012 2013 2014 2015

Page 35 of 112

-2
-4

2008 2009 2010 2011 2012 2013 2014 2015

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January 23, 2013

We estimate that foreign inflation in the fourth quarter came in at an annual rate
of a little under 2½ percent, about the same rate that prevailed in the third quarter, with an
increase in inflation in the advanced foreign economies (AFEs) and emerging Asia being
roughly offset by a steep decline in inflation in Mexico (which has a large weight in our
aggregate of total foreign prices). We expect foreign inflation to remain quiescent over
the forecast period, continuing to average about 2½ percent, held down by substantial
economic slack in the AFEs and only muted commodity price pressures.

Int’l Econ Devel & Outlook

ADVANCED FOREIGN ECONOMIES
We estimate that real GDP in the AFEs rose only ¼ percent in the fourth quarter,
a bit below our December Tealbook projection. Indicators suggest that activity in Europe
contracted a little more than we had assumed, and Canadian export and production data
also proved disappointing. Only partially offsetting these data, in Japan, consumer
spending held up surprisingly well, leading us to erase the small contraction we had
penciled in.
In the coming quarters, gradual progress in the resolution of the euro-area crisis
and a pickup in demand in the United States and emerging market economies (EMEs)
should help recovery in the AFEs gain traction, leading to an increase in real GDP growth
in these economies to about 1½ percent this year. The outlook for this year is revised up
a touch, largely based on more-stimulative policies in Japan and easier financial
conditions in Europe than we anticipated in December. We see AFE growth picking up
further to 2 percent in 2014 and 2¼ percent in 2015, about unchanged from the previous
Tealbook projection. Although these growth rates represent a considerable improvement
from last year’s paltry pace of under ¾ percent, they are still too low to eliminate the
substantial resource slack in these economies.
Data on consumer prices confirm our projection in the December Tealbook that
AFE inflation stepped up from ¾ percent at an annual rate in the third quarter to
1¾ percent in the fourth, reflecting a bounceback in inflation readings in Canada, a large
hike in university tuition fees in the United Kingdom, and the stabilization of Japanese
food prices following sharp declines. Thereafter, we project that AFE inflation will settle
around 1½ percent, held down by sizable resource slack and subdued commodity price
pressures. We expect the major AFE central banks to maintain their policy rates and
asset purchase programs at current levels through much of the forecast period, with the
major exception of Japan, where we anticipate further easing.

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Euro Area
Financial conditions in the euro area have eased further since the December
Tealbook, as European authorities made additional progress in addressing the fiscal and
banking crisis. Last month, the Greek government successfully exchanged about
€30 billion of its debt held by private investors at a discounted price, thus fulfilling a key
requirement of the agreement reached with the European Union and the International
Monetary Fund (IMF) in late November. As a result, euro-area governments and the IMF
were able to resume Greece’s financial assistance. The agreement also improved the
concerns, at least for the time being, over a possible Greek exit from the euro area.
European governments also made some progress in their protracted negotiations
regarding European banking union, agreeing in December on key details of a single
supervisory mechanism for European banks. In early 2014, the European Central Bank
(ECB) is slated to take over the supervision of large euro-area banks from national
authorities and be empowered to issue supervisory directives to any euro-area bank,
although many details remain to be worked out.
Over the next couple of years, we envision further moderate easing of financial
stresses against the backdrop of additional steps toward banking union, progress by the
Spanish government in reducing its deficit and shoring up its banking system, and further
fiscal adjustment in other peripheral economies. However, the process of financial
normalization will likely be interrupted by periods of heightened financial tensions. In
the near term, uncertainty about Spain’s fiscal performance and the outcome of Italy’s
upcoming national election could weigh on investors’ sentiment. Further down the road,
Greece will require additional assistance, and more generally, peripheral economies will
face severe challenges balancing their budgets in the face of continuing economic
weakness. These developments could prompt more adverse reactions by investors than
we currently anticipate, leaving open the possibility of more severe outcomes than in our
baseline.
Recent data point to a somewhat sharper-than-expected contraction of 1¼ percent
at an annual rate in euro-area GDP in the fourth quarter. Industrial production and retail
sales in November remained significantly below their third-quarter levels, and the
unemployment rate edged up to a record-high 11.8 percent. Activity in Germany
weakened noticeably; authorities noted that German GDP may have contracted as much
as 2 percent in the fourth quarter. Other indicators, however, have been more positive.

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terms on official debt, thus lightening Greece’s debt burden and greatly alleviating

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In December, euro-area economic sentiment improved further and the composite PMI,
while still in contractionary territory, popped up to a level not seen since early 2012.
Accordingly, we expect euro-area GDP to stabilize in the first half of 2013. Thereafter,
the pickup in global demand, the gradual normalization of financial conditions, and
reduced fiscal drag should help growth increase to 1 percent in the second half of the
year, 1½ percent in 2014, and 2 percent in 2015. This outlook is a bit more optimistic
than in the December Tealbook but is still quite anemic in light of the region’s substantial

Int’l Econ Devel & Outlook

resource slack.
Euro-area inflation increased slightly to 2½ percent at an annual rate in the fourth
quarter, reflecting increases in energy and food prices. Looking ahead, amid declining
energy prices and a large output gap, we expect inflation to hover around 1½ percent,
little changed from the December Tealbook. The Governing Council of the ECB at its
January meeting unanimously decided to keep its benchmark policy rate at ¾ percent. As
financial tensions slowly abate and the economy gradually recovers, we expect the ECB
to keep rates on hold through 2015 while providing ample liquidity support to banks.
This assumption is a change from our December Tealbook assumption, which called for a
policy rate cut by the ECB in early 2013. Although the euro-area outlook is not
substantially stronger than it was last month, comments by ECB officials after their
January meeting indicated no appetite for near-term rate cuts.

Japan
Parliamentary elections in Japan in December resulted in a new government,
bringing the Liberal Democratic Party back to power. Newly elected Prime Minister
Shinzo Abe (who also previously served as prime minister from September of 2006 to
September of 2007) introduced a large fiscal stimulus program to revive the economy and
called for aggressive monetary easing to end deflation. These developments contributed
to a stock market rally and a substantial depreciation of the yen. (See the box “Recent
Policy Developments in Japan.”)
Recent data suggest that Japanese economic activity, after declining for two
quarters, edged up at an annual pace of ¼ percent in the fourth quarter, an improvement
relative to the further contraction we had projected in the December Tealbook. Even
though industrial production and exports continued to decline early in the quarter and the
manufacturing PMI pointed to further contraction through December, real consumption
increased at a surprisingly solid pace in October and November. In addition,

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manufacturers reported plans for output expansion in December and January. In light of
the weaker yen and greater policy stimulus being provided by the new government, we
now call for Japanese growth to increase to 1¾ percent in 2013, up about ¾ percentage
point from the December Tealbook. However, growth will then likely fall back to an
average pace of only ½ percent in 2014 and 2015, a touch lower than in the previous
forecast, as the stimulus measures wind down and planned hikes in the consumption tax
go into effect.

deflation moderated from an annual rate of 2 percent in the third quarter to ½ percent in
the fourth. On December 20, the Bank of Japan (BOJ) announced a moderate expansion
of its Asset Purchase Program, and on January 22, amid mounting political pressure, it
took further actions, including the introduction of a 2 percent inflation target. We deem
that these recent measures fall well short of what is needed to break from a long history
of persistent deflation. Indeed, with substantial resource slack and recent core inflation
readings below negative 1 percent, we project that consumer prices—abstracting from the
temporary boost from the consumption tax hikes—will remain about flat over the forecast
period. This projection represents only a slight upward revision to our previous inflation
forecast. However, the BOJ may well take bolder action to boost prices once new
leadership is appointed by Prime Minister Abe, as the terms of Governor Shirakawa and
his two deputies expire soon.

United Kingdom
Recent data suggest that real GDP growth in the United Kingdom dropped from
3¾ percent in the third quarter to slightly negative in the fourth, as the boost from the
summer Olympics disappeared. Notably, retail sales declined through December,
industrial production and goods exports through November stood below their
third-quarter averages, and the composite PMI lingered near 50 throughout the quarter.
We continue to project that U.K. real GDP will expand at about a 1½ percent pace this
year, supported by an abatement of European financial stresses and stronger global
activity. Accommodative monetary policy and diminished fiscal drag should help GDP
growth increase further to 2¼ percent in 2014 and 2½ percent in 2015, unchanged from
our projection in the December Tealbook.
The latest hikes in retail energy prices and university tuition fees lifted inflation to
4¾ percent at an annual rate in the fourth quarter. We expect abundant resource slack to

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With food prices leveling off after earlier declines, we estimate that Japanese

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Int’l Econ Devel & Outlook

Recent Policy Developments in Japan
Following parliamentary elections on December 16, the Liberal Democratic Party (LDP)
returned to power in Japan, and its leader, Shinzo Abe, became the new prime minister.
Mr. Abe, who previously served as prime minister from 2006 to 2007 but did not initiate
any important economic programs at the time, swiftly put forward a large fiscal stimulus
program aimed at reviving economic growth and forcefully called for aggressive
monetary policy easing to overcome deflation. These moves have prompted strong
responses in financial markets and further actions by the Bank of Japan (BOJ), but absent
additional stimulus as well as structural reforms, these actions are unlikely to end Japan’s
prolonged economic slump.
The Japanese government’s initiatives follow two years of very weak growth. Real GDP,
shown in the upper-left figure on the next page, has yet to regain its level before the
global financial crisis, held down by a weak global recovery, a stronger yen, and the
disastrous March 2011 earthquake and tsunami. To jumpstart the economy, the new LDP
government unveiled a ¥10.3 trillion (about 2 percent of GDP) stimulus package, with the
bulk of the spending directed to construction projects. With only half of the package
consisting of genuine increases in spending, we estimate that these measures will boost
the level of GDP by about 1 percent by mid-2014. However, the new stimulus package
also exacerbates Japan’s fiscal problems, pushing the public deficit from 10 percent of
GDP in 2012 to nearly 11 percent in 2013. With the gross public debt projected to exceed
220 percent of GDP this year, the LDP government has stressed that it will adhere to the
medium-term fiscal goals laid out by the previous administration, which call for the
government to halve its deficit by 2015 and achieve a fiscal surplus by 2020. Accordingly,
we anticipate that the previously legislated plan to double the consumption tax rate over
2014 and 2015 will still be implemented and, thus, that the fiscal impulse will turn negative
next year.
Japan also continued to experience persistent deflation over the past year, despite the
BOJ’s implementation of its large Asset Purchase Program (APP) and its adoption in
February 2012 of a 1 percent inflation goal (see upper-right figure on the next page.) On
December 20, the BOJ increased the size of its APP from ¥91 trillion to ¥101 trillion,
pointing to a weakening economic situation. Amid mounting pressures from the new
government, the BOJ announced further measures on January 22. First, it introduced an
inflation target of 2 percent. Second, starting in January 2014, the BOJ intends to
conduct open-ended purchases at a monthly rate of ¥13 trillion rather than fixing the total
purchase amount. However, this should result in only a modest expansion of its APP, as
most of the purchases would merely replace maturing assets in the BOJ’s portfolio. The
BOJ stopped short of more aggressive measures, such as a significant lengthening of the
maturity of assets targeted by the APP, which is now only one to three years, or explicitly
linking the conduct of future monetary policy to the achievement of an economic target,
such as sustained inflation above 1 or 2 percent.
The statements and actions of the Abe government, along with more general
improvements in global risk sentiment, prompted a strong financial market response.
Since the time of the December Tealbook, the yen depreciated 8 percent against the U.S.
dollar, and the Nikkei outperformed other stock markets, soaring more than 13 percent

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(see the two bottom figures on this page). In contrast, Japanese sovereign bond yields
(not shown) rose just a little, suggesting that investors’ concerns about fiscal
sustainability have not increased despite the large new stimulus program.

Japan also faces deep structural problems—the growth rate of potential GDP has fallen
to ½ percent—and the new administration has so far shown little intention of tackling
these problems. Measures aimed at improving potential output growth—such as
enabling more immigration and more women in the labor force to offset a rapidly aging
population, deregulation of the services sector to boost productivity, and closer
integration with emerging Asia to sustain exports—should be top priorities for Japanese
policymakers.

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Although the stimulus package and the BOJ easing measures should help support
economic growth over the near term, they amount to modest expansions of policies tried
before with limited success. Accordingly, these initiatives alone will likely prove
inadequate to achieve the new 2 percent inflation target and restore the dynamism of
Japan’s economy over the longer term. The BOJ will likely take bolder steps to overcome
deflation once a new leadership is in place—the terms of Governor Shirakawa and his
two deputies expire by early April—though much uncertainty remains.

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help bring inflation down to 2 percent in 2013 and about 1¾ percent over the remainder
of the forecast period. As anticipated, the Bank of England (BOE) kept the Bank Rate at
½ percent and the size of its quantitative easing program, now completed, at £375 billion
over the intermeeting period. We expect the BOE to keep policy on hold over the
forecast period, although the Funding for Lending Scheme initiated last August may
provide further stimulus.

Canada
Int’l Econ Devel & Outlook

We now estimate that real GDP growth in Canada stepped up to an annual rate of
only 1½ percent in the fourth quarter, ½ percentage point less than previously anticipated.
Monthly GDP in October and exports through November were weak. However, data
from late in the fourth quarter were somewhat better. In December, the unemployment
rate inched down to a four-year low of 7.1 percent, and the manufacturing PMI edged up
following five consecutive monthly declines. Also, the most recent Bank of Canada
Business Outlook Survey reports a small improvement in business sentiment. The
positive tone of the most recent domestic data, along with the projected acceleration in
U.S. GDP, leads us to forecast growth of 2 percent in 2013, rising to nearly 3 percent by
the end of the forecast period. This projection is little changed from the December
Tealbook.
Recent price data suggest that fourth-quarter CPI inflation, at an estimated
1¾ percent, was somewhat lower than we had expected. We project that inflation will
gradually increase to 2 percent by the end of the forecast period. This outlook is
¼ percentage point higher in 2013 due to higher oil prices and firmer growth. Given
contained inflation pressures and a persistent though modest output gap, we continue to
expect the Bank of Canada to wait until mid-2014 before initiating a slow rise in its main
policy rate from the current level of 1 percent.

EMERGING MARKET ECONOMIES
We now estimate that real GDP growth in the EMEs stepped up to an annual rate
of more than 4 percent in the fourth quarter from 3¼ percent in the third. The pickup
reflects both stronger domestic demand as well as a recovery of EME exports;
across-the-board weakness in EME exports appears to be behind us, although exports to
the euro area remain weak. The fourth-quarter GDP growth estimate is ¼ percentage
point higher than we wrote down in the December Tealbook, largely reflecting stronger

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data from emerging Asia—especially China’s surprisingly high fourth-quarter GDP
release—which more than offset a downward revision in Mexico.
We anticipate that EME growth will step up further to 4¾ percent in the first half
of this year, supported by an acceleration of activity in the United States, the spillover of
the strength in China to the rest of emerging Asia, and continued accommodative
macroeconomic policies. This forecast is ¼ percentage point higher than in the
December Tealbook, reflecting a more positive outlook for U.S. activity—including U.S.
carry-forward of the stronger tone that incoming data are suggesting. We look for EME
growth to increase only slightly over the remainder of the forecast period. Although
demand from the advanced economies is expected to pick up further, EME output is
already close to potential and policy accommodation is assumed to be gradually
withdrawn. Beyond the near term, the EME growth outlook is little changed from the
December Tealbook.
Headline inflation in several EMEs increased in the fourth quarter because of
idiosyncratic food price increases and other country-specific factors. But the effect of
these developments on aggregate EME inflation was more than offset by a sharp decline
in Mexican inflation, reflecting an unwinding of a previous rapid run-up in food prices.
Thus, we estimate that overall inflation in the EMEs tapered off to 3 percent in the fourth
quarter from about 3½ percent in the third. This year, we expect overall EME inflation to
average about 3 percent before edging up to 3¼ percent in 2014 and 2015. Monetary
policy remained generally accommodative in these economies, and the central banks of
Israel and Colombia lowered policy rates, responding to concerns about economic
growth.

China
By our estimate, Chinese real GDP grew 9½ percent at an annual rate in the
fourth quarter, 1¼ percentage points higher than we projected in December. 1 This pace
of activity appears to be quite consistent with other recent indicators. Industrial
1

There is no official series for the level of Chinese real GDP and thus estimates of Chinese
economic growth from various sources can differ significantly. The staff’s quarter-on-quarter growth
estimates are constructed from the official series of four-quarter changes in real GDP, and should be
viewed as having relatively wide confidence bands.

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manufacturing production, which is especially relevant for Mexico—and some

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production accelerated in the fourth quarter, supported in part by an improvement in
external demand as exports grew briskly after stagnating in the previous quarter. In
addition, retail sales and fixed-asset investment continued to grow at their relatively
robust third-quarter rates. Given the increased momentum in the economy, we marked
up the forecast for Chinese growth about ½ percentage point over the first half of this
year, to 8½ percent. We project that Chinese growth will taper off to 8 percent by 2015,
reflecting a gradual decline in trend growth in the economy. Although problems in the
property market and the banking sector persist, the risk of a hard landing appears to have
Int’l Econ Devel & Outlook

faded somewhat in light of the strong recent readings on economic activity.
In the fourth quarter, Chinese headline inflation came in at an annual rate of
2 percent, up from 1¾ percent in the previous quarter, reflecting a sharp increase in pork
and vegetable prices in December. Although we believe the recent increase in food
prices will be reversed, we expect the solid economic expansion and associated strong
wage growth to lead inflation to gradually edge up, averaging 2¾ percent this year and
3 percent thereafter.

Other Emerging Asia
In the rest of emerging Asia, data suggest that real GDP growth moved up from
2¾ percent in the third quarter to a still below-trend 3¾ percent in the fourth, about
½ percentage point higher than the December Tealbook. Industrial production, PMIs,
and exports rebounded in East Asia during the fourth quarter from their weakness earlier
in the year. India’s economy also appears to be gaining momentum, with growth
estimated to have risen to 6 percent in the fourth quarter after bottoming out at
3¼ percent in the third. We project growth in emerging Asia excluding China to increase
further to about 4¼ percent this year and 4¾ percent in 2014 and 2015, supported by
positive spillovers from Chinese growth, a recovery of demand from the advanced
economies, and accommodative macroeconomic policies. In the near term, this outlook
is about ¼ percentage point higher than in the December Tealbook but is unchanged for
2014 and 2015.
We estimate that inflation in the region increased to an annual rate of 3¾ percent
in the fourth quarter from 3 percent in the third. The increase was largely driven by a
steep rise in inflation in Hong Kong after the removal of a public housing subsidy and
also a moderate rise in Korea, reflecting a resumption of food price inflation and
increases in transportation costs. We project that headline inflation in the region will fall

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January 23, 2013

back a bit and average about 3¼ percent over the forecast period, roughly in line with our
previous Tealbook forecast.

Latin America
We estimate that real GDP growth in Mexico picked up to a still-lackluster pace
of 2¼ percent in the fourth quarter from 1¾ percent in the third. We project that,
consistent with the pickup in U.S. manufacturing production, growth will increase to
4 percent this year and remain at about that pace in 2014 and 2015. The fourth-quarter
weaker-than-expected readings on Mexican industrial production. Nonetheless, we
marked up Mexican GDP growth about ¼ percentage point this year, in light of the
upward revision to U.S. manufacturing.
We believe that real GDP growth in South America increased to an annual rate of
3¼ percent in the fourth quarter from a downward-revised 2¼ percent in the third. We
expect growth in the region to increase to 3½ percent this year and further to 3¾ percent
in 2014 and 2015. In Brazil, the data have been mixed. Both the PMI and exports
increased in the fourth quarter and retail sales continued to show robust growth through
November. However, industrial production remained weak. On balance, these data are
consistent with a rise in real GDP growth to about 3¼ percent in the fourth quarter. We
continue to project Brazilian growth to increase gradually over the forecast period, to
3¾ percent this year and about 4 percent in 2014 and 2015, as the recovery strengthens,
supported by the effects of policy accommodation and a pickup in the advanced
economies.
Mexican inflation declined to an estimated annual rate of 3 percent in the fourth
quarter from 6½ percent in the third. Much of this decline was related to the expected
unwinding of third-quarter food price increases, but the fourth-quarter reading was still
¾ percentage point lower than previously anticipated. We see Mexican inflation
moderating a bit further in the current quarter but then, after the food price cycle plays
out, increasing to about 3½ percent in 2014 and 2015. In Brazil, inflation remained
elevated in the fourth quarter at an annual rate of 7½ percent, somewhat higher than
previously expected, as food price pressures remained and services prices rose more than
expected. As food price increases abate, we expect Brazilian inflation to decline to about
5½ percent over the forecast period.

