Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 18-19, 2013 : Tealbook A

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Prefatory Note

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

Content last modified 01/11/2019.

Authorized for Public Release

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Report to the FOMC
on Economic Conditions
and Monetary Policy

Book A
Economic and Financial Conditions:
Current Situation and Outlook
June 12, 2013

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

Authorized for Public Release

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June 12, 2013

Domestic Economic Developments and Outlook
Taken as a whole, the indicators that we have received since the April Tealbook
suggest a slightly weaker-than-anticipated pace of spending and production during the
first half of this year. On the spending side, first-quarter real GDP growth now appears to
have been softer than the available data suggested at the time of the April Tealbook;
similarly, the incoming readings on second-quarter consumer spending and business
outlays for equipment and software (E&S) point to somewhat less growth in these
components of final demand relative to our previous projection. In addition, factory
output has surprised us to the downside in recent months. All told, real GDP is now
projected to rise at an annual rate of 2 percent in the first half of this year, ¼ percentage
point less than our April forecast.
Despite the slightly weaker first half, we have made a small upward revision to
our forecast for real activity over the medium term. Among the factors boosting the
outlook for spending this round, the most important were the higher paths for equity and
house prices that we have assumed in this forecast, which result in a modestly faster pace
of consumer spending. We now expect real GDP growth to come in at just under
3 percent over the second half of 2013, led by an acceleration in consumption and
business investment. After that, GDP is expected to rise around 3½ percent per year in
2014 and 2015. All told, the level of real GDP at the end of the medium term is similar
to what we wrote down in April.
The incoming data on the labor market were, in total, a little better than expected,
and we have carried some of that good news forward. In addition, despite the similar
forecast for real GDP, we have significantly marked down the projected path of the
unemployment rate over the medium term. In this forecast, we have brought forward the
improvement in labor market functioning that we had assumed would occur over the
course of the recovery, and have also assumed additional permanent withdrawals of lessemployable workers from the labor force. As discussed in the sections on potential GDP
and the medium-term outlook for the labor market, these revisions steepen the downward
trajectory for both the actual and natural rates of unemployment. We therefore now
project that the unemployment rate will decline from 7½ percent in the current quarter to
5¾ percent at the end of 2015 and expect it to cross the FOMC’s 6½ percent threshold in
the first quarter of 2015, two quarters earlier than in the April Tealbook. Even so, the

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Revisions to the Staff Projection since the Previous SEP
The FOMC last published its Summary of Economic Projections (SEP) following
the March FOMC meeting. The table below summarizes revisions to the staff
economic projection since the March Tealbook.
The staff projection for real GDP growth is essentially the same as in the March
Tealbook. However, the projection for the unemployment rate is revised down
significantly, primarily the result of the revisions we made in this Tealbook to our
estimates of the natural rate of unemployment. Taking into account those
revisions to the natural rate, the projection for the unemployment gap is about
unrevised over the medium term, with the gap narrowing to about ½ percentage
point by the end of 2015.
The staff projection for inflation has revised down this year relative to the March
projection, reflecting the surprisingly low incoming data. However, as we view
this surprise as mostly reflecting transitory factors, our projection for inflation in
2014 and 2015, at 1½ percent, is also essentially unrevised from March.
With the revised unemployment projection, the unemployment rate now crosses
the FOMC’s 6½ percent threshold in early 2015, and the policy rule that governs
our assumption for the federal funds rate calls for the rate to lift off from the
effective lower bound in the second quarter of 2015, two quarters earlier than in
the March Tealbook. The federal funds rate therefore ends 2015 about 75 basis
points higher than in March.

Staff Economic Projections Compared with the March Tealbook
2013
Variable

2012
H1

2013

2014

2015

Longer run

Real GDP1
March Tealbook

1.7
1.7

2.0
2.3

2.9
2.8

2.5
2.5

3.4
3.2

3.6
3.6

2.3
2.3

Unemployment rate2
March Tealbook

7.8
7.8

7.5
7.7

7.3
7.5

6.6
7.1

5.8
6.3

5.2
5.2

PCE inflation1
March Tealbook

1.6
1.6

.4
1.1

1.3
1.5

.9
1.3

1.4
1.5

1.6
1.6

2.0
2.0

Core PCE inflation1
March Tealbook

1.5
1.5

1.0
1.5

1.4
1.7

1.2
1.6

1.6
1.7

1.8
1.7

n.a.
n.a.

Federal funds rate2
March Tealbook

.16
.16

.12
.13

.13
.13

1.04
.30

4.00
4.00

Memo:
Federal funds rate,
end of period
March Tealbook

.13
.13

1.25
.50

4.00
4.00

1. Percent change from final quarter of preceding period to final quarter of period indicated.
2. Percent, final quarter of period indicated.
n.a. Not available.

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lower natural rate and associated higher level of potential GDP in this projection imply
that the unemployment gap and GDP gap are each a little wider than in April.
The recent data on core consumer prices once again came in lower than expected.
Although a portion of the downward surprise to the core appears to be transitory, we took
some signal from our latest miss and reduced our near-term inflation projection.
Thereafter, the core inflation forecast is very similar to the April Tealbook, with core
PCE prices expected to rise 1.6 percent in 2014 and 1.8 percent in 2015. Headline
inflation runs a little under core inflation over the medium term, as consumer energy
prices are expected to decline in line with our assumed path for crude oil prices.
As we discuss more fully in the Risks and Uncertainty section, we view the
degree of uncertainty associated with our projection of real activity as being about
normal. Nevertheless, we continue to view the risks to the projection for real activity as
skewed to the downside, in part because of the constraints on monetary policy imposed
by the effective lower bound. We also regard the uncertainty around our inflation
forecast as being about normal, but we see these risks as roughly balanced. This
assessment of risks is unchanged from April.

KEY BACKGROUND FACTORS
Monetary Policy
We left our assumption for the cumulative purchase of long-term securities under
the LSAP program unrevised. Specifically, we assume that the pace of purchases will be
gradually reduced from $85 billion per month to zero over the course of the second half
of this year, resulting in cumulative purchases of $750 billion in 2013.1 Market
expectations for the total size of the asset purchase program, which were assessed in
April to be about $1.25 trillion, appear to have declined and are now assumed to be
around $1 trillion. As in earlier editions of the Tealbook, we assume that, over the next
few months, market participants will bring their expectations for the ultimate size of the
program into line with the intentions of the Committee, and that this learning process will
result in some additional modest upward pressure on long-term interest rates.

A more gradual slowing in the pace of purchases over the second half of this year might result in
cumulative purchases of about $900 billion, or $150 billion more than our baseline assumption. Staff
analysis suggests that an additional $150 billion in asset purchases would lower the unemployment rate by
4 to 8 basis points by the end of 2015, and raise the PCE inflation rate by 0 to 6 basis points.

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Key Background Factors underlying the Baseline Staff Projection

Federal Funds Rate

Long-Term Interest Rates
Percent

Quarterly average

10
Current
Previous Tealbook
Market, expected rate

Percent

11
Quarterly average

BBB corporate yield

6
3

3
5

2008

2010

2012

2014

110
100

5
4

10-year
Treasury yield

2008

2010

2012

2014

House Prices

Equity Prices
150
140
130
120

6
Conforming
mortgage rate

4
3

Ratio scale, 2007:Q1 = 100
Quarter-end

Dow Jones
U.S. Total Stock Market
Index

150
140
130
120
110

Ratio scale, 2007:Q1 = 100

105
100

Quarterly

105
100

100
85

CoreLogic
index

2008

2010

2012

2014

Crude Oil Prices
Dollars per barrel

140

Imported oil

120

100

80
West Texas
Intermediate

2008

2012

2014

2007:Q1 = 100

110

Quarterly average

2010

Broad Real Dollar

140

120

2008

2010

2012

2014

105

100

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2008

2010

2012

2014

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In terms of conventional monetary policy, we now assume that the federal funds
rate will lift off from its effective lower bound in the second quarter of 2015, two quarters
earlier than in the April Tealbook. The earlier increase in the policy path reflects
downward revisions to our projection for the unemployment rate, which result in the
Committee’s threshold for the federal funds rate being crossed at an earlier date than
before.2

Other Interest Rates
The 10-year Treasury yield has increased about 50 basis points since the April
Tealbook, likely owing, in part, to a combination of more upbeat sentiment among
market participants about the domestic economic outlook and greater uncertainty about
the size and duration of the Federal Reserve’s asset purchase program. We continue to
expect yields to rise substantially over the medium term; this path primarily reflects the
movement of the 10-year valuation window through the period of extremely low shortterm interest rates and a gradual waning of the effects of the FOMC’s balance sheet
policies. The level of the 10-year Treasury yield that we anticipate at the end of 2015 is
only a bit higher than in the April Tealbook, as we interpret recent increases in yields as
mostly pulling forward increases in term premiums that we had previously assumed
would be spread out over the medium term.
Yields on investment-grade corporate bonds have increased about 60 basis points,
leaving their implied risk spreads somewhat higher. We continue to expect this spread to
narrow gradually over the forecast horizon and to end 2015 about ½ percentage point
lower, at which time the yield on BBB-rated bonds is projected to be 5½ percent.
Conventional 30-year mortgage rates have increased about 55 basis points to nearly
4 percent since the time of the April Tealbook and are expected to rise further with
benchmark yields to around 5¼ percent by the end of the projection period.

Equity Prices and Home Prices
The Dow Jones U.S. total stock market index has risen about 3 percent since the
April Tealbook was finalized; we interpret these gains as reflecting a more rapid decline
2

As in the April Tealbook, we assume that the federal funds rate will remain within the current
target range of 0 to ¼ percent at least as long as inflation between one to two years ahead is expected to be
below 2½ percent and the quarterly average of the unemployment rate is above 6.5 percent. (Given the
staff’s projections for inflation and unemployment, it is the latter condition that determines the date of
liftoff in our forecast.) Once either threshold is crossed, the federal funds rate follows the prescriptions of
an inertial version of the Taylor (1999) policy rule starting in the following quarter.

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in equity risk premiums than we had previously anticipated. Equity prices are now
expected to rise at an average annual rate of about 8 percent through the end of 2015; the
pace of these anticipated gains is a little slower than we had assumed in April, as less of
the predicted normalization in the equity premium now remains to be accomplished. As
a result, the projected level of equity prices at the end of 2015 is little changed from the
April Tealbook.
The CoreLogic house price index increased 6½ percent over the first four months
of this year. In the past, we have been skeptical of the pace of house price growth
implied by the CoreLogic index because of concerns related to its seasonal adjustment
and because other major house price indexes were rising less rapidly. We continue to
harbor concerns about the reliability of this index as an indicator of household wealth.
However, in light of the sustained large increases posted by this and other house price
series, we have taken a stronger signal from the incoming data and have revised our
forecast significantly: We now project that house prices will rise 13 percent for 2013 as a
whole before decelerating to a 5 percent pace in 2014 and a 4 percent pace in 2015. With
this new path, the level of house prices at the end of 2015 is 6 percent higher than in the
April Tealbook.

Fiscal Policy
Our fiscal policy assumptions are essentially unchanged in this forecast. In
particular, we have maintained our assumption that policy is exerting considerable
restraint on the growth of aggregate spending as a result of the expiration of the payroll
tax cut and implementation of other tax increases at the beginning of the year, the
sequestration, and declines in purchases related to overseas defense operations.
Accordingly, fiscal policy at all levels of government is projected to reduce the rate of
real GDP growth by 1¼ percentage points (excluding multiplier effects) in 2013, by
¾ percentage point in 2014, and by ¼ percentage point in 2015.3
The near-term federal deficit outlook has brightened somewhat owing to
surprisingly strong April tax collections as well as to recent announcements of large onetime payments to the Treasury by Fannie Mae and Freddie Mac. Accordingly, we now
anticipate that the federal unified budget deficit will narrow to 4 percent in fiscal year
2013, down from 7 percent of GDP in fiscal 2012. The deficit is projected to decline to
3

Including multiplier effects, fiscal policy is projected to exert a drag on the growth rate of real
GDP of 1½ percentage points in 2013, 1¼ percentage points in 2014, and ¾ percentage point in 2015.

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2¼ percent of GDP by fiscal 2015 as a result of further improvements in the economy
and ongoing policy actions to reduce the deficit.

Foreign Activity and the Dollar
Foreign real GDP growth slowed in the first quarter to 2 percent at an annual rate,
¼ percentage point lower than expected in the April Tealbook, as a pickup in activity in
the advanced foreign economies was more than offset by subpar growth in the emerging
market economies (EMEs). The slowing in the EMEs partly reflected a greater-thanexpected step-down from the strong growth at the end of last year. For the second and
third quarters, we expect aggregate foreign growth to pick up to an average annual pace
of about 2½ percent. This path is a bit lower than we had projected in the April
Tealbook, reflecting continued softness in China and other EMEs. As the euro area starts
to recover and the ongoing U.S. economic expansion boosts global trade, we project that
foreign growth will rise to 3½ percent by the end of 2014 and will stay at about that rate
in 2015, little changed from the previous Tealbook.
The broad nominal dollar has appreciated about ½ percent since the previous
Tealbook, as increases against the currencies of many EMEs have more than offset
declines against most of the major foreign currencies. Going forward, the broad real
dollar is projected to depreciate at an annual rate of about 2 percent over the remainder of
this year and at a roughly 2¼ percent pace thereafter. This rate of depreciation is a touch
slower than we had assumed in the previous Tealbook. While we still project that the
gradual abatement of European financial stress will lessen safe-haven demand for the
dollar, we have scaled back the amount of dollar depreciation that we anticipate from this
source. The flatter path of the dollar also reflects our assumptions regarding the earlier
onset of monetary tightening in the United States. On net, the broad real dollar ends the
forecast period about 1½ percent higher than we had projected at the time of the April
Tealbook.

Oil and Other Commodity Prices
Oil prices have moved up some since the time of the April Tealbook, reversing a
dip that took place before that forecast. The spot price of Brent crude oil closed at
$103 per barrel on June 11, up $3 from the previous Tealbook, while the price of West
Texas Intermediate increased a little more. In response to the unexpected strength of
imported oil prices in the recent trade data, we revised up our forecast for the price of
imported oil by a bit more than the observed increase in market prices. Consequently,

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Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
2013:Q1

2013:Q2

2013:Q3

Measure

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

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

3.1
2.8
2.8
16.4
-.3
-2.3

2.2
3.1
3.1
13.3
.9
-4.8

1.5
3.1
2.3
22.0
4.1
-4.5

1.8
2.6
2.1
18.6
2.4
-3.4

2.4
3.7
2.6
15.8
8.2
-4.9

2.5
3.7
3.1
13.9
5.7
-3.8

1.4
-.1
7.7
.9
1.2

.7
-.2
7.7
1.0
1.3

-.5
.3
7.6
-.2
1.4

.0
.2
7.5
-.1
.8

.5
-.2
7.5
1.6
1.7

.1
.0
7.4
1.2
1.3

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

Real GDP and GDI
4-quarter percent change

8
6

Gross domestic product
Gross domestic income

8
6

3-month percent change, annual rate

-5

-10

-15

-20

-25

0
Apr.

-5

Q1
0
-2

-2

-4

-6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-6

-30

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

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Federal Reserve Board, G.17 Statistical Release,
"Industrial Production and Capacity Utilization."

Sales and Production of Light Motor
Vehicles

Real PCE Goods ex. Motor Vehicles

Millions of units, annual rate

Billions of chained (2005) dollars

3200
3100

18
Sales

-30

May
14

3200
3100

Apr.
3000

3000

2900

2800

2700

2600

2500

2400

2300

2300
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.

Apr.
10

10
Production

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Ward’s Auto Infobank.

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our forecast for the price of imported oil for the remainder of this year is $7 per barrel
higher than in the April Tealbook; this upward revision tapers to about $5 per barrel in
2015. Overall, the price of imported oil is projected to decline slowly over the remainder
of the forecast period, reaching $90 per barrel at the end of 2015.
Nonfuel commodity prices are little changed on net since the April Tealbook, as
slightly higher food prices balanced a small decline in metals prices. Notwithstanding the
modest movement seen in aggregate prices, some individual metals exhibited large price
swings; in particular, iron-ore prices fell sharply in response to incoming data that
pointed to weaker Chinese demand. Overall, nonfuel commodity prices are expected to
remain relatively flat through 2015; this forecast is in line with quotes from futures
markets and down slightly from the previous Tealbook.

RECENT DEVELOPMENTS AND THE NEAR-TERM OUTLOOK FOR REAL GDP
The incoming spending data led us to trim our projection for real GDP growth in
the first half of the year to an average annual rate of 2 percent, ¼ percentage point lower
than what we wrote down in the April Tealbook. In the third quarter, we have marked
down our forecast for investment spending; however, the stronger-than-expected recent
news about household wealth and consumer confidence led us to revise up our forecast
for consumer spending. As a result, we anticipate GDP growth of 2½ percent in the third
quarter—a pace that is about unchanged from our April projection.

Household Spending
Available indicators of consumer spending suggest that real PCE edged lower in
4

April. We have interpreted this unexpectedly weak consumer spending reading as a
temporary pause and expect a second-quarter pace of real PCE growth that is only a little
below our April Tealbook forecast. In the third quarter, we raised projected real PCE
growth by ½ percentage point, to 3 percent at an annual rate; this upward revision reflects
the higher path for household net worth suggested by recent gains in equity and house
prices, as well as our reaction to May’s noticeable improvement in consumer sentiment.5

Although real PCE was estimated to have risen 0.1 percent in April in the BEA’s most recent
Personal Income and Outlays release, the annual revisions to retail sales that were released at the end of
May implied slower growth in retail sales than was incorporated into the preliminary estimate of April
PCE. We will receive May retail sales data on Thursday, the day after Tealbook is closed.
5
Our current estimate of real disposable personal income (DPI) growth now implies an even
larger swing in real DPI between the fourth and first quarters. Real DPI spiked in the fourth quarter of last

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Recent Nonfinancial Developments (2)

Single-Family Housing Starts

Single-Family Home Sales

Millions of units, annual rate

2.1

1.8

1.5

1.2

Millions of units, annual rate

7.0
6.5

1.2

6.0

0.9

0.9
Apr.

0.6
0.3
0.0

0.6

Adjusted permits
Starts

Existing
(left scale)

5.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Apr.

4.5

0.6

4.0

0.0

0.3

3.0
2.5

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

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: For existing, National Association of Realtors;
for new, U.S. Census Bureau.

Billions of dollars

0.0

Nonresidential Construction Put in
Place

Nondefense Capital Goods ex. Aircraft
75

0.9

5.0

3.5
0.3

1.5

New
(right scale)

Billions of chained (2005) dollars

400

3-month moving average
Apr.

70
65
60

70
350

350

300

250

Orders

Shipments

Apr.
200

45
40

200

45
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: U.S. Census Bureau.

150

1.8

220

1.7

200

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Note: Nominal CPIP deflated by BEA prices through
2012:Q4 and by staff’s estimated deflator thereafter.
Source: U.S. Census Bureau.

Inventory Ratios ex. Motor Vehicles

Exports and Non-oil Imports
Months

1.8
1.7
1.6

Staff flow-of-goods system
Apr.

1.6
1.5

1.4

1.2
1.1

1.3

Census book-value data
Mar.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Note: Flow-of-goods system covers total industry ex. motor
vehicles and parts, and inventories are relative to consumption.
Census data cover manufacturing and trade ex. motor vehicles
and parts, and inventories are relative to sales.
Source: U.S. Census Bureau; staff calculation.

Billions of dollars

220
200

180

180
Non-oil imports

160

1.5

1.3

150

Apr.

160

140

120

100

1.2

1.1

Exports

60
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis;
U.S. Census Bureau.

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We expect residential investment to rise at an average annual rate of around
15 percent in the second and third quarters; this change is a little weaker than in our April
projection, reflecting an unexpected drop in starts of multifamily housing units and the
anticipated effect of the recent jump in mortgage rates. Other incoming data suggest that
activity in the housing sector has continued to trend up. Both new and existing home
sales have continued to move higher, on net, in recent months. And while single-family
starts declined in April, permits—which provide a better signal of underlying activity—
rose at about the same average pace that we have seen over the past year. The low cost of
housing, sustained job gains, and growing optimism about the trajectory of house prices
appear to be providing important support for the housing recovery. Nevertheless, we
think that housing demand is still being held back by limited access to mortgage credit
for many individuals, along with some wariness about the durability of the broader
economic recovery. In addition, it is possible that new construction is being restrained by
tight supplies of developed land and other inputs as builders ramp up activity from the
abnormally low levels of recent years.

Business Investment
Although the latest data led us to revise up our estimate of real spending on E&S
in the first quarter, this category of demand appears on track to post only a small increase
in the current quarter. New orders for capital goods excluding aircraft, which had
bounced back late last year from an earlier soft patch, have flattened out more recently at
a level that is only slightly above the level of shipments. In addition, other forwardlooking indicators of business investment, such as readings on business sentiment and
capital spending plans, have been lackluster of late. All told, real E&S purchases are
expected to rise at a modest annual rate of 3 percent in the first half of this year;
thereafter, as business output accelerates, we expect equipment investment growth to pick

year, in part because firms apparently made special one-time payments of dividends and bonuses in
advance of the January tax increases. While a large portion of this fourth-quarter income surge was
apparent in the data that we had in hand for the April Tealbook, the BEA’s subsequent incorporation of
data from the Quarterly Census of Employment and Wages caused them to revise up their estimate of
fourth-quarter wages and salaries by $100 billion. (The BEA again attributed a large portion of the wage
and salary jump to bonus payments and other forms of irregular pay, although at this point they have little
hard evidence on the precise nature of the increase.) As in our April forecast, we believe that consumers
will smooth through this income volatility and so do not expect it to have much of an effect on near-term
real PCE growth.

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up in the second half to 6½ percent.6 For the year as a whole, these projected growth
rates are a little weaker than in the April Tealbook.
Investment in nonresidential structures fell in the first quarter, led by a sharp taxrelated drop-off in expenditures on power-generation structures. More broadly, the level
of nonresidential building investment has remained relatively low as high vacancy rates,
tight financing conditions for new construction, and low commercial property prices
continue to restrain demand for new buildings. By contrast, the level of investment in
drilling and mining structures has stayed elevated, supported by high oil prices and the
continued deployment of new drilling technologies. In total, nonresidential structures
investment is expected to rise modestly in the second and third quarters at an average
pace that is similar to what we wrote down in the April Tealbook.
Estimates from the staff’s flow-of-goods system point to a moderate pace of
stockbuilding in the current quarter, while gauges of inventory sentiment from the ISM
survey and book-value inventory-to-sales ratios do not indicate any emerging inventory
imbalances. Consequently, we expect nonfarm inventory investment to be roughly
neutral for GDP growth in the first half of this year—similar to our April forecast—
before adding a small amount to GDP growth in the second half as businesses build
stocks in response to accelerating sales. In line with our April Tealbook estimate, farm
inventory investment is scored by the BEA as having boosted GDP growth by nearly
1 percentage point in the first quarter as farm output returned to more normal levels
following last summer’s drought; we expect this contribution to fall back to zero in the
second and third quarters.

Government
Total real federal purchases contracted at an annual rate of 9 percent in the first
quarter—a faster decline than the 5 percent rate we had estimated in the April
Tealbook—and are expected to decline at a similar rate in both the second and third
quarters. The first-quarter drop in purchases reflected weaker-than-expected defense
spending, which we have interpreted as partly reflecting an earlier-than-anticipated onset
of the effects of the sequestration. We expect that the effects of the sequestration on real
federal purchases will intensify over the second and third quarters. That said,
6

The near-term trajectory of E&S spending is affected by delivery delays for the Boeing 787
Dreamliner, which shift some final sales of aircraft from the first quarter to the second and third quarters.
These shifts should have no measurable effect on overall GDP, as they are offset by corresponding swings
in Boeing’s inventories.

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considerable uncertainty surrounds the timing of these effects: Agencies have announced
(and in some cased initiated) temporary furloughs, but we have little information about
what will happen to their other outlays.
Real purchases by state and local governments moved lower in the first quarter of
this year, led by a steep drop in construction spending; data from April suggest that real
construction outlays will decline further in the current quarter. However, consistent with
the improving outlook for this sector’s finances, employment in this sector moved up
slightly over the first five months of the year. Combining these cross-currents, we have
overall real state and local government purchases inching down in the second and third
quarters after declining at a 2 percent annual rate in the first quarter.

Foreign Trade
After declining in each of the preceding two quarters, real exports of goods and
services are expected to rise at an average pace of 5¼ percent in the second and third
quarters of this year as Boeing resumes exports of its 787 Dreamliner and as foreign
growth steps up. Real imports are projected to rise 3½ percent on average in the second
and third quarters, reflecting modest increases in U.S. demand as well as a continued
decline in real oil imports that is a bit more pronounced than in the April Tealbook.
Altogether, the external sector is expected to add ¼ percentage point to the growth of real
GDP in the second quarter and to be about neutral in the third quarter.

The Industrial Sector
Manufacturing output declined 0.4 percent in April after moving down
0.3 percent in March, a much weaker profile of activity than we had anticipated. Despite
these recent declines, we expect manufacturing production to turn up in coming months;
indeed, data on production-worker hours and available weekly physical-product data
suggest that factory output edged higher in May. Looking further ahead, while surveys of
manufacturing activity remain subdued, sustained consumer and business demand for
motor vehicles should provide continued support for automobile production and increases
in homebuilding should lift the production of construction supplies and related materials.
We now expect factory output to decline ½ percent in the current quarter but then to
increase 2¾ percent next quarter; the average annualized gain in the second and third
quarters of this year is more than 2 percentage points lower than our April Tealbook
forecast.

