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Presentation Materials (PDF) Pages 216 to 255 of the Transcript Appendix 1: Materials used by Mr. Dudley Class II FOMC - Restricted FR Page 1 Top panel (1) Title: 2007 Fed Fund Futures Curves Series: Fed fund futures curves, including the monthly fed fund futures contracts from January 2007 through July 2007 Horizon: Three curves shown for the dates of 10/25/2006, 12/12/2006, and 1/26/2007 Description: The more recent curve from 1/26/2007 shows that U.S. monetary policy expectations have come back up to levels similar to the 10/25/2006 curve. Middle panel (2) Title: Eurodollar Futures March 2008 - March 2007 Calendar Spread Series: Eurodollar futures March 2008 - March 2007 calendar spread Horizon: October 1, 2006 to January 26, 2007 Description: The calendar spread declined gradually throughout the first half of the period shown, then it has risen continually since the December 12, 2006 FOMC meeting. The FOMC meetings on October 25, 2006 and December 12, 2006 are shown with tripwires. Bottom panel (3) Title: Treasury Yield Curves Series: Treasury yield curves, including the 2-year, 5-year, 10-year, and 30-year securities. Horizon: Three curves shown for the dates of 10/25/2006, 12/12/2006, and 1/26/2007 Description: The more recent yield curve from 1/26/2007 shows that yields have significantly come back up since 12/12/2006, even surpassing levels seen on the 10/25/2006 yield curve. Page 2 Top panel (4) Title: U.S. Breakeven Inflation Rates Series: 5-year, 10-year, and 5-year 5-year forward breakeven inflation rates Horizon: January 2, 2006 to January 26, 2007 Description: All three breakeven inflation rates have fluctuated over the period shown. However, on net, all three breakeven inflation rates have risen, primarily occurring since early January 2007. The FOMC meetings on October 25, 2006 and December 12, 2006 are shown with tripwires. Source: Barclays Middle panel (5) Title: Corporate Cash Index Spreads, Investment Grade and High Yield Series: Merrill Lynch High Yield Index and Merrill Lynch Investment Grade Index Horizon: January 3, 2005 to January 26, 2007 Description: Both spreads have tightened significantly since late September 2006. Bottom panel (6) Title: Implied Volatility on the S&P 100 and Treasury Yield Implied Volatility Series: VIX Index and Merrill Lynch Move Index Horizon: January 2, 1995 to January 26, 2007 Description: Although both indexes began to pick up in December 2006, they have been declining significantly since mid 2002 and are at historical low levels dating back to 1995. Page 3 Top panel (7) Title: Foreign Exchange Implied Volatility Series: 1-month euro-dollar* and dollar-yen option implied volatility Horizon: January 2, 1995 to January 26, 2007 Description: Although implied volatility began to pick up in December 2006, it has since declined as it has been since 2004, and it is at historical low levels dating back to 1995. * Euro: 1990-1999 = USD/DM, 2000-present = USD/Euro Return to text Source: Goldman Sachs (1995-1996), Bloomberg (1997-present). Bottom panel (8) Title: Composition of First-Lien Mortgage Originations 2001-2006* Series: Conforming Mortgages, Jumbo, Subprime, Alt-A, and Subprime as % of Total Horizon: 2001 to 2006, full-year 2006 volumes are estimated as of Q3 2006. Description: While total first-lien mortgage originations have been flat since 2004 at around $2.5 trillion per year, subprime mortgages have grown from just 9 percent of total originations in 2003 to about 24 percent in 2006. $ Billions 2001 Conforming Mortgages* 2002 2003 2004 2005 2006 1,433 1,898 2,690 1,345 1,180 1,084 Jumbo 430 576 655 515 570 512 Subprime 190 231 335 540 625 620 60 68 85 200 380 400 Alt-A * Conforming mortgages include FHA/VA. Return to text Source: Inside Mortgage Finance Page 4 Top panel (9) Title: Delinquency and Charge-off Rates for Subprime MBS Series: 60+ days delinquencies and charge-off rate Horizon: January 1996 to September 2006 Description: Although the charge-off rate among securitized subprime mortgages has declined in the last couple years, delinquencies have risen and may portend higher future losses on subprime mortgages. Source: Moody's Middle panel (10) Title: 60+ Days Delinquencies by Vintage (Subprime ARMs) Series: Level of 60+ day delinquencies on subprime mortgages backing MBS pools. Shows delinquency levels according to year in which subprime MBS was issued. Horizon: 2002 to 2006 Description: Delinquency rates for mortgages originated during 2006 are increasing much faster than those of recent years. Delinquency data may indicate that credit problems may be particularly severe among recently originated mortgages. Source: JPMorgan Bottom panel (11) Title: Subprime MBS Tranche Spreads, Weekly Series: AA, A, and BBB subprime MBS tranche spreads Horizon: January 5, 1998 to January 22, 2007 Description: Spread widening in the cash subprime MBS market has been mostly confined to tranches rated triple-B and worse. Nonetheless, spreads on triple-B rated securities remain below the widest levels reached near the end of last year and during 2004. Moreover, spreads on double-A and single-A rated subprime MBS tranches remain near historically tight levels, implying that credit deterioration may be relatively contained. Page 5 Top panel (12) Title: Copper 3-Month Forward Price and LME Warehouse Stock Series: London Metal Exchange stock and 3-month forward contract price Horizon: June 2004 to January 2007 Description: The consistent rise in LME copper inventories since October 2006 is indicative of an improvement in the supply and demand fundamentals for copper and coincides with a decline in the 3-month forward contract price. Source: London Metal Exchange Middle panel (13) Title: Annual Global Corn Inventory vs. Weekly Front-Month Futures Price Series: World stock, U.S. stock, and front-month corn futures price Horizon: 2000 to 2006 Description: The decline in the world stock of corn has been led by a decline in U.S. stocks of corn. The broader use of corn as a bio-fuel likely contributed to decline in U.S. stocks and coincides with the sharp rise in the front-month corn futures price. Source: USDA, Bloomberg Bottom panel (14) Title: Crude Oil Inventory vs. Front-Month Futures Price Series: June 2006 - January 2007 U.S. inventory, 5-year historical average U.S. inventory, and front-month WTI price Horizon: June 2006 to January 2007 Description: U.S. crude oil inventory levels are above the 5-year historical average and unseasonably warm weather this winter further contributed to a decline in the front-month WTI crude oil futures price. Source: Department of Energy, Bloomberg Page 6 Top panel (15) Title: WTI Crude Oil Futures Curves Series: WTI crude oil futures curves, including the monthly rolling contracts from spot to 24 months Horizon: Three curves shown for the dates of 6/30/2006, 12/12/2006, and 1/26/2007 Description: The WTI crude oil futures curves have progressively shifted lower since June 2006 given an improvement in supply and demand fundamentals and a reduction in risks to supply. Source: NYMEX, Bloomberg Middle panel (16) Title: OPEC Spare Production Capacity Series: OPEC spare production capacity in millions of barrels per day, 2007 forecast excludes potential production capacity increases Horizon: 2000 - 2006, plus forecast for 2007 Description: OPEC spare capacity has been rising since mid- 2006 and is forecast to continue rising through 2007 even if potential production capacity increases (as a result of investment) are not included. Source: International Energy Agency Appendix 2: Materials used by Mr. Slifman, Mr. Wascher, and Mr. Gagnon Material for Staff Presentation on the Economic Outlook January 30, 2007 STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC* *Downgraded to Class II upon release of the February 2007 Monetary Policy Report. Exhibit 1 Recent Indicators Top panel Real GDP (Percent change, annual rate) 1. Real GDP 2002:Q4 to 2006:Q1 Q2 Q3 Q4p Q1p 3.5 2.6 2.0 2.6 2.0 2006 2007 2. 2002:Q4 to 2006:Q1 Q2 Q3 Q4p Q1p (3.5) (2.6) (2.0) (1.3) (1.7) 4.1 1.8 2.1 2.1 2.0 (4.1) (1.8) (2.0) (1.2) (1.3) (Dec. GB) 3. PDFP* 4. (Dec. GB) 2006 2007 * Private domestic final purchases is the sum of PCE, business fixed investment, and residential investment. Return to table p - staff projection. Return to table Middle-left panel Private Payroll Employment Average monthly change Thousands Period Employment 2004 161.33 2005 151.58 2006:Q1 169.33 2006:Q2 98.00 2006:Q3 143.67 2006:Q4 119.33 Middle-right panel Real Personal Consumption Expenditures Trillions of 2000 dollars, annual rate Period Expenditures January 2004 7.47 February 2004 7.47 March 2004 7.50 2004:Q1* 7.48 April 2004 7.51 May 2004 7.57 June 2004 7.52 2004:Q2 7.53 July 2004 7.59 August 2004 7.59 September 2004 7.64 2004:Q3 7.61 October 2004 7.66 November 2004 7.68 December 2004 7.72 2004:Q4 7.69 January 2005 7.72 February 2005 7.74 March 2005 7.75 2005:Q1 April 2005 7.74 7.80 Period Expenditures May 2005 7.79 June 2005 7.86 2005:Q2 7.82 July 2005 7.93 August 2005 7.89 September 2005 7.87 2005:Q3 7.90 October 2005 7.88 November 2005 7.91 December 2005 7.95 2005:Q4 7.91 January 2006 7.98 February 2006 8.01 March 2006 8.02 2006:Q1 8.00 April 2006 8.03 May 2006 8.06 June 2006 8.07 2006:Q2 8.05 July 2006 8.11 August 2006 8.10 September 2006 8.12 2006:Q3 8.11 October 2006 8.16 November 2006 8.21 2006:Q4 8.20 2007:Q1 8.28 * Quarterly figures are averages. Figures for 2006:Q4 and 2007:Q1 are staff estimates. Return to table Period Percent change, a.r. 2006:Q3 2.8 2006:Q4(p) 4.6 2007:Q1(p) 3.6 p - staff projection. Return to table Bottom-left panel Single-Family Housing Starts Millions of units, annual rate Period Starts Adjusted Permits* January 2004 1.56 1.57 February 2004 1.48 1.60 March 2004 1.63 1.68 April 2004 1.65 1.64 May 2004 1.65 1.70 Period Starts Adjusted Permits* June 2004 1.53 1.66 July 2004 1.68 1.64 August 2004 1.69 1.64 September 2004 1.56 1.63 October 2004 1.66 1.63 November 2004 1.46 1.59 December 2004 1.71 1.65 January 2005 1.74 1.68 February 2005 1.80 1.66 March 2005 1.58 1.63 April 2005 1.68 1.70 May 2005 1.72 1.70 June 2005 1.72 1.72 July 2005 1.74 1.75 August 2005 1.71 1.74 September 2005 1.79 1.82 October 2005 1.73 1.75 November 2005 1.80 1.74 December 2005 1.63 1.67 January 2006 1.81 1.69 February 2006 1.81 1.63 March 2006 1.62 1.60 April 2006 1.52 1.52 May 2006 1.59 1.51 June 2006 1.48 1.45 July 2006 1.45 1.36 August 2006 1.37 1.32 September 2006 1.39 1.25 October 2006 1.19 1.20 November 2006 1.28 1.17 December 2006 1.23 1.20 * Adjusted for non-permit-issuing localities. Return to table Bottom-right panel Orders and Shipments of Nondefense Capital Goods* Three-month moving average Billions of dollars Period Orders Shipments January 2004 50.49 50.19 February 2004 49.62 49.68 March 2004 49.98 49.83 April 2004 50.95 50.54 May 2004 51.73 51.07 June 2004 51.04 51.28 Period Orders Shipments July 2004 51.45 51.54 August 2004 51.40 52.28 September 2004 52.59 52.71 October 2004 52.70 53.14 November 2004 53.60 53.28 December 2004 53.70 53.78 January 2005 55.39 54.58 February 2005 56.42 55.30 March 2005 56.75 55.67 April 2005 56.60 55.54 May 2005 56.76 56.05 June 2005 57.64 56.32 July 2005 57.66 56.53 August 2005 58.53 56.82 September 2005 58.53 57.14 October 2005 59.33 57.80 November 2005 59.26 58.12 December 2005 59.94 58.94 January 2006 60.74 59.60 February 2006 61.39 60.00 March 2006 62.30 60.44 April 2006 62.35 60.74 May 2006 62.86 61.25 June 2006 62.87 61.29 July 2006 63.45 61.56 August 2006 64.01 62.09 September 2006 65.04 62.33 October 2006 65.05 61.94 November 2006 64.62 61.71 December 2006 64.02 61.78 * Excluding aircraft. Return to text Exhibit 2 A Closer Look at Recent Developments Top-left panel Production of Light Motor Vehicles Percent change, annual rate* Period Production 2004 -4.37 2005 -2.80 2006:H1 -1.18 Period Production 2006:Q3 -18.61 2006:Q4 -4.71 Note: Based on data from the Industrial Production system. * Annual bars are Q4/Q4: Half-year bar is Q2/Q4. Return to table Top-right panel Residential Investment Percent change, annual rate* Period Investment 2004 6.07 2005 9.03 2006:H1 -5.87 2006:Q3 -18.67 2006:Q4p -20.59 * Annual bars are Q4/Q4: Half-year bar is Q2/Q4. Return to table p Projection. Return to table Middle-left