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estimate is revised down ¼ percentage point relative to the December Tealbook, given

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January 23, 2013

Evolution of Staff’s International Forecast

Total Foreign GDP
Percent change, Q4/Q4

6
5

2014

2013

2015

4
3

Int’l Econ Devel & Outlook

2012

2
1

1/19

3/9 4/20

6/15 8/3 9/14 10/26 12/7 1/18
2011

3/7 4/18

6/13 7/25 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11
2012
2013

Tealbook publication date

Total Foreign CPI
Percent change, Q4/Q4

4.0
3.5
3.0

2014

2013

2015
2.5
2.0

2012

1.5
1.0
0.5
1/19

3/9 4/20

6/15 8/3 9/14 10/26 12/7 1/18
2011

3/7 4/18

6/13 7/25 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11
2012
2013

0.0

Tealbook publication date

U.S. Current Account Balance
Percent of GDP

0
-1

2015

-2

2013
-3

2012
2014

-4
-5

1/19

3/9 4/20

6/15 8/3 9/14 10/26 12/7 1/18
2011

3/7 4/18

6/13 7/25 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11
2012
2013

Tealbook publication date

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-6

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January 23, 2013

Financial Developments
Sentiment in financial markets improved, on net, over the intermeeting period,
largely in response to the partial resolution of the “fiscal cliff,” a positive start to the
corporate earnings reporting season in early January, and reassuring policy developments
in Europe. As a result, broad stock price indexes were up 4½ percent on balance,
near-term option-implied volatility on the S&P 500 index fell further to a very low level,
and corporate bond spreads narrowed. Nevertheless, market participants reportedly
remain closely attuned to fiscal developments, particularly those related to the debt
ceiling, possible sequestration of spending, and the expiration of the continuing
resolution.
Over the intermeeting period, market-based measures of the path of the federal
funds rate edged up, and the implied expected value of the federal funds rate now rises
above ¼ percent in the fourth quarter of 2014, one quarter earlier than at the time of the
December FOMC meeting. Yields on longer-term nominal and inflation-protected
Treasury securities also moved higher. In addition to the somewhat-more-optimistic tone
to the outlook, yields were likely boosted in part by a reversal of flight-to-quality flows
meeting, which investors reportedly read as suggesting that asset purchases may not
continue for as long as they had previously expected. Near-term inflation compensation
was slightly higher over the intermeeting period, while the foreign exchange value of the
dollar was little changed on balance.
Interest rates near historical lows continued to support the pace of borrowing in
the nonfinancial corporate sector. Net debt financing by nonfinancial firms surged in the
fourth quarter, with outstanding volumes of corporate bonds, commercial and industrial
(C&I) loans, and nonfinancial commercial paper (CP) all expanding. The household
sector also appeared to benefit from the low interest rate environment, as consumer credit
expanded further in October and November, reflecting growth in student and auto loans,
and mortgage refinancing remained quite strong. The January Senior Loan Officer
Opinion Survey on Bank Lending Practices (SLOOS) suggested that, over the past three
months, banks eased their credit standards and terms somewhat for most types of loans
and that demand for many types of loans increased further (see appendix).

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Financial Developments

after the resolution of the fiscal cliff and by the release of the minutes of the December

Authorized for Public Release

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January 23, 2013

Policy Expectations and Treasury Yields
Selected Interest Rates
Percent
Dec.
2.0
FOMC

Percent
The Congress declines
vote on tax proposal

The Congress passes
10-year Treasury tax relief bill

1.9

0.9

Dec. Employment
report
minutes

yield (left scale)

1.8

0.8

1.7
1.6
0.7

June 2015
Eurodollar (right scale)

1.5
1.4
1.3

0.6
Dec. 12

Dec. 17

Dec. 20

Dec. 25

Dec. 28

Jan. 2

Jan. 7

Jan. 10

Jan. 15

Jan. 18

Note: 5-minute intervals. 8:00 a.m. to 4:00 p.m. No adjustments for term premiums.
Source: Bloomberg.

Implied Federal Funds Rate

Percent
1.0

Financial Developments

Mean: January 22, 2013
Mean: December 11, 2012
Mode: January 22, 2013
Mode: December 11, 2012

Distribution of Modal Timing of First Rate Increase
from the Desk’s Dealer Survey
Percent

0.8

0.6

0.4

0.2

10
0

0.0
2013

2014

2015

Recent: 21 respondents
Dec. FOMC: 21 respondents

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2013
2014
2015
2016
Source: Desk’s dealer survey from January 22, 2013.

2016

Note: Mean is estimated using overnight index swap quotes.
Mode is estimated from the distribution of federal funds rate implied
by interest rate caps. Both include a term premium of zero basis
points per month.
Source: Bloomberg and CME Group.

Treasury Yield Curve

Inflation Compensation
Percent

Percent
4.0

4
Daily

Most recent: January 22, 2013
Last FOMC: December 11, 2012

3.5

Dec.
FOMC

5 to 10 years ahead

3.0

2.5
2.0

Jan.
22

1.5
1.0

1
Next 5 years*

0.5
0.0
1

Years ahead
Note: Smoothed yield curve estimated from off-the-run
Treasury coupon securities. Yields shown are those on
notional par Treasury securities with semiannual coupons.
Source: Federal Reserve Board.

2010

2011

2012

2013

Note: Estimates based on smoothed nominal and inflationindexed Treasury yield curves.
* Adjusted for the indexation-lag (carry) effect.
Source: Barclays PLC and staff estimates.

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January 23, 2013

POLICY EXPECTATIONS AND TREASURY YIELDS
Expected policy rates based on market quotes moved up, on balance, over the
intermeeting period, likely reflecting in part some attenuation of concerns about the fiscal
cliff and the attendant downside risks to the economic outlook. Overall, the December
FOMC statement and the Chairman’s press conference following the meeting were
characterized by market participants as largely in line with expectations. Some investors
expressed surprise that thresholds for unemployment and inflation were introduced in the
forward guidance at the December meeting, although many had reportedly anticipated
that roughly similar thresholds would be adopted at some point relatively soon.
Economic data releases over the period, including the December employment report,
were reportedly seen as about in line with expectations and elicited little price reaction.
On net, the expected path of the federal funds rate derived from overnight index swap
(OIS) rates steepened over the intermeeting period and now rises above the current target
range in the fourth quarter of 2014, one quarter earlier than at the time of the December
FOMC meeting. Some measures of policy uncertainty ticked up over the period,
suggesting that some of the increase in OIS rates could reflect an increase in term
premiums. The modal policy path—the most likely values for future federal funds rates
based on caps-implied risk-neutral distributions—also shifted up somewhat and now
from the Open Market Desk’s latest survey of primary dealers showed a slight downward
shift in modal policy rate expectations beyond the first half of 2015, although dealers
continued to view the third quarter of 2015 as the most likely time of the first increase in
the target rate.1
Reflecting in part the change in the market-implied path of policy, Treasury
coupon yields increased moderately over the period. The FOMC announcement
regarding asset purchases may have contributed to the upward rise in yields: The
announced pace of purchases of longer-term Treasury securities was widely anticipated,
but the specific maturity distribution for those purchases reportedly placed slightly more
weight on intermediate-maturity securities, as opposed to longer-term securities, than
some investors had expected. Yields increased again following the release of the
December FOMC minutes, which were reportedly interpreted by some market
1

The effective federal funds rate averaged 16 basis points over the intermeeting period, with the
intraday standard deviation averaging about 4 basis points.

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Financial Developments

indicates that the current range will prevail through the first quarter of 2016. Results

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January 23, 2013

Treasury and Agency MBS Market Functioning

Agency MBS Issuance and Fed Purchases

Nominal Treasury Issuance and Fed Purchases
Billions of dollars

Billions of dollars
400

Monthly rate

350

Gross issuance
Net issuance
Fed purchases by settlement date
H1

Gross issuance
Net issuance
Fed purchases by settlement date

300
Nov.
Oct.
H1

250

Dec.

200
Nov.

H1
H2

200

250

Monthly rate

150

Q3
Oct. Dec.

150
100

100
50

0
-50
2009

2010

2011

2012

2009

2010

2011

2012

Note: Excludes bills.
Source: U.S. Department of the Treasury; Federal Reserve
Bank of New York.

Note: Issuance and purchases of 30-year fixed-rate agency
MBS.
Source: Federal Reserve Bank of New York.

Average Nominal On-the-Run Daily Bid-Asked
Cents per 100 dollars
Price Spreads

Treasury and MBS Trading Volume

2-year
5-year
10-year
30-year

5-day moving average

Trillions of dollars
9

Dec.
FOMC

2.5
Monthly average of weekly volume

8
7

Trillions of dollars

3.0
Treasury securities
(left scale)

2.5

2.0

6
5
4

2.0

Jan.

1.5

Financial Developments

3
Jan.
18

2010

2011

2012

MBS
(right scale)

1
0

2009

1.0

1.0
0.5

0.5

2013

2005

2007

2009

2011

2013

Note: Series contain breaks and are considered more reliable
starting on January 1, 2010 (the dashed line), and going forward.
Source: BrokerTec.

Note: Excludes bills.
Source: Federal Reserve Board, FR 2004, Government
Securities Dealers Reports.

Agency MBS Fails

Dollar Roll Implied Financing Rates (Front Month),
Percent
Fannie Mae 30-Year

Billions of dollars

2500

200

Fails charge Fails charge
announced implemented

4-week moving average

Fails charge
announced

Fails charge
implemented

160

2000

1
3.0 percent coupon

120
1500

0
80

1000

Net fails
(right scale)

500

40
Jan.
9

Gross fails
(left scale)

Jan.
22

3.5 percent
coupon

-2

0
-40

2008

2009

2010

2011

2012

-3

2013

Note: Par value. Gross fails are the sum of fails to receive and
fails to deliver, while net fails are the difference.
Source: Federal Reserve Board, FR 2004, Government
Securities Dealers Reports.

-1

2011

2012

Note: For 3.0 percent coupon, data are omitted for
January 6-10, 2012.
Source: J.P. Morgan.

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2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

participants as signaling that the Federal Reserve might end asset purchases earlier than
previously expected as a result of concerns about the efficacy and costs of additional
purchases. Indeed, results from the most recent primary dealer survey indicate that far
fewer dealers now expect asset purchases to continue beyond 2014 than at the time of the
December survey, although median estimates suggest that dealers continue to view the
first quarter of 2014 as the most likely time for the end of those purchases. Dealer
expectations for the level of SOMA holdings at the end of 2013 were largely unchanged
from the December survey.
The passage of the American Taxpayer Relief Act of 2012 eased concerns about
the risk of substantially higher fiscal drag on growth in the near term; the reduced odds of
a sharp slowing in the economy, and the associated unwinding of safe-haven demand,
prompted a notable increase in Treasury yields. Nonetheless, investors reportedly remain
attuned to other fiscal developments, including those related to the debt ceiling, possible
sequestration, and expiration of the continuing resolution. (See the box “Debt Ceiling.”)
On net, Treasury yields rose over the intermeeting period, with 5-year yields increasing
12 basis points and 10-year yields up 21 basis points. Both TIPS- and swaps-based
inflation compensation over the next 5 years edged slightly higher. Five to 10 years
ahead, TIPS-based inflation compensation was unchanged, while the swaps-based

TREASURY AND AGENCY MBS MARKET FUNCTIONING
The Desk completed the maturity extension program, continued its monthly
purchases of agency MBS, and began the flow-based Treasury purchases announced
following the December FOMC meeting.2 Current-coupon yields on 30-year agency
MBS rose 17 basis points over the intermeeting period, reaching their highest level since
September of last year. Liquidity conditions in Treasury and agency MBS markets
displayed typical seasonal patterns associated with the year-end, with bid-asked spreads
widening somewhat and trading volumes edging lower in advance of the turn of the year.
However, liquidity conditions largely returned to normal in both markets early in the new
2

Over the intermeeting period, the Desk purchased $98 billion in agency MBS under the
flow-based MBS program and the reinvestment program. In addition, the Desk has purchased $31 billion
of Treasury securities since the start of the new Treasury purchase program at the beginning of the year.
Finally, as part of the maturity extension program, $28 billion of Treasury securities were purchased and
$23 billion were sold over the intermeeting period. The average maturity of SOMA Treasury holdings
increased by about 4¼ years over the course of the program.

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Financial Developments

measure fell a bit.

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January 23, 2013

Debt Ceiling
Over the intermeeting period, the Treasury announced a two-month Debt Issuance
Suspension Period and began using extraordinary measures to avoid breaching the
$16.394 trillion debt limit. As of January 22, the Board staff estimated that these
measures provided the Treasury with approximately $180 billion of remaining capacity,
implying, as shown in the top figure on the next page, that the debt ceiling will not be
breached until February 28. 1 On January 18, House Republican leaders announced a
proposal to temporarily raise the debt ceiling for three months; the proposed act would
suspend the debt ceiling until May 18, 2013.

Financial Developments

VerDate 0ct 09 2002 16:45 Jan 20, 2013 Jkt 000000 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 C:\DO
CUME~1\EWBALLOU\APPLIC~1\SOFTQUAD\XMETAL\5.5\GEN\C\CAMP_003.XML

Investor concerns about the debt ceiling appear to have left, as yet, only a modest
imprint on financial markets. As shown in the bottom figure on the next page, spreads
on both one- and five-year U.S. credit default swaps (CDS) have increased recently, and
the front end of the CDS curve has flattened. Nevertheless, both spreads remain
considerably below levels at the time of the debt ceiling impasse in 2011, although this
measure of investor expectations could be noisy due to the illiquidity of this market.
Signals of broader financial market strains are not evident, perhaps reflecting market
participants’ belief that the Congress will increase the debt limit before default becomes
a significant risk. Near-term interest rate uncertainty measured by implied volatility from
interest rate options is subdued, and near-term implied volatility for the S&P 500 stock
price index fell to a five-year low over the intermeeting period (as noted in the main
Financial Developments text). That said, in past debt limit episodes, stresses in some of
these measures often did not appear until the debt limit breach date was imminent.
Fitch Ratings recently stated that a failure to reach agreement on raising the debt ceiling
in a timely manner would undermine confidence in the United States as a reliable
borrower and prompt a review of its U.S. sovereign credit ratings. Last September,
Moody’s stated that the government’s rating would likely be placed under review after
the debt limit is reached but several weeks before the exhaustion of the Treasury’s
resources, similar to the actions Moody’s took in 2011. Standard & Poor’s Ratings
Services downgraded the U.S. credit rating following the 2011 debt ceiling debates but
has not made any statement on the current debt ceiling negotiations.

Although forecasts for the breach date are inherently uncertain, there is a higher-than-usual
degree of uncertainty in the current episode because the Debt Issuance Suspension Period coincides
with the tax-filing season, when the amounts and timing of tax payments and refunds are exceptionally
volatile. Against this backdrop, in a letter to the Congress on January 14, the Treasury Secretary noted
that the Treasury expects to exhaust the extraordinatry measures between mid-February and early
March.

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January 23, 2013

Financial Developments

Class II FOMC - Restricted (FR)

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Authorized for Public Release

January 23, 2013

Financial Institutions and Short-Term Dollar Funding Markets
Average Maturity for Unsecured Financial
Commercial Paper Outstanding in the U.S.
Days
Market

Funding Spreads
Basis points
Daily

Dec.
FOMC

3x6 FRA-OIS*
3-month LIBOR-OIS

Weekly

80
70

Dec.
FOMC

U.S. parent
European parent

50
Jan.
16

40
Jan.
22

30
20

10
0
2010
2011
2012
2013
* Spread is calculated from a LIBOR forward rate agreement
(FRA) 3 to 6 months in the future and the forward overnight
index swap (OIS) rate for the same period.
Source: Bloomberg.

30
2010
2011
2012
2013
Source: Federal Reserve Board staff calculations based on
data from the Depository Trust & Clearing Corporation.

Overnight Funding Rate

Expected Overnight Treasury Repo Rate
Basis points

Daily

Treasury GCF repo rate
Fed funds rate

Percent
60

Dec.
FOMC

0.24

Most recent: January 22, 2013
Last FOMC: December 11, 2012

0.22

0.20

30
0.18

Financial Developments

20
0.16
Jan.
22

10
0.14

2011
2012
2013
Note: GCF is general collateral finance; repo is repurchase
agreement.
Source: Depository Trust & Clearing Corporation; Federal Reserve.

Stock Prices

Dec.
Feb.
Apr.
June
Aug.
Oct.
Dec.
2014
2012
2013
Source: Bloomberg; staff calculations based on GCF Treasury
repurchase agreement (repo) futures quotes.

CDS Spreads of Large Bank Holding Companies
Dec. 11, 2012 = 100

Daily

S&P 500
Dow Jones bank index

Basis points
135

Dec.
FOMC

Daily
125

Jan.
22

115
105

Dec.
FOMC

Citigroup
JPMorgan Chase
Wells Fargo
Goldman Sachs
Bank of America
Morgan Stanley

500
400
300

Jan.
22

2011

2012

65
2013

Page 54 of 112

200
100

2010
Source: Bloomberg.

600

0
2010
Source: Markit.

2011

2012

2013

Class II FOMC - Restricted (FR)

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January 23, 2013

year, and fails-to-deliver in the MBS market remained at low levels. That said, there are
some signs of scarcity in the TBA market for production-coupon MBS. For example, the
dollar-roll-implied financing rate for Fannie Mae 30-year 3.0 percent–coupon TBAs—a
coupon in which significant portions of new issuance and of the Desk’s purchases are
concentrated—reached its most negative levels since September, possibly reflecting light
MBS issuance around year-end. In response, the Desk rolled about 12 percent of the
expected settlements of Fannie Mae 30-year 3.0 percent–coupon securities in January.
The Desk also conducted dollar roll operations in the 3.5 percent coupon, though this
coupon represents a significantly smaller portion of SOMA purchases. All told, the Desk
postponed settlement on 16 percent of its total purchases from January to February, a
proportion within the range of its dollar roll activity in recent months.

FINANCIAL INSTITUTIONS AND SHORT-TERM FUNDING MARKETS
Conditions in short-term dollar funding markets were generally little changed, on
balance, since the December FOMC meeting, although some money market rates edged
down on net. Year-end pressures were modest overall and roughly in line with
expectations. Data through early January show limited evidence of reallocation out of
deposits, in the aggregate, following the expiration of unlimited deposit insurance on
“Expiration of Unlimited FDIC Deposit Insurance.”)
Over the intermeeting period, the spread between three-month LIBOR and
comparable-maturity OIS rates was about unchanged, on net, as was the spread between
the three-month forward rate agreement three months ahead and the corresponding
forward OIS rate (a forward-looking measure of potential funding strains). The
outstanding amount of unsecured CP issued by European financial institutions increased
noticeably over the period, with most of the increase attributable to financial institutions
with parents domiciled in France, Germany, and other “core” European countries. In
contrast, the outstanding amount of unsecured CP issued by U.S. financial institutions
was about unchanged. European financial institutions appeared able to issue unsecured
CP at maturities similar to those of such CP issued by their U.S. counterparts, and spreads
on U.S. and European financial CP remained stable. In asset-backed commercial paper
(ABCP) markets, amounts outstanding have changed little for programs with sponsors
domiciled in the United States and Europe. Overnight spreads on ABCP were about flat,
on net, and spreads on most European ABCP issues remain close to those on U.S. issues.

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Financial Developments

noninterest-bearing transaction accounts at the end of December. (See the box

Class II FOMC - Restricted (FR)

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January 23, 2013

Expiration of Unlimited FDIC Deposit Insurance
The unlimited FDIC insurance of noninterest-bearing transaction accounts at insured depository
institutions provided under the Dodd–Frank Wall Street Reform and Consumer Protection Act
expired as scheduled on December 31, 2012. Anecdotal reports had suggested that the
expiration could prompt investors to shift deposits from banks to money market mutual funds
(particularly government-only money market funds) and other money market instruments,
moves that could push down Treasury bill yields and repo rates. 1 In addition, these reports also
suggested that some depositors might shift balances from smaller to the largest banking
institutions, which may be perceived as “too big to fail.” 2

Financial Developments

Data through early January do not show an aggregate runoff of liquid deposits as the unlimited
deposit insurance expired. 3 In December, liquid deposits grew at a robust seasonally adjusted
annual rate exceeding 15 percent. The largest institutions in the banking sector saw strong
inflows, but deposits at smaller banks also grew in aggregate (see the top figure on the next
page). In the first week of January, liquid deposits were about unchanged. 4
Institutional money market funds, particularly government-only money market funds, which
normally see net inflows around year-end, received strong inflows late in December (see the
bottom figure on the next page). 5 The effect of this new cash invested by money funds,
combined with typical year-end balance sheet management activities, may have contributed in
part to declines in money market rates around the turn of the year. However, the strong
growth in December did not continue into the first part of January.