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Components of Final Demand

Personal Consumption Expenditures
4-quarter percent change

Residential Investment
4-quarter percent change

5
Current
Previous Tealbook

-5

-10

-15

-1

-2

-20

-3

-25

-4

-30

2008

2009

2010

2011

2012

2013

2014

2015

Equipment and Software
20

-5

-10

-15

-20

-25

2008

2009

2010

2011

2012

2013

2014

2015

-25

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

Government Consumption & Investment
4-quarter percent change

-1

-5

-2

-3

-4
2008

2009

2010

2011

2012

2011

2012

2013

2014

2015

2013

2014

2015

4-quarter percent change

2008

2009

2010

2011

2012

2013

2014

2015

4-quarter percent change

-30

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

20
15

-1

-5

2010

Exports and Imports
5

2009

Nonresidential Structures

4-quarter percent change

2008

10
Exports

5
0
Imports

-5

-10

-4

-15

-5

-20

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

Page 14 of 110

2008

2009

2010

2011

2012

2013

2014

2015

-20

Authorized for Public Release

June 12, 2013

THE MEDIUM-TERM OUTLOOK FOR REAL GDP
Notwithstanding its slightly weaker performance over the first half of this year,
real GDP growth is projected to be a little stronger over the medium term than in the
April Tealbook, reflecting some changes to our conditioning assumptions that are slightly
positive on balance. Specifically, we raised our forecasts for equity and house prices,
which pushes up expected consumer spending growth over the medium term. We also
boosted our outlook for domestic oil production to reflect the newest projections from the
Department of Energy, which reduces projected oil imports. These positive factors are
mostly offset, however, by higher long-term interest rates and a stronger assumed path
for the exchange value of the dollar. (Our changes to potential output, discussed below,
had relatively modest effects on projected spending.)
In total, real GDP is expected to expand 2½ percent this year, up from 2012’s
1¾ percent pace; thereafter, our forecast calls for real GDP growth to step up to
3½ percent in 2014 and 2015. As in previous forecasts, the projected acceleration in
economic activity reflects our view that fiscal policy will be less of a drag on aggregate
demand growth after this year and that some of the factors that have weighed on the
recovery over the past several years will continue to subside; in particular, we expect that
European financial and economic conditions will gradually improve and that the housing
market will heal further. As households and firms become more confident that the main
threats to the recovery have diminished—and against a backdrop of still highly
accommodative monetary policy—asset risk premiums should decline and household and
business confidence should improve, resulting in a pickup in household spending,
business investment, and hiring.
The emergence of this sort of dynamic is most clearly apparent in our forecast for
personal consumption. Despite the higher payroll and income taxes that took effect in
January, real PCE is projected to rise 3 percent this year before accelerating to
3¾ percent in 2014 and to just under 4 percent in 2015—a path that is a touch higher than
in our April forecast. The expected upturn in PCE growth is supported by gains in
disposable personal income and consumer confidence that in turn reflect improvements in
the labor market that result from higher consumer spending—a self-reinforcing cycle of
rising spending, hiring, and confidence. In addition, the anticipated further increases in
house and equity prices lead to gains in household wealth that further support
consumption growth.

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We anticipate that solid gains in residential construction will also support the
recovery. Demand for housing is expected to benefit from the same sorts of factors that
contribute to a pickup in consumer spending, including rising income, wealth, and
confidence, though the effects of these factors will likely be counteracted by the
significant increase in mortgage interest rates that we expect to occur in coming years.
As a result, the projected trajectory of residential investment over the medium term is
relatively steady at a solid growth rate of just above 15 percent per year, about the same
as in the April Tealbook.
Business fixed investment is expected to accelerate only a little over the medium
term, as an increase in long-term corporate borrowing rates partly offsets the effects of
rising business output growth. As a result, our forecast calls for E&S growth to step up
from 4¾ percent in 2013 to just under 6½ percent in both 2014 and 2015—an average
rate of growth that is very close to our April Tealbook projection. In addition, we expect
only modest gains in nonresidential structures investment over the medium term.
After growing only 2 percent last year, real exports of goods and services are
expected to rise at a still-subdued 3 percent pace this year; this projection is down from
4¼ percent in the April Tealbook because of weaker-than-expected first-quarter export
data, the stronger dollar in this projection, and somewhat weaker foreign growth. We
then look for exports to expand 5 percent in 2014 and 6½ percent in 2015, similar to our
April projection. We also have a smaller rise in real imports in 2013—only 2¾ percent—
as the effects of the stronger dollar are outweighed by lower oil imports (which in turn
reflect our even brighter outlook for domestic oil production). Over the remainder of the
forecast period, import growth picks up to average about 5 percent. Overall, the
contribution of net trade to real GDP growth is expected to be slightly negative over the
medium term, a touch weaker than in the April Tealbook.
As discussed earlier, declines in real government purchases act as a significant
drag on economic growth this year. On the federal side, this drag is expected to diminish
after this year as the pace of fiscal consolidation slows and as reductions in spending on
overseas military operations moderate. Similarly, state and local government purchases
are projected to bottom out next year and then begin to slowly increase as budget
conditions continue to improve. In all, our outlook for total government purchases is
little changed from April.

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Aspects of the Medium-Term Projection

Personal Saving Rate

Wealth-to-Income Ratio
Percent

8
Current
Previous Tealbook

8
7

1995

2000

2005

2010

2015

Ratio

6.8

6.4

6.0

5.6

5.2

4.8

4.4

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

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

Single-Family Housing Starts

Equipment and Software Spending
Millions of units

2.00

6.8

Share of nominal GDP

2.00

10.0

1.75

9.5

1.50

9.0

1.25

8.5

1.00

8.0

0.75

7.5

0.50

7.0

0.25

6.5

0.00

6.0

0.00

1995

2000

2005

2010

2015

1995

2000

2005

2010

2015

10.0

6.0

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

Source: U.S. Census Bureau.

Current Account Surplus/Deficit

Federal Surplus/Deficit
Share of nominal GDP

Share of nominal GDP

-1

-2

-2
-3

-3

-4

-6

-4

-8

-5

-10

-6

-12

-7

4-quarter moving average

-12

1995

2000

2005

2010

2015

1995

Source: Monthly Treasury Statement.

2000

2005

2010

2015

-7

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

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

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THE OUTLOOK FOR THE LABOR MARKET AND INFLATION
Recent Developments and Near-Term Outlook for the Labor Market
Taken together, the two monthly employment reports that we have received since
the April Tealbook were a touch stronger than we had expected and imply that labor
market conditions have continued to improve. In the establishment survey, average
monthly nonfarm employment growth was revised up 40,000 in the first quarter, to
210,000 jobs per month. More recently, payroll employment growth in April and May
averaged around 160,000 jobs per month, about 10,000 above our April Tealbook
projection. In the household survey, the unemployment rate rounded back up to
7.6 percent in May, but the April–May average was nonetheless 0.1 percentage point
lower than our previous forecast.
Forward-looking indicators of labor market activity have been mixed but
generally point to some improvement in the labor market outlook since the April
Tealbook. Households’ expectations for future labor market conditions have brightened
appreciably from their March readings, and, while initial claims are little changed on net
since late April, they remain near their post-recession lows. Firms’ hiring plans edged up
recently and quits measured in the JOLTS continued to trend upward on balance.
However, measures of job openings from the JOLTS and the Conference Board’s helpwanted index have slipped a bit of late, and now appear roughly flat, on net, since early
2012. Finally, according to a preliminary version of a factor model maintained by the
staff that includes a range of labor market indicators, conditions in the labor market
continued to improve in May. In total, we now expect average nonfarm payroll gains of
160,000 per month in the second and third quarters, about the same as in our April
forecast.7 We project an average unemployment rate of 7.5 percent in the current quarter
and 7.4 percent next quarter; both figures are 0.1 percentage point lower than in the April
Tealbook.

Potential GDP and the Natural Rate of Unemployment
We have revised our supply-side assumptions this round and now judge that the
natural rate of unemployment is on a more pronounced downward trajectory than we had
previously thought. In particular, we now believe that the natural rate declined about
7

As in the April Tealbook, we expect the federal sequestration to subtract 30,000 jobs per month
from private payroll growth in the second and third quarters. We still expect that the effect on federal
payroll employment will be small in the current quarter as government agencies use furloughs, rather than
layoffs, to reduce spending.

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

19741995

19962000

20012010

2011

2012

2013

2014

2015

3.0
3.0

3.4
3.4

2.1
2.1

1.6
1.5

1.9
1.8

2.0
1.9

2.1
2.1

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

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

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

1.3
1.3
.2
.3
.9
.9
.6
.5
-.4
-.4

1.4
1.4
.4
.4
.9
.9
.7
.6
-.3
-.3

1.5
1.5
.5
.5
.9
.9
.7
.6
-.4
-.3

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

1.7
1.8
.7
.8
.9
.9
.6
.6
-.3
-.3

-2.4
-2.4

1.9
1.9

-4.0
-4.0

-3.6
-3.5

-3.9
-3.7

-3.4
-3.1

-2.2
-1.9

-.8
-.6

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

Structural and Actual Labor Productivity
(Nonfarm business sector)

Chained (2005) dollars per hour

54
Structural

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

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

Manufacturing Capacity Utilization Rate

GDP Gap
6

Percent

-2

-4

-6

-8

-10

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

-10

Percent

90
85

Average rate from
1972 to 2012

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

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

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¼ percentage point more through the end of 2012 than we had previously estimated, and
that it will also fall more quickly over the medium term, reaching our estimate of its
long-run level (which is unrevised at 5¼ percent) by the end of 2015—two years earlier
than in the April projection. In our assessment, the revision to the natural rate can be
attributed both to a greater improvement in labor market functioning and to a slightly
steeper rate of decline in trend labor force participation (on the grounds that we will see a
larger amount of permanent withdrawal from the workforce in coming years).8
These revisions also result in a small net upward revision to the level of potential
GDP at the end of 2015, since the reduction in trend participation only partly offsets the
lower natural rate. At 2 percent per year, the average rate of growth of potential output
over the medium term is not materially different from our April forecast; because our
estimate of the natural rate is unrevised in the long run, the revision to the level of
potential output after 2015 is even smaller.

The Medium-Term Outlook for the Labor Market
Beyond the near term, we look for the labor market to gradually improve in line
with the overall pace of economic recovery. We expect total payroll gains to step up
from an average pace of 160,000 per month in the second and third quarters to an average
monthly pace of 210,000 in 2014 and 265,000 in 2015. The unemployment rate is
0.1 percentage point lower at the start of the forecast period as a result of incoming data;
going forward, the improvement in labor market functioning and withdrawal of lessemployable workers that drive the steeper decline in the natural rate that we have
assumed in this projection also imply a correspondingly steeper decline in the actual
unemployment rate. In particular, by allowing employers to fill positions more easily,
improved labor market functioning results in workers moving into employment more
quickly, thereby bringing productivity and the workweek more quickly into line with
desired levels. Hence, by the end of the projection period, the unemployment rate
reaches 5¾ percent, nearly ½ percentage point lower than in our April forecast. With this
projected path, the unemployment rate crosses the FOMC’s 6½ percent threshold in the
first quarter of 2015, two quarters earlier than in the April Tealbook.

A more complete description of our supply-side revisions and their motivation is contained in the
June 7, 2013, memorandum to the FOMC, “Assessing the Recent Decline in the Unemployment Rate and
Its Implications for Monetary Policy,” by Stephanie Aaronson, Bruce Fallick, Charles Fleischman, and
Robert Tetlow.

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The Outlook for the Labor Market
(Percent change from final quarter of preceding period at annual rate)
2013
Measure

Output per hour, nonfarm business
Previous Tealbook

2012

2013
H1

2014

2015

.6
.7

.9
.9

.3
.7

1.5
1.2

1.6
1.6

Nonfarm private employment1
Previous Tealbook

189
189

183
170

190
166

175
175

218
220

265
265

Labor force participation rate2
Previous Tealbook

63.7
63.7

63.4
63.5

63.3
63.4

Civilian unemployment rate2
Previous Tealbook

7.8
7.8

7.3
7.4

7.5
7.6

7.3
7.4

6.6
6.9

5.8
6.2

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

Inflation Projections
(Percent change at annual rate from final quarter of preceding period)
2013
Measure

PCE chain-weighted price index
Previous Tealbook

2012

2013
H1

2014

2015

1.6
1.6

.9
1.0

.4
.3

1.3
1.6

1.4
1.5

1.6
1.6

Food and beverages
Previous Tealbook

1.1
1.1

1.2
1.1

1.1
1.1

.9
1.0

1.4
1.5

Energy
Previous Tealbook

3.2
3.2

-5.0
-6.6

-9.1
-14.2

-.8
1.6

-.9
-.3

-.9
-.7

Excluding food and energy
Previous Tealbook

1.5
1.5

1.2
1.5

1.0
1.3

1.4
1.6

1.6
1.7

1.8
1.8

Prices of core goods imports1
Previous Tealbook

.1
.1

-.1
.5

-.4
.3

.2
.6

1.4
1.6

1.5
1.6

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

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The top-right figure of the “Labor Market Developments and Outlook” exhibit
compares our current unemployment projection with our projection from
September 2012, when the Committee first tied its asset purchase decisions to an
improvement in the outlook for labor market conditions. By the end of 2013, the
unemployment rate is projected to be 7.3 percent, ¾ percentage point lower than
August’s 8.1 percent rate (the last observation that the Committee had in hand for the
September FOMC meeting); over the medium term as a whole, our forecast for the
unemployment rate averages about 1 percentage point lower than the September
Tealbook’s projection. The outlook for total payroll employment growth past the first
half of 2013 is little changed, on average, since September; that said, our current
projection for the level of total payroll employment at the end of this year is ¾ percent, or
1.1 million jobs, higher than our corresponding September forecast, reflecting both the
faster-than-expected payroll gains registered this past fall and winter and the effects of
the annual benchmark revision to payrolls that was published in February.9

Resource Utilization
The revisions that we have made to the natural rate and potential GDP imply that
the unemployment rate gap and the GDP gap were both a little wider at the end of 2012
than we had previously assumed. In the current quarter, the projected unemployment rate
is almost 2 percentage points above our estimate of the natural rate (nearly ¼ percentage
point more than our April forecast), while the level of actual output is almost 4 percent
below potential (implying a GDP gap that is nearly ½ percentage point wider relative to
April). These gaps are projected to diminish gradually over the medium term, with the
unemployment gap projected to be ½ percentage point by the end of 2015 and GDP
projected to be ¾ percent below potential (hence, these gaps are just a little wider than in
the April Tealbook). In the manufacturing sector, capacity utilization is currently almost
3 percentage points below its long-run average but rises to about its long-run average by
the end of 2014.10

Our supply-side revisions this round have only a small effect on our assessment of the change in
the unemployment gap since September 2012 because the estimated shifts in the paths of the natural rate
and the trend rate of labor force participation began in 2011. In particular, we currently estimate that the
unemployment gap narrowed 0.35 percentage point between 2012:Q2 and 2013:Q2; without this round’s
revisions to the natural rate, the gap would have narrowed 0.48 percentage point.
10
The degree of slack in the manufacturing sector appears to be smaller than that for the broader
economy, in part because of unprecedented declines in production capacity from 2007 to 2010 that
occurred as manufacturers shuttered plants that had been chronically underutilized. Note that we estimate
capacity in the industrial sector based largely on survey data that seek to capture the highest level of output

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Labor Market Developments and Outlook

Measures of Labor Underutilization
Percent

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

11
10
9

12
11

8.0

8
May

7.5
7.0

6.5

6.0

8.5

September 2012 Tealbook

8
7

Percent

8.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

7.5
Unemployment rate
Previous Tealbook
Natural rate of unemployment
with EEB adjustment

7.0
6.5

Previous Tealbook

6.0

5.5
5.0

5.5
2012

2013

2014

2015

5.0

* U-5 measures total unemployed plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached
to the labor force.
** Percent of Current Population Survey employment.
EEB Extended and emergency unemployment benefits.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Level of Payroll Employment*
120

Millions

140

Total (right axis)
Private (left axis)

142
May

115

135

110

105

130

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

125

Millions

144
Total
Previous Tealbook
September 2012 Tealbook

144
142

140

138

136

134

132

2012

2013

2014

2015

132

* 3-month moving averages in history; average levels in each quarter during the forecast period.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Change in Payroll Employment*
Thousands

400
200

May

300

200

250

200

150

-200

-400

-600

-800
-1000

Total
Private
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Thousands

400

100

-800

-1000

100
Total
Previous Tealbook
September 2012 Tealbook
2012

2013

2014

2015

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

Page 23 of 110

300

50
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Labor Market Developments and Outlook (2)
Labor Force Participation Rate*
Percent

67.5
67.0

Labor force participation rate
Estimated trend**

67.5

Percent

65.0

Labor force participation rate
Previous Tealbook
September 2012 Tealbook
Estimated trend**
Previous trend

67.0

66.5

66.0

65.5

65.0

64.5

64.0

64.5

65.0

64.5

64.0

63.5

May
63.5
63.0

63.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

63.0

2012

2013

2014

2015

63.0

* Published data adjusted by staff to account for changes in population weights.
** Includes staff estimate of the effect of extended and emergency unemployment benefits.
Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions.

Initial Unemployment Insurance Claims*
Thousands

Thousands

700

500

650

475

600

450

550

425

500

500
400

400

450

400

700

350
300
250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

June 1

375

350

300

325

250

300

350
June 1

375

500

2011

2012

2013

300

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

Private Hires, Quits, and Job Openings
5.0
4.5
4.0

Percent
Hires*
Quits*
Openings**

3.5

4.0

3.5

3.0

2.5

3.0
Apr.

2.5

2.0

1.5

1.0

Percent

4.0

4.5

3.5

3.0
2.5

5.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1.0

2.0

2.0
Apr.

1.5

2011

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

Page 24 of 110

2012

2013

1.5

June 12, 2013

Labor Market Data and Projections
Indicator

Aug.
20121

Projection for 2013:Q4 in the Tealbook dated:
Sept. 2012

Dec. 2012

Mar. 20132

June 20132

Unemployment rate (percent)

8.1

8.0

7.8

7.5

7.3

Labor force participation rate
(percent)

63.5

63.7

63.6

63.4

Monthly change in payroll employment
(thousands, three-month averages)
Total
Private

94
109

188
189

168
169

173
179

170
180

133.3

135.5

135.7

136.6

1.0

2.1

1.8

2.0

2.2

184.6

187.8

188.5

190.5

190.3

Level of total payroll employment
(millions)
Total hours worked (percent change)3
Total hours worked (billions)3

1. The figures for August 2012 refer to data as originally published in the September employment situation release along
with the staff’s real-time translation of those data into hours worked. These were the latest available data at the time of
the September FOMC meeting.
2. Projections of payrolls and hours worked include the effects of the benchmark revision to the payroll survey.
3. Total hours worked are aggregate hours in the nonfarm business sector. Because that series is available only on a
quarterly basis, the August 2012 figures refer to the quarterly percent change and level in 2012:Q3. The percent changes
and levels in hours are at annual rates.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics; staff projections.

Page 25 of 110

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The Outlook for Prices and Compensation
We expect overall consumer prices as measured by the PCE price index to rise at
an annual rate of only 0.4 percent in the first half of this year, held down by large
declines in energy prices and surprisingly low core inflation. This forecast is little
changed from April: Although consumer energy prices now appear likely to decline
somewhat less rapidly than we previously projected, core prices offset this development
by surprising us to the downside once again.
In particular, core PCE prices came in much lower than expected in April, with
about half of the miss accounted for by a downward surprise to medical services prices.11
As a result, we now expect core consumer prices to rise at an annual rate of 0.8 percent in
the second quarter, down 0.6 percentage point relative to our April Tealbook forecast.
We believe that April’s decline in medical services prices was mostly attributable to a
one-time reduction in Medicare prices associated with the sequestration that has few, if
any, implications for future inflation. That said, we did take some signal from our overall
miss on core PCE inflation (as well as from softer-than-expected readings on core
imported goods prices) and have therefore marked down our third-quarter core inflation
forecast by 0.4 percentage point, to 1.3 percent. For 2013 as a whole, these revisions
leave the projected change in core PCE prices at 1.2 percent, 0.3 percentage point below
our April forecast.
As in the past several forecasts, we project sizable reductions in consumer energy
prices through the first half of this year, largely mirroring the downward tilt in spot and
futures prices for imported crude oil. However, crude oil prices are higher and gasoline
price margins appear to have recovered a little faster than we had expected in April,
leading us to trim our projected first-half decline in consumer energy prices by
5 percentage points, to an annual rate of 9 percent. Given our projected oil price path, we
expect PCE energy prices to edge lower over the remainder of the medium term.

that plants can sustainably maintain given sufficient availability of variable inputs such as labor and
materials.
11
For the 12 months ending in April, the wedge between core CPI inflation and core PCE inflation
stood at 0.7 percentage point. Although this wedge is volatile year to year, its current level is much wider
than the 0.1 percentage point average seen over the past 10 years. Roughly 0.2 percentage point of this
differential can be ascribed to a smaller-than-usual contribution of PCE medical services prices to core PCE
inflation. Another 0.3 percentage point of the differential reflects an atypically low rate of change in core
nonmarket services prices (excluding medical), which are not included in the CPI. Over the medium term,
we expect the CPI–PCE wedge to narrow as both PCE components return to somewhat more typical rates
of increase.

Page 26 of 110

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

Headline Consumer Price Inflation
Percent

6
5

CPI
PCE

1
0

1
Apr.

-1

-2

-3

PCE - Current
PCE - Previous Tealbook

Percent

-3
0
2002200320042005200620072008200920102011201220132014
2012
2013
2014
2015
Source: For CPI, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis.

Measures of Underlying PCE Price Inflation
4.0
3.5
3.0

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

3.5

2.5

2.0

1.5

1.0

3.0

2.5

1.0
Apr.

0.5
0.0

Percent

3.5

4.0

0.5

Core PCE - Current
Core PCE - Previous Tealbook

3.5
3.0

2.5

2.0

1.5

1.0

0.5

0.0
0.0
2002200320042005200620072008200920102011201220132014
2012
2013
2014
2015
Source: For trimmed mean PCE, Federal Reserve Bank of Dallas; otherwise, U.S. Dept. of Commerce, Bureau of Economic Analysis.

0.0

Labor Cost Growth (Private Industry)
6
5

Percent
Employment cost index
Average hourly earnings
Compensation per hour

4
3

Percent

6
Compensation per hour - Current
Compensation per hour - Previous Tealbook

May
2
1
0

Q1
Mar.

2002200320042005200620072008200920102011201220132014

Note: Compensation per hour value for 2013:Q1 is a staff estimate.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.

Page 27 of 110

2012

2013

2014

2015

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June 12, 2013

Consumer food prices are on track to rise 1¼ percent on average in the first half
of this year, in line with our April forecast. Earlier concerns about weather-related
planting delays for corn and soybeans have mostly abated, and futures prices point to a
decline in crop prices of about 10 percent by the time of the autumn harvest. All told,
consumer food price inflation is anticipated to run a little below core inflation over the
medium term, at a pace that is unchanged from our April projection.
Core import prices are another factor likely holding down domestic inflation at
present. After rising at an annual rate of ¼ percent in the first quarter of 2013, prices of
imported core goods are expected to decline 1 percent in the current quarter in response
to earlier declines in commodity prices and a stronger dollar. In the second half of 2013,
we expect core import prices to increase ¼ percent at an annual rate; for the remainder of
the forecast period, core import price inflation is expected to run about 1½ percent per
year—little changed from our previous projection and in line with the relatively flat
projected trajectory for commodity prices and our assumed pace of dollar depreciation.
Readings on long-term inflation expectations remain generally stable. Median
5-to-10-year-ahead inflation expectations from the final May Michigan survey were
unchanged from April and within the relatively narrow range seen in recent years.
Median expected PCE price inflation over the next 10 years from the second-quarter
Survey of Professional Forecasters stood at 2 percent, unchanged from the first-quarter
survey. Finally, measures of inflation compensation derived from TIPS yields have
moved down a little more than ¼ percentage point since the time of the April Tealbook.
Given our projection of continued stability in long-run inflation expectations,
relatively modest movements in commodity and import prices beyond this year, and a
gradually diminishing margin of slack—as well as our judgment that much of the recent
softness in core inflation reflects transitory factors—we expect core PCE inflation to rise
from 1.2 percent this year to 1.6 percent in 2014 and to edge up further to 1.8 percent in
2015. Total PCE inflation is expected to run a bit below the core, rising about 1½ percent
per year in 2014 and in 2015. Thus, throughout the medium term, the PCE inflation
projection remains below both the Committee’s long-run objective of 2 percent and the
threshold level of 2½ percent.
The swing in wage and salary disbursements implied by the BEA’s incorporation
of the data from the Quarterly Census of Employment and Wages resulted in a large
upward revision to nonfarm compensation per hour (CPH) in the fourth quarter of last
Page 28 of 110

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

Commodity and Oil Price Levels
1967 = 100
Dollars per barrel
Brent crude oil history/futures (right axis)
1680
CRB spot commodity price index (left axis)
1420
1200
1000
800
June 11
600
2200

1967 = 100
220

Dollars per barrel

2000

168
142
120
100
80

1600
1400
1200

800

200
Brent crude oil history/futures (right axis)
CRB spot commodity price index (left axis)

160
140
120

1000

100
80
June 11

400

200

600

20
400
2002200320042005200620072008200920102011201220132014
2011
2012
2013
Note: Futures prices are the latest observations on monthly futures contracts.
Source: For oil prices, U.S. Dept. of Energy, Energy Information Agency; for commodity prices, Conference Research Board (CRB).

Energy and Import Price Inflation
18
15
12

Percent

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

60
50

Percent

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

-3

-10

-6

-20

-9

-30

-2

-40

-4

-12

Apr.

2002200320042005200620072008200920102011201220132014

0
Apr.
-5
2011

2012

2013

-10

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

Long-Term Inflation Expectations
Percent

4.25
3.75
3.25

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

2.75

4.25

Percent

4.25

3.75

3.25

2.75

2.25

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

4.25
3.75
3.25

May

2.75

May
2.25

2.25
Q2

Q2
1.75

2002200320042005200620072008200920102011201220132014

1.75

2011

2012

2013

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

Page 29 of 110

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June 12, 2013

year, with a corresponding downward revision to first-quarter CPH growth. We continue
to expect hourly compensation growth to rise slowly over the medium term as the labor
market gradually tightens.12

THE LONG-TERM OUTLOOK
We have extended the staff’s forecast beyond the medium term using the
FRB/US model and our assumptions about long-run supply-side conditions, fiscal policy,
and other factors. The contour of the long-term outlook depends on the following key
assumptions:


Monetary policy seeks to stabilize PCE inflation at 2 percent over the longer
term, consistent with the Committee’s strategy statement. As noted earlier,
the Committee’s threshold for the unemployment rate is crossed in the
baseline projection in the first quarter of 2015. Thereafter, the federal funds
rate is set according to the inertial Taylor (1999) rule.



The Federal Reserve’s holdings of securities continue to put downward
pressure on longer-term interest rates in 2016 and 2017, albeit to a
diminishing extent. The process of returning the SOMA portfolio to a normal
size is expected to be completed by 2019.