panel Upstream Effects The drop in motor vehicle output affects IP directly through its impact on light motor vehicle manufacturing and indirectly through its influence on production in upstream industries. In the case of construction, all of the IP effect comes through the influence of construction declines on upstream industries. Middle-right panel Industrial Production (Percent change, annual rate) 2006:Q3 1. Total IP 4.0 2006:Q4 -0.6 Direct and upstream contribution of: 2. Light motor veh. -1.1 -0.2 3. Res. invest. -1.3 -1.3 4. Other 6.4 0.9 Bottom panels Changes in Payroll Employment - Highly and Moderately Cyclical Industries Three-month moving average Thousands Period High Moderate January 1972 144.90 ND February 1972 146.17 ND March 1972 172.77 ND April 1972 124.83 58.33 May 1972 144.00 55.37 June 1972 132.37 62.17 July 1972 57.67 45.03 Period August 1972 High Moderate 105.53 44.17 81.43 21.17 October 1972 195.40 55.23 November 1972 144.37 67.57 December 1972 177.13 85.63 January 1973 177.30 78.17 February 1973 214.50 78.53 March 1973 208.53 76.50 April 1973 158.77 64.83 May 1973 114.77 40.60 June 1973 118.73 24.40 July 1973 105.23 9.30 August 1973 100.30 18.03 September 1973 66.07 16.80 October 1973 97.17 44.33 November 1973 106.43 52.43 December 1973 111.57 46.17 January 1974 49.93 43.13 February 1974 21.53 26.97 March 1974 3.40 24.97 April 1974 31.70 0.00 May 1974 28.63 5.53 June 1974 28.10 7.50 July 1974 -7.53 14.57 August 1974 -33.53 -8.17 September 1974 -60.40 -23.07 October 1974 -56.63 -35.40 November 1974 -141.23 -69.17 December 1974 -252.63 -118.90 January 1975 -333.83 -166.57 February 1975 -356.93 -174.90 March 1975 -287.43 -139.70 April 1975 -256.57 -91.10 May 1975 -129.83 -18.27 June 1975 -81.80 13.73 July 1975 -9.83 50.37 August 1975 60.50 66.47 September 1975 104.40 79.70 October 1975 127.00 89.43 November 1975 79.33 65.20 December 1975 119.23 69.23 January 1976 181.57 81.37 February 1976 210.73 102.87 September 1972 Period High Moderate March 1976 187.10 101.50 April 1976 145.97 75.40 May 1976 101.60 30.43 June 1976 64.70 21.63 July 1976 33.10 13.33 August 1976 66.30 31.50 September 1976 85.20 55.87 October 1976 46.17 39.50 November 1976 68.60 48.07 December 1976 77.13 37.83 January 1977 141.63 72.30 February 1977 135.60 82.77 March 1977 194.93 87.80 April 1977 212.33 85.63 May 1977 210.17 87.03 June 1977 180.00 87.50 July 1977 177.70 75.80 August 1977 155.80 69.00 September 1977 155.37 74.10 October 1977 135.20 69.47 November 1977 158.73 78.10 December 1977 171.07 76.17 January 1978 153.53 80.93 February 1978 141.43 79.80 March 1978 157.30 83.97 April 1978 246.20 94.13 May 1978 255.67 92.97 June 1978 248.70 97.10 July 1978 194.43 63.43 August 1978 185.87 61.00 September 1978 147.43 37.93 October 1978 153.47 72.57 November 1978 168.60 93.50 December 1978 170.53 102.57 January 1979 125.07 88.97 February 1979 98.47 60.60 March 1979 148.53 57.10 April 1979 132.47 3.97 May 1979 142.60 39.63 June 1979 85.40 48.17 July 1979 86.80 75.70 August 1979 13.07 32.77 September 1979 11.33 -1.73 Period High Moderate October 1979 18.83 33.70 November 1979 40.33 35.30 December 1979 14.97 41.30 January 1980 17.87 22.67 February 1980 31.50 1.33 March 1980 12.43 5.63 April 1980 -121.63 -33.60 May 1980 -227.70 -40.90 June 1980 -303.70 -75.27 July 1980 -243.10 -70.80 -91.33 -32.70 32.73 -1.33 October 1980 131.63 49.23 November 1980 124.33 41.50 December 1980 119.07 52.60 January 1981 90.47 40.10 February 1981 43.13 41.03 March 1981 41.57 35.37 April 1981 84.77 39.37 May 1981 81.47 37.93 June 1981 56.70 37.27 July 1981 9.27 31.77 August 1981 4.13 21.00 September 1981 -18.70 7.63 October 1981 -61.37 -22.87 November 1981 -121.07 -40.43 December 1981 -177.97 -61.60 January 1982 -214.03 -69.20 February 1982 -142.57 -54.63 March 1982 -106.27 -44.97 April 1982 -88.80 -40.80 May 1982 -106.43 -35.93 June 1982 -137.10 -36.57 July 1982 -123.27 -35.93 August 1982 -167.33 -43.40 September 1982 -142.83 -37.80 October 1982 -183.10 -28.67 November 1982 -166.57 -35.53 December 1982 -129.43 -25.90 January 1983 6.87 -5.63 February 1983 31.47 7.60 March 1983 53.23 29.57 April 1983 54.73 51.63 August 1980 September 1980 Period High Moderate May 1983 121.83 74.57 June 1983 173.87 82.83 July 1983 207.60 92.60 August 1983 210.80 89.15 September 1983 237.27 106.30 October 1983 222.53 90.67 November 1983 244.13 92.88 December 1983 216.83 73.57 January 1984 231.80 99.03 February 1984 253.30 111.37 March 1984 230.00 112.07 April 1984 204.80 89.53 May 1984 155.43 76.30 June 1984 180.80 76.27 July 1984 178.40 68.20 August 1984 167.03 58.80 September 1984 148.77 48.63 October 1984 134.80 60.07 November 1984 157.60 75.17 December 1984 134.17 67.77 January 1985 119.00 56.40 February 1985 63.30 45.13 March 1985 99.80 48.10 April 1985 91.33 47.83 May 1985 122.17 52.00 June 1985 69.40 53.73 July 1985 48.33 47.03 August 1985 46.33 31.23 September 1985 50.67 47.10 October 1985 73.40 53.13 November 1985 63.40 69.27 December 1985 64.13 57.70 January 1986 52.17 56.60 February 1986 27.07 51.83 March 1986 26.87 44.00 April 1986 51.30 44.87 May 1986 60.67 49.97 June 1986 22.00 25.77 July 1986 23.23 59.67 August 1986 41.73 27.33 September 1986 81.23 99.10 October 1986 55.37 63.23 November 1986 43.77 96.43 Period High Moderate December 1986 51.50 59.13 January 1987 54.30 61.83 February 1987 81.67 64.70 March 1987 87.47 63.17 April 1987 113.73 80.33 May 1987 104.80 70.77 June 1987 96.97 65.20 July 1987 91.23 65.20 August 1987 100.07 30.10 September 1987 107.20 75.30 October 1987 138.70 73.53 November 1987 129.40 115.73 December 1987 139.50 77.47 January 1988 45.87 77.83 February 1988 101.27 88.43 March 1988 105.30 75.20 April 1988 180.27 50.90 May 1988 127.67 25.23 June 1988 143.00 24.93 July 1988 137.00 24.07 August 1988 121.30 -13.43 September 1988 89.77 34.20 October 1988 73.53 62.57 November 1988 90.00 126.83 December 1988 99.00 112.20 January 1989 118.90 92.57 February 1989 114.47 83.37 March 1989 110.97 42.23 April 1989 89.47 24.63 May 1989 73.17 -11.40 June 1989 42.70 -30.33 July 1989 21.73 -30.53 August 1989 25.43 -91.97 8.40 16.53 -1.30 64.90 November 1989 1.60 183.57 December 1989 -16.60 141.63 January 1990 72.30 99.73 February 1990 97.33 62.33 March 1990 127.87 27.43 April 1990 27.10 13.77 May 1990 -55.13 -10.27 June 1990 -63.57 -13.17 September 1989 October 1989 Period High Moderate July 1990 -69.60 -2.80 August 1990 -84.13 10.17 September 1990 -112.10 2.23 October 1990 -140.47 -16.70 November 1990 -156.70 -13.67 December 1990 -166.03 -12.20 January 1991 -166.70 -4.37 February 1991 -187.00 -31.53 March 1991 -199.93 -42.77 April 1991 -195.03 -62.70 May 1991 -148.50 -48.63 June 1991 -102.37 -34.23 July 1991 -70.07 -19.80 August 1991 -38.63 0.13 September 1991 -25.80 -0.37 October 1991 -33.33 14.13 November 1991 -65.33 10.73 December 1991 -71.67 8.23 January 1992 -58.73 10.27 February 1992 -32.70 -2.33 March 1992 -17.73 -7.00 April 1992 8.50 7.97 May 1992 38.30 33.70 June 1992 27.47 42.43 July 1992 -8.13 36.07 August 1992 -17.47 25.73 September 1992 -11.83 38.60 October 1992 28.93 50.53 November 1992 41.37 54.00 December 1992 68.13 48.27 January 1993 99.70 49.43 February 1993 129.20 55.50 March 1993 89.20 26.23 April 1993 63.50 48.20 May 1993 59.33 57.33 June 1993 86.30 86.60 July 1993 96.53 59.97 August 1993 82.77 52.27 September 1993 110.73 61.20 October 1993 136.13 65.47 November 1993 143.30 73.87 December 1993 144.93 72.93 January 1994 121.33 77.43 Period High Moderate February 1994 126.37 66.40 March 1994 168.67 76.90 April 1994 212.17 56.63 May 1994 222.87 68.73 June 1994 196.63 52.13 July 1994 187.97 60.50 August 1994 195.70 49.73 September 1994 207.53 43.57 October 1994 183.57 32.03 November 1994 209.23 43.97 December 1994 172.30 60.60 January 1995 183.63 85.93 February 1995 131.80 70.17 March 1995 127.67 58.77 April 1995 102.53 37.40 May 1995 59.67 25.50 June 1995 62.20 27.60 July 1995 48.77 22.33 August 1995 104.33 43.67 September 1995 119.57 39.20 October 1995 115.80 47.07 November 1995 90.70 37.43 December 1995 71.37 20.10 January 1996 51.17 15.10 February 1996 111.00 27.73 March 1996 110.23 52.60 April 1996 149.63 57.57 May 1996 130.37 57.53 June 1996 154.30 59.10 July 1996 157.53 66.53 August 1996 147.27 55.77 September 1996 131.50 38.30 October 1996 136.77 39.37 November 1996 142.17 43.57 December 1996 144.03 45.07 January 1997 118.90 54.67 February 1997 123.07 57.47 March 1997 148.17 73.90 April 1997 183.57 65.87 May 1997 168.37 66.73 June 1997 142.50 59.23 July 1997 145.23 39.00 August 1997 141.43 -14.30 Period High Moderate September 1997 151.30 50.80 October 1997 153.50 68.53 November 1997 177.27 116.90 December 1997 190.80 51.30 January 1998 185.93 51.53 February 1998 143.70 56.50 March 1998 95.77 61.20 April 1998 97.00 60.00 May 1998 134.80 72.23 June 1998 160.87 63.00 July 1998 86.93 66.37 115.67 51.07 91.07 71.50 October 1998 150.23 50.87 November 1998 105.83 52.60 December 1998 155.10 44.83 January 1999 133.00 57.70 February 1999 155.80 58.50 March 1999 107.10 41.27 April 1999 159.90 49.03 May 1999 133.80 54.60 June 1999 155.43 66.13 July 1999 143.27 57.93 August 1999 124.57 46.73 September 1999 108.80 50.30 October 1999 126.30 65.63 November 1999 148.07 74.03 December 1999 181.90 66.80 January 2000 157.37 47.27 February 2000 123.60 32.63 March 2000 138.60 49.17 April 2000 127.93 62.53 May 2000 77.43 40.90 June 2000 44.03 34.47 July 2000 38.60 32.77 August 2000 77.93 29.20 September 2000 53.60 36.67 October 2000 20.87 -0.07 November 2000 40.87 44.17 December 2000 14.03 44.27 January 2001 -11.40 48.83 February 2001 -49.90 23.33 March 2001 -87.97 -6.93 August 1998 September 1998 Period High Moderate April 2001 -185.00 -9.80 May 2001 -215.43 -21.33 June 2001 -236.57 -45.60 July 2001 -184.77 -43.73 August 2001 -199.07 -60.33 September 2001 -195.67 -84.13 October 2001 -218.87 -115.27 November 2001 -253.40 -133.13 December 2001 -243.90 -114.67 January 2002 -211.07 -80.63 February 2002 -148.83 -70.27 March 2002 -113.17 -59.53 April 2002 -83.27 -73.43 May 2002 -78.63 -52.10 June 2002 -66.40 -46.77 July 2002 -74.47 -26.80 August 2002 -73.27 -14.00 September 2002 -89.57 2.83 October 2002 -66.87 38.17 November 2002 -67.60 38.00 December 2002 -75.80 17.47 January 2003 -68.80 -3.67 February 2003 -74.23 -32.90 March 2003 -86.93 -34.87 April 2003 -92.80 -66.73 May 2003 -59.73 -43.77 June 2003 -19.27 -31.73 July 2003 -13.73 -12.30 August 2003 -13.20 -7.63 September 2003 24.87 10.47 October 2003 52.13 22.23 November 2003 64.10 24.07 December 2003 56.43 20.13 January 2004 67.77 16.03 February 2004 60.23 18.97 March 2004 90.13 33.00 April 2004 117.50 28.00 May 2004 168.27 51.93 June 2004 135.03 37.10 July 2004 87.87 25.47 August 2004 53.77 -3.43 September 2004 63.13 9.70 113.43 33.87 October 2004 Period High Moderate November 2004 111.77 42.03 December 2004 112.27 32.33 January 2005 50.90 29.17 February 2005 96.93 30.97 March 2005 95.30 29.60 April 2005 130.63 37.90 May 2005 84.73 28.03 June 2005 81.23 27.17 July 2005 81.93 27.27 August 2005 85.10 39.17 September 2005 68.70 24.27 October 2005 41.77 13.47 November 2005 81.80 29.77 December 2005 102.27 44.07 January 2006 116.27 56.53 February 2006 75.13 47.40 March 2006 75.17 45.60 April 2006 53.57 40.37 May 2006 42.60 30.80 June 2006 34.57 29.87 July 2006 40.43 30.37 August 2006 45.37 38.83 September 2006 30.67 53.80 October 2006 15.30 55.30 November 2006 18.03 54.47 December 2006 25.17 54.50 Note: Shading indicates NBER periods of cyclical contraction (November 1973 to March 1975, January 1980 to July 1980, July 1981 to November 1982, July 1990 to March 1991, and March 2001 to November 2001). ND No data Return to table Exhibit 3 Forecast Summary Top panel GDP Projection (Percent change, annual rate*) 2006 2007 2008 1. Real GDP 2. 3. 