A survey by the Association for Financial Professionals conducted in November 2012 indicated that of
those anticipating reducing deposit balances in response to the FDIC insurance expiration, the anticipated
destination was Treasury-based money market funds, outright holdings of Treasury or agency securities, as well
as prime money market funds and repo holdings. See also the appendix “Senior Credit Officer Opinion Survey
on Dealer Financing Terms” (SCOOS) in the December 2012 Tealbook, which included a special question on the
FDIC insurance expiration.
2
The Board staff expected flows out of deposits related to insurance expiration to be a small fraction of
the level of insured deposits. See the box “Expiration of Unlimited FDIC Deposit Insurance” in the December
2012 Tealbook; the SCOOS appendix in the December 2012 Tealbook, which included a special question on the
FDIC insurance expiration; and the box “Bank Funding Consultations” in the September 2012 Tealbook for more
information on these projections.
3
Liquid deposits consist of demand deposits, other checkable deposits, and savings deposits. The Board
staff focuses on liquid deposits because automatic sweeping activity conducted by banks between customers’
transactions accounts and savings accounts contributes to volatility among these components. After
contracting in November, demand deposits grew 24 percent at an annual rate in December on a seasonally
adjusted basis.
4
Data from the January 18, 2013, Statistical Release H.8, “Selected Assets and Liabilities of Commercial
Banks in the United States,” showed a seasonally adjusted $39 billion decline in “other deposits” (which include
additional deposit types to liquid deposits) at large banks for the week ending January 9; however, these U.S.
banks have reported that only a fraction of this amount was related to the insurance expiration.
5
In December, institutional money market fund balances grew about 6 percent at an annual rate on a
seasonally adjusted basis and more than 28 percent at an annual rate on an unadjusted basis.

Page 56 of 112

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Financial Developments

Although there is limited evidence to date of significant reallocations due to the expiration of
unlimited deposit insurance, anecdotal reports indicate that some individual banks have been
affected. A small number of banks have reported that they had prepared for liquid deposit
runoffs at year-end by issuing alternative liabilities, such as time deposits. 6 Additionally, a few
small institutions indicated that they have seen modest transfers out of previously insured
deposits to alternative products within the bank or out of the bank to larger banks.

Large time deposits grew about 25 percent at an annual rate at domestic commercial banks in December
but contracted in early January.

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January 23, 2013

Other Domestic Asset Market Developments
Implied Volatility on S&P 500 (VIX)

S&P 500 Stock Price Index
Log scale; Dec. 11, 2012 = 100

Log scale; percent
110

Dec.
FOMC

Daily

Dec.
FOMC

Daily

100
80

100

Jan.
22

60
40

90
Jan.
22

2010
Source: Bloomberg.

2011

70
2013

2012

2007
2008
2009
2010
2011
2012
2013
Note: Option-implied 1-month-ahead volatility on the S&P 500
index.
Source: Chicago Board Options Exchange.

Revisions to S&P 500 Earnings per Share

Equity Risk Premium
Percent

Percent
14

Dec.
FOMC

Monthly

Financial Developments

Jan.
22

Expected real yield on 10-year Treasury*

-2

-4

-6

-8

-2
1990
1994
1998
2002
2006
2010 2013
* Off-the-run 10-year Treasury yield less Philadelphia Fed
10-year expected inflation.
+ Denotes the latest observation using daily interest rates
and stock prices and latest earnings data.
Source: Thomson Reuters.

Corporate Bond Spreads
900

MidDec.

Expected 10-year real equity return

Basis points

4
Monthly

-10

-12
1997
2000
2003
2006
2009
2012
Note: Weighted average of the percent change in the consensus
forecasts of current-year and following-year earnings per share.
* EPS revision is -17.22 percent in Feb. 2009.
Source: Thomson Reuters.

Spread on 30-Day A2/P2 Commercial Paper
Basis points

Basis points
1750

Dec.
FOMC

Daily

5-day moving average

Dec.
FOMC

100

1500
80

750
1250
600
450

750

Jan.
22

300

1000

10-year high-yield
(right scale)

Jan.
22

500

150

250

10-year BBB (left scale)
0

0
2007
2008
2009
2010
2011
2012
2013
Note: Spreads are measured relative to a smoothed nominal
off-the-run Treasury yield curve.
Source: Merrill Lynch; staff calculations.

0
2009
2010
2011
2012
2013
Note: The A2/P2 spread is the A2/P2 nonfinancial rate minus
the AA nonfinancial rate.
Source: Depository Trust & Clearing Corporation.

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January 23, 2013

The GCF repo rate for Treasury collateral declined, on balance, after the start of
the new year, averaging 15 basis points over the first three weeks of January, compared
with 25 basis points during the month of December. Prior to year-end, GCF futures
quotes had indicated that market participants anticipated a decrease in repo rates in early
2013, reflecting a number of factors, including the end of the maturity extension program,
expiration of unlimited deposit insurance, and increased demand for high-quality
collateral. The actual decrease in repo rates was apparently a bit larger and more abrupt
than had been expected, and futures quotes now suggest that the overnight Treasury GCF
repo rate is expected to increase slightly in coming months but to remain below the levels
observed late last year. The amount of financing provided by primary dealers against
Treasury and agency collateral fell some, on net, over the intermeeting period, consistent
with typical patterns around the turn of the year, and financing in the triparty repo market
moved down by a similar percentage.
A broad index of bank stock prices has risen 8 percent since the December FOMC
meeting—outperforming the S&P 500 index—and the median CDS spread of six large
banking organizations has decreased 16 basis points. Sentiment toward domestic
financial firms improved in response to the decline in tail risk following the fiscal
negotiations and to continued recovery in the housing market. Market reaction to large
participants reportedly focused on strong loan growth and investment banking results.
However, investors also noted a decrease in net interest margins at some large banks.
Several banks announced mortgage-related settlements, most notably Bank of America’s
settlement with Fannie Mae to resolve agency mortgage repurchase claims; the
settlements were in line with expectations and reportedly removed some legal uncertainty
surrounding the banking sector.

OTHER DOMESTIC ASSET MARKET DEVELOPMENTS
Broad U.S. equity price indexes increased, on net, over the intermeeting period,
reflecting in part an easing of concerns about the U.S. fiscal situation and a positive start
to the fourth-quarter earnings reporting season. The VIX, which measures
option-implied volatility for 30-day returns on the S&P 500 index, dropped sharply at the
turn of the year, after increasing early in the intermeeting period, and has subsequently
dipped to its lowest level since early 2007. The staff’s estimate of the spread between the
expected real equity return for the S&P 500 index and the real 10-year Treasury yield—a

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Financial Developments

domestic banks’ announcements of fourth-quarter earnings was mixed. Market

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Foreign Developments
Dollar Exchange Rates

Euro-Area 10-Year Government Bond Spreads
Jan. 2, 2012 = 100

Daily

Dec.
FOMC

Broad
Yen

Percentage points

120

Daily

115

Spain
Italy

Dec.
FOMC

6
110
105
Jan.
22

4
Jan.
22

100

2
95
90

2012

Source: Federal Reserve Board; Bloomberg.

2012

Bank Stocks
Jan. 2, 2012 = 100

DJ Euro
MSCI Emerging
Markets
DJ Euro Banks

Dec.
FOMC

Jan. 2, 2012 = 100

150

Daily

140
130
Jan.
22

Financial Developments

2013

Note: Spread over German bunds.
Source: Bloomberg.

Stock Price Indexes
Daily

2013

Nikkei 500 Banks
FTSE 350 Banks
DJ Euro-Bank

Dec.
FOMC

150
140
Jan.
22

120

100

100
90
80
70

Percent
Germany
United Kingdom
Japan
Canada

2013

Source: Bloomberg.

2012

2013

Foreign Net Purchases of U.S. Treasury
Securities

10-Year Nominal Benchmark Yields
Daily

120
110

Source: Bloomberg.

130

110

2012

160

Billions of dollars, annual rate

5
Official
Private

Dec.
FOMC

600

500

400

Nov.

700

300
200

Oct.

100

Jan.
22

-100
0
Source: Bloomberg.

2012

2013

-200
2011

2012

2013

Source: Treasury International Capital data adjusted for staff
estimates.

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January 23, 2013

gauge of the risk premium embedded in equity prices—narrowed some over the past few
weeks but continued to remain very wide by historical standards.
To date, about 100 firms in the S&P 500 have reported their fourth-quarter
earnings. Expectations from Wall Street analysts indicate that earnings per share for S&P
500 firms declined a bit on a quarterly basis, dragged down by the large loss incurred by
Bank of America. However, an elevated share of firms in the nonfinancial sector posted
earnings above Wall Street expectations. An index of revisions to analysts’ forecasts of
year-ahead earnings for S&P 500 firms was slightly negative for the four-week period
ending in mid-December.
Over the intermeeting period, yields on speculative-grade corporate bonds
decreased, and yields on investment-grade corporate bonds were about flat. Risk spreads
on speculative-grade bonds narrowed substantially, consistent with an increase in risk
appetite over the period. In the secondary market for leveraged loans, the average bid
price was up a bit since the December FOMC meeting. The spreads of yields on A2/P2
unsecured CP issued by nonfinancial firms over yields on AA-rated nonfinancial issues
were about flat, on net, over the period amid year-end pressures that were mild by

On a total return basis, the HFR Global Hedge Fund Index modestly trailed the
S&P 500 index over the intermeeting period. Market participants suggested that, since
the beginning of the year, appetite for risk on the part of levered investors has increased
somewhat as concerns about tail risk have continued to diminish.

FOREIGN DEVELOPMENTS
Foreign financial market conditions also improved over the intermeeting period.
Markets responded favorably to the partial resolution of the fiscal cliff negotiations,
incremental but reassuring European policy developments, and the decision to slow the
implementation of Basel III liquidity regulations. On net, benchmark sovereign yields
rose, European peripheral spreads declined, and bank stocks generally outperformed
broader indexes.
Over the intermeeting period, the staff’s broad index of the trade-weighted foreign
exchange value of the dollar was little changed. The dollar appreciated against the
Japanese yen as financial markets responded to statements from recently elected Prime

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Financial Developments

historical standards.

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January 23, 2013

Minister Shinzo Abe, who pressured the Bank of Japan to ease policy more aggressively
and to adopt a formal inflation target of 2 percent; the new government also announced
additional fiscal stimulus measures. (See the box “Recent Policy Developments in
Japan” in the International Economic Developments and Outlook section.) In contrast,
the dollar depreciated against most emerging market currencies and the euro, as global
risk sentiment improved and financial tensions in the euro area eased further. Early in the
period, Greece successfully completed a bond exchange that reduced its outstanding debt,
and official financial assistance to Greece resumed. European leaders also continued to
make progress toward a banking union, agreeing that the ECB would supervise the
largest banks in the euro area as of next year. Peripheral sovereign spreads continued to
decline over the period, and Ireland took another step toward full capital market access
with a successful syndicated bond sale.
Japanese equity prices increased significantly over the period; equity prices in
other countries also rose, though generally less sharply. European banking stocks
outperformed broader indexes and increased notably on the announcement by the Basel
Committee on Banking Supervision that it would give banks more time and flexibility to
implement the Basel III liquidity standard. Funding conditions improved somewhat for
euro-area banks; notably, Irish, Portuguese, and small Spanish banks, which had
Financial Developments

difficulty accessing capital markets for much of last year, recently issued unsecured debt.
Yields on foreign benchmark sovereign bonds increased over the period,
reflecting both the improvement in global sentiment and reduced expectations for
additional monetary easing in some of the advanced economies. Although the Bank of
Japan announced some further accommodation, the ECB and the Bank of England kept
their policy rates on hold and appeared to signal a lower likelihood of further easing.
Most emerging market central banks left their policy rates on hold, though a few eased
their policy rates further on growth concerns.
Foreign private demand for U.S. securities was particularly strong in November,
according to the latest TIC data. Although foreign official demand for U.S. securities
was weak in November, data on custody holdings at the Federal Reserve Bank of New
York indicate a considerable pickup in December, leaving official inflows for 2012 well
above their 2011 level.

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January 23, 2013

BUSINESS FINANCE
Available indicators suggest that the credit quality of nonfinancial corporations
continues to be solid. In the third quarter, the aggregate liquid asset ratio remained near
its highest level in at least 20 years, while the aggregate ratio of debt to assets stayed
quite low. The volume of nonfinancial corporate bonds upgraded by Moody’s Investors
Service in the fourth quarter increased and was somewhat larger than the volume of
downgrades. The six-month trailing default rate for nonfinancial corporate bonds ticked
up in December but remained low by historical standards. The KMV expected
year-ahead default rate for nonfinancial firms also stayed low in January.
Nonfinancial firms continued to tap debt markets at a prodigious pace over the
intermeeting period, as interest rates remained very favorable and investors displayed
strong appetite for fixed-income products. Bond issuance by nonfinancial firms
increased in the final quarter of last year from its robust third-quarter pace, boosted by a
pickup in investment-grade issuance, and appears to have remained strong in January.
C&I loans also expanded briskly in the fourth quarter, and the the volume of nonfinancial
CP outstanding rose notably over the intermeeting period. In the syndicated leveraged
loan market, institutional loan issuance was very strong in December, and fourth-quarter
half of 2007. Issuance of CLOs accelerated in the fourth quarter, pushing overall 2012
issuance above $50 billion. Interest on the part of institutional investors appears to have
remained strong in the first few weeks of 2013.
Recent issuance in both the corporate bond and the leveraged loan markets
continued to be driven importantly by firms borrowing in order to refinance existing debt
obligations. In addition, borrowing to issue dividends, a practice referred to as dividend
recapitalization, rose further in the fourth quarter, as some firms made dividend payments
in advance of expected tax changes. At $47 billion, the volume of such deals for the year
was the largest since at least 2004 (when data were first collected). The average
debt-to-earnings ratio for firms issuing highly leveraged loans continued to rise, reaching
its highest level since 2007 but still remaining below the 2007 peak. Nonetheless,
spreads on newly issued loans stayed quite elevated relative to their pre-crisis levels.
The pace of gross public issuance of equity by nonfinancial firms was subdued in
January, likely owing to seasonal factors, but remained solid in the fourth quarter. Net
equity issuance was again deeply negative in the final quarter of 2012, as retirements of

Page 63 of 112

Financial Developments

gross issuance totaled nearly $140 billion, almost the same quarterly pace as in the first

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Business Finance
Financial Ratios for Nonfinancial Corporations
Ratio
0.36
0.33

Bond Ratings Changes of Nonfinancial Firms

Ratio

Debt over
total assets
(left scale)

Percent of outstandings
0.13

Liquid assets over
total assets
(right scale)

Annual rate
Upgrades

0.11

H1 Q4

0.09

0.30

20
0

0.07

0.27
0.05

Downgrades

0.24
0.03
1992

1996

2000

2004

2008

1991 1994 1997 2000 2003 2006 2009 2012

Note: Data are annual through 1999 and quarterly thereafter.
Source: Compustat.

Source: Calculated using data from Moody’s Investors Service.

Selected Components of Net Debt Financing,
Nonfinancial Firms
Billions of dollars
Monthly rate

Financial Developments

Bonds
C&I loans*
Commercial paper*
Total

2008

2009

2010

2011

2012

U.S. CLO Issuance
Billions of dollars
100
80
60
40
20
0
-20
-40
-60
-80
-100

2012

2007

* Period-end basis, seasonally adjusted.
e Estimate.
Source: Depository Trust & Clearing Corporation; Thomson
Financial; Federal Reserve Board.

Q3 Q4

2009

2010

2011

2012

CMBS Issuance
Billions of dollars
50

2008

Note: CLO is collateralized loan obligation.
Source: Thomson Reuters LPC LoanConnector.

Selected Components of Net Equity Issuance,
Nonfinancial Firms
Billions of dollars
Monthly rate

120
110
100
90
80
70
60
50
40
30
20
10
0

Annual rate

25
0
Q4

-25
-50

Public issuance
Private issuance
Repurchases
Cash mergers

-100

Total

-125

-75

-150
2008

2009

2010

2011

2012

e Estimate.
Source: Thomson Financial, Investment Benchmark Report;
Money Tree Report by PricewaterhouseCoopers, National
Venture Capital Association, and Venture Economics.

2008

2009

2010

2011

2012

Note: CMBS is commercial mortgage-backed securities.
Source: Commercial Mortgage Alert.

Page 64 of 112

120
110
100
90
80
70
60
50
40
30
20
10
0
10
20

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

equity from share repurchases and cash-financed mergers continued to outpace issuance.
Announcements of share repurchases and cash-financed mergers picked up a bit,
suggesting that equity retirements are likely to maintain their rapid pace in the near
future.
Conditions in the commercial real estate (CRE) sector continued to be strained.
Delinquency rates on commercial mortgages at banks remained elevated in the third
quarter, and those on CMBS stayed near historical highs in December. Vacancy rates
also continued to be relatively high in the third quarter, causing rents to stagnate or
decline over the same period. Investor demand for CMBS remained a bright spot for the
sector. CMBS issuance during the fourth quarter was robust, capping off the strongest
year for issuance since 2007 (but still well below its 2007 levels). CMBS spreads
narrowed 18 basis points over the intermeeting period. In addition, the January SLOOS
indicated that moderate fractions of banks had eased some terms on CRE loans over the
past year, such as maximum maturity and spreads of loan rates over banks’ cost of funds.
However, banks reported that policies related to loan-to-value ratios, debt service
coverage ratios, and takeout financing requirements were about unchanged on net.

Conforming home mortgage rates touched new lows during the intermeeting
period but have edged up 4 basis points, on net, since the December FOMC meeting.
Yields on MBS rose by more, leaving the spread between primary and secondary rates
13 basis points narrower and at its lowest level since before the September FOMC
meeting. However, the spread still remained wide by historical standards due in part to
heavy workloads at the major mortgage originators.
Indeed, refinance originations in December and January stayed near their highest
levels since the housing market began to recover, supported by low interest rates and, to
some extent, HARP (the Home Affordable Refinance Program). Nonetheless,
originations remain below predictions from staff models based on past refinancing
behavior, as very tight underwriting conditions, consolidation among mortgage
originators, and low levels of home equity continue to limit access to credit for many
households. Capacity constraints in the mortgage market may also be having an effect on
the ability of some borrowers, especially those with lower-than-average credit scores, to
obtain mortgage credit. (See the box “Crowding Out in the Mortgage Market.”) Earlier
this month, the Consumer Financial Protection Bureau finalized the ability-to-repay rules

Page 65 of 112

Financial Developments

HOUSEHOLD FINANCE

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

Crowding Out in the Mortgage Market
Some market analysts and Federal Reserve staff have argued that the recent large spreads
between mortgage rates and the yields on agency MBS are at least partly attributable to
“capacity constraints” in the mortgage finance industry. Indeed, mortgage industry
employment (the red line in the bottom-left figure) plummeted over 40 percent between 2006
and 2010, and hiring has rebounded only modestly despite the heavy pace of mortgage
refinancing activity (the blue line). The resultant strain on industry processing capacity is
thought to convey temporary market power to originators, which may be reflected not only in
a higher primary–secondary market interest rate spread, but also in restraint on the quantity of
loans originated. Moreover, that restraint would likely be more binding on potential
borrowers with less-than-pristine credit scores, owing to the increased time and scrutiny now
required for underwriting such loans.

Financial Developments

These forces would compound the effects of the dramatic shift to tighter credit standards that
took hold in 2008. That shift is exhibited in the bottom-right figure, which shows the monthly
number of originations of prime mortgages for financing home purchases divided into five
groups according to borrower credit scores. Loans to borrowers with credit scores of 621 to
680 (the black line), which represented a sizable share of the market before 2008, have nearly
disappeared. But there was also a dramatic falloff in the number of loans made to borrowers
with fairly typical credit scores, such as those in the range of 721 to 750 (the purple line). In
contrast, purchase mortgages for borrowers with the highest credit scores (above 780, the
orange line) have continued to run at only a slightly slower pace than during the boom years.
In an environment in which origination capacity appears so stretched, the boon to refinancing
activity as a result of historically low mortgage interest rates might have the unfortunate side
effect of exacerbating the difficulties that borrowers without stellar credit scores face in
obtaining purchase and refinance mortgages. In particular, lenders might be prone to focus
their resources on easier-to-complete, but just as lucrative, refinance applications of borrowers
with very high credit scores, many of whom are repeat refinancing customers.