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



The federal budget deficit begins to widen after 2016, primarily reflecting
fast-rising transfer payments for retirement and health-care programs. Federal
debt stabilizes temporarily at almost 75 percent of GDP in 2017 and 2018 but
then begins to edge up later in the decade.



The real foreign exchange value of the dollar declines 2 percent per year from
2016 to 2018 and moves down more slowly thereafter. The price of crude oil
decreases slightly in 2016 and then holds steady in real terms. Foreign real

According to the Bureau of Labor Statistics (BLS), the employment cost index (ECI) releases
for the first quarter of 2013 and last two quarters of 2012 contained errors. While the BLS did not provide
any details about the extent of these errors, we are treating all recent ECI data as suspect until the BLS
publishes corrected ECI estimates at the end of July.

Page 30 of 110

June 12, 2013

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

Measure

2012

2013

2014

2015

2016

2017

Longer run

Real GDP
Previous Tealbook

1.7
1.7

2.5
2.6

3.4
3.2

3.6
3.5

2.8
2.9

2.1
2.0

2.3
2.3

Civilian unemployment rate1
Previous Tealbook

7.8
7.8

7.3
7.4

6.6
6.9

5.8
6.2

5.3
5.5

5.3
5.3

5.2
5.2

PCE prices, total
Previous Tealbook

1.6
1.6

.9
1.0

1.4
1.5

1.6
1.6

1.8
1.8

2.0
2.0

Core PCE prices
Previous Tealbook

1.5
1.5

1.2
1.5

1.6
1.7

1.8
1.8

1.9
1.9

2.0
2.0

Federal funds rate1
Previous Tealbook

.2
.2

.1
.1

1.0
.5

2.2
2.0

3.0
2.9

4.0
4.0

1.7
1.7

2.7
2.4

3.3
3.2

3.9
3.8

4.0
4.0

4.8
4.8

10-year Treasury yield1
Previous Tealbook

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

Real GDP

Unemployment Rate
4-quarter percent change

Potential GDP

Real GDP
2004

2008

2012

2016

Percent
10

5
4
3
2
1
0
−1
−2
−3
−4
−5
2020

Unemployment rate

8
Natural rate
with EEB
adjustment

7
6
Natural rate

5
4

2004

PCE Prices

2008

2012

2016

2020

Interest Rates
4-quarter percent change

Percent
5

Total PCE prices
4
BBB corporate

3
2
PCE prices
excluding
food and
energy

10-year Treasury

1
0

Federal
funds rate

−1
2004

2008

2012

2016

2020

2004

2008

2012

2016

2020

Note: In each panel, shading represents the projection period, and dashed lines are the previous Tealbook.
Page 31 of 110

10
9
8
7
6
5
4
3
2
1
0

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GDP growth slows from 3½ percent in 2015 to a 3 percent annual rate late in
the decade.


The natural rate of unemployment is 5¼ percent throughout the longer-term
outlook. Potential GDP rises just over 2 percent per year in 2016 and 2017
and around 2¼ percent thereafter. (See the box “Information Technology and
Labor Productivity” for a discussion of the effects of high-tech investment on
the economy’s long-run productive potential.)

The economy is projected to enter 2016 with output a little below its potential
level, unemployment correspondingly above its natural rate, and inflation below the longrun objective of the Committee. In the staff’s long-term forecast, further improvements
in household and business confidence, diminishing uncertainty, and supportive financial
conditions enable real GDP to rise 2¾ percent in 2016. Thereafter, the pace of gains in
real GDP moves down closer to the rate of growth in potential output, in large part
reflecting the progressive withdrawal of monetary accommodation. The unemployment
rate falls through 2016 to 5¼ percent and is roughly unchanged thereafter. Long-run
inflation expectations are assumed to remain well anchored, and, with the margin of slack
in labor and product markets diminishing, consumer price inflation moves up to 2 percent
by 2017. The nominal federal funds rate is 3¾ percent at the end of this decade and
eventually stabilizes at around 4 percent early in the next decade.

Page 32 of 110

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Information Technology and Labor Productivity
Labor productivity—output per hour worked—is a crucial determinant of potential output,
long-run real interest rates, and, ultimately, living standards. As shown by the bars in the
figure below, output per hour rose 1½ percent per year, on average, from 2004 to 2012 after
having risen 3 percent per year from 1995 to 2004. Below we provide an estimate of the
share of the recent labor productivity growth that can be attributed to information
technology (IT)—including computers, communication equipment, and software—and we
consider the prospects for IT to buttress labor productivity growth in the future.
A growth-accounting framework is commonly employed to decompose gains in labor
productivity into contributions from capital deepening (namely, net investment in
structures, equipment, and software); improvements in labor quality (from education,
training, and experience); and rising multifactor productivity (MFP)—the ability of firms to
produce more output from a given combination of inputs (from, for example, technological
change or improved business practices). With this framework, we can drill down even
further and calculate the separate contributions of IT capital deepening—that is, the greater
use of IT capital throughout the economy—and non-IT capital deepening. We can also
distinguish MFP increases within IT-producing industries from those elsewhere in the
economy.
Staff research using this framework has found that the combined contribution from IT
capital deepening (the blue portion of the bars in the figure below) and MFP growth for ITproducing industries (the green portion of the bars) accounted for about one-half of the
robust labor productivity gains in the 1995–2004 period and for about one-half of the
marked deceleration in productivity since 2004.1

Labor Productivity Growth Decomposition
3.5

Annualized growth rate, percent

Future scenarios

3.0
2.5
1947-2012 average

2.0

Other factors
MFP: IT-producing industries

1.5

IT capital deepening

1.0
0.5

0.0
1974-95

1995-2004

2004-12

Baseline

Optimistic

Source: Byrne, Oliner, and Sichel (2013).
1

See David M. Byrne, Steven D. Oliner, and Daniel E. Sichel (2013), “Is the Information Technology
Revolution Over?” Finance and Economics Discussion Series 2013–36 (Washington: Board of Governors of
the Federal Reserve System, March), www.federalreserve.gov/pubs/feds/2013/201336/201336pap.pdf.

Page 33 of 110

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Looking ahead, observers hold a wide range of opinions on the future prospects for
IT-fueled labor productivity gains.2 Some believe that the 1995–2004 period was exceptional
and the more recent period is a better guide to the future—that dwindling IT innovation has
weakened MFP growth and IT capital deepening and will continue to do so in the future.
Others believe that recent and prospective improvements in computing and
communications may bring more substantial productivity gains.
To the optimists, the recent surge in the adoption of new computing and communications
technologies evokes the IT-driven boom of 1995 to 2004. Among these emerging trends are
the widespread use of powerful smartphones and tablets, which free workers from
attachment to desktop and even laptop computers, and the rapidly increasing reliance on
“cloud computing”—the purchase of highly efficient computer services delivered through
the Internet—by businesses seeking to avoid costly IT investments. Exploiting these new
types of equipment and services may require time-consuming adjustments to business
practices, management structure, and training. Thus the full effect on labor productivity
may only become apparent after these “intangible” investments have been made, as
appears to have been the case for personal computers.
We can use our growth-accounting framework to project the trend rate of labor productivity
growth that might result when firms have completed these adjustments to their production
processes. The two right-most bars in the figure on the previous page explore two such
future scenarios for long-run labor productivity growth. In the baseline scenario (which is
broadly consistent with the staff’s long-run GDP growth rate of 2¼ percent), we assume that
MFP in the IT sector grows at roughly its average rate for the 1974–2012 period, raising
productivity directly and inducing capital deepening through lower investment prices. This
reasonably balanced scenario suggests that labor productivity growth will move modestly
higher in the future, to 1¾ percent. In the optimistic scenario, we assume that new
technologies drive up MFP in the IT sector to about two-thirds of the rapid pace seen in the
1995–2004 period, and that the complementary investments mentioned above also raise
MFP in the non-IT producing industries (part of the orange portion of the bars). In this
scenario, labor productivity growth is noticeably higher, rising to 2½ percent per year.
Neither scenario gives rise to stellar labor productivity growth, but the baseline is a little
better than the pace in recent years, and the optimistic scenario results in labor productivity
growth slightly above the 1947–2012 average (the dashed line). In each scenario, labor
productivity growth is damped by the diminished contribution from labor quality (part of the
orange portion of the bars) anticipated because of slower increases in educational
attainment. Nevertheless, both of these speculative scenarios include a substantial
contribution to labor productivity growth from the production and use of IT.

For example, see Robert J. Gordon (2012), “Is U.S. Economic Growth Over? Faltering Innovation
Confronts the Six Headwinds,” NBER Working Paper Series 18315 (Cambridge, Mass.: National Bureau of
Economic Research, August) for a pessimistic view, while Martin Baily, James Manyika, and Shalabh Gupta
(2013), “U.S. Productivity Growth: An Optimistic Perspective,” International Productivity Monitor, vol. 25
(Spring), pp. 3–12, provide a more upbeat assessment.

Page 34 of 110

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June 12, 2013

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

5
2012

2013

2014

2015

4/20

6/15

8/3

9/14

10/26

12/7

2011

1/18

3/7

4/18

6/13

7/25

9/5

10/17

12/5

2012

1/23

3/13

4/24

6/12

2013

Tealbook publication date

Unemployment Rate
Percent, fourth quarter
9.5

9.5

9.0

8.5

8.0
7.5

8.0
2013

2012

7.5

7.0

2014

7.0

2015

6.5

6.0

5.5

5.0

4/20

6/15

8/3

9/14

10/26

12/7

2011

1/18

3/7

4/18

6/13

7/25

9/5

10/17

12/5

2012

1/23

3/13

4/24

6/12

5.0

2013

Tealbook publication date

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

2.5
2015

2.0

1.5

1.5
2014

1.0

2012

2013

1.0

0.5

0.0

0.5

4/20

6/15

8/3

9/14

10/26

2011

12/7

1/18

3/7

4/18

6/13

7/25

2012

9/5

10/17

12/5

1/23

2013

Tealbook publication date

Page 35 of 110

3/13

4/24

6/12

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Page 36 of 110

June 12, 2013

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International Economic Developments and Outlook
Prospects for foreign economic growth remain lackluster, especially for 2013.
Foreign real GDP rose only 2 percent in the first quarter of this year, down from
2.3 percent in the last quarter of 2012. Economic growth in the emerging market
economies (EMEs) slowed sharply following an outsized fourth-quarter performance, led
by a step-down in Chinese growth. In contrast, GDP picked up in the advanced foreign
fourth quarter. The pace of decline in the euro area moderated, and Japanese growth
surged amid Abenomics-inspired improvements in confidence and declines in the yen.
However, on net, total foreign growth in the first quarter came in ¼ percentage point
below our April Tealbook estimate, as faster-than-expected growth in the AFEs was more
than offset by disappointing activity in the EMEs.
This weaker momentum together with more recent soft data led us to mark down
foreign growth nearly ½ percentage point in the second quarter and ¼ percentage point in
the third quarter. We now project foreign GDP to rise 2¼ percent in the current quarter
before accelerating to nearly a 3¼ percent pace by year-end and to 3½ percent by 2015,
sustained by the stronger U.S. expansion, a return to trend growth in China, and
supportive policies by most foreign central banks.
In this outlook, the recession in the euro area comes to an end later this year.
Indeed, as financial strains in the region have declined substantially since mid-2012,
output appears to be contracting less rapidly, and we project a modest recovery will take
hold next year amid diminishing fiscal consolidation, accommodative monetary policy,
and a stronger global recovery. However, there remains a risk that the euro-area
recession may be more severe and more prolonged than we are anticipating, a scenario
we explore in the Risks and Uncertainty section. Prospects outside Europe also appear
quite uncertain. In particular, we have been surprised by the slowdown this year in China
and in the EMEs more generally, and are alert to the possibility that this soft patch might
last longer than we are expecting.
Foreign inflation is on track to step down from 2.3 percent in the first quarter to
less than 2 percent in the second quarter, owing to persistent resource slack and lower
commodity price pressures. Going forward, we expect foreign inflation to average

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Int’l Econ Devel & Outlook

economies (AFEs), albeit at a pace of only 1.5 percent, following a contraction in the

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

Recent Foreign Indicators
Nominal Exports

Industrial Production
Jan. 2008 = 100

Int’l Econ Devel & Outlook

Jan. 2008 = 100

140

Foreign
AFE
EME*

Foreign
AFE*
EME**

130

115

120

110

105

100

60
2008

2009

2010

2011

2012

120

2013

80
2008

* Excludes Venezuela.

2009

2010

2011

2012

2013

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

Retail Sales

Employment
12-month percent change

4-quarter percent change

Foreign
AFE*
EME**

Foreign
AFE
EME*

5
4

15
3
10

2
1

0
0
-1
-5
2008

2009

2010

2011

2012

2013

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

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

-2
2008

2009

2010

2011

2012

2013

* Excludes Argentina and Mexico.

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

5
4

4
2
2
1

-2

-1
2008

2009

2010

2011

2012

2013

-4
2008

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

Page 38 of 110

2009

2010

2011

2012

2013

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The Foreign Outlook

2012
Q3

2013
Q2

2014

2015

2.5
2.6

1.7
1.7

2.3
2.1

2.0
2.3

2.3
2.7

3.0
3.0

3.3
3.3

3.5
3.5

Advanced foreign economies
Previous Tealbook

.7
.9

.3
.3

-.2
-.4

1.5
.8

1.3
1.2

1.7
1.6

2.0
1.9

2.3
2.3

Emerging market economies
Previous Tealbook

4.3
4.2

3.2
3.2

4.8
4.8

2.4
3.8

3.3
4.2

4.3
4.5

4.7
4.7

4.8
4.8

2.3
2.3

2.2
2.3

2.3
2.3

2.3
2.4

1.9
2.0

2.2
2.2

2.6
2.6

2.7
2.7

Advanced foreign economies
Previous Tealbook

1.4
1.4

.8
.8

1.6
1.6

.8
.9

.6
1.1

1.2
1.2

1.7
1.7

1.9
1.9

Emerging market economies
Previous Tealbook

3.1
3.1

3.4
3.4

2.8
2.8

3.5
3.6

2.9
2.7

2.9
3.0

3.3
3.3

Real GDP
Total foreign
Previous Tealbook

Consumer Prices
Total foreign
Previous Tealbook

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

Real GDP
Percent change, annual rate
Current
Previous Tealbook

Percent change, annual rate

Emerging market economies

15
10

0
Advanced foreign economies

Total foreign

-5

-10
2008 2009 2010 2011 2012 2013 2014 2015

Consumer Prices
Percent change, annual rate

Total foreign

Percent change, annual rate
Emerging market economies

-2

Advanced foreign economies

-4
2008 2009 2010 2011 2012 2013 2014 2015

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-2

Int’l Econ Devel & Outlook

(Percent change, annual rate)

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2¼ percent in the second half of 2013 and nearly 2¾ percent over the rest of the forecast
period. Our outlook for foreign inflation is little changed from the April Tealbook, as the
effect of a modest markup of oil prices is roughly offset by the softer near-term outlook
for economic activity. Amid subdued inflation and concerns about growth, several
foreign central banks, notably the European Central Bank (ECB), have loosened
monetary policy since the time of the April Tealbook.

ADVANCED FOREIGN ECONOMIES
Int’l Econ Devel & Outlook

Following a mild contraction in the final quarter of 2012, AFE output rose
1.5 percent at an annual rate in the first quarter, double the pace we had estimated in the
April Tealbook. Economic activity was surprisingly strong in Canada and Japan, thanks
to vigorous exports. In the United Kingdom, inventory rebuilding helped GDP advance
despite stagnating final demand. Euro-area output shrank for the sixth consecutive
quarter but the pace of contraction slowed, as private consumption growth turned
positive. Growth in the AFEs is expected to average 1½ percent through the rest of 2013,
slightly higher than previously forecast, reflecting better-than-expected data in Canada
and Japan. Thereafter, we expect diminishing fiscal drag, accommodative monetary
policies, and improving private balance sheets to lift AFE growth to 2 percent in 2014
and 2¼ percent in 2015, unchanged from the April Tealbook.
First-quarter AFE inflation came in about as expected at ¾ percent and should
remain near that pace in the current quarter. We project inflation to rise to 1¼ percent in
the second half of 2013, 1¾ percent in 2014, and nearly 2 percent in 2015, as activity
firms and Japan overcomes deflation. Consistent with their medium-term inflation goals,
we continue to expect the Bank of England (BOE) and the Bank of Japan (BOJ) to
deliver additional stimulus.

Euro Area
Euro-area GDP declined 0.8 percent at an annual rate in the first quarter, a slower
pace of contraction than the 1½ percent decrease registered in the second half of 2012, as
private consumption stabilized. On balance, data for the second quarter point to a further
but smaller contraction of ¼ percent, broadly consistent with our forecast in the April
Tealbook. Although retail sales declined in April, industrial production increased further,
and the composite PMI rose through May.

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Going forward, we see euro-area GDP bottoming out in the second half of this
year before expanding an anemic 1¼ percent in 2014 and 2 percent in 2015. While the
timing of the economy’s exit from recession is necessarily uncertain, a number of factors
should support the recovery: Monetary policy will remain quite accommodative,
financial stresses have eased considerably since mid-2012, external demand from the
United States and elsewhere is projected to firm, and the pace of fiscal consolidation is
slated to substantially diminish. Indeed, concern about the economic effects of
budget-cutting led the European Commission to extend the deadlines for some euro-area
This extension supports our forecast of a noticeable reduction in fiscal drag in 2013. (See
the box “Recent Changes in European Fiscal Policy.”)
Data through May suggest euro-area inflation has remained below 1 percent in the
second quarter. With the output gap continuing to widen, we expect inflation to remain
subdued for the rest of the year before gradually rising to 1¾ percent by the end of 2015.
Our forecast for inflation is little changed from that in the April Tealbook.
As anticipated, the ECB cut its benchmark policy rate 25 basis points to
0.5 percent in May and left it unchanged in June. We expect the ECB to keep its main
policy rate steady until late 2015 and possibly introduce measures to reduce funding costs
for small- and medium-sized firms.

Japan
Real GDP rose a better-than-expected 4.1 percent in the first quarter, driven by a
jump in exports and strong private consumption. The economic recovery appears to have
continued at a rapid pace in the current quarter, supported by highly accommodative
fiscal and monetary policy. In April, industrial production and exports rose robustly and,
in May, the manufacturing PMI moved further into expansionary territory and consumer
confidence reached a new multiyear high. Given these encouraging indicators, we
revised up our second-quarter growth estimate ½ percentage point to 3¼ percent.
Although Japan’s stock price index has plunged and the yen has appreciated in recent
weeks, both remain at more favorable levels than in the first quarter.
Going forward, we expect GDP growth to be around 3 percent through early 2014
before dropping to an average pace of only ½ percent over the remainder of the forecast
period, reflecting fiscal retrenchment—including two planned consumption tax hikes—

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Int’l Econ Devel & Outlook

countries, including France and Spain, to reduce fiscal deficits below 3 percent of GDP.

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Recent Changes in European Fiscal Policy

Int’l Econ Devel & Outlook

In recent months, as euro‐area output has fallen further and unemployment has continued
to rise, the emphasis of European authorities on aggressive near‐term fiscal austerity has
eased somewhat. As a consequence, we have moderated our estimate of fiscal drag on
euro‐area growth over the forecast period. Our analysis supports the view that, as long as
the commitment to fiscal adjustment remains credible, a more gradual pace of deficit
reduction should be beneficial for both near‐term growth and the longer‐term fiscal health
of the euro area.
Throughout most of the euro‐area crisis, the European Commission (EC) and core European
governments have trumpeted the need for fiscal consolidation. Authorities have insisted
that countries conform to the excessive deficit procedure, under which budget deficits must
be brought below 3 percent of GDP on a rigid timeline. When countries missed their initial
deadlines—in part because the targets were overly ambitious and based on optimistic
economic forecasts—European authorities altered adjustment paths only slightly and
required additional fiscal consolidation measures; this consolidation weighed further on
growth. Consequently, even though euro‐area countries have reduced their structural
budget deficits, particularly in the periphery, actual deficits have come down by less because
of the negative effect of lower growth on tax revenues (see upper‐left figure on the next
page).1
However, amid a deepening recession and increasing evidence that contractionary fiscal
policy was weighing on growth in core as well as peripheral countries, European authorities
began late last year to signal some flexibility. In particular, the EC indicated that it would
tolerate some fiscal slippage if GDP growth turned out weaker than forecast, provided that
countries made the required reduction in structural deficits. In addition, France and the
Netherlands announced they would not introduce further fiscal consolidation, despite
acknowledging that they would miss headline deficit targets this year. Most recently, the EC
recommended that the European Council grant some leeway to France, the Netherlands,
Portugal, Poland, Slovenia, and Spain in exchange for accelerated structural reforms.2 For
example, the deadline for bringing deficits down to 3 percent of GDP was extended by two
years for France and Spain (to 2015 and 2016, respectively) and by one year for the
Netherlands (to 2014).
Taking these developments into account, since late last year, we have reduced our
projection of the drag on real GDP growth from fiscal consolidation about ¼ percentage
point of GDP per year in the 2013–15 period (see upper‐right figure on the next page).
Moreover, our analysis suggests that there should be scope to further back‐load
consolidation efforts. To be sure, up‐front cuts were regarded by some as essential to
establishing fiscal credibility among investors early on in the euro‐area crisis. However,
several years of deep budget cuts, along with resultant shortfalls in growth, likely have
diminished the benefits of such signaling.

The structural deficit is the deficit that would prevail at full employment and absent one‐off changes
to taxes and spending and thus abstracts from cyclical movements in the economy.
2
These recommendations will likely be approved by the European Council later in June.

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Indeed, the drop in output in the front‐loaded consolidation is so severe that the debt‐to‐
GDP ratio does not improve at all in the near term relative to the more gradual consolidation
(see lower‐right figure). Beyond the near term, the debt‐to‐GDP ratio in the front‐loaded
consolidation rises above the back‐loaded consolidation because spending cuts taper off at
longer horizons in the front‐loaded consolidation, whereas they increase in the gradual
consolidation.
Consequently, these findings support the notion that too much austerity too soon can be
counterproductive, especially if the purpose is to put public debt on a more sustainable path.

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Int’l Econ Devel & Outlook

Simulations using the Board staff’s open‐economy model, SIGMA, suggest that for the same
cumulative amount of fiscal restraint, front‐loaded consolidation depresses the path of
output by more than gradual, back‐loaded consolidation (see lower‐left figure on this page).
This is because, with sticky prices and wages, private demand cannot adjust fast enough to
offset the effects of abrupt budget cuts in the front‐loaded consolidation, producing a very
sharp contraction in the short run. Moreover, in the present situation, the effect of the
front‐loaded consolidation is aggravated because the ECB is constrained by the zero lower
bound; conversely, most of the budget cuts under back‐loaded consolidation occur once
interest rates have risen off their floor, so that the ECB can partially offset the fiscal drag
through monetary easing.

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and fading impetus from past yen depreciation. Beyond the current quarter, our outlook
is unchanged since the April Tealbook, but we are closely monitoring developments in
financial markets and the implementation of Abenomics.
Consumer prices declined in the first quarter given persistently negative core
inflation and surprisingly moderate import price inflation. In April, however, consumer
prices edged up, supporting our forecast for slightly positive inflation in the current
quarter. Inflation should creep up further thereafter as the BOJ pursues its aggressive

Int’l Econ Devel & Outlook

asset purchase program and the sharp depreciation of the yen since late last year passes
through into domestic prices. Accordingly, we continue to project that, net of the effect
of consumption tax hikes, inflation will rise to 1¼ percent by the end of 2015, still below
the BOJ’s new 2 percent target but significantly improved from the deflation of previous
years.

United Kingdom
First-quarter GDP rose 1.3 percent, 1 percentage point more than we had
estimated in the April Tealbook. The upside surprise was concentrated in inventory
accumulation, with final domestic demand and net exports making small negative
contributions to GDP growth. More recent monthly data were mixed, with retail sales
sliding in April but the PMIs firming through May. As a result, we continue to expect
GDP growth to remain subdued, averaging about1½ percent through the end of this year
before increasing to 2¼ percent in 2014 and 2½ percent in 2015. This gradual
improvement is predicated on continued accommodative monetary policy, diminished
fiscal drag, and the projected recovery in the euro area.
Core consumer prices in April were weaker than we had anticipated, leading us to
mark down our second-quarter estimate of overall inflation to 1 percent. Smoothing
through the volatility introduced by the phasing-in of a large university tuition fee hike,
we project that inflation will be near 2 percent through 2015, unrevised from the April
Tealbook. With inflation in check and ample resource slack, we maintain our call for
additional monetary easing—possibly through the provision of forward guidance—
following the arrival of Mark Carney as governor of the BOE on July 1.

Canada
Following a 0.9 percent increase in the last quarter of 2012, real GDP growth in
Canada stepped up to 2.5 percent in the first quarter of 2013, 1 percentage point higher

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than we had estimated in the April Tealbook. The first-quarter figure was boosted by
surprisingly robust exports. April trade data suggest some weakening of net exports, but
domestic indicators show greater strength. In May, the manufacturing PMI jumped to
53.2 after lingering near 50 for several months, and stronger labor market conditions,
following some recent softness, led the unemployment rate to tick down to 7.1 percent.
All told, we see output growth averaging just above 2 percent through year-end before
picking up to 2½ percent in 2014 and 2015. Compared with the April Tealbook, this

Canadian consumer price inflation weakened in April because of falling retail
energy prices and softness in core components. We expect inflation to moderate to an
annual rate of 1 percent in the second quarter, down from 1.6 percent in the first quarter.
Thereafter, the projected firming of economic activity should gradually push inflation to
near the 2 percent target by the end of the forecast period. Given our outlook for mild
inflation along with still-high unemployment, we continue to anticipate the Bank of
Canada will maintain its accommodative stance and hold its main policy rate unchanged
until the second half of 2014.

