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January 30-31, 2007 Authorized for Public Release Appendix 1: Materials used by Mr. Dudley 216 of 255 January 30-31, 2007 Authorized for Public Release 217 of 255 Class II FOMC – Restricted FR Page 1 of 6 (1) 2007 Fed Fund Futures Curves Percent 10/25/2006 12/12/2006 Percent 1/26/2007 5.30 5.30 5.20 5.20 5.10 5.10 5.00 5.00 4.90 4.90 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Fed Fund Futures Contracts Percent (2) Eurodollar Futures March 2008 - March 2007 Calendar Spread October 1, 2006 – January 26, 2007 Percent -0.20 -0.20 -0.30 -0.30 -0.40 -0.40 -0.50 -0.50 -0.60 -0.60 10/25/06: FOMC -0.70 10/1 10/15 10/29 12/12/06: FOMC 11/12 11/26 12/10 -0.70 12/24 1/7 1/21 (3) Treasury Yield Curves Percent 10/25/2006 12/12/2006 Percent 1/26/2007 5.00 5.00 4.90 4.90 4.80 4.80 4.70 4.70 4.60 4.60 4.50 4.50 4.40 4.40 2-Year 5-Year Years to Maturity 10-Year 30-Year January 30-31, 2007 Authorized for Public Release 218 of 255 Class II FOMC – Restricted FR Page 2 of 6 (4) U.S. Breakeven Inflation Rates January 2, 2006 – January 26, 2007 Percent 2.80 Percent 10/25/06: FOMC 2.70 2.80 12/12/06: FOMC 2.70 5Y-5Y Forward Breakeven Rate 2.60 2.60 2.50 2.50 2.40 2.40 10Y Breakeven Rate 2.30 2.30 2.20 2.20 5Y Breakeven Rate 2.10 2.00 Source: Barclays Jan-06 2.00 Apr-06 Jul-06 Oct-06 Jan-07 (5) Corporate Cash Index Spreads, Investment Grade and High Yield January 3, 2005 – January 26, 2007 Basis Points 500 450 400 350 300 250 200 150 100 50 0 Basis Points 500 450 400 350 300 250 200 150 100 50 0 Merrill Lynch High Yield Merrill Lynch Investment Grade Jan-05 Percent 2.10 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 (6) Implied Volatility on the S&P 100 and Treasury Yield Implied Volatility January 2, 1995 – January 26, 2007 Basis Points 60 200 50 175 VIX Index (LHS) 40 150 30 125 20 100 10 75 Merrill Lynch Move Index (RHS) 0 1995 50 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 January 30-31, 2007 Authorized for Public Release 219 of 255 Class II FOMC – Restricted FR Page 3 of 6 (7) Foreign Exchange Implied Volatility January 2, 1995 – January 26, 2007 Percent Percent 30 30 One-month option implied volatility USD/Yen 25 25 20 20 15 15 10 10 One-month option implied volatility USD/Euro 5 0 5 Source: Goldman Sachs (1995-1996), Bloomberg (1997-present).*Euro: 1990-1999 = USD/DM, 2000-present = USD/Euro 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0 2007 (8) Composition of First-Lien Mortgage Originations 2001-2006* 2001 – Q3 2006 Conforming Mortgages* Jumbo Subprime Alt-A Subprime as % of Total (RHS) $ Billions 4,000 25% 85 3,500 335 3,000 655 24% 20% 68 231 2,500 60 2,000 200 576 540 190 380 400 15% 625 620 430 10% 515 1,500 570 512 1,000 5% 500 1,433 1,898 2,690 - 1,345 1,180 1,084 0% 2001 2002 Source: Inside Mortgage Finance 2003 2004 2005 2006 *Conforming mortgages include FHA/VA. Yearly volume for 2006 estimated as of Q3 2006. January 30-31, 2007 Authorized for Public Release 220 of 255 Class II FOMC – Restricted FR Page 4 of 6 (9) Delinquency and Charge-off Rates for Subprime MBS January 1996 – September 2006 Percent Percent 14 3.5 12 3.0 60+ Days Delinquencies (LHS) 10 2.5 8 2.0 6 1.5 Charge-off Rate (RHS) 4 1.0 2 0.5 0 0.0 Jan-96 Jan-97 Jan-98 Source: Moody’s Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 (10) 60+ Days Delinquencies by Vintage (Subprime ARMs) Percent Percent 16 16 14 12 14 12 2002 2005 10 10 2003 8 6 8 6 2006 2004 4 2 4 2 0 0 1 3 5 7 9 Source: JPMorgan 11 13 15 Deal Age in Months 17 19 21 (11) Subprime MBS Tranche Spreads, Weekly January 5, 1998 – January 22, 2007 Basis Points 23 Basis Points 350 350 300 300 BBB 250 250 200 200 150 150 A 