4. (Dec. GB) PDFP** (Dec. GB) H2 H1 H2 2.3 2.2 2.4 2.5 (1.7) (2.0) (2.4) (2.5) 2.1 2.1 2.5 2.8 (1.6) (1.7) (2.4) (2.7) * 2008 is Q4/Q4; half years are either Q4/Q2 or Q2/Q4. Return to table ** Private domestic final purchases is the sum of PCE, business fixed investment, and residential investment. Return to table Middle panel Major Forces Shaping the Outlook Restraint from housing diminishes this year, and the contribution from housing turns slightly positive next year. Recent declines in oil prices boost real income; the lagged effects support consumption growth this year and into next year. Fiscal policy remains somewhat stimulative, although the impetus ebbs over the projection period. Monetary policy: Given our conditioning assumptions, the assumed path of the nominal federal funds rate is consistent with a real funds rate that closes the output gap over time. Bottom-left panel Crude Oil Prices Quarterly average Dollars per barrel Period West Texas Intermediate Dec. GB WTI Forecast 2004:Q1 35.25 ND ND 2004:Q2 38.34 ND ND 2004:Q3 43.89 ND ND 2004:Q4 48.31 ND ND 2005:Q1 49.68 ND ND 2005:Q2 53.09 ND ND 2005:Q3 63.08 ND ND 2005:Q4 60.03 ND ND 2006:Q1 63.34 ND ND 2006:Q2 70.53 ND ND 2006:Q3 70.44 70.44 ND 2006:Q4 60.04 60.18 ND 2007:Q1 ND 63.87 54.28 2007:Q2 ND 66.62 56.59 2007:Q3 ND 68.09 58.28 2007:Q4 ND 69.04 59.48 2008:Q1 ND 69.63 60.28 2008:Q2 ND 69.93 60.70 2008:Q3 ND 70.06 60.91 2008:Q4 ND 70.03 60.97 2009:Q1 ND 69.89 60.97 Bottom-right panel Fiscal Impetus Percent of GDP Period Impetus Impetus Forecast 2003 0.95 ND 2004 0.72 ND 2005 0.25 ND 2006 0.35 ND Period Impetus Impetus Forecast 2007 ND 0.26 2008 ND 0.07 Exhibit 4 Private Domestic Final Demand Top panel Single-Family Starts and New Home Sales Thousands of units, annual rate Period Single-family starts New home sales Single-family starts forecast New home sales forecast 1970:Q1 687.33 407.67 ND ND 1970:Q2 758.33 465.33 ND ND 1970:Q3 839.00 520.00 ND ND 1970:Q4 972.33 565.67 ND ND 1971:Q1 1030.33 642.00 ND ND 1971:Q2 1148.00 643.00 ND ND 1971:Q3 1159.00 660.33 ND ND 1971:Q4 1246.33 682.33 ND ND 1972:Q1 1326.00 683.00 ND ND 1972:Q2 1262.33 682.67 ND ND 1972:Q3 1344.67 740.33 ND ND 1972:Q4 1310.67 783.33 ND ND 1973:Q1 1336.33 747.67 ND ND 1973:Q2 1180.67 657.00 ND ND 1973:Q3 1101.00 576.00 ND ND 1973:Q4 918.00 543.67 ND ND 1974:Q1 924.67 544.67 ND ND 1974:Q2 964.00 556.00 ND ND 1974:Q3 861.00 512.33 ND ND 1974:Q4 779.33 438.33 ND ND 1975:Q1 733.67 438.33 ND ND 1975:Q2 848.00 559.67 ND ND 1975:Q3 949.67 563.67 ND ND 1975:Q4 1033.00 652.67 ND ND 1976:Q1 1141.33 612.67 ND ND 1976:Q2 1098.67 590.67 ND ND 1976:Q3 1176.33 669.33 ND ND 1976:Q4 1249.67 742.67 ND ND 1977:Q1 1363.00 845.33 ND ND 1977:Q2 1425.33 803.67 ND ND 1977:Q3 1455.67 801.67 ND ND 1977:Q4 1505.33 827.67 ND ND Period Single-family starts New home sales Single-family starts forecast New home sales forecast 1978:Q1 1307.00 800.00 ND ND 1978:Q2 1485.00 851.67 ND ND 1978:Q3 1424.33 785.67 ND ND 1978:Q4 1456.33 825.00 ND ND 1979:Q1 1161.33 756.67 ND ND 1979:Q2 1293.33 725.00 ND ND 1979:Q3 1201.00 723.67 ND ND 1979:Q4 1030.67 608.67 ND ND 1980:Q1 794.00 535.67 ND ND 1980:Q2 691.00 463.67 ND ND 1980:Q3 956.00 630.33 ND ND 1980:Q4 979.00 551.67 ND ND 1981:Q1 867.67 511.67 ND ND 1981:Q2 786.33 450.67 ND ND 1981:Q3 648.00 382.33 ND ND 1981:Q4 541.33 398.33 ND ND 1982:Q1 569.00 369.00 ND ND 1982:Q2 601.00 364.33 ND ND 1982:Q3 660.67 421.00 ND ND 1982:Q4 821.33 518.33 ND ND 1983:Q1 1028.67 580.00 ND ND 1983:Q2 1085.33 651.00 ND ND 1983:Q3 1093.00 595.33 ND ND 1983:Q4 1052.67 683.00 ND ND 1984:Q1 1221.00 676.00 ND ND 1984:Q2 1103.33 628.00 ND ND 1984:Q3 1003.67 616.00 ND ND 1984:Q4 1065.67 627.00 ND ND 1985:Q1 1064.00 666.00 ND ND 1985:Q2 1053.00 673.33 ND ND 1985:Q3 1059.00 723.33 ND ND 1985:Q4 1107.67 703.00 ND ND 1986:Q1 1197.67 780.33 ND ND 1986:Q2 1215.33 791.33 ND ND 1986:Q3 1161.33 694.00 ND ND 1986:Q4 1155.33 720.00 ND ND 1987:Q1 1237.00 718.00 ND ND 1987:Q2 1138.00 674.33 ND ND 1987:Q3 1163.00 660.33 ND ND 1987:Q4 1078.67 623.33 ND ND 1988:Q1 1057.00 639.00 ND ND 1988:Q2 1066.00 700.00 ND ND 1988:Q3 1071.33 690.00 ND ND Period Single-family starts New home sales Single-family starts forecast New home sales forecast 1988:Q4 1137.00 668.00 ND ND 1989:Q1 1044.33 636.00 ND ND 1989:Q2 997.33 635.33 ND ND 1989:Q3 997.67 689.00 ND ND 1989:Q4 985.67 653.00 ND ND 1990:Q1 1057.67 595.00 ND ND 1990:Q2 900.00 540.33 ND ND 1990:Q3 856.00 522.00 ND ND 1990:Q4 788.67 474.00 ND ND 1991:Q1 703.00 463.33 ND ND 1991:Q2 844.00 513.67 ND ND 1991:Q3 879.00 508.00 ND ND 1991:Q4 913.67 552.33 ND ND 1992:Q1 1036.00 623.00 ND ND 1992:Q2 994.00 565.33 ND ND 1992:Q3 1015.00 637.67 ND ND 1992:Q4 1082.00 628.33 ND ND 1993:Q1 1034.67 600.67 ND ND 1993:Q2 1106.33 660.00 ND ND 1993:Q3 1130.33 675.33 ND ND 1993:Q4 1251.00 761.67 ND ND 1994:Q1 1193.00 684.00 ND ND 1994:Q2 1214.33 668.00 ND ND 1994:Q3 1193.67 653.67 ND ND 1994:Q4 1163.33 663.33 ND ND 1995:Q1 1044.00 600.33 ND ND 1995:Q2 1019.67 673.33 ND ND 1995:Q3 1122.00 714.67 ND ND 1995:Q4 1142.33 689.67 ND ND 1996:Q1 1149.33 734.67 ND ND 1996:Q2 1186.33 734.33 ND ND 1996:Q3 1183.67 788.67 ND ND 1996:Q4 1098.00 765.33 ND ND 1997:Q1 1139.67 820.67 ND ND 1997:Q2 1116.33 765.67 ND ND 1997:Q3 1146.00 820.00 ND ND 1997:Q4 1143.33 819.00 ND ND 1998:Q1 1228.33 858.00 ND ND 1998:Q2 1239.00 892.00 ND ND 1998:Q3 1278.67 862.00 ND ND 1998:Q4 1364.33 945.67 ND ND 1999:Q1 1337.00 862.00 ND ND 1999:Q2 1266.00 909.67 ND ND Period Single-family starts New home sales Single-family starts forecast New home sales forecast 1999:Q3 1286.33 873.00 ND ND 1999:Q4 1335.33 869.33 ND ND 2000:Q1 1278.67 876.33 ND ND 2000:Q2 1235.67 830.33 ND ND 2000:Q3 1189.33 882.33 ND ND 2000:Q4 1224.33 932.00 ND ND 2001:Q1 1257.67 946.00 ND ND 2001:Q2 1297.00 892.00 ND ND 2001:Q3 1275.67 866.33 ND ND 2001:Q4 1256.33 924.67 ND ND 2002:Q1 1360.67 917.00 ND ND 2002:Q2 1341.00 957.00 ND ND 2002:Q3 1342.33 1004.67 ND ND 2002:Q4 1410.33 1026.00 ND ND 2003:Q1 1412.33 978.00 ND ND 2003:Q2 1426.00 1094.33 ND ND 2003:Q3 1524.67 1168.33 ND ND 2003:Q4 1657.33 1122.00 ND ND 2004:Q1 1557.67 1200.00 ND ND 2004:Q2 1608.00 1202.33 ND ND 2004:Q3 1640.33 1159.00 ND ND 2004:Q4 1610.67 1242.00 ND ND 2005:Q1 1703.33 1256.33 ND ND 2005:Q2 1707.00 1284.33 ND ND 2005:Q3 1747.67 1297.00 ND ND 2005:Q4 1718.00 1280.33 ND ND 2006:Q1 1747.00 1110.67 ND ND 2006:Q2 1529.67 1100.00 ND ND 2006:Q3 1401.00 1007.33 ND ND 2006:Q4 1233.00 1061.33 ND ND 2007:Q1 ND ND 1175.00 1080.00 2007:Q2 ND ND 1190.00 1036.69 2007:Q3 ND ND 1204.00 1044.97 2007:Q4 ND ND 1214.67 1049.71 2008:Q1 ND ND 1243.00 1057.00 2008:Q2 ND ND 1255.00 1065.00 2008:Q3 ND ND 1271.00 1079.15 2008:Q4 ND ND 1295.00 1089.11 Note: Shading indicates periods of cyclical contraction in single-family starts (1972:Q3 to 1975:Q1, 1977:Q4 to 1981:Q4, 1990:Q1 to 1991:Q1, 1993:Q4 to 1995:Q2, and 2005:Q3 to 2007:Q1). Middle-left panel Real PCE and DPI Percent change, Q4/Q4 Period DPI* PCE DPI Forecast PCE Forecast 2004 2.61 3.96 ND ND 2005 1.76 2.90 ND ND 2006 3.40 3.71 ND ND 2007 ND ND 3.69 2.76 2008 ND ND 3.53 2.68 Note: 2006:Q4 is a projection. * Excluding December 2004 Microsoft dividend. Return to table Middle-right panel Saving Rate and Wealth-to-Income Ratio Period Personal saving rate (Percent) Wealth to income ratio Personal saving rate Forecast Wealth to income ratio Forecast 2004:Q1 2.11 5.28 ND ND 2004:Q2 1.96 5.29 ND ND 2004:Q3 1.62 5.28 ND ND 2004:Q4 1.24 5.43 ND ND 2005:Q1 0.59 5.44 ND ND 2005:Q2 -0.34 5.50 ND ND 2005:Q3 -1.47 5.60 ND ND 2005:Q4 -0.31 5.60 ND ND 2006:Q1 -0.32 5.67 ND ND 2006:Q2 -1.38 5.64 ND ND 2006:Q3 -1.16 5.65 ND ND 2006:Q4 -0.74 5.70 ND ND 2007:Q1 ND ND -0.40 5.65 2007:Q2 ND ND -0.24 5.62 2007:Q3 ND ND -0.05 5.59 2007:Q4 ND ND 0.16 5.56 2008:Q1 ND ND 0.50 5.52 2008:Q2 ND ND 0.63 5.49 2008:Q3 ND ND 0.83 5.46 2008:Q4 ND ND 1.01 5.44 Note: Excluding December 2004 Microsoft dividend. Bottom-left panel E&S Spending excluding Transportation Percent change, Q4/Q4 High Tech (contribution) Other (contribution) High Tech (contribution) Forecast Other (contribution) Forecast 2004 3.41 1.46 ND ND 4.87 2005 4.73 3.75 ND ND 8.48 2006 4.14 1.76 ND ND 5.90 2007 ND ND 4.74 0.95 5.69 Period Total Period High Tech (contribution) Other (contribution) High Tech (contribution) Forecast Other (contribution) Forecast ND ND 4.96 1.16 2008 Total 6.12 Note: 2006:Q4 is a projection. Bottom-right panel Nonresidential Structures* Percent change, Q4/Q4 Period Structures Structures Forecast 1959-2005 avg. 1.60 ND 2004 0.52 ND 2005 -1.20 ND 2006 12.79 ND 2007 ND 5.56 2008 ND 1.64 Note: 2006:Q4 is a projection. * Excluding mining exploration, shafts, and wells. Return to text Exhibit 5 Potential Output Top panel Staff Assumptions (Percent change, Q4/Q4) 2000 2005 2006 2007 2008 1. Potential output 3.0 2.7 2.6 2.5 2. 0.9 0.8 0.7 0.5 Total hours 3. Working-age population 1.2 1.2 1.2 1.1 4. Labor-force participation -0.1 -0.3 -0.3 -0.4 5. Average workweek -0.3 -0.2 -0.2 -0.2 2.9 2.6 2.5 2.5 -0.8 -0.7 -0.6 -0.5 6. Structural productivity 7. Technical factors Note: Components may not add to totals due to rounding. Middle-left panel Outside Estimates of Potential Output Growth Percent 1. Blue Chip 3.0 2. Macro Advisers 3.3 3. Global Insight 3.0 4. CBO 2.8 Middle-right panel Labor Force Participation Rate Percent Period Actual Trend Actual Forecast Trend Forecast 1985:Q1 65.16 65.04 ND ND 1985:Q2 65.12 65.09 ND ND 1985:Q3 65.14 65.14 ND ND 1985:Q4 65.35 65.20 ND ND 1986:Q1 65.43 65.30 ND ND 1986:Q2 65.65 65.36 ND ND 1986:Q3 65.79 65.41 ND ND 1986:Q4 65.81 65.46 ND ND 1987:Q1 65.85 65.53 ND ND 1987:Q2 65.99 65.58 ND ND 1987:Q3 66.04 65.63 ND ND 1987:Q4 66.17 65.68 ND ND 1988:Q1 66.22 65.77 ND ND 1988:Q2 66.21 65.83 ND ND 1988:Q3 66.41 65.90 ND ND 1988:Q4 66.58 65.97 ND ND 1989:Q1 66.81 66.07 ND ND 1989:Q2 66.90 66.14 ND ND 1989:Q3 66.94 66.23 ND ND 1989:Q4 67.02 66.32 ND ND 1990:Q1 67.03 66.42 ND ND 1990:Q2 66.85 66.48 ND ND 1990:Q3 66.78 66.51 ND ND 1990:Q4 66.70 66.53 ND ND 1991:Q1 66.56 66.57 ND ND 1991:Q2 66.57 66.59 ND ND 1991:Q3 66.38 66.61 ND ND 1991:Q4 66.38 66.63 ND ND 1992:Q1 66.59 66.66 ND ND 1992:Q2 66.84 66.67 ND ND 1992:Q3 66.88 66.69 ND ND 1992:Q4 66.56 66.71 ND ND 1993:Q1 66.46 66.73 ND ND 1993:Q2 66.61 66.74 ND ND 1993:Q3 66.61 66.75 ND ND 1993:Q4 66.58 66.77 ND ND 1994:Q1 66.41 66.79 ND ND 1994:Q2 66.31 66.79 ND ND 1994:Q3 66.36 66.79 ND ND 1994:Q4 66.55 66.77 ND ND 1995:Q1 66.56 66.78 ND ND Period Actual Trend Actual Forecast Trend Forecast 1995:Q2 66.44 66.78 ND ND 1995:Q3 66.42 66.78 ND ND 1995:Q4 66.33 66.77 ND ND 1996:Q1 66.33 66.78 ND ND 1996:Q2 66.50 66.79 ND ND 1996:Q3 66.65 66.78 ND ND 1996:Q4 66.80 66.77 ND ND 1997:Q1 66.83 66.77 ND ND 1997:Q2 66.89 66.77 ND ND 1997:Q3 66.92 66.77 ND ND 1997:Q4 66.86 66.75 ND ND 1998:Q1 66.98 66.75 ND ND 1998:Q2 66.90 66.74 ND ND 1998:Q3 66.94 66.73 ND ND 1998:Q4 67.04 66.73 ND ND 1999:Q1 67.08 66.73 ND ND 1999:Q2 67.01 66.71 ND ND 1999:Q3 66.99 66.70 ND ND 1999:Q4 67.03 66.70 ND ND 2000:Q1 67.29 66.70 ND ND 2000:Q2 67.17 66.70 ND ND 2000:Q3 66.89 66.70 ND ND 2000:Q4 66.92 66.70 ND ND 2001:Q1 67.15 66.70 ND ND 2001:Q2 66.76 66.71 ND ND 2001:Q3 66.65 66.70 ND ND 2001:Q4 66.70 66.67 ND ND 2002:Q1 66.58 66.65 ND ND 2002:Q2 66.64 66.64 ND ND 2002:Q3 66.56 66.62 ND ND 2002:Q4 66.36 66.59 ND ND 2003:Q1 66.28 66.55 ND ND 2003:Q2 66.37 66.51 ND ND 2003:Q3 66.06 66.48 ND ND 2003:Q4 65.99 66.44 ND ND 2004:Q1 65.98 66.41 ND ND 2004:Q2 65.92 66.38 ND ND 2004:Q3 65.93 66.34 ND ND 2004:Q4 65.92 66.31 ND ND 2005:Q1 65.82 66.26 ND ND 2005:Q2 66.04 66.22 ND ND 2005:Q3 66.12 66.18 ND ND Period Actual Trend Actual Forecast Trend Forecast 2005:Q4 66.03 66.14 ND ND 2006:Q1 66.05 66.09 ND ND 2006:Q2 66.14 66.05 ND ND 2006:Q3 66.20 66.01 ND ND 2006:Q4 66.30 65.97 ND ND 2007:Q1 ND ND 66.29 65.91 2007:Q2 ND ND 66.20 65.86 2007:Q3 ND ND 66.12 65.80 2007:Q4 ND ND 66.03 65.74 2008:Q1 ND ND 65.95 65.68 2008:Q2 ND ND 65.86 65.62 2008:Q3 ND ND 65.78 65.56 2008:Q4 ND ND 65.69 65.50 Note: Shading indicates periods when the unemployment rate was below the NAIRU (1988:Q1 to 1990:Q2, 1997:Q1 to 2001:Q3, and 2005:Q3 to 2008:Q4). Bottom-left panel Flows from Nonparticipation to Employment* Six-month moving average Period Percent June 1985 4.65 July 1985 4.67 August 1985 4.66 September 1985 4.69 October 1985 4.68 November 1985 4.62 December 1985 4.60 January 1986 4.65 February 1986 4.56 March 1986 4.55 April 1986 4.54 May 1986 4.59 June 1986 4.65 July 1986 4.57 August 1986 4.62 September 1986 4.58 October 1986 4.66 November 1986 4.61 December 1986 4.61 January 1987 4.59 February 1987 4.54 March 1987 4.58 April 1987 4.58 Period Percent May 1987 4.59 June 1987 4.56 July 1987 4.64 August 1987 4.68 September 1987 4.66 October 1987 4.74 November 1987 4.71 December 1987 4.80 January 1988 4.77 February 1988 4.83 March 1988 4.86 April 1988 4.83 May 1988 4.88 June 1988 4.91 July 1988 4.88 August 1988 4.84 September 1988 4.87 October 1988 4.81 November 1988 4.84 December 1988 4.77 January 