EMERGING MARKET ECONOMIES
With nearly all of the first-quarter GDP data in hand, we estimate that growth in
the EMEs slowed sharply to a meager 2½ percent from its robust pace of 4.8 percent at
the end of last year. The robust growth in the fourth quarter was supported by strong
demand from China and an apparent revving up of production for export in anticipation
of a firming of global activity. With indications that Chinese activity had slowed in the
first quarter and that the advanced economies had recovered at only a tepid pace, we were
already expecting a step-down in EME growth in the April Tealbook. But growth turned
out to be 1½ percentage points weaker than we had anticipated.
The surprising depth and breadth of the first-quarter slowdown suggests weaker
underlying momentum in the EMEs. This view has been reinforced by recent indicators
that point, on balance, to subpar growth in the current quarter. Although retail sales held
up well, readings on industrial production and exports remained weak and PMIs
moderated a bit. Accordingly, we revised down EME growth by nearly 1 percentage
point in the current quarter to 3¼ percent and by ½ percentage point to just under
4 percent in the third quarter.

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Int’l Econ Devel & Outlook

forecast is a bit higher through mid-2014 and unchanged thereafter.

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We project EME growth to rise to about 4¾ percent over the remainder of the
forecast period, in the neighborhood of its trend pace, supported by accommodative
policies and the recovery in the advanced economies. An anticipated end to the soft
patch in Chinese activity should also provide support for the rest of emerging Asia and
for commodity producers. That said, we recognize the possibility of less favorable
outcomes, especially if the projected recovery in the advanced economies is slower than
expected or if weakness in China persists.

Int’l Econ Devel & Outlook

We estimate EME inflation moved down to less than 3 percent in the current
quarter from 3.5 percent in the first, largely reflecting a moderation of earlier food price
pressures in some countries. Going forward, we see inflation moving back up to
3¼ percent in 2014 and 2015. Amid subdued inflation and weak economic growth,
central banks in several countries, including Israel, India, Korea, and Thailand, lowered
policy rates recently. In contrast, the central bank of Brazil raised its policy rate again to
rein in inflation, notwithstanding continued disappointing economic growth.

China
The official four-quarter GDP growth rate for China, which was available at the
time of the April Tealbook, suggests that quarterly GDP growth stepped down sharply in
the first quarter, to an annual rate of just 6½ percent, compared with 9½ percent in the
fourth quarter of last year. Recent indicators point to continued subdued activity—by
historical Chinese standards—in the current quarter. Although retail sales growth
improved a touch in April and May relative to the first quarter, investment growth was
about flat and industrial production decelerated. Consequently, we now estimate that
GDP growth will remain at 6½ percent in the current quarter, about ¾ percentage point
lower than forecast in the previous Tealbook. However, with policies remaining
accommodative and the advanced economies expected to pick up steam, we see Chinese
growth rising to a near-trend pace of about 8 percent by the end of this year and then
remaining around that pace through 2015.
Food prices have been volatile in China so far this year. Increases in these prices
caused headline inflation to pick up to 3½ percent at an annual rate in the first quarter,
and more recent declines in food prices will likely lead inflation to subside to about
2 percent in the current and third quarters. Overall, we expect inflation will average
around 2½ percent this year and 3 percent in 2014 and 2015.

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June 12, 2013

Other Emerging Asia
Elsewhere in emerging Asia, first-quarter GDP growth was disappointing,
dropping to 1¼ percent, about 2 percentage points below our April Tealbook estimate.
Notably, growth turned negative in Malaysia, Taiwan, and Thailand. We had anticipated
that the moderation of growth in China would spill over into these economies and that
some payback from outsized growth in the fourth quarter would weigh on the region’s
performance. However, the slowdown was more pronounced than we had anticipated, as
exports, particularly to China, and fixed investment (which in these economies tends to
quarter, along with the soft tone of recent data, prompted us to mark down the near-term
outlook for the region. We now see GDP growth picking up to only 3 percent in the
current quarter. Thereafter, growth is projected to rise to 4½ percent by next year,
supported by accommodative policies, faster Chinese economic growth, and firming of
economic activity in the advanced economies.
We estimate that inflation dipped to an annual rate of 1¾ percent in the current
quarter, reflecting weak growth and a reversal of earlier increases in food prices. As the
economies in the region gather steam, we expect inflation to rise to 3½ percent in 2014
and in 2015.

Latin America
Economic performance across Latin America was also disappointing. In Mexico,
GDP growth was just 1¾ percent in the first quarter, down from 2¾ percent in the
previous quarter and 1½ percentage points below our previous Tealbook estimate. The
manufacturing and agricultural sectors were surprisingly weak, and exports contracted.
This weakness, along with a drop in industrial production in April and downward
revisions to the projection for U.S. manufacturing output, led us to mark down Mexico’s
growth by about 1¼ percentage points, on average, in the current and third quarters. We
now expect Mexican real GDP to rise only 2¼ percent in the current quarter before
accelerating to a pace of almost 4 percent in 2014 and 2015, broadly mirroring the
contour of U.S. manufacturing output.
In South America, GDP growth declined to 1½ percent in the first quarter from
4½ percent in the fourth. Economic activity cooled across the region, largely driven by a
decline in demand for commodities; in Chile, for example, growth fell from 8 percent in
the fourth quarter to 2 percent in the first as copper exports plunged. In Brazil, by

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Int’l Econ Devel & Outlook

be well-correlated with exports) were surprisingly weak. The weakness in the first

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June 12, 2013

contrast, growth fell only slightly, to 2¼ percent, in the first quarter from 2½ percent at
the end of last year. However this rate was ½ percentage point lower than we had
expected, denting prospects for a vigorous recovery after a lackluster performance over
the past two years. In the current quarter, growth is expected to increase to 2¾ percent,
consistent with the recent pickup in manufacturing activity. Thereafter, growth should
recover further to reach 4 percent in 2015, aided by generally supportive macro policies,
the recovery in the advanced economies, and an improvement in Chinese growth that
should contribute to increased demand for commodities. The outlook for Brazil is a little
Int’l Econ Devel & Outlook

weaker than we wrote down in April, reflecting momentum from the subdued
first-quarter outcome and tighter monetary policy than previously anticipated.
Mexico’s inflation is on track to rise to 5½ percent in the current quarter, partly
reflecting a hike in administered public transport prices. Once this effect dissipates next
quarter, inflation will likely fall back to about 3½ percent over the remainder of the
forecast period, about the same as in the previous Tealbook.
In Brazil, inflation likely moderated further in the current quarter but remained
elevated amid persistent food price pressures. Twelve-month inflation came in at about
6½ percent in April and May, the upper end of the central bank’s tolerance range, and
inflation expectations remained elevated, prompting the central bank to raise the policy
rate 50 basis points to 8 percent in late May. Some easing of food price pressures,
together with further monetary tightening, should bring inflation to 5½ percent by next
year.

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June 12, 2013

Evolution of Staff’s International Forecast

Total Foreign GDP
Percent change, Q4/Q4

6
5

2012

2015

2014

2013

2
1

4/20
2011

6/15

8/3

9/14

10/26

12/7

1/18
2012

3/7

4/18

6/13

7/25

9/5

10/17

12/5

1/23
2013

3/13

4/24

6/12

Tealbook publication date

Total Foreign CPI
Percent change, Q4/Q4

4.0
3.5
3.0

2015

2014

2013

2012

2.5
2.0
1.5
1.0
0.5

4/20
2011

6/15

8/3

9/14

10/26

12/7

1/18
2012

3/7

4/18

6/13

7/25

9/5

10/17

12/5

1/23
2013

3/13

4/24

6/12

0.0

Tealbook publication date

U.S. Current Account Balance
Percent of GDP

0
-1

2012

2013

-2
2015
-3
2014

-4
-5

4/20
2011

6/15

8/3

9/14

10/26

12/7

1/18
2012

3/7

4/18

6/13

7/25

Tealbook publication date

Page 49 of 110

9/5

10/17

12/5

1/23
2013

3/13

4/24

6/12

-6

Int’l Econ Devel & Outlook

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Int’l Econ Devel & Outlook

(This page is intentionally blank.)

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June 12, 2013

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June 12, 2013

Financial Developments
Financial markets were volatile over the intermeeting period as investors digested
the implications of incoming economic data and Federal Reserve communications.
Equity prices and longer-term interest rates moved higher, on balance, boosted in part by
somewhat better-than-expected U.S. economic data and an accompanying improvement
in investor sentiment. Federal Reserve communications over the period were reportedly
read by market participants as suggesting that downward adjustments to the FOMC’s
flow-based asset purchase program might occur earlier than anticipated, and may also
have contributed to the steepening of the expected path of the federal funds rate. These
changes in policy expectations, and an associated increase in uncertainty about the
outlook for policy, boosted longer-term interest rates and appeared to damp the gains in
equity prices.
All told, yields on intermediate- and longer-term Treasury securities rose
substantially, and stock prices increased modestly. Market-based measures of uncertainty
about both short- and long-term interest rates rose sharply but remained lower than their
averages over the past few years. TIPS-based measures of inflation compensation moved
Reserve communications. Risk spreads on corporate bonds changed little on balance.
Ten-year sovereign yields in most foreign economies rose substantially, with increases in
Japan coming despite the Bank of Japan’s accelerated asset purchases. The dollar
appreciated, particularly against emerging market economy (EME) currencies amid
weaker readings on EME activity.
Financing flows were generally solid over the intermeeting period as a whole, but,
in some sectors, the pace of borrowing waned in response to the rise in rates and market
volatility. Bond issuance by nonfinancial corporations was robust again in May, but
high-yield issuance—which had been boosted by refinancing activity—declined late in
the period. Issuance of syndicated loans was sizable again in April and May, and
issuance of commercial mortgage-backed securities (CMBS) and asset-backed securities
(ABS) remained solid. Consumer credit expanded further in April, as the recent pattern
of significant increases in auto and student loans and nearly flat balances on credit card
accounts continued. Meanwhile, the volume of home mortgage refinancings slowed from
elevated levels as mortgage rates backed up. Growth in bank credit moderated in April

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Financial Developments

down, perhaps as investors reacted to the somewhat less accommodative tone of Federal

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June 12, 2013

Policy Expectations and Treasury Yields
Selected Interest Rates
Percent

Percent

2.3
May Employment
FOMC report

Chairman’s
testimony

10-year Treasury
yield (left scale)

2.1

1.1

Consumer
Confidence
Index

Employment
report
1.0
0.9
0.8

1.9
June 2015
Eurodollar (right scale)

0.7
1.7
0.6
1.5

0.5
May 1

May 3

May 7

May 9

May 14

May 17

May 22

May 27

May 30

June 4

June 7

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

Implied Federal Funds Rate

Percent
2.0

Mean: June 11, 2013
Mean: April 30, 2013
Mode: June 11, 2013
Mode: April 30, 2013

Distribution of Modal Timing of First Rate Increase
from the Desk’s Dealer Survey
Percent
50

Recent: 21 respondents
May FOMC: 21 respondents

1.5

30
1.0

Financial Developments

20
0.5

10
0

0.0
2014

2015

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2013
2014
2015
2016
Source: Desk’s dealer survey from June 10, 2013.

2016

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

Treasury Yield Curve

Inflation Compensation
Percent

Percent
4.0

4
Daily

Most recent: June 11, 2013
Last FOMC: April 30, 2013

3.5

May
FOMC

5 to 10 years ahead

3.0

2.5
2.0

1.5

June
11

1.0

Next 5 years*
0.5
0.0
1

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

2010

2011

2012

2013

Note: Estimates based on smoothed nominal and inflationindexed Treasury yield curves.
* Adjusted for lagged indexation of Treasury inflationprotected securities (carry effect).
Source: Barclays PLC and staff estimates.

Page 52 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

and May, as the expansion in commercial and industrial (C&I) loans slowed significantly
and banks’ securities holdings decreased. M2 expanded at roughly the same moderate
pace as in the first quarter of the year.

TREASURY YIELDS, POLICY EXPECTATIONS, AND AGENCY MBS YIELDS
Treasury yields and policy rate expectations rose sharply over the intermeeting
period amid some better-than-expected U.S. economic data and Federal Reserve
communications that were interpreted by market participants as signaling a possible
earlier-than-expected reduction in the asset purchase program. Markets appeared to focus
most intently on the April and May employment reports and improved readings on
consumer confidence, as well as on the Chairman’s Joint Economic Committee (JEC)
testimony. Anecdotal reports suggest that actual and expected convexity-hedging flows
may have amplified the rise in Treasury yields, at least for a time. All told, the 10-year
nominal Treasury yield climbed 54 basis points, while the 5-year and 30-year yields rose
43 basis points and 45 basis points, respectively.
Staff models attribute the bulk of the rise in long-term Treasury yields to an
increase in term premiums. The rise in term premiums, in turn, likely reflected a
program, and perhaps also some increase in investors’ willingness to take on risk in light
of the more positive U.S. economic outlook. Greater uncertainty about future Federal
Reserve policy—with regard to both the purchase program and the path of the federal
funds rate—also likely contributed to the rise in term premiums. Indeed, market-based
measures of uncertainty about both short- and long-term rates rose sharply after the
Chairman’s JEC testimony and remained elevated subsequently, although the measures
stayed low by historical standards. 1
Market participants appeared to revise up their expectations about the path of the
federal funds rate over the period. 2 Forward rates two to three years ahead derived from
overnight index swaps shifted up 30 to 50 basis points, likely reflecting both an increase
1

Reflecting investors’ assessment that rates could rise further, the on-the-run 10-year Treasury
note traded deeply special in the repo market in late May and early June. The relatively small supply of the
single issue also contributed to the security’s scarcity. Term repo rates for this security and market
commentary suggested that financing rates were expected to normalize following the settlement of the
reopening auction of the 10-year Treasury note on June 17.
2
The effective federal funds rate averaged 11 basis points over the intermeeting period, with the
intraday standard deviation averaging about 5.33 basis points.

Page 53 of 110

Financial Developments

reassessment of the pace and ultimate size of the Federal Reserve’s asset purchase

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

in the expected path for the federal funds rate and an increase in money market term
premiums. The modal path based on interest rate caps also shifted up over the
intermeeting period, suggesting that market participants expect the federal funds rate to
lift off sooner than they did at the time of the previous FOMC meeting. However, some
of the rise in the estimated modal path of the policy rate likely also reflected higher term
premiums.
In contrast to the readings from financial market quotes, the results from the Open
Market Desk’s latest Survey of Primary Dealers showed little material change, on
balance, in the dealers’ expectations for the target federal funds rate or in the median
expectation for Federal Reserve asset purchases. The difference between the market
quotes and the dealer survey results may reflect, in part, a divergence between the views
of the economists at dealer firms (the respondents to the Desk’s survey) and market
participants that are actively trading in fixed-income markets. Indeed, on a special
question in the survey, the dealer economists attributed the rise in longer-term interest
rates primarily to changes in perceptions regarding the FOMC’s view of appropriate
policy and heightened uncertainty about the FOMC’s view of appropriate policy,
suggesting the dealer economists thought that market views had changed.

Financial Developments

Both TIPS-based and swaps-based measures of inflation compensation decreased
over the intermeeting period, but both the near- and longer-term measures remained close
to the middle of their ranges over the past two years. The 5-year measure of inflation
compensation moved down 26 basis points and the 5-to-10–year-ahead measure declined
27 basis points, perhaps in part because investors came to anticipate that monetary policy
was going to be somewhat less accommodative going forward than they had expected.
The softer-than-expected reading of the CPI for April likely also contributed to the
decline in near-term inflation compensation.
Yields on agency mortgage-backed securities (MBS) rose more than those on
comparable-maturity Treasury securities, likely reflecting investors’ reassessment of the
outlook for the Federal Reserve’s MBS purchases. Indeed, the option-adjusted spread for
production-coupon MBS, which often reacts sensitively to changes in market
participants’ expectations for asset purchases, increased more than 25 basis points over
the intermeeting period. Thirty-year conforming mortgage rates rose in line with the rise
in MBS yields and ended the period about 60 basis points higher at 3.89 percent.

Page 54 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

TREASURY AND AGENCY FINANCE AND MARKET FUNCTIONING
The Treasury Department auctioned $203 billion in nominal securities and
$13 billion in 10-year TIPS over the intermeeting period. The auctions were relatively
well received, with bid-to-cover ratios in line with recent averages. 3
The Desk conducted outright purchases of Treasury securities and agency MBS as
planned, and the operations did not appear to adversely affect the functioning of either
the Treasury or agency MBS markets. 4 Most measures of liquidity conditions in these
markets were generally stable, as MBS settlement fails stayed low, and Treasury and
MBS trading volumes remained near their historical averages. Dollar-roll-implied
financing rates for the 30-year Fannie Mae 3.0 percent and 3.5 percent coupon securities,
which had been in fairly negative territory last month, drifted up, indicating fewer
settlement pressures in the TBA market for these securities. Over the intermeeting
period, the Desk executed dollar rolls on 7 percent of its scheduled agency MBS
purchases for May settlement, in line with the recent average.
On May 19, the statutory debt limit was reinstated and set at $16.7 trillion, which
was the level of federal debt outstanding on that day, and Treasury Secretary Lew
that its available accounting measures will allow federal debt to remain below the debt
ceiling until after Labor Day. 5

SHORT-TERM FUNDING MARKETS AND FINANCIAL INSTITUTIONS
Conditions in short-term dollar funding markets generally stayed fairly benign
over the intermeeting period. The spread between three-month LIBOR and
comparable-maturity OIS rates increased somewhat, on balance, over the period but
3

In the refunding statement released on May 1, the Treasury announced plans to issue a floatingrate note, starting either in the fourth quarter of 2013 or in the first quarter of 2014, with the 13-week
Treasury bill yield serving as the base rate.
4
Over the intermeeting period, the Desk purchased $58 billion of Treasury securities under the
flow-based program and $90 billion of agency MBS under the flow-based MBS purchase program and the
reinvestment program.
5
The extraordinary measures available to the Treasury include suspending daily reinvestment of
the Treasury securities held by the Government Securities Investment Fund, redeeming existing
investments and suspending new investments in the Civil Service Retirement and Disability Fund, and
suspending the daily reinvestment of dollar balances held by the Exchange Stabilization Fund into Treasury
securities. Based on staff projections, these actions should allow the Treasury to continue operating under
the current debt limit until October.

Page 55 of 110

Financial Developments

declared a “debt issuance suspension period” the next day. The Treasury has indicated

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

Treasury and Agency Finance and Market Functioning
Agency MBS Issuance and Fed Purchases

Nominal Treasury Issuance and Fed Purchases
Billions of dollars

Billions of dollars
400

Monthly rate

350

Gross issuance
Net issuance
Fed purchases by settlement date
H1
H2

300
Apr.
H2

May

250

Gross issuance
Net issuance
Fed purchases by settlement date

200
150

200

150

250

Monthly rate

100

May
Q1Apr.

100

50
0

0
-50
2009

2010

2011

2012

2013

2009

2010

2011

2012

2013

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

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

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

Treasury and MBS Trading Volume

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

5-day moving average

Trillions of dollars
9

May
FOMC

3.0
Monthly average of weekly volume

2.5

Treasury securities

6
2.0

5
4

1.5

Financial Developments

3
June
11

May

2
1

1.0
MBS

0
2009

2010

2011

2012

2013

0.5
2005

2007

2009

2013

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

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

Agency MBS Fails

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

Billions of dollars

2500
4-week moving average

200

Fails charge Fails charge
announced implemented

Fails charge
announced

Fails charge
implemented

160

2000

1
3.0 percent coupon

120
1500

June
11

80
1000

2011

Net fails
(right scale)

500

40
Gross fails
(left scale)

May
29

3.5 percent
coupon

-1
-2

0
-40

2008

2009

2010

2011

2012

2013

-3
2011

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

Page 56 of 110

Source: J.P. Morgan.

2012

2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

remained at the low end of its range over recent years. The spread between the
three-month forward rate agreement and the OIS rate three to six months ahead—a
forward-looking measure of potential funding pressures—was little changed.
In secured funding markets, Treasury general collateral finance (GCF) repo rates
decreased, on net, over the intermeeting period, in large part because of the seasonal
decline in the supply of Treasury securities associated with the timing of tax receipts. In
line with the decrease in the Treasury GCF repo rates, MBS GCF repo rates as well as
other money market rates also declined over the period (see the box “Recent Behavior of
Overnight Money Market Rates”). Haircuts in repo contracts for a range of collateral
types were reportedly little changed on net.
Conditions in commercial paper (CP) markets remained favorable for issuers,
with interest rates on unsecured CP staying at the low end of the range seen over the past
several years. The outstanding amounts of unsecured CP issued by both European and
U.S. financial institutions were little changed on net. In asset-backed commercial paper
markets, amounts outstanding were about unchanged for programs domiciled in the
United States but edged down for those with European sponsors.

improve somewhat over the intermeeting period, likely related in part to further
reductions in nonperforming loans and the generally positive tone of the incoming
economic data. Equity prices for large domestic banks outperformed broader equity
indexes over the period. CDS spreads for the largest bank holding companies (BHCs)
were little changed, on net, and remained near the bottom of their range over the past
five years.
Equity prices for other types of financial institutions, such as insurance companies
and regional banks, also generally outperformed the market. However, agency mortgage
real estate investment trusts were a notable exception, as their equity prices were battered
in response to the underperformance of agency MBS, weak earnings reports, and the rise
in longer-term interest rates.
Responses to the June 2013 Senior Credit Officer Opinion Survey on Dealer
Financing Terms generally suggested little change over the past three months in the credit
terms applicable to important classes of counterparties covered by the survey (see
appendix). Respondents also noted that the use of financial leverage by most classes of

Page 57 of 110

Financial Developments

Market sentiment toward large domestic banking organizations appeared to

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

Short-Term Funding Markets and Financial Institutions
Funding Spreads

Overnight Funding Rate
Basis points

Daily

Basis points

May
FOMC

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

Daily

80
70

MBS GCF repo rate
Treasury GCF repo rate
Fed funds rate

May
FOMC

70
60
50

50
30

40
June
11

June
11

20
10

10
0

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

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

30-Day Rates on Unsecured Financial Commercial
Basis points
Paper

Asset-Backed Commercial Paper Daily
Billions of dollars
Outstandings

5-day moving average
United States
Europe

May
FOMC

Daily

U.S. banks
European banks

175

May
FOMC

150

40
125

Financial Developments

30
June
11

100
June
11

10
June

Aug.
Oct.
Dec.
Feb.
Apr.
2012
2013
Source: Depository Trust & Clearing Corporation.

June

50
June

Aug.
Oct.
Dec.
Feb.
Apr.
2012
2013
Source: Depository Trust & Clearing Corporation.

Stock Prices

CDS Spreads of Large Bank Holding Companies
Apr. 30, 2013 = 100

Daily

S&P 500
Dow Jones Bank Index

June

Basis points
120

May
FOMC

Daily
110
100

June
11

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

800

May
FOMC

700
600
500

400
June
11

300
200

100

60
2012
Source: Bloomberg.

2013

2012
Source: Markit.

Page 58 of 110

2013

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

Recent Behavior of Overnight Money Market Rates
As shown in the figure below, overnight money market rates declined over the intermeeting period,
continuing a downward trend that began at the start of the year. As of June 11, 2013, the Treasury
general collateral finance (GCF) repo, federal funds, and Eurodollar rates are 3 to 16 basis points lower
than at the end of April and are near the bottom of their ranges observed since the zero lower bound
period began.1
The main driver of the recent move in rates appears to be the decline in the Treasury GCF repo rate.
This decline is partly attributable to the decrease in the supply of Treasury collateral in the market as
April tax receipts allow the Treasury to reduce net debt issuance for a time.2 The ongoing asset
purchases by the Federal Reserve and resulting increase in reserve balances may have also contributed
to some of the softening in the overnight federal funds rate. However, at the current level of reserve
balances, this effect is likely very modest.3
Despite the high level of reserve balances and substantially reduced volume of trading in the federal
funds market since 2008, the federal funds rate continues to be strongly correlated with other short‐
term money market rates, particularly the overnight Eurodollar rate.4 Moreover, futures quotes and
basis swaps suggest that market participants expect the federal funds effective rate to remain tightly
linked with a range of money market rates in the future as well.
Money Market Rates*
Basis points
35

Daily
Money market rates as of June 11:
Treasury GCF repo
Federal funds
Eurodollar
Commercial paper

5
9
10
6

0
Jan.

Apr.

July
2009

Oct.

Jan.

Apr.

July
2010

Oct.

Jan.

Apr.

July
2011

Oct.

Jan.

Apr.

July
2012

Oct.

Jan.

Apr.
2013

* 4-week moving average.
Source: Federal Reserve Bank of New York and the Depository Trust & Clearing Corporation.

As the AA rate for nonfinancial commercial paper (CP) reached a near‐record low on April 30, the current level is
somewhat higher. Still, the CP rate shows a downward trend since the start of the year, in line with the other overnight
money market rates.
2
Although Treasury GCF futures from earlier in the year did price in some softening of the repo rate, larger‐than‐
anticipated Treasury tax receipts allowed for a greater reduction in bill issuance than expected, which further
decreased holdings of short‐dated securities by the public.
3
Board staff estimates suggest that the federal funds effective rate responds relatively little to changes in the level
of reserve balances once reserve balances reach an elevated level.
4
The increase in collateral in the market associated with the maturity extention program (MEP) during 2012 may
have put some upward pressure on the Treasury GCF repo rate and increased the spread between the federal funds
effective rate and the Treasury GCF repo rate at that time. Since the end of the MEP, this spread has narrowed.

Page 59 of 110

Financial Developments

Treasury GCF repo
Federal funds effective
Eurodollar effective
Commercial paper

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

Other Domestic Asset Market Developments
Revisions to S&P 500 Earnings per Share

S&P 500 Stock Price Index

Percent

Log scale; Apr. 30, 2013 = 100
4

Monthly

MidMay

May
FOMC

Daily

120
110

0
100

-2
June
11

-4
-6

-8
80

-10
-12

-14
-16
1998
2001
2004
2007
2010
2013
Note: Weighted average of the percent change in the consensus
forecasts of current-year and following-year earnings per share.
Source: Thomson Reuters.

Equity Risk Premium

2011
Source: Bloomberg.

May
FOMC

Log scale, percent
14
Daily
12

May
FOMC

50
40

Expected 10-year real equity return

+
June
11

Financial Developments

2013

Implied Volatility on S&P 500 (VIX)
Percent

Monthly

2012

8
6

June
11

4
2

Expected real yield on 10-year Treasury*

0
-2

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

Corporate Bond Spreads
Basis points

350

10-year high-yield
(right scale)

2013

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

400
Daily

10
2011
2012
Source: Chicago Board Options Exchange.

May
FOMC

Basis points
800
5-day moving average

May
FOMC

650

300
June
11

500

30
June
11

250

200

350

200

10
2011
2012
2013
Note: The A2/P2 spread is the A2/P2 nonfinancial rate minus
the AA nonfinancial rate.
Source: Depository Trust & Clearing Corporation.