100 100 AA 50 50 0 Jan-98 0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 January 30-31, 2007 Authorized for Public Release 221 of 255 Class II FOMC – Restricted FR Metric Tonne (000s) 250 Page 5 of 6 (12) Copper 3-Month Forward Price and LME Warehouse Stock June 2004 – January 2007 USD/Metric Tonne 10000 200 8000 3-Month Forward Contract Price (RHS) 150 6000 LME Warehouse Stock (LHS) 100 4000 50 2000 0 Source: London Metal Exchange Jun-04 Dec-04 0 Jun-05 Dec-05 Jun-06 Dec-06 (13) Annual Global Corn Inventory vs. Weekly Front-Month Futures Price $U.S. Cents/Bushel Millions of Tonnes 2000 – 2006 400 400 350 300 250 200 150 100 50 0 Front-Month Corn Futures Price (RHS) 350 300 250 200 150 100 World Stock (LHS) U.S. Stock (LHS) 50 0 Source: USDA, Bloomberg 2000 2001 Millions of Barrels 2002 2003 2004 2005 2006 (14) Crude Oil Inventory vs. Front-Month Futures Price June 2006 – January 2007 USD/Barrel 400 80 Front-Month WTI Price (RHS) June 2006 - Jan 2007 U.S. Inventory (LHS) 350 70 5-Year Historical Average U.S. Inventory (LHS) 300 250 60 Source: Department of Energy, Bloomberg Jun 06 Jul 06 Aug 06 Sep 06 50 Oct 06 Nov 06 Dec 06 Jan 07 January 30-31, 2007 Authorized for Public Release 222 of 255 Class II FOMC – Restricted FR Page 6 of 6 (15) WTI Crude Oil Futures Curves USD/Barrel 6/30/2006 12/12/2006 USD/Barrel 1/26/2007 80 80 75 75 70 70 65 65 60 60 55 55 50 Source: NYMEX, Bloomberg SPOT 3 50 6 9 12 15 18 21 24 Rolling Contract Month (16) OPEC Spare Production Capacity 2000 – 2007 (Forecast) Millions of Barrels/Day Millions of Barrels/Day 7 7 6 Excludes potential production capacity increases 5 6 5 4 4 3 3 2 2 1 1 0 Source: International Energy Agency 2000 2001 2002 0 2003 2004 2005 2006 2007 Forecast January 30-31, 2007 Authorized for Public Release Appendix 2: Materials used by Mr. Slifman, Mr. Wascher, and Mr. Gagnon 223 of 255 January 30-31, 2007 Authorized for Public Release STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC* Material for Staff Presentation on the Economic Outlook January 30, 2007 *Downgraded to Class II upon release of the February 2007 Monetary Policy Report. 224 of 255 January 30-31, 2007 Authorized for Public Release 225 of 255 January 30-31, 2007 Authorized for Public Release 226 of 255 January 30-31, 2007 Authorized for Public Release 227 of 255 January 30-31, 2007 Authorized for Public Release 228 of 255 January 30-31, 2007 Authorized for Public Release 229 of 255 January 30-31, 2007 Authorized for Public Release 230 of 255 January 30-31, 2007 Authorized for Public Release 231 of 255 Exhibit 7 Class II FOMC - Restricted (FR) Labor Market and Measures of Slack Payroll Employment Unemployment Rate Thousands 400 400 Percent 7 7 Average monthly change 300 300 200 200 6 6 Trend 100 100 0 5 4 4 0 -100 -100 -200 -200 -300 NAIRU 5 2001 2003 -300 2007 2005 3 Job Openings Rate* 2001 2003 2005 3 2007 Beveridge Curve Percent 4.0 4.0 Job openings rate 3.5 3.5 2006:Q4 3.5 3.5 3.0 3.0 2.5 2.5 Nov. 3.0 3.0 2.5 2.5 2.0 2001 2002 2003 2004 2005 2.0 2006 2.0 4.0 3.5 2.0 6.5 6.0 Manufacturing Capacity Utilization 4.0 Percent 85 3.5 Average, 1996:H2 Average 1972 to 2006 80 3.0 5.5 Note: The data cover 2001:Q1 to 2006:Q4. The openings rate for 2006:Q4 is the average of October and November. Persons Working Part-Time for Economic Reasons 4.0 5.0 Unemployment rate * Number of job openings as a percent of the sum of private employment and job openings. Percent of household employment 4.5 Dec. 85 80 3.0 Q4 75 2.5 2.0 75 2.5 1996 1998 2000 2002 2004 2006 2.0 70 1996 1998 2000 2002 2004 2006 70 January 30-31, 2007 Authorized for Public Release 232 of 255 January 30-31, 2007 Authorized for Public Release 233 of 255 