Page 66 of 112

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

To look for evidence of congestion effects on purchase mortgage originations, we constructed
a measure of the mortgage employee “refinance workload” using recent months’ total
refinance applications divided by the number of real estate credit industry employees. We
then examined the relationship between that measure and the quantity of purchase mortgage
originations for borrowers in different credit score ranges. The result is shown in the bottomleft figure, which plots the estimated effects (along with standard error bands) from the
increase in the refinance workload seen over the past 18 months. Our estimates suggest that
such a rise in the refinance workload depresses monthly purchase originations about
50 percent for borrowers with credit scores of 621 to 680 and 15 percent for borrowers with
credit scores of 681 to 720. In contrast, there is no statistically significant effect for credit
scores above 720.

One implication of this analysis is that assessing the net effect of a modest rise in market
interest rates on home purchase and refinancing activity is more complicated than one might
expect. Higher rates will tend to depress home purchase and refinance activity through the
usual channels. But at least some of those direct effects might be offset to the extent that the
rise in rates curtails the demand for mortgage refinancing and so leaves lenders more willing
to provide purchase mortgages to borrowers with lower credit scores. Moreover, the
disappearance of “serial refinancers” could free up some capacity to refinance more
applicants with less-than-pristine credit scores.

Page 67 of 112

Financial Developments

We also explored the effects of our refinance workload measure on the monthly credit score
distribution for purchase mortgage originations. Indeed, the 10th percentile of credit scores
among newly originated purchase mortgages (the blue line in the bottom-right figure) exhibits
a strong positive correlation with our refinance workload measure (the red line). Our results
suggest that an increase in the refinance workload like that seen over the past 18 months
pushes the 10th percentile of the credit score distribution 12 points higher and pushes up the
median credit score about 3½ points. This effect of higher workloads is not confined to
purchase mortgages; we find similar results for the credit score distribution of newly
originated refinance mortgages.

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Household Finance
Spread between Primary and Secondary
Basis points
Mortgage Rates
Dec.
FOMC

Mortgage Rate and Refinance Loan Originations
Billions of dollars

Percent

400
150

30-year conforming fixed
mortgage rate (right scale)

300

7.5
7.0
6.5

125

6.0
200
Jan.
22

5.5

100
Jan.

100

4.5

50
2009

2010

2011

2012

Refi originations
(left scale)

4.0
Jan.
22

3.5
3.0

2003

2013

2005

2007

2009

2011

2013

Note: For mortgage rate, the data are weekly before 2010
and daily thereafter; for refinance (refi) originations, the data
are seasonally adjusted by FRB staff.
Source: For mortgage rate, Freddie Mac (before 2010) and
Loansifter (from 2010); for refi originations, staff estimates.

Note: Spread is calculated as the difference between the
Loansifter 30-year conforming mortgage interest rate and the
Fannie Mae 30-year current-coupon MBS yield.
Source: For MBS yield, Barclays; for mortgage rate, Freddie
Mac (before 2010) and Loansifter (from 2010).

Delinquencies on Prime Mortgages

Prices of Existing Homes

Percent of loans

Index peak normalized to 100
110

Monthly

1.8

Percent of loans
10

Monthly

1.6

100
Delinquency
transition rate
(left scale)

1.4
90
1.2

6
Nov.

Financial Developments

5.0

1.0
Nov.

2006

2008

2010

0.8

0.6

2012

Delinquency rate
(right scale)

0
2004

2006

2008

2010

2012

Note: For delinquency rate, percent of loans 90 or more days
past due or in foreclosure. For transition rate, percent of
previously current mortgages that transition to being at least
30 days delinquent each month.
Source: LPS Applied Analytics.

Source: CoreLogic.

Residential Mortgage Debt

Consumer Credit

Percent change, annual rate

Percent change, annual rate
20

Quarterly

3-month moving average
16

12
Nonrevolving

8
Nov.

-4

0
Q3

-8
-4

Revolving
-12

-8
2002

2004

2006

2008

Source: Federal Reserve Board.

2010

2012

-16
2004

2006

2008

Source: Federal Reserve Board.

Page 68 of 112

2010

2012

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

required by the Dodd–Frank Act, which delineates the types of “qualified mortgages” for
which mortgage originators will be provided legal safeguards from borrower lawsuits.
Publication of the rules, which go into effect at the beginning of 2014, had little effect on
market prices.
Residential mortgage debt continued to contract in the third quarter because of
high foreclosure and short-sale activity, low home sales, and tight mortgage credit.
Aggregate indexes of house prices increased further in November, leaving home prices
roughly 7½ percent above their year-earlier levels. The rate at which mortgages entered
delinquency continued to trend down in October and November, but overall, serious
delinquency rates on the stock of loans only edged down from a very high level.
Consumer credit expanded briskly again in October and November.
Nonrevolving credit continued to increase at a robust pace because of growth in student
and auto loans, while revolving credit moved roughly sideways. Consumer asset-backed
securities (ABS) issuance totaled about $35 billion in the fourth quarter, capping off the
strongest year for ABS issuance since prior to the crisis (but still well below 2007 levels).

Since the December FOMC meeting, the Treasury auctioned $199 billion in
nominal securities and $14 billion in five-year TIPS. On balance, the auctions were
about in line with expectations, although bid-to-cover ratios exhibited their usual
seasonal decline.
Amid continued fiscal pressures facing state and local governments, net issuance
of long-term municipal bonds was again negative in the fourth quarter, and partial data
indicate that it likely remained negative in January. In the third quarter, downgrades of
municipal bonds slowed with respect to the first half of the year but continued to far
outpace upgrades. CDS spreads for states narrowed a bit, on net, over the intermeeting
period, consistent with movements in corporate CDS spreads and a general increase in
investors’ risk appetite. Yields on 20-year general obligation municipal bonds did not
rise as much as those on comparable-maturity Treasury securities, leaving their ratio a bit
lower on net.

Page 69 of 112

Financial Developments

GOVERNMENT FINANCE

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Commercial Banking and Money
Change in Standards and Demand
across All Loan Categories

Change in Bank Credit
Total bank credit
C&I loans

30
20
10

Dec.

0
-10
-20
-30
2006

2008

2010

Net percent
Oct.
survey

Quarterly

Easing/weaker

3-month change, s.a.a.r.

Tightening/stronger

Percent

Standards
Demand

2012

1993

1998

2003

2008

Note: A composite index that represents the net percentage of
loans on respondents’ balance sheets that were in categories for
which banks reported tighter lending standards or stronger loan
demand over the past 3 months, with results weighted by
survey respondents’ holdings of loans in each category.
Source: Federal Reserve Board, Senior Loan Officer Opinion
Survey on Bank Lending Practices.

C&I Loan Terms, Large and Middle-Market Firms

Change in Terms of CRE Loans

1998

2003

2008

2013

Tightening

100
80
60
40
20
0
-20
-40
-60
-80
-100

Debt service coverage ratios
Spread
Loan-to-value ratio
Maximum maturity

Annual

Easing

Spread
Premiums charged on riskier loans

1993

Net percent
100
80
60
40
20
0
-20
-40
-60
-80
-100

Quarterly

Easing

Financial Developments

2013

Note: The data have been adjusted to remove the estimated
effects of certain changes to accounting standards and nonbank
structure activity of $5 billion or more. C&I is commercial and
industrial.
Source: Federal Reserve Board.

Net percent

100
80
60
40
20
0
-20
-40
-60
-80
-100

2001

2003

2005

2007

2009

2011

2013

Note: Spread is defined as spreads of loan rates over a bank’s
cost of funds. Data for premiums start in 1998. C&I is commercial and
industrial.
Source: Federal Reserve Board, Senior Loan Officer Opinion
Survey on Bank Lending Practices.

Note: Spread is defined as spreads of loan rates over a bank’s
cost of funds. CRE is commercial real estate.
Source: Federal Reserve Board, Senior Loan Officer Opinion
Survey on Bank Lending Practices.

Growth of M2 and Its Components

Level of Liquid Deposits
Trillions of dollars

Percent, s.a.a.r.
M2 Liquid Small time Retail Curr.
deposits deposits MMFs

2012

7.5

2012:H1
2012:H2
2012:Q4
Dec.

11.1

-16.8

-5.7

9.0

5.7

9.2

-16.7

-10.1

9.1

9.0

12.5

-18.5

-1.4

8.6

9.1

12.2

-19.8

2.6

9.0

12.7

15.6

-20.7

17.1

8.6

Jan.
7

2008
Note: Retail MMFs are retail money market funds.
Source: Federal Reserve Board.

Dec.
FOMC

Weekly

2009

2010

2011

Note: Seasonally adjusted.
Source: Federal Reserve Board.

Note: The shaded bars indicate periods of business recession as defined by the National Bureau
of Economic
Research.
Liquid
Deposits

Page 70 of 112

2012

2013

9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

COMMERCIAL BANKING AND MONEY
Growth of bank credit in the fourth quarter slowed to about half the pace it
registered over the first three quarters of the year, as securities holdings continued to
advance at a moderate rate and loan growth slowed. Gains in bank loans continued to be
concentrated in C&I loans, especially at domestic banks. In contrast, C&I loans
contracted at foreign-related institutions in the fourth quarter, the first such decline in
more than two years. CRE loans were about flat over that period. Closed-end residential
loans held on banks’ books decreased over the quarter, and home equity loans continued
to run off at a rate that was comparable to that of the previous quarter. Consumer loans
increased modestly in the fourth quarter, reportedly boosted by auto loans, while credit
card loans were flat. Meanwhile, noncore loans increased only marginally during the
quarter.
Growth in banks’ securities during the fourth quarter remained roughly on par
with that during the previous quarter. Banks reduced their portfolios of agency MBS, on
balance, over the quarter but continued to increase their holdings of Treasury securities
and “other” (non-Treasury and non-agency) securities. Detailed data available from the
Call Report for the third quarter suggest that municipal bonds account for an important

According to the January SLOOS, domestic banks continued to report having
somewhat eased their lending standards and some terms, on balance, and having
experienced a net increase in demand across most major loan categories in the fourth
quarter. Regarding business loans, large fractions of banks again reported having
reduced spreads of rates on C&I loans over their cost of funds, while much smaller
fractions indicated that the premiums charged on riskier loans had decreased. Regarding
credit policies on loans to households, a few banks reported having eased standards on
prime residential mortgages, including a large bank that reported having eased
considerably. On a loan-weighted basis, domestic banks indicated little change in their
credit card lending standards and generally reported weaker demand for credit card loans.
In contrast, standards and terms on auto loans reportedly were eased somewhat, while
demand for such loans reportedly continued to strengthen.
M2 and its largest component, liquid deposits, expanded robustly in December.
Anectodal evidence suggests that at the end of the year, in anticipation of the possibility
of higher tax rates next year, investors sought to incur tax liabilities in 2012 rather than

Page 71 of 112

Financial Developments

portion of the recent sustained growth in other securities.

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

2013 and firms increased dividend payments to shareholders. These actions likely
contributed to the growth in liquid deposits in December and played a role in the robust
growth in retail money market funds over the month. The monetary base expanded at a
13 percent annual rate in December, reflecting solid growth in currency and an increase
in reserve balances. The rise in reserve balances was due in part to the settlement of the

Financial Developments

Federal Reserve’s ongoing MBS purchases.

Page 72 of 112

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

Appendix
Senior Loan Officer Opinion Survey on Bank Lending Practices

On balance, although domestic and foreign respondents reported that standards on C&I
loans were about unchanged over the past three months, domestic banks indicated that most C&I
loan terms had been eased for firms of all sizes, reportedly in part because of increased
competition for such loans. On balance, respondents reported that demand for C&I loans,
especially from large and middle-market firms, had strengthened over the survey period.2 Several
banks noted that an important reason for this strengthening in C&I loan demand was firms’
increased use of loans to finance payments to investors and employees ahead of year-end, driven
by anticipated changes in tax policy. CRE lending standards reportedly remained about the same
over the past three months while large fractions of domestic and foreign respondents experienced
stronger demand for such loans on net. In addition, in their responses to an annual special
question on CRE lending policies, banks indicated that they had eased some loan terms over the
past 12 months.
In response to a set of special questions on lending to and competition from banks
headquartered in Europe, respondents indicated that lending standards to European banks and

The January 2013 survey addressed changes in the supply of and demand for loans to businesses
and households over the past three months. This appendix is based on responses from 68 domestic banks
and 22 U.S. branches and agencies of foreign banks. Respondent banks received the survey on or after
December 27, 2012, and responses were due by January 15, 2013.
For questions that ask about lending standards or terms, reported net fractions equal the fraction of
banks that reported having tightened standards minus the fraction of banks that reported having eased
standards. For questions that ask about demand, reported net fractions equal the fractions of banks that
reported stronger demand minus the fraction of banks that reported weaker demand.
2
Large and middle-market firms are generally defined as firms with annual sales of $50 million or
more and small firms as those with annual sales of less than $50 million.

Page 73 of 112

Financial Developments

In the January Senior Loan Officer Opinion Survey on Bank Lending Practices, generally
modest fractions of domestic banks reported having eased their standards across major loan
categories over the fourth quarter on net.1 Larger fractions reportedly had eased pricing terms on
commercial and industrial (C&I) loans over the past three months, and terms on some types of
consumer loans also had been eased somewhat. Respondent banks indicated that demand for
business loans, prime residential mortgages, and auto loans had strengthened, on balance, while
demand for other types of loans was about unchanged. U.S. branches and agencies of foreign
banks, which mainly lend to businesses, reported little change in their lending standards, while
demand for their loans was reportedly stronger on net. The January survey included a set of
special questions on lending to and competition from banks headquartered in Europe as well as
annual special questions on commercial real estate (CRE) lending policies and the outlook for
asset quality in major loan categories during 2013.

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Measures of Supply and Demand for Commercial and Industrial Loans,
by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for Commercial and Industrial Loans
Percent
100

Oct.
survey

Loans to large and middle-market firms
Loans to small firms

60
40
20
0
-20
-40

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Bank’s Cost of Funds
Percent
100
80
60

Financial Developments

40
20
0
-20
-40
-60
-80
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial and Industrial Loans
Percent
60
40
20
0
-20
-40
-60
-80
1991

1993

1995

1997

1999

2001

2003

Page 74 of 112

2005

2007

2009

2011

2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

their affiliates (hereafter, European banks) were little changed over the previous three months, the
first time that no net tightening was observed since the inception of this special question in the
October 2011 survey. On balance, the demand for loans from European banks was reportedly
unchanged.
On the household side, a few domestic banks reported having eased standards on prime
residential mortgages over the past three months, on net, including a large bank that reported
having eased such standards considerably. On a portfolio-weighted basis, respondents reported
that demand for prime residential mortgage loans had strengthened further on net. According to
portfolio-weighted responses, a modest fraction of banks had eased standards for home equity
lines of credit (HELOCs), on net, while demand was reportedly unchanged. A moderate fraction
of respondents had eased standards on auto loans over the past three months, on net, while
standards on credit card and other consumer loans had remained about unchanged. On balance,
banks reported having eased selected terms on consumer loans other than credit card loans over
the past three months. A moderate fraction of respondents reported weaker demand for credit
card loans on a portfolio-weighted basis, while a large fraction indicated that demand for auto
loans increased on net.
A set of special questions regarding respondents’ outlook for asset quality in 2013
revealed that moderate to large net fractions of domestic banks expect improvements in credit
quality in most major loan categories.

Questions on Commercial and Industrial Lending
A modest fraction of domestic survey respondents, on net, indicated that their C&I
lending standards had eased somewhat for all firm sizes over the past three months. On balance,
most loan terms were eased regardless of firm size, and none was tightened, but a large degree of
variation in the extent of easing across different loan terms was evident. Moderate to large
fractions of banks again reported having reduced the cost of credit lines, spreads of loan rates
over their banks’ cost of funds, and the use of interest rate floors for all firm sizes. Additionally,
the net fraction of domestic banks reportedly easing policies on loan covenants for large and
middle-market firms increased notably from the previous survey, to about 20 percent. However,
much smaller fractions had been indicating in recent surveys that the premiums charged on riskier
loans have decreased and collateral requirements have reportedly changed little. Of the
respondents that reported having eased either standards or terms over the past three months,
almost all cited more-aggressive competition from other banks or nonbank lenders as an
important reason for having done so. Moreover, the number of domestic banks citing
more-aggressive competition as an important reason for the change in their bank’s lending
position has been increasing since the October 2011 survey. As in the previous survey, no other
reasons were broadly cited as important.

Page 75 of 112

Financial Developments

LENDING TO BUSINESSES

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

Special Questions on Lending to and Competition from European Banks
Changes in Standards and Terms for Lending to European Banks*
Net
percent
100

Tightening

80
71

70
62

62
56

49
43
40
21

Easing

2011:Q4

2012:Q2

2012:Q4

2012:Q1

2012:Q3

2013:Q1

Domestic respondents

-20

Foreign respondents

Financial Developments

* Includes affiliates and subsidiaries.
Note: Domestic responses are weighted by survey respondents’ holdings of C&I loans; because the C&I loans originated by a branch
or agency of a foreign bank may not be sufficiently correlated with the loans the foreign bank chooses to hold on the balance sheet of
that subsidiary, foreign responses are unweighted.

Increase in Domestic Bank Business from Decreased
Competition from European Banks

Percent of respondents

Increased considerably

100

Increased to some extent
No appreciable increase
No decrease in competition

Increase in competition

0
2012:Q1

2012:Q2

2012:Q3

2012:Q4

2013:Q1

Note: Responses are weighted by survey respondents’ holdings of C&I loans.

Page 76 of 112

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

Similar to the previous survey, branches and agencies of foreign banks reported that their
C&I lending standards had remained about the same, on net, over the past three months. A
moderate net fraction of foreign respondents reported having reduced loan spreads over their cost
of funds. On balance, some foreign respondents also reportedly eased their policies on the size of
credit lines. Maximum loan maturity was the only category for which a modest net fraction of
foreign respondents reported having tightened. As was true for domestic respondents, the reason
most widely cited by foreign respondents for easing standards or terms was more-aggressive
competition from other lenders. Some foreign respondents also pointed to a more favorable or
less uncertain economic outlook and increased liquidity in the secondary market for C&I loans as
reasons for easing standards or terms. About 20 percent of foreign respondents reported stronger
demand for C&I loans, on net, over the past three months, the highest fraction observed among
those respondents since the July 2011 survey. A few foreign respondents deemed their
customers’ increased merger or acquisition financing needs as a very important reason for
stronger demand.

Special Questions on Lending to and Competition from European Banks
The January survey again included special questions about lending to European banks.
On balance, only about 10 percent of domestic respondents reported that their standards for loans
to European banks had tightened over the past three months, the smallest net fraction observed
since the introduction of this special question in the October 2011 survey. Furthermore, foreign
respondents indicated that their standards on such loans were essentially unchanged, which was
also the first time in the survey that such standards had not reportedly been tightened on net. As
in the October 2012 survey, domestic banks reported that they had experienced little change in
demand for loans from European banks.
The share of domestic banks that have observed an expansion of C&I lending business as
a result of a decrease in competition from European banks continued to trend down. After
responses were weighted by outstanding C&I loans, about one-third of domestic banks indicated
that they had experienced a decrease in competition from European banks that had resulted in
some increase in business at their institution. Most of the remaining domestic respondents that
compete with European banks reported having experienced a decrease in competition from such
institutions, but the decrease did not appreciably boost their business.

Page 77 of 112

Financial Developments

Moderate fractions of banks indicated stronger demand for C&I loans by firms of all
sizes, on net, and cited their customers’ increased investment in plant or equipment and increased
need to finance mergers or acquisitions and accounts receivable as the top reasons for increased
loan demand. Demand from large and middle-market firms was notably stronger than that from
small firms according to portfolio-weighted responses. Several banks acknowledged tax-related
distributions to investors and employees ahead of year-end as an important reason for
strengthening loan demand. Furthermore, inquiries from businesses about new or expanded
credit lines reportedly changed little over the past three months, suggesting that the increase in
C&I loans outstanding during the fourth quarter may have largely reflected draws on existing
credit lines.