10-year BBB (left scale)
150
2011
2012
2013
Note: Spreads over 10-year Treasury yield.
Source: Staff estimates of smoothed corporate yield
curves based on Merrill Lynch data and smoothed
Treasury yield curve.

Page 60 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

counterparties had remained basically unchanged over the same period; however, about
one-fourth of dealers reported an increase in the use of leverage by hedge funds,
continuing the trend observed in recent surveys. A set of special questions asked how
current hedge fund leverage stood in the range defined by the pre-crisis peak and
post-crisis trough. The responses indicated some variation in leverage based on hedge
fund strategy, with the leverage of equity-oriented and macro-oriented funds more
frequently described as having returned closer to their pre-crisis peaks. As has been the
case for several months, respondents reported an increase in the demand for funding on a
secured basis for a number of types of collateral—notably, non-agency RMBS,
high-yield and investment-grade corporate bonds, and CMBS. A second set of special
questions focused on secured financing of distressed assets. Dealers reported that
demand for such financing had increased since the start of 2013 for real-estate-related
loans globally as well as for U.S. corporate assets.

OTHER DOMESTIC ASSET MARKET DEVELOPMENTS
Broad equity price indexes ticked up, on net, over the intermeeting period, as
somewhat better-than-expected economic news was partly offset by the rise in interest
rates. Corporate bond yields rose sharply in line with the rise in comparable-maturity
stable over the period, with measures of trading activity suggesting that liquidity
continued to be reasonably high by historical standards.
Available indicators suggest that the credit quality of nonfinancial corporations
stayed solid. In the first quarter of this year, the aggregate ratio of cash to assets ticked
up and remained near its highest level in 20 years, while the aggregate ratio of debt to
assets stayed at a level well below its historical average for the same period. In April and
May, the volume of nonfinancial corporate bonds that was upgraded by Moody’s
Investors Service was slightly less than the volume downgraded. However, the
six-month trailing bond default rate for nonfinancial firms remained low in April by
historical standards, and the expected year-ahead default rate for nonfinancial firms from
the KMV model continued to inch down in May and June from already low levels,
reflecting an increase in asset valuations. Meanwhile, the C&I loan delinquency rate
continued to fall in the first quarter.

Page 61 of 110

Financial Developments

Treasury yields, leaving spreads little changed on net. Corporate bond markets remained

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

Foreign Developments
10-Year Nominal Benchmark Yields

Stock Price Indexes
Percent

Germany
United Kingdom
Japan

Daily

May
FOMC

3.0

July 3, 2012 = 100
May
FOMC

Daily
Nikkei 225
MSCI Emerging Markets
DJ Euro

2.5

170
155

2.0
June
12

140
1.5
June
12

1.0
0.5

Sep
2012

Nov

Jan

Mar
May
2013

Jul

Sep
2012

Nov

Jan

Mar
May
2013

Jul

Source: Bloomberg.

European 10-Year Sovereign Spreads

Dollar Exchange Rate Indexes

Basis points
Spain
Italy

Daily

110

80
Jul

Source: Bloomberg.

125

0.0
Jul

185

May
FOMC

July 3, 2012 = 100

700

May
FOMC

Daily

Broad
Advanced foreign economies
Emerging market economies

600

107
105
103

Financial Developments

500
101
400
99
June
12

June
12

300

200
Jul

Sep
2012

Nov

Jan

Mar
May
2013

Jul

Flows to Emerging Market Economies Funds
Billions of dollars
May
FOMC

Weekly
Bond funds
Equity funds

95
Jul

Note: Difference between given country’s yield and Germany’s yield.
Source: Bloomberg.

Sep
2012

Nov

Jan

Mar
May
2013

Jul

Source: Federal Reserve Board; Bloomberg.

Foreign Net Purchases of U.S. Treasury
Securities
Billions of dollars, annual rate

600
Official
Private

500

Q1
H2

400
300

200

100

-100

-2

-200

-4

-300

-6

Apr.

-8
Jul

Sep
2012

Nov

Jan

Mar
2013

Source: Emerging Portfolio Fund Research.

May

2011

2012

2013

Note: April 2013 data embargoed until June 14, 2013.
Source: TIC data adjusted for staff estimates.

Page 62 of 110

-400
-500

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

FOREIGN DEVELOPMENTS
Ten-year sovereign yields in the advanced foreign economies rose substantially
over the period. Yields in the United Kingdom and Germany followed U.S. yields higher
after the April U.S. employment report and were up about 40 to 50 basis points on net,
while yields on Japanese government bonds rose nearly 30 basis points. Increased
inflation expectations may have led to higher future expected nominal short rates in
Japan, although higher U.S. rates and unusual bond market volatility may have also
boosted term premiums (see the box “Recent Moves in Government Bond Yields in
Japan”). Japanese equity markets also displayed substantial volatility, rising 13 percent
early in the period and then plunging 18 percent in late May and early June. The sharp
selloff was accompanied by concerns that the positive effects of Japan’s recent macro
policies were losing momentum, but Japanese equity prices are still up significantly since
late last year.
European equity indexes were little changed over the period despite some greater
policy accommodation. The ECB lowered its main policy rate 25 basis points at its May
meeting, although communication after its June meeting appeared to signal that it was
less likely to ease further. In addition, the European Commission proposed that
The euro-area financial crisis remained quiescent; spreads of Italian and Spanish
government debt over German bunds rose slightly, but spreads on Greek debt declined
noticeably, and Portugal issued its first 10-year bond since seeking IMF support in 2011.
The broad dollar appreciated about 1¼ percent. The dollar was little changed, on
average, against the currencies of the advanced foreign economies but rose 2½ percent
against emerging market currencies amid rising U.S. yields, weak incoming data for the
emerging market economies themselves, and monetary policy easing in several EMEs,
including India, Korea, and Thailand. The Reserve Bank of Australia, whose economy is
closely linked to emerging Asia, also cut its policy rate, and the Australian dollar
depreciated significantly against the U.S. dollar. EME equity prices were down about
8 percent on net. Inflows into emerging market equity and bond funds were positive for
most of the period but turned to outflows more recently, and EME credit spreads widened
appreciably on net. In response to recent outflows, Brazil rescinded its tax on foreign
purchases of its domestic bonds. Despite subdued GDP growth, Brazil’s central bank

Page 63 of 110

Financial Developments

near-term fiscal targets be relaxed for some countries in the hope of stimulating growth.

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

Recent Moves in Government Bond Yields in Japan
On April 4, the Bank of Japan (BOJ) announced that it would double the size of Japan’s
monetary base by sharply stepping up its asset purchases. Although yields fell after the
announcement, since then longer‐dated Japanese benchmark yields have increased
substantially. This increase contrasts with the estimated responses to asset purchase
programs by other central banks, leading some analysts to question the efficacy of Japan’s
new program.
However, unlike other central banks, which are focused on stimulating economic activity by
reducing longer‐term interest rates, the BOJ also seeks to raise trend inflation and inflation
expectations, in line with its newly adopted 2 percent target. If the BOJ is successful,
nominal interest rates in Japan ultimately should increase. At the same time, BOJ asset
purchases ought to exert downward pressure on term premiums. Thus, long‐term interest
rates initially could rise or fall, depending on the relative strength of these two effects.

Financial Developments

A rise in inflation expectations should be associated with a rise in future expected short‐term
nominal interest rates. The upper‐left figure on the next page shows the decomposition of
Japan’s 10‐year rate into expected short‐term rates and a term premium, estimated using the
Board staff’s term structure model for Japan. According to this model, an increase in
expected short rates can account for about two‐thirds of the rise in yields since the BOJ’s
announcement, consistent with an increase in inflation expectations (and perhaps also
better prospects for economic activity).
Broadly consistent with this reading, market‐based measures of inflation expectations have
increased. The upper‐right figure on the next page shows five‐year breakeven inflation rates
computed from nominal and inflation‐linked Japanese government bonds (JGBs), as well as
inflation compensation derived from inflation swaps. Although both measures have
changed little, on net, since the BOJ’s April announcement, they are up about 70 basis points
since late last year. Some caution should be used, however, in interpreting these moves, as
these measures have been volatile, and the markets underlying them are relatively illiquid.
The remaining one‐third of the rise in JGB yields since early April is attributable to a higher
term premium (upper‐left figure). While this rise is puzzling given the experience with asset
purchase programs in other countries, it is important to note that term premiums had
declined prior to April in anticipation of BOJ action and that they are down, on net, from the
start of the year. A number of factors may explain their run‐up in recent weeks. First, as
shown in the lower‐left figure on the next page, a substantial portion of the rise in Japanese
yields has occurred since early May and may reflect a global rebalancing of investor
portfolios in reaction to increases in yields in other advanced economies.
In addition, the recent increase in volatility may be boosting the term premium. Volatility in
JGBs (shown in the lower‐right figure on the next page) has spiked to multiyear‐high levels.
Trading in JGB futures, not shown, has been halted several times over the past two months
as large price movements triggered market circuit breakers.

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There is some uncertainty over what accounts for the heightened volatility in Japanese bond
markets. It may be driven by the same underlying factors that have also pushed up volatility
in the bond market in the United States. Another possibility is simply that investors are
uncertain about pricing Japanese bonds in the novel environment of massive asset
purchases that are intended to shift the economy to a regime of positive inflation after
decades of deflation. The implementation of the BOJ’s asset purchase program has also
been cited. The BOJ’s purchases are slated to outstrip the planned net issuance of JGBs for
many longer‐dated maturities. In addition, an infrequent BOJ purchase schedule and lack of
detail regarding the amount and maturity of purchases raised concerns about market
functioning. Following several meetings with market participants, the BOJ made modest
changes to its purchases, but these changes fall short of some market participants’ call for a
more detailed purchase schedule.
In sum, the BOJ’s asset purchase program appears to be boosting inflation expectations.
Success in reducing the term premium is less apparent. However, the term premium’s
recent rise could reflect global factors (in which case the BOJ’s purchases may have
prevented an even larger rise), problems implementing the new program, or simply a
correction to its prior extended decline.
Japanese Inflation Expectations

Percent
BOJ
announcement

Monthly

Percent
2.5
BOJ
announcement
2.0

0.8
Monthly

0.6

Term
premium

5-year
inflation
compensation*

1.5

0.4

Average
expected
short rate

1.0
5-year
breakeven
inflation

0.2

0.5
0.0

0.0
Jan Mar May Jul
2012

Sep Nov Jan Mar May Jul
2013

-0.5
Jan Mar May Jul
2012

Source: Staff calculations and Thomson Reuters.

* Derived from inflation swaps.
Source: Staff calculations and Thomson Reuters.

10-Year Sovereign Bond Yields

Option-Implied Interest-Rate Volatility*
Percent

2.4

Basis points

BOJ
announcement

Daily

Sep Nov Jan Mar May Jul
2013

Basis points
BOJ
announcement

Daily

United
States

2.0

1.6

1.2

0.8

Germany
United
Kingdom

Japan

United
States

75
Japan

Jan

Feb

Source: Bloomberg.

Mar
Apr
2013

May

0.4
Jun

35
Jan

Feb

Mar
Apr
2013

May

70
Jun

* Derived from one-month options on 10-year interest rate swaps.
Source: Bloomberg.

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Financial Developments

Japanese 10-Year Yield Decomposition

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

Business and Municipal Finance
Selected Components of Net Debt Financing,
Nonfinancial Firms
Billions of dollars
Monthly rate
May e

Q1 Apr.

Bonds
C&I loans*
Commercial paper*
Total

2009

2010

2011

2012

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

Annual rate

May
Apr.

2013

2009

2010

2011

2012

2013

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

Note: CLO is collateralized loan obligation. April and May data
are subject to revision at quarter-end.
Source: Thomson Reuters LPC LoanConnector.

Bond Ratings Changes of Nonfinancial Firms

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

Percent of outstandings
40

Annual rate

Monthly rate
Q1

Upgrades

-25

Financial Developments

20
40

Downgrades

-50

Public issuance
Private issuance
Repurchases
Cash mergers

-100

Total

-125

-75

-150

1992 1995 1998 2001 2004 2007 2010 2013

2009

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

25
0

May

Apr.

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

2010

2011

2012

2013

Source: Thomson Reuters Financial, Investment Benchmark
Report; PricewaterhouseCoopers and National Venture Capital
Association, MoneyTree Report.

CMBS Issuance

Municipal Bond Yield Ratio
Billions of dollars

20-year general obligation

Annual rate

Weekly
May
Q1 Apr.

Over Treasury+

Ratio
May
FOMC

1.6
1.4

60
June
6

1.8

1.2
1.0
0.8

Over corporates++

0
2009

2010

2011

2012

0.6
2007 2008 2009 2010 2011 2012 2013

2013

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

+ Bond Buyer GO 20-year index over 20-year Treasury.
++ Bond Buyer GO 20-year index over estimated AAA 20-year yield.
Source: Bond Buyer; Merrill Lynch.

Page 66 of 110

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June 12, 2013

raised its policy rate in response to inflation concerns, in contrast to other EME central
banks.
Foreign official purchases of U.S. securities moderated in March and reversed in
April, as several emerging market countries sold U.S. Treasury securities to fund
intervention efforts to support their currencies. However, data on custody holdings at the
Federal Reserve Bank of New York indicate that foreign official demand recovered some
in May. Foreign private investors also made moderate net sales of Treasury securities in
April, which were partly offset by small purchases of agency bonds and corporate stocks,
while U.S. investors continued to make sizeable purchases of foreign assets.

BUSINESS AND MUNICIPAL FINANCE
On balance, credit flows to nonfinancial businesses remained strong in May,
particularly through corporate bond issuance. Gross high-yield issuance was particularly
elevated early in the intermeeting period, although, as has been the case for several
months, the bulk of the resulting proceeds were reportedly earmarked for refinancing
existing debt. High-yield issuance subsequently decelerated in response to the rise in
interest rates and market volatility, and high-yield bond mutual funds experienced
while C&I loans, discussed later, contracted modestly.
Issuance of syndicated leveraged loans remained robust in April and May as
issuers continued to take advantage of favorable market conditions to refinance and
reprice exisiting loans. Strong investor demand that outsripped new net supply pushed
market prices higher. Issuance of collateralized loan obligations (CLOs) slowed some in
April, reportedly reflecting in part uncertainty regarding a new FDIC regulation that
requires banks that buy such securities to designate them as higher-risk assets. Issuance
year to date, however, surpassed $35 billion, and a pickup in the CLO forward calendar
suggests that the slowdown might be only temporary. Inflows into loan mutual funds
continued to be strong despite outflows from other fixed-income funds late in the
intermeeting period.
Turning to equity financing, gross public issuance has stayed strong in the second
quarter, as solid stock market returns and generally modest volatility since the turn of the
year have continued to support both initial and secondary offerings. Even so, share
repurchases by nonfinancial firms maintained their recent strength in the first quarter,

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Financial Developments

significant outflows late in the period. Nonfinancial CP outstanding increased in May,

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

Household Finance
Mortgage Rate and MBS Yield

Purchase and Refinance Activity
Percent
May
FOMC

30-year conforming
fixed mortgage rate

Mar. 16, 1990 = 100
11000

600
5.5
5.0
4.5

10000

MBA Purchase Index (left scale)

500

9000
8000

400

7000

4.0
June
11

MBS yield

3.5
3.0

6000

MBA Refinance
Index
(right scale)

300
200

5000
May

3000

2.5
2.0
1.5
2010

2011

2012

2013

2000

100

1000
0

0
2001

Note: For MBS yield, the data are daily and consist of the
Fannie Mae 30-year current-coupon rate; for mortgage rate, the
data are weekly before 2010 and daily thereafter.
Source: For MBS yield, Barclays; for mortgage rate, Freddie
Mac (before 2010) and Loansifter (from 2010).

4000

2003

2005

2007

2009

2011

2013

Note: The data are seasonally adjusted by FRB staff.
Source: Mortgage Bankers Association.

Consumer Credit

Prices of Existing Homes
Index peaks normalized to 100

Percent change from a year earlier
110

Monthly

16
Zillow

Student and other loans

100

12
8

FHFA

Mar.
Apr.
Apr.

Financial Developments

CoreLogic

Apr.

4
0

Auto

-4

Credit cards

-12

Mar.

-8

70
20-city S&P/Case-Shiller
60
2005

2007

2009

2011

2013

2007

Source: For FHFA, Federal Housing Finance Agency; for
CoreLogic, CoreLogic; for S&P/Case-Shiller, Standard &
Poor’s; for Zillow, Zillow.

Gross Consumer ABS Issuance

2009

2010

2011

2012

2013

Credit Card Solicitation Mail Volume
Billions of dollars
Student loan
Credit card
Auto

Monthly rate

2008

Note: The data are not seasonally adjusted.
Source: Federal Reserve Board.

Millions of mailings
800

Monthly

700

600

500

May

16
H1

400

Apr.

8
June*

300
200

100
0

2007 2008 2009 2010 2011

2012

2003

2013

* Month to date.
Source: Inside MBS & ABS; Merrill Lynch; Federal Reserve
Board.

2005

* Break in series.
Source: Mintel.

Page 68 of 110

2007

2009

2011

2013

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while cash-financed mergers by such firms continued to slow. Announcements of merger
activity and new share repurchase programs in the second quarter indicate that equity
retirements are likely to continue to significantly outpace gross issuance going forward,
and that the current lull in M&A activity is likely to reverse in the coming months.
Financing conditions for commercial real estate improved a bit over the
intermeeting period, as vacancy and delinquency rates declined somewhat from their
elevated levels. CMBS issuance was strong, and spreads on commercial mortgages were
roughly unchanged. Underwriting standards on CMBS deals reportedly continued to
ease, with some market participants beginning to question whether, for certain deals,
standards were inappropriately loose.
The pace of gross issuance of long-term municipal bonds slowed a bit in May but
remained above the rate seen in the first quarter. New capital issuance was also solid,
reflecting continued improvements in sentiment amid strengthening tax receipts and some
easing of state and local budget pressures. The ratio of yields on 20-year municipal
bonds to those on comparable-maturity Treasury securities—a gauge of the perceived
relative riskiness of municipal bonds—decreased notably over the intermeeting period.

Incoming information over the intermeeting period suggested further
improvement in the housing sector but still-tight conditions in mortgage markets.
National house price indexes increased between 5 and 12 percent year over year for the
period ending in April, with the largest rebounds occurring in previously depressed
housing markets or those that have experienced strong job gains. Short sales and sales
stemming from foreclosures continued to decrease as a share of all sales, and the rate of
new delinquencies hovered near its historical low. However, refinancing activity fell
notably in response to the increase in rates, and purchase applications stayed low as tight
credit conditions persisted for households with imperfect credit scores. Non-agency
mortgages remained a small share of all originations, although the securitization of jumbo
mortgages picked up further, albeit from very low volumes.
Consumer credit continued to expand at a solid pace, reflecting ongoing strength
in auto and student loans while credit card debt remained about flat. Consumer credit
ABS issuance maintained its robust pace and in May reached one of its highest monthly
levels since the end of the TALF program in 2010. Many large credit card lenders

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Financial Developments

HOUSEHOLD FINANCE

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

Commercial Banking and Money
Change in Bank Credit

Growth in C&I Loans
Percent

Billions of dollars
30

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

Total bank credit
C&I loans

From Sept. 26 to Dec. 26
From Dec. 26 to Mar. 27
From Mar. 27 to May 29

-10

May

-20

-30
2005

2007

2009

2011

Top 4

Other top 25

All others

-6

2013

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

Note: "Top 4" consists of the top 4 contributors to change in
commercial and industrial (C&I) loans in 2012:Q4. "Other top 25"
consists of the top 25 banks by C&I holdings, excluding the top 4.
Source: Federal Reserve Board, FR 2644, Weekly Report of
Selected Assets and Liabilities of Domestically Chartered Commercial
Banks and U.S. Branches and Agencies of Foreign Banks.

Weighted-Average Adjusted Spread, by Bank Type

Net Interest Margin, by BHC Type

Basis points

Percent
450

Quarterly

400

Large domestic banks
Small domestic banks

4.5

Quarterly, n.s.a.

Large
All others

350
Q2

4.0

300
250

3.5
Q1

Financial Developments

200
150

3.0

100
50
1997

2001

2005

2009

2.5

2013

2001

Note: Adjusted for changes in nonprice loan characteristics. C&I
loans of amounts less than $25 million. Spreads are computed over
market interest rates on instruments with maturities comparable to
each loan’s repricing interval.
Source: Survey of Terms of Business Lending .

2003

2005

2007

2009

2011

2013

Note: "Large" consists of BAC, BK, C, GS, JPM, MS, NTRS, STT,
and WFC.
Source: Call Report.

Reserve Balances

Growth of M2 and Its Components

Billions of dollars
Percent, s.a.a.r.
M2

Liquid Small time Retail Curr.
deposits deposits MMFs

2012

7.5

11.1

-16.9

-5.3

9.0

2012:H1

5.8

9.2

-16.6

-9.8

9.1

2012:H2

9.0

12.5

-18.8

-.8

8.5

2013:Q1

4.9

6.8

-20.3

5.6

5.8

Apr. & May(p) 5.3

7.3

-19.8

-.1

7.5

14-day average
Held by domestic DIs
Held by foreign DIs

2000
1500
1000
500
0

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

2009

2010

2011

2012

2013

Note: DIs are depository institutions. Domestic depository institutions
consist of commercial banks, savings and loan associations, savings
banks or mutual savings banks, and credit unions. Foreign depository
institutions consist of U.S. branches and agencies of foreign banks and
Edge Act and agreement corporations.
Source: Federal Reserve Board.

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

Page 70 of 110

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increased the volume of offers sent by mail, although lending standards appeared to
remain tight. Most consumer credit delinquency rates continued to decline, partially
driven by a compositional shift toward higher-quality borrowers due to a tightening of
underwriting standards. Delinquencies on government-backed student loans, however,
remained elevated, likely reflecting the lack of underwriting on such loans and the
still-sluggish labor market. 6

COMMERCIAL BANKING AND MONEY
Growth in bank credit moderated in April and May compared with the first
quarter, as core loans softened and securities declined slightly. C&I loan growth
weakened noticeably at large banks, reportedly because of increased paydowns and
reduced originations. C&I loans had ramped up late last year, partly as firms borrowed to
make larger-than-usual dividend payments in advance of year-end tax hikes. Elevated
loan sales to nonbanks also appeared to be a factor in the weaker C&I loan growth of late.
In contrast, commercial real estate loans accelerated, especially at large banks. Overall,
closed-end residential mortgages on banks’ books dipped slightly over the two-month
period, perhaps reflecting the drop in refinancing activity. Home equity loan balances
also declined over the two months. Credit card loans on banks’ books picked up a bit
continued to bolster other consumer loans. As has been the case for some time, all other
loans and leases grew more rapidly than core loans over the period. 7 Banks reduced their
overall holdings of securities slightly, reflecting declines in holdings of Treasury
securities, which fell steeply for the fifth consecutive month in May.
According to the May Survey of Terms of Business Lending, spreads of C&I loan
rates over interest rates on market instruments of comparable maturity, adjusted for
nonprice loan characteristics, were little changed at both large and small domestic
banks. In contrast, spreads on loans made under smaller commitments, a proxy for small
business loans, declined slightly, but such spreads remain elevated by historical
standards. In addition, the overall average risk rating was little changed, but the share of

In the absence of congressional action, interest rates on new originations of subsidized Stafford
student loans are scheduled to rise from 3.4 percent to 6.8 percent on July 1.
7
The weekly bank credit data do not break out the different types of other loans and leases. Call
Report data indicate that the share of loans to foreign banks increased substantially in the first quarter of
2013 (the latest available data) and that the shares of loans to nonbank financial firms and state and local
governments have risen rapidly in the past year.

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Financial Developments

after having been generally flat earlier in the year, and strong auto loan originations

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

secured loan originations rose, consistent with anecdotal evidence that banks are
extending credit to riskier borrowers, as these loans have higher spreads.
The profitability of BHCs remained in the upper end of its subdued post-crisis
range in the first quarter of 2013. BHC profits were supported by cuts in provisioning for
loan losses and noninterest expenses even as noninterest income decreased slightly and
net interest margins (NIMs) narrowed further. The decline in NIMs was most substantial
for the largest BHCs; NIMs at smaller BHCs also declined in the first quarter but
continued to be much higher. Measures of credit quality at banks improved further in
every major asset class in the first quarter. Regulatory capital ratios remained high
overall, although risk-based capital ratios decreased a little in the first quarter, reflecting
the adoption of the market risk capital rule, which increased market-risk-equivalent assets
at large banks. 8
In April and May, M2 expanded at an annual rate of about 5½ percent. Liquid
deposits were boosted in April by a stronger-than-usual accumulation of balances in
advance of annual tax payments that were high relative to recent years, but the boost
unwound in May. Currency growth stepped up some relative to the last intermeeting

Financial Developments

period, likely reflecting stronger demand from abroad after a weak start to the year.
The monetary base expanded at an annual rate exceeding 37 percent over April
and May, driven mainly by the increase in reserve balances that resulted from the Federal
Reserve’s asset purchases. Over the intermeeting period, the growth in reserve balances
has been absorbed primarily by U.S. branches and agencies of foreign banks and a few of
the largest domestic banks. 9 The current stock of reserve balances is held about equally
by foreign and domestic institutions.

For more information on this change, see Board of Governors of the Federal Reserve System
(2012), “Federal Reserve Board Approves Final Rule to Implement Changes to Market Risk Capital Rule,”
press release, June 7, www.federalreserve.gov/newsevents/press/bcreg/20120607b.htm.
9
During the intermeeting period, in order to enhance operational readiness, the Federal Reserve
offered the first term deposits with a fixed-rate, full-allotment format under the Term Deposit Facility.
Tenders totaled $10.5 billion at a rate of 26 basis points, with 32 depository institutions participating, an
increase from previous operations. Outreach was conducted with major reserve holders to raise awareness
of the operation.