Exhibit 9 Class II FOMC -- Restricted (FR) Recent Market Developments Primary Commodity Prices Dollars per barrel Real Trade-Weighted Dollar Index, January 2005 = 100 Monthly 75 Index, Q1 2005 = 100 160 110 Quarterly Major currencies Oil* 150 140 130 Broad dollar 120 60 110 2005 Other important trading partners 100 IMF nonfuel index 45 100 2006 2007 2008 90 2005 2006 2007 2008 90 *West Texas Intermediate spot price. Equity Prices: Industrial Countries Index, March 2000 = 100 Equity Prices: Emerging Markets Index, March 2000 = 100 120 Daily 340 Daily Japan (TOPIX) United Kingdom (FTSE 350) 110 290 Mexico 100 Brazil United States (Wilshire 5000) 240 90 Thailand 80 190 70 Euro area (DJ Euro Stoxx) 140 Korea 60 2005 2006 50 2005 Source: MSCI Barra. 2006 90 January 30-31, 2007 Authorized for Public Release 234 of 255 Exhibit 10 Class II FOMC -- Restricted (FR) Emerging-Market Debt and Capital Flows Gross External Debt Yield Spreads over U.S. Treasuries Percent of GDP Basis points 55 Yearly 1800 Monthly 1600 50 Latin America 1400 Latin America 45 1200 40 1000 35 800 30 Asia 600 25 400 20 1990 1995 2000 2005 200 Asia 15 1990 Source: IMF World Economic Outlook database. 1995 2000 2005 0 Source: Merrill Lynch. Official Capital Outflows and Current Account Balances Billions of dollars 2005 Net official outflows* Current account 2006e 400 350 300 250 200 150 100 50 Emerging Africa and Eastern Asia Middle East Europe Latin America Emerging Africa and Eastern Asia Middle East Europe 0 Latin America * Changes in foreign exchange reserves, external public debt, and assets of government-run investment funds. Source: IMF World Economic Outlook database. Emerging-Market Official Flows and Industrial Country Interest Rates Percent Yearly EM net official flows* Real interest rate** 6 5 4 GDP growth rate** 3 2 1 0 -1 -2 -3 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 -4 * Net official capital flows of emerging markets as share of aggregate industrial-country GDP. ** Real GDP growth rate and 3-month interest rate minus CPI inflation rate for G-10 countries (including U.S.) plus Australia and Spain, weighted by GDP. Source: IMF World Economic Outlook database and IFS database. 2006 data are estimates. January 30-31, 2007 Authorized for Public Release 235 of 255 Exhibit 11 Class II FOMC -- Restricted (FR) Bond Markets, Inflation Compensation, and Monetary Policy (Monthly data, percent) Indexed Bond Yields, 10-Year 3 United States Canada** 3 3 3 2 2 2 1 1 United Kingdom 2 Japan* France 2003 1 2005 0 2007 1 2003 0 2007 2005 2003 2005 0 2007 *Japan first issued an inflationlinked bond in March 2004. 2003 2005 0 2007 **Bond maturing in 2021. Inflation Compensation, 10-Year United States United Kingdom Canada** 3 3 3 3 2 2 2 2 1 1 1 1 Euro Area Japan* 2003 2005 0 2007 2003 2005 0 2007 2003 2005 0 2007 *Japan first issued an inflationlinked bond in March 2004. 2003 2005 0 2007 **Bond maturing in 2021. Policy Interest Rates 6 6 6 6 5 5 5 5 4 4 4 3 3 3 3 2 2 1 1 Fed funds rate 4 Euro area refinancing rate 2005 2007 0 2009 UK bank rate 2005 2007 0 2009 Japanese call rate target 2005 2007 2 1 0 2009 Canadian overnight rate target 2005 2007 2 1 0 2009 January 30-31, 2007 Authorized for Public Release 236 of 255 Exhibit 12 Class II FOMC -- Restricted (FR) Housing Sectors Real House Prices* Four-quarter percent change 20 Quarterly Netherlands France 15 10 5 0 Japan Canada 1992 1996 2000 -5 -10 2004 * House price index deflated by CPI. House price index for France begins in 1996. Japan series is semi-annual. Australia 250 United Kingdom Index, 1992Q1 = 100 Percent of GDP 10 250 Index, 1992Q1 = 100 Quarterly 10 Quarterly 200 150 Percent of GDP 200 8 