1989 4.86 February 1989 4.90 March 1989 4.89 April 1989 4.86 May 1989 4.83 June 1989 4.87 July 1989 4.79 August 1989 4.77 September 1989 4.83 October 1989 4.89 November 1989 4.98 December 1989 4.89 January 1990 4.89 February 1990 4.94 March 1990 4.91 April 1990 4.89 May 1990 4.79 June 1990 4.89 July 1990 4.87 August 1990 4.81 September 1990 4.73 October 1990 4.70 November 1990 4.75 Period Percent December 1990 4.70 January 1991 4.58 February 1991 4.55 March 1991 4.53 April 1991 4.46 May 1991 4.37 June 1991 4.31 July 1991 4.37 August 1991 4.36 September 1991 4.36 October 1991 4.37 November 1991 4.32 December 1991 4.25 January 1992 4.28 February 1992 4.17 March 1992 4.13 April 1992 4.16 May 1992 4.16 June 1992 4.18 July 1992 4.20 August 1992 4.27 September 1992 4.25 October 1992 4.30 November 1992 4.32 December 1992 4.36 January 1993 4.27 February 1993 4.32 March 1993 4.34 April 1993 4.27 May 1993 4.31 June 1993 4.30 July 1993 4.35 August 1993 4.34 September 1993 4.39 October 1993 4.38 November 1993 4.32 December 1993 ND January 1994 ND February 1994 ND March 1994 ND April 1994 ND May 1994 ND June 1994 ND Period Percent July 1994 4.60 August 1994 4.57 September 1994 4.58 October 1994 4.57 November 1994 4.59 December 1994 4.53 January 1995 4.56 February 1995 4.55 March 1995 4.51 April 1995 4.52 May 1995 4.40 June 1995 4.52 July 1995 4.49 August 1995 4.44 September 1995 4.55 October 1995 4.55 November 1995 4.68 December 1995 4.47 January 1996 4.42 February 1996 4.59 March 1996 4.46 April 1996 4.41 May 1996 4.41 June 1996 4.50 July 1996 4.57 August 1996 4.47 September 1996 4.49 October 1996 4.51 November 1996 4.48 December 1996 4.37 January 1997 4.35 February 1997 4.32 March 1997 4.38 April 1997 4.42 May 1997 4.46 June 1997 4.55 July 1997 4.53 August 1997 4.55 September 1997 4.47 October 1997 4.49 November 1997 4.49 December 1997 4.55 January 1998 4.64 Period Percent February 1998 4.63 March 1998 4.69 April 1998 4.75 May 1998 4.75 June 1998 4.70 July 1998 4.74 August 1998 4.81 September 1998 4.91 October 1998 4.96 November 1998 5.00 December 1998 5.11 January 1999 5.13 February 1999 5.10 March 1999 5.03 April 1999 5.08 May 1999 5.15 June 1999 5.10 July 1999 5.15 August 1999 5.16 September 1999 5.18 October 1999 5.11 November 1999 5.02 December 1999 5.04 January 2000 4.96 February 2000 5.01 March 2000 5.13 April 2000 5.11 May 2000 5.09 June 2000 5.14 July 2000 5.08 August 2000 5.04 September 2000 4.97 October 2000 4.97 November 2000 5.06 December 2000 5.04 January 2001 5.17 February 2001 5.28 March 2001 5.30 April 2001 5.28 May 2001 5.24 June 2001 5.27 July 2001 5.26 August 2001 5.19 Period Percent September 2001 5.14 October 2001 5.10 November 2001 5.09 December 2001 5.00 January 2002 4.89 February 2002 4.88 March 2002 4.78 April 2002 4.78 May 2002 4.87 June 2002 4.88 July 2002 4.89 August 2002 4.87 September 2002 4.86 October 2002 4.87 November 2002 4.82 December 2002 4.79 January 2003 4.83 February 2003 4.76 March 2003 4.83 April 2003 4.81 May 2003 4.75 June 2003 4.76 July 2003 4.71 August 2003 4.79 September 2003 4.75 October 2003 4.81 November 2003 4.82 December 2003 4.80 January 2004 4.83 February 2004 4.72 March 2004 4.76 April 2004 4.74 May 2004 4.70 June 2004 4.67 July 2004 4.71 August 2004 4.75 September 2004 4.74 October 2004 4.75 November 2004 4.75 December 2004 4.80 January 2005 4.76 February 2005 4.78 March 2005 4.75 Period Percent April 2005 4.79 May 2005 4.83 June 2005 4.84 July 2005 4.86 August 2005 4.84 September 2005 4.90 October 2005 4.85 November 2005 4.77 December 2005 4.81 January 2006 4.79 February 2006 4.88 March 2006 4.88 April 2006 4.90 May 2006 5.01 June 2006 5.02 July 2006 5.03 August 2006 4.98 September 2006 5.00 October 2006 5.00 November 2006 5.01 December 2006 5.04 Note: Shading indicates periods when the unemployment rate was below the NAIRU (1988:Q1 to 1990:Q2, 1997:Q1 to 2001:Q3, and 2005:Q3 to 2006:Q4). The series has a statistical break in January 1994. * As a percent of persons not in labor force last month. Return to text Bottom-right panel Labor Force Participation Rates Percent Period Age 16-19 Age 62+ 1985:Q1 55.62 16.53 1985:Q2 54.90 16.31 1985:Q3 54.87 16.25 1985:Q4 54.79 16.32 1986:Q1 55.04 16.50 1986:Q2 55.92 16.55 1986:Q3 55.16 16.46 1986:Q4 54.80 16.12 1987:Q1 55.23 16.19 1987:Q2 54.93 16.18 1987:Q3 55.14 16.46 1987:Q4 55.77 16.68 1988:Q1 55.62 16.68 1988:Q2 55.26 16.55 1988:Q3 56.60 16.55 Period Age 16-19 Age 62+ 1988:Q4 55.78 16.81 1989:Q1 55.70 17.00 1989:Q2 56.15 17.04 1989:Q3 56.74 16.96 1989:Q4 57.09 17.04 1990:Q1 55.81 17.23 1990:Q2 54.64 17.28 1990:Q3 53.56 17.28 1990:Q4 53.20 17.01 1991:Q1 53.08 16.70 1991:Q2 52.16 16.73 1991:Q3 51.57 16.58 1991:Q4 52.01 16.62 1992:Q1 51.46 16.97 1992:Q2 51.06 16.81 1992:Q3 52.67 16.58 1992:Q4 51.87 16.73 1993:Q1 51.72 16.39 1993:Q2 51.84 16.38 1993:Q3 52.33 16.66 1993:Q4 51.98 16.66 1994:Q1 52.21 16.38 1994:Q2 52.54 16.41 1994:Q3 51.99 16.61 1994:Q4 52.54 16.56 1995:Q1 53.16 16.19 1995:Q2 53.30 15.96 1995:Q3 53.33 16.27 1995:Q4 52.61 16.07 1996:Q1 51.76 15.97 1996:Q2 52.06 15.88 1996:Q3 51.75 15.81 1996:Q4 51.99 16.03 1997:Q1 51.83 16.21 1997:Q2 51.52 16.22 1997:Q3 50.65 16.09 1997:Q4 51.13 16.30 1998:Q1 52.92 16.32 1998:Q2 52.41 16.23 1998:Q3 53.09 16.37 1998:Q4 52.66 16.69 1999:Q1 52.49 16.57 1999:Q2 51.86 16.84 Period Age 16-19 Age 62+ 1999:Q3 51.61 17.24 1999:Q4 52.09 16.89 2000:Q1 52.06 17.16 2000:Q2 52.41 17.09 2000:Q3 51.72 17.30 2000:Q4 51.83 17.34 2001:Q1 51.17 17.34 2001:Q2 49.71 17.46 2001:Q3 48.88 17.79 2001:Q4 48.83 17.88 2002:Q1 47.84 17.90 2002:Q2 47.56 18.07 2002:Q3 47.61 18.35 2002:Q4 46.75 18.34 2003:Q1 45.50 18.95 2003:Q2 45.06 18.82 2003:Q3 44.15 18.83 2003:Q4 43.58 19.05 2004:Q1 43.75 19.30 2004:Q2 43.63 19.18 2004:Q3 44.03 19.73 2004:Q4 44.15 19.76 2005:Q1 43.62 19.80 2005:Q2 43.84 20.40 2005:Q3 43.89 20.84 2005:Q4 43.44 20.79 2006:Q1 43.84 20.60 2006:Q2 43.73 20.86 2006:Q3 43.64 20.94 2006:Q4 43.29 21.67 Exhibit 6 Okun's Law and Productivity Top-left panel Okun's Law* Percent Period Actual rate of unemployment Simulated rate of unemployment Using GDI growth in 2006 1999:Q1 4.27 4.37 ND 1999:Q2 4.24 4.33 ND 1999:Q3 4.23 4.25 ND 1999:Q4 4.07 4.03 ND Period Actual rate of unemployment Simulated rate of unemployment Using GDI growth in 2006 2000:Q1 4.05 4.06 ND 2000:Q2 3.95 3.90 ND 2000:Q3 4.03 4.04 ND 2000:Q4 3.92 4.16 ND 2001:Q1 4.23 4.42 ND 2001:Q2 4.41 4.62 ND 2001:Q3 4.82 4.99 ND 2001:Q4 5.53 5.23 ND 2002:Q1 5.70 5.40 ND 2002:Q2 5.84 5.86 ND 2002:Q3 5.72 5.90 ND 2002:Q4 5.84 6.00 ND 2003:Q1 5.87 6.10 ND 2003:Q2 6.14 6.17 ND 2003:Q3 6.11 5.96 ND 2003:Q4 5.82 5.89 ND 2004:Q1 5.67 5.64 ND 2004:Q2 5.58 5.41 ND 2004:Q3 5.44 5.29 ND 2004:Q4 5.40 5.25 ND 2005:Q1 5.26 5.17 ND 2005:Q2 5.10 5.09 ND 2005:Q3 4.99 5.00 5.00 2005:Q4 4.96 4.98 4.96 2006:Q1 4.70 4.81 4.55 2006:Q2 4.65 4.77 4.58 2006:Q3 4.67 4.75 4.49 2006:Q4 4.46 4.76 4.45 * Dynamic simulation beginning in 1990:Q3. Return to text Top-right panel GDP and GDI Percent change, Q4/Q4 Period GDP GDI GDP Forecast GDI Forecast 2004 3.40 3.32 ND ND 2005 3.15 3.13 ND ND 2006 ND ND 3.17 4.01 Middle-left panel Labor Productivity: Nonfarm Business Sector Percent change, annual rate Period Actual Simulation Actual Forecast Period Actual Actual Forecast Simulation 2006:Q1 4.25 ND ND 2006:Q2 1.21 1.35 ND 2006:Q3 -0.16 1.40 ND 2006:Q4 ND 2.56 0.90 2007:Q1 ND 1.95 1.53 2007:Q2 ND 2.61 2.50 2007:Q3 ND 2.80 2.69 2007:Q4 ND 2.61 2.82 2008:Q1 ND 2.58 2.75 2008:Q2 ND 2.49 2.63 2008:Q3 ND 2.44 2.64 2008:Q4 ND 2.44 2.53 Middle-right panel Evolution of Structural Productivity Estimates (Percent change) GB Staff Kalman Filter Mar. 3.1 3.0 Aug. 2.7 2.5 Oct. 2.5 2.2 Jan. 2.5 2.0 Bottom-left panel Productivity: Nonfinancial Corporate Sector Period Percent change, annual rate 2003:H1 3.01 2003:H2 4.46 2004:H1 2.99 2004:H2 3.54 2005:H1 4.96 2005:H2 3.10 2006:H1 3.13 2006:Q3 5.65 Bottom-right panel Productivity: Nonfarm Business Excluding Residential Construction Period Percent change, annual rate Forecast 2003:H1 4.36 ND 2003:H2 4.23 ND 2004:H1 3.20 ND 2004:H2 0.64 ND 2005:H1 2.28 ND 2005:H2 2.34 ND Period Percent change, annual rate Forecast 2006:H1 3.66 ND 2006:H2 ND 2.01 Exhibit 7 Labor Market and Measures of Slack Top-left panel Payroll Employment Average monthly change Thousands Period Payroll Employment Forecast 2001:Q1 6.67 ND 2001:Q2 -152.33 ND 2001:Q3 -175.33 ND 2001:Q4 -266.67 ND 2002:Q1 -93.33 ND 2002:Q2 -26.00 ND 2002:Q3 -50.67 ND 2002:Q4 -8.33 ND 2003:Q1 -88.67 ND 2003:Q2 -26.33 ND 2003:Q3 18.00 ND 2003:Q4 134.33 ND 2004:Q1 174.33 ND 2004:Q2 199.00 ND 2004:Q3 115.33 ND 2004:Q4 210.33 ND 2005:Q1 160.33 ND 2005:Q2 166.67 ND 2005:Q3 154.67 ND 2005:Q4 178.67 ND 2006:Q1 176.33 ND 2006:Q2 115.33 ND 2006:Q3 185.33 ND 2006:Q4 135.67 ND 2007:Q1 ND 118.00 2007:Q2 ND 65.00 2007:Q3 ND 52.78 2007:Q4 ND 52.85 2008:Q1 ND 56.81 2008:Q2 ND 60.76 2008:Q3 ND 60.83 Period Payroll Employment 2008:Q4 ND Forecast 62.86 Payroll Employment: Trend Average monthly change Thousands Period Trend Forecast January 2001 140.95 ND February 2001 140.81 ND March 2001 140.48 ND April 2001 140.30 ND May 2001 139.80 ND June 2001 138.83 ND July 2001 138.23 ND August 2001 137.10 ND September 2001 135.35 ND October 2001 132.86 ND November 2001 130.52 ND December 2001 128.77 ND January 2002 126.79 ND February 2002 125.05 ND March 2002 123.40 ND April 2002 122.20 ND May 2002 121.12 ND June 2002 120.01 ND July 2002 119.60 ND August 2002 119.08 ND September 2002 118.34 ND October 2002 117.15 ND November 2002 116.26 ND December 2002 116.01 ND January 2003 115.61 ND February 2003 115.37 ND March 2003 115.10 ND April 2003 115.04 ND May 2003 114.80 ND June 2003 114.26 ND July 2003 114.16 ND August 2003 113.79 ND September 2003 113.01 ND October 2003 111.79 ND November 2003 110.65 ND December 2003 109.81 ND January 2004 108.86 ND Period Trend Forecast February 2004 108.22 ND March 2004 107.73 ND April 2004 107.60 ND May 2004 107.47 ND June 2004 107.28 ND July 2004 107.54 ND August 2004 107.82 ND September 2004 108.17 ND October 2004 108.06 ND November 2004 108.13 ND December 2004 108.74 ND January 2005 109.17 ND February 2005 109.75 ND March 2005 110.29 ND April 2005 111.05 ND May 2005 111.62 ND June 2005 111.88 ND July 2005 112.48 ND August 2005 112.73 ND September 2005 112.55 ND October 2005 111.74 ND November 2005 111.03 ND December 2005 110.78 ND January 2006 110.26 ND February 2006 109.81 ND March 2006 109.30 ND April 2006 109.00 ND May 2006 108.58 ND June 2006 107.92 ND July 2006 107.64 ND August 2006 107.07 ND September 2006 106.10 ND October 2006 104.58 ND November 2006 103.19 ND December 2006 102.26 ND January 2007 ND 101.10 February 2007 ND 100.06 March 2007 ND 98.97 April 2007 ND 98.07 May 2007 ND 97.05 June 2007 ND 95.83 July 2007 ND 95.03 August 2007 ND 94.03 Period Trend Forecast September 2007 ND 92.68 October 2007 ND 90.98 November 2007 ND 89.31 December 2007 ND 87.84 January 2008 ND 86.20 February 2008 ND 84.72 March 2008 ND 83.24 April 2008 ND 81.87 May 2008 ND 80.35 June 2008 ND 78.63 July 2008 ND 77.13 August 2008 ND 75.51 September 2008 ND 74.69 October 2008 ND 73.83 November 2008 ND 72.93 December 2008 ND 72.00 Top-right panel Unemployment Rate Percent Period Unemployment Rate Unemployment Rate Forecast NAIRU NAIRU Forecast 2001:Q1 4.20 5.15 ND ND 2001:Q2 4.40 5.13 ND ND 2001:Q3 4.80 5.11 ND ND 2001:Q4 5.50 5.10 ND ND 2002:Q1 5.70 5.09 ND ND 2002:Q2 5.80 5.09 ND ND 2002:Q3 5.70 5.08 ND ND 2002:Q4 5.80 5.06 ND ND 2003:Q1 5.90 5.04 ND ND 2003:Q2 6.10 5.02 ND ND 2003:Q3 6.10 5.01 ND ND 2003:Q4 5.80 5.01 ND ND 2004:Q1 5.70 5.02 ND ND 2004:Q2 5.60 5.02 ND ND 2004:Q3 5.40 5.02 ND ND 2004:Q4 5.40 5.01 ND ND 2005:Q1 5.30 5.01 ND ND 2005:Q2 5.10 5.00 ND ND 2005:Q3 5.00 5.00 ND ND 2005:Q4 5.00 5.00 ND ND 2006:Q1 4.70 5.00 ND ND 2006:Q2 4.70 5.00 ND ND Period Unemployment Rate Unemployment Rate Forecast NAIRU NAIRU Forecast 2006:Q3 4.70 5.00 ND ND 2006:Q4 4.46 5.00 ND ND 2007:Q1 ND ND 4.56 5.00 2007:Q2 ND ND 4.69 5.00 2007:Q3 ND ND 4.77 5.00 2007:Q4 ND ND 4.85 5.00 2008:Q1 ND ND 4.87 5.00 2008:Q2 ND ND 4.88 5.00 2008:Q3 ND ND 4.89 5.00 2008:Q4 ND ND 4.90 5.00 Middle-left panel Job Openings Rate* Period Percent January 2001 3.5 February 2001 3.4 March 2001 3.1 April 2001 3.1 May 2001 3.0 June 2001 2.9 July 2001 2.8 August 2001 2.6 September 2001 2.6 October 2001 2.4 November 2001 2.4 December 2001 2.3 January 2002 2.3 February 