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Appendix
Senior Credit Officer Opinion Survey on Dealer Financing Terms

As in previous surveys, respondents indicated that most nonprice terms incorporated in
new or renegotiated over-the-counter (OTC) derivatives master agreements were generally
unchanged, on balance, during the past three months. However, small net fractions of
respondents noted a tightening of terms related to the posting of additional margin and the types
of acceptable collateral. Dealers also reported that initial margin requirements, which fall outside
the scope of the master agreements, were generally little changed over the same period.
While the credit terms applicable to the funding of the various types of securities covered
in the survey were reported to be little changed, on net, over the past three months, a few dealers
indicated that they had increased clients’ maximum allowable amount of funding for high-yield
corporate bonds, agency residential mortgage-backed securities (RMBS), non-agency RMBS, and
1

The June survey collected qualitative information on changes over the previous three months in
credit terms and conditions in securities financing and over-the-counter (OTC) derivatives markets. In
addition to the core set of questions, this survey included a set of special questions about the current use of
financial leverage by hedge fund clients of different types adopting the pre-crisis peak and post-crisis
trough as reference points, and a second set of special questions about changes in funding of broad classes
of distressed assets by client types. The 22 institutions participating in the survey account for almost all of
the dealer financing of dollar-denominated securities to nondealers and are the most active intermediaries
in OTC derivatives markets. The survey was conducted during the period from May 21, 2013, to June 3,
2013. The core questions ask about changes between March 2013 and May 2013.

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Financial Developments

Responses to the June 2013 Senior Credit Officer Opinion Survey on Dealer Financing
Terms generally suggested little change over the past three months in the credit terms applicable
to important classes of counterparties covered by the survey. 1 As has been true since the
introduction of this question in September 2011, a large net fraction of respondents reported an
increase in the amount of resources and attention devoted to the management of concentrated
exposures to central counterparties and other financial market utilities. Overall, respondents
noted that the use of financial leverage by most classes of counterparties had remained basically
unchanged over the past three months; however, about one-fourth of all dealers reported an
increase in the use of leverage by hedge funds. In response to a set of special questions adopting
a longer-term perspective on this issue, asking that they categorize current leverage levels with
respect to the range bounded by the pre-crisis peak and the post-crisis trough, responses differed
depending on the strategy pursued by the funds. In particular, a net fraction of about one-fifth of
dealers noted that leverage for equity-oriented and for macro-oriented funds was in the upper part
of the range, with most-favored equity- and macro-oriented funds described as tapping more
financing than average clients pursuing those strategies. In contrast, a net share of nearly
one-third indicated that leverage for convertible-bond arbitrage funds was only moderately above
or near the trough level.

Class II FOMC - Restricted (FR)

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June 12, 2013

commercial mortgage-backed securities (CMBS). Notably, respondents indicated that demand
for funding had increased for a number of collateral types. In particular, significant net fractions
of dealers reported increased demand for funding of non-agency RMBS, high-yield corporate
bonds, CMBS, and investment-grade corporate bonds. Modest net fractions of respondents
indicated increased demand for term funding (that is, funding with a maturity of 30 days or more)
of CMBS, high-yield corporate bonds, and non-agency RMBS. About one-fifth of respondents
noted that the liquidity and functioning of the underlying markets for non-agency RMBS and
investment-grade corporate bonds had improved somewhat during the previous three months.
However, a few dealers indicated that the liquidity and functioning of the underlying market for
agency RMBS had deteriorated. For other collateral types covered in the survey, the liquidity and
functioning of the underlying markets were generally characterized as little changed on net.
The June survey also included special questions on funding of broad classes of distressed
assets: The first question addressed changes in funding across types of distressed assets in the
United States, Europe, and Asia, and the second focused on changes across various types of
clients. Notable net fractions of dealers reported that demand for funding had increased for
real-estate-related loans originated in all three regions and for U.S. corporate assets. Moreover,
respondents pointed to an increase in the demand for funding of such assets by most-favored
hedge funds, other hedge funds, private equity firms, and special purpose vehicles.

COUNTERPARTY TYPES

Financial Developments

Dealers and Other Financial Intermediaries
In the June survey, all but one respondent indicated that the amount of resources and
attention devoted to management of concentrated exposures to dealers and other financial
intermediaries remained basically unchanged over the past three months. (See the exhibit
“Management of Concentrated Credit Exposures and Indicators of Supply of Credit.”) The
fraction of dealers reporting an increase in the amount of resources and attention devoted to
management of concentrated exposures to dealers and other financial intermediaries has declined
gradually from the 90 percent peak reached in the December 2011 survey when concerns about
the condition of European financial institutions were particularly acute.

Central Counterparties and Other Financial Utilities
About two-thirds of dealers indicated that they had increased the amount of resources and
attention devoted to management of concentrated credit exposures to central counterparties and
other financial utilities over the past three months, roughly the same share as in previous surveys.
About four-fifths of the broad-scope dealers—dealers with a significant presence in essentially all
of the business areas covered by the survey—reported an increase. In light of the approaching
implementation of new regulatory requirements mandating increased central clearing of many
OTC contracts, continued focus on this issue is perhaps unsurprising. About one-fourth of survey
respondents noted that changes in the practices of central counterparties, including changes in
margin requirements and haircuts, had some influence on the credit terms they applied to clients
on bilateral transactions that are not cleared.

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Hedge Funds
As in March, respondents to the June survey generally indicated that both price terms
(such as financing rates) and nonprice terms (including haircuts, maximum maturity, covenants,
cure periods, cross-default provisions, or other documentation features) offered to hedge funds for
securities financing and OTC derivatives transactions had remained basically unchanged over the
past three months. About one-fourth of respondents reported an increase in the use of financial
leverage by hedge funds over the past three months. (See the exhibit “Use of Financial
Leverage.”) Of the dealers that reported an increase in leverage, all but one are broad-scope
firms. Several broad-scope dealers also indicated that the availability of additional financial
leverage (such as undrawn secured funding facilities) under agreements currently in place with
hedge funds had increased somewhat. Nearly one-fourth of dealers further noted that there had
been an increase in the intensity of efforts by hedge funds to negotiate more-favorable price and
nonprice terms over the same period. A few respondents also noted that the provision of
differential terms to most-favored hedge funds had increased somewhat over the same period.

Most respondents to the June survey reported that price and nonprice terms offered to
trading real estate investment trusts (REITs) had remained basically unchanged over the past
three months. 2 A few dealers indicated that price or nonprice terms had eased, with improvement
in general market liquidity and functioning the most cited reason for the change. Respondents
generally indicated that the use of financial leverage by trading REITs had remained basically
unchanged. Most respondents noted that the intensity of efforts by trading REITs to negotiate
more-favorable price and nonprice terms was broadly unchanged, with only a few dealers
indicating an increase. Most dealers also found the provision of differential terms to
most-favored REIT clients to be broadly unchanged.

Mutual Funds, Exchange-Traded Funds, Pension Plans, and Endowments
Respondents to the June survey indicated that both price and nonprice terms offered to
mutual funds, exchange-traded funds (ETFs), pension plans, and endowments had remained
basically unchanged over the past three months. A few dealers indicated that either price or
nonprice terms had eased somewhat, citing more aggressive competition from other institutions
as the most prominent reason. Provision of differential terms to most-favored clients and the
intensity of efforts by clients to negotiate more-favorable terms were also reported to be little
changed, as was the use of financial leverage.

Insurance Companies
As in the previous survey, respondents to the June survey indicated that both price and
nonprice terms offered to insurance companies had changed little over the past three months, as
had the provision of differential terms to most-favored clients. The use of financial leverage by

Trading REITs, including agency REITs, invest in assets backed by real estate rather than
directly in real estate.

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Financial Developments

Trading Real Estate Investment Trusts

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insurance companies also remained unchanged. A few respondents reported an increase in the
intensity of efforts by insurance companies to negotiate more-favorable price and nonprice terms.

Separately Managed Accounts Established with Investment Advisers
Similarly, nearly all of the dealers reported in the June survey that price and nonprice
terms negotiated by investment advisers on behalf of separately managed accounts were basically
unchanged over the past three months. Provision of differential terms to most-favored clients and
the use of financial leverage by investment advisers were also reported to be little changed. A
few dealers reported an increase in the intensity of efforts by investment advisers to negotiate
more-favorable terms.

Nonfinancial Corporations
Respondents to the June survey indicated that nonprice terms offered to nonfinancial
corporations had remained basically unchanged over the past three months. About one-fifth of
respondents indicated that they had tightened somewhat the price terms offered to nonfinancial
corporations over the past three months, while a few dealers pointed to an easing of price terms.
More than one-fourth of respondents reported an increase in the intensity of efforts by
nonfinancial corporations to negotiate more-favorable price and nonprice terms.

Financial Developments

Mark and Collateral Disputes
As in previous surveys, a large majority of respondents in June indicated that the volume,
persistence, and duration of mark and collateral disputes with each counterparty type included in
the survey were little changed over the past three months. A few respondents, however, reported
an increase over the same period in the volume, persistence, and duration of mark and collateral
disputes with dealers and other financial intermediaries as well as with mutual funds, ETFs,
pension plans, and endowments.

OVER-THE-COUNTER DERIVATIVES
As in previous surveys, most nonprice terms incorporated in new or renegotiated OTC
derivatives master agreements were reported to be basically unchanged, on net, over the past
three months. 3 However, a few dealers—including some broad-scope dealers—reported a
tightening in acceptable collateral, and one-fifth of respondents also indicated that requirements,
timelines, and thresholds for posting additional margin had tightened somewhat over the past
three months.
For all of the contract types included in the survey, nearly all of the dealers indicated that
initial margins (which fall outside the scope of master agreements) were little changed over the
past three months, for both average and most-favored clients. Posting of nonstandard collateral
3

The survey asks specifically about requirements, timelines, and thresholds for posting additional
margin, acceptable collateral, recognition of portfolio or diversification benefits, triggers and covenants,
and other documentation features, including cure periods and cross-default provisions.

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(that is, collateral other than cash and U.S. Treasury securities) also remained basically
unchanged. For most contract types included in the survey, dealers generally indicated that the
volume, duration, and persistence of mark and collateral disputes had remained basically
unchanged over the past three months. However, a few dealers reported that the volume of mark
and collateral disputes had increased for credit contracts referencing corporates and for credit
contracts referencing securitized products including MBS and asset-backed securities. Finally, a
few respondents indicated that the duration and persistence of mark and collateral disputes had
increased somewhat for foreign exchange contracts over the same period.

SECURITIES FINANCING

In the June survey, dealers reported that demand for funding had increased for a number
of collateral types. (See the exhibit “Measures of Demand for Funding and Market
Functioning.”) Two-fifths of dealers reported increased demand for funding of non-agency
RMBS, while about one-third of respondents pointed to increased demand for funding of
high-yield corporate bonds and CMBS. In addition, about one-fifth of dealers reported increased
demand for funding of investment-grade corporate bonds. Finally, net fractions of dealers
ranging between one-fifth and about one-fourth reported increased demand for term funding—
that is, funding with a maturity of 30 days or more—for CMBS, high-yield corporate bonds, and
non-agency RMBS.
About one-fifth of respondents indicated that the liquidity and functioning of the
underlying markets for non-agency RMBS and investment-grade corporate bonds had improved
somewhat during the previous three months. 4 Notably, a few dealers indicated that the liquidity
and functioning of the underlying market for agency RMBS had deteriorated. For other collateral
types covered in the survey, the liquidity and functioning of the underlying markets were
generally characterized as little changed on net.
Finally, as in previous surveys, all of the respondents indicated that the volume, duration,
and persistence of mark and collateral disputes were basically unchanged for all of the collateral
types.
4

Note that survey respondents are instructed to report changes in liquidity and functioning in the
market for the underlying collateral to be funded through repurchase agreements and similar secured
financing transactions, not changes in the funding market itself. This question is not asked with respect to
equity markets in the core questions.

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Financial Developments

As in previous surveys, dealers reported that the credit terms under which most types of
securities included in the survey are financed were little changed, on balance, over the past three
months. The exceptions were high-yield corporate bonds, agency RMBS, non-agency RMBS,
and CMBS, for which a few survey respondents indicated that they had increased the maximum
amount of funding for both most-favored and average clients. Finally, a few survey respondents
indicated that the maximum maturity had increased somewhat for funding of agency RMBS and
for funding of high-yield corporate bonds and CMBS provided to most-favored clients.

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SPECIAL QUESTIONS ON THE CURRENT USE OF FINANCIAL LEVERAGE BY
HEDGE FUND CLIENTS
The first set of special questions in the June survey asked dealers to characterize the
current use of financial leverage by hedge fund clients using the pre-crisis peak and post-crisis
trough as reference points. Respondents were asked to distinguish between most-favored clients
(as a consequence of breadth, duration, and/or extent of relationship) and other clients, and
among equity-oriented funds, macro-oriented funds, credit-oriented funds, convertible-bond
arbitrage funds, and other fixed-income-oriented relative-value funds. Notable fractions of
dealers, ranging between about one-third and about one-half, indicated that current levels of
leverage fall roughly in the middle between the peak and trough across specified strategies for
both most-favored and other clients. Responses exhibited some dispersion around this middle
point. Equity-oriented and macro-oriented funds were most frequently characterized as operating
with higher leverage: A net fraction of about one-fifth of dealers reported that such clients were
currently utilizing levels of leverage near to or at the pre-crisis peak, with most-favored equityand macro-oriented funds described as tapping more financing than average clients pursuing
those strategies. In contrast, a net share of nearly one-third characterized the leverage currently
employed by convertible-bond funds as only moderately above or near the trough level. 5

Financial Developments

SPECIAL QUESTIONS ON CHANGES IN FUNDING OF BROAD CLASSES OF
DISTRESSED ASSETS
The second set of special questions in the June survey asked dealers about changes in
funding of distressed assets since the start of 2013, distinguishing by type (real estate loans and
corporate assets such as loans or trade receivables) and by region of origin (United States,
Europe, or Asia), as well as by various client types.
The first question from this set addressed changes in funding of various types of
distressed assets. About one-fifth of dealers, on net, reported that demand for funding of
distressed real estate loans without regard for the region of origination had increased since the
beginning of the year. With respect to distressed corporate assets, about one-quarter of
respondents, on balance, indicated that the demand for funding for such assets from the United
States had risen, while little to no change was reported in the demand for funding for such assets
from Europe and Asia.
Dealers noted that demand for funding of distressed assets had increased on the part of
several types of clients. About one-third of respondents reported an increase in demand by
most-favored hedge funds, while nearly one-fifth, on net, pointed to a rise in demand on the part
of other hedge funds. In addition, one-fourth of dealers, on balance, reported increased demand
for funding by private equity firms and special purpose vehicles, which are often established by
5

Funds focused on equity-oriented strategies, macro-oriented strategies, and convertible-bond
arbitrage are generally regarded as those most likely to employ substantive amounts of leverage. In
addition, equity-oriented and macro-oriented funds are considered to be comparatively agile in adjusting
the amounts of leverage employed, given that most of their trading occurs in highly liquid markets.

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Financial Developments

institutional managers and financial institutions to take leveraged exposure to portfolios of
distressed assets.

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Management of Concentrated Credit Exposures and Indicators of Supply of Credit
Respondents increasing resources and attention to management of concentrated exposures to:
Net percentage

Net percentage
100

Dealers

100

Central counterparties+

0
2010

2011

2012

2013

0
2010

2011

2012

2013

Respondents tightening price terms to:
Net percentage

Hedge funds
Trading REITs+
Mutual funds* +

Financial Developments

Net percentage
60

Insurance companies
Separately managed accounts+
Nonfinancial corporations

2011

2012

-20

-40

-60
2010

2013

-60
2010

2011

2012

2013

Respondents tightening nonprice terms to:
Net percentage

Net percentage
60

Hedge funds
Trading REITs+
Mutual funds* +

Insurance companies
Separately managed accounts+
Nonfinancial corporations

2011

2012

-20

-40

-60
2010

2013

-60
2010

+ This question was added in the September 2011 survey.
* Includes mutual funds, exchange-traded funds, pension plans, and endowments.

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2011

2012

2013

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Use of Financial Leverage
Respondents reporting increased use of leverage by:
Net percentage

Net percentage
40

Hedge funds

Trading REITs

-20

-40

-60
2012

2013

-60
2011

2012

Net percentage

2013

Net percentage
40

Insurance companies

Separately managed accounts

-20

-40

-60
2011

2012

2013

-60
2011

2012

Net percentage

2013

Net percentage
40

Mutual funds
Exchange-traded funds

Pension funds
Endowments

-20

-40

-60
2011

2012

2013

-60
2011

Note: This question was added in the September 2011 survey.

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2012

2013

Financial Developments

2011

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June 12, 2013

Measures of Demand for Funding and Market Functioning
Respondents reporting increased demand for funding of:
Net percentage

Net percentage
80

High-grade corporate bonds
High-yield corporate bonds+

Equities
CMBS+

-20
2010

2011

2012

2013

-20
2010

2011

2012

Net percentage

Financial Developments

Net percentage
80

Agency RMBS
Non-agency RMBS+

2013

Consumer ABS+

-20
2010

2011

2012

2013

-20
2010

2011

2012

2013

Respondents reporting an improvement in liquidity and functioning in the underlying markets for:
Net percentage

Net percentage
80

High-grade corporate bonds
High-yield corporate bonds+
CMBS+

Agency RMBS
Non-agency RMBS+
Consumer ABS+

-20

-40

-60
2010

2011

2012

2013

-60
2010

+ This question was added in the September 2011 survey.

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2011

2012

2013

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Risks and Uncertainty
ASSESSMENT OF FORECAST UNCERTAINTY
We continue to view the uncertainty around our projection for economic activity
as roughly normal relative to the experience of the past 20 years (the benchmark used by
the FOMC), a period that now includes considerable volatility. 1 Sources of this
uncertainty include the difficulty of determining the likely implications for future
economic growth of the financial crisis, the deep recession, and the surprisingly slow
pace of recovery to date; risks still posed by the euro area to domestic economic growth;
and the unclear likelihood that recent positive news in some sectors—notably, housing—
will filter through to the broader economy. That said, on the whole, our concerns about
these factors have diminished over the past several quarters. A related concern is the
ability of the economy to weather potential future shocks. In particular, the resilience of
the financial system remains uncertain, despite ongoing regulatory reform. In addition,
monetary policy still has a limited capacity to counteract the effects of any new adverse
developments, such as a slower-than-anticipated improvement in domestic credit
conditions and confidence, or a more severe downturn in Europe. Given these
considerations, we continue to believe that the risks to domestic economic activity are
skewed to the downside.
Our assessment of the risks to the economic outlook has been informed by the
quantitative surveillance (QS) report completed in late May, which noted both positive
and negative developments about financial risks since the previous report a few months
ago. On the positive side, the financial strength of systemically important U.S. banking
organizations has continued to improve, as have the financial conditions of many
businesses and households. In addition, the prices of many widely held assets, including
corporate equity, nonfinancial debt, and real estate, do not, in general, appear to be
The benchmark estimates of uncertainty about real activity have increased sharply over the past
several years. In particular, as the fixed 20-year window used to assess the size of typical forecast errors
has moved forward to include the experience of the past 5 years, the estimated standard errors for out-year
projections of the unemployment rate almost doubled between 2008 and 2011 and have remained at this
higher level with the current 20-year sample. As a result, the benchmark estimates of uncertainty about
economic activity are no longer dominated by the experience of the Great Moderation period. In contrast,
benchmark estimates of uncertainty about inflation are essentially unchanged relative to earlier sample
periods.

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Risks & Uncertainty

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

2013
Measure and scenario

Risks & Uncertainty

2014 2015 201617

Real GDP
Extended Tealbook baseline
Housing-led recovery
Boom-bust
Headwinds
Low inflation
Prolonged European recession
Stronger dollar

2.0
2.2
3.2
2.0
2.0
2.0
2.0

2.9
3.4
4.8
2.0
3.0
2.4
2.5

3.4
4.3
4.8
2.2
2.7
2.6
2.6

3.6
4.3
-1.2
2.3
2.6
3.5
3.6

2.4
2.0
1.8
2.6
3.0
2.4
2.6

Unemployment rate1
Extended Tealbook baseline
Housing-led recovery
Boom-bust
Headwinds
Low inflation
Prolonged European recession
Stronger dollar

7.5
7.5
7.4
7.5
7.5
7.5
7.5

7.3
7.2
6.8
7.4
7.3
7.4
7.3

6.6
6.1
5.4
7.3
6.8
7.0
7.0

5.8
4.9
6.1
7.1
6.5
6.3
6.3

5.3
4.8
7.4
6.4
5.6
5.8
5.6

Total PCE prices
Extended Tealbook baseline
Housing-led recovery
Boom-bust
Headwinds
Low inflation
Prolonged European recession
Stronger dollar

.4
.4
.4
.4
.6
.4
.2

1.3
1.3
1.4
1.3
1.0
.8
.3

1.4
1.5
1.6
1.3
.7
1.0
.9

1.6
1.7
1.9
1.3
.5
1.3
1.4

1.9
2.2
1.6
1.3
.6
1.8
1.8

Core PCE prices
Extended Tealbook baseline
Housing-led recovery
Boom-bust
Headwinds
Low inflation
Prolonged European recession
Stronger dollar

1.0
1.0
1.0
1.0
1.2
1.0
1.0

1.4
1.4
1.5
1.4
1.1
1.2
1.0

1.6
1.7
1.8
1.5
.9
1.3
1.1

1.8
1.9
2.1
1.5
.7
1.6
1.6

1.9
2.2
1.6
1.3
.6
1.7
1.8

Federal funds rate1
Extended Tealbook baseline
Housing-led recovery
Boom-bust
Headwinds
Low inflation
Prolonged European recession
Stronger dollar

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

.1
.4
1.4
.1
.1
.1
.1

1.0
2.3
2.0
.1
.1
.4
.6

3.0
4.3
.5
.2
.9
2.4
2.5

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

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detached from fundamentals and thus likely to reverse in a destabilizing way. On the
negative side, the evidence continues to point to some slowly building financial
vulnerabilities as a result of increasing exposures to credit and maturity risk and
expanding leverage in the system. Moreover, structural vulnerabilities such as fragile
wholesale funding and tight connections among complex global financial firms remain
and make the economy susceptible to adverse shocks. In some areas, risks of such
shocks persist: The possibility of a much more substantial spike in Treasury yields is still
notable, and concerns related to the economic and financial situation in Europe or about
U.S. policymakers’ actions regarding the debt ceiling continue, although their immediacy
is less than several months ago. On balance, although the QS assessment suggests that
financial vulnerabilities have increased somewhat since the previous report, neither these
vulnerabilities nor the combined potential for adverse shocks appear unusually
pronounced at the current time.
With regard to inflation, we see significant uncertainty around our projection but
do not view the current level of uncertainty as unusually high. Longer-run inflation
expectations appear to have remained stable in recent years despite large fluctuations in
the prices of crude oil and other commodities and persistently wide margins of slack in
labor and product markets. Furthermore, we still view the risks to our inflation forecast
as balanced. On the downside, there is the possibility that the slowing in recent readings
on inflation, weaker-than-anticipated economic conditions, further subdued increases in
unit labor costs, and low levels of resource utilization could cause inflation to decrease
over time. On the upside, an increase in inflation expectations, potentially related to
concerns about the size of the Federal Reserve’s balance sheet and the ability to execute a
timely exit from the current stance of policy, could cause inflation to rise, as could a
stronger-than-expected recovery or a larger amount of damage to the supply side of the
economy than assumed in the baseline.

ALTERNATIVE SCENARIOS
alternatives to the baseline projection using simulations of staff models. The first
scenario contemplates a stronger recovery in residential construction and house prices
that sparks faster, sustainable improvements in the overall economy. In contrast, in the
second scenario, a stronger recovery is accompanied by an unsustainable buildup in
financial risk-taking and leverage that, ultimately, leads to another recession. The third

Page 85 of 110

Risks & Uncertainty

To illustrate some of the risks to the outlook, we construct a number of

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June 12, 2013

Forecast Confidence Intervals and Alternative Scenarios
Confidence Intervals Based on FRB/US Stochastic Simulations
Extended Tealbook baseline
Housing−led recovery
Boom−bust

Headwinds
Low inflation

Real GDP

Prolonged European recession
Stronger dollar

Unemployment Rate
4-quarter percent change

Percent
8

10.5

10.0
9.5

70 percent
interval

9.0
5

8.5

8.0

7.5
7.0

6.5
1

6.0

5.5

−1

5.0
4.5

−2

90 percent
interval

4.0
−3

3.5

−4

3.0

−5
2008

2010

2012

2014

2.5

2016

2008

PCE Prices excluding Food and Energy

2010

2012

2014

2016

Federal Funds Rate

4-quarter percent change

Percent
4.0

3.5
6
3.0
5
2.5
2.0

1.5

Risks & Uncertainty

3
1.0
2
0.5
0.0

−0.5
0
−1.0
2008

2010

2012

2014

2016

2008

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2010

2012

2014

2016

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June 12, 2013

scenario explores the possibility that we have underestimated the persistence of the
headwinds that have been restraining the recovery. The fourth scenario considers the risk
that recent low readings on prices are not the result of transitory forces, but instead reflect
a persistent decline in inflation. The final two scenarios explore risks to the U.S.
economy from foreign economic developments—first, that the recession in Europe could
be more prolonged and somewhat deeper than we currently anticipate, and, second, that
investor reaction to rising U.S. interest rates leads to an unanticipated strengthening of
the dollar.
We generate the first four scenarios using the FRB/US model and the last two
using the multicountry SIGMA model. In the FRB/US simulations, as in the baseline
forecast, the federal funds rate follows an inertial version of the Taylor (1999) rule,
subject to the FOMC’s thresholds for the unemployment rate and inflation. For the
SIGMA simulations, we use a broadly similar policy rule, subject to the same thresholds
but employing an alternative concept of resource utilization. 2 In all cases, we assume
that the size and composition of the SOMA portfolio follow their baseline paths.

Housing-Led Recovery
The increases in house prices, housing starts, and home sales over the past year or
so could fuel a more robust economic recovery than assumed in the baseline. In this
scenario, a stronger housing recovery, along with reduced uncertainty about the durability
of the expansion more broadly, sparks a vigorous boom that is well supported by
fundamentals. Real GDP rises at an annual rate of 3½ percent in the second half of this
year and above 4¼ percent in 2014 and 2015; the unemployment rate falls below
6½ percent by mid-2014 and below 5 percent in late 2015—a little more than
¼ percentage point below our projection of the natural rate at that time. With resource
slack decreasing more rapidly, wages and unit labor costs begin to accelerate gradually
relative to the baseline; however, with long-term inflation expectations assumed to
remain well anchored, consumer price inflation rises to only 2¼ percent by 2017. The
more steeply than in the baseline thereafter.