Residential investment 8 150 6 100 6 Real house prices* 100 4 4 Real house prices* 2 50 1992 1996 2000 2004 Residential investment 0 50 * House price index deflated by CPI. 1992 1996 2 2000 2004 * House price index deflated by CPI. Real GDP* (Percent change, annual rate**) 2006 H1 H2e 2007p 2008p 1. Total Foreign 4.4 3.4 3.4 3.5 2. Industrial Countries of which: Europe Japan Canada 3.0 2.3 2.4 2.5 3.4 1.9 2.9 2.8 2.2 2.0 2.3 1.9 2.6 2.1 1.7 2.9 Emerging Markets of which: Emerging Asia Latin America 6.4 5.0 4.8 4.9 6.7 6.0 6.5 3.7 6.0 3.5 6.2 3.5 United States 4.1 2.3 2.3 2.5 3. 4. 5. 6. 7. 8. memo: *GDP aggregates weighted by shares of U.S. exports. **Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2. 0 January 30-31, 2007 Authorized for Public Release 237 of 255 Exhibit 13 Class II FOMC -- Restricted (FR) U.S. External Sector Import Prices U.S. Real Goods Exports* Percent change, annual rate (Percent change) 15 Quarterly 2006** 10 5 1. -5 Goods and Services -10 2005 2006 2007 2008 10.5 selected contributions: 0 Core Goods Total 2. Aircraft 1.1 3. Machinery 2.3 4. Semiconductors 1.3 -15 * Census data. ** January-November at annual rate. Contributions to U.S. GDP Growth Percentage points, annual rate* Net exports Exports Imports 1.5 1.0 0.5 0.0 -0.5 -1.0 2005 *Half years are Q2/Q4 or Q4/Q2. 2006 2007 2008 -1.5 January 30-31, 2007 Authorized for Public Release 238 of 255 ECONOMIC PROJECTIONS FOR 2007 FOMC Range Central Tendency Staff -------------Percentage change, Q4 to Q4-----------Nominal GDP 4¾ to 5½ 5 to 5½ 5.0 July 2006 (4¾ to 6) (5 to 5½) (5.0) 2¼ to 3¼ 2½ to 3 2.3 (2½ to 3¼) (3 to 3¼) (2.7) 2 to 2¼ 2 to 2¼ 2.2 (2 to 2¼) (2 to 2¼) (2.2) Real GDP July 2006 Core PCE Prices July 2006 --------------Average level, Q4, percent--------------Unemployment rate July 2006 4½ to 4¾ 4½ to 4¾ 4.8 (4¼ to 5¼) (4¾ to 5) (5.2) Central tendencies calculated by dropping high and low three from ranges. ECONOMIC PROJECTIONS FOR 2008 FOMC Range Central Tendency Staff -------------Percentage change, Q4 to Q4-----------Nominal GDP 4¾ to 5½ 4¾ to 5¼ 4.8 Real GDP 2½ to 3¼ 2¾ to 3 2.5 Core PCE Prices 1½ to 2¼ 1¾ to 2 2.0 --------------Average level, Q4, percent--------------Unemployment rate 4½ to 5 4½ to 4¾ 4.9 January 30-31, 2007 Authorized for Public Release Appendix 3: Materials used by Mr. Reinhart 239 of 255 January 30-31, 2007 Authorized for Public Release 240 of 255 Class I FOMC – Restricted Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Vincent Reinhart January 31, 2007 January 30-31, 2007 Authorized for Public Release 241 of 255 Exhibit 1 Estimated Expected Federal Funds Rate FRBNY Survey of Primary Dealers Percent 7 Most Recent: January 30, 2007 Last FOMC: December 11, 2006 ● Dealers are unanimous in anticipating no change in policy rate at this meeting ● Nearly all dealers anticipate the funds rate at 5-1/4 percent through the May meeting ● Some anticipate a more upbeat assessment of the economic outlook ● Nearly unanimous in expecting no change in the assessment of risks 6 5 4 3 Jan. May Sept. 2007 Jan. May Sept. 2008 Jan. 2009 Note. Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments. Nominal and Inflation-Indexed Yields Decomposition of Change in Ten-Year Yield Percent Basis Points 6 30 Most Recent: January 30, 2007 Last FOMC: December 11, 2006 25 20 15 Nominal Yields 10 5 5 0 News Statement Minutes Speeches Other -5 -10 4 Primary Dealer Expectations, 2007 Most Recent: January 30, 2007 Last FOMC: December 11, 2006 Q4/Q4, Percent 3 FOMC Meeting December January GDP Growth 2.5 2.6 Core PCE Inflation 2.3 2.1 Inflation-Indexed Yields 2 1 3 5 7 10 20 January 30-31, 2007 Authorized for Public Release 242 of 255 Exhibit 2 Optimal