2002 2.3 March 2002 2.3 April 2002 2.3 May 2002 2.3 June 2002 2.3 July 2002 2.3 August 2002 2.3 September 2002 2.3 October 2002 2.4 November 2002 2.3 December 2002 2.1 January 2003 2.2 February 2003 2.2 March 2003 2.1 April 2003 2.2 Period Percent May 2003 2.2 June 2003 2.3 July 2003 2.2 August 2003 2.2 September 2003 2.1 October 2003 2.2 November 2003 2.3 December 2003 2.4 January 2004 2.3 February 2004 2.3 March 2004 2.5 April 2004 2.5 May 2004 2.5 June 2004 2.5 July 2004 2.6 August 2004 2.6 September 2004 2.6 October 2004 2.6 November 2004 2.5 December 2004 2.7 January 2005 2.6 February 2005 2.7 March 2005 2.9 April 2005 2.8 May 2005 2.6 June 2005 2.8 July 2005 2.8 August 2005 2.8 September 2005 2.8 October 2005 3.0 November 2005 3.1 December 2005 3.0 January 2006 3.0 February 2006 3.0 March 2006 3.1 April 2006 3.1 May 2006 3.0 June 2006 3.0 July 2006 2.9 August 2006 3.1 September 2006 3.1 October 2006 3.2 November 2006 3.2 * Number of job openings as a percent of the sum of private employment and job openings. Return to text Middle-right panel Beveridge Curve [Scatterplot and fitted curve] Percent Job openings rate Unemployment rate Fitted unemployment rate 3.33 4.23 4.36 3.00 4.41 4.71 3.20* 4.46 4.49 3.03 4.65 4.67 3.03 4.67 4.67 3.03 4.70 4.67 2.67 4.82 5.16 3.03 4.96 4.67 2.80 4.99 4.97 2.73 5.10 5.06 2.73 5.27 5.06 2.60 5.40 5.26 2.60 5.45 5.26 2.37 5.53 5.67 2.50 5.58 5.43 2.37 5.67 5.67 2.30 5.70 5.80 2.30 5.73 5.80 2.30 5.82 5.80 2.30 5.84 5.80 2.27 5.84 5.87 2.17 5.87 6.08 2.17 6.11 6.08 2.23 6.14 5.94 Note: The data cover 2001:Q1 to 2006:Q4. A vertical line at an unemployment rate of approximately 5.00 percent intersects the fitted curve at a job openings rate of approximately 2.78 percent. * The openings rate for 2006:Q4 is the average of October and November. Return to table Bottom-left panel Persons Working Part-Time for Economic Reasons Period Percent of household employment 1996:Q1 3.24 1996:Q2 3.30 1996:Q3 3.29 1996:Q4 3.19 1997:Q1 3.10 1997:Q2 3.04 1997:Q3 2.97 1997:Q4 2.87 Period Percent of household employment 1998:Q1 2.84 1998:Q2 2.76 1998:Q3 2.62 1998:Q4 2.48 1999:Q1 2.51 1999:Q2 2.46 1999:Q3 2.39 1999:Q4 2.32 2000:Q1 2.26 2000:Q2 2.28 2000:Q3 2.27 2000:Q4 2.33 2001:Q1 2.33 2001:Q2 2.49 2001:Q3 2.67 2001:Q4 3.15 2002:Q1 2.99 2002:Q2 2.95 2002:Q3 3.03 2002:Q4 3.11 2003:Q1 3.33 2003:Q2 3.31 2003:Q3 3.32 2003:Q4 3.40 2004:Q1 3.29 2004:Q2 3.22 2004:Q3 3.12 2004:Q4 3.20 2005:Q1 3.04 2005:Q2 3.03 2005:Q3 3.11 2005:Q4 2.87 2006:Q1 2.80 2006:Q2 2.80 2006:Q3 2.81 2006:Q4 2.86 Note: As shown in the chart, a horizontal line marks the average for 1996:H2, approximately 3.24 percent. Bottom-right panel Manufacturing Capacity Utilization Period Percent January 1996 80.98 February 1996 81.81 Period Percent March 1996 81.17 April 1996 81.68 May 1996 81.82 June 1996 82.26 July 1996 82.05 August 1996 82.15 September 1996 82.27 October 1996 81.83 November 1996 82.15 December 1996 82.49 January 1997 82.14 February 1997 82.82 March 1997 83.29 April 1997 82.53 May 1997 82.67 June 1997 82.67 July 1997 82.45 August 1997 83.15 September 1997 83.34 October 1997 83.37 November 1997 83.75 December 1997 83.58 January 1998 83.62 February 1998 83.04 March 1998 82.30 April 1998 82.22 May 1998 82.07 June 1998 81.02 July 1998 80.22 August 1998 81.80 September 1998 81.08 October 1998 81.36 November 1998 81.05 December 1998 81.06 January 1999 80.97 February 1999 81.25 March 1999 80.78 April 1999 80.68 May 1999 81.08 June 1999 80.48 July 1999 80.51 August 1999 80.72 September 1999 80.05 Period Percent October 1999 80.90 November 1999 81.13 December 1999 81.38 January 2000 81.13 February 2000 80.99 March 2000 81.16 April 2000 81.37 May 2000 81.02 June 2000 80.84 July 2000 80.42 August 2000 79.62 September 2000 79.66 October 2000 79.01 November 2000 78.41 December 2000 77.63 January 2001 76.93 February 2001 76.23 March 2001 75.68 April 2001 75.26 May 2001 74.55 June 2001 73.92 July 2001 73.52 August 2001 72.86 September 2001 72.51 October 2001 71.89 November 2001 71.59 December 2001 71.67 January 2002 71.88 February 2002 71.87 March 2002 72.38 April 2002 72.43 May 2002 72.81 June 2002 73.57 July 2002 73.25 August 2002 73.55 September 2002 73.63 October 2002 73.27 November 2002 73.61 December 2002 73.34 January 2003 73.75 February 2003 73.82 March 2003 74.05 April 2003 73.46 Period Percent May 2003 73.49 June 2003 73.96 July 2003 74.09 August 2003 73.97 September 2003 74.56 October 2003 74.53 November 2003 75.28 December 2003 75.21 January 2004 75.26 February 2004 75.82 March 2004 75.75 April 2004 76.20 May 2004 76.62 June 2004 76.11 July 2004 76.72 August 2004 77.16 September 2004 76.91 October 2004 77.44 November 2004 77.42 December 2004 77.81 January 2005 78.18 February 2005 78.55 March 2005 78.32 April 2005 78.38 May 2005 78.73 June 2005 78.89 July 2005 78.83 August 2005 78.96 September 2005 78.13 October 2005 79.15 November 2005 79.68 December 2005 79.83 January 2006 80.26 February 2006 79.88 March 2006 80.05 April 2006 80.66 May 2006 80.30 June 2006 80.82 July 2006 80.93 August 2006 81.05 September 2006 80.86 October 2006 80.18 November 2006 79.98 Period Percent December 2006 80.39 Note: As shown in the chart, a horizontal line marks the average from 1972 to 2006, approximately 79.55 percent. Exhibit 8 Inflation Outlook Top-left panel Recent Price Data (Percent change) Core CPI Q3 Q4 Nov. Dec. 3.0 1.8 0.0 0.2 0.0 0.2e Dec. GB Core PCE Dec. GB (2.3) 2.2 2.1e (2.6) Note: Quarterly figures are at annual rates. e - staff estimate. Return to table Top-right panel PCE Energy Prices Four-quarter percent change Period PCE Energy Prices PCE Energy Prices Forecast Dec. GB 2000:Q4 15.24 ND ND 2001:Q1 10.91 ND ND 2001:Q2 10.34 ND ND 2001:Q3 1.13 ND ND 2001:Q4 -9.94 ND ND 2002:Q1 -14.12 ND ND 2002:Q2 -10.54 ND ND 2002:Q3 -4.89 ND ND 2002:Q4 7.67 ND ND 2003:Q1 21.22 ND ND 2003:Q2 9.81 ND ND 2003:Q3 12.11 ND ND 2003:Q4 7.62 ND ND 2004:Q1 4.07 ND ND 2004:Q2 13.15 ND ND 2004:Q3 10.99 ND ND 2004:Q4 17.81 ND ND 2005:Q1 11.50 ND ND 2005:Q2 11.55 ND ND 2005:Q3 23.63 ND ND 2005:Q4 21.20 ND ND Period PCE Energy Prices PCE Energy Prices Forecast Dec. GB 2006:Q1 20.34 ND ND 2006:Q2 22.17 ND ND 2006:Q3 10.25 10.25 ND 2006:Q4 ND -4.75 -3.91 2007:Q1 ND 0.92 -5.32 2007:Q2 ND -4.05 -10.59 2007:Q3 ND -3.81 -10.07 2007:Q4 ND 9.53 1.79 2008:Q1 ND 3.84 4.10 2008:Q2 ND 2.69 3.89 2008:Q3 ND 1.72 2.84 2008:Q4 ND 1.10 2.20 Middle-left panel Core Nonfuel Import Prices Four-quarter percent change Period Core Nonfuel Import Prices Dec. GB Core Nonfuel Import Prices Forecast 2002:Q1 -2.71 ND ND 2002:Q2 -1.95 ND ND 2002:Q3 -0.67 ND ND 2002:Q4 0.12 ND ND 2003:Q1 1.20 ND ND 2003:Q2 1.23 ND ND 2003:Q3 1.16 ND ND 2003:Q4 1.60 ND ND 2004:Q1 2.36 ND ND 2004:Q2 3.16 ND ND 2004:Q3 3.55 ND ND 2004:Q4 3.66 ND ND 2005:Q1 3.51 ND ND 2005:Q2 2.89 ND ND 2005:Q3 2.17 ND ND 2005:Q4 2.16 ND ND 2006:Q1 1.40 ND ND 2006:Q2 1.94 ND ND 2006:Q3 3.04 3.04 ND 2006:Q4 2.86 2.92 ND 2007:Q1 ND 3.32 2.96 2007:Q2 ND 2.93 2.41 2007:Q3 ND 2.26 1.69 2007:Q4 ND 2.11 1.55 Period Core Nonfuel Import Prices Dec. GB Core Nonfuel Import Prices Forecast 2008:Q1 ND 1.58 1.32 2008:Q2 ND 1.27 1.17 2008:Q3 ND 1.13 1.08 2008:Q4 ND 1.04 1.04 Middle-right panel PCE Price Projection (Percent Change, Q4/Q4) 2006 2007 2008 1.9 2.2 2.1 (2.0) (2.8) (2.1) 2.3 2.2 2.0 (2.4) (2.3) (2.1) 1. PCE price index 2. Dec. GB 4. Core 5. Dec. GB Alternative Simulation Bottom-left panel Unemployment Rate Percent Period 70% confidence interval lower bound 70% confidence interval upper bound Lower prod, higher LFPR Baseline 2005:Q1 ND 5.30 ND ND 2005:Q2 ND 5.10 ND ND 2005:Q3 ND 5.00 ND ND 2005:Q4 ND 5.00 ND ND 2006:Q1 ND 4.70 ND ND 2006:Q2 ND 4.70 ND ND 2006:Q3 ND 4.70 ND ND 2006:Q4 4.46 4.46 4.46 4.46 2007:Q1 4.45 4.56 4.56 4.66 2007:Q2 4.50 4.69 4.67 4.86 2007:Q3 4.50 4.77 4.76 5.02 2007:Q4 4.50 4.85 4.84 5.16 2008:Q1 4.44 4.87 4.87 5.22 2008:Q2 4.39 4.88 4.89 5.27 2008:Q3 4.37 4.89 4.92 5.33 2008:Q4 4.32 4.90 4.95 5.38 Bottom-center panel Core PCE Prices Four-quarter percent change Period 70% confidence interval lower bound Baseline Lower prod, higher LFPR 70% confidence interval upper bound Period 70% confidence interval lower bound 70% confidence interval upper bound Lower prod, higher LFPR Baseline 2005:Q1 ND 2.19 ND ND 2005:Q2 ND 2.05 ND ND 2005:Q3 ND 2.03 ND ND 2005:Q4 ND 2.10 ND ND 2006:Q1 ND 2.02 ND ND 2006:Q2 ND 2.23 ND ND 2006:Q3 2.37 2.37 2.37 2.37 2006:Q4 2.23 2.27 2.27 2.31 2007:Q1 2.16 2.30 2.30 2.46 2007:Q2 1.94 2.17 2.23 2.44 2007:Q3 1.83 2.17 2.30 2.55 2007:Q4 1.70 2.16 2.37 2.67 2008:Q1 1.59 2.13 2.43 2.73 2008:Q2 1.47 2.08 2.42 2.75 2008:Q3 1.39 2.04 2.43 2.75 2008:Q4 1.33 2.02 2.44 2.76 Bottom-right panel Federal Funds Rate Percent Period 70% confidence interval lower bound 70% confidence interval upper bound Lower prod, higher LFPR Baseline 2005:Q1 ND 2.48 ND ND 2005:Q2 ND 2.94 ND ND 2005:Q3 ND 3.46 ND ND 2005:Q4 ND 3.98 ND ND 2006:Q1 ND 4.47 ND ND 2006:Q2 ND 4.90 ND ND 2006:Q3 ND 5.25 ND ND 2006:Q4 5.25 5.25 5.25 5.25 2007:Q1 5.05 5.25 5.26 5.46 2007:Q2 4.80 5.25 5.28 5.72 2007:Q3 4.56 5.25 5.32 5.99 2007:Q4 4.37 5.25 5.37 6.24 2008:Q1 4.24 5.25 5.44 6.44 2008:Q2 4.13 5.25 5.50 6.59 2008:Q3 4.08 5.25 5.55 6.67 2008:Q4 4.00 5.25 5.59 6.78 Exhibit 9 Recent Market Developments Exhibit 9 is a two-by-two array of panels, including graphs on the primary commodity prices, the real trade-weighted dollar, equity prices of industrial countries, and equity prices of emerging markets. Top-left panel Primary Commodity Prices Primary Commodity Prices on a monthly basis for oil and the IMF nonfuel index for 2005 through early 2007 (actual) and for early 2007 through 2008 (forecast). The range of the right y-axis, which measures the IMF nonfuel index, January 2005 = 100, is [90, 160]. The range of the left y-axis, which measures the oil price in dollars per barrel, is [45, 80]. The oil price is the West Texas Intermediate spot price. The oil price starts at about $47 per barrel, rises to nearly $75 per barrel by mid-2006, and falls to about $54 dollars per barrel by early 2007; over the forecast horizon, the oil price rises to about $62 by the end of the period. The IMF nonfuel index starts at 100, rises to about 149 by end-2006, and then declines slightly to about 147 by early 2007; over the forecast horizon, the index rises to about 150 by mid-2007, and then eases to about 148 by the end of the forecast period. Top-right panel Real Trade-Weighted Dollar Real Trade-Weighted Dollar on a quarterly basis for the major currencies index, the broad dollar index, and the index for other important trading partners for 2005 through early 2007 (actual) and for early 2007 through 2008 (forecast). The range of the y-axis is [90, 110]; index, Q1 2005 = 100. All three series begin at 100. The major currencies index rises to about 107 by late 2005, falls to about 102½ by late 2006, rises to about 103½ by early 2007, and falls to about 102 by the end of the period. The broad dollar index rises to about 103 by late 2005, falls to about 98½ by late 2006, and falls further to about 97½ by the end of the period. The index for other important trading partners falls to about 94 by early 2007, and declines further to about 93 by the end of the period. Bottom-left panel Equity Prices: Industrial Countries Equity Prices: Industrial Countries on a daily basis for the United States (Wilshire 5000), the United Kingdom (FTSE 350), Japan (TOPIX), and the euro area (DJ Euro Stoxx) for 2005 through early 2007. The range of the y-axis is [50, 120], ratio scale; index, March 2000 = 100. All the series are somewhat volatile. The United States' Wilshire 5000 index starts at about 85 and rises to about 102 by the end of the period. The United Kingdom's FTSE 350 index starts at about 77 and rises to about 103 by the end of the period. Japan's TOPIX index starts at about 68 and rises to about 104 by the end of the period. The euro-area's DJ Euro Stoxx index starts at about 59 and rises to about 89 by the end of the period. Bottom-right panel Equity Prices: Emerging Markets Equity Prices: Emerging Markets on a daily basis for Mexico, Brazil, Thailand, and Korea for 2005 through early 2007. The range of the y-axis is [90, 340], ratio scale; index, March 2000 = 100. All the series are somewhat volatile. The index for Mexico starts at about 163 and rises to about 340 by the end