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

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Risks & Uncertainty

federal funds rate lifts off from its effective lower bound by the end of 2014 and rises

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June 12, 2013

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

Risks & Uncertainty

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

2013

2014

2015

2016

2017

2.5

3.4

3.6

2.8

2.1

1.2–3.7
1.5–3.6

1.4–5.3
1.6–5.5

...
1.4–5.7

...
.4–5.2

...
-.5–4.9

7.3

6.6

5.8

5.3

6.8–7.8
7.0–7.7

5.8–7.4
5.5–7.6

...
4.3–7.2

...
3.7–7.0

...
3.7–6.9

1.4

1.6

1.8

2.0

.1–1.6
.2–1.6

.2–2.7
.5–2.5

...
.5–2.8

...
.6–3.0

...
.8–3.3

1.2

1.6

1.8

1.9

2.0

.8–1.7
.8–1.7

.9–2.3
.9–2.5

...
.9–2.7

...
.9–3.0

...
1.0–3.1

1.0

2.2

3.0

.1–.1

.1–1.0

.1–2.9

.1–4.5

.8–5.3

Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2012 set of
model equation residuals.
Intervals derived from Tealbook forecast errors are based on projections made from 1979–2012, except
for PCE prices excluding food and energy, where the sample is 1981–2012.
. . . Not applicable. The Tealbook forecast horizon has typically extended about 2 years.

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Boom–Bust
The faster recovery in the previous scenario incorporates a sustainable expansion
in credit availability to households and firms. In this scenario, by contrast, the stronger
recovery is spurred by a more-aggressive easing in lending standards, greater use of
leverage, house prices that run ahead of fundamentals, and a larger reduction in risk
spreads. These developments boost real activity this year and next above that of the
previous scenario but also significantly increase the vulnerability of the financial system
to adverse shocks. Such a shock is assumed to occur in mid-2015, bringing the leverage
cycle to an abrupt end. Credit market functioning becomes impaired; premiums on
corporate bonds jump about 150 basis points above the baseline; house prices begin to
fall back to their fundamental level; and spending on consumer durables, housing, and
investment declines sharply as the economy falls into recession. The unemployment rate
rises about 2¾ percentage points, reaching almost 8 percent by early 2017. Monetary
policy responds to the boom by tightening beginning in mid-2014 but later reverses
course once the credit market disruption begins. Although the inertial nature of the
assumed policy rule prevents a rapid return of the federal funds rate to its effective lower
bound, the policy easing (coupled with an assumed waning of the adverse effects of the
crisis) is sufficient to enable an economic recovery to begin in 2017. After rising to
2 percent during the boom, inflation falls during the recession and is about 1½ percent at
the end of the simulation horizon.

Headwinds
Despite the disappointingly slow pace of the recovery to date and recent weakness
in some indicators, the staff forecast continues to feature a marked acceleration in real
GDP. In this scenario, however, our baseline assumptions about the normalization of
credit availability and anticipated improvements in household and business confidence
turn out to be overly optimistic; as a result, real activity continues to expand at only a
moderate rate. Real GDP rises 2 percent per year, on average, in 2013 and 2014, and
economic growth barely exceeds its potential for some time thereafter. Because margins
the baseline. With inflation persistently below the FOMC’s longer-run objective and the
unemployment rate far above its natural rate, the federal funds rate remains near zero
until after 2017.

Page 89 of 110

Risks & Uncertainty

of resource slack remain wide, inflation stays close to 1¼ percent rather than rising as in

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

Low Inflation
In the baseline forecast, recent low readings on inflation prove to be transitory,
and, over the next few years, inflation gradually moves back toward 2 percent. In this
scenario, the recent price data instead prove to be a harbinger of a longer-lasting decline
in actual inflation, accompanied by a modest decrease in long-run inflation expectations.
Inflation runs below 1 percent next year and edges down further thereafter. In this
environment, investors become increasingly concerned that the economy is mired in a
weak state, with inflation running substantially below 2 percent and monetary policy
persistently constrained by the zero lower bound. As a result, bond premiums rise and
put upward pressure on real long-term interest rates, thereby modestly restraining
household and business spending and boosting unemployment relative to the baseline
over the next few years. The higher trajectory of the unemployment rate delays liftoff of
the federal funds rate until late 2016. In the longer run, monetary policy is sufficiently
stimulative to eventually bring the unemployment rate below the baseline and to check
any further disinflation.

Prolonged European Recession
In the baseline forecast, the European economies expand at a modest pace next
year and beyond while measures of financial stress, such as sovereign and corporate
spreads, slowly decline to their 2010 levels. In this scenario, the fiscal and financial
headwinds in Europe instead prove stronger and more persistent than anticipated.
Specifically, continued financial uncertainty and weak credit supply leave private
borrowing costs about 100 basis points higher than in the baseline in 2013, and consumer
confidence remains depressed, leading to weaker business and household spending. As a
consequence, real GDP in Europe is 2½ percent lower than in the baseline by the first
half of 2015, notwithstanding a persistent real depreciation in the foreign exchange value
of European currencies of about 10 percent against the dollar. The stronger dollar and
weaker foreign activity, in turn, cause U.S. real net exports to fall relative to the baseline.
Nevertheless, the overall impact on the U.S. economy is not too severe because the
Risks & Uncertainty

magnitude of the assumed financial shock in Europe is not so large as to substantially
disrupt financial markets outside of Europe. All told, U.S. real GDP expands roughly
2½ percent on average this year and in 2014, almost ¾ percentage point less than in the
baseline. With a higher unemployment rate, the federal funds rate runs a little below the
baseline through the end of the forecast period.

Page 90 of 110

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

Stronger Dollar
In light of the considerable appetite of investors for additional yield in today’s
low interest rate environment, the foreign exchange value of the dollar may respond to
the projected increases in U.S. interest rates to a greater extent than we have assumed.
To capture this possibility, this scenario introduces a shock to the exchange risk premium
that boosts the dollar by 10 percent above the baseline by the end of this year before
gradually receding. The higher foreign exchange value of the dollar restrains U.S. real
net exports and causes the trade balance as a share of GDP to fall by 1½ percentage
points by the end of 2014, although part of the drag on GDP growth is offset by stronger
private consumption that benefits from the appreciated dollar. All told, growth in U.S.
real GDP is only 2½ percent in 2014, and the unemployment rate remains above
7 percent through most of 2014, about ½ percentage point higher by the end of 2014 than
in our baseline. Core inflation falls to 1 percent in 2014, due to lower U.S. real activity
and the stronger dollar. With a higher unemployment rate and lower core inflation, the

Risks & Uncertainty

federal funds rate stays somewhat below the baseline throughout the forecast period.

Page 91 of 110

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

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

2013

2014

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Previous
Tealbook

Current
Tealbook

Real GDP
Staff
FRB/US
EDO
Blue Chip

1.7
1.7
1.7
1.7

2.6
1.9
3.3
2.4

2.5
2.1
2.5
2.3

3.2
2.4
3.0
2.9

3.4
3.3
2.9
2.8

Unemployment rate1
Staff
FRB/US
EDO
Blue Chip

7.8
7.8
7.8
7.8

7.4
7.8
7.4
7.5

7.3
7.5
7.5
7.4

6.9
7.7
7.2
7.0

6.6
7.3
7.3
6.9

Total PCE prices
Staff
FRB/US
EDO
Blue Chip2

1.6
1.6
1.6
1.9

1.0
.7
1.1
2.0

.9
.8
.8
1.5

1.5
1.0
1.4
2.2

1.4
1.1
1.4
2.2

Core PCE prices
Staff
FRB/US
EDO
Blue Chip

1.5
1.5
1.5
...

1.5
1.3
1.2
...

1.2
1.2
1.1
...

1.7
1.2
1.4
...

1.6
1.3
1.4
...

.2
.2
.2
.1

.1
.1
.9
.1

.1
.1
.7
.1

.1
.1
1.8
.3

.1
.1
1.6
.2

Federal funds rate1
Staff
FRB/US
EDO
Blue Chip3

Risks & Uncertainty

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

Page 92 of 110

Authorized for Public Release

Class II FOMC - Restricted (FR)

June 12, 2013

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

Real PCE
Percent change, annual rate

Percent change, annual rate

5
4

-2

-1

-2

-3

-4

-4
-5

Blue Chip consensus
Staff forecast

-4
-6

-8

-5

-10

-6

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

2008

Unemployment Rate

2009

2010

2011

2012

2013

2014

-6

Consumer Price Index
Percent

11
10

Percent change, annual rate

-2

-4

-6

-8

2008

2009

2010

2011

2012

2013

2014

-10

2008

Treasury Bill Rate
Percent

2008

2009

2010

2011

2010

2011

2012

2013

2014

-10

10-Year Treasury Yield

-1

2009

2012

2013

2014

-1

Percent

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

2008

2009

2010

2011

2012

2013

2014

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

Page 93 of 110

1.0

Risks & Uncertainty

Authorized for Public Release

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

Probability of Inflation Events
(4 quarters ahead—2014:Q2)
Probability that the 4-quarter change in total
PCE prices will be ...

Staff

FRB/US

EDO

BVAR

Greater than 3 percent
Current Tealbook
Previous Tealbook

.05
.03

.04
.01

.09
.10

.01
.06

Less than 1 percent
Current Tealbook
Previous Tealbook

.31
.42

.40
.57

.36
.32

.43
.18

Probability of Unemployment Events
(4 quarters ahead—2014:Q2)
Probability that the unemployment rate w ill...

Staff

FRB/US

EDO

BVAR

Increase by 1 percentage point
Current Tealbook
Previous Tealbook

.01
.02

.05
.06

.19
.19

.01
.01

Decrease by 1 percentage point
Current Tealbook
Previous Tealbook

.24
.17

.06
.04

.24
.24

.22
.20

Probability of Near-Term Recession
Probability that real GDP declines in
each of 2013:Q3 and 2013:Q4
Current Tealbook
Previous Tealbook

Staff

FRB/US

EDO

BVAR

Factor
Model

.02
.03

.03
.06

.04
.04

.04
.03

.11
.16

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

Authorized for Public Release

Assessment of Key Macroeconomic Risks (2)

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

Class II FOMC - Restricted (FR)

Authorized for Public Release

Risks & Uncertainty

(This page is intentionally blank.)

Page 96 of 110

June 12, 2013

4.2
2.8
5.9
1.3
4.4
2.2
4.2
4.9
4.7
4.8
5.0
5.1

3.5
3.6
3.3
4.6
4.7
5.1

4.0
3.5
3.9
4.9
5.2

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

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

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

Page 97 of 110

4.0
3.5
3.5
5.0
5.4

3.5
3.6
2.7
4.4
4.9
5.1

4.2
2.8
5.9
1.3
3.4
2.1
3.9
4.8
4.8
4.9
5.0
5.2

06/12/13

2.0
1.7
2.6
3.2
3.5

1.6
1.7
2.3
2.8
3.0
3.5

2.0
1.3
3.1
.4
3.1
1.5
2.4
3.2
2.9
3.1
3.4
3.5

04/24/13

2.0
1.7
2.5
3.4
3.6

1.6
1.7
2.0
2.9
3.2
3.5

2.0
1.3
3.1
.4
2.2
1.8
2.5
3.3
3.2
3.3
3.5
3.6

06/12/13

Real GDP

2.5
1.6
1.0
1.5
1.6

1.6
1.6
.3
1.6
1.6
1.5

2.5
.7
1.6
1.6
.9
-.2
1.6
1.6
1.6
1.5
1.5
1.5

04/24/13

2.5
1.6
.9
1.4
1.6

1.6
1.6
.4
1.3
1.5
1.4

2.5
.7
1.6
1.6
1.0
-.1
1.2
1.3
1.5
1.4
1.4
1.4

06/12/13

PCE price index

1.7
1.5
1.5
1.7
1.8

2.0
1.1
1.3
1.6
1.7
1.6

2.2
1.7
1.1
1.0
1.2
1.4
1.7
1.6
1.8
1.7
1.7
1.6

04/24/13

Greensheets

1.4
1.7
1.2
1.5
1.7

1.7
1.5
1.2
1.6
1.8

2.0
1.1
1.0
1.4
1.7
1.6

2.2
1.7
1.1
1.0
1.3
.8
1.3
1.5
1.7
1.6
1.6
1.6

06/12/13

8.9
8.1
7.6
7.1
6.5

-.8
-.9
-.4
-.5
-.7

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

8.2
8.2
8.0
7.8
7.7
7.6
7.5
7.4
7.3
7.2
7.1
6.9

04/24/13

8.9
8.1
7.5
6.9
6.1

-.8
-.9
-.5
-.7
-.8

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

8.2
8.2
8.0
7.8
7.7
7.5
7.4
7.3
7.1
7.0
6.8
6.6

06/12/13

Core PCE price index Unemployment rate1

Authorized for Public Release

Annual
2011
4.0
4.0
1.8
1.8
2.4
2.4
1.4
2012
4.0
4.0
2.2
2.2
1.8
1.8
1.7
2013
3.5
3.2
2.1
1.9
1.0
1.0
1.3
2014
4.6
4.6
2.9
3.1
1.5
1.3
1.7
2015
5.2
5.2
3.5
3.6
1.6
1.5
1.7
1. Level, except for two-quarter and four-quarter intervals.
2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points.
3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points.

04/24/13

Interval

Nominal GDP

Changes in GDP, Prices, and Unemployment
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
June 12, 2013

Page 98 of 110

41
41
53
-8

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

3.9
3.9
9.5
12.9
3.0
.3

-395
-395
1.9
-.6

-1.8
-1.8
-2.6
-2.6
.0
.0

13.5
13.5

1.6
1.6
8.9
1.2
.6

2.4
2.4
1.5
1.5

3.1
3.1

13
13
35
-15

-7.0
-7.0
-14.8
-22.1
1.7
-1.5

-385
-385
-2.8
-4.2

13.2
13.2
11.8
11.8
16.7
16.7

17.6
17.6

1.8
1.8
13.6
.1
.6

1.9
1.9
3.6
3.6

.4
.4

37
61
29
8

-4.8
-2.3
-8.7
-12.1
-2.1
-2.1

-391
-389
-1.2
.1

.9
-.3
4.6
1.1
-7.9
-3.8

13.3
16.4

3.1
2.8
8.4
2.5
2.4

1.5
1.8
3.1
2.8

2.2
3.1

42
58
34
8

-3.8
-4.9
-9.0
-10.7
-5.8
-.4

-3.4
-4.5
-7.9
-7.8
-8.1
-.5
38
44
30
8

-382
-387
4.6
3.7

5.7
8.2
6.2
9.3
4.4
5.5

13.9
15.8

3.1
2.6
8.8
2.9
2.2

2.4
2.0
3.7
3.7

2.5
2.4

-382
-380
5.7
3.0

2.4
4.1
1.6
4.2
4.5
3.8

18.6
22.0

2.1
2.3
4.4
1.2
2.0

1.8
2.0
2.6
3.1

1.8
1.5

2013

52
59
44
8

-2.0
-.7
-4.8
-3.8
-6.8
-.2

-388
-392
3.4
4.0

6.0
7.0
6.6
7.7
4.7
5.2

15.3
14.0

3.6
3.3
8.9
2.8
2.9

3.0
3.2
4.2
4.2

3.3
3.2

63
73
57
6

-1.6
-2.1
-4.3
-3.9
-4.9
.0

-401
-399
4.7
6.2

4.0
4.2
4.7
4.8
2.2
2.7

17.8
16.3

3.6
3.0
9.9
2.8
2.9

2.8
2.4
4.2
3.6

3.2
2.9

66
80
61
5

-2.5
-2.5
-6.6
-8.0
-4.0
.0

-401
-399
4.4
3.7

5.1
4.6
5.6
5.1
4.1
3.5

17.8
17.0

3.7
3.4
9.4
3.0
3.0

3.2
2.9
4.4
4.0

3.3
3.1

64
81
59
5

-2.3
-2.2
-6.0
-6.6
-5.0
.0

-402
-401
5.4
4.6

6.3
6.1
7.4
7.1
3.7
3.9

18.3
17.3

3.8
3.7
9.3
3.1
3.2

3.5
3.4
4.7
4.5

3.5
3.4

2014

59
79
54
5

-1.8
-1.7
-5.1
-6.1
-3.3
.1

-399
-398
5.9
4.3

6.5
6.3
7.6
7.3
3.8
4.0

17.1
15.3

3.9
3.8
9.4
3.1
3.2

3.8
3.6
4.7
4.5

3.6
3.5

43
43
60
-11

-1.8
-1.8
-2.8
-5.0
1.5
-1.1

-401
-401
2.1
.2

5.4
5.4
4.7
4.7
7.3
7.3

14.9
14.9

1.8
1.8
8.3
.9
1.1

2.1
2.1
2.6
2.6

1.7
1.7

20121

42
56
34
8

-3.5
-3.1
-7.6
-8.6
-5.7
-.8

-386
-387
3.1
2.7

3.7
4.7
4.7
5.5
1.3
2.6

15.3
17.0

3.0
2.8
7.6
2.3
2.4

2.2
2.2
3.4
3.5

2.5
2.6

20131

63
78
58
6

-2.1
-2.1
-5.5
-6.2
-4.3
.0

-401
-399
5.1
4.7

5.5
5.3
6.3
6.1
3.4
3.5

17.8
16.5

3.8
3.5
9.5
3.0
3.1

3.3
3.1
4.5
4.2

3.4
3.2

20141

49
70
48
1

-.7
-.7
-3.8
-4.1
-3.3
1.0

-401
-390
6.5
5.4

5.5
5.2
6.4
6.0
3.4
3.1

15.2
13.6

3.9
3.8
8.6
3.2
3.4

3.8
3.7
4.6
4.4

3.6
3.5

20151

Authorized for Public Release

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

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

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

3.6
3.6
4.8
4.8
.6
.6

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

8.5
8.5

Residential investment
Previous Tealbook

Net exports2
Previous Tealbook2
Exports
Imports

1.5
1.5
-.2
.6
2.1

1.7
1.7
1.9
1.9

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

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

1.3
1.3

Real GDP
Previous Tealbook

Item

2012

Greensheets
Changes in Real Gross Domestic Product and Related Items
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
June 12, 2013

Page 99 of 110

1.5
1.5
2.2
4.4
-2.3
1.2
59
59
63
-4

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

Change in bus. inventories1
Previous Tealbook1
Nonfarm1
Farm1

28
28
29
-1

1.9
1.9
3.1
2.6
4.2
1.2

-649
-649
10.1
.8

7.9
7.9
3.9
3.9
17.3
17.3

-20.7
-20.7

1.7
1.7
4.6
.8
1.4

2.4
2.4
1.2
1.2

2.2
2.2

2007

-36
-36
-38
1

2.7
2.7
8.8
9.8
6.8
-.9

-495
-495
-2.5
-5.9

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

-24.4
-24.4

-2.5
-2.5
-13.0
-3.1
-.5

-2.6
-2.6
-4.5
-4.5

-3.3
-3.3

2008

Greensheets

-139
-139
-138
-1

4.0
4.0
5.1
4.1
7.2
3.3

-355
-355
.3
-6.1

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

-13.3
-13.3

-.3
-.3
3.0
.4
-1.1

-.5
-.5
-2.8
-2.8

-.1
-.1

2009

51
51
58
-6

-1.3
-1.3
2.3
1.0
5.2
-3.6

-420
-420
8.8
10.9

7.7
7.7
11.9
11.9
-1.8
-1.8

-5.7
-5.7

2.9
2.9
9.5
3.0
1.9

1.7
1.7
3.2
3.2

2.4
2.4

2010

31
31
36
-4

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

-408
-408
4.3
3.5

10.2
10.2
11.4
11.4
6.9
6.9

3.9
3.9

1.9
1.9
5.9
1.4
1.5

1.7
1.7
2.9
2.9

2.0
2.0

2011

43
43
60
-11

-1.8
-1.8
-2.8
-5.0
1.5
-1.1

-401
-401
2.1
.2

5.4
5.4
4.7
4.7
7.3
7.3

14.9
14.9

1.8
1.8
8.3
.9
1.1

2.1
2.1
2.6
2.6

1.7
1.7

2012

42
56
34
8

-3.5
-3.1
-7.6
-8.6
-5.7
-.8

-386
-387
3.1
2.7

3.7
4.7
4.7
5.5
1.3
2.6

15.3
17.0

3.0
2.8
7.6
2.3
2.4

2.2
2.2
3.4
3.5

2.5
2.6

2013

63
78
58
6

-2.1
-2.1
-5.5
-6.2
-4.3
.0

-401
-399
5.1
4.7

5.5
5.3
6.3
6.1
3.4
3.5

17.8
16.5

3.8
3.5
9.5
3.0
3.1

3.3
3.1
4.5
4.2

3.4
3.2

2014

49
70
48
1

-.7
-.7
-3.8
-4.1
-3.3
1.0

-401
-390
6.5
5.4

5.5
5.2
6.4
6.0
3.4
3.1

15.2
13.6

3.9
3.8
8.6
3.2
3.4

3.8
3.7
4.6
4.4

3.6
3.5

2015

Authorized for Public Release

1. Billions of chained (2005) dollars.

-729
-729
10.2
4.1

Net exports1
Previous Tealbook1
Exports
Imports

7.8
7.8
6.0
6.0
13.0
13.0

-15.7
-15.7

Residential investment
Previous Tealbook

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

3.2
3.2
7.0
2.9
2.6

2.8
2.8
2.4
2.4

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

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

2.4
2.4

2006

Real GDP
Previous Tealbook

Item

Changes in Real Gross Domestic Product and Related Items
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
June 12, 2013

Page 100 of 110

.7
.7
1.1
-.4

.8
.8
.7
.6
.1
.0
-1.5
-1.5
-1.7
.1

-1.4
-1.4
-1.2
-1.3
.0
-.2

.3
.3
-.4
.7

1.3
1.3
.8
.8
.5
.5

.4
.4

1.3
1.3
1.0
.0
.3

1.9
1.9
3.0
3.0

.4
.4

.7
1.4
-.2
.9

-.9
-.4
-.7
-.6
-.1
-.2

-.2
-.1
-.2
.0

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

.3
.4

2.2
2.0
.6
.4
1.1

1.5
1.8
2.6
2.4

2.2
3.1

.0
-.5
.0
.0

-.7
-.9
-.6
-.4
-.2
-.1

.2
.3
.8
-.5

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

.5
.5

1.5
1.6
.3
.2
.9

1.8
2.0
2.2
2.6

1.8
1.5

.1
.5
.1
.0

-.7
-.9
-.7
-.5
-.1
.0

.0
-.2
.6
-.6

.6
.8
.5
.7
.1
.2

.4
.4

2.2
1.9
.7
.5
1.0

2.4
2.0
3.1
3.1

2.5
2.4

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

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

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

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

.4
.4
.3
.1

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

.3
.3

1.1
1.1
.7
.2
.3

2.4
2.4
1.3
1.3

3.1
3.1

2013

.3
.0
.3
.0

-.4
-.1
-.3
-.2
-.2
.0

-.2
-.2
.5
-.7

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

.4
.4

2.5
2.4
.7
.4
1.4

3.0
3.2
3.6
3.5

3.3
3.2

.3
.4
.4
-.1

-.3
-.4
-.3
-.2
-.1
.0

-.4
-.2
.6
-1.0

.4
.4
.4
.4
.1
.1

.5
.5

2.6
2.1
.8
.4
1.4

2.8
2.4
3.5
3.0

3.2
2.9

.1
.2
.1
.0

-.4
-.4
-.4
-.4
-.1
.0

.0
.0
.6
-.6

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

.5
.5

2.6
2.4
.7
.5
1.4

3.2
2.9
3.7
3.4

3.3
3.1

-.1
.0
-.1
.0

-.4
-.4
-.4
-.3
-.1
.0

.0
.0
.7
-.8

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

.6
.5

2.7
2.6
.7
.5
1.5

3.5
3.4
4.0
3.8

3.5
3.4

2014

-.2
.0
-.2
.0

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

.1
.1
.8
-.7

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

.5
.5

2.8
2.7
.8
.5
1.5

3.8
3.6
4.0
3.8

3.6
3.5

-.4
-.4
-.3
-.1

-.4
-.4
-.2
-.3
.0
-.1

.3
.3
.3
.0

.6
.6
.3
.3
.2
.2

.3
.3

1.3
1.3
.6
.1
.5

2.1
2.1
2.2
2.2

1.7
1.7

20121

.3
.3
.1
.2

-.7
-.6
-.6
-.4
-.1
-.1

.0
-.1
.4
-.5

.4
.5
.4
.4
.0
.1

.4
.4

2.1
2.0
.6
.4
1.1

2.2
2.2
2.9
2.9

2.5
2.6

20131

.1
.2
.1
.0

-.4
-.4
-.4
-.3
-.1
.0

-.1
-.1
.7
-.8

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

.5
.5

2.7
2.4
.8
.5
1.4

3.3
3.1
3.8
3.5

3.4
3.2

20141

-.2
-.2
-.1
.0

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

.0
.1
.9
-.9

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

.5
.5

2.8
2.7
.7
.5
1.6

3.8
3.7
3.9
3.7

3.6
3.5

20151

Authorized for Public Release

Change in bus. inventories
Previous Tealbook
Nonfarm
Farm

.2
.2
.7
-.5

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

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

Net exports
Previous Tealbook
Exports
Imports

.2
.2

Residential investment
Previous Tealbook

1.1
1.1
.0
.1
1.0

1.7
1.7
1.6
1.6

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

Personal cons. expend.
Previous Tealbook
Durables
Nondurables
Services

1.3
1.3

Real GDP
Previous Tealbook

Item

2012

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

Greensheets

Class II FOMC - Restricted (FR)
June 12, 2013

2.1
2.1
1.7
1.7
1.2
1.2
-.5
-.5
1.2
1.2

ECI, hourly compensation2
Previous Tealbook2

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

Page 101 of 110

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

3.1
3.1
1.2
1.2
-1.9
-1.9

1.7
1.7

2.1
2.1
1.6
1.6

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

2.7
2.7

1.7
1.7

-1.7
-1.5
9.9
2.6
11.8
4.6

1.7
2.1

2.2
2.2
1.7
1.7

1.6
1.6
9.9
9.9
1.8
1.8
1.0
1.0
.9
.9

1.0
1.0

.2
.7

.3
1.8
-3.8
.7
-4.1
-1.1

1.4
2.2

1.4
1.4
2.1
2.1

1.0
.9
-3.7
-3.8
1.3
1.3
1.3
1.2
1.6
1.6

1.2
1.3

-1.1
-.1

.2
-.5
2.0
2.9
1.8
3.4

2.4
2.4

-.2
-.6
1.3
1.9

-.1
-.2
-14.1
-23.4
1.1
1.0
.8
1.4
.4
1.2

.2
.7

.5
.9

1.6
1.2
2.7
2.9
1.1
1.8

2.5
2.5

1.4
1.7
1.7
1.7

1.3
1.6
-.8
2.6
.9
.9
1.5
1.6
1.4
1.4

1.5
1.7

Greensheets

-.2
.3

1.5
1.1
2.1
2.8
.6
1.7

2.5
2.5

1.4
1.6
1.7
1.7

1.2
1.6
-.9
.6
1.3
1.3
1.3
1.7
1.2
1.6

1.3
1.7

2013

1.0
1.2

1.6
1.4
2.8
2.9
1.1
1.4

2.6
2.7

1.6
1.7
1.9
1.9

1.5
1.6
-.4
.5
.7
.8
1.7
1.8
1.6
1.7

1.6
1.8

1.4
1.6

1.6
1.6
2.8
2.9
1.2
1.2

2.6
2.7

1.5
1.6
1.8
1.9

1.4
1.5
-.8
-.4
.8
.9
1.6
1.7
1.5
1.6

1.6
1.7

1.7
1.9

1.6
1.6
2.9
3.0
1.3
1.3

2.7
2.7

1.5
1.6
1.8
1.9

1.4
1.5
-1.1
-.7
1.0
1.1
1.6
1.7
1.5
1.6

1.5
1.6

2014

1.4
1.6

1.5
1.6
3.0
3.0
1.4
1.3

2.7
2.8

1.5
1.6
1.8
1.8

1.4
1.5
-1.1
-.7
1.2
1.2
1.6
1.6
1.4
1.5

1.5
1.5

.1
.1

.6
.7
4.4
2.6
3.8
2.1

1.9
1.9

1.9
1.9
1.9
1.9

1.6
1.6
3.2
3.2
1.1
1.1
1.5
1.5
1.6
1.6

1.8
1.8

20121

-.1
.5

.9
.9
.7
2.4
-.2
1.4

2.2
2.4

1.0
1.0
1.7
1.8

.9
1.0
-5.0
-6.6
1.2
1.1
1.2
1.5
1.1
1.5

1.0
1.3

20131

1.4
1.6

1.6
1.6
2.8
2.9
1.3
1.3

2.6
2.7

1.5
1.6
1.8
1.9

1.4
1.5
-.9
-.3
.9
1.0
1.6
1.7
1.5
1.6

1.6
1.6

20141

1.5
1.6

1.6
1.6
3.4
3.4
1.7
1.8

3.0
3.0

1.7
1.7
2.0
2.0

1.6
1.6
-.9
-.7
1.4
1.5
1.8
1.8
1.7
1.7

1.7
1.6

20151

Authorized for Public Release

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

1.0
1.0
2.4
2.4

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

1.6
1.6

Previous Tealbook
Ex. food & energy
Previous Tealbook

CPI

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

GDP chain-wt. price index
Previous Tealbook

Item

2012

Changes in Prices and Costs
(Percent, annual rate except as noted)
Class II FOMC - Restricted (FR)
June 12, 2013