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Measures of Supply and Demand for Commercial Real Estate Loans

Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate Loans
Percent
100

Oct.
survey
80

-20

-40

Financial Developments

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial Real Estate Loans
Percent
60

-20

-40

-60

-80

1991

1993

1995

1997

1999

2001

2003

Page 78 of 112

2005

2007

2009

2011

2013

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January 23, 2013

Questions on Commercial Real Estate Lending
A modest net fraction of domestic respondents to the January survey reported that they
had eased standards on CRE loans over the previous three months and a large share indicated that
demand for such loans had increased. Overall, the continued strengthening in demand for CRE
loans in recent surveys has corresponded with a gradual slowing in the pace of runoff in CRE
loans on domestic banks’ books.
On balance, foreign respondents reported similar trends in CRE lending conditions in the
fourth quarter; a small fraction indicated that they had eased lending standards and a large
fraction reportedly experienced stronger demand for CRE loans.

Annual Question on Commercial Real Estate Loan Terms

LENDING TO HOUSEHOLDS
Questions on Residential Real Estate Lending
A few domestic banks reported having eased standards on prime residential mortgages,
including a large bank that reported having eased such standards considerably. When responses
were weighted by outstanding closed-end mortgages on the respondents’ books, the net fraction
of banks that reported an increase in demand for prime residential mortgage loans remained
substantial, though slightly below its level in the previous survey.3 In contrast, standards for
nontraditional mortgages were reportedly little changed and weighted responses continued to
indicate that demand for such mortgages declined. According to the portfolio-weighted
responses, a modest fraction of banks had eased standards for HELOCs, on net, while demand for
such loans was reportedly unchanged.4

Although the survey instructs respondents to exclude refinancing from their considerations about
demand for residential mortgages, responses to the query about changes in demand may have been
influenced by the volume of refinance applications that banks received over the past three months.
4
Unweighted responses indicate no change in standards and a modest weakening in demand for
such loans on balance.

Page 79 of 112

Financial Developments

The January survey also included a special question regarding changes in lending policies
for CRE loans over the past year (repeated annually since 2001). During the past 12 months, on
net, several domestic banks reportedly had eased policies regarding the maximum size and
maturity of CRE loans and many had reduced the spreads on such loans. In particular, compared
with the responses from last year, there was a notable increase in the net fraction of respondents
reporting having increased maximum loan maturity. However, banks indicated no change in their
policies for debt service coverage ratios or loan-to-value ratios, which reportedly still have not
been eased since the height of the financial crisis. Foreign respondents also indicated that
policies on maximum loan size and spreads for CRE loans were eased somewhat, on balance, and
those on other terms were about unchanged.

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Measures of Supply and Demand for Residential Mortgage Loans

Net Percentage of Domestic Respondents Tightening Standards for Residential Mortgage Loans
Percent

Percent

100

All residential
20

0
Prime
Nontraditional
Subprime

-20
1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2009

2011

-20
2013

Financial Developments

Note: For data starting in 2007:Q2, changes in standards for prime, nontraditional, and subprime mortgage loans are reported separately.
Series are not reported when the number of respondents is three or fewer.

Net Percentage of Domestic Respondents Reporting Stronger Demand for Residential Mortgage Loans
Percent

Percent

80
Prime
Nontraditional
Subprime

All residential

-20

-40

-60

-80

-100

-100
1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

2009

2011

2013

Note: For data starting in 2007:Q2, changes in demand for prime, nontraditional, and subprime mortgage loans are reported separately.
Series are not reported when the number of respondents is three or fewer.

Page 80 of 112

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January 23, 2013

Measures of Supply and Demand for Consumer Loans

Net Percentage of Domestic Respondents Tightening Standards for Consumer Loans
Percent

Percent

100

Credit card loans
Other consumer loans

Credit card loans
Auto loans
Other consumer loans

80
60

-20

-40

-40
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Q2
2011

Q4
2011

Q2
2012

Q4
2012

Note: For data starting in 2011:Q2, changes in standards for auto loans and consumer loans excluding credit card and auto loans are
reported separately. In 2011:Q2 only, new and used auto loans are reported separately and equally weighted to calculate the auto loans series.

Net Percentage of Domestic Respondents Reporting Increased Willingness to Make Consumer Installment Loans
Percent
60

Oct.
survey

0
-20
-40
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Net Percentage of Domestic Respondents Reporting Stronger Demand for Consumer Loans
Percent

Percent

100

All consumer loans

Credit card loans
Auto loans
Other consumer loans

100
80
60

-20

-40

-60
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Q2
2011

Q4
2011

Q2
2012

Q4
2012

Note: For data starting in 2011:Q2, changes in demand for credit card loans, auto loans, and consumer loans excluding credit card and
auto loans are reported separately.

Page 81 of 112

-60

Financial Developments

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Special Questions on Asset Quality

Loans to Business, Commercial Real Estate
Net percent

80
60
40

Expecting Deterioration

2010

2011

2012

-20

-100
2009

-20

-80

2008

-60

2007

CRE loans

-40

2006

100

Expecting Deterioration

Expecting Improvement

100
C&I loans to all firms
C&I loans to large and middle-market firms
C&I loans to small firms

Expecting Improvement

Loans to Business, Commercial and Industrial
Net percent

-40
-60
-80
-100

2013

2006

2007

2008

2009

2010

2011

2012

2013

Loans to Households, Residential Mortgages
Net percent

Loans to Households, Consumer Loans
Net percent

60
40

-20

-100
2009

2010

2011

2012

-80

2008

-60

2007

Credit cards
Other

-40

2006

Expecting Improvement

Prime mortgages
Nontraditional mortgages

100

Expecting Deterioration

Expecting Improvement

100

Expecting Deterioration

Financial Developments

Note: Beginning from 2010, C&I Loans were split into large
and middle-market firms versus small firms.

-40
-60
-80
-100

2013

2006

2007

2008

2009

2010

2011

2012

2013

Note: Other is the average of "Other consumer excluding
auto" and "Auto" for 2013.

Note: All data are annual. Domestic respondents only.
Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices.

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Questions on Consumer Lending
Responses from domestic banks indicated that they had again eased standards on auto
loans over the past three months. However, standards on credit card loans were reportedly little
changed, whereas banks had been reporting a net easing of standards on such loans in recent
surveys. Standards on other consumer loans also were little changed. On balance, several banks
reported that they had reduced spreads on consumer loans other than credit card loans. A modest
fraction of banks also reported having increased the maximum maturity of auto loans on net.
Other terms for consumer loans were little changed over the past three months.
On a portfolio-weighted basis, banks reported moderately weaker demand for credit card
loans, on net, in contrast to the moderate net strengthening of demand reported in the previous
survey. Demand for auto loans and other consumer loans reportedly increased on balance.

ANNUAL QUESTIONS ON ASSET QUALITY EXPECTATIONS

Regarding the outlook for the quality of business loans, about 40 percent of domestic
banks, on net, reportedly expect delinquency and charge-off rates on their C&I loans to all sizes
of firms to decline in 2013. While still considerable, these responses indicate a less widespread
expected improvement in the quality of C&I loans relative to the 2012 survey, consistent with
already very low delinquency and charge-off rates on such loans by historical standards. Similar
to last year, about 55 percent of domestic banks indicated that they expect improvement in the
quality of CRE loans in 2013. Turning to foreign respondents, about 20 percent, on net,
anticipate improvement in the quality of C&I loans to large and middle-market firms this year.
Meanwhile, about 45 percent of foreign respondents forecast improvement in the quality of CRE
loans, on balance, a sizable increase from the 25 percent that reportedly expected improvement
last year.
About 45 percent of domestic banks expect the delinquency and charge-off rates on
prime and nontraditional residential real estate loans to improve in 2013, on net, about the same
fractions reported in last year’s survey. None of the six banks that responded to the question on
subprime residential real estate loans expected a change in the quality of such loans in 2013.
Expectations for improvements this year in the quality of HELOCs stayed roughly the same as
last year, with about one-third of the respondents anticipating an improvement in the quality of
such loans. The discrepancy between respondents’ expectations of improvements in the quality
of residential real estate loans and HELOCs in last January’s survey and the observed

Page 83 of 112

Financial Developments

The January survey contained a set of special questions on respondents’ expectations for
loan quality in 2013 (repeated annually since 2006). Overall, large fractions of domestic banks,
on net, expected improvements in delinquency and charge-off rates during 2013 for most loan
categories included in the survey, assuming that economic activity progresses in line with
consensus forecasts. Expectations for improvement in most loan categories were in line with the
corresponding responses from a year ago with the exception of C&I loans, for which a smaller
fraction of banks expected improvement in credit quality in 2013.

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delinquency and charge-off rates for such loans in 2012 may, in part, be attributed to widespread
mortgage putbacks by GSEs, reported delays in the foreclosure process in many states, and
changes in regulatory guidance on junior lien loan loss allowances. As the effects of these factors
dissipate, the expected improvements in the quality of residential real estate loans and HELOCs
may prove to be more aligned with actual changes in delinquency and charge-off rates for such
loans in 2013.

Financial Developments

Among major loan categories, domestic banks were least likely to expect improvement in
the quality of consumer loans in 2013. Only about 10 percent of banks, on net, expected
improvement in credit card loans, and similar fractions projected improvement in auto and other
consumer loans. However, the current credit quality of these types of loans appears to be high.
According to Call Report data available through the third quarter of 2012, the aggregate rate of
credit card delinquencies reached a historical low for the period on record since 1991, and
delinquency rates for other consumer loans are near their historical averages over the
corresponding period. Moreover, charge-off rates for these types of loans are near or below their
pre-recession levels.

Page 84 of 112

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Risks and Uncertainty
ALTERNATIVE SCENARIOS
To illustrate some of the risks to the outlook, we construct a number of
alternatives to the baseline projection using simulations of the staff’s models. The first
two scenarios examine risks to the supply side. In particular, the first scenario assumes
that the natural rate of unemployment declines to a greater extent than we have assumed
in the baseline because discouraged workers are leaving the workforce permanently. The
second scenario explores a different way to rationalize a more rapid near-term decline in
the unemployment rate, namely that potential GDP is growing less rapidly because of
weaker structural productivity growth in both the recent past and in the future. The third
scenario focuses on the risk that a near-term increase in actual inflation could feed into
higher inflation expectations, resulting in inflation that is persistently above the FOMC’s
longer-run objective through the rest of the decade. The next two scenarios focus on
contrasting risks to domestic spending—first, that we have underestimated the
persistence of the headwinds restraining the recovery and, second, that a strong recovery
in residential construction and house prices will spark broad improvements in the overall
economy. The final two scenarios consider downside and upside risks to the domestic
economy from foreign economic developments—first, that the European crisis could
intensify with severe spillovers to the U.S. economy and, second, that the pace of
economic growth abroad could increase more rapidly than assumed in the baseline.
We generate the first five scenarios using the FRB/US model and the last two
scenarios using the multicountry SIGMA model. In the FRB/US simulations, we use an
inertial version of the Taylor (1999) rule, subject to the thresholds for the unemployment
rate and inflation announced by the FOMC following its December 2012 meeting. For
the SIGMA simulations, we use a broadly similar policy rule, subject to the same
utilization.1 In these scenarios, we have assumed that the size and composition of the
SOMA portfolio follow their baseline paths.

The SIGMA policy rule uses a measure of slack equal to the difference between actual output
and the model’s estimate of the level of output that would occur in the absence of slow adjustment of wages
and prices.

Page 85 of 112

Risks & Uncertainty

unemployment and inflation thresholds but employing an alternative concept of resource

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January 23, 2013

Alternative Scenarios
(Percent change, annual rate, from end of preceding period except as noted)

2012
Measure and scenario

Risks & Uncertainty

2013 2014 2015 201617

Real GDP
Extended Tealbook baseline
Lower natural rate
Supply-side damage
Unanchored expectations
Headwinds
Housing-led recovery
European crisis with severe spillovers
Faster recovery abroad

1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6

2.7
2.6
2.5
2.6
2.4
5.0
-1.6
3.5

3.2
3.1
2.9
2.9
2.4
4.4
1.2
4.0

3.5
3.5
3.1
2.3
2.6
1.9
3.6
3.5

2.6
2.5
2.3
2.1
2.8
.9
3.6
2.1

Unemployment rate1
Extended Tealbook baseline
Lower natural rate
Supply-side damage
Unanchored expectations
Headwinds
Housing-led recovery
European crisis with severe spillovers
Faster recovery abroad

7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.8

7.6
7.4
7.5
7.6
7.7
6.8
8.9
7.4

7.1
6.8
6.7
7.2
7.5
5.5
9.5
6.5

6.3
6.0
5.8
6.9
7.2
5.1
8.7
5.6

5.3
5.4
5.2
6.5
6.1
6.3
6.7
4.9

Total PCE prices
Extended Tealbook baseline
Lower natural rate
Supply-side damage
Unanchored expectations
Headwinds
Housing-led recovery
European crisis with severe spillovers
Faster recovery abroad

1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4

1.4
1.3
1.4
2.7
1.4
1.5
-.7
2.2

1.5
1.4
1.5
3.2
1.4
1.8
.9
2.4

1.6
1.4
1.7
3.0
1.4
2.0
1.9
2.0

1.9
1.6
2.1
2.8
1.5
2.1
2.4
1.8

Core PCE prices
Extended Tealbook baseline
Lower natural rate
Supply-side damage
Unanchored expectations
Headwinds
Housing-led recovery
European crisis with severe spillovers
Faster recovery abroad

1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0

1.6
1.5
1.6
2.5
1.6
1.7
.6
1.9

1.7
1.6
1.7
3.0
1.6
2.0
1.2
2.1

1.7
1.5
1.8
2.8
1.5
2.1
1.7
2.0

1.9
1.6
2.1
2.5
1.5
2.1
2.1
2.0

Federal funds rate1
Extended Tealbook baseline
Lower natural rate
Supply-side damage
Unanchored expectations
Headwinds
Housing-led recovery
European crisis with severe spillovers
Faster recovery abroad

.2
.2
.2
.2
.2
.2
.2
.2

.1
.1
.1
.1
.1
.1
.1
.1

.1
.1
.1
1.4
.1
2.0
.1
.1

.3
.8
.8
2.3
.1
3.4
.1
.9

2.8
2.4
2.2
2.6
.7
3.0
.1
3.6

1. Percent, average for the final quarter of the period.

Page 86 of 112

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Lower Natural Rate
Over the past several quarters, the unemployment rate has declined somewhat
faster than we had expected despite relatively subdued output growth. The Tealbook
projection attributes only a small part of this surprise to a somewhat earlier decline of the
natural rate than we had previously anticipated. In this scenario, we consider the
possibility that the natural rate of unemployment started to decline substantially earlier
and more rapidly than assumed in the baseline, and that it will reach 5¼ percent by late
2013—several years earlier than in the baseline. However, the more rapid decline in the
natural rate is assumed to reflect not an improvement in labor market functioning, but
rather a greater number of the long-term unemployed permanently leaving the labor
force. The combination of a more rapidly falling natural rate and a steeper downward
trend in labor force participation implies little change in potential labor input—and thus
only a small revision from the baseline in potential GDP—through 2015.2 Under these
conditions, real GDP and employment fall slightly relative to the baseline, but the
unemployment rate falls more quickly because more of the long-term unemployed
become discouraged and leave the labor force permanently. As a result, the
unemployment rate falls below its threshold value in mid-2015, and so the federal funds
rate reverts to the prescriptions of the inertial Taylor rule and begins to rise one quarter
earlier than in the baseline.

Supply-Side Damage
Another possible explanation for the surprisingly rapid decline in the
unemployment rate during 2012 is that potential GDP has been expanding more slowly
than the staff estimates, perhaps because the financial crisis caused greater structural
damage than the staff has assumed. This scenario assumes that the current level of
potential output is actually 1 percent lower than in the baseline because of
smaller-than-estimated gains in structural productivity over the past few years, and that
these smaller gains will continue, shaving 0.3 percentage point off the average annual
growth rate of potential GDP going forward. As a result, real GDP rises only 2¾ percent
throughout the simulation period. Given the downward revision to potential output in
2012 and beyond in this scenario, Okun’s law implies a more rapid decline in the
unemployment rate than in the baseline. Inflation runs above baseline later in the decade,
2

Alternatively, the natural rate of unemployment could decline, reflecting an improvement in
labor market functioning. In this case, the natural rate would fall but labor force participation would not,
resulting in higher potential output.

Page 87 of 112

Risks & Uncertainty

per year, on average, in 2013 and 2014, and economic growth remains below baseline

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Forecast Confidence Intervals and Alternative Scenarios
Confidence Intervals Based on FRB/US Stochastic Simulations
Extended Tealbook baseline
Lower natural rate
Supply−side damage

Unanchored expectations
Headwinds
Housing−led recovery

Real GDP

European crisis with severe spillovers
Faster recovery abroad

Unemployment Rate
4-quarter percent change

Percent
8

10.5

10.0
9.5

9.0

70 percent
interval

8.5
4

8.0

7.5

7.0

6.5

6.0
5.5

−1

5.0
90 percent
interval

−2

4.5

−3

4.0

−4

3.5

−5
2008

2010

2012

2014

3.0

2016

2008

PCE Prices excluding Food and Energy

2010

2012

2014

2016

Federal Funds Rate

4-quarter percent change

Percent
4.0

3.5
5
3.0
2.5

2.0
3

Risks & Uncertainty

1.5
1.0

0.5
1

0.0
−0.5

−1.0
2008

2010

2012

2014

2016

2008

Page 88 of 112

2010

2012

2014

2016

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January 23, 2013

reflecting both the direct effect of lower productivity on firms’ costs and a smaller margin
of slack. With the unemployment rate falling below its threshold value in mid-2015, the
federal funds rate lifts off one quarter earlier than in the baseline.

Unanchored Expectations
In recent years, inflation has sometimes spiked on account of sharp increases in
the prices of oil, other commodities, or imported goods, but these developments have
proved to be temporary as longer-term inflation expectations have remained stable. In
this scenario, consumer prices rise significantly, pushing headline inflation up to
3¼ percent by 2014. But in this case, long-run inflation expectations become unmoored,
possibly facilitated by a loss of confidence associated with the large and expanding
Federal Reserve balance sheet and a misinterpretation of the Committee’s stated intention
of keeping monetary policy highly accommodative for a period of time after the recovery
has strengthened. As a result, both headline and core inflation run substantially above
baseline for several years, and projected inflation one-to-two years ahead exceeds the
2½ percent threshold in early 2014, prompting a liftoff of the federal funds rate under the
inertial Taylor rule. The federal funds rate then rises steeply and remains above baseline
until late 2017. Yields on Treasury securities and corporate bonds rise in response to
both higher expected short-term interest rates and an assumed increase in inflation risk
premiums. Real GDP rises only 2¾ percent per year, on average, in 2013 and 2014
because of these tighter financial conditions, and growth remains below baseline
throughout the simulation period.

Headwinds
In this scenario, the unfavorable baseline assumptions for foreign economic
conditions and credit availability, the remaining uncertainty about the fiscal outlook, and
the dysfunction in the mortgage lending market turn out to have a more restrictive effect
on aggregate demand than anticipated in the baseline. As a result, the pace of the
recovery does not pick up: Real GDP rises only 2½ percent per year, on average, in 2013
runs about a percentage point above its baseline trajectory from mid-2015 through 2017.
Because margins of resource slack remain high, inflation stays close to 1½ percent
through late 2015. With inflation persistently below the FOMC’s longer-run objective

Page 89 of 112

Risks & Uncertainty

and 2014, and growth remains below baseline until late 2016. The unemployment rate

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Selected Tealbook Projections and 70 Percent Confidence Intervals Derived
from Historical Tealbook Forecast Errors and FRB/US Simulations
Measure
Real GDP
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
Civilian unemployment rate
(percent, Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
PCE prices, total
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations
PCE prices excluding
food and energy
(percent change, Q4 to Q4)
Projection
Confidence interval
Tealbook forecast errors
FRB/US stochastic simulations

Risks & Uncertainty

Federal funds rate
(percent, Q4)
Projection
Confidence interval
FRB/US stochastic simulations

2012

2013

2014

2015

2016

2017

1.6

2.7

3.2

3.5

3.2

2.1

1.4–1.8
1.4–1.8

1.1–4.2
1.3–4.6

1.4–5.0
1.2–5.6

...
.3–5.0

...
-.2–5.1

...
-.3–5.2

7.8

7.6

7.1

6.3

5.6

5.3

7.8–7.8
7.8–7.9

7.0–8.2
6.8–8.1

6.2–8.0
5.6–8.2

...
4.9–7.8

...
4.6–7.6

...
4.2–7.4

1.5

1.4

1.5

1.6

1.8

2.0

1.4–1.6
1.4–1.6

.4–2.4
.5–2.4

.3–2.6
.4–2.6

...
.4–2.8

...
.5–3.0

...
.6–3.1

1.5

1.6

1.7

1.8

2.0

1.3–1.6
1.4–1.5

1.1–2.2
1.0–2.3

.9–2.5
.9–2.6

...
.8–2.7

...
.8–2.8

...
.9–2.9

1.8

2.8

.2–.2

.1–.7

.1–2.2

.1–3.5

.1–4.1

.5–4.6

Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2011 set of
model equation residuals.
Intervals derived from Tealbook forecast errors are based on projections made from 1979–2011, except
for PCE prices excluding food and energy, where the sample is 1981–2011.
. . . Not applicable. The Tealbook forecast horizon has typically extended about 2 years.