of the period. The index for Brazil starts at about 138 and rises to about 240 by the end of the period. The index for Thailand starts at about 175 and declines to about 168 by the end of the period. The index for Korea starts at about 105 and rises to about 159 by the end of the period. Exhibit 10 Emerging-Market Debt and Capital Flows Exhibit 10 is comprised of four panels, including graphs on gross external debt, yield spreads over U.S. Treasuries, official capital outflows and current account balances, and emerging-market official flows and industrial country interest rates. Top-left panel Gross External Debt Gross External Debt on a yearly basis for Latin America and Asia for 1990-2006. The range of the y-axis is [15, 55]; unit is percent of GDP. The source of the data is the IMF World Economic Outlook database. The gross external debt of Latin America starts at about 41 percent of GDP, falls to about 34 percent of GDP by 1997, rises to about 46 percent of GDP by 2002, and falls to about 27 percent of GDP by the end of the period. The gross external debt of Asia starts at about 30 percent of GDP, rises to about 35 percent of GDP by 1998, and falls to about 20 percent of GDP by the end of the period. Top-right panel Yield Spreads over U.S. Treasuries Yield Spreads over U.S. Treasuries on a monthly basis for Latin America and Asia for 1992-2006. The range of the y-axis is [0, 1800]; unit is basis points. The source of the data is Merrill Lynch. Both series show considerable volatility. The spread for Latin America starts at about 600 basis points, rises to about 1600 basis points by early 1995, falls to about 300 basis points by late 1997, rises to about 1450 basis points by mid-1998, and falls to about 150 basis points by the end of the period. The spread for Asia starts at about 900 basis points, falls to about 100 basis points by early 1997, rises to about 800 basis points by mid-1998, and falls to about 150 basis points by the end of the period. Middle panel Official Capital Outflows and Current Account Balances Official Capital Outflows and Current Account Balances for emerging Asia, Africa and the Middle East, Eastern Europe, and Latin America as a bar chart for 2005-2006e. The range of the y-axis is [0, 400]; unit is billions of dollars. Net official capital outflows are defined as changes in foreign exchange reserves, external public debt, and assets of government-run investment funds. The source of the data is the IMF World Economic Outlook database. Approximate values for the two periods are as follows: Billions of dollars 2005 Net official outflows 2006e Current account Net official outflows Current account Emerging Asia 225 170 270 185 Africa and Middle East 230 200 330 320 Eastern Europe 160 25 170 60 Latin America 70 40 60 40 Bottom panel Emerging-Market Official Flows and Industrial Country Interest Rates Emerging-Market Official Flows and Industrial Country Interest Rates. On a yearly basis, the panel plots the real interest rate and GDP growth rate for industrial countries as a line chart and plots emerging-market net official flows as a bar chart for 1985-2006. The range of the y-axis is [-4, 6]; unit is percent. Emerging-market net official flows are defined as the net official capital flows of emerging markets as a share of aggregate industrial-country GDP. The GDP growth rate and the real interest rate for industrial countries are defined as the real GDP growth rate and three-month interest rate minus CPI inflation rate for the G-10 countries (including the United States) plus Australia and Spain, weighted by GDP. The sources for the data are the IMF World Economic Outlook database and the IFS database. 2006 data are estimates. The real GDP growth rate for industrial countries starts at nearly 4 percent, rises to about 4¾ percent by 1988, falls to about ¾ percent by 1993, rises to about 3½ percent by 2000, falls to about 1 percent by 2001, and rises to about 3 percent by 2006. The real interest rate for industrial countries starts at about 4¾ percent, rises to about 5 percent by 1990, falls to about 3¼ percent by 2000, falls more sharply to about -¼ percent in 2003-2004, and then rises to about 1½ percent by 2006. Emerging-market net official flows start at about ¼ percent, fluctuate between about ¼ percent and -1 percent through 2002, and then decline from about -1½ percent in 2003 to about -2½ percent by 2006; approximate values for emerging-market net official flows for the twenty-two periods are as follows: Percent EM net official flows 1985 0.2 1986 0.2 1987 -0.1 1988 0.1 1989 0 1990 0 1991 -0.1 1992 -0.2 1993 -0.2 1994 -0.3 1995 -0.4 1996 -0.5 1997 -0.4 1998 0.1 1999 -0.3 2000 -0.8 2001 -0.5 2002 -0.9 2003 -1.5 2004 -1.9 2005 -2.2 2006 -2.6 Exhibit 11 Bond Markets, Inflation Compensation, and Monetary Policy Exhibit 11 is a three-by-four array of panels. The four top panels plot "Indexed Bond Yields, 10-Year" for the United States and France, the United Kingdom, Japan, and Canada. The four middle panels plot "Inflation Compensation, 10-Year" for the United States and the euro area, the United Kingdom, Japan, and Canada. The four bottom panels plot "Policy Interest Rates" for the United States and the euro area, the United Kingdom, Japan, and Canada. Data are monthly. Unit is percent. Top panels Indexed Bond Yields, 10-Year Indexed Bond Yields, 10-Year for the United States and France for 2003 through early 2007. The range of the y-axis is [0, 3½]. The yields for the United States start at about 2 percent, and, with considerable volatility, fall to about 1½ percent by late 2005, rise to about 2½ percent by mid-2006, decline to about 2¼ percent by early 2007, and then rise back to nearly 2½ percent by the end of the period. The yields for France start at about 2-1/3 percent, and, with considerable volatility, fall to about 7/8 percent by late 2005, rise to about 1¾ percent by mid-2006, fall to about 1½ percent by early 2007, and then rise to about 1-7/8 percent by the end of the period. Indexed Bond Yields, 10-Year for the United Kingdom for 2003 through early 2007. The range of the y-axis is [0, 3½]. The yields for the United Kingdom start at just above 2 percent, and, with considerable volatility, fall to about 1-1/3 percent by late 2005, rise to about 1¾ percent by mid-2006, decline to about 1½ percent by early 2007, and then rise back to about 1¾ percent by the end of the period. Indexed Bond Yields, 10-Year for Japan. Although the dates on the chart are set for 2003 through early 2007, the data actually begin in early 2004, because Japan first issued an inflation-linked bond in March 2004. The range of the y-axis is [0, 3½]. The yields for Japan start at just above 1 percent, and, with some volatility, fall to about 1/3 percent by mid-2005, and then rise to about 1¼ percent by the end of the period. Indexed Bond Yields, 10-Year for Canada** for 2003 through early 2007. The range of the y-axis is [0, 3½]. The yields for Canada start at about 3¼ percent, and, with some volatility, fall to about 1½ percent by late 2005, rise to about 1¾ percent by mid-2006, decline to about 1-2/3 percent by early 2007, and then rise back to about 1¾ percent by the end of the period. ** Bond maturing in 2021. Return to text Middle panels Inflation Compensation, 10-Year Inflation Compensation, 10-Year for the United States and the euro area for 2003 through early 2007. The range of the y-axis is [0, 3½]. Inflation compensation for the United States starts at about 2 percent, and, with some volatility, rises to about 2¾ percent by mid-2006, declines to about 2-1/3 percent by early 2007, and then rises to about 2½ percent by the end of the period. Inflation compensation for the euro area starts at about 1-7/8 percent, and, with some volatility, rises to about 2-2/3 percent by mid-2004, falls to about 2 percent by mid-2005, and then rises to about 2¼ percent by the end of the period. Inflation Compensation, 10-Year for the United Kingdom for 2003 through early 2007. The range of the y-axis is [0, 3½]. Inflation compensation for the United Kingdom starts at about 2-1/3 percent, and, with some volatility, rises to about 3 percent by mid-2004, declines to about 2½ percent by early 2005, and then rises to nearly 3 percent by the end of the period. Inflation Compensation, 10-Year for Japan. Although the dates on the chart are set for 2003 through early 2007, the data actually begin in early 2004, because Japan first issued an inflation-linked bond in March 2004. The range of the y-axis is [0, 3½]. Inflation compensation for Japan starts at about 1/3 percent, and, with some volatility, rises immediately to about 7/8 percent, stays at about that rate through early 2005, falls to about ½ percent by mid-2005, rises to about 1 percent by early 2006, and falls to about ½ percent by the end of the period. Inflation Compensation, 10-Year for Canada** for 2003 through early 2007. The range of the y-axis is [0, 3½]. Inflation compensation for Canada starts at about 2¼ percent, and, with some volatility, rises to nearly 3 percent by mid-2006, and then falls to about 2½ percent by the end of the period. ** Bond maturing in 2021. Return to text Bottom panels Policy Interest Rates Policy Interest Rates for the euro-area refinancing rate and the U.S. federal funds rate for 2005-2006 (actual) and for 2007-early 2009 (forecast). The range of the y-axis is [0, 6]. The euro-area refinance rate starts at 2 percent, stays at that rate through 2005, rises to about 3¾ percent by late 2006, rises in early 2007 to 4 percent, and remains there through the end of the period. The U.S. federal funds rate starts at 2¼ percent, rises to 5¼ percent by mid-2006, and remains there through the end of the period. Policy Interest Rates for the U.K. bank rate for 2005-2006 (actual) and for 2007-early 2009 (forecast). The range of the y-axis is [0, 6]. The U.K. bank rate starts at 4¾ percent, stays at that rate through mid-2005, declines to 4½ percent in mid-2005, stays there through mid-2006, then rises to 5¼ percent by late 2006, rises in early 2007 to 5½ percent, stays there through early 2008, declines to 5¼ percent in early 2008, and remains there through the end of the period. Policy Interest Rates for the Japanese call rate target for 2005-2006 (actual) and for 2007-early 2009 (forecast). The range of the y-axis is [0, 6]. The Japanese call rate target starts in early 2006 at 0 percent, rises to ¼ percent in mid-2006, stays at that rate until early 2007, rises in early 2007 to ½ percent, and then, in several small steps, rises to 1¼ percent by the end of the period. Policy Interest Rates for the Canadian overnight rate target for 2005-2006 (actual) and for 2007-early 2009 (forecast). The range of the y-axis is [0, 6]. The Canadian overnight rate target starts at 2½ percent, stays at that rate until late 2005, rises to 4¼ percent by mid-2006, and remains there through the end of the period. Exhibit 12 Housing Sectors Exhibit 12 is comprised of four panels, including graphs on real house prices, Australia, and the United Kingdom, and a table on real GDP. Top panel Real House Prices Real House Prices on a quarterly basis for the Netherlands, France, Canada, and Japan for 1992-2006. The range of the y-axis is [-10, 20]; unit is four-quarter percent change. Real house prices are defined as the house price index deflated by CPI. The house price index for France begins in 1996. The series for Japan is semi-annual. Real house prices for the Netherlands start at about 6 percent, rise to about 17 percent by 2000, decline to about 5 percent by mid-2001, and then slow to about 2 percent by the end of the period. Real house prices for France start at about -3 percent, rise to about 13 percent by early 2004, remain there until early 2006, and then decline to about 10 percent by the end of the period. Real house prices for Canada start at about -2 percent, rise to about 0 percent by early 1993, remain there until late 1994, fall to about -4 percent by early 1995, rise to about 0 percent by late 1997, fluctuate around 0 percent through mid-2001, rise to about 2 percent by mid-2005, rise sharply to about 12 percent by mid-2006, and decline to about 8 percent by the end of the period. Real house prices for Japan start at about -5 percent, fall to about -7 percent by