Greensheets

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

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

CPI

Previous Tealbook
Ex. food & energy
Previous Tealbook

ECI, hourly compensation1
Previous Tealbook1

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

Page 102 of 110

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

2.4
2.4
3.6
3.6
1.1
1.1

3.0
3.0

4.0
4.0
2.3
2.3

3.5
3.5
19.3
19.3
4.7
4.7
2.4
2.4
2.1
2.1

2.6
2.6

2007

3.7
3.7

-1.2
-1.2
2.5
2.5
3.7
3.7

2.4
2.4

1.6
1.6
2.0
2.0

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

2.1
2.1

2008

-1.7
-1.7

5.6
5.6
1.5
1.5
-3.9
-3.9

1.2
1.2

1.5
1.5
1.7
1.7

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

.5
.5

2009

2.7
2.7

1.9
1.9
1.6
1.6
-.2
-.2

2.1
2.1

1.2
1.2
.6
.6

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

1.8
1.8

2010

4.3
4.3

.4
.4
1.7
1.7
1.3
1.3

2.2
2.2

3.3
3.3
2.2
2.2

2.5
2.5
11.9
11.9
5.1
5.1
1.7
1.7
1.9
1.9

2.0
2.0

2011

.1
.1

.6
.7
4.4
2.6
3.8
2.1

1.9
1.9

1.9
1.9
1.9
1.9

1.6
1.6
3.2
3.2
1.1
1.1
1.5
1.5
1.6
1.6

1.8
1.8

2012

-.1
.5

.9
.9
.7
2.4
-.2
1.4

2.2
2.4

1.0
1.0
1.7
1.8

.9
1.0
-5.0
-6.6
1.2
1.1
1.2
1.5
1.1
1.5

1.0
1.3

2013

1.4
1.6

1.6
1.6
2.8
2.9
1.3
1.3

2.6
2.7

1.5
1.6
1.8
1.9

1.4
1.5
-.9
-.3
.9
1.0
1.6
1.7
1.5
1.6

1.6
1.6

2014

1.5
1.6

1.6
1.6
3.4
3.4
1.7
1.8

3.0
3.0

1.7
1.7
2.0
2.0

1.6
1.6
-.9
-.7
1.4
1.5
1.8
1.8
1.7
1.7

1.7
1.6

2015

Authorized for Public Release

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

2.9
2.9

2006

GDP chain-wt. price index
Previous Tealbook

Item

Changes in Prices and Costs
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
June 12, 2013

Page 103 of 110

12.3
-.4

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

-1,087
-140

9.9
12.3

5.9
.7
.7
3.6
3.6

.8
14.5

.3
.3
-.5
-.5
75.5
75.5

.4
8.0
8.0
5.7
6.0
-3.5
-3.3

13.6
1.2

-1,036
-125

9.6
12.5

1.3
8.9
6.2
5.3
4.7

.9
15.0

2.6
2.3
2.5
2.3
75.7
75.7

.5
7.8
7.8
5.7
5.9
-3.9
-3.7

13.5
1.3

-783
-117

-8.4
12.1

3.4
-8.4
-6.7
2.4
2.3

1.0
15.3

4.4
5.0
5.0
5.3
76.3
76.3

.6
7.7
7.7
5.6
5.9
-3.8
-3.4

14.3
3.4

-541
-90

-1.0
12.0

2.1
4.5
5.1
3.0
2.9

1.0
15.2

.7
4.2
-.6
3.0
75.9
76.6

.5
7.5
7.6
5.6
5.9
-3.9
-3.5

2013

14.4
2.8

-608
-86

4.7
12.1

3.9
2.6
2.0
2.8
2.8

1.1
15.3

4.3
4.7
2.8
3.8
76.0
76.9

.5
7.4
7.5
5.5
5.9
-3.8
-3.4

14.5
2.2

-678
-75

4.3
12.1

4.8
2.5
2.8
2.6
2.6

1.1
15.5

4.7
4.0
4.0
3.8
76.4
77.3

.5
7.3
7.4
5.5
5.9
-3.4
-3.1

14.5
2.2

-598
-74

.7
12.0

4.8
4.1
3.4
2.7
2.7

1.2
15.7

5.4
4.5
5.2
4.3
77.0
77.7

.5
7.1
7.3
5.4
5.9
-3.2
-2.9

14.6
2.4

-585
-49

2.6
11.9

4.9
3.2
3.0
2.5
2.6

1.3
15.9

4.7
4.5
4.7
4.5
77.6
78.2

.6
7.0
7.2
5.4
5.8
-2.9
-2.6

2014

14.7
2.4

-582
-40

4.7
11.9

5.0
3.6
3.4
2.5
2.5

1.3
16.1

4.5
4.3
4.6
4.3
78.1
78.6

.6
6.8
7.1
5.4
5.8
-2.6
-2.3

14.8
2.5

-577
-28

6.0
11.9

5.2
3.6
3.9
2.4
2.6

1.4
16.3

4.2
4.1
4.6
4.4
78.6
79.0

.7
6.6
6.9
5.4
5.8
-2.2
-1.9

Greensheets

13.6
1.2

-1,074
-129

3.1
12.5

3.5
3.8
3.2
5.3
4.7

.8
14.4

2.8
2.7
2.9
2.8
75.7
75.7

2.2
7.8
7.8
5.7
5.9
-3.9
-3.7

20121

14.5
2.2

-652
-92

-.2
12.1

3.5
.2
.7
2.6
2.6

1.0
15.3

3.5
4.5
2.8
4.0
76.4
77.3

2.2
7.3
7.4
5.5
5.9
-3.4
-3.1

20131

14.8
2.5

-585
-48

3.5
11.9

5.0
3.6
3.4
2.4
2.6

1.3
16.0

4.7
4.4
4.8
4.4
78.6
79.0

2.5
6.6
6.9
5.4
5.8
-2.2
-1.9

20141

15.2
3.0

-507
6

2.4
11.6

5.4
3.5
3.2
2.0
2.0

1.6
16.6

4.3
4.0
4.7
4.3
80.6
80.6

3.1
5.8
6.2
5.3
5.8
-.8
-.6

20151

Authorized for Public Release

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

-1,115
-124

Net federal saving8
Net state & local saving8

4.7
12.1

.7
14.1

Housing starts6
Light motor vehicle sales6

Corporate profits7
Profit share of GNP3

2.9
2.9
1.6
1.6
75.9
75.9

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

2.8
2.2
2.2
3.8
3.8

.5
8.2
8.2
5.8
6.0
-3.8
-3.6

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

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

Item

2012

Other Macroeconomic Indicators

Class II FOMC - Restricted (FR)
June 12, 2013

Greensheets

2.1
4.5
4.5
5.0
5.0
.8
.8
2.1
2.1
1.7
1.7
78.1
78.1
1.8
16.5
5.3
4.6
4.6
2.8
2.8
3.7
11.6
-204
51
16.5
4.4

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

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

Housing starts5
Light motor vehicle sales5

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

Corporate profits6
Profit share of GNP2

Page 104 of 110

Net federal saving7
Net state & local saving7

Gross national saving rate2
Net national saving rate2
13.9
1.7

-245
12

-8.1
10.1

4.9
1.6
1.6
2.5
2.5

1.4
16.1

2.7
2.7
2.9
2.9
78.4
78.4

1.2
4.8
4.8
5.0
5.0
.9
.9

2007

12.6
-.6

-613
-72

-33.5
6.8

-1.2
1.0
1.0
6.2
6.2

.9
13.1

-8.9
-8.9
-11.6
-11.6
69.9
69.9

-2.8
6.9
6.9
5.3
5.3
-4.3
-4.3

2008

11.0
-2.3

-1,229
-113

57.0
10.7

.4
-3.0
-3.0
3.8
3.8

.6
10.4

-5.5
-5.5
-6.1
-6.1
67.2
67.2

-5.6
9.9
9.9
6.0
6.0
-5.2
-5.2

2009

12.1
-.6

-1,308
-90

17.3
12.0

4.3
3.5
3.5
4.8
4.8

.6
11.5

6.2
6.2
6.4
6.4
72.9
72.9

.8
9.5
9.5
6.0
6.0
-4.0
-4.0

2010

12.4
-.3

-1,237
-102

9.2
12.5

4.0
.3
.3
3.4
3.4

.6
12.7

3.3
3.3
3.3
3.3
74.8
74.8

2.0
8.7
8.7
5.8
6.0
-3.6
-3.5

2011

13.6
1.2

-1,074
-129

3.1
12.5

3.5
3.8
3.2
5.3
4.7

.8
14.4

2.8
2.7
2.9
2.8
75.7
75.7

2.2
7.8
7.8
5.7
5.9
-3.9
-3.7

2012

14.5
2.2

-652
-92

-.2
12.1

3.5
.2
.7
2.6
2.6

1.0
15.3

3.5
4.5
2.8
4.0
76.4
77.3

2.2
7.3
7.4
5.5
5.9
-3.4
-3.1

2013

14.8
2.5

-585
-48

3.5
11.9

5.0
3.6
3.4
2.4
2.6

1.3
16.0

4.7
4.4
4.8
4.4
78.6
79.0

2.5
6.6
6.9
5.4
5.8
-2.2
-1.9

2014

15.2
3.0

-507
6

2.4
11.6

5.4
3.5
3.2
2.0
2.0

1.6
16.6

4.3
4.0
4.7
4.3
80.6
80.6

3.1
5.8
6.2
5.3
5.8
-.8
-.6

2015

Authorized for Public Release

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

2006

Item

Other Macroeconomic Indicators
(Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted)
Class II FOMC - Restricted (FR)
June 12, 2013

Page 105 of 110
-.8

-.2
-.4
-.4

-.7
-.8
-.8

-2.6
-1.4
-1.3

-1.1
-.7
-.7

-.7
-.7

-869.8

-396.0

-413.3

-518.0

-1,071

-499

-592

-742

-1,126

-922.1

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

3,407
3,940
937
608
329
3,003
-533
122

398
42
17

509
966
-457
-457
-458
1

3,187
3,797
972
634
338
2,826
-611
132

507
0
-120

3,270
3,656
-387
-408
-396
9

Q1a

3,001
3,743
1,020
665
355
2,723
-742
146

859
15
-371

3,028
3,531
-503
-522
-524
21

2015

2,633
3,744
1,062
709
353
2,682
-1,111
156

561
1
70

2,804
3,435
-632
-735
-668
37

2014

Fiscal year
2013

-.6
-.6

-925.3

-1,130

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

198
-48
-25

760
885
-125
-125
-187
62

230
6
-51

625
810
-185
-185
-160
-25

Q3a

.3
.3

-.2

-907.7

-1,100

2,673
3,761
1,086
728
358
2,674
-1,087
155

2012
Q2a

2013
Q3

-80
-16
6

897
807
90
-9
35
54

-9
10
120

710
831
-121
-126
-90
-30

507
-6
-281

676
897
-221
-221
-245
24

Not seasonally adjusted

-556.2
-1.7
-2.0
-1.6

-.5
-1.5
-1.5

-783

-1.2
-1.4

-1.5

-308.7

-537

-1.3
-1.5

-370.3

-600

-.9
-.6

-449.4

-665

Seasonally adjusted annual rates
2,947
3,192
3,128
3,072
3,730
3,733
3,736
3,750
1,032
1,014
993
985
672
661
645
643
360
353
348
342
2,698
2,719
2,744
2,764
-783
-541
-608
-678
146
142
139
136

336
14
-43

581
888
-307
-307
-303
-4

Q1a

-837.0

-1,048

2,736
3,772
1,042
682
360
2,730
-1,036
155

314
-7
-13

616
909
-293
-293
-311
17

Q4a

2014

-417.5
.0
-.5
-.4

-408.3
.0
-.7
-.6

-397.0
.0
-.9
-.9

-.3
-.9
-1.0

-548
-557
-565
-582

-398.5

3,309
3,886
948
616
331
2,939
-577
125

222
0
-30

741
933
-192
-194
-213
21

3,264
3,846
956
623
333
2,891
-582
128

120
0
-30

768
857
-90
-85
-56
-33

3,224
3,809
967
630
337
2,842
-585
131

-46
0
-30

952
875
76
64
28
48

3,187
3,785
978
639
339
2,806
-598
134

278
20
-30

633
901
-269
-280
-251
-18

Greensheets

Authorized for Public Release

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

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

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

1,152
-27
-36

Means of financing:
Borrowing
Cash decrease
Other2

Cash operating balance,
end of period

2,449
3,538
-1,089
-1,087
-1,151
62

2012a

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

Item

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

Class II FOMC - Restricted (FR)
June 12, 2013

2.6
2.6
1.9
2.0
1.2
1.7
2.5
2.2
3.1
2.4
1.6
2.0
5.1
5.2
4.0

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

Page 106 of 110

2.2
2.3
.8
.1
-1.5
3.1
2.0
2.0
3.4
2.4
1.0
1.7
5.7
5.7
7.3

1.7
1.7
.3
.8
-3.6
3.8
-.5
.9
3.2
4.8
.2
8.4
1.4
1.4
1.2

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

2.1
2.1
.9
.2
-.7
1.4
2.3
1.6
3.0
3.2
1.2
2.5
2.6
2.4
3.8

1.8
1.9
.4
1.6
-.6
-1.5
-.8
.7
3.3
3.8
1.2
6.5
2.8
3.0
1.3

2.3
2.3
1.6
1.4
.0
4.3
2.3
2.2
2.8
2.4
3.1
2.0
3.7
3.1
7.5

2.3
2.1
-.2
.9
1.2
-1.2
-2.3
-2.7
4.8
6.4
1.1
9.5
3.3
2.7
2.6

2.3
2.4
.8
1.6
-.4
2.2
.7
1.4
3.5
3.5
.4
3.5
3.8
3.5
6.9

2.0
2.3
1.5
2.5
4.1
1.3
-.8
.3
2.4
3.1
3.5
6.5
1.7
1.8
2.2

1.9
2.0
.6
1.0
.3
1.0
.4
1.6
2.9
1.9
1.4
2.0
5.4
5.6
4.3

2.3
2.7
1.3
2.0
3.2
1.0
-.3
1.2
3.3
4.2
3.0
6.5
2.4
2.2
2.8

2.1
2.1
1.1
1.4
.3
2.1
1.2
1.7
2.8
2.5
2.5
2.2
3.4
3.1
5.4

2.7
2.9
1.6
2.2
2.8
1.4
.2
1.3
3.9
5.0
3.5
7.5
2.9
2.8
3.4

2.3
2.3
1.3
1.6
.4
2.9
1.3
1.7
3.1
3.0
2.8
2.8
3.4
3.1
5.5

3.2
3.2
1.8
2.2
2.9
1.8
.8
1.4
4.6
5.7
3.9
8.3
3.7
3.8
3.5

2.4
2.4
1.3
1.7
.5
1.8
1.3
1.7
3.2
3.1
3.0
2.9
3.6
3.3
5.5

3.3
3.3
2.0
2.4
3.7
2.0
1.0
1.6
4.7
5.6
4.0
8.0
3.8
4.0
3.6

3.0
3.0
2.7
1.7
8.7
1.7
1.3
1.7
3.3
3.1
3.0
3.0
3.7
3.4
5.4

3.1
3.1
1.6
2.6
-2.3
2.2
1.2
1.7
4.7
5.7
4.1
8.0
3.8
4.0
3.6

2.5
2.5
1.4
1.8
.7
1.7
1.4
1.8
3.3
3.2
3.0
3.0
3.7
3.4
5.4

3.4
3.4
2.1
2.7
1.0
2.4
1.4
1.9
4.7
5.7
4.2
8.0
3.8
3.9
3.8

2.5
2.5
1.5
1.8
.9
2.9
1.4
1.9
3.3
3.2
3.1
3.0
3.7
3.4
5.4

3.5
3.5
2.2
2.7
1.1
2.5
1.6
2.0
4.8
5.8
4.3
8.0
3.8
3.9
3.8

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

Authorized for Public Release

1 Foreign

3.2
3.2
1.0
.8
4.8
-.3
-.2
2.5
5.4
6.0
3.3
7.0
5.0
5.8
.5

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

GDP 1

Measure and country

2012

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

Greensheets

Class II FOMC - Restricted (FR)
June 12, 2013

Page 107 of 110

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

Consumer prices 2
Total foreign
Previous Tealbook
Advanced foreign economies
Canada
Japan
United Kingdom
Euro area
Germany
Emerging market economies
Asia
Korea
China
Latin America
Mexico
Brazil
3.3
3.3
2.0
1.8
1.1
3.9
2.3
1.7
4.6
3.6
4.5
2.5
6.6
6.2
6.3

-.7
-.7
-1.6
.1
-4.8
-4.6
-2.1
-1.9
.4
.8
-3.2
7.7
-.3
-1.1
.9
1.2
1.2
.2
.8
-2.0
2.2
.4
.3
2.1
1.2
2.4
.6
3.9
4.0
4.3

.9
.8
-1.3
-1.4
-.5
-.9
-2.2
-2.2
3.6
8.1
6.3
11.3
-.8
-2.2
5.3

2009

2 Foreign

3.2
3.2
1.7
2.2
-.2
3.4
2.0
1.6
4.3
4.3
3.2
4.6
4.4
4.3
5.6

4.6
4.6
3.0
3.6
3.5
1.5
2.2
4.2
6.2
7.8
5.0
9.7
4.5
4.1
5.3

2010

Greensheets

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

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

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

2008

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

3.0
3.0
1.5
2.4
.0
1.1
.7
1.9
4.5
4.9
3.4
8.8
3.9
3.9
1.4

2011

2.3
2.3
1.3
.9
-.2
2.7
2.3
2.0
3.1
2.6
1.7
2.1
4.3
4.1
5.6

2.2
2.2
.4
1.0
.4
.2
-1.0
.3
4.2
5.2
1.4
7.8
3.1
3.2
1.4

2012

2.1
2.2
1.0
1.4
.1
2.1
.9
1.6
3.1
2.7
1.8
2.6
4.0
3.8
5.5

2.5
2.8
1.5
2.2
3.2
1.4
.0
1.0
3.6
4.5
3.5
7.2
2.7
2.7
3.0
2.6
2.6
1.7
1.7
2.6
2.0
1.3
1.8
3.3
3.1
3.0
3.0
3.7
3.4
5.4

3.3
3.3
2.0
2.6
.9
2.3
1.3
1.8
4.7
5.7
4.1
8.0
3.8
3.9
3.7

2.7
2.7
1.9
1.8
2.5
2.0
1.7
1.9
3.3
3.2
3.2
3.0
3.7
3.4
5.4

3.5
3.5
2.3
2.6
1.0
2.6
2.0
2.4
4.8
5.8
4.5
7.8
3.8
3.8
4.0

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

Authorized for Public Release

2007

Measure and country

Foreign Real GDP and Consumer Prices: Selected Countries
(Percent change, Q4 to Q4)
Class II FOMC - Restricted (FR)
June 12, 2013

Page 108 of 110

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

-712.6
-710.3
-5.1
-5.1
-699.1
111.1
244.6
-133.5
-124.7

2007

-512.5
-535.1
-3.3
-3.5
-571.8
197.8
283.4
-85.6
-138.5

2008

-466.5
-449.8
-3.0
-2.8
-516.1
194.1
271.2
-77.1
-144.5

-681.1
-677.1
-4.8
-4.7
-702.3
157.8
284.3
-126.5
-136.6

-464.0
-473.4
-3.0
-3.0
-541.2
216.0
291.8
-75.8
-138.8

2012

-386.4
-381.9
-2.8
-2.7
-383.7
127.6
253.0
-125.4
-130.3

2009

-437.5
-441.7
-2.8
-2.8
-509.5
217.1
307.9
-90.8
-145.1

-421.5
-442.1
-2.6
-2.7
-472.8
192.6
269.6
-77.0
-141.3

-446.6
-442.0
-3.1
-3.0
-499.4
191.0
297.9
-106.9
-138.2

2010

2011

-453.5
-463.7
-2.8
-2.8
-486.4
177.5
257.1
-79.5
-144.6

-462.9
-465.9
-3.1
-3.1
-556.8
235.0
321.7
-86.7
-141.1

2012

-495.0
-503.4
-3.0
-3.1
-507.5
159.2
249.9
-90.7
-146.7

-470.1
-475.0
-3.0
-3.0
-534.7
206.2
288.6
-82.3
-141.7

Billions of dollars

Annual Data

-445.1
-474.6
-2.8
-3.0
-494.6
196.5
274.9
-78.4
-146.9

-517.5
-524.1
-3.1
-3.1
-504.9
128.7
239.0
-110.3
-141.3

-547.2
-546.4
-3.2
-3.2
-515.8
113.2
234.4
-121.2
-144.6

-565.3
-571.7
-3.3
-3.3
-523.5
104.9
236.2
-131.3
-146.7

-453.8
-470.9
-2.8
-2.9
-490.3
181.5
262.9
-81.4
-144.9

-539.3
-543.8
-3.2
-3.2
-517.7
122.8
238.6
-115.8
-144.5

-581.8
-576.7
-3.3
-3.2
-525.8
87.5
251.5
-164.0
-143.4

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

-527.4
-532.9
-3.2
-3.2
-526.6
144.4
244.7
-100.3
-145.2

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

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

Quarterly Data

U.S. Current Account

Greensheets

Class II FOMC - Restricted (FR)

Authorized for Public Release
June 12, 2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

Abbreviations
ABS

asset-backed securities

AFE

advanced foreign economy

BEA

Bureau of Economic Analysis

BHC

bank holding company

BOE

Bank of England

BOJ

Bank of Japan

CDS

credit default swaps

C&I

commercial and industrial

CLO

collateralized loan obligation

CMBS

commercial mortgage-backed securities

commercial paper

CPH

compensation per hour

CPI

consumer price index

Desk

Open Market Desk

ECB

European Central Bank

EME

emerging market economy

E&S

equipment and software

ETF

exchange-traded funds

FDIC

Federal Deposit Insurance Corporation

FOMC

Federal Open Market Committee; also, the Committee

GCF

general collateral finance

GDP

gross domestic product

IMF

International Monetary Fund

ISM

Institute for Supply Management

JEC

Joint Economic Committee

JOLTS

Job Openings and Labor Turnover Survey

LIBOR

London interbank offered rate

Page 109 of 110

June 12, 2013

Class II FOMC - Restricted (FR)

Authorized for Public Release

June 12, 2013

LSAP

large-scale asset purchase

M&A

mergers and acquisitions

MBS

mortgage-backed securities

Michigan
survey

Thomson Reuters/University of Michigan Surveys of Consumers

NIM

net interest margin

NIPA

national income and product accounts

OIS

overnight index swap

OTC

over-the-counter

PCE

personal consumption expenditures

PMI

purchasing managers index

quantitative surveillance

REIT

real estate investment trust

repo

repurchase agreement

RMBS

residential mortgage-backed securities

SCOOS

Senior Credit Officer Opinion Survey on Dealer Financing Terms

SOMA

System Open Market Account

TALF

Term Asset-Backed Securities Loan Facility

TBA

to be announced (for example, TBA market)

TIPS

Treasury inflation-protected securities

Page 110 of 110

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 18-19, 2013 : Tealbook A

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