Page 90 of 112

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Authorized for Public Release

January 23, 2013

and the unemployment rate far above its natural rate, the federal funds rate remains at its
effective lower bound until mid-2017, almost two years longer than in the baseline.3

Housing-Led Recovery
The increases in house prices, housing starts, and home sales seen over the past
year may be pointing to a more robust recovery in the housing market than is assumed in
the baseline. In this scenario, the stronger housing recovery, along with the resolution of
some of the uncertainty pervading the economic environment, spark a cycle of increased
consumer and business confidence, faster hiring, and improved financial conditions that
leads to stronger spending by households and firms. As a result, real GDP rises at an
average annual rate of 4¾ percent in 2013 and 2014, and the unemployment rate falls
below 6½ percent in early 2014 and below 5¼ percent by mid-2015. Upward pressure on
inflation is initially tempered by the effects of increased capital investment on labor
productivity and unit labor costs. But, with less resource slack, unit labor costs
eventually rise more rapidly than in the baseline, and inflation is slightly above 2 percent
in 2015 and 2016. In response to higher inflation and the stronger pace of real activity,
the federal funds rate lifts off in early 2014 and stays higher than in the baseline.

European Crisis with Severe Spillovers
In this scenario, the improvements witnessed in European financial markets over
the past few months are assumed to be short-lived, and Europe plunges into a bout of
severe stress, much worse than seen to date during this crisis. While we think that the
likelihood of such an outcome has declined somewhat in recent months, it could still
occur, possibly triggered by a disorderly sovereign default, the failure of a large
European financial institution, or a loss of confidence by the public in the ability of
European governments to resolve the crisis. In this scenario, the greater stress prompts
both private and most sovereign borrowing costs in Europe to soar, with corporate bond
spreads rising 400 basis points above baseline; in addition, the confidence of European
households and businesses plummets. Real GDP in Europe declines about 8 percent
As noted earlier, we assume that the size and composition of the SOMA portfolio in these
alternative scenarios are the same as in the baseline. However, if the recovery were to prove as anemic as
shown in the “Headwinds” scenario, the FOMC might choose to purchase a larger amount of securities than
assumed in the baseline. One ad hoc way to account for this possibility might be to assume that the FOMC
continues adding to its SOMA portfolio through late this year, increasing the amount of purchases in 2013
by $500 billion relative to the baseline. FRB/US simulations as well as judgmental assessments of the
effect of large-scale asset purchases on the economy suggest that these purchases would lower the
unemployment rate by slightly less than ¼ percentage point by late 2015 relative to the “Headwinds”
scenario. Similar considerations could apply to all of the scenarios.

Page 91 of 112

Risks & Uncertainty

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

relative to the baseline by the second half of 2014, despite a 25 percent depreciation of
the real effective exchange value of the euro. Europe’s difficulties are assumed to have
important financial and economic spillovers to the rest of the world, including the United
States. U.S. economic activity contracts sharply, as U.S. corporate bond spreads rise
more than 300 basis points, equity prices plunge, credit availability is restricted, and
household and business confidence erodes. In addition, weaker foreign economic activity
and the stronger exchange value of the dollar depress U.S. net exports. In all, because of
greater resource slack and lower import prices, total U.S. consumer prices fall in 2013,
before beginning to rise in 2014 as economic activity starts to recover. U.S. real GDP
falls 1½ percent this year and increases only 1¼ percent in 2014. The unemployment rate
rises to 9½ percent in 2014 and then gradually declines. With inflationary pressures
subdued and the unemployment rate above its 6½ percent threshold value until late 2018,
the federal funds rate does not lift off from its effective lower bound until 2019.

Faster Recovery Abroad
In this scenario, output growth across our major trading partners turns out to be
stronger than anticipated, as favorable policy developments in the United States and
Europe and the strengthening of global economic activity envisaged in our forecast
contribute to a more rapid return of consumer and investor confidence. Specifically,
foreign output expands about 1½ percentage points faster than the baseline pace through
late 2014, as sentiment improves and corporate risk spreads fall about 100 basis points; in
addition, the broad real dollar depreciates about 5 percent relative to the baseline because
of a faster reversal of both safe-haven flows and monetary accommodation abroad. The
stronger foreign activity and the weaker dollar stimulate U.S. real net exports. All told,
U.S. real GDP rises 3½ percent in 2013, about ¾ percentage points faster than in the
baseline, while the unemployment rate falls to about 6½ percent by late 2014. Higher
import prices and stronger activity boost core PCE inflation to close to 2 percent in 2013
and 2014. The policy rule does not call for a liftoff until the third quarter of 2015, one
quarter earlier than in the baseline, even though the unemployment threshold is crossed
Risks & Uncertainty

three quarters earlier.

Page 92 of 112

Authorized for Public Release

January 23, 2013

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Risks & Uncertainty

Class II FOMC - Restricted (FR)

Page 93 of 112

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Alternative Projections
(Percent change, Q4 to Q4, except as noted)
2012
Measure and projection

2013

2014

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Real GDP
Staff
FRB/US
EDO
Blue Chip

1.7
1.7
1.7
1.7

1.6
1.6
1.6
1.9

2.5
1.4
3.0
2.3

2.7
2.0
3.0
2.2

3.2
2.9
3.3
...

3.2
2.2
3.2
2.8

Unemployment rate1
Staff
FRB/US
EDO
Blue Chip

8.0
8.0
8.0
7.9

7.8
7.8
7.8
7.8

7.8
8.3
7.7
7.6

7.6
8.0
7.6
7.5

7.4
8.1
7.3
...

7.1
8.0
7.3
7.0

Total PCE prices
Staff
FRB/US
EDO
Blue Chip2

1.6
1.6
1.6
2.0

1.5
1.5
1.5
1.9

1.3
1.0
1.3
2.0

1.4
1.3
1.2
1.9

1.4
1.1
1.5
...

1.5
1.0
1.4
2.2

Core PCE prices
Staff
FRB/US
EDO
Blue Chip

1.6
1.6
1.6
...

1.5
1.5
1.5
...

1.6
1.3
1.3
...

1.6
1.5
1.2
...

1.6
1.3
1.5
...

1.7
1.3
1.4
...

.2
.2
.2
.1

.1
.2
.9
.2

.1
.1
.9
.1

.1
1.3
1.7
...

.1
.1
1.7
.3

Federal funds rate1
Staff
FRB/US
EDO
Blue Chip3

Risks & Uncertainty

Note: Blue Chip forecast completed on January 10, 2013.
1. Percent, average for Q4.
2. Consumer price index.
3. Treasury bill rate.
... Not applicable. The Blue Chip forecast typically extends about 2 years.

Page 94 of 112

Authorized for Public Release

Class II FOMC - Restricted (FR)

January 23, 2013

Tealbook Forecast Compared with Blue Chip
(Blue Chip survey released January 10, 2013)
Real GDP

Real PCE
Percent change, annual rate

Percent change, annual rate

5
4

-2

-1

-2

-3

-4

-4
-5

Blue Chip consensus
Staff forecast

-4
-6

-8

-5

-10

-6

2008
2009
2010
2011
2012
2013
2014
Note: The shaded area represents the area between the
Blue Chip top 10 and bottom 10 averages.

2008

Unemployment Rate

2009

2010

2011

2012

2013

2014

-6

Consumer Price Index
Percent

11
10

Percent change, annual rate

-2

-4

-6

-8

2008

2009

2010

2011

2012

2013

2014

-10

2008

Treasury Bill Rate
Percent

2008

2009

2010

2011

2010

2011

2012

2013

2014

-10

10-Year Treasury Yield

-1

2009

2012

2013

2014

-1

Percent

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

2008

2009

2010

2011

2012

2013

2014

Note: The yield is for on-the-run Treasury securities. Over
the forecast period, the staff’s projected yield is assumed
to be 15 basis points below the off-the-run yield.

Page 95 of 112

1.0

Risks & Uncertainty

Authorized for Public Release

A ssessm en t o f K ey M acroecon om ic R isks (1)

Probability of Inflation Events
(4 quarters ahead—2013:Q4)
Probability that the 4-quarter change in total
PCE prices will be ...

Staff

FRB/US

EDO

BVAR

Greater than 3 percent
Current Tealbook
Previous Tealbook

.05
.04

.04
.03

.09
.10

.06
.09

Less than 1 percent
Current Tealbook
Previous Tealbook

.31
.36

.36
.47

.33
.30

.18
.13

Probability of Unemployment Events
(4 quarters ahead—2013:Q4)
Probability that the unemployment rate w ill...

Staff

FRB/US

EDO

BVAR

Increase by 1 percentage point
Current Tealbook
Previous Tealbook

.02
.02

.07
.13

.16
.17

.01
.02

Decrease by 1 percentage point
Current Tealbook
Previous Tealbook

.11
.04

.03
.00

.28
.28

.21
.18

Probability of Near-Term Recession
Probability that real GDP declines in
each of 2013:Q1 and 2013:Q2
Current Tealbook
Previous Tealbook

Staff

FRB/US

EDO

BVAR

Factor
Model

.04
.03

.08
.05

.04
.05

.08
.04

.10
.25

Note: “Staff” represents Tealbook forecast errors applied to the Tealbook baseline; baselines for FRB/US, BVAR, EDO, and
the factor model are generated by those models themselves, up to the current-quarter estimate. The current quarter is taken as data
from the staff estimate for the second Tealbook in each quarter, otherwise the preceding quarter is taken as the latest historical
observation.

Authorized for Public Release

Assessment of Key Macroeconomic Risks (2)

Note: See notes on facing page. Recession and inflation probabilities for FRB/US and the BVAR are real-time estimates. See
Robert J. Tetlow and Brian Ironside (2007), "Real-Time Model Uncertainty in the United States: The Fed, 1996- 2003,"
Journal of Money and Banking , vol. 39 (October), pp. 1533-61.

Authorized for Public Release

(This page is intentionally blank.)

4.2
2.8
5.7
2.6
3.1
3.9
4.2
4.2
4.4
4.6
4.7
4.9

3.5
4.1
3.5
4.2
4.5
4.8

4.0
3.8
3.9
4.6
5.2

Quarterly
2012:Q1
Q2
Q3
Q4
2013:Q1
Q2
Q3
Q4
2014:Q1
Q2
Q3
Q4

Two-quarter2
2012:Q2
Q4
2013:Q2
Q4
2014:Q2
Q4

Four-quarter3
2011:Q4
2012:Q4
2013:Q4
2014:Q4
2015:Q4

Page 99 of 112

4.0
3.5
4.1
4.8
5.1

3.5
3.6
4.0
4.2
4.4
5.2

4.2
2.8
5.9
1.3
3.7
4.2
4.1
4.2
4.1
4.7
5.1
5.3

01/23/13

2.0
1.7
2.5
3.2
3.6

1.6
1.8
2.1
2.8
3.0
3.3

2.0
1.3
2.8
.9
1.7
2.5
2.8
2.9
2.9
3.1
3.3
3.4

12/05/12

2.0
1.6
2.7
3.2
3.5

1.6
1.6
2.6
2.8
2.8
3.6

2.0
1.3
3.1
.1
2.7
2.4
2.7
2.8
2.5
3.1
3.5
3.7

01/23/13

Real GDP

2.5
1.6
1.3
1.4
1.5

1.6
1.6
1.2
1.3
1.4
1.4

2.5
.7
1.6
1.5
1.1
1.4
1.4
1.3
1.5
1.4
1.4
1.4

12/05/12

2.5
1.5
1.4
1.5
1.6

1.6
1.4
1.4
1.4
1.5
1.4

2.5
.7
1.6
1.2
.9
1.9
1.5
1.3
1.5
1.4
1.5
1.4

01/23/13

PCE price index

1.7
1.6
1.6
1.6
1.7

2.0
1.2
1.6
1.6
1.7
1.6

2.2
1.7
1.1
1.2
1.7
1.6
1.6
1.5
1.7
1.6
1.7
1.6

12/05/12

Greensheets

1.4
1.7
1.4
1.7
1.7

1.7
1.5
1.6
1.7
1.7

2.0
1.0
1.7
1.6
1.7
1.7

2.2
1.7
1.1
.8
1.6
1.7
1.7
1.5
1.7
1.7
1.7
1.6

01/23/13

8.9
8.1
7.9
7.6
6.9

-.9
-.7
-.2
-.4
-.9

-.5
-.2
-.1
-.1
-.1
-.3

8.2
8.2
8.1
8.0
7.9
7.9
7.9
7.8
7.7
7.7
7.5
7.4

12/05/12

8.9
8.1
7.7
7.3
6.6

-.8
-.9
-.2
-.5
-.8

-.5
-.4
-.1
-.1
-.2
-.3

8.2
8.2
8.0
7.8
7.8
7.7
7.7
7.6
7.5
7.4
7.2
7.1

01/23/13

Core PCE price index Unemployment rate1

Authorized for Public Release

Annual
2011
4.0
4.0
1.8
1.8
2.4
2.4
1.4
2012
4.1
4.0
2.2
2.2
1.8
1.7
1.7
2013
3.7
3.7
2.0
2.1
1.3
1.3
1.5
2014
4.4
4.4
3.0
2.9
1.4
1.5
1.6
2015
5.0
5.1
3.4
3.5
1.5
1.5
1.7
1. Level, except for two-quarter and four-quarter intervals.
2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points.
3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points.

12/05/12

Interval

Nominal GDP

Changes in GDP, Prices, and Unemployment
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
January 23, 2013

Page 100 of 112

41
41
53
-8

Change in bus. inventories2
Previous Tealbook2
Nonfarm2
Farm2
60
61
88
-19

3.9
4.0
9.5
12.9
3.0
.3

-395
-403
1.9
-.6

-1.8
-2.2
-2.6
-3.1
.0
-.2

13.5
13.8

1.6
1.4
8.9
1.2
.6

2.4
2.0
1.5
1.3

3.1
2.8

16
35
44
-19

-5.6
-3.5
-12.4
-17.1
-2.2
-.8

-403
-403
-4.5
-2.4

9.6
5.4
13.8
7.3
-.4
.9

13.1
14.8

2.2
2.1
12.0
.5
1.2

1.5
1.7
3.4
2.9

.1
.9

57
75
49
7

-1.1
-1.8
-2.8
-3.2
-2.0
.1

-396
-395
5.2
3.0

2.2
1.1
1.7
.4
3.6
2.9

15.0
17.0

1.7
.6
2.2
.9
1.8

1.8
.8
2.1
1.1

2.7
1.7

50
66
42
7

-1.5
-1.5
-4.2
-4.9
-2.7
.3

-396
-393
5.3
4.4

5.0
6.4
5.5
7.9
3.7
2.8

25.1
22.6

2.6
2.6
9.6
1.4
1.8

2.6
2.8
3.5
3.7

2.4
2.5

46
66
38
7

-1.4
-1.6
-4.1
-4.7
-2.7
.3

-390
-390
5.3
3.2

6.7
6.7
7.1
7.8
5.5
4.0

17.9
14.7

2.5
2.7
8.9
1.4
1.8

2.8
2.8
3.5
3.6

2.7
2.8

2013

52
74
44
7

-1.5
-1.5
-4.5
-5.4
-2.8
.4

-394
-396
5.4
5.1

7.3
6.5
8.6
8.5
4.0
1.8

14.1
13.0

2.7
2.9
9.2
1.7
2.0

2.6
2.6
3.6
3.7

2.8
2.9

71
83
66
5

-1.2
-1.2
-4.4
-5.3
-2.8
.9

-2.0
-1.1
-6.5
-8.2
-3.1
.8
67
83
62
5

-393
-402
5.4
3.9

4.1
5.5
4.7
6.7
2.6
2.6

13.2
12.3

3.2
3.3
9.1
2.5
2.5

3.0
3.1
3.7
3.9

3.1
3.1

-397
-403
5.7
5.3

3.4
5.7
4.2
7.5
1.4
1.3

11.6
10.3

2.6
3.1
8.7
1.7
1.9

2.0
2.6
3.0
3.6

2.5
2.9

69
77
64
5

-1.0
-1.0
-4.2
-4.9
-2.8
.9

-387
-393
6.3
4.1

5.6
5.9
6.7
7.0
3.0
3.0

13.4
12.7

3.6
3.4
8.5
3.0
3.0

3.6
3.5
4.2
4.0

3.5
3.3

2014

80
81
75
5

-1.0
-1.0
-4.4
-5.2
-2.8
1.0

-388
-391
6.8
6.0

6.3
5.7
7.5
6.8
3.1
3.1

12.6
11.9

3.6
3.5
8.9
2.9
3.0

3.4
3.3
4.3
4.1

3.7
3.4

44
49
62
-12

-1.4
-.8
-2.2
-3.5
.5
-.9

-405
-407
1.7
.7

4.6
3.5
5.2
3.5
3.1
3.4

13.8
14.3

1.9
1.9
7.9
1.0
1.3

2.0
1.9
2.6
2.4

1.6
1.7

20121

51
70
43
7

-1.4
-1.6
-3.9
-4.6
-2.6
.3

-394
-393
5.3
3.9

5.3
5.2
5.7
6.1
4.2
2.9

17.9
16.8

2.3
2.2
7.4
1.3
1.9

2.5
2.3
3.2
3.0

2.7
2.5

20131

72
81
67
5

-1.3
-1.1
-4.9
-5.9
-2.9
.9

-391
-397
6.1
4.8

4.8
5.7
5.8
7.0
2.5
2.5

12.7
11.8

3.3
3.3
8.8
2.5
2.6

3.0
3.1
3.8
3.9

3.2
3.2

20141

84
75
83
1

-.5
-.1
-3.3
-3.6
-2.8
1.2

-379
-379
7.1
5.3

4.8
5.0
6.0
6.2
2.1
2.1

13.8
12.7

3.5
3.6
8.4
2.8
2.9

3.5
3.6
4.1
4.1

3.5
3.6

20151

Authorized for Public Release

1. Change from fourth quarter of previous year to fourth quarter of year indicated.
2. Billions of chained (2005) dollars.