Policy Under Alternative Inflation Goals 1½ Percent Inflation Goal Federal funds rate 2 Percent Inflation Goal Percent 6.5 Percent 6.5 6.0 6.0 5.5 5.5 5.0 5.0 4.5 4.5 Current Bluebook December Bluebook October Bluebook 2007 2008 2009 2010 3.5 2011 Civilian unemployment rate 2007 2008 2009 2010 Current Bluebook December Bluebook October Bluebook 4.0 2011 2012 3.0 2007 2008 2009 2010 4.0 3.5 2011 2012 3.0 Percent 6.0 Percent 6.0 5.5 5.5 5.0 5.0 4.5 4.5 2012 4.0 2007 2008 2009 2010 2011 2012 4.0 Core PCE inflation Percent 3.0 Four-quarter average 2007 2008 2009 2010 2011 2012 Percent 3.0 Four-quarter average 2.5 2.5 2.0 2.0 1.5 1.5 1.0 2007 2008 2009 2010 2011 2012 1.0 January 30-31, 2007 Authorized for Public Release 243 of 255 January 30-31, 2007 Authorized for Public Release 244 of 255 Table 1: Alternative Language for the January FOMC Announcement December FOMC Policy Decision Rationale Assessment of Risk Revised: January 29, 2007 Alternative A Alternative B Alternative C 1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent. 2. Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent. The economy seems likely to continue to expand at a moderate pace on balance over coming quarters. However, the substantial cooling of the housing market remains a drag on economic growth. Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5½ percent. Economic growth seems to be rebounding and some tentative signs of stabilization have appeared in the housing market. Going forward, the economy seems likely to expand at a moderate pace over coming quarters. 3. Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time, partly reflecting the recent decline in energy prices. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures. Readings on core inflation have improved modestly in recent months but remain elevated. Inflation pressures seem likely to moderate over time, but the extent and speed of that moderation remain uncertain. 4. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. The Committee judges that inflation remains the predominant concern, and consequently that in the near term policy firming is more likely than policy easing. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information January 30-31, 2007 Authorized for Public Release 245 of 255 Appendix 4: Materials used by Mr. Reifschneider, Mr. Doyle, and Mr. Reinhart January 30-31, 2007 Authorized for Public Release CLASS I FOMC—RESTRICTED CONTROLLED (FR) Material for the Staff Presentation on Producing and Publishing Economic Forecasts January 31, 2007 246 of 255 January 30-31, 2007 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Exhibit 1 247 of 255 01-31-07 Should the Committee Change Its Current Practices for the Production and Publication of Forecast-Related Material? Key Issue • The Federal Reserve regularly provides information on the outlook to the public. • Effort undertaken with an eye towards advancing the goals of economic performance, public discourse, internal discourse, and efficient operations. • But would changing your practices advance these goals further, or achieve a better trade-off? Three Questions 1. What production and publication options are open to the Committee? 2. What can we learn from the international experience? 