mid-1992, rise to about -1 percent by early 1995, decline to about -7 percent by early 2004, and then rise to about -3 percent by the end of the period. Middle-left panel Australia A line chart plots real house prices and residential investment for Australia on a quarterly basis for 1992-2006. The range of the right y-axis, which measures residential investment as percent of GDP, is [0, 10]. The range of the left y-axis, which measures real house prices as an index, 1992Q1=100, is [50, 250], ratio scale. Real house prices are defined as the house price index deflated by CPI. Real house prices start at 100, remain around 100 through 1996, then rise to about 180 by late 2003 and remain at about that level through the end of the period. Residential investment starts at about 5 percent, rises to about 7 percent by early 2004, and then declines to just above 6 percent by the end of the period. Middle-right panel United Kingdom A line chart plots real house prices and residential investment for the United Kingdom on a quarterly basis for 1992-2006. The range of the right y-axis, which measures residential investment as percent of GDP, is [0, 10]. The range of the left y-axis, which measures real house prices as an index, 1992Q1=100, is [50, 250], ratio scale. Real house prices are defined as the house price index deflated by CPI. Real house prices start at 100, fall to about 90 by mid-1995, rise to about 210 by mid-2004, stay at about that level through late 2005, and then rise to about 230 by the end of the period. Residential investment starts at about 2¾ percent, fluctuates around 2¾ percent through 2001, and then rises to about 4 percent by the end of the period. Bottom panel Real GDP* (Percent change, annual rate**) 2006 2007p 2008p 3.4 3.4 3.5 3.0 2.3 2.4 2.5 H1 H2e 1. Total Foreign 4.4 2. Industrial Countries of which: 3. Europe 3.4 2.8 2.3 2.1 4. Japan 1.9 2.2 1.9 1.7 5. Canada 2.9 2.0 2.6 2.9 6.4 5.0 4.8 4.9 6. Emerging Markets of which: 7. Emerging Asia 6.7 6.5 6.0 6.2 8. Latin America 6.0 3.7 3.5 3.5 United States 4.1 2.3 2.3 2.5 memo: * GDP aggregates weighted by shares of U.S. exports. Return to text ** Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2. Return to table Exhibit 13 U.S. External Sector Exhibit 13 is comprised of three panels, including a graph on import prices, a table on U.S. real goods exports, and a graph on contributions to U.S. GDP growth by imports, exports, and net exports. Top-left panel Import Prices Import Prices on a quarterly basis for core goods and for core goods and services for 2005-2006 (actual), and for 2007-2008 (forecast). The range of the y-axis is [-15, 15]; unit is percent change, annual rate. The import price of core goods and services starts at about 2½ percent, rises to about 11 percent by mid-2005, falls to about -1 percent by early 2006, rises to about 10 percent by mid-2006, falls to about -8 percent by late 2006, rises to about 2 percent by mid-2007, remains there through early 2008, and then eases to about 1 percent by the end of the period. The import price of core goods starts at about 5 percent, falls to about 0 percent by mid-2005, rises to nearly 4 percent by mid-2006, declines to about 2 percent by late 2006, and then declines further to about 1½ percent by the end of the period. Top-right panel U.S. Real Goods Exports* (Percent change) 2006** 1. Total 10.5 selected contributions: 2. Aircraft 1.1 3. Machinery 2.3 4. Semiconductors 1.3 * Census data. Return to text ** January-November at annual rate. Return to table Middle panel Contributions to U.S. GDP Growth Contributions to U.S. GDP Growth of net exports as a line chart, and of exports and imports as a bar chart, for 2005:H1 through 2006:H2 (actual), and 2007:H1 through 2008:H2 (forecast). The range of the y-axis is [-1.5, 1.5]; unit is percentage points, annual rate. Approximate values for the eight periods are as follows: Percentage points, annual rate* 2005 H1 H2 2006 H1 H2 2007 H1 2008 H2 H1 H2 Net exports 0.30 -0.60 0.20 0.50 -0.25 -0.25 -0.30 -0.25 Exports 0.70 1.10 0.80 Imports 0.60 0.60 0.50 0.50 0.60 -0.40 -1.20 -0.90 -0.30 -0.85 -0.75 -0.80 -0.85 * Half years are Q2/Q4 or Q4/Q2. Return to table Exhibit 14 - Last Exhibit Top panel ECONOMIC PROJECTIONS FOR 2007 FOMC Staff Range Central Tendency 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. Bottom panel ECONOMIC PROJECTIONS FOR 2008 FOMC Staff Range Central Tendency 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 FOMC Staff Unemployment rate Range Central Tendency 4½ to 5 4½ to 4¾ 4.9 Appendix 3: Materials used by Mr. Reinhart Material for FOMC Briefing on Monetary Policy Alternatives Vincent Reinhart January 31, 2007 Class I FOMC - Restricted Controlled FR Exhibit 1 Exhibit 1 includes charts and tables that provide information on policy expectations and interest rate developments over the intermeeting period. Top-left panel Estimated Expected Federal Funds Rate A line chart displays the expected path of the federal funds rate derived from interest rate futures quotes as of the most recent date (January 30, 2007) and the date of the last FOMC meeting (December 11, 2006). The chart indicates that the expected path of policy has rotated up significantly over the intermeeting period. Currently, futures market participants anticipate only one quarter-point easing this year and a second easing sometime next year. Much of the change in the expected policy path over the intermeeting period occurred immediately following various economic releases. Note. Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments. Top-right panel FRBNY Survey of Primary Dealers 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 Bottom-left panel Nominal and Inflation-Indexed Yields A line chart displays the changes in the nominal and inflation-indexed Treasury yield curves over the intermeeting period. The nominal yield curve shifted up 20 to 30 basis points in roughly parallel fashion across maturities. The inflation-indexed yield curve shifted up as well, but not by quite as much as the nominal curve. As a consequence, inflation compensation--measured as the vertical difference between nominal yields and inflation-indexed yield curves--edged up a few basis points over the period. Middle-right panel Decomposition of Change in Ten-Year Yield A bar chart parses the change in ten-year nominal yields over the intermeeting period into portions attributable to economic data releases, the December FOMC statement, the release of the December FOMC minutes, speeches by Federal Reserve officials, and a residual "other" category. This decomposition was produced by cumulating the changes in the ten-year yield over short time intervals following each type of event; unit is basis points. The results show that about half of the change in ten-year yields over the intermeeting period occurred immediately following economic data releases. Various FOMC communications including the December FOMC statement and minutes as well as speeches by Federal Reserve officials had only a small net effect on yields over the period. All other changes in yields not directly attributable to economic releases or FOMC communications were grouped in the "other" category. This category accounted for about half of the net change in the ten-year yield over the period. Bottom-right panel Primary Dealer Expectations, 2007 Q4/Q4, Percent FOMC Meeting December January GDP Growth 2.5 2.6 Core PCE Inflation 2.3 2.1 Exhibit 2 Optimal Policy Under Alternative Inflation Goals Exhibit 2 includes six charts that summarize the results of optimal monetary policy simulations using the FRB/US model with an assumption that policymakers wish to minimize an objective function that includes squared deviations of output from potential, squared deviations of inflation from an inflation target, and squared values of changes in the target funds rate from one period to the next. This objective function is broadly consistent with the Federal Reserve's statutory objectives to pursue maximum sustainable employment and stable prices. 1½ Percent Inflation Goal The left column of the exhibit displays three line charts showing simulation results for the federal funds rate, civilian unemployment rate, and core PCE inflation over the period from 2007 to 2012. These simulations assume that policymakers operate with a 1½ percent inflation goal. Each of these charts also displays the optimal policy simulations as of the time of the October and December FOMC meetings. In general, the evolution of these optimal policy simulations suggests the FOMC currently faces a more favorable policy outlook than at the last two meetings. Relative to the October and December simulations, the results suggest that the FOMC can run a somewhat firmer monetary policy that will be associated with both lower inflation and lower unemployment over much of the forecast period. Top-left panel Federal funds rate The chart shows that the optimal funds rate policy in this case would involve a tightening of monetary policy over the next year that would push the federal funds rate a little above 6 percent. Thereafter, the funds rate would gradually decline to about 3½ percent by the end of 2012. Middle-left panel Civilian unemployment rate The chart shows that this funds rate path would be associated with a gradual rise in the unemployment rate from about 4½ percent currently to almost 5½ percent by early 2009. After 2009, the unemployment rate gradually edges lower to about 5¼ percent by 2012. Bottom-left panel Core PCE inflation The chart shows that the path for core PCE inflation falls from about 2¼ percent currently to around 1¾ percent by the end of 2012. 2 Percent Inflation Goal The right column of the exhibit displays the same basic set of charts shown in the left column but assuming that policymakers operate with a 2 percent inflation goal. The general contour of the paths for all these variables are similar to those estimated at the time of the October and December FOMC meetings. However, the simulation results for the current meeting suggest that the FOMC can achieve both lower unemployment and lower inflation over much of the projection period than in the earlier simulation results. Top-right panel Federal funds rate The chart shows that in these simulations, the optimal path for the funds rate stays close to its current level of 5¼ percent through this year and into early 2008. Thereafter, the funds rate gradually falls to about 4 percent by the end of 2012. Middle-right panel Civilian unemployment rate The chart shows that the unemployment rate drifts up to about 5 percent by the end of 2008 and remains close to that level through the end of the projection period. Bottom-right panel Core PCE inflation The chart shows that core PCE inflation edges down to about 2 percent by mid-2009 and remains close to that level until the end of the projection period. Exhibit 3 Policy Alternatives Exhibit 3 contains charts and bullet points that describe factors that the Committee might wish to consider in choosing between Alternative B (no change in the funds rate) and Alternative C (a quarter point tightening in the funds rate). Top-left panel Alternative C 1.5 percent inflation goal. Concerned about cost pressures. Inflation expectations unchanged despite incoming data on prices. Top-right panel Alternative B 2 percent inflation goal. Still concerned about housing and possible spillovers. Lower NAIRU. Middle panels Federal Funds Rate, Unemployment Rate, and Core PCE Prices Each of three line charts displays simulations from the FRB/US model: baseline; using a lower NAIRU; and "buoyant PCE", assuming that personal consumption expenditures are stronger than the staff anticipates. Using a lower NAIRU, the fund rate can edge lower over the next two years with unemployment remaining below 5 percent and inflation gradually drifting lower toward 1½ percent. Even if the Committee was wary about inflation pressures, it might view financial markets as well positioned to provide restraint. Longer-term yields would likely backup appreciably on adverse news about inflation, providing necessary restraint and lessening the possibility that the FOMC would fall "behind the curve" in countering inflation. If PCE is buoyant, these charts show that the FOMC would need to push the funds rate up to