-.7
-.7
-.2
-.2
-.4
-1.0

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local

3.6
3.6
4.8
4.8
.6
.6

Business fixed invest.
Previous Tealbook
Equipment & software
Previous Tealbook
Nonres. structures
Previous Tealbook
-407
-407
5.3
2.8

8.5
8.5

Residential investment
Previous Tealbook

Net exports2
Previous Tealbook2
Exports
Imports

1.5
1.5
-.2
.6
2.1

1.7
1.7
1.9
1.9

Final sales
Previous Tealbook
Priv. dom. final purch.
Previous Tealbook

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

1.3
1.3

Real GDP
Previous Tealbook

Item

2012

Greensheets
Changes in Real Gross Domestic Product and Related Items
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
January 23, 2013

Page 101 of 112

59
59
63
-4

Change in bus. inventories1
Previous Tealbook1
Nonfarm1
Farm1

28
28
29
-1

1.9
1.9
3.1
2.6
4.2
1.2

-649
-649
10.1
.8

7.9
7.9
3.9
3.9
17.3
17.3

-20.7
-20.7

1.7
1.7
4.6
.8
1.4

2.4
2.4
1.2
1.2

2.2
2.2

2007

Greensheets

-139
-139
-138
-1

4.0
4.0
5.1
4.1
7.2
3.3

2.7
2.7
8.8
9.8
6.8
-.9
-36
-36
-38
1

-355
-355
.3
-6.1

-15.7
-15.7
-7.8
-7.8
-29.4
-29.4

-13.3
-13.3

-.3
-.3
3.0
.4
-1.1

-.5
-.5
-2.8
-2.8

-.1
-.1

2009

-495
-495
-2.5
-5.9

-9.4
-9.4
-13.6
-13.6
-1.2
-1.2

-24.4
-24.4

-2.5
-2.5
-13.0
-3.1
-.5

-2.6
-2.6
-4.5
-4.5

-3.3
-3.3

2008

51
51
58
-6

-1.3
-1.3
2.3
1.0
5.2
-3.6

-420
-420
8.8
10.9

7.7
7.7
11.9
11.9
-1.8
-1.8

-5.7
-5.7

2.9
2.9
9.5
3.0
1.9

1.7
1.7
3.2
3.2

2.4
2.4

2010

31
31
36
-4

-3.3
-3.3
-4.2
-4.0
-4.6
-2.7

-408
-408
4.3
3.5

10.2
10.2
11.4
11.4
6.9
6.9

3.9
3.9

1.9
1.9
5.9
1.4
1.5

1.7
1.7
2.9
2.9

2.0
2.0

2011

44
49
62
-12

-1.4
-.8
-2.2
-3.5
.5
-.9

-405
-407
1.7
.7

4.6
3.5
5.2
3.5
3.1
3.4

13.8
14.3

1.9
1.9
7.9
1.0
1.3

2.0
1.9
2.6
2.4

1.6
1.7

2012

51
70
43
7

-1.4
-1.6
-3.9
-4.6
-2.6
.3

-394
-393
5.3
3.9

5.3
5.2
5.7
6.1
4.2
2.9

17.9
16.8

2.3
2.2
7.4
1.3
1.9

2.5
2.3
3.2
3.0

2.7
2.5

2013

72
81
67
5

-1.3
-1.1
-4.9
-5.9
-2.9
.9

-391
-397
6.1
4.8

4.8
5.7
5.8
7.0
2.5
2.5

12.7
11.8

3.3
3.3
8.8
2.5
2.6

3.0
3.1
3.8
3.9

3.2
3.2

2014

84
75
83
1

-.5
-.1
-3.3
-3.6
-2.8
1.2

-379
-379
7.1
5.3

4.8
5.0
6.0
6.2
2.1
2.1

13.8
12.7

3.5
3.6
8.4
2.8
2.9

3.5
3.6
4.1
4.1

3.5
3.6

2015

Authorized for Public Release

1. Billions of chained (2005) dollars.

1.5
1.5
2.2
4.4
-2.3
1.2

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local

7.8
7.8
6.0
6.0
13.0
13.0

Business fixed invest.
Previous Tealbook
Equipment & software
Previous Tealbook
Nonres. structures
Previous Tealbook
-729
-729
10.2
4.1

-15.7
-15.7

Residential investment
Previous Tealbook

Net exports1
Previous Tealbook1
Exports
Imports

3.2
3.2
7.0
2.9
2.6

2.8
2.8
2.4
2.4

Final sales
Previous Tealbook
Priv. dom. final purch.
Previous Tealbook

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

2.4
2.4

2006

Real GDP
Previous Tealbook

Item

Changes in Real Gross Domestic Product and Related Items
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
January 23, 2013

Page 102 of 112

.7
.8
1.1
-.4

.8
.8
.7
.6
.1
.0
-1.4
-.8
-1.4
.0

-1.1
-.7
-1.0
-1.0
-.1
-.1

-.2
.0
-.6
.4

.9
.5
1.0
.5
.0
.0

.3
.3

1.5
1.5
.9
.1
.6

1.4
1.7
2.8
2.4

.1
.9

.9
.9
.2
.8

-.2
-.3
-.2
-.2
-.1
.0

.2
.2
.7
-.5

.2
.1
.1
.0
.1
.1

.4
.4

1.2
.4
.2
.1
.9

1.8
.8
1.8
1.0

2.7
1.7

-.2
-.3
-.2
.0

-.3
-.3
-.3
-.3
-.1
.0

.0
.1
.7
-.7

.5
.6
.4
.6
.1
.1

.6
.6

1.8
1.8
.7
.2
.9

2.6
2.8
2.9
3.0

2.4
2.5

-.1
.0
-.1
.0

-.3
-.3
-.3
-.2
-.1
.0

.2
.1
.7
-.5

.7
.7
.5
.6
.2
.1

.5
.4

1.8
1.9
.7
.2
.9

2.8
2.8
2.9
3.0

2.7
2.8

1. Change from fourth quarter of previous year to fourth quarter of year indicated.

-.5
-.5
-.3
-.2

-.1
-.1
.0
.0
.0
-.1

Gov’t. cons. & invest.
Previous Tealbook
Federal
Defense
Nondefense
State & local

.4
.1
.3
.1

-.2
-.2
-.2
-.2
.0
.0

.3
.3

1.1
1.0
.7
.2
.3

2.4
2.0
1.3
1.1

3.1
2.8

2013

.2
.3
.2
.0

-.3
-.3
-.3
-.3
-.1
.0

-.1
-.2
.7
-.9

.8
.7
.6
.6
.1
.1

.4
.4

1.9
2.1
.7
.3
.9

2.6
2.6
3.0
3.1

2.8
2.9

.5
.3
.5
-.1

-.4
-.2
-.5
-.4
-.1
.1

-.1
-.2
.8
-.9

.4
.6
.3
.5
.0
.0

.3
.3

1.8
2.2
.7
.3
.9

2.0
2.6
2.5
3.0

2.5
2.9

.1
.0
.1
.0

-.2
-.2
-.3
-.2
-.1
.1

.1
.0
.8
-.7

.4
.6
.4
.5
.1
.1

.4
.4

2.3
2.3
.7
.4
1.2

3.0
3.1
3.1
3.2

3.1
3.1

.0
-.2
-.1
.0

-.2
-.2
-.3
-.2
-.1
.1

.2
.2
.9
-.7

.6
.6
.5
.5
.1
.1

.4
.4

2.6
2.4
.7
.5
1.4

3.6
3.4
3.6
3.4

3.5
3.3

2014

.3
.1
.3
.0

-.2
-.2
-.3
-.2
-.1
.1

-.1
.0
1.0
-1.0

.7
.6
.6
.5
.1
.1

.4
.4

2.6
2.5
.7
.5
1.4

3.4
3.3
3.6
3.4

3.7
3.4

-.4
-.2
-.2
-.1

-.3
-.2
-.2
-.2
.0
-.1

.1
.1
.2
-.1

.5
.4
.4
.3
.1
.1

.3
.3

1.4
1.3
.6
.2
.6

2.0
1.9
2.1
2.0

1.6
1.7

20121

.2
.2
.0
.2

-.3
-.3
-.3
-.2
-.1
.0

.1
.0
.7
-.7

.5
.5
.4
.4
.1
.1

.5
.4

1.7
1.6
.6
.2
.9

2.5
2.3
2.7
2.5

2.7
2.5

20131

.2
.1
.2
.0

-.2
-.2
-.3
-.3
-.1
.1

.0
.0
.8
-.8

.5
.6
.4
.5
.1
.1

.4
.3

2.3
2.3
.7
.4
1.2

3.0
3.1
3.2
3.3

3.2
3.2

20141

.0
.0
.1
.0

-.1
.0
-.2
-.2
-.1
.1

.1
.1
1.0
-.9

.5
.5
.5
.5
.1
.1

.4
.4

2.5
2.6
.7
.4
1.4

3.5
3.6
3.5
3.5

3.5
3.6

20151

Authorized for Public Release

Change in bus. inventories
Previous Tealbook
Nonfarm
Farm

.2
.2
.7
-.5

.4
.4
.4
.4
.0
.0

Business fixed invest.
Previous Tealbook
Equipment & software
Previous Tealbook
Nonres. structures
Previous Tealbook

Net exports
Previous Tealbook
Exports
Imports

.2
.2

Residential investment
Previous Tealbook

1.1
1.1
.0
.1
1.0

1.7
1.7
1.6
1.6

Final sales
Previous Tealbook
Priv. dom. final purch.
Previous Tealbook

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

1.3
1.3

Real GDP
Previous Tealbook

Item

2012

Contributions to Changes in Real Gross Domestic Product
(Percentage points, annual rate except as noted)

Greensheets

Class II FOMC - Restricted (FR)
January 23, 2013

2.1
2.1
1.9
1.9
1.3
1.3
-.5
-.5
1.2
1.2

ECI, hourly compensation2
Previous Tealbook2

Nonfarm business sector
Output per hour
Previous Tealbook
Compensation per hour
Previous Tealbook
Unit labor costs
Previous Tealbook

Page 103 of 112

Core goods imports chain-wt. price index3
Previous Tealbook3
-2.3
-2.4

3.3
3.0
1.1
.9
-2.1
-2.0

1.7
1.7

2.3
2.3
1.5
1.5

1.6
1.6
10.5
10.5
.6
.6
1.1
1.1
1.3
1.3

2.7
2.7

1.3
2.2

-3.0
-.6
1.0
1.8
4.1
2.4

2.1
2.1

2.1
2.3
1.6
1.8

1.2
1.5
5.6
4.6
2.1
2.4
.8
1.2
.8
1.3

1.2
1.7

2.5
1.5

.5
-1.0
2.6
2.4
2.1
3.5

2.3
2.3

.8
1.2
1.9
2.0

.9
1.1
-11.0
-9.3
3.1
3.4
1.6
1.7
1.4
1.6

1.0
1.4

1.6
.8

1.2
1.9
2.7
2.6
1.4
.7

2.6
2.5

2.1
1.3
1.8
1.7

1.9
1.4
3.6
-3.7
2.8
2.8
1.7
1.6
1.6
1.5

1.8
1.4

1.3
1.1

1.6
1.5
3.0
2.9
1.4
1.3

2.7
2.7

1.3
1.3
1.6
1.6

1.3
1.3
-2.2
-1.9
1.0
1.1
1.5
1.5
1.4
1.4

1.3
1.3

Greensheets

1.4
1.0

1.6
1.7
2.9
2.8
1.3
1.1

2.7
2.6

1.3
1.4
1.7
1.7

1.5
1.4
-2.7
-2.4
2.0
2.1
1.7
1.6
1.6
1.5

1.4
1.4

2013

1.3
1.3

1.3
1.7
3.1
2.9
1.7
1.2

2.9
2.7

1.4
1.4
1.8
1.8

1.5
1.5
-1.6
-1.4
.9
.9
1.7
1.7
1.6
1.6

1.5
1.5

1.4
1.4

1.8
1.9
3.1
3.0
1.3
1.1

3.0
2.8

1.4
1.4
1.8
1.8

1.4
1.4
-1.5
-1.7
1.0
1.0
1.7
1.6
1.6
1.5

1.5
1.4

1.7
1.7

2.1
1.8
3.1
3.1
1.0
1.3

3.0
2.9

1.4
1.4
1.8
1.8

1.5
1.4
-1.6
-2.0
1.1
1.1
1.7
1.7
1.6
1.5

1.5
1.4

2014

1.5
1.4

2.3
1.9
3.2
3.2
.9
1.2

3.0
2.9

1.4
1.4
1.7
1.7

1.4
1.4
-1.3
-1.8
1.2
1.3
1.6
1.6
1.5
1.4

1.5
1.4

.0
.2

.4
.9
2.3
2.4
1.9
1.5

1.9
1.9

1.9
2.0
1.9
2.0

1.5
1.6
2.2
1.9
1.2
1.2
1.5
1.6
1.6
1.7

1.9
2.0

20121

1.7
1.1

1.2
1.0
2.8
2.7
1.5
1.7

2.6
2.5

1.4
1.3
1.7
1.7

1.4
1.3
-3.2
-4.4
2.2
2.3
1.6
1.6
1.5
1.5

1.4
1.3

20131

1.5
1.5

1.8
1.8
3.1
3.0
1.2
1.2

2.9
2.8

1.4
1.4
1.8
1.7

1.5
1.4
-1.5
-1.7
1.1
1.1
1.7
1.6
1.6
1.5

1.5
1.4

20141

1.5
1.5

1.8
1.9
3.4
3.3
1.6
1.4

3.1
3.0

1.6
1.5
1.8
1.8

1.6
1.5
-1.1
-1.6
1.5
1.5
1.7
1.7
1.6
1.6

1.6
1.5

20151

Authorized for Public Release

1. Change from fourth quarter of previous year to fourth quarter of year indicated.
2. Private-industry workers.
3. Core goods imports exclude computers, semiconductors, oil, and natural gas.

.8
.8
2.6
2.6

.7
.7
-13.6
-13.6
.7
.7
1.7
1.7
1.8
1.8

1.6
1.6

Previous Tealbook
Ex. food & energy
Previous Tealbook

CPI

PCE chain-wt. price index
Previous Tealbook
Energy
Previous Tealbook
Food
Previous Tealbook
Ex. food & energy
Previous Tealbook
Ex. food & energy, market based
Previous Tealbook

GDP chain-wt. price index
Previous Tealbook

Item

2012

Changes in Prices and Costs
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
January 23, 2013

Greensheets

1.9
1.9
-3.7
-3.7
1.7
1.7
2.3
2.3
2.2
2.2
2.0
2.0
2.7
2.7
3.2
3.2
.8
.8
4.5
4.5
3.6
3.6
2.5
2.5

PCE chain-wt. price index
Previous Tealbook
Energy
Previous Tealbook
Food
Previous Tealbook
Ex. food & energy
Previous Tealbook
Ex. food & energy, market based
Previous Tealbook

CPI

Previous Tealbook
Ex. food & energy
Previous Tealbook

ECI, hourly compensation1
Previous Tealbook1

Nonfarm business sector
Output per hour
Previous Tealbook
Compensation per hour
Previous Tealbook
Unit labor costs
Previous Tealbook

Page 104 of 112

Core goods imports chain-wt. price index2
Previous Tealbook2
2.9
2.9

2.5
2.5
3.6
3.6
1.1
1.1

3.0
3.0

4.0
4.0
2.3
2.3

3.5
3.5
19.3
19.3
4.7
4.7
2.4
2.4
2.1
2.1

2.6
2.6

2007

3.7
3.7

-1.1
-1.1
2.5
2.5
3.7
3.7

2.4
2.4

1.6
1.6
2.0
2.0

1.7
1.7
-8.8
-8.8
7.0
7.0
2.0
2.0
2.2
2.2

2.1
2.1

2008

-1.7
-1.7

5.6
5.6
1.5
1.5
-3.9
-3.9

1.2
1.2

1.5
1.5
1.7
1.7

1.4
1.4
2.7
2.7
-1.7
-1.7
1.6
1.6
1.7
1.7

.5
.5

2009

2.7
2.7

1.8
1.8
1.6
1.6
-.2
-.2

2.1
2.1

1.2
1.2
.6
.6

1.5
1.5
6.5
6.5
1.3
1.3
1.2
1.2
.7
.7

1.8
1.8

2010

4.3
4.3

.6
.6
2.0
2.0
1.4
1.4

2.2
2.2

3.3
3.3
2.2
2.2

2.5
2.5
11.9
11.9
5.1
5.1
1.7
1.7
1.9
1.9

2.0
2.0

2011

.0
.2

.4
.9
2.3
2.4
1.9
1.5

1.9
1.9

1.9
2.0
1.9
2.0

1.5
1.6
2.2
1.9
1.2
1.2
1.5
1.6
1.6
1.7

1.9
2.0

2012

1.7
1.1

1.2
1.0
2.8
2.7
1.5
1.7

2.6
2.5

1.4
1.3
1.7
1.7

1.4
1.3
-3.2
-4.4
2.2
2.3
1.6
1.6
1.5
1.5

1.4
1.3

2013

1.5
1.5

1.8
1.8
3.1
3.0
1.2
1.2

2.9
2.8

1.4
1.4
1.8
1.7

1.5
1.4
-1.5
-1.7
1.1
1.1
1.7
1.6
1.6
1.5

1.5
1.4

2014

1.5
1.5

1.8
1.9
3.4
3.3
1.6
1.4

3.1
3.0

1.6
1.5
1.8
1.8

1.6
1.5
-1.1
-1.6
1.5
1.5
1.7
1.7
1.6
1.6

1.6
1.5

2015

Authorized for Public Release

1. Private-industry workers.
2. Core goods imports exclude computers, semiconductors, oil, and natural gas.

2.9
2.9

2006

GDP chain-wt. price index
Previous Tealbook

Item

Changes in Prices and Costs
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
January 23, 2013

Page 105 of 112

12.3
-.4

Gross national saving rate3
Net national saving rate3
12.3
-.3

-1,089
-140

9.9
12.3

5.9
.5
.5
3.6
3.6

.8
14.5

.4
.0
-1.0
-1.1
77.0
77.0

.4
8.0
8.1
6.0
6.0
-3.6
-3.9

12.2
-.4

-1,114
-139

1.7
12.3

1.3
2.3
2.1
3.6
3.6

.9
15.0

1.0
1.0
.2
-.3
76.8
76.6

.4
7.8
8.0
5.9
6.0
-4.0
-4.1

12.7
.3

-878
-128

-1.6
12.1

3.7
-3.0
-3.5
2.5
2.6

.9
14.9

2.6
4.0
3.8
2.9
77.1
76.8

.5
7.8
7.9
5.9
6.0
-3.8
-4.2

12.8
.4

-876
-107

-1.5
12.0

4.2
2.7
2.8
2.5
2.6

1.0
15.0

6.9
4.6
5.1
4.4
77.6
77.3

.5
7.7
7.9
5.9
6.0
-3.7
-4.1

2013

12.8
.5

-853
-97

-1.4
11.8

4.1
2.5
2.5
2.5
2.5

1.1
15.2

5.7
4.2
4.6
4.3
78.1
77.8

.5
7.7
7.9
5.9
6.0
-3.5
-3.9

13.0
.6

-834
-89

-1.4
11.6

4.2
3.1
3.2
2.5
2.6

1.1
15.4

4.5
3.8
4.0
4.2
78.4
78.2

.5
7.6
7.8
5.9
6.0
-3.3
-3.6

13.2
1.0

-743
-93

-2.2
11.5

4.1
4.9
5.3
3.1
3.1

1.2
15.6

3.9
3.7
3.9
4.0
78.7
78.6

.5
7.5
7.7
5.9
6.0
-3.2
-3.4

13.3
1.1

-737
-71

.5
11.4

4.7
3.4
3.3
3.1
3.1

1.2
15.9

3.9
3.6
3.9
3.9
79.0
78.9

.6
7.4
7.7
5.8
6.0
-3.0
-3.2

2014

13.4
1.2

-735
-66

4.0
11.3

5.1
3.5
3.6
3.0
3.1

1.3
16.0

4.1
3.6
3.9
3.9
79.2
79.1

.6
7.2
7.5
5.8
6.0
-2.6
-2.9

13.4
1.2

-737
-59

3.7
11.3

5.3
3.9
4.0
3.1
3.2

1.3
16.1

4.3
3.9
4.4
4.3
79.6
79.5

.7
7.1
7.4
5.8
6.0
-2.2
-2.6

Greensheets

12.2
-.4

-1,094
-133

1.2
12.3

3.5
2.2
2.1
3.6
3.6

.8
14.4

2.4
2.3
2.4
2.2
76.8
76.6

1.9
7.8
8.0
5.9
6.0
-4.0
-4.1

20121

13.0
.6

-860
-105

-1.5
11.6

4.1
1.3
1.2
2.5
2.6

1.0
15.2

4.9
4.2
4.4
4.0
78.4
78.2

1.9
7.6
7.8
5.9
6.0
-3.3
-3.6

20131

13.4
1.2

-738
-72

1.5
11.3

4.8
3.9
4.0
3.1
3.2

1.3
15.9

4.0
3.7
4.0
4.0
79.6
79.5

2.4
7.1
7.4
5.8
6.0
-2.2
-2.6

20141

14.0
2.0

-580
-29

2.4
11.0

5.1
2.9
3.1
2.4
2.6

1.5
16.5

4.1
4.0
4.5
4.3
80.9
80.7

3.1
6.3
6.5
5.8
5.8
-.9
-1.3

20151

Authorized for Public Release

1. Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise indicated.
2. Change, millions.
3. Percent; annual values are for the fourth quarter of the year indicated.
4. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential.
Annual values are for the fourth quarter of the year indicated.
5. Percent change, annual rate.
6. Level, millions; annual values are annual averages.
7. Percent change, annual rate, with inventory valuation and capital consumption adjustments.
8. Billions of dollars; annual values are annual averages.