3. What governance issues would alternative approaches raise? January 30-31, 2007 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) 248 of 255 Exhibit 2 01-31-07 Production Options and Their Implications Three Basic Options • Independent (each participant responsible for his or her own forecast) • Centralized (FOMC or a subcommittee produces a single forecast) • Coordinated (each participant produces own forecast but conditions on a common set of assumptions for factors such as oil prices and fiscal policy) Implications for Communications and Operational Costs Independent Option Coordinated Option Centralized Option difficult to distill message from multiple forecasts might be simplified a bit relatively easy naturally reveals diversity obscures some sources of diversity no diversity without additional comments Forecast production relatively low cost more costly very costly if task not delegated Forecast publication may be burdensome also may be burdensome could be less costly, especially under delegation Communications Telling the central story Conveying diversity Operational costs January 30-31, 2007 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Exhibit 3 249 of 255 01-31-07 Publication Options • Release more information about individual forecasts? • Provide more forecast details? • Lengthen the forecast period? • Publish information about the outlook more frequently? • Publish fan charts and confidence intervals? Two Options for Setting the Federal Funds Rate 1. Condition the outlook on “appropriate” monetary policy • Publishing details about the “appropriate” funds rate path could facilitate telling a more informative story • Forecast might be mistaken as a promise • Release might generate public criticism and create political pressures 2. Condition the outlook on a flat funds rate or market expectations • Might mitigate some of the problems of the “appropriate” option • Would alter nature of the outlook and create communication challenges • Would require statement about desirability of the projection • Might require providing guidance about a more “appropriate” path January 30-31, 2007 Authorized for Public Release 250 of 255 Exhibit 4 Class I FOMC -- Restricted Controlled (FR) 01-31-07 The Experience of Foreign Central Banks with Published Forecasts Publication Choices Factors (F) Head Resp. (G) External Members Yes Yes 0 3 Yes No 0 Not Stated 6 Yes Yes 0 Specified 7 Yes** No 6 7 Yes** No 5 Appropriate 6 Yes No 0 Yes Specified 9 Yes No 4 Yes Specified 9 Yes No 0 No Specified 18 No No 0 Dissent (C) Int. Rate Forecast 1. Reserve Bank of New Zealand Centralized No Appropriate 1 2. Swiss National Bank Centralized No Specified 3. Bank of Canada Centralized No 4. Reserve Bank of Australia Centralized No 5. Norges Bank Centralized No* Appropriate 6. Sveriges Riksbank Centralized Yes 7. Bank of England Centralized 8. Bank of Japan Coordinated Central Bank 9. European Central Bank Staff (B) (E) (D) Size of Same Comm. Location (A) Type of Forecast *Dissents at the Norges Bank are not released until 12 years after publication. **External members at the RBA and the Norges Bank are not full-time employees of the central bank and do not necessarily live in the same city. Consequences of Publishing a Forecast Publication is regarded as useful by central banks and obervers: -- Central banks have increased the amount of detail. -- Observers agree that forecasts have improved communications and accountability. We have found very little econometric work on whether publishing forecasts has improved monetary policy communications or economic outcomes: -- Publication has nearly always been part of a package. -- Econometric evidence does not provide a basis for deciding to publish a forecast. January 30-31, 2007 Authorized for Public Release 251 of 255 01-31-07 Class I FOMC -- Restricted Controlled (FR) Exhibit 5 (Last page) The Role of Economic Forecasts in the Policymaking Process One or many? 1 single forecast individual forecasts Which one? Committee (1) Chairman (2) Conditioned on what? Staff (3) 2 Common assumption Aggregated (4) Disaggregated (5) Appropriate policy Aggregated (4) Disaggregated (5) 1 Does the Committee want to produce a joint forecast or conduct a survey of individual forecasts? 