nearly 7 percent over the next two years to contain incipient inflation. Bottom-left panel Inflation Compensation* A line chart displays evidence of the third bullet point under Alternative C. Inflation compensation measures derived from the Treasury market, plotted as the solid line for the next five years** and the dashed red line for the five-year, five-year-forward rate, each varied within a fairly wide range of nearly 40 basis points over recent months and rose a touch on net over the intermeeting period, perhaps undercutting some of the claim that longer-term inflation expectations are well anchored. * Estimates based on smoothed nominal and inflation-indexed Treasury yield curves. Return to text ** Adjusted for the indexation-lag (carry) effect. Return to text Bottom-right panel Uncertainty Around Expected Policy Path A line chart displays curves and confidence intervals. Actual and Greenbook assumptions begin in 2007:Q1 at about 5.25%, and remain at about that level through 2008:Q3. Expectations from forward contracts begin in 2007:Q1 at about 5.25%, decline to about 4.7% by 2008:Q4, then decline more gradually to about 4.5% by 2012:Q4. Market-based confidence intervals surrounding investors' expectations, derived from interest-rate caps and shown by a blue fan chart, are narrow in the near term but then widen markedly. By 2012:Q4, the 70 percent confidence interval widens to about 3.2% to 5.8%, and the 90 percent confidence interval widens to about 2.6% to 7.0%, consistent with the notion that market participants can envision a wide range of policy outcomes. Table 1: Alternative Language for the January FOMC Announcement Revised: January 29, 2007 [Note: In Appendix 3, Table 1, strong emphasis (bold) has been added to indicate red text in the original document.] December FOMC Policy Decision Rationale 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. 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 Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5½ 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 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. 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. In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to The Committee judges that inflation remains the predominant concern, and consequently that in the near 4. Nonetheless, the Committee Assessment judges that some inflation risks remain. The extent and timing of of Risk any additional firming that may be December FOMC needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. Alternative A growth, as implied by incoming information. Alternative B Alternative C address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. 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 Appendix 4: Materials used by Mr. Reifschneider, Mr. Doyle, and Mr. Reinhart Material for the Staff Presentation on Producing and Publishing Economic Forecasts January 31, 2007 CLASS I FOMC--RESTRICTED CONTROLLED (FR) Exhibit 1 Should the Committee Change Its Current Practices for the Production and Publication of Forecast-Related Material? Top panel 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? Bottom panel 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? Exhibit 2 Production Options and Their Implications Top panel 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) Bottom panel Implications for Communications and Operational Costs Independent Option Coordinated Option Centralized Option Telling the central story difficult to distill message from multiple forecasts might be simplified a bit relatively easy Conveying diversity naturally reveals diversity obscures some sources of diversity no diversity without additional comments Communications Operational costs Independent Option Coordinated Option Centralized Option 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 Exhibit 3 Top panel 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? Bottom panel 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 Exhibit 4 The Experience of Foreign Central Banks with Published Forecasts Top panel Publication Choices (A) Type of Forecast Dissent (C) Int. Rate Forecast (E) Same Location (F) Head Resp. (G) External Members 1. Reserve Bank of New Zealand Centralized No Appropriate 1 Yes Yes 0 2. Swiss National Bank Centralized No Specified 3 Yes No 0 3. Bank of Canada Centralized No Not Stated 6 Yes Yes 0 4. Reserve Bank of Australia Centralized No Specified 7 Yes** No 6 5. Norges Bank Centralized No* Appropriate 7 Yes** No 5 6. Sveriges Riksbank Centralized Yes Appropriate 6 Yes No 0 7. Bank of England Centralized Yes Specified 9 Yes No 4 8. Bank of Japan Coordinated Yes Specified 9 Yes No 0 Central Bank (B) Factors (D) Size of Comm. Publication Choices Central Bank 9. European Central Bank (A) Type of Forecast Dissent (C) Int. Rate Forecast Staff No Specified (B) Factors (D) Size of Comm. 18 (E) Same Location (F) Head Resp. (G) External Members No No 0 * Dissents at the Norges Bank are not released until 12 years after publication. Return to table ** 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. Return to table Bottom panel Consequences of Publishing a Forecast Publication is regarded as useful by central banks and observers: -- 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. Exhibit 5 (Last page) The Role of Economic Forecasts in the Policymaking Process [decision tree] [orange box with red text] One or many? 1 (single forecast or individual forecasts) [single forecast] [box] Which one? [box] Committee (1) [Stop] [box] Chairman (2) [Stop] [box] Staff (3) [Stop] [individual forecasts] [red box with red text] Conditioned on what? 2 [box] Common assumption [box] Aggregated (4) [Stop] [box] Disaggregated (5) [Stop] [box] Appropriate policy [box] Aggregated (4) [Stop] [box] Disaggregated (5) [Stop] 1. [number in red text] Does the Committee want to produce a joint forecast or conduct a survey of individual forecasts? Return to decision tree 2. [number in red text] If the forecasts are done individually, should they be based on common assumptions about some key conditioning factors? Return to decision tree 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? Table 1: Details on Publicly Available Central Bank Forecasts New Zealand Canada Forecast first published June 1988 May 1995 Whose Forecast? Governor # of members Where forecasts are published Sweden Australia Norway ECB Switzerland Japan February 1993 October 1993 January 1995 December 1994 December 2000 December 1999 October 2000 Governing Council Monetary Policy Committee Executive Board Entire Bank Executive Board Staff Entire Bank Policy Board 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 How Dissent of Forecast is Noted Other commentary at release United Kingdom Press conference and presentation to Bank's Board Press conference, testimony to Parliament after Full Report Inflation Report Inflation Report In Minutes In Minutes Press conference, testimony to Parliament Press conference; Semi-annual testimony to Rikstag Statement on Monetary Policy Range, central tendency, and median of Board members' forecasts. In minutes. In Proceedings (only released after 12 years) Semi-annual testimony to Parliament Press conference Press conference Press conference (2/year) Press conference Timing of release relative to policy meeting Within 1 week 6 days after Day of policy Day of policy after policy policy announcement announcement announcement announcement Monday following Day of policy Tuesday of announcement policy announcement Day of policy announcement Day of policy Day of policy announcement announcement When is forecast finalized In practice about 2 week prior to publication About 2 weeks before publication About 2 weeks prior to policy meeting At policy meeting Staff forecast with only limited input from Board Board members write down after receiving staff forecast Quarterly (Both Semi-annually) Quarterly Semi-annual Annual Quarterly in chart, no precise data for GDP Annual (fiscal years) At policy meeting (Friday before announcement) Forecasting process (for policy makers) Staff presents initial forecast Council writes to Governor down after and advisers; receiving staff Revises after forecast receiving comments Frequency of forecast Quarterly Full report semi-annually, updates in remaining quarters Frequency of variables forecast Annual in tables, higher frequency in charts Quarterly in near-term, annual for later years At policy meeting About 1 week before publication 2 days before publication About 5 days prior to publication 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 Staff forecast; 2 members of initial forecast Gov. Council to Governor; have joint Revises after responsibility to receiving oversee comments Quarterly 3 times a year Quarterly 3 times a year Quarterly Annual in tables, higher frequency in charts No precise numbers Annual in tables, higher frequency in charts Variables forecasted in tables or charts Inflation measures CPI, underlying inflation, import and export prices, CPI; CPI excl. 8 volatile components and indirect taxes; CPI CPI (HICP) CPI; CPI excl. No interest and (A qualitative indirect taxes, forecast is import and provided) domestic CPI excluding energy and real taxes, CPI, import prices, Euro-area CPI (HICP) CPI CPI excluding fresh food, Domestic Corporate Goods New Zealand Canada United Kingdom terms of trade, excl. ind. taxes foreign inflation Sweden Australia prices, foreign Norway ECB Switzerland domestic prices, foreign CPI Japan 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 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 Published forecast Market expectations Other Many Foreign GDP, including: oil prices exchange rate, conditioned on productivity, futures foreign GDP, markets current account balance, fiscal balance, labor market variables. Conditioning assumption for interest rate How forecasts are presented Published forecast Tables; charts for inflation and GDP Forecast horizon 3 years Not specified Market expectations and constant path Published forecast (as of Constant path Jan. 17) 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 2 to 3 years 3 years; 2 years conditioned on unchanged policy 3 to 4 years 2 years 3 to 4 years Constant path Market expectations Chart for inflation; description of GDP; rest tables Range and median of individual members' forecasts Current year and next 3 years Current and next fiscal year "Fan" charts Range of values for key variables, in table table of means 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 Yes Yes Yes Yes Yes Yes No No Yes Discussion of risks Appendix 5: Materials used by Ms. Yellen Prototype for FOMC fan charts - 1/29/07 Four prototype fan charts. Each chart displays quarterly historical values, and annual forecasts and confidence intervals. Historical values are plotted as a curve. The central tendencies of the FOMC participants' mean forecasts are denoted by vertical thick intervals. Approximate 70 percent confidence intervals, which are based on historical forecast accuracy, are denoted by vertical thin intervals which extend above and below each thick interval. Within each chart, a shaded region fans out from the last historical value to the endpoints of each confidence interval. FOMC Economic Projections for 2007 and 2008 Top-left panel Real GDP Prototype fan chart for real GDP (4-quarter percent change) shows historical values for 2005:Q1 through 2006:Q3, and forecasts and confidence intervals for 2007:Q4 and 2008:Q4. Top-right panel Unemployment rate Prototype fan chart for unemployment rate (percent) shows historical values for 2005:Q1 through 2006:Q4, and forecasts and confidence intervals for 2007:Q4 and 2008:Q4. Bottom-left panel Core PCE price index Prototype fan chart for core PCE price index (4-quarter percent change) shows historical values for 2005:Q1 through 2006:Q3, and forecasts and confidence intervals for 2007:Q4 and 2008:Q4. Bottom-right panel Federal funds rate Prototype fan chart for federal funds rate (percent) shows historical values for 2005:Q1 through 2006:Q4, and forecasts and confidence intervals for 2007:Q4 and 2008:Q4. Return to top Home | Monetary policy | FOMC | FOMC transcripts Accessibility | Contact Us Last update: January 18, 2013
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