-1,115
-124

Net federal saving8
Net state & local saving8

4.7
12.1

.7
14.1

Housing starts6
Light motor vehicle sales6

Corporate profits7
Profit share of GNP3

2.4
2.3
.8
.7
77.5
77.5

Industrial production5
Previous Tealbook5
Manufacturing industr. prod.5
Previous Tealbook5
Capacity utilization rate - mfg.3
Previous Tealbook3

2.8
2.2
2.2
3.8
3.8

.3
8.2
8.2
6.0
6.0
-3.9
-4.1

Employment and production
Nonfarm payroll employment2
Unemployment rate3
Previous Tealbook3
Natural rate of unemployment3
Previous Tealbook3
GDP gap4
Previous Tealbook4

Income and saving
Nominal GDP5
Real disposable pers. income5
Previous Tealbook5
Personal saving rate3
Previous Tealbook3

Item

2012

Other Macroeconomic Indicators

Class II FOMC - Restricted (FR)
January 23, 2013

Greensheets

Page 106 of 112

-204
51
16.5
4.4

Net federal saving7
Net state & local saving7

Gross national saving rate2
Net national saving rate2
13.9
1.7

-245
12

-8.1
10.1

4.9
1.6
1.6
2.5
2.5

1.4
16.1

2.5
2.5
2.8
2.8
78.2
78.2

1.2
4.8
4.8
5.0
5.0
.8
.8

2007

12.6
-.6

-613
-72

-33.5
6.8

-1.2
1.0
1.0
6.2
6.2

.9
13.1

-9.0
-9.0
-11.8
-11.8
69.7
69.7

-2.8
6.9
6.9
5.3
5.3
-4.3
-4.4

2008

11.0
-2.3

-1,229
-113

57.0
10.7

.4
-3.0
-3.0
3.8
3.8

.6
10.4

-5.7
-5.7
-6.5
-6.5
67.0
67.0

-5.6
9.9
9.9
6.0
6.0
-5.3
-5.5

2009

12.1
-.6

-1,308
-90

17.3
12.0

4.3
3.5
3.5
4.8
4.8

.6
11.5

6.3
6.3
6.5
6.5
73.1
73.1

.8
9.5
9.6
6.0
6.0
-4.2
-4.4

2010

12.4
-.3

-1,237
-102

9.2
12.5

4.0
.3
.3
3.4
3.4

.6
12.7

4.1
4.1
4.2
4.2
76.1
76.1

1.8
8.7
8.7
6.0
6.0
-3.8
-4.0

2011

12.2
-.4

-1,094
-133

1.2
12.3

3.5
2.2
2.1
3.6
3.6

.8
14.4

2.4
2.3
2.4
2.2
76.8
76.6

1.9
7.8
8.0
5.9
6.0
-4.0
-4.1

2012

13.0
.6

-860
-105

-1.5
11.6

4.1
1.3
1.2
2.5
2.6

1.0
15.2

4.9
4.2
4.4
4.0
78.4
78.2

1.9
7.6
7.8
5.9
6.0
-3.3
-3.6

2013

13.4
1.2

-738
-72

1.5
11.3

4.8
3.9
4.0
3.1
3.2

1.3
15.9

4.0
3.7
4.0
4.0
79.6
79.5

2.4
7.1
7.4
5.8
6.0
-2.2
-2.6

2014

14.0
2.0

-580
-29

2.4
11.0

5.1
2.9
3.1
2.4
2.6

1.5
16.5

4.1
4.0
4.5
4.3
80.9
80.7

3.1
6.3
6.5
5.8
5.8
-.9
-1.3

2015

Authorized for Public Release

1. Change, millions.
2. Percent; values are for the fourth quarter of the year indicated.
3. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential.
Values are for the fourth quarter of the year indicated.
4. Percent change.
5. Level, millions; values are annual averages.
6. Percent change, with inventory valuation and capital consumption adjustments.
7. Billions of dollars; values are annual averages.

3.7
11.6

1.8
16.5

Housing starts5
Light motor vehicle sales5

Corporate profits6
Profit share of GNP2

2.1
2.1
1.8
1.8
78.2
78.2

Industrial production4
Previous Tealbook4
Manufacturing industr. prod.4
Previous Tealbook4
Capacity utilization rate - mfg.2
Previous Tealbook2

5.3
4.6
4.6
2.8
2.8

2.1
4.5
4.5
5.0
5.0
.8
.8

Employment and production
Nonfarm payroll employment1
Unemployment rate2
Previous Tealbook2
Natural rate of unemployment2
Previous Tealbook2
GDP gap3
Previous Tealbook3

Income and saving
Nominal GDP4
Real disposable pers. income4
Previous Tealbook4
Personal saving rate2
Previous Tealbook2

2006

Item

Other Macroeconomic Indicators
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
January 23, 2013

Page 107 of 112
-715.7
-1.4
-.9
-1.2

-1.0
-.6
-.5

-930

-1,127

-919.1

2,877
3,807
1,054
697
357
2,753
-930
144

2,632
3,744
1,062
709
353
2,682
-1,111
156

797
15
-19

2,745
3,538
-793
-741
-804
11

-.7
-.5

-.9

-577.0

-749

3,106
3,868
1,023
671
352
2,845
-762
134

708
0
-80

2,987
3,615
-628
-630
-631
3

2014

Fiscal year
2013

-.3
-.3

-.6

-494.1

-602

3,353
3,980
993
647
347
2,987
-628
126

624
0
-80

3,234
3,778
-544
-579
-536
-8

2015

-.7
-.7

-.8

-865.0

-1,071

2,665
3,724
1,056
703
352
2,668
-1,059
152

398
42
17

509
966
-457
-457
-458
1

Q1a

-.6
-.7

-922.6

-1,130

2,659
3,775
1,055
701
354
2,720
-1,115
156

198
-48
-25

760
885
-125
-125
-187
62

230
6
-51

625
810
-185
-185
-160
-25

Q3a

.3
.3

-.1

-909.2

-1,102

2,671
3,761
1,086
728
358
2,674
-1,089
155

2012
Q2a

-1.3
-1.0

-909.9

-1,118

2,693
3,807
1,060
701
359
2,747
-1,114
146

314
-7
-14

616
908
-292
-300
-310
17

2013
Q3

15
-31
30

859
873
-14
-14
-61
47

169
-10
-20

708
848
-140
-131
-106
-33

265
0
-20

673
918
-245
-241
-266
21

Not seasonally adjusted

-1.5
-2.1

-1.6

-657.9

-879

-.7
-1.1

-659.4

-874

-.8
-.9

-.2

-635.8

-849

-.7
-.8

-.1

-625.8

-826

Seasonally adjusted annual rates
2,906
2,939
2,970
3,003
3,784
3,814
3,823
3,836
1,059
1,052
1,045
1,037
701
696
690
684
358
357
355
353
2,725
2,762
2,778
2,799
-878
-876
-853
-834
145
143
141
139

299
63
-15

562
909
-347
-296
-327
-20

-1.1
-.6

-.4

-556.4

-731

3,102
3,846
1,025
673
353
2,820
-743
135

328
0
-20

615
923
-308
-297
-284
-23

-.7
-.5

-557.6

-722

3,138
3,875
1,018
667
351
2,858
-737
133

-21
0
-20

937
897
41
34
-3
43

136
0
-20

761
878
-116
-127
-78
-38

-.5
-.5

-568.4

-717

3,179
3,914
1,011
661
350
2,904
-735
131

2014
Q2

-.4
-.4

-584.5

-716

3,220
3,956
1,003
655
348
2,953
-737
129

250
0
-20

736
965
-230
-246
-247
17

Greensheets

Authorized for Public Release

1. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus and the Postal Service surplus are excluded from the on-budget
surplus and shown separately as off-budget, as classified under current law.
2. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
3. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises.
4. HEB is gross saving less gross investment (NIPA) of the federal government in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the
natural rate of unemployment. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. FI is the weighted difference of discretionary changes in federal spending and taxes in chained
(2005) dollars, scaled by real GDP. The FI estimates are calendar year contributions to Q4/Q4 real GDP growth. Also, for FI and the change in HEB, positive values indicate aggregate demand stimulus.
Quarterly figures for change in HEB and FI are not at annual rates.
a Actual.

Fiscal indicators4
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent of GDP
Previous Tealbook

NIPA federal sector
Receipts
Expenditures
Consumption expenditures
Defense
Nondefense
Other spending
Current account surplus
Gross investment
Gross saving less gross
investment3

1,152
-27
-36

Means of financing
Borrowing
Cash decrease
Other2

Cash operating balance,
end of period

2,449
3,538
-1,089
-1,089
-1,151
62

2012a

Unified budget
Receipts1
Outlays1
Surplus/deficit1
Previous Tealbook
On-budget
Off-budget

Item

Staff Projections of Federal Sector Accounts and Related Items
(Billions of dollars except as noted)

Class II FOMC - Restricted (FR)
January 23, 2013

2.6
2.6
2.1
2.1
2.3
1.7
2.4
2.3
3.0
2.4
1.6
2.0
4.6
4.5
4.0

Consumer prices 2
Total foreign
Previous Tealbook
Advanced foreign economies
Canada
Japan
United Kingdom
Euro Area
Germany
Emerging market economies
Asia
Korea
China
Latin America
Mexico
Brazil

Page 108 of 112

2.3
2.2
.8
.1
-2.0
3.0
2.3
2.0
3.4
2.1
1.0
1.7
6.3
6.5
7.3

1.8
1.8
.2
.6
-3.5
3.8
-.3
.9
3.3
4.6
.2
8.4
2.0
1.8
2.4

GDP aggregates calculated using shares of U.S. exports.
Foreign CPI aggregates calculated using shares of U.S. non-oil imports.

2.0
1.9
.7
.1
-.9
1.3
2.0
1.4
3.0
3.1
1.2
2.5
2.6
2.5
3.8

1.9
1.9
.5
1.7
-.1
-1.5
-.7
1.1
3.4
3.7
1.1
6.5
2.9
3.3
1.0

2.4
2.5
1.7
1.8
-.5
4.7
2.5
2.3
3.0
2.7
3.1
2.0
3.6
3.0
7.5

2.2
2.1
.3
1.4
.2
-.7
-1.2
-1.0
4.1
5.8
3.3
9.5
2.6
2.3
3.2

2.2
2.3
1.3
1.8
-.2
2.5
1.7
2.2
2.8
2.9
3.0
2.6
2.7
2.2
6.2

2.7
2.5
1.0
1.9
1.4
.7
-.5
.1
4.5
5.6
3.4
8.8
3.6
3.7
3.5

2.3
2.2
1.3
1.9
-.1
1.6
1.5
2.0
3.1
2.9
2.8
2.7
3.5
3.2
5.4

3.1
2.9
1.4
2.0
1.8
1.2
.4
.9
4.8
5.8
3.8
8.4
4.0
4.2
3.6

2.3
2.2
1.2
1.8
-.1
1.6
1.4
1.7
3.1
3.0
2.8
2.8
3.5
3.2
5.6

3.2
3.1
1.7
2.1
2.0
1.7
.8
1.2
4.8
5.8
3.8
8.2
3.9
4.1
3.8

2.3
2.2
1.3
1.7
.0
2.8
1.4
1.7
3.1
3.0
2.8
2.8
3.5
3.2
5.6

3.3
3.2
1.9
2.2
2.2
2.1
1.2
1.7
4.8
5.8
4.0
8.2
3.8
3.9
3.8

2.4
2.3
1.3
1.8
.0
1.4
1.4
1.7
3.2
3.1
3.0
3.0
3.7
3.4
5.6

3.4
3.4
2.1
2.3
3.4
2.2
1.4
1.8
4.8
5.9
4.1
8.2
3.8
3.9
3.9

3.0
3.0
2.5
1.9
7.1
1.4
1.4
1.7
3.3
3.2
3.0
3.0
3.7
3.4
5.6

3.2
3.1
1.6
2.5
-2.6
2.3
1.5
1.9
4.8
5.9
4.2
8.2
3.8
3.9
3.9

2.5
2.4
1.4
1.9
.1
1.5
1.5
1.8
3.3
3.2
3.0
3.0
3.7
3.4
5.5

3.5
3.5
2.1
2.7
.7
2.3
1.6
2.0
4.9
5.9
4.3
8.2
3.9
3.9
4.1

2.5
2.4
1.4
1.9
.1
2.6
1.5
1.9
3.3
3.2
3.1
3.0
3.7
3.4
5.5

3.5
3.5
2.2
2.8
.7
2.4
1.8
2.0
4.9
5.9
4.4
8.2
3.9
3.9
4.1

-----------------------------------------Projected----------------------------------------2013
2014
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Authorized for Public Release

1 Foreign

3.4
3.4
1.5
1.7
5.7
-1.0
-.1
2.0
5.4
6.2
3.5
7.0
4.6
5.4
.2

Real
Total foreign
Previous Tealbook
Advanced foreign economies
Canada
Japan
United Kingdom
Euro area
Germany
Emerging market economies
Asia
Korea
China
Latin America
Mexico
Brazil

GDP 1

Measure and country

2012

Foreign Real GDP and Consumer Prices: Selected Countries
(Quarterly percent changes at an annual rate)

Greensheets

Class II FOMC - Restricted (FR)
January 23, 2013

Page 109 of 112

3.7
3.7
2.2
2.5
.5
2.1
2.9
3.1
5.1
5.5
3.4
6.7
4.2
3.8
4.3

Consumer prices 2
Total foreign
Previous Tealbook
Advanced foreign economies
Canada
Japan
United Kingdom
Euro Area
Germany
Emerging market economies
Asia
Korea
China
Latin America
Mexico
Brazil
3.3
3.3
2.0
1.8
1.1
3.9
2.3
1.7
4.6
3.6
4.5
2.5
6.7
6.2
6.3

-.7
-.7
-1.6
.0
-4.8
-4.6
-2.1
-1.9
.4
.8
-3.2
7.7
-.2
-1.1
.9
1.3
1.3
.2
.8
-2.0
2.2
.4
.3
2.1
1.3
2.4
.6
3.9
4.0
4.3

.8
.8
-1.5
-1.6
-.6
-.9
-2.3
-2.2
3.5
8.0
6.3
11.3
-.8
-2.2
5.3

2009

2 Foreign

3.2
3.2
1.7
2.2
-.3
3.4
2.0
1.6
4.3
4.3
3.2
4.6
4.4
4.3
5.6

4.5
4.5
3.0
3.6
3.5
1.5
2.3
4.2
6.2
7.7
5.0
9.7
4.5
4.1
5.3

2010

Greensheets

Foreign GDP aggregates calculated using shares of U.S. exports.
CPI aggregates calculated using shares of U.S. non-oil imports.

4.3
4.3
2.4
2.3
1.6
3.8
2.4
2.4
6.7
8.9
5.8
13.7
4.4
3.5
6.6

Real GDP 1
Total foreign
Previous Tealbook
Advanced foreign economies
Canada
Japan
United Kingdom
Euro area
Germany
Emerging market economies
Asia
Korea
China
Latin America
Mexico
Brazil

2008

3.4
3.4
2.2
2.7
-.3
4.7
2.9
2.6
4.3
4.5
4.0
4.6
4.0
3.5
6.7

2.9
2.8
1.4
2.4
.0
.9
.6
1.9
4.5
4.9
3.4
8.8
3.9
3.9
1.4

2011

2.3
2.3
1.3
1.0
-.3
2.7
2.3
2.0
3.1
2.6
1.7
2.1
4.3
4.1
5.6

2.3
2.3
.6
1.3
.5
.2
-.6
.8
4.0
5.1
2.0
7.8
3.0
3.2
1.7
2.3
2.2
1.3
1.8
-.1
2.1
1.5
1.9
3.0
2.9
2.9
2.7
3.3
2.9
5.7

3.1
2.9
1.5
2.0
1.8
1.4
.5
1.0
4.7
5.7
3.7
8.4
3.8
4.0
3.7
2.6
2.5
1.7
1.9
1.8
1.8
1.5
1.8
3.3
3.1
3.0
3.0
3.7
3.4
5.6

3.4
3.4
2.0
2.6
.5
2.3
1.5
1.9
4.8
5.9
4.2
8.2
3.8
3.9
4.0

2.6
2.6
1.7
1.9
1.3
1.8
1.7
1.9
3.3
3.2
3.2
3.0
3.7
3.4
5.5

3.5
3.5
2.3
2.9
.3
2.5
2.0
2.4
4.8
5.9
4.6
8.0
3.8
3.8
4.1

--------------------Projected--------------------2012
2013
2014
2015

Authorized for Public Release

2007

Measure and country

Foreign Real GDP and Consumer Prices: Selected Countries
(Percent change, Q4 to Q4)
Class II FOMC - Restricted (FR)
January 23, 2013

Page 110 of 112

U.S. current account balance
Previous Tealbook
Current account as percent of GDP
Previous Tealbook
Net goods & services
Investment income, net
Direct, net
Portfolio, net
Other income and transfers, net

-710.3
-710.3
-5.1
-5.1
-696.7
111.1
244.6
-133.5
-124.7

2007

-534.5
-534.5
-3.5
-3.5
-593.5
197.4
282.9
-85.6
-138.4

2008

-430.0
-418.4
-2.7
-2.6
-498.0
211.0
286.1
-75.2
-143.1

-677.1
-677.1
-4.7
-4.7
-698.3
157.8
284.3
-126.5
-136.6

-472.4
-469.6
-3.0
-3.0
-549.7
215.9
291.6
-75.7
-138.7

2012

-381.9
-381.9
-2.7
-2.7
-379.2
127.6
253.0
-125.4
-130.3

2009

-450.8
-436.3
-2.8
-2.7
-531.0
219.4
283.4
-64.0
-139.2

-437.3
-415.0
-2.7
-2.6
-506.4
202.9
268.5
-65.6
-133.8

-442.0
-442.0
-3.0
-3.0
-494.7
191.0
297.9
-106.9
-138.2

2010

2011

-444.1
-433.8
-2.7
-2.7
-500.6
193.6
267.8
-74.2
-137.1

-465.9
-465.9
-3.1
-3.1
-559.9
235.0
321.7
-86.7
-141.1

-496.9
-500.2
-3.0
-3.0
-538.2
179.0
273.7
-94.7
-137.7

-469.9
-482.0
-2.8
-2.9
-506.7
170.6
274.6
-103.9
-133.8

-475.2
-489.1
-2.8
-2.9
-499.4
161.4
275.3
-114.0
-137.1

-496.7
-508.2
-2.9
-2.9
-515.2
157.8
282.2
-124.4
-139.2

-453.3
-438.1
-2.8
-2.7
-514.7
198.4
269.9
-71.5
-137.0

-484.7
-494.9
-2.9
-2.9
-514.9
167.2
276.4
-109.3
-137.0

-490.6
-497.7
-2.7
-2.8
-505.4
150.8
303.7
-152.9
-135.9

--------------------Projected--------------------2012
2013
2014
2015

-473.3
-471.6
-2.9
-2.9
-519.8
185.7
270.3
-84.6
-139.2

-471.9
-464.7
-3.0
-3.0
-543.0
210.9
286.0
-75.1
-139.8

Billions of dollars

Annual Data

-458.5
-432.0
-2.9
-2.7
-532.2
211.4
273.0
-61.6
-137.7

Billions of dollars, s.a.a.r.

-----------------------------------------Projected----------------------------------------2013
2014

uarterly Data

U.S. Current Account

Greensheets

Class II FOMC - Restricted (FR)

Authorized for Public Release
January 23, 2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

Abbreviations
ABCP

asset-backed commercial paper

ABS

asset-backed securities

AFE

advanced foreign economy

AHE

average hourly earnings

ASEAN

Association of Southeast Asian Nations

ATRA

American Taxpayer Relief Act

CDS

credit default swaps

C&I

commercial and industrial

CLO

collateralized loan obligation

CMBS

commercial mortgage-backed securities

commercial paper

CPI

consumer price index

CRE

commercial real estate

Desk

Open Market Desk

ECB

European Central Bank

EME

emerging market economy

E&S

equipment and software

EUC

Emergency Unemployment Compensation

FDIC

Federal Deposit Insurance Corporation

FOMC

Federal Open Market Committee; also, the Committee

GCF

general collateral finance

GDP

gross domestic product

GSE

government-sponsored enterprise

HARP

Home Affordable Refinance Program

HELOC

home equity line of credit

HFR

Hedge Fund Research

IMF

International Monetary Fund

Page 111 of 112

January 23, 2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

January 23, 2013

industrial production

ISM

Institute for Supply Management

LIBOR

London interbank offered rate

LSAP

large-scale asset purchase

MBS

mortgage-backed securities

MEP

maturity extension program

Michigan
survey

Thomson Reuters/University of Michigan Surveys of Consumers

NIPA

national income and product accounts

OIS

overnight index swap

PCE

personal consumption expenditures

PMI

purchasing managers index

PPI

producer price index

repo

repurchase agreement

SLOOS

Senior Loan Officer Opinion Survey on Bank Lending Practices

SOMA

System Open Market Account

S&P

Standard & Poor’s

TBA

to be announced (for example, TBA market)

TIC

Treasury International Capital

TIPS

Treasury inflation-protected securities

VIX

Chicago Board Options Exchange Market Volatility Index

WTI

West Texas Intermediate

Page 112 of 112

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 29-30, 2013 : Tealbook A

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