2 If the forecasts are done individually, should they be based on common assumptions about some key conditioning factors? 3 Should the forecasts be accompanied by a minutes-style narrative description? 4 Should the Committee jointly agree on the minutes-style description or delegate the release of it to the Chairman or the staff? 5 How frequently should forecasts be made? 6 How many years should the forecast cover? 7 How many variables should be forecasted? 8 Should there be some attempt to convey formally the uncertainty surrounding the forecasts? January 30-31, 2007 Authorized for Public Release 252 of 255 CLASS I FOMC — RESTRICTED CONTROLLED (FR) Table 1: Details on Publicly Available Central Bank Forecasts New Zealand Canada United Kingdom Sweden Australia Norway ECB Switzerland Japan Forecast first published June 1988 May 1995 February 1993 October 1993 January 1995 December 1994 December 2000 December 1999 October 2000 Whose Forecast? Governor Governing Council Monetary Policy Committee Executive Board Entire Bank Executive Board Staff Entire Bank Policy Board # of members 1 6 9 6 7 7 18 3 9 Monetary Policy Statement Monetary Policy Report and Monetary Policy Report Update Inflation Report ECB Staff Macroeconomic Projections and Eurosystem Staff Macroeconomic Projections Monetary Policy Report (in Quarterly Bulletin) Outlook for Economic Activity and Prices Where forecasts are published How Dissent of Forecast is Noted Inflation Report Inflation Report In Minutes In Minutes Statement on Monetary Policy Range, central tendency, and median of Board members’ forecasts. In minutes. In Proceedings (only released after 12 years) Other commentary at release Press conference and presentation to Bank’s Board Press conference, testimony to Parliament after Full Report Press conference, testimony to Parliament Press conference; Semi-annual testimony to Rikstag Semi-annual testimony to Parliament Press conference Press conference Press conference (2/year) Press conference Timing of release relative to policy meeting Day of policy announcement Within 1 week after policy announcement 6 days after policy announcement Day of policy announcement Monday following Tuesday of policy announcement Day of policy announcement Day of policy announcement Day of policy announcement Day of policy announcement At policy meeting (Friday before announcement) At policy meeting About 1 week before publication 2 days before publication About 5 days prior to publication About 2 weeks before publication About 2 weeks prior to policy meeting At policy meeting Council writes down after receiving staff forecast Iterative process between staff and MPC Staff forecast presented to Executive Board for approval Governor comments on Staff forecast; Governor presents to Policy Board Staff presents initial forecast to Governor; Revises after receiving comments Staff forecast; 2 members of Gov. Council have joint responsibility to oversee Staff forecast with only limited input from Board Board members write down after receiving staff forecast Quarterly 3 times a year Quarterly 3 times a year Quarterly (Both Semi-annually) Quarterly Semi-annual Quarterly Annual in tables, higher frequency in charts No precise numbers Annual in tables, higher frequency in charts Annual Quarterly in chart, no precise data for GDP Annual (fiscal years) When is forecast finalized Forecasting process (for policy makers) In practice about 2 week prior to publication Staff presents initial forecast to Governor and advisers; Revises after receiving comments Frequency of forecast Quarterly Full report semiannually, updates in remaining quarters Frequency of variables forecast Annual in tables, higher frequency in charts Quarterly in nearterm, annual for later years January 30-31, 2007 Authorized for Public Release 253 of 255 CLASS I FOMC — RESTRICTED CONTROLLED (FR) Table 1 (continued): Details on Publicly Available Central Bank Forecasts New Zealand Canada United Kingdom Sweden Australia Norway ECB Switzerland Japan Variables forecasted in tables or charts Inflation measures CPI, underlying inflation, import and export prices, terms of trade, foreign inflation CPI; CPI excl. 8 volatile components and indirect taxes; CPI excl. ind. taxes CPI (HICP) CPI; CPI excl. interest and indirect taxes, import and domestic prices, foreign No (A qualitative forecast is provided) CPI excluding energy and real taxes, CPI, import prices, domestic prices, foreign CPI Euro-area CPI (HICP) CPI CPI excluding fresh food, Domestic Corporate Goods inflation GDP growth Yes and its components Yes, and its components Yes Yes, and its components No Yes and some components Yes, and components Yes Yes Output gap Yes No No No No Yes No No No Other Many including: exchange rate, productivity, foreign GDP, current account balance, fiscal balance, labor market variables. Foreign GDP, oil prices conditioned on futures markets None Productivity, labor market variables, fiscal balance, Foreign GDP, oil prices, exchange rate. None Exchange rate, employment growth, unemployment rate, wage growth, foreign GDP None Foreign GDP, oil prices None Conditioning assumption for interest rate Published forecast Not specified Market expectations and constant path Published forecast (as of Jan. 17) Constant path Published forecast Market expectations Constant path Market expectations How forecasts are presented Tables; charts for inflation and GDP GDP and inflation in tables and charts; rest only described in text “Fan” charts, data provided 2 weeks after publication “Fan” charts for inflation, tables and charts Qualitative description with a few numbers for reference “Fan” charts for key variables, table of means Range of values in table Chart for inflation; description of GDP; rest tables Range and median of individual members’ forecasts Forecast horizon 3 years 2 to 3 years 3 years; 2 years conditioned on unchanged policy 3 to 4 years 2 years 3 to 4 years Current year and next 3 years Current and next fiscal year How risks to forecast are expressed Distribution measures No No “Fan” charts, data provided 2 weeks after publication “Fan” chart for inflation No “Fan” charts Range No No Alternative scenarios Yes No No No No No No No No Discussion of risks Yes Yes Yes Yes Yes Yes No No Yes January 30-31, 2007 Authorized for Public Release Appendix 5: Materials used by Ms. Yellen 254 of 255 January 30-31, 2007 Authorized for Public Release 255 of 255 Prototype for FOMe fan charts - 1/29/07 FOMe Economic Projections for 2007 and 2008 Real GOP 4-quarter percent change ~----------------------------------~6 Unemployment rate Percent , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , 6.0 5 Forecast 5.5 Forecast 4 5.0 3 2 4.5 4.0 2005 2006 2007 Core PCE price index 2008 2005 4-quarter percent change ,..--------------------------------------, 3.5 2006 2007 2008 Percent 7 Federal funds rate Forecast Forecast 3.0 6 2.5 5 2.0 4 1.5 2005 2006 2007 2008 3 2 2005 2006 2007 2008 Note: The central tendencies of the FOMe participants' mean forecasts are denoted by the vertical thick intervals. Approximate 70 percent confidence intervals, which are based on historical forecast accuracy, are denoted by the thin intervals.
@FedFRASER